The Commissioner Of Income Tax, Patiala v. M/S Ram Kumar, Govt. Contractor

I. T. A. No. 30 of 2016 (O&M) IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. Case No. : I. T. A. No. 30 of 2016 (O&M) Date of Decision : July 14, 2016 The Commissioner of Income Tax, Patiala ....Appellant vs. M/s Ram Kumar, Govt. Contractor ....Respondent CORAM :HON'BLE MR. JUSTICE S. J. VAZIFDAR, ACTING CHIEF JUSTICE.HON'BLE MR. JUSTICE DEEPAK SIBAL. * * * To be referred to Reporters or not ?Whether the judgment should be reported in the digest ? * * * Present :Mr. Zora Singh Klar, Senior Standing Counsel for the appellant – Revenue. * * * DEEPAK SIBAL, J. : C. M. No. 1817-C-II of 2016 : Through this application, condonation of delay of 183 days inre-filing the present appeal is sought for. Allowed as prayed for. CM stands disposed of. Main Appeal : An order dated 15.12.2015, passed by the Income TaxAppellate Tribunal, Division Bench, Chandigarh (hereinafter referred to as in Court today. The same is ordered to be taken on record asMark-A. The present is an appeal by the Revenue under Section 260-Aof the Income Tax Act, 1961 (hereinafter referred to as – the Act)impugning therein the order passed by the Tribunal dated 15.07.2014(Annexure A-3). At the time of hearing of the matter, the afore-referredorder dated 15.12.2015 (Mark-A) was produced and also assailed. The present appeal pertains to the assessment year 2010-11 andseeks to raise the following substantial questions of law :- “1.Whether in the facts andcircumstances of the case, the ITAT was right inlaw in directing the AO to apply the gross profitrate of 7% instead of 10% adopted by the AO,without appreciating the numerous andsubstantial deficiencies in the accounts pointed bythe AO and that the rate of net profit of 10% washeld to be reasonable in the case of CIT vs. M/sShivam Construction Co. in ITA No. 167 of 2007dated 07.05.2007 subject to allowing of interestand salary to the partners and disallowing thedepreciation ? 2.Whether in the facts andcircumstances of the case, the ITAT was right inlaw in allowing the depreciation claimed whereasthe Hon'ble Punjab and Haryana High Court,Chandigarh has held in the case of Surinder PalNayyar vs. CIT, Ludhiana reported in 177Taxmann 207 that the profit having been arrivedat on the basis of gross receipts by taking intoconsideration all allowable expenses, nodeduction on account of depreciation can be separately allowed. ?” The factual matrix of the matter, which, in brevity needs to benoticed is that the respondent-assessee is a Civil Contractor. After he hadfiled his return for the assessment year in question, his case was selected forscrutiny and in the proceedings which ensued, since according to theAssessing Officer, proper books of accounts were not produced by him,while rejecting his books of accounts, the Assessing Officer ordered that theassessee be assessed to tax after application of Net Profit Rate of 10%. Nodeduction on account of depreciation was allowed. The assessment order was taken up by the assessee in appealbefore the Commissioner of Income Tax (Appeals), Patiala (hereinafterreferred to as – the Commissioner) who ordered substitution of the NetProfit Rate @ 6.5% in place of 10%. The other relief granted to theassessee was with regard to the claim of depreciation. The Revenue challenged the order of the Commissioner bypreferring an appeal against the same before the Tribunal, in which NetProfit Rate was ordered to be applied @ 7% instead of 6.5%, as applied bythe Commissioner. The issue with regard to the claim of depreciation wasnot opined upon and for a decision on this issue, an application was filed bythe Revenue, which, through order dated 15.12.2015 (Mark-A), wasrejected. It is in the background of the afore-referred factual matrix that thepresent appeal has been filed by the Revenue seeking to raise therein thesubstantial questions of law as reproduced earlier. The Revenue challenged the order of the Commissioner bypreferring an appeal against the same before the Tribunal, in which NetProfit Rate was ordered to be applied @ 7% instead of 6.5%, as applied bythe Commissioner. The issue with regard to the claim of depreciation wasnot opined upon and for a decision on this issue, an application was filed bythe Revenue, which, through order dated 15.12.2015 (Mark-A), wasrejected. It is in the background of the afore-referred factual matrix that thepresent appeal has been filed by the Revenue seeking to raise therein thesubstantial questions of law as reproduced earlier. We have heard learned counsel for the appellant and with his able assistance, have also gone through the record of the case. Two issues were pressed before us. With regard to the Tribunalordering application of Net Profit Rate @ 7%, learned counsel for theappellant submitted that the same should be 10%, as assessed by theAssessing Officer and in any case, at least 8%, as per Section 44AD (1) ofthe Act, as it existed at the relevant time. On the issue of the assessee having been allowed to claimdepreciation, relying upon the provisions of Section 44AD (2) of the Act(as it existed at the relevant time), it was submitted by the learned counselfor the appellant that there was a complete bar to the same. Our attentionwas drawn to Section 44AD (2) of the Act, wherein it was provided that anydeduction allowable under the provisions of Sections 30 to 38, whichinclude the grant of depreciation under Section 32 of the Act, would bedeemed to have been given full effect to while applying the Net Profit Ratein accordance with Section 44AD(1) of the Act and thus, it was submittedthat once Net Profit Rate, on rejection of the books of accounts of therespondent-assessee had been ordered to be applied, no depreciation couldseparately have been allowed. Before proceeding further with the matter, we deem itappropriate to refer to the provisions of Section 44AD (1) and (2) of theAct, as it existed at the time of the assessment year in question and the sameis as under :- “44AD. Special provision for computing profits and gains of business of civil construction, etc. - (1)Notwithstanding anything to the contrarycontained in sections 28 to 43C, in the case of anassessee engaged in the business of civilconstruction or supply of labour for civilconstruction, a sum equal to eight per cent of thegross receipts paid or payable to the assessee inthe previous year on account of such business or,as the case may be, a sum higher than theaforesaid sum as declared by the assessee in hisreturn of income, shall be deemed to be the profitsand gains of such business chargeable to taxunder the head “Profits and gains of business orprofession” ; Provided that nothing contained in this sub-section shall apply in case the aforesaid grossreceipts paid or payable exceed an amount offorty lakh rupees. (2)Any deduction allowable under theprovisions of sections 30 to 38 shall, for thepurposes of sub-section (1), be deemed to havebeen already given full effect to and no furtherdeduction under those sections shall be allowed :Provided that where the assessee is a firm, thesalary and interest paid to its partners shall be I. T. A. No. 30 of 2016 (O&M) deducted from the income computed under sub-section (1) subject to the conditions and limitsspecified in clause (b) of section 40.” Circular No. 737 dated 23.02.1996, issued by the Central Boardof Direct Taxes, which culled out the objects behind insertion of Section44AD, is also extracted as under :- (2)Any deduction allowable under theprovisions of sections 30 to 38 shall, for thepurposes of sub-section (1), be deemed to havebeen already given full effect to and no furtherdeduction under those sections shall be allowed :Provided that where the assessee is a firm, thesalary and interest paid to its partners shall be I. T. A. No. 30 of 2016 (O&M) deducted from the income computed under sub-section (1) subject to the conditions and limitsspecified in clause (b) of section 40.” Circular No. 737 dated 23.02.1996, issued by the Central Boardof Direct Taxes, which culled out the objects behind insertion of Section44AD, is also extracted as under :- “The Estimated Income Method of assessment forcertain categories of businesses is prevalent inseveral countries. The Tax Reforms Committeehas also recommended gradual introduction of theEstimated Income Method in certain areas tofacilitate better tax compliance. Accordingly, anew Section 44 AD has been inserted to theIncome-tax with a view to providing for a methodof estimating income from the business of civilconstruction or supply or labour for civilconstruction work. The new section is applicableto all assessees whose gross receipts from theabove mentioned business do not exceed Rs.40lakhs. Gross receipts are the amount receivedfrom the clients for the contract and will notinclude the value of material supplied by theclient. The income from the above mentionedbusiness will be estimated at 8 per cent of the gross receipts paid or payable to an assessee. A taxpayer can voluntarily declare a higher incomein his return.” From a harmonious reading of the afore-quoted provision of theAct and the circular, it is abundantly clear that the provisions of Section 44AD of the Act were not applicable upon an assessee, whose gross receiptswere exceeding Rs. 40 lacs. On a query posed by us, it was admitted by the learned counselfor the appellant-Revenue that the gross receipts in the case of therespondent-assessee exceeded the amount of Rs. 40 lacs. That being so, inview of the afore-quoted proviso to Section 44AD (1), read with CircularNo. 737 dated 23.02.1996 of the Central Board of Direct Taxes, as extractedabove, we unhesitantly hold that Section 44AD would not apply in the caseof the respondent assessee. Resultantly, the challenge to the claim ofdepreciation having been allowed by the Tribunal must fail. So far as the challenge by the Revenue to the application of NetProfit Rate @ 7% is concerned, the same has been ordered to be applied bythe Tribunal after considering the entire facts and circumstances of the casebefore it, which we do not find as arbitrary or perverse and resultantly,choose not to interfere with the same. The argument of the learned counselfor the appellant to apply Net Profit Rate of 8% as provided under Section44AD (1) of the Act is also required to be rejected as in view of the provisoto Section 44AD (1) of the Act, since the gross receipts paid or payable inthe case of the assessee are over Rs. 40 lacs, the provisions of Section 44ADMONIKA2016.07.21 11:29I attest to the accuracy andauthenticity of this document (1) of the Act, as reproduced above, would not be attracted in the case of therespondent-assessee. The afore-referred view of ours on both the issues finds supportfrom a Division Bench judgment of this Court inCommissioner of Income-Tax, Patiala vs. Harbhajan Singh and Co. [2015] 60 taxmann.com 84(Punjab and Haryana), wherein it has been held as under :- (1) of the Act, as reproduced above, would not be attracted in the case of therespondent-assessee. The afore-referred view of ours on both the issues finds supportfrom a Division Bench judgment of this Court inCommissioner of Income-Tax, Patiala vs. Harbhajan Singh and Co. [2015] 60 taxmann.com 84(Punjab and Haryana), wherein it has been held as under :- “6. Section 44 AD (2) of the Income TaxAct, if read in isolation of a circular issued by theCentral Board of Direct Taxes would, require usto answer this question, in favour of the revenue.A perusal of the circular, however reveals that itis clarified, that Section 44 AD (2) of the Actapplies to assessees whose gross receipts do notexceed `40 lacs. The assessee's gross receipts, as,referred to in the assessment order, admittedlyexceeded `10 crores. A relevant extract from thecircular issued by the Central Board of DirectTaxes is as follows :- “The Estimated Income Method ofassessment for certain categories ofbusinesses is prevalent in severalcountries. The Tax ReformsCommittee has also recommendedgradual introduction of theEstimated Income Method in certainareas to facilitate better taxassessment for certain categories ofbusinesses is prevalent in severalcountries. The Tax ReformsCommittee has also recommendedgradual introduction of theEstimated Income Method in certainareas to facilitate better tax compliance. Accordingly, a newSection 44 AD has been inserted tothe Income-tax with a view toproviding for a method of estimatingincome from the business of civilconstruction or supply or labour forcivil construction work. The newsection is applicable to all assesseeswhose gross receipts from the abovementioned business do not exceedRs.40 lakhs. Gross receipts are theamount received from the clients forthe contract and will not include thevalue of material supplied by theclient. The income from the abovementioned business will be estimatedat 8 per cent of the gross receiptspaid or payable to an assessee. Ataxpayer can voluntarily declare ahigher income in his return.” 7.The circular having clarified that itapplies to an assessee whose gross receipts do notexceed `40 lacs,we have no hesitation in holdingthat the ITAT has rightly allowed depreciation tothe assessee. 8.As regards the first question namelyreduction of the net profit rate from 10% to 6% suffice is to state that Tribunal has determined thenet profit rate after considering the past net profit rate applied to the assessee and that there is noperceptible change, in the assessment year underconsideration. The findings of fact being devoid ofan arbitrary exercise of discretion or anyperversity in the reasoning does not give rise to asubstantial question of law. Consequently thequestions of laws are answered against therevenue and the appeal is dismissed.[Emphasis supplied]” In support of his submissions, learned counsel for the appellantpressed into service the following two Division Bench judgments of thisCourt :- 1.Commissioner of Income Tax vs. Chopra Bros. India (P)Ltd.- [2001] 119 Taxman 866 (Punjab and Haryana)and 2.Surinder Pal Nayyar vs. Commissioner of Income-tax,Ludhiana– [2009] 177 Taxman 207 (Punjab and Haryana). We have gone through both the afore-referred judgments andfind that neither of the judgments would apply to the facts of the case inhand. So far as the case ofChopra Bros.(supra) is concerned, in thatcase, the Division Bench held that the provisions of Section 44 AD wouldapply w.e.f. 01.04.1994 as this Section had been made effective from thatdate. The issue with regard to the applicability of Section 44 AD of the Act,in a case where the gross receipts of the assessee exceed Rs. 40 lacs, was neither considered nor decided. The reliance of the counsel for the appellant on the judgment of 2.Surinder Pal Nayyar vs. Commissioner of Income-tax,Ludhiana– [2009] 177 Taxman 207 (Punjab and Haryana). We have gone through both the afore-referred judgments andfind that neither of the judgments would apply to the facts of the case inhand. So far as the case ofChopra Bros.(supra) is concerned, in thatcase, the Division Bench held that the provisions of Section 44 AD wouldapply w.e.f. 01.04.1994 as this Section had been made effective from thatdate. The issue with regard to the applicability of Section 44 AD of the Act,in a case where the gross receipts of the assessee exceed Rs. 40 lacs, was neither considered nor decided. The reliance of the counsel for the appellant on the judgment of this Court inSurinder Pal Nayyar'scase (supra) is equally misplaced as aperusal of the judgment shows that in that case also, the issue with regard toapplicability of Section 44 AD of the Act upon an assessee, having grossreceipts more than Rs. 40 lacs, was neither considered nor decided. In view of the above, finding no merit in the present appeal, thesame is hereby ordered to be dismissed. No costs. ( S. J. VAZIFDAR ) ACTING CHIEF JUSTICE July 14, 2016 monika ( DEEPAK SIBAL )JUDGE