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Income Tax Appellate Tribunal, ‘C’ BENCH : BANGALORE
Before: SHRI. CHANDRA POOJARI & SMT. BEENA PILLAI
ORDER
PER BEENA PILLAI, JUDICIAL MEMBER Present appeal is filed by revenue against order dated 31.10.2019 passed by Ld.CIT(A)-1, Bangalore on following grounds of appeal: “1. The order of the Learned CIT (Appeals), in so far as it is prejudicial to the interest of revenue, is opposed to law and the facts and circumstances of the case.
2. The Ld. CIT (A) erred in adopting gross profit at 8.55% based on the trend of the gross profit in the preceding three years
3. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the Ld. CIT (A) be reversed and that of the Assessing Officer be restored.
4. The appellant craves leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of appeal.” 2. Brief facts of the case are as under: 2.1 The assessee is a Private Limited Company, regularly assessed to Income tax. It is engaged in the business of Civil Construction for wind mills and national highways. 2.2 The assessee filed return of income for the assessment year 2016-17 on 14-10-2016, declaring a total income of Rs.63,62,108/-. 2.3 Subsequently the case was selected for scrutiny through CASS, and notice was issued under Section 143(2) to the assessee, calling for details in connection with the return filed. In response the statutory notices, the assessee submitted all the requirements from time to time. 2.4 The assessee submitted that it has accounted entire gross turnover billed up to 31/03/2016 for the Financial year 01/ 04/ 2015 to 31/03/2016. It was submitted that the entire turnover was declared to the various authorities like V and Service Tax. The assessee submitted that M/s. Bhoruka Power Corporation Ltd., while deducting Tax at Source considered the bills raised and the work in progress, for the purpose of deducting the tax at source. The assessee had closing work in progress of Rs.1,84,29,813/- as per Schedule no.18 to the Profit & Loss Ac. It is submitted that this was duly accounted in the books of accounts, and hence the entire turnover is accounted for.
Page 3 of Regarding Srinidhi Mines, it was submitted that the assessee has not carried out any work over and above Rs.59,18,307/-. And this turnover was duly accounted in the books of accounts. The assessee submitted that they are unable to know, how these parties considered Rs.98,66,794/- as the value of work done. Assessee submitted that since no work was done, the question of TDS did not arise. The assessee challenged the turnover declared by the deductor, by relying on the ledger account for the subsequent year, to prove that, assessee received nothing from the customer, as no work over and above Rs.59,18,307/- was done. It was submitted that the TDS was considered in assessee’s books against work that was already billed. 2.5 The Assessing officer rejected the explanations furnished by the assessee. The Ld.AO further sought to add sum of Rs.2,11,65,787/-, towards difference in income accounted and income as per 26AS as unexplained Income under section 69 of the Income Tax Act 1961.
Aggrieved by the order of Ld.AO, assessee preferred appeal before Ld.CIT(A).
The Ld.CIT(A) observed and held as under: “4.1.3 Undoubtedly the amount received by the assessee from the client would definitely include the element of profit along with the material cost, statutory deductions, overheads etc. It is seen from the assessment order and the submissions of the appellant filed before me, that the difference of Rs.1.72 crores is appearing as Work-in- progress under schedule "Inventories", having taken the entire cost incurred on this contract to the Balance sheet, without routing through the Profit & account. This is due to the reason that the appellant adopted Percentage Completion method as prescribed under Accounting Standard -7: Construction Contracts and raised running bills as per its assessment on work completion.
Page 4 of Considering these facts and also respectfully following the decision of the Hon'ble Bangalore ITAT in the case of Natesh Subramanya Jayaram, I am of the view that only a reasonable amount can be considered as a profit for the purposes of making a GP addition from the said transaction. 4.1.4 It is also clear from the above facts that the sum of Rs.1.72 crores is turnover and the expenditure concerned to the above turnover is lying as Work-in- progress under "Inventories". Therefore, only the profit has to be added and brought to tax. Since the appellant could not show actual expenditure against the above turnover of Rs.1.72 crores, the profit has to be estimated in a reasonable manner. The decision of the Hon'ble Bangalore ITAT in the case of Natesh Subramanya Jayaram relied on by the appellant contains identical facts to the present case where the difference of turnover between profit and loss account and Form No. 26AS, was considered as turnover. 4.1.5 As observed and stated in the above paragraph, the appellant could not show the actual expenditure against the turnover of Rs.1.72 crores. Hence, the profit has to. Hence, the gross profit on such turnover has to be estimated taking into account the highest GP margin in the hands of the appellant in the recent past and accordingly, added to the taxable income For this purpose, the profit earned for preceding three years was to be considered and the highest profit rate earned in any of these years, could be considered and used as a yard stick to tax. In the submissions of the appellant, the gross profit earned in the immediate preceding year is highest being 8.55%. Hence, the same has to be adopted as income on the turnover of Rs.1.72 crores. 4.1.6 Considering the above, I am of the view that the gross profit at 8.55% on the turnover of Rs.1.72 crores can reasonably be treated as income in the hands of the appellant. In view of the above, the AO is directed to tax the transaction accordingly, by adopting the above GP rate of 8.55% instead of taxing the entire amount of Rs. 1.72 crores as income. 4.2 Similar issue of turn over mismatch was high- lighted by the AO in respect of another party M/s. Srinidhi Mines and Minerals. During the hearing, it was submitted that the appellant had taken a sum of Rs. 39.48 lakhs as Page 5 of advance in the earlier years. Since the project was completed during financial years 2015-16, the same was accounted by M/s. Srinidhi Mines as cost of project and deducted tax at source on the same. However, the appellant did not show the same as income in the books of account. 4.2.1 Having considered the above submissions, it is clear that the sum of Rs.39.48 lakhs is appearing in Form No. 26A5 as turnover but the same was not accounted as turnover by the appellant in its books of account. Since the project is completed, the advance of Rs.39.48 lakhs was considered as project cost by M/s. Srinidhi Mines, the same has to be considered as turnover in the hands of the appellant. Since the project is completed, the entire expenditure is accounted and hence, the total sum of Rs.39.48 lakhs constitutes income. Considering the above, I am of the view that the sum of Rs.39.48 lakhs has to be assessed as income and accordingly, the action of the AO in treating the said amount received as income of the appellant is sustained, while dismissing the submissions made by the appellant in this regard.”
Aggrieved by the order passed by Ld.CIT(A), revenue is in appeal before this Tribunal.
The Ld.DR submitted that there is no basis in arriving at the gross profit @ 8.55% as adopted by Ld.CIT(A). It is submitted that the discrepancy in the turnover as observed by the Ld.CIT(A) of Rs.1.72 Crores is appearing in work in progress without rooting it through the profit and loss account.
The Ld.DR submitted that, Ld.CIT(A) wrongly observed that the expenditure attributable to Rs. 1.72 Crores is to be estimated in a reasonable manner. It is the contention of the revenue that such estimation is without any basis since the assessee followed mercantile system of accounting and is supposed to declare income on accrual basis and as per Form 26AS. It was submitted that the actual income that has accrued to assessee as per Form 26AS from M/s. Bhoruka Corporation Ltd. is Rs.7,87,21,803/-.
Page 6 of He submitted that the entire issue needs to be reconsidered in the light of various accounting principles.
In respect of M/s. Srinidhi Mines and Minerals, the Ld.DR submitted that sum of Rs. 39.48 Lakhs is appearing in form 26AS as turnover, but the assessee did not account the said amount in the books of account. The Ld.DR submitted that, admittedly, the project with M/s. Srinidhi Mines and Minerals is completed and the advance of Rs. 39.48 lakhs was considered as project cost by M/s. Srinidhi Mines and Minerals in the hands of the assessee. Under such circumstances, the Ld.DR submitted that the entire amount of Rs. 39.48 lakhs was to be considered as income in the hands of the assessee. The Ld.DR thus submitted that the Ld.CIT(A) erred in estimating the GP and prayed for remand of both these issues for proper verification.
On the contrary, the Ld.AR submitted that, the assessee followed mercantile system of accounting and adopted Percentage Completion Method available in AS - 7. Based on the above, the assessee raised the invoices to the extent of Rs.6,15,04,503/. The assessee enclosed the Sales ledger and ledger extract of M/s.Bhoruka Corporation for the period 01.04.2015 to 31.03.2016, wherein actual sales accounted towards Bhoruka is Rs.6,15,04,503. The remaining sum of Rs.1,72,17,300/- is shown as Work-in-progress as the work was not completed. The Ld.AR submitted that the assessee did not raise the invoice to this extent. However, based on the work completion certification, M/s.Bhoruka accounted the above sum of Rs.1.72 crore in its Page 7 of TDS was made. He relied on the Financial Statements show the accounting of Work-in-progress.
Further, the Ld.AR submitted that percentage of sales during the preceding three Assessment Years are as under: Financial Year Sales Profits Percentage 2012-13 2,18,28,176 5,00,890 2.29% 2013-14 7,33,28,290 30,64,547 4.18% 2014-15 5,91,02,604 50,54,279 8.55% Average 5.00% 11. He thus submitted that, the average percentage is approximately 5%, whereas, the Ld.CIT(A) computed the gross profit @ 8.55%, which is at a higher rate, against which, the assessee is not in appeal. It is thus submitted that the addition restricted by the Ld.CIT(A) is justified.
We have perused the submissions advanced by both sides in the light of records placed before us.
We note that the assessee is following mercantile system of accounting based on project completion method. Nothing is placed on record in order to determine to what extent the project progressed and completed qua the income declared. We note that the Ld.CIT(A) without verifying the details estimated GP at 8.55% without any basis. We are of the view that all these details needs to be verified before determining the actual turnover of the assessee, during the year under consideration. Both the parties from whom income stands generated, has declared a higher value in 26AS against which TDS is deducted. The assessee is declaring a lesser turnover, however this in our view is not in accordance with the provisions of statute. We therefore remand this appeal back to Ld.AO for de novo verification. The assessee is directed to Page 8 of file all relevant details in order to establish the actual turnover during the year under consideration. The Ld.AO shall then verify the same and consider the issue in accordance with law. Accordingly, the grounds raised by revenue stands allowed for statistical purposes. In the result, the appeal filed by the revenue stands allowed for statistical purposes. Order pronounced in open court on 13th May, 2022.