Case Law Details
ACIT Vs Vardha Infra Ltd. (ITAT Jodhpur)
ITAT Jodhpur held that if the books of accounts are rejected, and net profit is estimated by application of net profit rate, there cannot be again addition on account of any disallowance based on the same set of books of accounts. Thus, addition u/s. 40(a)(ia) set aside.
Facts- It was found that during the year, the assessee has itself disallowed a sum of Rs 13,87,72,635/- u/s 40(a)(ia) of the Income-tax Act, 1961. This shows that the assessee violated the provisions of Section 40(a)(ia) by not deducting tax on payment of Rs. 46,25,75,450/-. The books of accounts as well as ledger account of the parties and details of work carried out by them has not been furnished by the assessee. In absence of which, it is not clear whether such payment was actually made by the assessee for any type of work sublet or carried out by them. By disallowing 30% of the total expenditure of Rs. 46,25,75,450/-, the assessee had actually enhanced its expenditure by 70%, as the same might not have been incurred / paid by the assessee at all. Considering these facts as observed by the ld. AO it was evident that the book results declared by the assessee suffers from various defects and deserves to be rejected by invoking provisions of 145(3) of the Act. While holding so ld. AO also noted that in the immediately preceding i.e. A. Y. 2016-17 assessment was completed u/s 143(3) and on account of assessee’s failure to prove the authenticity of books of account, book results were rejected u/s 145(3) and NP rate of 7.23% was applied as against negative NP rate of 6.97% shown by the assessee-company.
CIT(A) upheld the rejection of books and further directed to estimate profit before depreciation @ 10.32%. Being aggrieved, the present appeal is filed.
Conclusion- Held that if the books of accounts are rejected, and net profit is estimated by application of net profit rate, there cannot be again addition on account of any disallowance based on the same set of books of accounts. Here we note that the books of accounts were rejected, and net profit rate was applied. Thus, having accepted the fact of rejection of book results making separate addition from the same set of books is incorrect. The issue raised in this year also prevailed in the earlier year wherein no separate addition were made in relation to payments for default of section 40a(ia) while estimating the income, even by the AO himself. Thus, taking a different stand in the current year is not only bad in law but is also unjustified on the facts. Thus, when income is being estimated, no addition on account of section 40(a)(ia) be made.
FULL TEXT OF THE ORDER OF ITAT JODHPUR
By way of the present appeal the revenue challenges the order of the National Faceless Appeal Centre [ for short CIT(A) ] dated 18-01-2024, for assessment year 2017-18. That order was passed by ld. CIT(A) because the assessee challenged the order of the assessment passed against him by ACIT, Circle-3, Jodhpur [ for short AO] on 28.12.2019 as per provision of section 143(3) of the Income Tax Act [ for short Act ].
2. The grounds of following raised by the revenue in this appeal reads as follows:
“1. Whether in the facts and circumstances of the case, the Id. CIT(A) is justified in estimating net profit @0.11% and ignoring that the AO has categorically held that 70% of expenses Rs. 46,25,75,450/- not subject to TDS are not genuine and this disallowance of Rs. 32,38,02,815/-(70% of 46,25,75,450/-) was included in estimated addition by applying N.P. rate of 10.32%,
2. Whether in the facts and circumstances of the case, the Id. CIT(A) is justified in deleting addition of Rs. 13,87,72,635/- made u/s 40(a)(ia) which was disallowed by assesse itself and it should not have been made part of estimation of Net Profit.
3. Whether in the facts and circumstances of the case, the Id. CIT(A) is justified in estimating net profit @0.11% and not separately considering the disallowance u/s 40(a)(ia) of Rs. 13,87,72,635/- and disallowance of Rs. 32,38,02,815/-being non genuine expenses and accordingly whether the Id. CIT(A) is justified in relying upon the judgement of Hon’ble ITAT and High Court in the case of assesse for earlier assessment year when the facts of the case are distinguishable.
4. Whether in the facts and circumstances of the case, the Id. CIT(A) is justified in excluding amount of Rs. 1,72,77,91,273/- from turnover of the assesse for determining GP 29.29% whereas the above amount was shown by assesse itself in its ITR under the had “other income” in P&L account so it is part of business receipts along with amount of Rs. 2,73,93,10,472/- from revenue from operations shown by assessee. Whether the Id CIT(A) is justified in treating this amount as un- accrued income when the assessee itself has shown the same as part of income in its ITR.
5. Whether in the facts and circumstances of the case, the Id. CIT(A) is justified in excluding amount of Rs. 73,98,982/- from turnover of the assessee for determining GP @ 29.29% when the assessee failed in the appellate proceedings to explain the difference in amount shown in form 26AS and amount credited in books of accounts in the cases of M/s Rajasthan State Road Development and Construction Corporation Ltd. (difference of Rs. 71,98,207/- and M/s JMC Projects India Ltd. (difference of Rs. 2,56,778/-).
6. That the tax effect involved in this case is above the limit laid down in Circular No. 17/2019 dated 08.08.2019 issued by the CBDT, (Judicial Section) New Delhi.” That the appellant reserves its right to add, amend or alter the ground(s) of appeal on or before the date, the appeal is finally heard.”
3. The brief facts related to this case are that the assessee-company e-filed its return of income for AY 2017-18 in form ITR-6 declaring NIL income with carried forward of unabsorbed loss of Rs. 5,52,17,083/- (b/f loss of AY 2016-17 Rs.3,17,161 + current year’s loss of Rs.5,48,99,877/-). The case was selected for scrutiny through CASS and notice u/s 143(2) dated 17.08.2018 was digitally served on the registered email of the assessee-company through ITBA module by the DCIT, Central Circle-1, Jodhpur. Later on the case record were transferred to ITO, W-(1), Jodhpur who vide transfer memo dated 23.08.2019 transferred the case record to Circle-3, Jodhpur. On receipt of the case record, notice u/s 142(1) dated 30.09.2019 was issued and served on the assessee-company’s registered email along with a detailed questionnaire. In compliance to notices issued from time to time, the assessee- company filed its reply through E-proceeding facility.
3.1 As is evident from the record that the assessee-company was incorporated in 2008 and is engaged in road construction work and other civil works. For the year under consideration ld. AO observed that the assessee on gross receipts of Rs. 2,73,93,10,472/- declared gross loss of Rs 1,03,37,47,372/- (37.74%) and net loss of Rs.32,77,48,176/- (11.96%). On being asked it was submitted that contract receipts of the assessee-company during the year declined considerably to Rs.2,46,73.49.728/- from Rs 4,28,36,27,201/- as it was in immediately preceding year. The reasons for this down fall as is explained by the assessee reads as under :
“Decrease in contract receipts is approximately 42.40% as compared to last year. All work contracts are allotted on the basis of tender system. It is further submitted that in this line of business competition is very high and the assessee-company has to compete with other big players in the business and sometimes it is very difficult to compete with them on price. Many times to obtain work contract, competitive prices are quoted yielding lower profits. Moreover, cost of construction and other expanses keep on increasing Various contracts were required to be completed within strict time frame failing which contractual penalties were also too high. Besides these factors, the assessee-company took some of the projects on sub-contract basis on low profit margins.”
3.2 On perusal of the audited financial of the company, ld. AO noted that under the head “Long Term Loans and Advances an amount of Rs. 1,72,77,91,273/- was shown as “Claims”. In the immediate preceding year, the balance under that head was “Nil”. Further, the amount of Rs. 1,72,77,91,273/- so claimed as “Claims” in the audited financials, has also been shown in the ITR under the head “Other Income”. On being asked to explain the amount of Rs 1,72,77,91,273/- shown as “Claims”, the assessee vide its reply filed on 08.10.2019 stated that the increase in loans and advances is on account of Claims which is of Rs. 1,72,77,91,273/- and on account of TDS deducted at source and old pending refunds of earlier year. Later, vide reply filed on 11.12.2019, the assessee submitted the “Claim” shown in the audited financials are related to claim filed against the parties for loss incurred also.
Vide notice u/s 142(1) dated 18.12.2109, the assessee was again requested to explain the claim of Rs. 1,72,71,91,273/- shown under the head long term loans and advances with supportive documents. It was also requested as to how and why claims of Rs.1,72,71,91,273/- has been transferred /shown in the ITR under the head “other income as other claims”. In response to this specific query the assessee filed a reply vide letter e-filed on 21.12.2019. In support of contention of claim the assessee has filed copy of suit filed by it through its senior manager, Shri Ranu Singh s/o Shri Gulab Singh against PAN India Infrastructures P. Ltd, and others, in which the assessee prayed for a decree for permanent injunction restraining the defendants i.e. PAN India Infrastructures P Ltd, and others from claiming bank guarantee for performance security bearing no. 316020351949/AP dated 04.04.2011 for Rs.5,50,00,000/-, bank guarantee for performance security bearing no. 3160203519958/AS dated 04.04.2011 for Rs.8,25,00,000/- and bank guarantee for performance security bearing no. 316020453474/AN dated 26.06.2013 for Rs. 10,00,00,000/-.
Assessee also filed a copy of letter 31.12.2015 signed by authorized signatory of M/s Kurukshetra Expressway (P) Ltd. addressed to the Project Director, NHAI, Project Implementation Unit, 305, Vidhya Niketan Road. D Park Model Town Rohtak-124001. (Haryana), subject of which was “Four laning of Rohtak- Bawal Section of NH-71 from KM 363.300 (Design KM 363,300) to KM 450.800 (Design KM 445.853) under NHDP III in the state of Haryana on Design, Build, Finance, Operate and Transfer (DBFOT) Basis Notice by the concessionaire for payment of compensation on account of delay events, additional works/change of scope and breach of contract by the authority.”
In view of the facts furnished by the assessee, the amount of Rs.1,72,77,91,273/- shown in the ITR as other income, was treated as contract receipts of the assessee which the assessee itself has disclosed and offered for taxation.
3.3 In respect of amount shown as trade payable under the head sundry creditors for goods and expense in the balance sheet, assessee was specifically requested to file the name of all the persons / parties from shown as Trade Payable- Sundry creditor for goods and expenses in the Balance Sheet, the assessee simply filed name of the parties with amount as on 31.03.2017. In the absence of the complete present postal address, the genuineness of the transactions with the parties as claimed by the assessee could not be examined / verified by ld. AO.
3.4 During the course of the assessment proceedings, the assessee was specifically requested to furnish quantitative details of all the items shown under the head opening and closing stock with supportive bills and vouchers so that the valuation of the opening and closing stock can be verified. However, despite specific query, the assessee simply filed branch wise details of items and their value. In the details of opening and closing stock, the assessee has shown stock of Cement, Steel, Aggregate, Diesel, Pannel, Emulsion, RCC Pipes, Tyres etc.
In spite of specific query to file the documents in support of valuation of each and every item shown as opening and closing stock, the assessee did not file even a single bill in support of valuation of any of the items. Even the assessee failed to give quantitative detail of items available at the beginning of the year and left at the end of the year. This shows that the assessee has valued the opening and closing stock of various items dealt in by it on estimation basis. Here it pertinent to mention that slight change in the value of opening and closing stock can change the trading results of the company.
3.5 Further, on examination of ledger accounts filed in support of a few expense like miscellaneous expenses (Rs.19,20,379/-), camp messing expenses (Rs.1,19,30,751/-), site expenses (Rs.15,09,108/-), guest entertainment expenses (Rs. 27,45,595/-), travelling and conveyance (Rs. 1,33,23,009/-) it was found that most of the expenses were incurred in cash for which proper details has not been either maintained or filed during the course of the assessment proceedings. The assessee had also not maintained site-wise stock register of consumable goods debited under the head operating expenditure (directly attributable site) at Rs. 21,76,39,197/-and for material purchased for road construction Rs.2,11,38,78,317/-.
3.6 The assessee also failed to substantiate labour charges/wages (Rs.6,85,26,505), salaries, bonus and other allowances (Rs.16,83,84,454) with wage/labour/attendance register etc. The assessee also failed to justify the site wise expenditure on these heads. Further to mention that there is hike in these expenses as compared to last year whereas the works contract receipt has substantially reduced in comparison to the last year.
3.7 On perusal of the submission of the assessee, it was found that during the year, the assessee has itself disallowed a sum of Rs 13,87,72,635/- u/s 40(a)(ia) of the Income-tax Act, 1961. This shows that the assessee violated the provisions of Section 40(a)(ia) by not deducting tax on payment of Rs. 46,25,75,450/-. The books of accounts as well as ledger account of the parties and details of work carried out by them has not been furnished by the assessee. In absence of which, it is not clear whether such payment was actually made by the assessee for any type of work sublet or carried out by them. By disallowing 30% of the total expenditure of Rs. 46,25,75,450/-, the assessee had actually enhanced its expenditure by 70%, as the same might not have been incurred / paid by the assessee at all.
Considering these facts as observed by the ld. AO it was evident that the book results declared by the assessee suffers from various defects and deserves to be rejected by invoking provisions of 145(3) of the Act. While holding so ld. AO also noted that in the immediately preceding i.e. A. Y. 2016-17 assessment was completed u/s 143(3) and on account of assessee’s failure to prove the authenticity of books of account, book results were rejected u/s 145(3) and NP rate of 7.23% was applied as against negative NP rate of 6.97% shown by the assessee-company.
On appeal by the assessee, vide appellate order dated 22.07.2018 the Ld. CIT (A-2), Udaipur in Appeal No. 10181/2018-19 upheld the rejection of books and further directed to estimate profit before depreciation @ 10.32% subject to depreciation, except depreciation on fixed assets claimed to be added during the year under consideration (i.e. for AY 20162017). As the department had filed appeal against the order of the Id. CIT(A), so after rejecting books of accounts net profit rate of 10.32% was applied net of depreciation means no separate deduction of depreciation was allowed.
3.8 During the year, there is addition in fixed assets for which specific query was raised to the assessee to all related bills and vouchers. But, the assessee failed to substantiate additions made in the fixed assets with relevant bills and vouchers. Hence, the depreciation of Rs. 1,64,006/-claimed on the alleged fixed assets claimed to be added during the year shall not be allowed.
3.9 In order to verify the income shown in Form 26AS and in ITR, the assessee was requested to furnish a reconciliation chart. In response to the query, the assessee filed a copy of Form 26AS with reconciliation chart of income reconciling the figures as shown in 26AS and as declared in the ITR. Ld. AO on examination of each and every individual entry under specific head of income shown in the Form 26AS vis-a-vis, income as declared by the assessee in the ITR, it is found that work contract receipt of Rs.57,56,57,561/-has been less shown by the assessee in the ITR.
3.10 Having considered to reject the books of accounts of the assessee, ld. AO consider it just and fair to apply a net profit rate of 10.32% on the work receipts declared in the ITR, claims of Rs. 1,72,77,91,273/- shown as other income and contract receipts of Rs.57,56,57,561/- not disclosed by the assessee in the ITR. The effect of applying 10.32% net profit rate on the income of the assessee was computed as below:
| Gross turnover/receipt (2,73,93, 10,472+1,72,77,91,273 + 57,56,57,561) | ||
| 5,04,27,59,306 | ||
| Net profit @ 10.32% | 52 04.12,760 | |
| Add: Depreciation disallowed | 1,64,006 | 52,02,48,754 |
| Profit already declared | Nil | |
| Profit calculated on application of net profit rate | 52,02,48,754 | |
The profit of Rs.52,02,48,754/- was considered the income of the assessee from works contract.
(Addition: Rs.52,02,48,754)
3.11 In the computation of total income, the assessee has disallowed a sum of Rs. 13,87,72,635/- u/s 40(a)(ia) of the Income-tax Act, 1961 and added to the total income. Hence, the income so disallowed by the assessee itself u/s 40(a)(ia) to the tune of Rs. 13,87,72,635/- separately added to the total income of the assessee.
3.12 Ld. AO noted that apart from interest income of Rs.2,58,85,880/- and other non-operating income of Rs.1,23,88,682/- as disclosed by the assessee in the ITR separately considered for calculating the income of the assessee. As discussed in the earlier para and as observed by the AO that the assessee has not disclosed works contract receipt of Rs.57,56,57,561/-in its ITR whereas detail of the same was available in Form 26AS. The assessee has also shown the difference of Rs.57,56,57,561/- in the reconciliation chart given. This works contract receipt of Rs.57,56,57,561/-has been considered for application of NP rate after rejecting the books of account as discussed above by the ld. AO. While doing so the ld. AO noted that if the contention of the assessee that complete books of account have been maintained along with relevant bills and vouchers and trading results should be accepted as such, is considered then also there would be an addition of Rs.57,56,57,561/- to the income declared by the assessee being excess work receipt not disclosed in the ITR.
Ld. AO also noted that as the addition after rejection of books of account is more than the addition which could be made on account of difference in works contract receipts, without rejecting the books of account, so it is found reasonable to make addition after rejecting the books of account only. Based on that observation the assessment was completed determining the income of the assessee as detailed here in below:
4. Aggrieved from the order of the assessing officer, assessee preferred an appeal before the ld. CIT(A). Apropos to the grounds so raised the relevant finding of the ld. CIT(A) is reiterated here in below:
“8. Decision-
8.1.
GoA no. 1-
“The Id. AO has erred in passing order under section 143(3). The order so passed is bad in law and bad on facts and is passed without reasonable opportunity of being heard and without appreciating submissions made.
The appellant has stated inter alia that the AO did not provide reasonable opportunity to him. It is noticed from the order that the AO has passed the order after providing the opportunities to the appellant. This part of ground is, therefore, dismissed. With regard to the ground related to order having been passed on wrong facts and without appreciating facts, this part of ground is taken along with other grounds in subsequent paras.
8.2. GoA no. 3-
“The Id. AO has erred in disallowing depreciation of Rs. 1,64,006 on new plant and machinery The addition so made is bad in law and bad on facts.”
In this ground, the appellant has challenged disallowance of depreciation on new plant and machinery but it is noticed from the Order that the AO did not make any such addition.
GoA no. 3 is, therefore, dismissed.
8.3.
GoA no. 4-
“The Id. AO has erred in making disallowance of Rs. 13,87,72,635/- for business expenditure for non-deduction of tax. Since the AO has applied net profit rate on total turnover no separate disallowance should be made. The separate addition so made is bad in law and bad on facts.”
This ground is being taken ahead of ground no. 2 since it is embedded in computation of total income made on estimate basis which is challenged by the appellant in ground no. 2. In this ground, the appellant has challenged disallowance of expenses on which TDS was not made. This disallowance was made by the AO as there were certain expenses on which TDS was not made and the appellant himself had admitted this fact and made disallowance in his ITR. The stand of the appellant is that once income is assessed on estimate basis, no separate disallowance should be made u/s 40(a)(ia) of the Act. The appellant has also quoted provisions of section 44AD of the Act in his support. These provisions take care of all provisions of the Act from section 28 to 43C of the Act. As per this section, when income is computed on the basis of presumptive tax scheme, provisions of inter alia section 40a(ia) are not attracted. Same thing is provided in provisions of section 44AD, A44AE, 44AF, 44B, 44BB, 44BBA, and 44BBB. Provisions of section 44AD are reproduced below –
“Notwithstanding anything to the contrary contained in section 28 to 43C, in the case of an eligible assessee engaged in an eligible business, a sum equal to eight per cent of teh total turnover or gross receipts of the assessee in th previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the eligible assessee, shall be deemed to be the profits and gains of such business chargeable to tax under the head “Profits and gains of business or profession”
The judicial pronouncements relied upon by the appellant also approve this view. Ld ITAT in its order for AY 2016-17 in the case of appellant has also computed income of the appellant without making separate addition on account of section 40(a)(ia) of the Act though the appellant had disallowed amount of Rs. 37,56,32,712/- in computation of income (para 5.1 of Ld CIT(A) order for AY 201617). But in their order for AY 2016-17, neither LdCIT(A) nor Ld ITAT made any separate addition on this count. LdCIT(A) in para 7.6 of his order gave categorical finding that “This disallowance being 8.76% of the revenue, further addition to total income was not justified”.
It is also logical that when income is being estimated, no addition on account of section 40(a)(ia) be made. The AO is directed to delete separate addition of Rs. 13,87,72.635/- made u/s 40(a)(ia) of the Act.
GOA no. 4 is, therefore, allowed.
8.4. GoA no, 2-
“The Id. AO has erred in rejecting the books of accounts. The Id. AO has erred in applying ne t profit rate of 10.32 percent. The Id. AO has erred in not providing deduction for depreciation and interest expenses after application of net profit rate.”
The appellant has challenged rejection of books of account, applying net rate of profit at 10.32% and not providing deduction towards depreciation and interest.
With regard to rejection of books of account, it is noticed from the order that during the assessment proceedings, the appellant failed to get the expenses, valuation of closing stock and trade payable verified and therefore, the AO rejected the books of account. Relevant discussion in this regard is made in para 10-18 of the order.
It is noticed from the order that findings in this regard have been discussed in the order and in appeal the appellant has not demonstrated that the defects in the books of account, as discussed in the order, were incorrect. In fact, such defects were also noticed in assessment proceeding for AY 2016-17 and action of the AO regarding rejection of books of account was upheld in first as well as second appeal. This ground in as much as it challenges action of the AO regarding rejection of books of account is therefore, dismissed.
Remaining part of the ground-which challenges application of net profit rate of 10.32% and not providing deduction for depreciation and interest expenses – is taken for adjudication. In this case, the AO rejected books account and estimated income after applying net profit rate of 10.32% and further disallowing expenses in respect of which TDS was not made by the appellant. The basis for adopting this net profit rate is the order of Ld CIT (A) for immediately preceding assessment year ie. AY 2016-17. The appellant was in appeal before Ld. CIT (A) against the order of AO for AY 2016-17 where net profit rate of 7.6% was applied and neither deduction towards depreciation and interest was allowed nor addition towards disallowance u/s 40(a)(ia) of the Act was made since this disallowance had already been made by the appellant in the ITR for AY 2015-16. In his order Ld. CIT (A) applied net profit rate of 10.32% but allowed deduction towards depreciation as also did not uphold separate addition u/s 40(a)(ia) of the Act. Relevant discussion in this regard is made in para 7 of the order of Ld. CIT (A). Complete order of Ld CIT (A) is reproduced as under-
“Appellate Order U/s 250 of Income-tax Act 1961
The present appeal has been filed on 28.12.2018 against assessment order u/s 143(3) of the Income-tax Act, 1961, dated 23.12.2018 passed by the Deputy Commissioner of Income Tax, Central Circle-1, Jodhpur for the A.Y. 2016-17. The appeal was filed well within time and the same is admitted for disposal
2. During the appellate proceedings. Shri Amit Kothari, A.R of the appellant, appeared, filed written submissions and argued the appeal,
3 .The first ground of appeal is as under-
“The order passed by Ld. AO is bad in law and bad on facts and addition made declared Income is unjustified and contrary to facts existing on records.”
3.1 The above ground of appeal is general in nature and requires no separate adjudication
4. The second & third grounds of appeal are as under-
“The Ld. AD has erred in estimating the net income of the appellant at Rs. 34,11,14,682/- by applying 7.6 percent net profit rate. The addition so made is bad in law and bed on facts. The estimate is bad in law and bad on facts and is also highly excessive.”
“The Ld. AO has erred in not allowing separate deduction for interest and depreciation after applicable of net profit rate.”
The above grounds of appeal being interlinked are discussed and decided together
5 The relevant facts as energe from the record are noted in the sub paras below.
5.1 The appellant is carrying on the business of road construction and other civil works Theassessee e-filed return of income for the A.Y. 2016-17 declaring loss at Rs (-) 3,17,161/- on 14.03 2017 as under-
5.2 The case was selected for scrutiny. During the proceedings u/s 143(3) the A.O called for various details and documents in support of entries in the books of account but the assessee failed to furnish such evidence. The notices calling for specific details have been reproduced in the order under appeal and non-compliances by the assesseeare also noted.
5.3 The A. O required the assessee to show-cause why books of accounts may not rejected in response the assesses submitted as under-
“As regard to your proposal for rejection of books of accounts in sutimittedinat through there may be some technical defects in the maintenance of books of account, but still the Income can very well be computed fhore such books of accounts it is submitted that the starting point for computation of income should be from books of accounts unless they are such untrust worthy that proper determination of income is not possible.”
5.4 The AO noted that the assessee company had itself admitted that there were some technical defects in the maintenance of books of accounts Further, the A. O noted that non- production of bills of major expenses, purchases, closing stock details, led to the legitimate Inference that the books/supporting evidences/bills vouchers had not been properly particularly when there was a steep fall in net profit rate, in the year under consideration there was loss of 6.97% of receipts whereas in the immediately preceding year the assessce had declared net profit at 7.23% of receipts
5.5 In view of the above facts, the A.O concluded that the correctness and completeness of the books of accounts of the assessee was not satisfactory and rejected the books of accounts maintained by the assessee and proceeded to make an assessment as envisaged in Sec 144 of the Income Tax Act, 1961.
5.6 For the purpose of estimating net profit, the A.O noted that the average of the net profit rate declared by the assessee in the three years, immediately preceding the year under consideration, was 7.6% as under-
| AY | 2013-14 | 2014-15 | 2015-16 |
| NP rate | 9.76 | 5.81 | 7.23 |
| Average Net Profit rate | 7.6% |
The A.O accordingly estimated net profit in the year under consideration at 7.6% of the tum over of Rs. 4.48.83,51,085/, at Rs. 34,11.14.682/- As the assessee only had business income in the year under consideration, the Total Income was also assessed at the same figure of Rs. 34,11,14,682/-
Hence the present appeal.
In appeal, it is submitted as under-
It is respectfully submitted that the turnover of the company had declined substantially crisis and it was also very difficult to repay the bank loans and instalments to financial Institution The amount due to various creditors and other liabilities was also mounting These facts had not been properly appreciated by the id. AO.
2 The company had been not able to get good tenders, and therefore in such a situation had incurred heavy losses on account of fixed cost. The operating expenses had also increased substantially on account of low volume of work being executed various loans had become non performing. There was loss of Rs. 31,30,33,272/ during the year. In the computation of total income the assessee had already made disallowance of Rs 37.56.32, 712/ out of expenses u/s 40(la), which is almost 8 76% of the revenue Any further addition to the total income was not justified in the facts of the case.
3 In subsequent years also the appellant company had suffered heavy losses and it was submitted to the Id AO that in AY 2017-18 and A Y. 2018-19 there are heavy losses Even if any estimation was required to be made, the net profit rate can be estimated only subject to deduction of depreciation and interest separately
4 It is also submitted that the net profit estimation if any made should be maple subject to further claim of depreciation and interest. Various judicial decisions as well as guidelines Issued by the Board also suggests that the estimation should be subject to depreciation and interest to third parties These are peculiar facts and may not be a common feature amongst various contractors Some of the contractor may have substantial loans and some may have their own funds Similarly certain contractors may own their own equipment’s and vehicles while some may take the on hire. It will be useful to draw your honours kind attention towards the following judicial decisions in this regard which may kindly be appreciated while estimating the net profit in the case of the assessee
5 It is also submitted that as regards claim of bad debts is concerned the appellant had submitted complete details of parties in relation to which the bad debts was claimed, and had also submitted their account statements indicating the amount running from various years and the income which had been accounted for in earlier years, and since the amount was not receivable the same was written off as bad debts: The Chart of income parties and their corresponding income shown as work receipts in earlier year is submitted below. In some of the cases the advance was given towards the petty expenses which were also being received but final bills were not received and were only towards expenses and nothing was receivable, therefore the same was also written off. The entire expenses was towards expenses only, and the same was fully allowable.
| Party Name | Bad Debts Written Off | Total Work Receipts Received |
| KEPL (COS & Additional Work) | 70000000 | 525091184 |
| IMC Project India Ltd. | 140000000 | 6736018162 |
x x x x
The bad debts in relation to the Accrete Consultancy was only Rs 28,760/- and not Rs. 24,31,584/-. In the computer when there are multiple accounts, it is only indicating the first entry, and the other entry opens when the complete vouchers is opened. The details of complete Rs. 24,31,584/- was also submitted, which included amount of Rs. 28,760/ relating to Accrete Consultancy. The proper facts could not be appreciated which resulted into this addition.
As regards contention of the Id. AO that in earlier year the expenses claimed on 7 account of sub-contract payment made to Inter Ocean Videsh Limited being disallowed also does not hold any validity, as the said addition was also deleted in appeal by Hon’ble ITAT and the expenses were found to be genuine. The said reason so given by the Id. AO was also not justified in rejecting the books of accounts and estimation being made at such a high amount.
8. As regards consultancy fees paid and some disallowance made in earlier years on account of payment to SREI Limited, was also found to be not correct and the same addition was also deleted in appeal and was also approved by Hon’ble ITAT in appeal The services of professional and technical support provided by the said company was found to be correct and justified, and the addition was deleted. The details of such consultancy services paid was also submitted and the details of the same are as under:
–
9. The consultancy charges so paid is fully verifiable and the entire payment so made is also fully verifiable and is through banking channels. These are regular parties and services are taken from them on regular basis. ITMEN
10. It was submitted to the ID. AO that as per the audited Balance sheet the turnover during the year under consideration had declined considerably, and the same was only Rs. 428.36 crores as compared to Rs. 667.79 crores in the immediately preceding previous year There is downfall of about 36% in the total turnover of the assessee during year under consideration.
11. The assessee is engaged in the road construction work, and all work are allotted by tender system. The competition in this line of business is too high and the appellant has to compete with various other big players in the business and sometimes its very difficult to compete with them on prices At many a times with very low margin of profits the contract had been taken which also results into lower profits. The cost of construction and other expenses are continuously on the increasing trend resulting into very completive business Further various contracts are required to be completed in strict time frame falling which the contractual penalties are also too high. Further the assessee had also taken some of the projects on sub-contract basis, on which the profits are still lower.
12. The interest is mainly related to banks, financial institutions and working capital limits. There are various equipment finance loans being taken and in some of the vehicles finance in earlier year the interest was for part of the year, while in the current year the same is for full year. The details of these loans had also been given in the Audited Balance Sheat.
13. In the computation of total income the assessed had already made disallowance of 30% of the expenditure amounting to Rs. 1.25.21.09.040/- on which TDS had not been deducted. The disallowance of Rs. 37,56,32,712/- has been made in the computation of total Income. The addition for the said disallowance has already been made by the assessee
14. The total sundry creditors during the year under consideration is Rs. 105 11 crores as compared to Rs. 63.43 crores in the last year. The amount due to creditors had increased on account of financial crisis being faced by the company and it was not possible to repay the creditors in schedule time. The current liabilities had increased on account of increase in current maturity of long term borrowings which had increased to 113.27 crores from 89.89 cores in the past year.
15. Outward remittance is mainly on account of payment of term loans and interest on account of loan from Standard Chartered Bank: The copy of certain 15CA in relation to the same is enclosed herewith. The payment of foreign remittance has no connection with the income of the assessee, as this is the repayment of loans taken.
16. The amount of Rs. 18,89,88,076 is on account of current account and loan taken from directors, and is not a advance given to them. The company had been facing acute financial problem and to meet urgent business needs, the funds were being taken from the directors The Id. AO has wrongly.
17. In these facts, & is submitted that such high rate plied by the the Jus sited It is submitted that though there may be some technical defects in the maintenance of books of accounts. but still the income can very well be computed from such books of accounts if is submitted that the starting point for computation of income should be from Decks of accounts unless they are such untrust worthy that proper determination of income is not possible. The turnover of the company had declined substantially during the year, and the company had suffered heavy Insets. There were acute financial crisis and it was also very difficult to me the bank bans and instalments to financial institution. The amount due to various creditors and other liabilities was also mounting The company had been not able to get good lenders, and therefore in such a situation estimation of profit at 7.6% would be too high income to be estimated. Ultimately the various loans had become non performing Even at present the company is negotiating for settlement of dues There was loss of Ra 31 30,33 272-during the year in the computation of total income the assessee had already made disallowance of Rs 37,56 32 7121 out of expenses u/s 40(la), which is almost 8 76% of the revenue. Any further addition to the total income would not be justified in the facts of the case 18 in subsequent years also the company had suffered heavy losses as would be evident from the returns submitted for AY 2017-18 and AY 2018-19. Even if any estimation is required to be made it may kindly be estimated subject to deduction of depreciation and interest separately.
19. It is therefore prayed that the addition made to the declared results may kindly be deleted and alternatively the same is highly excessive and may be restricted to a reasonable income
7. I have considered the submissions of the assessee and the relevant findings of the AO
7.1 It is evident from the facts of the case that during the assessment proceedings the assessee failed to furnish primary evidence to support the books of account The position remains unchanged in appeal. Moreover, before the A.O the assessee admitted that there were defects in the books of account. In such facts, the rejection of books of accounts is hereby upheld.
7.2 Next, the issue of estimation of income by the A. O, is discussed The AO has estimated net profit by taking the average rate of net profit over the three immediately preceding years. The assessee has contended that estimation of profits should be made sect to further claim of depreciation and interest. This argument would hold good where interest and depreciation claimed are verifiable and therefore an estimate of profitsare that neither loan confirmations nor complete details of interest expenses were furnished In such facts. I find that estimation has to be made of profits after interest expense So far as the issue of depreciation is concerned, the A.O has noted that details and evidence in support of additions to assets during the year was not furnished by the assessee I find from the record that in the immediately preceding assessment year, AY 2016-16, a search was conducted in the case of the assesses, assessment was completed under scrutiny provisions and there was no adverse finding regarding claim of depreciation in these facts the AO could have disallowed depreciation only on the assets assessee claimed to have added curing the FY 2015-16, which were not substantiated with evidence.
7.3 In view of the discussion in Para 72 above, it is relevant to compare the position of profits after interest but before depreciation in the year under appeal and in the preceding years. The position is tabulated as under-
7.4 The average rate of profit before depreciation in the three immediately preceding years is 10.32%. Therefore I consider it reasonable to estimate profit before depreciation in the year under appeal at 10.32% of receipts of Rs. 448,83,51,085/-, Le at Rs 46,31,97,832/-
7.5 From the estimated profit of Rs 46,31,97,832/-, as above, the AO will further allow depreciation as per the I.T. Act, but depreciation on fixed assets claimed to be added during the year under consideration, will be disallowed
The ground of appeal is decided in the above terms.
7.6 A clarification is added at this point. The assessee has contended that there was a loss of Rs 31,30,33,272/- during the year and in the computation of total income, the assessee had already made disallowance of Rs. 37,56,32,712/- u/s 40(a)(ia), being 30% of the expenditure amounting to Rs 1,25,21,09,040/- on which TDS had not been deducted This disallowance being nearly 8.76% of the revenue, further addition to total income was pt justified. As discussed in Para- 5.6 above, the A. O has in fact not made any adjustments to Total Income after estimation of business profits. The foregoing argument of the assessee is therefore irrelevant
8. The fourth ground of appeal is as under-
“The Ld. AO has erred in charging interest u/s 234A, 2348, 234C and 234D.”
8.1 The charge of interest under the above sections is mandatory but consequential to Income. The A O is directed to allow consequential relief to the assessee while giving effect to this appeal order.
9 The fifth ground of appeal is as under
“The Ld. AO has erred in initiating penalty proceedings uis 274 and 271(1)(C)
9.1 The initiation of penalty is not appealable. The ground of appeal is therefore dismissed as not maintainable.
In the result appeal is partly allowed.
(Vandana Verma)
Commissioner of Income Tax
(Appeals-2) Udaipur
ITA No. 10181/2018-19 Α.Υ. 2016-17
Date:22:07:2019
Copy to the
1. The Director General of Income Tax (Inv.), Rajasthan, Jaipur
2. The Pr. Commissioner of Income Tax (Central), Jaipur
3. The Addl/Jt. Comm. of Income Tax, Central Range, Jodhpur/ Udaipur
4. The Assessing Officer
5. The Appellant
Commissioner of Income Tax
(Appeals-2), Udaipur
In the Order, though the AO adopted net profit rate of 10.32%, he made separate addition towards disallowance of expenses on which TDS was not made as the appellant had already disallowed a sum of Rs. 13,87,72,635/- in his I’TR. The appellant was in appeal before Ld ITAT against the order of CIT (A) for AY 2016-17 but by the time assessment order for AY 2017-18 was passed, order of Ld ITAT was not received. In its order, Ld. ITAT made discussion regarding adoption of gross profit rate-which being 29.29%- in its opinion was appropriate in comparison to AY 2015-16. From the gross profit as shown by the appellant, Ld ITAT allowed deduction towards interest and depreciation. In its order, Ld ITAT has discussed various judicial pronouncements and CBDT Circular dated 31.08.1965 the crux of which is that once the income is estimated after rejecting books of account, the assesse is entitled to get deduction towards depreciation and interest. The reason behind adopting gross profit and allowing deduction towards interest and depreciation was peculiar facts and circumstances of each case as in one case, the contractor might be working with own capital and machines taken on lease while other, working with borrowed funds and self-acquired machinery. Before arriving at this conclusion, Ld ITAT admitted arguments of the appellant regarding adoption of net profit rate subject to further deduction towards interest and depreciation and discussed various case-laws relied on by the appellant. Order of Ld ITAT is reproduced below –
“This is an appeal filed by the assessee against the order of the id CIT(A)-II, Udaipur dated 22/07/2019 for the A.Y. 2016-17 in the matter of order passed U/s 143(3) of the Income Tax Act, 1961 (in short, the Act).
2. The only grievance of the assessee relates to the addition made by the A.O estimating the net profit at 7.6% of total receipts.
3. Rival contentions have been heard and record perused. Facts in brief are that the assessee is carrying on business of road construction and otherEvil works. During the year under consideration the return of income was filed declaring loss of Rs 3.17,161/- During the course of scrutiny assessment, the A.O, estimated profit of ass by applying netprof it rate of 7.6% on total contract receipts. The A. O observed that the assessee had shown low income in comparison to the investment made by it the also observed that there was a high interest expenditure and large liabilities, the A.O also stated that certain payments were made in which Form ISCA was submitted and for such foreign, remittances, verification was required. As asked by the A.O, the assessee submitted various details from time to time through online submissions. In the assessment order, the A.O. also stated that there is a claim of bad debts of Rs. 24,31,584/- and there were dues to the directors and associates in the balance sheet. From the record, we found that the assessee had submitted various details as required by the AO. vide letter dated 06/12/2018 and 14/12/2018. The details were submitted comprises of details of bad debts, foreign remittances, detailsofstatutory dues, consultancy charges, borrowings on which interest was being paid. However, the A O. of the view that complete details were not submitted and the results declared are not fully verifiable The AO also observed that in the immediately preceding you Le. AY, 2015-16, a disallowance of Rs. 53.63 crores was made on account of payment to Inter Ocean Videsh Limited in respect of the expenses of Rs. 30.09 crores which was treated as bogus. The A.O. also that the assessee had claimed net loss of 6 97% as compared to the net profit rate of 7.23% shown in the immediate preceeding year, therefore, books of account are liable to be rejected. After making comparsion of net profit of last three years, the A. O. applied net profit rate of 7.6% to the total receipts of this year which was resulted into determination of income at Rs. 34.11 crores
4. By the impugned order, the Id. CIT(A) has confirmed most of the additions, againd, which the assessee is in further appeal before the ITAT.
5. It was submitted by the Id AR appeared on behalf of the assessee that the turnover of the company had declined substantially during the year and the company had suffered heavy losses. There were acute financial crisis and it was also very difficult to repay the bank loans and instalments to financial institution. The amount due to various creditors and others liabilities was also mounting. These facts had not been properly appreciated by the AO
6. He has further contended that the company had been not able to get good tenders, and therefore in such a situation had incurred heavy losses on account of fixed cost. The operating expenses had alsoincreased substantially on account of low volume of work being executed, Various loans had become non performing There was loss of Rs 31,30,33,272/- during the year in the computation St total income the assessee had already male disallowance of Rs. 17,56,32,712/- aut of expenses u/s 40(la), which is almost 8,769 of the Income was not justified in the revenue. Any further addition to the total income facts of the case
7. By inviting our attention to the financial statement for subsequent year, he has contended that the assessee company had suffered heavy losses and it was submitted to the AO that in A.Y. 2017-18 and A.Y. 2018-19 there are heavy losses. Even if any estimation was required to be made, the net profit rate can be estimated only subject to deduction of depreciation and interest separately.
8. As per the Id AR, the net profit estimation il any made should be made subject to further claim of depreciation and interest. Various judicial decisions as well as guidelines issued by the Board was placed on record to suggest that the estimation should be subject to depreciation and interest to third parties. As per the Id AR, these are peculiar facts and may not be a common feature amongst various contractors. Some of the contractor may have substantial loans andsome may have their own funds. Similarly, certain contractors may own their own equipment and vehicles while some may take the same on hire.
9. Our attention was drawn towards the following judicial decisions this regard with are required to be appreciated white estimating net profit in the wise of the assesses:
a. CIT v. Jain Construction Co. (2000) 245 ITR 527 (Raj)
Reference Question of Fact Findings of Tribunal based on appreciation of material on record and evidence produced by assessee-Same pure finding of (act- No referable question of law arose CBDT circular -Binding nature of circular-Powers of CBDT under 119 Scope In exercise of power unders. 119, CBDT is competent to reduce the rigor of low and bring about fait enforcement of it Act by issuing circulars-Such circulars are binding on IT authorities.
Date of such Order
Accounts-Rejection of Accounts-of accounts and estimation of income- Allowability of depreciation and interest / salary to partners-Even in a case of estimation of profits by rejection of books, depreciation and salary/interest to partners is separately allowable.
x x x x
b. DCIT vs. Allied Construction (2007) 105 ITDT 1 (Del)(SB)
Income from Other Sources-Vis a vis income from business-Investment in fixed deposits out of surplus funds generated from business out of award of arbitrators for damages for breach of contract-Offer of FD as security for various facilities availed by the assessee from banks- Interest received not a part of contract receipts for civil construction business-Hence, interest income is chargeable under other source. Interest expense claimed against the same cannot be allowed since no expense wasactually incurred in earning the award.
Accounts-Contractreceipts of contractor-Hybrid method of accounting followed by the assessee—
Rejection of books of accounts by the AO-Hence, assessee to change adopt one method of accounting
Accounts-Rejection of Accounts-past results showing nominal profit/loss-AO justified in applying 8 per cent rate — Estimation of income in past years before allowing depreciation. Hence, AO justified in allowing depreciation allowance in current year also.
c. This vs. Shri Ram Traders (2014) 165 TTJ UO (Jd)(U0) 11
Accounts Rejection Estimation of income AO rejected assessee’s books of account on the ground that it has not maintained stock register. works register, muster roll, wages register, attendance register, salary register, etc and the expenses under various heads are not properly vouched-On appeal CIT(A) upheld the rejection of books of account and applied net profit rate of 7.75 percent subject to depreciation interest and remuneration paid to the partners as against 12.5 percentapplied by the AO, relying on the order of the Tribunal for the preceding assessment year – No interference warranted.
d. ITO v. Shri Ram Traders (2013) 155 TTJ (Jd) 622
Accounts-Rejection-Estimation of income-it is well settled that when the books of account are rejected, then the only way to determine the income is to apply GP rate or net profit rate by considering the past history of the case along with other relevant circumstances in the instant case, there was a substantial increase in the receipts of the assessor to Rs 3,47,98.8 19 in the relevant year from Rs. 1,20,45,423 in the immediately preceding you while there was decrease in GP rate to 1.20 per cent in the relevant year in comparison to 10.25 per cent in the earlier year Explanation of the assessee that the substantial increase in gross receipts resulted in reduced margin has not been controverted Another explanation of the assessee that the contract works were executed by it in the military and air force areas where the working hours were less in comparison to normal civil work and thus various expenses and cost of material have increased is also not rebutted by bringing substantial material on record-Therefore, GP rate of 12.50 per cent applied by the AO on the basis of the case of another contractor IC & Co for asst, yr. 1994-95 and 1999 2000 is not justified, particularly when the assessment year involved in the present case is 2008-09 and there is nothing on record to show that the facts of the present case are identical to the facts of that case- CIT(A) has also not given any cogent reason while sustaining GP rate at 8 per cent which is on higher side-Therefore, in view of the peculiar facts of the case, it is fair and reasonable to apply profit rate of 7.50 per cent subject to deduction of interest, depreciation and salaries to partners.
10. The Id. AR has also invited our attention to the details of bad debts submitted before the A.O. duly mentioning complete details of parties in relation to which the bad debts was claimed, and had also submitted their account statements indicating the amount running from various years and the income which had been accounted for in earlier years, and since the amount was not receivable the same was written off as bad debts. The Chart of income parties and their corresponding Income shown as work receipts in earlier year submitted below. In some of the cases the advance was given towards the petty expenses which were also being received but final bills were not received and were only towards expenses and nothing was receivable, therefore the same was also written off. The entire expenses was towards expenses only, and the same was fully allowable.
| Party Name received | Bad Debts Written Off | Total Work Receipts |
| KEPL (COS & 70000000 | 525091184 Additional Work) | |
| IMC Project India Ltd. | 140000000 | 6736018162 |
| XXX | XXX | XXX |
| EsselLudhian Talwandi-Electric | 15708540 | 1333715033 |
| 356730530 |
The bad debts in relation to the Accrete Consultancy was only Rs 28,760/- and not Rs. 24,31,584/-. In the computer when there are multiple accounts, it is only indicating the first entry, and the other entry opens when the complete vouchers is opened. The details of complete Rs. 24,31,584/- was also submitted, which included amount of Rs. 28,760/ relating to Accrete Consultancy. The proper facts could not be appreciated which resulted into this addition.
11. With regard to the AO’s observation regarding expenses claimed on account of sub- contract to M/s Ocean Videsh Limited in the immediate proceeding year which was disallowed. The Id AR has further contended that as the said addition was also deleted in appeal by Hon’ble ITAT, and the expenses were found to be genuine. The said reason so given by the to, AO was also not justified in rejecting the books of accounts and estimation being made at such a high amount.
12. With regard to claim of consultancy fee paid and some disallowance made in earlier years on account of payment to SREI Limited, was also found to be not correct and the same addition was also deleted in appeal and was also approved by ITAT in appeal. The services of professional and technical support provided by the said company was found to be correct and justified, and the addition was deleted. The details of such consultancy services paid was also submitted and the details of the same areas under:
–
13. As per id AR the consultancy charges so paid is fully verifiable and the entire payment so made is also fully verifiable and is through banking channels. These are regular parties and services are taken from them on regular basis.
14. By inviting our attention to the audited financial statement, the Id AR has contended that the turnover during the year under consideration had declined considerably, and the same was only Rs. 428.36 crores as compared to Rs. 667.79 crores in the immediately preceding previous year There is downfall of about 36% in the total turnover of the assessee during year under consideration.
15. With regard to claim of interest of expenditure, the Id AR has contended that the interest is mainly related to banks, financial institutions and working capital limits. There are various equipment finance loans being taken and in some of the vehicle’s finance in earlier year the interest was for part of the year, while in the current year the same is for full year. The details of these loans had also been given in the Audited Balance Sheet.
16. Our attention was also invited to the computation of income filed long with return of income wherein the assessee had had already made is allowable of 30% off the expenditure amounting w Rs. 1,25,21,09,040/ on which TDS had not been deducted. The disallowance of Rs. 37,56,32,712/- has been made in the computation of total income. The addition for the said disallowance has already been made by the assessee.
17. By inviting our attention to the nature of business the assessee, was engaged, which was road construction work and all work are allotted by tender system by the Govt.. The Id AR has contended that the competition in this line of business is too high and the assessee has to compete with various other big players in the business and sometimes it is very difficult to compete with them on prices. At many a times with very low margin of profits the contract had been taken which also results intolower profits. The cost of construction and other expenses are continuously on the increasing trend resulting into very competitive business Further various contracts are required to be completed in strict time frame failing which the contractual penalties are also toohigh, Further the assessee had also taken some of the projects on sub contract basis, on which the profits are still lower.
18. The Id AR also invited our attention to the total sundry creditor during the year under consideration is Rs. 105. Tores as compared to Rs 63.43 crores in the last year. The amount due to creditors nag increased on account of financial crisis being laced by the company and it was not possible to repay the creditors in schedule time. The current liabilities had increased on account of increase in current maturity of long-term borrowings which had increased to 113.27 crores from 89.89 cores In the past year.
19. With regard to outward remittance, it was submitted that there are mainly on account of payment of term loans and interest on account of loan from Standard Chartered Bank. The copy of certain 15CA in relation to the same was also placed on record The payment of foreign remittance has no connection with the income of the assessee, as this is the repayment of loans taken As per the Id AR, the amount of Rs. 18,89,88,076 is on account of current account and loan taken from directors, and is not an advance given to then the company had been facing acute financial problem and to meet urgent business needs, the funds were being taken from the directors.
20. In view of above detailed submissions with regard to each and every objection of the A.O. the Id AR has submitted that high rate of net profit estimated by the A O was not justified. As per the Id AR, though there may be some technical defects in the maintenance of books of accounts, but still the income can very well be computed from such books of accounts It is submitted that the starting point for computation of income should be from books of accounts unless they are such untrust worthy that proper determination of income is not possible. The turnover of the company had declined substantially during the year, and the company had suffered heavy losses. There were acute financial crisis and it was also very difficult to repay the bank loans and instalments to financial institution. The amount due to various creditors and other liabilities was also mounting. The company had been not able to get good tenders, and therefore in such a situation estimation of profit at 7.6% would be too high income to be estimated. Ultimately the various loans and become non performing Even at present the company is negotiating for settlement of dues. There was loss of Rs. 31,30,33,272/ during the year In the computation of total income the assessee had already made disallowance of Rs. 37,56,32,712/- out of expenses u/s 40(ia), which is almost 8.76% of the revenue.
Any further addition to the total income would not be justified in the facts of the case.
21. On the other hand, the Id DR has relied on the detailed observation made by the A.O and the defects pointed out with regard to claim of expenditure and non-substantiation of claim due to proper evidence The DR has vehemently argued that in view of these defects, the A) was Justified in estimating the net profit rate at 7.6% of total contract receipt, which is comparable to the net profit rate shown in the earlier years.
22. We have considered the rival contentions and carefully gone through the orders of the authorities below. We had also perused the detailed observation made by the A.O. in the assessment order while estimating the net profit rate at 7.6%. We had also gone through the details submitted by the assessee before the A.O. during the course of assessment proceedings with regard to various queries raised by him and have also considered the contention of the Id AR with regard to each and every objection of the A O and the Id. CIT(A) in their respective orders. We had also deliberated on the various judicial pronouncements referred by the lower authorities in their respective orders as well as cited by the Id AR and the Id DR during the course of hearing before us in the context of factual matrix of the case There is no dispute to the fact that there were some technical mistakes in the maintenance of the books of account. Some of the observation made by the A.O. appears to be correct with regard to certain expenditure, however, the A.O. should not loose site of the gross profit rate shown by the assessee during the year as compared to the gross profit rate shown in the immediate preceding year while coming to the conclusion of rejecting the books of account and estimating net profit rate. From the record, we found that during the year under consideration, the gross profit rate shown by the assessee is 29 29% as compared to the gross profit rate of 27.87% shown in the immediately preceding year. Thus, we found that the gross profit rate shown during the year is much better than the gross profit of prereading year Under these facts and circumstances, there is no justification for complete decline of contract expenditure claimed by the assessee which goes to constitute the gross profit rate. We had carefully gone through the extract of P&L account for comparison of expenses. We found that the assessee had shown following revenues from operations:
| 1 | Contract Revenue |
4,28,36,27,201 |
| 2 | Sale of Aggregate | – |
| 3 | Sale of Scrapes | 19,78,14,626 |
| 4 | Sales of Trees | 69,09,258 |
| Total | 4,48,83,51,085 |
23. Thus, the total revenue receipts from operations during the year was Rs. 448.83 crores. However, the assessee had other income of Rs. 1.13 crores which is non-operating income. After giving credit of operating expenditure, there remains gross profit of Rs. 131.34 crores. So far as the gross profit is concerned, the assessee had shown much better than gross profit rate of 20.20% during the year under consideration as compared to the gross profit rate of 27.87% shown in the immediate preceding young Now coming to the assessee’s claim of indirect expenses with regard to employees’ benefit expenses which have been claimed at Rs. 28 21 croves, financial cost interest expenses of Rs. 70 96 crores and administrative and other expenses of Rs. 40.47 crores.
24. Since we consider the gross profit shown by the assessee is 24. reasonable, now question arises regarding claim of other indirect expenses in the form of employees benefit expenses, administrative and other expenses. The assessee has claimed employees’ benefit expenses of Rs. 28.23 crores and administrative and other expenses of Rs. 40.47 crores, total of these hvo expenses works out to be Rs 68: 70 crores.
25. The gross profit shown by the assessee at Rs. 131.37 crores:
Expenditure to be disallowed on account of employees’ benefit expenses and administrative expenses keeping in view the observation of the A O to the extent of 20%
| Rs. 68.70 crores | 80% | Rs. 54.96 crores |
| Gross profit | Rs. 76.51 crores |
So far as the assessee’s claim of interest expenses and depreciation is concerned, the same is required to be allowed in view of the judicial pronouncement: referred above.
26. Thus, out of profit of 76.51 crores, interest expenditure of Rs. 70.96 crores and deprecation of Rs. 24.23 crores is required to be allowed.
27. In view of the above factual discussions and genuineness and reasonableness of expenditure claimed by the assessee, we direct the AO to assess income of the assessee at Rs.50 Lacs in place of returned loss of Rs. 3,17.161/- We direct accordingly
28. Before parting, it is noted that the order is being pronounced after ninety (90) days of the hearing. However, taking note of extraordinary situation in the light of the COVID-19 pandemic and lockdown, the period of lockdown days to be excluded. For coming to such a conclusion, we rely upon the decision of the Coordinate Bench of the Mumbai Tribunal in the case of DCIT vs JSW Limited in ITA No. 6264/Mum/2018 & 6103/Mum/2018, Assessment Year 2013-14, order dated 14th May, 2020. As a result, the appeal of assessee is allowed in part
29. In the result, appeal of the assessee is allowed in part.
Order pronounced under Rule 34(4) of the Income Tax (Appellate Tribunal) Rules, 1962 by placing on the notice board.”
The revenue preferred appeal against the order of Ld ITAT. Hon’ble Rajasthan High Court (the High Court) dismissed the revenue’s appeal. The matter thus attained finality in as much as assessment for AY 2016-17 is concerned. The decision of the High Court is reproduced below-
x x x x
Since, order of Ld ITAT and decision of the High Court were not available with the AO at the time of passing the Order, the merit of additions made in the Order is to be seen in the light of aforesaid order of Ld. ITAT.
In the Order, the AO applied net profit rate of 10.32%, the basis of which was Ld CIT (A) order for AY 2016-17 since by the time the Order was passed, order of Ld ITAT and decision of Hon’ble High Court were not available. Ld ITAT in its order for AY 2016-17 ordered for computing net profit/total income at Rs. 50 lakhs, In that year, contract and other receipts of the appellant were Rs. 4,48,83,51,085/- The net profit rate thus comes at 11% (50,00,000/4,48,83,51,085)
As regard exclusion of claims of Rs. 172,77,91,273/- from contract receipts – which is raised in SoF and not in GoA, it is noticed from P/L account and Note 3.20 of financials that the appellant had himself included this amount in ‘Other income and computed taxable income after considering it as part of receipts. This argument is, therefore, dismissed. There is an another limb of this ground which is inclusion of this amount in contract receipts for the purpose of applying net profit rate on this amount. The appellant has argued that this claim was in respect of two parties who did not accept this claim and, therefore, it is a disputed claim. During the assessment proceedings, the appellant filed details in the shape of copy of suit and letter copy of letter from one of the parties. Relevant discussion in this regard has been made in para 6-9 of the Order.
The discussion made in the Order shows that there was no dispute with regard to nature of claim in as much as its nature is concerned. There is no doubt that this was an unilateral claim which was made on the part of the appellant and which was not accepted by the parties concerned. Now the questions that arises is whether such claim gives rise to any income and is it taxable. Courts have held that such claim gives rise to only notional income. Income may accrue in the year in which a cause of action arises if within the taxable year the other party admits liability even though the exact amount is left to later negotiations if there is a reasonable basis upon which it may be estimated. The estimated income is accrued at once subject to correction when the amount is agreed upon. If the amount of the liability is litigated however even though liability is admitted it has been held that income does not accrue until the litigation is finally terminated. But if liability is not admitted income does not arise from mere accrual of a cause of action. The income may not be accrued until a settlement is made or if the claim is litigated until all possible appeals have been taken or the liability has become final by the expiration of time to appeal from a judgement for the taxpayer. This amount, therefore, cannot be taken as base for applying net profit rate on estimate basis.
Now when action of AO regarding rejection of books of account has been upheld, the basis of computing total income of the appellant is to be taken in the light of order of Ld ITAT for AY 2016-17. As is gathered from the order of Ld ITAT (para 23), in AY 2016-17, the appellant declared gross profit rate of 29.29% which was higher in comparison to that for AY 2015-16 which was 27.87%. Ld ITAT, therefore, picked gross profit rate of 29.29%. In present AY, the gross profit comes at Rs. 1,03,37,47,371/- as per following calculation –
| Contract receipts and other operating income excluding Claims- | |||
| Rs.2,75,16,99,154/- | |||
| 1. | Contract revenue | Rs 2,73,93,10,472/- | |
| 2. | Other operating income | Rs. 1,23,88,682/- | |
| Total | Rs.2,75,16,99,154/- | ||
(Since it has been held in foregoing paragraph that Claims are just notional income and they are neither income nor give arise to any profit)
| Less- Operating expenditure | Rs.3,77,30,57,843/- |
| 2. Operating expenditure- | Rs.2,70,14,05,592/- |
| Gross profit | )Rs.1,02,13,58,689/- |
| Gross profit % | (-)37.11% |
This year there is gross loss @ 37.11% as against gross profit @ 29.29% for AY 2016-17. Since books of account are defective and, therefore, have been rejected, gross profit rate for AY 2016-17 is applied and gross profit comes at Rs.80,59,72,682/- ( Rs.2,75,16,99,154/-x29.29%).
In AY 2016-17, Ld ITAT disallowed 20% of employees’ benefit expenses and administrative expense on account of theybeing non-verifiable. From above, indirect expenses on account of these two expenses, debited by the appellant in the P/L account, are, therefore, allowed to the extent of 80% for the defects pointed out by the AO in para 11-14 of the Order. Amount debited with respect to these two expenses is as under-
| 1. Employees’ benefit expenses | Rs.27,75,56,119/- |
| 2. Administrative expense | Rs. 19,05,50,300/- |
| 3. Total | Rs. 46,81,06,419/- |
| 80% of Rs.46,81,06,419/- | Rs. 37,44,85,135/- |
Net profit/total income thus comes as under Gross profit 29.29%
| Less- | Rs.80,59,72,682/ |
| 1. Indirect expenses | Rs. 37,44,85,135/- |
| 2. Interest | Rs. 35,92,15,998/- |
| 3. Depreciation | Rs. 23,68,58,343/- |
| Total | Rs.97,05,59,476/- |
| Net profit/total income | |
| Rs.16,45,86,794/- | (-) |
The net result of computation of net profit is loss. The result of computation of income made by Ld ITAT in respect of AY 2016-17 was also in loss as is evident from para 25. 26 and 27 of its order.
As per calculation done in para 26 of order of Ld ITAT, total income was arrived at Rs. 76.51-Rs. 95.19 (70,96+24.23) (-) Rs.18.68. However Ld ITAT determined total income at Rs. 50,00,000/-. In the present case also, result of computation of total income is loss ie Rs.16,45,86,794/- but following rate of net profit of 11%, adopted finally by the Ld’ ITAT for arriving at figure of Rs. 50,00,000/-,total income on turnover of Rs.2,75,16,99,154/- (excluding Claims) comes at Rs.30,26,869/-.
The AO is directed to assess total income of the appellant at Rs.30,26,869/-and delete remaining addition.
GoA no. 2 is, therefore, allowed.
8.5.
GoA no. 5-
“The Id. AO has erred in making addition in respect of difference of income shown in return of income and 26AS in the gross turnover. The Id. AO has erred in applying net profit rate on such turnover also.
This ground challenges addition of Rs.57,56,57,561/- made in total turnover on account of less turnover declared by the appellant in comparison to that shown in Form 26AS. Since this ground is related to the computation of income after applying rate of profit, it is taken ahead of ground no. 4 of GoA. The AO noticed that total of contract receipts wereat Rs. 3,03,34,98,160/- but they were shown at Rs. 2,50,48,19,097/-, less by Rs. 57,56,57,561/-. It is seen from the financials for AY 2017-18 that revenue from operations which comprises of contract revenue (Rs. 2,46,73,49,728), sale of scraps (Rs. 26,15,34,005/-) and sale of trees (Rs. 1,04,26.739/-) is shown at Rs. 2,73,93,10,472/- and other income which comprises of other non-operating income and excluding other claims (unilateral and disputed claim on which no TDS was neither applicable nor made and hence not liable to be declared in 26AS) is shown at Rs. 1,23,88,682/-. Besides, interest receipts are also shown in Form 26AS. In the case of contract receipts alone, there is difference of Rs. 46,66,14,822/- as is evident from chart given at para 20 on page 10 of the Order. In this chart, total contract receipts as per Form 26AS are given at Rs. 2,90,15,36,171/- and against this figure, amount of Rs. 2,46,73,49,728/- is declared in the P/L account. The reason for difference between the figure as appearing in Form 26AS and figure shown in P/L account is explained to be on account of advance payment on which no TDS was made and since this advance was not part of turnover, it was not shown in the P/L account. The appellant has given justification for this difference in his reply.
The appellant has argued that this is a regular feature in every year because while the contractors make TDS on each amount which is credited to the account of contractee, the contractee books only that amount as turnover which is not an advance as advance received from contractor does not give rise to income. It is submitted by him that this advance keeps on running for years and adjustable in the year when work is done. A detailed chart along-with copy of Form 26AS has been filed by the appellant. It is noticed from this chart that there is difference between figure of contact receipts as per Form 26AS and as per books of account in AY 2014-15 to AY 2017-18 in many cases. While in some cases, receipts shown in the books are on higher side, in some cases, it is on lower side, In one case, both the figures are same. The appellant has also invited attention towards this difference in AY 2016-17 when total receipts as per Form 26AS were at Rs.4,39,73,61,640/- and as booked in P/L account were at Rs.4,48,83,51,085/- but no adverse inference was drawn by the AO in that year while passing assessment order. Copies of Form 26AS and copies of contractors’ accounts for AY 2016-17 are filed by the appellant.
I have considered the submission of the appellant, gone through copy of financials for AY 2016-17, copy of assessment order for AY 2016-17, and copy of account of contractors for AY 2016-17. In AY 2016-17, though there was difference between figures of receipts as per Form 26AS and that shown in the P/L account, no addition was made by the AO while passing assessment order. Similar is the situation this year but the stand of the AO is different. While making the addition, the AO did not consider explanation offered by the appellant where he submitted a detailed chart in respect of each deductor showing against them amount as per Form 26AS and amount booked in his accounts. Though the AO has reproduced the explanation – where difference was attributed to advance payment on which TDS was made but this was not part of turnover of the appellant in para 20 of the Order, he rejected the explanation summarily, without pinpointing the party in whose case it was different and without assigning any reasons for not accepting explanation of the appellant. It is noticed from this chart that in following cases of tax-deductors, the position was opposite as amount shown in Form 26AS was less and amount declared in books of account was on higher side –
While in some cases, amount booked in accounts was on lower side, in some it was on higher side and in some cases both the amounts matched with each other, as per Form 26AS and books of account. Though the explanation was offered by the appellant during assessment proceedings, mismatch was explained, the AO rejected the explanation of the appellant
During appellate proceedings also, the appellant filed copy of Form 26AS and copies of account of the parties concerned. The amount of difference has been once again explained in the reply. It is seen that this practice of receiving advance causes difference between figures of receipts as per Form 26As and that shown in the P/L account. Since the difference stands explained, and no adverse inference drawn in AY 2016-17, the difference is not to be included in figure of contract receipts and gross profit rate is not applied on this difference while computing gross profit.
Since this difference has not been included in turnover and not considered for estimating income of the appellant while taking GoA no.2, this ground stands already allowed.
GoA no. 5 is, therefore, allowed.
8.6.
GoA no. 6-
“The Id. AO has erred in making separate addition for Rs. 2,58.85,880 for interest income and Rs. 1,23,88,682 for other non-operating income, which are part of the business receipts. The addition so made is bad in law and bad on facts.”
This ground challenges action of the AO regarding making separate addition for interest income and other non-operating income.
8.6.1.
As regard separate addition for interest income, it is noticed from the Order that the AO found that the appellant had shown interest income in ITR and, therefore, the AO included this amount in total income of the appellant. The appellant’s submission is that the interest was received on margin-money and security deposit and he booked interest expenses as expenditure net of interest received. It is noticed from computation of income filed with ITR that profit as per P/L account was taken at Rs. (-) 32,77,48,176/- and income under this head was the only income for AY 2017-18. As per P/L account, interest expenses were at Rs. 8,29,76,390/ and interest received was Rs. 2,58,85,880/-. The amount of Rs. 5,70,90,510/- was booked as expenditure after deducting amount of interest received from amount of interest paid. Same practice was adopted in AY 2016-17 when interest paid was Rs. 10,89,23,556 and interest received was Rs. 2,51,33,962/- and interest expenses net of interest received was booked as expenditure in P/L account. No such addition was made in AY 2016-17 by the AO and both the Ld. CIT (A) and Ld. ITAT allowed deduction towards interest expenses from estimated income. In its order for Ay 2016-17, Ld ITAT in para 26 of its order has taken figure of Rs. 70,96,89,432/- as deductible from estimated profit. This figure of Rs. 70,96,89,432/- is shown by the appellant in his P/L account as per following details –
| Interest on-
Rupee term loan Rs.33,52,81,299/- |
Rs.69,63,668/- |
| Foreign currency loans Buyers’ credit Working capital loan Rs.28,18,84,837/-
Other finance charges Rs. 10,89,23,556/- Total Rs.73,48,23,394/- Less-Interest income Rs.2,51,33,962/- Amount booked as Finance cost Rs.70,96,89,432/ |
Rs.17,70,033/- |
8.6.2. Apart from that, the interest income is received on margin money and security deposit which are made being necessary in the nature of business carried out by the appellant. Since these margin money and security deposit were made during the course of business, interest income is derived from the business of the appellant and taxable as business income. The appellant could have shown this interest as income either in credit side of P/L account or deducted it from the interest expenses paid. The appellant has chosen the latter practice. Since this interest income was derived from business of appellant, it is his business income and is assessable under the head income from business’ and not under the head ‘income from other sources’. Ld ITAT in its order for AY 2016-17 has included this income as business income and deducted it from interest paid while estimating income of the appellant. This addition of Rs.2,58,85,880/- is, therefore, deleted.
This part of ground of appeal is allowed.”
8.6.3. As regard taxing ‘other non-operating income’ of Rs. 1,23,88,682/- under the head ‘income from other sources’, similar argument has been put by the appellant. In AY 2016-17 also, this income was shown at Rs. 1,13,20,333/- but it is noticed from assessment order for AY 2016-17 that no separate addition was made and this income was included in business receipts. Ld ITAT in its order for AY 2016-17 has not made separate addition with respect to this receipt and included this amount in receipts from operations for the purpose of arriving at gross profit rate. Since facts are similar this year, no separate addition on this count is called for.
Further, while discussing GoA no. 2, this amount has been included in receipts from operations for the purpose of applying gross profit rate. This addition of Rs. 1,23,88,682/- is, therefore, deleted.
This part of ground of appeal is allowed.
GoA no. 6 is allowed.
8.7.
GoA no. 7-
“The Id. AO has erred in charging interest under section 2348”
This ground is regarding wrong charging of interest u/s 2348 of the Act. Since this interest is to be computed afresh at the time of giving effect to this order, this ground does not require adjudication at this time and is, therefore, dismissed.
8.8.
GoA no.8-
“The Id. AO has erred in initiating penalty proceedings under section 270A.”
This ground challenges action of the AO regarding initiating penalty proceedings u/s 270A of the Act. Since this ground is to be raised separately in appeal against order passed u/s 270A of the Act, and it is not pressed by the appellant, this ground is, therefore, dismissed.
8.9.
GoA no. 9-
“The appellant craves liberty to add, amend, alter or modify any of its grounds of appeals on or before its hearing before CIT(A).”
This ground, being general in nature is dismissed.
9. In the result, the appeal is partly allowed.”
5. Feeling aggrieved from finding so recorded in the order of the ld. CIT(A), revenue preferred the present appeal on the grounds as stated herein above.
6. Before us both the parties have supported the respective orders of the lower authority as favorable to them.
7. DR in support of the appeal so filed vehemently argued that three is no basis given by the ld. CIT(A) adopting the profit estimation. The addition made u/s. 40(a)(ia) should be in addition to the profit estimation and it is disallowance. Every year is separate year and ld. AO has made various addition based on the detailed finding given in his order against that the ld. CIT(A) has accepted the GP without considering the basis of the making addition by the ld. AO.
8. Per contra, ld. AR of the assessee supported the finding recorded in the order of the ld. CIT(A) and relied upon the written submission so made before the ld. CIT(A). Ld. AR of the assessee also vehemently argued that in the past year the issue was accepted and the matter become finally accepted by the revenue as per the judgment of the Jurisdictional Hon’ble Rajasthan High Court and the ld. CIT(A) has based on the that finding given relief to the assessee in the year under consideration. Ld. AR of the assessee also relied upon the written submission made before the ld. CIT(A). Since that written submission is already forming part of the order of the ld. CIT(A) the same are not repeated to avoid the duplication.
9. We have heard the rival contentions and perused the material placed on record. In this appeal revenue has challenged the finding of the ld. CIT(A) on the five grounds of appeal. The brief facts on the grounds so raised are that the assessee e-filed its return of income for the year under consideration wherein company filed Nil income. In that return the assessee claimed carried forward of unabsorbed loss of Rs. 5,52,17,083/- (b/f loss of AY 2016-17 Rs.3,17,161 + current year’s loss of Rs.5,48,99,877/-).
The case was selected for scrutiny through CASS and notice u/s 143(2) dated 17.08.2018 was digitally served on the registered email of the assessee-company through ITBA module by the DCIT, Central Circle-1, Jodhpur. In the assessment proceeding assessee in compliance to notices issued from time to time, filed its reply through E-proceeding facility. As is evident from the record that the assessee-company was incorporated in 2008 and is engaged in road construction work and other civil works.
For the year under consideration ld. AO observed that the assessee on gross receipts of Rs. 2,73,93,10,472/- declared gross loss of Rs 1,03,37,47,372/- (37.74%) and net loss of Rs.32,77,48,176/- (11.96%). On being asked it was submitted that contract receipts of the assessee-company during the year declined considerably to Rs.2,46,73.49.728/- from Rs 4,28,36,27,201/- as they were in immediately preceding year. The reasons for this down fall as is explained by the assessee stating that Decrease in contract receipts is approximately 42.40% as compared to last year. All work contracts are allotted based on tender system. It is further submitted that in this line of business competition are very high and the assessee-company has to compete with other big players in the business and sometimes it is very difficult to compete with them on price. Many a time to obtain a work contract, competitive prices are quoted yielding lower profits. Moreover, the cost of construction and other expenses keep on increasing. Various contracts were required to be completed within a strict time frame, failing which contractual penalties were also too high. Besides these factors, the assessee-company took some of the projects on a subcontract basis on low profit margins.
Ld. AO from the records observed that under the head “Long Term Loans and Advances an amount of Rs. 1,72,77,91,273/- was shown as “Claims”. In the immediately preceding year, the balance under that head was Rs. “Nil”. Further, the amount of Rs. 1,72,77,91,273/- so claimed as “Claims” in the audited financials, has also been shown in the ITR under the head “Other Income”. On being asked to explain the amount of Rs 1,72,77,91,273/- shown as “Claims”, the assessee vide its reply filed on 08.10.2019 stated that the increase in loans and advances is on account of Claims which is of Rs. 1,72,77,91,273/- and on account of TDS deducted at source and old pending refunds of earlier year. Later, vide reply filed on 11.12.2019, the assessee submitted the “Claim” shown in the audited financials are related to claim filed against the parties for loss incurred also. Thus, vide notice u/s 142(1) dated 18.12.2109, the assessee was again requested to explain the claim of Rs. 1,72,71,91,273/- shown under the head long term loans and advances with supportive documents. It was also requested as to how and why claims of Rs.1,72,71,91,273/- has been transferred /shown in the ITR under the head “other income as other claims”. In response to this specific query the assessee filed a reply vide letter e-filed on 21.12.2019. In support of contention of claim the assessee has filed copy of suit filed by it through its senior manager, Shri Ranu Singh s/o Shri Gulab Singh against PAN India Infrastructures P. Ltd, and others, in which the assessee prayed for a decree for permanent injunction restraining the defendants i.e. PAN India Infrastructures P Ltd, and others from claiming bank guarantee for performance security bearing no. 316020351949/AP dated 04.04.2011 for Rs.5,50,00,000/-, bank guarantee for performance security bearing no. 3160203519958/AS dated 04.04.2011 for Rs.8,25,00,000/- and bank guarantee for performance security bearing no. 316020453474/AN dated 26.06.2013 for Rs. 10,00,00,000/-.
Assessee also filed a copy of letter 31.12.2015 signed by authorized signatory of M/s Kurukshetra Expressway (P) Ltd. addressed to the Project Director, NHAI, Project Implementation Unit, 305, Vidhya Niketan Road. D Park Model Town Rohtak-124001. (Haryana), subject of which was “Four laning of Rohtak- Bawal Section of NH-71 from KM 363.300 (Design KM 363,300) to KM 450.800 (Design KM 445.853) under NHDP III in the state of Haryana on Design, Build, Finance, Operate and Transfer (DBFOT) Basis Notice by the concessionaire for payment of compensation on account of delay events, additional works/change of scope and breach of contract by the authority. In the light of that facts furnished by the assessee, the amount of Rs.1,72,77,91,273/- shown in the ITR as other income, was treated as contract receipts of the assessee which the assessee itself has disclosed and offered for taxation.
Ld. AO from the amount shown as trade payable under the head sundry creditors for goods and expense in the balance sheet, assessee was specifically requested to file the name of all the persons / parties from shown as Trade Payable- Sundry creditor for goods and expenses in the Balance Sheet, the assessee simply filed name of the parties with amount lying as credit as on 31.03.2017. Ld. AO noted that in the absence of the complete present postal address, the genuineness of the transactions with the parties as claimed by the assessee could not be examined / verified.
Ld. AO requested the assessee to furnish quantitative details of all the items shown under the head opening and closing stock with supportive bills and vouchers so that the valuation of the opening and closing stock can be verified. However, despite specific query raised, the assessee simply filed branch wise details of items and their value. In the details of opening and closing stock, the assessee has shown stock of Cement, Steel, Aggregate, Diesel, Pannel, Emulsion, RCC Pipes, Tyres etc. The assessee did not file any documents in support of valuation of each item shown as opening and closing stock supported with bill. Even the assessee failed to give quantitative details of items available at the beginning of the year and left at the end of the year. This shows that the assessee has valued the opening and closing stock of various items dealt in by it on an estimation basis and the slight change in the value of opening and closing stock can change the trading results of the company. Ld. AO also noted that few expense like miscellaneous expenses (Rs.19,20,379/-), camp messing expenses (Rs.1,19,30,751/-), site expenses (Rs.15,09,108/-), guest entertainment expenses (Rs. 27,45,595/-), travelling and conveyance (Rs. 1,33,23,009/-) it was found that most of the expenses were incurred in cash for which proper details have not been either maintained or filed during the course of the assessment proceedings. The assessee had also not maintained the site-wise stock register of consumable goods debited under the head operating expenditure (directly attributable site) at Rs. 21,76,39,197/- and for material purchased for road construction Rs.2,11,38,78,317/-. Ld. AO also noted that the assessee also failed to substantiate labour charges/wages (Rs.6,85,26,505), salaries, bonus and other allowances (Rs.16,83,84,454) with wage/labour/attendance register etc. The assessee also failed to justify the site wise expenditure on these heads.
Ld. AO from the records also noted that during the year, the assessee has itself disallowed a sum of Rs 13,87,72,635/- u/s 40(a)(ia) of the Income-tax Act, 1961. This shows that the assessee violated the provisions of Section 40(a)(ia) by not deducting tax on payment of Rs. 46,25,75,450/-. The books of accounts as well as ledger account of the parties and details of work carried out by them has not been furnished by the assessee. In absence of which, it is not clear whether such payment was made by the assessee for any type of work sublet or carried out by them. By disallowing 30% of the total expenditure of Rs. 46,25,75,450/-, the assessee had enhanced its expenditure by 70%, as the same might not have been incurred / paid by the assessee at all.
Based on these observations ld. AO noted that the book results declared by the assessee suffers from various defects and deserves to be rejected by invoking provisions of 145(3) of the Act.
While holding so ld. AO also noted that in the immediately preceding i.e. A. Y. 2016-17 assessment was completed u/s 143(3) and on account of assessee’s failure to prove the authenticity of books of account, book results were rejected u/s 145(3) and NP rate of 7.23% was applied as against negative NP rate of 6.97% shown by the assessee-company. When the matter was carried before the ld. CIT(A) wherein the rejection of books was confirmed but was further directed to estimate profit before depreciation @ 10.32% subject to depreciation, except depreciation on fixed assets claimed to be added during the year under consideration (i.e. for AY 2016-2017). When revenue challenged that order of the ld. CIT(A) net profit rate of 10.32% was applied net of depreciation means no separate deduction of depreciation was allowable.
So, applying that precedent ld. AO noted that for the year there was addition in fixed assets for which specific query was raised to the assessee to all related bills and vouchers. But, the assessee failed to substantiate additions made in the fixed assets with relevant bills and vouchers. Hence, the depreciation of Rs. 1,64,006/- was not considered as allowable. Furthermore, income shown in Form 26AS and in ITR, the assessee was requested to furnish a reconciliation chart. In response to the query, the assessee filed a copy of Form 26AS with reconciliation chart of income reconciling the figures as shown in 26AS and as declared in the ITR. Ld. AO on examination of each individual entry under specific head of income shown in the Form 26AS vis-a-vis, income as declared by the assessee in the ITR, it is found that work contract receipt of Rs.57,56,57,561/-has been less shown by the assessee in the ITR.
Finally, having considered to reject the books of accounts of the assessee, ld. AO consider it just and fair to apply a net profit rate of 10.32% on the work receipts declared in the ITR, claims of Rs. 1,72,77,91,273/-shown as other income and contract receipts of Rs.57,56,57,561/- not disclosed by the assessee in the ITR. Accordingly, profit of Rs.52,02,48,754/- was considered the income of the assessee from works contract. Further to this the assessee has disallowed a sum of Rs. 13,87,72,635/- u/s 40(a)(ia) of the Income-tax Act, 1961 and added to the total income. Assessee against the interest income of Rs.2,58,85,880/- and other non-operating income of Rs.1,23,88,682/- as disclosed by the assessee in the ITR separately considered for calculating the income of the assessee. As discussed in the earlier para and as observed by the AO that the assessee has not disclosed works contract receipt of Rs.57,56,57,561/-in its ITR whereas detail of the same was available in Form 26AS. The assessee has also shown the difference of Rs.57,56,57,561/- in the reconciliation chart given. This works contract receipt of Rs.57,56,57,561/-has been considered for application of NP rate after rejecting the books of account as discussed above by the ld. AO. While doing so the ld. AO noted that if the contention of the assessee that complete books of account have been maintained along with relevant bills and vouchers and trading results should be accepted as such, is considered then also there would be an addition of Rs.57,56,57,561/- to the income declared by the assessee being excess work receipt not disclosed in the ITR. Ld. AO also noted that as the addition after rejection of books of account is more than the addition which could be made on account of difference in works contract receipts, without rejecting the books of account, so it is found reasonable to make addition after rejecting the books of account only. Based on that observation the assessment was completed wherein the income was computed as under:
Assessee filed first appeal before the commissioner of income tax wherein the appeal of the assessee was allowed in part and revenue has challenged the finding of the ld. CIT(A) in this appeal.
10. Ground no. 2 & 3 raised by the revenue is that the ld. CIT(A) was not justified in directing to delete the addition of Rs. 13,87,72,365/- when the assessee themselves disallowed the same while computing the income in the ITR filed as per provision of section 40(a)(ia) of the Act. The bench noted that while deciding this issue the ld. CIT(A) has considered the submission of the assessee that disallowance of Rs. 13,87,72,635/- already made u/s 40a(ia) by the assessee- appellant as the TDS amount was deposited delayed and based on the provisions of law, the same would have to be disallowed while making the computation of income and would be claimed only in the year of payment.
Since the said amount stands already included in the income while making the computation of income there is hardly any need to make any comment on the same and to draw any adverse inference on the basis of the same.
If the books of accounts are rejected, and net profit is estimated by application of net profit rate, there cannot be again addition on account of any disallowance based on the same set of books of accounts. Here we note that the books of accounts were rejected, and net profit rate was applied. Thus, having accepted the fact of rejection of book results making separate addition from the same set of books is incorrect. The issue raised in this year also prevailed in the earlier year wherein no separate addition were made in relation to payments for default of section 40a(ia) while estimating the income, even by the AO himself. Thus, taking a different stand in the current year is not only bad in law but is also unjustified on the facts. While accepting this contention of the assessee the ld. CIT(A) has held as under:
The judicial pronouncements relied upon by the appellant also approve this view. Ld ITAT in its order for AY 2016-17 in the case of appellant has also computed income of the appellant without making separate addition on account of section 40(a)(ia) of the Act though the appellant had disallowed amount of Rs. 37,56,32,712/- in computation of income (para 5.1 of Ld CIT(A) order for AY 201617). But in their order for AY 2016-17, neither Ld CIT(A) nor Ld ITAT made any separate addition on this count. Ld CIT(A) in para 7.6 of his order gave categorical finding that “This disallowance being 8.76% of the revenue, further addition to total income was not justified”.
It is also logical that when income is being estimated, no addition on account of section 40(a)(ia) be made. The AO is directed to delete separate addition of Rs. 13,87,72.635/- made u/s 40(a)(ia) of the Act.
As is available from the above, finding that while allowing the grounds of appeal of the assessee, ld. CIT(A) has considered the decision of the ITAT in the case of the assessee’s case and has accordingly allowed the grounds of appeal. The ld. DR did not demonstrate any contrary decision having binding precedent and therefore, we do not find any merit in the grounds of appeal raised by the revenue and therefore, ground no. 2 & 3 raised by revenue has no merit and therefore, dismissed.
11. Ground no. 4 raised by revenue stating that ld. CIT(A) was not justified in excluding amount of Rs. 1,72,77,91,273/- from turnover of the assessee for determining GP 29.29% whereas the above amount was shown by assessee itself in its ITR under the had “other income” in P&L account so it is part of business receipts along with amount of Rs. 2,73,93,10,472/- from revenue from operations shown by assessee and holding that this amount as un- accrued income when the assessee itself has shown the same as part of income in its ITR. On this issue the relevant finding of the ld. CIT(A) is reproduced herein below for the sake of convenience:
As regard exclusion of claims of Rs. 172,77,91,273/- from contract receipts – which is raised in SoF and not in GoA, it is noticed from P/L account and Note 3.20 of financials that the appellant had himself included this amount in ‘Other income and computed taxable income after considering it as part of receipts. This argument is, therefore, dismissed. There is an another limb of this ground which is inclusion of this amount in contract receipts for the purpose of applying net profit rate on this amount. The appellant has argued that this claim was in respect of two parties who did not accept this claim and, therefore, it is a disputed claim. During the assessment proceedings, the appellant filed details in the shape of copy of suit and letter copy of letter from one of the parties. Relevant discussion in this regard has been made in para 6-9 of the Order.
The discussion made in the Order shows that there was no dispute with regard to nature of claim in as much as its nature is concerned. There is no doubt that this was an unilateral claim which was made on the part of the appellant and which was not accepted by the parties concerned. Now the questions that arises is whether such claim gives rise to any income and is it taxable. Courts have held that such claim gives rise to only notional income. Income may accrue in the year in which a cause of action arises if within the taxable year the other party admits liability even though the exact amount is left to later negotiations if there is a reasonable basis upon which it may be estimated. The estimated income is accrued at once subject to correction when the amount is agreed upon. If the amount of the liability is litigated however even though liability is admitted it has been held that income does not accrue until the litigation is finally terminated. But if liability is not admitted income does not arise from mere accrual of a cause of action. The income may not be accrued until a settlement is made or if the claim is litigated until all possible appeals have been taken or the liability has become final by the expiration of time to appeal from a judgement for the taxpayer. This amount, therefore, cannot be taken as base for applying net profit rate on estimate basis.
As we note that in the assessment proceeding the assessee was asked to explain the claim of Rs. 1,72,71,91,273/- shown under the head long term loans and advances with supportive documents. It was also requested as to how and why claims of Rs.1,72,71,91,273/- has been transferred /shown in the ITR under the head “other income as other claims”. In response to this specific query the assessee filed a reply vide letter e-filed on 21.12.2019. In support of contention of claim the assessee has filed copy of suit filed by it through its senior manager, Shri Ranu Singh s/o Shri Gulab Singh against PAN India Infrastructures P. Ltd, and others, in which the assessee prayed for a decree for permanent injunction restraining the defendants i.e. PAN India Infrastructures P Ltd, and others from claiming bank guarantee for performance security bearing no. 316020351949/AP dated 04.04.2011 for Rs.5,50,00,000/-, bank guarantee for performance security bearing no. 3160203519958/AS dated 04.04.2011 for Rs.8,25,00,000/- and bank guarantee for performance security bearing no. 316020453474/AN dated 26.06.2013 for Rs. 10,00,00,000/-. In support assessee-appellant also filed a copy of letter 31.12.2015 signed by authorized signatory of M/s Kurukshetra Expressway (P) Ltd. addressed to the Project Director, NHAI, Project Implementation Unit, 305, Vidhya Niketan Road. D Park Model Town Rohtak-124001. (Haryana), subject of which was “Four laning of Rohtak- Bawal Section of NH-71 from KM 363.300 (Design KM 363,300) to KM 450.800 (Design KM 445.853) under NHDP III in the state of Haryana on Design, Build, Finance, Operate and Transfer (DBFOT) Basis Notice by the concessionaire for payment of compensation on account of delay events, additional works/change of scope and breach of contract by the authority. The entry so passed is merely to support the claim made by the assessee in court of law and the income has never realised, reached or accured in the hands of the assessee. Thus, when the book results were rejected while estimating the profit only the real income be taxed and not the notional income. While deciding this issue the ld. CIT(A) has considered the issue that there is no finality about the income and the estimated income is accrued at once subject to correction when the amount is agreed upon. If the amount is litigated, however, even though liability is admitted it has been held that income does not accrue until the litigation is finally terminated. But if liability is not admitted income does not arise from mere accrual of a cause of action. The income may not be accrued until a settlement is made or if the claim is litigated until all possible appeals have been taken or the liability has become final by the expiration of time to appeal from a judgement for the taxpayer and that too when book results are rejected and at that point of time only the real income be taxed and not the litigated income be considered while estimating the income. In the light of this observation we do not find any infirmity in the finding of the ld. CIT(A) and therefore ground no. 4 raised by the revenue stands dismissed.
12. Ground no. 5 raised by the revenue challenges the decision of the ld. CIT(A) in excluding amount of Rs. 73,98,982/- from turnover of the assessee for determining GP @ 29.29% when the assessee failed in the appellate proceedings to explain the difference in amount shown in form 26AS and amount credited in books of accounts in the cases of M/s Rajasthan State Road Development and Construction Corporation Ltd. (difference of Rs. 71,98,207/- and M/s JMC Projects India Ltd. (difference of Rs. 2,56,778/-). Apropos to this ground the relevant finding of the ld. CIT(A) is as under:
I have considered the submission of the appellant, gone through copy of financials for AY 2016-17, copy of assessment order for AY 2016-17, and copy of account of contractors for AY 2016-17. In AY 2016-17, though there was difference between figures of receipts as per Form 26AS and that shown in the P/L account, no addition was made by the AO while passing assessment order. Similar is the situation this year but the stand of the AO is different. While making the addition, the AO did not consider explanation offered by the appellant where he submitted a detailed chart in respect of each deductor showing against them amount as per Form 26AS and amount booked in his accounts. Though the AO has reproduced the explanation – where difference was attributed to advance payment on which TDS was made but this was not part of turnover of the appellant in para 20 of the Order, he rejected the explanation summarily, without pinpointing the party in whose case it was different and without assigning any reasons for not accepting explanation of the appellant. It is noticed from this chart that in following cases of tax-deductors, the position was opposite as amount shown in Form 26AS was less and amount declared in books of account was on higher side –
While in some cases, amount booked in accounts was on lower side, in some it was on higher side and in some cases both the amounts matched with each other, as per Form 26AS and books of account. Though the explanation was offered by the appellant during assessment proceedings, mismatch was explained, the AO rejected the explanation of the appellant
During appellate proceedings also, the appellant filed copy of Form 26AS and copies of account of the parties concerned. The amount of difference has been once again explained in the reply. It is seen that this practice of receiving advance causes difference between figures of receipts as per Form 26As and that shown in the P/L account. Since the difference stands explained, and no adverse inference drawn in AY 2016-17, the difference is not to be included in figure of contract receipts and gross profit rate is not applied on this difference while computing gross profit.
Since this difference has not been included in turnover and not considered for estimating income of the appellant while taking GoA no.2, this ground stands already allowed.
As is evident from the above finding of the ld. CIT(A) has favored the assessee on two reasons one the similar issue was raised in the A.Y. 2016-17 and the ld. AO accepted the explanation of the assessee, and the matter has reached to finality as the appeal before the High Court was not considered. Secondly the ld. CIT(A) has considered the explanation of the assessee and hold that difference stands explained, and no adverse inference drawn. Before us the ld. DR did not demonstrate any perversity in the explanation of the assessee and finding of the ld. CIT(A) and therefore, we do not find any merits in the ground raised by the revenue and the same stands dismissed.
13. Now the left-over ground no. 1 wherein the grievance of the revenue is that ld. CIT(A) was not justified in estimating net profit @0.11% and ignoring the fact that the AO has categorically held that 70% of expenses Rs. 46,25,75,450/- not subject to TDS are not genuine and this disallowance of Rs. 32,38,02,815/-(70% of 46,25,75,450/-) was included in the estimated addition by applying N.P. rate of 10.32%. The bench noted that on the issue of estimate of profit the ld. CIT(A) has observed as under :
Since, order of ld ITAT and decision of the High Court were not available with the AO at the time of passing the Order, the merit of additions made in the Order is to be seen in the light of aforesaid order of Ld. ITAT.
In the Order, the AO applied net profit rate of 10.32%, the basis of which was Ld CIT (A) order for AY 2016-17 since by the time the Order was passed, order of Ld ITAT and decision of Hon’ble High Court were not available. Ld ITAT in its order for AY 2016-17 ordered for computing net profit/total income at Rs. 50 lakhs, In that year, contract and other receipts of the appellant were Rs. 4,48,83,51,085/- The net profit rate thus comes at 0.11% (50,00,000 / 4,48,83,51,085)
xxx xxx xxx xxx
Now when action of AO regarding rejection of books of account has been upheld, the basis of computing total income of the appellant is to be taken in the light of order of Ld ITAT for AY 2016-17. As is gathered from the order of Ld ITAT (para 23), in AY 2016-17, the appellant declared gross profit rate of 29.29% which was higher in comparison to that for AY 2015-16 which was 27.87%. Ld ITAT, therefore, picked gross profit rate of 29.29%. In present AY, the gross profit comes at Rs. 1,03,37,47,371/- as per following calculation –
| Contract receipts and other operating income excluding Claims- | Rs.2,75,16,99,154/- |
| 1. Contract revenue | Rs 2,73,93,10,472/- |
| 2. Other operating income | Rs. 1,23,88,682/- |
| Total | Rs.2,75,16,99,154/- |
(Since it has been held in foregoing paragraph that Claims are just notional income and they are neither income nor give arise to any profit)
| Less- Operating expenditure | Rs.3,77,30,57,843/- |
| 1. Change in inventory – | Rs. 1,07,16,52,251/- |
| 2. Operating expenditure- | Rs.2,70,14,05,592/- |
| Gross profit) | Rs.1,02,13,58,689/- |
| Gross profit % | (-)37.11% |
This year there is gross loss @ 37.11% as against gross profit @ 29.29% for AY 2016-17. Since books of account are defective and, therefore, have been rejected, gross profit rate for AY 2016-17 is applied and gross profit comes at Rs.80,59,72,682/- ( Rs.2,75,16,99,154/-x29.29%).
In AY 2016-17, Ld ITAT disallowed 20% of employees’ benefit expenses and administrative expense on account of theybeing non-verifiable. From above, indirect expenses on account of these two expenses, debited by the appellant in the P/L account, are, therefore, allowed to the extent of 80% for the defects pointed out by the AO in para 11-14 of the Order. Amount debited with respect to these two expenses is as under-
| 1. Employees’ benefit expenses | Rs.27,75,56,119/- |
| 2. Administrative expense | Rs. 19,05,50,300/- |
| 3. Total | Rs. 46,81,06,419/- |
| 80% of Rs.46,81,06,419/- | Rs. 37,44,85,135/- |
Net profit/total income thus comes as under
| Gross profit 29.29% Less- |
Rs.80,59,72,682/ |
| 1. Indirect expenses | Rs. 37,44,85,135/- |
| 2. Interest | Rs. 35,92,15,998/- |
| 3. Depreciation | Rs. 23,68,58,343/- |
| Total | Rs.97,05,59,476/- |
| Net profit/total income | Rs.16,45,86,794/- |
| (-) |
The net result of computation of net profit is loss. The result of computation of income made by Ld ITAT in respect of AY 2016-17 was also in loss as is evident from para 25. 26 and 27 of its order.
As per calculation done in para 26 of order of Ld ITAT, total income was arrived at Rs. 76.51-Rs. 95.19 (70,96+24.23) (-) Rs.18.68. However Ld ITAT determined total income at Rs. 50,00,000/-. In the present case also, result of computation of total income is loss ie Rs.16,45,86,794/- but following rate of net profit of 0.11%, adopted finally by the Ld’ ITAT for arriving at figure of Rs. 50,00,000/-,total income on turnover of Rs.2,75,16,99,154/- (excluding Claims) comes at Rs.30,26,869/-.
The AO is directed to assess total income of the appellant at Rs.30,26,869/- and delete remaining addition.
As is evident from the above order of the ld. CIT(A) that he has followed the order of the co-ordinated bench which ultimately reached finality when challenged before our Jurisdictional High Court and therefore, when the ld. DR did not demonstrate before us as to how we can deviate from the binding precedent, when the ld. CIT(A) has compared the finding of the earlier year with that of the current year comes to loss and in that year of A. Y. 2016-17 being loss and based on the order of the co-ordinate bench applied the profit rate @ 0.11%. Thus, considering these overall facts as discussed in the order of the ld. CIT(A) and no contrary material before us to take a difference view of the matter we do not find any infirmity in the finding of the ld CIT(A). Based on these observation ground no. 1 raised by the revenue stands dismissed.
In the result, the appeal of the revenue is dismissed.
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