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Facts
The assessee, a civil contractor, filed its return declaring income of Rs.5,90,940/-. The AO selected the case for scrutiny and found discrepancies in labour expenses, leading to the rejection of the books of account under Section 145(3). The AO estimated the income at 9.40% and also made an addition of Rs.25,07,500/- for non-payment of service tax.
Held
The Tribunal observed that the AO rejected the books of account based on discrepancies in labour charges. While the assessee explained the fall in GP in the current year due to increased material costs, the reason for higher GP in the previous year was not explained. The Tribunal directed the AO to estimate the GP at 6.65% by averaging the GP of the last three years. Regarding the addition for service tax, the Tribunal noted it was an opening balance and not an expenditure claimed, thus directing its deletion.
Key Issues
Whether the rejection of books of account and estimation of income at a higher GP rate by the AO was justified, and whether the addition for non-payment of service tax was correctly made under Section 43B.
Sections Cited
143(2), 142(1), 145(3), 41(1), 43B, 234B, 234D, 270A
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH ‘G’: NEW DELHI
(Assessment Year: 2017-18) Singal and Sons Construction Pvt. Ltd., vs. ITO, Ward 4, Behind SBI Main Branch, Hisar. Delhi Road, Hisar – 125 001 (Haryana). (PAN : AACCS0362C) (APPELLANT) (RESPONDENT) ASSESSEE BY : Shri Pranav Yadav, Advocate REVENUE BY : Shri Manish Gupta, Sr. DR Date of Hearing : 10.07.2025 Date of Order : 10.07.2025 O R D E R
PER S. RIFAUR RAHMAN, ACCOUNTANT MEMBER :
This appeal is filed by the assessee against the order of the ld. Commissioner of Income-tax (Appeals)/National Faceless Appeal Centre (NFAC), Delhi (for short ‘ld. CIT (A)) dated 06.11.2023 for the Assessment Year 2017-18.
Brief facts of the case are, assessee filed its return of income declaring income of Rs.5,90,940/- on 29.10.2017 for the AY 2017-18. The case was selected for complete scrutiny through CASS. Accordingly, notices 143(2) and 142(1) of the Income-tax Act, 1961 (for short ‘the Act’) were issued and served on the assessee. The assessee is a civil contractor and during the year, it was constructing dwelling units. In response, ld. AR of the assessee submitted relevant information.
The AO observed that the total receipts for contracts was declared by the assessee at Rs.7,21,69,786/- on which GP of Rs.30,40,768/- @ 5.32% was declared against the earlier year receipt of Rs.4,14,26,669/- on which GP was declared @ 9.40% Since the profit rate declared by the assessee is substantially low compared to the previous assessment year, therefore, assessee was asked to furnish the details of various expenditures with supporting documents. After considering the detailed submissions made by the assessee, the AO found certain discrepancies in the labour expenses claimed by the assessee. Therefore, he came to the conclusion that details of labour expenses so prepared by the assessee were just to create documentary evidence. Accordingly, he observed that the books of account maintained by the assessee are not reliable. Accordingly, by invoking the provisions of section 145(3), he rejected the books of account maintained by the assessee. After rejecting the books of account, he observed that the profit of the assessee should be estimated @ 10% by relying on the decision of Hon’ble Punjab & Haryana High Court in the case of CIT vs. Prabhat Kumar (2010) 323 ITR 675. Further he observed GP of 9.40%. Since the assessee has declared less income during the year, he proceeded to estimate the income @ 9.40%. Further he observed from the Balance Sheet that a sum of Rs.24,50,000/- was shown as reserve for service tax in the liability side of the Balance Sheet and further an amount of Rs.57,500/- was also shown as liability in the Balance Sheet. In response, assessee submitted that the service-tax amount payable to Mohit Construction of Rs.24,54,000/- and Engineers and Builders of Rs.57,500/- and submitted relevant confirmation for the same. The above said amounts are payable as confirmed from the parties, therefore, there is no cessation of liability u/s 41(1) of the Act. After considering the submissions of the assessee, AO observed that the amounts are representing tax payable to the Government but the same was not paid and in the earlier year also, therefore, the amount was added u/s 43B of the Act. Accordingly, he added the same to the income of the assessee.
Aggrieved, assessee preferred an appeal before the ld. NFAC, Delhi and filed detailed submissions. After considering the detailed submissions, ld. CIT (A) sustained both the additions.
Aggrieved with the above order, assessee is in appeal before us raising following grounds of appeal :-
1. On the facts and circumstances of the case and in law, the CIT (A) erred in confirming the addition made by the assessing officer of Rs.34,44,803/- on income of computation of income as per higher i.e. 9.40 percent estimated GP ratio than actual i.e. 5.32 percent.
2. On the facts and circumstances of the case and in law, the CIT (A) erred in confirmation the addition made by the assessing officer of Rs.25,07,500/- on account of retention money wrongly made as non-payment of service tax as per section 43B of the Act.
3. On the facts and circumstances of the case and in law, the order passed by the assessing office is bad in law and the order passed by the assessing officer is against the principles of the natural justice and CIT (A) erred in not holding so.”
6. At the time of hearing, ld. AR of the assessee submitted as under :- “Return of Income was filed declaring profit Rs.5,90,940/-. The assessing officer has completed the assessment at income of Rs.65,43,244/- after making following additions:-
1. 1. Rs. 34,44,803/- on account of computation of income as per higher (9.40%) estimated GP Ratio than actual (5.32%).
2. Rs. 25,07,500 on account of Retention money wrongly made as non- payment of Service Tax as per section 43B of the Income Tax Act. The grounds of appeal are as under: -
1. On the facts and circumstances of the case and in law, the order passed by the assessing officer is bad in law.
2. On the facts and circumstances of the case and in law, the assessing officer erred in passing the order u/s 143(3) of the act.
3. On the facts and circumstances of the case and in law, the order passed by the assessing officer is against the principals of natural justice.
4. On the facts and circumstances of the case and in law, the assessing officer erred in making additions of Rs.34,44,803/- on account of computation of income as per higher (9.40%) estimated GP Ratio than actual (5.32%).
5. On the facts and circumstances of the case and in law, the assessing officer erred in making additions of Rs. 25,07,500 on account of Retention money wrongly made as non payment of service tax as per section 43B of the Income Tax Act.
6. On the facts and circumstances of the case and in law, the assessing officer erred in completing the assessment at income Rs. 65,43,244/- instead of income of Rs.5,90,940/- as returned by appellant.
7. On the facts and circumstances of the case and in law, the assessing officer erred in charging Interest u/s 234B and u/s 234D of the Act.
8. On the facts and circumstances of the case and in law, the assessing officer erred in initiating penalty proceedings u/s 270A of the Act. The submission of the appellant on various grounds of appeal
is as under: -
1. Ground no 1 to 4 During the year under consideration, the appellant was in engaged in business of Civil construction of dwelling units or other civil construction. The assessing officer has made an addition of Rs. 34,44,803/- on account of contract receipt @ 9.40% as shown by the assessee in the previous year on the total turnover of Rs.7,21,69,086/- comes to Rs. 67,83,894/- and the assessee has shown profit of Rs.38,40,766/- @ 5.32%. If bank interest of Rs.4,71,070/- and interest on refund of Rs.30,605/- totalling to Rs.5,01,675/- is subtracted from the GP of Rs.38,40,766/-, the balance amount comes to Rs. 33,39,091/-. In this way the assessee has shown short profit of Rs. 34,44,803/- and thus addition of Rs.34,44,803 is made to total income of the assessee. The assessing officer has raised concern in para 2(iii) to 2(v) of the assessment order The relevant para of assessment order is as under: - "2(iii) Further the expenses on account of freight has been claimed at Rs.24,83,355/-. The details filed by the assessee has been examined and found that in the name of Charan Singh Vehicle No. HR 39A 1721. Total amount claimed as payment at Rs.l,74,255/-. As per E- vahan portal report, no such vehicle is registered which means that the expense claimed are bogus. Similarly in the other cases the vehicles are registered in the different names the details of which are as under:- Sr.No. Vehicle No. Name of person to Name of owner of whom payment made vehicle as per e-vahan portal
1. HR39B-1312 Suresh Rajender Parshad
2. HR39C-5376 Rohtash Balwan
3. HR39B-5594 Pawan Kumar Manoj Kumar The assessee has also filed a bill for purchase of bricks dt. 02/08/2016 for Rs.7,81,548/- in the name of M/s Sunehari Bricks Company (TIN - 06631531093). As per report downloaded from the portal the registration of TIN was cancelled and was valid only upto 25/11/2014. The bill issued date is 02/08/2016. These facts clearly indicates that the expenses has been excessively claimed by preparing bogus vouchers." 1.1. Expenses on Account of Freight In the view of the above it is submitted that the inference drawn by the assessing officer is erroneous, the remarks of assessing officer that expenses are bogus just because the vehicles are registered in the name of different person cannot be a ground for drawing adverse inference. The appellant has timely paid wages to the above parties which are duly reflected in books of account. It is not appellants responsibility to check the registration of vehicles. In the present case of the appellant before your honour, since the amount of expenses are duly recorded in the books of accounts which are duly audited. The assessing has failed to appreciate the same. The assessing officer did not even bother to ask for explanation from the appellant to provide the details of aforesaid transaction of drivers or to verify whether the transaction was genuine or not. There neither an inquiry made, nor any show cause notice issued to the appellant so that he could prove the transaction. 1.2 Bills for purchase of bricks In this above instance a bill for purchases of bricks dt 02/08/2016 for Rs.7,81,548/- in name of M/s Sunehari Bricks Company (TIN - 06631531093) was declared bogus vouchers by assessee because from the portal the registration of TIN was cancelled, it is submitted that the remarks of assessing officer that because the TIN was cancelled cannot be a ground for making addition/disallowance in the case of the appellant. The appellant has purchased goods and made the payments to Sunehari Bricks Company by banking channel. The appellant is neither responsible nor concerned about the TIN related compliance of the supplier. The documents submitted relating to Sunehari Bricks are as under: - - Purchase invoice received from the party (Page no.15 of the paper book) - Ledger account of Sunehari Bricks Co. – 16 & 16 A - Bank statement of Sunehari Brick Co. which duly reflects payment received from Singhal Sons Construction Pvt. Ltd. 22 - 24 - Bank statement of Singhal Sons Construction Pvt. Ltd. which duly reflects payment made to Sunehari Bricks Co. (17 to 21) From the bank statement of Sunehari Bricks Company, it can be seen that payments made by the assessee to them are duly credited in there bank account. The assessing officer has erred in applying the provisions of section 145(3) of the Act. The provisions of section 145(3) are as under: - 145. Method of accounting.
"(3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub- section (1) [has not been regularly followed by the assessee, or income has not been computed in accordance with the standards notified under subsection (2)), the Assessing Officer may make an assessment in the manner provided in section 144.] " From a perusal of aforesaid provisions, it is evident that there is no case of applying the above provisions to the case of appellant. The assessing officer had rejected the books of accounts maintained by the assessee which was duly audited and certified by the Chartered Accountant in compliance of section 44AB of the Act on the basis of presumptions without making any further investigation was erroneous and not appreciable. The Hon'ble jurisdictional Delhi High court in the case of CIT v Paradise Holidays(2010) 325 ITR 13 (Delhi) held as under:- 6. The Assessing Officer has not pointed out any specific defect or discrepancy in the Account Books maintained by the assessee. Admittedly, the assessee had been maintaining regular Books of Accounts, which were duly audited by an independent Chartered Accountant. As noted by CIT(A), the financial results were fully supported by the assessee with vouchers and the Books of Account were complete and correct in all respects. The accounts which are regularly maintained in the course of business and are duly audited, free from any qualification by the auditors, should normally be taken as correct unless there are adequate reasons to indicate that they are incorrect or unreliable. The onus is upon the Revenue to show that either the Books of Accounts maintained by the assessee were incorrect or incomplete or method of accounting adopted by him was such that true profits of the assessee cannot be deduced therefrom.” The Hon'ble jurisdiction Delhi High Court in the case of CIT vs. Poonam Rani (2010) 5 Taxmann.com 76 has held that in the absence of any material pointing towards falsehood of accounts books, addition of gross profit and rejection of books of accounts cannot be made. Comparative gross profit margin/net profit margin for last three years are as under:- Comparative Chart of GPINP for 3 years Assessment Year 2017-18 2016-17 2015-16 Work done 72169086.00 41426669 71269410 Gross Profit 3840768.00 38933391.00 3673556.00 5.32 9.40 5.15 Net Profit 4199921.00 360306.00 447223.00 % 0.58 0.87 0.63 Gross profit percentage during the assessment year is slightly more than the gross profit margin for assessment year 2015-16. However, Gross profit margin during the assessment year 2017-18 is lower than the immediately preceding previous year. The reason for the same is because of (i)The Company has started EWS Flat for Housing Board, Haryana at Hansi. The Cost of material consumed is more in this project. The Company has executed work of 4.74 crores for the said project out of gross contract receipt of6.70 crores. (Note 14 of audited accounts), (ii)Also in the said project of Housing Board approx. 25-30 % material is supplied by the Contractee in which the rate charged is higher than the prevailing market price. New profit is slightly lower due to the aforesaid gross profit margin. The aforesaid explanation of variation in GP rate was duly submitted to AO. In the case of Shri Rajkumar Agarwal, the ITAT Jaipur Bench, Jaipur has decided vide as follows: "Accordingly, the addition made by the authorities below on account of unverifiable purchases is restricted to gross profit rate addition to be computed by the A.O. on the basis of past history of the assessee comprising the G.P. rate declared and accepted by the A.O. as well as G.P. rate which has attained finality. Therefore, for limited purposes computing the income by applying the average G.P. rate of the past history at minimum 3 years.” It is humbly submitted that the accounts of the company are not based upto GP ratio/NP ratio. The accounts are prepared on the basis of actual state of affairs and it is not possible that in every year to GP ratio and NP ratio will remain same. The company can have even Profit in a year and loss in subsequent year. As stated above, the accounts of the company are duly audited and there is no qualification are duly audited and there is no qualification in the Audit report. In view of above facts and position of law it is prayed that addition of Rs.34,44,803/- made by the assessing officer @9.40% as against the declared G.P. rate of 5.32% is wrong and bad in law which deserved to be deleted. Ground no 5 The assessing officer has made the disallowance in a most arbitrary manner without even giving any reason or logic. Since no deduction has been claimed, there is case of making disallowance thereof under any manner, either as made by the A.O. u/s 43B or otherwise. In the case of CIT vs Noble and Hewrit (1) Pvt. Ltd. (2008) 305 ITR 324 (Del), Hon'ble Delhi High Court held that where the amount was not debited to P & L A/c, amount could not be disallowed u/s 43B. The addition of Rs.24,50,000/- and Rs.57,500/- made by the assessing officer by invoking provisions of 43B of the Act is patently wrong. The assessee has not claimed any deduction of Rs.24,50,000/- and Rs.57,500/- and therefore, there is question of making any disallowance. The amount of Rs.24,50,000/- and Rs.57,500/- are not even expenditure. Moreover, the amount of Rs.24,50,000/- and Rs.57,500/- represent opening balance as on 01/04/2016 and thus, they are not even transactions of the year under consideration i.e., A.Y. 2017-18. Copy of balance shoot is attached as Annexure-I. Infact, the assessing officer gave show cause notice for making addition U/S 41 (1) of the Act on account of alleged remission of liability. The assessing officer never gave any show cause for making disallowance u/s 43B. to sum up it is submitted that the addition of Rs.24,50,0000/- and Rs.57,500/- are totally erroneous in view of the following :-
1) The amounts are not even in the nature of expense. 2) The assessee company has not claimed deduction of these amounts. 3) The amounts are the opening balance of last year. In view of the above, addition of Rs.24,50,000/- and Rs.57,500/- made is liable to be deleted.”
On the other hand, ld. DR of the Revenue relied on the findings of the lower authorities.
Considered the rival submissions and material placed on record. We observe that AO has found discrepancies in labour charges and accordingly he rejected the books of account. We observe from the detailed submissions and Profit & Loss account declared by the assessee for the last three years including the impugned assessment order, we observe that assessee has declared GP of 5.15% in AY 2015-16, 9.4% in AY 2016-17 and again 5.32% in the impugned assessment year. The assessee has explained the reasons for fall in the profit during the EWS flat for Housing Board, Haryana and the cost of material consumed is more in the above project. However, assessee could not explain the reasons for higher gross profit in assessment year 2016-17. It is submitted before us that payments were made to Sunehari Bricks Company were all routed through bank and they also confirmed the same and it was submitted that assessee has submitted bank statement of Sunehari Bricks Company also. Considering the overall facts on record, we observe that the AO has estimated the income on the basis of previous assessment year i.e. 9.40%. He has observed discrepancies on the expenditure involving cost of production, as submitted by the assessee, the profits are not consistent and achievable every year. Therefore, for the sake of justice, the average profit of three years can be estimated logically to iron out the variations. Therefore, we are inclined to direct Assessing Officer to estimate the GP at 6.65%. In the result, ground raised
by the assessee is partly allowed.
9. We observe that the AO has made addition on reserve for service tax and Withheld – Vardhman of Rs.24,50,000/- and Rs.57,500/-. These amounts were opening balance carried forward from previous year and there was no transaction for the current year under consideration. The AO has invoked section 43B with the understanding that this is payable to the Government account. We observe that the amount collected by the assessee as retention money and also not an expenditure claimed by the assessee. Since the addition proposed by the AO is not falling u/s 43B, the same is directed to be allowed. As per the submissions of the assessee, it is reserved for service tax and Withheld – Vardhman as retention money. Since there is no transaction for the year under consideration, the Assessing Officer cannot invoke section 43B. Therefore, we are inclined to allow the ground raised by the assessee.
10. In the result, the appeal filed by the assessee is partly allowed. Order pronounced in the open court on this 10th day of July, 2025 after the conclusion of the hearing.