2007 (11) TMI 300 - HC - Income Tax

Deduction of Freight Charges from Gross Receipts Denied in Tax Assessment

The High Court considered whether freight charges paid by the assessee to the Truck Operators' Union should be deducted from gross receipts before ... Rejection of books of accounts – best judgment assessment - assessee was a firm of labour contractors doing loading and unloading work of gunny bags from mandi to godowns and from the godowns to Railway Station and vice versa. The assessee received payment of Rs.25,40,127/- from the FCI for the assessment year 1983-84 and made payments on account of freight to the Truck Operators’ Union amounting to Rs.11,45,650/- by cheque and Rs.8,66,130/- in cash. The ITO after examining the evidence produced by the assessee rejected the books of account. The Assessing Officer applied the rate of profit at 8% on gross receipts – held that - looking to the normal net profit rate which is applicable to the case of civil construction contracts, the effective rate of profit on gross receipts would work out to less than 1% which would be extremely low and not practical. Moreover, once books of account are rejected then no separate deduction on account of freight charges as claimed by the assessee can be allowed – rejection of books of account upheld Issues:1. Interpretation of whether freight charges paid by the assessee to the Truck Operators' Union should be deducted from gross receipts before applying the net profit rate.Detailed Analysis:Issue 1: Interpretation of deduction of freight charges before applying net profit rateThe case involved a dispute regarding the deduction of freight charges paid by the assessee to the Truck Operators' Union from the gross receipts before applying the net profit rate. The Income Tax Appellate Tribunal referred the question of law to the High Court concerning the adoption of the net profit rate of 8% and the deduction of freight charges. The Assessing Officer had rejected the books of account, estimated the total income, disallowed certain expenditures, and applied an 8% net profit rate on the gross receipts. The Commissioner of Income-tax (Appeals) allowed the deduction of payments made to the Truck Operators' Union but disallowed other expenditures. The Tribunal upheld the net profit rate of 8% on the remaining balance. The issue for determination was whether the freight charges should be deducted from gross receipts before applying the net profit rate.Analysis:The High Court analyzed the relevant provisions of the Income Tax Act, specifically Sections 29, 144, and 145, to determine the correct legal position. Section 29 mandates that income assessable under the head 'profits and gains of business or profession' be computed in accordance with specific provisions of the Act. Section 145 deals with the computation of income based on the method of accounting regularly employed by the assessee. If the Assessing Officer rejects the books of account, he may estimate the income to the best of his judgment under Section 144. The Court concluded that once a best judgment assessment is made by fixing a net profit rate, the claim for deduction on expenses cannot be separately considered as the net profit rate accounts for all deductions under Section 29. Therefore, the claim of the assessee to deduct freight charges from gross receipts before applying the net profit rate was not accepted.Precedents and Additional Considerations:The Court referred to precedents such as the Indwell Constructions case and the Madras High Court judgment in a similar context. It also discussed the implications of Section 44AD of the Act, which provides a special provision for the computation of profits and gains for specific businesses. The Court distinguished other judgments related to deductions for depreciation from the present case's issue of deducting freight charges. Ultimately, the Court ruled in favor of the revenue, holding that the net profit rate should be applied without a separate deduction for freight charges.