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TMI Blog2013 (12) TMI 56X X X X Extracts X X X X X X X X Extracts X X X X ..... art of the business activity of Assessee company - Purchase of land and sale of land is a separate business activity and, therefore, the profits or losses on that business activity has to be considered separately. Even though, the income was estimated on contract receipts by rejecting books of account, on the basis of statements of accounts filed before the revenue authorities if they come to a conclusion that certain other business incomes are also earned, the same are necessarily to be brought to tax separately - Profit on sale of land has no nexus with the profit on contract receipts and accordingly, inclusion of profit on sale of land separately by making addition is justified – Decided against assessee. Addition u/s 40(a)(ia) – Tax not deducted at source – contract labour payment and fees paid to auditors - Held that:- These amounts are not labour contract payments but direct labour payments made by the company - As for as income estimation on contract receipts are concerned, Ii has already been upheld the estimation of income at 8% in this case - Once the books of account are rejected, while computing incomes from section 30 to 43D of the IT Act, there is no necessity for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R. Laxman ORDER Per B. Ramakotaiah, A. M. This is an appeal by Assessee directed against the order of the CIT(A)-III, Hyderabad, dated 26/08/2011 for the assessment year 2007-08. 2. Briefly stated, Assessee is a company, which derives income from execution of civil contract works. For the AY 2007-08, it had filed return of income on 12-02-2008 showing income of ₹ 2,59,96,696/-. Later, on 10-12-2008 Assessee filed revised return showing income at ₹ 70,04,576/-. The AO in the course of scrutiny assessment enquired various things/issues and since Assessee had not furnished books of account and vouchers for verification, he estimated the income of Assessee at 8% on the turnover. Assessee offered an amount of ₹ 1,89,92,120/- towards disallowance u/s 40(a)(ia) in the original return filed which was later withdrawn in the revised return on the ground that these are not labour contract payments but direct labour payments made by the company and by mistake in the original return they disallowed these amounts u/s 40(a)(ia). The AO, however, did not agree with the submission of Assessee and after estimating the income at 8% on contract receipts, made the addit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o compliance with various notices issued, the AO was of the opinion that income can only be estimated in view of Assessee's failure to produce books of account. He, therefore, estimated the income at 8% on gross contract receipts. It was the contention of Assessee that 8% pertains to section 44AD where the turnover of the contract is less than ₹ 40 lakhs and for this proposition he relied on various decisions of Hon'ble Supreme Court and various Hon'ble High Courts whereby submitted that income was to be assessed considering the past record of Assessee, even u/s 144 of the IT Act. 7. The learned counsel before us relied on the following cases for the proposition that while completing best judgment assessment, the AO should have done the assessment based on the material available on record. 1. State of Kerala Vs. Velukutty, 60 ITR 239 (SC) 2. CIT Vs. Pilliah and Sons, 63 ITR 411 (SC) 3. Yaggina Veeraraghavulu and Mavuleti Somaraju and Co. Vs.CIT, 62 ITR 528 (AP) 4. Raja Pullaiah Vs. CIT (Dy.), 73 ITR 224 (AP) 5. Polisetti Subbaraidu and Co. Vs. CIT, 34 ITR 492 (AP) 6. CIT Vs. Popular Electric Co.(P) Ltd., 203 ITR 630 (Cal.) 7. M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contract works and so, as upheld by the coordinate bench in similar cases estimation of income at 8% is reasonable. 10. We have considered the issue and examined the documents placed on record. It is a fact that the AO issued many notices which were not complied with by Assessee and books of account and other relevant vouchers have not been produced before the AO. In these circumstances, the AO had no option than to estimate the income. However, it is the contention before us that Assessee could not attend before the AO due to some litigation going on in Delhi in connection with contract works and audited statement of accounts and other information were provided to the AO from time to time. Be that as it may, we are really surprised with opinion of the CIT(A) that books of account were not rejected by the AO. Unless the books of account are rejected, estimation of income does not arise under the provisions of section 145. Therefore, one has to presume that the AO resorted to estimation of income only after rejecting the books of account, which have not produced before him in spite of several notices. We cannot, therefore, uphold the opinion of the CIT(A) on this issue. 11. Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilar position in the case of contracts taken by the assessee on sub-contract from other parties. Further, the assessee is entitled for depreciation and remuneration and interests to partners on the profit estimated by AO at applicable rates, because the income is estimated as above of the assessee is before the depreciation and interest and remuneration of the partners. Accordingly, we direct the AO to compute the income of the assessee afresh. Accordingly, this ground of the assessee appeal is partly allowed. 12. As seen from the above, in that particular case Assessee has not maintained books of account and the AO has no option than to reject the books of account and estimate the income at 10%. Assessee agreed that his income can be estimated at 9% of gross receipts. There is concession on the part of Assessee and the ITAT went on to give directions to estimate income at 9% on the contracts executed by Assessee. In case of contracts taken by Assessee on sub-contracts, income to be estimated 8% on the gross receipts. In case of contracts given by Assessee to the third parties on sub- contract, income is to be estimated at 4%. Thus, on a concession given by Assessee, the coord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Special Bench of the ITAT in the case of M/s Arihant Builders Vs. ACIT, 291 ITR 41 considered the issue under similar facts and circumstances of the case and after taking clue from the provisions of section 44AD, though not applicable, held that estimation of income at 8% of the turnover is reasonable. In our opinion, in the case under consideration estimation at 8% is very reasonable because the coordinate benches of the Tribunal is accepting the estimation of income ranging from 8% to 12.5% depending upon the facts of the case and nature of contracts undertaken and some of the cases are furnished below: 1. Krishnamohan Constructions Vs. ACIT, ITA No. 380/hyd/94, dtd. 10-03-1999. 2. ITO Vs. K.C. Reddy Associates, ITA No. 1843/Hyd/89, dtd. 29-08-1994. 3. Sri Srinivasa Construction, ITA Nos. 804 805/Hyd/93, dtd. 24-04-1996. 4. Bhaskar Reddy Vs. ITO, ITA No. 168/Hyd/06, dtd. 09-10- 2007. Therefore, in the absence of proper reasons for earning lesser profit, the order of the AO is upheld and income estimation at 8% on the gross receipts made by AO is accordingly confirmed. 15. Ground No. 3 is as under: The learned CIT(AS) should not have sustained t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... constructions (supra) do not apply to the facts of present case. The relevance of the above case law was discussed in next ground in detail. Purchase of land and sale of land is a separate business activity and, therefore, the profits or losses on that business activity has to be considered separately. Even though, the income was estimated on contract receipts by rejecting books of account, on the basis of statements of accounts filed before the revenue authorities if they come to a conclusion that certain other business incomes are also earned, the same are necessarily to be brought to tax separately. Therefore, we are of the opinion that profit on sale of land has no nexus with the profit on contract receipts and accordingly, inclusion of profit on sale of land separately by making addition is justified. This ground is accordingly rejected. 19. Ground Nos. 4 5 pertain to addition u/s 40(a)(ia), which are as under: 4. The learned CIT(A) should not have sustained the addition of ₹ 1,89,92,120/- under 40(a)(ia) when the same are not hit by provision of section 40(a)(ia) and also when P L A/c has been rejected. 5. The learned CIT(A) should not have sustained the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A/c. 23. The learned DR, on the other hand, supported the orders of the revenue authorities. 24. We have considered the issue and perused the material on record. As for as income estimation on contract receipts are concerned, we have already upheld the estimation of income at 8% in Ground No. 2. Therefore, once the books of account are rejected, while computing incomes from section 30 to 43D of the IT Act, there is no necessity for disallowing any further amounts as held by the Jurisdictional High Court. In fact the principles laid down by the Hon'ble AP High Court in the case of Maddi Sudarsanam Oil Co. (supra) with reference to addition of unexplained cash credits were not upheld by the Hon'ble Supreme court in the subsequent judgments, dealt with in Ground No. 7 on similar issue, but, suffice to say that the Hon'ble Jurisdictional High Court in case of Indwell Constructions Vs. CIT, 232 ITR 776 (AP) has considered similar issue of computation of income under the head 'business' from section 28 to 43D of the Act and held as under: Reversing the order of the Tribunal, that there was a big difference between profit earned with own capital and profit e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e decision of the Tribunal, that no disallowance could be made in view of the provisions of section 40A(3) read with rule 6DD(j) of the Income- tax Rules, 1962, as no deduction was allowed to and claimed by the assessee. When the gross profit rate was applied, that would take care of everything and there was no need for the AO to make scrutiny of the amount incurred on the purchases made by the assessee.' The above decision of the Hon'ble Allahabad High Court would be squarely applicable to the case of the assessee. When a net profit rate is applied, there remains no scope for further disallowance of any expenditure. In view of the above, we respectfully following the above decision of the Hon'ble Allahabad High Court hold that the CIT(A) was justified in deleting the disallowance u/s 40A(3) made by the AO. Accordingly, we uphold the order of the CIT(A) and dismiss the Revenue's appeal. Accordingly, we are of the opinion that the AO is not justified in making addition u/s 40(a)(ia) when income was estimated by rejecting books of account. Moreover, as contended by the learned counsel, these amounts are not covered by the provisions of TDS so as to be disall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en excluded on the ground that once incomes are estimated no other additions can be made. It is true that AO cannot make any further disallowance once incomes are estimated, following principles laid by the jurisdictional High Court in the case of Indwell Constructions (supra), but, since these incomes are brought to tax as 'other sources', the principles laid down by the Jurisdictional High Court in the said case does not apply to these particular incomes. As Assessee has not contested that these incomes are part of the Contract business income and no details have been placed on record either before the AO or before the CIT(A) or even before us. Except relying on legal principles, Assessee has not brought on record any factual details on this addition. In view of this, we have no other option than to confirm the incomes under the head 'other sources', which have to be necessarily brought to tax even though books of account are rejected to the extent of estimating business income on contracts. Ground No. 7 is therefore dismissed. 29. Ground No. 7 is as follows: The learned CIT(A) should not have sustained the addition of ₹ 82,93,484/- which was provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to make further addition. The books of account of the assessee was not relied, it was rejected by the AO and the same was confirmed by the CIT(A) as well as by us. Now, based on the reliance on the same books, for the purpose of invoking the provisions of s. 40(a)(ia) is improper. The estimation of income takes care of the irregularities committed by the assessee. Further addition by invoking s. 40(a)(ia) amounts to punishing the assessee for a same offence on double occasions, which is not permitted by law. There is a connection between expenditure claimed by the assessee and making non- deduction of TDS. Since the books of account not verifiable, for which the assessee's books were rejected and income was determined. It was held in the case of CIT Vs. Devi Prasad Vishwanath Prasad [1969] 72 ITR 194 (SC) where a particular business income of the assessee has been estimated and determined and in such a case, the AO precluded from adding any unexplained cash credit as undisclosed income of the business. 33. The learned DR, however, submitted that this principle that, once incomes are estimated no other addition can be, is not correct as incomes were assessed under the head ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nesses was computed by estimating his total sales and assessing the gross profits on the basis of certain percentages. Certain cash credits in the accounts of the assessee which had been overlooked in the original assessments were detected. In reassessment proceedings under section 34 of the Indian Income-tax Act, 1922, the assessee's explanation that they did not represent income was rejected and they were brought to tax, as representing income from undisclosed sources, in addition to the income which had been estimated in the original assessments: Held, that the amounts of the cash credits could be assessed to tax as income from undisclosed sources in addition to the business income computed by estimate. The taxing authorities were not precluded from treating the amounts of the credit entries as income from undisclosed sources simply because the entries appeared in the books of a business whose income they had previously computed on a percentage basis. An inference drawn by the Appellate Tribunal may be either one of fact or one law. If it is an inference of fact, no question with regard to it can be inferred to the High Court. If it is one of law, then a question wheth ..... 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