2002 (11) TMI 65 - HC - Income Tax

Constitutional validity of section 44AD of the Income-tax Act - The argument that section 44AD of the Act does not apply to sub-contracts and applies only to a contract cannot be accepted. The mere fact that in the matter of deduction at source, a distinction is made in section 194C between a contractor and a sub-contractor, does not enable the assessee to contend that section 44AD cannot apply to the case of a sub-contractor. The section speaks of any assessee engaged in the business of civil construction or supply of labour for civil construction and provides for a presumptive profit from such business. Whether a contractor or a sub-contractor, the assessee is admittedly engaged in the business of civil construction or supply of labour for civil construction within the meaning of section 44AD of the Income-tax Act. On the wording of section 44AD of the Act, there is no doubt that a sub-contractor would also come squarely within the purview of that provision. We are therefore not in a position to accept the argument that a sub-contractor is not covered by section 44AD

Summary

Issues:
Challenge to the constitutional validity of section 44AD of the Income-tax Act for assessment year 1994-95.

Analysis:
The petitioner, a sub-contractor, challenges the constitutional validity of section 44AD of the Income-tax Act, which presumes income at eight per cent of gross receipts for civil construction businesses. The petitioner did not maintain accounts for sub-contract works, leading to the Assessing Officer invoking section 44AD for assessment. The petitioner argues that section 44AD conflicts with section 194C, which allows a deduction at source of one per cent for sub-contractors, deeming section 44AD arbitrary and violative of article 14 of the Constitution. However, the Income-tax Department contends that section 44AD applies when actual accounts are unavailable, and the presumption of income is not arbitrary. The court refers to a previous Supreme Court decision regarding a similar provision for trading in liquor, emphasizing that section 44AD does not eliminate regular assessments under other sections of the Act.

The court rejects the argument that section 44AD does not apply to sub-contractors, emphasizing that the provision covers any assessee engaged in civil construction or labor supply for civil construction. The court upholds the Assessing Officer's estimation of income at eight per cent of gross civil contract works for the petitioner, finding no illegality in the assessment process. Ultimately, the court dismisses the writ petition, concluding that the challenge to the validity of section 44AD fails based on the arguments presented and the legal provisions involved.