Orissa High Court
Manohar Ram Chandra Patil vs Union Of India (Uoi) And 3 Ors. on 7 November, 2002
Equivalent citations: (2003)180CTR(ORI)548, [2003]260ITR87(ORISSA)
Bench: Chief Justice, A.S. Naidu
JUDGMENT P.K. Balasubramanyan, C.J.
1. In this writ petition, an assessee under the Income Tax Act, 1961 (hereinafter referred to as the "Act") challenges the constitutional validity of Section 44-AD of the Income Tax Act, and on that basis seeks the issue of a writ of certiorari to quash the order of assessment made for the assessment year 1994-1995 and the demand made pursuant thereto. Admittedly, the assessee is a Sub-contractor of M/s. Tata Robin, Frasers Limited and during the assessment year, he had executed work as a sub-contractor under the Principal Contractor. Admittedly the petitioner did not maintain accounts relating to the sub-contractor works. In that situation, the assessing officer invoked Section 44-AD of the Act and presumed the income of the assessee at 8% of the gross receipts payable to the assessee by the principal contractor during the previous year on account of the sub-contract business. It is in that context that the assessee has challenged the constitutional validity of Section 44-AD of the Act.
2. Section 44-AD of the Act contains a special provision for computing profits and gains of business of civil construction etc. The Section provides that notwithstanding anything to the contrary contained in Sections 28 to 43-C of the Act, in the case of an assessee engaged in the business of civil construction or supply of labour for civil construction, a sum equal to 8% of the gross receipts paid or payable to the assessee in the previous year on account of such business or as the case may be, a sum higher than the amount at 8%, if it is so declared by the assessee in his return of income, shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and Gains of business or Profession". What is argued on behalf of the assessee is that Section 194-C of the Act provides for deduction at source at 2% of the amount paid or found payable to the contractor and 1 % of the amount payable to a sub-contractor and in view of the inconsistency between that provision and the presumptive income specified in Section 44-AD of the Act, it must be held that Section 44-AD is arbitrary and unreasonable. It is pointed out that under Section 194-C(2) the amount deductible in case of a sub-contractor is only 1% of the sum found payable by the contractor, and in the context of that stipulation the provision for presuming the income to be 8% must be held to be invalid, since it is arbitrary and violative of Article 14 of the Constitution of India. Counsel submits that in the light of the decision of the Supreme Court in East India Tobacco Co. etc. v. State of Andhra Pradesh and another, AIR 1962 SC 1733, it is open to the assessee to challenge the validity of the relevant provision under the Income Tax Act to be violative of the fundamental rights of the assessee. The arguments on behalf of the assessee are met by the learned Standing Counsel for the Income Tax Department by pointing out that Section 194-C of the Act operates in a different field and it has nothing to do with assessing a sub-contractor on the income he has received and Section 44-AD clearly indicates the income to be presumed in a case where the assessee is not in a position to produce the actual accounts and satisfy the assessing officer of the income received by him from such work. It is also pointed out that the presumption regarding the income contained in Section 44-AD of the Act applies only in a case where gross receipts paid or payable exceeded Rs. 40,00,000/-. It is therefore, submitted that there is nothing irrational or arbitrary in Section 44-AD of the Act.
3. Section 44-AC of the Act contained a special provision for computing profits and gains from the business of trading in liquor. The Section was omitted with effect from 1.4.1993. But, the constitutional validity of that Section came up for consideration before the Supreme Court in Union of India v. A. Sanyasi Rao; 219 ITR 330 (SC). The Supreme Court after noticing that Article 14 of the Constitution of India applies equally to tax laws held that there was nothing in the legislative measure to offend Article 14 of the Constitution and that the said Section read with Section 206-C of the Act was not unconstitutional. But, their Lordships clarified that Section 44-AC was an adjunct to Section 206-C of the Act and Section 44-AC of the Act did not dispense with a regular assessment as provided, in accordance with Sections 28 to 43-C of the Act. We think that the ratio of the said decision applies equally to Section 44-AD of the Act and the Section cannot be said to be in any manner arbitrary of violative of Article 14 of the Constitution of India. We are therefore of the view that the challenge to the validity of Section 44-AD of the Act must fail.
4. It is clear from the decision referred to above that the Section does not dispense with a regular assessment as provided in accordance with Section 28 to 43-C of the Act. It is in that context that the assessing officer had called upon the assessee to file a return and after scrutinising the return had made an assessment in terms of Section 143(3) of the Act. The assessing officer has noticed that no books of accounts had been maintained as conceded by the assessee and the attempt of the assessee was to estimate the income at 5% of the gross civil contract works amount. It is in that context that the assessing officer took note of Section 44-AD of the Act and estimated the income of the assessee at 8% of the gross amount covered by the civil contract. It cannot therefore be said that there has been any illegality committed by the officer on that score.
5. The argument that Section 44-AD of the Act does not apply to sub-contracts and applies only to a contract cannot be accepted. The mere fact that in the matter of deduction at source, a distinction is made in Section 194-C between a contractor and a sub-contractor, does not enable the assessee to contend that Section 44-AD cannot apply to the case of a sub-contractor. The Section speaks of any assessee engaged in the business of civil construction or supply of labour for civil construction and provides for a presumptive profit from such business. Whether a contractor or a sub-contractor, the assessee is admittedly engaged in the business of civil construction or supply of labour for civil construction within the meaning of Section 44-AD of the Income Tax Act. On the wording of Section 44-AD of the Act, there is no doubt that a sub-contractor would also come squarely within the purview of that provision. We are therefore not in a position to accept the argument that a sub-contractor is not covered by Section 44-AD of the Act.
6. For the reasons aforesaid, we find no merit in this writ petition. The writ petition is dismissed.
A. S. NAIDU, J.
7. I agree.