ACIT-21(1), MUMBAI vs. KARAN BUILDERS & ASSOCIATED, MUMBAI

By the impugned order CIT(A) restricted the addition of profit to the extent of 3% as against estimated by the AO at 8% after having the following observation. 3.5. I have considered the above arguments of the Ld. AR and also perused the assessment order. The AO has rejected the books of accounts u/s 145(3) mainly on grounds that (l)the two parties namely M/s P D Sales Corporation and M/s J K Trading were not found on the given address and could not be produced personally before the AO,(2) stock register is not maintained,(3) the payments by cheques to these parties were withdrawn in cash from their bank a/c (4) Site wise matching of consumption of stock and. revenues is not possible in absence of stock register (5) the purchases made by assessee as per the bills between 27/3/2008 to 31/3/2008 were of Rs 1.7 Crores whereas the closing stock was shown at Rs 8.75 Lacs only and it was not possible to consume so much material in 5 days as no WIP' is shown nor the sales from such stock have been realized during the year and (6) Delivery challan were not produced( 7) a M/s. Karan Builders and Associates substantial portion of expenditure is in cash. It is noted that the AO issued Notices 133(6) to as many as 13 parties out of 6 came back unserved. Later upon issue of fresh notices, those 6 parties also replied to the AO including M/ s P D Sales Corporation and M/ s J K Trading as evident from the letters dated 29/12/2010 filed by assessee before the AO. The mere fact they were not 'found on the given addresses does not conclusively suggest that the purchases made from these two parties were bogus when the assessee was asked to produce them personally, the Counsel of those concerns attended before the AO and expressed inability to produce the parties in such short period of time. It is noted from the letter dated 9/12/2010 filed by appellant before the AO that it was informed by him that some of the parties might have shifted the place of business hence the enquiries conducted by the IT! on 29/12/2010 once again at the old address was futile when the letter u/s 133(6) issued earlier had already come back unserved. Since all the assessment proceedings were getting barred on 31/12/2010, hence the AO proceeded to draw the adverse inference without asking the assessee to give the current address of those parties particularly when those parties on telephonic request of the appellant had already replied to the Aa and their ARs had attended before the AO. The payments made by assessee by cheques have been credited in the bank a/ c of those two parties only which is confirmed from their bank a/ c collected by the AO himself from the bank u/s 133(6). The subsequent withdrawals from those account cannot be itself lead to conclusion that they' were received back by the assessee in absence of any specific corroborative evidence. The bills issued by those parties have also been placed before the AO which shows that and the MVAT and CST registration numbers are mentioned on the bill and VAT @ 12.5% has been duly charged in the bill and paid by assessee by cheques to those parties. The bills pertain to sale of cement which is one of the raw materials used by assessee. The factum of genuineness of any expenditure is not confined to the production of the parties in person only. If the payments is supported by bills and made through banking channels and they have filed replies to the notices issued, it will indicate the genuineness of the payments. In case of Diagnostics vs. CIT (2011) 56 DTR 317 (Cal)(High Court}, where the assessee purchased materials for his business by way of account payee cheque from third party and subsequently the parties do not appear before the assessing authorities as they had discontinued their business, the court held that assessee's claim of genuine business expenditure cannot be disallowed for their non existence after three years of transactions. No addition can be made merely because supplier could not be located or were not M/s. Karan Builders and Associates produced for examination as held in case of ABHISHEK EXPORTS (2010) 3 ITR (Trib) 823 (Ahd). In case of Kanchwala Gems 122 TTJ 854 (Jaipur), it was held that once the assessee has made the payments through cheques and accounted the purchase in the accounts books, a subsequent statement of the supplier that he was giving only accommodation bills would not be enough m absence of any other positive evidence to suggest that the goods was not purchased from the above named parties or that the money paid by the assessee were ultimately return to the assessee by the supplier. In the decision of CIT vs M.K.Bros 163 ITR 249 (Guj) also under similar circumstances the addition made on account of bogus purchases was held to be not valid. Merely because some of the persons did not respond to the notice issued by the Assessing Officer under section 133(6}, of the Act, it could not be taken that the transaction was not genuine as held in GP International Ltd 325 ITR 25 (P & H) when the summons could not be served on the parties, it was 'been held that the assessee could not be faulted and it cannot be made the sole basis for addition. Anis Ahmad 291 ITR 441(SC). Even when the addresses could not be provided but when the payment of commission was established, the same was allowed as deduction in case of Goodlas nerolac 188 ITR l(Bom}. The assessee is a contractor for govt. and semi govt. organizations. It will not get the contract receipts unless the work is actually carried as per the contract by consumption of materials. The contract receipts of the assessee have not been doubted by the AO. Once the sales(contract receipts} has been accepted as genuine, then it is not possible to say that the purchases are bogus as held in case of Babulal C Borara 282 ITR 251(BOM.). It is noted that the purchase of cement from Mls P D Sales during the year is of 11.36 lacs and from M/s J K Trading is of Rs 11.38 lacs on a turnover of more than 12.76 Crores. Thus the purchases from these two parties (even if non verifiable) are only 0.89 % of total purchases made by assessee. It is not that the purchases from these two parties have been made this year only. The purchases were made in earlier years. In fact the purchases made in earlier year IS more than this year which is evident from the opening debit balances of more than 30 lacs appealing in the ledger a/ c of assessee in the books of those two parties and no action to disallow the purchases of earlier year has been initiated by the AO, if those parties were to be held as nonexistent. Thus in view of the facts and circumstances of the case, the purchases made by assessee from M/s P D Sales corporation of Rs 11.36 lacs and M/ s J k Trading of Rs 11.38 lacs cannot be treated as bogus. 3.6. However, regarding the other discrepancies observed by the AO there is some substance and force. Though the assessee M/s. Karan Builders and Associates may have a bonafide reasons for non maintenance of site wise stock register owning to contract work under taken at several sites but u/s 145 it is the onus of the assessee to maintain some basic records from which would enable. the AO in the logical verification of the correctness of profits shown and completeness of books. It cannot escape from. such onus merely on account of practical difficulties when there are indicators to suspect the correctness or completeness of the accounts. It has to show by some alternate mechanism or circumstantial evidence about the correctness or completeness of the accounts when a suspicion arises based on specific anomalies. In the case of the appellant an important observation made by AO is that the purchases made by assessee as per the bills between 27/3/2008 to 31/3/2008 were of Rs 1.7 Crores whereas the closing stock was shown at Rs 8.75 Lacs only and it was not possible to consume so much material in 5 days as no WIP is shown nor the sales from such stock have been realized during the year and delivery challan for delivery of material were not produced. Regarding absence of stock register it was explained by the assessee that: “sometimes yuuc1~ are delivered before few days but due to practical problems like Quality Check or any other reason the goods are not confirmed and as such bill might be raised late. Sometime even the stock is damaged/ destroyed/ Lost/ Goods Returned due to various reasons which was explained in previous submission. And as such the stock is valued at the year by physical verification which is confirmed by the Assessee.” Regarding the absence of delivery challan it has been explained by Ld. AR: “that the Goods are delivered at the sites wherein the laborer / supervisor accepts the Goods and sign on the delivery challan or confirm the goods delivered by Mobile / Telephone. The bill is raised by the supplier on the basis of the challan or on the confirmation of goods delivered on mobile / Telephone. We have also explained that it is practically difficult to collect all the delivery challan. We have duly submitted all the details for verification. Also many time one bill has many delivery challan attached and as such it is not practically possible to keep all delivery challan with the Bill. Many times after the bill is raised and confirmed, the Suppliers destroys the Delivery challan due to volume of papers work involved. The said reason of Few Delivery Challan not available should not be taken as the base of rejecting the books of accounts. The above reply shows that on one hand the appellant does not maintain the stock register which is a very important document for verification of consumption of raw material which has a bearing on the computation of correct profits, .and on the other M/s. Karan Builders and Associates hand it is not maintaining the delivery challan to support the delivery of goods against the purchase bills. Under these circumstances the consumption of raw material purchased between 27th march to 31st March is not verifiable to rebut the suspicion of the AO that this amount of raw material could riot have been used within 5 days. Moreover in the above reply the appellant itself admits that there are situation where the stock arises much before the bill or the bill is raised but the stock is damaged/lost etc. Hence in both the situation an irresistible conclusion will be" that the correctness of abnormal consumption of raw material of 1.7 Crores in last 5 days of the FY as shown by assessee cannot be ascertained in absence of stock register, delivery challan , etc. It is noted that substantial portion of the labour expenses are incurred in cash which are not open to verification. Coupled with this there is fall in the GP and NP rate also as compared . to two preceding years. Hence the plea of the assessee that the books of accounts are correct and complete cannot be accepted full . It cannot be said that the books of accounts of the assessee are completely reliable and therefore on this ground the rejection of books u/ s.145(3) is valid. 3.7. The AO however, while proceeding in the best judgment cannot ignore the material available on record and other factors which are available and explained. Therefore to cover up above discrepancies, a reasonable estimate of income has to be made where the book results of the appellant also has to be considered to the extent the same are not questioned or found suffering from mistakes of accounting. These observations are based on decisions in case of Brijbhusan lal Parduman Kumar 115 ITR 524(SC) where it has been held that the estimate must be honest and fair, State of Kerala Vs Vellllkutty 60 ITR 239(SC) where it was held that best judgment assessment must have reasonable nexus to the available material. In case of Uniword Telecom Ltd 45 DTR (Del)(Trib) 433, also where though it was held that the profits cannot be estimated de hors the book results on the grounds that purchases of goods from some of the vendors was not established, money' were withdrawn in cash by vendors and that the assessee has not maintained the day to day stock register in view of large number of items but ITAT confirmed the disallowance @ 10% of purchases from vendors from whom purchases were found not verifiable. Regarding the reasons for fall in GP and NP, the explanation of the Ld AR that the Material Cost has increased by Approximately 20 % which has led to additional increase in cost of cement, steel and sand by approx. Rs 60 lacs in absolute terms and if the same is considered then the N.P will be better than last year cannot be said to be totally M/s. Karan Builders and Associates devoid of merit. It is further noted that the turnover in this year has increased by 57% and the gross profit has increased in absolute term to Rs.10.14 lacs as compared to 8.51 lacs in earlier year. It is well settled that the bigger contracts do not yield higher percentage of profits due to various factors and profits do not increase in the same ratio of increase in turnover. It is further explained that the Assessee is a Sub-Contractor and Not the main Contractor. The Ld AR has given the details which shows that the main contractor has retained the margin of 5.02%% on the contracts of MCGM subcontracted to the appellant and the appellant has already shown net profit rate of 2.52% on the same contract as sub-contractor. Thus the total profit earned by main contractor and appellant is 7.52%, As per 44AD of Income Tax Act the N.P. of the Total Contract (Main Contractor) should by approximately 8%. In the letter submitted from the main Contractor wherein, it is noted that the main contractor has kept approximately 5.00 % Margin and given the Sub-Contract to the Assessee. The' Assessee is a businessmen and if it gets even slight Margin in the Business, the commercial prudence requires to grab the contract and not to reject the contract just because 8 % Margin is prescribed 'to be kept in contract business u/s 44AD under the I T Act. Even otherwise the section 44AD does not apply to contractors having turnover more than 40 lacs. Even otherwise the assessee has shown NP @ 2.916% in AY 2006-07 and 2.76% in AY 2007-08 and 3.5 % in AY 2009-10. The assessment u/s 143(3) for AY 2009-10 has been completed on 20/12/2011 by accepting the net profit rate declared by assessee. Hence considering the explanation for increase in cost of inputs, and results of the appellant in earlier years, it shall be reasonable to apply the net profit rate of 3%, when it is not the case where the accounting entries in books have been found to be incorrect. This profit rate will take care of the any leakage in profits in absence of stock register, abnormal purchases in last 5 days of FY all as pointed out by AO, if any:" By doing so the total profit margin of main contractor and subcontractor also comes to 8%. Hence the application of net profit rate of 3 % for AY 2008-09 would be reasonable and fair. Accordingly after rejecting the books u/s. 145(3) and applying the net profit rate of 3% on the turnover of Rs 19,11,05,513 gives the net profit of Rs 57,33,165 as against which the profit disclosed by assessee is Rs 48,25,809. Thus the additional profit of Rs 9,07,356 is liable to be added as business income of the assessee over and above the profit declared by it. Accordingly the addition made by the AO is restricted to Rs 9,07,356 only over and above the profit of Rs 48,25,809 already declared as per P&L a/c.

M/s. Karan Builders and Associates 7. Revenue is in further appeal before us against the above order of CIT(A).

We have considered rival contentions and carefully gone through the orders of the authorities below and found from record that the A.O. had rejected book result of the assessee and had estimated net profit at Rs. 1,52,88,441/-, as against the income of Rs. 48,25,809/- declared by the assessee. In appeal, the CIT (A) reduced the estimation to Rs. 57,33,165/-. CIT(A) has dealt with each and every objection of AO threadbare and after recording his detailed finding came to the conclusion that even after rejecting books of accounts, net profit of assessee remains 3%, on the turnover of Rs 19,11,05,513 which gives the net profit of Rs 57,33,165/- as against which the profit disclosed by assessee is Rs 48,25,809/- 9. We also found that one of the observations made by the A.O. was that the bills for purchases made by the assessee between 27.03.2008 to 31.03.2008 were of Rs: 1.7 crores, whereas the closing stock was shown at Rs. 8.75 lacs only. The A.O. was of the opinion that in such a case, the closing stock should have been much higher. On this aspect we found that during this period, the assessee had raised contract income bills worth Rs. 5.98 crores, much more than the amount of purchase bills. Under these facts and circumstances the assumption of AO that stock is less is not sustainable.

Detailed finding has been recorded by CIT(A) to arrive at net profit rate of 3% as against net profit rate of 2.5% shown by the assessee. The M/s. Karan Builders and Associates estimation of net profit at 3% is higher than the net profit rate shown by the assessee in the earlier years, inspite of the fact that turnover of the assessee during the year under consideration has increased substantially from 12.12 crores in the assessment year 2007-08 to Rs.19.11 crores. Keeping in view the totality in facts and circumstances of the case vis-à- vis, nature of assessee business and the rate of profit declared by assessee in the preceding years as well as during the current year, estimation of profit at 3% appears to be quite reasonable. Nothing was brought on record to controvert the findings of the CIT(A). Accordingly, we do not find any reason to interfere in the order of CIT(A).

In the result, appeal of the Revenue is dismissed.