Income Tax Appellate Tribunal - Panji
Sh. Natha Singh Contractor,, Amritsar. vs The D.C. Of Income Tax, Amritsar. on 30 November, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
AMRITSAR BENCH; AMRITSAR.
BEFORE SH. T. S. KAPOOR, ACCOUNTANT MEMBER
AND SH. N. K. CHOUDHRY, JUDICIAL MEMBER
I.T.A No. 326/(Asr)/2015
Assessment Year: 2010-11
PAN: AAAFN8519R
Dy. C. I. T., Vs. M/s. Natha Singh Contractor,
Circle-4, 61-New Tehsilpura,
Amritsar. Amritsar.
(Appellant) (Respondent)
I.T.A No. 340/(Asr)/2015
Assessment Year: 2010-11
PAN: AAAFN8519R
M/s. Natha Singh Contractor, Vs. Dy. C. I. T.,
61-New Tehsilpura, Circle-4,
Amritsar. Amritsar.
(Appellant) (Respondent)
Appellant by : Sh. Rahul Dhawan (D. R.)
Respondent by: Sh. Ashwani Kalia (C. A.)
Date of Hearing: 06.09.2017
Date of Pronouncement: 30.11.2017
ORDER
PER T. S. KAPOOR (AM):
These are cross appeals filed by revenue as well as by assessee against the order of Ld. CIT(A), Amritsar dated 30.03.2015 for Asst. Year:
2010-11.
2. The grounds of appeal taken by revenue in ITA No. 326/Asr/2015 are reproduced below:
"1. On the facts and circumstances of the case, the Ld. CIT(A)-2, Amritsar erred in restricting the N.P. rate at 8% instead of 12% assessed by the 2 ITA Nos. 326&340(Asr)/2015 Assessment Year: 2010-11 Assessing Officer after considering all the facts and circumstances of the case.
2. On the facts and circumstances of the case, the Ld. CIT(A)-2, Amritsar erred in admitting the additional evidence produced by the assessee in the form of original muster rolls, without giving any opportunity to the Assessing Officer to examine the additional evidence as required under the provisions of Rule 46A of the Income Tax Rules, 1962.
3. On the facts and circumstances of the case, the Ld. CIT(A)-2, Amritsar erred in allowing deductions on account of salary and interest paid to the partners of the assessee firm considering the fact that the Assessing Officer had rejected the books and estimated the net profit rate as per his best judgment which takes into account all the expenses.
4. The appellant craves leave to amend or add any or more ground(s) of Appeal."
The Grounds of appeal taken by assessee in ITA No. 340/Asr/2015
1. That the worthy CIT (A) has erred in law and on facts of the case in estimating the net profit @8% of the total receipts.
2. That the worthy CIT(A) has erred in upholding the rejection of books of accounts in the light of material on record and facts and circumstances of the case.
3. That the worthy CIT(A) has erred in not appreciating that the muster rolls produced during the course of appellate proceedings and copies of muster rolls submitted during the course of assessment proceedings taken together constitute much higher proportion of the total wages as against 40% of total wages as mentioned by the worthy CIT(A) in his order.
4. That the worthy CIT(A) has erred in not appreciating that the muster rolls produced in original during the course of Appellate proceedings were for test check only and no further enquiry was ever worthy CIT (A) for the balance muster rolls as the same were in possession of the appellant.
5. That the worthy CIT (A) has erred in holding that the project wise wages register was not produced by ignoring the muster rolls submitted alongwith the wages account for various sites and trading accounts of various sites.
6. That the worthy CIT (A) has erred in law and on facts of the case in not allowing the depreciation on the fixed assets while estimating the net profit @8% of the total receipts.
7. That the order is bad in law and on facts of the case.
8. The Appellant craves leave to add, amend, alter vary and / or withdraw any or all the above grounds of Appeal."
3 ITA Nos. 326&340(Asr)/2015
Assessment Year: 2010-11
3. At the outset, the Ld. DR took up the appeal of revenue and submitted that Assessing Officer had rejected the books of account of the assessee and had applied net profit rate of 12% which the Ld. CIT(A) had reduced at 8%. It was submitted that the Ld. CIT(A) had admitted additional evidence produced by the assessee in the form of original muster rolls without giving any opportunity to the Assessing Officer to examine the additional evidence as required under the provisions of Rule 46A. The Ld. DR further argued that Ld. CIT(A) had wrongly allowed deduction on account of salary and interest paid to the partners of the assessee firm where as the Assessing Officer had estimated the net profit rate as per his best judgment which took into account all the expenses and therefore further allowing of expenses on account of salary and interest to partners was not warranted.
4. The Ld. AR on the other hand submitted that the ground no. 1 taken by revenue is connected with ground no. 1 of assessee's appeal wherein the department is contesting the reduction of net profit rate from 12% to 8% and whereas the assessee is contesting even application of net profit rate at the rate of 8%. The Ld. AR in this respect relied on the judgment of Punjab & Haryana High Court in the case of Telelinks Vs. CIT, Bathinda, wherein the Hon'ble Punjab & Haryana High Court has held that where the books of account of the assessee are rejected the arbitrary application of rate is not justified and discretion to determine a net profit rate must necessarily be exercised on the basis of relevant factors such as past tax history of the assessee, assessment orders that 4 ITA Nos. 326&340(Asr)/2015 Assessment Year: 2010-11 may have been passed and accepted by the department, the nature of the assessee's business, an appraisal of the value of the contract, prevailing economic conditions vis-à-vis the assessee's business, the price of raw material and labour etc. The Ld. AR submitted that as regard the past tax history of the assessee, the net profit declared by the assessee right from assessment year 2005-06 to 2010-11 has been accepted by the department and the net profit rate of 4.45% during the year which is though less than the net profit rate in the preceding years but it should have been accepted in view of the fact that there is huge increase in the volume of business and therefore the margins of the assessee had decreased. The Ld. AR submitted that net profit rate of 4.45% was declared by assessee should have been accepted keeping in view the fact that in preceding years as well as in succeeding year the result of the assessee under scrutiny proceedings were accepted except for minor additions out of expenses. As regards the assessee's business, the Ld. AR submitted that the nature of business remains same. As regards the appraisal of value of the contract, the Ld. AR submitted that the turnover during the year had increased to Rs.11.18 crore as against Rs.2.37 crore in the immediate previous year and therefore the turnover of the contracts is progressive. As regards the price of raw material and labour etc., the Ld. AR submitted that it is in common knowledge that in Punjab the rates of crusher, bajri, sand and soil have increased manifold due to restriction on the mining by Govt. Similarly labour rates have also increased manifold firstly because of inflation and secondly due to 5 ITA Nos. 326&340(Asr)/2015 Assessment Year: 2010-11 scarcity of labour. The Ld. AR submitted that page 36 in the P.B. is the comparative chart of the net working profit from 31.03.2006 to 31.03.2013 and from the chart it may be seen that the net working profit to gross receipts were between the range of 3.45% to 6.97% except an exceptional net profit rate of 11.03% which happened during the year ending year 31.03.2009. Therefore in view of these facts and figures the Ld. AR argued that application of 12% of rate applied by Assessing Officer was not at all justified and further the reduction of net profit rate from 12% to 8% by Ld. CIT(A) was also not justified and the assessee deserves a lower application of net profit rate as is apparent from the past and subsequent results of the assessee which has been accepted by the department.
As regards the contention of Ld. DR that no further deduction on account of salary and interest to partners should have been given the Ld. AR relied on the case law of Walia Construction Co. decided by Amritsar Bench in ITA No. 344 & 361/Asr/2013
5. Arguing upon the ground no. 2 to 5, the Ld. AR submitted that the authorities below has wrongly rejected the books of account as no major defect was pointed out by the authorities below. He submitted that Ld. CIT(A) during appellate proceedings had rejected the objection taken by the Assessing Officer and had upheld the rejection of books of account only in view of the fact that the assessee had produced muster rolls in original which evidenced the wages of about Rs.1 crore as against the 6 ITA Nos. 326&340(Asr)/2015 Assessment Year: 2010-11 claim of wages amounting to Rs.2.48 crore. The Ld. AR in this respect submitted that the Ld. AR had filed only a few of the muster rolls and the Ld. CIT(A) wanted all muster rolls to be produced. The assessee could have produced before him if Ld. CIT(A) wanted assessee to file the same. It was argued that no deficiency was found in the muster rolls produced before Assessing Officer and Ld. CIT(A). Moreover it was pointed out to the Assessing Officer that all employees were traceable and identifiable and they can be summoned at any point of time for verification. In view of the above facts and circumstances, the Ld. AR submitted that authorities below has wrongly rejected the books of account and book results should have been accepted by them.
Arguing upon the ground no. 6, the Ld. AR submitted that the Ld. CIT(A) has erred in law in not allowing the depreciation on fixed assets after applying net profit ratio. The Ld. AR submitted that the depreciation is a statutory allowance and it has to be allowed even in cases where the income of the assessee is estimated by applying of net profit rate and reliance in this respect was placed on the order of ITAT Amritsar Bench in the case of Walia Construction Co. in ITA Nos. 344&361/Asr/2013 and further the reliance was placed on the order of Punjab & Haryana High Court in the case of CIT, Patiala Vs. Harbhajan Singh and Co. Sangrur in ITA No. 31 of 2014.
6. The Ld. DR in his reply submitted that the Ld. CIT(A) has made a finding of fact that out of the claim of wages amounting to Rs.2.48 crore, 7 ITA Nos. 326&340(Asr)/2015 Assessment Year: 2010-11 the assessee had submitted muster rolls evidencing the wages of about Rs. 1 crore and moreover it has been held by the Ld. CIT(A) that projectwise Muster Rolls were not produced and therefore he has held that the entire claim of expenses to the tune of Rs.2.48 crore was not verifiable and therefore he has rightly upheld the action of A.O. in rejecting the books of account. As regards the claim of Ld. AR regarding depreciation of fixed assets, the Ld. DR relied on the order of authorities below.
7. We have heard the rival parties and have gone though the material placed on record. We first take up the appeal filed by revenue. In the first ground of appeal the revenue has challenged the relief of net profit rate from 12% to 8%. In this respect we find that in a case where the books of account of an assessee are rejected, the Assessing Officer has to estimate the income of the assessee on the basis of best judgment and for arriving at best results the best indicators are the past and subsequent tax history of the assessee and also the past and subsequent net profit ratios declared by assessee and accepted by the department. The Hon'ble Punjab & Haryana High Court in the case of Telelinks Vs. CIT, Bathinda has also held similarly. The findings of the Hon'ble Supreme Court are reproduced below:
"The second question of law namely factors required to be taken into consideration while applying a net profit rate has come up for consideration, as on the same set of facts the Assessing Officer, the Commissioner of Income Tax and Income Tax Appellate Tribunal have applied different rates of net profit. The discretion to determine an adequate net profit rate undoubtedly vests with authorities under the Act but the discretion so vested is neither unbridled nor unguided as it must be 8 ITA Nos. 326&340(Asr)/2015 Assessment Year: 2010-11 guided by reason i.e. should be preceded by reasons which, in turn, should be preceded by a perceptible process of reasoning based upon due consideration of all relevant facts. However, authorities under the Act appear to construe their jurisdiction as a discretion to apply a thumb rule dependent almost j I upon the whims of a particular Officer. The discretion to determine a net profit rate must necessarily be exercised on the basis of relevant factors which we shall enumerate but before doing so, would clarify that these factors are neither exhaustive nor a final word on relevant factors that may be considered while determining the net profit rate. A few significant factors are the past tax history of the assessee, if available, assessment orders that may have been passed and accepted by the department, the nature of the assessees' KANCHAN 2014.12.11 15:06 I attest to the accuracy and authenticity of this document Chandigarh ITA No. 269 of 2014 business, an appraisal of the value of the contract, prevailing economic conditions vis-a-vis the assessee's business, the price of raw material, labour etc. the rise in price index as notified by the Central Government from time to time if applicable and if the Assessing Officer proceeds to rely upon assessments of other assessees engaged in similar business to do so only after determining points of similarity etc. At this stage, it would be appropriate to clarify that the word similar is not synonymous with the word 'identical'. Factors referred to above are merely illustrative and not exhaustive of the circumstances that may or may not be taken into consideration."
In the present case, we find that the book results declared by assessee from 31.03.2006 to 31.03.2013 has been accepted by the department except for the year under consideration. The copies of assessment order for the assessment year 2006-07 and 2011-12 to 2014-15 are placed at P.B. page 17 to 30. From these assessment orders, we find that book results as declared by the assessee had been accepted during these years and the small additions has been made on account of disallowance of certain expenses. Therefore there is no doubt that the results declared by the assessee during these years has been scrutinized by the Assessing Officer and the net profit ratios as declared by the assessee has been accepted. Therefore in view of the facts and circumstances it will be appropriate to estimate the net profit of the 9 ITA Nos. 326&340(Asr)/2015 Assessment Year: 2010-11 assessee by arriving at an average of net profit ratios as declared by the assessee during the years from 31.03.2006 to 31.03.2013. Chart showing the net profit ratios for these years is placed at P.B. page 36 and if we take up the average of these net working profit to gross receipts, we find that net profit rate in the present year should have been 6.26%. The net profit rate as per this chart for various ratios is reproduced below:
NATHA SINGH CONTRACTOR COMPARATIVE CHART OF NETWORKING PROFITS ASSESSMENT YEAR 2010-11 Particulars 31.3.2006 31.3.2007 31.3.2008 31.3.2009 31.3.2010 31.3.2011 31.3.2012 31.3.2013 Gross Receipts 47642254 65559335 90945948 23732155 116865137 71407989 157682321 276351205 Net Profit before Interest, Salary to Partners & Depreciation 2872501 4280117 6794203 3748014 5402929 5932495 10800076 17150640 Less Other Income 1224262 697523 457813 1129946 204108 1816750 - -
Net Working Profit 1648239 3582594 6336390 2618068 5198821 4115745 10800076 17150640 %age of Net Working Profit to Gross Receipts 3.45% 5.46% 6.97% 11.03 4.45% 5.76% 6.84% 6.19% Therefore we direct the Assessing Officer to apply net profit at the rate of 6.26% which is based on the average of past and subsequent book results of the assessee. In view of above ground no. 1 of revenue's appeal is dismissed whereas the ground no. 1 of assessee's appeal is partly allowed.
As regards ground no. 2 of revenue's appeal, we find that this ground of appeal is misplaced in view of the fact that Ld. CIT(A) did not 10 ITA Nos. 326&340(Asr)/2015 Assessment Year: 2010-11 accept the original muster rolls as additional evidence and only for the purpose of verifying the wages he commented on the original muster rolls and held that the total muster rolls were not produced and therefore he has upheld the rejection of books of account and the information as contained in original muster rolls has not been used against the revenue and rather it has been used against the assessee in upholding the Assessing Officer and action in rejecting the books and therefore the ground no. 2 of revenue's appeal is dismissed.
As regards ground no. 3 regarding allowance of salary and interest paid to the partners of the assessee firm, we find that Hon'ble Amritsar Bench of the Tribunal in the case of Walia Construction Co. has held that salary and interest to partners is a deductible expenditure from the estimated profits after rejection of books. Para 10.1 of the order of Hon'ble Tribunal is reproduced below:
"As regards the estimation of income, there is no dispute to the fact that the assessee in the preceding years has been assessed almost at the returned income except minor additions. The assessee during the impugned year before depreciation, interest & salary to partners and bank interest has declared better results as is evident from the comparative figures mentioned hereinabove. Therefore, in the facts and circumstances of the case and the decisions relied upon by the Ld. counsel for the assessee, we modify the order of both the authorities below and direct the Assessing Officer to estimate Net Profit rate of 5% on contract receipts declared by the assessee and thereafter allow salary and interest to partners and depreciation subject to the income does not fall below the returned income. It is ordered accordingly. Thus, the appeal of the Revenue and that of the assessee are partly allowed."
Therefore respectfully following the above, we dismiss ground no. 2 & 3 of revenue's appeal.
8. Now we take up assessee's appeal.
11 ITA Nos. 326&340(Asr)/2015
Assessment Year: 2010-11 As regards ground no. 1, we have already allowed it partly while deciding the appeal filed by revenue. As regards ground no. 2 to 5 regarding rejection of books of account, we are in agreement with the authorities below that in the absence of complete record of wages the major expenses of wages were not verifiable, therefore the authorities below has rightly rejected the books of account. In view of the above ground no. 2 to 5 are dismissed.
As regards ground no. 6 regarding allowance of depreciation on fixed assets, we find that depreciation is a statutory allowance and it has to be allowed to the assessee if the particulars regarding the fixed assets has been filed with the Assessing Officer. This has been held in various case laws by the Amritsar Bench in the case of Walia Construction Co. wherein vide its order dated 26.03.2014 in ITA No. 344&361/Asr/2013, the Hon'ble Tribunal after relying on a number of case laws had decided the issue in favour of assessee.
The Hon'ble Punjab & Haryana High court in the case of CIT Patiala Vs. Harbhajan Singh & Co. vide its order dated 13th Nov., 2014 in ITA No. 31 of 20144 has also decided in favour of assessee by holding as under:
"We have heard counsel for the parties and perused the impugned order. The first question that calls for an answer, is whether the Income Tax Appellate Tribunal has erred in granting depreciation to the assessee, as his income was calculated at a net profit rate (question Nos. 2 and 3 framed by the revenue)?
Section 44 AD (2) of the Income Tax Act, if read in isolation of a circular issued by the Central Board of Direct Taxes would, require us to answer this question, in favour of the revenue. A perusal of the circular, however reveals that it is clarified, that Section 44 AD (2) of the Act applies to assessees whose gross 12 ITA Nos. 326&340(Asr)/2015 Assessment Year: 2010-11 receipts do not exceed Rs.40 lacs. The assessee's gross receipts, as, referred to in the assessment order, admittedly exceeded Rs. 10 crores. A relevant extract from the circular issued by the Central Board of Direct Taxes is as follows:-
"The Estimated Income Method of assessment for certain a category of businesses is prevalent in several countries. The Tax Reforms Committee has also recommended gradual introduction of the Estimated Income Method in certain areas to facilitate better tax compliance. Accordingly, a new Section 44AD has been inserted to the Income-tax with a view to providing for a method of estimating income from the business of civil construction or supply or labour for civil construction work. The new section is applicable to all assessees whose gross receipts from the above mentioned business do not exceed Rs. 40 lakhs. Gross receipts are the amount received from the clients for the contract and will not include the value of material supplied by the client. The income from the above mentioned business will be estimated at 8 per cent of the gross receipts paid or payable to an assessee. A tax payer can voluntarily declare a higher income in his return."
The circular having clarified that it applies to an assessee whose gross receipts do not exceed Rs.40 lacs, we have no hesitation in holding that the ITAT has rightly allowed depreciation to the assessee."
Therefore in the present case, the Assessing Officer is directed to allow depreciation to the assessee on fixed assets if the assessee had filed the necessary particulars as required under the provisions of law. In view of the above ground no. 6 is allowed for statistical purposes.
9. In nutshell, the appeal filed by assessee is partly allowed, partly dismissed and partly allowed for statistical purposes and whereas the appeal filed by revenue is dismissed.
Order pronounced in the open court on 30.11.2017
Sd/- Sd/-
(N. K. CHOUDHRY) (T. S. KAPOOR)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 30.11.2017.
/GP/Sr. Ps.
Copy of the order forwarded to:
(1) The Assessee:
(2) The
13 ITA Nos. 326&340(Asr)/2015
Assessment Year: 2010-11
(3) The CIT(A),
(4) The CIT,
(5) The SR DR, I.T.A.T.,
True copy
By Order