RAJA REDDY KATANGOOR,HYDERABAD vs. ACIT, CENTRAL CIRCLE- 2(2), HYDERABAD

The assessee has, more or less, raised common grounds of appeal for all the assessment years. Therefore, for the sake of brevity, grounds of appeal filed for the A.Y. 2018-19 are re- produced as under:

The brief facts of the case are that, the assessee is engaged in the business of civil construction works, has undertaken subcontract work for KNR Constructions Private Limited. The assessee has filed original return of income on 30.03.2019, declaring net profit of Rs. 1,75,08,514/-. The assessment has been completed under section 143(3) r.w.s. 144B of the Income- tax Act, 1961, dated 22-04-2021 and assessed the total income at Rs.3,34,83,580/-. A survey under section 133A of the Income Tax Act, 1961 was conducted on 15-03-2022 along with KNR Group of cases. During the course of survey, certain documents were seized. Consequent to survey, notice under section 148 of the Act, dated 29-08-2023 was issued. In response to notice, the assessee had filed return of income on 26.02.2024 by declaring net loss of Rs. 24,34,584/-. The case was selected for scrutiny, and during the course of assessment proceedings, the A.O. called upon the assessee to file the relevant evidences in support of return of income filed in response to notice under section 148 of the Act. The assessee had furnished the relevant details. The A.O., after considering the relevant submissions of the assessee, observed that, the assessee has declared sales turnover of Rs. 70,77,83,326/- for five assessment years, starting from A.Y. 2017- 18 to 2021-22, whereas as per the sales ledger of KNR Constructions Pvt. Ltd., the total receipts from the above company was Rs. 78,75,20,128/-. Since there is a difference in turnover as admitted by the assessee in the return of income filed for the last five years and payment made by KNR Constructions Pvt. Ltd., the A.O. rejected the books of accounts and estimated 6% net profit on total turnover declared by the assessee of Rs. 5,97,43,943/- and determined “Income from business” at Rs. 35,84,636/-.

Aggrieved by the assessment order, the assessee preferred an appeal before the Ld. CIT(A) and challenged the additions made by the A.O. towards estimation of net profit on difference in turnover when compared to the books of accounts of the assessee and the payment made by KNR Constructions Pvt. Ltd., and argued that, the assessee has executed sub-contract works for KNR Constructions Pvt. Ltd., in the state of Arunachal Pradesh and and estimation of the net profit @ 6% is not correct.

The Ld. CIT(A), after considering the submissions of the assessee and also taking note of various reasons given by the A.O. for estimating net profit of 6% on turnover, observed that, the assessee has failed to file relevant details and supporting evidences in respect of return of income filed in response to notice under section 148 of the Act, even though the assessee has declared net loss from huge turnover on subcontract works. Thus, rejected the arguments of the assessee and upheld the estimation of net profit on gross turnover.

Aggrieved by the order of Ld. CIT(A), the assessee is now in appeal before the Tribunal.

The learned counsel for the assessee, Shri T. Chaitanya Kumar, Advocate, submitted that the Ld. CIT(A) erred in sustaining 6% profit estimation on turnover even though the assessee has explained the reasons for loss incurred from subcontract works undertaken for KNR Constructions Pvt. Ltd. Pvt. Ltd., in the State of Arunachal Pradesh and due to various factors, including the location of project, the assessee has incurred huge losses. The A.O. without appreciating the relevant facts simply estimated 6% net profit on turnover without any basis and therefore, he submitted that the profit estimated by the A.O. may be scaled down to 4%. In this regard, he relied upon the decision of ITAT, Hyderabad Bench in the case of Sri Hanuman Infra Private Limited Vs. DCIT in ITA No.1059/Hyd/2018 dated 31.01.2019. 8. The learned Senior A.R. for the revenue, Dr. Sachin Kumar, on the other hand, supporting the order of A.O. and Ld. CIT(A), submitted that the assessment proceedings before the A.O. and Ld. CIT(A) are ex parte, because the assessee could not produce any evidences in support of the return of income filed in response to notice issued under section 148 of the Act. Further, during the course of appellate proceedings, the assessee could not justify the financial results declared in the return of income filed in response to notice under section 148 of the Act. The Ld. CIT(A), after made by the A.O. towards estimation of 6% profit on gross contract receipts from KNR Constructions Pvt. Ltd. Therefore, he submitted that the order of the Ld. CIT(A) should be upheld.

We have heard both parties, perused the material available on record and had gone through the orders of the authorities below. There is no dispute with regard to the fact that there is a difference between the turnover admitted by the assessee in the books of accounts for the last five assessment years starting from A.Y. 2017-18 to A.Y. 2021-22, when compared to payments made by KNR Constructions Pvt. Ltd. to the assessee for carrying out subcontract works which is evident from relevant tabulation of sales as per KNR Constructions Pvt. Ltd., ledger account and the turnover declared in the I.T. returns filed by the assessee. It is also not in dispute that, the A.O. estimated 6% net profit on turnover as reported by the assessee or sales as per KNR Constructions Pvt. Ltd. ledger account whichever is higher on the ground that the assessee could not explain the difference in turnover and also failed to file supporting evidences. It was the explanation of the assessee before the A.O. that due to the nature Constructions Pvt. Ltd. The assessee further contended that, the A.O. has rejected the books of accounts without assigning any reason and also estimated 6% net profit without bringing on record any comparable cases of similar nature.

We find that, the A.O. has rejected the books of accounts and estimated 6% net profit on turnover declared by the assessee as per books of accounts or payment made by KNR Constructions Pvt., Ltd., as per the sales ledger account without pointing out any inconsistencies or discrepancies in the books of accounts maintained by the assessee. Further, the A.O. has also estimated 6% net profit on gross receipts, however, failed to bring on record any cases of comparable nature and also failed to give any proper reasons for adopting 6% net profit on gross receipts. From the above, it is very clear that although the assessee has not supported financial results declared for the year under consideration, with evidence, but fact remains that the A.O. has estimation of 6% profit on gross receipts. Since both the parties failed to justify their cases with relevant evidences, in our considered view, the only option left with us is to estimate a reasonable profit from the contract receipts. We further noted that, the ITAT, Hyderabad Bench in the case of Sri Hanuman Infra Private Limited Vs. DCIT (supra) has considered an identical issue of estimation of profit from subcontract works and after considering relevant facts, has directed the A.O. to estimate 4% net profit on total turnover. Therefore, by following the decision of ITAT, Hyderabad Bench in the case of Sri Hanuman Infra Private Limited Vs. DCIT (supra) and also considering the facts of the present case, we deem it appropriate to estimate 4% net profit on total turnover considered by the A.O. for A.Y. 2018-19 to 2020-21. Thus, we direct the A.O. to estimate 4% net profit on gross turnover declared by the assessee or considered by the A.O.

Coming back to A.Y. 2021-22. The Ld. CIT(A) dismissed the appeal filed by the assessee for A.Y. 2021-22 by holding that there was no discussion in the assessment order passed by the A.O. under section 147 r.w.s. 144 of the Act, dated 26.02.2025 with profit. We further noted that, from the assessment order passed by the A.O. under section 147 r.w.s. 144 of the Act, dated 26-02- 2025, the A.O. has not made any addition to the returned income insofar as estimation of profit on gross contract receipts. From the order passed by the A.O. and Ld. CIT(A), it is abundantly clear that the grounds raised by the assessee on the issue of estimation of 6% net profit on gross receipts is neither emanating from the assessment order passed by the A.O. under section 143(3) r.w.s. 144 of the Act, dated 26.02.2025 nor considered by the Ld. CIT(A) in the appellate order passed on 01.09.2025. Therefore, in our considered view, the grounds raised by the assessee for the assessment year 2021-22 on the issue of estimation of net profit on contract receipts of Rs.7,97,36,802/- is not in consonance with the assessment order passed by the A.O. and therefore, the grounds raised by the assessee are rejected. In any case, assuming for a moment, the A.O. has considered the turnover for A.Y. 2021-22 as per the sales ledger account of KNR Constructions Pvt. Ltd. and estimated 6% net profit on said turnover, in our considered view, as directed by us for the earlier assessment years i.e., A.Y.s. 2018-19 to 2020-21, the A.O. is directed to estimate 4% net profit on gross contract receipts declared by the assessee or considered by the A.O. for A.Y. 2021-

In the result, the appeals filed by the assessee are partly allowed.

The Principal Commissioner of Income Tax (Central), Hyderabad. 4. नवभधगीयप्रनतनिनर्, आयकर अपीलीय अनर्करण, हैदरधबधद / DR, ITAT, Hyderabad 5. गधर्ाफ़धईल / Guard file