2018 (7) TMI 1749 - AT - Income Tax

Treating the liaisoning consultancy receipts as contractual receipts and applying NP @ 8% - Held that - Keeping in the view the nature of work got done through the sub contractor and the documents produced by the assessee there is no scope of any doubt about the genuineness of the work done and payment made by the assessee to the sub contractor. Even if the AO has wanted to verify the genuineness of the claim then it was open to the AO to summons the concerned persons and examine. Undisputedly the entire work is carried under a composite contract/ work order and assessee is working as one enterprise then in our view the production of separate trading account for each activity is not called for. As regards the net profit apply at 8% we find that the AO has not applied any comparable case or the prevailing rate in the particular industry therefore, the estimation of the net profit @ 8% by the AO is without any basis. Since, we have already decided the issue of rejection of accounts therefore, this issue becomes academic in nature. However, we find that having regard to the fact that this is the first year of the business activity of the assessee and therefore, the income declared by the assessee at GP rate 7.44% in our view cannot be defaulted with. Accordingly, we set aside the order of the authorities below on account of adopting the net profit at 8%. It is well settled law that the rejection of books of account may not necessary lead to an addition to the declared income of the assesee if the income declared by the assessee is reasonable and in line with the comparable bench mark. Having regard to the facts and circumstances of the case we are of considered opinion that no addition is called for even if the books of account are rejected u/s 145(3) of the Income Tax Act. Non grant of TDS credit arising on the amount received by the assessee under the work order - Held that - As per the provisions of 219 of the Act tax credit on account of TDS is available in respect of the corresponding income offered to tax by the assessee. Since, in the case in hand the TDS was deducted on the amount which was received by the assessee as mobilization advance and the said amount has to be recognized as income of the assessee in the subsequent year however, due to the succession of business of the assessee s partnership firm by the company the said TDS in the name of the assessee firm will not automatically available for credit to the said company. Accordingly, we direct the AO to allow the credit of the TDS available in the account of the assessee firm which has ceased to exist due to the succession of the business activity by the company in the subsequent year whenever the said receipt or part of the receipt is recognized as income by the company.

Summary

Issues Involved:
1. Rejection of Books of Accounts under Section 145(3) of the Income Tax Act.
2. Estimation of Net Profit Rate at 8%.
3. Treatment of Liaisoning and Consultancy Receipts.
4. Non-grant of TDS Credit.

Detailed Analysis:

1. Rejection of Books of Accounts under Section 145(3):
The assessee, a partnership firm engaged in infrastructure and industrial projects, was scrutinized by the AO who doubted the correctness of the books of accounts due to the absence of separate trading accounts for each contract work, low gross profit, and lack of supporting evidence for cash expenses on wages. The AO invoked Section 145(3) of the Income Tax Act to reject the books of accounts. The CIT(A) upheld the rejection but provided partial relief by treating liaisoning and consultancy work as part of the contract receipts. The assessee argued that the rejection was based on guesswork and that the books of accounts were audited and maintained on a mercantile system. The Tribunal found that the AO's rejection was not justified since the entire receipts were verifiable, and no defects were found in the purchase bills or wages register. The Tribunal emphasized that mere low profit rate in the first year of operation cannot be a reason for rejection of books of accounts, referencing the decision in Malani Ramjivan Jagannath vs. ACIT.

2. Estimation of Net Profit Rate at 8%:
The AO estimated the net profit rate at 8% on the contract receipt, which was contested by the assessee. The CIT(A) applied the net profit rate at 8% on the entire receipts, including liaisoning and consultancy work. The Tribunal noted that the AO did not use any comparable case or industry benchmark to justify the 8% rate. Given that this was the first year of business activity, the Tribunal found the declared gross profit rate of 7.44% reasonable and set aside the authorities' orders on adopting the 8% net profit rate. The Tribunal held that the rejection of books of accounts does not necessarily lead to an addition to the declared income if it is reasonable and in line with industry benchmarks.

3. Treatment of Liaisoning and Consultancy Receipts:
The AO treated liaisoning and consultancy receipts separately from the contract receipts, while the CIT(A) integrated them into the total contract receipts. The Tribunal upheld the CIT(A)'s decision, noting that the liaisoning work was an inseparable part of the work order given by Lafarge India, which included getting NOC from NHA and dealing with local villagers. The Tribunal found no error in treating the entire receipt as contract receipt.

4. Non-grant of TDS Credit:
The assessee was denied TDS credit for mobilization advance received from M/s ILFS Engineering & Construction Co. Ltd., as no work was carried out under that project during the year. The Tribunal directed the AO to allow the TDS credit in the account of the assessee firm, which had ceased to exist due to succession by a company, whenever the receipt or part of it is recognized as income by the company.

Conclusion:
The Tribunal allowed the assessee's appeal, setting aside the rejection of books of accounts and the estimation of net profit at 8%, and directed the AO to grant TDS credit as per the provisions. The Revenue's appeal was dismissed.