Validity of Reassessment if Additions made for items other than the items of reasons recorded

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Validity of Reassessment if Additions made for items other than the items of reasons recorded

Short Overview  When the grounds of reopening do not exist any longer and no additions are ultimately made on that account, then addition on account of other items, which are no longer part of “ reasons to believe” cannot be made.

Assessee was a government contractor. AO recorded reasons that income of the assessee had escaped assessment and issued notice under section 148. In the reassessment proceedings, AO had made the addition under section 40(a)(ia) for non-deduction of tax at source on crane charges and Boki charges. But said additions were deleted by CIT(A). Assessee contended that no addition could be sustained if the CIT(A) had deleted the addition, based on which the assessment was reopened.

It is held that  Since the addition made by AO on account of disallowance of crane charges and Boki charges has been deleted by the CIT (A), no addition on account of the items of reasons recorded was in existence after the order of the CIT (A). Further, the Revenue was also not in appeal against said deletion by the CIT (A). Thus, the additions made on account of the items other than the items of reasons recorded, could not survive. Hence, AO was directed to delete the additions.

Decision: In assessee’s favour.

Followed: CIT v. Adhunik Niryat Ispat Ltd. IT Appeal No. 2090 of 2010 : 2012 TaxPub(DT) 0591 (Del-HC),Ranbaxy Laboratories Ltd. v. CIT (2011) 242 CTR 117 (Del)  2011 TaxPub(DT) 1457 (Del-HC).

IN THE ITAT, DELHI BENCH

BHAVNESH SAINI, J.M. & O.P. KANT, A.M.

Naresh Kumar Garg v. ACIT

ITA No. 5706/Del/2016

A.Y. 2009-10

14 November, 2019

Appellant by: Satyajeet Goel, C.A.

Respondent by: Shankar Naskar, Sr. DR

ORDER

O.P. Kant, A.M.

This appeal has been preferred by the assessee against Order, dated 29-8-2016 passed by the learned Commissioner (Appeals), Hisar [in short the learned CIT(A)] for assessment year 2009-10.

  1. In the grounds of appeal raised, the assessee is aggrieved with the legality of reassessment proceedings completed under section 143(3) read with section 147 of the Income Tax Act, 1961 (in short the Act) as well as additions made in reassessment proceeding.
  2. Briefly stated, facts of the case are that the assessee is a government contractor and filed return of income on 30-9-2009 declaring total income of Rs. 26,79,270. The assessment under section 143(3) of the Act was completed on 20-9-2011 after making addition of Rs. 2,00,000 to the returned income. Subsequently, the assessing officer recorded reasons on 1-3-2013 that income of the assessee had escaped assessment and issued notice under section 148 of the Act. The reassessment proceedings in the case were completed on 21-3-2014, wherein following additions were made :–
Sr. No. Additions Amount
1. disallowance of the interest on borrowed funds for diverting to interest-free advances Rs. 2,25,912
2. Cash expenses in violation of provision section 40A(3) of the Act Rs. 1, 07, 671
3. Disallowance under section 40(a)(ia) of the Act for non-deduction of tax at source on crane Charges (Rs. 9,36,058) and Boki Charges (Rs. 5,90,452) Rs. 9,63,058
4. Other additions for loans, salary etc Rs. 21,54,000
Total Rs. 34,80,423

On further appeal, the learned Commissioner (Appeals) rejected the contention of the assessee challenging the proceeding under section 147 of the Act, however allowed the appeal partly on merit. The learned Commissioner (Appeals) allowed the disallowances/addition as under :–

Sr. No. Additions Amount Upheld by Commissioner (Appeals)
disallowance of the interest on borrowed funds for diverting to interest-free advances Rs. 2,25,912 Rs. 90,968
Cash expenses in violation of provision section 40A(3) of the Act Rs. 1,07,671 Nil
Disallowance under section 40(a)(ia) of the Act for non-deduction of tax at source on crane Charges (Rs. 9,36,058) and Boki Charges (Rs. 5,90,452) Rs. 9,63,058 Nil
Other additions for loans , salary etc. Rs. 21,54,000 19,50,000
Total Rs. 34,80,423
  1. Before us, the learned counsel of the assessee filed a paper book containing pages 1-22 and referred to copy of reasons recorded for reopening of the assessment. The learned counsel submitted that in the case of the assessee, no addition can be sustained if the learned Commissioner (Appeals) has deleted the addition, on the basis of which the assessment was reopened, relying on the decision dated 28-7-2011 of the Hon’ble Delhi High Court in the case ofCIT v. Adhunik Niryat Ispat Ltd. in IT Appeal No. 2090 of 2010 : 2012 TaxPub(DT) 0591 (Del-HC), wherein it is held that when the grounds for reopening the reassessment do not exist any longer and no additions were ultimately made on that account, the addition in respect of the other items, which were not part of the “ reasons to believe” cannot be made.
  2. The learned DR on the other hand, relied on the order of the lower authorities.
  3. We have heard the rival submission and perused the relevant material on record. The Hon’ble High Court in the case ofAdhunik Niryat Ispat Ltd. (supra) has held that when the ground of reopening do not exist any longer and no additions are ultimately made on that account, then addition on account of other items , which are no longer part of “ reasons to believe” cannot be made. Similar finding has been given by the Hon’ble Delhi High Court in the case of Ranbaxy Laboratories Ltd. v. CIT (2011) 242 CTR 117 (Del)  2011 TaxPub(DT) 1457 (Del-HC). We have to examine whether the ratio of the above decisions of the Hon’ble High Court apply in the case of the assessee.
  4. The reasons recorded by the assessing officer for reopening of the assessment in the case of the assessee, as available on page 2 of the paper book, are reproduced as under :–

“Return of income in this case was filed on 30-9-2009 declaring income of Rs. 26,79,270 and the assessment was completed at income of Rs. 28.79,270.

Perusal of the vouchers placed on file revealed that the assessee has got fabricated a tractor trolly from Garg Engineering Works for Rs. 78000. This is ‘work contract’ covered under section 194C of the Act on which tax is required to be deducted at source.

Ledger account for carriage inward expenses shows that the assessee has made the payment of freight M/s. Haryana Concrete, Hansi to the tune of Rs. 1,363,600 on account of carriage inward. The assessee has purchased 9 mtr. Electric pole from Haryana Concrete. The payment of freight is covered under section. 194C Income Tax Act. The assessee should have deducted tax at source on the above freight payment but has failed to do so. The assessee may take the plea that these payments of freight are included in the cost of goods and the seller have given delivery of goods on FOR basis, but when the cost of freight has been mentioned in the bills separately, it clearly indicates that the work has been executed on part of the purchaser. Explanation (iv)(c) to section 194C of the Act defines the work which include carriage of goods. In these circumstances the seller has executed work and received the freight payments whether they issued composite bill showing the cost of freight in the bill or otherwise. In these circumstances the seller has executed work and received the freight payments whether they issued composite bill showing the cost of freight in the bill or otherwise. In these circumstances section 194C is attracted. Since, the assessee has failed to deduct tax at source on freight payments, the expenses of Rs. 1,33,600 needs to be disallowed under section 40(a)(ia).

The assessee has made the payment of Rs. 1,56,660 to Ashok Crane Works for Crane Charges. These payments are nothing but the contract payments. Similarly, the assessee has paid Rs. 65,540 to Navarattan Balaji Crane Service. The assessee has paid Boki charges to Ram Kunwar amounting to Rs. 14,982, Rs. 15,260, Rs. 14,950, Rs. 15,290 and Rs. 15,010 on 27-10-2008, 25-10-2008, 24-9-2008, 20-9-2008 and 27-10-2008 respectively totalling to Rs. 75,492. These are nothing but the contract payments covered under section. 194C of the Act. The assessee has paid Rs. 1,80,000 to Rajender Aggarwal on account of accounting and consultancy charges which are covered under section. 194J of the Act. The assessee has not deducted tax on any of the above payments as mentioned in column 27(a) of the audit report. Since the assessee has failed to deduct tax on above expenses aggregating to Rs. 6,39,382 (78,000 + 1,33,600 +1,56,660 +65540 + 75,492 +1,30,000) the same is required to be disallowed under section. 40(a)(ia) and added back to the income of the assessee. The assessing officer may examine other expenses with this point of view.

I have therefore, reasons to believe that income of Rs. 6,39,382 chargeable to tax has escaped assessment for the assessment year 2009-10 and also any other income chargeable to tax which has escaped assessment and which comes to the notice of the assessing officer subsequently in the course of the proceedings under this section.

Issue notice under section 148 of the Income Tax Act, 1961.”

  1. We find that in the reasons recorded, the assessing officer has expressed escapement of the income of Rs. 6,39,382 on following items :–
  2. non-deduction of tax at source on under section 194C for freight payment of Rs. 1,33,600 paid to Haryana Concrete
  3. non-deduction of tax at source under section 194C on payment of Rs. 1,56,660 to Ashok Crane Works for crane charges
  4. non-deduction of tax at source under section 194C on payment of Rs. 65,540 to Navratan Balaji for Crane service.
  5. Non-deduction of tax at source under section 194C on payment of Rs. 75, 492 to Ramkunwar for Boki Charges
  6. non-deduction of tax at source under section 1904J for payment of Rs. 1,30,000 to Rajendra Agarwal on account of accounting and consultancy charges.
  7. On perusal of the impugned reassessment order, we find that out of the items of escapement of income in reasons recorded, in the reassessment order he made addition of Rs. 9,92,840 in terms of section 40(a)(ia) of the Act for non-deduction of tax at source on crane charges of Rs. 5,26,858 and Boki charges of Rs. 4,65,982 totaling to Rs. 9,92,840. This addition made by the assessing officer has also been deleted by the learned Commissioner (Appeals) observing as under :–

“6.1 In ground No. 5, the appellant has objected to disallowance of Rs. 9,92,840 on account of payments made to contractors under section 40a(ia) of the Income Tax Act. It was found by the assessing officer that the appellant had failed to prove that some payments had been made to casual workers directly. The record submitted by the appellant has shown that a few names were repeated many times which led the assessing officer to the conclusion that these are labour contractors until the appellant proves otherwise. The assessing officer held that even if alternative view is taken, the amount of Rs. 5,26,858 (remained payable out of Rs. 9,63,058 ) & Rs. 4,65,982 (remained payable out of Rs. 5,90,452) and disallowed the same under section 40a(ia). The assessing officer stated that the same has been accepted by the appellant in his reply dated 5-2-2014.

6.2 In its written submission, the appellant has stated as under :–

“As per para no. 3.3 the learned ACIT has held that the assessee has failed to prove that some payments have been made to casual workers directly. He has further held that the records submitted by the assessee clearly shows that a few names are repeated again and again which lead him to decide that those are labour contractor until assessee proves otherwise. The learned ACIT has further stated that the assessee should have deducted TDS on every payable amount before making payment therefore disallowance of Rs. 9,92,840 which remained payable at the close of the year are disallowed under section 40(a) (ia) and has made addition of Rs. 9,92,840 on this issue.

It is true that the assessee has debited on account of crane charges worth Rs. 9,63,058 and Boki Charges worth Rs. 5,90,452 and Rs. 2,04,15,441 on account of wages and labour charges. Out of above expenses, the payable expenses remained at Rs. 5,26,851 + Rs. 4,65,892. The learned ACIT has grossly rejected these payments which were to be made on account of crane charges and Boki charges and not out of the wages and labour charges which were Rs. 2,04,15,441. The assessee himself is a Govt, contractor supplying cables, Transformers, Electric poles, Wires, M.s Goods & Labour etc. All the above said payments were made in cash and below Rs. 20,000. These payments are related to labour work and the question of non deduction of TDS is not applicable. It is correct that a few of the labourers continuously engaged by the Contractor for disposal of his work. Therefore a few names of such labourer are repeated in the ledger to which these payments are made. No such labour contractor was engaged for this work and payments were made direct to the labour which is below Rs. 20,000 in a day in every case. Thus the provisions of section for deduction of tax at source as provided under section 40(a) (ia) are not applicable in this case. All these payments were paid to the labourers working at the site directly and no contractor was engaged for this purpose. Moreover such payment never exceeds Rs. 50000.00 to a single labour throughout the year therefore there was no liability to deduct TDS. The same may kindly be deleted sir. ”

6.3 I have carefully examined the facts of the case. The aforesaid payments for crane charges and Boki charges are on account of wages and labour. The appellant, being a labour contractor has made payments to labour in cash and all payments are below Rs. 20,000. According to the appellant, as these payments are to labours and related to labour contract, it does not attract provision for deduction of TDS. As some of the labourers are engaged continuously, names of few labourers appear in the ledger repetitively. However, as payments are below Rs. 20,000 in a day in every case, provisions of section 40(a)(ia) of the Act are not applicable in its case. There is no payment in excess of Rs. 50,000 to a single labour in a day and therefore there was no liability to deduct TDS. Considering the facts and circumstances of the case, the additions made by the assessing officer of Rs. 9,92,840 on account of non-deduction of TDS under section 40(a)(ia) of the Act is directed to be deleted. This ground of appeal is allowed.”

  1. It is evident that the assessing officer himself did not make addition in respect of the first part of the items of reason recorded i.e. freight to M/s Haryana Concrete. The addition made by the assessing officer on the second part of the reason recorded i.e. disallowance of crane charges and boki charges has been deleted by the learned Commissioner (Appeals). Thus we find that no addition on account of the items of reasons recorded is in existence after the order of the learned Commissioner (Appeals). As per the record, the Revenue is not in appeal against said deletion by the learned Commissioner (Appeals). In the circumstances, following the decision of the Hon’ble High Court in the case ofAdhunik Niryat Ispat Ltd. (supra) and Ranbaxy Laboratories Ltd. (supra) , the additions made on account of the items other than the items in reasons recorded , cannot survive. We direct the assessing officer to delete the additions accordingly. The issue in dispute involved in the grounds raised by the assessee is accordingly allowed in favour of the assessee. Since we have allowed the appeal on legality of the addition made in reassessment proceedings, we are not adjudicating on merit of the additions.
  2. In result, the appeal of the assessee is allowed .

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