2019 (9) TMI 861 - AT - Income Tax

Tribunal orders deletion of disallowance under section 40(a)(ia), remands income estimation issue, applies 8% net profit rate.

M/s. S.C. Thakur & Brothers Versus ACIT, Central Circle, Thane And (Vice-Versa)

M/s. S.C. Thakur & Brothers Versus ACIT, Central Circle, Thane And (Vice-Versa) - TMI Issues Involved:1. Confirmation of addition under section 40(a)(ia) of the Income-tax Act, 1961.2. Estimation of income at 10% of receipts and reduction of net profit estimation by CIT(A).Issue-wise Detailed Analysis:1. Confirmation of Addition under Section 40(a)(ia):The first issue in the assessee’s appeal concerns the confirmation of an addition of Rs. 1,05,18,217/- due to disallowance under section 40(a)(ia) of the Income-tax Act, 1961. The assessee, a firm engaged in Civil Construction and Infrastructure Development, was subjected to a search and seizure action under section 132 of the Act. During the assessment proceedings, the AO observed the assessee’s failure to deduct tax at source on payments amounting to Rs. 1,05,18,217/- towards Transportation receipts, leading to the disallowance under section 40(a)(ia). The assessee argued that since no notice under section 143(2) was issued within the stipulated period, the assessment was deemed completed, and thus, any addition could only be made based on incriminating material found during the search. The Tribunal observed that the disallowance was not based on any incriminating material found during the search and, following the jurisdictional High Court precedents, held that the disallowance could not be sustained. Consequently, the addition was ordered to be deleted.2. Estimation of Income at 10% of Receipts and Reduction of Net Profit Estimation by CIT(A):The second issue pertains to the estimation of income at 10% of receipts. The Revenue’s appeal contests the CIT(A)’s decision to reduce the estimation of net profit to 10%. During the search, incriminating documents indicating inflated expenses were found, and the assessee initially surrendered Rs. 6.50 crore, later revising it. The AO noted discrepancies between two sets of books of account and made an addition based on the difference in expenses recorded. The CIT(A) observed that the assessee reconciled the figures and reduced the addition to 10% of the turnover. Both parties appealed their respective stands. The Tribunal noted evidence of inflated expenses and discrepancies in the books but found the exact magnitude of inflation indeterminable. Considering Section 44AD, which suggests an 8% profit rate for Civil Construction businesses, the Tribunal deemed an 8% net profit rate reasonable. However, interest received on income-tax and office rent should be excluded from this calculation, while discount received and miscellaneous receipts should be included. The matter was remanded to the AO for recalculating the income based on these observations, ensuring the assessee is given a reasonable hearing.Conclusion:The Tribunal ordered the deletion of the disallowance under section 40(a)(ia) due to lack of incriminating material and remanded the issue of income estimation to the AO, directing the application of an 8% net profit rate on gross contract receipts, excluding specific items. Both appeals were partly allowed.