Principal Commissioner Of Income Tax-2 v. M/S.bharathi Constructions

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 11.9.2020 CORAM THE HON'BLE DR.JUSTICE VINEET KOTHARIANDTHE HON'BLE MR.JUSTICE KRISHNAN RAMASAMY Tax Case (Appeal) Nos.772 to 774 of 2017 Principal Commissioner of Income Tax-2, No.63, Race Course Road,Coimbatore.Appellant in all the 3 casesVs. M/s.Bharathi Constructions,No.119, Power House Road,Erode 638 001. PAN: AAB FB 9308 FRespondent in TCA 772/2017 M/s.URC Construction (P) Ltd.,No.119, Power House Road,Erode 638 001. PAN: AAA CU 2425 QRespondent in TCA 773 & 774 of 2017 Tax Case (Appeals) filed under Section 260A of the IncomeTax Act, 1961 against the order of the Income Tax AppellateTribunal, 'C' Bench, Chennai, dated 20.4.2017 made in ITANos.1871/Mds/2016, 2759/Mds/2016 and 1870/Mds/2016. Against the Order of the Commissioner of Income Tax(Appeals 3), Coimbatore, dated 30.06.2016 in ITA No.321/15-16in the assessment year 2008-2009. Against the Order of the Commissioner of Income Tax(Appeals 3), Coimbatore dated 31.03.2016 in ITA No.23/15-16in the assessment year 2007-2008. Against the Order of the Assistant Commissioner of IncomeTax circle 1, Erode 638001, dated 25.01.2016 & 11.03.2015 PANNO.AAACU2425Q in the assessment year 2008-2009 & 2007-2008. Against the Order of the Deputy Commissioner of Income TaxCircle 1, Erode dated 30.03.2010 & 30.12.2009 PAN/GIRNo. in the Assessment year 2008-2009 & 2007-2008. https://hcservices.ecourts.gov.in/hcservices/ For Appellant : Mr.T.R.Senthilkumar Senior Standing Counsel assisted by Mrs.K.G.Usharani, Jr.Standing CounselFor Respondents: Mr.M.P.Senthilkumar COMMON JUDGMENT (Delivered by DR.VINEET KOTHARI,J) The present Appeals are filed by the Revenue under section260A of the Income Tax Act by raising the following purportedsubstantial questions of law arising from the order passed bythe Income Tax Appellate Tribunal on 20.4.2017 for theAssessment Years 2007-2008 and 2008-2009 in the case of twoAssessees viz., URC construction (P) Ltd., Erode and BharathiConstructions, Erode:-"i) Whether the ITAT is correct in law in quashingthe reassessment order made under Section 143(3)read with Section 147 of the Income Tax Act, on theground that reassessment initiated after four yearsand no fresh material on record for suchreassessment proceedings? ii) Whether the ITAT is correct in law in quashingthe reassessment order without consideringExplanation 1 and Explanation 2(c) to Section 147of the Income Tax Act, when there was a failure onthe part of the assessee to disclose fully andtruly all material facts necessary for assessment?iii) Whether the Appellate Tribunal was right informing an opinion that the assessee has furnishedall the details and when the assessee only producedthe books of accounts but did not make fully andtruly disclosure in Tax Audit Report which is anannexure to the return of income?" 2. The learned Tribunal has decided in favour of theAssessees that the Assessing Authority was not entitled toinvoke the proviso to Section 147 of the Act and reopen theAssessment for those Assessment Years on the ground of failureon the part of the Assessee to truly and fully disclose therelevant materials before the original Assessing Authority, whopassed the Scrutiny Assessment Order under Section 143(3) of theAct. 3. The relevant portion of the order passed by the learnedTribunal is quoted below for ready reference:-"8. From the above it appears that the allegationagainst the assessees is non-deduction of tax atthe time of payment. A copy of the assessmentorder passed under Section 143(3) of the Act in thecase of M/s.URC Construction Pvt. Ltd. is available https://hcservices.ecourts.gov.in/hcservices/ https://hcservices.ecourts.gov.in/hcservices/ at page 68 of the paper-book. The AssessingOfficer, after considering the facts that theassessee being civil contractors, asked theassessee to furnish list of shareholders, TDScertificate, details of opening stock, work inprogress details, purchase details, details of sub-contract payments, payment of wages, interest, etc.before the Assessing Officer. The Assessing Officerhas also called upon the assessee to produce thedetails of secured loan availed from bank and otherfinancial institutions. The Assessing Officer hasalso conducted enquiry through Inspector of Income-tax in order to ascertain genuineness of sundrycreditors. After examining the material, theAssessing Officer observed as follows at page 2 ofthe assessment order, copy of which is available atpage 69 of the paper-book in the case of M/s.URCConstruction Pvt. Ltd.:- “On a perusal of details filed, it is seenthat the assessee has not included TDS receiptsof Rs.13,57,306 as income. Hence, the same isbrought to tax.(Add: Rs.13,57,306)The assessee has defaulted in TDS paymentson audit fees and hire charges paid ofRs.44,45,185. Hence the said sum ofRs.44,45,185 is disallowed u/s. 40(a)(ia) ofthe Income-tax Act, 1961. (Add: Rs.44,45,185)” 9. Therefore, it is obvious that the entire TDScertificates, opening stock, gross receipts fromcontractors, details of purchase, list ofshareholders, copy of current account, copy ofsales tax, general expenses claimed by theassessee, vehicle hire charges were availablebefore the Assessing Officer. 10. Now the contention of the Revenue before thisTribunal is that the audit reports under Section44AB of the Act do not disclose correct and fullparticulars. The assessees have furnished all thedetails before the Assessing Officer. The auditor,who prepared the report under Section 44AB of theAct, is expected to examine all the materials andrecord the same in the report prepared underSection 44AB of the Act. If the auditor fails torecord the lapses committed by the assessee, theassessee cannot be blamed for the same. Auditorbeing expert in accountancy, he has to examine thematerial independently and prepare the report asrequired under Section 44AB of the Act. The assessee, at the best, can produce all the relevantmaterial before the auditor for the purpose ofpreparing the audit report. assessee, at the best, can produce all the relevantmaterial before the auditor for the purpose ofpreparing the audit report. 11. Preparation of audit report is the exclusivefunction of auditor, therefore, if at all there wasany negligence and omission to disclose correctfact in the report prepared under Section 44AB ofthe Act, this Tribunal is of the considered opinionthat the assessee cannot be found fault. If theassessee suppresses any material either before theauditor or before the Assessing Officer, then wemay say there was negligence on the part of theassessee. In this case, the Assessing Officerhimself called upon the entire details of grossreceipts, TDS certificates, details of openingstock, work in progress, payment of wages, paymentof interest, payment of vehicle hire and machinerycharges, copy of sales tax order, etc. Therefore,when the assessee has furnished all the detailswhich are required in completing assessments, thisTribunal is of the considered opinion that mereomission of auditor to mention certain items in theaudit report prepared under Section 44AB of theAct, that alone cannot be a reason to say thatthere was negligence on the part of the assessee.This Tribunal is of the considered opinion thatwhen the assessees furnished all the details, therewas no negligence on the part of the assessees,hence, proviso to Section 147 of the Act would comeinto operation. In view of the above, the orderpassed by the Assessing Officer is barred bylimitation. Therefore, it cannot stand in the eyeof law. Accordingly, the orders of both the courtsbelow for all the three years are set aside and theappeals of the assessees stand allowed." 4. The learned Senior Standing Counsel appearing for theRevenue Mr.T.R.Senthilkumar has urged before us that there wasfailure on the part of the Assessee to disclose truly and fullythe Machine Hire Charges on which the Tax Deduction at Sourceunder Section 194-I was required to be done by the AssesseeCompany, who utilized the Plants and Equipments of theContractors during the construction works carried out by it andtherefore on such payments of rent made by the Assessee to suchcontractors for user of such Plant and Equipments Tax Deductionat Source was required to be done by the Assessee under Section194-I of the Act and in the absence of the same, the amounts inquestion paid to the Contractors was liable to be added back asincome of the Assessee under Section 40(a)(ia) of the Act. Hesubmitted that an Audit Objection was also raised for thoseAssessment Years by the Audit Team of the Department and in the subsequent Assessment Years 2010-11 and 2011-12, the Assesseehimself deducted Tax at Source on such Machine Hire Charges anddeposited the same under section 194-I of the Act and in theyear 2015, the Assessing Authority had "reason to believe" thatfor Assessment Years 2007-2008 and 2008-2009, it was liable toreopen and reassessment was required to be done for thoseAssessment Years, which are under challenge before us. 5. Against the re-assessment order, the Appeals preferred bythe Assessee were dismissed by the learned Commissioner ofIncome Tax (Appeals) and in the Appeal before the learnedTribunal, the Assessee succeeded and the learned Tribunal heldthat reassessment was bad in law as the notice issued underSection 147/148 was issued after expiry of four years after therelevant Assessment Year and there was no failure on the part ofthe Assessee and therefore the extended period of limitationcannot be invoked by the Authority concerned and thereassessment order was set aside. Aggrieved by the same, theDepartment is in these Appeals. 5. Against the re-assessment order, the Appeals preferred bythe Assessee were dismissed by the learned Commissioner ofIncome Tax (Appeals) and in the Appeal before the learnedTribunal, the Assessee succeeded and the learned Tribunal heldthat reassessment was bad in law as the notice issued underSection 147/148 was issued after expiry of four years after therelevant Assessment Year and there was no failure on the part ofthe Assessee and therefore the extended period of limitationcannot be invoked by the Authority concerned and thereassessment order was set aside. Aggrieved by the same, theDepartment is in these Appeals. 6. Per contra, the learned counsel Mr.M.P.Senthilkumarappearing for the Assessee, has drawn our attention to therelevant materials on record and submitted that during thecourse of Original Assessment Proceedings itself the Assesseehad made true and full disclosure of the tax deducted andamount paid by it to various Contractors vide letter dated7.12.2009 filed before the Deputy Commissioner of Income Tax,Circle-I, Erode through the Chartered Accountant M.Chinnayan &Associates and in reply to the Deputy Commissioner of Income Taxfor the Audit Objection, the said Chartered AccountantM.Chinnayan & Associates, vide its communication found at page60 of the paper book (TCA 774/2017), for the Assessment Year2007-2008, it was also contended before the Assessing Authoritythat such amounts paid to the Contractors did not amount topayments of rentals as there was no Lease Agreement andtherefore Section 194-I cannot apply to such payments. Hefurther submitted that the Assessing Authority had disallowed apart of the said amounts towards Machine Hire Charges undersection 40a(ia) of the Act and the Tax Deducted at Sourceduring the course of Original Assessment Proceedings itself andtherefore, there was no reason for the Assessing Authority toreopen the Original Assessment Order on a mere "change ofopinion" subsequently in the year 2015 and the reassessmentProceedings could not be undertaken by the Assessing Authority.In particular, Mr.M.P.Senthilkumar drew our attention to theorder sheet entry drawn on 30[th] December 2009 passed by theDeputy Commissioner, the Assessing Authority, which is quotedbelow for ready reference:-"Sri.Chinnayan, AR appeared and submitted detailscalled for. Case heard. The Assessee hasclaimed machinery & centering material repairsand maintenance at Rs.2,30,67,332/- and vehicle maintenance & repairs at Rs.58,01,668/- which aresupported partly by self vouchers and are paidpartly in cash. As the same appears to beexcessive, 5% of the above said expensesamounting to Rs.14,43,450/- is disallowed as beingexcessive. Further, the Assessee has not includedTDS receipts of Rs.13,57,306/- as income. Hence,the same is brought to tax. The Assessee hasdefaulted in TDS payments on hire charges & auditfees paid. Hence, the said sum of Rs.44,45,185/-is disallowed under Section 40(a)(ia)." 7. Having heard the learned counsel appearing for theparties, we are of the clear opinion that no substantialquestion of law arises in the present Appeal filed by theRevenue, as the law is well settled in this regard and unless asa matter of fact, the Revenue Authority can establish a failureon the part of the Assessee to truly and fully disclose therelevant materials during the course of original AssessmentProceedings, the reassessment proceedings, on mere change ofopinion, cannot be initiated much less beyond the period of fouryears after the expiry of the Assessment Years, in terms of thefirst Proviso to section 147 of the Act. 7. Having heard the learned counsel appearing for theparties, we are of the clear opinion that no substantialquestion of law arises in the present Appeal filed by theRevenue, as the law is well settled in this regard and unless asa matter of fact, the Revenue Authority can establish a failureon the part of the Assessee to truly and fully disclose therelevant materials during the course of original AssessmentProceedings, the reassessment proceedings, on mere change ofopinion, cannot be initiated much less beyond the period of fouryears after the expiry of the Assessment Years, in terms of thefirst Proviso to section 147 of the Act. 8. In the present case, it appears that Machine HireCharges paid by the Assessees to various Contractors or Sub-Contractors were fully disclosed not only in the Books ofAccounts and Audit Reports furnished by the Tax Auditor, but wayof replies to the notice issued by the Assessing Authorityparticularly vide letter dated 7.12.2009 of the Assessee duringthe course of Original Assessment Proceedings and it was alsocontended while giving reply to the Audit Objection that thepayments, having been made as Machine Hire Charges, do notamount to rentals and thereby did not attract Section 194-I ofthe Act, but, despite that the Assessing Authority appears tohave made additions to the extent of Rs.44,45,185/- inAssessment Year 2007-2008 under Section 40(a)(ia) of the Act incase of one of the Assessees viz., URC Construction (Private)Limited. The facts in both the Assessees' case are said to bealmost similar and it was represented by the same CharteredAccountant M/s.Chinnayan & Associates, Erode. 9. Thus, we do not see any failure on the part of theAssessee to truly and fully disclose the relevant materialsbefore the Assessing Authority during the course of OriginalAssessment Proceedings. In view of the same, the extended periodof limitation beyond four years after the end of relevantAssessment Years, cannot be invoked for the re-assessmentproceedings under Section 147/148 of the Act in view of thefirst Proviso to Section 147 of the Act.10. However, we are not inclined to agree with theobservations made by the learned Tribunal in para 11 of its https://hcservices.ecourts.gov.in/hcservices/ order quoted above to the extent where the learned Tribunal hasstated that if there is negligence or omission on the part ofthe Auditor to disclose correct facts in the Audit Reportprepared under Section 44AB of the Act, the Assessee cannot befaulted. 11. In our opinion, even if the relevant facts are notplaced before the Auditors by the Assessee himself, they mayqualify their Audit Report under Section 44AB of the Act. Ifthe Auditor's Report does not specifically disclose any relevantfacts, or if there is any omission or non-disclosure, it has tobe attributed to the Assessee only rather than to the Auditor.There are no facts placed before us like this that the Assesseehad disclosed the relevant facts, but, still the Auditor failedto disclose the same in his Audit Report. Therefore, theobservation made in para 11 of the order is not sustainablethough they do not affect the conclusion which we have arrivedat on the basis of other facts placed before us that there wasreally a disclosure of full and complete facts by the Assesseebefore the Assessing Authority during the course of OriginalAssessment Proceedings itself under Section 143(3) of the Actand therefore, even if anything is not highlighted in the AuditReport, the Assessee has shown that this aspect viz., non-deduction of TDS on the Machine Hire Charges attracting Section194-I of the Act was very much discussed by the AssessingAuthority during the original Assessment proceedings. 12. Therefore, we are of the opinion that on a mere changeof opinion, the Assessing Authority could not have invoked thereassessment proceedings under Section 147/148 of the Act beyondthe period of four years after the end of relevant AssessmentYears. There is no dispute that the impugned notices underSection 147/148 were issued beyond the period of four yearsafter the relevant Assessment Years viz., 2007-2008 and 2008-2009. The four years had expired in the year 2013, but, thenotices were issued in the year 2015. 13. Thus, we do not find any substantial question of law tobe arising in the present Appeals filed by Revenue andtherefore, the Appeals are devoid of merit and are liable to bedismissed. Accordingly, they are dismissed. No order as tocosts. Sd/- //True Copy// Assistant Registrar Sub Assistant Registrar To 1. Principal Commissioner of Income Tax No.63, Race Course Road, Coimbatore. https://hcservices.ecourts.gov.in/hcservices/ 2. The Asst. Commissioner of Income Tax, Circle 1, Erode 638 001. Circle 1, Erode 638 001. 3. M/s.Bharathi Constructions, No.119, Power House Road, Erode 638 001. No.119, Power House Road, Erode 638 001. 4. M/s.URC Construction (P) Ltd., No.119, Power House Road,Erode 638 001. No.119, Power House Road,Erode 638 001. 5. The Commissioner of Income Tax Appeals-I, Coimbatore. Coimbatore. 6. The Deputy Commissioner of Income Tax Circle 1, Erode Erode +1cc to Mr.Senthil Kumar, Advocate in SR.NO..29832T.C.(A)Nos.772 to 774 of 2017MG(CO)RV(19/10/2020)