TaxTMI 
TaxTMI 
2016 (5) TMI 1160
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.... in this appeal:- 1. The learned Commissioner of Income-tax (Appeals)-II, Baroda has erred in law and on facts of the case by confirming the addition of Rs. 21,01,300/- in respect of deposits received from Sanjay N. Patel of Rs. 7,51,300, from Jayaben Patel of Rs. 8,50,000/- and from Bhartiben Patel of Rs. 5,00,000/- u/s 68 of the Income-tax Act, 1961. 2. The learned Commissioner of Income-tax (Appeals)-II, Baroda has erred in law and on facts of the case by confirming the disallowance of Rs. 3,79,616/- in respect of interest paid to depositors. 3. The learned Commissioner of Income-Tax (Appeals)-II, Baroda has erred in law and on facts of the case by confirming the disallowance of Rs. 22,70,824/- @ 15% of Rs. 1,51,38,829/- paid to five sub-contractors. 4. The learned Commissioner of Income-tax (Appeals)-II, Baroda has erred in law and on facts of the case by confirming the disallowance of Rs. 43,18,175/- made u/s 40(ia) of the Income-tax Act, 1961 holding the same as commission paid by the appellant to Patel Infrastructure Pvt Ltd and for non-deduction of tax at source there from. 3. Briefly stated facts, as culled out from the records, are that the assessee is an ind....
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....of Rs. 7,51,300, from Jayaben Patel of Rs. 8,50,000/- and from Bhartiben Patel of Rs. 5,00,000/- u/s 68 of the Income-tax Act, 1961. 2. The learned Commissioner of Income-tax (Appeals)-II, Baroda has erred in law and on facts of the case by confirming the disallowance of Rs. 3,79,616/- in respect of interest paid to depositors. 6.1 The ld. Authorized Representative for the assessee made following submissions with regard to the addition of deposits of Rs. 21,01,300/- u/s. 68 of the Income-tax Act. 2.1 The Assessing Officer has made additions of (i) Rs. 7,51,300/- received from Shri Sanjay N. Patel (ii) Rs. 8,50,000/- received from Jayaben P. Patel and (iii) Rs. 5,00,000/- from Bhartiben D. Patel - totaling to Rs. 21,01,300/- as unexplained cash credits u/s 68 of the Income Tax Act, 1961. 2.1.1 In response to the show cause notice in this regard, the Appellant submitted detailed explanation vide letter dated 24.12.2009 stating that credit balance in the bank account of Sanjay N. Patel HUF of Rs. 7,51,300/- with Corporation Bank as on 01.04.2006 was out of labour payments received by the said HUF in March 2006. The said HUF was withdrawn Rs. 5,00,000 on 13.07.2006 for giving....
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....name of Bhartiben D.. Patel amounting to Rs. 5,00,000/- advanced by Bhartiben D. Patel to the Appellant, it is submitted that loan by way of cheque of Rs. 5,00,000/- was received on 10/7/2006 by the Appellant. This payment is duly reflected as withdrawal in the copy of bank account of Bhartiben D.. Patel with Canara Bank. Further, confirmation of Bhartiben D. Patel along with PAN No. j and copy of Income-tax Return have also been filed. Source of deposit made in the account of Bhartiben D. Patel have been duly explained as under : 31/03/2006 Loan from Sudhir N. Patel (HUF) Rs. 2,00,000 31/03/2006 Loan from D.N.Patel (HUF) Rs. 3,00,000 Total Rs. 5,00,000 2.3.2 Thus, source of loan received from Bhartiben D. Patel has been duly explained. Therefore, addition made by the Assessing Officer by way of cash credit u/s 68 of the Income Tax Act, 1961 of amount of Rs. 5,00,000/-- is totally unjustifiable and needs to be deleted. For this purpose, we rely on the following decisions: (i) DCIT v. Rohini Builders [256 ITR 360 (Guj)] (ii) ; Claris Lifesciences Ltd. v. ACIT [111 TTJ 902 (Ah'd)] (iii) Nemi Chand Kothari v. CIT & Anr. [264 ITR 254 (Gauh.)] (iv) CIT v. Dia....
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....ear has been disallowed u/s 68 of the Act. We further observe that there was an opening credit balance on unsecured loan standing in the books of accounts of the assessee in the name of Sanjay N. Patel HUF at Rs. 9,20,553/-, in the name of Jayaben N. Patel at Rs. 6,06,151/- and in the case of Bharti D. Patel at Rs. 14,09,318/-. This means that all these parties have not given unsecured loans to the assessee for the first time, rather they have a regular credit balance of unsecured loans given to the assessee since past which gets strengthen by the copies of the ledger account available in the paper-book. 7.1 We further observe that the ld. Assessing Officer, while going ahead with the impugned addition of Rs. 21,01,300/-, was having a view in his mind that the assessee has given sub-contract to the related parties covered 40A(2)(a) in such a way that these related parties will show the sub-contract charges received by them in their respective regular return of income and will show income @ 8% by covering themselves under the provisions of Section 44AD of the Income-tax Act and on the other hand, the assessee will claim them as an expenditure against his total receipts as civil con....
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...., as per ld. Assessing Officer, these parties did not had sufficient availability of finance for incurring the expenditure for completion of sub-contract work given to them and just by taking the shelter of provisions of Section 44AD they are able to show the income @ 8% on subcontract charges received on the assessee and no other regular source of income thereby paying a very meager amount of tax and that too gets adjusted against the tax deducted at source by the assessee on the sub-contract charges paid to these parties. 7.3 We further observe that, while completing the assessment, the ld. Assessing Officer has not touched upon the actual activities carried out by the assessee and has not appreciated that the assessee is regularly filing its return of income, regularly getting its accounts audited u/s 44AB of the Act and completing the contracts work received by him from Patel Infrastructure Pvt Ltd, Vraj & Vaj Constructions, Essar Construction (India) Limited. The ld. Assessing Officer has also not appreciated that there are detailed work orders from these three parties from whom contract work has been received and the same have been completed by the assessee to their satisfac....
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....h relates to disallowance of Rs. 3,79,616/- in respect of interest paid to depositors, is also going in favour of the assessee as the same is consequential, because as we have already held that no addition is called for towards the unsecured loans of Rs. 20,01,300, then certainly assessee will be eligible for claiming interest of Rs. 3,79,616/- in respect of interest paid to depositors. Accordingly, this ground of the assessee is also allowed. 8. Ground No. 3 of the assessee's appeal reads as under:- The learned Commissioner of Income-Tax (Appeals)-II, Baroda has erred in law and on facts of the case by confirming the disallowance of Rs. 22,70,824/- @ 15% of Rs. 1,51,38,829/- paid to five sub-contractors. 8.1 In this regard, the ld. Authorized Representative for the assessee submitted as under:- "4.1 The Assessing Officer vide letter dated 21/12/2009 called upon the Appellant to explain as to why 15% of the labour expenses to five parties should not be disallowed. 4.2 The Appellant, vide letter dated 24/12/2009, duly explained that all the labour payments were genuine and were incurred with reference to sub-contract work carried out by the Appellant. The payments made wer....
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....f the five parties, Bharat Hirapara is not a related party u/s 40A(2)(a) of the Income-tax Act as submitted by the ld. Authorized Representative which reduces the impugned payment to related parties to Rs. 1,21,62,179/-. The only reason given by the ld. Assessing Officer in its order was that since the payments are made to related or known parties, the assessee can rely on them and can request them to wait for the due payments and therefore, took a view that there is no iota of doubt that labour expenses are fluctuated to the cost as related parties can wait for the payment only because it is the assessee who is doing everything and therefore making an estimated addition of Rs. 22,70,824/-. This has been a settled view that the expenditure incurred in a business or profession for which payment has been or is to be made to the tax payer's relatives or associate concerns is liable to be disallowed in computing the profits of the business or profession to the extent the expenditure is considered to be excessive or unreasonable and further the reasonableness of any expenditure is to be judged having regard to the fair market value of the goods, services or facilities for which the paym....
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....ed commission payment made by the assessee to Patel Infrastructure Pvt Ltd (PIPL) (who is the main contractor and the appellant has taken the sub-contract work for the whole contract work taken by PIPL from Government), has observed as under in the assessment order:- "... PIPL is showing the work done in his books. He has deducted TDS on the full amount. Assessee has attached the same TDS certificate for the purpose of showing prepaid taxes. In his audited books also, he is taking the entire amount as work done and from there he is substracting sub-contract charges. In the whole discussion, it is PIPL which gets a clean chit and not the assessee. If PIPL is giving contract on back to back basis then he is charging the commission through whatever name he might choose and instead of taking from the assessee after paying the entire amount, he is deducting from the payments. Thus, there is commission payment to PIPL for which assessee ought to have deducted TDS which he has failed to deduct. The plain reading of section 194H makes it very clear that any person shall, at the time of credit of such income to the account of payee or at the time of payment.... whichever is earlier, deduc....
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.... and the appellant is not in the nature of a proper sub contract, the argument of the appellant is not sustainable. It is not explained that if the money retained by the PIPL is not in the nature of commission, then what it is. After all PIPL is not doing anything else except acting in reality as a frontman of the appellant before the principal contractee. The Assessing Officer has rightly pointed out that there has been default in so far as the TDS provisions are concerned and he has rightly made the disallowance. This ground is rejected." 10.3 Aggrieved, the assessee went in appeal before the Tribunal. 10.4 With regard to disallowance of Rs. 43,18,175/- u/s 40(ia) of the Act, the ld. Authorized Representative submitted as under:- "5.1 The Assessing Officer has stated that the Appellant has entered into subcontract agreement with Patel Infrastructure Pvt. Ltd. (PIPL) on back to back basis and deduction from gross bill received by PIPL represented commission on which the Appellant has failed to deduct TDS u/s 194H of the I.T. Act, 1961 and, therefore, payment deducted from gross billing was liable to be disallowed u/s 40(ia) of the I.T. Act, 1961. 5.2 It is submitted that P....
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....by ld. Assessing Officer which has been further confirmed by the ld. CIT(A). Reason for the peculiarness is that in the given facts a contractor named Patel Infrastructure Pvt Ltd (PIPL) was awarded a contract from the Government and PIPL entered into a sub-contract with the appellant and sub-contracted the work on back to back basis at 89.5% of the original contract value. Thereafter, the appellant completed the sub-contract work and in the audited financial statements it had shown 89.5% of the original contract value as its gross revenue heads. On the other hand, PIPL treated the 89.5% of the contract value as its expenditure and accordingly deducted tax at source @ 1 % u/s 194C of the Act. Copy of such agreement entered into with PIPL is placed in the paper-book which undoubtedly makes it clear that the appellant is working as a sub-contractor to PIPL. Now, surprisingly ld. Assessing Officer has taken a view that the 10.5% of the original contract price which PIPL has not passed over to the appellant (because the same has been shown as income by PIPL) represents commission which the appellant has indirectly paid to PIPL for getting the sub-contract from PIPL and then ld. Assessi....