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TMI Blog2017 (3) TMI 1029X X X X Extracts X X X X X X X X Extracts X X X X ..... be maintained in such a manner that the correct profits can be deduced therefrom. It is no doubt true that the closing stock of one year will form part of the opening stock of the next year, at the same time, the assessee has to determine and disclose its true and correct profit & loss situation for each year. The continuity of the transaction as well as the inter-connection between various transactions cannot be a basis to distort the state of affairs belonging to a particular financial year. Thus we are of the considered view that the assessee has failed to provide satisfactory explanation regarding non-disclosure of closing stock out of the purchases made towards the fag end of the year and the ld. CIT(A) giving specific instances of such cases, the books of accounts have been rightly rejected by the Assessing Officer and confirmed by the ld. CIT(A). Regarding the estimation of profits - AO has estimated the net profit rate @ 11% on contract receipt (subject to Interest, Salary to partners and Depreciation) - Held that:- In the instant case, it is true that the books of accounts have been rejected at the same time, there has to be a fair estimation taking into consideratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate on gross contract receipts. The Hon ble Commissioner of Income Tax (Appeals) also erred in dismissing the ground taken by the appellant. 2. Brief facts of the case are that the assessee is a civil contractor and engaged in the business of contract work from the Ex. Engineer, Water Resources Baran, Pali, Kota, Tonk etc. The return of income was filed on 30.10.2006 at total income of ₹ 1,20,07,390/-. During the year under consideration the assessee has shown gross contract receipts of ₹ 17,35,96,602/- and N.P. at ₹ 1,74,62,945/- giving NP rate of 10.05% as against gross contract receipts at ₹ 1,11,69,719/- and N.P. at ₹ 11,19,15,160/- giving NP rate of 9.94% last year (before interest, Salary and Depreciation. 3. The AO rejected the books of account u/s 145(3) of the Act and enhanced the NP rate to 11% (subject to Interest, Salary and Depreciation) on total contract receipt of ₹ 17,35,96,602/- and made trading addition of ₹ 16,32,681/-. The relevant findings of the AO are as under: I have carefully considered the written submission and objections of the assessee in respect of invoking of provision of section 145(3) of I.T. Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of CIT V/s Builders Union 211 ITR 993 has also considered reasonable NP rate of 12.5% in the case of contractor. The following assesses of this Range carrying out the business of civil construction have also disclosed better profit rate subject to depreciation interest etc. as under:- Sl. No. Name of the Assessee A.Y. Total contract receipts Net Profit Net Profit @ 1. M/s Jain Enterprises 2006-07 Rs.9,60,64,093/- Rs.1,00,68,196/ - 10.48% 2. Sh. Harbans Lal Sethi Prop M/s Goodwill Advance construction Co., Kota. 2006-07 Rs.24,27,14,639/- Rs.2,66,97,007/ - 11% Considering all the facts and circumstances mentioned above, considering the nature of business and work executed by the assessee and the GP rate shown in the comparable cases, the net profit rate is reasonable applied @ 11% on total contract re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Book (MB) and thereafter it goes upto Executive Engineer/Superintending Engineer depending upon the quantum of bill. Normally this procedure takes 3 to 15 days. Therefore normally the work related to payment has to be completed 3 to 15 days before the release of payment. The following observations are worth mentioning:- i) The bills of ₹ 10,33,834/- [Bundi Site] was related to escalation charges and not any new work done by assessee. ii) The bills of Tonk were dated 29/03/2006 and not 30.03.2006, out of these Sr. No. 5 6 were escalation bills and not related to any new work done by assessee. iii) Sr. No.3 [Sirohi Site] was also a price escalation bill [no work done]. iv) The Assessee purchased cement of ₹ 466900/- from Jodhpur on 31.03.2006 on the bill it was written that the same was delivered on 30.03.2006. We all know that such a huge quantity cannot be consumed in a day. Moreover ever if it was consumed, cement takes at least 7 days for quarrying etc. and no bill can be prepared and passed on the same day. v) Cement of ₹ 3,22,000/- was purchased on 31.03.2006, claimed to be delivered on 11/03/2006, no evidence of delivery was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to Tax Audit u/s 44AB. The same were produced before the AO also along with other details from time to time. The AO has not at all judiciously considered submissions made before the AO. Minor irregularities, even assuming were there, cannot be made basis of the rejection of the books of accounts or of trading addition. Kindly refer Padampath Ramgopal 76 ITR 719 (SC). What is pertinent to note is that the AO has very categorically admitted in the assessment order as regards the fact of maintenance of complete books of account; that the same are audited; were duly produced before him and the contract receipts duly reconciled with the TDS certificates. The fact of claiming labour payments based on the labour registers, must roll registers and the fact of maintenance of site wise details of labour payment, were also duly admitted by the AO. Thus, the only objection/basis of rejection of the accounts raised by the AO are that: i. the assessee has shown purchases of the material in the last days of the financial year, which is suspected not to have been consumed by the assessee and therefore, should remain as a part of the closing stock. Resultantly the profit to that extent s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business of real estate developers and, flat promoters-Assessee had adopted a consistent practice of not disclosing the work-in-progress while working its P L-AO made an addition of ₹ 5,47,000/- being the value of the work-in- progress- If the value of the work-in-progress is taken in the closing stock, the opening stock shall have to be adjusted in this assessment-Rate of profits shown by assessee reasonable- Tribunal was justified in upholding the deletion of value of goods used in work-in-progress. Hence, for the above reason and also for the reasons that because of the practical difficulties of the business and unavoidable compulsion on the part of the contractor to raise bills showing complete work done without being any work in progress/closing stock in hand, there is no justification for invoking of Section 145, also when this is not one of the reasons provided u/s 145. As regards the allegations of cash payment, it is a matter of common knowledge that labourers demand cash payment and cannot wait for receiving cheque and realization thereof. Further, once admittedly detailed wages sheets and muster rolls etc. have been maintained, they contain all the necessa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eral decisions have held that the moment accounts are rejected: ITO vs. Nardev Kumar Gupta (2013) 142 ITD 0303 (JP) wherein it was held that When assessee s income was assessed by estimating profit after rejection of books of accounts, no disallowance can be made separately u/s 40A(3). Also Kindly refer CIT Vs Banwari Lal Banshidhar (1998) 229 ITR 229, 232 (All.), CIT vs. G.K. Contractor (2009) (PB 17-18) 19 DTR 305 (Raj.), Indwell Constructions v CIT (1998) (PB 14-16) 232 ITR 776 (AP), Maddi Sudarsanam Oil Mills Co. v/s CIT (1959) 37 ITR 369 (AP), ECI Engineering Construction Co. Ltd. in ITA No.2048/Hyd/2011, Samurai Techno Trading Co. (P) Ltd. v/s CIT (2010) 37 DTR 386 (Ker.), ITO v/s Kenaram Saha Subhash Saha (2008) 116 TTJ 289 (Kol.) (SB). In this case the ld. CIT(A) made the estimation of NP @ 10.64% based on the adhoc addition on account of the alleged inflated consumption of material and thus again considered the same accounts already rejected, hence was not a good basis. The only course left after the rejection is a fair estimation taking relevant material into consideration and past history being the most relevant and binding material, could not have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as warranted. Hence, the remaining addition be also deleted. It was further submitted that disallowance of depreciation on vehicles is not warranted with the facts and merits of the case as depreciation being a statutory allowance and hence cannot be restricted on the basis of personal use as held in case of Triveni Pharma (2006) 35 Tax World 64 (JP) and also in Kailash Chand Gupta v/s DCIT 35 Tax World 36 (JP). 6. The ld DR is heard who has vehemently argued the matter and relied upon the order of ld CIT(A). 7. We have heard the rival contentions and pursued the material on record. Firstly, regarding the rejection of books of accounts, u/s 143 of the Act, the Assessing Officer has treated two broad reasons for rejection of books of accounts. Firstly, the assessee has shown purchase of material in the last week of March, 2006 which have been claimed to have been consumed and as a result no closing stock has been shown. However, necessary explanation regarding consumption of the material so purchased has been given by the assessee and the only explanation which has been furnished is that it will not significantly affect the profits as per the Assessing Officer as the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time, the assessee has to determine and disclose its true and correct profit loss situation for each year. The continuity of the transaction as well as the inter-connection between various transactions cannot be a basis to distort the state of affairs belonging to a particular financial year. 8. In light of above, we are of the considered view that the assessee has failed to provide satisfactory explanation regarding non-disclosure of closing stock out of the purchases made towards the fag end of the year and the ld. CIT(A) giving specific instances of such cases, the books of accounts have been rightly rejected by the Assessing Officer and confirmed by the ld. CIT(A). 9. Regarding the estimation of profits, the AO has estimated the net profit rate @ 11% on contract receipt (subject to Interest, Salary to partners and Depreciation). It has been brought down to 10.64% by the ld. CIT(A). The ld. AR has submitted that the assessee has declared NP rate of 10.05% as against 9.94% in the immediately preceding A.Y 2005-06 and submitted that where the results of the current year is better as compared to past year then no addition should be made. In the instant case, it is true tha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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