MR GURINDER PAL SINGH,CHANDIGARH vs. THE ADDITIONAL COMMISSIONER OF INCOME TAX, CHANDIGARH

PER ANNAPURNA GUPTA, A.M. :

The above cross appeals, by the assessee and the Revenue, have been filed against the order of learned

Commissioner of Income Tax (Appeals)-2, Chandigarh

dated 29.11.2016 relating to assessment year 2008-09. 2. At the outset it may be stated that this is the second

round of hearing before the I.T.A.T. Brief facts relating to the case are that the assessee is a road building contractor

being Proprietor of M/s Rajinder & Company.

Act, 1961 (in short ‘the Act’) was made on the assessee,

vide order dated 15.12.2010, wherein due to various

discrepancies noted by the Assessing Officer in the books of account maintained by the assessee, the books of accounts

were rejected u/s 145(3) of the Act and thereafter a net

profit rate of 12% was applied to the gross receipts of the assessee as reduced by the cost of material supplied by the Department and sales tax deducted at source, for determining the income earned by the assessee during the year from the said business. The Ld.CIT(Appeals) reduced

the net profit rate applied to 7%, noting that the facts of the impugned year were identical to the preceding years

wherein the rate of 7% had been accepted in appeal even by the I.T.A.T. The matter went up in appeal before the I.T.A.T.

who found that the facts of the present year were not identical with the preceding years on account of the fact

that a survey was conducted at the assessee’s premises

during which the details of wages taken out from the computer showed wide discrepancy in the wages actually

paid by the assessee as against that shown in the books of accounts. The I.T.A.T. further noted that the Tribunal had in A.Y. 2007-08 held that its order would not operate as a precedent if sufficient material was brought on record

warranting adoption of a higher percentage of net profit.

Considering the same, therefore, the ITAT, in the impugned

year, restored the issue to the CIT(Appeals) with the direction to re-examine the issue in the light of the facts

recorded by the Assessing Officer. The ITAT had also dealt

with the issue raised by the assessee of claiming deduction

of work subcontracted from the gross receipts while

applying 7% net profit rate and laid down the principle that when the work was subcontracted as it is by the assessee at the same rate at which it was taken, then the quantum

subcontracted work could be reduced from the gross

receipts for the purpose of calculating the net profit earned

during the year, otherwise it was held that the work

subcontracted only tantamounted to an expenditure of the assessee which would even otherwise be covered in the net

profit rate applied on the total turnover of the assessee.

After laying down the aforesaid principle the I.T.A.T.

restored this issue also to the CIT(Appeals) to determine the facts of the case and thereafter decide the issue after

applying the principle laid down by the I.T.A.T.

deducted at source and bitumen purchases made from the Government agency and further held that no deduction on account of the work subcontracted by the assessee be allowed from the same. The relevant findings of the CIT(Appeals) at paras 5 and 5.1 are as under:

“5. Submissions of the appellant, findings/directions of Hon'ble ITAT, assessment order and the relevant facts in this regard have been carefully considered. The assessee is doing business as contractor for construction of roads and in the absence of books of accounts the net profit of the assessee has been assessed and accepted at 7% of the contract receipts. This pattern is being followed from assessment year 2003-04 to 2007-08 and in AY 2005-06 and 2006-07 net profits at 7% of the contract receipts was directed to be assessed by Hon'ble ITAT and was confirmed by Hon'ble Punjab & Haryana High court. In AY 2007-08 Hon'ble ITAT, Chandigarh Bench directed to recompute the net profit of the assessee by applying net profit rate of 7% instead of 12% and this direction of taking net profit rate at 7% was in the normal circumstances in the relevant year. Hon'ble ITAT also observed in its order that this order will not operate as precedent if the assessing officer is in a position to bring sufficient material on record warranting hire percentage of net profit or higher amount of disallowance of expenses. A survey was conducted on the business premises of the assessee on 12.03.2009, during which a computer printout was taken from the computer of the assessee at its business premises for relevant assessment year in which the wages expenses have been shown at Rs. 2,05,60,856/- as against the wages of Rs. 9,06,13,880/- debited in P&L account and the return of income stood filed on 30.09.2008 i.e. before the date of survey. Thus there was discrepancy in the wages in the accounts of the assessee which were claimed to be audited. Appellant has not produced complete books of accounts before the assessing officer during course of assessment proceedings. The discrepancy in wages and no books of accounts clearly distinguish the relevant assessment year from the earlier assessment years including assessment year 2007-08 wherein net profit rate of 7% was directed to be applied in the normal circumstances of a road contractor. In the relevant A.Y. the assessing officer has applied the net profit rate of 12% relying on the decision of Hon'ble Punjab & Haryana high court in the case of M/s Prabhat Kumar (supra). The case relied upon by assessing officer is of a civil contractor and the appellant being a road contractor and in the business of road contractor the profit margins are lower than that in the business of civil contractor and this ratio has been recognized by the IT AT Chandigarh Bench in its order dated 24.02.2010 in the case of M/s M.K. Constructions (ITA No. 11/Chd/2011) wherein net profits of the assessee were directed to be assessed at 8%. Also in the case of another road contractor i.e Sh. Jaswant Singh, Contractor, Hon'ble IT AT, directed in ITA No. 1109/Chd/2011 to take net profits of a road contractor after rejection of books of accounts at 6% considering the fact in normal circumstances. The net profit rate at 7% has been directed to be applied by ITAT Chandigarh Bench in AY 2007- 08 and preceding assessment years in normal circumstances in the case of the assessee. The relevant year being a case where discrepancies in wages were found and appellant has not produced books of accounts to explain the same, therefore the net profit is directed to be taken at 10% of the gross receipts as defined in succeeding paragraph.

with the assessee challenging the application of 10% rate of net profit as against 7% claimed by it and also challenging

the act of the CIT(Appeals) in not granting the deduction of payment made to sub-contractors from the gross receipts

while applying profit rate. Ground raised by the assessee

read as under:

“1. That the Order of the Lrd. Commissioner of Income Tax [Appeals] - 2, Chandigarh is partly defective both in law and facts of the case.

by the Assessing Officer and has raised following grounds of appeal:

“1. On the facts & in the circumstances of the case and in law, the Ld.CIT(A)has erred in allowing appeal of the assessee without appreciating the facts of the case.

years net profit rate of 7% had consistently been applied

which had been affirmed as appropriate by the ITAT and the Hon’ble High Court also. Ld.Counsel for the assessee

pointed out that contended that in the assessment years

2005-06 and 2006-07 the ITAT had in the case of the assessee itself held a net profit rate of 7% to be appropriate which had been affirmed by the Hon'ble Punjab

& Haryana High Court also vide its order dated 13 th

September 2011. Copy of the orders of the ITAT and the Hon’ble High Court were placed before us. The Ld.Counsel

further contended that even in earlier years from A.Y 2001-

02 to A.Y 2004-05,net profit rate of 7% had been applied.

The Ld. counsel for assessee further relied upon the decision of the ITAT Chandigarh Bench in the case of M/s

M.K. Constructions Vs. ACIT in ITA No.11/Chd/2011 dated

No.1109/Chd/2011 dated 29.2.2012 in support of its plea

that the net profit rate of 7% be applied. The Ld. counsel

for assessee pointed out that the assessees in both the cases were road contractors to which a net profit rate of 8%

and 6% respectively was upheld by the I.T.A.T. to be appropriate for determining the income earned from the said business. Thus the Ld. counsel for assessee,

contended that 7% net profit rate ought to be applied to the turnover of the assessee as against 10% applied by the CIT(Appeals). The Ld.Counsel for the assessee further

contended that the abnormality taken note of by the CIT(Appeals) being the information obtained during survey

relating to wages actually paid by the assessee, was not a distinguishing factor at all to attract levy of 10% net profit

rate in the impugned year as done by the CIT(Appeals). The Ld. counsel for assessee stated that firstly the survey was conducted on 12.3.2009 , which was relevant for A.Y. 2009-

10 and not the impugned year i.e. A.Y. 2008-09. In any case, the Ld. counsel for assessee stated that even if the same is taken to pertain to the impugned year, the same

would not make any difference to the determination of the net profit rate to be levied on the gross receipts since in any case, the books of account of the assessee had been rejected and the net profit had to be estimated on the basis

of the past history of the assessee. Therefore, the actual

incurrence of any expenditure would make no difference to the applicable net profit rate at all. The Ld. counsel for assessee, therefore, stated that the net profit rate of 10%

applied by the CIT(Appeals) distinguishing the impugned

year’s case from the preceding years on the basis of documents relating to wages unearthed during survey

proceedings, was not sustainable. The Ld. counsel for assessee further pleaded that 12% net profit rate applied by the Assessing Officer and canvassed by the Revenue had rightly been held not applicable in the present case by the CIT(Appeals) having correctly noted that the basis of the 12% rate being the decision of the Hon'ble Juri ictional

High Court in the case of Prabhat Kumar in ITA No.293 of 2008 and M/s Shivam Construction in ITA No.167 of 2007,

both of them were engaged in the work of civil construction

while the assessee was a road contractor where the net

profit margin was lower as compared to a civil contractor

and, therefore, the said rates were not applicable to the present case.

the assessee contended that in the past also the assessee

had been allowed deduction on account of work

subcontracted in assessments made u/s 143(3) for assessment years 2003-04, 2004-05 and 2011-12. The Ld.

counsel for assessee further pointed out that even in the case of sister concern of the assessee M/s Grafcon

Infrastructure in ITA No.848/Chd/2011 dated 13.7.2012

deduction on account of subcontract was duly allowed. The Ld. counsel for assessee also relied upon the order of the Hon'ble Juri ictional High Court in the case of CIT Vs.

Pran Nath Gupta, 328 ITR 165 in support of its contention

that deduction of payment to subcontractors be allowed

from the gross receipts for levying net profit rate.

of the Assessing Officer in support of its contention that 12% net profit rate be applied, while he relied upon the order of the CIT(Appeals) in support of his contention that payment on account of sub-contract should not be deducted from the gross receipts for applying net profit

rate.

perused the orders of the authorities below and also gone

through various documents and orders referred to before

us. There are primarily two issues before us. The first issue

pertains to determination of net profit rate to be applied on the receipts of the assessee for determining the taxable

income. The second issue is whether deduction on account

of work sub contracted by the assessee is to be allowed

from the gross receipts for application of net profit rate

thereon.

is a contractor in the business of road construction and the books of accounts maintained by the assessee have been rejected u/s 145(3) of the Act, which has remained

unchallenged. Further undisputedly in the past net profit

rate of 7% has been held to be appropriate for determining

the income of the assessee. It is a fact on record that in assessment years 2005-06 and 2006-07, net profit rate of 7% had been held appropriate by the I.T.A.T. and the same

was confirmed by the Hon’ble High Court. In the impugned

year the CIT(Appeals) held 10% net profit rate as appropriate, as distinguished from the earlier years, for the reason that the a survey was conducted at the premises of the assessee wherein the computer printout of wages was found revealing that the assessee was actually paying far

less wages than that shown in the books of account. This the Ld.CIT(A) held made the impugned year’s case different

and distinguishable from the preceding years and,

therefore, the past history of applying 7% net profit rate

was held not applicable in the impugned year. The Ld.CIT(Appeals) also rejected 12% net profit rate applied by the Assessing Officer, which the Assessing Officer had applied following the decision of the Hon'ble Juri ictional

High Court in the case of Prabhat Kumar contractor (supra)

and Shivam Constructions (supra), stating that they were civil contractors whose work profile was different from that of the assessee who was a road construction contractor and,

therefore, net profit rate applicable in those cases could not be applied in the present case. The CIT(Appeals), therefore,

considered 10% net profit rate as appropriate.

Considering the past history of the assessee wherein 7% net

profit rate was held appropriate, the same undoubtedly

could have been digressed from only if the facts and circumstances in the impugned year demonstrated that the assessee had earned more than the normal appropriate

profits . This exactly was the observation of the I.T.A.T.

also when it remanded the issue to the CIT(Appeals) to re-

examine in the light of the evidence collected during survey,

being a wage sheet showing wages paid during the year at Rs.2,05,60,856/- as against Rs.9,06,13,380/- claimed by the assessee in its books of account. We find that the said

document has no effect/impact on the appropriate net profit

rate to be applied in the case of the assessee. The books of accounts of the assessee in any case, we find, have been rejected meaning thereby that it has been conclusively

found that the entries in the books of account do not reflect

the actual position of the assessee relating to income

earned during the year. And thereafter an appropriate net

profit rate applied to determine the income earned by the assessee. On application of a net profit rate all expenses

incurred are assumed to have been duly taken care of. In this scenario, any fact relating to the actual expenses

incurred by the assessee has no impact on the appropriate

net profit rate to be applied, since the same is the profit

which the assessee normally earns from the types of business activity it indulges in. The same is determined

considering the nature of business in which the assessee

indulges and the normal profit shown in the same line of business. Once the net profit rate is applied all expenditure

are assumed to have been accounted for and, therefore, the actual expenditure incurred will not impact the net profit

rate applicable. The applicable net profit rate can differ

only when the facts demonstrate that the nature of the work

carried out by the assessee during the impugned year

differed from the preceding years and in which the profit

margin the assessee was earning was also different. That being not the case in the present appeal before us, the CIT(Appeals) we hold had erred in taking note of the documents found during search relating to wages paid by the assessee and holding that the facts of the present year

differed from the preceding years and, therefore, the past

accepted history of the assessee of net profit rate of 7% was not applicable. Since we find that the fact situation in the present case remains unchanged for the purpose of determination of the net profit applicable to the turnover of the assessee, despite the documents relating to wages found

during survey, we see no reason to differ from the past

history of the assessee and, therefore, we set aside the act

of the CIT(Appeals) in applying the net profit rate of 10% to the gross turnover of the assessee and restrict the same to 7% as done in the past. For the same reason, we are not in agreement with the contention of the Revenue that the net

profit rate of 12% be applied to the gross turnover of the assessee. Accordingly, ground of appeal No.2 raised by the assessee is allowed, while ground of appeal No.2 of the Revenue is dismissed.

to deduction of payment made to sub-contractors from gross

receipts, we find that the I.T.A.T. had restored the issue to the CIT(Appeals) after laying down the principle that the payment to sub-contractors are to be reduced from the gross receipts only if the work is sub-contracted as it is to the sub-contractors without any profit margin being

retained by the contractors and the limited purpose for which the issue was restored to the CIT(Appeals) was to determine whether the fact in the present case was so and allow deduction of the work subcontracted only in the said

fact situation. The CIT(Appeals) having not found the said

fact situation, denied deduction of the payment made to sub-contractors. Even before us Ld.Counsel for the assessee has not been able to demonstrate the said fact. We

therefore find no reason to interfere in the order of the CIT(Appeals) considering the specific directions of the I.T.A.T. The arguments raised by the Ld.Counsel for the assessee that in earlier years it had been allowed deduction

of work sub-contracted irrespective of the manner in which it was sub-contracted is, we find, an argument against the principle laid down by the I.T.A.T. while restoring the issue

to the CIT(Appeals), which cannot be challenged before us.

The appropriate remedy with the assessee lay before the High Court. In view of the same, we dismiss ground No.2

raised by the assessee.

the Revenue’s appeal is dismissed.

Order pronounced in the Open Court. (SANJAY GARG) ACCOUNTANT MEMBER Dated : 15th June, 2018 *Rati* Copy to: