ACIT, Circle-1, Anantapur V. M/s. C.Gopal Reddy & Company, Anantapur

ITA 500/HYD/2012

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 66436 (ITAT-HYDERABAD)
• Duration Of Justice: 6 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-11-2012
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2009-2010
• Appeal Filed On: 10-04-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: M RAVINDER SAI
• Assessee Lawyers: S RAMA RAO
• Keywords: Depreciation
• Section: 44AD; 32; 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A, HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER ITA NO. 500/HYD/2012 ASSESSMENT YEAR: 2009-10 ASST. COMMISSIONER OF INCOME-TAX, APPELLANT CIRCLE 1, ANANTAPUR VS. M/S C. GOPAL REDDY & COMPANY, RESPONDENT ANANTAPUR. (PAN AAEFC3621R) APPELLANT BY : SHRI M. RAVINDER SAI RESPONDENT BY : SHRI S. RAMA RAO DATE OF HEARING : 05/11/2012 DATE OF PRONOUNCEMENT : 05/11/ 2012 ORDER PER ASHA VIJAYARAGHAVAN, J.M.: THIS APPEAL PREFERRED BY THE REVENUE IS DIRECTED AG AINST THE ORDER OF THE CIT(A), GUNTUR, DATED 30/01/2012 FOR T HE ASSESSMENT YEAR 2009-10. THE REVENUE FILED THIS APPEAL BEFORE US WITH A DELAY OF 7 DAYS. AFTER HEARING BOTH THE PARTIES, WE COND ONE THE DELAY AND ADMITTED FOR THE APPEAL FOR ADJUDICATION. 2. BRIEFLY THE FACTS OF THE CASE ARE THAT THE ASSES SEE FIRM CARRYING ON CIVIL CONTRACT WORKS OF FORMATION OF NEW ROADS A ND BLACK TOP THERE ON BESIDES REPAIRS AND MAINTENANCE OF THE ROA DS TO THE STATE GOVERNMENT DEPARTMENTS SUCH AS ROADS & BUILDINGS AN D PANCHAYAT RAJ ETC. IT FILED THE RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION ON 30/03/2009, ADMITTING TOTAL INCOME AT RS. ITA NO. 500/HYD/2012 M/S C. GOPAL REDDY & CO. 2 28,27,500/-. THE AO NOTED THAT THE VOUCHERS FOR LAB OUR AND LABOUR EXPENSES WERE SELF MADE VOUCHERS TO THE TUNE OF RS. 6,53,57,997/- AND THERE WERE SEVERAL CASH BILLS IN METAL SUPPLIER S ACCOUNTS. ON BEING ASKED BY THE AO TO EXPLAIN THE SAID PAYMENTS AND DEPRECIATION STATEMENT, THE ASSESSEE STATED DURING THE COURSE OF ASSESSMENT PROCEEDINGS THAT IT HAD MAINTAINED THE B OOKS OF ACCOUNT ON TALLY ACCOUNTING SOFTWARE AND ALL THE LEDGERS, J OURNALS AND VOUCHERS WERE MAINTAINED. THE AO OPINED THAT SINCE MOST OF THE EXPENDITURE CLAIMED BY THE ASSESSEE WAS IN THE FORM OF SELF MADE VOUCHERS AND WERE NOT VERIFIABLE, THE BOOK RESULTS DID NOT DISCLOSE TRUE PROFITS. THE AO ALSO OBSERVED THAT THERE WAS H UGE ESCALATION IN PRICES OF MATERIALS AT THE TIME OF EXECUTION OF WOR KS WHEN COMPARED TO THE PRICES QUOTED AT THE TIME OF TENDERS HAS ITS EFFECT ON THE NET PROFIT. THEREFORE, THE AO HAD OPINED THAT THE NET I NCOME FROM THE CONTRACT RECEIPTS OF THE ASSESSEE COULD NOT BE DEDU CTED CORRECTLY FROM THE BOOKS OF ACCOUNT MAINTAINED AND REJECTED T HE BOOKS OF ACCOUNT BY INVOKING THE PROVISIONS OF SECTION 145 O F THE ACT AND RELYING UPON THE CASE LAW OF M/S KRISHNA MOHAN CONS TRUCTION COMPANY IN ITA NO. 308 & 381/HYD/04 FOR AY 1991-92 & 1992-93 ESTIMATED THE PROFIT @ 12.5% WITHOUT ALLOWING ANY D EDUCTIONS ON TOTAL CONTRACT RECEIPTS OF RS. 23,03,74,493/-, WHIC H WORKED OUT TO RS. 2,87,96,810/-. THE AO ALSO NOTED THAT THE ASSES SEE HAD EXECUTED SUB-CONTRACT WORKS AMOUNTING TO RS. 7,83,9 39/-. HE, THEREFORE, ESTIMATED NET PROFIT ON SUB CONTRACT WOR KS @ 8& AS THE PROFIT MARGIN RATE CANNOT BE THE SAME AS CONTRACTS EXECUTED ON ITS ON AND ON SUBCONTRACT BASIS AND WORKED OUT NET PROF IT AT RS. 62,715/-. ITA NO. 500/HYD/2012 M/S C. GOPAL REDDY & CO. 3 3. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE C ARRIED THE MATTER IN APPEAL BEFORE THE CIT(A) ON THE GROUND TH AT THE AO ERRED IN HOLDING THAT THE PROVISIONS OF SECTION 145 OF TH E IT ACT ARE APPLICABLE AND FURTHER ERRED IN REJECTING THE BOOKS OF ACCOUNT AND ERRED IN ESTIMATING THE INCOME @ 12.5% ON THE OWN C ONTRACTS AND 8% ON THE SUB-CONTRACTS WITHOUT ALLOWING ANY DEDUCT IONS. 4. BEFORE THE CIT(A) THE ASSESSEE FILED WRITTEN SUB MISSIONS, THE CONTENTS OF WHICH WERE EXTRACTED BY THE CIT(A) AT P AGES 3 TO 10 OF HIS IMPUGNED ORDER. HE STATED THAT THE AO MADE ADDI TIONS BECAUSE THE ASSESSEE FIRM AT THE TIME OF SCRUTINY ASSESSMEN T PROCEEDINGS SUBMITTED TO THE AO THE SELF MADE VOUCHERS FOR LABO UR PAYMENT AND CASH BILLS FOR MATERIAL PURCHASED WITHOUT CONSIDERI NG THE FACTUAL POSITION IN THIS LINE OF CONTRACTS AND ALSO WITHOUT CONSIDERING VARIOUS JUDGMENTS PRONOUNCED BY THE HIGH COURTS WHICH INCLU DES ITAT, HYDERABAD BENCH IN THE CASE OF VISUAL INFRASTRUCTUR E LTD. VS. ASSC & T [2007] 107 TTJ (HYD) 537. HE ALSO RELIED ON VAR IOUS CASES IN SUPPORT OF ITS CASE. 5. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSE E, THE CIT(A) HELD AS FOLLOWS:- 5.3 I HAVE CONSIDERED THE SUBMISSIONS MADE BY THE A PPELLANT, GONE THROUGH THE ORDER OF THE AO AND HEARD THE AR I N PERSON WITH PARTICULAR REFERENCE TO THE JUDICIAL OPINION B ROUGHT ON RECORD. EVEN A PERUSAL AT THE CITATIONS RELIED ON B Y THE APPELLANT REVEALED THAT IF THERE ARE NO DEFECTS., B OOKS CANNOT BE REJECTED. SINCE SELF MADE VOUCHERS IN ADDITION T O OTHER SHORT COMINGS POINTED OUT BY THE AO ENORMOUSLY WEIG HT IN SUPPORTING THE DECISION OF THE AO IN REJECTING THE BOOK RESULTS. TO THIS EXTENT THE VIEW OF THE AO IS UPHELD. REGARD ING TO THE PERCENTAGE, EVEN THOUGH THE AO HAS APPLIED A RATE O F 12.5%, IN VIEW OF THE EXPLANATIONS OF THE AR AND ALSO THE CITATIONS RELIED UPON BY THE AR, SINCE IT IS A MIX OF CONTRAC TS AND SUBCONTRACTS, WHERE PERCENTAGE OF SUBCONTRACTS WAS MORE, IN ITA NO. 500/HYD/2012 M/S C. GOPAL REDDY & CO. 4 MY CONSIDERED OPINION A PERCENTAGE OF 8 IS CONSIDER ED APPROPRIATE FOR CONTRACT WORKS IN THE GIVEN BACKGRO UND OF THE CASE. TO THIS INTEREST INCOME AS ADMITTED AT RS. 4, 95,572/- HAS TO BE ADDED. THUS, THE PERCENTAGE ADOPTED AT 12.5% STAND CORRECTED TO 8% AND 6% ON CONTRACT WORKS AND SUBCON TRACT WORKS RESPECTIVELY. BESIDES, THE AR HAS POINTED OUT A TYPOGRAPHICAL ERROR AT PAGE NO. 4 OF THE ASSESSMENT ORDER, WHEREIN AFTER DEDUCTING DEPARTMENTAL RECOVERIES AT RS. 2,32,59,826/- FROM GROSS CONTRACT WORKS OF RS. 25,2 8,50,380/- THE AO HAS WRONGLY ARRIVED AT RS. 23,03,74,493/- IN STEAD OF RS. 22,95,90,554/-, WHICH THE AO HAS TO KEEP IN MIN D WHILE RECOMPUTING THE TOTAL INCOME. REGARDING ANY OTHER DISALLOWANCES, ONCE 8.5% IS APPLIED ON THE TOTAL TU RNOVER OF THE APPELLANT FIRM (ON TOTAL TURNOVER OF CONTRACTS AND SUBCONTRACTS), NOW IT IS SETTLED ISSUE THAT WHEN ES TIMATION IN THE CASE OF A PARTNERSHIP IS MADE THEN WHILE DETERM INING THE TOTAL INCOME FOR THE YEAR UNDER CONSIDERATION, THE AO IS DUTY BOUND TO ALLOW REMUNERATION OF THE WORKING PARTNERS , INTEREST PAID ON PARTNERS CAPITAL ACCOUNTS AND DEPRECIATION . THUS, HAVING REGARD TO THE FACTS, CIRCUMSTANCES AND CATEN A OF DECISIONS AVAILABLE ON THE SUBJECT, THE AO IS DIREC TED TO RE- COMPUTE THE TOTAL INCOME AS INDICATED HEREIN ABOVE. UPON SUCH RECOMPUTATION THE TOTAL INCOMES TO RS. 1,02,92,710 AND THE APPELLANT IS ENTITLED FOR RELIEF OF RS. 1,90,62,387 /-. 6. AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE US RA ISING THE FOLLOWING GROUNDS OF APPEAL: 1. THE NET PROFIT ESTIMATED BY THE CIT(A) IS LOW BO TH IN RESPECT OF CONTRACTS AND SUB-CONTRACTS. 2. THE DEDUCTIONS ALLOWED BY THE CIT(A) FROM THE NE T PROFIT ESTIMATED IN RESPECT OF DEPRECIATION, REMUNERATION TO PARTNERS AND INTEREST ON CAPITAL OF PARTNERS IS NOT JUSTIFIE D AS HELD BY THE JURISDICTIONAL HIGH COURT IN THE CASE OF INDWEL L CONSTRUCTIONS VS. CIT, [1999] 232 ITR 776 7. WE HAVE HEARD THE ARGUMENTS OF BOTH THE PARTIES AND PERUSED THE RECORD AS WELL AS GONE THROUGH THE ORDERS OF TH E AUTHORITIES BELOW. WE FIND THAT THE ISSUE IS COVERED BY THE DEC ISION OF JURISDICTIONAL COORDINATE BENCH IN THE CASE OF M/S C. EASWAR REDDY ITA NO. 500/HYD/2012 M/S C. GOPAL REDDY & CO. 5 IN ITA NO. 668/HYD/2009 AND ITA NO. 670/HYD/09, WHE REIN THE COORDINATE BENCH HELD AS FOLLOWS:- 10. WE HAVE ALSO CAREFULLY GONE THROUGH THE ORDERS OF THE LOWER AUTHORITIES. THE CIT(A) AFTER REFERRING TO TH E DECISION OF THIS TRIBUNAL IN THE CASE OF KRISHNAMOHAN CONSTRUCT IONS (SUPRA) AND THE SPECIAL BENCH DECISION IN ARIHANT B UILDERS (SUPRA) ESTIMATED THE PROFIT AT 8% FOR MAIN CONTRAC T AND FOR SUB CONTRACT AT 5%. IT MAY NOT BE OUT OF PLACE TO M ENTION THAT THIS TRIBUNAL UNIFORMLY ESTIMATING THE PROFIT FROM MAIN CONTRACT AT 8% TO 12.5% DEPENDING UPON THE FACTUAL SITUATION AND 5% TO 7% ON THE SUB CONTRACT DEPENDING UPON THE FACTUA L SITUATION. THEREFORE, IN OUR OPINION, ESTIMATION OF PROFIT AT 8% BY THE CIT(A) ON MAIN CONTRACT AND AT 5% ON SUB CON TRACT IS JUSTIFIED. WE DO NOT FIND ANY INFIRMITY IN THE ORDE R OF THE LOWER AUTHORITY. ACCORDINGLY THE SAME IS CONFIRMED. 8. RESPECTFULLY FOLLOWING THE DECISION OF THE COORD INATE BENCH, WE UPHOLD THE ORDER OF THE CIT(A) IN DIRECTING THE AO TO ESTIMATE THE PROFIT FROM MAIN CONTRACT AT 8% AND 6% ON SUB-CONTR ACTS. 9. REGARDING DEPRECIATION, IT IS ALLOWABLE U/S 32 O F THE IT ACT AND IT FALLS UNDER THE PROVISIONS OF SECTION 30 TO 38 AND BE DEEMED TO HAVE BEEN ALREADY GIVEN FULL EFFECT WHILE ESTIMATIN G THE INCOME OF THE ASSESSEE. HENCE WITH RESPECT TO DEPRECIATION, T HE GROUND OF APPEAL RAISED BY THE REVENUE IS ALLOWED. 10. WITH RESPECT TO INTEREST ON CAPITAL OF PARTNER S OUT OF ESTIMATED INCOME, WE FIND THAT THE ISSUE IS COVERED BY THE DECISION JURISDICTIONAL COORDINATE BENCH IN THE CASE OF M/S C. EASWAR REDDY IN ITA NO. 668/HYD/2009 AND ITA NO. 670/HYD/09, WHE REIN THE COORDINATE BENCH HELD AS FOLLOWS:- '14. NOW COMING TO THE PAYMENT OF INTEREST AND SALA RY TO THE PARTNER. PROVISO TO SECTION 44AD(2) CLEARLY SAYS TH AT SALARY AND INTEREST PAID TO THE PARTNER SHALL BE DEDUCTED FROM THE INCOME COMPUTED UNDER SUB-SECTION(1) OF SECTION 44A D SUBJECT ITA NO. 500/HYD/2012 M/S C. GOPAL REDDY & CO. 6 TO LIMITATION U/S 40(B) OF THE ACT. AS WE HAVE ALRE ADY OBSERVED, THOUGH THERE WERE RESTRICTIONS WITH REGAR D TO APPLICATION OF SECTION 44AD WHEREVER THE TOTAL CONT RACT RECEIPTS EXCEED RS. 40 LAKHS, WITH EFFECT FROM 01/0 4/2011 SUCH RESTRICTION WAS REMOVED BY THE LEGISLATURE. MOREOVE R, THE COORDINATE BENCH OF THIS TRIBUNAL IN M. BHASKAR RED DY VS. ITO, ITA NO. 168/HYD/06 DATED 10/10/2007 AFTER TAKING A CLUE FROM SECTION 44AD ESTIMATED THE PROFIT AT 8% OF THE CONT RACT RECEIPT. THEREFORE, BY TAKING A CLUE FROM THE PROVI SION OF SECTION 44AD AS IS APPLICABLE FOR THE ASSESSMENT YE AR UNDER CONSIDERATION AND THE PROVISIONS WHICH WOULD COME I NTO OPERATION WITH EFFECT FROM 01/04/2011, IN OUR OPINI ON, THE PAYMENT OF INTEREST AND SALARY TO THE PARTNER SHALL BE ALLOWED SUBJECT TO LIMITATION SPECIFIED IN SECTION 40(B) OF THE ACT FROM ESTIMATED INCOME.' 11. RESPECTFULLY FOLLOWING THE DECISION OF COORDINA TE BENCH IN THE CASE OF EASWAR REDDY (SUPRA), WE DISMISS THE REVENU E'S APPEAL ON THIS ISSUE. 12. IN THE RESULT, APPEAL OF THE REVENUE IS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON 05/11/2012. SD/- SD/- (CHANDRA POOJARI) (ASHA VIJAYARAGH AVAN) ACCOUNTANT MEMBER JUDICIAL MEMBE R HYDERABAD, DATED: 5 TH NOVEMBER, 2012. KV COPY TO:- 1) ACIT, CIRCLE 1, AAYAKAR BHAVAN, III ROAD, NEW TOW N, ANANTAPUR 2) M/S C. GOPAL REDDY & CO., 13-2-79, SHIRIDI NAGAR, ANANTAPUR. 3) THE CIT (A), GUNTUR 4) THE CIT, TIRUPATHI 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDE RABAD.