ACIT vs. MR. G. BALRAJ,

Date of hearing : 22/01/2015. Date of pronouncement: 30/01/2015. O R D E R Per Smt. P.MADHAVI DEVI, JM:

The appeal filed by the Revenue and the cross-objection by the assessee are directed against the order of the CIT(A), Mysore, dated 09/10/2012 for the assessment year 2005-06.

& CO No.93/Bang/2013 Shri G.Balaraj Page 2 of 11 2. Brief facts of the case are that the assessee, an individual, carrying on contract works, filed his return of income for the assessment year 2005-06 on 25/10/2005 declaring total income of Rs.76,45,620/-. The return was initially processed u/s 143(1) of the Income-tax Act, 1961[hereinafter referred to as 'the Act'] resulting in a refund of Rs.20,820/-. Subsequently, on perusal of the TDS certificates, the Assessing Officer (AO) noticed that the contract amount received works out to Rs.9,26,78,463/- whereas in the profit and loss account, the amount offered was only Rs.7,39,50,140/-. Therefore, the AO observed that there was under-assessment of income from contract receipts to the tune of Rs.1,87,28,323/-. In view of the same, the AO sought to reopen the assessment by issuance of notice u/s 148 of the Act on 25/02/2011. In response to the said notice, the assessee filed his return of income on 11/04/2011 returning the same income and requested for supply of reasons recorded for reopening of the assessment. The reasons were supplied to the assessee to which the assessee filed his objections. Order justifying the validity of the re- assessment proceedings u/s 147 of the Act was passed on 14/10/2011 and subsequently, during the assessment proceedings u/s 143(3) read with sec.147 of the Act, the AO proceeded to consider under-assessment of income of contract receipts. He observed that as per TDS certificates, total contract receipts were Rs.9,26,78,463/- whereas total contract receipts & CO No.93/Bang/2013 Shri G.Balaraj Page 3 of 11 shown by the assessee is only Rs.7,39,50,140/- and that the assessee has not offered a sum of Rs.1,87,28,323/- as part of his turnover but has claimed TDS of the entire amount of Rs.19,39,115/-. The AO, therefore, asked assessee to re-concile the discrepancy in contract receipts offered to tax. The assessee submitted that his contract receipts were only Rs.7,39,50,141/- all of which passed through his books of account and that he has shown a commission of Rs.3,34,218/- from one Shri Bapuji on contract gross turnover of Rs.1,54,73,053/-. It was explained that he had entered into agreement dated 17/06/2003 with one Shri J.Bapuji and as per the agreement, the entire contract receipts were diverted at source to Shri J.Bapuji and a joint account was opened at the place of the work and the entire power was given to Shri J.Bapuji to collect the contract receipts and also to withdraw the amount according to his needs for any purpose. Thus as per the agreement, the entire profit or loss was that of Shri J.Bapuji and that the assessee was entitled only to retain the income-tax deducted at source as commission. It was also submitted that Shri J.Bapuji was independently assessed to income-tax and he has reflected the entire contract receipts in his books of account. It was also submitted that for the assessment years 2006-07, 2007-08 and 2009-10 where similar circumstances exist, the assessing authority treated the same as income from sub-contract and taxed the same u/s 40(a)(ia)and on appeal the ITAT has held that it was not his & CO No.93/Bang/2013 Shri G.Balaraj Page 4 of 11 turnover and deleted the addition. The AO, however, was not convinced with the assessee’s submission and observed that the entire contract receipts of Rs.1,54,73,053/- stated to be diverted at source to Shri J.Bapuji is not acceptable. He held that it was a sub-contract and since TDS was not made at the time of payment, the contract receipts of Shri J.Bapuji should be disallowed u/s 40(a)(ia) of the Act. Further he proceeded to consider the difference in the contract receipts as per the TDS certificate and as offered by the assessee The assessee, vide reply dated 14/12/2011 stated that Form 16A dated 20/06/2005 issued by the Executive Engineer, Bangalore, related to only release of security deposit held in the department which was earlier shown by the assessee as an asset and therefore release of security deposit was not a contract receipt. The AO, however, held that the contention of the assessee that the department retained a portion of the amount as security deposit which is shown as an asset is not acceptable for the reason that the assessee should have accounted for the entire contract receipt as per TDS certificates. He observed that the assessee is following mercantile system of accounting which is based on accrual principle and therefore profits arising or accruing on the date of transaction are liable to be taxed not-withstanding the fact whether they are actually received or deemed to have been received under the Income-tax Act. He, therefore, brought to tax the difference in the gross receipts. & CO No.93/Bang/2013 Shri G.Balaraj Page 5 of 11 3. Aggrieved, the assessee preferred an appeal before the CIT(A) who confirmed the findings of the AO as regards the nature of the contract between the assessee and Shri J.Bapuji as sub-contract but granted relief to the assessee by following the decision of the Special Bench of Tribunal in the case of Merilyn Shipping and Transport wherein it was held that disallowance u/s 40(a)(ia) can be made only if the amount was payable and since the contract amount was already paid to Shri J.Bapuji, the same cannot be disallowed u/s 40(a)(ia). As regards difference in the contract receipts is concerned, the CIT(A) considered the assessee’s submission that the security deposit released during the relevant financial year was actually offered in gross receipts of the relevant assessment years and this is only a refund of security deposit and hence the same should be excluded. Thus holding, the CIT(A) deleted the additions made by the assessing authority. Before the CIT(A), the assessee had also raised a ground of appeal against the validity of the reopening of the assessment. However, since the CIT(A) has given relief to the assessee on merits, he has not adjudicated this ground of appeal.

5. In the application for condonation of delay in filing of the cross-objection, it is stated by the assessee that since the revenue had filed an appeal before the Tribunal against the order of the CIT(A) on merits, the assessee was under the impression that it could challenge the order of the CIT(A) under rule 27 of the Income-tax Rules. However, on legal advice that the assessee would have to raise cross-objection, the assessee has filed this cross-objection before us with a delay of 88 days and therefore the delay is not willful or wanton but is due to reasonable cause. The learned counsel for the assessee relied upon the contents of the affidavit while the learned Departmental Representative opposed the condonation of delay.

It is the case of the assessee that the assessee has filed detailed objections before the AO for reopening of the assessment and the AO has rejected the objections and proceeded to complete the re-assessment against which the & CO No.93/Bang/2013 Shri G.Balaraj Page 7 of 11 assessee had preferred specific grounds before the CIT(A) but since the CIT(A) has decided the appeal on merits in favour of the assessee, he has failed to consider and give a finding on the validity of the reopening of the assessment. Since there is no finding of the CIT(A) on this ground, we are unable to decide the ground against the validity of the re-assessment. Therefore, we remand this issue to the file of the CIT(A) with a direction to decide the issue after considering the assessee’s objections in detail in accordance with law. The assessee’s cross-objection is therefore allowed for statistical purposes.

The learned Departmental Representative, on the other hand, supported the order of the AO and submitted that the assessee has not filed any proof before the CIT(A) to demonstrate that these amounts were refund of security deposits which were part of gross receipts of the earlier years. Therefore, according to him, the relief given by the CIT(A) is erroneous and unjustified.