M/s Narayan Construction, Cuttack V. ITO, Dhenkanal

ITA 417/CTK/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 4466 (ITAT-CUTTACK)
• Duration Of Justice: 4 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-04-2011
• Appeal Filed By: Assessee
• Bench Allotted: DB
• Assessment Year: 2006-2007
• Appeal Filed On: 23-11-2010
• Court: TRIBUNAL
• Department Lawyers: S K DASH
• Assessee Lawyers: S N SAHU
• Keywords: Wrong claim
• Section: 44AD

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL, CUTTACK BENCH, CUTTACK ( ) BEFORE . . , , HONBLE SHRI K.K.GUPTA, ACCOUNTANT MEMBER. /AND . . . , S HRI K.S.S.PRASAD RAO , JUDICIAL MEMBER / I.T.A.NO. 417/CTK/2010 / ASSESSMENT YEAR 2006 - 07 M/S.NARAYAN CONSTRUCTION, BIRDAR PADA, POST. TALCHER,DIST.ANGUL. PAN: AACFN 5613 N - - - VERSUS - INCOME - TAX OFFICER, WARD 2, DHENKAN AL. ( /APPELLANT ) ( / RESPONDENT ) / FOR THE APPELLANT : / SHRI S.N.SAHU, AR / FOR THE RESPONDENT: / SHRI S.K.DASH, DR / ORDER . . , , SHRI K.K.GUPTA, ACCOUNTANT ME MBER. THIS APPEAL BY THE ASSESSEE AGITATES THE ACTION OF THE LEARNED COMMISSIONER OF INCOME - TAX (APPEALS) IN CONFIRMING THE AD HOC DISALLOWANCE @3% OF THE GROSS EXPENSES BEING THE POSSIBLE DISALLOWABILITY OF EXPENSES CLAIMED TO GENERATE THE SAID INCOME. 2. THE BRIEF FACTS OF THE ASSESSEES CASE ARE THAT THE ASSESSEE FIRM DERIVES INCOME FROM CIVIL CONSTRUCTION, TRANSPORTATION, HIRE OF EXCAVATORS ALONG WITH INTEREST ON FIXED DEPOSITS. IT FILED ITS RETURN DECLARING INCOME AT 1,65,587 ALONG WITH AUDIT REPORT IN FORM 3CB AND 3CD ALONG WITH THE FINANCIAL STATEMENT DULY CERTIFIED BY THE CHARTERED ACCOUNTANT UNDER THE PROVISIONS OF SECTION 44AB. DURING THE COURSE OF ASSESSMENT PROCEEDINGS U/S.143(3), THE ASSESSING OFFICER COULD NO T ESTABLISH ANY SPECIFIC DEFECT IN THE BOOKS OF ACCOUNT AND THE VARIOUS CLAIMS FOR EARNING THE DIFFERENT SOURCE OF INCOME , HELD THAT ON A PRINCIPLE THAT ON EVERY RECEIPT THERE MUST BE CORRESPONDING EXPENDITURE, HE ALLOWED 97% OF THE COMPOSITE EXPENDITURE I.T.A.NO. 417/CTK/2010 2 C LAIMED AND DISALLOWED 3% OF THE TOTAL EXPENSES AMOUNTING TO 6,27,008. AGGRIEVED, THE ASSESSEE APPEALED BEFORE THE FIRST APPELLATE AUTHORITY WHO CONFIRMED THE ACTION OF THE ASSESSING OFFICER ON THE PRE MISE THAT GROSS MARGIN ON THE VARIOUS BUSINESSES CARRIED OUT BY THE ASSESSEE WERE HIGH BUT RESULTED IN LOW NET PROF IT, THEREFORE, WAS RIGHTLY CONSID3ERED FOR DISALLOWANCE OF 3% OF THE COMPOSITE EXPENSES CLAIMED. 3. THE LEARNED COUNSEL FOR THE ASSESSEE INITIATED HIS ARGUMENTS BY SUBMITTING THAT THE PRINCIPLE OF HAVING ESTIMATED THE DISALLOWANCE OF EXPENSES IS BEST LEFT TO THE ASSESSING AUTHO RITIES HOLDING A VIEW THAT 8% NET PROFIT W AS REASONABLE TO BE RETURNED BY THE ASSESSEE IN SUCH TYPE OF BUSINESS. THE ASSESSEE HAD RETURNED ABOUT 5% NET PROFIT AND THEREAFTER CLAIMED THE REMUNERATION TO THE PARTNERS ALONG WITH THE IN TEREST WHICH HAS BEEN REDUCED AFTER THE DISALLOWANCE OF SUCH EXPENDITURE. IN OTHER WORDS, HE POINTED OUT THAT THE FINDINGS OF THE ASSESSING AUTHORITIES TO DISALLOW THE EXPENSES HAVE GOT NO BEARING TO FIND A ROUTE TO THE MAGIC FIGURE OF NET INCOME BE AT 8% OF THE GROSS RECEIPTS. IF ACCEPTED , THE FACT THAT THE INTEREST AND REMUNERATION TO THE PARTNERS HAS TO BE PAID THEREAFTER AND THE NET PROFIT ALREADY DECLARED BY THE ASSESSEE WAS ACCEPTABLE TO THEM, THERE WAS NO REASON FOR THE ASSESSING AUTHORITIES TO BURD EN THE ASSESSEE BY BRINGING ON RECORD THAT THE EXPENSES HAVE BEEN INFLATED TO BE DISALLOWED AT 3% OF THE TOTAL EXPENSES CLAIMED. NOT A WHISPER OF ANY DEFECT IN THE BOOKS OF ACCOUNT HAS BEEN MADE AND NEITHER THE AUTHORITY HAS SPECIFIED ANY PARTICULAR EXPEND ITURE WHICH CAN BE DISALLOWED. FOR THIS PURPOSE HE HAS RELIED ON VARIOUS ORDERS OF THE TRIBUNAL WHO HELD IN SUCH CIRCUMSTANCES AS THE PERCENTAGE OF NET PROFIT HAS BEEN ACCEPTED BY THE DEPARTMENT RETURNED BY THE ASSESSEE IN VIEW THERE OF THE GROSS MARGIN IS TO BE CONSIDERED IN I.T.A.NO. 417/CTK/2010 3 ACCORDANCE WITH THE GUIDED PRINCIPLES OF SECTION 44AD. HE HAS FILED A COMPILATION OF THE JUDICIAL PRONOUNCEMENT AND ALSO THE CITATIONS ALONG WITH THE FINANCIAL STATEMENT, WHICH INTER ALIA INDICATE THAT THE GROSS TURNOVER OF THE ASSESSEE WAS 13% AND NET INCOME RETURNED THEREON WAS 5.23% THEREFORE DID NOT REQUIRE ANY CONSIDERATION FOR DISALLOWANCE OF EXPENDITURE AT 3% AND THEREFORE, IT WAS THE CASE OF THE ASSESSING OFFICER TO DISALLOW EXPENSES IN ORDER TO REACH THE ORIGINAL FIGURE OF TAXAB ILITY OF 8% OF THE GROSS MARGIN. 3% OF DISALLOWANCE HAS GOT NO RELATION TO EITHER THE GROSS MARGIN OR THE COMPOSITE EXPENSES CLAIMED OR THE RATE OF RETURN OF INCOME ON CAPITAL EMPLOYED, OR INTEREST DISALLOWED OR BOGUS CLAIM FOR WANT OF SUFFICIENT DETAILS T HEREFORE MAY KINDLY BE CONSIDERED TO BE DELETED OR A FAIR REASONABLE DISALLOWANCE MAY BE MADE ON ACCOUNT OF PERSONAL USE BY THE PARTNERS. 4. THE LEARNED DR SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW FOR HIS PART SUBMISSIONS. 5. WE HAVE HEARD THE RIVA L CONTENTIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. ON OUR CAREFUL CONSIDERATION OF THE FACTS, WE ARE INCLINED TO HOLD THAT THE ASSESSING AUTHORITIES HA D NO BASIS TO DISALLOW EXPENSES ON PERCENTAGE BASIS. HITHERTO EFFORT HAS BEEN MADE TO ENHANCE IN COME ON THE BASIS OF GUIDING PRIN CIPLES OF SECTION 44AD IN RESPECT OF SUCH BUSINESSES WHEN HAVING ACCEPTED THE NET PROFIT RETURNED BY THE ASSESSEE, THE LEARNED ASSESSING OFFICER ALLOWED INTEREST AND REMUNERATION TO THE PARTNERS IN ACCORDANCE WITH THE PROVI SIONS OF THE ACT. THE REVENUE DOES NOT SUFFER ANY LOSS WHEN ALLOWING A PORTION OF THE PROFIT TO BE PARTED WITH BY THE FIRM TO THE PARTNERS SUFFERS THE SAME TAXATION. ON OUR PERUSAL OF THE FINANCIAL STATEMENT, WE ARE OF THE VIEW THAT NO EFFORT HAS BEEN MADE EITHER BY THE ASSESSING I.T.A.NO. 417/CTK/2010 4 OFFICER OR BY THE LEARNED CIT(A) TO SUBSTANTIATE 3% IS THE ONLY AMOUNT WHICH CAN BE DISALLOWED FROM THE EXPENSES CLAIMED OTHERWISE ALLOWABLE UNDER THE PROVISIONS OF THE INCOME - TAX ACT. DISALLOWANCE OF EXPENSES ON ACCOUNT OF NOT HAV ING BEEN INCURRED FOR THE BUSINESSES OF THE ASSESSEE HAS TO BE ESTABLISHED BY THE ASSESSING AUTHORITIES ON THE BASIS OF FINDINGS FROM THE FINANCIAL STATEMENT OR THE BOOKS OF ACCOUNT, WHICH THE LEARNED COUNSEL HAS SUBMITTED WERE DULY AUDITED AND REPORTED IN FORM 3CD AND 3CB.THEREFORE, WE DO NOT FIND ANY CONTROVERTING MATERIAL TO SUBSTANTIATE THAT IT COULD ONLY BE 3% OF ALLOWABLE COMPOSITE EXPENSES WHEN THE CITED DECISIONS BY THE LEARNED COUNSEL DEALT WITH BY THE TRIBUNAL HAVE INDICATED THE EXPENSES TO BE DI SALLOWED FOR DENIAL ON PERCENTAGE ON THE BASIS OF FACTUAL FINDINGS DURING THE COURSE OF ASSESSMENT OR THE FIRST APPELLATE PROCEEDINGS. IN VIEW THEREOF, WE ARE OF THE CONSIDERED VIEW THAT AS A TOKEN DISALLOWANCE ON ACCOUNT PERSONAL USE CLAIMED IN THE EXPENS ES AFTER THE GROSS MARGIN HAS BEEN ACCEPTED BY THE ASSESSING AUTHORITIES, A SUM OF 50,000 MAY BE DISALLOWED IN VIEW OF THE FOUR PARTNERS EXECUTING THE BUSINESS OF THE ASSESSEE FIRM . FOR THE PURPOSE OF ASSESSING AUTHORITIES HOLDING A VIEW THAT THE NET PROFIT WAS LOWER THAN AS PROVIDED U/S.44AD WHICH REQUIRE D EXPENSES TO BE DISALLOWED WA S ONLY WHEN BOOKS OF ACCOUNT ARE NOT MAINTAINED. 6. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. THIS ORDER IS PRONOUNCED IN OPEN COURT ON DT. 13 TH APRIL, 2011 S D/ - S D/ - ( . . . ) , ( K.S.S.PRASAD RAO), JUDICIAL MEMBER ( . . ) , , (K.K.GUPTA), ACCOUNTANT MEMBER. ( ) DATE: 13 TH APRIL, 2011 I.T.A.NO. 417/CTK/2010 5 - COPY OF THE ORDER FORWARDED TO: 1 . / THE APPELLANT : M/S.NARAYAN CONSTRUCTION, BIRDAR PADA, POST. TALCHER,DIST.ANGUL. 2 / THE RESPONDENT: INCOME - TAX OFFICER, WARD 2, DHENKANAL. 3 . / THE CIT, 4 . ( )/ THE CIT(A), 5 . / DR, CUTTACK BENCH 6 . GUARD FILE . / TRUE COPY, / BY ORDER, [ ] SENIOR PRIVATE SECRETARY ( ), ( H.K.PADHEE ), SENIOR.PRIVATE SECRETARY.