Ita/19/2011 Of Chandi Ram v. Dy Commissioner Of Income Tax Kota

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR D.B. Income Tax Appeal No. 19 / 2011 1. Chandi Ram (Deceased) 1/1. Sh. Hitesh Kumar Deepchandani S/o late Sh. Chandi Ram and Power of Attorney Holder of Smt. Sarla Deepchandani R/o A-20, Vallabh Nagar, Kota. ----Appellant The Deputy Commissioner of Income Tax, Cricle-I, Kota (Raj.) ----Respondent _____________________________________________________ For Appellant(s) : Mr. N.M. Ranka, Sr. Adv. with Mr. N.K. JainFor Respondent(s) : Mrs. Parinitoo Jain with Ms. Shiva Goyal _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE INDERJEET SINGHJudgment 30/08/2017 1.By way of this appeal, the appellant has assailed thejudgment and order of the Tribunal whereby tribunal has partlyallowed the appeal of the department and cross objection filed bythe assessee were also allowed. 2.This court while admitting the appeal on 1.3.2012 framedfollowing substantial question of law:- “Whether the tribunal was justified intreatingtheentireincomeofRs.8,13,194/- as income for theassessment year in question? ” 3.The facts of the case are that the assessee was a CivilContractor. He maintained books of accounts. System ofaccounting Mercantile. His books were rejected and not profit rate was applied on gross contract receipts from year to year. He wasassessed to income tax for the assessment year 1990-91 and1993-94 wherein for the said years a net profit rate of 8.5% and8.57% was applied and addition was made enhancing tax liability. In terms of arbitration awards the assessee receivedfollowing amount during the assessment year 2006-07. A.Works of A.Y. 1990-91 Claim Receipts (Principal) :Rs.4,70,268.00Interest Rs.2,38,092.00 ______________ Rs.7,08,360.00 _____________ Security refund______________Rs.1,80,540.00 _____________ 3.1The assessee on account of finding judgment of Apex Courtin Sh. Govind Choudhary case and inaccordance with thetreatment given earlier during relevant years applied said netprofit rate and declared in the return. 3.2The Assessing Officer vide order dt. 12.12.2008 (Annexure-1) discussed the issue observed as under:- -8. Arbitration Award Receipts: That during the year under considerationthe assessee has received the followingsamount of Arbitration Award and hasdisclosed only the net profit on thesereceipts by applying the NP rate of respectively of the relevant years asunder:- Rs.180514/-N.P. rate applied@ 8.57%Rs.708360/-N.P. rate applied@ 8.5% These receipts pertain to A.Y. 1993-94 &1990-91 respectively. In this context, theassessee submitted as under:- That your assessee had not claimed workexpenses in the A.Y. 1993-94 & 1990-91supported by audit report. In case of thework expenses had claimed in the A.Y.1993-94 & 1990-91. The return incomewould go in loss whereas the Income Taxreturn filed declaring net profit as under- To Work 4441460.00By Gross Work 4857976.00ExpensesreceiptsTo Depreciation332756.00By Closing StockNILTo Net Profit @ 83760.00(Work in progress)8.57%4857976.004857976.00 -P & L A/c for the A.Y. 199091 To Work 5936366.00By Gross Work6354579.00ExpensesreceiptsTo Depreciation390030.00By FDR 30116.00InterestTo Net Profit @ 57699.00By Closing NIL7.01%StockCIT(A) applied(Work in progress)8.5% upheld by ITAT6384695.006384695.00 That your assessee had not claimed workexpenses in the A.Y. 1993-94 & 1990-91supported by audit report. In case of thework expenses had claimed in the A.Y.1993-94 & 1990-91. The return incomewould go in loss whereas the Income Taxreturn filed declaring net profit as under- To Work 4441460.00By Gross Work 4857976.00ExpensesreceiptsTo Depreciation332756.00By Closing StockNILTo Net Profit @ 83760.00(Work in progress)8.57%4857976.004857976.00 -P & L A/c for the A.Y. 199091 To Work 5936366.00By Gross Work6354579.00ExpensesreceiptsTo Depreciation390030.00By FDR 30116.00InterestTo Net Profit @ 57699.00By Closing NIL7.01%StockCIT(A) applied(Work in progress)8.5% upheld by ITAT6384695.006384695.00 That the year under consideration yourassessee received Arbitration AwardRs.180514/- & Rs.708360/- pertain to theA.Y. 1993-94 & 1990-91 on which rate ofprofit applied @ 8.57% & 8.5% as per netprofit ratio applied to the relevant years asper audit report to the said years enclosedherewith. The Hon’ble ITAT Jaipur in appealNo.1003/JP/2007 for the A.Y. 2004-05 videorder dt. 31.3.2008 directed as per para 12in case of the AO finds that the expensesrelating to the above receipts were notclaimed during the A.Y. 1993-94, then insuch a situation directed to delete theaddition of Rs.571422/-. That in the A.Y.1990-91 & 1993-94 your assessee had notclaim work expenses against the above saidreceipts. The copy of audit report for theA.Y. 1990-91 & 1993-94 are also enclosedfor your verification. That no work inprogress in the said years in the P & L A/cand hence the gross receipt cannot betreated as an income to this year and theN.P. rate be applied as per ITAT decision inour case. Copy of judgment is also enclosedfor your kind consideration.” The reply of the assessee has beenconsidered & found unacceptable. (i) Firstly, the assessee has wronglyinterpreted and relied on the judgment ofthe ITAT in the year 2004-05 in his case.The matter in A.Y. 2004-05 was set aside bythe ITAT with the direction to the AssessingOfficers to verify as to whether the expensesincurred by the assessee relating to theaward related to assessment year 1993-94received during the year had already beenclaimed in the A.Y. 1993-94 or not. As perthe directions, opportunity was given to theassesse to prove with documentary evidencehis claim that no such expenses relating tothe awards receipts were claimed in the A.Y.1993-94. These assessee has failed todischarge his onus of producing evidence inhis own case. If the assessee claims that theexpenses relating to the award were notclaimed in the A.Y. 1993-94 then he shouldproduce the separate account of suchexpenses not claimed. The assessee hasfailed to identify the specific expensesrelated to this award. In the absence of any evidence filed by the assessee it wasconcluded that he assessee has alreadydebited the entire expenses related toarbitration receipts in the profit and lossaccount for A.Y. 1993-94 itself. Hence, in therelevant year A.Y. 2004-05 the assesseecannot take the benefit of such expenses(by adopting the profit rate) on thesereceipts. Hence, after considering all factsand circumstances and verification as perthe directions of the ITAT, it was held thatthe entire contract receipt of award fromarbitration award has been rightly treated asincome. (ii) Following the precedence of the finalappeal effect of the ITAT order for A.Y. 2004-05 in the case of assessee, show cause wasgiven to the assessee to explain why not theentire receipts of arbitration received in thisinstant A.Y. 2006-07 be subjected to tax,since the assessee has not been able toprove with documentary evidence thatexpenses pertaining to A.Y. 1993-94 and1990-91 were not claimed in those years.The reply furnished by the assessee on8.8.2008 reproduced above was consideredbut is not satisfactory for the facts discussedabove. (ii) Following the precedence of the finalappeal effect of the ITAT order for A.Y. 2004-05 in the case of assessee, show cause wasgiven to the assessee to explain why not theentire receipts of arbitration received in thisinstant A.Y. 2006-07 be subjected to tax,since the assessee has not been able toprove with documentary evidence thatexpenses pertaining to A.Y. 1993-94 and1990-91 were not claimed in those years.The reply furnished by the assessee on8.8.2008 reproduced above was consideredbut is not satisfactory for the facts discussedabove. (iii) Considering the above facts andcircumstances it is logical to treat the entirereceipts of Rs.180514/- and 708360/- as theincome in the instant A.Y. 2006-07.However, the assessee has already disclosedRs.157470/- and 60210/- out of the abovereceipts in the computation of incomesubmitted with the return. Therefore,Rs.813194/-(Rs.165044/-+648150/-)isadded to the total returned income of theassessee.” 3.3 Thereafter, he taxed the entire receipts. He added additionally Rs.8,13,194/- against which assessee has preferred appeal which came to be allowed by CIT(A) in para 13-15observed as under:- “Ground 5 That on the facts and in the circumstances ofthe case, the learned AO grossly erred inmaking a total addition of Rs.8,13,194/- (Rs.1,65,044/-+6,48,150/-) as the arbitrationaward receipts pertaining to the A.Y. 1993-94& 1990-91 respectively and in not taxing atthe net profit rate. The addition of entirereceipts by way of income without consideringthe expenses is totally unjustified, is illegaland is bad in law. The learned AO has mis-directed himself into the facts emerging onrecord vis-a-vis directions given by thelearned ITAT. Discussion and the Appellate Decision I have perused the A.O., report dt. 15.5.09 ofthe AO and considered submissions of theappellant, inter alia, contained in letters dt.29.3.09 27.5.09 and 12.6.09. The AO noticed that during the year underconsideration, the assessee received twoarbitration awards of Rs.180514/- (pertainingto AY 1990-91), but he offered for tax onlythe net profit on these receipts by applyingthe NP rate @ 8.57% and @ 8.5%,respectively. This view was taken, as among other reasons,the appellant was not “able to prove withdocumentary evidence that expensespertaining to AY 1993-94 & 1990-91 were notclaimed in those years” the AO was notsatisfied with reply dt. 8.8.2008 of theappellant. He, thus, concluded “ it is logical totreat the entire receipts of Rs.18051/- and708360/- as the income in the instant yearA.Y. 2006-07. However, the assessee hasalready diclosed Rs.157470/- and 60210/- outof the above receipts in the computation ofincome submitted with the return. Therefore,Rs.813194/- (Rs.165044/-+648150/-) isadded to the total returned income of theassessee. The defense of the appellant is that he had“rightly disclosed the N.P. as was declared inthose years as the income in the computationof income for the year under appeal..(as) in acase like this...these (the arbitration award)receipts partake character of contract receiptsthough by way of arbitration award. Nature ofreceipts remains the same and by no stretchof imagination one can tax the entire receiptsby way of income and not allow the expensesattributable to the said contract receipts. From P/L account for both the years it is seenthat the appellant has already declared thenet profit of 8.5% and 8.57% in A.Y. 1990-91 The defense of the appellant is that he had“rightly disclosed the N.P. as was declared inthose years as the income in the computationof income for the year under appeal..(as) in acase like this...these (the arbitration award)receipts partake character of contract receiptsthough by way of arbitration award. Nature ofreceipts remains the same and by no stretchof imagination one can tax the entire receiptsby way of income and not allow the expensesattributable to the said contract receipts. From P/L account for both the years it is seenthat the appellant has already declared thenet profit of 8.5% and 8.57% in A.Y. 1990-91 & 1993-94”, respectively it is not difficult toagree that NP of the order of 8% in cases ofcontractors is reasonable. In this view things,it is safe to presume that expenses pertainingto receipts from arbitration awards for notaccounted for in the audited accounts forrespective years. In the alternate scenario,with an assumption that expenses pertainingto receipts from arbitration awards werealready debited and now only the receiptsshould be added, the NP shoots up tounusually high rates of 17.67% and 11.85%respectively. In the light of explanation of the appellant,the only logical inference from these twoprofit loss accounts is that expensespertaining to the receipts under arbitrationaward were not included in the audit P/Laccount for respective years. To sum up, the AO has not given any reasonsto hold the reply dt. 8.8.2008 of the appellat“was...not satisfactory”. There is no merit inthe observation of the assessing officer, inreport dt. 15.5.09 that “the assessee cannotbe allowed to maintain hybrid system ofaccounting (both cash and mercantile)”, asthis observation is cryptic and does not showhow the appellant had followed hybridaccounting. In given facts and circumstances, the onlylogically acceptable inference is that expensespertaining to the receipts from arbitrationawards were not reflected in the auditedprofit loss accounts for A.Y. 1990-91 & 1993-94. The decision of the AO to treat entirereceipts from the arbitration awards asincome of the appellant, thus, is notconfirmed. The addition of Rs.8,13,194/- isdeleted. Ground 5 of the appeal isacceptable.” 3.4Against the said order both assesee as well as department preferred appeal wherein the tribunal observed as under:- “23. We have heard both the parties. The AOhas reproduced the P&L account of A.Y. 1990-91 & 1993-94. For the both the assessmentyears, the work in progress is nil. Hence, thereceipts which were required to be receivedwere shown as nil. We are not having the 3.4Against the said order both assesee as well as department preferred appeal wherein the tribunal observed as under:- “23. We have heard both the parties. The AOhas reproduced the P&L account of A.Y. 1990-91 & 1993-94. For the both the assessmentyears, the work in progress is nil. Hence, thereceipts which were required to be receivedwere shown as nil. We are not having the benefit of going through arbitration award ascopy of such award has not been filed.Whether the award was in respect of extrawork or in respect of extra work or in respectof extra rate demanded or was on account ofescalation in rates? The ld. CIT(A) has given afinding that assessee has not claimed suchexpenses for the A.Y. 1990-91 & 1993-94.The work in progress has been shown nil andthis will infer that in case the expenses wereincurred then these were not entered in thebooks of account. The decision of Hon’bleApex Court in case of Govind Choudhary andsons is not applicable as in that case interestawarded was held to be considered asbusiness receipts. This case helps the revenueto say that receipts as per arbitration awardsare to be considered as business receipts. TheAO has given finding on the basis of tribunalorder in the case of the assessee for earlieryear that the assessee has not establishedthe incurring of expenses in respect of suchreceipts for the A.Y. 1990-91 & 1993-94”. Theld. CIT(A) has recorded a finding thatexpenses related to such receipts are notreflected in the audited profit and lossaccount for A.Y. 1990-91 and 1993-94. Nodetails of expenses shown to have beenincurred in those years and it is finding thatsuch expenses have not been entered in thebooks of account. Such an expenditure forwhich no details filed or not entered in thebooks of account is not allowable as perproviso to Sec. 69C of the IT Act. Hence evenif for the argument it is accepted thatassessee has incurred expenditure againstsuch receipts even then such expenditure willnot be allowable. It is not the case of theassessee that it has kept details of expensesrelated to the issues on which receipts werereceived as a result of arbitration award. Theonus is on the assessee to estabish theoutgoings and have to explain the source ofsuch outgoings. We, therefore, hold thatld.CIT(A) was not justified in deleting theaddition of Rs.8,13,194/-.” 4.Counsel for the appellant has relied upon the followingdecisions:- 4.1. In CIT vs. Govinda Choudhury & Sons. 203 ITR 881 wherein Supreme Court held as under:- “The assessee contended that the amountreceived by him by way of interest was reallyin the nature of damages and was not taxableas a revenue receipt. This contention wasrejected by the Income-tax Officer as well asthe Appellate Assistant Commissioner. Beforethe Tribunal, again, the assessee urged thatthe amount of Rs. 2,77,692 was not at alltaxable in its hands. However, it also took analternative contention that, even if it istreated as a trading receipt or as a revenuereceipt, it should be treated as part of tradingreceipts accruing to the assessee from thecontract. The assessee's assessment hadbeen completed by applying a net profit rateof 10 per cent, to the trading receipts. Theassessee's contention was that this amount ofRs. 2,77,692 should be treated as part of thetrading 'receipts and that what wasassessable in his hands as income was only10 per cent, of this amount. The Tribunal didnot accept either contention of the assessee.It held that the sum of Rs. 2,77,692 was arevenue receipt and not a capital receipt. Itwas also of the opinion that the amount ofinterest was fully taxable as "income fromother sources" and that it had to be delinkedfrom the other trading receipts for thispurpose. This brings us to a consideration of thesecond question. The sum of Rs. 2,77,692was received by the assessee as interest onthe amounts which were determined to bepayable by the assessee in respect of certaincontracts executed by the assessee and inregard to the payments under which therewas a dispute between the two parties. Theassessee is a contractor. His business is toenter into contracts. In the course of theexecution of these contracts, he has also toface disputes with the State Government andhe has also to reckon with delays in paymentof amounts that are due to him. If theamounts are not paid at the proper time andinterest is awarded or paid for such delay,such interest is only an accretion to theassessee's receipts from the contracts. It isobviously attributable and incidental to thebusiness carried on by him. It would not becorrect, as the Tribunal has held, to say thatthis interest is totally de hors the contract business carried on by the assessee. It iswell-settled that interest can be assessedunder the head "Income from other sources"only if it cannot be brought within one or theother of the specific heads of charge. We findit difficult to comprehend how the interestreceipts by the assessee can be treated asreceipts which flow to him de hors thebusiness which is carried on by him. Inpurview, the interest payable to him certainlypartakes of the same character as thereceipts for the payment of which he wasotherwise entitled under the contract andwhich; payment has been delayed as a resultof certain disputes between the parties. Itcannot be separated from the other amountsgranted to the; assessee under the awardsand treated as "income from other sources".The second question is, therefore, answeredin favour of the assessee and against theRevenue. “ 4.2In CIT vs. N.C. Kaladharan, L/R Late Gowri ITA No.180 of 2002 decided on 31.1.2008 wherein it has been held as under:- “3. The question raised is whether theestimation of income at 10% as fixed by theCommissioner of Income Tax (Appeals) andconfirmed by the Tribunal applies to interestelement of the award amount According tothe Revenue, interest is entirely taxable as itis an addition to the contract amount.However, we find that the issue is covered bythe decision of the Supreme Court inCommissioner of Income Tax v. GovindarChoudhurg and Sons (203 ITR 881) whereinthe Supreme Court held that thecompensation as well as interest have to betreated as contract receipts. Since the issueraised is covered by the decision of theSupreme Court, we do not think there is anyscope for considering the decision relied on bythe learned counsel for the Revenue in UnitedConstruction Contractors v. Commissioner ofIncome Tax (1994(1) KLT 880).” 4.3 The same was confirmed by the Supreme Court in SLP (c)5158/2009 decided on 23.2.2009. “It is only common sense that the amountreceived on arbitration does not fullyrepresent profit as contended by theRevenue. In fact, the award is made toprovide for the escalation in cost due to dleayin completion of the work, interest chargesthat the assessee will have to incur as alsothe increased cost of labour. It is to offset theloss caused to the assessee by such delay inthe execution of the work that the arbitrationaward is made. The Income Tax Officer hasgone wrong in treating the arbitration awardamount as the income or profit of thebusiness forgetting the fact that the award isreally related to the escalation in the costsuffered by the contractor as mentionedearlier. It is this order that was rectified bythe Tribunal for adequate reasons. “It is only common sense that the amountreceived on arbitration does not fullyrepresent profit as contended by theRevenue. In fact, the award is made toprovide for the escalation in cost due to dleayin completion of the work, interest chargesthat the assessee will have to incur as alsothe increased cost of labour. It is to offset theloss caused to the assessee by such delay inthe execution of the work that the arbitrationaward is made. The Income Tax Officer hasgone wrong in treating the arbitration awardamount as the income or profit of thebusiness forgetting the fact that the award isreally related to the escalation in the costsuffered by the contractor as mentionedearlier. It is this order that was rectified bythe Tribunal for adequate reasons. We are also satisfied that the amountreceived did not fully represent income. Wecalled upon the assessee to produce a copy ofthe arbitration award. A perusal of the awardshows that the award was made for escalationof the cost and was not mere profit ascontended by the department. We are notrelying on this award as we looked into it onlyfor the purpose of satisfying ourselves aboutthe nature of the award.” 4.5Another decision of Allahabad High Court (Lucknow Bench) inParvati Construction Through Prop. Rajya Pal Mittal vs. Income TaxAppellate Tribunal, Lucknow & ors. (2012) 207 Taxman 229wherein it has been held as under:- “The interest was only an accretion to theassessee's receipts from the contracts andwas attributable to an incidental to thebusiness carried on by it. The interest payableto the assessee partook of the same characteras the receipts for the payments of which itwas otherwise entitled under the contract andwhich payment has been delayed as a resultof certain disputes between the parties. Itcannot be separated from the other amountgranted to the respondent under the awards and treated as "income from other sources".Had there not been any delay, the assesseemight have received the amount from theLucknow Development Authority and thesame might have been circulated in thebusiness. Therefore, we are of the view thatthe interest payable to the assessee is at parwith the business receipts, as it was notacquired separately as already held byHon'ble Apex Court in the case of CIT vs.Govind Chaudhary, (1993) 203 ITR 881 SC. In view of the above, the interest earnedalong with the award is to be treated as"income from the business" already claimedby the assessee.” 4.6He relied upon the decision of Orissa High Court in CIT vs. ALenka and Partners 215 ITR 298 wherein Orissa High Court heldas under:- “3. In the course of hearing our attention hasbeen drawn to the decision in CIT v. GovindaChoudhury and Sons [1993] 203 ITR 881(SC). Our attention was also drawn to thedecision in CIT v. Builders Union [1995] 211ITR 993 (Orissa). It is held therein that theassessee had executed a civil contract for theGovernment during the financial years 1961-62 to 1965-66. Disputes having arisenbetween the parties, in accordance with thearbitration clause in the agreement, thesame were referred to the arbitrator. Thearbitrator made the award which comprisedthe principal amount, pre-award interest andpost-award interest. The Assessing Officertaxed the entire amount received by theassessee under the award after allowingsome deductions. The Tribunal held that theassessee's income should be determined at12.5 per cent. of the award amount afterexcluding the interest component includedtherein. It also held that the pre-awardinterest should be totally excluded from theincome of the assessee. On the aforesaidfacts it was finally held that the Tribunal wasjustified in directing the Income-tax Officerto estimate the profit at 12.5 per cent. of theprincipal amount of the award. The Tribunalwas not right in holding that the pre-awardinterest component of the amount was not taxable. Following the ratio of the aforesaiddecision, we find that the interest out of theaward is taxable. The finding of the Tribunalis not justified and right. 4. With regard to the second contention as tothe rate of tax, it is brought to our noticethat in view of the settled position of law therates of tax on interest would be consistentwith the rate of profit on the principalbusiness at which the tax is levied inaccordance with law.” 4.7He relied upon the decision of Himachal Pradesh High Courtin CIT vs. Jai Prakash Hydro Power Ventures Ltd. where DivisionBench observed as under:- “This brings us to a consideration of thesecond question. The sum of Rs.2,77,692/-was received by the assessee as interest onthe amounts which were determined to bepayable by the assessee in respect of certaincontracts executed by the assessee and inregard to the payments under which therewas a dispute between the two parties. The assessee is a contractor. His business isto enter into contracts. In the course of theexecution of these contracts, he has also toface disputes with the State Governmentand he has also to reckon with delays inpayment of amounts that are due to him. Ifthe amounts are not paid at the proper andinterest is awarded or paid for such delay,such interest is only an accretion to theassessee’s receipts from the contracts. It isobviously attributable and incidental to thebusiness carried on by him. It would not becorrect, as the Tribunal has held, to say thatthis interest is totally de hors the contractbusiness carred on by the assessee. It iswell setled that interest can be assessedunder the head “Income from other sources”only if it cannot be brought within one or theother of the specific heads of charges. Wefind it difficult to comprehend how theinterest receipts by the assessee can betreated as receipts which flow to him dehors the business which is carried on byhim. In our view, the interest payable to himcertainly partakes of the same character as the receipts for the payment of which hewas otherwise entitled under the contractand which payment has been delayed as aresult of certain disputes between theparties. It cannot be separated from theother amounts granted to the assesseeunder the awards and treated as “incomefrom other sources.” The second question is,therefore, answered in favour of theassessee and against the revenue.” 5.Taking into consideration he contended that for theassessment year 2004-05, different issues were raised howevertax appeal on 825/2008 preferred by the department came to bedisposed of involving low tax effect in the said appeal followingsubstantial questions of law were framed by the counsel for theappellant:- “1. Whether under the facts andcircumstances of the case and in law, theorder of the tribunal is perverse in deletingthe additions of Rs.35,83,928/- made by theAO on account of bogus current liabilityshown by the assessee in the balance sheetwhereas the amount was an receipt/incomewhich has been received by the assesseeduring the year? 2. Whether under the facts andcircumstances of the case and in law theamount of Rs.35,83,928/- is taxable u/s45(5)(b) of the IT Act and the tribunal hascompletely failed to appreciate Sec.45(5)(c)of the Act? 3. Whether under the facts andcircumstances of the case and in law, theorder of the tribunal is perverse is notfollowing the dictum of Hon’ble Apex Court inthe case of Somaiya Organica (India) vs.State of U.P. reported in 251 ITR 20?” 5.1The tribunal in the appeal for assessment year 2004-05 videorder dt. 31.3.2008 and AO passed the order on 5.12.2006. 6.Counsel for the respondent has taken us to the order of the tribunal and contended that the tribunal while considering the case has observed as under:- 2. Whether under the facts andcircumstances of the case and in law theamount of Rs.35,83,928/- is taxable u/s45(5)(b) of the IT Act and the tribunal hascompletely failed to appreciate Sec.45(5)(c)of the Act? 3. Whether under the facts andcircumstances of the case and in law, theorder of the tribunal is perverse is notfollowing the dictum of Hon’ble Apex Court inthe case of Somaiya Organica (India) vs.State of U.P. reported in 251 ITR 20?” 5.1The tribunal in the appeal for assessment year 2004-05 videorder dt. 31.3.2008 and AO passed the order on 5.12.2006. 6.Counsel for the respondent has taken us to the order of the tribunal and contended that the tribunal while considering the case has observed as under:- “We have heard both the parties. In thepaper book filed by the ld.AR, he hasenclosed copies of letter submitted to theAO on 5.5.2008, 9.6.2008, 28.7.2008 and8.8.2008. It is also contained copies ofvouchers in respect of purchase of diesel.Letter of 5.5.2008 was is in response tonotice u/s 142 and it is not relevant inrespect of issue of allowability of dieselexpenses. Similrly letters dt. 9.6.2008,28.7.2008 and 8.8.2008 are not relevant asit appears that issue of allowability of dieselexpenses was perhaps not an issue. Beforethe CIT(A), the assessee filed writtensubmissions vide letters dt. 29.3.2009,9.4.2009, 27.5.2009 and 12.6.2009available at page 1 to 40 of the paper book.The AO has sent his report vide letter dt.15.5.2009. The assessee vide writtensubmission dt. 29.3.2009 mentioned atpages 4 to 7 (P.B. pages 21 to 24) statedthat diesel is being provided to JCB ownersand tractors and also enclosed copy ofregister showing the supply of diesel and itcontained the signatures or thumbimpressions of JCB/tractor owners. Copy ofsuch registers have not been placed in thepaper book. The AO in report mentionedthat such evidences should not admitted.When the ld. CIT(A) has admitted theevidences then the AO should haveexamined such additional evidences. Theld.CIT(A) has examined the additionalevidences and gave a factual finding thatdiesel has disturbed to JCB/tractor owners.However, in absence of copy of such registerwe are not in a position to see that theentire diesel purchased has been disturbed.Purchase of diesel per bill varies from Rs.233 to Rs. 38034. Hence entire purchasesare not in bulk. In the written submissionsvide letters dt. 29.3.2009 filed before ld.CIT(A) that in the preceding yearRs.70,000/- was disallowed out of tractorhire charges which was reduced toRs.35,000/- by the tribunal. Henceconsidering the non-availability of quantumof diesel disturbed vis-a-vis total purchase ofdiesel, purchase of diesel varying fromRs.233 to 38034 per bill and disallowance of tractor hire charges to the extent ofRs.35,000/- sustained by the tribunal in thecase of the assessee for the earlier year, wefeel that it will be fair and reasonable toestimate the disallowance of Rs.35,000/-.Accordingly disallowance is restricted toRs.35,000/-.” 6.1He contended that the assessee has failed to produce onrecord whether expenses for the A.Y. 1990-91 & 1993-94 wereclaimed or not and what happened to the proceedings for the A.Y.2004-05, in that view of the matter, tribunal was justified inupholding the order of the AO. 6.2He has relied upon the decision of ITAT Bench Mumbai in thecase of ITO vs. Mehul Construction decided on 20.11.2015wherein Division Bench of Tribunal held as under:- tractor hire charges to the extent ofRs.35,000/- sustained by the tribunal in thecase of the assessee for the earlier year, wefeel that it will be fair and reasonable toestimate the disallowance of Rs.35,000/-.Accordingly disallowance is restricted toRs.35,000/-.” 6.1He contended that the assessee has failed to produce onrecord whether expenses for the A.Y. 1990-91 & 1993-94 wereclaimed or not and what happened to the proceedings for the A.Y.2004-05, in that view of the matter, tribunal was justified inupholding the order of the AO. 6.2He has relied upon the decision of ITAT Bench Mumbai in thecase of ITO vs. Mehul Construction decided on 20.11.2015wherein Division Bench of Tribunal held as under:- “We have considered the rival submissionsand perused the material on record. We notethat the assessee received arbitration awardof Rs. 38,45,155/- inclusive of TDS of Rs.5,26,027/-. The said amount was inclusive ofinterest element. The assessee treated theentire amount as income from business andfiled its return of income u/s.44ADof the Actby taking the net receipt after TDS and failedto gross up the same while filing the returnof Income Tax. The ld. AO while framing theassessment order u/s.143(3)accepted thereturned income however the assessmentwas re-opened by issuing notice u/s.148.Whileframingtheorderu/s. 143(3)r.w.s. 147of the Act Ld. AObifurcated the total amount of award intoclaim originally lodged and interest thereonand treated amount of original claim as partof business income by considering sameu/s. 44ADof the Act while treating interestthereon as income from other sources. Theld. CIT(A) reversed the order of AO on thisissue and directed the AO to treat theinterest amount as part of business incomeof the assessee for the purpose of computingincome u/s. 44ADof the Act by following theratio laid by the Hon'ble Supreme Court in the case of Govinda Chaudhary and Sons(supra). We find that the assessee during thecourse of execution of contract had somedisputes with M/s. Konkan Railway whichwent into arbitration and the assessee wasawarded Rs. 11,65,889/- as claimed loss byassessee with interest for the delayedpayment @ 10% p.a. of Rs. 26,79,266/-. Inour opinion the interest is only the amount ofaddition and accretion to the assesseereceipts from the contracts and it is obviouslyattributable and incidental to the businesscarried out by the assessee. In the decisionreferred to above in the case of GovindaChaudhary and Sons (supra) similar issuedcame up for consideration before the Hon'bleSupreme Court and it was held by theHon'ble Court that interest is also part of thebusiness receipt of the assessee. Wetherefore, do not find any infirmity in theorder passed by the CIT(A) and upheld thesame by dismissing the appeal of therevenue.” 7.Before proceeding with the matter, counsel for the appellantrelied on the finding of the AO recorded in the earlier appeal whichis reproduced as under:- “On perusal of balance sheet of the assessee,it is found that assessee has shown currentliabilities which included liability ofRs.35,83,978/- as arbitration receipts fromXEN, Irrigation, Bundi. During the periodrelevant to the assessment year underconsideration the assessee received contractreceipts of Rs.3583978/- on Court’s order anappeal filed by the assessee against thedecision of the arbitration. Since these arethe receipts of the assessee and should bepart of the income of the assessee thereforehow this can be treated as liabilities. Theseassessee was required vide order sheet entrydt. 15.11.2006 to explain as to how this hasbeen shown as liability whereas thesecontract receipts of Rs.3583978/- havealready been received by you during theperiod relevant to the assessment year andthis your income and not liability. Theassessee has in written reply dt. 17.11.06stated that on request of the assessee the Hon’ble Court directed the State for paymentto the assessee on furnishing of solventsecurity subjected to final order in appealfiled by the State before the Rajasthan HighCourt. He further explained that the amountpermitted to be withdrawn subject tofurnishing a security bond for refunding theamount in the event of appeal being allowedby Hon’ble High Court and therefore it is notincome and this has not yet accrued to theassessee. He also cited the decision in thecase of CIT vs. Hindustan Housing and LandDevelopment Trust Ltd. (1986) 161 ITR 524.The assessee’s explanation is totallyunsatisfactory. As per accounting principlesall the contract receipts should have beenshown in the income side of profit and lossa/c and expenses should be shown inexpenses sides. Since the assessee hasreceived the contract receipts these shouldhave been shown in the income side of P & L.Moreover the receipts cannot be treated asliability till the order of High Court is receivedagainst the assessee. Further the assesseecould not file documentary evidenceregarding pendency of appeal of State in theHigh Court. Further the facts andcircumstances of the case cited above istotally different from this case and decisionin the above cited case is not applicable tothe assessee. The income received in theform of contract receipts cannot be termedas liablity in any way. All the most if theclaim of pendency of appeal in High Court istrue, even then these receipts can be termedas provision for contingent liability at thisstage. The provisions of contingent liability isalso not allowable as per Income Tax Act.Therefore considering all the facts andcircumstances of the case the contractreceipts of Rs.3583978/- received by Court’sorder is treated as income of the assessee.Accordingly an addition of Rs.3583978/- ismade to the total income of the assessee.” 8.We have heard counsel for the parties. 8.1From the record it is very clear that the assessee whilesubmitting his credential before the AO relied on the audit reportfor the A.Y. 1990-91 & 1993-94 which he alleged to have not claimed expenses. However, no finding has been arrived by the AOand if we look at the average which has been applied by the AOand tribunal, the same are not consistent. In that view of thematter, we are of the opinion that while considering the statementfor A.Y. 1990-91 & 1993-94, the AO ought not to have been givenfinding whether the expenses are claimed or not instead ofdeciding the issue which is not relevant and simply deducted theamount which is claimed in the income. 8.2In our considered opinion, CIT while considering the samehas rightly held the profit rate and allowed the claim of theappellant as reproduced hereinabove. The tribunal has committedserious error in concluding that subsequent years expenses whichare claimed ought not to be allowed in the relevant year . 8.3In view of the decision of the Supreme Court and other HighCourt decisions, the income which has been incurred in the year2006-07 is required to be allowed as expenses were not claimed inthe earlier year. Since, no finding arrived by the AO whether theexpenses are claimed or not for the A.Y. 2004-05. 8.4Taking into consideration the above, the issue is answered infavour of the assessee and against the department. 9.The appeal stands allowed. (INDERJEET SINGH),J. (K.S. JHAVERI),J. Brijesh 98.