CHANDI RAM PROP M/S CHANDI AND CO vs. DY COMMISSIONER OF INCOME TAX KOTA

By way of this appeal, the appellant has assailed the judgment and order of the Tribunal whereby tribunal has partly allowed the appeal of the department and cross objection filed by the assessee were also allowed.

This court while admitting the appeal on 1.3.2012 framed following substantial question of law:- “Whether the tribunal was justified in treating

The facts of the case are that the assessee was a Civil Contractor. He maintained books of accounts. System of accounting Mercantile. His books were rejected and not profit rate

1 The assessee on account of finding judgment of Apex Court in Sh. Govind Choudhary case and inaccordance with the treatment given earlier during relevant years applied said net profit rate and declared in the return.

2 The Assessing Officer vide order dt. 12.12.2008 (Annexure-1) discussed the issue observed as under:-

Arbitration Award Receipts:- That during the year under consideration the assessee has received the followings amount of Arbitration Award and has disclosed only the net profit on these receipts by applying the NP rate of (3 of 19) [ITA-19/2011] respectively of the relevant years as under:- Rs.180514/- N.P. rate applied @ 8.57% Rs.708360/- N.P. rate applied @ 8.5% These receipts pertain to A.Y. 1993-94 & 1990-91 respectively. In this context, the assessee submitted as under:- That your assessee had not claimed work expenses in the A.Y. 1993-94 & 1990-91 supported by audit report. In case of the work expenses had claimed in the A.Y. 1993-94 & 1990-91. The return income would go in loss whereas the Income Tax return filed declaring net profit as under- To Work Expenses 4441460.00 By Gross Work receipts 4857976.00 To Depreciation 332756.00 By Closing Stock NIL To Net Profit @ 8.57% 83760.00 (Work in progress) 4857976.00 4857976.00 P & L A/c for the A.Y. 1990-91 To Work Expenses 5936366.00 By Gross Work receipts 6354579.00 To Depreciation 390030.00 By FDR Interest 30116.00 To Net Profit @ 7.01% 57699.00 By Closing Stock NIL CIT(A) applied (Work in progress) 8.5% upheld by ITAT 6384695.00 6384695.00

3 Thereafter, he taxed the entire receipts. He added additionally Rs.8,13,194/- against which assessee has preferred appeal which came to be allowed by CIT(A) in para 13-15 observed as under:- “Ground 5 That on the facts and in the circumstances of the case, the learned AO grossly erred in making a total addition of Rs.8,13,194/-

The decision of the AO to treat entire receipts from the arbitration awards as income of the appellant, thus, is not confirmed. The addition of Rs.8,13,194/- is deleted. Ground 5 of the appeal is acceptable.”

4 Against the said order both assesee as well as department preferred appeal wherein the tribunal observed as under:- “23. We have heard both the parties. The AO has reproduced the P&L account of A.Y. 1990- 91 & 1993-94. For the both the assessment years, the work in progress is nil. Hence, the receipts which were required to be received were shown as nil. We are not having the (8 of 19) [ITA-19/2011] benefit of going through arbitration award as copy of such award has not been filed. Whether the award was in respect of extra work or in respect of extra work or in respect of extra rate demanded or was on account of escalation in rates? The ld. CIT(A) has given a finding that assessee has not claimed such expenses for the A.Y. 1990-91 & 1993-94. The work in progress has been shown nil and this will infer that in case the expenses were incurred then these were not entered in the books of account. The decision of Hon’ble Apex Court in case of Govind Choudhary and sons is not applicable as in that case interest awarded was held to be considered as business receipts. This case helps the revenue to say that receipts as per arbitration awards are to be considered as business receipts. The AO has given finding on the basis of tribunal order in the case of the assessee for earlier year that the assessee has not established the incurring of expenses in respect of such receipts for the A.Y. 1990-91 & 1993-94”. The ld. CIT(A) has recorded a finding that expenses related to such receipts are not reflected in the audited profit and loss account for A.Y. 1990-91 and 1993-94. No details of expenses shown to have been incurred in those years and it is finding that such expenses have not been entered in the books of account. Such an expenditure for which no details filed or not entered in the books of account is not allowable as per proviso to Sec. 69C of the IT Act. Hence even if for the argument it is accepted that assessee has incurred expenditure against such receipts even then such expenditure will not be allowable. It is not the case of the assessee that it has kept details of expenses related to the issues on which receipts were received as a result of arbitration award. The onus is on the assessee to estabish the outgoings and have to explain the source of such outgoings. We, therefore, hold that ld.CIT(A) was not justified in deleting the addition of Rs.8,13,194/-.”

Counsel for the appellant has relied upon the following decisions:-

In CIT vs. Govinda Choudhury & Sons. 203 ITR 881 wherein

2 In CIT vs. N.C. Kaladharan, L/R Late Gowri ITA No.180 of 2002 decided on 31.1.2008 wherein it has been held as under:- “3. The question raised is whether the estimation of income at 10% as fixed by the Commissioner of Income Tax (Appeals) and confirmed by the Tribunal applies to interest element of the award amount According to the Revenue, interest is entirely taxable as it is an addition to the contract amount. However, we find that the issue is covered by the decision of the Supreme Court in Commissioner of Income Tax v. Govindar Choudhurg and Sons (203 ITR 881) wherein the Supreme Court held that the compensation as well as interest have to be treated as contract receipts. Since the issue raised is covered by the decision of the Supreme Court, we do not think there is any scope for considering the decision relied on by the learned counsel for the Revenue in United Construction Contractors v. Commissioner of Income Tax (1994(1) KLT 880).”

3 The same was confirmed by the Supreme Court in SLP (c) 5158/2009 decided on 23.2.2009. (11 of 19) [ITA-19/2011]

4 Kerala High Court held as under:- “It is only common sense that the amount received on arbitration does not fully represent profit as contended by the Revenue. In fact, the award is made to provide for the escalation in cost due to dleay in completion of the work, interest charges that the assessee will have to incur as also the increased cost of labour. It is to offset the loss caused to the assessee by such delay in the execution of the work that the arbitration award is made. The Income Tax Officer has gone wrong in treating the arbitration award amount as the income or profit of the business forgetting the fact that the award is really related to the escalation in the cost suffered by the contractor as mentioned earlier. It is this order that was rectified by the Tribunal for adequate reasons. We are also satisfied that the amount received did not fully represent income. We called upon the assessee to produce a copy of the arbitration award. A perusal of the award shows that the award was made for escalation of the cost and was not mere profit as contended by the department. We are not relying on this award as we looked into it only for the purpose of satisfying ourselves about the nature of the award.”

5 Appellate Tribunal, Lucknow & ors. (2012) 207 Taxman 229 wherein it has been held as under:- “The interest was only an accretion to the assessee's receipts from the contracts and was attributable to an incidental to the business carried on by it. The interest payable to the assessee partook of the same character as the receipts for the payments of which it was otherwise entitled under the contract and which payment has been delayed as a result of certain disputes between the parties. It cannot be separated from the other amount granted to the respondent under the awards

With regard to the second contention as to the rate of tax, it is brought to our notice that in view of the settled position of law the rates of tax on interest would be consistent with the rate of profit on the principal business at which the tax is levied in accordance with law.”

7 Bench observed as under:- “This brings us to a consideration of the second question. The sum of Rs.2,77,692/- was received by the assessee as interest on the amounts which were determined to be payable by the assessee in respect of certain contracts executed by the assessee and in regard to the payments under which there was a dispute between the two parties. The assessee is a contractor. His business is to enter into contracts. In the course of the execution of these contracts, he has also to face disputes with the State Government and he has also to reckon with delays in payment of amounts that are due to him. If the amounts are not paid at the proper and interest is awarded or paid for such delay, such interest is only an accretion to the assessee’s receipts from the contracts. It is obviously attributable and incidental to the business carried on by him. It would not be correct, as the Tribunal has held, to say that this interest is totally de hors the contract business carred on by the assessee. It is well setled that interest can be assessed under the head “Income from other sources” only if it cannot be brought within one or the other of the specific heads of charges. We find it difficult to comprehend how the interest receipts by the assessee can be treated as receipts which flow to him de hors the business which is carried on by him. In our view, the interest payable to him certainly partakes of the same character as (14 of 19) [ITA-19/2011] the receipts for the payment of which he was otherwise entitled under the contract and which payment has been delayed as a result of certain disputes between the parties. It cannot be separated from the other amounts granted to the assessee under the awards and treated as “income from other sources.” The second question is, therefore, answered in favour of the assessee and against the revenue.”

Taking into consideration he contended that for the assessment year 2004-05, different issues were raised however tax appeal on 825/2008 preferred by the department came to be disposed of involving low tax effect in the said appeal following substantial questions of law were framed by the counsel for the appellant:- “1. Whether under the facts and circumstances of the case and in law, the order of the tribunal is perverse in deleting the additions of Rs.35,83,928/- made by the AO on account of bogus current liability shown by the assessee in the balance sheet whereas the amount was an receipt/income which has been received by the assessee during the year?

Whether under the facts and circumstances of the case and in law the amount of Rs.35,83,928/- is taxable u/s 45(5)(b) of the IT Act and the tribunal has completely failed to appreciate Sec.45(5)(c) of the Act?

Whether under the facts and circumstances of the case and in law, the order of the tribunal is perverse is not following the dictum of Hon’ble Apex Court in the case of Somaiya Organica (India) vs. State of U.P. reported in 251 ITR 20?”

1 The tribunal in the appeal for assessment year 2004-05 vide order dt. 31.3.2008 and AO passed the order on 5.12.2006. 6. Counsel for the respondent has taken us to the order of the (15 of 19) [ITA-19/2011] tribunal and contended that the tribunal while considering the case has observed as under:- “We have heard both the parties. In the paper book filed by the ld.AR, he has enclosed copies of letter submitted to the AO on 5.5.2008, 9.6.2008, 28.7.2008 and 8.8.2008. It is also contained copies of vouchers in respect of purchase of diesel. Letter of 5.5.2008 was is in response to notice u/s 142 and it is not relevant in respect of issue of allowability of diesel expenses. Similrly letters dt. 9.6.2008, 28.7.2008 and 8.8.2008 are not relevant as it appears that issue of allowability of diesel expenses was perhaps not an issue. Before the CIT(A), the assessee filed written submissions vide letters dt. 29.3.2009, 9.4.2009, 27.5.2009 and 12.6.2009 available at page 1 to 40 of the paper book. The AO has sent his report vide letter dt. 15.5.2009. The assessee vide written submission dt. 29.3.2009 mentioned at pages 4 to 7 (P.B. pages 21 to 24) stated that diesel is being provided to JCB owners and tractors and also enclosed copy of register showing the supply of diesel and it contained the signatures or thumb impressions of JCB/tractor owners. Copy of such registers have not been placed in the paper book. The AO in report mentioned that such evidences should not admitted. When the ld. CIT(A) has admitted the evidences then the AO should have examined such additional evidences. The ld.CIT(A) has examined the additional evidences and gave a factual finding that diesel has disturbed to JCB/tractor owners. However, in absence of copy of such register we are not in a position to see that the entire diesel purchased has been disturbed. Purchase of diesel per bill varies from Rs. 233 to Rs. 38034. Hence entire purchases are not in bulk. In the written submissions vide letters dt. 29.3.2009 filed before ld. CIT(A) that in the preceding year Rs.70,000/- was disallowed out of tractor hire charges which was reduced to Rs.35,000/- by the tribunal. Hence considering the non-availability of quantum of diesel disturbed vis-a-vis total purchase of diesel, purchase of diesel varying from Rs.233 to 38034 per bill and disallowance of (16 of 19) [ITA-19/2011] tractor hire charges to the extent of Rs.35,000/- sustained by the tribunal in the case of the assessee for the earlier year, we feel that it will be fair and reasonable to estimate the disallowance of Rs.35,000/-.

1 He contended that the assessee has failed to produce on record whether expenses for the A.Y. 1990-91 & 1993-94 were claimed or not and what happened to the proceedings for the A.Y. 2004-05, in that view of the matter, tribunal was justified in wherein Division Bench of Tribunal held as under:- “We have considered the rival submissions and perused the material on record. We note that the assessee received arbitration award of Rs. 38,45,155/- inclusive of TDS of Rs. 5,26,027/-. The said amount was inclusive of interest element. The assessee treated the entire amount as income from business and filed its return of income u/s. 44AD of the Act by taking the net receipt after TDS and failed to gross up the same while filing the return of Income Tax. The ld. AO while framing the assessment order u/s. 143(3) accepted the returned income however the assessment was re-opened by issuing notice u/s. 148. While

Before proceeding with the matter, counsel for the appellant relied on the finding of the AO recorded in the earlier appeal which is reproduced as under:- “On perusal of balance sheet of the assessee, it is found that assessee has shown current liabilities which included liability of Rs.35,83,978/- as arbitration receipts from XEN, Irrigation, Bundi. During the period relevant to the assessment year under consideration the assessee received contract receipts of Rs.3583978/- on Court’s order an appeal filed by the assessee against the decision of the arbitration. Since these are the receipts of the assessee and should be part of the income of the assessee therefore how this can be treated as liabilities. These assessee was required vide order sheet entry dt. 15.11.2006 to explain as to how this has been shown as liability whereas these contract receipts of Rs.3583978/- have already been received by you during the period relevant to the assessment year and this your income and not liability. The assessee has in written reply dt. 17.11.06 stated that on request of the assessee the (18 of 19) [ITA-19/2011] Hon’ble Court directed the State for payment to the assessee on furnishing of solvent security subjected to final order in appeal filed by the State before the Rajasthan High Court. He further explained that the amount permitted to be withdrawn subject to furnishing a security bond for refunding the amount in the event of appeal being allowed by Hon’ble High Court and therefore it is not The assessee’s explanation is totally unsatisfactory. As per accounting principles all the contract receipts should have been shown in the income side of profit and loss a/c and expenses should be shown in expenses sides. Since the assessee has received the contract receipts these should have been shown in the income side of P & L. Moreover the receipts cannot be treated as liability till the order of High Court is received against the assessee. Further the assessee could not file documentary evidence regarding pendency of appeal of State in the High Court. Further the facts and circumstances of the case cited above is totally different from this case and decision in the above cited case is not applicable to the assessee. The income received in the form of contract receipts cannot be termed as liablity in any way. All the most if the claim of pendency of appeal in High Court is true, even then these receipts can be termed as provision for contingent liability at this stage. The provisions of contingent liability is also not allowable as per Income Tax Act.

We have heard counsel for the parties.

1 From the record it is very clear that the assessee while submitting his credential before the AO relied on the audit report for the A.Y. 1990-91 & 1993-94 which he alleged to have not (19 of 19) [ITA-19/2011] claimed expenses. However, no finding has been arrived by the AO and if we look at the average which has been applied by the AO and tribunal, the same are not consistent. In that view of the matter, we are of the opinion that while considering the statement for A.Y. 1990-91 & 1993-94, the AO ought not to have been given finding whether the expenses are claimed or not instead of deciding the issue which is not relevant and simply deducted the amount which is claimed in the income.

2 In our considered opinion, CIT while considering the same has rightly held the profit rate and allowed the claim of the appellant as reproduced hereinabove. The tribunal has committed serious error in concluding that subsequent years expenses which are claimed ought not to be allowed in the relevant year .

3 In view of the decision of the Supreme Court and other High Court decisions, the income which has been incurred in the year 2006-07 is required to be allowed as expenses were not claimed in the earlier year. Since, no finding arrived by the AO whether the expenses are claimed or not for the A.Y. 2004-05.

4 Taking into consideration the above, the issue is answered in favour of the assessee and against the department.

The appeal stands allowed. (INDERJEET SINGH),J. (K.S. JHAVERI),J. Brijesh 98.