KRISHNA CONSTRUCTION CO,TALALA, JUNAGADH vs. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-1(1), RAJKOT

Succinct facts qua the issue are that assessee`s case was selected for Complete Scrutiny assessment under the E-assessment Scheme, 2019 for verification of Contract Receipts/ Fees. The assessee filed Income Tax Return, for the assessment year under consideration, on 27.10.2018, declaring income of Rs.1,98,94,820/-, claiming refund of Rs.40,19,960/- which was processed u/s 143(1) of the Income Tax Act,1961, on 06.11.2019. Later on, the assessee`s case was selected for scrutiny through CASS and notice u/s 143(2) of the Act, was issued to the assessee, on 22.09.2019. Thereafter, notices 142(1) of the Income tax Act, 1961, with detailed questionnaire, was issued on 9.12.2020.

In response to the show cause notice, the assessee filed reply enclosing copy of TDS Returns, Service Tax Returns and GST returns. The assessing officer stated that underlying information element ,on the basis of which case Krishna Construction Co Vs. DCIT 3 has been taken into scrutiny, is that assessee is engaged in construction business and has shown very low profit in comparison to total revenue/other income and claimed large amount of refund. During the year, assessee has shown gross receipt at Rs.48,64,24,467/-and other income at Rs.55,10,533/- (from interest and machinery rental income). Net profit shown by the assessee is Rs.1,98,94,817/- which is 4.09% of gross receipts. If the other income of Rs.55,10,533/- is considered separately, then net profit ratio would come only 2.95% which is very low considering that NP ratio of 8 to 12% in civil contractor business has been justified by various appellate authorities. The assessing officer noticed that as per Profit &Loss account, assessee has shown total contractual receipts at Rs.48,64,24,467/- and sub-contract expenses are claimed at Rs.40,86,44,447/-. However, as per Form 3CD, auditor has reported contract payment of Rs.32,85,99,789/- only on which TDS u/s 194C of the Income Tax Act, 1961 has been deducted. Therefore, vide notice u/s 142(1) of the Income Tax Act,1961 above, the assessee was asked to furnish details of sub-contract expenses viz. name, address, PAN, relationship with partners, site details, mode of payment, balance amount and contract copy.From the ledger account of sub-contract, it was noticed by the assessing officer that assessee has debited payments of Rs.1,30,27,822/- on 29.03.2019, as per details given in assessment, order on page no.3. Therefore, as per the details mentioned in assessment order, vide page no. 4 of the assessment order, the total of 20 parties is stated at Rs. 1,30,27,822/-. The assessing officer noticed that on account of preponderance of probability, it is crystal clear that expenditure of Rs.1,30,27,822/- claimed as sub-contract expenditure is bogus expenditure, therefore, expenditure of Rs.1,30,27,822/- was disallowed u/s.37(1) of the Income Tax Act, 1961, being not expended wholly and exclusively for business purposes.

Aggrieved by the order of the ld.CIT(A), the assessee is in further appeal before us.

Shri R.D. Lalchandani, Learned Counsel for the assessee, vehemently argued that the assessee has made payment of sub-contract expenses and while making such payment, the assessee has deducted TDS and transactions were through banking channel. During the assessment proceedings, the assessee submitted a TDS- chart showing party-wise TDS deducted, which is placed at paper book Page no.178C, which is self- explanatory, therefore, the assessee has demonstrated that the payment of sub-contract expenses were made through account payee cheques, and TDS, as applicable, as per the Act, has also been deducted therefore, genuineness of these sub-contract expenses, should not be doubted. Hence, the addition made by the assessing officer and confirmed by the ld.CIT(A) should be deleted.

On the other hand, the ld. DR for the Revenue submitted that since the assessee has not filed complete details and documents before the ld.CIT(A), therefore, the matter should be restored back to the file of the ld.CIT(A) for fresh adjudication.

In rejoinder, the ld. Counsel for the assessee, submitted that all papers, documents and evidences, as required by the assessing officer, as well as by the ld.CIT(A) were filed by the assessee. The ld. Counsel for the assessee, took us through paper book page no.167 and stated that there is an acknowledgment received by the assessee from the Department, stating that the various details/documents furnished before the ld.CIT(A), therefore, matter should not be restored back to the file of the ld.CIT(A).

We heard both sides in detail and also perused the records of the case including the paper book filed by the assesses company running in to 390 page. The necessary facts of the case have already been discussed in paragraphs above. On examination of the facts and circumstances of the case, we note that during the assessment proceedings, as well as appellate proceedings, the assessee submitted required documents and evidences and details along with written submissions. Therefore, plea of the ld.DR for the Revenue that entire documents and details were not submitted, before ld.CIT(A), is not acceptable, and hence, we find that the impugned issue cannot be remitted back to the file of the ld.CIT(A) for fresh adjudication, as all documents and details were already on record, of both the authorities below.

We find that the said amount in question was disallowed by the assessing officer for the reason that the parties to whom these payments were made, have not issued GST Invoice and also not deducted any TDS on these payments. The contention of the ld. Counsel for the assessee is that GST was not mandatory, as it is reflected only in respect of those registered under the GST law. However, the assessee claimed that as per the nature of the transaction, the assessee deducted and paid TDS on all the related payments and TDS credit was also available to the concerned parties. Hence, the above disallowance is completely Krishna Construction Co Vs. DCIT 6 unjustified and arbitrary. We also find merit in the submissions of ld. Counsel for the assessee, to the effect that the assessee has made payment of sub- contract expenses and while making such payment, the assessee has deducted TDS and transactions were through banking channel. During the assessment proceedings, the assessee submitted a TDS- chart showing party-wise TDS deducted, which is placed at paper book Page no.178C, which is self- explanatory, therefore, the assessee has demonstrated that the payment of sub- contract expenses were made through account payee cheques, and TDS, as applicable, as per the Act, has also been deducted therefore, genuineness of these sub-contract expenses, should not be doubted. Based on these facts and circumstances of the case, we delete the addition.

In the result, ground No. 2(a) raised by the assessee, is allowed.

Now, we shall take ground no.2(b) raised by the assessee, which relates to disallowance of Rs.1,66,600/- out of salary paid to partners.

In this regard, the ld.Counsel for the assessee, submitted that after making final assessment based on the directions of this Bench, the assessing officer, may compute the final net profit ( taking into account, the disallowance and allowance, as the case, may be) and then compute the partners’ salary on the profit, as per the terms and conditions mentioned in the partnership deed. The ld.Counsel for the assessee submitted that this matter may be remitted back to the file of the assessing officer, with directions to compute the profit of the assessee, after making adjustment/deductions and disallowance and on the basis of that profit, salary payable to the partners would be computed, as per the terms and conditions mentioned in the partnership deed. Therefore, this matter may be remitted back to the file of the assessing officer with the directions to compute the profit, and then compute eligible salary to the partners in Krishna Construction Co Vs. DCIT 7 accordance with the terms and conditions mentioned in the partnership deed. On the other hand, the ld.DR for the Revenue, did not arise any objection, if the matter is remitted back to the file of the assessing officer to compute the profit of the partnership firm and then compute the eligible salary payable to the partners, as per the terms and conditions of the partnership deed. We accept the prayer of the ld. Counsel, and therefore, we remit this issue back to the file of the assessing officer with a direction to compute the profit of the firm and then compute eligible salary as per the terms and conditions mentioned in the partnership deed.

In the result, ground no.2 (b) raised by the assessee, is allowed for statistical purposes, in about terms.

Ground no.2[c] raised by the assessee, relates to disallowance of Rs. 4,30,808/- on ad- hoc basis out of various expenses, as expenses of personal nature.

Brief facts qua the issue are that during the assessment proceedings, the assessing officer noticed that as per Form 3CD and Income Tax Return, there has been no disallowance on account of expenditure of personal nature. From the Capital account of partners, it was observed by the assessing officer that one of the partners, Sh.Kirti Kumar B. Patel, has shown household drawing at Rs. NIL and Sh. Haresh Kumar B. Kalsariya has shown drawings of Rs.2,50,000/- only. Vide notice u/s 142(1) of the Income Tax Act, 1961, dated 09.12.2020, assessee- firm was asked to furnish details of family members and justification of household withdrawals and any other source of income of the partners. In reply to this, the assessee has furnished copy of computation of income of both the partners. As per computation of income, source of income of partner Sh.Haresh Kumar B. Kalsariya is only income from salary, profit and interest Krishna Construction Co Vs. DCIT 8 from the firm. From the above, facts, the assessing officer was of the view that it can be safely concluded that element of expenditure of personal nature claimed on account of maintenance of vehicles cannot be ruled out. During the year, assessee has purchased one luxury car (Toyota Fortuner) for Rs.34,98,461/- in the name of partner Sh. Kirti Bhai B. Patel. Assessee firm has claimed following expenses on vehicles (other than commercial vehicle):

Aggrieved by the order of the assessing officer, the assessee carried the matter in appeal, before the ld.CIT(A) who has confirmed the action of the assessing officer. The ld.CIT(A) observed that the assessee’s submission was not backed by any evidence, therefore, 1/4th expenses of the motor car expenses were treated as personal in nature, and hence, addition was confirmed by the ld.CIT(A).Aggrieved by the order of the ld.CIT(A), the assessee is in further appeal before this Tribunal.

Learned Counsel for the assessee, submitted that the assessing officer has confirmed the addition on account of depreciation, petrol, insurance, repair Krishna Construction Co Vs. DCIT 9 expenses and interest on car loan by stating that some of the expenses are in the nature of personal and personal use of the motor car cannot be ruled out therefore, 1/4th of expenditure was disallowed, without bringing any cogent evidence on record, thus, the addition should not be sustained.

On the other hand, the Ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity.

We have heard both the parties and note that the motor car expenses though looks genuine payment, but the personal use of the motor car cannot be ruled out and therefore, we are of the view that 10% of total expenditure should be added in the hands of the assessee. Hence, we direct the assessing officer to make the addition at the rate of 10% of total motor car expenses of Rs.17,23,232/-. Thus, this ground raised by the assessee is partly allowed.

In the result, ground no.2[c] raised by the assessee, is partly allowed.

Next ground no.2(d) raised by the assessee relates to disallowance of Rs.12,600/- under the provisions of section 40(a)(ia) of the Act. The ld.Counsel for the assessee has fairly agreed that the assessee paid such amounts to the Chartered Accountant, against his fee, without deducting TDS, therefore, the fee being paid by firm without deducting TDS, hence the addition of Rs.12,600/- may be confirmed.We have heard both the parties. We accept the prayer of the ld. Counsel for the assessee and therefore we direct the assessing officer to confirm the addition of Rs.12,600/- in the hands of the assessee.

In the result, ground no.2(d) of the assessee is dismissed.

Brief facts qua the issue are that during the assessment proceedings, the assessing officer noticed that in the Profit &Loss account, the assessee has shown following direct expenses: a) To Direct Expenses i) Goods @GST 12% = Rs.23,482/- ii) Goods @GST 18% =Rs.68,67,987/- iii) Goods @GST 28% = Rs.1,55,54,658/- iv) Goods @GST 5% =Rs.14,03,032/- v) Goods @Composition =Rs.6,65,493/- vi) Cement =Rs.67,66,594/- vii) Goods @ 15%Composition =Rs.6,96,438/- viii) Goods @ 5%Composition =Rs.9,81,457/- ix) Goods@URD = Rs. 86,200/- Total 3,30, 45,341 b) Direct expenses (as per schedule A) = Rs.42,76,40,276/- The assessing officer noticed that from above narration of expenditure, it is impossible to make out as to which items have been purchased. Only cement falls under 28% GST rate. All other items used for civil construction business viz. Bajri, sand, building stone, etc. fall under 5% GST rate. Expensive on account of cement have been claimed separately at Rs.67,66,594/-. Thus, assessee has made excessive and disproportionate claim of purchase of material falling under 28% and 18% GST rate. In the Income Tax Return, the assessee has claimed purchases expenses of Rs.44,33,45,699/-. Vide notice u/s 142(1) of the Income Tax Act, 1961 as above, the assessee was required to give party wise details of purchases as the details were not given in Profit and Loss Krishna Construction Co Vs. DCIT 11 account/ITR. In this regard, the assessee stated that Rs.44,33,45,699/- includes total material purchase of Rs.3,47,01,251/- and back to back sub-contract of Rs.40,86,44,448/-. The assessee has furnished ledger of purchase account for the period 01.03.2018 to 31.03.2018. However, assessing officer rejected the contention of the assessee and made addition at the rate of 20% of these expenses, which comes to Rs.69,40,248/- ( 20% of Rs. 3,47,01,251/-).

Aggrieved by the order of the assessing officer, the assessee carried the matter in appeal before the ld.CIT(A) who confirmed the action of the assessing officer observing as under: “The assessing officer has disallowed the same as the assessee failed to provide the details of the suppliers, material purchased expenses are ingenuine. The assessee claims that during the AY 2015-16, it has incurred Rs.5,06,61,487 (i.e.7.67% of sales) towards material purchases, which was accepted by the Department and during the year under consideration, it is 7.13%, which needs no reason to reject the expenses, without any reasonable grounds. The submissions filed by the assessee have been perused. However, the assessing officer clearly brought out that cement purchase expense in the P&L Account reflected as “Goods @ GST 28%” and again showed cement purchase as “Cement” in P&L Account. Further the details were not provided by the assessee as required to prove the genuineness of the said claim except for stating that in the previous year such expenses were allowed. The same cannot be accepted. Therefore, the 20% disallowance in this regard is considered appropriate and the assessing officer’s action is upheld. The relevant ground is accordingly dismissed.”

Aggrieved by the order of the ld.CIT(A), the assessee is in further appeal before us. The ld.Counsel for the assessee submitted that the direct expenses were paid during the course of business. Further, assessing officer observed that after reading the narration down below each accounting entry of the assessee, that it is doubtful whether the items have been purchased or not, without any base. The assessing officer also noticed that only cement expenses falls under 28% of the GST rate. However, all other items used for civil construction business like bajri, sand, building stone, etc. fall under 5% of the GST rate. The assessing officer also noticed that the assessee has made Krishna Construction Co Vs. DCIT 12 excessive and disproportionate claim of purchase of material falling under 28% and 18% GST rate, without bringing any material on record. Therefore, the addition made by the assessing officer is based on assumption and presumption, and the same should be deleted. On the other hand, the ld.DR for the Revenue has relied on the finding of the assessing officer and the ld.CIT(A).

We have heard both the parties and perused the material available on record. We note that there is a small mismatch in the expenditure incurred by the assessee, and therefore the assessing officer disallowed 20% of this expenditure. However, we note that ad-hoc disallowance of 20% of these small expenses, is on higher side, and without bringing any material on record, therefore, we restrict the addition to the extent 10% of these expenses. Hence, we direct the assessing officer to make addition at the rate of 10% of these expenses. Accordingly, this ground of the assessee is partly allowed.

In the result, ground no.2(e ) raised by the assessee, is partly allowed.

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