2019 (10) TMI 1177 - AT - Income Tax

Revision u/s 263 - estimation of profits - HELD THAT - AO was swayed by the action of his predecessor in the earlier year which he had made an adhoc addition, however, the AO failed to take into consideration the declared G.P in the past year (11.68%) which is substantially higher as compared to current year (5.95%). Where there is a substantial increase in the turnover (₹ 61.21 Crores) as compared to the past year (₹ 6.08 Crores), the same is a material change which has happened during the year and it was incumbent on part of the AO to examine and consider the impact thereof while carrying out the best judgment. AO was not aware of the said development and in fact, the assessee in its submission during the course of assessment proceedings has submitted the said fact before the AO. Besides that during the year, the assessee was also engaged in sub-contract work which was awarded by a Joint Venture by name of HGIEPL-RPS JV of which the assessee is one of the members. The fact of increase in turnover and the fact of involvement in a sub-contract during the year, which may have different profits margins depending upon nature of work and other parameters, and that too, with a related entity, is clearly a material development and distinction vis- -vis the past year and the same should have been examined and considered while estimating the profits by the AO. AO has failed to take the same into consideration and therefore, the basis of estimation merely relying on the past history cannot be accepted as rational having failed to establish reasonable nexus with the material on record. Violation of provisions of section 40A(3) - Pr. CIT has rightly highlighted this fact which the Assessing has failed to examine during the course of assessment proceedings and the same should be considered as a relevant factor while estimating the profits by the Assessing officer. It is a clear case of failure on part of the AO to examine the matter ignoring the material available on record and thus, a matter of complete lack of application of mind. We therefore donot see any infirmity in the action of the Pr. CIT who has rightly intervened and exercised his revisionary jurisdiction u/s 263 of the Act. Increase in the partner s capital account - Pr. CIT has observed that no documentary evidence is available on record and apparently the said matter has not been examined by the Assessing Officer. Undisputedly, the matter relating to increase in the partners capital account has not been examined by the Assessing Officer. Therefore, when the matter has not been examined at first place by the Assessing Officer, it would be difficult to hold that the order of the AO is not erroneous and as far as whether the order is prejudicial to the interest of the Revenue or not, the same is subject matter of examination and had the matter been examined by the Assessing officer, it can be determined whether the joint venture has been finally assessed at MMR at claimed by the assessee and whether the shares of the members are determinate or not. Therefore, in absence of examination by the Assessing officer, it is difficult to hold that the issue raised by the ld Pr CIT has not caused any prejudice to the Revenue and therefore, we upheld the order of the ld Pr. CIT and do not see any infirmity in the action of the ld. Pr. CIT in directing AO to examine the same during set aside proceedings. Capital infusion by the assessee firm in the joint venture - as been shown as loan and advance in the books of the assessee firm and the fact that the assessee has incurred huge interest expenses on the secured loans and on the partners of the capital account. The assessee has not disputed these facts and we find that the same has not been examined by the Assessing officer. The contention of the ld. AR regarding the business expediency of contributing the capital to the joint venture is again a matter of examination and given that the said matter has not been examined by the Assessing Officer, we do not see any infirmity in the action of the ld. Pr. CIT in exercising his revisionary jurisdiction. Examination of source of cash deposited in the bank account of Sh. Rameshwar Prasad Sharma (HUF) from whom the assessee has received unsecured loan of ₹ 10,00,000/-, given that Rameshwar Prasad Sharma (HUF) is a related entity , the onus of the assessee is clearly on higher pedestal to justify the creditworthiness and genuineness of the transaction especially in light of the observations of the ld. Pr. CIT that the cash was deposited in the bank account of Rameshwar Prasad Sharma (HUF) just before unsecured loan was given to the assessee firm. Given that the Assessing Officer has not examined the said transaction, there is no infirmity in the action of the ld. Pr. CIT in directing the Assessing Officer to do so in the set aside proceedings. Reflection of individual partner s bank accounts in the balance sheet of the assessee firm , apparently given that these are partner s personal bank accounts and not the bank accounts maintained by the partners on behalf of the assessee firm, we find it strange as to how the personal bank accounts have been reflected as part of the balance sheet of the assessee firm which is legally distinct entity viz a viz the partners as far as taxation laws is concerned. CIT was right in directing the Assessing Officer to examine these transactions in the partner s personal bank accounts and linkage thereof with the transactions of the assessee firm. It is a clear case where the order passed by the Assessing officer is erroneous and prejudicial to the interest of the Revenue. We therefore, do not see any infirmity in action of the ld. Pr. CIT who has rightly intervened and exercised his revisionary jurisdiction u/s 263 of the Act. Appeal of the assessee is dismissed.

Summary

Issues Involved:
1. Rejection of books of accounts under Section 145(3) and estimation of profits.
2. Potential violation of Section 40A(3) regarding contract expenses.
3. Addition in partner capital accounts.
4. Loans and advances to Joint Venture (JV).
5. Unsecured loans from related entities.
6. Reflection of individual partner’s bank accounts in the firm’s balance sheet.

Detailed Analysis:

1. Rejection of books of accounts under Section 145(3) and estimation of profits:
The ld. Pr. CIT observed discrepancies in the NP rate reported in Form 3CD and during assessment proceedings, which the AO failed to notice. The AO made a lump sum trading addition of ?3 lakhs without considering the substantial increase in turnover from ?6.08 crores to ?61.21 crores. The tribunal noted that once books are rejected, the AO must estimate income based on best judgment with a reasonable nexus to the material on record. The AO's arbitrary addition of ?3 lakhs, without considering the increased turnover and the nature of sub-contract work, was deemed erroneous and legally unsustainable. The ld. Pr. CIT's intervention under Section 263 was upheld.

2. Potential violation of Section 40A(3) regarding contract expenses:
The ld. Pr. CIT highlighted the possibility of violation of Section 40A(3) due to substantial contract expenses. The AO should have examined ledger accounts to affirm compliance. The tribunal agreed that while no separate addition under Section 40A(3) is required once books are rejected, the AO should consider potential violations as a relevant factor in profit estimation. The AO's failure to do so was seen as a lack of application of mind, justifying the ld. Pr. CIT’s revisionary jurisdiction.

3. Addition in partner capital accounts:
The ld. Pr. CIT noted the absence of documentary evidence for an increase of ?64,11,975 in partner capital accounts. The assessee claimed this was due to profits from a JV credited directly to partners' accounts, already taxed at the JV level. The tribunal found that the AO did not examine this matter, making it difficult to determine if it was prejudicial to Revenue. The ld. Pr. CIT's directive to the AO to examine this issue was upheld.

4. Loans and advances to Joint Venture (JV):
The ld. Pr. CIT questioned the nature and source of ?3.94 crores shown as loans and advances to the JV, especially given the significant interest expenses claimed by the assessee. The tribunal noted that the AO did not examine these transactions, and the assessee's claim of business expediency needed verification. The ld. Pr. CIT's directive for further examination was upheld.

5. Unsecured loans from related entities:
The ld. Pr. CIT observed that cash deposits in the lender's bank account before giving a ?10 lakh unsecured loan to the assessee indicated potential issues. The tribunal agreed that the AO should have examined the source of these deposits, especially since the lender was a related entity. The ld. Pr. CIT's directive for further examination was upheld.

6. Reflection of individual partner’s bank accounts in the firm’s balance sheet:
The ld. Pr. CIT found it unusual that individual partners' personal bank accounts were reflected in the firm's balance sheet. The tribunal agreed that these accounts should be examined for any linkage with the firm's transactions. The ld. Pr. CIT's directive was upheld.

Conclusion:
The tribunal concluded that the AO's order was erroneous and prejudicial to the interests of the Revenue, justifying the ld. Pr. CIT's intervention under Section 263. The appeal of the assessee was dismissed, and the order was pronounced in the Open Court on 25/10/2019.