INCOME TAX ACT, 1961

Business income- Under section 44AD-Civil construction business-Inclusion of receipt of on money

Assessee-firm entered into a construction agreement with two associations for certain price. It was entitled to recover cost in respect of any extra work in the constructed flat(s). Survey action conducted at the premises of the assessee, one of its partners admitted to have collected on-money outside the regular books of account and assured that the same would be shown as clear income in the books of the assessee. For the relevant assessment year, the assessee did not include the impugned amount as a part of its gross receipts; it returned its income on the basis of presumptive rate of 8 per cent on the enhanced turnover as against its net profit as per its profit and loss account. AO completed the assessment on the basis of the assessees books of account in preference to its claim of being assessed under the presumptive regime of section 44AD. Held:The assessee-firm entered into a construction agreement with two associations for development of lands belonging to them by undertaking construction of residential flats thereon, the specifications for which stood listed in the agreement itself. The assessee was entitled to recover cost in respect of any extra work in the flat(s), as well as the price of the cabin, the under and overhead water tanks. All other responsibilities and obligations under law, including those in respect of getting the building plan(s) prepared and approved as well as of administration of the said scheme, were of the respective associations. H, a partner with 20 per cent share, submitted in the statement recorded on oath under section 131(1) during survey that he was the person handling financial matters in relation to the assessees business as well as its principal activity. Further, he also admitted of having received on-money during the relevant assessment year in respect of 38 flats constructed/being constructed from the purchasers of the said flats, and he assured that the said amount would be shown as clear income in assessees books for the relevant accounting period. The assessee having admitted receipt of on-money in respect of the flats directly from the purchasers thereof and also across the board from all of them, in its own right was reason enough to suspect the construction agreement as being the sole relationship between the assessee, the two associations and their members. The assessees turnover excluding the receipt for the year stood increased after inclusion thereto of the premium received directly from the members. That being the case, sole reliance upon the assessees books, as also its statement, could not be placed for the purpose of determination of its turnover for the relevant year and which was material to decide the applicability or otherwise of section 44AD. Whenever the law provides any concession(s) from its rigors, the observance and satisfaction of the qualifying criteria are presumed as correctly met., i.e., without any doubt, as the law contemplates a true disclosure, and in any case are subject to scrutiny/verification. In the present case, the same could not be said for sure, and as such the assessee having failed to record its turnover correctly in its books, it could not be said to be a case to which section 44AD was strictly applicable. Section 44AD bestows the option on the assessee to avail of an alternate mechanism, i.e., to be assessed at a presumptive income of 8 per cent of its turnover, provided the same does not exceed Rs. 40 lakhs. The presumptive income so arrived at, or any higher income as declared by the assessee, is to be deemed as its income chargeable under the provisions of Chapter IV-D of course, subject to the allowance of salary and interest to partners where the assessee happens to be a partnership firm. Sub-section (4) draws exclusion in respect of its relevant turnover i.e., arising from the business of civil construction or supply of labour therefor, for the purpose of the requirement of maintenance and audit of accounts by the assessee under the Act. Sub-section (6) carves out an exception, so that an assessee, desirous of disclosing a lower income than that assessable under the said scheme, would need to maintain accounts, as well as get the same audited, notwithstanding the fact that its turnover does not exceed the threshold limit of Rs. 40 lakhs. In the present case, the assessee contended to have declared its income at the presumptive rate, being covered by the provisions of section 44AD, of which, clearly, there was no doubt, it being engaged in the civil construction of residential flats. The provision of section 44AA i.e., with regard to mandatory maintenance of books of account, would apply to an assessee engaged in such business, only, if the assessee chooses to be taxed at lower than the presumptive rate of 8 per cent, which is clearly in the nature of a, and the only, concession accorded by the statute to the relevant class of assessees, to which assertion of the assessee, there could be no doubt, it being statutorily recognized/ enacted. Where the assessee, despite the said concession, chooses to maintain the books of account, preferring to rely thereon for various other purposes, both apart from and under the Act, it cannot ignore the book results and claim to be entitled to a lower presumptive rate of income than that revealed by such books. The law does not accord a privileged status to the assessee engaged in this line of business but only, considering the vagaries that attend thereto, draws a higher bar for the purpose of maintenance of books, i.e., than that normally obtains under section 44AA. Though the assessee earns more, he would still be liable to be assessed to income-tax at a lower income by virtue of the said concession. Section 44AD would not operate to curtail the scope of income as defined under section 2(24), read with section 5, so that where the assessee admittedly earns a higher income, the character of which as income is undoubted, it would be liable to tax on that basis, that is, on the basis of real income, even as held by CIT (A). The assessee, by maintaining its accounts, also derived benefit of capital that became available to it for employment in its business or otherwise, besides complying with the other laws and which provide for the maintenance or otherwise require information derived from the books of account. Even as the same may, under the facts of a given case, i.e., where the assessee does not maintain books of account and provides clear evidence of its gross receipt turnover (as not exceeding Rs. 40 lakhs), well amount to that. In fact, the assessee is at liberty to declare any amount equal to or higher than 8 per cent as it deems fit and proper, and which only further goes to show that the assessee cannot, except at the cost of tax, take advantage of, as sought to be done, higher capital/ income generated. The said concession, or its equivalent of standard deduction at 92 per cent, cannot be taken or assumed as a matter of prescription/right, the matter being subject to factual considerations, and the limited right granted cannot transgress the basic or the fundamental scheme of the Act. The returned income has, therefore, necessarily to be in accordance with and in conformation to the underlying documents which form an integral part thereof, so that the assessee cannot arbitrarily claim to be assessed at a lower figure by virtue of a concessionary measure provided under the Act to alleviate a particular hardship, i.e., of the maintenance of accounts and, therefore, also their audit, and which hardship itself bears, or chooses to bear, the several other factors that impinge on the said requirement, and, thus, in effect choose not to avail benefit of. Section 44AD(1) itself providing for the deeming of the higher income as the assessees income chargeable to tax, there cannot be any further disallowance on the ground that the relevant expenditure has not been, or could not be subject to a proper verification. Once the assessees income, in terms of the underlying documents, stands worked out at a sum higher than the presumptive income, the same has to be accepted as such, excepting for prima facie adjustments in respect of clear inadmissible, for otherwise, it would amount to transgressing the clear provision of law and penalizing the assessee for having chosen to be assessed at a higher sum, in terms of the section itself, and which vests the option on him. Therefore, the order of CIT (A) was to be upheld.