TaxTMI 
TaxTMI 
TaxTMI 
2023 (7) TMI 1207
X X X X Extracts X X X X
X X X X Extracts X X X X
....evenue 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 30.05.2022 153A r.w. Section 143(3) 2839/Del/2022 Revenue 2020-21 CIT(A)-4, Kanpur, dated 27.09.2022 30.05.2022....
X X X X Extracts X X X X
X X X X Extracts X X X X
....onding 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 of the AO that the creditors shown by the assessee are bogus, based on which the books of the assessee have been held unreliable and rejected. 2. T....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d 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. While framing the assessment, the Assessing Officer observed that during the search proceedings, it was gathered from the analysis of the audit report of the assessee....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 Joshi was neither privy to the correct facts nor was competent to offer his comments. The statement given was without knowledge of the affairs and under coercion which was ....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., 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 conspicuously absent. 8.3 The assessee on the basis of such detailed submissions thus claimed that the assessment order grossly suffers from the vice of perversity and ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ody 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 brought on record sufficient material which leads to the conclusion that books of accounts cannot be relied. 6.15 In the assessment orders of AY 2014-15 to AY 2020-21, the AO has....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er 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 maintaining accounts and is not aware of the real nature of suppliers. In the matter of disallowances made u/s. 40A(3) of IT Act, there is force in the submission of the AR that the payments made to a single party in a single day above Rs. 20,000/- for AY 2015-16 to 2017-18 and above Rs. 10,000/- for AY 2018-19 to 2020-21 have not been singled out and cash wi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....0% 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, 63,019 2,07, 76,388 4,61, 73,480 -2,53, 97,092 1,53, 17,123 + 507100 = 15,36, 78,337 3,33, 96,302 5,87, 93,394 9,48, 84,943 2019-20 60,38, 38,198 2,81, 96,508 5,59, 26,950 -2,77, 30,442 25,87, 89,893 + 5,14, 53,169 + 148002 = 31,03, 91,064 6,03, 83,820 8,81, 14,262 22,22, 76,802 2020-21 69,76, 06,268 4,21, 53,618 5,35, 96,996 -1,14, 43,378 5,12, 50,000 + 9,15, 19,864 + 385454 + 1,47, 75,588 = 15,79, 30,906 6,97, 60,6....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 him. It was alleged that CIT(A) failed to appreciate business spectrum, factual matrix and attendant circumstances in its natural perspective. 13. We have carefully considered the rival submissions and perused the respective assessment orders, respective CIT(A) orders as well as the material placed on record. The controversy involves correctness of estimated disallowances made by the Assessing Officer towards alleged bogus purchases, violation of Section 40A(3) and verified employee expense. The connected ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e 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 business only. As contended, the contract business cannot possibly run without the use of securities and guarantees compelling the assessee to set aside the money by way of FDs. The assessee thus contends that fixed deposits being part of working capital interest income on such FDs, cannot be divorced from business receipts. 14. Paradoxically, the Revenue has also challenged the rejection of books by CIT(A) and contended that the profit estimations made by the CIT(A) disregards the substantial incriminating documen....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ow 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 note of ground reality. This act of disallowance towards bogus purchase has the effect of unpalatable and spectacular increase in the net profit ratio. The high pitched disallowance was carried out by the AO based on stray instances of quoting sample bills obtained from local suppliers primarily on the ground that payments have not been made without understanding the constant constraints of cash flow in Govt. contracts. (iv) The pendency of outstanding amount to the supplier is attributable to prolong delay in corresponding receipts from....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 employee expenses, if given effect in the respective assessment years, the net profit ratio to the turnover would show meteoric rise to staggering percentage of unrealistic nature. For instance, for Assessment Year 2015-16, the net profit ratio would stand at 48.65% as against the profit ratio of 6.59% declared by the assessee. Likewise, net profit ratio of the other assessment years as tabulated at page no. 54 of the first appellate 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 no....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 be kept in such business to utilize for guarantees, securities and other unforeseen emergencies. Furthermore, the assessee also contends that share of profit from the JV are completely exempt under Section 10(2A) and thus has to be excluded for the purposes of determination of taxable income. 19. The assessee before us restated and reiterated the arguments placed before CIT(A) earlier and vociferously contended that having 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tors 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 available to the assessee as well. The contents of books and documents found in possession and control of searched person thus shall be deemed to be true and the presumption would apply to both sides and such presumption thus, in effect, a double edged sword. The presumption of correctness of entries found in the books at the time of search has not been rebutted by the revenue. While the cash payments toward labour expenses have 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 an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....fit 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 inclined to interfere and re-estimate the estimations made by the CIT(A) in the absence of any palpable overreach on this score. 25. We however find merit in the plea of the assessee towards treatment of interest on fixed deposits as integral part of business activity. It is common knowledge that the large scale guarantees and securities are required in contract businesses. The factual matrix also underscores the proposition 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....