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TMI Blog2013 (1) TMI 133X X X X Extracts X X X X X X X X Extracts X X X X ..... out purchases and other expenses, and therefore, the entire claim cannot be disallowed. Profit calculated by AO is highly abnormal cannot be considered as reasonable. Section 44AD deems the net profit rate at 8% in cases where accounts are not maintained and turnover is up to Rs.40.00 lacs. This however, does not mean that profit will lower when the turnover is more than Rs.40.00 lacs. In fact with rise in volume, working becomes more economical and profitability may normally be higher. Each case has to be decided on its own facts and circumstances. Even in the comparable cases cited, the net profit rate had varied from 2.93% to 9.96%. These are big concerns who maintain proper accounts and also maintain quality standards. Estimation of net profit rate of 8% by CIT(A) is justified. In favour of revenue Addition on account of penal charges u/s 37(1) - Delayed execution of contract work - AO had treated the payment as penalty for infraction of law – Held that:- The payment was not for infraction of law cannot be faulted with. Any payment for violation for contractual obligation has to be allowed as normal business expenditure. In favour of assessee - ITA No.3719/Mum/2010, IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ooks of account and that these were not correct and complete and for not appreciating the comparable cases while estimating net profit. 3. We first take up the dispute relating to addition on account of cash credits. The AO noted that the assessee had taken fresh loans during the year from seven agriculturists aggregating to Rs.24,50,000/- as per details given below :- S.No. Name of the Loan Creditor Loan amount (Rs.) In name of 1. Bhanwarsingh Medtiya 5,00,000/- M/s. Ratansingh Bros 2. Bhawanishingh Champawat 3,00,000/- M/s. Ratansingh Bros 3. Dhansingh S. Dahiya 2,00,000/- M/s. Ratansingh Bros 4. D.I. Deora 50,000/- M/s. Ratansingh Bros 5. Lalsingh B. Rathore 4,00,000/- M/s. Ratabsingh Bros. 6. Dungarsingh H. Deora 6,00,000/- Shri Ratabsingh 7. Mohansingh H. Deora 4,00,000/- Shri Ratabsingh Total 24,50,000/- 3.1 The assessee during the assessment proceedings filed the confirmations from the agriculturists the land record documents and copy of ledger accounts. It was submitted that the loans had been given out of their income from agricultural land. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e cheques and were genuine. It was also submitted that the agriculturists had substantial land holdings to advance loans. It was pointed out that other creditors were assessed to tax. However, the assessee vide letter dated 16.3.2010 submitted that peak credit on all loans could be added as income to avoid litigation and assessee was ready to accept peak credit of Rs.44,50,000/-. CIT(A) observed that in case of agriculturists, the assessee had given addresses as well as their land holding details and though the other creditors did not exist on the addresses given, the assessee had given details of their Income tax returns filed. The AO had not conducted any enquiry to disprove the claim of the assessee. But, since the assessee had agreed for peak credit addition, CIT(A) computed the peak credit as under :- Name of the party Date of Loan taken Amount Recd. Date of Repayment Amount paid Aggregate loan balance outstanding (Peak Credit) Shaila Enterprises 27.04.2006 5,00,000 - - 5,00,000/- P. Nainmal Co. 10.05.2006 5,00,000 - - 10,00,000/- P. Nainmal Co. 10.5.2006 5,00,000 - - 15,00,000/- Shaila Enterpr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to be treated as income. 4. We have perused the records and considered the rival contentions carefully. The dispute raised is regarding addition on account of cash credit to the tune of Rs.54,50,000/- made by the AO which consisted of a sum of Rs.24.50 lacs claimed to be received from seven agriculturists and Rs.30.00 lacs from five other persons. The AO treated the cash credits as income of the assessee under section 68 of the Income tax Act on the ground that the assessee failed to prove the credit worthiness and genuineness of transactions. In appeal, CIT(A) observed that the assessee had given addresses as well as land holding details of the agriculturists but the AO had not made any enquiries to disprove the loan. CIT(A) also observed that though other creditors did not exist on the addresses given, the assessee had given details of income tax returns filed. However, as per CIT(A), since the assessee had agreed vide letter dated 16.3.2010 for peak addition to avoid litigation, he confirmed the peak credit of Rs.44.50 lacs. 4.1 The ld. AR for the assessee has argued that the assessee had not agreed for addition of peak credit. He has filed an affidavit dated 22.6.2012 fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oted that the assessee had shown purchases of Rs.2,87,57,709/- from three parties as per details given below:- S.No. Name of the Purchase Party Amount Purchased (Rs.) Amount outstanding as on 31.3.2007 Purchased by 1. N.B. Enterprises 94,39,722/- 74,64,389/- M/s. Ratansigh Bros. 2. Shri Sai Sales Corporation 93,15,283/- 68,80,592/- M/s. Ratansingh Bros. 3. P.K. Trading Co. 1,00,02,704/- 74,43,585/- M/s. Ratansingh Bros. Total 2,87,57,709/- 5.1 The AO got enquiries made through notice server at the addresses of the parties given by the assessee but found that the concerns were not found at the addresses given. On being confronted, the assessee provided the present address and also confirmations from the parties giving their P.A. No. The AO got further verifications made and noted that P.A. Nos. given in respect of parties at Sl.No.1 and 3 i.e. AAYPL 7154 J and AAFPC 4789 H respectively were wrong and belonged to some other persons The Inspector on enquiry also reported that party No.1 did not exist at the address given. The address of the party at Sl.No.2 was a chawl and no office was f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from assessee Capital introduced by partners Returned income Method of computatio n of income Date of Partnership Deed Payment of Outstandin g from assessee as on 31.3.2007 1. Kedarnath Enterprises Nil 50,000/- 2,38,480/ u/s. 44AD 1.1.2007 29,14,106/- 2. Nallikaarjun Const. Co. Nil 50,000/- 2,45,760/- u/s. 44AD 1.1.2007 30,03,065/- 3. Nageshwar Construction Co. Nil 50,000/- 2,41,700/- u/s. 44AD 1.1.2007 29,53,502/- 4. Omkareshwar Enterprises Nil 50,000/- 2,37,410/- u/s. 44AD 1.1.2007 29,00,756/- 5. Parlevejnath Construction Co. Nil 50,000/- 2,38,910/- u/s. 44AD 1.1.2007 29,19,366/- 6. Somnath Contruction Co. Nil 50,000/- 2,43,350/- u/s. 44AD 1.1.2007 29,73,591/- 7. Trambakeshwar Enterprises Nil 50,000/- 2,39,700/- u/s. 44AD 1.1.2007 29,29,063/- 8. Bhimashanker Construction Co. Nil 50,000/- 2,40,990/- u/s. 44AD 1.1.2007 29,44,792/- 5.4 From the information collected, the AO noted that all these firms were created on the same date i.e. 1.1.2007 with capital of Rs.50,000/- each. These were claimed to have don ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uent year by cheque. 5.7 The AO was, however, not satisfied by the explanation given. It was observed by him that out of total claim of contract charges of Rs.2,23,83,278/-, a sum of Rs.2,02,47,929/- was outstanding at the end of the year. These parties were claimed to have done work valued up to Rs.20-30 lacs each during the year with almost no capital when the job was labour intensive for which payments are required to be made regularly. They had filed returns of income under section 44AD showing income of Rs.2.5 to 3 lacs on estimation whereas assessee had claimed full deduction of Rs.20-30 lacs in each case. These parties had not done business with any other concern. The AO also noted that date of agreements with the parties was 1.4.2006 whereas date of stamp paper was 30.6.2006. The AO therefore, concluded that the claim of sub-contract charges was not genuine and it was a colourable device to reduce income by the assessee. The AO accordingly disallowed the sum of Rs.2,23,83,278/- and added to the total income. 5.8 The assessee disputed the decision of AO regarding disallowance of purchases and sub-contract charges aggregating to Rs.7,25,19,857/- . The assessee submitted b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 5% of gross contract receipts. CIT(A) further observed that the assessee had filed details of comparative cases in which net profit varied from 3% to 10%. CIT(A) therefore, held that net profit rate of 8% would be reasonable in case of the assessee who had shown contract receipts of Rs.21,14,74,874/-. Accordingly he estimated net profit at Rs.1,69,17,830/- in place of declared net profit of Rs.1,38,49,505/- and thus upheld the addition of Rs.30,68,325/- and deleted the balance addition of Rs.6,94,51,532/-. Aggrieved by the decision of CIT(A), both the parties are in appeal before the Tribunal. Whereas the assessee has disputed the decision of CIT(A) to estimate net profit rate at 8%, the department has challenged the order allowing substantial relief of Rs.6.94 crores. 5.11 Before us the ld. AR reiterated the submissions made before CIT(A)that disallowance of entire purchases and sub-contract charges could not be justified as the same resulted into highly abnormal net profit rate in support of which AO had given no evidence. The assessee had filed a list of comparative cases in which net profit rate varied from 3% to 10% and therefore, net profit of 6.5% declared by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rejected can not be accepted. The assessee had shown total purchases of Rs.2,87,57,790/- from three parties. The income tax P.A. Number given by the assessee of the two parties was found to be wrong. The proprietor of the third party was found to be a different person than the person who had signed the confirmation. Further the said party had shown turnover of only Rs.37,91,849/- whereas the purchases claimed to be made by the assessee from the party was Rs.1,00,02,704/-. Further, the assessee had shown the outstanding amount of Rs.74,43,585/- payable to the party whereas the said party had shown debit of only Rs.3,27,938/-. Under these circumstances the purchases shown by the assessee can not be said to be supported by proper evidence. As regards the sub-contract payment to related parties, AO has placed material on record to show that the said parties had been created only on 1.1.2007 but subcontract agreements were dated 1.9.2006. They had meager capital of Rs.50,000/- each. The assessee had not made any payment to them during the year and entire payment made by cheque in the subsequent year immediately withdrawn in cash. It has not been explained as to how those parties had don ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es cited, the net profit rate had varied from 2.93% to 9.96%. These are big concerns who maintain proper accounts and also maintain quality standards. In case of the assessee as held earlier, accounts are not reliable and therefore, in our view on the facts of the case, estimation of net profit rate of 8% by CIT(A) is justified. The order of CIT(A) is accordingly upheld. 6. In the departmental appeal, a ground has also been raised regarding deletion of addition of Rs.2,88,353/- made by AO on account of penal charges on delayed execution of contract work. The AO disallowed the claim under the provisions of section 37(1) holding it of penal in nature. In appeal, the assessee submitted before CIT(A) that AO had made addition without giving proper opportunity of hearing to the assessee. It was submitted that the payment had been made to Municipal Corporation and other government authorities for delayed execution of contract work and not towards any infraction of law. Therefore, provisions of Explanation to Section 37(1) were not applicable. CIT(A) agreed with the submission of the assessee that the penal charges were not for infraction of law and accordingly he deleted the addition ..... X X X X Extracts X X X X X X X X Extracts X X X X
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