Income Tax Appellate Tribunal - Hyderabad
Bdr Projects Pvt. Ltd., Hyderabad vs Assessee on 12 June, 2009
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH 'A', HYDERABAD
BEFORE SHRI. G.C. GUPTA, VICE PRESIDENT AND
SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER
ITA No.954/Hyd/09 : Asstt. Year 2006-07
M/s. BDR Projects (P) Ltd. VS The ACIT Circle 1(3),
Hyderabad Hyderabad.
(AAACB8263 D)
Appellant by : ShrI. Angeneulu
Respondent by : Shri K.V.N. Charya
ORDER
Per Shri Chandra Poojari, Accountant Member
This appeal preferred by assessee is directed against order passed by the learned CIT(A) II, Hyderabad dated 12.6.2009 for the assessment year 2006-07. The first in this appeal is as follows:
i) The order of the learned appellate authority is so far sustaining the invocation of provision of Sec. 40a(ia) and restricting the adhoc addition to 10% is erroneous in law, contrary to facts and against the principles of equity and natural justice.
ii) The CIT(A) erred in law by sustaining the invocation of section 40a(ia) towards the payments made by the assessee directly to different labourers engaged by it in execution of the work in the absence of any agreement to attract the TDS provisions.
Therefore, the sustentation of addition is unjustified, unwarranted and against both in law and on facts.
2. We have heard both the parties and perused the material available on record. The argument of the learned counsel of the assessee is that the Section 40(a) (ia) applies to cases in which the 2 hire charges are 'payable' and not applicable to the amounts which has been already paid. The Departmental Representative relied on the following judgements:
i) M/s Southern Agro Engine (P) Ltd. Vs. Union of India (170 Taxman 468) (MAD)
ii) M/s Dey's Medical (UP) (P) Ltd. Vs. Union of India (HC Allahabad) (216 CTR 83) He submitted that sub clauses (i), (ia) and (ib) substituted for sub clauses (i) to Section 40 by the Finance Act (No.2) Act, 2004 with effect from 1.4.2005 and also drew our attention to the Memorandum explaining the clauses which reads as follows:
Clause 11 of the Bill to seek to amend Section 40 of the IT Act relating to amounts not deductible. The proposed amendment seeks to insert a new sub clause (ia) in clause (a) of the said section so as to provide that any interest, commission or brokerage, fees for professional services or fees for technical services, payable to a resident or amount credited or paid to a contractor or sub contractor being a resident for carrying out any work (including supply of labour for carrying out any work) on which tax has not been deducted or, after deduction has not been paid before the expiry of the time prescribed under sub section (1) of section 200 and in accordance with the other provisions of Chapter XVII B shall not be allowed as deduction in computing the income chargeable under the head 'Profits and gains of business or profession. It is further proposed to provide that where in respect of any such sum, tax has been deducted under Chapter XVII-B or paid in any subsequent year, such sum shall be allowed as deduction nin computing the income of the previous year in which such tax has been 3 paid. It is also proposed to define the expressions 'commission or brokerage', fees for technical services', 'professional services' and 'work' used in the proposed new clause (ia).
This amendment will take effect from 1st April, 2005, and will, accordingly, apply in relation to the assessment year 2005-06 and subsequent years.
2.1. Further he submitted that a statute is a creature of the legislature. Every statute has its preamble; it has objects and reasons for which it was enacted. To find out the correct meaning of a particular provision of the statute, it is the duty of the Court of law to examine not only the words of the said provision but also the background in which such law is enacted. Every statute must be given a logical meaning and harmonious construction. The words used in the statute are not used for nothing,. Each and every word has its significance. It is a duty of the judiciary to interpret the same for its implementation as and when they are approached.
2.2. In our opinion, this issue already decided by the Coordinate Bench in the case of M/s Teja Constructions in ITA No.308/Hyd/2009 for the assessment year 2005-06 vide order dated 23.10.2009 wherein it was held as follows:
"11. We have heard both the parties and perused the material on record.
In this case, main contention of the assessee's counsel is that, once the books of account are rejected, income is estimated, the assessing officer precluded from invoking any other provisions of the IT Act to make further addition. We find force in this argument. The books of account of the assessee was not relied, it was rejected by the assessing officer and the same was confirmed by the CIT(A) as well as by us. Now, based on the reliance on the same books, for the purpose of invoking the provisions of 40a (ia) is improper. The estimation of income taken care of the irregularities committed by the assessee. Further, addition by invoking S. 40 a (ia) amounts to punishing the assessee for a same offence on double occasions, which is not permitted by law. There is a connection between expenditure claimed by the assessee and making non deduction of TDS. Since the books of account not verifiable, for which the assessee books was rejected and income was determined. It was held in the case of CIT Vs. Devi Prasad Viswanath Prasad (72 ITR 192 that) (SC)' where a particular business income of the assessee has been estimated and determined and in such a case, the assessing officer precluded from adding any unexplained cash credit as undisclosed income of the business '.4
12. Further, the argument of the ld. counsel for the assessee is that, strict interpretation of statute to be made. He relied on the judgement of ACIT, Assessment II Bangalore & Others Vs. Velliappa Textiles Ltd. & Others (263 ITR 550) (SC) wherein it was held:
"
"iii) A court cannot breach a casus omissus and no canon of construction permits the court to supply a lacunae in a statute: nor can courts of law fill up the lacuna in an ill drafted and hasty legislation. Whether the omission is intentional or inadvertent is no concern of the court. The duty of the court is to decide what the law is an apply it, not to make it.
iv) Since the function of the court of law is jus dicere and no jus dare, the court of law cannot read the recommendations of the Law Commission as justifying an interpretation of the section in tune with them, even when the words of the section are plain and unambiguous"
We find force in this argument of the assessee's counsel. S. 40a (ia) reads as under:
"40. amounts not deductible: Notwithstanding anything to the contrary in ss.30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head 'Profits and gains of business or profession-
a) in the case of any assessee
i) .......
(ia) any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub contractor, being resident, for carrying out any work (including supply of labour for carrying out any work) on which tax is deductible at source under chapter XVIIB and such tax has not been deducted or, after deduction has not been paid (A) in the case where the tax was deductible and was so deducted during the last month of the previous year, on or before the due date specified in sub. s(1) of S.139 or (B) in any other case, on or before the last The bare provision of S.40(a) (ia) provides for non deduction of amount which remains payable to a resident in respect of fees for technical services etc. It is not applicable where expenditure is paid. It is applicable only in cases where the payments are due and outstanding. The word payable is not defined though the word paid is defined under s.43(2) to mean actually paid or incurred. Hence, by implication the word payable does not actually paid or incurred. Hence, by implication the word payable does not include paid. The difference in the word paid and payable is also there in the rules for depositing the TDS and also for levy of interest u/s 234B where interest is worked out on the basis of tax actually deducted at source and not on the basis of tax deductible. S.40(a) (ia) otherwise being a legal fiction needs to be construed strictly in views of the decision of SC in CIT Vs. Mother India Refrigeration Industries (P) Ltd. 1985 48 CTR (SC) 176: 1985 155 ITR 711 (SC). The CBDT circular No.5 of 2005 dated 15th July, 2005 197 CTR (ST) 1 has also clarified that the provision of the S.40(a) (ia) is to augment compliance of TDS provision in the case of residents and curb bogus payments to them. In the present case the payment is not in dispute and on the issue whether tax is to be deducted at source on such payment is not free from doubt. In any case, if the assessee has paid the impugned amount and not payable at the end of the year on the date of balance sheet, then the provisions of S.40a (ia) not applicable. It is only applicable in respect of "payable amount" shown in the balance sheet as outstanding expenses on which TDS has not been made. Further, tax is deductible u/s 193, 194A, 194C, 194H and 194J either at the time of payment or at the time of giving credit to the 5 recipient. However, Sec. 40a (ia) is applicable only in respect of TDS capital defaults amount is "payable". If amount is actually paid and tax is not deducted under the above section, Sec.40a (ia) is not applicable. There is different between the word 'paid' or 'payable' , the Legislature used the word very carefully in S.40a(ia) and in all its wisdom at the time of incorporating the section by way of Finance (No.2) Bill, 2004. It was inserted in Sec. 40a(ia) that the amount on payable to contractor or sub contractor liable for disallowance, its TDS not deducted. ( Sec. 40a (ia) has to be subjected to strict interpretation. Going by the rule of strict interpretation the default with reference to actual 'payment' of expenditure would not entail disallowance. This is because, the language used in the section 40a (ia) is very simple, clear and unambiguous. Literal rule of interpretation has to be applied. The speech of Finance Minister or even other provisions of the Act can be pressed into service if there is some ambiguity about the meaning of the section. But the same was not the case in the instant case. Even the principles of liberal interpretation cannot be applied where the language is clear, simple, and the meaning of the word is apparent. As such, we are of the view that provisions of S.40(a) (ia) are not applicable in the present facts of the case." The disallowance, if any required to be made shall be restricted to the extent of payable shown in the balance sheet at the end of the year. However, this is not the case in the present case because once the estimation of income is made, further disallowance are unwarranted.
13. Further in the case of Shri N. Ramachandra Reddy ITA.1372/07 the Tribunal order vide dated 6/3/2009 held as follows on the similar circumstances.
We have considered the rival submissions and perused the material available on record. Undisputedly, there are defects and discrepancies in the books of account noted by the assessing officer as well as the CIT(A). The assessing officer on that ground has not rejected the books of account, but proceeding on the basis of returned income of Rs.24,92,428, made substantial additions including statutory disallowance of Rs.3,92,08,601 under S.40(a)(ia) of the Act. He thus, completed the assessment on a total income of Rs.5,04,75,532 as against returned income of Rs.24,92,428, on a total undisputed turnover of Rs.8,14,78,527. When the assessing officer found the books of account and other records maintained by the assessee to be defective, in all fairness, he should have rejected the same and proceeded to estimate the income as a reasonable percentage of turnover, instead of preferring to start with the returned income and makes substantial item-wise statutory/otherwise additions/disallowances. Faced with substantially exorbitant additions to the returned income of Rs.24,92,428, which resulted in the determination of assessee's income by the assessing officer at an abnormal rate 64% of the gross receipts, in the course of appellate proceedings, the assessee filed an affidavit, proposing before the CIT(A) to reject the books of account for the defects and discrepancies noticed and estimate the net income from contracts at the rate of 13% of the gross receipts. Even though the assessing officer has not rejected the books and estimated the income, since the powers of Appellate Commissioner are co-terminus with those of the assessing officer, the CIT(A) in our considered view was competent and justified in rejecting the books maintained by the assessee, for the deficiencies therein, noticed even by the assessing officer, and proceeding to determine the income at the rate proposed by the assessee. After carefully examining the affidavit of the assessee, which has also been extracted by the CIT(A) on pages 13 to 14 of impugned order, the CIT(A) accepting the proposal of the assessee, estimated the income of the 6 assessee at 13% of the gross receipts computed at Rs.8,14,78,527 ad determined the total income including bank interest, at Rs.1,07,47,807.
On a careful consideration of the matter in the light of the totality of the facts and circumstances of the case, we find no infirmity in the impugned order of the CIT(A). In the first place, we may note that in the assessee's line of business, viz. execution of civil contracts, the rate of 13% proposed by the assessee and accepted by the CIT(A) for estimation of assessee's net income from contracts is not only reasonable, but also on a higher side compared to the rate approved by this Tribunal in similar cases. If the assessee himself has come forward with such a higher rate for estimation of profit, it is because he is faced with several other statutory/otherwise additions made by the assessing officer, which if sustained by the CIT(A), would result in determination of its income at a very substantially higher rate of 64% or even more than 100% if separate disallowance under S.40A(3) is also considered. The fact that the assessee has made this offer for estimation of income at a higher rate of 13%, is also evident from the rider he put in the concluding sentence of the penultimate para of his affidavit, which reads as follows-
"...This statement and affirmation are made subject to the point that no other adverse inferences are drawn and no other proceedings under the Income tax Act for the said assessment consequent to the statement and affirmation are invoked."
On a close reading of the above provisions, it is observed that though the above provisions stipulate a statutory disallowance, leaving no scope for any discretion or lenient view considering the peculiar circumstances under which payments caught by the scheme of S.40(a)(ia) have been made, the non-obstante clause "Notwithstanding anything to the contrary in Sections 30 to 38", with which the provisions of S.40 begin, take the items of expenses covered by the provisions of S.30 to 38 alone within the ambit of S.40, and any item of expenditure allowable under the provisions of the Act, preceding S.30, are not covered by the said statutory disallowances envisaged under S.40. It may also be observed that if an assessee claims any expenditure as necessary to earn the business income and as such the same is allowable u/s 28; and not u/s 37, because section 28 taxes profits of the business which can be worked out only after allowing expenditure, such expenditure goes out of the clutches of the disallowances in terms of the provisions of S.40. In this view of the matter, an assessee may claim all his expenditure, except for those which are clearly covered by some other sections e.g. section 30 covering rent, rates, taxes, insurance, etc., as allowable u/s 28. It may further be observed that all the expenditure, just as labour charges in the instant case, which represents direct costs and therefore, adjustable against revenue for the purpose of determining the profit u/s 28(i) of the Act, do not come within the provisions u/s 40(a)(ia). As such, it may be observed that it is only the deductions referred to in S.30 to 38 which would definitely fall for consideration of disallowance u/s 40 and they cannot be claimed as deduction u/s 28. This reasoning applies with equal force to the analogous provisions of S.43, S.44AD, S.44AE, S.44AF, S.44B, S.44BB, S.44ABA, S.44BBB, S.44C, S.44D, and so on which all relate to computation of business income and clearly start with a non-obstinate clause, which is similar to the one in S.40, but reading "Notwithstanding anything to the 7 contrary in Sections 28 to 43C". In this view of the matter, it may be observed that the provisions of S.40(a)(ia) are applicable only to items covered by Section 30 to Section 38 and not to section 28 and all the direct cost/ expenditure covered by section 28 of the Act, are beyond the scope of disallowance under S.40(a)(ia) of the Act.
As for the permissibility of the independent disallowance in terms of S.40(a)(ia), after determining the income by resorting to estimation as a percentage of turnover/gross receipts, we find that in the case of Indwell Constructions V/s. CIT (232 ITR 776) it has been clearly held that where the books of account have been rejected, the revenue cannot rely on the same books of account for addition of an exact amount of expenditure in the Profit and Loss Account. It was also held in that case that when an estimate is made, it is in substitution of the income that is to be computed under S.29 and in other words, all the deductions which are referred to under S.29 are deemed to have been taken into account, while making such an estimate. This will also mean, the High Court observed, the embargo placed in S.40 is also taken into account. It has been held in the concluding paras 4 and 5 of that decision as follows:
"4. The pattern of assessment under the IT Act is given by s.29 which states that the income from profits and gains of business shall be computed in accordance with the provisions contained in s.30 to 43D. Sec.40 provides for certain disallowances in certain cases notwithstanding that those amounts are allowed generally under other sections. The computation under s.29 is to be made under s.145 on the basis of the books regularly maintained by the assessee. If those books are not correct or complete, the ITO may reject those books and estimate the income to the best of his judgment. When such an estimate is made it is in substitution of the income that is to be computed under s.29. In other words, all the deductions which are referred to under s.29 are deemed to have been taken into account while making such an estimate. This will also mean that the embargo placed in s.450 is also taken into account.
5. No doubt there is big difference between profit earned with own capital and profit earned with borrowed capital and such a difference could have been taken into account by the ITO while making an estimate. If the CIT had set aside the estimate on the ground that the vital fact that the business was carried on with own capital and not with borrowed capital has been ignored by the ITO, there may not have been any difficulty in upholding that order. But, when he proposes to add back an exact item in the P&L a/c., he was relying on the rejected books which he could not do as held by the Bench of this Court in Maddi Sudarsanam Oil Millls Co. vs. CIT (supra). There is also a further difficulty if s.40, as argued by learned counsel, is to be taken into account even after making an estimate. When there are certain other deductions which are to be disallowed such as wealth-tax payment in s.4, can it be said that after making an estimate, the wealth-tax charged in the P&L a/c. should again be added back to the profit. This example, illustrates how the contention of the Revenue, that s.40(b) makes a difference in the situation, is untenable. ......"
The above decision of the A.P. High Court has been followed and a similar view has been taken by the Special Bench (Kolkata) of this Tribunal in the case of ITO Vs. Kenaram Saha and Subhash Saha (301 ITR (AT)
171), wherein disallowance made in terms of S.40A(3) has been deleted. Respectfully following the decision of the jurisdictional High Court in the case of Indwell Corporation (supra), besides the Special Bench decision of this Tribunal noted above, we are of the considered opinion that the income of the assessee having been determined by resorting to estimation, there is 8 no scope for any further disallowance either in terms of S.40(a)(ia)/40A(3) or otherwise.
In the light of the above discussion, we uphold the impugned order of the CIT(A) and reject the grounds of the Revenue in this appeal.
13. In this view of the matter, we are unable to uphold the action of CIT(A) in confirming the disallowance u/s 40a(ia) of the IT Act. The same is deleted."
3. Respectfully following ratio laid down by the Coordinate Bench, Hyderabad in the case of M/s Teja Constructions cited supra we are inclined to set aside the issue to the file of assessing officer to disallow only such expenses which are debited to the profit and loss account without making actual payment and by making provision towards said liability in the balance sheet and which is yet to be paid as on the date of balance sheet. We also came across similar kind of order in the case of Jaipur Vidhyut Vitarna Nigam Ltd. Vs. DCIT (123 TTJ 888)(2009). Further, the judgement relied by the departmental representative are relating to the upholding the constitutional validity of the provisions of section 40(a) (ia) and not relating to the applicability of section 40(a) (ia). Accordingly, this ground of appeal partly allowed.
4. The next grounds in appeal are as follows:
i) The CIT(A) ought not to have sustained 10% of the ad hoc addition out of 20% made by the assessing officer towards expenditure without any base or material evidence on record. Therefore, the addition shall be deleted.
ii) The assessee craves to submit that, all the facts, contentions and case laws mentioned in the statement of facts accompanied these grounds of appeal, shall be treated as part and parcel of these grounds and shall be dealt with.9
5. We have heard both the parties and perused the material available on record. In this case, the assessing officer disallowed 20% of the expenditure of Rs.72,23,095 works out at Rs.14,14,619 on account of cash payments not supported by proper vouchers. The CIT(A) on appeal disallowed the same at 10% since in his opinion 20% disallowance will be on the higher side. In our opinion, the assessing officer disallowed the expenditure on account of cash payment by doubting the genuineness of the payments. Most of the vouchers are self made and not supported by third parties vouchers. It is the duty of the assessee to produce the necessary evidence in support of its claim. The only book entry not enough to prove the genuineness of the payments. It should be supported by proper bills, vouchers and receipts. In the absence of these things, disallowance is warranted. After going through the entire facts and circumstances of the case, in our opinion, the CIT(A) is very reasonable in sustaining the 10% of disallowance out of 20% disallowed by the assessing officer on account of non production of proper vouchers. The view taken by the CIT(A) is confirmed. These grounds of the assessee are dismissed.
6. In the result, appeal of the assessee is partly allowed.
Order pronounced in the open Court on 23. 12.2009
Sd/- Sd/-
(G.C. GUPTA) (CHANDRA POOJARI)
VICE PRESIDENT ACCOUNTANT MEMBER
Dated the 23rd December, 2009.
10
Copy forwarded to:
1. M/s Anjaneyulu & Co., CA, 30, Bhagyalakshmi Nagar, Gandhi Nagar, Hyderabad-500080.
2. The DCIT Circle 1(3), Hyderabad
3. CIT(A)-II, Hyderabad.
4. The D.R., ITAT, Hyderabad.
Np