TMI Blog2002 (5) TMI 198X X X X Extracts X X X X X X X X Extracts X X X X ..... vil contracts where the rate of 8 per cent is considered to be fair and reasonable even by Departmental parameters. 4. Because the rate of profit applied at 10% is highly excessive, injudicious, arbitrary and untenable, looking the rate of 8 per cent applied in the preceding year." 2. Similarly, ITA No. 1944/1995 by the Revenue is directed against the same order of the CIT(A) and for the same assessment year on the following grounds: "1. Learned CIT(A) has erred in law and on facts on not confirming the addition of Rs. 18,56,140 on account of inflated purchases ignoring the fact that the purchases amounting to Rs. 18,58,140 out of total purchases shown at Rs. 73,85,460 were not verifiable and the parties from whom the purchases were made were not traceable at the given addresses and also because the forensic export's report also indicated that the bills in many cases were written by one and the some persons further inquiries with the bank also indicated that in many cases the cheques were encashed by the persons who were different from the persons in whose names the cheques were issued. 2. He also erred in not confirming the disallowance of Rs. 2,26,565 out of total c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess of the transactions made with the parties. The assessee filed copies of the accounts and copies of the confirmation letters stated to have been obtained from the parties before the AO. However, the AO did not agree with the confirmation letter as the letter sent to the parties had returned unserved. Secondly, the independent enquiries were made by the Inspector of Income-tax on the instruction of the AO, which revealed that out of those parties, six parties namely Munnalal, Narendra Kumar, Manik Chand, M/s Shakti Store Works, M/s Shanker Construction Co. and Bhagwati Singh were not present and none were operating from the addresses that were furnished by the assessee. Copy of the report of the Inspector was also handed over to the assessee for explanation and the assessee was directed to produce those parties before the AO. The AO also observed that affidavits of the parties were also filed, but the AO was of the opinion that since the enquiries letter received unserved and the assessee had not been able to obtain confirmatory letter and affidavit from the parties, it was considered necessary to examine them in person. The assessee was alternatively asked to furnish the present ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esult the addition of Rs. 18,56,140 were made. 4. As regards the payments made to the labourers to the extent of Rs. 9,89,000, the assessee had submitted samples and muster rolls totalling Rs. 4,28,130 before the AO. These were examined by the handwriting expert, which indicated that the thumb impressions are not of different parties and the AO observed that it can be easily deduced that the labour payments are excessive and inflated and accordingly made disallowance of Rs. 2,61,565 out of the total labour payment. However, the AO allowed depreciation to the assessee as per P L a/c. The assessee feeling aggrieved with the assessment order filed appeal before the CIT(A) and the learned CIT(A) after going through the material on record and explanations of the parties, the explanations of the assessee and working out of the details of the construction, came to the conclusion that the assessee has not maintained verifiable accounts and as such net profit rate should be applied. The learned CIT(A) also held that the consumption of the raw-material claimed is within the parameter laid down by the laboratories for particular type of road construction. The learned CIT(A) further held th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... py of contract bond for the assessee, computation of labour charges, copies of various case laws decided by the Tribunal, Allahabad, which we shall refer subsequently identical to the issue. Copy of judgment of Hon'ble Allahabad High Court reported in CST vs. Pilot Shoe Factory 39 STC 95, copies of the assessment order and order of the CIT(A) for the asst. yrs. 1996-97 and 1997-98 of assessee and copy of the balance sheet and P L a/c for the year under appeal. The learned counsel for the assessee argued on the basis of the paper book and material on record that the assessee had been carrying on contract business and construction of road by obtaining contracts from the Government departments and had been maintaining the books of account and were also audited under s. 44AB. He has further argued that out of 17 parties, hins could not be verified according to the AO and the AO has held that the transactions are not genuine. He has further argued that explanation and affidavits of all the parties were filed before the AO. The learned counsel for the assessee further argued that the details of contract by specifications were filed before the AO as well as in the paper book with respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... years as well as for the subsequent years to show that the net profit was excessive in this year. The learned counsel for the assessee further argued that sales-tax and interest should also be reduced from the not profit as the depreciation has been allowed. The learned counsel for the assessee further argued that in the nature of the business of the assessee, purchases are generally made from unorganised sector, which has been given due consideration by the Tribunal, Allahabad Bench in other cases, copies of which have been filed on the record. On the basis of the orders of the Tribunal, Allahabad Bench, the authorised representative has further argued that this Tribunal had been allowing interest on sales-tax out of the net profit. 8. On the other hand, the learned Departmental Representative Shri A.K. Monchanda argued that these bills were prepared by the persons of the assessee and purchases are bogus. The learned Departmental Representative further argued that the handwriting Expert report on this issue is not denied. The learned Departmental Representative further argued that net profit rate should not be applied and all the books of account should be rejected and additio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bhushari Parduman Kumar vs. CIT 1978 CTR (SC) 134 : (1978) 115 ITR 524 (SC). The learned counsel for the assessee has again taken as through the comparative chart at p. 1 of the paper book and also argued that the contract started in the earlier years also from 17th Oct., 1990 to 31st Mach, 1991, and as such, the part of the work fell in the asst. yr. 1991-92. Therefore, comparative chart is applicable. Comparative chart could be relied upon as disputed by the learned Departmental Representative. The learned counsel for the assessee further argued that the disputed purchases are not of Rs. 34 lacs. The learned counsel for the assessee further argued that the ratio of British paints judgment is not applicable. He has further argued that keeping in view the nature of the business and that stone ballast is used in the construction work, the position of the seller is such that they may not be available after sometime. Therefore, it was impossible for the assessee to locate them and produce before the AO. The other parties available were produced before the AO. The learned counsel further argued that the AO has not rejected the books of accounts and has not given any adverse finding tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchase and labour charges, which are in dispute, could be deleted, then the gross profit would come to 35 per cent, which is highly unrealistic and impossible. The learned counsel for the assessee also filed copies of the TDS certificates and sales-tax deduction. He has also filed copies of various orders of the Tribunal, Jodhpur Bench deducting depreciation and interest to third party after adopting net profit rate. 11. We have bestowed our careful consideration to the rival submissions of the parties. It is not disputed that during the year under consideration the assessee has shown receipts of Rs. 1,83,96,695 from the business of cunstruction of roads on different contracts. The AO has also specifically mentioned this fact in the assessment order. The AO has also mentioned in the assessment order that the books of account care examined by him. The assessee has also filed audit report under s. 44AB of the IT Act. The purchases as mentioned above in the order, out of 17 parties nine were rejected by the AO alongwith the wages in a sum of Rs. 2,61,565. The AO has given reason that some parties were not produced. The parties were not having certificates. The payments though ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of material data. It was stated that for 100 matres square area, 7.48 M-3 was required. We have also seanned copy of the Transportation Engineer Laboratory, Varanasi dt. 7th Jan., 1991. It was the issue for sample and test required for development of job mix formula for 80M-50M. The first report of UP P.W.D. Research Institute would be relevant for the same consideration in this case but the remaining report is merely of advisory nature, therefore, could not be considered in the assessment year in question. We have also seen copy of the contract bond in which estimated cost and tender cost is given. It was in respect of strengthening of national high way-2. The work was to be started on 17th Oct., 1990 to 16th Oct., 1991. Part of the period therefore, fell in this assessment year in question and part contract were pertained to the preceding assessment year. The difference between the estimated cost and tender cost was approximately Rs. 18 lacs. Similar is the position with regard to the construction of remaining section of National High way-2 in which the contract was to be started on 26th Oct., 1990, and had to be completed on 25th Oct., 1992. The difference between the es ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the assessee had to undertake four stages of work on Km. 8.213 to 11.308 and Km. 14.540 to 18.200. As per rates given the agerage rate per cum comes to Rs. 1,114. The payment received during the year is Rs. 1,58,59,086 and hence the area of constructed road works out to (1,58,59,085/1114) 14226 cum. (b) Consumption of grit of various sizes stone dust. 2. From a perusal of the P L a/c it will be seen that we have charged a sum of Rs. 3,04,286 to the P L a/c by way of sales-tax. This represents deductions from the bills represented by the department after due verification of the work and countersigned by us, by way of token of our acceptance of the name. The said figures of Rs. 3,04,206 is fully verifiable from the certificate of TDS which are already on record. 3. As per the information already placed on record the construction of road, our inputs are in the from of grits of various sizes, stone dust and ballast of different sizes and bituman required for construction of roads is supplied by the department on chargeable basis. As the imputs used by us are subject to levy of sales-tax/trade-tax in the state of UP it is the responsibility of contractee to deduct sales ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave been accepted except some minor variation in the net profit rate." 13. The learned counsel for the assessee also filed TDS certificate for reduction of sales-tax by the authorities below. The total value of the supply of the gitti was shown in both the certificates at Rs. 60,83,994.96, upon which the total sales-tax of Rs. 3,04,206 was deducted. The certificates are filed on the record. The learned counsel for the assessee submitted that 5 per cent sales-tax was deducted, therefore, on that basis tried to argued that if the figure of the raw-material is calculated in respect of sales-tax at 5 per cent then the same amount of the sales-tax as deducted by the Government would come to approximately the same figure. Though the learned counsel for the assessee did not file the evidence of the consumption of the goods but we are in agreement with his contention that if the purchase of raw-material in dispute is seen, which is at Rs. 60,17,700, if 5 per cent sales-tax is deducted out of this amount, then approximately the same figure of sales-tax in a sum of Rs. 3 lacs approximately would come. Therefore, it could be inferred from this part of circumstances and material that atleas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee further pointed out that for 25MM carpet, in addition to loose grits other materials such as lime, cement and ash of the power house is required. It was also pointed out to the CIT(A) on the same lines that the assessee had constructed 14,426 cm roads which was worked out on the basis of payment of Rs. 1,58,59,086 received during the year. Therefore, consumption of the loose grit should have been 19,475 cm. of the value of Rs. 61,87,925 on the value of the grit prevailing at that time. However, the assessee has shown at Rs. 60,17,700. On the basis of these submissions and record, the learned CIT(A) decided this issue, which we would like the reproduce for the sake of convenience: "5. I have carefully considered the submissions made, facts involved and the reasons mentioned in the assessment order. I have no difficulty in holding that, the appellant has not maintained verifiable accounts. The past history of the case shows that in earlier years also book-results have not been accepted, and that in asst. yrs. 1989-90, 1990-91 and 1991-92, net profit rate of 8.25 per cent, 8 per cent and 8 per cent respectively has been applied on the net contract receipt. During the pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would work out to Rs. 11,95,858. The appellant has claimed depreciation amounting to Rs. 5,26,218, which the AO has considered/allowed while completing the assessment. Thus, the total income would work out to Rs. 6,69,640 (11,95,858 - 5,26,218), as against Rs. 24,20,238. Consequently, the appeal is partly allowed with a relief of Rs. 17,50,598 (24,28,238 - 6,69,640)." 15. The comparative chart of net profit rate applied in the earlier year in the case of the assessee is as under; which is not disputed by the Revenue: Asst. yr. Turnover N.P. Rate (upheld before depreciation) 1989-90 68,19,827 8.25% (minus depreciation) 1990-91 92,06,995 8.25% (minus depreciation) 1991-92 1,49,56,699 8.00% (minus depreciation) 1992-93 (under appeal) 1,19,58,591 10% (minus depreciation) by CIT(A). 1993-94 1,63,66,650 8.00% (minus depreciation) 1994-95 1,80,64,329 8% (minus depreciation) No second appeal was filed by the Department in the above year except under appeal before us. The learned counsel for the assessee relied upon the order of the Tribunal, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counsel for the assessee also relied upon the order of the Tribunal, Allahabad Bench in the matter of Gaurav Builder vs. ITO in ITAT No. 1941/91 dt. 28th April, 1995, in which the Tribunal has adopted net profit rate of 6 per cent. Copies of the orders are incorporated in the paper book from pp. 24 to 57. We may mention here that the CIT(A), Varanasi in the case of the same assessee for the asst. yr. 1996-97 vide his order dt. 21st Feb., 2000, has allowed the appeal of the assessee and held that it will be just and reasonable to apply rate of 8 per cent in order to arrive at the correct income of the contract work and shall also allow the depreciation and interest payable to partners separately. Similarly, the CIT(A) in the case of the assessee for the asst. yr. 1997-98 has allowed the appeal of the assessee and directed the AO to apply flat rate of 8 per cent on the receipts after deducting the material and sales-tax as in the past and allow depreciation as per rules. It was stated that no further appeal is filed by the Department against the order of the CIT(A) and as such have become final. 16. The Hon'ble Allahabad High Court in the matter of CIT vs. Banwarilal Bansidhar he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts in the bills and purchases and therefore, possible leakage is not ruled out. Even if the value of the dalla grit is calculated on the basis of sales-tax deduction, the figure would come in approximation. Therefore, the learned CIT(A) has rightly held that the assessee has not maintained verifiable account, and the assessee also did not dispute the handwriting expart's report. The learned CIT(A) also rightly held that the road was constructed by the assessee as per the specification of the principal as the payment was made to the assessee. The learned CIT(A) also held: "It cannot be held that the appellant has not utilised grits and has not paid the wages for construction of road." We have also noted about that the payment of wages as compared to last year was very low and as such, no separate addition could have been made on that account. It appears that the AO has not considered the case of the assessee by adopting the test of human probabilities. The AO had also not looked into the case of the assessee at this angle as to whether the consumption of grit was made in the construction of the road. Therefore, in our considered view, the CIT(A) was justified in adopting the n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s constructing the buildings and as such, the facts and circumstances are clearly distinguishable. We have considered the entire facts and circumstances of the case. Before applying the net profit, we have to use the past record and the comparable cases. The Department itself has accepted the net profit rate in the case of the same assessee in different years at 8 per cent to 8.25 per cent on the receipts after deducting the material and sales-tax as in the past and allowed the depreciation. The comparable cases were also cited, which we have mentioned in this order of Ajanta Buider, Tej Vear Singh, Niranjan Lal Shyam Sunder, Gauvav Builders. In the comparable cases also, the Tribunal has applied 6 per cent to 8 per cent as not profit. The cases cited by the learned Departmental Representative are of builders constructing the buildings and are not applicable; therefore, looking to the past history and comparable cases, we are of the considered view that it would be reasonable and appropriate if the net profit rate of 8 per cent on the receipts after deducting the cost of the material supplied by the Government department applied in this case. The CIT has given the figure of net con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt in the matter of Saraya Engineering Works, in which it was held that since the depreciation had been taken into consideration in estimating the income from the contract work, therefore, no further depreciation was to be allowed. The Hon'ble Allahabad High Court in its subsequent judgment in the matter of CIT vs. Bishambhar Dayal Co. after going through the CBDT Circular has held; "That the depreciation should be allowed separately". The Hon'ble Allahabad High Court has further taken into consideration the above CBDT Circular and the Hon'ble Supreme Court in the matter of UCO Bank vs. CIT has held that the circulars having effect of relaxing rigour of law and thus binding upon the authorities. The Hon'ble Allahabad High Court has further held that: "No provision of the IT Act was brought to our notice, which makes the claim of depreciation inadmissible where the income is computed by applying a flat rate." The Hon'ble Allahabad High Court has further observed that the case reported in (1987) 168 ITR 455 (All) in distinguishable. The earlier judgment was passed by the Allahabad High Court in the year 1986 and the subsequent judgment referred to above in (1994) 210 ITR 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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