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Income Tax Appellate Tribunal, KOLKATA ‘SMC’ BENCH, KOLKATA
Before: Shri P.M. Jagtap
This appeal filed by the assessee is directed against the order of ld. Commissioner of Income Tax (Appeals)-XXXII, Kolkata dated 18.09.2014 for the assessment year 2007-08.
2. The assessee in the present case is an individual, who is engaged in contracting business. The return of income for the year under consideration was filed by him on 26.10.2007 declaring total income of Rs.2,32,230/-. In the Profit & Loss A/c filed alongwith the said return, three amounts of Rs.49,640/-, Rs.8,82,460/- and Rs.22,410/- were debited by the assessee on account of carrying charges, wages paid to ./2014 Assessment year: 2007-2008 Page 2 of 10 labours and loading and unloading charges respectively. According to the Assessing Officer, the assessee was required to deduct tax at source from the said amounts under section 194C of the Act and since no such tax was deducted by the assessee, he requested the assessee to explain as to why these amounts should not be disallowed under section 40(a)(ia) of the Act. The assessee, however, could not offer any explanation to the satisfaction of the Assessing Officer and consequently a disallowance of Rs.9,54,510/- was made by the Assessing Officer under section 40(a)(ia) of the Act. He also made a further disallowance of Rs.50,000/- on account of low withdrawals shown by the assessee, which, according to the Assessing Officer, were not sufficient to meet the personal and household expenses of the assessee considering his status and the place of dwelling. Accordingly in the assessment completed under section 143(3) by an order dated 24.12.2009, the total income of the assessee was computed by the Assessing Officer at Rs.12,38,802/-.
3. Against the order passed by the Assessing Officer under section 143(3), an appeal was preferred by the assessee before the ld. CIT(Appeals) challenging therein the additions made by the Assessing officer. As regards the disallowance made by the Assessing Officer under section 40(a)(ia), the following submissions were made by the assessee in writing before the ld. CIT(Appeals):- It is submitted that the assessee's accounts are audited and the Tax Audit Report field before the AO did not show any violation of section 40(a)(ia). A copy of the audited accounts with TAR is enclosed herewith. Even otherwise the heads of the expenses disallowed itself shows that the provision of section 194C was not applicable. The total payment under the head carrying charges was Rs.49,460/- which is normal business phenomenon paid every year to small truckwallas and further the total payment during the whole year was Rs.49,460/- which was below Rs.50,000/- during the whole year. Therefore provisions of section 194C were not applicable for these payments. So far as the wages was concerned it was claimed under the head wages and not as contractor's payment. The term wages itself suggest that it was a payment to daily wages ./2014 Assessment year: 2007-2008 Page 3 of 10
earners. Needless to say that the assessee was a contractor and executed construction job for the Government. Similarly the expenses under the head loading and unloading was also paid to daily wages earners and the total payment was Rs.22,410/- which also below Rs.50,000/-.
Moreover, it is mentioned in the assessment order itself vide page 2 para 2 that the assessee produced the books of accounts, registers, original bills and vouchers. The AO has not been able to paint out any such item on which the tax was deductable.
4. Ld. CIT(Appeals) did not find merit in the submissions made by the assessee on this issue and confirmed the disallowance made by the Assessing Officer under section 40(a)(ia) for the following reasons given in his impugned order:- “On merits it is seen that assessee has not been able to tile any evidence that the payment made for carrying charges and loading & unloading charge are below Rs.20,000/- in the aggregate and the payments were made for the whole year and therefore are not covered u/s.194C of the Act.
As regards the disallowance of Rs.8,82,460/- debited under the head 'Wages', the assessee has not filed any evidence or produced any record to substantiate his claim. The written submission of the AR extracted above also merely harps on a literary point that "the term wages itself suggest that it was a payment to daily wages earners". The above statement ignores the basic law that the manner of recording of any income/expense in the books of the assessee is not determinative of its character. The assessee has not cared to produce/file/submit the following evidences/records: -
(a) Books of Account & ledger accounts (b) Details of wages paid (c) Details of recipient of ‘wages’. (d) ‘Register of wages' as mandated by the Departmental of Labour. (e) Cash book to explain availability of cash on each day. ./2014 Assessment year: 2007-2008 Page 4 of 10
(f) Details or the person who had verified the work done at each site and who had released the so called 'wage' payments on daily basis at each site.
(g) PF/ESI details of the workers and the PF/ESI Returns filed by the assessee.
(h) Establishing the chain of flow of cash to the ultimate recipient on a periodical basis, if the assessee's claim is correct.
Lastly, all the above would have been verified on the ground had such details been submitted either before the AO or in these appellate proceedings. As the assessee has not produced or filed any record or submission in this matter, the ground of appeal No.2 of the assessee is dismissed as not proved and all the additions of Rs.49,640/- plus Rs.8,82,460/- plus Rs.22,410/- are confirmed”.
5. As regards the addition of Rs.50,000/- made by the Assessing Officer on account of low withdrawals, the ld. CIT(Appeals) found that heavy investment was made by the assessee in LIP in A.Y. 2005-06. He also noted that no details of total drawings of Rs.1,97,381/- shown by the assessee were furnished to show the investment made in LIP as well as personal and household expenses. In these facts and circumstances of the case, the ld. CIT(Appeals) was of the opinion that the addition of Rs.50,000/- made on account of low withdrawals was not sufficient and issued a notice to the assessee proposing to enhance the said addition. In reply to the said notice, it was pointed out by the assessee that in A.Y. 2005-06 withdrawals were shown at Rs.1,20,386/- and after increase of the same by Rs.1,00,000/- as confirmed by the Tribunal, the total withdrawals were only Rs.2.2 lakhs. It was contended by the assessee that the addition made by the Assessing Officer on this issue of Rs.50,000/- making the total drawings of the assessee at Rs.2,47,381/- thus was fair and reasonable and no further enhancement therein was justified. The ld. CIT(Appeals) did not find merit in this submission of the assessee and enhanced the addition made by the Assessing Officer on account of low withdrawals by Rs.1,90,000/- to Rs.2,40,000/- observing ./2014 Assessment year: 2007-2008 Page 5 of 10 that drawings atleast to the extent of Rs.20,000/- per month were required by the assessee for household purpose only.
After having confirmed the addition made by the Assessing Officer under section 40(a)(ia) and enhancing the addition made by the Assessing Officer on account of low withdrawals, the ld. CIT(Appeals) proceeded to adopt an alternative recourse also to determine the income of the assessee for the year under consideration. In this regard, he noted that the assessee had not disclosed any work-in-progress or closing stock or advances of regular nature except for one advance given to M/s. Voltas Limited. According to him, in the similar facts and circumstances involved in A.Y. 2005-06, books were rejected by the Assessing Officer and although the addition made by the Assessing Officer in that year was not deleted by the ld. CIT(Appeals), the later had upheld the action of the Assessing Officer in rejecting the books of account with a direction to the Assessing Officer to estimate the income of the assessee at 5% of the gross receipt. He noted that the order of the ld. CIT(Appeals) for A.Y. 2005-06 was even upheld by the ITAT and in A.Y. 2006-07 also, the income of the assessee stood finally estimated at 5% of the gross receipts after rejection of the books of account. According to the ld. CIT(Appeals), the facts involved in the year under consideration being similar, the Assessing Officer should have rejected the books of account of the assessee and estimated the income of the assessee by applying some Net Profit rate. Accordingly, as an alternative measure, the ld. CIT(Appeals) rejected the books of account of the assessee and computed the income of the assessee from business at Rs.5,65,750/- by applying the Net Profit rate of 8% to the turnover. In the income so estimated, he added the amount of Rs.2,40,000/- on account of low withdrawals and held that the total income of the assessee could alternatively be assessed at Rs.8,05,750/-. Aggrieved by the order of the ld. CIT(Appeals), the assessee has preferred this appeal before the Tribunal on the following grounds:- ./2014 Assessment year: 2007-2008 Page 6 of 10
“1. For that the order of the Ld. CIT(A) is arbitrary, illegal and bad in law.
For that the Ld. C.I.T.(A) erred in confirming the additions made by the AO even though he rejected the books of accounts and estimated the NP.
For that the Ld. C.I.T.(A) erred in estimating the profit of the assessee at 8% as against 5% estimated on exactly same facts by the Hon'ble ITAT in the assessee's own case for assessment year 2005-06.
For that the Ld. C.I.T(A) should have telescoped the addition made apart from drawings with the addition on account of drawings for correct computation of income of the assessee.
For that alternatively the Ld. C.I.T(A) erred in confirming the addition of Rs.9,54,510/ - made by the AO under sec. 40(a)(ia) for alleged non- deduction of tax at source, when the assessee was an Individual and the provisions of Sec. 194C were not applicable during the relevant assessment year.
6. For that the Ld. C.I.T(A) erred in confirming the addition of Rs.50,000/- on account of low drawings and further enhancing it by a sum of Rs.1,90,000/- when the total drawings as increased by the AO only exceeded the total drawings as confirmed by the Hon'ble ITAT in the assessee's own case for assessment year 2005-06.
7. For that on the facts and circumstances of the case the order of the CIT(A) be modified and the assessee be given the relief prayed for”.
I have heard the arguments of both the sides and perused the material available on record.
7.1. Grounds No. 1, 7 & 8 raised by the assessee in this appeal are general, which do not call for any specific adjudication.
7.2. Grounds No. 3 & 4 dispute the alternative course of computation of income of the assesese adopted/suggested by the ld. CIT(Appeals) and I, therefore, would deal with the same later after deciding the issues raised ./2014 Assessment year: 2007-2008 Page 7 of 10 by the assessee in Grounds No. 5 & 6 which are arising right from the assessment stage.
As regards the issue involved in Ground No. 5 relating to the disallowance made by the Assessing Officer under section 40(a)(ia) and confirmed by the ld. CIT(Appeals), it is observed that the relevant expenses claimed by the assessee were mainly on account of wages paid to labours amounting to Rs.8,82,460/-, while the balance amounts of Rs.49,640/- and Rs.22,410/- were on account of carrying charges and loading and unloading charges. As rightly submitted by the ld. counsel for the assessee, the nature of the expenditure of Rs.8,82,460/- being incurred on account of wages paid to labours was not disputed by the Assessing Officer at the assessment stage and going by this very nature clearly indicating payment of wages by the assessee to individual labours, it cannot be said that the said amount was paid under some contract attracting the provisions of section 194C. Similarly there is nothing brought on record by the Assessing Officer or even by the ld. CIT(Appeals) to show that carrying charges of Rs.49,640/- and loading and unloading charges of Rs.22,410/- were paid by the assessee under some contract to the concerned recipients attracting the provisions of section 194C. In his impugned order, the ld. CIT(Appeals) has observed that the relevant record in the form of wage register, cash book, etc. was not produced by the assessee to support and substantiate his claim or having paid the amount in question towards wages to individual labours. However, as rightly contended by the ld. counsel for the assessee, the nature of this expenditure being wages paid to individual labours was not disputed even by the Assessing Officer and there was thus no reason/occasion for the assessee to establish this undisputed position. Having considered all these facts of the case, I am of the view that the case of application of section 194C to the payment of wages and other charges was not successfully made out by the authorities below and in the absence of the same, the disallowance made by them under section 40(a)(ia) for the alleged failure of the assessee to deduct tax at source is ./2014 Assessment year: 2007-2008 Page 8 of 10 not sustainable. I, therefore, delete the same and allow Ground No. 5 of the assessee.
As regards the issue involved in Ground No. 6 relating to the addition of Rs.50,000/- made by the Assessing Officer on account of low withdrawals, which is further enhanced by the ld. CIT(Appeals) to Rs.2,40,000/-, it is observed that a similar addition made in assessee’s own case for A.Y. 2005-06 was confirmed by the Tribunal to the extent of Rs.1,00,000/-, after taking note of the fact that heavy investment in LIP was made by the assessee. The investment in LIP being a recurring event and there being no details of withdrawals of Rs.1,97,381/- shown by the assessee during the year under consideration to give the break-up of withdrawals made for LIP investment and personal and household expenses, the ld. CIT(Appeals) enhanced the addition of Rs.50,000/- made by the Assessing Officer on account of low withdrawals to Rs.2,40,000/- observing that the drawings of the assesese for household expenses should reasonably be estimated at Rs.20,000/- per month. While doing so, it appears that the ld. CIT(Appeals) has not considered the fact that the drawings shown by the assessee in the year under consideration were Rs.1,97,381/- and since the withdrawals of the assessee as estimated by the Tribunal in A.Y. 2005-06 at Rs.2.2 lakhs were inclusive of LIP investment also, the drawings of Rs.1,97,381/- shown by the assessee could reasonably be taken as partly for LIP investment and partly for household expenses. In these circumstances, even if the estimate made by the ld. CIT(Appeals) of the household expenses of the assessee at Rs.20,000/- per month is taken as fair and reasonable, it would not justify the addition of the entire amount of Rs.2,40,000/- on account of low drawings. Keeping in view all these facts and circumstances of the case, I am of the opinion that the addition of Rs.1,50,000/- on account of low drawings would be fair and reasonable. Accordingly, I modify the impugned order of the ld. CIT(Appeals) on this issue and sustain the addition on account of low withdrawals to the extent of Rs.1,50,000/-. ./2014 Assessment year: 2007-2008 Page 9 of 10
Now reverting back to Grounds No. 3 & 4 which involve the issue relating to the alternative course of computation of income of the assessee as adopted by the ld. CIT(Appeals), it is observed that the assessee in his final accounts had not disclosed any work-in-progress or closing stock or advance of regular nature as found by the ld. CIT(Appeals). As further found by the ld. CIT(Appeals), in the similar facts and circumstances involved in assessee’s own case for Assessment Years 2005-06 and 2006-07, the books of account of the assessee were rejected by the Assessing Officer and such rejection was upheld even by the Tribunal. Keeping in view this finding of facts recorded by the ld. CIT(Appeals), which have not been rebutted or controverted by the ld. counsel for the assessee, I find myself in agreement with the ld. CIT(Appeals) that the books of account of the assessee for the year under consideration are liable to be rejected and his income from the contracting business is required to be computed on estimated basis. In this regard, it is observed that the ld. CIT(Appeals) has estimated the income of the assessee by applying net profit rate of 8% to the turnover of the assessee by relying on some judicial pronouncements. In my opinion, the issue relating to the determination of the net profit rate to be applied for estimating the income of the assessee is purely an factual issue which entirely depends on the facts and circumstances involved in each and every case. In so far as the case in hand is concerned, it is observed that the income of the assessee for the immediately preceding two years, i.e. A.Ys. 2005-06 and 2006-07, has been estimated by the Tribunal at 5% of the turnover in the similar facts and circumstances. Respectfully following the said decision of the Tribunal, I hold that it would be fair and reasonable to estimate the income of the assessee from contracting business by applying the net profit rate of 5% to the turnover. Ground No. 3 of the assessee’s appeal is accordingly allowed.
As regards the issue raised in Ground No. 4 relating to the claim of the assessee for telescoping the addition made by way of estimating the income of the assessee on higher side with the addition made on account ./2014 Assessment year: 2007-2008 Page 10 of 10 of low withdrawals, I am of the opinion that when the income of the assessee as finally estimated is more than the income declared by him, it results in additional income in the hands of the assessee to that extent and the same can be taken as available to the assessee to meet his personal and household expenses. In that view of the matter, I find merit in the claim of the assessee for the benefit of telescoping and direct the Assessing Officer to allow such benefit to the extent the estimation of income is more than the income declared by the assessee. Ground No. 4 is accordingly allowed.
In the result, the appeal of the assessee is partly allowed. Order pronounced in the open Court on October 7th, 2015.