M/S SHALIMAR CONSTRUCTION,DARJEELING vs. D.C.I.T, CIR-2, SILIGURI

IN THE INCOME TAX APPELLATE TRIBUNAL “A”, BENCH KOLKATA BEFORE SHRI N.V.VASUDEVAN, JM & DR. A.L.SAINI, AM आयकर अपील सं./ITA No.2443/Kol/2013 (�नधा�रण वष� /Assessment Year:2010-2011) M/s Shalimar Construction, Vs. DCIT, Circle-2, Matigara, Shivmandir, PO:Kadamtala, Siliguri, West Bengal. District : Darjeeling-734011 �थायी लेखा सं./जीआइआर सं./PAN/GIR No.: AAWFS 5786 K .. (अपीलाथ� /Appellant) (��यथ� / Respondent) Assessee by : Shri S.K.Tulsian, Senior Advocate Revenue by : Shri Rajat Kumar Kureel, JCIT सुनवाई क� तार�ख / Date of Hearing : 27/02/2017 घोषणा क� तार�ख/Date of Pronouncement 22/03/2017 आदेश / O R D E R Per Dr. Arjun Lal Saini, AM: The captioned appeal filed by the Assessee pertaining to Assessment Year 2010-2011, is directed against the order passed by ld. CIT(A), Siliguri, in Appeal No.03/CIT(A)/Slg/2013-14, dated 29.05.2013, which in turn arises out of an order passed by the Assessing Officer (AO) Under Section 143(3) of the Income Tax Act 1961, (hereinafter referred to as the ‘Act’), dated 01.03.2013. 2. Brief facts of the case qua the assessee are that the assessee filed its e-return of income on 14/10/2010, disclosing total income of Rs.12,36,040/-. The assessee’s case was selected for scrutiny u/s 143(3) of the Act and the AO has completed the assessment by making disallowance on account of unexplained expenditure Rs.5,98,492 ( expenditure incurred by the assessee without debit balance in the cash book) and disallowed Rs.5,73,950/-( Machine hire charges paid without deducting TDS).

2 ITA No.2443/13 M/s Shalimar Construction 3. The captioned appeal is time barred for 54 days. The assessee filed a

petition for condonation of delay alongwith affidavit. After hearing ld AR

for the assessee, we think that there is genuine reason for delay in filing

the said appeal therefore, we condone the delay and the appeal is

admitted for hearing.

before the ld. CIT(A), who has partly allowed the appeal of the assessee

observing the followings :-

Observation of CIT(A) for ground No. 4 raised by assessee I have carefully examined and considered the submission of the Ld AR and also perused the assessment order. On perusal I find that the Ld AO has examined the cash book in detail and' found out discrepancies as mentioned in the assessment order. The Ld AO has made painstaking efforts to detect the discrepancies in the cash book and came to the finding that the assessee made several payments against various expenses amounting to Rs.5,98,492/- during the period from 02.12.2009 to 18.01.2010 although the firm had no sufficient cash in hand during that period. In course of assessment proceedings the assessee was asked to show cause as to why the amount of Rs. 5,98,492/- shown as expenses incurred during the above period should not be added back to the returned income for failure to explain the source thereof. As it is evident from the assessment order the assessee failed to explain before the Ld AO the source of payments of Rs. 5,98,492/-against various expenses during the above period. Even in the course of appellate proceedings the explanation submitted by the Ld AR 'of the assessee is without any documentary evidences. The Ld AR has stated in the written submission that the amount of Rs. 5,98,492/-was actually paid by the partners on behalf of the firm which later on reimbursed it to the partners. The Ld AR has admitted that there was clerical error in recording the entries in the cash book. But the Ld AR failed to substantiate the claim made in the written submission by furnishing supporting documents. In the absence of supporting documents the contention of the Ld AR of the assessee cannot be accepted. In such circumstances the action of the Ld AO of making addition of Rs. 5,98,492/- as unexplained expenditure met out of undisclosed source is held to be justified. Therefore. I am not inclined to interfere with the order of the Ld AO on this point. The addition of Rs.5,98,492/-made by the ld AO as unexplained expenditure met out of undisclosed source is confirmed. Observation of CIT(A) for ground No. 3 raised by assessee Therefore, it is clear that the judgements of the Special Bench of ITAT, Visakhapatnam in M/s Merilyn Shipping & Transports, Visakhapatnam vs. ACIT (2012) in ITA No. 477/Vizag/2008 and of the Hon'ble ITAT, Kolkata

3 ITA No.2443/13 M/s Shalimar Construction in Masoom Raja vs. Asst. CIT, ITA No.06/Kol/2012 cannot be followed in the instant case. Following the judgements of the Hon'ble High Court of Calcutta in the cases of CIT, Kolkata-XI Vs. Crescent Export Syndicates and CIT vs. Md. Jakir Hossain Mondal cited above, I hold that the assessee was liable to deduct tax at source from the payments of Rs. 5,73,950/- paid on account of machinery hire charges as per the provisions of section 1941 of the Act-and since the assessee has failed to deduct tax at source from the payments of Rs. 5,73,950/- paid on account of machinery hire charges the Ld AO was fully justified in disallowing the sum of Rs. 5,73,950/-paid on account of machinery hire charges as-per the provisions of section 40(a)(ia) of the Act. Therefore, the addition of Rs. 5, 73,950/- on account of machinery hire charges made by the Ld AO is confirmed. 5. Not being satisfied with the order of ld. CIT(A), the Assessee is in appeal before us and has taken the following grounds of appeal :- 1. That on the facts and in the circumstances of the case, the Ld. Commissioner of lncome Tax (Appeal) erred in not the allowing the sum of Rs.5,73,950/- on account of machinery hire charges as per the provisions of section 40(a)(ia) of the Act.

4 ITA No.2443/13 M/s Shalimar Construction 6. Grounds Nos. 1 ,2 and 3 raised by the assessee relate addition

of Rs.5,73,950/- on account of machinery hire charges as per the

provisions of section 40(a)(ia) of the Act.

6.1 Ld. AR for the assessee submitted before us that section 40(a) (ia)

can not be seen as intended to be a penal provision to punish the lapses

of non deduction of tax at source from payments for expenditure-

particularly when the recipients have taken into account income

embedded in these payments, paid due taxes thereon and filed income

tax returns in accordance with the law.

The Ld AR for the assessee also relied on the following judgments:

(1).RKP Company, ITA No.106/RPR/2016 dated 24.06.2016:

“8. The second issue is with respect to the second proviso to Section 40(a)(ia) being held to be retrospective, without corresponding enabling provision in the rules being held to be retrospective. That is a hyper technical argument and too pedantic an approach. The second proviso to Section 40(a)(ia) was held to be retrospective in in the context of finding solution to the problem to the taxpayer, and the matter was set aside to the file of the Assessing Officer with certain directions about factual verifications on the recipient having included the same in the receipts based on which taxable income is computed, and the income having been offered to tax. It is this action of the coordinate bench that was upheld by the Tribunal and the course of action so adopted by the coordinate bench approved by Their Lordships. It is impermissible to pick up one of the aspects of the decision of the judicial authority and read the same in isolation with other aspects. The decision is not on the retrospectivity of the proviso alone, its also on deletion of disallowance in the event of the recipient having taken into account these receipts in the computation of income. The judge made law is as binding on the authorities below as is the legislated statue. The hyper technical stand of the Departmental Representatives, therefore, does not merit our approval. 9. As regards lack of guidance from Hon'ble jurisdictional High Court, that can not be reason enough to disregard the decisions from non-jurisdictional High Courts.Hon'ble Courts above, being a higher tier of the judicial hierarchy, bind the lower forums not only in the jurisdiction of respective High Courts, but unless, there is anything contrary thereto by the jurisdictional High Courts, other jurisdictions as well. There cannot be any dispute on the fundamental proposition that in the hierarchical judicial system that we have, better wisdom of the Court below has to yield to higher wisdom of the Court above, and therefore we have to humbly bow before the views expressed by Hon'ble Courts above, Such a High Court being a non-jurisdictional High Court does not alter the position as laid down by Hon'ble Bombay High Court in the matter of CIT vs. Godavari Devi Saraf (1978) 113 ITR 589 (Born) and as analyzed by a coordinate bench of this Tribunal in the case of ACIT Vs Aurangabad Holiday Resorts Pvt.Ltd [(2009) 118/TD 1 (Pune)].

5 ITA No.2443/13 M/s Shalimar Construction 10. In view of the above discussions, as also bearing in mind entirety of the case, we deem it fit and proper to remit the matter to the file of the Assessing Officer for limited verification on the aspect as to whether recipient of payment has included the same in his computation of business income offered to tax, and, if found to be so, delete the disallowance in question. With these directions, the matter stands restored to the file of the Assessing Officer.

11.In the result, the appeal is allowed for the statistical purposes in the terms indicated above. Pronounced in the open court today on the 24th day of June, 2016.”

(2). Rajeev Kumar Agarwal, ITA No.337/Agra/2013, dated May 29,2013

“9. On a conceptual note, primary justification for such a disallowance is that such a denial of deduction is to compensate for the loss of revenue by corresponding income not being taken into account in computation of taxable income in the hands of the recipients of the payments. Such a policy motivated deduction restrictions should, therefore, not come into play when an assessee is able to establish that there is no actual loss of revenue. This disallowance does deincentivize not deducting tax at source, when such tax deductions are due, but, so far as the legal framework is concerned, this provision is not for the purpose of penalizing for the tax deduction at source lapses. There are separate penal provisions to that effect. Deincentivizing a lapse and punishing a lapse are two different things and have distinctly different, and sometimes mutually exclusive, connotations. When we appreciate the object of scheme of section 40(a)(ia), as on the statute, and to examine whether or not, on a "fair, just and equitable" interpretation of law- as is the guidance from Hon'ble Delhi High Court on interpretation of this legal provision, in our humble understanding, it could not be an "intended consequence" to disallow the expenditure, due to non deduction of tax at source, even in a situation in which corresponding income is brought to tax in the hands of the recipient. The scheme of Section 40(a)(ia), as we see it, is aimed at ensuring that an expenditure should not be allowed as deduction in the hands of an assessee in a situation in which income embedded in such expenditure has remained untaxed due to tax withholding lapses by the assessee. It is not, in our considered view, a penalty for tax withholding lapse but it is a sort of compensatory deduction restriction for an income going untaxed due to tax withholding lapse. The penalty for tax withholding lapse per se is separately provided for in Section 271 C, and, section 40(a)(ia) does not add to the same. The provisions of Section 40(a)(ia), as they existed prior to insertion of second proviso thereto, went much beyond the obvious intentions of the lawmakers and created undue hardships even in cases in which the assessee's tax withholding lapses did not result in any loss to the exchequer. Now that the legislature has been compassionate enough to cure these shortcomings of provision, and thus obviate the unintended hardships, such an amendment in law, in view of the well settled legal position to the effect that a curative amendment to avoid unintended consequences is to be treated as retrospective in nature even though it may not state so specifically, the insertion of second proviso must be given retrospective effect from the point of time when the related legal provision was introduced. In view of these discussions, as also for the detailed reasons set out earlier, we cannot subscribe to the view that it could have been an "intended consequence" to punish the assessees for non deduction of tax at source by declining the deduction in respect of related payments, even when the corresponding income is duly brought to tax. That will be going much beyond the obvious intention of the section. Accordingly, we hold that the insertion of second proviso to Section 40(a)(ia) is declaratory and curative in nature and it has retrospective effect from 1st April, 2005, being the date from which sub clause (ia) of section 40(a) was inserted by the Finance (No.2) Act, 2004. 10. In view of the above discussions, we deem it fit and proper to remit the matter to the file of the Assessing Officer for fresh adjudication in the light of our above observations and after carrying out necessary verifications regarding related payments having been taken into account by the recipients in computation of their income, regarding payment of taxes in respect of such income and regarding filing of

6 ITA No.2443/13 M/s Shalimar Construction the related income tax returns by the recipients. While giving effect to these directions, the Assessing Officer shall give due and fair opportunity of hearing to the assessee, decide the matter in accordance with the law and by way of a speaking order. We order so.

6.2. Ld. DR for the Revenue has primarily relied on the findings of the

AO, which we have already noted in our earlier para and is not being

repeated for the sake of brevity.

6.3. Having heard the rival submissions, perused the material on record,

we are of the view that there is merit in the submissions of the assessee,

as the proposition canvassed by ld. AR for the assessee are supported by

the facts narrated by him above and the case laws cited by him above. As

Ld. AR for the assessee has pointed out that the object of scheme of

section 40(a)(ia), as on the statute, and to examine whether or not, on a

"fair, just and equitable" interpretation of law- as is the guidance from

Hon'ble Delhi High Court on interpretation of this legal provision, in our

humble understanding, it could not be an "intended consequence" to

disallow the expenditure, due to non deduction of tax at source, even in a

situation in which corresponding income is brought to tax in the hands of

the recipient. In view of the above discussions, we deem it fit and proper

to remit the matter to the file of the Assessing Officer for fresh adjudication

in the light of our above observations and after carrying out necessary

verifications regarding related payments having been taken into account

by the recipients in computation of their income, regarding payment of

taxes in respect of such income and regarding filing of the related income

tax returns by the recipients.

7 ITA No.2443/13 M/s Shalimar Construction 7.Ground No.4 relates to addition of Rs.5,98,492/- on account of

unexplained expenditure met out of undisclosed source when the

same was actually paid by the partners on behalf of the firm and was

later on reimbursed to the partners.

7.1 The ld AR for the assessee submitted before us that the amount of

Rs.5,98,492/- was actually paid by the partners on behalf of the firm and

was later on reimbursed to the partner. The ld AR for the assessee has

submitted before us an affidavit of the partner. In the affidavit the partner

stated that he made payment of Rs.5,98,492.46 for and on behalf of

partnership firm, M/s Shalimar Construction.

7.2. Ld. DR for the Revenue has primarily relied on the findings of the

AO, which we have already noted in our earlier para and is not being

repeated for the sake of brevity.

7.3 Having heard the rival submissions, perused the material on record,

we are of the view that this issue requires fresh examination at the end of

the Assessing Officer, as the ld AR for the assessee has submitted before

us an affidavit, which states that the Partner made payment on behalf of

partnership firm. This is an additional evidence before us and to be

examined by the Assessing Officer. Therefore, we remit this issue to the

file of the Assessing Officer to examine the affidavit of the partner and

adjudicate the said issue after giving proper opportunity of being heard to

the assessee.

7.4. In the result, the appeal filed by the assessee on ground No.4, is

allowed for statistical purposes.

8 ITA No.2443/13 M/s Shalimar Construction Order pronounced in the open court on this 22/03/2017.

Sd/- Sd/- (N.V.VASUDEVAN) (DR. A.L.SAINI) �या�यक सद�य / JUDICIAL MEMBER लेखा सद�य / ACCOUNTANT MEMBER कोलकाता /Kolkata; �दनांक Dated 22/03/2017 �काश �म�ा/Prakash Mishra,Sr.PS. आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : अपीलाथ� / The Appellant-M/s Shalimar Construction 1. 2. ��यथ� / The Respondent.- DCIT, Circle-2, Matigara, Siliguri 3. आयकर आयु�त(अपील) / The CIT(A), Kolkata. 4. आयकर आयु�त / CIT आदेशानुसार/ �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, कोलकाता / DR, ITAT, Kolkata 5. BY ORDER, 6. गाड� फाईल / Guard file. स�या�पत ��त //True Copy// सहायक पंजीकार (Asstt. Registrar) आयकर अपील�य अ�धकरण, कोलकाता / ITAT, Kolkata