R GOVINDE GOWDA,MANDYA vs. PRINCIPAL COMMISSIONER OF INCOME TAX, BANGALORE-3, BANGALORE

The facts relating to the issue are stated in brief. The assessee is an individual and he filed his return of income on 16.10.2016 declaring total income of Rs.23,06,750/-. The assessee is engaged in the business of undertaking civil contract works. The

During the course of assessment proceedings, the A.O. noticed that the turnover reported in Form 26AS was Rs.4,42,29,118/-, whereas the assessee had declared Rs.35,38,329/- in the return of income. When questioned, the assessee submitted that he has not maintained books of accounts for civil contract business. He submitted that the Income tax portal did not accept gross receipts, when it exceeds Rs.1.00 crore. Hence the assessee has filled up the net income in the return of income. He submitted that he has estimated income before depreciation and interest @ 8% on the gross contract receipts, which worked out to Rs.35,38,329/- and deducted expenditure towards depreciation and interest there from. Accordingly, the assessee has declared net income of Rs.11.32 crores. The assessee submitted that the income has been estimated around 8% taking guidance from the provisions of section 44AD of the Act (though the said provision is not applicable to him) and depreciation and interest expenditure was deducted therefrom. In support of this exercise, the assessee relied on the decision of Hon’ble Kerala High Court rendered in the case of Sammurai Techno Trading Company Ltd. Vs. CIT (2010) 37 DTR 386.

The A.O. did not accept the income declared by the assessee. He expressed the view that the onus of proving income declared by the assessee as correct lies upon the assessee. Accordingly, the A.O. proposed to estimate the income of the assessee @ 10% of the gross contract receipts and deduct there from depreciation and interest expenditure claimed by the assessee. The assessee agreed to the same and accordingly, the AO estimated the income @ 10% of

Since the assessee did not maintain books of accounts as required under provisions of section 44AA of the Act, it appears that the A.O. also initiated penalty proceedings u/s 271A of the Act.

The Ld. PCIT examined the assessment record and took the view that the action of the A.O. in granting depreciation and interest expenditure as deduction is not in accordance with provisions of section 44AD(2) of the Act. The Ld. Principal CIT also noticed that the A.O. has dropped the penalty proceedings initiated u/s 271A of the Act accepting the decision cited by the assessee, viz., decision of Hon’ble jurisdictional High Court rendered in the case of CIT Vs. Babu Reddy (2010) 38 DTR 147 (KAR). The Ld PCIT took the view that the decision rendered in the case of Babu Reddy (supra) was not applicable to the facts of the present case, since in the case of Baby Reddy (supra), the said assessee was maintaining books of account. Accordingly, the Ld PCIT took the view that the assessment order passed by the AO is erroneous and prejudicial to the interests of revenue. Accordingly, he initiated revision proceedings u/s 263 of the Act on both the issues referred above. After affording opportunity of being heard to the assessee, the Ld. Principal CIT held that the assessment order is erroneous and prejudicial to the interest of the revenue in so far as it is related to allowing deduction of depreciation and interest. He also held that the dropping of penalty proceeding initiated u/s 271A of the Act was clearly on wrong appreciation of the judgement of the Court.

The Ld. A.R. submitted that the assessing officer has duly examined the income declared by the assessee from civil contract works by raising queries. After considering the replies given by the assessee, the A.O. has taken a conscious decision to estimate the income @ 10% of gross receipts as against 8% estimated by the assessee and allowed deduction of depreciation and interest. In support of this submission, the Ld. A.R. took us through the queries raised by the A.O. and the replies given by the assessee. Accordingly, the Ld. A.R. submitted that the assessing officer has taken a plausible view on the matter and hence the Ld. PCIT was not justified in initiating the revision proceedings. He further submitted that it is an admitted fact that the assessee did not maintain books of accounts and hence the income from civil contract works can only be estimated. Accordingly he submitted that, even if the matter is restored to the file of A.O., there is no option but to estimate the income. The Ld A.R placed his reliance on the decision rendered by Hon’ble High Court of Karnataka in the case of CIT Vs. P. Sudhakar (2015) 61 Taxmann.com 17, wherein the Hon’ble High Court has quashed revision proceedings initiated

The Ld. A.R. further submitted that the provisions of section 44AD of the Act are not applicable to the assessee, as the turnover of the assessee has exceeded the limit prescribed in that section. Accordingly, he submitted that the Ld. PCIT was not justified in placing reliance to the provisions of section 44AD(2) of the Act in order to form the view that the depreciation and interest expenditure is not allowable as deduction.

The Ld. A.R. further submitted that the Ld. PCIT has also expressed the view that the dropping of penalty u/s 271A of the Act was clearly on a wrong appreciation of the judgement of the Hon’ble High Court of Karnataka. The Ld. A.R. submitted that the Ld. PCIT should have passed separate revision order in respect of penalty proceedings initiated u/s 271A of the Act. Accordingly, the Ld. A.R. submitted that the Ld. PCIT was not justified in combining the same in the impugned revision order.

The Ld. D.R., on the contrary, supported the order passed by Ld. PCIT. From the paper book filed by the assessee, we notice that the assessee has mentioned in the letter dated 02-08-2018 that he is not maintaining books of account for civil contract works business. We notice that the A.O has issued many notices u/s 142(1) of the Act asking several information and the assessee has also complied with the notices.

Thereafter the assessing officer has issued another notice dated 21.8.2018 with the following remarks:-

We notice that the A.O. again issued another notice dated 10.9.2018 u/s 142(1) of the Act, wherein he proposed to estimate income before interest and depreciation @ 10% of the turnover. Thereafter, the A.O. has completed the assessment estimating the gross income @ 10% of the turnover and allowed deduction of depreciation and interest.

From the foregoing discussions, it can be noticed that the A.O. has applied his mind on the impugned issue and has taken a conscious decision to allow deduction of depreciation and interest after estimating gross income @ 10% of the gross receipts. We find merit in the contentions of the assessee that the AO has taken a plausible view in this matter and hence it cannot be considered to be prejudicial to the interest of the revenue. We notice that the above said contentions of the assessee finds support from the decision rendered by Hon’ble High Court of Karnataka in the case of CIT Vs. P. Sudhakar (supra). The relevant observations are extracted below:- “7. The material on record discloses that, Rs. 35.38 crores is the gross bill. The assessee is working under the main contractor M/s IVRCL. They deducted a sum of Rs. 22.99 crores from the bill of the assessee on account of the materials supplied and expenditure incurred by them. Only a sum of Rs. 12.38 crores was actually paid to the assessee. On that basis a sum of Rs. 4,95,970/- was the income offered by the assessee in the return of income. However, the Assessing Authority after scrutiny of the entire material on record added a sum of Rs. 80,64,764/-. Thus, the total income was determined at Rs. 85,60,730/-. The said income with reference to the contract receipts of Rs. 13.37 crores works out to 6.4%. Therefore, the contention that it works out to 0.12% is erroneous.

The scope of revision proceedings initiated under section 263 of the Act was considered by Hon'ble Bombay High Court, in the case of Grasim Industries Ltd. V CIT (321 ITR 92) by taking into account the law laid down by the Hon'ble Supreme Court. The relevant observations are extracted below: Section 263 of the Income-tax Act, 1961 empowers the Commissioner to call for and examine the record of any proceedings under the Act and, if he considers that any order passed therein, by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the Revenue, to pass an order upon hearing the assessee and after an enquiry as is necessary, enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment. The key words that are used by section 263 are that the order must be considered by the Commissioner to be “erroneous in so far as it is prejudicial to the interests of the Revenue”. This provision has been interpreted by the Supreme Court in several judgments to which it is now necessary to turn. In Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83, the Supreme Court held that the provision “cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer” and “it is only when an order is erroneous that the section will be attracted”. The Supreme Court held that an incorrect assumption of fact or an incorrect application of law, will satisfy the requirement of the order being erroneous. An order

With regard to the observation of Ld. PCIT that the dropping of penalty u/s 271A of the Act was on wrong appreciation of the judgement of the High Court, the Ld. A.R. contended that the Ld. PCIT should have passed separate order on this issue. However, the Ld. A.R. did not cite any authority in support of his contentions. In any case we notice that the Ld. PCIT has given opportunity to the assessee in this regard. Accordingly, we do not find it necessary to interfere with observations made by Ld. PCIT on the second issue.

In the result, the appeal filed by the assessee is partly allowed.