Panaji, Goa v. M/S. Arm Engineers, Shop

IN THE HIGH COURT OF BOMBAY AT GOA TAX APPEAL NO. 34 OF 2004. The Commissioner of Income Tax,having Office at AaayakarBhavan Patto, Plaza, Panaji, Goa. .... Appellant. Versus M/s. Arm Engineers,Shop No. 40, Apna Bazaar,1st Floor, Vasco-da-Gama, Goa. .... Respondent. Shri S. R. Rivonkar, Advocate for the Appellant. Shri N.M. Porwal with Shri A.D. Bhobe, Advocates for the Respondent. CORAM: B. H. MARLAPALLE & N. A. BRITTO, JJ. DATE: 15 15th December, 2004. ORAL JUDGMENT: ( PER MARLAPALLE, J.) This is an appeal by the Revenue, being aggrieved by the Orderpassed by the Commissioner of Income Tax (Appeals) and the Income TaxAppellate Tribunal, Panaji Bench, Goa and it raises the following substantialquestion of law for our decision and it recites the following substantial questionof law for our decision :- “ Whether the lower appellate forums committed an error in law inmaking applicable the decision of the Supreme Court in the case of BrijBhushan Lal Parduman Kumar (115 ITR 524). In the instant case wherein the contractee is a cooperative sugar factory and not a GovernmentDepartment/establishment and the clause of the contract had provided anoption to the contractor/assessee to procure the material in case the contracteefailed to do so and also the debit notes for an amount of Rs.1,03,61,602/- weremade available. “ 2.The Assessee had filed return of income on 31.12.1996 and the same wasprocessed under Section 143(1)(a) of the Income Tax Act 1961 on 7.1.1997. On9.1.1997 the Assessee had filed a revised return of income declaring totalincome of Rs.2,98,580/- as against the earlier declared income of Rs.5,28,720/- .The revised return of process was filed under Section 143(1B) on 13.2.1997. Theassessment was completed on 27.3.98 determining the income of Rs.2,98,580/- .During the course of assessment proceedings for the accounting year 1998-99the Assessing Officer noticed that there was a short account of contract receiptsto the extent of Rs. 94,35,804/- and he presumed that income chargeable to taxwas escaped within the meaning of S.147 of the Act. Consequently theassessment was reopened by issuing notice under S.148 of the Act. 3.After hearing the Assessee, the Assessing Officer on considering therecord, passed the assessment order on 27.3.02 and held that theUnderstatement of Contract Receipts came to Rs.70,82,160/- and thedisallowance under S.40A(3) of the Act was worked out at Rs.1,48,957/- thusmaking a total additional income of Rs.75,29,700/- for additional tax as well asinterest, etc. This order was challenged in appeal before the Commissioner ofIncome Tax (Appeals) Panaji, Goa and the appeal was partly allowed inasmuch as the Order of disallowing under S.40A(3) was confirmed while the orderregarding understatement of contract receipts valued at Rs.70,82,116/- was setaside. The A.O. therefore went in further appeal before the Income TaxAppellate Tribunal, Panaji and Income Tax Appeal No.11/2003 for theassessment year 1996-97 came to be dismissed by accepting the reasoninggiven by the CIT (Appeals). Both the appellate authorities below referred to thedecision of the Supreme Court in the case of Brij Bhushan Lal PardumanKumar v. CIT (115 ITR 524) and held that that the contractee had confirmed tohave purchased the construction material even to the extent of differentialamount of Rs.7082,160/- and even in the absence of the debit notes, theassessing quantum of income would not be affected. 4.The Revenue does not agree with the view taken by both the appellateauthorities below, mainly on the ground that the contractee in the case of BrijBhushan (supra) was a Government establishment/department, whereas in thecase at hand, the contractee was a sugar factory by name Shivajirao PatilNilangekar Sahakari Sakhar Karkhana Ltd. The A.O. also referred to thecontract and also to the letter of confirmation submitted by the contracteeregarding the differential amount having been spent on purchase ofconstruction material which was purportedly handed over to the assessee andutilised in the project under review. The A.O. had taken into consideration thatfor the balance amount of Rs.1,02,000/- the debit notes were available and forthe balance amount of Rs.70,82,000/- they could not be made available. Hetherefore rejected the contentions of the assessee and treated the saiddifferential amount as the income to tax. 5.During the course of arguments Mr. Porwal, the learned counselappearing for the assessee, on instructions had submitted that subsequentlythe contractee had furnished the debit notes and along with the affidavit, thelist of debit notes amounting to Rs.1,45,60,127/- has been annexed thereto. It isfurther submitted that the assessee had received material worthRs.1,45,60,127/- during the assessment year 1995-96 (financial year 1994-95)and Rs.1,03,61,602/- during the assessment year 1996-97 thus making the totalmaterial received of Rs.2,49,21,729/- . It is further stated that during thefinancial year 1994-95 and 1995-97 the total material consumed was of thevalue of Rs.1,79,25,956/- and this was all purchased and supplied by thecontractee. Whereas the balance material worth Rs.71,95,772/- was lying withthe contractor/assessee and it was the property of the contractee. Based onthis additional information that is made available to him and placed before usalong with the affidavit, Mr. Porwal submitted that the deficiency which wasnoticed by the assessing officer has been made up and therefore the orderpassed by the assessment officer cannot be sustained and, on the other hand,the view taken by both the lower appellate authorities requires to be confirmed. 6. We are of the considered opinion that the debit notes which are placedbefore us for the first time cannot be subjected to verification in this TaxAppeal and the said verification is required to be undertaken by theAssessing Officer. The relevance of all these debit notes will have to beexamined by the Assessing Officer on the basis of all the material/recordthat will have to be furnished before him by the assessee.before us for the first time cannot be subjected to verification in this TaxAppeal and the said verification is required to be undertaken by theAssessing Officer. The relevance of all these debit notes will have to beexamined by the Assessing Officer on the basis of all the material/recordthat will have to be furnished before him by the assessee. 7. In the case of Brij Bhushan Lal (supra) the contractor was a MilitaryEngineering Services (M.E.S.) (contractor) and as such he was carrying onbusiness of executing contracts and works on behalf of the Government. Forthe execution of the works undertaken by the contractor, certain materialssuch as cement, coal, items of steel etc. were supplied at the fixed ratesspecified in Schedule B to the contract by the Government for being used inthe works. During the relevant assessment period the contractor had takentwo contracts, one at Delhi and the other at Ambala. Thecontractor/assessee did not furnish any figures about the stores (material)received by it from the M.E.S. and when called upon to produce the relevantcertificates in respect of such stores, the assessee failed to do so on theground that the departments were not cooperating with it. Under ConditionNo.10 and 33 of the General Conditions it was stated that the contractorshall, at his own expense supply all stores and materials required for thecontract, other than those listed in Schedule 'B' which are to be provided bythe Government at the rates detailed therein and stores and materialsrequires for the works are to be deposited by the contract only in places to beindicated by the Engineer- in-charge . All the stores and materials broughtto the site shall become and remain the property of the Government andshall not be removed off the site without the prior written approval of theGarrison Engineer. It was under these circumstances that the SupremeCourt held in favour of the assessee. It further noted that having regard tothe terms and conditions on which supply of stores/materials is made therewas not even a theoretical possibility of any element of profit being involvedin the turnover represented by the cost of such stores/material. Since no element of profit involved in the turnover of costs of stores/materialssupplied by M.E.S. to the assessee, the income or profits derived by thecontractor from such contract will have to be determined on the basis of thevalue of the contract represented by the cash payment received by theassessee- firm from the M.E.S. Department exclusive of the cost of thematerial/stores received for being used, fixed or incorporated in the worksundertaken by them. 8. In the case at hand the relevant tender term read as under: ' The materials listed in the above from 1 to 5 may be supplied to thecontractor by the Employer with the coated basic rate separately.However, supply of the above materials, if not made available from theemployer the same will be solely procured by the Contractor in executionof the works, in confirmation of the given basic price of materials listed in1 to 5 only. ' 9. If the contractee who was a cooperative sugar factory failed to supplythe relevant material, the contractor was compelled to buy of his own so asto complete the project. In addition the contractee had made available debitnotes for an amount of Rs.1,03,61,602/- and the debit notes for the amountof Rs.70,82,160/- were not made available. Having regard to the style ofmanagement and more particularly the fiscal management of thecooperative sugar factor in Maharashtra the assessing officer was right in notrelying upon the certificate issued by the contractee regarding thedifferential amount. The ratio laid down in BrijBhushan Lal's case (supra)was therefore not applicable per se in the instant case and the assessee will have to support the purchases made by the contractee on the basis of thedebit notes or any other relevant documents. have to support the purchases made by the contractee on the basis of thedebit notes or any other relevant documents. 10. Mr. Porwal also raised an additional point before us. He submittedthat even if there is any differential amount, such an amount in its entiretycannot be treated to be the additional income and it may be considered asthe turnover. This is also an issue which will have to be gone into by theassessing officer while examining the record/documents. We are sure theassessing officer would certainly understand the meaning between turnoverand net income and record his findings accordingly. 11. We therefore allow the appeal partly and remand the assessment for therelevant period to the assessing officer for fresh investigation. The orderspassed by the appellate authorities below are set aside. The Assessee willthappear before the Assessing Officer on 11 January, 2005 and furnish therelevant documents/record. The Assessing Officer to proceed with theinquiry de novo and complete the same as expeditiously as possible and inthany case within four weeks from 11 January, 2005. B. H. MARLAPALLE , J. N. A. BRITTO, J.