2015 (7) TMI 112 - AT - Income Tax

Estimation of net income at the rate of 16% - Held that - The estimate of net income from the contract work at the rate of 16% of the turnover was without any basis. We find that as per the provisions of section 44AD of the Income Tax Act, net profit from contract work declared by the assessee at the rate of 8% of the turnover would be accepted if the turnover of the assessee is less than the limit specified in that section. Though the said section is not applicable in the instant case, as the turnover of the assessee is more than the turnover specified in that section, however, taking a cue from the provision of this section and taking into consideration normal trend that the percentage of net profit is generally less when the turnover is higher, in our considered view, it shall meet ends of justice, if the net profit is estimated at 8% of its turnover. - Decided partly in favour of assessee. CIT(A) ought to have sustained the disallowance of ₹ 1,25,00,000/- made by the AO on the ground that the expenditure was not genuine, and ₹ 60,00,000/- on account of section 40(a)(ia) of the Act - Held that - When the CIT(A) has estimated the net profit, question of allowing or disallowing of any specific expenditure does not arise. The DR could explain as to why after estimation of net profit, still the disallowance of certain expenses of ₹ 1,25,00,000/- and ₹ 60,00,000/- was warranted, and how it can be held that such expense was allowed by the CIT(A). As we have already estimated the net income of the assessee of the contract work executed by the assessee, question of any further disallowance does not arise. - Decided against revenue. Addition made on the alleged ground of retraction of income admitted during the search - Held that - merely on the basis of admission of the assessee, the additions cannot be made unless and until some corroborative evidence was found in support of such admission. Therefore, in our considered view, in the absence of any corroborative material to support the admission made during the course of search under section 132(4) of the Act addition cannot be sustained, especially when such admission was later on retracted by the assessee by filing the return of income as well as by filing a separate retraction letter also. We, therefore, delete the addition of ₹ 1,78,00,000/- and allow this ground of the appeal of the assessee. See Kailashben Manharlal Chokshi Vs. CIT 2008 (9) TMI 525 - GUJARAT HIGH COURT - Decided in favour of assessee. Disallowance u/s.40(a)(ia) - Held that - CIT(A) on estimate basis by assuming net income at the rate of 16% of the turnover. Thus, it is observed that the business income of the assessee was not computed as per the normal computation provision contained in sections 28 to 43AC of the Income Tax Act, but the net income was estimated after rejecting the book results. Once this alternative method of estimating the net income was utilized, question of making allowance or disallowance as per provision of sections 28 to 43AC does not arise. In the instant case, we have upheld the computation of business income on the basis of estimation in ground no.3 of the appeal of the assessee, though, at the rate of 8% of the turnover in replace of 16%, and therefore, the question of further disallowance by invoking the provisions of section 40(a)(ia) of the Act does not arise. See CIT Vs. Banwari Lal Banshidhar(1997 (5) TMI 37 - ALLAHABAD High Court ) - Decided in favour of assessee.

Issues Involved:
1. Estimation of net profit and rejection of book results.
2. Disallowance of specific expenditures.
3. Imposition of penalties under sections 271(1)(c) and 271AAA.
4. Charging of interest under sections 234A, 234B, and 234C.
5. Retraction of income admitted during the search.
6. Disallowance under section 40(a)(ia).

Detailed Analysis:

1. Estimation of Net Profit and Rejection of Book Results:
For the Assessment Years (AY) 2008-09, 2009-10, and 2010-11, the issue centered around the estimation of net profit and rejection of book results. The CIT(A) estimated the net profit at 16% of the turnover, which was contested by the assessee as excessive and unrealistic. The tribunal found no basis for the 16% estimation and noted that the net profit for the preceding year was 12.41%. Considering the nature of the work and the provisions of section 44AD, the tribunal deemed an 8% net profit estimation more appropriate. This decision was applied consistently across the mentioned assessment years.

2. Disallowance of Specific Expenditures:
For AY 2008-09, the CIT(A) had disallowed specific expenditures amounting to Rs. 1,25,00,000 and Rs. 60,00,000. The tribunal held that once the net profit is estimated, the question of allowing or disallowing specific expenditures does not arise. This principle was applied to subsequent years, leading to the dismissal of the Revenue's grounds for disallowance.

3. Imposition of Penalties Under Sections 271(1)(c) and 271AAA:
For AY 2008-09, 2009-10, and 2010-11, the assessee contested the imposition of penalties under sections 271(1)(c) and 271AAA. The tribunal found these grounds premature and dismissed them.

4. Charging of Interest Under Sections 234A, 234B, and 234C:
The assessee contested the charging of interest under sections 234A, 234B, and 234C for AY 2008-09, 2009-10, and 2010-11. No arguments were made on these grounds, and the tribunal held that charging interest is consequential in nature, dismissing these grounds.

5. Retraction of Income Admitted During the Search:
For AY 2010-11 and 2011-12, the issue involved the retraction of income admitted during the search. The assessee retracted the disclosed income of Rs. 1,78,00,000 for AY 2010-11 and Rs. 7,00,00,000 for AY 2011-12, claiming the admissions were made under coercion and without corroborative evidence. The tribunal found that the statements were made without fully reviewing the seized material and lacked corroborative evidence. Citing the jurisdictional High Court's decision in Kailashben Manharlal Chokshi Vs. CIT, the tribunal held that admissions without corroborative evidence cannot sustain additions. Consequently, the tribunal deleted the additions for both years.

6. Disallowance Under Section 40(a)(ia):
For AY 2010-11, the CIT(A) made a disallowance of Rs. 20,00,000 under section 40(a)(ia). The tribunal noted that since the net income was estimated, the question of further disallowance under section 40(a)(ia) does not arise. The tribunal deleted the disallowance, citing the Allahabad High Court's decision in CIT Vs. Banwari Lal Banshidhar.

Conclusion:
The tribunal's judgment consistently applied principles regarding the estimation of net profit, rejection of book results, and the handling of specific expenditures and penalties. The tribunal emphasized the need for corroborative evidence to sustain admissions made during searches and upheld that estimated net profits preclude further specific disallowances. The appeals of the assessee were partly allowed, and those of the Revenue were dismissed.

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