High Court Of Orissa
Manohar Ram Chandra Patil vs. Union Of India & Ors.
Section 44AD, Art. 14
Asst. Year 1994-95
P.K. Balasubramanyan, C.J. & A.S. Naidu, J.
OJC No. 5996 of 1997
7th November, 2002
Counsel Appeared
Jagbandhu Sahoo, M. Das & S.K. Mohanty, for the Assessee : Standing counsel, for the Revenue
JUDGMENT
P.K. Balasubramanyan, C.J. :
In this writ petition, an assessee under the IT Act, 1961 (hereinafter referred to as the “Act”), challenges the constitutional validity of s. 44AD of the IT Act and on that basis seeks the issue of a writ of certiorari to quash the order of assessment made for the asst. yr. 1994-95 and the demand made pursuant thereto. Admittedly, the assessee is a sub-contractor of Tata Robin Frasers Ltd. and during the assessment year, he had executed work as a sub-contractor under the principal contractor. Admittedly, the petitioner did not maintain accounts relating to the sub-contract works. In that situation, the AO invoked s. 44AD of the Act and presumed the income of the assessee at eight per cent of the gross receipts payable to the assessee by the principal contractor during the previous year on account of the sub-contract business. It is in that context that the assessee has challenged the constitutional validity of s. 44AD of the Act.
2. Sec. 44AD of the Act contains a special provision for computing profits and gains of business of civil construction, etc. The section provides that notwithstanding anything to the contrary contained in ss. 28 to 43C of the Act, in the case of an assessee engaged in the business of civil construction or supply of labour for civil construction, a sum equal to eight per cent, of the gross receipts paid or payable to the assessee in the previous year on account of such business or, as the case may be, a sum higher than the amount at eight per cent, if it is so declared by the assessee, in his return of income, shall be deemed to be the profits and gains of such business chargeable to tax under the head “Profits and gains of business or profession”. What is argued on behalf of the assessee is that s. 194C of the Act provides for deduction at source at two per cent of the amount paid or found payable to the contractor and one per cent of the amount payable to a subcontractor and in view of the inconsistency between that provision and the presumptive income specified in s. 44AD of the Act, it must be held that s. 44AD is arbitrary and unreasonable. It is pointed out that under s. 194C(2) the amount deductible in the case of a sub-contractor is only one per cent of the sum found payable by the contractor, and in the context of that stipulation the provision for presuming the income to be eight per cent must be held to be invalid, since it is arbitrary and violative of Art. 14 of the Constitution of India. Counsel submits that in the light of the decision of the Supreme Court in East India Tobacco Co. vs. State of Andhra Pradesh AIR 1962 SC 1733, it is open to the assessee to challenge the validity of the relevant provision under the IT Act to be violative of the fundamental rights of the assessee. The arguments on behalf of the assessee are met by learned standing counsel for the IT Department by pointing out that s. 194C of the Act operates in a different field and it has nothing to do with assessing a sub-contractor on the income he has received and s. 44AD clearly indicates the income to be presumed in a case where the assessee is not in a position to produce the actual accounts and satisfy the AO of the income received by him from such work. It is also pointed out that the presumption regarding the income contained in s. 44AD of the Act applies only in a case where gross receipts paid or payable exceeded Rs. 40,00,000. It is, therefore, submitted that there is nothing irrational or arbitrary in s. 44AD of the Act. Sec. 44AC of the Act contained a special provision for computing profits and gains from the business of trading in liquor. The section was omitted w.e.f. 1st April, 1993. But, the constitutional validity of that section came up for consideration before the Supreme Court in Union of India vs. A. Sanyasi Rao (1996) 132 CTR (SC) 81 : (1996) 219 ITR 330 (SC). The Supreme Court after noticing that Art. 14 of the Constitution of India applies equally to tax laws held that there was nothing in the legislative measure to offend Art. 14 of the constitution and that the said section r/w s. 206C of the Act was not unconstitutional. But, their lordships clarified that s. 44AC was an adjunct of s. 206C of the Act and s. 44AC of the Act did not dispense with a regular assessment as provided, in accordance with ss. 28 to 43C of the Act. We think that the ratio of the said decision applies equally to s. 44AD of the Act and the section cannot be said to be in any manner arbitrary or violative of Art. 14 of the Constitution of India. We are, therefore, of the view that the challenge to the validity of s. 44AD of the Act must fail.
It is clear from the decision referred to above that the section does not dispense with a regular assessment as provided in accordance with ss. 28 to 43C of the Act. It is in that context that the AO had called upon the assessee to file a return and after scrutinising the return had made an assessment in terms of s. 143(3) of the Act. The AO has noticed that no books of accounts had been maintained as conceded by the assessee and the attempt of the assessee was to estimate the income at five per cent of the gross civil contract works amount. It is in that context that the AO took note of s. 44AD of the Act and estimated the income of the assessee at eight per cent of the gross amount covered by the civil contract. It cannot therefore be said that there has been any illegality committed by the officer on that score. The argument that s. 44AD of the Act does not apply to sub-contracts and applies only to a contract cannot be accepted. The mere fact that in the matter of deduction at source, a distinction is made in s. 194C between a contractor and a sub-contractor, does not enable the assessee to contend that s. 44AD cannot apply to the case of a sub-contractor. The section speaks of any assessee engaged in the business of civil construction or supply of labour for civil construction and provides for a presumptive profit from such business. Whether a contractor or a sub-contractor, the assessee is admittedly engaged in the business of civil construction or supply of labour for civil construction within the meaning of s. 44AD of the IT Act. On the wording of s. 44AD of the Act, there is no doubt that a sub-contractor would also come squarely within the purview of that provision. We are therefore not in a position to accept the argument that a sub-contractor is not covered by s. 44AD of the Act. For the reasons aforesaid, we find no merit in this writ petition. The writ petition is dismissed.
[Citation : 260 ITR 87]