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Facts
The assessee, a civil contractor, filed their return of income estimating profit at 6% on contract receipts and declaring it as income from other sources, as they did not maintain books of accounts. The AO accepted this estimation under section 143(3). The PCIT initiated proceedings under section 263, holding the AO's order erroneous and prejudicial to revenue, suggesting a higher estimation.
Held
The Tribunal held that the PCIT erred in invoking section 263. The AO had conducted proper inquiry and accepted the assessee's estimation of 6% profit based on facts. The PCIT's opinion that the estimation should be higher, without proper justification or reliance on law, was not sufficient to deem the AO's order erroneous and prejudicial.
Key Issues
Whether the PCIT was justified in invoking revisionary powers under Section 263 when the Assessing Officer had made a reasoned assessment based on the facts presented by the assessee, and the PCIT's disagreement with the estimation was not supported by legal grounds or evidence?
Sections Cited
263, 143(3), 143(2), 142(1), 194C, 57, 44AD, 56
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Income Tax Appellate Tribunal, ‘A’ BENCH : BANGALORE
Before: SHRI WASEEM AHMED & SHRI SOUNDARARAJAN K.
ORDER PER SOUNDARARAJAN K., JUDICIAL MEMBER
These are the appeals filed by the assessees challenging the separate orders of Ld.PCIT, Bengaluru – 3 dated 26/03/2025 and 27/03/2025. to 925/Bang/2025
We are taking up all the three appeals together for the sake of convenience since the issue involved are common in all the appeals and the counsel for the assessees are also one and the same. We will take up the appeal in as the lead case and therefore the grounds raised in the said appeal has been extracted and the decision arrived in the said appeal shall apply mutatis mutandis to the other two appeals in & 925/Bang/2025.
Grounds raised by assessee in 1. The order passed by the learned Principal Commissioner of Income Tax, Bengaluru-3, passed under section 263 of the Act is so far as it is against the Appellant is opposed to law, weight of evidence, probabilities, facts and circumstances of the Appellant's case.
2. The notice issued for initiation of proceedings under section 263 of the Act is bad in law.
The learned PCIT is not justified in law in invoking the jurisdiction under section 263 of the Act and setting aside the order of the learned assessing officer as being "erroneous and prejudicial to the interest of the revenue".
4. The learned PCIT is not justified in law in holding that the order passed by the assessing officer is bad in law, without appreciating that there was no error in the orders passed, much less prejudicial to the interest of revenue, on the facts and circumstances of the case.
5. The learned PCIT failed to appreciate that the provisions of section 263 of the Act shall be attracted only when the order is both erroneous and prejudicial to the interest of revenue and since the order passed under section 143(3) of the Act was not erroneous, much less prejudicial, the invoking of section 263 was not warranted on the facts and circumstances of the case.
6. The learned PCIT was not justified in appreciating that the assessing officer has made proper enquiry on all of the aspects on which the revision is sought to be made, on the facts and circumstances of the case. to 925/Bang/2025
The learned PCIT is not justified in exercising the powers conferred under section 263 of the Act where the income of the assessee is accepted by the learned assessing officer on estimation and revisionary power cannot be exercised where the assessing officer has taken a plausible view, on the facts and circumstances of the case.
8. The learned PCIT has failed to appreciate that the order passed by the learned assessing officer is a reasoned order and revisionary powers cannot be exercised merely if the learned PCIT is of the opinion that there was inadequacy of enquiry, on the facts and circumstances of the case.
9. The appellant craves to add, alter, amend, substitute, change and delete any of the grounds of appeal
10. For the above and other grounds that may be urged at the time of hearing of the appeal, the Appellant prays that the appeal may be allowed and justice rendered.”
3. 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 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 29.06.2021 and sought for clarifications about the TDS from “Income from other sources”, Contract Receipts & Sales turnover and receipts. The assessee also filed his explanation on 10/08/2021. In the reply the assessee explained about the deductions from “Income from other sources” and furnished the details about the contract receipts. Thereafter the AO issued a notice u/s. 142(1) of to 925/Bang/2025 the Act and several queries were raised including about the Form ITR 2. The assessee filed their detailed reply on 07/12/2021. 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 wrongly shown the same as income from other sources. 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 brought to the notice of the AO that the similar estimation of income for the A.Y. 2019-20 was accepted by the CPC while processing the return u/s. 143(1) of the Act.
Again the AO issued a notice u/s. 142(1) of the Act and sought for the details about the reconciliation of 26AS with receipts and also sought for the copies of the GST returns. The AO also sought for the reason for filing non business ITR and also about the large deduction claimed u/s. 57 with documents. The assessee filed all the details on 27.02.2022 through the portal. Another notice u/s. 142(1) was issued on 28/02/2022 seeking the details of the properties and agricultural lands. The assessee also submitted the details on 07.03.2022. The AO after going through the details furnished by the assessee, had accepted the income returned in the return and to that effect, an order was passed on 02/09/2022 u/s. 143(3) of the Act.
The Ld.PCIT under the powers vested with him u/s. 263 of the Act, issued a notice on 20/02/2025 in which the Ld.PCIT had alleged that the AO had not examined the basis on which the assessee estimated the net profit at 6% and on what basis allowed the entire claim of expenses u/s. 57 of the Act and therefore proposed to invoke section 263 of the Act against the assessment order dated 02.09.2022. The assessee filed his objections to the show cause notice on 22.02.2025. In the objections, the assessee explained the basis for estimating the contract income at 6% of the receipts. The assessee also explained that he could not declare the contract receipts to 925/Bang/2025 as business income, since he has not maintained books of accounts and therefore could not audit the same. Further, the portal not accepted the business income without any audit report and therefore shown the income as from other sources. The assessee also submitted that the income offered to tax u/s. 56 is the amount found place in Form26AS. The assessee also submitted that since the books of accounts are not maintained, he has estimated the profit at 6% by taking clue from section 44AD of the Act. The assessee also submitted that he has not declared his income u/s. 44AD but only for the purpose of arriving his income, he has relied on the rate specified u/s. 44AD of the Act. The assessee also submitted that the entire contract receipts are received from government through banking channels and also suffered TDS and therefore the assessee has taken 6% of the income for arriving his business income. The assessee also submitted that the income from contract receipts should be estimated since the books of accounts are not maintained and therefore the balance are claimed as deemed expenditure. The assessee also submitted that the AO raised various queries about the large deduction claimed u/s. 57 of the Act and the assessee also filed his detailed explanations on 10/08/2021 and 07/12/2021 and thereafter the AO had accepted the return of income filed. The assessee also submitted that the AO conducted proper enquiry and considered each and every points before passing the assessment order. The assessee also submitted that he has not declared his income u/s. 44AD of the Act and estimated his income from contract receipts at 6% based on the rate prescribed under that section and therefore the expenditure has been rightly claimed and allowed by the AO.
7. The Ld.PCIT had not accepted the explanations and confirmed his proposals for the following reasons: 1) The estimation of income u/s. 44AD is not applicable to income from other sources 2) Assessee had not maintained regular books to 925/Bang/2025
3) AO should have rejected the method of estimation and make a best judgment assessment. 4) AO should have atleast estimated the correct income at 8%.
Therefore the Ld.PCIT had arrived a conclusion that the order of the AO is erroneous and prejudicial to the interest of revenue and set aside the assessment order and directed the AO to verify the expenditure claimed and compute the total income of the assessee for A.Y. 2020-21.
As against the order of the Ld.PCIT, the assessee is in appeal before this Tribunal.
At the time of hearing, the Ld.AR submitted that the reasoning given by the Ld.PCIT is not correct to invoke the jurisdiction u/s. 263 of the Act. The Ld.AR also filed a paper book and enclosed the notices issued by the AO u/s. 143(2) and 142(1) and the replies filed by the assessee and the basis for estimating the income at 6%. The Ld.AR also took us through the notices and the replies and submitted that the assessee had not claimed his income u/s. 44AD of the Act. The Ld.AR also explained the reason for estimating the profit at 6% and also submitted that the contract receipts mentioned in Form 26AS and the income declared in the return are tallied. The Ld.AR further submitted that the AO had verified the details and satisfied himself about the replies and documents and accepted the estimated income at 6% of the receipts. The Ld.AR further submitted that the opinion of the Ld.PCIT that atleast the income should be estimated at 8% is not correct since the assessee had received the entire payments through banking channel from the government and therefore the estimated income at 6% is a reasonable one. The Ld.AR also submitted that the Ld.PCIT could not have come to the conclusion that the AO had not done proper enquiry based on his finding that atleast the profit should be estimated at 8%. The Ld.AR submitted that the order of the AO is not erroneous and also prejudice to the interest of revenue, warranting the invoking of section 263 of the Act. to 925/Bang/2025
The Ld.DR reiterated the findings given by the Ld.PCIT and prayed to dismiss the appeal.
We have heard the arguments of both sides and perused the materials available on record.
From the facts narrated above, we understand that the assessee is a civil contractor executed the government works and received the payments through banking channel. The assessee had not maintained any books of accounts and therefore the accounts were not audited. His turnover also exceeds Rs. 2 crores and therefore he could not be able to file the return in ITR 4 without the Audit Report. Therefore the assessee instead of filing the return in ITR 4, filed his return of income in ITR 2 and declared the estimated income earned through the contract receipts. The government while making the contract payments, deducted the TDS which was also reflected in Form 26AS. The assessee estimated the income at 6% of the contract receipts and declared the same as income from other sources. In the computation of income, the assessee also declared the income received from contract works and shown the same as income from other sources. In Schedule 4, the details of the contract receipts and the expenses were shown.
The return was processed and the AO had issued notices u/s. 143(2) and 142(1) of the Act since the assessee had filed non-business return and to verify the genuineness of the expenses deducted u/s. 57 of the Act. In the paper book filed, the copies of the notices and the replies filed by the assessee has been enclosed. From the said reply, we find that the assessee had given proper explanations to the various queries raised by the AO and explained the reason why he has filed ITR 2 instead of ITR 4. We find that the assessee had duly reported the total contract receipts and the reason for the estimation of profit at 6%. The AO considers the details and satisfied to 925/Bang/2025 himself that the assessee had reported the income based on estimation and not reported the income u/s. 44AD of the Act. Therefore the AO had accepted the returned income and computed the assessment u/s. 143(3) of the Act.
We have also perused the reasons given by the Ld.PCIT for initiation of proceedings u/s. 263 of the Act. The Ld.PCIT was under the impression that the assessee had reported his income u/s. 44AD and therefore calculated the income at 6%. In our view and after going through the various replies filed by the assessee, we are of the view that the Ld.PCIT had misconstrued himself and found that the order of the AO is erroneous.
Moreover, the AO during the assessment proceedings, sought for all the details from the assessee and thoroughly analysed the facts and made the assessment. It is an admitted fact that the assessee had not maintained books of accounts and therefore based on the facts that all the payments were received through banking channel, had reasonably estimated the income at 6% of the contract receipts. The Ld.PCIT without considering the facts in detail, had termed the order of the AO as erroneous. The circumstances as stated by the assessee was considered by the AO and on that basis only the estimated income was accepted by the AO. Further the AO also verified the Form 26AS and the earlier year order and accepted the estimated income at 6%. The Ld.PCIT had not given any other method for computing the income in the facts and circumstances of the case except stating that atleast 8% should be estimated as income as per section 44AD of the Act. When there is no doubt in the receipt of contract amount and also when the assessee is not entitled to pay tax u/s. 44AD of the Act, the assessee voluntarily estimated the income at 6%. We do not find any error in the method adopted by the assessee which was accepted by the AO.
The order of the AO is a well considered one and passed on the facts and circumstances of the case. If there is any other method to be followed, the Ld.PCIT can find fault with the order of the AO. In the proceedings u/s. to 925/Bang/2025 263, the Ld.PCIT himself observed that atleast 8% of the income should be estimated as against 6%. This shows that the Ld.PCIT had accepted that estimation is required but not accepted the estimation at 6% which in our view could not be a reason for invoking the powers vested with him u/s. 263 of the Act.
We are therefore of the view that the AO had properly considered the facts and accepted the estimated income at 6%. To take a different view, the Ld.PCIT had not relied on any documents or any provision of law to term the order of the AO as erroneous. When the order of the AO is not an erroneous one, it cannot be termed as prejudicial to the interest of revenue.
We have also considered the judgments of the Hon’ble Supreme Court and other Hon’ble High Courts which are relied on by the assessee in support of their case. i) Judgment of Hon’ble Supreme Court in case of CIT vs. Max India Ltd. reported in (2007) 295 ITR 282 (SC) ii) Judgment of Hon’ble Supreme Court in case of Malabar Industrial Co. Ltd. vs. CIT reported in (2000) 243 ITR 83 (SC) iii) Judgement of Hon’ble Karnataka High Court in case of CIT vs. Chemsworth (P.) Ltd. reported in (2020) 119 taxmann.com 358 (Kar)
In the above judgments, the Hon’ble Supreme Court as well as the Hon’ble Jurisdictional High Court have held that to invoke the revisional powers u/s. 263, the order of the AO would be an erroneous one and therefore the same would be prejudicial to the interest of revenue. We find that the order of the AO is a well considered one in the facts and circumstances of the case and we do not find any error in the same. In fact the Ld.PCIT had also observed that atleast 8% should be estimated instead of 6%. In such circumstances, we do not find any merit in the revision order made u/s. 263 of the Act. to 925/Bang/2025
We, therefore set aside the order of the Ld.PCIT and allow the appeals filed by the assessees.
In the result, all the three appeals filed by the assessees are allowed. Order pronounced in the open court on 25th September, 2025.