TMI Blog2018 (2) TMI 962X X X X Extracts X X X X X X X X Extracts X X X X ..... sing out of the expense of material purchased by the assessee. Thus all the purchases have been duly accepted by the AO and same was not disputed. However, the trade creditors which are emanating from the purchases have been disallowed merely on the ground of non-response of notice issued to them u/s 133(6) of the Act. In our considered view, the trade creditors cannot be disturbed without disallowing the corresponding purchase. - Decided against revenue. Addition made being 5% of material purchase on the ground that assessee failed to produce supporting evidence - Held that:- Once the AO has reached to a conclusion that assessee has failed to produce the books of account and no supporting evidence has been filed then he should have disallowed entire amount of expense or he should have rejected the books of account and should have framed the assessment u/s. 144. We also observed in the absence of any documentary evidence the AO should have referred to the historical data of the assessee for making the disallowance in scientific manner but in the instant case, AO has made the disallowance based on his surmise and conjecture. AO arbitrarily has disallowed @ 5% of material purchase ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account of non-availability of supporting evidence. 3. Briefly stated facts are that assessee is an individual and acting as government contractor. The assessee is a proprietor of two firms namely Bengal Trading Company Bengal Trading Corporation . The assessee has debited its profit and loss account for ₹8,30,52,972/- on labour charges. The assessee out of total labour charges has deducted Tax Deducted at Source (TDS) to the tune of labour charges of ₹2,30,26,215/- and remaining labour charges of ₹600,26,712/- was incurred without deducting TDS. The AO during the course of assessment proceedings observed that the labour charge incurred without TDS deduction are incurred in cash and supported with the self-made vouchers. The AO further observed that the selfmade vouchers were completed in all respects and necessary details such as address and identity of payees were missing. Thus, the AO in absence of sufficient documentary evidence disallowed @ 10% of labour charges of ₹60,02,671/- by holding that these are not genuine expenses. Thus, the labour charges for ₹60,02,671/- was disallowed and added to the total income of assessee. 4. Aggrieved ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cash cannot militate against the assessee. It is not disputed by the AO that the appellant had maintained records in respect of labour wages paid and the same were produced before him. Although the AO alleged that the expenses were not fully verifiable he did not spell out in the impugned order any specific instance where the labour payment were found to be unsupported by relevant vouchers or evidences. Having regard to the nature of appellant s business and also having regard to the fact that the labour wages were disbursed at periodic intervals at the job sites which were all in the interiors of the State, adverse inference could not be drawn only because payments were disbursed in cash. Before making adhoc disallowance it was necessary for the AO to bring on record at least few specific instances where the expenditure was found to be not supported by any vouchers or other supporting evidences. I however find that just by making generalized observation that the appellant failed to produce full supporting evidences the AO produced to make adhoc disallowance. I also find merit in the AR s submissions that the disallowance was made without application of mind. Not only the AO disal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vidences were not furnished by assessee. The AO was very much empowered to reject the books of account and to frame assessment u/s 144 of the Act which in our considered view AO failed to do so. 6.2 We also observed that AO was very much empowered to initiate the penalty u/s 271(1)(b) of the Act in the event of non appearance of assessee on the date of hearing despite the fact that notices for hearing were sent to him. On perusal of the assessment order, we note that no penalty of whatsoever has been initiated by the AO. We also observed that the AO has not initiated penalty on account of nonmaintenance of books of account u/s 271A of the Act. 6.3 We also find that various Tribunal s orders as well as judgments of various Hon'ble High Courts have held that profit declared in the contractor business @ 4 to 6% is quite reasonable some of the cases are listed below:- 3. In the case of Metropolitan Engg. Co. Opt. Society Ltd. vs. ACIT ITA No.s 2172 2172/Kol/2010 it has been held that in the AY 2001-02, the assessee is engaged in civil contract business with others business segments. AO estimated net income from the work contract @ 10% on the gross contract receipts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the assessee has offered net profit @ 6.5% which is quite reasonable from the business of Government contracts. We also note that the AO has made the disallowance on the ground that in most of the cases self made vouchers were produced by the assessee. However on examination of AO order we notice certain lapses as detailed below : 1. The AO made the disallowance on adhoc basis and without pointing out any specific defects in the vouchers produced before him. 2. The AO was very much authorized by the statute to reject the books of accounts under section 145(3) of the Act in the event he is not satisfied with the correctness of the books of accounts. The relevant provision of section 145(3) reads as under : 16[ Method of accounting. 17 145. (1) ----------------- (2)--------------- (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144.] But ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in many cases either the notice was not served or no reply was made by the parties except three parties. The assessee was requested to produce necessary details in respect of following parties:- Name of the parties Amount 1. Shahabuddin Dhali 5,70,964 2 Nur Ali Khan 5,16,280 3 Maji Enterprise 3,36,530 4 Konked International 3,83,986 5 Bengal Trading Corporation 8,42,829 6 Anisur Alam Malick 98,000 7 Adhunik Traders 4,53,620 8 Mazid Ali Gazi 2,18,112 9 Kamlesh Biswas 28,,61,533 10 Chandan Kr. Viswas 23,76,000 11. Amit Basu 26,93,691 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s with whom the assessee was doing regular business transactions; c) All the creditors shown in the books of account were arisen from the purchase made by assessee thus no loan of whatsoever was taken by assessee from those parties; According Ld. CIT(A) deleted the addition made by AO by observing as under:- it appeared from the material on record that the assessee had trading transactions with 11 parties. From the copies of accounts furnished, it appeared that 11 parties had either supplied materials or labor for executing contractual jobs. Value of invoices raised by each of the party was credited to the individual account of the creditor in the appellant s books. From the information on record it appeared that in the course of assessment the appellant had furnished details of labour charges paid as well as materials consumed in execution of contracts. Copies were field. Out of the total expenditure on labour charges debited in the P L A/c. labour charges of ₹2,40,50,615/- were payable to 13 parties and in respect of these charges tax u/s.194C was deducted at source by the appellant. In respect of the labour charges payable to these parties, the AO accepted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ared that one proprietary concern of the appellant had provided sum of money to another proprietary concern i.e. Bengal Trading Company. As such, the transactions between the two proprietary concerns beneficially belonged to the appellant himself. Having regard to these facts, I therefore find that the addition made by the AO was factually as well as legally unjustified. 6.6 As noted in the foregoing, the amounts were added by the AO without specifying the enabling provision of the Act which permitted the AO to make addition only in respect of outstanding balances appearing in the accounts of sundry creditors. The information and evidences on record prove that save and except the transactions between Bengal Trading Corporation and Bengal Trading Company, the transactions with remaining 11 parties were on trading account. The said 11 parties had supplied ma erial or labour for which invoices were raised on the appellant. In he impugned assessment order, the AO did not disallow the expenses incurred on the ground that the assessee s trading transactions were either bogus or proved to be not genuine. In the circumstances, whom part of the transactions resulting in debit of expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee himself and therefore liability appearing in the books of one proprietary concern in the name of another could not be assessed as the income of the appellant. for the reasons discussed in the foregoing, therefore, the entire addition of ₹1,14,49,545/- is directed to be deleted. Ground No.s 3, 4 5 are allowed. The Revenue, being aggrieved, is in appeal before us. 10. Before us Ld. DR submitted that books of account were not produced before Ld. CIT(A) as well as before AO. Therefore Ld. CIT(A) should have rejected books of account as he held co-terminus power but Ld. CIT(A) failed to invoke the provision of Section 145(3) of the Act He requested the Bench to restore the matter to the file of AO for fresh adjudicated in accordance with law. The ld. DR heavily relied on the order of AO. On the other hand, Ld. AR submitted that out of 12 parties 8 parties have responded to the notice issued u/s 133(6) of the Act and AO has admitted the transactions with the parties as discussed above as genuine other than the amount of closing ba ance appearing at the end of the year under consideration. Ld. AR relied on the order of Ld. CIT(A). 11. We have heard the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otal turnover of ₹ 2,51,55,930 giving an exorbitant gross profit rate of 27.89 per cent, which is not the case. It is also important to note that the assessee is in the business of exports and its entire income is exempt. There is, as such, no reason for the assessee to suppress the profit as its income. [Para 20] Taking into consideration the above facts of the assessee, it is a fit case not to make any addition by invoking the deeming fiction of section 68 in respect of the sundry creditors, despite the fact that the assessee could not supply the addresses of these creditors. All the facts and circumstances of the case, including that of destruction of books of account, old period, petty karigars, advances to the suppliers, debtors and the closing stock, and particularly the fact that all these creditors have been paid off in the subsequent year and the return for that year has been accepted by the department clearly show that in the case of the assessee it is not necessary to add these creditors. Respectfully following the same, we do not find any interference in the order of Ld. CIT(A). We hold accordingly. Consequently, ground raised by Revenue is dismissed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sity or infirmity in the information statutorily provided by the Tax Auditor. In the circumstances, I find that the AO did not prove any specific short coming or inadequacy in the audited accounts furnished before him. The appellant had also furnished the details of materials consumed and no specific infirmity in these details was pointed out. I further note that even though the AO stressed on the fact of non-compliance on the appellant s part, yet 95% of the expenses was allowed by the AO himself, meaning thereby that the AO was satisfied about the genuineness of the expenditure to the extent of 95%. In the above background, therefore, I do not see any justification in the AO's action of disbelieving the genuineness of only about 5% of the expenses on account of material consumption particularly when no specific infirmity was pointed out n the details furnished. I also find that on the turnover of ₹15 crores, the assessee had disclosed income in excess of ₹1 crore which in percentage terms was approximately 6.5%.Having regard to the nature of business and the turnover achieved disclosure of such income cannot be considered to be low or unreasonable. For the reasons ..... 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