K B S ENTEPRISES,JAIPUR vs. ACIT(CIRCLE-6), JAIPUR

The Assessing Officer found that the assessee had reflected gross contract receipt of Rs. 15,47,59,333/-, in the receipt and expenditure Account and also having claimed a sum of Rs. 13,61,10,612/- as expenditure, declared its net profit of Rs. 1,11,55,911/- i.e. before interest and depreciation, but after claiming interest, depreciation and remuneration, the assessee declared its net profit as Rs. 22,30,311/-, for the purpose of taxation. The said net profit came to 1.44% of the turnover.

The assessee faced query from the Assessing Officer to justify its claim regarding major part of TDS as refund, and also to have offered income as meager percentage of the turnover. Thereupon, the assessee submitted reply. Response of the assessee was that NP ratio and high refund was result of depreciation, and interest & remuneration paid to its partners. However, the Assessing Officer found that interest and remuneration paid to partners came to Rs. 29,38,955/- only and after that an amount of Rs. 59,86,645/- was debited by the assessee towards depreciation and interest paid to others. In order to justify its claim, the assessee was found to have K B S Enterprises, Jaipur. excluded an amount of Rs. 89,25,600/- i.e. interest and remuneration paid to partners and the amount debited towards depreciation and interest paid to others, and in this way claimed NP ratio @ 6.96% . However, as observed by the Assessing Officer, at the same time the assessee had claimed NP ratio of 1.44%, which was qualified by the auditor in the relevant column of the audit reports. That is how, the Assessing Officer was of the view that response given by the assessee to the query raised was nothing but camouflaging of the facts. It led to issuance u/s 142(1) of the Act, calling upon the assessee to furnish following details:- “1. Furnish contract wise details of expenses & income details. Also furnish site wise details of opening stock, purchases made during the year, consumption made during the year and closing stock details.

It may mentioned here that the Assessing Officer observed in para 3.3 of the assessment order that the assessee failed to furnish any of the above said details and the said failure led to issuance of letter dated 21.10.2019, calling for following further details, but, surprisingly as K B S Enterprises, Jaipur. observed by A.O., the assessee did not comply with the said letter dated 21.10.2019:- “1. Prove the identity and creditworthiness of the cash creditors and genuineness of the transactions of unsecured loan accepted by you during the year under reference ay furnishing copy of their ITR, relevant extract of their bank statement highlighting the relevant entries and financial statement. It may please be noted that in the event of failure on your part to prove the identity and creditworthiness of the lender and genuineness of the transactions by furnishing relevant supporting documentary evidences, the same would be treated as unexplained cash credit u/s 63 of the Income-tax Act, 1961 and added to your total income.

Party wise details of interest expenses.

Reason for non deduction of TDS on fees for professional or technical service amounting to Rs. 83,200/-.

Furnish all pending details called for vide earlier notices issued u/s 142(1) Income-tax Act.

It may please be noted that in the event of failure on your part to furnished details/documents/clarification, the case will be completed u/s 144 of the without affording any further opportunity of being heard.”

Ultimately, the Assessing Officer issued another notice u/s 142(1) of the calling upon to the assessee, to furnish details to substantiate the claim of expenditure debited in P & L account. In this way, the assessee was called upon show cause as to why 10% of the expenses, as claimed by the assessee in P and L Account and trading account, be not disallowed.

As observed by the Assessing Officer, in para 3.5 of the assessment order, the assessee did not furnish following details, even though it submitted ledger account and confirmation of unsecured loans:-

In para 3.6, the Assessing Officer referred to the instructions contained in notification No. 87/2016 notified by CBDT, as regards computation of income and disclosure standards applicable from the assessment year 2017-18, and observed that as per provisions of ICDS-III contained in para 5 to 8 of the above said notification issued by CBDT, the assessee was required to maintain separate income and expenditure account for each construction contract and also to return Revenue, while attributing expenditure to each contract.

In the course of arguments, we put a specific query to Ld. AR for the appellant as to whether the assessee firm was maintaining separate income and expenditure account for each construction contract. Thereupon, Ld. AR for the appellant candidly admitted that the assessee was not maintaining separate income and expenditure account for each construction contract. Admittedly, the assessee firm received more than 98% of the revenue from different government departments related to construction work.

In the given situation, the Assessing Officer deemed it appropriate to disallow 10% of Rs. 14,13,71,468/- towards expenditure shown to have been debited in P & L account (excluding opening stock of Rs. 3,21,78,760/-, depreciation of Rs. 22,85,789/- and interest of Rs. 13,78,955/- to partners), which came to Rs. 1,41,37,147/-.

The only contention raised by Ld. AR for the appellant in this regard is that the Assessing Officer did not reject the books of account to the assessee firm, and as such, the Assessing Officer was not justified to disallow 10% of the above said amount, and to add the same to the income of the assessee.

As noticed above, the Assessing Officer observed that the assessee firm had not maintained separate income and expenditure account for which construction contract, and Ld. AR for the appellant has not disputed this fact before us.

In the given situation, we do not find any merit in the contention raised by Ld. AR for the appellant that for want of rejection of books of account of the assessee firm, the Assessing Officer was not justified in disallowing 10% of the above said amount towards expenditure.

It may be mentioned here that when the assessee was in appeal before Learned CIT(A), there, the previous decisions by Learned CIT(A), K B S Enterprises, Jaipur. pertaining to the assessments carried out in respect of the assessee itself during the past years, were taken into consideration. Vide those decisions net profit @ 8% of gross receipts, prior to depreciation and remuneration and interest to partners, stood already upheld. Learned CIT(A) also took into consideration, relevant documentary evidence in terms of the said decisions passed by the Appellate Authorities and was of the view that even as regards the assessment year under consideration, net profit @ 8% of the gross receipt, prior to depreciation, remuneration and interest to partners, would be the fair rate of interest. Accordingly, Learned CIT(A) restricted the above to Rs. 52,46,981/- .

In the course of arguments, ld. AR for the appellant has admitted that net profit @ 8% of the gross receipt was held by previous decisions of Learned CIT(A), relating to the years. Furthermore, Learned AR for the appellant has consented to on this rate i.e. net profit @ 8% of the gross receipts, prior to depreciation, remuneration and interest to partners.

In the given facts and circumstances, we do not find any ground to modify the order passed by Learned CIT(A), whereby net profit @ 8% of the gross receipt before depreciation, remuneration and interest to partners, has been held to be the “fair net profit rate”.

The only contention raised by Ld. AR for the appellant is that all the relevant transactions of credits were shown in its books of accounts, and as such, the assessee firm discharged its burden to prove creditworthiness and genuineness of the transactions, and that the addition made in both orders, in this regard deserves to be set aside.

While referring to the written submissions submitted before Learned CIT(A), copy whereof has been furnished here in the Paper Book, Ld. AR for the appellant has submitted that the assessee firm had furnished all the confirmations from the loan creditors in addition to ITRs of six loans creditors, but same were not considered.

During appellate proceedings, before Learned CIT(A), the assessee firm was able to submit documentary evidence regarding repayment of Rs. 14,00,000/-, out of the total unsecured loan of Rs. 26,50,000/-. Learned CIT(A) accepted the submissions put forth on behalf of the appellant that K B S Enterprises, Jaipur. the balance amount of unsecured loans reflected in the balance sheet pertained to the previous years. At page 18 of the Paper Book, furnished here, appellant has submitted a table depicting details of nine unsecured loans, forming part of the written submissions furnished before Learned CIT(A), while alleging that these were also made available to the Assessing Officer. Further, it has been submitted at page 19 of the written submissions that addresses and PAN particulars of said 9 parties were submitted there by e-filing on 9.9.2019 and 3.10.2019 , in addition to the ITRs of 6 loan creditors, on 18.11.2019, with the prayer for issuance of summons to said parties calling upon them to furnish their Bank statements etc. But, the fact remains that bank statements of said 9 parties were not made available either to the Assessing Officer or Learned CIT(A). It is significant to note that at Sr.No.8 of the list of nine unsecured creditors is the name of one Ashish Khandelwal, who is stated to have lent Rs.2,50,000/-to the assessee firm on 3.2.2017 through banking channel. As per said table, said amount was repaid by the assessee to said creditor through banking channel. Surprisingly, on going through page 39 and 60 of the said Paper Book, it transpires that name and address of said Ashish Khandelwal tallies K B S Enterprises, Jaipur. with the particulars of Shri Ashish Khandelwal, who is representing the appellant firm, before us as its authorized representative/counsel. Furthermore, at page 60 of the Paper Book submitted here is available copy of Form No.3CB i.e. audit report under section 44 AB of the Act. This report is dated 6.11.2017. It has been prepared by Shri Ashish Khandelwal, Proprietor of ASHISH KHANDELWAL AND ASSOCIATES, CHARTERED ACCOUNTANTS. When Shri Ashish Khandelwal claims to have lent Rs.2,50,000/-to the Assessee firm by way of unsecured loan on 3.2.2017, the question arises as to whether it was just and proper on the part of said Shri Ashish Khandelwal, to carry out audit under section 44 AB of the Act and submit report. The answer would be in the negative. Furthermore, it remains unexplained as to why Shri Ashish Khandelwal did not himself appear before the Assessing Officer to establish identity, creditworthiness and genuineness as regards said transaction of unsecured loan. At page 43 of the written submissions furnished before Learned CIT(A), is available page 2 of the reply to the notices dated 30.9.2019 and 21.10.2019 from the assessee to the Assessing Officer.