AO was justified to estimate profits of civil construction @10% applying section 44BBB

AO was justified to estimate profits of civil construction @10 percent applying provisions of section 44BBB

In a recent judgment, ITAT has held that Assessing Officer was justified in estimating profits of civil construction @10 percent applying provisions of section 44BBB when books were rejected and the assessee was not co-operating 

ABCAUS Case Law Citation:
ABCAUS 4011 (2024) (05) ITAT

Important Case Laws relied upon:
UCO Bank vs. CIT [1999] 104 Taxman 547 (SC)
CIT v. Harprasad & Co. P. Ltd. (1975) 99 ITR 118 (SC)
CIT vs Vikram Plastics [1999] 239 ITR 161 (GUJ.)
Pankaj Diamond vs. Assistant Commissioner of Income-tax [2010] 5 ITRCTRIB.) 469
Nice Industries vs ITO [2010] 7 taxmann.com 89 (Ahmedabad)
Deputy Commissioner of Income-tax vs. Asian Grantio India Ltd [2020] 113 taxmann.com 445
Inspecting Assistant Commissioner Vs. Dinesh Tiles Factory [1988] 37 TAXMAN 357
Kamani Oil Industries Pvt. Ltd. Vs DCIT
Panchshil Exim Pvt. Ltd. vs. Deputy Commissioner of Income Tax (2020) 58 CCH 0326
Keshavji Ravji & Co. vs. CIT, 183 ITR 1 (SC)
DCIT & Anr. vs. Proficient Commodities Pvt. Ltd. & Anr. [2020] 58 CCH 0291
Royal Western India Turf Club Ltd. vs. ACIT, [2019] 73 ITR 0670
Brij Bhushan Lal Parduman Kumar vs. Commissioner of Income-tax [1978] 115 ITR 524 (SC)
Dhakeswari Cotton Mills Ltd. vs. Commissioner of Income Tax (1955) 27 ITR 0126
Principal Commissioner of Income Tax vs. Swastik Construction [2018] 91 taxmann.com 10

In the instant case, the assessee had challenged the order passed by the CIT(A) of National Faceless Appeal Centre (NFAC) in upholding the addition made by the Assessing Officer (AO) being estimated net profit @ 10% of total receipts.

The assessee was a builder involved in development of various projects. The assessee had e-filed its return of income declaring loss. The case was selected for complete scrutiny under CASS. The AO noticed that in the current year the assessee had shown negative net profit of minus 61% as compared to positive NP of 17.82% in the preceding year.  

In the course of assessment, the AO had called for various details from the assessee which was only partly complied. As the assessee did not furnish the complete details as required by the AO, he rejected the books of accounts u/s 145(3) of the Income Tax Act 1961 and estimated income of the

assessee @ 10% of the total turnover which was upheld by the CIT(A).

Before the Tribunal the assessee submitted that the notice issued by the AO was in contravention to the Instruction No. 01/2011 of CBDT and was, therefore, not valid. He explained that as per the said Instruction, the jurisdiction over corporate returns with income of above Rs. 30 Lakhs in the Metro Cities was with the DCIT/ACIT and the jurisdiction of the case with income upto Rs. 30 Lakhs was with ITOs. As the assessee had not disclosed income above Rs. 30 Lakhs in the current year, the jurisdiction was not with the DCIT and, therefore, the issue of notice u/s.143(2) of the Act by the DCIT was incorrect.

On merits, it was submitted that the documents as required by the AO were submitted by the assessee but the evidences brought on record were brushed aside by the AO. He contended that the AO had passed the order on surmises and conjunctures with a pre-determined mind and without pointing out any defect in the books of accounts and the method of accounting adopted by the assessee.

He further submitted that the AO had not given any basis for estimating the net profit @ 10% of total receipts. He further submitted that if the addition as made by the AO was accepted then the gross profit would be 78.6%, which was absurd and not possible in the construction industry. It was pointed out that as a result of addition as made by the AO, the closing stock of current year will increase and accordingly, the opening stock of next year will also increase by the equivalent amount and, therefore, this addition will have no tax impact in the long run.

It was further submitted that the CIT(A) had mechanically confirmed the addition made by the

AO without applying his mind to the facts of the case. The assessee relied upon several decision in respect of his contentions.

The Tribunal rejected the legal objection of the assessee over the jurisdiction of the AO observing that the definition of income in Section 2(24) of the Act is an inclusive definition and it is a settled principle that under the provision of Income Tax Act, income includes loss. The Hon’ble Supreme Court had held that the words ‘income’ or ‘profits and gains’, should be understood as including losses also.

The Tribunal observed that as per the finding given by the AO, several details were not provided in the course of assessment. The assessee had not explained the Tribunal as to why these documents were not produced before the AO or even before the CIT(A). The assessee had not come forward and produced these evidences before the Tribunal also and neither the reason for non-production of these details of the accounts had been explained.

The Tribunal further observed that the assessee contended that all the details that were not furnished had no impact on the profitability of the assessee and that it had furnished the trial balance which was examined and analysed in the assessment order. The Tribunal opined that it was true that all the details and documents as not produced by the AO may not have impact

on the profit but nevertheless they have a bearing on the correctness of the accounts.

The Tribunal found that reasons as recorded by the AO that books of accounts were not rejected on flimsy ground. It is a settled principle that books of accounts maintained by the assessee must be supported by evidences in the form of vouchers, bills etc. and all receipts and payments must be properly vouched and supported. The AO had specifically pointed out that the copy of bills and the delivery challan for purchases were not produced, neither any supporting evidence for expenditure as claimed in the books of accounts were brought on record. Further, the party-wise ledger account of purchases and expenses were not provided, which prevented the AO from making any enquiry in this respect. The quantitative details and workings of WIP were also not produced.

The Tribunal stated that the assesse was duty-bound to produce the details and information as called for by the AO and explain the reason for the abnormal loss incurred during the year.

In view of the defects as pointed out by the AO and for the failure on the part of the assessee to produce the relevant details as required by the AO the Tribunal opined that the AO was justified in rejecting the accounts of the assessee and estimating the income on a reasonable basis.

The Tribunal further opined that once the books of account were rejected and the assessee was not co-operating, the only option left with the Assessing Officer was to estimate reasonable income after taking into account the total receipts of the year. The AO estimated the income of the assessee @ 10% for the reason that net profit disclosed by the assessee in the preceding year was 17.82%.

The Tribunal opined that the rate of estimate of 10% as applied by the AO is found to be reasonable as the work of the assessee was mostly in the nature of civil construction and estimation rate of 10% is prescribed u/s. 44BBB of the Act to compute the profit and gain of the foreign companies engaged in the business of civil construction. Considering the presumptive rate of taxation as prescribed under the Act, the estimation as made by the AO was reasonable.

Therefore, the Tribunal declined to interfere in the quantum aspect as well and disturb the estimation of income as made by the AO and as upheld by the CIT(A).

In the result, appeal filed by the assessee was dismissed

Download Full Judgment Click Here >>

• Assessee has right to get complete statements recorded against him – High Court
• CBDT issues FAQs on new capital gains tax regime proposed in Union Budget 2024-25
• Payment by corporate guarantor does not extinguish liability of corporate debtor – SC
• AO is under obligation to give reasons for not accepting explanations u/s 69
• ITAT remitted case for verification of Transporter’s declaration u/s 194C(6)