The Assistant Commissioner of Income tax, Amritsar. V. M/s. National Construction Co., Amritsar.

ITA 67/ASR/2011

• Counselvise Citation: 6720914 RSA 2011
• Duration Of Justice: 2 year(s) 10 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-01-2014
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 06-08-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 24-02-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: AMRIK CHAND
• Assessee Lawyers: BALDEV PATHANIA
• Keywords: Depreciation
• Section: 44AD; 28; 144

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AMRITSAR BENCH; AMRITSAR. BEFORE SH. H.S. SIDHU, JUDICIAL MEMBER AND SH. B.P.JAIN, ACCOUNTANT MEMBER I.T.A. NO.67(ASR)/2011 ASSESSMENT YEAR:2006-07 PAN :AAAFN8509P ASSTT. COMMR. OF INCOME TAX, VS. M/S. NATIONAL CONS TRUCTION CO; CIRCLE-IV, AMRITSAR. AMRITSAR. (APPELLANT) (RESPONDENT) APPELLANT BY:SH.AMRIK CHAND, DR RESPONDENT BY:SH.BALDEV PATHANIA, CA DATE OF HEARING: 09/01/2014 DATE OF PRONOUNCEMENT:17/01/2014 ORDER PER BENCH ; THIS APPEAL OF THE REVENUE ARISES FROM THE ORDER O F THE CIT(A), AMRITSAR, DATED 02.12.2010 RELATING TO ASSESSMENT Y EAR 2006-07. THE REVENUE HAS RAISED FOLLOWING GROUNDS OF APPEAL: 1. WHETHER THE LD. CIT(A) HAS ERRED IN HOLDING THA T DEDUCTION OF SALARY AND INTEREST PAID TO THE PARTNERS BE ALLOWED OUT OF THE ASSESSED INCOME KEEPING IN VIEW STATUTORY DEDUCTION UNDER CLAUSE (IV) OF SECTION 44AD. ITA NO.67(ASR)/2011 2 2. WHETHER THE LD. CIT(A) HAS ERRED IN APPLYING TH E PROVISION OF SECTION 44AD TO THE CASE OF THE ASSESSEE BY IGNORIN G THE FACT THAT AS PER PROVISO TO SUB SECTION (1) TO SECTION 4 4AD, IT DOES NOT APPLY IN CASE WHERE THE GROSS RECEIPTS PAID OR PAYABLE EXCEEDS AN AMOUNT OF RS.40 LACS, WHEREAS IN THE CAS E OF THE ASSESSEE THE GROSS RECEIPTS IS OF RS.4,55,80,729/-. 3. WHETHER THE LD. CIT(A) HAS ERRED IN IGNORING THE FINDINGS GIVEN BY THE AO THAT THE ASSESSEE HAS NOT MAINTAINED THE BOOKS OF ACCOUNT CORRECTLY AND THE SAME WERE REJECTED BY THE AO BY INVOKING THE PROVISIONS OF SECTION 145(3) OF THE AC T AND THEREAFTER THE NET PROFIT @ 8% WAS APPLIED ON THE G ROSS RECEIPTS AFTER GIVING DEEMED EFFECT TO PROVISIONS OF DEPRECI ATION, SALARY AND INTEREST TO THE PARTNERS. 4. WHETHER THE LD. CIT(A) HAS ERRED IN NOT CONSIDER ING THE FACT THAT THE ASSESSEE HAD THEMSELVES MADE OFFER DURING THE COURSE OF ASSESSMENT PROCEEDINGS THAT NET PROFIT OF 10% MA Y BE APPLIED ON GROSS RECEIPTS AND THEREFROM THE ASSESSE E BE ALLOWED DEDUCTION ON DEPRECIATION, SALARY AND INTEREST TO T HE PARTNERS. 5. APPELLANT CRAVES LEAVE TO AMEND OR ADD ANY OR MO RE GROUNDS OF APPEAL. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E FIRM IS A CONTRACTOR. THE AO DURING THE ASSESSMENT PROCEEDINGS OBSERVED T HAT THE ASSESSEE HAS CLAIMED RS.3719731/- AS PURCHASES OF CRUSHER. THE P AYMENT OF THE CRUSHER ON THE EXAMINATION OF BILLS AS REFERRED IN PARA-3 THAT ALL THE PAYMENTS ARE MADE IN CASH AND ACCORDINGLY, THE SAME WERE NOT VER IFIABLE. THE EXPLANATION OF THE ASSESSEE IN THE ASSESSMENT PROCEEDINGS WAS T HAT THE CREDITORS WERE DRIVERS OF VEHICLES, WHO WERE WILLING TO SUPPLY THE GOODS TO THE ASSESSEE AND THEREFORE, THE MATERIAL WAS PURCHASED DIRECTLY FROM THE DRIVERS OF THE TRUCKS ITA NO.67(ASR)/2011 3 AND THE CONTRACT WAS TO BE COMPLETED IN A TIME BOUN D PERIOD. THE NAME OF THE OWNER OF THE TRUCK IS NOT KNOWN. THE AO OBSERV ED THAT THE EXPLANATION LACKS CREDIBILITY AND THE AO WAS NOT SATISFIED WIT H THE SAID EXPLANATION. ALSO FROM THE LIST OF SUNDRY CREDITORS REVEALED CRE DITORS AMOUNTING TO RS.1969955/- WHICH WERE AGAINST THE EXPENSES OF IND IVIDUAL PERSONS BUT AS A MATTER OF FACT, WERE MENTIONED AS TRUCK NUMBERS OR TROLLEY NUMBERS. THE AO WAS NOT SATISFIED WITH THE EXPLANATION OF THE ASSES SEE IN PARA 4 OF HIS ORDER AND ACCORDINGLY, THE AO REJECTED THE BOOKS OF ACCOU NT BY INVOKING THE PROVISIONS OF SECTION 145(3) OF THE ACT, AFTER GIVI NG SHOW CAUSE NOTICE. THE AO ACCORDINGLY APPLIED A NET PROFIT RATE OF 8% AND THE RELEVANT PARA FOR THE APPLICATION OF RATE IS REPRODUCED FOR THE SAKE OF C ONVENIENCE AS UNDER: COMING TO THE ESTIMATION OF NET PROFIT RATE, IT WO ULD BE REASONABLE TO TAKE THE SAME AT 8% OF THE GROSS RECEIPTS. IT IS DE EMED THAT THE EFFECT HAS BEEN GIVEN TO THE PROVISIONS OF DEPRECIATION, S ALARY AND INTEREST TO THE PARTNERS. THIS IS SO BECAUSE THE NET PROFIT RAT E OF 8% IS VERY REASONABLE AND APPLIED AFTER TAKING INTO ACCOUNT AL L THE CONSIDERATIONS. THE SUBMISSION OF THE COUNSEL IN THIS REGARD CANNOT BE ACCEDED TO. THUS, ON GROSS RECEIPTS OF RS.45580729/- THE NET PR OFIT @ 8% SHOULD BE RS.3646458/-. THE ASSESSEE HAS SHOWN NET PROFIT OF RS.1608311/-. ACCORDINGLY, AN AMOUNT OF RS.2038147/- IS ADDED TO THE TOTAL INCOME OF THE ASSESSEE. 3. THE LD. CIT(A) CONFIRMED THE ACTION OF THE ASSES SING OFFICER FOR INVOKING THE PROVISIONS OF SECTION 145(3) OF THE AC T, BUT REDUCED THE VALUE OF MATERIAL AMOUNTING TO RS.76,97,694/- EMBEDDED IN THE GROSS RECEIPTS IN ITA NO.67(ASR)/2011 4 VIEW OF THE DECISION OF HONBLE SUPREME COURT IN TH E CASE OF BRIJ BHUSHAN LAL PARDUMAN KUMAR REPORTED IN 115 ITR 524 AND CBDT CIRCULAR NO.684 DATED 10.06.1994 BUT MAINTAINED NET PROFIT RATE AT 8%. AT THE SAME TIME, THE ASSESSEE AGITATED BEFORE THE LD. CIT(A) THAT DEPREC IATION, INTEREST AND SALARY TO PARTNERS SHOULD HAVE BEEN ALLOWED, WHICH THE LD. CIT(A) ALLOWED UNDER SECTION 40(B)(I) OF THE ACT AND OBSERVED THAT IT IS A STATUTORY DEDUCTION, WHICH IS ALLOWABLE UNDER SECTION 44AB OF THE ACT. 4. THE LD. DR ARGUED THAT DEPRECIATION, INTEREST A ND SALARY TO PARTNERS HAVE ALREADY BEEN ALLOWED BY THE AO WHICH IS EVIDEN T FROM THE ORDER OF THE A.O. AT PAGE 3, THE CONCLUDING PARA. 5. THE LD. COUNSEL FOR THE ASSESSEE, SH. BALDEV PAT HANIA, CA, ON THE OTHER HAND, READ WRITTEN SUBMISSIONS PLACED ON RECO RD, WHICH ARE REPRODUCED FOR THE SAKE OF CONVENIENCE AS UNDER: THE ASSESSING OFFICER ERRED IN NOT ALLOWING SALARY AND INTEREST PAID TO PARTNERS AMOUNTING TO RS.192000/- AND RS.341680/ - RESPECTIVELY WHILE APPLYING NET PROFIT RATE OF 8% AND INVOKING T HE PROVISIONS OF SECTION 145(3) OF THE INCOME TAX ACT, 1961. THE LD. CIT(APPEALS) RIGHTLY ALLOWED SALARY AND IN TEREST PAID TO THE PARTNERS AS DEDUCTION VIDE ORDER DATED 02.12.2010. THE SALARY AND INTEREST PAYABLE TO PARTNERS ARE GOV ERNED UNDER SECTION 40(B)(I) OF THE INCOME TAX ACT SUBJECT TO THE FULFI LLMENT OF CONDITIONS PRESCRIBED U/S 184 OF THE ACT WHICH READS AS UNDER: 1 THE PARTNERSHIP MUST BE EVIDENCED BY AN INSTRUMEN T OF PARTNERSHIP DEED. ITA NO.67(ASR)/2011 5 2. THE INDIVIDUAL SHARES OF THE PARTNERS MUST BE S PECIFIED IN THE INSTRUMENT. 3. A CERTIFIED COPY OF THE INSTRUMENT MUST ACCOMPAN Y THE RETURN OF FIRST ASSESSMENT YEAR IN WHICH THE ASSESSMENT AS A FIRM IS SOUGHT AND ONCE THE DEED OF THE PARTNERSHIP IS FUR NISHED FOR ANY ASSESSMENT YEAR, IT SHALL ASSESSED IN THE SAME STATUS UNLESS THERE IS A CHANGE. 4. NOTWITHSTANDING ANYTHING CONTAINED IN ANY OTHER PROVISION OF THE ACT, WHERE IN RESPECT OF ANY ASSESSMENT YEAR, T HERE IS NON THE PART OF THE FIRM ANY SUCH FAILURE AS MENTIONED IN SECTION 144, THE FIRM SHALL E SO ASSESSED THAT NO DEDUCTION BY WAY OF ANY PAYMENT OF INTEREST, SALARY, BONUS, COMMISSION OR REMUNERATION BY WHATEVER NAME CALLED, MADE BY SUCH FIRM TO ANY PARTNER OF SUCH FIRM SHALL BE ALLOWED IN COMPUT ING THE INCOME CHARGEABLE UNDER THE HEAD PROFIT AND GAINS O F BUSINESS OR PROFESSION AND SUCH SALARY AND INTEREST SHALL NO T BE CHARGEABLE TO INCOME TAX UNDER CLAUSE (V) OF SECTIO N 28 OF THE INCOME TAX ACT, 1961. FURTHER, IT IS MENTIONED THAT SALARY, BONUS COMMIS SION OR REMUNERATION BY WHATEVER NAME CALLED PAID TO A WORK ING PARTNERS IS ALLOWABLE WHILE COMPUTING THE INCOME O F THE FIRM. THE SECTION IS DRAFTED NEGATIVELY TO PRESCRIBE WHEN SUCH SALARY IS NOT ALLOWABLE. IT SAYS PAYMENT OF SALARY TO PART NER SHALL NOT BE ELIGIBLE FOR DEDUCTION. SIMILARLY THE PAYMENT OF INTEREST WHICH IS NOT IN ACCORDANCE WITH THE NEED OF PARTNERSHIP IS NOT ELIGIBLE FOR DE DUCTION. IN THE CASE OF ASSESSEE ALL THE ABOVE MENTIONED CO NDITIONS HAVE BEEN SATISFIED. THERE IS PARTNERSHIP DEED, SHARES A ND REMUNERATION PAYABLE AND INTEREST PAID IS AS PER RA TE SPECIFIED IN THE DEED OF PARTNERSHIP. HENCE, THERE IS NO QUESTIO N OF DISALLOWANCE OF SALARY AND INTEREST TO PARTNERS. FURTHER, THE ASSESSMENT OF THE ASSESSEE WAS MADE U /S 145(3) OF THE ACT WHERE INTEREST AND SALARY PAID CANNOT BE DI SALLOWED. ITA NO.67(ASR)/2011 6 THE DISALLOWANCE CAN ONLY BE MADE IF ASSESSMENT HAD BEEN MADE U/S 144 OF THE ACT. IT IS PRAYED THAT THE SALARY OF RS.192000/- AND IN TEREST ON CAPITAL OF RS.341680/- BE ALLOWED AND ORDER OF THE CIT(A) B E ENFORCED. 6. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. AS REGARDS, THE APPLICATION OF NET PROFIT RATE AS A LLEGED BY THE REVENUE THAT IT SHOULD HAVE BEEN 10%, IN THIS REGARD, THE AO HER SELF AS APPLIED A NET PROFIT RATE OF 8% ON THE GROSS RECEIPTS AFTER INVOK ING THE PROVISIONS OF SECTION 145(3) OF THE ACT. THERE IS NO MENTION OF A PPLICATION OF NET PROFIT RATE OF 10%. THEREFORE, GROUND NO.4 OF THE REVENUE IS WITHOUT ANY BASIS AND IS DISMISSED. 6.1. AS REGARDS GROUNDS NO. 1 TO 3, WE ARE CONVINCE D WITH THE ARGUMENTS MADE BY THE LD. DR THAT THE AO HERSELF HAS ALREADY ALLOWED DEPRECIATION, SALARY AND INTEREST TO THE PARTNERS AND THEREFORE, THE LD. CIT(A) WAS NOT JUSTIFIED IN FURTHER ALLOWING DEPRECIATION, SALARY AND INTEREST TO THE PARTNERS AFTER APPLICATION OF NET PROFIT RATE OF 8% ON GROSS CONTRACT RECEIPTS AFTER REDUCING THE VALUE OF THE MATERIAL. THEREFORE, IN THE FACTS AND CIRCUMSTANCES OF THE CASE, WHEN THERE IS A CASE OF APPLICATION OF NET PROFIT RATE AND AO HAS SPECIFICALLY MENTIONED IN HIS ORDER, AS REPRODUCED HEREINABOVE. THAT EFFECT HAS BEEN GIVEN TO THE ASSESSEE ON ACCOUNT OF DEPRECIATION, SALARY AND INTEREST TO TH E ITA NO.67(ASR)/2011 7 PARTNERS I.E. @ 8% IS VERY REASONABLE AND IS APPL IED AFTER TAKING INTO ACCOUNT ALL THE CONSIDERATIONS. ACCORDINGLY, THE LD . CIT(A) IS NOT JUSTIFIED IN ALLOWING DEPRECIATION, SALARY AND INTEREST TO TH E PARTNERS. THEREFORE, THE ORDER OF THE LD. CIT(A) TO THAT EXTENT IS REVERSED AND THE APPEAL OF THE REVENUE IS PARTLY ALLOWED. 7. IN THE RESULT, THE APPEAL FILED BY THE REVENUE I S ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 17TH JANUARY, 2014. SD/- SD/- (H.S. SIDHU) (B.P. JAIN) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 17TH JANUARY, 2014 /SKR/ COPY OF THE ORDER FORWARDED TO: 1. THE ASSESSEE:M/S. NATIONAL CONSTRUCTION CO. AMRITSA R. 2. THE ACIT, CIRCLE IV, ASR. 3. THE CIT(A), ASR 4. THE CIT, ASR. 5. THE SR DR, ITAT, AMRITSAR. TRUE COPY BY ORDER (ASSISTANT REGISTRAR) INCOME TAX APPELLATE TRIBUNAL, AMRITSAR BENCH: AMRITSAR.