IN INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B , HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA No. Asst. Year Appellant Respondent 1262/Hyd/2013 2005-06 R K Township DCIT, Constructions Pvt Circle-3(1), Limited, HYDERABAD HYDERABAD [PAN: AACCR6127Q] 1304/Hyd/2013 2005-06 DCIT, R K Township Circle-3(1), Constructions Pvt HYDERABAD Limited, HYDERABAD [PAN: AACCR6127Q] For Assessee : Shri K.C. Devdas, AR For Revenue : Smt G. Aparna Rao, CIT-DR Date of Hearing : 04-10-2016 Date of Pronouncement : 21-10-2016 ORDER PER B. RAMAKOTAIAH, A.M. : These are cross-appeals for AY. 2005-06 against order of Ld. Commissioner of Income Tax (Appeals)-IV, Hyderabad dated 10-07-2013. 2. Briefly stated, assessee is private limited company formed in year 2003. Consequent to search and seizure operations conducted in assessee s case on 12-12-2005, proceedings u/s. 153A of Income Tax Act [Act] were initiated for this year. Assessee has shown sales in original return at Rs. 5.61 Crores and has revised sales to Rs. 8,58,96,664/- in proceedings u/s. 153A. Assessee has originally offered income at Rs. I.T.A. Nos. 1262 & 1304/Hyd/2013 :- 2 -: RK Township Constructions Pvt. Ltd., 13,42,435/- and in return u/s. 153A, income was offered at 1,29,16,404/-. In proceedings u/s. 153A, Assessing Officer (AO) determined income at Rs. 3,10,46,622/- by order dt. 31-12-2007. On appeal, CIT(A) directed AO to estimate profit rejecting book results. On further appeal by assessee as well as department, ITAT, Visakhapatnam vide order dt. 24-01- 2011, set aside assessment with direction to re-do assessments afresh. While setting aside assessment, ITAT observed that AO if considered necessary can avail services of C.A., in accordance with provisions of Section 142(2A) of Act. In consequential proceedings, AO made reference u/s. 142A for Special Audit. On basis of report, AO finalised assessment vide order dt. 16-08-2012 and determined income at Rs. 5,38,84,528/-. In appeal, Ld.CIT(A) however, directed AO to estimate profit at 15% on gross sales as worked out by Special Auditor in Special Audit Report u/s. 142(2A) of Act. He also further directed disallowance u/s. 40A(3) as such. Both assessee and Revenue are aggrieved on above orders. 3. At outset, Ld. Counsel submitted that Co-ordinate Bench has considered appeals in assessee s group case i.e., RK Township Promoters Pvt. Ltd., on similar facts and estimated income at 8%. While referring to above order, it was submission of assessee s Counsel that assessee is not civil contractor and income was determined at higher percentage and depreciation and interest should also be allowed. I.T.A. Nos. 1262 & 1304/Hyd/2013 :- 3 -: RK Township Constructions Pvt. Ltd., 4. Ld. DR however, relied on orders of CIT(A) to extent of confirming amounts but however, submitted that Revenue is also in appeal on deletions made by CIT(A). 5. We have considered rival contentions and perused orders on record. It is true that both assessee and Revenue have come in appeal in first round and ITAT has set aside issue to file of AO to consider it afresh. However, Co-ordinate Bench in case(s) of RK Township Promoters Pvt. Ltd., (dt. 29- 04-2016) has examined Special Audit Report in that case and other aspects and decided issue as under: 13.2 There is no doubt that book keeping adopted by assessee was complex and relevant data generated by assessee based on Bills and Vouchers were not available with assessee and part of documents were seized by department, which was used by special auditor to recast P&L A/c. degree of reliance and reliability of information adopted by special auditor is main grounds of appeal by assessee. There is no dispute that special auditor had to rely on information available with him & with AO which were acquired due to search and seizure operation. assessee also expressed in one of communication with special auditor that due to efflux of time, assessee was not in position to submit relevant bills and vouchers either because of seizure or not in position to submit due to fact that passage of time, shifting of premises etc. 13.3 We are in agreement with assessee that reliability of special audit report and recasting of P&L A/c were computed based on information available and presumptions adopted by special auditor. It is worthwhile to mention here that income status generated by special auditor are not correlating to turnover of company, i.e. out of seven AYs, in three AYs are loss. In real estate business, profit generated against sales has to be on band range, it cannot be fluctuating in such high degree. profit has to be arrived based on matching principle, in our considered view, special auditor has failed in this regard. related cost has to be aligned with relevant sales/collection. In above stated situation, we are inclined to suggest that books of account maintained by assessee must be rejected, at same time, recasted account cannot be relied upon due to reliability factor. I.T.A. Nos. 1262 & 1304/Hyd/2013 :- 4 -: RK Township Constructions Pvt. Ltd., 13.4 We are left with overall turnover of assessee and net income determined by AO, CIT(A) , special auditor and estimated profit @ 15% in subsequent year by this coordinate bench. We cannot adopt 15% of sales simply because coordinate bench treated business of assessee as civil contract business and same was not controverted by assessee. But from records submitted before us by both assessee & DR as business of assessee is in real estate dealing only in buying, developing and selling lands. 13.5 relevant data before us are (extracted from paper book Submitted by assessee) Cumulative figures a) Cumulative turnover for 7 AYs 100.61 crores (As per special audit report accepted by assessee) b) Income assessed by ACIT 21.20 crores (21.07%) c) Income assessed by CIT(A) 11.64 crores (11.57%) d) Income computed by special auditor 9.71crores(9.65%) While analyzing above values, we are of view that income assessed by ACIT is ruled out as it is at 21.07% as above % is more than 15%, which was already rejected by ITAT and also profit arrived were before special audit. Similarly, assessee had submitted & relied on case law in case of Madhav Propcon Pvt. Ltd., of Delhi ITAT, wherein it was held that income of assessees at 2.24% of total gross receipts, who are engaged in business of land development activities. We cannot follow this percentage because activities involved were only for land development activities but in present case assessee is in activities which involve purchase, development and sale of land. With respect to CIT(A) arrived at profit of Rs. 11.64 crores as cumulative profit for 7 years (i.e. 11.57%). But he had accepted special audit profit as base and gave partial relief to assessee by deleting disallowance made on site development etc. After deleting disallowance made by AO, profit arrived by CIT(A) is more than special auditor. CIT(A) had accepted special auditors report and profit arrived by them, mere adjustment cannot increase profit arrived by special auditors. CIT(A) has not found anything new while adjudicating but had only rejected grounds raised by assessee. Hence, there cannot be any incremental profit arrived by CIT(A). Hence, profit arrived after consequential to CIT(A) s order cannot be relied. 13.6 We are left with income computed by special auditor at 9.65%. But this income arrived by special auditor by adopting presumptions and modifying values of purchase, sales, opening and closing stock. Based on submissions of DR and assessee, we are of view that reliability of special audit could be in between 80- 85%. On applying reliability factor to income determined by special auditor of 9.65%, we will end up arriving income at 8%, which is similar to section 44AD. I.T.A. Nos. 1262 & 1304/Hyd/2013 :- 5 -: RK Township Constructions Pvt. Ltd., 13.7 On other hand, provisions of section 44AD proposed to adopt 8% of total turnover or gross receipts of assessee shall be deemed to be profits & gains of business chargeable to tax. This section prescribes thumb rule or presumptive net profit rate applied for those assessees whose turnover are less than one crore. No doubt, turnover of assessee is more than prescribed limit in section 44AD but it gives thumb rule to estimate income of assessee. When books are not maintained or rejected, flat rate of 8% can be adopted as decided by Hon ble Delhi High Court in case of CIT Vs. Subodh Gupta, ITA N 80 of 2014, dated 09/12/2014. 13.8 above decision is relevant particularly when revenue could not submit or ascertain who had declared higher percentage of income, who are in similar business of assessee. In our considered view, in present case, books of assessee cannot be accepted due to complexity of nature of business and maintenance of books of account at same time recasted profits & loss computed by special auditor also has reliability issue, which were computed based on presumptions. This is fit case to estimate income of assessee. In this given situation, presumptive rate available in section 44AD may be adopted even though turnover of assessee is more than turnover of eligible assessee as prescribed in section 44AD. This is rate which is near to percentage arrived after factoring reliability and income computed by special auditor. Hence, we direct AO to adopt 8% of sales as determined by special auditor, to compute income of assessee year to year basis for AY 2000-01 to 2006-07 . 5.1. Considering above, we are of opinion that income can be determined in this case also at 8% on gross sales shown by assessee at Rs. 8,58,96,664/-. In case income so estimated is less than returned income of Rs. 1,29,16,404/-, AO is directed to accept income returned. Since income is estimated at net basis, considering facts of case, no further deduction under depreciation and interest should be allowed on estimated income. AO is directed to do accordingly. 6. As far as Revenue appeal is concerned, Revenue is contesting deletions made by Ld.CIT(A) of expenditure on estimation basis and determination of profit at 15% on gross sales. I.T.A. Nos. 1262 & 1304/Hyd/2013 :- 6 -: RK Township Constructions Pvt. Ltd., Since these are on same issue of estimation of income, no separate adjudication is required as income of 8% is considered reasonable on facts of case. Subject to observations made above in assessee s case, we are of opinion that there is no merit in Revenue s contentions. AO is directed to determine income at 8% on net on sales declared or income returned in proceedings u/s. 153A, whichever is higher. 7. In result, assessee s appeal is considered partly allowed and Revenue s appeal is dismissed. Order pronounced in open Court on 21st October, 2016 Sd/- Sd/- (P. MADHAVI DEVI) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER Hyderabad, Dated 21st October, 2016 TNMM Copy to : 1. RK Township Constructions Pvt. Limited, Hyderabad. C/o. B. Narsing Rao & Co., Chartered Accountants, Plot No. 554, Road No. 92, Jubilee Hills, Hyderabad. 2. DCIT, Circle-3(1), Hyderabad. 3. CIT(Appeals)-IV, Hyderabad. 4. CIT-III, Hyderabad. 5. D.R. ITAT, Hyderabad. 6. Guard File. R K Township Constructions Pvt Limited v. DCIT, Circle-3(1), Hyderabad