TMI Blog2015 (9) TMI 1505X X X X Extracts X X X X X X X X Extracts X X X X ..... served 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 wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellant. The AO accordingly issued a show-cause notice to the assessee asking the assessee to explain why the net profit should not be estimated @ 8% of total turnover of ₹ 37,99,00,855/- which works out to ₹ 3, 03, 92, 068/The AO in this regard placed reliance in the case of British Paints (I) limited 188 ITR 44 (SC). 2.1 In response to the aforesaid show-cause notice in his submissions the assessee reiterated that because of peculiar nature of business it is not possible to calculate the actual work in progress and as per the procedure being followed since inception the WIP is valued as per actual closing stock at site at cost. As regards to the expenses, the assessee submitted before the AO that the same have actually been incurred and copies of agreements executed with the contractors along with the confirmation letters were filed and such outstanding expenses have been paid in the next financial year. The payment of outstanding expenses as on 31.03.2010 were paid to the sub contractors as per the agreements executed with them for carrying out the contract work and the TDS as per section 194C had been deducted and deposited to Government account. The assessee thu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NP RATIO 6.42% 6.35% 6.95% 6.74% That it is seen from the above that the net profit ratio in the case of the appellant in the past 4 years has been ranging between 6.35% to 6.95%. That in the year under appeal the NP ratio declared by the appellant is 6.95% which is the highest ~in the past 4 years. That it thus transpires from the above that the profits declared by the appellant have been deduced from the audited books of account maintained by the appellant which have been accepted by the department in the earlier years, therefore, invoking the provision s of section 145 (3) in the year and the appeal is not justified in as much as that the books of the appellant are completed in all respects which have duly been audited and the net results of profit could be deduced there from without any complexity. That it is significant to mention here that the appellant in the course of assessment proceedings produced the audited books of account and vouchers before the AO which were verified and examined by the AO. That the AO, however, has estimated the net profit @8% in the line of the provisions of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 (SC). In that case no overhead or other expenses are includable in the above stock so as to have a direct impact on the true profits in order to invoke section 145(3). This has no impact on the work in progress as styled by the AO as against stock of material not consumed in the road making. From the above Ld. CIT(Appeals) observed that it is quite manifest from the above that the total value of items of stock at the end of the year as mentioned above have been valued at cost and do not form part of work in progress. Therefore, the ratio of the decision relied upon by the Ld. AO is not applicable to the facts and the circumstances of the present case. Ld. CIT(Appeals) further observed that so far as the payment of labour charges is concerned, it is a common practice that labour payments at the site are paid through Mukadams mainly in cash for which details in the form of payment registers are maintained by Mukadams engaged by the payer. That in the case of appellant, the appellant has made the payments through the Mukadams in cash for which entries are made in the registers which are supported by vouchers. That the appellant in the course of assessment proceedings has pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NP RATIO 6.42% 6.35% 6.95% 6.74% Thus the profitability declared by the assessee is quite normal as compared to preceding years. In these circumstances there is no case of rejection of books of accounts on account of variation in profitability shown by the assessee. The prime reason given by the AO in rejecting the books of accounts is regarding his reservation on valuation of work in progress and large outstanding liability for labour payments. As regards valuation of work in progress is concerned as explained by the assessee in his submission to the learned CIT(Appeals), AO s inference that valuation of work in progress is on cash basis is flawed. 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orities below have found that the profits are not computable, no interference is called for. In our considered opinion in the present case it is not at all the finding of the learned CIT(Appeals) that the assessee s profits are not computable and we have also agreed with the above. Hence it cannot be said that the ratio from the Hon ble Patna High Court decision is applicable in this case. Hence the Revenue s reliance on the same is misplaced. The decision of the Special bench of ITAT in the case of M/s Arihant Builders, Developers and Investors (P) Ltd. 106 ITD 10 has been relied upon by the Revenue in the grounds of appeal for the proposition that the application of 8% as net profit of the business after rejection of books of accounts is correct. In this regard since we have already found that the books of accounts are not liable to be rejected, this decision does not help the case of the Revenue. Furthermore the Hon ble Delhi High Court has held in the case of Action Electricals vs. DCIT 258 ITR 188 that when books of accounts are rejected the estimation of sales/gross profit rate based on past year s result cannot be said to be arbitrary. Further more Hon ble Rajasthan High Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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