CIT Vs SPL Infrastructure Pvt. Ltd. (Madras High Court)
Conclusion: Since assessee-contractor carried out work for laying down road in a thermal power plant, therefore, there was no question of not incurring of expenditure by assessee to carry on road work contracts but the disallowance of whole expenditure towards sub contract work by AO for want of proper bills was not justified instead disallowance of 10% of expenses made by appellate authorities was justified.
Held: Assessee was a contractor, who carried out the work of road laying in the Thermal Power Plant. AO made an addition in the hands of assessee on the ground that 14 of the sub contractors to whom the sub contracts were assigned by assessee/ contractor were not produced before AO upon summons being issued to them and thereupon, disbelieving their existence and the sub contract work carried out by them, the entire payments made to them were disallowed by AO and they were added back to the income of assessee. Tribunal, restricted disallowance to 10% of expenditure incurred towards subcontractors. It was held that a bare perusal of the compared results of the Gross Profit and Net Profit by assessee clearly showed that the Gross Profit at the rate of 14.21% and Net Profit at the rate of 3.83% declared by Assessee, with the addition of 10% agreed by assessee before CIT (Appeals), resulted in a much better result of profits declared by assessee in the present Assessment Year viz., A.Y.2010-11 as compared to the previous years. Therefore, the estimation of profit by Appellate Authorities even on the premise taken by AO that some of the sub contractors could not be produced before AO, did not result in any perversity in the findings of CIT (Appeals) as well as Tribunal. Considering nature of work carried on by assessee, there was no question of not incurring of expenditure by assessee to carry on road work contracts and the work was mentioned in the Measurement book maintained by assessee and counter signed by the sub contractors. However, there was chances of inflating the expenditure for which disallowance of 10% of expenditure claimed was justified and disallowance of entire amount could not be appreciated.
FULL TEXT OF THE HIGH COURT ORDER /JUDGEMENT
The Court was held by Video Conference, as per the Resolution of the Full Court dated 3 July 2020, by Judges at their respective residences and the counsel, staff of the Court appearing from their Order dt. 7.8.2020 in TCA 766 of 2017 CIT v SPL Infrastructure Pvt Ltd. respective residences.
2. The Revenue has preferred this Appeal under Section 260A of the Act, aggrieved by the order dated 14.1.2016 passed by the learned Tribunal for the Assessment Year 2010-11.
3. The Respondent/Assessee is a Contractor, who carried out the work of road laying in the Thermal Power Plant, Rathnagiri, to the tune of Rs.3300 lakhs. The learned Assessing Authority made an addition of Rs.4,41,08,210/- in the hands of the Assessee on the ground that 14 of the Sub Contractors to whom the sub contracts were assigned by the Respondent/Assessee/ Contractor were not produced before the Assessing Authority upon summons being issued to them and thereupon, disbelieving their existence and the sub contract work carried out by them, the entire payments made to them were disallowed by the Assessing Authority and they were added back to the income of the Assessee.
4. On appeal by the Assessee before the learned Commissioner of Income Tax (Appeals), the said addition was restricted to 10% of the total sum of Rs.4,41,08,210/- on the agreement of the Assessee and thus, relief to the extent of 90% was granted by the Commissioner of Income Tax (Appeals), which order was upheld by the learned Tribunal by the order impugned before us.
5. The following substantial questions of law are suggested in the Memorandum of Appeal filed by the revenue:-
“(i) Whether the Tribunal was correct in restricting the disallowance to 10% of expenditure of Rs.4,41,08,210/- incurred towards subcontractors even though the assessee had failed to prove the identity, credibility and genuineness of the sub contractors?
(ii) Whether the Tribunal was right in not appreciating the findings of the assessing officer that the contractors were nonexistent, inexperienced, incompetent and bogus and the assessee had claimed the said expenditure only to reduce the income and the tax incidence on the income.
(iii) Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in holding that the liability of the assessee to pay back to the creditors had not ceased even after 3 years time limit provided under Limitation Act and thereby holding that no addition can be made on account of cessation liability u/s 41 (1)?“
6. The relevant findings of the learned Tribunal on the said issue, including the extract of the order passed by the learned Commissioner of Income Tax (Appeals), are quoted below for ready reference:
“4. On appeal, the CIT(A) has restricted the disallowance to Rs.44,10,821/- as against the disallowance of Rs.4,41,08,210/- by observing as under:
” 6.1.2. I have considered the findings of the assessing officer and also submission made by the AR of the appellant in the course of appellate proceedings along with the cited case laws on this issue carefully. It is not disputed that all the 14 persons have furnished the confirmation and some of the parties in response to the summons issued to them have furnished the copies of the Income Tax returns and also copies of the bank accounts. Some of the parties have also confirmed that they do not have invoice copies and maintain only M. Book which was retained by the assessee i.e M/s.SPL Infrastructure Private limited. The copy of the M. Book placed before me give the details of work done for particular period, measurement up to date of work done with signature of the supervisor of the company. 11 parties have sent the details from far of places to the assessing officer through courier. One party namely M/s.Sakthi Kanna Constructions Private limited appeared before the assessing officer and the transactions with this party were accepted by the assessing officer. The letters issued by assessing officer were remain uncomplied with only two parties. It is also fact that the appellant carried out the sub contract work with EDAC Engineering limited for laying the road work at the remote places for the purpose of Thermal Power Plant, JSW Energy (Rathnagiri limited), Nandiwadi Maharashtra State. For laying out road work man power is necessarily required. There is no evidence available on the record that the appellant had not executed the road work at Thermal Power Plant, Rathnagiri. The most of the labour contractors were either relatives of the appellant or known to the appellant. The entire disallowance made by the assessing officer in respective expense debited in the name 14 parties cannot be accepted without disproving the confirmations received, disproving the payments made to them beyond doubt, disproving the execution of the work order. However there is a possibility of the inflation of the expenses in respect of road work carried out by the appellant as a whole. In the earlier A.Ys, the department accepted the 5% of the turnover declared by the appellant after detection of the inflation of the expenses by carrying out survey action. In the year under consideration, there was increase in GP and Net profit ratio declared by the appellant as compared to the GP and Net profit ratio declared in the earlier years. However the net profit declared by the appellant at 3.83% is less than the 5% of the Net profit accepted by the department in the earlier years. The 5% of the Net profit on the turnover of Rs. 3334.16 lacs comes to Rs.166.7 lacs. The appellant had declared Rs.127.53 lacs as Net profit. The difference comes to about Rs.39.178 lacs. In the course of the appellant proceedings, the AR of the appellant had come out to offer 10% of the disallowance of Rs.4,41,08,210.00 which comes to about Rs.44,10,821.00 on the basis of the decision of the Honorable ITAT, Chennai B BENCH reported in (2014) 159 TTJ (Chennai) 526 and also on the basis of the decision of the Honorable Gujarat High Court reported in [2013] 355 TR290 (Guj). In the case cited by the AR of the appellant decided by Chennai B BENCH, the similar road work was entrusted to two persons namely Sri.N.Erulappan and Sri S.Kesavan by EDAC Engineering limited and the assessing officer recorded the statement of the two persons who admitted that they had not carried out any work of the nature mentioned. In spite of the denial of the work carried out by Sri N.Erulappan and Sri S.Kesavan, on examination of the facts, the Honorable tribunal came to conclusion that the entire disallowance made by the assessing officer cannot be sustained and restricted the disallowance to 25% of the total claim of Rs. 22.10 crores. The Honorable Gujarat High Court in the case of Bholanath Poli Fab Pvt. Ltd., reported in [2013] 355 ITR 290 held that tribunal having examined the evidence on the record came to the conclusion that assessee did purchase cloth and sell the finished fabrics, as a natural corollary, not the amount covered under such purchase but the profit element embedded would be subject to tax. In the instant case the parties have not denied the payments made to them and also have not denied the work carried out by them. The existence of the parties and the payments are also not disproved. The only fact was that the parties have not appeared before assessing officer for the summons issued to them but have given confirmation to the assessing officer. Since all the parties are known to the appellant, the appellant would have taken to the adequate steps for producing before the assessing officer for examinations. The net profit ratio declared by the appellant in the year under consideration is also less as compared to the net profit computed by the assessing officer in the earlier years which was also accepted by the appellant. Looking to the facts of the case in totality and legal position on this issue, I am convinced that the offer of the 10% of the total disallowance of Rs.4,41,08,210.00 made by the appellant during the course of the appellate proceedings as additional income over and above retuned income is reasonable. The offer of the 10% of the total disallowance would lead to net profit ratio more than 5% of the turnover which was any way accepted by assessing officer in the earlier years. Therefore, the assessing officer is directed to restrict the disallowance to Rs. 44,10,821.00 as against the disallowance of Rs.4,41,08,210.00. The grounds of appeal raised by the appellant on this issue are treated as disposed off accordingly.” .
Against the above, the Revenue is in appeal before us.
5. . We have heard both the parties and perused the material on record. In this case, it is admitted fact that 14 persons have furnished confirmation and some of the parties in response to summons issued to them have furnished the copies of income-tax return and also copies of bank account. Some of the parties also confirmed that they do not have invoice copies and maintain only Method book which was returned by the assessee. The copy of M.Book gave details of work done for a particular period, measurement up to the date of work with the signature of supervisor of the company. 11 parties have sent the details from far off places to the Assessing Officer through courier. However, there was no response from two parties. The assessee has taken the road laying work and also completed that work. Most of the payments are not supported by bills issued by the above parties. On the above reasons, the Assessing Officer disallowed Rs.4,41,08,210/-. However, the CIT(A) considering the nature of business of the assessee and also chances of inflated expenses, sustained the disallowance to 10% of above expenditure. As seen from the fact brought on record that the assessee’s total turnover for the assessment year under consideration is at Rs.3334.16 lakhs against which the assessee declared gross profit of 14.21% and net profit at 3.83%. When we compare the turnover of gross profit and net profit of the present assessment year with other assessment years it is at higher side. This can be seen from the below mentioned table:
Rs. in lakhs
