Full Judgment Text
$~1
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Date of Decision: December 09, 2014
+ ITA 80/2014
COMMISSIONER OF INCOME TAX-XII ..... Appellant
Through Mr.Kamal Sawhney, Sr.
Standing Counsel with
Mr.Sanjay Kumar, Advocate
versus
SUBODH GUPTA ..... Respondent
Through Mr.Ved Jain, Advocate
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE V. KAMESWAR RAO
SANJIV KHANNA, J (ORAL)
This appeal by the Revenue under Section 260A of the Income
Tax Act, 1961 (‘Act’ in short) relates to assessment year 2009-10.
2. The assessee had filed return for the said year on 28.09.2009
declaring income of Rs.35,21,970/-.
3. In the scrutiny assessment, the Assessing Officer relying upon
Section 40A(3) disallowed expenditure of Rs.10,61,49,773/-. He
rejected reliance on Clause g to Rule 6DD of Income Tax Rules, 1962
(‘Rules’ for short) to the effect that payments were made to villagers
who were operating tractors, trolleys, bullock carts and had supplied
materials like bitumen, grit etc. It was the contention of the assessee
that the development work undertaken was in rural or sub rural area
and the villagers to whom payments were made did not have benefit of
banking facility. The Assessing Officer in addition made adhoc
disallowance of 20% on depreciation, car running and maintenance
expenditure, telephone expenses, staff welfare expenses etc. The
Assessing Officer observed that the assessee had not produced the
books of accounts on the plea that books had been stolen. Copy of an
FIR in support was filed.
4. The Commissioner of Income Tax (Appeals) noticed that the
disallowance of Rs.10.61 crores had resulted in an abnormal
conclusion, as the net profit rate had jumped to 59.60% on the total
turnover of Rs.18.43 crores. This was illogical and could not be
accepted. Relying upon Rule 6DD(g) of the Rules and after making
reference to several decisions, he observed that the assessee should
partly succeed. He observed that the assessee had filed copy of the
ledger accounts before the Assessing Officer which was also filed
before him but supporting details/vouchers and details of payments had
not been filed. Further, the assessee had claimed that the books of
accounts had been stolen and an FIR in respect of the said theft had
been recorded. In the absence of full details and confirmations from the
parties concerned, the book results and income declared could not be
verified. The only figure verifiable was the total turnover of the
contractual work undertaken by the assessee as the said work was
undertaken for the Greater Noida Authority who had deducted tax at
source on the payments made. He felt that the only option available
was to reasonably estimate the assessee’s income after rejecting the
books of accounts and the profits as declared. Recording absence of
material to show the net profit rate, which could be applied, the
Commissioner of Income Tax (Appeals) applied net profit rate of 8%
on total turnover referring to the net profit rate mentioned in Section
44AD of the Act. He observed that Section 44AD was not applicable
as the turnover of the assessee was more than Rs.40 lacs but the
presumptive net profit rate of 8% as stipulated could be taken for
estimation. It would be reasonable to estimate the income by applying
8% net profit rate on turnover of Rs.18,43,03,935/-. He accordingly
computed income of the respondent assessee at Rs.1,46744,314/-, thus
making an addition of Rs.1,13,22,344/- to the declared income of
Rs.34,21,970/-.
5. Aggrieved, the Revenue preferred an appeal before the Tribunal,
primarily raising the ground that Section 44AD was not applicable as
the assessee’s turnover was in excess of Rs.40 lacs and the Assessing
Officer was justified in making addition of Rs.10,61,49,773/- in view
of contravention of Section 40A(3) of the Act. It was also stated that
20% disallowance of expenses on account of car running and
maintenance, telephone expenses, business promotion, depreciation on
car etc. should be also restored. The Tribunal did not agree and has
held that the assessee was in business of civil construction and
disallowing expenditure of Rs.10.98 crores would give an abnormal
profit rate of 59.60% on the total turnover of Rs.18.43 crores. This
would be illusory and illogical. They agreed that Section 44AD would
not be applicable but there was no other material or basis to reasonably
estimate income of the assessee. In these circumstances, the
Commissioner of Income Tax (Appeals) had adopted a reasonable net
profit rate of 8% to estimate the income. They did not find any
infirmity in estimating income on the said basis. It was observed that
the Commissioner of Income Tax (Appeals) had rightly accepted the
explanation of the assessee that this case was covered under the
exceptional circumstances stipulated in Clause (g) to Rule 6DD of the
Rules. Further, the assessee had asserted that the payments in cash at a
particular point of time (i.e. each day) did not exceed Rs.20,000/-. This
submission was made before the Commissioner of Income Tax
(Appeals), but the first appellate authority had not elucidated and
verified facts as details could not be ascertained in the absence of
books. The total turnover or quantum of work done by the assessee was
undisputed as the assessee had only worked for the Greater Noida
Authority.
6. Learned counsel for the Revenue submits that Section 44AD has
no application as the turnover of the respondent assessee was Rs.18.43
crores and the said section prescribes a thumb rule or presumptive net
profit rate if the turnover of an assessee is less than Rs.40 lacs. This is
correct and has been noticed by the Commissioner of Income Tax
(Appeals) and the Tribunal. The difficulty in the present case is that the
Assessing Officer did not conduct any inquiry and ascertain the net
profit rate of other comparable contractors. On the other hand, he
disallowed expenditure of Rs.10.61 crores resulting in abnormal gross
profit rate of 59.60%, which should not be accepted. The effect thereof
was that 70% of the expenditure on account of purchases worth
Rs.10.61 crores out of total purchases of Rs.14 crores was disallowed.
The appellate authorities have taken a holistic and broader view and
held that as the books of accounts had not been produced and were not
regularly maintained, the book results should be rejected. We agree
with the counsel for the Revenue that the assertion that the books of
accounts were stolen had a hidden motive and the assertion is rather
unbelievable. The respondent assessee therefore must suffer adverse
consequences. The only question is whether the addition of
Rs.1,13,22,334/- to declared income of Rs.34,21,970/- is adequate or a
higher addition would be justified. As far as total turnover is
concerned, the appellate authorities are right in holding that the figure
of Rs.18.43 crores cannot be disputed as the assessee was only doing
development work for the Greater Noida Authority. The total turnover
is also supported by the tax at source certificate. The quantum of
turnover was not adversely commented upon by the Assessing Officer.
In view of the aforesaid position, we wanted the counsel for the
Revenue to ascertain the gross profit or net profit rates declared and
accepted by the Assessing Officer in case of other contractors engaged
in similar work. We wanted ascertainment of this aspect as the counsel
for the Revenue had submitted that net profit @ 8% was inadequate
and low and a higher profit rate should be attributed. By order dated
19.08.2014, counsel for revenue was required to ascertain the said
aspect. It is stated at Bar that the Assessing Officer has not given any
comments in this regard. Noticeably, counsel for the assessee had
earlier produced before us a copy of the assessment order relating to
assessment year 2010-11, wherein the Assessing Officer himself had
applied net profit rate of 8% on contractual receipt of Rs.6.66 crores
and net profit rate of 3% on supply receipts of Rs.7.21 crores. As per
the said order, the total receipts were to the tune of about Rs.14 crores.
In the present assessment year the total turnover of the assessee was
about Rs.18 crores. In these circumstances we are not inclined to
accept the prayer of the counsel for the Revenue that an order of
remand may be passed. The Assessing Officer in the subsequent years
has accepted the figure of 8% net profit, which is the figure which has
been adopted by the appellate authorities in the present case. Reliance
placed by counsel for the Revenue on CIT vs. Sobti Construction
(India) Ltd. [2008] 307 ITR 374 is misplaced. In the said case, Section
44AD had been applied though the turnover of the assessee was
admittedly above Rs.40 lacs. In the case in hand, the appellate
authorities have not applied Section 44AD as such. Difficulty arose as
they had to estimate reasonable rate of net profit. In the absence of any
data and details, they applied the net profit rate as mentioned in Section
44AD. As recorded above, we had asked counsel for the Revenue to
ascertain whether similar contractors have declared a higher profit rate.
Counsel for the Revenue has not been able to point out or state that the
other contractors have a higher profit rate, than the net profit rate of
8% as held by the appellate authorities. The said rate was also applied
in the assessment year 2010-11.
7. In view of the aforesaid factual position, we do not see any
reason to interfere with the impugned order and the appeal is
dismissed.
SANJIV KHANNA, J.
V. KAMESWAR RAO, J.
DECEMBER 09, 2014 /km
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Date of Decision: December 09, 2014
+ ITA 80/2014
COMMISSIONER OF INCOME TAX-XII ..... Appellant
Through Mr.Kamal Sawhney, Sr.
Standing Counsel with
Mr.Sanjay Kumar, Advocate
versus
SUBODH GUPTA ..... Respondent
Through Mr.Ved Jain, Advocate
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE V. KAMESWAR RAO
SANJIV KHANNA, J (ORAL)
This appeal by the Revenue under Section 260A of the Income
Tax Act, 1961 (‘Act’ in short) relates to assessment year 2009-10.
2. The assessee had filed return for the said year on 28.09.2009
declaring income of Rs.35,21,970/-.
3. In the scrutiny assessment, the Assessing Officer relying upon
Section 40A(3) disallowed expenditure of Rs.10,61,49,773/-. He
rejected reliance on Clause g to Rule 6DD of Income Tax Rules, 1962
(‘Rules’ for short) to the effect that payments were made to villagers
who were operating tractors, trolleys, bullock carts and had supplied
materials like bitumen, grit etc. It was the contention of the assessee
that the development work undertaken was in rural or sub rural area
and the villagers to whom payments were made did not have benefit of
banking facility. The Assessing Officer in addition made adhoc
disallowance of 20% on depreciation, car running and maintenance
expenditure, telephone expenses, staff welfare expenses etc. The
Assessing Officer observed that the assessee had not produced the
books of accounts on the plea that books had been stolen. Copy of an
FIR in support was filed.
4. The Commissioner of Income Tax (Appeals) noticed that the
disallowance of Rs.10.61 crores had resulted in an abnormal
conclusion, as the net profit rate had jumped to 59.60% on the total
turnover of Rs.18.43 crores. This was illogical and could not be
accepted. Relying upon Rule 6DD(g) of the Rules and after making
reference to several decisions, he observed that the assessee should
partly succeed. He observed that the assessee had filed copy of the
ledger accounts before the Assessing Officer which was also filed
before him but supporting details/vouchers and details of payments had
not been filed. Further, the assessee had claimed that the books of
accounts had been stolen and an FIR in respect of the said theft had
been recorded. In the absence of full details and confirmations from the
parties concerned, the book results and income declared could not be
verified. The only figure verifiable was the total turnover of the
contractual work undertaken by the assessee as the said work was
undertaken for the Greater Noida Authority who had deducted tax at
source on the payments made. He felt that the only option available
was to reasonably estimate the assessee’s income after rejecting the
books of accounts and the profits as declared. Recording absence of
material to show the net profit rate, which could be applied, the
Commissioner of Income Tax (Appeals) applied net profit rate of 8%
on total turnover referring to the net profit rate mentioned in Section
44AD of the Act. He observed that Section 44AD was not applicable
as the turnover of the assessee was more than Rs.40 lacs but the
presumptive net profit rate of 8% as stipulated could be taken for
estimation. It would be reasonable to estimate the income by applying
8% net profit rate on turnover of Rs.18,43,03,935/-. He accordingly
computed income of the respondent assessee at Rs.1,46744,314/-, thus
making an addition of Rs.1,13,22,344/- to the declared income of
Rs.34,21,970/-.
5. Aggrieved, the Revenue preferred an appeal before the Tribunal,
primarily raising the ground that Section 44AD was not applicable as
the assessee’s turnover was in excess of Rs.40 lacs and the Assessing
Officer was justified in making addition of Rs.10,61,49,773/- in view
of contravention of Section 40A(3) of the Act. It was also stated that
20% disallowance of expenses on account of car running and
maintenance, telephone expenses, business promotion, depreciation on
car etc. should be also restored. The Tribunal did not agree and has
held that the assessee was in business of civil construction and
disallowing expenditure of Rs.10.98 crores would give an abnormal
profit rate of 59.60% on the total turnover of Rs.18.43 crores. This
would be illusory and illogical. They agreed that Section 44AD would
not be applicable but there was no other material or basis to reasonably
estimate income of the assessee. In these circumstances, the
Commissioner of Income Tax (Appeals) had adopted a reasonable net
profit rate of 8% to estimate the income. They did not find any
infirmity in estimating income on the said basis. It was observed that
the Commissioner of Income Tax (Appeals) had rightly accepted the
explanation of the assessee that this case was covered under the
exceptional circumstances stipulated in Clause (g) to Rule 6DD of the
Rules. Further, the assessee had asserted that the payments in cash at a
particular point of time (i.e. each day) did not exceed Rs.20,000/-. This
submission was made before the Commissioner of Income Tax
(Appeals), but the first appellate authority had not elucidated and
verified facts as details could not be ascertained in the absence of
books. The total turnover or quantum of work done by the assessee was
undisputed as the assessee had only worked for the Greater Noida
Authority.
6. Learned counsel for the Revenue submits that Section 44AD has
no application as the turnover of the respondent assessee was Rs.18.43
crores and the said section prescribes a thumb rule or presumptive net
profit rate if the turnover of an assessee is less than Rs.40 lacs. This is
correct and has been noticed by the Commissioner of Income Tax
(Appeals) and the Tribunal. The difficulty in the present case is that the
Assessing Officer did not conduct any inquiry and ascertain the net
profit rate of other comparable contractors. On the other hand, he
disallowed expenditure of Rs.10.61 crores resulting in abnormal gross
profit rate of 59.60%, which should not be accepted. The effect thereof
was that 70% of the expenditure on account of purchases worth
Rs.10.61 crores out of total purchases of Rs.14 crores was disallowed.
The appellate authorities have taken a holistic and broader view and
held that as the books of accounts had not been produced and were not
regularly maintained, the book results should be rejected. We agree
with the counsel for the Revenue that the assertion that the books of
accounts were stolen had a hidden motive and the assertion is rather
unbelievable. The respondent assessee therefore must suffer adverse
consequences. The only question is whether the addition of
Rs.1,13,22,334/- to declared income of Rs.34,21,970/- is adequate or a
higher addition would be justified. As far as total turnover is
concerned, the appellate authorities are right in holding that the figure
of Rs.18.43 crores cannot be disputed as the assessee was only doing
development work for the Greater Noida Authority. The total turnover
is also supported by the tax at source certificate. The quantum of
turnover was not adversely commented upon by the Assessing Officer.
In view of the aforesaid position, we wanted the counsel for the
Revenue to ascertain the gross profit or net profit rates declared and
accepted by the Assessing Officer in case of other contractors engaged
in similar work. We wanted ascertainment of this aspect as the counsel
for the Revenue had submitted that net profit @ 8% was inadequate
and low and a higher profit rate should be attributed. By order dated
19.08.2014, counsel for revenue was required to ascertain the said
aspect. It is stated at Bar that the Assessing Officer has not given any
comments in this regard. Noticeably, counsel for the assessee had
earlier produced before us a copy of the assessment order relating to
assessment year 2010-11, wherein the Assessing Officer himself had
applied net profit rate of 8% on contractual receipt of Rs.6.66 crores
and net profit rate of 3% on supply receipts of Rs.7.21 crores. As per
the said order, the total receipts were to the tune of about Rs.14 crores.
In the present assessment year the total turnover of the assessee was
about Rs.18 crores. In these circumstances we are not inclined to
accept the prayer of the counsel for the Revenue that an order of
remand may be passed. The Assessing Officer in the subsequent years
has accepted the figure of 8% net profit, which is the figure which has
been adopted by the appellate authorities in the present case. Reliance
placed by counsel for the Revenue on CIT vs. Sobti Construction
(India) Ltd. [2008] 307 ITR 374 is misplaced. In the said case, Section
44AD had been applied though the turnover of the assessee was
admittedly above Rs.40 lacs. In the case in hand, the appellate
authorities have not applied Section 44AD as such. Difficulty arose as
they had to estimate reasonable rate of net profit. In the absence of any
data and details, they applied the net profit rate as mentioned in Section
44AD. As recorded above, we had asked counsel for the Revenue to
ascertain whether similar contractors have declared a higher profit rate.
Counsel for the Revenue has not been able to point out or state that the
other contractors have a higher profit rate, than the net profit rate of
8% as held by the appellate authorities. The said rate was also applied
in the assessment year 2010-11.
7. In view of the aforesaid factual position, we do not see any
reason to interfere with the impugned order and the appeal is
dismissed.
SANJIV KHANNA, J.
V. KAMESWAR RAO, J.
DECEMBER 09, 2014 /km