RUDRAPRATAP R TRIPATHI,THANE vs. ACIT CIR 3, THANE

The solitary issue to be decided in this appeal is as to whether the ld. CIT(A) was justified in upholding the action of the ld. AO in rejecting the books of accounts of the assessee and confirming the addition made by the ld. AO of net profit at 9% of total turnover on an estimated basis subject to minor corrections in the figures.

The brief facts of this issue are that the assessee is a proprietor of two concerns namely M/s. Indian Corporation and M/s. Indian Complex Services engaged in the business of land development and the assessee is also a contractor. The main business of the assessee is to acquire land on development basis from the villagers and construct the warehouses on that land and to rent out those warehouses to various customers as per their requirement. During the year under consideration, the assessee has shown gross profit and net profit of Rs.8,67,85,966/- and Rs.6,33,25,718/- respectively of total turnover of Rs.41,66,23,189/-. The gross profit and net profit ratio worked out to 18.79% and 14.12% of total turnover. The assessee filed his return of income for the A.Y.2012- 13 on 30/09/2012 declaring total income of Rs.5,48,35,710/-. The ld. AO observed in para 1 of his assessment order that the authorised representative of the assessee attended from time to time and explained the return by producing books of accounts and documents, bank statements and other records maintained by the assessee together with audited financial statements, tax audit report in form No.3CB and 3CD.

3.1. The survey operation u/s.133A of the Act was carried out in the premises of the assessee on 28/09/2011 wherein some pocket diaries were impounded by the survey team. Admittedly, the said pocket diaries contained certain entries aggregating to Rs.5,62,00,000/- which when confronted with the assessee, the assessee came forward to make a disclosure at the time of survey offering such sum of Rs.5,62,00,000/- as part of his turnover in contract business. The assessee admittedly included this sum of Rs.5,62,00,000/- as part of his turnover in contract business while filing the return of income for A.Y.2012-13. There was a specific question put by survey team on the assessee vide question Nos.15 – 18 as to why the said sum of Rs.5,62,00,000/- should not be treated as part of cash component of sale consideration in contract business for the F.Y.2011-12 relevant to A.Y.2012-13 which the assessee came forward to accept that the said sum of Rs.5,62,00,000/- to be cash component of sale proceeds in his contract business for the F.Y.2011-12. The assessee declared income from his contract business to the tune of Rs.5,88,25,751/- which admittedly included Rs.5,62,00,000/-, pursuant to which the gross profit and net profit ratio worked out to 18.50% and 15.71% respectively. The ld. AO, however, observed that the amount offered in the sum of Rs.5,62,00,000/- was over and above the regular income offered by the assessee in the return of income and if the said sum of Rs.5,62,00,000/- is excluded from the profit of contract business, the net profit of the assessee would work out only to 0.73% which is far low when compared to that earned by the assessee in the earlier years. The ld. AO also observed that the profit of the assessee had declined drastically during the year in view of the fact that assessee had not valued its work in progress properly during the year. With these observations, he proceeded to reject the book results of the assessee and based on earlier three years net profit margins, arrived on the average net profit figure of 9% on an estimated basis on the total receipts of the assessee. The basis of ld. AO estimating the net profit at 9% is worked out as under:-

The ld. CIT(A) upheld the action of the ld. AO in rejecting the books of accounts and give partial relief to the assessee stating that the direct income and maintenance income are not akin to the receipts from contract business and hence, the same are to be excluded while determining the net profit at 9% on turnover of contract business. Accordingly, he arrived at the turnover of contract business at Rs.31,82,82,489/- (Rs.37,44,82,489 – income offered of Rs.5,62,00,000/) and applied 9% on the said sum which worked out to Rs.2,86,45,425/- and from the said sum, he reduced the income already disclosed by the assessee in the sum of Rs.26,25,750/- (5,88,25,750 – Rs.5,62,00,000/-). By this working, the ld. CIT(A) sustained the addition in the sum of Rs.2,60,19,675/- towards estimation of net profit against which assessee is in appeal before us on the following grounds:

We have heard rival submissions and perused the materials available on record. At the outset, we find that the ld. AO had indeed recorded a finding in his assessment order that the entire books of accounts together with audited financial statements and tax audit report were duly furnished before him by the assessee. We find that the ld. AO had merely resorted to rejections of book results and books of accounts u/s.145(3) of the Act merely on the ground that the profit declared by the assessee had fallen drastically during the year under consideration. We find that in order to arrive at this conclusion that profit has declined drastically during the year, the ld. AO had conveniently ignored the amount offered by the assessee in the return to the tune of Rs.5,62,00,000/- in consonance with the declaration made by the assessee at the time of survey conducted on 29/09/2011. Infact, the ld. AO had reduced Rs.5,62,00,000/- from the net profit from the contract business declared by the assessee and then compared the profit percentage and arrived at a wrong conclusion that net profit has declined drastically during the year. We have gone through the statements recorded from the assessee at the time of survey which is part of the paper book filed before us. From the said statement, we find that the question posed by the survey team on the assessee and the replies given by the assessee categorically inferred that the amounts reflected in the pocket diaries impounded represented cash component of sale receipts from contract business of the assessee, meaning thereby, the said sum of Rs.5,62,00,000/- is nothing but undisclosed turnover of the assessee from contract business found during the survey. It is not in dispute that this sum of Rs.5,62,00,000/- had been duly included for taxation by the assessee and is included in the total turnover of contract business to the tune of Rs.37,44,82,489/-. Hence, we hold that the preliminary action of the ld. AO to reduce Rs.5,62,00,000/- from the disclosed profit from contract business of Rs.5,88,25,750/- is patently wrong. Once, this action of the ld. AO is found to be erroneous, the entire reasoning given by the ld. AO that profit has declined completely vanishes. We find that the ld. AR had placed on record the comparative chart of gross profit and net profit derived by him from his contract business alone as under:-

In the result, appeal of the assessee is allowed.