2025 (1) TMI 1064 - AT - Income Tax

Sub-contract payments as non-genuine and bogus - Non Genuineness of Expenses - estimation of the profit at 8% of the gross contract receipts - addition being the payments to sub-contractors made by the assessee on the ground that the assessee could not substantiate with documentary evidence to his satisfaction regarding the genuineness of such huge payments to the sub-contractors - HELD THAT - We find before the CIT(A) / NFAC apart from making elaborate submissions the assessee took an alternate ground that making addition to the total income of the assessee declared on a turnover will give net profit ratio of about 40% which is not possible in such line of business especially when the assessee is doing contract work for government departments. We find based on the arguments advanced by the assessee the Ld. CIT(A) / NFAC directed the AO to estimate the profit at 8% of the gross contract receipts. No infirmity in the order of the CIT(A) / NFAC on this issue. A perusal of the net profit ratio declared by the assessee from assessment year 2015-16 to 2021-22 the details of which are given at para 12 above gives average net profit rate at 5.37%. Similarly various contractors operating near the place of the assessee i.e. near Nashik and engaged in similar line of business are also showing the profit rates ranging from 4% to 8% and in one case such profit rate has been shown at 10.24%. Provisions of section 44AD of the Act prescribe profit rate of 8% for civil contractors in unaudited cases where the turnover is less than the prescribed limit. Although in the case of the assessee the turnover is above the prescribed limit as per the provisions of section 44AD and the accounts are audited still the provisions of section 44AD can be taken as a parameter for estimating the income. The average net profit ratio for the last four years i.e. from assessment year 2015-16 to 2021-22 is 5.37% we are of the considered opinion that the order of CIT(A) / NFAC directing the AO to estimate the profit at 8% is justified under the facts and circumstances of the case. We uphold the order of the Ld. CIT(A) / NFAC on this issue and the grounds raised by the Revenue are dismissed.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

Whether the Assessing Officer (AO) correctly added Rs. 3,16,96,450/- to the assessee's income for the assessment year 2018-19, considering these payments as non-genuine and bogus sub-contract expenses.
Whether the CIT(A)/NFAC was justified in directing the AO to estimate the profit at 8% of the gross contract receipts instead of sustaining the addition made by the AO.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Legitimacy of Sub-Contract Expenses

Relevant legal framework and precedents: The Income Tax Act, 1961, particularly sections related to the verification of expenses and the requirement for tax deduction at source (TDS) under Chapter XVII-B.
Court's interpretation and reasoning: The AO questioned the genuineness of sub-contract payments due to discrepancies in documentation and the absence of supporting evidence like sub-contract agreements and RA bills. The AO noted that payments were made to sub-contractors who had not filed returns or were not registered under GST.
Key evidence and findings: The AO highlighted discrepancies such as pre-dated bills and lack of GST registration. The CIT(A)/NFAC considered the overall profit margin and industry standards to evaluate the reasonableness of the AO's addition.
Application of law to facts: The AO applied the provisions of the Income Tax Act to disallow the sub-contract expenses due to lack of evidence. The CIT(A)/NFAC applied industry norms and section 44AD as a benchmark for estimating profits.
Treatment of competing arguments: The assessee argued that the addition resulted in an unrealistic profit margin and provided comparative data from similar businesses. The CIT(A)/NFAC found these arguments persuasive and adjusted the profit estimation accordingly.
Conclusions: The CIT(A)/NFAC concluded that the AO's addition was excessive and directed an 8% profit estimation based on industry standards and past profit margins.

Issue 2: Profit Estimation at 8%

Relevant legal framework and precedents: Section 44AD of the Income Tax Act, which provides a presumptive taxation scheme for small taxpayers, was used as a reference point for estimating profits.
Court's interpretation and reasoning: The CIT(A)/NFAC considered the average profit rates in the industry and the assessee's historical profit margins to determine a reasonable profit estimation.
Key evidence and findings: The CIT(A)/NFAC reviewed the assessee's profit margins over several years and compared them with industry norms, finding that an 8% estimation was appropriate.
Application of law to facts: The CIT(A)/NFAC applied section 44AD as a guideline, despite the turnover being above the prescribed limit for unaudited cases, to justify the 8% profit estimation.
Treatment of competing arguments: The Revenue argued for sustaining the AO's addition, while the assessee advocated for a lower profit estimation. The CIT(A)/NFAC balanced these positions by selecting an 8% rate, higher than the historical average but lower than the AO's addition.
Conclusions: The CIT(A)/NFAC's decision to estimate profits at 8% was upheld, as it was deemed reasonable given the circumstances and industry comparisons.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: "The provisions of section 44AD can be taken as a parameter for estimating the income... Under these circumstances and considering the totality of the facts of the case... the order of Ld. CIT(A) / NFAC directing the Assessing Officer to estimate the profit at 8% is justified."
Core principles established: Profit estimation should consider industry standards and historical profit margins, even when discrepancies in documentation exist. Section 44AD can serve as a guideline for profit estimation in audited cases with higher turnover.
Final determinations on each issue: The appeal by the Revenue was dismissed, and the CIT(A)/NFAC's decision to estimate profits at 8% was upheld as reasonable and justified.

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