DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE, SIKAR V. M/S DURGA CONSTRUCTION COMPANY, SIKAR

ITA 549/JPR/2018

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 6905 (ITAT-JAIPUR)
• Duration Of Justice: 8 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-01-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2013-2014
• Appeal Filed On: 25-04-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P P MEENA
• Keywords: Rejection of books of accounts; Business income; Depreciation; Question of law; Tax effect

Judgement Text

VK;DJ VIHYH; VF/KDJ.K] T;IQJ U;K;IHB] T;IQJ IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHE -A, JAIPUR JH FOT; IKY JKO ] U;KF;D LNL; ,OA JH FOE FLAG ;KNO] YS[KK LNL; DS LE{K BEFORE: SHRI VIJAY PAL RAO, JM & SHRI VIKRAM SINGH YADAV, AM VK;DJ VIHY LA-@ ITA NO. 549/JP/2018 FU/KZKJ.K O'K Z@ ASSESSMENT YEAR : 2013-14 DY. COMMISSIONER OF INCOME-TAX, CIRCLE, SIKAR CUKE VS. M/S DURGA CONSTRUCTION COMPANY, VPO- KHOOR, TEHSIL- DANTA RAMGARH, DISTT.- SIKAR LFKK;H YS[KK LA-@THVKBZVKJ LA-@ PAN/GIR NO.: AAEFD6106G VIHYKFKHZ@ APPELLANT IZR;FKHZ@ RESPONDENT IZR;K{KSI.K @ C.O. NO. 14/JP/2018 (ARISING OUT OF VK;DJ VIHY LA-@ ITA NO. 549/JP/2018) FU/KZKJ.K O'K Z @ ASSESSMENT YEAR 2013-14 M/S DURGA CONSTRUCTION COMPANY, VPO- KHOOR, TEHSIL- DANTA RAMGARH, DISTT.- SIKAR CUKE VS. DY. COMMISSIONER OF INCOME-TAX, CIRCLE, SIKAR LFKK;H YS[KK LA-@THVKBZVKJ LA-@ PAN/GIR NO.: AAEFD6106G IZR;K{KSID@ OBJECTOR IZR;FKHZ@ RESPONDENT JKTLO DH VKSJ LS @ REVENUE BY : SHRI P. P. MEENA (JCIT) FU/KZKFJRH DH VKSJ L S@ ASSESSEE BY : SHRI P. C. PARWAL (CA) LQUOKBZ DH RKJH[ K@ DATE OF HEARING : 01/01/2019 MN?KKS'K.KK DH RKJH[ K@ DATE OF PRONOUNCEMENT : 07/01/2019 VKNS'K@ ORDER PER: VIKRAM SINGH YADAV, A.M. THIS IS AN APPEAL FILED BY THE REVENUE DIRECTED AG AINST THE ORDER OF THE LD. CIT(A)-3, JAIPUR DATED 01/02/2018 FOR TH E A.Y. 2013-14 AND ITA 549/JP/2018 & C.O. 14/JP/2018_ DCIT, SIKAR VS M/S DURGA CONSTRUCTION COMPANY, SIKA R 2 THE CROSS OBJECTION FILED BY THE ASSESSEE WHEREIN R ESPECTIVE GROUNDS OF APPEAL ARE AS UNDER:- GROUNDS OF REVENUES APPEAL: (I) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE, THE LD. CIT(A) HAS ERRED IN ADOPTING NP RATE @ 5% INSTEAD OF NP RA TE @ 8.5% SUBJECT TO ALLOWABILITY OF DEPRECIATION, INTEREST AND REMUN ERATION TO THE PARTNERS, AS APPLIED BY THE AO. (II) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN TREATING THE INTEREST ON FD R AS BUSINESS INCOME INSTEAD OF INCOME FROM OTHER SOURCE AS ASSESSED BY THE AO. GROUNDS OF ASSESSEES CROSS OBJECTION: 1. THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW I N CONFIRMING THE REJECTION OF BOOKS OF ACCOUNTS BY APPLYING THE PROV ISIONS OF SECTION 145(3) OF THE ACT. 2. THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW IN CONFIRMING THE ADDITION OF RS. 28,25,036/- BY APPLYING N.P. RATE O F 5% AS AGAINST N.P. RATE OF 3.45% DECLARED BY THE ASSESSEE. 2. FIRSTLY, IN RESPECT OF REVENUES APPEAL, THE LD. AR SUBMITTED THAT THE TAX EFFECT INVOLVED IS RS. 17,65,760/- AND AS P ER THE CBDT CIRCULAR NO. 3/2018, THE TAX EFFECT BEING LESS THAN 20 LAKH, THE APPEAL SHOULD BE DISMISSED ON ACCOUNT OF LOW TAX EFFECT. 3. ON MERIT, GROUND NO. 1 IN ASSESSEES CROSS OBJEC TION WAS PRESSED DURING THE COURSE OF HEARING. REGARDING GROUND NO. 1 OF REVENUES APPEAL AND GROUND NO. 2 IN THE ASSESSEES CROSS OBJ ECTION, IT WAS ITA 549/JP/2018 & C.O. 14/JP/2018_ DCIT, SIKAR VS M/S DURGA CONSTRUCTION COMPANY, SIKA R 3 SUBMITTED BY THE LD AR THAT IN AY 2012-13, CIT(A) T OOK N.P. RATE AT 5% AS AGAINST 3.5% DECLARED BY THE ASSESSEE. HOWEVER, CONSIDERING THAT IN AY 2012-13 TURNOVER WAS RS. 7.07 CRORES WHICH DURIN G THE YEAR HAS INCREASED TO RS. 18.11 CRORE, THE APPLICATION OF N. P. RATE OF 5% IS NOT JUSTIFIED IN AS MUCH AS TO INCREASE THE TURNOVER, T HE ASSESSEE HAS TO REDUCE THE MARGIN. THE TRIBUNAL IN CASE OF M/S GUPT A K.N. CONSTRUCTION CO. VS. ITO (ITA NO. 60/JP/2016 ORDER DT. 05.07.2016) WHEREIN THE AO APPLIED N.P. RATE OF 5% ON GROSS RECEIPT OF RS. 10. 96 CRORES AS AGAINST 4.67% DECLARED BY THE ASSESSEE, RESTRICTED THE TRAD ING ADDITION TO RS. 2 LACS. CONSIDERING THIS FACT, THE N.P. RATE OF 5% AP PLIED BY THE LD. CIT(A) RESULTING INTO ADDITION OF RS. 28,25,036/- IS EXCES SIVE AND THE SAME BE SUITABLY REDUCED. 4. IT WAS FURTHER SUBMITTED THAT IN CASE N.P. RATE OF 5% IS UPHELD THEN THE SAME BE MADE SUBJECT TO INTEREST PAID TO B ANK/FINANCIAL INSTITUTIONS OF RS. 20,02,145/- IN AS MUCH AS THE N .P. RATE BE SUBJECT TO INTEREST PAID TO THIRD PARTIES, DEPRECIATION AND IN TEREST & REMUNERATION PAID TO THE PARTNERS. IN THIS CONNECTION, RELIANCE IS PLACED IN CASE OF CIT VS. BHAWAN PATH NIRMAN (BOHRA) & CO. 258 ITR 43 1 (RAJ.) AND THE DECISION OF TRIBUNAL REFERRED SUPRA. 5. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. FIRSTLY, REGARDING DISMISSAL OF REVENUES APPEAL ON ACCOUNT OF LOW TAX EFFECT, WE FIND THAT COMMON GROU NDS OF APPEAL HAVE BEEN TAKEN BY THE REVENUE AND THE ASSESSEE REGARDIN G ESTIMATION OF NET PROFIT IN THEIR RESPECTIVE APPEALS. IN VIEW OF THE SAME, WE DEEM IT APPROPRIATE TO DECIDE THE MATTER ON MERIT RATHER TH AN DISMISSING ON ACCOUNT OF LOW TAX EFFECT. ITA 549/JP/2018 & C.O. 14/JP/2018_ DCIT, SIKAR VS M/S DURGA CONSTRUCTION COMPANY, SIKA R 4 6. REGARDING ESTIMATION OF NET PROFIT, WE FIND THAT MERELY BECAUSE THERE IS AN INCREASE IN TURNOVER DURING THE YEAR, T HE SAME BY ITSELF WOULDNT BE SUFFICIENT TO JUSTIFY A LOW NET PROFIT DURING THE YEAR. THE ASSESSEE HAS TO DEMONSTRATE THROUGH VERIFIABLE EVID ENCE AS TO WHY THERE IS A FALL IN NET PROFIT RATE DURING THE YEAR. THERE IS NOTHING ON RECORD IN TERMS OF WHICH IT CAN BE DETERMINED THAT THE MARGINS HAVE COME UNDER PRESSURE EITHER DUE TO INCREASE COMPETIT ION OR HIGHER INPUT COSTS OR INCURRENCE OF ANY EXTRA-ORDINARY EXPENDITU RE DURING THE YEAR. THEREFORE, MERELY BECAUSE THE ASSESSEE HAS DISCLOSE D A HIGHER TURNOVER, THE SAME IS NOT SUFFICIENT ENOUGH TO JUST IFY A LOWER NET PROFIT RATE. THEREFORE, CONSISTENT WITH A.Y 2012-13, WHE RE THE LD CIT(A) HAS APPLIED NET PROFIT RATE OF 5% AND THE SAID FINDING HAS BEEN ACCEPTED BY THE ASSESSEE IN THE EARLIER YEAR, WE DONT SEE ANY JUSTIFIABLE REASON TO INTERFERE WITH THE SAID FINDINGS. 7. AS REGARDS ALLOWABILITY OF INTEREST PAID TO BAN KS/FINANCIAL INSTITUTIONS, THE LD AR HAS RELIED ON THE DECISION OF HONBLE RAJASTHAN HIGH COURT IN CASE OF BHAWAN PATH NIRMAN (SUPRA) WH EREIN IT WAS HELD AS UNDER: HELD DISMISSING THE APPEAL, THAT THE TRIBUNAL LINK ED THE PROCESS OF ESTIMATING INCOME WITH THE PAST PRACTICE FOLLOWE D IN THE ASSESSEES CASE BY THE REVENUE ITSELF CONSISTENTLY FOR FIVE YE ARS PRIOR TO THE RELEVANT YEARS IN QUESTION. IN THIS CASE THE VERY F OUNDATION OF FIXING THE NET PROFIT RATE HAD BEEN THE AVERAGE NET PROFIT RAT E AS HAD BEEN APPLIED BY THE REVENUE IN THE PAST CONSISTENTLY SINCE THE A SSESSMENT YEAR 1989-90 AND WHICH HAD BEEN FOLLOWED IN DETERMINING THE TEXABLE INCOME OF THE ASSESSEE YEAR AFTER YEAR. IN THE NET PROFIT SO FIXED THE ELEMENT OF DEPRECIATION ON THE FIXED ASSET AND INTE REST ON BORROWINGS ITA 549/JP/2018 & C.O. 14/JP/2018_ DCIT, SIKAR VS M/S DURGA CONSTRUCTION COMPANY, SIKA R 5 HAD NOT BEEN TAKEN INTO CONSIDERATION IN DETERMININ G THE NET PROFIT RATE. CONSEQUENTLY, THE TRADING RESULT OBTAINED BY APPLYI NG SUCH NET PROFIT RATE NEEDED FURTHER APPROPRIATION TOWARDS ALLOWABLE DEPRECIATION AND INTEREST ON BORROWINGS. THE TRIBUNAL WAS RIGHT IN M ODIFYING THE ORDER PASSED BY THE ASSESSING AUTHORITY BY MAKING THE NET PROFIT RATE SUBJECT TO ADJUSTMENT TOWARDS DEPRECIATION AND INTEREST ON BORROWINGS. THIS CONCLUSION WAS A PURE FINDING OF FACT AND WOULD NOT GIVE RISE TO A QUESTION OF LAW MUCH LESS A SUBSTANTIAL QUESTION OF LAW. 8. FOLLOWING THE ABOVE, NET PROFIT RATE OF 5% AS DE TERMINED BY THE LD CIT(A) IS MODIFIED TO THE EXTENT THAT THE SAME B E MADE SUBJECT TO INTEREST PAID TO BANKS/FINANCIAL INSTITUTIONS. THE ASSESSING OFFICER IS DIRECTED TO VERIFY THE INTEREST PAID TO BANK/FINANC IAL INSTITUTIONS BY THE ASSESSEE DURING THE YEAR AND ALLOW THE SAME WHILE C OMPUTING THE NET PROFIT IN THE HANDS OF THE ASSESSEE. IN THE RESULT, THE GROUND OF REVENUES APPEAL IS DISMISSED AND GROUND IN ASSESSE ES CROSS OBJECTION IS PARTLY ALLOWED. 9. REGARDING GROUND NO. 2 OF THE REVENUES APPEAL, IT WAS SUBMITTED THAT THE ISSUE IS COVERED IN FAVOUR OF TH E ASSESSEE BY THE DECISION OF THE HONBLE RAJASTHAN HIGH COURT IN CASE OF M/S CHOUDHARY & BROTHERS VS. DCIT (DBIT NO. 355/2017 DT. 31.08.2018) WHEREIN IT WAS HELD AS UNDER:- IN THE PRESENT CASE ALSO, ON THE FACTS OF THE PRES ENT CASE, WE FIND THAT APPELLANT BEING A CIVIL CONTRACTOR WAS REQUIRED TO PROVIDE A PERFORMANCE GUARANTEE TO THE VARIOUS WORKS DEPARTME NTS FOR OBTAINING CONTRACTS OF CIVIL CONSTRUCTION. HE HAS TO KEEP SUC H PERFORMANCE GUARANTEE ALIVE BY WAY OF UTILIZING THE BANK OVERDR AFT LIMIT AGAINST ITA 549/JP/2018 & C.O. 14/JP/2018_ DCIT, SIKAR VS M/S DURGA CONSTRUCTION COMPANY, SIKA R 6 WHICH HE HAD TO FURNISH FDRS/NSC FOR EXECUTION OF T HE CONTRACTS. HIS FAILURE TO SUBMIT THE PERFORMANCE GUARANTEE OR INAB ILITY TO KEEP THEM ALIVE WOULD HAVE RESULTED IN TERMINATION OF THE CON TRACT AWARDED TO HIM AND IN THAT EVENT, THE CONCERNED DEPARTMENTS/EM PLOYER COULD ENCASH THE SECURITY. RELEASE OF SUCH PERFORMANCE GU ARANTEE IS DEPENDENT ON FULFILLMENT OF CERTAIN CONDITIONS. IT IS NOT THAT THE APPELLANT HAD INVESTED SURPLUS MONEY LYING IDLE WIT H HIM ONLY IN FDRS/NSCS WITH A VIEW TO EARNING INTEREST. OBTAININ G OF FDRS/NSCS AND FURNISHING OF THE SAME AGAINST THE PERFORMANCE GUARANTEE BY THE APPELLANT, THEREFORE, HAD AN INEXTRICABLE NEXUS WIT H HIS BUSINESS OF SECURING CIVIL CONTRACTS AND INTEGRAL TO HIS WORKIN G AS CIVIL CONTRACTOR. THE INCOME OF INTEREST EARNED FROM THE INTEREST SUC H FDRS/NSCS BY THE APPELLANT THEREFORE, IN OUR CONSIDERED VIEW, CA NNOT BE TREATED AS INCOME FROM OTHER SOURCES AND WOULD RATHER BE AN IN COME EARNED FROM BUSINESS.' 10. WE HAVE HEARD THE RIVAL CONTENTIONS AND PURUSE D THE MATERIAL AVAILABLE ON RECORD. THE LD CIT(A) HAS RETURNED A FINDING THAT FDRS WERE MADE WITH BANK TO PROVIDE MARGIN AGAINST THE B ANK GUARANTEE OBTAINED FOR THE PURPOSE OF BUSINESS BY UTILIZING T HE CREDIT FACILITIES AND PARTNERS CAPITAL ON WHICH BANK INTEREST AND INTERE ST TO PARTNERS IS PAID AND THUS THERE SEEMS TO A DIRECT NEXUS OF PLEDGING OF FDR AND BUSINESS. THE SAID FINDINGS OF THE LD CIT(A) REMAIN UNCONTROV ERED BEFORE US. FOLLOWING THE RATIO LAID DOWN BY THE HONBLE RAJAST HAN HIGH COURT IN CASE OF M/S CHOUDHARY & BROTHERS (SUPRA), OBTAINING AND PLEDGING THE FDR FOR THE PURPOSES OF OBTAINING BANK GUARANTEE FO R THE PURPOSES OF ITS BUSINESS, THE ASSESSEE HAS THUS ESTABLISHED THE NECESSARY NEXUS WITH HIS BUSINESS AND INTEREST EARNED FROM SUCH FDRS CAN NOT BE TREATED AS INCOME FROM OTHER SOURCES AND WOULD RATHER BE TREAT ED AN INCOME ITA 549/JP/2018 & C.O. 14/JP/2018_ DCIT, SIKAR VS M/S DURGA CONSTRUCTION COMPANY, SIKA R 7 EARNED FROM BUSINESS. THE FINDINGS OF THE LD CIT(A) ARE ACCORDINGLY CONFIRMED AND GROUND OF REVENUES APPEAL IS DISMISS ED. IN THE RESULT, BOTH THE APPEAL OF THE REVENUE AND T HE CROSS OBJECTION OF THE ASSESSEE ARE DISPOSED OFF WITH ABOVE DIRECTIONS . ORDER PRONOUNCED IN THE OPEN COURT ON 07/01/2019 SD/- SD/- FOT; IKWY JKO FOE FLAG ;KNO (VIJAY PAL RAO) (VIKRAM SINGH YADAV) U;KF;D LNL;@ JUDICIAL MEMBER YS[KK LNL;@ ACCOUNTANT MEMBER TK;IQJ@ JAIPUR FNUKAD@ DATED:- 07/01/2019 *GANESH KR. VKNS'K DH IZFRFYFI VXZSFKR@ COPY OF THE ORDER FORWARDED TO: 1. VIHYKFKHZ@ THE APPELLANT- THE DCIT, CIRCLE, SIKAR 2. IZR;FKHZ@ THE RESPONDENT- M/S DURGA CONSTRUCTION COMPANY, SIKAR 3. VK;DJ VK;QDR@ CIT 4. VK;DJ VK;QDR@ CIT(A) 5. FOHKKXH; IZFRFUF/K] VK;DJ VIHYH; VF/KDJ.K] T;IQJ@ DR, ITAT, JAIPUR 6. XKMZ QKBZY@ GUARD FILE (ITA NO. 549/JP/2018 & CO 14/JP/2018) VKNS'KKUQLKJ@ BY ORDER, LGK;D IATHDKJ@ ASST. REGISTRAR