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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: SHRI MAHAVIR SINGH, JM & SHRI RAJESH KUMAR, AM
O R D E R PER RAJESH KUMAR, AM These two appeals by the assessee are directed against the order dated 31.1.2008 passed by the ld.CIT(A)-III, Thane under section 263 of the Income 2 And 22/Mum/2010 Tax Act, 1961 and order dated 23.11.2009 passed under section 144 r.w.s.263 by the CIT(A)-II, Thane both for the assessment year 2005-06. Since these appeals pertain to the same assessee, these appeals are heard together and are being disposed of by this common order, for the sake of convenience.
At the outset, the ld.AR submitted before us that there is a delay of 581 days in filing the appeal before the Tribunal. The ld. AR submitted before us that the delay in filing the appeal was attributable to reasons such as assessee being illiterate, improper guidance and ill-advice by the earlier Chartered Accountant Shri N T Rahalkar not to file appeal before the ITAT. The ld. AR also submitted that the assessee has a very good case on merits and therefore, he prayed that the delay of 581 days in filing the appeal before the ITAT be condoned and the appeal be heard on merits. In support of his contention, the ld.AR has filed an affidavit of the assessee narrating each and every day’s delay in addition to the affidavit in support of averments made by Shri N T Rahalkar, earlier CA . The ld.AR also filed an affidavit of Shri D S Jain, CA accepting the fact that he has advised under the bonafide belief to the assessee not to file any appeal against the order u/s 263 before ITAT. Therefore, the ld.AR submitted that the delay is not on the part of assessee and there is no malafide intention to file appeal belatedly before the ITAT. Moreover, no prejudice would be caused to the revenue if the delay is condoned and appeal is heard and decided on merits. Accordingly, the ld. AR submitted that the delay in filing the appeal be condoned 3 And 22/Mum/2010 and the matter be decided on merits. In support of his contention the ld.AR relied upon the following decisions : A) N Balakrishna V/s M Krishnamurthy (1998) 7 Supreme Court cases 123; B) Collector, Land Acquisition V/s Mst. Katiji and Others (1987) 167 ITR 471 (SC) C) Baburao Deorao Wankhede V/s Sewa Sahakari Sanstha and Anr in Writ petition no.1974 of 1979 order dated 2.8.1988 (Bombay High Court); D) Urudavan Investment and Trading V/s CIT in (AY-2004-05) dated 11.5.2010
The ld. DR vehemently opposed the submissions of the ld.AR and prayed that there was an in ordinate delay of 582 days and hence, the appeal be dismissed on this preliminary issue.
After hearing both the parties and on perusal of the facts as emerged from the record and considering the decisions relied upon by the assessee in support of his contention, we find that this is a fit case where the delay must be condoned. Accordingly, we condone the delay and admit the appeal for disposal on merit.
The issue raised in all the grounds of appeal
is against the invocation of the provisions of section 263 of the Act in the case of the assessee by directing the AO to add contract payments under section 40(a)(ia) of the Act on which 4 And 22/Mum/2010 the assessee did not deduct any tax at source as the order passed by the AO was erroneous and also prejudicial to the interest of revenue.
6. The assessment order, in this case, was passed under section 143(3) on 7.3.2007 determining the total income at Rs.5,68,869/-. On examination of the order, the Commissioner came to the conclusion that the order passed by the AO is erroneous in so far as prejudicial to the interest of the revenue for the following reasons : “i) The assessee had sub-contracted work of Rs. 40.40 lakhs' during the year but failed to deduct tax at source on it in terms of provisions of Section 194C of the IT. Act and therefore this payment should have been disallowed while computing the income of the assessee invoking provisions of Section 40a(ia) of the IT. Act. The A.O. had failed to do so because he had only disallowed all amount of Rs.16,177/- under this head. ii) The assessee had obtained unsecured loan of Rs. 45,000/- from one Mr. S.A. Gaikwad. No confirmation of loan was obtained by the A.O. consequently he even did not make enquiry about the financial capacity of tile creditor or genuineness of the transaction before accepting the same as genuine. iii) The assessee had shown Agricultural income of Rs.35,650/- but as per balance-sheet no agricultural land is owned by him. The AO had also failed to make inquiry on this issue. Accordingly, a notice u/s 263 of the Act was issued to the assessee on 4.12.2007 proposing to revise the assessment order dated 7.3.2007”
7. The assessee replied the notice issued by the Commissioner u/s 263 which is as under : “(i) Regarding non-deduction of tax on payments to sub-contractors, the facts have not been disputed by the assessee except for stating that he was not aware of provisions of TDS being made applicable to him.
5 And 22/Mum/2010 (ii) As far as agricultural income is concerned, the same is said to arise out of some ancestral land received by the assessee after death of his father. This is the reason why the land is not appearing in the balance- sheet of the assessee. (iii) The loan of Rs.45,000/- appears to have been taken from assessee’s wife (wrongly shown as Mr.S A Gaikwad instead of Mrs. S A Gaikwad in the balance sheet). This amount was suppose to arrange by pledging jewellery of assessee’s wife to make labour payment” Finally, the Commissioner observed that no TDS was deducted on the payment of Rs.40.40 lakhs made to sub-contractor during the year in violation of provisions of section 194C of the Act and the AO should have disallowed the same instead of Rs.16,177/- adding to the income of the assessee. The Commissioner also held that the AO did not make any proper inquiry with regard to the agricultural income of Rs.35,650/- and loan of Rs.45,000/- received by the assessee. Accordingly he set aside the assessment order dated 7.3.2007 u/s 263 and directed to the AO to pass fresh order on the three issues after giving proper and reasonable opportunity of being heard to the assessee.
8. The ld. AR vehemently submitted before us that deduction of tax on the payment made to the subcontractor could not be made as the assessee was not aware the provisions of TDS as applicable to him and as regard the agricultural income, the assessee submitted that the income arose from ancestral land which the assessee inherited after the death of his father and for this reason the land was not appearing in the balance sheet of the assessee and qua third item, the 6 And 22/Mum/2010 ld.AR submitted that the loan of Rs.45,000/- were taken by the assessee from his wife which was wrongly shown as received from Mr.S A Gaikwad instead of Mrs. S A Gaikwad in the balance sheet. The said amount was arranged by pledging jewellery of assessee’s wife in order to make labour payment. The ld. AR submitted before us that during the original assessment proceedings all these issues were examined in detail by the AO and it was only thereafter assessed the income of the assessee by applying net profit at the rate of 8% at Rs.64,63,772/- as against 6.16% as against disclosed by the assessee. The ld.AR drew our attention to the relevant extracts from the assessment order. The ld. AR submitted that the AO has taken one of the possible view and thereafter applied flat rate 8% on the gross receipt. The ld. AR submitted that once the flat rate of estimation of income is applied no other disallowance could be made as the same were applied to the turnover of the assessee. The ld. AR submitted that the CIT has not disputed or doubted the estimation of income which, the AO calculated. The ld. AR also relied upon the following decision in support of his claim:
A. Decision of the Honble Punjab & Harayana High Court in the case of C1T v Smt. Santosh [ain (296 ITR 324) ; B. Decision of the Hon'ble Madhya Pradesh High Court in the case of CIT v Purushottamlal Tamrakar (270 ITR 314); C. Order of the Tribunal, Special Bench, Kolkata in the case of ITO v Kenaram Shah and Subhash Saha (301 ITR (AT) 171 (relevant pages only) D. Order of the Hon'ble Tribunal, Jaipur Bench, in the case of Singhal Builders Contractor v. ACIT (12 Taxmann.com 199) ; 7 And 22/Mum/2010 E. Order of the Tribunal, Hyderabad Bench, in the case of Teja Constuctions V.s ACIT (129 TTJ (UO) F. Order of the Tribunal, Hyderabad Bench, in the case of K Srinivasan Naidu v. ACIT [131 TTJ 17 (UO)] G. Order of the Hon'ble Tribunal, Kolkata Bench, in the case of ITO v. Shri Sadananda Singha and vice versa for A.Y. 2006-07 in and 1881/Kol/2009 dated 13.8.2014 H. ITO V/s Akash Developers in ITA No.859/Kol/2012 (AY-2007-08) dated 20.11.2015”
The ld. AR submitted that the AO has taken one of the possible view and therefore reopening the assessment as made by the AO was bad in law.
9. The ld. DR on the other hand, strongly opposed the argument advanced by the ld.AR and submitted that the order passed by the AO was erroneous and prejudicial to the interest of the revenue as the AO has failed to examine the issue as raised by the Commissioner in the notice issued under section 263 of the Act. The AO instead of making disallowance of amount for non deduction of tax at source within the meaning of section 40(a)(ia) of the Act just estimated the income by applying fixed rate of 8% on the gross turnover against the rate 6.16 shown by the assessee. Similarly other issues like loan from wife and agricultural income has not been properly inquired by the AO and therefore strongly submitted that order passed by the Commissioner be upheld.
We have carefully considered the rival contentions and perused the material placed before us including the citations relied upon by the parties. AO observed that the assessee has made payments to the subcontractor in violation 8 And 22/Mum/2010 of the provisions of section 40(a)(ia) of the Act and therefore applied the profit at the rate of 8% on the gross turnover to regularize the income of the assessee. The relevant part is reproduced below : “4. I have gone through the assessee's reply to the query and adopt his net profit at 8% as against 6.16% on the total receipt of Rs.64,63,772/-. The working of the addition on this account is as under. 8% of Rs.64,63,772/- Rs. 5,17,100/- Less: NP declared Rs. 3,97,860/- Difference Rs. 1,19,2401- ============= As regards the deduction of TDS for the contracts given to the sub contractor assessee was required to deduct tax at 1 % on amount of Rs.16,17,668/-. However, the assessee did not deduct the same. As per the TDS provisions forgoing, the 1% on the amount of Rs.16,17,668/- comes to Rs.16,177/- is taken on additional income of the assessee towards not applying the provisions of TDS rules is added to the total income of the assessee” In the case Smt. Santosh (supra), the Hon’ble P&H has held that :
“6. We are of the view that when income of the assessee was computed by applying gross profit rate, there was no need to look into the provisions of Section 40A(3) of the Act, as applying the gross profit rate takes care of expenditure otherwise by way of cross cheque also. We are in agreement with the view taken by the Allahabad High Court in Banwari Lal Banshidhars case (supra) to the following effect: ...The question for consideration is when no deduction was sought and allowed under Section 40A(3), was there any need to go into Section 40A(3) and rule 6DD(l). We see force in the view taken by the Appellate Tribunal that when the income of the assessee was computed applying the gross profit rate and when no deduction was allowed in regard to the purchases of the assessee, there was no need to look into the provisions of Section 40A(3) and rule 6DD(J). No disallowance could have been made in view of the provisions of Section 40A(3), read with rule 6DD(J) as no 9 And 22/Mum/2010 deduction was allowed to and claimed by the assessee in respect of the purchases. When the gross profit rate is applied, that would take care of everything and there was no need for the assessing officer to make scrutiny of the amount incurred on the purchases by the assessee.
No substantial question of law arises.
8. The appeal is dismissed.” In the case of Purushottamlal Tamrakar (supra), the Hon’ble MP High Court has held : 270 ITR 314); “30. We have considered this aspect in detail while deciding the ground No. 5 in the case of Shri Santosh Kumar Tamrakar. The facts are similar in the case of assessee also. In the case of the assessee also the income on sale of utensils has been assessed on estimated basis i.e., by applying a net profit rate. Once a net profit rate is applied, the expenses are deemed to be considered while applying the net profit rate. Therefore, no further deduction is to be allowed or to be disallowed. Accordingly, we delete the addition of Rs. 2,49,523 for asst. yrs. 1995-96 and 1996-97. Ground No. 5 of the assessee's appeal is allowed."
It is submitted by Mr. Purohit that the AO has determined the income by applying the principle of net profit rate thereby taking into consideration the whole amount which was transacted below the permissible limit under Section 40A(3). It is contended by him that once the whole amount is computed on the formula of net rate income, there is no question of grant of deduction as envisaged under Section 40A(3). We are of the considered opinion that the submission of Mr. Purohit has substantial force and the Tribunal has rightly treated that Section 40A(3) is not applicable, when net profit rate is applied by the AO.
In view of the aforesaid analysis both the questions are answered in favour of the assessee and against the Revenue.”
10 And 22/Mum/2010 In the case of Singhal Builders Contractor (supra) the Jaipur Bench of the Tribunal has held as under : HELD The Assessing Officer had made enquiry in respect to cash payments hit by provisions of section 40A(3) and assessee had filed reply that the provisions were not applicable on the facts of the case. It was further seen that after knowing various defects in the maintenance of books of account, the books of account were rejected by invoking provisions of section 145(3) by the Assessing Officer and profit rate of 12 per cent was applied subject to deduction on account of depreciation and interest. Once GP rate or net profit rate is applied, then no further disallowance can be made under section 40A(3) or any other provision. Therefore, there was no reason to set aside the order of Assessing Officer at the end of Commissioner by holding the same erroneous and prejudicial to the interest of the revenue.
In view of these facts and circumstances it was to be held that initiation of proceedings under section 263 was not justified. Accordingly, the order of the Commissioner was to be set aside the order of the Assessing Officer passed originally was to be restored. In the case of Teja Constuctions (supra), the Hyderabad Bench of the Tribunal has held as under :
7. We have heard both the parties and perused the material on record. In the present case, the Assessing Officer rejected the books of account on the reason that, the assessee has not maintained proper books of account and also failed to produced vouchers for verification and the expenditure claimed by the assessee arc not substantiated. The assessee in earlier years also has not maintained the proper books of account. The assessee’s past track records show that the assessed has neglected the presenting of the books of account in accordance with law. When the assessee claimed any expenditure, it is mandatory on the part of the assessee to produce the books of account supported by proper bills and vouchers. Since the assessee has not produced the proper books of account, true profits or loss cannot be deduced from the books of account 11 And 22/Mum/2010 of the assessee. The Assessing Officer having no other option rejected the books of account and estimated the income at 10 per cent of gross receipts. But the position is that, the assessee is carrying on three kinds of contracts, as in earlier years, i.e., (i ) own contracts, (ii) contracts taken from the sub-contractors, (iii) contracts given to other parties on sub- contracts. The assessee had a higher rate of profit on the contracts executed by the assessee itself. In these contracts, the assessee agreed that his income is at 9 per cent of the gross receipts. Thus, accordingly the Assessing Officer is directed to estimate the income on the contracts executed by the assessed own at 9 per cent. In case of contracts taken by assessee on sub-contract, the income to be estimated at 8 per cent of the gross receipts. In case of contracts given by the assessee to the 3rd party on sub-contract, income to be estimated at 4 per cent. This is, because, when the assessee gives contract to the other parties on sub-contract, the assessee cannot keep the same percentage of profit at 9 per cent, it has to forgo certain portion of profit i.e., around 5 per cent to the sub- contractors. Similar position in the case of contracts taken by assessee on sub-contract from other parties. Further, the assessee is entitled for depreciation and remuneration, and interests to partners on the profit estimated by Assessing Officer at applicable rates, because the income estimated as above of the assessee is before the depreciation and interest and remuneration of the partners. Accordingly, we direct the Assessing Officer to compute the income of the assessee afresh. Accordingly, this ground of the assessee appeal is partly allowed.
In the case of Income-tax Officer V/s M/s. Akash Developers in (AY-2007-08) dated 20.11.2015 “5. We have heard Ld. Sr. DR and gone through facts and circumstances of the case. We find that there are errors/inconsistencies in the maintenance of books of account because in several cases for the relevant AY booking of sales does not tally with the year of registration. Even the method of recognition of sale adopted by the assessee is inconsistent, defective and not in accordance with any recognized system of accounting. Even before the AO or before the CIT(A), the assessee could not explain the basis of booking of various construction expenses in respect of flats kept in stock in trade. In view of these differences, we find that the CIT(A) has rightly rejected the books of account by applying the provisions 12 And 22/Mum/2010 of section 145(3) of the Act and we find no infirmity in the order of CIT(A) in applying profit rate of 8%.
In reply to other additions, it is clear that once net profit rate is applied, the expenses or other disallowances, since relating to business, cannot be made separately because the profit element of expenses or disallowances have already been considered while applying profit rate. Accordingly, we confirm the order of CIT(A). Appeal of revenue is dismissed.
From ratio laid down in the above decisions it is clear that the AO has considered the issue of non deduction of Tax at source on the payment to sub- contractors and other defects in the books of account such as non maintenance of proper record bills and vouchers and ultimately assessing the income at the rate of 8% which in our opinion takes care of all other issues like agricultural income and loan from wife. The case of the assessee also covered by the decision of the Hon’ble Supreme Court in the case of Malabar Industries Co.Ltd (2008) 243 ITR 83 (SC) in which it has been held that when the AO has taken a plausible view which is in favour of the assessee and the CIT cannot take recourse of the revisionary powers u/s 263 to disturb the already completed assessment. From the facts as discussed above, we find that the case of the assessee squarely covered by the ratio laid down in the aforesaid decision. Therefore, we respectfully following the said decision set aside the order of Commissioner passed u/s 263 of the Act. The grounds taken by the assessee are allowed.
13 And 22/Mum/2010 12. Since, we have already decided the issue of application of provisions of section 263 in favour of assessee, the appeal filed by the assessee against the quantum assessment passed u/s 143(3) read with section 263 of the Act rendered infructuous. Accordingly dismissed as infructuours.
In the result, the appeal u/s 263 stands allowed and appeal bearing no.22/Mum/2010 is dismissed as infructuous. Order pronounced in the open court on this 27th day of October,2016. sd (MAHAVIR SINGH ) (RAJESH KUMAR) Judicial Member Accountant Member म ंबई Mumbai; ददनधंक Dated : 27.10.2016 Sr.PS:SRL: