2023 (9) TMI 1497 - AT - Income Tax

Assessment u/s 153A - reasonable estimate of net profit in the case of the assessee - HELD THAT - As precedence in assessee s case for earlier years on similar facts permeating in these years also becomes very relevant factor. Thus, in line with the earlier years, we estimate the profit in the following manner - i) In so far as direct contract receipts, that is, contracts which assessee has carried out as a contractor, estimation of net profit rate of 9% would be reasonable as compared to 11% estimated by the AO for the A.Y.2013-14 and 2014-15; and ii) In so far as sub-contracts receipts, net profit @4.5% is estimated, instead of 5.5% by the AO. Thus, assessee gets part relief in both the years. Rental receipts - As brought on record that in later years, ld. CIT(A) has estimated profit @85% of the rental receipts which has not been challenged by the department and has attained finality, therefore, we hold that on rental receipts, 85% of the profit should be estimated on the gross receipts. This issue is partly allowed. Deduction under Chapter VIA - As we find that this issue has not been discussed in the ld. CIT(A) order and also no details have been discussed in the assessment order also. Therefore, we feel that this issue should be remanded back to the file of the ld. AO to examine the claim of deduction and onus is on the assessee to substantiate its claim for deduction and AO shall grant relief in accordance with law, if found admiissble. Post Search Assessment Appeals - addi tion on account of bogus sub-contract charges - search and seizure operation was carried out and in response to notice u/s. 153A assessee has declared income on estimated basis, because the books of accounts were already rejected by the ld. AO in the original assessment proceedings - HELD THAT - The net profit in various years is ranging from 7.77% to 14.95%. The assessee in the return of income filed in response to notice u/s.153A had shown net profit rate of 8% in the contract receipts to factor in the sub-contract charges; and 4% from sub-contract receipts. The impact of this addition, if made on the net profit rate of 8% which is already more than declared in the books of account is more, then as stated above the net profit rate in these years will increase furthermore, viz., A.Y. 2012-13- 11.52%; A.Y. 2013-14- 12.67%; A.Y. 2014-15- 8.78%; A.Y. 2015-16- 17.55%; A.Y. 2016- 17- 14.69%; and in A.Y. 2017-18- 13.19%. This is more than, what has been estimated in earlier years. In the regular appeal for A.Y.2013-14 and 2014-15 we have estimated 9% on contract receipts and 4.5% on sub-contract receipts. Such estimation applicable for regular assessments will also apply here. As held above in the regular assessment appeals for A.Y.s 2012-13, 2013-14 and 2014-15, we have applied 9% on the direct contract receipts and 4.5% on sub-contract receipts. Accordingly, for these years also we are applying net profit rate of 9% on the direct contract receipts. Addition made by the AO separately for some of sub-contract charges - Assessee did carry out the work during the year as per the awarded contract, both as the main contractor and also have got the work done through subcontractor, the bogus sub-contract charges shown by the assessee would be a part of the business and expense. At the most net profit on the bogus sub-contract charges can be added to the net profit declared, because it is part of the contract work carried out by the assessee and if these sub-contract charges are treated to be bogus, then it means that assessee has tried to suppress profit from its contract business. The best recourse would be to estimate the net profit rate in all these years instead of making separate addition of the subcontract charges over and above the net profit shown in the books of accounts. Thus we hold that estimate of 9% as held above is far reasonable to factor in the sub-contract charges added by the AO. Accordingly, assessee gets part relief and now instead of net profit on direct contract receipts declared at 8% in the return filed u/s 153A, it will be 9% and separate addition as held will get subsumed. Additional income was declared by the assessee in its return of income pursuant to the notice u/s. 153A in the nature of interest received on fixed deposits with the banks as margin for issue of bank guarantees in favour of the Government organization - We find that before the ld. AO assessee has not made any such claim and it has offered it as income in the return of income. Further, this issue has not been challenged before the ld. CIT (A) also. Under these facts, we are not tinkering with the additional income declared by the assessee in the return of income and accordingly, this ground is dismissed. Additional income declared on the turnover of Directors - as argued it cannot be added as it is very high and excessive because in the seized documents, the turnover made by the Directors which was not according to regular books - The assessee estimated 12% from such turnover and offered it as additional income. Now the case of the assessee before us that, it is on higher side, not commensurate with the business of the assessee and lower percentage should be applied. We do not find any justification for such a plea that once the assessee has offered the income on the basis of seized document, then assessee cannot take a plea that the said additional income offered should be reduced by some adhoc percentage of net profit. Accordingly, ground No.4 is dismissed. Disallowance of Foreign travel expenses - foreign visit of directors alongwith their family members is not wholly and exclusively for the purpose of business - Undisputedly this assessment had abated at the time of search, because the last date of issuing notice u/s.143(2) dated 30/09//2017 and search was conducted on 20/09/2017. On merits, we find that the ld. AO has given detailed reasons as to why assessee has failed to prove the foreign travel expenses and the purpose for the business, accordingly and without any proper facts and material brought on record to show that the foreign travel related to the business of the assessee, ground raised by the assessee is confirmed. Bogus sub-contract charges - A.Y.2017-18 - As we have already held that since it is part of contract business of the assessee and no separate addition should be made and once we have estimated the net profit, this addition gets subsumed in the estimation of net profit. For this year we have estimated 9% on the contract receipts and therefore, this ground of the assessee is treated as partly allowed. Cash sales at Ulwe Bambavi - As we have already held that no profit rate of 9% should be applied instead of entire cash sales. Accordingly, this ground is partly allowed. Depreciation suomoto disallowed - case of the assessee before us is that assessee has wrongly offered additional disallowance of depreciation in the return of income filed u/s.153A and moreover this addition is not based on any incriminating documents found during the course of search - The contention raised by the ld. Counsel cannot be accepted because if the assessee has disallowed depreciation suomoto in the return of income under Section 153A, then it cannot be held that same is beyond the purview of Section 153A. It is not a case of any addition made on account of incriminating material or not. But then it had offered it as a disallowable depreciation and the same cannot be allowed unless the facts are brought on record. Thus, this ground raised by the assessee is dismissed. Foreign travel expenses - As in this year assessment for A.Y.2017-18 had abated at the time of search because the last date of issuing notice u/s.143(2) dated 30/09/2017 and search was conducted on 20/09/2017. On merits, we find that the ld. AO has given detailed reasons as to why assessee has failed to prove the foreign travel expenses and the purpose for the business, accordingly, and without any proper facts and material brought on record to show that the foreign travel related to the business of the assessee. Accordingly, ground raised by the assessee is confirmed.

Summary

Issues Involved:
1. Estimation of income from direct and sub-contract receipts.
2. Estimation of income from rentals.
3. Deduction under Chapter VIA.
4. Addition on account of bogus sub-contract charges.
5. Additional income declared in response to notice u/s 153A.
6. Disallowance of foreign travel expenses.
7. Depreciation disallowed suo-moto.

Detailed Analysis:

1. Estimation of Income from Direct and Sub-Contract Receipts:
The appeals pertain to pre-search assessments for A.Y. 2013-14 and 2014-15, where the common issue was the estimation of income from direct contract receipts at 11% of turnover and sub-contract receipts at 5.5% of turnover. The assessee also contested the estimation of income from rentals and the non-allowance of a deduction under Chapter VIA. The Tribunal noted that the assessee had previously been subjected to search and seizure, revealing improper maintenance of bills, vouchers, and supporting documents. The AO proposed and the CIT(A) upheld the estimation of income at 11% for direct contract receipts and 5.5% for sub-contract receipts. However, the Tribunal, considering past precedents, estimated the net profit rate at 9% for direct contract receipts and 4.5% for sub-contract receipts, granting partial relief to the assessee.

2. Estimation of Income from Rentals:
The AO estimated rental income at 100% of the total receipts. However, the Tribunal noted that in later years, the CIT(A) had estimated profit at 85% of the rental receipts, which had attained finality. Therefore, the Tribunal held that 85% of the profit should be estimated on the gross rental receipts, providing partial relief to the assessee.

3. Deduction under Chapter VIA:
The issue of deduction of Rs.5,50,000/- under Chapter VIA was not discussed in detail in the CIT(A) order or the assessment order. The Tribunal remanded this issue back to the AO to examine the claim and grant relief per law, if admissible.

4. Addition on Account of Bogus Sub-Contract Charges:
For A.Y. 2012-13 to 2017-18, the main issue was the addition on account of bogus sub-contract charges. The AO found that the assessee was debiting bogus sub-contract expenses to inflate expenses. The CIT(A) upheld this addition, citing various pieces of evidence, including statements from the Managing Director and other employees admitting to the bogus expenses. The Tribunal, however, noted that the assessee explained the cash obtained from sub-contractors was used to make payments to laborers at various sites. The Tribunal found this explanation plausible and held that the sub-contract charges were part of the contract work executed. Therefore, instead of making a separate addition for bogus sub-contract charges, the Tribunal applied a net profit rate of 9% on direct contract receipts for all the years, subsuming the addition of bogus sub-contract charges.

5. Additional Income Declared in Response to Notice u/s 153A:
The assessee declared additional income in response to notice u/s 153A, including interest received on fixed deposits and turnover of directors. The Tribunal upheld the additional income declared by the assessee, noting that it was based on seized documents and the assessee had not challenged this before the CIT(A).

6. Disallowance of Foreign Travel Expenses:
The AO disallowed foreign travel expenses, stating they were not wholly and exclusively for business purposes. The Tribunal held that for A.Y. 2015-16 and 2016-17, the disallowance was beyond the scope of Section 153A as these assessments had attained finality at the time of search. Therefore, the Tribunal directed the deletion of these disallowances.

7. Depreciation Disallowed Suo-Moto:
The assessee had suo-moto disallowed depreciation in the return of income filed u/s 153A. The Tribunal upheld this disallowance, noting that the assessee could not retract the disallowance made in the return of income.

In conclusion, the Tribunal provided partial relief to the assessee by adjusting the net profit rates for direct and sub-contract receipts and rental income while upholding the additional income declared and the suo-moto disallowed depreciation. The disallowance of foreign travel expenses was deleted for specific years, and the issue of deduction under Chapter VIA was remanded back to the AO for re-examination.