TMI Blog2023 (7) TMI 1207X X X X Extracts X X X X X X X X Extracts X X X X ..... bills remaining unpaid and lack of evidences towards transportation, unsupported statement of low rung employee etc, the AO has also not brought out specific defects in the books despite drastic action of search. CIT(A) to our mind, has rightly rejected the books of account and set aside book results for fair and benign estimations of profits and to shun absurdity in the income assessed. While, the assessee has provided justifications towards large creditors arising year after year, such justifications are largely circumstantial and abstract. The outstanding creditors of such significant amounts in the context do invoke disquiet. It is indeed difficult to appreciate the correctness of book results in an objective manner. The AO has made wide ranging observations against the assessee. - Action the CIT(A) sustained. Presumption to the books of accounts u/s 132(4A) - The Hon ble Kerala High Court in the case of CIT (central), Kochi vs. Damac Holdings (P) Ltd. [ 2017 (12) TMI 1170 - KERALA HIGH COURT ] observed that in the case seizure of documents in the course of search, the presumption under 132(4A) would be equally available to the assessee as well. The contents of books a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epted, that such FDRs are nothing but integral part of working capital of the assessee kept and expanded for commercial reasons. Hence, the interest income deserves to be treated alike with business contract receipts for the purposes of estimations. The interest income cannot be treated differently from contract receipts merely because such income flows from a different source. - Order of CIT(A) modified to this extent. The interest income and similarly discount credits shall thus form integral part of the business receipts and shall be subjected to estimation at same rate of 10% as made applicable to contract receipts. However, the interest income on IT refunds and NSC deposits will not get the benefit of estimations but will be chargeable as other income in accordance with law. Exclusion of exempted income - Assessee has claimed that share of profit arising from joint venture in some assessment years are fully exempted from taxation u/s 10(2A) of the Act. Needless to say, where the income is exempt from the ambit of taxation under the provisions of the Income Tax Act, same has to be excluded from the taxability at the threshold. Thus, the AO is directed to do so by determ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -18 CIT(A)-4, Kanpur, dated 27.09.2022 30.05.2022 153A r.w. Section 143(3) 2837/Del/2022 Revenue 2018-19 CIT(A)-4, Kanpur, dated 27.09.2022 30.05.2022 153A r.w. Section 143(3) 2557/Del/2022 Assessee 2018-19 CIT(A)-4, Kanpur, dated 27.09.2022 30.05.2022 153A r.w. Section 143(3) 2838/Del/2022 Revenue 2019-20 CIT(A)-4, Kanpur, dated 27.09.2022 30.05.2022 153A r.w. Section 143(3) 2558/Del/2022 Assessee 2019-20 CIT(A)-4, Kanpur, dated 27.09.2022 30.05.2022 153A r.w. Section 143(3) 2839/Del/2022 Revenue 2020-21 CIT(A)-4, Kanpur, dated 27.09.2022 30.05.2022 153A r.w. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ddition of Rs. 15,22,47,537/- by completely ignoring the fact that the assessee has been unable to prove the genuineness of purchases and the corresponding sundry creditors. On bare perusal of the balance sheet of the assessee it is clear that the bogus sundry creditors have been generated to create FDRs against it of similar amounts. In the assessment order it was proved beyond doubt that the assessee has furnished fake bills and invoices and the assessee miserably failed to prove the identity and creditworthiness of the sundry/other creditors and genuineness of transactions. Whereas the primary onus was on the assessee to prove the same. The sundry creditors were also held bogus on the basis of statement of accountant of the assessee Sh. Kuldeep Joshi who admitted that the creditors in the books are mere entries, the infirmities found in the bills produced before the AO in the matter of purchases, huge payments outstanding to be made to the huge amount of other Sundry Creditors'. In face of all these issues the assessee completely failed to prove the genuineness of the sundry creditors and the corresponding purchases. Moreover, the Ld. CIT(A) has also acknowledged the stand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reas which are not easily accessible. The revenue generated is thus 100% on the basis of approved tenders/invoices generated on the basis of work certified and approved by the government engineers and architects for the work awarded. The material used for construction activities involve material like cement, steel, construction equipment, electrical wires etc. which are bought from specified suppliers. However, many petty and general materials are also needed such as gritt, coarse sand, local sand and other local materials. Such type of material are purchased from lacal areas and local vendors which are mostly from unorganized sector. 6.1 A search and seizure operation under Section 132 of the Act was conducted on 27.11.2020 in the premises of the assessee firm. During the course of search operation, certain documents/information belonging to the assessee were found and seized which were allegedly of incriminating nature. Consequently, notices under Section 153A of the Act for various assessment years were issued. In pursuance thereof, the assessee inter alia filed return of income [ROI] declaring total income at Rs. 2,35,63,250/- for Assessment Year 2015- 16 in question. Whil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct artificially keeping the cash payments below limits prescribed of Rs. 20,000/-. The Assessing Officer thus determined the violation of Section 40A(3) of the Act and quantified an estimated figure of Rs. 7,09,18,475/- on this count. Another estimated disallowance of Rs. 7,89,451/- was carried out on account of unverified employee expenses. The income was finally assessed at Rs. 17,58,10,789/- against returned income of Rs. 2,35,63,250/- for the Assessment Year 2015-16 in question. 8. Aggrieved by the disallowance towards bogus purchases, i.e., estimated increase in sundry creditors; cash expenses incurred in violation of Section 40A(3) of the Act and estimated unverified employee expenses etc, the assessee preferred appeal before the CIT(A). Before the CIT(A), the assessee filed detailed submissions and factual analysis to assail the action of the Assessing Officer as reproduced in paragraph 6.5 of the first appellate order. 8.1 The assessee broadly pleaded that to appreciate the issue in perspective, it is necessary to understand the nature of business and hurdles associated with it. The materials are supplied by the large vendors as well as local vendors. Mr. Kuldeep Josh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this regard. It was contended that only issue red-flagged by the AO was that the expenses are not verifiable with supporting evidence in the opinion of the AO. However, the AO failed to take note of circumstantial peculiarities and hazards while executing the work in remote areas which are not quite accessible and where material are supplied by the unorganized local vendors. The AO disregarded the proof of existence of vendors, consumption of material as per specifications of the Govt. holistically and founded its view to reject the purchases on petty defects such lack of VAT no. in the supply bills, bills carrying same or similar handwritings etc. The payments, where remained outstanding, was shown as sundry creditors and it is common knowledge that the release of funds by the Govt. agencies are, at times, characterized by red-tapism and inordinate delays. 8.2 As regards disallowances under Section 40A(3), the assessee contended before CIT(A) that cash book was duly furnished. The books were seized also. The large cash withdrawal undertaken cannot be the basis to infer violation of Section 40A(3) and such disallowance can be carried on the basis of specific instances which are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... summons and notices could not be properly responded. Further it has been found that in the search proceedings ample amount of evidences have been gathered and produced in the body of assessment order which clearly indicates that provisions of section 40A(3) of IT Act have been violated. But at the same time it cannot be ignored that the nature of the business of the appellant is such that the appellant has to perform work in the remote areas, where there are no facilities of banks, ATMs and the site in-charges have to keep cash ready for payment to the laborers as well as suppliers of sand, gritt, bricks and all related material which is supplied and provided by local unregistered and petty suppliers. In the light of the peculiar circumstances of the case, the AR was asked to explain as to why books of accounts should not be rejected and the NP should be estimated in the light of provisions of section 145(3) of IT Act. The AR relied on the written submission furnished before the AO as well as in the appellate proceeding and submitted that books of accounts have been audited and the same should not be rejected. But the submission of the AR has not been found correct, the AO has brou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15,31, 71,237 + 5,07,100 17,44, 54,725 (52.54%) 2019-20 92,70, 58, 874 91, 93, 14, 743 25,87, 89,893 60,38, 38,198 153.53% 2,81, 95,508 25,87, 89,893 + 5,14, 53,169 + 1,48,002 33,85, 87,572 (56.07%) 2020-21 98,39, 24, 325 97, 05, 64, 743 5,12, 50,000 69,76, 06,268 141.04% 4,21, 53,618 5,12, 50,000 + 9,15,19,864 + 3,85,454 + 1.47,75,588 20,00, 84,524 (28.68%) From the above table it can be seen that in a case of the appellant if the disallowances are made on account of alleged Bogus expenses and expenses incurred in cash above prescribed limit as per provisions of section 40A(3) of IT Act and unverified employee expenses, the NP becomes very high. Therefore looking to the facts and circumstances of the case, though the decision of the AO of making disallowance on account of expenses is sustained but it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ious persons, relating to which seized material has been produced in the body of assessment order, I hereby hold that books of accounts of appellant are not reliable. Therefore provisions of section 145(3) of IT Act are hereby invoked since the undersigned is not satisfied about the correctness of the accounts of the assessee. In the light of this decision, the disallowance made by AO on various heads is restricted in such a way that NP of contractor-ship business should be @ 10% of gross receipts of contractor-ship business. 6.17 Based on the above observations, the following table is made for restricting disallowance by considering NP @10% of turn-over. In this regard it has been found that the appellant has earned huge other income ie interest income on FDR, is just on IT refunds, NSC Interest, share of profit from JV and other such receipts, which are not related to contractor-ship business and hence the same are kept separate while computing the NP of the contractor-ship business as under: AY Turnover /gross contract receipts (a) Net Profit as shown by appellant (b) Other income (interest from FDR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... + 9,15, 19,864 + 385454 + 1,47, 75,588 = 15,79, 30,906 6,97, 60,627 8,12, 04,005 7,67, 26,901 While restricting disallowance made by the AO, it was necessary to have a cap on the NP of the business and the same has been considered @10% of turn-over/receipts from govt. contracts, however it has been found that the appellant has included other receipts i.e. interest on FDR, Interest on NSC, Interest on IT refund and share of profit from JV, but the same has been excluded in the NP working. It can also be seen that the appellant has also shown het loss in its core business and the positive NP was appearing in the profit and loss account only because of such other receipts which are not arrived from the contractor-ship business. Therefore looking to the findings of the search proceedings and various evidences produced in the assessment order, the decision of the AO is upheld to make disallowance of purchases made from various other sundry creditors, disallowances for violation of provisions of section 40A(3) of IT Act and other discrepancies found in the claim of expenses but at the same time since the estimation o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wances made by the Assessing Officer towards alleged bogus purchases, violation of Section 40A(3) and verified employee expense. The connected issue arises on the correctness of action of CIT(A) towards estimation of taxable income and manner and extent of estimations. The whole gamut of issue is essentially factual in nature. 13.1 On perusal of the order of the CIT(A), it is noticed that CIT(A) observed that the assessee has failed to properly discharge the onus with respect to purchases from other sundry creditors . In the absence of proper corroboration, the books of account of the assessee were rejected and the provision of Section 145(3) was invoked. Having rejected the books of account, the CIT(A) estimated the likely profits derived by the assessee from contract business disregarding the expenses claimed by the assessee. The net profit of the contract business was holistically estimated at 10% of the turnover/receipts from the government contracts. While doing so, however, interest on FDR, interest on NSC, interest on income tax refund and share of profit from joint venture etc. were excluded for the purposes of estimations holding such income to be unconnected to contra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... challenged the rejection of books by CIT(A) and contended that the profit estimations made by the CIT(A) disregards the substantial incriminating documents found in the course of search. The Revenue thus has sought restoration of the assessment order and seeks to challenge the estimation of income by rejection of books of account. 15. While dealing with the issue, it may be pertinent to summarize the key observations emerging from the first appellate order of CIT(A) and submissions of the Assessee: (i) The assessee is a government approved contractor deriving revenue solely from government contracts. Thus, there is little possibility of any unaccounted receipts in cash per se . No incriminating documents were found in the search either to reflect any such cash receipts. Hence, the dispute, if any, can arise only in relation to the expenses/outgo incurred in cash. As observed by the CITA), the firm has purchased material predominantly from regular vendors supplying steel, cement, construction equipments, electric wires etc. However, certain relatively small value items such as gritt, coarse sand, local sand and other similar fringe materials used in the execution of contracts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... traints of cash flow in Govt. contracts. (iv) The pendency of outstanding amount to the supplier is attributable to prolong delay in corresponding receipts from the government contracts. The poor cash flow has resulted in such outstanding creditors. The payments to the tune of Rs. 35.61 were however made to such creditors out of receipts obtained towards government contracts. (v) The fixed deposits were kept owing to specific needs of the contract business to serve the purposes of security and meet the immediate contingency. The money lying in fixed deposits served as working capital to meet the business exigencies of Govt. contracts. The outstanding amount towards other sundry creditors are dynamic and keeps changing in proportion to change in Contract Performing Expenses. (vi) The assessee has purchased material from the vendors on credit for which confirmations were duly provided and therefore it is incorrect to say that onus on the assessee was not discharged at all. (vii) The adverse inference toward creditworthiness of creditors and their meager income is of no real consequence as a seller needs to check the credibility of the buyer and not vice versa. The asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llate order, would rise upto as much as 56.07% of the contract value which is manifestly absurd and unimaginable in such business. The high pitched income assessed thus do not resonate with ground realities. 17. Taking into account many glitches in the explanation of the assessee and in the absence of adequate corroboration of the expenses claimed, the CIT(A) however concluded that the onus of proving genuineness of purchases has not been fully discharged and it is difficult to reconcile and deduce true profits of the assessee-firm from the books maintained. Having regard to the totality of the circumstances, such unrealistic variation in the net profit ratio, difficulty in identifying and analyzing of exact purchases made from such other sundry creditors , huge cash expenses incurred towards labour and other payments, etc.,, the non compliance of summons and notices to suppliers in some instances etc., the CIT(A) opined that books of account of the assessee cannot be said to be reliable and without element of doubts. Provision of Section 145(3) of the Act was thus referred to hold that the correctness of accounts of the assessee is not satisfactory. In the absence of exact ide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regard to a very high volume of business, the profits generated in such contract business are quite low and the presumptive tax @ 8% as prescribed under Section 44AD of the Act is best guiding estimate under the circumstances which should serve as bench mark without prejudice to the primary argument that rejection of books itself is unjustified in the factual matrix. The assessee thus pressed for reversal of rejection of books and restoration of the profits declared by the assessee or in the alternative, the profit estimate should stand in the region of 6-8% of the turnover/ contract receipts including similar estimations on interest generated from fixed deposits etc. instead of 10% applied by the CIT(A) and that too excluding such interest income from fixed deposits and discounts availed. 20. The Revenue on the other hand has called upon the tribunal to restore the action of the Assessing Officer in the absence of material particulars made available by the assessee to support the book results. The Revenue contends that onus lay upon the assessee to adduce evidences in support of return and rebut the adverse material found in the course of search and such onus has not been disc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been accepted by the AO, other expenses have been whimsically estimated and rejected showing uneven and inconsistent approach in the matter of assessment. 22. When seen holistically and in totality, the CIT(A) to our mind, in the balance of things, has rightly rejected the books of account and set aside book results for fair and benign estimations of profits and to shun absurdity in the income assessed. While, the assessee has provided justifications towards large creditors arising year after year, such justifications are largely circumstantial and abstract. The outstanding creditors of such significant amounts in the context do invoke disquiet. It is indeed difficult to appreciate the correctness of book results in an objective manner. The AO has made wide ranging observations against the assessee. The CIT(A) while examining the issue could not be said to be in the zone of comfort to give objective considerations to the complex factual matrix presented to him. Under the circumstances, in our considered opinion, the estimation of income carried out by the CIT(A) was best course available and cannot be displaced on first principles. We thus see no justifiable reason to interfere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... position that the fixed deposits have not been placed to enjoy interest income simplicitor out of any surplus money. Circumstantially, large scale outstanding liabilities suggests otherwise. Coupled with this, the assessee has also incurred interest and finance costs. Having regard to the peculiarity of contract business, the claim of the assessee that the interest on FDRs cannot be seen differently from receipt derived directly from contract work carries weight. Having regard to the nature of business, we thus find force in the plea of the assessee that such FDRs are nothing but integral part of working capital of the assessee kept and expanded for commercial reasons. Hence, the interest income deserves to be treated alike with business contract receipts for the purposes of estimations. The interest income cannot be treated differently from contract receipts merely because such income flows from a different source. As already noted, the fixed deposits are a necessity to provide security and meet the contingency of such peculiar business. The accounts and other attendant circumstances vindicate the position. We thus have no hesitation to modify the order of the CIT(A) to this exten ..... X X X X Extracts X X X X X X X X Extracts X X X X
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