DINESHBHAI MOHANBHAI PATEL,SURAT vs. THE ASST. COMMISSIONER OF INCOME TAX, CIRCLE1(2) , SURAT

Succinct facts are that assessee is an individual and engaged in business of civil construction. The assessee filed his return of income on 26.11.2014, declaring total income of Rs.27,33,920/-. The case of assessee was selected for scrutiny and notice was issued u/s 143((2) on 24.09.2015. The notice u/s 142(1) of the Act was also issued by the assessing officer. In compliance thereto, the assessee filed written submission before the assessing officer. During the year under consideration, the assessee has paid Rs.98,03,030/- to Sengani Buildcon, the proprietary concern of Shri Pranay Patel. The same is reported in the 3CD report filed by the assessee. The assessee has not filed 3CEB report as the total transactions are below threshold for filing such report. At the outset the assessee was asked to submit the details of payments made to the M/s Sengani Buildcon and the comparison of the same with the market rates. When the assessee failed to do so, a summon u/s 131 was issued to Shri Pranay Patel, proprietor of M/s Sengani Builcon and son of the assessee. He was required to produce books that he relied upon to do day-to-day business and carry out estimation of profit.

The Assessing Officer noticed that the assessee or M/s Sengani Buildcon failed to submit any proof of services actually rendered to the assessee. In response to the summons, Shri Pranay Patel appeared but failed to submit any documentary evidences. He simply stated that he does not maintain any books of accounts. Therefore, the Assessing Officer

In response to the show cause notice, the assessee submitted his reply, vide letter dated 09.12.2016. The reply of the assessee is produced as under: “With reference to your above referred show cause notice, we submit herewith following document/information to justify the genuineness and reasonableness of the payment made M/s Sengani Buildcon. (1) Copy of IT return of Pranay D Patel prop. of M/s Sengani Buildcon. (2) Copy of service tax return of M/s Sengani Buildcon. (3) We have already submitted copies of all bills received from M/s Segani Buildcon as well as from other contractor M/s Aryan Construction for comparison with regard to rates paid for various work. (4) In addition to the above, we also submit herewith comparative figures of labour charges/exp. For FY 2012-13 and FY 2013-14. FY Turnover of Labour Labour construction charges/exp. charges./exp. In business terms of % to turnover 2012-13 4,10,09,619 1,23,96,991 30.23% 2013-14 9,90,53,830 2,39,12,633 24.14% It can be seen from the above that overall labour charges/exp in terms of percentage to total turnover for the FY 2013-14 is lower than labour charges / expm, for the FY 2012-13. We also reconfirm that labour charges

However, the assessing officer rejected the contention of the assessee and noted that the assessee has not brought anything new in record to prove that the amount paid is reasonable and wholly and exclusively for the purpose of business. The Sennagani Buildcon failed to provide any supporting documents in relation to his claim for the amount received by him from the assessee. It is pertinent to mention here that the case of Shri Pranay Patel is not audited. The only receipts that he has shown is from his father. Therefore, the Assessing officer noted that 8% of the deemed income on turnover of Rs.98,03,030/- is Rs.7,84,242/-, which may be reasonable. The Assessing Officer noted that Section 44AD is unambiguous as it allows a person to calculate the income @ 8% of the turnover. Shri Prany Patel has declared an income which is greater than the deemed income @ 8%. He has offered an amount of Rs.7,95,050/- as income. Now this determination of income requires some form of books and supporting documents. The assessee or his son Shri Pranay Patel failed to submit any supporting documents. The assessee in his reply to the show- cause notice has also submitted the Profit &Loss account of Shri Pranay Patel. The said Profit &Loss account is reproduced as follows. “P&L account of M/s Sengani Buildcon as on 31.03.14 Expenditure Income Labour charges 745426 Construction income 9803030 Service tax 2088583 Telephone expenses 21,120 Office expenses 24,855 Conveyance and travelling expenses 20,740 Printing & stationery 3,350 Vehicle expenses 48,960 Bank commission 1,652 Staff and worker welfare 34,980 Account fees 12,000 Depreciation 6,313 Net profit 7,95,050

In the absence of any books or any material that may prove that the services of the proprietary concern of the Son was taken, the claim of the assessee was rejected by the Assessing Officer. Hence, the assessee has simply decreased his tax liability by paying an amount of Rs.98,03,030 to his son. His son paid the tax as per 44AD and they both in turn escaped the taxation at Maximum Marginal Rate (MMR). The receipts shown were artificially kept low to avoid audit. Therefore, the books of the assessee were rejected u/s 145 of the Act due to the discrepancies in the payments made to related persons. The auditor has failed to establish the reasonableness of the payment and has written the column mechanically. Thus, the payment made was held by the Assessing Officer entirely bogus and disallowed Rs.98,03,030/-.

Aggrieved, by the order of ld CIT(A), the assessee is in further appeal before us.

Learned Counsel for the assessee submitted that Assessing Officer made addition at Rs.9,90,53,830/- after rejection of books of accounts. The assessee pleaded before the Assessing Officer that assessee had filed the return of income u/s 44AD of the Act therefore a suitable addition may be made in the hands of the assessee, however, Assessing Officer rejected the plea of the assessee and made 100% addition of the disputed amount of at Rs.9,90,53,830/-. On appeal, the ld CIT(A) restricted the addition at the rate of 8% of Rs.9,90,53,830/-, which comes to Rs.79,24,306/- by following the principle laid down under section 44AD of the Act. However, Ld Counsel contended that the assessee has already declared @ 3% profit on the disputed amount of Rs.9,90,53,830/- therefore if 8% addition is to be sustained on Rs.9,90,53,830/-, then ld CIT(A) would have made addition @ 5% on Rs.9,90,53,830/-, so that total addition should not go beyond 8% (5% + 3%). After sustaining the addition by ld CIT(A) at the rate of 8%, the total tax liability on the assessee comes at the rate of 11% (8% + 3%), which is higher than 8% (as per section 44AD of the Act). Therefore, ld Counsel contended that addition on Rs.9,90,53,830/- should

Alternatively, the Ld. Counsel for the assessee also argued that Assessing Officer did not find any defect in the books of accounts of the assessee. Therefore, Assessing Officer, as well as, Ld. CIT(A) ought not to have rejected the books of accounts of the assessee. The ld Counsel contended that payment was made on account of business exigency. Therefore, addition should not have been made. Moreover, the Assessing Officer has not given enough opportunity to assessee to represent his case. Therefore Ld. Counsel contended that addition made by the Assessing Officer should be deleted in toto.

On the other hand, Ld.Sr.DR for the Revenue submitted that assessee has not furnished any evidence regarding labour expenses. Neither labour register was furnished nor assessee has proved the expenses. The assessee has not brought on record anything to prove that the amount paid was reasonable and paid wholly and exclusively for the purpose of assessee’s business. The Ld. Sr-DR for the Revenue submitted that assessee has not produced any supporting evidence on the issue raised by him. It is also pertinent to mention that books of account in the case of Shri Pranay Patel is not audited and the only receipts that he has shown are from his father and he has shown @ 8% deemed income on his turnover of Rs.9,90,53,830/- which comes to Rs.79,24,306/-. The Ld. Sr-DR also pointed out that the books of account which were rejected by the Assessing Officer, and upheld the rejection by Ld. CIT(A), were on valid grounds and the estimation made by the NFAC/Ld. CIT(A) is not proper. Therefore, the addition made by the Assessing Officer may be confirmed.

However, so far estimation of profit, by following the provisions of Section 44AD of the Act is concerned, we note that Section 44AD of the Act prescribes the rate of 8%, of the total turnover/gross receipts of the assessee. The ld Counsel stated that the assessee has already declared @ 3% profit on the turnover / gross receipts, therefore, ld CIT(A) should sustained addition @ 5% only. If 8% addition is to be sustained on Rs.9,90,53,830/- (turnover), then ld CIT(A) would have made addition @ 5% on Rs.9,90,53,830/-, so that total addition should not go beyond 8% (5% + 3%). After sustaining the addition by ld CIT(A) at the rate of 8%, the total tax liability on the assessee comes at the rate of 11% (8% + 3%), which is higher than 8% (as per Sec. 44AD of the Act). Therefore, we are of the view that assessee`s lis should be remitted back to the file of the Assessing Officer to examine the fact that whether assessee had added 3% on Rs.9,90,53,830/- (turnover), and paid the taxes thereon. That is, addition on Rs.9,90,53,830/- should be made @ 5% on Rs.9,90,53,830/-, so as to achieve the total addition at the rate of 8% as per the provisions of Section 44AD of the Act. We note that whether assessee had added 3% on

In the result, the appeal filed by the assessee is partly allowed for statistical purposes in above terms.