M/S NATIONAL SANITATION,JAIPUR vs. INCOME TAX OFFICER, WARD-2(3), JAIPUR

PER VIJAY PAL RAO, JM :

This appeal by the assessee is directed against the order dated 28th

December, 2017 of ld. CIT (A)-I, Jaipur for the assessment year 2009-10. The

assessee has raised the following grounds :-

“ 1. That on the facts and in the circumstances of the case and in law, the invocation of the provision of section 147/148 of the Income Tax Act, 1961 and the reassessment order passed thereafter in itself is illegal, without jurisdiction and deserves to be quashed.

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Ground No. 1 is regarding validity of reopening of the assessment.

assessee does not press ground no. 1 and the same may be dismissed as not

pressed. The ld. D/R raised no objection if the ground no. 1 of the assessee’s appeal

is dismissed as not pressed. Accordingly, the ground no. 1 of the assessee’s appeal

is dismissed being not pressed.

Ground No. 2 is regarding estimation of income by the AO by

applying net profit rate of 10% on the contract receipts as against the net

profit declared by the assessee at 8%.

construction work. During the year under consideration, the assessee filed its return

of income in response to notice under section 148 of the IT Act issued by the AO

and declared the income under section 44AD of the Act at 8% net profit on the

turnover of Rs. 53,34,397/-. After reducing the remuneration paid to the partners of

Rs. 2,23,200/-, the assessee declared the total income of Rs. 2,03,550/-. The AO

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noted that the provisions of section 44AD are not applicable in the case of the

assessee as the gross receipts of the assessee are more than Rs. 40 lacs.

Accordingly, the AO estimated the net profit @ 10% and computed the income of

the assessee at Rs. 5,33,438/-. The assessee challenged the action of the AO before

the ld. CIT (A) but could not succeed.

under consideration the total revenue of the assessee was Rs. 53,34,398/- out of

which major contribution was from the execution of two contracts worth Rs.

21,80,059/- awarded by M/s. Marudhar Hotels Pvt. Ltd., Jodhpur which was a very

low margin work and further a work of Rs. 27,69,122/- awarded by Sri Shikha

Sansthan (Sanskar School, Jaipur) and major portion of the contract amount was

bad debts for the assessee. Thus the ld. A/R has submitted that during the year

under consideration the actual profit of the assessee was very less but since the

assessee was not maintaining the books of account, it declared total profit in

accordance with the section 44AD of the Act @ 8%. The ld. A/R has further

submitted that the AO has applied the net profit rate of 10% without any basis

which is also excessive. In support of his contention he has relied upon the decision

of Hon’ble Delhi High Court in the case of CIT vs. Subodh Gupta, 229 Taxman 367

(Delhi) and submitted that even though the provisions of section 44AD are not

applicable in the case of the assessee it can be taken as a guidance for estimation of

the income of the assessee when the assessee is not maintaining the books of

account and particularly when the AO has not brought on record any comparable

case where the contractor has declared a higher profit rate. Thus the ld. A/R has

4 ITA No. 231/JP/2018 M/s. National Sanitation, Jaipur.

submitted that the addition made by the AO is not justified and same may be

deleted.

4.1. On the other hand, the ld. D/R has submitted that the assessee did not file

any return of income for the year under consideration and only when the AO issued

the notice under section 148 of the Act, the assessee filed the return of income and

declared the income on estimated basis without supporting with documentary

evidence or books of accounts. Thus the AO has estimated the income of the

assessee @ 10% net profit on turnover. He has relied upon the orders of the

authorities below.

record. The assessee estimated its income @ 8% of turnover under the provisions

of section 44AD of the Act though the assessee is engaged in the business of civil

construction. However, since the turnover of the assessee is more than Rs. 40 lacs,

therefore, the provisions of section 44AD are not applicable in the case of the

assessee. The estimation of income was the only option that left with the assessee

as well as with the AO in the absence of books of accounts as well as the supporting

evidence. The assessee has applied net profit rate of 8% by taking the support from

the provisions of section 44AD whereas the AO has estimated the income by

applying the net profit rate of 10%. Thus it is clear that the rate applied by the

assessee is based on the provisions of section 44AD which provides a guiding factor

though strictly not applicable in the facts of the case. However, the non application

of provisions of section 44AD is only for the purpose of compulsory requirement of

maintenance of books of account and, therefore, for the purpose of estimating the

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income, the said provision can be considered as a guiding factor. On the other hand,

the ld. AO has not brought on record any basis or comparable case to support the

rate of net profit at 10%. Thus when the assessee’s estimation is based on the

provisions of section 44AD and the AO has not brought any contrary case to show

that the assessee’s declaration is substantially lower than the profits declared by any

comparable civil contractor, we find force in the contention of the assessee. The

Hon’ble Delhi High Court in the case of CIT vs. Shri Subodh Gupta (supra) while

considering the issue has held and analyzed this issue in para 5 & 6 as under :-

“5. Aggrieved, the Revenue preferred an appeal before the Tribunal, primarily raising the ground that Section 44AD was not applicable as the assessee's turnover was in excess of Rs.40 lacs and the Assessing Officer was justified in making addition of Rs.10,61,49,773/- in view of contravention of Section 40A(3) of the Act. It was also stated that 20% disallowance of expenses on account of car running and maintenance, telephone expenses, business promotion, depreciation on car etc. should be also restored. The Tribunal did not agree and has held that the assessee was in business of civil construction and disallowing expenditure of Rs.10.98 crores would give an abnormal profit rate of 59.60% on the total turnover of Rs.18.43 crores. This would be illusory and illogical. They agreed that Section 44AD would not be applicable but there was no other material or basis to reasonably estimate income of the assessee. In these circumstances, the Commissioner of Income Tax (Appeals) had adopted a reasonable net profit rate of 8% to estimate the income. They did not find any infirmity in estimating income on the said basis. It was observed that the Commissioner of Income Tax (Appeals) had rightly accepted the explanation of the assessee that this case was covered under the exceptional circumstances stipulated in Clause (g) to Rule 6DD of the Rules. Further, the assessee had asserted that the payments in cash at a particular point of time (i.e. each day) did not exceed Rs.20,000/-. This submission was made before the Commissioner of Income Tax (Appeals), but the first appellate authority had not elucidated and verified facts as details could not be ascertained in the absence of books. The total turnover or quantum of work done by the assessee was undisputed as the assessee had only worked for the Greater Noida Authority. 6. Learned counsel for the Revenue submits that Section 44AD has no application as the turnover of the respondent assessee was Rs.18.43 crores and the said section prescribes a thumb rule or presumptive net profit rate if

6 ITA No. 231/JP/2018 M/s. National Sanitation, Jaipur.

the turnover of an assessee is less than Rs.40 lacs. This is correct and has been noticed by the Commissioner of Income Tax (Appeals) and the Tribunal. The difficulty in the present case is that the Assessing Officer did not conduct any inquiry and ascertain the net profit rate of other comparable contractors. On the other hand, he disallowed expenditure of Rs.10.61 crores resulting in abnormal gross profit rate of 59.60%, which should not be accepted. The effect thereof was that 70% of the expenditure on account of purchases worth Rs.10.61 crores out of total purchases of Rs.14 crores was disallowed. The appellate authorities have taken a holistic and broader view and held that as the books of accounts had not been produced and were not regularly maintained, the book results should be rejected. We agree with the counsel for the Revenue that the assertion that the books of accounts were stolen had a hidden motive and the assertion is rather unbelievable. The respondent assessee therefore must suffer adverse consequences. The only question is whether the addition of Rs.1,13,22,334/- to declared income of Rs.34,21,970/- is adequate or a higher addition would be justified. As far as total turnover is concerned, the appellate authorities are right in holding that the figure of Rs.18.43 crores cannot be disputed as the assessee was only doing development work for the Greater Noida Authority. The total turnover is also supported by the tax at source certificate. The quantum of turnover was not adversely commented upon by the Assessing Officer. In view of the aforesaid position, we wanted the counsel for the Revenue to ascertain the gross profit or net profit rates declared and accepted by the Assessing Officer in case of other contractors engaged in similar work. We wanted ascertainment of this aspect as the counsel for the Revenue had submitted that net profit @ 8% was inadequate and low and a higher profit rate should be attributed. By order dated 19.08.2014, counsel for revenue was required to ascertain the said aspect. It is stated at Bar that the Assessing Officer has not given any comments in this regard. Noticeably, counsel for the assessee had earlier produced before us a copy of the assessment order relating to assessment year 2010-11, wherein the Assessing Officer himself had applied net profit rate of 8% on contractual receipt of Rs.6.66 crores and net profit rate of 3% on supply receipts of Rs.7.21 crores. As per the said order, the total receipts were to the tune of about Rs.14 crores. In the present assessment year the total turnover of the assessee was about Rs.18 crores. In these circumstances we are not inclined to accept the prayer of the counsel for the Revenue that an order of remand may be passed. The Assessing Officer in the subsequent years has accepted the figure of 8% net profit, which is the figure which has been adopted by the appellate authorities in the present case. Reliance placed by counsel for the Revenue on CIT v. Sobti Construction (India) Ltd. [2008] 307 ITR 374/[2008] 174 Taxman 39 (Delhi) is misplaced. In the said case, Section 44AD had been applied though the turnover of the assessee was admittedly above Rs.40 lacs. In the case in hand, the appellate authorities have not applied Section 44AD as such. Difficulty arose as they had to estimate reasonable rate of net profit. In the absence of any data and details, they applied the net profit rate as mentioned in Section 44AD. As recorded above, we had asked counsel for the Revenue to ascertain whether similar contractors have declared a higher profit rate. Counsel for the Revenue has

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not been able to point out or state that the other contractors have a higher profit rate, than the net profit rate of 8% as held by the appellate authorities. The said rate was also applied in the assessment year 2010-11.”

Accordingly, in view of the facts and circumstances of the case, we find that the

action of the AO applying the net profit rate of 10% is baseless and arbitrary and

hence the addition made by the AO on account of estimation of income by applying

the net profit rate of 10% is deleted.

Ground No. 3 is regarding disallowance of remuneration paid to the

partners to the extent of Rs. 1,27,200/-.

remuneration paid to the partners of Rs. 2,23,200/-. The AO noted that as per the

Partnership Deed the remuneration to each partner is provided @ Rs. 4,000/- per

month and hence the AO allowed the remuneration of Rs. 96,000/- as against the

claim of the assessee of Rs. 2,23,200/-. The assessee challenged the action of the

AO before the ld. CIT (A) but could not succeed. However, the ld. CIT (A) has

directed the AO to amend his order as instead of allowing the deduction, the AO

added this amount of Rs. 96,000/- to the income of the assessee.

material on record. The ld. A/R of the assessee has submitted that the

remuneration paid to the partners is within the limitation as provided under section

40(b)(v) of the IT Act and, therefore, the same is an allowable expenditure. He has

further submitted that though the partnership deed provides monthly

salary/remuneration of Rs. 4,000/- but the same can be altered or varied as per the

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profits of the business. Hence the ld. A/R has submitted that the claim of

remuneration paid to the partners may be allowed.

7.1. On the other hand, the ld. D/R has submitted that as per the provisions of

section 40(b)(v) of the Act, the remuneration cannot be paid more than the amount

provided in the partnership deed and further with a cap of percentage as provided

under the provisions of section 40(b)(v) of the Act.

record, we find that undisputedly the partnership deed of the assessee firm provides

for payment of monthly salary/remuneration @ Rs. 4,000/- to each partner.

Therefore, the remuneration to the partners has to be paid in terms of the

partnership deed and if the payment so made as allowed by the partnership deed is

exceeding the limit provided under clause (v) of section 40(b) of the Act then the

claim would be restricted to the amount computed as per the provision of section

40(b)(v) of the Act. The AO has considered this issue as under :-

“ During the course of assessment proceedings, the A/R of the assessee filed copy of Partnership Deed which was executed on 19th day of May, 2001. On going through the Parthershuip Deed, it is gathered that both the partners are working partners and they will be allowed to draw monthly salary/remuneration of Rs. 4,000/- per month. Para No. 7 of the Partnership Deed is reproduced as under :-

“7. That both the partners shall be the working partner and shall be looking after the day to day business activity of the firm for which they shall be entitled to draw monthly salary/remuneration of Rs. 4,000/- which can be altered/reduced booking to the profit of the business.”

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In view of the above clause incorporated in the Partnership Deed, both the partners are eligible for remuneration of Rs. 4,000/- per month only. However, the assessee firm has claimed payment of remuneration as per Provisions of section 40(b)(v). As such, it has not been mentioned in the partnership deed that the amount of remuneration will be allowable under the provisions of section 40(b)(v), therefore, remuneration claimed by the assessee at Rs. 2,23,200/- is not allowable. The position has further been clarified by the CBDT vide their Circular No. 739 dated 25th March, 1996 that :

“ It is clarified that for the assessment years subsequent to the assessment year 1996-97, no deduction under section 40(b)(v) will be admissible unless he partnership deed either specifies the amount of remuneration payable to each Individual working partner or lays down the manner of qualifying such remuneration 7-19.”

In view of the Provisions of Section 40(b)(v) of the I.T. Act and also in view of the clarification made by the CBDT, New Delhi, the total amount of remuneration allowable to both the working partner is Rs. 96,000/- (Rs. 48,000/- each). Thus, the balance amount of Rs. 1,27,200/- (Rs. 2,23,200/- minus Rs. 96,000/-) is added back to the total income of the assessee firm.”

The facts recorded by the AO regarding the clause of the Partnership Deed is not in

dispute and, therefore, as per the Partnership Deed, an amount of Rs. 4,000/- per

month is payable to the partner as remuneration. It is also not in dispute that for

the year under consideration the Partnership Deed has been considered by the AO is

relevant and any amendment in the partnership deed subsequent to the year under

consideration is not relevant for this issue. Hence in view of the facts and

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circumstances of the case, we do not find any error or illegality in the orders of the

authorities below.

Order is pronounced in the open court on 14/08/2018.

Sd/- Sd/- (foØe flag ;kno) (fot; iky jkWo ½ (VIKRAM SINGH YADAV ) (VIJAY PAL RAO) U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member

Jaipur Dated:- 14/08/2018. Das/

आदेश की प्रतिलिपि अग्रेषित@ब्वचल वf जीम वतकमत वितूंतकमक जवरू

सहायक पंजीकार@ Aेेपेजंदज. त्महपेजतंत

11 ITA No. 231/JP/2018 M/s. National Sanitation, Jaipur.