ORDER
K.C. Sinahal. J. M.
The appeal is directed against the block assessment order dt. 29th Nov., 1996, passed by Shri A.S. Phadke, Assistant Commissioner, Investigation Circle l(1), Kolhapur. The block period consists of asst. yrs. 1995-96 and 1996-97 only.
2. Though various grounds have been raised by the assessee, the only effective issue raised before us relates to the addition of Rs. 1,45,930 on account of unexplained expenditures.
3. The assessee-firm is engaged in the business of construction of roads by obtaining contracts from Public Works Department and Municipal Councils. The premises of the assessee were searched under section 132 on 30-11-1995, in the course of which certain exercise books and Fixed Deposit Receipts etc., were found and seized. In response to the notice 158BC, the return of undisclosed income was filed by the assessee declaring income at Rs. 1,45,000 for assessment year 1995-96 and Rs. 2,13,775 for assessment year 1996-97. In the course of assessment proceedings, the assessee was asked to explain the nature and source of expenditure of Rs. 5,000, Rs. 1,10,000 and Rs. 30,930 which were found to have been incurred by the assessee on the basis of seized records. It was contended by the assessee that provisions of section 44AD were applicable for assessment of income from contracting business and therefore, no cognizance is to be taken of the expenses incurred by the assessee. This contention of the assessee was rejected by the assessing officer by observing that provisions of Chapter XIV-B are self-contained code for assessing the undisclosed income. The relevant observations in respect of the legal finding given by the assessing officer, in this regard, are contained in para 5.1 of his order which is being reproduced as under :
“I am not able to appreciate the contentions raised by the assessee’s representatives. The statement that once the option under section 44AD is exercised no cognizance of seized documents can be taken is not supported by any provision in the Income Tax Act. Nowhere in the IT law it is provided that the option exercised under section 44AD entitles the assessee to the immunity from the provisions of Chapter XIV-B which governs the special procedure of assessment of search cases. It is important to note that the section 158BA(1) provides that `notwithstanding anything contained in any other provisions of this Act ……. the assessing officer shall proceed to assess the undisclosed income in accordance with the provisions of this chapter’. The non obstante clause presenting section 158BA(1) of the Act provides for the overriding effect over normal or any other special mode of assessment or rate of tax laid down elsewhere in the Act. In other words specially enacted provisions of law find their way in suppression of general provision. Even though the provisions of section 44AD(1), start with non obstante clause of limited field, it cannot supercede the presence of non obstante clause in section 158BA(1) which is having wider field encompassing the entire act. Therefore, to say that the special provisions of Chapter XIV-B laying down assessment in search cases are not applicable to the cases wherein provisions under section 44AD have been invoked would be travesty of justice ”
4. Since the assessee was unable to explain the nature and source of expenses, in the addition of Rs. 1,45,930 was made by the assessing officer. Aggrieved by the same, assessing officer assessee is in appeal before the Tribunal.
5. The learned counsel for the assessee has vehemently assailed the order of the assessing officer by contending that provisions of section 44AD are applicable even to search cases as the provisions of section 158BB itself provides the computation of undisclosed income in accordance with the provisions of Chapter IV. Section 44AD. falls within the Chapter IV. Therefore, the assessing officer is legally wrong in holding that provisions of section 44AD would not be applicable to search cases. According to him, section 44AD is a deeming provision for the assessment of income where the assessee is engaged in the business of civil construction and total receipts from .Wich business do not exceed Rs. 40,00,000. Since in the present case, the total receipts being below Rs. 40,00,000, it is mandatory to assess the income of assessee under section 44AD. Therefore, the question of any disallowance on account of unexplained expenses does not arise. On the other hand, the learned Departmental Representative has relied on the reasonings given by the assessing officer.
6. After considering the rival submissions of the parties, we are unable to sustain the legal finding recorded by the assessing officer in para 5.1 of his order which has already been reproduced for the benefit of this order. The main reasoning given by the assessing officer is that provisions of Chapter XIV-B have overriding effect over the entire provisions of the Act while the provisions of section 44AD have limited overriding effect i.e. over these sections 28 to 43C. We are unable to accept this reasoning because section 168BB in Chapter XIV-B itself provides for computation of total income in accordance with the provisions of Chapter IV which includes section 44AD. Besides, that, section 158BH specifically provides application of other provisions of the Act save as otherwise provided in the Chapter. That means that only those provisions of the Act which have been specifically excluded by Chapter XIV-B would not be applicable to the assessment of undisclosed income. Nowhere Chapter XIV-13 excludes application of section 44AD. On the contrary, application of such provision has been made clear by the provision of section 158BB. Therefore, we vacate the legal finding recorded by the assessing officer in this regard and hold that the provisions of section 44AD would be applicable to search cases.
7. In view of the above discussion, we are of the view that addition of Rs. 1,45,930 cannot be sustained. Admittedly, the assessee is engaged in the construction activities and the total contract receipts are below Rs. 40,00,000 In such situation, s, 44AD provides that profits chargeable to tax would be 8 per cent of the gross receipts paid or payable to the assessee or the higher sum declared by the assessee in the return. This section is a deeming section and it overrides the provisions of sections 28 to 43C provided the total receipts paid or payable does not exceed Rs. 40,00,000. In view of such mandatory provisions, the business income of the assessee carrying on construction activity has to be determined under section 44AD and not in accordance with the provisions of sections 28 to 43C. That means profits computed under section 44AD would take care of expenditures and allowances provided in sections 28 to 43C. From the above discussion, it is implied that legislature has recognized 92 per cent of the contract receipts on account of expenditures and allowances specified in sections 28 to 43C irrespective of any material or evidence. Therefore, assessee cannot be asked to explain the entries of expenditure to the extent of 92 per cernt of the contract receipts minus (-) the amount of statutory allowances such as depreciation. Similarly, assessee cannot claim any such statutory allowances or other expenditure against the deemed profits chargeable to tax under section 44AD. The three amounts of Rs. 5,000, Rs. 1,10,000 and Rs. 30,930 are much less than 92 per cent of the contract receipts. Therefore, in our opinion, no addition can be made in respect of such expenses. Accordingly the addition of Rs. 1,45,930 is hereby deletEd. This would dispose of ground numbers 5,7,8,9 and 10.
8. Ground numbers 2,3,4 and 6 have not been pressed and therefore the same are dismissed.
9. Ground Nos. 1, 11 and 12 are general in nature and therefore, no comments are required.
10. In the result, appeal is partly allowed.