CIT, CHANDIGARH vs. M/S COMPETENT CONST., CHANDIGARH

This order shall dispose of ITA Nos. 482 and 646 of 2010 as common question of law and facts are involved in both the appeals. ITA No.646 of 2010 has been filed by the revenue whereas ITA No.482 of 2010 has been filed by the assessee under section 260A of the Income Tax Act, 1961 (for brevity, “the Act”) against the common order dated 29.12.2009 passed by the Income Tax Appellate Tribunal 'B' Bench, Chandigarh (in short, “the Tribunal”) in ITA No.402/CHD/2009 for the assessment year 2005-06. 2. Following substantial question of law has been claimed in ITA No.646 of 2010:- “Whether on the facts and circumstances of the case and in law the ITAT was right in directing to determine the net profit @ 7% on contract receipts minus cost of material subject to allowability of salary and interest paid to the partners instead of net profit @ 10% on contract receipts applied by the AO in view of the fact that the case was referred to Special Audit, the trading results were not prone to verification and the books of accounts were rejected under section 145(3)?”

In ITA No.482 of 2010, following substantial questions of law have been claimed:- “i) Whether in the facts and circumstances of the case the Tribunal's findings are perverse and arbitrary in ignoring the principle of consistency i.e. history of the case as followed by the CIT(A) in applying a net profit rate of 6.5% to the direct receipts and 5% to sub-contract receipts, against 10% rate arbitrarily applied by the AO without any logical basis whatsoever? ii) Whether in the facts and circumstances of the case the Tribunal's findings are perverse and arbitrary in estimating the consolidated rate of 7% to the total contract receipts (including sub-contract receipts) ignoring the fact that in the case of sub-contract receipts, the profit is always shared between two or more persons and the same rate as applied to direct contract-receipts cannot be applied to the sub-contract receipts, despite the fact that the CIT(A) by following the judicious approach applied a net profit rate of 6.5% to the direct receipts and 5% to sub-contract receipts?”

The facts have been extracted from ITA No.646 of 2010. These may be briefly noticed. The assessee firm is engaged in the civil construction work. During the course of assessment proceedings, the assessee produced cash book and ledger. However, the purchase file claimed to have been lost, was not produced. The assessee had shown sale and purchase of fixed assets during the year but the bills for verification of the same were not produced by the assessee. The Assessing Officer referred the case for special audit under Section 142(2A) of the Act. In the absence of proper documents and voucher and the report of the special auditor that the assessee had not maintained proper books of account, the Assessing officer vide order dated 11.7.2008, Annexure A.1 rejected the books of account of the assessee under Section 145(3) of the Act and on the basis of gross profit worked out at ` 4,19,99,172/- applied 10% net profit rate and worked out income at ` 41,99,917/-. Besides applying net profit rate of 10%, other additions made were on the issue of negative cash of ` 8,88,195/-, on account of non submission of proof of sales tax payment of ` 6,12,124/- and labour payments pertaining to assessment year 2004-05 claimed during the year amounting to `2,60,498/-. Aggrieved by the order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. Vide order dated 5.2.2009, Annexure A.2, the CIT(A) upheld the action of the Assessing Officer in invoking the provisions of Section 145(3) of the Act, following the ratio laid down by the Hon'ble Supreme Court in CIT v. British Paints India, 188 ITR 44. The CIT(A) also applied net profit rate of 6.5% to the direct contract receipts and rate of 5% to receipts of sub contract and further allowed deduction in respect of interest and salary to the partners, if any. Aggrieved by the order, the revenue went in appeal before the Tribunal. Vide order dated 29.12.2009, Anenxure A.3, the Tribunal adopted consolidated rate of 7% to be applied on the total contract receipts to estimate the income from contract business and found no merit in making additions on the issue of negative cash, the issue of sales tax and for payments pertaining to preceding years in a case where books of account had been rejected and net profit rate applied. Hence the present appeals, one by the revenue and the other by the assessee.

The core issue that arises for consideration in both these appeals is whether the Tribunal was justified in adopting net profit rate of 7% on contract receipts including sub-contract receipts.

The Assessing Officer had adopted rate of 10% after rejecting the books of account under Section 145(3) of the Act. On appeal by the assessee, the same had been varied by the CIT(A). The CIT(A) adopted the rate of 6.5% in case of direct contract receipts and 5% on sub contract receipts. The Tribunal applied the rate of 7% on the total contract receipts to estimate the income from contract business. The Tribunal while adjudicating the aforesaid issue in para 6 had recorded as under:- “6. We have heard the rival contentions and perused the records. The Hon'ble Supreme Court in CIT v. British Paints India Limited (supra) had laid down the principles that the Assessing officer while exercising his powers under the provisions of the Act has to be satisfied that the accounts maintained by the assessee are correct and complete and the income had been computed in accordance with the method of accounting regularly employed by the assessee. In the facts of the present case, the books of account have not been properly maintained by the assessee and the Assessing Officer after rejecting the same had invoked the provisions of section 145(3) of the Act for working out the profits of the business. The assessee has not filed any appeal against the rejection of books of account. The issue which remains to be addressed is the rate to be applied for determining the profits of the business. The Assessing Officer had applied net profit rate of 10% whereas the CIT(A) had applied net profit rate of 6.5% on direct contract receipts and 5% on sub contract receipts. The first limb of dispute is with regard to the rate to be applied. The assessment had shown net profit rate of 6.5% in assessment year 2003-04 and net profit rate of 5.2% in assessment year 2004-05. However, during the year under consideration, where the Assessing Officer has found discrepancy in the books of account maintained by the assessee and had rejected the same, we are not in conformity with the order of the CIT(A) in adopting the net profit rate of 6.5% on direct contract receipts and 5% on sub contract receipts. We find no justification for the estimation made by the CIT(A), which corresponds to the precedents of earlier year. Notably, in the earlier years, the assessee had maintained and produced the books of account to the satisfaction of the authorities. This is not the case in the instant year. Therefore, in our view, it will meet the ends of the justice, that a consolidated rate of 7% is applied to the total contract receipts (including sub-contract receipts) to estimate the income from contract business for the year.”

Nothing could be shown by either side that the rate was either arbitrary or irrational in the facts and circumstances. Though some amount of guess work may necessarily be there in adopting the net profit rate as there is no definite method prescribed under the statute, the court shall interfere only where the same appears to be excessive or arbitrary or discriminatory. That being not the situation in the present case, the adoption of 7% rate by the Tribunal cannot be faulted.

Accordingly, we do not find any infirmity in the impugned order dated 29.12.2009 passed by the Tribunal which may warrant variance by this Court.

As a result, both the appeals are dismissed.