2019 (9) TMI 861 - AT - Income Tax

Addition u/s.153A - Disallowance u/s.40(a)(ia) - failure to deduct tax at source on payment towards Transportation receipts - HELD THAT - The instant case falls under the completed assessment category, for which though the return was filed u/s.139(1) but the assessment was not taken up and further the time limit for issuing notice u/s.143(2) had already expired. The extant addition has been made by invoking the provisions of section 40(a)(ia) - assessee debited its Profit and loss account with a sum of ₹ 3,46,64,154/- on account of Earth moving charges. AO found that the assessee did not deduct any tax at source on this amount u/s.194C of the Act. Following his order for the A.Y. 2005-06, he considered 25% of the payments made on Earth moving charges as towards transportation of sand etc. on which it was opined that tax was liable to be deducted at source. Having not deducted tax at source, the AO held that the amount was disallowable u/s.40(a)(ia). It is observed from the above discussion that the disallowance in question is not based on any incriminating material found during the course of search and assessment year under consideration is that of completed assessment, and not that of abated assessment. In our considered opinion and respectfully following the above precedents of the Hon ble jurisdictional High Court, we hold that the disallowance in question cannot be sustained because no incriminating material was found on this score. We, therefore, order to delete the above disallowance. Estimation of income at 10% of receipts - number of incriminating documents were found during the course of search, which were seized - HELD THAT - Section 44AD though the section strictly applied only where the gross receipts did not exceed an amount of ₹ 40.00 lakh, but at any rate, it gave hint about the appropriate percentage of profit in the business of Civil Construction. Even though this section technically does not apply to the assessee because of the amount of gross receipts exceeding ₹ 40.00 lakh, still we can find out a reasonable net profit percentage to be applied in the given circumstances at 8%. We, therefore, hold that a net profit rate of 8% be applied to the Total receipts as against 7.49% declared by the assessee and 10% estimated by the ld. CIT(A). However, in applying this percentage, income in the nature of interest received on income-tax amounting to ₹ 6,994/- and office rent received amounting to ₹ 1,75,500/- which are items of subject matter of Ground No.1 of the Revenue s appeal, should be excluded. Interest received on income-tax should be separately included in the total income of the assessee under the head Income from other sources . Office rent should be considered for the purposes of computation of income under the head Income from house property . These two amounts of receipts, however, are directed to be excluded while applying the percentage of net profit at 8% on the gross contract receipts. The other two items in Ground No.1 of the Revenue s appeal, namely, Discount received and Miscellaneous receipts are related to the contract receipts of the assessee which cannot be separately excluded.

Summary

Issues Involved:
1. Confirmation of addition under section 40(a)(ia) of the Income-tax Act, 1961.
2. Estimation of income at 10% of receipts and reduction of net profit estimation by CIT(A).

Issue-wise Detailed Analysis:

1. Confirmation of Addition under Section 40(a)(ia):

The first issue in the assessee’s appeal concerns the confirmation of an addition of ?1,05,18,217/- due to disallowance under section 40(a)(ia) of the Income-tax Act, 1961. The assessee, a firm engaged in Civil Construction and Infrastructure Development, was subjected to a search and seizure action under section 132 of the Act. During the assessment proceedings, the AO observed the assessee’s failure to deduct tax at source on payments amounting to ?1,05,18,217/- towards Transportation receipts, leading to the disallowance under section 40(a)(ia). The assessee argued that since no notice under section 143(2) was issued within the stipulated period, the assessment was deemed completed, and thus, any addition could only be made based on incriminating material found during the search. The Tribunal observed that the disallowance was not based on any incriminating material found during the search and, following the jurisdictional High Court precedents, held that the disallowance could not be sustained. Consequently, the addition was ordered to be deleted.

2. Estimation of Income at 10% of Receipts and Reduction of Net Profit Estimation by CIT(A):

The second issue pertains to the estimation of income at 10% of receipts. The Revenue’s appeal contests the CIT(A)’s decision to reduce the estimation of net profit to 10%. During the search, incriminating documents indicating inflated expenses were found, and the assessee initially surrendered ?6.50 crore, later revising it. The AO noted discrepancies between two sets of books of account and made an addition based on the difference in expenses recorded. The CIT(A) observed that the assessee reconciled the figures and reduced the addition to 10% of the turnover. Both parties appealed their respective stands. The Tribunal noted evidence of inflated expenses and discrepancies in the books but found the exact magnitude of inflation indeterminable. Considering Section 44AD, which suggests an 8% profit rate for Civil Construction businesses, the Tribunal deemed an 8% net profit rate reasonable. However, interest received on income-tax and office rent should be excluded from this calculation, while discount received and miscellaneous receipts should be included. The matter was remanded to the AO for recalculating the income based on these observations, ensuring the assessee is given a reasonable hearing.

Conclusion:

The Tribunal ordered the deletion of the disallowance under section 40(a)(ia) due to lack of incriminating material and remanded the issue of income estimation to the AO, directing the application of an 8% net profit rate on gross contract receipts, excluding specific items. Both appeals were partly allowed.