THE ACIT, CIRCLE-6, SURAT vs. M/S. C.R.PATEL, SURAT

This appeal filed by the Revenue is directed against the order of Learned Commissioner of Income-tax (Appeals)-I, Surat [in short "the CIT (A)"] dated 14.08.2014 pertaining to Assessment Year 2011-12, which in turn has arisen from the order dated 31.01.2014 passed by the Assistant Commissioner of Income Tax, Circle -6, Surat (in short "the AO") under section 143 (3) of Income Tax Act, 1961 (in short "the Act'): ACIT-6, Surat v. C. R. Patel /I.T.A. No.2959 /Ahd/2014/A.Y.11-12 2. The AO has taken as many as three grounds of appeal, but in sum and substance, these all relates to deleting addition of Rs.32,45,660/-; without appreciating the facts that the assessee has failed to produce bills of expenses: The CIT (A) has also ignored ratio of the landmark judicial pronouncements by the Hon ble Supreme Court in the case of CIT v. British Paints India Ltd. [1991] 188 ITR 44 (SC) 54 Taxman 499/ 91 CTR 108 (SC) wherein it was held that the assessee is required to disclose complete work in progress and valuation should be as per Accounting Standard: 3. Succinctly, facts as culled out from the orders of lower authorities are that the assessee is civil contractor and is engaged in civil construction: The Assessing Officer found that oUt of total expenses of Rs. 98.09 Lakhs debited in the month of March 2011, an amount of Rs.32.45 Lakhs has been paid in cash during the period from 25.03.2011 to 31.03.2011 of which bills were not produced for verification inspite of providing enough opportunity, nor the assessee has shown any work in progress in closing stock: The assessee has considered the labour expenses pertaining to month of March 2011, in the purchases made for working out gross profit ratio but not considered the same for working out of closing stock: The AO observed that the valuation of closing stock is not as per Accounting Standard-2, which deals with valuation of inventories: Inventories are held as assets for sale in the course of business, in the production for such sale or form of ACIT-6, Surat v. C R. Patel /I.T.A. No.2959 /Ahd/201A/A.Y.11-12 materials or supplies to be consumed in the production: Inventory should be valued at the lower of the cost or net realizable value (NRV): The Assessing Officer noted that perusal of cashbook showed bulk labour payments in month of March in cash amounting to Rs.32,45,660/-. However, the assessee has failed to explain bulk labour payments made in cash during the period from 25.03.2011 to 31.03.2011. Accordingly, the AO revalued the closing stock of Rs.1,34,70,443 /- to Rs.1,67,16,103 /- by making addition of Rs.32,45,660/- being cash payments made in last 5 days of financial year: 4. Being, aggrieved the assessee filed an appeal before the Id. CIT (A) The CIT (A) deleted the addition made by the AO by stating that the AO has failed t0 establish that how the labour payments were unexplained: No comments are given by the AO in respect of genuineness or in genuineness of these expenses: The AO has failed to contradict the claim of the appellant: On the other hand, the appellant has shown the withdrawal of Rs 40 lakhs (11+4+15+10) during 25.03.2011 to 26.03.2011 from various bank accounts. In support of these withdrawals, the appellant has filed copies of bank statement: Therefore, source of cash expenses of Rs.32,45,660 / - is also explained: The assessee further submitted a chart of labour expenses against contract receipts income for the assessment year 2006-06 to 2011-12 ranging between 19.36%/ to 21.50% to show that labour expenses incurred are not unusual: ACIT-6, Surat V C. R. Patel /I.T.A. No.2959 /Ahd/2014/A.Y.11-12 5 The Id. Sr. DR relied on the order of the AO and submitted the assessee shown work in progress closing stock during the year under has not any consideration even though 98.09 Lakhs have been debited under the head of and relevant bills for expenses were not produced for labour expenses verification in spite of providing enough opportunities. Further, the assessee has stated that bills of Rs.98,09,441 /- do not pertains to month of March but the bills have been received in the month of March: Therefore, the assessee has failed to explain the payments towards labour expenses in cash of Rs 32.45 lakhs: Further, the Id. Sr. DR relied on decision of Hon"ble Supreme Court in the case of CIT v British Paints India Ltd: [1 991] 188 ITR 44 (SC) / 54 Taxman 499 / 91 CTR 108 (SC) wherein it was held that section 1 45 confers sufficient power upon the officer- nay, it imposes 4 duty upon him to make such computation in such manner as he determines for deducing the correct profits and gains This means that where without disclosing the real cost of the stock-in- accounts are prepared trade, albeit on sound expert advice in the interest of efficient administration of the company, it is the duty of the ITO to determine the taxable income by making such computation as he thinks fit. The Id: Sr. DR submitted that in this case; the valuation was not in accordance with Accounting Standards-2 nor the assessee has produced the bills of expenses for verification in spite of opportunity provided: Therefore, the order of the AO may be restored: ACIT-6, Surat v. C R. Patel /I.T.A. No.2959 /Ahd/2014/A.Y.11-12 6 Per contra, the assessee has filed written submissions: It is seen from written submissions that the assessee, value of closing stock on the basis of physical material lying at the site from year to year: There is no WIP in respect of work done and since there is no WIP , there cannot be any component of labour expenses as stated by the AO. The State Government certifies the work carried up to the year-end and on that basis, the assessee makes billing: The valuation of unfinished work is also done by the State Government: The AO added that notional labour payments of Rs.34.45 Lakhs as WIP. No such addition was made in earlier Year $ even orders were passed under section 1 43(3). Without prejudice to above, if notional addition is made in closing stock, it again affect the opening stock of next year. The assessee is partnership firm and income in all years chargeable to tax at maximum marginal rate, hence, enhancement in closing stock and corresponding opening stock of next year does not have any loss to revenue loss. Hence, the CIT (A) has rightly deleted the addition: 7 We have heard the submissions of the Id. Sr. D.R;; perused the written submissions of the assessee and relevant material on record: We find that the AO has not questioned the source of payments of labour expenses of Rs. 34.45 lakhs during last week of March 2011 , which is demonstrated before CIT(A) by producing bank statement showing cash withdrawals of Rs.40 Lakhs during the period from 25.03.2011 to 28.03.2011 Hence, source in established: As far as ACIT-6, Surat v. C. R. Patel /I.T.A. No.2959 /Ahd/2014/A.Y.11-12 valuation of WIP is concerned, the closing stock is valued based on certificate from State Government as the assessee is 4 civil contractor for State Government: This method is being followed year to year basis in past and never disturbed even in scrutiny assessment made in earlier year s. Moreover, by enhancing closing stock corresponding credit to opening stock of next year will have to be given which will not make any loss of revenue, as the income is chargeable to tax at maxim marginal rate in the subsequent year. So far as reliance on the decision of CIT v. British Paints India Ltd: [1991] 188 ITR 44 (SC) / 54 Taxman 499/ 91 CTR 108 (SC) is concerned same is not applicable to present case as the AO has not invoked the provisions of section 1 45(3) of the Act nor there is any rejection of books of accounts. In the light of above discussions, we do not find any infirmity in the order of Id. CIT (AJ; hence, grounds of appeal of Revenue are dismissed.

In the result, the appeal of the Revenue is dismissed: 9. Order pronounced in the open Court on 24.01.2018 Sdl - (CM: GARG) JUDICIAL MEMBER S (O.P. MEENA) ACCOUNTANT MEMBER Td/ Surat, f2aldz Dated:24.01.2018 Copy of order forwarded to: Assessee/AO /Pr. CIT / CIT (A)/ITAT (DR) /ITAT-file: By order Assistant Registrar Surate