ITA No. 142/Pat/2013. IN INCOME TAX APPELLATE TRIBUNAL, PATNA BENCH, PATNA. BEFORE SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER. (S.M.C.) I.T.A. No. 142/PAT/2013. Assessment Year : 2009-10. M/s Bhupendra Prasad Singh, Asstt. Commissioner of Income-tax, Kadirabad, Darbhanga. Vs. Circle-3, Darbhanga. Appellant. Respondent. Appellant by : S/Shri A.K. Rastogi, Rakesh Kumar & Ashish Agrawal. Respondent by : Shri Ram Babu. Date of Hearing : 03 -08-2016 Date of Pronouncement : 21st Sept., 2016 ORDER This appeal by assessee is directed against order of learned CIT(Appeals) dated 18-03-2013 and pertains to assessment year 2009-10. grounds of appeal read as under : 1. For that grounds of appeal hereto are without prejudice to one another. 2. For that appellant had shown net profit of Rs.10,35,560/- after setting off depreciation, interest and remuneration to partners and not Rs.29,12,822/- as observed by CIT(A) at page 7 of appellate order. Thus estimate of net profit based on wrong figure of income alleged to be shown is wrong, illegal, unjustified and excessive. 3. For that estimate of net profit @ 13.5% of gross contract receipt (Rs.3,79,92,301) and allowing set off of depreciation, interest and remuneration allowable to partners is wrong, illegal, unjustified, arbitrary and in any view high and excessive. 4. For that order passed by learned CIT(A) has resulted in enhancement of income to Rs.34,40,545/- as against assessed income of Rs.20,88,590/-. order of enhancement without notice to 2 ITA No. 142/Pat/2013. appellant is contrary to mandatory provision of section 251(2) of Income Tax Act, 1961 and is liable to be set aside. 5. For that confirmation of addition of Rs.22,45,315/- u/s 68 of Income Tax Act, 1961 in respect of amount standing in name of Abhimanue Singh (Rs.4,53,541/-) and Ram Pukar Singh (Rs.17,91,774/-) is wrong, illegal, unjustified under facts and circumstances of case. authorities below failed to appreciate that there was no fresh deposit and both amount were bought forward from preceding year. 2. Apropos issue of addition on account of estimated profit. brief facts of case are that assessee is civil contractor and derived income from execution of contract work showing total income of Rs.10,35,560/- for assessment year 2009-10. During year under consideration, gross receipt shown by assessee was Rs.3,79,92,301/-. On this receipt, assessee had shown net income of Rs.29,19,822/- which was 5.13% of receipt. 3. On examination of books AO did not reject books of accounts but made certain disallowances on account of purchases and labour charges resulting in addition of Rs.4,97,830/- and Rs.5,55,200/- respectively. 4. Before learned CIT(Appeals), assessee submitted that disallowance of Rs.10,53,030/- if added to income shown from contract, net profit will work out to 9% approximately which is high and excessive. It was submitted that even where books of accounts were rejected, net profit is estimated normally at 6% of contract receipt as upheld by ITAT, Patna Bench subject to allowance of depreciation and interest and salary paid to partners. Hence assessee pleaded that addition should be deleted. In this regard assessee cited following case laws : 3 ITA No. 142/Pat/2013. i) Shyam Bihari V. Commissioner of Income Tax (2012) 345 ITR 283 (Patna). ii) M/s Pioneer Construction Company V. DCIT, Circle-5, Patna, ITA No. 35&36/Pat/2009 Assessment Year 2002-03 & 2004-05. iii) Ram Prakash Rai Estate Pvt. Ltd. V. DCIT ITA No. 05/Pat/2010 Dt. 10-08-2011. iv) Yogendra Rai, Gopalganj V. DCIT, Circle-2, Muzaffarpur. v) CIT V. Jain Construction Co. & Ors. (1999) 156 CTR 290 (Raj.) vi) CIT V. Chinna Nachimuthu Constructions (2008) 297 ITR 70 (Kar.). 5. Considering above, learned CIT(Appeals) observed that in this case credit liabilities also could not be substantiated. That in nature of business carried out by assessee often estimation of profit has to be resorted to. Hence learned CIT(Appeals) held that AO has correctly rejected books of account u/s 145(3) of Act and made disallowance of 5% each of material and labour charges. Further more learned CIT(Appeals) held that estimation of profit be enhanced to 8%. Learned CIT(Appeals) further concluded as under : However, in instant case it is seen that depreciation as per books is claimed at Rs.1,62,584/- while interest to partnes and remuneration to partners is debited to P & L A/c amounting to Rs.7,77,958/- AND Rs.7,77,873 respectively. total on this account comes to Rs.17,18,415 which represents 4.5% of contractual receipts. If same is allowed to be deducted from estimated profits @ 8% of contractual receipts amounting to Rs. 30,39,385/- resultant profit will be 13,20,970/- @ 3.5% of contractual receipts, must below profits declared by appellant @ 7.68% amounting to Rs.29,12,822/-. This will be unacceptable position and precisely for this reason Hon ble Patna Hih Court in case of Shyam Bihari vs. CIT held that if net profit it to be estimated it should be estimated subject to allowance of depreciation and depreciation allowance should be deducted there from . Since in instant case appellant has offered 7.68% itself amounting to Rs.29,12,822/- after setting off depreciation and interest and remuneration to partners and since appellant has failed to substantiate its expenses and p;rofits have to be estimated subject to allowance of depreciation and interest and salary to partners (4.5% in this case), 4 ITA No. 142/Pat/2013. profits are estimated @ 13.5% amounting to Rs.51,28,960/- and AO is directed to allow depreciation as per rules and interest and remuneration allowable to partners against said profits. 6. Against above order, assessee is in appeal before ITAT. 7. I have heard both counsel and perused records. I find that AO in this case has not rejected books of accounts but has made adhoc disallowances out of expenditure on account of lack of proper vouchers. Without appreciating AO s order learned CIT(Appeals) has observed that AO has rightly rejected books of accounts and estimation of profit is correct. This is not at all case here. learned CIT(Appeals) has also justified AO s action for non substantiation of liabilities. How this can justify estimate of profit is also not comprehendible. Further more learned CIT(Appeals) has proceeded to make enhancement on reasoning mentioned above which is also beyond cogent. I find that when assessee is citing case laws from ITAT, Patna itself that in line of assessee s business 6% estimation of profit is adequate, I do not see any reason why this should not be followed. Hence I direct AO to examine addition in light of ITAT, Patna decisions in this regard that estimation of 6% profit is sufficient. Hence AO is directed to limit addition to extent it does not exceed 6% of profit as expounded by ITAT Patna in other cases. 8. Apropos confirmation of addition u/s 68. On this account assessee s accounts had disclosed that two partners of assessee firm had retired and in balance sheet their capital account were converted into unsecured loan. However, this conversion of balance appearing into capital account into loan account was not accepted by Revenue on ground that there is no confirmation by retired partners. One of retired partner had died and confirmation from his son was produced which was not found sufficient by Revenue. 5 ITA No. 142/Pat/2013. 9. In my considered opinion Revenue is not disputing case that amounts lying as unsecured loan in name of earstwhile partners were earlier balances outstanding in their capital accounts. Revenue s allegation that in absence of confirmation these earlier capital account balances can now be added u/s 68 is not correct. only possible legal basis for this addition can be that capital account balances have been repaid out of books. No such case has been made out by Revenue. Mere absence of confirmation from earlier partners cannot give jurisdiction to AO for addition of their earlier balances without making proper enquiry. Since they were earlier partners of firm there is no case that their PAN Nos. or addresses were not known to AO. AO has not brought on record any enquiry whatsoever made by him in this regard. Hence in my considered opinion, this addition is made upon surmises and conjecture and deserves to be quashed. Accordingly I set aside orders of authorities below and delete addition on this issue. 10. In result this appeal by assessee stands partly allowed. Order pronounced in Open Court on this 21st day of Sept., 2016. Sd/- ( SHAMIM YAHYA) ACCOUNTANT MEMBER. Dated: 21st Sept., 2016. 6 ITA No. 142/Pat/2013. Copy forwarded to : 1. M/s Bhupendra Prasad Singh, Kadirabad, Darbhanga-846 004. 2. A.C.I.T., Circle-3, Darbhanga. 3. C.I.T.- Patna. 4. CIT(Appeals)-I, Patna. 5. D.R., ITAT, Patna. 6. Guard File True Copy By Order Assistant Registrar, Income Tax Appellate Tribunal, Patna Bench, Patna. Wakode. M/s Bhupendra Prasad Singh v. Asstt. Commissioner of Income-tax, Circle-3, Darbhanga