Income Tax Appeal No. 404 of 2006 1 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. --- Income Tax Appeal No. 404 of 2006 Date of decision: 2.12.2010 M/s. J.J. Associates through its Partner Janki Gupta --- Appellant Versus Commissioner of Income Tax Patiala. --- Respondent CORAM: HON’BLE MR. JUSTICE ADARSH KUMAR GOEL HON’BLE MR. JUSTICE AJAY KUMAR MITTAL --- Present: Mr. Pankaj Jain, Advocate for the appellant. Ms. Tejinder K. Joshi, Standing Counsel for 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 order dated 22.9.2005, passed by the Income Tax Appellate Tribunal Chandigarh 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 following substantial question of law: “Whether under the facts and circumstances of the case, the Tribunal is justified in withdrawing the statutory claim under Section 32 while computing the chargeability of the income Income Tax Appeal No. 404 of 2006 2 under Section 29 especially when there was no dispute arising out of assessment order and there was no ground of appeal of the respondent?” The facts, in brief, necessary for adjudication as narrated in the appeal, are that the appellant-assessee is a partnership firm engaged in the business of construction of roads and executing various alike contracts. The assessee filed its return of income on 31.10.2000 at an amount of Rs. 2,30,820/-. The return was processed under Section 143(1) of the Act and a refund in the sum of Rs. 43,740/- was issued to the assessee. The case of the assessee was chosen for scrutiny and ultimately, the assessing officer made addition of an amount of Rs. 39,74,129/- on account of purchases made and of another amount of Rs.26,99,959/- on account of expenses which, according to the Revenue, were not made wholly and exclusively for the purpose of business. The assessing officer, thus, vide order dated 28.3.2003, completed the assessment at an amount of Rs. 69,04,910/- creating a demand of Rs. 25,69,525/- and charging interest under Section 234B of the Act in the sum of Rs. 9,79,302/- whereby the interest under Section 244A, of an amount of Rs. 49,526/-, as allowed on the refund was withdrawn. The assessee filed appeal before the Commissioner of Income Tax (Appeals) [for short “the CIT(A)”]. The appeal was partly allowed vide order dated 19.8.2003. The CIT(A) though upheld the action of the assessing officer to make assessment under Section 144, but did not approve the additions made by him of Rs. 39,74,129/- and Rs. 26,99,959/-. Income Tax Appeal No. 404 of 2006 3 Feeling not satisfied with the order of the CIT(A), the Revenue preferred appeal before the Tribunal. The Tribunal partly allowed the appeal, vide a detailed order dated 22.9.2005. The reference to the findings of the Tribunal will be made at the appropriate place while dealing with the submissions made by learned counsel for both the parties. Suffice it to notice that the Tribunal directed the assessing officer to compute the income of the assessee afresh and frame assessment in the light of the observations made in its order. We have heard learned counsel for the parties and perused the record. Learned counsel for the assessee submitted that once the net profit rate was applied, the assessee was entitled to deduction on account of depreciation under Section 32 while computing the chargeability of income from the business under Section 29, in view of the decision of this Court in Commissioner of Income Tax v. Chopra Bros. India (P) Ltd. (2001) 252 ITR 412. Controverting the aforesaid submission, learned counsel for the Revenue supported the order passed by the Tribunal. He argued that net profit rate of 8% was applied by considering that the claim for depreciation had already been taken care of while applying the said net profit rate. We do not find any merit in the submission of the learned counsel for the assessee. It would be advantageous to refer to the findings recorded by the Tribunal in paras 7 to 10 which are as under: “We have given our careful consideration to the rival contentions. As already pointed out, it is a case of a Income Tax Appeal No. 404 of 2006 4 contractor having gross receipts of more than Rs. 40 lacs. In the case of contractors deriving income whose gross receipts do not exceed Rs. 40 lacs, the provisions of section 44AD are applicable and income of the contractor in such cases is determined by application of net profit rate of 8% of the gross receipts paid or payable to the assessee. The depreciation is deemed to have been allowed while calculating net profit @ 8%. There is an option to such contractors to produce the books of account to support the declaration of profits at lower rate than the net rate of 8% applicable u/s 44AD. In the case of contractors whose gross receipts exceed Rs. 40 lacs, there is an obligation u/s 44AA to maintain such books of account and other documents as may enable the AO to compute his total income in accordance with the provisions of the Act, meaning thereby that the option of paying tax on 8% net profit without maintaining accounts is not permissible to the contractors having receipts of more than Rs. 40 lacs. In this case, assessee has claimed to have maintained books of account and audit report has also been furnished along with the return. Strangely, the assessee failed to produce the books of account before the Assessing Officer at any stage of the proceedings. Even before the CIT(A), the books of account have not been produced. The AO on the basis of the documents furnished by the assessee along with the return had detected certain anomalies in the statement of accounts. As pointed out earlier, the AO had found that assessee had received the last payment for the completion Income Tax Appeal No. 404 of 2006 5 of works on 7.1.2000. It was further found that assessee had debited expenses in regard to purchases made after 7.1.2000 to the tune of Rs. 39,74,129/-. The assessee had been asked to explain the circumstances under which the purchases had been debited in the accounts after the receipt of the last payment from the departments for execution of the works. The assessee claimed that some material had been supplied prior to 7.1.2000 and bill submitted later in some cases the material was required to repair the earlier completed works. So, however, no evidence was produced before the AO or even before the CIT(A) to support the claim. The AO accordingly made addition of Rs. 39,74,129/-. The AO had further found that the assessee had debited expenses 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 made an addition of Rs. 26,99,959/- also. The AO had further noticed that assessee had shown liabilities to the tune of Rs. 25,23,376/- payable on account of labour and carriage expenses. The assessee had been asked to furnish evidence to establish the genuineness of the credits. The assessee failed to furnish any evidence. The AO was of the view that in the absence of evidence, the addition of Rs. 25,23,376/- was justified. He, however, did not make the addition of the said amount as the claim in regard to expenses to the tune of Rs. 26,29,959/- had already been Income Tax Appeal No. 404 of 2006 6 disallowed. 8. On appeal, the CIT(A) has upheld the action of the AO to reject the books results. So, however, the additions made by the AO have been found to be excessive. The CIT(A) has pointed out that if the additions made by the AO are sustained, the net profit rate of the assessee works out to more than 37%. We agree with the view expressed by the CIT(A) that the net profit rate of more than 37% appears to be exorbitant. So, however, one has to take into account the fact that assessee had been given sufficient opportunity to establish the genuineness of the claims made in the statement of accounts. The assessee, as already pointed out, has failed to furnish any evidence to establish the genuineness 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 profits which may not appear to be reasonable; nonetheless it is well established principle of law that if a person who is to discharge the burden of proof fails to furnish the best evidence in his favour, an adverse inference can be drawn against him. Since the assessee has not produced the books of 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 abnormal rate of profit, it would be just and reasonable to resort to a fair estimation of income taking into account all the factors including the factor that the assessee had failed to furnish Income Tax Appeal No. 404 of 2006 7 the best evidence before the AO to support the claim. We find that on the basis of the addition made by the AO, the net rate of 37.62% is derived. The CIT(A) has applied a net rate of 10% on the net receipts i.e. the gross receipts minus the material supplied by the departments and further directed to allow depreciation. As per the information furnished before us, the claim of depreciation made by the assessee is of Rs. 9,94,557/-. Once the claim is allowed to the assessee, the net profit rate after depreciation works out to 4.6% only. This is even lower than the 8% rate applicable in the case of small contractors. As pointed out earlier, contractors having turnover or more than Rs. 40 lakhs are required to maintain books of account so that if higher profit is earned, that does not escape assessment. We have to consider as to whether in this case on the facts and in the circumstances of this case, the rate of 4.5% upheld by the CIT(A) is reasonable. 9. It may be pertinent to mention that u/s 44AD, the Legislature in its wisdom has fixed the net rate of 8% of depreciation in respect of contracts where receipts do not exceed Rs. 40 lacs. In the case of contractors whose gross receipts exceed Rs. 40 lacs, the net rate of 8% is not applicable. In our view, the net rate of 8% has not been made mandatory in the case of contractors where the receipts are more than Rs. 40 lacs, mainly for the reason that they have an obligation to maintain books of account and get the same audited. Once the books of account are maintained by the contractors, the AO has the liberty to make an Income Tax Appeal No. 404 of 2006 8 assessment on the basis of such books of account and determine the rate of profit which may not necessarily be a fixed rate of 8%. The rate of profit may vary, it may be higher or lower depending upon various factors. Once the books of account of the assessee are found to be defective, the AO would be at liberty to reject the books results and estimate the profits. In the present case, though it is claimed that books of account have been maintained by the assessee, the same have not been produced and that too, without any explanation much less a satisfactory explanation. Moreover, even without the production of books of account, the Assessing Officer has demonstrated that the book results do not appear to be correct and complete. In such circumstances, the books results are bound to be rejected. 10. Again the issue that comes for consideration is, as to what should be the reasonable rate of profit in the case of contractor whose gross receipts exceed Rs. 40 lacs. In the case of Brij Bhushan Lal Parduman Kumar etc. v. CIT, 115 ITR 524(SC), a rate of 10% was applied by the AO on gross receipts without deducting the cost of material. The Tribunal had upheld the application of net profit at 10% on the net receipts i.e. the gross receipts reduced by the material supplied by the department. The Hon’ble Punjab and Haryana High Court had reversed the judgment of the Tribunal. However, on appeal, the Hon’ble Supreme Court reversed the decision of Punjab and Haryana High Court and upheld the order of the Tribunal. The result of the said Income Tax Appeal No. 404 of 2006 9 decision of the Hon’ble Supreme is that a net rate of profit of 10% was upheld on net receipts subject to no further deduction. In the case of contractors having receipts less than Rs. 40 lacs, the Legislature has fixed a net rate of 8%. In this case, assessee has been guilty of non-production of books of account and non-furnishing of necessary evidence. If one were to go by the defects detected by the AO, then substantial addition would be justified. So, however, when one has to take into account the totality of the facts and circumstances of this case into consideration, a reasonable estimate has got to be made keeping in view of the provisions of Section 44AD, the decision of the Hon’ble Supreme Court in the case of Brij Lal Parduman Kumar etc. v. CIT (supra), including the fact that assessee has no explanation for non-production of books of account and other evidence before the AO cannot be utilized as an advantage by the taxpayers and a rate of profit applied in such cases less than 8% which is applicable in the case of contractors having the gross receipts of less than 40 lacs. In our considered view, the contractors who are executing bigger contracts have bigger advantages in the form of infrastructural facilities and administrative assistance. Taking the totality of facts and circumstances of this case into consideration, we are of the considered view that the net rate of profit of 10%, as in the case of Brij Bhushan Lal Parduman Kumar etc. v. CIT (supra), would meet the ends of justice. No further deduction on account of depreciation is justified as Income Tax Appeal No. 404 of 2006 10 the said deduction shall be deemed to have been allowed in working out the net profit chargeable to tax in this case. As already pointed out u/s 44AD for applicable of net profit rate of 8%, no further deduction is allowed on account of depreciation as the same is deemed to have been allowed in working out the profit @ 8%. However, since the benefit of Section 44AD is not available to the assessee, it cannot be put to higher advantage. We direct the AO to compute the income 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 taken care of while applying the net profit rate. The Tribunal had further observed that in case separate deduction on account of depreciation was allowed after application of net profit rate, the assessee would be getting additional allowance when the assessee was not entitled to benefit in terms of Section 44AD. In view of the findings noticed above, the judgment of this Court in Chopra Bros’s case (supra) does not advance the case of the assessee. Accordingly, the substantial question of law is answered against the assessee and the appeal is dismissed. (AJAY KUMAR MITTAL) JUDGE (ADARSH KUMAR GOEL) December 2, 2010 JUDGE *rkmalik* Income Tax Appeal No. 404 of 2006 11