Kerala H.C : Whether, on the facts and in the circumstances of the case, the Tribunal is right and had material in confirming the finding of the CIT(A) determining the percentage of profit at 8 per cent of the gross receipts ?

High Court Of Kerala

CIT vs. Nathekkattu Constructions

Sections 145

Asst. Year 1993-94

G. Sivarajan & Kurian Joseph, JJ.

IT Appeal Nos. 32 & 124 of 2000

1st September, 2003

Counsel Appeared

P.K.R. Menon & George K. George, for the Appellant : P. Gopalakrishna Warriyar & P. Balakrishnan, for the Respondent

JUDGMENT

By the court :

Both these appeals arise from the common order of the Tribunal, Cochin Bench in ITA No. 552/Coch/1998, dt. 26th Oct., 1999, in respect of the asst. yr. 1993-94. ITA No. 32 of 2000 is filed by the Revenue and ITA No. 124 of 2000 is filed by the assessee. While admitting ITA No. 32 of 2000 notice was ordered on the following five questions of law :

“1. Whether, on the facts and in the circumstances of the case, the Tribunal is right and had material in confirming the finding of the CIT(A) determining the percentage of profit at 8 per cent of the gross receipts ?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in estimating the income from the total contract receipt on a percentage basis, when the assessee maintains books of accounts and filed audited accounts in the prescribed Form 3 CD ?

Whether, on the facts and in the circumstances of the case, and in view of the Tribunal’s finding that ‘looking to’ the facts and circumstances of the case brought on record, we find it difficult to accept the proposition of the assessee that the assessee has made payment to the subcontractors’, the Tribunal is right in law and facts in holding that the CIT(A) rightly estimated the profit at 8 per cent and we agree with this estimation as it is realistic ?

Whether, on the facts and in the circumstances of the case, should not the Tribunal, if at all, have only allowed deduction of expenditure incurred for “cutting and removing of metamorphic rock which work was not there in the agreement from the arbitration award ?

Whether, on the facts and in the circumstances of he case and in the light of the findings at p. 28 (line 13) “For this work done and other work and for other reasons such as the non-completion of the work before the expiry of time on 23rd May, 1985, due to the other parties failure to make available electricity without interruption and for the extra work such as cutting and removing of trees that blocked the work etc. compensation were awarded” should not the Tribunal have determined the income from the arbitration award after deducting the expenditure for the above-narrated work without fixing the income at 8 per cent of the award and is not the determination at 8 per cent wrong, unreasonable, irrational and arbitrary ?”

Similarly while admitting ITA No. 124 of 2000 notice was ordered on the following two questions of law : “(i) Whether in the case of a contractor, who is awarded in arbitration, amounts found payable for the work actually done but not fully paid or not paid at all, and also interest on the same for delay, is it open to treat the interest portion thereof de hors the income of the business to be assessed under the head “income from other sources”. (ii) Is the Tribunal right in delinking the interest portion of the award from its other portions, for being treated differently when the Revenue itself had proceeded as if the entire receipt under the award is only trading receipt ?” The brief facts are as follows. The assessee is a partnership-firm having four partners namely (1) N.K. Aboobacker, (2) N.A. Kunju Mohammed, (3) N.A. Ali Kunju and (4) N.A. Mohammed. The firm started its business in the year 1982. It is engaged in the execution of civil work. It entered into a civil contract work-Kaliada Irrigation Project, Kottarakkara as per agreement No. 1/SE KCQ-84-85 dt. 9th May, 1984. The work done under the agreement was KIP Formation of L.B. Main Canal from Ch. 47005 of 48254 including cutting and covering open flumes C.D. Works and driving a tunnel from Ch. 57690 to 47815 metres, including stipping of both the faces of the tunnel. The work was started in 1984 and completed in the year 1992. The total amount of PAC was Rs. 31,24,778. There were disputes and difference of opinion between the assessee and the Irrigation Department. The matter was referred to arbitration. The arbitrator has passed an award on 14th March, 1989. As per the said award the assessee had obtained an additional amount of Rs. 87,51,092. This amount comprised of the following : Here it must be noted that the assessee had received a total sum of Rs. 1,15,47,873 which includes contract receipt for the work executed during the accounting year 1992-93 Rs. 27,96,781.

2. The main dispute in the appeal filed by the Department relates to the substitution of the method of estimation of the income made by the AO and the adoption of estimation of income based on a percentage of the profit. Though the assessee has produced the books of accounts and other documents along with a special audit report under s. 44AD of the Act, the AO did not accept the book results and estimated the income by disallowing the expenditure incurred by the assessee for payments to seven sub-contractors totalling Rs. 68,43,650. The AO relying on the balance-sheets of the assessee for the years 1985-86 to 1988-89 wherein the assessee had shown the liabilities which did not include the amounts due to the seven sub-contractors, adopted the entire award amount as income of the assessee for the assessment year. Being aggrieved by the said assessment order the assessee filed appeal before the CIT(A), who by his order dt. 30th Sept., 1998 (Annexure B) sustained the rejection of accounts but adopted a different method of estimating the income by directing the assessing authority to adopt 8 per cent of the gross receipt as the income. The Department being aggrieved by the said order took up the matter in appeal before the Tribunal, Cochin Bench. The Department contended that the assessee itself, in the balance sheet for the earlier years, had shown only a small amount as the outstanding liability under the contract and, therefore, the award amount of Rs. 87,51,092 received during the previous year relevant to the assessment year concerned has to be treated as the income. The Department also contended before the Tribunal that the AO had rejected the claim of expenses to the even subcontractors on valid grounds and that in the absence of any evidence to show that the assessee had incurred expenses from the amount of Rs. 87,51,092 the AO was justified in treating the sum of Rs.87,51,092 as the income of the assessee. It was also contended before the Tribunal that the interest received for belated payments of the award amount cannot be treated as business income and that it has to be assessed only as income under the head ‘income from other sources’. The Tribunal had adverted to the assessment order and the first appellate authority’s order and in para. 16 of the appellate order considered the matter as follows : “The stand of the Revenue is that the entire amount of award and the interest thereon is taxable. The entire amount that was payable to the sub-contractors has been paid earlier and there was nothing due to them. The later events, such as the complaint to the Police Commissioner and the settlement arrived at, opening of the bank accounts and making payments to the sub-contractors etc. was a clever device by the assessee to defraud the amount due to the Revenue.

The persons who are said to have received the amount after the award as a consequence of the police complaint initially denied having received any amount after the receipt of the award. Looking to the facts and circumstances of the case brought on record, we find it difficult to accept the proposition of the assessee that the assessee had made payments to the sub-contractors. Of course, the CIT (A) has not proceeded on that basis also. As rightly observed by the CIT(A), the Revenue was harping only on the payments to the sub-contractors but not the work done which was not in the contract agreement. The above quoted portion of the award makes it clear that the assessee had to spend for cutting and removing of metamorphic, which work was not there is the agreement. Therefore, we are unable to say that the entire amount of the award is a profit to the assessee and taxable as contended by the Department. The CIT(A) rightly estimated the profit at 8 per cent and we agree to this estimation as it is realistic.” Shri P.K.R. Menon, learned senior counsel appearing for the Revenue, submits that the Tribunal had entered a clear finding that it is “difficult to accept the proposition of the assessee that the assessee had made payments to the sub-contractors”. The senior counsel on that basis submits that the Tribunal, in such circumstances, ought to have affirmed the order of the assessing authority instead of affirming the method of estimation made by the first appellate authority on percentage basis. The senior counsel also submitted that the Tribunal has not assigned any valid reasons to depart from the findings of the AO and to approve the order of the Tribunal estimating the profit at 8 per cent. The senior counsel also brought to our notice that the sum of Rs. 87,51,092 comprises of three items of which a sum of Rs. 16,76,500 represents compensation for loss and damage suffered by the contractor on account of the lapses on the part of the authorities in which no amount of expenditure is involved. The senior counsel also submits that the sum of Rs. 23,42,801 represents interest at the rate of 12 per cent on the award amount directed by the arbitrator which calls for a separate treatment. Shri P. Balakrishnan, learned counsel appearing for the assessee, on the other hand, submits that the assessee had entrusted the additional work for which the arbitrator had awarded a sum of Rs. 87,51,092 under different heads, that it was got done through seven sub-contractors, that, since the assessee could not make payment to the sub- contractors for the work done by them, they had raised a police complaint and that at the instance of the police the matter was settled between the assessee and the sub-contractors. The counsel submits that an amount of Rs.68,43,650 was paid to the said sub-contractors by crossed cheques from the amount of Rs. 87,51,092 received pursuant to the award of the arbitrator. Counsel submits that though the said sub-contractors had given a statement to the AO on a surprise visit denying the receipt of the crossed cheque and factum of execution of sub-contract, in cross-examination by the assessee the sub-contractors had deposed that they had entered into sub-contract with the assessee, that they had executed the work, that they have received cheques for payment of the work done and that they have deposited the said amount in their pass book and also spent it. Counsel submitted that the assessee had thus discharged the burden of establishing the payment of amounts to the subcontractors for the work done by them under the contract between the assessee and the subcontractors referred to in the assessment order itself.

Counsel also submitted that the assessee did not disclose its liability in the balance sheet for the asst. yrs. 1985-86 to 1988-89 only because of the liability due to the sub-contractors had not been quantified. Counsel further submitted that the assessment of the assessee for the earlier years were completed on estimate basis after rejecting the books and that the first appellate authority has rightly held that when the book results are rejected the appropriate course is to estimate the income and that it is one of the well-known methods of estimating the income from contract receipts by adopting a percentage of such receipt as the profit. Counsel also submitted that the assessing authority had treated the entire sum of Rs. 87,51,092 as income from business whereas the Tribunal for the first time on the basis of the contention raised by the Department has treated the sum of Rs. 23,42,801 representing the interest under the award as income from other sources. The counsel submitted that with regard to the interest income it is concluded by the decisions of the Supreme Court that the interest income should also have the characteristics of the amount which yielded the interest. He, in support of the above, relied on the decision of the Supreme Court in CIT vs. Govinda Choudhury & Sons (1994) 116 CTR (SC) 61 : (1993) 203 ITR 881 (SC) and CIT vs. B.N. Agarwala & Co. (2003) 180 CTR (SC) 311 : (2003) 259 ITR 754 (SC) and submitted that the effect of the said decisions is that the interest receipt under the award also must be treated as part of the total receipt which is subject to the provisions of computation of total income under the Act. On the question of separately treating the interest income, the senior counsel for the Revenue submits that though the interest income can be treated as business income since there is nothing to be adjusted from the entire interest income, it must be subjected to tax and that the decisions of the Supreme Court relied on by the assessee do not take a different view.

We have considered the rival submissions. We have also perused the orders of the AO and the two appellate authorities. As we have already stated, the AO did not accept the books of accounts of the assessee which was subjected to a special audit as provided under s. 44AD of the Act. The main reason for rejecting the books of accounts was that the AO, after considering the statements and depositions of the seven sub-contractors, was of the view that they were only name lenders. It is in the above circumstances the claim of deduction of a sum of Rs. 68,43,650 was not allowed as deduction from the gross receipt. The AO was also of the view that there was nothing to be deducted from the gross receipt of the sum of Rs. 87,51,092 received under the award of the arbitrator. It is in that view of the matter he has treated the entire sum of Rs. 87,51,092 as income. The first appellate authority had adverted to the contentions of the assessee with reference to the payments made to the sub- contractors. However, the first appellate authority has taken the view that this is at the most a case for rejection of the accounts and that if the accounts are rejected the income has to be estimated. The first appellate authority was of the view that when the income is being estimated there is no question of making separate additions in the light of certain decisions of the other Courts. The first appellate authority, therefore, after rejecting the books, had resorted to the estimation of income on percentage basis. Here, it must be noted that the first appellate authority did not thereafter make any reference to the books of accounts and other documents relied on by the assessee for the purpose of estimation of income. In other words, he had totally discarded the materials available in the form of books of accounts and other documents. He had resorted to the estimation on percentage basis. On an overall view with regard to the profit that can be derived from a contract business, the first appellate authority felt that it is strange to think that out of the total contract receipt of Rs. 1,15,47,373 there may be a profit to the tune of Rs. 87,51,092, which will come to more than 75 per cent of the contract receipt. According to us the first appellate authority was not justified on the facts of this case to totally discard the books of accounts and other documents relied on by the assessee in the matter of estimation of income. As held by the Supreme Court in CST vs. Girja Shanker Awanish Kumar 104 STC 130 (SC), even after rejection of the books of accounts for technical and other reasons, it is for the AO on the facts of each case to consider the materials disclosed to ascertain as to what extent the books of account can be relied on for determination of the turnover. The Tribunal in the instant case has adverted to the findings of the AO and the first appellate authority. However, in para. 16 of the appellate order, which we have already extracted, the appellate Tribunal did not consider this aspect of the matter even though the Tribunal found it difficult to accept the case of the assessee regarding payment to the sub-contractors. We notice that the Tribunal has adverted to the award passed by the arbitrator and found that the amount awarded represents the value of the extra work done, which also represents interest at the rate of 12 per cent. The Tribunal was of the view that even if the additional work was not got done through sub-contractors, it might have been done by the assessee itself, which aspect has not been considered. The Tribunal however, observed that it is not possible to say that the entire amount of award is a profit to the assessee and taxable as contended by the Department. In such circumstances, according to us it was for the Tribunal to remit the matter to the AO or at any rate the first appellate authority to consider the matter afresh. However, what we find is that the Tribunal has agreed with the first appellate authority that this is a case which calls for estimation of the profit on percentage basis. We do not find any reason stated by the Tribunal for justifying the estimate made on profit basis. We note that, apart from the general observations made by the Tribunal on the merits of the matter, there is no due consideration of the case of the assessee or of the Department in respect to the acceptance of the books of accounts or the estimation of the income which reference to all the materials available on record including the books of account and documents.

The question on which notice was issued in the Departmental appeal relates to the justification for interfering with the order of the AO in estimating the income with reference to the books of accounts and other documents by substituting it with determination of profit on percentage basis. As we have already noted, the first appellate authority, without considering the case of the assessee based on the books of accounts and other records, had straightaway thought that this is a fit case for estimation of profit on percentage basis. We do not think that on the facts of this case the first appellate authority was justified in adopting such a course. The Tribunal has also committed the mistake in approving the estimation of income adopted by the first appellate authority. In these circumstances we are of the view that the question of estimation of income from the contract receipt is a matter to be considered by the AO himself in accordance with law in the light of the observations made in this judgment. In the above circumstances we decline to answer the questions of law on which notice is ordered in the appeal filed by the Department.

7. Now, coming to the assessee’s appeal, the only question is with regard to the separate treatment of the sum of Rs. 23,42,801 representing interest at the rate of 12 per cent on the award amount. The assessing authority had treated the entire income as business income. However, the Tribunal in the appellate order, taking note of the fact that the sum of Rs. 87,51,092 received by the assessee pursuant to the award of the arbitrator includes the interest amount of Rs. 23,42,801, took the view that the said sum must be treated as the income from other sources and has to be taxed. Counsel for the assessee had relied on the two decisions of the Supreme Court (supra), which has taken the view that the interest income in similar circumstances will also have to be treated as business income and therefore, the separate treatment was not justified. We note that, since the assessing authority had treated the entire receipt as business income, the Tribunal was not justified in taking a different view in an appeal filed by the Department against the order of the first appellate authority adopting the estimation of profit on percentage basis. However, now that we have remitted the main question regarding the treatment of the entire sum of Rs. 87,51,092 for fresh consideration before the assessing authority, it is open to the assessing authority to consider this aspect also in the light of the two decisions of the Supreme Court mentioned supra. In this view we decline to answer the questions of law raised by the assessee also. These two appeals are disposed of as above.

[Citation : 269 ITR 346]

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