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Income Tax Appellate Tribunal, BANGALORE BENCHES “C”, BANGALORE
Before: Shri George George K, JM & Ms.Padmavathy S, AM
IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES “C”, BANGALORE Before Shri George George K, JM & Ms.Padmavathy S, AM ITA No.536/Bang/2021 : Asst.Year 2016-2017 Sri.Chithappa Karthik Yadav The Income Tax Officer No.182, 5th Cross, Venakteshwara v. Ward 6(3)(4) Nagar Jakkur Bangalore. Bengaluru – 560 064. PAN : AARPY0131F. (Appellant) (Respondent) Appellant by : Sri.Rampriyadas, CA Respondent by : Smt.Prayadarshini Besaganni, JCIT-DR Date of Date of Hearing : 30.03.2022 Pronouncement : .03.2022 O R D E R Per Padmavathy S, AM This appeal is against the order of the CIT(A), Bangalore-6, dated 29.01.2020 for the assessment year 2016-2017.
The assessee raised four legal grounds and grounds on merits, however, during the course of hearing, the learned AR argued only the grounds on merits, which are as under:-
Grounds on Merits: 15. The learned authorities below have failed to appreciate that, the law itself has specified that if a civil works contractor declares 8.00% profit, he need not maintain books of accounts. Hence, without prejudice the learned authorities below could have considered the profit as 8% of the turnover or profit as declared by the Assessee whichever is higher. However, the learned Authorities below have considered the Higher income which is not in accordance with the law and hence the entire additions liable to be deleted in full.
2 ITA No.536/Bang/2021 Sri Chithappa Karthik Yadav. 16. The authorities below have failed in appreciating the fact that the Income Tax Act itself has fixed the higher turnover limits for declaring income under presumptive basis under section 44AD for subsequent years, the turn over achieved by the assessee is much lesser than the revised limit fixed by the Income Tax Act from the facts and circumstances of the case. 17. The learned Authorities below erred in ignoring the fact that the assessee was entitled to offer the income under presumptive basis u/s 44AD for the civil contracts business carried out by him. 18. The learned Authorities below erred in disallowing the expenses merely relying on the cash withdrawals and without calling of any information on the beneficiaries for the expenses incurred, merely on surmise and conjunctures that the assessee has violated the provisions of section 40A (3) of the Act. 19. The learned Authorities below erred in adding back a sum of Rs.55,66,121/- under the premise that the cash withdrawals are spend for payment of expenses which is disallowable u/s 40A (3) of the Act, without appreciating the fact that the withdrawn amounts are paid over a period of time to various parities within the limits allowable under 40A(3) of the Act from the facts and circumstances of the case. 20. The learned authorities below erred in not giving any opportunity or have not called for any information and explanation regarding the nature of expense incurred by the Appellant out of cash withdrawn Rs.55,66,121/- from the bank accounts by the assessee. 21. The learned authorities below failed to appreciate the fact that, the cash is not spend as they are drawn from the bank to a single person in a day and are not justified in not calling for the details for payment of cash at any point during the course of proceedings before arriving at the conclusion that the appellant has incurred the cash expenses to attracts the rigorous provisions of section 40A(3) of the Act from the facts and circumstances of the case. 22. The learned authorities below merely on surmise and conjunctures arrived at the conclusion that the cash payments are subjected to disallowance under section 40A (3) of the Act,
3 ITA No.536/Bang/2021 Sri Chithappa Karthik Yadav. without appreciating the fact that the payments are made to various persons on different dates. 23. Without prejudice, the learned AO at the most ought to have levied penalty for non-maintenance of books of accounts and / or for non-filing of Form 3CD within the stipulated time. Instead, the learned authorities below disallowed the expenses arbitrarily, which is impermissible under the law and the entire additions are liable to be deleted. 24. Appellant denies itself liable to be charged interest u/s 234A and 2348 of the Act from the facts and circumstances of the case. 25. Without prejudice, it is submitted that the disallowance is highly excessive, irrational and required to be deleted. 26. The appellant craves leave to add, alter, amend, substitute, change and delete any of the grounds of appeal. 27. For the above and other grounds t hat may be urged at t he time of hearing of the appeal, the appellant prays that the appeals may be allowed and justice rendered.” 3. There is a delay of 527 days in filing the appeal before the Tribunal. The assessee pleaded for condonation of delay on the basis of Cognizance for Extension of Limitation (2020) 117 taxmann.com 66 (SC) dated 23.03.2020, where the Hon’ble Supreme Court has suo moto extended all the time limits till further orders by extending the due dates with effect from 15.03.2020. We have considered this matter and have taken the materials on record to admit the grounds filed for condonation of delay. The Hon’ble Supreme Court suo moto writ petition No.03/2020 along with M.P 21/2022 has held that the period from 15/3/2020 till 28/02/2022 shall stand excluded for the purpose of period of limitation as may be prescribed under any general or special laws in respect of quasi judicial and judicial proceedings. The period of delay in assessee’s case is covered by the exclusion of period of limitation as per the order of the Hon’ble Supreme Court. Hence we hold
4 ITA No.536/Bang/2021 Sri Chithappa Karthik Yadav. that there is no delay to be condoned in filing these appeals and the appeals are deemed to be filed in time for further adjudication.
The Brief facts of the case: 4. The assessee is an individual, who filed his return of income for the assessment year 2016-2017 on 06.02.2017 declaring a total income of Rs.9,99,270 under the head ‘Profits and Gains from Business or Profession’. The assessee is a civil contractor and entered into a civil work contract with DEC Infrastructure and Projects India Limited. The assessee’s case was selected for scrutiny. Notices u/s 143(2) and 142(1) were issued and served on the assessee. During the year under construction, the turnover of the assessee was Rs.1,32,51,267 against which the assessee claimed direct expenses of Rs.1,20,20,415 and indirect expenses of Rs.2,40,437. During the course of hearing, the Assessing Officer (AO) called for furnishing documentary evidences in respect of direct and indirect expenses. The assessee vide letter dated 15.11.2018 stated that he has not maintained any books of account and net income from civil work contract have been estimated and offered to tax. The AO was not satisfied with the explanation offered by the assessee for the reasons that (i) The turnover of the assessee is more than Rs.1 crore and therefore provision of section of 44AD of the Income Tax Act (the Act) is not applicable to the assessee (ii) The assessee ought to have maintained the books of account and should have also got them audited (iii) The assessee should have furnished the copy of the audit report along with the return of income. (iv) The explanation of the assessee of having estimated the income from the civil work is not teneable
5 ITA No.536/Bang/2021 Sri Chithappa Karthik Yadav. The AO concluded the assessment by disallowing the entire expenditure and added the same to the total income returned.
Aggrieved, the assessee preferred an appeal before the CIT(A). The assessee submitted before the CIT(A) that the disallowance of entire expenditure was unjustifiable. The assessee also pleaded that for the earning of income of Rs.1,32,51,268, the assessee ought to have incurred some expenditure and according to section 44AD of the Act, 8% of the turnover may be treated as profit, but disallowing the entire expenditure taking the profit margin @ 100% is not a fair. The CIT(A) called for submission of further evidences by the assessee whereby he submitted the bank statements before the CIT(A). On perusal of the bank statements, the CIT(A) noticed that there was withdrawals of Rs.52,43,000 by way of cash on several dates and bearer cheques were issued in various names for an amount of Rs.6,23,121. The CIT(A) proceeded to conclude the assessment by disallowing an amount of Rs.58,66,121 (Rs.52,43,000 + 6,23,121) on the presumptions that the expenditures would have been incurred using the cash withdrawals and is disallowable u/s 40A(3) of the Act. However the CIT(A) gave partial relief to the assessee by allowing the deduction for the balance amount of Rs.61,54,294.
Aggrieved by the order of the CIT(A), the assessee is in appeal before us.
The learned AR submitted that the assessee is a small time contractor and his turnover for earlier and subsequent assessment years to the year under consideration are below Rs.1 crore. So, the assessee was under a bonafide belief that he was not required to maintain books of account and hence did not do so. The learned AR also submitted the decision of the CIT(A) to consider the profit at more than 40% is not in accordance with any law. The
6 ITA No.536/Bang/2021 Sri Chithappa Karthik Yadav. learned AR further submitted that the CIT(A) ought not to have assumed the cash withdrawals as expenditure to be disallowed u/s 40A(3) of the Act without giving an opportunity of being heard to the assessee and without any evidence to support the claim therefore is against the principles of natural justice.
The learned Departmental Representative supported the decision of the lower authorities.
We heard the rival submissions and perused the materials on record. There is no dispute that the assessee’s has earned a revenue of Rs.1,32,51,267 as contract receipts and this fact is also supported by Form 26AS which shows that tax is being deducted at source on these receipts. The assessee is required to maintain books of accounts as the presumptive provisions of section 44AD is not application basis the turnover exceeding Rs.1 crore which the assessee failed to do so. Given this, whether the lower authorities are justified in estimating the profits of the assessee at more than 40% is to be looked into. We notice that a similar issue is considered by the Delhi High Court in the case of CIT vs Subodh Gupta (2015) 54 Taxmann.com 343 (Delhi) where the court has held that
“6. Learned counsel for the Revenue submits that Section 44AD has no application as the turnover of the respondent assessee was Rs.18.43 crores and the said section prescribes a thumb rule or presumptive net profit rate if the turnover of an assessee is less than Rs.40 lacs. This is correct and has been noticed by the Commissioner of Income Tax (Appeals) and the Tribunal. The difficulty in the present case is that the Assessing Officer did not conduct any inquiry and ascertain the net profit rate of other comparable contractors. On the other hand, he disallowed expenditure of Rs.10.61 crores resulting in abnormal gross profit rate of 59.60%, which should not be accepted. The effect thereof was that 70% of the expenditure on account of purchases worth Rs.10.61 crores out of
7 ITA No.536/Bang/2021 Sri Chithappa Karthik Yadav. total purchases of Rs.14 crores was disallowed. The appellate authorities have taken a holistic and broader view and held that as the books of accounts had not been produced and were not regularly maintained, the book results should be rejected. We agree with the counsel for the Revenue that the assertion that the books of accounts were stolen had a hidden motive and the assertion is rather unbelievable. The respondent assessee therefore must suffer adverse consequences. The only question is whether the addition of Rs.1,13,22,334/- to declared income of Rs.34,21,970/- is adequate or a higher addition would be justified. As far as total turnover is concerned, the appellate authorities are right in holding that the figure of Rs.18.43 crores cannot be disputed as the assessee was only doing development work for the Greater Noida Authority. The total turnover is also supported by the tax at source certificate. The quantum of turnover was not adversely commented upon by the Assessing Officer. In view of the aforesaid position, we wanted the counsel for the Revenue to ascertain the gross profit or net profit rates declared and accepted by the Assessing Officer in case of other contractors engaged in similar work. We wanted ascertainment of this aspect as the counsel for the Revenue had submitted that net profit @ 8% was inadequate and low and a higher profit rate should be attributed. By order dated 19.08.2014, counsel for revenue was required to ascertain the said aspect. It is stated at Bar that the Assessing Officer has not given any comments in this regard. Noticeably, counsel for the assessee had earlier produced before us a copy of the assessment order relating to assessment year 2010-11, wherein the Assessing Officer himself had applied net profit rate of 8% on contractual receipt of Rs.6.66 crores and net profit rate of 3% on supply receipts of Rs.7.21 crores. As per the said order, the total receipts were to the tune of about Rs.14 crores. In the present assessment year the total turnover of the assessee was about Rs.18 crores. In these circumstances we are not inclined to accept the prayer of the counsel for the Revenue that an order of remand may be passed. The Assessing Officer in the subsequent years has accepted the figure of 8% net profit, which is the figure which has been adopted by the appellate authorities in the present case. Reliance placed by counsel for the Revenue on CIT vs. Sobti Construction (India) Ltd. [2008] 307 ITR 374 is misplaced. In the said case, Section 44AD had been applied though the turnover of the assessee was admittedly above Rs.40 lacs. In the case in hand, the appellate authorities have not applied Section
8 ITA No.536/Bang/2021 Sri Chithappa Karthik Yadav. 44AD as such. Difficulty arose as they had to estimate reasonable rate of net profit. In the absence of any data and details, they applied the net profit rate as mentioned in Section 44AD. As recorded above, we had asked counsel for the Revenue to ascertain whether similar contractors have declared a higher profit rate. Counsel for the Revenue has not been able to point out or state that the other contractors have a higher profit rate, than the net profit rate of 8% as held by the appellate authorities. The said rate was also applied in the assessment year 2010-11.”
We agree that there is no hard and fast rule for estimating income from the civil construction business. However, section 44AD prescribes estimation from contract business in cases specified there at the rate of 8% of gross receipts. Though the assessee does not fall within the prescription of section 44AD, the presumptive rate of net profit of 8% incorporated in section 44AD reflects a legislative approved rate of net profit, that can be considered as fair and reasonable to estimate income from contract business in cases like that of the assessee, where the books of accounts are not maintained and when the details furnished are not found acceptable to the AO. The Hon’ble Delhi High Court in the case of Subodh Gupta (Supra) has upheld the estimation of profits at 8% is reasonable when no evidence to the contrary is produced by the revenue. Therefore, considering the judicial precedence and overall facts and circumstances of the case, we are of the considered view that it would be fair and proper that the income from contract business of the assessee be estimated at 8 per cent of the gross receipts. The AO is directed accordingly. The appeal of the assessee is allowed
9 ITA No.536/Bang/2021 Sri Chithappa Karthik Yadav. 8. In the result, the appeal filed by the assessee is allowed.
Order pronounced on this 31st day of March, 2022.
Sd/- Sd/- (George George K) (Padmavathy S) JUDICIAL MEMBER ACCOUNTANT MEMBER Bangalore; Dated : 31st March, 2022. Devadas G* Copy to : 1. The Appellant. 2. The Respondent. 3. The CIT(A)-6, Bangalore. 4. The Pr.CIT-6, Bangalore. 5. The DR, ITAT, Bengaluru. 6. Guard File. Asst.Registrar/ITAT, Bangalore