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Income Tax Appellate Tribunal, DELHI BENCH “G”, NEW DELHI
Before: SHRI R. K. PANDA & MS. SUCHITRA KAMBLE
This appeal filed by the Revenue is directed against the order of CIT(A), Rohtak, dated 05.03.2014 relating to assessment year 2010-11 against order passed under section 143(3) of the Income Tax Act, 1961 (in short “the I.T.
Act”). 2. In the ground of appeal no.1, the Revenue has challenged the order of the ld. CIT(A) in sustaining the addition of Rs.1,00,000/- as against Rs.54,15,219/- made by the Assessing Officer by estimating net profit from contract work at 8% of the turnover before salary & interest to the partners.
Facts of the case, in brief, are that the assessee is a partnership firm engaged in the business of civil construction. It filed its return of income on 12.10.2010 declaring total income of Rs.6,91,760/-. During the course of assessment proceedings, the Assessing Officer observed that the assessee has declared net profit rate of 1.08% on the total contract receipts of Rs.7,82,24,067/-. He noted that in the preceding assessment year, the assessee had declared net profit rate of 1.3% on the total contract receipt of Rs.3,83,43,061/-. While examining the books of account and the bills/ invoices/ vouchers etc., the Assessing Officer noted that most of the expenses claimed by the assessee are either not been properly vouched or even completely un- vouched. Further, a large number of self made vouchers were also noticed. He, therefore, held that the correctness of the books of account cannot be established. He, therefore, rejected the book results by invoking the provisions of section 145(3) and estimated the profit at 8% of the turnover before salary & interest to the partners. Accordingly, he made an addition of Rs.54,15,219/-.
Before the ld. CIT(A), it was argued that the assessee is maintaining regular books of accounts which are audited by a Chartered Accountant. The books of account so maintained were produced before the Assessing Officer during the assessment proceedings. The Assessing Officer could not point out a single defect in the books apart from the one that expenses are unvouched or not properly vouched. It was argued that most of the payments are through cheques and only some petty expenses were in cash. All the requisite details were filed before the Assessing Officer. Therefore, under the facts and circumstances of the case, the rejection of books of account by the Assessing Officer is unwarranted.
In its alternate contention, it was argued that the application of 8% net profit on the turnover after depreciation is wrong. Relying on various decisions, it was submitted that depreciation should be separately allowed. In yet another argument, it was submitted that adoption of net profit at 8% is too high and excessive. It was argued that the assessee had undertaken majority of work as sub-contractor only. Since the firm mainly obtained contracts from other contractors, therefore, application of 8% profit rate is very high. It was argued that in case of sub-contractors adoption of net profit of 4% will be justified.
Based on the argument advanced by the assessee, ld. CIT(A) sustained the addition of Rs.1,00,000/- and deleted the remaining addition by observing as under :-
“4. I have examined the submissions made by the appellant and the facts on record. The AO has rejected the books of accounts on the premise that they were not correct due to the fact that most expenses were either nor properly vouched, unvouched or were self made. However, no specific instance of defect has been found out. The books of accounts were produced before me. They are audited by a CA. However, it is a fact that expenses are shown in the form of vouchers, some self-made, verification of which may be difficult. Therefore, in order to plug any possible leakage of revenue, I confirm disallowance on account of expenses amounting to Rs.1,00,000/- and delete the remaining addition of Rs.53,15,219/-. This ground is partly allowed.”
Aggrieved with such order of the ld. CIT(A), the Revenue is in appeal before us.
Ld. DR strongly objected to the order of ld. CIT(A). He submitted that the ld. CIT(A) in a very cryptic order has allowed substantial relief to the assessee when the assessee has failed to maintain proper bills and vouchers. He submitted that the assessee himself had claimed that certain expenses cannot be verified in absence of proper bills and vouchers. Therefore, the order of the CIT(A) be reversed. In his alternate contention, he submitted that the matter may be set-aside to the file of the Assessing Officer with direction to the assessee to produce all details.
Ld. counsel for the assessee, on the other hand, strongly supported the order of the CIT(A). He submitted that the Assessing Officer in one line has mentioned that the correctness of the books of account cannot be established on account of vouchers being self-made. He submitted that full details were given before the Assessing Officer. The assessee is mainly engaged in sub-contract.
Most of the payments, such as labour payments and raw material purchases were not doubted by the Assessing Officer. Most of the payments have been made by the account payee cheques. Certain expenditure of petty nature cannot be supported with full documentary evidence. Therefore, even if the matter is set-aside to the Assessing Officer, no purpose will be served since the assessee cannot produce any documentary evidence for these petty expenses. He submitted that in the preceding assessment year, the assessee had declared 1.3% net profit. Because of increase in the turnover during the year, which is almost double the amount, the net profit rate has gone down. He submitted that if the salary & interest to the partners and depreciation is considered the net profit rate is more than 5%. Since the assessee is a sub-contractor, therefore, the rate of profit is quite reasonable. He accordingly submitted that the order of the CIT(A) should be upheld.
We have considered the rival arguments made by both the sides, perused the order of the CIT(A) and the Paper Book filed on behalf of the assessee. We find the assessee in the instant case is a partnership firm engaged in business of civil construction. It had declared net profit rate of 1.08% on the total contract receipt of Rs.7,82,24,067/-. During the course of assessment proceedings, the Assessing Officer noted that large number of vouchers are self-made for which the correctness of the books of account cannot be established. He, therefore, rejected the book result and estimated the net profit at 8% of the turnover before salary & interest to the partners. We find the ld. CIT(A) restricted the disallowance to 1,00,000/- and deleted the amount of Rs.53,15,219/-. It is the submission of the ld. DR that the CIT(A) is not justified in deleting the addition of Rs.53,15,219/- since the assessee failed to produce details of various expenses supported by bills and vouchers. According to him, the order of the Assessing Officer is justified. It is the submission of ld. counsel for the assessee that the assessee firm being a sub-contractor and majority of the expenses being incurred through banking channel, therefore, merely because certain petty expenses could not be substantiated with supporting bills and vouchers the same cannot be a ground for rejecting the book results and going for huge addition by estimating the profit at the rate of 8% of the turnover.
We find some force in the above argument of the ld. counsel for the assessee. It is an admitted fact that the assessee has maintained books of account which were duly audited by the auditors and no defects have been pointed out by the auditors. The submission of ld. counsel for the assessee before the CIT(A) that the assessee has undertaken civil construction work as a sub-contractor has not been controverted by the ld. DR. Further, the Assessing Officer has not quantified the amount of expenses for which no vouchers were available or vouchers were self-made. No other defects in the books have been pointed out by the Assessing Officer. Therefore, adoption of the net profit rate of 8% by the Assessing Officer in the instant case appears to be very high especially when the Assessing Officer himself has pointed out in the order that the assessee had declared net profit rate of 1.3% in the immediately preceding assessment year on a turnover of Rs.3.83 crores. At the same time, the order of the CIT(A) in sustaining the addition of only Rs.1,00,000/- appears to be too low especially when the assessee had not maintained proper bills and vouchers to substantiate the expenses which has been pointed out by the Assessing Officer and not controverted by the assessee. Therefore, the order of the CIT(A) sustaining the addition of Rs.1,00,000/- cannot be accepted.
Considering the totality of the facts of the case, we are of the considered opinion that addition of Rs.5,00,000/- as against Rs.1,00,000/- sustained by the CIT(A) will meet the ends of justice. We hold and direct accordingly. Thus, ground no.1 by the Revenue is accordingly partly allowed.
In the ground no.2, the Revenue has challenged the order of the CIT(A) in treating the interest on FDR as business income.
After hearing both the sides, we find the Assessing Officer while estimating the net profit did not consider interest on FDR of Rs.2,24,892/- as business income. In appeal, the ld. CIT(A) considered such income as part of the business income. It is the submission of the ld. DR that the interest on FDR cannot be considered as business income and the Assessing Officer was justified in treating the same separately as income from other sources. It is submission of the ld. counsel for the assessee that the FDRs are for the purposes of business only and, therefore, it should be included in the net profit.
We find there is no discussion on this issue by the Assessing Officer in the assessment order as to how and why he treated such interest income as not a part of the business income. The order of the CIT(A) is also very vague and absolutely there is no discussion in his order as to how and why he has considered such interest income as part of the business income. In view of the above, we deem it fit and proper to restore this issue to the file of the ld. CIT(A) with a direction to pass a speaking order on this issue. We hold and direct accordingly. Thus, ground no.2 raised by the Revenue is allowed for statistical purposes.
In the result, the appeal filed by the Revenue is partly allowed for statistical purposes. Order pronounced in the open court on this 26th day of May, 2017.