| SooperKanoon Citation | sooperkanoon.com/72112 |
| Court | Income Tax Appellate Tribunal ITAT Allahabad |
| Decided On | May-20-2002 |
| Judge | P Kalsian, B Saini |
| Reported in | (2004)84TTJ(All.)46 |
| Appellant | Gupta Construction Co. |
| Respondent | Assistant Commissioner of Income |
1992-93 on the following grounds : "1. Because the learned CIT(A) has erred in law as well as on facts in not giving full relief by deleting the total addition for alleged bogus purchase and bogus labour payments, when he had categorically held that neither the purchases nor labour payments were bogus or inflated or ingenuine.
2. Because the learned CIT(A) has erred in law as well as on facts in applying a net rate of 10 per cent on gross contract receipts by rejecting the book version of assessee's audited accounts when he has clearly held that there is no case for holding that the assessee's purchases were bogus.
3. Because, without prejudice to above grounds, in applying the net profit rate of 10 per cent the learned CIT(A) has overlooked the past comparable history of the assessee himself and numerous other cases of civil contracts where the rate of 8 per cent is considered to be fair and reasonable even by Departmental parameters.
4. Because the rate of profit applied at 10% is highly excessive, injudicious, arbitrary and untenable, looking the rate of 8 per cent applied in the preceding year." 2. Similarly, ITA No. 1944/1995 by the Revenue is directed against the same order of the CIT(A) and for the same assessment year on the following grounds : "1. Learned CIT(A) has erred in law and on facts on not confirming the addition of Rs. 18,56,140 on account of inflated purchases ignoring the fact that the purchases amounting to Rs. 18,58,140 out of total purchases shown at Rs. 73,85,460 were not verifiable and the parties from whom the purchases were made were not traceable at the given addresses and also because the forensic export's report also indicated that the bills in many cases were written by one and the some persons & further inquiries with the bank also indicated that in many cases the cheques were encashed by the persons who were different from the persons in whose names the cheques were issued.
2. He also erred in not confirming the disallowance of Rs. 2,26,565 out of total claim of labour payments aggregating Rs. 9.89 lakhs, without appreciating that as per forensic expert's report the labour payments were excessive and inflated to the extent of Rs. 2,26,565 and when confronted the assessee could not contradict the finding of the forensic experts.
3. While estimating the net profit he erred further in allowing depreciation of Rs. 5,26,218 ignoring the decision of Hon'ble Allahabad High Court in the case of Saraya Engineering Works v. CIT (1987) 168 ITR 455 (All), specially when he has already accepted that the books maintained by the assessee are not verifiable.
4. CIT's reliance on the AO's order for allowing depreciation after net profit estimation is unjustified since the AO's working of profit was based on different footing. The AO based on strong evidences had made additions and disallowances to the declared profit whereas the CIT(A) though rejecting the book profits still wrongly allowed depreciation." Both the appeals relate to the same assessee though cross-appeals in nature by both the parties. Since both the appeals arise out of the same impugned order, therefore, we heard them together and propose to decide the same by this common consolidated order.
3. The facts as taken from the impugned order and record are that the assessee carried on contract business of construction of roads by obtaining contracts from the Government departments i.e., P.W.D., IRCON and N.T.P.C. etc. The return of income was filed alongwith the tax audit report under Section 44AB. The assessment was completed by the AO by making the following disallowances :(1) Out of raw material (Balla grits purchased at) Rs. 18,56,140(2) Out of labour charges of Rs. 9,89,lacs (Rs. 60,17,700) Rs. 2,61,565 -------------- During the course of the assessment proceedings, the AO asked the assessee to furnish the names and addresses of the parties and sundry creditors with whom raw material for construction of the road had been purchased during the year under consideration, The assessee furnished the addresses and as such, the AO issued letters of enquiry under Section 133(6) of the Act. However, the letters sent to 17 parties whose names are mentioned in the assessment order, returned unserved to the AO. The assessee was intimated about this fact and was directed to prove the genuineness of the transactions made with the parties. The assessee filed copies of the accounts and copies of the confirmation letters stated to have been obtained from the parties before the AO.However, the AO did not agree with the confirmation letter as the letter sent to the parties had returned unserved. Secondly, the independent enquiries were made by the Inspector of Income-tax on the instruction of the AO, which revealed that out of those parties, six parties namely Munnalal, Narendra Kumar, Manik Chand, M/s Shakti Store Works, M/s Shanker Construction Co. and Bhagwati Singh were not present and none were operating from the addresses that were furnished by the assessee. Copy of the report of the Inspector was also handed over to the assessee for explanation and the assessee was directed to produce those parties before the AO. The AO also observed that affidavits of the parties were also filed, but the AO was of the opinion that since the enquiries letter received unserved and the assessee had not been able to obtain-confirmatory letter and affidavit from the parties, it was considered necessary to examine them in person. The assessee was alternatively asked to furnish the present business and residential addresses of those parties so that Department could do something in this case. However, the assessee replied that earlier he traced the parties from the same address as given to the Department and in some cases after reaching the last known address of business traced down their present whereabouts with the help of neighbours. Some of the parties were annoyed and reluctant in giving any further information or service due to fear of prosecution by the IT Department. The AO further, observed that four parties have responded to the letters of enquiry. The AO accordingly inferred that the transaction with the remaining parties are not genuine. The AO also noted certain discrepancies in the purchase as some of them were not having mining licence and the payments by cheques were encashed by different persons.
The opinion of forensic science export was also obtained regarding the handwriting on the purchases, which were handed over to the assessee for reply. The AO further observed that it has been submitted by the assessee many times that there are standard specifications in respect of raw materials required or construction of various thickness and in its support a few formula were furnished. It was further submitted by the assessee before the AO that the purchases of raw-material shown are just hardly sufficient to execute the volume of contract implemented by the assessee and if the purchases are disbelieved then there is no possibility of such huge contracts being completed. The AO pointed out that there might be standard specification but it is difficult to arrive at a definite conclusion in the absence of specific formula for construction of road of various thickness. The AO further observed that in the absence of details, general statement would not support any measurement and it is not possible to arrive at the exact consumption of raw material. The AO further observed that prima facie it is established that the transaction made with the aforesaid parties are not genuine. However, after making due enquiries and collecting material on record, the AO came to the conclusion that the purchases from nine parties out of 17 are not genuine. The onus cast on the assessee has not been discharged for the purpose of proving their genuineness. The details were mentioned in Annex. 'A' attached with the assessment order of nine parties and as a result the addition of Rs. 18,56,140 were made.
4. As regards the payments made to the labourers to the extent of Rs. 9,89,000, the assessee had submitted samples and muster rolls totalling Rs. 4,28,130 before the AO. These were examined by the handwriting expert, which indicated that the thumb impressions are not of different parties and the AO observed that it can be easily deduced that the labour payments are excessive and inflated and accordingly made disallowance of Rs. 2,61,565 out of the total labour payment. However, the AO allowed depreciation to the assessee as per P&L a/c. The assessee feeling aggrieved with the assessment order filed appeal before the CIT(A) and the learned CIT(A) after going through the material on record and explanations of the parties, the explanations of the assessee and working out of the details of the construction, came to the conclusion that the assessee has not maintained verifiable accounts and as such net profit rate should be applied. The learned CIT(A) also held that the consumption of the raw-material claimed is within the parameter laid down by the laboratories for particular type of road construction. The learned CIT(A) further held that the AO has not made out a foolproof case for addition on account of bogus purchases. The learned CIT(A) further held that the road constructed by the assessee during the year was found up to this specification by the principals while making payment to the contractor. The learned CIT(A) further held that it cannot be held that the assessee has not utilised grit and has not paid the wages for construction of roads. The learned CIT(A) while placing reliance upon the judgment of Hon'ble Supreme Court in the case of CIT v. British Paints (India) Ltd. (1991) 188 ITR 44 (SC) came to the conclusion that it would be most reasonable and fully justified if the book results are rejected and net profit rate is applied. Accordingly, the CIT(A) applied net profit rate of 10 per cent on the receipts of Rs. 1,19,59,581 as against 8 per cent applied in the immediately preceding year. The learned CIT(A) applied net profit of 10 per cent keeping in view the discrepancy pointed out in the maintenance of the books of account. The learned CIT, however, granted the depreciation after not profit as allowed by the AO also.
5. Both the parties are aggrieved by the findings of the CIT(A) and filed appeal before this Tribunal. All the grounds of the assessee and ground Nos. 1 & 2 of the revenue are remised mainly on account of purchases of the raw-material and labour payment as well as adoption of net profit rate.
6. The other two grounds in appeal of the Revenue are with regard to allowing of depreciation. First of all, we take up first issue with regard to the addition and disallowances on account of purchase of raw-material and labour payment on adoption of net profit. The issue of depreciation would be considered subsequently.
7. We have heard the learned counsel for the assessee and the learned Departmental Representative Initially, Shri A.K. Manchanda, CIT (Departmental Representative) argued the matter on behalf of the Revenue and subsequently, it was argued by Shri Rajeev Deva, CIT (Departmental Representative). The learned counsel for the assessee besides relying upon the grounds of appeal filed paper book containing comparative chart of gross profit for many years, written submissions made before the CIT(A), copy of certificate issued by U.P.P.W.D.Research Institute, Lucknow, copy of certificate from transportation engineer laboratory, copy of contract bond for the assessee, computation of labour charges copies of various case laws decided by the Tribunal, Allahabad, which we shall refer subsequently identical to the issue. Copy of judgment of Hon'ble Allahabad High Court reported in CST v. Pilot Shoe Factory 39 STC 95, copies of the assessment order and order of the CIT(A) for the asst. yrs. 1996-97 and 1997-98 of assessee and copy of the balance sheet and P&L a/c for the year under appeal.
The learned counsel for the assessee argued on the basis of the paper book and material on record that the assessee had been carrying on contract business and construction of road by obtaining contracts from the Government departments and had been maintaining the books of account and were also audited under Section 44AB. He has further argued that out of 17 parties, hins could not be verified according to the AO and the AO has held that the transactions are not genuine. He has further argued that explanation and affidavits of all the parties were filed before the AO. The learned counsel for the assessee further argued that the details of contract by specifications were filed before the AO as well as in the paper book with respect to the contract work of M.H.-2 and N.H.-7. He has further argued that 5 per cent of the sales-tax in a sum of Rs. 3,04,206 was deducted and if the same is calculated then almost the same figure of the purchase of raw-material would show that all the purchases were genuine. He has also referred to pp. 9 & 10 of the paper book, which is a report of the UP. PWD Research Institute, Lucknow, dt. 17th Sept., 1991 to prove the guidelines and specifications which would clearly prove that the material which was purchased was consumed in the contract work for road construction. The learned counsel for the assessee has taken us through p. 7 of the CIT(A)'s order and on the basis of the averments argued that no bogus purchases have been made. The learned counsel for the assessee further argued that the construction of road is not in dispute. Therefore, the material must have been consumed for the purpose of construction of the road. The learned counsel for the assessee relied upon the various orders of the Tribunal Allahabad Bench in respect of similar case, copies of which are filed from pp. 24 to 57 of the paper book. The learned counsel for the assessee further argued that for the purpose of assessment only the material available on the record has to be considered and no construction evidence is required. He has further argued that if no purchases have been made then the assessee would not have constructed the road which is not in dispute. The learned counsel for the assessee further argued that presumption could be raised in favour of the assessee in view of these circumstances. The learned counsel for the assessees has taken us through p. 23 of the paper book which is a comparative chart of the labour payments and on that basis argued that the labour charges were made less in comparison to the preceding years and as such, no additions could be made. The learned counsel for the assessee also relied upon 39 STC 95 (supra) and CIT v.Gotan Lime Khanij Udhyog. On the basis of these arguments, the learned counsel for the assessee argued that no addition in respect of purchases of raw material and labour payments should have been made by the authorities below. Alternatively, the learned counsel for the assessee submitted that the net profit rate of 10 per cent as directed by the CIT(A) is excessive. He has further filed comparative chart for the earlier years as well as for the subsequent years to show that the net profit was excessive in this year. The learned counsel for the assessee further argued that sales-tax and interest should also be reduced from the not profit as the depreciation has been allowed. The learned counsel for the assessee further argued that in the nature of the business of the assessee, purchases are generally made from unorganised sector, which has been given due consideration by the Tribunal, Allahabad Bench in other cases, copies of which have been filed on the record. On the basis of the orders of the Tribunal, Allahabad Bench, the authorised representative has further argued that this Tribunal had been allowing interest on sales-tax out of the net profit.
8. On the other hand, the learned Departmental Representative Shri A.K.Monchanda argued that these bills were prepared by the persons of the assessee and purchases are bogus. The learned Departmental Representative further argued that the handwriting Expert report on this issue is not denied. The learned Departmental Representative further argued that net profit rate should not be applied and all the books of account should be rejected and addition should be made regarding those purchases. The learned Departmental Representative further argued that the AO has given number of opportunities to the assessee to produce those nine parties from whom purchases have been made, but the same were not produced before the AO. The learned Departmental Representative further argued that the length of the road as constructed is not correct. The learned Departmental Representative further argued that the assessee had been doing the work of strengthening of the road for which less material is required. The learned Departmental Representative further argued that since the contract was obtained on bid so no competition was there for adoption of less net profit. The learned Departmental Representative further argued that the purchases in about Rs. 34 lacs were made in cash and other cheques are not crossed cheques. The learned Departmental Representative further argued that no illegality or irregularity were found in the earlier years. Therefore, no comparison of earlier year could be made. The learned Departmental Representative further argued that the depreciation should not be allowed from the net profit. The learned Departmental Representative relied upon (1987) 168 ITR 455 (All) (supra), in this regard. The learned Departmental Representative further argued that Government supplies were made at very nominal rates and the cases relied upon by the counsel for the assessee, copies of which are filed in the paper book are not applicable to this case.
9. The learned counsel for the assessee in rejoinder, further argued that the details of the interest paid to third parties are mentioned at p. 80 of the paper book and interest was also shown as income of the assessee. The learned counsel for the assessee relied upon CIT v.Bishambhai Payal & Co. (1994) 210 ITR 118 (All) and argued that the depreciation has to be allowed after applying net profit rate. He has further argued that the depreciation is a statutory deduction and as such, the decision of the Allahabad High Court reported in (1987) 168 ITR 455 (All) (supra) is no longer a good law, in view of the same High Court judgment reported in (1994) 210 ITR 118 (All) (supra). The learned counsel for the assessee also relied upon UCO Bank v. CIT (1999) 237 ITR 889 (SC). He has further relied upon CIT v. Jain Construction Co. and Ors. and Brij Bhushari Parduman Kumai v. CIT (1978) 115 ITR 524 (SC). The learned counsel for the assessee has again taken as through the comparative chart at p. 1 of the paper book and also argued that the contract started in the earlier years also from 17th Oct., 1990 to 31st Mach, 1991, and as such, the part of the work fell in the asst. yr. 1991-92. Therefore, comparative chart is applicable. Comparative chart could be relied upon as disputed by the learned Departmental Representative. The learned counsel for the assessee further argued that the disputed purchases are not of Rs. 34 lacs. The learned counsel for the assessee further argued that the ratio of British paints judgment is not applicable. He has further argued that keeping in view the nature of the business and that stone ballast is used in the construction work, the position of the seller is such that they may not be available after sometime. Therefore, it was impossible for the assessee to locate them and produce before the AO.The other parties available were produced before the AO. The learned counsel further argued that the AO has not rejected the books of accounts and has not given any adverse finding that the books of account have not been regularly maintained. He has further argued that since the audit report was prepared under Section 44AB, therefore, the authorities below should not have rejected the explanation of the assessee. He has relied upon Addl. CIT v. Jay Engineering Works Ltd. (1978) 113 ITR 389 (Del). He has further argued that the books of account have been maintained in the regular course of business and as such Section 34 of the Evidence Act is applicable.
10. We may mention here that this Bench vide order sheet dt. 21st Nov., 2001 sought details from the counsel for the assessee about the length of the road, quantity of store material and grit and the basis and evidence for consumption of stock. This Bench further sought clarification from the counsel for the assessee about the sales-tax deducted, TDS Certificate and assessment orders and the case laws relevant thereto. The learned counsel for the assessee in compliance to the directions and clarification of this Bench submitted the details alongwith the letter dt. 7th Feb., 2002. We would refer those items at the appropriate stage. When Shri Rajeev Deva, CIT (Departmental Representative) has taken charge of this case, he was permitted to supplement the argument if any. The learned Departmental Representative Shri Rajeev Deva argued that no vouchers were verifiable, though the books of account have not been rejected, but the opinion of the AO was that the results from the books are not correct of the AO was that the results from the books are not correct so the CIT(A), applied proviso to Section 145. He has relied upon (1991) 188 ITR 44 (SC) (supra). He has further argued that no depreciation should be applied if net profit rate is adopted and net profit rate of 10 per cent is reasonable. He has relied upon the orders of the Tribunal, Allahabad Bench in the cases of, M/s Madan Lal Sita Ram and Shri Krishna Gopal in which higher rate was adopted. Lastly, the learned counsel for the assessee in his rejoinder to the argument of the learned Departmental Representative argued that once the books of account have been rejected, then no details of purchases would be considered. He has relied upon CIT v.Banwarilal Banshidhar (1998) 229 ITR 229 (All) and contended that the defects, if any including the payments should have been ignored. He has further argued that if purchase and labour charges, which are in dispute, could be deleted, then the gross profit would come to 35 per cent, which is highly unrealistic and impossible. The learned counsel for the assessee also filed copies of the TDS certificates and sales-tax deduction. He has also filed copies of various orders of the Tribunal, Jodhpur Bench deducting depreciation and interest to third party after adopting net profit rate.
11. We have bestowed our careful consideration to the rival submissions of the parties. It is not disputed that during the year under consideration the assessee has shown receipts of Rs. 1,83,96,695 from the business of cunstruction of roads on different contracts. The AO has also specifically mentioned this fact in the assessment order. The AO has also mentioned in the assessment order that the books of account care examined by him. The assessee has also filed audit report under Section 44AB of the IT Act. The purchases as mentioned above in the order, out of 17 parties nine were rejected by the AO alongwith the wages in a sum of Rs. 2,61,565. The AO has given reason that some parties were not produced. The parties were not having certificates.
The payments though made by cheque, were obtained by other persons and the report of handwriting expert is not in dispute. Those reasons prompted the AO to make addition of Rs. 19,55,140 on purchases of Dalla grit. On the same reasons of handwriting export report, wages in a sum of Rs. 2,61,565 was disallowed. However, we have noted that the AO did not reject the books of account of the assessee. The AO has also not pointed any mistake in the audit report under Section 44AB. The AO has merely observed that the transaction with the purchasing parties are not genuine as the onus cast on the assessee has not been discharged for the purpose of proving their genuineness. The AO has not held that the purchases are bogus. The assessee has filed copy of the written submissions filed before the CIT(A) stating therein whosoever parties were available were produced before the AO, but the AO kept on insisting for personal production of the parties, which was neither required nor desirable. The assessee has given explanation that some of the parties were produced in person and for remaining confirmatory letters and affidavits were filed and payments were made by cheque. It was also explained that the suppliers come to the site on truck loads, gets the goods measured, negotiate the rates and then the challan/bills are given to the staff at the site for being filled. It was also explained that some of the parties were illiterate or semi-literate and therefore, taken the assistance of the assessee in preparing the bills.
It was also explained that the averment for the consumption of the grit is not clear from the formula on record is also ill-quoted as an average 1.35 times of grit is required for making a compact read, irrespective of the thickness. As far as the disallowance of labour payment was concerned, it was explained that the labourers were employed from the rural and backward arears at less rate simply to reduce the cost. The labourers were headed by the labour called "Maith", through whom the payments of the wages were made. The assesses pleaded before the CIT(A) that the net profit rate should be fixed looking to the various conditions like past record, expenditure and underquoting of contract price, normal rates in comparable cases etc.
12. We have also considered the report of UP P.W.D. Research Institute, Lucknow dt. 17th Sept., 1991, which has given report of laboratory samples in respect of material data. It was stated that for 100 matres square area, 7.48 M-3 was required. We have also scanned copy of the Transportation Engineer Laboratory, Varanasi dt. 7th Jan., 1991. It was the issue for sample and test required for development of job mix formula for 80M-50M. The first report of UP P.W.D. Research Institute would be relevant for the same consideration in this case but the remaining report is merely of advisory nature, therefore, could not be considered in the assessment year in question. We have also seen copy of the contract bond in which estimated cost and tender cost is given.
It was in respect of strengthening of national high way-2. The work was to be started on 17th Oct., 1990 to 16th Oct., 1991. Part of the period therefore, fell in this assessment year in question and part contract were pertained to the preceding assessment year. The difference between the estimated cost and tender cost was approximately Rs. 18 lacs.
Similar is the position with regard to the construction of remaining section of National High way-2 in which the contract was to be started on 26th Oct., 1990, and had to be completed on 25th Oct., 1992. The difference between the estimated cost and tender cost was approximately Rs. 3 lacs. As far as the work of strengthening National High way No. 7 was concerned, the date of context was 22nd Feb., 1992, and the date of completion was 21st Aug., 1992. The difference between the estimated cost and tender cost was shown approximately Rs. 31,000. A copy of bill, quantity and estimate is also filed in the paper book, alongwith the terms and conditions of the contract and details of the contract mentioned above. The details of labour payment is also mentioned at p.
23 of the paper book, in which it was shown that in this year labour payment in a sum of Rs. 9,58,852 was made which was very low as compared to the last year as in the last preceding year i.e., 1991-92, labour payment of Rs. 25,71,051 was made. The percentage to the net receipt was 17.19 per cent in 1991-92 and in this year under appeal, it was 8.82 per cent. We have also noticed that the sales-tax of Rs. 3,04,206 was mentioned in the P&L a/c and the internet of Rs. 2,35,474.88 is also mentioned which was reduced from the profit. The assessee has also shown interest on security deposit in a sum of Rs. 1,25,289.40p. in the income of the assessee in the balance sheet. We have already mentioned that this Bench on various dates directed the counsel for the assessee to file details of the length of road, quantity of store and grit and basis of evidence for consumption of the raw material and the details of the sales-tax and TDS certificate issued on that account. Though the learned counsel for the assessee has not filed the evidence with regard to consumption of the raw material and length of the road, but he has filed the reply dt. 7th Feb., 2002 on all these points. For the sake of convenience, the same is reproduced herein below : "As per the directions of the Hon'ble Bench, we give below the requisite information and/or explanation in the matters related to : (b) Consumption of grit of various sizes and stone dust required for construction of roads; (d) As regards the basis of working out of constructed road at 14226 cum, it may be submitted that it is calculated as per payment received on average rate of payment. Please refer to p. 18 of the paper book whereas the contract band with NH 1 appears according to which the assessee had to undertake four stages of work on Km. 8.213 to 11.308 and Km. 14.540 to 18.200. As per rates given the agerage rate per cum comes to Rs. 1,114. The payment received during the year is Rs. 1,58,59,086 and hence the area of constructed road works out to (1,58,59,085/1114) 14226 cum.
2. From a perusal of the P&L a/c (copy appearing at p. 30 of the paper book) it will be seen that we have charged a sum of Rs. 3,04,286 to the P&L a/c by way of sales-tax. This represents deductions from the bills represented by the department after due verification of the work and countersigned by us, by way of token of our acceptance of the name. The said figures of Rs. 3,04,206 is fully verifiable from the certificate of TDS which are already on record.
3. As per the information already placed on record the construction of road, our inputs are in the from of grits of various sizes, stone dust and ballast of different sizes and bituman required for construction of roads is supplied by the department on chargeable basis. As the imputs used by us are subject to levy of sales-tax/trade-tax in the state of UP it is the responsibility of contractee to deduct sales on the same. On the basis of sales-tax amounting to Rs. 3,04,206 as has been collected by them, if you work back the value of our inputs i.e., grit, stone dust and ballast, the same is in confirmity with the expenses claimed by us in the P&L a/c as may be seen from the following : Stone ballast purchased in Madhya Pradesh for 1RCON V STPP for railway track (receipt of which are accounted for under the head ICON/VSTPP in Schedule Charged to P&L a/c on account of construction of roads between NH-1 & NH-2 Division P.W.D. Varanasi.
As against this the assessment of the contracts department about the cost of said inputs is Rs. 60,46,615 as worked out hereunder :Sales Tax deducted from the bills as stated above.Value of grit on which above sales-tax has been deducted ------------ 3A. Further the consumption of various inputs is in full conformity with the usual standards that for construction of 1 cum compated road/bituman road, one requires the material in excess by about 45 to 55 per cent. It means that for constructing of 1 cum compacted road minimum material required is 1.45 cum. In support of this contention, we are submitting herewith a certificate issued by the PWD department, Varanasi.
4. By applying the said formula to the present case, the consumption of grit (in terms of value) should be Rs. 60,46,615 as per the details given below :(1) Area of road constructed during the year 14,226 cum(ii) Inputs required at 1.45 per cum of road 20,917 cum(iii) Cost by applying an average rate of Rs. 295 per cum 61,70,721(iv) Consumption charges to P&L a/c 60,58,780 7. By way of out-compilation (PB-23) it has already been placed on record that in the year under consideration, the labour components of the expenses claimed in the P&L a/c is less as compared to the immediately preceding year where the book results have been accepted except some minor variation in the net profit rate." 13. The learned counsel for the assessee also filed TDS certificate for reduction of sales-tax by the authorities below. The total value of the supply of the gitti was shown in both the certificates at Rs. 60,83,994.96, upon which the total sales-tax of Rs. 3,04,206 was deducted. The certificates are filed on the record. The learned counsel for the assessee submitted that 5 per cent sales-tax was deducted, therefore, on that basis tried to argued that, if the figure of the raw-material is calculated in respect of sales-tax at 5 per cent then the same amount of the sales-tax as deducted by the Government would come to approximately the same figure. Though the learned counsel for the assessee did not file the evidence of the consumption of the goods but we are in agreement with his contention that if the purchase of raw-material in dispute is seen, which is at Rs. 60,17,700, if 5 per cent sales-tax is deducted out of this amount, then approximately the same figure of sales-tax in a sum of Rs. 3 lacs approximately would come. Therefore, it could be inferred from this part of circumstances and material that atleast considerable purchase material was used in the construction of the road, which is also to some extent corroborated by the report of U.P.P.W.D. Research Institute, Lucknow.
14. The Hon'ble Supreme Court in the matter of CIT v. Durga Prasad More (1971) 82 ITR 540 (SC) has held : "It is true that an apparent must be considered real until it is shown that there are reasons to believe that the apparent is not real. Therefore, the Courts and Tribunals have to judge the evidence before them by applying the test of hjman probabilities." The Hon'ble Delhi High Court in the matter of Addl. CIT v. Jay Engineering Works Ltd. (supra) has held as under: "While the word "evidence" may recall the oral and documentary evidence as may be admissible under the Indian Evidence Act, 1872, the use of the word "material" in Section 143(3) of the IT Act, 1961, shows that the ITO, not being a Court, can rely upon material which may not be strictly evidence admissible under the Evidence Act for the purpose of making an order of assessment. Courts often take judicial notice of certain facts which need not be proved while administrative and quasi-judicial authorities can take "official notice" of wider varieties of facts which need not be proved before them. Thus, not only in respect of the relevancy but also in respect of proof, the material which can be taken into consideration by the ITO and other authorities under the Act is far wider than the evidence which is atrictly relevant and admissible under the Evidence Act. The ITO's have to deal with such numerous cases of assessment that they can accept as correct books of account maintained in regular course of business without such a formal proof.
It is quite competent for the IT authorities not only to accept the auditor's report but also to draw the proper inference from the same." The assessee has similarly explained the reasons before the CIT(A), which we have mentioned briefly above. It was pleaded before the CIT(A) that the raw-material was the most essential component without which roads cannot be constructed. The assessee had also on the basis of the rate of the UP.P.W.D. Research Institute, Lucknow explained before the CIT(A) that in the construction of 1 cum. road, the requirement of loose grits would be 1.52 m. for 50 MM thickness and 1.45 CM for 40MM thickness and 1.56 CM compact road of 25MM. The assessee further pointed out that for 25MM carpet, in addition to loose grits other materials such as lime, cement and ash of the power house is required.
It was also pointed out to the CIT(A) on the same lines that the assessee had constructed 14,426 cm roads which was worked out on the basis of payment of Rs. 1,58,59,086 received during the year.
Therefore, consumption of the loose grit should have been 19,475 cm. of the value of Rs. 61,87,925 on the value of the grit prevailing at that time. However, the assessee has shown at Rs. 60,17,700. On the basis of these submissions and record, the learned CIT(A) decided this issue, which we would like the reproduce for the sake of convenience : "5. I have carefully considered the submissions made, facts involved and the reasons mentioned in the assessment order. I have no difficulty in holding that, the appellant has not maintained verifiable accounts. The past history of the case shows that in earlier years also book-results have not been accepted, and that in asst. yrs. 1989-90, 1990-91 and 1991-92, net profit rate of 8.25 per cent, 8 per cent and 8 per cent respectively has been applied on the net contract receipt. During the previous year, assessee's gross receipts amounted to Rs. 1,83,96,695. After deducting/adjusting the cost of materials supplied by the Government departments amounting to Rs. 64,38,464 the net contract receipts work out to Rs. 1,19,58,591. Coming to the dispute for this year, I have held that, the books maintained are not verifiable. It is a fact that the assessee has filed confirmatory letters from the suppliers; and in the case of Shri Munna Lal, the payment of Rs. 5,92,800 was made through crossed cheques and the supplier, personally attended the AO's office for confirming the transaction. The appellant has not disputed the forensic science expert's opinion about writing of bills of some of the suppliers by its staff, and as such, the finding about hand-writing is not disputed. The fact remains that, the consumption of raw materials claimed is within the para meters laid down by the laboratories for a particular type of road construction. In these circumstances, the point for consideration is whether the AO has made out a foolproof case to show that, the assessee has claimed bogus purchases to the extent of Rs. 18,56,140.
The answer is obvious and is in negative. It is also a fact that the roads constructed by the appellant, during the year, ware found upto the specification by the principals, while making the payment to the contractor. The contract bond, relied upon clearly shows that in this type of contract, the labour component is about 15 per cent as against which the appellant has shown about 5.5 per cent. On the facts mentioned in the assessment orders, it cannot be held that, the appellant has not utilised grita and has not paid the wages for construction of roads. The assessment order does not contain any material to prove the purchases of raw materials as bogus. In these circumstances in my view, it would be most reasonable and fully justified if the book results are rejected and a net profit rate is applied, which finds support from the Supreme Court's judgment in the case of CIT v. British Paints India Ltd. (supra). Keeping in view the discrepancies pointed out in the assessment order, it would be fairly reasonable to apply a net profit rate of 10 per cent as against 8 per cent applied in the immediately proceeding year, I have kept in view the discrepancies/defects pointed out in the maintenance of the books of account. If this is done, the net profits would work out to Rs. 11,95,858. The appellant has claimed depreciation amounting to Rs. 5,26,218, which the AO has considered/allowed while completing the assessment. Thus, the total income would work out to Rs. 6,69,640 (11,95,858 - 5,26,218), as against Rs. 24,20,238. Consequently, the appeal is partly allowed with a relief of Rs. 17,50,598 (24,28,238 - 6,69,640)." 15. The comparative chart of net profit rate applied in the earlier year in the case of the assessee is as under; which is not disputed by the Revenue :Asst yr.
Turnover N.P. Rate (upheld before depreciation)1989-90 68,19,827 8.25% (minus depreciation)1990-91 92,06,995 8.25% (minus depreciation)1991-92 1,49,56,699 8.00% (minus depreciation)1992-93.
1,19,58,591 10% (minus depreciation)(under appeal) by CIT(A).1993-94 1,63,66,650 8.00% (minus depreciation)1994-95 1,80,64,329 8% (minus depreciation) No second appeal was filed by the Department in the above year except under appeal before us. The learned counsel for the assessee relied upon the order of the Tribunal, Allahabad Bench in the matter of Lala Bandhu Lal & Co. v. Asstt. CIT in ITA No. 343/95 for the asst. yr.
1991-92 dt. 31st Aug., 1995, in which also dispute of purchase of raw-material was there which was purchased from unorganised sector from 16 kabaries and it was held "as stated above, the learned CIT(A) has taken a categorical finding that the consumption of raw/material and production of finished goods was found to be in order that being so it is not appreciable by us as to how the finished goods could have been produced by the assessee without pig iron and iron scraps." The learned counsel for the assessee also relied upon the order of the Tribunal, Allahabad Bench of Structo Constructions v. Asstt. CIT in ITA No.598/1994 for the year 1990-91 dt. 14th Sept., 1990, it was held by the Tribunal that though "in the facts and circumstances of the case, are categorical that 10 per cent profit rate stands reduced to 8 per cent, in estimating the net profit at 8 per cent since we have not taken into consideration the element of depreciation, the assessee is certainly entitled to the claim of depreciation in accordance with the provisions of law". The learned counsel for the assessee also relied upon the order of the Tribunal, Allahabad Bench in the matter of Tej Veer Singh v. ITO in ITA No. 864/1994 dt. 23rd June, 1995. In which also net profit rate of 8 per cent was adopted. The learned counsel for the assessee also relied upon the order of the Tribunal Allahabad Bench in the matter of Niranjan Lal Shyam Sunder ITA No, 2165/1993 for the asst.
yr. 1990-91 dt. 3rd July, 1996. The facts of this case had been similar to that of the assessee in which also the assessee derived income from contract business. In the absence of vouchers, the entire purchase shown at Rs. 12,22,365 were unverifiable and therefore, in the absence of books of account and verification of P&L a/c, the books were rejected and net profit rate of 10 per cent was applied by the AO, which was upheld by the CIT(A). The order of the Tribunal also give the facts with regard to type of the work which was widening and strengthening of road in which also the receipts were shown from supply of grit etc. The Tribunal keeping in view these facts considered that the net profit rate of 10 per cent was excessive and held that it would be reasonable to apply flat net profit rate of 7 per cent. The learned counsel for the assessee also relied upon the order of the Tribunal, Allahabad Bench in the matter of Gaurav Builder v. ITO in ITAT No.1941/91 dt. 28th April, 1995, in which the Tribunal has adopted net profit rate of 6 per cent. Copies of the orders are incorporated in the paper book from pp. 24 to 57. We may mention here that the CIT(A), Varanasi in the case of the same assessee for the asst. yr. 1996-97 vide his order dt. 21st Feb., 2000; has allowed the appeal of the assessee and held that it will be just and reasonable to apply rate of 8 per cent in order to arrive at the correct income of the contract work and shall also allow the depreciation and interest payable to partners separately. Similarly, the CIT(A) in the case of the assessee for the asst. yr. 1997-98 has allowed the appeal of the assessee and directed the AO to apply flat rate of 8 per cent on the receipts after deducting the material and sales-tax as in the past and allow depreciation as per rules. It was stated that no further appeal is filed by the Department against the order of the CIT(A) and as such have become final.
16. The Hon'ble Allahabad High Court in the matter of CIT v. Banwarilal Bansidhar (supra) held : "When the gross profit rate was applied, that would take care of everything and there was no need for the AO to make scrutiny of the amount incurred on the purchases made by the assessee." 17. The Hon'ble Rajasthan High Court in the matter of CIT v. Gotan Lime Khanij Udyog (supra) has held : "Mere rejection of books of account by resorting to Section 145 need not necessarily lead to additions to the returned income or a different figure of income. Finding of Tribunal deleting the entire trading addition notwithstanding the rejection of assessee's books of account was a finding of fact, and same could not be said to be erroneous." 18. The Hon'ble Allahabad High Court in the matter of CST v. Pilot Shoe Factory (supra) has held : "On the facts and circumstances of the case, when the assessee's books of account were rejected, the turnover, as returned by the assessee, need not necessarily have been rejected but could be accepted if it appeared to be reasonable and proper." Keeping in view the above discussion, material and explanations and authorities referred to above, it is established the undisputed fact that the road was constructed by the assessee as per contract otherwise the Government would not have released the payments to the assessee. It is also established from the explanations and more particularly from the deduction of the sales-tax on the amount that the assessee had used considerable dalla grits (purchased material) in the construction of the road. The learned counsel for the assessee could not give evidence regarding the consumption of the dalla grit in the construction of the road but by applying the test of human probabilities to the explanations and the material on record and that the books of account have not been rejected and that the assessee has also filed audit report shows that considerable purchases of raw material were used in the construction of the road, but it is difficult to arrive at definite conclusion about exact consumption of raw material in the absence of specific evidence. It is also established fact from the past history of the assessee that in the preceding years and subsequent years, income of the assessee was computed and assessed by the Department on the basis of estimation by applying the net profit rate of 8 per cent to 8.25 per cent and the matters have become final. The authorities below have pointed out the defects in the bills and purchases and therefore, possible leakage is not ruled out. Even if the value of the dalla grit is calculated on the basis of sales-tax deduction, the figure would come in approximation. Therefore, the learned CIT(A) has rightly held that the assessee has not maintained verifiable account, and the assessee also did not dispute the handwriting expart's report. The learned CIT(A) also rightly held that the road was constructed by the assessee as per the specification of the principal as the payment was made to the assessee. The learned CIT(A) also held : "It cannot be held that the appellant has not utilised grits and has not paid the wages for construction of road." We have also noted about that the payment of wages as compared to last year was very low and as such, no separate addition could have been made on that account. It appears that the AO has not considered the case of the assessee by adopting the test of human probabilities. The AO had also not looked into the case of the assessee at this angle as to whether the consumption of grit was made in the construction of the road. Therefore, in our considered view, the CIT(A) was justified in adopting the net profit rate in view of the facts and circumstances of the case and more particularly looking to the past history of the assessee. We have also mentioned above the judgment of Hon'ble Allahabad High Court in the matter of CIT v. Banwarilal Bansidhar (supra), in which it was held that when the gross profit rate was applied, that would take care of everything and there was no need for the AO to make scrutiny of the amount incurred. The AO should have examined the past history of the assessee and should have himself adopted the net profit rate instead of making the additions on account of purchase's in the raw material. The Department has accepted the orders of the CIT(A) in the preceding assessment years, i.e., 1989-90, 1990-91 & 1991-92, in which 8 per cent to 8.2 per cent minus depreciation adopted by the first appellate authority is not challenged in the second appeal. In the subsequent years also, the same position was there.
19. Therefore, the ground No. 1 in the appeal of the assessees and ground Nos. 1 & 2 in the grounds of appeal of the Revenue have no merits and force and accordingly the same are rejected.
20. However, the issue remains as to what should be the net profit rate to be applied in this case. As stated above, once net profit rate is applied that would take care of everything. In the asst. yrs. 1989-90 to 1991-92, net profit rate of 8.25 per cent to 8 per cent minus depreciation was applied by the first appellate authority and the Department has not challenged in second appeal before the Tribunal. In the asst. yrs. 1993-94 & 1994-95 also, 8 per cent minus depreciation was applied by the first appellate authority and the Department has not challenged the same in second appeal. Similarly, in the asst. yrs.
1996-97 & 1997-98, the first appellate authority has directed to apply 8 per cent net profit on the receipt after deducting the material and sales-tax as in the past and also allow depreciation. Those orders were also accepted by the Department as no second appeals were filed. The learned Departmental Representative has relied upon the order of the Tribunal, Allahabad Bench in the matter of Madan Lal Sita Ram, in which 12.5 per cent was adopted as net profit. In the case of Krishna Gopal v. ITO, the Tribunal, Allahabad has applied 10 per cent net profit. The learned counsel for the assesses, however, argued that those cases were of builders constructing the buildings and as such, the facts and circumstances are clearly distinguishable. We have considered the entire facts and circumstances of the case. Before applying the net profit, we have to use the past record and the comparable cases. The Department itself has accepted the net profit rate in the case of the same assessee in different years at 8 per cent to 8.25 per cent on the receipts after deducting the material and sales-tax as in the past and allowed the depreciation. The comparable cases were also cited, which we have mentioned in this order of Ajanta Buider, Tej Vear Singh, Niranjan Lal Shyam Sunder, Gauvav Builders (supra). In the comparable cases also, the Tribunal has applied 6 per cent to 8 per cent as not profit. The cases cited by the learned Departmental Representative are of builders constructing the buildings and are not applicable; therefore, looking to the past history and comparable cases, we are of the considered view that it would be reasonable and appropriate if the net profit rate of 8 per cent on the receipts after deducting the cost of the material supplied by the Government department applied in this case. The CIT has given the figure of net contract receipt at Rs. 1,19,58,591. In the case of Tej Veer Singh, Tribunal, Allahabad Bench has directed to adopt 8 per cent net profit on net receipts after considering additional outgoing on account of sales-tax, The findings of the CIT(A) in asst. yr. 1996-97, 1997-98 deducting sales-tax from receipts are not binding upon us. The CIT(A) in these years referred to (1978) 115 ITR 524 (SC) (supra) in which sales-tax deduction was not subject-matter. The learned counsel for the assessee relied upon (1978) 115 ITR 524 (SC) (supra) but the relief has already been granted by deducting the cost of material from the total receipts. The judgment of the Hon'ble Supreme Court in the matter of CIT v. British Paints India Ltd. (supra) was made in a different context about the calculation of the value of the closing stock as adopted in the earlier years. The net receipts after deducting the cost of material supplied by the Government would come to Rs. 1,19,58,591. We direct that the AO should calculate the net profit of 8 per cent on this net receipt. The finding of the CIT(A) are accordingly modified to the extent stated above. The appeal of the assessee on this issue is partly allowed and the appeal of the Revenue is dismissed.
21. The last issue is about grant of depreciation and interest to third parties. We have noted above that the depreciation has already been allowed by the AO in favour of the assessee. The learned CIT(A) has also allowed the depreciation in favour of the assessee after applying the net profit rate on the net receipts. The CIT(A) has also granted depreciation, after applying the net profit rate in the preceding years as well as on subsequent years. The finding of the CIT(A) in the preceding year and subsequent years have not been challenged by the Department and as such, have become final in favour of the assessee.
This Tribunal in the comparable case of Structo Constructions, Tej Veer Singh have also allowed the depreciation after applying the net profit rate. In the asst. yr. 1997-98 in the case of the same assessee, the CIT(A) has also directed to allow depreciation as per rules. The CIT(A) in the case of the same assessee in the asst. yr. 1996-97 has also allowed depreciation after applying net profit rate. These findings have not been disputed by the Revenue. However, the learned Departmental Representative has relied upon the judgment of the Allahabad High Court in the matter of Saraya Engineering Works (supra), in which it was held that since the depreciation had been taken into consideration in estimating the income from the contract work, therefore, no further depreciation was to be allowed. The Hon'ble Allahabad High Court in its subsequent judgment in the matter of CIT v.Bishambhar Dayal & Co. (supra) after going through the CBDT Circular has held ; "That the depreciation should be allowed separately". The Hon'ble Allahabad High Court has further taken into consideration the above CBDT Circular and the Hon'ble Supreme Court in the matter of UCO Bank v. CIT (supra) has held that the circulars having effect of relaxing rigour of law and thus binding upon the authorities. The Hon'ble Allahabad High Court has further held that : "No provision of the IT Act was brought to our notice, which makes the claim of depreciation inadmissible where the income is computed by applying a flat rate." The Hon'ble Allahabad High Court has further observed that the case reported in (1987) 168 ITR 455 (All) (supra) in distinguishable. The earlier judgment was passed by the Allahabad High Court in the year 1986 and the subsequent judgment referred to above in (1994) 210 ITR 118 (All) was pronounced in 1993. Therefore, by relying on the subsequent judgment, which is binding upon this Tribunal, and keeping in view the cases of the assessee and the aforesaid judgment, the learned CIT(A) was justified in directing the AO to allow depreciation to the assessee after applying net profit rate. The learned counsel for the assessee relied upon catena of orders of the Tribunal, Jodhpur Bench to support this contention. We will refer to some of the orders of the Tribunal, Jodhpur Bench which passed the orders while relying on the ratio of judgment of Rajasthan High Court in the case of CIT v. Jam Construction & Co. (supra). The Tribunal, Jodhpur bench in the matter of ITO v. Amar Singh Krishna Chandra (2001) 71 TTJ (Jd) 182 has held, "depreciation and interest paid to third parties are separately allowable after determining the net profit rate. The Tribunal, Jodhpur Bench in the matter of ITO v. Gopal Ram Prem Ram (2001) 72 TTJ (Jd) 698 has held, as mentioned above. The ITAT, Jodhpur Bench in the matter of Rikhabdass Jain v. ITO (2001) 72 TTJ (Jd) 526, ITO v. Jagdamba Construction Co. (2001) 72 TTJ (Jd) 530, New Mitharawal Construction Co. v. Asstt. CIT (2001) 72 TTJ (Jd) 531 held that separate deduction is to be allowed in respect of depreciation and interest paid to third parties from contract receipts estimated by applying net profit rate.
Therefore, Keeping in view the past history of the assessee in which depreciation has been allowed and the authorities above, we are of the considered view that the depreciation has rightly been allowed by the CIT(A) as held above, after applying net profit rate. We have noticed that no specific ground has been taken with regard to the allowability of interest paid to third parties, but the fact remains that the same fact is mentioned in the balance sheet and this fact was also available before the authorities and was legal in nature and arising out of the record in this appeal. Therefore, as held in the above authorities, the CIT(A) should have also allowed interest paid by the assessee to third parties after applying net profit rate and the same is allowed as in the case of the depreciation. It is mentioned in the balance sheet that the assessee received interest on security deposit in a sum of Rs. 1,25,289.42p and interest paid was Rs. 2,35,474.88 which we have incorporated above also in the order. The AO shall verify the claim of the assessee from this figure and shall allow appropriate interest paid by assessee to third parties in accordance with the order of the Tribunal, Jodhpur Bench. No other point was argued or pressed by the parties. Accordingly, we do not see any merits in the remaining grounds of the Revenue and accordingly, the same are decided in favour of the assessee and against the Revenue.
22. As a result, the appeal of the assessee is partly allowed as indicated above and the appeal of the revenue is dismissed.