K.kannan v. The Assistant Commissioner Of Income Tax, Circle-I

IN THE HIGH COURT OF JUDICATURE AT MADRAS Dated : 01.10.2013 Coram The Honourable Mrs.Justice CHITRA VENKATARAMANandThe Honourable Mr.Justice T.S.SIVAGNANAM Tax Case (Appeal) Nos.679 and 680 of 2013and M.P.No.1 of 2013 andM.P.Nos.1 and 2 of 2013 K.Kannan ... Appellant in both the appealsvs The Assistant Commissioner ofIncome Tax, Circle-I, No.100,Nanjikottai RoadThanjavur 613 007, Tamil Nadu ... Respondent in both the appeals Tax Case Appeals filed under Section 260A of the Income TaxAct, 1961 against the order of the Income Tax Appellate Tribunal,Chennai 'B' Bench dated 06.09.2012 in ITA No.370/Mds/2011 and ITANo.371/Mds/2011 for the assessment years 2006-2007 and 2007-2008respectively, against the order dated 21.12.2010 in I.T.A.No.546/08-09 and 426/09-10 preferred against on the file of the office of theCommissioner, I.T.(Appeals) Tiruchirappalli, order dated 30.12.2008and made in GIR.No./PAN K-867/AGSPK 9485H on the file of AssistantCommisssioner of Income Tax, Income Tax Department, Circle-IThanjavur and order dated 17.12.2009 and made in PA No./GIR.No.AGSPK9489H 17.12.2009 on the file of Deputy Commissioner of Income Tax,Circle I, Income Tax Department, Thanjavur, for the Assessment year2006-2007 and 2007-2008 respectively. For appellant:Mr.Nithiyaesh Natrajin both the appeals For respondent :Mr.J.Narayanasamyin both the appealsStanding counsel forIncome Tax Department (The Judgment of the Court was made by CHITRA VENKATARAMAN, J.) The assessee is on appeal as against the order of the IncomeTax Appellate Tribunal dated 06.09.2012 in ITA No.370/Mds/2011 andITA No.371/Mds/2011 relating to the assessment years 2006-2007 and2007-2008 respectively, raising the following questions of law: 1. Whether in the impugned assessment year, incomecan be assessed at 8% rate on the gross contract receiptsinvoking S.44AD of the Act when the turnover of theassessee had exceeded the Rs.40 lakh limit prescribed inthe Act? And whether the Tribunal can uphold such apatently erroneous assessment especially after making aspecific finding in the beginning of para 7 of theimpugned order that S.44AD of the Act has no applicationin the instant case as the turnover has exceeded Rs.40lakhs/ 2. Whether the Tribunal ought to have takencognizance of the violation of natural justice principlesby the AO while making the assessment u/s.143(3) because abest judgment assessment as per S.144 can only be madeafter providing reasonable opportunity of being heard tothe Assessee (by issuing a show cause notice) inconsonance with statutory procedural requirements mandatedin S.145(3) and S.144 of the Act? 3. Whether the AO has unfettered discretionarypowers to arbitrarily reject the audited books of accountssubmitted by the assessee on improper/invalid groundswithout proper understanding and due consideration of theground realities/nature of the business and the prevailingcircumstances of the case? 4. Whether the impugned order of the Tribunalupholding the assessment order of the AO (insofar asestimation of income is concerned) based on a merepresumption of facts without any material on record istenable in law? 2. The assessee herein is a Civil Contractor. While computingthe income for the assessment year 2006-07 and 2007-2008, theAssessing Officer pointed out that the assessee could produce onlythe books of accounts and vouchers in respect of bitumen expensesand hand made vouchers in respect of other expenses. When theassessee was asked to produce as to how the work in progress wasworked out, it was noticed that the assessee did not show any https://hcservices.ecourts.gov.in/hcservices/ 4. Whether the impugned order of the Tribunalupholding the assessment order of the AO (insofar asestimation of income is concerned) based on a merepresumption of facts without any material on record istenable in law? 2. The assessee herein is a Civil Contractor. While computingthe income for the assessment year 2006-07 and 2007-2008, theAssessing Officer pointed out that the assessee could produce onlythe books of accounts and vouchers in respect of bitumen expensesand hand made vouchers in respect of other expenses. When theassessee was asked to produce as to how the work in progress wasworked out, it was noticed that the assessee did not show any https://hcservices.ecourts.gov.in/hcservices/ bills/ receivables in the balance sheet. The assessee could notproduce even a reconciliation statement with reference to thecontract receipts and the bank account. In the absence of detailsand there being no proper books of account maintained, theAssessing Officer estimated the income from contract business at 8%on the gross contract receipts admitted by the assessee ofRs.4,02,10,611/- and Rs.5,34,96,995/- respectively by invoking theprovisions of Section 44 AD of the Income Tax Act, 1961. Apart fromthis there were other incomes for the assessee and those wereassessed as per the regular procedure. It is a matter on record,the assessee was issued with a notice and the assessment was takento scrutiny and notice under Section 143(2) of the Act was made andultimately the assessment order was passed under Section 143(3) ofthe Act. Aggrieved by the assessment made under Section 44AD of theAct, taking the total receipt on Rs.4,02,10,611/- andRs.5,34,96,995/- respectively on a presumptive basis, the assesseeefiled an appeal before the Commissioner of Income Tax (Appeals), whoultimately held that the net profit of the assessee be assessed at5%. Except for narrating the order of the Assessing Officer, we donot find any discussion as regards the claim of the assessee thatthe assessment under Section 44 AD of the Act was bad in law.Aggrieved by this, the assessee went on appeal before the Income TaxAppellate Tribunal. Simultaneously the assessee also filed anappeal relating to the assessment year 2007-2008. The Commissionerof Income Tax (Appeals) passed a common order for both theassessment years. The relief granted by the Commissioner of IncomeTax (Appeals) in respect of the assessment year 2007-08 was on thesame line as that of the assessment year 2006-07. Against thisalso, the Revenue went on appeal before the Income Tax AppellateTribunal. 3. A reading of the order of the Income Tax AppellateTribunal shows that the assessee had pointed out that its turnoverfor the assessment year 2006-07 did not exceed Rs.40 lakhs to bebrought for assessment in presumptive basis under Section 44AD ofthe Income Tax Act, 1961. However, noting that the assessee had notfiled profit and loss account or balance sheet for the years andthat the returns and the vouchers produced were defective in nature,the Income Tax Appellate Tribunal confirmed the order of theassessment thereby taking the gross turnover at 8% as the income ofthe assessee. 4. Aggrieved by this, the present appeals have been preferredby the assessee before this Court. 5. Learned Counsel appearing for the assessee pointed out thaton the admitted fact, for the assessment year 2006-07, theassessee's turnover exceeded Rs.40 lakhs, as prescribed underSection 44AD of the Act, the Section had no relevance at all forthe purpose of taxing the assessee on presumptive basis. In any https://hcservices.ecourts.gov.in/hcservices/ event, even while restoring the assessment, the assessee had notbeen put on notice as regards this aspect to proceed under Section144 of the Act. In the circumstances, the order of the Income TaxAppellate Tribunal restoring the assessment is bad in law. 4. Aggrieved by this, the present appeals have been preferredby the assessee before this Court. 5. Learned Counsel appearing for the assessee pointed out thaton the admitted fact, for the assessment year 2006-07, theassessee's turnover exceeded Rs.40 lakhs, as prescribed underSection 44AD of the Act, the Section had no relevance at all forthe purpose of taxing the assessee on presumptive basis. In any https://hcservices.ecourts.gov.in/hcservices/ event, even while restoring the assessment, the assessee had notbeen put on notice as regards this aspect to proceed under Section144 of the Act. In the circumstances, the order of the Income TaxAppellate Tribunal restoring the assessment is bad in law. 6. A reading of Section 44 AD of the Income Tax Act, 1961shows that notwithstanding anything to the contrary contained inSections 28 to 43C, in the case of eligible assessee havingbusiness with a gross receipts not exceeding Rs.40 lakhs, theassessee would be assesed on a presumptive basis, to be taxed at 8%on the total turnover gross receipts in the previous year on accountof such business or as the case may be a sum higher than theaforesaid sum claimed to have been earned by the eligible amountunder the head "profit and gain of the business or profession".Sub Section (2) states that any deduction allowable under theprovisions of Sections 30 to 38, shall, for the purpose of SubSection (1), be deemed to have been already given full effect to andno further deduction would be allowed under those Sections. Inother words, considering the percentage of liability fixed as incomeon the eligible assessees who are defined under clause (a)Explanation and eligible business defined under Clause (b)Explanation, so long as the gross turnover does not exceed Rs.40lakhs, the income would be assessed at the specified percentage ofthe gross turnover. There is no denial of the fact, as is evidentfrom the order of assessment that the assessee's gross contractreceipt was Rs.4,02,10,611/- for the assessment year 2006-2007 andRs.5,34,96,995/- for the assessment year 2007-2008, which means,Section 44 AD of the Act has no relevance. 7. As far as this case is concerned, it is a matter of recordand it is not disputed by the assessee that it had not filed anyprofit and loss account or the balance sheet for the assessmentyears under consideration along with the returns of income. Eventhe vouchers given by the assessee were found to be defective. Itis pointed out in the Appeals filed by the assessee, theCommissioner of Income Tax (Appeals) mainly scaled down suchestimate for the reason that in the earlier assessment year 2005-2006, 3.69% of turnover was considered to be appropriate forcompleting the assessment. The Income Tax Appellate Tribunal heldthat 8% of the gross receipts would be a justifiable assessment evenby way of best of assessment. Thus, the Tribunal restored theorder of the Assessing Officer. In so holding, the Tribunal furtherheld that while so fixing the income at 8% of the gross receipts,the claim of the depreciation be allowed thereafter. However, aftergranting the depreciation if the income goes below, then theAssessing Officer shall assess the income at the returned levelitself. With these directions, the appeals were disposed of. Thuson the admitted fact, that the assessee had no materials to producein support of his income assessable under the provisions of the Act,the only ground thus available on which the assessee's income could be assessed would be a best of judgment assessment. It is no doubttrue while passing the Assessment Order for the assessment year2006-07, the Assessing Officer had adopted 8% based on Section 44ADof the Act. But in stricto sensu, one cannot take this as anassessment under Section 44AD of the Act for taxing the assesseeon a presumptive basis. The Commissioner of Income Tax (Appeals)accepted the contention of the assesseee that it was an assessmentunder Section 44 AD of the Act. 8. Before the Commissioner of Income Tax (Appeals), theassessee submitted that the total income of the assessee was notexceeding 4% at anytime in the preceding year when the turnover waslow and that high percent of net profit in the assessment year 2006-07 was not possible when the turnover was high i.e. above Rs.4Crores. It was further submitted by the assessee that the natureof business was such that they had to face lot of practicaldifficulties in maintaining the bills and vouchers and consideringthe quality maintenance in civil work, the assessee had to sacrificethe profit. Thus, taking note of these submissions and othermaterials on record and since the net profit was shown in the rangeof 1.26 to 3.69 per cent in the preceding year, assessing the incomeat high rate of 8% was not called for. In the circumstances, as avia-media the Commissioner of Income Tax (Appeals) fixed it at 5%. 9. Thus in the background of the facts considered by theCommissioner of Income Tax (Appeals) and in the context of theassessee not maintaining any books of accounts or filing profit andloss account and balance sheet, the assessee felt satisfied that therelief granted by the the Commissioner of Income Tax (Appeals)fixing the assessable income at 5% was acceptable to it.Consequently no appeal was filed thereafter by the assessee beforethe Tribunal. 10. In the background of the reasoning of the Tribunal, we donot agree with the assessee that the assessment suffers on accountof the absence of any opportunity granted to it by the AssessingOfficer before passing the order under Section 144 of the Act. Asto the merits of the case herein is concerned, as already seen, theCommissioner of Income Tax (Appeals) considered the case of theassessee as regards the profit margin in the earlier years to refixthe income at 5% of the gross turnover. Consequently, we do notfind any justification in the Tribunal straightaway restoring theassessment at 8% of the gross turnover without any discussion on themerits of the Commissioner of Income Tax (Appeals) order. In thecircumstances, after going through the order of the Commissioner ofIncome Tax (Appeals), we have no hesitation in restoring the orderof the Commissioner of Income Tax (Appeals) and thereby set asidethe order of the Tribunal. 11. Consequently, while partly allowing the appeals filed bythe assessee, the Order of the Income Tax Appellate Tribunal is setaside and the order of the Commissioner of Income Tax (Appeals) isrestored in fixing the income of the assessee at 5% on the grossturnover. 12. In the result, the Tax Case Appeals are partly allowedwith the above observation. No costs. Consequently, the connectedmiscellaneous petitions are closed. Sd/Assistant Registrar /True Copy/Sub Assistant Registrarvj2 To1. The Assistant Commissioner of Income Tax Circle-I, No.100, Nanjikottai Road, Thanjavur-613007, Tamilnadu.2. The Commissioner of Income Tax-Appeals No.44, Williams Road, Cantonment Tiruchirapalli 620 001.3. The Income Tax Appellate Tribunal 'B' Bench, Chennai4.The Deputy Commissioner of Income Tax,Circle-I, Thanjavur.two ccs to M/s.Nithiyesh Natraj, advocate SR.No.51964 one cc to M/s.J.Narayanasamy, advocate SR.No.51969 Tax Case (Appeal) Nos.679 and 680 OF 2013 RSI(CO)SKY/31/10