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Income Tax Appellate Tribunal, DELHI BENCH “G” DELHI
Before: SHRI PRADIP KUMAR KEDIA & SHRI NARENDER KUMAR CHOUDHRY
PER PRADIP KUMAR KEDIA, A.M.:
The captioned appeal has been filed by the Assessee against the order of the Commissioner of Income Tax (Appeals)- IX, Delhi [‘CIT(A)’ in short] dated 31.10.2019 arising from assessment order dated 30.12.2016 passed by the Assessing Officer (AO) under Section 143(3) of the Income Tax Act, 1961 (the Act) concerning AY 2014-15.
As per its grounds of appeal, the assessee has challenged the disallowance of Rs.3,02,39,330/- made by the Assessing Officer towards claim of job work expenses.
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Briefly stated, the assessee is a private limited company and carrying on the business of trade of rice and other agro products for the Assessment Year 2014-15 in question. The return filed by the assessee was subjected to scrutiny assessment. In the course of the scrutiny assessment, the Assessing Officer inter alia made inquiries on the job work expenses incurred by the assessee amounting to Rs.3,02,39,330/. The name and addresses of all contractors rendering the services to the assessee were provided to the Assessing Officer. The notices under Section 133(6) were issued by the Assessing Officer for verification purposes. The contractors however did not respond to the notice issued in respect of job work transactions. Consequently, the Assessing Officer draw adverse inference on the genuineness of expenses and disallowed job work expenses of Rs.3,02,39,330/- while computing the assessed income of the Assessee.
Aggrieved, the assessee preferred appeal before the CIT(A).
4.1 The assessee filed documentary evidences in corroboration of claim of job work expenses and reiterated its claim before the CIT(A). The CIT(A) directed the AO to issue summons to the parties and make enquiries. Accordingly, summons under Section 131(1) were issued to the parties rendering job work services. As per the remand report from AO, it was observed by the Assessing Officer that despite service of summons on the parties, the parties did not turn up for substantiation of the jobwork services rendered to the assessee. The Assessing
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Officer thus re-asserted before CIT(A) that the non compliance of summons justifies the action of the Assessing Officer in denying the job work expenses.
4.2 The CIT(A) endorsed the action of the Assessing Officer on the premise that the compliance of summons under Section 131 has not been carried out by the job work service providers.
Aggrieved by the denial of relief in disregard to tangible evidences by the CIT(A), the assessee has preferred appeal before the Tribunal.
The ld. Counsel for the assessee canvassed wide ranging arguments which are narrated hereunder:
(i) The ld. counsel adverted to the P&L account and submitted that a turnover of the assessee has witnessed 16% increase during the year whereas the total cost of job work qua the turnover is merely 1.28%. The ld. counsel further pointed out that in addition to trading activity, the assessee during the year has also embarked on process work during the year for which the new machinery worth Rs.15.29 crore were added to the Gross block and thus the Gross block at the beginning of the financial year which stood at Rs. 7.79 crore swelled to Rs. 23.08 crore. The newly added process work inevitably warranted incurring of additional expenses which were filled by way of job work. (ii) The parties to whom the job work charges have been paid are identifiable with PAN with address. (iii) The payments to the contractors have been made regularly throughout the year against the services rendered as vouched by respective ledger account of parties and the bank statement placed on record. The obligations towards TDS deduction attached to such expenses were also duly complied with by the assessee. The income tax return filed by the respective contractors was also placed on record. The TDS
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deducted by the assessee on such payments are simultaneously reflected in the corresponding ITR return of the contractors with the job work income. (iv) The solitary basis for the disallowance of job work expenses is attributable to non compliance of notice/ summons served under Section 133(6)/131 of the Act. In this context, the ld. Counsel pointed out that the job work has been carried out at the business premises of Assessee situated at Gujarat which is nearly 1200 kms away from the location of the office of Assessing Officer in Delhi. Hence, non attendance by contractors at Delhi in pursuance of the summons served cannot per se be faulted to the prejudice of the assessee who has no control over the suppliers. Making reference to the provisions of the CPC governing exercise of powers under S. 131(1) of the Act, the ld. Counsel contends that asking third parties for personal attendance to vouch the transactions who are situated in distant places nearly 1200 kms away cannot be ordered in a casual & nonchalant manner. The ld. Counsel submits that the right course available to the Assessing Officer located in Delhi was to issue commission to the Assessing Officer situated at the place of residence of the contractor for making requisite inquiries, if considered necessary. The action of the Assessing Officer issuing summons for personal attendance at Delhi is thus prima facie unjustified and outside the authority of law vested under Section 131 of the Act. The ld. counsel also contends that the factum of non attendance on issue of notice under Section 133(6) was not confronted to the assessee at the assessment stage. The requisite information including the IT returns of the contractors demonstrating the inclusion of receipt of job work income of exact amount was made available to the lower authorities. In appellate proceedings, the CIT(A) choose to direct the AO to exercise powers of Court vested under section 131 in substitution of Section 133(6) without showing as to how the documentary evidences filed smacks of any malafide. The AO while exercising powers under S. 131 failed to appreciate the constraints imposed by law in calling for personal attendance under Section 131 without observing the procedure laid down under CPC. The addition has been confirmed merely for non compliance of summons in total
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disregard to the cogent evidences of substantial nature, both direct as well as circumstantial. The huge addition to fixed assets coupled with increase in turnover necessitated such services which fact was ignored. The reflection of income in the ROI of contractors vindicated the incurring of expenses by the assessee. Such facts have been totally overlooked. It was thus contended that the action of CIT(A) is totally arbitrary and opposed to the contours of law. (v) The ld. counsel further extended its argument that where notice under Section 133(6) issued by the Assessing Officer is not responded by the third party or where summons have been issued and served but not responded due to fetters imposed in law, the assessee cannot be blamed for such inaction of a third party. The assessee has produced substantial evidences in corroboration and mere failure of contractors to attend in response to summons in the circumstances narrated hereinabove should not be read adversely on the face of tell-tale evidences. The documentary evidence establishes admission of rendering service by third parties and no infallible proof to the hilt can be expected for the purposes of such claim. (vi) On an inquiry from the Bench, the ld. counsel for the assessee strenuously contended that the fault squarely lies at the door of the Revenue to issue wrongful summons seeking personal attendance at Delhi instead of setting up local commission for requisite inquiry as called upon as per Section 131 read with provisions of CPC. Thus, a fresh opportunity cannot be given to the Revenue to cover up the lapse at this very belated stage for compliance of S. 131 by third parties by setting up commission for at least two reasons: (a) It is common knowledge that it would be extremely difficult to remember nuances of a transaction by any person after such long gap as echoed by the Hon’ble Supreme Court in several judgments. The underlying documentary evidences supported by bank transactions are in any case available to assert the correctness of transaction recorded. (b) The business of the assessee has come to a grinding
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halt way back in 2016 and assets & records of the assessee ultimately were taken over by lender bank in its command in exercise of powers conferred under SARFAESI Act,2002 and therefore, the assessee is left with no wherewithal to defend its position in any other way except the tangible documents already made available in this regard. It was thus contended that having regard to the peculiar circumstances, a fresh round of inquiry at this belated stage without any fault attributable to assessee would be a grossly futile exercise and would not serve any useful purpose. Remitting the matter back to the revenue for compliance of summons and that too without casting any aspersions on the documentary evidences would be dehors the ground realities and thus would possibly result in unjust treatment to the defunct assessee in such peculiar circumstances.
(vii) To buttress its plea to shun second round of enquiry at the end of revenue in the peculiar circumstances where the assessee is altogether estopped & prevented in dealing with and defend its interests, the Ld. counsel referred to a recent judgment of the Hon’ble Supreme Court in Union of India vs. CITI Bank N.A. (2022) 141 taxman.com 409 (SC) wherein it was inter alia observed that such proceedings cannot be initiated in respect of transactions which took place long back. It was noted by the Hon’ble Supreme Court that the records are unlikely to be preserved by a witness for such a long period to throw light on the subject. The show cause notices issued by the Revenue Authorities were thus set aside. The ld. counsel thus submitted that when seen holistically in the context, the assessee has discharged primary onus placed upon it with regard to propriety of expenses incurred by adducing overwhelming evidences and mere lack of response from the third parties will not vitiate the bona fide on a standalone basis in the absence of any adverse evidence at the command of the Revenue. (viii) The ld. counsel thus urged for reversal of the disallowances made by the Revenue Authorities and sought restoration of claim made by the assessee.
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Per contra, the ld. DR for the Revenue submitted that mere production of documentary evidences in itself is not sufficient to exonerate the assessee of its burden of proof. The ld. DR thus submitted that the findings given by the CIT(A) adverse to the assessee stands the test of reasons and thus no inference with the order of the CIT(A) is called for.
We have carefully considered the rival submissions and perused the assessment order and the first appellate order. The material referred to relied upon were also perused. The disallowance of Rs.3,02,39,330/- on account of job work expenses is in controversy.
8.1 As stated, the assessee company was, at the relevant time, engaged in the business of manufacturing, processing and trading of rice and other food grains. In the preceeding assessment years, the assessee was engaged only in trading activity of commodity i.e rice. The processing activity begun during the year under review as reported in the tax audit report. The quantum jump in the turnover on account of processing activity, as reflected in financial statement, also evidences the integration of processing activity. The fixed assets/machineries were acquired during the year, as shown in the fixed asset schedule to achieve the requirement of processing/manufacturing activity. The assessee claims to have incurred job work expenses of Rs.3.02 crore which amounts to 1.28 % of the turnover. The payment towards job work charges were paid mainly to four job work contractors situated in
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Gandhidham, Gujarat. The Assessing Officer and CIT(A) has rejected the job work expenses claimed by the assessee on the ground that notice issued under Section 133(6) and thereafter summons issued under Section 131 to the contractors have remained uncomplied with, by such contractors. In this regard, it is the case of the assessee that the payments to job work providers have been subjected to TDS provisions and the job work income is correspondingly reflected in the respective return of income filed by the contractors which is placed on record. Besides, the necessity of incurring expenses is also demonstrated circumstantially; viz. (i) acquisition of fixed assets and increase in Gross block by a nearly triple (ii) process activity translating in corresponding increase in turnover. Furthermore, the income tax return filed by the contractors establishes the identity of job work service providers with their addresses and therefore the onus on the assessee towards identification and genuineness of transaction is manifestly discharged by the overwhelming documentary evidences. A mere physical presence or otherwise of such service providers will not alter the factual matrix in the absence of any suspicious circumstance brought on record. The Assessee also contends that the authority issuing summons should judge the relevancy of documents or books of accounts before issuing summons for production of documents. There is no averment in this regard in the orders of the lower authorities on such co-relation and application of mind.
8.2 It is further case of the assessee that the summons issued to the parties situated in Gujarat for personal attendance in Delhi
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is an obvious case of overreaching the exercise of power vested under Section 131 of the Act read with provisions of CPC. In the instant case, where the contractors are situated at a remote area situated in excess of distance of 500 kms, witnesses could not be ordered to attend in person before the Assessing Officer having regard to the order XVI Rule 19 of Civil Procedure Code 1908. The assessee contends that the Assessing Officer has the same powers as are vested in a Court in Civil Procedure Code 1908 while trying a suit, for exercise of power vested under Section 131(1) of the Act. This being so, the right course of action available to the Assessing Officer was to issue ‘commission’ under S. 131(1)(d) of the Act at the nearest place of the situation of the contractors for personal attendance, enquiry and local investigations. The power to issue commission is identical with section 75 of the Code of Civil procedure 1908. It is further case of the assessee that the Assessing Officer having committed serious fault in exercise of omnibus power and cannot be given second round of proceedings to correct his own lackadaisical approach. Since the tangible evidence by way of ITR of the contractor reflecting corresponding income is already placed on record coupled with the fact that reimbursements have been made through banking channel after deduction of tax at source, there is no warrant to disbelieve the version of the assessee. No fallacy in the documents presented before revenue authorities has been brought on record either.
8.2 This apart, the assessee also points out that the business operations of the assessee is closed in the subsequent years and the money lent by the banks to the assessee were declared as
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non performing assets (NPA) in September 2016 by the Punjab National Bank. Hence, all the assets were securitized on behalf of the bank under SARFAESI Act 2002 and thereafter mostly auctioned to realize the dues. The company is not doing business anymore and is rendered without any staff, financial records and other support and backup. Hence, a fresh round of inquiry on demonstrable facts will not serve any useful purpose. The assessee asserts that on the face of speaking documents, it is difficult to visualize a different position emerging from such belated enquiry, if permitted, after lapse of considerable time and the closure of the business of the assessee. A reference was made to the judgment of the Hon’ble Supreme Court in Union of India vs. CITI Bank N.A. (2022) 141 taxman.com 409 (SC) among others.
8.3 The reasons broadly condensed in the preceding paragraphs justifies the plea of the assessee. The assessee has successfully demonstrated the incurring of job work expenses on the basis of clinching evidences, both direct and circumstantial. No adverse materials to controvert these tell-tale evidences are on record at present.
8.4 Shorn off the non-compliance of summons served under Section 131 of the Act, the assessee has filed formidable evidences to identify the contractors as well as the factum of incurring job work expenses as demonstrated by the income tax returns of the service providers. TDS has been deducted on such expenses and reflected in the return of income of the contractors. The increase in turnover, addition of new line of
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business, i.e., processing of rice and substantial increase in the fixed asset are vital indicators of plausibility of the explanation offered by the assessee in this regard. In this factual matrix, in the absence of any culpable evidence in possession of revenue, the job work expenses deserves to allowed, on a standalone basis, as incurred in the ordinary course of business.
8.5 Now we turn to address the grievance of revenue on non- compliance of summons. Admittedly, the summons under Section 131 were duly served on the contractors but had remained unresponded. In this backdrop, the observations of Hon’ble Madras High Court in S. Hastimal vs. CIT 49 ITR 273 are worth noting wherein an impetus was given on the difficulty on the part of any assessee to explain a transaction after a decade. Similar view has been recently expressed by the Hon’ble Supreme Court in CITI Bank case (supra).
8.6 This apart, we are alive to the concern of the assessee that owing to closure of business and in the absence of any support service available at the end of the assessee, it is not positioned to defend its stand on outcome of such inquiries after such a long gap and will cause onerous burden on the assessee if such inquiries are continued even after a decade.
8.7 Having regard to these ground realities read with overwhelming tangible documents suggesting the state of affairs to true, we are not inclined to engage the department in futile exercise by second round of proceedings and rake up a stale cause. Needless to say, the assessee is not required to demonstrate the bona fides to the hilt and no infallible proof is
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required to be furnished to the satisfaction of the Revenue in every case. In the totality of circumstances so weighed cumulatively, the plea of the Assessee deserves to be accepted in the peculiar facts of the case.
The action of the CIT(A) is thus set aside and the addition/ disallowance on account job-work charges are reversed and cancelled.
In the result, the appeal of the Assessee is allowed.
Order pronounced in the open Court on 25/11/2022.
Sd/- Sd/- [NARENDER KUMAR CHOUDHRY] [PRADIP KUMAR KEDIA] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: /09/2022 Prabhat