J M MHATRE INFRA PVT LTD.,,PANVEL vs. ACIT, CC-1 , THANE

आदेश / O R D E R PER AMIT SHUKLA (J.M): The aforesaid appeals have been filed by the assessee and one batch of appeals are against quantum of assessment passed u/s.143(3) for A.Y. 2013-14 and 2014-15 vide separate order of even date 31/03/2023 passed by ld.CIT(A)-Pune-11. Another set of appeals pertaining to A.Y.2012-13 to 2017-18 have been filed by the assessee against common order passed by ld. CIT(A) vide

2 ITA No. 1663-1670/Mum/2023 M/s. J M Mhatre Infra Pvt. Ltd order dated 31/03/2023 for the quantum of assessment passed u/s.153A r.w.s. 143(3). 2. In the sets of two appeals, which are pertaining to pre-search assessments passed u/s.143(3) for A.Y. 2013-14 and 2014-15, wherein the common issue involved pertains to estimation of income from direct contract receipts by taking 11% of turnover and estimation income of sub-contact receipts for taking 5.5% of its turnover. Apart from that, assessee had also raised estimation of income from rentals by the AO by taking 100% of the total receipts; and lastly, not allowing deduction of Rs.5,50,000/- as claimed by the assessee under Chapter VIA in A.Y.2013-14. 3. We will take up the appeal pertaining to pre-search assessments passed u/s.143(3) for the A.Y.2013-14 and our finding given therein will apply mutatis mutandis in the appeal for A.Y. 2014-15, because the finding of AO and ld. CIT(A) are exactly same based on similar set of facts. 4. The brief facts are that assessee is engaged in the business of undertaking construction contracts for various Government agencies like, Railways, National Highway Authority of India, Jawaharlal Nehru Port Trust, CIDCO etc. and other private organizations. Assessee is also doing business of quarrying and paver block manufacturing. For A.Y.2013-14 assessee had filed return of income on 30/09/2013 by declaring total income at Rs.12,22,22,534/-. During the course of assessment proceedings, ld. AO noted that assessee had shown net profit

3 ITA No. 1663-1670/Mum/2023 M/s. J M Mhatre Infra Pvt. Ltd margin of 6.86% with respect to turnover of Rs.176,23,61,579/-. The break-up of the said turnover was as under:- i. Direct contract receipts Rs. 96,51,77,258/- ii. Sublet contract receipts Rs. 63,81,93,001/- iii Sand sales Rs. 12,67,87,238/- iv Rent income Rs. 2,61,66,205/- v Transport Charges Received Rs. 60,37,877/-

4 ITA No. 1663-1670/Mum/2023 M/s. J M Mhatre Infra Pvt. Ltd vouchers and the supporting documents and in earlier assessment year’s books of accounts of the assessee were rejected and income was estimated. He further noted that in A.Y.2008-09 income was estimated @10% of the direct contract receipts and 5% of sub-contract receipts. Accordingly, in this year Assessing Officer proposed to estimate income @11% of the direct contract receipts and 5.5% of sub-contract receipts and 10% of other income. He further estimated 8% of other income. Thus, the income of the assessee was estimated in the following manner:- i. Income on direct contract receipt@11% Rs. 10,61,69,498/- ii. Income on sub-contract receipts@5.5% Rs. 35,00,615/- iii Income on sale of sand @ 10% Rs. 1,26,78,724/- iv Income on transport receipts @ 10% Rs 6,03,788/- v Rental Income @ 100% Rs. 2,61,66,205/- Total Rs. 14,91,18,830/- ==================

5 ITA No. 1663-1670/Mum/2023 M/s. J M Mhatre Infra Pvt. Ltd company has been debiting the bogus sub-contract expenses in the profit & loss account in order to inflate the expenses and he declared additional income on account such bogus expenses debited in the books of accounts for AY 2012-13 to AY 2017-18. In AY 2013-14, he had declared 12% of bogus expenses while filing the return of income. He further noted that assessee in the return filed in response to show-cause notice u/s 153A for A.Y.2013-14 had shown income of direct contract receipts @ 8%; income from sub-contract @ 4%; income of sale of sand @10%, rental income @85% and other receipts @100%. The income declared in the return filed u/s.153A for A.Y.2013-14 as noted by the ld. CIT (A) is as under: i. Income on direct contract receipt @ 8% Rs. 7,72,14,181/- ii Income on sub-contract receipts @ 4% Rs. 2,55,27,720/- iii. Income on sale of sand @ 10% Rs. 1,26,78,724/- iv Rental Income @ 85% Rs. 2,22,41,274/- v Other receipts @ 100% Rs. 60,37,877/- Total Rs. 14,36,99,776/- =============== - 8. Besides above, the assessee declared following additional income in the return filed u/s 153A: i. Additional income of Rs. 43,38,508/- by applying a GP Rate of 12% on unverified sub-contractors amounting to Rs. 3,61,54,230/-

6 ITA No. 1663-1670/Mum/2023 M/s. J M Mhatre Infra Pvt. Ltd ii. Additional income of Rs. 5,01,954/- on the turnover of the directors to be considered in the hands of the company. In this manner, the assessee declared total income of Rs. 14,85,40,238/- (14,36,99,776 +43,38,508 +5,01,954) in the return filed u/s 153A of the Act.

7 ITA No. 1663-1670/Mum/2023 M/s. J M Mhatre Infra Pvt. Ltd 10. In the year A.Y.2014-15 also the assessee in response to show-cause notice u/s.1 53A subsequent to the search had declared income by showing income of direct contract receipt @8% income of sub-contract receipt @4% and rental income @85%. Here also the additional income was offered in the return of income filed u/s.153A in the following manner:- i. Additional income of Rs. 51,30,303/- by applying a GP Rate of 12% on unverified sub-contractors amounting to Rs 4,27,52,522/-. ii. Additional income of Rs. 30,455/- as per AB bundles. In this manner, the assessee declared total income of Rs. 26,88,65,450 (26,37,04,692 +51,30,303 + 30,455) in the return filed u/s 153A of the Act. Thus, ld. CIT (A) in A.Y.2013-14 has upheld the estimation made by the ld. AO.

8 ITA No. 1663-1670/Mum/2023 M/s. J M Mhatre Infra Pvt. Ltd that assessee has been showing sub-contract receipts and inflate the expenses which were admitted by the Managing Director of the assessee company and on this ground he held that estimation made by the ld. AO is justified. However, before us, ld. Counsel submitted that in the case of the assessee this Tribunal vide order dated 06/11/2019 for A.Y.2011-12 and 2012-13 on exactly similar set of facts had estimated the income of the assessee on direct contract receipts @ 9% of the turnover and on sub-contract receipts @ 4.5% of the turnover. Further, in the earlier years the Tribunal from A.Y.2005-06 to 2008-09 noted that in the A.Yrs. 2005-06 to 2007-08, ld. AO has estimated rate of 8% of the contract receipts and for A.Y. 2008-09, ld. AO had estimated @10% of the contract receipts and similarly, 4% of sub-contract receipts for A.Yrs. 2005-06 to 2007-08, and 5% for A.Y.2008-09. In those years the assessee before the Tribunal had not disputed the rate of 10% albeit, it was pleaded that, since it is a partnership firm, therefore, salary and interest paid to the partners debited to the profit and loss account should be allowed and this was allowed by the Tribunal. In subsequent years, i.e., from A.Y.2009-10 to A.Y.2012-13, the Tribunal has upheld the net profit rate of 9% and 4.5% on the contract receipts and sub- contract receipts respectively. 12. Since in these years, only dispute before us is, what should be the reasonable estimate of net profit in the case of the assessee, therefore, precedence in assessee’s case for earlier years on similar facts permeating in these years also becomes

9 ITA No. 1663-1670/Mum/2023 M/s. J M Mhatre Infra Pvt. Ltd very relevant factor. Thus, in line with the earlier years, we estimate the profit in the following manner:- i) In so far as direct contract receipts, that is, contracts which assessee has carried out as a contractor, estimation of net profit rate of 9% would be reasonable as compared to 11% estimated by the AO for the A.Y.2013-14 and 2014-15; and ii) In so far as sub-contracts receipts, net profit @4.5% is estimated, instead of 5.5% by the AO. Thus, assessee gets part relief in both the years.

10 ITA No. 1663-1670/Mum/2023 M/s. J M Mhatre Infra Pvt. Ltd Post Search Assessment Appeals 15. There are other bunch of appeals which are post search assessment wherein by and large the issue remains the same, i.e., estimation of profit on direct contract receipts and on sub- contract receipts and on rental receipts. Since issues raised in all the years are by and large same arising out of identical set of facts and findings arising out of consolidated order passed by the ld. CIT (A), therefore, same are being disposed of in the consolidated order. 16. We will take up the appeal for A.Y.2012-13 wherein the main issue is of addition on account of bogus sub-contract charges. As noted above, a search and seizure operation was carried out on 20/09/2017 and in response to notice u/s. 153A, assessee has declared income on estimated basis, because the books of accounts were already rejected by the ld. AO in the original assessment proceedings. The assessee has estimated its income, in the following manner: Particulars Estimation On direct contract receipts 8% of turnover On sub-contract receipts 4% of turnover On rental receipts 85% of receipts

11 ITA No. 1663-1670/Mum/2023 M/s. J M Mhatre Infra Pvt. Ltd respectively with regard to the aforesaid receipts. Thus in a way ld. AO has not tinkered with estimation made by the assessee. However, the main issue raised by the ld. AO is on account of separate addition of bogus sub-contract charges of Rs.2,43,75,113/-. During the course of search, it was found that various relatives of the employees of the assessee company were acting as sub-contractors and assessee was making payment through cheque to these sub-contractors and the employees / and then these sub-contractors would withdraw cash from the bank and the same was to be handed over to the Directors of the assessee company or employees. The ld. AO has discussed about the statement recorded u/s. 132(4) of Shri Gagan Koli who was accounts officer and various documents found during the course of search, from where he drew his inference that assessee was generating cash out of bogus sub-contracts charges debited to the. Also during the course of search operation, summons were issued to various sub-contractors, some of them had replied also and admitted that they did not carry out any work for the assessee company. Apart from that, AO has also incorporated the statement of Shri J M Mhatre, MD of the assessee company, wherein he has explained that even though the measurement book for bogus sub-contractors were prepared but basically no actual work was carried out by these bogus sub-contractors. The reasons given by the ld. AO based on various materials referred to by him for holding that the payment to the sub-contractors is bogus can be summarised as under:-

12 ITA No. 1663-1670/Mum/2023 M/s. J M Mhatre Infra Pvt. Ltd i. That the Measurement Book is maneuvered so as to ostensibly provide virtual really to the bogus sub-contract changes. ii. That the Measurement Book is prepared only for record in the case of bogus sub- contractors with the main purpose to ensure that the staff in general in the company UMP does not know of the bogus accommodation entries carried out by company (MPL) is books. iii. That the normal procedure in the case of genuine sub- contractor is followed in maintaining the Measurement Book in the case of bogus sub-contractor. iv. That in the case of genuine sub-contractors Measurement Book is prepared on the basis of actual work completed whereas in the case of non-genuine subcontractor, Measurement Book is prepared as per convenience as required v. That in the case of bogus contracts there is no work order issued, since, no actual work is carried out by them. vi. That the bank accounts are opened in the case of bogus sub- contractors from whom pre-signed cheques are obtained, which are then used by the company (JMMIPL) lo withdraw the cash from these accounts whenever required vii That Shri Janardhan Moru Mhatre offer perusing the books of accounts and consulting his in-house Chartered Accountant has confirmed that all the subcontractors as mentioned in Q.30 of his statement, have not done any contractual work and have been used by the company (JMMIPL) to inflate the expenses. He

13 ITA No. 1663-1670/Mum/2023 M/s. J M Mhatre Infra Pvt. Ltd unequivocally has confirmed that each and every such contractor is bogus. viii. That Shri Janardhan Moru Mhatre has gone on to explain and agreed that either the bogus sub-contractors were the employees of the company (JMMIPL) or their relatives. ix. That with respect to the remarks Adjustment party as per Gagan, it is explained by Shri Janrdhan Moru Mhatre that these are non-genuine subcontractors (bogus sub- contractors), which are managed by Shri Gagan Koli, accountant of the assessee company. x. That bogus sub-contract charges have been booked in the last 6 years and he declared the same during the search action as the income of the assessee for respective years. xi. That all the bogus sub-contractors have admitted to have not performed any contractual work for JMMIPL but have in connivance with JMMIPL Indulged into providing bogus entries in the form of sub-contract charges. xii. Bank accounts of the alleged sub-contractors are in the same bank ie. Bank of Baroda, Panvel Branch, where the bank account of Assessee Company is operated. These bank accounts are operated and managed by the assessee company. Significantly, the assessee company came forward as introducer to open these bank accounts in the same bank Le Bank of Baroda, where the assessee company has its bank account xiii. Returns of income of the alleged sub-contractors have been uploaded by the assessee company-as is evident from presence of

14 ITA No. 1663-1670/Mum/2023 M/s. J M Mhatre Infra Pvt. Ltd same IP addresses in their returns of income as is appearing in the assessee company's and its directors returns of income. This too indicates that the returns of income of the alleged sub- contractors are prepared and filed by the assessee company. xiv. Almost all the sub-contractors have denied to have carried out any contractual work for the assessee company. They have also admitted that only the amount was credited in their bank account, which was subsequently withdrawn in cash by the employees of the assessee company after obtaining blank signed cheques from them. 18. AO has also noted the list of various sub-contractors in respective amount for F.Y.2011-12 to F.Y.2016-17 which has been tabulated in the assessment order. Thus, he made following addition from A.Y.2012-13 to A.Y.2018-19:

Sr. No A.Y. Amount

1 2012-13 2,43,75,113/-

2 2013-14 4,20,07,333/-

3 2014-15 4,20,36,705/-

4 2015-16 6,02,00,657/-

5 2016-17 11,61,52,713/-

6 2017-18 2,29,38,184/-

15 ITA No. 1663-1670/Mum/2023 M/s. J M Mhatre Infra Pvt. Ltd 7 2018-19 56,04,344/-

16 ITA No. 1663-1670/Mum/2023 M/s. J M Mhatre Infra Pvt. Ltd bogus expenses booked in AY 2012-13 to AY 2017- 18. Complete modus operandi was explained by him. He also admitted additional income for these assessment years on account of bogus sub- contract expenses. v. During post search investigation, Statements of Shri J M Mhatre and Shri Gagan Koli were again recorded wherein they confirmed and admitted their earlier statements recorded during the search. vi. During the assessment proceedings, the Assessing Officer undertook extensive investigation as detailed in the assessment order and the result of such investigation has already been discussed in this order which indicate that all the sub- contractors denied having carried out any work for the appellant. vii. After issuing show-cause notice, all the objections have been dealt in detail by the assessing officer in the assessment order. 41.1 During the appellate proceedings, the appellant has submitted that no s of these sub contractors were recorded during the search proceedings. The said intention is factually incorrect. As discussed in the assessment order, statements of many sub contractors were recorded during the search proceedings when they died having carried out any work for the appellant. Further, the assessing officer has made enquiries from these sub-contractors during the proceedings as well. The AO has elaborated the facts of each sub- contractor separately in the assessment order explaining as to why the said contractor is bagus. The appellant has not rebutted these findings of the assessing 41.2 The appellant has relied on the Measurement Books of these persons. were in his statement recorded u/s 132(4) of the Act, Shri J M Mhatre has categorically stated that the Measurement Books for these subcontractors were maintained on random basis and were maintained only for creating records so that other employees do not come to know about such adjustment entries. In view of such categorical admission, the said contention of the appellant does not have any force.

17 ITA No. 1663-1670/Mum/2023 M/s. J M Mhatre Infra Pvt. Ltd

41.3 The appellant has contended that seizure of blanked signed cheques of the subcontractors does not mean that the cash was withdrawn by the appellant company. This contention of the appellant is in complete contradiction to the confession made by Shri Gagan Koli wherein he admitted that the cash was withdrawn and given to director of the company. Shri J M Mhatre along with other directors bad agreed to this statement of Shri Gagan Koli. Therefore, this contention does not have any force. 41.4 It has been contended that the comments on seized page adjustment party as per Gagan does not denote any illegal or false practice as sometimes, accounting entries require adjustments. In this connection, it may be stated that the meaning of said comment has been explained in detail by Shri Gagan Koli wherein he admitted that all these parties denote bogus sub-contractors. The said page was specifically confronted with Shri J M Mhatre as well and he also confessed the same. Therefore, the said contention cannot be accepted. 41.5 The appellant has raised issues regarding the reliability of statement of Shri Gagan Koli. This issue has been discussed in detail by the AO in his order as well as by me. Shri Gagan Koli has admitted the bogus expenses thrice i.e. u/s 132(4) on 20/09/2017, u/s 131 on 21/09/2017 and u/s 131 on 12/10/2017 His statement was accepted by Shri J M Mhatre on 22/09/2017, 23/09/2017 and on 3/10/2017. The statement of Shri J M Mhatre recorded u/s 132(4) was countersigned by 4 other directors and 2 Auditors as discussed above. Therefore, the contention that the statement of Shri Gagan Kali is unreliable cannot be accepted. 41.6 The appellant has also relied upon the paper trails in the form of invoices, payments, ledger accounts, etc., submitted during the assessment proceedings. In this connection, it may be stated that the facts of the case clearly suggest that the paper trails were created only for giving colors to non-genuine transactions and cannot be relied upon. As mentioned in the assessment order, there are sufficient evidences to suggest that the sub-contract expenses to the extent of Rs. 2,43,75,113/-

18 ITA No. 1663-1670/Mum/2023 M/s. J M Mhatre Infra Pvt. Ltd debited in the P&L account for the year under consideration, are bogus. 41.7 The appellant has further contended that the assessing officer has not brought any evidence of utilization of cash by the assessee. This contention cannot be accepted because as per the settled legal position, any expense debited in the P & L A/c can be allowed as deduction only when the assessee substantiates its genuineness. In other words, the onus of proving the genuineness of any expense is on the assessee and in the present case the assessee has failed to discharge the said onus. In fact, the assessee has admitted that the expenses are bogus and offered additional income @ 12% of such bogus expenses in its return of income filed u/s 153A of the Act. Considering these facts, the said contention of the appellant is rejected. 41.8………………………………….. 41.9…………………………………. 41.10. The reasons for holding the sub-contract charges claimed to have been paid to the persons mentioned at Sl. No. 10 to 14 above as bogus, have been discussed in detail in the assessment order particularly at page 75 wherein the assessing officer has stated that all these persons in their statements have admitted that they did not carry out any sub-contract work for the appellant. During the appellate proceedings, the appellant has not filed any specific submission denying these findings of the Assessing Officer, therefore, for the reasons given in detail in the assessment order, it is held that the sub-contract expenses claimed to have been given to these persons are bogus. 42. In view of above discussion and after considering the facts as discussed in the assessment order as well as the fact that the appellant company on various occasions has admitted that it has booked bogus sub-contract expenses in its P&L account and the fact that in the return filed u/s 153A of the Act, the appellant company has declared additional income @12% on such bogus sub-contract expenses, the action of the assessing officer in holding that the appellant company has booked bogus sub- contract expenses to the extent of Rs. 2,43,75,113/- is upheld.

19 ITA No. 1663-1670/Mum/2023 M/s. J M Mhatre Infra Pvt. Ltd 19. In so far as the plea of the assessee before the ld. CIT (A) if the action of the ld. AO is upheld then, it will result into unreasonable net profit ration which too he has rejected. 20. Before us, ld. Counsel for the assessee submitted that there is no allegation by either by the Investigation Wing, the Assessing Officer or by the CIT(A) that the assessee have not carried out the work as per contracts awarded to it. Further, it is also not in dispute that the identified sub-contractors (not all) were withdrawing cash and giving back the same to the assessee. Before us, he explained that the cash obtained from the sub- contractors was utilised by the assessee for the purpose of making payments to various labour at various sites, where construction activity is going on. It was explained that the assessee would have some labour on the pay roll, required to do specific work, but most of the labour would be sourced locally at the site which are mainly in remote areas, to whom necessarily daily cash payment was required to be made. It is a highly unorganized sector and it is virtually impossible for the assessee to maintain detailed/ voluminous and proper records for such labour so as to enable verification, if and when required, by any statutory department, presently (here) the Income-tax Department. As a result, the Assessing Officer, in pre-search assessments (right from AY 2005-06 to AY 2014-15), has rejected the books of account and estimated profits of the assessees, citing reasons that the assessees were unable to prove the genuineness of such payments to labours in absence of proper bills/ invoices/ records. It was due to such difficulties, the

20 ITA No. 1663-1670/Mum/2023 M/s. J M Mhatre Infra Pvt. Ltd assessee-company resolved to this pivot and decided to generate cash through relatives of the employees thinking this could be a better way to deal with the objections of the Department that resulted in rejection of books of account; but it was in vain. The modus would be that these relatives would act as sub- contractors and give the cash back to the assessee, which would then be utilised to make payments to the labour at various sites. This would do away with the defect earlier pointed out by the Department of self-made vouchers, or other defects on the vouchers such as no signatures, no name, not mentioning of work done and so on. This way the payments were made in cheques to some of sub-contractors and then they use to withdraw cash for the purpose of making payments to labours and assessee didn’t had to then make payments in cash to labours directly which were in thousands in number. The fact that the assessee have reduced payments in cash (per books of account) to labourers at various sites is also evident from the following table –

Financial Labour Total labour Ratio Contract Total year Charges charges Of Receipts for sub- ended paid in debited (Rs) Cash the year (Rs) contract cash (Rs) Payment charges to debited total (including labour alleged charges bogus) (Rs) 31.03.2011 3,34,98,454 6,48,87,399 51.63 170,07,84,189 35,03,72,971 31.03.2012 5,86,17,731 9,72,76,658 60.26 148,80,57,045 29,67,96,333

21 ITA No. 1663-1670/Mum/2023 M/s. J M Mhatre Infra Pvt. Ltd 31.03.2013 7,05,24,217 11,23,77,987 62.76 160,33,70,259 29,32,74,331 31.03.2014 9,08,85,940 19,72,95,932 50.35 405.23,43,543 91,48,50,895 31.03.2015 8,48,35,728 26,45,34,053 42.59 356,81,00,077 75,51,57,795 31.03.2016 4,39,39,345 17,70,36,381 29.47 388,77,20,367 44,37,94,697 33.03.2017 1,57,77,456 12,57,69,771 12.54 366.64,92,999 54,59,82,615 31.03.2018 6,32,82,623 29,22,11,369 25.58 653,50,63.231 113,16,65,813

22 ITA No. 1663-1670/Mum/2023 M/s. J M Mhatre Infra Pvt. Ltd operations of 29.09.2017. Thus, it will be appreciated that nothing has changed except for masking.

23 ITA No. 1663-1670/Mum/2023 M/s. J M Mhatre Infra Pvt. Ltd 25. He further submitted that if the case of the Assessing Officer is accepted and the sub- contract charges are held to be bogus, and not utilsed for labour payments, it will lead to absurd results with net profit spurting to as high as 17.19% for the year ended 31.03.2015, which is simply not possible, or even imaginable. It is not possible to earn this high a profit in contractors' business, that too a government contractor. He also referred to the following documents furnished during the course of hearing- (a) Statement showing net profit earned by the assessee for various years, including the net profit if the disallowance of bogus sub-contract charges is considered. (b) Statement giving comparables - net profit declared by other firms/ corporates in the same business. (c) Photo copy of letter of acceptance dated 02.09.2016 issued by CIDCO to the assessee together with Bill of Quantities (BOQ) to show that the assessee has accepted the contract at 32.55% below the cost estimated by CIDCO (d) Photo copy of letter of acceptance dated 02.09.2016 issued by CIDCO to the assessee together with Bill of Quantities (BOQ) in respect of "Integrated development in Sector-3 on West side of NH-4B of Pushpak Nagar at Dapoli, Navi Mumbai" to show that the assessee have accepted the contract at 32.55% below the cost estimated by CIDCO. (e) Photo copy of letter of acceptance dated 02.09.2016 issued by CIDCO to the assessee together with Bill of Quantities (BOQ) in

24 ITA No. 1663-1670/Mum/2023 M/s. J M Mhatre Infra Pvt. Ltd respect of "Integrated development in Sector-4 to 10 on East side of NH-4B of Pushpak Nagar at Dapoli, Navi Mumbai" - to show that the assessee has accepted the contract at 32.55% below the cost estimated by CIDCO. 26. Ld. Counsel further pointed out that the assessee is a government contractor. The government organisations like CIDCO floating the tender arrives at the estimated cost on the basis of expected materials, labour, etc., to be consumed and expected rates thereof. The rates are prescribed by CPWD (in case of central government contracts) or by the respective state PWDs. The organisations cannot deviate from the rates prescribed. Thereafter, various contractors bid for the tender and the contract is awarded to the lowest bidder, the bid of the contractor also include a profit element. Thus, he submitted that due to intense competition in an already competitive bid, it is virtually impossible to earn super-profits in the business of the assessee. Further, there is already a guidance provided by the Tribunal in order dated 06.11.2019 for AYS 2011-12 and 2012- 13, where the Tribunal has held the estimation of income at:- (i) On direct contract receipts 9% of turnover (ii) On sub-contract receipts 4.5% of turnover

25 ITA No. 1663-1670/Mum/2023 M/s. J M Mhatre Infra Pvt. Ltd 28. On the other hand, ld. DR strongly relied upon the order of the ld. AO & ld. CIT (A) and referred to various observations made by the ld. CIT(A) as noted above. 29. We have heard both the parties at length and perused the relevant finding given in the impugned order as well as material placed on record before us. In the assessments which have been passed post search u/s. 153A/143(3), the issue is with regard to booking of bogus sub-contracting charges to inflate expenses or to appropriate cash. The ld. Assessing Officer has held that sub- contract charges are bogus based on various reasons as has been discussed in the foregoing paragraphs. In sum and substance, his finding is based on; firstly, list of sundry creditors found during the course of search where in the names of various sub-contractors and against their names it has been remarked as “adjustment party as per Gagan” and on enquiry it was found that these sub-contractors are providing bogus entries to the assessee company and Shri Gagan Koli, a key employee of the assessee company who was looking after the payment of the sub- contractors was handling the cash generated from such adjustment of sub-contract charges; secondly, the statement on oath of Shri Gagan Koli, wherein he has admitted and explained the modus of booking of bogus sub-contractor charges. Thirdly, statement on oath of J.M. Mhatre, MD of the assessee company who too have admitted to book bogus sub-contract charges for inflating expenses. Lastly, statement on oath of various sub- contractors and other persons who also corroborated the same fact coupled with other enquiries. Thus, on these facts it stands

26 ITA No. 1663-1670/Mum/2023 M/s. J M Mhatre Infra Pvt. Ltd concluded that assessee did debited few of subcontract charges to generate cash. However, most of the subcontract charges has been found to be genuine for which no addition has been made. 30. However, the case of the assessee has been that, assessee is working on a huge projects for construction of roads on contract awarded by government and various projects for various Government agencies, for which it requires huge manpower and many sub-contractors to execute the work. The contract work awarded has all the clause of material and labour and rates and work to be executed and labours engaged have to be paid in cash as they are working on different sites and often on daily wages. Assessee had stated that by making the payments to the sub-contractors by cheque, the same were entirely used for making the payments to various labourers at various sites while construction activity is going on. Looking to the volume of the labours involved and requirement for the payment of making in cash, this modus operandi was adopted by the assessee, that some of its employees were enrolled as sub- contractor to whom assessee used to pay cheques and they used to encash it for making the payments at various sites at remote areas. These sub-contact charges are purely linked to carrying out contract work only and this method was adopted for the disbursal of cash payments to labours and to avoid so many vouchers and details. Since construction activities in the remote areas are highly unorganized, therefore, it was very difficult for the assessee to maintain and detailed and voluminous paper records for such labour so as to put for full verification. It was

27 ITA No. 1663-1670/Mum/2023 M/s. J M Mhatre Infra Pvt. Ltd stated that, this was the precise reason that the books of accounts have always been rejected and profits have been estimated in the case of contracting and sub-contract receipts. It was also explained before the authorities below that assessee has resolved to this pivot and decided to generate cash through employees of the relatives wherein at least there is a trail of payment made for the labours in cheque. The ld. Counsel has also tried to explain as to why these were required to be made in cash and also he has pointed out that in the books, assessee has reduced substantial payments in cash in the books to the labourers at various sites and this has been achieved so only through this mode. He pointed out that from F.Y.2010-11 to F.Y.2016-17, the ratio of cash payment to the labour have reduced from 51-60% to 12.5%, despite contract receipts have been increased multi fold over the period of time. It has been pointed out that after the search, assessee has continued this payment made to sub-contractors through cheque and taking back cash from them to make the payments of labourers against the quantum of cash payments have increased substantially. This goes to show that the entire modus operandi was adopted only to reduce the cash expenses in the books and also not its construction activity suffer by making the payment to the labourers in cash. 31. This explanation from the records and circumstances seem to be plausible and we accept that sub-contract charges were booked to generate cash to make payments to labourers. The submission of the assessee cannot be brushed aside completely

28 ITA No. 1663-1670/Mum/2023 M/s. J M Mhatre Infra Pvt. Ltd because looking to the nature of business and the manner of conducting business specially when huge construction activities are carried out in remote areas and it is unskilled labour intensive work which is highly disorganized. It is a well known fact that labourers demand the wages in cash on daily basis or short periodic basis. It is also a matter of fact that in the case of the assessee, in earlier years, the payment of labour charges in cash was huge which was done by withdrawing from the bank account and making self-made voucher payments and due to payment made in cash and getting it verified fully to the satisfaction of the ld. AO / Income Tax department was difficult resulting into estimation of profit and rejection of books of account. Assessee introduced this mode where few sub- contractors are appointed on papers, and they shall be given the amount in cheques and after withdrawing the cash from their bank accounts would disburse to the labourers. It is also a matter of record that assessee has also actually sub-contracted most of the work and payment has been made for which there is no dispute except in the cases of few sub-contractors who were out of employees and the relatives of the employees through whom assessee has rotated cash for making the payments to the labourers. 32. One very important fact which has to be seen that the assessee is a Government contractor and in the tender document assessee has to complete the contract work as per the given specification and strictly according to the quantity of materials to be consumed and the quality of the material to be used and how

29 ITA No. 1663-1670/Mum/2023 M/s. J M Mhatre Infra Pvt. Ltd much work is to be done. Every contract work has its own percentage of material used and labour work involved. The said tender document elaborates the whole quality and quantity and the price rate. Once the assessee executes the work and after the inspection of the work and the quality audit by the concerned Government department, assessee is given the payment. Even the profit on the contract is also determined at the level of tender document. Further, no where it has been brought on record or by any enquiry that during these years the percentage of labour expenses has reduced or it is not in parity with tender documents or the work awarded to the assessee has not been done by the assessee. If the work has been carried out in accordance with the contractual agreement and tender document, then one has to see if the work has been done then how much is the cost with regard to the labour expenses. Whether assessee has done the correct approach or has taken the dubious route by routing the payment of the labourers to the sub-contractors is immaterial. It can only entail rejection of books of account and estimating profit rate. Fact of the matter which is to be seen is here that, whether assessee has executed the work and whether has made the payment to the various sub- contractors and the labourers for getting the work done. If the entire sub-contract charges are to be disallowed, then the gross profit rate or net profit rate of the assessee will go multi-fold which is much more than tender document and also in this line of business such a huge quantum of profit is not comparable.

30 ITA No. 1663-1670/Mum/2023 M/s. J M Mhatre Infra Pvt. Ltd 33. Before us, ld. Counsel has tried to demonstrate that if in all the years this sub-contract charges are added, the net profit rate in various years will go very high and the gross profit itself will increase multifold. First of all he pointed out that as per the books the net profit on all the contract receipts and other receipts is ranging from 5.43% to 7.32 % in AYS. 2012-13 to 2017-18. But if a sub-contact charges which has been added by the AO is included then net profit goes to 8.68 % to 14.65% in these years. Already assessee in its return of income filed u/s 153A, assessee has shown 8% net profit and has declared much higher income than original return of income. If on this further addition is made the net profit rate will go even higher. Fot instance: A.Y. 2012-13- 11.52% A.Y. 2013-14- 12.67% A.Y. 2014-15- 8.78% A.Y. 2015-16- 17.55% A.Y. 2016-17- 14.69% A.Y. 2017-18- 13.19% Ld. Counsel has also submitted a chart, wherein he has given the details of various receipts, direct expenses, gross profit ratio as per the books, indirect expenses, net profit shown in the books of accounts and if these sub-contractor charges are added, the resultant gross profit as well as net profit would be as under:-

31 ITA No. 1663-1670/Mum/2023 M/s. J M Mhatre Infra Pvt. Ltd

32 ITA No. 1663-1670/Mum/2023 M/s. J M Mhatre Infra Pvt. Ltd

33 ITA No. 1663-1670/Mum/2023 M/s. J M Mhatre Infra Pvt. Ltd 34. From the above it could be seen that the net profit in various years is ranging from 7.77% to 14.95%. The assessee in the return of income filed in response to notice u/s.153A had shown net profit rate of 8% in the contract receipts to factor in the sub-contract charges; and 4% from sub-contract receipts. The impact of this addition, if made on the net profit rate of 8% which is already more than declared in the books of account is more, then as stated above the net profit rate in these years will increase furthermore, viz., A.Y. 2012-13- 11.52%; A.Y. 2013-14- 12.67%; A.Y. 2014-15- 8.78%; A.Y. 2015-16- 17.55%; A.Y. 2016- 17- 14.69%; and in A.Y. 2017-18- 13.19%. This is more than, what has been estimated in earlier years. In the regular appeal for A.Y.2013-14 and 2014-15 we have estimated 9% on contract receipts and 4.5% on sub-contract receipts. Such estimation applicable for regular assessments will also apply here. As held above in the regular assessment appeals for A.Y.s 2012-13, 2013-14 and 2014-15, we have applied 9% on the direct contract receipts and 4.5% on sub-contract receipts. Accordingly, for these years also we are applying net profit rate of 9% on the direct contract receipts. 35. We also hold that addition made by the AO separately for some of sub-contract charges will get subsumed in the net profit rate of 9%. We have already held that this sub-contact charges was ultimately was part of contract work executed by the assessee, albeit ultimately accommodation of subcontract charges was to generate cash to be utilised for payment of wages. Looking into the fact that assessee did carry out the work during

34 ITA No. 1663-1670/Mum/2023 M/s. J M Mhatre Infra Pvt. Ltd the year as per the awarded contract, both as the main contractor and also have got the work done through sub- contractor, the bogus sub-contract charges shown by the assessee would be a part of the business and expense. At the most net profit on the bogus sub-contract charges can be added to the net profit declared, because it is part of the contract work carried out by the assessee and if these sub-contract charges are treated to be bogus, then it means that assessee has tried to suppress profit from its contract business. In such a situation the best recourse would be to estimate the net profit rate in all these years instead of making separate addition of the sub- contract charges over and above the net profit shown in the books of accounts. Thus we hold that estimate of 9% as held above is far reasonable to factor in the sub-contract charges added by the AO. Accordingly, assessee gets part relief and now instead of net profit on direct contract receipts declared at 8% in the return filed u/s 153A, it will be 9% and separate addition as held will get subsumed. 36. In so far as appeals for A.Y.2012-13, 2013-14 & 2014-15 is concerned, there is no addition are tinkering with the accounts of the sub-contract charge by the ld. AO and therefore, in these years this is not the issue at all. 37. Now coming to the issue of bogus sub-contract charges for A.Y.2015-16, 2016-17 and 2017-18, the facts leading to the additions made by the ld. AO are exactly same. In these years also we are applying net profit rate net profit rate of 9% on the

35 ITA No. 1663-1670/Mum/2023 M/s. J M Mhatre Infra Pvt. Ltd direct contract receipts. In these years also assessee in the return of income filed u/s.153A has disclosed the net profit @8%. Here also, finding given above will apply mutatis mutandis that these sub-contract charges were in fact directly related to carrying out the contract work undertaken by the assessee and again there is no finding that assessee has not incurred labour expenses in proportionate to earlier years. The reason for applying the net profit rate we have already held that sub- contract charges are in fact part and parcel of contract work and the modus operandi of sub-contract charges was to reduce the cash expenses in the books of account of labourers and to give back the amounts paid to the sub-contracts in cheque to ultimately making payment to the labourers in cash as per discussion made above. Thus, these sub-contract charges at the most can be said to be in the nature of inflating expenses and reducing the profit. In this year also estimation of net profit would cover up all these expenses of bogus sub-contract charges. Accordingly, we direct the ld. AO to apply net profit rate on 9% direct contract receipts for A.Y. 2015-16, 2016-17 and 2017-18 and consequently, this issue is partly allowed. 38. In A.Y.2012-13 another issue which has been raised in the grounds by the assessee is on account of additional income declared of Rs.59,62,723/-. This additional income was declared by the assessee in its return of income pursuant to the notice u/s. 153A in the nature of interest received on fixed deposits with the banks as margin for issue of bank guarantees in favour of the Government organization. The assessee submitted that

36 ITA No. 1663-1670/Mum/2023 M/s. J M Mhatre Infra Pvt. Ltd this additional income declared by the assessee is not arising out of any incriminating documents found during the course of search and such additional income is not in accordance with the law. Before us ld. Counsel has submitted that interest earned on FD kept with the bank for margins for obtaining various contracts and for overdraft facility from the banks his FDs were created only out of the overdraft facility. Since assessee has to pay interest on overdraft facility and has earned interest from such FDs. Thus, interest paid is more than the interest earned therefore, interest should have been allowed. In support, he has relied upon various propositions and case laws. 39. We find that before the ld. AO assessee has not made any such claim and it has offered it as income in the return of income. Further, this issue has not been challenged before the ld. CIT (A) also. Under these facts, we are not tinkering with the additional income declared by the assessee in the return of income and accordingly, this ground is dismissed. 40. Further, in ground No.4 in A.Y.2012-13 assessee has challenged that additional income declared on the turnover of Directors of Rs.7,88,469/- cannot be added as it is very high and excessive because in the seized documents, the turnover made by the Directors which was not according to regular books was Rs. 65,70,571/-. The assessee estimated 12% from such turnover and offered it as additional income. Now the case of the assessee before us that, it is on higher side, not commensurate with the business of the assessee and lower percentage should

37 ITA No. 1663-1670/Mum/2023 M/s. J M Mhatre Infra Pvt. Ltd be applied. We do not find any justification for such a plea that once the assessee has offered the income on the basis of seized document, then assessee cannot take a plea that the said additional income offered should be reduced by some adhoc percentage of net profit. Accordingly, ground No.4 is dismissed.

Sr no Particulars Amount Our comments (Rs) (i) Sub-contract 61,37,878 Income may be receipts estimated by applying a reasonable percentage in line with ground of appeal no 2 for AY 2012- 13, as the nature of receipts is same/ similar. (ii) Transport (-) 1,71,037 Figure is in negative charges (iii) Misc income 71,037 Income may be estimated by applying a reasonable percentage Total 60,37,877

38 ITA No. 1663-1670/Mum/2023 M/s. J M Mhatre Infra Pvt. Ltd 43. In so far as contract receipts are concerned, the assessee already offered income @ 4% now which cannot be estimated below. Other charges and miscellaneous income also we do not find any reason to tinker with the income offered to the assessee. Accordingly, ground No.3 is also dismissed.

39 ITA No. 1663-1670/Mum/2023 M/s. J M Mhatre Infra Pvt. Ltd contract charges offered @4% by the assessee is upheld. Accordingly, ground No.3 is dismissed.

40 ITA No. 1663-1670/Mum/2023 M/s. J M Mhatre Infra Pvt. Ltd absence of any incriminating material such disallowance of expenses cannot be made in the assessment made u/s.153A. Therefore, the additional ground of foreign travel expenses is directed to be deleted.

Sr. Particulars Amount Our comments No. (Rs.) (i) Sundry balance 49,30,182 --- written-back (ii) Misc Income 1,00,00,000 Income may be estimated by applying a reasonable percentage Total 1,49,30,182

41 ITA No. 1663-1670/Mum/2023 M/s. J M Mhatre Infra Pvt. Ltd offered miscellaneous income and sundry balance written back and therefore, now at this stage assessee cannot reason and held that income should be reduced.

42 ITA No. 1663-1670/Mum/2023 M/s. J M Mhatre Infra Pvt. Ltd 55. In so far as disallowance of foreign travel expenses of Rs.4,69,420/-, in this year also since it is an unabated assessment and assessment has attained finality, therefore, this addition is beyond the scope of Section 153A, accordingly, ground No.6 is allowed.

43 ITA No. 1663-1670/Mum/2023 M/s. J M Mhatre Infra Pvt. Ltd during the course of search. However, the contention raised by the ld. Counsel cannot be accepted because if the assessee has disallowed depreciation suomoto in the return of income u/s 153A, then it cannot be held that same is beyond the purview of Section 153A. It is not a case of any addition made on account of incriminating material or not. But then it had offered it as a disallowable depreciation and the same cannot be allowed unless the facts are brought on record. Thus, this ground raised by the assessee is dismissed. 59. In so far as of foreign travel expenses of Rs.10,94,405/-, in assessment year A.Y.2016-17, undisputedly this assessment had abated at the time of search, because the last date of issuing notice u/s.143(2) dated 30/09//2017 and search was conducted on 20/09/2017. On merits, we find that the ld. AO has given detailed reasons as to why assessee has failed to prove the foreign travel expenses and the purpose for the business, accordingly and without any proper facts and material brought on record to show that the foreign travel related to the business of the assessee, ground raised by the assessee is confirmed.

44 ITA No. 1663-1670/Mum/2023 M/s. J M Mhatre Infra Pvt. Ltd

45 ITA No. 1663-1670/Mum/2023 M/s. J M Mhatre Infra Pvt. Ltd merits, we find that the ld. AO has given detailed reasons as to why assessee has failed to prove the foreign travel expenses and the purpose for the business, accordingly, and without any proper facts and material brought on record to show that the foreign travel related to the business of the assessee. Accordingly, ground raised by the assessee is confirmed.

Order pronounced on 22nd September, 2023.

Sd/- Sd/- (AMARJIT SINGH) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai; Dated 22/09/2023 KARUNA, sr.ps

Copy of the Order forwarded to : 1. The Appellant 2. The Respondent. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file. //True Copy// BY ORDER,

(Asstt. Registrar) ITAT, Mumbai