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TMI Blog2012 (5) TMI 734X X X X Extracts X X X X X X X X Extracts X X X X ..... d Maintenance u/s 40A(3) and u/s 40a(ia) 3,67,256 6. Legal Fees u/s 40a(ia) 39,100 7. Wages Lump sum disallowance of 10% 26,80,466 8. Outstanding Wages u/s 69 62,12,600 Total R/off 3,09,63,950/- 2.3 The basic facts discussed by the ld. CIT(A) at pages 2 to 5 of his order are as under:- ''2.1.1. The basic facts of the case are that the assessee firm is engaged in the business of a civil contractor, executing work on contract basis for various government apartments and others. The return of income was filed on 08-10-2008 declaring a total income of Rs. 1,11,10,330/- (before claiming remuneration and interest to partners) on total contract receipts of Rs. 20,27,87,825/-giving N.P. rate of 9.96%. The AO, while finalizing the assessment proceeding made the following observations:- (a) In Para - 3.B of the Assessment Order, it was noticed by the AO that a sum of Rs. 8,61,928/- has been debited under the head "Freight Charges". During the relevant year out of the above, a payment of Rs. 713662/- has been made to M/s G.R. Construction on which tax was deducted at source u/s 194C of the Act. No explanation was given by the appellant in this regard. Thus, the sai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... seen that such payments have not been made and are shown as 'outstanding liability'. The assessee was given opportunity to file documentary evidences in support of such expenditure as claimed. However, the assessee failed to provide any details on this account. In view of the above, the AO held that the assessee himself was not aware of the details of such expenses, thus treated them as bogus in nature. The expenses of Rs. 85,00,000/- were, therefore, disallowed and added back to the total income. (d) In Para - 3.E(a) of the Assessment Order, it is mentioned that the assessee has shown various payments of Rs. 40,57,317/- shown payable to "sundry creditors' under the head "Diesel & Petrol Expenses". It is further seen that the payment has not been made and are shown as 'outstanding Liability'. As the assessee could not submitted necessary details in this regard, therefore, it was concluded that such expenses payable are bogus, in nature and Rs. 40,57,317/- are therefore, disallowed and added back to the total income. - In Para - 3E(b) payments of Rs. 1,14,240/- and Rs. 1,00,000,/- were found made in cash and held as violation of Section 40(A)(3) of the Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 to 11 of his order are as under:- ''2.2 During the appellate proceedings, Id. A.R. filed various written submissions and contented as under- 2.2.1. Additions made towards outstanding expenses and on adhoc basis:- Regarding disallowance out of expenses like Fuel and Petrol Charges, Legal Fees, Wages, Outstanding Wages etc., the AO argued in following manner:- (a) The Ld. AR argued that the A.O. has pointed out many defects in the books of accounts in the Assessment Order, such as the discrepancies regarding non maintenance of regular books of accounts, and Stock Register, non availability of proper and complete evidence or vouchers of various expenses claimed, etc. However the appellant was having proper books of account and all necessary details and documents to support the profit declared by him. (b) The Ld. AR further submitted that appellant has declared a NP @ 5.48%, which is higher, as compared to the appellant's own case and accepted by the appellate authorities, for assessment year 2006-07 @1.95%, Assessment Year 2005-06 @2.12% and in the assessment year 2004-05 @1.15%. The Ld AR also submitted a comparative chart showing past results of the appellant. Particular ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AO, while making lump sum disallowances out of the claimed expenses by setting aside the disallowances in question made out of claimed expenses. (d) The Ld AR argued that, in the present case Ld. AO has rejected the book results and made several additions to the returned income. It is most important while making the assessment that AO must go to the root of the matter. Several defects have been pointed out by the AO in the books of accounts maintained by the appellant. Thus, by implication, the AO have found the books of accounts maintained by the appellant as not reliable to deduce the correct income of the appellant. In these circumstances books of accounts of the appellant were rejected by implication. It is submitted that it is not required to reject the books of accounts u/s 145(3) of the Act with specific mentioning about it. Hon'ble Jaipur bench of the Tribunal in the case of ACIT vs. M/s Rishabh Construction (P) Ltd. ITA No. 581/JP/2009 (AY 2006-07). Order dt. 17- 06-2010 has accepted the principle of implied rejection of books. In the order Hon'ble Jurisdictional ITAT has stated that, once the books of accounts are rejected, implied or specifically, the only course ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asis of tax deductible. Section 40(a)(ia) otherwise being a legal fiction needs to be construed strictly. The CBDT in circular no. 5 of 2005, dt. 15th July 2005 has also clarified that the provision of the Section 40(a)(ia) is to augment compliance of TDS provision in the case of residents and curb bogus payments to them. In present case the payment is not in dispute and on the issue whether tax is to be deducted at source on such payment is not free from doubt. In any case since appellant has made actual payment of the expenses as per the evidence placed on the record, provisions of Section 40(a)(ia) are not applicable. He relied on the case of "Jaipur Vidyut Vitran Nigam Ltd. Vs. DCIT (2009) 123 TTJ (JP). - The Ld. AR further relied on the case of Teja Constructions vs. AC1T (2010) 36 DTR 220 (ITAT, Hyderabad 'A' Bench), wherein it is held that the books of accounts of the appellant was not relied, and rejected by the AO and the same was confirmed. Now, based on the reliance on the same books, for the purpose of invoking the provisions of s. 40(a)(ia) is improper. The estimation of income takes care of the irregularities committed by the appellant. Further addition by invoking s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns made under section 40(a)(ia), 40A(3), 69 etc., as discussed above, the Ld. AR also relied upon various case laws, which are being discussed as under10 i.) Once the books are rejected, whether implied or specifically mentioning under section 145, than addition under section 40A(3), it was held in the case of CIT vs. Banwari Lal Banshidhar (1998) 229 ITR 229 (ALL) could not be made, as there is no deduction claimed by the appellant firm towards any these expenses. that, when income of the appellant was computed applying the gross profit rate and when no deduction was allowed in regard to the purchases of the appellant, there was no need to look into the provisions of section 40A(3) and r.6DD(j). ii.) Regarding the additions made, i.r.o., 'Wages Payable of Rs. 62,12,600, 'Sundry Creditors' towards hire charges of Rs. 85,00,000 and 'Sundry Creditors' towards Diesel & Petrol Expenses 40,57,317, it was agitated that treating the such expenses as bogus in nature, is not according to the provisions of section 69C of IT Act. Section 69C implies on the un-explained source of expenses and as far as source of the above expenses is concerned is not in dispute. Once the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing manner. . ''As stated above, the AO has made such additions as he found the books of accounts of the appellant as not reliable and also in wants of sufficient details and supporting documents in this regards. While opposing the above, the Ld. AR has argued that when the books of account have been impliedly rejected by the AO, then best course of action would have, on the part of the AO, to make a composite addition, i.r.o., the net profit only, then making separate addition on different heads as such. In this regard, the decisions of Hon'ble ITAT- Jaipur Bench in the appellant's own case for A.Y. 06-07 & 07-08 were referred, wherein similar views have been expressed. After considering the rival stands of the AO and on perusal of the material available on record and also the latest decision of the Hon'ble ITAT in the appellant case for A.Y. 07-08, the Hon'ble ITAT Jaipur Bench, in order no. ITA 1177/JP/2010 dated 31-05-2011, relevant to A.Y. 07-08 in the appellant case, has observed as under:- "2. The following grounds have been raised by the assessee in its appeal:- 1) the Ld. CIT(A) has erred in facts and in law in confirming the disallowance of Rs. 13994870/- out of var ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y while following the principles purported by the Hon'ble ITAT as discussed above, the AO is hereby directed to adopt the N.P of previous year i.e. 11.5%, in the current year also (subject to Depreciation, interest and remuneration payable to the partner etc.) to cover up all the discrepancies and short-comings found i.r.o. books of accounts and records, leading to the different additions made by the AO, as referred hereinabove. In other words, an addition to the extent of Rs. 3122932/- [1.54% (gap in the n.p. rates)* Rs. 202787825 (total T.O.)/-] has been confirmed u/s 145(3) of the Act in this regard, instead of Rs. 22766258/- made by the AO towards different aspects, under deemed rejection of books of accounts. Consequently this ground of appeal is partly upheld.'' 2.8 The ld CIT - DR who appeared on behalf of the Department argued that though the ld. CIT(A) has given the finding on the basis of the order of the Tribunal in immediately preceding year yet the AO after noting various defects in the books of accounts and on the basis of the auditors report, has disallowed various expenses claimed under various heads by giving the detailed and very reasonable findings. The attentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eard the rival contentions and considered them carefully. After considering the submissions of both the parties as well as the material on record and on which the attention of the Bench was drawn, we are of the view that the ld. CIT(A) has adopted the reasonable approach. It is seen that in the assessment year 2006-07, similar additions were made and the matter reached to the stage of the Tribunal and the Tribunal has directed the AO to allow the net profit rate as per past history of the case after rejecting the books of accounts. Therefore, for the assessment year 2007-08, similar additions were made. The disallowance of Rs. 1,39,94,870/- was made under the same heads as made the additions in the year under consideration. Again the matter reached to the stage of the Tribunal and the Tribunal after discussing the issue in detail held that the provision of Section 145(3) is squarely applicable on the facts of the present case and therefore, the Tribunal taking into account the net profit rate of the assessee which was at 10.07% directed to apply net profit rate of 11.5%. In the year, under consideration also, the ld. CIT(A) has directed to apply the net profit rate of 11.5% subject ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts made to different sub contractors. In this regards the Ld. AR has pointed out that in view of the decision of the Hon'ble ITAT Jaipur Bench's decision in case of Jaipur Vidyut Nigam Ltd. Vs. DCIT (2009) 123 TTJ (Jp)", the provisions of sec. 40 (a)(ia) are applicable in the situation, wherein the amount due to the sub-contractors are still payable, on the last date of relevant F.Y.. In the present case, the AO has disallowed even such type of expenses, which were paid to the sub- contractors, during the relevant period itself. Accordingly the action of the AO is contrary to the decision of the Hon'ble ITAT- Jaipur, which is of binding in nature. After analyzing the facts of the issue under question, I find merit in the Ld. AR contentions made in this regard. Thus while following the above decision of the Hon'ble ITAT- Jaipur Bench, I also upload the provisions of Sec. 40(a)(ia) are not applicable in the appellant's case as these expenses, under consideration, were already paid during the current year and not remained payable or outstanding, as such, therefore the provision of Sec, 40(a)(ia) are not applicable on such matters, Accordingly the additions of Rs. 7327214 made u/s 40(a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd also the compelling circumstance, leading to the such cash payments, as narrated by the Ld. AR,. hereinabove, I am of considered view that no separated additions is warranted u/s 40A(3) of the Act in the given circumstances. Accordingly, the additions of Rs. 554284 made u/s 40A(3) is deleted.''
4.3 We have heard both the parties and perused the material on record. The above findings of the ld. CIT(A) again are in consonance with the order of the Hon'ble Allahabad High Court in the case of Banwari Lal Bansidhar (1998), 229 ITR 229 wherein it has been held that if the profit of the assessee has been estimated by applying net profit rate than no separate disallowance can be made on account of any expenditure claimed under profit and loss account. In the present case, we have already held that the ld. CIT(A) was correct in applying the net profit rate. Therefore, no separate disallowance u/s 40A(3) can be made. In view of these facts and circumstances of the case, we hold that the ld. CIT(A) was justified in deleting this addition also.
5. In the result, appeal of the Revenue is dismissed.
The order is pronounced in the open court on 25-05-2012. X X X X Extracts X X X X X X X X Extracts X X X X
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