Income Tax Appellate Tribunal - Pune
Sanjay Bapusaheb Patil, Pune vs Department Of Income Tax on 23 February, 2010
ITA No.729/PN/2010 Sanjay B. Patil, Pune
IN THE INCOME TAX APPELLATE TRIBUNAL
Pune Bench B, Pune
Before Shri SHAILENDRA KUMAR YADAV Judicial Member
and Shri D. KARUNAKARA RAO, Accountant Member
ITA No.729/PN/2010
Assessment Year : 2006-07
ACIT Circle-3 Sanjay B. Patil
Pune Vs. Pune
(Appellant) (Respondent)
PAN No.AAUPP 2855J
C.O. 69/PN/2011
Assessment Year : 2006-07
Sanjay B. Patil ACIT Circle-3
Pune Vs. Pune
(Appellant) (Respondent)
Appellant By: Shri Pankaj Garg, DR
Respondent By: Shri K. Srinivasan
ORDER
Per Shri D. Karunakara Rao, Accountant Member:-
This is the revenue's appeal filed against the order of the CIT(A) dated 23.2.2010. The grounds are as under:
1. The order of the learned CIT(A) is contrary to law and to the facts and circumstances of the case.
2. The learned CIT(A) grossly erred reducing the profit margin from 15% to 8% instead of confirming the same.
3. The learned CIT(A) erred in failing to appreciate that the Assessing Officer had pointed out specific reasons for rejection of books of accounts which the CIT(A) himself had not found fault with; and in the circumstances, the addition/estimate made by the Assessing Officer ought not to have been reduced merely by making comparisons on unrelated issues.
4. The learned CIT(A) grossly erred in applying the provisions of section 44AD which is not at all applicable to the assessee's case.
2. Assessee also filed the CO raising the following objections and the same read as under:
" CIT(A) has rejected the claim of depreciation and interest from the net profit estimated at 8% even though the rovisions of section 44 AD are no applicable."
3. The relevant facts of the case are that the assessee is an individual engaged in the business of civil contractors. He registered the turnover of Rs.2,35,71,701/- during the year and disclosed the net profit of Rs.6,91,718/- which works out to 2.93%. Otherwise, the gross profit rate for the year is 11%. During the scrutiny assessment proceedings, the issue of rejection of ITA No.729/PN/2010 Sanjay B. Patil, Pune books of accounts u/s 145 of the Act came up and eventually, the books of accounts were rejected at the end of the proceedings due to various defects in the books, in general and the auditor's report in form no.3CD (point no.27), in particular. The A.O. not only proposed to reject the books of accounts but also announced to calculate the assessee's profit adopting the profit @ 20% on the gross receipts. In this regard, the assessee filed a written submission dated 9.12.2008. The A.O. considered the above said submissions and finally invoked the provisions of section 145 of the Income-tax Act, 1961. As mentioned in para 4.4 of the AO's order, assessee discussed the facts of a case of M/s. S.K. Orse & Co., a comparable case whose turnover is around Rs.4.65 crores for the same assessment year, which reported the gross profit rate of 12% ( before the allowing of interest and depreciation expenses) Finally, the A.O. adopted the profit percentage of 15% over the contract receipts and determined the taxable income on this account at Rs.35,35,755/-. The A.O. did not grant any deduction on account of interest and depreciation.
4. Aggrieved with the above, the assessee filed an appeal before the CIT(A). There is no dispute about the decision of the AO in matters of rejection of books of accounts before the first appellate authority (ie CIT(A). Manner of making of the 'best judgment assessment' is the core dispute. During the first appellate proceedings, assessee contested that the case of M/s. S.K. Orse & co is not a comparable case to the facts of this case on the grounds of (1) its higher turnover; and (2) the meager nature of the interest and depreciation claims. In this regard, assessment mentioned that in the instant case, the interest expenditure and depreciation expenditure are Rs.5,49,955/- and Rs.14,43,849/- respectively. Where as in the sais comparable case, corresponding figures are meager and negligible (Rs. 44,282/- is the depreciation claim). On considering the submissions of the assessee, the CIT(A) mentioned that there is no issue or dispute about the rejection of books of accounts and the issue is only on the estimation of the profits in the best judgment assessment. On this issue, the CIT(A) upheld the requirement of estimation of profits, in principle. But he decided to disagree with the decision of the AO and decided to take a deviation in matters of the manner of estimation of profits of the assessee for the instant AY. The said diversion is discussed in para 3.5 & 3.6 of the impugned order. Further, we find that the CIT(A) criticized the AO's decision in reckoning the case of M/s. S.K. Orse & Co. as a comparable case on the reasoning that in the said comparable case, the claim of depreciation does not arise as that assessee does not own its plant and machinery and they rely on the outsourcing the same. Whereas, in the assessee's case, depreciation claim is more as he owns major machinery as required for the civil contracts. He also discussed the heavy interest burden on the assessee unlike in the comparable case. Depreciation 2 ITA No.729/PN/2010 Sanjay B. Patil, Pune claim in the comparable case is only Rs. 44,282/- against Rs.14.4 lakhs (rounded off) in the assessee's case. Finally, CIT(A) discussed the provisions of section 44AD of the Act and certain citations before resorting to adopt the spirit of the said provisions and eventually adopting the bench mark of 8% rate of net profit mentioned therein. In the process, he relied on the decisions of the Rajasthan Bench in the case of CIT Vs. Kailash Kacchwaha 293 ITR 449 (Raj) and Eastern Construction Company Vs. ITO 59 TTJ 723 and Surendra Prasad Misra Vs. ITO 104 TTJ 292 (Lucknow) in his support. The CIT(A) did not allow the deductions on account of interest on depreciation out of the estimated profits @ 8% on the gross turnover.
5. Thus, the assessee is not happy with the invoking of the said provisions of section 44AD of the Act and also not allowing the claim of deduction on accounts of Depreciation and interest. Revenue is also not happy with the his decision of invoking the said provisions of section 44AD of the Act. Thus, both parties are not happy with the decision of CIT(A) in resorting to the provisions of section 44AD of the Act. We shall adjudicate the appeals of both the parties in the succeeding paragraphs and shall take up the C.O. of the assessee first for adjudication.
C.O. 69/PN/2011 by the Assessee
6. During the proceedings before us, Shri K. Srinivasan Ld. Counsel for the assessee narrated laboriously all the details of the instant case and traced the following arguments which are as follows:-
(i) The CIT(A) erred in invoking the provisions of section 44AD of the Act which is in fact applicable only to the similar cases with the turnover not exceeding Rs 40 lakhs and the same is now increased to Rs 60 lakhs w.e.f. 1.4.2011 onwards.
(ii) The CIT(A) erred in not granting deduction from the said profit, so computed, on accounts of interest and depreciation. In this regard, the counsel objected to the decision of the CIT(A) in invoking the provisions of section 44AD relying on judgment of the High Court of Rajasthan in the case of Shri Ram Jhanwar Lal Vs. ITO & Ors. 321 ITR 400 for the proposition that,-
"Gross receipts of the assessee contractor being more than Rs.40 lakhs, s. 44AD, as such is not applicable, nor the principle underlying s. 44AD could be applied for estimating the profits; impugned order of the Tribunal is set aside and the matter is sent back to the Tribunal for deciding the same afresh."
7. Further, Sri Srinivasan argued stating that after resorting to estimation of net profit of the assessee by the A.O in any method of estimation in the 'best judgment assessment', the AO ought to have allowed the claim of depreciation 3 ITA No.729/PN/2010 Sanjay B. Patil, Pune out of the so estimated profits and took strength in this regard from the contents of para-8 of the above judgment in the case of Shri Ram Jhanwar Lal (supra). Thus, he summed up stating that the CIT(A) erred in invoking the provisions of section 44AD of the Act and after having invoked the same, he has erred in not granting deduction on accounts of the statutory deduction such as (i) the depreciation and (ii) interest expenses.
Further, referring to the appeal of the revenue, Ld counsel argued stating that the assessee's book profit (net) percentage is 2.93% against the assessed profit rate of 15%, which is extraordinarily high and unacceptable. He also mentioned that the CIT(A) decided the reduce the said per cent of 8% of the gross receipts, while the comparable case registers the profit percentage of 4.5% only. Further, Ld counsel mentioned that the truth lies somewhere among the 15%, 8%, 4.5% mentioned above. Further, Ld counsel filed a chart showing if 15% as adopted by the A.O. has to be considered reasonable, the statutory deductions on account of interest depreciation may be allowed, in such case, the net profit would work out to 15,41,951/- and in percentage terms the net profit percentage is 6.55% ie after granting deduction on account of interest on depreciation.
8. On the other hand, the D.R. for the revenue also mentioned that the CIT(A) erred in reducing the net profit rate of 15% to 8% by wrongly invoking the provisions of section 44AD of the Act. The D.R. pleads for confirming the order of the A.O. without any disturbance.
9. We heard both the parties, perused the orders of the revenue and the material available before us. As it is already described in the preceding paragraphs above, there is no dispute about the invoking of the provisions of section 145 of the Act relating to "method of accounting' and the rejection of books of accounts. The limited issue for adjudication before us relates to the making of an assessment in the manner provided in section 144 of the Act read with section 145(3) of the Act. Section 144 refers to best judgment assessment and A.O. shall make assessment of the total income or loss to the best of his judgment and determined the same payable by the assessee on the basis of such assessment after taking into account all the relevant material which the A.O. has gathered. On hearing both the parties, we find that there are 3 situations or three different ways of making of the best judgment assessments, which are required to be taken into account for adjudicating the 'best judgment assessment'. They are the: (1) decision of the A.O; (2) decision of CIT(A); and (3) Comparable cases of M/s S K Orse & Co Relevant basic particulars of these 3 situations are tabulated as under:
4 ITA No.729/PN/2010 Sanjay B. Patil, Pune(Rs) Sl.No. Particulars As per AO As per If M/s S K Orse order CIT(A) & Co pattern order is followed
1. Profit before Interest 3,535,755 1,881,736 3,064,321 & depreciation (PBID) Percentage @ 15% 8% 12%
2. Interest - - 549,955
3. Depreciation - - 1,443,849
4. Net Profit 3,535,755 1,881,736 1,070,517
5. Net Profit Percentage 15% 8% 4.50%
10. We shall now discuss the merits of each of the above. First we take up the situation adopted by the A.O, where he has directly applied net profit rate of 15% on the gross receipts of Rs.2,35,71,701/- without any legally sustainable logic. Further, the A.O. did not grant any deduction on account of interest and depreciation too, which are huge incidental expenditure specific to this case and which cannot be ignored considering the legally allowable claims to the assesssee. In principle, we can not appreciate such decision of the A.O. Having invoked the net profit rate of 15% on the gross profits, he should have allowed benefit of deductions on account of the depreciation. We take the spirit of Rajasthan High court decision in the case of Shri Ram Jhanwar Lal Vs. ITO & Ors. 321 ITR 400. Para 6 to 8 are relevant in this case which are as under:
6. The grievance of the appellant is, that when the best judgment assessment of net profit is made, thereafter, depreciation is required to be allowed to be deducted therefrom, and for that purpose, reliance is placed on judgments of this Court, in CIT Vs. Jain Construction Co. (1999) 156 CTR (Raj) 290 : (2000) 245 ITR 527 (Raj), and IT Ref. no.55 of 1998, Bharat Construction Co. Vs. CIT, decided on 13th Sept., 2001 [reported at (2002) 172 CTR (Raj) 408 - Ed.].
7. On the other hand, learned counsel for the Revenue submitted, that the findings recorded are pure findings of fact, and do not require any interference.
8. In our view, so far as the question no.1 is concerned, it is clear from the judgements of this Court in Jain Constructions (supra) and Bharat Construction's cases (supra), that where the AO has adopted net profit rate in making assessment on best judgement assessment basis, even in that case allowance of depreciation is required to be made. The question no.1 is accordingly, answered in favour of the assessee, and against the Revenue.
However, we find that the interest issue was not the subject matter before the High court of Rajasthan.
11. Secondly, we have examined the decision of the CIT(A) in the matter ie rejection of the decision of the AO and invoking of the provisions of section 44AD of the Act, which is legally meant for the case of turn over not exceeding the amount of Rs.40 lakhs. In the instant case, the turnover is 6 times more than that of the cases referred in s. 44AD of the Act. Of course, he has relied on various citations as narrated above. Notwithstanding the same, considering the 5 ITA No.729/PN/2010 Sanjay B. Patil, Pune plain language of the provisions of section 44AD of the Act and stated judgment in the case of Sri Ram Jhanwar Lal, Supra, in our opinion, the said approach of the CIT(A) is not considered valid also in view of the categorical disapproval of the Hon ble High court of Rajasthan as mentioned in para-9 of the order of the judgment above case i.e. Shri Ram Jhanwar Lal Vs. ITO & Ors. (supra). We follow the same.
12. Third situation relates to likely net profit calculation if the manner of computing recorded in the said comparable case i.e. M/s. S.K. Orse & Co. (supra), is applied to the instant case. In the said comparable case, the net profit percentage before allowing the deductions on accounts of interest and depreciation, was calculated at 12%. After allowing the said deductions, the net profit percentage comes to 4.5%. As discussed, this situation is not acceptable to both the parties of the litigation. Both the parties mentioned that the case of M/s. S.K. Orse & Co cannot constitute a comparable case in view of the high turn over, lower depreciation and interest claims.
13. In the light of the above 3 situations and our express views, none of the three situations discussed above brings out 'best judgment' assessment as each of them suffer from one problem or other. As discussed above, considering the genuineness of the claims relating to interest and depreciation and their allowability to the assessee in view of the settled legal propositions narrated above, it becomes the duty of the AO allow the same. Assessee is entitled to the said deduction on account of interest and depreciation out of the profits determined by any method. It is an undisputed fact that the assessee incurred expenditure by way of interest on the borrowals taken for the business purpose and same is the case with other fact ie the assessee owns substantial plant and machinery, on which the assessee is entitled to depreciation as per the law. The allowability of the deduction of depreciation was already advocated by the aforesaid Rajasthan High court in the case of Shri Ram Jhanwar Lal Vs. ITO & ors. (supra). On the same reasoning, the assessee must be entitled to the claim of interest too. Therefore, in principle, we approve the assessee's claims for allowance of these two expenditures. Accordingly, the cross objections raised by the assessee is allowed to that extent.
14. Next issue for adjudication relates to what is the best judgment net profit rate to be applied on the gross profits for determining the profits of this assessee. Should it be 15% as adopted by the A.O. or 8% as applied by the CIT(A) or 12% as reported by the so called comparable case of M/s. S.K. Orse & Co?. Considering our express opinion strengthened by the judgment of the Honble High Court of Rajasthan, CIT(A)'s decision to invoke provisions of section 6 ITA No.729/PN/2010 Sanjay B. Patil, Pune 44AB to the instant case is not proper and therefore, we dismiss the CIT(A)'s decision on the dispute. Coming to the 12% net profit rate before interest and depreciation is allowed in the alleged comparable case of M/s. S.K. Orse & Co, we find the facts of this case are not even comparable for many reasons.
15. In the end, we examined if the profit percentage of 15% as adopted by the AO in the assessment proceedings shall meet the ends of justice and if it constitutes the best judgment assessment. Of course, the assessee is entitled to deduction on accounts of interest and depreciation as discussed above. In our opinion, the AO's decision with profit percentage of 15% on the gross turnover should be approved and for want of clarity, we disapprove AO's refusal to grant deduction on account of interest on depreciation. In summary, we also disapprove the CIT(A)'s decision in invoking the provisions of section 44AD of the Act and also the decision in not granting deduction on account of interest and depreciation in view of the said Judgment of Rajasthan in the case of Shri Ram Jhanwar Lal, Supra. Therefore, among the three available scenarios above, the estimation of net profits percentage of 15% as adopted by the A.O and granting the deduction to the interest and depreciation should constitute most reasonable and best judgment assessment and it would meet both ends of the justice. Accordingly, grounds raised in both the appeals of the revenue as well as the C.O. of the assessee are partly allowed.
16. In the result, the appeal of the revenue and the C.O. of the assessee are partly allowed.
Order pronounced in the open Court on 29/11/2011
Sd/- Sd/-
(SHAILENDRA KUMAR YADAV) (D. KARUNAKARA RAO)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Pune, dated the 29/11/2011
Copy of the order is forwarded to :,
1. ACIT, Circle-3, Pune
2. Sanjay Bapusaheb Patil, 32, Continental Chambers, Karve Road, Pune-004
3. The CIT(A), Pune
4. The CIT concerned
5. D.R. "B" Bench, Pune
6. Guard File By order Assistant Registrar Income Tax Appellate Tribunal Pune 7