M/s M.K. Construction, Chandigarh v. ACIT, Chandigarh

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCHES B CHANDIGARH BEFORE SHRI N. BARATHVAJA SANKAR VICE PRESIDENT AN D MS SUSHMA CHOWLA JUDICIAL MEMBER ITA NO.11/CHD/2011 ASSESSMENT YEAR: 2007-08 M/S M.K. CONSTRUCTION VS. THE ACIT CIRCLE 4(1) CHANDIGARH CHANDIGARH PAN NO. AADFM6190Q (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI B.M.KHANNA RESPONDENT BY: SMT SARITA KUMARI ORDER PER SUSHMA CHOWLA JM THE APPEAL BY THE ASSESSEE IS AGAINST THE ORDER O F CIT(A) CHANDIGARH DATED 15.9.2010 RELATING TO ASSESSMENT Y EAR 2007-08 AGAINST THE ORDER PASSED UNDER SECTION 143(3) OF THE I.T. A CT. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL:- 1. THAT THE LD. CIT(A) HAS ERRED IN NOT DEDUCTING THE SALES TAX CHARGED FROM THE PARTIES FOR DEPOSIT IN GOVT. ACCOUNT. IT IS JUST LIKE THE SUPPLY OF MATERIAL BY THE GOVT. NO INCOME ACCRUES TO THE APPELLANT. PLEA OF THE APPELLANT HAS BEEN DISPOSED OFF WITH THE REMARKS IS NOT TENABLE. 2. THAT THE LD. CIT(A) HAS ERRED IN UPHOLDING THE REJECTION OF BOOKS OF ACCOUNT U/S 145(2) EVEN THOUGH THE REASONS ADVANCED BY THE ASSESSING OFFICER STOOD REBUTTED IN APPELLATE PROCEEDINGS. 3. THAT THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN IGNORING THE PAST HISTORY AND THEREBY APPLYING 2 NET PROF RATE @ 10% FOR ARRIVING AT THE NET INCOME. THIS IS ARBITRARY AND UNCALLED FOR. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS A ROAD CONTRACTOR AND FOR THE YEAR UNDER CONSIDERATION HAD DECLARED AN INCOME OF RS. 18 13 717/-. THE CASE OF THE ASSESS EE WAS PICKED UP FOR SCRUTINY AND ON EXAMINATION OF THE BOOKS OF ACC OUNT THE ASSESSING OFFICER FOUND CERTAIN DISCREPANCIES IN THE SAME W HICH ARE ENUMERATED AT PAGES 3 & 4 OF THE ASSESSMENT ORDER. THE DISCREPANCIES WERE ON ACCOUNT OF MAINTENANCE OF SUP PORTING VOUCHERS IN RESPECT OF EXPENSES CLAIMED UNDER VARIOUS HEADS. THE ASSESSING OFFICER CONFRONTED THE ASSESSEE AS TO WHY THE BOOKS OF ACCOUNT BE NOT REJECTED U/S 145(3) OF THE ACT AND AS PER THE RATIO LAID DOWN IN PARBHAT KUMAR CONTRACTOR VS. CIT (ITA NO. 293 OF 2008) RATE OF 12% BE NOT APPLIED. IN REPLY THE ASSESSEE FILED A N EXPLANATION IN RESPECT OF THE VARIOUS DISCREPANCIES POINTED OUT BY THE ASSESSING OFFICER AND ALSO POINTED OUT THAT THE FACTS AND CIR CUMSTANCES OF THE CASE IN PARBHAT KUMAR CONTRACTOR (SUPRA) ARE TOTA LLY DIFFERENT AND NOT APPLICABLE TO THE CASE OF THE ASSESSEE. THE OT HER PLEA OF THE ASSESSEE WAS THAT THE BOOKS OF ACCOUNT WERE ACCEPTE D IN THE PRECEDING YEAR. THE ASSESSING OFFICER REJECTING THE BOOKS O F ACCOUNT OF THE ASSESSEE INVOKED THE PROVISIONS OF SECTION 145(3) O F THE ACT AND APPLIED A RATE OF 12% TO THE GROSS WORK DONE LESS M ATERIAL SUPPLIED BY THE GOVERNMENT AND COMPUTED THE INCOME OF THE ASSES SEE. THE CIT(A) WAS OF THE OPINION THAT THE APPLIED RATE OF 12% WAS ON A HIGHER SIDE AND KEEPING IN VIEW THAT THE ASSESSEE W AS A ROAD CONTRACTOR RATE OF 10% ON GROSS WORK DONE BY THE A SSESSEE WAS DIRECTED TO BE APPLIED TO ESTIMATE THE INCOME FOR T HE YEAR. THE 3 SECOND PLEA OF THE ASSESSEE THAT BENEFIT OF SALES T AX AMOUNTING TO RS. 10.49 LACS SHOULD BE ALLOWED WAS FOUND TO BE NOT T ENABLE. 4. THE ASSESSEE IS IN APPEAL AGAINST THE NON DEDUCT ION OF THE SALES TAX CHARGED FROM THE PARTIES FROM THE GROSS RECEIPT S AND ALSO AGAINST THE REJECTION OF BOOKS OF ACCOUNT UNDER SECTION 145 (2) OF THE ACT. THE THIRD ISSUE RAISED BY THE ASSESSEE IS WITH REGA RD TO THE APPLICATION OF NET PROFIT RATE. 5. THE LD. AR FOR THE ASSESSEE POINTED OUT THAT THE SALES TAX WAS NOT TO BE INCLUDED IN GROSS TURN OVER AS IT IS A ST ATE LEVY AND AFTER COLLECTION FROM THE PARTIES THE SAME IS TO BE PAID TO THE GOVERNMENT. THE LD. AR FAIRLY CONCEDED THAT THE OBJECTION WAS O NLY TO THE APPLICATION OF THE RATE AND IN THE CASE OF A ROAD C ONTRACTOR THE RATE APPLIED BY CIT(A) AT 10% WAS ON THE HIGHER SIDE. IT WAS POINTED OUT THAT EVEN UNDER THE PROVISIONS OF SECTION 44AD OF T HE INCOME TAX ACT RATE OF 8% IS PRESCRIBED. THE LD. DR PLACED RELIANCE ON THE ORDER OF THE CIT(A) AND POINTED OUT THAT THE CIT(A ) WHILE ESTIMATING THE INCOME HAD CONSIDERED THAT IN CERTAIN CASES RA TE OF 8% WAS UPHELD BY THE HON'BLE PUNJAB & HARYANA HIGH COURT. HOWEVER IN THE PRESENT CASE THE RATE OF 10% APPLIED TO DETERM INE THE INCOME WAS A FAIR RATE. 6. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORDS. THE FIRST ISSUE RAISED BEFORE US IS WITH REGARD TO THE SALES TAX WHETHER THE SAME IS TO BE INCLUDED AS PART OF THE G ROSS RECEIPTS. THE CLAIM OF THE ASSESSEE IS THAT IT HAD CHARGED SA LES TAX FROM THE PAYER WHICH IN TURN HAD TO BE DEPOSITED IN THE GOVE RNMENT ACCOUNT. 4 THE TURN OVER FOR THE YEAR UNDER CONSIDERATION WAS TO BE ADOPTED AFTER DEBITING THE COST OF MATERIAL SUPPLIED BY THE GOVER NMENT DEPARTMENT AND THE SALES TAX COLLECTED FROM THE PARTIES. THE ASSESSING OFFICER WHILE COMPUTING THE TURN OVER OF THE ASSESSEE FOR T HE YEAR UNDER CONSIDERATION HAD DEDUCTED THE COST OF MATERIAL SUP PLIED BY THE GOVERNMENT / DEPARTMENT AND ON THE NET WORK DONE HA D APPLIED THE RATE FOR DETERMINING THE INCOME FOR THE YEAR. WE F IND MERIT IN THE CLAIM OF THE ASSESSEE THAT THE SALES TAX CHARGED FR OM THE PARTIES WHICH IN TURN IS TO BE PAID TO THE GOVERNMENT ON ACCOUNT OF STATE LEVIES CANNOT FORM PART OF THE TURN OVER OF THE ASSESSEE A S NO ELEMENT OF PROFIT IS EMBEDDED IN THE SAID COLLECTIONS. ACCORD INGLY WE DIRECT THE ASSESSING OFFICER TO REDUCE THE AMOUNT OF SALES TAX COLLECTED FROM THE PARTIES BY THE ASSESSEE ON VERIFICATION OF THE NEC ESSARY EVIDENCE IN THIS REGARD. THE BALANCE TURN OVER SHALL BE THE B ASIS FOR THE ADOPTION OF THE NET PROFIT RATE TO WORK OUT THE INCOME OF TH E ASSESSEE. THE GROUND OF APPEAL NO.1 IS THUS ALLOWED FOR STATISTIC AL PURPOSES. 7. IN VIEW OF THE ADMISSION OF THE LD. AR FOR THE A SSESSEE WITH REGARD TO THE REJECTION OF BOOKS OF ACCOUNT UNDER S ECTION 145(2) OF THE ACT AND APPLICATION OF NET PROFIT RATE THE GRO UND NO.2 RAISED BY THE ASSESSEE IS DISMISSED. 8. THE ONLY ISSUE REMAINING TO BE ADDRESSED IS NET PROFIT RATE APPLICABLE. THE ASSESSING OFFICER HAD APPLIED A NE T PROFIT RATE OF 12% TO DETERMINE THE INCOME OF THE ASSESSEE WHICH WAS REDUCED TO 10% BY THE CIT(A). WE FIND THAT A SIMILAR CASE OF ROAD CONTRACTOR AROSE BEFORE THE CHANDIGARH BENCH OF THE TRIBUNAL I N GURINDER PAL SINGH VS. ACIT (ITA NOS. 818 & 819/CHD/2010 ORDER D ATED 5 18.8.2010) WHEREIN A NET PROFIT RATE OF 7% WAS APP LIED HOLDING AS UNDER;- 7. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORDS. THE ASSESSEE IS CARRYING ON THE BUSINESS OF ROAD CONTRACTOR. DUE TO NON PRODUCTION OF BOOKS OF ACC OUNT BY THE ASSESSEE THE SAME WERE REJECTED BY THE ASSESSING O FFICER AND A NET PROFIT RATE OF 7% WAS APPLIED TO DETERMINE TH E INCOME FOR THE YEAR. THE CIT(A) ENHANCED THE SAID RATE TO 12% TO DETERMINE THE INCOME IN THE HANDS OF THE ASSESSEE. THE ASSESSEE IS IN APPEAL AGAINST THE RATE TO BE APPLIE D FOR WORKING OUT THE INCOME FOR THE YEAR. THE ASSESSEE CLAIMS THAT THE BUSINESS WAS BEING CARRIED OUT BY THE FATHER OF THE ASSESSEE IN SOLE PROPRIETORSHIP IN THE EARLIER YEAR S AND ON HIS DEATH THE SAME BUSINESS HAS BEEN TAKEN OVER BY THE ASSESSEE. THE ASSESSEE IS CARRYING ON THE BUSINESS OF ROAD CO NTRACTOR AND CLAIMS TO BE DEALING WITH THE SAME GOVERNMENT AGENCIES AS HIS FATHER. WE FIND THAT IN THE CASE OF THE FA THER OF THE ASSESSEE A NET PROFIT RATE OF 8% ON NET RECEIPTS F ROM CONTRACT I.E. AFTER DEDUCTION THE COST OF MATERIAL SUPPLIED BY THE DEPARTMENT INCLUSIVE OF DEPRECIATION WAS APPLIED BY THE TRIBUNAL IN ITA NO.241/CHANDI/2000 RELATING TO ASSE SSMENT YEAR 1996-97 BY ORDER DATED 23.4.2004. SIMILAR RAT E WAS APPLIED IN ASSESSMENT YEAR 1998-99 BY THE TRIBUNAL IN ITA NO. 253/CHANDI/2002. THEREAFTER NET PROFIT RATE OF 7% WAS APPLIED BY THE ASSESSING OFFICER IN ASSESSMENT YEAR S 2003-04 AND 2004-05. NO OTHER DEDUCTION ON ACCOUNT OF ANY OTHER EXPENDITURE WAS ALLOWED TO THE ASSESSEE EXCEPT THE COST OF MATERIAL SUPPLIED BY THE GOVERNMENT AGENCIES. 8. THE ISSUE RAISED IN THE PRESENT GROUNDS OF APPEA L IS AGAINST THE APPLICATION OF RATE TO BE APPLIED TO TH E NET CONTRACT RECEIPTS FOR DETERMINING THE INCOME OF THE ASSESSEE. THE ASSESSING OFFICER APPLIED A NET PROFIT RATE OF 7% WHICH WAS ENHANCED TO 12% BY THE CIT(A) FOLLOWING THE RAT IO LAID DOWN BY THE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF M/S PARBHAT KUMAR IN ITA NO.293 OF 2008 (DA TE OF DECISION 14.11.2008). THE CIT(A) ALSO NOTED THAT T HE HON'BLE PUNJAB & HARYANA HIGH COURT IN M/S SHIVAM CONSTRUCT ION (ITA NO. 167 OF 2007) DATED 7.5.2007 HAD UPHELD APP LICATION OF NET PROFIT RATE OF 10%. THE LEARNED AR POINTED OUT THAT IN THE FACTS OF THE CASE BEFORE THE HON'BLE PUNJAB & H ARYANA HIGH COURT THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF CIVIL CONSTRUCTION WHEREAS THE ASSESSEE IS ENGAGED IN THE BUSINESS OF ROAD CONSTRUCTION AND THE PROFITS EARNED IN THE TWO LINES OF BUSINESS ARE DIFFERENT. WE ARE NOT IN CONFORMITY WITH THE ORDER OF CIT(A) THAT IN EACH CASE OF CIVIL CONSTRUC TION A FLAT RATE OF 12% IS TO BE APPLIED. APPLICATION OF DIFFE RENT NET PROFIT RATES TO COMPUTE INCOME HAVE BEEN UPHELD B Y THE HON'BLE PUNJAB & HARYANA HIGH COURT AS IN M/S PRAB HAT KUMAR (SUPRA) RATE OF 12% HAS BEEN UPHELD WHEREAS THE JURISDICTIONAL HIGH COURT IN M/S SHIVAM CONSTRUCTIO N (SUPRA) 6 HAD UPHELD THE APPLICATION OF NET PROFIT RATE OF 10 %. WE FURTHER FIND THAT THE HON'BLE PUNJAB & HARYANA HIGH COURT IN RAJA RAM CONTRACTORS VS. CIT IN ITA NO. 689 OF 2009 DATE OF DECISION 7.4.2010 HAS UPHELD APPLICATION O F NET PROFIT RATE OF 10% AS NET PROFIT RATE. IT HAS BEEN FURTHER LAID DOWN BY THE HON'BLE JURISDICTIONAL HIGH COURT THAT WHERE THE BOOKS OF ACCOUNT HAVE BEEN REJECTED THE ESTIMATION OF IN COME BY APPLYING OF FLAT RATE INHERENTLY INVOLVES AN ELEMEN T OF SUBJECTIVITY. SIMILAR ISSUE OF ROAD CONTRACTOR AROS E BEFORE THE TRIBUNAL IN KUMAR BUILDERS VS. ACIT LUDHIANA (ITA NO.416/CHD/2010) WHEREIN ALSO THE ISSUE RAISED WAS THE APPLICATION OF NET PROFIT RATE. THE ASSESSING OFF ICER AND CIT(A) HAD APPLIED NET PROFIT RATE OF 12% TO THE GR OSS RECEIPTS TO DETERMINE THE INCOME FOR THE YEAR FOLLOWING THE RATIO LAID DOWN BY THE HON'BLE PUNJAB & HARYANA HIGH COURT IN M/S PRABHAT KUMAR (SUPRA). THE TRIBUNAL IN THE CASE OF KUMAR BUILDERS (ITA NO.416/CHD/2010) VIDE ORDER DATED 30. 6.2010 HAD DIRECTED THE ASSESSING OFFICER TO RECOMPUTE TH E INCOME AFTER APPLYING NET PROFIT RATE OF 10%. 9. THE NET PROFIT RATE TO THE APPLIED FOR COMPUTING THE INCOME OF THE ASSESSEE IS THUS DEPENDENT ON THE FAC TS OF EACH CASE. WE FIND THAT THE TRIBUNAL IN THE CASE OF THE FATHER OF THE ASSESSEE IN EARLIER YEARS UP TO ASSESSMENT YEAR 199 8-99 HAD DIRECTED APPLICATION OF RATE OF 8% ON THE GROSS REC EIPTS LESS THE VALUE OF MATERIAL SUPPLIED BY THE GOVERNMENT AG ENCIES. AS PER THE LEARNED COUNSEL FOR THE ASSESSEE NO DEDUCT ION WAS ALLOWED ON ACCOUNT OF THE BITUMEN PURCHASED AND VAL UE OF WORK CONTRACT WHICH WAS SUB CONTRACTED. THE ASSESS ING OFFICER IN ASSESSMENT YEARS 2003-04 & 2004-05 HAD C OMPLETED THE ASSESSMENT U/S 143(3) OF THE ACT AND APPLIED TH E RATE OF 7% TO THE RECEIPTS TO DETERMINE THE INCOME OF THE R ESPECTIVE YEARS. THE ASSESSING OFFICER IN ASSESSMENT YEARS 2005-06 AND 2006-07 HAD APPLIED THE NET PROFIT RATE OF 7% WHICH WAS ENHANCED TO 12% BY THE CIT(A). THE ASSESSEE HAS F ILED APPEAL BEFORE US RELATING TO ASSESSMENT YEARS 2005- 06 AND 2006-07 WHEREIN THE CIT(A) HAD ENHANCED THE RATE O F NET PROFIT AT 12% ON THE RECEIPTS LESS THE VALUE OF MAT ERIAL SUPPLIED BY THE DEPARTMENT. WE FIND NO MERIT IN TH E ORDER OF CIT(A) IN APPLYING NET PROFIT RATIO OF 12% WITHOUT BRINING ON RECORD ANY EVIDENCE TO PROVE THAT ASSESSEE HAS EARN ED HIGHER PROFITS THAN ADOPTED BY THE ASSESSING OFFICER. SIM ILAR NET PROFIT RATES HAD BEEN APPLIED IN EARLIER YEARS TO D ETERMINE THE INCOME OF THE ASSESSEE IN ASSESSMENTS COMPLETED U/S 143(3) OF THE ACT RELATING TO ASSESSMENT YEARS 2003-04 & 2004 -05. IN THE ABSENCE OF ANY CONTRARY FINDINGS AND IN THE ENT IRETY OF THE FACTS AND CIRCUMSTANCES OF THE CASE WE SET ASIDE T HE ORDER OF CIT(A) AND UPHOLD THE ORDER OF ASSESSING OFFICER IN DETERMINING THE INCOME FOR THE YEAR UNDER APPEAL BY APPLYING THE NET PROFIT RATE OF 7% TO THE TOTAL CONTRACT RE CEIPTS AS REDUCED BY THE AMOUNT OF MATERIAL SUPPLIED BY THE D EPARTMENT WHILE DETERMINING THE INCOME FOR THE YEARS UNDER AP PEAL WE UPHOLD THE ORDER OF THE CIT(A) TO THE EXTENT THAT N O FURTHER DEDUCTION ON ACCOUNT OF DEPRECIATION INTEREST AND OTHER 7 EXPENSES INCLUDING THE PAYMENTS MADE TO THE SUB CON TRACTOR FROM GROSS RECEIPTS IS TO BE ALLOWED AS NO SUCH DE DUCTION WAS ALLOWED BY THE TRIBUNAL IN THE EARLIER YEARS WHILE ESTIMATING THE INCOME IN THE HANDS OF THE ASSESSEE. 10. ACCORDINGLY WE UPHOLD THE ORDER OF ASSESSING O FFICER IN APPLYING NET PROFIT RATE OF 7% TO THE RECEIPTS LESS COST OF MATERIAL SUPPLIED BY THE GOVERNMENT AND BITUMEN PUR CHASED FROM GOVERNMENT AGENCIES. AND ALLOW THE GROUND NOS. 2 AND 3 RAISED BY THE ASSESSEE IN ASSESSMENT YEARS 2005-06 AND 2006- 07 AND GROUND NO. 4 IN ASSESSMENT YEAR 2005-06 AND GROUND NOS. 4 & 5 IN ASSESSMENT YEAR 2006-07 ARE DISMISSED . 9. THE NET PROFIT RATE OF 7% WAS APPLIED IN VIEW OF THE ORDER OF THE ASSESSING OFFICER IN THE CASE OF GURINDER PAL S INGH VS. ACIT (ITA NOS. 818 & 819/CHD/2010 ORDER DATED 18.8.2010) . IN THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE WE ARE OF TH E VIEW THAT A NET PROFIT RATE OF 8% MERITS TO BE APPLIED TO DETERMINE THE INCOME OF THE ASSESSEE IN THE INSTANT YEAR ASSESSEE BEING A ROAD CONTRACTOR. THE GROUND NO.3 RAISED BY THE ASSESSEE IS THUS ALLOWED. 10. IN THE RESULT APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 24 TH DAY OF FEBRUARY 2010 SD/- SD/- (N.BARATHVAJA SANKAR) (SUSHMA CHOWLA) VICE PRESIDENT JUDICIAL MEMBER DATED : 24 TH FEBRUARY 2010 RKK COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR 8