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TMI Blog2014 (12) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed this year 32,25,53,865 Disallowance of depreciation 53,37,952 Total income assessed 260,67,86,152 3. The assessee is a public limited company executing major contracts. The turnover of the company is around 1000 crores during the relevant previous year. In the course of the assessment proceedings, the AO made enquiries regarding the sub-contract works given by the company. The AO had issued letters seeking information u/s 133(6) of the Act to 107 subcontractors seeking details, but received response in only 25 cases. The AO accepted these 25 cases. Of the balance 82 cases, the AO found that in 38 cases the notices were returned unserved. The amount involved in these sub-contractors totalled to Rs. 67.76 crores. The AO doubted the existence of the sub-contractors and disallowed the entire sub-contract expenses of Rs. 64.76 crores and added it to the income returned (para 5 of the asst. order). Of the balance 44 letters, the AO observed that these were served on the subcontractors but no replies were received. The sub-contract expenses totalled to Rs. 78.31 crores pertaining to these 44 sub-contractors. The AO disallowed this expenditure and Rs. 78.31 crores was added t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... names of the sub-contractor wherever deployed against each main contract. The assessee stated that disallowance of entire sub-contract expenditure results in abnormally high profit in respect of the works in' question, even 100% in many of the cases, which is not possible in this line of business. The details of the principal contractor in respect of the work sub-contracted to the above persons, gross value of the work taken on contract, total disallowance out of such amount, commission already offered as income/value of work executed on its own and the rate of profit from the said work considering the total disallowance made by the AO and the commission/profit on own works computed at average rate of profit disclosed in the P&L Account were submitted sub-contractor wise. 8. The CIT(A) observed that the information filed as indicated was on similar lines as filed for earlier year AY 2009-10 and which was discussed in detail case wise in the appellate order. The assessee reiterated earlier arguments which were threefold as under: (a) The disallowance of sub-contract expenditure would result in 100% of profit in most of the cases and it would be abnormally high which is not pra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... more but less than 50% 14,63,24,493 30% and more but less than 40% 17,84,29,624 Less than 30% 10. The CIT(A) held that there is merit in the argument of the assessee that one cannot consider the receipt as income and also disallow the entire related expenditure without proving that either the receipt was under some other account or no work was actually done. He also observed that disallowance of sub-contract expenses as done by the AO would give distracted results of profits of nearly 90% in some cases and at any rate profits in excess of 30% to 90% of works, when the accepted norms of civil contracts is for a profit margin of 10% to 12% on direct works. Any tender document and any costing estimation made would also indicate profit margins in this region. Under the Circumstances, in terms of the earlier appellate order passed for AY 2009-10 in the case of the assessee, the CIT(A) directed the AO to estimate the profit of the assessee-company @ 12.5% on direct contract works (12.5% of Rs. 328.04 crores) and @ 8% on sub-contract works undertaken by the assessee (8% of Rs. 725.02 crores). 11. The CIT(A) held that no disallowance of Rs. 30.30 crores on account of 43B is necessary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mputation of income statement to the net profit and taxable income by the assessee are no more relevant. Accordingly, no disallowance is therefore required to be made on this account. 15. The CIT(A) concluded that the income of the assessee is to be estimated @ 12.5% on direct contract works and @ 8% on sub-contract works. All other expenses are deemed to have been allowed and no further disallowances are also called for. 16. Aggrieved by such order of the CIT(A), the Revenue is in appeal before us with the following grounds: (a) On the facts and circumstances of the case, and in law, the CIT(A) erred in resorting to estimation even in respect of so called sub-contractors, who either denied having done any work or denied receipt of sub-contract payments. (b) On the facts and circumstances of the case and in law, the CIT(A) erred in deleting the disallowances u/s. 40(a)(ia). (c) The appellant prays that the order of the CIT(A) on the ground be set aside and that of the Assessing Officer be restored. 17. The learned DR submitted that the findings of the special audit were not referred to by the Ld. CIT(A) nor the payments alleged to have been made in the guise of sub-contracts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age No. 94 to 98 particularly with reference to final conclusion is as under: "Keeping in view the non-genuineness of the sub-contract payments as established by A.O. after detailed discussion in the assessment order but at the same time keeping in view the submission made by the assessee before the Ld. CIT(A) that the profit is assessed at abnormally high at 70.9% of the turnover & certain back to back contract constitutes major part of the turnover, the Ld. CIT(A) may decide the issue on merits and consider estimating the income if the finding of the AO in the assessment order as well as in the remand report is held to be unreasonable. However, wherever there is clinching evidence against the assessee regarding nonexecution of work or unexplained expenditure, it is requested that the same should be upheld and should be kept out of the purview of estimation if the Ld. CIT(A) decides to estimate the income". 6.1 Therefore, there is no objection for estimation of income by the Revenue. Moreover, the grounds as raised by the Revenue are also not on the issue of resorting to estimation after rejecting the books of accounts. The only issue which the Revenue is contending that the Ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llegation that the appellant received back such amounts, nor was any evidence to that effect found/gathered, either during the search or assessment proceedings. Even otherwise it is a settled principle of law that when the receipts/income, in respect of the works given on sub-contract, are accepted, the corresponding expenditure for earning such income cannot be disallowed in full even assuming that the sub-contracts were not established to the fullest satisfaction of the AO. Despite submissions of one-toone correlation of the projects executed, the AO failed to assess the impact of the disallowance of the expenditure relating to a project in toto. The disallowance of the entire expenditure, relating to the actual execution of work, the income from which is admitted by the appellant and accepted by the AO, resulted in abnormally high profits. It is a fact that apart from the sub-contract expenditure, no other expenditure was claimed on such works. The factual analysis of profits resulting from such disallowance, filed by the appellant, was also not controverted by the AO. The disallowance of most of the sub-contract expenditure has led to a situation where the assessed income was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant's own case for A.Y. 2008-09 and 2009- 10, the Addl. CIT, Central Range alternatively recommended for estimation of income. The details of sub-contracts received and executed for the AY 2007-08, is shown in the tabular form as under : Description Contract receipts (Rs.) To be estimated now (%) Total income estimated now for taxation(Rs.) Sub contract received from others 333388010 8% 26671041 Direct works received 2547050154 12.50 318381269 Total turnover 2880438164 Total 345052310 This rate of percentage is adopted based on the various judicial decisions from time to time and also the decision by Hon'ble ITAT, Hyderabad in the case of KNR Constructions Vs DCIT, C-2, in MA Nos. 113 & 114/Hyd/2012, dated 12.10.2012. The observations of the Hon'ble Tribunal is as under: ...... , the argument of the assessee counsel is that the assessee is also undertaken sub contract from other contractors. However, the AO not considered the same since the assessee failed to furnish the agreement or work orders or confirmation from the sub- contractors to prove that the assessee has taken sub-contract. In the event, assessee has executed contract on sub contract basis, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts. Ld. CIT(A) seems to have examined all the issues, accepted part of the findings of the A.O. that the sub-contracts are only name sake. However, he did not agree for disallowance of entire sub-contract expenditure when the project was undertaken by the assessee and contract receipts were accounted for. In view of this, as both the authorities of Revenue accepted the estimation of income and as Ld. CIT(A) resorted to estimation based on the norms already been formed in this regard i.e., estimation of income at 12.5% on the main contracts and 8% on subcontracts undertaken, we do not see any reason to interfere with the order of the Ld. CIT(A). As seen from the consequential orders passed by the A.O. except in A.Y. 2007- 08 where income returned is more than the estimation, in other years the assessed income is more than the income returned by the assessee. In view of this, we uphold the orders of Ld. CIT(A). since Revenue has not questioned the estimation at the above rates and since no evidence has been filed to establish the clinching evidence of non-execution of contract work or unexplained expenditure, the grounds raised by the Revenue do not require any consideration ..... X X X X Extracts X X X X X X X X Extracts X X X X
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