Income Tax Appellate Tribunal - Jaipur
Tarad Construction Co. vs Income Tax Officer on 28 August, 1996
ORDER
B.S. Saluja, J.M.
1. The assessee is in appeal against the consolidated order of the CIT(A), Jodhpur, dt. 11th Oct., 1995, for the asst. yrs. 1991-92 and 1992-93.
ITA No. 2091/Jp/952. In the asst. yr. 1991-92 the AO applied a net profit rate of 10.5% on total receipts of Rs. 32,59,091. The AO also did not allow the claim of the assessee for depreciation and interest paid to third parties. The assessee had declared G. P. rate of 8.31% during this year.
2.1. On first appeal, the counsel of the assessee submitted that the AO has not allowed 100% depreciation on hutments as claimed by the assessee in the asst. yr. 1991-92. The learned CIT(A) observed that the AO had applied the net profit rate of 10.5% and has observed that the same takes care of the depreciation claimed by the assessee. He, therefore, agreed with the AO in principle. However, keeping in view the rise in the price index of various inputs, the learned CIT(A) allowed a lumpsum relief of Rs. 50,000 to the assessee.
3. The learned counsel for the assessee Shri Suresh Ojha invited our attention to the written submissions filed before the learned CIT(A), wherein attention of the learned CIT(A) was invited to the decisions by the Tribunal in the case of M/s Tolaram Phusaram, Bikaner, and Shri Poonam Chand Acharya, Bikaner, where G. P. rates of 8% and 7% were found reasonable in the case of contractors maintaining no books of account. In the said written submissions it was further mentioned that the case of the assessee was rather well placed because the books of accounts were there and, therefore, it was contended that the AO should not have applied higher rate than in the cases in which no books of accounts were maintained. It was further submitted that during the year under consideration the prices of diesel were substantially higher on account of Gulf war. It was also contended that even in the case of assessee in the preceding year a rate of 10% was applied when the assessment was completed under s. 143(3). The assessee also referred to the case of M/s Ajmera Singh & Co. wherein a rate of 9.06% was held to be reasonable. The learned counsel further submitted that the main reason for the addition was that according to the AO the household expenses of the partners were too low as there were hardly any withdrawals and, therefore, the addition made also took into account the low withdrawals for household expenses. The learned counsel also submitted that in this year the returned income by the assessee was Rs. 1,84,736 and that after the appeal effect the assessed income comes to Rs. 1,87,330 and that only an addition of Rs. 2,594 is sustained by the learned CIT(A), which looking to the facts of the case should not have been sustained.
4. The learned Departmental Representative Shri A. K. Singh strongly refuted the submissions made by the learned counsel and submitted that the main reason given by the AO related to maintenance of the books in improper manner and that it was a clear case of application of the provisions of s. 145 of the Act. He submitted that the low withdrawals by the partners was only one aspect for making the additions. The learned Departmental Representative further submitted that the assessee could not produce any vouchers with reference to the expenses claimed and that even the purchase of coal, etc. were unvouched. He further submitted that the cases mentioned by the learned counsel were distinguishable on facts. He, therefore, submitted that there should be no interference with the orders of the first appellate authority.
5. The learned counsel in reply submitted that it was never contested that the provisions of s. 145 were not applicable and that the only submission was that reasonable G. P. rate should have been applied by the AO. He also placed before the Bench the relevant papers relating to assessment of partners and submitted that no addition should have been made in the hands of the firm on account of low withdrawals by the partners in view of the assessments made in the case of partners. He also submitted that the rate of 8.31% declared by the assessee during the assessment year under consideration was without claiming depreciation and interest paid to third parties.
6. We have carefully considered the rival submissions on this issue and have also perused the orders of the tax authorities and the relevant record to which attention was invited during the course of hearing. It is observed that in various decisions the Tribunal has been allowing the claim of the assessees for depreciation and interest paid to third parties where net profit rate has been applied by the tax authorities. In this connection the learned counsel has filed copies of the decision dt. 15th Nov., 1994 in the case of ITO Ward-2 vs. Shri Poonam Chand Acharya, Bikaner in ITA No. 1298/Jp/1991 and of decision dt. 31st Oct., 1994 in the case of ITO Ward-2 vs. Shri Bhanwarlal Choudhary in ITA No. 884/Jp/1991. The learned counsel has also filed a copy of decision of the Tribunal dt. 9th Aug., 1979, in the case of Hiranand Ramchand vs. ITO (ITA No. 346/Jab/1978-79) [reported at (1979) 8 TTJ (Jab) 603], wherein it was held that additions on account of low withdrawals by partners unmatching their household expenses were misconceived and that the firm was not liable to explain how the partners met their household expenses. In view of the foregoing decisions and taking into account the overall facts and circumstances of the case, we feel that the addition of Rs. 2,594 as sustained by the learned CIT(A) is uncalled for, as the learned counsel has specifically mentioned in response to a query made by the Bench that the G. P. rate of 8.31% has been declared by the assessee without taking into account the claim of depreciation and interest paid to third parties. The said addition is, therefore, deleted. In view of the assertion made by the learned counsel that the G. P. rate has been declared without claiming depreciation and interest, the other grounds of appeal become infructuous and the same are, therefore, rejected.
7. In the result, the appeal is allowed in part.
ITA No. 2092/Jp/95 :8. In the asst. yr. 1992-93 the assessee filed a return at Rs. 1,65,140. The return was processed initially under s. 143(1)(a). However, with the prior permission of the CIT(A) notice was issued under s. 143(2). The assessee was asked to produce cash book and other books of accounts, which were test checked. The AO observed that the assessee had received Rs. 23,42,341 on account of contract receipts and that the assessee had shown profit of Rs. 1,96,494 giving a G. P. rate of 8.38%. He further observed that the assessee had shown total profits at Rs. 1,65,138 which gave a G. P. rate of 7.05%. The AO made a reference to the asst. yr. 1991-92 wherein the assessee had shown a G. P. rate of 8.31%. He also observed that in the preceding year a net profit rate of 10.5% was applied without allowing depreciation and interest paid to third parties. He also pointed out that the cash book was written by the assessee fortnightly and that the books of account could not be believed. He further observed that the assessee had not maintained any vouchers for various expenses. The AO, therefore, applied the provisions of s. 145 and estimated the profits at net rate of 10%. In the process the AO also made a reference to the provisions of s. 44AD of the IT Act whereby net rate of 8% became applicable from asst. yr. 1994-95 in case of contractors having gross receipts upto Rs. 40 lacs. The AO also referred to the decision of the Tribunal, Jaipur Bench, in the case of M/s Sriram & Co. and M/s Gopalaram Pemaram wherein net profit rate of 9% was upheld without allowing depreciation and interest paid to third parties.
9. On first appeal, the counsel of the assessee contended that the AO has not allowed depreciation on truck and machinery used for construction work. The learned CIT(A), however, referred to the assessment order wherein the AO had applied the lower net rate of 10% after taking into consideration the depreciation on trucks and machinery and other equipments. The learned CIT(A) agreed with the AO with reference to the application of net profit rate of 10% in principle. However, keeping in view the rise in price index he allowed a lumpsum relief of Rs. 60,000 to the assessee during the asst. yr. 1992-93.
10. The learned counsel for the assessee submitted that the AO had applied flat rate of 10% without considering the claim of the assessee for depreciation and interest. He submitted that when the provisions of s. 145 are invoked, the AO has to see the past history of the assessee. He submitted that in the asst. yr. 1990-91 the AO had applied flat rate of 10% subject to allowing deduction on account of depreciation and interest paid to third parties and that there was no appeal by the assessee. He further submitted that similarly in the asst. yr. 1991-92 the AO had applied a flat rate of 10.5% subject to allowability of deduction on account of depreciation and interest paid to third parties. However, in the assessment year under consideration i.e., 1992-93 the AO has applied a flat rate of 10% without allowing the claim of the assessee for depreciation and interest paid to third parties. In this connection he invited our attention to the submissions made before the CIT(A), wherein the assessee referred to the decisions of the Tribunal in the cases of M/s Tolaram Phusaram, Bikaner, Shri Poonamchand Acharya, Shri Bhanwar Lal Choudhary and M/s Agarwal Construction Co. In the said cases a G. P. rate of 7 to 8% was found reasonable. He also invited our attention to the decision of the Tribunal dt. 31st March, 1995, in the case of Mohangarh Construction Co. vs. Asstt. CIT in ITA No. 1732/Jp/1994, wherein the Tribunal relying on the case of Chopra Bros. (India) Pvt. Ltd. vs. ITO (1993) 46 TTJ (Chd) (TM) 523 : (1993) 202 ITR 40 (A.T.), wherein the CBDT Circular No. 29-D, dt. 30th Aug., 1965, and various cases of the High Courts were considered, held that after rejection of accounts and estimation of net profits, depreciation should be worked out separately. The learned counsel has also filed copies of the decision of the Tribunal, Chandigarh Bench, in the case of Chopra Bros. (India) Pvt. Ltd. vs. ITO (supra). The learned counsel further submitted that the main basis for applying the net profit rate of 10% by the AO was low withdrawals by the partners, the two decisions of the Tribunal referred by the AO - which were never confronted to the assessee, and that the circular issued by the CBDT was very old and various developments had taken place thereafter including the reference to the provisions of s. 44AD. The learned counsel submitted that the provisions of s. 44AD came into force from the asst. yr. 1994-95 and that the same cannot be applied in the case of the assessee. He further submitted that the circular issued by the CBDT have binding force for the tax authorities. The learned counsel also relied upon the decision in the case of CIT vs. Bishambhar Dayal & Co. (1995) 210 ITR 118 (All). In view of the foregoing, he submitted that the claim of the assessee for depreciation and interest paid to third parties ought to be allowed.
11. The learned Departmental Representative relied heavily on the orders of the tax authorities and his further submissions were reiteration of the reasons given by the AO for rejecting the books of account and applying net profit rate of 10%. The learned Departmental Representative further submitted that the AO had rightly relied on the decision of the Tribunal wherein net profit rate was upheld without allowing depreciation and interest paid to third parties.
12. We have carefully considered the rival submissions and have also perused the orders of the tax authorities and various decisions referred to by the learned counsel. It is observed that in majority of the decisions the Tribunal has held the view that even after applying the net profit rate, depreciation and interest paid to third parties are allowable separately. In the case of Chopra Bros. (India) Pvt. Ltd. (supra) and Mohangarh Construction Co. (supra), the Tribunal has carefully considered the question of allowability of depreciation in circumstances similar to the case before us. Respectfully following the aforesaid decisions of the Tribunal and having regard to the decision reported in (1995) 210 ITR 118 (All) (supra), we feel that the claim of the assessee for depreciation and interest paid to third parties has to be allowed. The AO is accordingly directed to allow these claims in relation to the assessment year under consideration after verifying the factual details.