THE COMMISSIONER OF INCOME TAX vs SRI P SUDHAKAR

IN THE HIGH COURT OF KARNATAKA AT BENGALURU

Dated this the 13th day of January, 2015 PRESENT

THE HON’BLE MR. JUSTICE N KUMAR

AND

THE HON’BLE MR. JUSTICE B VEERAPPA

ITA No.48 of 2009

BETWEEN:

The Commissioner of Income Tax

284/1, Park View Building

4th Main, P.J. Extension

Davangere – 577 002

The Income Tax Officer

Ward-1

Chitradurga

…Appellants

(By Sri K. V. Aravind, Advocate)

AND:

Sri P. Sudhakar P.W.D. Contractor Gandhinagar Challakere

…Respondent

(By Sri A. Shankar & M. Lava, Advocates)

This ITA filed under Section 260-A of I.T. Act, 1961 arising out of order dated 26-09-2008 passed in ITA No.286/Bang/2008, for the Assessment year 2005-06, praying to (i) formulate the substantial questions of law stated therein; (ii) allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.286/Bang/2008, dated 26-09-2008 and confirm the order passed by the Revisional Authority.

This ITA coming on for hearing this day, N. KUMAR J delivered the following:

J U D G M E N T

The revenue has preferred this appeal against the order passed by the Tribunal setting aside the order of the Commissioner of Income Tax passed under Section 263 of the Income Tax Act, 1961 (hereinafter for short referred to as ‘the Act’) and restoring the order of assessment passed by the assessing authority.

The assessee is a sub-contractor. He filed a return of income declaring his total income at Rs.4,95,970/- along with the audit report in Form No. 3CB and 3CD. The assessing authority passed an order under Section 143 (2) of the Act determining the total income at Rs.85,60,730/-. The

tax was paid. The Commissioner of Income Tax issued notice under Section 263 of the Act calling upon the assessee to show cause as to why the order of assessment passed should not be revised as it is erroneous and prejudicial to the interest of the revenue. The assessee filed his detailed objections showing cause. However, over-ruling the said objections the Commissioner of Income Tax held that the record clearly shows that the Assessing Officer has not verified the facts with reference to the supporting material and also has not compared the results shown by the assessee himself for the earlier assessment years. Instead, the Assessing Officer has blindly, without verifying the details, accepted the results as shown in the profit and loss account and completed the assessment after bringing to tax the unexplained cash credits in the assessee’s capital account to the tune of Rs.80.64 lakhs. The unexplained cash credits in the capital account cannot be considered as business income arising out of the assessee’s contract activities. The assessee has shown huge expenditure under

various heads in the profit and loss account. The Assessing Authority should have probed into these and critically examined the correctness of the same. There is nothing on record to show that the Assessing Officer has gone through any material in respect of such transactions and, thus he set aside the assessment orders and directed the assessing authority to frame the assessment for the year 2005-06 afresh after proper verification/examination of the points discussed in the order in detail and allowing the opportunity to the assessee of being heard.

Aggrieved by the said order, the assessee preferred an appeal to the Tribunal. The Tribunal on consideration of the entire material on record held that, the order framed by the Assessing Authority was not prejudicial to the interest of the revenue is glaring as per the records available. The Assessing Authority satisfied himself with the income as returned by the assessee being cash credits and brought it to tax in accordance with the provisions of the Act. The

Assessing Authority had adopted the permissible course available in law in framing assessment of the assessee’s income who had not rendered any loss to the revenue and, therefore, allowed the appeal, set aside the order passed under Section 263 of the Act and restored the assessment order passed by the Assessing Authority. Aggrieved by the said order, the revenue is in appeal.

The Appeal was admitted to consider the following substantial questions of law:-

Whether the Tribunal was justified in setting aside the order under 263 when the Revisional Authority had directed the assessment afresh after proper verification and examination of the alleged expenditure of the assessee?

Whether the Tribunal was justified in setting aside the revisional order when on

similar set of facts the Tribunal had confirmed the order under Section 263 of I.T. Act, in two cases i.e., I.T.A. No.287 and 288/Bang/2008 dated 03-10-2008 where the facts remained the same? 3. Whether the Tribunal was justified in setting aside the revisional order when the order of the Assessing Officer was erroneous insofar as it being prejudicial to the interest of the revenue? 4. Whether the Tribunal was right in holding that the provisions of Section 263 of the Income Tax Act, 1961 were not attracted in the given case and that the Commissioner was not justified in exercising the suo motu revisional powers under this provision of law?

The learned counsel for the revenue assailing the impugned order contended that, the total receipts was Rs.35.33 crores. The net profit shown in the Profit and Loss Account was only Rs.4.63 lakhs which works out to 0.12%. This shows that the Assessing Officer had not verified the supporting materials and had not compared the results shown by the assessee himself for the earlier assessment years and, therefore, the Revisional Authority was justified in exercising his power under Section 263 of the Act and, therefore, a case for interference is made out.

Per contra, the learned counsel for the assessee submitted that, the material on record clearly discloses, out of the total receipts of Rs.35.33 crores, the contractor has paid for the materials supplied to the extent of Rs.22.99 crores, as such the assessee did not receive the said amount. Though the assessee had shown a profit of only Rs.4.95 lakhs, the Assessing Authority added a sum of Rs.80,64,764/- and determined the income at

Rs.85,60,730/-. It works out to 6.4% of net contract receipts of Rs.13.37 crores and, therefore, he submits there is no error which has resulted in loss to the revenue. Therefore, he submits that no case for interference is made out.

The material on record discloses that, Rs.35.38 crores is the gross bill. The assessee is working under the main contractor M/s IVRCL. They deducted a sum of Rs.22.99 crores from the bill of the assessee on account of the materials supplied and expenditure incurred by them. Only a sum of Rs.12.38 crores was actually paid to the assessee. On that basis a sum of Rs.4,95,970/- was the income offered by the assessee in the return of income. However, the Assessing Authority after scrutiny of the entire material on record added a sum of Rs.80,64,764/-. Thus, the total income was determined at Rs.85,60,730/-. The said income with reference to the contract receipts of Rs.13.37 crores works out to 6.4%. Therefore, the contention that it works out to 0.12% is erroneous.

Even in respect of the main contract, in respect of civil contracts 8% is taken normally as the income earned out of such contracts. When such a contractor gives the work to a sub contractor normally about 5% is taken as the income of the contractor. In the instant case it works out to 6.4%. The tenor of the order of the Commissioner under Section 263 of the Act discloses that, because the net profit shown in the Profit and Loss Account was only Rs.4.63 lakhs which works out to 0.12% the proceedings are initiated. Factually it is incorrect. In those circumstances, in the absence of any other material which was before the Commissioner he was not justified in recording a finding that the assessing authority has not applied its mind, not verified the expenses, not verified the receipts and looked into the book and, therefore, a case for interference under Section 263 is made out cannot be accepted. The Tribunal by a considered order rightly set aside the order passed by the Commissioner relying on several judgments on the question after appreciating the entire evidence on record.

Under these circumstances, we do not find any justification to interfere with the said order. No merits. The substantial questions of law are answered in favour of the assessee and against the revenue.

Accordingly, the appeal is dismissed.

Sd/- JUDGE

ckl/-

THE COMMISSIONER OF INCOME TAX vs. SRI P SUDHAKAR