Commissioner Of Income Tax-Xii vs Subodh Gupta
2014 Latest Caselaw 6599 Del

$~1
*IN THE HIGH COURT OF DELHI AT NEW DELHI
                                  Date of Decision: December 09, 2014
+     ITA 80/2014
      COMMISSIONER OF INCOME TAX-XII                  ..... Appellant
                         Through       Mr.Kamal Sawhney, Sr.
                                       Standing Counsel with
                                       Mr.Sanjay Kumar, Advocate

                         versus

      SUBODH GUPTA                               ..... Respondent

                         Through       Mr.Ved Jain, Advocate

      CORAM:
      HON'BLE MR. JUSTICE SANJIV KHANNA
      HON'BLE MR. JUSTICE V. KAMESWAR RAO

SANJIV KHANNA, J (ORAL)

This appeal by the Revenue under Section 260A of the Income

Tax Act, 1961 ('Act' in short) relates to assessment year 2009-10.

2. The assessee had filed return for the said year on 28.09.2009

declaring income of Rs.35,21,970/-.

3. In the scrutiny assessment, the Assessing Officer relying upon

Section 40A(3) disallowed expenditure of Rs.10,61,49,773/-. He

rejected reliance on Clause g to Rule 6DD of Income Tax Rules, 1962

('Rules' for short) to the effect that payments were made to villagers

who were operating tractors, trolleys, bullock carts and had supplied

materials like bitumen, grit etc. It was the contention of the assessee that the development work undertaken was in rural or sub rural area

and the villagers to whom payments were made did not have benefit of

banking facility. The Assessing Officer in addition made adhoc

disallowance of 20% on depreciation, car running and maintenance

expenditure, telephone expenses, staff welfare expenses etc. The

Assessing Officer observed that the assessee had not produced the

books of accounts on the plea that books had been stolen. Copy of an

FIR in support was filed.

4. The Commissioner of Income Tax (Appeals) noticed that the

disallowance of Rs.10.61 crores had resulted in an abnormal

conclusion, as the net profit rate had jumped to 59.60% on the total

turnover of Rs.18.43 crores. This was illogical and could not be

accepted. Relying upon Rule 6DD(g) of the Rules and after making

reference to several decisions, he observed that the assessee should

partly succeed. He observed that the assessee had filed copy of the

ledger accounts before the Assessing Officer which was also filed

before him but supporting details/vouchers and details of payments had

not been filed. Further, the assessee had claimed that the books of

accounts had been stolen and an FIR in respect of the said theft had

been recorded. In the absence of full details and confirmations from the

parties concerned, the book results and income declared could not be

verified. The only figure verifiable was the total turnover of the contractual work undertaken by the assessee as the said work was

undertaken for the Greater Noida Authority who had deducted tax at

source on the payments made. He felt that the only option available

was to reasonably estimate the assessee's income after rejecting the

books of accounts and the profits as declared. Recording absence of

material to show the net profit rate, which could be applied, the

Commissioner of Income Tax (Appeals) applied net profit rate of 8%

on total turnover referring to the net profit rate mentioned in Section

44AD of the Act. He observed that Section 44AD was not applicable

as the turnover of the assessee was more than Rs.40 lacs but the

presumptive net profit rate of 8% as stipulated could be taken for

estimation. It would be reasonable to estimate the income by applying

8% net profit rate on turnover of Rs.18,43,03,935/-. He accordingly

computed income of the respondent assessee at Rs.1,46744,314/-, thus

making an addition of Rs.1,13,22,344/- to the declared income of

Rs.34,21,970/-.

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 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 vs. Sobti Construction

(India) Ltd. [2008] 307 ITR 374 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 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.

7. In view of the aforesaid factual position, we do not see any

reason to interfere with the impugned order and the appeal is

dismissed.

SANJIV KHANNA, J.

V. KAMESWAR RAO, J.

DECEMBER 09, 2014/km