M/S ARDHENDU MONDAL.,BURDWAN vs. I.T.O WD - 1(1),BURDWAN, BURDWAN

The only issue that arises for consideration in this appeal by the assessee is as to whether the CIT(A) was justified in confirming the order of AO disallowing a sum of Rs.11,87,154/- which is 20% of the expenses debited in the profit and loss account and adding the said sum of Rs.11,87,154/- to the total income of the assessee.

The Assessee is a partnership firm. It derives income from execution of construction contracts for Government and public enterprises. For A.Y.2008-09 the assessee filed return of income declaring total income of Rs.30,000/-. In the course of assessment proceedings u/s 143(3) of the Income Tax Act, 1961 (Act), the assessee produced audited balance sheet and profit and loss account of the previous year relating to A.Y.2008-09. Photo copies of the ledger of labour charges and material purchased were M/s. Ardhendu Mondal. A.Yr.2008-09 also produced. However, no bills, vouchers in support of the books of accounts were produced. The assessee submitted before the AO that no vouchers for labour charges were maintained and bills for purchase of materials were not provided by the sellers. The AO was of the view that non production of vouchers of expenses and bills for purchase of materials could only lead to an inference that the assesee had inflated expenses to reduce its income and tax liability. The AO thereafter concluded that it was reasonable to assume that 20% of the expenses were inflated. The total expenses debited by the assessee in profit and loss account was Rs.59,35,772/- and 20% of the expenses was Rs.11,87,154/-. The same was added by the AO to the total income of the assessee.

Before CIT(A) the assessee submitted that in the case of the assessee income was always assessed at 8% of the gross receipts and accordingly in the present assessment year also 8% of the gross receipts may be accepted as income of the assessee. CIT(A) however did not agree with the claim of the assessee and he held as follows :- “In course of appellate proceedings the appellant has contended that the A.O. has always assessed his income at 8% of gross receipts in previous years and, that, his method of accounting had also been accepted by the A.O. In my opinion, the appellant's submission has glossed over the non- production of bills & vouchers. It appears from the submission made that the appellant wants net profit to be adjudicated at a figure of 8% of receipts. But that, in my opinion, would be tantamount to accepting that the appellant is not maintaining any books of accounts and, therefore, should be assessed u/s.44AD. This however goes against the appellant's earlier disclosure of his net profit at 5.6% which the appellant itself has sought to justify with the claim that his works contract was given under old rates. Inherent in such disclosure is a claim that he is maintaining books of accounts. In fact, his submissions made before the A.O. would lead to a belief that such claim is true. However, such claim is not backed by evidence that he is actually doing so. I therefore find the situation to be contradictory. I do not see it to be the appellant's case that he is in a position to produce biils & vouchers even now. Under the circumstances, though this is an estimated addition I do not want to interfere with the A.a's decision in this regard. The disallowance made is therefore confirmed.”

We have heard the rival submissions. The gross contract receipt by the Assessee during the previous year was a sum of Rs.62,98,412/-. On the above gross contract receipt the Assessee had shown profit of Rs.3,26,640/- in the profit and loss account. The expenses debited by the assessee in the profit and loss account and the amount disallowed by the AO is given in the following chart: Head of Accounts Amount of Expenditure Disallowanceof Expenses

We are of the view that the absence of bills and vouchers in support of the expenses can no doubt lead to an adverse inference, but the disallowance to be made of expenses on this count cannot be unreasonable. It can be seen from the above chart that the gross profit of the assessee would be 24.61% whereas the average of four assessment years referred to above would be around 6.5%. It has been held by ITAT Kolkata Bench in the case of M/s. Shree Venkatesh Agro Food Pvt. Ltd vs DCIT vide IT(SS)A.54-56/Kol/2011 that disallowance purely resorting to adhoc method cannot be made when the expenses claimed in the profit and loss account are found to have relevance with the business of the assessee. Disallowance cannot be made on adhoc sum without assigning cogent reason. In the present case the above ratio laid down would squarely apply. The disallowance in the present case made by the AO and sustained by CIT(A) was arbitrary. The expenses that were disallowed were in connection with the business and therefore it has to be seen whether but for incurring these expenses the Assessee could have executed contracts worth Rs. 62,98,412. Keeping in mind all factors, past history of profits in Assessee’s case, the nature of expenses disallowed, the turnover of the Assessee and the corresponding expenses claimed by the Assessee, comparative figures of gross receipts and book profits and percentage of income declared by the assessee in the past, we are of the view that it would be just and appropriate to sustain the disallowance of 3% of the expenses debited in the profit and loss account instead of 20% made by AO and sustained by CIT(A). This would mean that the gross profit percentage of the Assessee would be slightly above 8% of the contract receipts. We make it clear that this should be considered as the percentage to the applied in all the future assessments, which will be done keeping in mind facts and circumstances prevailing in each AY. We hold and direct accordingly. 4

In the result the appeal of the assessee is partly allowed.