Developers And Investors P. Ltd v. In The Order Under Appeal Before Us, The Tribunal Affirmed Theorder Passed By The Commissioner Of Income Tax (Appeals) Holding

THE HON’BLE SRI JUSTICE RAMESH RANGANATHANANDTHE HON’BLE SRI JUSTICE M.SATYANARAYANA MURTHYI.T.T.A.Nos. 452, 453 454 & 455 of 2015 COMMON JUDGMENT:(per Hon’ble Sri Justice Ramesh Ranganathan) These appeals, under Section 260-A of the Income Tax Act,1961 (for short “the Act”), are preferred against the common orderpassed by the Income Tax Appellate Tribunal in I.T.A.Nos.668, 670,685 and 686 of 2009 for the assessment years 2003-04 and 2004-05. For the assessment years under consideration, the books ofaccounts of the assessee were rejected by the Assessing Officer; andthe profit was estimated at 12.5% of the gross receipts. In appeal, theCommissioner of Income Tax (Appeals), following the judgment of theSpecial Bench of the Tribunal, Indore in Arihant Builders, Developers and Investors P. Ltd. vs. ACIT[[1]],held that estimation ofnet profit at 8% was reasonable; and such a rate is in tandem with thespirit of the provisions of Section 44AD of the Act, which could beconsidered as a guideline for the purpose of applying a particular netprofit rate in the case of civil contractors. With regards the worksentrusted to the sub-contractor, the Commissioner of Income Tax(Appeals) followed the decision of this Court in Indwell Constructions vs. CIT[[2]], and held that no deduction from the income estimated canbe allowed, once the books of accounts were rejected. The matterwas remanded to the Assessing Officer to re-compute the total incomeof the assessee by adopting the profit in respect of contracts at 8%,and sub-contracts at 5%, after necessary verification of the claimregarding sub-contract without giving any further deduction in respectof depreciation, salary or interest to partners. Aggrieved thereby, boththe assessee and the Revenue carried the matter in appeal to theTribunal. In the order under appeal before us, the Tribunal affirmed theorder passed by the Commissioner of Income Tax (Appeals) holding that, when the books of accounts were rejected, the only methodavailable to the Assessing Officer was to estimate the profit; the profitratio cannot be a constant factor for each and every year; the profit ratiowould fluctuate depending upon various factors such as the place ofexecution of the contract, availability of raw material, labour andassessee’s own funds etc; while estimating the profit, the authoritiesmay take into consideration the profit ratio of similarly placed traders inthe same locality and other factors; the profit ratio of the otherassessees in that locality would be one of the factors to be taken intoconsideration, but that cannot be the sole criteria for fixing the profitratio from the contract business; in similar orders, passed in the case ofKrishnamohan Constructions, K.C.Reddy Associates, Sri SrinivasaConstructions and M.Bhaskar Reddy, the Tribunal had estimated theprofit between 12.5% to 8% depending upon the factual situation; abare reading of the earlier order of the Tribunal, in M.Bhaskar Reddy,showed that the Tribunal, after considering the judgment of the Supreme Court in State of Kerala vs. C.Velukutty[[3]]and the decisionof the Special Bench of the Tribunal in Arihant Builders, Developersand Investors P. Ltd.[1], and by taking a clue from Section 44AD of theAct, had estimated profits at 8%; Section 44AD of the Act would beapplicable in respect of cases where the gross contract receipts do notexceed Rs.40 lakhs; where the gross contract receipts exceed Rs.40lakhs, the provisions of Section 44 AD of the Act are not applicable;profit, in such cases, can be estimated either at lower than 8% orabove 8% depending upon the factual situation; in KrishnamohanConstructions, the Tribunal, in I.T.A.Nos.116 and 117/Hyd/2007 for theassessment years 1993-94 and 1994-95, had estimated the profit onlyat 8% even though it had estimated the profit at 12.5% for the earlierassessment year 1992-93; the Commissioner of Income Tax(Appeals), after referring to the order of the Tribunal in KrishnamohanConstructions and Arihant Builders, Developers and Investors P. Ltd.[1],had estimated the profit at 8% for the main contract, and at 5%on sub-contract; the Tribunal was uniformly estimating the profitsbetween 8% to 12.5% depending upon the factual situation, and 5% to7% on the sub-contracts depending upon the factual situation; and, intheir opinion, estimation of profit at 8% on the main contract, and at 5%on the sub-contract, was justified. Section 44AD of the Act stipulates that, notwithstanding anythingto the contrary contained in Sections 28 to 43C, in the case of aneligible assessee engaged in an eligible business, a sum equal to 8%of the total turnover or gross receipts of the assessee in the previousyear on account of such business or, as the case may be, a sum higherthan the aforesaid sum claimed to have been earned by the eligibleassessee, shall be deemed to be the profits and gains of suchbusiness chargeable to tax under the head “Profits and gains ofbusiness or profession”. Under the proviso thereto, the requirement ofClause (1) of Section 44AD would not apply in cases where the grossreceipts exceed Rs.40 lakhs. In the present case, the gross receipts, no doubt, are far inexcess of Rs.40 lakhs and, as such, Section 44AD of the Act is notattracted. The Tribunal, however, held that Section 44AD of the Actserves as a guidance in estimating net profit even in cases where thegross receipts exceed Rs.40 lakhs also. The Tribunal has referred tothe earlier orders passed in several other cases where profits wereestimated at 8% of the gross receipts for the main contract, and atbetween 5% to 7% for sub-contracts. As has been rightly held by the Tribunal, estimation of profitswould depend on several factors, and would vary from one case toanother. As the manner in which profits are to be estimated woulddepend on the facts of a given case, no question of law arises on suchestimation either by the Commissioner of Income Tax (Appeals) or bythe Tribunal, unless such an estimation is perverse. In the presentcase, we are satisfied that the order of the Tribunal does not suffer from any such infirmity. We are also supported in this regard by an orderpassed by a Division Bench of this Court in I.T.T.A.No.21 of 2013 andbatch dated 23.07.2013. The appeals fail and are, accordingly, dismissed. The miscellaneous petitions pending, if any, shall also standdismissed of. There shall be no order as to costs. _____________________________ RAMESH RANGANATHAN, J Date: 22.12.2015JSU ___________________________________ M. SATYANARAYANA MURTHY, J THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN AND THE HON’BLE SRI JUSTICE M.SATYANARAYANA MURTHY I.T.T.A.Nos. 452, 453 454 & 455 of 2015 JSU Date:22.12.2015 [1]291 ITR 41 (SB)291 ITR 41 (SB) [2]232 ITR 776232 ITR 776 [3]60 ITR 23960 ITR 239