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Facts
The assessee, a civil contractor and trader with a turnover of approximately Rs. 25 crores, declared net profit at 1.51%. The Assessing Officer, citing the assessee's inability to produce books of account despite being required to maintain them under Section 44AA and file a tax audit report under Section 44AB, estimated the net profit at 8% on the total turnover. The CIT(A) upheld the 8% estimation but reduced the addition by accounting for the declared profit, leading the assessee to appeal to the Tribunal.
Held
The Tribunal noted that the 8% net profit rate is typically applicable under Section 44AD for small businesses, which the assessee, with a Rs. 25 crore turnover, clearly was not. Given the assessee's obligation to maintain books of account and submit a tax audit report but failure to produce them, the Tribunal decided to provide one more opportunity. It remitted the matter back to the Assessing Officer for fresh verification of the books of accounts.
Key Issues
1. Whether the estimation of net profit at 8% under the principles of Section 44AD is appropriate for an assessee whose turnover significantly exceeds the limits prescribed for small businesses. 2. Whether the case should be remanded to the Assessing Officer to provide another opportunity for the assessee to produce books of account, given the failure to do so before lower authorities.
Sections Cited
250, 143(3), 147, 44AD, 44AA, 44AB, 271(1)(c)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, MUMBAI BENCH “A”, MUMBAI
Before: SHRI PRASHANT MAHARSHI & SHRI ANIKESH BANERJEE
This bunch of 4 appeals were filed against the order of theNational Faceless Appeal Centre, Delhi [for brevity, ‘Ld.CIT(A)’] passed under section 250 of the Income-tax Act, 1961 (in short, ‘the Act’), for Assessment Years 20008-09 to 2011- 12, date of orders21.12.2024.The impugned orders were emanated from the 2 /Mum/2024 Anil Tilakraj Mehra orders of the ld. Income-tax Officer 20(1)(1),Mumbai (in short, ‘the A.O.’) for A.Y.s 2008-09 & 2009-10 orderspassed under section 143(3)/147of the Act date of order19/03/2014& 23/12/2011, respectively. For A.Ys 2010-11 & 2011-12 orders passed by the Ld.Assistant Commissioner of Income-tax 20(1), Mumbai under section 143(3) / 147 and 143(3), date of order 24/03/2014 and 21/03/2014 respectively.
In the outset, all the appeals are of same nature of facts and having common issue. Therefore, all the appeals were taken together, heard together, and are being disposed of by this common order. is taken as lead case.
ITA No.2011/Mum/2024 (AY 2011-12)
3. The assessee has taken the following grounds: - “
i) On the facts and in the circumstances of the case and in law, the learned A.O. erred in not disposing off appeal except to 2 grounds relating to reopening and estimate of income u/s. 44AD. ii) On the facts and in the circumstances of the case and in law, the learned A.O. erred in reopening the assessment U/s. 147 of the Income Tax Act, 1961, and the learned CIT(A) erred in confirming the reopening of the assessment by the A.O. on the ground that the income for the Assessment Year 2011-2012 should have been estimated U/s. 44AD of the Income Tax Act, 1961, by relying on the assessment order for Assessment Year 2009-2010. iii) On the facts and in the circumstances of the case and in law, the learned CIT(A) did not appreciate the fact that no officer of the Department can travel beyond the provisions contained in the Income Tax Act, 1961, by ignoring section 44AD sub section 6 explanation (b)(ii) where eligible business is defined. The total turnover for the year under appeal is much beyond the limit of Rs.
40. Lakhs
3 /Mum/2024 Anil Tilakraj Mehra prescribed u/s. 44AD and therefore, the assessment itself by application of section 44AD is bad in law and, therefore, requires to be annulled. iv)On the facts and in the circumstances of the case and in law, the mistake committed in any Assessment Year cannot become base for reopening of the assessment as each assessment year is an independent assessment year and, therefore, on this ground only the order passed by the learned A.O. should be quashed. On the ground that the assessment could not have been reopened on mere change of opinion. v)The learned A.O. and the learned C.I.T.(A) do not have power to travel beyond the provisions contained in the Income Tax Law in respect of section 44AD. Therefore, the assessment order passed by the learned A.O. requires to be quashed, on the ground that the learned AO's action in reopening the assessment is ultra virus of the Income Tax Law. vi) On the facts and in the circumstances of the case and in law, without considering the fact that the appellant has challenged the application of section 44AD, as applicant's turnover for the year under consideration was Rs.24,68,91,424/- which is 41 times higher than the limit of turnover prescribed u/s. 44AD. It is further submitted that the AO, ignored the Tax Audit Report in Form No. 3CD and 3CB duly certified by the C.A. M/s. S.A. More and Co., without discussing the issue involved in this appeal. vii) On the facts and in the circumstances of the case and in law, the issue of notice u/s. 143(2), of the Act is mandatory when the order is passed u/s. 143(3). This submission of the appellant has not been discussed or dealt with by the CIT(A) while discussing the appeal. viii) On the facts and in the circumstances of the case and in law, the learned A.O. did not issue the notice u/s. 143(2) of the I.T. Act 1961, during the course ofassessment proceedings and the learned C.I.T.(A) had ignored this fact while passing the appellate order and, therefore, on this ground itself the assessment order requires to be quashed. ix) On the facts and in the circumstances of the case and in law, learned A.O. as well as the learned C.I.T.(A) ignored the submissions made during the course
4 /Mum/2024 Anil Tilakraj Mehra ofassessment vide letters dated 09.03.2016, 14.12.2021 & 23.01.2024 submitted to the CIT(A). The appellate order is passed without considering the submission. x) On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in relying the assessment order & appellate Order for the Assessment years 2001-2002 To 2003-2004 as the facts of these assessment years are totally different from the facts of the current assessment year. xi) All the above grounds are without prejudice to each other. xii) The appellant craves leave to add, alter, amend or delete any ground(s) of appeal either before or during the course of hearing of the appeal.”
The brief facts of the case are that the assessee is a civil contractor and trader of ready-mix concrete, running the business under proprietorship name, ‘Tirupati Ready-mix Concrete’. During the impugned assessment year, the assessee declared the net profit amount @1.51% on the total turnover amount of Rs.24,68,91,424/- which works out net profit amount of R.28,27,150/-. The assessee filed the return accompanied by tax audit report U/s 44AB with requisite form Nos. 3CB & 3CD. During the assessment proceedings, the assessee is asked to produce the books of account before the Ld.AO. But in all 4 years, the assessee was unable to submit the books of account maintenanceas per the provision of section 44AA of the Act. Consideringthe tax audit report, the assessee is bound to maintain the books of account under section 44AA of the Act. The turnover is calculated by the ld. AO during the assessment in the following manners. The turnover declared by the assessee amount of Rs. 24,68,91,424/- add direct income amount to Rs. 31,59,125/- which works out total amount Rs. 25,00,50,549/-. Accordingly, ld.AOestimated the net profit @8% on turnover and 5 /Mum/2024 Anil Tilakraj Mehra added back the total income. The ld. AO calculated the net profit@8% on the enhanced turnover amount to Rs.25,00,50,549/- which works out net profit amount of Rs.2,00,04,043/-. The entire net profit of Rs.2,00,04,043/- is added back with the total income of the assessee. The aggrieved assessee filed an appeal before the ld. CIT(A); but was unable to submit the books of account before the authority. The Ld.CIT(A) considering the submission of the assessee upheld the net profit percentage @8% but deducted the declared net profit of amount to Rs.29,27,154/- from the estimated net profit calculated by the Ld.AO. Accordingly, the addition is restricted to Rs.1,70,76,889/- (Rs.2,00,04,043/- (-) Rs.29,27,154/-). Being aggrieved on the appeal order, assessee filed an appeal before us.
The Ld.AR argued and placed that the addition was made @8% net profit on the turnover which is arbitrary. The net profit @8% is applicable only for specified business entity U/s 44AD of the Act. The ld.AO cannot apply the net profit @8% for the assessee whose turnover is far above the turnover mentioned in section 44AD of the Act. The relevant part of the assessment order is duly reproduced as below: - “The contention putforth by the authorized representative of the assessee is duly considered and the same is not acceptable. Further as per order sheet noting dated 05.03.2014, the authorized representative of the assessee was asked to produce books of accounts. However, as stated in the order sheet on 12.03.2014, the representative of the assessee was unable to produce the books of accounts for the relevant assessment year.
6 /Mum/2024 Anil Tilakraj Mehra Therefore, in view of the above, Rs.2,00,04,043/- i.e. 8% of Rs. 25,00,50,549/- (Rs. 24,68,91,424 + Rs. 31,59,125) is hereby added to the total income of the assessee presuming 8% profit on the gross receipts and other direct incomes of the assessee during the relevant assessment year. Penalty u/s.271(1)(c) is initiated separately for concealment of income and furnishing inaccurate particulars.”
The Ld.AR further argued that the profit percentage of the assessee’s business varies from 1.97% to 1.51% year to year due to the increase of turnover of the assessee. The Ld.AR prayed for further opportunity for submission of books of account before the authority and explaining the net profit of the assessee.
The Ld.DR argued and fully relied on the order of the revenue authorities. The relevant part of the appeal order is reproduced as below: - “7.7 Furthermore/it is also observed from the assessment orders for the AYs 2001-2002, 2002-2003 & 2003-2004 that the appellant had accepted the application of 8% net profit on the turnover. Also, the appellant himself had agreed for the application of 8% net profit on the turnover in the AY 2009-10. In view of the above facts & circumstances, considering the volume of the turnover I'm of the considered opinion that without producing the books of accounts the AO doesn't have any other alternative apart from estimating of net profit at 8% of the turnover unless the appellant shows with proper documentary evidence that estimation is palpably arbitrary or perverse.
7.8 Be that as it may, normally in civil contracts where turnover is of such high magnitude, the net profit realised is much more. Even in the case of small-time contractors, whose assessments are completed u/s.44AD of the Act, the net income is assessed at 8% of the turnover. Therefore, in the caseof the appellant, the assessment is completed by estimating the income at 8% of the turnover in 7 /Mum/2024 Anil Tilakraj Mehra the absence of the books of accounts. In this regard, I'm of the considered opinion that the AO conclusion of estimating the net profit at 8% of the turnover is in line with the trend of profit in that industry.
7.9 During the course of appellate proceedings, the appellant has submitted that the AO has wrongly made addition of Rs. 2,00,04,043/- to the returned income since the net profit arrived by the AO by estimating at 8% of the total turnover already includes the net profit declared by the appellant in the ITR for the impugned AY 2011-12. On perusal of the assessment order, it is seen that there is a merit in the contention of the appellant. Accordingly, the AO is directed to restrict the addition to the extent of Rs.1,70,76,889/- (Rs.2,00,04,043/- minus Rs.29,27,154/-) and recomputed the tax liability. Accordingly, the grounds of appeal nos. 2, 3 & 4 are partly allowed.”
7. We heard the rival submission and considered the documents available in the record. The assessee is bound to submit tax audit U/s 44AB of the Act with the return of income. As per the Act, the assesse is bound to maintain the audited books of account under section 44AA of the Act. The books of accounts are duly audited by the certified Chartered Accountant and filed the tax audit report in Form Nos-3CB & 3CD with return of income. The assessee failed to submit the books of account before any of the revenue authorities. But @8% profit is too high for the assessee as per the claim of the Ld.AR which is applicable for section 44AD of the Act under specified business conditions. The assesseehas the turnover amount of Rs.25 crores. In our considered view, the assessee should get another opportunity for submitting the books of account before the ld. AO. Accordingly, we remit back the matter to the file of the Ld.AO for verification of books of accounts of the assessee maintain U/s 44AA of the Act. We are not 8 /Mum/2024 Anil Tilakraj Mehra expressing any view on merit of the case which will impair the assessment proceedings. Needless to say, theassessee should get a reasonable opportunity of hearing for set aside proceedings. On the other hand, the assessee should be diligent and co-operative with the assessing authority for quick disposal of the assessment.
In the result, appeal in is allowed for statistical purposes.
ITAs 2013, 2014 & 2015/Mum/2024 (AYs 2010-11, 2009-10 & 2008-09)
Since the facts and circumstances in these appeals are identical to that of the facts and circumstances in are identical, the decision arrived at above shall apply mutatis mutandis to these appeals also. As a result, appeals in ITAs 2013, 2014 & 2015/Mum/2024 are allowed for statistical purpose.
In the result, all the appeals of the assessee in 2011, 2013, 2014 & 2015/Mum/2024 are allowed for statistical purposes.