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TMI Blog2023 (9) TMI 1497X X X X Extracts X X X X X X X X Extracts X X X X ..... ver and estimation income of sub-contact receipts for taking 5.5% of its turnover. Apart from that, assessee had also raised estimation of income from rentals by the AO by taking 100% of the total receipts; and lastly, not allowing deduction of Rs.5,50,000/- as claimed by the assessee under Chapter VIA in A.Y.2013-14. 3. We will take up the appeal pertaining to pre-search assessments passed u/s.143(3) for the A.Y.2013-14 and our finding given therein will apply mutatis mutandis in the appeal for A.Y. 2014-15, because the finding of AO and ld. CIT(A) are exactly same based on similar set of facts. 4. The brief facts are that assessee is engaged in the business of undertaking construction contracts for various Government agencies like, Railways, National Highway Authority of India, Jawaharlal Nehru Port Trust, CIDCO etc. and other private organizations. Assessee is also doing business of quarrying and paver block manufacturing. For A.Y.2013-14 assessee had filed return of income on 30/09/2013 by declaring total income at Rs.12,22,22,534/-. During the course of assessment proceedings, ld. AO noted that assessee had shown net profit margin of 6.86% with respect to turnover of Rs.176, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p; Rs. 35,00,615/- iii Income on sale of sand @ 10% Rs. 1,26,78,724/- iv Income on transport receipts @ 10% Rs 6,03,788/- v Rental Income @ 100% Rs. 2,61,66,205/- Total Rs. 14,91,18,830/- & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; Rs. 14,36,99,776/- =============== 8. Besides above, the assessee declared following additional income in the return filed u/s 153A: i. Additional income of Rs. 43,38,508/- by applying a GP Rate of 12% on unverified sub-contractors amounting to Rs. 3,61,54,230/- ii. Additional income of Rs. 5,01,954/- on the turnover of the directors to be considered in the hands of the company. In this manner, the assessee declared total income of Rs. 14,85,40,238/- (14,36,99,776 +43,38,508 +5,01,954) in the return filed u/s 153A of the Act. 9. The ld. CIT(A) further noted that in A.Y.208-09, the Tribunal had held that income should be estimated by applying 10% of direct contract receipts, 5% of sub-contract receipts and therefore, the claim of the assessee that income should be es ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... +51,30,303 + 30,455) in the return filed u/s 153A of the Act. Thus, ld. CIT (A) in A.Y.2013-14 has upheld the estimation made by the ld. AO. 11. After hearing both the parties and on perusal of the impugned order, we find that in the regular assessment order u/s. 143(3) passed by the AO for A.Y.2013-14 and 2014-15, income has been estimated by the ld. AO wherein on direct contract receipts he has estimated 11% of the turnover; on subcontract receipts 5.5% of the turnover and on rental receipts 100% of the receipts. The ld. CIT (A) has justified such estimation on the ground that after completion of the assessment, a search and seizure action has been taken u/s.132 on 20/09/2017 wherein the assessee itself has offered income from direct contract receipts @ 8% and sub-contract receipts @4%. In the search, various incriminating documents were found that assessee has been showing sub-contract receipts and inflate the expenses which were admitted by the Managing Director of the assessee company and on this ground he held that estimation made by the ld. AO is justified. However, before us, ld. Counsel submitted that in the case of the assessee this Tribunal vide order dated 06/11/2019 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be remanded back to the file of the ld. AO to examine the claim of deduction and onus is on the assessee to substantiate its claim for deduction and AO shall grant relief in accordance with law, if found admiissble. Accordingly, appeals for the A.Y.2013-14 and 2014-15 in ITA No.1664 & 1666/Mum/2022 are partly allowed. Post Search Assessment Appeals 15. There are other bunch of appeals which are post search assessment wherein by and large the issue remains the same, i.e., estimation of profit on direct contract receipts and on subcontract receipts and on rental receipts. Since issues raised in all the years are by and large same arising out of identical set of facts and findings arising out of consolidated order passed by the ld. CIT (A), therefore, same are being disposed of in the consolidated order. 16. We will take up the appeal for A.Y.2012-13 wherein the main issue is of addition on account of bogus sub-contract charges. As noted above, a search and seizure operation was carried out on 20/09/2017 and in response to notice u/s. 153A, assessee has declared income on estimated basis, because the books of accounts were already rejected by the ld. AO in the original assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion entries carried out by company (MPL) is books. iii. That the normal procedure in the case of genuine subcontractor is followed in maintaining the Measurement Book in the case of bogus sub-contractor. iv. That in the case of genuine sub-contractors Measurement Book is prepared on the basis of actual work completed whereas in the case of non-genuine subcontractor, Measurement Book is prepared as per convenience as required v. That in the case of bogus contracts there is no work order issued, since, no actual work is carried out by them. vi. That the bank accounts are opened in the case of bogus subcontractors from whom pre-signed cheques are obtained, which are then used by the company (JMMIPL) lo withdraw the cash from these accounts whenever required vii That Shri Janardhan Moru Mhatre offer perusing the books of accounts and consulting his in-house Chartered Accountant has confirmed that all the subcontractors as mentioned in Q.30 of his statement, have not done any contractual work and have been used by the company (JMMIPL) to inflate the expenses. He unequivocally has confirmed that each and every such contractor is bogus. viii. That Shri Janardhan Moru Mh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tire gamut of facts and findings of the ld. AO has confirmed the said addition of Rs.2,43,25,113/- after observing and holding as under:- 40. As regards to the merits of the addition, it may be stated that the facts elaborated by the assessing officer in the assessment order suggest that i. During the search operation page no. 7, Bundle No. 1 Party AB-1 was seized from the business premises of the appellant which suggests that the appellant company had taken adjustment entries which were managed by Shri Gagan Koli, Accountant of the company ii. In his statement recorded u/s 132(4) of the Act, Shri Gagan Koli admitted that the company had booked bogus sub-contract expenses in its P&L account. He explained the complete modus operandi and gave the list of such bogus sub- contractors. This statement was confirmed by him on the next day in the statement recorded u/s 131 of the Act iii. Many of such bogus sub-contractors were also covered u/s 132 of the Act. Further statements of some of other subcontractors were also recorded during the search itself and all of them confessed that they did not carry out any work for the appellant company iv. These statements and seized mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ention of the appellant does not have any force. 41.3 The appellant has contended that seizure of blanked signed cheques of the subcontractors does not mean that the cash was withdrawn by the appellant company. This contention of the appellant is in complete contradiction to the confession made by Shri Gagan Koli wherein he admitted that the cash was withdrawn and given to director of the company. Shri J M Mhatre along with other directors bad agreed to this statement of Shri Gagan Koli. Therefore, this contention does not have any force. 41.4 It has been contended that the comments on seized page adjustment party as per Gagan does not denote any illegal or false practice as sometimes, accounting entries require adjustments. In this connection, it may be stated that the meaning of said comment has been explained in detail by Shri Gagan Koli wherein he admitted that all these parties denote bogus sub-contractors. The said page was specifically confronted with Shri J M Mhatre as well and he also confessed the same. Therefore, the said contention cannot be accepted. 41.5 The appellant has raised issues regarding the reliability of statement of Shri Gagan Koli. This issue has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmission denying these findings of the Assessing Officer, therefore, for the reasons given in detail in the assessment order, it is held that the sub-contract expenses claimed to have been given to these persons are bogus. 42. In view of above discussion and after considering the facts as discussed in the assessment order as well as the fact that the appellant company on various occasions has admitted that it has booked bogus sub-contract expenses in its P&L account and the fact that in the return filed u/s 153A of the Act, the appellant company has declared additional income @12% on such bogus sub-contract expenses, the action of the assessing officer in holding that the appellant company has booked bogus subcontract expenses to the extent of Rs. 2,43,75,113/- is upheld. 19. In so far as the plea of the assessee before the ld. CIT (A) if the action of the ld. AO is upheld then, it will result into unreasonable net profit ration which too he has rejected. 20. Before us, ld. Counsel for the assessee submitted that there is no allegation by either by the Investigation Wing, the Assessing Officer or by the CIT(A) that the assessee have not carried out the work as per contracts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debited (Rs) Ratio Of Cash Payment to total labour charges Contract Receipts for the year (Rs) Total subcontract charges debited (including alleged bogus) (Rs) 31.03.2011 3,34,98,454 6,48,87,399 51.63 170,07,84,189 35,03,72,971 31.03.2012 5,86,17,731 9,72,76,658 60.26 148,80,57,045 29,67,96,333 31.03.2013 7,05,24,217 11,23,77,987 62.76 160,33,70,259 29,32,74,331 31.03.2014 9,08,85,940 19,72,95,932 50.35 405.23,43,543 91,48,50,895 31.03.2015 8,48,35,728 26,45,34,053 42.59 356,81,00,077 75,51,57,795 31.03.2016 4,39,39,345 17,70,36,381 29.47 388,77,20,367 44,37,94,697 33.03.2017 1,57,77,456 12,57,69,771 12.54 366.64,92,999 54,59,82,615 31.03.2018 6,32,82,623 29,22,11,369 25.58 653,50,63.231 113,16,65,813 21. Thus, it can be seen that per books of account, the ratio of cash payment made to labourers has gone down drastically (from 51.63% in 2011 to 12.54% in 2017). Though the ratio has increased again from the year, 2018 after the search in September, 2017, as this methodology was discontinued, postsearch. It can also be seen that the quantum of sub-contract charges has increased over the years. 22. He thus submitted that, it wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esults with net profit spurting to as high as 17.19% for the year ended 31.03.2015, which is simply not possible, or even imaginable. It is not possible to earn this high a profit in contractors' business, that too a government contractor. He also referred to the following documents furnished during the course of hearing- (a) Statement showing net profit earned by the assessee for various years, including the net profit if the disallowance of bogus sub-contract charges is considered. (b) Statement giving comparables - net profit declared by other firms/ corporates in the same business. (c) Photo copy of letter of acceptance dated 02.09.2016 issued by CIDCO to the assessee together with Bill of Quantities (BOQ) to show that the assessee has accepted the contract at 32.55% below the cost estimated by CIDCO (d) Photo copy of letter of acceptance dated 02.09.2016 issued by CIDCO to the assessee together with Bill of Quantities (BOQ) in respect of "Integrated development in Sector-3 on West side of NH-4B of Pushpak Nagar at Dapoli, Navi Mumbai" to show that the assessee have accepted the contract at 32.55% below the cost estimated by CIDCO. (e) Photo copy of letter of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry it was found that these sub-contractors are providing bogus entries to the assessee company and Shri Gagan Koli, a key employee of the assessee company who was looking after the payment of the subcontractors was handling the cash generated from such adjustment of sub-contract charges; secondly, the statement on oath of Shri Gagan Koli, wherein he has admitted and explained the modus of booking of bogus sub-contractor charges. Thirdly, statement on oath of J.M. Mhatre, MD of the assessee company who too have admitted to book bogus sub-contract charges for inflating expenses. Lastly, statement on oath of various subcontractors and other persons who also corroborated the same fact coupled with other enquiries. Thus, on these facts it stands concluded that assessee did debited few of subcontract charges to generate cash. However, most of the subcontract charges has been found to be genuine for which no addition has been made. 30. However, the case of the assessee has been that, assessee is working on a huge projects for construction of roads on contract awarded by government and various projects for various Government agencies, for which it requires huge manpower and many sub-contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the entire modus operandi was adopted only to reduce the cash expenses in the books and also not its construction activity suffer by making the payment to the labourers in cash. 31. This explanation from the records and circumstances seem to be plausible and we accept that sub-contract charges were booked to generate cash to make payments to labourers. The submission of the assessee cannot be brushed aside completely because looking to the nature of business and the manner of conducting business specially when huge construction activities are carried out in remote areas and it is unskilled labour intensive work which is highly disorganized. It is a well known fact that labourers demand the wages in cash on daily basis or short periodic basis. It is also a matter of fact that in the case of the assessee, in earlier years, the payment of labour charges in cash was huge which was done by withdrawing from the bank account and making self-made voucher payments and due to payment made in cash and getting it verified fully to the satisfaction of the ld. AO / Income Tax department was difficult resulting into estimation of profit and rejection of books of account. Assessee introduced this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uge quantum of profit is not comparable. 33. Before us, ld. Counsel has tried to demonstrate that if in all the years this sub-contract charges are added, the net profit rate in various years will go very high and the gross profit itself will increase multifold. First of all he pointed out that as per the books the net profit on all the contract receipts and other receipts is ranging from 5.43% to 7.32 % in AYS. 2012-13 to 2017-18. But if a sub-contact charges which has been added by the AO is included then net profit goes to 8.68 % to 14.65% in these years. Already assessee in its return of income filed u/s 153A, assessee has shown 8% net profit and has declared much higher income than original return of income. If on this further addition is made the net profit rate will go even higher. Fot instance: A.Y. 2012-13- 11.52% A.Y. 2013-14- 12.67% A.Y. 2014-15- 8.78% A.Y. 2015-16- 17.55% A.Y. 2016-17- 14.69% A.Y. 2017-18- 13.19% Ld. Counsel has also submitted a chart, wherein he has given the details of various receipts, direct expenses, gross profit ratio as per the books, indirect expenses, net profit shown in the books of accounts and if these sub-contractor charges are adde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ract charges over and above the net profit shown in the books of accounts. Thus we hold that estimate of 9% as held above is far reasonable to factor in the sub-contract charges added by the AO. Accordingly, assessee gets part relief and now instead of net profit on direct contract receipts declared at 8% in the return filed u/s 153A, it will be 9% and separate addition as held will get subsumed. 36. In so far as appeals for A.Y.2012-13, 2013-14 & 2014-15 is concerned, there is no addition are tinkering with the accounts of the sub-contract charge by the ld. AO and therefore, in these years this is not the issue at all. 37. Now coming to the issue of bogus sub-contract charges for A.Y.2015-16, 2016-17 and 2017-18, the facts leading to the additions made by the ld. AO are exactly same. In these years also we are applying net profit rate net profit rate of 9% on the direct contract receipts. In these years also assessee in the return of income filed u/s.153A has disclosed the net profit @8%. Here also, finding given above will apply mutatis mutandis that these sub-contract charges were in fact directly related to carrying out the contract work undertaken by the assessee and again t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , in ground No.4 in A.Y.2012-13 assessee has challenged that additional income declared on the turnover of Directors of Rs.7,88,469/- cannot be added as it is very high and excessive because in the seized documents, the turnover made by the Directors which was not according to regular books was Rs. 65,70,571/-. The assessee estimated 12% from such turnover and offered it as additional income. Now the case of the assessee before us that, it is on higher side, not commensurate with the business of the assessee and lower percentage should be applied. We do not find any justification for such a plea that once the assessee has offered the income on the basis of seized document, then assessee cannot take a plea that the said additional income offered should be reduced by some adhoc percentage of net profit. Accordingly, ground No.4 is dismissed. 41. The grounds raised in A.Y.2013-14 in so far as bogus subcontracting charges of Rs. 4,20,06,333/- is concerned, we have already adjudicated this issue. 42. In so far as ground No.3 is concerned assessee has challenged additional income offered which was as under:- Sr no Particulars Amount (Rs) Our comments (i) Sub-contract receipts 61 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eign travel expenses. The ld. AO has made disallowance of Rs.5,48,700/- being foreign travel expenses debited to the profit and loss account for the reason that foreign visit of directors alongwith their family members is not wholly and exclusively for the purpose of business. Before us, ld. Counsel submitted that this disallowance is not arising out of any incriminating material found during the search of assessee. In support, he has relied upon the decision of the Hon'ble Supreme Court in the case of Abhisar Buildwell reported in 454 ITR 212. It is an undisputed fact that the assessment for the A.Y. 2015-16 had attained finality at the time of search on 20/09/2017 and therefore, in absence of any incriminating material such disallowance of expenses cannot be made in the assessment made u/s.153A. Therefore, the additional ground of foreign travel expenses is directed to be deleted. 50. In A.Y.2015-16 in so far as bogus sub-contract charges are concerned, we have already held that since it is part of contract business of the assessee and no separate addition should be made and once we have estimated the net profit, this addition gets subsumed in the estimation of net profit. For t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is part of contract business of the assessee and no separate addition should be made and once we have estimated the net profit, this addition gets subsumed in the estimation of net profit. For this year also have already estimated 9% on the contract receipts and therefore, this ground of the assessee is treated as partly allowed. 57. In so far as ground No.2 regarding cash sales at Ulwe Bambavi of Rs.41,62,085/-, we have already held that no profit rate of 9% should be applied instead of entire cash sales. Accordingly, this ground is partly allowed. 58. In ground No.3, assessee has challenged that depreciation suomoto disallowed of Rs.3,09,98,065/-. The assessee had suomoto recomputed depreciation and made a disallowance of Rs.3,09,98,065/-. The case of the assessee before us is that assessee has wrongly offered additional disallowance of depreciation in the return of income filed u/s.153A and moreover this addition is not based on any incriminating documents found during the course of search. However, the contention raised by the ld. Counsel cannot be accepted because if the assessee has disallowed depreciation suomoto in the return of income u/s 153A, then it cannot be held th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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