Income Tax Appellate Tribunal - IT
Income-Tax Officer vs Nikka Ram Sanjeev Kumar on 17 March, 1998
Equivalent citations: [1999]69ITD195(NULL)
ORDER
Bedi
1. This is an appeal by the revenue and cross-objection by the assessee relating to assessment year 1989-90. The revenue has agitated the relief of Rs. 27,946 allowed by ld. CIT(A) out of profit, by applying a net profit rate of 8% instead of 10%; whereas the assessee has objected to the CIT(A)'s action in rejecting the book version and applying a rate of 8% for working of business profits; in rejecting its claim for allowance of interest on borrowed capital and depreciation on car and jeep; and in disallowing the expenditure incurred for the purposes of business claimed in the profit and loss account.
2. The assessee is a firm of contractors and it is the first year of its business. The assessee-firm did work of fencing of wire on Indo-Pak border in Punjab, for which it got contract receipts of Rs. 13,96,812. The assessee declared a profit of Rs. 53,302 on these receipts, which gave a net profit rate of 3.9%, which was considered low by the Assessing Officer. On examination of accounts, the Assessing Officer noted that the assessee was not maintaining stock register or daily consumption register. For the purchase of 'bajri' and 'sand', signatures or thumb impressions had been obtained on vouchers, giving only truck number and tractor trolley number, i.e., these payments were not open to verification. The Assessing Officer also noted that the payments to labour were also not open to verification, as no labour register had been maintained. He accordingly rejected the books of account and worked out the profit, by applying a net rate of 10% at Rs. 1,39,690.
3. On appeal, ld. CIT(A), while confirming the action of the Assessing Officer in rejecting the books, has accepted the alternate plea of the assessee that the rate applied at 10% was excessive. After taking into consideration the nature of work, i.e., fencing of wire at Indo-Pak border, which was hazardous in nature and labour-oriented, he held that, 'it will be fair and reasonable to compute profit by applying net rate of 8%.' However, the assessee's plea regarding depreciation allowance on vehicles and interest paid on deposits raised by way of loans for various services, were rejected. Therefore, the revenue is in appeal and the assessee has filed a cross-objection.
4. Learned counsel for the assessee submitted before us that, in view of the Tribunal's orders dated 30-11-1994 in I.T.A. Nos. 57 and 58 of 1990 relating the assessment years 1985-86 and 1986-87, which was followed in I.T.A. No. 943 of 1991 for assessment year 1988-89 dated 12-12-1996 in the case of V. K. Aggarwal & Co., profit rate restricted to 8% by ld. CIT(A) in this case, is unwarranted. Similarly, he submitted that the assessee is entitled to depreciation and interest paid on loans raised for manufacturing activities. In this behalf, he relied on CIT v. Vinod Kumar Bhatia [1995] 211 ITR 253/83 Taxman 466 (Punj. & Har.) and pleaded that interest and depreciation be allowed.
5. Learned Departmental Representative, on the other hand, relied on Saraya Engg. Works v. CIT [1987] 168 ITR 455/31 Taxman 165 (All.) and pleaded that the claim of depreciation is not allowable. He also submitted that the Assessing Officer was very much justified in applying rate of 10% and ld. CIT(A) fell in error in reducing the same to 8%.
He further submitted that in the cases referred to by learned counsel, rate of 9.25% was applied on payments/receipts. So far as profit rate is concerned, he submitted that the order of the Assessing Officer should be restored and, in view of the peculiar facts of this case, neither interest nor depreciation deserves allowance.
6. We have heard the rival contentions, perused the record and find that in the cases referred to by ld. counsel, rate of profit was applied at 9.25%. In one of those cases, interest was not allowed but in the other case, same was allowed. In the case of Vinod Kumar Bhatia (supra), we find that the point at issue was regarding the question of law, whether to be referred or not, and it was held by the Hon'ble High Court, as under :-
"It may be made clear at the outset that in the present petition, we are not sitting in appeal over the order, annexure P.4, dated 3-7-1992, of the Appellate Tribunal. The present discussion must, therefore, be confined to the precise question whether the aforesaid facts give rise to a question of law, which requires the opinion of the High Court. We are of the view that no such question of law arises."
From the above and in view of the peculiar facts of this case, we are of the view that it would be fair and reasonable, if profit rate of 9% is applied on total payments. The Assessing Officer is directed to compute income accordingly and allow depreciation, if claimed and particulars are available on record. But so far as interest is concerned, we are unable to accept the plea of the assessee. We also notice that depreciation was allowed in the case of Chopra Bros. (India) (P.) Ltd. v. ITO [1993] 45 ITD 85 TM. In CIT v. Bishambhar Dayal & Co. [1994] 210 ITR 118/74 Taxman 123 (All.) also, it has been held that depreciation has to be allowed, where flat rate is applied.
7. As a result, both the revenue's appeal and the assessee's cross-objection are partly allowed, as above.
Shri R. K. Bali, Accountant Member
1. I have carefully gone through the proposed order of my ld. brother but I am unable to agree with his reasoning and conclusion with regard to the addition on account of interest paid on borrowed money for investment in the business of contract work relating to the fencing of wire on Indo-Pak border in Punjab. The assessee had declared a profit of Rs. 53,302 on contract receipts of Rs. 1.3,96,812 giving a net profit rate of 3.9% which was considered low by the Assessing Officer who accordingly rejected the books of account and worked out the profit by applying a net rate of 10%, at Rs. 1,39,690. The assessee appealed and pleaded before the ld. first appellate authority that the contract taken by the assessee was labour oriented and hazardous in nature and as such the application of net rate of 10% was higher and the books results should be accepted. The ld. first appellate authority, however, directed that the profit should be computed by applying a net rate of 8% but further directed that depreciation allowance on vehicles and interest paid on deposits raised by way of loans for various services were not to be allowed deduction as the income was being estimated by applying a net rate of 8%.
2. Against the order of the ld. CIT(A), the Revenue has filed the appeal and the assessee has filed a cross-objection. In the appeal of the Revenue, the agitation is against the relief of 2% allowed by the ld. first appellate authority from the net rate of 10% applied by the Assessing Officer whereas the assessee has challenged the action of the ld. CIT(A) in not granting depreciation allowance on vehicles as well as interest paid on deposits raised by way of loans for purposes of business.
3. During the course of appellate proceedings before us, the assessee relied on the Tribunal's decision dated 30-11-1994 in ITA Nos. 57 & 58/Chd./1990 relating to assessment years 1985-86 and 1986-87 which was followed in I.T.A. No. 943/Chd./1991 for assessment year 1988-89 order dated 12-12-1996 in the case of V. K. Aggarwal & Co. and submitted that even in a case where income is computed in the case of a contractor by applying a flat rate, the deduction on account of depreciation and interest on borrowed capital for purposes of business has to be allowed. Reliance was also placed on the Punjab and Haryana High Court judgment in the case of Vinod Kunwr Bhatia (supra) and it was prayed that interest and depreciation should be allowed. On the other hand, the ld. D.R. relied on the decision in the case of Saraya Engg. Works (supra) and claimed that depreciation as well as interest were not allowable as these were deemed to have been considered while applying the net rate of profit. The ld. D.R. also submitted that the Assessing Officer was very much justified in applying a net profit rate of 10% and the CIT(A) was in error to reduce the same to 8%.
4. After considering the submissions of the parties, my ld. brother held that it would be appropriate to apply a net profit rate of 9% on total payments and also directed that depreciation should be allowed relying on the decision of third member in the case of Chopra Bros. (India) (P.) Ltd. (supra) as well as the decision of the Allahabad High Court in the case of Bishambhar Dayal & Co. (supra). He however refused to allow deduction on account of interest paid on borrowed capital although the Hon'ble Punjab and Haryana High Court in the case of Vinod Kumar Bhatia (supra) has approved the action of the Tribunal in allowing depreciation as well as interest when the profit in the case of a contractor is estimated by applying a flat rate.
5. My ld. brother has extracted a portion of the judgment in the case of Vinod Kumar Bhatia in para 6 of the proposed order to prove the point that what the High Court decided in that case was that the facts in that case did not give rise to a question of law which required the opinion of the High Court and the High Court was not sitting in appeal over the order of the Tribunal dated 3-7-1992.
6. As far as the application of net profit rate of 9% and the direction of my ld. brother with regard to grant to depreciation after determination of income by applying a net rate of profit is concerned, I am in full agreement with his conclusion. However, I am of the opinion that in view of the binding decision of the Hon'ble Punjab and Haryana High Court in the case of Vinod Kumar Bhatia (supra) the assessee is further entitled to deduction of interest on borrowed capital used for purposes of its business of carrying on the contract work. The same is amply clear from the fact that in the case of Vinod Kumar Bhatia (supra), the Tribunal deleted the addition of Rs. 24,158 on account of interest paid and Rs. 76,725 on account of depreciation on truck which was disallowed by the departmental authorities while computing the income of the assessee Vinod Kumar Bhatia by applying a flat rate of 10% on the total contract payments. The question of law in the case of Vinod Kumar Bhatia sought by the Revenue under section 256(1) reads as under :-
"Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in deleting the additions of Rs. 24,158 on account of interest paid and Rs. 76,725 on account of depreciation on truck when the total income has been computed by applying a flat rate of ten per cent. On the total contract payments ?"
The above reference application by the Revenue was dismissed by the Tribunal vide order dated 10th December, 1992. The Revenue came in petition under section 256(2) before the High Court and the Hon'ble High Court after discussing the facts of the case, did not find any merit in this petition and dismissed the same in limine. Thus the Hon'ble High Court approved the order of the Tribunal in allowing relief to the assessee on account of interest paid on borrowings as well as on account of depreciation on truck used for the business of the assessee. Thus the Hon'ble High Court having approved the order of the Tribunal in the case of Vinod Kumar Bhatia, the same became a binding precedence for all the authorities executing and interpreting the Income-tax Act under the jurisdiction of the Hon'ble High Court in view of the binding decision of the Hon'ble Supreme Court in the case of Asstt. Collector of Central Excise v. Dunlop India Ltd. [1985] 154 ITR 172 wherein it is held as under :-
"In the hierarchical system of courts which exists in our country, it is necessary for each lower tier, including the High Court, to accept loyally the decisions of the higher tiers. It is inevitable in a hierarchical system of Courts that there are decisions of the supreme appellate tribunal which do not attract the unanimous approval of all members of the judiciary. But the judicial system works only if someone is allowed to have the last word and that last word, once spoken, is loyally accepted. The better wisdom of the court below must yield to the higher wisdom of the Court above. That is the strength of the hierarchical judicial system."
Accordingly I will direct that the income of the assessee be determined by applying a net profit rate of 9% as suggested by my ld. brother but further direct that after computing the income by applying net profit rate of 9%, the assessee should be allowed further deduction on account of depreciation as well as interest paid on borrowed money for purposes of business in accordance with the decision of the Punjab and Haryana High Court in the case of Vinod Kumar Bhatia (supra). The appeal of the Revenue as well as the cross-objection of the assessee are allowed in terms of the above directions.
ORDER U/S 255(4) OF THE INCOME-TAX ACT, 1961
1. On a difference of opinion between the Members who heard this appeal and cross-objection, the following point of difference is referred to the Hon'ble President for the opinion of the third Member :-
Whether, on the facts and in the circumstances of the case, the Judicial Member is justified in denying the claim of interest on borrowed moneys made by the assessee or the claim of interest made by the assessee should be allowed as held by the Accountant Member, while applying net profit rate of 9% which has been agreed by both the Members ?
THIRD MEMBER ORDER The following point was referred to me for decision :
"Whether, on the facts and in the circumstances of the case, the Judicial Member is justified in denying the claim of interest on borrowed moneys made by the assessee or the claim of interest made by the assessee should be allowed as held by the Accountant Member, while applying net profit rate of 9% which has been agreed by both the Members ?"
2. The facts which are not disputed are as follows. The assessee firm did work out fencing of wire on Indo-Pak Border in Punjab for which it got contract receipt of Rs. 13,96,812. The assessee declared a profit of Rs. 53,302 which gives a net profit of 3.9%. The Assessing Officer did not accept the net profit shown by the assessee and applied a rate of 10%. On appeal, the CIT(A) reduced it to 8%. He, however, did not accept deduction on account of depreciation on vehicles and interest paid on deposits raised by way of loans for various services.
3. Aggrieved by the said order, the revenue came up in appeal before the Tribunal and the assessee filed a cross-objection. The revenue challenged the relief of 2% allowed by the CIT(A) and the assessee challenged the action of the CIT(A) in not granting depreciation allowance on vehicles as well as interest paid on deposits raised by way of loans. Ld. Judicial Member was of the view that a net profit of 9% on total payments is appropriate and deduction of depreciation should be allowed in the light of the decision of the Tribunal in the case of Chopra Bros. (India) (P.) Ltd. (supra), as well as the decision of the Hon'ble Allahabad High Court in the case of Bishambhar Dayal & Co. (supra). He, however, refused to allow deduction on account of interest paid on borrowed capital. Ld. Accountant Member, however, was of the view that the assessee should be given deduction of interest paid on borrowed money in the light of the decision of the Hon'ble Punjab & Haryana High Court in the case of Vinod Kumar Bhatia (supra).
4. On this difference of opinion, the above point was referred to me. At the time of hearing before me, Shri Rakesh Goel, ld. D.R. appeared for the revenue and Shri Tej Mohan Singh, ld. A.R. appeared for the assessee.
5. On careful consideration of the rival submissions, in the light of material on record, I am of the view that the question referred, cannot be answered as the premises on which the question referred by the ld. Members are not the same. Apparently, there is no discussion by the ld. Judicial Member that the amount borrowed was not for the purpose of the business. In such a case, the presumption is that the amount was indeed borrowed for the purpose of the business, but the interest has already been included while estimating the net profit from the contract receipt. In other words, the ld. Judicial Member held that all the expenses including the interest paid by the assessee have already been included in the inputs and need not be separately deducted. On the other hand, ld. Accountant Member allowed deduction on the interest on the reasoning that this has not formed part of the expenses considered by the Assessing Officer and CIT(A) while estimating the net profit. On these facts, there can be no correct answer of the question referred to me.
6. The business of the assessee is construction of wire fencing on Indo-Pak Border. The contract receipt during the year was Rs. 13,96,812. The Assessing Officer did not accept the expenses claimed as they were not fully vouched and verifiable. When an estimate of an income is made, all the inputs i.e., the expenses including interest paid for capital borrowed for the purpose of the business are allowable deductions. In doing so, it is to be seen whether the assessee borrowed capital for the purpose of the business and was used for the same. If so, then the interest thereon has to be allowed as a deduction. If, however, the assessee has sufficient capital and in spite of that borrowed money which was not utilised for the purpose of the business it is for the Assessing Officer to disallow the claim as the borrowed money was not for the purpose of the business. In the present case, there is no dispute regarding the capital borrowed which was utilised for the purpose of the business. Admittedly, it is allowable deduction. The question, therefore, for the Bench to decide is whether the interest paid by the assessee should be deducted alongwith the other expenses and the net profit should be arrived at after allowing all the allowable deductions. Alternatively, if the interest is not considered while working out the net profit, then it has to be allowed as deduction from the net profit. Since the ld. Members in this case did not proceed on the same premises, I consider it necessary to send back the matter to their file with a direction that they will re-consider the rate of net profit and in doing so, they should decide whether the interest paid by the assessee should be included and allowed as deduction alongwith other expenses. If the same is considered at this stage, it should not be allowed as deduction again from the net profit. On the other hand, if the ld. Members decide not to take the interest into account while estimating the net profit, then the interest to the extent the capital borrowed was utilised for the business should be considered for deduction from the net profit.
7. With these remarks, I refer back the matter to the Bench and return the question unanswered. The Bench will decide the issue in accordance with law after giving full opportunity to both the parties.