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Section 263 in The Income- Tax Act, 1995
The Income- Tax Act, 1995
Section 145(3) in The Income- Tax Act, 1995
Section 269SS in The Income- Tax Act, 1995
Section 40A(3) in The Income- Tax Act, 1995

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Income Tax Appellate Tribunal - Jodhpur
Jain Construction Co., Jodhpur vs Assessee on 19 January, 2012

1

IN THE INCOME TAX APPELLATE TRIBUNAL

JODHPUR BENCH , JODHPUR

(BEFORE SHRI R.K.GUPTA AND SHRI N.L.KALRA)

ITA No. 106/ JU/2010

Assessment year : 2006-07

PAN: ADEFJ 1736 G

M/s. Jain Construction Co. Vs. The DCIT Sardarpura, Barmer Circle- Barmer (Appellant ) (Respondent)

Assessee by : Shri U.C. Jain

Department by : Shri R.K. Choubey

Date of hearing: 08-12-2011

Date of Pronouncement: 19-01-2012

ORDER

PER N.L. KALRA, AM:-

The assessee has filed an appeal against order of the ld. CIT, Jodhpur passed

u/s 263 on 12-01-2010 for the assessment year 2006-07.

2.1 The grounds of appeal raised by the assessee are as under:

''1. That on the facts and in the circumstances of the case, the order passed by ld. CIT -2, Jodhpur u/s 263 of Income Tax Act, 1961 is bad in law and bad in facts.

2. That on the facts and in the circumstances of the case, the order passed by ld. CIT -2, Jodhpur grossly erred in holding the assessment order passed by AO u/s 143(3) as erroneous and prejudicial to the interest of the revenue

3. That on the facts and in the circumstances of the case, the findings recorded by the ld. CIT -2, Jodhpur I his order u/s 263 are perverse and contrary to the material on record.

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4. That on the facts and in the circumstances of the case, the ld. CIT - 2 erred in issuing direction in respect of points which were neither subject matter of show cause notice u/s 263 nor for which any explanation was sought from assessee before issuing such direction to AO

5. That on the facts and in the circumstances of the case, the order passed by ld. CIT -2, Jodhpur is nothing but an act to frame the assessment order like AO which he could not have passed directly under the law and therefore, crossed scope of revision u/s 263.'

2.2 The assessee is engaged in the business of contract work of roads. Before we

consider the show cause notice issued u/s 263 of the Act., It will be useful to ascertain as

to what transpired in assessment proceeding.

(A) The AO has prepared a chart showing GP rate and NP rate of five assessment years including the assessment years under consideration

(B) Assessee has maintained cash book and ledger and no stock register is maintained.

(C) Assessee failed to give head wise break up of expense. Auditor has mentioned that there might be same personal expenses pertaining to partners

(D) Assessee has not maintained log book, wages register, attendance register.

(E) No complete expenses vouchers available in respect of labour, diesel, petrol, oil kersone, tyre tube, traveling etc. Hence there expenses are not subject to verification.

(F) No value of closing stock or work in progress shown.

(G) No register maintained to verify the consumption of material at different sites

(H) The ld AO held that results declared are not verifiable and AO invoked the provisions of section 145(3)

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(I) The AO after considering the past history applied GP rate of 12.5%

(J) Interest on FDR and interest on IT refund added after application of rates and made addition of R.s 3,00,68/-.

(K) Assessee has not charged interest ffom certain debtors and hence interest of R.s 1,40,762/- disallowed.

(L) Assessee claimed sale of one tractor & JCB machine JCB machine sold to one of the relatives of the contractor who provided such machine on hire to the assessee. AO disallowed a sum of Rs. 1,50,000/-

(M) Assessment made on an income of Rs. 80,18,813/- as against returned income of Rs. 67,83,280/-

2.3 The Id CIT issued show cause notice and this show cause has been reproduced by

Id CIT at pages 2 to 7 of the order. The points raised in show cause are as under:-

(1) Auditor has pointed out that it is not possible to verify that payments in respect of expenses are through accounts payee cheque or not. According to Id CIT issue should have been examined by AO

(2) Auditor pointed out that personal elements can not be ruled out in respect & certain expenses debited. The AO has not called for details and no verification made.

(3) AO has not verified that the assessee has controverted the provision of section 269SS from bank account. The ld CIT has noticed that assessee has made cash deposits in the bank accounts

(4) The AO vide query letter required the assessee to produce following details:-

(a) Produce stock register

(b) Details of all expenses

© Copy of accounts of transaction more than 5 lacs (d) Party wise purchase and sales above R.s 50,000/-. 4

((e) How the work in progress was valued.

The above details were not filed.

In trading account, a sum of Rs. 12,30,63,205/- debited for material, labour, salary, transportation, diesel, telephone, motor parts, loading, unloading, tyre, tube, entertainment. The details are not filed.

(5) The assessee stated that there is no closing stock or work in progress and such statement accepted without verification. The AO should have seen TDS certificate of subsequent year to see as to whether any work in progress was there at the end of year. (6) There are creditors in the balance sheet and the AO has not called for any confirmation. There may be outstanding wages.

2.4 The assessee filed reply vide letters dated 7.9.2009 and 21.9.2009. No books of

account or vouchers were produced before the ld CIT. The point wise reply is

summarized as under.

(1) The ld CIT (A) has upheld the rejection of books of accounts and hence no disallowance u/s 40A(3) can be made. The ld CIT held that issue at point no. 1 is not pressed

(2) Issue stated at point No.2 was not pressed by ld CIT as the order of AO has merged with order of CIT (A)

(3) Before the ld CIT, the assessee filed extracts of cash book to show that amounts were deposited out of cash in hand. The ld CIT held that the AO should have considered as the assessee build up substantial cash in hand. On this issue the ld CIT was of the opinion that the order is erroneous.

(4) In respect of point No.4, it was contended by assessee that order of AO has merged with order of ld CIT (A) and hence no addition can be made.

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2.5 This issue and other points have been elaborately discussed and it will be

useful to reproduce the finding of ld CIT

''I have given a careful consideration to the facts on record and it is found that no closing stock or work in progress has been declared in the trading account. The AO failed to verify the monthly expenditures on different items so as to arrive at a correct quantum of closing stock or work in progress. The facts on record reveal that the assessee failed to declare any closing stock of raw materials and/or work in progress. The AO failed to look into the above aspect of work. No verifications were made with reference to purchases of materials and labor charges vis-a-vis completion/part completion of different contracts. It would be against the provisions of law to argue that the addition as made by the AO by applying a particular rate of profit also covered the issue of non disclosure of closing stock of raw materials and/or work in progress. Application of NP rate is strictly and exclusively with reference to gross receipts/ gross sales and it has nothing to do with non disclosure or disclosure of closing stock of raw materials and/or work in progress. A separate addition is to be made, if called for, for non/part disclosure of closing stock of raw materials and/or work in progress. For instance, if an assessee purchases goods worth Rs.10 lacs on the last day of the accounting year, but declares closing stock of Rs.2 lacs only and suppresses closing stock of Rs.8 lacs, a separate addition of Rs.8 lacs is to be made. Take another example where there is an opening stock as also purchases but no sales are declared. The closing stock as declared is found substantially suppressed by the AO. There are no evidences available for unaccounted sales. The assessee fails to produce books of accounts before the AO and the AO applies provisions of Section 145(3). No addition on account of application of a particular GP/NP rate can be made as the sales are nil. Whether under such circumstances no addition on account of suppression of 6

stock can be made? If the contention of the assessee is accepted, it would imply that the assessee would go scot-free without any addition which in my opinion would be an incorrect, unjustified approach, both from the angle of accountancy as also general logic and common sense. Thus, a separate addition on account of suppression of closing stock can always be made even after rejection of books of accounts and application of a particular GP/NP rate. Reverting back of the discussion, it is found that it normally takes 30 to 45 days for receipt of cheque after intimation of completion of work to the contractee. When a particular work is completed, the contractor gives a detailed bill to the PWD/ contractee for payment. On receipt of such bill, the PWD authority/ contractee goes to the site and measures the actual work done including that of quality. A report is thereafter sent and the bill is screened. The bill passes through several authorities before a cheque is finally issued. All these procedures take at least a month. Under such circumstances, in contractors' cases, the expenditures incurred in the last month normally becomes the closing work in progress. However, in the instant case, the AO failed to do any such exercise to determine the correct quantum of closing work in progress or closing stock of raw materials. The AO further failed to verify the return of the AY 2007- 08 to find out the TDS certificates issued in the month of April, 2006. The TDS certificates issued in April, 2006 would mean that such works were more or less completed in March, 2006 and therefore, the same should have been reflected as closing WIP in the AY 2006-07. No such exercise was made by the AO. In nutshell, the nil closing WIP/raw material declared by the assessee was accepted by the AO with closed eyes. No verification at all was made by the AO nor any question was raised by the AO during the course of entire assessment proceedings which was admittedly called for on the given facts of the case. No stock register for consumption of various raw materials was maintained by the assessee. Even if for 7

the time being, the contention of the assessee is accepted that addition made by applying a flat NP rate would also cover the discrepancy, if any, in closing stock/WIP, the AO was required to look into as to whether it would be more beneficial to the revenue to make addition by applying a flat NP rate or by making specific addition of closing work in progress/raw materials. The AO cannot adopt a path which is detrimental to the interest of revenue. He is required to analyze the case from all angles and choose a path which favours the interest of revenue. The above discussion further shows that the assessment was completed in hurry and haste without looking into the facts and without making any inquiries which were admittedly called for on the given facts of the present case before me on hand.

The trading accounts as filed along with the return shows that the same is debited by a lump sum amount as below:

Particulars Amount (Rs.) Particulars Amount (Rs.) To Work expenses Rs.12,30,63,205/- By Works receipts Rs. 8,87,82,304 material, labour,

salary, By sublet work Rs.5,13,96,741 transportation,

diesel, telephone,

motor parts, loading,

unloading, mess,

tyre tube,

entertainment

To Gross profit Rs.1,71,15,840

Total Rs.14,01,79,045 Rs.14,01,79,045

It is observed that the neither the return nor the audit report contain any bifurcation of the expenditures incurred under the various heads such as material, labour, salary, 8

transportation, diesel, telephone, motor parts, loading, unloading, mess, tyre tube, entertainment. Though the AO vide query no. 6 specifically directed the assessee to furnish the details of all expenses but the same was never complied with nor filed by the assessee nor the AO ever reminded the assessee that the requirement has not been complied with. In spite of that, the AO proceeded to complete the assessment. This shows the carelessness and negligent attitude of the AO. The question of making any inquiry or investigation did not arise for the reason that the preliminary details of various expenses remained to be furnished by the assessee. I believe that had the details been furnished by the assessee, the AO would have made at least some inquiries. During the course of such investigations/inquiries, the AO could have come across instances of bogus expenditures as also instances where expenditures were incurred out of books. Under such circumstance, the AO would have admittedly applied a higher NP rate as also made addition u/s 69A or 69B or 69C, as the case may be. The assessee was also duty bound to supply the relevant details of expenses as asked for by the AO. In any event, it is a fact that the assessment was completed without bringing such most important details on record and therefore, I have every reason to hold that the assessment was made in undue hurry, haste and without making any inquiries.

The assessee failed to file copy of accounts of all transactions of more than Rs.5 lacs though specifically asked for by the AO during the course of assessment proceedings. However, the assessment was completed though the requirement was not complied with. Had the AO insisted upon the assessee to file the relevant details and thereafter made inquiries, he could have and might have noticed cases of merely obtaining bills without supply of materials or cases 9

of bogus purchases or cases where purchases were made totally out of books. In any case, the point to be impressed upon is that the assessee by not filing the required details prevented the AO from making desired inquiries, if any, emanating from the copies of transactions of more than Rs.5 lacs. Surprisingly, the AO also did not remind the assessee to file the details and on the contrary with a careless approach, proceeded to complete the assessment. Therefore, I have every reason to hold that the assessment was made in undue hurry, haste and without making required inquiries.

In similar fashion as discussed above, the assessee failed to file copy of accounts party-wise of purchases above Rs.50,000/- though specifically asked for by the AO during the course of assessment proceedings. However, the assessment was completed though the requirement was not complied with. Had the AO insisted upon the assessee to file the relevant details and thereafter made inquiries, he could have noticed cases of merely obtaining bills without supply of materials or cases of bogus purchases or cases where purchases were made totally out of books. In any case, the point to be impressed upon is that the assessee by not filing the required details prevented the AO from making desired additions, if any, emanating from the investigations. Surprisingly, the AO also did not remind the assessee to file the details and on the contrary with a careless approach, proceeded to complete the assessment. Therefore, I have every reason to hold that the assessment was made in undue hurry, haste and without making any inquiries.

The above discussion amply shows that the assessment order so passed by the AO is erroneous as also prejudicial to the interest of revenue and therefore, the same is set-aside to 10

the extent as above. The AO shall thoroughly verify and investigate the issue of closing stock of raw material and work in progress and take action as per law. He shall also investigate the purchases with reference to genuineness and purchases made outside the books of accounts and pass a well reasoned fresh assessment order. He shall also investigate as to whether expenditures have been claimed under all heads which are normally required and incurred in the case of road construction or other contract works as entered into by the assessee. It is found that in few cases, some of the expenditures so incurred are not entered in the books on account of non-availability of bill or shortage of cash on hand etc. etc. whereas other expenditures are inflated so as to give a balancing approach. Needless to mention that the AO shall provide an opportunity of being heard to the assessee in the matter.

8. In respect of issue stated at para P-5 of this office show cause notice u/s 263 dated 06.03.2009, it is submitted by the assessee before me that the AO rejected the books of accounts and applied provisions of Section 145(3). The said rejection u/s 145(3) was upheld by the ld. CIT(A). Thus, the assessment order has merged into the appellate order and no disallowance/addition on account of closing stock or work in progress could be made now.

I have given a careful consideration to the entire material facts and it is found that during the course of assessment proceedings, the assessee stated that there is no closing stock or closing work in progress for the reason that all the works were completed. The AO accepted the statement without any verification. No verifications were made with the contractees in this regard. The A.O. also failed to look into the expenditures on different items date wise and correlate the same with the date of contract receipts 11

amounts to arrive at a correct conclusion regarding closing stock of materials and closing work in progress. The A.O. further failed to verify the TDS certificates annexed with the return of A.Y. 2007-08. If in the return for A.Y. 2007-08, any TDS certificate showed receipt of amounts in the month of April or May 2006, it would mean that bills for the same were submitted by the assessee in March 2006 and under such circumstances the same should have been shown as closing work in progress. Normally, there is a time lag of one to two months between presentation of bill to the PWD and receipt of amount by the contractor. The AO also failed to verify as to whether any of the contracts continued in the next year. The TDS certificate of Rs.2,19,96,512/- issued by PWD, Jaisalmer reveals payments of VI running bill on 28.03.06 for Rs.21,75,418/-. This admittedly shows that it was a running contract and therefore, should have some closing stock of materials/closing work in progress. Had the AO verified the purchases date wise, he would have quantified the closing stock of materials/closing work in progress. Similar is the case with M/s NG projects Ltd. who made substantial payments (Rs.27,09,199 + Rs.6,35,200 + Rs.8,14,046 + Rs.2,31,889/-) on 31.03.06 to the assessee. Here again it was a running contract. Similarly, M/s. B Ratan & Co. paid a sum of Rs. 4,34,244/- and Rs.12,65,435/- on 29.03.06 to the assessee. The AO failed to make any verification as to whether the contract with M/s B Ratan & Co. was a running contract which spread over to the next year. Likewise, it is also observed from the TDS certificates placed on records that M/s Cairns Energy India Pvt. Ltd., PWD Barmer and PWD Jalore paid a sum of Rs.7,41,896/-, Rs.2,10,559/- and Rs.21,36,082/- on 29.03.06 and 31.03.06, respectively. As mentioned above, no verifications were made with reference to closing stock of materials/closing work in progress. In any event, these facts suggest that the contracts continued and therefore, the assessee had certain quantum of closing stock of materials/closing work in progress. The 12

AO also failed to verify the purchases made and wages incurred in the month of March, 2006 to ascertain the closing stock of materials as also work in progress. All the above facts goes to prove that the assessment was made in undue hurry and without making any enquires. The point to be noted here is that there is apparent and substantial suppression of closing stock and had the AO substituted the correct figure of closing stock/work in progress, he would have ended up with a much more addition than the addition made by him after rejecting the books of accounts and applying a particular NP rate. I have already discussed earlier that closing stock is an integral part of accounts and any deviation therein changes the profit. In other words, if an addition is made by rejecting the books, yet the AO is required to and legally bound to substitute the figure of closing stock etc. as disclosed by the assessee with the correct figure.

The above discussion amply shows that the assessment order so passed by the AO is erroneous as also prejudicial to the interest of revenue and therefore, the same is set-aside to the extent as above. The AO shall thoroughly verify and investigate the issue of closing stock of raw material and work in progress and take action as per law.

9. In respect of issue stated at para P-6 of this office show cause notice u/s 263 dated 06.03.2009, it is submitted by the assessee before me that the AO rejected the books of accounts and applied provisions of Section 145(3). The said rejection u/s 145(3) was upheld by the ld. CIT(A). Thus, the assessment order has merged into the appellate order and no addition on account of sundry creditors mentioned in the balance sheet could be made now.

I have given a careful consideration to the entire material facts on record and it is found that the assessee has shown following sundry creditors in its balance sheet as on 31.03.2006: 13

Madan Lal Gurjar Rs.1,50,000/-

Girdhari Lal Sharma Rs.1,50,000/-

Kamal Gandhi Rs.1,00,000/-

Kalu Ram Rs.1,00,000/-

Naina Ram Rs.1,00,000/-

Thakara Ram Rs.1,00,000/-

Chutra Ram Rs.1,00,000/-

Dalu Ram Rs.1,00,000/-

Harkha Ram Rs.1,00,000/-

Khet Dan (JCB) Rs.1,00,000/-

Kheta Ram Rs.1,00,000/-

Purkha Ram Rs.1,00,000/-

Thana Ram Rs.1,00,000/-

Anil Gong Rs.1,00,000/-

Prakash Chand Rs.50,000/-

Sona Ram Rs.1,00,000/-

Dipa Ram Rs.50,000/-

Jai Ram Rs.50,000/-

Tulsa Ram Rs.50,000/-

Chetan Ram Rs.50,000/-

Labhu Ram Rs.50,000/-

No confirmations in the matter were asked for by the AO during the course of assessment proceedings. In fact, not even a question was raised by the AO nor any explanation was ever filed by the assessee. The outstanding sums in round figures must have and should have prompted the AO to make enquiries. The AO did not enquire as to what is the nature of credits i.e. whether they represent outstanding in respect of purchases or outstanding wages or they represent loan entries. I disagree with the contention of the assessee that if the books of accounts are rejected, no addition on account of cash credit 14

can be made. For instance, if an assessee files a return of income showing income below taxable limit or for that matter above the taxable limit and it also introduces crores of non- genuine loans/credits in its books of accounts and at the time of assessment, books etc. are not produced resulting into application of provisions of Section 145 and making some addition to the trading results by looking into past records or comparable cases. Whether under such circumstances, no addition could be made on account of such huge cash credits introduced in the books with ulterior motive? If the contention of the assessee is accepted, every assessee would indulge in this practice and it would be a very easy way of introducing the concealed income in the guise of cash credits. Besides that, addition on the basis of GP/NP rate after rejecting the books represents "income from business" whereas addition on account of cash credits represents "deemed income" and therefore, the two are entirely different without any overlapping. In this regard, it would be useful to refer to the decision of the Hon'ble Supreme Court in the case of Kale Khan Mohd. Hanif Vs. CIT reported in 50 ITR 1, wherein it has been observed that cash credit can be assessed even when business income is estimated. This view was again reiterated by the Apex Court in the case of CIT Vs. Devi prasad Vishvanath Prasad (72 ITR 194). Besides that, decisions reported in 38 ITR 188, 120 ITR 294, 28 ITR 713 and 40 ITR 590 clearly supports the above view.

Coming back to the issue, it appears that the above figures represent outstanding wages payable. If so, the credits appear to be out rightly non genuine for the reason that the total annual wages payable to a person could not have exceeded Rs. 36,000/- (Majduri Rate of 100 per day for 360 15

days). Further, a Majdur is hand to mouth and he would always require payments every 15 days or so which is a prevalent market practice also in contract business. If the figures represent outstanding wages to supervisors or Thekedars, it is observed that tax was liable to deducted while making payments to such sub-contractors or Thekedars and since no tax was deducted, the entire payments to such sub- Contractors and Thekedars were liable to be disallowed u/s 40(a)(ia). All the above facts go to prove that the assessment was made in undue hurry and without making any inquiries.

In the light of the above, it requires to be concluded that the assessment order so passed by the AO is erroneous as also prejudicial to the interest of revenue. The assessment order to the extent as above is set aside with a direction to the AO to make the assessment afresh after making required investigations as stated above and as deemed fit by him.

10. It is found that the assessee in the balance sheet had shown investment in NSC of Rs.4,50,000/-. However, no interest income on the same has been shown. The AO also failed to inquire as to when the investment in NSC was made and the quantum of interest accrued or received by the assessee. Thus, the inquiry which was required, remained to be made by the AO and consequently, the assessment is to be treated as erroneous as also prejudicial to the interest of revenue.

11. It is found that the AO while estimating and applying a net profit rate, has allowed deduction of interest paid to third parties which is contrary to the principle laid down by the Hon'ble Rajasthan High Court in its decision 16

dated 03.07.2008 in the case of M/s. Jhanwar Lal Vs. ITO, Bikaner & Ors. In the said decision, it has been held that interest paid to third parties is not allowable when profit rate is estimated. Admittedly, under such circumstances, the assessment requires to be treated as erroneous as also prejudicial to the interest of revenue.

12. It is found that the AO after rejecting the books u/s 145(3) applied GP rate of 12.5% on contract receipts of Rs.14,01,79,045/-. It implies that the AO rejected the books in respect of all items of expenditure relating to trading account but accepted as correct all items of expenditure debited to P&L account. It is not understood as to how the AO adopted the above standards. It is incorrect as also unjustified to treat some of the expenditures debited in the books as correct and some as incorrect/unreliable. The books of accounts cannot be rejected in part. Once books are rejected, it means that the entire books are not reliable in so far as business income is concerned. Therefore, the AO admittedly erred as discussed above and the assessment is to be treated as erroneous as also prejudicial to the interest of revenue.

13. Perusal of the details of sundry creditors shows some of the amounts as below:

Shiv Shakti Roadlines Rs.2,65,796/- Ritu Roadlines Rs.1,27,673/- Bherav Const. Co. Rs. 4,49,868/- Khatri Maga Ram Bhoorchand Rs.2,35,000/- Hasti Mal Mohan Lal Rs.23,78,638/- Puroshtam Das Jagdish Chand Rs.2,21,000/- Bhanwar Lal Mufat Lal Rs.6,75,239/- 17

The AO failed to even ask for any question as to what for the above liabilities are reflected in the balance sheet leave aside directing the assessee to furnish confirmatory letters and the purpose of such credits (to verify the genuineness of the credit entries). Whether the above entries represents any contract on account of transportation or construction etc. and whether tax was deducted (to verify applicability of Section 40(a)(ia))? Failure to make inquiries as above has made the assessment as erroneous as also prejudicial to the interest of revenue and accordingly, the assessment is set aside u/s 263 with the AO to pass a fresh assessment order after making in-depth investigations

14. I deem it necessary to refer to the decision of Hon'ble Karnataka High Court in the case of Thalibai F. Jain Vs. ITO (101 ITR 1) wherein it was held that the assessment made in undue haste or without enquiry is prejudicial to the interests of the revenue, and what is prejudicial to the interests of the revenue must be held as erroneous. In the case of CIT Vs. Pushpa Devi (164 ITR 639), it has been held by the Hon'ble Patna High Court that if enquiry into the source of the initial capital is crucial for the ITO and if that is not done, the assessment is bound to be erroneous and hence prejudicial to the revenue. Similar views have been expressed by the Hon'ble Delhi High Court in the case of Gee Vee Enterprises Vs. Addl. CIT (99 ITR 375) holding that the Commissioner can regard the AO's order as erroneous on the ground that in the circumstances of the case the AO should have made further enquiries before accepting the statements made by the assessee in his return.

15. To sum up, I hold that the assessment order under reference is erroneous as also prejudicial to the interest of revenue to the extent as stated above in the preceding paragraphs. The 18

assessment order is accordingly set aside with the direction to the AO to examine the issues as mentioned above afresh, make in-depth investigations and pass a well reasoned fresh order depending upon the facts, inquiries, investigations and legal aspects of the case. ''

2.6 Before us the ld A/R has filed written submissions and these are reproduced as

under:-

4. That the ld AO completed the assessment after due enquiry and passed the assessment order on 28-03-2008 and assessed the total income of Rs. 80,18,813 by making further addition of Rs 997983/- under following heads:-

a] Rejected the books of accounts and invoked the provisions of section 145(3) of the Act and computed the income by applying gross profit rate of 12.5% on the contract receipts and made an addition of Rs. 4,06,540/

b] Interest received on FDRs & KVP treated as income from other sources amounting to Rs.

3,00,681/-

c] Disallowances of interest amounting to Rs 1,40,762/- as the has not charged interest from debtors.

d] Lump sum addition of Rs 1,50,000/-

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5. As the addition made by AO were contrary to the well settled law the appellant firm preferred an appeal before CIT(A) Jodhpur on 16-04-2008.

6. That appeal filed by the appellant firm was heard by the then CIT(A) Jodhpur from time to time. The additions made by AO was eligible for deletion in light of decisions of CIT(A) and Hon'ble Tribunal in other cases on similar facts, yet the ld CIT(A) rather deleting the additions issued a show cause notice u/s 251(1)(a) of I.T. Act 1961 for enhancing the income on the issue of deduction allowed by AO in respect of sub-let commission paid to main contractor which was allowed by AO as a separate deduction while computing taxable income in light of decisions taken in earlier years in the appellant case as well as in other cases of contractor.

7. That on 29-09-2008 a detail reply to the show cause notice of enhancement was filed before CIT(A) Jodhpur. The appeal thereafter was fixed from time to time and the hearing of appeal was concluded on 16-06- 2009.

8. That on 09-09-2009 the appellant firm received the copy of order passed by ld CIT(A), Jodhpur. Though in the appellant case the claim of sub-letting commission paid to the main contractor was held to be allowable separately in the preceding years by the AO whenever the contracts were obtained by it from other parties and claim so allowed by AO was never disputed by the same CIT(A) while hearing and deciding the appeals for the proceeding assessment years 2003-04 [Appeal No. 248/2005-06] and for the assessment year 2005-06 20

[Appeal No. 306/2006-07] however such claim was disputed by the same ld CIT(A) for the first time while hearing the appeal for the assessment year under consideration.

9 That in the assessment year 1993-94 while passing the assessment order u/s 143(3) the AO applied a profit rate of 12.5% and allowed the deduction from the income so computed: -

a) Depreciation.

b) Interest paid to third parties.

c) nterest paid to partners as per terms of partnership deed.

d) Salary paid to partners as per terms of partnership.

10. That the assessment order so passed was considered by ld CIT as erroneous and prejudicial to the interest of revenue and as such the same was cancelled u/s 263.

11. That even after assessment order having set aside by ld CIT the AAC before whom the assessee filed appeal against the estimation of rate enhanced the income by disallowing the claim allowed by AO.

12. That assessee preferred appeals before Hon'ble ITAT against the order u/s 263 as well as against the order enhancing the income by disallowing the claim of 21

depreciation, interest paid to third parties and interest & salary paid to partners as per terms of partnership deed.

13. That Hon'ble Tribunal in the appeal against the order u/s 263 cancelled the order of ld CIT u/s 263 holding that the AO has rightly allowed the claim of depreciation, interest paid to third parties and interest and salary paid to partners as per terms of partnership deed.

14. That against the order of Hon'ble ITAT the department filed reference before the Hon'ble Rajasthan High Court which was rejected. The decision of Hon'ble Rajasthan High Court is reported in 257 ITR 753 (Raj).

15. That the assessee's appeal against the order of AAC enhancing the income by disallowing the claim of depreciation, interest paid to third parties and interest and salary paid to partners was also allowed by the Hon'ble Tribunal by reversing the order of ld CIT.

16. That department also filed reference application against the order of Hon'ble Tribunal which was also dismissed. The judgment of Hon'ble Rajasthan High Court is reported in 245 ITR 527 (Raj).

17. That after the decision of Hon'ble Rajasthan High Court the ld AO while passing the assessment order for the assessment year 1994-95 to 2008-09 allowed the following claims even in the orders passed u/s 143(3).

(a) Depreciation.

(b) Interest paid to third parties.

© Subletting Commission

22

(d) Interest paid to partners as per terms of partnership deed.

(e) Salary paid to partners as per the terms of partnership deed.

18. That after the assessment year 1994-95 the ld CIT (A) for the first time in the assessment year 2006-07 in the order u/s 263 directed the AO to disallow the claim of interest paid to third parties. This direction was issued without raising the issue in show cause notice u/s 263 and as such the order of ld CIT u/s 263 on this issue is without jurisdiction as held by Hon'ble Delhi High Court in the case of CIT v/s Contimeters Electricals (P) Ltd reported in 317 ITR 249 (Del).

19. Further while issuing the direction to disallow claim of interest to third party by placing reliance on the decision of Hon'ble Rajasthan High Court in the case of Jhanwarlal v/s ITO, Bikaner [CIT order para II Page 18] is also erroneous as in this case which is reported in 321 ITR Page 400 no such question was raised nor deliberated or decided by Hon'ble High Court as understood by ld CIT.

20. That on 12-01-2010 the ld CIT set aside the assessment order passed by the ld AO with a direction to make further enquiries in detail and pass a fresh order. In the order u/s 263 the ld CIT has not disputed the application of provisions of section 145(3) and also the rate of profit applied by AO for computing the income from contract business.

23

21. Pending the appeal before Hon'ble Tribunal against the order of the ld CIT u/s 263 the ld AO passed a fresh assessment order in light of the direction issued by the ld CIT by making additions under the following heads which was desired to be made by AO while setting aside the assessment order. The copy of the assessment order is available at paper book page No. 53 to 60 (P.B. 60, relevant Page- P.B. 60)

(a)Disallowances u/s 40(a)(ia) Rs. 34,78,276/- (b)Disallowances of interest paid to Rs. 32,82,530/- third party

© Interest on NSC, FDR etc Rs. 3,34,411/-

Having discussed the facts of the case I would like to submit on each ground of appeal raised in memo of appeal.

GROUNDS OF APPEAL

1] Regarding grounds of appeal No. 1 & 2: -

(a) That the reasons recorded by the ld CIT while setting aside the assessment order u/s 263 can broadly be divided under the following heads

(i) Relating to violation of provisions of 40A(3) [P 1]

(ii) Relating to non-examination of element of personal use of expenditure under the head

traveling, rasoda and entertainment. [P 2]

24

(iii) Relating to non-examination of applicability of sec 269SS on account of deposit in cash in the bank a/c [P 3]

(iv) Relating to non-filing of details of

expenditure incurred by the assessee and non- furnishing of copy of a/c of transaction with parties above Rs. 5 Lac. [P 4]

(v) Relating to non examination of issue of closing stock [P 5]

(vi) Relating to failure of AO to obtain

confirmation of a/c from the parties in whose names amounts are shown as out standing and application of provisions of sec 40(a)(1a).

(b) That reasons recorded in the show cause notice at S. No. 1, 2, 4, 5 and 6 are related to the computation of income from contract business. In the appellant case the AO rejected the books of accounts and applied the provisions of sec 145(3). The rejection of books of accounts was up held by CIT(A) in his order dated 18-08-2009 in Appeal No. 9/2008-09. The ld CIT(A) also up held the trading addition and application of profit rate adopted by AO. In such a situation when the books of accounts are rejected and income was estimated by AO after applying nett profit rate and income so determined is confirmed by CIT(A) the issues covered by Para No. 1, 2, 4, 5 and 6 of show cause notice which relates to contract account will not survive while exercising powers u/s 263 as all the issues raised relates to computation of income from contract business and are merged in the order of CIT(A). Not only this when the books of accounts are rejected and income is computed by application of nett profit rate then the same books of 25

accounts cannot be considered either for application of provision of sec 40A(3) or for making disallowances separately on a/c of personal element of expenditure in respect of traveling or rasoda or valuation of closing stock or disallowances u/s 40(a) (1a). In light of above Point No. 1, 2, 4, 5 & 6 raised in the show cause notice are out side the scope of sec 263 as: -

(i) All the issues raised relates to trading a/c / Computation of income from contract.

(ii) Trading results stood confirmed by CIT(A). (iii) Issue stand merged in the order of CIT(A).

Further the law is well settled that when the books of accounts are rejected and profit is estimated by application of nett profit rate then no separate disallowances or addition can made on the basis of same books of accounts.

Reliance is placed on the following judgment: -

i. CIT v/s Bhanwar Lal Bansi Dhar

229 ITR 229 (All)

ii. ITO v/s Shri Sawai Singh (ITAT, Jodhpur Bench) ITA No. 321 & 330/JU/02 dated 17-03- 2006 [Copy enclosed]

iii. Smt. Kallu Devi v/s ITO( ITA No. 89/JP/99 dated 10-01-2005

26

a] That amount out standing in the names of persons shown in Para 6 relates to outstanding amount in respect of expenditure incurred for execution of contracts and payment is due to them in respect of expenditure incurred for plying of J.C.B., suppliers of grit, sand, stone and out standing labors appellant through particular Jamadar. No cash deposit was received by the firm from any one and AO has examined this fact during the assessment proceedings with reference to books of accounts. Further in respect of such out standing expenditure provisions of sec 68 are not applicable in light of decision of Hon'ble Rajasthan High in the case of CIT v/s G.K. Contractors reported in 19 DTR Page 305. [A copy of which is enclosed herewith]

b] That amounts deposited in bank a/c are not out of any cash borrowings so as to attract provision of sec 269SS but are out of cash in hand in the books of accounts and all the entries are recorded in the books of accounts. The AO had examined the books of accounts and verified the same on test check. Further if the credits in bank accounts are on a/c of cash loan received then the loan amount must have appeared in the balance sheet and in absence of any cash credits the presumption drawn is patently erroneous. However I am herewith filing relevant copies of cash book and the details of cash deposited in bank accounts which are out of cash in hand and was mostly on account of withdrawals from one a/c and deposit in other account.

c] The perusal of the order passed u/s 263 shows that the order has been set aside merely on the ground of allegation of lack of enquiry. There is no definite finding about the errors or prejudiced caused to the Revenue. Further it appears from the body of the order that the ld CIT simply wants detailed enquiries and investigation of the case as per his own wisdom.

d] That the ld CIT in his order has not disputed the rejection of books of accounts and the application of net profit rate as applied by the ld AO. In the case of the assessee the consistent mode of 27

computation of income from contract business is the application of net profit rate on the gross contract receipts after exclusion of amount deducted by Government Authorities from the gross contract receipt and from the profit so derived is further subject to deduction on account of depreciation, interest and salary paid to partners as per terms of partnership deed and the interest paid to the third parties. This system of computation of income has been upheld by the Hon'ble Tribunal and also the Hon'ble Rajasthan High Court.

e] That when the Assessing Officer passed the assessment order and computed the income as per the previous history of the case which has been accepted by the ld CIT (A), Hon'ble Tribunal and the jurisdictional High Courts than such order cannot be branded as erroneous or prejudicial to the interest of Revenue. The majority of points considered by the ld CIT for branding the assessment order as erroneous or prejudicial to the interest of Revenue are related to items of contract account. It is settled law that once the books of accounts are rejected and income is computed by application of particular rate of profit than the same books cannot be made a basis for making further addition in respect of expenditures which are the part of contract account.

To support my submission I relying on the following decisions: -

(i) CIT V/s Leisure wear exports Ltd. reported in 46 DTR 97 (Delhi)

(P.B. 40 to 52)

The power of revision is not meant to be exercised for the purpose of directing the AO to hold another investigation without describing as to how the order of the AO is erroneous.

(ii) CIT v/s Gabria India Ltd., reported 203 ITR 108 (Hon'ble Bombay High Court )

28

15.......... Moreover, in the instant case, the Commissioner himself, even after initiating proceedings for revision and hearing the assessee, could not say that the allowance of the claim of the assessee was erroneous and that the expenditure was not revenue expenditure but an expenditure of capital nature. He simply asked the ITO to reexamine the matter. That, in our opinion, is not permissible. Further, inquiry and/or fresh determination can be directed by the Commissioner only after coming to a conclusion that the earlier finding of the ITO was erroneous and prejudicial to the interest of the Revenue.

(iii) CIT V/s Jai Marwar Wine Contractors Reported in 251 ITR 785 (RAJASTHAN)

8. The very fact that CIT is required to make an order after affording an opportunity of hearing to the assessee ingrains in the process the requirement of recording reasons for its conclusion, as is necessary for any quasi judicial order required to be made by a quasi judicial authority. It cannot be doubted nor it has been questioned that orders under s. 263 bears stamps of quasi judicial nature and require to be supported by reasons for its conclusion. Necessary consequence is that while passing the order revising an order passed by subordinate officer of the rank of ITO or Asstt. CIT, the CIT must record reasons in support of his conclusion that the order is revised being erroneous and that it would be prejudicial to interests of Revenue due to such erroneousness.

9. If the order is tested on aforesaid anvil, it is apparent that the CIT has recorded his satisfaction before issuance of notice to the assessee, that having believed that the order is erroneous and prejudicial to interest of the Revenue, he issued to assessee notice for giving an opportunity of hearing but the order is unequivocally silent after notice was given to the assessee and he was heard, to record any finding as a result of such hearing whether order of the ITO holding the firm to be genuine is erroneous in any manner or it is prejudicial to the interests of the Revenue. When no finding has been recorded, it is very 29

difficult to assume that CIT must have arrived at finding as to erroneous nature of the order sought to be revised, or if such order is allowed to stand would be prejudicial to interests of the Revenue.

(iv) Singhal Builders Contractor v/s Addl. CIT (ITAT Jaipur Bench) reported in 133 TTJ 102 (P.B. Page 29 to 32)

(v) Ahalya Trading (P) Ltd. v/s CIT (ITAT Mumbai Bench) reported in 22 SOT 68 (P.B. Page 33 to 39)

(vi) CIT V/s Vikash Polymers 194 Taxman 57 (Delhi)

It is also trite that there is a fine though subtle distinction between "lack of inquiry" and "inadequate inquiry". It is only in cases of "lack of inquiry" that the CIT is empowered to exercise his revisional powers by calling for and examining the records of any proceedings under the Act and passing orders thereon. In Gabrial India Ltd. (supra), it was expressly observed :

"The CIT cannot initiate proceedings with a view to starting fishing and roving enquiries in matters or orders which are already concluded. Such action will be against the well- accepted policy of law that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce, repose in and set at rest judicial and quasi judicial controversies as it must in other spheres of human activity [see Parashuram Pottery Works Co. Ltd. vs. ITO 1977 CTR (SC) 32 : (1977) 106 ITR 1 (SC)]."

(vii) CIT v/s Mangilal Didwania, 286 ITR 126 (Raj) (viii) CIT v/s Ratanchand Jain, 230 ITR 693 (MP) (ix) CIT v/s R.K. Construction Co., 313 ITR 65 (Guj) (x) CIT v/s Jain Construction Co. & Ors., 245 ITR 527 (Raj) (xi) Dhruv N. Shah v/s D.C.I.T., 88 ITD 118 (Mumbai)(TM) (xii) Allied Engineers v/s CIT, 180 Taxman Page 70 30

(xiii) On the similar facts the ld CIT-2, Jodhpur set aside the assessment u/s 263 which was quashed by Hon'ble ITAT, Jodhpur Bench in the case of Amritlal Khatri v/s DCIT, Barmer ITA No. 233/Ju/2009 dated 19-07-2010. The Hon'ble Tribunal held as under [Para 11 P.B. 69-70]: -

"11. For effective adjudication of this appeal the provision continued in section 263 is most relevant. As can be seen from the said provision it is found that the power of suomotto revision under sub-section 1 of section 263 of IT Act is in the nature of supervisory jurisdiction which can be exercised only if the order of the Assessing Officer is found erroneous and is also resulting in prejudice to the interest of revenue. These two circumstances must necessarily exist to empower the Commissioner to exercise the power of revision under this section. Any order of the Assessing Officer cannot be termed as erroneous unless it is not in accordance with law. It necessarily implies that if the order passed by the Assessing Officer is in accordance with law applicable thereto, the same cannot be branded as erroneous. On perusal of the records the CIT may be of the opinion that the estimate by the officer concerned is on the lower side and left to the Commissioner to estimate the income at higher figure than determined by the ITO. That would not vest the Commissioner with power to reexamine the accounts and determine the income himself at higher figure. This is because the ITO is exercising the quasi judicial power rested with him in accordance with law and arriving at a conclusion and such a conclusion cannot be termed to be erroneous simply because the CIT does not feel satisfied with the conclusion reached by the ITO. In such a case in the opinion of the Commissioner the order is prejudicial to the interest of revenue but that by itself would not be enough to vest the Commissioner with the power of suo-motto revision because the first requirement namely that the order is erroneous, is absent. Similarly if the order is erroneous but not prejudicial to the interest of revenue, then the power of the suo-motto revision cannot be exercised. 31

Therefore the twin ingredients of 1) order being erroneous and 2) prejudicial to the interest of revenue must necessarily exist for empowering the CIT to invoke provisions u/s 263 (1). Further more the CIT is not having any power u/s 263 to direct the Assessing Officer to make a fishing and roving inquiries. It was so held by the Hon'ble Bombay High Court in the case of CIT v/s Gabria India Ltd., reported in 203 ITR 108, and of the present impugned order is analyzed in the light of the decision of the Hon'ble Bombay High Court stated supra, it is found that the CIT has nowhere observed that the order passed by the Assessing Officer is prejudicial to the interests of the revenue and he simply directed the Assessing Officer to make detailed inquiries and investigations and pass consequential orders as per law. Therefore we are of the considered view that the impugned order passed by the CIT is not sustainable for legal scrutiny and accordingly the same is hereby set aside by allowing the issues raised by the assessee in this appeal."

2. As regards grounds of appeal No. 3 to 5 : -

That the reasons recorded by the ld CIT-2, Jodhpur in his order u/s 263 dated 24-12-2009 for considering the assessment order passed by ld AO as erroneous and prejudicial to the interest of Revenue can be broadly divided under the following categories:

(a) Relating to non-examination of applicability of sec 269SS on account of deposit in cash in the bank a/c.

(b) Relating to non-filing of details of expenditure incurred by the assessee and non-furnishing of copy of a/c of transaction with parties above Rs. 5 Lac.

© Relating to non examination of issue of closing stock. 32

(d) Relating to failure of AO to obtain confirmation of a/c from the parties in whose names amounts are shown as out standing and application of provisions of sec 40(a)(1a).

(e) Relating to non examination of interest income from NSE of Rs. 4,50,000/- shown in balance sheet.

(f) Relating to deduction of interest paid to third party which is contrary to the decision of Hon'ble Rajasthan High Court in the case of Jhanwar lal v/s ITO, Bikaner, 321 ITR 400. [Not a issue in show cause notice]

(g) Relating to failure of AO to obtain confirmation of a/c from the creditors which are shown as out standing and application of provisions of sec 40(a)(1a).

a] As regards issues which are related to expenditure which are part of contract account and for which AO rejected the books of accounts and applied provisions of section 145(3) which stood confirmed by CIT(A) and as such out side the scope of sec. 263.

S.

Reasons in show cause notices

No.

1 Relating to non-filing of details of expenditure incurred by the assessee and

non-furnishing of copy of a/c of transaction with parties above Rs. 5 Lac.

2 Relating to non examination of issue of closing stock.

33

3 Relating to failure of AO to obtain

confirmation of a/c from the parties in whose names amounts are shown as out standing

and application of provisions of sec

40(a)(1a).

4 Relating to failure of AO to obtain

confirmation of a/c from the creditors which are shown as out standing and application of provisions of sec 40(a)(1a).

(i) The issue raised by the ld CIT in respect of application of provision of section 40(a)(ia) is not correct as

(1) The appellant maintained day to day books of accounts & vouchers. The appellant appointed various persons at site where the contract work carried out who controls the labour and makes payments on behalf of the firm. Since number of worker employed are several and as such consolidated vouchers are prepared showing payment through the particular person. These persons are neither the sub contractor nor the work was given to them on contract basis but they are employees of the assessee. At the close of the year the wages payable to the several labors through a particular person is shown in the balance sheet as a credit while debiting the expenditure on labour.

(2) The assessee submits that the persons listed in the order u/s 263 at page 15-16 are not sub contractors of the assessee either for supply of labour or material. These persons only distribute the wages to the labours on behalf of the appellant firm. There is no contract either in writing or oral with such person for supply of labour or material. The labours are directly employed by the firm and such person's acts on behalf of the firm at site where 34

the actual work is carried out. In the books rather writing the name of several labours to whom labour remains payable at the end of year the assessee for convenience writes the name of person employed by the firm who is responsible for controlling labours employed by the firm for getting the work done. The appellant himself distribute labour payment through such persons who sign the voucher showing total payment made through him on work site to the individual labour. The payment is shown in the books by writing the name of such person who sign the payment voucher showing total payment made by him to the individual labour. These persons are doing work at site on behalf of and as per direction of the appellant firm.

(3) That on the given facts which is supported from books of accounts and vouchers the ld CIT erred in directing the AO to examine the application of section 40A (10) which has no application and the issue was examined by AO when he passed the assessment order u/s 143(3) and as such the assessment order passed under section 143(3) cannot be branded as erroneous or prejudicial to the interest of Revenue.

(ii) The ld CIT in his order has not disputed the rejection of books of accounts made by AO and application of profit rate. The application of provisio to section 145 was held by CIT (A). Once the AO has rejected the books of accounts by invoking provisions of section 145(3) & estimated income by application of profit rate than the same books cannot be considered for making specific disallowances. Reliance is placed on: -

(1) J. K. Construction Co. v/s ITO reported in 100 TTJ 1101 (ITAT, Jodhpur) (P.B. Page 71-75) [P.B. 71 to 75]

35

"Revision - Erroneous and prejudicial order - Lack of proper enquiry - Objections of CIT on the points of GP rate, provision of Rs. 16,57,350 made in the books and non-application of s. 40A(3)-Not justified in the facts and circumstances of the case- As regards GP rate, assessee had returned 3.8 per cent as compared to 3 percent accepted by Department in immediately preceeding year - CIT was not therefore, justified in applying GP rate of 5 percent - As regards provision of Rs. 16,57,350/- it basically represented expenses claimed in the trading account and only a small portion related to expenses of P&L a/c - Further, after applying GP rate, it was not open to the AO to consider the expenses separately and therefore no separate addition under s. 40A(3) can be made."

(2) Amritlal Khatri v/s DCIT, Barmer ITA No. 233/Ju/2009 dated 19-07-2010 (Jodhpur)(P.B. Page 60 - 70) [P.B. 60 to 70]

In this case while dealing appeal against order under section 263 the Hon'ble ITAT, Jodhpur Bench held in para page of the order as under: -

"The CIT has found that the Assessing Officer has applied the Net Profit Rate by rejecting the books of account of the assessee, and making adhoc disallowance out of claim of expenditure. The CIT has observed in the impugned order that adhoc disallowances out of expenditure claimed by the assessee can be made when once Net Profit Rate is applied for returning the income to be assessed in the hands of the assessee on rejection of books and invoking section 145(3) of the IT Act. Therefore such an order passed by the Assessing Officer is not at all erroneous even as per the view of the CIT. What he ultimately directed the Assessing Officer observing that the Assessing Officer has not considered 36

the disallowability of the expenditure for personal use. In such a case assessment order cannot be colored as erroneous and prejudicial to the interests of revenue."

(3) ITO, Ward -1, Rajsamand v/s M/s Amrit Marbles & Granites Pvt. Ltd., ITA No. 07/JDPR/2005 dated 13-02- 2007 (P.B. Page 76 to 79)

In this case the Hon'ble Tribunal while dealing with the issue of separate addition on account of closing stock held in Para 7 at Page 3 of the order as under: -

"We have heard both the sides and perused the relevant material on record. In the first ground of Revenue's appeal, the only question was that of the trading addition by applying a particular gross profit rate to the declared turnover. The amount of Gross Profit encompasses the effect of all individual items debited or credited to the trading account. When it is held that a particular rate of Gross Profit is applicable, that would take care of the figures of opening stock, purchases, direct expenses, sales and closing stock, etc., which find place in their trading account. Having held that the particular Gross Profit rate is appropriate, it is not open to the Revenue authorities to go back to the individual figures of trading account again and make separate additions. In our considered opinion, when the trading addition has been made by applying particular Gross Profit rate, there is no question of considering the valuation of closing stock on a lower of higher level once again. Accordingly, no addition for under valuation of closing stock can be sustained. We order for the deletion of the entire addition of Rs. 26,20,509/-. The ground of appeal of the assessee is accordingly accepted and the ground of the Revenue's appeal is dismissed." 37

(4) Income Tax Officer, v/s M/s Midha Construction, Hanumangarh Town ITA No. 291/JDPR/2007

(P.B.Page 80-82) In this case the Hon'ble Tribunal held at Page No. 3 as under: -

"After rejection of books, this Bench has been, preferably, adopting the rate of immediately preceding assessment year, as the best guide for estimation of the net profit. From the above chart, it is manifest that in the immediately preceding assessment year the net profit rate was 6.30%, but in this year it is 6.08%. To determine the income of the assessee the net profit rate of the past year has to be applied to the declared receipts. Therefore, we direct the Assessing Officer to adopt the net profit rate of 6.30% and apply it to the total receipts of Rs. 1,95,89,154/- and the figure of W.I.P. shall not be considered for this purpose. In view of our above finding the solitary ground raised by the revenue stands dismissed."

The following decisions also support to claim of assessee: - (1) CIT v/s Girdharilal, 258 ITR 331.

(2) CIT v/s Honda Siel Power Products Ltd., 333 ITR 547 (Del)

(3) CIT v/s Max India Ltd., 295 ITR 282 (SC)

(iii) It is humbly submitted that the above reasons cannot be made a ground for considering the order passed by AO as erroneous or prejudicial to the interest of Revenue.

b] The Issues which are self explanatory on the basis of Material & Evidence available on record

38

S.

Reasons in show cause notice

No.

1 Relating to non-examination of applicability of sec 269SS on account of deposit in cash in the bank a/c.

(i) That while passing the order u/s 263 the ld CIT-2, Jodhpur has not recorded any finding about the non genuine claim of the assessee. The ld CIT simply directed the AO to reexamine the matter. .

(ii) That the amounts deposited in bank a/c are not out of any cash borrowings so as to attract provision of sec 269SS but are out of cash in hand in the books of accounts due to withdrawal from one account to other account. The most of entries are on account of receipt by way of a/c payee cheque or payment by main contractor and all the entries are recorded in the books of accounts. Further if the credits in bank accounts are on a/c of cash loan received then the loan amount must have appeared in the balance sheet and in absence of any cash credits the presumption drawn is patently erroneous. The relevant copies of cash book and the detail of cash deposited in bank accounts which proves the deposits in the bank is out of cash in hand and was mostly on account of withdrawals from one a/c and deposit in other account.

(iii) It is humbly submitted that the ld AO passed the assessment order in light of the direction of the ld CIT contained in the order u/s 263/143(3) and was satisfied in respect of all the issues and made no adverse comments on the above issues and as such the above reasons cannot be 39

made a ground for considering the order passed by AO as erroneous or prejudicial to the interest of Revenue.

c] Grounds taken in the order u/s 263 but was not part of show cause notice u/s 263

Grounds taken in order Submission

S.

but not part of show cause Evidences

No.

notice u/s 263

1 The ld CIT in show cause The ld CIT notice nowhere objected the cannot travel interest paid to third parties beyond the as deductible from the profit show cause arrived after application of notice.

net profit rate. This issue 317 ITR 249 could not have been raised in (Del)

light of the order of the

Hon'ble Rajasthan High

Court in the assessee's own

case for the assessment year

1993-94 and in light of

decision of Hon'ble

Rajasthan High Court in the

case of CIT v/s Bhavan Va

Path Nirman (Bohra) &

Company reported in 258

ITR 431. SLP against this

order stood rejected in 264

ITR (ST) 36.

Relating to non examination

of interest income from NSE

of Rs. 4,50,000/- shown in

balance sheet.

(i) The interest paid to creditors is to be reduced after estimating the profit by application of particular rate of 40

profit was decided in the case of assessee by Hon'ble Rajasthan High Court reported in 257 ITR 753 and the same was allowed right from assessment year 1993-94 to 2007-08 by AO and was not objected in all the years in which appeals were filed.

(ii) That in the show cause notice the ld CIT has no where objected to the deductibility of interest paid to third parties and interest on NSC shown in balance sheet. When a issues which were not subject matter of notice u/s 263 cannot form a basis while passing the order u/s 263 as held by Hon'ble Delhi High Court in the case of CIT v/s Contimeters Electricals P. Ltd. reported in 317 ITR 249 following the decision of Hon'ble Supreme Court in the case of Commissioner of Customs vs. Toyo Engg. India Ltd. (2006) 7 SCC 592.

(iii) Regarding Interest paid to third party (1) That when the Hon'ble Rajasthan High Court in the case of the appellant himself reported in [257 ITR 753] and in the case of Bhawan Va Path Nirman (Bohra) & Company [258 ITR 431] held that interest paid to third parties is allowable than the direction issued by the ld CIT in the order u/s 263 is itself erroneous and this issue cannot be made a foundation for setting aside the completed assessment u/s 143(3).

(2) That the ld CIT erred in directing the AO to disallow the claim of interest on the basis of decision of Hon'ble Rajasthan High Court in the case of Shri Ram Jhanwarlal reported in 321 ITR Page 400 as on this case the issue relating to deduction of interest paid to third partner was neither raised nor decided.

(iv) Regarding Interest on NSC

(1) That while passing the original assessment order the ld AO made additions of Rs. 3,00,681/- on account of 41

interest received from bank, NSC & FDR as per finding recorded in Para 3 at page No. 4 & 5 which reads as under: -

"From the details of interest it is revealed that the assessee has claimed interest payment of Rs. 35,83,211/- @ 15% to 18%. Out of the above Rs. 12,33,232/- have been paid to Banks and Finance companies and the remaining amount of Rs. 23,49,980/- have been paid to the HUF of the partners and the other family members (persons specified u/s 40A(2)b) and the relatives. This payment of interest is besides the interest payment allowable to the partners. Further the assessee has claimed to receive interest of Rs. 3,00,681/-, which includes the interest on refund of Rs. 49,440/- received in this year. If the interest of refund is excluded, the receipt of interest remains at Rs. 2,51,241/- only and the same is from the interest of FDRs with the Banks.

It is to be seen that the interest income received from Bank/NSC/FDR/IT Department does not represent contract business income and, therefore, requires to be separately taxed. This view gets support from the decision reported in the cases of M.K. Gupta v/s ITO (XXXI Taxworld 106) and Morarial Singhal Ws. ITO (XXXII Taxworld 95). This income represents Rs. 3,00,681/- and the same is added back in the total income of the assessee. The assessee is liable for penalty u/s 271(1)(c) for concealment and for furnishing inaccurate particulars of its income."

(2) That the assessment order passed by AO shows that he considered the issue and made addition which to was confirmed by CIT (A) the ld CIT erred in branding the order as erroneous and prejudicial to the interest of Revenue.

42

In light of above the order passed by ld CIT u/s 263 may kindly be quashed. ''

2.7 The ld. AR relied upon the details filed before the AO which is

available at pages 32 and 38 of the paper book. Such details were also filed

before the ld. CIT during the course of proceedings u/s 263 of the Act. The

ld. AR drew our attention to pages 16 to 30 of the paper book. The ld. AR

drew our attention to page 34 of the paper book. The assessee vide reply

dated 18-02-208 stated that the assessee has fully complied with the

provision of Section 269SS and 269T of the.

2.8 Before the ld. CIT, the assessee filed the extract from the cash book to

explain the deposits in the bank account in cash.

Submission /

S. Grounds taken in order but not part of Evidences No. show cause notice u/s 263

1 The ld CIT in show cause notice The ld CIT nowhere objected the interest paid to cannot travel third parties as deductible from the profit beyond the arrived after application of net profit show cause rate. This issue could not have been notice. raised in light of the order of the Hon'ble 317 ITR 249 Rajasthan High Court in the assessee's (Del) own case for the assessment year 1993-

94 and in light of decision of Hon'ble

Rajasthan High Court in the case of CIT

v/s Bhavan Va Path Nirman (Bohra) &

43

Company reported in 258 ITR 431. SLP

against this order stood rejected in 264

ITR (ST) 36.

Relating to non examination of interest

income from NSE of Rs. 4,50,000/-

shown in balance sheet.

(iii) The interest paid to creditors is to be reduced after estimating the profit by application of particular rate of profit was decided in the case of assessee by Hon'ble Rajasthan High Court reported in 257 ITR 753 and the same was allowed right from assessment year 1993-94 to 2007-08 by AO and was not objected in all the years in which appeals were filed.

(iv) That in the show cause notice the ld CIT has no where objected to the deductibility of interest paid to third parties and interest on NSC shown in balance sheet. When a issues which were not subject matter of notice u/s 263 cannot form a basis while passing the order u/s 263 as held by Hon'ble Delhi High Court in the case of CIT v/s Contimeters Electricals P. Ltd. reported in 317 ITR 249 following the decision of Hon'ble Supreme Court in the case of Commissioner of Customs vs. Toyo Engg. India Ltd. (2006) 7 SCC 592.

(v) Regarding Interest paid to third party (1) That when the Hon'ble Rajasthan High Court in the case of the appellant himself reported in [257 ITR 753] and in the case of Bhawan Va Path Nirman (Bohra) & Company [258 ITR 431] held that interest paid to third parties is allowable than the direction issued by the ld CIT in the order u/s 263 is itself erroneous and this issue cannot be made a foundation for setting aside the completed assessment u/s 143(3).

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(2) That the ld CIT erred in directing the AO to disallow the claim of interest on the basis of decision of Hon'ble Rajasthan High Court in the case of Shri Ram Jhanwarlal reported in 321 ITR Page 400 as on this case the issue relating to deduction of interest paid to third partner was neither raised nor decided.

(vi) Regarding Interest on NSC

(1) That while passing the original assessment order the ld AO made additions of Rs. 3,00,681/- on account of interest received from bank, NSC & FDR as per finding recorded in Para 3 at page No. 4 & 5 which reads as under: -

"From the details of interest it is revealed that the assessee has claimed interest payment of Rs. 35,83,211/- @ 15% to 18%. Out of the above Rs. 12,33,232/- have been paid to Banks and Finance companies and the remaining amount of Rs. 23,49,980/- have been paid to the HUF of the partners and the other family members (persons specified u/s 40A(2)b) and the relatives. This payment of interest is besides the interest payment allowable to the partners. Further the assessee has claimed to receive interest of Rs. 3,00,681/-, which includes the interest on refund of Rs. 49,440/- received in this year. If the interest of refund is excluded, the receipt of interest remains at Rs. 2,51,241/- only and the same is from the interest of FDRs with the Banks.

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It is to be seen that the interest income received from Bank/NSC/FDR/IT Department does not represent contract business income and, therefore, requires to be separately taxed. This view gets support from the decision reported in the cases of M.K. Gupta v/s ITO (XXXI Taxworld 106) and Morarial Singhal Ws. ITO (XXXII Taxworld 95). This income represents Rs. 3,00,681/- and the same is added back in the total income of the assessee. The assessee is liable for penalty u/s 271(1)(c) for concealment and for furnishing inaccurate particulars of its income."

(2) That the assessment order passed by AO shows that he considered the issue and made addition which to was confirmed by CIT (A) the ld CIT erred in branding the order as erroneous and prejudicial to the interest of Revenue.''

2.9 During the course of proceeding before us, the ld. DR relied upon the order of the

ld. CIT. It was submitted by the ld. DR that the AO has not made any enquiry while

completing the assessment. The AO has simply rejected the books of accounts and

applied the net profit rate. The AO is an investigator as well as arbitrator. If the AO has

not made necessary enquiry then the order of the AO is erroneous and prejudicial to the

interest of the revenue.

2.10 The ld. DR drew our attention to the assessment order passed by the AO. As a

result of order u/s 263 of the Act, the assessment has been made at an income of Rs. 1.87 46

crores as against return of income of Rs. 67,83,280/-. It was therefore, submitted that

earlier assessment order was erroneous and prejudicial to the interest of the revenue. The

ld. DR relied upon the following decisions.

1. CIT Vs. Sunil Goyal, 176 Taxman 184 (Uttra) - The AO accepted huge sundry credits without any verification. The Hon'ble Uttrakhan High Court held that the order is erroneous in case the AO has accepted huge sundry credits without any verification.

2. CIT Vs. Assam Tea House, 48 DTR 122 (P&H) - the Hon'ble Punjab & Haryana High Court held that order is erroneous in case there is lack of proper enquiry. The ld. CIT noticed that the assessee has not produced any record while the AO has mentioned that records of statements were produced.

3. Raja & Company Vs. CIT, 49 DTR 294 (Ker.) - In the case before the Hon'ble Kerala High Court, it was noticed that the assessee has made cash purchases in excess of limits provided u/s 40A(3) and the AO has failed to consider the application u/s 40A(3) of the Act. The question of disallowance u/s 40A(3) was not considered by the Hon'ble Kerala High Court and held that order is erroneous and prejudicial to the interest of the revenue.

4. T. Sheraffudin Vs. CIT, 41 DTR 286 (Ker.) - the Hon'ble Kerala High Court held that the AO accepting the cash credits without conducting examination as to genuineness thereof showed that the AO has not made proper enquiry and the order was held as erroneous and prejudicial to the interest of the revenue

5. D.C. Auddy & Bros Vs. CIT, 28 ITR 713 (Cal.) - Hon'ble High Court held that the addition of cash credit can also be made even if income from business is estimated.

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6. CIT Vs. Maduri Rajaiahgari Kistaiah, 120 ITR 294 (A.P.) - In this case, the Hon'ble Andra Pradesh High Court held that addition on account of cash credit can be made even if income from business is estimated.

2.11 We have heard both the parties. The ld. CIT issued the show cause notice in

which he raised six points. The ld. CIT has not considered the point no. 1 and 2 as

necessary for the purpose of invoking the provision of Section 263 of the Act. Hence the

issue on point no. 1 and 2 are not required to be considered for deciding the issue as to

whether the action of the ld CIT in invoking the provision of Section 263 is correct.

Moreover, we also agree with the contentions of the ld. AR that Section 263 cannot be

invoked on the issues which have not been included in the show cause notice . It is

necessary for the ld. CIT to provide opportunity to the assessee before passing the order

u/s 263 of the Act. Hence, the issues which have not been raised in the show cause notice

and not confronted to the assessee cannot be ground for invoking the provision of Section

263 of the Act.

2.12 The third issue on which ld. CIT has held that order is erroneous and prejudicial

to the interest of the revenue is that the AO has not looked into the contravention of

provision of Section 269SS.

2.13 In the show cause notice , the ld. CIT has referred to the cash deposits in the bank

account. The assessee during the course of proceeding before ld. CIT filed the extract of

cash book and this shows that the cash was deposited out of the cash in hand. The

assessee has filed the tax audit report. The auditor is required to give particulars of

different loans or deposits in the Audit Report. These details are available as Annexure of 48

tax audit report. In this tax audit report , it is clearly mentioned that assessee has not

deposited the loan except otherwise than cheque or draft. The ld. CIT has not recorded

any finding in his order that the assessee has accepted the deposits in cash in violation of

provision of Section 269SS. It has not been held that details mentioned in tax audit report

are factually incorrect or wrong. Thus there was no case of holding the order as erroneous

and prejudicial to the interest of the revenue on the issue that the AO has not looked into

the contravention of provision of Section 269SS.

2.14 The 4th issue on which the ld. CIT has held that order is erroneous and prejudicial

to the interest of the revenue.

2.15 The AO in his order has clearly mentioned that the assessee has not maintained

the stock register. The AO has already made an enquiry in respect of the maintenance of

stock register. The AO has already mentioned that the assessee is not having any

vouchers of the expenses. The AO in his order has mentioned that the assessee has failed

to give headwise break up of the expenditure. It is also observed by the AO that that the

assessee has not maintained log book, wage register and attendance register. The AO has

recorded the findings that the expenses are not subject to verification. Thus the issue on

which the ld. CIT is considering the order as erroneous and prejudicial to the interest of

the revenue have already been considered by the AO. There is difference between the

lack of enquiry and insufficient enquiry. An enquiry may be sufficient for one authority

while the same may be insufficient for other authority. Sufficiency of the enquiry is a

subjective decision. If the AO made enquiry and considered all the aspects then there was

no case of holding the order as erroneous and prejudicial to the interest of the revenue. 49

2.16 The 5th issue taken by the ld. CIT is that the AO has accepted the statement

without verification. There may be closing stock. The AO should have verified the

closing stock. The assessee is accounting the purchases as consumption. The assessee is

following the same consistent principles of accounting. In case the AO wants to change

the method of stock then he has to give opening stock also. In case the method of

valuation is changed by the assessee then there is no need of making adjustment in the

opening stock. Once the assessee is following the consistent method of accounting and if

the AO has accepted such consistent method then order of the AO cannot be considered

as erroneous. The Hon'ble Delhi High Court in the case of CIT Vs. Mahavir Alluminium

Ltd. 297 ITR 77 has considered the decision of the Privy Council in the case of CIT Vs.

Ahmedabad New Cotton Mills Co. Ltd. AIR 1930 PC 56 has held that adjustment is

required to be made in case the valuation of the closing stock is changed. Such

adjustment is to be made in the opening stock also. Hence, we feel that the order of the

AO cannot be termed as erroneous and prejudicial to the interest of the revenue as it is

settled principle that one should follow the consistent method of accounting..

2.17 The sixth issue on which the ld. CIT has treated the order as erroneous and

prejudicial to the interest of the revenue as the AO has not examined the sundry creditors

in the balance sheet. The Hon'ble Jurisdictional High Court in the case of CIT Vs. G.K.

Contractors, 19 DTR 305 has held that if the books of accounts are rejected then no

separate adition can be made on account of cash credit u/s 68 of the Act even though the

assessee has failed to discharge its onus of proof in explaining the amount shown in the

books of accounts as market outstanding. In view of the decision of Hon'ble 50

Jurisdictional High Court, it cannot be said that the order of the AO is erroneous and

prejudicial to the interest of the revenue. The ITAT Jodhpur Bench in the case of

Amritlal Khatri Vs. DCIT, Barmer (ITA No. 233/ JU/2009 dated 19-07-2010) on similar

issue held that the ld. CIT was not justified in holding the order of the AO as erroneous

and prejudicial to the interest of the revenue. It will be useful to reproduce para 11 from

that decision.

''11. For effective adjudication of this appeal the provision contained in Section 263 is most relevant. As can be seen from the said provision, it is found that the power of suo-motto revision sub-section 1 of Section 263 of I.T. Act is in the nature of supervisory jurisdiction which can eligible business exercised only if the order of the Assessing Officer is found erroneous and is also resulting in prejudice to the interest of the revenue. These two circumstances must necessarily exist to empower the Commissioner to exercise the power of revision under this Section. Any order of Assessing Officer cannot be termed as erroneous unless sit is not in accordance with law. It necessarily implies that if the order passed by the Assessing Officer is in accordance with law applicable thereto, the same cannot be branded as erroneous. On perusal of the records, the CIT may be of the opinion that the estimate by the officer concerned is on the lower side and left to the Commissioner to estimate the income at higher figure than determined by the ITO. That would not vest the Commissioner with power to re-examine the accounts and determined the income himself at higher figure. This is because the ITO is exercising the quasi judicial power rested with him in accordance with law and arriving at a conclusion and such a conclusion cannot be termed to be erroneous simply because the CIT does not feel satisfied with the conclusion reached by the ITO. In such a case in the opinion of the Commissioner the order is prejudicial to 51

the interest of the revenue but that by itself would not be enough to vest the Commissioner with the power of suo-motto revision because the first requirement namely that the order is erroneous, is absent. Similarly if the order is erroneous but not prejudicial to the interest of revenue, then the power of the suo-motto revision cannot be exercised. Therefore, the twin ingredients of 1) order being erroneous and 2) prejudicial to the interest of the revenue must necessarily exist for empowering the CIT to invoke provision of Section 263(1). Further more the . CIT is not having any power u/s 263 to direct the Assessing Officer to make a fishing and roving inquiries. It was so held by the Hon'ble Bombay High Court in the case of CIT Vs. Gabria India Ltd., reported in 203 ITR 108 and of the present impugned order is analyzed in the light of the decision of the Hon'ble Bombay High Court supra, it is found that the CIT has nowhere observed that the order passed by the Assessing Officer to make detailed inquiries and investigations and pass consequential order as per law. Therefore, we are of the considered view that the impugned order passed by the CIT is sustainable for legal scrutiny and accordingly the same is hereby set aside by allowing the issues raised by the assessee in this appeal.''

2.18 The ITAT Jodhpur Bench in the case of Shri Ashok Kumar Dhariwal, Barmer Vs.

ACIT, (ITA No. 153/JU/2010 dated 29-07-201) held that provision of Section 40a(ia)

cannot be invoked when the books of accounts are rejected after considering the decision

of ITAT Hyderabad Bench in the case of Teja Construction Vs. ACIT in ITA No.

308/Hyd//2009 reported in (2010) 36 DTR (Hyd) (Trib) 220 . If there is one possible

view which the AO has taken then the order cannot be considered as erroneous and

prejudicial to the interest of the revenue. The decision of Hyderabd Bench is reported at

129 TTJ (UO) 57, Teja Construction co. Vs. ACIT. The ITAT Jaipur Bench in the case of 52

Singhal Builders Contractors Vs. Addl. CIT 133 TTJ (UO) 102 held that no disallowance

u/s 40a(ia) cannot be made in case books of accounts have been rejected. We have also

gone through the case laws on which the ld. DR has relied upon. We agree with the views

of the ld. DR that order is erroneous if the AO has not made any enquiry. We had already

discussed that the AO has made enquiry and it is not a case where the AO has not

considered the issue on which the ld. CIT has passed the order u/s 263 of the Act. We

therefore, feel that the ld. CIT was not justified in setting the order with the direction to

the AO to examine the issue as mentioned in the order of the ld. CIT. In view of above

discussions, the order of the ld. CIT is cancelled and the appeal of the assessee is

allowed.

3. In the result, the appeal of the assessee is allowed.

The order is pronounced on 19-01-2012.

Sd/- Sd/- (R.K. GUPTA) (N.L. KALRA) JUDICIAL MEMBER ACCOUNTANT MEMBER

Jaipur

Dated; 19 /01/2012

*Mishra

Copy forwarded to :-

1. M/s. Jain Construction Co. Sardarpura, Barmer

2. The DCIT, Circle- Pali

3. The ld. CIT By Order

4. The ld.DR

5. The Guard file (ITA No.106/JU /10)

A.R, ITAT, Jodhpur

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