Shri Sumanbhai Zaverbhai Patel, Dist.Navsari V. The ACIT., Circle-1, Navsari

ITA 1318/AHD/2007

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 8651 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 11 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-03-2010
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 10-03-2010
• Assessment Year: 2003-2004
• Appeal Filed On: 02-04-2007
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: C K MISHRA
• Keywords: Set aside

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH B BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER AND SHRI MAHAVIR SINGH, JUDICIAL MEMBER DATE OF HEARING:10/03/2010 DRAFTED ON: 10/03/20 10 ITA NO.1318/AHD/2007 ASSESSMENT YEAR : 2003-2004 SHRI SUMANBHAI ZAVERBHAI PATEL RAJA ROAD, UMBHARAT ROAD, MAROLI BAZAR, MAROLI, TAL. JALAPORE, DIST.NAVSARI. VS. ASST. COMMISSIONER OF INCOME TAX, CIRCLE.1. NAVSARI. PAN/GIR NO. : ABGPP6502K (APPELLANT) .. (RESPONDENT) ITA NO.1443/AHD/2007 ASSESSMENT YEAR : 2003-2004 ASST. COMMISSIONER OF INCOME TAX, CIRCLE.1. NAVSARI. VS. SHRI SUMANBHAI ZAVERBHAI PATEL RAJA ROAD, UMBHARAT ROAD, MAROLI BAZAR, MAROLI, TAL. JALAPORE, DIST.NAVSARI. PAN/GIR NO. : ABGPP6502K (APPELLANT) .. (RESPONDENT) APPELLANT BY : SHRI TUSHAR P. HEMANI A.R. RESPONDENT BY: SHRI C.K.MISHRA SR. D.R. O R D E R PER N.S.SAINI , ACCOUNTANT MEMBER :- THESE ARE THE CROSS APPEALS FILED BY THE ASSESSEE AND REVENUE AGAINST THE ORDER OF THE LEARNED COMMISSION ER OF INCOME TAX (APPEALS), VALSAD, DATED 15.12.2006 PASSED IN A PPEAL NO.CIT(A)/VLS/34/06-07. 2. THE GROUNDS OF THE APPEAL OF THE ASSESSEE READS AS UNDER:- 1. THE ASSESSING OFFICER HAS ERRED IN LAW IN MAKI NG ADDITION ON ACCOUNT SUPPRESSED NET PROFIT OF RS.23,22,834/- WITHOUT CONSIDERING THE SUBMISSIONS. 2. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS), VALSAD HAS ERRED IN LAW AND FACTS IN UPH OLDING ITA 1318/A/2007 & 1443/A/2008 - 2 - THE ADDITION OF RS.4,76,529/- WITHOUT CONSIDERING T HE SUBMISSION. 3. IN THE REVENUES APPEAL, THE GROUNDS OF APPEAL R EADS AS UNDER:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING AN ADDITION O F RS.18,46,305/- MADE BY THE AO ON ACCOUNT OF LOW G.P . AFTER REJECTING THE BOOKS OF ACCOUNTS BY INVOKING T HE PROVISION OF SECTION 145A OF THE ACT. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT(A) OUGHT TO HAVE UPHELD THE ADDITI ON MADE BY THE AO. 4. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS CONTRACTOR ENGAGED IN CONSTRUCTION OF ROAD FOR GOVERNMENT AND SEMI GOVERNMENT AGENCIES AND LOCAL BODIES. THE ASSESSEE HAD SHOWN CONTACT RECEIPT OF RS.3,69,26,084/- FOR THE YEAR UN DER APPEAL AND NET PROFIT OF RS.6,31,253/- WHICH WAS 1.71% OF CONT RACT RECEIPT. THE AO WAS OF THE OPINION THAT THE NET PROFIT SHOWN BY THE ASSESSEE WAS LOW IN COMPARISON TO THE SIMILAR BUSINESS OF OT HER ASSESSEE WHO WERE SHOWING NET PROFIT OF MORE THAN 5%. THE AO ALS O OBSERVED THAT ASSESSEE HAD NOT FURNISHED SATISFACTORY REPLY IN THE PRESCRIBED PROFORMA AS REQUIRED AND THEREFORE, THE CORRECTNESS OF RECEIPTS EXPENSES AND LIABILITIES ETC. COULD NOT BE VERIFIED . THE AO FURTHER OBSERVED THAT ASSESSEE HAS NOT MAINTAINED DAY TO DA Y QUANTITIES RECORDS OF VARIOUS RAW MATERIALS. THEREFORE, THE AO HELD THAT THE BOOK RESULTS DECLARED BY THE ASSESSEE WERE NOT COMP LETE AND CORRECT FROM WHICH CORRECT AMOUNT OF NET PROFIT COU LD NOT BE REDUCED AND REJECTED THE BOOKS OF ACCOUNT BY INVOKING PROVI SIONS OF SECTION 145(3) OF THE ACT. THE AO FURTHER OBSERVED THAT WH EN ASSESSEE WAS REQUIRED TO EXPLAIN THE CORRECTNESS OF BOOK RESULT , THE ASSESSEE EXPLAINED THAT THE REASON FOR LOW PROFITABILITY WAS THAT ASSESSEE HAD TAKEN SUBCONTRACT FROM M/S.ANISH CONSTRUCTION CO. A ND DURING THE YEAR THE SUBCONTRACT REVENUE WAS RS.85,97,402/- AND THEREFORE, ASSESSEE DID NOT HAVE MORE MARGIN IN THE SUBCONTRAC T WORK ITA 1318/A/2007 & 1443/A/2008 - 2 - UNDERTAKEN. IT WAS ALSO EXPLAINED THAT ASSESSEE HAD GIVEN SUBCONTRACT TO M/S.RIYAZBHAI ABBASBHAI VIJAPUR FOR RS.1,05,73,179/- DURING THE YEAR AND THERE WAS A T HIN MARGIN ON WORK THAT WAS SUBCONTRACTED RANGING FROM 1.5% TO 2. 5%. IT WAS ALSO EXPLAINED THAT THE ASSESSEE HAD TO PAY HEAVY I NTEREST TO BANK AND OTHERS ON AMOUNTS BORROWED WHICH EFFECTED THE P ROFITABILITY TO A GREAT EXTENT WHICH WAS OTHERWISE, NOT THE CASE WITH OTHER BUSINESSMAN. THE ASSESSEE ALSO EXPLAINED THAT PAYME NT FOR ROLLER RENT, SALARY CARTING EXPENSES AND INTEREST WERE MAD E TO RELATIVES DEFINED UNDER SECTION 40A(2)(B) AT PREVAILING MARKE T RATES AND THE SAME WERE SHOWN AS INCOME BY THE RELATIVES IN THEIR INCOME TAX RETURN. INTEREST ON UNSECURED LOAN WAS PAID BY THE ASSESSEE ON OLD LOAN BORROWED AT THE TIME WHEN THE PREVAILING MARKE T RATE FOR PRIVATE FINANCE WAS 12% AS HUGE FUNDS OF THE ASSESS EE WAS STUCK UP IN DEBTORS. IT WAS FURTHER EXPLAINED TO THE AO THAT THE RATE PROFIT DISCLOSED BY THE ASSESSEE WAS TRUE AND CORRECT AND SHOULD BE ACCEPTED. HOWEVER, THE AO DECLINED TO ACCEPT THE CO NTENTION OF THE ASSESSEE AND REJECTED THE BOOKS RESULT AND ESTIMATE D THE NET PROFIT @ 8% OF GROSS CONTRACT RECEIPTS AND MADE TRADING AD DITION OF RS.23,22,834/- FOR SUPPRESSED NET PROFIT, PLACING R ELIANCE OF THE DECISION OF THE CIT(APPEALS)-I, SURAT, FOR AY 1998- 1999 WHICH WAS SET ASIDE BY THE TRIBUNAL VIDE ORDER DATED 6.10.200 6 IN ITA NO.04/AHD/2003. 5. IN APPEAL, THE CIT(A) HELD AS UNDER:- 5.1. I HAVE CONSIDERED THE SUBMISSIONS AND GONE TH ROUGH THE DETAILS FILED BY THE APPELLANT BEFORE THE AO AS WEL L. IT SEEMS THAT THE MAIN OBJECTION OF THE AO WAS BASED ON THE LOW PROFITABILITY OF THE APPELLANT IN THE YEAR UNDER CO NSIDERATION AGAINST WHICH THE APPELLANT'S CONTENTION WAS BASED ON THE THREE FACTORS, VIZ, HIGHER INTEREST BURDEN AND LOWE R MARGINS IN THE SUB-CONTRACT UNDERTAKEN AND HIGHER COSTS INVOLV ED IN THE SUBCONTRACT GIVEN TO A SUB-CONTRACTOR. AS FAR AS IN TEREST PAYMENT MADE BY THE APPELLANT TO THE BANK, THERE IS NO DEBATE ABOUT THE RATE OF INTEREST. AT THE SAME TIME IT IS A FACT THAT APPELLANT HAS SHOWN SUB-CONTRACT REVENUE OF RS.85,97,402/- DURING CURRENT YEAR FROM ANISH CONST RUCTION ITA 1318/A/2007 & 1443/A/2008 - 2 - COMPANY. IT CANNOT BE DISPUTED THAT NET MARGINS IN SUB- CONTRACT WORKS ARE LOWER THAN DIRECT CONTRACT WORK. SIMILARLY, THE APPELLANT HAS DEBITED SUB-CONTRACT LABOUR CHARG ES OF RS.1,05,73,179/-. SINCE THE APPELLANT HAS NOT CARRI ED OUT CERTAIN WORK HIMSELF AND HE SUB-CONTRACTED THE WORK IT CANNOT BE DENIED THAT HIS COSTS ARE HIGHER AND HE HAD LOWE R MARGINS ON SUCH WORKS CONTRACT. SIMILARLY, THE AGGREGATE IN TEREST BURDEN OF RS.13.87 LACS HAS ADVERSELY AFFECTED THE NET PROFIT POSITION OF THE APPELLANT. 5.2 AS REGARDS THE COMPARISON OF PROFIT OF OTHER TH REE PARTIES M/S. J.N. SHAH AND M/S. J.S. DHANANI AND AP PELLANT, THE COMPARATIVE RESULTS ARE AS UNDER: J.M.SHAH Y.S.DHANANI APPELLANT TURNOVER NET PROFIT INTEREST BURDEN % OF INTEREST VIS-- VIS SALES/ TURNOVER. 6,11,67,817 35,79,500 6,91,118 1.12% 6,60,26,394 31,94,830 12,53,115 1,89% 3,69,26,084 6,31,253 13,97,727 3.76% 5.3 FROM THE ABOVE DATA IT IS SEEN THAT THE APPELLA NT HAD TOTAL TURNOVER OF RS.3.69 CRORES AGAINST WHICH THE OTHER TWO PARTIES HAD TOTAL TURNOVER OF MORE THAN RS. 6 CRORE S. IT IS ALSO CLEAR THAT THE INTEREST BURDEN OF OTHER PARTIES WAS MUCH LOWER THAN THE BURDEN BORNE BY THE APPELLANT. THEREFORE, THE NET PROFIT OF THE APPELLANT SHALL OBVIOUSLY BE LOWER AS COMPARED TO THE OTHER TWO CONTRACTORS ON WHICH THE AO HAS RELIE D UPON. INTEREST COST IN THE HANDS OF THE APPELLANT IS 3.76 % AGAINST 1.12% IN THE CASE OF M/S. J.M. SHAH AND 1.89% IN TH E CASE OF M/S. Y.S. DHANANI. THEREFORE THE CONTENTION OF THE APPELLANT THAT HIS PROFITABILITY WAS MAINLY AFFECTED BY THE B URDEN OF FINANCIAL CHARGES APPEARS TO BE CORRECT. 5.4. HOWEVER, IN RESPECT OF THE LABOUR PAYMENTS. I AM IN AGREEMENT WITH THE CONTENTION OF THE AO THAT THE LA BOUR PAYMENTS IN THE AMOUNT OF RS. 17000/- TO 19000/- AP PEARS TO BE NOT CONVINCING AND THE CONTENTION OF THE APPELLA NT IS NOT CORRECT BECAUSE THE APPELLANT IS SUPPOSED TO MAINTA IN PROPER RECORDS OF LABOUR PAYMENT CHARGES IN RESPECT OF PAY MENT TO DIFFERENT WORKERS THE CONTENTION OF THE APPELLANT T HAT IT IS NOT PRACTICALLY POSSIBLE TO MAINTAIN DAY TO DAY STOCK R ECORDS IS ALSO NOT CORRECT. IN MY OPINION THE APPELLANT IS SU PPOSED TO MAINTAIN PROPER STOCK REGISTER IN HIS LINE OF BUSIN ESS. HOWEVER, UNDER THE FACTS AND CIRCUMSTANCES OF THE C ASE, THE ESTIMATION OF PROFIT AT THE RATE OF 8% IN THE CASE OF THE APPELLANT IS VERY MUCH ON HIGHER SIDE BECAUSE THE ITA 1318/A/2007 & 1443/A/2008 - 2 - COMPARATIVE DATA FURNISHED BY THE AO ITSELF SUGGEST THAT THE INTEREST EXPENSES IN OTHER TWO CASES WERE MUCH LOWE R WHEREAS THE TURNOVER OF BOTH OF THEM WERE MUCH HIGH ER AS COMPARED TO THE APPELLANT'S CASE. FROM THE COMPARAT IVE DATA, IT CAN BE VISUALIZED THAT THE APPELLANT HAD SHOULDE RED HIGHER BURDEN OF FINANCE CHARGES AND THE APPELLANT DESERVE S CONCESSION. SECONDLY, THE FACT REMAINS THAT THE APP ELLANT HAD UNDERTAKEN SUB-CONTRACT WORTH RS.85,97,402/- ON WHI CH HE HAD NARROW MARGINS AND HE CANNOT BE EXPECTED TO EAR N 8% OR EVEN 5% ON THE SUB-CONTRACT UNDERTAKEN AS THE MARGI NS ARE IN THE VICINITY OF 1.5% TO 2.5%. SIMILARLY, THE APP ELLANT HAS GIVEN SUB-CONTRACT WORTH RS. 1,05,73,179/- ON WHICH , THE NET EARNINGS ARE THIN BECAUSE IT IS IMPLIED THAT THE AP PELLANT HAS PASSED ON PROFIT TO THE SUB-CONTRACT WHEN THE SUB-C ONTRACT WAS GIVEN. 5.5. HOWEVER, AFTER CONSIDERING THE TOTALITY OF FAC TS AND CIRCUMSTANCES OF THE CASE AND ALSO CONSIDERING THE OTHER DEFECTS LIKE INSUFFICIENT RECORDS FOR LABOUR PAYMEN T CHARGES AND NON MAINTENANCE OF DAY TO DAY STOCK REGISTER, I AM OF THE OPINION THAT IT IS REASONABLE TO ESTIMATE THE NET P ROFIT AT 3% OF GROSS CONTRACT RECEIPT OF RS. 3,69,26,084/- WHICH C OMES TO RS. 11,07,782/-. THE APPELLANT HAS DECLARED NET PROFIT OF RS. 6,31,253/- AND THEREFORE, THE ADDITION TO THE TUNE OF RS.4,76,529/- (RS. 11,07/782 - RS. 6,31,253/-) IS H EREBY CONFIRMED. AS A RESULT THE ADDITION IS REDUCED TO R S. 4,76,529/- FROM RS. 23,22,834/-AND APPELLANT GET RE LIEF OF RS.18,46,305/-. 6 IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. 6. THE AR OF THE ASSESSEE ARGUED THAT THE NET PROFI T SHOWN BY THE ASSESSEE IN THE AY 1999-2000 WAS 3.38%, IN AY 2 000- 01, 2.58%, IN THE AY 2001-02-2.24% IN THE AY 2002-03 1. 39% , IN VIEW OF THE ABOVE, NET PROFIT SHOULD NOT HAVE BEEN ESTIM ATED @ 3%. 7. THE LEARNED DEPARTMENTAL REPRESENTATIVE ON THE O THER HAND RELIED ON THE ORDER OF THE AO. 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIALS AVAILABL E ON RECORD. IN THE INSTANT CASE, THE ASSESSEE IS A CONTRACTOR ENGAGED IN EXECUTION OF CONSTRUCTION AND REPAIRING OF ROADS. DURING THE YEA R, ITS GROSS ITA 1318/A/2007 & 1443/A/2008 - 2 - RECEIPTS FROM CONTRACT WAS RS.3,69,26,084/-. THE NE T PROFIT SHOWN BY THE ASSESSEE OF RS.6,31,253/- WORKS OUT TO 1.71% OF THE TOTAL CONTRACT RECEIPTS. THE AO AFTER POINTING OUT CERTAI N DEFECTS AS STATED IN THE ASSESSMENT ORDER REJECTED THE BOOK RESULT OF THE ASSESSEE AND ESTIMATED THE NET PROFIT OF THE ASSESSEE @ 8% O F CONTRACT RECEIPTS WHICH WORKED OUT TO RS.29,54,086/- AND AFT ER ALLOWING CREDIT FOR THE NET PROFIT DISCLOSED BY THE ASSESSEE AT RS.6,31,253/- MADE ADDITION OF RS.23,22,834/-. ON APPEAL, THE CIT (A) AFTER TAKING INTO CONSIDERATION THE SUBMISSIONS OF THE ASSESSEE, PASSED ACCEPTED POSITION OF NET PROFIT IN THE CASE OF THE ASSESSEE AND FULL FACTS AND CIRCUMSTANCES OF THE CASE, ESTIMATED NET PROFIT OF THE ASSESSEE @ 3% OF THE CONTRACT RECEIPTS WHICH WORKED OUT TO RS. 11,07,782/- AND AFTER ALLOWING CREDIT FOR THE NET PROFIT ALREADY SH OWN BY THE ASSESSEE AT RS.6,31,253/- SUSTAINED ADDITION OF RS.4,76,529/ - AND GRANTED RELIEF OF RS.18,46,305/- TO THE ASSESSEE. BEING AGG RIEVED BY THIS ORDER OF THE CIT(APPEALS), BOTH THE PARTIES ARE IN APPEAL BEFORE US. WE FIND THAT THE REVENUE COULD NOT POINT OUT ANY BA SIS FOR ESTIMATING OF THE NET PROFIT BY THE AO @ 8% OF THE CONTRACT RECEIPTS. WE FIND THAT IN SUCH ESTIMATE BY THE AO, HE COMPLET ELY IGNORED THE PAST ACCEPTED POSITION IN THE CASE OF THE ASSESSEE AND SUCH ESTIMATE WITHOUT ANY BASIS AND MATERIAL CANNOT BE SUSTAINED. THE AR OF THE ASSESSEE BEFORE US, CONTENDED THAT THE RATE OF NET PROFIT ACCEPTED IN THE CASE OF THE ASSESSEE IN AY 1999-2000 WAS 3.38%, IN AY 2000- 01, 2.58%, IN THE AY 2001-02-2.24% IN THE AY 2002-0 3 1.39% . HE CONTENDED THAT IN VIEW OF THE ABOVE, THE NET PROFIT SHOULD NOT HAVE BEEN ESTIMATED @3%. WE FIND THAT THE ASSESSEE COULD NOT CONTROVERT THE FACT THAT THERE WAS DEFECT IN THE BO OKS OF ACCOUNT MAINTAINED BY IT AS POINTED OUT BY THE AO IN THE OR DER OF ASSESSMENT AND THE ASSESSEE COULD NOT FURNISHED THE DETAILS AS CALLED FOR AT THE TIME OF THE HEARING BY THE AO. KE EPING IN VIEW THE ABOVE FACTS AND CIRCUMSTANCES OF THE CASE, WE DO NO T FIND ANY GOOD ITA 1318/A/2007 & 1443/A/2008 - 2 - REASON TO INTERFERE WITH THE ORDER OF THE CIT(A). T HEREFORE, THE ORDER OF THE CIT(A) IS CONFIRMED. 9. IN THE RESULT, THE APPEAL OF THE ASSESSEE AND RE VENUE BOTH ARE DISMISSED. ORDER SIGNED, DATED AND PRONOUNCED IN THE COURT ON 12/03/2010. SD/- SD/- ( MAHAVIR SINGH) ( N.S. SAINI ) JUDICIAL MEMBER ACCO UNTANT MEMBER AHMEDABAD; DATED 12/03/2010 PARAS COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE LD. CIT(APPEALS) 5. THE DR, AHMEDABAD BENCH 6. THE GUARD FILE. BY ORDER, //TRUE COPY// (DY./ASSTT.REGISTRAR), ITAT, AHMEDABAD