MAHEBOOB,WADI, TQ CHITTAPUR, DIST KALAB V. INCOME TAX OFFICER, WARD-1 & TPS, GULBARGA

ITA 1770/BANG/2024

AI Insights

The case involves an appeal by the assessee, Maheboob, against the order of the National Faceless Appeal Centre (NFAC), which pertained to the assessment year 2017-18. The primary contention revolved around the rejection of the assessee's books of accounts and the estimation of gross profit at 25% by the Assessing Officer (AO), which was challenged as arbitrary. The assessee, engaged in the business of labor supply and civil work, had not filed a return of income as per the statutory requirements, leading to a reassessment. The CIT(A) found the AO's estimation excessive and directed a reduction in the estimated profit margin. The assessee also contested the validity of the notice issued under section 148 of the Income Tax Act, although this was not a focal point in the appeal.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 312195 (ITAT-BANGALORE)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-04-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: SMC
• Assessment Year: 2017-2018
• Laws Referred To: Income Tax Act
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: REVENUE; GANESH R GHALE; STANDING
• Assessee Lawyers: RAJKUMAR HANCHAL
• Keywords: Rejection of books of accounts; TDS; FORM 26AS
• Section: 148; 139; 234B

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL ‘SMC’ BENCH, BANGALORE BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER ITA No.1770/Bang/2024 Assessment Years : 2017-18 Maheboob, H. No.19-114/2, Near Bhavani Temple, Ward No.11, Wadi – 585 225. PAN – ANZPM 8711 G Vs. The Income Tax Officer, Ward – 1 & TPS, Gulbarga. . APPELLANT RESPONDENT Assessee by : Shri Rajkumar Hanchal, CA Revenue by : Shri Ganesh R Ghale, Advocate – Standing Counsel for Revenue Date of hearing : 26.02.2025 Date of Pronouncement : 30.04.2025 O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER: This is an appeal filed by the assessee against the order passed by the NFAC, Delhi dated 16/07/2023 in DIN No. ITBA/NFAC/S/ 250/2024-25/1066770307(1) for the assessment year 2017-18. 2. The issues raised by the assessee through grounds Nos. 6 and 8 of the appeal are general in nature and therefore the same do not require any separate adjudication. Hence, the same are hereby dismissed as infructuous. 3. Likewise, the issue raised by the assessee in ground No. 7 of the appeal pertains to the levy of interest u/s 234A, 234B and 234C of the Act which are ITA No.1770/Bang/2024 Page 2 of 7 . consequential in nature and therefore the same does not require any separate adjudication. Hence, the same is hereby dismissed as infructuous. 4. The issue raised by the assessee through grounds Nos. 2 to 5 are interconnected and pertains to the addition made to the total income on the basis of estimation of profit after rejecting the books of accounts. 5. The relevant facts are that the assessee is an individual and engaged in the business of labour supply and execution of civil work. For the year under consideration, the assessee has not filed return as per the provision of section 139 of the Act. 6. The AO received information that the assessee during the year made cash withdrawal amounting to Rs. 1,33,98,500/-, earned income by renting plant & machinery for Rs. 3,92,217/- and also made payment to contractor amounting to Rs. 2,32,04,904/- only. Therefore, the assessment was reopened by issuing notice under section 148 of the Act, dated 31st March 2021. 7. In response, the assessee filed return of income declaring total income at Rs. 13,26,630/- only. During the assessment proceeding, the assessee made multiple submission and claimed that during the year supplied labour and executed contract work for the company namely ACC Limited. The assessee explained that his father Late Sri Mohammad Ameen was also in the same business and executed contract work for ACC Limited for almost 3 decades. After the expiry of father in the year relevant to A.Y. 2015-16, he took over the business of the assessee. The assessee submitted that, for execution of work and supply of labour to ACC Limited, he received gross amount of Rs. 2,34,83,846/- through banking channel and the same represents gross total turnover of the year. The assessee claimed that the income tax return was not filed due to prolong illness of the mother and he is being only male member in the family was very much occupied with ongoing diagnosis of the mother in the hospital at Hyderabad. ITA No.1770/Bang/2024 Page 3 of 7 . 8. The assessee also claimed that he, on the impugned turnover, earned gross profit @ 11.53% and net profit @ 6.34% which is more the GP & NP Ratio of 11.53 % & 6.09% as reported in the immediate previous year despite being the fact that the total over for the year under consideration increased. The assessee contended that it is very much normal in the business that the businessman to achieve higher turnover reduces the profit margin whereas in his case percentage of profit increased along with increase in turnover. 9. The assessee in respect of withdrawal of cash submitted that the nature of business in which he is engaged requires regular cash to make payment to labourer, materials suppliers i.e. sand, concreate, cement etc. Therefore, the cash was withdrawn throughout the year. However, such withdrawal aggregates to Rs. 88,36,000/- as against the alleged amount of Rs. 1,33,98,500/- only. 10. Likewise, the assessee with respect to alleged rental income submitted that he did not earn any rental income during the year. The assessee claimed that in the process of execution of work contract awarded by the ACC Limited, his tractor was used on which hire charges was paid by the ACC limited on which they deducted TDS under section 194I of the Act. However, the entire amount received from ACC limited is included in the turnover declared. 11. The assessee in support of the above explanation/claim/contention furnished supporting document such as extract of all the bank statement, bank book, cash book, labour wages register, bonus to labour, summary of wages paid, service tax, EPF & ESI challans etc. 12. Based on the documents provided, the AO has made the following final findings. The assessee failed to furnish essential documentation such as agreements for labour supply, ledger accounts, invoices for material purchases, detailed records for the payment to labourers and their PAN, reconciliation statements, and bank book with narration. Additionally, the cash book, EPF, ESI challan etc submitted ITA No.1770/Bang/2024 Page 4 of 7 . were found to be in the name of \"Mohammed Ameen Contractor\" and not in the assessee’s name. Due to the absence of proper evidence and incomplete financial records, late filing of audit report etc the AO rejected the assessee’s books of accounts under section 145(3) of the Act. 13. Thereafter the AO, upon examining the gross profit (G.P.) margin, it was noted that for the year under consideration (Assessment Year 2017–18), the G.P. was shown as 11.67%, which was lower compared to the previous and subsequent years. Given that the turnover had increased by 150% from the previous year and considering the nature of the business, the AO estimated the G.P. at 25%. This led to an addition of Rs. 30,70,412/- to the total income of the assessee. 14. Furthermore, it was observed that the assessee did not declare any rental income of Rs. 3,92,217/- received from ACC Ltd., despite this being reflected in the Form 26AS and TDS being deducted. The AO treated this as additional income under the head \"Income from Other Sources.\" The assessee was also found to be in default for not filing the return of income for the Assessment Year 2017–18 and for not getting the accounts audited in time, despite the turnover exceeding Rs. 1 crore. Accordingly, the AO assessed total income for the year under consideration at Rs. 47,89,259/- which was rounded off to Rs. 47,89,260/- only. 15. The aggrieved assessee preferred an appeal before the learned CIT(A). 16. On the merit of the assessment, the assessee before the learned CIT(A), besides reiterating the submissions made during the assessment proceedings, further contended that the \"Mohammed Ameen Contractor\" is trade name of the assessee business, hence the same is appearing on the EPF, ESI, cash book, bankbook etc. The business was run by his late father Sri Mohammed Ameen with the same name for more than 3 decades and after his expiry, the assessee took over the business and continued to run with the same trade name. The assessee further claimed that majority of the expenditure (72%) was incurred through banking ITA No.1770/Bang/2024 Page 5 of 7 . channel only. The assessee further contended that wages paid to most of the local labourer, hired from local market of work site, were uneducated. Therefore, their PAN were neither nor available nor collected. Nature of the business involves cash transaction for materials which were purchased from local small-time traders. 17. The assessee regarding the rejection of books of accounts and estimation of profit @25% contended that the AO without pointing out any defect and lacuna in the audited books of account, documentary evidence proceeded to reject the books of account and estimated the profit in arbitrary manner. The addition made was ad- hoc without any basis. 18. The learned CIT(A), after examining the submissions and facts of the case, found that the AO’s estimation of 25% gross profit (GP) was arbitrary and unreasonable, especially considering the nature of the appellant’s business, which is primarily service-based involving labour contracts and machinery hire. The appellant had declared a net profit of only 6.21% on the gross turnover of Rs. 2,34,83,846/-, and the ld. CIT(A) noted that such a high GP rate as estimated by the AO had never been recorded by the appellant in the past. In the absence of complete evidence and return filing for the relevant assessment year, the ld. CIT(A) held that adopting a reasonable net profit percentage would serve the ends of justice. Accordingly, the AO was directed to adopt a net profit rate of 12.5% instead of the estimated 25% GP. Furthermore, the ld. CIT(A) accepted the appellant’s claim that the hire charges of Rs. 3,92,217/- formed part of the total turnover and should not be treated as income from other sources. Consequently, the AO was directed to delete this addition. Based on these findings, the ground raised by the appellant was partly allowed, providing partial relief to the assessee. 19. Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before me challenging the addition confirmed on merit as well as challenging the validity of notice issued under unamended provision of section 148 of the Act and consequently the validity of the assessment order. ITA No.1770/Bang/2024 Page 6 of 7 . 20. The learned AR before me filed a paper book running from pages 1 to 41 and among other submissions contended that profit at the rate of 12.5% has been estimated in arbitrary manner and without any basis. According to the Ld. AR, the profit declared by the assessee in the earlier years should be adopted as a yardstick for estimating the profit in the year under consideration. 21. On the other hand, the learned DR before me vehemently supported the order of the authorities below. 22. I have heard the rival contentions of both the parties and perused the materials available on record. The assessee is engaged in the business of labour supply and execution of civil work. It is noted that the books of account were rejected by the AO under section 145(3) of the Act, and the profit was estimated at an exaggerated GP rate of 25%, which was found to be arbitrary in light of the nature of the business, being predominantly service-based. While the assessee did not file a return of income within the prescribed time and failed to maintain or submit certain evidentiary documentation, it is also observed that a significant portion of transactions—approximately 72%—were conducted through banking channels. Additionally, the assessee’s business was previously run by his late father under the trade name \"Mohammed Ameen Contractor,\" which continues to be used, justifying the documents presented in that name. 22.1 I also find merit in the contention that estimating a 25% GP is disproportionate and inconsistent profit margins in past years, and the fact that increased turnover does not necessarily correlate with increased profit percentage, particularly in labour-intensive contracts. The assessee had declared a net profit of around 6.21% which, though on the lower side, is not entirely unsubstantiated considering the nature of the business and economic realities. It is also pertinent to mentioned similar GP and NP ratio has been declared by the assessee in the previous years also. Therefore, I find it reasonable and in the interest of justice to ITA No.1770/Bang/2024 Page 7 of 7 . partly allow the appeal on merits by directing that the net profit be estimated at 9% of the gross receipts, which represents a fair and reasonable based on the facts and surrounding circumstances. 22.2 As regards the legal grounds raised in relation to the validity of the notice issued under section 148 of the Act and the consequential assessment order, I record that the assessee has not seriously pressed these grounds and has not objected to proceeding with the case on merit. Hence, the Bench is not inclined to give a finding on the legal grounds and treats the same as not requiring adjudication. 22.3 In view of the above, the appeal of the assessee is partly allowed. 23. In the result, the appeal of the assessee is partly allowed. Order pronounced in court on 30th day of April, 2025 Sd/- (WASEEM AHMED) Accountant Member Bangalore Dated, 30th April, 2025 / vms / Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order Asst. Registrar, ITAT, Bangalore "