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2016 (5) TMI 1160 - ITAT AHMEDABAD

2016 (5) TMI 1160 - ITAT AHMEDABAD - TMI - Addition u/s 68 - unsecured loans received - Held that:- The appellant has been able to prove the identity, genuineness and creditworthiness of Sanjay Patel HUF, Jayaben Patel and Bharti Patel repeatedly and certainly, when there is a provision of showing income @ 8% on the civil construction receipts u/s 44AD of the Act, then the parties taking sub-contract work are free enough to get themselves covered under the provisions embedded in the Statute. The .....

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e.

Disallowance in respect of interest paid to depositors - Held that:- The same is consequential, because as we have already held that no addition is called for towards the unsecured loans of ₹ 20,01,300, then certainly assessee will be eligible for claiming interest of ₹ 3,79,616/- in respect of interest paid to depositors. - Decided in favour of assessee.

Disallowance @ 15% of the labour expenses paid to five sub-contractors being related parties u/s 40A(2)(a .....

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in that these related parties has been paid on a higher rate or excess amount in comparison to the general market rate. We also observe that the detailed ratewise chart is available on record which the related parties has provided to the assessee on the basis of which work has been awarded to them and the same have been completed to the satisfaction of the contract awarders. We also observe that no disallowance on payment to sub-contractors to related parties have been made u/s 40A(2)(b) of the .....

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ion when the books of accounts have not been rejected and all other expenditures have been accepted without pointing out any error, then in such situation estimated addition should not be called for. We, therefore, delete the addition - Decided in favour of assessee.

Disallowance made u/s 40(ia) - Non deduction of tds u/s 194H on the deemed commission payment made - Held that:- We failed to understand that how such type of addition or disallowance can be made by ld. Assessing Officer .....

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on other contract work also and gross turnover of ₹ 5,19,71,858/- has been achieved by the appellant during the year under appeal and a net profit of ₹ 16,52,490/- has been shown in its return of income. There is no justification given by the ld. Assessing Officer that on what basis deemed commission payment has been calculated at ₹ 43,18,175/- and going a step further how can a provision of Section 40(a)(ia) can be applied for non-deduction of deduction u/s 194H of the Act on .....

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the assessee; one relating to quantum addition for the Assessment Year 2007-08 is directed against the order of ld. Commissioner of Income-tax (Appeals)-II, Baroda dated 29.09.2010 wherein the assessment u/s 143(3) of the Income-tax Act (hereinafter referred to as the Act ) was framed on 29.12.2009 by ACIT, Circle-3, Baroda; and another appeal relating to the imposition of penalty u/s 271(1)(c) of the Act for Assessment Year 2007-08 is directed against the order of the ld. Commissioner of Incom .....

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- and from Bhartiben Patel of ₹ 5,00,000/- u/s 68 of the Income-tax Act, 1961. 2. The learned Commissioner of Income-tax (Appeals)-II, Baroda has erred in law and on facts of the case by confirming the disallowance of ₹ 3,79,616/- in respect of interest paid to depositors. 3. The learned Commissioner of Income-Tax (Appeals)-II, Baroda has erred in law and on facts of the case by confirming the disallowance of ₹ 22,70,824/- @ 15% of ₹ 1,51,38,829/- paid to five sub-contrac .....

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ng subcontracts from various contractors. Return of income for Assessment Year 2007-08 was filed on 31.10.2007 at an income of ₹ 16,52,490/- and showing gross turnover during the year at ₹ 5,19,75,858/-. The case was selected for scrutiny assessment under CASS and notice u/s 143(2) dated 22.09.2008 was served on the assessee followed by notice u/s 142(1) of the Act alongwith questionnaire issued on 05.02.2009. During the course of assessment proceedings, the ld. Assessing Officer, wh .....

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to the impugned parties which are mostly related parties to the assessee as per provisions of Section 40A(2)(a) of the Act and further taking the same amount as unsecured loan directly or indirectly and then again claiming interest expenditure on these unsecured loans. Taking these observations in his mind, the ld. Assessing Officer assessed the income at ₹ 1,08,43,953/-, after making following three additions:- i. Addition u/s 68 of the Act for unexplained / unsecured loans at ₹ 21 .....

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the same was dismissed. 5. Aggrieved, the assessee is now in appeal before the Tribunal. 6. First, we will take up Ground Nos. 1 & 2 which read as under:- 1. The learned Commissioner of Income-tax (Appeals)-II, Baroda has erred in law and on facts of the case by confirming the addition of ₹ 21,01,300/- in respect of deposits received from Sanjay N. Patel of ₹ 7,51,300, from Jayaben Patel of ₹ 8,50,000/- and from Bhartiben Patel of ₹ 5,00,000/- u/s 68 of the Income-tax .....

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₹ 8,50,000/- received from Jayaben P. Patel and (iii) ₹ 5,00,000/- from Bhartiben D. Patel - totaling to ₹ 21,01,300/- as unexplained cash credits u/s 68 of the Income Tax Act, 1961. 2.1.1 In response to the show cause notice in this regard, the Appellant submitted detailed explanation vide letter dated 24.12.2009 stating that credit balance in the bank account of Sanjay N. Patel HUF of ₹ 7,51,300/- with Corporation Bank as on 01.04.2006 was out of labour payments receive .....

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e Appellant and various payments were made to them by cheques. Copy of bank statement of Shri Sanjay N. Patel HUF from Corporation Bank is also submitted wherein amount received by way of subcontract payments from the Appellant have been duly reflected since F.Y.2004-05. 2.1.3 Thus, it is clear from the copy of the statement of the Corporation Bank that balance of ₹ 7,51,300/- which stood to the credit of account of Sanjay N. Patel HUF is the opening balance as on 01/04/2006. The said bala .....

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10/7/2006 by the Appellant and loan of ₹ 5,00,000/- was received by cheque on 14/07/2006. These payments are duly reflected as withdrawal in the copy of bank account of Jayaben N. Patel with Canara Bank. Further, confirmation of Jayaben N. Patel along with PAN No. and copy of her IT Return has also been filed. 2.2.2 Source of deposits made in the account of Jayaben N. Patel have been duly explained as under : 31/03/2006 Loan from Sudhir N. Patel (HUF) ₹ 3,00,000 31/03/2006 Loan from .....

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y of cash credit in the name of Bhartiben D.. Patel amounting to ₹ 5,00,000/- advanced by Bhartiben D. Patel to the Appellant, it is submitted that loan by way of cheque of ₹ 5,00,000/- was received on 10/7/2006 by the Appellant. This payment is duly reflected as withdrawal in the copy of bank account of Bhartiben D.. Patel with Canara Bank. Further, confirmation of Bhartiben D. Patel along with PAN No. j and copy of Income-tax Return have also been filed. Source of deposit made in t .....

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rely on the following decisions: (i) DCIT v. Rohini Builders [256 ITR 360 (Guj)] (ii) ; Claris Lifesciences Ltd. v. ACIT [111 TTJ 902 (Ah'd)] (iii) Nemi Chand Kothari v. CIT & Anr. [264 ITR 254 (Gauh.)] (iv) CIT v. Diamond Products Ltd. [ 177 ITR 331 (Del)] Copies of the judgments are enclosed herewith. 6.2 The ld. Authorized Representative for the assessee submitted as under with regard to the disallowance of interest of ₹ 3,79,616/- on loan.:- 3.1 The Assessing Officer has disal .....

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y order u/s 154 dated 02/03/2010, disallowance has been reduced to ₹ 73,593/- and ₹ 43,562/- respectively. 6.3 On the other hand, ld. Departmental Representative supported the orders of the lower authorities. 7. We have heard the rival contentions and perused the material on record. Two issues are raised before us by way of these grounds against the order of ld. CIT(A) towards addition of ₹ 21,01,300/- u/s 68 of the Act and disallowance of interest of ₹ 3,79,616/- claimed .....

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loan taken by the assessee during the year, but this is a closing bank balance in the bank account of Sanjay N. Patel HUF which ld. Assessing Officer believes that this amount was previously given by the assessee during Assessment Year 2006-07 to Sanjay N. Patel HUF towards sub-contract charges and during the year under appeal this was a part of unsecured loan taken by the assessee. Similarly, in the case of Jayaben P. Patel, out of the total unsecured loan taken during the year at ₹ 10,00 .....

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#8377; 14,09,318/-. This means that all these parties have not given unsecured loans to the assessee for the first time, rather they have a regular credit balance of unsecured loans given to the assessee since past which gets strengthen by the copies of the ledger account available in the paper-book. 7.1 We further observe that the ld. Assessing Officer, while going ahead with the impugned addition of ₹ 21,01,300/-, was having a view in his mind that the assessee has given sub-contract to .....

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contract charges from the assessee and after utilizing a very minor part of the amount received towards business expenditure, balance was returned back in the shape of unsecured loan to the assessee in the same year or in the following year. The ld. Assessing Officer also observed that in some cases, payment was to be made to sub-contracted parties namely Sudhir Kr. N. Patel HUF and D. N. Patel HUF and these two parties further advanced the money to Jayaben N. Patel and Bharti Patel and these pa .....

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ficer observed that out of the payments made towards sub-contract charges during the Assessment Year 2006-07, most of the amount remained unutilized upto 31st March 2006 and the bank balance in the account of Sanjay N Patel HUF stood at ₹ 7,51,300/-, which was thereafter used for giving unsecured loans to the assessee during the Assessment Year 2007-08. Due to this very reason, the ld. Assessing Officer was of the view that the assessee is trying to create the transactions jugglery whereby .....

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the amounts received as unsecured loans are through accounts payee cheque and regular returns of income are being filed by these three parties and their related proofs are placed on record. The only basis for making this addition by the ld. Assessing Officer was lack of creditworthiness, because, as per ld. Assessing Officer, these parties did not had sufficient availability of finance for incurring the expenditure for completion of sub-contract work given to them and just by taking the shelter .....

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reciated that the assessee is regularly filing its return of income, regularly getting its accounts audited u/s 44AB of the Act and completing the contracts work received by him from Patel Infrastructure Pvt Ltd, Vraj & Vaj Constructions, Essar Construction (India) Limited. The ld. Assessing Officer has also not appreciated that there are detailed work orders from these three parties from whom contract work has been received and the same have been completed by the assessee to their satisfact .....

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unts regularly used for carrying on business activities and they were placed on record during the assessment proceedings also and no defect was pointed out. Further, all the three cash creditors were called for giving statements before the assessing authorities and they all have accepted that they have given unsecured loan to the assessee and have also stated that they are carrying on sub-contract work regularly. The ld. Assessing Officer also should have appreciated that all these parties were .....

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been able to prove the identity, genuineness and creditworthiness of Sanjay Patel HUF, Jayaben Patel and Bharti Patel repeatedly and certainly, when there is a provision of showing income @ 8% on the civil construction receipts u/s 44AD of the Act, then the parties taking sub-contract work are free enough to get themselves covered under the provisions embedded in the Statute. The ld. Assessing Officer has not raised any doubt in the books of accounts as the same have not been rejected u/s 145(3) .....

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rs, is also going in favour of the assessee as the same is consequential, because as we have already held that no addition is called for towards the unsecured loans of ₹ 20,01,300, then certainly assessee will be eligible for claiming interest of ₹ 3,79,616/- in respect of interest paid to depositors. Accordingly, this ground of the assessee is also allowed. 8. Ground No. 3 of the assessee s appeal reads as under:- The learned Commissioner of Income-Tax (Appeals)-II, Baroda has erred .....

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nts were genuine and were incurred with reference to sub-contract work carried out by the Appellant. The payments made were at rates lower than the prevailing market rate at the relevant time. It was also submitted that since these parties were either related or known, the Appellant could rely on them for doing the work and also request them to wait for their due payments. 4.3 The Assessing Officer has disallowed 15% of labour charges paid to following parties : (i) D.N.Patel (HUF) ₹ 29,72 .....

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Assessing Officer after considering the same has accepted payments to related parties as being reasonable and no addition was made on this account to the book result. We also enclose herewith copies of orders of A.Y.2005-06 and A.Y. 2006-07 which are passed u/s 143(3) of the Income Tax Act, 1961 and wherein no such addition has been made by the Assessing Officer after the scrutiny. 4.5 It is, therefore, submitted that payments to sub-contract labour are all genuine and rate paid are reasonable c .....

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38,829/- paid to sub-contractors being related parties u/s 40A(2)(a) of the Income-tax Act. During the course of assessment proceedings, ld. Assessing Officer observed that payment of ₹ 1,51,38,829/- towards labour charges has been made to the following five parties:- i) D.N. Patel HUF - ₹ 29,72,529/- ii) Sanjay Kr. N. Patel HUF - ₹ 30,22,313/- iii) Sudhir Kr. N. Patel HUF - ₹ 30,12,416/- iv) N.B. Patel HUF - ₹ 31,54,921/- v) Bharat Hirapara - ₹ 29,76,650/- To .....

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there is no iota of doubt that labour expenses are fluctuated to the cost as related parties can wait for the payment only because it is the assessee who is doing everything and therefore making an estimated addition of ₹ 22,70,824/-. This has been a settled view that the expenditure incurred in a business or profession for which payment has been or is to be made to the tax payer s relatives or associate concerns is liable to be disallowed in computing the profits of the business or profes .....

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o satisfy that there is no attempt to evade taxes. In the case of the assessee, there has been no such exercise done by the Assessing Officer by way of scrutinizing the expenditure paid to the related parties and comparing the rates with the available market rates and further to ascertain that these related parties has been paid on a higher rate or excess amount in comparison to the general market rate. We also observe that the detailed ratewise chart is available on record which the related par .....

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on by the ld. Assessing Officer to arrive at a decision that excessive payments have been made to the related parties in comparison with the fair market rates as well as comparison with the rates of work awarded by the appellant to its other sub-contractors and also in the given situation when the books of accounts have not been rejected and all other expenditures have been accepted without pointing out any error, then in such situation estimated addition should not be called for. We, therefore .....

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at source there from. 10.1 The ld. Assessing Officer, while making addition of ₹ 43,18,175/- towards non-deduction of TDS u/s 194H on the deemed commission payment made by the assessee to Patel Infrastructure Pvt Ltd (PIPL) (who is the main contractor and the appellant has taken the sub-contract work for the whole contract work taken by PIPL from Government), has observed as under in the assessment order:- … PIPL is showing the work done in his books. He has deducted TDS on the full .....

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he is deducting from the payments. Thus, there is commission payment to PIPL for which assessee ought to have deducted TDS which he has failed to deduct. The plain reading of section 194H makes it very clear that any person shall, at the time of credit of such income to the account of payee or at the time of payment…. whichever is earlier, deduct income tax thereon at the rate of 10%. Therefore the said amount of ₹ 43,18,175/- shown as subcontract expense is added to the income of .....

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as been argued that it had taken contract at back-to-back basis from M/s. PIPL which in turn had taken contract with the government. The appellant's contention is not considered true. When government gives a contract it is based on several factors and a contractor has to satisfy those conditions. Apparently contractor cannot pass the full contract on back-to-back basis to any other person without the consent of the government unless the subcontractor also fulfils those conditions. There is a .....

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PL is working itself. In other words the appellant is working on the site camouflaging as PIPL, so far as the government is concerned. This can happen only when PIPL is paid commission to pass on the contract to the appellant. The second possible scenario is that contract has been passed on the appellant after taking Government approval. In that case PIPL becomes only an intermediately for which it is paid by the appellant. It is clearly established that a portion of the total contract amount re .....

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ll PIPL is not doing anything else except acting in reality as a frontman of the appellant before the principal contractee. The Assessing Officer has rightly pointed out that there has been default in so far as the TDS provisions are concerned and he has rightly made the disallowance. This ground is rejected. 10.3 Aggrieved, the assessee went in appeal before the Tribunal. 10.4 With regard to disallowance of ₹ 43,18,175/- u/s 40(ia) of the Act, the ld. Authorized Representative submitted a .....

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ant has taken subcontract from them. As per the sub-contract agreement, the Appellant is to receive 89.50% of the contract value received by PIPL from the Government. PIPL has treated the payment to the Appellant as its sub-contractor and has duly deducted tax at the rate of 1% on net contract payment receivable by the Appellant u/s 194C of the I.T. Act, 1961. Copy of sub-contract agreement entered into with PIPL is submitted in the Paper Book at page Nos. 54 to 56. It is clear from the agreemen .....

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ment from Government is received by PIPL and the same is passed over to the Appellant as a sub-contractor after deducting 10.50% from the gross billing so as to arrive at value of sub-contract. It is strange that on the one hand transaction between PIPL and the Appellant is treated as being between contractor and sub-contractor subject to provisions of Section 194C, while on the other hand, the Assessing Officer wants to treat reduction in gross amount received from the Government by PIPL as com .....

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of the ld. CIT(A) in confirming the addition of ₹ 43,18,175/- on account of disallowance u/s 40(a)(ia) of the Act for non-deduction of TDS u/s 194H of the Act on the deemed commission which the appellant has indirectly given to the contract awarder. 11.1 From going through the record, we observe that a very peculiar type of addition has been made by ld. Assessing Officer which has been further confirmed by the ld. CIT(A). Reason for the peculiarness is that in the given facts a contractor .....

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dingly deducted tax at source @ 1 % u/s 194C of the Act. Copy of such agreement entered into with PIPL is placed in the paper-book which undoubtedly makes it clear that the appellant is working as a sub-contractor to PIPL. Now, surprisingly ld. Assessing Officer has taken a view that the 10.5% of the original contract price which PIPL has not passed over to the appellant (because the same has been shown as income by PIPL) represents commission which the appellant has indirectly paid to PIPL for .....

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shown as revenue in its books of accounts and thereafter complete contract has been sub-contracted to the appellant at 89.5% of the contract price by way of which 10.5% remained with PIPL as a part of its profit which have been subjected to tax. Further 89.5% of the contract price has been shown as Revenue by the appellant and together with this sub-contract, the appellant has carried on other contract work also and gross turnover of ₹ 5,19,71,858/- has been achieved by the appellant duri .....

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