Maliyekkal Construction Co. vs Commissioner of Income Tax

C.N. Ramachandran Nair, J.—The assessee, a civil construction firm, is the appellant before us against the common order of the Income Tax Appellate Tribunal for the assessment years 1993-94 and 1994-95. The assessee admittedly did not maintain books of account. However, returns were filed estimating the net income at 7 per cent. of the contract receipts. The Assessing Officer taking note of the net profit retained for the earlier years at 10 per cent. of the contract receipts, fixed the net income at 8 per cent. of the contract receipts. It was specifically mentioned by the Assessing Officer that the net income fixed at 8 per cent. is inclusive of all deductions towards payment of salary and interest to partners. In other words, the net income so fixed is after excluding all deductions which are available to the assessee. The assessee, however, contested the assessment in the first appeal and pressed for deductions towards payment of salary and interest to partners as provided u/s 40(b) of the Income Tax Act. The Commissioner of Income Tax (Appeals) dismissed the appeal. The assessee filed a second appeal before the Tribunal. The Tribunal noticed that the assessee is entitled to deduction u/s 40(b) of the Act towards payment of salary to partners, and interest on advances. However, the Tribunal, taking note of the fact that the assessee did not maintain books of account, and that the assessee returned a higher rate of profit for the earlier years at 10 per cent., fixed the net income at 10 per cent., and allowed the deductions claimed u/s 40(b) of the Act. It is against this order of the Tribunal that the assessee filed the above two appeals.

We have heard Sri P. Balachandran, counsel appearing on behalf of the assessee, and senior counsel Sri P.K.R. Menon, on behalf of the Revenue. The assessee''s counsel contended that the order of the Tribunal has resulted in enhancement of tax for one year, for which they have no powers. Admittedly, the first appellate authority dismissed the appeal, and, therefore, the only action open to the Revenue was to file a cross-appeal when the assessee filed appeal before the Tribunal. In the absence of cross-appeal by the Revenue, the Tribunal has no power to enhance the tax demanded, is the contention of the assessee''s counsel.

We have not seen the recomputation of the order of the Tribunal. However, we are informed that for one year there is enhancement of tax consequent on the order of the Tribunal. Enhancement of estimated income of the assessee is from 8 per cent. to 10 per cent. On going through the orders of the Tribunal, and after hearing counsel for the assessee, we find that the assessee pressed for deductions towards payment of salary and interest to partners. The Tribunal also noticed that the estimation of income at 8 per cent. by the Assessing Officer was after reckoning the deductions otherwise eligible to the assessee. Therefore, the only option open to the Tribunal on appeal by the assessee was to reduce the net income if the Tribunal found reasons for the same. There was no scope for enhancement of net income in the absence of any cross-appeal by the Revenue. Therefore we feel the Tribunal committed an error in enhancing the income from 8 per cent. to 10 per cent., without a cross-appeal by the Revenue demanding such enhancement. We also find that the assessee has not maintained books of account. There is no material before the Tribunal to arrive at a profit at 10 per cent. even though the assessee might have returned profit at 10 per cent. for the earlier years. When the officer himself fixed the income at 8 per cent. covering all deductions and when the Tribunal did not find any ground to interfere with the same, there was no necessity for the Tribunal to enhance the income and simultaneously grant deductions without realizing its tax effect so far as the assessee is concerned. We, therefore, find that the order of the Tribunal resulting in enhancement of tax effect is not sustainable. Counsel for the assessee also pressed before us for grant of deductions u/s 40(b) of the Act after retaining the net income fixed by the officer. We have already noticed that the Assessing Officer himself fixed the net income only at 8 per cent. as against 10 per cent. returned by the assessee for the earlier years, and it is inclusive of all deductions. When such a conditional order was passed and in the absence of any material to vary the same, we feel the assessee is not entitled to further deductions u/s 40(b) of the Act. We, therefore, allow the appeal setting aside the order of the Tribunal and restoring that of the Assessing Officer confirmed in the first appeal. The balance court fee, if any, will be recovered from the appellant.

The appeals are allowed.