Business profit estimated at 8 percent; section 57 disallowance partly deleted for KRDC receipts, LIC disallowance sustained

ITAT Chennai dismissed the Revenue's challenge to the CIT(A)'s estimation of business profit at 8% where the assessee had not maintained books and had himself adopted 8% presumptive profit in subsequent years. The Tribunal held that there was no basis to accept the assessee's plea for 6% profit and upheld the 8% rate. On disallowance under s.57, ITAT accepted the assessee's contention that receipts from Karnataka Road Development Corporation Ltd. were business income, not income from other sources, and directed that only 8% profit thereon be taxed, deleting the balance 92%. Disallowance relating to LIC receipts was sustained. The appeal was partly allowed.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether, for A.Y. 2015-16, the net profit rate to be applied on contract receipts (in absence of proper books of account) should be restricted to 6% as claimed by the assessee, or sustained at 8% as estimated by the appellate authority.

1.2 For A.Y. 2020-21, whether the deduction claimed under section 57 at 92% of "other receipts" is allowable when the assessee has otherwise offered income on a presumptive basis at 8% of receipts.

1.3 For A.Y. 2020-21, whether receipts from Karnataka Road Development Corporation Ltd., subjected to TDS under section 194C, are to be treated as business receipts taxable on presumptive basis at 8%, or as "income from other sources" without deduction.

1.4 For A.Y. 2020-21, whether disallowance of deduction under section 57 in respect of receipts from LIC of India is to be sustained.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Estimation of net profit rate on contract receipts for A.Y. 2015-16

Interpretation and reasoning

2.1 The assessee, a civil contractor, had not filed a return originally and subsequently filed a return in response to notice under section 148, declaring income by applying a 6% net profit rate on gross receipts as per Form 26AS. No proper books of account were maintained for the year under consideration, and the income itself was on an estimated basis.

2.2 The Assessing Officer estimated profit at 10% of gross receipts. The appellate authority observed that in earlier years, where proper books were maintained, the assessee's net profit ratio was around 6%, but in subsequent years, when no books were maintained, the assessee had declared 8% profit on a presumptive basis. On that basis, the appellate authority restricted the estimated profit to 8% of the receipts.

2.3 Before the Tribunal, the assessee relied on historical audited results reflecting 6% profit ratio and urged that this rate be applied. However, no independent or contemporaneous material was produced to justify 6% as a reasonable estimate for the year where books were admittedly not maintained. The Tribunal noted the admitted fact that in subsequent years, in the absence of books, the assessee himself consistently adopted 8% profit on a presumptive basis.

Conclusions

2.4 In the absence of proper books of account and in view of the assessee's own conduct of declaring 8% profit on presumptive basis in subsequent years under similar circumstances, the Tribunal upheld the appellate authority's estimation of net profit at 8% of gross receipts. The assessee's grounds seeking restriction of the rate to 6% were dismissed.

Issue 2: Allowability of deduction under section 57 against "other receipts" for A.Y. 2020-21 when income is otherwise declared on presumptive basis

Interpretation and reasoning

2.5 The assessee declared total receipts of Rs. 2,31,46,496/- as per Form 26AS and claimed to have adopted an 8% presumptive income approach for business receipts, while conceding that no books of account were maintained. Due to an ITR form limitation for presumptive reporting beyond Rs. 2 crore, the assessee structured the declaration by offering certain receipts as "other sources" income and then claiming a deduction under section 57 @ 92% of those receipts, so that effectively only 8% would be taxed.

2.6 The Assessing Officer held that once income is offered on a presumptive basis, there is no scope for granting a deduction under section 57 on such receipts and disallowed the entire deduction claimed under section 57 (Rs. 72,50,910/-). The appellate authority confirmed this disallowance.

2.7 Before the Tribunal, the assessee explained that the use of section 57 and the presentation in the ITR were only to overcome the technical limitation of the form, and that substantively the claim was for estimating business income at 8% on contract receipts. The Tribunal examined the nature of the receipts to determine whether they were truly business receipts or income from other sources and separated the analysis based on the payer and TDS section.

Conclusions

2.8 The Tribunal accepted that, in respect of contract receipts properly classifiable as business income, only the profit element at 8% should be taxed, and the balance 92% effectively allowed as deduction, albeit not under section 57 but as part of estimation of business income. However, for receipts not constituting business income (LIC receipts), the deduction under section 57, being unsubstantiated, was not allowable. The disallowance under section 57 was thus partly deleted and partly sustained in line with the character of the underlying receipts.

Issue 3: Characterisation of receipts from Karnataka Road Development Corporation Ltd. and rate of taxation for A.Y. 2020-21

Interpretation and reasoning

2.9 The assessee's "other receipts" included Rs. 67,08,424/- from Karnataka Road Development Corporation Ltd., on which TDS was deducted under section 194C. The assessee contended that these were contract receipts forming part of the civil construction business and that only 8% thereof should be taxed as presumptive business income, consistent with his practice and consistent with the rate accepted by the appellate authority for A.Y. 2015-16.

2.10 The Tribunal noted that (i) the assessee had been consistently offering 8% profit on business receipts on presumptive basis in years where no books were maintained; (ii) the appellate authority had already accepted 8% as a reasonable rate for A.Y. 2015-16; and (iii) the receipts from Karnataka Road Development Corporation Ltd. had clearly been subjected to TDS under section 194C, confirming their nature as contract payments. It thus accepted that classification of these receipts as "income from other sources" in the ITR was inadvertent and incorrect.

Conclusions

2.11 The Tribunal held that the receipts from Karnataka Road Development Corporation Ltd. constitute business receipts from civil contract works. Only 8% of such receipts are to be taxed as income, and the Assessing Officer was directed to delete the addition corresponding to 92% of these receipts, thereby bringing the tax treatment in line with the presumptive rate consistently applied and accepted.

Issue 4: Treatment of LIC receipts and disallowance of section 57 claim for A.Y. 2020-21

Interpretation and reasoning

2.12 The assessee's "other receipts" also included Rs. 11,72,999/- from LIC of India, Puducherry. The assessee's representative conceded before the Tribunal that this receipt did not constitute business income from contract activity, and that the expenditure/deduction claimed under section 57 against this amount was not supported by substantiating evidence.

Conclusions

2.13 The Tribunal confirmed the disallowance of deduction claimed under section 57 in respect of the LIC receipt and upheld its treatment as income from other sources without the claimed 92% deduction. The Revenue's action on this aspect was sustained.

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