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Facts
The appellant, a civil contractor, filed a nil return. The AO completed assessment u/s 143(3) r.w.s. 144B, treating Rs. 6,12,03,924/- as unexplained expenditure u/s 69C for unsubstantiated labour expenditure. The CIT(A) confirmed this addition u/s 37.
Held
The Tribunal found that disallowing the entire labour expenditure resulted in an exorbitantly high gross profit of 46.8% and a high-pitched assessment. Though Section 44AD was not strictly applicable, the Tribunal estimated income at 12% of the gross turnover of Rs. 13.12 crores and directed deletion of the addition for labour charges.
Key Issues
Whether the CIT(A) was justified in confirming the disallowance of Rs. 6,12,03,924/- as unsubstantiated labour expenditure, leading to an excessive assessment, or if an estimation of profit based on turnover was appropriate.
Sections Cited
143(3), 144B, 69C, 37, 44AB, 44AD
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, COCHIN BENCH
Before: SHRI INTURI RAMA RAO, AM & SHRI PRAKASH CHAND YADAV, JM
Assessment Year: 2022-23 Innovate Designers & Builders Pvt. Ltd. .......... Appellant TC 93/1944 Krishna Flat, KRA 11A Railway Station Road, Pallikuku, Pettah Thiruvananthapuram 695024 [PAN: AAECI2784C] vs. The Income Tax Officer, Ward - 1(1) .......... Respondent Thiruvananthapuram Appellant by: Shri Mathew Joseph, CA Respondent by: Smt. Leena Lal, Sr. D.R. Date of Hearing: 21.05.2025 Date of Pronouncement: 27.06.2025 O R D E R Per: Inturi Rama Rao, AM This appeal filed by the assessee is directed against the order of the Commissioner of Income Tax (Exemptions), Kochi, dated 25.09.2024 for Assessment Year (AY) 2022-23.
Brief facts of the case are that the appellant is a company incorporated under the provisions of Companies Act, 1956. It is engaged in the business of undertaking civil contracts and Innovate Designers & Builders Pvt. Ltd. constructions. The return of income for AY 2022-23 was filed on 26.09.2022 declaring Nil income. Against the said return of income, the assessment was completed by ITO, Ward-1(1), Thiruvananthapuram (hereinafter called "the AO") vide order dated 21.03.2024 passed u/s. 143(3) r.w.s. 144B of the Income Tax Act, 1961 (the Act) at a total income of Rs. 6,12,03,924/- by holding that the appellant could not furnish evidence in support of the expenditure incurred on commission, etc. and treated the same as unexplained expenditure u/s. 69C of the Act.
On appeal before the CIT(A), the CIT(A) confirmed the addition u/s. 37 of the Act.
Being aggrieved, the appellant is in appeal before this Tribunal in the present appeal.
The learned counsel for the assessee submitted that even in exparte assessment high pitched assessment cannot be made by disallowance of expenditure of Rs., 6,12,03,924/-. It has resulted determining assessed income at 46.8%, which is exorbitantly high in civil construction business. Therefore, he submitted that the AO ought not have resorted to adhoc disallowance without rejecting the books of account. He further submitted that based on the spirit of provisions of section 44AD income may be estimated at 8%.
On the other hand, the learned Sr. DR supporting the order of the authorities submitted that no interference is called for.
Innovate Designers & Builders Pvt. Ltd.
We have heard the rival contentions and perused the material available on record. The short issue that arises for our consideration is whether the CIT(A) was justified in confirming the addition of Rs. 6,12,03,924/- by disallowing the expenditure incurred on labour. Admittedly, the appellant is in the business of execution of construction of buildings for private individuals. The turnover of the appellant company is stated to be Rs. 13.12 crores and books of accounts have been maintained and audited u/s. 44AB of the Act. However, the appellant could not discharge the onus of substantiating the expenditure incurred on labour charges of Rs. 6,12,03,924/- during the course of assessment proceedings as well as before the CIT(A). It is stated that this expenditure is incurred on daily payment basis in cash not exceeding Rs. 20,000/- per person in a day. It cannot be ruled out that without incurring any expenditure on labour, construction of building can be completed. Therefore, in our considered opinion the AO ought to have resorted to estimation of profit based on the comparable instances in similar line of business. Otherwise disallowing the entire labour expenditure would amount to gross profit of Rs. 46.8%, which unreasonably high and amount to high pitched assessment. In our considered opinion, though the provisions of section 44AD has no application to the appellant. However, we are of the considered opinion that income may be estimated @12% on gross turnover of Rs. 13.12 crores and addition on account of labour charges of Rs. 6,12,03,924/- may be deleted.
Order pronounced in the open court on 27th June, 2025.