ACIT, Circle (1), Tirupathi V. Sri N. Sreenath Reddy (HUF), Chttoor District

ITA 1510/HYD/2012

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 5530 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 3 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-01-2014
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2009-2010
• Appeal Filed On: 04-10-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: JEEVAN LAL LAVADIYA
• Assessee Lawyers: S RAMA RAO
• Keywords: Depreciation
• Section: 44AD; 32; 145; 6

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B', HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER ITA NO. 1510/HYD/2012 ASSESSMENT YEAR 2009'10 THE ASST. CIT CIRCLE'1 TIRUPATI VS. SRI N. SREENATH REDDY (HUF) KEELAVATHI (V&P) PAN: AADHN1321A [APPELLANT] [RESPONDENT] APPELLANT BY: SRI JEEVAN LAL LAVADIYA RESPONDENT BY: SRI S. RAMA RAO DATE OF HEARING: 22.01.2014 DATE OF PRONOUNCEMENT: 22.01.2014 O R D E R PER CHANDRA POOJARI, AM: THIS APPEAL BY THE DEPARTMENT IS DIRECTED AGAINST THE ORDER OF THE CIT(A), GUNTUR DATED 6.8.2012 FOR ASSE SSMENT YEAR 2009'10. 2. THE REVENUE RAISED THE FOLLOWING GROUNDS OF APPEAL: 1. THE ORDER OF THE LD. CIT(A) IS ERRONEOUS BOTH IN LA W AND ON FACTS. 2. THE DECISION OF THE LD. CIT(A) IS UNILATERAL AS NO OPPORTUNITY WAS GIVEN TO THE ASSESSING OFFICER ON T HE SUBMISSIONS MADE BY THE APPLICANT. 3. THE CIT(A) OUGHT TO HAVE UPHELD THE ORDER OF THE AS SESSING OFFICER. THE CIT(A) RESTRICTING THE ADDITION @ 6.5 % AS AGAINST THE ORDER OF THE ASSESSING OFFICER ESTIMATI NG THE INCOME ON CONTRACT RECEIPTS @ 12.5% IS NOT ACCEPTAB LE. ITA NO. 1510/HYD/2012 SRI N. SREENATH REDDY (HUF) ======================= 2 4. THE LD. CIT(A) ERRED IN ALLOWING THE ORDER IN FAVOU R OF THE ASSESSEE ON THE BASIS OF HONBLE ITAT VIZAG ORDER I N ITA NO. 184/VIZAG/2010 DATED 27.12.2010 TO ADOPT THE NP RATE OF 6.5%. BUT THE CIT(A) MISSED HIS ATTENTION TO TH E VARIOUS DECISIONS OF UNIFORMLY ESTIMATING THE PROFIT FROM M AIN CONTRACTS @ 8% TO 12.5% AND 5% TO 7% ON SUB-CONTRAC TS DEPENDING ON THE FACTUAL SITUATION. THE DECISIONS ARE LISTED HEREUNDER: A) ITA NO. 668 & 671/HYD. DT. 31.01.11 IN THE CASE OF M/S. E. ESWAR REDDY & CO. B) ITA NO. 308/HYD/2009 DT. 23.10.2009 IN THE CASE OF M/S. TEJA CONSTRUCTIONS. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE CARRY ING ON CIVIL CONTRACT WORKS FILED HIS RETURN OF INCOME FOR A.Y. 2009'10 ON 25.9.2009 DECLARING TOTAL INCOME OF RS. 65,29,810. IT IS SEEN FROM THE ASSESSMENT ORDER THAT THE ASSESSEE HAS RECEIVED GROSS RECEIPTS FROM CONTRACT WORKS AMOUNTING TO RS. 11,50 ,81,257. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AS SESSEE WAS REQUESTED TO PRODUCE BOOKS OF ACCOUNT, BILLS AND VO UCHERS FOR THE EXPENDITURE CLAIMED, DETAILS OF BANK ACCOUNT ST ATEMENTS, WORK'IN'PROGRESS, ETC. THE ASSESSEE HAS PRODUCED L EDGER ACCOUNTS FOR THE PURCHASE OF MATERIALS. THE ASSESS EE HAS NOT FURNISHED BILLS AND VOUCHERS FOR MOST OF EXPENDITUR E VIZ., BITUMEN, MACHINERY AND VEHICLE MAINTENANCE, SAND PU RCHASES, STONE AND METAL PURCHASES, STEEL, CEMENT, PIPE, WAT ER, ETC., AMOUNTING TO RS. 8,66,17,981. THEREFORE, THE ASSES SING OFFICER HAS REJECTED THE BOOKS OF ACCOUNT OF THE ASSESSEE U /S. 145 OF THE INCOME'TAX ACT, 1961 AND ESTIMATED THE NET INCO ME @ 12.5% ON GROSS CONTRACT RECEIPTS BY DEDUCTING DEPAR TMENTAL RECOVERIES, WHICH WORKED OUT TO RS. 1,30,93,040 AND NO FURTHER DEDUCTIONS WERE ALLOWED. ON APPEAL, THE CIT(A) DI RECTED THE ITA NO. 1510/HYD/2012 SRI N. SREENATH REDDY (HUF) ======================= 3 AO TO ESTIMATE INCOME OF THE ASSESSEE AT 6.5% ON CO NTRACT RECEIPTS. AGAINST THIS, THE REVENUE IS IN APPEAL B EFORE US. 4. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IN OUR OPINION, SIMILAR ISSUE CAME FOR CONSIDERATION BEFORE THIS TRIBUNAL IN THE CASE OF M /S. C. ESWARA REDDY & CO. VS. ACIT IN ITA NOS. 668 & 669/HYD/2009 FOR A.YS. 2003'04 AND 2004'05, RESPECTIVELY. THE TRIBUNAL VI DE ORDER DATED 31 ST JANUARY, 2011 HELD AS FOLLOWS: '6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EI THER SIDE AND PERUSED THE MATERIALS AVAILABLE ON RECORD. ADM ITTEDLY THE ASSESSEE PRODUCED THE BOOKS OF ACCOUNT AND VOUCHERS . ON EXAMINATION OF THE BOOKS OF ACCOUNT WITH REFERENCE TO THE VOUCHER PRODUCED, THE ASSESSING OFFICER FOUND THAT THE VOUCHER DOES NOT TALLY WITH THE CASHBOOK. WHEN THE VOUCHER DOES NOT TALLY WITH CASHBOOK, IN OUR OPINION, THE ASSESSEE H AS NOT MAINTAINED THE BOOKS OF ACCOUNT PROPERLY. THEREFOR E, THE BOOK RESULT WILL NOT REFLECT THE CORRECT PROFIT OF THE A SSESSEE. IN THESE CIRCUMSTANCES, IN OUR OPINION, THE ASSESSING OFFICE R HAS RIGHTLY REJECTED THE BOOKS OF ACCOUNT. THEREFORE, WE DO NO T FIND ANY INFIRMITY IN THE ORDER OF THE LOWER AUTHORITY IN RE JECTING THE BOOKS OF ACCOUNT AND ESTIMATING THE PROFIT. 7. NOW COMING TO THE ESTIMATION OF PROFIT. THE AS SESSING OFFICER ESTIMATED THE PROFIT AT 12.5%. HOWEVER, TH E CIT(A) RESTRICTED THE SAME TO 8% IN RESPECT OF MAIN CONTRA CT AND 5% ON SUB-CONTRACT. WHEN THE BOOKS OF ACCOUNT WERE RE JECTED THE ONLY METHOD AVAILABLE TO THE ASSESSING OFFICER IS T O ESTIMATE THE PROFIT. THE PROFIT RATIO CANNOT BE A CONSTANT FACT OR FOR EACH AND EVERY YEAR. IN OTHER WORDS, PROFIT RATIO WOULD FLUCTUATE DEPENDING UPON VARIOUS FACTORS SUCH AS THE PLACE OF EXECUTION OF CONTRACT, AVAILABILITY OF RAW MATERIAL, LABOUR A ND ASSESSEE'S OWN FUNDS, ETC. THEREFORE, FOR THE PURPOSE OF ESTI MATING THE PROFIT, THE LOWER AUTHORITIES MAY TAKE INTO CONSIDE RATION THE PROFIT RATIO OF THE SIMILARLY PLACED TRADERS IN THE SAME LOCALITY AND OTHER FACTORS SUCH AS AVAILABILITY OF LABOUR, D EMAND IN THE MARKET, ETC., AS DISCUSSED ABOVE. THEREFORE, THE P ROFIT RATIO OF THE OTHER ASSESSEES IN THAT LOCALITY MAY BE ONE OF THE FACTORS TO BE TAKEN INTO CONSIDERATION. HOWEVER, THAT CANNOT BE THE SOLE CRITERIA FOR FIXING THE PROFIT RATIO FROM THE CONTR ACT BUSINESS. BY KEEPING THIS FACTUAL SITUATION IN MIND, LET US N OW EXAMINE ITA NO. 1510/HYD/2012 SRI N. SREENATH REDDY (HUF) ======================= 4 WHETHER THE ESTIMATION OF PROFIT BY THE CIT(A) AT 8 % ON MAIN CONTRACT AND 5% ON SUB CONTRACT IS JUSTIFIED OR NOT . 8. WE HAVE CAREFULLY GONE THROUGH THE ORDER OF THI S TRIBUNAL IN THE CASE OF KRISHNAMOHAN CONSTRUCTIONS (SUPRA), K.C. REDDY ASSOCIATES (SUPRA), SRI SRINIVASA CONSTR UCTIONS (SUPRA) AND M. BHASKAR REDDY (SUPRA). NO DOUBT THI S TRIBUNAL ESTIMATED THE PROFIT FROM 12.5% TO 8% DEPENDING UPO N THE FACTUAL SITUATION. THE LEARNED DR MADE AN ATTEMPT TO DISTINGUISH THE ORDER OF THIS TRIBUNAL IN M. BHASKA R REDDY (SUPRA) ON THE GROUND THAT THE TURNOVER IS ONLY RS. 54,40,420. IT IS A WELL KNOWN FACT THAT WHENEVER THE TURNOVER INCREASES THE PROFIT RATIO WOULD GO DOWN. MERELY BECAUSE THE TUR NOVER INCREASES THE PROFIT MAY NOT GO UP. THEREFORE, WE DO NOT FIND ANY JUSTIFICATION IN THE DISTINCTION MADE BY THE LE ARNED DR TO SHOW THAT THIS TRIBUNAL ESTIMATED THE PROFIT AT 8% IN THE CASE OF M. BHASKAR REDDY (SUPRA) ONLY BECAUSE THE TURNOVER WAS RS. 51,40,420. A BARE READING OF THE ORDER OF THIS TRI BUNAL IN M. BHASKAR REDDY (SUPRA) CLEARLY SHOWS THAT THIS TRIBU NAL AFTER CONSIDERING THE JUDGEMENT OF THE APEX COURT IN C. V ELUKUTTY, 60 ITR 239 AND THE DECISION OF THE SPECIAL BENCH OF THIS TRIBUNAL IN ARIHANT BUILDERS PVT. LTD. VS. ACIT, 29 1 ITR 41 (SB) AND BY TAKING A CLUE FROM SECTION 44AD OF I.T. ACT THE PROFIT WAS ESTIMATED AT 8%. ADMITTEDLY SECTION 44A D WOULD BE APPLICABLE IN RESPECT OF A CASE WHERE THE GROSS CON TRACT RECEIPT DOES NOT EXCEED RS. 40 LAKHS. WHEREVER THE GROSS C ONTRACT RECEIPTS EXCEED RS. 40 LAKHS THE PROVISIONS OF SECT ION 44AD ARE NOT APPLICABLE. THEREFORE, THE PROFIT CAN BE ESTIM ATED EITHER AT LOWER THAN 8% OR ABOVE 8% DEPENDING UPON THE FACTUA L SITUATION. AS DISCUSSED EARLIER, FOR THE PURPOSE O F ESTIMATING THE PROFIT VARIOUS FACTORS SUCH AS THE PROFIT RATIO OF THE ASSESSEE IN THE EARLIER YEAR, PROFIT RATIO OF THE SIMILARLY PLACED TRADERS IN THE SAME LOCALITY, DEMAND FOR THE PRODUCT, AVAILABI LITY OF LABOURERS, RAW MATERIALS, ETC., AND THE TIME GAP AV AILABLE FOR EXECUTING THE CONTRACT WORK, ETC., HAVE TO BE TAKEN INTO CONSIDERATION. THEREFORE, IN OUR OPINION, REFERENC E TO EARLIER ORDER OF THIS TRIBUNAL ALONE FOR THE PURPOSE OF EST IMATING THE PROFIT AT 12.5% MAY NOT BE JUSTIFIED AT ALL. 9. IN FACT, IN THE CASE OF KRISHNAMOHAN CONSTRUCTI ONS IN ITA NOS. 116 AND 117/HYD/2007 FOR A.YS. 1993-94 AND 1994- 95 THE TRIBUNAL ESTIMATED THE PROFIT ONLY AT 8% EVE N THOUGH THE PROFIT WAS ESTIMATED AT 12.5% FOR A.Y. 1992-92. TH IS ITSELF SHOWS THAT FOR EACH YEAR THE PROFIT HAS TO BE ESTIM ATED DEPENDING UPON THE FACTORS WHICH PREVAIL IN THE LOC ALITY. 10 WE HAVE ALSO CAREFULLY GONE THROUGH THE ORDERS OF THE LOWER AUTHORITIES. THE CIT(A) AFTER REFERRING TO T HE DECISION OF THIS TRIBUNAL IN THE CASE OF KRISHNAMOHAN CONSTRUCT IONS ITA NO. 1510/HYD/2012 SRI N. SREENATH REDDY (HUF) ======================= 5 (SUPRA) AND THE SPECIAL BENCH DECISION IN ARIHANT B UILDERS (SUPRA) ESTIMATED THE PROFIT AT 8% FOR MAIN CONTRAC T AND FOR SUB CONTRACT AT 5%. IT MAY NOT BE OUT OF PLACE TO MENTION THAT THIS TRIBUNAL UNIFORMLY ESTIMATING THE PROFIT FROM MAIN CONTRACT AT 8% TO 12.5% DEPENDING UPON THE FACTUAL SITUATION AND 5% TO 7% ON THE SUB CONTRACT DEPENDING UPON THE FACTUAL SITUATION. THEREFORE, IN OUR OPINION, ESTIMATION O F PROFIT AT 8% BY THE CIT(A) ON MAIN CONTRACT AND AT 5% ON SUB CON TRACT IS JUSTIFIED. WE DO NOT FIND ANY INFIRMITY IN THE ORD ER OF THE LOWER AUTHORITY. ACCORDINGLY THE SAME IS CONFIRMED. 11. NOW COMING TO THE CLAIM OF THE ASSESSEE TOWARD S SEIGNIORAGE CHARGES. NO DOUBT THE SEIGNIORAGE CHAR GES ARE IN RELATION TO THE MATERIAL SUPPLIED BY THE GOVERNMENT FOR EXECUTING THE WORK. THE APEX COURT IN THE CASE OF BRIJ BHUSHANLAL (SUPRA) CONSIDERED THIS ISSUE AND FOUND THAT THE MATERIAL SUPPLIED BY THE GOVERNMENT/CONTRACTOR WILL NOT HAVE ANY ELEMENT OF PROFIT. THEREFORE, THE SAME SHALL B E REDUCED FROM THE CONTRACT RECEIPTS. IN VIEW OF THE JUDGEME NT OF THE APEX COURT THE SEIGNIORAGE CHARGES SHALL BE REDUCED FROM THE TOTAL CONTRACT RECEIPTS FOR THE PURPOSE OF ESTIMATI NG THE PROFIT. ACCORDINGLY WE DIRECT THE ASSESSING OFFICER WHILE C OMPUTING THE TOTAL CONTRACT RECEIPTS THE SEIGNIORAGE CHARGES SHALL BE REDUCED FROM THE TOTAL CONTRACT RECEIPTS FOR THE PU RPOSE OF ESTIMATING THE PROFIT. 12. NOW COMING TO THE DEPRECIATION. WE HAVE CAREF ULLY GONE THROUGH THE JUDGEMENT OF THE JURISDICTIONAL HI GH COURT IN THE CASE OF INDWELL CONSTRUCTION (SUPRA). IN THE C ASE BEFORE THE JURISDICTIONAL HIGH COURT AN ADDITION WAS MADE TOWA RDS INTEREST AND REMUNERATION PAID TO THE PARTNER WHEN THE PROFIT WAS ESTIMATED. THE JURISDICTIONAL HIGH COURT AFTER CONSIDERING THE PROVISIONS OF SECTION 29 AND 40 FOUND THAT NO S EPARATE ADDITION SHALL BE MADE. THE CONTENTION OF THE LEAR NED COUNSEL FOR THE ASSESSEE IS THAT DEPRECIATION SHALL BE ON T HE WDV FROM THE PROFIT COMPUTED/ESTIMATED. THEREFORE, DEPRECIA TION SHALL BE ALLOWED ON THE PROFIT COMPUTED. 13. WE HAVE CAREFULLY GONE THROUGH THE PROVISIONS OF SECTION 44AD OF THE ACT. NOW DOUBT THIS PROVISION I S APPLICABLE FOR THOSE CASES WHERE THE TURNOVER/TOTAL CONTRACT R ECEIPT DOES NOT EXCEED RS. 40 LAKHS. HOWEVER, BY FINANCE (NO. 2) ACT OF 2009 WITH EFFECT FROM 1.4.2011 THE LEGISLATURE REMO VED THE RESTRICTION OF THE TOTAL CONTRACT RECEIPTS OF RS. 4 0 LAKHS. BY TAKING A CLUE FROM THE PROVISION OF SECTION 44AD AS IS APPLICABLE FOR THE ASSESSMENT YEAR UNDER CONSIDERAT ION AND THE PROVISIONS WHICH ARE APPLICABLE WITH EFFECT FROM 1. 4.2011, WE FIND THAT THE DEDUCTION AVAILABLE U/SS. 30 TO 38 SH ALL BE DEEMED TO HAVE BEEN ALREADY GIVEN FULL EFFECT AND NO FURTH ER DEDUCTION ITA NO. 1510/HYD/2012 SRI N. SREENATH REDDY (HUF) ======================= 6 UNDER THOSE SECTIONS SHALL BE ALLOWED. DEPRECIATIO N IS ALLOWABLE U/S. 32 OF THE INCOME-TAX ACT. THEREFORE , AS PROVIDED IN SECTION 44AD NO FURTHER/SEPARATE DEDUCTION SHALL BE ALLOWED. IN VIEW OF THE ABOVE, IN OUR OPINION, THE CLAIM OF DEPRECIATION ON THE ESTIMATED INCOME IS NOT JUSTIFI ED. THEREFORE, THE LOWER AUTHORITIES HAVE RIGHTLY REJEC TED THE SAME. 14. NOW COMING TO THE PAYMENT OF INTEREST AND SALA RY TO THE PARTNER. PROVISO TO SECTION 44AD(2) CLEARLY SAYS T HAT SALARY AND INTEREST PAID TO THE PARTNER SHALL BE DEDUCTED FROM THE INCOME COMPUTED UNDER SUB-SECTION (1) OF SECTION 44 AD SUBJECT TO LIMITATION U/S. 40(B) OF THE ACT. AS WE HAVE AL READY OBSERVED, THOUGH THERE WERE RESTRICTIONS WITH REGAR D TO APPLICATION OF SECTION 44AD WHEREVER THE TOTAL CONT RACT RECEIPTS EXCEED RS. 40 LAKHS, WITH EFFECT FROM 1.4. 2011 SUCH RESTRICTION WAS REMOVED BY THE LEGISLATURE. MOREOV ER, THE CO- ORDINATE BENCH THIS TRIBUNAL IN M. BHASKAR REDDY (S UPRA) AFTER TAKING A CLUE FROM SECTION 44AD ESTIMATED THE PROFI T AT 8% OF THE CONTRACT RECEIPT. THEREFORE, BY TAKING A CLUE FROM THE PROVISION OF SECTION 44AD AS IS APPLICABLE FOR THE ASSESSMENT YEAR UNDER CONSIDERATION AND THE PROVISIONS WHICH W OULD COME INTO OPERATION WITH EFFECT FROM 1.4.2011, IN OUR OP INION, THE PAYMENT OF INTEREST AND SALARY TO THE PARTNER SHALL BE ALLOWED SUBJECT TO LIMITATION SPECIFIED IN SECTION 40(B) OF THE ACT FROM THE ESTIMATED INCOME. 15. WE HAVE CAREFULLY GONE THROUGH THE JUDGEMENT O F THE JURISDICTIONAL HIGH COURT IN THE CASE OF INDWELL CO NSTRUCTION (SUPRA). THE ASSESSMENT YEAR UNDER CONSIDERATION B EFORE THE JURISDICTIONAL HIGH COURT WAS ASSESSMENT YEAR 1981- 82. SECTION 44AD WAS INTRODUCED IN THE STATUTE BOOK WIT H EFFECT FROM 1.4.1994. THEREFORE, THE JURISDICTIONAL HIGH COURT HAD NO OCCASION TO CONSIDER THE PROVISIONS OF SECTION 44AD AS IT IS APPLICABLE FOR THE ASSESSMENT YEAR UNDER CONSIDERAT ION AND AS IT WOULD BE APPLICABLE WITH EFFECT FROM 1.4.2011. IN VIEW OF THE PROVISION OF SECTION 44AD AS IT IS APPLICABLE FOR T HE ASSESSMENT YEAR UNDER CONSIDERATION AND THE AMENDMENT MADE WIT H EFFECT FROM 1.4.2011 IT IS OBVIOUS THAT THE LEGISLATURE IN TENDED TO ALLOW THE INTEREST AND SALARY SEPARATELY FROM THE E STIMATED INCOME. THEREFORE, THE JUDGEMENT OF THE JURISDICTI ONAL HIGH COURT IN THE CASE OF INDWELL CONSTRUCTIONS (SUPRA) MAY NOT BE OF ANY ASSISTANCE TO THE REVENUE IN THIS CASE. ACC ORDINGLY WE DIRECT THE ASSESSING OFFICER TO ALLOW THE SALARY AN D INTEREST PAID TO THE PARTNER SUBJECT TO THE LIMITATION PROVI DED IN SECTION 40(B) OF THE ACT. 5. IN VIEW OF THE ABOVE ORDER OF THE TRIBUNAL, WE DIRE CT THE AO TO ESTIMATE INCOME OF THE ASSESSEE AT 8% OF THE CONTRACT ITA NO. 1510/HYD/2012 SRI N. SREENATH REDDY (HUF) ======================= 7 RECEIPTS AS MENTIONED IN THE ORDER CITED SUPRA. FU RTHER, WE MAKE IT CLEAR THAT INTEREST INCOME IS TO BE CONSIDE RED AS 'INCOME FROM OTHER SOURCES' AND SEPARATE ADDITION I S TO BE MADE ON THIS COUNT. 6. IN THE RESULT, REVENUE APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 22 ND JANUARY, 2014. SD/' (ASHA VIJAYARAGHAVAN) JUDICIAL MEMBER SD/' (CHANDRA POOJARI) ACCOUNTANT MEMBER HYDERABAD, DATED THE 22 ND JANUARY, 2014 TPRAO COPY FORWARDED TO: 1. THE ASST. CIT, CIRCLE'1(1), AAYAKAR BHAVAN, K.T. ROAD, TIRUPATI'517 507. 2. SRI N. SREENATH REDDY (HUF), KEELAVATHI (V & P), PUNGANUR TALUK, CHITTOOR DISTRICT. 3. THE CIT(A), GUNTUR 4. THE CIT, TIRUPATI 5. THE DR BENCH 'B', ITAT, HYDERABAD