AI Drafter 
TaxTMI 
TaxTMI 
2017 (10) TMI 675
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....proceedings in the shape of letter dated 14.11.2015 without remanding the matter to the AO or making any enquiries on his own. 2. Whether the Ld. CIT(A) was right in law and fact in deleting the addition amounting to Rs. 2,75,000/- on account of addition of assets (Car) without appreciating the finding of the Assessing Officer that the assessee has failed to explain the source and mode of the payment made for purchase of the said car. 3. Whether the Ld. CIT(A) was correct in law and fact in allowing relief amounting to Rs. 20,44,961/- out of total addition of Rs. 38,66,917/- on account of non-payment of Work Contract Tax (WCT) despite the fact that the assessee had not disputed the liability to the extent of Rs. 85,16,917/- on account of WCT which is also supported with the figure as reflected in the Balance sheet duly audited. 4. Whether the Ld. CIT(A) was correct in law &fact in deleting the addition amounting to Rs. 2,14,000/- for the purchase of construction material from M/s Raizada Brick Kiln despite the fact that the said party had confirmed to the AO that no such sales were made by it to the assessee. Also, it is clear that the assessee was in the....
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.... the original deed which was registered in the Court of law cannot be overruled by a Notary. 8. Whether the Ld. CIT(A) was correct in law & fact in deleting the addition of Rs. 3,42,166/- despite the fact that M/s Ruchi Infotech has admitted that nothing outstanding is receivable from the assessee." 3. The assessee has also filed cross objections to the appeal filed by Revenue which are supportive of Ld. CIT(A) order. 4. The brief facts of the case are that assessee filed a return of income declaring net income of Rs. 16,89,468/- from the business activity of civil construction. The case of the assessee was selected for scrutiny and during assessment proceedings, the Assessing Officer made following additions. (i) Addition of account of Unsecured loan of Rs. 1,53,458/-. (ii) Addition on account of fixed assets (Car) Rs. 2,75,000/- (iii) Addition on account of Work Contract Payments to Rs. 38,66,917/- (iv) Addition on account of bills Rs. 8,42,192/-, (v) Addition on account of static creditors to Rs. 26,60,270/- (vi) Addition on account of disallowance of expenditure u/s 40A(i)(ia) for non deduction of tax at sourc....
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....r:- "The appellant submits that it received loan for purchase of JCB 3DX excavator from M/s Srei Equipment Finance Limited, Kolkata. The financier charged additional interest/overdue charges over and above the loan amount. This led to a dispute between the parties and the appellant stopped crediting interest/overdue charges to the account of the financier in its books of account and neither claimed expenses on that account. The loan is still payable by the appellant and financier is still demanding his dues. Copy of a recent letter dated 14.11.2015 received from the financier demanding an amount of 879505.45 is enclosed for your perusal (Page 1). This proves that the debt is not unexplained as alleged by the Ld. AO and is still payable by the appellant. As soon as the parties reach a settlement, the outstanding balance including additional charges if any shall be repaid. The appellant therefore requests your good self to delete the addition of Rs. 153458." I have considered the assessment order and the submissions made by the appellant stated as above. The AO has made the addition on the ground that the assessee has failed to establish the genuineness of the balan....
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....tted as under:- "The appellant submits that it purchased a second hand Tata Indigo car from one Sh. Yakoob Khan for a consideration of Rs. 275000/-. The Ld. AO alleged that the entry for purchase of car was not shown in the books of account maintained by the appellant. It is submitted that the entry for purchase of car was duly reflected in the books of account and the balance sheet of the appellant which was produced before the Ld. AO at the time of assessment. Copy of sale agreement entered with the seller was also furnished to the Ld. AO which he acknowledged in last para of page 5 of the assessment order. Copy of the same is also enclosed for your perusal. (Page 2-3). Now since the entry for purchase of car is duly supported with an affidavit and duly entered in the books of account, it is prayed that the addition of Rs. 275000/- be deleted." I have considered the above addition made by the AO. I have also considered the submissions made by the appellant. The AO has stated in the assessment order that no evidence was given in support of addition of car amounting to Rs. 2.75 lacs in the fixed assets schedule and the sale deed produced by the assessee and duly n....
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....d the assessee pay this amount when it was the liability of U Flex, the assessee replied that there was understanding between the assessee and the U Flex that this liability will be discharged by the assessee out of payment received from M/s. U Flex. Since, M/s. U Flex paid only a sum of Rs. 46,50,000/- to the assessee, the same was deposited in the Govt, account on account of WCT. Not convinced with the reply filed by the assessee, the AO, allowed only Rs. 46,50,000/- and added back the remaining amount of Rs. 38,66,917/- on account of unpaid work contract tax( WCT) under section 43B of the Income Tax Act. During the appellate proceedings the appellant has submitted as under:- "The appellant submits that it entered into works contract with M/s U Flex. During the year under consideration, the appellant was to receive an amount of Rs. 8516917/- from M/s U Flex on account of works contract tax (WCT) in addition to the contract receipts. This WCT was to be deposited to the account of the Govt, by the appellant. But out of the total WCT amount of Rs. 8516917/- the appellant was able to deposit Rs. 4650000/- only. The shortfall in depositing WCT was due the fact that t....
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....rk contract Tax. The appellant in his submission, made during the appellate proceedings, has not disputed the amount actually paid but has claimed that the section 43 B of the Act will not apply in his case and cited the Hon'ble Bombay High Court decision in the case of CIT vs. Ovira Logistics P Ltd. 377 ITR 129 and Hon'ble Delhi High Court decision in the case of CIT vsTTJoble & Hewitt (I) (P) Ltd. 305 ITR 324 in support of his claim. I have gone through both the decisions cited by the appellant. The Hon'ble Delhi High Court in the case of CIT vs. Noble & Hewitt (I) (P) Ltd. 305 ITR 324 has held that "when the assessee is following mercantile system of accounting and is not paying to Government part of service tax and has not debited the amount to the P & L A/c as an expenditure nor did the assessee claim any deduction in respect of the amount, the question of disallowing the deduction not claimed would not arise." Similarly, Hon'ble Bombay High Court in the case of CIT vs. Ovira Logistics P Ltd. 377 ITR 129 has held as under:- "Having perused the aforesaid decisions, we are of the view that section 43B does not contemplate liability to p....
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....terial from M/s. Raizada Brick Kiln. Since this expenditure did not pertain to the assessee's business, the AO disallowed the same being wrongly claimed. Further, the AO, found that the assessee has failed to produce bills allegedly issued by M/s. Aggarwal Steel Rolling Mills representing purchase of construction material which were recorded in the books of account on 13/08/2011 and 06/09/2011 amounting to Rs. 3,28,725/- and Rs. 2,99,467/- respectively. When the AO, issued the notice u/s. 133(6) to the said firms, they denied to have issued any such bills or sold any such material to the assessee firm. The AO, therefore, disallowed a sum of Rs. 2,14,000/-, 3,28,725/- and Rs. 2,99,467/- totaling to Rs. 8,42,192/- and added to the income of the assessee. The appellant, on the other hand, has claimed that it had purchased construction material from M/s. Raizada Brick Klin for a consideration of Rs. 2,14,000/- for its construction business. However, inadvertently, the seller issued the bill in the name of Ch. Wali Mohd who is one of the partners of the assessee firm. Sh. Ch. Wali Mohd. has already given undertaking that he has not claimed this expenditure in his books of a....
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....pper, the unit has been closed since long and no confirmation could be made. The AO, therefore, asked the assessee to submit its reply on the proposed addition. In response to that the assessee submitted that the amounts shown in the above table 'as payable' against the creditors are not static and are actually payable. There is no cessation or remission of liability shown against them. The assessee further submitted that it is a fact that the assessee firm is not dealing with these parties and has withheld the payments because of working capital crunch at that time. The replies not received from these parties do not mean that the liability has ceased to exist or has been remitted. The AO, however, was not convinced with the reply of the assessee and added back the entire amount of Rs. 26,60,270/- to the total income of the assessee u/s. 41(1) of the Income tax Act. The appellant, on the other hand, in his submission made during the appellate proceedings has stated as under:- "The appellant submits as under: - The Ld. AO has made additions of Rs. 2660270/- u/s 41(1) on account of static creditors. Section 41(1) of the Income Tax Act, 1961 reads as....
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....ion thereof c) Such amount or benefit is obtained by the assessee; and d) Such amount or benefit is obtained in a subsequent year. Only if all these conditions are fulfilled section 41(1) gets attracted. Moreover the amounts are added to the income of the previous year in which the liability ceases or remits or the benefit is received by the appellant. In the present case; neither the liability has ceased to exist nor has the appellant written off these amounts in its books of account as provided by Explanation-1 above. All the balances are shown as payable in the books of account. Copies of account of all these creditors showing that there were no transactions during the year are enclosed (Page 28-29). Moreover, the Ld. AO had not brought anything on record to prove that any amount or benefit had been obtained by the appellant during the year under consideration against liabilities which is allegedly ceased to exist. It is also an established proposition of law that onus is on the AO to establish that any benefit has accrued to the appellant against alleged liabilities during the year under consideration. Since the Ld. AO has failed to ....
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.... Rs. 1,51,68,9877- have been made to petty contractors but no TDS has been deducted as required under the provisions of section 194C of the Income tax Act. The AO, therefore, proposed to make addition u/s. 40(a)(ia) of the Income tax Act and asked the assessee to explain the reasons for non-deduction. The assessee in his reply stated as under:- "The assessee has made payments to certain persons who have been mentioned as P/C (petty contractors) in the books of accounts. These persons are not sub-contractors and the payments were made on account of labour charges. The assessee hired several hundreds of labourers for executing contract works and the persons named herein were responsible for disbursal of payments to them and for looking after these persons. The assessee did not enter into any sub-contract with any person and all the workers were directly employed by the assessee. Since there was no subcontract and the payments were made on account of labour, the provisions of section 40(a)(ia) are not applicable and the expenditure is prayed to be allowed." The AO was not convinced with the above reply and added this sum of Rs. 1,51,68,987/- u/s 40 (a) (ia) of the Ac....
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....ve, it is prayed that the disallowance made u/s 40(a)(ia) be deleted." I have considered the reasons given by the AO for the said addition and also the submission made by the appellant. After considering all aspects involved in this case, the explanations given by the appellant appear to be correct. It is a well known fact that in a civil contract business payments to labourers are made through 'Labour Mates' who maintains and keeps the muster rolls and disburse the payment on the basis of the work actually executed by them either on daily or weekly basis. This system is widely followed across the country. Regarding the cash payment, the payments are always made to the labourers in cash as it is not possible for the daily wagers to accept payments by cheques. What happens on the ground level that 'labour mate' gets the money from the contractor and disburse the same to the labourers on work sites. Section 194C (1) of the Income Tax Act provides that any person responsible for paying any sum to any contractor for carrying out ant work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and a speci....
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....aw. During the appellate ^proceedings the appellant has submitted as under:- "The appellant partnership firm had entered into supplementary partnership deed dated 01/04/2007 (mentioned as 01/04/2008 in the assessment order) (Page 59) which provided for payment of interest on capital to partners as per the provisions of section 40(b)(v) of the Income Tax, 1961. This deed was notarised by Sh. Mohinder Gupta who was the counsel of the appellant during assessment proceedings. The Ld. AO observed that the counsel of the assessee himself notarised the deed. It is submitted that Sh. Mohinder Gupta being an advocate notary was duly licensed to notarise the deed and there is nothing illegal in his doing so. The Ld. AO also pointed out that the earlier deed was duly registered in court of law whereas the supplementary deed was notarised only. It is pertinent to mention here that section 40(b) nowhere mandates that the partnership deed has to be registered in a court of law. It only prescribes that the partnership deed should be a written document. Moreover when the appellant submitted before the Ld. AO that there has been no change in constitution of the firm> it meant that....
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....ssee for Rs. 49,954/-. The last and final entry resulting to 'NIL' balance outstanding is for Rs. 14,956/- being cash payment which was recorded on 22/12/2008. Thus, according to the AO, the assessee has not done any transaction after 22/12/2008 as confirmed by M/s. Ruchi Infotech Systems and, therefore, he added a sum of Rs. 3,42,166/- to the total income of the assessee u/s. 68 of the Income tax Act. During the appellate proceedings the appellant submitted as under:- "It is submitted that the appellant has shown a sum of Rs. 342166/- as payable to M/s Ruchi Infotech Systems. The Ld. AO issued notice u/s 133(6) to M/s Ruchi Infotech Systems. The Ld. AO noted in his assessment order that the said party has informed that there was nothing outstanding being receivable from the appellant. On this basis, the Ld. AO added the amount standing to the credit of M/s Ruchi Infotech Systems as unexplained credits u/s 68. It is submitted that the Ld. AO did not provide the appellant any opportunity to cross-examine the party on whose statement he relied on to make the addition. This is against the principles of natural justice and the additions made on this basis are ....
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....ice as has been held by Hon'ble Delhi High Court in the case of Vijay Kumar Ahuja Vs. ACIT ITA NO. 5856/Del/2012. The appellant has also submitted that alternatively, if the same is to be added, it can't be added u/s. 68 of the Income tax Act if these creditors are coming from earlier years. I have considered the decisions of the Hon'ble High Courts as quoted by the appellant in support of his case. The addition made by the AO only on the basis of the statement given by M/s Infotech cannot be sustained as it goes against the principle of natural justice because the appellant was not provided the opportunity to cross-examine M/s Ruchi Infotech. Otherwise also, Hon'ble Courts have already held (supra.) that the question whether the liability is actually barred by limitation is not a matter which can be decided by considering the assessee's case alone but it is a matter which has to be decided only if the creditor has stated that the liability has ceased to exist because the creditor may enforce the debt or liability after expiry of sometime then it would not be possible for the assessee to pay back the outstanding balance. Though, M/s Ruchi Infotech has s....
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....e Act. The Ld. DR submitted that each bill issued by these petty Contractors exceeded rupees in lacs and therefore, assessee was required to deduct tax at source. It was submitted that the Ld. CIT(A) has wrongly allowed the relief by holding that the payments were made through labour mates who maintained the Muster Rolls and distributed wages to various workers. As regards addition on account of interest on capital the Ld. DR submitted that partnership deed did not contain any provision for payment of interest to partners on thier capital and the alleged supplementary partnership deed was attested by the Advocate of the assessee himself. He submitted that original partnership deed was registered in Court of Law whereas the supplementary deed was notarized only. He submitted that the Ld. CIT(A) has allowed relief on the basis that Advocate was competent to notarize a document and has overlooked the facts that the supplementary deed was not sighed of by all the parties. As regards the addition on account of Ruchi Infotec System, the Ld. DR submitted that the Assessing Officer during the assessment proceedings had observed that first transaction was recorded on 20.12.20104 and asse....
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....itted that by mistake the bills was raised in the name of partner and partner had submitted an undertaking that he had not claimed the expenses and therefore, the Ld. CIT(A) has allowed the relief. As regards deletion of addition of Rs. 26,60,270/- on account of static creditors by invoking the provisions of Section 41(1) of the I.T. Act, the Ld. AR submitted that the onus was on the Assessing Officer to establish that any benefit had accrued to the appellant against these liabilities and moreover it was submitted that assessee had not written off of the creditors. Reliance in this respect was placed in a number of case laws as discussed by Ld. CIT(A) and therefore, it was prayed that the order of Ld. CIT(A) in this this respect be upheld. As regards deletion of addition for non deduction of tax, the Ld. AR submitted that assessee is engaged in the business of executing works contract which requires engagement of labourers. Labour mates are appointed who keeps a record of the work done by each labourers and the payments are made to various labourers employed at various sites through these mates. It was submitted that it is a regular practice in the business of civil construction....
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....merely made the addition as the Accountant of Firm was unable to provided information like PAN and IT particulars. While making addition the Assessing Officer overlooked the fact that the assessee had not obtained loan during the year under consideration but it was outstanding from the earlier years which remained payable due to a dispute between the parties. The Ld. CIT(A) has taken a correct view and has rightly deleted the addition. The Objection of Ld. DR that Ld. CIT(A) accepted the fresh evidence in the form of letter dated 14.11.2015, we find that this argument has no force as the amount was already reflected in the balance sheet which itself proves the existence of liability. Therefore, we do not find any infirmity in the order of Ld. CIT(A) and therefore, Ground No.1 is dismissed. Addition of account of the purchase of second hand Car. The assessee had purchased a second hand Car for a sum of amount of Rs. 2,75,000/- which it had reflected in its balance sheet and for which he made entries in the books of accounts. The copy of ledger account of Car is placed at PAPER BOOK-4. The Assessee had claimed an amount of Rs. 20,625/- as depreciation and was allowed depreca....
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.... from M/s Raizada Brick Kiln In this respect, we find that that this addition was deleted by Ld. CIT(A) as the partner of the assessee had submitted an affidavit claiming therein that the bill raised by Raizada Brick Kiln to the extent of Rs. 2,14,000/- was not claimed by him in his individual books of accounts. The partner of the assessee firm was also engaged in the construction business and the seller issued the bill in the name of partner. In fact this bill belonged to the assessee firm as the payment was also made from the books of accounts of assessee and it was not claimed as expenditure in the proprietorship business of the partner and therefore, the Ld. CIT(A) has rightly deleted the addition. In view of the above Ground No.4 is dismissed. Addition on account of Static Creditors. As regards deletion of addition on account of Static creditors, we find that the Assessing Officer during assessment proceedings noted that there were certain creditors the balance of which was outstanding for last more than three years and there was no transaction between the assessee and creditors and neither any interest has been paid and creditors had also not demanded the outstanding....
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....vious year. Explanation 1. - For the purposes of this sub-section, the expression 'Loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof shall include the remission or cessation of any liability by a unilateral act by the first mentioned person under clause (a) or the successor in business under clause (b) of that sub-section by way of writing off such liability in his accounts." 15. Indisputably, Explanation 1 to section 41(1) of the Act, which was inserted, w.e.f 01.04.1997 is not applicable, as the assessee has not written off the liability to pay M/s Elephanta Oil & Vanaspati Ltd. in its books of account. 16. The Supreme Court in the case of CIT v. Sugauli Sugar Works (P). Ltd. (1999) 236 ITR 5l8/102 Taxman 713 has held that section 41(1) contemplates obtaining by the assessee an amount either in cash or any other manner or any benefit by way of cessation or remission of liability. In order to come within the sweep of section 41(1) it is necessary that the benefit derived by an assessee results from cessation or remission of a trading liability. The relevant extract from the decision ....
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....f his liability. Remission has to be granted by the creditor. It is not in dispute, and it indeed cannot be disputed, that it is not a case of remission of liability. Similarly, a unilateral act on the part of the debtor cannot bring about a cessation of his liability. The cessation of the liability may occur either by reason of the operation of law, i.e., on the liability becoming unenforceable at law by the creditor and the debtor declaring unequivocally his intention not to honour his liability when payment is demanded by the creditor, or a contract between the parties, or by discharge of the debt-the debtor making payment thereof to his creditor. Transfer of an entry is neither an agreement between the parties nor payment of the liability. We have already held in Kohinoor mills' case [1963)49 ITR 578(Bom) that the mere fact of the expiry of the period of limitation to enforce it, does not by itself constitute cessation of the liability. In the instant case, the liability being one relating to wages, salaries and bonus due by an employer to his employees in an industry, the provisions of the Industrial Disputes Act also are attracted and for the recovery of the dues from the....
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....act the provisions of Section 41(1) of the Act, there should have been an irrevocable cession of liability without any possibility of the same being revived. The assessee-company having acknowledged its liability successively over the years would not be in a position to defend any claim that may be made on behalf of the liquidator for credit of the said amount reflected by the assessee as payable to M/s Elephanta Oil & Vanaspati Ltd. 22. We may also add that, admittedly, no credit entry has been made in the books of the assessee in the previous year relevant to the assessment year 2008-2009. The outstanding balances reflected as payable to M/s Elephanta Oil & Vanaspati Ltd. are the opening balances which are being carried forward for several years. The issue as to the genuineness of a credit entry, thus does not arise in the current year and this issue could only be examined in the year when the liability was recorded as having arisen, that is, in the year 1984-1985. The department having accepted the balances outstanding over several years, it was not open for the CIT (Appeals) to confirm the addition of the amount of Rs. 1,53,48,850/- on the ground that the assessee coul....
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....artnership deed placed at 9 to 13 there is no clause for making any interest to be paid to partners. However, before the Ld. CIT(A) the assessee furnished an affidavit that the capital of the partners shall carry interest @ 12% with effect from 1.4.2007. However, we find that it is not a supplementary partnership deed as it has not been signed by all partners and has been signed only by one partner and that too in the form of an affidavit. As per provisions of Sec. 40(b)(v) the partners are entitled to receive interest on their capital which is in accordance with terms of partnership deed and relates to any period following after date of such partnership deed. Since in the original partnership deed there is no provision for making payment of interest to partners capital the assessee did not enter into any supplementary partnership deed signed by all the partners, the payment of interest to partners was not permitted as the payment of interest was not in accordance with the said provisions. The Ld. CIT(A) has overlooked this fact that supplementary partnership deed placed at PB-8 was in fact no partnership deed but was an affidavit signed by one partner, therefore, the order of Ld. ....