DCIT, CENTRAL CIRCLE-1, MANGALURU, MANGALURU vs. USK CONSTRUCTION COMPANY DP, UDUPI

IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : BANGALORE

BEFORE SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER AND SHRI SOUNDARARAJAN K., JUDCIIAL MEMBER

ITA No. 647/Bang/2023 Assessment year : 2019-20

The Deputy Commissioner of Vs. USK Constructions Co. DP, Income Tax, 13-2-1A16, Vishwas Tower, Central Circle-1, First Floor, Court Road, Mangaluru. Ajjarakadu, Udupi – 575 001. PAN : AAFFU 0260K APPELLANT RESPONDENT

Appellant by : Shri Thamba Mahendra, Jt.CIT(DR), Bengaluru. Respondent by : Shri Shiva Prasad Reddy, ITP

Date of hearing : 25.04.2024 Date of Pronouncement : 12.06.2024 O R D E R Per Laxmi Prasad Sahu, Accountant Member This appeal is filed by the assessee against the order dated 26.05.2023 of the CIT(Appeals), Pananji-2, Panaji for the AY 2019-20 on the following grounds:-

“1. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) was justified in deleting the additional business income amounting to Rs.5,48,01,107/- brought to tax on account of profit from business estimated at 10% of the turnover without appreciating the fact that on the basis of serious discrepancy and

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findings thereon, the AO rejected the books of account and made estimation of income after considering the industry standards and profits in similar type of business. 2. Whether on the facts and circumstances of the case, the Ld. CIT(A) was justified in deleting the addition of Rs.5,48,01,107/- and ignoring thereby the fact that the assessee had systematically booked bogus expenses under subcontract charges by making payment to several of his employee's accounts, which were subsequently withdrawn and returned in cash to him. 3. The above grounds are without prejudice to each other and appellant craves leave to modify, amend or revise the above grounds of appeal and add further grounds of appeal, if necessary.” 2. Briefly stated the facts of the case are that the assessee is a partnership firm and filed its return of income on 01.11.2019 declaring total income at Rs.5,75,01,380. The return was processed u/s. 143(1) accepting returned income. A search & seizure action u/s. 132 was carried out in the case of assessee group on 23.01.2019. During search proceedings at various premises material evidence were collected in regard to inflation of expenditure through bogus sub-contract payments, bogus fish purchases, signed cheques of sub-contractors were found in the premises of assessee and various sub-contractors have further deposed that no work was actually carried out and their bank accounts were used by the assessee, money had been found to be transferred to their accounts and cash withdrawn immediately and returned in cash for own utilization. It was also established that assessee was systematically indulged in inflation of expenses and also making payments to his employees under the guise of sub-contract

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payments over a period of time. These payments towards sub-contract charges are inflated by bringing in to books bogus sub-contractors who are nothing but close confidants, employees of the assessee. They do not render any services except offering their bank account to be utilized. It was established that the assessee artificially reduces his profits by booking huge expenditure as labour expenses in the name of his employees and close associates. The assessee is also showing huge amount of Sundry Creditors over the past few years. A major part of sundry creditors relates to labour sub-contractors and labour charges booked in the name of assessee’s employees and accordingly book results show very low profit.

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“Letter dated 01-03-2021filed by the assessee:

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Our concern started in the financial year 2017-18. Our one of the partner Sri Uday Shetty doing contract work for himself. When he joined as a partner to this firm our condition was to transfer all his works to the firm whatever the position on that date and whatever the deposits details that is interest earned should be transferred to the firm if he needs contract work it should be sub contract works to him on which he has to pay 2% of his business profit to the firm on whatever the contract amount received by his sub contract work from our partnership deed date even though he started the work previously. On this condition we joined as partner and

continued our business. All the works we did are allotted to Udaya Kumar Shetty on Individual but, we filed an application to all the department to make the payment to the firm from 01-04-2017. As per our letter even though the work allotted to Muniyal Uday Kumar Shetty, the bill are drawn in the name of USK Constructions.

The total amount was Rs. 41,54,28,718/- form which we received contract receipt of 41,54,28,7051-

On the above amount we granted 28,89,45,946 as sub-contract in which Udaya Shetty did the work for Rs. 25,65,93,733/-. This transaction is only on 2% business profit base along with this there are 2 to 3 other sub contractors i.e. mainly supply of material like jelly, sand and other materials required for our contract work etc i.e Umesh Shetty, Arjun Hegde, ShanthaKumar Rai, Suresh Shetty, Inspire Engineering, Abhishek Enterprises etc. Hence our contract work was Rs.15,88,34,895 only.

Even though I complied with my declaration it is found that 10% net profit proposed on my turnover in show cause notice.

There is expenses of business profit share to main contractor, there is GST which is not refunded or paid by the government even VAT, royalty, labour cess etc. which comes to nearly 20%. Again, there is cost of working capital, guarantee period maintenance etc. which are the other expenditure.

I request you sir to keep all the facts I have given above which is true and correct with the evidence of proof by the government Authorities documents and main contractor agreements.

Further, as per point No-4 of show cause notice, original declaration of undisclosed income of Rs. 3.52 crores for the A Y 2017-18 and 2018-19 on first day of survey action which is taken by the inspection authority.

They took this declaration disallowing sub contract expenses, we given our submission on 15th July 2019 DCIT 1 Mangalore, the copy of the same is attached herewith. They disallowed sub-Contract expenditure and treated it as income instead of expenditure.

Out of turnover of Rs.38,13,71,482/- the turnover of sub contract was Rs. 28,89,45,946. The main sub-contractor was Sri Uday Shetty who was the original contract allottee and finished half of the part of the work allotted but, when we joined as a partner, we given letter of authority for payment that even though contract was allotted to Sri Uday Shetty payment should be made to USK Construction Company. By this letter even though original Contractor Shri Udaya Shetty made the work before our partnership establishment our firm received the payment of that work and for that payment of work we drafted a subcontract agreement and we received the bill

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for the same work which cannot be denied because there is documentary evidence proof and we are enclosing Sri Udaya Shetty Profit and loss account for showing the same turnover in his account. With this evidence we can say that the investigation authorities findings that disallowance of subcontract is not fair and not justified. Hence, we submitted our submission before DCIT Investigation Mangalore for which as per point 6 of show cause notice to overcome the lack of evidence for our final declaration of additional income.

Further, the remaining work there was material purchase and at the same time 30% labour expenditure was only considered and accounted which is allowable as per the Act.

Hence, there is no base for seeking declaration on disallowance of sub-Contract work or labour charges in the both the year that to for the year 2018-19 turnover was Rs. 125,42,06,864/- out of which sub contract was Rs. 57,95,83,321/- in which Sri Uday Shetty was the main Contractor. After the sub contract work, main contract work was Rs. 45,40,87,646/- for which the material was Rs. 35,01,14,012/- and labour was Rs. 10,62,81,613/- which is less than 30% of the contract receipt which is also acceptable hence, disallowance of sub contract or labour contract is not justified by Inspection Authority and treating it as income is unjustified way of taking declaration as stated in point No-4.

Finally, we decided to take her as partner with certain amount as remuneration to her without any Investments. This agreement was taken place in the month of October 2018 at the same time we applied of GST Registration, power supply etc. in the name of Kushal Stone crusher as a firm. Further, there was a condition from Crusher owner Smt. Rekha that we cannot raise any financial assistance more than Rs. 50 lakhs in the name of the firm. Moreover, she can nit lease out the crusher license to our firm. Hence, with no alternative we gone for al loan In the name of a USK Construction under certain terms and conditions that is repayment of Interest etc.. by Kushal Stone Crusher to USK Construction loan account o which TDS should be made. The coy of the TDS 26AS enclosed herewith Other than this we are buying jelly from Kushal Stone crusher for our business without an obligation of partners of the firm.

As per point No-11 there was a agreement or memorandum for the above statement and the same was enclosed herewith as a proof of evidence.

The partywise detail evidence provided for examination as per point No-10.

As per point No-9 regarding Net profit declared, we already explained how the expenditure occur or lease rent interest etc are connected to Kushal Stone's business which I collected from them and paid to the bank without any profit with TDS collections. Hence there is no evasion of income. Due to a very small turnover of Rs. 10 Crores and collection of TDS of sub Contractor that to original contractor for whom TDS amount refunded due to the amount repaid as sub contractor with TDS. Hence, we paid TDS amount to the government on one side and reimbursed to the sub contractor i n major portion which is without any profit to the firm. Hence the collection and payment are one and the same of sub- contractors and contractors and Hence, TDS amount was asked for refund.

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About GST, It is mis' calculation by our accountant by not reflecting collection and payment. Now we revised the same and filed the original refund amount with GST Cash ledger cop enclosed herewith. Regarding point No-7 the closing stock of Rs. 4.25 crores for the year 2018-19 and Rs.5.23 crores for year 2019-20 is valid by the government engineers who will visit our site in alternative weeks to look over the proceedings of the work along with quality and they certify the work completion every month as per their terms and conditions of the agreement and its valuation by their own measure. We take the same measurement an value as stock or work in progress. Hence, we request you to drop your proposal of considering 10% of net profit on my turnover as you mentioned in show cause notice that 10% estimation on my turnover in point no -16 of your notice.”

“ 1. It is noted from records that the assessee has declared a total turnover of Rs.125.42 crores for AY 2019-20 and Rs.41.54 crores for AY 2018-19. The turnover as per 26AS is found to be Rs.135,98,000,678/- AY 2019-20 Rs.41,54,28,745/- for AY 2018-19 and there is no reconciliation, with reference to books of account. Against this turnover declared in the books, the assessee has claimed net profit of Rs.5.70 crores and adjusted profits of business offered for taxation is Rs.5.62 crores. 1. 1. For AY 2018-19 the net profit declared is Rs.89.24 lakhs and adjusted profits offered is Rs.1.12 crores. The profits declared is after additional income offered during search proceedings and hence very low. The assessee has claimed more than Rs.1.60 crores as refund for these two years. The assessee was specifically asked to justify the low net profit disclosed in the returns, considering the volume of business. 1. 1. It Is also noted that the assessee Initially disclosed Rs.3.50 crores as undisclosed income due to examination of evidences during search/survey for AY 2019-20 and later revised the same to Rs.1 crores for AY 2019-20. This was again revised to Rs.25 lakhs for AY 2018-19 and Rs.75 lakhs for AY 2019-20. None of these disclosures are in order as there is no basis for any of them. 1. 1. The evidences found during the course of search and search proceedings, statements given by the assessee and his associates including accountant and employees, unambiguously establish that the assessee has claimed bogus expenses in order to suppress profits to be declared to the department. 1. 1. The assessee has no further counter evidences in support of the claim that the URD purchases are wrongly treated as Sub contract expenses and accordingly, it is only an accounting error. Assessee is not able to produce details and evidences establishing that the payments were actually made for service rendered.

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Even though the existence of these persons is ascertainable, there is no proof of actual rendering of services by these alleged sub-contractors, who are in fact employees and associates of the assessee. No details like bills, work order, agreements or any sort of documentary evidence is in the possession of the assessee.

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” 7. Accordingly the AO completed the assessment. Aggrieved from the assessment order, the assessee filed appeal before the CIT(Appeals).

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“5.3 I have gone through the assessment order, argument made by the AR of the appellant and submissions made by the AR. The AO made addition on estimation basis without bringing on record any comparable case of similar nature or give reasons for adopting such rate of net profit. The AO has to bring on record certain material to support his finding with regard to rate of profit admitted for estimation of profit with some comparable cases of similar nature or the profit declared in the similar industry. In the instant case the AO adopted the profit at 10% but failed to bring on record any comparable case of similar nature nor give reasons for adopting such rate of net profit. On the other hand, the appellant had declared net profit of Rs. 5,70,72,957/- on the turnover of Rs.73,67,21,756/- which is nearly 7.75% on this net turnover which is very much on higher side, considering the nature of business and place of work. As seen in construction work, the rate of profit varies from nature of contract executed by the appellant and place of such contracts. Therefore, no uniform yardsticks can be applied for estimating net profit. The appellant placed reliance in the case of Shri LakshmananVs lTO,ITAT wherein it was held that: It is an admitted fact that if books of accounts maintained by the assessee are incomplete or not supported by necessary evidences then the AO is empowered to complete assessment in the manner provided in section I44 of the Act. But fact remains that still in the best judgement assessment, the AO has to bring on record material on the basis of which he has arrived at the conclusion with regard to rate of profit for estimation of income from the business. No doubt, under the best judgement assessment there is an element of guesswork but it should not be arbitrary. Therefore, while completing the assessment under best judgement assessment, the AO has to bring on record certain material to support his finding with regard to rate of profit admitted for estimation of profit with some comparable cases of similar nature or the profit declared in the similar industry. In this case,

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although the AO has adopted 5% net profit on gross receipts, but failed to bring on record any comparable case of similar nature nor give reasons for adopting such rate of net profit. On the other hand, the assessee has agreed for estimation of 3% profit on gross receipts considering the nature of business and place of work. Further in the civil construction work, the rate of profit varies from nature of contract executed by the assessee and place of such contracts. Therefore, no uniform yardsticks can be applied for estimating net profit. Therefore, considering the fact that the assessee is into civil construction business and also the AO has not given any reasons for adopting 5% net profit rate, we are of the considered view that a reasonable profit of 3% on total receipts would meet the ends of justice. Therefore, we direct the AO to estimate 3% profit on total gross receipts received by the assessee for the year. 5.4 In the case of Shri LakshmananVs ITO (supra) it was also held that if the AO rejected the books of account then the AO is bound to complete the assessment as per the provisions of Section 144 of the Act. However, in the instant case the AO completed the assessment under Section 153C r.w.s. 143(3) of the Act and not followed the provision of Section 144 of the Act nor provide any finding to support his claim. Therefore, without going into the technicality and following the decisions of Shri LakshmananVs ITO (supra) and considering the fact that the appellant is into construction business and also the AO has not given any reasons for adopting l0% net profit rate, I am of the considered view that a reasonable profit as declared by the appellant would meet the ends of justice. Therefore, the AO is directed to delete the said addition which is made by adopting 10% profit rate and re-estimate the profit on total gross receipts received and additional income declared by the appellant of Rs.75.00,000/- for the year under consideration. In view of the above discussion ground no. 3 may be treated as allowed.” 9. Aggrieved from the above order, the assessee is in appeal before the ITAT.

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for rendering services by sub-contractors who were in fact employees and associates of assessee. No details like bills, work order, agreement or any sort of documentary evidence were produced by the assessee in support of sub-contract payment. Accordingly he requested that the order of the CIT(Appeals) should be reversed and order of AO should be restored.

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disallowance of sub-contract is not fair and not justified. Hence, the assessee made submission before DCIT Investigation Mangalore as per point 6 of show cause notice to overcome the lack of evidence for final declaration of additional income.

“ …………. ...... As could be seen from the Grounds of Appeal - No.1 and No.2 – taken by the Revenue, the only objection is against the relief given by the learned CIT Appeals directing the learned AO to delete the addition, made by estimation of income by adopting net profit at 10% of Gross receipts. The CIT Appeals has held that estimation of income as aforesaid by taking 10% profit margin is unjustified and the admission of additional income of Rs.75,00,000/- in the return of income by the assessee, over and above the regular profits as per the statement made during the Searches, is more than enough to meet the alleged deficiencies. 2. In Ground No.1, the Revenue has stated that the learned AO has considered the industry standards and profit in similar type of cases as basis for estimation of profit at 10%, which is contrary to the material facts on record; there is no whisper either about the industry standards or any comparable case as submitted in the later part of these submissions. 3. In Ground No.2, the Revenue has stated that the expenses are inflated by making bogus sub-contract payments. The alleged bogus sub-contract payment is only Rs.41,50,000/- para-6.3 of pages 5 & 6 of the assessment order, whereas the assessee has admitted Rs.75,00,000/- in the return of income as additional income over and above the regular profits in order to buy peace and avoid protracted litigation, even though there was no evidence of receipt of any such money back by the assessee, as submitted more clearly in later part of these submissions. 4. It is submitted that the learned AO estimated the net profit at Rs. 11,11,74,238/ - by adopting profit ratio of 10% on turnover of Rs.11,17,42,376/-, which was computed after reducing the

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subcontract amount of Rs.24,83,23,582/-. Certain mistakes crept into the working of the turnover by the learned AO at Rs.111,17,42,376/- which has been reconciled and reworked by the learned CIT Appeals at Rs.73,67,21,756/- vide para 5.2 of pages of 11 and 12 of his order. 5. The only Ground taken by the Revenue against the deletion of addition made by the learned AO by adopting 10 profit rate on the Gross Receipts, is not maintainable for the following reasons: (i). The assessee has declared net profit ofRs.5,70,19,137 ¬in the return of income which includes, Business income of Rs.5,62,92,781 which translates into profit margin of 7.62. The said business income includes an amount of Rs.75,00,000/- declared during the Searches as additional income over and above the regular profits and admitted in the return of income. The alleged difference in the income by way of bogus sub-contract payment as for the learned AO himself is Rs.41,50,000/- for the subject AY, 2019-20 - para 6.4 of pages 5 & 6 of the impugned assessment order. Hence the additional income ofRs.75,00,000/- admitted in the return of income is more than the amount of Rs.41,50,000/- alleged to be the bogus sub-contract payment. (ii). The learned CIT Appeals has relied on the decision of the Hon'ble Tribunal, Chennai in the case of Shri Lakshmanan vs ITO (2021-189ITD 499 (Chennai-Trib) which has laid down the guidelines for estimation of Profit in the civil construction work and applying these guidelines, held that net profit of 3 on Gross Receipts would be reasonable and, not 5 as was determined by the AO. Applying these guidelines, it is seen that the learned AO has not brought on record any material to support his net profit rate of 10 and therefore, the estimation is unsustainable. The finding of the learned CIT Appeals in Para 5.3 of Page-19 of the order is as under:- “ xxxxxxxxxxxxxx Xxxxxxxxxxxxxx” The learned CIT Appeals has thus recorded an unassailable finding that the AO has not brought on record any material or any comparable case of similar nature for adopting 10% net profit as

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income. The case of the Respondent Assessee stands on a better footing because the net profit rate 7.62 is more than 3% profit in civil construction, considered as reasonable by Hon'ble ITAT, Chennai in Shri Lakshmanan (supra). (iii). The Hon'ble jurisdictional Tribunal in the case of M/ s JSR Constructions (P) Ltd (2016), 71 taxmann.com 184, held that estimation of net profit at 8 was not justified as no justification was provided by the AO and average net profit for the two preceding assessment years- at 1.70 and 2.21¬should be taken to estimate the net profit. The Hon'ble Tribunal referred to the judgement of the Hon'ble Apex Court in the case of Ragubhar Mandal and Harihar Mandal (Para 27), which had laid down the law that no estimation should be made without bringing in evidences on record and or the comparable cases in similar business. Reverting to the case of the assessee, the learned AO has not brought on record any comparable case of similar business to justify the adaptation of 10% as the net profit in the business. In the light of the above, it is respectfully submitted that the Appeal of the Revenue is devoid of any merit and therefore, the Hon'ble Tribunal may be pleased to dismiss.” 13. The assessee has filed written submissions No.2 which is as under:-

“1. It is respectfully submitted that the Respondent- assessee has already filed the written submissions on 29- 01-2024 explaining how the appeal of the Revenue is not maintainable on merits. In continuation of the same, the present submissions are filed, since: (i). The learned Principal Commissioner of Income Tax (PCIT) has set aside the assessment order vide order u/s 263 dated, 21-02-2023 on the ground that the assessment order was erroneous as well as prejudicial to the interests of the Revenue, insofar the learned AO has excluded sub-contract amount of Rs.24,83,23,582/- in estimating profits applying net profit ratio of 10. (Copy enclosed herewith marked as Annexure - A)

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(ii). The learned AO has passed the assessment order u/ s 143(3) r.w.s 263 on 27-03-2024 accepting the claim of the assessee that certain sub-contracts allotted to others should be excluded from the turnover of the assessee. (Copy enclosed herewith marked as Annexure - B) 2. The learned CIT(A) has allowed the appeal recording a categorical finding that the net profit margin of 7.75% on turnover of Rs.73,67,21,756/- declared by the assessee is on higher side and the learned AO was not justified in estimating the net profit applying 10% margin. Further, the learned CIT(A) has rightly observed that the learned AO has not brought on record any evidence or a comparable case to justify his estimation of income for applying net profit margin of 10%. 3. As could be seen from the impugned assessment order itself, the learned AO has excluded the sub-contract amount of Rs.24,83,23,582/ - allotted to Shri. Udaya Shetty and thereafter estimated the net profit at 10 of the turnover of Rs.111, 17,42,376/- (Rs.136,00,65,958 - Rs.24,83,23,582). 4. While the learned AO excluded this amount of Rs.24,83,23,582/ - from the turnover, he did not exclude other sub-contract amounts from the turnover in estimating the net profit as above-submitted, which was a mistake. The learned CIT(A) has corrected the said mistake and rightly computed the turnover of Rs.73,67,21,756/- and observed that the net profit of Rs.5,70,72,957/- which translates into net profit margin of 7.75% is on the higher side. 5. Even otherwise and without prejudice to the submissions & the objections, the following working would demonstrate that the appeal of the Revenue is devoid of any merit: (i). As per the learned PCIT himself, the net profit of 2% is reasonable to be added in respect of sub-contract work - para 2.0 of page 3 of the said order u/s 263 of the Act. The total turnover is Rs.125,42,06,864/- without excluding the sub-contract amounts. The own turnover is Rs.73,67,21,756/- as worked in the order of the learned CIT(A); and the profit on the same would be Rs.4,42,03,305/- applying net profit margin of 6%.

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(ii). On the balance turnover of Rs.57,95,83,321/- (sub- contract amount), the net profit would be Rs. 1,15,91,666/- applying profit margin of 2%, which is considered reasonable in his order u/ s 263 of the Act. 6. On the basis of the above, it may be thus seen that the profit margin is on the higher side as per the following: Sl. Particulars Amount No. (in Rs.) (i) Profit of 6% on own contract work 4,42,03,305 Profit of 2% on sub-contract work – which as per (ii) 1,15,91,666 the learned AO cannot be included in the turnover (iii) Total profits from contract work (i + ii) 5,63,46,602 (iv) Total profits declared by the assessee as per the 5,63,46,602 learned AO - kindly refer the computation page in the assessment order.

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Uday Shetty had to pay 2% on business profit to the firm. Accordingly AO passed consequential order u/s. 143(3) r.w.s. 263 on 27.03.2024 and accepted the returned income filed by the assessee and no any further addition was made. Therefore addition made by the AO @ 10% on the turnover considering the entire shortcomings noted by the AO for enhancing the expenditure by treating bogus sub-contract expenses is totally wrong & very higher side. Accordingly he submitted that the CIT(Appeals) order is correct.

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and filed detailed written submissions. During the course of appellate proceedings, the details of sub-contract amount was submitted which is as under:-

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net of GST accordingly the net turnover excluding GST is Rs. 1,25,42,06,864 (73,67,21,756+51,7485,108). The CIT(A) has relied on the judgment of Lakshmanan v. ITO in which 3% reasonable profit has been considered as net profit. The CIT(A) in the impugned case also noted that AO has failed to bring on record any comparable cases of similar nature nor given reasons for adopting the net profit @ 10%. This observation noted by the CIT (A) is not correct, since this is the second year of business and the partner Shri Uday Shetty has converted his proprietorship business into partnership and still getting some works in the proprietorship and there is agreement also between the Uday Shetty and assessee. Further the CIT(A) is wrong because while calculating Net Profit rate @ 7.75% he has entirely set aside the sub- contract amount of Rs.51,74,85,108 net of GST (57,95,83,321 minus GST of Rs. 6,20,98,213) noted supra. There is no doubt that sum of Rs.57,95,83,321(including GST of Rs. 6,20,98,213) has been given on sub-contract basis which clearly shows that there is share of profit transferred to sub-contract and other sub-contractors have also offered income and filed their return on presumptive basis and they have got the benefit of minimum threshold tax limit and tax slab rates i.e., 10%, 20% & 30%. The assessee is covered under the maximum marginal rate of tax.

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hire purchase received, machinery rent lease and discount received. The turnover disclosed in the tax audit report is net of GST. We further note that a sum of Rs.24,83,23,582 was given as sub-contract to Uday Shetty on which element of profit has not been considered by the AO and this was taken up by ld. PCIT u/s. 263 by his order dated 22.02.2023. Accordingly AO has passed order u/s. 143(3) r.w.s. 263 vide order dated 27.03.2024. However the AO has not made any separate addition of the amount on the sub-contract work given to Uday Shetty and accepted the profit of Rs.5,62,92,782 as declared business profit in return u/s 139(1) of the Act. The sub-contract work of Rs.24.83 crore given to Uday Shetty is not considered as part of assessee’s turnover in the 143(3) order. Further we note that as per submission of the assessee the total sub-contract amount is Rs.57,95,83,321 which includes sub-contract given to Uday Shetty and assessee has calculated the GST amount included in the entire sub- contract of Rs.6,20,98,213. It might be that GST is also included on the sub-contract given to Uday Shetty. As per various decisions for calculating profit for income tax purpose, the GST is not considered as part of turnover.

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relied on the judgment of Shri Lakshmanan v. ITO which is not applicable in the present case because this is a search case and various discrepancies were noted for inflating expenses by the assessee. We noted from the grounds of appeal that the payments made to sub- contractors are bogus payments. If the contention of the revenue is accepted then the income offered by the sub-contractors on the payments received from the assessee should have also been treated as bogus income in the hands of sub-contractors. But the ld. DR could not produce any documents in this regard. Considering the entire shortcomings of assessee, it will be just and appropriate to consider the net profit rate @ 5.40% on the total turnover/gross receipts reported in the profit & loss account excluding the sub-contract amount given to Uday Shetty of Rs.22,17,17,484 (62098213/579583321 x 248323582) (net of GST). Further 2% profit has to be considered on Rs.22,17,17,484 of Rs.44,34,350 as net income on the sub-contract given to Uday Shetty, since during the course of assessment proceedings vide assessee letter dated 1.3.2021 2% profit has to be given by Uday Shetty to the firm as per para 13.2 of the assessment order. The assessee is directed to provide the details for arriving net turnover net of GST for the purpose of calculation of net profit. The assessee will not get any deduction for interest on capital and salary, bonus, commission or remuneration from the above net profit calculated as provided u/s 40(b).

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Sd/- Sd/- ( SOUNDARARAJAN K.) (LAXMI PRASAD SAHU ) JUDICIAL MEMBER ACCOUNTANT MEMBER

Bangalore, Dated, the 12th June, 2024.

/Desai S Murthy /

Copy to: 1. Appellant 2. Respondent 3. Pr.CIT 4. CIT(A) 5. DR, ITAT, Bangalore.

By order

Assistant Registrar ITAT, Bangalore.