TMI Blog2014 (12) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... in Indwell Constructions vs. CIT [1998 (3) TMI 121 - ANDHRA PRADESH High Court] - section 40 provides for certain disallowances in certain cases notwithstanding that those amounts are allowed generally under other sections - The computation under Section 29 is to be made under section 145 on the basis of the books regularly maintained by the assessee - If those books are not correct or complete, the Income-tax Officer may reject those books and estimate the income to the best of his judgment - when such an estimate is made it is in substitution of the income that is to be computed u/s 29 - all the deductions which are referred to u/s 29 are deemed to have been taken into account while making such an estimate - the embargo placed in Section 40 is also taken into account – the order of the CIT(A) is upheld – Decided against revenue. - I.T.A. No. 1149/Hyd/2014 - - - Dated:- 26-11-2014 - Shri B. Ramakotaiah And Smt. Asha Vijayaraghavan,JJ. For the Appellant : Sri D. Sudhakar Rao For the Respondent : Sri A.V. Raghuram and Sri Y.P. Rao ORDER Per Asha Vijayaraghavan, JM: The appeal by the Revenue is directed against the order of the CIT(A)-VII, Hyderabad dat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to the Govt. A/c before the due date of filing of return. The AO also made a disallowance of ₹ 30.30 crores u/s 43B. These were the statutory payments classified as outstanding as per section 43B, as per the Audit Report enclosed with the return. The breakup of this amount of ₹ 31.25 crores is - VAT Payable ₹ 20,56,796, Service Tax payable ₹ 30,10,18,267. The assessee contended that the service tax is not passed through the P L a/c and the same need not be considered for disallowance. The AO, however, did not accept the contention and made the disallowance. The company had claimed set off of disallowance of ₹ 33,36,74,170 towards disallowance made in earlier year made u/s 40(a)(ia). The AO, however, noticed that in the earlier years i.e., for AY 2008- 09 and 2009-10 only an amount of ₹ 3,19,23,596 and ₹ 5,38,78,801 respectively totalling to ₹ 8.58 crores was only disallowed u/s 40(a)(ia). The AO further observed that during the submissions made before the CIT(A) for the earlier year, the assessee had contended that only an amount of ₹ 1,11,20,305 is disallowable for AY 2008-09. The AO, therefore, considered set off of only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tract is a direct expenditure intimately connected with its business of civil contracts, the receipts from which were duly accounted for and accepted by the department. There cannot be income without any expenditure. Majority of its works were taken on sub-contract basis and the net profit declared by the assessee was about 8.55% of net contract receipts which is well within the accepted norm of civil contract business especially in view of the fact that only about 30% of the works represented direct contract and 70% of turnover was on account of execution of work through sub-contracts. (b) Wherever works were sub-contracted except for sub contract expenditure, no other expenditure was claimed against such work. The payments were made by crossed cheques issued in the names of the parties concerned and the same were encashed. There is neither any allegation that the assessee neither received back such amounts nor was any evidence brought on record to that effect. No evidence was also brought on record that the impugned works were not executed or any other expenditure of the same nature In respect of the same work was separately claimed. (c) The sole ground of disallowance was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) directed the AO to estimate the profit of the assessee-company @ 12.5% on direct contract works (12.5% of ₹ 328.04 crores) and @ 8% on sub-contract works undertaken by the assessee (8% of ₹ 725.02 crores). 11. The CIT(A) held that no disallowance of ₹ 30.30 crores on account of 43B is necessary, as even otherwise the entire amount was remitted before the due date of filing of return of income and no separate allowance of depreciation as expenditure is being entertained as income is being estimated and consequently the question of making an addition on account of disallowing or reworking depreciation to the tune of ₹ 54.37 lakhs also does not arise. 12. The CIT(A) observed that the disallowance u/s 40(a)(ia) to the tune of ₹ 4.62 crores was made on account of non remittance of tax deducted at source to Govt. A/c. This was on account of interest payable as seen from para 7 of the assessment order. Since, no separate allowance of any expenditure including interest is being made and income is being estimated, no separate disallowance of interest expenditure on account of provisions of section 40(a)(ia) is, therefore, necessary. 13. As regards th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 were confirmed, even though Addl.CIT reported that the same may be kept out of purview of estimation while deciding the appeals. He also submitted that sub contracts allegedly executed by family members and relatives should have been disallowed while estimating the income. He referred to various facts as pointed out by the A.O. and referred to the orders of Ld. CIT(A) and his findings on each issue. 18. Ld. Counsel, however, submitted that A.O. has accepted that books of accounts maintained by the assessee are complicated so the matters were referred to special audit whose report, even though was available, was not considered by the A.O. fully. Moreover, it was submitted that assessee has got the work executed through sub contracts as assessee itself could not undertake the contracts, in view of the increase in business activity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pt 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. CIT(A) should have excluded the amounts on which there is clinching evidence against the assessee regarding non-execution of work or unexplained expenditure. Neither the A.O. nor the Addl. CIT(A) in the remand report indicated or quantified the amounts on which there was clinching evidence against the assessee. In fact, Ld. CIT(A) also considered this issue and his findings are as under : REASONS FOR ESTIMATION: After a careful analysis of the submissions and evidences filed by the applicant from time to time vis-a-vis the facts of the case, I am of the opinion that there is considerable force in the contention of the appellant with regard to disallowance of sub-contract expenditure. As is evident from the detailed subcontract submissions made by the appellant, with regard to the grounds of disallowance of sub-cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 about 30.29% of the net contract receipts, for the AY 2007-08, which is impossible to achieve in this line of business. In fact, the Additional CIT, Central Range-2, Hyderabad, has concurred with this view, in his forwarding comments vide letter dated 19.02.2013 for the AY 2008-09 09-10. Further, it is also an undisputed fact that despite a thorough search at the premises of the appellant, no assets over and above those recorded in the books were found to justify the huge additions/ disallowances made in the impugned assessment. The AO failed to establish any nexus between the alleged suppressed income and corresponding investments in assets. However, it is also a fact that the appellant could not establish the entire sub-contract expenditure to the satisfaction of the AO. Neither the appellant nor the AO/had concl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le 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 profit margin cannot be same as contracts executed on own. If the assessee is able to prove that it has carried out the sub contract and on that contract the percentage of profit to be estimated 8% since the assessee has to forego certain profit on sub-contract basis and the profit cannot be same as in the case of main contracts got and executed by assessee own. Hence we direct the AO to re-compute the profit on main contract at 12.5% as held by Tribunal in the case cited supra and on sub contract 8% of the contract receipt ... In the instant case, the AO has not disputed the sub-contracts received by the appellant. He has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere 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 on merits. Accordingly, they are rejected. 20. Respectfully following the decision of the co-ordinate Bench (supra), we dismiss ground No. 1 of the Department. 21. With respect to ground No. 2, we find the Hon ble A.P. High Court in the case of Indwell Constructions vs. CIT, 232 ITR 776 (AP) held as follows: The pattern of assessment under the Income-tax Act is given by Section 29 which states that the income from profits and gains of business shall be computed in accordance with the provisions contained in Sections 30 to 43D. Section 40 provides for certain disallowances in certain cases notwithstanding t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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