High Court Of Allahabad
CIT â I Vs. Sahu Construction (P.) Ltd.
Assessment Years : 1994-95 To 2003-04
Section : 44AD, 32, 271(1)(c), 115JA
Rajiv Sharma And Dr. Satish Chandra, Jj.
IT Appeal Nos. 130 & 135 Of 2006
91, 93, 107, 127 To 137 Of 2007 & 44 Of 2009
October Â 8, 2013
Dr. Satish Chandra, J.Â – All the present appeals have been filed by the Department under Section 260-A of the Income-Tax Act, 1961 against the different judgments and orders passed by the Income Tax Appellate Tribunal, Lucknow. The details of the Income Tax Appeals are as under:â
|ITA No.||Assessment Year||Judgment & order dated|
|44/2009||2002-03||28.11.2008 passed in ITA No.778/Luc/2008;|
|127/2007||2002-03||11.5.2007 passed in ITA No.170/Luc/2006; 11.5.2007 passed in ITA No.54/Luc/2006;|
|128/2007||2003-04||11.5.2007 passed in ITA No.1203/Luc/2006; 11.5.2007 passed in ITA No.1140/Luc/2006;|
|129/2007||2001-02||11.5.2007 passed in ITA No.357/Luc/2005; 11.5.2007 passed in ITA No.411/Luc/2005;|
|130/2006||1995-96||16.9.2005 passed in ITA No.511/Alld/2000;|
|94/2007||1994-95||16.3.2007 passed in ITA No.30/Luc/2007;|
|107/2007||1999-2000||11.5.2007 passed in ITA No.1197/Luc/2006;|
|108/2007||2001-02||11.5.2007 passed in ITA No.1199/Luc/2008;|
|130/2007||2001-02||11.5.2007 passed in ITA No.361/Luc/2004; 11.5.2007 passed in ITA No.372/Luc/2004;|
|131/2007||1999-2000||11.5.2007 passed in ITA No.191/Luc/2005; 11.5.2007 passed in ITA No.200/Luc/2004;|
|93/2007||1997-98||16.3.2007 passed in ITA No.32/Luc/2007;|
|135/2006||1994-95 1996-97 1997-98||16.9.2005 passed in ITA No.1512/Alld/1997;|
2.Â On 27.5.2009, a Coordinate Bench of this Court has admitted the Income Tax Appeal No.44 of 2009, on the following substantial questions of law:â
“(I). Â Whether on the facts and circumstances of the case, the learned Income Tax Appellate Tribunal has erred in law in cancelling the penalty of Rs.50,00,000.00 levied under Section 271 (1) (c) of the I.T.Act without approaching that willful concealment is not an essential ingredient for attracting penalty as has been held by the Hon’ble Supreme Court of India in the case ofÂ Union of IndiaÂ v.Â Dharmendera Textile ProcessorsÂ  295 ITR 244/ 166 Taxman 65?
II. Â Whether on the facts and in the circumstances of the case, the learned Income Tax Appellate Tribunal has erred in law in cancelling the penalty of Rs.50,00,000.00 levied u/s 271 (1) (C) of the I.T. Act without approaching that false or exaggerated claim of expenditure or deduction is very well covered under the concealment of income/furnishing of inaccurate particulars of income thereby making the assessee liable for penalty.
III. Â Whether on the facts and in the circumstances of the case, the learned Income Tax Appellate Tribunal has erred in law in cancelling the penalty of Rs.50,00,000.00 levied u/S 271 (1) (c) of the I.T. Act without approaching that in quantum appeal the rejection of books of account by the Assessing Officer has been upheld by the learned Income Tax Appellate Tribunal itself. The learned Income Tax Appellate Tribunal has further failed to appreciate that specific defects in the books of account of the assessee have been detected by the Assessing Officer which is a clear proof of concealment of income/furnishing of inaccurate particulars of income?”
3.Â In Income Tax Appeal Nos.130 of 2006, 94 of 2007, 107 of 2007, 108 of 2007 and 93 of 2007, different Coordinate Benches have admitted the respective appeals on the following substantial questions of law:â
“I. Â Whether on the facts and in the circumstances of the case, the learned I.T.A.T. was justified in law in deleting the penalty imposed u/S 271 (1) (c) of the Income Tax Act, 1961 when in quantum appeal the rejection of books of accounts by the Assessing Officer for the reason of particulars of income being inaccurate had been upheld and application of net profit rate to the extent of 3.5% had also been confirmed by them?
II. Â Whether on the facts and in the circumstances of the case, the learned I.T.A.T. was justified in deleting the penalty u/S 271 (1) (c) when both the preconditions despite being mutually exclusive, for imposition of such penalty, were fully satisfied in the case.”
4.Â On 14.11.2007, a Coordinate Bench of this Court has admitted the Income Tax Appeal No.127 of 2007, 128 of 2007, 129 of 2007, 130 of 2007 and 131 of 2007, on the following substantial questions of law:â
“I. Â Whether on the facts and in the circumstances of the case the Income Tax Appellate Tribunal was justified in law and on facts in reducing the estimated net profit to 3.5% as against the 10% rate applied by the Assessing Officer and further allowing depreciation from it.
II. Â Whether on the facts and in the circumstances of the case the Income Tax Appellate Tribunal was right in law in estimating the rate of net profit at a substantially reduced rate resulting in a situation where the relief is more than the addition made and has also resulted into estimated loss.
III. Â Whether on the facts and in the circumstances of the case the Income Tax Appellate Tribunal was right in law in not appreciating that it is a well settled principle that where the estimate by the Assessing Officer is based on a rational basis, prima facie the Assessing Officer is the best judge of the situation and the CIT (Appeals) could not substitute her judgment for that of the Assessing Officer unless there were compelling reasons for doing so. [Commissioner of Sales TaxÂ v.Â H.M. Esufali H.M. AbdulaliÂ  90 ITR 271 (SC)
V. Â Whether on the facts and in the circumstances of the case the Income Tax Appellate Tribunal was justified in law in stretching the definition of Net Profit so as to conclude that depreciation and interest are liable to be deducted subsequent to it, contrary to the basic principles of accounting especially when the net profit has been estimated after considering all the expenses and depreciation etc. by the Assessing Officer.”
5.Â The facts and circumstances in all the appeals are identical. Hence, all the appeals are disposed of by this consolidated order for the sake of brevity. However, the dates, figures, etc. have been taken from the leading ITA No.44 of 2009 for the purpose of adjudication of the present appeals.
6.Â The brief facts of the case are that during the assessment years under consideration, the assessee has worked out the profit as per the provision under Section 115-JA of the Income-tax Act. The assessee has not furnished the details as asked by the Assessing Officer so the books of accounts were rejected by the Assessing Officer. When the books of accounts were rejected, the Assessing Officer has estimated the net profit rate at the rate of 10% of the gross receipt and made the additions accordingly. In appeal, the CIT (A) reduced the net profit rate to 8% on estimate basis, but did not allow depreciation as claimed. Thus, the CIT (A) has given partial relief to the assessee. However, in IInd appeal, the ITAT has further reduced the net profit rate @ 3.5% and also allowed the depreciation as claimed from the contract receipts.
7.Â When the A.O. has made addition on estimate basis for the same assessment years, then he has also levied the penalty under Section 271 (1) (C) of the Income-tax Act. Income Tax Appeal Nos.127 of 2007, 128 of 2007, 129 of 2007, 130 of 2007, 131 of 2007 and 135 of 2006 are pertaining to the quantum, i.e. additions which were made on estimate basis. The remaining Income Tax Appeal Nos. 94 of 2007, 130 of 2006, 93 of 2007, 107 of 2007, 108 of 2007 and 44 of 2009 are related to penalty under Section 271 (1) (c) which were rejected by the Tribunal. Being aggrieved, the Department has filed the present appeals.
8.Â With this background, Sri D. D. Chopra, learned counsel for the Department, at the strength of written submissions, submits that the Tribunal has reduced the net profit rate by following its earlier order. He further submits that each assessment year will have to be dealt separately. He also submits that the Tribunal has passed the order in an arbitrary manner without considering the finding of the Assessing Officer.
9.Â Further, he submits that Hon’ble Supreme Court in the case ofÂ Commissioner of Sales Taxv.Â H.M. Esufali H.M. AbdulaliÂ  90 ITR 271, observed that in estimating any escaped turnover, it is inevitable that there is some guess work. He further submits that the Tribunal has not recorded the reasons which are required as per the ratio laid down in the case ofÂ CITv.Â Palwal Co-operative Sugar Mills Ltd.Â  284 ITR 153/ 147 Taxman 636 (Punj. & Har)], which reads as under:â
“Every judicial/quasi-judicial body/authority must pass a reasoned order which should reflect the application of mind of the concerned authority to the issues/points raised before it. The requirement of recording reasons is an important safeguard to ensure observance of the rule of law. It introduces clarity, checks the introduction of extraneous or irrelevant considerations and minimises arbitrariness in the decision making process. Another reason which makes it imperative for quasi-judicial authorities to give reasons is that their orders are not only subject to the right of the aggrieved persons to challenge them by filing statutory appeal and revision but also by filing wit petition under article 226 of the Constitution. Such decisions can also be challenged by way of appeal under article 136 of the Constitution of India. The High Courts have the power to issue writ of certiorari to quash the orders passed by quasi-judicial authorities/Tribunals. Likewise, in appeal the Supreme Court can nullify such order/decision. This power of judicial review can be effectively exercised by the superior courts only if the order under challenge contains reasons. If such order is cryptic and devoid of reasons, the Courts cannot effectively exercise the power of judicial review.”
10.Â It is also the submission of learned Counsel that it is the duty of the Tribunal to deal with and dispose of the issues of the facts in detail and then give categorical findings for its eventual conclusions as per the ratio laid down in the case ofÂ CITÂ v.Â Mandsaur Ferro Alloys Ltd.Â  296 ITR 176 (MP), which reads as under:â
“The Tribunal being the last Court of facts in the hierarchical system, it is its legal duty rather legal obligation to deal with and discuss the issues of fact in detail and then give categorical findings for its eventual conclusion. A casual approach while deciding the issue exhibits non-application of mind. It is much more so when the factual finding recorded by the Commissioner (Appeals) is assailed specifically by the assesse in the appeal on the facts. It must appear from the order that sincere efforts were made to go into the factual arena and then keeping in view the legal position applicable to the facts of the case, a categorical finding is recorded by the Tribunal.”
11.Â On the other hand, learned Counsel for the assessee, Sri Aruneshwar Gupta, assisted by Sri Sushil Kumar and Sri Sunil Kumar, has justified the impugned orders. He submits that the Assessing Officer has rejected the books of accounts and has applied net profit @ 10% of the gross receipts. Finally, the Tribunal has reduced the net profit rate @ 3.5% plus depreciation. All the appeals were decided after inserting Section 44-AD of the Income-tax Act. However, this Hon’ble High Court in ITA Nos.134 of 2006 and 129 of 2006, in the assessee’s case observed that Section 44-AD is not applicable as the turnover is less then 40 lacs. So, no substantial questions of law were involved. This order has attained the finality. Lastly, he made a request for dismissal of the appeals.
12.Â We have heard the parties at length and gone through the material available on record. It is an undisputed fact that the A.O. has rejected the books of accounts and estimated the net profit rate at the rate of 10% of gross contract receipts. During the assessment years under consideration, the CIT (A) has reduced the same and finally, the Tribunal has estimated the net profit @ 3.5% of gross receipts. In addition, the Tribunal has also allowed the depreciation on the contract receipts.
13.Â It is also a submission of learned Counsel that as per C.B.D.T. Circular No.29-D (XIX-14) [F.No.45-239-65-ITJ] dated 31.8.1965, if the profits are estimated, and prescribed particulars have been furnished by the assessee, the depreciation allowance should be separately worked out and the deductions should be separately deducted from the profit, but the facts remains that in the instant cases, if the net profit @ 3.5% is taken and depreciation separately allowed then the income of the assessee will come to negative, as appears from the details (exemplary) mentioned below for the assessment years 1994-95 and 1996-97:â
|A.Yr.||Net Receipt||10% of estimated profit||3.5% of net profit||Depreciation allowed||Resultant profit or loss||Effective relief|
14.Â From the above, it appears that the net effect of the decision of the ITAT is that it has resulted into a negative figure or marginal profit in other assessment years. Thus the relief appears more than the rate of net profit @ 10% estimated by the Assessing Officer. In such cases, the intention and purpose behind the relevant provisions in the statute i.e. to estimate the income and not to estimate negative income (loss) is defited. In the instant cases, the impugned orders of ITAT have resulted into just opposite to this.
15.Â Secondly, the ITAT has further erred in allowing depreciation over and above the net profit of 3.5% decided by them. As per the definition of net profit given in the Law Lexican by P. Ramanatha Aiyer page 1300 means the surplus left after deducting for all losses. Further, “Net profits of a company is the sum divisible after the discharging or making provision for every outgoing expense properly chargeable against the period, whether a year or less, for which the profits are to be calculated” (per KEKEWICH, J.,Â GlassietÂ v.Â RollsÂ 42 Ch D 453)
16.Â Thus, the term net profit by its very name is an all inclusive one or in a nutshell it is the profit which has been arrived at after netting off of income over the expenditure, meaning thereby that whatever expenses or notional expenses were due and to be deducted from the income of the firm or the company had been done prior to deriving the final figure, i.e. profit. It is the same profit that is offered for taxation. Therefore, when the Assessing Officer applied the rate of 10% for estimating the net profit then the depreciation is deemed to have already been given especially when the Assessing Officer in his concluding line of the assessment order had clearly mentioned that “Since no deduction from section 30 to 38 including depreciation is allowable as per section 44AD, in case of small contractors, therefore no deduction on account of depreciation etc. will be allowed, on net profit, in this case also.” Thus, the estimated net profit includes depreciation and it can not be claimed separately.
17.Â Further, the case laws on which the ITAT has placed its reliance is also distinguishable on two grounds-
18.Â Firstly, the circular no.29D dated 31.8.1965 which prescribed to allow depreciation out of the estimated profit, is not applicable, as the Rule 5AA of the income Tax Rules has been omitted with effect from 2nd April, 1987. This aspect was discussed by this High Court and it was observed in the case ofÂ CITÂ v.Â Bishambhar Dayal & Co.Â  210 ITR 118/74 Taxman 123 (All.)Â that the Income-tax Appellate Tribunal relied upon a circular of the Central Board of Direct Taxes No.29D(xix) of 1965, F.No.45/239/65-ITC, dated March 31, 1965. Under this circular, the Board had issued instructions that where income is proposed to be computed by applying a net rate and the assessee has furnished the prescribed particulars for the claim in respect of depreciation, the depreciation should be allowed separately and deducted out of the gross profits. The order of the Income-tax Appellate Tribunal is in conformity with the circular issued by the Central Board of Direct taxes. No provision of the Income-tax Act was brought to our notice which makes the claim to depreciation inadmissible where the income is computed by applying the flat rate.
19.Â Secondly, subsequent to the Assessment Year 1994-95, in such matters the basic principle as enumerated in Section 44-AD of the Income-tax Act, 1961 is taken to be applicable wherein the matrix of estimation of profit on Gross receipts have been laid down for the civil construction work. The sub-section (2) of Section 44-AD reads under:â
“Any deduction allowable under the provisions of Sections 30 to 38, for the purposes of sub-section (1), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed:
Provided that where the assessee is a firm, the salary and interest paid to is partners shall be deducted from the income computed under sub-section (1) subject to the conditions and limits specified in clause (b) of section 40.”
and sub section (3) reads that
“The written down value of any asset used for the purpose of the business referred to in sub-section (1) shall be deemed to have been calculated as if the assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment year years.”
20.Â Hon’ble Punjab and Haryana High Court in the case ofÂ Chopra Bros. India (P.) LtdÂ v.Â CITÂ  252 ITR 412/119 Taxman 866 (Punj. & Har.)Â observed that after allowing 8% profit under Section 44-AD, no further deduction is allowable as per Section 44 AD (2).
21.Â In the case ofÂ CITÂ v.Â Gian Chand Labour ContractorsÂ  316 ITR 127/ 167 Taxman 265 (Punj. & Har.)], it was observed that no further separate deduction is allowable as per Sections 29, 144 and 145 of the Act. Relevant portion of the judgment reads as under:â
“Section 145 of the Income-tax Act, 1961 provides for computation of income under section 29 on the basis of books of account and methods of accounting regularly followed by the assessee. However, where the Assessing Officer is not satisfied with the correctness or completeness of the books, he may reject them and estimate the income to the best of his judgment in accordance with the provisions of Section 144 of the Act. When an estimate is made to the best judgment of an Assessing Officer, he substitutes the income that is to be computed under section 29 of the Act. Once best judgment assessment is made by fixing a rate of net profit, the assessee’s claim for deduction on account of expenses cannot be deemed to have been ignored. The net profit rate is applied after taking into consideration all factors and it accounts for all the deductions which are referred to under section 29 and are deemed to have been taken consideration while making such estimate.”
22.Â In the case ofÂ Indwell ConstructionsÂ v.Â CITÂ  232 ITR 776 (AP), Hon’ble High Court observed as under:â
“The pattern of assessment under the Income-tax Act, 1961 is given by section 29 which states that the income from profits and gains of business shall be computed in accordance with the provisions contained in sections 30 to 43D of the Act. Section 40 provides for certain disallowances in certain cases notwithstanding that those amounts are allowed generally under other sections. The computation under Section 29 is to be made under section 145 on the basis of the books regularly maintained by the assessee. If those books are not correct or complete, the Income-tax Officer may reject those books and estimate the income to the best of his judgment. When such an estimate is made, it is in substitution of the income that is to be computed under Section 29. In other words, all the deductions which are referred to under Section 29 are deemed to have been taken into account while making such an estimate. This will also mean that the embargo placed in section 40 is also taken into account.
Where the books of account have been rejected, the revenue cannot rely on the same books for addition of an exact item (of expenditure) in the profit and loss account.”
23.Â However, regarding the validity of Net Profit Rate on estimated basis, it appears that in the instant case, the Assessing Officer has made the additions on the estimate basis and CIT (A) has reduced the same on estimate basis and the Tribunal has further reduced on estimate basis.
24.Â Needless to mention that the estimate is question of fact as per the ratio laid down in the cases ofÂ Commissioner of Customs (Import)Â v.Â Stonemann Marble IndustriesÂ  2 SCC 758,Â Vijay Kumar TalwarÂ v.Â CITÂ  1 SCC 673;Â New Plaza RestaurantÂ v.Â ITOÂ  309 ITR 259/183 Taxman 33 (HP); andÂ Sanjay Oilcake IndustriesÂ v.Â CITÂ  316 ITR 274 (Guj.).
25.Â In the light of above discussion and by considering the facts and circumstances of the case, we uphold Net Profit @ 3.5% estimated by the Tribunal, being question of fact. But we direct the A.O. that no separate deduction like depreciation will be allowed. Thus, when the Net Profit is made on estimate basis after rejecting the books of account, then no deduction including depreciation is allowed.
26.Â In the instant cases, when the books of accounts were rejected, then the assessee is not entitled for the depreciation separately on the same set of books of accounts which have no value after its rejection. Hence, we modify the impugned order passed by the Tribunal pertaining to the addition and direct that the depreciation will not be allowed when the books of accounts were rejected and net profit rate was estimated.
27.Â When we uphold the estimation made by the Tribunal, then penalty orders, which are consequential to the quantum appeals, have become meaningless. Therefore, the penalty orders are not sustainable. So, the Tribunal order in this regard is hereby upheld.
28.Â The answer to the substantial questions of law is partly in favour of the assessee as well as the department.
29.Â In the result, Income Tax Appeal Nos. 94 of 2007, 130 of 2006, 93 of 2007, 107 of 2007, 108 of 2007 and 44 of 2009 are hereby dismissed and Income Tax Appeal Nos.127 of 2007, 128 of 2007, 129 of 2007, 130 of 2007, 131 of 2007 and 135 of 2006 pertaining to quantum are hereby partly allowed.
[Citation :Â 362 ITR 609]