A.C.I.T. CIR - 3,SILIGURI, SILIGURI vs. NANU SHOME, SILIGURI

The Revenue has raised the following grounds before us. “1) Whether the CIT(A), Siliguri was justified in deleting the addition of Rs.13,84,395/- on account of inflated expenditure in respect of private contract. 2) Whether the ld. CIT(A) was justified in granting relief of Rs.10,15,120/- on account of non-deduction of TDS under section 40(a)(ia) of the Act.”

The ld. CIT(A) observed during the first appellate proceedings that the AO did not bring any material to show that the assessee might have inflated the expenses of private contract works. Thereby, the CIT(A) deleted the addition made by the AO to an extent of Rs.13,84,395/-. The ld. CIT(A) also relied on the order passed by the Kolkata benches in the case of ACIT-vs- M/s. M.K.Gupta & Co. The relevant portion of the observations of the ld. CIT(A) in the above case are reproduced as under: “6………we are not inclined to accept the contention of the assessee that the net income @4% of total contract receipt to be reasonable as has been held in the case of M/s. D.D.S.D. Construction by the Hon. I.T.A.T. We find that in that case proper books of account were maintained by the assessee and therefore, the Hon’ble I.T.A.T. thought it proper to take the net profit rate @4% of the contract Nanu Shome Assessment Year: 2009-10 receipt. In the instant case, books of accounts have not been maintained, therefore, the ratio of that order is not applicable to the facts of this case. We, therefore, are of the considered opinion that in this case to meet the ends of justice, the net profit rate of 5% of the total contract receipt should be taken to arrive at taxable income of the assessee in all the three years. We hold accordingly.”

Before us, at the time of hearing, the ld. DR submitted that the assessee failed to produce bills, vouchers and agreement relating to the private contracts. The assessee did not even furnish the bifurcation of private contract works and government contract works and failed to produce the details of contract agreement i.e., nature of private contract. The ld. DR sought to apply the provisions of section 44AD of the Act.

The ld. Counsel for the assessee relied on the order of the Hon’ble ITAT, “B” bench, Kolkata in the case of JCIT-vs- M/s. M.K.Gupta & Company wherein it held that net profit of 5% is reasonable in the case of a contractor even where no books of accounts are maintained. Further, it was submitted that the books of accounts were audited and no qualifications were recorded by the auditors. The assessee has shown a net profit of 5.26% on gross receipts on government contracts and private contracts and there is no justification in applying the section 44AD in the instant case. It was further submitted that there is no material before the AO to say that the assessee might have inflated the expenditure of private contract work.

With regard to ground no.2, during the assessment proceedings, the AO noticed that the assessee made payments towards hire of machinery of Rs.8,00,200/- and Rs.2,14,920/- towards freight charges. In the absence of any reply from the assessee to the show-cause notice dated 12.12.2011 issued by the AO, the amount to the extent of Rs.10,15,120 was added to the income of the assessee for invoking the provisions of section 40(a)(ia) for non-deduction of tax at source. Before the ld. CIT(A), the assessee contended that the provisions contemplated in section 40(a)(ia) only applies to those amounts which remains to be payable at the end of the financial year i.e. March 31st Nanu Shome Assessment Year: 2009-10 but not to the amount which are already paid. The ld. CIT(A) relied on the order passed by “A” bench of ITAT, Kolkata in the case of Masoom Raja –vs- ACIT in ITA No.06/Kol/2012. The ld. DR relied on the assessment order and submitted that the assessee did not give any reply to the show cause notice issued by the AO and he failed to deduct tax at source and sought to set aside the order by the ld. CIT(A). The ld. Counsel for the assessee relied on the order of the CIT(A) and referred to the recent order of “A” bench of ITAT, Kolkata in the case of Masoom Raja –vs- ACIT (supra). We have carefully gone through the order (supra) wherein by following the proposition laid down by the Special Bench of ITAT, Visakhapatnam in the case of Merilyn Shipping & Transports –vs- ACIT reported in [2012] 20 taxmann.com 244 and also taking into consideration the case laws in the case of Teja Constructions –vs- CIT [2010] 39 SOT 13, held that the disallowance under section 40(a)(ia) is confined to the amount payable as on 31st March of the year and not to the amount already paid during the year. This issue has been decided in favour of the revenue by the Jurisdictional High Court of Calcutta decision in the case of CIT vs Crescent Export Syndicate reported in (2013) 33 taxmann.com250(Cal). However the alternative argument of the Ld.AR, that the 2nd proviso to Sec.40(a)(ia) inserted w.e.f 1.4.2013 wherein if the payee has included the relevant receipts in his books and filed returns thereon, then the payer (assessee) should not be invited with disallowance u/s 40(a)(ia), contains lot of force. This amendment has been held to be retrospective in nature by the decision of the Hon’ble Delhi High Court in the case of CIT vs Ansal Land Mark Township Pvt Ltd reported in 377 ITR 635 (Del), wherein it has been held as below: Section 40(a)(ia) was introduced by the Finance (No.2) Act, 2004 to ensure that an expenditure should not be allowed as deduction in the hands of an assessee in a situation where Nanu Shome Assessment Year: 2009-10 income embedded in such expenditure has remained untaxed due to tax withholding lapses by the assessee. Hence, section 40(a)(ia) is not a penalty provision for tax withholding lapse but it is a provision introduced to compensate any loss to the revenue in cases where deductor hasn’t deducted TDS an amount paid to deductee and, in turn, deductee also hasn’t offered to tax income embedded in such amount. The penalty for tax withholding lapse per se is separately provided under section 271C and, therefore, section 40(a)(ia) isn’t attracted to the same. Hence, an assessee could not be penalized under section 40(a)(ia) when there was no loss to revenue. The Agra Tribunal in the case of Rajiv Kumar Agarwal – vs- ACIT [2014] 45 taxmann.com 555(Agra- Trib) had held that the second proviso to Section 40(a)(ia) is declaratory and curative in nature and has retrospective effect from 1st April, 2005, being the date from which sub-clause(ia) of section 40(8) was inserted by the Finance No.2) Act, 2004, even though the Finance Act, 2012 had not specifically stated that proviso is retrospective in nature. The High Court affirmed the ratio laid down by The Agra Tribunal and held that said proviso is declaratory and curative in nature and has retrospective effect from 1st April, 2005”.

In the result, the appeal filed by the Revenue is partly allowed. Order Pronounced in the Open Court on 10th December, 2015.