ASST, COMMISSIONER OF INCOME TAX, CIRCLE-15(1), HYDERABAD vs. K. SESHAGIRI RAO & CO.,, HYDERABAD

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH “A”, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER Assessment Year: 2009-10 Assistant Commissioner of Vs. M/s. K. Seshagiri Rao & Co, Income Tax, Circle-15(1), 2-98/3, Block-B, Kakateeya Hyderabad. Nagar, Habsiguda, Hyderabad-500 007. (Appellant) (Respondent) Assessee by: Sri K.C. Devdas Revenue by: Sri Murali Mohan, DR Date of hearing: 16/01/2020 Date of pronouncement: 19/03/2020 ORDER PER A. MOHAN ALANKAMONY, AM.:

This appeal is filed by the Revenue against the order of the Ld. CIT(A)-7, Hyderabad in appeal No.745/CIT(A)-7/2014-15, dated 30/11/2016 passed U/s. 143(3) r.w.s 250(6) of the Act for the A.Y. 2009-10.

“1. The Ld. CIT(A) erred on both facts and law of the case. 2. The Ld. CIT(A) erred in restricting the disallowance of expenditure to 5% from 20% without giving any reasons for such relief.

4. The Ld. CIT(A) erred in deleting the addition of Rs. 44,26,564/- made U/s. 43B without appreciation of the facts brought on record. 5. The Ld. CIT(A) erred in deleting the addition of Rs. 1,16,73,049/- made towards difference in turnover. 6. Any other ground or grounds that may be urged at the time of hearing.”

3. The brief facts of the case are that the assessee is partnership firm engaged in the business of undertaking material handling contracts and hiring of equipment for construction and infrastructure industry at its client’s site. The assessee firm filed its return of income on 30/09/2009 admitting total income of Rs. 1,79,88,944/- under the head ‘income from businesses’. Initially the return was processed U/s. 143(1) of the Act and thereafter the case was taken up for scrutiny and assessment was completed on 30/12/2011 wherein the Ld. AO made additions towards, disallowance of 20% of expenditure aggregating to Rs. 44,34,052/- for want of supporting documents; Rs. 36,90,927/- towards non-furnishing of confirmation statements from sundry creditors; Rs. 44,26,564/- towards non-remittance of service tax collected invoking the provisions of section 43B of the Act and Rs. 1,16,73,049/- towards difference of income disclosed in the books of accounts and the income stated in Form 26AS. On appeal, the Ld. CIT (A) restricted the disallowance of expenditure to 5%; granted relief for Rs. 26,27,677/- in respect of addition towards sundry creditors and further deleted the addition of Rs. 44,26,564/- and Rs. 1,16,73,049/- U/s. 43B of the Act and towards difference in turnover respectively. Aggrieved by the order of the Ld. CIT (A), the Revenue is now in appeal before us.

4.1. During the course of scrutiny assessment proceedings, it was observed by the ld. AO that the assessee had failed to maintain documentary evidence such as bills and vouchers with respect payment made towards wages of Rs. 2,09,14,712/-, labour charges Rs. 5,05,278/- and loading and unloading expenses Rs. 7,50,270/-. Therefore, the ld. AO disallowed 20% of the expenditure incurred which worked out to Rs. 44,34,052/-. The ld. CIT (A) sustained the addition to 5% of the aggregate expenditure keeping in view of the fact that the assessee’s business involves dealing with unskilled labourers at remote areas wherein maintenance of proper vouchers become problematic and difficult.

4.2. Before us, the Ld. DR submitted that it was mandatory for the assessee to maintain sufficient documentary evidence in order establish the genuineness of the expenditure. Since, the assessee has failed to do so the Ld. AO has rightly disallowed 20% of the expenditure taking a lenient view. It was further submitted that restricting the disallowance to 5% by the Ld. CIT (A) is unjustified. It was therefore pleaded that the addition made by the Ld. AO may be sustained.

4.3. We have heard the rival submissions and carefully perused the materials on record. We agree with the arguments advanced by the ld. DR that it is mandatory for the assessee to maintain cogent documentary evidence in order to establish the genuineness of the expenditure incurred. Therefore, the Ld. Revenue Authorities are justified to estimate the disallowance when proper bills and vouchers are not produced. However, while doing so, they ought to have compared the gross profit or net profit (whichever is relevant) earned by the assessee along with the profit earned by other entities in the same industry and thereafter estimated the disallowance on a rational basis. Instead of doing so, it appears that the Ld. CIT (A) has estimated the disallowance on the basis of surmises and conjectures which is not appropriate. From the paper book filed by the Revenue it is evident that the turnover disclosed by the assessee is Rs.26,76,23,235/- and the income declared by the assessee is only Rs. 1,79,38,944/-. Thus, the net profit of the assessee is only 6.70% (Rs. 1,79,38,944 X 100 / Rs.26,76,23,235/-) which appears to be on the lower side. The total expenditure incurred by the assessee in cash is Rs. 2,21,70,260/- which is not supported by proper supporting evidence. Even if the entire amount of Rs. 44,34,052/- being 20% of the expenditure is added back to the returned income of the assessee the net profit of the assessee will work out to Rs. 8.40% [(Rs. 1,79,38,944 + Rs. 44,34,052) X 100 / Rs.26,76,23,235/-] which is not on the higher side. Therefore, the estimate made by the Ld. AO appears to be appropriate. Hence, we hereby set-aside the order of the Ld. CIT (A) and sustain the order of the Ld. AO on this issue. It is ordered accordingly.

(i) The Ld. AO has not doubted the purchases and services rendered by the sundry creditors. (ii) The assessee has filed complete details and confirmation statements from some of the creditors.

(iii) The sundry creditors are regular suppliers who have been paid during the subsequent year and there is no other material brought on record by the Ld. AO to doubt the assessee’s transaction with the above creditors.

5.2. At the outset, we do not agree with the view of the Ld. CIT (A) on this issue. The Ld. AO has categorically stated in his order that the assessee had not furnished the details of the sundry creditors from whom confirmation statements are not received. Passing of entries in the books of accounts with respect to purchases/services obtained and payments made regularly towards the same year after year does not prove the genuineness of the transaction. In this situation, the conclusion of the Ld. CIT (A) that no other materials are brought on record by the Ld. AO to doubt the assessee’s transaction with the sundry creditors from whom confirmation statements are not received and complete particulars are not furnished, is not appropriate. Therefore, the order of the Ld. CIT (A) deleting the addition for Rs. 26,37,677/- is devoid of merits. However, considering the facts and circumstance of the case, in the interest of justice, we hereby remit this issue back to the file of the Ld. AO for fresh consideration in order to provide one more opportunity to the assessee to establish the genuineness of the sundry creditors.

6.1. During the course of assessment proceedings, it was observed by the Ld. AO that the total service tax collectable for which bills have been raised by the assessee’s firm amounts to Rs. 74,54,488/- against which the assessee has paid an amount of Rs. 30,27,924/- to the Service Tax Authorities until the due date of filing the income tax return. Therefore, the Ld. AO invoked the provisions of section 43B of the Act and disallowed the expenditure of Rs. 44,26,564/- (Rs. 74,54,488 – Rs. 30,27,924). On appeal, the Ld. CIT (A) deleted the addition because the assessee had not debited any amount with respect to sales tax (sic) service tax in the P & L Account relying on various decisions of the Tribunal and higher judiciary.

6.2. At the outset, the Ld. AR submitted that the assessee has not claimed the amount of Rs. 74,54,488/- as expenditure in its P & L Account. It was further submitted that the entire amount of Rs. 74,54,488/- collected was to be remitted to the Government Treasury on behalf of the clients of the assessee and therefore, these transactions do not reflect in the P & L Account of the assessee but it will be only reflected in the balance sheet of the assessee. It was therefore pleaded that the disallowance of expenditure by the Ld.AO which was not claimed by the assessee as deduction is not justifiable. The Ld. AR further relied on the orders of the Ld. CIT (A) and argued in support of the same. The Ld. DR on the other hand argued in support of the order of the Ld. AO.

6.3. We have heard the rival submissions and carefully perused the materials on record. We agree with the submission of the Ld. AR that the entire service tax collected from the clients of the assessee has to be remitted to the Government Treasury within the stipulated period. Therefore, these transactions will neither result in any income or expenditure when provisions of the relevant Act are complied. However, if the service tax that are collected from the clients of the assessee are not remitted to the Government Treasury but retained by the assessee, then obviously it would result in income to the assessee. It appears from the order of the Ld. CIT (A) that he has misunderstood the ‘Service Tax’ as ‘Sales Tax’. Whatever may it be, whether Service Tax or Sales Tax, it mandates the assessee to collect the same from its clients on every transaction and remit the same to the Government Treasury within the stipulated period. Therefore, we hereby remit the issue back to the file of Ld. AO to verify whether the assessee has remitted the entire amount of Rs. 74,54,488/- to the Government Treasury as on date of such verification and if found so, delete the addition made on this issue. It is pertinent to mention that if the assessee has remitted the entire service tax collected from the clients of the assessee in the Government Treasury then the decisions relied by the assessee will obviously support the case of the assessee in its favour. However, if the assessee has not remitted any portion of Rs. 74,54,488/- to the Government Treasury, the same shall be treated as the income of the assessee. We also make it clear that section 43B of the Act which was relied by the Ld. Revenue Authorities on this issue has no relevance as the relevant section that would be applicable is section 28 sub-section (iv) of the Act.

7.1. During the course of scrutiny assessment proceedings, it was observed by the Ld. AO that the assessee had understated an amount of Rs. 70,53,639/- as its turnover in the books of accounts compared to the income stated in the Form 26AS. On query, it was submitted that during the relevant assessment year the contractee had claimed the sum of Rs. 70,53,639/- as expenditure towards contract and debited to its P & L Account and further on payment towards the same in the relevant assessment year deducted tax at source. However, since the assessee had not executed the contract during the relevant assessment year, based on mercantile system of accounting which the assessee is following regularly, had not included the same as its revenue in the relevant assessment year. On perusing the explanation offered by the assessee the Ld. AO opined that since the assessee is claiming the credit for the TDS on the payment received for Rs. 70,53,639/- as evident from Form 26AS the entire amount of Rs. 70,53,639/- ought to be treated as the revenue of the assessee in accordance with the provisions of section 199 of the Act irrespective of the fact that the assessee had not executed the contract in the relevant assessment year. On appeal, the Ld. CIT (A) deleted the addition after verifying the fact that the assessee had disclosed the amount as its income in the year in which the contract was executed.

7.2. At the outset, we do not find any infirmity in the order of the Ld. CIT (A) on this issue. The assessee is apparently following Mercantile System of Accounting and the same is not in dispute. Therefore, unless and until the income has crystallised in the hands of the assessee i.e., when the contract is executed by the assessee, it cannot be said that the income has accrued to the assessee attracting tax liability. In the case of the assessee it is obvious that the assessee has not executed the contract during the relevant assessment year though payment was received during the relevant assessment year against which the tax was deducted. When the assessee has not executed the contract in the relevant AY, it is obvious that the gain arising out of the contract has not crystallised in the hands of the assessee during the relevant AY. Hence, the amount received towards the contract cannot be treated as the revenue receipt of the assessee for the relevant AY. It is also evident that the assessee has disclosed the amount of Rs. 70,53,639/- as its revenue receipt in the year in which the assessee has executed the contract. Therefore, it is apparent that the assessee has followed the mercantile system of accounting and disclosed the revenue receipt in the appropriate year i.e., when the contract was executed by the assessee. Hence, treating the amount of Rs. 70,53,639/- as revenue receipt of the assessee during the relevant AY will amount to double taxation and is not appropriate. Therefore, the Ld. CIT (A) has rightly deleted the addition of Rs. 70,53,639/- in the relevant AY after examining the facts of the case. Further, by virtue of the amendment in section 199 of the Act by the Finance Act 2008 w.e.f 01/04/2008 it is obvious that the assessee shall be entitled to claim credit for the tax deducted at source which is remitted to the Revenue by the payer / contractee during the relevant AY, even though the related revenue receipt is not included as the turnover in the relevant assessment year as service is not rendered by the assessee during the relevant AY. Hence, we do not find it necessary to interfere with the order of the Ld. CIT (A) on this issue.

7.3. With respect to the discrepancy of Rs. 46,19,410/- it was explained by the assessee that the bills were raised and accounted in the previous year relevant to the preceding assessment year since the assessee had executed the contract in that year. However, the contractee had accounted the same in the relevant AY and accordingly deducted the Tax at Source. However, the Ld. AO was of the view that the assessee ought to have disclosed the contract receipt as its revenue during the relevant assessment year and not in the previous year relevant to the preceding assessment year. Therefore, he treated the amount of Rs. 70,53,639/- as the revenue receipt of the assessee for the relevant AY. On appeal, the Ld. CIT (A) deleted the same on the same analogy with respect to the addition made for Rs. 70,53,639/- discussed herein above. Since we have already upheld the decision of the Ld. CIT (A) hereinabove with respect to the addition made for Rs. 70,53,639/- the same decision holds good with respect to the addition made for Rs. 46,19,410/- wherein the facts are somewhat similar. Accordingly, the decision of the Ld. CIT (A) for having deleted the addition of Rs. 1,16,73,049/- (Rs. 70,53,639 + Rs. 46,19,410) is hereby upheld.

7.4. Since Grounds No. 1 and 6 are general in nature they do not call for any adjudication and therefore do not survive.

7.5 In the result, appeal of the Revenue is partly allowed for statistical purposes as indicated herein above.

Pronounced in the open Court on 19th March, 2020.