Income Tax Officer, Ward-9(1), Hyderabad V. M/S KMR Constructions, Hyderabad

ITA 461/HYD/2014

• Counselvise Citation: 46122514 RSA 2014
• Duration Of Justice: 8 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-11-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2010-2011
• Appeal Filed On: 18-03-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAMAKRISHNA BANDI
• Assessee Lawyers: A V RAGHURAM
• Keywords: Depreciation
• Section: 44AD; 40A(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A, HYDERABAD BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER ITA NO. 461/HYD/2014 ASSESSMENT YEAR 2010-11 THE INCOME TAX OFFICER WARD-9(1) HYDERABAD VS M/S. KMR CONSTRUCTIONS HYDERABAD PAN: AADFK8803G APPLICANT RESPONDENT APPELLANT BY: SRI RAMAKRISHNA BANDI RESPONDENT BY: SRI A.V. RAGHURAM DATE OF HEARING: 10.11.2014 DATE OF PRONOUNCEMENT: 26.11.2014 ORDER PER ASHA VIJAYARAGHAVAN, JM: THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER OF THE CIT(A)-VI, HYDERABAD DATED 29.11.2013 FOR A.Y. 2010-11. 2. THE ASSESSEE IS A CIVIL CONTRACTOR AND EXECUTED CO NTRACTS FOR ROADS AND BUILDINGS AND FOR THE A.Y. 2010-11, FILED RETURN ADMITTING AN INCOME OF RS. 2,42,30,990. THE AO DURING THE CO URSE OF ASSESSMENT PROCEEDINGS HAD CALLED FOR THE BOOKS OF ACCOUNT, BILLS AND VOUCHERS, WHICH WERE PRODUCED BY THE ASSESSEE AND W ERE EXAMINED, BY TEST CHECK. IT WAS OBSERVED BY THE ASSESSING OF FICER THAT THE BOOKS OF ACCOUNT MAINTAINED BY THE ASSESSEE DO NOT HAVE R ECORD OF QUANTITATIVE DETAILS OF MATERIALS PURCHASED AND NO STOCK REGISTER WAS PRODUCED BY THE ASSESSEE FOR VERIFICATION OF INFLOW /OUTFLOW OF GOODS. IT WAS OBSERVED THAT UNDER THE HEAD 'LABOUR CHARGES ', AN AMOUNT OF RS. 2,37,86,486 WAS DEBITED, WHICH WAS SUPPORTED BY SELF MADE VOUCHERS. IT WAS FURTHER OBSERVED THAT WHEREVER THE PAYMENTS IN CASH EXCEEDED RS. 20,000/- THE SAME WERE SPLIT AND WERE BROUGHT BELOW RS. 20,000, TO AVOID THE PROVISIONS OF S. 40A (3). IT WAS ALSO 2 ITA NO. 461/HYD/2014 M/S. KMR CONSTRUCTIONS ================== OBSERVED THAT THE EXPENDITURE IN RESPECT OF GRAVEL OF RS. 59,33,524 IS NOT SUPPORTED BY ANY VOUCHER AND HERE ALSO IT WAS O BSERVED THAT THE ASSESSEE HAD TAKEN CARE ABOUT THE PROVISIONS OF S. 40A(3). IT WAS ALSO OBSERVED BY THE AO THAT THE ASSESSEE HAD DEBITED AN EXPENDITURE UNDER THE HEAD 'METAL PURCHASE' AN AMOUNT OF RS. 8, 84,72,369, AND HAS NOT PRODUCED VOUCHERS, EXCEPT FILING LETTERS FR OM THE SUPPLIERS. IN RESPECT OF THE PAYMENTS WHICH WERE STATED TO HAVE B EEN MADE TO VARIOUS PERSONS NUMBERING 431 (BEING METAL SUPPLIER S), NO VOUCHERS WERE PRODUCED BEFORE THE AO FOR EXAMINATION. CONSI DERING ALL THE DEFICIENCIES IN THE BOOKS OF ACCOUNT, THE ASSESSING OFFICER OPINED THAT THE TRUE PROFITS OF THE ASSESSEE CANNOT BE DEDUCED FROM BOOKS AND THAT THE PROVISIONS OF S. 145(3) OF THE INCOME-TAX ACT, 1961 ARE CLEARLY APPLICABLE. THUS, THE ASSESSING OFFICER REJECTED TH E BOOKS OF ACCOUNT AND RESORTED TO ESTIMATION OF INCOME OF THE ASSESSE E. THE ASSESSING OFFICER WHILE ESTIMATING THE INCOME OBSERVED THAT T HE ASSESSEE HAD REFLECTED GROSS RECEIPTS AT RS. 41,70,04,086 AND AC CRUED INTEREST OF RS. 41,403 ON WHICH NET PROFIT OF RS. 2,26,66,994 WAS S HOWN, WHICH WORKED OUT TO 5.43%, AND OPINED THAT THE SAME IS ON A LOWER SIDE IN THIS LINE OF ACTIVITY. HENCE, THE ASSESSING OFFICER HAD ESTIMATED THE PROFIT @9% OF THE GROSS RECEIPTS AND ARRIVED AT THE TAXABLE INCOME AT RS. 3,75,30,367. THE AO HAD ALSO BROUGHT TO TAX IN TEREST INCOME OF RS. 41,403. 3. BEFORE THE CIT(A), THE ASSESSEE RAISED SEPARATE GRO UND OF APPEAL AGAINST REJECTION OF BOOKS AND ESTIMATION OF PROFIT. ASSESSEE ALSO RAISED GROUND FOR NOT ALLOWING DEPRECIATION AN D CLAIMS OF PARTNERS' REMUNERATION. AS REGARD TO THE REJECTION OF BOOKS AND ESTIMATION OF PROFIT, THE CIT(A) OBSERVED THAT THE AO HAS BROUGHT THE SHORTCOMINGS IN MAINTENANCE OF BOOKS, WITH SPEC IFIC REFERENCE TO EXPENSES UNDER THE HEADS SUCH AS 'GRAVEL PURCHASES' , 'LABOUR EXPENSES', CASH PAYMENTS FOR EXPENSES IN CONTRAVENT ION OF PROVISIONS OF S. 40A(3) AND FOR NON-MAINTENANCE OF QUANTITATIV E PARTICULARS ETC. IN THIS REGARD, THE ASSESSEE'S ARGUMENT WAS THAT BO OKS WERE MAINTAINED REGULARLY AND AUDITED AND MOST OF THE PA YMENTS ARE 3 ITA NO. 461/HYD/2014 M/S. KMR CONSTRUCTIONS ================== INCURRED BY PAYMENTS IN CHEQUES AND VOUCHERS/ BILLS ARE MAINTAINED AND SUBMITTED FOR VERIFICATION DURING THE ASSESSMEN T PROCEEDINGS. HENCE, REJECTION OF BOOKS WAS NOT JUSTIFIED, AS PER THE ASSESSEE. THE CIT(A) OBSERVED THAT THE AO HAS ENLISTED THE DEFECT S IN DETAIL, AS SUCH THE REJECTION OF BOOKS AND ESTIMATION OF PROFIT IS JUSTIFIED AND THIS GROUND OF APPEAL WAS TREATED AS DISMISSED BY THE CI T(A). 4. THE CIT(A) FURTHER OBSERVED THAT THE CONTENTION OF THE ASSESSEE WAS THAT NET PROFIT OF 9% ESTIMATED IS ARB ITRARY AND VERY HIGH AND STATED THAT ONCE THE BOOKS ARE ESTIMATED, THE REASONABLENESS OF THE RATE OF PROFIT ADOPTED DEPEND S UPON THE FACTS OF THE CASE, SUCH AS NATURE OF CONTRACT, PLACE OF C ONTRACTS, AVAILABILITY OF LABOUR, MATERIAL ETC. THE CIT(A) NOTED THAT THE NET PROFIT RATES AS UPHELD BY VARIOUS JUDICIAL DECISIONS, AS REGARD TO MAIN CONTRACTS ARE IN THE RANGE OF 8 TO 12.5%. IN THIS REGARD, THE ASS ESSEE'S ARGUMENT THAT NOWHERE THE RATE OF 9% STIPULATED AND EVEN AS PER P ROVISIONS OF S. 44AD THE RATE ADOPTED SHOULD BE 8% IS NOT TENABLE I N THE LIGHT OF THE STATUTORY PROVISIONS STIPULATED DIFFERENT RATES FOR DIFFERENT CLASS OF ASSESSES AND THERE IS NO SCOPE FOR EQUITY IN TAXATI ON LAWS. THE CIT(A) HELD THAT THE DECISION BY JURISDICTIONAL ITAT SUPPO RTS THE RANGE OF PROFITS IN CONTRACT BUSINESS AT 8 TO 12.5% BASED ON THE FACTS OF INDIVIDUAL CASES OF ESTIMATIONS OF PROFIT AND, THER EFORE, RELYING ON THE DECISION OF ITAT IN THE CASE OF M/S. E. ESWARA REDD Y & CO. VS. DCIT (ITA NO. 685/HYD/2009) DATED 31.01.2011 ESTIMATED T HE PROFIT AT 9% ON MAIN CONTRACT RECEIPTS. 5. THE CIT(A) OBSERVED THAT THE FURTHER CONTENTION OF THE ASSESSEE WAS THAT THE AO ADOPTED THE NET PROFIT OF 9% ON ENTIRE CONTRACT RECEIPTS OF RS. 41,70,04,086, WHICH INCLUD E RECEIPTS FROM MAIN CONTRACTS (RS. 25,91,14,281) AND SUB-CONTRACTS (RS. 15,78,89,805) AND THE NET PROFIT RATES ADOPTED FOR MAIN CONTRACTS SHOULD BE DIFFERENT FROM THAT OF THE NET PROFITS ON SUB-CONTR ACTS, IN CASES OF ESTIMATION OF PROFITS BY REJECTION OF BOOKS, AS DEC IDED BY A CATENA OF JUDICIAL DECISIONS. 4 ITA NO. 461/HYD/2014 M/S. KMR CONSTRUCTIONS ================== 6. THE CIT(A) HELD THAT, BASED ON THE FACTS OF THE CAS E AND THE RULINGS OF THE JUDICIAL DECISION IN THE CASE OF M/S . E. ESWARA REDDY & CO. (SUPRA) THE RATE OF PROFIT ON SUB-CONTRACTS WAS QUANTIFIED AT 5% ON THE SUB-CONTRACT RECEIPTS. ACCORDINGLY, THE CIT (A) DIRECTED THE AO TO ESTIMATE THE PROFIT @ 5% ON THE SUB-CONTRACT REC EIPTS AND GRANTED PART RELIEF TO THE ASSESSEE. 7. AGGRIEVED, THE DEPARTMENT IS IN APPEAL BEFORE US BY RAISING THE FOLLOWING GROUNDS OF APPEAL: I) THE ORDER OF LD. CIT(A) IS ERRONEOUS ON FACTS AND I S NOT ACCEPTABLE. II) THE LD. CIT(A) ERRED IN ESTIMATING PROFIT AT 5% ON SUB- CONTRACT RECEIPTS WHICH IS VERY LOW IN THE LINE OF BUSINESS. 8. WE HEARD BOTH PARTIES. WE FIND THAT THE AO WRONGLY ADOPTED THE NET PROFIT AT 9% ON ENTIRE CONTRACT REC EIPTS OF RS. 41,70,04,086 WHICH INCLUDES RECEIPTS FROM MAIN CONT RACTS (RS. 25,91,14,281) AND SUB-CONTRACTS (RS. 15,78,89,805). THE NET PROFIT RATE TO BE ADOPTED FOR MAIN CONTRACTS SHOULD BE DIFFEREN T FROM THAT OF THE NET PROFITS ON SUB-CONTRACTS, IN CASES OF ESTIMATIO N OF PROFITS BY REJECTION OF BOOKS AS DECIDED BY THE JUDICIAL DECIS IONS OF THE CO- ORDINATED BENCH. WE FIND NO INFIRMITY IN THE ORDER OF THE CIT(A) AS HE HAS FOLLOWED THE DECISION OF THIS TRIBUNAL IN TH E CASE OF M/S. E. ESWAR REDDY & CO. (SUPRA) WHEREIN IT HAS BEEN HELD AS FOLLOWS: '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 KRISHNAMOH AN CONSTRUCTIONS (SUPRA) AND THE SPECIAL BENCH DECISIO N IN ARIHANT BUILDERS (SUPRA) ESTIMATED THE PROFIT AT 8% FOR MAIN CONTRACT AND FOR SUB CONTRACT AT 5%. IT MAY N OT BE OUT OF PLACE TO MENTION THAT THIS TRIBUNAL UNIFO RMLY ESTIMATING THE PROFIT FROM MAIN CONTRACT AT 8% TO 12.5% DEPENDING UPON THE FACTUAL SITUATION AND 5% T O 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% 5 ITA NO. 461/HYD/2014 M/S. KMR CONSTRUCTIONS ================== ON SUB CONTRACT IS JUSTIFIED. WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LOWER AUTHORITY. ACCORDINGLY THE SAME IS CONFIRMED.' 9. THEREFORE, WE ARE OF THE OPINION THAT THE RATE TO B E ADOPTED IS 5% ON SUB-CONTRACT RECEIPTS OR RS. 15,78,89,805. THE GROUND TAKEN BY THE REVENUE IS REJECTED. 10. IN THE RESULT, DEPARTMENT APPEAL IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON 26 TH NOVEMBER, 2014 SD/- (P.M. JAGTAP) ACCOUNTANT MEMBER SD/- (ASHA VIJAYARAGHAVAN) JUDICIAL MEMBER HYDERABAD, DATED THE 26 TH NOVEMBER, 2014 TPRAO COPY TO: 1. THE INCOME TAX OFFICER, WARD - 9(1), BLOCK NO. 2D, INCOME TAX TOWERS, AC GUARDS, HYDERABAD-4. 2. M/S. KMR CONSTRUCTIONS, PLOT NO. 35, PHASE VI, HIG, VANASTHALIPURAM, HYDERABAD. 3. THE CIT(A) - V I, HYDERABAD. 4. THE CIT - VI , HYDERABAD. 5. THE DR, A - BENCH, ITAT, HYDERABAD.