At, Income Tax Appellate Tribunal Delhi
By, THE HONOURABLE MR. N.K. BILLAIYA
By, ACCOUNTANT MEMBER & THE HONOURABLE MR. K.N. CHARY
By, JUDICIAL MEMBER
For the Appellant: Ved Jain, Advocate. For the Respondent: Ashima Neb, Sr. DR.
N.K. Billaiya, AM:
1. ITA No.4518/Del/2018 and 1974/Del/2018 are two separate appeals filed by assessee's preferred against the two separate orders of CIT (A)-2, Delhi dated 16.03.2018 pertaining to A. Y. 2009-10 and 2012-13.
2. Both theses appeals were heard together and are disposed of by this common order for the sake of convenience and gravity.
3. We first take up ITA No.4518/Del/2018 A.Y.2009-10. Representatives of both the sides were heard at length. Briefly stated that the facts of the case are that the appellant company is engaged in the business of civil construction. For the year under consideration it has shown sales of Rs.62.17crores besides other income of Rs.55.87 lacs. During the course of the scrutiny assessment proceedings the Assessing Officer noticed that there is decline in the profit ratio when compared with that of earlier years. The Assessing Officer observed that in A. Y. 207-08 the N. P. rate was 6.27% which declined to 5.17 % in A. Y. 2008-09 and further declined to 3.95% during the year under consideration. The Assessing Officer was of the opinion that the book results are not liable and accordingly proceeded by rejecting the books of accounts. The net profit was estimated at 6.5% which resulted into an addition of Rs.4.07 crores. 1974/Del/2018 & Stay Application No.610 to 611/Del/2018 After estimating the net profit the Assessing Officer further made addition on account of provision for bad and doubtful debts, disallowances made u/s 43B and 40(a) (ia) of the Act.
4. The assessee strongly agitated the matter before the CIT(A) and challenged the rejection of books of accounts and consequent estimation of profit by the Assessing Officer.
5. After considering the facts and submission the CIT(A) observed that the Assessing Officer has rightly rejected the books of accounts of the assessee. Coming to the estimation of profit the CIT(A) found that the net profit rate of 3.95% is lower than net profit rate of 6.27% and 5.17% shown in earlier years. The CIT(A) was convinced that the trading results need to be estimated and accordingly estimated net profit of 5.2% of the turnover and directed the Assessing Officer to take the net profit at Rs.3.26 crores as against 4.07 crores taken by the Assessing Officer. However, the CIT(A) after estimating the net profit further confirmed the addition on account of provision of bad and doubtful debts, disallowances made u/s 43B and 40 (a) (ia) of the Act.
6. Before us the counsel for the assessee vehemently submitted that the net profit rate of 5.2% is on the higher side considering the nature of business of the assessee. It is the say of the counsel that the net profit rate is on decline since past assessment years per contra the DR strongly supported the findings of the Assessing Officer.
7. We have carefully considered the orders of the authorities below. There is no dispute that the net profit rate is declining from A. Y. 2007-08 onwards which can be seen from the fact in A. Y. 2007-08 net profit rate was 6.27% which dropped down to 5.17% in A. Y. 2008-09 and further 1974/Del/2018 & Stay Application No.610 to 611/Del/2018 came down to 3.95% during the year under consideration. Thus, the fall in net profit rate cannot be brushed aside lightly. However, we find that the estimation of profit at 5.2% is from reasonable on the facts of the case and should meet the ends of justice. We, therefore, do not find any error or infirmity in the findings of the CIT(A) so far as the estimation of profit is concerned. However, in our considered opinion once net profit is estimated as a percentage of sales no further disallowances should be made in the profit and loss account. Since we have confirmed the estimation of net profit, we do not find any merit in the additions / disallowances made by the Assessing Officer.
8. We accordingly direct the Assessing Officer to delete the addition on account of disallowances made u/s 43B of the Act and disallowance made u/s 40(a) (ia) of the Act.
9. In so far as the addition on account of provisions for bad and doubtful debts is concerned. We find that the Assessing Officer has disallowed the same because he was of the opinion that the provisions for bad debts is not allowable. When the matter was agitated before the first appellate authority the First Appellate Authority confirmed the disallowance made by the Assessing Officer stating that the claim of bad debts is not in accordance with the provision of section 36 (2) of the IT Act and therefore cannot be allowed.
10. We find that both the lower authorities have grossly erred in not appreciating the facts in true perspective. Both the lower authorities have ignored the fact that the asset side is actually reduced by the amount of bad debts which means that the debt has been actually written of. The Hon'ble Supreme Court in the case of Vijaya Bank 323 ITR 166 has categorically held that if the asset side is reduced by the provision it 1974/Del/2018 & Stay Application No.610 to 611/Del/2018 amounts to writing of the debts. Drewing support from the ratio laid down by the Hon'ble Supreme Court (supra), we direct the Assessing Officer to delete the disallowance on account of provision for bad debts.
11. In the result, the appeal filed by the assessee is partly allowed.
12. Facts on record show that in the year under consideration the nature of business of the assessee remained the same as it was in A. Y. 2009-10 (supra). For similar reasons the books of accounts were rejected by the Assessing Officer but in this year the Assessing Officer has disallowed 10% of the expenses which were confirmed by the first appellate authority.
13. In our understanding of the facts when profit has been estimated in earlier year after rejecting the books of accounts we do not find any reason why the same should not be done for the year under the consideration also. Since, the CIT(A) has estimated 5.2% in A. Y. 2009-10 and the order of the CIT(A) has been accepted by the revenue and to this extent confirmed by us supra. We are of the opinion that
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the same rate of net profit should be adopted for this year also which should meet the ends of justice. We accordingly direct the Assessing Officer to adopt the net profit rate of 5.2 % instead of making ad-hoc disallowances of 10% of the total expenditure. This appeal is also partly allowed. 14. In the result, the appeal filed by the assessee is partly allowed. 1974/Del/2018 & Stay Application No.610 to 611/Del/2018 Stay Application No. 610 to 611/Del/2018 (A.Y. 2012-13 & 2009-10) 15. Since appeals for both the years under consideration have been decided the stay petitions become Otiose. 16. The order pronounced in the open court on 26.09.2018.