TaxTMI 
TaxTMI 
2023 (7) TMI 1207
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.... Section under which appeal is filed 2836/Del/2022 Revenue 2015-16 CIT(A)-4, Kanpur, dated 27.09.2022 30.05.2022 153A r.w. Section 143(3) 2554/Del/2022 Assessee 2015-16 CIT(A)-4, Kanpur, dated 27.09.2022 30.05.2022 153A r.w. Section 143(3) 2835/Del/2022 Revenue 2016-17 CIT(A)-4, Kanpur, dated 27.09.2022 30.05.2022 153A r.w. Section 143(3) 2555/Del/2022 Assessee 2016-17 CIT(A)-4, Kanpur, dated 27.09.2022 30.05.2022 153A r.w. Section 143(3) 2834/Del/2022 Revenue 2017-18 CIT(A)-4, Kanpur, dated 27.09.2022 30.05.2022 153A r.w. Section 143(3) 2556/Del/2022 Assessee 2017-18 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 30.0....
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....s by deleting the addition of Rs. 12,08,41,884/-out of total addition 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 purcha....
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....t. contracts. These projects are stated to be carried out in remote areas 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 ....
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....n window dressed to meet the requirement of Section 40A(3) of the Act 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 suppl....
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....ks was submitted before AO and no adverse observations were made in 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 disal....
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....and the appellant failed to prove genuineness of all purchases and when 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. ....
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....d 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 its quantum is restricted. In this regard it would not be out of place to mention that in AY 2015-16 the AO has considered incremental increase in 'other sundry creditors' as Rs. 8,11,39,611/- by considering 'other sundry creditors' as Rs. 18,13,54,404/- in AY 2015-16 and Rs. 10,14,02,793/- in AY 2014-15, though the fact is that in AY 2014-15, this amount is for 'all sundry creditors' as is clear from the para-4 of assessment order itself. The Assessing Officer could not do the proper analysis of exact purchases made from such 'other sundry creditors', which are actually Bogus and a general estimate is done which is very high Further the summons and notices are issued selectively, however the number of such other sundry creditors' is around 841. Further the statement of an accountant i.e. Sh. Kuldeep Joshi has been applied sweepingly on all other sundry creditors, though the appellant has questioned his competency and domain since he is simply main....
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....or-ship business as under: AY Turnover /gross contract receipts (a) Net Profit as shown by appellant (b) Other income (interest from FDR, interest on IT refund, NSC Interest , other income, share of profit from JV) shown in P&L account (c) Net Profit attributable to contract or-ship business (d= bc) Dis-allowances made by Assessing Officer (e) Total NP @ 10% of turnover (=10% of a) Net Dis-allowance (NP @10% of turnoverr NP as already shown (g =f-d) Relief allowed to the appellant (h=a-g) 2014-15 2015-16 34,48, 88, 689 1,55, 25,932 1,24, 42,716 30, 83,216 8,11, 39,611 + 7,09, 18,475 + 1,89,451 = 15,22,47,537 3,44, 88,869 3,14,05,653 12,08,41,864 2015-16 98,50, 42, 772 4,34, 42,060 2,48, 61,156 1,85, 80,904 25,86, 76,218 + 12,78, 64,975 + 3,26,16 9 + 8,52,408 = 38,77, 19,770 9,85, 04,277 7,99,23,373 30,77, 96,397 2016-17 65,30, 19, 346 3,59, 03,453 4,82, 43,929 -1,23, 40,476 23,30, 90,798 = 8,03, 46,431 + 282783 + 854316 = 31,45, 74,325 65,3, 01,935 7,76, 42,411 23,69, 31,914 2018-19 33,39....
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....6.18 In the light of above observations total disallowances of Rs. 15,22.47.537/- made by the AO in this AY 2015-16 is restricted to Rs. 3,14,05,653/- and relief of Rs. 12,08.41,884/- is allowed to the appellant." 10. Aggrieved by the partial relief given by the CIT(A), both the Revenue as well as the assessee are in Cross Appeals before the Tribunal for respective assessment years. While the Revenue is aggrieved by the scaling down and reduction of the disallowances as per estimates, the assessee is aggrieved by the retention of a part of the disallowances. 11. When the matter was called for hearing, the ld. CIT-DR for the Revenue broadly reiterated the observations made by the Assessing Officer and submitted that the CIT(A) was not justified in granting partial relief against the disallowances so carried out. It was submitted that Assessing Officer has pain stakingly pointed out the defects in the books and papers seized and rightly carried the disallowance in the absence of proper corroboration. 12. Per contra, the ld. counsel for the assessee supported the partial relief granted by the CIT(A) but however assailed his action for denying complete relief as claimed before....
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....visions. The assessee contends that such presumptive income at 8% of receipts is determined based on threadbare study of empirical data collected and collated from various sources by the government and thus provides a sound basis for estimations at 8% of business receipts. The increased turnover in fact, would ordinarily bring down profit ratio rather than enhancement of estimations @10% as perfunctorily done by CIT(A). The assessee also simultaneously challenged the action of the Revenue Authorities for taxing the entire amount of interest generated on fixed deposits on the ground that such fixed deposits have been solely used for the purpose of business and served as collateral for obtaining bank finance. The fixed deposits were stated to be money parked for immediate financing needs and do not represent any idle funds or any kind of surplus. The assessee thus claimed that the principles applied for estimations of profits on contract receipts after rejection of books should apply mutatis mutandis to all stream of business income including fixed deposits which are integral and intrinsic part of the business activity of the assessee and directly contributes to the carrying on of bu....
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.... the purchases and supply of services are clubbed under the head 'other sundry creditors'. The local supply of material and service is quite plausible and cannot be disregarded. (ii) The reliance placed on the statement of Kuldip Singh before the investigating team to draw adverse inference is not justified. Kuldip Singh is a mere junior accountant/ field boy mainly engaged for bank purposes and other petty work. He is no person of any worthy knowledge to comment on the affairs of the contract work. The statement of such low rung person obtained under duress and influence has no rational probative value for making such whopping estimated disallowance out of 'other sundry creditors'. Significantly, the assessee also filed retraction statement on oath of Shri Kuldip Joshi wherein he has asserted coercion and duress earlier. The statement of Shri Mukesh Kumar does not cast any aspersions in the state of affairs of the assessee firm either. (iii) The increase in 'other sundry creditors' was rejected by AO in toto without recognizing any expenses incurred whatsoever. The entire expenses incurred and credited have been treated as bogus on flimsy grounds without taking n....
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....s thus dehors the ground realities. (ix) With respect to disallowance of expenses carried out for assumed breach of limits under Section 40A(3) of the Act, as stated before CIT(A), the expenses are incurred out of cash withdrawals from banks in the respective assessment year for payment of expenses such as labour, purchase of material and other project related expenses. The books of account showing cash payments towards expenses were seized at the time of search and therefore, there was no scope for any manipulation to comply with provisions of Section 40A(3) of the Act. The breach of S. 40A(3) has not been demonstrated by the AO qua the books seized. (x) As regards estimated disallowance of 10% of the employees' expenses, the TDS has been deducted whichever applicable. (xi) The net profit ratio declared in sync with the book results in the past and also quite comparable with other contractors in similar business. 16. In the backdrop of these facts and detailed submissions filed on behalf of the assessee, the CIT(A) also observed that the disallowances made towards alleged bogus creditors and other disallowances under Section 40A(3) and unverified empl....
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....ome chargeable to tax on gross basis. 18. The assessee, in its appeal, has challenged the action of the CIT(A) on the ground that (i) rejection of books are not justified owing to availability of corroborative evidences in support of book entries towards purchases and other expenses (ii) without prejudice, the estimations made @10% of gross receipts are very high as compared to such similar contract business where the net profit ratio ordinarily ranges between 5-6% only. Besides, the assessee has also challenged non inclusion of interest on fixed deposit and other income derived in the course of business for the purposes of estimations on the ground that fixed deposits are not idle or surplus funds of the assessee but are integrally connected to the business operations of the assessee. Such fixed deposits are made perforce, to use them for security and guarantee purposes and thus cannot be seen in isolation unlike other types of business where surplus funds are normally kept in such instruments as a matter of course. The assessee contends that large outstanding on account of liabilities itself suggests acute dearth of funds for such investments. The fixed deposits are bound to b....
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.... making reference to some hand 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. The AO has resorted to complete disallowance of increase in 'other sundry creditors' disregarding the nature of expenses, its necessity and also the peculiarity of business of execution of Govt. contracts. The AO has also disregarded the fact that a part of such creditors may also relate to other assessment years. The AO has assumed that all increase in sundry creditors represents bogus purchase. Such approach is apparently superficial. Likewise, estimated disallowance towards cash expenses are also in the realm of conjectures and surmises without any concrete evidence. The books seized has not been taken into account to gauge the correctness of cash payments in tune with S. 40A(3) of the Act. The Hon'ble Kerala High Court in the case of CIT (central), Kochi vs. Damac Holdings (P) Ltd. (2018) 89 Taxmann.com 70 (kerala) observed that in the case seizure of documents in the course of search, the presumption under 132(4A) would be equally availa....
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....n at fair per centage of 8% at best. 24. We however do not see merit in the plea of the assessee for such indulgence. The issue is highly factual and varies from case to case. The income estimated at 8% in the case of Subodh Gupta (supra) is based on its own set of facts. The judgment in Subodh Gupta cannot be read to mean that net profit ratio of 8% is sacrosanct percentage in all circumstances. The CIT(A), in his wisdom, has estimated profit at 10% after considering host of circumstances such a quality of evidence made available to support 'other sundry creditors', large cash expenses incurred, the net profit ratio declared and net profit ratio determined by the Assessing Officer etc. The law has not invented any straight jacket formula to judge such estimations precisely. Such estimations are in the realm of probabilities. There is nothing conclusive about it. The estimations carried out by the CIT(A) cannot be said to be marred by any kind of perversity. The estimates of profits by the CIT(A) are not fanciful or whimsical but appears to be guided by the principles of objectivity, fairness and considerations of justice and maintains some sort of equilibrium. We thus are not i....
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....mining the taxable income. 27. In the light of the delineation made in the preceding paragraphs, the appeal of the assessee is partly allowed while the appeal of the Revenue is dismissed on all counts. 28. In the result, the appeal of the assessee in ITA No.2554/Del/2022 is partly allowed whereas the appeal of the Revenue in ITA No.2836/Del/2022 is dismissed. Assesse's Appeal in ITAs No.2555/Del/2022 (2016-17), 2556/Del/2022 (2017-18), 2557/Del/2022 (2018-19), 2558/Del/2022 (2019-20) & 2559/DEL/2022 (2020-21) Revenue's Appeal in ITAs 2835/Del/2022 (2016- 17), 2834/Del/2022 (2017-18), 2837/Del/2022 (2018-19), 2838/Del/2022 (2019-20) & 2839/DEL/2022 (2020-21) 29. Identical grievances have been raised by the assessee as well as by the Revenue in their respective captioned appeals relating to di fferent assessment years. 29.1 For the reasons mentioned in Assessment Year 2015-16, we affirm the action of the CIT(A) in estimating the net profits at 10% of the receipts from contract business estimated by the CIT(A) after rejection of books of accounts of the assessee. We thus decline to interfere with the action of the CIT(A) on first principles. However, we f....