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Facts
The Revenue appealed against the CIT(A)'s order, which restricted the addition of income to 5% of the turnover. The assessee, a partnership firm engaged in infrastructure projects on a sub-contract basis, did not file income tax returns for the relevant assessment years. The Assessing Officer treated the entire sub-contract amount as unexplained income. The CIT(A) reduced the addition to 5% of the net profit.
Held
The Tribunal held that the relationship between Madhucon Projects Ltd and the assessee was that of a main contractor and sub-contractor. Citing previous judgments of the ITAT, it was held that the estimation of income should be at 5% of the gross contract receipts for sub-contractors. The Tribunal upheld the CIT(A)'s decision to restrict the addition to 5% of the turnover.
Key Issues
Whether the addition of entire turnover as unexplained income by the AO was justified, or if the estimation of income at 5% of turnover by the CIT(A) was appropriate, considering the assessee's status as a sub-contractor.
Sections Cited
147, 148, 144, 69A, 139, 44AB, 194C, 44AD, 30, 38, 32, 153A, 143(3), 68, 69
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Income Tax Appellate Tribunal, Hyderabad ‘ A ‘ Bench, Hyderabad
Before: Shri Vijay Pal Rao, Vice-Shri Madhusudan Sawdia
ORDER
Per Vijay Pal Rao, Vice President These two appeals filed by the Revenue are directed against the separate orders of the learned CIT (A) NFAC Delhi both dated 22/01/2024 for the A.Ys 2014-15 & 2016-17 respectively. The revenue has raised identical grounds of appeal for these A.Ys. The grounds raised by the Revenue for the A.Y 2014-15 are as under:
Brief facts of the case are that the assessee is a partnership firm and engaged in the business of development of infrastructure projects on sub-contract basis. The Assessing Officer has recorded that the assessee has not filed any return of income for the year under consideration. There was information with the Department that there is contract awarded to the tune of Rs.12,57,90,370/- during the financial year relevant to the A.Y under consideration. Accordingly, the Assessing Officer issued Page 2 of 23 notice u/s 148 of the I.T. Act, 1961 on 30/03/2021 asking the assessee to file the return of income within 30 days from the service of the notice. In response to the notice, the assessee submitted vide order dated 25/11/2021 that it engaged in the business of civil contract and made a turnover of Rs.12,57,90,370/- on which TDS @ 2% has been deducted. The assessee also submitted that it has earned profit @ 5% on the turnover amounting to Rs.62,89,519/-. It was further stated that due to technical glitches in the new Income Tax Portal, it is unable to file return of income in response to note u/s 148. The assessee enclosed computation of income along with reply. The Assessing Officer did not accept this explanation of the assessee for not filing the return of income and further noted that in the absence of books of account, the claim of the assessee of profit @ 5% on the turnover is not acceptable. Accordingly, the Assessing Officer proceeded to frame the assessment u/s 144 of the I.T. Act, 1961 and assessed the total amount to Rs.12,57,90,370/- as unexplained income of the assessee u/s 69A of the I.T. Act, 1961.
On appeal, the learned CIT (A) has restricted the addition to the net profit @ 5% of the turnover against which the Revenue has filed the present appeals.
Before the Tribunal, the learned DR has submitted that the assessee has not carried out any real business activity of execution of projects under the sub-contract but the alleged Page 3 of 23 transaction of sub-contract receipts are given back to the main contractor i.e. Madhucon Projects Ltd and therefore, the assessee was used as a conduit for siphoning of the money. He has further submitted that it is a case of non-filing of the return of income even in response to notice u/s 148 of the I.T. Act, 1961. The assessee has not filed any supporting evidence to show that this amount of Rs.12,57,90,370/- is received on account of sub- contract awarded to the assessee and the assessee has actually executed the contract. He has further submitted that the learned CIT (A) has restricted the addition only to 5% of the said amount by considering the same as turnover of the assessee by following the order in case of MAA Highways another sister concern. He has further contended that the Principal Contractor Madhucon Projects Ltd initially deducted the TDS but the same was reversed and finally it was paid after a gap of many years which shows that this is only a sham transaction in the garb of sub-contract receipts which was handed over back to the principal contractor. The learned DR has referred to the address of the assessee and submitted that the assessee has shown the same address as of Madhucon Projects Ltd and therefore, is not an independent entity but only a conduit of Madhucon Projects Ltd Hyderabad. He has relied upon the orders of the Assessing Officer.
5. On the other hand, the learned AR of the assessee has submitted that the Assessing Officer in the assessment of Madhucon Projects Ltd has not doubted the said transaction of Page 4 of 23 sub-contract payment to the assessee. He has referred to the assessment order in case of Madhucon Projects Ltd and submitted that the Assessing Officer has accepted the transaction of sub-contract payment by the Madhucon Projects Ltd to the assessee. He has further submitted that the Assessing Officer in case of MAA Highways (P) Ltd vide order dated 30/03/2022 has assessed the income by estimating @8% of contract receipts as per the provisions of section 44AD of the Act. On further appeal, the learned CIT (A) has restricted the addition by adopting 5% of the turnover instead of 8% estimated by the Assessing Officer. He has further submitted that the assessment was framed in case of MAA Highways (P) Ltd u/s 147 r.w.s. 144 of the Act on identical facts and sub contract receipts were received from Madhucon Projects Ltd. Thus, the transaction in case of MAA Highways (P) Ltd as well as the assessee in the present case are based on identical facts, therefore, the learned CIT (A) has taken a consistent view while passing the impugned order and estimated the income @ 5% of the turnover. The learned AR has further submitted that this Tribunal in assessee’s own case with sister concerns and others in 2015 vide composite order dated 31/03/2016 has considered and decided an identical issue in favour of the assessee. The learned AR has also relied upon the decision of this Tribunal in case of Sri Nagendra Constructions in and others vide composite order dated 10/11/2017 whereby this Tribunal has decided an identical issue by restricting the addition to 5% of the Page 5 of 23 gross receipts as against 8% estimated by the Assessing Officer. Thus, the learned AR has submitted that this issue is covered by various decisions of the Tribunal in assessee’s own case as well as other sister concerns based on identical facts.
We have considered the rival submissions as well as the relevant material available on record. The Assessing Officer has made the addition of the entire sub-contract amount by treating the same as unexplained income u/s 69A of the I.T. Act, 1961. It is pertinent to note that while issuing notice u/s 148 of the Act, the Assessing Officer has admitted this fact that the Department is having information that there is a contract awarded to the tune of Rs.12,57,90,370/- during the financial year relevant to A.Y under consideration. Thus, at the time of reopening of the assessment, the Assessing Officer has taken this amount as contract receipts which is nothing but the turnover of the assessee. In reply to the notice u/s 148, the assessee filed the computation of income and offered income @5% of the total turnover, though, the return of income was not filed and the assessee has explained the reasons that there was some technical glitches in the new Income Tax Portal. The Assessing Officer despite having accepted the nature of income as contract amount has made the addition of the entire amount. It is pertinent to note that in case of MAA Highways (P) Ltd, the Assessing Officer himself has estimated the income of the said assessee @ 8% vide Page 6 of 23 order dated 30/03/2022. The relevant findings in Para 4.2 in case of MAA Highways (P) Ltd, the Assessing Officer held as under:
4.2 Any expenditure claimed must invariably be supported by full and proper vouchers. The assessee-firm is carrying on contract works wherein, it has to incur certain expenditure towards labour charges, transportation, purchases and other expenses etc. However, in the absence of full and proper vouchers in respect of all items of expenditure, the veracity of book results, if any, declared by the assessee firm cannot be accepted. Accordingly, it is proposed to reject the book results, if any, u/s 145 of the Act and to estimate the income of the assessee-firm @ 8% on gross contract receipts as per the provisions of section 44AD of I. T. Act, 1961. After taking into consideration all the material facts and circumstances of the case, the income of the assessee-firm is estimated @ 8% on gross contract receipts clear of depreciation, interest and remuneration paid to partners apart from assessing other income, if any, separately. Accordingly, the income is estimated @ 8% on the contract receipts of Rs.13,38,15,523/, which works out to Rs. 1,07,05,240/- and the same is hereby brought to tax as Income from Business of the assessee-firm for the year under consideration
The said order was also passed ex-parte wherein the assessee did not file any return of income and therefore, on identical facts the Assessing Officer has taken a decision for estimating income @ 8% on contract receipts in the case of MAA Highways (P) Ltd.
8. On further appeal in case of MAA Highways (P) Ltd, the learned CIT (A) vide order dated 29/09/2023 has restricted the addition to 5% of the contract receipts. The learned CIT (A) in the Page 7 of 23 impugned order has taken a consistent view as taken in the case of MAA Highways (P)( Ltd in Para No.7.2 as under:
“7.2 I have perused the assessment order, grounds of appeal and submissions filed by the appellant. I find from the assessment order that the AO had asked the appellant to file the return of income for AY 2014-15 and to explain the nature of transactions and income earned there from. However, the appellant filed only letter stating that the appellant is sub-contractor of M/s. Madhucon Project Ltd who is main contractor of NHAI projects and that the margin of the appellant was only 5%. However, the contention of the appellant was rejected by the AO since the appellant had not filed any documentary evidence in support and did not file the return of income hence treated the entire receipts as income of the appellant u/s 69A of the Act.
The appellant has produced form No. 26AS and form No.16A from which it is clear that the appellant was awarded contract by M/s. Madhucon Project Ltd and the payment of Rs.12,57,90,370/- was made to the appellant after deducting TDS @ 2%. Thus, I find that the nature and source of receipts is explained. I find that copy contract agreement between M/s. Madhucon Project Ltd and the appellant was furnished before the AO during assessment proceedings also. From the above facts, addition of entire turnover u/s 69A of the Act is not justified. Regarding the profit of the appellant in contract receipts, the appellant has relied upon various decisions of Hon’ble ITAT to justify 5% margin and also relied upon the decision of Ld CIT(A)-12, Hyderabad in the case of M/s. MAA Highways ( sub- contractor of NHAI projects) group concern of appellant group, who by relying on the decision of Hon’ble ITAT, Hyderabad in the case of M/s. MAA Highways itself, restricted the addition on account of estimation of net profit at the rate of 5%. The finding of the Ld CIT(A)-12, Hyderabad in the case of M/s. MAA Highways for AY 2014- 15 is re-produced as under:-
Page 8 of 23 Page 9 of 23 Page 10 of 23 Page 11 of 23 Page 12 of 23 Page 13 of 23 Page 14 of 23 Page 15 of 23 I find that the facts of the above decision are identical to the facts of the present case except one difference that in above referred case, the AO had estimated net profit at the rate of 8% whereas in the present case, the AO has made addition of entire turnover u/s 69A of the Act. I find that the case of appellant gets covered with the above decision. Therefore, the addition made by the AO is restricted to 5% of the gross contract receipts and thus the addition of Rs.62,89,518/- is confirmed and balance addition of Rs.11,95,00,852/- is deleted, Thus the grounds of appeal raised by the appellant are partly allowed.”
9. Thus, it is manifest from the impugned order that the learned CIT (A) has followed the order in case of MAA Highways (P) Ltd. We further note that this Tribunal has taken a consistent view on this issue in assessee’s own case as well as other sister concerns for the A.Y 2007-08 to 2010-11 vide composite order dated 31/03/2016 (Supra) and the concluding the findings of the Tribunal in Para 9 are as under: “9. Having regard to the rival contentions and the material on record, we find that on the issue of estimation of business income, the issue has already been considered and adjudicated by the coordinate bench of this Tribunal in the case of one of the assessees herein, viz., Maa Highways, for assessment year 2007- 08, wherein estimation of income in the hands of sub- contracts at 5% of the gross receipts was held to be reasonable. Respectfully following the same, we hold that in all these cases as well, the business income of the assessees for the years under appeal be estimated at 5%% of the gross receipts, and additions if any, may be determined accordingly. Assessees appeals are accordingly treated as allowed.”
10. Similarly, this Tribunal again for the A.Y 2011-12 in and 136/Hyd/2015 vide composite order dated 10/11/2017 has decided this issue in Paras 6, 7 and 12 as under: “6. Having regard to the rival contentions and the material on record, we find that in the case of MAA Highways, it has been observed that the assessments in the said case have also been done u/s 153A of the Act, pursuant to the search conducted in the group cases of M/s Madhucon Projects Ltd on the same date i.e. 4.2.2011. In the said case also, the Revenue had sought remand of the matters to the file of the CIT (A) to decide along with the cases of Madhucon Projects Ltd. After considering the arguments of both the parties at length, this Tribunal has held that the assessee being a sub-contractor and since its books of account were not reliable, the income Page 17 of 23 can be estimated at 8% of the gross receipts where the assessee is a main contractor and at 5% if it is a sub- contractor. Further, it has also been observed that where the income has been estimated, then there cannot be any disallowance of expenditure as held by the jurisdictional High Court in the case of M/s Indwell Constructions Ltd (232 ITR 776). For the purpose of ready reference, the relevant paragraphs are reproduced hereunder: “2. Facts of the case common in all these cases are that there was a search and seizure operation under S.132 of the Act in the case of Madhucon Projects Limited and group of cases on 4.2.2011. After the search in the case Madhucon Projects Ltd. and its group concerns including the assessees herein, notices under S.153A were issued to the assessees. In response thereto, the assessees filed returns of income for relevant assessment years. During the assessment proceedings, under S.143(3), the books of account maintained by the assessees were rejected and the income of the assessees was estimated at 8% of the gross receipts, and the Assessing Officer accordingly made additions to the income returned by the assessees.
3. Further, the Assessing Officer also observed that the company's address given by M/s. Madhucon Projects Ltd. was actually a small room on the terrace and no documents or papers relating to the assessee or M/s. Madhucon Group were available. He further observed that during the course of search and in the post search proceedings, though the assessees were given sufficient time to produce the books of account and other supporting documents, the assessees have failed to produce the same. He further observed that the assessees were mainly stationed at Khammam and have opened bank accounts in Hyderabad and New Delhi, where they do not have any operations, and therefore, he came to the conclusion that these bank accounts are opened only to facilitate the diversion of funds to the principal contractor, Madhucon Projects Ltd. He further observed that these accounts are used for withdrawing funds by the employees of Madhucon Projects Ltd., as it was unearthed during the course of search and that though the payments are realised and cheques were issued in favour of these sub-contractors, the money was eventually withdrawn by the promoters of M/s. Madhucon Projects Ltd. through their employees by way of self-signed cheques, which are handed over by these sub-contractors to the Managers of M/s Madhucon Projects. Observing that these amounts were withdrawn and siphoned back to the management of M/s.
Page 18 of 23 Madhucon Projects Ltd. during the relevant financial year, the Assessing Officer concluded that these amounts were never used for the business activity of the assessees herein but were returned back to the contractor. He therefore, disallowed the same in the hands of the principal contractor, and added the same protectively in the hands of the assessee firms herein.
4. Against the assessments thus made, assessees preferred appeals before the CIT(A), who though, confirmed the estimation of income at 8% of the gross receipts, granted relief by deleting the additions made on protective basis.
Learned counsel for the assessees submitted that the assessees were maintaining regular books of account, but the Assessing Officer rejected the same and estimated the income of the assessees at 8% of the gross receipts. He submitted that this estimation of income in an assessment completed under S.143(3) read with S.153A is not sustainable. Even otherwise, he submitted that the issue of estimation of income in the case of M/s MA Highways, one of the assessees herein, has come up before this Tribunal in ITA No.54/Hyd.2013 and this Tribunal vide its order dated 30.7.2013 has directed estimation of income at 5% of the gross receipts in the case of sub-contracts and therefore, since all the assessees herein belong to the same group and factual background in these cases also being same, income of these assessees herein should also be estimated at 5%.
6. As regards the estimation of income, the Learned Departmental Representative submitted that there is no fixed percentage of gross receipts, which can be adopted to estimate the income of the assessees, and that as the books of account of the assessees are not reliable, the Assessing Officer on a notional basis can estimate the income. According to her, the estimation of income at 8% of the gross receipts is quite reasonable and justified.
7. As regards the Revenue's appeal against the deletion of additions made on protective basis, the Learned Departmental Representative submitted that since the substantive additions made in the hands of M/s. Madhucon Projects Ltd., are pending adjudication by the CIT(A), these appeals may be kept pending, to which the learned counsel for the assessee objected. The Learned Departmental Representative also relied upon the decision of the coordinate Bench of this Tribunal in the case of Prabhu Wines in ITA No.1100/Hyd.2013 dated 23.10.2013, wherein after considering the principles laid Page 19 of 23 down in Indwell Constructions (232 ITR 776), it has been held that they are applicable only to the extent of computation of income under the head "Business" and as far as addition of cash credits under S.68 and S.69, the decision of the Hon'ble Supreme Court in the case of CITV/s. Devi Prasad Vishwanath Prasad reported in 72 ITR 194 (SC) was followed.
On the other hand, the learned counsel for the assessees also relied upon the decision of the jurisdictional High Court in the case of Indwell Constructions (232 ITR 776), wherein it was held that where the income of an assessee is estimated, there cannot be any other addition. Therefore, according to him, the addition of rerouting of funds in the hands of the assessees herein on protective basis is rightly deleted by the CIT(A).
Having regard to the rival contentions and the material on record, we find that on the issue of estimation of business income, the issue has already been considered and adjudicated by the coordinate bench of this Tribunal in the case of one of the assessees herein, viz., MA Highways, for assessment year 2007-08, wherein estimation of income in the hands of subcontracts at 5% of the gross receipts was held to be reasonable. Respectfully following the same, we hold that in all these cases as well, the business income of the assessees for the years under appeal be estimated at 5% of the gross receipts, and additions if any, may be determined accordingly. Assessees appeals are accordingly treated as allowed.
As regards the Revenue's appeals against the deletion of the additions made on protective basis in the cases of these assessees, we find that the additions have been made consequent to detecting that the assessees received funds from M/s. MPL Ltd. and rerouted the same back to M/s. MPL itself. Assessing Officer therefore, presumed that the assessees have not expended the said receipts towards their business activity. But as rightly held by CIT(A), all withdrawals cannot be presumed to be the business expenditure of the assessee, particularly, when, the same is not debited to the Profit & Loss Account. The CIT(A), after examining the issue has held at para 6.5.3 as under- "6.5.3. Knowing that the amount withdrawn from bank account was appropriated by the main contractor and that it was not used by the appellant is one aspect. However, to say that this item needs to be disallowed in the hands of the Page 20 of 23 appellant, we have to first establish that the specific withdrawals were accounted in books as expenditure incurred during the year and further, the expenditure was not only revenue in nature but was also debited to the P&L account to be disallowed as expenditure. In the absence of books and vouchers, one cannot specifically conclude that the amounts withdrawn were indeed deployed and were incurred towards revenue expenditure and got debited to P&L acct. It is also seen that the withdrawals were actually more than the entire turnover of the appellant firm in AY 2011-12 indicating that all withdrawals could not have been debited in the appellant's books as expenditure. Similar feature was found in the case of the other two subcontracting firms namely, M/s. Varalakshmi Constructions, the withdrawals from bank were more than turnover for assessment year 2010-11. For M/s Ragini Constructions, the withdrawals were more than the turnover for A.Y. 2010-11 and A.Y. 2011-12." The Learned Departmental Representative, had relied upon the decision in the case of Madhu Wines cited (supra), but we find that the decisions relied upon by the Learned Departmental Representative are not applicable to the facts of the cases before us. In the cited case, besides the addition on account of estimation of business income, further additions under S.68 were upheld. In the cases before us, though the authorities below have not mentioned the section under which the disallowance and the consequential additions are made, from the order of the Assessing Officer, it appears that the receipts of the assessee were disallowed as they are not used for business M/s. MA Highways and three others Khammam activity. Thus, it is disallowance of business expenditure. The CIT(A) has rightly pointed out that the amounts withdrawn cannot be presumed to have been deployed and incurred towards revenue expenditure and got debited to the Profit & Loss Account. Where there is estimation of business income, disallowance and consequential addition of revenue expenditure is not sustainable, as held by the jurisdictional High Court in the case of Indwell Constructions (supra). In view of the same, we agree with the view of the CIT(A) that this issue is also squarely covered by the decision of the jurisdictional High Court in the case of Indwell Constructions (supra), wherein it has been categorically held that where business income of an assessee is estimated, no other disallowance may be made. In the case of MA Highways, cited supra, as well, the Tribunal has taken into consideration the decision of the jurisdictional High Court and held that no separate disallowance of expenditure shall be made once Page 21 of 23 income is determined by resorting to estimation. Respectfully following the same, we do not see any reason to interfere with the orders of the CIT(A).
7. The learned DR had placed reliance upon the judgment of the Hon'ble Gujarat High Court in the case of CIT vs. Surendra Gulabchand Modi for keeping the matter pending till the appeals of the Madhucon Projects Ltd are disposed of by the CIT (A). We find that the said decision was for the A.Ys 1956-57 and 1957-58 and in the said cases, the issue was pending before the Hon'ble Supreme Court and not before the CIT (A). The judgment of the Hon'ble Supreme Court will be binding on all the Courts in India including the Tribunal whereas the order of the ITAT will be binding on the CIT (A). Therefore, the said decision is not applicable to the facts of the case before us. In the case of MAA Highways (cited Supra), we have already held that where the income is estimated after rejection of books of account, no further disallowance of business expenditure can be made. In the case before us also, the AO has made the estimation on the ground that the assessee had not incurred any expenditure and the amounts were never used for its business activities and were returned back to the main contractor. Since the facts and circumstances are the same before us as in the case of Maa Highways and since we have confirmed the estimation of income by the AO at 8% in the case of main contractor and 5% in the case of a sub- contractor, we see no reason to interfere with the order of the CIT (A). “ITA Nos.139&196/Hyd/2015-A.Y 2011-12 (MAA Highways) 12. is Revenue’s appeal and is assessee’s appeal for the A.Y 2011- 12. The issues involved in these appeals for the relevant A.Y, are similar to the issues in the case of Sree Nagendra Constructions in ITA No.167/Hyd/2015-A.Y 2009-10 and in ITA No.202/Hyd/2015 for A.Y 2011-12 as above and for the reasons given in the above paragraphs and subject to the condition that the assessed income shall not be less than the returned income of the assessee, the Revenue’s appeal is dismissed and the assessee’s appeal is treated as allowed for statistical purposes.”
Accordingly, in view of the earlier orders of this Tribunal in assessee’s own case on the same issue, we do not find Page 22 of 23 any error or illegality in the impugned order of the learned CIT (A) and, the same is upheld. Since the issue is common and arising from identical facts and circumstances for both the A.Ys, therefore, both the appeals of the Revenue are without any merit.