DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-19, NEW DELHI, NEW DELHI vs. ANNAI INFRA DEVELOPERS LTD., TAMIL NADU

Notice u/s 153A of the Act was issued on 09.03.2021 and served on the assessee and subsequently, notices u/s 143(2) & 142(1) were issued and served & 2461/DEL/2023 CO Nos.160 & 161/Del/2023 on the assessee along with questionnaire. In response, assessee submitted relevant details and clarifications as called for.

Assessee is in the business of infrastructure development and mainly undertakes Government contracts till FY 2017-18. In FY 2018-19, the assessee has received substantial amount of contracts from big corporate companies and the same were sub-contracted to several other entities without undertaking any work by itself. In an enquiry with Managing Director of the company, it was confirmed that assessee has not done any project received from various infrastructure companies and it has only sub-contracted all the contracts on a profit margin of 3 to 5%.

The assessee was asked to explain whether these profits were recorded in the books of account by issue of notice. In response, assessee, submitted explanation in this regard. After considering the submissions of the assessee, AO found not tenable. AO analysed the financial statements of the assessee with financial transactions involving receipts and payments of back to back contracts and he was of the opinion that the resultant profit is much more than the profit declared by the assessee. He found that the profit declared by the assessee is less than average of 4% and he brought to tax difference of 0.54% as under-declared profit and accordingly made additions to the total income of the assessee.

As regard to wrong availment of ITC credits, after considering the submissions of the assessee, ld. CIT (A) deleted the addition by observing as under:- “11. Ground nos. 10, 11 and 12: In this ground the appellant has challenged the addition made by the AO amounting to Rs.2,04,22,341/- on account of wrong availment of Input Tax Credits (ITC). I have carefully perused the submissions of the appellant and the observations of the Ld. AO. The AO has mentioned in the assessment order that during the investigation conducted by the GST Department in the case of appellant and its subcontractors, it was found by the G8T Department that the nub contractors of the appellant company were fictitious and were engaged in raising of fake invoices. The AO has observed that the appellant was found to be involved in availing of wrong ITC amounting to Rs.19.13 crores as per the Incident Report of GST department. During the assessment proceedings, the appellant submitted to the Assessing Officer a letter from the GST Department stating that the appellant company had taken a wrong availment of ITC maximum to the extent of Rs.3,21,71,300/- against amount of 19.13 crores mentioned in the & 2461/DEL/2023 CO Nos.160 & 161/Del/2023 show cause notice (SCN). The AO has accordingly apportioned the amount of wrongful credit of ITC in two AYs 2019-20 and 2020-21 in the ratio of the turn-over declared by the appellant in the respective AYs. Appellant in the written submission has stated that it followed exclusive method of accounting for the GST payment; therefore, the wrongful claim of input tax credit does not have any bearing in the P/L Account of the appellant. The appellant further stated that the assessee paid the GST on the sale consideration received from the principal contractors by way of debit to the electronic cash ledger and by way of input tax ledger and it had availed the input tax credit on the tax paid by the sub- contractor in respect of the bills raised by the assessee company. The input tax credits are not passed through the P/L Account and they are kept as current assets in the balance-sheet of the appellant. The GST liabilities are similarly accounted for as current liabilities. Therefore, GST payments and Input Tax credits do not have any impact in the profit declared by the appellant. In case the appellant is held to be liable for additional payment of GST same is required to be paid out of the reserve and surplus or from the available ITC and it cannot be charged to P/L Account. In case the appellant charges GST liability in the P/L Account whenever the same is crystallized, it is disallowable in the year of claim, Further, any penalty which may be imposed on wrong availment of ITC is also not allowed to be charged to the P/L Account. Accordingly, I am of the opinion that the wrong availment of ITC which has not been passed during the P/L Account shall not be added in the taxable income of the appellant. Hence, the addition made by the AO is held to be non- sustainable.”

At the same time, assessee also filed cross-objection raising following grounds of appeal :-

The impugned assessment order dared 30.09.2021 does not bear any unique Document Identification Number (DIN) as per the & 2461/DEL/2023 CO Nos.160 & 161/Del/2023 circular 19/2019 dated 14.08.2019 issued by CBDT on the body of impugned assessment order and therefore the assessment order dated 30.09.2021 is non-est in the eyes of law.”

At the time of hearing, ld. DR for the Revenue brought to our notice relevant grounds of appeal. She brought to our notice page 23 of the first appellate order and submitted that assessee has not carried on any business activities and on receipt of huge contracts, it has given back to back contracts. As per the terms of contract, assessee received margin of 3 to 5% of each contract and AO has estimated the profit @ 4% which is average of the net profit earned by the assessee. She submitted that ld. CIT (A) found that the above findings of the Assessing Officer are not relevant since no incriminating materials found during search. She submitted that ld. CIT (A) has not considered the conversation with Yogesh Gupta, however, the assessee has submitted additional evidences before the ld. CIT (A) which he should not have considered. She submitted that he completely over-looked the main conversations recorded during the search, which can be considered as incriminating material. With regard to ITC claim, he submitted that Department has received information from GST Intelligence, the same was not considered by the ld. CIT (A) apart from relevant statements recorded from the Directors. He heavily relied on the findings of AO.

With regard to GST Intelligence report, he submitted that this is nothing to do with the Income-tax proceedings but related to input tax credit. He submitted that based on the above report, AO has added the relevant ITC during the assessment year, however ld. CIT (A) has analysed the same and found not proper, accordingly he deleted the same. Further, he submitted that ITC is a balance sheet item and not a revenue item and it is only a receivable item in the balance sheet which has no relevance to profitability.

In the rejoinder, ld. DR for the Revenue submitted that the ITC claimed by the assessee by creating fictitious entities and entries and it is not entitled for input tax credit.

Considered the rival submissions and material placed on record. We observed that no doubt the assessment was initiated after search proceedings & 2461/DEL/2023 CO Nos.160 & 161/Del/2023 and accordingly, assessment was reopened under section 153A of the Act. AO completed the assessment based on the statements recorded from the Managing Director and after analysing the information contained in financial statements, he proceeded to make the additions. It is settled position of law that in case of reassessment proceedings initiated under section 153A of the Act, the assessment can be completed based on incriminating material found during the search. In the previous year of searched assessment, when there is no proceeding pending for the relevant assessment year on the date of search, the assessment under section 153A can be made only on the basis of incriminating material. In this case, we find that there is no incriminating material brought on record by the tax authorities. Even otherwise, the additions proposed by the AO are only on the basis of estimation with the observation that assessee is having business of giving back to back contracts and with the intention to earn the profit between 3 to 5%. The Assessing Officer presumed that assessee must have earned profit at 4% by the assessee is uncalled for when all the transactions are already forming part of the financial statements and it has declared relevant profits as per books of account and books submitted before the Assessing Officer were also duly audited. Therefore, we do not see any reason to disturb the findings of the ld.CIT(A) in deleting the additions.

With regard to the issue of availment of input tax credit, we observed that ld.CIT(A) has elaborately discussed the issue and found that input tax credit is & 2461/DEL/2023 CO Nos.160 & 161/Del/2023 not an element of profit and loss account and it is only a balance sheet item, therefore, liabilities of GST cannot be found part of the profitability of the assessee. Therefore, we are inclined to agree with the findings of the ld. CIT (A) in this regard. Accordingly the Revenue’s appeal being in AY 2019-20 is dismissed 18. Since, the facts in other AY i.e. 2020-21 are exactly similar, our above findings in AY 2019-20 are applicable mutatis mutandis in AY 2020-21. Accordingly, the appeal being AY 2020-21 filed by the Revenue is also dismissed. 19. Since we have already decided the issue in favour of the assessee we are not inclined to adjudicate cross objections filed by the assessee. 20. In the result, both the appeals filed by the Revenue are dismissed and both the cross objections filed by the assessee are also dismissed. Order pronounced in the open court on this 13th day of September, 2024.