Income Tax Appellate Tribunal - Amritsar
National India Construction Co,, ... vs Department Of Income Tax on 15 June, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
AMRITSAR BENCH; AMRITSAR
BEFORE SH. A.D.JAIN, JUDICIAL MEMBER AND
SH. T.S. KAPOOR, ACCOUNTANT MEMBER
I.T.A Nos.81,82(Asr)/2015
Assessment Years:2010-11 & 2011-12
M/s National India Vs. Addl. CIT
Construction Co., Range, VI
Shop No.52, Near SDM Court, Pathankot.
Dalhousie Road, Pathankot.
PAN:AAEFN-3826D
(Appellant) (Respondent)
I.T.A No.113(Asr)/2016
Assessment Year: 2012-13
Income Tax Officer Vs. M/s National India Construction
Ward-2, Pathankot Co.,
Pathankot. Shop No.52, Near SDM Court,
Dalhousie Road, Pathankot.
PAN:AAEFN-3826D
PAN: PAN:AAEFN-3826D
(Appellant) (Respondent)
Appellant by: Sh. J.S Bhasin (Adv.)
Respondent by: None.
Date of hearing: 13.06.2016
Date of pronouncement: 15.06.2016
ORDER
PER T.S.KAPOOR (AM):
These are three appeals relating to Asst. Years 2010-11, 2011-12 & 2012-13. The ITA Nos.81 & 82 (Asr)/2015 has been filed by assessee against the consolidated order of CIT(A)-II, Amritsar, dated 2.12.2014 2 ITA Nos.80,81&113 (Asr)/2015& 2016 Asst. Years: 2010-11 to 2012-13 and ITA No.113(Asr)/2016 has been filed by Revenue against the order of CIT(A)-II, Amritsar, dated 4.11.2015.
2. In ITA Nos.81 & 82 (Asr)/2015, the assessee has taken the similar grounds of appeal and only differences are due to figures. The issues raised by assessee is the action of learned CIT(A) by which he had upheld the application of 10% of net profit rate and has also upheld the action of learned Assessing Officer of separately making addition of interest on fixed deposits receipts which were claimed to have been held as business assets. The assessee is also aggrieved with the denial of depreciation claim from the profits worked out by estimation on % age basis.
3. In ITA No.113(Asr)/2016, the Revenue is aggrieved with the action of learned CIT(A) by which he had reduced the application of rate of 10% to 8% and is also aggrieved with the action of learned CIT(A) by which he had allowed depreciation from the estimated income.
4. None was present on behalf of Revenue and neither any application for adjournment was filed by Revenue, therefore, it was decided to proceed ex-parte qua Revenue.
5. The brief facts of the case as noted in the assessment order are that assessee is a Govt. Contractor. The case of the assessee was selected for scrutiny. The Assessing Officer, during the course of assessment proceedings observed various discrepancies in the books of accounts, therefore, he rejected the books of accounts and estimated the income of assessee after applying 10% of profit to gross receipts. The Assessing 3 ITA Nos.80,81&113 (Asr)/2015& 2016 Asst. Years: 2010-11 to 2012-13 Officer, further made addition on account of interest on fixed deposits. The learned CIT(A) in assessment year 2010-11 and 2011-12 upheld the action of Assessing Officer whereas in Asst. Year 2012-13 the learned CIT(A) reduced the rate of 10% to 8% and also allowed the claim of depreciation from the estimated income but upheld the separate addition which the Assessing Officer had made on account of interest on fixed deposits.
6. Aggrieved with the orders, both parties are in appeal before us.
7. These appeals were heard together and therefore, for the sake of convenience a common and consolidated order is being passed.
8. At the outset, the learned AR invited our attention to the appeal filed by Revenue in Asst. Year 2012-13 and submitted that learned CIT(A) in this year had reduced the rate of estimation of 10% to 8% after going through the various submissions of assessee and after analyzing the various figures and ratios of various expenses to gross receipts and in this respect our attention was invited to page 6 to 10 of learned CIT(A)'s order. It was submitted by him that rate of 8% is acceptable to the assessee in the Asst. Year 2010-11 & 2011-12 also provided claim of depreciation is allowed to the assessee. As regards the issue of taxation of interest income as separate income the learned AR submitted that once books of accounts were rejected the same books of accounts can not be relied upon to make separate addition of interest income. Reliance in this respect was placed on the case law of Daljit Singh & Bros. in ITA 4 ITA Nos.80,81&113 (Asr)/2015& 2016 Asst. Years: 2010-11 to 2012-13 201(Asr)2002 decided by Amritsar Bench vide its order dated 14.11.2002. Therefore, it was prayed that the appeal of Revenue be dismissed and appeals of assessee be allowed.
9. On a question from Bench as to why not these cases be restored to Assessing Officer for fresh assessment in view of the decision of Punjab & Haryana High Court in the case of Telelinks vs. CIT, Bathinda, the learned AR submitted that learned CIT(A) in Asst. Year 2012-13 has considered all relevant parameters and therefore, there is no point in sending back the cases to Assessing Officer.
10. We have heard the learned AR and have gone through the material placed on record. We find that in the three years the assessee continues to be in the same business as Govt. Contractor and Assessing Officer in these three years rejected the books of accounts and applied net profit rate of 10% in Asst. year 2010-11 & 2011-12 by holding as under:
"This state of affair cannot be accepted and in view of same application of past profit rate in this case will not be correct as this will give leeway to the assessee to report any income and get away with estimated profit. In view of above mentioned reasons, in the present case, as AO has found certain unverified expenses and unverifiable labour and wage expenses, and in view of same estimation of profit at 10 per cent is justified. The AO has compared the case of assessee with M/s Shivam Construction V/s CIT-3 Ludhiana in ITA no. 167 of 2007, where net profit rate of 10% was confirmed by Hon'ble jurisdictional High Court. The AO has quoted another case of Hon'ble ITAT Chandigarh of M/s ESS ESS Builders Private Limited in ITA no. 707/Chd/1997 and M/s Agarwal construction in ITA No 387 & 490/Chd/2004 where income was determined at 12 per cent of contract receipt. It was further mentioned that application of rate of 12 per cent on the contract receipt has been upheld by Hon'ble jurisdictional high court also. In my opinion, particular facts of the case cannot be compared with any other case as circumstances and situations have been different, even for the same assessee. Civil 5 ITA Nos.80,81&113 (Asr)/2015& 2016 Asst. Years: 2010-11 to 2012-13 construction work varies from year to year on the basis of specific site conditions. However, it is established practice in various Govt. Departments to estimate cost of any project by crying out detailed item wise valuation and on that cost an estimated profit of 10 per cent is added to arrive at estimated cost of the project to the said department. Thus, in general 10 per cent profit in civil construction work is taken as norms. Civil contractor can earn more or less than norms depending upon situation. Normally all contractors prepare their estimate in their own way by making their own estimate of cost and profits. If a contractor produces his estimate which he has submitted to the department and expenditure for each unit of work regarding why his cost has gone up or down, it will not be difficult for the AO to accept arrived net profit which may be less or more than the established norm of 10 per cent. However in the present cases the assessee has not submitted even details submitted to various departments regarding each project far less submitting his own internal documents of such estimates in this regard. In absence of such details, present facts cannot be compared with earlier year facts of the assessee's own case and in view of same past year net profit cannot be applied. The Hon'ble Punjab & Haryana High court has also observed in ITA No. 163 of 2014 in order dated 15.09.2014 that if there are change in circumstances, a separate profit rate can be applied to the assessee case. In view of above decision, it is clear that assessee's current year facts cannot be compared with earlier year case in quality of nature of work and also in respect of huge quantum of unverifiable and bogus expenses.
Hon'ble Supreme Court has held in the case of CST V/s H.M. Esuf Ali H.M. Abdul Ali 191 ITR 271 (SC) that the AO is the best judge of the situation and CIT(A) cannot substitute her judgment for that of the AO unless there were compelling reason for doing so. The Hon'ble Supreme Court further observed that estimation always have some guess work and in quasi judicial authority must record reasons for not accepting the AO's estimate. The Hon'ble P & H High Court has said in the case of CIT V/s Palwal Co- operative Sugar Mills Limited 284 ITR 153 (P &H) as under:
"Every judicial/quasi-judicial body/authority must pass a reasoned order which should reflect the application of mind of the concerned authority to the issues/points raised before it. The requirement of recording reasons is an important safeguard to ensure observance of the rule of law. It introduces clarity, checks the introduction of extraneous or irrelevant considerations and minimizes arbitrariness in the decision making process. Another reason which makes it imperative for quasi-judicial authorities to give reasons is that their orders are not only subject to the right of the aggrieved persons to challenge them by filing statutory appeal land revision but also by filing wit petition under article 226 of the Constitution. Such 6 ITA Nos.80,81&113 (Asr)/2015& 2016 Asst. Years: 2010-11 to 2012-13 decisions can also be challenged by way of appeal under article 136 of the Constitution of India. The High Courts hve the power to issue writ of certiorari to quash the orders passed by quasi-judicial authorities/Tribunals. Likewise, in appeal the Supreme Court can nullify such order/decision. This power of judicial review can be effectively exercised by the superior courts only if the order under challenge contains reasons. If such order is cryptic and devoid of reasons, the Courts cannot effectively exercise the power of judicial review. "
The issue of providing depreciation from the estimated net profit has been dealt by jurisdictional High Court in the case of Surender Pal Nayyar 177 Taxmann 207 (P & H) and also in the case of CIT V/s Gian Chan labour Contractor 316 ITR 127 (P &H), it was observed that no further separate deduction is allowable as per Section 29, 144 and 145 of the Act. The relevant Section of the judgment read as under:
"Section 145 of the Income Tax Act, 1961 provides for computation of income under section 29 on the basis of books of account and methods of accounting regularly followed by the assessee. However, where the Assessing Officer is not satisfied with the correctness or completeness of the books, he may reject them and estimate the income to the best of his judgment in accordance with the provisions of Section 144 of the Act. When an estimate is made to the best judgment of an Assessing Officer, he substitutes the income that is to be computed under section 29 of the Act. Once best judgment assessment is made by fixing a rate of net profit, the assessee's claim for deduction on account of expenses cannot be deemed to have been ignored. The net profit rate is applied after taking into consideration all factors and it accounts for all the deductions which are referred to under section 29 and are deemed to have been taken consideration while making such estimate. "
These all decisions were discussed by Hon'ble Allahabad High Court in his latest judgment (2013) of CIT-1 V/s Sahu Construction Private Limited in ITA No. 44 of 2009. The Hon'ble High Court has also taken into consideration that CBDT circular no 29-D(XIX-14) dated 31.08.1965 is not applicable as the rule 5AA of the Income Tax rule has been amended with effect from 02.04.1987. It was observed:-
'Firstly, the circular no 29D dated 31.08-1965 which prescribed to allow depreciation out of the estimated profit, is not applicable, as the Rule 5AA of the income Tax Rules has been omitted with effect from 2.04.1987. This aspect was discussed by this High Court and it was observed in the case of CIT Vs Bishambhar Dayal Co. 210ITR 118(Alld) that the Income Tax appellate Tribunal relied upon a circular of the Central Board of Direct 7 ITA Nos.80,81&113 (Asr)/2015& 2016 Asst. Years: 2010-11 to 2012-13 Taxes No. 29D (xix) of 1965, F. No. 45/239/ 65-ITC, dated 31.03.1965. Under this circular, the Board had issued instructions that where income is proposed to be computed by applying a net rate and the assessee hs furnished the prescribed particulars for the claim in respect of depreciation, the depreciation should be allowed separately and deducted out of the gross profits. The order of the Income Tax appellate Tribunal is in conformity with the circular issued by the Central Board of Direct Taxes. No provision of the Income Tax Act was brought to our notice which makes the claim to depreciation inadmissible where the income is computed by applying the flat rate.
Secondly, subsequent to the Assessment Year 1994-95, in such matters the basic principle as enumerated in Section 44-AD of the Income Tax Act, 1961 is taken to be applicable wherein the matrix of estimation of profit on Gross receipts have been laid down for the civil construction work. The sub-section (2) of Section 44-AD reads under:
"Any deduction allowable under the provisions of Sections 30 to 38, for the purposes of sub-section (1), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed:
Provided that where the assessee is firm, the salary and interest paid to is partners shall be deducted from the income computed under sub-section (1) subject to the conditions and limits specified in clause (b) of section 40".' In view of above jurisdictional high court decisions and facts and circumstances of the case depreciation is not allowable on net profit estimation and this ground of appeal is rejected.
In view of the above ground No.1 to 10 of the appeal are dismissed."
11. However, in Asst. year 2012-13 the learned CIT(A) reduced profit rate to 8% and also allowed relief on account of depreciation. The learned CIT(A) in Asst. Year 2012-13 has distinguished the case law of Shivam Construction Company as relied upon by Assessing Officer and has held that in that case the assessee itself had estimated its net profit @ 10% of income whereas in the present case the assessee declared net profit 8 ITA Nos.80,81&113 (Asr)/2015& 2016 Asst. Years: 2010-11 to 2012-13 which ranged 5.3% to 5.8%. However the learned CIT(A) upheld the addition of interest on fixed deposits. The findings of learned CIT(A) for Asst. Year 2012-13 are reproduced below.
"I am in agreement with the appellant that the facts of the case of M/s Shivam Construction Company relied upon by AO were clearly distinguishable with that of the appellant. The AO has not brought the facts on record in the case of M / s Shivam Construction Co as to how the facts of that case were similar / identical to the facts of the present case of the appellant and therefore the ratio in the case of M/s Shivam Contruction Co cannot be applied straightaway in the case of the appellant.
In support of his grounds of appeal, the appellant had relied upon the following case laws:-
(i) Decision of Hon'ble ITAT, Amritsar in the case of Vidya Sagar Saini, Pathankot vs DCIT in ITA No. 80/2012 dated 13-02- 2013.
(ii) Decision of Punjab & Haryana High Court in the case of CIT vs Earth Tech Engineers in ITA No. 689 of 2013 dated 13-03-2014.
(iii) Decision of Hon'ble Punjab & Haryana High Court in the case of Tellinks vs CIT Bhatinda in ITA no. 269 of 2014 and 225 of 2014 dated 20-11-2014.
(iv) Decision of hon'ble ITAT, Amritsar in the case of ACIT vs Arihant Builders in ITA No. 401 (Asr) /2011.
(v) Decision of Hon'ble ITAT, Amritsar in the case of Construction Engineers Srinagar, Addl. CIT in ITA No.266/Asr/2010 for A.Y.2006-07.
(vi) Decision of Hon'ble ITAT, Chandigarh in the case of Jaswant Singh Contractor vs. ACIT, Circle Kurushetra in ITA No.1109/Chd/2011 dated 29.02.2012.
(vii) Decision of Hon'ble ITAT, Amritsar in the case of M/s Satish Aggrawal & Co. vs. Addl. CIT in ITA no. 483(Asr)/2013 dated 26.08.2013.
The past history of the last five years of the case of the appellant was as under:
AY Total Contract NP declared N P rate Additions made Payments declared made (Rs) 2008-09 54170909/- 1615750/- 2.98% Rs 90,000/-
disallowed 2009-10 47821200/- 1531742/- 3.20% Addition of Rs 130,000/-
2010-11 70743474/- 2494330/- 5.80% Books rejected
1
i and N P rate of
10% applied
2011-12 74539163/- 4126316/- 5.53% Books rejected
and N P rate of
10
9 ITA Nos.80,81&113 (Asr)/2015& 2016
Asst. Years: 2010-11 to 2012-13
2012-13 106342563/- 5884400/- 5.53% Books rejected
and N P rate of
10% applied
The books of account of the appellant were audited by the Chartered Accountant and the appellant had produced his cash book 8s ledger alongwith vouchers (but not complete vouchers) before the AO during the assessment proceedings. The labour expenses were not fully verifiable in absence of muster rolls/vouchers of payment of wages.
However in view of the above discussion and in my opinion, it would meet ends of justice to uphold the determination of net profit by applying the net profit rate of 8% of the gross contract receipts declared by the appellant and allow deduction of salary to partners and depreciation as claimed at Rs 32,37,428/- (discussed ground of appeal ho.3) thereafter. The AO is directed to modify the assessment order accordingly.
(iii) The ground of appeal no. 7 is against the disallowing the claim of depreciation at Rs 32,37,428/- as claimed by the appellant after applying the net profit rate. The AO had determined the net profit of the appellant by applying N P rate of 10% of gross contract receipts of Rs 10,63,42,563/- and did not allow the depreciation claimed. In the written submissions the appellant argued that the claim of depreciation is allowable in view of the following case laws -
(a) Decision of hon'ble Punjab & Haryana High Court in the case of Girdhari Lai vs CIT reported in (2002) 256 ITR 318 held that "where income was estimated by applying net profit rate, depreciation was allowable as per circular no. 29D dated 31-08-1965.
(b) Decision of hon'ble Rajasthan High Court in the case of Bharat Construction Co vs CIT reported in (2002) 258 ITR 140.
(c) Decision of hon'ble ITAT, Amritsar in the case of ITO vs Khosla Construction Co. dated 8 Dec, 2000.
It is not the case of the AO that the Assets on which depreciation of Rs 32,37,428/- had been claimed by the appellant were not put to use for the business purposes of the appellant. Even the board's circular No. 29D(XIX-14) dated 31-08-1965 duly supports the case of the assessee. 10 ITA Nos.80,81&113 (Asr)/2015& 2016
Asst. Years: 2010-11 to 2012-13 Even the following decisions support the claim of depreciation after applying net profit rate: -
(i) Decision of Hon'ble Supreme Court of India in the case of CIT vs Poddar Cement (P) Ltd reported in 226 ITR 625
(ii) Decision of Hon'ble Punjab & Haryana High Court in the case of CIT vs Fazilka Dabwali Tpt Co. (P) Ltd reported in (2004) 270 ITR 378
(iii) Decision of Hon'ble Punjab & Haryana High Court in the case of CIT vs Metalman Auto (P) Ltd., reported in 336 ITR 434.
The AO has not held anywhere in the assessment order stated that the assets on which the depreciation has been claimed by the appellant were not put to use for the business purposes of the appellant firm but for the personal use of the partners of the appellant firm.
It has been held by Hon'ble Punjab & Haryana High Court in the case of Lali Construction Co vs ACIT-cum Assessing Officer (2015) 229 Taxman 286 that depreciation is allowable from Net profits even if total income is computed by applying net profit rate. Several other hon'ble High Courts and the hon'ble Income Tax Appellate Tribunals have held likewise. Accordingly, in view of the above discussion, the AO is directed to allow the depreciation claimed at Rs 32,37,428/- from the Net profit determined by applying the Net profit rate of 8% of gross contract receipts declared by: the appellant (held above), and subject to the returned income .
(iv) The ground of appeal no. 8 is against the separate addition of interest of Rs 11,98,006/- earned on FDR shown as business income. In the written submission the appellant had not made any submission with respect to this ground of appeal.
The appellant had declared the interest on fixed deposits of Rs.11,98,006/- in his return of income. The said interest income of FDRs was not a part of the gross contract receipts of the appellant. Therefore, the AO was justified in making a separate addition of interest on FDRs of Rs.11,98,006/-. Accordingly the separate addition of interest of Rs.11,98,006/- on FDRs, shown as business income is upheld." 11 ITA Nos.80,81&113 (Asr)/2015& 2016
Asst. Years: 2010-11 to 2012-13 We are in agreement with the argument of learned AR and findings of learned CIT(A) in Asst. Year: 2012-13 wherein he has reduced the rate of profit to 8% from 10% and therefore, in Asst. Years: 2010-11 & 2011-12 we hold the rate of 8% instead of 10% and in view of the above, Ground No.2 to 4 in assessee's appeal are allowed whereas Ground No.1 is dismissed as not pressed.
12. As regards Ground No.5, in assessee's appeal regarding claim of depreciation we find that learned CIT(A) himself in Asst. Year: 2012-13 has allowed to assessee the claim of depreciation after analyzing various case laws and we are in agreement with his findings and therefore, Ground No.5 in both appeals is allowed.
13. As regards Ground No.6 regarding separate addition of interest on fixed deposits we find that Amritsar Bench of ITAT in the case of Daljit Singh and Bros (PKT),in its decision in ITA No.201(Asr)/2002 vide its order dated 14.11.2002, under similar facts and circumstances has held that once the books of accounts has been rejected the Assessing Officer cannot fall back upon the same books for making addition on account of interest accrued on the FDRs reflected in the books of account. The findings of the Hon'ble Bench as contained in para 6.6 are reproduced below.
"6.6 After considering the rival submissions and going through the material available on the record, it has been noticed that the Assessing Officer rejected the books of account of the assessee and applied a net profit rate of 8% on the gross receipts of the assessee. In other words, the Assessing Officer has not accepted the books results. On the other hand, he took the figure of Rs.2,94,700/- on account of interest accrued on FDRs as reflected by the assessee in the books of account. We, therefore find substantial force in this contention of the learned counsel for the assessee that once the books of account has 12 ITA Nos.80,81&113 (Asr)/2015& 2016 Asst. Years: 2010-11 to 2012-13 been rejected, the Assessing Officer cannot fall back upon the same books for making addition on account of interest accrued on the FDRs reflected in the books of account. It is well settled that when net profit rate is applied, all the income has been considered. It is also true that the Assessing Officer had not denied this fact that the FDRs were related to the business because he himself admitted that the assessee has reflected the interest accrued in the profit and loss account which was based on the books of account maintained by the assessee. We, therefore, considering the totality of the facts as discussed above, are of the view that the Assessing Officer was not justified in making separate addition on account of interest on FDR's when he had applied a net profit rate of 8% on the gross receipts for the full- year by invoking the provisions of Sec. 145 of the Income Tax Act, 1961. We, therefore, set aside the order of the learned CIT(A) on this issue and direct the Assessing Officer not to include the interest accrued on the FDR's amounting to Rs.2,94,700/- in the income of the assessee"
14. In view of the above, Ground No.6 in Asst. Year 2010-11 and 2011- 12 is allowed.
15. In view of the above, two appeals filed by assessee are partly allowed.
16. Now coming to the appeal filed by Revenue was in Asst. Year 2012- 13, we have already noted that learned CIT(A) had analyzed the P&L Account of assessee and has also analyzed the ratio of various expenses to gross receipts and has distinguished the case laws of Shivam Construction Compay and moreover, the application of 8% as profits of gross receipts is inconsonance with the provisions of section 44AD which prescribes application rate of 8% in case of a Contractor where books of accounts are not maintained.
17. In view of the above, Ground No.1 of Revenue's appeal is dismissed.
18. As regards Ground No.2 regarding allowing of deprecation after estimating the income by applying a ratio we find that the learned CIT(A) has relied upon the case law of Hon'ble Punjab & Haryana High Court in 13 ITA Nos.80,81&113 (Asr)/2015& 2016 Asst. Years: 2010-11 to 2012-13 the case of Lali Construction vs. ACIT, 229 Taxman 286 for allowing depreciation from the net profits even if the total income was computed by applying the net profit rate. The learned CIT(A),s order as reproduced earlier in this year is an exhaustive one and we are in agreement with his findings and therefore, Ground No.2 is also dismissed.
19. In view of the above, the appeal of Revenue in ITA 113(Asr)/2016 is dismissed.
20. In nutshell, the appeals filed by assessee are partly allowed, whereas the appeal filed by the Revenue is dismissed.
Order pronounced in the open Court on 15th June, 2016.
Sd/- Sd/-
(A.D. JAIN) (T. S. KAPOOR)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated:15.06.2016.
/PK/Ps.
Copy of the order forwarded to:
(1) The Assessee:
(2) The
(3) The CIT(A),
(4) The CIT,
(5) The SR DR, I.T.A.T.,
True copy
By order