2014 (9) TMI 277 - AT - Income Tax

Application of net profit rate on contract receipts - Interest and depreciation on contract receipt Held that - The total turnover of assessee during the year was more than 96 crores, on which, the assessee has disclosed net profit before depreciation @ 6.97% - There is decline in the net profit during the year but gross receipt has gone up by 3 crorers approximately - In A.Y. 2006-07, N.P. rate in assessee s case was 7.02% on gross receipt of 66.75 crores whereas in A.Y. 2005-06, the N.P. rate was 6.73% on gross receipts of ₹ 42.07 crores - the net profit rate has been fluctuating year after year and not constant AO applied 8% net profit rate subject to depreciation in AY 2005-06 to 2008-09 - The evidence of expenditure were submitted before the lower authorities that during the year, the decline of net profit was due to price increase of bitumen from 16,720/- per ton in preceding year to ₹ 24,350/- during the year - the royalty on Chaja pathhar has increased twice by the State Govt. i.e. from ₹ 8 per ton to 16 per ton. In the line of business, there is a huge competition amongst the contractor to get the contract in their favours by putting lower rates - The contractor has to survive in the business. 8% net profit rate has been provided U/s 44AD for the Act for the smaller contract, in case of gross receipts are more than 40 lacs thus 8% net profit rate cannot be applied on the cases where the gross receipts are more than the prescribed limit of Section 144AD of the Act - The best method of estimating the income on the contractual receipts would be past history of the assessee himself as held in Kansara Bearings P. Ltd. v. Assistant Commissioner of Income-tax 2003 (5) TMI 13 - RAJASTHAN High Court - The AO is directed to calculate income as per the above observation - The defects pointed out by the AO in case of assessee are sufficient to reject the book result u/s 145(3) of the Act - the rejection of book result U/s 145(3) as justified Decided partly in favour of assessee. Joint venture charges from Net profit rate not allowed Held that - The amount was lying with the assessee from preceding year on which, interest was paid in that year - During the year, the assessee entered in joint venture agreement with M/s Maruti Nandan Colonizers Pvt. Ltd. - The AO held that the joint venture agreement is sham and is on paper - Actually, it is a finance transaction and joint venture expenses also in form of interest to M/s Maruti Nandan Colonizers Pvt. Ltd., which is liable to be deducted TDS U/s 194A of the Act - by getting this amount from M/s Maruti Nandan Colonizers Pvt. Ltd., the assessee became financially sound and had substantial fund with him, on which he earned substantial interest from the outside parties compared to preceding year - no joint venture was executed during the year - The funds were used by the assessee for the business purposes and excess fund was put in the FDs with the bank - In subsequent year, the assessee again reverted this fund from joint venture account to loan account and paid interest on it the payments are not joint venture expenses but are interest expenses on loan taken of ₹ 15.96 crores of M/s Maruti Nandan Colonizers Pvt. Ltd. - it is allowable deduction from the net income Decided in favour of assessee.

Summary

Issues Involved:

1. Application of net profit rate on contract receipts.
2. Allowability of joint venture charges as expenditure.
3. Rejection of books of account under Section 145(3) of the Income Tax Act.
4. Disallowance of interest payment under Section 40(a)(ia) of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Application of Net Profit Rate on Contract Receipts:

The primary issue involves the application of the net profit rate on the contract receipts of Rs. 96,53,57,927/- for the A.Y. 2008-09. The assessee declared a net profit rate of 6.06%, while the Assessing Officer (AO) applied a net profit rate of 8% after rejecting the books of account under Section 145(3) of the Income Tax Act. The CIT(A) directed to apply a net profit rate of 7.20%, considering the past history of the assessee's net profit rates. The Tribunal concluded that a net profit rate of 7% is reasonable given the peculiar circumstances of the year, such as increased material costs and competitive business conditions, subject to depreciation and interest to third parties.

2. Allowability of Joint Venture Charges as Expenditure:

The assessee claimed joint venture charges of Rs. 65,04,574/- paid to Maruti Nandan Colonizers Pvt. Ltd. as an expenditure. The AO disallowed these charges, treating them as interest payments subject to TDS under Section 194A, and not as genuine joint venture expenses. The CIT(A) upheld the AO's view, stating that the joint venture agreement was only on paper and not practically executed. The Tribunal, however, allowed the deduction, recognizing the payment as interest on the loan taken from Maruti Nandan Colonizers Pvt. Ltd., thus reversing the disallowance made by the AO and CIT(A).

3. Rejection of Books of Account Under Section 145(3):

The AO rejected the books of account under Section 145(3) due to various discrepancies, such as the lack of project-wise accounting, improper maintenance of vouchers, and unsupported expenses. The CIT(A) upheld the rejection, citing past instances where the books were similarly rejected and the decisions were affirmed by higher authorities. The Tribunal also upheld the rejection of books, agreeing with the AO and CIT(A) that the defects pointed out justified the rejection under Section 145(3).

4. Disallowance of Interest Payment Under Section 40(a)(ia):

The AO disallowed the interest payment of Rs. 65,04,574/- under Section 40(a)(ia) for non-deduction of TDS. The CIT(A) supported this disallowance, treating the payment as interest rather than joint venture charges. The Tribunal, however, allowed the deduction, recognizing the payment as interest on the loan from Maruti Nandan Colonizers Pvt. Ltd., thereby reversing the disallowance.

Conclusion:

The Tribunal partly allowed the assessee's appeal, directing the application of a 7% net profit rate and allowing the deduction of joint venture charges as interest expenses. The Revenue's appeal was dismissed, affirming the CIT(A)'s decision on the rejection of books and the method of estimating income based on past history. The judgment emphasizes the importance of maintaining proper books of account and the necessity of substantiating claims with adequate evidence.