Commissioner of Income Tax vs Surinder Pal Nayar

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.

I.T.A. Nos. 391 and 602 of 2007

This judgment will dispose of I. T. A. 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 u/s 260A of the Income Tax Act, 1961 (hereinafter referred to as "the Act") against the order dated May 31, 2006 passed by the Income Tax Appellate Tribunal, Chandigarh Bench "B" Chandigarh in I. T. A. No. 381/Chandi/2004 for the assessment year 2000-01 raising the following substantial questions of law:

Is the hon''ble Income Tax Appellate 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 Assessing Officer ?

The Income Tax Act clearly provides for applicability of deeming provisions of Section 44AD in case of contractor with a total turnover not exceeding Rs. 40 lakhs. Can the hon''ble Income Tax Appellate Tribunal travel beyond the provisions of the Income Tax 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 ?

Appeal No. 602 of 2007 has been filed by the Revenue against the order dated April 20, 2007 passed by the Tribunal in I. T. A. No. 380/Chandi/2004 for the assessment year 1999-2000 raising the following substantial question of law:

Whether on the facts and circumstances of the case, is the hon''ble Income Tax Appellate 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 Assessing Officer ?

The necessary facts for disposal of these appeals are being noticed from I. T. A. 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 October 30, 2000 declaring net income of Rs. 8,24,512 which was processed u/s 143(1) of the Act on June 14, 2001 at the returned income. The case was reopened by issuing notice u/s 148 of the Act on June 18, 2001. During the course of assessment proceedings, the Assessing Officer asked the assessee to furnish various details. He rejected the accounts and the accounting system followed by the assessee while passing the assessment order dated March 31, 2003, u/s 143(3) of the Act.

The assessee filed an appeal before the Commissioner of Income Tax (Appeals) (for short "the CIT(A)") against the order of the Assessing Officer and submitted that the Assessing Officer 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 Section 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 Assessing Officer 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 Section 40(b) of the Act. Reliance was also placed on the CBDT Circular No. 737, dated February 23, 1996 ([1998] 218 ITR 97). The Commissioner of Income Tax (Appeals) vide order dated January 30, 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 Section 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 Sections 29 to 43C of the Act. The Commissioner of Income Tax (Appeals) further pointed out that the receipts shown by the assessee had not been doubted/suspected by the Assessing Officer except that there was a bona fide difference in receipts which was explained to the Assessing Officer and it was held that the assessee''s case was fit for taxing gross receipts at 12 per cent.

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 Assessing Officer rightly disallowed the whole expenses claimed by the assessee. It was further argued that the Commissioner of Income Tax (Appeals) 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 Section 44AD of the Act where all the expenses including depreciation are deemed to have been allowed. The Tribunal, vide its order dated May 31, 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 Assessing Officer 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 Assessing Officer. It is also noticed that the assessee neither before the Assessing Officer nor before the learned Commissioner of Income Tax (Appeals) 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 Commissioner of Income Tax (Appeals) 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 Assessing Officer and had not produced the relevant vouchers to the satisfaction of the Assessing Officer. At the same time, the Assessing Officer 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 Assessing Officer 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 Commissioner of Income Tax (Appeals) 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 Commissioner of Income Tax (Appeals) 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 Commissioner of Income Tax (Appeals) directing the Assessing Officer 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 Assessing Officer 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 Income Tax Act in which the Assessing Officer is empowered to change the system of accountancy without giving an opportunity. However, the Assessing Officer can make assessment on the basis of best judgment u/s 144 of the Act after rejection of the accounted version of the assessee and rejection of books of account u/s 145 of the Act, 1961. The system of presumptive taxation has been adopted u/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 Commissioner of Income Tax (Appeals) rightly directed the Assessing Officer 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 Commissioner of Income Tax (Appeals) 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 Commissioner of Income Tax (Appeals) 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 Commissioner of Income Tax (Appeals). Even this has not been argued before the Tribunal that the net profit rate of 12 per cent. applied by the Commissioner of Income Tax (Appeals) 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.