J.K. Construction Co. Vs. Income Tax Officer [Alongwith Ita - Court Judgment

Excerpt:
1. these two appeals by different but connected assessees emanate from the orders passed by the cit under section 263 on 28th nov., 2005 in relation to asst. yr. 2004-05. since the both the appeals are based on identical facts, we are therefore, proceeding to dispose them of by this common order for the sake of convenience.2. briefly stated, the facts of this case are that the return of income was furnished on 31st oct., 2004 declaring an income of rs. 1,56,308.the ao observed that the assessee, a transport contractor, had not properly maintained the books of account. it was further noted that in the year under consideration, the assessee had shown gp rate of 3.84 per cent on contract receipts of rs. 2-01 crores as against preceding year's gp rate of 2.65 per cent and contract receipts of rs. 3.01 crores, after rejecting the books of account, he applied 5 per cent gp rate to make an addition of rs. 2,33,128. the cit, vide show-cause notice dt. 13th july, 2005 observed that the assessee had shown lower net profit, which was not properly examined by the ao. she further noted that interest income of rs. 77,879 was in the nature of a non-business income and if the same was excluded, the net profit would come at only 1.54 per cent. she further observed that the evidence of expenses were not furnished and hence the proper course of action before the ao was to disallow such expenses rather than making ad hoc gp addition. she took into consideration the provision of rs. 16,57,350 made by the assessee in its books of accounts, which in her opinion was not properly dealt with by the ao, the other factor, which weighed with her, was the making of cash payments violating the provisions of section 40a(3). the assessee furnished detailed reply to the cit. not satisfied, she held the assessment order to be erroneous and prejudicial to the interest of the revenue. resultantly, assessment order was set aside and the matter was restored to the file of the ao for making proper examination.3. we have heard both the sides and perused the relevant material on record. it is obvious that the main factor, which necessitated the revision action under section 263 by the cit is the showing of lower net profit. it is true that the books of account maintained by the assessee were defective and hence it was not possible to deduce the correct total income. the jodhpur bench of the tribunal is consistently holding that where books of account are rejected, the ao should be guided by the profit rate assessed in the immediately preceding year unless facts justify departure therefrom. the learned authorised representative has placed on record a copy of the order passed by the tribunal in assessee's own case for the immediately preceding year in ita no. 572/ju/2005 in which it was directed to apply gp rate of 3 per cent on the declared receipts. as against this, the assessee itself declared gp rate of 3.8 per cent which was enhanced by the ao after rejecting books of account to 5 per cent enabling the making of addition of rs. 2,33,128. from the assessment order, it is observed that the ao has duly considered the gp rates of the earlier years and nowhere there is reference to the net profit rate. it is true that the ao after rejecting the books of account has option either to apply the gp rate and then allow deductions of indirect expenses, or apply net profit rate to determine the total income in a straight-forward manner.the course of action adopted in the case of the assessee in the preceding assessment years is the consideration of gp rate which also became the subject-matter of adjudication before the tribunal, a copy of which has been placed at p. 1 onwards of the paper book in which the gp rate of 3 per cent was held to be applicable. the cit has nowhere referred to the net profit rate of the assessee in the preceding year to show that it was on a lower side in comparison with the earlier year. be that as it may, since the ao had been consistently following the adoption of gp rate in the past and thereafter allowing deduction for expenses, which is an accepted proposition, no fault can be found with that. from the copy of trading and p&l a/c made available to us, we find that the interest income so referred to by the cit in her order has been credited to the p&l a/c and not trading account. therefore, it will not in any manner affect the gp rate whether it is considered as business income or income from other sources. we further note from the p&l a/c that the major expenses claimed are remuneration to partners and interest to partners, both of which have been subjected to tax in the hands of the respective partners. apart from depreciation of rs. 46,177, which is a statutory deduction, the other expenses claimed are nominal and regular in nature being salary and wages, bank charges, etc. when these factors are considered in totality, it becomes apparent that the application of gp rate at 5 per cent by the ao in comparison with 3 per cent gp rate finally held to be applicable in the immediately preceding year, cannot be said to be on lower side by any standard.4. the next objection taken by the learned cit is against the provision of rs. 16,57,350 made by the assessee in its books of account, which in her opinion was not properly examined by the ao.5. from the copy of balance sheet, it is observed that the total amount under the head current liabilities' is at rs. 16,60,350. its detail is available as per schedule no. 9, which divulges that the provision/expenses payable was at a sum of rs. 16,57,350. on going through the trading and p&l a/c of the assessee, it is observed that the direct expenses were claimed at rs. 1.94 crores in the trading account whereas the total of indirect expenses other than salary and interest to partners along with depreciation total in the range of rs. one and a half lakhs and odd. the provision of rs. 16,57,350 basically represents the expenses claimed in the trading account and a small portion relates to the expenses of the p&l a/c. when the gp rate of 5 per cent was applied by the ao, that took into consideration the direct expenses of rs. 1.94 crores inclusive of provision for these expenses, after applying gp rate, it was not open to the ao to consider the expenses separately which has been merged in the figure of gp. in our considered opinion, the learned cit was not justified in holding that the ao should not have accepted the claim of the assessee in this regard.6. last, ground taken by the learned cit for invoking the provisions of section 263 is the non-examination by the ao of the applicability of provisions of section 40a(3).7. here again, we find that the consideration of expenses by the cit for the purpose of making disallowance under section 40a(3) is directed towards the direct expenses of rs. 1.94 crores and odd, which were debited to the trading account. obviously, when the gp rate of 5 per cent was applied by rejecting the books of account, the ao became powerless to again go through the books of account and make separate additions under section 40a(3). the hon'ble allahabad high court in the case of cit v. bhanwari lal bansidhar has categorically held that where the ao has made trading addition after rejecting books of account and applied gp rate, no separate addition under section 40a(3) can be made. the ao's action is duly supported by the aforesaid judgment.it is pertinent to note that the cit gets revisional power under section 263 where assessment order passed by the ao is erroneous and prejudicial to the interest of the revenue. the twin condition's are required to be satisfied simultaneously. if an order is only erroneous arid not prejudicial to the interest of the revenue, that case does not fall within the sweep of section 263, in the like manner, if the assessment order is not erroneous but prejudicial to the interest of the revenue, the same also goes out of the ambit of the revisional power of the cit under section 263. adverting to the facts of the instant case, we find that the view of the ao on all the three points, considered by the learned cit for invoking the provisions of section 263, is not erroneous. he has adopted a reasonable view, which cannot be disturbed by the cit. as the very assessment order is held to be not erroneous, there can be no question of invoking the provisions of section 263. we, therefore, set aside the impugned order on this count.9. here again, we find that this assessee is the sister concern of m/s hanuman construction company, the case of which has been dealt with in the foregoing paras. the nature of business of the present assessee is similar to that of its sister-concern and the order of the learned cit under section 263 also proceeds on the same basis. to be more particular, we find that this assessee had declared gp rate of 3.75 per cent as against 4.39 per cent of the preceding year. the ao while finalizing the assessment rejected the books of account and applied gp rate of 4.86 per cent, which resulted into an addition of rs. 2,71,118.the other factors, which were considered by the learned cit to. brand the assessment order as erroneous and prejudicial to the interest of revenue are non consideration of the applicability of provisions of section 40a(3) by the ao and improper examination of genuineness of outstanding liabilities. both the sides, are in agreement that the basic facts of this assessee, mutatis mutandis are similar to that of m/s hanuman construction company. by adopting the same reasons, as discussed supra, we hold that learned cit was not justified in setting aside the assessment order passed by the ao under section 143(3). we, therefore, overturn the impugned order.

Judgment:
1. These two appeals by different but connected assessees emanate from the orders passed by the CIT under Section 263 on 28th Nov., 2005 in relation to asst. yr. 2004-05. Since the both the appeals are based on identical facts, we are therefore, proceeding to dispose them of by this common order for the sake of convenience.

2. Briefly stated, the facts of this case are that the return of income was furnished on 31st Oct., 2004 declaring an income of Rs. 1,56,308.

The AO observed that the assessee, a transport contractor, had not properly maintained the books of account. It was further noted that in the year under consideration, the assessee had shown GP rate of 3.84 per cent on contract receipts of Rs. 2-01 crores as against preceding year's GP rate of 2.65 per cent and contract receipts of Rs. 3.01 crores, After rejecting the books of account, he applied 5 per cent GP rate to make an addition of Rs. 2,33,128. The CIT, vide show-cause notice dt. 13th July, 2005 observed that the assessee had shown lower net profit, which was not properly examined by the AO. She further noted that interest income of Rs. 77,879 was in the nature of a non-business income and if the same was excluded, the net profit would come at only 1.54 per cent. She further observed that the evidence of expenses were not furnished and hence the proper course of action before the AO was to disallow such expenses rather than making ad hoc GP addition. She took into consideration the provision of Rs. 16,57,350 made by the assessee in its books of accounts, which in her opinion was not properly dealt with by the AO, The other factor, which weighed with her, was the making of cash payments violating the provisions of Section 40A(3). The assessee furnished detailed reply to the CIT. Not satisfied, she held the assessment order to be erroneous and prejudicial to the interest of the Revenue. Resultantly, assessment order was set aside and the matter was restored to the file of the AO for making proper examination.

3. We have heard both the sides and perused the relevant material on record. It is obvious that the main factor, which necessitated the revision action under Section 263 by the CIT is the showing of lower net profit. It is true that the books of account maintained by the assessee were defective and hence it was not possible to deduce the correct total income. The Jodhpur Bench of the Tribunal is consistently holding that where books of account are rejected, the AO should be guided by the profit rate assessed in the immediately preceding year unless facts justify departure therefrom. The learned Authorised Representative has placed on record a copy of the order passed by the Tribunal in assessee's own case for the immediately preceding year in ITA No. 572/Ju/2005 in which it was directed to apply GP rate of 3 per cent on the declared receipts. As against this, the assessee itself declared GP rate of 3.8 per cent which was enhanced by the AO after rejecting books of account to 5 per cent enabling the making of addition of Rs. 2,33,128. From the assessment order, it is observed that the AO has duly considered the GP rates of the earlier years and nowhere there is reference to the net profit rate. It is true that the AO after rejecting the books of account has option either to apply the GP rate and then allow deductions of indirect expenses, or apply net profit rate to determine the total income in a straight-forward manner.

The course of action adopted in the case of the assessee in the preceding assessment years is the consideration of GP rate which also became the subject-matter of adjudication before the Tribunal, a copy of which has been placed at p. 1 onwards of the paper book in which the GP rate of 3 per cent was held to be applicable. The CIT has nowhere referred to the net profit rate of the assessee in the preceding year to show that it was on a lower side in comparison with the earlier year. Be that as it may, since the AO had been consistently following the adoption of GP rate in the past and thereafter allowing deduction for expenses, which is an accepted proposition, no fault can be found with that. From the copy of trading and P&L a/c made available to us, we find that the interest income so referred to by the CIT in her order has been credited to the P&L a/c and not trading account. Therefore, it will not in any manner affect the GP rate whether it is considered as business income or income from other sources. We further note from the P&L a/c that the major expenses claimed are remuneration to partners and interest to partners, both of which have been subjected to tax in the hands of the respective partners. Apart from depreciation of Rs. 46,177, which is a statutory deduction, the other expenses claimed are nominal and regular in nature being salary and wages, bank charges, etc. When these factors are considered in totality, it becomes apparent that the application of GP rate at 5 per cent by the AO in comparison with 3 per cent GP rate finally held to be applicable in the immediately preceding year, cannot be said to be on lower side by any standard.

4. The next objection taken by the learned CIT is against the provision of Rs. 16,57,350 made by the assessee in its books of account, which in her opinion was not properly examined by the AO.5. From the copy of balance sheet, it is observed that the total amount under the head Current liabilities' is at Rs. 16,60,350. Its detail is available as per Schedule No. 9, which divulges that the provision/expenses payable was at a sum of Rs. 16,57,350. On going through the trading and P&L a/c of the assessee, it is observed that the direct expenses were claimed at Rs. 1.94 crores in the trading account whereas the total of indirect expenses other than salary and interest to partners along with depreciation total in the range of Rs. one and a half lakhs and odd. The provision of Rs. 16,57,350 basically represents the expenses claimed in the trading account and a small portion relates to the expenses of the P&L a/c. When the GP rate of 5 per cent was applied by the AO, that took into consideration the direct expenses of Rs. 1.94 crores inclusive of provision for these expenses, After applying GP rate, it was not open to the AO to consider the expenses separately which has been merged in the figure of GP. In our considered opinion, the learned CIT was not justified in holding that the AO should not have accepted the claim of the assessee in this regard.

6. Last, ground taken by the learned CIT for invoking the provisions of Section 263 is the non-examination by the AO of the applicability of provisions of Section 40A(3).

7. Here again, we find that the consideration of expenses by the CIT for the purpose of making disallowance under Section 40A(3) is directed towards the direct expenses of Rs. 1.94 crores and odd, which were debited to the trading account. Obviously, when the GP rate of 5 per cent was applied by rejecting the books of account, the AO became powerless to again go through the books of account and make separate additions under Section 40A(3). The Hon'ble Allahabad High Court in the case of CIT v. Bhanwari Lal Bansidhar has categorically held that where the AO has made trading addition after rejecting books of account and applied GP rate, no separate addition under Section 40A(3) can be made. The AO's action is duly supported by the aforesaid judgment.

It is pertinent to note that the CIT gets revisional power under Section 263 where assessment order passed by the AO is erroneous and prejudicial to the interest of the Revenue. The twin condition's are required to be satisfied simultaneously. If an order is only erroneous arid not prejudicial to the interest of the Revenue, that case does not fall within the sweep of Section 263, In the like manner, if the assessment order is not erroneous but prejudicial to the interest of the Revenue, the same also goes out of the ambit of the revisional power of the CIT under Section 263. Adverting to the facts of the instant case, we find that the view of the AO on all the three points, considered by the learned CIT for invoking the provisions of Section 263, is not erroneous. He has adopted a reasonable view, which cannot be disturbed by the CIT. As the very assessment order is held to be not erroneous, there can be no question of invoking the provisions of Section 263. We, therefore, set aside the impugned order on this count.

9. Here again, we find that this assessee is the sister concern of M/s Hanuman Construction Company, the case of which has been dealt with in the foregoing paras. The nature of business of the present assessee is similar to that of its sister-concern and the order of the learned CIT under Section 263 also proceeds on the same basis. To be more particular, we find that this assessee had declared GP rate of 3.75 per cent as against 4.39 per cent of the preceding year. The AO while finalizing the assessment rejected the books of account and applied GP rate of 4.86 per cent, which resulted into an addition of Rs. 2,71,118.

The other factors, which were considered by the learned CIT to. brand the assessment order as erroneous and prejudicial to the interest of Revenue are non consideration of the applicability of provisions of Section 40A(3) by the AO and improper examination of genuineness of outstanding liabilities. Both the sides, are in agreement that the basic facts of this assessee, mutatis mutandis are similar to that of M/s Hanuman Construction Company. By adopting the same reasons, as discussed supra, we hold that learned CIT was not justified in setting aside the assessment order passed by the AO under Section 143(3). We, therefore, overturn the impugned order.