2009 (7) TMI 175 - AT - Income Tax

Income From Undisclosed Sources - discrepancies in the receipt - The stand of the assessee is that the assessee derives income from transport business. Books of accounts like cash books, ledger, journal and vouchers are maintained and audited u/s. 44AB. HELD THAT - We find that the Hon'ble Gujarat High Court in the case of President Industries 1999 (4) TMI 8 - GUJARAT HIGH COURT , has held that the entire addition of undisclosed sales cannot be added. Only the profit embedded in the sale proceeds can be taxed. Similar view has been taken in the case of Balchand Ajit Kumar 2003 (4) TMI 76 - MADHYA PRADESH HIGH COURT has decided the similar issue in favour of the assessee wherein the AO was directed to adopt GP rate declared by the assessee for the years under consideration. The facts being the same, so following the same reasoning, we are of the considered view that in case of the difference between the assessee's books and as per TDS certificate, then on the said difference, the only embedded portion of the profits is to be taken into consideration. Therefore, we set aside the order of the Revenue authorities on the issue and direct the AO to adopt the GP rate declared by the assessee for the assessment year under consideration and compute addition in question accordingly. Disallowance by invoking provisions of s. 40(a)(ia ) - the assessee was not held liable to deduct tax u/s. 194C from payments made to the transporters. In view of the above, the learned Authorised Representative requested to delete the addition in question. Respectfully following the order of the Hon'ble Punjab Haryana High Court in CIT vs. United Rice Land Ltd. 2008 (5) TMI 142 - PUNJAB AND HARYANA HIGH COURT , we set aside the orders of the Revenue authorities on this issue and direct the AO to allow the expenditure claimed by the assessee without applying the provisions of s. 40(a)(ia). we find it undisputed that the assessee is a transporter executing various contracts by engaging its own vehicles and transporter's vehicles. The AO disallowed the payments by observing that payments made to the transporter as sub-contract. There is nothing on record to suggest that any contract existed between the assessee and the alleged transporter as sub-contractor. There is neither written nor oral agreement in this regard. There is no dispute to the settled legal proposition that written agreement is not compulsory. Even oral agreement can be inferred in the facts and circumstances of the case. The AO has not made out the case that on the basis of the contract of the business by the assessee, there existed contractor and sub-contractor relationship between the assessee and the alleged sub-contractor. The AO has not made out the case that the alleged sub-contractor has been engaged on some definite terms and conditions for executing the work of the assessee. Basically, the assessee has engaged different transporters for executing its different work. Even, there is nothing on record to suggest that the assessee has assigned any particular portion of work to a particular transporter. So, the AO was not justified in making disallowance by invoking the provisions of s. 40(a)(ia). Accordingly, the disallowance in question is cancelled. In the result, the appeal of the assessee is partly allowed.

Summary

Issues:
1. Addition of Rs. 14,94,285 under 'Undisclosed transportation charges'
2. Addition of Rs. 24,09,77,368 under s. 40(a)(ia)

Analysis:

Issue 1: Addition of Rs. 14,94,285 under 'Undisclosed transportation charges'
The appeal was filed against the addition made by the AO and confirmed by CIT(A) regarding undisclosed transportation receipts. The assessee argued that discrepancies in receipts were due to reconciliation issues. The assessee contended that only the profit embedded in the sale proceeds should be taxed, not the entire amount. The Tribunal referred to relevant case laws and directed the AO to adopt the GP rate declared by the assessee for the assessment year to compute the addition accordingly, considering only the profits embedded in the difference.

Issue 2: Addition of Rs. 24,09,77,368 under s. 40(a)(ia)
The AO disallowed the amount under s. 40(a)(ia) for non-deduction of tax at source. The assessee, a transport contractor, engaged other truck-owners without any sub-contract agreement. The Tribunal noted that without a valid contract or subcontract agreement, the provisions of s. 40(a)(ia) could not be applied. Citing relevant case laws, the Tribunal directed the AO to allow the expenditure claimed by the assessee without applying s. 40(a)(ia). The Tribunal emphasized the absence of a contract or subcontract agreement between the assessee and the transporters, leading to the cancellation of the disallowance.

In conclusion, the Tribunal partly allowed the appeal of the assessee, directing the AO to compute the additions based on the profits embedded in the sale proceeds for the first issue and allowing the expenditure claimed by the assessee without applying s. 40(a)(ia) for the second issue. The judgments referred to by the Tribunal emphasized the importance of valid contracts or agreements in tax deduction cases, leading to the decisions in favor of the assessee based on the absence of such agreements.