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Income Tax Appellate Tribunal, “E” Bench, Mumbai
Before: Shri B.R. Baskaran (AM)& Shri Pawan Singh (JM)
O R D E R Per B.R. Baskaran (AM) :-
All these appeals, filed at the instance of the Revenue, are directed against separate orders passed by the learned CIT(A)-35, Mumbai for A.Y. 2007-08 to 2009-10. Since the issue urged in these appeals is identical in nature, all these appeals were heard together and are being disposed of by this common order, for the sake of convenience.
In all these appeals the Revenue is aggrieved by the decision of learned CIT(A) in granting relief to the assessee by deleting disallowance made by the Assessing Officer out of labour charges.
2 M/s. Sheth Construction Company
This is second round of proceeding. In the first round, the co-ordinate bench had restored the matter back to the file of Ld CIT(A). In the set aside proceedings, the Ld CIT(A) again passed identical orders granting relief to the assessee and hence the revenue has filed these appeals before us. Facts relating the issue are stated in brief. The assessee is a partnership firm engaged in the business of civil construction work. It mainly undertakes work for Municipal Corporation of Greater Mumbai relating to construction/repairs/restoration of roads, footpath and other civil works and maintenance works. During the course of assessment proceedings, the Assessing Officer noticed that the assessee has engaged four persons as contractors for supplying labourers, viz., Shri Pandurange Bullaki, Shri Rishi Tanna, Shri Chandrakant Hangare & Shri Ajay G. Shah. The Assessing Officer examined the bills for labour charges submitted by these labour contractors and found that they have been randomly and arbitrarily numbered without following any sequence. Hence the Assessing Officer, in order to verify the genuineness of the work done by these contractors, asked the assessee to produce them. The assessee produced three contractors but he could not produce Shri Ajay G. Shah. The Assessing Officer recorded the statement u/s. 131 of the Act from three contractors produced before him. The Assessing Officer noticed that Shri Rishi Tanna has also worked as an employee of the assessee. Father of Shri Chandrakant Hangare was working as peon of the assessee. The third person Shri Pandurang Bullaki was found to be an illiterate person. All these persons could not furnish any record to show that they have supplied laborers to the assessee. These persons also did not hold labourer licences. The cheques issued by the assessee to these persons were found to have been withdrawn immediately. The Assessing Officer also noticed that the bills furnished by these persons were found prepared at the office of the assessee. Though, these persons have filed return of income, it was noticed that the Chartered Accountant of the assessee was also handling the files of these persons. In the statement, Shri Pandurang Bullaki submitted that he had supplied labourers in Surat also. However, the Assessing Officer
3 M/s. Sheth Construction Company noticed that during the year under consideration, Shri Pandurang Bullaki did not raise any bill with regard to supply of labourers in Surat.
In view of the above, the Assessing Officer sought explanation from the assessee. In response thereto, the assessee submitted that the work undertaken by him from the Municipal Corporation is labourer incentive one, which cannot be completed without employing adequate number of the workers. He submitted that the deficiency that were noted by the Assessing Officer in the bills raised by the contractors cannot go against the assessee since concerned bills otherwise provide correct site address, nature of work done, rate and quantity. It submitted that the failure on the part of the labour contractors to maintain proper accounts cannot be used to take adverse inference against the assessee. It submitted that the TDS has been deducted from the payments made to the contractors and the contractors have also filed return of income by offering income u/s 44AD of the Act. It was submitted that the provisions of sec. 44AD does not require maintenance of books of accounts. The assessing officer noted that the assessee has declared net profit @ 2.7% of the gross receipts only. He also noted that the assessee has booked labour expenses under other heads also. Accordingly, the Assessing Officer, having not convinced with the explanations given by the assessee, disallowed labour charges paid to the above said four contractors in all the three years under consideration.
Before the learned CIT(A) in the first round of proceedings, the assessee contended that the Assessing Officer has disputed labour contract payments by merely placing reliance on the statements given by the labour contractors. In the statement taken from them, the labour contractors, being illiterate persons, could not properly give reply to the queries raised by the Assessing Officer. The assessee also contended that the Assessing Officer has used these statements so recorded from them without confronting the same to it or without allowing cross examination. It was also submitted that the aggregate percentage of labour charges paid to the sub-contractors compares well with 4 M/s. Sheth Construction Company the earlier years. It was further submitted that the assessee had made identical payments in the earlier years and the Assessing Officer has accepted the same without making any disallowance. In this regard, the assessee furnished following details before the learned CIT(A) :-
Description Asst. year Asst. year Asst. year Asst. year 2004-05 2005-06 2006-07 2007-08 1 Gross amount of civil 5,57,07,937 9,75,88,786 7,67,34,137 16,91,15,385 work done 2 Labour charges paid 78,04,390 70,37,321 77,76,684 1,28,60,915 to subcontractors 3 Depreciation claimed 8,54,102 11,63,485 8,93,441 17,33,287 4 Taxable income 11,82,750 23,88,750 14,75,110 46,68,750 returned 5 Taxable income Intimation Assessed Assessed Assessed determined in received u/s. u/s. 143(3) u/s. 143(3) u/s. 143(3) assessment order 143(1) refund passed u/s. 143(3) received 22,885/- Assessment Gross Labour charges Percentage of labour Assessed year amount of paid to charges paid to under civil works subcontractors subcontractors to which done gross amount of civil section of works done the Act ? 2004-05 5,57,07,937 78,04,390 14.00% 143(1) 2005-06 9,75,88,786 70,37,321 07.21% 143(3) 2006-07 7,67,34,137 77,76,684 10.14% 143(3) 2007-08 16,91,15,385 1,28,60,915 07.60% 143(3)
The Ld CIT(A) also noticed in the first round that the labour contractors have confirmed that they have executed works given by the assessee. They have also confirmed that they have received the payments by way of account payee cheques and the TDS was also deducted there from. The amount disallowed by the AO worked out to 74.3% (in AY 2007-08) of the total labour charges. The Ld CIT(A) noticed that the AO did not make such kind of disallowances in the earlier years and he also did not confront the statements taken from the labour contractors. The Ld CIT(A) also noticed that the labour charges paid to the contractors were well comparable with the payments made in the earlier
5 M/s. Sheth Construction Company years. He also noticed that the AO did not point out any specific mistakes in the books of accounts maintained by the assessee. The net profit rate of 2.7% worked out by the AO was wrong, i.e., it was computed after deducting the payments made to partners by way of remuneration and interest. The net profit rate before such reduction worked out to 5.83% and the same also compared well with the profits declared in the earlier years. The Ld CIT(A) also placed reliance on the decision rendered by the Jabalpur bench of ITAT in the case of Addl CIT Vs. Ram Manohar Singh (178 Taxman 047)(Jab) to hold that the claim of the assessee should be accepted when the revenue did not bring any evidence to show that the payments made to the contractors have flown back to the assessee. Accordingly the Ld CIT(A), in the first round of proceedings, sustained an addition of Rs.2,50,000/- in AY 2007-08 and deleted balance amount of addition. In the second round of proceedings, the Ld CIT(A) called for a remand report from the AO and after considering the same, the Ld CIT(A) took the very same decision in the second round of proceedings also.
In AY 2008-09 also, the Tribunal had set aside the issue to the file of Ld CIT(A). In the first round, the Ld CIT(A) had deleted the addition. In the second round also, the Ld CIT(A) took identical view and deleted the addition. In AY 2009-10 also, the AO had disallowed the labour contract payments made to the above said four contractors and the Ld CIT(A) deleted the same on identical reasoning. Aggrieved by the order passed by Ld CIT(A) in all the three years, the revenue has filed these appeals before us.
We have heard rival contentions and perused the record. The Ld D.R highlighted various defects pointed by the AO in the assessment order and accordingly supported the order passed by the assessing officer in all the three years under consideration. On the contrary, the Ld A.R placed strong reliance on the orders passed by Ld CIT(A) by submitting that the AO has made the impugned additions only on surmises and conjectures.
6 M/s. Sheth Construction Company
We notice that the Ld CIT(A) has given detailed reasoning on the basis of which he has deleted the addition made by the AO. For the sake of convenience, we extract below the operative portion of the order passed by Ld CIT(A) in AY 2007-08:- 10. I have considered relevant contents of the assessment order and the written and submissions of the appellant at assessment stage, first round of appellate proceedings and also during second round of present appellate proceeding before me. After considering and analyzing the entire facts and circumstances of the case and also the observation of Hon’ble ITAT; the case is dealt with and decided in the subsequent paragraphs.
10.1 It has been explained by the Ld. A.R. that similar proportion of expenditure has been allowed u/s. 143(3) in respect of the appellant in the earlier assessment years namely 2004-05, 2005-06 and 2006-07. Nature of expenditure incurred in respect of the previous year relevant to the current assessment year is same. In the earlier assessment years also the payments were allowed to the same sib contractors.
10.2. After all it is the privilege of the appellant to determine as to whom to give the work. Appellant having tested the integrity of the some of the sub contractors as employees was entitled to entrust the works to them. Employees function with limited responsibility. While if they are entrusted sub contracting works, they function with more responsibility as the performance brings direct profits to them. There is always a possibility of the turnover of the employees while as sub contractors they are likely to be business associates for a substantially long term. Employees after they settle seek various benefits including the retirement benefits, and may go on leaves for various reasons. While as sub contractors they function as businessmen.
10.3 The AO has stated in his view that the net profit ratio of 8% is not usual in the case of appellant, but the same is not substantiated by A.O. either by production of the industry statistics or any other data and therefore is considered a very personal view and devoid of any back-up.
10.4. The issues as to who prepared the bills of the sub contractors and why there was abnormality in sequential numbers of such bills is considered not very material in the face of overwhelming evidences and books of account and toe income tax records of the payer and the payees. At the most such abnormality in billing indicates laxity on the part of those who prepared the same. The 7 M/s. Sheth Construction Company abnormality can be interpreted in either way. If the bills were bogus, the persons would have applied more vigilance and accuracy. In my considered view, the serial numbers of the bills is purely accidental and no implications can be attributed to the same.
10.5. All the payments to sub-contractors have been subjected to TDS provisions.
10.6. All the payments have been effected by Account Payee • cheques. AO has at brought on record any evidence that the monies have not been paid by appellant to the sub contractors or that the monies paid by the appellant to the sub contractors have come back to the appellant in any form whatsoever, 10.7. AO has heavily relied upon some of the technical lapses in the documentation of the transactions and variations in the statements of the three sub-contractors, but AO has not been able to bring in cogent evidence to substantiate that the civil work as claimed to have been done by the subcontractors was not done. Perusal of the evidences and totality of the facts indicate that, the civil works as claimed by the appellant w o done.
10.8. Once it is accepted that the civil work was done, appellant cannot be faulted for technical lapses in preparation of the bills or for some minor variations in the statements of the witnesses. I agree with the submission of the appellant that the statements of the witnesses cannot be accepted in part.
10.9. Perusal of the profit and loss account of the appellant reveals that tie appellant has earned Rs. 16.91 crores from civil construction works during the year. As against that, the payments to sub- contractors are only at Rs. 6.03 crores. Even though the purchases are effected for Rs. 5.39 crores, but it is not the case of the AO that appellant is engaged in supply of goods and appellant is not engaged in carrying out civil construction works. Even though the appellant has paid equipment hire charges of Rs. 5.65 lakhs, it is not the case of the AO that such equipments were used by the appellant itself. There is no finding by the AO that appellant itself had carried out the civil construction works. There is no finding by the AO that appellant had engaged required manpower to do the civil construction works to the extent of Rs. 16.91 crores.
10.10. Therefore, ultimately AO has also accepted that the appellant is engaged and has earned from civil construction works and that appellant itself did not carry out such civil construction works. All available evidences, books of account and totality of the facts indicate that on the one hand appellant has earned from civil
8 M/s. Sheth Construction Company construction works and on the other hand the appellant has got done the civil construction works.
10.11 The books of account of the appellant are audited u/s. 44AB and the auditor has found the same true and fair. AO has not given any finding or led any cogent - evidence to indicate that the books of account of the appellant are faulty or false or fabricated. The appellant has earned by municipal contract works and the same is labour oriented. It is not the case of the AO that the labour works have not been carried out in respect of such contracts undertaken by the appellant. There is therefore no reason to reject the result of the books of account.
10.12. There are adverse findings by the AO. As against the same there are positive evidences led by the appellant. The statements of the labour contractors are positive but at the same time some of their replies indicate abnormalities, but does not cast its shadow to make any material changes or material effect on the merit of the case.
10.13. I have weighed the positive as well as adverse aspects about the transactions. I find that the transactions have been supported by very substantive evidences and have been undertaken in a business like manner. At the same time the statements of the labour contractors indicate some abnormalities. But these abnormalities are not sufficient to negate the transactions or to prove the transactions as bogus. Per se such irregularities do not carry the weight of defeating the genuineness of the transactions. The positive evidences led by be appellant are not negated by the irregularities and abnormalities pointed out by the AO. Further the statements of the labour contractors have not met the cross examination by the appellant. The irregularities and abnormalities attributable on labour contractors cannot penalize the appellant. The bonafides of the appellant have been established. The explanations furnished by the appellant in the context of the irregularities and abnormalities on the part of labour contractors are also convincing.
10.14 The point that labour contractors have not kept or preserved any documentary evidence of labour having been provided also does not defeat otherwise a well documented transaction by the appellant. The labour contractors may not give required importance to the documentation once they have received payments of their work. The labour contractors have confirmed having received payments by account payee cheques and the same have been deposited in their respective bank accounts.
10.15. For the reasons stated by the appellant, simply because after deposit of account payee cheques, cash have been immediately
9 M/s. Sheth Construction Company withdrawn by one contractor that the transaction is bogus. In fact, onus was on A.O. to prove that such withdrawn money had come back to the appellant in any form and in the absence of such finding no adverse decision will lie against the appellant.
10.16 Similarly a labor contractor having the same address as that of appellant and staying on the site of work cannot defeat the genuineness of the transaction. A sub-contractor being supported and helped by the contractor is also considered as a step of commercial expediency in today's times of labour troubles and higher and higher expectations of labour. At the most the appellant has chosen a dependant and a small sub-contractor as against a well-off arid established contractor but such decisions are to be taken by the businessman as he knows his business the most. In any case, such factors cannot be the basis to treat the transactions of sub contracting as bogus.
10.17. The bills having been prepared in similar manner and may be a common person or even by the appellant is not a factor so much uncommon If over a period of time parties build up relations of trusting each other and in any case the bills prepared does not mean that the bills were prepared at the wishes of the appellant. There is no indication that the labour contractors have not done the work and simply prepared the bills, there is no indication that the appellant prepared the bills on his own and not as per the decisions of the abour contractors. The statement of the labour contractor has not been cross examined by the appellant.
10.18. Sub contractors and contractor having the same CA is also not a very abnormal factor. On the contrary the same should be considered as a very normal happening. In fact there is no such bar that two different parties can't have sane Chartered Accountants or Advocate.
10.19 How a labour contractor has managed his finances cannot be a point against the appellant. There is no indication that the monies other than the payments by the appellant by account payee cheques have flown from tale appellant to the labour contractors.
10.20. The AO has not led any evidence to show that Shri Ajay G. Shah was paid in excess than the fair market value of the services provided by Shri Ajay G. Shah to the appellant.
10.21. The appellant has very elaborately explained why the appellant considered it necessary to abandon employing labour and why the appellant has shifted to the methodology of sub-contracting the works. The appellant has also explained in the problems of 10 M/s. Sheth Construction Company employing of the labour. There is no reason why commercial aspects elaborately stated by the appellant should be disbelieved.
10.22. I agree with the submission of the appellant that since the bills contain details about the nature of the work done, the quantity and the rate and that serial numbers of the bills given in a haphazard manner cannot defeat validity of the transactions.
10.23. It is also observed that the nature of the work to be done by the appellant in execution of the works was the same as the appellant got done from the lablour contractors. There is a complete nexus between the work required to be done by the appellant as a principal contractor under the tender term and the work done by the labour contractors for the appellant. A labour contractor has named the sites of the work as Surat as well as Mumbai but ultimately the documents indicate that the works have been carried at Mumbai only and payments have been made at Mumbai. Further as stated by my predecessor it is not known for which period the statement. Ultimately the documentary evidences have established that he had done the works at Mumbai only in the relevant previous year. The statement of the labour contractor as far as Surat part is concerned remains unsubstantiated. But that does not mean that the work was not carried out at Mumbai. The appellant has earned from the main contracting works and the sub contractor's work is a part of the same. The claimed work as Surat not getting substantiated but at the same time such claimed work does not appear in main contract work also.
10.24. The explanation furnished by the appellant in respect of the bill numbers and the bills is convincing and are not liable to be rejected.
10.25 Non preservation of the records may be a subject matter to be taken up the assessments of the labour contractors but cannot penalize the contractor (i.e. the appellant).
10.26 AO has accepted that nature of work of the appellant is primarily labour based.
10.27. The Ld.A.R. has demonstrated and substantiated appellant's claim by the available records in respect of works performed by the appellant for the Municipal Corporation as the contractor. The Ld.A.R. has explained with reference to the bills raised by the sub- contractors upon the appellant as the bills raised by the labour contractors upon the appellant. Perusal of all these clearly reveal that the appellant has delegated or outsourced the works from sub- contractors who performed works with material and the appellant
11 M/s. Sheth Construction Company has outsourced labour work to the labour contractors who have done only labour works and the works performed by the sub-contractors are very much different than the works performed by the labour contractors. The appellant's explanation that the underground activities and utilities like excavation, preparing sub-grades, laying of pipes for cables, were supply, sewer, are the labour activities and have to necessarily be done prior to the works of specialized natured performed by the sub-contractors.
10.28. Further, it is toe established position of the law that material collected at the back of the appellant cannot be used against him unless a chance has been offered to him to rebut or cross examination the same. The decision of the Hon'ble Supreme Court in the case of Kishincnand Chellaram 125 1TR 713 would have o be honoured in letter as well as spirit in this context.
10.29. As reproduced in the assessment order by the AO, the appellant has furnished sound business and commercial reasons as to why the appellant preferred sub contracting of labour works as against doing the same by the appellant himself. AO cannot sit in the position of making business decision in place of the appellant. It has to be accepted that the appellant knows how to lo his business. AO has disregarded substantive aspects of the transaction which are in favour of the appellant and the AO has concentrated on the technical and clerical aspects which cannot be given more weightage than the substantive evidences and in any case such technical and clerical aspects are attributable o the labour sub contractors for which the appellant cannot be punished.
10.30. AO has not brought any evidence, much less any cogent evidence, to suggest that the monies paid by the appellant to the impugned labour contractors were unaccounted money of the appellant or that such monies flew back to appellant from the labour contractors. On the contrary, the income tax department has accepted the income tax returns of impugned labour contractors.
10.34 Records and evidences produced by the appellant have to be objectively considered. Explanation furnished by the appellant has to be judiciously examined as there is no place for any arbitrariness in making a quasi judicial decision. It is not possible to rely upon solely upon the direct testimonies provided by the contractors but it is essential to take into consideration all relevant evidences and circumstances, Further, in respect of statements of the labour contractors also it cannot be ignored that ultimately the labour contractors he.ie confirmed the works done and payments received. It is not possible to over emphasise some technical or clerical aspects of the statements of the labour contractors and decide the issue
12 M/s. Sheth Construction Company based only on the same.
10.32. I am inclined to concur with the findings, observations and views of my Ld. predecessor the CIT(A) reproduced hereinabove at appropriate places. I do not consider it necessary to state the same once again and therefore suffice to that I fully agree with the findings, observations and views of the earlier CIT (A), my Ld. Predecessor. The issues raised by the AO but not considered by my predecessor have been duly considered by me as per the directions of the Hon'ble Tribunal. However, on merits they do not defeat the genuineness of the transactions of sub contracting works by the appellant to the said 4 labour contractors.
A careful perusal of the operative portion of the order passed by Ld CIT(A), in our view, would show that the first appellate authority has analysed the facts available on record thread bare and considered the same under established principles and law and accordingly disposed of the impugned issue. We notice that the assessee had employed the very same contractors in the earlier years also and the payments made to them have been accepted by the AO in sec. 143(3) proceedings. Though the principle of resjudicata would not apply to income tax proceedings, in our view, what is required to be seen is whether the view taken by the assessing officer is supported by the material available or brought on record.
There is no dispute with regard to the fact that the contract works undertaken by the assessee is labour intensive, meaning thereby, the assessee could not have executed works without employing labourers. The Ld CIT(A), in the first round of proceedings, has noticed that the labour cost vis-à-vis the contract receipts incurred by the assessee is well comparable with the earlier years. We notice that the AO has pointed out the deficiencies in the bills submitted by the labour contractors, but did not bring any material on record to show that they did not carry on the work as stated in those bills. The deficiencies pointed out by the AO relates to peripheral items like bill number etc., but the assessee has pointed out that the important details like the details of work site, nature of work, quantitative details have been properly noted down in the bills. It is pertinent to note that the AO has not proved the 13 M/s. Sheth Construction Company same as wrong or against the facts. Further the assessing officer has not established that the proportion of labour cost incurred by the assessee is in excess of industry standards. The Ld CIT(A), in the first round of proceedings, have pointed out that the net profit rate declared by the assessee was also comparable, meaning thereby that no case was brought on record that the assessee has suppressed the profits by inflating the labour expenses. Hence there is no reason to suspect the work carried out by the contractors only on the reasoning that there are deficiencies in the bills submitted by the contractors. The AO should have brought any other material on record to show that the labour contractors have not carried out the work. It is pertinent to note that, in the statement taken from the labour contractors, they have accepted the transactions. They could only not furnish the records as called for by the AO, since they have been declaring income u/s 44AD of the Act.
Another important observation made by Ld CIT(A) is that the AO has not brought any material on record to show that the payments made to the contractors by way of account payee cheques have flown back to the assessee. The Ld CIT(A) has further observed that the books of accounts of the assessee has been audited u/s 44AB of the Act and the AO has not rejected the same. He has further observed that the statement given by labour contracts, in substance, prove the genuineness of the work carried out by them. Accordingly the Ld CIT(A) has taken the view that the bonafides of their work has been established and hence the irregularities, if any, noticed at the end of the labour contractors cannot lead one to take a decision against the assessee in respect of payments made to them.
The Ld CIT(A) has further addressed each and every defects pointed out by the AO in respect of the activities of the labour contractors and finally held that all of them are no so important to affect the genuineness of the expenditure incurred by the assessee. We notice that the revenue could not contradict the various observations made by the Ld CIT(A). As stated earlier,
14 M/s. Sheth Construction Company the Ld D.R placed strong reliance on the deficiencies noticed by the AO. However we have noticed that the Ld CIT(A) has duly addressed all the points.
In view of the foregoing discussions, we are of the view that there is no reason to interfere with the findings given by the Ld CIT(A) on the issue contested before us in all the three years. Accordingly, we uphold the order passed by Ld CIT(A) in all the three years.
In the result, all the three appeals of the revenue are dismissed.
Order has been pronounced in the Court on 28.2.2017.