INCOME TAX ACT, 1961

Section 145

Accounting method - Contract business - Estimation of not profit (NP) - Books of account not produced

Assessee was an AOP, constituted with two participant companies namely, (i) M/s. Kiran Infra Engg. Ltd., Jaipur and (ii) M/s. Eliop S. A., Acda, Spain. These two entities joined together and formed a Joint Venture (JV) for making a bid for the supply and installation, testing and commissioning of signaling equipment with Route Setting Panel. Upon formation of such Joint Venture, they become eligible to participate in the bidding process and excepting this, there was no role assigned to the joint venture. Assessee, under bona fide belief that since total income was below maximum amount not chargeable to tax, did not file Return of Income nor claimed the credit of TDS. Subsequently, case of assessee was reopened by issuance of notice under section 148, assessee furnished return of income declaring loss of Rs. 550. Assessment was made by assessing total income of assessee at Rs. 1,18,96,853 by applying net profit rate of 8% on contract receipts by assuming that the contract work was executed by the assessee itself and not by its lead partner M/s. KIEL though the payments made to it were not doubted. Held: Balance Sheet set of M/s. KIEL duly evidencing the contract receipts and contract expenses from the project of assessee JV. However, the AO ignored these details and evidences and proceeded to make additions without rebutting the documents and evidences and without bringing on record any contrary evidence any by merely observing that books of account of M/s. KIEL were not produced by assessee JV. AO had vast powers and could have issued summons under section 131 and directed the company KIEL to produce the books before him. However, AO opted not to call the records of KIEL directly. It was mutually decided by KIEL and ELIOP, the other constituent of the JV, that entire receipts would be taken by the lead partner, i.e., KIEL, who ultimately executed the work after incurring all the expenses and also paid to ELIOP towards technical support services. M/s. KIEL had duly declared entire receipts of Rs. 14,87,10,667 in its books of account and after claiming expenses towards such contractual receipts, had declared profit to the tune of Rs. 88,76,377.40 from impugned project, which gives a profit rate of around 6% and due taxes were paid on that by it. During the course of assessment proceedings, it was requested by the assessee before AO that direct enquiry may be made from KIEL by issuing notice under section 133(6) and it may be directed to furnish books of account. However, no action was taken by AO and rather, adverse inference was drawn against the assessee and it was presumed that assessee JV may have executed the project, which was quite contrary to the facts on record. Further, without having any material in possession and also without bringing on record any comparable case, profit rate of 8% was applied. CIT(A) while upholding this exorbitant profit rate had observed that in the case of M/s. KIEL, the profit rate of 8% was applied in its assessment completed under section 143(3) and failed to appreciate the fact that such a high rate of profit as applied was deleted in appellate proceedings in the case of M/s. KIEL.

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