Income Tax Appellate Tribunal - Bangalore
Vijayaraj Constructions Pvt. Ltd.,, ... vs Department Of Income Tax on 17 December, 2008
Page 1 of 9 1 ITA No.187/Bang/2009
IN THE INCOME TAX APPELLATE TRIBUNAL,
BANGALORE BENCH 'A'
BEFORE SHRI K P T THANGAL, VICE PRESIDENT AND
SHRI N L KALRA, A.M.
ITA No.187/Bang/09
(Asst. year 2005-06)
The Asst. Commissioner of Income Tax,
Central Circle-2(3), Bangalore. - Appellant
Vs
M/s Vijayraj Constructions Pvt. Ltd.,
#32, CSRIE, 17th H Main,
Grape Garden, 6th Block,
Koramangala, Bangalore-95. - Respondent
Appellant by : Shri Jason P Boaz
Respondent by : Shri Vallinath
ORDER
PER N L KALRA :
The revenue has filed an appeal against the order of learned CIT(A)-VI, Bangalore dated 17th December, 2008.
2. The grounds of appeal raised by the revenue are as under:-
i) The learned CIT(A) ought not to have reduced the percentage of profit estimated from 10% to 4.5% since no bills/vouchers in support of expenditure have been produced either in the assessment proceedings or Page 2 of 9 2 ITA No.187/Bang/2009 appeal proceedings. The learned CIT(A) ought to have considered that there is huge variation in percentage of profit in earlier years and that in immediate preceding year it was 5.89% as pointed out by learned CIT(A) himself.
ii) The learned CIT(A) ought to have considered that the percentages of profits for earlier years relied on by the assessee are on its returned income and not on the income assessed by the Assessing Officer for respective years and hence the percentages of profits shown were not subjected to verification in the earlier years.
iii) The learned CIT(A) has erred in holding that the percentage of profit will come down with increase in turnover which in fact will go up in view of reduction in indirect costs and other administrative expenditures.
3. The assessee company is engaged in executing construction contracts and also engaged in the construction of building for sale. The Assessing Officer issued notice u/s 143(2) on 12th November, 2007 vide which the case was fixed for 22nd November, 2007. The assessee sought adjournment and the case was adjourned to 30th November, 2007. The Assessing Officer issued a notice u/s 142(1) calling for certain information. None attended the proceedings on 30th November, 2007 and no reply was filed in response to the queries raised. The Assessing Officer issued another letter on 14th December, 2007 and the case was fixed for 17th Page 3 of 9 3 ITA No.187/Bang/2009 December, 2007. None attended the proceedings on 17th December, 2007 and therefore, the Assessing Officer completed assessment u/s 144 of the I T Act. 3.1 During the previous year relevant to the asst. year under consideration, the assessee has shown a receipt of Rs.6,99,50,000/- from sale of building and contract receipt has been shown at Rs.22,85,61,801/-. As per the Assessing Officer, the assessee has debited huge expenses towards material consumed, construction expenses and administrative expenses. No details for such expenses have been furnished. The Assessing Officer therefore was of the view that the claim of the expenses is on higher side. The Assessing Officer estimated the income at 10% of the receipts and accordingly assessed the total income at Rs.2,98,51,180/- as against return of income of Rs.91,53,216/-.
4. Before the learned CIT(A) it was argued that the estimation of net profit ratio is arbitrary and very high. The assessee is an old assessee and at no point of time, it has scaled the height of 10%. The assessee has shown net profit rate of 5.89% in asst. year 2004-05. In asst. year 2003-04, the net profit was 3.02%. The turnover of the asst. year under consideration is more than four times of immediately preceding year. It was argued that as turnover increases, expenses too become more resulting in lesser net profit rate. The learned Page 4 of 9 4 ITA No.187/Bang/2009 CIT(A) after considering the submissions of the assessee held as under:-
"The above was considered. I find strength in the argument of the Authorised Representative. Admittedly complete bills and vouchers showing expenditures have not been produced. Therefore the returned profit cannot be accepted as a truth. But keeping in view of the past history of the case increasing the net profit rate to 10% of the gross turnover, I find, is not justified. I therefore reduce the net profit rate to 4.5%. The AO is directed to compute the profit accordingly. Thus appellant is allowed partial relief".
5. During the course of proceedings before us, the learned DR submitted that the assessee has not filed any details either before the Assessing Officer or before the learned CIT(A). In the immediately preceding year, the net profit was 5.89%. If one has to consider the past history of the case, then net profit rate as disclosed by the assessee in the immediately preceding year should have been applied. The learned CIT(A) should have considered the percentage of profit on the basis of the assessment made by the Assessing Officer and not on the basis of percentage of profit returned. In case the income has been accepted u/s 142(1) then it does not mean that the revenue has accepted the reasonableness of net profit rate. If the assessment is made u/s 143(1) then the Assessing Page 5 of 9 5 ITA No.187/Bang/2009 Officer has not applied his mind. It was further submitted that in case the turnover is increased then the net profit rate should go up because indirect cost and other administrative expenses got reduced. During the course of proceedings before us, the learned DR drew our attention to the assessment order made for the asst. year 2002-03. The returned income was accepted for the asst. year 2002-03. Assessment for the asst. year 2003-04 has also been completed u/s 143(3). In that year, net profit as per the books worked out to 3.69% and it was adopted at 5%. Income returned for the asst. year 2004- 05 was accepted vide order u/s 143(3). Hence, the earlier assessments have been completed u/s 143(3) and it is not the case that the learned CIT(A) has considered the net rate of profit as disclosed by the assessee in the return. It was submitted that increase in volume of business will bring down the gross margin rate of profit but increases the volume of profit. The quantum of profit increase as against the rate of profit. The learned DR submitted that the assessee was willing to produce the necessary documents and in fact produced all other information that was called for. Since the information, which was asked at the last stage of proceedings, the assessee sought time for filing of that information. The last notice issued was served on 15th December, 2007 and the case was fixed for hearing on 17th December, 2007. Since the case was going to be barred by limitation on 31st December, 2007, Page 6 of 9 6 ITA No.187/Bang/2009 therefore, the Assessing Officer completed the assessment u/s 144 of the I T Act.
6. The learned AR has referred to the decision of the Jodhpur Tribunal in the case of ITO v Munichand Dhariwal 33 DTC 497. In that case, gross profit rate declared by the assessee was of less than 5% was accepted by the department in earlier year and therefore, the relief given by the Commissioner of Income Tax (Appeal) was upheld by the Tribunal. The learned AR has referred to the decision of Rajasthan High Court in the case of CIT v Bhawan VA Path Nirman (Bohra) & Co. (No.2) 258 ITR 440. In this case, the net profit rate was applied for preceding year subject to adjustment towards depreciation and interest and therefore, the same rate applied by the Tribunal in the succeeding year was upheld.
7. We have heard both the parties. Assessment for the asst. year 2002-03 has been completed u/s 143(3) r.w.s. 153A. As per the assessment order, action u/s 132 was conducted in the case of Shri K C Vijayakumar, Director of the assessee company on 31st December, 2003. No discrepancy has been noticed even after conducting search and return was accepted. Assessment for the asst. year 2003-04 has also been completed u/s 143(3) r.w.s. 153A. The net profit declared was 3.69% and the same was adopted at 5%. For this asst. year Page 7 of 9 7 ITA No.187/Bang/2009 also, books of account relating to the company were seized. Even on the basis of the seized books of account, the Assessing Officer applied the net profit rate of 5%. The assessment for the asst. year 2004-05 has also been completed u/s 143(3). The returned income has been accepted. Perhaps the net profit rate was accepted because the net profit rate declared for the asst. year 2004-05 was 5.89% i.e. more than 5% applied in the immediately preceding year. It is true that the turnover for the asst. year 2004-05 was more than the declared profit rate. Hence, in the case of the assessee, it cannot be accepted as a matter of principle that increase in turnover will result in decrease in net profit.
8. In the case of a contractor, we have to see the gross profit rate declared by the assessee before interest and depreciation. Hence, one has to compare gross profit declared in the year with the gross profit rate disclosed in the immediately preceding year. We are reproducing the comparative decrease for both the asst. years:-
Item A.Y. 2004-05 A.Y. 2005-06
(Rs.0 (Rs.)
Turnover 29,85,11,801 6,29,25,015
Profit after depreciation & 1,02,64,523 37,31,580
interest
Depreciation 55,50,910 23,50,985
Finance charges 98,69,901 18,47,868
Profit before depreciation and 2,56,85,334 6,38,42,082
interest
Profit rate before depreciation 10.015% 8.615%
and interest
Page 8 of 9 8 ITA No.187/Bang/2009
Thus, the fall in profit rate before interest and depreciation as compared to last year is 1.4%. The assessee has declared a net profit, after interest and depreciation, an income of Rs.91,53,216/- on turnover of Rs.29,85,11,101/-. This gives the net profit rate of around 3%. The learned CIT(A) has applied net profit rate of 4.5% on the total receipts. Thus, from the declared results, the learned CIT(A) has upheld the addition of 1.5% to the net profit. This favours comparably with the fall in profit before interest and depreciation as compared to last year.
9. The Hon'ble Rajasthan High Court in the case of CIT v Bhawan VA Path Nirman (Bohra) and Co. (No.1) 258 ITR 431 upheld net profit rate after interest and depreciation as applied in the earlier years. In that case, the Assessing Officer was applying net profit rate before interest and depreciation but for the year for which the matter was considered by the Hon'ble High Court, the Assessing Officer applied net profit rate and did not allow depreciation and interest. The Hon'ble Rajasthan High Court observed that the trading result obtained by applying such net profit rate needed further appropriation towards allowable depreciation and interest on borrowings. Thus, while applying net profit rate one has to consider the net profit rate as disclosed by the assessee before depreciation and interest. Considering the issue from Page 9 of 9 9 ITA No.187/Bang/2009 this angle, it is clear that the rate applied by the learned CIT(A) is justified.
10. In the result, the appeal of the revenue is dismissed.
Pronounced in the open court on 16th October, 2009.
Sd/- Sd/-
(K P T THANGAL) (N L KALRA)
VICE PRESIDENT ACCOUNTANT MEMBER
Bangalore,
Dtd. 16/10/2009
Copy to : 1. The Assessee 2.The Revenue 3. The CIT(A) concerned.4. The CIT concerned. 5. The DR 6. Guard File.
7. GF, ITAT, New Delhi.
MSP/07.10. By Order Asst. Registrar, ITAT, Bangalore.