THE PRINCIPAL COMMISSIONER OF INCOME TAX-2 vs. M/S. GANESH ROLLILNG SHUTTERS AND ENGINEERING WORKS

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ITTA/415/2016HC TelanganaHBHC01080792201609 August 2019Bench: P.KESHAVA RAO,SANJAY KUMAR3 pages
AI SummaryDismissed

What did the High Court hold?

The High Court held that the issue of disallowance under Section 40(a)(ia) of the Act was settled by a prior Division Bench decision of the same High Court in I.T.T.A.No.430 of 2014, dated July 17, 2014. This decision, confirmed by the Supreme Court's dismissal of a Special Leave Petition (SLP), stated that if profit is estimated (whether by ignoring or rejecting books of account), there is no scope for allowability or disallowability of any deduction. The Court reasoned that such provisions for deduction/disallowance are to be considered when books of account are available and accepted. Consequently, the Revenue cannot assert a right to allow or disallow deductions once books of account are rejected. In light of this settled position, the substantial questions of law raised by the Revenue were considered to be settled against them, and the incidental questions did not survive for independent consideration. The appeal was accordingly dismissed.

What were the facts?

This appeal by the Revenue concerns Assessment Year 2005-06. The Revenue challenges an order of the Income Tax Appellate Tribunal (ITAT) which had set aside an order passed by the Commissioner of Income Tax (CIT) under Section 263 of the Income Tax Act, 1961. The ITAT had held that the assessment order was not erroneous or prejudicial to the revenue, and that the CIT could not re-examine the issue of gross contractual receipts once it had been considered by the Assessing Officer. A key issue revolved around a disallowance made under Section 40(a)(ia) of the Act. The ITAT's decision was influenced by a prior High Court ruling which was subsequently confirmed by the Supreme Court.

What were the issues?

The Tribunal was asked to decide the following substantial questions of law: 1. Whether the ITAT was correct in holding that the assessment order was not erroneous or prejudicial to the revenue, despite the Assessing Officer not examining the disallowance under Section 40(a)(ia) (Question of law). 2. Whether the ITAT was correct in holding that once the Assessing Officer considered the issue of gross contractual receipts, the CIT could not revisit it under Section 263 (Question of law). 3. Whether the ITAT was correct in holding that if the assessee's income was estimated by rejecting books of account, no disallowance under Section 40(a)(ia) could be made (Question of law). 4. Whether the ITAT was correct in deleting the disallowance under Section 40(a)(ia) by following a decision rendered before the incorporation of the provision effective from April 1, 2005 (Question of law). 5. Whether the ITAT was correct in interpreting 'payable' in Section 40(a)(ia) as 'payable on 31st March of the accounting year', relying on Merilyn Shipping Transporter, and ignoring a contrary ruling (Question of law). 6. Whether the ITAT was correct in holding that if profit is estimated, there is no scope for allowability/disallowability of deductions, without appreciating that statutory disallowances apply irrespective of profit determination method (Question of law). Assessee's contentions: Not recorded in the judgment. Revenue's contentions: The Revenue argued that the ITAT erred in its findings on the above issues, particularly concerning the disallowance under Section 40(a)(ia) and the scope of the CIT's revisionary powers. They relied on the fact that the prior High Court decision was rendered before the relevant amendment to Section 40(a)(ia) and that the interpretation of 'payable' was incorrect.

Which sections of the Income-tax Act were involved?

Section 260A,Section 263,Section 40(a)(ia),Section 43B

AI-generated summary — verify with the full judgment below

THE HON’BLE SRI JUSTICE SANJAY KUMAR AND THE HON’BLE SRI JUSTICE P.KESHAVA RAO

I.T.T.A. NO.415 OF 2016 ORDER: (per SK,J) This appeal by the Revenue under Section 260A of the Income Tax Act, 1961, in relation to the Assessment Year 2005-06, raises the following substantial questions of law for consideration:

‘6.1 Whether on the facts and circumstances of the case and in law, the ITAT was correct in holding that the assessment order was not erroneous or prejudicial to the interests of revenue, though disallowance under section 40 (a) (ia) of the Act was not examined by the Assessing Officer?

6.2 Whether on facts and in circumstances of the case and in law, the Hon’ble ITAT is correct in holding that once the issue of gross contractual receipts was considered by the Assessing Officer, it was not open for the CIT to go into it proceeding under Section 263 of the Act?

6.3 Whether on facts and in circumstances of the case and in law, the Hon’ble ITAT is correct in holding that once the income of the Assessee was estimated by rejecting the books of account, the assessing Officer cannot make any disallowance under section 40(a)(ia) of the Act, 1961.

6.4 Whether on facts and in circumstances of the case and in law, the Hon’ble ITAT is correct in deleting the disallowance made u/s. 40 (a) (ia) of the I.T. Act by following the decision of the Hon’ble High Court in the case of Indwell Constructions (232 ITR 776) without appreciating the fact that the said decision was rendered before incorporating the provisions of section 40 (A) (ia) of the Act W.e.f. 01.04.2005?

6.5 Whether on the facts and circumstances of the case and in law, the ITAT was correct and justified in interpreting the word “payable” appearing in sec. 40 (a) (ia) of IT Act as

2 “payable on 31st March of accounting year” by relying upon the ratio in the case of Merilyn Shipping Transporter Vs. CIT (TDS) 136 ITD 23 (SB) (Vizag) and thereby not appreciating and ignoring the ratio of decision in the case of CIT, Kolkatta XVIII vs. Md. Jakir Hossain Mondal [2013] 33 taxman. Com 223 which ruled that the decision in the case of Merilyn Shipping & Transport as above does not constitute a good law?

6.6 Whether on the facts and circumstances of the case and in law, the Hon’ble ITAT is correct in holding that if the profit is estimated, then there is no scope of allowability/disallowability of any deduction without appreciating the fact that the statutory disallowances under section 43B and 40(a)(ia) were made as applicable to all the assesses irrespective of method of determination of profit?’

2.

Insofar as the issue of disallowance under Section 40 (a) (ia) of the Act of 1961 is concerned, a Division Bench of the High Court for the State of Telangana and the State of Andhra Pradesh, comprising the then Hon’ble The Chief Justice and one of us (SK,J), had occasion to consider the issue in I.T.T.A.No.430 of 2014. By order dated 17.07.2014, while dismissing the Revenue’s appeal, the Division Bench observed as under: ‘We are of the view that amendment or no amendment, if the profit is estimated on any ground, whether ignoring books of accounts or rejection thereof, then there is no scope for allowability/disallowability of any deduction. In our considered view, the above provision mentions how to consider the same when the books of accounts are available and the same shall be accepted on fact by the authorities below.’

3.

We are now informed by Ms.K.Mamatha, learned senior counsel for Revenue, that the aforestated order of the Division Bench has been confirmed by the Supreme Court by virtue of the dismissal of the SLP at the threshold.

4.

In that view of the matter, it is not open to the Revenue to assert any right to allow or disallow any deductions once the books of accounts are rejected. Such an option would arise only in the event the books of accounts are accepted.

5.

In the light of the aforestated decision, which we are not inclined to disagree with, the main questions of law sought to be raised presently stand settled against the Revenue. In consequence, the incidental questions which are sought to be raised would not survive for independent consideration.

6.

The appeal is accordingly dismissed on the aforestated grounds. No order as to costs.

________________ SANJAY KUMAR,J

_______________ P.KESHAVA RAO,J Date:09.08.2019 KL

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