TMI Blog1997 (8) TMI 106X X X X Extracts X X X X X X X X Extracts X X X X ..... the basis of bills, vouchers and other statements maintained by the assessee and also from the certificates received from the clients and banks. The AO in para 3 of the order has mentioned that the assessee did not produce any accounts books, vouchers or papers though notices under s. 142(1) were issued for producing the same on more than one occasion. The AO, therefore, observed that the assessee has prepared copies of P L a/c and balance sheet just on estimated basis without having any documentary evidence to support the same. The AO also recorded the statement of the managing partner Shri Gurucharan Singh and the extracts from such statement have been reproduced in the assessment order. The managing partner in the said statement has admitted that account books were not maintained. The return have been filed on the basis of gross receipts. He also stated that the P L a/c have been prepared on estimated basis. The AO also observed that the gross contract receipts, cost of material supplied by the awarder of the contract and the net contract receipts shown by the assessee in the statements annexed with the various returns were different. The AO, therefore, required the assessee to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO, as indicated above .(c) Assets pledged/possessed in lieu of overdraft facility availed from Indian Overseas Bank. 16,364 Restored to AO (d) Unexplained credit difference in bank account on account of Bank Reconciliation Statement 20,128 Addition confirmed (e) Disallowance out of expenses debited in P L a/c @ 10 per cent of total expenses 3,35,784 Disallowance restricted to 5 per cent i.e. Rs. 1,67,892 confirmed. (f) Interest as advanced 12,000 Restored to AO (g) Disallowance out of interest 18,000 Restored to AO . . 8,86,141 . Depreciation debited in P L a/c Rs. 53,468 was allowed. 4. The assessee has raised the following grounds in their appeal against the aforesaid order of the CIT(A): "1. That the authorities below were not justified in making addition for different items instead of applying the profit rate as has been done in the earlier years of the assessments of the assessee firm. The learned assessing authority should have adopted the same method in this year also. 2. That rate method should have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has perhaps no strong case on merits but such an addition could not have been made by the AO, where an assessment is made according to the best judgment of the AO by invoking of provisions of s. 145(2). 8. The learned counsel vehemently contended that the disallowance of 5 per cent out of total contract expenses sustained by the learned CIT(A) as against the disallowance made by the AO at 10 per cent of the total expenses is patently wrong and unjustified. He submitted that the total expenses debited in the P L a/c annexed with the third return comes to Rs. 33,57,845. The AO made ad hoc disallowance @ 10 per cent to the tune of Rs. 3,35,784. The learned lawyer submitted that such a disallowance has been made by the AO without application of mind. He has not given any basis on which the finding of inflation of expenses to the extent of 10 per cent can be supported. Such ad hoc and lumpsum disallowance without any basis is invalid. He pointed out that the AO in para 9 of the assessment order has observed that the expenses debited by the assessee in the P L a/c are quite disproportionate in relation to the disclosed contract payments received during the year. The learned counsel arg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enses were made in the past. The AO has not given any convincing reasons for disallowing a lumpsum amount out of various expenses. The CIT(A), therefore, ought to have deleted the entire amount of disallowance made out of total expenses by the AO. (iii) As regards ground No. 4 is concerned, the learned counsel was fair enough to state that the said ground has been incorrectly taken in the grounds of appeal, as the addition made on account of profit on labour escalation charges has been deleted by the CIT(A). Hence, this ground was not pressed by the learned counsel for the assessee. Hence, ground No. 4 is rejected as not pressed. (iv) The learned counsel thus vehemently argued that addition of Rs. 20,120 made on account of unexplained difference in bank accounts as a result of bank reconciliation statement as well as the disallowance out of expenses confirmed by the CIT(A) to the extent of Rs. 1,67,892 should be cancelled. 9. The learned Departmental Representative strongly supported the order of the CIT(A) and relied upon the detailed reasons mentioned in the assessment order. He submitted that the assessee filed 3 returns of income in which different figures of contract rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recorded in the assessment order. The correctness of the observations made by the AO in the assessment order in this regard has not been disputed by the learned counsel for the assessee. It is also an undisputed fact that the assessee did not produce before the AO the vouchers or any other documentary evidence to support the correctness of various expenses shown in the P L a/c submitted along with the returns of income submitted by the assessee. It was, therefore, incumbent upon the AO to have resorted to estimation of profit from the contract business. It is true that the AO while making the best judgment as to make a fair, just and reasonable estimate of income. Such estimation of profit in a fair and just manner could be done by the AO either by applying a net profit rate on the contract receipts or he could also estimate the profit in any other manner which can be regarded as fair and reasonableness. It cannot, therefore, be said that the method of computing the taxable income adopted by the AO while making the best judgments was patently erroneous or invalid. The year under consideration was the first accounting year of the firm. The contention of the learned counsel that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arlier was allowed to be raised before the Tribunal. In the present case, the AO determined the income of the assessee according to his best judgment by making separate additions or disallowances out of various expenses claimed in the P L a/c. Since the assessee failed to produce vouchers or any other documentary evidence in support of the expenses claimed by the assessee, the AO was fully justified in making a best judgment by choosing to make disallowance out of the total expenses claimed by the assessee against the contract receipts. The Tribunal can certainly consider the reasonableness of such disallowance by taking into consideration the net effect of such disallowances and find out whether the net profit rate finally sustained by the CIT(A) as a result of confirmation of various disallowances can be regarded as fair and reasonable. It is not a case where the Tribunal is considering the assessability of the disputed amount of additions under a separate and distinct head of income. Such an exercise is being made only with a view to ascertain that the disallowances and addition made by the AO and confirmed by the CIT(A) should be restricted to such an amount so that the net inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on behalf of the assessee before the CIT(A) that the assessee had given sub-contract to Rawlley Construction Co. in respect of which the contract amount of Rs. 5,11,927 was received. This sub-contract was given on a margin of 2 per cent. The said income from sub-contract @ 2 per cent was also included in the net profit as disclosed in the P L a/c. Such facts have been recorded by the CIT(A) on p. 4 of the order passed by him. Therefore, the income @ 2 per cent contract receipt of Rs. 5,11,927 which comes to Rs. 10,238 is also included in the total income of Rs. 1,80,225 shown as per P L a/c. The point relating to the aforesaid sub-contract has been restored back to the AO by the CIT(A). Therefore, the 2 per cent profit on sub-contract receipts will also have to be deducted from the profit shown as per P L a/c with a view to arrive at the figure of profit declared by the assessee as per P L a/c in relation to contracts excluding the contract money received in respect of such sub-contracts. The AO had also estimated profit @12.5 per cent on labour escalation receipt of Rs. 7,74,273 which has been deleted by the CIT(A). This contract receipt will also have to be excluded from the t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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