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TMI Blog2016 (5) TMI 1160X X X X Extracts X X X X X X X X Extracts X X X X ..... at no addition is called for towards the unsecured loans of ₹ 20,01,300, then certainly assessee will be eligible for claiming interest of ₹ 3,79,616/- in respect of interest paid to depositors. - Decided in favour of assessee. Disallowance @ 15% of the labour expenses paid to five sub-contractors being related parties u/s 40A(2)(a) - Held that:- . For making any such addition, it will be necessary for the Assessing Officer to scrutinize the reasonableness of the expenditure and to exercise his judgment in a reasonable and fair manner and to satisfy that there is no attempt to evade taxes. In the case of the assessee, there has been no such exercise done by the Assessing Officer by way of scrutinizing the expenditure paid to the related parties and comparing the rates with the available market rates and further to ascertain that these related parties has been paid on a higher rate or excess amount in comparison to the general market rate. We also observe that the detailed ratewise chart is available on record which the related parties has provided to the assessee on the basis of which work has been awarded to them and the same have been completed to the satisfaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adav, Judicial Member And Shri Manish Borad, Accountant Member For the Assessee : Smt. Arti N. Shah, AR For the Revenue : Shri Narendra Singh, Sr. DR ORDER Per Manish Borad, Accountant Member These two appeals are directed at the instance of the assessee; one relating to quantum addition for the Assessment Year 2007-08 is directed against the order of ld. Commissioner of Income-tax (Appeals)-II, Baroda dated 29.09.2010 wherein the assessment u/s 143(3) of the Income-tax Act (hereinafter referred to as the Act ) was framed on 29.12.2009 by ACIT, Circle-3, Baroda; and another appeal relating to the imposition of penalty u/s 271(1)(c) of the Act for Assessment Year 2007-08 is directed against the order of the ld. Commissioner of Income-tax(Appeals)-II, Baroda dated 03.03.2014 and the penalty u/s 271(1)(c) was framed on 30.03.2012 by DCIT, Circle-3, Baroda. 2. First, we will take up ITA No.3371/Ahd/2010. The assessee has raised following grounds 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 ₹ 21,01,300/- in respect of deposits received from Sanja ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd, the ld. Assessing Officer assessed the income at ₹ 1,08,43,953/-, after making following three additions:- i. Addition u/s 68 of the Act for unexplained / unsecured loans at ₹ 21,01,300/- and interest of ₹ 3,79,616/- claimed on the unexplained cash creditors together making an addition of ₹ 24,80,916/-. ii Addition of ₹ 22,70,824/- by way of disallowance of 15% of subcontract charges paid to related parties at ₹ 1,51,38,829/- iii Disallowance of ₹ 43,18,175/- u/s 40(a)(ia) for non-deduction of TDS u/s 194H of the Act on the deemed commission payment of ₹ 43,18,175/-. 4. Aggrieved, the assessee went in appeal before the ld. CIT(A) and the same was dismissed. 5. Aggrieved, the assessee is now in appeal before the Tribunal. 6. First, we will take up Ground Nos. 1 2 which read as under:- 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 ₹ 21,01,300/- in respect of deposits received from Sanjay N. Patel of ₹ 7,51,300, from Jayaben Patel of ₹ 8,50,000/- and from Bhartiben Patel of ₹ 5,00,000/- u/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out of total loan of ₹ 10,00,000/- advanced by Jayaben Patel to the Appellant, it is submitted that loan of ₹ 5,00,000/- was received by cheque on 10/7/2006 by the Appellant and loan of ₹ 5,00,000/- was received by cheque on 14/07/2006. These payments are duly reflected as withdrawal in the copy of bank account of Jayaben N. Patel with Canara Bank. Further, confirmation of Jayaben N. Patel along with PAN No. and copy of her IT Return has also been filed. 2.2.2 Source of deposits made in the account of Jayaben N. Patel have been duly explained as under : 31/03/2006 Loan from Sudhir N. Patel (HUF) ₹ 3,00,000 31/03/2006 Loan from D.N.Patel (HUF) ₹ 2,00,000 14/07/2006 Loan from Sudhir N. Patel (HUF) ₹ 2,50,000 14/07/2006 Loan from D.N.Patel (HUF) ₹ 2,50,000 Total. ₹ 10,00,000 2.2.3 Thus, source of loan advanced by Jayaben N. 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 ₹ 8,50,000/- out of ₹ 10,00,000/- is totally unjustifiable and needs to be deleted. 2.3.1 As regards additi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before us by way of these grounds against the order of ld. CIT(A) towards addition of ₹ 21,01,300/- u/s 68 of the Act and disallowance of interest of ₹ 3,79,616/- claimed by the assessee on the impugned unsecured loans of ₹ 21,01,300/-. As regard the addition of ₹ 21,01,300/-, the same has been made u/s 68 of the Act for unsecured loans from following parties:- i) Sanjay N. Patel HUF - ₹ 7,51,300 ii) Jayaben P. Patel - ₹ 8,50,000 iii) Bhartiben D. Patel - ₹ 5,00,000 ₹ 21,01,300 From going through the records, we find that the addition of ₹ 7,51,300/- made in the case of Sanjay N. Patel HUF is not the amount of unsecured loan taken by the assessee during the year, but this is a closing bank balance in the bank account of Sanjay N. Patel HUF which ld. Assessing Officer believes that this amount was previously given by the assessee during Assessment Year 2006-07 to Sanjay N. Patel HUF towards sub-contract charges and during the year under appeal this was a part of unsecured loan taken by the assessee. Similarly, in the case of Jayaben P. Patel, out of the total unsecured loan taken during the year at S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the assessee s account as unsecured loans. Similarly, in the case of Sanjay N. Patel HUF, the ld. Assessing Officer observed that out of the payments made towards sub-contract charges during the Assessment Year 2006-07, most of the amount remained unutilized upto 31st March 2006 and the bank balance in the account of Sanjay N Patel HUF stood at ₹ 7,51,300/-, which was thereafter used for giving unsecured loans to the assessee during the Assessment Year 2007-08. Due to this very reason, the ld. Assessing Officer was of the view that the assessee is trying to create the transactions jugglery whereby first it claims the amount as an expenditure paid to the related parties and then again routing the same amount as unsecured loan in its business, thereby intentionally reducing its actual profits by way of making such adjustments. 7.2 We find that there is no dispute to the fact from the side of the Revenue before both the lower authorities that the identity and genuineness of transactions have been proved beyond doubt in the cases of Sanjay N. Patel HUF, Jayaben N. Patel and Bharti Patel, as the amounts received as unsecured loans are through accounts payee cheque and regular ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parties were appearing under unsecured loan list on the opening of the year under appeal and no addition was made during the assessment completed u/s 143(3) of the Act for Assessment Years 2005-06 and 2006-07 which further supports the view that the identity, genuineness and creditworthiness of these three cash creditors have been accepted by the Revenue in past years also, wherein similar transactions were carried out and unsecured loans were given. 7.4 We are, therefore, of the view that the appellant has been able to prove the identity, genuineness and creditworthiness of Sanjay Patel HUF, Jayaben Patel and Bharti Patel repeatedly and certainly, when there is a provision of showing income @ 8% on the civil construction receipts u/s 44AD of the Act, then the parties taking sub-contract work are free enough to get themselves covered under the provisions embedded in the Statute. The ld. Assessing Officer has not raised any doubt in the books of accounts as the same have not been rejected u/s 145(3) of the Act and no specific defect in the actual working of the appellant has been pointed out in its books of accounts and above all construction work has been completed to the satis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essing Officer after considering the same has accepted payments to related parties as being reasonable and no addition was made on this account to the book result. We also enclose herewith copies of orders of A.Y.2005-06 and A.Y. 2006-07 which are passed u/s 143(3) of the Income Tax Act, 1961 and wherein no such addition has been made by the Assessing Officer after the scrutiny. 4.5 It is, therefore, submitted that payments to sub-contract labour are all genuine and rate paid are reasonable considering the prevailing market rate and, therefore, it is submitted that ad-hoc disallowance without any basis of 15% of ₹ 22,70,8247- be set aside. 8.2 The ld. Departmental Representative, on the other hand, supported the orders of the lower authorities. 9. We have heard the rival contentions and perused the material on record. The issue before us in this ground is against the order of the ld. CIT(A) in confirming the disallowance of ₹ 22,70,824/- calculated @ 15% of ₹ 1,51,38,829/- paid to sub-contractors being related parties u/s 40A(2)(a) of the Income-tax Act. During the course of assessment proceedings, ld. Assessing Officer observed that payment of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which work has been awarded to them and the same have been completed to the satisfaction of the contract awarders. We also observe that no disallowance on payment to sub-contractors to related parties have been made u/s 40A(2)(b) of the Act during the assessment proceedings completed u/s 143(3) of the Act for Assessment Year 2005-06 and 2006-07. In such situation, when there is a complete absence of specific working which should have been carried on by the ld. Assessing Officer to arrive at a decision that excessive payments have been made to the related parties in comparison with the fair market rates as well as comparison with the rates of work awarded by the appellant to its other sub-contractors and also in the given situation when the books of accounts have not been rejected and all other expenditures have been accepted without pointing out any error, then in such situation estimated addition should not be called for. We, therefore, delete the addition of ₹ 22,70,824/- made by the ld. Assessing Officer and allow this ground of appeal of the assessee. 10. Last ground of the assessee s appeal reads as under:- The learned Commissioner of Income-tax (Appeals)-II, Bar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e appellant's contention is not considered true. When government gives a contract it is based on several factors and a contractor has to satisfy those conditions. Apparently contractor cannot pass the full contract on back-to-back basis to any other person without the consent of the government unless the subcontractor also fulfils those conditions. There is a set procedure of awarding contract by government agencies and what the appellant is canvassing does not fit into that procedure. The appellant has not produced contract agreement between PIPL and the Government or any document to establish that PIPL has informed the government that it has passed on the contract to a sub contractor in totality. In the absence of these documents it had to be presumed that for the purpose of government there is no sub contract and the work is executed as if the PIPL is working itself. In other words the appellant is working on the site camouflaging as PIPL, so far as the government is concerned. This can happen only when PIPL is paid commission to pass on the contract to the appellant. The second possible scenario is that contract has been passed on the appellant after taking Government appro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that there is no direct contract agreement between the Appellant and the Government and, therefore, question of giving commission on the amount at 10.50% (deducted from the bill by PIPL) does not arise at all. On the contrary, contract with Government is entered with by PIPL, payment from Government is received by PIPL and the same is passed over to the Appellant as a sub-contractor after deducting 10.50% from the gross billing so as to arrive at value of sub-contract. It is strange that on the one hand transaction between PIPL and the Appellant is treated as being between contractor and sub-contractor subject to provisions of Section 194C, while on the other hand, the Assessing Officer wants to treat reduction in gross amount received from the Government by PIPL as commission paid by the Appellant to PIPL. By no stretch of imagination, PIPL is the agent of the Appellant and there is no question of making any payment of commission to PIPL. Therefore, question of applying provisions of Section 194H does not arise at all. 10.5 On the other hand, the ld. Departmental Representative supported the orders of the lower authorities. 11. We have heard the rival contentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own as Revenue by the appellant and together with this sub-contract, the appellant has carried on other contract work also and gross turnover of ₹ 5,19,71,858/- has been achieved by the appellant during the year under appeal and a net profit of ₹ 16,52,490/- has been shown in its return of income. There is no justification given by the ld. Assessing Officer that on what basis deemed commission payment has been calculated at ₹ 43,18,175/- and going a step further how can a provision of Section 40(a)(ia) can be applied for non-deduction of deduction u/s 194H of the Act on this deemed commission of ₹ 43,18,175/-, even when no such expenditure has been claimed by the assessee in its profit and loss account. 11.3 Under these circumstances, we are of the view that no addition is called for by way of disallowance u/s 40(a)(ia) of the Act for ₹ 43,18,175/-. Accordingly, we allow the ground of appeal of the assessee. 12. This appeal filed by the assessee is allowed. 13. Now we take up ITA No.1888/Ahd/2014. The assessee has filed this appeal against the order of the ld. CIT(A)-II, Baroda dated 03.03.2014 confirming the penalty of ₹ 22,29,300/- imp ..... X X X X Extracts X X X X X X X X Extracts X X X X
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