G.R.M. CONSTRUCTIONS,NAMAKKAL vs. ACIT, CENTRAL CIRCLE, SALEM

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ITA 1974/CHNY/2024Status: DisposedITAT Chennai18 October 2024AY 2014-158 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal held that the reopening of assessment under Section 147 was justified. While the initial admission was made by the partner during the survey, the assessee failed to discharge the onus during the assessment proceedings to submit all bills/vouchers in support of the claimed labour expenses, especially after admitting that some were not fully vouched. Therefore, the AO was justified in making disallowances. Regarding the quantum, the Tribunal noted the net profit ratios for AYs 2013-14 to 2019-20. Citing the Madras High Court decision in K. Kannan vs. Assistant Commissioner of Income-tax, which held a net profit of 5% of contract receipts justifiable for such businesses, the Tribunal restricted the disallowance to 5% of labour expenses for AYs 2003-04 to 2018-19, aiming for a net profit of approximately 5%. For AY 2019-20, where the assessee already showed a net profit of 6.18%, no further disallowance was deemed necessary. The AO was directed to compute the disallowance accordingly. The issue of limitation for the Section 148 notice was implicitly addressed by upholding the reassessment, and the reliance on survey statements was contextualized by the assessee's failure to substantiate expenses during assessment.

What were the facts?

The assessee, GRM Constructions, filed eight appeals before the Income Tax Appellate Tribunal (ITAT), Chennai, challenging identical orders from the Commissioner of Income Tax (Appeals) [CIT(A)] dated 24.05.2024. These orders confirmed additions made by the Assessing Officer (AO) for assessment years (AYs) 2013-14 to 2020-21. The appeals stem from reassessment proceedings initiated under Section 148 of the Income Tax Act, 1961, based on a survey conducted under Section 133A on 05.02.2022. During the survey, the assessee's partner admitted to potential issues with labour expenses, offering a 10% disallowance. The AO reopened assessments based on this statement, and the CIT(A) confirmed the additions, citing the assessee's initial admission.

What were the issues?

1. Whether the notice issued under Section 148 of the Income Tax Act, 1961, dated 29.03.2021, for Assessment Year 2013-14, is barred by limitation, given that the due date for issuing such a notice expired on 31.03.2020? (Question of law) 2. Whether the reassessment proceedings, initiated after four years from the end of the assessment year, are valid without fresh material in possession of the AO, relying solely on a statement recorded during a survey under Section 133A? 3. Whether the addition made by the AO, solely based on a statement recorded during a survey under Section 133A, is legally sustainable, especially when the assessee retracted the admission in the return filed in response to the Section 148 notice and when documents were also seized during the survey? Assessee's contentions: The reopening of assessment for AYs 2013-14, 2014-15, and 2015-16 is bad in law as it was based solely on a statement and not fresh material. The addition is unsustainable as it relies only on a survey statement, which lacks evidentiary value as per the Madras High Court in CIT vs. S. Khader Khan Son, and the CBDT Circular dated 10.03.2003 instructs against obtaining confessions. The assessee retracted the admission by not including the disallowance in the return filed in response to the Section 148 notice. Additions should not be based solely on statements when documents were also seized. Revenue's contentions: The Ld. Departmental Representative relied on the orders of the authorities below and argued that the CIT(A)'s order should be confirmed as the addition was based on a disallowance of labour expenses agreed to by the assessee.

Which sections of the Income-tax Act were involved?

Section 133A,Section 147,Section 148,Section 250,Section 149

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, ‘C’ BENCH: CHENNAI

Before: SHRI MAHAVIR SINGH & SHRI JAGADISH

Hearing: 14.10.2024Pronounced: 18.10.2024

Heard together (8 matters)

ITA No.1973/Chny/2024
ITANo.1974/Chny/2024
ITANo.1975/Chny/2024
ITA No.1976/Chny/2024
ITA No.1977/Chny/2024
ITA No.1978/Chny/2024
ITA No.1979/Chny/2024
ITANo.1980/Chny/2024

Read from the judgment's own cause title. This page is filed under one of them.

आदेश / O R D E R

PER JAGADISH, A.M :

1.

Aforesaid eight appeals filed by the assessee are against the identical orders passed by Learned Commissioner of Income Tax (Appeals), Chennai-20 [hereinafter “CIT(A)”] dated 24.05.2024 confirming the addition made by the Ld. Assessing Officer.

2. The facts in all the appeals of the assessee are identical and issues are common hence, we proceed to pass a common order. For brevity, we shall take up the appeal in for A.Y to 1980/Chny/2024 :- 2 -:

2013-14 as lead case. The grounds of appeal raised by the assessee for A.Y 2013-14 are as under:

“1. On the facts and circumstances of the case the order of first appellate authority dated 24.05.2024 in dismissing the appeal of the appellant is bad in law and is not legally justified.

2.

On the facts and circumstances of the case the first appellate authority is not justified in giving a finding that the notice U/s 148 issued on 29.03.2021 for the assessment year 2013-14 for which the due date for issue of the notice has expired on 31.03.2020, is a valid notice. The above notice is barred by limitation and the reassessment proceedings are bad in law. On Similar facts Income Tax Appellate Tribunal 'B' Bench in by order dated 31.05.2024 has held that the notice U/s 148 for the A.Y 2013-14 issued to the assessee on 27.03.2021 in that case is barred by limitation U/s 149 of the Act.

3.

On the facts and circumstances of the case the first appellate authority is not justified in sustaining the reassessment proceedings which has been done after four years from the end of the assessment year on same set of facts without any fresh materials coming into the possession of the AO other than the statement recorded in the course of survey U/s 133A on 06.02.2020.

4. On the facts and circumstances of the case the first appellate authority is not justified in solely acting upon the statement recorded in the course of survey U/s 133A of the Act on 06.02.2020 in sustaining the addition of Rs.10,78,063/- made by the AO. It has been judicially settled that the statements recorded in the course of survey does not have any evidentiary value as held by The Madras High Court in the case of CIT vs. S.Khader Khan Son reported in 300 ITR 157 which decision has also been affirmed by The Apex court.

5.

On the facts and circumstances of the case the amount admitted in the course of survey U/s 133A was not admitted in the return filed in response to notice U/s 148 of the Act which action amounts to retraction of the statement.

6. On the facts and circumstances of the case in the course of survey proceedings books of accounts and documents were also seized and the addition of Rs.10,78,063/- has been made not on the basis of the above seized documents but the addition has been made solely on the basis of statement recorded in the course of survey which is bad in law.

to 1980/Chny/2024 :- 3 -:

7. On the facts and circumstances of the case reliance was placed upon the circular of CBDT dated 10.03.2003 wherein departmental officials have been specifically instructed not to get confessions during the course of search and survey operations, which circular is binding on all the officials of the department. The framing of the assessment on the basis of such confessions given by the assessee which action has been sustained by The First Appellate Authority is bad in law.

8.

In view of the above grounds and other submissions to be made at the time of Appeal hearing, the order U/S 250 passed by Commissioner of Income Tax (Appeals Chennai 20 may be cancelled and justice rendered.”

3. The assessee is involved in a civil contract works and filed return of income for A.Y 2013-14 on 13.09.2014 declaring total income of Rs.13,33,194/-. A survey u/s. 133A of the Income-tax Act, 1961 (hereinafter “the Act”) was conducted in the premises of the assessee on 05.02.2022. During the survey proceedings, it was found that the assessee has claimed labour expenses, but could not substantiate the labour expenses with bills and vouchers fully. The partners therefore, in his statement recorded during the survey u/s. 133A of the Act admitted for disallowance of 10% of labour expenses. The A.O has reopened the assessment on the basis of above statement by issuing notice u/s. 148 of the Act. The assessee in response to notice u/s. 148 of the Act has stated that the return originally filed may be treated as return filed u/s. 148 of the Act. The assessee therefore has not accepted the disallowance of 10% of labour expenses in the return filed in response to notice u/s.148 of the Act. The A.O in the to 1980/Chny/2024 :- 4 -: assessment order passed u/s. 147 of the Act has made the addition by adding 10% of labour expenses as per the reasons recorded. The Ld. CIT(A) has confirmed the addition as the assessee itself has agreed for disallowance of 10% labour expenses during survey.

4.

The Ld. Authorized Representative (A.R) of the assessee before us has challenged the reopening of assessment after four years for A.Ys 2013-14, 2014-15 & 2015-16 as there was no fresh materials in possession of AO and assessment has been reopened only on the basis of statement. On merit, the Ld. AR has submitted that the addition has been made merely on the basis of statement taken during survey u/s. 133A of the Act and without giving any show cause during assessment proceedings. The Ld. AR has further submitted that survey was conducted on 06.02.2020 and thereafter, Covid pandemic broke out and there was a lock down in the country due to Covid and the assessee in the return of income in response to notice u/s 148 on 20.10.2021 has not accepted the disallowance of labour expenses @ 10%. The Ld. AR has submitted that during the course of survey proceedings, the documents have been impounded, but no documents relating to labour expenses has been impounded or relied upon while making the addition. The Ld. AR relying on the decision of Hon’ble to 1980/Chny/2024 :- 5 -:

Madras High Court in the case of CIT vs. S. Khader Khan Son 300 ITR 157 (Mad.) has submitted that statement of partner in survey operation regarding undisclosed income is not a conclusive piece of evidence.

The Ld. AR has argued that the CBDT in a Circular dated 10.03.2003 has also emphasized that the assessing officer should not take confession during survey operation and the A.O should rely on the evidence or material recovered during the course of survey operation to make addition and in the present case the A.O has relied only on statement and not on any documents therefore, addition made should be deleted.

5. The Ld. Departmental Representative (DR), on the other hand, has relied on the orders of authorities below and argued that the order of CIT(A) may be confirmed as addition has been made on the basis of disallowance of labour expenses agreed by the assessee.

6.

We have heard the rival submissions, and perused the materials available on record. A survey u/s. 133A of the Act was conducted in the premises of the assessee. The managing partner, Shri R.

Ganeshan, in his statement during survey stated that all vouchers relating to labour charges are prepared by site supervisors and some to 1980/Chny/2024 :- 6 -: of the vouchers might have been misplaced and some of the vouchers might be self made, based on the expenses incurred by the site Supervisor. Hence, there will be increase/fluctuation in labour charges expenses claimed. He, therefore offered 10% of the labour charges as income for A.Y 2013-14 to 2019-20.

7.

The Ld AR has challenged the reopening of assessment, affirmed by Ld CIT(A). We do not find any merit in the submission of Ld AR as the the assessment has been reopened on the basis of finding of survey that some of the vouchers for labour charges was not available and accepted by the partner , therefore the A.O was justified to reopen assessment u/s. 147 of the Act.

8. As regards to merit, the A.O has made the addition only on the basis of statement of the managing partner , who has agreed for 10% of disallowance of labor expenses during survey .We note that the firm has not accepted the disallowances admitted by the partner as it did not include the disallowances in the return of income filed in response to notice u/s. 148 of the Act. The A.O has made the addition only on the basis of statement of the partner. However, after admitting that some of labour expenses are not fully vouched during survey, onus was on the assessee to submit all bill/vouchers in support of the to 1980/Chny/2024 :- 7 -: expenses claimed during assessment proceeding, which assessee has failed to discharge. We therefore hold that the AO was justified to make the disallowances. As regard to quantum of disallowances, assessee has shown net profit between 2.5% to 6.18% of gross receipt for A.Y 2013-14 to A. Y 2019-20 as under:

Assessment Gross Labour Net Profit Net profit Net profit year receipts Charges (in Rs.) ratio ratio after (in Rs.) before addition addition 2013-14 6,05,53,329 1,07,80,638 18,13,194 3.01% 4.80% 2014-15 10,68,13,303 3,74,41,710 33,11,210 3.10% 6.61% 2015-16 16,18,82,230 5,07,29,378 40,48,867 2.50% 5.63% 2016-17 31,30,81,445 13,82,99,882 1,10,16,460 3.52% 7.94% 2017-18 50,05,10,773 21,96,07,058 1,77,78,218 3.55% 7.94% 2018-19 45,89,75,164 6,24,93,442 1,83,99,015 4.01% 5.37% 2019-20 75,34,10,690 6,87,88,056 4,65,32,817 6.18% 6.99%

9.

The net profit ratio after disallowances of 10% labour expenses has gone up to 4.80% to 6.99% for A.Y 2013-14 to A.Y 2019-20.The Hon’ble Madras High Court in the case of K. Kannan vs. Assistant Commissioner of Income-tax, Circle-I in Tax Case (Appeal) Nos. 679 & 680 of 2013 in M.P. Nos. 1 of 2013 and 1 & 2 of 2013 dated 01.10.2013, has held the net profit of 5% of contract receipt in such business justifiable. We therefore, after considering the nature of business, gross receipts, labour expenses claimed, restrict the disallowances to 5% of labour expenses for A.Y 2003-04 to A.Y 2018- 19, which will result in net profit of approximately 5%. As regard to A.Y 2019-20, the assessee itself has shown net profit of Rs 6.18% in the to 1980/Chny/2024 :- 8 -: return of income, therefore no further disallowances is called for in A.Y 2019-20. Hence, the A.O is directed to compute disallowance accordingly.

10.

In the result, all the appeals filed by the assessee are partly allowed. Order pronounced on 18th October, 2024.

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