THE DCIT, CIRCLE-2(1), Vijayawada V. M/s. Ratna Constructions, Vijayawada

ITA 301/VIZ/2013

• Counselvise Citation: [2015] 134 COUNSELVISE.COM (IT) 0170 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 2 year(s) 7 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-12-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Assessment Year: 2009-2010
• Appeal Filed On: 02-05-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M NARAYANA RAO
• Keywords: Rejection of books of accounts; Depreciation
• Section: 145

Judgement Text

ITA NO.301/VIZAG/2013 M/S. RATNA CONSTRUCTIONS, VIJAYAWADA 1 , , IN THE INCOME TAX APPELLATE TRIBUNAL, VISAKHAPATNAM BENCH, VISAKHAPATNAM . . . . , . . . . , $ $ $ $ BEFORE SHRI V. DURGA RAO, JUDICIAL MEMBER & SHRI G. MANJUNATHA, ACCOUNTANT MEMBER ./ I.T.A.NO.301/VIZAG/2013 ( / ASSESSMENT YEAR : 2009-10 ) DCIT CIRCLE - 2(1) VIJAYAWADA VS. M/S. RATNA CONSTRUCTIONS VIJAYAWADA [ PAN: AAEFR 5790C ] ( & & & & / APPELLANT) ( '(& '(& '(& '(& / RESPONDENT ) & ) / APPELLANT BY : SHRI M. NARAYANA RAO, DR '(& ) / RESPONDENT BY : SHRI G.V.N. HARI, AR ) - / DATE OF HEARING : 19.11.2015 ) - / DATE OF PRONOUNCEMENT : 04.12.2015 / O R D E R PER BENCH: THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAIN ST THE ORDER OF CIT (A), VIJAYAWADA DATED 18.2.2013 FOR THE ASSESSM ENT YEAR 2009-10. 2. BRIEF FACTS OF THE CASE, IS THAT THE ASSESSEE IS A PARTNERSHIP FIRM, WHICH IS ENGAGED IN THE BUSINESS OF CIVIL CONSTRUCT ION WORKS FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2009-10 ON 30.9.2009 ITA NO.301/VIZAG/2013 M/S. RATNA CONSTRUCTIONS, VIJAYAWADA 2 DECLARING A TOTAL INCOME OF RS.2,72,73,429/-. THE CASE WAS SELECTED FOR SCRUTINY AND ACCORDINGLY NOTICE U/S 143(2) OF THE I NCOME-TAX ACT, 1961 WAS ISSUED ON 19.8.2010. DURING THE COURSE OF ASSE SSMENT PROCEEDINGS, THE ASSESSE WAS ASKED TO PRODUCE BILLS & VOUCHERS FOR THE EXPENDITURE DEBITED TO P&L ACCOUNT. THE A.O., AFTE R VERIFICATION OF BILLS & VOUCHERS SUBMITTED BY THE ASSESSEE, HAS OBSERVED THAT MOST OF THE EXPENDITURES WERE SUPPORTED BY SELF-MADE VOUCHERS. THE A.O., FURTHER NOTICED THAT THE VOUCHERS DID NOT CONTAIN THE ESSEN TIAL DETAILS REGARDING THE ADDRESS OF THE PAYER, THE QUANTUM OF WORK DONE OR SERVICES RENDERED, THE RATE PER UNIT, ETC. THEREFORE, IN TH E LIGHT OF THESE DEFICIENCIES, THE A.O. WAS OF THE OPINION THAT THE BOOKS OF ACCOUNTS MAINTAINED BY THE ASSESSEE ARE NOT CORRECT AND COMP LETE. THEREFORE ISSUED A SHOW CAUSE NOTICE TO THE ASSESSE, AS TO WH Y THE BOOKS OF ACCOUNT SHALL NOT BE REJECTED AND NET PROFIT FROM T HE BUSINESS IS ESTIMATED. IN RESPONSE TO SHOW CAUSE NOTICE, THE A SSESSEE FILED ITS REPLY VIDE LETTER DATED 24.11.2011 AND CONTENDED THAT THE ASSESSEE HAS MAINTAINED PROPER BOOKS OF ACCOUNTS AND ALSO VOUCHE RS FOR EXPENDITURE DEBITED TO P&L ACCOUNT. HOWEVER, THE A.O. CONSIDER ING THE EXPLANATIONS FURNISHED BY THE ASSESSEE REJECTED THE BOOKS OF ACC OUNTS U/S 145 OF THE ACT AND ESTIMATED THE NET PROFIT. ITA NO.301/VIZAG/2013 M/S. RATNA CONSTRUCTIONS, VIJAYAWADA 3 3. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE A.O. NOTICED THAT THERE WAS A DIFFERENCE IN TURNOVER DECLARED BY THE ASSESSEE IN THE FINANCIAL STATEMENTS, WHEN COMPARED TO FORM NO.26AS GENERATED FROM THE INCOME-TAX DATABASE. ON PERUSAL OF FORM NO.26A S, THE A.O. NOTICED THAT THERE IS A DIFFERENCE IN TURNOVER, THEREFORE R E-WORKED THE TURNOVER BASED ON FORM NO.26AS AND DETERMINED THE GROSS CONT RACT RECEIPTS OF RS.43,99,91,831/-, AS AGAINST THE TURNOVER DECLARED BY THE ASSESSEE OF RS.37,02,12,416/-. IN RESPONSE THERETO, THE ASSESS EE FILED A RECONCILIATION STATEMENT, WHEREIN IT WAS STATED THA T THE DIFFERENCE WAS OCCURRED DUE TO RECEIPT OF MOBILIZATION ADVANCE REC EIVED FROM THE CONTRACTOR. THE ASSESSEE FURTHER SUBMITTED THAT IN RESPECT OF M/S. GAYATRI PROJECTS LIMITED, IT WAS STATED THAT THE TU RNOVER OF THE OTHER PERSONS WAS ALSO SHOWN IN ITS FORM 26AS, THEREFORE, THERE IS A DIFFERENCE. THE ASSESSEE FURTHER SUBMITTED THAT IT HAS REQUESTED THE PARTY TO RECTIFY THE MISTAKES IN FORM NO.26AS. THE REFORE, REQUESTED TO ACCEPT THE DECLARED TURNOVER IN THE FINANCIAL STATE MENTS. THE A.O., HOWEVER AFTER CONSIDERING THE EXPLANATIONS, RECOMPU TED THE TURNOVER BASED ON FORM NO.26AS AND ESTIMATED THE NET PROFIT OF 12.5% ON MAIN CONTRACT WORKS AND 8% NET PROFIT ON SUB CONTRACT WO RKS AND 3% NET PROFIT ON SUB CONTRACT WORKS GIVEN TO THIRD PARTIES . ITA NO.301/VIZAG/2013 M/S. RATNA CONSTRUCTIONS, VIJAYAWADA 4 4. AGGRIEVED BY THE ASSESSMENT ORDER, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A). BEFORE CIT(A), THE ASSES SEE CONTENDED THAT THE A.O. WAS NOT CORRECT IN REJECTING THE BOOKS OF ACCOUNTS, AS IT HAS MAINTAINED PROPER BOOKS OF ACCOUNTS AND ALSO BILLS & VOUCHERS FOR THE EXPENDITURE DEBITED TO P&L ACCOUNT. THE ASSESSEE F URTHER CONTENDED THAT THE NET PROFIT ESTIMATED BY THE ASSESSING OFFI CER IS VERY HIGH WHEN COMPARED TO THE NATURE OF WORKS EXECUTED BY IT DURI NG THE YEAR UNDER CONSIDERATION. THE ASSESSEE SUBMITTED THAT DURING THE YEAR UNDER CONSIDERATION, IT HAS EXECUTED MOSTLY BUILDING WORK S, THE PROFIT ELEMENT IN THESE WORKS IS QUITE LESS, THEREFORE, FOR ESTIMA TION OF NET PROFIT FROM THE BUSINESS, THE ASSESSEES CASE CANNOT BE COMPARE D WITH NORMAL CIVIL CONTRACT WORKS EXECUTED BY OTHER CONTRACTORS. THE ASSESSEE FURTHER SUBMITTED THAT THE ITAT, HYDERABAD BENCH IN THE CAS E OF M/S. TEJA CONSTRUCTIONS, SECUNDERABAD VS. ACIT IN ITA NO.308/ HYD/2009 UPHELD THE NET PROFIT OF 9% ESTIMATED BY THE ASSESSING OFF ICER. THEREFORE, REQUESTED TO ESTIMATE 9% NET PROFIT. THE CIT(A), A FTER CONSIDERING EXPLANATIONS OFFERED BY THE ASSESSEE AND ALSO RELIE D UPON THE ITAT HYDERABAD BENCH DECISION IN THE CASE OF M/S. TEJA C ONSTRUCTIONS, SECUNDERABAD VS. ACIT, DIRECTED THE A.O. TO ESTIMAT E 9% NET PROFIT ON TOTAL TURNOVER. THE CIT(A), FURTHER HELD THAT WHIL E, ESTIMATING THE NET PROFIT, THE A.O. IS DIRECTED TO EXCLUDE THE VAT AND SALES TAX COMPONENT ITA NO.301/VIZAG/2013 M/S. RATNA CONSTRUCTIONS, VIJAYAWADA 5 INCLUDED IN THE GROSS CONTRACT RECEIPTS AND ALSO DI RECTED TO EXCLUDE THE DIFFERENCE IN TURNOVER DECLARED BY THE ASSESSEE AFT ER CONSIDERING THE REVISED FORM NO.26AS, AFTER NECESSARY VERIFICATION. AS REGARDS, THE ISSUE OF INCLUSION OF CLOSING WORK IN PROGRESS IS CONCERN ED, THE CIT(A) DIRECTED THE A.O. TO EXCLUDE THE WORK IN PROGRESS FOR THE PU RPOSE OF DETERMINING THE GROSS TURNOVER. AGGRIEVED BY THE CIT(A) ORDER, THE REVENUE IS IN APPEAL BEFORE US AND RAISED THE FOLLOWING GROUNDS. 1. THE ID. CIT(A) ERRED BOTH IN LAW AND ON FACTS OF TH E CASE. 2. THE ID. CIT(A) ERRED IN DIRECTING THE A.O. TO ESTIM ATE THE INCOME AT 9% AS THE A.O. HAS ESTIMATED THE INCOME 12.5% AFTER EXAMINING THE BOOKS AND AFTER CONSIDERING THE FACTS & CIRCUMSTANCES OF THE CASE. 3. THE PD. CIT(A) OUGHT TO HAVE CONSIDERED THE DECISIO N OF THE THEN PREVIOUS CIT(A) IN THE CASE OF SRI VALLABHANEN I VENKATESWARA RAO IN WHICH INCOME WAS ESTIMATED AT 1 2,5% ON SIMILAR CIRCUMSTANCES. 4. THE ID. CIT(A) ERRED IN DIRECTING THE AO NOT TO CON SIDER THE WORK IN PROGRESS AS GROSS RECEIPTS FOR ESTIMATI NG THE INCOME UNLESS THE WORK IN PROGRESS IS CONSIDERED IN TRADING ACCOUNT TRUE INCOME DOES NOT GET REFLECTED. 5. ANY OTHER GROUND THAT MAY BE URGED AT THE TIME OF H EARING. 5. THE D.R., SUBMITTED THAT THE CIT(A) WAS ERRED IN DIRECTING THE A.O. TO ESTIMATE NET PROFIT OF 9%, AS AGAINST THE 1 2.5% NET PROFIT ITA NO.301/VIZAG/2013 M/S. RATNA CONSTRUCTIONS, VIJAYAWADA 6 ESTIMATED BY THE ASSESSING OFFICER. THE D.R. SUBMI TTED THAT THE A.O., AFTER CONSIDERING RELEVANT FACTS AND CIRCUMSTANCES OF THE CASE THAT THE ASSESSEE DID NOT MAINTAINED PROPER BOOKS OF ACCOUNT S AND SUPPORTING VOUCHERS FOR EXPENDITURE DEBITED TO P&L ACCOUNT AND ALSO CONSIDERING THE ITAT HYDERABAD BENCH DECISION IN THE CASE OF M/ S. K.N.R. CONSTRUCTIONS LTD. IN ITA NO.9/HYD/2007, ESTIMATED 12.5% NET PROFIT. THE D.R. FURTHER ARGUED THAT THE CIT(A) WAS NOT COR RECT IN EXCLUDING THE WORK IN PROGRESS FROM THE CONTRACT RECEIPTS, AS UNL ESS THE WORK IN PROGRESS IS CONSIDERED IN TRADING ACCOUNT, THE CORR ECT PROFIT CANNOT BE DETERMINED. THEREFORE, REQUESTED TO UPHOLD THE ORD ER OF THE ASSESSING OFFICER. ON THE OTHER HAND, THE A.R. OF THE ASSESS EE STRONGLY SUPPORTED THE ORDER OF THE CIT(A). 6. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MA TERIALS AVAILABLE ON RECORD. WE HAVE ALSO GONE THROUGH THE CASE LAWS RELIED UPON BY THE PARTIES. IN THIS CASE, THE ASSESSING O FFICER REJECTED THE BOOKS OF ACCOUNTS AND ESTIMATED THE NET PROFIT OF 1 2.5% ON MAIN CONTRACTS, 8% NET PROFIT ON SUB CONTRACT WORKS. TH E CIT(A) SCALED DOWN THE ESTIMATION OF NET PROFIT FROM 12.5% TO 9% IN CA SE OF MAIN CONTRACT WORKS. WHILE DOING SO, THE CIT(A) DIRECTED THE A.O. TO EXCLUDE THE WORK IN PROGRESS INCLUDED IN THE GROSS TURNOVER. THE D. RS CONTENTION IS THAT ITA NO.301/VIZAG/2013 M/S. RATNA CONSTRUCTIONS, VIJAYAWADA 7 THE A.O. HAS RIGHTLY ESTIMATED THE NET PROFIT OF 12 .5%, CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE THAT THE ASSESS E DID NOT PRODUCED BILLS AND VOUCHERS FOR THE EXPENDITURE DEBITED TO P &L ACCOUNT. THE D.R. FURTHER CONTENDED THAT UNLESS THE WORK IN PROGRESS IS INCLUDED IN THE GROSS TURNOVER, THE CORRECT NET PROFIT CANNOT BE DE TERMINED IN THE CIVIL CONSTRUCTION BUSINESS. 7. WE HAVE GONE THROUGH THE ASSESSMENT ORDER, CIT(A) ORDER AND ALSO CASE LAWS RELIED UPON BY THE PARTIES. IT IS A N ADMITTED FACT THAT ESTIMATION OF NET PROFIT FROM CIVIL CONTRACT RECEIP TS IS CONSISTENTLY FOLLOWED BY THE DEPARTMENT ON DIFFERENT RATES DEPEN DING UPON THE FACTS AND CIRCUMSTANCES OF EACH CASE. THE ITAT, ALSO HAV E UPHELD THE ESTIMATION OF NET PROFIT RANGING FROM 8% TO 12.5% O N CASE TO CASE BASIS. THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN T HE CASE OF ACIT VS. TEJA CONSTRUCTIONS IN ITA NO.1191/HYD/01, HAS UPHEL D THE ESTIMATION OF NET PROFIT AT 9% FROM MAIN CONTRACT WORKS. THE RELE VANT PORTION IS REPRODUCED HEREUNDER: THE ASSESSEES PAST TRACK RECORDS SHOW THAT THE AS SESSEE HAS NEGLECTED THE PRESENTING OF THE BOOKS OF ACCOUNT IN ACCORDANCE WITH LAW. WHEN THE ASSESSEE CLAIMED ANY EXPENDITURE, IT IS MANDATORY ON THE PART OF THE ASSESSEE TO PRODUCE THE BOOKS OF AC COUNT SUPPORTED BY PROPER BILLS AND VOUCHERS. SINCE THE ASSESSEE HAS N OT PRODUCED THE PROPER BOOKS OF ACCOUNT, TRUE PROFITS OR LOSS CANNO T BE DEDUCED FROM THE BOOKS OF ACCOUNT OF THE ASSESSEE. THE AO HAVING NO OTHER OPTION REJECTED THE BOOKS OF ACCOUNT AND ESTIMATED THE INC OME AT 10 PER CENT OF GROSS RECEIPTS. BUT THE POSITION IS THAT, THE AS SESSEE IS CARRYING ON ITA NO.301/VIZAG/2013 M/S. RATNA CONSTRUCTIONS, VIJAYAWADA 8 THREE KINDS OF CONTRACTS, AS IN EARLIER YEARS, I.E. , (I) OWN CONTRACTS, (II) CONTRACTS TAKEN FROM THE SUB-CONTRACTORS, (III) CON TRACTS GIVEN TO OTHER PARTIES ON SUB-CONTRACTS. THE ASSESSEE HAD A HIGHER RATE OF PROFIT ON THE CONTRACTS EXECUTED BY THE ASSESSEE ITSELF. IN T HESE CONTRACTS, THE ASSESSEE AGREED THAT HIS INCOME IS AT 9 PER CENT OF THE GROSS RECEIPTS. THUS, ACCORDINGLY THE AO IS DIRECTED TO ESTIMATE TH E INCOME ON THE CONTRACTS EXECUTED BY THE ASSESSEES OWN AT 9 PER C ENT. IN CASE OF CONTRACTS TAKEN BY ASSESSEE ON SUB-CONTRACT, THE IN COME TO BE ESTIMATED AT 8 PER CENT OF THE GROSS RECEIPTS. IN CA SE OF CONTRACTS GIVEN BY THE ASSESSEE TO THE 3RD PARTY ON SUB-CONTRACT, I NCOME TO BE ESTIMATED AT 4 PER CENT. THIS IS, BECAUSE, WHEN THE ASSESSEE GIVES CONTRACT TO THE OTHER PARTIES ON SUB-CONTRACT, THE ASSESSEE CANNOT KEEP THE SAME PERCENTAGE OF PROFIT AT 9 PER CENT, IT HAS TO FORGO CERTAIN PORTION OF PROFIT I.E., AROUND 5 PER CENT TO THE SU B-CONTRACTORS. SIMILAR IS THE POSITION IN THE CASE OF CONTRACTS TAKEN BY A SSESSEE ON SUB- CONTRACT FROM OTHER PARTIES. FURTHER, THE ASSESSEE IS ENTITLED FOR DEPRECIATION AND REMUNERATION, AND INTERESTS TO PAR TNERS ON THE PROFIT ESTIMATED BY AO AT APPLICABLE RATES, BECAUSE THE IN COME ESTIMATED AS ABOVE OF THE ASSESSEE IS BEFORE THE DEPRECIATION AN D INTEREST AND REMUNERATION OF THE PARTNERS. ACCORDINGLY, THE AO I S DIRECTED TO COMPUTE THE INCOME OF THE ASSESSEE AFRESH. 8. COMING TO THE INCLUSION OF WORK IN PROGRESS FOR DETERMINING THE GROSS TURNOVER. THE A.O. INCLUDED THE WORK IN PROGR ESS FOR DETERMINING THE GROSS TURNOVER AND ESTIMATED THE NET PROFIT ON WORK IN PROGRESS. THE ASSESSEES CONTENTION IS THAT THE WORK IN PROGRESS CANNOT BE CONSIDERED FOR ESTIMATION OF NET PROFIT, AS THIS WAS NOT RECEI VED BY THE ASSESSEE DURING THE FINANCIAL YEAR AND ALSO THE SAME IS RECE IVED DURING THE NEXT FINANCIAL YEAR AND INCLUDED IN THE GROSS TURNOVER. THE CIT(A) ACCEPTED THE ASSESSEES EXPLANATIONS AND DIRECTED THE A.O. T O EXCLUDE THE WORK IN PROGRESS FOR THE PURPOSE OF DETERMINING THE GROSS T URNOVER. IT IS AN ADMITTED FACT THAT THE WORK IN PROGRESS IS NOT A TU RNOVER BUT IT IS A COST ITA NO.301/VIZAG/2013 M/S. RATNA CONSTRUCTIONS, VIJAYAWADA 9 OF MATERIAL AND OTHER CHARGES INCURRED ON UNBILLED WORKS. THE ASSESSEE CONTENDED THAT THE WORK IN PROGRESS IS CARRIED OVER TO SUBSEQUENT YEAR AND RECOGNIZED THE INCOME, THEREFORE IT CANNOT BE T AKEN INTO TURNOVER FOR THE CURRENT YEAR. WE FIND FORCE IN THE ARGUMENT S OF THE ASSESSEE FOR THE REASON THAT THE ASSESSEE DID NOT RECEIVED ANY A MOUNT TOWARDS THIS WORK IN PROGRESS. THOUGH THE INCOME SHOULD BE RECO GNIZED ON PERCENTAGE COMPLETION METHOD OR COMPLETION CONTRACT METHOD IN CIVIL CONTRACT WORKS, THE A.O. NECESSARILY HAS TO FOLLOW THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE FROM THE EARLIE R YEARS. THE ASSESSEE CONTENDED THAT IT IS RECOGNIZING ITS INCOM E ONLY ON COMPLETION CONTRACT METHOD. WHEN THE ASSESSE IS FOLLOWING A PA RTICULAR METHOD, OF ACCOUNTING, WHICH WAS ACCEPTED BY THE DEPARTMENT IN EARLIER YEARS, CANNOT DISPUTED NOW. THEREFORE, WE ARE OF THE OPINI ON THAT THE A.O. IS NOT CORRECT IN INCLUDING THE WORK IN PROGRESS FOR T HE PURPOSE OF DETERMINING THE GROSS RECEIPTS FOR ESTIMATION OF NE T PROFIT. THE CIT(A), RIGHTLY EXCLUDED THE WORK IN PROGRESS FROM THE CONT RACT RECEIPTS. WE DO NOT FIND ANY ERROR OR INFIRMITY IN THE ORDER OF CIT (A). THEREFORE, WE DIRECT THE A.O. TO EXCLUDE THE WORK IN PROGRESS FRO M THE GROSS TURNOVER. 9. CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE AND ALSO APPLYING THE RATIOS OF THE CASE LAWS DISCUSSED ABOV E, WE ARE OF THE ITA NO.301/VIZAG/2013 M/S. RATNA CONSTRUCTIONS, VIJAYAWADA 10 OPINION THAT THE CIT(A) HAS RIGHTLY ESTIMATED THE N ET PROFIT OF 9% ON THE TOTAL TURNOVER, EXCLUDING WORK IN PROGRESS. THERE I S NO ERROR OR INFIRMITY IN THE ORDER OF CIT(A). HENCE, WE INCLINED TO UPHE LD THE ORDER OF THE CIT(A) AND DISMISS THE APPEAL FILED BY THE REVENUE. 10. IN THE RESULT, THE REVENUES APPEAL IS DISMISSE D. THE ABOVE ORDER WAS PRONOUNCED IN THE OPEN COURT ON 4 TH DEC15. SD/- SD/- ( . ) ( . . . . ) ( (( ( V. DURGA RAO ) )) ) ( G. MANJUNATHA) / // / JUDICIAL MEMBER / // / ACCOUNTANT MEMBER /VISAKHAPATNAM: 3 / DATED : 4.12.2015 VG/SPS ) ' 4 / COPY OF THE ORDER FORWARDED TO :- 1. & / THE APPELLANT THE DCIT, CIRCLE-2(1), VIJAYAWADA 2. '(& / THE RESPONDENT M/S. RATNA CONSTRUCTIONS, D.NO.59-7-1/1A, ACHARYA RANGA STREET, GAYATRI NAGAR, VIJAYAWADA-520 008. 3. 5 / THE CIT, VIJAYAWADA 4. 5 () / THE CIT(A), VIJAYAWADA 5. ' , , / // / DR, ITAT, VISAKHAPATNAM 6 . . . . / GUARD FILE / BY ORDER // TRUE COPY // 9: ( SR.PRIVATE SECRETARY ) , / // / ITAT, VISAKHAPATNAM