J.K. Construction Co. v. Income-tax Officer
[Citation -2006-LL-0303-6]

Citation 2006-LL-0303-6
Appellant Name J.K. Construction Co.
Respondent Name Income-tax Officer
Court ITAT-Jodhpur
Relevant Act Income-tax
Date of Order 03/03/2006
Assessment Year 2004-05
Judgment View Judgment
Keyword Tags rejecting books of account • construction company • trading account • interest income • net profit rate
Bot Summary: The Assessing Officer observed that the assessee, atransport contractor, had not properly maintained the books of account. Resultantly, assessment order was set aside and thematter was restored to the file of the Assessing Officer for making properexamination. From the assessment order, it isobserved that the Assessing Officer has duly considered the GP rates of theearlier years and nowhere there is reference to the net profit rate. 6.Last ground taken by the learned CIT for invoking the provisions of section 263is the non-examination by the Assessing Officer of the applicability ofprovisions of section 40A(3). The Hon'ble Allahabad HighCourt in the case of CIT v. BhanwarilalBanshidhar 1998 has categorically held 'thatwhere the Assessing Officer has made trading addition after rejecting books ofaccount and applied GP rate, no separate addition under section 40A(3) can bemade. The Assessing Officer's action is duly supported by the aforesaidjudgment. Adverting to the facts of the instant case,we find that the view of the Assessing Officer on all the three points,considered by the learned CIT for invoking the provisions of section 263, isnot erroneous.


ITAT JODHPUR BENCH J.K. CONSTRUCTION v. INCOME TAX OFFICER CO. March 3, 2006 JUDGMENT R.S.Syal, Accountant Member - These two appeals bydifferent but connected assessees emanate from theorders passed by CIT under section 263 on 28-11-2005 in relation toassessment year 2004-05. Since both appeals are based on identical facts,we are, therefore, proceeding to dispose them of bythis common order for sake of convenience. M/s.Hanuman Construction Co - ITA No. 802/Ju/M2005 2.Briefly stated, facts of this case are that return of income wasfurnished on 31-10-2004 declaring income of Rs. 1,56,308.The Assessing Officer observed that assessee, atransport contractor, had not properly maintained books of account. It wasfurther noted that in year under consideration, assesseehad 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 centand contract receipts of Rs. 3.01 crores. Afterrejecting books of account, he applied 5 per cent GP rate to make anaddition of Rs. 2,33,128. CIT, videshow-cause notice dated 13-7-2005 observed that assesseehad shown lower net profit, which was not properly examined by AssessingOfficer. She further noted that interest income of Rs. 77,879 was in natureof non-business income and if same was excluded, net profit wouldcome at only 1.54 per cent. She further observed that evidence of expenses were not furnished and hence proper course of actionbefore Assessing Officer was to disallow such expenses rather than making adhoc GP addition. She took into consideration provision of Rs. 16,57,350 made by assessee inits books of account, which in her opinion was not properly dealt with by theAssessing Officer. other factor, which weighed with her, was making ofcash payments violating provisions of section 40A(3).The assessee furnished detailed reply to CIT. Notsatisfied, she held assessment order to be erroneous and prejudicial to theinterest of revenue. Resultantly, assessment order was set aside and thematter was restored to file of Assessing Officer for making properexamination. 3.We have heard both sides and perused relevant material on record. It isobvious that main factor, which necessitated revision action undersection 263 by CIT is showing of lower netprofit. It is true that books of account maintained by assessee were defective and hence it was not possible todeduce correct total income. Jodhpur Bench of Tribunal isconsistently holding that where books of account are rejected, AssessingOfficer should be guided by profit rate assessed in immediatelypreceding year unless facts justify departure therefrom.The learned Authorised Representative has placed onrecord copy of order passed by Tribunal in assessee'sown case for immediately preceding year in ITA No. 572/Ju/2005in which it was directed to apply GP rate of 3 per cent on declaredreceipts. As against this, assessee itselfdeclared GP rate of 3.8 per cent which was enhanced by Assessing Officerafter rejecting books of account to 5 per cent enabling making of additionof Rs. 2,33,128. From assessment order, it isobserved that Assessing Officer has duly considered GP rates of theearlier years and nowhere there is reference to net profit rate. It is truethat Assessing Officer after rejecting books of account has optioneither to apply GP rate and then allow deductions of indirect expenses, orapply net profit rate to determine total income in straight- forwardmanner. course of action adopted in case of assesseein preceding assessment years is consideration of GP rate which alsobecame subject-matter of adjudication before theTribunal, copy of which has been placed at p. 1 onwards of paper book inwhich GP rate of 3 per cent was held to be applicable. CIT has, nowherereferred to net profit rate of assessee inthe preceding year to show that it was on lower side in comparison with theearlier year. Be that as it may, since Assessing Officer had beenconsistently following adoption of GP rate in past and thereafterallowing deduction for expenses, which is accepted proposition, no fault canbe found with that. From copy of trading and P&L a/c made available tous, we find that interest income so referred to by CIT in her order hasbeen credited to P&L a/c and not trading account. Therefore, it will not in any manner affect GP rate whether it is consideredas business income or income from other sources. We further note from theP&L a/c that major expenses claimed are remuneration to partners andinterest to partners, both of which have been subjected to tax in hands ofthe respective partners. Apart from depreciation of Rs. 46,177, which is astatutory deduction, other expenses claimed are nominal and regular innature being salary and wages, bank charges, etc. When these factors areconsidered in totality, it becomes apparent that application of GP rate at5 per cent by Assessing Officer in comparison with 3 per cent GP ratefinally held to be applicable in immediately preceding year,cannot be said to be on lower side by any standard. 4.The next objection taken by learned CIT is against provision of Rs. 16,57,350 made by assessee inits books of account, which in her opinion was not properly examined by theAssessing Officer. 5.From copy of balance sheet, it is observed that total amount under thehead 'Current liabilities' is at Rs. 16,60,350. Its detail is available as perSchedule No. 9, which divulges that provision/expenses payable was at sumof Rs. 16,57,350. On going through trading andP&L a/c of assessee, it is observed that thedirect expenses were claimed at Rs. 1.94 crores inthe trading account whereas total of indirect expenses other than salaryand interest to partners along with depreciation total in range of Rs. oneand half lakhs and odd. provision of Rs. 16,57,350 basically represents expenses claimed in thetrading account and small portion relates to expenses of P&L a/c.When GP rate of 5 per cent was applied by Assessing Officer,that took into consideration direct expenses of Rs. 1.94 crores inclusive of provision for these expenses. Afterapplying GP rate, it was not open to Assessing Officer to consider theexpenses separately which has been merged in figure of GP. In ourconsidered opinion, learned CIT was not justified in holding that theAssessing Officer should not have accepted claim of assesseein this regard. 6.Last ground taken by learned CIT for invoking provisions of section 263is non-examination by Assessing Officer of applicability ofprovisions of section 40A(3). 7.Here again, we find that consideration of expenses by CIT for thepurpose of making disallowance under section 40A(3) is directed towards thedirect expenses of Rs. 1.94 crores and odd, whichwere debited to trading account. Obviously, when GP rate of 5 per centwas applied by rejecting books of account, Assessing Officer becamepowerless to again go through books of account and make separate additionsunder section 40A(3). Hon'ble Allahabad HighCourt in case of CIT v. BhanwarilalBanshidhar [1998] has categorically held 'thatwhere Assessing Officer has made trading addition after rejecting books ofaccount and applied GP rate, no separate addition under section 40A(3) can bemade. Assessing Officer's action is duly supported by aforesaidjudgment. Itis pertinent to note that CIT gets revisionalpower under section 263 where assessment order passed by Assessing Officeris erroneous and prejudicial to interest of revenue. twin condition's are required to be satisfied simultaneously. Ifan order is only erroneous and not prejudicial to interest of revenue,that case does not fall within sweep of section 263. In like manner, ifthe assessment order is not erroneous but prejudicial to interest of therevenue, same also goes out of ambit of revisionalpower of CIT under section 263. Adverting to facts of instant case,we find that view of Assessing Officer on all three points,considered by learned CIT for invoking provisions of section 263, isnot erroneous. He has adopted reasonable view, which cannot be disturbed bythe CIT. As very assessment order is held to be not erroneous, there can beno question of invoking provisions of section 263. We, therefore, set asidethe impugned order on this count. 8.In result, appeal is allowed. M/s.J.K. Construction Co.'ITA No. 801/Jd/2005 9.Here again, we find that this assessee is sisterconcern of M/s. Hanuman Construction Company, case of which has been dealtwith in foregoing paras. nature of businessof present assessee is similar to that of itssister concern and order of learned CIT under section 263 also proceeds on same basis. To be more particular, we findthat this assessee had declared GP rate of 3.75 percent as against 4.39 per cent of preceding year. Assessing Officerwhile finalizing assessment rejected books of account and applied GPrate of 4.86 per cent, which resulted into addition of Rs. 2,71,118. other factors, which were considered by thelearned CIT to brand assessment order as erroneous and prejudicial to theinterest of revenue are non-consideration of applicability of provisions ofsection 40A(3) by Assessing Officer and improper examination of genuinenessof outstanding liabilities. Both sides are in agreement that basicfacts of this assessee, mutatis mutandis aresimilar to that of M/s. Hanuman Construction Company. By adopting samereasons, as discussed supra, we hold that learned CIT was not justifiedin setting aside assessment order passed by Assessing Officer undersection 143(3). We, therefore, overturn impugned order. 10.In result, appeal is allowed. *** J.K. Construction Co. v. Income-tax Officer
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