2022 (4) TMI 668 - AT - Income Tax

Estimation of income from contract business - Estimation of profits of the assessee at more than 40% - Application of specified rate of 8% of gross receipts - applicability of presumptive provisions of section 44AD - HELD THAT - There is no dispute that the assessee's has earned a revenue as contract receipts and this fact is also supported by Form 26AS which shows that tax is being deducted at source on these receipts. The assessee is required to maintain books of accounts as the presumptive provisions of section 44AD is not application basis the turnover exceeding ₹ 1 crore which the assessee failed to do so. There is no hard and fast rule for estimating income from the civil construction business. However, section 44AD prescribes estimation from contract business in cases specified there at the rate of 8% of gross receipts. Though the assessee does not fall within the prescription of section 44AD, the presumptive rate of net profit of 8% incorporated in section 44AD reflects a legislative approved rate of net profit, that can be considered as fair and reasonable to estimate income from contract business in cases like that of the assessee, where the books of accounts are not maintained and when the details furnished are not found acceptable to the AO. The Hon'ble Delhi High Court in the case of Subodh Gupta 2014 (12) TMI 479 - DELHI HIGH COURT has upheld the estimation of profits at 8% is reasonable when no evidence to the contrary is produced by the revenue. Therefore, considering the judicial precedence and overall facts and circumstances of the case, we are of the considered view that it would be fair and proper that the income from contract business of the assessee be estimated at 8 percent of the gross receipts.- Decided in favour of assessee.

Summary

Issues Involved:
1. Applicability of Section 44AD for turnover exceeding ?1 crore.
2. Requirement for maintaining books of accounts and getting them audited.
3. Disallowance of expenses under Section 40A(3) of the Income Tax Act.
4. Estimation of profit margin and the reasonableness of such estimation.
5. Condonation of delay in filing the appeal.

Detailed Analysis:

1. Applicability of Section 44AD for Turnover Exceeding ?1 Crore:
The appellant argued that the authorities failed to appreciate that the law specifies if a civil works contractor declares 8% profit, they need not maintain books of accounts. The authorities, however, considered a higher income which was not in accordance with the law. The Tribunal noted that Section 44AD is not applicable as the turnover exceeded ?1 crore, and thus, the assessee was required to maintain books of accounts and get them audited.

2. Requirement for Maintaining Books of Accounts and Getting Them Audited:
The assessee did not maintain books of accounts, believing it was not required due to the nature of his business and turnover in previous years. The authorities contended that the assessee should have maintained books and submitted an audit report. The Tribunal upheld the requirement for maintaining books and getting them audited as the turnover exceeded ?1 crore, making Section 44AD inapplicable.

3. Disallowance of Expenses Under Section 40A(3):
The authorities disallowed expenses based on cash withdrawals, presuming violations of Section 40A(3) which disallows cash payments exceeding ?20,000. The Tribunal found that the authorities disallowed expenses without concrete evidence and solely on presumption, which is against the principles of natural justice. The Tribunal directed that the expenses should not be disallowed merely based on cash withdrawals without proper inquiry into the nature of expenses.

4. Estimation of Profit Margin and Reasonableness:
The authorities estimated the profit margin at more than 40%, which the Tribunal found unreasonable. The Tribunal referred to the Delhi High Court's judgment in CIT vs Subodh Gupta, which held that an 8% profit margin is reasonable for contract business when books are not maintained. The Tribunal concluded that an 8% profit margin, as per Section 44AD, though not directly applicable, reflects a legislatively approved rate and directed the AO to estimate the income from the contract business at 8% of the gross receipts.

5. Condonation of Delay in Filing the Appeal:
The Tribunal considered the delay of 527 days in filing the appeal and referred to the Supreme Court's suo moto extension of limitation periods due to the COVID-19 pandemic. The Tribunal held that the delay was covered by the exclusion period as per the Supreme Court's order and thus, there was no delay to be condoned, deeming the appeal filed in time.

Conclusion:
The Tribunal allowed the appeal, directing the AO to estimate the income from the contract business at 8% of the gross receipts and not to disallow expenses under Section 40A(3) without proper evidence. The Tribunal emphasized the importance of maintaining books of accounts and getting them audited when turnover exceeds ?1 crore but found the authorities' estimation of profit margin and disallowance of expenses without proper inquiry unreasonable. The appeal was allowed, and the order was pronounced on March 31, 2022.