M/S. J.j. Associates v. Commissioner Of Income Taxpatiala

Income Tax Appeal No. 404 of 2006 1 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. --- Income Tax Appeal No. 404 of 2006Date of decision: 2.12.2010 M/s. J.J. Associates through its Partner Janki Gupta --- Appellant Versus Commissioner of Income TaxPatiala. --- Respondent CORAM:HON’BLE MR. JUSTICE ADARSH KUMAR GOELHON’BLE MR. JUSTICE AJAY KUMAR MITTAL Ms. Tejinder K. Joshi, Standing Counselfor the respondent. --- AJAY KUMAR MITTAL, J. This appeal under Section 260A of the Income-Tax Act, 1961(for short “the Act”) has been filed by the assessee against the orderdated 22.9.2005, passed by the Income Tax Appellate TribunalChandigarh Bench ‘A’, Chandigarh (in short “the Tribunal”) in ITA No.610/CHANDI/2003, relating to the assessment year 2000-01. The appeal was admitted for determining the followingsubstantial question of law: “Whether under the facts and circumstances of the case, theTribunal is justified in withdrawing the statutory claim underSection 32 while computing the chargeability of the income under Section 29 especially when there was no disputearising out of assessment order and there was no ground ofappeal of the respondent?” The facts, in brief, necessary for adjudication as narrated inthe appeal, are that the appellant-assessee is a partnership firmengaged in the business of construction of roads and executing variousalike contracts. The assessee filed its return of income on 31.10.2000 atan amount of Rs. 2,30,820/-. The return was processed under Section143(1) of the Act and a refund in the sum of Rs. 43,740/- was issued tothe assessee. The case of the assessee was chosen for scrutiny andultimately, the assessing officer made addition of an amount of Rs.39,74,129/- on account of purchases made and of another amount ofRs.26,99,959/- on account of expenses which, according to theRevenue, were not made wholly and exclusively for the purpose ofbusiness. The assessing officer, thus, vide order dated 28.3.2003,completed the assessment at an amount of Rs. 69,04,910/- creating ademand of Rs. 25,69,525/- and charging interest under Section 234B ofthe Act in the sum of Rs. 9,79,302/- whereby the interest under Section244A, of an amount of Rs. 49,526/-, as allowed on the refund waswithdrawn. The assessee filed appeal before the Commissioner ofIncome Tax (Appeals) [for short “the CIT(A)”]. The appeal was partlyallowed vide order dated 19.8.2003. The CIT(A) though upheld theaction of the assessing officer to make assessment under Section 144,but did not approve the additions made by him of Rs. 39,74,129/- andRs. 26,99,959/-. Feeling not satisfied with the order of the CIT(A), theRevenue preferred appeal before the Tribunal. The Tribunal partlyallowed the appeal, vide a detailed order dated 22.9.2005. Thereference to the findings of the Tribunal will be made at the appropriateplace while dealing with the submissions made by learned counsel forboth the parties. Suffice it to notice that the Tribunal directed theassessing officer to compute the income of the assessee afresh andframe assessment in the light of the observations made in its order. We have heard learned counsel for the parties and perusedthe record. Learned counsel for the assessee submitted that once thenet profit rate was applied, the assessee was entitled to deduction onaccount of depreciation under Section 32 while computing thechargeability of income from the business under Section 29, in view ofthe decision of this Court in Commissioner of Income Tax v. ChopraBros. India (P) Ltd. (2001) 252 ITR 412. Controverting the aforesaid submission, learned counselfor the Revenue supported the order passed by the Tribunal. He arguedthat net profit rate of 8% was applied by considering that the claim fordepreciation had already been taken care of while applying the said netprofit rate. We do not find any merit in the submission of the learnedcounsel for the assessee. We have heard learned counsel for the parties and perusedthe record. Learned counsel for the assessee submitted that once thenet profit rate was applied, the assessee was entitled to deduction onaccount of depreciation under Section 32 while computing thechargeability of income from the business under Section 29, in view ofthe decision of this Court in Commissioner of Income Tax v. ChopraBros. India (P) Ltd. (2001) 252 ITR 412. Controverting the aforesaid submission, learned counselfor the Revenue supported the order passed by the Tribunal. He arguedthat net profit rate of 8% was applied by considering that the claim fordepreciation had already been taken care of while applying the said netprofit rate. We do not find any merit in the submission of the learnedcounsel for the assessee. It would be advantageous to refer to the findings recorded bythe Tribunal in paras 7 to 10 which are as under: “We have given our careful consideration to the rivalcontentions. As already pointed out, it is a case of a contractor having gross receipts of more than Rs. 40 lacs. Inthe case of contractors deriving income whose gross receiptsdo not exceed Rs. 40 lacs, the provisions of section 44ADare applicable and income of the contractor in such cases isdetermined by application of net profit rate of 8% of the grossreceipts paid or payable to the assessee. The depreciationis deemed to have been allowed while calculating net profit@ 8%. There is an option to such contractors to produce thebooks of account to support the declaration of profits at lowerrate than the net rate of 8% applicable u/s 44AD. In the caseof contractors whose gross receipts exceed Rs. 40 lacs,there is an obligation u/s 44AA to maintain such books ofaccount and other documents as may enable the AO tocompute his total income in accordance with the provisionsof the Act, meaning thereby that the option of paying tax on8% net profit without maintaining accounts is not permissibleto the contractors having receipts of more than Rs. 40 lacs.In this case, assessee has claimed to have maintainedbooks of account and audit report has also been furnishedalong with the return. Strangely, the assessee failed toproduce the books of account before the Assessing Officer atany stage of the proceedings. Even before the CIT(A), thebooks of account have not been produced. The AO on thebasis of the documents furnished by the assessee along withthe return had detected certain anomalies in the statement ofaccounts. As pointed out earlier, the AO had found thatassessee had received the last payment for the completion of works on 7.1.2000. It was further found that assessee haddebited expenses in regard to purchases made after7.1.2000 to the tune of Rs. 39,74,129/-. The assessee hadbeen asked to explain the circumstances under which thepurchases had been debited in the accounts after the receiptof the last payment from the departments for execution of theworks. The assessee claimed that some material had beensupplied prior to 7.1.2000 and bill submitted later in somecases the material was required to repair the earliercompleted works. So, however, no evidence was producedbefore the AO or even before the CIT(A) to support the claim.The AO accordingly made addition of Rs. 39,74,129/-. TheAO had further found that the assessee had debitedexpenses on account of wages, carriage etc. at Rs.26,99,959/- after the last payment for completed works.Since no satisfactory evidence was produced before the AO,the AO presumed the claim as bogus and accordingly madean addition of Rs. 26,99,959/- also. The AO had furthernoticed that assessee had shown liabilities to the tune of Rs.25,23,376/- payable on account of labour and carriageexpenses. The assessee had been asked to furnishevidence to establish the genuineness of the credits. Theassessee failed to furnish any evidence. The AO was of theview that in the absence of evidence, the addition of Rs.25,23,376/- was justified. He, however, did not make theaddition of the said amount as the claim in regard toexpenses to the tune of Rs. 26,29,959/- had already been disallowed. 8. On appeal, the CIT(A) has upheld the action of the AO to reject the books results. So, however, the additions made bythe AO have been found to be excessive. The CIT(A) haspointed out that if the additions made by the AO aresustained, the net profit rate of the assessee works out tomore than 37%. We agree with the view expressed by theCIT(A) that the net profit rate of more than 37% appears tobe exorbitant. So, however, one has to take into account thefact that assessee had been given sufficient opportunity toestablish the genuineness of the claims made in thestatement of accounts. The assessee, as already pointedout, has failed to furnish any evidence to establish thegenuineness of the expenses. The AO was, therefore,technically correct to make the disallowance. So, however,the results of the addition give a distorted result of profitswhich may not appear to be reasonable; nonetheless it iswell established principle of law that if a person who is todischarge the burden of proof fails to furnish the bestevidence in his favour, an adverse inference can be drawnagainst him. Since the assessee has not produced the booksof account nor has the assessee supported the explanation,it was permissible for the AO to take an adverse inference.As already pointed out, since the addition gives abnormalrate of profit, it would be just and reasonable to resort to afair estimation of income taking into account all the factorsincluding the factor that the assessee had failed to furnish the best evidence before the AO to support the claim. Wefind that on the basis of the addition made by the AO, the netrate of 37.62% is derived. The CIT(A) has applied a net rateof 10% on the net receipts i.e. the gross receipts minus thematerial supplied by the departments and further directed toallow depreciation. As per the information furnished beforeus, the claim of depreciation made by the assessee is of Rs.9,94,557/-. Once the claim is allowed to the assessee, thenet profit rate after depreciation works out to 4.6% only. Thisis even lower than the 8% rate applicable in the case of smallcontractors. As pointed out earlier, contractors havingturnover or more than Rs. 40 lakhs are required to maintainbooks of account so that if higher profit is earned, that doesnot escape assessment. We have to consider as to whetherin this case on the facts and in the circumstances of thiscase, the rate of 4.5% upheld by the CIT(A) is reasonable.9. It may be pertinent to mention that u/s 44AD, theLegislature in its wisdom has fixed the net rate of 8% ofdepreciation in respect of contracts where receipts do notexceed Rs. 40 lacs. In the case of contractors whose grossreceipts exceed Rs. 40 lacs, the net rate of 8% is notapplicable. In our view, the net rate of 8% has not beenmade mandatory in the case of contractors where thereceipts are more than Rs. 40 lacs, mainly for the reason thatthey have an obligation to maintain books of account and getthe same audited. Once the books of account are maintainedby the contractors, the AO has the liberty to make an assessment on the basis of such books of account anddetermine the rate of profit which may not necessarily be afixed rate of 8%. The rate of profit may vary, it may be higheror lower depending upon various factors. Once the books ofaccount of the assessee are found to be defective, the AOwould be at liberty to reject the books results and estimatethe profits. In the present case, though it is claimed thatbooks of account have been maintained by the assessee,the same have not been produced and that too, without anyexplanation much less a satisfactory explanation. Moreover,even without the production of books of account, theAssessing Officer has demonstrated that the book results donot appear to be correct and complete. In suchcircumstances, the books results are bound to be rejected.10. Again the issue that comes for consideration is, as towhat should be the reasonable rate of profit in the case ofcontractor whose gross receipts exceed Rs. 40 lacs. In thecase of Brij Bhushan Lal Parduman Kumar etc. v. CIT, 115ITR 524(SC), a rate of 10% was applied by the AO on grossreceipts without deducting the cost of material. The Tribunalhad upheld the application of net profit at 10% on the netreceipts i.e. the gross receipts reduced by the materialsupplied by the department. The Hon’ble Punjab andHaryana High Court had reversed the judgment of theTribunal. However, on appeal, the Hon’ble Supreme Courtreversed the decision of Punjab and Haryana High Court andupheld the order of the Tribunal. The result of the said decision of the Hon’ble Supreme is that a net rate of profit of10% was upheld on net receipts subject to no furtherdeduction. In the case of contractors having receipts lessthan Rs. 40 lacs, the Legislature has fixed a net rate of 8%.In this case, assessee has been guilty of non-production ofbooks of account and non-furnishing of necessary evidence.If one were to go by the defects detected by the AO, thensubstantial addition would be justified. So, however, whenone has to take into account the totality of the facts andcircumstances of this case into consideration, a reasonableestimate has got to be made keeping in view of theprovisions of Section 44AD, the decision of the Hon’bleSupreme Court in the case of Brij Lal Parduman Kumar etc.v. CIT (supra), including the fact that assessee has noexplanation for non-production of books of account and otherevidence before the AO cannot be utilized as an advantageby the taxpayers and a rate of profit applied in such casesless than 8% which is applicable in the case of contractorshaving the gross receipts of less than 40 lacs. In ourconsidered view, the contractors who are executing biggercontracts have bigger advantages in the form ofinfrastructural facilities and administrative assistance. Takingthe totality of facts and circumstances of this case intoconsideration, we are of the considered view that the net rateof profit of 10%, as in the case of Brij Bhushan Lal PardumanKumar etc. v. CIT (supra), would meet the ends of justice. Nofurther deduction on account of depreciation is justified as the said deduction shall be deemed to have been allowed inworking out the net profit chargeable to tax in this case. Asalready pointed out u/s 44AD for applicable of net profit rateof 8%, no further deduction is allowed on account ofdepreciation as the same is deemed to have been allowed inworking out the profit @ 8%. However, since the benefit ofSection 44AD is not available to the assessee, it cannot beput to higher advantage. We direct the AO to compute theincome of the assessee accordingly.” From the perusal of the above findings, it would be clear that the Tribunal had arrived at the conclusion that no further deduction on account of depreciation would be justified as the same had been takencare of while applying the net profit rate. The Tribunal had furtherobserved that in case separate deduction on account of depreciationwas allowed after application of net profit rate, the assessee would begetting additional allowance when the assessee was not entitled tobenefit in terms of Section 44AD. In view of the findings noticed above, the judgment of thisCourt in Chopra Bros’s case (supra) does not advance the case of theassessee. Accordingly, the substantial question of law is answeredagainst the assessee and the appeal is dismissed. (AJAY KUMAR MITTAL) JUDGE (ADARSH KUMAR GOEL) JUDGE