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TMI Blog2018 (2) TMI 962X X X X Extracts X X X X X X X X Extracts X X X X ..... that:- It is undisputed fact that all the trade creditors appearing in the balance-sheet are arising out of the expense of material purchased by the assessee. Thus all the purchases have been duly accepted by the AO and same was not disputed. However, the trade creditors which are emanating from the purchases have been disallowed merely on the ground of non-response of notice issued to them u/s 133(6) of the Act. In our considered view, the trade creditors cannot be disturbed without disallowing the corresponding purchase. - Decided against revenue. Addition made being 5% of material purchase on the ground that assessee failed to produce supporting evidence - Held that:- Once the AO has reached to a conclusion that assessee has failed to produce the books of account and no supporting evidence has been filed then he should have disallowed entire amount of expense or he should have rejected the books of account and should have framed the assessment u/s. 144. We also observed in the absence of any documentary evidence the AO should have referred to the historical data of the assessee for making the disallowance in scientific manner but in the instant case, AO has made the disallowanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on account of non-availability of supporting evidence. 3. Briefly stated facts are that assessee is an individual and acting as government contractor. The assessee is a proprietor of two firms namely "Bengal Trading Company & Bengal Trading Corporation". The assessee has debited its profit and loss account for ₹8,30,52,972/- on labour charges. The assessee out of total labour charges has deducted Tax Deducted at Source (TDS) to the tune of labour charges of ₹2,30,26,215/- and remaining labour charges of ₹600,26,712/- was incurred without deducting TDS. The AO during the course of assessment proceedings observed that the labour charge incurred without TDS deduction are incurred in cash and supported with the self-made vouchers. The AO further observed that the selfmade vouchers were completed in all respects and necessary details such as address and identity of payees were missing. Thus, the AO in absence of sufficient documentary evidence disallowed @ 10% of labour charges of ₹60,02,671/- by holding that these are not genuine expenses. Thus, the labour charges for ₹60,02,671/- was disallowed and added to the total income of assessee. 4. Aggrieved, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... litate against the assessee. It is not disputed by the AO that the appellant had maintained records in respect of labour wages paid and the same were produced before him. Although the AO alleged that the expenses were not fully verifiable he did not spell out in the impugned order any specific instance where the labour payment were found to be unsupported by relevant vouchers or evidences. Having regard to the nature of appellant's business and also having regard to the fact that the labour wages were disbursed at periodic intervals at the job sites which were all in the interiors of the State, adverse inference could not be drawn only because payments were disbursed in cash. Before making adhoc disallowance it was necessary for the AO to bring on record at least few specific instances where the expenditure was found to be not supported by any vouchers or other supporting evidences. I however find that just by making generalized observation that the appellant failed to produce full supporting evidences the AO produced to make adhoc disallowance. I also find merit in the AR's submissions that the disallowance was made without application of mind. Not only the AO disallowance not poi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by assessee. The AO was very much empowered to reject the books of account and to frame assessment u/s 144 of the Act which in our considered view AO failed to do so. 6.2 We also observed that AO was very much empowered to initiate the penalty u/s 271(1)(b) of the Act in the event of non appearance of assessee on the date of hearing despite the fact that notices for hearing were sent to him. On perusal of the assessment order, we note that no penalty of whatsoever has been initiated by the AO. We also observed that the AO has not initiated penalty on account of nonmaintenance of books of account u/s 271A of the Act. 6.3 We also find that various Tribunal's orders as well as judgments of various Hon'ble High Courts have held that profit declared in the contractor business @ 4 to 6% is quite reasonable some of the cases are listed below:- 3. In the case of Metropolitan Engg. Co. Opt. Society Ltd. vs. ACIT ITA No.s 2172 & 2172/Kol/2010 it has been held that in the AY 2001-02, the assessee is engaged in civil contract business with others business segments. AO estimated net income from the work contract @ 10% on the gross contract receipts. Assessee failed to furnish necessa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uite reasonable from the business of Government contracts. We also note that the AO has made the disallowance on the ground that in most of the cases self made vouchers were produced by the assessee. However on examination of AO order we notice certain lapses as detailed below : 1. The AO made the disallowance on adhoc basis and without pointing out any specific defects in the vouchers produced before him. 2. The AO was very much authorized by the statute to reject the books of accounts under section 145(3) of the Act in the event he is not satisfied with the correctness of the books of accounts. The relevant provision of section 145(3) reads as under : 16[Method of accounting.17 145. (1) ----------------- (2)--------------- (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144.] But we note that the AO has not rejected the books of accounts of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xcept three parties. The assessee was requested to produce necessary details in respect of following parties:- Name of the parties Amount 1. Shahabuddin Dhali 5,70,964 2 Nur Ali Khan 5,16,280 3 Maji Enterprise 3,36,530 4 Konked International 3,83,986 5 Bengal Trading Corporation 8,42,829 6 Anisur Alam Malick 98,000 7 Adhunik Traders 4,53,620 8 Mazid Ali Gazi 2,18,112 9 Kamlesh Biswas 28,,61,533 10 Chandan Kr. Viswas 23,76,000 11. Amit Basu 26,93,691 12. Bengal Engineering Corpn 35,30,257 Total amount Rs.1,14,49,545 As the assessee failed to produce the necessary details therefore the addition was made by AO for ₹1,14,49,545/-. 9. Aggrieved, assessee preferred an appeal before Ld. CIT(A). The assessee before Ld. CIT(A) submitted that AO has made the addition in respect of 12 parties for the outstanding amount appearing as on 31.03.2010, however, the AO has not pointed out any provision of the Income-tax Act under which the addition was made. Similarly, the necessary details in respect of the creditors consisting names, address, opening and closing balance were duly furnished before AO. The assessee was doing transactions regularly wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ell as materials consumed in execution of contracts. Copies were field. Out of the total expenditure on labour charges debited in the P&L A/c. labour charges of ₹2,40,50,615/- were payable to 13 parties and in respect of these charges tax u/s.194C was deducted at source by the appellant. In respect of the labour charges payable to these parties, the AO accepted the genuineness of the entire expenditure amounting to ₹240.50 lacs on being satisfied. Out of the 13 parties to whom such labour charges were payable, 6 parties viz. Bengal Engineering Corpora ion, Kamlesh Biswas, Chandan Biswas, Anisur Alam Mallick, Mazid Ali Gazi and Amit BIasu are the persons whose outstanding balances as on 31.03.2010 were considered by the AO for the purposes of making impugned addition. I further find that out of the aforesaid six parties, 5 parties viz Kamlesh Biswas, Chandan Biswas, Anisur Alam Mallick, Mazid Ali Gazi and Ami Basu had furnished their letters of confirmations in the office of the AO in the month of December 2012. In their confirmatory letters, each of the party had confirmed their transactions with the appellant. In the letters of confirmations they had also confirmed tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The said 11 parties had supplied ma erial or labour for which invoices were raised on the appellant. In he impugned assessment order, the AO did not disallow the expenses incurred on the ground that the assessee's trading transactions were either bogus or proved to be not genuine. In the circumstances, whom part of the transactions resulting in debit of expenses to the profit & loss account was not proved to be bogus or unverifiable then the remaining part could not be disbelieved. In fact, to the extent the appellant had made payments to these 11 parties during the relevant year, the AO had accepted the genuineness of the parties and did not draw any adverse inference. Once part of the transactions with the same parties and draw adverse inference against the appellant only with reference to the amounts remaining outstanding as at the close of the previous year. 6.7 In this regard I find that the appellant's case is supported by the decision of Delhi High Court in the case of CIT vs. Ritu Anurag Agarwal (supra). In this case, additions in respect of sundry creditors' balances were made on the ground that the assessee failed to produce books of account, bills &vouchers etc. Whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R submitted that out of 12 parties 8 parties have responded to the notice issued u/s 133(6) of the Act and AO has admitted the transactions with the parties as discussed above as genuine other than the amount of closing ba ance appearing at the end of the year under consideration. Ld. AR relied on the order of Ld. CIT(A). 11. We have heard the rival contentions of both the parties and perused the material available on record. In the instant case, the addition was made by AO on the ground that the trade creditors could not respond to the notice issued u/s 133(6) of the Act. However, Ld. CIT(A) reversed the order of AO. It is undisputed fact that all the trade creditors appearing in the balance-sheet are arising out of the expense of material purchased by the assessee. Thus all the purchases have been duly accepted by the AO and same was not disputed. However, the trade creditors which are emanating from the purchases have been disallowed merely on the ground of non-response of notice issued to them u/s 133(6) of the Act. In our considered view, the trade creditors cannot be disturbed without disallowing the corresponding purchase. In holding so, we draw support and guidance from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quent year and the return for that year has been accepted by the department clearly show that in the case of the assessee it is not necessary to add these creditors." Respectfully following the same, we do not find any interference in the order of Ld. CIT(A). We hold accordingly. Consequently, ground raised by Revenue is dismissed. 12. Next issue raised by Revenue is that Ld. CIT(A) in deleting the addition made by AO for ₹21,53,716/-being 5% of material purchase on the ground that assessee failed to produce supporting evidence. 13. Assessee during the year has claimed material purchased of ₹4,30,74,339/- in its profit and loss account. The AO to verify the genuineness of the expenses requested the assessee to produce the supporting evidence but assessee failed to do so. Therefore, AO disallowed the materials purchased expenditure @ 5% i.e. ₹21,53,716/- and added to the total income of assessee. 14. Aggrieved, assessee preferred an appeal before Ld. CIT(A). The assessee before Ld. CIT(A) submitted that all the necessary details of materials purchased were duly produced before AO during assessment proceedings. The assessee further submitted that if it has fail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shed. I also find that on the turnover of ₹15 crores, the assessee had disclosed income in excess of ₹1 crore which in percentage terms was approximately 6.5%.Having regard to the nature of business and the turnover achieved disclosure of such income cannot be considered to be low or unreasonable. For the reasons aforesaid, therefore, I do not find any justification for sustaining the adhoc estimated disallowance of ₹21,53,716/- on account of material consumption. The disallowance is therefore deleted. Ground Nos 6 & 7 are accordingly allowed." The Revenue, being aggrieved, is in appeal before us. 14. Before us both parties relied on the order of Authorities Below as favorable to them. 15. We have heard the rival contentions o both the parties and perused the materials available on record. We find that the finding of AO is contrary to the facts of the case. Once the AO has reached to a conclusion that assessee has failed to produce the books of account and no supporting evidence has been filed then he should have disallowed entire amount of expense or he should have rejected the books of account and should have framed the assessment u/s. 144 of the Act We also ..... X X X X Extracts X X X X X X X X Extracts X X X X
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