M/S RAMAN and COMPANY vs. A C I T

By way of this appeal, the appellant has assailed the judgment and order of the Tribunal whereby Tribunal has partly allowed the appeal preferred by the Department.

Mr. Sanjay Jhanwar, counsel for the appellant has raised following questions which reads as under:- “(i) Whether in facts and circumstances of the case the order passed by the ld. ITAT is not perverse, unjust, improper, contrary to the material on record and with out application of mind? (ii) Whether learned Income Tax Appellate Tribunal was justified in applying Net Profit rate of 8% on contract receipts on the basis of Section 44 AD which was introduced by the Finance Act 1994, inspite of the specific finding that the provisions of Section 44 AD are not applicable in the instant case? (iii) Whether learned Income Tax Appellate Tribunal was justified in not allowing deduction in respect of interest and salary to partners in accordance with the provisions of Section 44 AD inspite of adopting the Net Profit rate in accordance with that section? (iv) Whether the deduction for depreciation on (2 of 4) [ITA-186/2004] borrowings and interest and salary to partners should have been allowed separately by ld. ITAT after applying the N.P. rate of 8% in view of various judgment of jurisdictional High Court. (v) Whether ld. ITAT was correct in stating that no day to day details of issuance of stock is available when the same was available on record as per the specific finding given by ld. CIT(A) on internal page 4 & 5 of the CIT(A)’s order? (vi) Whether the ld. ITAT was justified in upholding the application of section 145(1) of the Act, by holding that method of valuation of closing work in progress is not scientific method without pointing out any specific defect there in?”

1 However, this court has admitted the appeal only on question no.3 which reads as under:- “(iii) Whether learned Income Tax Appellate Tribunal was justified in not allowing deduction in respect of interest and salary to partners in accordance with the provisions of Section 44 AD inspite of adopting the Net Profit rate in accordance with that section?”

2 Proviso of sub-section (2) of Section 44 AD of the Income Tax Act reads as under:- “Provided that where the eligible assessee is a firm, the salary and interest paid to its partners shall be deducted from the income computed under sub-section (1) subject to the conditions and limits specified in clause (b) of Section 40.”

He has taken us to the order of the Tribunal wherein it has been held as under:-

Now coming to the application of net profit rate, it is found that the Assessing Officer considered four comparable cases in which the net profit rate varied from 7.2% to 9%. It is found that the assessment year under consideration is 1994-95. Section 44AD was introduced by the Finance Act 1994 with effect from assessment year 1994-95 in which the net profit rate of 8% has been prescribed. Though the provisions of Sec. 44 AD are not applicable in the instant case, yet the guidance for the net profit rate to be applied can be obtained from this Section. In view of these factors, we are satisfied that it would be in the fitness of the things, if the net profit rate of 8% on the contract receipts of Rs.1,01,40,042/- is applied. This would also bring the (3 of 4) [ITA-186/2004] net profit rate close to the average of the four comparable cases noted by the Assessing Officer.”

If Section 44 AD is invoked then the tribunal is bound to follow proviso and is required to grant deduction on the interest and salary paid to the partners.

However, Mr. Mathur counsel for the department has taken us to the order of CIT(A) which reads as under:- “I have considered the facts of the case and the written submission of the appellant as well as the comments of the A.O. which is general in nature and nothing specifically has been pointed out by the contentions of the appellant. In view of this I am of the opinion that there was no material before the A.O. to reject the books of account of the appellant. In view of the fact that books of account were properly maintained, supporting evidence had been furnished and also verified by at least two officers of Heavy Water Plant, Kota on monthly basis and certified to be correct and also the fact that the appellant had to offer heavy rebate in order to win this contract, I am of the opinion that provisions of Section 145(1) of the I.T. Act are not attracted in this case. Accordingly, the addition made by the A.O. in the trading results of the appellant are deleted entirely.

He further contended that in the first paragraph department appeal has been considered and on the second paragraph (1) & (2), cross objections are not pressed. The same are reproduced as under:- “(1) This appeal by the revenue and cross objection by the assessee emanate from the order passed by the ld. Commissioner of Income-tax (Appeals) on 28.6.1996 in relation to the assessment year 1994-95. (2) The ld. Counsel for the assessee did not press the cross objection. The same therefore, stands dismissed.”

The contentions which has been raised by Mr. Jhanwar that Section 45 AD which has been invoked, the proviso of which is required to be made applicable. However, factual matrix of the case is that since assesse has not pressed into service this ground against which he preferred appeal before the tribunal, in our opinion, it will not be appropriate to answer this question since, he has not pressed into service the same before the tribunal.

Hence, the issue is answered in favour the Department and against the assessee on factual matrix.

The appeal stands dismissed. (VINIT KUMAR MATHUR)J. (K.S. JHAVERI)J. Brijesh 9.