KOLLI SUBRAHMANYAM,VIJAYAWADA vs. THE INCOME TAX OFFICER, WARD-2(2), , VIJAYAWADA

IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH, VISAKHAPATNAM (Through web-based video conferencing platform) BEFORE SHRI DUVVURU R L REDDY, HON’BLE JUDICIAL MEMBER & SHRI S. BALAKRISHNAN, HON'BLE ACCOUNTANT MEMBER I.T.A. No. 134/VIZ/2020 (Asst. Year : 2007-08)

Kolli Subrahmanyam, Vs. Income Tax Officer 40-12-3/3, Flat No.502, Ward-2(2), Vijayawada. Shri Bhaskara Residency, Patamata Lanka, Vijayawada. PAN No. AJWPK 6488 R (Appellant) (Respondent)

Assessee by : None. Department by : Shri Sankar Pandi, Sr.DR Date of hearing : 15/02/2022. Date of pronouncement : 09/03/2022.

O R D E R PER S. BALAKRISHNAN, ACCOUNTANT MEMBER:

This appeal is filed by the assessee against the order of Commissioner of Income Tax (Appeals) [for short, “CIT(A)”], Vijayawada in appeal No.334/CIT(A)/VJA/14-15, dated 24/12/2019 for the A.Y. 2007-08 arising out of order passed by the AO u/sec. 144 r.w.s. 263 of the Income Tax Act, 1961 (hereinafter referred to as "Act").

2 ITA No. 134/VIZ/2020 (Kolli Subrahmanyam) “1. The order of the ld.CIT(A) is erroneous to the extent it is prejudicial to the appellant. 2. The ld.CIT(A) erred in confirming the addition of Rs. 33,99,322/- out of Rs. 35,79,539/- made by the AO disbelieving the explanation for increase in the capital of the appellant. 3. The ld.CIT(A) erred in confirming the action of the AO in rejecting the books of account and in estimating the profit at 5% of the gross contract receipts net of depreciation. 4. Any other ground that may be urged at the time of hearing.” 3. Brief facts of the case are that the assessee is an individual engaged in the business of execution of civil contracts, filed his return of income for the A.Y. 2007-08 on 08/11/2007 admitting total income of Rs. 3,92,960/-. The case was selected for scrutiny and the assessment was completed u/sec. 143(3) on 02/12/2009 determining the total income of Rs. 18,00,210/-. The assessment proceedings have been reopened by issue of notice u/sec. 143(2) dated 14/02/2011 with reference to the proceedings of the CIT, Vijayawada u/sec. 263 of the Act dated 18/11/2011. In pursuance to the order u/sec. 263 there was no compliance by the assessee to the notices issued and serviced as below:-

Notice u/s. Date of notice Date of service of notice 143(2) 14/12/2011 16/12/2011 142(1) 01/08/2012 10/08/2012 142(1) 02/11/2012 10/11/2012 131 19/12/2012 19/12/2012 Show cause notice 31/01/2013 02/02/2013

3 ITA No. 134/VIZ/2020 (Kolli Subrahmanyam) Since the assessee has not responded to the notices, assessment was completed by the AO ex-parte by invoking the provisions of section 144 r.w.s. 263 of the Act. In the assessment order, the AO rejected the books of account u/s 145(2) and estimated the contracts business income at 8% of the gross receipts net of depreciation, which resulted in addition of Rs. 25,03,724/-. Further, the AO made addition of Rs. 35,79,539/- towards unexplained increase in the capital account of the assessee and addition of Rs.22,45,535/- towards unexplained sundry creditors.

4 ITA No. 134/VIZ/2020 (Kolli Subrahmanyam) in the revision order is an open direction to the AO to redo the assessment de-novo after duly examining the issues pointed out by the CIT and it was open to the AO to examine the issues on merits as per the provisions of the Act. Therefore the ld CIT(A) took the case for adjudication.

The ld.CIT(A) based on the written submissions furnished by the assessee and also considering the petition for admission of additional evidence believed that there is a reasonable cause for failure of the assessee in furnishing the relevant evidences during the course of assessment proceedings, the ld.CIT(A) admitted the evidence under Rule 46A. The ld.CIT(A) remanded the matter back to the AO on 14/02/2019 for examination of evidences by AO. The AO submitted his remand report vide letter dated 18/03/2019 rejecting the additional evidences furnished by the assessee.

The assessee was again provided an opportunity by ld CIT(A) by letter dt 08/04/2019 to furnish a rejoinder, if any to the observations of the AO in the remand report. Subsequently, the assessee filed a rejoinder vide written submission dated 07/08/2019 stating that he will produce the evidences with respect loan creditors, before the AO, if he will be provided one more opportunity to do so. The ld CIT(A) requested the AO vide letter dt 08/08/2019 to provide an opportunity to the assessee to produce the loan creditors for necessary examination and furnish a remand report regarding the genuineness of the loan creditors. The AO submitted the remand report on 12/09/2019, which is reproduced below:

”2. Sri Kolli Subrahmanyam (herein after called 'the assessee')

5 ITA No. 134/VIZ/2020 (Kolli Subrahmanyam) was engaged in execution of civil contract works. The assessment for the assessment year 2007-08 was completed u/s. 144 r.W.5.263 of the Income Tax Act, 1961 on 31.03.2013 determining the total income at Ps 87,20,758/- by estimating the profit from business at 8% of contract receipts and also making additions towards unexplained capital investment and, unproven sundry creditors. The assessment was completed ex-parte u/s. 144 r. w. s.263 of the Act as there was no response from the assessee and there are no details / evidences / proper explanation from the assessee. 3. The CIT(A) has called for a remand report vide letter dated 14,02.2019, on additional evidences furnished by the assessee before the CIT(A) with regard to the additions towards unexplained increase in capital account of the assessee amounting to Rs.35,79,539/-. The contention of the assessee is that the assessee has obtained loans from the following persons and invested the same in his business: a. Sri K.Gopala Rao .. Rs.9 lakhs b. Sri Kamaraju V.Prasad .. Rs.8 lakhs c. Sri Gumma Srinivasa Rao .. Rs.5 lakhs d. Sri Putti Sambasiva Rao .. Rs.4 lakhs. e. Sri Bhashyam Murali Krishna Mohana Rao .. Rs.5 Iakhs Along with the written submissions, the assessee - has also filed notarized affidavits from the above persons along with copies of pattadar passbooks pertaining to the above person. Summons were issued by the then A 0 to the above mentioned persons and in response except Sri Kohl Gopala Rao, none appeared nor furnished any information before the then Assessing Officer. The AO recorded sworn deposition from Sri K.Gopala Rao and this office has submitted remand report on 18-03-2019. With regard to the loan creditor, Sri Kamaraju V.Prasad, Visakhapatnam, it was stated by the AO that the assessee has submitted a forged documents in respect of Sri Kamaraju V.Prasad Gollapalli. The CIT(A), Vijayawada vide letter dated 08-08-2019 has directed the AO to furnish a remand report regarding the genuineness of the four loan creditors after examination, viz., Sri Gumma - Srinivasa Rao, Sri Putti Sambasiva Rao, Sri Bhash yam Murali Krishna Mohan Rao and Sri Kamaraju V.Prasad. As per the directions of the Ld. CIT(A), Vijaya wada, a letter has been issued to the assessee on 09-08-2019, requesting him to produce the loan creditors along with their identity proof and

6 ITA No. 134/VIZ/2020 (Kolli Subrahmanyam) documentary evidence with regard to the loans given by them by 19-08-2019. In response, the assessee could produce only two loan creditors, viz., Sri Gumma Srinivasa Ran- and Sri Putti Sambasiva Rao on 26-08-2019. Statements have been recorded from them. Though sufficient opportunity has been given to the assessee to produce all the 5 creditors, he could not produce the other three creditors "Sri Gumma Srinivasarao in his statement submitted that he is an agriculturalist having 10.44 acres and he took tease of 8 acres of agricultural land from his father and he is growing crops of red chilli and cotton, sale of milk and deriving net agricultural income of Rs. 8,00,000/- p.a. He further informed that he has given an amount of Rs.5,00,000/- to Sri Kolli Subrahman yam, the assessee, in cash to invest as a partner for entering into real-estate business. He stated that he has kept the money, which was received on sale of agricultural produce with him and out of the same, he has given it. It is confirmed that there are no cash receipts / promissory notes with regard to the said transaction and out of faith in assessee only he has given the amount. "Sri Putti Sambasvarao in his statement submitted that he is an agriculturalist having 9.19 acres, his wife is having 2 acres of agricultural land and he took lease of 16 acres of agricultural land from his sister and he is growing crops of red-chilli and cotton, deriving net agricultural income of Rs. 8,00,000/- p.a. He further informed that he has- given air amount of Rs.4,00,000/- to Sri Kolli Subrahman yam, the assessee, in cash to invest as a partner for entering into real-estate business. He stated that he has kept the money, which was received on sale of agricultural produce with him and out of the same, he has given it. It is confirmed that there are no cash receipts / promissory notes with regard to the said transaction and out of faith in assessee only he has given the amount. In this connection, it is submitted that on verification of the additional grounds submitted by the assessee before the Ld.CIT(A) on 23-06-2011, it is noticed that at page No.2 of the written submissions it was clearly mentioned by the assessee that" the grounds 4 & 5 are against the addition made by the Assessing Officer of Rs.35,79,539/- on the ground that there was an increase in the capita! account. It is humbly submitted that the appellant has obtained the amounts from the above persons as loans and invested the same in the business as on the first day of the year. The loans were shown as capital by crediting the same to the capital account."

7 ITA No. 134/VIZ/2020 (Kolli Subrahmanyam)

From the above it is clear that the as in his written submissions made before the Ld.CIT(A) has stated the amount said to have been received from the creditors as LOANS, whereas, the two creditors, who appeared before the undersigned. categorically admitted in their statements that they have given the amount to the assessee Sri Kolli Subrahmanyam with a view to invest the amount as a partner in the new real estate business, which is yet to be started by them. Hence, it is an afterthought and the explanation of the assessee cannot be accepted. It is further submitted that with regard to the two loan creditors, viz., Sri Gumina Srinivasa Ran and Sri Putti Sambasiva Rao, the main aspects for accepting the loan as genuine, 1) identity 2) Genuineness and 3) Credit worthiness of the creditor are to be verified. In this case only two aspects have been satisfied, i.e., identity and creditworthiness of the creditor were only proved and the genuineness of the transaction was not proved in the absence of any documentary evidence since the said loan creditors have given cash to the assessee. The assessee filed a letter on 06-09-2019, requesting further time till 09-09-2019 to produce the other two loan creditors, viz., Kamraju V Prasad and Bhashyam Murali. However, the assessee could not produce them though sufficient time was given. It is further submitted that during the course of scrutiny proceedings also, the assessee was never denied to produce the requisite information. Though the notices issued from time to time by this office were duly served on the assessee and sufficient opportunity was afforded, the assessee had not chose to comply to the notices. In these circumstances, the additional evidence produced by the assessee cannot be admitted under rule 46A of the I.T.Rules.” The assessee was once again provided an opportunity by ld CIT(A) by letter dt 13/09/2019 to furnish a rejoinder, if any to the observations of the AO in the remand report. Subsequently, the assessee filed a rejoinder vide written submission dated 23/09/2019 which is reproduced below:

“In continuation of the submissions made earlier, the appellant may be permitted to submit the following further explanation.

8 ITA No. 134/VIZ/2020 (Kolli Subrahmanyam) In the Remand Report dated 18.03.2019, the Assessing Officer referred to the amount taken from Sri K. Gopala Rao. In response to the summons issued u/s 131 of the I.T.Act, the appellant produced Sri K. Gopala Rao and statement was recorded. According to the Assessing Officer, Sri K. Gopala Ran stated that he has got agricultural income and from out of the savings, he has advanced Rs. 9 lakhs. The Assessing Officer in the remand report mentioned that for the following reasons, the claim of the appellant cannot be accepted. a) Sri K.Gopala Ran is having bank loan with the Union Bank of India and the amounts were not paid. b) His children studied higher education i.e. MBA and M. Tech., and, therefore, there is no possibility for having savings. c) It is also mentioned that his daughter was married in the year 2007- 2008. Therefore, the Assessing Officer is of the view that there is no possibility for Sri K. Gopala Rao to have given any amount of advance to the appellant. In this regard, it is submitted that Sri K.Gopala Rao was prOduced before the Assessing Officer. He stated clearly that he has advanced the amount of Rs. 10. lakhs. The fact that Sri K.Gopala Rao has got his children educated and got his daughter married clearly shows his capacity to invest the amount. The marriage of his daughter was after the loan was given during the financial year 2006-07. Further, in so far as the education of his son is concerned, it is a payment made regularly in installments and the expenditure would not be in a lump sum. Therefore, the apprehension of the Assessing Officer is unjust If the facts obtained by the Assessing Officer are adopted, it would be clear that Sri K.Gopala Rao had sufficient sources required for payment of the amount. During the course of further hearing, the appellant produced Sri Gumma Srinivasa Rao. He has stated that he is the owner of 10.44 acres of agricultural land and he has taken 8 acres of agricultural land on lease He stated that he has grown crops like red chillies, cotton etc He also stated that he has got dairy and derived income on sale of milk. The total of his annual income, according to him, is Ps.8 lakhs. The Assessing Officer also did not have any doubt about his income. He paid an amount of P5.5 lakhs to the appellant. Therefore, the appellant proved the genuineness of the person as he was produced before the Assessing Officer. He has got the

9 ITA No. 134/VIZ/2020 (Kolli Subrahmanyam) sources of investment of the money and he has confirmed the fact that he has invested the money. In the circumstances, the amount of Rs.5 lakhs is to be treated as genuine. The appellant also produced one Sri Putti Sambasiva Rao. He has stated that he owns9. 19 acres for himself and 2 acres of agricultural land owned by his wife He stated that he cultivated 16 acres of agricultural land belonging to his sister that his agricultural income was Ps. 8 lakhs per annum He accepted that he has given amount of Rs.4 lakhs from out of his income It seems that the said person stated that the investment was made to join the business of real estate with the appellant and that such business did not commence The appellant is in the business of construction The Assessing Officer doubts part of the statement of Sri Putti Sambasiva Rao In this regard it is submitted that the person who has given the advance is available He has the sources for investment. He appeared before the Assessing Officer. He deposed that he has given the amount and therefore, all the factors mentioned in Sec 68 of the I T Act are satisfied by the appellant. The appellant having produced three of the persons required time for production of another two persons which was not allowed by the Assessing Officer. In so far as the amount of Ps. 9 lakhs received from Sri K.Gopala Ra Rs.5 lakhs received from Sri Gumma Srnivasa Rao and Rs.4 lakhs received from Sri Putti Sambasiva Rao are concerned, it is clear that they appeared before the Assessing Officer. All of them have stated that they have given the advances and also stated the source from where the amounts were invested. In the circumstances, the sources from these persons may kindly be accepted. In so far as the balance of two persons i.e. Sri Kamaraju V. Prasad and Sri Bhashyam Murali Krishna Mohana Rao are concerned, the appellant already filed the - affidavits before the Commissioner of Income Tax (Appeals) and the Assessing Officer did not bring on record any substantive evidence to reject the claim. Therefore, the addition of Rs.35, 79,539/- made by the Assessing Officer may kindly be deleted.” The assessee also further submitted a written submission on 26/09/2019 in continuation to the rejoinder furnished on 23/09/2019, which is reproduced below:

“In continuation of the submissions made during the earlier

10 ITA No. 134/VIZ/2020 (Kolli Subrahmanyam) hearing, the appellant may be permitted to submit the following further explanation. Ground Nos.4 and 5 are with regard to the addition of Rs. 35,79,5391- made by the Assessing Officer on the ground that there was an increase in the capital of the appellant without any source of income. In this regard, the appellant submits as under: The amount of Ps.38,66,970/- shown in the books as capital as on 31.0.3.2007 consists of the following amounts: a) Opening balance i.e. the closing balance for the financial year 2005-06 of Rs.2,87,378/- b) Profit -for the year under consideration as per the profit' and loss account of Rs. 4,20,217/- d) As submitted in the earlier written submissions, the appellant received credits from various persons personally and introduced the same as capital of Rs.31,.00,000/. e) As submitted 'during the course of assessment proceedings, the appellant inherited agricultural lands admeasuring Ac.2.86 cents situated at Kishkindapalem, Guntur District. The income derived from the said agricultural lands amounted to Rs.1,00,000/- out of which an amount of Rs.,60, 000/- was introduced as capital. e) The appellant also inherited 1/4/h share in the cinema hall situated at the same, place. The, above amounts have directly been taken to the capital account. The appellant already submitted the explanation 'with reference to Rs. 31,00,000/-. It is further- submitted that in so far as the amount of Rs.31 lakhs is concerned, it is an addition on account of increase in the capital. The Assessing Officer, in fact, rejected: the books of account based on which the capital account is taken into consideration. The Assessing Officer estimated the net income from contracts at 8%. The appellant submitted a separate explanation as to why estimation of 8% is not justified The Assessing Officer, in the assessment order, made an addition on account of estimation at Rs.25,03,724/-. This percentage is not correctly worked out as the appellant undertaken the works on sub contract basis and in the sub contract works the normal rate of

11 ITA No. 134/VIZ/2020 (Kolli Subrahmanyam) profit is 5% and not 8%. The appellant also cited-some of the decisions in this regard. Even when an estimation at 5% of the receipts is made, the Assessing Officer is not justified in separately adding the capital investment based on the same set of books of account which were rejected by him. The appellant humbly submits that no addition on account of unexplained capital investment should have been made by the Assessing Officer particularly when the appellant is able to explain the receipt and when the books of account are rejected. It is further submitted that in any event of the lion Hon'ble Commissioner of Income Tax (Appeals) is not accepting the explanation for the credits, the appellant submits that the addition made on estimation of income may kindly be telescoped to the cash credits introduced as above. The credits i.e. increase in capital to this extent may kindly be reduced. In view of the above, the appellant requests the Hon'ble Commissioner of Income Tax (Appeals) to kindly pass appropriate orders in the matter.”

Considering the remand reports submitted by the AO and the rejoinders furnished by the assessee, the ld.CIT(A) while passing an order u/sec. 144 r.w.s. 263 of the Act, allowed a sum of Rs.1,80,217/- from the additions made to the capital account for Rs.35,79,539/-. The ld.CIT(A) relying on various decisions of the Hon'ble Supreme Court and the High Courts concluded that since the assessee is a sub-contractor, net income is estimated at 5% of the gross sub-contract receipts net of depreciation. He relied on the decision of ITAT, Hyderabad Bench in the case of C. Eswara Reddy & Co. Vs. ACIT in ITA Nos.668 to 670/Hyd/2009 vide order dated 31/01/2011.

12 ITA No. 134/VIZ/2020 (Kolli Subrahmanyam) accounted as capital of the assessee in his balance sheet, inspite of various opportunities provided by ld CIT(A). He also argued that the entire amount of Rs. 31,00,000/- was taken by way of cash from five parties as listed below:-

1 Sri K. Gopala Rao Rs. 9 lakhs 2 Sri Kamaraju V. Prasad Rs. 8 lakhs 3 Sri Gumma Srinivasa Rao Rs. 5 lakhs 4 Sri Putti Sambasiva Rao Rs. 4 lakhs 5 Sri Bhashyam Murali Krishna Rs. 5 lakhs Mohanarao Total Rs. 31 lakhs

The assessee failed to explain the source of cash given by above parties, to the satisfaction of the AO. The ld DR stated that on the directions of ld.CIT(A) the AO has made various enquiries regarding the loan given by above five parties. Mr. G.Srinivasa Rao and Mr. P.Sambasiva Rao failed to respond to the summons issued u/sec. 131 of the Act by the AO. The assessee failed to produce the two creditors namely Sri B. Murali Krishna Mohana Rao and Sri K.V. Prasad during the course of remand proceedings. Out of them, Sri K.V. Prasad responded to the notice issued u/sec. 133(6) by the AO and later informed the AO that the signature on the notarized affidavit purportedly given by him is not his signature and that the contents of the notarized affidavit are not true. The ld DR also stated that ld.CIT(A) has not accepted the cash loans and treated the same as unexplained cash credits u/sec. 68 of the Act.

13 ITA No. 134/VIZ/2020 (Kolli Subrahmanyam) With respect to Ground No.2, the ld CIT(A) held that the increase in the capital account to the extent of Rs 31,00,000/- remains unexplained and the same is liable to treated as unexplained cash credits u/s 68 of the Act. We note from the orders of the authorities below that the assessee has been provided numerous opportunities but the assessee has failed to prove the genuineness of the cash credits to the satisfaction of the AO. In the case of Mangilal Jain Vs. ITO (315 ITR 105) the Hon'ble Madras High Court held as under:-

“16. In all, the result of inquiries carried out by the department should reveal and satisfy transparently all parameters of section 68, concurrently. In the present case, the finding of fact is to the effect that neither the creditworthiness nor genuineness of the parties has been established by the assessee...... The appellant however failed to establish the genuineness of the cash contributions as well as the capacity of the persons to have made such contributions in the first place. The findings of the fact arrived at by the tribunal are accepted and nothing has been placed on record to show that they are perverse.” Respectfully following the decision of the Hon'ble Madras High Court, and considering the facts that the assessee has not established the creditworthiness and genuineness of the transaction to the satisfaction of the AO, we find no infirmity in the order passed by the ld.CIT(A) and uphold the order of the ld.CIT(A), and ground No 2 of the assessee is dismissed.

With respect to ground No.3, the ld.CIT(A) has rejected the books of account of the assessee and has estimated the income at 5% of gross receipts, net of depreciation, since the assessee is a sub-contractor, by relying on the decision of ITAT, Hyderabad bench in the case of C.Eswara Reddy & Co. (supra). Respectfully following

14 ITA No. 134/VIZ/2020 (Kolli Subrahmanyam) the decision of the coordinate bench, we find no infirmity in the order of ld.CIT(A) and therefore uphold the order of the ld CIT(A), and consequently this ground of the assessee is dismissed.

Ground Nos. 1 and 4 are general in nature and need not be adjudicated.

Order Pronounced in open Court on this 09th day of March, 2022.

Sd/- Sd/- (DUVVURU R L REDDY) (S. BALAKRISHNAN) Judicial Member Accountant Member

Dated: 09th March, 2022. vr/- Copy to: 1. The Assessee – Kolli Subrahmanyam, 40-12-3/3, Flat No.502, Shri Bhaskara Residency, Patamata Lanka, Vijayawada. 2. The Revenue – ITO,Ward-2(2), Vijayawada. 3. The Pr.CIT, Vijayawada. 4. The CIT(A), Vijayawada. 5. The D.R., Visakhapatnam. 6. Guard file. By order

Sr. Private Secretary, ITAT, Visakhapatnam.