Mistake in nomenclature in account head cannot change nature of payment

Art-E-Mide Construction Pvt. Ltd. Vs DCIT (ITAT Kolkata)

AO noted that the assessee has paid consolidated salary (contract pay) of Rs. 8,39,960/-. Since it was shown as contractual payment made by the assessee of Rs. 8,39,960/- according to AO, Section 194C of the Act was attracted and therefore, the assessee was bound to deduct the tax at source. Therefore, he called for details of the payment as well as the tax deducted at source. Pursuant to the same, the assessee replied that the payment of Rs. 8,39,960/-was disbursed to its employees only and since the salary has not crossed the taxable limit after allowing deduction u/s 80C of the Act, tax deduction at source did not arise. This submission of the assessee was not accepted by the AO who in turn issued notices u/s 133(6) to 15 persons and only 7 persons replied back, so he disallowed the balance amount of Rs. 5,57,909/- disbursed to 8 persons. According to Ld. A.R, the whole confusion was because of the mistake which happened in the “Notes to Accounts”. According to Ld. A.R, the typographical error of showing the amount of Rs. 8,39,960/- under consolidated salary (contract pay) was the root cause of the problems though actually it was paid to the employees only. In order to substantiate this claim, the Ld. A.R drew our attention to page 31 of PB wherein the chartered accountant Shri A.K. Basu and associates the auditor had clarified by issuing a certificate that there was a typographical mistake in the account head “Consolidated Salary” (Contract Pay) of Rs. 8,39,960/- in Note R – Other Expenses of the Final accounts of Art-E-Mide Construction Pvt. Ltd. (assessee) for AY 2015-16. Therefore, the Chartered Accountant clarifies that this account head should be read as the Consolidated Salary. Thereafter, he reiterates that the payment under this head was purely salary in nature and from their individual accounts PF & ESI were duly deducted and deposited. And the ld. A.R drew our attention to page 44 of the Paper book wherein it is found the details of the PF deducted from all 15 persons to whom Rs. 8,39,960/- was given is seen; and also drew our attention to challans of deposit of PF which are placed at pages 45 to 75 of paper book. Thereafter he drew our attention to page 76 wherein the details of consolidate salary, house rent and pay roll voucher are found placed. Thus according to ld. A.R since these are nothing but consolidate salary given to the tune of Rs. 8,39,960/- and since the salary of an individual employee among them has not exceeded the taxable limit for deduction of TDS, the tax was not deducted at source by the assessee company. Though Smt. Ranu Biswas, ld. D.R fully supported the action of AO, and strenuously tried to convince that AO was right on this issue, however, she could not controvert the contentions and the facts emanating from the documents placed in the paper book to show that the 15 persons to whom the payment of Rs. 8,39,960/- was paid by the assessee were the salary given by the assessee and this fact could be proved from a perusal of page 44 of PB wherein the depositors copy of Employees’ State Insurance Corporation and name of employee is given. We also note that challans of PF is found placed at page 45 to 75 wherein the payments made by the assessee company to the individual account of these 15 persons is found placed, so from a perusal of all these documents along with letter of Chartered Accountant Shri A. K. Basu, who has accepted the mistake of showing Rs. 8,39,960/- as contract payment whereas it was actually salary paid to employees and which mistake led to the confusion for the AO to draw adverse inference against the assessee and on appeal the Ld CIT(A) confirmed the action of AO by passing a non­speaking order without giving any reason. This action by the Ld. CIT(A) cannot be countenanced. We note that the confusion happened due to the typographical mistake in the account head “Consolidated salary (contract pay)” of Rs. 8,39,960/- which should have been under the head Consolidated Salary as clarified by the Auditor A.K. Basu & Associates refer page 31 of PB. And as discussed, the assessee has filed the PF & ESI remittance details of all the 15 persons to whom the assessee had paid Rs. 8,39,960/- who are employees and so the mistake in nomenclature in the account head cannot change the nature of payment as well as the status of the person to whom the payment was made. So we are of the opinion that these15 persons to whom the payment was paid to the tune of Rs. 8,39,960/- are the employees of the assessee and since the salary payment has not exceeded the taxable limit as prescribed before the deduction of tax at source could have been resorted, the assessee has not deducted tax at source and section 194C of the Act in the facts and circumstances of the case was not attracted so, no disallowance was warranted. Therefore, we direct AO to delete the addition of Rs. 5,57,909/-.

FULL TEXT OF THE ITAT JUDGEMENT

This is an appeal preferred by the assessee against the order of Ld. CIT(A)-17, Kolkata dated 12.06.2019 for A.Y. 2015-16.

2. At the outset the ld. Counsel for the assessee Shri Soumitra Chowdhury stated that ground nos. 1 and 2 are general in nature and ground no. 3 is not pressed. Therefore, we come to ground no. 4 which is preferred by the assessee against the action of the Ld. CIT(A) in confirming the addition made by the AO u/s 37(1) read with Section 40(a)(ia) of the Income Tax Act, 1961 (hereinafter referred to as the “Act”) to the tune of Rs. 5,57,909/-.

3. Brief facts of the case as noted by the AO is that when he perused Note: R of the audited ‘Notes to Accounts’ filed by the assessee during the assessment proceedings that under the head of ‘Other Expenses’ the assessee has claimed ‘Salary & Bonus Expenses’ of Rs. 17,74,650/-; the AO noted that the assessee has paid ‘Consolidated salary (Contract Pay)’ of Rs. 8,39,960/-. According to AO since this contractual payment requires TDS to be deducted u/s 194C of the Act, he called upon the assessee to furnish the work contract along with copy of TDS return reflecting party wise ledger as the evidence of deducting TDS along with PAN and the address of the persons concerned. Pursuant to the notice of the AO, the assessee replied that the payments were made on account of salary and therefore Section 194C is not attracted and that salary has not crossed the taxable limit after allowing deduction u/s 80C of the Act. Therefore, according to assessee there was no question of deduction of tax at source did not arise. The reply of the assessee could not convince the AO because the assessee has separately claimed salary and bonus expenses of Rs. 17,74,650/- under another specific head of consolidated salary (contract pay) of Rs. 8,39,960/-. Further according to AO, there was no evidence to substantiate that there was an employer-employee relationship between the assessee company and the alleged persons who received Rs. 8,39,960/-. Moreover, according to AO the assessee had submitted the list of 15 persons to whom such contractual payment was made and he duly issued notice u/s 133(6) of the Act and out of which he received reply only from 7 parties and no response was received from the rest of the 8 parties. Therefore, according to him, the genuineness of 8 parties remained unsubstantiated and so he added back a sum of Rs. 4,37,030/- after disallowing the same; and further 30% of Rs. 4,02,930/- amounting to Rs. 1,20,879/- was disallowed as per section 40(a)(ia) of the Act, thus a total disallowance of Rs. 5,57,909/- (Rs. 4,37,030/- + Rs. 1,20,879/-) was made.

4. Aggrieved the assessee preferred an appeal before the Ld. CIT(A) who was pleased to confirm the order of AO by passing a non-speaking order.

5. Aggrieved the assessee is before us.

6. We have heard both the parties and perused the records. We note that the assessee company is into executing contract business and had declared total income of Rs. 94,59,290/- for this relevant AY 2015-16. Later the case was selected for scrutiny and AO noted that the assessee had claimed expenses on account of salary and bonus to the tune of Rs. 17,74,650/-. Apart from that he noted that the assessee has paid consolidated salary (contract pay) of Rs. 8,39,960/-. Since it was shown as contractual payment made by the assessee of Rs. 8,39,960/- according to AO, Section 194C of the Act was attracted and therefore, the assessee was bound to deduct the tax at source. Therefore, he called for details of the payment as well as the tax deducted at source. Pursuant to the same, the assessee replied that the payment of Rs. 8,39,960/-was disbursed to its employees only and since the salary has not crossed the taxable limit after allowing deduction u/s 80C of the Act, tax deduction at source did not arise. This submission of the assessee was not accepted by the AO who in turn issued notices u/s 133(6) to 15 persons and only 7 persons replied back, so he disallowed the balance amount of Rs. 5,57,909/- disbursed to 8 persons. According to Ld. A.R, the whole confusion was because of the mistake which happened in the “Notes to Accounts”. According to Ld. A.R, the typographical error of showing the amount of Rs. 8,39,960/- under consolidated salary (contract pay) was the root cause of the problems though actually it was paid to the employees only. In order to substantiate this claim, the Ld. A.R drew our attention to page 31 of PB wherein the chartered accountant Shri A.K. Basu and associates the auditor had clarified by issuing a certificate that there was a typographical mistake in the account head “Consolidated Salary” (Contract Pay) of Rs. 8,39,960/- in Note R – Other Expenses of the Final accounts of Art-E-Mide Construction Pvt. Ltd. (assessee) for AY 2015-16. Therefore, the Chartered Accountant clarifies that this account head should be read as the Consolidated Salary. Thereafter, he reiterates that the payment under this head was purely salary in nature and from their individual accounts PF & ESI were duly deducted and deposited. And the ld. A.R drew our attention to page 44 of the Paper book wherein it is found the details of the PF deducted from all 15 persons to whom Rs. 8,39,960/- was given is seen; and also drew our attention to challans of deposit of PF which are placed at pages 45 to 75 of paper book. Thereafter he drew our attention to page 76 wherein the details of consolidate salary, house rent and pay roll voucher are found placed. Thus according to ld. A.R since these are nothing but consolidate salary given to the tune of Rs. 8,39,960/- and since the salary of an individual employee among them has not exceeded the taxable limit for deduction of TDS, the tax was not deducted at source by the assessee company. Though Smt. Ranu Biswas, ld. D.R fully supported the action of AO, and strenuously tried to convince that AO was right on this issue, however, she could not controvert the contentions and the facts emanating from the documents placed in the paper book to show that the 15 persons to whom the payment of Rs. 8,39,960/- was paid by the assessee were the salary given by the assessee and this fact could be proved from a perusal of page 44 of PB wherein the depositors copy of Employees’ State Insurance Corporation and name of employee is given. We also note that challans of PF is found placed at page 45 to 75 wherein the payments made by the assessee company to the individual account of these 15 persons is found placed, so from a perusal of all these documents along with letter of Chartered Accountant Shri A. K. Basu, who has accepted the mistake of showing Rs. 8,39,960/- as contract payment whereas it was actually salary paid to employees and which mistake led to the confusion for the AO to draw adverse inference against the assessee and on appeal the Ld CIT(A) confirmed the action of AO by passing a non­speaking order without giving any reason. This action by the Ld. CIT(A) cannot be countenanced. We note that the confusion happened due to the typographical mistake in the account head “Consolidated salary (contract pay)” of Rs. 8,39,960/- which should have been under the head Consolidated Salary as clarified by the Auditor A.K. Basu & Associates refer page 31 of PB. And as discussed, the assessee has filed the PF & ESI remittance details of all the 15 persons to whom the assessee had paid Rs. 8,39,960/- who are employees and so the mistake in nomenclature in the account head cannot change the nature of payment as well as the status of the person to whom the payment was made. So we are of the opinion that these15 persons to whom the payment was paid to the tune of Rs. 8,39,960/- are the employees of the assessee and since the salary payment has not exceeded the taxable limit as prescribed before the deduction of tax at source could have been resorted, the assessee has not deducted tax at source and section 194C of the Act in the facts and circumstances of the case was not attracted so, no disallowance was warranted. Therefore, we direct AO to delete the addition of Rs. 5,57,909/-.

7. Ground nos. 5 and 6 raised by the assessee are against the action of Ld. CIT(A) in confirming the addition under the head “donation and subscription” and under the head “puja expenses” amounting to Rs. 15,230/-.

8. Brief facts of the case as noted by the AO is that under the head “other expenses” the assessee has claimed expenses in the nature of subscription and donation of Rs. 97,449/-; when asked for the details, the assessee submitted the details out of which the AO disallowed the following subscription & donation which are as under:

The AO has disallowed the aforesaid claims and made an addition of Rs. 41,287/-. We note that the assessee is in the construction business and returned an income of Rs. 94.59 lakhs. The assessee, a contractor and interior designer has subscribed for Infocircles (subscription) for which payment of Rs .7,416/- has been made and paid, Poddar Solution (DSC) amounting to Rs. 1500/- and subscribed for designers Interior Rs. 3371/- which are claimed to be necessary for updating the latest technology and development in the field of interior designing & construction, therefore these expenses were incurred for the purpose of business of the assessee and therefore according to us these amounts of Rs. 7416/- + Rs. 1500/- + Rs. 3371/- should be allowed as business expenditure and we direct the AO to do so.

9. Coming to donation of Rs. 3000/- for UNICEF, Rs. 25,000/- for Bharat Seva Ashram and Rs. 1000/- for Ramkrishna Path Chakra, we are of the opinion that the assessee may be eligible for deduction u/s 80G of the Act, of course subject to fulfillment of necessary pre-conditions prescribed therein. Therefore, the issue of expenses relating to donation made by the assessee to UNICEF, Bharat Seva Ashram and Ramkrishna Path Chakra (3000 + 25000 + 1000), are set aside back to the file of AO for determining whether the assessee is eligible for deduction u/s 80G of the Act for the said donations and if it is found that the assessee is eligible then it should be allowed in accordance to law or disallowed as per law for the aforesaid action.

10. Coming to the Puja expenses claimed by the assessee to the tune of Rs. 15,230/-, the AO was of the opinion that since the assessee was involved in the business of civil construction, puja expenses is not necessary and therefore he did not allow the claim.

11. We have heard both the parties and perused the records. We note that the AO has relied on the decision of Hon’ble Chattisgarh High Court to deny the claim. However the ld. A.R drew our attention to the decision of jurisdictional High Court in Bata India Ltd. reported in 201 ITR 884(at page 890) wherein the Hon’ble High Court at Calcutta has held that sums donated to different clubs for Durga Puja etc. is necessary expenses incurred by the assessee’s for the smooth functioning of its business and is an allowable expenses u/s 36 of the Act. Since we are bound by the decision of jurisdictional High Court, we allow the claim of the assessee and direct the AO to allow the claim of expenditure on account of puja donation to the tune of Rs. Rs. 15,230/-.

12. Ground No. 7 is against the action of the Ld. CIT(A) in confirming the addition of Rs. 3, 88,995/- on the ground of payment to sub-contractor.

13. Brief facts of the case as noted by the AO is that the assessee has paid to sub­contractor at Assam an amount of Rs. 3,69,021/- and to Sub-contractor at West Bengal to the tune of Rs. 8,00,145/- without deducting TDS, so the AO asked the assessee to give details and to show cause as to why this amount should not be disallowed as per provision of Section 40(a)(ia) of the Act. Pursuant to which the AO acknowledges that the assessee had filed reply wherein he furnished the details of statement of payment and explained that no payment has exceeded the taxable limit as prescribed under Section 194C of the Act, therefore according to assessee disallowance was not warranted. According to AO, he issued notice u/s 133(6) of the Act for verification of the genuineness of the claim made by the assessee. However, according to AO the notices were un-served, therefore according to AO the assessee failed to substantiate the aforesaid payment and therefore he treated the same as bogus and disallowed Rs. 3,88,995/-.

14. Aggrieved the assessee preferred an appeal before the Ld. CIT(A) who has confirmed the action of the AO by passing a non-speaking order.

15. Aggrieved the assessee is before us.

16. We have heard both the parties and perused the records. We note that in respect of the payments in issue, the assessee had filed details of the payments made to seven sub-contractors, from which it reveals that details like date wise payment made to each of the seven sub-contractor is found and has been reproduced by the AO at page 7 and 8 of the assessment order which is given in the table form. We note from a perusal of assessment year [i.e, AY 2015-16] that the threshold limit for deduction TDS was Rs. 75,000/-. We note from a perusal of the table in the assessment order that in this case, the payment made by the assessee to the seven sub-contractors didn’t breached the threshold limit of Rs. 75,000/-. We note the assessee had filed ledger copy of payment, vouchers and details of TDS deducted which are found placed at page 92 to 143 of PB. We note that the assessee has made payment to a sub­contractors at Assam without deduction of TDS to the tune of Rs. 3,69,021/- and Rs. 8,00,145/- has been paid to sub-contractors located at West Bengal and these payments are made by assessee for execution of small works to sub-contractors and who have been paid less than seventy five thousands in that assessment year. Taking into consideration the facts that the assessee has incurred expenses in crores by making payment to sub-contractors in Assam itself where TDS of an amount of Rs. 4,70,97,972/- ,in West Bengal to the tune of Rs. 3,50,86,872/- and in Orissa to the tune of Rs. 76,00,058/- etc. and has filed documents to substantiate payment made which are available at page 92 to 143 of PB, we are inclined to delete the addition.

17. In the result, appeal of the assessee is partly allowed.

Order is pronounced in the open court on 03.12.2020