2024 (11) TMI 429 - AT - Income Tax

Assessment proceedings concluded by non jurisdictional AO - ACIT, Panvel Circle being the jurisdictional Assessing Officer has not issued the notice u/s 143(2) of the Act and therefore, the assessment order is invalid - As argued assessee participated in the assessment proceedings without challenging the jurisdiction at any stage - HELD THAT - It is an admitted fact that the assessee had filed its return of income before the ITO, Ward-2, Panvel who had issued notice u/s 143(2). Subsequently due to monetary limits of the income returned, the ITO Ward-2, Panvel transferred the file to the ACIT, Panvel Circle who issued notice u/s 142(1) of the Act. It is also an admitted fact that the assessee never challenged the jurisdiction of the ACIT, Panvel Circle for not issuing notice u/s 143(2) either before him or before the CIT(A) / NFAC and has participated in such assessment proceedings. We find an identical issue had come up in the case of DCIT vs. Kalinga Institute of Industrial Technology 2023 (6) TMI 1076 - SC ORDER wherein quashed the assessment order on the ground that the jurisdiction to issue notice u/s 143(2) of the Act in case of assessee laid with JCIT (OSD) (Exemption), Bhubaneswar, whereas the notice u/s 143(2) of the Act was issued by the ACIT, Corporate Circle 1(2), Bhubaneswar, who has no jurisdiction but SC set aside the order of the Hon ble High Court and allowed the appeal filed by the Revenue on the ground that the records revealed that the assessee had participated pursuant to the notice issued u/s 142(1) of the Act and had not questioned the jurisdiction of the Assessing Officer and therefore, in such case, the order of the Hon ble High Court could not be sustained. Since the assessee in the instant case had participated in the assessment proceedings and had never challenged the jurisdiction of the ACIT, Panvel Circle who had issued the notice u/s 142(1) of the Act, therefore, we hold that the assessment order passed by the ACIT, Panvel Circle is valid. Bogus expenses - details provided by the assessee are not sufficient to verify the genuineness of the expenses claimed, the assessee has not provided the complete addresses of the parties to carry out third party verification - HELD THAT - The assessee himself has given wrong information to the Assessing Officer as well as the CIT(A) / NFAC in respect of some of the parties. Despite the above, the Ld. CIT(A) / NFAC closed his eyes and allowed the appeal filed by the assessee which in our opinion, cannot be accepted. In our opinion, the estimation of profit @ 25% is uncalled for especially when the assessee has declared reasonable profit rate @ 9% of the total contract receipts and the decision relied on by case of Vijay Protein 2015 (4) TMI 1146 - SC ORDER is distinguishable and not applicable to the facts of the present case. At the same time, it cannot be said that there is no leakage of revenue in the instant case especially when the assessee could not give the complete addresses of the parties to whom the payments have been made and that there are similar PAN numbers for different vendors which the assessee itself has admitted in the written submissions. Considering the totality of the facts of the case, we are of the opinion that lump sum of disallowance of Rs. 20 lakhs will meet the ends of justice.

Issues Involved:

1. Validity of the assessment order due to jurisdictional issues concerning the issuance of notice under Section 143(2) of the Income Tax Act.
2. Disallowance of 25% of contract expenses as bogus expenses by the Assessing Officer.
3. Sufficiency of evidence provided by the assessee to substantiate the genuineness of the claimed expenses.
4. Applicability of the decision in Vijay Proteins Ltd. to the present case.
5. Estimation of profit and reasonableness of the net profit declared by the assessee.

Issue-wise Analysis:

1. Validity of the Assessment Order:

The primary legal contention raised was the validity of the assessment order due to jurisdictional issues. The assessee argued that the notice under Section 143(2) was issued by the Income Tax Officer, Ward-2, Panvel, who did not have jurisdiction over the assessee. However, the Tribunal noted that the assessee participated in the assessment proceedings without challenging the jurisdiction at any stage before the Assessing Officer or the CIT(A)/NFAC. Referring to the provisions under Section 124(3) of the Income Tax Act and the Supreme Court's decision in DCIT vs. Kalinga Institute of Industrial Technology, the Tribunal held that since the assessee did not question the jurisdiction within the stipulated time frame, the assessment order dated 16.12.2019 was valid.

2. Disallowance of 25% of Contract Expenses:

The Assessing Officer disallowed 25% of the expenses claimed by the assessee as bogus, citing insufficient details to verify the genuineness of the expenses. The discrepancies noted included incomplete addresses for third-party verification, identical PAN numbers for different vendors, and unsubstantiated photographs of paintwork. The CIT(A)/NFAC, however, deleted this disallowance, reasoning that the assessee had provided necessary documentation like invoices and bank payments, and the profit declared was reasonable. The Tribunal agreed with the CIT(A)/NFAC that the estimation of profit at 25% was uncalled for, as the assessee had declared a reasonable profit rate of 9%.

3. Sufficiency of Evidence Provided by the Assessee:

The Tribunal examined the evidence provided by the assessee, including invoices, bank payment details, and descriptions of the work done. The CIT(A)/NFAC found that the assessee had discharged its onus of substantiating the expenses claimed. The Tribunal noted that while the payments were made through proper banking channels, the assessee had not provided complete details, such as full addresses of the vendors, which led to some suspicion. However, the Tribunal concluded that a disallowance of Rs. 20 lakhs, instead of the Rs. 2,05,45,539/- initially disallowed by the Assessing Officer, would be just.

4. Applicability of Vijay Proteins Ltd. Decision:

The Assessing Officer relied on the Supreme Court's decision in Vijay Proteins Ltd. to justify the disallowance. However, the Tribunal found this reliance misplaced, as the case pertained to bogus purchases and hawala transactions, which were not directly applicable to the facts of the present case. The Tribunal emphasized that the nature of the assessee's business, involving sub-contracting in remote areas, justified the expenses claimed to a significant extent.

5. Estimation of Profit and Reasonableness of Net Profit:

The Tribunal considered the net profit of approximately 9% declared by the assessee on its gross turnover as reasonable. It noted that the Assessing Officer had not pointed out any defects in the books of accounts maintained by the assessee. The Tribunal, therefore, found no basis for the 25% disallowance and instead directed a lump sum disallowance of Rs. 20 lakhs to address any potential revenue leakage.

Conclusion:

The Tribunal partly allowed the Revenue's appeal by modifying the CIT(A)/NFAC's order, directing a reduced disallowance of Rs. 20 lakhs. The judgment emphasized the importance of substantiating expenses with adequate documentation while also acknowledging practical business constraints in certain industries.

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