ACIT, Bangalore V. M/s. Vijayaraj Constructions Pvt. Ltd., Bangalore

ITA 187/BANG/2009

• Counselvise Citation: [2009] 115 COUNSELVISE.COM (IT) 0572 (ITAT-BANGALORE)
• Duration Of Justice: 7 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-10-2009
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 29-06-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 06-03-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: JASON P BOAZ
• Assessee Lawyers: VALLINATH
• Keywords: Depreciation
• Section: 143(3); 142(1); 143(1); 143(2); 132; 144

Judgement Text

PAGE 1 OF 9 ITA NO.187/BANG/2009 1 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 O R D E R 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 ITA NO.187/BANG/2009 2 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 CONS TRUCTION OF BUILDING FOR SALE. THE ASSESSING OFFICER ISSUED NO TICE U/S 143(2) ON 12TH NOVEMBER, 2007 VIDE WHICH THE CASE W AS FIXED FOR 22ND NOVEMBER, 2007. THE ASSESSEE SOUGHT ADJOU RNMENT AND THE CASE WAS ADJOURNED TO 30TH NOVEMBER, 2007. THE ASSESSING OFFICER ISSUED A NOTICE U/S 142(1) CALLIN G 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 ANOTH ER LETTER ON 14TH DECEMBER, 2007 AND THE CASE WAS FIXED FOR 17TH PAGE 3 OF 9 ITA NO.187/BANG/2009 3 DECEMBER, 2007. NONE ATTENDED THE PROCEEDINGS ON 1 7TH 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 RECEI PT 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 ASSESS ING OFFICER, THE ASSESSEE HAS DEBITED HUGE EXPENSES TOW ARDS MATERIAL CONSUMED, CONSTRUCTION EXPENSES AND ADMINI STRATIVE EXPENSES. NO DETAILS FOR SUCH EXPENSES HAVE BEEN F URNISHED. THE ASSESSING OFFICER THEREFORE WAS OF THE VIEW THA T THE CLAIM OF THE EXPENSES IS ON HIGHER SIDE. THE ASSESSING O FFICER ESTIMATED THE INCOME AT 10% OF THE RECEIPTS AND ACC ORDINGLY ASSESSED THE TOTAL INCOME AT RS.2,98,51,180/- AS AG AINST RETURN OF INCOME OF RS.91,53,216/-. 4. BEFORE THE LEARNED CIT(A) IT WAS ARGUED THAT TH E 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 PROF IT 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 U NDER CONSIDERATION IS MORE THAN FOUR TIMES OF IMMEDIATEL Y PRECEDING YEAR. IT WAS ARGUED THAT AS TURNOVER INCREASES, EXP ENSES TOO BECOME MORE RESULTING IN LESSER NET PROFIT RATE. T HE LEARNED PAGE 4 OF 9 ITA NO.187/BANG/2009 4 CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASS ESSEE 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 FILE D ANY DETAILS EITHER BEFORE THE ASSESSING OFFICER OR BEFO RE THE LEARNED CIT(A). IN THE IMMEDIATELY PRECEDING YEAR, T HE NET PROFIT WAS 5.89%. IF ONE HAS TO CONSIDER THE PAST HISTORY OF THE CASE, THEN NET PROFIT RATE AS DISCLOSED BY THE A SSESSEE IN THE IMMEDIATELY PRECEDING YEAR SHOULD HAVE BEEN APPLI ED. THE LEARNED CIT(A) SHOULD HAVE CONSIDERED THE PERCENTAG E OF PROFIT ON THE BASIS OF THE ASSESSMENT MADE BY THE ASSESSING OFFICER AND NOT ON THE BASIS OF PERCENTAGE OF PROFIT RETURN ED. IN CASE THE INCOME HAS BEEN ACCEPTED U/S 142(1) THEN IT DOE S 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 ITA NO.187/BANG/2009 5 OFFICER HAS NOT APPLIED HIS MIND. IT WAS FURTHER S UBMITTED THAT IN CASE THE TURNOVER IS INCREASED THEN THE NET PROFIT RATE SHOULD GO UP BECAUSE INDIRECT COST AND OTHER ADMINI STRATIVE EXPENSES GOT REDUCED. DURING THE COURSE OF PROCEED INGS 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. YE AR 2004- 05 WAS ACCEPTED VIDE ORDER U/S 143(3). HENCE, THE EARLIER ASSESSMENTS HAVE BEEN COMPLETED U/S 143(3) AND IT I S 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 V OLUME OF PROFIT. THE QUANTUM OF PROFIT INCREASE AS AGAINST T HE RATE OF PROFIT. THE LEARNED DR SUBMITTED THAT THE ASSESSEE WAS WILLING TO PRODUCE THE NECESSARY DOCUMENTS AND IN FACT PRODU CED ALL OTHER INFORMATION THAT WAS CALLED FOR. SINCE THE I NFORMATION, WHICH WAS ASKED AT THE LAST STAGE OF PROCEEDINGS, T HE ASSESSEE SOUGHT TIME FOR FILING OF THAT INFORMATION. THE LA ST NOTICE ISSUED WAS SERVED ON 15TH DECEMBER, 2007 AND THE CA SE WAS FIXED FOR HEARING ON 17TH DECEMBER, 2007. SINCE TH E CASE WAS GOING TO BE BARRED BY LIMITATION ON 31ST DECEMBER, 2 007, PAGE 6 OF 9 ITA NO.187/BANG/2009 6 THEREFORE, THE ASSESSING OFFICER COMPLETED THE ASSE SSMENT 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 DECLAR ED BY THE ASSESSEE WAS OF LESS THAN 5% WAS ACCEPTED BY THE DEP ARTMENT IN EARLIER YEAR AND THEREFORE, THE RELIEF GIVEN BY TH E COMMISSIONER OF INCOME TAX (APPEAL) WAS UPHELD BY TH E TRIBUNAL. THE LEARNED AR HAS REFERRED TO THE DECIS ION OF RAJASTHAN HIGH COURT IN THE CASE OF CIT V BHAWAN VA PATH NIRMAN (BOHRA) & CO. (NO.2) 258 ITR 440. IN THIS C ASE, THE NET PROFIT RATE WAS APPLIED FOR PRECEDING YEAR SUBJECT T O ADJUSTMENT TOWARDS DEPRECIATION AND INTEREST AND TH EREFORE, THE SAME RATE APPLIED BY THE TRIBUNAL IN THE SUCCEED ING YEAR WAS UPHELD. 7. WE HAVE HEARD BOTH THE PARTIES. ASSESSMENT FO R 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, DIREC TOR OF THE ASSESSEE COMPANY ON 31ST DECEMBER, 2003. NO DISCREP ANCY HAS BEEN NOTICED EVEN AFTER CONDUCTING SEARCH AND RETUR N WAS ACCEPTED. ASSESSMENT FOR THE ASST. YEAR 2003-04 HAS ALSO BEEN COMPLETED U/S 143(3) R.W.S. 153A. THE NET PRO FIT DECLARED WAS 3.69% AND THE SAME WAS ADOPTED AT 5%. FOR THIS ASST. YEAR PAGE 7 OF 9 ITA NO.187/BANG/2009 7 ALSO, BOOKS OF ACCOUNT RELATING TO THE COMPANY WERE SEIZED. EVEN ON THE BASIS OF THE SEIZED BOOKS OF ACCOUNT, T HE ASSESSING OFFICER APPLIED THE NET PROFIT RATE OF 5%. THE ASS ESSMENT FOR THE ASST. YEAR 2004-05 HAS ALSO BEEN COMPLETED U/S 1 43(3). THE RETURNED INCOME HAS BEEN ACCEPTED. PERHAPS THE NET PROFIT RATE WAS ACCEPTED BECAUSE THE NET PROFIT RATE DECLA RED FOR THE ASST. YEAR 2004-05 WAS 5.89% I.E. MORE THAN 5% APPLI ED IN THE IMMEDIATELY PRECEDING YEAR. IT IS TRUE THAT THE TURN OVER FOR THE ASST. YEAR 2004-05 WAS MORE THAN THE DECLARED PR OFIT RATE. HENCE, IN THE CASE OF THE ASSESSEE, IT CANNOT BE AC CEPTED 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 IN TEREST AND DEPRECIATION. HENCE, ONE HAS TO COMPARE GROSS PROF IT 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 (RS.0 A.Y. 2005-06 (RS.) TURNOVER 29,85,11,801 6,29,25,015 PROFIT AFTER DEPRECIATION & INTEREST 1,02,64,523 37,31,580 DEPRECIATION 55,50,910 23,50,985 FINANCE CHARGES 98,69,901 18,47,868 PROFIT BEFORE DEPRECIATION AND INTEREST 2,56,85,334 6,38,42,082 PROFIT RATE BEFORE DEPRECIATION AND INTEREST 10.015% 8.615% PAGE 8 OF 9 ITA NO.187/BANG/2009 8 THUS, THE FALL IN PROFIT RATE BEFORE INTEREST AND D EPRECIATION AS COMPARED TO LAST YEAR IS 1.4%. THE ASSESSEE HAS DEC LARED A NET PROFIT, AFTER INTEREST AND DEPRECIATION, AN INCOME OF RS.91,53,216/- ON TURNOVER OF RS.29,85,11,101/-. T HIS GIVES THE NET PROFIT RATE OF AROUND 3%. THE LEARNED CIT(A) H AS APPLIED NET PROFIT RATE OF 4.5% ON THE TOTAL RECEIPTS. THU S, FROM THE DECLARED RESULTS, THE LEARNED CIT(A) HAS UPHELD THE ADDITION OF 1.5% TO THE NET PROFIT. THIS FAVOURS COMPARABLY WIT H 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 DEPRE CIATION AS APPLIED IN THE EARLIER YEARS. IN THAT CASE, THE ASS ESSING OFFICER WAS APPLYING NET PROFIT RATE BEFORE INTEREST AND DEPRECIATION BUT FOR THE YEAR FOR WHICH THE MATTER W AS CONSIDERED BY THE HON'BLE HIGH COURT, THE ASSESSING OFFICER APPLIED NET PROFIT RATE AND DID NOT ALLOW DEPRECIAT ION AND INTEREST. THE HON'BLE RAJASTHAN HIGH COURT OBSERVE D THAT THE TRADING RESULT OBTAINED BY APPLYING SUCH NET PROFIT R ATE NEEDED FURTHER APPROPRIATION TOWARDS ALLOWABLE DEPRECIATIO N AND INTEREST ON BORROWINGS. THUS, WHILE APPLYING NET PR OFIT 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 ITA NO.187/BANG/2009 9 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. GUAR D FILE. 7. GF, ITAT, NEW DELHI. MSP/07.10. BY ORDER ASST. REGISTRAR, ITAT, BANGALORE.