DCIT, CHANDIGARH vs. SH. GURINDER PAL SINGH, CHANDIGARH

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH ‘A’, CHANDIGARH

BEFORE SHRI SANJAY GARG, JUDICIAL MEMBER AND MS. ANNAPURNA GUPTA, ACCOUNTANT MEMBER ITA No.235/Chd/2017 (Assessment Year : 2008-09) Mr.Gurinder Pal Singh, Vs. The Addl. CIT, H.No.66, Sector 27-A, Range – 5, Chandigarh. Sector 17, Chandigarh. PAN: ACNPS7888M & ITA No.294/Chd/2017 (Assessment Year : 2008-09) The D.C.I.T., Vs. Mr.Gurinder Pal Singh, Circle 1(1), H.No.66, Sector 27-A, Sector 17, Chandigarh. Chandigarh. PAN: ACNPS7888M (Appellant) (Respondent)

Appellant by : Shri Atul Mandhar, Adv. Respondent by : Smt.Chanderkanta, Addl.CIT Date of hearing : 20.03.2018 Date of Pronouncement : 15.06.2018

ORDER 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.

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.

aforesaid directions of the I.T.A.T. adjudicated both the

issues and held that the net profit rate of 10% be applied to

the gross receipts of the assessee as reduced by the

material supplied by the Department and the sales tax

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. 5.1 Appellant has claimed that the sub contract work of Rs.2,37,71,741/- be allowed to be deducted from the gross receipts. Hon'ble ITAT has given specific directions that the sub-contract work is an expenditure of the assessee and the same cannot be reduced from the turn over as appellant has filed no evidence to show that the sub-contract work was given on the same rates as received by the assessee. Assessing Officer in the absence of books of accounts made an addition of profit margin of 6% estimated to be applied to the value of subcontract work and made addition of Rs..14,26,304/- which was deleted by CIT(A) and the decision was upheld by Hon'ble ITAT, Therefore it is held that the subcontract work will not be allowed to be deducted from gross receipts for applying net profit rates as it is in the nature of expenditure and appellant has not brought any evidence on record to prove that the subcontract work was given on the same rates as received by the assessee. For applying net profit rate I have considered that Hon'ble Tribunal in assessment years 2005-06 and 2006-07 confirmed the net profit rate of 7 % of gross receipts as reduced by material supplied by government and purchases made from government agencies. This principle was confirmed by Hon'ble P&H high court in these assessment years and as per the copy of the order filed by the appellant for assessment year 2011-12 it has been followed by assessing officer in AY 2011- 12 wherein net profit rate of 7%*has been applied after making deductions on account of material recovered from government and material purchased from government agencies. Similar principle of allowing deduction of material supplied from govt. and purchases made form government agencies was upheld by Hon'ble ITAT in case sister concern of the assessee M/s Grafcon Infrastructure in AY 2008-09 in its order dated 13.07.2012 (ITA No 848/Chd/2011) on identical facts. In view of the above discussion and respectfully following the decisions of Hon'ble ITAT mentioned above AO is directed to assess the net profit at the rate of 10% of the gross receipts as per TDS certificates less material supplied by department, sales tax deducted at source and bitumen purchases made from govt. agencies after due verification.; The net profit determined at 10% of the total receipts determined as above will be as if all the expenses including depreciation have been allowed and no further expenses will be allowable from the net profit so determined. The issues set aside and discussed in para 3 & 4 above are partly allowed.”

assessee and the Revenue have come up in appeal before us

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. 2. That the Lrd. Commissioner of Income Tax [Appeals] - 2, Chandigarh has been unjustified in applying Profit Rate @ 10% as against Profit Rate of 7% of Gross Receipts as further reduced by various deductions as held by Hon'ble Punjab & Haryana High Court in Assessee's own case for Preceeding Years. 3. That the Lrd. Commissioner of Income Tax [Appeals] - 2, Chandigarh has been unjustified in not deducting payment made to Sub-Contractors from Gross Receipts while applying Profit Rate. 4. That any other ground which may be taken up at the time of hearing of the Appeal with the kind permission.” 6. The Revenue, on the other hand, has challenged the

application of net profit rate of 10% as against 12% charged

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. 2. The Ld. CIT(A) have erred in restricting the net profit from 12% to 10% without appreciating that the net profit was applied as per the documents impounded during the course of survey wherein specific discrepancies were noticed?

common and interlinked, we shall be dealing with both the

appeals together.

net profit rate to be applied, the Ld.Counsel for the

assessee laid emphasis on the fact that in all preceding

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

24.2.2010 and Jaswant Singh Contractor in ITA

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 Jurisdictional

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.

assessee from the gross receipts for applying net profit rate

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 Jurisdictional 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 Jurisdictional

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.

Sd/- Sd/-

(SANJAY GARG) (ANNAPURNA GUPTA) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated : 15th June, 2018 *Rati* Copy to: 1. The Appellant 2. The Respondent 3. The CIT(A) 4. The CIT 5. The DR

Assistant Registrar, ITAT, Chandigarh