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TMI Blog2013 (9) TMI 226X X X X Extracts X X X X X X X X Extracts X X X X ..... th the audit report and were laid by the assessee alongwith return of income filed by it. Under these circumstances, the Assessing Officer could not have estimated income by applying a higher gross profit rate on this count even after the accounts stood rejected for some technical reasons. - Decided against the revenue. The appellant, therefore, has contested that the true profits can be deduced from the rejected accounts as well. We, therefore, having regard to the judgment rendered by the jurisdictional High Court in the case Kanhaiaya Lal Jangid v. Asstt. CIT (2007 (1) TMI 496 - HIGH COURT OF RAJASTHAN) and considering the over all conspectus as well as circumstances and peculiar facts of this case and also the earlier in issued judgments, find no rational in such estimation in the impugned year. We, therefore, consider it reasonable to estimate the profit for the peculiar year under consideration by making a disallowance of expenses of Rs. 10 lacs and modify the trading addition sustained by the Ld. CIT(A) - Decided partly in favor of assessee. - I.T.A. No. 712/JP/2012 - - - Dated:- 26-4-2013 - V. DURGA RAO AND B.R. JAIN , JJ. For the Appellant : Subhash Chandra. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aling system to the Modern Colour Light signaling System for various divisions of Indian Railways besides manufacturing railway signaling equipments. The accounts maintained by the assessee are audited by the firm of Chartered Accountants. The assessee returned income of Rs. 3,91,56,910, which stood revised within the statutory period at an income of Rs. 2,34,58,360/-. The Assessing Officer completed the assessment u/s 143(3) at a total income of Rs. 5,69,26,200/- disregarding revised return filed by the assessee and by rejecting accounts after application of provisions of Section 145(3) of the Act and estimating income by application of gross profit rate of 8%. 3. The reasons for rejecting the accounts by the Assessing Officer are that he noticed following discrepancies in the accounts maintained by the assessee: (1) No stock register available with assessee. (2) Assessee does not maintain site wise expenses vouchers. (3) Assessee does not maintain payment voucher/bill made towards site wise wages to the workers. (4) Assessee does not maintain any attendance or labour control register. (5) In absence of stock register quantitative figures of da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer to exclude the gross receipts of Rs. 27,75,17,919/- pertaining to Kiran Tirupati Mangala, a Joint Venture from the turnover of the appellant company and thus corrected the turnover to Rs. 46,28,68,976/- as against Rs. 74,03,86,895/- adopted by the Assessing Officer. 5. The Ld. CIT(A) vide para 4.1 of the impugned order took note of the fact that there is no material change in the facts and circumstances of the year under reference with the assessee's case in immediately preceding years i.e. assessment years 2003-04 to 2007-08 in respect of grounds with regard to contracts with Indian Railways where, the earlier Tribunal has upheld estimation by application of a profit rate of 7%. Accordingly he upheld the rejection of books of account by application of provisions of Section 145(3) of the Act and directed the Assessing Officer to apply net profit rate of 7% on gross contract receipts of Rs. 46,28,68,976/- and worked out the income of Rs. 3,24,00,828/- as against the net profit disclosed in the revised return at Rs. 2,77,72,138/- and thus sustained addition at Rs. 46,28,690/- on account of estimation of profits in the contract business with Indian Railways. 6. The Ld. CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of Rajesh Jhaveri Stock Brokers (P.) Ltd. (supra), the Ld. CIT(A) on the peculiar facts and circumstances of the case, cannot be said to have erred in admitting the revised return as a valid return and requiring the Assessing Officer to proceed on that basis. Finding no merit in the ground raised in appeal by revenue, the same stands rejected. 9. The ground No. 2 in appeal by revenue and the grounds No. 1 and 2 in cross objection by assessee relate to the rejection of accounts and estimation of income. The assessee's counsel through its written submission as well as orally submitted that during the year under consideration assessee company continued its old activity of Railway Contractor where the job mainly relates to the conversion of old traditional signaling system to the Modern Colour Light Signaling System for various divisions of Indian Railways. The contracts are awarded by Railway after objective analysis of the tender submitted and the work executed are subject to the critical inspection and supervision by Railways Authorities requiring frequent re-doing of the job as any failure in the signaling system involves precious public life. Safety and infallibilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing in the jungles as well where the basic facility such as water, electricity, food etc to the labour are not available and in those conditions since the work has to be completed within the time frame of the contract the site incharge engages local labour and execute the work. Also due to the fact that work sites were spread all over the country it is practically not possible to employ permanent labours and therefore, work has been completed by hiring local labours who are not only habitual to the local conditions but also costed less as compared to the permanent labour since the transportation and local stay of the permanent labour would be the additional cost therefore, the work has been completed by engaging local labour. 10. On the ground of estimation on contract activity, the assessee submitted that the total contract receipts for the year ended on 31.03.2009 were of Rs. 74.04 Crores which stood reduced to Rs. 46.29 Crores after reducing the receipts of Rs. 27.75 crores pertaining to AOP namely M/s Kiran Tirupati Mangla JV. The results declared by the assessee in contract activity for the year under appeal and of immediately preceding two assessment years are tabulated a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therein lying at a distance of few kms. from Railways stations and the signalling posts requiring most precise and meticulous working of the system, the failure of which may not only lead to serious financial implications in the nature of penalty but even put the partners of the firm to criminal consequences. (iv) The material involved in the execution of works contracts is compulsorily required to be procured from the approved suppliers of the Railways (technically known as RDSO approved suppliers). It may incidentally be noted that the approved suppliers always tend to charge higher prices as compared with the open market because of the higher standards applied for production of material for Railways having rich specifications, which is not of routine nature. (v) The quality control over the material and erection job at contractee's end (Railways) is very strong and the assessee company has to suffer repeated rejections of the works done due to strict and vigorous inspection by the contractees. The job involved is highly specialized and technical in nature. (vi) The Hon'ble Bench in the case of assessee itself in ITA No. 1069, 1070 1071/JP/08 for A.Y. 2004- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n gross contract receipts of Rs. 46,28,68,976/- which works out to Rs. 3,24,00,828/-. In the revised return of income, the appellant has declared net profit of Rs. 2,77,72,138/- and, therefore, the difference works out of Rs. 46,28,690/- which has to be sustained. I, therefore, direct the AO to restrict the addition of Rs. 46,28,690/- on account of estimation of profits in the contract business with Indian Railways instead of Rs. 1,48,81,776/- made by the AO. (viii) While sustaining the profit rate of 7%, Ld. CIT(A) has failed to appreciate the special nature of business of the assessee and simply guided by past history, i.e. he proceeded on same path as has been taken by Ld. AO. The assessee explained the mode and manner of supply of material which travelled under strict supervision of the wander i.e. Railway and the labour involved is in accordance with the daily requirements thus cannot be doubted by making passing remarks and without bringing on record any specific instances. (ix) In the circumstances, it is humbly prayed that the addition sustained by Ld. CIT(A) by applying the profit rate of 7% deserves to be deleted in toto. 11. On the other hand, Ld. Departm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lized therein lying at a distance of a few kms. From Railways stations and the signaling posts requiring most precise and meticulous of the system, the failure of which may not lead to serious implications in the nature of penalty but even put the partners of the firm to criminals consequences. The material involved in the execution of works contracts is compulsorily required to be procured from the approved suppliers of the Railways (technically known as RSDO approved suppliers). It may incidentally be noted that the approved suppliers always tend to charge higher prices as compared with the open market because of the higher standards applied for production of material for Railways having rich specifications, which is not of routine nature. The quality control over the material and erection job at contractee's end (Railways) is very strong and the assessee firm has to suffer repeated rejection of the works done due to strict and vigorous inspection by the contractees. The job involved is highly specialized and technical in nature. We are convinced with the arguments made by Shri O.P. Agrawal, Chartered Accountant, Counsel for the assessee that such explanation were also available ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pected by the team of RSDO, who upon the satisfaction of quality of the goods, issues an inspection certificate (IC) and places stickers thereon as a mark of inspection of such goods. These goods are then transported alongwith delivery note to the work site stock yard of the division of Indian Railways where, on the basis of IC issued by the authorities, the goods are received by the Railways store incharge. The store incharge of Indian Railways issues goods on requirement basis from time to time to the assessee for execution of work awarded to it. The balance of stock that remains unutilized at the site of work is returned to the store incharge of railways. The goods that have remained in the store of railways is property of Indian Railways and the assessee does not have any lien or claim thereon. In so far the work that has been carried out by the assessee, the measurement thereof is recorded in the measurement book known as M.B., in which entries are made by the engineers of the railway department. On the basis of such certification contained in the M.B., which are tendered to the railway authorities, the assessee gets payment of work done by it. Any work which is not found sati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lation shall be subject to inspection by RDSO/RITES/Railways representative at the manufacturer's premise. For this purpose the contractor shall give sufficient notice of time to RDSO/RITES/Railway's representative when the material is ready for testing/inspection. All facilities as may be necessary shall be provided for carrying out the tests. (c) Loading/unloading of material: [APB 158, 236, 257] The material shall be delivered by the contractor at the depot of consignee (situated at JP, JU and All)/ site of work. Material supplied by Railways for execution of the work and the material delivered by the Contractor shall be transported from the Store of SSE (Sig./Con.)/Jaipur. 13. The appellant has also made payment of wages for work done at site as has been explained in the arguments hereinbefore and the expenses are fully vouched. The accounts are fully audited with no adverse comments or findings thereon. It is, therefore, neither justified nor correct for the authorities below to have rejected the accounts and estimated profits by application of profit rate of 7% when the books of account even after rejection thereof gave true and correct position of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are recorded in the books of account of the appellant. This is not the case of the revenue authorities that the purchases and handling of materials and stores etc. is not controlled by railway authorities. It is also an admitted fact that the payment to appellant for actual work done is made on the basis of measurement book prepared and certified by the engineers of railway department. The defect, if any, in the work done by the appellant is removed or that work is redone and certificate obtained for taking payment thereof from railway department after certification in measurement book. This procedure is regulated and is in conformity with the covenants contained in the contract between the assessee and the Indian Railways. These agreements were laid before the authorities below also. Neither the authorities below have found that the purchases of materials or consumables and stores etc. that are inspected by the railway officials at the site of approved supplier of RDSO under Ministry of Railways is not accompanied with an inspection certificate nor that they are not supported by delivery challan or transport receipt for their delivery to railway depot. These materials are further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at all the payments made to labour are not acknowledged by them properly and call for disallowance of expenses on estimate basis instead of estimating of income by application of gross profit rate. It is so because, in a situation like this, the actual disallowance cannot be made on account of non-verification of certain payments of labour as the Assessing Officer himself did not give specific instances as to which payments are not evidenced by the payment receipts or supported by the vouchers of payment. Under the circumstances only, an ad hoc disallowance would be justified in a case like this. Likewise for the expenses, the assessee is found to have claimed total expenses of Rs. 1,55,52,397/-, which are included in the contract control account. These, expenses are shown to have been incurred and payments made towards daily traveling, conveyance, tea/refreshments, telephone and other miscellaneous expenses incurred at various sites. Even though the appellant claims to have maintained proper vouchers yet the Assessing Officer did not point out any specific instance as to which of such payment is not supported by proper voucher. The Ld. CIT(A) is also not found to have considered t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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