Vildirect: IncomeTax-caselaws-2011-VIL-723-ITAT-LCK

2011-VIL-723-ITAT-LCK

Income Tax Appellate Tribunal LUCKNOW

I.T.A. No. 172/Lkw/10

Date: 27.04.2011

ARVIND KUMAR CHAUDHARY

DY. C.I.T., GONDA CIRCLE, GONDA

For the Appellant : H. Rahman, Advocate
For the Respondent : P. K. Bajaj, D. R.

BENCH

H. L. Karwa (Vice President) And N. K. Saini (Accountant Member)

JUDGMENT

N. K. Saini (Accountant Member)

This is an appeal filed by the assessee against the order dated 15/01/2010 of CIT(A)-II, Lucknow relevant to assessment year 2005-2006. In this appeal the assessee has raised the following grounds:

“1. That the order of the learned CIT (A) is contrary to facts, law and evidence on record.

2. That the learned CIT (A) is not justified in confirming a net profit rate of 7% on gross receipts of contract by relying on the orders of the Hon'ble ITAT Bench, Lucknow in the case of Gupta Contractor which is not comparable with the case of the Appellant.

3. That the learned CIT (A) erred in confirming 50% of Rs. 14,16,513/- as unexplained investment in contract business in absence of any material or evidence.

4. That the learned Assessing Officer failed to provide any opportunity to the Appellant to explain before he applied the rate of 7% relying on the case of Gupta Contractor.

5. That copy of remand report alleged to have been furnished vide CIT (A) letter dated 14/12/2008 was not received by the Appellant, thereby denying the opportunity of further submissions.

6. That the learned CIT (A) has legally erred in confirming the levy of interest of Rs. 1,37,719/- u/s 234B.”

2. Ground No. 1 of the appeal is general in nature so do not require any comment on our part.

3. The grievance of the assessee, vide ground No. 2, relates to the confirmation of addition by applying the net profit rate of 7% on the gross receipts. The facts related to this issue, in brief, are that the assessee is a contractor and had shown contract receipts of Rs. 1,8203,701/- and declared net profit of Rs. 1,96,537/-. The case was selected for scrutiny. During the course of assessment proceedings, the Assessing Officer observed that the assessee could not produce complete books of account and vouchers so the business result could not be verified. He also collected information from Assistant Commissioner, Trade Tax, Basti and M/s Khalilabad Sugar Mills (P) Ltd. in respect of contract receipts obtained by the assessee from which it was found that the assessee had not disclosed the receipts amounting to Rs. 14,16,513/-. In response to the show cause notice issued by the Assessing Officer, the assessee tried to contest the information collected by the Assessing Officer from the aforesaid persons but at the same time agreed that only notional profit may be added to his income. The Assessing Officer, after considering the reply of the assessee, adopted the total receipts of the assessee at Rs. 1,96,20,214/- (Rs. 1,82,03,370/- + Rs. 14,16,513/-) and computed 7% net profit on the same on the basis of decision of the ITAT, Allahabad Bench in the case of Ganga Prasad Tripathi vs. ITO and the decision of ITAT Lucknow in the case of Gupta Brothers vs. ITO. Accordingly, the net profit of the assessee for the year was computer at Rs. 13,73,415/-.

4. Being aggrieved, the assessee carried the matter to the learned CIT (A) and submitted that the cases relied by the Assessing Officer were not comparable with the assessee’s case since in those cases, remuneration to working partners and interest on capital was deducted from the net profit of 7% while the assessee’s status was individual. It was also stated that for the assessment year 2001-2002, the ITAT, Lucknow Bench has upheld the estimation of profit @6% in the assessee’s own case. The learned CIT (A) also asked the remand report from the Assessing Officer wherein it was stated that the assessee agreed for addition of notional profit from the excess receipts and the net profit rate @7% was applied on the basis of aforesaid decision of the Tribunal.

4.1 The Learned CIT(A), after considering the submissions of the assessee, observed that the action of the Assessing Officer in adopting the turnover at Rs. 1,96,20,214/- was correct in view of the fact that the assessee had also impliedly agreed for inclusion of receipts of Rs. 14,16,513/- in the turnover during the assessment proceedings before the Assessing Officer. As regards to the net profit rate of 6% adopted by ITAT in assessee's own case for earlier year, the learned CIT (A) was of the view that the said rate was applied on peculiar facts pertaining to that year, so it cannot be considered while applying the net profit rate for the year under consideration. According to the learned CIT (A), the Assessing Officer had relied on the decisions of ITAT wherein the net profit rate of 7% was applied in the case of civil contractor. He, therefore, confirmed the action of the Assessing Officer in applying the net profit rate of 7%. Being aggrieved, the assessee is in appeal.

5. The learned counsel for the assessee reiterated the submissions made before the authorities below and further submitted that the net profit rate @1.5% had been accepted for the preceding year on the turnover of Rs. 1,53,76,166/- and in the subsequent year the net profit rate accepted by the Department was @2.45% on the turnover of Rs. 3,19,78,202/-. He further submitted that the average net profit rate for the assessment years 2004-2005 to 2006-2007 comes at 3.65%, therefore, the net profit rate applied @7% was very excessive. In support of the above contention, the learned counsel for the assessee drew our attention towards a chart showing the turnover and net profit rates for the assessment years 2004-2005 to 2006-2007 which is placed at page No. 4 of the submissions furnished on 13/04/2011. He further submitted that the facts of the case relied by the Assessing Officer while applying the net profit rate of 7% are distinguishable from the facts of the assessee’s case.

6. In his rival submissions, the learned D. R. strongly supported the order of the authorities below.

7. We have considered the rival submissions and carefully gone through the material available on the record. In the present case, it is noticed that the Assessing Officer applied the net profit rate of 7% on the basis of decision of the ITAT Lucknow Bench in the case of Gupta Contractor, Basti vs. ITO wherein the earlier order of the ITAT, Allahabad Bench in the case of Ganga Prasad Tripathi vs. ITO was followed. However, the Assessing Officer, while applying the aforesaid decision, has not considered this vital fact that the assessee is a proprietor and doing the business in his individual capacity while the comparable cases were of the firm wherein the interest to the partners capital and the salary of the partners have been allowed out of the net profit. It is also noticed that the turnover in the case of M/s Gupta Contractor, Basti was at Rs. 62,40,823/- while the turnover in the assessee’s case is at Rs. 1,96,20,240/-. Therefore, the case relied by the Assessing Officer is not comparable on facts. In the instant case, it seems that the book results disclosed by the assessee were not completely verifiable, therefore, the books were rejected and the action of the Assessing Officer in rejecting the books of account has not been challenged by the assessee. If the books are rejected, the only way to determine the income is to estimate the same by applying the net profit rate. In the present case, the net profit rate declared by the assessee for the preceding year i.e. assessment year 2004-2005 was at 1.5% while in the succeeding year i.e. for the assessment year 2006-2007 was at 2.45% but in the succeeding year, the turnover of the assessee was at Rs. 3,19,78,208/- while in the year under consideration the turnover is at Rs. 1,96,20,240/-, therefore, the net profit rate for the year under consideration should have been more in comparison to the succeeding year because the increase in the turnover may be one of the reasons for the decline in the net profit rate. In our opinion, the net profit rate applied by the Assessing Officer and confirmed by the learned CIT (A) @7% is excessive because the assessee neither in the earlier year nor in the subsequent year has earned such a net profit, so considering the history of the assessee’s case and to meet the ends of natural justice, we consider it fair and reasonable to apply the net profit rate of 5% on the turnover of Rs. 1,96,20,240/-. We accordingly set aside the order of learned CIT (A) on this issue and direct the Assessing Officer to work out the income of the assessee by applying net profit rate of 5%.

8. The next issue, vide ground No. 3, relates to the confirmation of addition on account of unexplained investment in contract business.

9. The facts related to this issue, in brief, are that the Assessing Officer, during the assessment proceedings, observed that the assessee was having undisclosed receipts of Rs. 14,16,513/- and must have invested some money against such receipts. The Assessing Officer worked out the investment part by adopting the net profit rate of 7% on the receipts of Rs. 14,16,530/-. Accordingly, the investment part was worked out at Rs. 13,17,357/- which was added to the income of the assessee.

10. The assessee carried the matter to learned CIT(A) and submitted that only profit element could have been added out of total difference in contract receipts amounting to Rs. 14,16,513/-.

10.1 The Learned CIT(A), after considering the submissions of the assessee, observed that the Assessing Officer has been unreasonable in treating almost entire undisclosed receipts as unexplained investment in business and taxing the same separately in addition to the profit estimated from the undisclosed contract receipts. He further observed that the undisclosed receipts to the extent of Rs. 14,16,513/-, which were not accounted for by the assessee and were indirectly accepted to be assessed as notional profit and that some investment outside books, must have been made by the assessee for earning such receipts. The Assessing Officer considered it fair and reasonable to estimate the investment @50% of total undisclosed receipts. Accordingly, the addition of Rs. 7,08,256/- was sustained. Now the assessee is in appeal.

11. The learned counsel for the assessee reiterated the submissions made before the authorities below and the learned D. R. supported the order of learned CIT (A).

12. We have considered the rival submissions and carefully gone through the material available on the record. In our opinion, the estimate of investment @50% of the undisclosed receipts is highly excessive because the investment remained in circulation throughout the year and it is not the case of the Department that the receipts of Rs. 14,16,513/- were earned by the assessee on a single day. We, therefore, considering the totality of the facts, deem it fair and reasonable to estimate the investment part @10% of the receipt of Rs. 14,16,513/- Accordingly, the Assessing Officer is directed to recompute the income keeping in view the above direction.

13. Ground No. 4 & 5 of the appeal are correlated with ground No. 2 & 3, so do not require any specific comment on our part while the last issue agitated by the assessee vide ground No. 6, relates to the charging of interest u/s 234Bof the Act.

14. Shri H. Rahman, learned counsel for the assessee submitted that no interest u/s 234B of the Act is leviable in the facts and circumstances of the case. On the other hand learned D. R. submitted that levy of interest u/s 234B is consequential. Keeping in view the entire facts and circumstances of the case, we restore this issue to the file of the Assessing Officer. The Assessing Officer will examine the issue and decide the same afresh in accordance with law.

15. In the result, the appeal is allowed partly and partly for statistical purposes.

(The order was pronounced in the open court on 27/04/2011)

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