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Income Tax Appellate Tribunal, “C” BENCH, MUMBAI
Before: SHRI ABY T VARKEY, JM & SHRI S RIFAUR RAHMAN, AM
ITA.NO.468/MUM/2021 AY. 2014-15 M/s. Pratibha China State Jonit Venture, Mumbai IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH, MUMBAI BEFORE SHRI ABY T VARKEY, JM AND SHRI S RIFAUR RAHMAN, AM आयकर अपील सं/ (निर्धारण वर्ा / Assessment Year: 2014-15) बिधम/ Dy. Commissioner of Income Tax-26(1) M/s Pratibha China State Room No 623, 6th floor, kautilya Bhavan, Joint Venture Vs. Universal Majestic, 14th Bandra Kurla Complex Bandra East, Mumbai-400051 Floor, Off Eastern Expressway, Ghatkopar Mankhud Link Road, Govandi, Mumbai-400043 स्थधयी लेखध सं./जीआइआर सं./PAN/GIR No. : AABAP0740 (अपीलार्थी /Appellant) .. (प्रत्यर्थी / Respondent) Assessee by: None Revenue by: Mr. Hiren Bhatt, Sr AR सुनवाई की तारीख / Date of Hearing: 31/10/2022 घोषणा की तारीख /Date of Pronouncement: 29/11/2022 आदेश / O R D E R PER ABY T. VARKEY, JM:
This is an appeal preferred by the Revenue against order of the Ld.CIT(A)-25, Mumbai dated 28.02.2020 for A.Y. 2014-15. 2. Grounds of appeal of Revenue raised as under :- 1. "On the facts and in the circumstances of the case, the Ld.CIT(A) is right in deciding that no case is made out for rejection of the books of accounts of the assessee and estimation of its income where the AO has put forwarded valid reason for rejection of the books of accounts of the assessee."
ITA.NO.468/MUM/2021 AY. 2014-15 M/s. Pratibha China State Jonit Venture, Mumbai 2. "On the facts and in the circumstances of the case, the Ld.CIT(A) is right in deciding that no case is made out for rejection of the estimated income of the assessee at 8.44% of the gross receipts as per the industry standards."
3"On the facts and in the circumstances of the case, the Ld.CIT(A) is right in allowing the expenses disallowed by the AO with proper justification."
4"On the facts and in the circumstances of the case, the Ld.CIT(A) is right in derecting the AO to allow credit for TDS, where the turnover has not been offered for taxation by the assessee." 5"The appellant prays that the order of the CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored."
6"The appellant craves leave to amend or to alter any ground or add a new ground, which may be necessary."
From a perusal of the grounds of appeal it reveals that Revenue is aggrieved by the action of Ld.CIT(A) reversing the action of AO rejecting the books of account of the assessee which paved way for estimation of the income of assessee.
Brief facts as noted by Ld. CIT(A) is that the assessee is an Association of Person (AOP)/Joint Venture (JV) formed between M/s.Pratibha Industries Limited (in short M/s PI Ltd) and M/s. China State Construction Engineering Hong Kong Limited (in short M/s CSCEHK Ltd). The said Joint Venture (JV) i.e. assessee M/s Pratibha China State Joint Venture (in short M/s PCSJV Ltd) was formed for the purpose of bidding in the tender proceeding for ITA.NO.468/MUM/2021 AY. 2014-15 M/s. Pratibha China State Jonit Venture, Mumbai getting the contract from National Building Construction Corporation Limited (in short M/s NBCC Ltd). The assessee was awarded the contract on 10th August, 2009 from M/s NBCC Ltd for “Construction of ESIC Medical College” comprising of Hospital Building, Medical College, Hostels, Residential complex including allied services at Bihta (Patna). The assessee filed return of income for A.Y. 2014-15 on 26.11.2014 declaring total income of Rs. 33,46,947/-. The case was selected for complete scrutiny under CASS and after services of statutory notices u/s.143(2) & 142(1) of the Income Tax Act 1961 (herein after the Act) the assessment was completed on 26.12.2016 determining total income at Rs.4,48,24,535/- after rejecting the books of accounts of the assessee and estimating the income @8% of total project cost.
Aggrieved by the aforesaid action of AO, the assessee preferred an appeal before the Ld.CIT(A) wherein the assessee contested the action of AO to have rejected the books and to have resorted to estimation of the income. Before Ld.CIT(A), the assessee challenged the action of AO to have rejected the books of accounts without pointing out any deficiency as regards to its completeness or correctness as envisaged u/s 145 of the Act. It was also brought to the notice of Ld.CIT(A) that books of accounts pertaining to preceding years have been accepted by way of regular assessment for A.Yrs.2012-13 and 2013-14. Further, according to assessee, the AO failed to provide any details of the notices, which was claimed to have been served upon the assessee because according to assessee, the notices were unserved. And the 3 ITA.NO.468/MUM/2021 AY. 2014-15 M/s. Pratibha China State Jonit Venture, Mumbai assessee challenged the action of AO to have estimated 8% of gross profit (ad- hoc) which according to assessee was not in accordance with the industry standards.
After hearing the assessee, the Ld.CIT(A) reversed the action of AO rejecting the books and resorting to estimation of the income by holding as under:-
5.3 I have carefully considered the aforesaid order of the AO and the Appellant's submission. It is observed that during the course of assessment proceedings the AO came to the conclusion that the appellant had offered hardly any income against TDS which had been claimed and, therefore, he proposed to disallow this TDS as per the provisions of section 199(1). Aggrieved by same, the appellant filed an application u/s.144A on 15.12.2016 requesting the JCIT-27(2), Mumbai to direct the Assessing Officer not to disallow the TDS on such grounds. The JCIT observed that the sales shown in the P&L a/c were more than the turnover shown in Form 26AS and that the appellant had offered the entire consideration received during the year pertaining to the project in the books of accounts, for which TDS had been deducted. Therefore, the AO was directed to allow the TDS credit as appearing in Form 26AS while passing assessment order. Thereafter the JCIT looked into the Accounting Standard-7 and directed the AO to examine whether the appellant, being a contractor had offered income according to the percentage completion method or prescribed as per AS-7. If it was found that this has been done, the AO was directed to compute the income as per the above method after giving credit to the positive income already offered and tax it accordingly. The JCIT also mentioned that since profit margin of the appellant in this project had not been disclosed either in the tender document or during the proceedings u/s.144A before him, the AO may estimate such percentage of the total revenue, as the profit margin of the appellant for this contract, as per Industry Standards and may apply percentage completion method accordingly. Thus, the JCIT gave two directions to the AO (i) to examine whether the income had been offered as per percentage completion method, (ii) to estimate the profits as per Industry Standards.
ITA.NO.468/MUM/2021 AY. 2014-15 M/s. Pratibha China State Jonit Venture, Mumbai 5.3.2 It is observed that while issuing such directions JCIT did not point out any shortcoming in the books of accounts maintained by the appellant so as to suggest that accounts were either incomplete or incorrect. Thereafter, the AO issued show cause notice to the appellant pointing out that the profit shown by the appellant was very low, that under presumptive taxation scheme u/s.44AD the net profit of 8% was required to be shown. Perusal of the expenses showed that major portion was expended towards manufacturing, construction and operating charges. The appellant had asked to give details regarding estimated cost of project and estimated profits, which the appellant failed to furnish. Further, notices u/s.133(6) to verify various expenses incurred, had come back unserved. The AO concluded from the same that the genuineness of the purchases were not proved and, therefore, proposed to reject the books of accounts of the appellant and estimated the income at 8% of the gross receipts as per industry standard. In response, the appellant submitted that no deficiency had been pointed out in the books of account and percentage of net profit proposed was unreasonably high. It was further pointed out that the estimation proposed by the AO was in contravention of the ICDS-III issued by the CBDT. It was further submitted that the appellant had followed percentage completion method and to determine stage of completion on contract, it had used survey of work performance method. It was further submitted that no result of notice u/s.133(6) had been confronted to the appellant. The appellant also furnished a list of turnover and profit/loss of 39 companies engaged in similar line of business where the industry average was amounting to -2.39% Hence, the AO was requested to consider the said comparables while estimating income.
5.3.3 After considering the submissions of the appellant, the AO rejected the following accounts:
(i)The profit margin of the appellant in this project was not disclosed either in the tender document or in the proceedings u/s.144A.
(ii) Turnover in form 26AS was less than the sales shown by the appellant in the P&L account.
ITA.NO.468/MUM/2021 AY. 2014-15 M/s. Pratibha China State Jonit Venture, Mumbai (iii) The industry average quoted by the appellant were not reliable as profits earned by TATA Projects Ltd., which was also the infrastructure company reported a profit at 8.5% during the A.Y. 2014-15 and 2015- 16. 5.3.4 On this account, the books of accounts were rejected and the income was estimated at 8% of total revenue on 8.44% of contract completed value.
5.3.5 Before me, the appellant argued that neither the JCIT nor the AO had pointed any defects in the books of account. It was submitted that simply declaring profits cannot be a ground to reject the books of account in itself. It was further submitted that the claim of the AO that notice had been sent u/s.133(6) and had returned unserved was simply not true because the entire work had been executed through supplementary agreement with co- venturer, M/s.Pratibha Industries Ltd, and the entire payment had been made to M/s. Pratibha Industries Ltd. The only other payment made by the Joint Venture was to the Chartered Accountant who prepared the accounts. It was submitted that Notices u/s.133(6) had not been issued to M/s. Pratibha Industries Ltd. or they would have responded. On an enquiry, the financials of M/s.Pratibha Industries Ltd., was submitted along with statement of TDS from which the appellant attempted to show that all the amounts remitted to M/s.Pratibha Industries Ltd. by the appellant for the execution of the sub-contract was accounted for in the books of M/s. Pratibha Industries Ltd. and taken into account while preparing the final accounts of M/s Pratibha Industries Ltd. for filing their Income Tax returns. Copies of the Joint Venture agreement, supplementary agreement, work order given by the Joint Venture to M/s.Pratibha Industries Ltd. were submitted as proof, 5.3.6 On going through the documents, it appears that Joint Venture was merely an instrument constituted for procuring the contract and the name of M/s.China State Construction Engineering Hong Kong Ltd. was merely used to obtain the contract. Of the total contract value of Rs.5,23,40,50,539/-, work amounting to Rs.5,18,17,39,379/- was sub contracted to M/s.Pratibha Industries Ltd. on a back to back basis. Thus, essentially the entire contract was executed by M/s.Pratibha Industries Ltd. and the Joint Venture was nothing more than a front organization which was used to obtain the contract. It is also observed from the TDS statement that during the year payments have been made to 6 ITA.NO.468/MUM/2021 AY. 2014-15 M/s. Pratibha China State Jonit Venture, Mumbai M/s. Pratibha Industries Ltd. on account of this project, which is in excess of the construction operation expenses of Rs.40,57,82,549/- that has been claimed by the appellant as expenses during the year. It is further seen that M/s.Pratibha Industries Ltd. has disclosed revenue from operations in its audited account as on 31.03.2014 at Rs.1551.23 crores. Thus, considering the facts that the entire work has been outsourced to one of the co-venturer, M/s.Pratibha Industries Ltd. and after subtracting the value of the work outsourced to M/s.Pratibha Industries Ltd., the Joint Venture is left with potential receipts of Rs.5,23,11,160/- over the entire contract period. Thus, the profit declared of Rs.33,46,947/- by the Joint Venture cannot be held to be unreasonable considering its actual retention of contract receipts.
5.3.7 Neither the AO nor the JCIT have pointed out any defects in the books of accounts of the appellant. The low profit can be a ground for suspicion and a starting point for enquires, but it itself cannot be a ground to reject books of account. It is not understood as to which notices u/s.133(6) have returned unserved leading to doubts in the purchases, when the entire work has been subcontracted to one of the two co-ventures namely M/s. Pratibha Industries Ltd. and the amount of subcontract awarded to M/s.Pratibha Industries Ltd. amounts to nearly 99% of total contract value. Since the contract value was arrived at during the course of tender, the subcontract value for executing the entire work cannot be held to be unreasonable. It is further observed that other than the subcontract expenses, the remaining expenses are only auditor remuneration and taxes. Hence, there does not appear to be any scope of making disallowance from these accounts.
5.3.8 Having regard to the aforesaid facts, it is held that no infirmity has been pointed out in the books of the appellant and no enquiries have been done to show that the payments for the subcontract claimed as expenses were unreasonable, as regards the work done by it. Thus, no case is made out for rejection of the books of accounts of the appellant and estimation of its income. Furthermore, it is observed that the AO has not cited any reason for relying on the book results of Tata Projects Ltd, and rejecting the 39 other example cited by the appellant and, therefore, even otherwise the estimated income could not be held to be based on an objective assessment. Finally, considering the nature of the appellant's Joint Venture, wherein a front organization was created only with a view to 7 ITA.NO.468/MUM/2021 AY. 2014-15 M/s. Pratibha China State Jonit Venture, Mumbai obtaining a contract, the appellant cannot be compared with a full fledged construction and project manufacturing company. 5.3.9 Considering the totality of facts of the case, it is quite clear that the decision to reject the books of account and estimate income of the appellant at 8.44% on receipts is, without adequate and sufficient reasons. The addition made in this regard therefore, cannot be sustained. It is, accordingly, deleted. 5.4 In the result, ground Nos. 1 to 5 are allowed.
Aggrieved by the aforesaid action of Ld.CIT(A), the Revenue is before us.
We have heard both the parties and perused the records. We note that assessee is an AOP (Joint Venture/JV) formed between M/s PI Ltd & M/s CSEHK Ltd for participating in the tender proceedings so that it can bid for contract of construction of Medical College from M/s NBCC Ltd. Assessee/ JV (AOP) bagged the contract from M/s NBCC Ltd for construction of ESIC Medical College on 10.08.2009. And in the relevant year under consideration i.e. AY 2014-15, the assessee filed ROI declaring income of Rs.33,44,947/-. Assessee’s ROI was picked up for complete scrutiny and as per the application of assessee u/s 144A of the Act, the assessment was carried out under the guidance and directions of JCIT-27(2). The AO show-caused the assessee the reason for declaring low profit margin. Pursuant to the show cause notice, the assessee submitted all documentary evidences/audited financials and further brought to his notice that the assessee (JV/AOP) was only front organization ITA.NO.468/MUM/2021 AY. 2014-15 M/s. Pratibha China State Jonit Venture, Mumbai which was used to participate in the tender proceeding so as to bid for the contract of construction of Medical College. And that the actual work was executed/sub contracted to M/s PI Ltd. And out of the total contract value of Rs.523,40,50,539/- work amounting to Rs. 518,17,39,379/- was sub-contracted to M/s PI Ltd on a back to back basis. Thus , it was brought to AO’s notice that M/s PI Ltd (Pratibha India) which actually executed the contract and the assessee’s receipt was only to the tune of Rs. 5,23,11,160/- (Rs. 523,40,50,539- Rs. 518,17,39,379/-). And that on it, the assessee has declared profit to the tune of Rs. 33,46,447/-. It was also brought to notice of AO that M/s PI Ltd has disclosed Revenue from operation as on 31.03.2019 at Rs. 1551.23 crores. However the AO was of the opinion that the assessee has shown low profit margin and rejected the audited books and estimated the income of assessee @ 8% of the total project cost. On appeal the Ld CIT(A) gave relief to the assessee taking note of the overall facts and that assessee’s books are audited; and that AO failed to give a finding of fact (i) that assessee has not regularly followed the method of accounting u/s 145(1) of the Act; and (ii) that assessee has not computed the income in accordance with the accounting standard notified u/s 145(2) of the Act, and (iii) that AO was not satisfied with the correctness or completion of the account of the assessee, the Ld CIT(A) found that the conditions for invoking section 145(3) of the Act was not satisfied [ i.e, for rejecting the audited books maintained by the assessee]. Therefore, we concur with the Ld CIT(A) that AO erred in resorting to estimation of income as stipulated u/s 144 of the Act without satisfying the conditions prescribed u/s 9