ITA No.158&159/Vizag/2014 Shri Akkina Muni Koteswara Rao, Rajahmundry IN INCOME TAX APPELLATE TRIBUNAL, VISAKHAPATNAM BENCH, VISAKHAPATNAM BEFORE SHRI V. DURGA RAO, JUDICIAL MEMBER & SHRI G. MANJUNATHA, ACCOUNTANT MEMBER I.T.A.Nos.158&159/Vizag/2014 ( Assessment Year:2009-10 & 2010-11) ACIT, Circle-1, Shri Akkina Muni Koteswara Rao, Rajahmundry Vs. Rajahmundry PAN: ABDPA9567E] ( Appellant) ( Respondent) Appellant by : Shri Aravindakshan, DR Respondent by : Shri G.V.N. Hari, AR Date of hearing : 15.09.2016 Date of Pronouncement : 22.09.2016 ORDER PER G. MANJUNATHA, Accountant Member: These appeals filed by revenue are directed against common order passed by CIT(A), Visakhapatnam dated 14.2.2014 for assessment year 2009-10 & 2010-11. Since, facts are 1 ITA No.158&159/Vizag/2014 Shri Akkina Muni Koteswara Rao, Rajahmundry identical and issues are common, they are clubbed, heard together and disposed off, by way of this common order for sake of convenience. 2. brief facts of case are that assessee is individual engaged in business of works contract for Indian Railways, filed his return of income for assessment year 2009-10 & 2010-11 declaring total income of Rs.25,08,288/- and Rs.15,84,960/-, besides agricultural income of Rs.35,000/- and Rs.40,000/- respectively. case has been selected for scrutiny under CASS and accordingly, notices u/s 143(2) & 142(1) of Act were issued. In response to notices, authorized representative of assessee appeared from time to time and produced books of accounts, copies of ledger accounts, copies of agreement and other information called for. During course of assessment proceedings, A.O. observed that assessee has got contract for supply of machines crushed stone ballast to Indian Railways, which was sub contracted to M/s. Cherukuri Veerraju & Co., Rajahmundry. assessee has sub contracted entire works contract to M/s. Cherukuri Veerraju & Co., by retaining margin of 1.25% on total contract value. reasons given by assessee for sub contracting work to M/s. Cherukuri Veerraju & Co. is that firm had required experience and equipment to handle such type of works contract. 2 ITA No.158&159/Vizag/2014 Shri Akkina Muni Koteswara Rao, Rajahmundry 3. During course of assessment proceedings, A.O. noticed that books of accounts maintained by assessee are not susceptible for verification, as assessee has failed to account security deposit deducted by Indian Railways in work bills in books of accounts. A.O. further observed that on verification of ledger accounts of security deposit (seignorage deposit), it was found that assessee has debited amount of Rs.38,79,632/-, however, on cross verification of relevant entries, Indian Railways has not deducted any seignorage charges in respect of hard and durable machines crushed stone ballast of 50mm gaze. Therefore, A.O. was of opinion that books of accounts of assessee are not showing true and correct position of financial results and hence, rejected books of accounts under provisions of section 145 of Act and estimated net profit of 10% on total contract receipts. Besides, A.O. made further additions towards disallowance of interest under section 14A of Act for which authorized representative of assessee agreed. 4. Aggrieved by assessment order, assessee preferred appeal before CIT(A). Before CIT(A), assessee reiterated submissions made before A.O. assessee further submitted 3 ITA No.158&159/Vizag/2014 Shri Akkina Muni Koteswara Rao, Rajahmundry that A.O. was erred in rejection of books of accounts, as discrepancies noticed by A.O. are not correct. It was further submitted that assessee has considered security deposit deducted by Indian Railways for work bills which was debited to separate ledger account under head security deposit , therefore, A.O. was not correct in holding that books of accounts are not susceptible for verification. As regards estimation of net profit, assessee submitted that he had sub contracted total works to partnership firm wherein he is one of partner, because firm had relevant experience and machines to undertake work, therefore, A.O. was erred in estimation of 10% net profit on total contract receipts, inspite of producing agreement between firm and assessee, wherein profit margin was retained at 1.25% of total contract bills. Similarly, as regards disallowance of interest u/s 14A of Act, it was submitted that when net profit is estimated on gross contract receipts further additions towards interest u/s 14A of Act is unwarranted. 5. CIT(A) after considering explanations of assessee, held that none of deficiencies pointed out by A.O., in books of accounts were found to be correct. A.O. has pointed out certain discrepancies with regard to accounting of security deposits deducted 4 ITA No.158&159/Vizag/2014 Shri Akkina Muni Koteswara Rao, Rajahmundry from work bills, however, from facts it reveals that assessee has considered security deposit deducted from work bills under head security deposit (seignorage charges) , therefore, A.O. was not correct in rejection of books of accounts without pointing out any specific defects in books of accounts, with these observations, directed A.O. to delete estimation made on gross contract receipts. As regards separate additions towards interest, CIT(A) held that since assessee has agreed for additions towards interest before A.O., principle of promissory estoppel would debar assessee from raising this issue in present appeal. With these observations, upheld additions made by A.O. towards interest u/s 14A of Act. Aggrieved by CIT(A) order, revenue is in appeal before us. 6. Ld. D.R. submitted that CIT(A) is not correct in deleting additions on account of estimation of net profit, as A.O. has rejected books of accounts and estimated net profit of 10%. D.R. further submitted that assessee failed to adduce any valid reasons for sub contracting work to M/s. Cherukuri Veerraju & Co., as contract entered into by assessee with M/s. Indian Railways prohibits any sub contract of works to third parties. D.R. further argued that CIT(A) deleted additions only on assumptions and 5 ITA No.158&159/Vizag/2014 Shri Akkina Muni Koteswara Rao, Rajahmundry presumptions without considering submission presented by A.O. in his remand report that sub contract agreement between Cherukuri Veerraju & Co. and assessee, no way specifies percentage of income and transfer of profit was not quantified, therefore, A.O. has rightly estimated net profit of 10% and his order should be upheld. 7. On other hand, Ld. A.R. for assessee supported order of CIT(A). 8. We have heard both parties, perused materials available on record and gone through orders of authorities below. A.O. rejected books of accounts under provisions of section 145 of Act and estimated net profit of 10% on gross contract receipts. A.O. was of opinion that books of accounts of assessee are not susceptible for verification, as books of accounts maintained by assessee are found with number of discrepancies. According to A.O., assessee has not considered security deposit deducted by Indian Railways from work bills. A.O. further was of opinion that assessee has not adduced any valid reasons for sub contracting work to partnership firm wherein assessee was one of partner. It is contention of assessee that A.O. was not correct in observing that books of accounts are not showing true 6 ITA No.158&159/Vizag/2014 Shri Akkina Muni Koteswara Rao, Rajahmundry and correct financial position of assessee. assessee further contended that none of discrepancies pointed out by A.O. are correct as he had accounted security deposit deducted by Indian Railways and kept under separate ledger account under name security deposit (seignorage deposit) and copies of which were filed before A.O. Therefore, A.O. was erred in rejection of books of accounts and estimation of net profit of 10% on gross contract receipts ignoring evidences filed in form of agreement between M/s. Cherukuri Veerraju & Co. and assessee, wherein margin of 1.25% was kept on total contract receipts. 9. We find force in arguments of assessee for reason that assessee has sub contracted entire works contract to M/s. Cherukuri Veerraju & Co. by agreement and as per said agreement, assessee has retained 1.25% margin on total contract receipts, which was not disputed by A.O. A.O. rejected books of accounts for simple reason that assessee has not considered security deposit deducted by Indian Railways in his books of accounts. But fact is that assessee has considered security deposit deducted by Indian Railways and kept under separate head security deposit (seignorage charges) , copies of which were furnished before A.O. As 7 ITA No.158&159/Vizag/2014 Shri Akkina Muni Koteswara Rao, Rajahmundry regards sub contract of supply contract to partnership firm, assessee has given reason that concerned firm had relevant experience and equipments to handle such type of works contract. A.O. without pointing out any defects in books of accounts and also modus operandi of assessee, simply disbelieved sub contract agreement and estimated net profit of 10% which is incorrect. CIT(A) after considering explanations of assessee and relevant details rightly deleted additions made by A.O. towards estimation of net profit. We do not see any reasons to interfere with order of CIT(A) and hence we inclined to uphold CIT(A) order and reject appeal filed by revenue. 10. In result, appeals filed by revenue in ITA Nos.158 & 159/Vizag/2014 are dismissed. above order was pronounced in open court on 22nd Sept 16. Sd/- Sd/- (V. DURGA RAO) (G. MANJUNATHA) JUDICIAL MEMBER ACCOUNTANT MEMBER Visakhapatnam: Dated : 22.09.2016 VG/SPS 8 ITA No.158&159/Vizag/2014 Shri Akkina Muni Koteswara Rao, Rajahmundry Copy of order forwarded to:- 1. Appellant ACIT, Circle-1, Rajahmundry 2. Respondent Shri Akkina Muni Koteswara Rao, D.No.24-14-105, RV Nagar, Rajahmundry 3. CIT, Rajahmundry 4. CIT (A), Visakhapatnam 5. DR, ITAT, Visakhapatnam 6. Guard file BY ORDER // True Copy // 1 2 (Sr.Private Secretary) ITAT, VISAKHAPATNAM 9 ACIT, Circle-1, Rajahmundry v. Akkina Muni Koteswara Rao