BHADRAIAH KALLENAHALLI DINESHA,MANDYA vs. INCOME TAX OFFICER, WARD 1, MANDYA, MANDYA
Facts
The assessee, a civil contractor, filed its return of income for AY 2020-21 declaring a gross total income of Rs. 35,92,290/-. The assessee did not maintain books of accounts and estimated income at 6% of gross receipts, claiming deduction under section 57. The Assessing Officer (AO) estimated the income at 10% of gross receipts, disallowing the claimed expenses and proposing penalties.
Held
The CIT(A) upheld the AO's order, stating that since the assessee did not maintain books of account and the turnover exceeded Rs. 2 crores, the AO was justified in estimating the profit. The CIT(A) noted that in the subsequent assessment year, the assessee declared a profit of 10.45%. Therefore, estimating the profit at 10% based on the subsequent year was considered logical. However, the Tribunal found that the estimation should be based on the assessee's declared profit in preceding years and the subsequent year. Considering the average of these, the profit rate should not exceed 8%. The Tribunal directed the net profit to be computed at 6.5% of the gross receipt.
Key Issues
The primary issue was the estimation of the assessee's income by the AO at 10% without proper basis, when the assessee had declared income at 6% and claimed expenses. The CIT(A) upheld the AO's estimation, but the Tribunal considered the profit rates declared in previous and subsequent years for a more reasonable estimation.
Sections Cited
44AD, 57, 143(2), 142(1), 234A, 234B, 234C, 44AB, 194C
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Income Tax Appellate Tribunal, ‘A’ BENCH : BANGALORE
Before: SMT BEENA PILLAI & SHRI LAXMI PRASAD SAHU
IN THE INCOME TAX APPELLATE TRIBUNAL ‘A’ BENCH : BANGALORE
BEFORE SMT BEENA PILLAI, JUDICIAL MEMBER AND SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER
ITA No. 231/Bang/2024 Assessment Year : 2020-21
Shri Bhadraiah Kallenahalli Dinesha, 12, Kallenahally Village, The Income Tax Thiruganahalli Post, Officer, Honakere Hobli, Ward – 1, Nagamangala, Mandya. Mandya – 571 432. Vs. PAN: BIBPD0214P APPELLANT RESPONDENT
Assessee by : Shri Tharun Kothari, CA Revenue by : Shri Srinath .S, JCIT-DR
Date of Hearing : 07-05-2024 Date of Pronouncement : 28-06-2024
ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal arises out of order dated 29.12.2023 passed by NFAC, Delhi for A.Y. 2020-21 on following grounds of appeal: “1. The order passed by the learned Commissioner of Income Tax, NFAC, under section 250 of the Act in so far as it is against the Appellant is opposed to law, weight of evidence, probabilities, facts and circumstances of the Appellant's case.
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The appellant denies himself liable to be assessed to a total income of Rs. 60,39,965/- as against the income returned at Rs. 35,92,290/- for the impugned assessment year 2020-21 on the facts and circumstances of the case. 3. Grounds on merits of the matter: a. The authorities below have failed to appreciate that though the provisions of section 44AD of the Act is not applicable in the given case, reference can be drawn from the rate specified under the provisions of section 44AD in order to estimate income from contract business on the facts and circumstances of the case. b. The appellant has rightly estimated his income at the rate of 6% by relying on the rate specified under the first proviso to section 44AD(1) of the Act as the contract receipts have been received through banking channels after suffering from TDS under chapter XVII-B of the Act on the facts and circumstances of the case. c. The learned CIT(A) is not justified in confirming the order of the learned assessing officer in estimating the income at 10% without any basis for such estimation and has failed to appreciate the preceding and succeeding years profit to estimate the income for the relevant assessment year on the facts and circumstance of the case. d. The authorities below have erred in relying on the gross profit margin of the assessment year 2021-22 to estimate the income for the relevant assessment year without appreciating the fact that the net profit margin ought to have been considered for estimation. e. Without prejudice, the income of the appellant from contract business cannot exceed the rate of 8% on the facts and circumstances of the case. 4. That the learned CIT(A), NFAC has failed to provide the opportunity of hearing though specifically requested, thereby violating the principles of natural justice on the facts and circumstances of the case. 5. The appellant denies the liability to pay interest under section 234A, 234B and 234C of the Act in view of the fact that there is no liability to additional tax as determined by the learned assessing officer. Without prejudice the rate, period and on what quantum the interest has been levied
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are not in accordance with law and further are not discernible from the order and hence deserves to be cancelled on the facts and circumstances of the case. 6. The appellant craves to add, alter, amend, substitute, change and delete any of the grounds of appeal. 7. For the above and other grounds that may be urged at the time of hearing of the appeal, the Appellant prays that the appeal may be allowed and justice rendered and the appellant shall be awarded cost in prosecuting the appeal and also order for the refund of institution fees as part of the cost.” 2. Brief facts of the case are as under: 2.1 The assessee is an individual and a civil contractor undertaking government works and had filed its return of income for the Assessment Year under consideration on 15.01.2021 declaring gross total income of Rs.35,92,290/-. The Ld.AO observed that, the assessee had not maintained books of accounts as specified u/s. 44AD of the act, and declared the contract receipts under the head “Income from other sources”. It was noted that the assessee estimated the income at 6% of the gross receipts and claimed expenditure of Rs.5,75,20,327/- u/s. 57 of the act. The case of the assessee was selected for limited scrutiny and notice u/s. 143(2) was issued on 29.06.2021. Subsequently, notice u/s. 142(1) of the act was issued calling for various information and details.
2.2 The Ld.AO while completing the assessment estimated the income of the assessee at 10% as against 6% declared by the assessee by observing as under: “The submission of the assessee has been perused but the same are not tenable. The statements of assessee are not
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backed by any evidence or supporting documents. The assessee in his submissions mentioned that he has declared profit as per provisions of section 44AD of the Act. The provisions of section 44AD of the Act are not applicable in those cases where the gross receipts exceed Rs. 2 Crore. In the case under consideration, the assessee has a turnover of Rs.6,11,91.886/- for AY 2020-21 and the assessee has not maintained any books of accounts. The assessee has simply estimated profit @ 6% of total gross receipts of Rs. 6,11,91,886/- This, the assessee is not eligible for declaring the profit u/s 44AD of the Act as his turnover exceeds Rs. 2Crore.The assessee has avoided providing the expenses details in the return of income by filing the wrong ITR and mentioning the business income as Income from other sources. This is deliberate evasion by the assessee. The accounts of the assessee and his computation has to be rejected as the expenses have not been substantiated and the basis for the arriving at 6% margin is arbitrary and not provided even though specifically asked for the same. Penalty for not getting the books audited, not maintaining the books of account and penalty for non-production of the details sought is proposed to be initiated. It has also been noted that the assessee has stated that it has not paid any subcontractors for the work it has done. The perusal of the information in possession of the department reveals that the persons to whom the assessee has made payments and they have reflected the same in their GST returns is aggregated to Rs. 2,97,19,941/- only with the payees being Nirmala Rani Kulandiasamy PAN ALSPK1828K; New Bharat Traders PAN AAMFN7637E; Easwari Industrial Corporation AAAFE1932F; Doddaiah AKKPD7088F; Byre Gowda AGFPG2231G; Penna cement IndustriesAABCP2290D; Encore Heavy Machinery Private Limited AADCE9858Q, being the entities with payments in excess of Rs, 10 lacs. The genuineness of the expenses made to the others is not proved, therefore. The balance expenses can be disallowed. However, taking a judicious view of the facts on record, estimation of the profit and the rejection of the accounts of the assessee (which are claimed to have not been maintained) is proposed. Show cause was issued to the assessee as to why a profit margin of 12% should not be adopted and the assessee has not mentioned anything to say that the margin should be otherwise; excepting stating that the labour payments are substantial and he has not
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maintained any vouchers for the same. Also, no valid explanation for the margin of 6% has been provided. It is noteworthy to mention here that on an average a Civil Contractor earns a profit of Minimum 10% to 15% of the project cost on any project he does. With own machinery, manpower and finance the civil contractor can make a profit of upto 30% to 50%, depending upon the nature of work. It is also pertinent to mention here that the assessee in his submissions accepted that while uploading the data in ITR-4 Form, software did not accept the gross receipts as per 26AS in respect of contract works executed where the gross receipts exceeded two crore but has only considered only income figure uploaded. It is further submitted that the assessee inadvertently shown the contract receipts under OTHER SOURCES instead of BUSINESSINCOME and made a wrong claim of deduction u/s 57 of the Act.lt is noted further that the assessee has disclosed a gross margin of 10.45% the very next year on the turnover of 7.54 cr. In view of the above, it is very much clear that assessee wanted to declare the profit arising out of civil contract under the presumptive taxation provisions and accordingly estimated profit @ 6% of contract under the presumptive taxation provisions and accordingly estimated profit © 6% of contract receipts u/s 44AD of the Act. The assessee or his Auditor completely ignored that special provisions of Section 44AD of the Act are only applicable when the gross receipts/turnover is below Rs. 2 Crore. Moreover, it is evident from the submissions that the assessee did not maintain books of account and for the AY 2019-20 also assessee applied same method and estimated profit @ 6% even though the turnover exceeded Rs. 2 Crore. This shows the assessee is repeatedly contravening the provisions of the Act despite having a good understanding of the Income Tax Act. In view of the same and keeping in view that the profit element ranges between 10-15% of the cost and to meet the ends of justice, the profit of the assessee is to be estimated at an average of 10% of the contract receipts of Rs. 61,19,188/-. Accordingly, the variation of 4% extra income is added in calculation to the total income of the assessee instead of 10% i.e. 4% additional income is estimated from the income from civil contracts on turnover of Rs. 6,11,91,886/- and arrived at an income of 10% i.e 6% as declared by the assessee of Rs. 36,71,514/- + 4% additional income of Rs.24,47,675/-
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thereby total addition of_Rs.24,4Z675/- is made to the total income of the assessee.” 3. Aggrieved by the order of the Ld.AO, assessee preferred appeal before the Ld.CIT(A).
3.1 The Ld.CIT(A) after considering the arguments and submissions of the assessee, observed and held as under:
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Aggrieved by the order of the Ld.CIT(A), assessee filed appeal before this Tribunal.
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All the grounds raised by the assessee is on one single issue regarding estimation of the income at 10% without any basis. The Ld.AR submitted that assessee had to declare business income under the head “Income from other sources” for the year under consideration and estimated the net income at 6% of the total contract receipts. It is submitted that, the assessee being a civil contractor, makes it difficult for maintaining proper books of accounts as he operate in an unrecognised sector wherein, details regarding delayed wages paid, purchases made of materials like cement, bricks, sand, boulders etc. is not possible to be maintained on day-to-day basis. The Ld.AR thus submitted that an estimation of an income was carried out as per the provisions of section 44AD(1) of the act.
4.1 The Ld.AR further submitted that, the assessee could not declare the said income under the head “business income”, as he had not maintained the books of accounts and the turnover exceeded Rs. 2 crores. Consequently, the assessee only had the option to declare the business receipts u/s. 56 of the act and claim deemed expenditure u/s. 57 of the act by relying on the receipts specified under the first proviso to section 44AD of the act (6%).
4.2 The Ld.AR further submitted that, the gross receipts from the business amounted to Rs.6,11,91,886/- received through banking channel, which was subjected to TDS u/s. 194C and
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therefore the requirement of estimation at 6% stood satisfied. The Ld.AR placed reliance on the following decisions in support. Samurai Techno Trading Co. (P.) Ltd. reported in (2011) 197 Taxman 144 (Kerala) CIT vs. Subodh Gupta reported in (2015) 229 Taxman 369 (Delhi) CIT vs. Sobti Construction (India) Ltd. reported in (2008) 307 ITR 374 / (2008) 174 Taxman 39 (Delhi) Chithappa Karthik Yadav in ITA No. 536/Bang/2021
4.3 The Ld.AR also placed reliance on the turnover in the previous years relevant to the AY under consideration, wherein the gross profit declared from the business was as under:
4.4 It is submitted by the Ld.AR that even in the preceding year, the assessee had consistently declared the profits at the rate of 6% and therefore the estimated rate adopted for the year under consideration is in sync with the preceding years. In support, he placed reliance on the decision of Hon’ble Karnataka High Court in case of Deluxe Roadlines in ITA No. 213/2014 vide order dated 14.10.2014 wherein Hon’ble Court observed and held as under: “6. The Apex Court in the case of RAGHUBAR MANDAL HARIHAR MANDAL vs THE STATE OF BIHAR (1957 Vo.VIII STC 770) has held when the returns and the books of account are rejected, the assessing officer must make an
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estimate, and to that extent he must make a guess; but the estimate must be related to some evidence of material and it must be something more than mere suspicion. The assessing officer must make what he honestly believes to be a fair estimate of the proper figure of assessment and for this purpose he must take into consideration such materials as the assessing officer has before him, including the assessee's circumstances, knowledge of previous returns and all other matters which the assessing officer thinks will assist him in arriving at a fair and proper estimate. 7. Therefore, in the instant case, when the assessee did not produce the books of accounts, the assessing officer was not helpless. The assessee has been filing returns every year. In fact, he has produced five years returns. It is from that they took the turnover because the turnover offered by the assessee for the year 2009-10 was comparable with the past five years turnover as reflected in the returns filed. They acted on that. However, he refused to act on the profits shown in the said returns. No reasons are given for not relying on the said profits at the same time, he has also not taken into consideration the comparable cases in similar business to come to the conclusion. Without any basis, the assessing authority determined the profit at 8%, the first appellate authority reduced it to 3% and the tribunal has reduced it to 2.5%. In coming to the said finding, all the three authorities have declined to take note off the evidence by way of earlier returns. In that view of the matter, what the authorities have done is a mere guess work and without any basis. That is not permissible in law as held by the Apex Court in the aforesaid judgment.” 4.5 The Ld.AR thereafter submitted that the assessing officer while estimating the income at 10% had considered the gross profit margin for A.Y. 2021-22 which is almost double the net profit margin. He submitted that the assessee has offered 6% on the net profit margin for the year under consideration. The details of the profit earned by the assessee in the subsequent assessment year has been submitted as under:
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4.6 It is thus submitted that the net profit margin declared by the assessee at 6% for the years under consideration is more than the net profit margin for A.Y. 2021-22 which is apparent from the figures in the table hereinabove.
On the contrary, the Ld. DR strongly supported the orders passed by the authorities below and submitted that assessee being a civil contractor without books being maintained the presumptive tax rate of net profit is to be considered.
We have perused the submissions advanced by both sides in the light of records placed before us.
During the course of the hearing, the Ld.AR tried to justify the 6% adopted on the net profit earned by the assessee for the year under consideration by submitting that, in the preceding assessment year, assessee declared 6% profit, whereas, in the subsequent assessment year, the net profit declared was only 5.95%. The Ld.AR also submitted that adopting the reference rate of subsequent assessment year on gross profit alone cannot be considered for the purpose of estimation.
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We also note that the assessee has also raised an alternative plea that assessee being in the business of civil contract cannot exceed the rate of 8% in the facts and circumstances.
6.1 At this juncture, we note that the assessee has received the payments through banking channel and there is no allegation by the Ld.AO regarding any unaccounted cash against which TDS has been duly deducted. The reasoning of the Ld.AO to reject the estimation carried out by the assessee at 6% is without any basis. Admittedly, assessee has not maintained any books of accounts and the gross receipts / turnover exceeds more than Rs. 2 crores. However, the estimation must be based on sound principles of the profit rates declared by the assessee in the preceding assessment years on the net of expenditure.
6.2 In the present facts of the case, in the preceding assessment years, the assessee had declared net profit of around 6% as has been submitted in the preceding paragraphs. In the subsequent assessment year which is the basis for the Ld.AO the assessee had declared a net profit of 5.95%. Considering the average of all these details, in any event, for the year under consideration, the profit rate for the purpose of estimation cannot be 10% or rather cannot even exceed 8%.
6.3 If it is to be considered, that the average net profit margin on immediately 3 preceding assessment year and the succeeding assessment year is taken would be 4.48% and the assessee has
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offered net profit margin of 6%. In the interest of justice, we direct the net profit to be computed at 6.5% of the gross receipt. Based on the above, we do not find any reason to uphold the addition made by the Ld.AO and the same stands deleted. Accordingly, the grounds raised by the assessee stands allowed. In the result, the appeal filed by the assessee stands allowed. Order pronounced in the open court on 28th June, 2024.
Sd/- Sd/- (LAXMI PRASAD SAHU) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 28th June, 2024. /MS /
Copy to: 1. Appellant 2. Respondent 3. CIT 4. DR, ITAT, Bangalore 5. Guard file 6. CIT(A) By order
Assistant Registrar, ITAT, Bangalore
