M/s. Walia Construction Company, Pathankot V. The Additional Commissioner of Income-tax, Pathankot

ITA 361/ASR/2013

• Counselvise Citation: 36120914 RSA 2013
• Duration Of Justice: 9 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-03-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB
• Next Hearing Date: 22-12-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 30-05-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Depreciation; Question of law
• Section: 44AD; 143(3); 144

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AMRITSAR BENCH; AMRITSAR. BEFORE SH. H.S. SIDHU, JUDICIAL MEMBER AND SH. B.P.JAIN, ACCOUNTANT MEMBER I.T.A. NO.344(ASR)/2013 ASSESSMENT YEAR:2009-10 PAN :AAAFW1495R DY.COMMR. OF INCOME TAX VS. M/S. WALIA CONSTRUCTION CO., CIRCLE-IV, PATHANKOT. 1-R, ABROL NAGAR, PATHANKOT . (APPELLANT) (RESPONDENT) AND I.T.A. NO.361(ASR)/2013 ASSESSMENT YEAR:2009-10 PAN :AAAFW1495R M/S. WALIA CONSTRUCTION CO., VS. DY.COMMR. OF INCOM E TAX 1-R, ABROL NAGAR, PATHANKOT. CIRCLE-IV, PATHANKOT. (APPELLANT) (RESPONDENT) DEPARTMENT BY: SH.TARSEM LAL, DR ASSESSEE BY: SH.ASHWANI KALIA, CA DATE OF HEARING:20/03/2014 DATE OF PRONOUNCEMENT:26/03/2014 ORDER PER BENCH ; THESE CROSS APPEALS OF THE REVENUE AND THE ASSES SEE ARISE FROM THE ORDER OF THE CIT(A), AMRITSAR DATED 14.03.2013 FOR THE ASSESSMENT YEAR 2009-10.THE REVENUE HAS RAISED FOLLOWING GROUNDS O F APPEAL: ITA NO.344(ASR)/2013 ITA NO.361(ASR)/2013 2 I) THAT THE LD. CIT(A) HAS ERRED IN RESTRICTING TH E NET PROFIT AT 10% OF THE CONTRACT RECEIPTS IGNORING THE FACT THAT THE AO HAS APPLIED THE RATE OF 12% FOLLOWING THE VARIOUS ORDER S OF HONBLE PUNJAB & HARYANA HIGH COURT IN SIMILAR CONTRACTORS CASES. IT IS PRAYED THAT THE RATE OF 12% OF CONTRACT RECEIPTS AS APPLIED BY THE A.O. BE RESTORED. II) APPELLANT CRAVES LEAVE TO AMEND OR ADD ANY OR M ORE GROUNDS OF APPEAL. 2. THE ASSESSEE HAS RAISED FOLLOWING GROUNDS OF AP PEAL : 1. THAT THE LD. CIT(A) HAS GROSSLY ERRED IN CONFIR MING THE REJECTION OF BOOKS OF ACCOUNT BY THE AO U/S 145(3) AND IN FURTHER HOLDING THAT SECTION 144 WAS IMPLIED INVOKE D, WHEN EVEN THE BASIS TO APPLY NP RATE OF 12% WAS NOT CONF RONTED TO ASSESSEE IN ASSESSMENT. 2. THAT THE LD. CIT(A) HAS GROSSLY ERRED IN LAW AND ON FACTS TO RESTRICT THE ESTIMATION OF INCOME BY APPLICATION OF NP RATE OF 10% ON GROSS CONTRACTUAL RECEIPTS, AGAINST 12% APPL IED BY THE A.O. 2.1. THAT THE NP RATE OF 10% SUBSTITUTED BY THE LD. CIT(A) IS NOT ONLY ARBITRARY, HIGHLY EXCESSIVE AND WITHOUT MATERI AL, BUT ALSO NOT CONSISTENT WITH THE ACCEPTED PAST HISTORY OF TH E CASE 2.2. THAT MOST PLAUSIBLE CONTENTIONS RAISED BEFORE THE L D. CIT(A) SUPPORTED BY COGENT MATERIAL, JUSTIFYING THE DECLAR ED RESULTS, HAS BEEN WRONGLY BRUSHED ASIDE BY THE LD. CIT(A). 3. THAT THE LD. CIT(A) WAS NOT JUSTIFIED IN ALLOWIN G DEPRECIATION, AFTER UPHOLDING ESTIMATION OF INCOME BY APPLICATION OF FLAT NP RATE. 4. THAT THE ORDER UNDER APPEAL, TO THE EXTENT DISPU TED HEREINABOVE, IS WHOLLY AGAINST LAW AND FACTS OF THE CASE. ITA NO.344(ASR)/2013 ITA NO.361(ASR)/2013 3 3. THE BRIEF FACTS OF THE CASE AS PER AOS ORDER, A RE REPRODUCED HEREUNDER FOR THE SAKE OF CONVENIENCE. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE A SSESSEE VIDE ORDER SHEET ENTRY DATED 05.12.2011 WAS ASKED TO JUSTIFY N ET PROFIT RATE OF 1.89% ON A TURNOVER OF 12.44 CRORES. IN RESPONSE, THE ASSESSEE HAS SUBMITTED THE FOLLOWI NG REPLY: APPARENTLY THERE IS MINOR DECLINE OF 0.44% IN NET P ROFIT RATE AS COMPARED TO IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR AS IN THE ASSESSMENT YEAR 2008-09 THE NP RATE WAS SHOWN 2.33% ON THE TURN OVER OF RS.10.99 CRORES. .THAT THERE IS AN INCREASE IN RATES OF BITUMEN, CEMENT, BRICKS ETC. AS COMPARED TO THE RATES SUCH GOODS PREVAILING AT THE TIME OF FILING TENDERS AND EXECUTING THE CONTRACT. THE INFL ATION IN THE COST OF MATERIAL USED ALSO EFFECTS ON THE NET PROFIT RATE T HE SUM OF THE BILLS/DOCUMENTS ARE BEING PRODUCED HEREWITH FOR YOU R VERIFICATION. IN VIEW OF THESE SUBMISSION, IT IS PRAYED THAT THE NET PROFIT RATE DECLARED BY THE ASSESSEE FIRM MAY PLEASE BE ACCEPTED. THE VARIOUS REPLIES FILED BY THE ASSESSEE DURING TH E COURSE OF ASSESSMENT PROCEEDINGS HAVE BEEN CONSIDERED. 2.1. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, O N EXAMINATION OF BOOKS OF ACCOUNT, CERTAIN DISCREPANCIES HAVE BEE N OBSERVED. THE ASSESSEE WAS ASKED TO PRODUCE PROOF OF EXPENDITURE INCURRED ON WAGES AND LABOUR, WAGES REGISTER AND ALSO TO CORRELATE WA GES PAID WITH THE PROJECTS EXECUTED. THE ASSESSEE WAS FURTHER ASKED T O GIVE RATIONALE OF LABOUR AND WAGES EXPENSES OF RS.2,15,33,520/-. THE ASSESSEE PRODUCED VOUCHERS OF WAGES PAID WHICH WERE NOT VERIFIABLE. THEREFORE, THE VERACITY OF THE HUGE EXP ENDITURE OF RS.2,15,33,520/- DEBITED TO LABOUR & WAGES EXPENSES IS NOT OPEN TO VERIFICATION. FROM THE EXAMINATION OF BOOKS OF ACCOUNT, IT IS SEE N THAT THE ASSESSEE HAS NOT MAINTAINED A PROPER RECORD OF LABOUR AND WA GES ACCOUNT. THE ITA NO.344(ASR)/2013 ITA NO.361(ASR)/2013 4 ASSESSEE HAS CLAIMED TO HAVE INCURRED EXPENDITURE O F RS.2,15,33,520/- WHICH IS VERY MUCH ON THE HIGHER SIDE AS THE WORKS EXECUTED BY THE ASSESSEE ARE TO THE TUNE OF RS.12,14,41,449/- ONLY. FURTHER, IT WAS SEEN THAT THERE WAS NO PROPER AUTHE NTICATION REGARDING PROOF OF EXPENDITURE FOR VARIOUS EXPENSES WHICH WER E CLAIMED AND DEBITED TO PROFIT & LOSS ACCOUNT SUCH AS TIPPER MAI NTENANCE EXPENSES. AS THE WAGES ACCOUNT PERTAINING TO LABOUR AND WAGES EXPENDITURE OF RS.2,15,33,520/- ARE NOT VERIFIABLE, WHICH IS THE M OST IMPORTANT COMPONENT OF THE EXPENDITURE CLAIMED BY THE ASSESSE E CONTRACTOR, THE BOOKS OF ACCOUNT OF THE ASSESSEE ARE BEING REJECTED AFTER INVOKING PROVISIONS OF SECTION 145(3) OF THE ACT. 2.2. KEEPING IN VIEW THE NATURE OF BUSINESS I.E. C ONTRACTOR BUSINESS, THE NEXT RELEVANT QUESTION IS OF APPLICATION OF APP ROPRIATE NET RATE OF PROFIT ON GROSS TURNOVER TO ARRIVE AT CORRECT INCOM E OF THE ASSESSEE. FOR THIS PURPOSE, A NET PROFIT RATE OF 12% IS BEING APPLIED ON THE GROSS TURN OVER OF RS.12,14,41,449/-. GROSS RECEIPT FOR THE YEAR UNDER CONSIDERATION RS.1 2,14,41,449/- LESS: MATERIAL SUPPLIED BY THE DEPARTMENT NIL BALANCE GROSS RECEIPTS RS.12,41,41,449/- FOR THIS PURPOSE, A NET PROFIT RATE OF 12% IS BEING APPLIED ON THE GROSS TURN OVER OF RS.12,14,41,449/-. THEREFORE, THE INC OME OF THE ASSESSEE IS BEING DETERMINED AT RS.1,45,72,974/-. 4. THE AO WHILE APPLYING NET PROFIT RATE OF 10% REL IED UPON THE DECISIONS OF VARIOUS COURTS OF LAW, AS UNDER: I) DECISION OF HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF M/S. PARBHAT KUMAR IN ITA NO.293 OF 2008 DATED 14.11.2008. II) DECISION OF ITAT CHANDIGARH IN THE CASE OF M/S. ESS ESS BUILDERS (P) LTD. IN ITA NO.707/CHANDI/1997 FOR THE A.Y. 1993-94. ITA NO.344(ASR)/2013 ITA NO.361(ASR)/2013 5 III) DECISION OF HONBLE P & H HIGH COURT IN THE CASE OF SURINDER PAL NAYYAR, 177 TAXMAN 207 (P&H). IV) DECISION OF ITAT CHANDIGARH, IN THE CASE OF SHIVAM CONSTRUCTION CO. IN ITA NO. 383 & 384/CHANDI/2004, DATED 30/8/2006. 5. BEFORE THE LD. CIT(A), THE ASSESSEE MADE THE SUB MISSIONS DATED 16.05.12, 12.07.2012 AND 19.02.2013 FOR REMAND REP ORT, WHICH WERE RECEIVED BY THE LD. CIT(A). THE ASSESSEE PRODUCED S EVEN PERSONS FOR VERIFICATION OF WAGES AND LABOUR CHARGES ON ONE OCC ASION AND 17 PERSONS ON SECOND OCCASION I.E. LABOUR PRODUCED 24 PERSONS ONL Y FOR VERIFICATION OF WAGES AND LABOUR CHARGES. THEREFORE, LABOUR AND WAG ES CHARGES AS A WHOLE WERE NOT VERIFIABLE AND ACCORDINGLY UPHELD THE PROV ISIONS OF SECTION 145(3) OF THE ACT AND AFTER CONSIDERING THE DECISIONS OF VARIOUS COURTS OF LAW REFERRED TO IN THE ORDER OF THE LD. CIT(A), THE LD. CIT(A) RESTRICTED THE NET PROFIT RATE AT 10% AND THEREAFTER ALLOWED THE SALA RY AND INTEREST AMOUNTING TO RS.16,18,081/-. 6. THE LD. DR, MR. TARSEM LAL, ARGUED AND MAINLY RE LIED UPON THE ORDER OF THE ASSESSING OFFICER. HE FURTHER MADE ARGUMENTS THAT WAGES WERE NOT VERIFIABLE AMOUNTING TO RSS.2,15,33,520/- AND THERE FORE, THE LD. CIT(A) HAS RIGHTLY CONFIRMED THE INVOCATION OF PROVISIONS OF S ECTION 145(3) OF THE ACT. AS REGARDS THE ESTIMATION OF INCOME, THE LD. CIT(A) IS NOT JUSTIFIED IN REDUCING THE APPLICABILITY OF NET PROFIT RATE AT 10 % INSTEAD OF 12% APPLIED BY THE A.O. ITA NO.344(ASR)/2013 ITA NO.361(ASR)/2013 6 6.1 THE LD. COUNSEL FOR THE ASSESSEE, MR. ASHWANI K ALIA, CA SUBMITTED AND ARGUED THAT THE ASSESSEE IS A REGULAR INCOME T AX ASSESSEE, AND GROSS CONTRACT RECEIPTS BEING MUCH MORE THAN RS.40 LACS, THE BOOKS ARE REGULARLY MAINTAINED AND ARE SUBJECT TO AUDIT U/S 44AB. THE C OPY OF AUDIT REPORT ALONG WITH TRADING, PROFIT & LOSS A/C AND BALANCE SHEET A LONGWITH OTHER ANNEXURES WERE DULY FILED WITH AO. HE FURTHER SUBMI TTED THAT FOR THE YEAR UNDER APPEAL THE ASSESSEE DECLARED NET INCOME OF RS .2295870 ON GROSS CONTRACT RECEIPT OF RS.121441449 GIVING NET PROFIT RATE OF 1.89% AFTER CHARGING FOLLOWING EXPENSES IN ADDITION TO OTHER NO RMAL EXPENSES OF BUSINESS :- 1 INTEREST PAID TO BANK RS.10053209 2 DEPRECIATION RS.5653301 3 SALARY TO PARTNERS RS.1618081 TOTAL RS. 17324591 6.2. THE LD. COUNSEL FURTHER SUBMITTED DEPRECIATIO N AND SALARY TO PARTNERS ARE STATUTORILY ALLOWABLE WHEREAS INTEREST HAS BEEN PAID TO BANK FOR THE TERM LOAN AND WORKING CAPITAL LOAN FOR THE RUNNING OF BU SINESS AS THE FIRM IS SHORT OF ITS OWN CAPITAL. HENCE THE SAME IS ALSO ALLOWABL E. IN CASE THE ABOVE EXPENSES ARE ADDED TO THE NET PROFIT IT WILL GIVE N ET PROFIT RATE OF 16.15% WHICH IS QUITE HIGH IN THIS BUSINESS. THE AO WHILE FRAMING THE ASSESSMENT REJECTED THE BOOKS OF ACCOUNT AND MADE BEST JUDGMEN T ASSESSMENT BY ITA NO.344(ASR)/2013 ITA NO.361(ASR)/2013 7 APPLYING NET PROFIT RATE OF 12% AND ASSESSED THE IN COME AT RS.14572974 WHICH IS MORE THAN 6 TIMES OF THE RETURNED INCOME. 6.3. THE LD. COUNSEL FURTHER SUBMITTED T HAT THE LD .CIT(A) CONFIRMED THE REJECTION OF BOOKS OF ACCOUNT BUT REDUCED THE NET P ROFIT RATE TO 10% FROM THE RATE OF 12% APPLIED BY THE A.O. THAT IN ALL THE EAR LIER YEARS BOOKS OF ACCOUNT HAVE ALWAYS BEEN ACCEPTED AND ASSESSMENTS HAVE BEEN FRAMED AT THE DECLARED RESULT EXCEPT FOR MINOR DISALLOWANCES OUT OF EXPENSES. THE METHOD OF ACCOUNTING FOLLOWED BY THE APPELLANT FIRM IS CON SISTENT FROM YEAR TO YEAR AND THE BOOKS OF ACCOUNT FOR THE YEAR UNDER APPEAL HAVE ALSO BEEN MAINTAINED ON THE SAME LINES AS IN THE EARLIER YEAR S. THERE IS NEITHER ANY CHANGE IN THE METHOD OF ACCOUNTING NOR ANY CHANGE I N THE ACCOUNTING SYSTEM IN COMPARISON TO THE EARLIER YEARS. 6.3.1 HE FURTHER ARGUED THAT FROM THE READING OF THE ASSESSMENT ORDER IT WILL BE OBSERVED THAT MAIN GROUND FOR REJECTION OF BOOKS OF ACCOUNT IS THAT ASSESSEE HAD NOT MAINTAINED PROPER RECORD OF LABOUR & WAGES AND THE EXPENDITURE OF RS.21533520 UNDER THIS HEAD IS NOT V ERIFIABLE AND IS ON HIGHER SIDE. THE AO HAS ALSO MADE A PASSING A REMAR K THAT THERE WAS NO PROPER AUTHENTICATION REGARDING PROOF OF EXPENDITUR E OF VARIOUS EXPENSES SUCH AS TIPPER MAINTENANCE EXP.THE LD.CIT(A) CONFIR MED THE REJECTION OF THE BOOKS OF ACCOUNT FOR THE REASONS GIVEN BY THE A O.FROM THE PERUSAL OF ITA NO.344(ASR)/2013 ITA NO.361(ASR)/2013 8 THE ASSESSMENT ORDER IT WILL BE OBSERVED THAT AO HI MSELF HAS OBSERVED THAT THE TOTAL AMOUNT OF WAGES ARE 2.15 CRORE AGAINST TH E CONTRACT RECEIPT OF RS.12.14 CRORE GIVING THE RATE OF 17.73% WHICH IS M UCH BELOW THE AVERAGE RATE OF 24 TO 25% IN THIS LINE OF BUSINESS. THE ROA D CONSTRUCTION IS A HIGHLY LABOUR INTENSIVE WORK AND THE RATIO OF LABOUR TO CO NTRACT RECEIPT IS APPROX. 25% IN THIS WORK. THE AO HAS NOT GIVEN ANY COMPARAT IVE CASE WHERE THE WAGES TO CONTRACT RECEIPT RATIO IS LESS. NOR HE HAS MADE ANY COMPARISON WITH THE FIGURES OF PRECEDING YEARS. THE AOS OBSERVAT ION THAT EACH PROJECT WISE WAGES WERE REQUIRED TO BE CO-RELATED IS ALSO NOT RE LEVANT. DURING THE YEAR, THE ASSESEE HAD ABOUT FIFTEEN ONGOING PROJECTS AT V ARIOUS SITES. IT WAS NEITHER PRACTICAL NOR FEASIBLE TO MAINTAIN INDEPENDENT LABO UR FOR EACH PROJECT. AS A PRUDENT BUSINESSMAN THE ASSESSEE MAKES OPTIMAL USE OF LABOUR, HELD IN COMMON FOOD, BY PLACING THE SAME AT DIFFERENT SITES , AS A SITUATION DEMAND. DURING THE REMAND PROCEEDINGS THE AO REQUIRED THE A SSESSEE TO PRODUCE THE WORKERS FOR THE PERSONAL VERIFICATION. THE ASSESSEE PRODUCED 24 WORKERS WHOSE STATEMENTS WERE ALSO RECORDED BY AO AND ALL O F THEM CONFIRMED HAVING WORKED WITH THE ASSESSEE FIRM. THE LD.AO AND CIT(A) HAVE IGNORED THE FACT THAT REMAND PROCEEDINGS WERE CONDUCTED IN 2013 WHEREAS THE FINANCIAL YEAR FOR WHICH THE APPEAL PERTAIN WAS FIN ANCIAL YEAR 2008-09 WHICH MEANS AFTER A GAP OF MORE THAN 4 YEARS. IT IS A COM MON KNOWLEDGE THAT ITA NO.344(ASR)/2013 ITA NO.361(ASR)/2013 9 LABOUR WITH CONTRACTOR IS NOT PERMANENT BUT MOST OF THE WORKERS ARE MIGRATORY WORKERS WHO KEEP SHIFTING FROM ONE CONTRA CTOR TO OTHER AND FROM ONE CITY TO ANOTHER CITY. MOST OF THEM EVEN GO BACK TO THEIR VILLAGES IN BIHAR, UP ORISSA, WEST BENGAL ETC. HENCE IT IS NOT POSSIBL E TO PRODUCE ALL THE WORKERS BEFORE THE AO AFTER A GAP OF MORE THAN 4 YE ARS. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE APPELLANT WAS NOT REQ UIRED TO PRODUCE ANY WORKER. AS REGARDS THE NON AVAILABILITY OF ADDRESSE S OF WORKERS IT IS SUBMITTED THAT THESE WORKERS MAINLY COME FROM FAR F LUNG PLACES AND THE ASSESSEE HAS NO MEANS TO VERIFY THEIR ADDRESSES. EV EN THE AOS REMARK THAT PROPER AUTHENTICATION OF VARIOUS EXPENSES DEBITED T O PROFIT & LOSS A/C SUCH AS TIPPER MAINTENANCE EXPENSES IS NOT THERE IS ABSO LUTELY VAGUE AND WILD AS NOTHING SPECIFIC HAS BEEN PIN POINTED SUGGESTING LA CK OF AUTHENTICATION OF ANY SUCH EXPENSES. BOOKS OF ACCOUNT WERE DULY AUDIT ED AND ALL BILLS/VOUCHERS, MUSTER/ROLLS ETC WERE PRODUCED BEFO RE AND VERIFIED THE AO. HENCE THERE WAS NO REASON FOR THE AO TO INVOKE THE PROVISIONS OF SECTION 145(3). KIND ATTENTION WAS INVITED TO THE FOLLOWING DECISIONS OF HONBLE PUNJAB & HARYANA HIGH COURT WHERE THE HONBLE PUNJA B & HARYANA HIGH COURT HAS HELD THAT IN THE ABSENCE OF SPECIFIC DEFE CTS, THE REJECTION OF BOOKS AND APPLICATION OF HIGHER G.P. RATE IS NOT SUSTAINA BLE:- I) CIT V LUDHIANA STEEL ROLL MILLS 295 ITR 111 P&H) ITA NO.344(ASR)/2013 ITA NO.361(ASR)/2013 10 II) CIT V OM OVERSEAS (2009) 315 ITR 185 6.4. THE LD. COUNSEL FOR THE ASSESSEE FURTHER STATE D THAT THE HYDERABAD BENCH OF ITAT IN 104 ITD 537 (HYD.) DID NOT APPROVE THE REJECTION OF BOOKS WITHOUT STRONG AND SUFFICIENT REASON AND THUS DELETED THE ADDITIONS MADE. FURTHER THE ASSESSMENT MADE BY THE AO AFTER R EJECTION OF BOOKS OF ACCOUNT IS NOT IN ACCORDANCE WITH THE PROVISIONS OF SECTION 144 WHICH REQUIRES THE AO TO ISSUE A SHOW CAUSE NOTICE CONFRO NTING THE MATERIAL GATHERED BY AO TO DRAW A FAIR ESTIMATE OF ASSESSEE S INCOME. HOWEVER, IN THIS CASE NEITHER ANY SHOW CAUSE IN TERMS OF SECTIO N 144 WAS ISSUED NOR THE ASSESSMENT ORDER PASSED U/S 144. RATHER THE ASSESSM ENT HAS BEEN FRAMED U/S 143(3) TO BE NORMAL ASSESSMENT FRAMED AFTER VERIFIC ATION AND ACCEPTANCE OF BOOKS SUPPORTING THE RETURNED INCOME. THE HONBLE S UPREME COURT IN CIT V REAL ESTATE BUILDERS & SERVICES LTD 307 ITR 202 (SC) HELD THAT SANS ANY SUCH ALLEGATION OR FINDING EVEN THE METHOD OF A CCOUNTING CONSISTENTLY FOLLOWED CANNOT BE FAULTED WITH. IN VIEW OF ABOVE S UBMISSIONS THE REJECTION OF BOOKS OF ACCOUNT MADE BY AO AND CONFIRMED BY CIT (A) IS TOTALLY ILLEGAL AND NOT SUSTAINABLE. ITA NO.344(ASR)/2013 ITA NO.361(ASR)/2013 11 7. AS REGARDS THE APPLICATION OF NET PROFIT RATE, T HE LD. COUNSEL FOR THE ASSESSEE ARGUED THAT IT IS AN ESTABLISHED LAW THAT EVEN WHEN THE AO MAKES ASSESSMENT TO THE BEST OF HIS JUDGMENT HE MUST NOT ACT VINDICTIVELY OR CAPRICIOUSLY. THE HONBLE PUNJAB & HARYANA HIGH COU RT HAS HELD IN THE CASE OF AXIA ENGINEERING WORKS V. CIT (2007) 292 IT R 577 ( P&H) THAT MERELY BECAUSE THE ACCOUNTS ARE BOUND TO BE REJECTE D BY RESORT TO SECTION 145, IT DOES NOT FOLLOW THAT THE ESTIMATES NEED NOT BE REASONABLE. IT HAS ALWAYS TO BE REASONABLE. 7.1 THE LD. COUNSEL REFERRED TO THE FOLLOWING JUD GMENTS:- I) 76 ITR 690(SC) HELD THAT POWER TO MAKE BEST JUDGM ENT ASSESSMENT IS NOT AN ARBITRARY POWER. II) 207 ITR 979 (CAL.) HELD THAT MAKING BEST JUDGMENT A SSESSMENT THE AO MUST BE GUIDED BY RULES OF JUSTICE, EQUITY A ND GOOD CONSCIOUS. III) CIT V DALMIA PROMOTERS DEVELOPERS PVT LTD (2006) 28 1 ITR 346 (DEL) HELD THAT FOR REJECTING THE VIEW TAKEN IN EARLIER A SSESSMENT YEARS, THERE MUST BE MATERIAL CHANGE IN THE FACT, S ITUATION OR IN LAW. IV) SRI RAM JHANWAR LALA V. ITO 98 TTJ (JDH) 639 HELD THAT AFTER REJECTING THE BOOK RESULTS THE AO D OES NOT GET UNFETTERED POWERS TO MAKE AN ASSESSMENT AT ANY INCO ME. HE HAS TO BE GUIDED EITHER BY PREVIOUS RESULTS OF THE ASSE SSEE OR SOME COMPARABLE CASE. ITA NO.344(ASR)/2013 ITA NO.361(ASR)/2013 12 V) 256 ITR 243 (RAJ.) HELD AFTER INVOKING THE PROVISIO NS OF SECTION 144 THE AO IS NOT BOUND TO MAKE ADDITIONS TO THE DE CLARED RESULTS VI) DCIT V. ALLIED CONSTRUCTION (2007) 105 ITD 1 (DEL.) (SB) THE ITAT WHILE UPHOLDING THE REJECTION OF BOOKS U/S 145(3) PRIMARILY BECAUSE OF WRONG SYSTEM OF ACCOUNTING DI D NOT APPROVE OF ESTIMATION OF INCOME BY APPLICATION OF N ET PROFIT RATE OF 8% ON THE ANALOGY OF PROVISIONS OF SECTION 44AD OBSERVING THAT PAST RESULTS, AS ASSESSED FINALLY, FORMED A RE ASONABLE BASIS OF SUCH ESTIMATION. AO WAS NOT JUSTIFIED IN APPLYIN G NET PROFIT RATE OF 8% TO THE CONTRACT RECEIPTS IF PAST RESULTS SHOW LOSS OR NOMINAL NET PROFIT RATE. THE AO WHILE APPLYING THE 12% NET PROFIT RATE RELIE D ON VARIOUS TRIBUNAL & HIGH COURT CASES ESPECIALLY IN THE CASE OF PARBHAT KUMAR WHERE THE RATE OF NET PROFIT WAS RESTRICTED TO 12% BY ITAT WHEN THE C IT(A) HAD ENHANCED THE ASSESSED INCOME. THE REVENUES APPEAL BEFORE THE HI GH COURT WAS DISMISSED ON THE GROUND THAT NO SUBSTANTIAL QUESTION OF LAW E MERGED. THUS IT WAS NOT MANDATED BY HIGH COURT THAT CIVIL CONTRACTOR BE ASS ESSED BY APPLYING NET PROFIT RATE OF 12%. FURTHER IT IS SUBMITTED THAT IN PARBHAT KUMARS CASE THE TRIBUNAL HAD TAKEN NOTE OF EARLIER TWO DECIDED CASE S OF ESS ESS BUILDERS PVT LTD AND SURINDER PAL NAYYAR WHICH TOO HAVE BEEN CIT ED BY AO. THERE IS NO INDICATION IN ORDER WHETHER PARBHAT KUMAR WAS ALSO IN ROAD CONSTRUCTION. IN CASE OF ESS ESS BUILDERS PVT LTD ADMITTEDLY THE ASS ESEEE WAS INTO CONSTRUCTION OF QUARTERS OF PUNJAB POLICE. IN THE C ASE OF SURINDER PAL NAYYAR, CIT(A) RESTRICTED THE ADDITION TO 12% OF TH E NET PROFIT WHICH ITA NO.344(ASR)/2013 ITA NO.361(ASR)/2013 13 ASSESSEE CHOOSE NOT TO CONTEST. DEPRECIATION IN THI S CASE WAS DISALLOWED AS THE ADDITIONS TO FIXED ASSETS WERE NOT SUPPORTED BY BILLS. THUS IN BOTH THE CASES THE ASSESSEE DID NOT CONTEST APPLICATION OF 1 2% NET PROFIT RATE BEYOND FIRST APPEAL WHICH MAY WELL BE CONSTRAINED BY THEIR OWN FACTS AND COMPULSION. ANOTHER CASE RELIED UPON BY THE AO IS S HIVAM CONSTRUCTION CO. IN THIS CASE ALSO NATURE OF WORK DONE BY ASSESS EE REMAINED UNFOLDED. UNLESS IT WAS ROAD CONSTRUCTION ITS MECHANICAL APPL ICATION WOULD BE OF NO CONSEQUENCE. IN THE SAID CASE RATE OF 12% WAS SUBST ITUTED AT 10% BY ITAT FOLLOWING ITS PAST HISTORY WHERE THE INCOME WAS ASS ESSED BY AO AT 10% WHICH WAS FURTHER ENDORSED BY THE HIGH COURT. THERE FORE, PAST ACCEPTED HISTORY OF THE ASSESSEES OWN CASE CANNOT BE LOST S ITE BY REVENUE. IN VIEW OF ABOVE SUBMISSIONS THE APPLICATION OF RATE OF 10% BY CIT(A) IS ABSOLUTELY MEANINGLESS AND IN ABSENCE OF ANY DISCREPANCY IN BO OKS OF ACCOUNT OR IN METHOD OF ACCOUNTING THE BOOK RESULTS DECLARED AS I N THE PAST SHOULD HAVE BEEN UPHELD. THIS IS AN ESTABLISHED LAW THAT ONCE T HE BOOKS ARE REJECTED, THE PAST HISTORY OF THE CASE BECOMES, PERHAPS, THE MOST RELEVANT CRITERION FOR ESTIMATING THE INCOME. KINDLY REFER TO THE FOLLOWIN G JUDGMENTS:- I) ITO V SURINDER PAL NAYYAR CONTRACTOR ITA NO.366/ASR/2010 II) MOHAN SINGH CONTRACTOR V ITO GURDASPUR ITA NO.59/ASR/2012 ITA NO.344(ASR)/2013 ITA NO.361(ASR)/2013 14 III) ITO BHATINDA V JARNAIL SINGH CONTRACTOR ITA NO.181(ASR)2005 IV) ACIT V SHIVAM CONSTRUCTION CO. ITA NO.383 & 384/CHAND/2004 V) VRAJLAL MANILAL & CO V CIT 1973) 92 ITR 287 (MP) VI) MULJI UDHAVJI V CIT (1984) 145 ITR 575(MP) VII) DINANATH DUBEY V CIT (1986) 160 ITR 1 (MP) VIII) DELA ENGG CO PVT LTD V CIT (1990) 186 ITR 383 (ALL) IX) CHOWDHARY & BROTHERS. V ITO 135 TTJ (JP) 40 7.2 THE LD. COUNSEL FOR THE ASSESSSEE FURTHER STATE D THAT THE FACTS OF THE CASES RELIED UPON BY THE A.O. AND CIT(A) ARE NOT CO MPARABLE AND EVEN THE HONBLE HIGH COURT HAS HELD THAT APPLICATION OF FIX ED RATE OF PROFIT DEPENDS ON FACTS OF EACH CASE AND NO RATE CAN BE FIXED FOR ALL THE CASES. THE WORKING RESULTS OF THE YEAR UNDER APPEAL ARE ALREADY MUCH H IGHER AS COMPARED TO THE PRECEDING TWO YEARS AS IS REFLECTED FROM THE ENCLOS ED STATEMENT. FROM THE PERUSAL OF ABOVE STATEMENT IT WILL BE OBSERVED THAT THE NET PROFIT BEFORE SALARY AND INTEREST TO PARTNERS, BANK INTEREST AND DEPRECATION FOR THE YEAR UNDER APPEAL COMES TO 16.51% OF CONTRACT RECEIPT AS AGAINST 12.86% FOR THE ASSESSMENT YEAR 2008-09 AND 9.87% FOR THE ASSESSMEN T YEAR 2007-08. THE WORKING RESULTS FOR THE PRECEDING TWO YEARS WERE AC CEPTED BY THE DEPARTMENT AS THE ASSESSMENT FOR THE ASSESSMENT YEAR 2007-08 W AS MADE U/S 143(3) AND ASSESSMENT FOR THE ASSESSMENT YEAR 2008-09 WAS MADE U/S 143(1). IN VIEW OF THE WORKING RESULTS FOR THE YEAR UNDER APPEAL ARE M UCH BETTER AS COMPARED TO THE PRECEDING TWO YEARS. THE AO & CIT(A) HAD NO BAS IS TO APPLY THE NET ITA NO.344(ASR)/2013 ITA NO.361(ASR)/2013 15 PROFIT RATE OF 12% WITHOUT ALLOWING THE INTEREST AN D SALARY TO PARTNERS, DEPRECIATION AND BANK INTEREST. ACCORDINGLY THE WOR KING RESULTS DEBITED BY THE ASSESSEE NEEDS TO BE ACCEPTED. 6.3. AS REGARDS THE DEPRECIATION, THE LD. COUNSEL FOR THE ASSESSEE ARGUED THAT THE DEPRECIATION IS A STATUTORY ALLOWANCE AND THE SAME IS ALLOWABLE EVEN IN THOSE CASES WHERE THE NET PROFIT RATE IS APPLIED ON GROSS CONTRACT RECEIPTS EXCEPT IN THOSE CASES WHICH ARE COVERED U/S 44AD. K INDLY REFER TO THE FOLLOWING JUDGMENTS OF AMRITSAR BENCH WHERE AFTER A PPLICATION OF NET PROFIT RATE IT HAS BEEN HELD THAT DEPRECIATION IS ALLOWABL E TO THE ASSESSEE. I) SATISH AGGARWAL & CO. V ADDL.CIT - ITA NO.328/ASR/2 003 DATED 28.6.2013 NET PROFIT RATE OF 10% APPLIED BY THE AO WAS REDUCED TO 5% WITH FURTHER DEDUCTION OF DEPRECI ATION. II) ITO NAWASHAHAR V. SURINDER PAL NAYYAR CONTRACTOR IT A NO.366(ASR)/2010 ASSESSEES CLAIM OF DEPRECATION ALLOWED AFTER CON FIRMING THE NET PROFIT RATE OF 5% ON THE GROSS CONTRACT RECEIPT S III) DALJIT SINGH & BROS.V ITO ITA NO.201/ASR/2002 HONBLE ITAT AMRITSAR BENCH ALLOWED DEDUCTION ON A CCOUNT OF DEPRECATION AFTER THE APPLICATION OF RATE OF PRO FIT IV) ITO VS. INTERNATIONAL ENGINEERS IN ITA NO.307/ASR/2 008 IN THIS CASE THE AMRITSAR BENCH HELD THAT THE DEPR ECIATION ALLOWABLE AFTER APPLYING NET PROFIT RATE V) ITO V JARNAIL SINGH CONTRACTOR ITA NO.181/ASR/2005 ITA NO.344(ASR)/2013 ITA NO.361(ASR)/2013 16 ALSO REFER TO THE FOLLOWING JUDGMENTS OF HIGH COURT S WHERE IT HAS BEEN HELD THAT THE ASSESSEE IS ELIGIBLE FOR DEP RECIATION AFTER APPLICATION OF NET PROFIT RATE. VI) CIT V CHOPRA BROS. INDIA (P) LTD (2001) 252 ITR 412 (PB) VII) GIRDHARI LAL V CIT 256 ITR 318 (PB) VIII) SHRI RAM JHANWAR LAL V ITO 321 ITR 400 (RAJ) IX) BHARAT CONSTRUCTION CO. V CIT 258 ITR 140(RAJ) THE CBDT HAS ALSO IN ITS CIRCULAR NO. 29-D(XIX-14) DATED 31.8.1965 HAS DIRECTED THAT DEPRECIATION HAS TO BE ALLOWED WHERE THE ASSESSEE HAS SUPPLIED THE NECESSARY PARTICULARS. 8. THE LD. COUNSEL FOR THE ASSESSEE PLACED COMPARAT IVE FIGURE OF PROFIT OF THE IMPUGNED YEAR WITH THE PRECEDING YEARS AS UNDER : COMPARATIVE FIGURES OF PROFITS PARTICULARS AY 2009-10 AY 2008-09 AY:2007-08 CONTRACT RECEIPTS 121441449 131777913 90228764 NET PROFIT :ADD BACK 2295870 2559897 1822080 INTEREST & SALARY TO PARTNERS 1618081 3171748 2573640 BANK INTEREST 10053209 5648771 1378823 DEPRECIATION 5653301 5572318 3135178 TOTAL 19620461 16952734 8909721 NET PROFIT RATE TO CONTRACT RECEIPTS 16.15% 12.86% 9.87% ITA NO.344(ASR)/2013 ITA NO.361(ASR)/2013 17 9. THE LD. DR, ON THE OTHER HAND, RELIED UPON THE O RDER OF THE ASSESSING OFFICER. 10. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. THERE IS NO DISPUTE TO THE FACT THAT THE ASSESSEE HAS PRODUCED 24 LABOURERS IN THE REMAND PROCEEDINGS, WHO HAVE CONFIRMED TO HAVE RECEIVED WAGES, AS DECLARED BY THE ASSESSEE. BUT AT THE SAME TIME, TH E ASSESSEE COULD NOT GET THE VERIFICATION OF REST OF THE WAGES OUT OF TOTAL WAGES OF RS.2,15,33,520/-, WHICH IS A HUGE AMOUNT AND THERE IS POSSIBILITY OF LEAKAGE OF REVENUE, WHERE ACCURATE INCOME CANNOT BE DEDUCTED BY THE A.O. THER EFORE, WE FIND NO INFIRMITY IN THE ORDER OF THE LD. CIT(A) WHO HAS R IGHTLY CONFIRMED THE INVOKING OF SECTION 145(3) OF THE ACT. 10.1. AS REGARDS THE ESTIMATION OF INCOME, THERE IS NO DISPUTE TO THE FACT THAT THE ASSESSEE IN THE PRECEDING YEARS HAS BEEN ASSESS ED ALMOST AT THE RETURNED INCOME EXCEPT MINOR ADDITIONS. THE ASSESSEE DURING THE IMPUGNED YEAR BEFORE DEPRECIATION, INTEREST & SALARY TO PARTNER S AND BANK INTEREST HAS DECLARED BETTER RESULTS AS IS EVIDENT FROM THE COMP ARATIVE FIGURES MENTIONED HEREINABOVE. THEREFORE, IN THE FACTS AND CIRCUMSTAN CES OF THE CASE AND THE DECISIONS RELIED UPON BY THE LD. COUNSEL FOR THE AS SESSEE, WE MODIFY THE ORDER OF BOTH THE AUTHORITIES BELOW AND DIRECT THE AO TO ESTIMATE NET PROFIT RATE OF 5% ON CONTRACT RECEIPTS DECLARED BY THE ASS ESSEE AND THEREAFTER ALLOW ITA NO.344(ASR)/2013 ITA NO.361(ASR)/2013 18 SALARY AND INTEREST TO PARTNERS AND DEPRECIATION SU BJECT 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. 11. IN THE RESULT, THE APPEAL OF THE REVENUE I N ITA NO.344(ASR)/2013 AND APPEAL OF THE ASSESSEE IN ITA NO.361(ASR)/2013 ARE PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 26TH MARCH, 2014. SD/- SD/- (H.S. SIDHU) (B.P. JAIN) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 26TH MARCH, 2014 /SKR/ COPY OF THE ORDER FORWARDED TO: 1. THE ASSESSEE:M/S. WALIA CONSTRUCTION CO. PATHANKOT. 2. THE DCIT, CIR.IV, PATHANKOT. 3. THE CIT(A), ASR. 4. THE CIT,ASR. 5. THE SR DR, ITAT, AMRITSAR. TRUE COPY BY ORDER (ASSISTANT REGISTRAR) INCOME TAX APPELLATE TRIBUNAL, AMRITSAR BENCH: AMRITSAR