SRI. K. VENKATESH,BANGALORE vs. ITO, BANGALORE

The assessee, an individual, is carrying on a business of providing security guards and running a detective agency. The assessee filed his return of income for the year under appeal reporting an income of Rs.3,08,770/-. It is submitted that the return of income filed by the assessee was accompanied by the report of an accountant u/s.44AB of the Act. The total revenue or turnover shown for the year under appeal was Rs.53,27,417/- and ultimately, the assessee had shown a net income of Rs.3,08,770/- which works out to 5.80% of the gross receipts.

It was submitted that there were payments made by the assessee’s clients directly to the security guards provided by the assessee. However, these payments made were debited by the assessee’s clients to the assessee’s account as if the payments were made to the assessee himself; whereas, these payments were made to the security guards directly, so in such cases and in such circumstances, the assessee neither records these receipts nor the expenditure in his books of accounts.

Aggrieved by the order of the CIT(A), the assessee preferred an appeal before the ITAT in ITA No.712/Bang/2010. It is submitted that the Department accepted the order of the CIT(A) as mentioned above and there was no appeal filed by the Department before the ITAT. The ITAT disposed of the appeal filed by the assessee by the order dated 30.08.2011. In the aforesaid order, the ITAT restored the issue to the AO with a direction to take into consideration the totality of facts and compute the net income of the assessee by observing in para (8) as under:-

In the set aside proceedings, the AO called for certain details from the assessee. After consideration of the details filed by the assessee, the AO determined the income of the assessee by the impugned order dated 30.3.2013, at Rs.18,89,072/- based on the extent of income sustained by the CIT(A) in the first round.

On further appeal before the CIT(A), the assessee submitted that the AO has clearly overlooked the observations of the ITAT that, it was not sufficient if only wages and direct expenses are considered for making the addition. In fact, this was what the CIT(A) had done while passing the appellate order dated 16.02.2010, estimating the income by applying the income by applying he GP of 38.98% on the alleged concealed turnover. The said order of the Hon’ble CIT(A) was challenged before the ITAT and the ITAT had observed that the mere allowance of wages and direct expenses was not enough. Thus the basis on which the learned CIT(A) has proceeded to estimate the income of the assessee has not been approved by the ITAT and therefore, the AO ought not to have determined the income on that basis, especially as the assessee had not claimed any expenses in respect of these receipts, which, if reckoned, would mean that the income shown by the assessee was capable to being accepted. The assessee submitted before the CIT(Appeals) that the AO, at best, ought to have made only the addition of the net profit on the alleged concealed turnover and she ought not to have made the addition by taking recourse to the extent of GP as was done by the CIT(A) earlier. The assessee submitted that the addition made by the AO being excessive is liable to be reduced to the extent of Rs.2,36,627/- being the net profit at 5.80% of the alleged concealed turnover of Rs.40,79,790/-.

The CIT(Appeals) observed that there is no dispute in the fact that the total receipt of Rs.40,79,790/- has not been accounted for in the turnover by the assessee. The CIT(A) in his order dated 16.02.2010 has given a relief of Rs.24,99,488/- after considering the fact that the assessee must have incurred ESI, PF etc. At the same time, the contention of the assessee that there are circumstances that agency / contractor has to incur other expenses for the purpose of carrying on the business, it is likely that there are other expenses apart from wages and direct expenses which has not been considered before making the addition in the total income of assessee. These expenses may be of business promotion expenses, medical expenses (staff), miscellaneous expenses and telephone charges. The CIT(A) held that the total expenses debited under these heads is Rs.2,22,736/- for the total turnover of Rs.53,27,417/- shown in the profit and loss account which comes to 4.18% of undisclosed turnover of Rs.40,79,790/- can be allowed as additional expenses. Accordingly, the assessee was granted a relief of Rs.1,70,535/-.

Aggrieved by the above order of CIT(Appeals), the assessee is in appeal before me on the following grounds:-

Without prejudice to the right to seek waiver with the Hon'ble CCIT/DG, the appellant denies himself liable to be charged to interest u/s. 234-B and 234-D of the Act, which under the facts and in the circumstances of the appellant's case deserves to be cancelled.

For the above and other grounds that may be urged at the time of hearing of the appeal, your appellant humbly prays that the appeal may be allowed and Justice rendered, and the appellant

The ld. counsel for the assessee submitted that the CIT(Appeals) ought to have determined the income of the assessee on the basis of net profit earned in accordance with the directions of the ITAT. Reliance was placed on the decision of the Hon’ble Madhya Pradesh High Court in CIT v. Balchand Ajit Kumar, 263 ITR 610 (MP), wherein it was held that the total sale could not be regarded as profit of the assessee. The net profit rate had to be adopted and once it was adopted, it could not be said that there was perversity of approach.

The ld. counsel for the assessee also relied on the decision of Hon’ble Bombay High Court in the case of CIT v. Hariram Bhambhani, of 2013 dated 4.2.2015, wherein the Hon’ble High Court considered the following question of law formulated by the Revenue :-

The Hon’ble High Court upheld the order of the Tribunal holding that it is not the entire sales consideration which is to be brought to tax but only the profit attributable on the total unrecorded sales consideration which alone can be subject to income tax.

I have heard the rival submissions and considered the relevant material on record. The return of income filed by the assessee was accompanied by a report of the accountant u/s. 44AB. The total revenue/turnover shown by the assessee in the year under appeal was Rs.53,27,417 and the assessee has shown a net income of Rs.3,08,770, which works out to 5.80% of the gross receipts. The assessee has submitted that the omission to show the aforesaid receipt of Rs.40,79,790 does not distort the correct income of the assessee, in as much as to the extent of such receipts, the related expenditure on the payment made to security guards is also not claimed as a deduction. The AO did not appreciate the contention of the assessee and the CIT(Appeals) took a different view with respect to determination of income. The Tribunal had held that the entire receipts cannot be stated to be the income of the assessee because the assessee would have to pay the wages and also incur other expenses for the purpose of carrying on of the business of the assessee. Hence the Tribunal directed the AO to consider the totality of facts and compute the net income of the assessee. Following the decision of the Hon’ble Madhya Pradesh High Court in CIT v. Balchand Ajit Kumar (supra) and the Hon’ble Bombay High Court in the case of CIT v. Hariram Bhambhani (supra), I am of the view that the lower authorities ought to have determined the net income of the assessee on the basis of net profit earned by the assessee and ought to have adopted the net profit @ 5.80%. I direct accordingly.

In the result, the appeal by the assessee is allowed.