2020 (8) TMI 278 - HC - Income Tax

Revenue appeal against the pure question of facts - unnecessary litigation on the part of the Revenue Authorities - Estimation of Net profit - net profit rate - estimation of profit - HELD THAT - It is well known that where the books of accounts maintained by the contractors are not accepted by the Department, the estimation of profit made on the basis of history of Gross Profit rate and Net Profit rate of the Assessee in the previous years or comparable cases of contractors can be made. Once such profit rates are compared, the additions on account of non confirmation or non production of the sub contractors, etc. is totally irrelevant and cannot be made. In the hierarchy of the fact finding bodies created under the Income Tax Act, obviously the findings of the Assessing Authority stand superseded for all purposes, by the findings of the higher appellate authorities. Unless glaring perversity in the findings of the appellate authorities are pointed out and established by the Revenue in the Appeals filed by them under Section 260A of the Act, there is nothing for the High Court or Constitutional Courts to do in such matters. The findings of fact arrived at by the Authorities below are binding on the High Court under Section 260A of the Act, unless the perversity as aforesaid is clearly visible, established and proved. As against the perversity in these findings, we see abetter taxable income finally taxed in the hands of the Assessee, albeit with the agreement to disallowance to the extent of 10% of the payments made to the sub contractors, which the Assessee appears to have agreed under the compulsion of circumstances to avoid litigation and to buy peace. Results declared by the Assessee of the net profit rate at the rate of 3.83% was much better as compared to previous three years and only marginally less than the previous two years of 2005-06 and 2006-07, which were at the rate of 4.20% and 3.94%. In these circumstances, no disallowance was called for. Still, if the Assessee agreed to such addition to apparently buy peace with the Department, we fail to understand as to why the Revenue has filed these Appeals to drag cases further in the High Court incurring the loss of man hours and cost of litigation. Such unnecessary litigation on the part of the Revenue Authorities deserves to be strongly deprecated, but, the Revenue Authorities do not seem to be seeing the sense behind this and keep on filing Appeals under Section 260A of the Act, as a matter of routine. Though the provisions of Section 260A of the Act are intended only to settle the substantial questions of law arising from the order of the Tribunal, such appeals, against the pure findings of facts, are also filed in an absolutely reckless manner. We strongly deprecate this practice of the Revenue Authorities, as there seems to be no application of mind by the higher Authorities in sanctioning filing of these appeals before the High Court. We would have imposed exemplary costs in the present case also to compensate the Respondent/Assessee, who had to incur such litigation expenditure at all the levels of appellate forums, three in number, beyond the Assessing Authority, viz., before CIT(Appeals), before the Income Tax Appellate Tribunal and before the High Court.

Issues Involved:
1. Restriction of disallowance to 10% of expenditure incurred towards subcontractors.
2. Non-appreciation of findings regarding non-existent, inexperienced, incompetent, and bogus contractors.
3. Addition on account of cessation of liability under Section 41(1) of the Income Tax Act.

Detailed Analysis:

Issue 1: Restriction of Disallowance to 10% of Expenditure
The Revenue challenged the Tribunal's decision to restrict the disallowance to 10% of the expenditure of ?4,41,08,210/- incurred towards subcontractors. The Assessing Authority had disallowed the entire amount on the grounds that 14 subcontractors were not produced for verification, questioning their existence and the genuineness of the work carried out. However, the CIT(A) reduced the disallowance to 10%, noting that confirmations and some evidence, such as Income Tax returns and bank account details, were provided by most subcontractors. The Tribunal upheld this decision, considering the nature of the business and historical profit margins. The court found no substantial question of law in this matter, emphasizing that the estimation of profit based on historical data was reasonable.

Issue 2: Non-Appreciation of Findings Regarding Contractors
The Revenue contended that the Tribunal failed to appreciate the Assessing Officer's findings that the contractors were non-existent, inexperienced, incompetent, and bogus. The Tribunal, however, noted that the payments to subcontractors were subject to TDS and made by cheques, and the work was documented in the M. Book, which was signed by the subcontractors. The court agreed with the Tribunal's view that the nature of the business justified the expenses and that the CIT(A)'s decision to disallow only 10% of the expenses was justified. The court dismissed the Revenue's contention, finding no perversity in the Tribunal's findings.

Issue 3: Addition on Account of Cessation of Liability under Section 41(1)
The Assessing Officer had added ?18,16,728/- towards creditors, arguing that liabilities outstanding for more than three years should be considered ceased under the Limitation Act. The CIT(A) and the Tribunal disagreed, stating that there was no cessation of liability as the assessee had not written off these amounts in its books. The court upheld the Tribunal's decision, noting that the Assessing Officer had not provided evidence of cessation of liability and that the acknowledgement of liability in the balance sheet extended the period of limitation. The court cited judgments from the Delhi High Court and Punjab & Haryana High Court to support its decision.

Conclusion:
The court dismissed the Revenue's appeal, stating that the Tribunal's order did not raise any substantial question of law. The court emphasized that the estimation of profit based on historical data was reasonable and that the findings of the appellate authorities were binding unless glaring perversity was established. The court also criticized the Revenue for filing unnecessary appeals, urging responsible authorities to avoid such litigation in the future. The court directed the Registry to send a copy of the order to relevant authorities for information and necessary action.

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