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The Deputy Commissioner of Income Tax, Central Circle 2 (2) , Bangalore Versus M/s. JSR Constructions Pvt. Ltd., and Vica-Versa

Invocation of section 144 - estimation of income - Held that:- It is not disputed that assessee failed to produce books of account. It could not furnish various details called for by the AO. Assessee had filed its balance sheet and profit & loss account along with the return of income. Once the assessee, despite notices, failed to produce books of account for verification, AO is left with no choice but to proceed with a best judgment assessment. We cannot find any fault with the AO in this regar .....

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of assessee and foist on it a different method, unless there is a clear statutory edict allowing a departure from such accepted standards. We cannot say that assessee had understated its work-in-progress or inventory by not charging interest relating to working capital loan to its valuation. Assessee was well justified in considering interest as a period cost and debiting in its profit & loss account. We do not find any merit in the additions made by the AO - Decided in favour of assessee - .....

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ts of the assessee and determine its income from business for the impugned assessment year - Addition u/s 41(1) - Held that:- AO in his remand report has stated that assessee was unable to give ledger extracts from the books of creditors for proving the credit. But this by itself would not show that liabilities had ceased to exist; when the liabilities were appearing in the books of account. AO had not issued any summons on the creditors or obtained any statements from them which would show .....

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d in deleting such addition.- Decided in favour of assessee - ITA No.875/Bang/2014, ITA No.741/Bang/2014 - Dated:- 13-4-2016 - SHRI ABRAHAM P. GEOERGE, ACCOUNTANT MEMBER AND SHRI GEORGE GEORGE K., JUDICIAL MEMBER For The Revenue : Shri Sunil Kumar Agarwala, Jt. CIT(DR) For The Assessee : Shri V. Chandrashekar, Advocate ORDER Per Abraham P. George, Accountant Member These are cross appeals filed by the Revenue and the assessee respectively directed against the order dated 26.2.2014 of the CIT(App .....

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for the A.Y. 2007-08 at ₹ 1,45,72,139. In the course of assessment proceedings, the assessee was required to give break-up of the inventory of ₹ 36.04 crores shown by it in its accounts, details of contract receipts, operating expenditure and current liabilities. Assessing Officer also required the assessee to produce books of accounts. In reply, assessee furnished copies of inventory and break-up of unsecured loans along with statement of sundry creditors as on 31.3.2007 and 31.3.20 .....

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the non-compliance with the requirement of production of books of account and evidence in respect of its claim of expenditure. 5. Now before us, the ld. AR strongly submitted that invocation of section 144 of the Act was not warranted under the facts and circumstances of the case. Per contra, the ld. DR supported the orders of authorities below. 6. We have perused the records and heard the rival contentions. It is not disputed that assessee failed to produce books of account. It could not furni .....

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0. AO during the course of assessment proceedings found that assessee had in its profit & loss account debited a sum of ₹ 4,49,07,419 as finance charges. Out of this, sum of ₹ 62,97,421 was bank charges and commission, whereas the balance represented interest paid to various banks on loans taken by the assessee. AO noted that majority of the loans taken were for the working capital needs of the assessee. However, according to the AO, assessee had advanced a sum of ₹ 4.45 cr .....

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CIT(A) was of the opinion that assessee could not substantiate this argument. According to him, assessee had given a loan of ₹ 5,66,26,900 to one Shri J. Srinivasulu Reddy, ₹ 87,51,304 to Smt. J. Sowadhamini and ₹ 62,58,275 to one Shri R. Ramachandra Reddy, who were all directors of the assessee. As per ld. CIT(A), no interest was charged by the assessee on the above loans and he held that disallowance of pro rata interest at 15% was justified since assessee had paid substantia .....

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erest free funds. Relying on the judgment of the Hon ble Bombay High Court in the case of CIT v. Reliance Utilities and Power Ltd., 313 ITR 340, the ld. AR submitted that if interest free funds and interest bearing funds were both available, then a presumption would arise that loans were first given out of interest free funds. Reliance was also placed in the case of M/s. KBD Sugars & Distilleries Ltd. v. ACIT, ITA Nos. 1362 & 1363/Bang/2011 dated 22.11.2013. 10. Per contra, ld. DR strong .....

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the case of Abhishek Industries (supra) was considered by the Hon ble Apex Court in the case of Munjal Sales Corporation v. CIT, 298 ITR 298 (SC) and the said decision stood overturned. 12. We have perused the orders and heard the rival contentions. Interest free funds available with assessee as on 31.3.2007 and 31.3.2008 were as under:- Particulars 31.03.2008 31.03.2007 Share Capital 60,62,000 60,62,000 Reserves & Surplus 16,93,24,161 15,32,96,877 Loans from Directors & Shareholders 8, .....

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ans taken, then a presumption would arise that investments would be out of the interest-free funds generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case, this presumption was established considering the finding the fact both by the Commissioner (Appeals) and the Tribunal. The interest was deductible. 14. As for the contention of ld. DR that Hon ble Punjab & Haryana High Court had accepted the principle of proportionate fundi .....

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₹ 1,78,91,526 was disallowed for the reason that it was expenditure pertaining to work-in-progress and had to be capitalized. 16. Facts apropos are that during the course of assessment proceedings, it was noted by AO that assessee was holding inventory of more than ₹ 34 crores as on 31.3.2008. The average work-in-progress of the assessee for the year came to ₹ 23,85,53,685. AO was of the opinion that assessee should have capitalized the interest attributable to work-inprogress .....

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llowed the claim of interest to this extent and made an addition. 17. In appeal before the CIT(Appeals), argument of the assessee was that none of the work-in-progress was capital work-in-progress. As per assessee, it was undertaking road contract works. The work-in-progress and closing stock of ₹ 14,63,91,113, as per assessee, were held as part of its business. Argument of the assessee was that working capital loans taken and interest paid thereon could not be capitalized. Further content .....

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r ld. CIT(A), in another project called Nagpur Project, work-in-progress was calculated considering the entire value of the work. Thus, as per the ld. CIT(A), the addition made by the AO considering 50% of work-in-progress to have been financed out of interest bearing funds was justified. He confirmed the addition. 18. Now before us, ld. AR submitted that section 145 which was relied on by the AO for making this disallowance did not require interest on loans raised for financing working capital .....

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AR, charging interest on such closing work-in-progress would give rise to absurd results. 19. Per contra, ld. DR strongly supported the orders of authorities below. 20. We have perused the record and heard the rival contentions. There is no dispute that work-in-progress shown by the assessee was a part of its current assets. Such work-in-progress and inventory did not represent any capital item or capital asset being constructed or acquired by the assessee for its own use. Assessee was doing ro .....

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ventories to Valuation of Inventories to their present location and condition. Costs of Purchase 7. The costs of purchase consist of the purchase price including duties and taxes (other than those subsequently recoverable by the enterprise from the taxing authorities), freight inwards and other expenditure directly attributable to the acquisition. Trade discounts, rebates, duty drawbacks and other similar items are deducted in determining the costs of purchase. Costs of Conversion 8. The costs o .....

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tration. Variable production overheads are those indirect costs of production that vary directly, or nearly directly, with the volume of production, such as indirect materials and indirect labour. 9. The allocation of fixed production overheads for the purpose of their inclusion in the costs of conversion is based on the normal capacity of the production facilities. Normal capacity is the production expected to be achieved on an average over a number of periods or seasons under normal circumstan .....

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unit of production is decreased so that inventories are not measured above cost. Variable production overheads are assigned to each unit of production on the basis of the actual use of the production facilities. 10. A production process may result in more than one product being produced simultaneously. This is the case, for example, when joint products are produced or when there is a main product and a by-product. When the costs of conversion of each product are not separately identifiable, they .....

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product. As a result, the carrying amount of the main product is not materially different from its cost. Other Costs 11. Other costs are included in the cost of inventories only to the extent that they are incurred in bringing the inventories to their present location and condition. For example, it may be appropriate to include overheads other than production overheads or the costs of designing products for specific customers in the cost of inventories. 12. Interest and other borrowing costs ar .....

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s of assessee and foist on it a different method, unless there is a clear statutory edict allowing a departure from such accepted standards. We cannot say that assessee had understated its work-in-progress or inventory by not charging interest relating to working capital loan to its valuation. Assessee was well justified in considering interest as a period cost and debiting in its profit & loss account. We do not find any merit in the additions made by the AO. As such, these additions are de .....

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uld not be verified in the absence of books of account and nonproduction of vouchers and bills. As per AO, it could not also be verified whether expenditure incurred by the assessee were through cash or through account payee cheques. Thus, according to AO, it was not possible to make the verifications required under the Act. He therefore rejected the book results of the assessee and estimated net profit at 8% of the total contract receipts. The total receipts came to ₹ 65,28,61,901 and app .....

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ee was that estimation of income was done at an excessive rate. As per assessee, books of account were audited and audit reports were filed along with return of income. Contention of assessee was that estimation of profit at 8% was not warranted. However, the ld. CIT(Appeals) did not agree with the above arguments. According to him, there was possibility of large number of violations with regard to rules on cash payments. Further, as per ld. CIT(A), AO could also show that there were number of d .....

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hen considering the normal standards. As per ld. AR, 8% was fixed by the ld. AO relying on section 44AD of the Act, but such section applied only to contractors having turnover below 40 lakhs. Further, as per ld. AR, in assessee s own case for preceding assessment years 2006-07 and 2007-08 where assessments were done u/s. 143(3), net profits were accepted at 1.7% and 2.21% on the contract receipts. Even if average of above was taken, as per ld. AR, it would much less than 8%. Thus, according to .....

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or accepting the rates of profits for earlier years before the lower authorities. Thus, according to him, estimation done by the AO was justified. 27. We have perused the record and heard the rival contentions. It has been not disputed by the Revenue that assessee s own assessments for the AYs 2006-07 and 2007-08 were completed u/s. 143(3) of the Act after scrutiny. As per assessee, the net profit rate for AY 2006-07 and worked out to 2.2% and for AY 2007-08 it came to 1.7%. In the case of M/s. .....

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erial and it must be something more than mere suspicion. The assessing officer must make what he honestly believes to be a fair estimate of the proper figure of assessment and for this purpose he must take into consideration such materials as the assessing officer has before him, including the assessee s circumstances, knowledge of previous returns and all other matters which the assessing officer thinks will assist him in arriving at a fair and proper estimate. 7. Therefore, in the instant case .....

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relying on the said profits at the same time, he has also not taken into consideration the comparable cases in similar business to come to the conclusion. Without any basis, the assessing authority determined the profit at 8%, the first appellate authority reduced it to 3% and the tribunal has reduced it to 2.5%. In coming to the said finding, all the three authorities have declined to take note off the evidence by way of earlier returns. In that view of the matter, what the authorities have don .....

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al is partly allowed. 28. What we find from the above judgment is that in the said case, assessment was completed u/s. 144 of the Act estimating the income of assessee at 8% as done here. The concerned assessee had failed to produce books of account. The CIT(A), on assessee s appeal, had reduced the net profit to 3% of the total turnover. This was reduced by the Tribunal to 2.5%. Their Lordships had held that such adhoc estimate was not warranted, when evidence in the nature of earlier returns f .....

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sessee and determine its income from business for the impugned assessment year. Ordered accordingly. Ground Nos.6 to 8 of the assessee are treated as partly allowed. 29. Now we take up the appeal of the Revenue. Revenue in its appeal is aggrieved that CIT(A) had deleted the addition of ₹ 1,14,31,582 made by the assessee u/s 41(1) of the Act. 30. During the course of assessment proceedings, it was noted by the AO that assessee had shown sundry creditors of ₹ 21.62 crores on 31.3.2007 .....

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ist. He held that section 41(1) was attracted. An addition of ₹ 1,14,31,582 was made. 31. In its appeal before the CIT(A), argument of the assessee was that many of the creditors had transactions in subsequent and earlier year which would show that there was no cessation of liability. As per assessee, the balances were genuine and just because there were no repayments during the relevant previous year would not mean that the liabilities had ceased to exist. The CIT(A) sought a remand repor .....

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limitation. As per ld. CIT(A), unless AO could show that there was a remission or cessation of trading liability, section 41(1) could not be applied. He deleted the addition. 33. Now before us, the ld. DR strongly assailing the order of CIT(A) submitted that AO in the remand report clearly brought out the failure of assessee to prove the credits. According to him, it was clearly proved that credits did not exist. Hence as per ld. DR, section 41(1) was correctly applied by AO. 34. Per contra, ld. .....

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