Notion Of Earning 90% Profit Is Unimaginable, Is Contractual Loot Under Guise Of Alleged Development Activities: ITAT

The Hyderabad Bench of Income Tax Appellate Tribunal (ITAT) has held that the notion of earning 90% profit is unimaginable and is contractual loot under the guise of alleged development activities.

The bench of R.K. Panda (Vice President) and Laliet Kumar (Judicial Member) has observed that the government funds meant for development should be used for development and not for the growth or enrichment of any individual. Though it is correct that the assessee disclosed the entire receipts and attempted to provide back-to-back verification from the contract justifying payment to the assessee, except for providing a copy of the contract by MEIL, MEIL had not provided the ledger account and other details of the expenditure to the lower authorities. The 12 work contracts were issued after October 2016; therefore, it is highly unimaginable and unfathomable that the major work has been completed, running bills were raised, and payments were made for the work done by the assessee before March 2017.

The assessee obtained the sub-contract work from M/s. Megha Engineering and Infrastructures Limited, Hyderabad (MEIL) through the Government of Telangana and the Government of Andhra Pradesh. The assessee claimed to have earned a huge profit, approximately more than 92% of the total cost of the project. Out of which, the assessee had only spent a sum of Rs. 14,65,865 on the construction work. When the work is allocated by the state government, the technical and commercial bids are called for, and the payments are typically released based on the amount of work certified by the state agency.

The tribunal noted that the Assessing Officer and CIT(A) had failed to apply their minds to the basic fact that earning more than 92% profit in the case of development activities, especially those intended for boosting the infrastructure meant to benefit the citizens, is highly unusual. It is the case of the assessee that it had apparently earned a huge profit of Rs. 113 crore out of a total cost of Rs. 131 crore and thus pocketed more than 90% of the contract work. The earnings of such a huge profit and declaration of income by the assessee are unimaginable, beyond the preponderance of human probability, and against common sense.

“The Assessing Officer/CIT(A) should have raised an eyebrow and scrutinized the profits earned by the assessee, particularly considering that the development activity was intended for the citizens' welfare and not merely meant for the enrichment of the assessee,” the ITAT said.

The tribunal has held that it is highly unimaginable and unfathomable that the major work has been completed, running bills were raised, and payments were made for the said work done by the assessee before March 2017. A livelink is required to be established with respect to the allotment of the work and its commencement, execution, completion, and payment thereof. No such information was provided to any of the lower authorities by the assessee. The release of payments is directly linked to bench marks fixed for various stages of completing the project.

The tribunal noted that the department authorities have failed to examine the details of the work contracts awarded and the payments made by the government, which are relatable to various stages of the work contract; therefore, the tribunal remitted the matter to the file of the assessing officer for fresh examination.

Counsel For Appellant: K.C. Devdas

Counsel For Respondent: K.J. Rao

Case Title: Deputy Commissioner of Income Tax Versus M/s. LEPL Projects Limited

Case No.: ITA No.345/Hyd/2023

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