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2019 (11) TMI 401

..... THAT:- AO has adopted the net profit rate as estimation of the income. Similarly the ld. CIT (A) has also applied the net profit though at a higher percentage for estimation of income, therefore, even if considering net profit for the purpose of estimation of the income, the average of past history of the assessee has to be the proper and reasonable basis. The average of the preceding three years 2006-07 to 2008-09 of net profit before tax, interest and depreciation comes to 5.11% in comparison to the current year’s net profit declared by the assessee at 5.38%. Therefore, the net profit declared by the assessee for the year under consideration is in line with the past history of the assessee and consequently even after the rejection of books of account no trading addition is warranted in the case of the assessee. There is another point involved in this matter regarding the closing stock shown by the assessee at ₹ 5,00,000/- regarding the contract amount which was not certified by one of the companies, namely, M.C. Nally Bharat Engineering Co. Ltd. and consequently the assessee has shown the same in the closing stock instead of recognizing the same as sales for the year .....

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..... rounds :- 1. That on the facts, in the circumstances of the case and in law, the ld. Lower authorities grossly erred in rejecting the books of accounts of the assessee appellant u/s 145(3) of the Income-tax Act. 1.1. That the ld. Commissioner of Income-tax (appeals) grossly erred in applying 11% NP Rate on gross receipts of ₹ 5,45,19,491/- and in further enhancing the trading addition by ₹ 19,29,108/- u/s 251(2) of the Income-tax Act and in computing the total business income at ₹ 59,97,144/- as against ₹ 25,42,865/- declared by the assessee appellant, in turn making total addition of ₹ 34,54,279/- against the assessee appellant. 1.2. That the ld. Assessing Officer grossly erred in applying 8% NP Rate on gross receipts of ₹ 5,45,19,491/- and on uncertified work in progress of ₹ 5,00,000/- and in computing total business income at ₹ 41,67,451/- as against ₹ 25,42,865/- declared by the assessee appellant, in turn making total addition of ₹ 16,24,586/- against the assessee appellant. 2. That on the facts, in the circumstances of the case and in law, the ld. Lower authorities grossly erred in treating the interest earned on Fi .....

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..... (A) has undertaken the exercise to examine the sub-contractors and got recorded their statements. Since there were discrepancies in the statements vis-à-vis the receipts shown in the books of account of the sub-contractors as well as the payment claimed by the assessee to these sub-contractors, the ld. CIT (A) held that the payment to sub-contractors is bogus and accordingly proposed to enhance the assessment by issuing a show cause notice under section 251(2) of the IT Act. The ld. CIT (A) estimated the income of the assessee by adopting NP rate of 11% and consequently the income of the assessee was enhanced by ₹ 19,29,108/-. 4. Before us, the ld. Counsel for the assessee has submitted that during the year under consideration the assessee suffered a paralytic attack and his half body got paralyzed. The assessee was undergoing treatment in Kerala and, therefore, was not able to look after the matter personally during the assessment proceedings as well as in the appellate proceedings. Thus the ld. A/R has submitted that the noncompliance or deficiencies as pointed out by the A.O. and ld. CIT (A) are only due to the reason that it was not possible for the assessee to lo .....

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..... that after rejection of books of account the AO has to consider either the past history of the assessee or history of similarly situated other businessmen/traders. Thus in view of the fact that the assessee s own past history is available and the net profit declared by the assessee is in line with the average of the past history, then no addition is called for. The ld. Counsel has then relied upon the decision in case of CIT vs. Garment Crafts, 68 taxmann.com 222 (Raj.) as well as the decision in case of CIT vs. Ashok Behi Bharat Sethi & Party, 35 taxmann.com 214 and submitted that the Hon ble High Court has taken a consistent view that the past history of the assessee is a proper and reasonable basis for estimation of income. He has also relied upon the following decisions :- CIT vs. Jaimal Ram Kasturi, 33 taxmann.com 315 (Raj.) CIT vs. Inani Marbles Pvt. Ltd. 175 taxman 56 (Raj.) Thus the ld. Counsel for the assessee has submitted that the addition made by the AO as well as enhanced by the ld. CIT (A) is without any basis, the same deserves to be deleted. 5. On the other hand, the ld. D/R has submitted that the AO has pointed out specific deficiency in the books of account a .....

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..... ther big and reputed corporate houses. Therefore, the assessee s contract work is not only audited by the auditors but it is also certified by the other companies including some future companies before making the payment to the assessee. When the facts pertaining to the assessment year under consideration are not different from the preceding years as far as the business activities of the assessee are concerned, then the assessee s own past history should be the proper basis for estimation of income for the year under consideration. In the case of CIT vs. Inani Marbles Pvt. Ltd. (supra), the Hon ble High Court while dealing with this issue has held para 3 as under :- 3. We have heard learned counsel for the parties, and have gone through the impugned judgments. The Assessing Officer rejected the books of account for valid reasons, and invoked provisions of section 145 of the Income-tax Act, and made assessment by applying gross profit rate of 15 per cent on the sales disclosed by the assessee, and accordingly additions were made to the different result. This matter relates to assessment year 2000-01. The Assessing Officer for arriving at this conclusion considered that the assessee .....

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..... y the ld.CIT(A) would not affect the assessment which is based on estimation. The ld. CIT (A) has though took the pain to examine the genuineness of the claim and in that process the statements of the sub-contractors were recorded. On careful perusal of the statements recorded of the sub-contractors as well as the other relevant material, it is noted that there were some discrepancies regarding the quantum of sub-contract receipts by these sub-contractors from the assessee as recorded in the books of account and stated in their statements as well as the payments to these sub-contractors claimed by the assessee. Therefore, owing to these discrepancies and inconsistencies, the ld. CIT (Appeals) has held that the claim of payment to sub-contractor is bogus. However, this finding of the ld. CIT (A) is also inconsistent with the fact that the execution of the particular work for which the sub contract payments were made by the assessee is not in dispute and the revenue generated by the assessee from execution of the said work is also not in dispute. Therefore, even if there is a discrepancy in the amounts of the sub-contract payment, it is inevitable that the assessee has to incur the e .....

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..... ontract amount which was not certified by one of the companies, namely, M.C. Nally Bharat Engineering Co. Ltd. and consequently the assessee has shown the same in the closing stock instead of recognizing the same as sales for the year under consideration. This is only a method of accounting and if the assessee has been following a consistent method of accounting for recognizing the revenue/sales subject to the certification of the work by the awarder company, then it shall have no revenue effect as the same will be shown as sales in the subsequent year. The assessee has also claimed that this amount of ₹ 5,00,000/- shown in the closing stock has been offered as part of the income of the subsequent year and, therefore, if an addition is made in respect of the said amount for the year under consideration, it would be double taxation. Since this is a method of accounting consistently followed by the assessee and having no revenue impact, then considering the said amount as part of sale is not justified. Accordingly, the addition made by the AO and enhancement made by the ld. CIT (A) are deleted. Ground No. 2 is regarding the interest on the fixed deposits was treated as income f .....

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..... rned would fall in the category of income from other sources, but may come in the category of income earned from business. The Supreme Court in the aforesaid case has considered the judgement in Tuticorn Alkali Chemicals and Fertilizers Ltd., supra and held thus: In the present case, the assessee had deposited money to open a letter of credit for the purchase of the machinery required for setting up its plant in terms of the assessee's agreement with the supplier. It was on the money so deposited that some interest has been earned. This is, therefore, not a case where any surplus share capital money which is lying idle has been deposited in the bank for the purpose of earning interest. The deposit of money in the present case is directly linked with the purchase of plant and machinery. Hence, any income earned on such deposit is incidental to the acquisition of assets for the setting up of the plant and machinery. In this view of the matter the ratio laid down by this court in Tuticorin Alkali Chemicals and Fertilizers Limited v. CIT- (1997( 227 ITR 172 , will not be attracted. The more appropriate decision in the factual situation in the present (8 of 12) [ITA-355/2017] case i .....

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..... nterest was earned from fixed deposits which was kept in the bank for furnishing the bank guarantee. It had an inextricable nexus with securing the contract. Therefore, we are disposed to think that the factual matrix is covered by the decisions rendered in Bokaro Steel Ltd. (supra), Karnal Co-operative Sugar Mills Ltd. (supra) and Koshika Telecom Ltd. (supra) and, accordingly, we hold that the view expressed by the tribunal cannot be found fault with. Another judgment on the similar facts is of Madhya Pradesh High Court in Bharat Oman Refineries Ltd., supra. That was a case in which assessee-company filed nil return and along with the return, statement of income and expenditure was filed. In this statement, income from interest on account of short-term deposit with the bank was indicated. The Assessing Officer made assessment and treated the said sum as income from other sources'. The assessee challenged the said assessment pointing out that interest income could not be added under the head income from other sources'. On appeal, both the Commissioner (Appeals) and the Tribunal upheld the order of Assessing Officer. The High Court however held that the appellant has not ear .....

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..... t work would also be assessable as income from other sources. In the present case also, on the facts of the present case, we find that appellant being a civil contractor was required to provide a performance guarantee to the various works departments for obtaining contracts of civil construction. He to keep such performance guarantee alive by way of utilizing the bank overdraft limit against which he had to furnish FDRs/NSC for execution of the contracts. His failure to submit the performance guarantee or inability to keep them alive would have resulted in termination of the contract awarded to him and in that event, the concerned departments/employer could encash the security. Release of such performance guarantee is dependent on fulfillment of certain conditions. It is not that the appellant had invested surplus money lying idle with him only in FDRs/NSCs with a view to earning interest. Obtaining of FDRs/NSCs and furnishing of the same against the performance guarantee by the appellant, therefore, had an inextricable nexus with his business of securing civil contracts and integral to his working as civil contractor. The income of interest earned from the interest such FDRs/NSCs .....

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..... parcel of the business income. Ground No. 2 is decided in favour of the assessee. ITA No. 511/JP/2015 : 10. In the Penalty appeal, the assessee has challenged the levy of penalty by the ld. CIT (A) in respect of the enhancement made by the ld. CIT (A) while passing the quantum order. 11. I have heard the ld. Counsel for the assessee as well as the ld. D/R. The ld. CIT (A) after making enhancement of assessment has also levied the penalty under section 271(1)(c) of the IT Act in respect of the said addition being enhancement of income of ₹ 19,29,108/-. In view of the finding of the Tribunal on quantum appeal when the said enhancement is deleted, the penalty levied under section 271(1)(c) will not survive. Even otherwise, the penalty levied against the addition made on the basis of estimation of income is not justified in view of decision of coordinate bench of the Tribunal dated 16.12.2016 in case of Shri Collector Ram Sharma vs. ACIT in ITA No. 19/JP/2014 as relied upon by the ld. Counsel for the assessee. Accordingly, the penalty levied under section 271(1)(c) is deleted. 7. In the result, both the appeals of the assessee are allowed. Order is pronounced in the open court on .....

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