2012 (8) TMI 121 - AT - Income Tax

Tribunal: Revenue appeal partially allowed, Section 40(a)(ia) issue remanded. Sales increase impacts profit rate.

The Tribunal partially allowed the Revenue's appeal, directing a restricted trading addition and remanding the Section 40(a)(ia) disallowance issue for ... Gross profit addition after rejecting the books of account - CIT(A) deleted the addition - Held that:- The appellant had already included additional income of Rs. 22,02,339/- in its audited profit & loss account and after inclusion of such income, the appellant had filed the return of income at total income - the additional income so declared is going to effect the net profit rate shown by the assessee, however, there is no impact on the trading results or gross profit so earned by the assessee by inclusion of such additional income - as there is a substantial increase in sales during the year under consideration of 3.48 times as against sale of earlier year - the settled legal proposition is that with increase in sale volume, the assessee has to make some sacrifice on the part of gross profit rate, meaning thereby with increase in overall turnover, even though over all gross profit will increase, but the gross profit rate will fall to certain extent - additional income of Rs. 22.02 crores surrendered by the assessee, which has resulted into increase net profit of the assessee direction to AO to restrict the trading addition to the extent of Rs. 1.00 lac Addition in respect of payments made without deduction of tax - CIT(A) deleted the addition - Held that:- No justification in CIT(A)'s Order in deleting the disallowance in so far as the goods transported by the transporter and payment made by the assessee for the same itself amounts to a contract. It is not necessary that such contract should also be in writing. The work of transporter in carrying the goods and act of the assessee in making payment for such transportation of goods itself amounts to a contract on which the assessee was liable to deduct tax u/s 194C(2) - restore the matter back to the file of AO with a direction to recompute the amount of disallowance with reference to the amount which remained payable at the end of the year - partly in favour of revenue. Issues Involved:1. Deletion of gross profit addition made by the Assessing Officer after rejecting the books of account.2. Addition under Section 40(a)(ia) for payments made without deduction of tax.Detailed Analysis:1. Deletion of Gross Profit Addition:The Revenue's first grievance pertains to the deletion of gross profit addition by the CIT(A) after the Assessing Officer (AO) rejected the books of account. The AO observed discrepancies in the books and applied the gross profit rate of the previous year, leading to a trading addition. The CIT(A) upheld the rejection of the books under Section 145(3) but deleted the addition, noting that the appellant included an additional income of Rs. 22,02,339 in its audited profit and loss account. The CIT(A) found that this additional income had a direct nexus with the trading results, leading to a gross profit rate of 5.74% for the year under consideration, which was better than the previous year's 5.43%. The CIT(A) concluded that without specific findings of suppression of sales or overstatement of expenses, there was no justification for further addition. The Tribunal, however, noted that while the additional income affected the net profit rate, it did not impact the gross profit. Given the substantial increase in sales and better yield, the Tribunal directed the AO to restrict the trading addition to Rs. 1 lakh, acknowledging the need for some sacrifice in gross profit rate with increased sales volume.2. Addition Under Section 40(a)(ia):The AO also made an addition under Section 40(a)(ia) for payments made without tax deduction. The CIT(A) deleted this addition, observing that the AO did not record definite findings on the appellant's liability to deduct tax under Section 194C. The CIT(A) noted that payments were made to group leaders of laborers, not creating a principal-contractor relationship. The Tribunal, however, found no material suggesting direct payments to individual laborers below the prescribed limit. It emphasized that even oral contracts require tax deduction if payments exceed the prescribed limits. The Tribunal cited its previous decision in Durgesh Shukla, affirming that the act of transporting goods and making payments amounts to a contract, necessitating tax deduction under Section 194C. The Tribunal also considered the Special Bench decision in Merilyn Shipping and Transports, which held that Section 40(a)(ia) applies only to amounts payable at year-end, not to amounts already paid. Consequently, the Tribunal restored the matter to the AO to recompute the disallowance, excluding amounts already paid and not outstanding at year-end.Conclusion:The Tribunal partially allowed the Revenue's appeal, directing a restricted trading addition and remanding the Section 40(a)(ia) disallowance issue for recomputation based on amounts payable at the end of the year.