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Income Tax Appellate Tribunal, SURAT BENCH, SURAT
Before: SHRI PAWAN SINGH, JM & DR. A. L. SAINI, AM
आदेश / ORDER PER DR. A. L. SAINI, AM: Captioned appeal filed by the assessee, pertaining to Assessment Year (AY) 2014-15, is directed against the order passed by the National Faceless Appeal Centre, Delhi (in short “NFAC/ld. CIT(A)”], dated 22.05.2023, which in turn arises out of an assessment order passed by the Assessing Officer u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 23.12.2016. 2. Grounds of appeal
raised by the assessee are as follows: “1. The learned CIT(A), NFAC, Delhi has grossly erred in allowing the appellant’s appeal in part only & upholding the impugned addition of Rs.98,03,030/- to the amount of Rs.51,90,386/- by estimating appellant’s income @ 8% of gross turnover of Rs.9,90,53,830/-.
2. Both the learned CIT(A) & the AO have miserably failed to understand & appreciate that calling for documentary evidences from the impugned sub contract enjoying absolute immuring / exemption from maintenance from books records etc., u/s 44AD is ultra vires and illegal.
3. The disallowances of impugned labour expenses u/s 40A(2)(b) without establishing the same to be excessive & unreasonable & inspite of the appellant
AY.14-15 Sh. Dineshbhai M Patel heavy submitted comparative invoice & also huge reduction in aggregate labour expenses. As compared to proceeding year is unwarranted, unjustified & illegal. 4. The Appellant craves leave to add to, alter or amend the present grounds of Appeal.”
3. 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.
4. 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 AY.14-15 Sh. Dineshbhai M Patel issued a final show cause notice dated 05.12.2016 to the assessee, which is reproduced as under: “During the year, you have made payment of Rs.98 Lacs to the proprietor concern of your son. Since, you have not submitted any documents to justify the genuineness and reasonableness of the payment made, a summons of u/s 131 of the IT Act, 1961 was issued to Shri Pranay D Patel in which he was required to produce the books of account and other documents. He has failed to submit the books of account and other documents which could prove the genuineness and reasonableness of the payment received from his father.
After this the Authorized representative was continuously and regularly perused to submit the books of accounts and documents related to the said payment.
In the absence of compliance and relevant document that could prove the genuineness and reasonableness of payment made to Shri Pranay D Patel, you are require to show cause why the amount of payment made to him of Rs.98 Lacs shall not be disallowed and added to the total income during the year.
5. Hearing in your case is fixed on 09/12/2016 at 12.30 pm 6. Please treat this show cause notice as full and final opportunity and no further opportunity shall be provided in any condition the case shall be decided u/s 144 based on material available on record.”
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
AY.14-15 Sh. Dineshbhai M Patel paid to M/s Sengani Buildcon is genuine business expenditure and also reasonable considering the work done by them.”
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
AY.14-15 Sh. Dineshbhai M Patel 7. The Assessing Officer, on perusal of above profit & loss account, noticed that Shri Pranay Patel has claimed to have expanded Rs.77,45,426 for labour charges. No labour register or proof of expenses are available with him. He is also claimed to have paid Rs.12000 for account fees. In that case basic accounts have to be maintained by him for the fees paid. It is again reiterated that by basic books and documents, the specified books are not intended. It simply means the books and documents which Shri Pranay Patel, has relied upon to make this profit & loss account. Further, in the Service Tax Return of Shri Pranay Patel, he has clearly admitted that the information provided therein is in accordance with the “record and books maintained by him”. However, no such records or books were submitted before the Assessing Officer. To make the requirements of documents further clear to the assessee; the following order sheet entry was made on the date of submissions by the assessee “The AR is again apprised of the fact that in the absence of supporting documents, books etc., on the part of Shri Pranay Patel, the genuineness and reasonableness of the payment mode is not established by the assessee.”
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/-.
AY.14-15 Sh. Dineshbhai M Patel 9. Aggrieved by the order of the Assessing Officer, the assessee carried the matter in appeal before Ld. CIT(A), who has partly confirmed the action of the Assessing Officer observing as follows: “…….6.3 However, as the Ld AO has rejected the assessee’s books of account is correct but to my considerate view, he should have estimated the income taking the que from section 44AD and estimated it 8% which would have been justified and reasonable instead of adding the full amount which gives rise to income more than 8%. Thus, in my considerate opinion to meet the end of justice the income of the appellant is taken at Rs.79,24,306/- which is 8% of his civil contract work of Rs.9,90,53,830/-. The appellant gets relief accordingly on the income from business of civil contract work. GroundNo.1 is upheld, and ground No.2 is partly allowed.”
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
AY.14-15 Sh. Dineshbhai M Patel 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.
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.
AY.14-15 Sh. Dineshbhai M Patel 14. We have heard both the parties and perused the materials available on record. We note that assessee has not submitted the required details of labour charges or expenses in spite of various notices issued by the Assessing Officer. No labour charges details were submitted before the Assessing Officer. The assessee had not proved the expenses, as genuine. 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. Therefore, the book results were rejected by the Assessing Officer. Hence, we confirm the action of the Assessing Officer as well as NFAC/Ld. CIT(A) to reject the books of accounts. Hence, this ground of assesee’s appeal is dismissed.
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 AY.14-15 Sh. Dineshbhai M Patel Rs.9,90,53,830/- (turnover), and paid the taxes thereon, has not been examined by the lower authorities. Therefore, we remit this issue back to the file of the Assessing Officer to examine whether assessee had added 3% on Rs.9,90,53,830/- (turnover), and paid the taxes thereon, and if the Assessing Officer finds that assessee had already offered 3% on Rs.9,90,53,830/- (turnover), then in that situation, the Assessing Officer should make estimated addition @ 5% on Rs.9,90,53,830/- (turnover). Therefore, assessee`s appeal is allowed for statistical purposes in above terms.
In the result, the appeal filed by the assessee is partly allowed for statistical purposes in above terms.
Order is pronounced in the open court on 11/12/2022 by placing the result on the Notice Board as per Rule 34(5) of the Income Tax (Appellate Tribunal) Rule 1963.