THE ACIT, CIRCLE - 1, Rajahmundry V. Md Naushad Ali, Kovvur

ITA 659/VIZ/2013

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 2054 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 2 year(s) 3 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-02-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Assessment Year: 2009-2010
• Appeal Filed On: 07-11-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M K SETHI
• Keywords: Rejection of books of accounts; Depreciation; Tax effect; Revenue expenditure; Capital expenditure
• Section: 142(1)

Judgement Text

ITA NO637&659/VIZAG/2013&CO 18/VIZAG/2014 MD. NAUSHAD ALI, KOVVUR 1 , , IN THE INCOME TAX APPELLATE TRIBUNAL, VISAKHAPATNAM BENCH, VISAKHAPATNAM . , . , $ BEFORE SHRI V. DURGA RAO, JUDICIAL MEMBER & SHRI G. MANJUNATHA, ACCOUNTANT MEMBER ./I.T.A.NO.637/VIZAG/2013 ( / ASSESSMENT YEAR: 2009-10) MD. NAUSHAD ALI KOVVUR, W.G. DIST. VS. ACIT , CIRCLE - 1 , RAJAHMUNDRY [PAN: AAZPM9193M ] ( / APPELLANT) ( / RESPONDENT) ./I.T.A.NO.659/VIZAG/2013 ( / ASSESSMENT YEAR: 2009-10) ACIT , CIRCLE - 1 , RAJAHMUNDRY VS. MD. NAUSHAD ALI KOVVUR, W.G. DIST. ( % / APPELLANT) ( &'% / RESPONDENT) C.O. NO.18/VIZAG/2014 (ARISING OUT OF I.T.A.NO.659/VIZAG/2013) ( / ASSESSMENT YEAR: 2009-10) MD. NAUSHAD ALI KOVVUR, W.G. DIST. VS. ACIT , CIRCLE - 1 , RAJAHMUNDRY ( % / APPELLANT) ( &'% / RESPONDENT) / APPELLANT BY : SHRI M.K. SETHI, DR / RESPONDENT BY : SHRI G.V.N. HARI, AR ITA NO637&659/VIZAG/2013&CO 18/VIZAG/2014 MD. NAUSHAD ALI, KOVVUR 2 / DATE OF HEARING : 17.2.2016 / DATE OF PRONOUNCEMENT : 25.2.2016 / O R D E R PER G. MANJUNATHA, ACCOUNTANT MEMBER: THESE CROSS APPEALS FILED BY THE ASSESSEE AS WELL AS REVENUE ARE DIRECTED AGAINST THE ORDER OF COMMISSIONER OF INCOM E TAX (A), VISAKHAPATNAM DATED 29.8.2013 AND IT PERTAINS TO TH E ASSESSMENT YEAR 2009-10. THE CROSS APPEAL FILED BY THE ASSESSEE IS IN SUPPORT OF THE ORDER OF CIT(A). SINCE, THE ISSUES INVOLVED IN THES E APPEALS AND CROSS OBJECTIONS ARE COMMON, THEY ARE CLUBBED, HEARD TOGE THER AND DISPOSED OFF BY WAY OF THIS COMMON ORDER, FOR THE SAKE OF CO NVENIENCE. ITA 637/VIZAG/2013: 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS AN INDIVIDUAL ENGAGED IN THE BUSINESS OF EXECUTION OF WORKS CONTR ACT, SALES OF PETROL, DIESEL AND ALSO EXCAVATION OF QUARRY. THE ASSESSEE HAS FILED HIS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2009-10 ON 30.9.2009 DECLARING A TOTAL INCOME OF RS.41,83,920/-, BESIDES AGRICULTURAL INCO ME OF RS.2,90,862/-. THE RETURN WAS PROCESSED U/S 143(1) OF THE INCOME T AX ACT, 1961 (HEREINAFTER CALLED AS 'THE ACT') ON 24.4.2010. SUB SEQUENTLY, THE CASE ITA NO637&659/VIZAG/2013&CO 18/VIZAG/2014 MD. NAUSHAD ALI, KOVVUR 3 HAS BEEN SELECTED FOR SCRUTINY UNDER CASS AND ACCOR DINGLY, NOTICES U/S 143(2) & 142(1) OF THE ACT WERE ISSUED. IN RESPONSE TO NOTICE, THE AUTHORIZED REPRESENTATIVE OF THE ASSESSEE APPEARED FROM TIME TO TIME AND FURNISHED THE BOOKS OF ACCOUNTS AND OTHER RELEV ANT INFORMATION CALLED FOR. DURING THE COURSE OF ASSESSMENT, THE A .O. NOTICED THAT THE ASSESSEE HAS MAINTAINED SEPARATE SET OF BOOKS OF AC COUNTS FOR EACH BUSINESS CONCERN. ON VERIFICATION OF THE BOOKS OF A CCOUNTS, THE A.O. NOTICED THAT THE ASSESSEE HAS CLAIMED EXPENDITURE U NDER VARIOUS HEADS, WHICH WERE SUPPORTED BY SELF MADE VOUCHERS. THE A. O. FURTHER NOTICED THAT THE NET PROFIT FROM THE CONTRACT BUSINESS WAS REDUCED TO 2.95% WHEN COMPARED TO 3.48% FOR THE PRECEDING FINANCIAL YEAR. THEREFORE, ISSUED A SHOW CAUSE NOTICE AND ASKED TO EXPLAIN WHY THE BOOKS OF ACCOUNTS SHOULD NOT BE REJECTED AND ESTIMATE NET PR OFIT FROM THE BUSINESS. IN RESPONSE TO SHOW CAUSE NOTICE, THE AS SESSEE SUBMITTED THAT HE HAS MAINTAINED BOOKS OF ACCOUNTS AND RELEVA NT VOUCHERS IN SUPPORT OF ALL EXPENDITURES. THE ASSESSEE FURTHER S UBMITTED THAT HE HAS UNDERTAKEN SUB CONTRACT WORKS FROM MAIN CONTRACTORS , THEREFORE, THE PROFIT MARGIN IN HIS BUSINESS IS COMPARATIVELY LOW. THE A.O., HOWEVER, AFTER CONSIDERING EXPLANATIONS FURNISHED BY THE ASS ESSEE REJECTED THE BOOKS OF ACCOUNTS AND ESTIMATED NET PROFIT OF 6% ON CONTRACT RECEIPTS. WHILE DOING SO, THE A.O. WAS OF THE OPINION THAT THE BOOKS OF ACCOUNTS ITA NO637&659/VIZAG/2013&CO 18/VIZAG/2014 MD. NAUSHAD ALI, KOVVUR 4 HAVING DISCREPANCIES ARE NOT RELIABLE AND ASSESSEE COULD NOT SUBSTANTIATE THE EXPENDITURE CLAIMED WITH ANY EVIDE NCES. HOWEVER, TAKING INTO CONSIDERATION OF THE FACT THAT THE ASSE SSEE HAS ACCEPTED SUB CONTRACT WORKS, THE INCOME FROM WORKS CONTRACT IS E STIMATED @ 6% ON GROSS CONTRACT RECEIPTS. FURTHER, IN ADDITION TO E STIMATION OF NET PROFIT FROM CONTRACT RECEIPTS, THE A.O. MADE SEPARATE ADDI TIONS TOWARDS INCOME FROM OTHER SOURCES BEING INSURANCE CLAIM, IN TEREST RECEIVED ON FDR AND OTHER RECEIPTS AS DISCLOSED BY THE ASSESSEE IN THE PROFIT & LOSS ACCOUNT. 3. AGGRIEVED BY THE ASSESSMENT ORDER, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A). BEFORE THE CIT(A), THE A SSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE A.O. THE ASSESSEE F URTHER SUBMITTED THAT OUT OF THE GROSS CONTRACT RECEIPTS OF RS.5,51, 90,495/-, A SUM OF RS.4,32,00,311/- WAS FROM SUB CONTRACT WORKS. DURIN G THE YEAR UNDER CONSIDERATION, HE HAS EXECUTED SUB CONTRACT WORKS T HEREFORE, THE PROFIT MARGIN IN HIS BUSINESS IS VERY LOW WHEN COMPARED TO MAIN CONTRACTOR. THE ASSESSEE, IN SUPPORT OF HIS ARGUMENTS RELIED UP ON THE DECISION OF ITAT, VISAKHAPATNAM BENCH IN THE CASE OF K. VENKATA RAJU VS. ACIT AND SUBMITTED THAT THE HONBLE ITAT CONSIDERED THE NET PROFIT RATE OF 4.5% IN CASES OF SUB CONTRACT RECEIPTS. SIMILARLY, THE A SSESSEE FURTHER ITA NO637&659/VIZAG/2013&CO 18/VIZAG/2014 MD. NAUSHAD ALI, KOVVUR 5 SUBMITTED THAT THE A.O. WAS ERRED IN MAKING SEPARAT E ADDITIONS TOWARDS INCOME FROM OTHER SOURCES BEING INSURANCE CLAIM ON ACCOUNT OF DAMAGE OF EXCAVATOR AND PROFIT ON SALE OF DOZER, AS THESE TWO ITEMS NECESSARILY SHOULD HAVE BEEN CONSIDERED FOR CALCULATION OF DEPR ECIATION AND TO ARRIVE AT VALUE OF BLOCK OF ASSETS. THEREFORE, THESE ITEMS SHOULD NOT BE SEPARATELY ADDED WHEN THE INCOME FROM BUSINESS IS E STIMATED BY APPLYING THE NET PROFIT RATE. THE CIT(A) AFTER CONS IDERING THE EXPLANATIONS FURNISHED BY THE ASSESSEE, DIRECTED TH E A.O. TO SCALE DOWN THE ESTIMATION OF NET PROFIT FROM 6% TO 4.5% IN CAS E OF CONTRACT RECEIPTS AND 3% FROM BUSINESS OF HIRING OF MACHINERY. AS RE GARDS THE ADDITION OF INCOME FROM OTHER SOURCES BEING INSURANCE CLAIM ON ACCOUNT OF DAMAGE OF EXCAVATOR AND PROFIT ON SALE OF DOZER, TH E CIT(A) HELD THAT THESE ARE NOT REVENUE GENERATED FROM HIS MAIN CONTR ACT BUSINESS. THEREFORE, THE A.O. HAS RIGHTLY ADDED THE INCOME UN DER THE HEAD INCOME FROM OTHER SOURCES. AGGRIEVED BY THE CIT(A )S ORDER, THE ASSESSEE IS IN APPEAL BEFORE US. 4. THE LD. A.R. SUBMITTED THAT THE CIT(A) WAS ERRED IN CONFIRMING THE ADDITIONS MADE BY THE A.O. TOWARDS INCOME FROM OTHE R SOURCES BEING INSURANCE CLAIM ON ACCOUNT OF DAMAGE OF EXCAVATOR A ND PROFIT ON SALE OF DOZER. THE A.R. FURTHER SUBMITTED THAT THE ASSESSEE HAS RECEIVED ITA NO637&659/VIZAG/2013&CO 18/VIZAG/2014 MD. NAUSHAD ALI, KOVVUR 6 INSURANCE CLAIM TOWARDS LOSS INCURRED ON ACCOUNT OF DAMAGE OF EXCAVATOR DUE TO FIRE. DURING THE FINANCIAL YEAR UN DER CONSIDERATION, A MACHINE CALLED EX-70 WAS MET WITH FIRE ACCIDENT THE ASSESSEE HAS CLAIMED INSURANCE AND THE INSURER HAS REIMBURSED AN AMOUNT OF RS.8 LAKHS TOWARDS LOSS OF EXCAVATOR. THE INSURANCE CLAI M RECEIVED TOWARDS LOSS OF EXCAVATOR SHOULD BE FORMING PART OF BLOCK O F ASSETS AND ACCORDINGLY CONSIDERED FOR CLAIMING DEPRECIATION. WH EN A.O. HAS CHOSEN TO ESTIMATE THE NET PROFIT FROM THE BUSINESS, SEPAR ATE ADDITIONS TOWARDS INSURANCE CLAIM AND PROFIT ON SALE OF DOZER IS NOT CORRECT. ON THE OTHER HAND, THE LD. D.R. STRONGLY SUPPORTED THE ORDER OF THE CIT(A). 5. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE MATER IALS AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHOR ITIES BELOW. THE A.O. MADE ADDITIONS TOWARDS INCOME FROM OTHER SOURC ES BEING INSURANCE CLAIM, INTEREST ON FDRS AND PROFIT ON SALE OF ASSET S. THE A.O. WAS OF THE OPINION THAT THE ASSESSEE HIMSELF HAS CREDITED THES E ITEMS INTO P&L ACCOUNT AND THESE ITEMS ARE NOT FORMING PART OF ASS ESSEES MAIN BUSINESS, THEREFORE, THESE ITEMS CANNOT BE CONSIDER ED FOR ESTIMATION OF NET PROFIT. IT WAS THE CONTENTION OF THE ASSESSEE THAT INSURANCE CLAIM RECEIVED ON ACCOUNT OF DAMAGED EXCAVATOR DUE TO ACC IDENTAL FIRE SHOULD HAVE BEEN CONSIDERED IN THE BLOCK OF ASSETS TO ARRI VE AT DEPRECIATION, NOT ITA NO637&659/VIZAG/2013&CO 18/VIZAG/2014 MD. NAUSHAD ALI, KOVVUR 7 AS A SEPARATE ITEM OF INCOME UNDER THE HEAD INCOME FROM OTHER SOURCES. 6. WE HAVE GONE THROUGH THE RECORDS. ON PERUSAL OF T HE FINANCIAL STATEMENT FILED BY THE ASSESSEE, WE NOTICED THAT TH E ASSESSEE HIMSELF HAS ADMITTED THESE RECEIPTS UNDER THE HEAD INCOME FROM OTHER SOURCES. THOUGH ASSESSEE RIGHTLY CLAIMED THAT THE SE ITEMS ARE FORMING PART OF BLOCK OF ASSETS, THE ASSESSEE HIMSELF HAS C HOSEN NOT TO ADOPT METHOD OF ACCOUNT PRESCRIBED FOR CALCULATION OF DEP RECIATION AS PER BLOCK OF ASSETS CONCEPT. ONCE ASSESSEE HIMSELF HAS CREDI TED THE INCOME UNDER THE HEAD INCOME FROM OTHER SOURCES, THERE I S NO MERIT IN THE ASSESSEE ARGUMENTS THAT THESE ITEMS SHOULD BE CONSI DERED UNDER BLOCK CONCEPT FOR CLAIMING DEPRECIATION AND TO ARRIVE AT WRITTEN DOWN VALUE AS PER SECTION 50 OF THE ACT. WE FURTHER NOTICED THAT THE ASSESSEE CLAIMS TO HAVE INCURRED A SUM OF RS.17,40,198/- TOWARDS RE PAIR OF THE DAMAGED EXCAVATOR. THOUGH ASSESSEE CLAIMS THAT IT HAS INCUR RED SUBSTANTIAL AMOUNT FOR REPAIR OF THE DAMAGED EXCAVATOR, THE A.O . AS WELL AS THE CIT(A) HAVE FAILED TO CONSIDER THE FACT THAT WHETHE R THE SAID EXPENDITURE HAS BEEN CLAIMED AS REVENUE IN NATURE AND DEBITED T O PROFIT & LOSS ACCOUNT OR CAPITAL IN NATURE AND ADDED TO THE COST OF THE ASSET TO CLAIM DEPRECIATION. IF THE AMOUNT INCURRED TOWARDS REPAIR OF THE VEHICLE IS ITA NO637&659/VIZAG/2013&CO 18/VIZAG/2014 MD. NAUSHAD ALI, KOVVUR 8 FORMING PART OF COST OF THE ASSET, THEN THE ASSESSE E SHOULD HAVE DEDUCTED THE INSURANCE CLAIM FROM THE BLOCK OF ASSE T. IN THIS CASE, ON VERIFICATION OF THE DEPRECIATION SCHEDULE FILED ALO NG WITH THE RETURN OF INCOME, WE NOTICED THAT THE ASSESSEE HAS NOT CREDIT ED ANY AMOUNT IN THE DEPRECIATION SCHEDULE. AT THE SAME TIME, FROM THE RECORDS, IT CANNOT BE ASCERTAINED THAT WHETHER THE EXPENDITURE IS DEBI TED AS A REVENUE EXPENDITURE OR CAPITAL EXPENDITURE. PRIMAFACIA, FR OM THE ENTRIES IN THE FINANCIAL STATEMENTS, IT APPEARS THAT ASSESSEE HAS CHOOSES TO DEBIT THE RELEVANT EXPENDITURE INCURRED TOWARDS REPAIR OF DAM AGED EXCAVATOR TO PROFIT & LOSS ACCOUNT AND CREDITED THE INSURANCE CL AIM INTO PROFIT & LOSS ACCOUNT. HOWEVER, IN THE ABSENCE OF SPECIFIC DETAIL S AND ALSO THE FACT THAT BOTH THE AUTHORITIES HAVE FAILED TO SHOW ANY L IGHT ON THIS ASPECT, WE ARE OF THE OPINION THAT THE ISSUE NEEDS TO BE RE-EX AMINED BY THE A.O. IN THE LIGHT OF THE ABOVE DISCUSSIONS. HENCE, WE SET A SIDE THE ISSUE TO THE FILE OF THE A.O. AND DIRECT THE A.O. TO VERIFY THE ISSUE IN THE LIGHT OF ABOVE DISCUSSION AND PASS FRESH ORDER AFTER AFFORDI NG AN OPPORTUNITY OF HEARING TO THE ASSESSEE. 7. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. ITA NO637&659/VIZAG/2013&CO 18/VIZAG/2014 MD. NAUSHAD ALI, KOVVUR 9 ITA 659/VIZAG/2013: 8. WHEN THIS APPEAL IS TAKEN UP FOR HEARING, THE LD. COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT THE TAX EFFECT INVOLVED IN THIS APPEAL IS BELOW RS.10 LAKHS. AS PER THE LATEST CIRCULAR NO.21 /2015 DATED 10.12.2015 OF CBDT BEING RETROSPECTIVE IN NATURE, T HE APPEAL FILED BY THE REVENUE IS NOT MAINTAINABLE. THE LD. D.R. HAS N OT RAISED ANY OBJECTION. IN VIEW OF THE ABOVE, THE APPEAL FILED BY THE REVENUE IS NOT MAINTAINABLE. HENCE, THE SAME IS DISMISSED. 9. THE CROSS OBJECTION FILED BY THE ASSESSEE IS SUP PORTING THE ORDER OF THE CIT(A). THEREFORE, FOR THE REASONS RECORDED IN THE PRECEDING PARAGRAPH, THE C.O. FILED BY THE ASSESSEE BECOMES I NFRUCTUOUS AND HENCE, THE SAME IS DISMISSED. THE ABOVE ORDER WAS PRONOUNCED IN THE OPEN COURT ON 25 TH FEB16. SD/- SD/- ( . ) ( . ) (V. DURGA RAO) (G. MANJUNATHA) /JUDICIAL MEMBER /ACCOUNTANT MEMBER # /VISAKHAPATNAM: ' /DATED : 25.02.2016 VG/SPS ITA NO637&659/VIZAG/2013&CO 18/VIZAG/2014 MD. NAUSHAD ALI, KOVVUR 10 )# *# /COPY OF THE ORDER FORWARDED TO:- 1. / THE APPELLANT MD. NAUSHAD ALI, D.NO.15-4-16, B APUJI NAGAR, OPP GIRLS HIGH SCHOOL, KOVVUR, W.G. DIST. 534350. 2. / THE RESPONDENT THE ACIT CIRCLE-1, RAJAHMUNDRY 3. + / THE CIT, RAJAHMUNDRY 4. + ( ) / THE CIT (A), VISAKHAPATNAM 5. # . , . , # / DR, ITAT, VISAKHAPATNAM 6 . / GUARD FILE / BY ORDER // TRUE COPY // 12 . (SR.PRIVATE SECRETARY) . , # / ITAT, VISAKHAPATNAM