PER Shri Manjunatha, Accountant Member: These two appeals filed by the revenue and cross objections filed by the assessee are directed against the common order passed by the CIT(A), Guntur dated 3.10.2012 for the assessment year 2008-09 and 2009-10. Since, the facts are identical and issues are common, they are clubbed, heard together and disposed-off by way of this common order for the sake of convenience.

2. The brief facts of the case are that the assessee is a partnership firm engaged in the business of execution of works contracts, filed its return of income for the assessment year 2008-09 & 2009-10 declaring total income of ` 10,61,330/- and ` 15,02,900/- respectively. The cases have been selected for scrutiny and accordingly, notices u/s 143(2) & 142(1) of the Income Tax Act, 1961 (hereinafter called as the) were issued. In response to notices, the authorized representative appeared from time to time and furnished books of accounts and other details as called for. During the course of assessment proceedings, the A.O. noticed that the books of accounts maintained by the assessee are not amenable for verification as the assessee has not maintained supporting bills and vouchers in respect of expenditure debited in the P&L account and accordingly rejected books of accounts u/s 145(3) of the and estimated net profit of 8% on contracts executed directly ITA No.471 & 472/Vizag/2012 M/s. Nara Constructions, Eluru 3 and 4% on contracts executed through sub contractor. The A.O. allowed further deduction towards depreciation for the assessment year 2008-09, however, the same has been not allowed for the assessment year 2009-10.

3. Aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A). Before the CIT(A), the assessee contended that net profit estimated by the A.O. is on higher side when compared to the peculiar facts of the case and also the assessee is executing major part of contracts through sub contracts. The assessee further contended that it is executing some of the works in the state of Jammu & Kashmir where he works as a sub contractor, wherein the profit margin is much lower than the normal profit derived from regular works contracts. It was further submitted that in respect of Polavaram project because of unforeseen reasons, it has pre-closed contracts and incurred huge losses. The A.O. without considering any of these factors, simply estimated net profit of 8% on works contracts executed directly and 4% on works contracts executed through sub contracts.

4. The CIT(A) after considering the relevant submissions of the assessee and also taken into account the peculiar facts of the case has directed the A.O. to estimate net profit of 2.5% on contracts executed directly and 2% on contracts executed through sub contractor. In so far ITA No.471 & 472/Vizag/2012 M/s. Nara Constructions, Eluru 4 as Polavaram project is concerned, the CIT(A) directed the A.O. to take 0% net profit on total turnover and ignored the loss declared by the assessee. Aggrieved by the CIT(A) order, the revenue is in appeal before us.

5. The Ld. D.R. submitted that the Ld. CIT(A) erred in directing the A.O. to estimate profit from contract works at 2.5% as against 8% estimated by the A.O. and at 2% on works given on sub contract to others as against 4% estimated by the A.O. The D.R. further submitted that the CIT(A) erred in not appreciating fact that the assessee failed to produce purchase bills, regular books of accounts with regard to Jammu & Kashmir project as they were claimed to have been lost in journey from Jammuj to Reaso. The D.R. further submitted that the CIT(A) ought to have considered the case law relied upon by the A.O. to justify the estimation of net profit of 8% and 4% before concluding that it is fair and justified in estimating net profit of 2.5% and 2% respectively on contracts executed directly and contracts executed through sub contractors. The Ld. CIT(A) erred in accepting percentage of assessed income of the assessee for the previous assessment years which were inconsistent with the figures of assessed income as per records. The A.O. after considering all the facts and circumstances of the case has rightly estimated net profit of 8% on contracts executed directly and 4% ITA No.471 & 472/Vizag/2012 M/s. Nara Constructions, Eluru 5 on contracts executed through sub contractors and his order should be upheld.

6. The Ld. A.R. for the assessee, on the other hand strongly supporting the order of the CIT(A), submitted that the Ld. CIT(A) estimated net profit from contract works based on the past assessed results of the assessee, which are more realistic and more comparable. The A.R. further submitted that because of peculiar facts of the case, the assessee cannot rely on any case law for estimating net profit, as the major portion of the work has been executed through sub contract and also the assessee has executed works in the state of Jammu & Kashmir, wherein the net profit percentage normally less than the normal net profit that can be derived from regular works contracts. The A.R. further submitted that because of unforeseen reasons, the assessee has incurred huge losses in Polavaram project, which is one of the reasons for low net profit admitted in the books of accounts. The A.O. without appreciating the facts properly, simply estimated net profit of 8% and 4% rates which is incorrect. The CIT(A) after considering the relevant facts has rightly directed the A.O. to estimate net profit of 2.5% and 2% and his order should be upheld.

7. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The ITA No.471 & 472/Vizag/2012 M/s. Nara Constructions, Eluru 6 A.O. rejected books of accounts u/s 145(3) of the and estimated net profit of 8% on works contract directly executed and 4% on work contracts executed through sub contractor. The A.O. was of the opinion that the books of accounts maintained by the assessee are not amenable for verification as the assessee has failed to produce bills and vouchers for the expenditure debited in the P&L account. It is the contention of the assessee that it has maintained regular books of accounts and also furnished necessary bills and vouchers in respect of all works contracts, except in the case of works contracts executed in the state of Jammu & Kashmir, where the books of accounts are lost in transit because of that the assessee could not be able to produce bills and vouchers. The assessee further contended that it has reported a net profit of about 3% in the previous financial years and based on the previous financial results of the assessee, the CIT(A) has estimated net profit of 2.5% and 2% respectively.

8. Having heard both the sides and considered material on record, we find that the A.O. has rejected books of accounts for the reason that the assessee has failed to produce necessary bills and vouchers in respect of expenditures. Although the assessee claims that it has produced bills and vouchers in respect of major expenditure, fails to substantiate the claim with necessary evidences, therefore, we are of ITA No.471 & 472/Vizag/2012 M/s. Nara Constructions, Eluru 7 the view that the A.O. was right in rejection of books of accounts and estimation of net profit. Having said, let us examine on facts and in the circumstances of the case, whether the A.O. was right in taking net profit of 8% on gross contract executed directly and 4% on works contract executed through sub contractors. The assessee has filed a paper book containing financial statements and also a statement of gross contract receipts and net profit declared in the previous financial years. On perusal of the details filed by the assessee, we find that the assessee has declared a net profit of 2.87% to 6.74% on different projects, however, the average net profit declared by the assessee is at 2.87% for the financial year 2006-07. It is an admitted fact that the assessee has failed to produce necessary bills and vouchers in support of expenditure claimed in the profit & loss account. It is also an admitted fact that the assessee has not furnished books of accounts in respect of J&K works contracts. Under these circumstances, the A.O. is left with no option, has estimated net profit based on certain facts and circumstances. In this case, the A.O. has adopted net profit of 8% and 4% based on certain judicial precedents, however failed to justify net profit rates with any comparable cases. The assessee claims that it has executed major portion of contracts through sub contracts where the margin of net profit is much lower than the net profit margin in theA No.471 & 472/Vizag/2012 M/s. Nara Constructions, Eluru 8 normal works contracts. The assessee also claims that it has incurred huge losses in Polavaram project because of unforeseen reasons. Therefore, considering the overall facts of the present case, we deem it appropriate to estimate net profit of 4% on contracts executed directly including contract receipts from Polavaram Project and 3% on contracts executed through sub contractor net of all deductions including depreciation. Accordingly, we direct the A.O. to estimate net profit as directed above.

9. In the result, the appeals filed by the revenue are partly allowed.

10. The assessee has filed cross objections in support of the order of the Ld. CIT(A). Therefore, for the reasons recorded in the preceding paragraphs, we dismiss the cross objections filed by the assessee as not maintainable.

11. In the result, the cross objections filed by the assessee are also dismissed. The above order was pronounced in the open court on 28 th Mar17. Sd/- Sd/- (. ) (. ) (V. DURGA RAO) (G. MANJUNATHA)  /JUDICIAL MEMBER /ACCOUNTANT MEMBER # /Visakhapatnam: /Dated : 28.03.2017 VG/SPS ITA No.471 & 472/Vizag/2012 M/s. Nara Constructions, Eluru 9   )# *#/Copy of the order forwarded to:-

1.  / The Appellant The ITO, Ward-2, Eluru

2.  / The Respondent M/s. Nara Constructions, 24A-16-9, Allasani Peddana Street, Ashok Nagar, Eluru-534 002.

3. + / The CIT, Rajahmundry

4. + () / The CIT (A), Guntur

5. #  .,  ., # / DR, ITAT, Visakhapatnam

6.  / Guard file / BY ORDER // True Copy // Sr. Private Secretary ITAT, VISAKHAPATNAM