Where net profit estimated by AO then disallowance under section 40(a)(ia) towards Payment without TDS can be done

When income of assessee was estimated by applying N.P. rate after rejection of books of account, then, AO could not make disallowance on the same books of account for the purpose of disallowance by invoking provisions of section 40(a)(ia) or general disallowance under section 37(1), therefore, the disallowance made by the AO was deleted.

AO rejected books of account of assessee and estimated income of the assessee by applying Net Profit rate. Subsequently, the AO made disallowance under section 40(a)(ia). Assessee’s contention was that once its income was estimated by applying the N.P. rate, then no further disallowance was called for under section 40(a)(ia), but CIT(A) upheld the order of the AO. Held: Once the income of the assessee was estimated after rejection of books of account, then, the AO could not make disallowance on the same books of account for the purpose of disallowance by invoking provisions of section 40(a)(ia) or general disallowance under section 37(1). Hence, the disallowance made by the AO was deleted.

Decision: In assessee’s favour.

Referred: Rakesh Construction Co. v. ACIT [ITA No. 274/JP/2014, dt: 23-9-2016], CIT v. Vatika Township Pvt. Ltd. 109 DTR 33, andIndwell Constructions v. CIT (1998) 232 ITR 776.

IN THE ITAT JAIPUR BENCH

VIJAY PAL RAO, JM & ARJUN LAL SAINI, AM

Power Liners v. ACIT

ITA No. 194/JP/2017

8 January, 2018

Assessee by: Rohan Sogani (CA)

Revenue by: P.P. Meena (JCIT)

Vijay Pal Rao, J.M.

This appeal by the assessee is directed against the order dated 29-12-2016 of learned Commissioner (Appeals)-I, Jaipur for the assessment year 2012-13. The assessee has raised following grounds of appeal:

“1. In the facts and circumstances of the case and in law Commissioner (Appeals) has erred in confirming the action of the Id. assessing officer in rejecting the books of accounts of the assessee company by invoking the provisions of section 145(3) of the Income Tax Act, 1961. The action of the Commissioner (Appeals) is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted by quashing the rejection of books of accounts.

2. In the facts and circumstances of the case and in law the learned Commissioner (Appeals) has erred in confirming the action of the Id. assessing officer in disallowing a sum of Rs. 16,17,487 under section 40(a)(ia) of the Income Tax Act, 1961. The action of learned Commissioner (Appeals) is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted by quashing of the said disallowance of Rs. 16,17,487.

3. In the facts and circumstances of the case and in law the learned Commissioner (Appeals) has erred in confirming the action of the Id. assessing officer in disallowing a sum of Rs. 14,30,423 of service tax under section 43B of the Income Tax Act, 1961. The action of the Commissioner (Appeals) is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted by quashing the said disallowance of Rs. 14,30,423.”

2. At the time of hearing, the learned Authorised Representative of the assessee has stated that the assessee does want to press ground No. 1 and the same may be dismissed as not pressed. The learned Departmental Representative has raised no objection if ground No. 1 of the assessee’s appeal is dismissed being not pressed. Accordingly, ground No. 1 of the assessee’s appeal is dismissed being not pressed.

3. Ground No. 2 of the assessee’s appeal is regarding disallowance made under section 40(a)(ia) of the Income Tax Act, 1961 (in short the Act). The learned Authorised Representative of the assessee has submitted that the assessing officer has rejected the books of account of the assessee and estimated the income of the assessee by applying N.P. rate, therefore, once the income of the assessee is estimated by applying the N.P. rate then no further disallowance is called for under section 40(a)(ia) of the Act. In support of his contention he has relied upon the decision of Coordinate Bench of this Tribunal in the case of Rakesh Construction Co. v. ACIT in ITA No. 274/JP/2014 order dated 23-9-2016. Thus, the learned Authorised Representative has submitted that once the income of the assessee is estimated after rejection of books of account, no disallowance can be made under section 40(a)(ia) of the Act. Alternatively, the learned Authorised Representative of the assessee has submitted that as per the amendment in Section 40(a)(ia) of the Act only 30% of the sum payable to a resident shall be disallowance if the tax is not deducted at source. The said amendment is explanatory in nature and therefore, it is applicable retrospectively. The learned Authorised Representative of the assessee has relied on the decision of Hon’ble Supreme Court in the case of CIT v. Vatika Township Pvt. Ltd. 109 DTR 33 and submitted that the Hon’ble Apex Court has observed that if legislation confers a benefit on some persons but without inflicting a corresponding detriment on some other person or on the public generally, then the presumption would be that such legislation giving it a purposive construction, would warrant it to be given a retrospective effect. The learned Authorised Representative has contended that even in a case it is held that the disallowance under section 40(a)(ia) of the Act is warranted, the same will be restricted only 30% of the amount payable or paid.

4. On the other hand, the learned Departmental Representative has relied on the orders of the authorities below.

5. We have considered the rival submissions as well as relevant materials available on the record. There is no dispute that the income of the assessee was determined by the assessing officer on the basis of the estimation and best judgment after rejecting the books of account under section 145(3) of the Act. The assessing officer has applied N.P. rate of 8% on the total receipts of Rs. 1,53,44,942 and accordingly, the addition of Rs. 2,18,277 was made by the assessing officer. The learned Commissioner (Appeals) has confirmed the addition of the assessing officer by rejecting the contention of the assessee. The amount was already paid during the previous year and not payable at the end of the year. Thus, it is clear that the contention raised by the assessee before us that after rejection of books of account and estimation of income of the assessee, no further addition can be made by the assessing officer, has not been considered or decided by the learned Commissioner (Appeals). We find that the Coordinate Bench of this Tribunal in the case of Rakesh Construction Co. v. ACIT (supra) while dealing with the identical issue has held in para 2.4 as under:

“2.4 We have heard the rival contentions and perused the material available on record. In the instant case, the books of accounts were rejected under section 145(3) of the Act and thereafter the assessing officer has estimated net profit @ 5.05% on contract receipt after deduction of depreciation, interest and remuneration paid to partners as against net profit of 2.39% declared by the assessee. From the perusal of the assessment order, it is noted that there have been discussions between the assessing officer and the assessee in terms of estimating the net profit rate once the books of account have been rejected. As part of that discussion, it is noted that in response to assessing officer’s show-cause as to why 8.5% net profit rate should not be allowed, the learned Authorised Representative has submitted that if the net profit at the rate of 8.5% is applied, then the deduction on account of payment of hiring charges for machinery taken on rent amounting to Rs. 22,41,600 and Rs. 21,60,000 are also to be allowed. The learned assessing officer finally decided to apply net profit of 5.05% which has been agreed upon by the assessee. It is therefore seen that issue of allowance of payments of machinery hire charges has been duly taken into consideration by the assessing officer while estimating the N.P. rate of 5.05% Further, it is noted that the decision of Hon’ble Kolkatta High Court in the case of Arjun Bhowmick (supra) directly support the case of the assessee. In that case, the view taken by the Kolkotta Bench of the ITAT has been confirmed by the Honble High Court wherein it has held that “once the n.p. rate is estimated, the assessing officer cannot based this disallowance on the same books of accounts for the purpose of disallowance by invoking provisions of section 40(a)(ia) of the Act or general disallowance under section 37 of the Act. The estimation made by the assessing officer of net profit will take care of every addition related to business income or business receipts and no further disallowance can be made.” It is also noted that Jaipur Bench of ITAT in the case of Banas Sand Toll Tax collection (supra) has taken a similar view in the matter following the decision in case of Hon’ble Andhra Pradesh High Court in the case of Indwell Construction ((1998) 232 ITR 776). In light of above, we see no reason for assessing officer to invoke provisions of section 154 of the Act. Hence, the order passed by the assessing officer under section 154 is quashed and the original order passed under section 143(3) of the Act is sustained.”

Following the order of the Coordinate Bench of this Tribunal (supra) we delete the addition made by the assessing officer on this account.

6. Ground No.3 of the assessee’s appeal is regarding disallowance made under section 43B of the Act. The learned Authorised Representative of the assessee has submitted that the assessing officer has made an addition on account of service tax under section 43B of the Act. He has further submitted that the assessee has not made any claim of expenditure in the P&L account or in computation of income on account of service tax payable, therefore, no disallowance is called for under section 43B of the Act. In support of his contention, he has relied upon the decision of Hon’ble Bombay High court in the case of CIT v. Knight Frank (India) Pvt. Ltd. 242 Taxman 313 (Bom) and submitted that the Hon’ble High Court has held that the assessee had not claimed any deduction on account of the service tax payable in order to determine its taxable income, there can no occasion to invoke Section 43B of the Act.

7. On the other hand, the learned Departmental Representative has relied on the orders of the authorities below.

8. We have considered the rival submissions of both the parties as well as relevant materials available on the record. There is no quarrel on the point that if the assessee has not claimed a deduction on account of service tax payable then the provisions of Section 43B of the Act cannot be invoked. However, at the same time, it is also to be kept in mind that when the assessee has not claimed any deduction for the year under consideration and which has not been disallowed under section 43B of the Act then the assessee cannot take the benefit of Section 43B in future when the said service tax is paid because the assessee has not included this amount as part of turnover. The Hon’ble Bombay High Court in the case of CIT v. Knight Frank (India) Pvt. Ltd. (supra) has held in para 7 as under:

“7. Regarding question (ii):

(a) It is an admitted position before us that the respondent assessee had not claimed any deduction on account of the service tax payable in order to determine its taxable income. In the above view, there can be no occasion to invoke Section 43B of the Act.

(b) Mr. Suresh Kumar, learned Counsel for the Revenue fairly states that the issue stands concluded against the Revenue by the decision of this Court in CIT v. Ovira Logistics Pvt. Ltd. (2015) 377 ITR 129 and CIT v. Calibre Personnel Service Pvt. Ltd. (Income Tax Appeal No. 158 of 2013) rendered on 2-2-2015.

(c) In view of the above, the question (ii) as proposed is covered by the decision of this Court. Therefore, it does not give rise to any substantial question of law. Thus, not entertained.”

Following the decision of the Hon’ble Bombay High Court cited above, the disallowance made by the assessing officer is not sustainable. However, subject to the verification of the fact that the assessee has not made any claim while computing its taxable income. Accordingly, the assessing officer is directed to verify this fact then allow the claim of the assessee.

9. In the result, the appeal of the assessee is partly allowed.

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