If no suppression of income detected during search then no estimation of undisclosed income u/s. 145 can be made

IN THE ITAT HYDERABAD BENCH ‘A’

Nagarjuna Construction Co. Ltd.

V/s.

Deputy Commissioner of Income-tax

IT (SS) APPEAL NOS. 88 & 94 (HYD.) OF 2004

[BLOCK PERIOD : ASSESSMENT YEARS 1996-97 TO 2001-02 AND UPTO 20-12-2001]

MARCH 30, 2012

ORDER

Chandra Poojari, Accountant Member 

These two appeals are cross appeals directed against the order of the CIT(A)-I, Hyderabad dated 10.6.2004 for the block period A.Ys. 1996-97 to 2001-02 and up to 20.12.2001.

2. Brief facts of the issue are that in this case there was a search action u/s. 132 of the Income-tax Act, 1961 on 20.12.2001 and the same was finally concluded on 4.3.2002. Consequent to the search action notice u/s. 158BC was issued on 14.02.2003. The assessee filed return of income on 22.3.2002 admitting undisclosed income of Rs. 2,98,51,129. Assessment was completed u/s. 143(3) r.w.s. 158BC of the Act on 16.1.2004 by determining undisclosed income of the assessee at Rs. 29,24,23,330 for the block period. While making the assessment the Assessing Officer rejected books of account of the assessee and estimated the income of the assessee u/s. 145 of the Act for A.Ys. 1996-97, 1997-98 and 2000-01, the percentage of income admitted before depreciation as shown in the books of account was 11.57%, 10.57% and 10.53%, respectively. Since the income declared in these years was more than 10% of gross contract receipts, the trading results shown in the regular returns of income have not been disturbed. The percentage of income before depreciation shown in the A.Ys. 1998-99, 1999-2000, 2000-01, 2001-02 and part period 1.4.2001 to 20.12.2001 was shown at 9.07%, 8.5%, 4.49% and 5.59%, respectively. In these years, the income has been estimated at 10% of the gross receipts. For estimating the income at 10% the Assessing Officer has cited two comparable cases viz., M/s. Prasad & Company (PW) and M/s. SEW Construction Ltd. He has, therefore, estimated the undisclosed income from construction activity for the block period at Rs. 22,77,88,361. In addition to this, one more addition of Rs. 6,46,34,972 being interest accrued on amount advanced to Mr. V. Srinivasa Raju on the basis of calculations shown in the loose sheets has been made. Thus, the total undisclosed income for the block period has been computed at Rs. 29,24,23,330 by assessing officer as follows:

	Asst. Year	Description of income	Rs.	Amount (Rs.)
	1996-97	Undisclosed income		Nil
	1997-98	Undisclosed income		Nil
	1998-99	(a) Interest receivable from Sri V. Srinivasa Raju for the period 4.9.95 to 31.3.98 as mentioned at para 6.4(d).	2,19,93,681
		(b) Undisclosed income estimated from contract works as mentioned at para 5.5(m)	1,33,41,820	3,53,35,501
	1999-00	(a)  Interest receivable from Sri V. Srinivasa Raju for the period 1.4.98 to 31.3.99 as mentioned at para6.4(d)	96,14,486
		(b) Undisclosed income estimated from contract works as mentioned at para 5.5 (m)	1,96,45,767	2,92,60,253
	2000-01	(a) Interest receivable from Sri V. Srinivasa Raju for the period 1.4.99 to 31.3.00 as mentioned at para 6.4(d).	1,02,54,391
		(b) Undisclosed income admitted by the assessee in the return of income	35,00,000	1,37,54,391
	For this year there is a claim in the regular return of income for deduction u/s. 80(IA). After allowing set-off of brought forward unabsorbed depreciation of Rs. 8,03,06,430/- relating to the A.Y. 1998-99 and Rs. 16,12,31,991/- out of Rs. 19,87,91,084/- relating to the A.Y. 1999-00, the income from business is Nil. Hence, the assessee is not entitled to deduction u/s. 80(IA). the set-off of unabsorbed depreciation of 1999-00 of Rs. 16,12,31,991/- is after taking into account the undisclosed income of Rs. 1,37,54,391/-. the unabsorbed depreciation available for set-off for the A.Y. 2001-02 works out to Rs. 3,75,59,093/-.
	2001-02	(a) Interest receivable from Sri V. Srinivasa Raju for the period 1.4.00 to 31.3.01 as mentioned at para 6.4(d)	1,24,34,158
		(b) Undisclosed income estimated from contract works as mentioned at para 5.5(m)	10,26,01,015
			11,50,35,173
	Undisclosed income admitted by the assessee in the return of income for this A.Y. of Rs. 62,11,980 is deemed to have been included in the undisclosed income estimated as above – See para 5.5(p).
		Income as per regular return of income before set-off of brought forward losses	7,62,72,822
	Less:	Unabsorbed depreciation of A.Y. 1999-00 as stated above.’	3,75,59,093
		Balance of Income	3,87,13,729
	Add:	Undisclosed income as determined above	11,50,35,173
		Total	15,37,48,902
		Less 80(IA) deduction
		The assessee in the return of income claimed 80(IA) deduction representing profits from infrastructure projects at Rs. 9,48,72,688/-. This is as per audit report filed along with return of income. In the letter dated 9.1.04 after allocating expenditure relating to head office, the profits from infrastructure projects eligible for deduction u/s. 80(IA) was worked out to Rs. 6,40,04,966/-.	6,40,04,966
		UNDISCLOSED INCOME OF THE YEAR	8,97,43,966	8,97,43,936
	1.4.01 to 20.12.01	(a) Interest receivable from Sri V. Srinivasa Raju for the period 1.4.01 to 20.12.01 as mentioned at para 6.4(d) & 6.4(h)	1,03,38,256
		(b) Undisclosed income estimated from contract works as mentioned at para 5.5(p)	11,39,90,996	12,43,29,252
		Income admitted by the assessee in the return of income for this A.Y. of Rs. 2,01,39,149 is deemed to have been included in the undisclosed income estimated as above – See para 5.5(q)
	UNDISCLOSED INCOME FOR THE BLOCK PERIOD			29,24,23,333
				Or 29,24,23,330

3. Against this, the assessee went in appeal before the CIT(A). The CIT(A) confirmed the action of the Assessing Officer relating to invoking of provisions of section 145 of the Act.

4. Regarding the ground with regard to the assessment of income by applying rate of profit of 10%, in the first two assessment years viz., 1996-97 and 1997-98, the percentage of income declared before depreciation was 11.57% and 10.57%, respectively. For subsequent assessment years, the percentage is slightly lower. In A.Y. 1998-99, the percentage is 9.07% and for A.Y. 1999-2000 it is 8.5%. For these two years, the income has been estimated by applying rate of profit of 10% thereby making addition of Rs. 1,33,41,820 for A.Y. 1998-99 and Rs. 1,96,45,767 for A.Y. 1999-2000. No specific reason has been given for applying the flat rate of 10% except stating that considering the nature of contract works executed by the assessee-company and the percentage of income admitted for other A.Ys. viz., 1996-97, 1997-98 and 2000-01 and also for the percentage of income admitted by other contractors viz., M/s. Prasad & Co. (PW) and M/s. SEW Constructions Ltd., the CIT(A) estimated the income before depreciation at 10% for the A.Ys. 1998-99, 1999-2000 and 2001-02 and for the period 1.4.2001 to 20.12.2001 and treated the difference of income estimated and the income admitted as undisclosed income of the assessee-company for such assessment years. After considering the entire facts and circumstances of the case, the CIT(A) was of the opinion that the rate of profit declared for A.Ys. 1998-99 and 1999-2000 is quite reasonable and ought not to have been disturbed by rejecting the books of account for these two years. The regular assessments for both these years were finalised u/s. 143(3) after due scrutiny of regular books of account. Further, in these two years, the assessee had incurred losses in certain projects the details of which are as under:

	Loss making projects	Loss (Rs.)
		1997-98	1998-99
	Essar Oils Ltd.	17,355,573	9,904,758
	Mukund (Kalyani Steels Ltd.)	8,561,031	–
	White Field	–	3,464,020
	Chennai Airport	–	1,849,880
	Indira Airport	–	1,963,363
	Total loss	25,916,604	17,182,021
	Turnover relating to the loss making projects	47,652,727	99,768,128

5. The assessee submitted the following explanation before the lower authorities:

(i)  In the case of Essar Oils Ltd., Gujarat, the contracts relate to the construction of factory buildings and townships. However, due to the financial problems, the oil refinery project could never be completed even till date. Right from the beginning the company Essar Oil Ltd., has violated all the terms of the contract including the payment of mobilisation advance. Some of the work bills are still due from Essar Oils Ltd. In view of the problems faced by the assessee-company, a claim was lodged before the Arbitrator for an amount of Rs. 3.67 crores.

(ii)  In the case of the other contract works, the works were spread more than one financial year. The contract works include several stages for example; civil works include earth work, escalation, ground levelling, basement, structural works, finishing works, sanitary, plumbing, electrical works and all other miscellaneous works. The bills are always submitted based on the progress of the work from time to time. The income has been recognised based on the percentage of work completion. The fact remains that all the contract works may not end up in profits. At the same time each stage of any particular contract work may not result in profit from stage to stage. Conceptually and as in vogue the total project may either end up in profit and/or loss. In the case of Mukund (Kalyani Steels Ltd.), Whitefiled – Bangalore, Chennai Airport and Indira Airport were incurred losses during the financial year 1998-99, since these works were in initial stage in this financial year. The said works generated profits in the subsequent financial years, which was also revealing from the profits of that year. Once the losses in the above specified projects are as merged into the accounts considered, the average profit earned by the company would obviously be on low side. In other words, to the exclusion of such losses if the profitability of the other projects is considered, it is working out to 11.25% for the financial year 1997-98 and 10.62% for the financial year 1998-99.

6. In view of the explanation, the CIT(A) of the opinion that percentage of income before depreciation declared at 9.07% for assessment year 1998-99 and 8.5% for the assessment year 1999-2000 is quite reasonable and therefore, no addition is required to be made for these two years. Hence, he directed the Assessing Officer to delete the addition made in these two years.

7. Further the CIT(A) observed that the income before depreciation declared in assessment year 2001-02 and part period 1.4.2001 to 20.12.2001 appears quite low as compared to other years. In A.Y. 2001-02, on gross contract receipts of Rs. 204.21 crores, the income admitted before depreciation is Rs. 9.16 crores which in terms of percentage works out to 4.49% as compared to 10.53% shown in the immediately preceding A.Y. 2000-01. Similarly, for the part period from 1.4.2001 to 20.12.2001 on gross contract receipts of Rs. 258.58 crores, the income admitted before depreciation is Rs. 14.46 crore which in terms of percentage works out to 5.59% which is also very low compared to income declared in other years. For these two periods, the CIT (A) given findings that the Assessing Officer appears to be perfectly justified in rejecting the books of account and resorting to the estimation of income as provided u/s. 145 of the I.T. Act. The explanation for low rate of profit for these years was filed by the assessee vide letters dated 14th October, 2003, 4th November, 2003, 18th November, 2003 and 4th December, 2003 filed before the Assessing Officer. It was explained that the company has been in the construction industry for more than two decades. The company for quite some years focussed its core activity in civil works consisting of mostly industrial/house structures. Besides such civil contracts, the company diversified its activities into cement industry, wind power, manufacture of cylinders and other incidental jobs. Heavy losses resulted in closure of its cement division during financial year 1999-2000. The company also started focussing on infrastructure projects because of its line of business in construction and contracts. Hence, in the initial years, the company had undertaken some of the smaller projects especially the road works outside the state of Andhra Pradesh. to intrude into the competitive sector like this, and to withstand the obvious competition from the established giants and multinationals, obviously the company to had to quite the price in tenders either without a profit or with nominal profit. During the financial year 2000-01 and 2001-02 (up to 31st December, 2001) the company had incurred losses in certain major road projects. The details of such projects and losses are as follows:

	Loss making projects	Loss (Rs.)
		2000-01	2001-02
	MCC Road Works	28,14,247	3,426,220
	Road work Bangalore	17,171,350	4,359,546
	NHAI Haryana	0	14,201,346
	BMP Bangalore	5,569,146	2,196,106
	NGV Bangalore	23,205,995	9,393,679
		74,087,738	33,576,897
	Add: Proportionate expenses of Head office and Regional offices	4,95,011	3,846,170
	Total loss	79,038,749	37,423,067
	Turnover relating to the loss making projects	140,223,082	195,542,001

8. The specific reasons for such losses are:

(a)  The desire to gain entry into the road project necessitated the company to quote low price in the bids.

(b)  The establishment cost of infrastructure for executing the road works was high. This is because of the need for establishment of machinery, manpower and related infrastructure and the expenditure related revenue incurred.

(c)  In spite of the best efforts the cost efficiency in the operations could not be achieved.

(d)  Added to the above for the road/highway works bitumen and diesel are the major components. During the financial years 2000-01, 2001-02 and subsequently there was a steep increase in the bitumen and diesel prices, which can never be visualised and much less considered at the time of tender. Almost all the projects are not covered by the cost escalation/compensation clauses, especially MCC road work/Bangalore road work thus due to the steep increase in bitumen/diesel prices the company had incurred loss of Rs. 3.15 crores and Rs. 2.16 crores respectively in those two projects.

(e)  Whereas, in the case of Haryana road project, the cost coverage on diesel at a rate of 5% on the total coverage could not offset the increase which was between 20% to 25%.

(f)  The steep increase in bitumen price and diesel price were demonstrated in terms of statistics as follows:

Bitumen price increase

	S. No.	Year Rate	(Rs)	% of increase
	1.	October, 1999	7,965.95
	2.	June, 2000	10,835,33	36.02
	3.	June, 2002	10,562.50	32.60
	Diesel price increase
	S. No.	Year	Rate per litre (Rs)	% of increase
	1.	October, 1999	15.57
	2.	September, 2000	19.25

The steep increase in bitumen and diesel cost was not visualised at the time of bidding the project. The above tables would, therefore, confirm that the increased cost has its impact on the ultimate profits of the project as explained above.

(g)  Majority of the road works are abetting the villages. Due to local social problems, it is always the case labour from abetting villages has to be engaged at higher rate on daily basis besides our permanent labour. Added to this, peripheral works though not connected to main works had to be done as commercial expediency of the business to sail with the local elements without deterrence to our works. This also resultant in additional cost.

9. It has been submitted by the assessee that the net profits estimated by the Assessing Officer at 10% was on the basis of two allegedly comparable cases cited by him in the block assessment order viz., Prasad & Co. (PW) and SEW Constructions. At no point of time in the course of assessment proceedings, were these two cases were put to the assessee for comments. Further, these two cases are not comparable since they are not in the same line of business as that of the assessee. These two firms carry on business of the construction mostly in the line of canals and dams whereas the assessee company is mostly in the business of housing and industrial constructions. From the financial year 1996-97 onwards, the assessee diversified its activities into infrastructure development such as roads, bridges, water works and electrical works. Therefore, the line of business is not comparable merely because the two firms also deal in contracts. Further the Assessing Officer has taken into consideration for arriving at the percentage of profit figures as per Profit and Loss A/c. and if the incomes returned by these two firms as per the income tax computation are considered the net profit rates are lower. In the assessee’s case, the Assessing Officer has considered the net profit as per income-tax computation. On the other hand, the assessee-company as cited two comparable cases namely Simplex Concrete Piles (India) Ltd. and Gammon India Ltd. The results of these two concerns are tabulated hereunder:

Simplex Concrete Piles (India) Ltd.

	A.Y.	Contract Receipts	Income as per Profit and Loss A/c. before depreciation	Percentage of income
	1998-99	3,537,700,777	134,869,568	3.81
	1999-00	2,983,808,824	66,789,513	2.24
	2000-01	3,219,177,860	100,515,563	3.12
	2001-02	3,922,104,907	109,715,310	2.80
	2002-03	4,090,648,794	118,076,047	2.89
	Average profit			2.97
	Gammon India Ltd.
	A.Y.	Contract Receipts	Income as per Profit and Loss A/c. before depreciation	Percentage of income
	1999-00	3,289,892,000	173,212,000	5.26
	2000-01	4,532,501,000	249,134,000	5.49
	2001-02	5,055,096,000	291,500,000	5.76
	2002-03	5,156,383,000	423,285,000	8.20

It has, therefore, been contended that estimation of rate of net profit at 10% by the Assessing Officer is arbitrary, without any basis and not in any way nearer to the facts of the assessee’s case.

10. The CIT(A) considered the submissions made by the assessee-company and also gone through the facts narrated in the block assessment order. He observed that analysis of seized documents have clearly indicated that the assessee-company was in the habit of inflating the expenses and thereby suppressing the income. This is clearly borne out from the statement given by the Managing Director u/s. 132(4) of the Income-tax Act, 1961. Analysis of the seized documents and the statement given by the Managing Director on 21.12.2000 is given in para 3.4 of assessment order. the gist of analysis of the seized documents and explanation given by the Managing Director is given below:

Loose sheet No. 31:

This seized document shows the details of amounts spent on behalf of head office for the period from 1.4.1999 to 31.3.2000. Total payment as per this loose sheet is Rs. 55 lakhs.

Explanation of the Managing Director:

I have gone through the seized material above and confirm the facts as true and correct. The amounts on the dates 26.7.99, 14.11.99, 6.9.99, 8.9.99 and 8.9.99 are in fact paid by the company but no reflected in the books of account. These amounts totalling to Rs. 55 lakhs are paid to various persons and these payments are related to the business of the company, NCCL and accordingly, I admit Rs. 55 lakhs as the undisclosed income of the block period in the hands of NCCL.

Loose sheet No. 33:

This seized document reflects the details of cost of land at Amravati project. As per the said document, the cost of the land is Rs. 22,49,510.

Explanation of the Managing Director:

I have gone through the above seized material and I confirm the facts mentioned therein are true and reflected correctly therein. The amount of Rs. 22,49,510 is paid in cash outside the books of account and the same is shown as amount paid in suspense. Accordingly, I admit this amount as the undisclosed income in the hands of NCCL for the block period.

Loose sheet No. 83:

This seized document is handwritten and shows the details of expenditure incurred. The total payment is Rs. 1,10,270.

Explanation:

This paper contains the details of payments made outside the books of account and not a business expenditure. The total payments amount to Rs. 1,10,270 which I admit as undisclosed income for the block period in the hands of NCCL.

Annexure A/NCCL/10:

This is a note book containing details of payments made between 30.7.2001 and 7.12.2001. The cumulative total of such payments appearing on page No. 5 of the note book is Rs. 15,43,141.

Explanation:

Majority of this expenditure/payments except train tickets/ flight tickets, etc., have been paid outside the books of account and the amounts not relating to the business will be offered to tax as undisclosed income in the hands of the appropriate persons during the course of the proceedings.

Ans. to Q. No. 3): These are the vouchers maintained at project office. Mainly these vouchers represent the amounts paid as advances to the persons mentioned therein with regard to the expenditure to be incurred. The relevant expenditure will be reflected in the books of accounts maintained by the company. whereas in the case of sheet 13 of annexure A/NCCL/5, total suspense amount mentioned as Rs. 23,39,167/- shall be reconciled with the petty cash books maintained. In the same sheet mentioned as ‘loan Suribabu Rs. 1,00,000/-” and ‘loan MKR Rs. 2,00,000/-” are the amount returned by them, hence they were deducted from the suspense balance in the same sheet. However, these loans will be reconciled with the books of account, otherwise, the same will be offered for taxation.

Ans. to Q. No. 5): Krishnappa exchange account appearing in page No. 152 of annexure: A/NCCL/11 is relating to the real estate division account maintained by regional office of M/s. NCC Ltd., Bangalore, where Sri Krishnappa and M/s. NCCL have developed a property in Bangalore. The payments appeared in this page are relating to that development. The payments appeared in this page will be reconciled with the books of account maintained by the company. If there is any difference, the same will be offered to tax as undisclosed income in the hands of the appropriate persons during the course of proceedings. However, some of the figures appearing on page No. 151 are nothing but repetition of payments appearing on page No. 152. All the figures appeared in page No. 151 are reconcilable with page No. 152.

Ans. to Q. No. 11): Sheet Nos. 91, 92 and 93 of annexure: A/NCCL/37 comparing with the sheet No. 23 & 24 of annexure: A/NCCL/38 Are relating to certain expenditure incurred at the project office, Bangalore. the entire expenditure will be reconciled with the books of account of the company, the difference amounts will be offered for taxation in the hands of appropriate persons during the course of the proceedings. Sheet Nos. 99 & 100 of annexure: A/NCCL/37 are relating to certain income and expenditure. The same will be reconciled with the books of account maintained by the company and the difference, if any, will be offered for tax in the hands of appropriate persons during the course of the proceedings.

11. The CIT(A) observed from the above that payments were being made outside the books of account generated through inflation of expenses. The most important documents related to payments made to piece rate workers/sub contractors. During the course search, certain TDS certificates were relating to payments made to piece rate workers/labour contractors were seized from the office premises of the assessee-company. The post-search enquiries conducted by the DDIT (Inv) confirmed that some of these contractors or piece rate workers either did not exist or were not available at the addresses given. The Managing Director in his statement given u/s. 132(4) confirmed that some of the payments made to piece rate workers/labour contractors were fictitious and on this account lone, he offered an income of Rs. 1,37,00,000 towards undisclosed income to be assessed for the block period. This disclosure was allocated on proportionate basis of gross expenditure incurred each year on piece rate workers/labour contractors for A.Ys. 1996-97 to 2001-02. The details of these are given in para 5 of the assessment order. Considering the entire facts and circumstances of the case, it was observed by the CIT(A) that the rate of profit declared for A.Y. 2001-02 and 1.4.01 to 20.12.2001 was quite low as compared to other years and, therefore, the Assessing Officer was perfectly justified in invoking the provisions of section 145 of the Act. However, considering the explanation given by the assessee and facts and circumstances of the case, the CIT(A) was of the opinion that it would be fair and reasonable to apply net profit rate of 6.5% before depreciation as against 4.49% and 5.59% declared by the assessee for A.Y. 2001-02 and part period from 1.4.01 to 20.12.01 respectively. He directed the Assessing Officer to compute the income accordingly. However, since for A.Y. 2000-01, the assessee has admitted undisclosed income of Rs. 35,00,000 the same should be adopted. For A.Y. 2001-02 the assessee has admitted undisclosed income at Rs. 62,11,980. For this year, if by applying rate of 6.5% of gross contract receipts and allowing rebate u/s. 80IA the undisclosed income works out lower than the undisclosed income admitted in the return, the undisclosed income admitted in the return should be adopted. For broken period from 1.4.01 to 20.12.01 the undisclosed income admitted is Rs. 2,01,39,149. By applying profit rate 6.5% of gross contract receipts amounting to Rs. 258.59 crore, the undisclosed income works out to Rs. 2,34,85,632 (Rs. 16,80,81,389 – Rs. 14,45,95,757) and, therefore, the CIT(A) given a direction that the same should be adopted.

12. The facts relating to the addition of Rs. 6,15,03,415 being interest receivable on funds advanced to Sri V. Srinivasa Raju, prop. Rachana Associates, Bangalore have been narrated at paras 6.1 to 6.4 of the assessment order. The assessee company entered into two MOUs dated 15.9.95 and 15.11.95 with Sri V. Srinivasa Raju, Prop. Rachana Associates for procuring lands at Kodigehalli and Nandi Hills, Bangalore. For this purpose, the assessee-company advanced an amount of Rs. 440 lakhs between 28.12.1995 and 30.8.1996 to Sri V. Srinivasa Raju. Para 4 of the MOU dated 15.9.95 provided that in case the said Sri V. Srinivasa Raju fails to get the lands as per the understanding, he will repay the entire amount along with interest @ 20% p.a. from the date of receipt till the date of refund. Sri V. Srinivasa Raju could not procure the land as per the terms of understanding since some of the lands acquired by him were spread out and were not contiguous to take up any project. In such a scenario, the assessee-company rejected the offer and claimed refund of the amount along with interest. H however, in spite of best efforts, the assessee could realise Rs. 305.95 lakhs consisting of cheque payment and value of certain flats vested in favour of the assessee-company. The balance thus stood in the account of Sri V. Srinivasa Raju as on 31st October, 2003 was Rs. 138.44 lakhs including some expenditure incurred by the assessee-company relating to the rectification works in the flats registered in favour of the company.

13. Before the Assessing Officer it was submitted that the assessee-company is recognising its revenue as per the accounting standard “Revenue Recognition” as prescribed by the ICAI. Therefore, in the light of Accounting Standards followed by the company, interest is not an issue to be considered for Income-tax relating to block period. In reply to Q. No. 89, the Managing Director has admitted that the company is following mercantile system of accounting. In reply to Q. No. 11, the MD had also admitted that interest was not recorded in the books of account considering its doubtful nature of recovery. The clauses in the MOU was to protect the interests of the company in the event of unfound circumstances if arise at any given point of time. In other words, interest if any could at best be considered, is always contingent in the given facts that were there and as explained above. In such a situation, it is not correct to consider any income on notional and/or hypothetical basis, much less in the proceedings relating to the block assessment. In the of block assessment, only the real income should be considered on the basis of material found during the course of search proceedings but not notional income. In the case of interest, the uncertainty was established and the recovery of which is doubtful. In such a scenario, if it needs to be considered as an income it would only mean notional income. Even in respect of noting found on the loose sheets, when there is no evidence to show that such interest change materialised. Such notings cannot be relied upon to determine income relating to the block period. In the case of interest from Sri V. Srinivasa Raju, calculations were found but nowhere evidence for payment/receipt of such interest was found. Added to the above, Sri V. Srinivasa Raju confirmed that there was oral understanding that interest shall not be charged once the principal is fully disclosed.

14. The CIT(A) observed that the Assessing Officer basically given the following reasons for taxing the notional interest:

(a)  The assessee is following mercantile system of method of accounting and the income is chargeable to tax on accrual basis.

(b)  Clause 4 of the MOU dated 15.9.95 clearly provided for payment of interest at the rate of 20% p.a. In case of failure on the part of the agent to get the lands registered and such interest is payable from the date of receipt of advance by Shri V. Srinivasa Raju and till the date of refund of the amounts to the assessee-company. This is a written agreement executed on a stamp paper and binding on the parties. There is no dispute regarding the fact that Sri V. Srinivasa Raju failed to get the lands registered in the name of the assessee-company and hence decided to refund the advances received. As per the written agreement the advances are to be refunded with interest.

(c)  The claim that there was an oral understanding between the parties not to charge interest in case the principal amount is paid is without any basis and contrary to the facts contained in the written agreements and is clearly an afterthought to avoid admission of interest income and proper payment of tax.

(d)  Loose sheet numbered 136 to 153 of annexure marked A/NCCFL-I/1, seized from the office premises situated at Plot No. 41, Nagarjuna Hills, Punjagutta, Hyderabad and loose sheets Nos. 1 to 37 of annexure marked A/NCCL/5 seized from the office premises clearly indicate calculation of interest payable on quarterly basis for each of the assessment years in the block period. The interest calculated as noted in sheet No. 136 is Rs. 8,23,61,150. This is without taking into account the repayments made by Sri V. Srinivasa Raju from time to time. However, page Nos. 144 to 149 contain calculations of interest taking into account the repayments made by Sri V. Srinivasa Raju, which are enclosed to this order. The interest receivable according to these sheets are as under:

Abstract as Interest Receivable as noted in Page No. 146 of seized material market A/NCCFL-I/1

	Principal amount		Rs. 4,40,00,000
	Interest		Rs. 6,15,03,415
		Total	Rs.10,55,03,415
	Less:	Receipts (includes 4 flats at Davis Road and one flat at Malleswaram)	Rs. 2,85,65,000
		Total due as on 30.9.01	Rs. 7,69,38,415
	Interest year-wise		Rs.
	1995-96		24,47,057
	1996-97		90,37,625
	1997-98		1,05,08,999
	1998-99		96,14,486
	1999-00		1,02,54,391
	2000-01		1,24,34,158
	2001-02		72,06,699
	Total		6,15,03,415

(e)  When the assessee-company is debiting interest to loan accounts on mercantile basis and claiming as expenditure in the Profit and Loss A/c., it ought to have charged interest receivable on the advances made and credited to Profit and Loss A/c. especially when the written agreement provides for charging of interest on the advances made. It is well established that the assessee cannot follow mercantile system for payment of interest and cash system for receiving interest. Further the companies are required to follow only mercantile system of accounting both for expenses and receipts.

(f)  The guidelines issued by the ICAI are not binding on the department for determining the correct income of the year under the Income-tax Act.

(g)  The fact that the assessee charged interest on quarterly basis on the advances made to Sri V. Srinivasa Raju, and worked out the interest giving credit to the payments made by the assessee-company as reflected in pages 144 to 149 of the seized material marked A/NCCFL-I/1 is a clear indication of appropriating payments received from Sri V. Srinivasa Raju towards interest receivable from him and non admission of the same in the books of account is a clear omission of admission of income on the part of the assessee-company and the same is, therefore, assessable as undisclosed income for the block period.

(h)  For the above reasons I treat the interest receivable of Rs. 6,15,03,415/- as undisclosed income of the assessee company for the block period along with a further sum of Rs. 31,31,557 interest chargeable for the period 1.10.01 to 20.12.01. Since the venture has been cancelled and Sri V. Srinivasa Raju was asked to refund the advances along with interest in the year 1997 and as the first instalment of amount of Rs. 40 lakhs was received on 21.8.97, the interest is held as accrued for the first time in the accounting year relevant for assessment year 1998-99 onwards and assessed as undisclosed income accordingly.

15. There is no dispute in the fact that the assessee-company has not been able to recover even the principal amount much less the interest calculated in the loose sheets No. 136 to 153 of annexure marked as A/NCCL-1/1 seized from the office premises situated at Plot No. 41, Nagarjuna Hills, Punjagutta, Hyderabad. According to the assessee, all these calculations were done by the company to put pressure on Sri V. Srinivasa Raju to recover the advance of Rs. 440 lakhs paid by the company. The CIT(A) observed that the principles laid down by the Apex Court in the case of CIT v. Shoorji Vallabhdas & Co.[1962] 46 ITR 144 are clearly applicable to the facts of the assessee’s case. Their Lordships have held that where income has not resulted at all, there is neither accrual nor receipt of income. Their Lordships further laid down the principle that income-tax can be levied only on real income i.e., income that has accrued or received and not on notional income i.e., income that could have been received, if at all. In other words, the income which the assessee could have received but which has not at all been received is not taxable. This principle has again been reiterated in the case of Poona Electric Supply Co. Ltd. v. CIT [1965] 57 ITR 521 (SC). In the case of CIT v. Birla Gwalior (P.) Ltd. [1973] 89 ITR 266 (SC), their Lordships of the Supreme Court held that “it is not a hypothetical accrual of income that has got to be taken into consideration but the real accrual of income”. In the case of State Bank of Travancore v. CIT [1986]158 ITR 102/24 Taxman 337 their Lordships of the Supreme Court reiterated the above mentioned principle of law by holding that “It is the income which has really accrued or arisen to the assessee that is taxable.” In the present case, the income has neither accrued nor has arisen and as such, the same is not taxable in the block assessment. Accordingly, the CIT(A) directed the Assessing Officer to delete the addition of Rs. 6,15,03,415 from the block assessment.

16. Against the deletion of addition, the Revenue is in appeal and against sustaining of addition; the assessee is in appeal before us.

17. Regarding invoking the provisions of section 145 of the Income Tax Act in Block Assessment, the learned counsel for the assessee submitted that the Assessing Officer was of the view that the net profit percentage of the assessee was lower for the financial years 2000-01 and 2001-02 (forming part of the block period). The Assessing Officer resorted to estimate for 4 years, though he mentioned only two years in the show cause notice. In other words, on the basis of illusory percentage of profit which the Assessing Officer had in his mind, as a thumb rule, in whichever year falling during the block period he found that the percentage of profit was less than 10%, he resorted to estimate the income. The learned counsel for the assessee submitted that a detailed explanation was filed before the Assessing Officer on 9th January 2004. The explanation substantiated the percentage of net profit derived by the assessee and as to why it was the correct rate of net profit as derived by the assessee. The said explanation takes into its fold only two financial years in respect of which the Assessing Officer has pointed out in the show cause notice. Such being the case the explanation covering the four years including that of the two years not mentioned by the Assessing Officer in the show cause notice is now submitted hereunder.

18. The learned counsel for the assessee drew our attentions to various letters filed before lower authorities viz. on 14th October 2003, 4th November 2003, 18th November 2003 and 4th December 2003 which are placed on record. The important contents of those letters ware as follows:

(i)  Clause (a) of the letter directs for submission of the details of contract receipts relating to business of infrastructure development projects. The details relating to such projects together with profit & loss accounts pertaining to the financial years 1999-2000, 2000-01 and 2001-02 (up to 31st December 2001) are enclosed as Annexure-1.

 (i)  Clause (b) of the letter consist of the particulars of contract receipts in totality and the net income before depreciation and the percentage of income on such contract receipts pertaining to the financial year 2000-01 and 2001-02 (up to 20th December 2001). A point of view was expressed that the net profit percentage was lower for the said periods. In this context our submissions are:

(ii)  The net income from any specific contract and / or a project depends on various considerations. It can never be the case that all projects necessarily should result in profit. In other words all projects may not end up with fixed rate of profits. It, therefore, follows that some projects may result in profits and in some projects losses are suffered.

(iii)  The key factor for award of any project is the price quoted in the tender schedule. It is always the case that the contract is awarded based on the lowest bid quotation. At the same time the participation in a bid depends upon several factors that weigh with reference to the conditions imposed in the tender schedule. Such conditions vary from tender to tender.

(iv)   The company has been in the construction industry from more than two decades. The company for quite some years focused its core activity in civil works consisting of mostly industrial/housing structures. The records reveal that up to the financial year 1996-97, the company’s exposure in other sectors including infrastructure, irrigation, electrical, water works and railway works were practically not there and if it were there they are very nominal.

(v)  Besides such civil contracts, the company diversified its activities into cement industry, wind power, manufacturing of cylinders and other incidental jobs. Under the group concept, the promoters diversified into aquaculture in the name of M/s. NCC Bluewater Products Ltd., and finance in the name of M/s. NCC Finance Ltd.

(vi)  The heavy losses which lead to the financial troubles, resulted in hiving off its cement division during the financial year 1999-2000. The businesses of aquaculture and finance are no exception to the financial troubles because of the market conditions.

(vii) The Government considering the huge requirement in infrastructure industry and with the presence of multinational companies had liberalized the policies which helped the Indian companies to consider the infrastructure business, that increased progressively from 1997-98 onwards.

(viii)  The company had also started focusing on the infrastructure projects because of its line of business in construction and contracts. This focus takes its own time to be nearer to the prerequisite qualifications. Hence in the initial years, the company had undertaken some of the smaller projects especially the road works out side the state of Andhra Pradesh. To intrude into the competitive sector like this, and to withstand the obvious competition from the established giants and multinationals. Obviously the company had to quote the price in tenders either without a profit or with nominal profit. It is generally the case; the smaller projects have the disadvantage of huge administrative set up and operations of the company. The impact of the same would be on the net result. The company in that specific sector has to establish itself which would afforded it an opportunity to participate in further tenders for any works relating to that sector.

(ix)  In this direction, the company participated in certain tenders relating to road works and incurred losses which were inevitable. A business entity, always absorbs such losses as investment for future works in the related sectors. In completion of such works in the roads/highway sector, though the company had incurred losses in the initial years, the company had gained the experience that enabled strength to participate in the works relating to roads and highways of higher quantum.

(x)  The ld. AR highlight the key factors about which it was mentioned and of relevance for pricing the tender schedules/bids.

  i.  Competitors and their pricing policy.

 ii.  Payment comfort from clients/contractees.

iii.  Locational advantageous and inherent disadvantages.

iv.  To gain entry into works of the sector/ industry / and the contractees.

 v.  Optimum utilization of machinery and other infrastructure.

vi.  Elements of cost involved in the project.

vii.  Time is the essence of completion of every project.

viii.  The untoward average cost of the major fluctuation in the items like steel, cement and other consumables.

ix.  Absence of escalation clauses in the some of the tenders.

(xi)  All the above key factors shall have their impact on the ultimate result in the project and most of the key factors cannot be visualized at the time of tender. The company’s initiative while quoting the tender with the meagre profits ultimately ended up in losses in some of the projects. This factor effected the overall profitability of the company.

(xii)  During the financial years 2000-2001 and 2001-2002 (up to 31st December 2001) the company had incurred losses in certain major road projects. The details of such projects and losses are as follows:

	Major loss making projects	Loss
		2000-01	2001-02
	MCC Road works	28141247	3426220
	Road Work Bangalore	17171350	4359546
	NHAI Haryana	0	14201346
	BMP Bangalore	5569146	2196106
	NGV Bangalore	23205995	9393679
	Total	74087738	33576897
	Add: Proportionate expenses of Head Office & Regional Offices	4951011	3846170
	Total loss	79038749	37423067
	Turnover relating to the loss making projects	140223083	195542001

 (xiii)  The specific reasons for such losses are:

(A)  The desire to gain entry into the road project necessitated the company to quote low price in the bids.

(B)  The establishment cost of infrastructure for executing the road works was high. This is because of the need for establishment of machinery, manpower and related infrastructure and the expenditure related revenue incurred.

(C)  In spite of the best efforts the cost efficiency in the operations could not be achieved.

(D)  Added to the above for the road/highway works bitumen and diesel are the major components. During the financial years 2000-01, 2001-02 and subsequently there was a steep increase in the bitumen and diesel prices, which can never be visualized and much less considered at the time of tender. Almost all the projects are not covered by the cost escalation/compensation clauses, especially MCC road work/ Bangalore road work thus due to the steep increase in bitumen/diesel prices the company had incurred loss of Rs. 3.15 crores and Rs. 2.16 crores respectively in those two projects.

(E)  Whereas, in the case of Haryana road project, the cost coverage on diesel at a rate of 5% on the total coverage could not off set the increase which was between 20% to 25%.

(F)  The steep increase in bitumen price and diesel price were demonstrated in terms of statistics as follows:

Bitumen price increase

	S. No.	Year	Rate (Rs.)	% of Incr.
	1	October, 1999	7965.95
	2	June, 2000	10835.33	36.02
	3	June, 2002	10562.5	32.60
	Diesel price increase
	S. No.	Year	Rate per litre (Rs.)	% of Incr.
	1	October 1999	15.57
	2	September 2000	19.25	24.00

 The steep increase in Bitumen and diesel cost was not visualized at the time of bidding the project. The above tables would therefore confirm our submission that the increased cost has its impact on the ultimate profits of the project as explained above.

(G) Majority of the road works are abetting the villages. Due to local social problems, it is always the case labour from abetting villages has to be engaged at higher rate on daily basis besides our permanent labour. Added to this, peripheral works though not connected to main works had to be done as commercial expediency of the business to sail with the local elements without deterrence to our works. This also resultant in additional cost.

1. Explanation Project Wise

(i)  In the case of MCC road project and Road work Bangalore, the sub-contractor caused problems. The sub- contractor’s failure lead the company to complete the work as per the tender norms. In view of that, the projects were delayed and there was a time over run. In view of the time factor the steep increase in bitumen and increase in other construction materials had hit the company very badly and resulted in losses. In view of these problems, there was a loss of Rs. 4. 52 crores in MCC road works and Rs. 0.78 crores in Road Work Bangalore.

(ii)  In the case of Haryana road project, the company was executing such large project for the first time. The coverage on cost of diesel, which is a major component in the project was not sufficient to meet the escalated amount. This could not offset the periodical increase in the diesel cost. The fact of increase. in diesel cost is demonstrated in the above mentioned table. Further, to get an entry into the large projects in road sector and to gain experience for future works, the company had quoted low price. Adding to these problems, there was a time over run for completing the project. In view of these problems, there was a loss of Rs. 1.42 crores on this project.

(iii) In the case of BMP Bangalore project, the client had not made payments promptly. There was undue delay in payments. In view of the delay in payments, the company was forced to stop the work at project site for a period of 8 months from April 2001 to November 2001. During the period June 2000 to October 2000, the company had executed works value of Rs. 1O.25 crores against which in spite of best efforts of the company it could able to realized Rs. 1.61 crores only. Majority of the balance amount of Rs. 8. 65 crores was paid by the company during the financial year 2002-03. The delay in payments forced the company to stop the work and to look for alternative financials to meet the eventuality, which ultimately lead the company an interest burden of Rs.26. 78 lakhs against the UCO bank loan and Rs. 40 lakhs approximately against other loans diversified from other projects. In view of the delay in work, the fixed overheads and the establishment cost was incurred by the company. Due to these problems, the project had ended up with a loss of Rs.86 lakhs relating to the financial years 2000-01 and 2001-02 (up to 31st December 2001).

(iv)  In the case of NG V Bangalore project also, there was delay in payments from the client. There was a time over run of the project, due to that, there is further additional expenditure was incurred by the Company. Further, the company had maintained certain period even after the completing the work, such maintenance expenditure was incurred by the company. In view of these, the project ended up with a loss of Rs. 3. 26 Crores relating to the financial years 2000-01 and 2001-02 (up to 31st December 2001).

(v)  Considering the proportionate expenditure of Head Office and Regional Offices relating to these sites, the total loss from all these projects is arrived at Rs. 7.90 crores for the financial year 2000-01 and Rs. 3.74 crores for the financial year 2001-02 (up to 31st December 2001).

(vi)  In view of the losses in the circumstances explained in detail, the profits of the Company had appeared low. During the financial year 2000-01 and 2001-02 (up to 21st December 2001) the company had handled 81 projects and 70 projects respectively. Out of which, the major loss making projects are the five in number which were explained in detail as above.

19. In addition to these factors for low profitability, there is one more factor which had its impact on profitability. It pertains to the works undertaken by the company on sub-contract basis. To gain experience and to get eligibility to participate in future tenders, the company had undertaken certain works on subcontract basis. The turnover of such sub-contract works are Rs. 16.98 crores and Rs. 27.05 Crores relating to the financial years 2000-01 and 2001-02 (up to 31st December 2001) respectively. The turnover on sub-contract basis done by the company is demonstrated in the following table.

(Rs. in Crores)

	S. No.	Name of the Contractee	Nature of work	Quantum of Work 2000-01	Quantum of Work 2001-02 (up to 31st Dec’ 02
	1	ONDEO DEGREMONT	Water	0.49	3.13
	2	MECON	Road	6.34	12.43
	3	TATA INT.	Electrical	—	4.10
	4	BHEL	Housing	0.74	—
	5	NCC-ECIL JV	Roads	2.78	6.04
	6	NCC-KNR JV	Roads	6.63	1.36
		Total		16.98	27.06

20. In the above table confirms majority of the sub-contracts are relating to roads, water works and electrical, where the company requires experience in terms of volumes to participate in tenders for future projects in those sectors. The profitability on these sub- contract works can never as in the case of a main contractor.

21. It was submitted that, once the losses in the five major projects as explained in detail is considered the average profits earned by the company would obviously be on low side. To the exclusion of such losses if the profitability of the other projects is considered, it is working to 10.03% for the financial year 2000-01 and 8.58% for the financial year 2001-02 (up to 31st December 2001). On infrastructure projects, the company earned profit at 7.32% and 6.22% for the respective financial years. The average profitability of all the projects (including infrastructure and other projects) stood at 8.18% and 7.04% respectively. The summarized details are as follows:

Details of turnover and profit thereon

	Particulars		Financial year 2000-01 Turnover %	Financial year 2001-02 (up to 31.12.01) Turnover %
	Turnover
	Infrastructure projects		874228297	977107715
	*Other projects		1167909756	1608759821
		Total	2042138053	2585867536
	Turnover excluding major loss making projects
	Infrastructure projects		874228297	977107715
	*Other projects		1027686673	1413217820
		Total	1901914970	2390325535
	*Includes Sub-contract turnover		169767068	270544422
	Profit before depreciation excluding major loss making projects
	Infrastructure projects		64004966	7.32	60781983	6.22
	Other projects		103042910	10.03	121236841	8.58
		Total	167047876	8.18	182018824	7.04

	Major loss making projects	2000-01	2001-02
		Loss	Loss
	MCC road works	28141247	3426220
	Road work Bangalore	17171350	4359546
	NHAI Haryana	0	14201346
	BMP Bangalore	5569146	2196106
	NGV Bangalore	23205995	9393679
		74087738	33576891
	ADD: Proportionate Expenses of Head Office & Regional Offices	4951011	3846170
		79038749	37423061

22. The above data therefore reveal that to the exclusion of the losses on five projects, the profitability relating to the financial years 2000-01 and 2001-02 (up to 31st December 2001) in the other projects stood at 10.03% and 8.58% respectively.

23. The specific reasons for losses in such projects have been explained in detail. In addition to the specific reasons, there were several other factors which also contributed for the low profitability as an industry in general and the company as specific. Such reasons, contributed for the low profitability are as under:

(a)  Competition in the construction industry: The competition in the construction industry particularly from 1998-99 onwards has been on increasing trend because of the presence of global players and the established companies, which associated with multi-nationals. The obvious result is the competition amongst the players in the construction industry increased tremendously. The severe competition was one of the reasons for the reduction of the margins compared to others to get the work. The bid success of the company were very low from 1998-99 onwards, when compared with the previous strike rates.

(b)  Entry into new sectors and business expansion: The company had established a cement plant during the financial year 1997-98. Due to the losses and financial difficulties, the cement plant was hived off during the financial year 1999-2000. During the same period, in view of the change in government policies, the infrastructure sector has opened up with great opportunities and good hope. In order to compensate the volumes of turnover lost on account of sale of cement division and to concentrate/ participate in infrastructure industry to increase the turnover and profitability of the company and also in order to maintain its minimum growth rate in the business activity, the company has gone for expansion/ diversification in its core activity of construction. Accordingly, the company has diversified into:

 (i)  Road projects

 (ii)  Water and Sewerage pipeline works

(iii)  Electrical transmission & distribution lines.

To capture works in diversified sectors, the company obviously quoted lesser rates. As such, the margins from the above-diversified sectors is low in the initial years 2000-01 and 2001-02 (up to 31st December 2001). Losses incurred on such works have been explained in detail. In view of diversification, the company also incurred expenditure for the diversified sectors, which include:

 (i)  Business development

 (ii)  Establishment of specialized divisions.

(iii)  Recruitment of senior technical employees

(iv)  Establishment of regional offices around the country.

(v)  Procurement of new machinery.

The diversification into new sectors and the consequent expenditure incurred for such diversification, had its impact on the profitability during the financial years 2000-01 and 2001-02 (up to December 2001).

(c)  Low profit margins: The company has quoted the low price and captured more works in the core sector and new sectors including roads and highways. The profitability is no doubt low, but the company, could increase its turnover double in the financial year 2001-02 (up to 31st December 2001) as compared to the year 1999-2000.

(d)  High Administrative and Project Execution Cost: The company executing the projects all over the country. For the administrative convenience the company had established regional offices at a) Delhi, b) Mumbai, c) Chennai, d) Bangalore, e) Bhubaneshwer, f) Visakhapatnam. At any point of time, the project sites under execution will be around BO to 90. The regular employees on the rolls of the company are 1450 and NMRs is 200. In addition to these regular staff, the company should sail with constant labour problems. Unless the company maintains such an establishment, the growth cannot be sustained, and the consequent establishment expenditure, and its impact on the profits.

24. Taking into consideration the future works, especially in the area of road works and highways, the company had to bear the losses, if the company had to complete the works in the time from exclusion of the losses on five projects as explained in detail out of the total number of projects 81 relating to the financial year 2000-01 and 70 projects in 2001-02 (up to 31st December 2001), the company achieved an average profits of 8.18% and 7.04% respectively.

25. Explanation for low profitability during the financial years 1997 -98 & 1998-99:

(a)  During the financial year 1997-98 & 1998-99, the Appellant had incurred losses in certain projects the details of such projects and losses are as follows:

	Loss making projects	1997-98	1998-99
		Loss	Loss
	Essar Oils Ltd.	17355573	9904758
	Mukund (Kalyani Steels Ltd.)	8561031	—
	White Field	—	3464020
	Chennai Airport	—	1849880
	Indira Airpot	—	1963363
	Total loss	25916604	17182021
	Turnover relating to the loss making projects	47652727	99768128

Explanation for the losses:

 (i)  In the case of Essar Oils Ltd., Gujarat, the contracts relate to the construction of factory buildings and townships. However, due to the financial problems, the oil refinery project could never be completed even till date. Right from the beginning the company Essar Oils Ltd., has violated all the terms of the contract including the payment of mobilization advance. Some of the work bills are still due from the company Essar Oils Ltd. In view of the problems faced by the Appellant Company, a claim was lodged before the Arbitrator for an amount of Rs. 3.67 Crores. A copy of Arbitration minutes and a brief note is enclosed.

 (ii) In the case of the other contract works, the works were spread more than one financial year. The contract works includes several stages for example; civil works include earth work escalation, ground levelling, basement, structural works, finishing works, sanitary, plumbing, electrical works and all other miscellaneous works. The bills are always submitted based on the progress of the work from time to time. The income has been recognized based on the percentage of work completion. The fact remains that all the contract works may not end up in profits. At the same time each stage of any particular contract work may not result in profit from stage to stage. Conceptually and as in vogue the total project may either end up in profit and/or loss. In the case of Mukund (Kalayani Steels Ltd.,) Whitefiled – Bangalore, Chennai Airport and Indira Airport, were incurred losses during the financial year 1998-99, since these works were in initial stage in this financial year. The said works generated profits in the subsequent financial years, which was also revealing from the profits of that year.

Site wise profit & loss accounts were part of the assessment records. It is our submission that, once the losses in the above specified projects are as merged into the accounts considered, the average profit earned by the company would obviously be on low side. In other words, to the exclusion of such losses if the profitability of the other projects is considered, it is working out to 11.25% for the financial year 1997-98 and 10.62% for the financial year 1998-99.

26. Further, it was submitted that the comparable cases relied upon by the assessing officer (page 16 of the assessment order), to adopt the rate of net profit at 10%, do not bear any relevance to the facts of the appellant’s case. Hence, it was contended that the comparison is misplaced and therefore not correct.

27. He submitted that the net profit estimated by the Assessing Officer at 10% was on the basis of two allegedly comparable cases cited by him in the block assessment order. It was submitted that at no point of time in the course of the assessment proceedings were these two alleged comparable instances ever put to the appellant. According to the appellant the two cases cited are not comparable, since they are not in the similar line of the business, as that of the appellant. Those two entities carry on business of the construction mostly in the line of canals and dams. The appellant is mostly in the business of housing and industrial structures. From the financial year 1996-97 onwards the appellant diversified its activities into infrastructure development such as roads, bridges, water works and electrical works. Therefore, the line of business is not comparable merely because the two firms also deal in contracts. The works of those two firms comprise of earth work where the margin of profits are relatively higher. Neither the turnovers of the two firms nor the area of operations are not in any way comparable to the turnover of the appellant and its scope of operations. Further the establishment cost of the appellant is more because of the overheads of the Regional Offices and the site offices spread over the country depending upon the works. This is not the case with those two firms.

28. The point that needs appreciation is that even in those two cases, which the Assessing Officer considers as comparable, there is a glaring variation in the rate of net profit which ought to have been noticed by the Assessing Officer. The undisputed fact remains that both those concerns, carry on business in one line viz. construction of irrigation works such as dams, canals, etc. which is not strictly comparable with the business of the appellant. As to the percentage of net profit amongst the two concerns there is a variation of 4.15% approximately. Further, the Assessing Officer has taken into consideration for arriving at the percentage, the profit figures as per the profit and loss account. If the incomes returned by those two firms as per the income tax computation, are considered, the net profit rates are lower. In the appellant’s case the Assessing Officer considered the net profits as per income tax computation. Hence, the comparison is not of like with like and to explain this point a statement is enclosed (As Annexure I & /I). Hence, the basis of comparison suffers from several infirmities viz., (a) in respect of the line of business (b) in respect of the volume of turnover, profits (c) in respect of the area of operations and (d) in respect of comparison as to the quantum of profits as per the books of account vis-a-vis the incomes as per the return of income.

29. It was submitted that one contractor’s concern cannot be compared with another contractor’s concern as a thumb rule in a general way, as already submitted before assessing officer in detail in assessee’s letter dated 9th January 2004. According to AR the submission made by the assessee has not been controverted by the Assessing Officer in his order under appeal.

30. Further it was contended by the AR that two concerns those are carrying on business in the appellant’s line with other diversified areas of work connected with civil contracts etc., are (a) Simplex Concrete Piles (India) Ltd., situated at 1211 Nellie Sengupta Sarian, Kolkatta-700087 (b) Gammon India Ltd., Gammon House, Veer Savarkar Marg, Mumbai whose particulars would explain how the appellant’s results are fair and far better than the others.

31. The results of the two concerns for those assessment years, which the Assessing Officer has relied on in his order are tabulated hereunder:

A. SIMPLEX CONCRETE PILES (INDIA) LIMITED

	Asst. Year	Contract Receipts (Rs.)	Income as per Profit and Loss A/c. before Depreciation (Rs.)	Percentage of Income
	1998-1999	3,53,77,00,777	13,48,69,568	3.81
	1999-2000	2,98,38,08,824	6,67,89,513	2.24
	2000-2001	3,21,91,77,860	10,05,15,563	3.12
	2001-2002	3,92,21,04,907	10,97,15,130	2.80
	2002-2003	4,09,06,48,794	11,80,76,047	2.89
		Average Profit:		2.97
	B. GAMMON INDIA LIMITED
	Asst. Year	Contract Receipts (Rs.)	Income as per Profit & Loss A/c. before Depreciation (Rs.)	Percentage of Income
	1999-2000	3,28,98,92,000	17,32,12,000	5.26
	2000-2001	4,53,25,01,000	24,91,34,000	5.49
	2001-2002	5,05,50,96,000	29,15,00,000	5.76
	2002-2003	5,15,63,83,000	42,32,85,000	8.20
		Average Profit:		6.17

Total Average of both the Companies: 4.57%

32. The above data reveals that the results of the appellant are quite fair and reasonable in spite of the fact that the appellant suffered with the untoward situations of escalation and price increases without corresponding increase in the contract receipts. Further the average profitability of the appellant for the 3 years mentioned above is fair and that too stands at better rate when compared with the two concerns.

33. The perusal of the above two explanations when considered in detail would therefore affirm the submission of the appellant that the estimation of the rate of net profit @ 10% by the assessing officer on the facts of the appellant’s case is arbitrary, not proper, not correct and illusory. The comparison relied upon by the assessing officer is without any basis and not in any way nearer to the facts of the appellant’s case. The assessing officer even in his reply submitted, to the appellant’s written arguments did not controvert the facts brought on record by the appellant. He has also not brought any further facts on record in his reply.

34. The comparable cases cited by the appellant establish the fact that the profit in this line of business when considered with the volume of business of the appellant that a net profit in the range of 4 to 5% is more reasonable and fair. Therefore the unilateral estimate @ 10% by resorting to the rejection of books is not warranted and contrary to the facts on record.

35. In this view of the matter, the AR contended that there is no case for the estimation of net profit at 10% coupled with the rejection of the books of account.

36. The Departmental Representative submitted that payments were being made outside the books of account generated through inflation of expenses. The most important documents related to payments made to piece rate workers/sub contractors. During the course search, certain TDS certificates were relating to payments made to piece rate workers/labour contractors were seized from the office premises of the assessee-company. The post-search enquiries conducted by the DDIT (Inv) confirmed that some of these contractors or piece rate workers either did not exist or were not available at the addresses given. The Managing Director in his statement given u/s. 132(4) confirmed that some of the payments made to piece rate workers/labour contractors were fictitious and on this account lone, he offered an income of Rs. 1,37,00,000 towards undisclosed income to be assessed for the block period. This disclosure was allocated on proportionate basis of gross expenditure incurred each year on piece rate workers/labour contractors for A.Ys. 1996-97 to 2001-02. He relied on specifically para 5 of the assessment order. He also submitted that the profit declared by the assessee in the years covering the block period is very low as compared to other assessment years and he drew our attention to the comparative chart in page 8 of assessment order.

37. We have heard both the parties and perused the material available on record. As per provisions of Section 158BB, the block assessment to be made based on evidence before the assessing officer. The word “Evidence” has to be construed in a comprehensive and it includes all circumstantial evidence also. The material or evidence with the assessing officer may base assessment is not confined to direct testimony by witnesses. Such evidence need not only be evidence found during the course of search but also material gathered by him. The assessing officer was not fettered by the technical rules of evidence and the like and he may act on material which may not strictly speaking, be accepted as an evidence in the court of law. It may circumstantial evidence or assessment based on the pre-ponderous of probabilities judged by human conduct. For this purpose, the past history of the case, and general market conditions will constitute relevant material for the purpose of assessment. For the purpose of block assessment under Chapter XIV-B, in view of amendment by Finance Act, 2002 to Section 158BC(b) of the I.T. Act which is retrospective effect from 01.07.1995 wherein there is insertion of Section 145 for the purpose of determining the undisclosed income. As per amendment to Section 158BC(b), the Section 145 could also be invoked by assessing officer for determining the undisclosed income. For clarity, we are reproducing the relevant section herein below:

Section 158BC: Where any search has been conducted u/s 132 or books of accounts, other documents or assets are requisitioned u/s 132A in the case of any person, then –

(a)  …..

(b)  he assessing officer shall proceed to determine the undisclosed income of the block period in the manner laid in Section 158BB and the provisions of the section 142, subsection (2) and (3) of section 143, section 144 and section 145, shall, so far as may be applied;

38. The provisions of Section 158BC(b) which have been amended by Finance Act, 2002 with retrospective effect from 1st July, 1995, as per which ss 144 and 145 have been specifically made applicable to block assessment. However, we make it clear that if no material was found during the search which could show suppression of income, no estimation of undisclosed income of block period by resorting to Section 145 could be made. In other words, where there is a material, such an estimation of income can be made. This view of ours is fortified by the Judgment of Jurisdictional High Court in the case of Rajnik & Co. v. Asstt. CIT [2001] 251 ITR 561/117 Taxman 675 (AP) wherein held that once the suppression is established, estimate cannot be avoided. It is not necessary that addition should be limited to what is found during the search if the circumstance warranting an estimate. We have also noticed that Punjab & Haryana High Court in the case of Ved Prakash v. CIT [2004] 265 ITR 642/136 Taxman 163 wherein held that when the books of accounts maintained by the assessee were not reliable and verifiable, the block assessment has to be made in the light of material recovered during the search and in such circumstances, some element of estimate was unavoidable.

39. Adverting to the facts of the present case, assessment was made by applying the rate of net profit @ 10% for the AY 1998-99 & 1999-2000 for which no reasons has been given for applying such a flat rate of 10% except stating that considering the nature of contract works executed by the assessee company and the percentage of income admitted for the AYs 1996-97, 1997-98 & 2000-2001 and also for the percentage of income admitted by other contractors viz. M/s Prasad & Co. (PW) and M/s SEW Constructions Ltd., income was estimated before depreciation @ 10% for the AY 1998-99, 1999-2000, 2001-02 and for the period 01.04.2001 to 20.12.2001 and treat the difference of income estimated and the income admitted as undisclosed income of the assessee company for such assessment year. The CIT(A) though held that for the AY 1998-99, income declared @ 9.08% before depreciation and 8.5% for the AY 1999-2000 as reasonable. However, he has given different finding for the AY 2001-02 and for the period from 01.04.2001 to 20.12.2001. For AY 2001-02, the total gross receipt was at Rs.204.21 crores, income admitted before depreciation was at Rs.9.16 crores worked out at 4.49% as against 10.53% shown in the immediately preceding AY 2000-2001. Similarly, for the part period 01.04.2001 to 20.12.2001, the total contract receipt was at Rs.258.58crores, income declared before depreciation at Rs.14.46crores worked out at 5.59%. The assessee explained the reasons for low profit that the company has been in the construction industry for more than two decades. The company for quite some years focused its core activity in civil works consisting of mostly industrial/housing structures. Besides such civil contracts, the company diversified its activities into cement industry, wind power, manufacture of cylinders and other incidental jobs. Heavy losses resulted in closure of its cement division during financial year 1999-2000. The company also started focusing on infrastructure projects because of its line of business in construction and contracts. Hence, in the initial years, the company had undertaken some of the smaller projects especially the road works outside the state of Andhra Pradesh. To intrude into the competitive section like this, and to withstand the obvious competition from the established giants and multinationals, obviously the company had to quote the price in tenders either without a profit or with nominal profit. During the FY 2000-01 and 2001-02 (up to 31.12.2001) the company has incurred losses in certain major projects.

The specific reasons for such losses are:

(A)  The desire to gain entry into the road project necessitated the company to quote low price in the bids.

(B)  The establishment cost of infrastructure for executing the road works was high. This is because of the need for establishment of machinery, manpower and related infrastructure and the expenditure related revenue incurred.

(C)  In spite of the best efforts the cost efficiency in the operations could not be achieved.

(D)  Added to the above for the road/highway works bitumen and diesel are the major components. During the financial years 2000-01, 2001-02 and subsequently there was a steep increase in the bitumen and diesel prices, which can never be visualized and much less considered at the time of tender. Almost all the projects are not covered by the cost escalation/compensation clauses, especially MCC road work/Bangalore road work thus due to the steep increase in bitumen/diesel prices the company had incurred loss of Rs.3.15 crores and Rs.2.16 crores respectively in those two projects.

(E)  Whereas, in the case of Haryana road project, the cost coverage on diesel at a rate of 5% on the total coverage could not off set the increase which was between 20% to 25%.

(F)  There was steep increase in bitumen price and diesel price.

(G)  Majority of the road works are abetting the villages. Due to local social problems, it is always the case labour from abetting villages has to be engaged at higher rate on daily basis besides our permanent labour. Added to this, peripheral works though not connected to main works had to be done as commercial expediency of the business to sail with the local elements without deterrence to our works. This also resultant in additional cost.

40. We have gone through the reasons explained by the assessee. In our opinion, there is a reasonable cause for declining in net profit rate and it is found to be genuine. The low profit rate itself cannot be the reason for rejecting the books of accounts more so in the block assessment. It was held by Hon’ble Gauhati High Court in the case of Aluminium Industries (P.) Ltd. v. CIT [1995] 80 Taxman 184 observed that a lower rate of gross profit declared by the assessee as compared to the previous year, would not by itself be sufficient to justify any addition. The mere fact that the percentage of loss or gross profit is high or low in a particular year does not necessarily lead to inference that there has been suppression. Low profit is neither a circumstance nor material to justify addition or profits. The ratio of the judgments in Dhakeswari Cotton Mills Ltd. v. CIT [1954] 26 ITR 775 (SC); Raghubar Mandal Harihar Mandal v. State of Bihar [1957] 8 STC 770 (SC); State of Kerala v. C. Velukutty [1966] 60 ITR 239 (SC); State of Orissa v. Maharaja Shri B P Singh Deo [1970] 76 ITR 690 (SC); Brij Bhushan Lal Parduman Kumar v. CIT [1978] 115 ITR 524 (SC); Chouthmal Agarwalla v. CIT [1962] 46 ITR 262 (Assam); R.V.S. & Sons Dairy Farm v. CIT [2002] 257 ITR 764/[2003] 130 Taxman 615 (Mad.); International Forest Co. v. CIT [1975]101 ITR 721 (J&K); .Durai Raj v. CIT [1972] 83 ITR 484 (Ker); Ramachandra Ramnivas v. State of Orissa [1970] 25 STC 501 (Orissa); Action Electricals v. Dy. CIT [2002] 258 ITR 188/[2003] 132 Taxman 640 (Delhi) and Kamal Kumar Saharia v. CIT [1995] 216 ITR 217/[1994] 73 Taxman 299 (Gau) indicate that the assessing officer is not fettered by any technical rules of evidence and pleadings, and he is entitled to act on material which is not acceptable in evidence in a court of law, but while making the assessment under the principles of best judgment, the Income Tax Officer is not entitled to act on material which is not acceptable as evidence in a court of law, but while making the assessment under the principles of best judgment, the assessing officer is not entitled to make a pure guess without reference to any evidence or material. There must be something more than a suspicion to support the assessment. Low profit in a particular year itself cannot be ground for invoking the provisions of Section 145 of I.T. Act. Further, if there was no challenge to the transactions reflected in the books of accounts, then it is not open to the assessing officer to contend that what is shown by the entries in the books of accounts is not the real state of affairs. Even if for some reason, the books are rejected, it is not open for the assessing officer to make any addition on estimate basis or on pure guess work. The main reasons for rejecting books of accounts in this case are that during the course of search, certain TDS certificates relating to payment made to piece rate workers/ labour contractors were seized from the office premises of the assessee. According to the revenue, these payments were made to the non-existing parties. The Managing Director stated in his statement recorded u/s 132(4) that some of the payments made to the piece rate workers / labour contractors were fictitious and on these account he offered an additional undisclosed income of Rs.1.37 crores. The Department not satisfied with this explanation and offer of additional income of Rs.1.37 crores, further resorted to estimating of income for the AY 2001-02 and part period commencing to 01.04.2001 to 20.12.2001. In our opinion, the further estimation of income by the Department, after accepting the additional income offered by the assessee is not proper. More so, this is the block assessment and not the regular assessment. The block assessment is not a substitute for a regular assessment. Both the assessments are standing on different footings. Its scope and ambit is limited in that sense to materials unearthed during search. It is an addition to the regular assessment already done or to be done. The assessment for the block period can only be done on the basis of evidence found as a result of search or requisition of books of accounts or documents and such other materials or information as are available with the assessing officer. Evidence found as a result of search is clearly relatable to Section 132 and 132A of the I.T. Act. The clause (a) of the explanation to Section 158BA(2) postulates that assessment made under Chapter XIV-B shall be in addition to the regular assessment of each previous year included in the block period. Clause (b) of the explanation further clarified the position that the total undisclosed income relating to the block period shall not include the income assessed in any regular assessment as income of the related block period. Clause (c) puts a ban on treating any income assessed under the “Block Assessment” so as to form part of regular assessment of any previous year included in the “Block Period”. The special procedure of Chapter XIV-B is intnended to provide a mode of assessment of undisclosed income, which has been detected as a result of search. It cannot be a substitute for regular assessment. In this case, the addition is not based on seized material to estimate the turnover and thereby estimate the income. Similarly, expenditure claimed in the regular returns, cannot be disallowed in the block assessment consequent to the search action as the disallowance, and at the best, it could be the subject matter in regular assessment not in the block assessment. For this purpose we place reliance on the following precedents:

CIT v. N.R. Papers & Boards Ltd., [2001] 248 ITR 526/[2000] 108 Taxman 536 (Guj.)

“If prior to the date of search, the assessee had disclosed the particulars of income or expenditure either in the return or in the books of account or in the course of proceedings to the Assessing Officer or where the return had not become due, they are duty recorded in the regular books of account, then such Income cannot be treated as undisclosed income so as to tax a person ft the rate of Sixty per cent. Under Chapter XIV.

N.R. Papers & Boar’ds Ltd. (supra)

“Under the scheme of the provisions for block assessment it is apparent that it related to assessment of “undisclosed income” of the assessee excluding the income subjected to, regular assessment in pursuance of the returns filed by the assessee for such period. From a perusal of section 158BB of the Income-tax Act, 1961, it is clear that the returns are required to be filed in pursuance of a notice under section 158BC(a) and the assessment has to be framed on that basis in the light of material that had come into the possession of the assessing authority during the course of search which was the foundation of proceedings. The correctness or otherwise of the returns filed in pursuance of the notice under section 158BC(a) has to be examined with reference to the material in the possession of the assessing authority having nexus to assessment of “undisclosed income”. “

Bhagwati Prasad Kedia v. CIT [2001] 248 ITR 562/116 Taxman 261 (Calcutta)

“The Explanation to section 158BA of the Income-tax Act, 1961, makes it clear that the Legislature thought it fit to make a distinction, between the block assessment and the regular assessment. In the case of regular assessment, the Assessing Officer is free to examine the veracity of the return as well as the claims made by the assessee, whereas the undisclosed income is taxed by way of block assessment as a result of search and seizure. The logic behind the two different modes of assessment is that concealment of income and claiming deduction or exemption in respect of a disclosed income cannot be treated at part. The former is an offence which goes to the root of the matter and the other is on the basis of the causes shown by the assessee where the Assessing Officer is free to accept the justification shown or reject the same.”

CIT v. Vikram A. Doshi [2002] 256 ITR 129/[2003] 127 Taxman 513 (Bom)

“Block assessment – undisclosed income-undisclosed transactions assessed in block assessment-tribunal finding transactions disclosed in return which were subject-matter of regular assessments-transactions in question not to be considered in block assessment -income;-tax act, 1961, ss. 143, 158b.”

CIT v. Shamlal Balram Gurbani [2001] 249 ITR 501/118 Taxman 835 (Bom)

“A search was conducted at the residential premises of the assessee on March 25,1996, and a notice under section 158BC of the Income-tax Act, 1961, was issued; The assessee did not file the returns for the years 1993-94, 1994-95 and 1995-96. The Assessing Officer treated the income of the three years as the income of the block period. On appeal, the Tribunal found that the assessee’s income from interest, salary and rent was reflected in the audited balance-sheet of the respective assessment years of the firm and, therefore, the Tribunal deleted the addition.”

On appeal the Hon’ble Bombay High Court did not find any reason to interfere with the findings of facts recorded by the Tribunal. It was held:

“Held dismissing the appeal, that the conclusion of the Tribunal that there was no reason for treating the said income as undisclosed income for the purposes of block assessment was based on facts. No substantial question of law arose.”

CIT v. Vinod Danchand Ghodawat [2001] 247 ITR 448/114 Taxman 90 (Bom)

“Where the value of the gold and silver articles. and jewellery had been disclosed in the assessee’s wealth-tax return which was accepted by the Department:

Held that Chapter XIV-B of the Income-tax Act 1961, had no application to the facts of the case and the addition made by the Department on the ground of undisclosed income was erroneous.

During the search, it was found that the assessee had constructed a bungalow. It was found that the assessee had incurred an expense of Rs.4.16 lakhs. The Assessing Officer, thereafter, referred the matter to the Department Valuer, who valued the property at Rs. 6. 66 lakhs and accordingly, the difference had been added to the income of the assessee as undisclosed income:

Held, that the above basis clearly showed that the Department had not understood the scope of Chapter XIV-B of the Act. The addition did not fall within the Chapter XIV-B.”

(H) Even if it is presumed that post-search enquiries have resulted in detection of certain undisclosed income, though it is not relatable to the evidence found as on the date of search then also, Mumbai Bench of the Tribunal, in the case of Morarjee Goculdas Spg. & Wvg. Co. Ltd. v. Dy. CIT [2005] 95 ITD 1 (TM), while considering an identical situation, held as follows:-

“8. Block period for which the assessment is to be made under Chapter XIV-8 means the period comprising previous years relevant to ten assessment years preceding a previous year in which the search was conducted under section 132 or any requisition was made under section 132A, and also includes in the previous year in which such search was conducted or requisition made the period up to the date of the commencement of such search or as the case may be the date of such requisition. Therefore, the assessment for the block period under chapter XIV-8 can be made of the undisclosed income only up to the date of commencement of search or the date of the requisition and not of the period thereafter. Section 1588A provides for assessment of undisclosed income as result of search for the block period and computation of income and the computation of undisclosed income for the block period to be made as per the provisions of section 158BE and assessment has also to be made under section 158BC of the block period. The “undisclosed income” for which the assessment is to be made is defined in section 158B(b) which include money, bullion, jewellery or other valuable article or thing or any income based on any entry in the books of account or other documents or transactions, where such money, bullion, jewellery, valuable articles, things, entry in the books of account or other document or transaction represents wholly or partly income or property which has not been or would not have been disclosed for the purpose of this Act and after the amendment by Finance Act, 2002 w.e.f. 1-7-1995 it includes also any expenses, deduction or allowance claimed under this Act which is to be found to be false.”

41. In view of the above discussion, we are of the opinion that estimation of income on contracts which are disclosed in the regular books of accounts cannot be disturbed in the block period, and at best it could be the subject matter of regular assessment only. In view of this, we are inclined to hold that the CIT(A) is not justified in giving the direction to assessing officer for the Assessment Year 2001-02 and for part period from 01.04.2001 to 20.12.2001 to determine the undisclosed income at 6.5% before depreciation as against 4.49% for the assessment year 2001-02 and 5.59% for part period from 01.04.2001 to 20.12.2001 declared by the assessee. Accordingly, the ground raised by the assessee is allowed.

42. Now we will take up the issue relating to addition towards interest at Rs.6,15,03,415/- being receivable on funds advanced to Shri Srinivasa Raju, proprietor M/s Rachana Associates, Bangalore. According to learned counsel for the assessee, the CIT(A) ought have deleted entire addition of Rs.6,46,34,872/-instead of restricting it to Rs.6,15,03,415/- and thus grievance of the assessee is with regard to sustaining of Rs.31,31,557. The revenue has raised the ground with regard to deletion of Rs.6,15, 03,415/-. The Departmental Representative submitted that the asessee is debiting interest to loan accounts on mercantile basis and claiming as an expenditure in the Profit & Loss Account, it ought to have charged interest receivable on the advances made and credited to P & Loss A/C especially when the written agreement provides for charging of interest on the advances made. He submitted that the assessee can not follow dual method of accounting. He also submitted that the guide lines issued by the Institute of Chartered Accountants are not binding on the department for determining the correct income of the assessee.

43. We have heard both the parties on this issue. As seen from the facts of the case, the addition based on the loose seeds bearing no. 136 to 153 of Annexure marked as A/NCCL-1/1 seized from the office premises situated at plot No.41, Nagarjuna Hills, Punjagutta, Hyderabad. This is with reference to calculation of interest receivable from Shri V Srinivasa Raju on advance of Rs.440 lakhs made by the Company. This is only the calculation made by the assessee to put pressure on Shri V Srinivasa Raju. These loose sheet bundles is a dumb documents and cannot be considered as tangible material to determine the undisclosed income. There should be a accrual of income and it should be a real one. The income should be receivable and cannot be hypothetical and only on real income, income tax could be levied. On hypothetical accrual of income, Tax cannot be levied.

44. In our opinion, the undisclosed income of the assessee is to be computed by the assessing officer on the basis of available record. In many a time, it is very important to have direct evidence or conclusive evidence to prove to determine the undisclosed income. When the assessee gives an evasive reply to the assessing officer, he has no choice but to take estimation of the income. The only thing is it should be reasonable on the basis of material available on record. It should not be based on conjunctures and surmises. As of now material considered by the assessing officer for making the impugned addition is only the seized material marked as A/NCCL-1/1 which is loose sheets No. 136 to 153 containing the calculation of interest advanced to Shri V. Srinivasa Raju details to whom the money was advanced at Rs.440 lakhs. In view of this, we have to consider the seized material A/NCCL-1/1 to see whether it is enough to make addition. In our opinion, this document is only note book/loose slips. We have to look into the statement recorded u/s 132(4) or 132(4A) of the IT Act. The seized material A/NCCL-1/1 found during the course of search and the statement recorded is some piece of evidence to make an addition. The assessing officer has to establish the link between the seized material A/NCCL-1/1 and with other books of accounts of the assessee. It cannot be considered alone as conclusive evidence. The word ‘may be presumed’ appear in section 132(4A) gives an option to the authorities concerned to presume the things. But it is rebuttable and it does not give a definite authority and conclusive evidence. The assessee has every right to rebut the same by producing the same in support of his claim. The entire case depends on the rule of evidence. The assessee has every right to shift the burden of proof. There is no conclusive presumption. In the present case, the assessee explained that the assessee entered into an MOU dated 15.09.1995 and 15.11.1995 with Shri V Srinivasa Raju, Bangalore for procuring lands at Kodigehalli and Nandi Hills, Bangalore with an intention to develop the land into a township. The assessee company made an advance of Rs.440 lakhs between 28.12.1995 & 30.08.1996 to Shri V Srinivasa Raju. The said Shri V Srinivasa Raju could not acquire the land as per the terms of MOU. Some of the land acquired by Shri V Srinivasa Raju is not suitable to the assessee. In such circumstances, the assessee company rejected the land so acquired by Shri V Srinivasa Raju and made a claim for refund of the advance of Rs.440 lakhs. The assessee able to realize only Rs.305.95 crores principal amount from Shri V Srinivasa Raju. The payments includes (i) payment by cheque, (ii) value of flats registered in favour of assessee. The balance outstanding was at Rs.134.05 lakhs in the accounts of Shri V Srinivasa Raju. As pr MOU, Shri V Srinivasa Raju is liable for payment of interest @ 20% per annum on the amounts advanced by the assessee in the event of failure in buying the lands as required by the assessee. Loose sheets 1 to 37 of A/NCCL/5 represents interest calculation worked out by the company. All these calculations were done by the company to put pressure on Shri V Srinivasa Raju to recover the advance of Rs.440 lakhs made by the company. The advance made to Sri V Srinivasa Raju were recorded in the books of account in the year in which it was advanced. The financial statement from the year of advance reveal that interest income has not charged to this account. This confirm that this is a matter relating to the regular books of account. In such a situation, to consider same in the block assessment as undisclosed income is not possible.

45. Further, the assessing officer shall be specific about the nature of nexus of the seized material to the business of the assessee. The allegation of the Department is the seized material that reflected money advanced by the assessee and interest accrued thereon. But they are not able to unearth any background with regard to accrual of real income. Without any of these, the department has taken a view that the assessee has acquired the right to receive the interest. The department also not find any material from Shri V Srinivasa Raju which confirms the accrual or receipt of interest in favour of the assessee. There is no evidence as to whether he paid the interest. The department cannot draw inference on the basis of suspicion, conjuncture and surmise. Suspicion, however strong cannot take place of material in support of the findings of the assessing officer. The assessing officer should act in a judicial manner, proceed with judicial spirit and should come to a judicial conclusion. The assessing officer is required to act fairly as a reasonable person and not arbitrarily and capriciously. Assessment made should have adequate material and it should stand on its own legs. The assessing officer without examining concerned party, who has received advance from the assessee, cannot come to the conclusion that the assessee has received interest. The basis for addition is only note book/loose slips. These note book/loose slips are unsigned documents. The assessing officer has not established nexus between the note book/loose slips with actual accrual/ receipt of interest. The note book/loose slips seized marked A/NCCL-1/1 found during the course of search is a dumb document having no evidentiary value, no addition can be made in the absence of corroborative material. If there is circumstantial evidence in the form of promissory notes, loan agreement and bank entries, the addition is to be made on that basis to the extent of material available. The assessee is not expected to explain the loose papers found as there is no evidence other than note book/loose slips regarding accrual of interest. In our opinion, no addition can be made on the basis of dumb documents/note book/loose slips in the absence of any other material to show that the assessee has carried on money lending business. Noting on the note book/diary/loose sheets are required to be supported/ corroborated by other evidence and are also include the statement of a person who admittedly is a party to the noting and statement from all the persons whose names there on the note book/loose slips and their statements to be recorded and then such statement undoubtedly should be confronted to the assessee and he has to be allowed to cross examine the parties. In the present case, undoubtedly no statement from the parties whose names found in the note book/loose slips has been brought to our notice and as such entire addition in the hands of the assessee on the basis of uncorroborated writings in the loose papers found during the course of search is not possible. The evidence on record is not sufficient to support the revenue’s case that interest has been accrued to the assessee. This is the block assessment and we are concerned only with the undisclosed income and we have to consider only material and evidence detected as a result of search. It means that if an examination of the material already on record before search or if as a result of some external information or some other sources other than a search, it is found that some income had escaped assessment and then it is open for the Assessing Officer to resort to a regular assessment including reopening of a completed assessment if so advised. But he cannot drag these items into the block assessment proceedings envisaged under Chapter XIV-B of the I.T. Act. In our opinion evidence available with the Assessing Officer as a result of search is to be used for the purpose of determining the undisclosed income of the block period.

46. Further, Hon’ble Supreme Court in the case of Shoorji Vallabhadas & Co. (supra) wherein held as follows:

“Income Tax is a levy on income. No doubt, the income-tax Act takes into account two points of time at which the liability to tax is attracted, viz. the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a “hypothetical income”, which does not materialize. When income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipients, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account”.

47. Further, we find that same view has been taken by the Court in the case of CIT v. Motor Credit Corpn. Co. (P.) Ltd. [1981] 127 ITR 572/6 Taxman 63 (Mad.) and in the case of CIT v. Ferozepur Finance (P.) Ltd. [1980] 124 ITR 619/4 Taxman 439 (Punj. & Har.).

48. In view of above discussion, we are of the opinion that the addition at Rs. 6,46,34,872/- towards accrual of interest is not justified and the entire addition is deleted. Being so, the this ground raised by the assessee is allowed.

49. Coming to the ground raised by the revenue in its appeal that CIT(A) ought have upheld the rate of net profit of 10% adopted for AY 1998-99 (against 9.07% disclosed by the assessee) and 1999-2000 (against 8.5% disclosed by the assessee). We have heard both the parties on this issue. We have already dealt this issue in detail while adjudicating the determination of undisclosed income relating to the AY 2001-2002 & part period 01.04.2001 to 20.12.2001. Being so, this ground having no merits and on the same line, this ground dismissed.

50. Similarly the second ground raised by the revenue that the profit rate @ 6.5% by the CIT(A) for the AY 2001-02 and part period 01.04.2001 to 20.12.2001 is too low and it is to be 10%. This ground is dismissed as infructuous in view of our finding on the same issue in the assessee appeal.

51. In the result, revenue appeal is dismissed and the assessee appeal is allowed.