DELHI D BENCH T.R. KATYAL, ITO, MODERN WARD 38(2), NEW v. DECORATORS DELHI July 21, 2006 JUDGMENT PerNV Vasudevan, Judicial Member - This is appealby Revenue against order dated 17-1-2002 of Commissioner of Income-tax(A) - XXVIII, relating to assessment year 1998-99. 2.The only ground of appeal of Revenue reads as follows: "Onthe facts and in circumstances of case, ld. CIT(A)was not justified in deleting addition of Rs. 4,41,378 made by theAssessing Officer in income of assessee onaccount of non-declaration of closing stock duly accounted for in purchaseswithout realizing that section 44AD as such was not applicable in case ofthe assessee." 3.The assessee is firm. It carries on business ofcarrying out construction contracts as well as decoration contracts. In thecourse of assessment proceedings Assessing Officer noticed several defectsin books of accounts and ultimately concluded that books of accountsand ultimately concluded that books of accounts of assesseewere not correct and complete. provisions of section 145 were invoked bythe Assessing Officer and on book results on which income of Rs. 1,29,761 was returned by assesseewas rejected by Assessing Officer. Since assesseewas in business of civil construction, Assessing Officer was of theview that provisions of section 44AD would be applicable. provisions of section 44AD incorporates principle ofrecognizing income of particular business on estimate basis. Thelegislature taking into account all aspects of civil construction businessdeems 8 per cent of gross receipts from contract business as income ofthe assessee and brings to tax such deemed income.The provisions of section 44AD are however applicable only to contractors whosegross receipts from contract business does notexceed Rs. 40 lakhs. gross receipts from thecontract in case of assessee was however Rs. 53,54,283. Though assessee wasnot covered by provisions of section 44AD of Act, yet AssessingOfficer was of view that presumptive income at 8 per cent of grossreceipts would be appropriate in assessee's casealso. Accordingly income from contract business was determined at Rs. 4,35,260. Apart from making aforesaid estimate of income,the Assessing Officer further noticed that on 29, 30th and 31st of March, 1998the assessee had effected credit purchases totaling asum of Rs. 4,41,378. He found that these purchases hadnot been reflected in closing stock. Assessing Officer accordingly addedback value of these purchases to income from contract business alreadydetermined by him by applying 8 per cent profit rate on gross contract receiptsof assessee. 4.The assessee was aggrieved by estimation ofincome at 8 per cent of gross contract receipts and also addition madeby Assessing Officer on account of under valuation of closing stock. TheCommissioner of Income- tax (A) upheld rejection of books of accountsmade by Assessing Officer and also up held application of net profitrate of 8 per cent on gross contract receipts.Asfar as addition made on account of under valuation of closing stock isconcerned Commissioner of Income-tax (A) was of view that once netprofit of gross receipts is determined there was no necessity to make aseparate addition in respect of closing stock. CIT(A) held that closingstock is not included in gross receipts and havingapplied method of determining profits at 8 per cent on gross receipts,further addition by way of under valuation of closing stock would not beappropriate. CIT(A) accordingly deleted theaddition made by Assessing Officer on account of closing stock. Revenueis aggrieved by this action of Commissioner of Income-tax (A) and hencepreferred aforesaid ground of appeal before Tribunal. 5.We have heard submissions of ld. counsel for assesseeand ld. DR. ld. DR relied on order of Assessing Officer. Theld. counsel for assessee relied on order ofthe assessee relied on order of Commissionerof Income-tax (A). Considering rival submissions, we are of view thatthe order of Commissioner of Income-tax (A) is just and proper and callsfor no interference. As rightly held by Commissioner of Income-tax (A) oncethe gross receipts is basis of estimation of income, question ofvaluation of closing stock becomes irrelevant in determining income of assessee. In fact rate of 8 per cent on gross receiptspresumed as income of assessee under theprovisions of section 44Ad is comprehensive percentage which takes into accountall deductions under section 30 to 38 including depreciation. Though provisionsof section 44AD are not applicable in case of assessee,yet having applied principles enunciated in that section, it was not opento Revenue to ignore intention behind enactment of theseprovisions. On facts and circumstances of this case, we do not find any justificationfor impugned addition made by Assessing Officer. Commissioner ofIncome-tax (A) in our view was justified in deleting addition made by theAssessing Officer. order of Commissioner of Income-tax (A) is thereforeconfirmed and this appeal by Revenue is dismissed. 6.In result, appeal by Revenue is dismissed. *** ITO, Ward 38(2), New Delhi v. Modern Decorator