TMI Blog2018 (5) TMI 1579X X X X Extracts X X X X X X X X Extracts X X X X ..... the purchase of assets or the use of assets for the purpose of business. Therefore, as relying on case of Awasthi Traders [2016 (11) TMI 894 - SUPREME COURT] we hold that CIT(A) has rightly directed the AO to grant the deduction for depreciation out of gross income estimated - I.T.A.No.169-175/Viz/2013 And I.T.A.No.183-189/Viz/2013 - - - Dated:- 23-5-2018 - SHRI V. DURGA RAO, JUDICIAL MEMBER AND SHRI D.S. SUNDER SINGH, ACCOUNTANT MEMBER For The Assessee : Shri I. Kamasastry, AR For The Revenue : Shri Deba Kumar Sonowal, DR ORDER PER D.S. SUNDER SINGH, Accountant Member: These appeals are filed by the assessee and revenue against the orders of the Commissioner of Income-Tax (Appeals)[CIT(A)]-1, Hyderabad vide I.T.ANo.0524 to 0530/CC-2, Vizag/CIT(A)-1/11-12 dated 28.12.2012for the assessment year 2004-05 to 2010-11. Since the issues involved in these appeals are common, these appeals are clubbed , heard together and disposed off in a common order for the sake of convenience as under. 2. Grounds of Appeal and additional grounds of appeal for the Assessment Years 2004-05 to 2010-11 are common in all the appeals of the assessee bearing Nos.169 to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment years 2004-05 to 2009-10. Hence the assessment orders passed under section 143(3) r.w.s. 153A are null and void in the absence of notice under section 143(2) being issued separately for each assessment year. 3. The Ld. AO and the Ld. CIT (A) are not correct in estimating profits uniformly on the gross contract receipts without taking into consideration the sub-contract payments made which would yield a substantially lower margin on the corresponding contract receipts 4. Detailed submissions will be made at the time of the hearing of the case. 3. Ground No.1 to 6, 8 and 9 in original grounds filed along with appeal Memo are not pressed by the Ld.AR during the appeal hearing. Therefore Ground No.1 to 6, 8 and ground No.9 are dismissed as not pressed. 4. Ground No.1, 2 and 4 in additional grounds filed by the assessee are not pressed by the Ld.AR during the appeal hearing. Therefore, additional ground No.1, 2 and 4 are dismissed as not pressed. The grounds remained for adjudication in assessee s appeal are ground No. 6 related to estimation of income @12.5% on gross receipts and ground No.3 in Additional grounds which is related to estimation of profits on sub-cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loyee of the assessee reveals that he has encashed the cheques on similar pattern in the following sub contracts: (i) Sri IGK Raju (ii) Sri S.V.VenugopalaRaju (iii) Sri GRK Prasad (iv) Sri DVSN Raju (v) Sri K.Venkateswarlu (vi) Sri Premchand Sharma and (vii) Sri DVJJ Raju 7. As per the statements recorded form the sub-contractors and the employees of the assessee, it was observed by the AO that though the cheques were issued to sub contractors they were encashed by the employee of the assessee thereby the money has come back to the assessee. The subcontractors also failed to establish that they have executed the works with relevant evidences. Hence viewed that the payments to above sub contractors were bogus. Since all the sub contract bills were withdrawn from the bank by cash, the entire expenses were stated to have been incurred in cash. The AO further observed that the assessee had inflated the expenditure and suppressed the income. During the assessment proceedings, the assessee also has accepted for completion of assessment by reasonable estimation of income. Accordingly, the AO completed the assessment by estimating the income at 12% of of the gross c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ract payments were bogus, the inflation of expenditure and the suppression of income is far from the truth. The assessee submitted reply to show cause notice issued by the A.O. but due to delay in producing the relevant evidences, the AO landed in incorrect conclusion and viewed that there was inflation of expenditure, which was not correct. The third defect i.e. suppression of income was also argued by the Ld.AR stating that there was no suppression of income, and hence requested to consider the estimation of income at lesser percentage. For a query from the Bench, the Ld.AR argued that in the case of ISNAR constructions, a group company, the Hon ble ITAT held that estimation of profit @11% before depreciation would be reasonable since ISNAR constructions is a group company. 11. With regard to the sub contracts, the Ld.AR argued that during the period under consideration for the assessment year 2004-05 to 2009-10, the assessee has given as much as 69.24 crores to sub contract works. The Ld.AR argued that the entire amount of sub contracts should be excluded from the estimation of income and separate estimation is required to be made in this case. The assessee do not get so much ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were bogus. The Ld. DR further submitted that during the assessment proceedings, the AO analyzed the pattern of sub contracts as under : ( i) All of them except Sri Premchand Sharma and ShrI DVSJJ Raju were exemployees of SVC Projects. ( ii) All of them, except the above two, executed sub-contract works for SVC Projects while they were full time employees of SVC Projects. ( iii) In all the cases, the sub-contractors executed works only for SVC Projects (As seen from their bank accounts) and also the statements. ( iv) In almost all cases, except in the case of Sri Premchand Sharma, account payee cheques to be credited into their respective bank accounts were actually deposited into their bank accounts by a trusted employee of SVC Projects namely Mr. S.R. Mohan. ( v) In all the above mentioned cases, signed self cheques allegedly used to withdraw cash for payment to labourers were actually encashed by the same employee who had deposited the cheque as aforementioned, namely Mr. S. R.Mohan. ( vi) In all the cases, the contract receipts per year received by the aforementioned sub-contractors were less than 40 lakhs. In most of the cases, the con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unts. The AO estimated the income at 12% clear of depreciation and all other expenses considering the entire material placed before him. The assessee s case cannot be equated with the other cases of estimation of income, wherein, certain vouchers could not be found. In this case, the assessee is systematically suppressing the income, involved in bogus sub contracts, inflation of expenditure for which the evidences were found and discussed in detail in the assessment order. Therefore, the Ld. DR argued that estimation of income, clear of depreciation and all other expenses @12% is reasonable. Hence, argued to confirm the order of the AO., and requested not to allow the depreciation from the estimated income, since the facts of the case are distinguishable in the other cases of estimation of income. The Ld. DR supported the order of the AO and argued that there is no case for allowing the depreciation and there is no case for scaling down the estimation of income. 15. We have heard both the parties and perused the material placed on record. In this case the statement was recorded from Mr.S.R.Mohan, the trusted employee of the assessee company. It is observed that the assessee awar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee company. The above pattern of payment and withdrawal of cash indicates that the sub contract works appear to be bogus and no evidence was furnished by the sub -contractors before the AO to prove that the sub contract works were actually carried on by the respective sub-contractors. The sub contractors did not produce any agreement for contract, details of payment of PF and ESI, details of infrastructure that they have executed the contract. There are no establishments, no registration and no books of accounts and no possible reason is given for encashing the cheques by Mr.S.R.Mohan and incurring the entire expenditure in cash. The assessee also did not prove that the sub-contracts were executed by them. The circumstantial evidences suggest that there was no reason to disbelieve that the observation of the AO that the above sub -contractors were the name lenders. 18. The AO further observed from the seized material as well as from the books of accounts in post search enquiry that the assessee has failed to admit sales of ready mix concrete from RMC plant. This fact was evidenced from the spiral bound book seized as annexure SVC A/13 and quantified the amount at ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd unverifiable vouchers noticed in the course of search It was also clear that n view of such defective vouchers and Incorrect and unreliable books of account only, the appellant had voluntarily admitted additional income for the Assessment Years 2004-05 and 2005-06 in the course of survey u/s 133A earlier. In11view, of the detection of fresh evidence regarding Inflation of expenses by way of sub contracts given to employees only, there existed sufficient reason and basis to hold that despite such admission in the course of survey conducted earlier, the entire undisclosed income earned by the appellant in these years also had not been offered to tax. Therefore, the provisions of sec.153A here clearly attracted and were applicable even in respect of Assessment Years 2004-05 and 2005-06, which fell within the span of six years. Under the circumstances, finding no strength in the arguments of the Authorised Representative of the appellant, the legal grounds raised in this regard are decided against the appellant. 06.3. As regards the Issue of rejection of books of account as discussed earlier, the Acquittance Register seized in the course of search clearly showed that the appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection, as he denied being their personal friend or knowing any other member of the sub contractors' family. Nor could he substantiate his claim that the cash so withdrawn by him was being handed over to the representative of sub contractors Obviously, no expertise is required in withdrawing cash from banks against self cheques for which the services of Shri Mohan were needed by the representatives of the sub contractors, if any. In fact, it was found that the bank accounts of some of the sub contractors had been introduced by the persons of the appellant company itself. 06.3.1 The facts discussed above clearly bring out that the appellant had put in place an elaborate system for siphoning of the funds/income of the business by way of sub contracts shown as given to certain employees. It even took abundant precaution to keep the turnovers of such sub contractors below the limit of ₹ 40 lakhs, so as to avoid maintenance of books of account, while none of them could submit any documentary evidence to justify the withdrawal of almost entire payments on the same or the very next day, Therefore, even if payments to such sub contractors were made through Payee cheques and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he denial of the appellant of this fact was not acceptable, as the seized document showing investments even contained cheque entries, matching with their bank accounts Since they had no other source of Income, the only logical inference could be that such investments were made by them out of the unaccounted income of the company itself, which was not duly recorded in the books of account. This finding also fortified the conclusion regarding incorrectness of accounts maintained by the appellant. 06.3.5. It also cannot be denied that it was on account of the above findings with regard to the business/income of the appellant only that compelled the appellant to come forward with a voluntary disclosure of additional income of ₹ 5.78 crores in the Assessment Years 2007-08, 2008-09 [and 200-10. Despite making such disclosure, the appellant could not provide basis thereof, implying that that the same was indeed based on discrepancies and deficiencies existing in the books of account. 06.3 .6. In the light of the above discussion, I am of the considered opinion that In the facts and circumstances of the case, as established by the seized documents and the post search enquiries, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... persons in the Assessment Years 2004-05 to 2010-11, the sub contracts executed in dual capacity or employee and sub contractor were of ₹ 1.09 crores only, which was very nominal considering the total sub contracts given by the appellant during the period of ₹ 50.55 crores. He has therefore claimed that the rate of 9.40% was at par with the facts of the case and the decisions of the Hon'ble ITAT. 06.4.1. On going through the facts of the case, I find merit in the contention of the Representative of the appellant that the Assessing Officer has adapted the rate of 12%, net of deprecation, without citing any comparable cases or any judicial precedent. Adoption of this rate, without giving the benefit of depreciation, indeed translates into profit ranging from 13.03% to 14.82%, which is indeed higher than the range considered as reasonable in the cases of civil contractors by the Hon ble Jurisdictional Income-tax Appellate Tribunal or even by the Hon ble Special Bench of the ITAT, Indore in the case of ArihanthBuilders Developers and Investors (P) Ltd (106 ITO 10), wherein the was considered as reasonable after rejection of books of account. However.since the appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal also referred to the decisions in the case of Commissioner of income-tax Vs. Jain Construction company (supra), Gian Chand Labour Contractors (214 CTR 149) and Commissioner of Income-tax, Vs. Chopra Brothers India (P) Ltd (170 CUR 597), some of which have been referred to by the Representative of the present appellant also. 06.4 .3. Considering the facts and circumstances of the case of the present appellant, and following the decision of the Hon'ble Jurisdictional Income-tax Appellate Tribunal in the case of ACIT Vs Satyanarayana Constructions, therefore, I am of the considered view that it will meet the ends of justice if the profit before depreciation in the appellant's case also as estimated @ 12.5% of gross receipts The Assessing Officer is accordingly directed to recalculate the income from contracts by applying the said percentage on gross receipts and granting deduction for depreciation out of the gross income so arrived at The grounds raised In this regard are therefore partly decided in favour of the appellant. 20. The CIT(A) observed that the AO has rightly rejected the books of accounts. In the facts and circumstances of the case, we agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sub contractors. Therefore, requested to estimate the reasonable income on sub contracts. The revenue s case is that since the sub contracts appear to be bogus, there is no reason to reduce profit in the case of sub contracts. 22. It is undisputed fact that the assessee has given sub contract works to various sub- contractors and only in handful of sub contracts listed in this order involving the sub contract payment of ₹ 7.93 crores were supposed to be executed by the employees or ex employees or closely connected people of the assessee which were proved to be bogus on circumstantial evidences. Though the AO quantified such sub contracts at ₹ 7,73,04,476/-, for the impugned assessment years, the AO has not made separate addition on account of sub-contract payments. Therefore, the entire sub contracts cannot be presumed to be bogus. Having accepted that the assessee has given sub contract works to the various sub- contractors, estimation of income @12.5% on par with own contracts is unreasonable. For a query from the Bench, the Ld.AR submitted that the estimation of income @ 5% to 7% is reasonable in case of sub-contracts. Whereas, the Ld. DR opposed for separate es ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n ble High Court was with regard to separate addition of fees of ₹ 63,859/- representing the interest on remuneration paid to partners but not the depreciation. Hence, the case laws relied upon by Ld. DR is no way helpful. The Ld. DR relied on the case of CIT Vs. Gian Chand Labour Contractors 316 ITR 0127. The issue involved in this case is separate deduction towards freight charges but not the depreciation. Therefore, the case law relied upon by the DR is also not helpful. The depreciation is a statutory allowance which required to be allowed. Hon ble jurisdictional High court in Commissioner of Income-tax, Andhra Pradesh. v. Y. Ramachandra Reddy, [2014] 50 taxmann.com 129 (Andhra Pradesh), considered the decision of Indwell constructions and the Board circular referred above and held as under: 13. The learned counsel for the appellant is not able to point out any provision of law in the Act or Rules made thereunder, which restricts the allowance of the depreciation and interest. On the other hand, the facility created under the Act is so firm and strong that if for any reason it becomes impermissible or unnecessary for an assessee to seek the allowance of depreciation ..... X X X X Extracts X X X X X X X X Extracts X X X X
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