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2010 (12) TMI 875 - AT - Income TaxEstimation of profit - Notional profit - when asked by the AO the assessee could not explain such a presumption that there would have been a loss - assessee itself admitted that there was understanding with the group company to reimburse the cost and pay some reasonable profit but no profit was charged by the assessee - assessee was doing the business of development of project and sale thereof - This is a case of rejection of accounts and estimation of profit which is legally in order - the estimation of profit is held appropriate and the order of CIT(A) is upheld. Expenditure incurred as work-in-progress - there was no dispute that till financial closure the expenditure incurred was shown by the assessee in the balance sheet as advance recoverable. - as and when the project came to financial closure and the revenue was realized from the project, the expenses could be allocated on pro-rata basis depending upon the volume of revenue and other financial parameters. - Decided against the assessee. Regarding penalty - It is a case of estimation of income and addition to total income. Such addition as we have held earlier is covered by the provisions of Explanation 1 to section 271(1)(c) and penalty is leviable. Even the Hon ble Supreme Court in case of Reliance Petro Products Ltd. (2010 (3) TMI 80 - SUPREME COURT) have held that for levy of penalty it has to be seen that conditions of section 271(1)(c) are applicable. In the present case we have held that the provisions of Explanation 1 are applicable and penalty is leviable. - Decided against the assessee
Issues Involved:
1. Estimation of profit on transfer of BPO business. 2. Disallowance of business loss including loss on transfer of BPO business. 3. Levy of penalty under section 271(1)(c). Detailed Analysis: 1. Estimation of Profit on Transfer of BPO Business: The first issue pertains to the estimation of profit on the transfer of a BPO business amounting to Rs. 1,01,47,914/-. The assessee, formerly known as Hotgi Fibres Ltd, changed its name and objects to Birla Project Development Co. Ltd. The company undertook a BPO project, which was completed in the assessment year 2004-05 and transferred to a group company, Indo P.T. Rayon Ltd. (IPRL), at cost price. The total expenditure on the project was Rs. 10,43,64,821/-, recovered as professional charges. Additionally, Rs. 430.18 lacs was billed as professional fees, including service tax. The AO questioned the transfer at cost price and considered the transaction a colorable device to avoid taxes, estimating the profit at 10% of the project cost, resulting in an income of Rs. 1,01,37,910/-. The CIT(A) upheld the AO's decision, noting the lack of evidence that the assessee attempted to sell the project in the market and the abnormality of not charging profit despite an understanding with IPRL. The Tribunal agreed with the lower authorities, finding the transaction collusive and the estimation of profit justified, citing the Supreme Court's judgment in McDowell and Co. 2. Disallowance of Business Loss: The second issue involves the disallowance of business loss amounting to Rs. 5,89,60,444/-, including a loss of Rs. 11,75,348/- on the transfer of the BPO business. The assessee, engaged in developing projects until financial closure, had taken over various projects from group companies, incurring expenses charged to the profit and loss account. The AO treated these expenses as work in progress to be carried forward, disallowing the claimed loss. The CIT(A) confirmed this decision, following the Tribunal's ruling in the assessee's case for the assessment year 2003-04, which treated such expenses as work in progress until project completion. The Tribunal upheld the CIT(A)'s order, adhering to its previous decision. 3. Levy of Penalty Under Section 271(1)(c): The third issue concerns the levy of penalty under section 271(1)(c) related to the estimated income from the BPO project. The AO initiated penalty proceedings, and in the absence of any explanation from the assessee, levied a penalty of Rs. 36,40,563/-. The CIT(A) upheld the penalty, referencing the Supreme Court's judgment in Dharmendra Textile Processors, which held that penalty under section 271(1)(c) is a civil liability not requiring proof of willful concealment. The Tribunal confirmed the penalty, rejecting the assessee's arguments that penalty cannot be imposed on estimated additions or debatable issues. It found the assessee's explanation for selling the project at cost unsubstantiated and not bonafide, thus falling under Explanation 1 to section 271(1)(c). The Tribunal distinguished the case from the Supreme Court's decision in Reliance Petro Products, noting that the present case involved an estimation of income and addition to total income, not a mere disallowance of a claim. Conclusion: The Tribunal dismissed both appeals of the assessee, upholding the estimation of profit on the transfer of the BPO business, the disallowance of business loss, and the levy of penalty under section 271(1)(c). The decisions were based on the findings that the transactions were collusive and aimed at tax evasion, justifying the AO's and CIT(A)'s orders.
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