INDWELL CONSTRUCTIONS Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) AT the instance of the assessee, the following question has been referred by the Tribunal :

(2.) THE assessee is a registered firm having contract business in engineering works and some of its work was done through Sub-contractors. For the assessment year 1981-82, the gross contract receipts came to Rs. 27,20,083 and the net income shown in the profit and loss account was Rs. 1,24,830. THE Income-tax Officer rejected the books and applying the proviso to Section 145, estimated the income at Rs. 2,50,000. THE Commissioner of Income-tax considered that this estimate was erroneous and prejudicial to the interests of the Revenue and added a sum of Rs. 63,859 under Section 263, which was shown as interest and salary paid to the partners in the profit and loss account. This was done by following a decision of a Bench of the Tribunal in another case of contractors, Rama Krishna Contractors, Tadepalligudem, where the Appellate Tribunal had upheld the addition of the interest paid to the partner even after an estimation of the net income was made. When the assessee appealed to the Appellate Tribunal, naturally the Tribunal followed its own decision of the Special Bench case and upheld the order of the Commissioner of Income-tax. THE question stated above has, therefore, been referred at the instance of the assessee.

(3.) NO doubt there is a big difference between profit earned with own capital and profit earned with borrowed capital and such a difference could have been taken into account by the Income-tax Officer while making an estimate. If the Commissioner had set aside the estimate on the ground that the vital fact that the business was carried on with own capital and not with borrowed capital has been ignored by the Income-tax Officer, there may not have been any difficulty in upholding that order. But, when he proposes to add back an exact item in the profit and loss account, he was relying on the rejected books which he could not do as held by the Bench of this court in Maddi Sudarsanam Oil Mills Co. v. CIT [1959] 37 ITR 369. There is also a further difficulty if Section 40, as argued by learned counsel, is to be taken into account even after making an estimate. When there are certain other deductions which are to be disallowed such as wealth-tax payment in Section 40, can it be said that after making an estimate, the wealth-tax charged in the profit and loss account should again be added back to the profit. This example illustrates how the contention of the Revenue, that Section 40(b) makes a difference in the situation, is untenable. In our considered opinion, the answer to the question has to be in the negative and in favour of the assesses.