IN INCOME TAX APPELLATE TRIBUNAL, DELHI BENCH G NEW DELHI BEFORE : SHRI I.C. SUDHIR, JUDICIAL MEMBER & SHRI L.P. SAHU, ACCOUNTANT MEMBER ITA No. 2029/Del./2009 & 1651/Del./2012 Asstt. Year : 2003-04 Scantec (India) Pvt. Ltd., vs. A.C.I.T., Circle, Dadri Road, P.O. Kuleshra, Noida. Greater Noida, Noida. (PAN: AAHCS 4330H) (Appellant) (Respondent) Appellant by : Sh. Yogesh K. Jagia, Advocate Respondent by : Sh. B. Ramanjaneyula, Sr. DR Date of hearing : 23.08.2016 Date of pronouncement : 16.09.2016 ORDER Per L.P. Sahu, Accountant Member: Both these appeals by assessee are directed against orders dated 17.02.2009 & 20.01.2012 of ld. CIT(A), Ghaziabad for assessment year 2003-04, challenging sustenance of addition made in quantum appeal and confirmation of consequential penalty imposed by AO u/s. 271(1)(c) of Income-tax Act (hereinafter referred to as Act ). grounds raised in quantum appeal read as under : 1. That in facts and circumstances of case and in law order passed by Ld. Commissioner of Income Tax (A), hereinafter referred as 2 ITA No.2029/Del./2009 & 1651/Del./2012 CIT(A) is in contravention to provisions of law and hence is void ab initio. 2. That in facts and circumstances of case and in law Ld. CIT(A) erred in upholding rejection of books of accounts under section 145(3) of Income Tax Act, 1961, hereinafter referred as Act . 3. That in facts and circumstances of case and in law Ld. CIT(A) erred in estimating income of appellant @ 8% by applying section 44AD of Act. 4. That in facts and circumstances of case and in law Ld. CIT(A) erred in upholding that onus to produce sub contractors before Ld Assessing Officer is on Appellant. 5. That in facts and circumstances of case and in law Ld. CIT(A) erred in observing that appellant failed to furnish any cogent materials/evidence to controvert finding of Assessing Officer. 2. brief facts of case are that assessee company is engaged in business of electro-mechanical and civil engineering contractor and carried out erection of Extra High Voltage Overhead transmission lines, installation of underground EHV power cables, Microbe and telecom towers, repair and maintenance of EHV transmission and distribution equipments for electrification. assessee filed its return of income on 01.12.2003, declaring total income of Rs.16,79,304/- which comprises business income at Rs.9,43,295/- and income from other sources at Rs.7,36,009/-. During assessment proceedings, AO noticed that during year, assessee has executed contracts awarded from various Govt. Departments. 3 ITA No.2029/Del./2009 & 1651/Del./2012 assessee declared gross receipts from such contracts at Rs.7,13,83,337/- and income at Rs.9,43,295/- giving net profit rate of 1.32%. assessee was asked to justify net profit of Rs.9,43,295/- against gross job receipts of Rs.7,13,83,337/-. In response, assessee explained that operating profit without considering bad debt, provision for doubtful debt and provision for tax including deferred tax, in current year comes to 16% of turnover as against 12% in last year. There is 68.10% increase in turnover and 60.95% in project expenses resulting GP of 29% as against 30% in last year. It was also explained that depreciation and exceptional items have been increased in current year as compared to last year. On perusal of profit and loss account, AO noticed that assessee had claimed wages expenses of Rs.1,16,41,903/- besides sub-contractors cost of Rs.1,44,61,444/-. material consumption has been shown at Rs.1,66,44,053/- as against Rs.64,71,601/- of last year. assessee was asked to justify payments made to sub-contractors and wages. In response assessee submitted list of sub-contractor/petty contractors and payments made to them along with their addresses. In order to verify, payments to sub-contractors, notices u/s. 133(6) were issued to 11 parties through whom excavation work etc. was shown to have been made, were issued to test check payments, details of which are as under : 4 ITA No.2029/Del./2009 & 1651/Del./2012 1) M/s Infogip Systems & Translines, R/7, B-18, Raj Nagar, Ghaziabad having transaction of Rs.26,78,387/- for concrete and excavation expenses. 2) M/s Tulcha Ram Sharma, Village Badaria, Tehsil. Sardar Sehra, Distt. Churu. Rajasthan having transaction of Rs.l 0,65,336/- for excavation and concrete/erection. 3) M/s H.P. Sharma and Associates, Ward No. 8, Sardar Sehr, Churu having transaction of Rs. 15,34,298/- for excavation and concrete. 4) Sri Suresh Babu Sharma, Vidhya Nagar, Bagarpur, Auraiya Rs.3,83,762/- for excavation and concrete. 5) M/s Dwevedi Trading Co., Sikandarpur, Rath. Hamirpur, U.P. - Rs.4.16,667/- for excavation and concrete. 6) Shri Shiv Charan, Kunali Bazar, Distt. Supaul, Bihar. Rs.4,27,856/- for excavation and concrete. 7) Shri S. Soman, SS Sadanam, Mulhalakullam, P.O. Kollam, Kerala. Rs.5,02,594/- Survey Work. 8) Sri K. Girisham Pillai, Kizakkepaiavilia, PO Nedunagolam, Distt Koilam, Kerala Rs.68,600/- excavation and concrete. 9) M/s Solar Engg. Pvt. Ltd, B-56, Sector-14, Noida - Rs. 3,88,700/- excavation and concrete. 10) M/s R.K. Constructions, Palloo, Rawaisar, distt : Hanuman Garh, Rajasthan Rs.4,37,903/- excavation and concrete. 11) Jai Maruti Constructions, Ram Nagar, Mangalpuri, Kankarkhera, Meerut. Rs.3,86,926/-excavation and concrete. Out of above parties, notices sent to S. Soman, Solar Engg., and Jai Maruti were returned back with remarks "Not traceable". Only M/s H.P. Sharma & Associates confirmed transaction vide his letter dated 25.9.2005. Since notice sent to above parties were returned back and no response was received from remaining parties for whom payments 5 ITA No.2029/Del./2009 & 1651/Del./2012 had been claimed, AO issued letter dated 15.12.2005 to assessee for justifying same and to produce evidence to prove impugned expenditure. 3. Thereafter confirmations were received from four parties M/s INFOZIP Systems and Translines, Ghaziabad for accepting payment of Rs.28,64,382/- (Rs. 18,89,932/- through cheque/DD and balance in cash), Shri Shiv Charan Contractor of Dehradun for confirming payment of Rs.4,27,856/- (Rs.2,23,560/- by DD and Rs.1,77,000/- in cash and Rs.22,803/- balance), M/s Dwevedi Trading Co. for Rs.5,15,250/- [ Rs.3,05,000/- by DD & Rs.2,10250/- in cash] and Sri Tulcha Ram Rs.10,65,336/-. No other confirmations were received. To further verify genuineness of transaction, summon u/s 131 was issued on 3.1.2006 to Sri K.P. Singh signatory of confirmation letter of M/s Infozip Systems and Translines, Ghaziabad, which was duly served through Inspector, but Sri K.P. Singh did not respond. Accordingly, show cause notice dated 24.1.2006 was issued to assessee requiring him to justify cash portion of payments in cases where confirmations were received and total payments with respect to five parties mentioned herein below : 1) Sri Suresh Babu Sharma, Vidhya Nagar, Bagarpur, Auraiya Rs.3,83,762/- for excavation and concrete. 6 ITA No.2029/Del./2009 & 1651/Del./2012 2) Shri S. Soman, SS Sadanam, Muthalakullam, P.O. Kollam, Kerala. Rs.5,02,594/- Survey Work. 3) Sri K. Girisham Pillai, Kizakkepalavilla, PO Nedunagolam, Distt Kollam, Kerala Rs,68,600/- excavation and concrete. 4) M/s R.K. Constructions, Paltoo, Rawatsar, distt Hanuman Garh, Rajasthan Rs.4,37,903/- excavation and concrete. 5) Jai Maruti Constructions, Ram Nagar, Mangalpuri, Kankarkhera, Meerut. Rs.3,86,926/-excavation and concrete. assessee could not be able to furnish confirmations from above parties and therefore, keeping in view huge payments made by assessee which could not be verified, ld. Assessing Officer rejected books of account u/s. 145(3) of Act and applying net profit rate of 8% as applicable u/s. 44AD, on gross contract receipts of Rs.7,13,83,337/-, assessed net profit from contract business at Rs.57,10,666/- as against Rs.9,43,295/- declared by assessee, thereby making addition of Rs.47,67,371/- vide assessment order dated 03.03.2006. Consequent upon this addition, penalty proceedings were also initiated by AO u/s. 271(1)(c) of Act and penalty of Rs.17,52,011/-. assessee carried both matters in appeal before ld. CIT(A), who confirmed action of AO. Aggrieved, assessee is in these appeals before Tribunal. For sake of convenience, we first take up quantum appeal. 7 ITA No.2029/Del./2009 & 1651/Del./2012 4. During course of hearing, ld. Counsel for assessee submitted that rejection of accounts, made by authorities below is not justified as AO has failed to point out any specific defect in maintenance of books, as per section 145(3) of Act. Simply because some of contractors did not respond to notices of AO, expenditure made cannot be disbelieved, particularly when complete books of accounts along with relevant vouchers were produced before AO. It was further submitted that ld. Authorities below have failed to consider explanation of assessee that provisions of section 44AD are not applicable in present case, because appellant company is neither eligible assessee nor doing eligible business as contemplated u/s. 44AD of Act. It is admitted fact that turnover of assessee company exceeds Rs.40 lacs and books of accounts maintained by assessee duly audited, were produced before ld. Assessing Officer, which were examined on test check basis and no defects were been pointed out. Reliance is placed on following decisions : (i). CIT vs. Rice India Exports Pvt. Ltd. (ITA No. 999/10 dated 03.08.10)(Delhi High Court. (ii). CIT vs. Fancy Internation, 168 Taxman 183 (Delhi H.C.) (iii). Anis Ahmad & Sons vs. CIT, 297 ITR 441 (SC) (iv). ITO vs. Raees Garments (ITA No. 997/Del./07(ITAT) (v). CIT vs. Winner Constructions Pvt. Ltd. (ITA No. 796/2011 dated 03.05.12)(Delhi High Court. 8 ITA No.2029/Del./2009 & 1651/Del./2012 (vi). Continental Carbon India Ltd. vs. ITO, ITAT, Delhi dated 31.10.2011 (ITA No. 5269 to 5271/Del./2010) He, therefore, urged for deletion of impugned addition. 5. ld. DR, on other hand, relied on orders of authorities below and submitted that since impugned expenditure debited in P & L account were not found open for verification during investigation made by AO, authorities below were justified to reject books of account and to apply net profit rate of 8% on gross receipts, as entries in books of account of assessee were found not deducing correct profit. It was submitted that since recipients of amounts did not confirm payments allegedly made to them, ld. Authorities were justified to discard nominal net profit shown by assessee on huge contract receipts. 6. We have heard rival submissions and have gone through entire material available on record. only question to be adjudicated in this appeal is with regard to rejection of account books u/s. 145(3) of Act and computing net profit from contract business by applying net profit rate of 8% on gross receipts as contemplated u/s. 44AD of Act. Having gone through relevant provisions of section 145(3) of Act, we find that 9 ITA No.2029/Del./2009 & 1651/Del./2012 sub-sec. (3) of Section 145 lays down that where Assessing Officer is not satisfied about correctness or completeness of accounts of assessee, or where method of accounting namely cash or mercantile systems or accounting standards have not been regularly followed by assessee, Assessing Officer may make assessment in manner provided in Section 144 of Act. In instant case, it is not case of Revenue that method of accounting followed in this year is not consistent with accounting standards or with method followed regularly by assessee. However, as to correctness and completeness of accounts maintained by assessee, main objection of Revenue has been that expenditures debited by assessee in its profit and loss accounts towards payments to various sub-contractors, were not found open for verification. Such expenditures were found to have been made both through account payee cheques/DDs as well as in cash. Assessing Officer had made deep investigations to verify impugned expenditures by issuing summons u/s. 133(6) and 131 of Act and also afforded several opportunities to assessee, but no confirmations regarding work done by five parties noted above certifying receipt of payments from assessee, could be produced before Assessing Officer. It is no doubt true that mere lack of response by parties to whom payments are said to have been made by assessee, cannot 10 ITA No.2029/Del./2009 & 1651/Del./2012 be taken to be sole ground for rejection of books of accounts and making best judgment assessment u/s. 144 as held in various decisions relied by assessee, but once assessee was required time and again, informing result of investigation, to furnish confirmations of parties to justify impugned expenditure, it was incumbent upon assessee to discharge its onus, which he failed to do in instant case. In absence of this, expenditure shown by assessee were not found open for verification and thus, entries made in books of account do not go to deduce correct profit from contract business. AO, therefore, could resort to make assessment to best of his judgment by invoking provisions of section 144 of Act. However, while making best judgment assessment AO has to take into account all relevant material. It is well settled that even in case of best judgment assessment estimate of profit or addition should be on rational basis and it should not be based upon whims and fancies of AO. In instant case, authorities below have applied net profit rate of 8% on gross receipts as per section 44AD of Act, which section does not apply to present case, as assessee is not civil contractor but is engaged in business of electro-mechanical and civil engineering contractor and carried out erection of Extra High Voltage Overhead transmission lines, installation of underground EHV power cables, Microbe and telecom 11 ITA No.2029/Del./2009 & 1651/Del./2012 towers, repair and maintenance of EHV transmission and distribution equipments for electrification. It is also admitted fact that turnover of present assessee exceeds sum of Rs.40 lacs which bars application of section 44AD or profit rate prescribed therein. Therefore, conclusion reached by AO to apply profit rate as contemplated u/s. 44AD cannot be supported. perusal of impugned order of ld. CIT(A) also reveals that ld. CIT(A) has justified profit rate of 8% after considering results of assessment year 2006-07 in instant case for A.Y. 2003-04, which is not appropriate. In facts and circumstances of present case, we find that profit rate applied by authorities below is not based on correct appreciation of facts or any rational. In order to justify best judgment assessment, support could be derived from previous history of assessee and comparable cases of same line of business. AO could also verify genuineness of payments from concerned banks where expenditures were paid by assessee by way of account payee cheques or demand drafts, as are reflected in ledger accounts of those five parties whose confirmations were not brought on record or notices u/s. 133(6) stood un-responded. In such state of affairs, and in peculiar facts of present case, we deem it expedient in interest of justice to restore matter to file of AO for deciding issue afresh in view of 12 ITA No.2029/Del./2009 & 1651/Del./2012 observations made in body of this order. Accordingly, appeal of assessee deserves to be allowed for statistical purposes. 7. Since we have restored matter of addition involved in quantum appeal to file of Assessing Officer, appeal challenging penalty is also restored to AO for deciding same afresh as per decision to be taken on quantum of addition. Accordingly, appeal relating to penalty is also allowed for statistical purposes. 8. In result, both appeals of assessee are allowed for statistical purposes. Order pronounced in open court on 16.09.2016. Sd/- Sd/- (I.C. SUDHIR) (L.P. SAHU) Judicial Member Accountant Member Dated :16.09.2016 *aks/- Copy of order forwarded to: (1) appellant (2) respondent (3) Commissioner (4) CIT(A) (5) Departmental Representative (6) Guard File By order Assistant. Registrar Income Tax Appellate Tribunal Delhi Benches, New Delhi Scantec (India) Pvt. Ltd. v. A.C.I.T., Circle, Noida