DCIT, CIRCLE-2(1), HYDERABAD, HYDERABAD vs. KMC CONSTRUCTIONS LIMITED, HYDERABAD, HYDERABAD

We shall proceed to discuss the merits of the appeal Ground-wise. Ground No. 1 & 10 of Revenue appeal, are general in nature, requires no adjudication. Ground No. 2 of Revenue’s appeal and all the grounds of assessee’s appeal are interconnected and those are in respect of the rejection of books of accounts and determination of income of the assessee at 12.5% before depreciation by the learned CIT(A), stating that when the books of accounts are not rejected by the learned Assessing Officer, the learned CIT(A) is not justified in making estimation that too basing on the additional information furnished by the assessee without calling for the remand report from the learned Assessing Officer in violation of Rule 46A of the Income Tax Rules, 1962 (“the Rules”). According to the Revenue, the expenditure was proved to be bogus and, therefore, the direction of the learned CIT(A) to the learned Assessing Officer to estimate the income, cannot be sustained. We shall therefore, answer this issue with the following common discussion:

On a perusal of the impugned order, we find that the learned CIT(A) did not base his view as to the estimation of income on any fresh evidence produced by the assessee, but it was based on the consistent view taken in assessee’s own case for the earlier assessment years. For the sake of completeness, we reproduce the observations of the learned CIT(A) on this aspect,-

We, therefore, do not find any violation of Rule 46A of the Rules in this matter. Further, there is no denial of the fact that in assessee’s own case right from the year 1999-2000, income of the assessee has been determined by resorting to estimation and dealing with other additions made. This fact is evident from the orders of the Tribunal for earlier assessment years and more particularly in ITA No. 1627 to 1634/Hyd/2013 dated 02/04/2014 and ITA No. 33/Hyd/2017 and batch by order dated 25/08/2023. No change of circumstances warranting a different view is brough to our notice. Since the learned CIT(A) followed the binding precedents in resorting to estimation of the income of the assessee, we do not find anything illegality or irregularity in the findings of the learned CIT(A) on this aspect. Hence, Ground No. 2 of Revenue’s appeal is dismissed.

Turning to the grounds of assessee’s appeal, the issue that is directly and substantially canvassed by the assessee under all the grounds, is in respect of the rate of profit as estimated by the learned CIT(A). Learned AR submitted that this issue is squarely covered by the order dated 25/08/2023 of the Co-ordinate Bench of the Tribunal in assessee’s own case for the assessment years 2014-15 and 2015-16 in ITA Nos. 635 & 636/Hyd/2019. On a perusal of the record including the order cited by the

In view of the fact that the figures relating to the assessment year 2011-12 also fallen for consideration in the above order, while respectfully following the same, we follow the findings given therein and hold that estimation of profit at 11.5% as against 12.5% directed by the learned CIT(A) for this year will be fair and reasonable estimation. We, therefore, modify the order of the learned CIT(A) accordingly and direct the learned Assessing Officer to estimate the profit at 11.5% before depreciation on contract work executed by the assessee itself. With this, assessee’s appeal is accordingly allowed in part.

Now coming to Ground No. 3 and also the additional ground of Revenue’s appeal, it relates to disallowance of claim for deduction of Rs. 8,45,39,638/- under section 80-IA(4) of the Act. It was brough to the notice of the learned Assessing Officer that this issue was covered in assessee’s own case for the earlier assessment years, but the learned Assessing

Learned CIT(A) held that for the assessment years 2002-03 to 2007- 08 it was held that the assessee is entitled to the deduction under section 80-IA(4) of the Act, and it was confirmed by a Co-ordinate Bench of the Tribunal for assessment year 2008-09 and 2009-10. While following the common order dated 16/03/2012, in ITA No. 996/Hyd/2003 and batch and also the common order dated 28/10/2013, in ITA No. 1382 and 1383/Hyd/2012 learned CIT(A) allowed the claim of the assessee for deduction under section 80-IA(4) of the Act.

According to the learned DR, the assessee is only a works contractor and since the order of the ITAT is challenged before the Hon’ble High Court and such appeals are pending, the same may not be followed.

Learned AR submitted that all the works undertaken were considered at page Nos. 67 and 68 of the impugned order and the learned CIT(A) took a view that in the light of the decision of the Tribunal in assessee’s own case for the earlier assessment years since there is no change of circumstances either in the nature of development works undertaken by the assessee. He further submitted that the learned CIT(A) placed reliance on various decision and the Circular No. 4/2010 issued by the CBDT on 18/05/2010.

We have gone through the record in the light of the submissions made on either side. It could be seen that the issue is squarely covered by

Admittedly there is no change in the facts and circumstances of the case obtaining from the earlier assessment years. In these circumstances, we find it difficult to take a different view for this assessment year. We, therefore, do not find any illegality or irregularity in the order of learned CIT(A) following the binding precedent in the well-considered view of a Co- ordinate Bench of the Tribunal taken for the earlier assessment years by orders dated 16/03/2012 and 25/08/2023. Accordingly, we uphold the findings of the learned CIT(A) for this assessment year also and dismiss the Ground No. 3 of Revenue’s appeal.

Grounds No. 4, 8 and 9 of Revenue’s are interrelated. These grounds relate to the issue of disallowance of interest of Rs.9,54,48,642/- under section 14A of the Act read with Rule 8D of the Rules and also the disallowance of interest expense under section 36(1)(iii) of the Act at Rs. 8,38,75,714/-. According to the learned Assessing Officer, some of the borrowed funds were diverted to sister concerns and, therefore, such part

When the assessee appealed, learned CIT(A) found that the sister concerns are all joint ventures in which the assessee happens to be one of the constituents and forming of the joint venture is a prerequisite to carry out the works allotted by the NHAI, and, therefore, the investment that was made in accordance with the procedure laid down by the NHAI to obtain and execute it work is a business exigency. On this score, learned CIT(A) held that the investment so made towards the business activity of the assessee from out of the substantial own funds of the assessee, then the interest on the borrowings cannot be disallowed. In this process, learned CIT(A) followed the decision of the Hon’ble Apex Court in the case of S.A. Builders vs. CIT 288 ITR 1 (SC).

Learned DR challenged the findings of the learned CIT(A) on the ground that when the assessee advanced funds to the sister concerns without any interest and the assessee fails to establish that such advances were made from out of the own funds it is but natural to assume that the lent amounts were out of the borrowed funds and, therefore, the learned

Learned AR placed reliance on the observations of the learned CIT(A) and submitted that the learned CIT(A) made extensive investigation into the contract value and the works done in respect of the SPV projects and found as a matter of fact, that it is only to meet the business exigency with few more constituents, the assessee formed the SPV and for execution of the work entrusted by the Government, the funds were allocated to the constituents and, therefore, it is nothing but meeting business exigency.

On a perusal of record, we find that there is nothing to contradict the findings of the learned CIT(A) on this aspect. Learned CIT(A) on a comprehensive enquiry, found that the assessee had to associate with other concerns to form into a joint venture for obtaining and executing works of NHAI and after being successful bidder, when the works were allotted to the SPV in accordance with the rules framed by the NHAI, the assessee being a constituent of joint venture, had to invest amounts through the constituents to further the process of business activity.

In this particular situation, in the absence of any material to prove contrary, we find it difficult to reach a different conclusion than the one reached by the learned CIT(A). Certainly, the constitution of the SPV in terms of the rules of NHAI, obtaining contracts there from and to pump the funds to the constituents for execution of such work allotted to the constituents, all is part of the business exigency. We, therefore, do not find anything illegality or irregularity in the learned CIT(A) following the

Turning to Ground No. 5 of Revenue’s appeal, it relates to the taxing of the interest earned on FDs. On an examination of the trial balance of the assessee, learned Assessing Officer found that an amount of Rs. 2,88,53,061/- was shown towards interest on unsecured loans as other income category, but the same was not offered to tax. Learned Assessing Officer referred to the decision of the Co-ordinate Bench of the Tribunal in ITA Nos. 1247/Hyd/2012 and batch for the assessment year 2008-09 and 2009-10 and held that the interest income is income from other sources and accordingly brough it to tax.

Learned CIT(A) examined the details of the finance charges wherein a sum of Rs. 138,44,11,485/- was debited, reducing the said amount, as shown in schedule-16 of the final accounts. According to the learned CIT(A) since the amount received towards interest was reduced from the expenditure incurred, the same is not to be added by the learned Assessing Officer separately. Accordingly, learned CIT(A) directed the deletion of this addition.

Learned DR vehemently relied upon the findings of the learned Assessing Officer; whereas the learned AR submitted that this amount of interest has already been reduced from the interest payable by the assessee and only the balance is debited to the P&L Account and, therefore, it cannot be added again.

Next issue by way of Ground No. 6 of Revenue’s appeal that arises for our consideration is the disallowance of Rs. 19,56,840/- under section 40A(3) of the Act. According to the learned Assessing Officer, the payments comprised of this amount are cash payments in violation of section 40A(3) of the Act, and though the assessee submitted that these are petty expenses and site and office, but failed to substantiate the same with details to justify the same.

In appeal, learned CIT(A) found from the details furnished that the cash payments were made at sites which are far away from the urban areas for providing housing accommodation and other facilities to the workers at sites and, therefore, directed the deletion of the addition.

Learned DR placed reliance on the assessment order to submit that the cash payments were made at Allahabad site, Kurnool site and Kalyan

Learned AR submitted that when once the income is estimated, disallowance under section 40A(3) of the Act cannot be made. He further submitted that after making thorough enquiry only learned CIT(A) reached a factual conclusion that these payments were made at sites which are far away from the urban areas for the purpose of providing housing accommodation and other facilities to the workers at the site. He submits that without contradicting this finding with reference to any material it is not open for the Revenue to say that such payments are not justified.

It is the settled principle of law as laid down by the Hon’ble High Courts in the cases of CIT vs. Banwari Lal Banshidhar [1998] 229ITR229 (ALL.), Indwell Constructions vs. CIT [1998] 232 ITR 776 (Andhra Pradesh) and CIT vs. Smt. Santosh Jain [2007] 159 Taxman 392 (Punjab & Haryana) that when once income of assessee was computed by applying gross profit rate or by estimation, provisions of section 40A(3) could not be invoked. Apart from this, the order of the learned Assessing Officer does not spell out as to the distance of the sites from the urban areas of Allahabad, Kurnool etc., but going by the name of the site, learned Assessing Officer concluded that the payments in cash at such places is not justified. We have to keep it in mind that the name of the site is only for identification purpose, but it does not indicate anything about the distance between such site and the urban areas with which those are identified.

Learned CIT(A) recorded that on verification of the details he found that there were no banking facilities at the sites at which the cash

Ground No. 7 of Revenue’s appeal relates to the disallowance made by the learned Assessing Officer in respect of the business promotion expenses. In the assessment order, learned Assessing Officer noted that verification of account of business promotion expenses revealed that the assessee claimed an amount of Rs. 33,77,260/- as business development expenses which the learned Assessing Officer disallowed and made an addition to that effect.

In appeal, learned CIT(A) held that the said expenditure is not of suspicious nature and learned Assessing Officer did not deal with the explanation offered by the assessee to the effect that such expenditure was incurred by the directors and Head Officer staff, accompanying them to the sites. Learned CIT(A) further held that the income of the assessee is estimated by rejecting the books of accounts and, therefore, no further addition need be made.

Learned DR placed reliance on the assessment order; whereas learned AR submitted that as rightly observed by the learned CIT(A), this amount was incurred by the Directors of the company and the officers and staff, when they visited sites, the details of this expenditure are separately

There is no dispute that the details of the expenses to the tune of Rs. 33,77,260/- alone were disallowed by the learned Assessing Officer and allowed by the learned CIT(A). The figure mentioned in the Grounds of appeal is purely a typographical mistake. Assessee contended that this expenditure was met by the Directors, Officers and staff members at the time when they visited the sites and since it is connected to the business promotion of the assessee, the same is allowable. Learned Assessing Officer disallowed the same on the ground that no vouchers were produced for verification and the learned AR was unable to produce the same and, therefore, the justification for this expenditure is remained unverifiable.

Learned CIT(A) recorded that the assessee submitted before him that this expenditure was incurred in the process of visiting various sites by the Directors, Officers and staff members and since it is connected to the business promotion of the assessee, the same is allowable, and, therefore, the learned CIT(A) allowed the same. Further, learned CIT(A) recorded that when once the income is determined by resorting to the estimation by rejecting the books of accounts, no further addition need be made.

With the above discussion, appeal of Revenue shall stands dismissed.

In the result, the appeal of Revenue is dismissed, and the appeal of assessee is partly allowed.