TMI Blog2012 (4) TMI 340X X X X Extracts X X X X X X X X Extracts X X X X ..... pute to the fact that the payments in question related to the liabilities brought forward from earlier year, i.e. payments were made against the opening balance of liabilities of the assessment year under consideration. In such circumstances, by no stretch of imagination, provisions of sec. 69C of the Act do apply to such transactions. It is also not disputed that the payments have not been entered in the P/L Account and claimed as expenditure. In that view of the matter, we find no infirmity in the order of ld. C.I.T.(A) in deleting the addition of Rs. 33,13,143/- made u/s. 69C of the Act, which is upheld Regarding estimation of gross profit - The ld. C.I.T.(A) has elaborately discussed the issue and came to a reasonable conclusion that net profit @ 3% instead of 4.5% estimated by the ld. A.O. would meet the ends of justice under the facts and circumstances of the case. After careful perusal of the said observation/finding, we are inclined to uphold the direction given by the ld. C.I.T.(A) to the ld. A.O. to compute contract profit @ 3% in place of 4.5% - Decided in favor of the assessee - IT Appeal Nos. 1703 and 1821 (Kol.) of 2009 And 1119 (Kol.) of 2010 - - - Dated:- 24-2- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irm is a contractor and also earning income from machinery hire charges. Return of income for the assessment year under consideration was filed showing income of Rs. 45,57,740/-. The assessment for the assessment year under consideration u/s. 143(3) was framed on a total income of Rs. 2,60,14,550/- as against income declared by the assessee in its return at Rs. 45,57,740/- making thereby addition of Rs. 1,44,91,357/- u/s. 40(a)(ia) of the Act. During the assessment year under consideration, the assessee-firm executed contract job for construction of fencing along with boarder road at Mahadevo, Meghalaya obtained from National Buildings Construction Corpn. Ltd. (NBCC). Referring to letter of award for the said construction issued by NBCC dated 6/12/2004, a copy of which is placed in the assessee's paper book at pages 14 to 20, the assessee claimed that it executed contract job at Meghalaya where bandh is a common feature due to disturbed area. The location of the contract site was on washing up of sand and earth surrounded by hills. As per clause-11.1 of Letter of Award issued by NBCC dated 06/12/2004, a copy of which is placed at pages 14 to 20 of the paper book, the terms condit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 91,357/- on this account not allowable and added the same to the total income of the assessee u/s. 40(a)(ia) read with sec. 194C of the Act. Being aggrieved, the assessee preferred appeal before the ld. CIT(A). 4. Before the ld. C.I.T.(A), the assessee reiterated the submissions as made before the ld. A.O. It was further submitted that as per certificate issued by M/s. Bharat Earth Movers, it was clear that the payment was on account of hire charges to M/s. Bharat Earth Movers and not for any contractual work relating to excavation of earth and rock. In the said certificate it was stated that machinery was placed on hire with the assessee during the relevant period at Meghalaya site and used for earth excavation and/or rock excavation and that hire charges were not paid on hourly basis but on the basis of measurement of earth or rock excavated by using the said machinery and such arrangement was made in view of the trouble prone locality. The ld. C.I.T.(A) forwarded the said certificate to the ld. A.O. for his report, who in turn deputed Inspector to investigate into the matter with M/s. Bharat Earth Movers. The C.I.T.(A) observed that the Inspector enquired from one of the par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee-firm. The learned counsel in this connection submitted that the assessee made security deposit with NBCC against award of contract job for construction of fencing along with boarder road at Mahadevo, Meghalaya, because it has the obligation to discharge the contract job satisfactorily. Here M/s. Bharat Earth Movers had no obligation to the assessee, because simply there was deployment of machinery. Therefore, no security deposit was required to deploy machinery. ( f ) According to CBDT Circular contained in 276 ITR (ST) 165, certain amounts shall not be allowed as deduction while computing income under the head 'profits gains of business or profession' if tax is not deducted at source. It has been clarified in that circular that with a view to augment compliance with TDS provisions in the case of residents and curb bogus payments to them it has been provided that no deduction will be allowed where tax is not deducted from payments under different categories as mentioned therein. But in the case of the assessee it was not the case of the department that bogus payments were made by the assessee and there was at all no job being carried out by the assessee at Meghalaya. ( g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransport v. Asstt. CIT [IT Appeal No.262 (Kol) of 2009, dated 11-9-2009] Samanwaya v. Asstt. CIT [2009] 34 SOT 332 (Kol.). 6. The Ld. Departmental Representative, on the other hand, relied on the orders of the authorities below and submitted that the ld. A.O. was justified in adding back Rs. 1,44,91,357/- which was paid/credited to M/s. Bharat Earth Movers on account of contract job u/s. 40(a)(ia) of the Act. 7. We have heard the rival contentions of the parties and gone through the orders of the authorities below. We have also perused the papers placed in the paper book. On perusal of the assessment order we find that the ld. A.O. considered sum of Rs. 1,44,91,357/- on the basis of the bill issued by M/s. Bharat Earth Movers as contractual and, accordingly, invoked provisions of Sec.40(a)(ia)/194C of the Act. Section 194C of the Act speaks of payments to contractors and sub-contractors. According to this section, any person responsible for paying any sum to any resident, i.e. contractor, for carrying out any work including supply of labour for carrying out any work, in pursuance of a contract between the contractor and any firm etc., shall, at the time of credit o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the meaning of 'contractor' and 'sub-contractor'. From a perusal of section 194C of the Act, it is obvious that a 'contractor' for the purpose of the provisions of this section would be any person who enters into a contract with the Central or any State Government, any local authority and corporation established by or under a Central, State or Provincial Act, any company or any co-operative society for carrying out any work including the supply of labour for carrying out any work and a 'sub-contractor' would mean any person who enters into a contract with the contractor for carrying out, or for the supply of labour for carrying out, the whole or part of the work undertaken by the contractor under a contract with any of the authorities named above or for supply whether wholly or partly any labour which the contractor has undertaken to supply in terms of his contract with any of the aforesaid authorities. Hon'ble Himachal Pradesh High Court had the occasion to deal with the meaning of 'contractor' and 'sub-contractor' in terms of Sec. 194C in the case of ITO v. Rama Nand Co. [1987] 163 ITR 702, 704/30 Taxman 434. In that case, the respondent-firm purchased from the Government c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny work or for supply of labour for carrying out any work. 8. It is an admitted position that the assessee would be liable for deduction of tax on payments made by him under a valid contract. In the case of the assessee, as per report of the Inspector, there was no written contract between the assessee and M/s. Bharat Earth Movers, although one of the partners in his statement has stated that there was verbal agreement. The assessee filed a certificate issued by M/s. Bharat Earth Movers under the signature of the Manager stating that the payment was on account of hire charges to M/s. Bharat Earth Movers on measurement basis for excavation of earth and rock and not for any contractual work relating to construction of boarder fencing . The same person of M/s. Bharat Earth Movers issued the impugned bill, basing upon which the department treated the transaction as contractual and not on account of hire of machinery on measurement basis. Therefore, there is no written agreement and assumption of the ld. A.O. of having an oral agreement is not corroborated with any evidences on record. On the other hand, the assessee is able to establish that it worked on peace-meal basis on hiring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the ld. Departmental Representative. We, therefore, set aside the orders of the authorities below and hold that the assessee was not liable to deduct TDS u/s. 194C on the payments of Rs.1,44,91,357/- to M/s. Bharat Earth Movers and, therefore, the addition u/s. 40(a)(ia) made by the A.O. and sustained by the C.I.T.(A) was unwarranted. The same is, therefore, directed to be deleted. 10. In the result, the appeal of the assessee is allowed. ITA No. 1821 (Kol)/2009 - A.Y. 2006-07 } Revenue's appeals. ITA No. 1119 (Kol)/2010 - A.Y. 2007-08 } 11. In ground No.1 for assessment year 2006-07, the department has objected to the deletion of addition of Rs. 33,13,143/- u/s. 69C of the Act by the ld. C.I.T.(A), being payments made to different parties against earlier year's liabilities. The ld. A.O. treated this as unexplained expenditure. The assessee explained before the ld. C.I.T.(A) that the amounts outstanding in the names of these creditors were all old brought forward balances of the earlier year and pertained to outstanding liability of the earlier year. It was further started that there was no debit in respect of the amounts paid to these parties in the year under cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents have not been entered in the P/L Account and claimed as expenditure. In that view of the matter, we find no infirmity in the order of ld. C.I.T.(A) in deleting the addition of Rs. 33,13,143/- made u/s. 69C of the Act, which is upheld. 13. Identical issue was also subject matter of appeal by the Revenue for assessment year 2007-08. In this assessment year, the ld. A.O. added Rs. 54,19,625/- u/s. 69C of the Act, which was deleted by the ld. C.I.T.(A). For the discussions made above and reasons adopted while deleting the addition of Rs. 33,13,143/- for assessment year 2006-07, we uphold the order of ld. C.I.T.(A) on this issue in deleting the said addition made u/s. 69C of the Act for assessment year 2007-08. 14. In the Revenue's appeal for assessment year 2006-07, the only other ground raised was with respect to ld. C.I.T.(A)'s action in deleting the addition of Rs. 7,75,104/- on account of allowing of higher rate of depreciation on machinery given on hire. The ld. A.O. observed that the assessee has credited Rs. 68,07,328/- as hire charges of machineries received from M/s. Bharat Earth Movers, which has been confirmed by the partner of the said firm. On the above facts, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as some payments had been made in that year as well as in the F.Yr.2006-07 which is the relevant F.Yr. under appeal. The A.O. was of the opinion that the creditors were bogus and made an addition on account of the payments made to the brought forward creditors in A.Yr.2005-06. The matter came in appeal before me. In that appeal, I held that disallowance U/s.69C can only be made in respect of expenditure incurred during the F.Yr. for which the assessment order was being passed. Reliance was placed by me in this regard on the Mumbai Tribunal's decision in the case of Harakchand P. Vora v. ACIT [2000] 68 TTJ. The A.O. has not made an addition in the relevant year under appeal, but has discussed the issue in detail in light of the best judgment assessment order passed. He has observed that the payment of Rs. 54,19,625/- to the fake creditors represented income of the assessee as the amount has not been paid. The learned A/R referring to ground No. 1 stated that this statement was wrong as payment had been made as would be apparent from the perusal of the cash book and ledger. The same were produced before me in support of this contention. It was also stated that the payments to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee was a big contractor having substantial turnover and was dependent for most of the work on staff as close personal supervision was not possible in view of the volume of work and the advanced age of the partners. I have considered the matter. The Supreme Court in the case of Brijbhusan Lall Parduman Kumar v. CIT 115 ITR 524 observed that the authority making a best judgment assessment must make an honest and fair estimate of the income of the assessee and though arbitrariness cannot be avoided in such an estimate, the same must not be capricious but should have a reasonable nexus to the available material and the circumstances of the case. Similar observations were made in another case by the apex court namely, State of Kerala v. C. Velukutty 60 ITR 239. I have already held that the estimation was justified. However, keeping in view of the past records of the assessee as well as the amount of profit assessed in such cases, I am of the opinion that calculation of net profit @ 3% (which would result in an enhancement of income by approximately 70%) in place of 4.5% would meet the ends of justice. The A.O. is, therefore, directed to compute net business profit according ..... 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