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Income Tax Officer 11(2)(2), Aayakar Bhavan, New Marine Lines, Mumbai -400 020 Vs. M/s Om Sai Construction, E21/:1, Bhimashankar CHS, Sector 19A, Nerul, Navi Mumbai -400 706
August, 20th 2015
                                                                   M/s Om Sai Construction
                                                                    ITA No. 869/Mum/2011

                 MUMBAI BENCH "C", MUMBAI
                       . .  ,    

                       ITA No. : 869/Mum/2011
                       (Assessment year: 2007-08)
Income Tax Officer 11(2)(2),          Vs      M/s Om Sai Construction,
Aayakar Bhavan,                               E21/:1, Bhimashankar CHS,
New Marine Lines,                             Sector 19A, Nerul,
Mumbai -400 020                               Navi Mumbai -400 706
                                                 .:PAN: AAAFO 4846 Q
 (Appellant)                                     (Respondent)
                       Appellant by       :   Shri Permanand J
                      Respondent by       :   Shri Sunil Makhija

          /Date of Hearing                        : 23-06-2015
          /Date of Pronouncement                  : 19-08-2015


        , . .:

             The aforesaid appeal has been filed by the revenue against
      impugned order dated 20.10.2010 passed by CIT(A)-33, Mumbai
      for the quantum of assessment passed u/s143(3) for the
      assessment year 2007-08, on the following grounds:

             "1.     On the facts and circumstances of the case and in law,
                     the Ld. CIT(A) erred in granting relief of Rs. 48,28,612/-
                     out of labour and purchase charges just on the
                     reasoning that work cannot be executed without labour
                     and TDS has been deducted without appreciating the
                     fact that TDS on labour payments was not the issue

             2.      On the facts and circumstances of the case and in law,
                     the Ld. CIT(A) erred in not appreciating the facts that
                     the primary onus to prove the genuineness of the
                     labour/purchases lies on the assessee which the
                     assessee has failed to discharge.
                                                           M/s Om Sai Construction
                                                            ITA No. 869/Mum/2011
        3.          On the facts and circumstances of the case and in law,
                    the Ld. CIT(A) erred in wrongly estimating the profit
                    without appreciating the fact that this was not the
                    subject matter either in the assessment order or
                    grounds of appeal.

        4.          On the facts and circumstances of the case and in law,
                    the Ld. CIT(A) erred in granting relief by estimating
                    profit relying on the comparative chart produced as
                    additional evidence in contravention to the provisions as
                    contained in Rule 46A of the I T Rules".

2.      Brief facts are that the assessee is engaged in the business
of civil construction, mainly laying of water pipelines for Navi
Mumbai Municipal Corporation. During the year, the assessee has
disclosed gross work receipts of Rs. 5,70,81,773/- and declared
net profit of Rs. 26,21,257/- i.e. @ 4.59%. The Assessing Officer
noted        that     the   assessee   has   debited   purchases       at    Rs.
4,14,45,133/- and labour charges of Rs. 98,03,191/- in the profit
and loss account. In order to verify genuineness of the purchases
and other expenses, the Assessing Officer issued notices u/s
133(6) to various persons as per the details mentioned in para 5 of
the assessment order. Thereafter, he issued a show cause notice
stating that most of the notices returned back and therefore, the
assessee was directed to produce these persons along with their
books of account, bills issued by them, bank statements, copy of
their income-tax returns and copy of their final accounts. In
response, the assessee submitted that the contract work under
taken by the assessee is labour intensive, who are mostly illiterate
and stay in the slum area without any fixed addresses. The
assessee however tried to contact many of them and also filed
confirmation letters of the most of the parties along with their
entire details and balances due from the assessee. The Assessing
Officer however disallowed most of the disallowances on the
ground that there is no seal or stamp in the confirmation letters
and no bills and receipts issued by these parties have been
produced. Accordingly, he disallowed sum of Rs. 53,48,060/- .
                                                      M/s Om Sai Construction
                                                       ITA No. 869/Mum/2011
3.    Before the CIT(A) assessee filed detailed submissions and
also past records to justify the overall percentage of profit, labour
expenses and purchases. The Ld. CIT(A) after considering the
entire facts and material on record, gave part relief after observing
and holding as under:

      I have gone through the written submissions filed by the
      appellant during the course of assessment proceedings along
      with confirmation letters. The payments received by these
      parties   had   been   confirmed   by   them.     In   few     cases
      handwritten letters are available and in others letter is written
      in English which is probably prepared by the appellant itself
      but signed with name. I understand that these kinds of
      confirmation letters cannot be treated to be as proper
      confirmation letters but at the same time this fact is not denied
      that it would be impossible to execute the contract without
      material and labour. Hence, disallowance of entire material
      purchase and labour charges cannot be sustained. Now the
      persons are labour contractors who have arranged labourers
      for the execution of cutting of rocks for making trenches,
      shifting of pipes and labouring work. Again fact is available
      on record that they are having PAN numbers and TDS has
      been deducted for the payment made to them by the
      appellant. The appellant during the appellate proceedings
      argued that this been a labour intensive job which is being
      carried out at sites, the local labours is arranged for the work.
      The TDS is deducted on the payments made to them. The fact
      that these people in turn are not filing return of income, is not
      within the purview of the appellant.

4.3   On the other hand this also is a matter of record that these
      parties could not be traced at the given address. The
      appellant has tried to support its plea by stating that its net
      profit ratio for the concerned period relevant to AY 2007-08 is
      4.59% which is not very different from percentage of profit of
                                                   M/s Om Sai Construction
                                                    ITA No. 869/Mum/2011
      4.33% in AY 2004-05, 5.07% in AY 2005-06, 5.40% in AY
      2006-07, 5.75% in AY 2008-09 and 5.82% in AY 2009-10. It is
      thus seen that from the chart that ratio of purchase of
      materials have gone up whereas labour charges has come
      down. In view of this that these parties are for purchase of
      materials the profit is estimated at 5.50% i.e. Rs. 31,39,510/-
      against the profit shown at 4.9% i.e. Rs. 26,20,063/-. Thus
      the gap between these two amounts for Rs. 5,19,447/- will
      take care of the dip in profit in the present assessment year
      under consideration. The appellant thus gets relief for the
      balance amount i.e. Rs. 48,28,613/-".

4.    After hearing both the parties and on perusal of material on
record, we find that the assessee has debited total labour expenses
at Rs.98 lakhs, out of which, the Assessing Officer has disallowed
Rs. 53.48 lakhs on the ground that notices could not be served on
the labourers. The assessee's case has been that it has produced
the confirmation letter and details of all the parties to whom the
notices u/s 133(6) have been sent, the details of which have been
given in paper book from pages 22 to 27. The Ld. DR before us had
argued that onus cast upon the assessee has not been properly
discharged as the assessee has to justify the claim/expenses in the
profit & loss account.

5.    The assessee has shown turnover of 5.70 crores on which
net profit rate has been shown at 4.59%. The Ld. CIT(A) observed
that in the earlier years and subsequent years the assessee's net
profit is ranging between 4.33% to 5.28%. Further, the percentage
of material used is 72.16% whereas the labour charge is 17.17%.
After analyzing these percentage of expenses and past history, the
Ld. CIT(A) held that if the net profit is estimated at 5.5%, the
addition would be at the most Rs. 5,19,444/- which will take care
of the Dip in the profit and loss account. We agree with the
reasoning of the CIT(A), because in the case of a civil contractor,
generally, what needs to be examine, is to how much net profit has
                                                        M/s Om Sai Construction
                                                         ITA No. 869/Mum/2011
     been earned or could be earned. In the case of the assessee, past
     history and subsequent assessments show that assessee's net
     profit rate has been ranging between 4.33% to 5.82%. Thus, to
     apply net profit rate of 5.5% appears to be quite a reasonable basis
     for estimating the proper income of the assessee and accordingly,
     the relief given by the CIT(A) is upheld. Moreover, in this case, the
     assessee has given all the confirmation of the parties and details,
     which has not been rebutted by the Assessing Officer, therefore, it
     cannot be held that such a addition on account of labour payment
     is fully justified as the overall percentage of labour expenses is in
     conformity with the past and subsequent history of the assessee's
     case. Thus the grounds raised by the department is dismissed.

     7.     In the result, appeal of revenue stands dismissed.
     Order pronounced in the open court on 19th August, 2015.
              Sd/-                                            Sd/-
     (. .  )                                            (  )
   (B R BASKARAN)                                    (AMIT SHUKLA)
 ACCOUNTANT MEMBER                                 JUDICIAL MEMBER
Mumbai, Date: 19th August, 2015
 /Copy to:-
     1)  /The Appellant.
     2)    /The Respondent.
     3) The CIT(A) -33, Mumbai.
     4) The CIT­22, Mumbai.
     5)   "",   , /
        The D.R. "C" Bench,   Mumbai.
        Copy to Guard File.
                                             /By Order
          / / True Copy / /

                                        Dy./Asstt. Registrar
                                         I.T.A.T., Mumbai
*  ..
*Chavan, Sr.PS
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