BEFORE SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER & SHRI PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER
Case Details:
This case involves an appeal filed by the DCIT, Central Circle-II, Noida, against Shiv Shakti Construction, Greater Noida, for the assessment year 2018-19. The appeal was against the disallowance under Section 14A of the Income Tax Act. The final tribunal order was pronounced on July 27, 2023.
The DCIT challenged the disallowance made by the Assessing Officer (AO) under various grounds, including alleged bogus purchases, violation of Section 40A(3), and unverifiable employee expenses. The CIT(A) partially upheld the disallowances, leading both the Revenue and the assessee to cross-appeal before the Tribunal.
The assessee, a partnership firm, is engaged in executing government-approved civil contracts, particularly in irrigation development activities. A search and seizure operation was conducted on November 27, 2020, at the assessee’s premises. During the search, incriminating documents were found, leading to the issuance of notices under Section 153A for various assessment years.
The Assessing Officer observed that the assessee had shown unusually large amounts outstanding as ‘other sundry creditors.’ The AO initiated inquiries, and based on the analysis of the audit reports and statements recorded from the accountant, Mr. Kuldeep Joshi, and the main partner, Mr. Mukesh Kumar, concluded that the purchases against such creditors were bogus.
The assessee contended that the nature of their business involves purchasing materials from local vendors in remote areas, where formal documentation may not always be available. They argued that the statements recorded during the search were made under coercion and retracted later. The assessee also provided evidence of purchases, including confirmations, PAN, Aadhar, and payment details through banking channels.
The CIT(A) observed that while there were discrepancies in the books of accounts, the high volume of outstanding creditors could not be entirely disregarded. The CIT(A) partially upheld the AO’s disallowances but restricted the disallowance amount to Rs. 3,14,05,653/- from the originally disallowed Rs. 15,22,47,537/-.
The Tribunal upheld the CIT(A)’s decision to estimate the net profits at 10% of the contract receipts, excluding interest income from fixed deposits, IT refunds, NSC interest, and share of profit from JV, which were deemed unrelated to the contract business. The Tribunal also recognized the peculiar nature of the assessee’s business, requiring them to keep fixed deposits for guarantees and securities.
The final order stated, “In the light of the findings of the search which lead to clear evidence that the provisions of Section 40A(3) of the IT Act have been violated, huge cash payments have been made for labor payments as well as purchases, the appellant has failed to discharge the onus to prove the purchases from other sundry creditors, statements recorded on oath from the accountant as well as main partner of the firm, the infirmities found in the bills produced before the AO in the matter of purchases, payments outstanding to be made to the huge amount of ‘other Sundry Creditors’ and number of evidences of huge cash payments made to various persons, relating to which seized material has been produced in the body of assessment order, I hereby hold that books of accounts of appellant are not reliable. Therefore, provisions of Section 145(3) of IT Act are hereby invoked since the undersigned is not satisfied about the correctness of the accounts of the assessee. In the light of this decision, the disallowance made by AO on various heads is restricted in such a way that NP of contractor-ship business should be @ 10% of gross receipts of contractor-ship business.”
Thus, the appeals of the assessee were partly allowed, while the appeals of the Revenue were dismissed.
Conclusion
In summary, the Tribunal upheld the CIT(A)’s order, estimating the net profits at 10% of the contract receipts and recognizing the necessity of fixed deposits for business operations. This case highlights the complexities involved in assessing the profits of businesses engaged in government contracts, particularly when dealing with local suppliers and the necessity of maintaining fixed deposits for operational needs.
DCIT vs. Shiv Shakti Construction – AY 2018-19 – Appeal Against Disallowance Under Section 14A
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