Income Tax Appellate Tribunal - Delhi
Pramod Mittal, vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH 'F' : NEW DELHI)
BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND
SHRI K.D. RANJAN, ACCOUNTANT MEMBER
ITA Nos.884/Del./08;
ITANo.2019/Del./2009; &
ITA No.718/Del./2010
(Assessment Years : 2005-06 & 06-07)
Shri Pramod Mittal, Vs. ACIT, Circle 38(1),
Prop. M/s Gupta Construction Co., New Delhi.
A-24B, Kailash Colony,
New Delhi.
(PAN/GIR No.AAKPM5145L)
(Appellant) Respondent)
Assessee by : Shri K. Sampath, Adv.
Revenue by : Smt. Pratima Kaushik, Sr.DR
ORDER
PER K.D. RANJAN: AM These appeals by the assessee for assessment years 2005-06 & 2006-07 arise out of separate orders of CIT(A)-XXVIII, New Delhi.
2. In ITA No.884/Del./2008 and ITA No.2019/Del./2009 for assessment years 2005- 06 & 2006-07 are directed against the quantum appeal whereas in ITA No.818/Del./2010 is directed against confirming the penalty u/s 271(1)(c) of the I.T. Act, 1961 for assessment year 2005-06. These appeals were heard together and for the sake of convenience are disposed of by this consolidated order.
3. First we will take up the quantum appeals for assessment years 2005-06 and 2006-07. The relevant grounds of appeals for both the years are reproduced as under:
ASSESSMENT YEAR : 2005-06 "1. The order is bad in law, as it has been passed in gross violation of principles of natural justice.
2I.T.A. Nos.884/D/08, 2019/D/09 & 718/D/10 (A.Ys. 2005-06 & 2006-07)
2. Under the given facts and circumstances Assessing Officer has erred in allowing the loss of firm amounting to Rs. 22,40,193/- prior to dissolution in the hands of the assessee.
3. The CIT has erred in confirming the hire charges of Rs.1,11,500/- paid to Ms. Neena Chadha in the hands of the assessee which is the business expenditure."
ASSESSMENT YEAR : 2006-07
" On the facts and in the circumstances of the case and in
law the CIT(A) erred:-
1. In making an addition of `2,04,000/- on account of Hire
Charges.
2. In making the following additions to the returned income:
(i) Late deposit of PF & ESI Employee's contribution -
`75,466/-
(ii) Disallowance on account of water & electricity
charges - `54,832/-
(iii) Disallowance on account of telephone expenses -
`13,056/-
(iv) Disallowance on account of vehicle expenses -
`58,815/-
3. That the appellant may be allowed to add, alter, delete or amend any ground of appeal, if considered necessary at the time of hearing.
4. That the appellant prays that the demand created by the Asstt. Commissioner may kindly be deleted."
4. The first issue for consideration in assessment year 2005-06 is against the confirming the disallowance of loss of firm amounting to Rs. 22,40,193/- in the hands of the assessee. The facts of the case stated in brief are that M/s Gupta Construction Co. was carrying on business in the status of firm. Shri Pramod Mittal and Shri Mukesh Mittal were two partners. On 18.9.2004, Shri Mukesh Mittal retired from partnership and Shri Pramod Mittal became proprietor of M/s Gupta Construction Co. The assessee in the return of income for the period from 18.9.2004 to 31.3.2005 had shown profit of Rs. 34,32,042/-. For the period from 1.4.2004 to 17.9.2004, when the business was carried out in the status of firm, the assessee suffered a loss of Rs. 22,40,193/-. The loss of profit 2 3I.T.A. Nos.884/D/08, 2019/D/09 & 718/D/10 (A.Ys. 2005-06 & 2006-07) for the period from 1.4.2004 to 17.9.2004 was set off against the income earned in the individual status at Rs. 34,32,042/-. Since there was no provision under the Act vide which loss of firm could be set off against the profit of proprietary concern, the Assessing Officer required the assessee to explain as to why the loss of firm amounting to Rs. 22,40,193/- should not be disallowed as the same could not be set off against the profit of the proprietary concern.
5. In response to the query, it was submitted by the assessee that under a family settlement, Shri Mukesh Mittal decided to relinquish his share in the partnership to his own brother Shri Pramod Mittal. As per mutual understanding Shri Pramod Mittal became sold proprietor of M/s Gupta Construction Co. All assets and liabilities of the firm belonged to Shri Pramod Mittal. The business of proprietary concern was carried on in the exiting name i.e. M/s Gupta Construction Co. It was also agreed between two partners that there will not be any break in the business and all profit and loss till the date of separation will be the responsibility of new firm. Accordingly, a net profit and loss account was prepared till the date of separation just for record purposes and the entire profit/loss has been accounted in the hands of proprietary concern M/s Gupta Construction Co. In view of these facts, it was submitted that loss occurred in the business till the date of retirement of Shri Mukesh Gupta was to be set off against the profit earned during the period of proprietary concern. The Assessing Officer examined the contention of the assessee. He was of the opinion that there was no provision under I.T. Act, 1961, under which a loss of firm could be set off against income of individual. M/s Gupta Construction Co. with two partners was assessable in the status of firm and from 18.9.2004 to 31.3.2005, Shri Pramod Mittal was to be assessed in the capacity of individual as proprietor of M/s Gupta Construction Co. Since both the assessees were different, the income for both the period was assessable in their respective hands. Clause 12 of partnership deed, which provided that in case a partner wished to retire from the firm he could do so with the consent of other partners by giving at least one month's notice in writing and the business in that case could be carried on by the remaining partners in the name of the firm, the Assessing Officer in this respect observed that specific clause 12 of partnership deed was only to take care of the interest of remaining 3 4I.T.A. Nos.884/D/08, 2019/D/09 & 718/D/10 (A.Ys. 2005-06 & 2006-07) partner. The partnership firm ceased to exist on 18.9.2004. Therefore, as per provisions of section 78(2) of the I.T. Act, 1961, there was no inheritance of business which would entitle the assessee to set off the profits with the loss of predecessor firm. He, therefore, concluded that the loss suffered by partnership firm could not be set off against profit of proprietorship concern.
6. On appeal, similar arguments were made. It was submitted that the firm M/s Gupta Construction Co. was engaged in resurfacing of road and was working in CPWD, MCD, NDMC etc. There were running unfinished jobs on the date of dissolution of firm, the income of which had not been booked when it was agreed to change the constitution. This resulted in the loss in the period prior to dissolution. Moreover, Government billing generally takes place towards the end of the fiscal year. This added to the loss during the initial part of the year. The Govt. agency issued single TDS certificate for the entire period. Therefore, it was not possible to get TDS certificate separately for the work done during the year. All these factors forced the assessee to treat the firm as a single entity and declared the entire profits in the hands of the assessee. Accordingly, the return was submitted adjusting the pre dissolution loss against the post dissolution profit. In view of these facts, it was submitted before CIT(A) that the loss incurred by the firm should be adjusted against profit of the assessee.
7. The CIT(A) considered the submissions of the assessee. He observed that section 78 provides the method of carry forward of loss in the case of change of constitution of a firm or on succession. In the present case, there was neither change of constitution of the firm nor of succession. It was a case where the firm had ceased to exist and a new assessee had taken its place. Therefore, the right to carry forward and set off of losses belonging to person who suffered loss could not be set off. The CIT(A), therefore, upheld the stand taken by the Assessing Officer.
8. Before us, Ld.AR of the assessee reiterated the similar arguments as were taken before lower authorities. He submitted that since there was continuance of business, the loss suffered in the status of partnership firm could be set off against the income of 4 5I.T.A. Nos.884/D/08, 2019/D/09 & 718/D/10 (A.Ys. 2005-06 & 2006-07) proprietary concern. He placed reliance on the terms and conditions specified under the partnership deed permitting the remaining partners to carry on business of that of the partnership concern. On the other hand, Ld. Sr. DR supported the order of CIT(A).
9. We have heard both the parties and gone through the material available on record. There is no dispute about the facts that partnership firm ceased to exist w.e.f. 18.9.2004 and from 18.9.2004, the business was carried on by Shri Pramod Mittal in the status of individual. Section 78 of I.T. Act, 1961 provides the method for carry forward and set off of loss in case of change in constitution of firm or on succession. Sub-section (2) of section78 provides that where person carrying on any business or profession has been succeeded in such capacity by another person otherwise than by inheritance, nothing in Chapter-VI shall entitle any person other than the person incurring the loss to have it carried forward and set off against his income. From the provisions of section 78(2), it is clear that loss suffered by any person cannot be set off by another person. Admittedly, it is not a case of inheritance of business. The proprietorship concern has suffered loss and, therefore, the loss of the partnership firm cannot be set off against business income of individual carried on in the capacity of proprietorship concern. In a case where trader goes out of business, his right to carry forward loss is lost. The right to carry forward loss is not only personal but is a right which can only be asserted in relation to the tax payable by the predecessor in respect of profits of the trade carried on by him. It cannot devolve upon the successor merely because of the assignment or the transfer of the business, the successor in fact would be regarded as commencement or setting up a new business from the date of his succession. Such trade of the successor for the purposes of taxation would be treated as a different trade altogether. Hence, the restriction that the particular person, predecessor or successor, incurred the loss should alone be entitled to carry forward and set off against his future income. The provision of section 78(2) of the Act are unambiguous and, therefore, the loss suffered by the partnership concern cannot be set off against the profit earned by proprietorship concern. Our view is supported by the decision of Hon'ble Madras High Court in the case of Smt. S. Parvathammal vs. CIT, 163 ITR 171 (Mad.). In this case the firm constituted by two partners and was dissolved 5 6I.T.A. Nos.884/D/08, 2019/D/09 & 718/D/10 (A.Ys. 2005-06 & 2006-07) on the death of one of the partners. A new firm was constituted by the surviving partners and widow of the deceased partners. It was held that in such circumstances there was no succession by inheritance to the business of the deceased partners so as to entitle the widow of the deceased partners to carry forward and set off of loss of deceased partner. Accordingly, in our considered opinion, the CIT(A) was justified in confirming the order of Assessing Officer.
10. The next issue for consideration which is common in both the years relates to confirming the hire charges in respect of road roller. In assessment year 2005-06, the Assessing Officer disallowed the hire charges of Rs 1,11,500/- on the ground that hire charges were paid to Ms. Neena Chaddha who was an employee of the assessee. The assessee could not provide evidence of ownership of road roller by Ms. Neena Chaddha. Since there was no evidence regarding the ownership of road roller, the Assessing Officer came to conclusion that genuineness of transaction was not proved. He accordingly disallowed the amount of Rs. 1,67,220/-. In assessment year 2006-07, on identical facts, disallowance of Rs. 2,04,000/- was made on account of hire charges paid to two persons, namely, Ms. Neena Chadha at Rs. 1,44,000/- and Shri Sunil Chadha at Rs.60,000/-. Both the persons were employees of the assessee.
11. On appeal, the CIT(A) confirmed the disallowance on the ground that Ms. Neena Chadha and Shri Sunil Chadha were employees of the assessee. They could not provide any evidence in support of ownership of road roller. Therefore, the genuineness of transaction was not proved. The CIT(A) confirmed the disallowance of Rs.1,11,500/- in assessment year 2005-06 and Rs. 2,04,000/- in assessment year 2006-07.
12. Before us, Ld.AR of the assessee submitted that without road roller, the road carpeting work cannot be completed. The assessee had taken the road roller from Ms. Neena Chadha and Shri Sunil Chadha on hire and had paid hire charges to them. Merely, because they are employees of the assessee, disallowance cannot be made in the hands of the assessee. He further submitted that ownership proof will be required by the Assessing Officer of Ms. Neena Chadha and Shri Sujil Chadha and not by the Assessing 6 7I.T.A. Nos.884/D/08, 2019/D/09 & 718/D/10 (A.Ys. 2005-06 & 2006-07) Officer of the assessee. Therefore, the disallowance made by the Assessing Officer and confirmed by the CIT(A) in both the years deserves to be deleted.
13. On the other hand, Ld.Sr.DR submitted that assessee could not prove the genuineness of transaction as Ms. Neena Chadha and Shri Sunil Chadha could not produce any evidence that they owned road rollers. In the absence of existence of road roller, the payment of hire charges cannot be treated as genuine. Therefore, the CIT(A) was justified in confirming the disallowance made by the Assessing Officer in both the years.
14. We have heard both the parties. In the case before us, the assessee had paid road roller hire charges to Ms. Neena Chadha and Shri Sunil Chadha, who were the employees of the assessee in the relevant period. Ms. Neena Chadha and Shri Sunil Chadha could not produce any evidence that they had owned road rollers. In the absence of any ownership, the payment made to them cannot be treated as genuine. Therefore, in our considered opinion, the CIT(A) was justified in confirming the disallowance on account of road roller hire charges in both the years.
15. The next issue for consideration in assessment year 2006-07 relates to disallowance of the following amounts:
1.Late deposit of PF & ESI employees contribution Rs.75,00,466
2.Disallowance of water and electricity charges Rs. 54,832
3.Disallowance on account of telephone expenses Rs. 13,056
4.Disallowance on account of vehicle expenses Rs. 58,815
16. Ld.AR of the assessee submitted that Assessing Officer had made disallowance on ad hoc basis. In respect of late deposit of PF & ESI, he submitted that the payment had been made before the due date for filing of the return of income. The late deposit of employees contribution towards PF & ESI is allowable in view of decision of Hon'ble Delhi High Court in the case of CIT Vs. P.M. Electronics Ltd. 220 CTR 635(Del) if the payment is made before due date of filing of the return of income. From the assessment 7 8I.T.A. Nos.884/D/08, 2019/D/09 & 718/D/10 (A.Ys. 2005-06 & 2006-07) order as well as from the order of CIT(A), it is not clear whether assessee had paid the employees' contribution before due date of filing of the return of income except in respect of April to July, 2005. In respect of the balance amount, there is nothing on record to suggest whether the payments were made before due date of filing of the return of income. However, as per statement of Ld.AR of the assessee, the payment has been made before due date for filing of the return. We, therefore, set aside the matter to the file of the Assessing Officer with the directions to verify the payments received from employees' contribution in August, 2005 to March, 2006, whether the same have been paid before due date of filing of the return. If it is found that the assessee had made payments before the due date of filing of the return, the same will be allowable as deduction. We order accordingly. As regards employees' contribution for the month of April to July, 2005, as per assessment order, the actual date of deposit is 16th and 20th March, 2006. Therefore, the assessee had made payment before the due date of filing of the return. In respect of these payments, the assessee is entitled for relief.
17. The next disallowance is in respect of water and electricity charges. The Assessing Officer noted that assessee had maintained his house in the same building from where he runs the shop. He has, therefore, disallowed 50% of the electricity and water charges. The CIT(A) has upheld the disallowance. Before us, Ld.AR of the assessee could not produce any evidence that expenditure incurred on electricity and water charges in respect of his residence was lower than 50% of the total expenses. In the absence of any such material, we do not find any infirmity in the disallowance of 50% of such expenses. Now, coming to telephone expenses, the Assessing Officer had disallowed 1/10th of the telephone expenses in respect of his residence out of total expenses incurred at Rs.1,30,562/-. Since the assessee operates his business from his residence, 10% disallowance of telephone expenses is justified. Accordingly, we do not find any infirmity in the order passed by the CIT(A) confirming the disallowance. As regards the disallowance on vehicle expenses, the assessee incurred an expenditure of Rs.5,88,158/-. During the course of assessment proceedings, the assessee was asked to explain the justification of these expenses. The Ld.AR of the assessee simply stated that expenditure 8 9I.T.A. Nos.884/D/08, 2019/D/09 & 718/D/10 (A.Ys. 2005-06 & 2006-07) was incurred only for business purposes. However, Assessing Officer disallowed 10% of expenses for the personal use of the proprietor and family members of the assessee.
18. We have heard both the parties. The assessee has not maintained any log book and, therefore, possibility of incurring expenditure for non-business purposes cannot be ruled out. Hon'ble Madras High Court in the case of Kanthimati Plantations Pvt. Ltd. vs. State of Tamil Nadu, 215 ITR 203 .has held that in absence of a log book, the disallowance made on account of personal use will be justified. Respectfully following the decision of Hon'ble Madras High Court, it is held that Assessing Officer was justified in disallowing 10% of the vehicle maintenance expenses.
19. In the result, the appeal filed by the assessee for assessment years 2005-06 is dismissed and for assessment year 2006-07 is partly allowed.
20. Now, coming to appeal in I.TA No.718/Del./2010, the only issue for consideration relates to confirming the penalty u/s 271(1)(c) of the I.T. Act, 1961.
21. The Assessing Officer has imposed penalty in respect of set off of loss of firm amounting to Rs. 22,40,193/- against individual income, the disallowances in respect of PF & ESI contributions made by employees and disallowance on estimate basis in respect of electricity and water charges, road roller hire charges, car disallowance.
22. The Assessing Officer imposed penalty in respect of disallowance of Rs.24,65,641/-, which consists of set off of partnership firm loss of Rs.22,40,193/-; employees' contribution to PF & ESI at Rs.65,542/- and employer's contribution towards PF & ESI at Rs.22,402/-; disallowance of water and electricity charges of Rs.26,000/- and hire charges of Rs1,11,500/-.
23. On appeal, the CIT(A) noted that assessee had not submitted any reply as to why penalty u/s 271(1)(c) of the Act, should not be imposed. He had only requested that penalty proceedings may be kept in abeyance till the disposal of quantum appeal. Even in appellate proceedings, the assessee had not made any submission regarding merits of penalty u/s 271(1)(c) of the Act. The CIT(A) further noted that while deciding the 9 10I.T.A. Nos.884/D/08, 2019/D/09 & 718/D/10 (A.Ys. 2005-06 & 2006-07) quantum appeal, the CIT(A) had clearly held that assessee was not entitled to set off of loss incurred by the assessee firm against his income. In respect of addition towards hire charges, he confirmed the addition to the extent of Rs1,11,500/- by observing that payment was made to an employee of the assessee and assessee could have easily obtained proof of ownership from her. The CIT(A) further noted that in appeal, ground Nos.4 & 5 challenging the disallowance on late deposit of employees and employer's contribution to PF & ESI were withdrawn by assessee. Since assessee had chosen not to make any submissions regarding levy of penalty u/s 271(1)(c) he confirmed the penalty.
24. We have heard both the parties and gone through the material available on record. While deciding the issue on merits, we have upheld the disallowance of Rs22,40,193/- on account of loss suffered by firm which was adjusted against individual income. During the course of hearing, Ld.AR of the assessee submitted that assessee has made full disclosure. Furnishing of inaccurate particulars of income would arise when false statement is given. Nothing was suppressed. All the expenses were allowable. The loss incurred by the partnership firm was allowable as set off against income of proprietorship concern as assessee is continuing the business as provided in partnership deed. Therefore, penalty u/s 271(1)(c) of the Act is not imposable. He placed reliance on the decision of Hon'ble Supreme Court in the case of CIT Vs. Reliance Petro Products P. Ltd. 322 IT.R 158.
25. On the other hand, Ld.Sr.DR submitted that assessee had not submitted any reply before the Assessing Officer and CIT(A). Further, assessee had claimed bogus hire charges and has set off the loss of partnership concern, which is not permissible as per provisions of law. Therefore, penalty u/s 271(1)(c) of the Act is impossible.
26. We have heard both the parties and gone through the material available on record. As regards levy of penalty in respect of employees/employer' contribution to PF & ESI, the deduction is allowable if payment has been made before filing of the return of income. Moreover, the issue was debatable. Therefore, the penalty u/s 271(1)(c) of the Act cannot be imposed in respect of addition on account of employees/employer' contribution to PF & ESI.
1011I.T.A. Nos.884/D/08, 2019/D/09 & 718/D/10 (A.Ys. 2005-06 & 2006-07)
27. Now, coming to penalty imposed in respect of hire charges of Rs1,11,500/-, paid to Ms. Neena Chadha, the genuineness of transaction was not proved. Ms. Neena Chadha was an employee of the assessee. The assessee alleged to have made payment on account of hire charges of road roller, but the ownership of the same was not proved by the assessee. It is not a case where the party is not cooperating with the assessee. She is in the employment of the assessee and, therefore, there could not have been any difficulty in furnishing the documents relating to the ownership of the road rollers. From these facts, it is evident that the assessee had not proved the genuineness of the transactions. Therefore, assessee had claimed expenditure which was not allowable as deduction. As regards setting off of loss of the firm against the individual income, the provisions of section 78(2) are clear and unambiguous. The loss incurred by an assessee cannot be set off against the profit earned by another assessee. A firm and an individual are two different assessees. Therefore, the claim made by the assessee setting off of the loss of erstwhile partnership firm against the income of the assessee was not allowable as deduction. We have upheld the disallowance made by the Assessing Officer and upheld by the CIT(A). In view of these facts, it is clear that the assessee had made a false claim which was not allowable as deduction. Explanation (1) to section 271(1)(c) of the Act provides for two situations under which the additions made will be deemed to represent the income in respect of which particulars have been concealed. Clause (A) of the Explanation(1) to section 271(1)(c) of the Act takes into the ambit the cases, where a person fails to offer an explanation or offers an explanation which is found by the Assessing Officer or CIT(A) or Commissioner to be false whereas under clause (B), a person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and all the material facts relating to the same and material to the computation of his total income have been disclosed by him. In assessee's case, the claim of set off of partnership firm's loss against the individual income is blatantly wrong. It is not a case of bona fide explanation that the assessee had claimed set off of loss under bona fide belief that set off of brought forward loss was allowable. Therefore, the addition made by Assessing Officer will amount to represent the income in respect of which particulars have been concealed.
1112I.T.A. Nos.884/D/08, 2019/D/09 & 718/D/10 (A.Ys. 2005-06 & 2006-07)
28. Hon'ble Delhi High Court in CIT Vs. Har Prasad & Co. Ltd. 328 ITR 53 (Del.) has held that findings given in assessment proceedings are relevant and have probative value. Where the assessee produces no fresh evidence or presents any additional or fresh circumstances in penalty proceedings he would be deemed to have failed to discharge onus placed on him and the levy of penalty would be justified. Even if there is no concealment of income or furnishing of inaccurate particulars, but on the basis thereof the claim which is made is ex facie bogus, it may still attract penalty provisions. The Explanation appended to section 271(1)(c) of the Act entirely indicate the element of strict liability on the assessee for concealment or for giving inaccurate particulars while filing return. The object behind enactment of section 271(1)(c) read with the Explanations indicate that section had been enacted to provide for remedy for loss of revenue. The penalty under that provision is a civil liability. Willful concealment is not an essential ingredient for attracting civil liability as it is the case in the matter of prosecution under section 276C of the Act.
29. The decision relied upon by the ld. AR of the assessee in the case of CIT Vs. Reliance Petro Products (supra) is not applicable to the facts of the assessee's case as the information given in the return of income has been found to be incorrect. It is not a case merely of making incorrect claim for deduction, but it is a case of bogus claim for set off of loss of firm against income of individual. It is also a case of bogus claim in respect of road roller hire charges. Therefore, the issue is squarely covered by the decision of Hon'ble Delhi High Court in the case of Har Parshad & Co. Ltd. (supra). Respectfully following the decision of Hon'ble Delhi High Court, it is held that penalty under section 271(1)(c) is leviable in respect of set off of loss of Rs.22,40,193/- and bogus claim for payment of road roller hire charges to Ms. Neena Chadha. We, therefore, uphold the order of the ld. CIT (Appeals).
1213I.T.A. Nos.884/D/08, 2019/D/09 & 718/D/10 (A.Ys. 2005-06 & 2006-07)
30. In the result, the appeal filed by the assessee in ITA. No. 718 (Del) of 2010 in respect of assessment year 2005-06 is partly allowed.
Pronounced in the open court on : _15.07. 2011.
Sd/- Sd/-
[RAJPAL YADAV] [K.D. RANJAN]
JUDICIAL MEMBER ACCOUNTANT MEMBER
Date: 15th July, 2011
SKB
Copy forwarded to: -
1. Appellant
2. Respondent
3. CIT
4. CIT (A)-XXVIII, New Delhi.
5. CIT( ITAT)
By Order,
Deputy Registrar,
ITAT, Delhi Benches
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