2024 (4) TMI 1279 - AT - Income Tax

Addition of expenses incurred by the assessee in respect of purchase of material labour expenses repair and maintenance establishment selling and administrative expenses - CIT(A) directing disallowance of expenses @ 7.5% as against 10% made by the AO - HELD THAT - As noted in the order of ld. CIT(Appeals) himself in the case of CIT vs. Prabhat Kumar 2008 (11) TMI 356 - PUNJAB HARYANA HIGH COURT as approved a net profit rate of 12% in a similar activities carried out by the assessee and the Ld. CIT(A), noting that assessee s profit would come to 11.8% of the gross turnover after disallowance of 7.5% of the expenses he accordingly applied rate of 7.5% to the adhoc disallowance. But be that so there cannot be a standard net profit rate applicable to all persons working in a similar activity. The assessee has pointed out to us that as per its past history net profit rate assessed on average rate of 8% We therefore consider it fit to reduce the disallowance to 5% of the expenses. Disallowance u/s. 40(a)(ia) - non-deduction of tax at source on various expenses rent paid for hiring of JCB Porcelain Roller Tractor and Tanker - HELD THAT - The details submitted as reproduced above supports the contention of ld. Counsel that none of the payments made exceeded Rs. 1, 20, 000/- which is a limit for tax deduction at source. The DR was unable to point out any counter to the facts and position of law. We hold that the payment of Rs. 7, 42, 600/- could not be visited with the disallowance in terms of provision of section 40(a)(ia) of the Act. Even the tax audit report stated that the assessee was not liable to any TDS under the provisions of the Act. The details submitted by the assessee of the payment of Rs. 7, 42, 600/- corroborated with the tax audit report submitted by the Accountant support the assessee s claim of no disallowance being warranted on the impugned payment u/s. 40(a)(ia) of the Act. As for the payment of water tax rent of Rs. 2, 10, 400/- without tax deducted at source as per admission of the ld. Counsel himself the assessee has no case with respect to disallowance u/s. 40(a)(ia) on the same and therefore this disallowance is confirmed.

Summary

The core legal questions considered in this appeal pertain primarily to the correctness and quantum of disallowance of expenses made by the Assessing Officer (AO) and sustained by the Commissioner of Income-tax (Appeals) [CIT(A)] under the Income-tax Act, 1961. Specifically, the issues include:

1. Whether the disallowance of expenses at 7.5% by the CIT(A), as against 10% by the AO, in respect of purchase of material, labour expenses, repair and maintenance, establishment, selling and administrative expenses, is justified.

2. Whether the resultant profit rate of 11.8% after disallowance is excessive and inconsistent with the assessee's past profit history, and whether the reliance on precedent case law for applying the disallowance rate is appropriate.

3. Whether the disallowance under section 40(a)(ia) of the Act amounting to Rs. 9,53,000/- on account of non-deduction of tax at source (TDS) on rent payments for hiring machinery is warranted, particularly where the payments to individual payees are below the threshold limit for TDS deduction.

Issue-wise Detailed Analysis:

Issues 1, 2 & 3: Disallowance of Expenses and Determination of Profit Rate

Relevant Legal Framework and Precedents: The disallowance was made under the provisions of the Income-tax Act, 1961, in the context of the assessee not maintaining proper books of account. In such cases, the AO is empowered to make an estimate of expenses and disallow a portion thereof if the claimed expenses lack adequate substantiation. The CIT(A) relied on the decision of the Punjab & Haryana High Court in CIT vs. Prabhat Kumar Contractor, which approved a net profit rate of 12% for similar activities, to justify the application of a 7.5% disallowance.

Court's Interpretation and Reasoning: The Court acknowledged that the assessee did not maintain proper books of account, justifying some level of disallowance. However, it emphasized that any adhoc disallowance must be reasonable and not arbitrary. The CIT(A) had reduced the AO's disallowance from 10% to 7.5%, basing this partly on the precedent case. The assessee contended that the precedent was not applicable and that the net profit rate of 11.8% after disallowance was excessive compared to its historical profit rates, which mostly ranged around 8%.

Key Evidence and Findings: The Court noted the assessee's past profit history from AY 2004-05 to AY 2013-14, showing net profits varying between 6% and 11%, with 8% being the most common rate. The Court found merit in the assessee's argument that a uniform net profit rate applicable to all persons engaged in similar activities is not appropriate and that the assessee's own past profit history is a relevant benchmark.

Application of Law to Facts: Applying the principle that disallowance must be just and reasonable, and considering the assessee's historical profit rates, the Court reduced the disallowance from 7.5% to 5% of the expenses. This adjustment was made to align the disallowance with the facts and past profit trends of the assessee rather than relying solely on external precedent.

Treatment of Competing Arguments: The Department's argument to uphold the CIT(A)'s order was rejected on the ground that the past profit history of the assessee was a significant factor that could not be ignored. The Court found the assessee's submissions more persuasive and held that the precedent case cited was not strictly applicable.

Conclusions: Grounds 1, 2, and 3 were partly allowed by reducing the disallowance to 5% of the expenses, thereby moderating the resultant profit rate to a figure consistent with the assessee's past profit history.

Issue 4: Disallowance under Section 40(a)(ia) for Non-Deduction of TDS on Rent Payments

Relevant Legal Framework: Section 40(a)(ia) of the Income-tax Act disallows expenses where tax is required to be deducted at source but is not deducted. The threshold limit for deduction of TDS on rent payments is relevant to determine applicability.

Court's Interpretation and Reasoning: Both the AO and CIT(A) had disallowed expenses amounting to Rs. 9,53,000/- for non-deduction of TDS on rent paid for hiring machinery such as JCB, Poclane, Roller, Tractor, and Water Tanker. The assessee submitted detailed charts and evidence showing that payments made to individual payees for JCB, Poclane, Roller, and Tractor rent were below Rs. 1,20,000/- each, which is below the threshold limit for TDS deduction for the relevant year. The assessee also produced e-acknowledgements of submissions made to the authorities. However, the assessee admitted that no details were provided for the water tanker rent of Rs. 2,10,400/-.

Key Evidence and Findings: The Court examined the detailed payment chart submitted by the assessee, which demonstrated that all payments to individual payees for machinery rent were below the threshold limit for TDS deduction. The tax audit report also supported the assessee's claim that it was not liable to deduct TDS on these payments. The Department could not refute these facts.

Application of Law to Facts: Since the payments were below the threshold limit for TDS deduction, the disallowance under section 40(a)(ia) was unwarranted for the machinery rent payments. However, for the water tanker rent payment, no details were provided, and the assessee admitted the lack of evidence. Therefore, the disallowance for this amount was upheld.

Treatment of Competing Arguments: The Department's insistence on confirming the disallowance was rejected with respect to the machinery rent payments due to the documentary evidence provided by the assessee. The Department's argument was accepted only for the water tanker rent due to lack of evidence.

Conclusions: Ground No. 4 was partly allowed by deleting the disallowance of Rs. 7,42,600/- related to machinery rent payments but confirming the disallowance of Rs. 2,10,400/- related to water tanker rent.

Significant Holdings:

"Undisputedly, in the absence of proper books of accounts maintained by the assessee, the Revenue has resorted to an adhoc disallowance of expenses being made. Though, admittedly, the assessee has no justification for the expenses claimed by it, but be that so, any adhoc exercise by the revenue authorities has to be justified and cannot be an arbitrary exercise."

"There cannot be a standard net profit rate applicable to all persons working in a similar activity. The assessee has pointed out to us that as per its past history, net profit rate assessed on average rate of 8%. We, therefore, consider it fit to reduce the disallowance to 5% of the expenses."

"The details submitted as reproduced above, supports the contention of ld. Counsel that none of the payments made exceeded Rs. 1,20,000/-, which is a limit for tax deduction at source. The DR was unable to point out any counter to the facts and position of law."

Core principles established include the necessity for any adhoc disallowance to be reasonable and supported by facts, the relevance of the assessee's own past profit history in determining appropriate profit rates, and the requirement that disallowances under section 40(a)(ia) must be based on tangible evidence of failure to deduct TDS beyond the prescribed threshold limits.

Final determinations on each issue are as follows: The disallowance of expenses was reduced from 7.5% to 5% of the total expenses, thereby allowing part of the appeal on Grounds 1-3. The disallowance under section 40(a)(ia) was deleted with respect to machinery rent payments but confirmed for water tanker rent, partly allowing Ground 4. Overall, the appeal was partly allowed.