Facts of the Case

The assessee firm was engaged in electrical contract work primarily for Central Government Departments such as MES, Railway and BSNL.

For the relevant assessment year, the assessee declared contractual receipts of Rs.10,66,77,556/-, out of which Rs.5,87,25,039/- related to sales of generators from its Jaipur branch. The remaining receipts related to electrical contract business.

During assessment proceedings under Section 143(3), the Assessing Officer observed that certain works had been completed before the end of the financial year but the entire tender value had not been shown as received. He worked out short receipts and ultimately held that Rs.56,69,837/- represented suppressed receipts.

The Assessing Officer also pointed out several defects in the books of account including:

  • Non-deduction of TDS on certain payments.
  • Payments allegedly in violation of Section 40A(3).
  • Differences in bank guarantee and commission figures.
  • Entries recorded on a single date.
  • Self-made vouchers.
  • Personal expenses debited to business account.
  • Incomplete treatment of work-in-progress.

On this basis, the Assessing Officer rejected the books under Section 145(3) and applied net profit rate of 7% on total receipts, assessing income at Rs.66,55,450/- as against returned income of Rs.9,03,480/-.

The CIT(A) upheld rejection of books, confirmed addition of Rs.56,69,837/- on account of suppressed receipts relying upon accrual principles and the decision in CIT vs Woodward Governor India Pvt. Ltd. (312 ITR 254, SC), but reduced the net profit rate from 7% to 5%.

.Issues Involved

  1. Whether rejection of books under Section 145(3) was justified.
  2. Whether addition of Rs.56,69,837/- on account of alleged suppressed receipts was sustainable.
  3. Whether receipts should be recognized on accrual basis under mercantile system.
  4. Whether estimation of net profit at 5% was justified for an electrical contractor.
  5. Whether past history should be considered while estimating profit.

 Petitioner’s Arguments

  • Regular books of account were maintained and audited.
  • No specific material defects warranting rejection under Section 145(3) were found.
  • All receipts were from Government Departments through account payee cheques and subject to TDS.
  • No suppression of receipts existed; reconciliation statement explaining Rs.56,69,837/- was furnished.
  • Certain amounts represented sundry debtors and had not accrued due to pending measurement and certification by Government Departments.
  • Income accrues only when measurements are taken and payable amounts are recorded by the concerned Department.
  • Electrical contract business cannot be compared with civil construction contracts.
  • Past assessments under Section 143(3) had accepted declared profit rates.
  • Even if addition is sustained, only profit element could be added.

 Respondent’s Arguments

The Revenue submitted that:

  • The assessee followed mercantile system and was required to disclose income on accrual basis.
  • Tender amounts were not fully reflected.
  • The assessee failed to produce evidence of reduction in scope of work.
  • Multiple inconsistencies existed in books justifying rejection under Section 145(3).
  • Past history does not give vested right once books are found unreliable.
  • Reliance was placed on judicial precedents including:
    • Aggarwal Construction Company vs ACIT (P&H)
    • S.P. Construction (P&H High Court)
    • Skyline Builders (ITAT Cochin)

 

Court Order / Findings

1. Alleged Suppression of Receipts – Rs.56,69,837/-

  • Of the total amount, Rs.9,39,029/- related to alleged reduction in scope of work.
  • The Assessing Officer had not conclusively verified reduction in scope of work from concerned Government Departments.
  • TDS statements could have clarified actual payments.
  • Rs.34,64,577/- was shown as sundry debtors in the balance sheet.
  • In Government contracts, income accrues only after measurement and quantification of payable amount.

The Tribunal held that without proper enquiry and verification, addition could not be sustained.

The matter was restored to the file of the Assessing Officer for fresh examination of reconciliation and accrual.

 2. Rejection of Books under Section 145(3)

The Tribunal upheld rejection of books observing that multiple discrepancies existed indicating that books were not complete and correct.

Accordingly, rejection under Section 145(3) was justified.

 3. Estimation of Net Profit

  • Estimation should be based on comparable cases or past history.
  • Electrical contractor cannot be equated with civil contractor.
  • No comparable case of electrical contractor was brought on record.
  • Past history, though not conferring vested right, cannot be completely ignored.

Considering nature of inconsistencies and past results, the Tribunal directed that:

  • Net profit be estimated at 3.5% on contractual receipts of Rs.4,79,52,517/- (excluding generator sales).
  • For generator sales receipts, declared profits be accepted.

Thus, profit rate was reduced from 5% to 3.5%.

 4. Interest

Charging of interest was held consequential and allowed to the extent of relief granted.

 Important Clarification

  • Accrual of income in Government contracts depends upon measurement and certification.
  • Tender value alone cannot determine taxable receipts.
  • Past history may be considered where no comparable cases are available.
  • Electrical contracting business has distinct profit margins compared to civil construction.
  • Rejection of books does not automatically justify arbitrary high estimation.

Link to download the order - https://www.mytaxexpert.co.in/uploads/1770885396_MSDEORAELECTRICWORKSALLAHABADVS.JT.CITALLAHABAD2.pdf  

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