The ACIT, Circle-5(1), Visakhapatnam V. M/s M/s Kalathil Brothers, Visakhapatnam

ITA 20/VIZ/2005

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 0667 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 5 year(s) 5 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-06-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 31-05-2010
• Assessment Year: 2001-2002
• Appeal Filed On: 04-01-2005
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SUBRATA SARKAR
• Assessee Lawyers: C V S MURTHY

Judgement Text

ITA NO. 20 & 21/VIZAG/2005 KALATHIL BROTHERS, VIZAG PAGE 1 OF 7 IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH, VISAKHAPATNAM BEFORE: SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI BR BASKARAN, ACCOUNTANT MEMBER ITA NO. 20 &21/VIZAG/2005 ASSESSMENT YEAR: 2001-02 ACIT CIRCLE-5(1), VISAKHAPATNAM KALATHIL BROTHERS, VISAKHAPATNAM (APPELLANT) VS. (RESPONDENT) PAN NO: AAEFK 4336 P APPELLANT BY: SHRI SUBRATA SARKAR, CIT(DR) RESPONDENT BY: SHRI C.V.S. MURTHY, CA ORDER PER SHRI B. R. BASKARAN, ACCOUNTANT MEMBER: THESE TWO APPEALS FILED BY THE REVENUE RELATE TO T HE ASSESSMENT YEAR 2001-02 AND HENCE THEY WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS COMMON ORDER. 2. WE FIRST TAKE UP THE APPEAL NUMBERED AS ITA NO.21/VIZAG/2005. IT IS DIRECTED AGAINST THE ORDER DATED 13.10.2004 PASSED BY LEARNED CIT(A) BY REVERSING THE ORDER PASSED BY THE ASSESSING OFFICER U/S 185 OF THE ACT TO TREAT THE STATUS OF THE ASSESSEE AS ASSOCIATION OF PERSONS. IN HIS ORDER, THE LEARNED CIT(A) HAS HELD THAT THE STATUS OF THE ASSESSEE SHOULD BE TAKEN AS PARTNERSHIP FIRM ONLY. 2.1 THE ASSESSING OFFICER EXAMINED THE ISSUE OF STATUS OF THE ASSESSEE FIRM DURING THE ASSESSMENT YEAR 2001-02 AND HELD TH AT THE STATUS OF THE ASSESSEE SHOULD BE TREATED AS ASSOCIATION OF PERSO NS U/S 185 OF THE ACT AS THE ASSESSEE HAS FAILED TO COMPLY WITH THE PROVISIO NS OF SECTION 184 (2) OF ITA NO. 20 & 21/VIZAG/2005 KALATHIL BROTHERS, VIZAG PAGE 2 OF 7 THE ACT IN THE ASSESSMENT YEARS 1999-2000 AND 2000- 01. IT IS PERTINENT TO NOTE THAT THE ASSESSEE WAS ASSESSED IN THE STATUS O F PARTNERSHIP FIRM DURING THE ASSESSMENT YEARS 1999-2000 & 2000-01. H ENCE THE ASSESSEE HAS CONTENDED THAT, AS PER THE PROVISIONS OF SECTIO N 184(3), THE SAME STATUS SHOULD BE CONTINUED DURING THE YEAR UNDER CO NSIDERATION ALSO AS THERE WAS NO CHANGE EITHER IN THE CONSTITUTION OF T HE FIRM OR IN THE SHARES OF THE PARTNERS IN THE YEAR UNDER CONSIDERATION. THE S AID PLEA WAS NOT ACCEPTED BY THE ASSESSING OFFICER. IN THE APPEAL F ILED BY THE ASSESSEE, LEARNED CIT (A) ACCEPTED THE CONTENTION OF THE ASSE SSEE AND REVERSED THE ORDER PASSED BY THE ASSESSING OFFICER U/S 185 OF TH E ACT. HENCE THE REVENUE IS IN APPEAL BEFORE US. 2.2 WE HAVE HEARD THE PARTIES ON THIS ISSUE AND PER USED THE RECORD. WE EXTRACT BELOW THE OPERATIVE PORTION OF THE ORDER PA SSED BY THE LEARNED CIT (A). I HAVE CONSIDERED THE RIVAL SUBMISSIONS. CONTRARY TO WHAT HAS BEEN MENTIONED BY THE ASSESSING OFFICER THAT TH E APPELLANT CLAIMED THE STATUS OF THE PARTNERSHIP FIR M FOR THE FIRST TIME IN THE ASSESSMENT YEAR 2000-01, IT IS SE EN THAT THE CLAIM OF STATUS OF A PARTNERSHIP FIRM WAS MADE FROM ASSESSMENT YEAR 1999-2000. FOR BOTH THE ASSESSMENT YEARS 1999-2000 AND 2000-01, THE APPELLANT WAS TREATED AS A PARTNERSHIP FIRM VIDE ASSESSMENTS COMPLETED U/S 143 (1) OF INCOME TAX ACT, 1961. SUB SECTION 3 OF SEC. 184 REA DS AS UNDER: WHERE A FIRM IS ASSESSED AS SUCH FOR ANY ASSESSMEN T YEAR, IT SHALL BE ASSESSED IN THE SAME CAPACITY FOR ANY SUBS EQUENT YEAR IF THERE IS NO CHANGE IN THE CONSTITUTION OF T HE FIRM OR THE SHARES OF THE PARTNERS AS EVIDENCED BY THE INSTRUME NT OF A PARTNERSHIP ON THE BASIS OF WHICH THE ASSESSMENT AS A FIRM WAS FIRST SOUGHT. IN VIEW OF THE ABOVE, AS THE ASSESSING AUTHORITIES HAD TREATED THE APPELLANT AS A PARTNERSHIP FIRM IN EARLIER TWO ASSESSMENT YEARS I.E. ASSESSMENT YEARS 1999-2000 AND 2000-01 A ND SINCE THERE IS NO CHANGE IN THE CONSTITUTION OF THE FIRM IN THE ITA NO. 20 & 21/VIZAG/2005 KALATHIL BROTHERS, VIZAG PAGE 3 OF 7 PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR 2001- 02, THE ASSESSING OFFICER HAD NO JURISDICTION TO TREAT THE FIRM AS AOP. MOREOVER, AS LONG AS THERE IS NO CHANGE IN THE CONS TITUTION OF THE FIRM, THE APPELLANT WAS NOT REQUIRED TO SUBMIT ANY CERTIFIED PARTNERSHIP DEED. EVEN IF THERE IS ANY TE CHNICAL BREACH OF LAW, IN NOT ADHERING TO THE PROVISIONS OF SUB SECTION 2 OF SEC.184 I THE EARLIER ASSESSMENT YEARS, THE PR OCEEDINGS RELATING TO THE STATUS OF THE APPELLANT SHOULD BE D EALT WITH ACCORDINGLY IN THESE ASSESSMENT YEARS, BUT NOT IN T HE ASSESSMENT YEAR UNDER CONSIDERATION. IN VIEW OF THIS, THE STATUS OF THE APPELLANT SHOULD BE TAKEN AS A PARTNERSHIP FIRM AND THE APPEAL IS ALLOWED. 2.3 THE UNDISPUTED FACTS ARE THAT THE ASSESSEE WAS ASSESSED IN THE STATUS OF PARTNERSHIP FIRM IN THE ASSESSMENT YEARS 1999-2000 AND 2000-01 AND FURTHER THERE WAS NO CHANGE IN THE CONSTITUTION OF THE FIRM OR THE SHARES OF THE PARTNERS DURING THE YEAR RELEVANT FOR THE ASSESSMENT YEAR 2001-02. IN THAT KIND OF SITUATION, AS PER THE PRO VISIONS OF SEC. 184(3), THE ASSESSEE SHALL BE ASSESSED IN THE STATUS OF PARTNER SHIP FIRM ONLY DURING THE ASSESSMENT YEAR 2001-02. HENCE WE AGREE WITH THE V IEWS OF LEARNED CIT (A) THAT IF THERE IS ANY TECHNICAL BREACH OF LAW IN THE EARLIER ASSESSMENT YEARS, THE PROCEEDINGS RELATING TO THE STATUS OF TH E ASSESSEE SHOULD ONLY BE DEALT WITH IN THOSE ASSESSMENT YEARS. HENCE THE AS SESSING OFFICER WAS NOT RIGHT IN LAW IN EXAMINING THE STATUS OF THE ASSESSE E IN THE ASSESSMENT YEAR 2001-02 AND ACCORDINGLY WE UPHOLD THE ORDER PASSED BY THE LEARNED CIT (A). 3. THE APPEAL NUMBERED AS ITA/20/VIZAG/2005 IS DIRE CTED AGAINST THE ORDER DATED 13-10-2004 PASSED BY LEARNED CIT (A) VI SAKHAPATNAM IN THE QUANTUM PROCEEDINGS. THE REVENUE IS CONTESTING FOLL OWING TWO ISSUES: A) ADDITION OF RS.6,30,000/- RELATING TO REMUNERATI ON PAID TO THE PARTNERS. ITA NO. 20 & 21/VIZAG/2005 KALATHIL BROTHERS, VIZAG PAGE 4 OF 7 B) ADDITION OF RS.11,31,675/- RELATING TO EQUIPMEN T HIRE CHARGES. 3.1 THE FIRST ISSUE RELATES TO THE DISALLOWANCE OF REMUNERATION PAID TO PARTNERS. THE REMUNERATION PAID TO THE PARTNERS WE RE DISALLOWED, SINCE THE STATUS OF THE ASSESSEE WAS TREATED AS ASSOCIATION OF PERSONS BY THE AO. IN THE APPEAL NUMBERED AS ITA 21/VIZAG/2005, WE HAV E CONFIRMED THE ORDER PASSED BY THE LEARNED CIT (A) IN HOLDING THAT THE STATUS OF THE ASSESSEE SHOULD BE TREATED AS PARTNERSHIP FIRM ONLY . HENCE THE GROUND ON WHICH THE REMUNERATION WAS DISALLOWED NO LONGER EXI ST AND HENCE THE REMUNERATION PAID TO THE PARTNERS IS ADMISSIBLE AS PER THE PROVISIONS OF SEC.40(B) OF THE ACT. ACCORDINGLY WE UPHOLD THE OR DER OF THE LEARNED CIT (A) ON THIS ISSUE. 3.2 THE NEXT ISSUE RELATES TO THE DISALLOWANCE OF R S.11,31,675/- RELATING TO EQUIPMENT HIRE CHARGES. THE ASSESSING OFFICER DI SALLOWED THE SAME FOR THE REASON THAT THE ASSESSEE DID NOT PROVE THE SAID EXPENDITURE. THE ASSESSEE HAD INCURRED MACHINERY HIRE CHARGES OF RS. 5,33,000/- FOR ITS VISAKHAPATNAM SITE AND RS.5,98,675/- FOR ITS MUMBAI SITE. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSING OFFI CER CAUSED THE INQUIRIES WITH THE PARTIES AT VISAKHAPATNAM, FROM WHOM THE AS SESSEE HAS CLAIMED TO HAVE HIRED THE MACHINERIES OUT OF THE 5 CONCERNS, 3 CONCERNS COULD NOT BE LOCATED AND TWO OTHER PERSONS STATED THAT THEY DID NOT HIRE OUT MACHINERIES TO THE ASSESSEE. HENCE THE ASSESSING OFFICER DISAL LOWED THE ENTIRE CLAIM OF RS.11,31,675/-. IN THE APPEAL PREFERRED BY THE ASSE SSEE THE LEARNED CIT (A) CONFIRMED THE DISALLOWANCE ONLY TO THE EXTENT OF RS .1.00 LAKH ON AN ADHOC BASIS AND GRANTED RELIEF FOR THE BALANCE AMOUNT. TH E REASONING OF LEARNED CIT (A) IS EXTRACTED BELOW: I HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS. AS COULD BE SEEN THE ASSESSING OFFICER MADE DETAILED VERIFICATI ONS IN THE ADDRESSES GIVEN BY THE APPELLANT AT VISAKHAPATNAM A ND ON THAT BASIS DISALLOWED THE ENTIRE EXPENDITURE RELATABLE T O ITA NO. 20 & 21/VIZAG/2005 KALATHIL BROTHERS, VIZAG PAGE 5 OF 7 VISAKHAPATNAM SITE AS WELL AS MUMBAI SITE. THE ACTI ON OF THE ASSESSING OFFICER IS NOT JUSTIFIED. FOR DISALLOWING ANY EXPENDITURE, THE ASSESSING OFFICER HAS TO CONCLUSIVELY PROVE WIT H EVIDENCE TO THE EFFECT THAT THE EXPENDITURE CLAIMED IS BOGUS AN D FOR THE SAME HAVE NOT BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS. THEREFORE, DISALLOWING RS .5,98,675/- REPRESENTING EQUIPMENT HIRE CHARGES FOR MUMBAI SITE WITHOUT MAKING ANY ENQUIRIES WHATSOEVER REGARDING ITS GENUI NENESS IS FULLY UNJUSTIFIED AND THE SAME IS DELETED. FROM THE COPIES OF THE WORK ORDERS ISSUED BY PUBLIC SECTOR UNDERTAKINGS LIKE VISAKHAPATNAM STEEL PLANT, IT IS SEEN THAT THE EQUIPMENT AND MACHINERY ETC., HAD TO BE ARRANGED BY THE APPELLANT ON THEIR OWN FOR CARRYING ON THE WORKS. M OREOVER, THE FACT OF DOING ENGINEERING CONTRACT WORKS TO VARIOUS CONCERNS HAS NOT BEEN DISPUTED BY THE ASSESSING OFFICER. IN ORDE R TO CARRY OUT THE CONTRACTUAL OBLIGATIONS, IT IS A FACT THAT THEY HAVE TAKEN ON HIRE THE MACHINES, EQUIPMENTS WITHOUT WHICH THEY CO ULD NOT HAVE COMPLETED THE TYPE OF WORK UNDERTAKEN BY THEM DURING THE RELEVANT YEAR. THE APPELLANTS NATURE OF WORK IS SU CH THAT THE EQUIPMENTS ARE REQUIRED AT VERY SHORT NOTICE. UNDER THESE CIRCUMSTANCES, THE APPELLANT IS LEFT WITH NO OPTION BUT TO HIRE THE AVAILABLE ONES AT ANY COST AND CONDITIONS SO AS TO COMPLETE THE ASSIGNED JOBS WITHIN THE SPECIFIED TIME. THEREFORE , IT WAS DIFFICULT TO INSIST UPON ALL THE PARTICULARS LIKE C ORRECT ADDRESSES, LOCATION OF BUSINESS ETC., FROM THE PARTIES FROM WH OM THE EQUIPMENTS ARE HIRED. CONSIDERING THE FACTS AND CIR CUMSTANCES OF THE CASE, IT IS UNDISPUTED FACT THAT THE APPELLANT HAD TAKEN MACHINERY AND EQUIPMENT ON HIRE FROM VARIOUS PARTIE S IN CONNECTION TO CARRYING OF ENGINEERING CONTRACT WORK S. THE ONLY POINT OF THE ASSESSING OFFICER WHILE DISALLOWING TH E ENTIRE EXPENDITURE IS THAT HE COULD NOT VERIFY THE GENUINE NESS OF SOME OF THE PARTIES AS THEY WERE NOT AVAILABLE IN THE AD DRESSES. THIS DOES NOT MEAN THAT THE APPELLANT DID NOT MAKE ANY P AYMENTS OR INCURRED ANY EXPENDITURE TOWARDS HIRE CHARGES OF EQ UIPMENT AND MACHINERY. WITHOUT INCURRING ANY EXPENDITURE OF THI S NATURE, IT WAS NOT POSSIBLE TO EXECUTE THE WORKS THAT WERE UND ERTAKEN BY THE APPELLANT FIRM. HENCE, EVEN IF THE ASSESSING OF FICER HAD ANY DOUBT ABOUT THE PAYMENTS MADE BY THE APPELLANT THAT DOUBT SHOULD HAVE BEEN LIMITED TO WHETHER THE ENTIRE EXPE NDITURE WAS GENUINELY INCURRED OR WAS THERE ANY INFLATION. THE EXPENDITURES INCURRED FOR EQUIPMENT CHARGES FOR VARIOUS ASSESSME NT YEARS ARE AS UNDER: ITA NO. 20 & 21/VIZAG/2005 KALATHIL BROTHERS, VIZAG PAGE 6 OF 7 ASSESSMENT EQUIPMENT HIRE TOTAL PERCENTAGE OF YEAR CHARGES TURNOVER EQUIPMENT CHARGE OF THE TOTAL TURNOVER 1998-99 2,27,826 71,51,750 3.19 1999-2K 5,90,893 1,23,89,934 4.77 2000-01 10,95,150 1,66,27,972 6.58 2001-02 11,31,675 2,21,55,910 5.11 AS COULD BE SEEN FROM THE ABOVE TABLE, THE PERCENTA GE OF EQUIPMENT HIRE CHARGES IN RELATION TO THE TOTAL TUR NOVER FOR THE ASSESSMENT YEAR 2001-02 HAS DECLINED. THEREFORE, TH ESE FIGURES DO NOT INDICATE THAT THE EQUIPMENT HIRE CHARGES HAV E BEEN INITIATED TO REDUCE THE PROFITS. FOR THE ASSESSMENT YEAR 1998-99, THE ASSESSMENT WAS COMPLETED AFTER SCRUTINY U/S 143 (3) VIDE ORDER DT. 21-12-2000 WHEREIN A ROUND SUM ADDITION O F RS.20,000/- WAS MADE FROM OUT OF THE EXPENDITURE OF RS.2,27,826/- DEBITED TO THE PROFIT & LOSS ACCOUNT TOWARDS EQUIPMENT HIRE CHARGES AS THERE WERE NO PROPER EVID ENCES FOR THE EXPENDITURE CLAIMED. FOLLOWING THE SAME FACT AN D IN VIEW OF THE FACT THAT THE ASSESSING OFFICER COULD NOT FIND SOME OF THE PERSONS TO WHOM THE EQUIPMENT HIRE CHARGES WERE PAI D AT VISAKHAPATNAM SITE, I FEEL IT WOULD BE FAIR AND REA SONABLE TO DISALLOW A ROUND SUM AMOUNT OF RS.1,00,000/- OUT OF THE EQUIPMENT HIRE CHARGES OF RS.5,33,000/- INCURRED AT VISAKHAPATNAM SITE INSTEAD OF DISALLOWING THE ENTIR E EQUIPMENT HIRE CHARGES. IN COMING TO THE ABOVE CONCLUSION, I AM FORTIFIED IN MY VIEWS BY THE OBSERVATIONS OF HON'BLE SUPREME COU RT IN CIT VS. SIMON CARGES LTD., 105 ITR 212 WHERE IT WAS OBS ERVED THE TAXING AUTHORITIES EXERCISE QUASI JUDICIAL POWERS A ND IN DOING SO, THEY MUST ACT IN A FAIR AND NOT IN A PARTISAN MANNE R. ALTHOUGH IT IS PART OF THEIR DUTY TO ENSURE THAT NO TAX WHICH I S LEGALLY DUE FROM AN ASSESSEE SHOULD REMAIN UNRECOVERED THEY MUS T ALSO AT THE SAME TIME NOT ACT IN A MANNER AS MIGHT INDICATE THAT SCALES ARE WEIGHED AGAINST THE ASSESSEE. THUS THE APPELLA NT GETS A RELIEF OF RS.10,31,675/- (RS.11,31,675-RS.1,00,000) ON THIS GROUND. 3.3 SINCE THE ASSESSEE IS A CONTRACTOR, IT IS A FACT THAT IT COULD NOT EXECUTE THE CONTRACTS WITHOUT THE AID OF MACHINERIE S. IT IS NOT THE CASE OF THE ASSESSING OFFICER THAT THE ASSESSEE WAS HAVING ADEQUATE MACHINERIES. WE FIND FROM THE ORDER OF LEARNED CIT(A), THAT THE FIRST APPELLATE AUTHORITY HAS TAKEN THE DECISION AFTER CONSIDERING THE VARIOU S ASPECTS SURROUNDING THE ITA NO. 20 & 21/VIZAG/2005 KALATHIL BROTHERS, VIZAG PAGE 7 OF 7 ISSUE. THE LEARNED CIT(A) HAS CONFIRMED THE ADDITI ON TO THE EXTENT OF RS.1.00 LAC FOR THE DEFICIENCIES NOTICED BY THE ASS ESSING OFFICER. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, WE FIND THE DE CISION REACHED BY LEARNED CIT(A) TO BE REASONABLE AND HENCE WE DO NOT FIND ANY REASON TO INTERFERE WITH THE SAME. 4. IN THE RESULT, BOTH THE APPEALS OF THE REVENUE ARE DISMISSED. PRONOUNCED IN THE OPEN COURT ON 30.06.2010. SD/- SD/- (SUNIL KUMAR YADAV) (B R BASKARAN ) JUDICIAL MEMBER ACCOUNTANT MEMBER PVV/SPS VISAKHAPATNAM, DATE: 30 TH JUNE, 2010 COPY TO 1 THE ASSTT. COMMISSIONER OF INCOME TAX CIRCLE-5(1) , RANGE-5, II FLOOR, DIRECT TAXES BUILDING, SECTOR-8, MVP COLONY, VISAKH APATNAM 17 2 M/S KALATHIL BROTHERS 23-64-7 B.C. ROAD, GAJUWAKA , VISAKHAPATNAM 3 4. THE CIT 1, VISAKHAPATNAM THE CIT(A)-1, VISAKHAPATNAM 5 THE DR, ITAT, VISAKHAPATNAM. 6 GUARD FILE. BY ORDER SENIOR PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM