ORDER
M.A. Bakshi, Vice President
1. Appeal of the assessee for the asst. yr. 2001-02 is directed against order dt. 19th Feb., 2004, of the CIT(A), Karnal. Parties have been heard and record perused.
2. The relevant facts, briefly stated, are that the assessee had entered into a contract with M/s Unitech Ltd. for supply of sand from specified zones during the previous year relevant to asst. yr. 2001-02. As per the information available on record, assessee had received a payment of Rs. 36,58,267 during the previous year. Since M/s Unitech Ltd. had deducted tax at source @ 2 per cent from the payments of Rs. 16,85,044, stated to be attributable to transportation charges, the assessee filed the return of income for the asst. yr. 2001-02 disclosing income at the net profit of 8 per cent under Section 44AD in respect of the said payments. The case of the assessee was selected for scrutiny. Statutory notice under Section 143(2) was issued to the assessee on 30th Oct., 2002. During the course of assessment proceedings, when assessee was asked about the gross receipts, assessee filed revised return disclosing the gross receipts at Rs. 36,58,267 but computed the income @ 5 per cent under Section 44AF instead @ 8 per cent under Section 44AD. Whereas income in respect of the payment of Rs. 16,85,044 was declared at Rs. 1,34,800 in the original return, the income in respect of the total payments of Rs. 36,58,267 was declared at Rs. 1,82,910 in the revised return,
3. During the course of assessment proceedings, it was claimed by the assessee that no books of account had been maintained by him and the profits in respect of the payments were required to be assessed under Section 44AF, which is applicable in respect of retail traders. It was pleaded before the AO that provisions of Section 44AD were not applicable in this case. The AO on consideration of the terms and conditions of the agreement between the assessee and M/s Unitech Ltd. held that the assessee had executed the contract work and accordingly, income was to be computed in accordance with provisions of Section 44AD. Assessee appealed to the CIT(A) but without any success. Hence, this appeal.
4. Before me, the assessee had filed written submissions and during the course of hearing of the appeal, reliance has been placed on the same. The assessee’s claim is that it does not fall within the definition of contractor engaged; in the business of civil construction or supply of labour thereof. It has been claimed that the assessee is engaged in the business of trading goods on retail basis and, therefore, the income is to be computed under Section 44AF @ 5 per cent net.
5. The learned Departmental Representative, on the other hand, contended that as per Expln. (b) to Section 44AD, the expression “civil construction” includes the execution of any works contract. Since assessee has engaged itself in the work of supply and transportation of material to the civil contractor, the provisions, of Section 44AD are clearly attracted. It was further contended that the assessee is not engaged in the retail business of trading. Assessee is a contractor who has supplied sand to the civil contractor for the construction of road at Ambala. the contractor has also deducted tax at source in respect of contract payments attributable to transportation of sand. therefore, the appeal of the assessed is without any merit, contended the learned Departmental Representative.
6. I have given my careful consideration to the rival contentions. It is not disputed that assessee had filed original return disclosing a net profit @ 8 per cent on the payments of Rs. 16,85,044. When the case was selected for scrutiny, it was detected by the AO that the assessee had received the gross payment of Rs. 36,58,267 from M/s Unitech Ltd. as against Rs. 16,85,044 disclosed by him. The assessee immediately filed a revised return disclosing gross receipts but resiled from its original stand that provisions of Section 44AD were applicable in his case. In the revised return, computation had been made under Section 44AF disclosing income @ 5 per cent net on the gross receipts. I, therefore, first consider as to whether provisions of Section 44AF are attracted in this case. The relevant provision is quoted hereunder :
44AF. Special provisions for computing profits and gains of retail business.–(1) Notwithstanding anything to the contrary contained in Sections 28 to 43C, in the case of an assessee engaged in retail trade in any goods or merchandise, a sum equal to five per cent of the total turnover in the previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum as declared by the assessee in his return of income shall be deemed to be the profits and gains of such business chargeable to tax under the head “Profits and gains of business or profession :
Provided that nothing contained in this sub-section shall apply in respect of an assessee whose total turnover exceeds an amount of forty lakh rupees in the previous year.
(2) Any deduction allowable under the provisions of Sections 30 to 38 shall, for the purposes of Sub-section (1), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed :
Provided that where the assessee is a firm, the salary and interest paid to its partners shall be deducted from the income computed under Sub-section (1) subject to the conditions and limits specified in Clause (b) of Section 40.
(3) The written down value of any asset used for the purpose of the business referred to in Sub-section (1) shall be deemed to have been calculated as if the assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years.
(4) The provisions of Sections 44AA and 44AB shall not apply insofar as they relate to the business referred to in Sub-section (1) and in computing the monetary limits under those section, the total turnover or, as the case may be, the income from the said business shall be excluded.
The above section was inserted w.e.f. 1st April, 1998, by the Finance Act, 1997 and is operative from asst. yr. 1998-99. The headnote to the said section reads as “special provisions for computing profits and gains of retail business”, It is evident from the headnote as well as the language of Section 44AF, quoted above, that the section is applicable for computation of profits of the assessees engaged in the retail business of trading in goods or mercandise.
7. The first question to be determined in this case is as to whether the assessee can be said to be a retail trader of goods or merchandise. The assessee is not engaged in the trading of goods as is evident from the return of income filed. The only source of income disclosed by the assessee in the original return as well as in the revised return is from execution of contract with M/s Unitech Ltd. for supply and transportation of sand during the year under appeal. The contract with M/s Unitech Ltd. is a composite contract for supply and transportation of coarse sand from particular sites. It is relevant to point out that sand is available at various sites and as per the works order issued by M/s Unitech Ltd., assessee was required to supply sand from particular zones and had no liberty to supply sand from any other zone not specified in the work order. The amount payable to the assessee was inclusive of royalty, taxes, loading and unloading, handling charges and octroi. The transportation charges for the material have also been paid by M/s Unitech Ltd. The relevant terms and conditions of the agreement, copy of which has been placed on record, are reproduced hereunder:
10 The above rates are inclusive of all taxes, royalty, loading/unloading, handling charges and octroi.
11. Coarse sand will be supplied by you at site, i.e., Km-182/Km-205 after weighment at our weighbridge or on a weighbridge nominated by us.
12. You will submit bills duly supported with verified challans of delivery at site. The bill should be prepared in the name of Unitech Ltd. LGC JV.
13. Coarse sand brought from other than specified sources shall be rejected and no payment shall be made. In case of change in source prior approval shall have to be obtained by you.
14. The deduction on account of moisture content beyond 3 per cent shall be made. This will have effect both on quantities as well as transportation. In case moisture content is more than 3 per cent, the deduction will be done after ascertaining the moisture content.
15. The supply shall be completed by 31st May.
16. The payment shall be made to you after 30 days from the date of submission of your fortnightly bills.
17. Rejected material will be shifted back by you at your own risk and cost.
18. Income-tax deduction as applicable shall be made from your bills.
It is evident from the terms and conditions stated above that the assessee has not simply sold the sand to the assessee. As pointed out earlier, the sand is available at site on payment of royalty to the State Government. The assessee has to engage labourers for loading and unloading of the same. The assessee has to engage vehicle for carriage of sand upto the site. The sand is to be unloaded from the vehicle. The assessee was also required to pay octroi in respect of the said supply of sand. It is evident from these facts that assessee was not engaged in the retail business of trading of goods. On the other hand, assessee had undertaken to supply sand from the specified zones for which he had to make payment of royalty. He had also to engage labourers for loading and unloading of the sand and also to arrange vehicles for transportation of the same. The octroi was also to be paid by the contractor, namely, the assessee. The price fixed by M/s Unitech Ltd. was inclusive of all the above charges. It is therefore, evident that assessee was a contractor for supply of sand from particular zone on the terms and conditions as provided in the contract between the assessee and M/s Unitech Ltd. Section 44AF is applicable in respect of retail traders. Assessee is not engaged in any retail trading–buying or selling goods to customers. The assessee is neither a retailer nor a wholesale trader. From the return of income filed by the assessee, it is evident that the only business conducted by the assessee is the work executed by the assessee on account of contract for supply and transportation of sand, etc. to M/s Unitech Ltd. for construction of road at Ambala. No other income has been disclosed. Therefore, assessee cannot be said to be engaged in the retail business of trading of goods. The assessee has engaged himself in the execution of contract with M/s Unitech Ltd. only. In my considered view, provisions of Section 44AF are not attracted in this case.
8. The next question that arises for consideration is as to whether provisions of Section 44AD are attracted in this case. Section 44AD reads as under :
44AD (1)–Special provision for computing profits and gains of business of civil construction, etc,–(1) Notwithstanding anything to the contrary contained in Sections 28 to 43C, in the case of an, assessee engaged in the business of civil construction or supply of labour for civil construction, a sum equal to eight per cent of the gross receipts paid or payable to the assessee in the previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum as declared by the assessee in his return of income, shall be deemed to be the profits and gains of such business chargeable to tax under the head ‘Profits and gains of business or profession’ :
Provided that nothing contained in this Sub-section shall apply in case the aforesaid gross receipts paid or payable exceed an amount of forty lakh rupees.
(2) Any deduction allowable under the provisions of Sections 30 to 38 shall, for the purposes of Sub-section (1), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed :
Provided that where the assessee is a firm, the salary and interest paid to its partners shall be deducted from the income computed under Sub-section (1) subject to the conditions and limits specified in Clause (b) of Section 40.
(3) The written down value of any asset used for the purpose of the business referred to in Sub-section (1) shall be deemed to have been calculated as if the assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years.
(4) The provisions of Sections 44AA and 44AB shall not apply insofar as they relate to the business referred to in Sub-section (1) and in computing the monetary limits under those sections, the gross receipts or, as the case may be, in the income from the said business shall be excluded.
(5)xxxx.
Explanation. : For the purposes of this section, the expression ‘civil construction includes–
(a) The construction or repair of any building, bridge, dam or other structure or of any canal or road,
(b) the execution of any works contract.
A plain reading of Section 44AD reveals that the above section is applicable in respect of the assessees engaged in the business of civil construction or supply of labour for civil construction. As per the Explanation to Section 44AD, reproduced above, the civil construction includes the construction or repair of any building, bridge, dam or other structure or of any canal or road. The said Explanation also provides that execution of any works contract will be included in the expression “civil construction”. Assessee is not engaged in the business of civil construction. The assessee is also not engaged in the supply of labour for civil, construction. It is noteworthy that whereas persons engaged in the supply of labour in civil construction are covered under Section 44AD, the persons engaged in the supply of material for civil construction have not been specifically provided to be covered under the said section. Thus, the only area which requires consideration is as to whether the assessee can be said to be covered under the Explanation to Section 44AD which includes the persons engaged in the execution of any works contract in the definition of “civil construction”. As already pointed out in this case, it is not a simple sale of material by a trader to a civil contractor. The assessee has been entrusted with the job of supplying sand from particular zones for the purpose of which he has to pay royalty to the Government, engage labourers for loading and unloading and arrange for transportation of the sand upto the site for construction of the road. If one goes by the work order placed on record, it seems that there is a composite contract for execution of the job of lifting sand from particular area and supplying the same to the contractor at site. Whether such composite contract not being a simple sale per se amounts to works contract, it will be useful to refer to CBDT Circular No. 684, dt. 10th June, 1994 (1994) 119 CTR (St) 25, is relevant. The relevant portion of the said circular reads as under:
Estimated income method for taxpayers engaged in the business of civil construction.–
31. The estimated income method of assessment for certain categories of business is prevalent in several countries. The Tax Reforms Committee has also recommended gradual introduction of the estimated income method in certain areas to facilitate better tax compliance. Accordingly, a new Section 44AD has been inserted in the IT Act with a view to providing for a method of estimating income from the business of civil construction or supply of labour for civil construction work….
31.2 The expression ‘civil construction’ will include the construction or repair of buildings, dams, bridges or other structures, or of roads or canals. It will also include the execution of any other works contract. It will; thus, include work related to electrical fittings, plumbing job, landscaping work, etc.
9. In this case, the assessee has executed the work of supplying and transportation of sand from particular area to a civil contractor. In other words, the assessee is a Sub-contractor to the civil contractor for execution of part of the work involved in the construction of the road. Reference to Section 194C is considered to be relevant. The said section is in regard to deduction of tax from payments to contractors and sub-contractors, Expln, 3 to Section 194C defines the word “work” as under :
Explanation III. : For the purposes of this section, the expression ‘work’ shall also include–
(a) advertising;
(b) broadcasting and telecasting including production of programmes for such broadcasting or telecasting;
(c) carriage of goods and passengers by any mode of transport other than by railways;
(d) catering.
Taking a cue from the above Explanation, it would not be difficult to appreciate that execution of work includes the carriage of goods by any mode of transport of goods other than by railways. Therefore, for the purpose of Section 44AD, the execution of any works contract would include carriage of goods by any mode of transport other than by railways. In this case, the assessee has engaged himself in the supply, and transportation; of sand from particular area to the civil contractor. If one were to go by the composite contract, then the entire payments made to the assesses would fall within the ambit of Section 44AD being the payment received for the execution of works contract in the, construction of a road. In this view of the matter, the entire payment would fall within the ambit of Section 44AD.
10. However, it is observed from the TDS certificate that the main contractor has deducted tax in respect of a sum of Rs, 16,85,044 out of the total payment of Rs. 36,58,267. The basis of bifurcation of the payment is not forthcoming from records. It seems that the contractor has made payments to the assessee in two parts–one is for supply of material, i.e., the sand at specified rates and the other is transportation charges including loading and unloading, octroi, etc. In case the contract is divisible in two parts–one for the supply of material and another for transport of the same, then Section 44AD would be applicable only in respect of transportation charges, i.e., Section 44AD would be applicable in respect of the payments of Rs. 16,85,044 and for the supply of material it would be reasonable to apply a net rate of profit of 5 per cent as applicable in the case of retail traders, notwithstanding the fact that assessee’s case may not strictly fall within the ambit of Section 44AF in respect of the supply of the material. In the absence of relevant material, I consider it just and reasonable to restore the issue to the file of the AO for the purpose of determination of the net profits after verification of the nature of payments to the assessee. In case there is a composite contract and there is no basis for bifurcation of transportation charges and cost of material, then the profit of the assessee shall be computed @ 8 per cent as provided under Section 44AD, However, if there is a reasonable basis for bifurcation of payments for the cost of material separately and for transportation charges, then the profit shall be computed (r) 8 per cent in respect, of payments made for transportation charges and @ 5 per cent for the supply of the material. The AO shall decide the issue accordingly after giving reasonable opportunity of being heard to the assessee.
13. For statistical purposes, appeal of the assessee is partly allowed.