Income Tax Appellate Tribunal - Jaipur
Kirodi Mal Modi , Jaipur vs Assessee on 24 July, 2015
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IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES,
JAIPUR
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BEFORE: SHRI R.P. TOLANI, JM & SHRI T.R. MEENA, AM
vk;dj vihy la-@ITA No. 815/JP/2012
fu/kZkj.k o"kZ@Assessment Year : 2009-10
Kirodi Mal Modi cuke Assistant Commissioner of
9, Leela Mansion, Raj Vs. Income Tax,
Bhawan Road, Civil Lines, Circle-2, Jaipur.
Jaipur.
LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AFAPM 2021 E
vihykFkhZ@Appellant izR;FkhZ@Respondent
vk;dj vihy la-@ITA No. 869/JP/2012
fu/kZkj.k o"kZ@Assessment Year : 2009-10
Deputy Commissioner of cuke Kirodi Mal Modi
Income Tax, Circle-2, Jaipur. Vs. 9, Leela Mansion, Raj
Bhawan Road, Civil Lines,
Jaipur.
LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AFAPM 2021 E
vihykFkhZ@Appellant izR;FkhZ@Respondent
fu/kZkfjrh dh vksj ls@ Assessee by : Shri P.C. Parwal (C.A.)
jktLo dh vksj ls@ Revenue by : Mrs. Neena Jeph (JCIT)
lquokbZ dh rkjh[k@ Date of Hearing : 15/06/2015
?kks"k.kk dh rkjh[k@ Date of Pronouncement : 24/07/2015
2 ITA 815 & 869/JP/2012_
Kirodi Mal Modi Vs. ACIT
vkns'k@ ORDER
PER: T.R. MEENA, A.M. These are cross appeals, one by the assessee and another by the revenue arise against the order dated 25/09/2012 passed by the learned C.I.T.(A)-I, Jaipur for the A.Y. 2009-10. The grounds of assessee's as well as revenue's are as under:-
Ground of ITA No. 815/JP/2012 "1 The Ld. Commissioner of Income Tax (Appeals) has erred on facts and in law in applying net profit rate of 8.89% subject to interest and depreciation on contract receipt of Rs. 1,20,09,79,663/- as against 6.46% declared by assessee and 8% applied by the A.O. 1.1 The ld. Commissioner of Income Tax (Appeals) has erred on fact and in law in enhancing the income of the assessee by 0.89% of the contract receipt of Rs.
1,20,09,79,663/- without giving any specific show cause notice of enhancement of income u/s 251.
1.2 The Ld. Commissioner of Income Tax (Appeals) has erred on facts and in law in not accepting the net profit declared by the assessee.
2. The Ld. Commissioner of Income Tax (Appeals) has erred on facts and in law in not allowing the claim of Joint Venture charges of Rs. 86,06,107/- from the net profit rate applied by her.
3 ITA 815 & 869/JP/2012_ Kirodi Mal Modi Vs. ACIT 2.1 The Ld. Commissioner of Income Tax (Appeals) has erred in facts and in law in holding that Joint Venture Charges of Rs. 86,06,107/- paid to Maruti Nandan Colonizer Private Limited towards share of profit as per Joint Venture agreement cannot be debited to the profit and loss account and therefore disallowable. She has further erred in directing A.O. to call the return of joint venture and tax the income of joint venture." Ground of ITA No. 869/JP/2012 "Whether on the facts and in the circumstances of the case and in law the Ld. CIT(A) is justified in allowing the interest payment of Rs. 43,94,830/- to deducted despite the fact that interest income shown has been assessed under the head "Income from other sources" and accepted by the Ld. CIT(A)."
2. The assessee is a civil contractor. He declared income of Rs. 7,54,41,440/-. The case was scrutinized U/s 143(3) of the Income Tax Act, 1961 (hereinafter referred as the Act). The ld Assessing Officer observed that during the year under consideration, the total contract receipts of Rs. 1,20,02,63,973/- had been declared on which G.P. rate @ 6.46% had been shown, which was 6.60% in the preceding year. The ld Assessing Officer rejected the books of account U/s 145(3) of the Act on the following grounds:
i. No stock register is being maintained.
4 ITA 815 & 869/JP/2012_
Kirodi Mal Modi Vs. ACIT
ii. Site wise details of expenses and material consumed is not
maintained.
iii. No supporting evidences/bills are available for traveling expenses.
iv. The bills/vouchers maintained for conveyance expenses are not proper/available.
v. Salary expenses incurred in cash without any receipt and signature.
vi. Diesel expenses had been claimed without quantitative details maintained and also not vehicle wise. vii. Payment to the suppliers for purchase of rodi, moram, GsP, stone etc. mining material amounting to Rs. 15,54,29,075/- had been claimed without any supporting voucher. viii. The mess expenses had been claimed on the basis of cash receipts.
ix. The payments to the suppliers for purchase of Bajri had been claimed without any voucher and supporting evidence.
x. Office expenses incurred in cash and without any supporting voucher.
5 ITA 815 & 869/JP/2012_ Kirodi Mal Modi Vs. ACIT xi. The machinery freight charges were paid for hiring of tractor but without any voucher and supporting evidence. xii. Pani charges had been claimed without any supporting evidence and paid in cash.
xiii. Wood charges had been claimed without any supporting voucher.
xiv. Printing and stationary expenses were not supported by any voucher and were paid in cash.
In view of the above serious defects detected in the books of account, it has been held that true profit cannot be determined from such defective books of account, so the assessee was asked to show cause as to why books of account should not be rejected U/s 145(3) of the Act and net profit rate of 8% be applied considering the facts and circumstances of the case, past history and other relevant material placed on record. The assessee submitted that the assessee had maintained books of account regularly and produced bills and vouchers during the course of hearing before the Assessing Officer. In respect of labour payment, the laboursheets were produced but vouchers could not be produced as they were lying at worksite. For expenses debited in P/L account like Roda stone, moram roda, pani, bajri, mess 6 ITA 815 & 869/JP/2012_ Kirodi Mal Modi Vs. ACIT expenses etc. on self made vouchers procured from the local persons, who do not keep printed bills. The nature of work is different with other business and being various work places it is difficult to pay the attention on qualitative and quantitative work by the assessee. Further each and every record cannot be maintained in this line of business wherever the evidence can be collected has been taken by the assessee to prove the genuineness of expenditure. The assessee has shown G.P. rate @ 6.46% as per CBDT instruction for selection of cases, this case should not have been selected for scrutiny as turnover is more than two crores and net profit is more than 5%. He further relied on the following case laws:-
i. Mahendra Kumar Sethi Vs. ITO (ITA No. 1452/JP/1993). ii. Prem Shankar Vs. JCIT (ITA No. 400/JU/2005).
For depreciation and interest he submitted as under:-
"Depreciation:- In the following cases it was held that depreciation allowance is mandatory and would be allowable after the application of profit rate.
a. CIT Vs. Jain Construction Co. (2000) 245 ITR 527 (Raj).
b. CIT Vs. Amril Lal Khatri (2003) 172 Taxation 11 (Rat)
c. Ansari Builders Vs. ITO 66 TTJ 902.
7 ITA 815 & 869/JP/2012_
Kirodi Mal Modi Vs. ACIT
Interest:- During the year under consideration the assessee have paid Rs. 44,24,118.29 on account of interest against the loans taken by the assessee for business purpose. Out of Rs. 44,24,118.29 Rs. 37,32,255.29/- have been paid to Citycorp, Tata Motors, HDFC Bank, Reliance Capital and Bank of Rajasthan Ltd. and balance paid to other parties. Such interest is allowable after application of N.P. rate as held in assessee own case for assessment year 2007-08, 2008-09 and also in view of the decision of Hon'ble Rajasthan High Court in the case of CIT Vs. Bhawan Path Nirman (Bohra) and Co. 258 ITR 431 (SLP filed by the department is dismissed by the Hon'ble Supreme Court 264 ITR 36 (Statute)."
After considering the assessee's reply, the ld Assessing Officer observed that the assessee himself admitted that complete details/vouchers could not be produced as the same were lying at work site and also admitted that it is not possible for him to maintain each and every record. Therefore, correctness and completeness of the books of account of the assessee is totally ruled out and correct profit of the assessee cannot be deduced therefrom. Therefore, she applied Section 145(3) of the Act and rejected the book result shown by the assessee. The ld Assessing Officer further observed that the Hon'ble ITAT, Jaipur Bench, Jaipur in the case of the assessee had also 8 ITA 815 & 869/JP/2012_ Kirodi Mal Modi Vs. ACIT confirmed the rate of 8% in the order dated 13/07/2005 for the A.Y. 1994-95 and 1995-96 in ITA No. 288/01 and 349/99 respectively holding that past record of the assessee suggests to apply net profit rate of 8%. After considering the various case laws and past history of the case, the ld Assessing Officer applied net profit rate @ 8% on disclosed turnover subject to depreciation on the basis of past history of the case but allowability of interest, the ld Assessing Officer did not allow the interest by considering the assessee's legal submission in the case of CIT Vs. Bhawan Path Nirman (Bohra) and Co. (supra). The interest was not allowed in past also, accordingly, she did not allow the interest. After applying the NP rate of 8%, the ld Assessing Officer determined the contract income at Rs. 7,20,90,040/-. She further observed that there was a violation of Section 40(a)(ia) of the Act for making payment without deduction of tax -Rs. 1,07,896/-, penalty disallowed- Rs. 1,96,478/- and donation- Rs. 3,79,850/-. 2.1 The ld Assessing Officer further observed that there was a survey U/s 133A of the Act on the assessee's premises on 14/7/2011, during which very incriminating documents were found and impounded. As per Annexure-A/1, which was an Ultra-tech cement 9 ITA 815 & 869/JP/2012_ Kirodi Mal Modi Vs. ACIT diary, there were some entries which depicted cash payments by the assessee to his sub contractor Shri Birbal Singh Shoora. During the survey proceedings, assessee was inquired about the nature of transactions mentioned in the diary and to verify the same from his books of account. Statement U/s 133A of the Act was recorded, which has been reproduced by the Assessing Officer on page No. 17 of the assessment order. On the basis of this statement and incriminating documents found, the assessee admitted additional income of Rs. 17,05,800/- for the F.Y. 2008-09. The assessee had not revised the return for disclosing this additional income admitted during the course of survey, therefore, she asked to explain the reasons and also proposed to make addition on account of disclosure made by the assessee during the survey proceedings. The ld AR submitted that at the time of survey, the assessee could not verify the entries from the regular books of account but after verification of the account, it was found by him that these entries referred in the statement U/s 133A for disclosure, had been entered in the regular books of account. Therefore, the additional income thus admitted by the assessee, has not been considered by revising the return. The assessee's reply was not found convincing to her. However, she has not made addition of 10 ITA 815 & 869/JP/2012_ Kirodi Mal Modi Vs. ACIT Rs. 17,05,800/- as net profit rate had been applied and not separate addition was made by her.
2.2 The assessee had claimed joint venture charges of Rs. 86,06,107/- as expenditure in the schedule 14 of the audit report under the head direct cost. The Assessing Officer asked to give justification on the allowability of the joint venture charges. It was submitted by the assessee that joint venture charges were paid to M/s Maruti Nandan Colonizers Pvt. Ltd. under the financial joint venture held with the company for financial assistance provided by the company to the assessee and submitted a copy of the joint venture agreement. The ld Assessing Officer after verification of the joint venture agreement, concluded that this agreement was just on paper and in reality there is no existence of any joint venture. The detailed reasoning had been given by the Assessing Officer on page 15 and 16 of the assessment order from serial No. 1 to 8 and finally concluded that the joint venture agreement is only on paper and during the relevant year, there was no joint venture in reality. Whatever payments made to M/s Maruti Nandan Colonizers Pvt. Ltd. was actually interest on the money lent by it to the assessee. Since it was actually interest 11 ITA 815 & 869/JP/2012_ Kirodi Mal Modi Vs. ACIT payment, which was liable to TDS U/s 194A of the Act and the assessee did not make any TDS at all for the same and are disallowable U/s 40a(ia) of the Act but no separate addition was made by the Assessing Officer as net profit rate had been applied and this addition was treated as covered under the addition made by applying N.P. rate.
3. Being aggrieved by the order of the Assessing Officer, the assessee carried the matter before the learned CIT(A), who had enhanced the income of the assessee by observing as under:-
"I have carefully perused the order of the Assessing Officer and the submissions of the AR and the following facts emerge in the case of the assessee:
1. The assessee has not been maintaining any books of accounts from A.Y. 2003-04 if not earlier.
2. The assessee's case has regularly been picked up for scrutiny, his books of accounts have been rejected by invoking provisions of Section 145(3) and the matter has gone up to the Hon'ble ITAT, Jaipur Bench. The Hon'ble ITAT Jaipur Bench has consistently upheld the rejection of the books of accounts in the case of the assessee but has relied on the finding of Hon'ble jurisdictional High Court in the case of Gotan Khanij Udyog Pvt. Ltd. Vs. CIT to hold 12 ITA 815 & 869/JP/2012_ Kirodi Mal Modi Vs. ACIT that the past history of the case is the best guide for estimation of profit of the assessee.
3. Survey operations U/s 133A were carried out at the business premises of the assessee on 14/07/2011 wherein various incriminating documents were found and impounded. As per these documents it was found that the assessee has been violating the specific provisions of Income Tax Act and has also been suppressing his taxable income in the previous assessment years.
In short, the assessee has intelligently taken advantage of the judicial history in his case to deliberately violate the provisions of the Income Tax law and evade taxes. Year after year he has not made any attempt to maintain any books of accounts in order to prevent the Department from verifying his real profits. He has taken advantage of the judicial pronouncements in his case to declare profits on an average ranging from 6.06% to 6.73% as per his convenience rather than the actual profits earned by him and every time has taken refuge in the finding of the Hon'ble ITAT, Jaipur Bench that his past history should be considered for estimating his profits. Given the evidence gathered by the Department during the course of survey proceedings, it is seen that the judicial pronouncements regarding reliance on past history for determining the GP in his case would no longer be applicable because the facts of his case during this A.Y. are different from the previous A.Ys. and 13 ITA 815 & 869/JP/2012_ Kirodi Mal Modi Vs. ACIT also are different from the facts of the case of Gotan Khanij Udyog Pvt. Ltd. Vs. CVIT 256 ITR 243.
I do not agree with the A.O. that reliance should be placed on section 44AD for estimating the NP of the assessee in view of the finding of the Hon'ble Jurisdictional High Court in the case of Shri Ram Jhanvarlal Vs. ITO 321 ITR 400, wherein it has been held that section 44AD is applicable only in cases where contractor's receipts do not exceed Rs. 40,00,000/-. Since the past history of the assessee is not reliable given the evidence gathered during the course of survey proceedings, he was asked to show cause why the profit rate may not be estimated on the basis of subsequent year that is A.Y. 2011-12 wherein the profit rate was 10.26% as against 6.46% declared by him during this A.Y.. A detailed reply was furnished by the AR wherein it was submitted that in A.Y. 2011-12 the proprietory concern had been converted into a partnership firm and there would be an increase in profit rate by 1.37% due to non debiting of the joint venture charges. It was also mentioned that there would be differences in profit rates due to change in rate of bitumen.
I have considered the reply of the AR and find it partly acceptable and give an allowance of 1.37% on account of non debiting of joint ventures charges. However, the detailed submissions regarding the change in the prices of bitumen influencing the profit rate cannot be verified because of the lack of proper records. In the absence of any records it is not 14 ITA 815 & 869/JP/2012_ Kirodi Mal Modi Vs. ACIT known what was the percentage of input of the component of bitumen in the overall cost and the exact amount of consumption and how much of it influenced the profit rate. The exercise undertaken by the AR is a hypothetical conjecture in the absence of any supporting books of accounts, bills and vouchers in the case of the assessee. A set off is given of 1.37% (due to non debiting of joint venture charges) from the profit rate of 10.26% in A.Y. 2011-12. Thereafter, the net profit rate before depreciation and interest is estimated at 8.89%. The A.O. is directed to calculate the profit of the assessee at rate of 8.89% on total contractual receipts of Rs. 1,20,09,79,663/- before depreciation and interest allowable of Rs. 43,94,830/-."
Further the ld CIT(A) has held for payment made to M/s Maruti Nandan Colonizers Pvt. Ltd. as joint venture charges as under:-
"I have carefully perused the order of the A.O. and the submissions of the AR and find that the matter is covered by the CIT(A) in the case of the assessee in A.Y. 2008-09 vide her order dated 07/06/2011, ITA No. 438/10-11. After a detailed discussion from pages 8 to 10 of this order the following findings was given:
"The Joint Venture contract is for profit sharing and the share of profit of a Venturer cannot be debited in P&L account. Therefore, Rs. 65,04,574/- being payment as per Joint Venture 15 ITA 815 & 869/JP/2012_ Kirodi Mal Modi Vs. ACIT agreement debited by the assessee in his P&L account is to be disallowed. The Financial Reporting of Interests in Joint Venture is governed by Accounting Standard (AS) 27 w.e.f. 01/04/2002 issued by Council of ICAI. While the Joint Venture Agreement has been drawn as per these guidelines the financial reporting has not been done accordingly by the assessee.
The A.O. may consider calling for the return and financial statements as per AS 27 of the Joint Venture. The NP on contract turnover may be determined as discussed in para 3.3 and 3.4 and after allowing depreciation and interest, the income of the Joint Venture be taxed as on AOP."
Since the facts of the case are the same as in A.Y. 2008-09 regarding this ground of appeal, and the A.O. has not brought on record any argument or evidence to controvert the finding of CIT(A) vide her order supra the matter is covered by this finding. Therefore, the A.O. is required to call for the return and financial statements as per the AS 27 of the Joint Venture and the income of the joint venture is to be taxed as AOP. The amount of Rs. 86,06,107/- is to be disallowed as a claim of expenditure while calculating the profits of the contract business of the assessee."
4. Now the assessee is in appeal before us.
5. The learned A.R. of the assessee has submitted as under:-
16 ITA 815 & 869/JP/2012_ Kirodi Mal Modi Vs. ACIT "1. At the outset we may point that the gross contract receipts is around 24% higher than the last year. Therefore, the N.P. Rate of 8% applied by the AO and 8.89% directed to be applied by the Ld. CIT(A) is without considering the increase in the receipt and the past history. The position of N.P. rate declared by the assessee, applied by the AO and upheld by the CIT(A)/ITAT in earlier years is as under:-
A.Y. Gross Contract N.P. Rate N.P. Rate N.P. Rate Paper Receipts declared by applied by AO applied by Book PB assessee CIT(A) & (before dep. upheld by ITAT and interest) (before depreciation and interest) 2009-10 1,20,09,79,663/- 6.46% 8% (subject to 8.89% Present depreciation) Appeal 2008-09 96,53,57,927/- 6.06% 8% 7.2% by CIT(A) PB 64-65, 7% by ITAT Para 7 2007-08 93,96,06,963/- 6.97% 8% 7.2% PB 41-42, Para 6 and
6.1 2006-07 66,75,57,202/- 7.02% 8% 7.1% PB 47, Para 6 2005-06 42,07,54,436/- 6.73% 8% 7.2% PB 49-50, Para 5
- Hon'ble ITAT in A.Y. 05-06 in applying the N.P. rate, by relying on the decision of Rajasthan High Court in case of Shree Ram Jhanwar Lal Vs. ITO 10 DTR 229 held that where gross receipt of a contractor exceed Rs. 40 lacs, section 44AD cannot be applied. This is followed in A.Y. 06-07 and 07-08.
- The comparison made by the AO with A.Y. 1994-95, 1995-96 for application of the net profit rate is irrelevant. The comparison should be made with immediate past and not distant past. Hon'ble ITAT in A.Y. 2005-06 considered this aspect while 17 ITA 815 & 869/JP/2012_ Kirodi Mal Modi Vs. ACIT uploading net profit rate of 7.2% and this had been followed in the assessee's own case in the A.Y. 2006-07 & 2007-08. In the A.Y. 2008-09, the Hon'ble ITAT has considered the case of Hon'ble Rajasthan High Court in the case of Kansara Bearings P. ltd. v. Assistant Commissioner of Income Tax (2004) 270 ITR 235 in holding that the best method of estimating the income on the contractual receipt would be past history of the assessee himself and applied the net profit rate of 7% subject to depreciation and interest to third parties. Hence, the income estimated by the AO in applying the net profit rate of 8% is unjustified.
- In the past, as stated in the table above, the Hon'ble ITAT has directed the application of net profit rate of 7.0% to 7.2% before depreciation and finance charges. In A.Y. 2008-09, net profit rate of 7% before depreciation and interest was upheld by Hon'ble ITAT. However, this year considering the increase in the turnover from Rs.96.53 crores to Rs.120.02 crores, the net profit rate of 6.46% declared by the assessee is reasonable and the AO be directed to accept the same.
2. The CIT(A) has directed to apply n.p. rate of 8.89% subject to depreciation and interest. For application of N.P rate of 8.89%, she has taken the n.p. rate of 10.26% before depreciation and interest declared by the assessee in AY 2011-12, the return of which is filed after survey as the basis. The assessee has explained that n.p. rate of 10.26% declared in AY 2011-12 cannot be applied in AY 2009-10 for which detailed reasons 18 ITA 815 & 869/JP/2012_ Kirodi Mal Modi Vs. ACIT were given as reproduced by CIT(A) at Pg 5-7 of the order. It was specifically pointed out that in AY 2011-12 there was no claim of joint venture charges, that there is variation in price of Bitumen/High speed diesel and that the gross receipt in AY 2011-12 declined to Rs.62.92 crores as compared to Rs.120.02 crores in AY 2009-10. The effect of the same was also demonstrated in form of a table according to which the adjusted n.p. rate before depreciation and interest in AY 2009-10 is worked out at 8.02% as compared to 8.29% in AY 2011-12. The CIT(A) accepted the adjustment on account of joint venture charges but did not accept the adjustment on account of Bitumen by stating that the same cannot be verified because of the lack of proper records ignoring that in respect of variation in the rates, assessee has filed detailed working supported by the evidences which is placed at PB 9A-12A. Therefore, application of n.p. rate of 8.89% by CIT(A) without considering the effect of the cost of Bitumen is unjustified and uncalled for. If the effect of the same is considered, the n.p. rate of AY 2011-12 is comparable with that of the year under consideration. Otherwise also the finding in survey for a subsequent year cannot be a basis for making an addition for earlier years as held by Hon'ble Banglore Bench in the case of Anjaneya Brick Works Vs. ACIT (Inv.) 74 TTJ 921 (Bang.) and therefore based on the n.p. rate of AY 2011-12, the n.p. rate of AY 2009-10 should not be estimated.
19 ITA 815 & 869/JP/2012_ Kirodi Mal Modi Vs. ACIT
3. The Ld. CIT(A) has directed the AO to apply a N.P. rate of 8.89% subject to depreciation and interest. This has resulted in the enhancement of income by Rs.62,93,889/-. The enhancement is made without issuing any specific show cause notice as required by section 251 of the Act. Sub section 2 to Section 251 reads as under:
"The Commissioner (Appeals) shall not enhance an assessment or a penalty or reduce the amount of refund unless the appellant has had a reasonable opportunity of showing cause against such enhancement or reduction".
Therefore, before enhancing the assessment, CIT(A) is required to issue show cause notice to the assessee against such enhancement. The assessee has not been issued any show cause notice required u/s section 251 of the Income Tax Act, 1961. Without issue of such show cause notice, the enhancement to the income made by CIT(A) is illegal and bad in law. For this reliance is placed in case of Gedore Tools (P.) Ltd. Vs. CIT 238 ITR 268 (Delhi) (HC). In view of this legal position enhancement to the income made by CIT(A) be directed to be deleted.
4. We may also submit that the net profit rate of 6.46% declared by the assessee is after considering the joint venture charges of Rs. 86,06,107/-. If this is not considered the net profit rate is worked out at 7.17%. The joint venture charges is a separate and independent cost to the contract towards the return to the venture for the time, efforts, funds provided by him. Considering this fact, 20 ITA 815 & 869/JP/2012_ Kirodi Mal Modi Vs. ACIT the net profit rate of 7.17% is in conformity with the past performance of the assessee. Therefore, the rate declared by the assessee should be accepted and the addition made by the AO and that enhanced by CIT(A) be deleted.
5. The department has challenge the allowability of interest payment of Rs.43,94,830/-. It may be noted that in earlier years, Hon'ble ITAT has held that interest is to be allowed separately after the application of n.p. rate considering the decision of CIT Vs. Bhawan Path Nirman (Bohra) & Co. 258 ITR 431 & 440 (Raj). Therefore, the ground of the department be dismissed.
With regard to the Joint venture expenses, the AR has submitted as under:-
1. The payment of Rs. 86,06,107/- to M/s Maruti Nandan Colonizers Private Limited is towards joint venture charges. As per agreement, it has contributed a sum of Rs.1500 lacs into joint venture as security deposit on which no interest is payable. It has further appointed Chief Operating officer, who shall have the overall control for the purpose of execution of the contracts awarded to M/s Brahm Prakash Modi and Supervisor to supervise the project site. The cost of these personnel is not be borne by the assessee. It has a sharing in profit as well as in loss. Thus this is an arrangement whereby assessee received fund of Rs.1500 lacs from Maruti Nandan Colonizers without interest and against which it has to pay only the JV charge as per the agreement. This payment is a charge to the P&L A/c and therefore it is allowable business expenditure and not a 21 ITA 815 & 869/JP/2012_ Kirodi Mal Modi Vs. ACIT simple finance transaction. It does not attract any of the provision of TDS and therefore it is a specific charge, it ought to be separately allowed from N.P. rate applied in assessing the income of the assessee.
2. It may be noted that assessee has reduced its cost by entering into joint venture transaction. From the copy of the account of M/s Maruti Nandan Colonizers Private limited in the books of assessee, it can be noted that a sum of Rs. 16,58,72,534/- remained interest free with the assessee. The simple interest @ 12% on this amount, works out to Rs.1,99,04,704/-. As against this, the assessee paid only Rs. 86,06,107/- as joint venture charges as per the terms of the agreement. If this is in the nature of interest than why the second party will agree to receive joint venture charges of Rs.86,06,107/- only as against simple interest of Rs.1,99,04,704/-.
Rather, the assessee saved expenditure to the extent of Rs.1,12,98,579 (1,99,04,704 -86,06,107). Therefore, the disallowance made by the AO by treating the same as finance charge is incorrect.
3. The AO has incorrectly held this arrangement as a finance arrangement by not appreciating the various terms and condition of the agreement. The CIT(A) has therefore not accepted the finding of the AO that it is simply a finance arrangement. However, at the same time, she has incorrectly observed that it is only a contract for profit sharing ignoring that the payment of 10% of the profit is made to Maruti Nandan Colonizers Pvt. Ltd. as it has appointed a Chief Operating Officer and Supervisor whose salary and 22 ITA 815 & 869/JP/2012_ Kirodi Mal Modi Vs. ACIT administrative expenses is borne by it. Further, it has also placed substantial deposit with the assessee on which no interest is paid. AS-27 as referred by CIT(A) is not at all applicable on such arrangement nor the amount of Rs. 86,06,107/- can be taxed as income of AOP which is exclusively paid to Maruti Nandan Colonizers Pvt. Ltd.
The ld AR further relied on the decision of the Hon'ble ITAT, Jaipur Bench in assessee's own for A.Y. 2008-09 in ITA No. 697/JP/2011 and 776/JP/2011 order dated 05/09/2014 and has drawn our attention on paragraph No. 13 page 19 and argued that this interest expenses is allowable.
6. At the outset, the ld DR has vehemently supported the order of the ld CIT(A) and argued that the ld CIT(A) has given reasoned order on this issue by applying NP rate @ 8.89% before depreciation and interest allowable of Rs. 43,94,830/-. The ld DR also argued that interest expenses claimed on account of joint account contract with M/s Maruti Nandan Colonizers Pvt. Ltd. is to be assessed as per direction of the ld CIT(A) as AOP. The amount of Rs. 86,06,107/- is to be disallowed as a claim of the expenditure while calculating the contract profit of the business of the assessee.
23 ITA 815 & 869/JP/2012_ Kirodi Mal Modi Vs. ACIT
7. We have heard the rival contentions of both the parties and perused the material available on the record. The ld Assessing Officer applied N.P. rate @ 8% and joint venture made with M/s Maruti Nandan Colonizers Pvt. Ltd. was held as Shan. However, the ld CIT(A) applied NP rate @ 8.89%. During the year under consideration, the assessee total turnover was 120.09 crores as against 96.59 crores in preceding year. The assessee has shown NP rate @ 6.46% in year under consideration, which was 6.06% in preceding year before depreciation and interest. The ld CIT(A) had applied NP rate in A.y. 2008-09 @ 7.2% whereas this Bench has decided NP rate at 7% before depreciation and interest paid to third party at Rs. 43,94,830/-. It is a fact that 8% NP rate can be applied in a case of contractor where gross receipts does not exceed Rs. 40 lacs U/s 44AD of the Act. In assessee's case as discussed above, total turnover was Rs. 120.09 crores during the year under consideration, therefore, Section 44AD cannot be applied as held by the Hon'ble Rajasthan High Court in the case of CIT Vs. Bhawan Path Nirman (Bohra) and Co. (supra). The comparison of NP rate should be made with immediate 2 to 3 preceding years not much earlier assessment year. The best method of estimating of income on the contractual receipt is only past history 24 ITA 815 & 869/JP/2012_ Kirodi Mal Modi Vs. ACIT except exceptional variation in the activity of the assessee compared to past. The ld CIT(A) had also not given any show cause notice before enhancing the income of the assessee, which has been held by the Hon'ble Delhi High Court as illegal and bad in law. Reliance is placed on the decision in the case of Gedore Tools (P) Ltd. Vs. CIT (supra) is squarely applicable. There was a survey in the case of assessee on 14/07/2011 and incriminating documents were found during the course of survey. On that basis, the assessee had admitted additional income of Rs. 17,05,800/- but the ld Assessing Officer had not made separate addition on account of disclosure made by the assessee. The assessee also had explained that after verification of the books of account, the disclosure made was not warranted as these discrepancies were not found when verified from the regular books of account after survey, therefore, no revised return was filed by the assessee. Keeping in view of the past history and our own decision in A.Y. 2008-09 we are of the considered view that the N.P. rate @ 7% is reasonable on turnover of Rs. 120.09 crores. No separate addition is required to be made on various additions proposed by the Assessing Officer in her assessment order. We further considered the argument made on joint venture expenses but no separate addition was made by the Assessing Officer.
25 ITA 815 & 869/JP/2012_ Kirodi Mal Modi Vs. ACIT We have already considered the other additions proposed by the Assessing Officer in deciding the net profit rate in contract business. Therefore, we confirm the order of the ld CIT(A) on this issue. Even the assessee succeed on this ground on merit, the income of the assessee goes in minus, which cannot be allowed in view of the Hon'ble Supreme Court decision in the case CIT Vs. Shelly Products & Ors. 261 ITR 367. Accordingly ground No. 1 of the assessee's appeal is allowed partly and ground No. 2 is dismissed.
8. Now we are deciding the revenue's appeal. The sole ground of appeal is against allowing the interest payment at Rs. 43,94,830/- to be deducted despite the fact that the interest income shown has been assessed as income from other sources. The ld Assessing Officer estimated the income on contract business @ 8% subject to depreciation. She further observed that the assessee also claimed interest after net profit rate in computation of income of contract business for which he relied upon the decision of Hon'ble Rajasthan High Court in the case of CIT Vs. Bhawan Path Nirman (Bohra) and Co. (supra), which was not held applicable in the case of assessee on the ground that there was a past history of allowing of the interest and 26 ITA 815 & 869/JP/2012_ Kirodi Mal Modi Vs. ACIT depreciation in the case of CIT Vs. Bhawan Path Nirman (Bohra) and Co. (supra) from income determined by applying NP rate whereas in the case of assessee, interest has not been allowed by the Assessing Officer while applying NP rate in previous year following the previous history interest was not allowed in this year.
9. The assessee challenged the issue of net profit rate applied by the Assessing Officer as well as not allow the interest expenses at Rs. 43,94,830/- and bank charges of Rs. 13,78,860/- before the ld CIT(A), who had applied NP rate @ 8.89% on receipt of Rs. 1,20,09,79,663/- before depreciation and interest allowable of Rs. 43,94,830/-.
10. Now the revenue is in appeal before us. The ld DR supported the order of the Assessing Officer. At the outset, the ld AR of the assessee submitted that in earlier year, the Hon'ble ITAT had held that interest is being allowed separately after the application of NP rate considering the decision of CIT Vs. Bhawan Path Nirman (Bohra) and Co. (supra). Therefore, he prayed to dismiss the revenue's appeal.
11. We have heard the rival contentions of both the parties and perused the material available on record. This Bench has decided in 27 ITA 815 & 869/JP/2012_ Kirodi Mal Modi Vs. ACIT assessee's own for A.Y. 2008-09 in ITA No. 697/JP/2011 order dated 05/09/2014 wherein we have confirmed the NP rate @ 7% subject to depreciation and interest to third party. Accordingly we dismiss the revenue's ground on this issue.
12. In the result, appeal of the assessee is partly allowed and revenue's appeal is dismissed.
Order pronounced in the open court on 24/07/2015.
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vkns'k dh izfrfyfi vxzsf'kr@Copy of the order forwarded to:
1. vihykFkhZ@The Appellant- Shri Kirodi Mal Modi, Jaipur
2. izR;FkhZ@ The Respondent- The ACIT, Circle-2, Jaipur
3. vk;dj vk;qDr@ CIT
4. vk;dj vk;qDr¼vihy½@The CIT(A)
5. foHkkxh; izfrfuf/k] vk;dj vihyh; vf/kdj.k] t;iqj@DR, ITAT, Jaipur
6. xkMZ QkbZy@ Guard File (ITA No. 815 & 869/JP/2012) vkns'kkuqlkj@ By order, lgk;d iathdkj@Asst. Registrar