Income Tax Officer, Ward -6(1), Hyderabad V. Acurite Contractors and Engineers, Hyderabad

CO 141/HYD/2012

• Counselvise Citation: [2016] 123 COUNSELVISE.COM (IT) 2176 (ITAT-HYDERABAD)
• Duration Of Justice: 3 year(s) 3 month(s) 29 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 29-02-2016
• Appeal Filed By: Assessee
• Bench Allotted: B
• Next Hearing Date: 03-02-2016
• Assessment Year: 2005-2006
• Appeal Filed On: 31-10-2012
• Court: TRIBUNAL
• Department Lawyers: B KURMI NAIDU
• Assessee Lawyers: K A SAI PRASAD
• Keywords: Depreciation
• Section: 40A(3); 6; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH ES B , HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER I.T.A. NO S . 976 & 977 / H YD /201 0 ASSESSMENT YEAR S : 2005 - 06 & 2006 - 07 THE INCOME TAX OFFICER , WARD - 6(1) , HYDERABAD VS M/S. ACURITE CONTRACTORS AND ENGINEERS, HYDERABAD [PAN: A A EFA3961E ] (APPELLANT) (RESPONDENT) C.O. NO S . 141 & 142 /HYD/2 01 2 (IN ITA NO S . 97 6 & 97 7 /H YD / 2010 ) ASSESSMENT YEAR S : 2005 - 06 & 2006 - 07 M/S. ACURITE CONTRACTORS AND ENGINEERS, HYDERABAD [PAN: AAEFA3961E] VS THE INCOME TAX OFFICER, WARD - 6(1), HYDERABAD ( CROSS - OBJECTOR ) (RESPONDENT) FOR REVENUE : S HRI B. KURMI NAIDU , DR FOR ASSESSEE : S HRI K .A. SAI PRASAD , AR DATE OF HEARING : 03 - 0 2 - 201 6 DATE OF P RONOUNCEMENT : 29 - 02 - 2016 O R D E R PER BENCH : THE APPEALS ARE BY REVENUE AGAINST THE COMMON ORDER PASSED BY THE LD. COMMISSIONER OF INCOME TAX (APPEALS), TIRUPATI HAVING CONCURRENT JURISDICTION, DATED 18 - 0 3 - 201 0 AND THE I.T.A. NO S . 97 6 & 97 7 / HYD / 2010 C.O. NO S . 141 & 142/HYD/2012 : - 2 - : CROSS - OB JECTIONS ARE BY A SSESSEE . REVENUE HAS FILED REDRAFTED REVISED GROUNDS IN BOTH THE YEARS ON THE ISSUES OF : A) LD. CIT(A) ACCEPTED CASH SYSTEM OF ACCOUNTS INSTEAD OF MERCANTILE SYSTEM FOLLOWED BY ASSESSEE; B) LD. CIT(A) WRONGLY REJECTED BOOKS OF ACCOUNTS A ND ESTIMATED INCOME AT 9%; C) LD. CIT(A) WRONGLY DELETED THE ADDITIONS MADE U/S. 40A(3) & 40(A)(IA) OF THE AC T ;. D) LD. CIT(A) HAS WRONGLY STATED ENHANCEMENT OF INCOME IN AY. 2005 - 06 WHEN HE HAS GIVEN SUBSTANTIAL RELIEF AND ; E) IN AY. 2006 - 07 WRONGLY BROUGHT TO TAX A TURNOVER OF RS. 6.54 CRORES IN THAT YEAR AS AGAINST AY. 2007 - 08. THE CROSS - OBJECTIONS BY ASSESSEE IS ON THE ISSUE OF 40(A)(IA) STATING THAT THERE A RE NO OUTSTANDING PAYMENTS AS AT THE END OF THE YEAR, SO THE PROVISIONS DO NOT APPLY. 2. SINCE CO MMON ISSUES ARE INVOLVED, WE HAVE HEARD THE CASES TOGETHER, AND ARE DECIDED BY THIS COMMON ORDER. WE HAVE HEARD LD. DR AND AR IN DETAIL AND PERUSED THE DOCUMENTS AND ORDERS ON RECORD. 3. BRIEF FACT S LEADING TO PRESENT A PPEA LS ARE THAT, ASSESSEE - FIRM IS A CIVIL CONTRACTOR AND HAS CARRIED OUT WORKS AT A L LAHABAD , UTTAR PRADES H . THE RETURNS FILED BY THE APPELLANT FIRM FOR THESE TWO YEARS IE. AY . 2005 - 06 & AY . 2006 - 07 WERE TAKEN - UP FOR SCRUTINY AT I.T.A. NO S . 97 6 & 97 7 / HYD / 2010 C.O. NO S . 141 & 142/HYD/2012 : - 3 - : SEPARATE TIMES AND DISALLOWANCES HAVE BEEN CARRIED OUT BY INVOK ING THE PROVISIONS OF SECTION 40(A)(IA), EXPENDITURE CLAIMED, INTEREST ON MONIES A D VANCED TO PARTNERS, SECTION 40A(3) AND SALARIES. AS COMMON ISS UES INVOLVED, BOTH THE APPEALS WE RE TAKEN - UP SIMULTANEOUSLY AND HAVE BEEN DISPOSED OFF BY A COMMON ORDER BY LD .CIT(A) . ONE ISSUE OF CONTENTION WAS EXTENT OF VOUCHERS IMPOUNDED. WHILE THE AO HAS OBSERVED THAT WHATEVER VOUCHERS THAT WERE IMPOUNDED AT THE TIME OF SURVEY W ERE ALL CONSIDERED WHILE IT IS HOTLY CONTESTED BY ASSESSEE THAT ALL VOUCHERS WERE IMPOUNDED AN D THEY WERE NOT IMPOUNDED BY NUMBER OR QUANTITY BUT WERE IMPOUNDED BY THE NUMBER OF BOXES THEY WERE PRESENT IN . IT IS SO CRYSTALLIZED THAT ASSESSEE - FIRM HAS EXECUTED EARTH WORK AND BOOKED AN EXPENDITURE OF RS. 2,15,04,401 / - (FOR AY . 2005 - 06) WHILE THE AO HAS ARRIVED AT THE ACTUAL EXPENDITURE BASED UPON THE VOUCHERS AVAILABLE AT RS. 22,13,997 / - AND THUS RESULTING IN DISALLOWING THE EXPENDITURE OF RS. 1,92,90,404 / - . 4 . THE OTHER MAJOR ITEM OF CONTEST IS WITH REGARD TO SUBSTANTIAL PAYMENTS MADE TO INDIVIDU ALS WITH REGARD TO LABOUR CHARGES, CENT E RING, BRICK MASONRY, ELECTRICAL, PAINTING AND OTHER MASONRY WORKS TOTALING TO R S. 1,23,35,119 / - IN AY . 2005 - 06 AND RS. 67,88,723 / - IN AY . 2006 - 07. IT IS THE CONTENTION OF THE AO THAT THESE PAYMENTS WERE ALL MADE TO THESE INDIVIDUALS BY ENTRUSTING THE WORKS TO THEM ON A SUB - CONTRACT BASIS AND HENCE , ASSESSEE FIRM IS LIABLE TO DEDUCT TAX AT SOURCE AND HENCE THE EXPENDITURE SHOULD BE BROUGHT INTO THE MISCHIEF OF S ECTION 40(A)(IA) IN BOTH THE ASSESSMENT YEARS. ON THE OTH ER HAND, ASSESSEE HAS CONTESTED THE AO'S INTERPRETATION BY STATING THAT ALL THESE WORKS WERE ENTRUSTED TO A LARGE NUMBER OF SKILLED WORKERS ON UNIT BASIS AND FOR THE SAKE OF CONVENIENCE OF BOTH SIDES, THE PAYMENTS WERE MADE ON A GROUP I.T.A. NO S . 97 6 & 97 7 / HYD / 2010 C.O. NO S . 141 & 142/HYD/2012 : - 4 - : BASIS TO ONE OF THEM IDENTIFIED AS A GROUP LEADER. HENCE, THESE PERSONS MENTIONED WERE NOT CON T RACTORS BUT THEY WERE GROUP LEADERS AND FOR THE SAKE OF CONVENIENCE, THE PAYMENTS WERE DISBURSED TO INDIVIDUAL LABOURERS THROUGH T H E GROUP LEADERS. THUS, IT IS ARGUED THAT THE WORKS CARRIED OUT WERE NOT ON SUB - CONTRACT BASIS AND THUS, THE PROVISIONS OF SEC TION 4 0 (A)(IA) WERE NOT APPLICABLE. 5 . AS ASSESSEE HAS DONE CONTRACT WORK ONLY WITH M/S. ALLAHABAD UNIVERSITY, LD. CIT(A) HAS ASKED THE AO TO MAKE FURTHER ENQUIRIES AND MATTERS WERE REMANDED REGULARLY. THE INFORMATION OBTAINED FROM THE SAID CONTRACTEE WAS PUT TO ASSESSEE AND AFTER CONSIDERING T HE INFORMATION ON RECORD AND NATURE OF WORK, LD. CIT(A) PASSED A DETAILED ORDER ON THE ISSUES IN CONTENTION. I N THE BARGAIN HE HAS REJECTED T HE BOOKS OF ACCOUNTS, DIRECTED ESTIMATION OF INCOME ON A REVISED TURNOVER WITH ENHANCEMENT OF TURNOVER IN AY. 2006 - 07 BY AN AMOUNT OF RS. 6.54 CRORES. SOME OF HIS FINDINGS ON VARIOUS ISSUES ARE AS UNDER: A. ON THE WORKS CARRIED ON BY ASSESSEE: 4.3 AS CAN BE SEEN THE ASSESSEE HAS BEEN AWARDED WORKS IN THE FOLLOWING PROJECTS OF THE AAI, AS PER THE LETTERS OF AAI (A) COLLEGE OF EDUCATION (B) COLLECTION OF PHARMACY (C) GIRLS HOSTEL (D) BASKET BALL COURT AND OLYMPIC TORCH (E) YESHU DARBA R 4.4 THE AAI IN THEIR LETTER DT.30.11.2007 HAS INDICATED THE VALUE OF WORKS CARRIED OUT BY THE APPELLANT FIRM ON YESHU DARBAR AS PER M - BOOK IS RS4.11 CRORES AND PAYMENTS MADE WERE RS.73 LAKHS AND I.T.A. NO S . 97 6 & 97 7 / HYD / 2010 C.O. NO S . 141 & 142/HYD/2012 : - 5 - : THE PAYMENTS DUE WERE SHOWN AS RS.3.38 CRORES. BESIDES, A GAINST TOTAL CLAIM OF WORKS CARRIED OUT BY THE APPELLANT FIRM ON ALL FIVE OF THE ABOVE PROJECTS, STANDING AT RS.26,31,72,802 AS ADMITTED BY THE AAI IN THEIR LETTER DT.30.11.2007, THE PAYMENTS MADE WERE RS.19,25,39,470, WITH THE DISPUTES ARISING IN COLLEGE OF PHARMACY, GIRLS HOSTEL AND YESHU DARBAR. HERE WE ARE CONCERNED WITH THE GENUINENESS OF THE EXPENDITURE ON THE WORK CARRIED OUT IN YESHU DARBAR. AS MAY BE SEEN FROM COPIES OF M - BOOK PAGES, EVEN THOUGH THE VALUE OF WORK AS SUPPORTED BY THE M - BOOK IS CLAIM ED AT RS 4.1 0 CRORES, BY VIRTUE OF AAI'S UNILATERAL AND ARBITRARY REDUCTION OF UNIT PRICES BUT WITHOUT DISTURBING THE QUANTITY OF UNITS, THE MONIES RECEIVABLE WERE THROWN INTO A DISPUTE. AS CAN BE SEEN THERE APPEARS TO BE SOME DISPUTES BETWEEN THE BILLS PR ESENTED BY THE APPELLANT FIRM AND PAYMENTS MADE BY THE UNIVERSITY. IT IS ALSO NOTICED FROM THE RETURNS OF INCOME FURNISHED THAT THE APPELLANT FIRM HAS BEEN OFFERING THE MONIES FOR TAXATION ON ACTUAL RECEIPT BASIS FROM THESE WORKS. THUS, IT IS APPARENT THAT THE MAJOR AREA OF DISPUTE IS ONLY ABOUT WORK CARRIED OUT ON 'YESHU DARBAR PROJECT' AND THE AMOUNTS REALIZED FROM THE AA I. B. ON THE QUALITY AND RELIABILITY OF EVIDENCE GATHERED: 4.7. IN THIS BACKGROUND, IT IS DESIRABLE TO COMMENT UPON THE QUALITY AND RELIABILITY OF EVIDENCE FURNISHED BY THE AAI. IT IS QUITE SURPRISING THAT THE AAI HAS ENTRUSTED SUCH VALUABLE WORKS TO THE APPELLANT FIRM WITHOUT CALLING FOR TENDERS NOR GIVING A CL EAR DETAILED WORK ORDER TO THE APPELLANT. EVEN SO, THE VALUE OF WORK AND SUB - ITEMS WERE NOT MENTIONED IN THE WORK ORDER, WHICH IS USUALLY THE CASE IN ANY WORK ORDER. IT IS QUITE DIFFICULT FOR THE PRINCIPALS TO KEEP MONITORING THE PROGRESS OF WORK AS WELL A S PAYMENTS WITHOUT THIS CLARITY IN WORK ORDER. BE THAT APART; THE AAI HAS GIVEN CONTRADICTORY INFORMATION AT DIFFERENT TIMES ABOUT THE VALUE OF WORKS CARRIED OUT BY THE APPELLANT, ON EACH PROJECT. FOR INSTANCE, A CERTIFICATE ISSUED BY AAI DT.21 - 7 - 2005 INDI CATES VARIOUS WORKS CARRIED, OUT OF WHICH YESHU DARBAR WORK IS STATED AT RS.2.30 CR. AS CAN SEEN FROM A COPY OF THE LETTER BELOW. HOWEVER, AS CAN BE SEEN FROM BILL DATED 18 - 6 - 2005, THE VALUE OF WORK DONE ON YASHU DARBAR IS RS.6.56 CRORES. FURTHER, THE AO B ASED UPON M - BOOKS IS ALSO ARGUING IN HIS REMAND REPORT THAT AIL WORK OF VALUE OF RS.6.56 CRORES IS COMPLETED BY 31 - 3 - 2004 AND NO WORK SEEMS TO HAVE BEEN CARRIED OUT BY APPELLANT AFTER 31 - 3 - 2004. HOWEVER, IN THEIR LETTER DATED 25/01/2000, THE VALUE OF WORK WAS INDICATED AT RSA.11 CRORES. HENCE, THERE IS A RING OF DUBIOUSNESS AROUND THE QUALITY OF INFORMATION GIVEN BY AAI. ALL THESE CONTRADICTIONS WERE SUBMERGED IN THEIR CORRESPONDENCE ONLY POST - MOU. THEREAFTER, THEIR CORRESPONDENCE ON VALUE OF WORKS CARRIED OUT BY THE APPELLANT FIRM WAS MATCHING WITH THE VALUE OF WORKS MENTIONED IN MOU. HENCE, IT IS INFERRED THAT THE AAI IS I.T.A. NO S . 97 6 & 97 7 / HYD / 2010 C.O. NO S . 141 & 142/HYD/2012 : - 6 - : NOT COMING CLEAN ON FURNISHING THE CORRECT INFORMATION. HENCE, ALL THE INFORMATION FILED BEFORE THE AO BY THE AAI DURING ASSESSMENT NEEDS TO BE SEASONED WITH THE INFORMATION F.LED NOW. THUS, ONLY THAT CORRESPONDENCE FILED BY THE AAI NOW CAN BE GIVEN CREDENCE TO. 4.8. FURTHER, IT IS THE ARGUMENT OF THE AO VIDE HIS FINAL REMAND REPORT DATED 19 - 2 - 2010 THAT THE APPELLANT HAS EXECUTED ALL THE WORKS RELATING TO YASHU DARBAR BY 31 - 3 - 2004 AS CAN BE SEEN FROM PARAS - 3, 4 AND 5 OF HIS REPORT. THE AO DRAWS ATTENTION TO PAGE - 280F M - BOOK, WHEREIN IT IS CLEAR THAT THE APPELLANT EXECUTED WORKS WORTH RS.6,38,00,869/ - BY 10 - 3 - 2004 AND BALANCE WORK, OF RS.18 ,51,003/ - AS DONE SUBSEQUENTLY AS PER PAGE - 24 OF THE SAID M - BOOK. HE HAS ALSO DRAWN REFERENCE TO STATEMENT STYLED 'ANNEXURE III ' GIVEN BY AAI. HE FINALLY CONCLUDES THAT THE VALUE OF EARTH WORK DONE BY ASSESSEE ON YASHU DARBAR IS ONLY RS.86,46,913/ - AS ON 31 - 3 - 2004 AND THEREFORE PLEADED FOR REJECTING THE CLAIM OF THE APPELLANT FOR EXPENDITURE ON EARTH WORK TO AN EXTENT OF R S .1,92,90,404/ - ON YASHU DARBAR. 4.9. THE ARGUMENT OF THE AO IS VERY CLOSELY CONSIDERED IN THE BACKDROP OF M - BOOKS, RUNNING BILLS AND CORRESPONDENCE FROM AAI. THE AO HAS MISSED THE WOOD FOR THE TREES SINCE HE HAD FAILED TO CONSIDER THAT EVEN THOU GH WORKS WERE COMPLETED BY THE SAID DATES, THE APPELLANT HAD NOT RECEIVED ANY MONIES AND SINCE THE APPELLANT IS FOLLOWING 'CASH' SYSTEM OF ACCOU NTING, IT IS NOT TO BE CONSIDERED THAT ENTIRE EXPENDITURE .WAS INCURRED AND HENCE TO BE DEDUCTED IN THE SAME YEAR. EVEN THOUGH THE METHOD OF ACCOUNTING FOLLOWED BY APPELLANT IS LOPSIDED, WHICH WILL BE DISCUSSED LATER, THE PRESENTATION MADE BY THE APPELLANT DESERVES TO BE CONSIDERED FOR OBTAINING A HOLISTIC VIEW OF THE ASSESSEE'S PICTURE. BESIDES, THE AO HAD ALSO OBTAINED COPIES OF RUNNING BILLS SUBMITTED BY THE APPELLANT TO A AI WHICH INCLUDES BILLS DATED 18 - 6 - 2005 (INCORPORATED BELOW HERE). AS PER THIS BILL , IT CAN BE INFERRED THAT EVEN THOUGH WORK WAS CARRIED OUT BY 31 - 3 - 2004 - AS PER THE M - BOOK, THE BILLS WERE NOT SUBMITTED TILL 18 - 6 - 2005 AND ACCORDINGLY THE EXPENDITURE ALSO NEEDS TO BE CONSIDERED IN FY'S 2005 - 06 AND 2006 - 07, IF ASSESSEE'S METHOD OF ACCOUN TING, THOUGH DEFECTIVE, IS ACCEPTED . C. ON EXPENDITURE INCURRED IN AY. 2005 - 06 ON YE SHU DARBAR : 4.10. HAVING SAID SO, THE ISSUE OF EXPENDITURE INCURRED FOR EARTH WORK IN YESHU DARBAR REMAINS TO BE RESOLVED. IN THIS REGARD, THE PRIMARY EVIDENCE AVAILAB LE IN THE FORM OF MBOOKS CAN BE RELIED UPON. IT CAN BE SEEN THAT THE AAI HAS ONLY DISTURBED THE RATE PER UNIT BUT NOT DISTURBED THE QUANTITIES OF THE WORK CARRIED OUT. THUS, IT CAN BE HELD THAT THE APPELLANT HAS CARRIED OUT THE WORKS ON YESHU DARBAR AS CAN BE VERIFIED FROM THE M - BOOK. COMING TO THE VALUE OF WORK CARRIED OUT AN BILLED TO AAI, IT IS ALSO SEEN THAT THE SAME CAN BE VERIFIED FROM THE BILLS PRESENTED TO THE AAI ON 18 - 6 - 2005 AND 4 - 7 - 2006. FROM THESE BILLS, IT IS APPARENT THAT THE APPELLANT HAD CAR RIED OUT THE WORKS, AS CAN BE I.T.A. NO S . 97 6 & 97 7 / HYD / 2010 C.O. NO S . 141 & 142/HYD/2012 : - 7 - : SUPPORTED BY THE RESPECTIVE M - BOOKS. HENCE, I AM NOT INCLINED TO CONCUR WITH THE AO WHEN HE STATES THAT THE EXPENDITURE WAS NOT INCURRED BY THE APPELLANT FIRM ON YESHU DARBAR EARTH WORK. THERE IS ADEQUATE EVIDENCE TO INDICATE THAT THE WORK HAS BEEN CARRIED AS CAN BE SEEN FROM THE RUNNING BILLS DATED 18 - 6 - 2005, AND STATEMENT FURNISHED BY THE AAI SUBSEQUENT TO THE CAPTIONED MOU. BESIDES, THERE IS STRENGTH IN THE ARGUMENT OF THE APPELLANT THAT THE VOUCHERS WERE NOT SERIALLY IMPOUN DED BUT BY THE BOXES CONTAINING THEM. IT IS GAINSAYING TO REITERATE THAT ANY EVIDENTIARY DOCUMENT OR MATERIAL IS TO BE IMPOUNDED OR SEIZED BY A SPECIFIC DESCRIPTION LEST IT LOSES ITS EVIDENTIA RY VALUE. FOR ALL THESE REASONS, IT IS HELD THAT THE ADDITION DE SERVES TO BE DELETED. ACCORDING L Y, THE ADDITION OF RS. 1,92,90,404 DUE TO ABSENCE OF VOUCHERS FOR EARTH WORK WAS DIRECTED TO BE DELETED IN THE AY. 2005 - 06. D. ON COR RECTNESS OF M ETHOD OF ACCOUNTING & TOTAL R ECEIPTS : 5 . 1. THE SCENARIO EMERGING OUT OF T HE ABOVE POSITION THROWS UP TWO ISSUES TO BE RESOLVED - CORRECTNESS OF THE METHOD OF ACCOUNTING - ADOPTED BY THE APPELLANT AND THE CORRECT AMOUNTS TO BE BROUGHT TO TAX. IT IS THE STAND OF THE APPELLANT THAT HE HAD BEEN FOLLOWING THE CASH SYSTEM OF ACCOUNTIN G AND WAS OFFERING WHATEVER GROSS RECEIPTS RECEIVED FROM THE AAI IN THE CAPTIONED YEARS. HOWEVER, I FIND AN INCONSISTENCY IN THIS METHOD OF ACCOUNTING IN THE BACKDROP OF WORKS CARRIED OUT AS PER M - BOOKS AND THE BILLS SUBMITTED ON 18/06/2005. APPARENTLY, TH E WORKS CARRIED OUT AS PER M - BOOKS ARE OF SIGNIFICANTLY HIGHER VALUE VIS - A - VIS THE AMOUNTS PAID BY THE AAI TO THE APPELLANT FIRM. FOR EXAMPLE, AS PER THE BILL DATED 15 - 6 - 2005 SUBMITTED BY THE FIRM TO THE AAI, THE VALUE OF WORKS ON YESHU DARBAR COME TO RS.6 .51 CRORES IN THE AY'S 2005 - 06 & 2006 - 07 WHEREAS THE FIRM HAS OFFERED LESSER MONIES IN THEIR RETURN OF INCOME FOR THIS WORK, SINCE NO MONIES WERE RECEIVED BY THE FIRM. ON THE OTHER HAND, AS THE BILL CORROBORATED BY THE M - BOOK IS MUCH HIGHER, IT CAN BE SAFE LY INFERRED THAT THE BALANCE WORK UNPAID DUE TO DISPUTES SHALL BE REFLECTED AS WORK IN PROGRESS IN THE P & L ACCOUNT AND BALANCE SHEET. BUT THE SAME TREATMENT IS MISSING IN THE BOOKS OF THE APPELLANT. THUS, THIS IS A MAJOR LACUNA IN THE METHOD OF ACCOUNTIN G FOLLOWED BY THE APPELLANT FIRM. THUS, THE METHOD OF ACCOUNTING AND THEREBY THE BOOKS OF ACCOUNTS WERE CONSIDERED DEFECTIVE AND UNRELIABLE FOR ARRIVING AT TRUE PROFITS. ACCORDINGLY, IT IS PROPOSED TO ENHANCE THE ASSESSMENT TO THIS EXTENT BY ISSUING A LETT ER FROM THIS OFFICE DT.10.03.201 0 . IN RESPONSE TO THIS, THE ASSESSEE HAS FILED A REPLY DT.12.03.2010, BOTH BEING INCORPORATED HERE. 5.4 IT IS NOTICED FROM THE MATERIAL AVAILABLE ON RECORD SUCH AS BILLS, M - BOOKS, LETTER FROM AAI AND THE SAID MOU, THAT THE APPELLANT HAS COMPLETED THE WORKS BY 31 - 3 - 2006 AND THUS ALL THE EXPENDITURE COULD ALSO HAVE BEEN INCURRED BY THEM. IN FACT, THERE WAS NO EVIDENCE THAT I.T.A. NO S . 97 6 & 97 7 / HYD / 2010 C.O. NO S . 141 & 142/HYD/2012 : - 8 - : ANY EXPENDITURE WAS INCURRED AFTER 31 - 3 - 2006. THIS IS ALSO CORROBORATED BY M - BOOKS AND BILLS. HENCE, A LL THE MONIES RECEIVABLE AS ON 31 - 3 - 2006 SHOULD HAVE BEEN BROUGHT INTO GROSS RECEIPTS. HOWEVER, IT IS NOTICED THAT A CUMULATIVE AMOUNT OF RS.19,484,702/ - ONLY WERE OFFERED TO TAX IN ALL ASSESSMENT YEARS, AS ARISING FROM THE WORK WITH AAI BUT THE TOTAL RECE IPTS LIABLE TO BE OFFERED TO TAX, AS PER MOU IS RS.26,32,72,391/ - . THUS, THERE IS A SHORT - OFFERING BY AN AMOUNT OF RS.6,83,25,279/WHICH HAS ESCAPED TAXATION. THE ASSESSEE HAS ARGUED THAT HE HAS BEEN FOLLOWING C ASH METHOD OF ACCOUNTING. HOWEVER, THIS IS HEL D TO BE INCORRECT IN PRECEDING PARA. A CCORDINGLY, THIS DIFFERENTIAL AMOUNT ALSO IS TO BE TAXED AS ON 31 - 3 - 2006. IT IS ALSO POSSIBLE THAT A CERTAIN PORTION OF IT M IGH T BE COMING FROM EARLIER ASSESSMENT YEARS AS A BROUGHT FORWARD WORK - IN - PROGRESS. BUT IN THE ABSENCE OF ANY MATERIAL, IT IS DIFFICULT TO DISCERN THE SAME RELATING TO EARLIER YEARS. HENCE THE ENTIRE DIFFERENTIAL SUM IS PROPOSED TO BE TAXED IN AY 2006 - 07. HOWEVER, IT IS ALSO TO BE CONSIDERED HERE THAT THE APPELLANT HAD OFFERED RS.30, 00,000 / - IN AY 2007 - 08 AS RECEIVED FROM AAI. THE APPELLANT WOULD BE ENTITLED TO A DEDUCTION ON THIS COUNT. T H US , R S. 6,83,25, 729/ - (6,53,25,729 - 30,00,000) BE ADDITIONALLY BROU GH T TO TAX IN AY 2006 - 07 . E. ON ESTIMATION OF INCOME AT 9%: 5.5. THE FACTUAL POSITION AS EMERGING FROM THE CORRESPCNDENCE FROM THE UNIVERSITY ESPECIALLY LETTER DT.30.11.2007, M - BOOKS AND THE MEMORANDUM OF UNDERSTANDING HAS BEEN PERUSED IN THE BACKDROP OF ASSESSEE'S EXPLANATION DT.12.03.2010. THE APPELLANT HAD VEHEMENTLY ARGUED THAT THE ENTIRE MONIES RECEIVABLE BY VIRTUE OF MOU CANNOT BE TREATED AS INCOME AND THUS TAXED. WHILE ADMITTING THE DEFICIENCY IN NOT ACCOUNTING FOR WORK - IN - PROGRESS AND THUS, THE DEFECT IN THE ACCOUNTS MAINTAINED, THE APPELLANT HAD ALSO ARGUED THAT THE FIRM HAD CARRIED OU T WORKS AS GATHERED FROM AAI AND HENCE, EXPENDITURE HAS TO BE ALLOWED THEREUPON THE RESIDUAL RECEIVABLES. HOWEVER, NOTHING IS CLAIMED TO ALLOW AS EXPENDITURE. EVEN THOUGH IT IS ACCEPTABLE THAT THE EXPENDITURE HAS BEEN INCURRED BY THE ASSESSEE ON YESHU DARB AR PROJECT FOR CARRYING OUT THE EARTH WORK ETC., THE MONIES RECEIVED ON THAT WORK WERE NOT BROUGHT TO TAX EITHER ON ACCOUNT BASIS AS PER MOU OR ON ACTUAL RECEIPT BASIS OR EVEN UPON THE BASIS OF INCURRING EXPENDITURE. HENCE IT IS HELD THAT THESE MONIES WERE TO BE BROUGHT TO TAX. IT IS ALSO ACCEPTABLE THAT THE ENTIRE RECEIPTS CANNOT BE TAXED AND EXPENDITURE SHOULD BE ALLOWED AND ONLY PROFIT BE BROUGHT TO TAX, EVEN THOUGH THE RESIDUAL AMOUNT IS YET TO BE RECEIVED FROM THE AAI. BY CONSIDERING ALL THESE ISSUES, IT IS DECIDED TO TAX THE GROSS RECEIPTS AFTER ALLOWING SETOFF FOR EXPENDITURE. SINCE THE VOUCHERS ALSO WERE N OT FURNISHED RELATING TO YESHU D ARBAR WORK AS ON 31.3.2005, IF THE EXPENDITURE INCURRED THEREIN BE TAKEN AS GROSS RECEIPTS THIS WOULD RESULT IN AN ARTIFICIALLY HIGHER INCOME STRAYING AWAY FROM THE ENDS OF JUSTICE. HENCE IT IS HELD THAT THE APPELLANT SHOULD BE ALLOWED EXPENDITURE FOR EXECUTING THE I.T.A. NO S . 97 6 & 97 7 / HYD / 2010 C.O. NO S . 141 & 142/HYD/2012 : - 9 - : WORKS. AS ALREADY DISCUSSED ABOVE, THERE ARE SERIOUS DEFECTS IN THE METHOD OF ACCOUNTING AND HENCE, THE B OOKS LOOSE THEIR SANCTITY, AS DECIDED IN THE CASE OF WALL STREET CONSTRUCTIONS LTD, 87 ITD (MUM - TM). IT IS NOT THE PREROGATIVE OF THE ASSESSEE TO IGNORE THE PROVISIONS OF LAW AND PRINCIPLES OF COMMERCIAL ACCOUNTING, AS LAID DOWN IN SUTLEJ COTTON MILLS LTD. (SC) 116 ITR 1 AND UPSIDC 225 ITR 703 (SC). THE SCENARIO APPLIES SQUARELY TO THE CASE HERE AND IN THIS BACKDROP, IT IS THE DUTY OF REVENUE TO REJECT THE BOOKS OF ACCOUNT AND ESTIMATE THE PROFITS. I AM GUIDED BY THE RATIO IN THE CASE OF SARANGPUR COTTON MF G.CO.LTD. (PC) 6 ITR 36 AND SUNDARAM & CO. LTD. 36 ITR 162 (MAD.). BY DRAWING POWER AND AUTHORITY TO REJECT THE BOOKS OF ACCOUNT IS DERIVED BY ME FROM THE DECISION OF ME.MILLAN & CO. (1958) 33 ITR 182 (SC) AND NAMASIVAYAM CHETTIYAR (SN) (1960) 38 ITR 579 ( SC), IT IS DECIDED TO REJECT THE BOOKS AND ESTIMATE THE PROFITS. REJECTION OF BOOKS BASED ON CONCLUSION BACKED BY VALID REASONS IS A QUESTION OF FACT, AS WHAT IS THE PROFIT OF TRADE IS A FACT THAT MUST BE ASCERTAINED WITH REFERENCE TO RELEVANT EVIDENCE AND AFTER DUE OPPORTUNITY TO THE ASSESSEE. THE NOTICE DATED 9 - 3 - 2010 AND THE RESPONSE THERETO VIDE APPELLANT'S LETTER DATED 12 - 3 - 2010 ARE CONSIDERED ADEQUATE TO MEET THE .OBLIGATION OF GIVING A NOTICE FOR ESTIMATION OF INCOME. HAVING DECIDED SO, THE NEXT LOGI CAL COROLLARY WOULD BE TO DETERMINE THE RATE OF PROFIT. IT IS NOTICED THAT IN CIVIL CONTRACT CASES, THE GROSS PROFIT IS ESTIMATED AT 8% GENERALLY AND SOMETIMES AT 11 % IN EXTRAORDINARY CASES. I DO NOT CONSIDER THE CASE OF APPELLANT A GENERAL ONE, AS THE EX PENDITURE INCURRED ON WORK - IN - PROGRESS IS NOT BROUGHT INTO BOOKS, NOR IT IS EXTRAORDINARY SINCE THE APPELLANT IS STILL REELING UNDER DISPUTES ABOUT RECEIPT OF THE MONIES ACCEPTED TO BE PAID AS PER MOU DATED 29 - 12 - 2006. HENCE, I DEEM IT PROPER, JUST AND AD EQUATE TO ESTIMATE THE INCOMES AT 9%. THE ASSESSEE WOULD BE ENTITLED TO DEDUCTION ON ACCOUNT OF DEPRECIATION, INTEREST TO PARTNERS AND REMUNERATION TO PARTNERS, IF ANY. F. ON 40(A)(IA) : 5.6. COMING TO THE DISALLOWANCE U/S . 40 (A)(IA), THE ARGUMENT OF THE APPELLANT THAT EACH INDIVIDUAL WORKER IS ENGAGED BUT PAID THROUQH GROUP LEADER, IS ACCEPTED. ACCORDINGLY, THE ADDITION IS ALSO DELETED IN BOTH THE AY'S 2005 - 06 AND 2006 - 07. HOWEVER, ON APPLICATION OF THE RATIO IN TNE CASES OF LNDWELL CONSTRUCTIONS (19 98) 232 ITR 776 (AP) AND INTERNATIONAL FOREST CO. (1975) 101 ITR 721 (J&K), THERE WAS NO JUSTIFICATION FOR SEPARATE ADDITIONS AFTER REJECTING BOOKS AND APPLYING H I GHER GROSS PROFIT, RATE. HENCE THE OTHER DISALLOWANCES ON TILE COUNT OF INTEREST ON ADVANCE T O PARTNER AND DISALLOWANCES U/S . 40A(3 ) ARE ALSO DELETE D. I.T.A. NO S . 97 6 & 97 7 / HYD / 2010 C.O. NO S . 141 & 142/HYD/2012 : - 10 - : LD. CIT(A) FINALLY CONCLUDED THE APPEALS STATING AS UNDER: 6. HOWEVER, THE ASSESSMENT IS CONSIDERED AS 'ENHANCED' FOR THE REASON THAT THE UNREALIZED MONIES OF R S.6.57 C RORES WERE BROUGHT TO T AX BY BRINGING THE CAPTIONED MOU OF DECEMBER, 2006 TO II . EVEN THOUGH THE MONIES WERE BROUGHT TO TAX ON ESTIMATE BASIS, IT IS CONSIDERED THAT THE MONIES COULD ESCAPE TAX, ESPECIALLY SINCE THE APPELLANT HAD CLOSED RELATIONS WITH AAI AND THE LAST RETURN FIL ED BY THE APPELLANT IS FOR AY 2007 - 08, BESIDES, THE ADDITIONS/DISALLOWANCES MADE BY THE AO WERE DELETED FOR AN ENTIRELY DIFFERENT REASON. WHILE ADJUDICATING THE APPEAL BEFORE ME, THE METHOD OF ACCOUNTING FOLLOWED BY THE APPELLANT IS THOROUGHLY ASSAILED AND FOUND DEFECTIVE RESULTING IN REJECTION OF BOOKS. HENCE, IT IS CONSIDERED THAT THE A D JUDICATION OF APPEALS HAS RESULTED IN 'ENHANCEMENT' OF THE ASSESSMENT IN BOTH THE AY'S 2005 - 06 AND 2006 - 07 . 7. BEFORE PARTING, MY DUTY WILL BE COMPLETE ONLY ON RECORDIN G THE COMMITMENT, SINGLE MINDEDNESS, ENTHUSIASM AND SINCERITY DISPLAYED BY THE ASSESSING OFFICER, SR I B.NARASINGA RA O , ITO 6(1), HYDERABAD. HE HAS PURSUED THE MATTER DILIGENTLY AT THE ASSESSMENT STAGE AS WELL AS DURING THE APPEAL PROCEEDINGS. THE CLARITY O F MIND, THE PIN - POINTED ENQUIRIES AND PRESENTATION SKILLS COMMANDED BY HIM IN THE ASSESSMENT AS WELL AS APPEAL PROCEEDINGS IS EXEMPLARY . 6 . LD. DR REITERATED THE ARGUMENTS OF AO WHEREAS LD.AR RELIED ON THE ORDER OF LD. CIT(A) WHICH WAS ACCEPTED BY ASSESS EE. LD. COUNSEL SUBMITTED THAT GROUND NO. 10 IN AY. 2006 - 07 IS IN FACT IN FAVOUR OF ASSESSEE, AS ASSESSEE HAS NOT RECEIVED THE AMOUNT IN DISPUTE AND HAS INCURRED LOSS, SO EXCLUDING THE SAME FROM AY. 2006 - 07 IS BENEFICIAL TO ASSESSEE. HE S UBMITTED A CHART INDICATING THE INCOMES THAT WERE DETERMINED AFTER LD. CIT(A)S ORDERS. ASST. YEAR 2005 - 06 ASST. YEAR 2006 - 07 GROSS RECEIPTS ADMITTED 11,24,38,255 4,45,09,000 INCOME ADMITTED 54,52,614 22,54,187 INCOME ASSESSED 3,76,66,336 1,14,73,395 INCOME AS CIT(A ) - MO GROSS RECEIPTS 11,24,38,255 10,99,32,270* GP ESTIMATED AT 9% 1,01,19,442 98,94,084 DEPN. & SALARY TO PARTNERS 9,73,366 8,45,812 NET INCOME ASSESSED 91,60,164 90,48,272 I.T.A. NO S . 97 6 & 97 7 / HYD / 2010 C.O. NO S . 141 & 142/HYD/2012 : - 11 - : * GROSS RECEIPTS ENHANCED BY CIT(A) RS. 6,54,25,270/ - 7 . AFTER CONSIDERI NG THE REVISED CONTENTIONS AND PERUSING THE MATERIAL ON RECORD PLACED BY REVENUE AND ORDERS OF THE LD. CIT(A), WE ARE OF THE OPINION THAT THE ORDER OF CIT(A) DO NOT REQUIRE ANY MODIFICATIONS. AS CAN BE SEEN FROM THE DETAILED REASONS GIVEN ON EACH OF THE I SSUE AND PAINSTAKING EFFORTS BY AO AS WELL AS CIT(A), THE ISSUES WERE CRYSTA L LISED, EVEN THOUGH REVENUE MAY GOT AGGRIEVED BY THE REDUCTION OF I NCOME IN AY. 2005 - 06. T HE REVENUE CONTENTIONS HAVE NO MERIT IN CONSIDERING THE FACT THAT SO MANY VOUCHERS WERE I MPOUNDED IN THE COURSE OF SURVEY, BUT HAS NOT CONSIDERED THEM. WE ARE ALSO NOT INCLINED TO ACCEPT THE REVENUES CONTENTIONS THAT SO MUCH OF EXPENDITURE WAS NOT INCURRED. WITHOUT THE EXPE NDITURE BEING INCURR ED, THE PROJECT CO ULD NOT BE COMPLETED. I N AY. 2005 - 06, THE AO DISALLOWED THE EXPENDITURE AS NOT VOUCHED AND ALSO INVOKING SECTION 4 0(A)(IA) SO MUCH SO ON THE TURNOVER OF 11.24 C RORES, THE INCOME WAS DETERMINED AT RS. 3.76 CRORES , WHICH ITS ELF IS VERY HIGH IN THIS LINE OF BUSINESS. IN THE GIVEN CI RCUMSTANCES, THE ONLY OPTION IS TO REJECT THE BOOKS OF ACCOUNTS AND ESTIMATE THE INCOME. IN CONTRACT WORKS, SINCE, ASSESSEE HAS DONE WORK AWAY FROM ITS AREA OF OPERATION , IN ALLAHABAD , ESTIMATION OF INCOME AT 9% IS REASONABLE. FURTHER, IF THE GROUND 10 OF REVENUE IN AY. 2006 - 07 IS ALLOWED, THERE WILL BE REDUCTION OF TURNOVER AND CONSEQUENT INCOME. WE ARE NOT ABLE TO UNDERSTAND WHY REVE NUE HAS TAKEN THAT STAND WHICH WILL REDUCE THE INCOME. BE THAT AS IT MAY , WE ARE OF THE OPINION THAT LD. CIT(A) HAS ANA LYSED THE ISSUES IN DETAIL AND HAS COME TO CORRECT DECISION IN DETE RMINING THE ISSUES AND ADJUDICATING RIVAL CONTENTIONS. W E SEE NO REASON TO DIFFER F ROM THE FINDINGS , AS REVENUE HAS PLACED I.T.A. NO S . 97 6 & 97 7 / HYD / 2010 C.O. NO S . 141 & 142/HYD/2012 : - 12 - : ONLY ARGUMENTS WITHOUT ANY EVIDENCE IN SUPPORT. WE FIND NO MERIT IN REVENUES GROUNDS AND ACCORDINGLY, THEY ARE REJECTED. 8 . COMING TO ASSESSEES CROSS - OBJECTIONS, THE SAME BECOMES ACADEMIC IN NATURE AS THE ORDER OF LD. CIT(A) IS UPHELD. NO DISALLOWANCE U/S. 40(A)(IA) ALSO COULD BE MADE AS THERE WAS NO OUTSTANDING A M OUNT AT THE END OF THE YEAR. O N THAT REASON ALSO, AS PER THE PREVAILING LAW, REVENUES GROUNDS ON DISALLOWANCE U/S. 40(A)(IA) HAS NO MERIT. SINCE, WE UPHE LD THE ORD ER OF CIT(A), CROSS - OBJECTIONS BECAME ACADEMIC AND NO SEPARATE ADJUDICATION IS REQUIRED. ACCORDINGLY, THEY ARE REJECTED. 9 . IN THE RESULT, BOTH REVENUES APPEALS AN D CROSS - OBJECTIONS ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 29 TH FEBRUARY, 2016 SD/ - SD/ - (P. MADHAVI DEVI) (B.RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER HY DERABAD, DATED 29 TH FEBRUARY, 2016 TNMM I.T.A. NO S . 97 6 & 97 7 / HYD / 2010 C.O. NO S . 141 & 142/HYD/2012 : - 13 - : COPY TO : 1. THE I NCOME TAX OFFICER , WARD - 6(1), 7 TH FLOOR, D - BLOCK, I.T. TOWERS, AC GUARDS, HYDERABAD. 2. M/S. ACURITE CONTRACTORS AND ENGINEERS, 6 - 3 - 856/A/3, AM EERPET, HYDERABAD. C/O. CH. PARTHASARATHY & CO., 1 - 1 - 298/2/B/3, 1 ST FLOOR, STREET NO. 1, SOWBHAGYA AVENUE, ASHOKNAGAR, HYDERABAD. 3. CIT(A PPEALS ), TIRUPATI . 4. CIT - 3 , HYDERABAD . 5. D.R. ITAT, HYDERABAD . 6. GUARD FILE.