Commissioner Of Income Taxchennai v. M/S.spl Infrastructure Pvt. Ltd

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 7.8.2020 CORAM THE HON'BLE DR.JUSTICE VINEET KOTHARIANDTHE HON'BLE MR.JUSTICE KRISHNAN RAMASAMY T.C.A.No.766 of 2017 Commissioner of Income TaxChennai. ... Appellant/Appellant vs M/s.SPL Infrastructure Pvt. Ltd.,No.15, Kasthuri Rangan Street, Alwarpet, Chennai-18. ... Respondent/Respondent Tax Case Appeal filed under Section 260-A of the Income TaxAct, 1961 against the order of the Income Tax AppellateTribunal, Madras ‘C’ Bench dated 14.1.2016 in inI.T.A.No.2488/Mds/2014, against the Order of the Commissioner of Income Tax(Appeals)-VI, Chennai-34 dated 30/06/2014 in ITA No.1388/13-14/A-VI, against the order of the Deputy Commissioner of IncomeTax, Company Circle-VI (1), Chennai dated 28/03/2013 in PAN/GIRNo.AAICSO881N. For Appellant : Mr.J.Narayanasamy, Senior Standing Counsel For Respondent: Mr.M.P.Senthilkumar (Made by Dr.Vineet Kothari,J) The Court was held by Video Conference, as per theResolution of the Full Court dated 3 July 2020, by Judges attheir respective residences and the counsel, staff of the Courtappearing from their respective residences. https://hcservices.ecourts.gov.in/hcservices/ 2. The Revenue has preferred this Appeal under Section 260Aof the Act, aggrieved by the order dated 14.1.2016 passed by thelearned Tribunal for the Assessment Year 2010-11. 3. The Respondent/Assessee is a Contractor, who carried outthe work of road laying in the Thermal Power Plant, Rathnagiri,to the tune of Rs.3300 lakhs. The learned Assessing Authoritymade an addition of Rs.4,41,08,210/- in the hands of theAssessee on the ground that 14 of the Sub Contractors to whomthe sub contracts were assigned by the Respondent/Assessee/Contractor were not produced before the Assessing Authority uponsummons being issued to them and thereupon, disbelieving theirexistence and the sub contract work carried out by them, theentire payments made to them were disallowed by the AssessingAuthority and they were added back to the income of the Assessee. 4. On appeal by the Assessee before the learned Commissionerof Income Tax (Appeals), the said addition was restricted to 10%of the total sum of Rs.4,41,08,210/- on the agreement of theAssessee and thus, relief to the extent of 90% was granted bythe Commissioner of Income Tax (Appeals), which order was upheldby the learned Tribunal by the order impugned before us. 5. The following substantial questions of law are suggestedin the Memorandum of Appeal filed by the revenue:-"(i) Whether the Tribunal was correct inrestricting the disallowance to 10% of expenditureof Rs.4,41,08,210/- incurred towards subcontractorseven though the assessee had failed to prove theidentity, credibility and genuineness of the subcontractors? (ii) Whether the Tribunal was right in notappreciating the findings of the assessing officerthatthecontractorswerenonexistent,inexperienced, incompetent and bogus and theassessee had claimed the said expenditure only toreduce the income and the tax incidence on theincome. (iii) Whether on the facts and in thecircumstances of the case, the Income Tax AppellateTribunal was right in holding that the liability ofthe assessee to pay back to the creditors had notceased even after 3 years time limit provided underLimitation Act and thereby holding that no additioncan be made on account of cessation liability u/s 41(1)?" 6. The relevant findings of the learned Tribunal on the saidissue, including the extract of the order passed by the learned Commissioner of Income Tax (Appeals), are quoted below for readyreference: "4. On appeal, the CIT(A) has restricted thedisallowance to Rs.44,10,821/- as against thedisallowance of Rs.4,41,08,210/- by observing asunder: (iii) Whether on the facts and in thecircumstances of the case, the Income Tax AppellateTribunal was right in holding that the liability ofthe assessee to pay back to the creditors had notceased even after 3 years time limit provided underLimitation Act and thereby holding that no additioncan be made on account of cessation liability u/s 41(1)?" 6. The relevant findings of the learned Tribunal on the saidissue, including the extract of the order passed by the learned Commissioner of Income Tax (Appeals), are quoted below for readyreference: "4. On appeal, the CIT(A) has restricted thedisallowance to Rs.44,10,821/- as against thedisallowance of Rs.4,41,08,210/- by observing asunder: " 6.1.2. I have considered the findings ofthe assessing officer and also submissionmade by the AR of the appellant in thecourse of appellate proceedings along withthe cited case laws on this issue carefully.It is not disputed that all the 14 personshave furnished the confirmation and some ofthe parties in response to the summonsissued to them have furnished the copies ofthe Income Tax returns and also copies ofthe bank accounts. Some of the parties havealso confirmed that they do not have invoicecopies and maintain only M. Book which wasretained by the assessee i.e M/s.SPLInfrastructure Private limited. The copy ofthe M. Book placed before me give thedetails of work done for particular period,measurement up to date of work done withsignature of the supervisor of the company.11 parties have sent the details from far ofplaces to the assessing officer throughcourier. One party namely M/s.Sakthi KannaConstructions Private limited appearedbefore the assessing officer and thetransactions with this party were acceptedby the assessing officer. The letters issuedby assessing officer were remain uncompliedwith only two parties. It is also fact thatthe appellant carried out the sub contractwork with EDAC Engineering limited forlaying the road work at the remote placesfor the purpose of Thermal Power Plant, JSWEnergy (Rathnagiri limited), NandiwadiMaharashtra State. For laying out road workman power is necessarily required. There isno evidence available on the record that theappellant had not executed the road work atThermal Power Plant, Rathnagiri. The most ofthe labour contractors were either relativesof the appellant or known to the appellant.The entire disallowance made by theassessing officer in respective expensedebited in the name 14 parties cannot be acceptedwithoutdisprovingtheconfirmations received, disproving thepayments made to them beyond doubt,disproving the execution of the work order.However there is a possibility of theinflation of the expenses in respect of roadwork carried out by the appellant as awhole. In the earlier A.Ys, the departmentaccepted the 5% of the turnover declared bythe appellant after detection of theinflation of the expenses by carrying outsurvey action. In the year underconsideration, there was increase in GP andNet profit ratio declared by the appellantas compared to the GP and Net profit ratiodeclared in the earlier years. However thenet profit declared by the appellant at3.83% is less than the 5% of the Net profitaccepted by the department in the earlieryears. The 5% of the Net profit on theturnover of Rs. 3334.16 lacs comes toRs.166.7 lacs. The appellant had declaredRs.127.53 lacs as Net profit. The differencecomes to about Rs.39.178 lacs. In the courseof the appellant proceedings, the AR of theappellant had come out to offer 10% of thedisallowance of Rs.4,41,08,210.00 whichcomes to about Rs.44,10,821.00 on the basisof the decision of the Honorable ITAT,Chennai B BENCH reported in (2014) 159 TTJ(Chennai) 526 and also on the basis of thedecision of the Honorable Gujarat High Courtreported in [2013] 355 TR290 (Guj). In thecase cited by the AR of the appellantdecided by Chennai B BENCH, the similar roadwork was entrusted to two persons namelySri.N.Erulappan and Sri S.Kesavan by EDACEngineering limited and the assessingofficer recorded the statement of the twopersons who admitted that they had notcarried out any work of the naturementioned. In spite of the denial of thework carried out by Sri N.Erulappan and SriS.Kesavan, on examination of the facts, theHonorable tribunal came to conclusion thatthe entire disallowance made by theassessing officer cannot be sustained andrestricted the disallowance to 25% of thetotal claim of Rs. 22.10 crores. TheHonorable Gujarat High Court in the case of Bholanath Poli Fab Pvt. Ltd., reported in[2013] 355 ITR 290 held that tribunal havingexamined the evidence on the record came tothe conclusion that assessee did purchasecloth and sell the finished fabrics, as anatural corollary, not the amount coveredunder such purchase but the profit elementembedded would be subject to tax. In theinstant case the parties have not denied thepayments made to them and also have notdenied the work carried out by them. Theexistence of the parties and the paymentsare also not disproved. The only fact wasthat the parties have not appeared beforeassessing officer for the summons issued tothem but have given confirmation to theassessing officer. Since all the parties areknown to the appellant, the appellant wouldhave taken to the adequate steps forproducing before the assessing officer forexaminations. The net profit ratio declaredby the appellant in the year underconsideration is also less as compared tothe net profit computed by the assessingofficer in the earlier years which was alsoaccepted by the appellant. Looking to thefacts of the case in totality and legalposition on this issue, I am convinced thatthe offer of the 10% of the totaldisallowance of Rs.4,41,08,210.00 made bythe appellant during the course of theappellate proceedings as additional incomeover and above retuned income is reasonable.The offer of the 10% of the totaldisallowance would lead to net profit ratiomore than 5% of the turnover which was anyway accepted by assessing officer in theearlier years. Therefore, the assessingofficer is directed to restrict thedisallowance to Rs. 44,10,821.00 as againstthe disallowance of Rs.4,41,08,210.00. Thegrounds of appeal raised by the appellant onthis issue are treated as disposed offaccordingly." .Against the above, the Revenue is in appeal beforeus. 5. . We have heard both the parties and perused thematerial on record. In this case, it isadmitted fact that 14 persons have furnished Further, it is also admitted fact that thepayment to above parties was subject to TDS andpaid by cheques and the assessee has maintainedthe M. book which is signed by the sub-contractors. The only discrepancy noticed bythe Assessing Officer is that the payments arenot supported by the bills raised by theparties and only self-made vouchers weremaintained by the assessee. In our opinion,considering the nature of work carried on bythe assessee, there is no question of notincurring of expenditure by the assessee tocarry on the road work contracts and the workis mentioned in the M book maintained by theassessee and counter signed by the subcontractors. However, there is chances ofinflating the expenditure for which the CIT(A)has, already disallowed 10% of the expenditureclaimed by the assessee to the extent ofRs.4,41,08,210/-. Hence, the contention of theld. DRthatthe entire amountofRs.4,41,08,210/- is to be disallowed cannot beappreciated as held by the Tribunal in the caseof EDAC Engineering Ltd vs ACIT, 149 ITD 341,wherein held that if expenditure claimed wasnot supported by proper evidence and somedeficiencypersistinevidence,partexpenditure is disallowed on estimated basis.Being so, by placing reliance on the abovedecision of the Tribunal, the CIT(A) isjustified in disallowing only 10% of the sub-contract expenses not supported by properbills. This ground of the Revenue is dismissed.6. The next ground is with regard to deletion ofaddition made u/s 41(1) of the Act as cessationof liability. 7. The facts of this issue are that the AssessingOfficer made an addition of Rs.18,16,728/-towards creditors as they are outstanding formore than three years and any claim beyondthree years is not good in law as perLimitation Act. However, the CIT(A) observedthat there is no cessation of liability as onthe date of the accounts since the assessee hasnot written off these amounts in its books ofaccount. According to the CIT(A), Explanation1 sec. 41(1)(4) also to apply to the facts ofthis case. Accordingly, he deleted the additionagainst which the Revenue is in appeal beforeus. 8. We have heard both the parties and perused thematerial available on record. In the presentcase, the Assessing Officer has not issued anynotice to the creditors to confirm from themwhether they have given up their dues from theassessee. The assessee has also not writtenback these amounts in its books of account.Except for the fact that the amounts areoutstanding, there was no material evidence toshow that there was remission or cessation ofliability. It is the Assessing Officer who haspresumed that the liability in respect of thesecreditors was ceased to exist. Before coming tothe conclusion by the Assessing Officer thatthe creditors were no more existing, it isincumbent upon the Assessing Officer to makenecessary enquiry to bring on record materialthat the creditors were ceased to exist. Hecould have made necessary enquiry to thiseffect. The assessee herein, is a limitedcompany and as per the legal position theacknowledgement of the liability in favour ofthe creditors in its Balance Sheet extends theperiod of limitation for the purpose of sec.18of the Limitation Act. It is the assessee'sclaim that the debts are subsisting and itcontinues to be liable to pay the creditors.Therefore, it is not open to the AssessingOfficer to draw the conclusion that thecreditors have remitted the liability or thatthe liability has otherwise ceased withoutevidence or material when the assesseeacknowledges a liability in the Balance Sheetand Explanation 1 is not applicable. Since thecreditors are continued to be appearing in theBalance Sheet from year to year and the accounts of the creditors have not been writtenback, the conclusion of the Assessing Officerthat it was ceased to exist is not proper.Accordingly, in our opinion, the CIT(A) isjustified in deleting the addition made by theAssessing Officer u/s 41(1) of the Act. Thisview of our is fortified by the judgment of theDelhi High Court in the case of CIT vs HotlineElectronics Ltd, [2012] 80 CCH 156, and Punjab& Haryana High Court judgment in the case ofCIT vs GP International Ltd, 325 ITR 25.Accordingly, the deletion made by the CIT(A) isconfirmed. 9. In the result, the appeal of the Revenue isdismissed" accounts of the creditors have not been writtenback, the conclusion of the Assessing Officerthat it was ceased to exist is not proper.Accordingly, in our opinion, the CIT(A) isjustified in deleting the addition made by theAssessing Officer u/s 41(1) of the Act. Thisview of our is fortified by the judgment of theDelhi High Court in the case of CIT vs HotlineElectronics Ltd, [2012] 80 CCH 156, and Punjab& Haryana High Court judgment in the case ofCIT vs GP International Ltd, 325 ITR 25.Accordingly, the deletion made by the CIT(A) isconfirmed. 9. In the result, the appeal of the Revenue isdismissed" 7. The learned Senior Standing Counsel Mr.J.Narayanasamyappearing for the Appellant/Revenue submitted that for want ofproduction of the Sub Contractors before the AssessingAuthority, and one of them being 94 years old, the AssessingAuthority was justified in believing that the payments made tothose Sub contractors were not the actual expenditure incurredby the respondent/assessee Contractor and therefore, he wasjustified in disallowing the same and adding back the same asthe income of the Assessee. He also submitted that though thelearned Commissioner of Income Tax (Appeals) had found that 11out of these 14 sub contractors had not appeared before theAssessing Authority but submitted their confirmation forms, thepayments made to them tallied with TDS (Tax Deducted at Source)claimed by the Respondent/Assessee Company. However, since thesepersons were not produced before the Assessing Authority, noproper verification could be carried out by the AssessingAuthority for such payments made to them, and merely on thebasis of Measurement Books (M Book) maintained by the RespondentContractor Company, the allowance could not be made. 8. Upon the court's question, however, the learned SeniorStanding Counsel for the Appellant/Revenue was unable to satisfyas to how the work, in the absence of sub contractors, wasreally carried out by the Respondent/ Assessee Company and whythe estimate of the Gross Profit/Net Profit by the AppellateAuthority could not be made, and no satisfactory answer could begiven by the learned counsel for the Revenue. 9. The learned counsel for the Respondent/Assessee, however,submitted that the agreement to the extent of 10% disallowancewas made by the Assessee to buy peace and such disallowance hasdefinitely given a much better compared result of Net Profitover 5% and a Gross Profit over 10% in the present assessment https://hcservices.ecourts.gov.in/hcservices/ year compared to the previous years, which were given in theform of table by the learned Tribunal in the impugned orderextracted above. Therefore, he submitted that the fact findingBodies at appellate levels have given proper, cogent andreasonable estimation of profits in the hands of the contractorAssessee and the said findings do not give rise to any questionof law, much less a substantial question of law, requiringconsideration by this Court. 10. On the other issue of disallowance under Section 41(1)of the Act to the extent of Rs.18,16,728/-, the relief has beengiven by both the Appellate Authorities also, giving theirfindings, as they found that the amount in question did notbecome bad merely on expiry of three years of limitation andthere was no cessation of liability in the hands of theAssessee. 11. Having heard the learned counsel for the parties, we areof the clear opinion that the impugned order of the learnedTribunal does not give rise to any question of law much less asubstantial question of law. 10. On the other issue of disallowance under Section 41(1)of the Act to the extent of Rs.18,16,728/-, the relief has beengiven by both the Appellate Authorities also, giving theirfindings, as they found that the amount in question did notbecome bad merely on expiry of three years of limitation andthere was no cessation of liability in the hands of theAssessee. 11. Having heard the learned counsel for the parties, we areof the clear opinion that the impugned order of the learnedTribunal does not give rise to any question of law much less asubstantial question of law. 12. A bare perusal of the compared results of the GrossProfit and Net Profit by the Assessee given in para 7 of theTribunal's order clearly shows that the said Gross Profit at therate of 14.21% and Net Profit at the rate of 3.83% declared bythe Assessee, with the addition of 10% agreed by the Assesseebefore the learned Commissioner of Income Tax (Appeals),resulted in a much better result of profits declared by theAssessee in the present Assessment Year viz., A.Y.2010-11 ascompared to the previous years. The Net Profit rate in theprevious three years was less than 3%, whereas the Assesseehimself declared the net profit at the rate of 3.83% before theaforesaid addition of 10% of Rs.4,41,08,210/-. Therefore, theestimation of profit by the Appellate Authorities even on thepremise taken by the Assessing Authority that some of the subcontractors could not be produced before the AssessingAuthority, does not result in any perversity in the findings ofthe learned Commissioner of Income Tax (Appeals) as well as thelearned Tribunal. 13. It is well known that where the books of accountsmaintained by the contractors are not accepted by theDepartment, the estimation of profit made on the basis ofhistory of Gross Profit rate and Net Profit rate of the Assesseein the previous years or comparable cases of contractors can bemade. Once such profit rates are compared, the additions on account of non confirmation or non production of the subcontractors, etc. is totally irrelevant and cannot be made. 14. In the hierarchy of the fact finding bodies createdunder the Income Tax Act, obviously the findings of theAssessing Authority stand superseded for all purposes, by thefindings of the higher appellate authorities. Unless glaringperversity in the findings of the appellate authorities arepointed out and established by the Revenue in the Appeals filedby them under Section 260A of the Act, there is nothing for theHigh Court or Constitutional Courts to do in such matters. Thefindings of fact arrived at by the Authorities below are bindingon the High Court under Section 260A of the Act, unless theperversity as aforesaid is clearly visible, established andproved. 15. As aforesaid, as against the perversity in thesefindings, we see a better taxable income finally taxed in thehands of the Assessee, albeit with the agreement to disallowanceto the extent of 10% of the payments made to the subcontractors, which the Assessee appears to have agreed under thecompulsion of circumstances to avoid litigation and to buy peace. 15. As aforesaid, as against the perversity in thesefindings, we see a better taxable income finally taxed in thehands of the Assessee, albeit with the agreement to disallowanceto the extent of 10% of the payments made to the subcontractors, which the Assessee appears to have agreed under thecompulsion of circumstances to avoid litigation and to buy peace. 16. In fact, the results declared by the Assessee of the netprofit rate at the rate of 3.83% was much better as compared toprevious three years and only marginally less than the previoustwo years of 2005-06 and 2006-07, which were at the rate of4.20% and 3.94%. In these circumstances, no disallowance wascalled for. Still, if the Assessee agreed to such addition toapparently buy peace with the Department, we fail to understandas to why the Revenue has filed these Appeals to drag casesfurther in the High Court incurring the loss of man hours andcost of litigation. Such unnecessary litigation on the part ofthe Revenue Authorities deserves to be strongly deprecated, but,the Revenue Authorities do not seem to be seeing the sensebehind this and keep on filing Appeals under Section 260A of theAct, as a matter of routine. 17. Though the provisions of Section 260A of the Act areintended only to settle the substantial questions of law arisingfrom the order of the Tribunal, such appeals, against the purefindings of facts, are also filed in an absolutely recklessmanner. We strongly deprecate this practice of the RevenueAuthorities, as there seems to be no application of mind by thehigher Authorities in sanctioning filing of these appeals beforethe High Court. We would have imposed exemplary costs in thepresent case also to compensate the Respondent/Assessee, who had to incur such litigation expenditure at all the levels ofappellate forums, three in number, beyond the AssessingAuthority, viz., before Commissioner of Income Tax (Appeals),before the Income Tax Appellate Tribunal and before the HighCourt. However, we are not imposing the said costs with a clearwarning to the Revenue Authorities in this regard. They should,as responsible Authorities, try to give quietus to litigationinstead of mindlessly increasing the same before theConstitutional Courts. Even to dismiss such frivolous appeals,the precious time of the court is taken. In the present caseitself, during Covid times, when we are hearing urgent mattersthrough Video Conferencing, such matters are brought before usto be heard at least for an hour and then to pass such adetailed order. 18. We expect and have a sanguine hope that the RevenueAuthorities will see the absence of reasonableness in filingsuch Appeals in future. On the one hand, the Central Board ofDirect Taxes keeps on issuing of litigation policies and as ofnow, the latest CBDT instructions talks of withdrawal of Appealswith Revenue stake of less than Rupees One Crore. On the otherhand, by such arbitrary additions made by the AssessingAuthority, merely because the Revenue's stake may be more thanRupees One Crore for the Revenue Department, the validity ofsubstantial question of law arising in the matter ought to havebeen examined by the responsible authorities of the RevenueDepartment, before filing such Appeals before this Court. 19. In these circumstances, while not imposing the cost onthe Appellant/Revenue with the hope that they will not file suchunnecessary Appeals in future, we dismiss this Appeal in favourof the Respondent/ Assessee, while holding that no question oflaw arises in the present Appeal at all. No costs. 20. Registry is directed to send a copy of this order to theChairman, Central Board of Direct Taxes (CBDT), New Delhi, andto the Secretary, Ministry of Finance, Government of India, NewDelhi and also to the President, Income Tax Appellate Tribunal,for information and needful. Sd/- //True Copy// Assistant Registrar Sub Assistant Registrar To 19. In these circumstances, while not imposing the cost onthe Appellant/Revenue with the hope that they will not file suchunnecessary Appeals in future, we dismiss this Appeal in favourof the Respondent/ Assessee, while holding that no question oflaw arises in the present Appeal at all. No costs. 20. Registry is directed to send a copy of this order to theChairman, Central Board of Direct Taxes (CBDT), New Delhi, andto the Secretary, Ministry of Finance, Government of India, NewDelhi and also to the President, Income Tax Appellate Tribunal,for information and needful. Sd/- //True Copy// Assistant Registrar Sub Assistant Registrar To 1. The Income Tax Appellate Tribunal, ‘C’ Bench, Madras. Madras. 2. The Commissioner of Income Tax, Chennai. Chennai. 3. The Commissioner of Income Tax (Appeals)-VI, Chennai. Chennai. 4. The Deputy Commissioner of Income Tax (Appeals), VI, Chennai-34. 5. The Asst. Commissioner of Income Tax, Company Circle VI(3), Chennai. Company Circle VI(3), Chennai. 6. M/s.SPL Infrastructure Pvt. Ltd., No.15, Kasthuri Rangan Street, Alwarpet, Chennai-18. 7. The Chairman, Central Board of Direct Taxes (CBDT), 9[th] Floor, Lok Nayak Bhawan, Khan Market New Delhi 110 003. 8. The Secretary, Ministry of Finance, Government of India, New Delhi. 9. The President Income Tax Appellate Tribunal 3[rd] & 4[th] Floor, Pratishtha Bhawan Maharshi Karve Marg Mumbai 400 020. T.C.A.No.766 of 2017 ssd[co]srg 22/10/2020