ACIT, Hyderabad v. Nagarjuna Construction Company Limited, Hyderabad

ITSSA 94/HYD/2004 | misc
Pronouncement Date: 30-03-2012 | Result: Dismissed

Appeal Details

RSA Number 9422516 RSA 2004
Assessee PAN AAACN7335C
Bench Hyderabad
Appeal Number ITSSA 94/HYD/2004
Duration Of Justice 7 year(s) 6 month(s) 19 day(s)
Appellant ACIT, Hyderabad
Respondent Nagarjuna Construction Company Limited, Hyderabad
Appeal Type Income Tax (Search & Seizure) Appeal
Pronouncement Date 30-03-2012
Appeal Filed By Department
Order Result Dismissed
Bench Allotted A
Tribunal Order Date 30-03-2012
Date Of Final Hearing 11-10-2011
Next Hearing Date 11-10-2011
Assessment Year misc
Appeal Filed On 10-09-2004
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A' HYDERABAD BEFORE SHRI CHANDRA POOJARI ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN JUDICIAL MEMBER I.T(SS).A. NO. 88/HYD/2004 (BLOCK PERIOD: A.YS. 1996-97 TO 2001-02 AND UP TO 20.12.2001) M/ S. NAGARJUNA CONSTRUCTION COMPANY LTD. HYDERABAD PAN: AAACN7335C VS. DY. COMMISSIONER OF INCOME - TAX CENTRAL CIRCLE-III HYDERABAD. APPELLANT RESPONDENT I.T(SS).A. NO. 94/HYD/2004 (BLOCK PERIOD: A.YS. 1996-97 TO 2001-02 AND UP TO 20.12.2001) DY. COMMISSIONER OF INCOME - TAX CENTRAL CIRCLE-3 HYDERABAD. VS. M/S. NAGARJUNA CONSTRUCTION COMPANY LTD. HYDERABAD PAN: AAACN7335C APPELLANT RESPONDENT REVENUE BY: SHRI V. SRINIVAS A ASSESSEE BY: SHRI P.R. DATLA DATE OF HEARING: 0 9 .02.2012 DATE OF PRONOUNCEMENT: 30.03.2012 O R D E R PER CHANDRA POOJARI AM: THESE TWO APPEALS ARE CROSS APPEALS DIRECTED AGAIN ST THE ORDER OF THE CIT(A)-I HYDERABAD DATED 10.6.2004 FO R THE BLOCK PERIOD A.YS. 1996-97 TO 2001-02 AND UP TO 20.12.200 1. 2. BRIEF FACTS OF THE ISSUE ARE THAT IN THIS CASE THER E 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. CO NSEQUENT TO THE SEARCH ACTION NOTICE U/S. 158BC WAS ISSUED ON 1 4.02.2003. THE ASSESSEE FILED RETURN OF INCOME ON 22.3.2002 AD MITTING 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 I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 2 DETERMINING UNDISCLOSED INCOME OF THE ASSESSEE AT RS. 29 24 23 330 FOR THE BLOCK PERIOD. WHILE MAKIN G 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 PER CENTAGE 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. 1998-99 199 9-2000 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 THE SE YEARS THE INCOME HAS BEEN ESTIMATED AT 10% OF THE GROSS RECEI PTS. FOR ESTIMATING THE INCOME AT 10% THE ASSESSING OFFICER HAS CITED TWO COMPARABLE CASES VIZ. M/S. PRASAD & COMPANY (PW) A ND M/S. SEW CONSTRUCTION LTD. HE HAS THEREFORE ESTIMATED THE UNDISCLOSED INCOME FROM CONSTRUCTION ACTIVITY FOR T HE 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 ADVANC ED TO MR. V. SRINIVASA RAJU ON THE BASIS OF CALCULATIONS SHOWN I N 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 PARA I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 3 6.4(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 RETUR N OF INCOME FOR DEDUCTION U/S. 80(IA). AFTER ALLOWING SET-OFF OF B ROUGHT FORWARD UNABSORBED DEPRECIATION OF RS. 8 03 06 430/- RELATI NG 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 NI L. 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 F OR 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 ABO VE 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 ST ATED ABOVE.` 3 75 59 093 ---------------- BALANCE OF INCOME 3 87 13 729 ---------------- ADD: UNDISCLOSED INCOME AS DETERMINED ABOVE 11 50 3 5 173 ---------------- 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 AUDI T REPORT FILED ALONG WITH RETURN OF INCOME. IN THE L ETTER DATED 9.1.04 AFTER ALLOCATING EXPENDITURE RELATING TO HEAD OFFICE THE PROFITS FROM INFRASTRUCTURE PROJEC TS ELIGIBLE FOR DEDUCTION U/S. 80(IA) WAS WORKED OUT T O RS. 6 40 04 966/-. 6 40 04 966 ---------------- UNDISCLOSED INCOME OF THE YEAR 8 97 43 966 ---------------- 8 97 43 936 I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 4 1.401 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 T O 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 OF FICER RELATING TO INVOKING OF PROVISIONS OF SECTION 145 OF THE ACT. 4. REGARDING THE GROUND WITH REGARD TO THE ASSESSME NT OF INCOME BY APPLYING RATE OF PROFIT OF 10% IN THE FI RST TWO ASSESSMENT YEARS VIZ. 1996-97 AND 1997-98 THE PER CENTAGE 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 TH E INCOME HAS BEEN ESTIMATED BY APPLYING RATE OF PROFIT OF 10% TH EREBY 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 GI VEN FOR APPLYING THE FLAT RATE OF 10% EXCEPT STATING THAT CONSIDERIN G 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 INCOM E 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 1999-200 0 AND 2001- 02 AND FOR THE PERIOD 1.4.2001 TO 20.12.2001 AND TR EATED THE I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 5 DIFFERENCE OF INCOME ESTIMATED AND THE INCOME ADMIT TED AS UNDISCLOSED INCOME OF THE ASSESSEE-COMPANY FOR SUCH ASSESSMENT YEARS. AFTER CONSIDERING THE ENTIRE FACTS AND CIRC UMSTANCES OF THE CASE THE CIT(A) WAS OF THE OPINION THAT THE RATE O F PROFIT DECLARED FOR A.YS. 1998-99 AND 1999-2000 IS QUITE REASONABLE AND OUGHT NOT TO HAVE BEEN DISTURBED BY REJECTING THE BOOKS O F ACCOUNT FOR THESE TWO YEARS. THE REGULAR ASSESSMENTS FOR BOTH THESE YEARS WERE FINALISED U/S. 143(3) AFTER DUE SCRUTINY OF RE GULAR 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 65 2 727 99 768 128 5. THE ASSESSEE SUBMITTED THE FOLLOWING EXPLANATION BEFORE THE LOWER AUTHORITIES: (I) IN THE CASE OF ESSAR OILS LTD. GUJARAT THE CONTRA CTS RELATE TO THE CONSTRUCTION OF FACTORY BUILDINGS AND TOWNSH IPS. HOWEVER DUE TO THE FINANCIAL PROBLEMS THE OIL REF INERY PROJECT COULD NEVER BE COMPLETED EVEN TILL DATE. R IGHT FROM THE BEGINNING THE COMPANY ESSAR OIL LTD. HAS VIOLA TED ALL THE TERMS OF THE CONTRACT INCLUDING THE PAYMENT OF MOBILISATION ADVANCE. SOME OF THE WORK BILLS ARE S TILL DUE FROM ESSAR OILS LTD. IN VIEW OF THE PROBLEMS FACED BY THE ASSESSEE-COMPANY A CLAIM WAS LODGED BEFORE THE ARB ITRATOR 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 INC LUDE EARTH I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 6 WORK ESCALATION GROUND LEVELLING BASEMENT STRUC TURAL WORKS FINISHING WORKS SANITARY PLUMBING ELECTRI CAL WORKS AND ALL OTHER MISCELLANEOUS WORKS. THE BILLS ARE A LWAYS SUBMITTED BASED ON THE PROGRESS OF THE WORK FROM TI ME TO TIME. THE INCOME HAS BEEN RECOGNISED BASED ON THE PERCENTAGE OF WORK COMPLETION. THE FACT REMAINS TH AT ALL THE CONTRACT WORKS MAY NOT END UP IN PROFITS. AT THE S AME 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 LO SS. IN THE CASE OF MUKUND (KALYANI STEELS LTD.) WHITEFILED BANGALORE CHENNAI AIRPORT AND INDIRA AIRPORT WERE INCURRED LO SSES DURING THE FINANCIAL YEAR 1998-99 SINCE THESE WORK S WERE IN INITIAL STAGE IN THIS FINANCIAL YEAR. THE SAID WOR KS GENERATED PROFITS IN THE SUBSEQUENT FINANCIAL YEARS WHICH WA S 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 COMPAN Y WOULD OBVIOUSLY BE ON LOW SIDE. IN OTHER WORDS TO THE E XCLUSION OF SUCH LOSSES IF THE PROFITABILITY OF THE OTHER PROJE CTS IS CONSIDERED IT IS WORKING OUT TO 11.25% FOR THE FIN ANCIAL 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 DECLA RED AT 9.07% FOR ASSESSMENT YEAR 1998-99 AND 8.5% FOR THE ASSESS MENT YEAR 1999-2000 IS QUITE REASONABLE AND THEREFORE NO ADD ITION IS REQUIRED TO BE MADE FOR THESE TWO YEARS. HENCE HE DIRECTED THE ASSESSING OFFICER TO DELETE THE ADDITION MADE IN TH ESE TWO YEARS. 7. FURTHER THE CIT(A) OBSERVED THAT THE INCOME B EFORE DEPRECIATION DECLARED IN ASSESSMENT YEAR 2001-02 AN D PART PERIOD 1.4.2001 TO 20.12.2001 APPEARS QUITE LOW AS COMPARE D TO OTHER I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 7 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 P ERCENTAGE WORKS OUT TO 5.59% WHICH IS ALSO VERY LOW COMPARED TO INC OME 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 E XPLANATION FOR LOW RATE OF PROFIT FOR THESE YEARS WAS FILED BY THE ASSESSEE VIDE LETTERS DATED 14 TH OCTOBER 2003 4 TH NOVEMBER 2003 18 TH NOVEMBER 2003 AND 4 TH DECEMBER 2003 FILED BEFORE THE ASSESSING OFFICER. IT WAS EXPLAINED THAT THE COMPANY HAS BEE N IN THE CONSTRUCTION INDUSTRY FOR MORE THAN TWO DECADES. T HE 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 ACTIVI TIES 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 COMP ANY ALSO STARTED FOCUSSING ON INFRASTRUCTURE PROJECTS BECAUS E OF ITS LINE OF BUSINESS IN CONSTRUCTION AND CONTRACTS. HENCE IN THE INITIAL YEARS THE COMPANY HAD UNDERTAKEN SOME OF THE SMALL ER PROJECTS ESPECIALLY THE ROAD WORKS OUTSIDE THE STATE OF ANDH RA 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 QUI TE THE PRICE IN TENDERS EITHER WITHOUT A PROFIT OR WITH NOMINAL PRO FIT. DURING THE FINANCIAL YEAR 2000-01 AND 2001-02 (UP TO 31 ST DECEMBER 2001) I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 8 THE COMPANY HAD INCURRED LOSSES IN CERTAIN MAJOR RO AD PROJECTS. THE DETAILS OF SUCH PROJECTS AND LOSSES ARE AS FOLL OWS: 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 NECE SSITATED THE COMPANY TO QUOTE LOW PRICE IN THE BIDS. (B) THE ESTABLISHMENT COST OF INFRASTRUCTURE FOR EXECUT ING THE ROAD WORKS WAS HIGH. THIS IS BECAUSE OF THE NEED F OR 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 BITUM EN AND DIESEL ARE THE MAJOR COMPONENTS. DURING THE FI NANCIAL YEARS 2000-01 2001-02 AND SUBSEQUENTLY THERE WAS A STEEP INCREASE IN THE BITUMEN AND DIESEL PRICES WHICH CA N 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 ROA D WORK/BANGALORE ROAD WORK THUS DUE TO THE STEEP INCR EASE IN BITUMEN/DIESEL PRICES THE COMPANY HAD INCURRED LOSS OF RS. 3.15 CRORES AND RS. 2.16 CRORES RESPECTIVELY IN THO SE TWO PROJECTS. I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 9 (E) WHEREAS IN THE CASE OF HARYANA ROAD PROJECT THE C OST COVERAGE ON DIESEL AT A RATE OF 5% ON THE TOTAL COV ERAGE COULD NOT OFFSET THE INCREASE WHICH WAS BETWEEN 20% TO 25 %. (F) THE STEEP INCREASE IN BITUMEN PRICE AND DIESEL PRIC E 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 N OT 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 A S EXPLAINED ABOVE. (G) MAJORITY OF THE ROAD WORKS ARE ABETTING THE VILLAGE S. 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 W ORKS. THIS ALSO RESULTANT IN ADDITIONAL COST. 9. IT HAS BEEN SUBMITTED BY THE ASSESSEE THAT TH E NET PROFITS ESTIMATED BY THE ASSESSING OFFICER AT 10% WAS ON TH E BASIS OF TWO ALLEGEDLY COMPARABLE CASES CITED BY HIM IN THE BLOC K ASSESSMENT I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 10 ORDER VIZ. PRASAD & CO. (PW) AND SEW CONSTRUCTIONS . AT NO POINT OF TIME IN THE COURSE OF ASSESSMENT PROCEEDINGS WE RE THESE TWO CASES WERE PUT TO THE ASSESSEE FOR COMMENTS. FURTH ER 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 BUSIN ESS OF HOUSING AND INDUSTRIAL CONSTRUCTIONS. FROM THE FIN ANCIAL YEAR 1996-97 ONWARDS THE ASSESSEE DIVERSIFIED ITS ACTIV ITIES INTO INFRASTRUCTURE DEVELOPMENT SUCH AS ROADS BRIDGES WATER WORKS AND ELECTRICAL WORKS. THEREFORE THE LINE OF BUSIN ESS IS NOT COMPARABLE MERELY BECAUSE THE TWO FIRMS ALSO DEAL I N CONTRACTS. FURTHER THE ASSESSING OFFICER HAS TAKEN INTO CONSID ERATION 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 PROFI T RATES ARE LOWER. IN THE ASSESSEE'S CASE THE ASSESSING OFFIC ER HAS CONSIDERED THE NET PROFIT AS PER INCOME-TAX COMPUTATION. ON T HE OTHER HAND THE ASSESSEE-COMPANY AS CITED TWO COMPARABLE CASES NAMELY SIMPLEX CONCRETE PILES (INDIA) LTD. AND GAMMON INDI A LTD. THE RESULTS OF THESE TWO CONCERNS ARE TABULATED HEREUND ER: 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 I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 11 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 O F 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 T HE ASSESSEE-COMPANY AND ALSO GONE THROUGH THE FACTS NA RRATED 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 STATEME NT 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 SEIZE D DOCUMENTS AND EXPLANATION GIVEN BY THE MANAGING DIRECTOR IS GIVEN BELOW: LOOSE SHEET NO. 31 : THIS SEIZED DOCUMENT SHOWS THE DETAILS OF AMOUNTS S PENT 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 C ONFIRM 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 ACC OUNT. THESE AMOUNTS TOTALLING TO RS. 55 LAKHS ARE PAID TO VARIOUS PERSONS AND THESE PAYMENTS ARE RELATED TO THE BUSIN ESS OF THE COMPANY NCCL AND ACCORDINGLY I ADMIT RS. 55 L AKHS AS I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 12 THE UNDISCLOSED INCOME OF THE BLOCK PERIOD IN THE H ANDS OF NCCL. LOOSE SHEET NO. 33 : THIS SEIZED DOCUMENT REFLECTS THE DETAILS OF COST O F LAND AT AMRAVATI PROJECT. AS PER THE SAID DOCUMENT THE CO ST 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 CA SH 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 D ETAILS OF EXPENDITURE INCURRED. THE TOTAL PAYMENT IS RS. 1 10 270. EXPLANATION : THIS PAPER CONTAINS THE DETAILS OF PAYMENTS MADE OU TSIDE 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 HAND S 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 TO TAL OF SUCH PAYMENTS APPEARING ON PAGE NO. 5 OF THE NOTE B OOK IS RS. 15 43 141. EXPLANATION : MAJORITY OF THIS EXPENDITURE/PAYMENTS EXCEPT TRAIN TICKETS/ FLIGHT TICKETS ETC. HAVE BEEN PAID OUTSIDE THE BO OKS OF ACCOUNT AND THE AMOUNTS NOT RELATING TO THE BUSINES S WILL BE OFFERED TO TAX AS UNDISCLOSED INCOME IN THE HANDS O F THE APPROPRIATE PERSONS DURING THE COURSE OF THE PROCEE DINGS. I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 13 ANS. TO Q. NO. 3): THESE ARE THE VOUCHERS MAINTAIN ED AT PROJECT OFFICE. MAINLY THESE VOUCHERS REPRESENT TH E AMOUNTS PAID AS ADVANCES TO THE PERSONS MENTIONED THEREIN W ITH REGARD TO THE EXPENDITURE TO BE INCURRED. THE RELE VANT EXPENDITURE WILL BE REFLECTED IN THE BOOKS OF ACCOU NTS 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 WI TH THE PETTY CASH BOOKS MAINTAINED. IN THE SAME SHEET MEN TIONED 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 BO OKS OF ACCOUNT OTHERWISE THE SAME WILL BE OFFERED FOR TA XATION. ANS. TO Q. NO. 5): KRISHNAPPA EXCHANGE ACCOUNT APPE ARING 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 WI LL 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 AP PROPRIATE PERSONS DURING THE COURSE OF PROCEEDINGS. HOWEVER SOME OF THE FIGURES APPEARING ON PAGE NO. 151 ARE NOTHING B UT REPETITION OF PAYMENTS APPEARING ON PAGE NO. 152. ALL THE FIGURES APPEARED IN PAGE NO. 151 ARE RECONCILABLE W ITH PAGE NO. 152. ANS. TO Q. NO. 11): SHEET NOS. 91 92 AND 93 OF ANN EXURE: A/NCCL/37 COMPARING WITH THE SHEET NO. 23 & 24 OF ANNEXURE: A/NCCL/38 ARE RELATING TO CERTAIN EXPENDI TURE INCURRED AT THE PROJECT OFFICE BANGALORE. THE ENT IRE EXPENDITURE WILL BE RECONCILED WITH THE BOOKS OF AC COUNT 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 DIFFERENC E IF ANY WILL BE OFFERED FOR TAX IN THE HANDS OF APPROP RIATE PERSONS DURING THE COURSE OF THE PROCEEDINGS. 11. THE CIT(A) OBSERVED FROM THE ABOVE THAT PAYME NTS WERE BEING MADE OUTSIDE THE BOOKS OF ACCOUNT GENERATED T HROUGH I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 14 INFLATION OF EXPENSES. THE MOST IMPORTANT DOCUMENT S RELATED TO PAYMENTS MADE TO PIECE RATE WORKERS/SUB CONTRACTORS . DURING THE COURSE SEARCH CERTAIN TDS CERTIFICATES WERE RELATI NG TO PAYMENTS MADE TO PIECE RATE WORKERS/LABOUR CONTRACTORS WERE SEIZED FROM THE OFFICE PREMISES OF THE ASSESSEE-COMPANY. THE P OST-SEARCH ENQUIRIES CONDUCTED BY THE DDIT (INV) CONFIRMED THA T 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 B LOCK PERIOD. THIS DISCLOSURE WAS ALLOCATED ON PROPORTIONATE BASI S OF GROSS EXPENDITURE INCURRED EACH YEAR ON PIECE RATE WORKER S/LABOUR CONTRACTORS FOR A.YS. 1996-97 TO 2001-02. THE DETA ILS OF THESE ARE GIVEN IN PARA 5 OF THE ASSESSMENT ORDER. CONSIDERI NG THE ENTIRE FACTS AND CIRCUMSTANCES OF THE CASE IT WAS OBSERVE D BY THE CIT(A) THAT THE RATE OF PROFIT DECLARED FOR A.Y. 2001-02 A ND 1.4.01 TO 20.12.2001 WAS QUITE LOW AS COMPARED TO OTHER YEARS AND THEREFORE THE ASSESSING OFFICER WAS PERFECTLY JUST IFIED IN INVOKING THE PROVISIONS OF SECTION 145 OF THE ACT. HOWEVER CONSIDERING THE EXPLANATION GIVEN BY THE ASSESSEE AND FACTS AND CIR CUMSTANCES OF THE CASE THE CIT(A) WAS OF THE OPINION THAT IT WOU LD 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 FO R A.Y. 2001- 02 AND PART PERIOD FROM 1.4.01 TO 20.12.01 RESPECTI VELY. HE DIRECTED THE ASSESSING OFFICER TO COMPUTE THE INCOM E ACCORDINGLY. HOWEVER SINCE FOR A.Y. 2000-01 THE ASSESSEE HAS A DMITTED UNDISCLOSED INCOME OF RS. 35 00 000 THE SAME SHOULD BE ADOPTED. FOR A.Y. 2001-02 THE ASSESSEE HAS ADMITTED UNDISCLO SED 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 I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 15 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 AMOUNTI NG 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 TH E CIT(A) GIVEN A DIRECTION THAT THE SAME SHOULD BE ADOPTED. 12. THE FACTS RELATING TO THE ADDITION OF RS. 6 1 5 03 415 BEING INTEREST RECEIVABLE ON FUNDS ADVANCED TO SRI V. SRI NIVASA RAJU PROP. RACHANA ASSOCIATES BANGALORE HAVE BEEN NARR ATED AT PARAS 6.1 TO 6.4 OF THE ASSESSMENT ORDER. THE ASSESSEE C OMPANY 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 SR I V. SRINIVASA RAJU FAILS TO GET THE LANDS AS PER THE UNDERSTANDIN G HE WILL REPAY THE ENTIRE AMOUNT ALONG WITH INTEREST @ 20% P.A. FR OM 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 SCENA RIO THE ASSESSEE-COMPANY REJECTED THE OFFER AND CLAIMED REF UND 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 31 ST OCTOBER 2003 WAS RS. 138.44 LAKHS INCLUDING SOME EXPENDITURE INCURRED BY THE ASSESSEE -COMPANY I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 16 RELATING TO THE RECTIFICATION WORKS IN THE FLATS RE GISTERED IN FAVOUR OF THE COMPANY. 13. BEFORE THE ASSESSING OFFICER IT WAS SUBMITTED T HAT 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 FOL LOWED BY THE COMPANY INTEREST IS NOT AN ISSUE TO BE CONSIDERED FOR INCOME-TAX RELATING TO BLOCK PERIOD. IN REPLY TO Q. NO. 89 T HE MANAGING DIRECTOR HAS ADMITTED THAT THE COMPANY IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING. IN REPLY TO Q. NO. 11 THE M D HAD ALSO ADMITTED THAT INTEREST WAS NOT RECORDED IN THE BOOK S OF ACCOUNT CONSIDERING ITS DOUBTFUL NATURE OF RECOVERY. THE C LAUSES IN THE MOU WAS TO PROTECT THE INTERESTS OF THE COMPANY IN THE EVENT OF UNFOUND CIRCUMSTANCES IF ARISE AT ANY GIVEN POINT O F TIME. IN OTHER WORDS INTEREST IF ANY COULD AT BEST BE CONSIDERED IS ALWAYS CONTINGENT IN THE GIVEN FACTS THAT WERE THERE AND A S EXPLAINED ABOVE. IN SUCH A SITUATION IT IS NOT CORRECT TO C ONSIDER ANY INCOME ON NOTIONAL AND/OR HYPOTHETICAL BASIS MUCH LESS IN THE PROCEEDINGS RELATING TO THE BLOCK ASSESSMENT. IN T HE OF BLOCK ASSESSMENT ONLY THE REAL INCOME SHOULD BE CONSIDER ED 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 DOUBTF UL. IN SUCH A SCENARIO IF IT NEEDS TO BE CONSIDERED AS AN INCOME IT WOULD ONLY MEAN NOTIONAL INCOME. EVEN IN RESPECT OF NOTING FO UND ON THE LOOSE SHEETS WHEN THERE IS NO EVIDENCE TO SHOW THA T 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 W ERE FOUND BUT NOWHERE EVIDENCE FOR PAYMENT/RECEIPT OF SUCH INTERE ST WAS FOUND. ADDED TO THE ABOVE SRI V. SRINIVASA RAJU CONFIRMED THAT THERE WAS I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 17 ORAL UNDERSTANDING THAT INTEREST SHALL NOT BE CHARG ED 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 METH OD OF ACCOUNTING AND THE INCOME IS CHARGEABLE TO TAX ON A CCRUAL 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 CA SE OF FAILURE ON THE PART OF THE AGENT TO GET THE LANDS REGISTERE D AND SUCH INTEREST IS PAYABLE FROM THE DATE OF RECEIPT OF ADV ANCE 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 TH AT SRI V. SRINIVASA RAJU FAILED TO GET THE LANDS REGISTERED I N THE NAME OF THE ASSESSEE-COMPANY AND HENCE DECIDED TO REFUND THE ADVANCES RECEIVED. AS PER THE WRITTEN AGREEMENT TH E ADVANCES ARE TO BE REFUNDED WITH INTEREST. (C) THE CLAIM THAT THERE WAS AN ORAL UNDERSTANDING BETW EEN THE PARTIES NOT TO CHARGE INTEREST IN CASE THE PRINCIPA L AMOUNT IS PAID IS WITHOUT ANY BASIS AND CONTRARY TO THE FACTS CONTAINED IN THE WRITTEN AGREEMENTS AND IS CLEARLY AN AFTERTH OUGHT TO AVOID ADMISSION OF INTEREST INCOME AND PROPER PAYME NT OF TAX. (D) LOOSE SHEET NUMBERED 136 TO 153 OF ANNEXURE MARKED A/NCCFL-I/1 SEIZED FROM THE OFFICE PREMISES SITUAT ED 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 CA LCULATION 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 RAJ U WHICH ARE ENCLOSED TO THIS ORDER. THE INTEREST REC EIVABLE ACCORDING TO THESE SHEETS ARE AS UNDER: I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 18 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 L OAN ACCOUNTS ON MERCANTILE BASIS AND CLAIMING AS EXPEND ITURE IN THE PROFIT AND LOSS A/C. IT OUGHT TO HAVE CHARGED INTEREST RECEIVABLE ON THE ADVANCES MADE AND CREDITED TO PRO FIT AND LOSS A/C. ESPECIALLY WHEN THE WRITTEN AGREEMENT PRO VIDES FOR CHARGING OF INTEREST ON THE ADVANCES MADE. IT IS W ELL ESTABLISHED THAT THE ASSESSEE CANNOT FOLLOW MERCANT ILE SYSTEM FOR PAYMENT OF INTEREST AND CASH SYSTEM FOR RECEIVING INTEREST. FURTHER THE COMPANIES ARE REQUIRED TO FO LLOW ONLY MERCANTILE SYSTEM OF ACCOUNTING BOTH FOR EXPENSES A ND RECEIPTS. (F) THE GUIDELINES ISSUED BY THE ICAI ARE NOT BINDING O N THE DEPARTMENT FOR DETERMINING THE CORRECT INCOME OF TH E YEAR UNDER THE INCOME-TAX ACT. (G) THE FACT THAT THE ASSESSEE CHARGED INTEREST ON QUAR TERLY BASIS ON THE ADVANCES MADE TO SRI V. SRINIVASA RAJU AND WORKED OUT THE INTEREST GIVING CREDIT TO THE PAYMEN TS MADE BY THE ASSESSEE-COMPANY AS REFLECTED IN PAGES 144 T O 149 OF THE SEIZED MATERIAL MARKED A/NCCFL-I/1 IS A CLEAR I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 19 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 RECEIVAB LE OF RS. 6 15 03 415/- AS UNDISCLOSED INCOME OF THE ASSESSEE COMPANY FOR THE BLOCK PERIOD ALONG WITH A FURTHER S UM 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 ALO NG WITH INTEREST IN THE YEAR 1997 AND AS THE FIRST INSTALME NT OF AMOUNT OF RS. 40 LAKHS WAS RECEIVED ON 21.8.97 THE INTEREST IS HELD AS ACCRUED FOR THE FIRST TIME IN THE ACCOUN TING YEAR RELEVANT FOR ASSESSMENT YEAR 1998-99 ONWARDS AND AS SESSED AS UNDISCLOSED INCOME ACCORDINGLY. 15. THERE IS NO DISPUTE IN THE FACT THAT THE ASSE SSEE-COMPANY HAS NOT BEEN ABLE TO RECOVER EVEN THE PRINCIPAL AMO UNT MUCH LESS THE INTEREST CALCULATED IN THE LOOSE SHEETS NO. 136 TO 153 OF ANNEXURE MARKED AS A/NCCL-1/1 SEIZED FROM THE OFFIC E PREMISES SITUATED AT PLOT NO. 41 NAGARJUNA HILLS PUNJAGUTT A HYDERABAD. ACCORDING TO THE ASSESSEE ALL THESE CALCULATIONS W ERE 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 SHOORJI VALLABHDAS AND CO. (46 ITR 144) ARE CLEARLY APPLICABLE TO THE FACTS OF THE ASSESSEE'S CASE. TH EIR LORDSHIPS HAVE HELD THAT WHERE INCOME HAS NOT RESULTED AT ALL THE RE IS NEITHER ACCRUAL NOR RECEIPT OF INCOME. THEIR LORDSHIPS FUR THER LAID DOWN THE PRINCIPLE THAT INCOME-TAX CAN BE LEVIED ONLY ON REAL INCOME I.E. INCOME THAT HAS ACCRUED OR RECEIVED AND NOT O N NOTIONAL INCOME I.E. INCOME THAT COULD HAVE BEEN RECEIVED IF AT ALL. IN OTHER WORDS THE INCOME WHICH THE ASSESSEE COULD HA VE RECEIVED BUT WHICH HAS NOT AT ALL BEEN RECEIVED IS NOT TAXAB LE. THIS PRINCIPLE HAS AGAIN BEEN REITERATED IN THE CASE OF POONA ELECTRIC SUPPLY COMPANY LTD. VS. CIT (1965) 57 ITR 521 (SC). IN THE CASE I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 20 OF CIT VS. BIRLA GWALIOR PVT. LTD. (1973)* 89 ITR 2 66 (SC) THEIR LORDSHIPS OF THE SUPREME COURT HELD THAT 'IT IS NOT A HYPOTHETICAL ACCRUAL OF INCOME THAT HAS GOT TO BE TAKEN INTO CON SIDERATION BUT THE REAL ACCRUAL OF INCOME'. IN THE CASE OF STATE BANK OF TRAVANCORE VS. CIT (1986) 158 ITR 102 THEIR LORDSHI PS OF THE SUPREME COURT REITERATED THE ABOVE MENTIONED PRINCI PLE OF LAW BY HOLDING THAT 'IT IS THE INCOME WHICH HAS REALLY ACC RUED OR ARISEN TO THE ASSESSEE THAT IS TAXABLE.' IN THE PRESENT CASE THE INCOME HAS NEITHER ACCRUED NOR HAS ARISEN AND AS SUCH THE SAM E 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 14 5 OF THE INCOME TAX ACT IN BLOCK ASSESSMENT THE LEARNED CO UNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSING OFFICER WAS O F 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 BLOC K PERIOD). THE ASSESSING OFFICER RESORTED TO ESTIMATE FOR 4 YE ARS THOUGH HE MENTIONED ONLY TWO YEARS IN THE SHOW CAUSE NOTICE. IN OTHER WORDS ON THE BASIS OF ILLUSORY PERCENTAGE OF PROFI T 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 ESTIMAT E THE INCOME. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT A DETAILED EXPLANATION WAS FILED BEFORE THE ASSESSING OFFICER ON 9 TH JANUARY 2004. THE EXPLANATION SUBSTANTIATED THE PERCENTAGE OF NET PROFIT DERIVED BY THE ASSESSEE AND AS TO WHY IT WAS THE CO RRECT RATE OF NET PROFIT AS DERIVED BY THE ASSESSEE. THE SAID EXPLAN ATION TAKES INTO I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 21 ITS FOLD ONLY TWO FINANCIAL YEARS IN RESPECT OF WHI CH THE ASSESSING OFFICER HAS POINTED OUT IN THE SHOW CAUSE NOTICE. SUCH BEING THE CASE THE EXPLANATION COVERING THE FOUR YEARS INCLUD ING 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 A TTENTIONS TO VARIOUS LETTERS FILED BEFORE LOWER AUTHORITIES VIZ. ON 14TH OCTOBER 2003 4TH NOVEMBER 2003 18 TH 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 SUBMIS SION OF THE DETAILS OF CONTRACT RECEIPTS RELATING TO BUSINESS OF INFRASTRUCTURE DEV ELOPMENT 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 31 ST 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 DEPR ECIATION AND THE PERCENTAGE OF INCOME ON SUCH CONTRACT RECEI PTS PERTAINING TO THE FINANCIAL YEAR 2000-01 AND 2001-0 2 (UP TO 20 TH DECEMBER 2001). A POINT OF VIEW WAS EXPRESSED THAT THE NET PROFIT PERCENTAGE WAS LOWER FOR THE SA ID 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 FIX ED RATE OF PROFITS. IT THEREFORE FOLLOWS THAT SOME PROJEC TS MAY RESULT IN PROFITS AND IN SOME PROJECTS LOSSES ARE S UFFERED. (III)THE KEY FACTOR FOR AWARD OF ANY PROJECT IS THE PRICE QUOTED IN THE TENDER SCHEDULE. IT IS ALWAYS THE CASE THAT THE I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 22 CONTRACT IS AWARDED BASED ON THE LOWEST BID QUOTATI ON. AT THE SAME TIME THE PARTICIPATION IN A BID DEPENDS UPON SEVERAL FACTORS THAT WEIGH WITH REFERENCE TO THE CO NDITIONS IMPOSED IN THE TENDER SCHEDULE. SUCH CONDITIONS VAR Y FROM TENDER TO TENDER. (IV) THE COMPANY HAS BEEN IN THE CONSTRUCTION INDUSTRY F ROM MORE THAN TWO DECADES. THE COMPANY FOR QUITE SOME YEARS FOCUSED ITS CORE ACTIVITY IN CIVIL WORKS CONS ISTING OF MOSTLY INDUSTRIAL/HOUSING STRUCTURES. THE RECORDS R EVEAL THAT UP TO THE FINANCIAL YEAR 1996-97 THE COMPANY'S EXPOSURE IN OTHER SECTORS INCLUDING INFRASTRUCTURE IRRIGATION ELECTRICAL WATER WORKS AND RAILWAY WOR KS WERE PRACTICALLY NOT THERE AND IF IT WERE THERE THEY ARE VERY NOMINAL. (V) BESIDES SUCH CIVIL CONTRACTS THE COMPANY DIVERSIFI ED ITS ACTIVITIES INTO CEMENT INDUSTRY WIND POWER MANUFACTURING OF CYLINDERS AND OTHER INCIDENTAL JOB S. 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 TROUBL ES RESULTED IN HIVING OFF ITS CEMENT DIVISION DURING T HE FINANCIAL YEAR 1999-2000. THE BUSINESSES OF AQUACULTURE AND FINANCE ARE NO EXCEPTION TO THE FINANCIAL TROUB LES 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 POLICIE S WHICH HELPED THE INDIAN COMPANIES TO CONSIDER THE INFRASTRUCTURE BUSINESS THAT INCREASED PROGRESSIVE LY FROM 1997-98 ONWARDS. I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 23 (VIII) THE COMPANY HAD ALSO STARTED FOCUSING ON THE INFRASTRUCTURE PROJECTS BECAUSE OF ITS LINE OF BUSI NESS IN CONSTRUCTION AND CONTRACTS. THIS FOCUS TAKES ITS OW N TIME TO BE NEARER TO THE PREREQUISITE QUALIFICATIONS. HE NCE 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 NO MINAL PROFIT. IT IS GENERALLY THE CASE; THE SMALLER PROJE CTS HAVE THE DISADVANTAGE OF HUGE ADMINISTRATIVE SET UP AND OPERATIONS OF THE COMPANY. THE IMPACT OF THE SAME W OULD 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 A NY WORKS RELATING TO THAT SECTOR. (IX) IN THIS DIRECTION THE COMPANY PARTICIPATED IN CERT AIN 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 INCURR ED 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 QUAN TUM. (X) THE LD. AR HIGHLIGHT THE KEY FACTORS ABOUT WHICH I T WAS MENTIONED AND OF RELEVANCE FOR PRICING THE TENDER SCHEDULES/BIDS. I. COMPETITORS AND THEIR PRICING POLICY. I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 24 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) A LL 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 COM PANY'S INITIATIVE WHILE QUOTING THE TENDER WITH THE MEAGRE PROFITS ULTIMATELY ENDED UP IN LOSSES IN SOME OF THE PROJEC TS. THIS FACTOR EFFECTED THE OVERALL PROFITABILITY OF T HE COMPANY. (XII) DURING THE FINANCIAL YEARS 2000-2001 AND 2001-2002 (UP TO 31 ST DECEMBER 2001) THE COMPANY HAD INCURRED LOSSES IN CERTAIN MAJOR ROAD PROJECTS. THE DETAILS OF SUC H 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: I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 25 (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 B ITUMEN AND DIESEL ARE THE MAJOR COMPONENTS. DURING THE FIN ANCIAL YEARS 2000-01 2001-02 AND SUBSEQUENTLY THERE WAS A STEEP INCREASE IN THE BITUMEN AND DIESEL PRICES WHICH CA N 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 ROA D WORK/ BANGALORE ROAD WORK THUS DUE TO THE STEEP INC REASE IN BITUMEN/DIESEL PRICES THE COMPANY HAD INCURRED L OSS OF RS. 3.15 CRORES AND RS. 2.16 CRORES RESPECTIVELY IN THOSE TWO PROJECTS. (E) WHEREAS IN THE CASE OF HARYANA ROAD PROJECT T HE COST COVERAGE ON DIESEL AT A RATE OF 5% ON THE TOTAL COV ERAGE COULD NOT OFF SET THE INCREASE WHICH WAS BETWEEN 20% TO 2 5%. (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 I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 26 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 N OT 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 PROFI TS 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 LAB OUR 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 W ORKS. 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- CONTRA CTOR'S FAILURE LEAD THE COMPANY TO COMPLETE THE WORK AS PER THE TENDER NORMS. IN VIEW OF THAT THE PROJECTS WERE DE LAYED 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 BAD LY AND RESULTED IN LOSSES. IN VIEW OF THESE PROBLEMS THER E WAS A LOSS OF RS. 4. 52 CRORES IN MCC ROAD WORKS AND RS. 0.78 CRORES IN ROAD WORK BANGALORE. I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 27 (II) IN THE CASE OF HARYANA ROAD PROJECT THE COMP ANY WAS EXECUTING SUCH LARGE PROJECT FOR THE FIRST TIME. TH E COVERAGE ON COST OF DIESEL WHICH IS A MAJOR COMPONENT IN THE PROJECT WAS NOT SUFFICIENT TO MEET THE ESCALATED AMOUNT. TH IS COULD NOT OFFSET THE PERIODICAL INCREASE IN THE DIESEL CO ST. 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 CL IENT HAD NOT MADE PAYMENTS PROMPTLY. THERE WAS UNDUE DELAY IN PAYMENTS. IN VIEW OF THE DELAY IN PAYMENTS THE COM PANY WAS FORCED TO STOP THE WORK AT PROJECT SITE FOR A P ERIOD 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. 1 O.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 FIN ANCIAL YEAR 2002-03. THE DELAY IN PAYMENTS FORCED THE COMP ANY 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 L OANS DIVERSIFIED FROM OTHER PROJECTS. IN VIEW OF THE DEL AY 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 31 ST DECEMBER 2001). I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 28 (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 ADDITION AL EXPENDITURE WAS INCURRED BY THE COMPANY. FURTHER T HE COMPANY HAD MAINTAINED CERTAIN PERIOD EVEN AFTER TH E COMPLETING THE WORK SUCH MAINTENANCE EXPENDITURE W AS INCURRED BY THE COMPANY. IN VIEW OF THESE THE PROJ ECT ENDED UP WITH A LOSS OF RS. 3. 26 CRORES RELATING TO THE FINANCIAL YEARS 2000-01 AND 2001-02 (UP TO 31 ST DECEMBER 2001). (V) CONSIDERING THE PROPORTIONATE EXPENDITURE OF H EAD OFFICE AND REGIONAL OFFICES RELATING TO THESE SITES THE T OTAL LOSS FROM ALL THESE PROJECTS IS ARRIVED AT RS. 7.90 CROR ES FOR THE FINANCIAL YEAR 2000-01 AND RS. 3. 74 CRORES FOR THE FINANCIAL YEAR 2001-02 (UP TO 31 ST DECEMBER 2001). (VI) IN VIEW OF THE LOSSES IN THE CIRCUMSTANCES EX PLAINED IN DETAIL THE PROFITS OF THE COMPANY HAD APPEARED LOW . DURING THE FINANCIAL YEAR 2000-01 AND 2001-02 (UP TO 21 ST DECEMBER 2001) THE COMPANY HAD HANDLED 81 PROJECTS AND 70 PR OJECTS RESPECTIVELY. OUT OF WHICH THE MAJOR LOSS MAKING P ROJECTS ARE THE FIVE IN NUMBER WHICH WERE EXPLAINED IN DETA IL 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 BAS IS. 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 31 ST DECEMBER 2001) RESPECTIVELY. THE TURNOVER ON SUB- CONTRACT BASIS DONE BY THE COMPANY IS DEMONSTRATED IN THE FOLLOWING TABLE. I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 29 (RS. IN CRORES) S. NO. NAME OF THE CONTRACTEE NATURE OF WORK QUANTUM OF WORK 2000-01 QUANTUM OF WORK 2001-02 (UP TO 31 ST 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 SU B-CONTRACTS ARE RELATING TO ROADS WATER WORKS AND ELECTRICAL WHERE THE COMPAN Y REQUIRES EXPERIENCE IN TERMS OF VOLUMES TO PARTICIPATE IN TENDERS FOR FUTURE PROJECTS IN THOSE SECTORS. THE PROFITABI LITY ON THESE SUB- CONTRACT WORKS CAN NEVER AS IN THE CASE OF A MAIN C ONTRACTOR. 21. IT WAS SUBMITTED THAT ONCE THE LOSSES IN THE FIVE MAJOR PROJECTS AS EXPLAINED IN DETAIL IS CONSIDERED THE AVERAGE PROFI TS EARNED BY THE COMPANY WOULD OBVIOUSLY BE ON LOW SID E. TO THE EXCLUSION OF SUCH LOSSES IF THE PROFITABILITY OF TH E OTHER PROJECTS IS CONSIDERED IT IS WORKING TO 10.03% FOR THE FINANCI AL YEAR 2000-01 AND 8.58% FOR THE FINANCIAL YEAR 2001-02(UP TO 31 ST DECEMBER 2001). ON INFRASTRUCTURE PROJECTS THE COMPANY EARN ED PROFIT AT 7.32% AND 6.22% FOR THE RESPECTIVE FINANCIAL YEARS. THE AVERAGE PROFITABILITY OF ALL THE PROJECTS (INCLUDING INFRAS TRUCTURE AND OTHER PROJECTS) STOOD AT 8.18% AND 7.04% RESPECTIVELY. TH E SUMMARIZED DETAILS ARE AS FOLLOWS: DETAILS OF TURNOVER AND PROFIT THEREON PARTICULARS FINANCIAL YEAR 2000-01 FINANCIAL YEAR 2001- 02 (UP TO 31.12.01) TURNOVER % TURNOVER % TURNOVER INFRASTRUCTURE PROJECTS 874228297 977107715 * OTHER PROJECTS 1167909756 1608759821 TOTAL 2042138053 2585867536 I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 30 TURNOVER EXCLUDING MAJOR LOSS MAKING PROJECTS INFRASTRUCTURE PROJECTS 874228297 977107715 * OTHER PROJECTS 1027686673 1413217820 TOTAL 1901914970 2390325535 * INCLUDES SUB-CONTRACT TURNOVER 169767068 2705444 22 PROFIT BEFORE DEPRECIATION EXCLUDING MAJOR LOSS MAK ING PROJECTS INFRASTRUCTURE PROJECTS 64004966 7.32 60781983 6.2 2 OTHER PROJECTS 103042910 10.03 121236841 8.58 TOTAL 167047876 8.18 182018824 7.04 MAJOR LOSS MAKING PROJECTS 2000 - 01 2001 - 02 L OSS L OSS M CC ROAD WORKS 28141247 342622 0 ROAD WORK BANGALORE 17171350 4359546 N HAI H ARYANA 0 14201346 B MP B ANGALORE 5569146 2196106 N GV B ANGALORE 23205995 939367 9 74087738 ; 33576891 ADD: PROPORTIONATE EXPENSES OF HEAD OFFICE & REGIONAL OFFICES 4951011 3846170 79038749 37423061 22. THE ABOVE DATA THEREFORE REVEAL THAT TO THE EXC LUSION OF THE LOSSES ON FIVE PROJECTS THE PROFITABILITY RELATING TO THE FINANCIAL YEARS 2000-01 AND 2001-02 (UP TO 31 ST DECEMBER 2001) IN THE OTHER PROJECTS STOOD AT 10.03% AND 8.58% RESPECTIVELY. 23. THE SPECIFIC REASONS FOR LOSSES IN SUCH PROJEC TS HAVE BEEN EXPLAINED IN DETAIL. IN ADDITION TO THE SPECIFIC RE ASONS THERE WERE SEVERAL OTHER FACTORS WHICH ALSO CONTRIBUTED FOR TH E LOW PROFITABILITY AS AN INDUSTRY IN GENERAL AND THE COM PANY 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 WIT H MULTI- NATIONALS. THE OBVIOUS RESULT IS THE COMPETITION AM ONGST THE PLAYERS IN THE CONSTRUCTION INDUSTRY INCREASED TREM ENDOUSLY. THE SEVERE COMPETITION WAS ONE OF THE REASONS FOR THE R EDUCTION OF THE I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 31 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 C EMENT PLANT WAS HIVED OFF DURING THE FINANCIAL YEAR 1999-2000. DURING THE SAME PERIOD IN VIEW OF THE CHANGE IN GOVERNMENT PO LICIES THE INFRASTRUCTURE SECTOR HAS OPENED UP WITH GREAT OPPO RTUNITIES AND GOOD HOPE. IN ORDER TO COMPENSATE THE VOLUMES OF TU RNOVER LOST ON ACCOUNT OF SALE OF CEMENT DIVISION AND TO CONCENTRA TE/ PARTICIPATE IN INFRASTRUCTURE INDUSTRY TO INCREASE THE TURNOVER AND PROFITABILITY OF THE COMPANY AND ALSO IN ORDER TO MAINTAIN ITS MI NIMUM GROWTH RATE IN THE BUSINESS ACTIVITY THE COMPANY HAS GONE FOR EXPANSION/ DIVERSIFICATION IN ITS CORE ACTIVITY OF CONSTRUCTIO N. 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 COMPAN Y OBVIOUSLY QUOTED LESSER RATES. AS SUCH THE MARGINS FROM THE ABOVE- DIVERSIFIED SECTORS IS LOW IN THE INITIAL YEARS 200 0-01 AND 2001-02 (UP TO 31 ST DECEMBER 2001). LOSSES INCURRED ON SUCH WORKS HAVE BEEN EXPLAINED IN DETAIL. IN VIEW OF DIVERSIFICATIO N THE COMPANY ALSO INCURRED EXPENDITURE FOR THE DIVERSIFIED SECTO RS WHICH INCLUDE: I) BUSINESS DEVELOPMENT II) ESTABLISHMENT OF SPECIALIZED DIVISIONS. III) RECRUITMENT OF SENIOR TECHNICAL EMPLOYEES IV) ESTABLISHMENT OF REGIONAL OFFICES AROUND THE COUNTRY. I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 32 V) PROCUREMENT OF NEW MACHINERY. THE DIVERSIFICATION INTO NEW SECTORS AND THE CONSEQ UENT EXPENDITURE INCURRED FOR SUCH DIVERSIFICATION HAD ITS IMPACT ON THE PROFITABILITY DURING THE FINANCIAL YEARS 2000-0 1 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 SECT ORS INCLUDING ROADS AND HIGHWAYS. THE PROFITABILITY IS NO DOUBT L OW BUT THE COMPANY COULD INCREASE ITS TURNOVER DOUBLE IN THE FINANCIAL YEAR 2001-02 (UP TO 31 ST 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 TH E ADMINISTRATIVE CONVENIENCE THE COMPANY HAD ESTABLISHED REGIONAL OF FICES AT A) DELHI B) MUMBAI C) CHENNAI D) BANGALORE E) BHUBANESHWER F) VISAKHAPATNAM. AT ANY POINT OF TIME THE PROJECT SI TES UNDER EXECUTION WILL BE AROUND BO TO 90. THE REGULAR EMPLOYEES ON THE ROLLS OF THE COMPANY ARE 1450 AND NMRS IS 200. IN A DDITION TO THESE REGULAR STAFF THE COMPANY SHOULD SAIL WITH C ONSTANT LABOUR PROBLEMS. UNLESS THE COMPANY MAINTAINS SUCH AN ESTA BLISHMENT THE GROWTH CANNOT BE SUSTAINED AND THE CONSEQUENT ESTABLISHMENT EXPENDITURE AND ITS IMPACT ON THE PR OFITS. 24. TAKING INTO CONSIDERATION THE FUTURE WORKS E SPECIALLY 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 EXPLAIN ED IN DETAIL OUT OF THE TOTAL NUMBER OF PROJECTS 81 RELATING TO THE FIN ANCIAL YEAR 2000- 01 AND 70 PROJECTS IN 2001-02 (UP TO 31 ST DECEMBER 2001) THE I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 33 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 TH E 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 CONTRA CTS RELATE TO THE CONSTRUCTION OF FACTORY BUILDINGS AND TOWNSHIPS . HOWEVER DUE TO THE FINANCIAL PROBLEMS THE OIL REFINERY PRO JECT COULD NEVER BE COMPLETED EVEN TILL DATE. RIGHT FROM THE B EGINNING THE COMPANY ESSAR OILS LTD. HAS VIOLATED ALL THE TERMS OF THE CONTRACT INCLUDING THE PAYMENT OF MOBILIZATION ADVA NCE. SOME OF THE WORK BILLS ARE STILL DUE FROM THE COMPANY ES SAR OILS LTD. IN VIEW OF THE PROBLEMS FACED BY THE APPELLANT COMP ANY A CLAIM WAS LODGED BEFORE THE ARBITRATOR FOR AN AMOUN T OF RS. 3.67 CRORES. A COPY OF ARBITRATION MINUTES AND A BRIEF N OTE IS ENCLOSED. II) IN THE CASE OF THE OTHER CONTRACT WORKS THE WO RKS WERE SPREAD MORE THAN ONE FINANCIAL YEAR. THE CONTRACT WORKS IN CLUDES SEVERAL STAGES FOR EXAMPLE; CIVIL WORKS INCLUDE EAR TH WORK ESCALATION GROUND LEVELLING BASEMENT STRUCTURAL WORKS I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 34 FINISHING WORKS SANITARY PLUMBING ELECTRICAL WOR KS AND ALL OTHER MISCELLANEOUS WORKS. THE BILLS ARE ALWAYS SUB MITTED 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 F ROM STAGE TO STAGE. CONCEPTUALLY AND AS IN VOGUE THE TOTAL PROJE CT MAY EITHER END UP IN PROFIT AND/OR LOSS. IN THE CASE OF MUKUND (KALAYANI STEELS LTD. ) WHITEFILED - BANGALORE CHENNAI AIRPO RT AND INDIRA AIRPORT WERE INCURRED LOSSES DURING THE FINANCIAL YEAR 1998-99 SINCE THESE WORKS WERE IN INITIAL STAGE IN THIS FIN ANCIAL YEAR. THE SAID WORKS GENERATED PROFITS IN THE SUBSEQUENT FINA NCIAL YEARS WHICH WAS ALSO REVEALING FROM THE PROFITS OF THAT Y EAR. 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 OBVI OUSLY 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 CASE S RELIED UPON BY THE ASSESSING OFFICER (PAGE 16 OF THE ASSES SMENT ORDER) TO ADOPT THE RATE OF NET PROFIT AT 10% DO NOT BEAR AN Y RELEVANCE TO THE FACTS OF THE APPELLANT'S CASE. HENCE IT WAS CO NTENDED THAT THE COMPARISON IS MISPLACED AND THEREFORE NOT CORRECT. 27. HE SUBMITTED THAT T HE NET PROFIT ESTIMATED BY THE ASSESSING OFFICER AT 10% WAS ON THE BASIS OF TWO ALLEGEDLY CO MPARABLE 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 I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 35 WERE THESE TWO ALLEGED COMPARABLE INSTANCES EVER PU T 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 D AMS. 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 INFRASTRU CTURE DEVELOPMENT SUCH AS ROADS BRIDGES WATER WORKS AND ELECTRICAL WORKS. THEREFORE THE LINE OF BUSINESS IS NOT COMPARABLE M ERELY 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 TUR NOVER OF THE APPELLANT AND ITS SCOPE OF OPERATIONS. FURTHER THE ESTABLISHMENT COST OF THE APPELLANT IS MORE BECAUSE OF THE OVERHE ADS OF THE REGIONAL OFFICES AND THE SITE OFFICES SPREAD OVER T HE COUNTRY DEPENDING UPON THE WORKS. THIS IS NOT THE CASE WITH THOSE TWO FIRMS. 28. THE POINT THAT NEEDS APPRECIATION IS THAT EVE N IN THOSE TWO CASES WHICH THE ASSESSING OFFICER CONSIDERS AS COM PARABLE THERE IS A GLARING VARIATION IN THE RATE OF NET PROFIT WH ICH OUGHT TO HAVE BEEN NOTICED BY THE ASSESSING OFFICER. THE UNDISPUT ED 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 AMONG ST THE TWO CONCERNS THERE IS A VARIATION OF 4.15% APPROXIMATEL Y. FURTHER THE ASSESSING OFFICER HAS TAKEN INTO CONSIDERATION FOR ARRIVING AT THE PERCENTAGE THE PROFIT FIGURES AS PER THE PROFIT AN D LOSS ACCOUNT. IF THE INCOMES RETURNED BY THOSE TWO FIRMS AS PER THE INCOME TAX COMPUTATION ARE CONSIDERED THE NET PROFIT RATES A RE LOWER. IN THE I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 36 APPELLANT'S CASE THE ASSESSING OFFICER CONSIDERED T HE NET PROFITS AS PER INCOME TAX COMPUTATION. HENCE THE COMPARISON I S 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 LIN E OF BUSINESS (B) IN RESPECT OF THE VOLUME OF TURNOVER PROFITS (C) IN R ESPECT OF THE AREA OF OPERATIONS AND (D) IN RESPECT OF COMPARISON AS T O THE QUANTUM OF PROFITS AS PER THE BOOKS OF ACCOUNT VIS-A-VIS TH E INCOMES AS PER THE RETURN OF INCOME. 29. IT WAS SUBMITTED THAT ONE CONTRACTOR'S CONCE RN CANNOT BE COMPARED WITH ANOTHER CONTRACTOR'S CONCERN AS A THU MB RULE IN A GENERAL WAY AS ALREADY SUBMITTED BEFORE ASSESSING OFFICER IN DETAIL IN ASSESSEES LETTER DATED 9 TH JANUARY 2004. ACCORDING TO AR THE SUBMISSION MADE BY THE ASSESSEE HAS NOT BE EN CONTROVERTED BY THE ASSESSING OFFICER IN HIS ORDER UNDER APPEAL. 30. FURTHER IT WAS CONTENDED BY THE AR THAT TWO CON CERNS THOSE ARE CARRYING ON BUSINESS IN THE APPELLANT'S LINE WI TH OTHER DIVERSIFIED AREAS OF WORK CONNECTED WITH CIVIL CONT RACTS ETC. ARE (A) SIMPLEX CONCRETE PILES (INDIA) LTD. SITUATED AT 12 11 NELLIE SENGUPTA SARIAN KOLKATTA-700087 (B) GAMMON INDIA L TD. GAMMON HOUSE VEER SAVARKAR MARG MUMBAI WHOSE PART ICULARS WOULD EXPLAIN HOW THE APPELLANT'S RESULTS ARE FAIR AND FAR BETTER THAN THE OTHERS. 31. THE RESULTS OF THE TWO CONCERNS FOR THOSE ASS ESSMENT YEARS WHICH THE ASSESSING OFFICER HAS RELIED ON IN HIS OR DER ARE TABULATED HEREUNDER: A. SIMPLEX CONCRETE PILES (INDIA) LIMITED ASST. YEAR CONTRACT RECEIPTS (RS.) INCOME AS PER PROFIT AND LOSS A/E. BEFORE DEPRECIATION (RS.) PERCENTAGE OF INCOME 1998-1999 3 53 77 00 777 13 48 69 568 3.81 I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 37 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 TH E 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 CON TRACT RECEIPTS. FURTHER THE AVERAGE PROFITABILITY OF THE APPELLANT FOR THE 3 YEARS MENTIONED ABOVE IS FAIR AND THAT TOO STANDS AT BETT ER RATE WHEN COMPARED WITH THE TWO CONCERNS. 33. THE PERUSAL OF THE ABOVE TWO EXPLANATIONS WHE N 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 ARB ITRARY NOT PROPER NOT CORRECT AND ILLUSORY. THE COMPARISON RELIED UPO N BY THE ASSESSING OFFICER IS WITHOUT ANY BASIS AND NOT IN A NY WAY NEARER TO THE FACTS OF THE APPELLANT'S CASE. THE ASSESSING OF FICER EVEN IN HIS REPLY SUBMITTED TO THE APPELLANT'S WRITTEN ARGUMEN TS DID NOT CONTROVERT THE FACTS BROUGHT ON RECORD BY THE APPEL LANT. HE HAS ALSO NOT BROUGHT ANY FURTHER FACTS ON RECORD IN HIS REPLY. I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 38 34. THE COMPARABLE CASES CITED BY THE APPELLANT EST ABLISH 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. THERE FORE 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 TH AT THERE IS NO CASE FOR THE ESTIMATION OF NET PROFIT AT 10% COUPLE D WITH THE REJECTION OF THE BOOKS OF ACCOUNT. 36. THE DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT PAYM ENTS WERE BEING MADE OUTSIDE THE BOOKS OF ACCOUNT GENERA TED THROUGH INFLATION OF EXPENSES. THE MOST IMPORTANT DOCUMENT S RELATED TO PAYMENTS MADE TO PIECE RATE WORKERS/SUB CONTRACTORS . DURING THE COURSE SEARCH CERTAIN TDS CERTIFICATES WERE RELATI NG TO PAYMENTS MADE TO PIECE RATE WORKERS/LABOUR CONTRACTORS WERE SEIZED FROM THE OFFICE PREMISES OF THE ASSESSEE-COMPANY. THE P OST-SEARCH ENQUIRIES CONDUCTED BY THE DDIT (INV) CONFIRMED THA T 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 B LOCK PERIOD. THIS DISCLOSURE WAS ALLOCATED ON PROPORTIONATE BASI S OF GROSS EXPENDITURE INCURRED EACH YEAR ON PIECE RATE WORKER S/LABOUR CONTRACTORS FOR A.YS. 1996-97 TO 2001-02. HE RELIE D ON SPECIFICALLY PARA 5 OF THE ASSESSMENT ORDER. HE ALSO SUBMITTED T HAT 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 ASS ESSMENT ORDER. I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 39 37. WE HAVE HEARD BOTH THE PARTIES AND PERUSED TH E MATERIAL AVAILABLE ON RECORD. AS PER PROVISIONS OF SECTION 1 58BB THE BLOCK ASSESSMENT TO BE MADE BASED ON EVIDENCE BEFORE THE ASSESSING OFFICER. THE WORD EVIDENCE HAS TO BE CONSTRUED I N A COMPREHENSIVE AND IT INCLUDES ALL CIRCUMSTANTIAL EV IDENCE ALSO. THE MATERIAL OR EVIDENCE WITH THE ASSESSING OFFICER MAY BASE ASSESSMENT IS NOT CONFINED TO DIRECT TESTIMONY BY W ITNESSES. SUCH EVIDENCE NEED NOT ONLY BE EVIDENCE FOUND DURING THE COURSE OF SEARCH BUT ALSO MATERIAL GATHERED BY HIM. THE ASSES SING OFFICER WAS NOT FETTERED BY THE TECHNICAL RULES OF EVIDENCE AND THE LIKE AND HE MAY ACT ON MATERIAL WHICH MAY NOT STRICTLY SPEAK ING BE ACCEPTED AS AN EVIDENCE IN THE COURT OF LAW. IT MA Y CIRCUMSTANTIAL EVIDENCE OR ASSESSMENT BASED ON THE PRE-PONDEROUS O F PROBABILITIES JUDGED BY HUMAN CONDUCT. FOR THIS PU RPOSE THE PAST HISTORY OF THE CASE AND GENERAL MARKET CONDIT IONS WILL CONSTITUTE RELEVANT MATERIAL FOR THE PURPOSE OF ASS ESSMENT. 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 DETERMI NING THE UNDISCLOSED INCOME. AS PER AMENDMENT TO SECTION 15 8BC(B) THE SECTION 145 COULD ALSO BE INVOKED BY ASSESSING OFFI CER 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 T HEN (A) .. (B) HE ASSESSING OFFICER SHALL PROCEED TO DETERMINE THE UNDISCLOSED INCOME OF THE BLOCK PERIOD IN THE MANNE R 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; I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 40 38. THE PROVISIONS OF SECTION 158BC(B) WHICH HAVE BEEN AMENDED BY FINANCE ACT 2002 WITH RETROSPECTIVE EFF ECT FROM 1 ST JULY 1995 AS PER WHICH SS 144 AND 145 HAVE BEEN S PECIFICALLY MADE APPLICABLE TO BLOCK ASSESSMENT. HOWEVER WE MA KE IT CLEAR THAT IF NO MATERIAL WAS FOUND DURING THE SEARCH WHI CH COULD SHOW SUPPRESSION OF INCOME NO ESTIMATION OF UNDISCLOSED INCOME OF BLOCK PERIOD BY RESORTING TO SECTION 145 COULD BE M ADE. IN OTHER WORDS WHERE THERE IS A MATERIAL SUCH AN ESTIMATIO N OF INCOME CAN BE MADE. THIS VIEW OF OURS IS FORTIFIED BY THE JUDGMENT OF JURISDICTIONAL HIGH COURT IN THE CASE OF RAJNIK & C OMPANY VS. ACIT (251 ITR 561) WHEREIN HELD THAT ONCE THE SUPPR ESSION 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 AL SO NOTICED THAT PUNJAB & HARYANA HIGH COURT IN THE CASE OF VED PRAKASH VS. CIT (265 ITR 642) WHEREIN HELD THAT WHEN THE BOOKS OF ACCOUNTS MAINTAINED BY THE ASSESSEE WERE NOT RELIABLE AND VE RIFIABLE THE BLOCK ASSESSMENT HAS TO BE MADE IN THE LIGHT OF MAT ERIAL RECOVERED DURING THE SEARCH AND IN SUCH CIRCUMSTANCES SOME E LEMENT OF ESTIMATE WAS UNAVOIDABLE. 39. ADVERTING TO THE FACTS OF THE PRESENT CASE ASS ESSMENT WAS MADE BY APPLYING THE RATE OF NET PROFIT @ 10% FOR T HE AY 1998-99 & 1999-2000 FOR WHICH NO REASONS HAS BEEN GIVEN FOR APPLYING SUCH A FLAT RATE OF 10% EXCEPT STATING THAT CONSIDE RING 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 ADM ITTED BY OTHER CONTRACTORS VIZ. M/S PRASAD & CO. (PW) AND M/ S SEW CONSTRUCTIONS LTD. INCOME WAS ESTIMATED BEFORE DEP RECIATION @ 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 O F INCOME ESTIMATED AND THE INCOME ADMITTED AS UNDISCLOSED IN COME OF THE I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 41 ASSESSEE COMPANY FOR SUCH ASSESSMENT YEAR. THE CIT( A) THOUGH HELD THAT FOR THE AY 1998-99 INCOME DECLARED @ 9.0 8% BEFORE DEPRECIATION AND 8.5% FOR THE AY 1999-2000 AS REASO NABLE. 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 20 01-02 THE TOTAL GROSS RECEIPT WAS AT RS.204.21 CRORES INCOME ADMITTED BEFORE DEPRECIATION WAS AT RS.9.16 CRORES WORKED OU T AT 4.49% AS AGAINST 10.53% SHOWN IN THE IMMEDIATELY PRECEDING A Y 2000- 2001. SIMILARLY FOR THE PART PERIOD 01.04.2001 TO 20.12.2001 THE TOTAL CONTRACT RECEIPT WAS AT RS.258.58CRORES INCO ME 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 ACTIV ITY IN CIVIL WORKS CONSISTING OF MOSTLY INDUSTRIAL/HOUSING STRUC TURES. BESIDES SUCH CIVIL CONTRACTS THE COMPANY DIVERSIFIED ITS A CTIVITIES INTO CEMENT INDUSTRY WIND POWER MANUFACTURE OF CYLINDE RS AND OTHER INCIDENTAL JOBS. HEAVY LOSSES RESULTED IN CLOSURE OF ITS CEMENT DIVISION DURING FINANCIAL YEAR 1999-2000. THE COM PANY 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 SMALL ER PROJECTS ESPECIALLY THE ROAD WORKS OUTSIDE THE STATE OF ANDH RA 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 PRO FIT. DURING THE FY 2000-01 AND 2001-02 (UP TO 31.12.2001) THE COMPA NY HAS INCURRED LOSSES IN CERTAIN MAJOR PROJECTS. THE SPECIFIC REASONS FOR SUCH LOSSES ARE: (A) THE DESIRE TO GAIN ENTRY INTO THE ROAD PROJECT NECE SSITATED THE COMPANY TO QUOTE LOW PRICE IN THE BIDS. I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 42 (B) THE ESTABLISHMENT COST OF INFRASTRUCTURE FOR EXECUT ING THE ROAD WORKS WAS HIGH. THIS IS BECAUSE OF THE NEED F OR 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 BITUM EN AND DIESEL ARE THE MAJOR COMPONENTS. DURING THE FI NANCIAL YEARS 2000-01 2001-02 AND SUBSEQUENTLY THERE WAS A STEEP INCREASE IN THE BITUMEN AND DIESEL PRICES WHICH CA N 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 ROA D WORK/BANGALORE ROAD WORK THUS DUE TO THE STEEP INCR EASE IN BITUMEN/DIESEL PRICES THE COMPANY HAD INCURRED LOSS OF RS.3.15 CRORES AND RS.2.16 CRORES RESPECTIVELY IN T HOSE TWO PROJECTS. (E) WHEREAS IN THE CASE OF HARYANA ROAD PROJECT THE C OST COVERAGE ON DIESEL AT A RATE OF 5% ON THE TOTAL COV ERAGE COULD NOT OFF SET THE INCREASE WHICH WAS BETWEEN 20% TO 2 5%. (F) THERE WAS STEEP INCREASE IN BITUMEN PRICE AND DIESE L PRICE. (G) MAJORITY OF THE ROAD WORKS ARE ABETTING THE VILLAGE S. 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 W ORKS. THIS ALSO RESULTANT IN ADDITIONAL COST. 40. WE HAVE GONE THROUGH THE REASONS EXPLAINED BY THE ASSESSEE. IN OUR OPINION THERE IS A REASONABLE CA USE FOR DECLINING I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 43 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 LT D. VS. CIT (ITR 12 OF 1990) )([1995] 80 TAXMAN 184) OBSERVED THAT A LOWER RATE OF GROSS PROFIT DECLARED BY THE ASSESSEE AS COMPARED T O THE PREVIOUS YEAR WOULD NOT BY ITSELF BE SUFFICIENT TO JUSTIFY ANY ADDITION. THE MERE FACT THAT THE PERCENTAGE OF LOSS OR GROSS PROF IT IS HIGH OR LOW IN A PARTICULAR YEAR DOES NOT NECESSARILY LEAD TO I NFERENCE THAT THERE HAS BEEN SUPPRESSION. LOW PROFIT IS NEITHER A CIRCUMSTANCE NOR MATERIAL TO JUSTIFY ADDITION OR PROFITS. THE RA TIO OF THE JUDGMENTS IN DHAKESWARI COTTON MILLS LTD. VS. CIT(1 954) 26 ITR 775 (SC); RAGHUBAR MANDAL HARIHAR MANDAL VS. STATE OF BIHAR [1957] 8 STC 770 (SC); STATE OF KERALA VS. C.VELUKU TTY (1966) 60 ITR 239 (SC); STATE OF ORISSA VS. MAHARAJA SHRI B P SINGH DEO [1970] 76 ITR 690 (SC); BRIJBHUSHAN LAL PARDUMAN KU MAR VS. CIT (1978) 115 ITR 524 (SC); CHOUTHMAL AGARWALLA VS. CI T (1962) 46 ITR 262 (ASSAM); R.V.S. AND SONS DAIRY FARM VS. CIT (2002) 257 ITR 764 (MAD); INTERNATIONAL FOREST CO. VS. CIT (19 75) 101 ITR 721 (J&K); M DURAI RAJ VS. CIT (1972) 83 ITR 484 (K ER); RAMACHANDRA RAMNIVAS VS. STATE OF ORISSA (1970) 25 STC 501 (ORISSA); ACTION ELECTRICALS VS. DEPUTY CIT (2002) 258 ITR 188 (DELHI) AND KAMAL KUMAR SAHARIA VS. CIT (1195) 216 ITR 217 (GAU) INDICATE THAT THE ASSESSING OFFICER IS NOT FE TTERED BY ANY TECHNICAL RULES OF EVIDENCE AND PLEADINGS AND HE I S ENTITLED TO ACT ON MATERIAL WHICH IS NOT ACCEPTABLE IN EVIDENCE IN A COURT OF LAW BUT WHILE MAKING THE ASSESSMENT UNDER THE PRINCIPLE S OF BEST JUDGMENT THE INCOME TAX OFFICER IS NOT ENTITLED TO ACT ON MATERIAL WHICH IS NOT ACCEPTABLE AS EVIDENCE IN A COURT OF L AW BUT WHILE MAKING THE ASSESSMENT UNDER THE PRINCIPLES OF BEST JUDGMENT THE ASSESSING OFFICER IS NOT ENTITLED TO MAKE A PURE GU ESS WITHOUT REFERENCE TO ANY EVIDENCE OR MATERIAL. THERE MUST BE SOMETHING I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 44 MORE THAN A SUSPICION TO SUPPORT THE ASSESSMENT. L OW PROFIT IN A PARTICULAR YEAR ITSELF CANNOT BE GROUND FOR INVOKIN G THE PROVISIONS OF SECTION 145 OF I.T. ACT. FURTHER IF THERE WAS NO CHALLENGE TO THE TRANSACTIONS REFLECTED IN THE BOOKS OF ACCOUNTS TH EN IT IS NOT OPEN TO THE ASSESSING OFFICER TO CONTEND THAT WHAT IS SH OWN BY THE ENTRIES IN THE BOOKS OF ACCOUNTS IS NOT THE REAL ST ATE OF AFFAIRS. EVEN IF FOR SOME REASON THE BOOKS ARE REJECTED IT IS NOT OPEN FOR THE ASSESSING OFFICER TO MAKE ANY ADDITION ON ESTIM ATE BASIS OR ON PURE GUESS WORK. THE MAIN REASONS FOR REJECTING BO OKS 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 PREM ISES OF THE ASSESSEE. ACCORDING TO THE REVENUE THESE PAYMENTS WERE MADE TO THE NON-EXISTING PARTIES. THE MANAGING DIRECTOR STA TED IN HIS STATEMENT RECORDED U/S 132(4) THAT SOME OF THE PAYM ENTS MADE TO THE PIECE RATE WORKERS / LABOUR CONTRACTORS WERE FI CTITIOUS AND ON THESE ACCOUNT HE OFFERED AN ADDITIONAL UNDISCLOSED INCOME OF RS.1.37 CRORES. THE DEPARTMENT NOT SATISFIED WITH T HIS EXPLANATION AND OFFER OF ADDITIONAL INCOME OF RS.1.37 CRORES F URTHER RESORTED TO ESTIMATING OF INCOME FOR THE AY 2001-02 AND PART PE RIOD COMMENCING TO 01.04.2001 TO 20.12.2001. IN OUR OPI NION THE FURTHER ESTIMATION OF INCOME BY THE DEPARTMENT AFT ER ACCEPTING THE ADDITIONAL INCOME OFFERED BY THE ASSESSEE IS NO T PROPER. MORE SO THIS IS THE BLOCK ASSESSMENT AND NOT THE REGULA R ASSESSMENT. THE BLOCK ASSESSMENT IS NOT A SUBSTITUTE FOR A REG ULAR ASSESSMENT. BOTH THE ASSESSMENTS ARE STANDING ON D IFFERENT FOOTINGS. ITS SCOPE AND AMBIT IS LIMITED IN THAT SE NSE TO MATERIALS UNEARTHED DURING SEARCH. IT IS AN ADDITION TO THE REGULAR ASSESSMENT ALREADY DONE OR TO BE DONE. THE ASSESSME NT FOR THE BLOCK PERIOD CAN ONLY BE DONE ON THE BASIS OF EVIDE NCE FOUND AS A RESULT OF SEARCH OR REQUISITION OF BOOKS OF ACCOUNT S OR DOCUMENTS AND SUCH OTHER MATERIALS OR INFORMATION AS ARE AVAI LABLE WITH THE I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 45 ASSESSING OFFICER. EVIDENCE FOUND AS A RESULT OF SE ARCH 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 TH E REGULAR ASSESSMENT OF EACH PREVIOUS YEAR INCLUDED IN THE BL OCK PERIOD. CLAUSE (B) OF THE EXPLANATION FURTHER CLARIFIED THE POSITION THAT THE TOTAL UNDISCLOSED INCOME RELATING TO THE BLOCK PERI OD SHALL NOT INCLUDE THE INCOME ASSESSED IN ANY REGULAR ASSESSME NT 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 THEREB Y ESTIMATE THE INCOME. SIMILARLY EXPENDITURE CLAIMED IN THE REGU LAR RETURNS CANNOT BE DISALLOWED IN THE BLOCK ASSESSMENT CONSEQ UENT TO THE SEARCH ACTION AS THE DISALLOWANCE AND AT THE BEST IT COULD BE THE SUBJECT MATTER IN REGULAR ASSESSMENT NOT IN THE BLO CK ASSESSMENT. FOR THIS PURPOSE WE PLACE RELIANCE ON THE FOLLOWING PRECEDENTS: CIT V. N.R. PAPERS AND BOARDS LTD. 248 ITR 526 (GA UHATI) '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 TH E RETURN HAD NOT BECOME DUE THEY ARE DUTY RECORDED I N THE REGULAR BOOKS OF ACCOUNT THEN SUCH INCOME CANN OT BE TREATED AS UNDISCLOSED INCOME SO AS TO TAX A PER SON FT THE RATE OF SIXTY PER CENT. UNDER CHAPTER XIV. CIT V. N.R. PAPERS AND BOAR'DS LTD. 248 ITR 526 (G AUHATI) 'UNDER THE SCHEME OF THE PROVISIONS FOR BLOCK ASSESSMENT IT IS APPARENT THAT IT RELATED TO ASSESS MENT OF 'UNDISCLOSED INCOME' OF THE ASSESSEE EXCLUDING T HE I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 46 INCOME SUBJECTED TO REGULAR ASSESSMENT IN PURSUANC E OF THE RETURNS FILED BY THE ASSESSEE FOR SUCH PERIO D. FROM A PERUSAL OF SECTION 158BB OF THE INCOME-TAX A CT 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 TH E 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 248 ITR 562 (CALCUTTA ) 'THE EXPLANATION TO SECTION 158BA OF THE INCOME-TAX ACT 1961 MAKES IT CLEAR THAT THE LEGISLATURE THOU GHT IT FIT TO MAKE A DISTINCTION BETWEEN THE BLOCK ASSESS MENT AND THE REGULAR ASSESSMENT. IN THE CASE OF REGULA R ASSESSMENT THE ASSESSING OFFICER IS FREE TO EXAMIN E THE VERACITY OF THE RETURN AS WELL AS THE CLAIMS MA DE BY THE ASSESSEE WHEREAS THE UNDISCLOSED INCOME IS TAX ED BY WAY OF BLOCK ASSESSMENT AS A RESULT OF SEARCH AN D SEIZURE. THE LOGIC BEHIND THE TWO DIFFERENT MODES OF ASSESSMENT IS THAT CONCEALMENT OF INCOME AND CLAIMI NG DEDUCTION OR EXEMPTION IN RESPECT OF A DISCLOSED IN COME 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 JUSTIFI CATION SHOWN OR REJECT THE SAME.' CIT VS. VIKRAM A. DOSHI 256 ITR 129 (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 VS. SHAMLAL BALRAM GURBANI 249 ITR 501 (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 ISSU ED; THE ASSESSEE DID NOT FILE THE RETURNS FOR THE YEARS I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 47 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 THA T THE ASSESSEE'S INCOME FROM INTEREST SALARY AND RENT WA S REFLECTED IN THE AUDITED BALANCE-SHEET OF THE RESPE CTIVE ASSESSMENT YEARS OF THE FIRM AND THEREFORE THE TRIBUNAL DELETED THE ADDITION.' ON APPEAL THE HON'BLE BOMBAY HIGH COURT DID NOT FIN D 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 247 ITR 448 (BOM) 'WHERE THE VALUE OF THE GOLD AND SILVER ARTICLES. A ND JEWELLERY HAD BEEN DISCLOSED IN THE ASSESSEE'S WEAL TH- 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 H AD CONSTRUCTED A BUNGALOW. IT WAS FOUND THAT THE ASSESSEE HAD INCURRED AN EXPENSE OF RS.4.16 LAKHS. THE ASSESSING OFFICER THEREAFTER REFERRED THE MAT TER TO THE DEPARTMENT VALUER WHO VALUED THE PROPERTY AT R S. 6. 66 LAKHS AND ACCORDINGLY THE DIFFERENCE HAD BEE N 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 H AVE 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 MORARJI GOKULDAS SPG. & WV G. I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 48 CO. LTD. V. DCIT 95 ITD 1 (MUM) (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 ASSESSMEN T 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 T HE 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 ASSESS MENT FOR THE BLOCK PERIOD UNDER CHAPTER XIV-8 CAN BE MAD E OF THE UNDISCLOSED INCOME ONLY UP TO THE DATE OF COMMENCEMENT OF SEARCH OR THE DATE OF THE REQUISITI ON AND NOT OF THE PERIOD THEREAFTER. SECTION 1588A PROVIDES FOR ASSESSMENT OF UNDISCLOSED INCOME AS RESULT OF SEARCH FOR THE BLOCK PERIOD AND COMPUTATI ON OF INCOME AND THE COMPUTATION OF UNDISCLOSED INCOME FO R THE BLOCK PERIOD TO BE MADE AS PER THE PROVISIONS O F 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 S UCH MONEY BULLION JEWELLERY VALUABLE ARTICLES THING S 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 F ALSE. 41. IN VIEW OF THE ABOVE DISCUSSION WE ARE OF THE OPINION THAT ESTIMATION OF INCOME ON CONTRACTS WHICH ARE DISCLOS ED IN THE REGULAR BOOKS OF ACCOUNTS CANNOT BE DISTURBED IN TH E BLOCK PERIOD AND AT BEST IT COULD BE THE SUBJECT MATTER OF REGUL AR ASSESSMENT ONLY. IN VIEW OF THIS WE ARE INCLINED TO HOLD THA T THE CIT(A) IS NOT JUSTIFIED IN GIVING THE DIRECTION TO ASSESSING OFFI CER FOR THE ASSESSMENT YEAR 2001-02 AND FOR PART PERIOD FROM 01 .04.2001 TO I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 49 20.12.2001 TO DETERMINE THE UNDISCLOSED INCOME AT 6 .5% BEFORE DEPRECIATION AS AGAINST 4.49% FOR THE ASSESSMENT YE AR 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 ADDI TION TOWARDS INTEREST AT RS.6 15 03 415/- BEING RECEIVABLE ON FU NDS ADVANCED TO SHRI SRINIVASA RAJU PROPRIETOR M/S RACHANA ASSOCIA TES BANGALORE. ACCORDING TO LEARNED COUNSEL FOR THE AS SESSEE THE CIT(A) OUGHT HAVE DELETED ENTIRE ADDITION OF RS.6 4 6 34 872/- INSTEAD OF RESTRICTING IT TO RS.6 15 03 415/- AND T HUS GRIEVANCE OF THE ASSESSEE IS WITH REGARD TO SUSTAINING OF RS.31 31 557. THE REVENUE HAS RAISED THE GROUND WITH REGARD TO DELETI ON OF RS.6 15 03 415/-. THE DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE ASESSEE IS DEBITING INTEREST TO LOAN ACCO UNTS ON MERCANTILE BASIS AND CLAIMING AS AN EXPENDITURE IN THE PROFIT & LOSS ACCOUNT IT OUGHT TO HAVE CHARGED INTEREST REC EIVABLE ON THE ADVANCES MADE AND CREDITED TO P & LOSS A/C ESPECIA LLY WHEN THE WRITTEN AGREEMENT PROVIDES FOR CHARGING OF INTEREST ON THE ADVANCES MADE. HE SUBMITTED THAT THE ASSESSEE CAN N OT FOLLOW DUAL METHOD OF ACCOUNTING. HE ALSO SUBMITTED THAT T HE GUIDE LINES ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS AR E NOT BINDING ON THE DEPARTMENT FOR DETERMINING THE CORRECT INCOM E 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 LO OSE SEEDS BEARING NO. 136 TO 153 OF ANNEXURE MARKED AS A/NCCL-1/1 SEI ZED FROM THE OFFICE PREMISES SITUATED AT PLOT NO.41 NAGARJU NA HILLS PUNJAGUTTA HYDERABAD. THIS IS WITH REFERENCE TO C ALCULATION OF INTEREST RECEIVABLE FROM SHRI V SRINIVASA RAJU ON A DVANCE OF RS.440 LAKHS MADE BY THE COMPANY. THIS IS ONLY THE CALCULATION I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 50 MADE BY THE ASSESSEE TO PUT PRESSURE ON SHRI V SRIN IVASA RAJU. THESE LOOSE SHEET BUNDLES IS A DUMB DOCUMENTS AND C ANNOT BE CONSIDERED AS TANGIBLE MATERIAL TO DETERMINE THE UN DISCLOSED INCOME. THERE SHOULD BE A ACCRUAL OF INCOME AND IT SHOULD BE A REAL ONE. THE INCOME SHOULD BE RECEIVABLE AND CANN OT BE HYPOTHETICAL AND ONLY ON REAL INCOME INCOME TAX CO ULD BE LEVIED. ON HYPOTHETICAL ACCRUAL OF INCOME TAX CANNOT BE LE VIED. 44. IN OUR OPINION THE UNDISCLOSED INCOME OF TH E ASSESSEE IS TO BE COMPUTED BY THE ASSESSING OFFICER ON THE BASIS O F AVAILABLE RECORD. IN MANY A TIME IT IS VERY IMPORTANT TO HA VE DIRECT EVIDENCE OR CONCLUSIVE EVIDENCE TO PROVE TO DETERMI NE THE UNDISCLOSED INCOME. WHEN THE ASSESSEE GIVES AN EVA SIVE REPLY TO THE ASSESSING OFFICER HE HAS NO CHOICE BUT TO TAKE ESTIMATION OF THE INCOME. THE ONLY THING IS IT SHOULD BE REASONA BLE ON THE BASIS OF MATERIAL AVAILABLE ON RECORD. IT SHOULD NOT BE BASED ON CONJUNCTURES AND SURMISES. AS OF NOW MATERIAL CONS IDERED 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 A DVANCED TO SHRI V. SRINIVASA RAJU DETAILS TO WHOM THE MONEY WAS ADV ANCED 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 NO TE 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 RECOR DED IS SOME PIECE OF EVIDENCE TO MAKE AN ADDITION. THE ASSESSI NG OFFICER HAS TO ESTABLISH THE LINK BETWEEN THE SEIZED MATERIAL A/NC CL-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 I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 51 AUTHORITIES CONCERNED TO PRESUME THE THINGS. BUT I T IS REBUTTABLE AND IT DOES NOT GIVE A DEFINITE AUTHORITY AND CONCL USIVE EVIDENCE. THE ASSESSEE HAS EVERY RIGHT TO REBUT THE SAME BY P RODUCING THE SAME IN SUPPORT OF HIS CLAIM. THE ENTIRE CASE DEPE NDS 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 IN TO AN MOU DATED 15.09.1995 AND 15.11.1995 WITH SHRI V SRINIVA SA RAJU BANGALORE FOR PROCURING LANDS AT KODIGEHALLI AND NA NDI HILLS BANGALORE WITH AN INTENTION TO DEVELOP THE LAND INT O A TOWNSHIP. THE ASSESSEE COMPANY MADE AN ADVANCE OF RS.440 LAKH S 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 T HE ASSESSEE COMPANY REJECTED THE LAND SO ACQUIRED BY SHRI V SRI NIVASA RAJU AND MADE A CLAIM FOR REFUND OF THE ADVANCE OF RS.44 0 LAKHS. THE ASSESSEE ABLE TO REALIZE ONLY RS.305.95 CRORES PRIN CIPAL 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 A CCOUNTS OF SHRI V SRINIVASA RAJU. AS PR MOU SHRI V SRINIVASA RAJU IS LIABLE FOR PAYMENT OF INTEREST @ 20% PER ANNUM ON THE AMOU NTS ADVANCED BY THE ASSESSEE IN THE EVENT OF FAILURE IN BUYING THE LANDS AS REQUIRED BY THE ASSESSEE. LOOSE SHEETS 1 T O 37 OF A/NCCL/5 REPRESENTS INTEREST CALCULATION WORKED OUT BY THE COMPANY. ALL THESE CALCULATIONS WERE DONE BY THE C OMPANY TO PUT PRESSURE ON SHRI V SRINIVASA RAJU TO RECOVER THE AD VANCE OF RS.440 LAKHS MADE BY THE COMPANY. THE ADVANCE MADE TO SRI V SRINIVASA RAJU WERE RECORDED IN THE BOOKS OF ACCOUN T IN THE YEAR IN WHICH IT WAS ADVANCED. THE FINANCIAL STATEMENT FROM THE YEAR OF ADVANCE REVEAL THAT INTEREST INCOME HAS NOT CHAR GED TO THIS I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 52 ACCOUNT. THIS CONFIRM THAT THIS IS A MATTER RELATI NG TO THE REGULAR BOOKS OF ACCOUNT. IN SUCH A SITUATION TO CONSIDER SAME IN THE BLOCK ASSESSMENT AS UNDISCLOSED INCOME IS NOT POSSI BLE. 45. FURTHER THE ASSESSING OFFICER SHALL BE SPECIF IC ABOUT THE NATURE OF NEXUS OF THE SEIZED MATERIAL TO THE BUSIN ESS OF THE ASSESSEE. THE ALLEGATION OF THE DEPARTMENT IS THE SEIZED MATERIAL THAT REFLECTED MONEY ADVANCED BY THE ASSESSEE AND I NTEREST 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 ASS ESSEE HAS ACQUIRED THE RIGHT TO RECEIVE THE INTEREST. THE D EPARTMENT ALSO NOT FIND ANY MATERIAL FROM SHRI V SRINIVASA RAJU WH ICH CONFIRMS THE ACCRUAL OR RECEIPT OF INTEREST IN FAVOUR OF TH E ASSESSEE. THERE IS NO EVIDENCE AS TO WHETHER HE PAID THE INTEREST. THE DEPARTMENT CANNOT DRAW INFERENCE ON THE BASIS OF SUSPICION CO NJUNCTURE AND SURMISE. SUSPICION HOWEVER STRONG CANNOT TAKE PLA CE OF MATERIAL IN SUPPORT OF THE FINDINGS OF THE ASSESSING OFFICER . THE ASSESSING OFFICER SHOULD ACT IN A JUDICIAL MANNER PROCEED WI TH JUDICIAL SPIRIT AND SHOULD COME TO A JUDICIAL CONCLUSION. THE ASSE SSING OFFICER IS REQUIRED TO ACT FAIRLY AS A REASONABLE PERSON AND N OT ARBITRARILY AND CAPRICIOUSLY. ASSESSMENT MADE SHOULD HAVE ADEQ UATE 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 TH AT THE ASSESSEE HAS RECEIVED INTEREST. THE BASIS FOR ADDI TION IS ONLY NOTE BOOK/LOOSE SLIPS. THESE NOTE BOOK/LOOSE SLIPS ARE UNSIGNED DOCUMENTS. THE ASSESSING OFFICER HAS NOT ESTABLISH ED NEXUS BETWEEN THE NOTE BOOK/LOOSE SLIPS WITH ACTUAL ACCRU AL/ RECEIPT OF INTEREST. THE NOTE BOOK/LOOSE SLIPS SEIZED MARKED A/NCCL-1/1 FOUND DURING THE COURSE OF SEARCH IS A DUMB DOCUMEN T HAVING NO EVIDENTIARY VALUE NO ADDITION CAN BE MADE IN THE A BSENCE OF CORROBORATIVE MATERIAL. IF THERE IS CIRCUMSTANTIAL EVIDENCE IN THE I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 53 FORM OF PROMISSORY NOTES LOAN AGREEMENT AND BANK E NTRIES THE ADDITION IS TO BE MADE ON THAT BASIS TO THE EXTENT OF MATERIAL AVAILABLE. THE ASSESSEE IS NOT EXPECTED TO EXPLAI N THE LOOSE PAPERS FOUND AS THERE IS NO EVIDENCE OTHER THAN NOT E BOOK/LOOSE SLIPS REGARDING ACCRUAL OF INTEREST. IN OUR OPINIO N NO ADDITION CAN BE MADE ON THE BASIS OF DUMB DOCUMENTS/NOTE BOOK/LO OSE SLIPS IN THE ABSENCE OF ANY OTHER MATERIAL TO SHOW THAT THE ASSESSEE HAS CARRIED ON MONEY LENDING BUSINESS. NOTING ON THE NO TE BOOK/DIARY/LOOSE SHEETS ARE REQUIRED TO BE SUPPORTE D/ 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 AN D HE HAS TO BE ALLOWED TO CROSS EXAMINE THE PARTIES. IN THE PR ESENT CASE UNDOUBTEDLY NO STATEMENT FROM THE PARTIES WHOSE NAM ES FOUND IN THE NOTE BOOK/LOOSE SLIPS HAS BEEN BROUGHT TO OUR NOTICE AND AS SUCH ENTIRE ADDITION IN THE HANDS OF THE ASSESSEE O N THE BASIS OF UNCORROBORATED WRITINGS IN THE LOOSE PAPERS FOUND D URING THE COURSE OF SEARCH IS NOT POSSIBLE. THE EVIDENCE ON RECORD IS NOT SUFFICIENT TO SUPPORT THE REVENUES CASE THAT INTER EST HAS BEEN ACCRUED TO THE ASSESSEE. THIS IS THE BLOCK ASSESSM ENT AND WE ARE CONCERNED ONLY WITH THE UNDISCLOSED INCOME AND WE H AVE TO CONSIDER ONLY MATERIAL AND EVIDENCE DETECTED AS A R ESULT OF SEARCH. IT MEANS THAT IF AN EXAMINATION OF THE MATERIAL ALR EADY ON RECORD BEFORE SEARCH OR IF AS A RESULT OF SOME EXTERNAL IN FORMATION 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 ENVISAG ED UNDER CHAPTER XIV-B OF THE I.T. ACT. IN OUR OPINION EVID ENCE AVAILABLE I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 54 WITH THE ASSESSING OFFICER AS A RESULT OF SEARCH IS TO BE USED FOR THE PURPOSE OF DETERMINING THE UNDISCLOSED INCOME O F THE BLOCK PERIOD. 46. FURTHER HONBLE SUPREME COURT IN THE CASE O F CIT VS. SHOORJI VALLABHADAS AND CO. (1962) 46 ITR 144 WHERE IN HELD AS FOLLOWS: INCOME TAX IS A LEVY ON INCOME. NO DOUBT THE INCO ME-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 THOU GH IN BOOK- KEEPING AN ENTRY IS MADE ABOUT A HYPOTHETICAL INC OME WHICH DOES NOT MATERIALIZE. WHEN INCOME HAS IN FA CT BEEN RECEIVED AND IS SUBSEQUENTLY GIVEN UP IN SUCH CIRCU MSTANCES THAT IT REMAINS THE INCOME OF THE RECIPIENTS EVEN THOUGH GIVEN UP THE TAX MAY BE PAYABLE. WHERE HOWEVER THE IN COME CAN BE SAID NOT TO HAVE RESULTED AT ALL THERE IS OBVIO USLY NEITHER ACCRUAL NOR RECEIPT OF INCOME EVEN THOUGH AN ENTRY TO THAT EFFECT MIGHT IN CERTAIN CIRCUMSTANCES HAVE BEEN M ADE IN THE BOOKS OF ACCOUNT. 47. FURTHER WE FIND THAT SAME VIEW HAS BEEN TAKE N BY THE APEX COURT IN THE CASE OF CIT VS. MOTOR CREDIT CORPORAT ION (127 ITR 572) AND IN THE CASE OF CIT VS. FEROZPORE FINANCE P. LTD. (124 ITR 619 )(P & H). 48. IN VIEW OF ABOVE DISCUSSION WE ARE OF THE OPINION THAT THE ADDITION AT RS. 6 46 34 872/- TOWARDS ACCRUAL OF IN TEREST 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 A PPEAL THAT CIT(A) OUGHT HAVE UPHELD THE RATE OF NET PROFI T OF 10% ADOPTED FOR AY 1998-99 (AGAINST 9.07% DISCLOSED BY THE ASSESSEE) AND 1999-2000 (AGAINST 8.5% DISCLOSED BY THE ASSESS EE). WE HAVE HEARD BOTH THE PARTIES ON THIS ISSUE. WE HAVE ALREA DY DEALT THIS I.T.(SS)A. NOS. 94 & 88/HYD/2004 M/S. NAGARJUNA CONSTRUCTION CO. LTD. ============================ 55 ISSUE IN DETAIL WHILE ADJUDICATING THE DETERMINATIO N OF UNDISCLOSED INCOME RELATING TO THE AY 2001-2002 & PART PERIOD 0 1.04.2001 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 REV ENUE 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 I S 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 AN D THE ASSESSEE APPEAL IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 30 TH MARCH 2012. SD/ - (ASHA VIJAYARAGHAVAN) JUDICIAL MEMBER SD/ - (CHANDRA POOJARI) ACCOUNTANT MEMBER HYDERABAD DATED THE 30 TH MARCH 2012 COPY FORWARDED TO: 1. THE ASST. COMMISSIONER OF INCOME - TAX CENTRAL CIRCLE - 3 3 RD FLOOR SHAKKAR BHAVAN BASHEERBAGH HYDERABAD-500 0 04. 2. DEPUTY COMMISSIONER OF INCOME - TAX CENTRAL CIRCLE - III SHAKKAR BHAVAN HYDERABAD. 3 . M/S. NAGARJUNA CONSTRUCTION CO. LTD. 41 NAGARJUNA HILLS PUNJAGUTTA HYDERABAD. 4 . THE CIT(A) - I HYDERABAD 5 . THE CIT (CENTRAL) HYDERABAD 6 . THE DR A BENCH ITAT HYDERABAD TPRAO