2017 (11) TMI 717 - AT - Income Tax

Disallowance of expenditure - amounts were never used for its business activities - Estimation of income at 8% in the case of main contractor and 5% in the case of a sub-contractor - Held that - In the case of MAA Highways (2016 (5) TMI 344 - ITAT HYDERABAD) we have already held that where the income is estimated after rejection of books of account, no further disallowance of business expenditure can be made. In the case before us also, the AO has made the estimation on the ground that the assessee had not incurred any expenditure and the amounts were never used for its business activities and were returned back to the main contractor. Since the facts and circumstances are the same before us as in the case of Maa Highways and since we have confirmed the estimation of income by the AO at 8% in the case of main contractor and 5% in the case of a sub-contractor, we see no reason to interfere with the order of the CIT (A). - Decided against revenue

Issues Involved:
1. Legitimacy of protective additions made by the Assessing Officer (AO).
2. Estimation of business income for sub-contractors.
3. Applicability of the jurisdictional High Court's ruling on disallowance of business expenditure when income is estimated.
4. Verification of whether the assessee is a main contractor or a sub-contractor for appropriate income estimation.

Detailed Analysis:

1. Legitimacy of Protective Additions:
The Revenue's appeal for the A.Y 2009-10 involved the legitimacy of protective additions made by the AO. The AO observed that M/s. Madhucon Projects Ltd had diverted funds from sub-contractors and siphoned them off. These amounts were disallowed in the hands of the principal contractor and added protectively in the hands of the assessee firm. The CIT(A) granted relief to the assessee by deleting the protective additions, observing that these issues were identical to those decided in the case of M/s. MAA Highways. The Tribunal upheld the CIT(A)'s decision, noting that the withdrawals could not be presumed to have been used for business expenditure and thus, disallowance of such amounts was not justified.

2. Estimation of Business Income for Sub-Contractors:
The AO estimated the business profit of the assessee at 8% of the gross receipts. The CIT(A) confirmed this estimation. However, the Tribunal referred to the case of M/s. MAA Highways, where it was held that the income should be estimated at 5% of the gross receipts for sub-contractors. The Tribunal directed that the income be estimated at 5% for sub-contractors and 8% for main contractors, following the precedent set by the jurisdictional High Court in the case of Indwell Constructions Ltd.

3. Applicability of Jurisdictional High Court's Ruling:
The Tribunal emphasized the jurisdictional High Court's ruling in Indwell Constructions Ltd, which held that where income is estimated, no other disallowance of business expenditure can be made. This principle was applied consistently across all appeals, leading to the deletion of protective additions and the confirmation of income estimation at the specified rates.

4. Verification of Contractor Status:
In ITA No.202/Hyd/2015 for A.Y 2011-12, the assessee challenged the CIT(A)'s order confirming the estimation of income at 8%. The Tribunal directed the AO to verify whether the assessee was a main contractor or a sub-contractor and to estimate the income accordingly at 8% for main contractors and 5% for sub-contractors, ensuring that the assessed income is not less than the returned income.

Conclusion:
The appeals filed by the Revenue were dismissed, while the appeals of the respective assessees were allowed for statistical purposes, subject to verification of their contractor status and ensuring that the assessed income is not less than the returned income. The Tribunal's decisions were consistent with the principles laid down by the jurisdictional High Court and previous Tribunal rulings, ensuring fair and accurate estimation of business income.

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