RAJAGHATTA PAPANNA REVANNA,MANDYA vs. INCOME TAX OFFICER WARD 1, MANDYA

The authorities below has failed to appreciate that inference can be drawn from the rate specified under the first proviso to section 44AD of the Income Tax Act, 1961

The authorities below ought to have taken guidance from the past profit percentage declared by the appellant and the industry average while estimating the income for the impugned assessment year on the facts and circumstances of the case.

The learned CIT(A) has failed to take cognizance of the fact that for the assessment year 2020-21, the assessment under section 143(3) of the Act was completed by accepting the profit percentage of 6.40% and that the rule of consistency should have been followed on the facts and circumstances of the case.

The estimation of income at 10% by the learned CIT(A) is highly excessive and deserves to be substantially reduced.

Without prejudice, the income from contract business cannot exceed 8% on the facts and circumstances of the case.

It is a settled proposition of law that "consent cannot confer juri iction" on the facts and circumstances of the case.

The appellant denies the liability to pay interest under section 234A, 234B and 234C of the Act in view of the fact that there is no liability to additional tax as determined by the learned assessing officer. Without prejudice the rate, period and on what quantum the interest has been levied are not in accordance with law and further are not discernable from the order and hence deserves to be cancelled on the facts and circumstances of the case.

The appellant craves leave to add, alter, delete or substitute any of the grounds urged above.

1n view of the above and other grounds that may be urged at the time of the hearing of the appeal, the appellant prays that the appeal may be allowed and appropriate relief be granted in the interest of justice and equity.”

The brief facts of the case are that the assessee is a civil contractor and did the contract works to the various Govt. agencies and received the payment through the Banking channels. The Government deducted the Page 3 of 8 TDS amount u/s. 194C of the Act which was also duly reflected in Form 26AS. The assessee filed his return of income in Form ITR 2 even though his income comprises of business income since the portal had not accepted the return in ITR 4 without any audit report where the gross receipts exceeds Rs. 2 crores. In order to avoid delay in filing the return, the assessee filed the return in ITR 2 within the extended time and shown the income as income from other sources. In any event, the entire contract receipts are reflected in Form 26AS on which TDS was deducted.

The AO issued notice u/s. 143(2) of the Act on 01.06.2023 and sought for clarifications about the TDS from “Income from other sources”, Contract Receipts & Sales turnover and receipts. Thereafter the AO issued a notice u/s. 142(1) of the Act and several queries were raised including about the Form ITR 2. The assessee filed their detailed reply on 31/08/2023. In the said reply, the assessee submitted that he was not maintaining any books of accounts and therefore out of the total contract receipts, he had estimated his income at 6% but mistakenly shown the same as income from other sources. The assessee also enclosed the assessment order for A.Y. 2020-21 in which similar deduction claimed was allowed including the profit percentage at 6%. The assessee also produced some sample purchase invoices and also attached sample RF bills received from the Government to prove that the assessee is doing only the contract work. The assessee also submitted that all the contract receipts are only through banking channels and requested to assess the same under the head business income.

The assessee also submitted for the A.Ys. 2020-21 and 2021-22, the net profit declared at 6.4% and 6% was accepted by the AO and therefore the rate adopted at 6% for the current year is in order. The assessee also submitted the GST component should be deducted from the gross receipts since the same is a liability and the net profit should be arrived based on the gross contract receipts and also explained the facts in detail. The assessee also filed the GSTR returns.

As against the order of the AO, the assessee filed an appeal before the Ld.CIT(A). The Ld.CIT(A) accepted that the assessee is doing the contract business and he should be assessed under the head “Profits & Gains of business or profession”. The Ld.CIT(A) estimated the net profit at 10% and directed the AO to compute the income accordingly.

As against the said order, the assessee is in appeal before this Tribunal.

At the time of hearing, the Ld.AR submitted that the Ld.CIT(A) had erred in adopting the profit margin at 10% when the department has accepted the profit margins at 6.4% and 6% for the earlier years. The Ld.AR further submitted that when there is no data available, it can be safely presumed that the rate of profit should be at 6% as declared by the assessee in the previous years. The Ld.AR further submitted that all the payments were received through banking channels and TDS also deducted by the Government agencies and therefore the estimation at 6% is a reasonable one. The Ld.AR filed a paper book and a case law compilation of the Juri ictional High Court as well as the Hon’ble Madras High Court and prayed to allow the appeal.

We have heard the arguments of both sides and perused the materials available on record.

We have perused the assessment order as well as the appellate order. In the assessment order, the AO had treated the entire contract receipts as income from other sources and denied the expenses claimed out of it. On appeal, the Ld.CIT(A) had accepted that the income declared by the assessee is only contract receipts and should be assessed under the head “Profits & Gains of Business or Profession”. Therefore the Ld.CIT(A) had changed the head of income as business income. Thereafter the Ld.CIT(A) had estimated the profit margin at 10% instead of 6% calculated by the assessee.

Right from the beginning, the assessee submitted that he earned net profit at 6.4% and 6% in respect of the A.Ys. 2020-21 and 2021-22 which was accepted by the Department. The assessee had also established that when the turnover increases, automatically the profit margin would get decreased but the assessee had shown the profit margin at 6%. From the various documents filed by the assessee, we cannot come to the conclusion that the profit margin adopted at 6% is not correct.

We have also perused the judgment of the Hon’ble Juri ictional High Court in ITA No. 213 of 2014 dated 14.10.2014 in the case of Deluxe Roadlines P. Ltd. wherein the Hon’ble High Court held as follows: “7. Therefore, in the instant case, when the assessee did not produce the books of accounts, the assessing officer was not helpless. The assessee has been filing returns every year. In fact, he has produced five years returns. It is from that they took the turnover because the turnover offered by the assessee for the year 2009-10 was comparable with the past five years turnover as reflected in the returns filed. They acted on that. However, he refused to act on the profits shown in the said returns. No reasons are given for not relying on the said profits at the Page 6 of 8 same time, he has also not taken into consideration the comparable cases in similar business to come to the conclusion. Without any basis, the assessing authority determined the profit at 8%, the first appellate authority reduced it to 3% and the tribunal has reduced it to 2.5%. In coming to the said finding, all the three authorities have declined to take note off the evidence by way of earlier returns. In that view of the matter, what the authorities have done is a mere guess work and without any basis. That is not permissible in law as held by the Apex Court in the aforesaid judgment.

In that view of the matter, the impugned orders are unsustainable. Hence, the order passed by the tribunal is hereby set-aside. Matter is remitted back to the tribunal for fresh consideration in the light of the observations made above. In that view of the matter, the substantial question of law is answered in favour of the assessee and against the revenue and appeal is partly allowed.”

We have also perused the judgment of the Hon’ble Madras High Court reported in (2013) 39 taxmann.com 10 (Mad) in the case of K. Kannan vs. ACIT wherein it was held as follows: “8. Before the Commissioner of Income Tax (Appeals), the assessee submitted that the total income of the assessee was not exceeding 4% at anytime in the preceding year when the turnover was low and that high percent of net profit in the assessment year 2006-07 was not possible when the turnover was high i.e. above Rs.4 Crores. It was further submitted by the assessee that the nature of business was such that they had to face lot of practical difficulties in maintaining the bills and vouchers and considering the quality maintenance in civil work, the assessee had to sacrifice the profit. Thus, taking note of these submissions and other materials on record and since the net profit was shown in the range of 1.26 to 3.69 per cent in the preceding year, assessing the income at high rate of 8% was not called for. In the circumstances, as a via-media the Commissioner of Income Tax (Appeals) fixed it at 5%.

Thus in the background of the facts considered by the Commissioner of Income Tax (Appeals) and in the context of the assessee not maintaining any books of accounts or filing profit and loss account and balance sheet, the assessee felt satisfied that the relief granted by the the Commissioner of Income Tax (Appeals) fixing the assessable income at 5% was acceptable to it.

In the background of the reasoning of the Tribunal, we do not agree with the assessee that the assessment suffers on account of the absence of any opportunity granted to it by the Assessing Officer before passing the order under Section 144 of the Act. As to the merits of the case herein is concerned, as already seen, the Commissioner of Income Tax (Appeals) considered the case of the assessee as regards the profit margin in the earlier years to refix the income at 5% of the gross turnover. Consequently, we do not find any justification in the Tribunal straightaway restoring the assessment at 8% of the gross turnover without any discussion on the merits of the Commissioner of Income Tax (Appeals) order. In the circumstances, after going through the order of the Commissioner of Income Tax (Appeals), we have no hesitation in restoring the order of the Commissioner of Income Tax (Appeals) and thereby set aside the order of the Tribunal.”

The principles laid down by the Hon’ble High Court in the above judgments would support the case of the assessee. In the present case also, the assessee adopted the profit margin at 6% by taking a clue from the earlier assessment years orders. No different facts are available to take a contrary view. Once an estimation is required to be made, it should be a reasonable one. The Ld.CIT(A) had not pointed out any peculiar facts and also no comparison was made with similar business and therefore the adoption of profit margin at 10% by the Ld.CIT(A) as against 6% adopted by the assessee is not correct. No comparable dates were made available by the Ld.CIT(A) whereas the assessee had furnished the data for the earlier years which was accepted by the department. The data for the earlier years are as follows: COMPARISON OF BUSINESS PROFIT ON YEAR-ON-YEAR BASIS Assessment Year Receipts from contract work [excl. GST] Net Profit declared Net Profit Margin 2020-21 8,58,40,344 55,50,022 6.40% 2021-22 5,49,40,870 32,96,452 6.00%

In such circumstances, we do not find any merit in the order of the Ld.CIT(A) in which he has estimated the profit margin at 10% and we therefore set aside the same and direct the AO to accept and adopt the profit margin at 6% as declared by the assessee and compute the income accordingly.

With the above directions, we allow the appeal filed by the assessee.

In the result, the appeal filed by the assessee is allowed.

Respondent 3. CIT

DR, ITAT, Bangalore

Guard file

CIT(A)