Income Tax Appellate Tribunal - Jaipur
Chudhary & Brothers, Jaipur vs Acit, Jaipur on 30 June, 2017
vk;dj vihyh; vf/kdj.k] t;iqj U;k;ihB] t;iqj
IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR
Jh dqy Hkkjr] U;kf;d lnL; ,oa Jh foØe flag ;kno] ys[kk lnL; ds le{k
BEFORE: SHRI KUL BHARAT, JM & SHRI VIKRAM SINGH YADAV, AM
vk;dj vihy la-@ITA No.722/JP/2014
fu/kZkj.k o"kZ@Assessment Year : 2010-11
M/s Choudhary & Brothers, cuke ACIT, Circle-7, Jaipur
Jaipur Vs.
LFkk;h ys[kk la-@thvkbZvkj la-@PAN No. AAEFC0190M
vihykFkhZ@Appellant izR;FkhZ@Respondent
fu/kZkfjrhdh vksj ls@Assessee by : Shri Rajeev Sogani (CA)
jktLo dh vksj ls@Revenue by : Shri R.A.Verma (Addl.CIT)
lquokbZ dh rkjh[k@Date of Hearing : 04/05/2017
?kks"k.kk dh rkjh[k@Date of Pronouncement: 30/06/2017
vkns'k@ORDER
PER: VIKRAM SINGH YADAV, A.M. This is an appeal filed by the assessee against the order of Ld. CIT(A)-
III, Jaipur 05.09.2014 for A.Y. 2010-11 wherein the assessee has taken following ground of appeal:-
"1. In the facts and circumstances of the case and in law the ld. CIT(A) has erred in confirming the action of the ld. AO in estimating the net profit rate at 11.50% against the declared N.P. rate of 11.44% which resulted into confirming the addition of Rs. 1,05,428/-. The action of the ld. CIT(A) is illegal, unjustified arbitrary and against the facts of the case. Relief may please be granted by deleting the said addition of Rs. 1,05,428/-.
2. In the facts and circumstances of the case and in law the ld. CIT(A) has erred in confirming the action of the ld. AO in not allowing the deduction towards interest paid to third parties amounting to Rs.ITA No. 722/JP/14
M/s Choudhary & Brothers, Jaipur Vs. ACIT, Circle-07, Jaipur 24,10,948/- out of the estimated net profit. The action of the ld. CIT(A) is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted by allowing the said deduction of interest paid to third parties amounting to Rs. 24,10,948/-."
2. Firstly, we refer to order the ld. CIT(A) wherein the findings which are under challenge before us reads as under:-
"4.3 I have carefully considered the findings of the A.O. as also the submission of the appellant. It may be noted that while filing the appeal the appellant has disputed rejection of books of accounts by applying provisions of sec. 145(3) of IT Act, inclusion of closing stock in the total turnover and estimating the profit by applying higher N.P. rate of 13% ignoring the past history as also not allowing the claim of interest payment to the third parties amounting to Rs. 24,10,948/-. However, during the appellate proceedings the appellant has not pressed the rejection of books of accounts and application of provisions of sec. 145(3). In this matter the effective issues disputed by the appellant and to be adjudicated remain as under:-
i) Inclusion of closing stock in the value of contract amount
ii) Estimation of profit after rejection of books of accounts by ignoring the past history.
iii) Not allowing the interest payment to the third parties from the N.P. As regards inclusion of closing stock in the contract receipts, the A.O noted that the interest income from the fixed deposits and the closing stock/WIP is to be included in the gross receipts for determination of profit. As regards interest income the A.O. noted that the FDR's on which interest was earned were kept as security for contractual agreements and therefore such income is to be treated as business income. Such finding of the A.O is not disputed by the appellant, however for inclusion of closing stock in the gross receipts and estimation of profit on such gross receipts the A.O has not cited any specific reasons. During the year under consideration the assessee has shown 2 ITA No. 722/JP/14 M/s Choudhary & Brothers, Jaipur Vs. ACIT, Circle-07, Jaipur contract receipts of Rs. 172846412/- other income of Rs. 3306619/- including capital gain of Rs. 439320/- whereas the closing stock was shown for Rs.
1670300/-. The AO excluding capital gain of Rs. 439320/- determined total receipts for Rs. 177384011/- (172846412 + 3306619+1670300-439320).
As regards estimation of profit on such gross receipts including closing stock/WIP, the A.O. has applied N.P. rate of 13% out of which deduction on account of depreciation was allowed but deduction on account of third party interest amounting to Rs. 2410948/- was not allowed. As per A.O the estimation of N.P. was to be made keeping in view the contribution of depreciation, interest of partners and remuneration to partners and that in the assessment year under consideration such contribution/claim on account of depreciation/interest to partners and remuneration to partners was about 2% more as compared to immediately preceding assessment year. As regards non-allowing of interest to third parties the A.O noted that claim of interest to third parties was not a statutory deduction and that such claim was inherently included in the allowance of expenses to the extent of 87% to the assessee.
On the other hand the appellant case is that the closing stock and WIP amounting to Rs. 1670300/- cannot be part of contract receipts for estimation of contract receipts. It is stated that the closing stock is the amount of inventory available with the assessee at the end of the financial year and the closing stock is the opening stock in the immediately succeeding year. The appellant also stated that as per accounting standard the closing stock cannot be part of the receipts. As regards estimation of profit by applying N.P. rate of 13%, the appellant has submitted that in the assessment year under consideration on total turnover of Rs. 175713711/- the net profit was shown for Rs. 20101939/- subject to allowability of partners remuneration, interest to partners, depreciation claim and interest to bank and that the N.P rate was 3 ITA No. 722/JP/14 M/s Choudhary & Brothers, Jaipur Vs. ACIT, Circle-07, Jaipur arrived at 11.44% as against N.P rate of 10.40% in the immediately preceding year. The exact calculation of such N.P/N.P rate is as under:
Particulars AY 2010-11 AY 2009-10
Net Profit Declared (computation) 74,56,090 1,44,43,738
Partners Remuneration 12,00,000 10,80,000
Interest to Partners 7,73,921 8,38,226
Interest to Bank 24,10,948 33,34,816
Depreciation claimed 82,60,980 82,56,853
Total Net Profit 2,01,01,939 2,79,53,633
Turnover 17,57,13,711 26,88,37,074
Percentage 11.44% 10.40%
It is stated that the assessee intended to declare exact profit without any attempt to show a fix rate of profit. The appellant also referred to the decision of the Hon'ble ITAT, Jaipur in the case of M/s Rishabh Constructions Pvt. Ltd., ITA No. 581/JP/2009 in which after application of N.P rate of 8% the claim of depreciation and interest payment was allowed whereas in the appellant case the declared N.P rate at 11.44% was much higher. It is also contended that in the immediately preceding year the assessee has shown N.P. rate of 10.40% subject to depreciation, interest to partners, remuneration to partners and interest to third parties. While completing the assessment the A.O has made various additions amounting to Rs. 14971912/- and against such additions the appellant has filed appeal before the CIT (A)-III, Jaipur. As per the appellant while deciding the appeal of the appellant, the CIT(A) applied N.P. rate of 11.50% subject to partners payment, depreciation and bank interest. The Department has filed appeal against the order of CIT(A) which is pending. As per the appellant in A.Y 2007-08 and 2008-09 also the N.P rate of 11.50% was applied by AO which was confirmed both by CIT(A) and Hon'ble ITAT. It 4 ITA No. 722/JP/14 M/s Choudhary & Brothers, Jaipur Vs. ACIT, Circle-07, Jaipur is contended that the AO has not completed the assessment as per the past history of the appellant case as also that in appellant own case in A.Y 2006-07 the Hon'ble ITAT has directed that the previous history of the appellant is the best basis for estimation of profit. As regards non-allowance of interest payment to bank apart from the past history of the case, the ld AR has placed reliance on the following case laws in which after estimation of profit interest to the third parties was also allowed.
i) Shri Ram Jhanwar Lal Vs. ITO 321 ITR 400 Raj
ii) Bharat Construction Co. 258 ITR 140
iii) CIT vs. Bhawan Va path Nirman (Bohra) and Co. 258 ITR 440
iv) CIT vs. Gottan Lime Khaniz Udhyog 256 ITR 243 (Raj.)
v) Avdhesh Pratap Singh Abdul Rehman & Bros. Vs. CIT (1994) 76 Taxman 106 (All) It was accordingly requested that the addition made by the A.O. may be deleted.
First of all the issue of inclusion of closing stock in the contract receipts is to be decided. It may be noted that the A.O. has not given any specific reason as to how the closing stock can be part of contract receipts for estimation of profit. It is also noted that in earlier assessment years whenever the cases were completed under scrutiny assessment the profit was determined with respect to the contract receipts and closing stock was never made part of the contract receipts. Therefore even the past history does not suggests inclusion of closing stock in the contract receipts. Moreover, the closing stock is the inventory available with the assessee which will be opening stock in the next year and will be forming part of the contract work in the next year. Therefore the action of the A.O. of inclusion of closing stock in the contract receipts cannot be approved. Accordingly the profit is to be determined on the 5 ITA No. 722/JP/14 M/s Choudhary & Brothers, Jaipur Vs. ACIT, Circle-07, Jaipur contract receipts including other income of Rs. 2867299/- (3306619-439320) shown by the assessee amounting to Rs. 175713711/- (172846412+2867299) excluding the closing stock of Rs. 1670300/-. The next issue is to be decided is as to what basis the profit is to be determined after rejection of books of accounts.
On consideration of relevant facts as regards estimation of profit, after invoking the provisions of sec. 145 (3) of IT Act, it may be stated that it is a settled law that even after invoking the provisions of sec. 145 (3), the AO is not empowered to assess the income at whatever figures he wants and the AO is supposed to make an honest estimation either based on the past history of the appellant's own case or on the basis of any comparable case. For such proposition reliance is placed on the following case laws:
I) M/s Brijbhushan Lal Pradhuman Kumar vs. CIT, 115 ITR 524 II) Shree Shankar Khandsari Sugar Mills vs. CIT, 193 ITR 669 III) CIT vs Dr. A.P. Bahel 2 DTR 387 (Raj) IV) CIT vs. Suresh Marbles Pvt. Ltd. 18 DTR 118 (Raj) V) CIT vs. Inani Marbles Pvt. Ltd. [2009] 316 ITR 125 (Raj) VI) Shri Ram Jhanwar vs. ITO 98 TTJ, (ITAT, Jodhpur) VII) Ajay Goyal vs. ITO 99 TTJ 164, (ITAT, Jodhpur) VIII) Ghasi Ram Todarmal Vs. ITO 196 ITR 329 (Raj.)] IX) M/s Bhikha Ram Devrath Vs. ITO, Ward-1, Chura, ITA No. 245/Jodh/2013, date of order 23.09.2013 (ITAT, Jodhpur) X) The income Tax Officer, Ward-2, Chura Vs. M/s Jai Construction Co., ITA No. 64/Ju/2014, date of order 12.06.2014 (ITAT, Jodhpur). The Hon'ble Jurisdictional High Court and Hon'ble Jurisdictional ITAT has consistently held that estimation of profit after rejection of books of accounts 6 ITA No. 722/JP/14 M/s Choudhary & Brothers, Jaipur Vs. ACIT, Circle-07, Jaipur u/s 145 (3) of IT Act, the past history of the assessee's own case should be the best guide. Keeping in view the consistent decisions of Hon'ble Jurisdictional High Court as also Hon'ble ITAT, the profit is to be determined on the basis of past history of the appellant case in respect of immediate preceding assessment year. In this background it is to be seen as to what was the past history or otherwise. It may be noted that in the immediate preceding year i.e. 2009-10 while completing the assessment u/s 143 (3) of the IT Act the A.O. has rejected the books of accounts and made disallowances out of various expenses totalling for Rs. 13041580/- and accordingly the net profit was increased from 5.22% to 10.08%. The A.O. further made disallowance of Rs. 1930332/- u/s 40a(ia) of IT Act. While deciding the appeal against this assessment order, the worthy CIT (A) in ITA No. 928/JPR/2011-12 vide order dated 08.10.2012 deleted the addition of Rs.
1930332/- and as against various disallowances of Rs. 13994870/-, directed the A.O. to apply N.P. rate of 11.50% subject to depreciation, interest & remuneration to partners, not interest to third parties. While applying N.P. rate of 11.50% the worthy CIT (A) relied on the decision of Hon'ble ITAT in A.Y. 2007-08. On perusal of order of Hon'ble ITAT in respect of A.Y. 2007-08, it is noted that in this assessment year, the worthy ITAT has directed to recompute the profit by applying N.P. rate 11.50% as against N.P. rate of 10.07% shown by the assessee. It is further noted that in A.Y. 2007-08 on gross contract receipts of Rs. 168406532/-, N.P. before depreciation, payment to partners and interest to partners was for Rs. 16867510/- and accordingly N.P. was shown at 10.02% against which the Tribunal directed to apply N.P. rate of 11.50%. These facts will indicate that the past history of the assessee is to apply N.P. rate of 11.50% subject to claim of depreciation and interest/remuneration to partners. The above facts will also indicate that as per the decision of Hon'ble ITAT, interest to third parties was not to be allowed. It may also be mentioned that as per the past history of the case the 7 ITA No. 722/JP/14 M/s Choudhary & Brothers, Jaipur Vs. ACIT, Circle-07, Jaipur N.P. was to be determined with reference to the contract receipts and there is no such findings or the directions of the Hon'ble ITAT that the N.P. rate is to be reduced/increased on the basis of increase/decrease of depreciation claim and interest/remuneration to the partners as held by the A.O. Moreover, the claim of depreciation and interest/remuneration to partners is his statutory claim and it has to be allowed. Keeping in view the above facts that the A.O. is directed to apply the N.P. rate of 11.50% subject to depreciation and interest/remuneration or partners on total receipts of Rs. 175713711/-. The fact that the Hon'ble ITAT has directed to apply N.P. rate of 11.50% subject to depreciation and interest/remuneration to partners is further proved from the decision of the Hon'ble ITAT in M.A. No. 40/JP/2012 order dated 18.07.2014 which has been filed by the assessee in respect of ITA No. 1177/JP/2012, A.Y. 2007-08 for rectification in the order and for direction that N.P. rate of 11.50% was subject to depreciation, interest to partners and interest to third parties wherein the M.A. was dismissed by the Hon'ble ITAT.
As regards the claim of the appellant of interest to third parties from the net profit, as discussed above, after rejection of books of accounts the profit is to be determined on the basis of past history of the appellant case and as per the past history decided by Hon'ble ITAT, N.P. rate of 11.50% was to be applied subject to depreciation and interest/remuneration to partners (not interest to third parties). As regards reliance on various case laws by the appellant for allowing of interest to third parties, it may be stated that the decision of the Hon'ble Courts for allowing of third parties interest are case specific and it is not the settled law that in each and every case of the contractor, third party interest is to be allowed. In fact, the settled law is that after rejection of books of accounts, profit is to be estimated on the basis of the past history of the case."
8 ITA No. 722/JP/14M/s Choudhary & Brothers, Jaipur Vs. ACIT, Circle-07, Jaipur
3. We now refer to the submissions of the ld AR wherein the ld AR has submitted as under:
3.1 The ld AR submitted that during the year under consideration, assessee firm declared NP rate of 11.44% which is better than immediately preceding year of 10.40%. Thus, the NP rate declared in the current year should be upheld.
3.2 It was further submitted that during the year under reference, ld. AO while applying the NP rate unsettled the settled position of allowance of interest to third parties from the NP rate applied. In the AY 2007-08 and 2008-09 NP rate applied was subject to depreciation, remuneration to partners, interest to partners and interest to third parties. The Ld. AO did not dispute this factual aspect, however, he did not follow the same by observing as under at page 7 of the assessment order:
"The ld. ARs argument that interest to third parties was allowed during the previous assessment proceedings is not acceptable as each assessment proceeding is a new proceedings..."
3.3 It was submitted that the ld. CIT (A) misread the order of the Hon'ble ITAT in the AY 2007-08 and therefore upheld the order of the ld. AO on this issue. Ld. CIT (A) also misinterpreted the orders of jurisdictional High court while observing as under at page 20, last para of his order:-
"...As regards reliance on various case laws, by the appellant, for allowing of interest to third parties, it may be stated that decision of the Hon'ble courts for allowing of third partied interest are case specific and it is not the settled law that in each and every case of contractor, third party interest is to be allowed..."
3.4 The ld AR submitted that estimation of net profit for construction activitycan be with respect to operations of the business. Various components of direct costs can be estimated i.e. material, labour and overheads. However, financing pattern is case specific i.e. one may do business with his own capital not having any expenditure, whereas, some other person may do business 9 ITA No. 722/JP/14 M/s Choudhary & Brothers, Jaipur Vs. ACIT, Circle-07, Jaipur with borrowed capital having interest expenditure. Even for assessee doing business with borrowed capital, rate of interest may vary. Even in different years of the same assessee, financial cost can be different. Therefore, finance cost cannot be part of estimation and has to be given deduction further to estimation of profit. Ld. CIT(A) has wrongly observed that in the case laws relied upon by the assessee, High Court has given case specific finding. High Court decides on issue of law and not facts. The decision in those cases lay down a ratio that interest is to be allowed on actual basis further to estimation of profit. Ld. CIT(A), at Page 19 of his order, has given a factually wrong finding for AY 2007-08 that NP before depreciation, payment to partner and interest to partner was Rs. 1,68,67,510. The facts remains that this amount of Rs. 1,68,67,510 was subject to further deductions the details of which are as under:-
Particulars A.Y. 2007-08
Depreciation 3,510,651
Payment to Partners 1,456,071
(Remuneration and Interest)
Interest to Others 1,123,112
Total 6,089,834
This is evident from the table, appearing at page 6 of Hon'ble ITAT order for the AY 2008-09 in ITA No. 879/JP/2011 and this 10.02% was replaced by 11.5% by the Hon'ble ITAT for the AY 2007-08.It is further submitted that similar calculation for AY 2008-09 appeared from the same table at Page 6 of the ITAT order which gave NP of 9.96% before depreciation, payment to partners and interest to third parties. This 9.96% was replaced by 11.5% by the Hon'ble ITAT.
10 ITA No. 722/JP/14M/s Choudhary & Brothers, Jaipur Vs. ACIT, Circle-07, Jaipur In view of the above, the lower authorities have done an illegal act by not following the order of the Hon'ble ITAT in respect of allowance of interest to third parties from the estimated NP rate.
3.5 Reliance is placed on the judgment of the Hon'ble Supreme Court in the case of Radhasoami Satsang [1992] 193 ITR 321 (SC) wherein the Hon'ble Supreme Court has held that ".... We are aware of the fact strictly speaking res judicata does not apply to income-tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year...."
Futher, Hon'ble Jurisdictional High Court in the case of Bhawan Va Path Nirman (Bohra) & Co. [2003] 130 TAXMAN 361 (RAJ.), under identical set of facts, observed that AO did not allow deduction for interest to third parties from the Net Profit estimated, for the year under appeal, even though the same was allowed in the preceding years. Hon'ble Jurisdictional High Court, allowed deduction of such interest and held that:
"........Consequently, the trading result obtained by applying such net profit rate needed further appropriation towards allowable depreciation and interest on borrowings. There is no doubt about the fact that both expenses, on account of depreciation and interest on borrowings are allowable expenses and without taking into account such expenses net taxable income cannot be determined. In fact there is no dispute about appropriation towards 11 ITA No. 722/JP/14 M/s Choudhary & Brothers, Jaipur Vs. ACIT, Circle-07, Jaipur depreciation, notwithstanding the assessing authority has applied net profit rate excluding appropriation towards any allowable expenditure. We are in agreement with the Tribunal for modifying the order passed by the assessing authority by making net profit rate subject to adjustment towards depreciation and interest on borrowings...'' Further, Hon'ble Jurisdictional High Court in the case of Jain Construction Company, Barmer [2014] 52 taxmann.com 167 (Rajasthan), observed that:
"......After rejecting the books of accounts and while referring to the order as passed in relation to the assessee for the Assessment Year 1993-94, the AO proceeded to apply net profit rate of 12.5% on the net contract receipts subject to depreciation, interest, remuneration to partners and interest payment to third parties for the purpose of making assessment of income....."
To this, Hon'ble Jurisdictional High Court even allowed deduction of Sales Tax Payment from the Net Profit Estimated in addition to deduction of depreciation, interest, remuneration to partners and interest payment to third parties allowed by the AO in assessment proceedings.
3.6 The ld AR further submitted that this issue about what exactly was decided by the Hon'ble ITAT, in quantum appealin A.Y 2007-08 in ITA No. 1177/JP/2010, came up for consideration before the Hon'ble ITAT in deciding the penalty appeal of the assessee for A.Y 2007-08 in ITA No. 928/JP/2012 order dated 25/11/2016. The Hon'ble ITAT at para 2.4 of the order at page 6 observed as under:-
"The contentions of the ld AR thus prima facie seems correct as the addition sustained by the ITAT shall form the basis for levy of penalty. Where the additions have been deleted, there would not be any basis of levy penalty as 12 ITA No. 722/JP/14 M/s Choudhary & Brothers, Jaipur Vs. ACIT, Circle-07, Jaipur machinery provision would fall. The AO is directed to verify N.P rate of 10.07% disclosed by the assessee and whether the same was before depreciation, interest, remuneration to partners and interest to third parties, and where the same is found to be correct, allow the necessary relief to the assessee."
Thus the lower authorities have misread the order of the Hon'ble ITAT for A.Y 2007-08 in ITA No. 1177/JP/2010 and accordingly misdirected themselves in not allowing further deduction of interest to third parties from the NP rate of 11.5%.
3.7 It was further submitted that the rejection of miscellaneous application by the Hon'ble ITAT Jaipur Bench does not lead to a conclusion that inference of the Hon'ble ITAT in its order in ITA No. 1177/JP/2012 for AY 2007-08, stands changed. The only thing Hon'ble ITAT in its order in M.A. No. 40/JP/2012 has mentioned is that adding words to an order may amount to review of an order. The Hon'ble Bench in very clear words has concurred with the below mentioned argument, put-forth by the ld. DR:
"........ This is a possible intention of ITAT but it cannot be held to be the mistake apparent from record ....."
In view of the above, the order of the Hon'ble ITAT Jaipur Bench in ITA No. 1177/JP/2012 stands as it is. Reading the order as a whole, on account of references of the earlier orders of the ITAT itself, leads to conclusion that 11.50%. Net Profit Rate is subject to further allowances of Depreciation, Interest and Remuneration to Partners.
3.8 Without prejudice to above, it is submitted the order of Hon'ble ITAT, Jaipur Bench for AY 2007-08 is dated 31.05.2011 whereas the order for AY 13 ITA No. 722/JP/14 M/s Choudhary & Brothers, Jaipur Vs. ACIT, Circle-07, Jaipur 2008-09 is dated 25.05.2012. Thus, the subsequent order, which explicitly provides for Net Profit Rate of 11.50% subject to Depreciation, Interest and Remuneration to Partners has to be followed as a precedence. Otherwise also, ld. CIT(A) has held that 11.50% is subject to Depreciation, Interest And Remuneration To Partners except Interest To Third Parties. To this extent, the finding of ld. CIT(A) is accepted by the Department, as Department is not in appeal. It is a settled principle of law, that any order has to be read in its entirety and that reading the order in piecemeal can result into absurd results which should be avoided.
5. On the contrary, the ld. DR vehemently argued the matter and supported the orders of the authorities below.
6. We have heard the rival contentions and perused the material available on record. The limited issue under consideration relates to estimation of net profit rate after the books of accounts have been rejected. The ld CIT(A) has directed the A.O. to apply the N.P. rate of 11.5% subject to depreciation and interest/remuneration to partners on total receipts of Rs. 175713711/-. The Revenue has accepted the said findings of the ld CIT(A) and has not challenged the same before us. The ld AR has raised two grounds challenging the said findings. Firstly, it is claimed that the assessee has declared net profit rate of 11.44% in this year as against net profit rate of 10.40% in AY 2009-10 and the same should be accepted. In this regard, it is noted that in the past, the matter has reached the Tribunal and net profit rate of 11.50% has been directed to be applied in AY 2007-08 and AY 2008-09 and following the same, the ld CIT(A) has applied net profit rate of 11.50% in AY 2009-10. Keeping the past history of the assessee into account, the net profit rate of 11.5% is therefore upheld for the impunged assessment year.
14 ITA No. 722/JP/14M/s Choudhary & Brothers, Jaipur Vs. ACIT, Circle-07, Jaipur
7. The next contention raised by the ld AR relates to allowance of interest on bank borrowings paid during the year amounting to Rs 24,10,948 after estimating net profit rate of 11.5%. During the course of assessment proceedings, the assessee has contended that in the past, third party interest was allowed. However, the AO has not accepted the said contention holding that each assessment year is a separate assessment year. Basically, the AO has followed the principle that res-judicata doesn't apply in income tax proceedings, allowance for bank interest was not allowed in the impunged assessment year. As held by the Hon'ble Supreme Court in case of Radhasoami Satsang (supra) that though strictly speaking res judicata does not apply to income-tax proceedings but what is relevant is where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. In light of that, what is relevant to examine is the past position adopted by the AO and whether the same has been challenged and the outcome of appeal before the appellate authorities.
8. Firstly, we look at the position for AY 2007-08. In that year, the AO had made various disallowances of expenses, addition of outstanding wages and capital introduced by the partners, however, there is no disallowance of interest paid to third parties. The ld CIT(A) confirmed the order of the AO. On appeal, the Tribunal found the contention of the ld AR reasonable that instead of disallowing expenses head-wise, a reasonable N.P rate should be applied and directed to apply net profit rate of 11.5% as against net profit rate of 10.07% shown by the assessee. Before us, the ld AR has contended that net profit rate of 10.07% computed by the assessee and as compared by the Tribunal while directing net profit rate of 11.5% was before depreciation, 15 ITA No. 722/JP/14 M/s Choudhary & Brothers, Jaipur Vs. ACIT, Circle-07, Jaipur remuneration and interest payment to partners and interest to third parties and accordingly, there was no disallowance of interest paid to third parties. We find force in the said contention of the ld AR given that firstly, there is no disallowance of third party interest done by the AO and secondly, the Coordinate Bench has held that instead of specific disallowances as done by the AO, net profit rate of 11.5% should be applied as compared to 10.07% as computed by the assessee which is claimed to be before interest payment to third party.
9. Similarly, for AY 2008-09, the AO had made various disallowances of expenses @ 10%, expenses disallowed u/s 40(a)(ia), 40A(3), addition of creditors and wages payable, however, there is no disallowance of interest paid to third parties. The ld CIT(A) directed to apply net profit rate of 11.5% subject to depreciation, interest and remuneration payable to partners, etc to cover up all the discrepancies and short-comings found in respect of the books of accounts, leading to different additions against net profit rate of 10.07% shown by the assessee and an addition of Rs 31,22,932 has been confirmed u/s 145(3) as against Rs 2,27,66,258 made by the AO. Here, it would be relevant to note that the ld CIT(A) has worked out figure of Rs 31,22,932 after taking into consideration N.P rate of 11.5% and reducing the N.P rate of 9.96% declared by the assessee and thus working out the gap in N.P rate of 1.54% which applied on total contract receipts of Rs 20,27,87,825, gives a figure of Rs 31,22,932. The Coordinate Bench has thereafter affirmed the order of the ld CIT(A) wherein it has stated that the facts are similar to AY 2007-08 and the ld CIT(A) has rightly applied the net profit rate of 11.5% as per past history as against net profit of 9.96% shown by the assessee. Before us, the ld AR has again contended that net profit rate of 9.96% computed by the assessee and as compared by the ld CIT(A) and the Tribunal while directing net profit rate of 11.5% was before depreciation, remuneration and 16 ITA No. 722/JP/14 M/s Choudhary & Brothers, Jaipur Vs. ACIT, Circle-07, Jaipur interest payment to partners and interest to third parties and accordingly, there was no disallowance of interest paid to third parties. We find force in the contention of the ld AR given that firstly, there is no disallowance of third party interest done by the AO and secondly, the Coordinate Bench has upheld the ld CIT(A) finding of applying the net profit rate of 11.5% as per past history as against net profit of 9.96% shown by the assessee which is claimed to be before interest payment to third party.
10. If we look at the above past history of the assessee for last two assessment years where the matter has reached the Tribunal, it is clear that the AO has disallowed various expenses after rejection of the books of accounts. At the same time, there has been no disallowance of third party interest by the AO in any of these years. Thereafter, instead of specific disallowances, the ld CIT(A) as well as Tribunal have considered the position of net profit rate offered by the assessee and have thereafter directed to apply net profit rate of 11.5%. As we have held above, keeping the past history of the assessee into account, the net profit rate of 11.5% is upheld for the impunged assessment year. Further, the past history of the assessee doesn't suggest disallowance of third party interest either by the AO or by the Coordinate Benches. The Coordinate Benches have compared net profit rate as offered by the assessee which is claimed to be before depreciation, remuneration and interest payment to partners as well as interest to third parties and thereafter, directed to apply 11.5%. For the impunged assessment, we see no reason to deviate from the said settled position as both Revenue and the assessee has relied on the past history as we have discussed above. The AO is directed to apply net profit rate of 11.5% before depreciation, remuneration and interest payment to partners and interest to third parties (bank). Accordingly, there would not be any further disallowance 17 ITA No. 722/JP/14 M/s Choudhary & Brothers, Jaipur Vs. ACIT, Circle-07, Jaipur of interest paid to third parties amounting to Rs 24,10,948. In the result, ground no. 1 is dismissed and ground no. 2 is allowed.
In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open court on 30/06/2017.
Sd/- Sd/-
¼dqy Hkkjr ½ ¼foØe flag ;kno½
(Kul Bharat) (Vikram Singh Yadav)
U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member
Jaipur
Dated:- 30/06/2017
Ganesh Kumar
vkns'k dh izfrfyfi vxzfs "kr@Copy of the order forwarded to:
1. vihykFkhZ@The Appellant- M/s Choudhary & Brothers, Jaipur.
2. izR;FkhZ@The Respondent- The ACIT, Circle-7, 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,
6. xkMZ QkbZy@Guard File (ITA No.722/JP/2014) vkns'kkuqlkj@ By order, lgk;d iathdkj@ Assistant. Registrar.18