ITO Vs Late Shri Chandi Ram (ITAT Jaipur)
In ITO Vs Late Shri Chandi Ram, ITAT Jaipur reviewed the contentions presented by the Departmental Representative (DR) and the Authorized Representative (AR) regarding the taxation of business income. The bench carefully examined the records, including audited accounts and relevant notes, while considering the arguments put forth by both sides.
The bench noted that the assessee had received a demand draft on November 20, 2010, which was subsequently deposited in their bank account. The amount was recorded in the assessee’s books of account for the period ending March 31, 2011. The audited accounts revealed that the liability amounting to Rs. 20,15,36,554 was squared up in the financial year 2011-12.
Additionally, the bench observed that the assessee had recognized the interest income of Rs. 1,39,44,881 as capital receipts and credited it to the capital account. However, the bench acknowledged that the income in question was not interest on compensation or enhanced compensation, but rather interest on delayed payment related to the contracts executed by the assessee. Referring to a previous Supreme Court judgment, the bench deemed this interest as an accretion to the assessee’s business receipts.
Furthermore, the bench took note of the relief provided by the CIT-A, who considered estimated expenditure, treated the income as business receipts, and relied on the judgment of the jurisdictional high court in the assessee’s own case. The bench highlighted that the entire receipt of contract money and compensation on delayed payment needed to be considered as business income, based on previous assessments and court decisions.
Conclusion: After careful consideration, the appellate bench dismissed the appeal of the Assessing Officer. The bench found no fault with the CIT-A’s detailed findings, which aligned with the directions given by the jurisdictional high court in the assessee’s previous case. Thus, the bench upheld the relief granted to the assessee, confirming that the income in question should be treated as business income.
FULL TEXT OF THE ORDER OF ITAT JAIPUR
This appeal is filed by the revenue aggrieved from the order of the Commissioner of Income Tax (Appeals), Kota [ Here in after referred as “Ld. CIT(A)” ] for the assessment year 201 2-13 dated 21 .02.2018 which in turn arises from the order passed by the ITO, Ward-1(1), Kota passed under Section 143(3) r.w.s 147 of the Income tax Act, 1961 (in short ‘the Act’) dated 28.12.201 6.
2. In this appeal, the revenue has raised following grounds: –
“1. On the facts and in the circumstances of the case, the CIT(A) has erred in deleting the addition of Rs. 1,76,41 ,574/- out of total addition of Rs. 1,93,23,858/- made on account of arbitration receipts.
2. The appellant craves liberty to raise additional ground and to modify/amend the ground of appeal at the time of hearing.”
3. The assessee has raised a preliminary objection against the maintainability of the appeal on the ground that the department has filed the present appeal against the deceased person despite the fact the assessee had already expired on 21.02.2017. The ld. Counsel contended that since the assessee has raised legal issue regarding maintainability of the appeal and the preliminary objection raised by the assessee being legal in nature and goes into the root of the matter therefore, vide order dated 31.07.2019 after hearing both the parties the coordinate bench of this tribunal has passed a detailed order. The relevant finding of the bench on the legal issue vide order dated 31.07.2019 is reiterated here in below for the sake of brevity of the facts:
4. We have considered the rival submissions as well as the relevant material on There is no dispute that the assessee late Shri Chandi Ram had expired on 21st February, 2017 during the pendency of the appeal before the ld. CIT (A). This fact was apprised to the AO by the legal heir by various letters and also brought to the notice of the ld. CIT (A). However, the ld. CIT (A) has passed the impugned order in the name of the deceased assessee and not against the legal heir of the deceased assessee. The AO was very much aware about the death as it is manifest from the record that even the set aside assessment order for the assessment year 2004-05 was passed by the AO on 21st December, 2017 in the name of legal heir. When the appeal of the revenue was listed for hearing first time before the Tribunal on 12th July, 2018, the legal heir of the deceased assessee filed an application raising the objection against the maintainability of the appeal. On that date of hearing, the Tribunal adjourned the matter to 4th September, 2018 and directed the AO to submit the report on the expiry of the assessee and necessary steps/action taken. Immediately after the said directions of the Tribunal, the AO has filed a revised Memorandum of Appeal in Form No. 36 wherein deceased assessee has been substituted by the legal heir. It is pertinent to note that on 12th July, 2018 when the Tribunal directed the AO to take the necessary action on this aspect, the limitation had already expired for filing the appeal against the impugned order of the ld. CIT (A). However, since the Tribunal has directed the AO to take necessary action and thereby granted the leave to the department to substitute the deceased assessee by legal heir, therefore, the revised form no. 36 filed by the department on 26th July, 2018 is as per the leave granted by the Tribunal for bringing the legal heir on record. There is no quarrel on the point that the appeal filed against the deceased assessee is not maintainable, however, the said invalid appeal filed by the revenue will not forfeit the right to file a fresh appeal against the legal heir subject to the leave of the court. In the case in hand, since the revenue was allowed to take the necessary steps, therefore, the delay in filing the Memorandum of Appeal against the legal heir of the deceased assessee has been found to be explained by the revenue due to inadvertent mistake and, therefore, even if the said revised form no. 36 is filed belatedly, the Tribunal is satisfied with the reasons and cause of delay explained by the ld. D/R. Accordingly, the delay in filing the form no. 36 is condoned.
5. As regards the decisions relied upon by the ld. Counsel for the assessee, there is no dispute that the appeal filed against the deceased assessee is not covered under the provisions of section 292B and, therefore, the same is an invalid appeal liable to be dismissed. However, the appeal dismissed being invalid in limini due to the reason of impleading a deceased assessee cannot take away the right of the appellant to file a fresh appeal against the legal heir of the deceased assessee subject to the provisions of limitation and leave taken from the court. Hence once the Tribunal has granted the leave to the revenue for filing the revised form no. 36, the appeal of the revenue is admitted for deciding on merits. The legal preliminary objection raised by the assessee is rejected. The appeal of the revenue is directed to be listed for hearing on merits on 14th October, 2019. In the result, preliminary objection of the assessee is dismissed.
4. Since the preliminary objection raised was dismissed by a detailed order as referred in above by the coordinate bench of this tribunal and there is no contrary order of the higher court in the matter, the appeal filed by the revenue listed to be decided on merits and the same was heard on merits.
5. Succinctly, the fact as culled out from the records is that the assessee derives income from civil construction works. A notice u/s 148 of the Income-Tax Act, 1961 issued on 08.03.2016, after seeking prior approval of the Additional Commissioner of Income-Tax, Range-01, Kota u/s 151(2) of the Income Tax Act, 1961 duly served upon the assessee on 09.03.2016 through the Notice-Server with requiring to deliver a return in the prescribed form of his income for the AY 2012-13 within 30 days from the date of service of that notice. The reasons to believe recorded u/s. 148(2) of the Act which reads as under :
“On perusal of the assessment records, if notices that the assessee has received interest on arbitration receipts of Rs. 1,39,44,881 which has credited in capital account. But, he has not pay tax thereon as he did not disclose such receipts as revenue receipts. Further, he has received contract receipts of Rs. 58,46,714 and the same has shown in P&L A/c, out of which he has transferred of Rs. 53,78,977 in his capital A/c without forming part of his total income. Thus, it is a clear that the assessee has capitalized such sums without paying a single penny as a tax thereon.
In view of the above facts and circumstances, such income i.e. Rs. 1,93,23,858 (Rs. 1,39,44,881 + Rs. 53,78,977), to the extent of such receipts which is not forming part of his total income, has escaped assessment should be chargeable to tax under section 147 of the Income-Tax Act, 1961. I, therefore, have reason to believe that the assessee has concealed the particulars of his income for the above-mentioned year. Therefore, Notice under section 148 of the Income-Tax Act, 1961 is to be issued for initiating the escaped assessment proceedings under section 147 of the Act.”
6. In response assessee contended that there is no understatement of income and no income has escaped assessment to tax as envisaged u/s. 147 of the Act. Therefore, assessee stated to vacate the notice and drop the re-assessment proceedings. Without prejudice assessee also submitted that the return filed on 28.05.2012 be treated as a return filed in compliance to the impugned noticed dated 08.03.2016. Thereafter the notice u/s. 143(2) of the Act issued on 08.04.2016 for compliance on 25.04.2016 with notice u/s. 142(1) of the Act duly served upon the assessee along with a copy of reasons recorded u/s. 148(2) of the Act.
6.1 The assessee objected to issue notice u/s. 148 which was rejected by letter dated 08.04.201 6. The assessee again objected to the issue of notice u/s. 148 vide letter dated 25.04.2016 which was also rejected vide letter dated 28.04.201 6.
6.2 The assessee filed a written submission on 14.06.2016 in compliance to the notice dated 28.04.2016 along with re-computation / revised computation of income offering at Rs. 4,96,970/- [ being the 8.5 % of Rs. 58,46,714 receipt relating to contract work ] and Rs. 11,85,314/- [ being the 8.5 % of 1,39,44,881/-interest of compensatory nature for delay of payment] totaling to 16,82,284/- as against the return of income of Rs. 4,67,737/- stating that this additional income is declared to purchase the peace and to avoid unending litigation with the department. The assessee further stated that tax on the said income is paid on the condition that no additional tax liability is created; no penalty is lied and no other action for this or earlier year is taken and assessee requested to accept the humble offer as the assessee seriously ill and is bed ridden. The impugned receipt is received in the assessment year 2012-13 pertains to the work executed by the assessee in assessment year 1989-90 & 1990-91 but the payment was not released as the matters went in dispute to be decided by the arbitration. The assessment for both these years were completed u/s. 143(3) of the Act. The books of accounts were rejected u/s. 145(3) of the Act and income of the assessee was determined by way of rate application which stood finally determined at 8.5 % by CIT(A) and ITAT. It is the submission of the assessee that had there been no dispute and if the contract receipts were released in the relevant assessment years, then the income on these receipts apparently would have been decided by way of rate application. Therefore, the assessee urges and made the submission to complete the assessment by applying to NP rate of 8.5%. It is further submitted that the major part of the receipt is on account of interest of Rs. 1,39,44,881/-. This receipt of interest fallout of the long delay of 20-22 years in settling the matter. Therefore, it would be not proper on the part of the department to press for submitting details of expenses on such receipts which are impossibility. The assessee spends time and money in engaging the advocates and that all these efforts ultimately succeeded. The interest has been paid as compensation for delay and is of the character of contract receipts to be assessed by way of rate application. The second part of the receipt to the tune of Rs. 58,46,714/- pertain to works executed in the assessment year 1989-90 & 1990-91 but was not paid in those assessment years. Further it is submitted that it was because of these facts and nature of the case that the books of account were rejected and income was determined by way of net profit of 8.5% of the receipt.
6.3 The ld. AO taken into consideration the submission of the assessee and stated that receipts to the tune of Rs. 58,46,714/- pertain to work executed by the assessee on Anandpuri Canal Work and Annas Syphone Works. These receipts are in respect of works executed by the assessee in Assessment Year 1989-90 & 1990-91 but were not released on account of arising of disputes. The matter went to arbitration and it is after more than 20 years that the amount has been released to the assessee during the A. Y. 2012-13. The assessee has also received interest of compensatory nature for delay of payment of long delay of 20-22 years in settling the disputes.
6.4 Based on the detailed discussion in the assessment order, a final show cause notice dated 18.11.2016 was issued to the assessee and the assessee filed reply on 28.11.2016 and 14.12.2016 contending that the receipt under reference relates to those years i.e. A. Y. 1989-90 & 1990-91 where in the books were rejected and profit was estimated and the similar ratio should apply related to the receipt received in the year under consideration related those years. Relying on the decision of the apex court in the case of Govinda Choudary [ 203 ITR 881 ] the assessee submitted that the interest payable in connection with the delayed payment of contract amount partakes the same character as the receipt of contract.
6.5 The ld. assessing officer observed in the order that the assessee did not produce any books of account with its supporting bills and vouchers regarding expenditure which may be considered therefore, he rejected the contention of the assessee while doing so he relied upon the order dated 15.12.2010 of ITAT in the assessee ‘s case for A. Y. 2006-07 where in the ITAT took the view that
“No details of expenses shown to have been incurred in those years and it is a finding that such expenses have not been entered in books of account. Such an expenditure for which no details filed or not entered in books of account is not allowable as per provision to section 69C of the Act. Hence even if for the argument it is accepted that the assessee has incurred expenditure against such receipts then such expenditure will not be allowable”
However, the ld. AO has accepted the submission of the assessee to treat the interest receipts of Rs. 1,39,44,881/- as business receipts considering the decision of the apex court in the case of Govinda Choudhary & sons [ 203 ITR 881 (SC) ]. However, the contention of the assessee to consider the income of Rs. 11,85,314/- against such interest receipts of Rs. 1,39,44,881/- was not accepted. As the assessee did not furnish and/or explain for incurring any expenditure against such interest receipts. The ld. AO further noted the interest receipt of the assessee on compensation / enhanced compensation is being deemed to be the income of the year in which it is received under the provision of section 145A(b) of the Act. The assessee has capitalized the entire interest receipts in his original ITR and since it was escaped the assessment the reopening proceeding initiated against the assessee. The assessee furnished the details of the legal expenses of Rs. 26,29,000/- and travelling expenditure of Rs. 3,49,330/- over these periods. On perusal of these bills the ld. AO noted that these expenses are not having nexus with the court proceedings related to the arbitration awards and he has discussed the purposes of each legal expenses bills in his order in para 9.5. Finally, the ld. AO made an addition of Rs. 1,93,23,858/- [ 58,46,714 + 1,39,44,881 less 4,67,737/- income already offered ] charged to tax.
7. Being aggrieved, the assessee carried the matter in appeal before the ld. CIT(A). Before the ld. CIT(A) the assessee has challenged the reopening proceeding and the addition made by the AO. The ld. CIT(A) upheld the reopening proceeding. But in respect of the addition made by the ld. AO the relevant finding of the ld. CIT(A) is reiterated here in below:
“As regards Ground of appeal no. 8 to 14 (Except 1 0&1 1), objecting to treating of gross receipts as income by the A.O. when these pertained to A.Y. 1989-90 & 1990-91 where the books were already rejected by the A.O. u/s 145 & profit estimated, it is apparent that though the facts are as above, however the A.O.’s stand on this has to be seen in the light of department’s earlier stand.
On his part the assessee, in the course of reassessment proceedings filed a revised computation offering an additional 0.5% above the originally returned income (accepted by the department with income of Rs 4,67,737/-) and on the interest portion@ 8.5% amounting to Rs. 11,85,31 4/- thus revising his total income to Rs. 1 6,82,284)-& passing the additional tax & interest thereon voluntarily.
The fact involved was that the assessee received an amount of Rs. 32,16,195/- an award for Anandpuri Canal Work & Rs 1,69,37,559/- for Annas Syphon Work vide order of Supreme Court in SLP no. 11185-86 of 2011 (order dt. 16/08/11) in civil suit filed against the irrigation department. The amount of award became final as it was finally decided by Apex Court dismissing the irrigation department’s appeal on limitation. The award constituted refund of security, compensation, extra & disputed items & interest etc.
Since the award was pertaining to A.Y. 1989-90, the assessee referred to the order in that year’s assessment proceedings mentioning rejection of books there & application of N.P. rate @ 10% (against 1.48% shown by him) by the A.O., which was upheld by CIT(A) upto 8.5% and also confirmed by ITAT.
For the A.Y. 1990-91, similarly the books were also rejected and N.P. rate of 11% adopted by the A.O. which was again reduced by CIT (A). Ajmer to 8.5% which on this Ground was not challenged by the department before ITAT, hence on N.P. rate it became final.
The A,O in this assessment order has held that the interest was compensatory in nature hence covered u/s 1 45A(6) of the IT Act, 1961. Further, in the absence of any evidences in support of any claim of expenses incurred to earn these amounts, since allthe expenses had been duly considered in the originally filed returns, no further claims were allowable & for that reason argument of applying percentage as profit on this receipt was not allowable.
He relied on the order for A.Y. 2004-05 where award for contract related to A.Y. 1993- 94 was received where a similar stand had been taken by the assessee & rejected by the department. The ITAT in that case set aside the matter on verification of expenses. In the second round the ITAT mentioned that the identical issue was decided by the Bench for AY 2006-07 and challenged before the High Court & was pending disposal. Hence, they again set aside the issue to the AO. to decide the same on the basis of High Court decision (setting aside order of CIT (A) who had allowed part relief to the assessee.
The issue decided in AY. 2004-05 which was referred by ITAT was regarding verification of claim of expenses against the reward (claimed in A.Y. 1993-94 or not). The ITAT treated the entire contract receipt as income of the assessee. Hence in A.Y 2006-07 also the A.O. took the same stand & held that since the assessee could not prove with documentary evidence that expenses pertaining to A.Y. 1993-94 & 1990-91 were not claimed in those years, the entire arbitration receipts were liable to be brought to tax.
In further appeal, the ITAT reversing the order of CIT(A) held that the expenditure was not allowable even if incurred as it was never a part of audited P&L account for A.Y. 1990-91 & 1993-94.
The assessee explained in the present assessment under appeal here that receipts in AY. 2006-07 which pertained to two years did not contain contract related receipts to but for illegal termination of contract work. However in A.Y. 2012-13 the award receipts were related to contract works. He summarized the difference accordingly & mentioned that the ratio for A.Y. 2006-07 was not applicable here as in this year receipts pertained to A.Y. 1989-90 & 1990-91 when books were rejected & N.P. rate applied.
The A.O. has however, not considered the explanations of the assessee & held the entire receipt as taxable based on ITAT’s order for A.Y. 2006-07 regarding claim of expenses & secondly on the interest receipts while agreeing that these were business receipts in view of Apex Court order in Govinda Chaudhary & Sons (1993) 203 ITR 881 (SC), he has not accepted rate application on the basis of no claim of expenses evidenced against these receipts. He has therefore also rejected the assessee’s revised computation of income filed in the assessment proceedings as discussed earlier. He also rejected the claim of expenses of Rs. 26,29,000/- for AY 2011-12 to 201 7-18 as legal expenses & Rs. 3,49,330/ for AY 2001-02 to 2012-13 as travelling expenses since nexus of these with arbitration award could not be established & order of Apex Court was dated 16.08.2011 & this claim was made afterwards vide order sheet entry dated 16.12.16 (Page 49 & 50 of assessment order).
Since the A.O. has broadly relied on the ITAT’s order in the appellant’s own case for A.Y. 2006-07 in which the ITAT had mentioned that no claim of expenses will be allowable & as per the assessment order the appeal was then pending before the High Court, a reference is now needed to be made to the Rajasthan High Court order for the above year enclosed with the assessee’s paper book. The appeal was decided on 30/08/17 in DB income tax appeal no. 19/2011 on the following issue-
“Whether the Tribunal was justified in treating the entire income of Rs. 8,13,194// as income for the assessment year in question?”
The Hon’ble jurisdictional High Court at para 8.1 to 8.4 of the order held that “while considering the statement for A.Y. 1990-91 & 1993-94, the A.O. ought not to have been given finding whether the expenses are claimed or not instead of deciding the issue which is not relevant and simply deducted the amount which is claimed in the income.”
The High Court opined that the CIT (A) had rightly held the profit rate and allowed the claim of the appellant. The Tribunal had committed serious error in concluding that subsequent year’s expenses which are claimed ought not to be allowed in the relevant year.
In view of the decision of Supreme Court & other High Court decisions, the income which has been incurred in the year 2006-07 is required to be allowed as expenses were not claimed in the earlier year. Since no finding arrived by the A.O. whether the expenses are claimed or not for the AY 2004-05.
Taking into consideration the above, the issue is answered in favour of the assessee and against the department.
The agreement of the High Court on the Apex Court decision in the case of CIT us. Govind Chaudhary & Sons 203 ITR 881 (SC) & other High Court decisions cited to reach its findings mentioned above shows that while the income from interest & contract work were both revenue receipts & the interest being attributable to the contract receipts disputed (& received later) it was totally de hors the contract business and could not be from other sources’ as the A.O. has also agreed here.
In the present case also, therefore the entire receipts of contract & interest amounts covered by the award pertaining to the A.Ys. 1989-90 & 1990-91 will be considered as business receipts only. Now coming to the issue of what amount out of the above required to be taxed, firstly it is clear from the High Court order for A.Y. 2006-07 in the appellant’s own case (on which ITAT order reversed by High Court as referred above, the A.O. had relied), the entire income could not be brought to tax.
The issue will then arise as to whether any expenses were there in respect of the same? Although the appellant in the course of the proceedings did mention about legal & travelling expenses which the A.O. did not consider in absence of nexus with the arbitration award, but in any case the analogy is that these awards pertained to works done for A.YS 1989-90 & 1990-91 & only reflected in the return for AY 2012-13 because they were received in financial year 2011-12, when the matter of award was finalized by the Apex court. Various Tribunals & High Courts have opined that in the case of contractors, estimation of income on such arbitration awards was a reasonable view on facts involved.
In the present case also, it is observed that on the regular receipts for A.Y. 1989-90 & 1990-91, the department had resorted to rejection of books of accounts u/s 145. Since the receipt of award is from those very contracts & related books rejected by the department then & estimating the profits, the contract & the interest awarded are also deemed to be of the same character & whatever be the receipt it was duly covered by the Net Profit rate on the same as applied & finalized earlier in the first round of assessment proceedings.
The contract as well as interest award only partake the character of business receipts in the present case and were awarded on disputes & delay caused in regular course of contract works, the primary business of the assessee.
As regards the revised computation of the assessee filed in the course of assessment proceedings, it has been held by higher judicial forums that if a revision is done in the income before the completion of assessment proceedings, there is no bar against it being accepted (at least at appellate level).
In view of the discussion made above on the lacts involved & in law, I am of the view that the contract as well as interest receipts awarded to the appellant totaling to Rs. 1,93,23,858/- were in the nature of business receipts & deserved to be assessed as such. In the background of these pertaining to the A.Ys for which books of the appellant were rejected u/s 145 & net profit rate estimated, I am of the opinion that the same net profit rate of 8.5% shall be applicable on these receipts as well.
THE ITAT CHANDIGARH BENCH B in Mit Mohan Singh Kahlon v. Deputy Commissioner of Income-tax 39 taxmann.com 145 (Chandigarh – Trib.) held-
Section 143, read with section 139, of the Income tax Act, 1961-Assessment – General Revised computation of income Assessment year 2007-08 Whether when a notice under section 143(2) has been issued and proceedings of assessment under section 143/3) are in progress, assessee can put forth any claim for deduction or exemption or relief, which was not claimed in return of income and same shall have to be considered by Assessing Officer Held, yes – Whether similarly, in case assessee files and produces correct computation of his income, and can conuince Assessing Officer that income disclosed in original retum is not actually correct income and correct income is one which is being furnished during assessment proceedings, such a revised computation has to be considered and acted upon by Assessing Officer-Held, yes Whether, therefore, where assessee had inadvertently offered higher income in his return but during assessment proceeding assensee filed reused computation of his total income to show that he had Tower income than declared in return, Assessing Officer must compute income on basis of revised computation of income- Held, yes
THE ITAT MUMBAI BENCH F in Furniture Concepts (1) Ltd. v. Assistant Commissioner of Income-tax,Range-9 (1), Mumbai 64 taxmann.com 47 (Mumbai Trib.) held-
Section 139 of the Income-tax Act, 1961 Return of income (Revised computation)- Assessment year 2007-08 Assessee filed its return declaring certain taxable income- Subsequently assessee filed revised computation wherein deduction was claimed on account of remission by bank under one time settlement Assessee did not raise said claim by filing a revised return because prescribed time for filing return had already elapsed Assessing Officer refused to consider revised computation submitted by assessee Whether since mandate of Constitution is to levy and collect due taxes, issue raised by assessee was to be restored to file of Assessing Officer to examine it afresh and decide in accordance with law- Held, yes
This additional amount of income comes to Rs. 16,82,284/- and has been disclosed by way of revised computation filed in the course of assessment proceedings. This is over and above the income disclosed in the regular/revised return. The same is considered as acceptable. The balance addition of Rs. 1,76,41 ,574/- Is therefore, directed to be deleted.
These grounds of appeal are treated as partly allowed.”
8. The revenue feeling not satisfied with the finding of the ld. CIT(A) carried this matter by filling an appeal before this tribunal on the grounds as stated here in above.
8.1 The ld. DR representing the revenue has relied upon the detailed finding of the ld. AO as recorded in the scrutiny report of the ld. AO forwarded vide ld. DR submission dated 18.10.2021. The ld. DR also relied upon the detailed submission containing the background of the case and comments on the issue involved vide submission dated 02.05.2022. These are reiterated here in below:
