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2015 (9) TMI 1505 - AT - Income TaxRejection of books of accounts - NP determination - reservation on valuation of work in progress and large outstanding liability for labour payments - applicability of provisions of the section 44AD - Held that:- As the assessee is a contractor, the purchased materials and they are straight away used without any processing or conversion into other items where some overheads expenses are incurred. The items purchased and remained to be consumed in the construction of road are treated as stock in trade. Their value is the cash actually paid for acquiring and inward freight expenses. Hence it is not the cash system of accounting but the cash value of items. Hence the AO is not correct in holding that the assessee is following cash system of accounting. Nevertheless it is not the case of the AO that a system of valuation of the work in progress is not as per the preceding years. The consistent system of accounting is not to be interfered unless there is a change in the facts or law. As regards the outstanding payment of labour charges CIT(Appeals) has observed that the assessee has made the payments through Mukadams in cash for which register and supporting vouchers are there. That the assessee in the course of assessment proceedings has also produced the registers maintained by Mukadams in which payments made to local labourers in cash below `.20,000/- each were produced. In such circumstances we agree with the learned CIT(Appeals) that there is no reason to disbelieve that the expenses incurred are bogus. Thus from the above it is apparent that the reasons found by the AO to reject the books of accounts i.e. improper valuation of work in progress and huge outstanding liability for labour cannot be a basis for rejection of books of accounts. Moreover as evident from the above discussion the profitability of the assessee is in line with the profitability declared in preceding years rather there is slight improvement. In such circumstances there is no reason to reject the books of accounts. Further even if the books of accounts are rejected, the profitability applied should be the profit declared by the assessee and accepted by the Department in preceding years. In this case the AO after rejecting the books has applied 8% profit which is at variance with the profitability declared by the assessee in preceding years. Hence on this account also the AO’s order is not sustainable and deletion of the addition by the learned CIT(Appeals) has been correctly done.
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