M/s Haribhai Dhanjibhai & Co., Kheda V. The Income Tax Officer, Ward -3, Nadiad

ITA 2626/AHD/2005

• Counselvise Citation: [2009] 114 COUNSELVISE.COM (IT) 9020 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 9 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-09-2009
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 16-09-2009
• Assessment Year: 2002-2003
• Appeal Filed On: 14-12-2005
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ALOK JOHRI
• Assessee Lawyers: DIVYAKANT PARIKH
• Keywords: Depreciation
• Section: 44AD; 40(b); 234B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH C AHMEDABAD BEFORE SHRI H.L. KARWA, JUDICIAL MEMBER AND SHRI N.S. SAINI, ACCOUNTANT MEMBER DATE OF HEARING: 16.09.09 DRAFTED ON: 17.09. 09 ITA NO.2626/AHD/2005 ASSESSMENT YEAR : 2002-2003 M/S. HARIBHAI DHANJIBHAI & CO. KRISHNA NIVAS, BAZAR, MATAR, DIST. KHEDA. VS. THE INCOME TAX OFFICER, WARD-3, 2 ND FLOOR, KDCC BUILDING, GODIA BAZAR, NADIAD. PAN/GIR NO. : AABFN 0562 N (APPELLANT) .. (RESPONDENT) APPELLANT BY : SHRI DIVYAKANT PARIKH RESPONDENT BY: SHRI ALOK JOHRI CIT DR O R D E R PER N.S.SAINI , ACCOUNTANT MEMBER :- THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST T HE ORDER OF THE LD.CIT(APPEALS)-IV, BARODA, DATED 18.10.2005. 2. GROUND NOS.1 AND 2 OF THE APPEAL RELATES TO ADDI TION OF RS.12,20,095/- AS CLOSING STOCK OF WORKING PROGRESS ON ESTIMATE BA SIS. 3. GROUND NO.4 OF THE APPEAL RELATES TO DIRECTING T HE LEARNED ASSESSING OFFICER TO ALLOW REMUNERATION TO PARTNERS AS PER PA RTNERSHIP DEED ON THE INCOME FINALLY DETERMINED. 4. GROUND NO.5 OF THE APPEAL RELATES TO DIRECTING T HE LEARNED ASSESSING OFFICER TO ALLOW INTEREST TO PARTNERS AS PER PARTNE RSHIP DEED. 5. SINCE THE ISSUE AND FACTS INVOLVED IN THE ABOVE GROUNDS OF APPEAL ARE COMMON, THEY ARE CONSIDERED AND DECIDED AS UNDER. ITA NO .2626/AHD/2005 M/S.HARIBHAI DHANJIBHAI & CO. ASST.YEAR -2002-03 - 2 - 3. THE BRIEF FACTS OF THE CASE ARE THAT THE LEARNED ASSESSING OFFICER OBSERVED THAT THE ASSESSEE IS IN THE BUSINESS OF RO AD CONSTRUCTION AND WAS HAVING HUGE TURNOVER OF RS.2,01,76,773/- AND THEREA FTER, THE ASSESSEE HAS SHOWN NET LOSS OF RS.39,664/- UNDER THE HEAD BUSINE SS INCOME. IN THE ONION OF THE LEARNED ASSESSING OFFICER ASSESSEE WAS EXPECTED TO DECLARE AT LEAST 8% NET PROFIT IN VIEW OF SECTION 44AD EVEN THOUGH SAID PRO VISIONS APPLIES TO ASSESSEE WHOSE TURNOVER IS BELOW RS.40 LACS. THE LEARNED AS SESSING OFFICER FOUND THAT THE REASON FOR SHOWING LOSS WAS HEAVY PURCHASE S AMOUNTING TO RS.17,57,273/- MADE BY THE ASSESSEE IN THE MONTH OF MARCH 2002 AGAINST WHICH IT HAS SHOWN RECEIPTS OF RS. 6,56,204/- ONLY DURING MARCH ON ACCOUNT OF MEHMDABAD LINK ROAD FOR MARCH 2002. SINCE, NO WORK IN PROGRESS OR CLOSING STOCK FOR THE BALANCE PURCHASES WAS SHOWN, IT WAS P RESUMED THAT THE ASSESSEE UTILISED THE WHOLE OF PURCHASES DURING THE YEAR AGA INST WHICH THE PROPORTIONATE RECEIPTS OF RS.11,01,069/- (RS.17,57, 275-6,56,204) HAS NOT BEEN SHOWN. THE LEARNED ASSESSING OFFICER FURTHER OBSER VED THAT THE ASSESSEE HAS HEAVILY DEBITED EXPENSES OF CARTING, LABOUR, DIESEL , ETC. IN THE CLOSING MONTH OF PART OF FEBRUARY. HE ALSO NOTED THAT THOUGH CONSTRU CTION ACTIVITY HAD STOPPED UPTO 22.03.2002 YET, LABOUR CHARGES AS PER THE MUST ER ROLL WERE PAID IN THE END OF MARCH 2002. ACCORDINGLY, HE WAS OF THE VIEW THA T EITHER EXPENSES WERE INFLATED OR THERE WAS WORK IN PROGRESS EVEN AFTER 2 2.03.2002. ACCORDINGLY, HE DISALLOWED INDIRECT OVERHEAD EXPENSES MADE IN THE M ONTH OF MARCH 2002 TO RS.1,88,872/- AFTER DEDUCTING PROPORTIONATE ADMINIS TRATIVE EXPENSES FOR MEHMDABAD LINK ROAD OF RS.69,882/-. THEREBY, DISALL OWING RS.1,18,990/-. IN THIS WAY, HE MADE DISALLOWANCE OF RS.12,20,059/-(11 ,01,069+1,18,990). ITA NO .2626/AHD/2005 M/S.HARIBHAI DHANJIBHAI & CO. ASST.YEAR -2002-03 - 3 - 4. IN APPEAL, THE LEARNED COMMISSIONER OF INCOME TA X(APPEALS) OBSERVED AS UNDER: I HAVE GONE THROUGH THE SUBMISSIONS OF THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE AND THE FINDINGS OF THE LEARNED ASSESSING OFFICER AND OBSERVE THAT THE APPELLANTS ARGUMENT T HAT THE APPELLANTS G.P. IS ABOUT 9% IF THE PAYMENT OF INTEREST OF RS.12.91 LAC S TO PARTNERS WAS NOT TAKEN INTO CONSIDERATION AND THAT IT COMPARED FAVOURABLY IN VIEW OF THE PROVISION OF SECTION 44AD DOES NOT HAVE MUCH RELEVANCE BECAUSE U NDER THE PRESUMPTIVE SECTIONS LIKE 44AD, THE YIELD OF 8% IS ENVISAGED AS NET YIELD, DEEMING THAT ALL EXPENSES INCLUDING DEPRECIATION HAS BEEN ALLOWED. H ENCE, THE YIELD OF 9% CLAIMED BY THE APPELLANT WITHOUT TAKING INTO CONSID ERATION THE INTEREST OF RS.12.91 LACS PAID TO THE PARTNERS, IS DEVOID OF LO GIC. DURING THE HEARING OF APPEAL, THE APPELLANT WAS DI RECTED TO PRODUCE A COPY OF PARTNERSHIP DEED. ON GOING THROUGH THE CLAU SE (6) OF THE TRANSLATED VERSION OF THE PARTNERSHIP DEED SUPPLIED BY THE APP ELLANT, IT IS OBSERVED THAT THE INTEREST IS AGREED TO BE PAID @ 18% OR SUBJECT TO THE PROVISIONS OF 40(B)(IV) OF THE ACT OR ANY OTHER APPLICABLE PROVISIONS AS MA Y BE IN FORCE FOR THE RELEVANT ACCOUNTING PERIOD ON THE CAPITAL OR LOAN ACCOUNT OF THE PARTNERS. HOWEVER, IN THE SUBSEQUENT PARA, IT IS MENTIONED THAT THE PART NERS SHALL BE AT LIBERTY TO INCREASE OR REDUCE THE RATE OF INTEREST FROM TIME T O TIME DURING ANY FINANCIAL YEAR WITH MUTUAL UNDERSTANDING OF ALL PARTNERS . THE TERM SHALL BE AT LIBERTY TO INCREASE OR REDUC E. IN THE ABOVE MENTIONED TERMS OF PARTNERSHIP DEED CLEARLY SHOW THAT THE TER M FOR GRANTING INTEREST TO THE PARTNERS ON THEIR CAPITAL IS NOT FIXED. THE CBD T VIDE CIRCULAR NO.739 DATED 25.03.1996 HAS CLARIFIED THAT DEDUCTION FOR INTERES T/REMUNERATION TO THE PARTNERS CAN BE ALLOWED WHEN THE SPECIFIC AMOUNTS O F SUCH PAYMENT IS LAID DOWN/QUANTIFIED IN THE TERMS OF PARTNERSHIP DEED AN D WHERE NEITHER THE AMOUNT HAS BEEN QUANTIFIED NOR EVEN THE LIMIT OF TO TAL PAYMENT HAS BEEN SPECIFIED BUT HAS BEEN LEFT TO BE DETERMINED BY THE PARTNERS THEN IN SUCH CASES, PAYMENT OF REMUNERATION/INTEREST CANNOT BE ALLOWED AS DEDUCTION UNDER SECTION 40(B) IN THE COMPUTATION OF THE FIRMS INCO ME. HENCE, AS STATED ABOVE THE TERMS OF PAYMENT OF INTEREST TO THE PARTNERS ON THEIR CAPITAL ACCOUNT IS NOT FIXED, THEREFORE, THE CLAIM OF INTEREST AMOUNTING T O RS.12.91 LACS CANNOT BE ALLOWED. INSPITE OF THE FACT THAT THE LEARNED ASSESSING OFFI CER HAS NOT GIVEN CLEAR REASONING AS TO WHO HE HAS ARRIVED AT THE RATIO OF DISALLOWING 1/12 TH OF THE EXPENSES DEBITED BY THE APPELLANT FOR THE MONTH OF MARCH, 2002, YET, THE INFLATION OF EXPENSE DURING THE CLOSING MONTH IS CE RTAIN. THE A.RS ARGUMENT TO COVER SUCH EXCESSIVE DEBITING OF EXPENSES IN THE MO NTH OF MARCH BY STATING THAT PART OF THE EXPENSES CLAIMED, ACTUALLY PERTAIN TO EARLIER MONTHS, IS NOT ITA NO .2626/AHD/2005 M/S.HARIBHAI DHANJIBHAI & CO. ASST.YEAR -2002-03 - 4 - ACCEPTABLE FOR THE REASON THAT THE ASSESSEE IS FOLL OWING MERCANTILE SYSTEM OF ACCOUNTING AND AS SUCH SHOULD HAVE RECORDED THE PUR CHASES IN THE MONTH TO WHICH IT PERTAINED. FURTHER, THE APPELLANT HAS NOT BEEN ABLE TO PRODUCE ANY DOCUMENTARY EVIDENCE TO SUPPORT THE ARGUMENT THAT T HE PURCHASES ENTERED IN MARCH ACTUALLY PERTAINED TO MONTHS OTHER THAN MARCH . FURTHER, THE LABOUR EXPENSES HAVE BEEN DEBITED FOR THE WHOLE MONTH OF M ARCH WHEN THE PROJECT WORK HAD CEASED BY 22.03.2002, WHICH CLEARLY SHOW T HAT EXPENSE HAVE BEEN INFLATED. AS RECEIPTS SIGNIFICANTLY, DO NOT MATCH T HE PURCHASES MADE IN THE MONTH OF MARCH AND FOR THE SAID DIFFERENCE, NEITHER THE WORK IN PROGRESS NOR THE CLOSING STOCK HAS BEEN REFLECTED, I HOLD THAT T HE ADDITION OF RS.17.57 LACS MADE BY THE LEARNED ASSESSING OFFICER AND THE PROPO RTIONATE DISALLOWANCE OUT OF THE ADMINISTRATIVE EXPENSES DESERVES TO BE SUSTA INED, SPECIALLY IN VIEW OF THE FAT THAT THE INTEREST PAYMENT OF RS.12.91 LACS TO THE PARTNERS IS NOT BASED ON SPECIFIC TERMS OF PAYMENT IN THE PARTNERSHIP DE ED. 5. THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASS ESSEE EXPLAINED THAT BILLS OF MATERIAL IN RESPECT OF WHICH GOODS RECEIVE D PRIOR TO MARCH 2002, WERE ALSO RECEIVED IN MONTH OF MARCH 2002 AND THEREFORE, THE ADDITION MADE BY THE LEARNED ASSESSING OFFICER IS NOT CORRECT AND JUSTIF Y. HE ALSO POINTED OUT THAT THE INTEREST AND SALARY PAID TO PARTNER WORKS OUT T O 6.1% OF THE TURNOVER AND THEREFORE, THE PROFIT SHOWN BY THE ASSESSEE WAS REA SONABLE. ON QUERY FROM BENCH, THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE REPLIED THAT LAST MEASUREMENT OF WORK DONE WAS MADE ON 21.03.2002 IN RESPECT OF WHICH BILLS WERE RAISED AND DULY ACCOUNTED FOR. 6. THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS SUPP ORTED THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS). 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIALS AVAILABLE ON RE CORD. IN THE INSTANT CASE, THE ASSESSEE IS A CONTRACTOR ENGAGED IN CONSTRUCTION AN D REPAIRING OF ROADS. THE ASSESSEES TURNOVER DURING THE YEAR WAS RS.2,01,67, 773/- AND AFTER PAYMENT OF ITA NO .2626/AHD/2005 M/S.HARIBHAI DHANJIBHAI & CO. ASST.YEAR -2002-03 - 5 - INTEREST AND SALARY, TWO PARTNERS, NET PROFIT WAS D ISCLOSED AT A NET OF RS.39,000/-. THE LEARNED ASSESSING OFFICER OBSERVED THAT AS PER THE PROVISION OF SECTION 44AD PROFIT OUGHT TO HAVE BEEN 8% OF THE TURNOVER. THE LEARNED ASSESSING OFFICER FURTHER OBSERVED THAT THE EXPENSE S FOR MATERIALS AND LABOUR SHOWN IN THE MONTH OF MARCH, 2002 BY THE ASSESSEE W AS RS.17,57,275/- AND FOR LABOUR WAS RS.1,88,872/- AND THE RECEIPT WAS SHOWN AT RS.6,56,204/- ONLY IN THE MONTH OF MARCH 2002, THEREFORE, RS.12,20,059/-S HOULD HAVE BEEN SHOWN AS WORK IN PROGRESS OR CLOSING STOCK BY THE ASSESSE E. HOWEVER, THE ASSESSEE HAS SHOWN CLOSING STOCK OR WORK IN PROGRESS AT NIL AND THEREFORE, THE LEARNED ASSESSING OFFICER ADDED RS.12,20,059/- TO THE INCOM E OF THE ASSESSEE WHICH WAS ALSO CONFIRMED BY THE LEARNED COMMISSIONER OF I NCOME TAX(APPEALS). THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE E XPLAINED THAT BILLS OF MATERIAL IN RESPECT OF WHICH GOODS RECEIVED PRIOR T O MARCH 2002, WERE ALSO RECEIVED IN MONTH OF MARCH 2002 AND THEREFORE, THE ADDITION MADE BY THE LEARNED ASSESSING OFFICER IS NOT CORRECT AND JUSTIF IED. HE ALSO POINTED OUT THAT THE INTEREST AND SALARY PAID TO PARTNER WORKS OUT T O 6.1% OF THE TURNOVER AND THEREFORE, THE PROFIT SHOWN BY THE ASSESSEE WAS REA SONABLE. ON QUERY FROM BENCH, THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE REPLIED THAT LAST MEASUREMENT OF WORK DONE WAS MADE ON 21.03.2002 IN RESPECT OF WHICH BILLS WERE RAISED AND DULY ACCOUNTED FOR. THUS, FROM THE FACTS, IT IS OBSERVED THAT THE WORK DONE BETWEEN 21.03.2002 TO 31.03.2003 SHOULD H AVE BEEN SHOWN BY THE ASSESSEE AS WIP. THE EXACT AMOUNT OF WORK DONE DURI NG THIS PERIOD AND MATERIALS PURCHASED DURING THIS PERIOD COULD NOT BE POINTED OUT BY THE ASSESSEE. CONSIDERING THE FULL FACTS AND CIRCUMSTAN CES OF THE CASE, IN OUR CONSIDERED OPINION THE WORKING MADE BY THE LOWER AU THORITIES TO DETERMINE THE WORK IN PROGRESS AT RS.12,20,095/- FOR 10 DAYS CANNOT BE ACCEPTED. KEEPING ITA NO .2626/AHD/2005 M/S.HARIBHAI DHANJIBHAI & CO. ASST.YEAR -2002-03 - 6 - IN VIEW THE FACTS THAT ESTIMATE OF WORK IN PROGRESS AT RS.4 LACS MAKES THE NET PROFIT OF THE ASSESSEE AT 8% BEFORE ALLOWANCE OF DE DUCTION FOR INTEREST AND SALARY TO PARTNERS AND KEEPING IN VIEW THE FACTS TH AT WORK DONE UPTO 21.03.2003 WAS ACCOUNTED FOR BY THE ASSESSEE IN ITS RECEIPTS, IN OUR CONSIDERED OPINION, IT SHALL MEET THE END OF JUSTICE IF WORK I N PROGRESS OF THE ASSESSEE IS ESTIMATED AT RS.4 LACS AS AT THE CLOSE OF THE RELEV ANT ACCOUNTING YEAR. WE THEREFORE, MODIFY THE ORDERS OF THE LOWER AUTHORITI ES AND RESTRICT THE ADDITION OF RS.4LACS IN PLACE OF RS.12,20,095/-. THUS, THE G ROUNDS OF APPEAL OF THE ASSESSEE ARE PARTLY ALLOWED. 8. GROUND NO.6 OF THE APPEAL RELATES TO CHARGING OF INTEREST UNDER SECTION 234B OF THE ACT. THE LEARNED AUTHORISED REPRESENTAT IVE OF THE ASSESSEE DID NOT MAKE ANY SUBMISSION ON THIS GROUND OF APPEAL. W E HOLD THAT CHARGING OF INTEREST IS CONSEQUENTIAL AND ACCORDINGLY DISPOSE O F THIS GROUND OF APPEAL OF THE ASSESSEE. 9. GROUND NO.7 OF THE APPEAL RELATES TO CHARGING OF INTEREST UNDER SECTION 234D OF THE ACT. WE FIND THAT THIS ISSUE IS SQUAREL Y COVERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE BY THE DECISION OF THE TRIBUNAL DELHI E (SPECIAL BENCH) IN THE CASE OF ITO, WARD 11, NEW DE LHI V. EKTA PROMOTERS PVT. LTD. (2008) 113 ITD 719 (DELHI) (SPECIAL BENCH) WHE REIN IT HAS BEEN HELD THAT PROVISIONS OF SECTION 234D, WHICH HAS BEEN BROUGHT ON STATUTE FROM 01.6.2003, WILL HAVE APPLICATION ONLY WITH EFFECT FROM ASSESS MENT FROM 2004-05 AND, THEREFORE, INTEREST U/S 234D CANNOT BE CHARGED FOR EARLIER YEARS EVEN THOUGH REGULAR ASSESSMENTS IN THOSE YEARS WERE FRAMED AFTE R 01.6.2003 OR REFUND WAS GRANTED FOR THOSE YEARS AFTER THE SAID DATE. RESPEC TFULLY FOLLOWING THE THE DECISION OF THE TRIBUNAL DELHI SPECIAL BENCH IN THE CASE OF EKTA PROMOTERS PVT. LTD. (SUPRA), WE HOLD THAT INTEREST UNDER SECTION 2 34D COULD NOT BE CHARGED IN ITA NO .2626/AHD/2005 M/S.HARIBHAI DHANJIBHAI & CO. ASST.YEAR -2002-03 - 7 - RESPECT OF ASSESSMENT FALLING BEFORE 01.6.2003, AS THE PROVISIONS OF SECTION 234D WERE INSERTED WITH EFFECT FROM 1.6.2003. ACCOR DINGLY, WE DIRECT THE LEARNED ASSESSING OFFICER TO DELETE THE INTEREST CH ARGED UNDER SECTION 234D OF THE ACT. THUS THIS GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED. 10. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED AS ABOVE. ORDER SIGNED, DATED AND PRONOUNCED IN THE COURT ON 18/09/2009. SD/- SD/- ( H.L. KARWA ) ( N.S. SAINI ) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD; DATED 18/09/2009 PARAS# COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE LD. CIT(APPEALS)-IV, BARODA. 5. THE DR, AHMEDABAD BENCH 6. THE GUARD FILE. BY ORDER, //TRUE COPY// (DY./ASSTT.REGISTRAR), ITAT, AHMEDABAD