M/S DEORA ELECTRIC WORKS,,ALLAHABAD vs. JT.CIT,, ALLAHABAD

addition is highly unjustified and illegal and therefore the declared income is liable to be accepted in all fairness. 8.That in any view of the matter for maintaining net profit rate of 5% out of 7% as applied by the Assessing Officer, cited case laws in the orders of the two lower authorities are not applicable in the present case and the copies of those cited cases should have been provided to the appellant before taking the shelter of those cases for making and maintaining the addition in which the lower authorities totally failed, hence the addition as made and maintained on this count is unwarranted and illegal. 9.That in any view of the matter the interest charged under different sections of the Income Tax Act is highly unjustified and illegal in the facts and circumstances of the case. 10.That in any view of the matter the assessee reserves his right to take any fresh ground of appeal before hearing of the appeal.

2. The facts of the case are that during the year under consideration, the assessee declared contractual receipts from various Government Departments at Rs.10,66,77,556/-. Of the above, receipts amounting to Rs.5,87,25,039/- came from Branch Office of Jaipur and pertained to sales of Generators that were dispatched from Jaipur Branch against Government orders. The Assessing Officer, on going through the agreements entered into by the assessee with various Government Departments, noticed that some of the works had been completed before the end of the financial years, but the entire Tender value had not been shown as received by the assessee. He worked out a sum of Rs.23,11,600/- which, in his opinion, ought to have been received by the assessee by this time, but was not shown as having been received. The Assessing Officer also observed that while some of the works which were not completed, stretched to the following financial years, no expenses other than material used had been shown towards work-in-progress. He went on to point out many more defects in the books of account in his assessment order. Some of these defects that were observed by him were that: TDS was not paid on the payments made to the Advocate; some payments were made in contravention of the provisions of section 40A(3) of the Act; there were differences in the figures of Bank Guarantee and payment of commission as disclosed by the assessee and bank; payments made to LED Power in the months of November, December, 2009, January, February and March, 2010 were all recorded in the books on a single day, i.e., on 31.03.2010; purchases amounting to Rs.2,52,000/- were not verifiable from vouchers; certain telephones were found installed at the residences of the partners, expenses of which have been claimed in the profit and loss account; expenditure had been claimed with regard to vehicle that was not in the books of the firm; vouchers for office expenses, salary and wages, labour charges and site expenses were found to be self-made; payment of electricity had been made relating to residences of the partners, etc. On the basis of these, the Assessing Officer held that the books of the assessee were – both incomplete and incorrect and he proposed to reject the same under section 145(3) of the Act. To the show cause notice, the assessee pointed out that it was maintaining its books of account on mercantile basis and the income was disclosed as and when it was received. The assessee was entitled to receipts when the work was executed and not on the basis of the work awarded. It was submitted that the payment was received when the Department took measurements and recorded the amount in their books. The assessee submitted that when the amount was not received, the same was shown as sundry debtors. The assessee submitted that its books had been audited in the past and results are generally accepted. On the other allegations, the assessee submitted replies explaining why the observations made by the Assessing Officer were not of a nature that would require rejection of its books. It was submitted that in some cases, there were variations in receivables on account of the fact that the work had either been increased or reduced by the concerned Government Departments. However, it was not in a position to provide details, as the respective Government Departments were not providing the evidences for such extension/reduction. Regarding the payment made to Advocate without deduction of TDS, it was submitted that the same was not made according to the bonafide belief that tax deduction was not required for the amounts below Rs.50,000/-. Regarding the payments disallowable under section 40A(3) of the Act, it was submitted that these were made after office hours at various sites. Regarding the difference in amount of bank guarantee and commission as reported by the Bank, the assessee submitted that the guarantees were taken from Bank of Baroda, Main Branch, Allahabad and the fees were collected by them from the bank account and such bank account tallied with the books of account. On the issue of entry of five months of payment to LED Power, it was submitted that this was due to a clerical mistake. On the purchases of items through self-made vouchers, it was submitted that sometimes items like sand, bricks, etc. were done by the employees at remote sites in small quantities for execution of works and local vendors dealing in such items were not in a position to issue bills. Therefore, self-made vouchers were made, but these were for negligible amounts as compared to overall purchases. With regard to vehicles, on which expenditure had been made, it was submitted that while they were not properties of the firm, they were used by the firm for business purposes and hence the expenditure had been claimed. Regarding payment of electricity and telephone on account of partners, Shri Pawan Kumar Deora and Shri Ashok Kumar Deora, it was submitted that a part of their house was used for office premises and hence the payment relating to business expenses were claimed. It was further submitted that in previous years, the same issue had arisen and the Assessing Officers had examined and verified the same and also considered the practical problems. Thereafter, no adverse view had been taken. It was, therefore, prayed that adverse inference should not be taken in this regard.

3. The AO did not agree with the explanations offered by the assessee. He made enquiries from some of the Departments concerned and collected information from BSNL (ED), Kanpur and The Garrison Engineer (West), Allahabad. From the accounts of BSNL (ED), Kanpur, he ascertained that the date of completion of work was 29.06.2009 and the date of final payment was 17.06.2010. From the analysis of the reply, he concluded that an amount of Rs.98,750/- which was paid in financial year 2010-11, ought to have been disclosed in the books of account on the basis of mercantile system of accounting. The correspondence made with The Garrison Engineer (West), Allahabad revealed that tender amount was of Rs.19,82,510/- and the date of completion was 30.01.2009. The date of final payment was in August, 2009, leaving the balance at Nil. Thus, he concluded that the assessee had not disclosed the amount of Rs.4,69,067/-. He rejected the explanation of the assessee that there was short receipt due to reduction of scope of work on the basis of the reply submitted by The Garrison Engineer (West), Allahabad. On the basis of such observations made by him, the Assessing Officer rejected the book results and applied net profit rate of 7% on the contractual receipts of Rs.10,66,77,556/- as against the declared net profit rate of 2.02%. He also made an addition of Rs.56,69,837/- on account of short receipts as disclosed above and thus assessed the total net profit at Rs.79,09,394/- on total receipts of Rs.11,29,91,342/-.

4. Aggrieved with this addition, the assessee went in appeal before the ld. CIT(A), Allahabad. Before the ld. CIT(A), it was submitted that the assessee firm was mainly engaged in electrical contracts for Central Government Departments, such as MES, Railway and BSNL. Regular books of account had been maintained on day-to-day basis, which were audited year after year. In the last five years, all the assessments have been completed under section 143(3) of the Act and no additions of the nature made in the current year, had been made previously. It was submitted that all the books of account had been produced before the Assessing Officer and all the required information/details as per his queries were furnished. No specific fault was found in the books of account or the audit report. It was submitted that there was no suppression of receipts but out of the tender amount, certain receipts were not received by the assessee from Government Departments in Serial No.9 due to reduced work by the Government Department. Similarly, on other occasions, receipts were increased due to enhancement of the work. While the assessee had included the amounts received on enhancement of work, it had reduced the amounts not received due to reduction in scope of work. The Assessing Officer had not verified this fact from the concerned Government Department and made additions in arbitrary manner, which were unjustified and illegal. It was also submitted that the Assessing Officer had made additions without appreciating that of the added receipts of Rs.56,69,837/-, seven sundry debtors of Rs.34,64,577/- had been shown in the balance sheet as on 31.03.2010. Therefore, the Assessing Officer was wrong in alleging suppression of receipts. A chart was submitted by the assessee before the ld. CIT(A) to reconcile this amount of Rs.56,69,837/-, with its accounts. It was pointed out that with regard to Rs.98,750/- stated to have been suppressed on account of BSNL(ED), Kanpur, it was submitted that the same amount was appearing in the balance sheet under the head ‘Sundry Debtors receivable’, as was the sum of Rs.4,69,067/-. The assessee also questioned the application of rate of 7% to the net receipts of the assessee ignoring the past results of the assessee and the fact that those past results have been accepted in successive assessments under section 143(3) of the Act. It was further submitted that the reduction of amount was not correct because the profit declared by the assessee in this year was more than the profits declared in previous year and no specific faults have been found in the books of account.

5. The ld. CIT(A) was not convinced with the replies of the assessee. He observed that the assessee had submitted that it follows mercantile system of accounting, but had shown its income on the basis of receipts. This was against the principle of accounting. He held that the assessee did not have any explanation as to why, inspite of following mercantile system of accounting, it had shown the income on receipt. He further observed that when the Assessing Officer examined certain documents, he did not find that the short receipt of the assessee was attributable to reduced scope of work. He also rejected the arguments of the assessee that addition made on account of suppression of receipts amounted to double addition, observing that it was the responsibility of the assessee to declare income according to the method of accounting regularly followed by it.

He held that debtors could not be shown in the balance sheet without routing the same through the profit and loss account. He upheld the decision of the Assessing Officer to rely upon the decision of the Hon'ble Supreme Court in the case of CIT vs. Wood Word Governor India Pvt. Ltd. (2009) 312 ITR 254 (SC), in which it has been held that the income has to be declared on due basis, even before it is actually received. Therefore, he confirmed the addition of Rs.56,69,837/- made by the Assessing Officer. On the issue of rejection of the books of account, the ld. CIT(A) observed that different ITAT Benches in the cases of Goyal Construction Company, Pooja Construction Company, Singhal Builders Contractor and Gupta Construction Company had confirmed the profit rates of 11%, 10%, 12% and 8% respectively. He agreed with the Assessing Officer on the fact that there were mistakes in the books of account, as listed above in this order, and held that since the principle of res-judicata did not apply in Income Tax proceedings, the reliance placed by the assessee on the principle of consistency to hold that the additions should not be made was not justified. He also rejected the decisions relied upon by the assessee, holding that the said decisions were distinguishable from the facts of the case of the assessee. He, therefore, upheld the decision of the Assessing Officer to reject the books of account. However, on the issue of estimation of profits, he held that the Assessing Officer had not considered many such judgements wherein the Tribunals have confirmed the estimation of lower profit. The Assessing Officer had also overlooked the fact that receipt of Rs.5,87,25,039/- was related to the supply of Generators, which were not Civil Contract works. Therefore, he directed the Assessing Officer to estimate the net profit rate at 5% instead of 7% and accordingly granted relief to the assessee of Rs.29,59,826/-.

6. The assessee is aggrieved against this order of the ld. CIT(A) and has accordingly come in appeal before us. Shri Praveen Godbole, C.A. (hereinafter known as Ld. A.R.), arguing the case of the assessee, pointed out that in the assessment proceedings, the books of account were produced on a number of times and thoroughly examined by the Assessing Officer, but no specific defects have been found. He submitted that the assessee was not engaged in Civil Construction, but in electrical contract business, and in such type of work, the margin of profit was much lower as compared to Civil Contract work. Apart from this, there was cut-throat competition and work was allotted by competitive tender bid. The price variation in materials after bid was awarded had also to be absorbed by the Contractor. Therefore, it was not proper for the authorities below to disturb the net profits declared by the assessee when the same had consistently been declared year after year on similar set of facts. With regard to estimation of receipt at Rs.11,23,47,393/-, it was submitted that all the receipts were from Government Departments after deduction of TDS in all cases. The benefit of TDS had been allowed. The only cause for the enhancement was that the amount in question was not received during the year. However, the assessee had declared receipts in the year in question and reconciliation had also been furnished, showing how the receipts were taken into their accounts. In this background, it was not proper to consider higher receipts on presumption basis. Hence, the additions made were liable to be deleted. It was further submitted, without prejudice to these arguments, that there was no suppression of receipts and that even if the amounts have to be added back, it could not constitute income, as there was expenditure component involved in the same and, therefore, only profit element of the same could be added back. For this reason, it was submitted that the addition made was unwarranted.

7. On the other hand, Shri A. K. Singh, the ld. Departmental Representative (hereinafter know as ld. D.R.), pointed out that the Assessing Officer had observed that the assessee had suppressed receipts of Rs.56,69,827/- and the ld. CIT(A) had also observed that the same were disallowable as per mercantile system of accounting that was adopted by the assessee. The assessee’s claim of rejection in quantity of receipts due to reduction in scope of work had not been borne out by correspondence with certain Government Departments that the Assessing Officer had undertaken. Nor could assessee produce evidence in this regard. Furthermore, the ld. D.R. pointed out that inconsistencies in the books of account had been duly pointed out by the Assessing Officer in his order, wherein he had demonstrated that besides other things, the assessee was only showing cost of material in work-in-progress which demonstrated how the accounts were incorrect. Therefore, he submitted that the Assessing Officer was justified in rejecting the books of account. He also challenged the view of the Ld. A.R. that the estimation of income after rejection of the books of account ought to be done based on past history. He submitted that when the books of account had been felt to be unreliable, then there was no justification to insist that the books of account of the same assessee for previous years ought to be relied upon, because the past history would not give a vested right to the assessee to insist on those same profits. For this proposition, he placed reliance on the following case laws:

Order pronounced on 20/03/2025.