PR. COMMISSIONER OF INCOME TAX-1, CHD. vs. M/S N.H. CONSTRUCTION PVT. LTD.
What did the High Court hold?
The High Court held that the ITAT was justified in accepting the findings of the Commissioner. The Commissioner's decision to reduce the net profit rate from 10% to 6% was based on the material on record, specifically the net profit rates of the assessee in earlier and subsequent years, which were significantly below 6%. Therefore, no fault was found with the Commissioner's procedure or the ITAT's upholding of it. Regarding the addition of Rs. 6,50,35,836/- on account of trade payables, the Court noted that the Commissioner had rightly set aside the AO's order. The Commissioner held that these payables were not cash credits under Section 68 but were directly linked to the assessee's purchases. As per settled law, sundry trade creditors cannot be disallowed once a flat net profit rate is applied. The ITAT upheld this, noting that the increase in trade payables is linked to the purchase and consumption of raw material, and no further disallowance is warranted. The Court agreed that the AO was not justified in making the addition under Section 68, as there was no concealment of income. The ITAT rightly upheld the Commissioner's well-reasoned order. The appeal was accordingly dismissed, with no substantial question of law arising.
What were the facts?
The Principal Commissioner of Income Tax-1, Chandigarh (appellant-revenue) filed an appeal under Section 260A of the Income Tax Act, 1961, against an order of the Income Tax Appellate Tribunal (ITAT), Chandigarh Bench, dated July 13, 2022, for Assessment Year 2016-2017. The appeal challenges the ITAT's decision to reduce the net profit and delete an addition made on account of trade payables. The ITAT had upheld the order of the Commissioner of Income Tax (CIT), dated December 13, 2019. The CIT had found that the net profit rate of 10% applied by the Assessing Officer (AO) was not justified and reduced the addition of Rs. 3,85,48,274/- to 6% based on comparable cases, directing the AO to compute net profit at 6%. The ITAT further noted that the assessee's past history had been accepted and comparable data of other assessees was not a reasonable basis.
What were the issues?
The appeal raises several substantial questions of law: 1. Whether the ITAT's order is perverse in reducing net profit and deleting the addition on account of trade payables when the assessee failed to produce requisite details and evidence before the AO and appellate authorities? 2. Whether there has been a miscarriage of justice due to the absence of complete examination and appreciation of evidence, and premature conclusions by the ITAT, against the backdrop of judicial pronouncements like *Arvind Kumar Chaudhary Vs. Commissioner of Income Tax*? 3. Whether the ITAT was right in reducing the net profit rates from 10% applied by the AO, given the assessee's failure to produce necessary evidence? 4. Whether the ITAT was right in sustaining the deletion of an addition of Rs. 6,50,35,836/- on account of the assessee's failure to submit evidence proving the genuineness of 'Trade Payables' and their abnormal increase? 5. Whether the ITAT misconstrued the provisions of the Income Tax Act, 1961, leading to a perverse order? Assessee's contentions: The judgment does not explicitly record the assessee's arguments before the High Court. However, it refers to the ITAT's reasoning which accepted the assessee's past history and found comparable data of other assessees not to be a reasonable basis. The CIT had also considered the assessee's past history. The ITAT upheld the CIT's order, which had deleted additions related to trade payables, holding they were linked to purchases and not cash credits under Section 68, relying on *Commissioner of Income Tax Vs. Dulla Ram, Labour Contractor*. Revenue's contentions: The revenue argued that the ITAT's order was perverse as the assessee failed to produce requisite details and evidence. They contended that the ITAT did not properly examine the evidence and arrived at premature conclusions. The revenue also argued that the ITAT was wrong in reducing the net profit rates and sustaining the deletion of additions related to trade payables, as the assessee failed to prove their genuineness.
Which sections of the Income-tax Act were involved?
AI-generated summary — verify with the full judgment below
Cause title — parties, addresses and appearances
authenticity of this order/judgment Chandigarh
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the various applicable judicial pronouncements in the case of the Hon'ble Courts including the Apex Court that have been consolidated by the Hon'ble Allahabad High Court (Lucknow Bench) in the case titled as Arvind Kumar miscarriage of justice?
(iii) Whether on the facts and in law the Ld. Income Tax Appellate Tribunal was right in reducing the net profit rates of 10% applied by the Assessing Officer when the assessee has failed to produce necessary evidences not only before the Assessing Officer but also before the appellate authorities?
(iv) Whether on the facts and in law, the Ld. Income Tax Appellate Tribunal was right in sustaining the deletion of addition of Rs.6,50,35,836/- on account of failure of the assessee to submit any evidence to prove the genuineness of 'Trade Payables' and abnormal increase therein not only before the AO but also before the appellate authorities?
(v) Whether on the facts and in the circumstances of the case, the Ld. Income Tax Appellate Tribunal misdirected itself in misconstruing the provisions of the Income Tax Act, 1961 resulting into delivering a perverse order contrary to the scheme of the statute and material on record?
In sum and substance the appellant is aggrieved against the order of the Tribunal which has upheld the order of the Commissioner of Income Tax (hereinafter referred to as ‘the Commissioner’) dated 13.12.2019 (Annexure A-2). The Appellate Authority had come to the conclusion that the net profit @ 10% of the gross receipts which was done by the Assessment Officer for the assessment year 2016-2017 was not justified and the addition at `3,85,48,274/- was accordingly not sustained and it was reduced to 6% on the comparable cases engaged in similar business where contract receipts were inclusive of material and the Assessment Officer was directed to compute the net profit of the assessee by applying the rate of 6%. NAVEEN NAGPAL 2024.01.16 17:47 authenticity of this order/judgment Chandigarh
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The Tribunal had noticed that the past history of the assessee had been accepted and had attained finality and comparable data in the case of other assessees involved in similar line of business would not provide a reasonable basis. The Assessment Officer had not considered the past history or the comparable data of other assessees involved in similar line of business and Commissioner had considered the past history of the assessee and, therefore, the order passed by the Commissioner was confirmed.
We have also perused the order of the Commissioner which would go on to show that from the preceding years 2012-2013 till 2014- 2015 and for subsequent years 2017-2018 and 2018-2019 the net profit rate was considered while coming to the conclusion that 6% would be appropriate. The chart as such relied upon by the Commissioner reads as under:-
AY Net Sale Net Profit NP Rate Additions u/s 143(3) Net Profit after additions NP Rate after additions 2012-13 35,89,26,010 77,34,831 2.15 24,82,008 1,02,16,839 2.8 2013-14 24,59,96,273 74,46,628 3.03 - - - 2014-15 35,01,89,112 1,21,51,180 3.47 61,28,044 1,82,79,224 5.2 2015-16 42,98,43,102 1,63,74,498 3.81 - - - 2016-17 56,39,86,237 1,78,50,349 3.17 - - - 2017-18 1,06,49,15,569 3,77,06,153 3.54 - - - 2018-19 1,07,71,97,227 3,81,22,014 3.54 - - -
In such circumstances, we are of the considered opinion that the Tribunal is well justified in accepting the findings of the Commissioner, which are based on the material available on record and keeping in view the net profit of the assessee for the earlier and subsequent years, which are far below 6%. Therefore, no fault can be found in the NAVEEN NAGPAL 2024.01.16 17:47 authenticity of this order/judgment Chandigarh
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procedure adopted by the Commissioner, who has applied higher rate than earlier applied which has been duly upheld by the Tribunal.
Regarding the second issue, the record would go on to show that the petitioner had filed the return of income on 28.03.2017 by declaring an income of `2,09,33,660/-. The case had been selected for compulsory scrutiny and notice under Section 143(2) of the Act had been issued on 21.09.2017 and duly served and it was on that basis the Assessment Officer had added `6,50,35,836/- on account of increase in trade payables. Keeping in view the fact that for the financial year 2014- 2015 the amount was merely `57,74,488/- the addition had been made The provisions of Section 68 read as under:- “68. Cash credits.—Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the [Assessing Officer], satisfatory, the sum so NAVEEN NAGPAL 2024.01.16 17:47 authenticity of this order/judgment Chandigarh
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credited may be charged to income-tax as the income of the assessee of that previous year: Provided that where the assessee is a company (not being a company in which the public are substantially interested), and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless—
(a) the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and (b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory: Provided further that nothing contained in the first proviso shall apply if the person, in whose name the sum referred to therein is recorded, is a venture capital fund or a venture capital company as referred to in clause (23FB) of section 10.”
It is in such circumstances, the Tribunal has also upheld the said order by noticing that the increase in trade payable is directly linked to purchase and consumption of raw material and, therefore, no further disallowance can be made towards the trade payable. Therefore, we do not find any justifiable basis to disturb the findings of the Commissioner in the absence of any contrary material brought on record.
We are of the view that the Tribunal was well justified to hold that the respondent is a construction company and therefore, in a particular year, if there has been more consumption of raw material, it would not entail tax on the same as there was no concealment of any income. The Assessment Officer was not justified in making the addition under Section 68 of the Act in the facts and circumstances. Resultantly, we are of the considered opinion that no substantial question of law arises in the present NAVEEN NAGPAL 2024.01.16 17:47 authenticity of this order/judgment Chandigarh
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appeal as the Tribunal has rightly upheld the well reasoned order passed by the Commissioner and the present appeal is, accordingly, dismissed.
(G.S. SANDHAWALIA) JUDGE
(LAPITA BANERJI) 08.01.2024
JUDGE Naveen
Whether speaking/reasoned : Yes
Whether Reportable :
No NAVEEN NAGPAL 2024.01.16 17:47 authenticity of this order/judgment Chandigarh
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