Punjab & Haryana H.C : Is the Hon’ble Tribunal legally justified in holding that in the case of contractors profit can be worked out on estimate basis at 12 per cent of the gross receipts, when the assessee claims to be maintaining proper books of account which have duly been audited by a chartered accountant, but does not produce complete books for verification before the AO?

High Court Of Punjab & Haryana

CIT vs. Surinder Pal Nayar

Section 44AD, 145(1)

Asst. Year 1999-2000, 2000-01

Satish Kumar Mittal & Rakesh Kumar Garg, JJ.

C.M. No. 18809-CII of 2007 and IT Appeal Nos. 391 and 602 of 2007

10th April, 2008

Counsel Appeared :

Sanjiv Bansal, for the Appellant

JUDGMENT

Rakesh Kumar Garg, J. :

C. M. No. 18809-CII of 2007

For the reasons stated in the application, delay of 263 days in refiling the appeal is condoned.

CM stands disposed of.

IT Appeal Nos. 391 and 602 of 2007 This judgment will dispose of IT Appeal Nos. 391 and 602 of 2007 as in both the appeals the same question of law is being raised by the Revenue on similar facts against the orders passed by the Tribunal.

The Revenue has filed Appeal No. 391 of 2007 under s. 260A of the IT Act, 1961 (hereinafter referred to as “the Act”) against the order dt. 31st May, 2006 passed by the Tribunal, Chandigarh Bench “B” Chandigarh in ITA No. 381/Chd/2004 for the asst. yr. 2000-01 raising the following substantial questions of law :

“1. Is the Hon’ble Tribunal legally justified in holding that in the case of contractors profit can be worked out on estimate basis at 12 per cent of the gross receipts, when the assessee claims to be maintaining proper books of account which have duly been audited by a chartered accountant, but does not produce complete books for verification before the AO?

2. The IT Act clearly provides for applicability of deeming provisions of s. 44AD in case of contractor with a total turnover not exceeding Rs. 40 lakhs. Can the Hon’ble Tribunal travel beyond the provisions of the IT Act and make the provisions applicable to even those cases which are not covered under the statutory limit of Rs. 40 lakhs as specifically provided for in the Act ?”

6. Appeal No. 602 of 2007 has been filed by the Revenue against the order dt. 20th April, 2007 passed by the Tribunal in ITA No. 380/Chd/2004 for the asst. yr. 1999-2000 raising the following substantial question of law :

“Whether on the facts and circumstances of the case, is the Hon’ble Tribunal legally justified in holding that in the case of contractors profit can be worked on estimate basis at 12 per cent of the gross receipts, when the assessee claims to be maintaining proper books of account which have duly been audited by a chartered accountant, but does not produce complete books for verification before the AO ?”

7. The necessary facts for disposal of these appeals are being noticed from ITA No. 391 of 2007. The assessee- firm was carrying on the business of construction of roads at various places as per agreement with the various Government authorities. The assessee filed its return of income on 30th Oct., 2000 declaring net income of Rs. 8,24,512 which was processed under s. 143(1) of the Act on 14th June, 2001 at the returned income. The case was reopened by issuing notice under s. 148 of the Act on 18th June, 2001. During the course of assessment proceedings, the AO asked the assessee to furnish various details. He rejected the accounts and the accounting system followed by the assessee while passing the assessment order dt. 31st March, 2003, under s. 143(3) of the Act.

8. The assessee filed an appeal before the Commissioner of Income-tax (Appeal) [for short “the CIT(A)”] against the order of the AO and submitted that the AO was not entitled to make a pure guess work while making the additions. It was pointed out that the assessee carried on the business of civil construction and maintained regular books of account and that the net profit rate of 8 per cent was being applied as per s. 44AD of the Act where gross receipts did not exceed Rs. 40 lakhs and in the absence of regular books of account, the average rate was applicable. It was contended that the assessee maintained regular books of account. Therefore, the addition on the basis of “no account” case was highly arbitrary. It was also argued that the AO had estimated 100 per cent profit on gross receipts. Alternatively, it was submitted that the average rate was to be applied and the salary along with interest paid to partners should have been deducted from the income computed within the limits specified in s. 40(b) of the Act. Reliance was also placed on the CBDT Circular No. 737, dt. 23rd Feb., 1996 [(1996) 131 CTR (St) 9 : (1998) 218 ITR 97 (St)]. The CIT(A) vide order dt. 30th Jan., 2004 allowed the appeal of the assessee partly and held that the gross receipts could not be termed as profits and gains for the purpose of s. 28 of the Act and that the assessee had a right to claim further additional rebate, deduction, allowance or other benefits from the profits and gains earned by the assessee as per the provisions contained in ss. 29 to 43C of the Act. The CIT(A) further pointed out that the receipts shown by the assessee had not been doubted/suspected by the AO except that there was a bona fide difference in receipts which was explained to the AO and it was held that the assessee’s case was fit for taxing gross receipts at 12 per cent.

9. Being aggrieved against the said order, the Revenue filed an appeal before the Tribunal and it was argued that the assessee did not produce the books of account in spite of ample opportunity given to it. It was also argued that the assessee was adopting the cash system of accounting and since the expenses were not proved to have been incurred during the year under consideration, the AO rightly disallowed the whole expenses claimed by the assessee. It was further argued that the CIT(A) was not justified in allowing separate claim of depreciation after applying a flat rate of 12 per cent by observing that the application of flat rate runs parallel to the provisions of s. 44AD of the Act where all the expenses including depreciation are deemed to have been allowed. The Tribunal, vide its order dt. 31st May, 2006, dismissed the appeal of the Revenue. The relevant part of the order of the Tribunal is reproduced hereunder :

“We have heard both the parties on this issue and carefully gone through the material available on record. In the instant case, as regards the amount of gross receipts is concerned, it is noticed that the AO ignored the figures given by the assessee on the basis of revised TDS certificate and even the statement of the concerned person recorded during the assessment proceedings was not considered by the AO. It is also noticed that the assessee neither before the AO nor before the learned CIT(A) claimed that the figure declared by it at Rs. 3,56,00,115 was wrong figure. We, therefore, do not see any merit in this contention of the assessee that the learned CIT(A) should have considered the figure of Rs. 3,40,40,831 instead of Rs. 3,56,00,115. It is also true that the assessee could not meet the objections raised by the AO and had not produced the relevant vouchers to the satisfaction of the AO. At the same time, the AO disallowed the whole of the expenses claimed by the assessee, in our opinion, he was not justified because in executing the work certain expenses are required to be incurred. We are, therefore, of the confirmed view that the AO was not justified in rejecting the whole of the expenses. However, it is true that the assessee could not furnish evidence in respect of its claim of the expenses. Therefore, the learned CIT(A) was justified in applying the gross profit rate of 12 per cent The assessee, although challenged the application of the gross profit rate of 12 per cent and contended that 10 per cent rate of gross profit was justified. However, the assessee neither filed any appeal nor cross-objection against the application of net profit rate of 12 per cent and also had not stated that he was declaring the profit rate near to 10 per cent in most of the preceding and succeeding years. We, therefore, decline to interfere with the action of the learned CIT(A) in applying the profit rate of 12 per cent on the gross receipts declared by the assessee.”

It was also held by the Tribunal that the assessee was not entitled to depreciation since the same had been assumed to have been allowed while determining the income by applying the net profit rate on the gross receipts. Further, the claim of the assessee with regard to interest and salary paid to the partners as per the partnership deed was allowed. Not satisfied with the above order of the Tribunal, the Revenue has filed the present appeal.

We have heard learned counsel for the Revenue and perused the record. Sh. Sanjiv Bansal, learned counsel for the Revenue has argued that the Tribunal was not justified while upholding the order of the CIT(A) directing the AO to tax the gross receipts declared by the assessee by applying a net profit rate of 12 per cent against the addition of Rs. 3,47,99,824 made in the assessment order as no evidence of expenses incurred in the contract work was produced before the AO when the assessee claims to be maintaining, proper books of account which have been duly audited but were not produced for verification.

We find no force in the contention raised by the counsel for the Revenue. While making the assessment, there is no provision under the IT Act in which the AO is empowered to change the system of accountancy without giving an opportunity. However, the AO can make assessment on the basis of best judgment under s. 144 of the Act after rejection of the accounted version of the assessee and rejection of books of account under s. 145 of the Act, 1961. The system of presumptive taxation has been adopted under s. 44AD as it was not practicable for persons engaged in contract work of civil construction to follow the principles of accountancy in the strict sense. Thus, the CIT(A) rightly directed the AO to make the assessment against the assessee on the basis of flat rate of 12 per cent. The assessee has not challenged the order of the CIT(A) applying the net profit rate at 12 per cent to tax it. On the other hand, the Revenue has also failed to challenge the order of the CIT(A) applying the net profit rate at 12 per cent by producing evidence that a higher rate of net profit should have been applied than the rate applied by the CIT (A). Even this has not been argued before the Tribunal that the net profit rate of 12 per cent applied by the CIT(A) is on the lower side. In these circumstances, no error can be found in the order of the Tribunal. No other point has been raised by the Revenue. Accordingly, there is no merit in both the appeals and the same are hereby dismissed.

[Citation : 327 ITR 236]