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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 ..... sed 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 addition of amount offered by Assessee in first return at Rs. 1,89,92,120/- u/s 40(a)(ia) in the assessment. Assessee also sold a piece of land and the AO vide para 6.2 of his order computed the profit on sale of land separately and brought to tax the same as business income at Rs. 1,49,48,532/-. The AO also made an addition of Rs. 82,93,484/- as 'income from other sources' considering the same as unexplained share application money. There are two other small disallowances with reference to auditor's fee of Rs. 67,416/- u/s 40(a)(ia) and payment towards PF u/s 43B of the IT Act. Assessee contested various additions made by the AO and also estimation of income at 8% before the CIT(A). 3. The learned CIT(A) while opining that books of account were not rejected by the AO, confirmed the addition at 8% estimated by the AO and also confirmed various ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Maddi Sudarsanam Oil Mills Co. Vs. CIT, 37 ITR 369 (AP) 8. Indwell Constructions Vs. CIT, 232 ITR 776 (AP) 8. Continuing the argument, the learned counsel submitted that in earlier years Assessee's incomes were also assessed u/s 143(3) and in earlier two assessment years, the income of contracts comes to 4.4% for AY 2004-05 and 3.86% for AY 2005-06. The counsel's submission is that income at 8% cannot be assessed in Assessee's case. Further, it was also submitted that Assessee did not undertook any main contracts and has only undertook sub-contracts and as per the orders of the Hon'ble ITAT in the case of Teja Constructions Vs. ACIT in ITA No. 308/Hyd/2009, income can be estimated only at 5% on sub-contracts. He also relied on the coordinate bench in the case of Ratna Constructions Vs. ACIT in 716/Hyd/2011. He also placed on record the orders of ITAT in the immediately preceding year for AY 2006-07 where in MA dated 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Coming to the estimation of income at 8%, there is no hard and fast rule that income can only be estimated at 8% or at 5% as canvassed before us by the learned counsel. In fact in many of the cases estimation of income at 12.5% was also upheld by the coordinate bench. Moreover, as seen from the decision of Teja Constructions Vs. CIT (supra), the coordinate bench held as follows in said decision: "We have heard both the parties and perused the material on record. In the present case, the AO rejected the books of account on the reason that, the assessee has not maintained proper books of account and also failed to produce vouchers for verification and the expenditure claimed by the assessee are not substantiated. The assessee in earlier years also has not maintained the proper books of account. The assessee's past track records show that the assessee has neglected the presenting books of account in accordance with law. When the assessee claimed an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see 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 coordinate bench has decided that in three kinds of contracts undertaken by that Assessee, income can be estimated on own contracts at 9%, contracts taken on sub-contract at 8% and contracts given to other parties on sub-contract basis at 4%. In our view, estimation of income by the AO at 8% is reasonable whether it is own contract or sub-contract. There cannot be any estimation of less than 8% on the gross receipts in such contracts executed by assessee. In fact on own contracts what the coordinate bench agreed was at 9% in that particular case. May be in the case of a person, who assigns sub-contract, estimation of his income at 4% is reasonable because he does not undertake any risk but in the case of contractor, who executes the works taking risk, the estimation of income cannot be at 5%. Generally, business is conducted to earn more profits. It can not be at 5% which is less than the Bank Interest, which any person can get if the amounts are deposited in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it, 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 the addition of Rs. 1,49,48,532/- under the head business income on the ground that in profit & loss a/c excess amount on sale of land is credited at Rs. 1,49,48,532/- since profit & loss a/c has been rejected and AO has resorted to estimation of income, question of making any addition as such does not arise." 16. As stated earlier, on noticing that Assessee had receipts from sale of land at Rs. 10.45 crores shown in the P& L A/c and the cost of land claimed at Rs. 9,35,94,535/-, AO computed the income from sale of land separately at Rs. 1,49,48,532/-. Assessee contested before the learned CIT(A) that once books of account were rejected, there cannot be any other additions as made out by the AO. The learned CIT(A) confirmed the action of the AO having regard to the factual position that profits from sale of land has no nexus with the contract receipts. 17. Before us, the learned counsel referring to the orders of the AO and CIT(A), submitted that if the income is estimated no other i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 addition of auditor's fees of Rs. 67,416/- as hit by section 40(a)(ia) which in fact it is not." 20. Assessee originally filed return of income by adding an amount of Rs. 1,89,92,120/- u/s 40(a)(ia) on the reason that TDS has not been made on the basis of the audit report enclosed to the return of income. Subsequently, on realizing that these amounts are not labour contract payments but direct labour payments made by the company, withdrew the same by filing a revised return of income. However, the learned AO did not agree with the contention of Assessee on the revised return on the reason that since original return was filed belatedly, Assessee has no right to revise the return. Even when Assessee offered subject to vouchers verification, the AO did not agree in the absence of books of account and original vouchers. Even though ledger account copies were furnished, he made the addition of Rs. 1,89,92,120/- u/s 40(a)(ia) and also made addition of Rs. 67,416/- towards the payment made to auditors on account of fees as hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s under: "Reversing the order of the Tribunal, that there was a big difference between profit earned with own capital and profit earned with borrowed capital and such a difference could have been taken into account by the Income-tax Officer while making an estimate. If the Commissioner had set aside the estimate on the ground that the vital fact that the business was carried on with own capital and not with borrowed capital had been ignored by the ITO, there might not have been any difficulty in upholding that order. But when he proposed to add back an exact item in the profit and loss account, he was relying on the rejected books, which he could not do. There was also a further difficulty if section 40 was to be taken into account even after making an estimate. When there are certain other deductions which are to be disallowed such as wealth-tax payment in section 40, it cannot be said that after making an estimate the wealth-tax charged in the profit and loss account should again be added back to the profit. Therefore, it was not correct in law to make the separate addition of Rs. 63,859/- representing the interest and remuneration paid to the partners to the income already esti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as contended by the learned counsel, these amounts are not covered by the provisions of TDS so as to be disallowed u/s 40(a)(ia). This aspect was not at all considered by the AO even though Assessee contended the same by filing a revised return. In our opinion, both the AO and the CIT(A) erred in taking legal stand of original return and revised return when in fact the computation of income started with estimation of income without any reference to the incomes offered by Assessee in the books of account. When the assessed income was arrived at on the basis of estimation and computation does not refer to the incomes offered by Assessee at all, we are not in agreement with the finding of the CIT(A) that Assessee has no right to withdraw the disallowance made u/s 40(a)(ia) by way of revised return. If Assessing Officer based his assessment either on the basis of original return or on the basis of revised return while computing income, these contentions could be considered as valid. But since the computation is made on the basis of estimation of income by rejecting books of account, relevance of admission in the return by Assessee looses its significance. Therefore, without going into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) should not have sustained the addition of Rs. 82,93,484/- which was provided by new share-holders and which is credited by Journal Entries with corresponding debit to land Purchase Account." 30. The AO noted that there is increase in share application money of Rs. 86,53,484/- stated to have been received from the following persons: (Rs. ) 1. Mukesh G. Shah 3,60,000 2. Chandraiah 27,64,594 3. Gunti Izra 27,64,440 4. Bapaiah 27,64,450 86,53,484 On being asked by the AO to furnish confirmation letters, Assessee filed only one confirmation from Mr. Mukesh G. Shah and in the absence of confirmation letters/PAN etc., the amount appearing in the names of Mr. Chandraiah, Mr. Gunti Izra and Mr. Bapaiah totaling to Rs. 82,93,484/- treated as unexplained income of Assessee by the AO. 31. Before the CIT(A), in the written submission filed by learned AR, it was submitted that it is not actual amount received by Assessee but the same is a journal entry in respect of cost of land payable to those parties mentioned as above, treating the same as towards their share application money. Stating that such entire amount is adjustment journal entry, it was contende ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntions and perused the order of the coordinate bench placed on record and the ratio laid down on the issue of addition u/s 40(a)(ia) of the Act. The opinion expressed by the Bench that other disallowances under the head 'Business'need not be made once income is estimated may be correct, but, the same is not applicable to the unexplained cash credits as opined by the Bench in the above order. In fact, the principles laid down by the Hon'ble Supreme Court in the case of CIT Vs. Devi Prasad Vishwanath Prasad, 72 ITR 194(SC) are as under: "There is nothing in law which prevents the ITO in an appropriate case in taxing both the cash credit, the nature and source of which is not satisfactorily explained, and the business income estimated by him under section 13 of the Indian Income-tax Act, 1922, after rejecting the books of account of the assessee as unreliable. Where there is an unexplained credit, it is open to the ITO to hold that it is income of the assessee, and no further burden lies on the ITO to show that that income is from any particular source. It is for the assessee to prove that, even if the cash credit represents income, it is income from a source which has a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act is not a question which can arise out of the decision of the Tribunal and a question in that form cannot be referred to the High Court u/s 66 of the Indian Income- tax Act, 1922." (Emphasis supplied) 36. As can be seen from the above ratio laid down by the Hon'ble Supreme Court, the AO was not precluded from adding any unexplained cash credit as undisclosed income of the business and it is for Assessee to adduce evidence that the same is not taxable. Therefore, we are not in agreement with the decision of the coordinate bench in the case of Teja Constructions (supra) in the later part as extracted above and hold that the AO is not precluded in making additions of cash credits. It may be that the word 'not' before the word 'precluded' in the decision of Hon'ble Supreme Court was missing in the order of Coordinate bench which changed the meaning. Be that as it may the principles laid down by Hon'ble Supreme Court is binding. 37. However, as seen from the facts of the case, it was the submission of Assessee that it purchased property and the sellers agreed to take the amount as share application money and to this effect entries were passed by way of j ..... 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