Income Tax Appellate Tribunal - Amritsar
Income Tax Officer vs Khosla Construction Co. on 8 December, 2000
ORDER
1. The Revenue has filed an appeal against the order of the CIT(A), Bhatinda, dt. 14th Dec., 1993, and the assessee has filed C.O. arising out of that order. 2. The relevant facts of the case appearing from the orders of the authorities below in brief are that the assessment was framed under Section 143(3) and during assessment proceedings cash book and ledger were produced before the AO. It was also stated that no other account book/register had been kept. The AO observed that proviso to Section 145(1) was clearly applicable in this case. He further observed that the assessee received gross payments at Rs. 22.82,261, and declared net profit at Rs. 1,84,337 which was 8 per cent. The AO considered it as low and observed that in such type of contractor's qases the net profit rate of 10 per cent was being applied and upheld in appeals. The contention of the assessee was that even if proviso to Section 145(1) was applicable in that case, the depreciation was still allowable. This explanation of the assessee was not accepted by the AO who applied net profit rate of 10 per cent without allowing any further deduction in its own. He relied on the following case laws :
(i) Brij Bhushan Lal Patdaman Kumar v. CIT (1978) 115 ITR 524 (SC);
(ii) CIT v. Kartar Singh Gill (1979) 117 ITR 618 (All) and,
(iii) Saraya Engg. Works v. CIT (1987) 168 ITR 455 (All).
3. In the first appeal before the CIT(A), the assessee raised the issues that rate of 10 per cent on gross receipts was excessive since depreciation amounting to Rs. 17,887 had not been allowed and the same was allowable in view of the CBDT Circular dt. 31st Aug., 1965, and the AO had not allowed the interest to the tune of Rs. 26,009 paid on borrowed capital. It was further pleaded before the learned CIT(A) that the depreciation was required to be allowed since the same was duly claimed in the return of income. He further argued that the depreciation was to be allowed even if the accounts were rejected [Allahabad Glass Works v. CIT (1961) 42 ITR 439 (All)] and where the net income was estimated, depreciation was required to be allowed as per the instructions of the CBDT Circular No. 29-D(XIX-14) (F. No. 45-239-65-ITJ) dt. 31st Aug., 1965. He further, emphasised that the benevolent instructions of the CBDT were binding as held by the Bombay High Court Kirti Lal Jaisinglal & Co. v. CIT (1980) 121 ITR 279 (Bom). Regarding interest it was stated that the same was allowable and had been allowed in the cases of other contractors, and funds were borrowed for the purpose of business.
4. The learned CIT(A) observed in his impugned order that the assessee himself had shown gross profit at Rs. 2,28,233 prior to the claim of depreciation and Interest which gave percentage of 10 per cent. Regarding claim of depreciation, the learned CIT(A) observed that the facts were the same as were in the asst. yr. 1989-90 and claim of depreciation was to be allowed in view of his appellate order dt. 9th Dec., 1992, for the asst. yr. 1989-90. He directed the AO to allow the depreciation, to verify the details of credits and allow the interest on borrowings which were genuine and were utilised for purpose of assessee's business keeping in view the decision of the Tribunal in the case of Chopra Brothers (India) Ltd. v. ITO (1993) 46 TTJ (Chd) (TM) 523: (1993) 202 ITR 40 (AT).
5. Being aggrieved, the Department is in appeal. At the time of hearing of the case, the learned Departmental Representative relied on the order of the AO and also decision of the Tribunal Amritsar Bench in the case of AO v. Popja Construction Co. (1999) 64 TTJ (Asr) 733: (1999) 69 ITD 147 (Asr).
6. In his rival submissions, the learned authorised representative of the assessee submitted that the decision of the TM in the case of Chopia Brothers (India) Ltd. v. ITO (supra) is squarely applicable in the case of the assessee. Hence, the learned CIT(A) was right in directing the AO to allow the depreciation and interest. The learned authorised representative further submitted that the case of M/s Popja Construction Co., relied by the learned Departmental Representative is distinguishable wherein the decision of the Hon'ble Allahabad High Court in the case of M/s Saraya Engg. Works v. CIT (supra) was relied which later on was distinguished by the same High Court in the case of CIT v. Bishambhar Dayal & Co. (1994) 210 ITR 118 (All). The learned authorised representative further relied on the decision of the jurisdictional High Court (P&H High Court) in the case of CIT v. Vinod Kumar Bhatia (1995) 211 ITR 253 (P&H).
7. We have heard both the parties and also carefully gone through the material available on the records along with various cases laws cited by both the parties. The observations of the Tribunal, Amritsar Bench, in the case of AO. v. Pooja Construction Co. (supra) were as under:
"AO has to adopt rationale and reasonable method in arriving at the estimate of income, after he gives finding that the accounts maintained by the appellant are neither prone to verification nor reliable. He can use his own method but his method should be rationale and reasonable. In the case of the assessee he had used rationale and reasonable method. The application of net rate is directly dependent on the net rate shown by the other cases in the line of the business. Other cases of contractors are being applied net rate of profit without giving them advantage of loss or trading account expenditure and claimed 100 per cent of depreciation. This method creates an abnormal situation in the net profit- The AO had, therefore, taken a proper course by ignoring the depreciation and the interest and applied net rate of 10 per cent. The second positive feature in the assessment of the ITO related to the observation that the net profit rate of the person who used heavy machinery was going to be more than the net profit of a person who was not using the mechanical aid for execution of civil work.
Hence, there was no infirmity in the method adopted by the AO. The order of the CIT(A) was reversed and the order of the AO maintained."
7.1. It appears that at the time of hearing of the appeal in the case of Pooja Construction Co. (supra) the decision of the Hon'ble Punjab & Haryana High Court was not brought to the notice of the Tribunal. The jurisdictional High Court in the case of CIT v. Vinod Kumar Bhatia (supra) dismissed the reference application of the Revenue by making following observations :
"The assessee, a building contractor, filed his return for the asst. yr. 1984-85 showing an income of Rs. 1,20,730. The assessee had not maintained any accounts and the income mentioned in the return was arrived at by applying a profit rate of ten per cent of the payment received by him. The assessee had also claimed deduction on account of interest paid to banks and the LIC and depreciation of a truck which was purchased and was used in connection with the construction work. The ITO accepted the income on the basis of ten per cent of the total payments received by the assessee as building contractor, but rejected the claim to deduction on account of payment of interest and depreciation on the truck. The Tribunal observed that there could not be any rigid formula where income was estimated by applying a net profit rate. In the facts and circumstances of the case, therefore, the Tribunal accepted the return and allowed deduction on account of interest paid to the bank as well as depreciation on the truck. On an application to direct reference.
Held, dismissing the application, that no question of law arose from the order of the Tribunal."
7.2 It is observed that in the case of Popja Construction Co., the Tribunal Amritsar Bench referred the case of Saraya Engineering Works v. CIT (supra) which was distinguished by the Hon'ble Allahabad High Court in the case of CTT v. Bishambhar Dayal Co. (supra) wherein it was held that:
"the Tribunal had relied upon a Circular of the CBDT No. 29D(xix) of 1965 F. No. 45/239/65-ITC, dt. 31st March, 1965. Under this circular, the Board had issued instructions that where income was proposed to be computed by applying a flat rate and the assessee had furnished the prescribed particulars for the claim in respect of depreciation, the depreciation should be allowed separately and deducted out of the gross profits. The order of the Tribunal was in conformity with the circular issued by the CBDT. There is no provision in the IT Act which makes the claim of depreciation inadmissible where the income is computed by applying the flat rate. The Tribunal was justified in directing the ITO to allow depreciation. No question of law arose from its order.
Saraya Engineering Works v. CIT (1987) 168 ITR 455 (All) distinguished.
Similarly, in the TM decision, in the Tribunal Chandigarh Bench, in the case of Chopra Brothers (India) Ltd. v. ITO (supra), the then Hon'ble President, Ch. G. Krishnamurthy held that:
"In the instance case it was clear that the ITO never wanted to disallow depreciation. The non-allowance of depreciation, therefore, appeared to be innocent mistake. If it was otherwise, there should have been a mention in the assessment order. Secondly, the rate of net profit before depreciation would work out to 16.5 per cent which was totally unacceptable. One would not expect the ITO to estimate the net profit at 16.5 per cent before depreciation first making out a case in support thereof if it was to be presumed that the net profit rate of 10 per cent estimated by him was after depreciation. The need to issue a circular such as the one issued in the present case arose because determination of income by estimating the net profit without mentioning anything about the allowance of depreciation led to serious legal difficulties in assessing the profits arising on the sale of assets by applying the provisions of Section 10(2)(vii) of the 1922 Act.
Moreover, beneficial circulars and benevolent circulars should receive the highest respect and consideration in the hands of the AO particularly at the level of the CIT(A) because that was the policy of CBDT which means the Government. They are not supposed to go against the intention of the Government in implementing laws. They must advance the course of justice by extending the benefits. There is no room for personal predilections in implementing fiscal laws. The spirit more than the letter should receive highest consideration. Thus, both the ITO and the CIT(A) erred in appreciating the circular and in not applying it. The net profit shown by the assessee after depreciation as per books worked out to 1.2 per cent. If 10 per cent net profit was applied and depreciation was allowed, thereafter, the rate of profit would work out to a reasonable percentage which would conform to the net profit rates arrived at after depreciation in the case of other contractors. Therefore, the view of the AM was to be upheld."
7.3. Considering the aforesaid discussions, We are of the view that the decision of the Tribunal in the case of Popja Construction Co. (supra) is distinguishable and ratio of the decision of the Hon'ble Allahabad High Court in the case of CIT v. Bishambhar Dayal & Co. (supra) and decision of the Tribunal (TM) in the case of Chopra Bros. (India) (P) Ltd. v. fit) (supra) along with the decision of the Hon'ble jurisdictional High Court (Punjab & Haryana High Court) (supra) in the case of CIT v. Vinod Kumar Bhatia, is squarely applicable in the instant case and we are bound to follow the decision of the Hon'ble jurisdictional High Court as per the ratio of the decision of the Hon'ble Supreme Court in the Case of Union of India & Ors. v. Kamlakshi Finance Corporation Ltd: AIR 1992 SC 711 wherein the observations of the Hon'ble Justice S. Ranganathan were following :
"It is clear that the observations of the High Court, seemingly vehement, and apparently unpalatable to the Revenue, are only intended to curb a tendency in revenue matters which, if allowed to become widespread, could result in considerable harassment to the assessee-public without any benefit to the Revenue. We would like to say that the Department should take these observations in the proper spirit. The observations of High Court should be kept in mind in future and the utmost regard should be paid by the adjudicated authorities and the appellate authorities to the requirements of judicial discipline and the need for giving effect to the orders of the higher appellate authorities which are binding on them."
Hence, by respectfully following the decision of the Hon'bte Punjab & Haryana High Court in the case of CIT v. Vinod Kumar Bhatia (supra), we are of the considered view that there was no infirmity in the order of the learned CIT(A) who rightly directed the AO to allow the depreciation and interest from the income estimated under Section 44AC and the same is hereby upheld.
8. C.O. No. 26/ASI/1994 The assesses has raised following grounds in the C.O. :
"1. That on the facts and in the circumstances of the case and in law the learned CIT(A) is correct in allowing depreciation as it is a statutory allowance not expenditure.
2. That the depreciation is to be allowed even if the accounts are rejected. Reliance is placed on Allahabad Glass Works Ltd. v. CIT (1961) 42 ITR 439 (All).
3. That depreciation is to be allowed even if the income is estimated as per instructions of the CBDT vide Circular No. 29-D(XIX-14) (F. No. 45-239-65-ITJ-dt. 31st Aug.. 1965) as benevolent instructions/circulars of the Board are binding on the officers of the Department.
4. That reliance on the case law in the grounds of appeal No. 1A by the AO is mistaken."
8.1 This issue we have already decided in favour of the assessee while considering the appeal of the Department in ITA No. 208/Asr/1994 for the asst. yr. 1991-92 discussed above. We find that the grounds raised by the assessee which merely support the order of the CIT(A) are infructuous in nature so these are dismissed.
9. In the result, the appeal of the Department is dismissed and the COs of the assessee are also dismissed as infructuous.