Ita/399/2015 Of M/S S.p. Construction v. Income Tax Officer Ward 1(4) Chandigarh

1 IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH ITA No.399 of 2015Date of decision: 4.2.2016 M/s S.P. Construction Vs, .....- Appe Income Tax Officer, Ward 1(4), Chandigarh ....mesponden CORAM: HON BLE MR. JUSTICK AJAY KUMAR MITTALHON BLE MRS. JUSTICEK RAJ RAHUL GARG Present: Mr. Sandeep Goyal, Advocate for the appellant-assessee.Ajay Kumar Mittal, J. inThis appeal has been preferred by the appellant-assessee underSection 260A of the Income Tax Act, 1961 (in short, “the Act”) against theorder dated 31.3.2015, Annexure A.7 passed by the Income Tax AppellateTribunal, Chandigarh Bench 'B', Chandigarh (in short, “the Tribunal’) inITA No.244/Chd/2015 for the assessment year 2007-08, claiming followingsubstantial questions of law:- *'1) Whether on the facts and 1n the circumstances of the casethe order passed by the learned Tribunal is violative ofprinciples of natural justice 1n as much as the same has beenpassed without dealing with all the contentions raised by the appellant during the course of hearing as well as writtensubmissions 1n the paper book’ 11) Whether on the facts and in the circumstances of the case,the learned Tribunal was justified in upholding the applicationof net profit rate on an estimated basis without there being anyspecific rejection of books of account by the AO” 111) If the answer to question No.(11) 1s in affirmative,whetheron the facts and in the circumstances of the case, the learnedAO had sufficient reasons not to rely upon the books anddocuments produced by the appellant and applying anestimated net profit rate? 1v) Whether in the facts and circumstances of the case, thelearned ITAT 1s justified in applying a net profit rate of 9% onthe total gross receipts without giving any reasons or relyingupon any comparable case especially when in the case ofappellant itself, the net profit rate of 2.48% had been acceptedby the department for the assessment year 2005-06? v) Whether the finding of learned ITAT 1s perverse in so faras 1t has observed that the rate of 9% gross profit 1s applicablebecause the appellant is engaged in construction of residentialbuildings whereas the appellant is primarily involved inconstruction of industrial buildings?” ? A few facts relevant for the decision of the controversy, involved as narrated in the appeal may be noticed. On 24.7.2009, a searchoperation had been carried out under section 132 of the Act at the premisesof one Anil Talwar group of persons. Some of the information which wasobtained from his premises related to the appellant firm and accordingly notices were issued under section 148 of the Act to the appellant for the assessment years 2005-06, 2007-08 and 2008-09. In response thereto, the appellant filed its returns for the concerned assessment years. Necessary ? A few facts relevant for the decision of the controversy, involved as narrated in the appeal may be noticed. On 24.7.2009, a searchoperation had been carried out under section 132 of the Act at the premisesof one Anil Talwar group of persons. Some of the information which wasobtained from his premises related to the appellant firm and accordingly notices were issued under section 148 of the Act to the appellant for the assessment years 2005-06, 2007-08 and 2008-09. In response thereto, the appellant filed its returns for the concerned assessment years. Necessary ITA No.399 of 2O154framing assessment for the assessment year 2005-06, vide order dated28.12.2010, Annexure A.1, the books were not rejected and certaindisallowances were made 1n addition to an amount ot=a477,80,000/- whichad been treated as business receipt and in lieu of 1mprest account receivedfrom Anil Talwar. A net profit rate of 8% was applied on the same. On thisaccount, an addition of|=a3,82,400/- had been made in the income besidesother petty additions totalling —Lv1,64,581/-. Aggrieved by the order, theassessee filed appeal before the first appellate authority. Vide order dated3.12.2012, Annexure A.2, the first appellate authority deleted the additionwith regard to receipt from Anil Talwar holding that the said amount was onaccount of imprest amount and therefore could not be treated as businessreceipt. The appeal was partly allowed. Similarly for the assessment year2007-08, the Assessing officer carried out proceedings under section 147 ofthe Act in which certain enquiries were made. The appellant submittedwritten submissions and produced necessary documents. Certain defectswere noticed by the Assessing Officer which were not removed by theappellant. The Assessing Officer vide order dated 8.3.2013, Annexure A.3without rejecting the books of account applied net profit rate of 10% on thegross receipts working out the receipts at =a5,42,83,935/-. The income wasworked out atv54,28,393/-. After giving deduction of interest paid toparmers atan6,28,455/-, the mcome was calculated at |LO47,99,938/-.Agegrieved by the order, the assessee filed appeal Annexure A.4 on15.4.2013 before the Commissioner of Income Tax (Appeals) [CIT(A)].Vide order dated 10.12.2014, Annexure A.5, the CIT(A) partly allowed theappeal holding that receipts trom Anil Talwar could not be added in the gross receipts and similarly entries with regard to bounced cheques/totalmistakes could also not be considered for the purpose of examining grossreceipts from business. The net profit rate of 10% was however upheld. Theappellant filed appeal, Annexure A.6 before the Tribunal pleading that theCIT(A) erred 1n confirming the application of net profit rate of 10% on theturnover even though books of account had not been rejected by theAssessing Officer. Vide order dated 31.3.2015, Annexure A.7, the Tribunalpartly allowed the appeal observing that net profit rate of 9% appeared to bereasonable though in the normal course the net profit rate of 8% would havebeen estimated. Hence the instant appeal by the assessee. 3)We have heard learned counsel for the appellant. 4Learned counsel for the appellant-assessee submitted that thethe Tribunal erred in applying the gross profit rate of 9% without thoroughlyexamining the matter. It was incumbent upon the authorities to haverejected the books of account first while adopting a certain rate of grossprofit keeping in view the comparative cases. 3)We have heard learned counsel for the appellant. 4Learned counsel for the appellant-assessee submitted that thethe Tribunal erred in applying the gross profit rate of 9% without thoroughlyexamining the matter. It was incumbent upon the authorities to haverejected the books of account first while adopting a certain rate of grossprofit keeping in view the comparative cases. 4 A perusal of the impugned order passed by the Tribunal showsthat after considering the overall facts and circumstances of the case, theTribunal had estimated the rate of profit at 9%. It is true that the discretionto determine a net profit rate must necessarily be exercised on the basis ofrelevant factors. In the present case, it has been categorically recorded bythe Tribunal that the assessee did not produce any supporting vouchers forexpenses exceeding L25,000/-. It did not file copies of the bank accountsof the partners and thus the Assessing Officer could not have verified thevarious payments received by the appellant from bankers or payments taken ITA No.399 of 2O15 directly from the customers by the partners. The assessee did not file thedetails of purchases 1n the format given by the Assessing Officer. Regardingsundry debtors, no confirmation was filed and even in the balance sheet, thenames of the sundry debtors to the extent of=a1,66,00,000/- were notshown. No details of opening and closing stock were filed. In view of thesefacts, the Assessing officer could not verify various details and in this wayhe could not rely upon the book version of the assessee. The assessee evendid not file return unless the same was detected during the search. Keepingall the factors 1n view, the Assessing Officer adopted net rate of 10% on thegross receipts on estimate basis which was reduced by the Tribunal to 9% tomeet the ends of justice. The relevant findings recorded by the Tribunal inparas 11 to 16 read thus:- “1 1.We have considered the rival submissions carefully. Beforus the issue of reyection of books was not seriously pressed butit 1s clear from the material available on record that assessee 1sa firm and was having two permanent account numbers. It wasadmitted before us that there was a firm with the same name butthe partners were different and the firm was again started withthe same name with different partners. Since this issue is notbefore us we are not going into the details. Further, it 1s alsoadmitted fact that assessee did not file any return despite havingtaxable income. This fact becomes clear because assessee hasitself filed the return declaring income of ||3,19,865/- inresponse to notice under section 148. We have alreadydiscussed the affairs of the assessee and failure to file manydetails while discussing the facts of the case at the outset ofthis order. To summarize the details again, the assessee did notproduce any supporting vouchers for expenses exceedingL25,000/-. The assessee did not file copies of the bank account ofthe partners and, therefore, the Assessing Officer could not have verified the various payments received by the firm from bankersor payment taken directly from the customer by the partners,The assessee has shown wages payable of Lv9,38,500/- whichwere paid on 5.7.2007 and normally labour will not work forperiod of three months without receiving their payments. Theassessee also did not file the details of purchases in the formatgiven by the Assessing Officer. The assessee was having sundrycreditors of v75,69,505/- and did not file any confirmationeven in cases where sundry creditors exceedv1 lakh. Evenregarding sundry debtors no confirmation was filed and asnoted by the Assessing Officer even in the balance sheet thenames of the sundry debtors to the extent of<a1,66,00,000/-were not shown. No details of opening and closing stock werefiled. The Assessing Officer has discussed and summarized thisissue at page 5 1n the following para:- ‘From the above discussion, it 1s clear that purchases madeby the assessee are not subject to any verification. Sundrycreditors and debtors are also not subject to any verification.Wages, salaries, general expense and other expensesmentioned in para 15 of my letter dated 21.1.2013 are alsonot subject to any verification. In view of the above facts, thebook version shown by the assessee cannot be relied upon. Itherefore, apply net profit rate of 10% on the gross receiptsof.=a5,42,83,935/- which will mean that assessee's incomewould work out at|54,28,393/-.From this interest paid topartmers atan6,28,455/- 1s to be deducted and the balancewould be income of the assessee atLT47,99,938/-.” 12. The above clearly shows that since Assessing Officer couldnot verify various details 1.e. why he has estimated the profits,This clearly shows that books have been rejected. 13. Now the question is once books of account are rejected,what rate of profit should be applied. We agree with thecontention of learned counsel that profit should be estimated onthe basis of various facts a particular case. Even the Hon'ble Punjab and Haryana High Court in the case cited by learnedcounsel in the case ofTelelinks vs. CIT(supra) has observedthat while discussing the nature of power to be exercised fordetermining the net profit, it was observed as under:- “The first question relates to the nature of the powerexercised while determining a net profit rate. The questionmust necessarily be answered by holding that where booksof account rejected or not produced, the Assessing Officerwould be well within the limits of his jurisdiction to accessincome by applying a fictional net profit rate. The power soconferred 1s quasi judicial and, therefore, not unbridled as itmust be guided by reason and though it may involve adegree of guesswork, must be based upon a rationalanalysis of facts. The first question of law 1s answeredaccordingly’, 14. While discussing the second question, factors required tobe taken into consideration for determination of the net profitrates, it was observed as under:- ‘The second question of law namely factors required to betaken into consideration while applying a net profit rate hascome up for consideration, as on the same set of facts theAssessing Officer, the Commissioner of Income Tax andIncome Tax appellate Tribunal have applied different ratesof net profit, the discretion to determine on adequate netprofit rate undoubtedly vests with authorities under the Actby the discretion so vested is neither unbridled norunguided as it must be guided by reason 1.e. should bepreceded by reasons which, in turn, should be preceded bya perceptible process of reasoning based upon dueconsideration of all relevant facts. However, authoritiesunder the Act appear to construe their jurisdiction as adiscretion to apply a thump rule dependent almost entirelyon the whims of a particular officer. The discretion to determine a net profit rate must necessarily be exercised on the basis of relevant factorswhich we shall enumerate but before doing so, wouldclarify that these factors are neither exhaustive nor a finalword on relevant factors that may be considered whiledetermining the net profit rate. A few significant factors arethe past tax history of the assessee, 1f available, assessmentorder that may have been passed and accepted by thedepartment, the nature of the assessee's business, anappraisal of the value of the contract, prevailing economicconditions vis a vis the assessee's business, the price of rawmaterial, labour etc. the rice in price index as notified bythe Central Government from time to time if applicable andif the Assessing Officer proceeds to rely upon assessmentsof other assessees engaged in similar business to do so onlyafter determining points of similarity etc.” 15.|Therefore, once details are not filed, the profit has to beestimated and such estimation would have to be doneconsidering the facts of the particular case in a judiciousmanner. In the case ofCIT vs. Prabhat kumar(supra) whereaddition was made on account of wages, which was not foundto be verifiable, ultimately the court applied profit rate of 12%and it was observed as under:- “The Tribunal has proceeded on the basis that there maybe unverifiable wages which may call for addition toincome but not to the extent assessed by theCommissioner of Income Tax (Appeals). Applying netprofit rate on the basis of best judgment assessment in agiven situation will be a question of fact unless such anassessment 1s shown to be arbitrary or perverse. In thepresent case, it cannot be said that any substantialquestion of law arises. Assessment of 12 per cent of netprofit rate of contract receipt 1s not shown to be arbitraryOT Pperver;r Thus, wherein in a case wages were found not verifiable, 12% profit reached was held to be reasonable. 16. Now in the case before us we have already noted thatassessee did not file even the return unless the same wasdetected during search made in the case of M/s Talwar Group.Anyway the most relevant factor in the case before us was thatassessee 1S engaged in the business of construction of house forprivate parties. It is a common knowledge that rate of profit inconstruction of a private houses is much higher than incomparison to the mass construction contracts for governmentor other government authorities. This 1s so because theconstruction of a private house involves superior quality ofwork, fancy items for which generally the contractor chargeshigher rate of margin. Further, it is to be noted that assessee hadhuge amount of sundry creditors amounting to LT75,69,505/- forwhich no confirmation has been filed. Even the names of thesundry debtors are not disclosed in the balance sheet. Normally,the Chandigarh Bench of the Tribunal has estimated the rate ofprofit in the case of construction firms at 8%. But consideringthe above facts, we are of the opinion that estimate of profit atthe rate of 9% would meet the ends of justice in this case andtherefore, we set aside the order of learned CIT(A) and estimatethe net profit at 9%.” 6.The estimation of gross profit rate at 9% could not be held to be arbitrary or unreasonable warranting interference by this Court 1n the factsand circumstances of the case. The view adopted by the Tribunal 1s aplausible view and we find no error therein. The judgments cited by thelearned counsel for the appellant assessee in ITA No.269 of 2014, decidedon 20.11.2014 (Telelinks vs. Commissioner ofIncome Tax, Bathinda), ITANo.428 of 2014 (Jangir Singh Mahli vs. Commissioner Central Tax, Patiala, decided on 6.5.2015, Aggarwal Engineering Co. vs. Assistant ITA No.399 of 2O15 Roadlines Pvt. Limited vs. the Deputy Commissioner ofIncome Tax, LIANo.213 of 2014 decided on 14.10.2014 (Bangalore) being based onlindividual fact situation involved therein do not come to the rescue of theappellant. Consequently, no substantial question of law arises. The appealstands dismissed. (Ajay Kumar Mittal)Judge February 04, 2016@7"@ (Raj Rahul Garg)Judge