RATAN SINGH RATHOD, MUMBAI V. ACIT WD 25(2), MUMBAI

CO 103/MUM/2011

• Counselvise Citation: [2012] 122 COUNSELVISE.COM (IT) 7495 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 12 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 13-07-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 26-06-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 01-07-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: D C SEJPAL
• Keywords: Bogus purchase; Peak credit; Accommodation entries
• Section: 44AD; 133(6); 37(1); 68

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH D , MUMBAI BEFORE SHRI D. MANMOHAN, (VICE PRESIDENT) AND SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER ITA NO.3719/MUM/2010 ASSESSMENT YEAR : 2007-08 SHRI RATTAN SINGH RATHOD B-1, NEELA APT. S.V.P. ROAD BORIVALI (W) MUMBAI. PAN NO. AACPR 4164 L JT. CIT-25(2) MUMBAI. (APPELLANT) VS. (RESPONDENT) ITA NO.5110/MUM/2010 ASSESSMENT YEAR : 2007-08 ASSTT. COMMISSIONER OF INCOME TAX -25(2), BLDG. NO.C-11, 1 ST FLOOR, ROOM NO.108, PRATYAKSHKAR BHAVAN BANDRA KURLA COMPLEX, BANDRA (E) MUMBAI-400 051. SHRI RATTAN SINGH RATHOD MUMBAI. PAN NO. AACPR 4164 L (APPELLANT) VS. (RESPONDENT) CROSS OBJECTION NO.103/MUM/2011 ARISING OUT OF ITA NO.5110/MUM/2010 ASSESSMENT YEAR : 2007-08 SHRI RATTAN SINGH RATHOD MUMBAI. PAN NO. AACPR 4164 L ASSTT. COMMISSIONER OF INCOME TAX -25(2) MUMBAI. (CROSS OBJECTOR) VS. (RESPONDENT) ITA NO.3719,5110 /10 & C.O.-103/11 A.Y.07-08 2 ASSESSEE BY : SHRI D.C. SEJPAL DEPARTMENT BY : SHRI SATISH SINGH DATE OF HEARING : 28.6.2012 DATE OF PRONOUNCEMENT : 13.7.2012 O R D E R PER RAJENDRA SINGH, AM: THESE CROSS APPEALS AND CROSS OBJECTION OF THE ASSESSEE ARE DIRECTED AGAINST THE ORDER DATED 24.3.2010 OF CIT(A) FOR ASSESSMENT YEAR 2007-08. THE DISPUTES RAISED IN THESE APPEALS RELAT E TO ADDITION ON ACCOUNT OF CASH CREDIT, DISALLOWANCE OF PURCHASES AND SUB- CONTRACT CHARGES, ESTIMATION OF NET PROFIT AND DISALLOWANCE OF PE NALTY. THESE APPEALS ARE BEING DISPOSED OF BY SINGLE CONSOLIDATED ORDE R FOR THE SAKE OF CONVENIENCE. 2. THE FACTS IN BRIEF ARE THAT THE ASSESSEE WHO WAS THE SOL E PROPRIETOR OF M/S. RATANSINGH & BROTHERS AND WAS ENGAGE D IN THE BUSINESS AS CONTRACTOR UNDERTAKING CIVIL WORK CONTRACT FOR MUNICIPAL CORPORATION AND SEMI-GOVERNMENT ORGANIZATIONS, HAD DE CLARED NET PROFIT OF RS.1,38,49,505/- @ 6.55% ON THE GROSS CONTRACT RECEIPTS OF RS.21,14,72,874/- FOR ASSESSMENT YEAR 2006-07. THE ASSESSEE HAD ALSO SHOWN TOTAL CASH CREDITS OF RS.54,50,000/-. THE AO I N THE ASSESSMENT, TREATED CASH CREDITS AS INCOME OF THE ASSESSEE AS THE ITA NO.3719,5110 /10 & C.O.-103/11 A.Y.07-08 3 SAME WERE NOT EXPLAINED SATISFACTORILY. THE AO ALSO DISAL LOWED THE PURCHASES TO THE TUNE OF RS.2,87,57,709/- AS NOT SUPPORTE D BY PROPER EVIDENCE. THE AO FURTHER DISALLOWED CLAIM OF SUB-CONTRA CT CHARGES PAYABLE BY THE ASSESSEE TO THE TUNE OF RS.2,13,78,870/- IN RESPECT OF RELATED CONCERNS AND RS.2,23,83,278/- IN RESPECT OF OTHER CONCERNS. THE AO HAD ALSO DISALLOWED CLAIM OF PENALTY OF RS.2,88, 353/-. IN APPEAL, CIT(A) CONFIRMED THE ADDITION ON ACCOUNT OF CASH CREDIT TO THE TUNE OF RS.44,50,000/- AND DELETED THE ADDITIONS ON A CCOUNT OF BOGUS PURCHASES AND SUB-CONTRACT CHARGES AND INSTEAD ESTIMATED GP P ROFIT @ 8% ON THE GROSS CONTRACT RECEIPTS. CIT(A) ALSO DELETED THE ADDITION MADE ON ACCOUNT OF PENALTY CHARGES. AGGRIEVED BY THE DE CISION OF CIT(A), BOTH THE PARTIES ARE IN APPEAL BEFORE THE TR IBUNAL. WHEREAS THE REVENUE HAS CHALLENGED THE ORDER OF CIT(A) IN ALLOWIN G RELIEF IN RESPECT OF CASH CREDIT AS WELL AS IN RELATION TO DISALLOWANCE OF P URCHASE, CONTRACT CHARGES AND PENALTY, THE ASSESSEE HAS DISPUTED THE O RDER OF CIT(A) IN CONFIRMING THE CASH CREDIT ADDITION PARTLY A ND ESTIMATED NET PROFIT RATE AT 8%. IN THE CROSS OBJECTIONS, THE ASSESSEE HA S ALSO DISPUTED THE FINDING OF CIT(A) THAT THERE WERE DISCREP ANCIES IN THE BOOKS OF ACCOUNT AND THAT THESE WERE NOT CORRECT AND COMPL ETE AND FOR NOT APPRECIATING THE COMPARABLE CASES WHILE ESTIMATI NG 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 ITA NO.3719,5110 /10 & C.O.-103/11 A.Y.07-08 4 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 DOC UMENTS AND COPY OF LEDGER ACCOUNTS. IT WAS SUBMITTED THAT THE LOAN S HAD BEEN GIVEN OUT OF THEIR INCOME FROM AGRICULTURAL LAND. TH E ASSESSEE ALSO SUBMITTED THAT HE COULD PRODUCE THE PARTIES IF TIME WAS ALLOWED. THE AO OBSERVED THAT THE AGRICULTURISTS WERE NOT ASSESSED TO TA X AND THEIR ADDRESSED WERE NOT GIVEN IN THE CONFIRMATIONS AND SUBMI TTED ONLY IN RESPONSE TO SHOW CAUSE NOTICE. THE AO FURTHER OBSERVED TH AT THE ONUS WAS ON THE ASSESSEE TO PROVE THE IDENTITY OF THE LOAN CRE DITORS, THEIR CREDIT WORTHINESS AND GENUINENESS OF TRANSACTIONS WHICH HA D NOT BEEN DISCHARGED IN THIS CASE. THE AO, THEREFORE, TREATED TH E SUM OF RS.24.50 LACS AS INCOME OF THE ASSESSEE UNDER SECTION 68 OF T HE ACT. ITA NO.3719,5110 /10 & C.O.-103/11 A.Y.07-08 5 3.2 THE AO ALSO NOTED THAT THE ASSESSEE HAD TAKEN FRESH L OANS FROM FIVE OTHER PERSONS AGGREGATING TO RS.30.00 LACS AS PER DE TAILS GIVEN BELOW:- S.NO. NAME OF THE LOAN CREDITOR LOAN AMOUNT(RS.) IN NAME OF 1. P. NAINMAL & CO. 5,00,000/- M/S. RATANSINGH & BROS. 2. SHAILA ENTERPRISE 10,00,000/- M/S. RATANSINGH & BROS. 3. MANSUKHLAL & CO. 5,00,000/- SH. RATANSINGH 4. M.M. TRADING CO. 5,00,000/- SH. RATANSINGH 5. P. NANIMAL & CO. 5,00,000/- SH. RATANSINGH TOTAL 30,00,000/- 3.3 THE ASSESSEE SUBMITTED BEFORE THE AO THAT THE LOAN CR EDITORS WERE ASSESSED TO TAX AND FILED LOAN CONFIRMATIONS GIVING THEIR INCOME TAX ACKNOWLEDGEMENT RECEIPT, P.A. NUMBER ETC. THE AO M ADE ENQUIRY THROUGH NOTICE SERVER WHO REPORTED THAT THE PARTIES WE RE NOT FOUND AT THE GIVEN ADDRESS. THIS WAS POINTED OUT TO THE ASSESSEE WHE REUPON THE ASSESSEE FURNISHED THE NEW ADDRESSES. THE AO GOT ENQU IRIES MADE THROUGH INSPECTOR WHO, IN THE REPORT DATED 14.12.2009 MENTIONED THAT THE PARTIES AT SL.NO.1,2, & 3 WERE NOT RESIDING AT T HE NEW ADDRESSES GIVEN AND INSTEAD SOME OTHER PARTIES WERE RESIDING AND IN RESPECT OF PARTY NO.4 IT WAS REPORTED THAT THE ADDRESS WAS INCOMPL ETE. THE AO ALSO VERIFIED THE INCOME TAX RETURNS OF THE PARTIES AN D NOTED THAT THEY HAD NOT FILED THEIR BALANCE SHEET AND P&L ACCOUNT AND T HAT THE LOAN ITA NO.3719,5110 /10 & C.O.-103/11 A.Y.07-08 6 ADVANCED TO THE ASSESSEE WAS NOT REFLECTED IN THEIR INCOME TAX RETURNS. THE AO THEREFORE, CONCLUDED THAT THE CREDIT WO RTHINESS OF THE PARTY WAS NOT PROVED. THE AO THEREFORE, TREATED THE LOANS OF RS.30.00 LACS AS UNEXPLAINED INCOME OF THE ASSESSEE. THUS TOTAL ADDIT ION MADE UNDER SECTION 68 WAS RS.54,50,000/-. 3.4 THE ASSESSEE DISPUTED THE DECISION OF AO AND SUBMITTED BEFORE CIT(A) THAT THE LOANS HAD BEEN RECEIVED THROUGH ACCOUN T PAYEE CHEQUES AND WERE GENUINE. IT WAS ALSO SUBMITTED THAT TH E AGRICULTURISTS HAD SUBSTANTIAL LAND HOLDINGS TO ADVANCE LOANS. IT WAS POINTED OUT THAT OTHER CREDITORS WERE ASSESSED TO TAX. HO WEVER, THE ASSESSEE VIDE LETTER DATED 16.3.2010 SUBMITTED THAT PEA K 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) O BSERVED THAT IN CASE OF AGRICULTURISTS, THE ASSESSEE HAD GIVEN ADDRESSES AS WEL L AS THEIR LAND HOLDING DETAILS AND THOUGH THE OTHER CRED ITORS DID NOT EXIST ON THE ADDRESSES GIVEN, THE ASSESSEE HAD GIVEN DETAILS OF T HEIR INCOME TAX RETURNS FILED. THE AO HAD NOT CONDUCTED ANY ENQUIR Y TO DISPROVE THE CLAIM OF THE ASSESSEE. BUT, SINCE THE ASSESSEE HAD AGREED FOR PEAK CREDIT ADDITION, CIT(A) COMPUTED THE PEAK CREDIT AS UND ER :- NAME OF THE PARTY DATE OF LOAN TAKEN AMOUNT RECD. DATE OF REPAYMENT AMOUNT PAID AGGREGATE LOAN BALANCE OUTSTANDING ITA NO.3719,5110 /10 & C.O.-103/11 A.Y.07-08 7 (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 ENTERPRISES 10.5.2006 5,00,000 - - 20,00,000/- DUNGARSINGH H. DEORA 17.5.2006 4,00,000 - - 24,00,000/- MOHANSINGH H. DEORA 20.5.2006 4,00,000 - - 28,00,000/- DHANSINGH S. DALMIYA 23.5.2006 2,00,000 - - 30,00,000/- LALSINGH B. RATHORE 23.5.2005 4,00,000 - - 34,00,000/- BHAWANSINGH MEDITYA 25.5.2006 5,00,000 - - 39,00,000/- BHAWANSINGH CHAMPAWAT 25.5.2006 3,00,000 - - 42,00,000/- DUNGARSINGH H. DEORA 29.5.2006 2,00,000 - - 44,00,000/- D.I. DEORA 24.8.2006 50,000 - - 44,50,000/- P. NAINMAL & CO. - - 06.11.2006 5,00,000 39,50,000/- D.I. DEORA - - 31.01.2007 50,000 39,00,000/- LALSINGH B. RATHORE - - 28.2.2007 4,00,000 35,00,000/- BHANWARSINGH MEDTIYA - - 28.2.2007 50,000 34,50,000/- M.M. TRADING CO. 13.03.2007 5,00,000 - - 39,50,000/- MANSUKHLAL & CO. 13.3.2007 5,00,000 - - 44,50,000/- 3.5 CIT(A) AFTER ANALYSIS OF THE PEAK CREDIT COMPUTATI ON OBSERVED THAT THERE WAS NO EVIDENCE THAT TOTAL SUM OF RS.10.00 LACS WITHDRAWN BY THE ASSESSEE HAD BEEN UTILIZED FOR SOME OTHER PURPOSE. THEREFORE, HE COMPUTED THE PEAK CREDIT AT RS.44,50,000/- AND ADDI TION TO THAT EXTENT WAS CONFIRMED AND BALANCE ADDITION WAS DELETED. AGGRIEVED BY THE SAID DECISION BOTH THE PARTIES ARE IN APPEAL. ITA NO.3719,5110 /10 & C.O.-103/11 A.Y.07-08 8 3.6 BEFORE US, THE LD. AR SUBMITTED THAT THE ASSESSEE HAD GIVEN DETAILS OF LAND HOLDINGS AS WELL AS ADDRESSES WITH CONFIRM ATIONS FROM THE AGRICULTURISTS AND THEREFORE WITHOUT PRODUCING AN Y DIVERSE MATERIAL AO WAS NOT JUSTIFIED IN MAKING ADDITION AND CIT(A) WA S NOT JUSTIFIED IN CONFIRMING THE ADDITION OF PEAK CREDIT. IT WAS ALSO SUBM ITTED THAT THE ASSESSEE HAD NOT AGREED FOR PEAK ADDITION BEFORE CIT(A) .IT WAS FURTHER SUBMITTED THAT THE ASSESSEE IS A SEMI LITERATE PERSON WHO H AD SIGNED THE LETTER DATED 16.3.2010 FILED BEFORE CIT(A), WHI CH HAD BEEN PREPARED BY HIS TAX PRACTITIONER, WITHOUT EXPLAINING THE CONTENTS AND IMPLICATIONS OF THE SAID LETTER. AN AFFIDAVIT DATED 22 .6.2012 TO THE ABOVE EFFECT HAS BEEN FILED FROM THE ASSESSEE. THE LD. D R ON THE OTHER HAND SUBMITTED THAT BURDEN WAS ON THE ASSESSEE TO PROVE N OT ONLY THE IDENTITY OF THE CREDITORS BUT ALSO CREDIT WORTHINESS OF T HE CREDITORS WHICH HAD NOT BEEN DISCHARGED BY THE ASSESSEE AND THEREFOR E, THE ENTIRE CASH CREDIT WAS REQUIRED 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/- MAD E BY THE AO WHICH CONSISTED OF A SUM OF RS.24.50 LACS CLAIMED TO BE RECE IVED FROM SEVEN AGRICULTURISTS AND RS.30.00 LACS FROM FIVE OTHER PE RSONS. THE AO TREATED THE CASH CREDITS AS INCOME OF THE ASSESSEE UNDER SECTI ON 68 OF ITA NO.3719,5110 /10 & C.O.-103/11 A.Y.07-08 9 THE INCOME TAX ACT ON THE GROUND THAT THE ASSESSEE FAILED TO PROVE THE CREDIT WORTHINESS AND GENUINENESS OF TRANSACTIONS. IN APPEA L, CIT(A) OBSERVED THAT THE ASSESSEE HAD GIVEN ADDRESSES AS WELL AS LAN D HOLDING DETAILS OF THE AGRICULTURISTS BUT THE AO HAD NO T 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 CI T(A), SINCE THE ASSESSEE HAD AGREED VIDE LETTER DATED 16.3.2010 FOR PEA K 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 A N AFFIDAVIT DATED 22.6.2012 FROM THE ASSESSEE STATING THAT THE ASSESSEE IS A SEM I LITERATE PERSON WHO HAD ONLY SIGNED THE LETTER DATED 16.3.2010 PREPARED BY THE TAX PRACTITIONER WHO HAD NOT EXPLAIN ED THE CONTENTS AND THE IMPLICATIONS OF THE LETTER TO THE ASSESSEE. IN V IEW OF THE DENIAL BY THE ASSESSEE AND THE AFFIDAVIT FILED, IN OUR VIEW, I T WOULD NOT BE APPROPRIATE TO MAKE ANY ADDITION OF PEAK CREDIT ON A GREED BASIS AND MATTER IS REQUIRED TO BE EXAMINED ON MERIT. AS FOR TH E MERIT OF THE ADDITION, WE FIND THAT THE ASSESSEE HAD FILED CONFIRMATI ONS FROM AGRICULTURISTS AND HAD ALSO GIVEN LAND HOLDING DETAILS. HOWEVER, ONLY ON THE BASIS OF LAND HOLDINGS, IT COULD NOT BE ESTABLIS HED THAT THE AGRICULTURISTS HAD SUBSTANTIAL INCOME FROM WHICH LOANS HAD BEEN ITA NO.3719,5110 /10 & C.O.-103/11 A.Y.07-08 10 ADVANCED. THE ASSESSEE HAD NOT GIVEN ANY FURTHER DETAILS AND EVIDENCE IN SUPPORT OF AGRICULTURAL INCOME TO PROVE CRED IT WORTHINESS. THE AO HAD ALSO FAILED TO EXAMINE THE ISSUE IN DETAIL BY EITHER SUMMONING THE CREDITORS OR FOR CALLING FOR FURTHER DETA ILS. CIT(A) WHO HAS POWER CO-TERMINUS WITH AO IN SUCH MATTERS HAS ALSO FAI LED TO EXAMINE THE ISSUE IN DETAIL AS HE PROCEEDED TO MAKE AD DITION ON AGREED BASIS. IN RESPECT OF OTHER CREDITORS, ALSO THE PAR TIES WERE EITHER NOT FOUND AT THE ADDRESSES GIVEN OR THE ADDRESSES GIVEN B Y THE ASSESSEE WERE INCOMPLETE. THE AO ALSO VERIFIED THEIR INCOM E TAX RETURNS AS PER P.A. NUMBER GIVEN ON CONFIRMATIONS AND H AS GIVEN A FINDING THAT LOANS ADVANCED TO THE ASSESSEE WERE NOT REF LECTED IN THE INCOME TAX RETURNS. THE AO, THEREFORE, PROCEEDED TO CON CLUDE THAT THE CREDIT WORTHINESS OF THE PARTIES WAS NOT PROVED, WITHOUT GIVING ANY FURTHER OPPORTUNITY TO THE ASSESSEE TO EXPLAIN THE CREDI T. CIT(A) HAS ALSO NOT EXAMINED THIS ASPECT AS HE CONFIRMED THE PEAK CREDIT ON THE BASIS OF ADMISSION OF THE ASSESSEE WHICH HAS SINCE BEEN DENIED , AND IS SUPPORTED BY AN AFFIDAVIT. THEREFORE, IN OUR VIEW MA TTER IS REQUIRED TO BE EXAMINED BY CIT(A) AFRESH FOR GIVING FINDING ON M ERIT OF THE CASE I.E., THE CREDIT WORTHINESS AND GENUINENESS OF TRANSACTIO NS BOTH IN RELATION TO AGRICULTURISTS AND OTHER CREDITORS. WE, THE REFORE, SET ASIDE THE ORDER OF CIT(A) AND RESTORE THE MATTER BACK TO HI M FOR PASSING A ITA NO.3719,5110 /10 & C.O.-103/11 A.Y.07-08 11 FRESH ORDER AFTER NECESSARY EXAMINATION AND AFTER ALLOW ING OPPORTUNITY OF HEARING TO THE ASSESSEE. 5. THE SECOND DISPUTE IS REGARDING DISALLOWANCE OF BOGUS P URCHASES AND SUB-CONTRACT CHARGES. THE AO DURING THE ASSESSMENT PROCEE DINGS NOTED THAT THE ASSESSEE HAD SHOWN PURCHASES OF RS.2,87,57,70 9/- 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 TH AT THE CONCERNS WERE NOT FOUND AT THE ADDRESSES GIVEN. ON BEING CONFRONTED, THE ASSESSEE PROVIDED THE PRESENT ADDRESS AND ALSO CONFIRMAT IONS 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 ITA NO.3719,5110 /10 & C.O.-103/11 A.Y.07-08 12 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 OFFI CE WAS FOUND THERE. THE THIRD CONCERN WAS FOUND IN EXISTENCE BUT THE PROPRIETOR WAS M/S. PRAKASH CHEDDA AND NOT RAJESH WHO HAD SIGNED THE CONFIRMATION. THE INSPECTOR ALSO REPORTED THAT NAME OF THE ASSESSEE DID NOT APPEAR IN THE LIST OF DEBTORS OF P.K. TRADING CO. LATER, IN RESPONSE TO NOTICE UNDER SECTION 133(6), THE PROPRIETOR OF SHRI SAI SALE S CORPN. INFORMED THE AO THAT HE HAD NOT DONE ANY BUSINESS ACTIVITIES DU RING THE ASSESSMENT YEAR 2007-08 WITH THE ASSESSEE. HIS SIGNATURE ALSO D ID NOT MATCH WITH THE CONFIRMATION GIVEN. FURTHER, ON PERUSAL OF BALANCE SHEET FILED WITH THE RETURN OF INCOME IN CASE OF P.K. TRADING CO., THE AO NOTED THAT SUNDRY DEBTORS WERE ONLY RS.3,27,938/- AND TURNOVER FOR ASSESSMENT YEAR 2007-08 WAS RS.37,91,849/- WHEREAS THE ASSESSEE IS SAID TO HAVE MADE PURCHASES OF RS.1,00,02,704/- FROM THE SAID PARTY AND A SUM OF RS.74,43,585/- WAS OUTSTANDING. CONSIDERING THE VARIOUS DISCREPANCIES FOUND, THE AO CONCLUDED THAT THE PURCHASES SHOWN FROM THESE PARTIES WERE NOT GENUINE AND THESE WE RE ONLY ACCOMMODATION ENTRIES. THE AO THEREFORE, DISALLOWED THE SUM OF RS.2,87,57,709/- AND ADDED TO THE TOTAL INCOME. 5.2 THE AO ALSO NOTED THAT THE ASSESSEE HAD CLAIMED THE D EDUCTION ON ACCOUNT OF SUB-CONTRACT CHAGES PAYABLE TO 8 PERSONS WHICH WERE RELATED PARTIES UNDER SECTION 40A(2)(B), AS PER DETAILS GIVEN BELOW:- ITA NO.3719,5110 /10 & C.O.-103/11 A.Y.07-08 13 S.NO. NAME OF THE SUBCONTRACTOR AMOUNT (RS.) SUB CONTRACTED BY 1. KEDARNATH ENTERPRISES 29,81,000/- M/S. RATANSINGH & BROS. 2. MALLIKAARJUN CONST. CO. 30,72,000/- M/S. RATANSINGH & BROS. 3. NAGESHWAR CONSTRUCTION CO. 30,21,300/- M/S. RATANSINGH & BROS. 4. OMKARESHWAR ENTERPRISES 29,67,650/- M/S. RATANSINGH & BROS. 5. PARLEVEJNATH CONTRUCTION CO. 29,86,380/- M/S. RATANSINGH & BROS. 6. SOMNATH CONSTRUCTION CO. 30,41,850/- M/S. RATANSINGH & BROS. 7. TRAMBAKESHWAR ENTERPRISES 29,96,300/- M/S. RATANSINGH & BROS. 8. BHIMASHANKER CONSTRUCTION CO. 30,12,390/- M/S. RATANSINGH & BROS. TOTAL 2,13,78,870/- 5.3 THE ASSESSEE SUBMITTED THAT THE SUB-CONTRACT CHARGES WER E BONAFIDE AND PARTIES WERE ASSESSED TO TAX AND PAYMENTS W ERE MADE IN SUBSEQUENT YEAR BY CHEQUE. THE AO HOWEVER COLLECTED INFO RMATION FROM THE PARTIES UNDER SECTION 133(6) WHICH WAS COMPILED AS UNDER :- S.NO . NAME OF THE SUBCONTRACTOR RECEIPTS OTHER THAN FROM ASSESSE E CAPITAL INTRODUCE D BY PARTNERS RETURNED INCOME METHOD OF COMPUTATIO N OF INCOME DATE OF PARTNERSHI P 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/- ITA NO.3719,5110 /10 & C.O.-103/11 A.Y.07-08 14 7. TRAMBAKESHWA R 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 CAPIT AL OF RS.50,000/- EACH. THESE WERE CLAIMED TO HAVE DONE WORK WORTH RS.30.00 LACS EACH DURING THE PERIOD OF THREE MONTHS WIT H ALMOST NO CAPITAL. THEY HAD NOT RECEIVED ANY PAYMENT DURING THE YEAR. THEY HAD DONE JOB RELATING TO EXCAVATION OF ROADS, DRAINS, FIX ING OF PAVER BLOCKS ETC. WHICH ARE LABOUR INTENSIVE WORK AND IT WAS NOT P OSSIBLE TO DO THE WORK WITH MERE CAPITAL OF RS.50,000/-. ALL THESE CONCERN S HAD FILED RETURNS UNDER SECTION 44AD ON ESTIMATE BASIS WITH ACTUAL INCOME SUBJECT TO TAX BEING RS.2.5 TO RS.3.00 LACS WHEREAS THE ASSE SSEE GOT FULL DEDUCTION OF RS.30.00 LACS IN EACH CASE. THE ADDRESSES OF ALL FIRMS WERE EITHER OFFICE OR RESIDENTIAL ADDRESS OF THE ASSESSEE A ND THEY WERE HAVING BANK ACCOUNT IN THE SAME BANK IN WHICH ASSESSEE WAS HAVING ACCOUNT. THE ACCOUNTS WERE OPENED DURING FINANCIAL YEAR 2007-08 AND PAYMENT MADE BY ASSESSEE BY CHEQUE WERE IMMEDIATELY WITH DRAWN IN CASH. NONE OF THE PARTIES HAD SHOWN EXPENSES BY WAY OF CHE QUES. THE ASSESSEE HAD ALSO FILED THE SUB-CONTRACT AGREEMENTS WITH THE PARTIES WHICH WERE ENTERED ON 1.9.2006 WHICH WAS BEFORE THE PA RTIES CAME INTO EXISTENCE ON 1.1.2007. THE AO THEREFORE, CONCLUDE D THAT SUB- ITA NO.3719,5110 /10 & C.O.-103/11 A.Y.07-08 15 CONTRACT CHARGES CLAIMED BY THE ASSESSEE WERE NOT GENUINE AN D ASSESSEE HAD ONLY ADOPTED THE DEVICES TO REDUCE INCOME. HE, THEREFORE, DISALLOWED CLAIM AND ADDED THE SUM OF RS.2,1 3,78,870/- TO THE TOTAL INCOME. 5.5 THE AO ALSO NOTED THAT THE ASSESSEE HAD CLAIMED DEDU CTION OF RS.2,23,83,278/- ON ACCOUNT OF SUB-CONTRACT CHARGES PAYABL E TO NINE OTHER PARTIES AS PER DETAILS GIVEN BELOW:- S.NO. NAME OF THE SUBCONTRACTOR AMOUNT (RS.) PAYMENT OUTSTANDING FROM ASSESSEE 1. PARBHAT SINGH 31,15,000/- 11,86,685/- 2. HANSRAJ PRAJAPATI 19,85,000/- 19,62,975/- 3. CHHELSINGH DEORA (HUF) 30,68,865/- 42.19,832/- 4. BABUSINGH B. DEORA 19,75,450/- 19,53,531/- 5. BHIMSINGH B. DEORA (HUF) 20,15,000/- 19,92,643/- 6. SHEELA S. JAIN 10,22,694/- - 7. KARAN ENTERPRISES 30,38,637/- 20,70,790/- 8. PRAHLAD SINGH DEORA 30,21,032/- 29,54,000/- 9. ANIL R. GUPTA 31,41,600/- 30,07,473/- TOTAL 2,23,83,278/- 2,02,47,929/- 5.6 IN THESE CASES ALSO, THE ASSESSEE CLAIMED THAT THE TRANSA CTIONS WERE GENUINE AND PARTIES WERE ASSESSED TO TAX AND ALSO E NCLOSED THE CONTRACT ORDER AND INVOICE. IT WAS ALSO SUBMITTED THAT T HE PAYMENTS HAD BEEN MADE TO THE PARTIES IN THE SUBSEQUENT YEAR BY CHEQUE. 5.7 THE AO WAS, HOWEVER, NOT SATISFIED BY THE EXPLANA TION 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 OUTSTAND ING AT THE ITA NO.3719,5110 /10 & C.O.-103/11 A.Y.07-08 16 END OF THE YEAR. THESE PARTIES WERE CLAIMED TO HAVE DO NE 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 R EQUIRED TO BE MADE REGULARLY. THEY HAD FILED RETURNS OF INCOME UND ER SECTION 44AD SHOWING INCOME OF RS.2.5 TO 3 LACS ON ESTIMATION WHEREAS A SSESSEE HAD CLAIMED FULL DEDUCTION OF RS.20-30 LACS IN EACH CASE. T HESE PARTIES HAD NOT DONE BUSINESS WITH ANY OTHER CONCERN. THE AO ALS O NOTED THAT DATE OF AGREEMENTS WITH THE PARTIES WAS 1.4.2006 WHERE AS 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 TH E TOTAL INCOME. 5.8 THE ASSESSEE DISPUTED THE DECISION OF AO REGARDING DISA LLOWANCE OF PURCHASES AND SUB-CONTRACT CHARGES AGGREGATING TO RS.7,25,19,857/- . THE ASSESSEE SUBMITTED BEFORE CIT(A) THAT THE AO WAS NOT JUSTIFIED IN DISALLOWING THE PURCHASES WHEN THE A O HAD PRODUCED THE BILLS AND PAYMENTS HAD BEEN MADE BY CHEQU E IN SUBSEQUENT YEAR AND CORRESPONDING INCOME IN THE FORM OF CONTRACT RECEIPTS HAD BEEN TAXED. THE ASSESSEE COULD NOT DO BUSINESS W ITHOUT PURCHASES. MERELY BECAUSE THE PARTIES WERE NOT FOUND AT THE ADDRESSES, DISALLOWANCE COULD NOT BE MADE. SIMILARLY IN RESPECT OF SUB-CONTRACT PAYMENTS, ASSESSEE HAD FILED COPIES OF WORK CONTR ACT ITA NO.3719,5110 /10 & C.O.-103/11 A.Y.07-08 17 ORDER AND LEDGER ACCOUNT AND PAYMENTS HAD BEEN MADE BY CHEQUE WHICH WERE CLEARED IN THE SUBSEQUENT YEAR. IT WAS FURTHE R SUBMITTED THAT ON TOTAL CONTRACT RECEIPT OF RS.21,14,72,874/- ASSE SSEE HAD DECLARED NET PROFIT @ 6.55% WHICH WAS QUITE REASONABLE. THE ASSESSEE FILED SEVEN COMPARABLE CASES IN WHICH NET PROFIT HAD BEE N DECLARED FROM 2.93% TO 9.96% AS PER DETAILS GIVEN BELOW:- S.NO. NAME OF COMPANY NET PROFIT IN PERCENTAGE 1. LARSEN & TOUBRO 8.46% 2. JAIPRAKASH ASSOCIATES 9.96% 3. GAMMON INDIA LTD. 4.14% 4. HINDUSTAN CONSTRUCTION 4.25% 5. IVRCL INFRASTRUCTURE 3.57% 6. NAGARJUNA CONSTRUCTION 3.97% 7. PUNJ LYOD 2.93% TOTAL.. 37.28 AVERAGE NET PROFIT IN PERCENTAGE WORKOUT TO 37.28 = 5.33 7 5.9 THE ASSESSEE POINTED OUT THAT AFTER CONSIDERING THE DISALLOWANCES OF PURCHASES AND SUB-CONTRACT CHARGES MADE BY A O, NET PROFIT CAME TO 34.43% WHICH WAS NOT POSSIBLE IN THIS LINE OF BUSINESS. IT WAS ALSO SUBMITTED THAT DUE TO VARIOUS DISCREPANCIES AND OMISSIONS POINTED OUT BY AO, HE COULD HAVE REJECTED THE BOOKS OF ACCOUNT AND WAS REQUIRED TO MAKE PROPER ESTIMATION OF NET PROFIT WHICH IN ANY CASE COULD NOT BE 34.43%. THE NET PROFIT RATE DECLARED BY THE ASSESSEE WAS REASONABLE. ITA NO.3719,5110 /10 & C.O.-103/11 A.Y.07-08 18 5.10 CIT(A) AGREED WITH THE ASSESSEE THAT THE AO WAS NO T JUSTIFIED IN DISALLOWING TOTAL PURCHASES AND SUB-CONTRACT CHARGES AND THUS ASSESSING NET PROFIT AT 34.43%. IT WAS OBSERVED BY HI M THAT NO DOUBT THERE WERE MANY DISCREPANCIES IN THE BOOKS OF ACCOU NT WHICH COULD NOT BE CONSIDERED AS CORRECT AND COMPLETE. BUT THE A O HAD BROUGHT NO MATERIAL OR ANY COMPARATIVE MATERIAL TO SH OW THAT NET PROFIT RATE IN CASE OF GOVERNMENT CONTRACTORS COULD BE 34 .43%. HE REFERRED TO THE DECISION OF THE TRIBUNAL IN THE CASE OF SINGHAL & BROS. IN ITA NO.7253/MUM/2004 DATED 24.7.2007 FOR ASSESSMENT YEAR 2001-02 IN WHICH NET PROFIT HAD BEEN ESTIMATED AT 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 RECE IPTS 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 DE LETED THE BALANCE ADDITION OF RS.6,94,51,532/-. AGGRIEVED BY T HE DECISION OF CIT(A), BOTH THE PARTIES ARE IN APPEAL BEFORE THE TR IBUNAL. 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. ITA NO.3719,5110 /10 & C.O.-103/11 A.Y.07-08 19 5.11 BEFORE US THE LD. AR REITERATED THE SUBMISSIONS M ADE BEFORE CIT(A)THAT DISALLOWANCE OF ENTIRE PURCHASES AND SU B-CONTRACT CHARGES COULD NOT BE JUSTIFIED AS THE SAME RESULTED INTO HIGHLY ABNORMAL NET PROFIT RATE IN SUPPORT OF WHICH AO HAD G IVEN NO EVIDENCE. THE ASSESSEE HAD FILED A LIST OF COMPARATIVE CASES IN WHICH NET PROFIT RATE VARIED FROM 3% TO 10% AND THEREFORE, NET PROFI T OF 6.5% DECLARED BY THE ASSESSEE WAS REASONABLE. IT WAS ALSO SUBMITTED THAT THE BOOKS OF ACCOUNT OF THE ASSESSEE WERE AUDITED AND PURCHASES AND SU B- CONTRACT CHARGES WERE SUPPORTED BY DOCUMENTS AND, THEREFO RE, THE RESULTS DECLARED COULD NOT BE REJECTED. IT WAS ACCORDINGLY URGED THAT PROFIT DECLARED BY THE ASSESSEE SHOULD BE ACCEPTED. THE LD . DR ON THE OTHER HAND STRONGLY SUPPORTED THE ORDER OF AO AND ARG UED THAT THE PURCHASES AND SUB-CONTRACT CHARGES WERE NOT PROPERLY SUBSTANT IATED AND THERE WERE SERIOUS DISCREPANCIES AND AO WAS, THEREFOR E, JUSTIFIED IN DISALLOWING THE CLAIM. 5.12 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RI VAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING ADDITION ON ACCOUNT OF CONTRACT BUSINESS DONE BY THE ASSESSEE. THE ASSESSEE HAD SHOWN T OTAL CONTRACT RECEIPTS OF RS.21,14,72,874/- ON WHICH IT HAD DECLARED NET PROFIT OF RS.1,38,49,505/- @ 6.5%. THE AO DISALLOWED THE PURCHASES OF RS.2,87,57,709/- FROM THREE PARTIES, DETAILS OF WHI CH HAVE BEEN ITA NO.3719,5110 /10 & C.O.-103/11 A.Y.07-08 20 GIVEN IN PARA-5 EARLIER ON THE GROUND THAT THE PURCH ASES WERE NOT PROPERLY SUBSTANTIATED. THE AO ALSO DISALLOWED THE SUB- CONTRACT PAYMENTS OF RS.2,13,78,870/- MADE BY THE ASSESSEE TO EIGH T RELATED PARTIES AS PER DETAILS IN PARA 5.2 AND OTHER SUB CONTRACT CHARGES OF RS.2,23,83,278/- TO NINE OTHER PARTIES ON ACCOUNT OF SEV ERAL DISCREPANCIES NOTICED AS MENTIONED EARLIER. CIT(A) HAS O BSERVED THAT TOTAL DISALLOWANCE ON ACCOUNT OF PURCHASES AND SUB-CONTRACT CHARGES AGGREGATING TO RS.7,25,19,857/- WOULD RESULT INTO ABN ORMALLY HIGH NET PROFIT RATE OF 34.43%. CIT(A) HELD THAT ON ACCOUNT OF VARIOUS DISCREPANCIES POINTED OUT BY AO THE BOOKS OF ACCOUNT COULD BE REJECTED AND IN THAT CASE NET PROFIT HAS TO BE ESTIMATED REASONABLY. HE HAS ESTIMATED NET PROFIT RATE AT 8%. THE CASE OF THE ASSE SSEE IS THAT THE PURCHASES AND SUB CONTRACT CHARGES WERE SUPPORTED BY BI LLS AND SUB-CONTRACT ORDERS, AND BOOKS OF THE ASSESSEE WERE AUDITED AND, THEREFORE, NO ADDITION IS CALLED FOR. 5.13 THE CASE OF THE DEPARTMENT IS THAT THE PURCHASES AN D SUB- CONTRACT CHARGES ARE NOT SUPPORTED BY PROPER EVIDENCE IN VIEW OF SEVERAL DISCREPANCIES POINTED OUT AND, THEREFORE, THESE W ERE REQUIRED TO BE DISALLOWED FULLY AND CIT(A) WAS NOT JUSTIFIED IN CONFIRMING THE ADDITION ONLY ON THE BASIS OF 8% OF NET PROFIT RATE. ITA NO.3719,5110 /10 & C.O.-103/11 A.Y.07-08 21 5.14 WE HAVE GIVEN CAREFUL THOUGHT TO VARIOUS ASPECTS O F THE MATTER. IN OUR VIEW, THE ARGUMENTS OF THE ASSESSEE THAT THE BOOKS OF ACCOUNT COULD NOT BE REJECTED CAN NOT BE ACCEPTED. THE ASSESSE E HAD SHOWN TOTAL PURCHASES OF RS.2,87,57,790/- FROM THREE PAR TIES. THE INCOME TAX P.A. NUMBER GIVEN BY THE ASSESSEE OF THE TWO PARTIES WAS FOUND TO BE WRONG. THE PROPRIETOR OF THE THIRD PART Y WAS FOUND TO BE A DIFFERENT PERSON THAN THE PERSON WHO HAD SIGNED THE C ONFIRMATION. FURTHER THE SAID PARTY HAD SHOWN TURNOVER OF ONLY RS.3 7,91,849/- WHEREAS THE PURCHASES CLAIMED TO BE MADE BY THE ASSESSEE FR OM THE PARTY WAS RS.1,00,02,704/-. FURTHER, THE ASSESSEE HAD SHOW N THE OUTSTANDING AMOUNT OF RS.74,43,585/- PAYABLE TO THE P ARTY 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-CONTR ACT PAYMENT TO RELATED PARTIES, AO HAS PLACED MATERIAL ON RECORD TO SHOW THAT THE SAID PARTIES HAD BEEN CREATED ONLY ON 1.1.200 7 BUT SUB- CONTRACT AGREEMENTS WERE DATED 1.9.2006. THEY HAD MEAG ER CAPITAL OF RS.50,000/- EACH. THE ASSESSEE HAD NOT MADE ANY PAYMENT T O THEM DURING THE YEAR AND ENTIRE PAYMENT MADE BY CHEQUE I N THE SUBSEQUENT YEAR IMMEDIATELY WITHDRAWN IN CASH. IT HAS NO T BEEN EXPLAINED AS TO HOW THOSE PARTIES HAD DONE WORK WORTH RS.30.00 LACS IN EACH CASE WITH MEAGER CAPITAL OF RS.50,000/- WHEN THE WORK WAS ITA NO.3719,5110 /10 & C.O.-103/11 A.Y.07-08 22 LABOUR INTENSIVE. SIMILAR WAS THE POSITION OF OTHER SU B-CONTRACT PARTIES. ALMOST THE ENTIRE AMOUNT REMAINED OUTSTANDING AT THE END OF THE YEAR AND IT WAS NOT EXPLAINED AS TO HOW THE PARTIES DID WOR K WORTH RS.20- 30 LACS FOR THE ASSESSEE DURING THE YEAR WITH ALMOST NO CA PITAL. THE AGREEMENT WITH THEM WAS DATED 1.4.2006 WHEREAS THE STA MP PAPER WAS DATED 30.6.2006. OBVIOUSLY THE SUB-CONTRACT CHARGES U NDER THESE CIRCUMSTANCES CAN NOT BE SAID TO BE PROPERLY SUBSTANTIATED. ONLY MAKING PAYMENT BY CHEQUE IS NOT ENOUGH AS THE AMOUNT P AID BY CHEQUE CAN BE TAKEN BACK IN CASH. IN OUR VIEW CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE, THE ACCOUNTS OF THE ASSESSEE IN RELATION TO CONTRACT CHARGES AND PURCHASES CAN NOT BE TAKEN AS RELIA BLE AND THESE HAD BEEN RIGHTLY REJECTED BY THE AUTHORITIES BEL OW. HOWEVER, IT IS ALSO AN ESTABLISHED FACT THAT THE ASSESSEE HAD DONE THE CONTRACT WORK AND HAD SHOWN TOTAL CONTRACT RECEIPTS OF RS.21,14,7 2,874/-. THE BUSINESS CAN NOT BE DONE WITHOUT PURCHASES AND OTHER EXPEN SES, AND THEREFORE, THE ENTIRE CLAIM CAN NOT BE DISALLOWED. WE AGREE WITH CIT(A) THAT AFTER REJECTING THE ACCOUNTS, NET PROFIT H AS TO BE DETERMINED ON ESTIMATE. THE ASSESSEE HAD DECLARED NET PRO FIT RATE OF 6.5% . THE NET PROFIT RATE AFTER CONSIDERING THE DISAL LOWANCES OF EXPENSES AND SUB-CONTRACT CHARGES BY AO COMES TO 34.43% WHI CH IS HIGHLY ABNORMAL CAN NOT BE CONSIDERED AS REASONABLE. THE ASSESSEE HAD GIVEN COMPARATIVE CASES OF NET PROFIT VARYING FROM 2.93% TO ITA NO.3719,5110 /10 & C.O.-103/11 A.Y.07-08 23 9.96% AS PER DETAILS IN PARA 5.8 EARLIER. THE LD. AR FOR THE ASSESSEE HAS ARGUED THAT 6.65% NET PROFIT RATE DECLARED BY THE ASSESSEE IS REASONABLE AND NET PROFIT RATE OF 8% ADOPTED BY THE AO IS NOT CORRECT AS RATE OF 8% IS TO BE TAKEN UNDER SECTION 44AD WHICH IS APPLICABLE ONLY IN CASE OF ASSESSEES HAVING TURNOVER OF LESS THAN 40.00 LACS. WE ARE UNABLE TO ACCEPT THE ARGUMENTS ADVANCED ON BEHALF OF THE ASSESSEE. 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 LOWE R WHEN THE TURNOVER IS MORE THAN RS.40.00 LACS. IN FACT WITH RISE IN VOLUME, WORKING BECOMES MORE ECONOMICAL AND PROFITABILITY MAY N ORMALLY BE HIGHER. EACH CASE HAS TO BE DECIDED ON ITS OWN FACTS AND CIRCUMSTANCES. EVEN IN THE COMPARABLE CASES CITED, THE NET PR OFIT RATE HAD VARIED FROM 2.93% TO 9.96%. THESE ARE BIG CONCERN S WHO MAINTAIN PROPER ACCOUNTS AND ALSO MAINTAIN QUALITY STAND ARDS. IN CASE OF THE ASSESSEE AS HELD EARLIER, ACCOUNTS ARE NOT RELIABLE AND THEREFORE, IN OUR VIEW ON THE FACTS OF THE CASE, ESTIM ATION 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 BEE N RAISED REGARDING DELETION OF ADDITION OF RS.2,88,353/- MADE BY AO ON ACCOUNT ITA NO.3719,5110 /10 & C.O.-103/11 A.Y.07-08 24 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 BEFOR E CIT(A) THAT AO HAD MADE ADDITION WITHOUT GIVING PROPER OPPORTUN ITY OF HEARING TO THE ASSESSEE. IT WAS SUBMITTED THAT THE PAYMENT HAD BEEN MADE TO MUNICIPAL CORPORATION AND OTHER GOVERNMENT AUTHORIT IES FOR DELAYED EXECUTION OF CONTRACT WORK AND NOT TOWARDS ANY INFRACTI ON OF LAW. THEREFORE, PROVISIONS OF EXPLANATION TO SECTION 37(1) WERE NOT APPLICABLE. CIT(A) AGREED WITH THE SUBMISSION OF THE A SSESSEE THAT THE PENAL CHARGES WERE NOT FOR INFRACTION OF LAW AND ACCORDI NGLY HE DELETED THE ADDITION AGGRIEVED BY WHICH, THE REVENUE IS IN A PPEAL BEFORE THE TRIBUNAL. 6.1 WE HAVE HEARD BOTH THE PARTIES, PERUSED THE RECORD S AND CONSIDERED THE MATTER CAREFULLY. THE DISPUTE IS REGARDI NG ALLOWABILITY OF PENAL CHARGES OF RS.2,88,353/- PAID TO MUNICIPAL CORPOR ATION AND OTHER GOVERNMENT AUTHORITIES. THE AO HAD TREATED THE PAYMENT AS PENALTY FOR INFRACTION OF LAW. THE CASE OF THE ASSESSEE IS THAT THE PENAL CHARGES WERE FOR DELAYED EXECUTION OF CONTRACT AND NOT FOR INFRACTION OF LAW. THE CLAIM THAT THE PAYMENTS WERE FOR DELAY IN EX ECUTION OF CONTRACT WORK HAS NOT BEEN CONTROVERTED BEFORE US. THERE FORE, THE FINDING OF CIT(A) THAT THE PAYMENT WAS NOT FOR INFRA CTION OF LAW CAN NOT BE FAULTED WITH. ANY PAYMENT FOR VIOLATION FOR CONTRACTUAL ITA NO.3719,5110 /10 & C.O.-103/11 A.Y.07-08 25 OBLIGATION HAS TO BE ALLOWED AS NORMAL BUSINESS EXPENDIT URE. WE, SEE NO INFIRMITY IN ALLOWING THE CLAIM AND SAME IS THEREFO RE UPHELD. 7. IN THE RESULT, BOTH THE APPEALS AND THE CROSS OBJECTIO N ARE PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 13.7.2012. SD/- SD/- (D. MANMOHAN ) VICE PRESIDENT (RAJENDRA SINGH) ACCOUNTANT MEMBER MUMBAI, DATED: 13.7.2012. JV. COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR BENCH TRUE COPY BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.