Deputy Commissioner of Income-tax, V. A. B. Associates,

ITA 303/PUN/2014

• Counselvise Citation: 30324514 RSA 2014
• Duration Of Justice: 1 year(s) 3 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-05-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2005-2006
• Appeal Filed On: 14-02-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: R G NAHAR
• Keywords: Principle of natural justice; Deemed to accrue or arise in india; Permanent establishment
• Section: 44AD; 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE BEFORE MS. SUSHMA CHOWLA, JUDICIAL MEMBER AND SHRI R.K. PANDA, ACCOUNTANT MEMBER ITA NO. 303/PN/2014 (ASSESSMENT YEAR : 2005-06) DCIT, CIRCLE-3, PUNE .. APPLICANT VS. A.B. ASSOCIATES, 1206/23B, SHIVAJINAGAR, PUNE 411004 .. RESPONDENT PAN NO.AACFA6993J ITA NO. 375/PN/2014 (ASSESSMENT YEAR : 2005-06) A.B. ASSOCIATES, 1206/23B, SHIVAJINAGAR, PUNE 411004 .. APPELLANT PAN NO.AACFA6993J VS. ACIT, CIRCLE-3, PUNE .. RESPONDENT ASSESSEE BY : SHRI R.G. NAHAR REVENUE BY : SHRI RAJESH DAMOR DATE OF HEARING : 15-04-2015 DATE OF PRONOUNCEMENT : 27-05-2015 ORDER PER R.K.PANDA, AM : THESE ARE CROSS APPEALS. THE FIRST ONE IS FILED BY THE REVENUE AND THE SECOND ONE FILED BY THE ASSESSEE AND ARE D IRECTED AGAINST THE ORDER DATED 31-10-2013 OF THE CIT(A)-II, PUNE RELAT ING TO ASSESSMENT YEAR 2005-06. 2 2. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESS EE IS A PARTNERSHIP FIRM ENGAGED IN THE BUSINESS OF CONTRACTOR, PROMOTE R AND BUILDER. IT FILED ITS RETURN OF INCOME ON 21-10-2005 DECLARING TOTAL INCOME OF RS.12,78,560/-. DURING THE COURSE OF ASSESSMENT PR OCEEDINGS THE AO NOTED THAT THE ASSESSEE HAS CLAIMED EXPENDITURE ON ACCOUNT OF PAYMENT TO THE FOLLOWING PERSONS : SR.NO. NAME BILL RAISED DURING OPENING BALANCE AS ON 01-04-05 1 BALU SONAR 5,19,472 67,406 2 RAJ KUMAR VERMA 13,96,261 2,00,547 3 S.K. WATER PROOFING 45,142 73,039 4 BASAPPA DHOTRE NIL 1,39,180 5 PENDHARY V.K. NIL 92,782 TOTAL 19,60,875 5,72,954 TOTAL 25,33,829 3. TO VERIFY THE VERACITY AND GENUINENESS OF THE EX PENSES HE DEPUTED THE INSPECTOR WHO SUBMITTED THAT NO ENTITY NAMED M/S. S.K. WATER PROOFING WAS EXISTING ON THE ADDRESS GIVEN BY THE ASSESSEE. SOMEBODY NAMED BALANI IS STAYING OVER THERE FOR LAS T 8 TO 10 YEARS. NO PERSON NAMED BASAPPA DHOTRE WAS FOUND AT THE GIV EN ADDRESS. SHRI RAJ KUMAR VERMA, SHRI V.K. PENDHARY WERE FOUND AND SUMMONED. SINCE AS PER THE REPORT OF THE INSPECTOR THE ADDRESS OF S.K. WATER PROOFING AND BASAPPA DHOTRE ARE NOT TRAC EABLE AND NO ENTITY OR PERSON BY THOSE NAMES WERE FOUND OVER THE RE, THE AO DISALLOWED THE OUTSTANDING BALANCE OF RS.1,39,180/- IN THE NAME OF BASAPPA DHOTRE AND RS.73,039/- IN THE NAME OF S.K. WATER PROOFING AS CESSATION OF LIABILITY U/S.41(1) . SIMILARLY, T HE BILLS RAISED DURING F.Y. 2004-05 IN THE NAME OF S.K. WATER PROOFING AMO UNTING TO RS.45,142/- WAS ALSO DISALLOWED BY THE AO AS BOGUS EXPENDITURE. SO FAR AS THE EXPENSES RELATING TO OTHER 3 PERSONS ARE CONCERNED, THE AO 3 RECORDED THEIR STATEMENTS. IN THE CASE OF SHRI RAJ KUMAR VERMA THE AO NOTED THAT SHRI VERMA IS NOT HAVING ANY EVIDENCE WHICH WILL PROVE THAT HE HAS WORKED FOR A.B. ASSOCIATES APART FROM EVIDENCE IN THE FORM OF BANK ACCOUNT IN SUVARNA SAHAKARI BANK. AS PER HIS BANK STATEMENT SHRI VERMA HAD RECEIVED ONLY RS.30,0 00/- IN F.Y. 2004-05 FROM THE ASSESSEE. ALTHOUGH THE ASSESSEE H AS CLAIMED THAT IT HAS DEDUCTED TDS FOR WHICH THE SAID EXPENSES HAS TO BE HELD AS GENUINE, HOWEVER, SHRI VERMA HAS NOT FILED HIS RETU RN OF INCOME FOR ANY FINANCIAL YEAR TILL DATE AND HE DOES NOT HAVE A NY PAN NUMBER. IN VIEW OF THE ABOVE, OUT OF THE BILLS RAISED BY SH RI RAJ KUMAR VERMA AT RS.13,96,261/- FOR THE IMPUGNED ASSESSMENT YEAR THE AO ALLOWED ONLY RS.30,000/- WHICH HAS BEEN PAID BY THE ASSESSEE FIRM IN SHAPE OF CHEQUE AND DISALLOWED THE BALANCE AMOUNT O F RS.13,66,261/- AS BOGUS EXPENSES. SIMILARLY, HE AL SO DISALLOWED AN AMOUNT OF RS.2,00,547/- OUTSTANDING IN THE NAME OF SHRI RAJ KUMAR VERMA AS CESSATION OF LIABILITY. 4. THE AO SIMILARLY NOTED THAT SHRI BALU SONAR IN H IS STATEMENT RECORDED U/S.131 HAD CONFIRMED THAT HE HAS DONE WOR K FOR M/S. A.B. ASSOCIATES AND TO PROVE THE SAME HE PRODUCED HIS BA NK ACCOUNT MAINTAINED WITH SUVARNA SAHAKARI BANK. HOWEVER, TH E AO NOTED THAT ONLY AN AMOUNT OF RS.10,000/- HAS BEEN DEPOSIT ED IN THE SAID BANK ACCOUNT DURING F.Y. 2004-05. THEREFORE, HE WA S OF THE OPINION THAT ONLY AN AMOUNT OF RS.10,000/- HAS BEEN PAID BY THE ASSESSEE TO SHRI BALU SONAR. ACCORDINGLY, OUT OF THE TOTAL BIL L RAISED BY HIM AT RS.5,19,472/- THE AO DISALLOWED AN AMOUNT OF RS.5,0 9,472/- AS BOGUS EXPENSES. SIMILARLY, HE ALSO DISALLOWED THE OPENING BALANCE 4 OF CREDITORS IN THE NAME OF SHRI BALU SONAR AT RS.6 7,407/- AS CESSATION OF LIABILITY. AS REGARDS THE STATEMENT O N OATH OF SHRI V.K. PENDHARY IS CONCERNED, THE AO NOTED THAT HE HAD CON CEDED THE FACT THAT ONLY RS.20,000/- WAS RECEIVABLE TO HIM AS ON 3 1-03-2004. THE BALANCE PAYABLE TO SHRI V.K. PENDHARY WAS RS.92,782 /-. HE THEREFORE DISALLOWED THE BALANCE AMOUNT OF RS.72,78 2/- AS CESSATION OF LIABILITY. 5. BEFORE CIT(A) THE ASSESSEE MADE ELABORATE SUBMIS SIONS. IT WAS ARGUED THAT THE AO WAS NOT CORRECT IN DISALLOWI NG THE EXPENSES SINCE THESE ARE ALL GENUINE EXPENSES AND TAX HAS BE EN DEDUCTED AND PAID. THE FIRM PREPARES MEASUREMENT SHEETS, WORK S HEETS AND THE DRAFT PROFORMA GIVING DETAILS AS TO THE NATURE OF W ORK, THE RATE APPLICABLE AND THE TOTAL AMOUNT PAYABLE AS PER WORK SHEET AND IN CASES OF THE ABOVE PARTIES NAMELY SHRI RAJ KUMAR VE RMA, SHRI BALU SONAR AND S.K. WATER PROOFING THE WORK SHEETS IN TH E FORM OF INVOICE ON THE LETTER HEAD OF THE ASSESSEE FIRM WAS PREPARED BY THE SUPERVISOR OF THE FIRM AND SAME WAS ENDORSED AS A T OKEN OF ACCEPTANCE BY THE CONTRACTOR. IT WAS ARGUED THAT T HESE CONTRACTORS ARE ILLITERATE AND THEREFORE UNABLE TO PREPARE THEIR OW N INVOICES AND THAT THEY COME WITH THEIR TEAM, EXECUTE THE WORK, TAKE T HE PAYMENT AND AFTER THE WORK IS OVER FOR A PARTICULAR SITE, LOOK FORWARD TO ANOTHER SITE FOR WORK. IT WAS ARGUED THAT SHRI RAJ KUMAR V ERMA IS WORKING FOR THE ASSESSEE FOR LAST 3 YEARS AND ALSO IN SUBSE QUENT YEARS DOING THE WORK OF PLASTERING, MASONARY AND PILING ETC. AN D DURING THE PRESENT A.Y. 2005-06 HE HAS DONE WORK OF RS.13,96,2 61/-. HE HAD APPEARED BEFORE THE AO. 5 6. IT WAS SUBMITTED THAT THE IDENTITY OF SHRI VERMA IS PROVED SINCE HE HAS APPEARED BEFORE THE AO FOR HIS EXAMINA TION WHOSE STATEMENT WAS RECORDED. THE WORK SHEETS BY SHRI VE RMA GIVE DETAILS OF THE WORK CARRIED OUT BY HIM AND IT HAS NOT BEEN PROVED BY THE AO THAT THE SAID WORK/JOB HAS NOT BEEN CARRIED OUT. I T WAS ARGUED THAT WITHOUT CARRYING OUT ANY SUCH WORK THE PROJECT COUL D NOT HAVE BEEN COMPLETED AS THERE WAS NO OTHER CONTRACTOR DOING TH E SAID WORK. 7. IT WAS FURTHER ARGUED THAT THE ASSESSEE FIRM WA S PAYING TO SHRI VERMA ON A WEEKLY/DAILY BASIS AS PER THE REQUIREMEN T OF SHRI VERMA AND THEREFORE NUMBER OF TIMES PAYMENTS WERE MADE BY BEARER CHEQUES WHICH COULD NOT FIGURE IN THE BANK STATEMEN T. DURING THE CROSS EXAMINATION, THE FACT OF RECEIPT OF BEARER CH EQUES FROM TIME TO TIME WAS CONFIRMED BY SHRI VERMA. IT WAS ALSO STAT ED THAT SUBSEQUENT TO THE COMPLETION OF THE ASSESSMENT PROC EEDINGS HE FILED HIS RETURN OF INCOME FOR A.Y. 2005-06 DECLARING INC OME OF RS.1,30,738/- AND DISCLOSED LABOUR CHARGES RECEIVED OF RS.14,10,230/- IN THE RETURN AND HE HAS ALSO OBTAIN ED PAN NUMBER. 8. AS REGARDS THE EXPENDITURE OF RS.5,09,472 TREATE D AS NOT GENUINE IN THE CASE OF SHRI BALU SONAR, IT WAS ARGU ED THAT SHRI BALU SONAR HAD APPEARED BEFORE THE AO WHOSE STATEMENT WA S RECORDED U/S.131. HE HAD CONFIRMED THAT HE WAS DOING BUSINE SS OF CENTERING WORK AND HAD WORKED FOR A.B. ASSOCIATES AND ALSO CA RRIED OUT THE WORK OF CENTERING AND THAT EXCEPT FOR THE BANK PASS BOOK HE DID NOT HAVE ANY OTHER EVIDENCE TO PROVE THAT HE HAD WORKED FOR THE ASSESSEE FIRM. IT WAS ARGUED THAT THE IDENTITY OF SHRI BALU SONAR AND HIS 6 ABILITY TO CARRY OUT THE CENTERING JOB WAS ESTABLIS HED ON THE BASIS OF HIS EXAMINATION AND THE DETAILS OF WORK CARRIED OUT GIVING THE DETAILS OF WORK AND RATE APPLICABLE. SIGNATURE OF SHRI BAL U SONAR ON THE WORK SHEET WAS SUBMITTED DURING ASSESSMENT PROCEEDI NGS AND THE EXPENSES DEBITED TO THE PROFIT AND LOSS ACCOUNT OF CENTERING EXPENDITURE HAS BEEN RAISED ON THE BASIS OF DETAILS OF WORK CARRIED OUT WHICH WAS NOT DISPUTED. IT WAS ALSO STATED THA T SHRI BALU SONAR WAS PAID CERTAIN AMOUNTS BY BEARER CHEQUES WHICH GE T REFLECTED IN THE STATEMENT OF ACCOUNT ALTHOUGH NOT IN THE PASS B OOK OF THE CONTRACTOR. IT WAS AGAIN SUBMITTED THAT THIS SUB C ONTRACTOR BEING ILLITERATE AND NEED PAYMENT IN CASH FOR ITS DISTRIB UTION AMONGST ITS WORKERS SOMETIMES ACCEPT CASH ALSO FROM THE ASSESSE E. MERELY BECAUSE THE PAYMENTS HAVE NOT BEEN REFLECTED IN HIS BANK STATEMENTS DOES NOT MEAN THAT SHRI BALU SONAR HAS NOT DONE ANY WORK SINCE WITHOUT HIS SERVICES THE PROJECT COULD NOT HAVE BEE N COMPLETED. 9. AS REGARDS THE DISALLOWANCE OF RS.45,145/- IN TH E CASE OF S.K. WATERPROOFING IT WAS SUBMITTED THAT MERELY BECAUSE THE PERSON WHO CARRIED OUT WORK UNDER THE NAME AND STYLE OF M/S. S .K. WATERPROOFING COULD NOT BE FOUND ON THE ADDRESS POS SESSED BY THE ASSESSEE, THE DISALLOWANCE IS NOT JUSTIFIED. IT WA S ARGUED THAT THESE ARE SMALL AND PETTY CONTRACTORS WHO KEEP ON SHIFTIN G THEIR PLACES AFTER THE WORK OF A PARTICULAR SITE IS OVER AND HEN CE THEY DO NOT HAVE ANY PERMANENT ESTABLISHMENT AS SUCH. 10. BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSEE , THE LD.CIT(A) CALLED FOR A REMAND REPORT FROM THE AO. AFTER 7 CONSIDERING THE COMMENTS OF THE AO IN THE REMAND RE PORT AND THE REPLY OF THE ASSESSEE TO SUCH REMAND REPORT, THE LD .CIT(A) ALLOWED THE FOLLOWING AMOUNTS OF RS.8,62,001/- OUT OF DISAL LOWANCE OF RS.19,20,878/- OUT OF THE VARIOUS EXPENSES. SIMILA RLY, HE ALSO ALLOWED AN AMOUNT OF RS.2,67,953/- OUT OF ADDITION OF RS.5,52,954/- MADE BY THE AO U/S.41(1) OF THE I.T. ACT. A SUMMAR Y OF SUCH DISALLOWANCE MADE BY THE AO AND PART RELIEF GIVEN B Y THE CIT(A) ARE AS UNDER, THE DETAILS OF WHICH ARE AS UNDER : SR.NO. NAME OF PARTY ADDITION RELIEF CIT(A) BEFORE ITAT ADDITION RELIEF CIT(A) BEFORE ITAT 1 S.K. WATERPROOFING 45145 35507 9638 73039 -- 73039 2 RAJKUMAR VARMA 1366261 775666 590595 200547 200547 -- 3 BALU SONAR 509472 50828 458644 67406 67406 -- 4 BASSAPPA DHOTRE -- -- -- 139180 -- 139180 5 PANDARE V.K. -- -- -- 72782 -- 72782 TOTAL 1920878 862001 1058877 552954 267953 285001 11. WHILE GIVING PART RELIEF ON ACCOUNT OF VARIOUS EXPENSES THE LD.CIT(A) OBSERVED THAT THE AO HAS NOT BROUGHT ON R ECORD THAT THESE PERSONS HAVE NOT DONE ANY WORK AND SOME OTHER WAS D EPLOYED FOR SUCH WORK BY THE ASSESSEE. THEREFORE, THE EXPENSES INCURRED BY THE ASSESSEE PRIMA-FACIE CANNOT BE ENTIRELY DOUBTED AND SAID TO BE BOGUS. HE OBSERVED THAT THE TOTAL COST OF CIVIL CONSTRUCTI ON COMES TO RS.78,53,838/- AS PER THE BOOKS OF ACCOUNT WHEREIN THE MATERIAL COMPONENT IS RS.53,02,972/- WHICH IS 67.52% AND THE LABOUR COST COMPONENT WORKS OUT TO RS.25,50,866/- WHICH IS 32.4 8% OF THE TOTAL COST OF CIVIL CONSTRUCTION. FURTHER, PAYMENT OF RS .50,828/- HAVE BEEN MADE TO SHRI BALU SONAR AND RS.7,75,666/- TO SHRI R AJ KUMAR VERMA DURING THE YEAR WHICH IS EVIDENT FROM THE LEDGER AC COUNT EXTRACT. FURTHER, THE ASSESSEE HAS ALSO DEDUCTED TDS FROM TH E PAYMENTS MADE. SIMILARLY, IN THE CASE OF M/S. S.K. WATERPRO OFING HE OBSERVED 8 THAT THE LEDGER ACCOUNT INDICATES PAYMENT OF RS.35, 507/- ALONG WITH TDS DEDUCTION OF RS.507/- AS AGAINST WATERPROOFING CHARGES CLAIMED OF RS.45,142/-. SINCE THE OWNER OF M/S. S.K. WATER PROOFING IS A SMALL CONTRACTOR AND HE HAD ALSO WORKED FOR THE ASS ESSEE IN THE PRECEDING YEARS WHEN PAYMENT OF RS.18,548.25 WAS MA DE TO HIM, THEREFORE, HE HELD THAT THE IDENTITY AND GENUINENES S OF THE PAYMENT ACTUALLY MADE SHOULD NOT BE DOUBTED. IN VIEW OF TH E ABOVE FACTS, HE WAS OF THE OPINION THAT THE ENTIRE PAYMENTS MADE TO THE 3 CONTRACTORS CANNOT BE SAID TO BE BOGUS OR NON-GENUINE. HOWEVER , SINCE ACCORDING TO THE ASSESSEE THESE ARE SMALL CONTRACTO RS WHO NEED TO DISTRIBUTE THE PAYMENT WEEKLY/DAILY BASIS TO ITS WO RKERS, THEREFORE, THE LD.CIT(A) WAS OF THE OPINION THAT KEEPING CREDI T BALANCE OF A LARGE PART ON THEIR TOTAL PAYMENT BY THE ASSESSEE I S NOT UNDERSTANDABLE AND IS NOT REASONABLE. THEREFORE, H E WAS OF THE OPINION THAT ONLY THE AMOUNT TO THE EXTENT IT HAS B EEN PAID DURING THE YEAR SHOULD BE ALLOWED AS GENUINE AND HE DISALLOWED THE BALANCE AMOUNT WHICH WAS OUTSTANDING. ACCORDINGLY, AS AGAI NST RS.19,20,828/- DEBITED BY THE ASSESSEE ON ACCOUNT O F 3 PARTIES THE LD.CIT(A) ALLOWED AN AMOUNT OF RS.8,62,001/-. THUS , HE SUSTAINED THE BALANCE AMOUNT OF RS.10,58,877/-. 12. SO FAR AS THE DISALLOWANCE MADE BY THE AO U/S.4 1(1) IN RESPECT OF THE 5 PARTIES NAMELY (I) SHRI BALU SONAR-RS.67,4 06/-, (II) SHRI RAJ KUMAR VERMA-RS.2,00,547, (III) S.K. WATER PROOFING- RS.73,039/-, (IV) SHRI BASAPPA DHOTRE-RS.1,39,180/- AND (V) SHRI PENDHAR V.K.- RS.72,782/- ARE CONCERNED HE OBSERVED THAT THE CRED ITORS ARE BEING CARRIED FORWARD YEAR AFTER YEAR IN TRANSACTIONS AND THE AMOUNTS 9 INVOLVED WERE CONTINUING WITH THE ASSESSEE FOR QUIT E NUMBER OF YEARS AND THERE WAS NO CLAIMS OR CLAIMANT AS FAR AS THESE AMOUNTS ARE CONCERNED. AS REGARDS THE CONTENTION OF THE ASSESS EE THAT CESSATION OF LIABILITY IS NOT COMPLETE, THE LD.CIT(A) OBSERVE D THAT THE SAME IS NOT BACKED BY ANY EVIDENCE WHICH COULD JUSTIFY THE CLAIM OF THE ASSESSEE. HE ACCORDINGLY WAS OF THE OPINION THAT T HE AO WAS JUSTIFIED IN MAKING ADDITION OF RS.2,85,001/- IN TH E CASE OF M/S. S.K. WATER PROOFING, SHRI BASAPPA DHOTRE AND SHRI PENDHA RY V.K. PERTAINING TO THE CREDITORS FOR EXPENSES IN RESPECT OF THE ASSESSEE U/S.41(1) OF THE I.T. ACT. 13. SO FAR AS THE OTHER PERSONS ARE CONCERNED HE DE LETED THE SAME BY OBSERVING AS UNDER : 4.7 I HAVE CAREFULLY CONSIDERED THE SUBMISSION MADE BY THE APPELLANT AND PERUSED MATERIAL ON RECORD. IT IS NOTIC ED THAT THE OUTSTANDING BALANCES IN THE CASE OF RAJKUMAR VARMA AND BALU SONAR OF RS. 2,00,547/- AND RS. 67,406/-, RESPECTIVELY HAS BE EN HELD BY THE ASSESSING OFFICER TO HAVE CEASED TO EXIST. IT IS SEEN THAT DURING THE FINANCIAL YEAR 2003-04 I.E. A.Y. 2004-05 I.E. THE E ARLIER YEAR THE CONSTRUCTION ACTIVITY OF THE APPELLANT WAS CARRIED OU T AT TWO SITES VIZ. ASHTEKAR SITE AND PHATAK SITE AND THE BREAKUP OF LABOU R CHARGES AT BOTH SITES REVEALS THAT BOTH THE CONTRACTORS MENTIONED ABOVE WERE WORKING ON BOTH SITES AND THE EXPENDITURE IN RESPECT O F WORK DONE BY THEM HAS BEEN ACCEPTED AS GENUINE EXPENDITURE AS NO MATERIAL IN THIS REGARD HOLDING THEM TO BE BOGUS OR SHAM HAS BEEN BROUGHT ON RECORD. THE ACCOUNT EXTRACT OF RAJKUMAR VARMA FOR F .Y. 2003-04 REVEALS THAT REGULAR WORK WAS BEING DONE BY HIM FOR T HE APPELLANT AND THE TOTAL WORK DONE BY HIM HAD BEEN TO THE EXTE NT OF RS. 8,08,220/- AND HE WAS PAID A SUM OF RS.6,45,082/- DURI NG THE YEAR ITSELF AND THE SAME WAS A RUNNING ACCOUNT HAVING OPENI NG BALANCE AS ON 1-4-2003 AT RS. 37,409/-. LIKEWISE IN THE CASE OF B ALU SONAR IT IS NOTICED THAT THIS CONTRACTOR HAD BEEN WORKING WITH THE APPELLANT FROM EARLIER YEARS. THE ACCOUNT EXTRACT OF BALU SONA R FOR F.Y. 2003- 04 ALSO REVEALS THAT WORK OF RS. 5,88,6127- WAS DONE BY HIM AND A TOTAL PAYMENT OF RS.6,40,340/- WAS MADE DURING THE SAI D YEAR. IT IS ALSO SEEN THAT THE SAID ACCOUNT IS A RUNNING ACCOUNT AN D HAD AN OPENING BALANCE OF RS.1,19,134/-. IN BOTH THE CASES O F THE ABOVE CONTRACTORS IT IS ALSO SEEN THAT THEY CONTINUED WORKING WITH THE APPELLANT DURING F.Y. 2004-05 ALSO AND THEIR STATEMEN TS WERE ALSO RECORDED BY THE ASSESSING OFFICER PROVING THEIR IDENTIT Y AND ALSO EXPLAINED THE NATURE OF WORK OF CONSTRUCTION ON CONT RACT BASIS FOR THE APPELLANT. THUS THE OPENING BALANCES IN AFORESAID CASES OF THE TWO CONTRACTORS PRIMA FACIE CANNOT BE DOUBTED AND HE NCE THE 10 DISALLOWANCE MADE BY THE ASSESSING OFFICER DOES NOT GET SUBSTANTIATED IN VIEW OF THE MATERIAL ON RECORD. THEY HAVE BEEN PAID SUBSTANTIAL AMOUNTS DURING THE F.Y. 2003-04 LEAVING A SMALL SUM TO BE PAID SUBSEQUENTLY, WHICH HAD BEEN SHOWN PAYABLE. TH US THE BALANCES IN RESPECT OF THE AFORESAID CONTRACTORS CANNOT BE SAID TO HAVE CEASED TO EXIST AS THEY HAVE ENGAGED IN THE WORK RELATING TO THE CONSTRUCTION OF THE APPELLANT AND HENCE THEIR GENUIN ENESS CANNOT BE DOUBTED. 14. AGGRIEVED WITH SUCH RELIEF GIVEN BY THE CIT(A) THE REVENUE AS WELL AS THE ASSESSEE ARE IN APPEAL BEFORE US WIT H THE FOLLOWING GROUNDS : GROUNDS BY REVENUE : (1) THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN HOLDING THAT THE ACTUAL PAYMENTS MADE BY THE ASSESSEE TO THE CONTRACTORS SHRI.RAJKUMAR VARMA, SHRI.BALU SONAR AND S.K. WATER PROOFING WAS ALLOWABLE WHEN NO EVIDENCE OF WORK CARR IED OUT AND PAYMENTS MADE WERE SUBMITTED EITHER IN THE ASSESSMENT OR APPELLATE PROCEEDINGS AND THE SUB CONTRACT CHARGES CLAIMED BY TH E ASSESSEE WERE BOGUS. (2) THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) E RRED IN NOT APPRECIATING THAT OUT OF THE TOTAL BILLS RAISED AGAIN ST THE CONTRACTORS SHRI. RAJKUMAR VARMA & SHRI.BALU SONAR, ONLY THE AMOUNTS O F RS.30,000/- & RS.10,000/- WERE FOUND GENUINE AS PER THE BANK STATEME NT OF THEIR ACCOUNTS IN SUVARNA SAHAKARI BANK AND AS PER THE STATE MENT RECORDED U/S.131 OF THE ACT IN THE COURSE OF ASSESSMENT PROCEEDING S. (3) THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) E RRED IN NOT CONSIDERING THE FACT THAT THE CONTRACTOR S.K.WATER P ROOFING WAS NOT TRACEABLE DURING THE ASSESSMENT PROCEEDINGS AND ITS EXISTE NCE WAS NOT PROVED DURING THE APPELLATE PROCEEDINGS ALSO. (4) THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) E RRED IN DELETING THE DISALLOWANCE MADE U/S.41(1) OF THE ACT B EING CESSATION OF LIABILITY WHEN THE LIABILITY ON ACCOUNT OF CONTRACT ORS SHRI.BALU SONAR AND SHRI.RAJKUMAR VARMA WAS NOT ESTABLISHED BY THE ASSESSEE EI THER IN THE ASSESSMENT PROCEEDINGS OR APPELLATE PROCEEDINGS. (5) THE APPELLANT CRAVES LEAVE TO ADD, ALTER OR AMEN D ANY OR ALL THE GROUNDS OF APPEAL. GROUNDS BY ASSESSEE : 1. ON FACTS & CIRCUMSTANCES PREVAILING IN THE CASE & A S PER PROVISIONS OF LAW IT BE HELD THAT THE ADDITIONS MADE O N ACCOUNT OF PAYMENTS MADE TO THE CONTRACTORS, THE DETAILS OF WHICH ARE TABULISED BELOW, HOLDING THE SAME TO BE BOGUS OR NON GENUINE AR E NOT IN ACCORDANCE WITH THE PROVISIONS OF THE ACT. THE ADDITIONS SO MADE/RETAINED BE DELETED. 11 SR.NO. NAME TOTAL PAYMENT DISALLOWED ALLOWED NOT ALLOWED 01 RAJKUMAR VARMA 13,66,261 7,75,666 5,90,595 02 BALU SONAR 5,09,472 50,828 4,58,644 03 S K WATER PROOFING 45,145 35,507 9,638 TOTAL 19,20,878 8,62,001 10,58,877 JUST AND PROPER RELIEF BE ALLOWED TO THE APPELLANT. 2. ON FACTS & CIRCUMSTANCES PREVAILING IN THE CASE & AS PER PROVISIONS OF LAW IT BE HELD THAT ADDITIONS MADE/RETAI NED U/S.41 (1) OF THE INCOME TAX ACT OF RS.2,85,001/- ARE NOT IN AC CORDANCE WITH THE PROVISIONS OF THE ACT. THE AUTHORITIES BELOW HAVE ERRE D IN ADDING/RETAINING IN NOT CONSIDERING THE EXPLANATIONS GIVEN PROPERLY. THE ADDITIONS MADE BE DELETED. JUST AND PROPER RELIEF BE ALLOWED TO THE APPELLANT. 3. THE APPELLANT PRAYS TO BE ALLOWED TO ADD, AMEND , DELETE, MODIFY, RECTIFY ANY GROUNDS OF APPEAL AT THE TIME OF HEARING . 15. THE LD. COUNSEL FOR THE ASSESSEE STRONGLY OPPOS ED THE ADDITION SUSTAINED BY THE CIT(A). SO FAR AS THE DI SALLOWANCE IN THE HANDS OF SHRI RAJKUMAR VARMA IS CONCERNED HE SUBMIT TED THAT OUT OF DISALLOWANCE OF RS.13,66,261/- BY THE AO THE LD.CIT (A) HAS ALLOWED ONLY AN AMOUNT OF RS.7,75,666/- AND SUSTAIN ED THE BALANCE AMOUNT OF RS.5,90,595/-. REFERRING TO PARA 8 OF TH E ASSESSMENT ORDER HE SUBMITTED THAT SHRI RAJKUMAR VARMA APPEARED BEFO RE THE AO WHOSE STATEMENT WAS RECORDED U/S.131 ON 23-11-2007. IN THE SAID STATEMENT HE HAS CONFIRMED TO HAVE WORKED FOR M/S. A.B. ASSOCIATES AND HAS ALSO CONFIRMED TO HAVE RECEIVED AN AMOUNT O F RS.30,000/- BY CHEQUE ON 06-11-2004 AND ANOTHER RS. 1 LAKH ON 10-0 4-2006. HE SUBMITTED THAT THE AO DISALLOWED AN AMOUNT OF RS.13 ,66,261/- BY ALLOWING ONLY RS.30,000/- WHICH HAS BEEN PAID BY TH E ASSESSEE IN CHEQUE. HE SUBMITTED THAT SHRI RAJKUMAR VARMA IS A PETTY CONTRACTOR AND IS ILLITERATE. HE HAS RAISED THE BI LLS ON THE ASSESSEE FOR THE WORK DONE BY HIM AS PER SQ.FT./PER SQ.MTR. THE AO OR THE CIT(A) 12 HAVE NOT DISPUTED THE MEASUREMENTS. HE SUBMITTED T HAT IN THIS LINE OF TRADE CERTAIN PEOPLE ARE TO BE PAID ON DAILY BAS IS OR WEEKLY BASIS. ALL THE DEBITS ARE BOOKED IN THE BOOKS OF ACCOUNT O F THE ASSESSEE. FURTHER, THE ASSESSEE HAS MADE DEDUCTION OF TDS FRO M THE PAYMENT TO THE LABOUR CONTRACTOR. ALTHOUGH THE LD.CIT(A) A LLOWED THE PAYMENTS WHICH ARE MADE TO SHRI RAJKUMAR VARMA IN S HAPE OF BEARER CHEQUES/ACCOUNT PAYEE CHEQUES, HOWEVER, HE D ISALLOWED THE BALANCE AMOUNT WHICH HAS BEEN PAID IN SHAPE OF CASH ON DIFFERENT DATES. HE SUBMITTED THAT ONCE IT IS ACCEPTED THAT THEY HAVE DONE THE WORK AS PER MEASUREMENT SLIPS, THERE IS NO JUSTIFIC ATION FOR DENYING THE DEDUCTION MERELY ON THE BASIS OF PAYMENT. 16. SO FAR AS THE DISALLOWANCE U/S.41(1) OF THE I.T . ACT IS CONCERNED HE SUBMITTED THAT THE AO DISALLOWED AN A MOUNT OF RS.2,00,547/- WHICH WAS THE OPENING BALANCE AS ON 0 1-0D-2004 UNDER THE HEAD CESSATION OF LIABILITY. THE LD.CIT( A) HAS RIGHTLY DELETED THE ADDITION/DISALLOWANCE MADE BY THE AO U/ S.41(1) ON THE GROUND THAT THERE IS NO MATERIAL TO HOLD THAT THE C ONDITIONS FOR INVOKING THE DEEMING FICTION ARE SATISFIED. FURTHE R, THE PROVISIONS OF SECTION 145 ARE NOT INVOKED AND THE BOOK RESULTS AR E ACCEPTED. THEREFORE, NO DISALLOWANCE U/S.41(1) ON THIS ACCOUN T ALSO IS WARRANTED. HE ACCORDINGLY SUBMITTED THAT THE ORDER OF THE CIT(A) BEING IN CONSONANCE WITH LAW SHOULD BE UPHELD. 17. SO FAR AS THE DISALLOWANCE IN THE HANDS OF SHRI BALU SONAR IS CONCERNED HE SUBMITTED THAT THE AO DISALLOWED AN AM OUNT OF RS.5,09,472/- OUT OF THE TOTAL PAYMENT OF RS.5,19,4 72/- PAID TO SHRI 13 BALU SONAR ON THE GROUND THAT AN AMOUNT OF ONLY RS. 10,000/- HAS BEEN PAID DURING THE YEAR BY CHEQUE WHICH IS REFLE CTED IN THE BANK ACCOUNT OF SHRI BALU SONAR. HE SUBMITTED THAT THE ABOVE PERSON APPEARED BEFORE THE AO FOR HIS EXAMINATION AND HIS STATEMENT WAS RECORDED. HOWEVER, WHEN THE ASSESSEE REQUESTED FOR CROSS EXAMINATION OF SHRI BALU SONAR, THE SAME WAS NOT GR ANTED. THEREFORE, THE PRINCIPLES OF NATURAL JUSTICE WERE N OT FOLLOWED. ALTHOUGH THE AO IN THE ASSESSMENT ORDER HAS WRITTEN THAT THE AUTHORISED REPRESENTATIVE DID NOT OFFER ANY COMMEN TS NOR ASKED TO CROSS EXAMINE SHRI BALU SONAR, HOWEVER, THE LD. COU NSEL FOR THE ASSESSEE REFERRING TO PAGE 57 OF THE PAPER BOOK DRE W THE ATTENTION OF THE BENCH TO THE LETTER DATED 27-11-2007 WRITTEN BY THE ASSESSEE TO THE AO IN WHICH IT WAS SPECIFICALLY MENTIONED THAT THE ASSESSEE MAY BE GIVEN AN OPPORTUNITY TO CROSS EXAMINE SHRI S.B. MARATHE, SHRI BALU SONAR AND SHRI RAJKUMAR VARMA IF THEY HAVE GIV EN ANY NEGATIVE STATEMENT. 18. SO FAR AS THE DISALLOWANCE IN THE HANDS OF S.K. WATERPROOFING IS CONCERNED HE SUBMITTED THAT OUT OF TOTAL AMOUNT OF RS.45,145/- DISALLOWED BY THE AO THE LD.CIT(A) ALLOWED ONLY RS. 35,507/- AND SUSTAINED AN AMOUNT OF RS.9,638/-. HE SUBMITTED TH AT THE AO DISALLOWED THE AMOUNT PAID TO S.K. WATERPROOFING AM OUNTING TO RS.45,142/- ON THE GROUND THAT THE SAID PARTY DOES NOT EXIST. HOWEVER, THE LD.CIT(A) ALLOWED AN AMOUNT OF RS.35,5 07/- ON THE BASIS OF PAYMENT OF RS.35,507/- ALONG WITH TDS DEDU CTION OF RS.507/- AS AGAINST WATERPROOFING CHARGES CLAIMED A T RS.45,142/-. HE SUBMITTED THAT WATERPROOFING WORK IS A MUST FOR ANY CIVIL 14 CONSTRUCTION AND WITHOUT THIS THE WORK CANNOT BE CO MPLETED. FURTHER, S.K. WATERPROOFING IS A VERY SMALL CONTRAC TOR AND HE HAS WORKED IN THE PRECEDING AS WELL AS SUBSEQUENT YEARS . SINCE THESE PEOPLE GO FROM PLACE TO PLACE OR SITE TO SITE THEY DID NOT STAY AT A PARTICULAR PLACE FOR A LONG TIME FOR WHICH HE WAS N OT TRACEABLE. FURTHER, THERE IS NO EVIDENCE ON RECORD THAT SOMEBO DY ELSE HAS ALSO DONE WATERPROOFING WORK. HE SUBMITTED THAT IF THE VARIOUS EXPENSES DISALLOWED BY THE AO AND PARTLY SUSTAINED BY CIT(A) ARE ACCEPTED, THEN IT WILL GIVE AN ABSURD RESULT. 19. SO FAR AS THE DISALLOWANCES U/S.41(1) IN RESPEC T OF VARIOUS PERSONS ARE CONCERNED HE SUBMITTED THAT WHEN THE AS SESSEE HAS NOT WRITTEN OFF THE AMOUNT AND THE OUTSTANDINGS ARE APP EARING IN THE BALANCE SHEET OF THE ASSESSEE COMPANY AND THE BOOK RESULT IS NOT DISTURBED, THEN THERE IS NO JUSTIFICATION IN MAKING DISALLOWANCE OF THE SAME. 20. REFERRING TO THE DECISION OF HONBLE GUJARAT HI GH COURT IN THE CASE OF CIT VS. BHOGILAL RAMJIBHAI ATARA REPORTED I N 43 TAXMANN.COM 55 HE SUBMITTED THAT THE HONBLE HIGH C OURT IN THE SAID DECISION HAS HELD THAT WHERE THE ASSESSEE IN T HE RETURN OF INCOME FOR A.Y. 2007-08 HAD SHOWN CERTAIN AMOUNT BY WAY OF HIS DEBTS AND THE AO APPLYING THE PROVISIONS OF SECTION 41(1) ADD ED BACK SAID AMOUNT IN INCOME OF THE ASSESSEE AS DEEMED INCOME, THE SAID AMOUNT CANNOT BE ADDED BACK TO THE INCOME OF THE ASSESSEE IN ABSENCE OF ANY RECORD TO SUGGEST THAT THERE WAS REMISSION OR CESSI ON OF LIABILITY THAT 15 TOO DURING A.Y. 2007-08. HE ACCORDINGLY SUBMITTED THAT NO ADDITION U/S.41(1) COULD BE MADE. 21. FURTHER, HE SUBMITTED THAT THE ASSESSEE HAS SHO WN PROFIT OF 15.88%. ALTHOUGH THE PROVISIONS OF SECTION 44AD AR E NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE, HOWEVER, THE VARI OUS BENCHES OF THE TRIBUNAL ARE TAKING THE CONSISTENT VIEW THAT 8% PRO FIT IS REASONABLE. SINCE THE ASSESSEE IN THE INSTANT CASE HAS DECLARED MORE THAN 15% GROSS PROFIT, THEREFORE, THERE IS NO NEED FOR ANY S PECIFIC ADDITION ON ANY HEAD. 22. THE LD. COUNSEL FOR THE ASSESSEE ALSO FILED A C HART SHOWING THE AMOUNT CREDITED TO VARIOUS LABOUR CONTRACTORS AND T HE TDS AND ALSO THE CHALLANS OF DEPOSIT FOR SUCH TDS WHICH ARE AS U NDER : PARTICULARS AMT. CREDITED TDS RATE ABDUL SATTAR A/C. 52,524.00 477.00 1.12 SUBCONTRACTOR BALU SONAR A/C. 519,471.50 5,828.00 1.12 SUBCONTRACTOR MARATHE S.B. A/C. 266,150.00 2,920.00 1.10 SUBCONTRACTOR RAJKUMAR VARMA A/C. 1,396,261.00 15,666.00 1.12 SUBCONTRACTOR SHARAD AMALE A/C 75,618.00 849.00 1.12 SUBCONTRACTOR SHRI A. FABRICATORS A/C. 126,886.00 1,479.00 1.17 SUBCONTRACTOR S.K. WATERPROOFING A/C. 45,142.00 507.00 1.12 SUBCONTRACTOR 27,726.00 CHINMAY ELECTRICAL A/C. 708,323.50 15,895.00 2.24 CONTRACTOR PARIMAL DECORATORS A/C. 224,899.58 5,228.00 2.32 CONTRACTOR 21,123.00 HE ACCORDINGLY SUBMITTED THAT THE ORDER OF THE CIT( A) BE SET ASIDE TO THE EXTENT HE HAS SUSTAINED THE ADDITION AND THE RE TURNED INCOME BE ACCEPTED. 23. THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHE R HAND HEAVILY RELIED ON THE ORDER OF THE AO. HE SUBMITTE D THAT WHEN THE PARTIES COULD NOT JUSTIFY OR GIVE EVIDENCE TO HAVE DONE ANY WORK BY 16 THEM THE ASSESSEE CANNOT BE REWARDED FOR SUCH BOGUS EXPENSES BOOKED IN THE BOOKS OF ACCOUNT. SO FAR AS THE DISA LLOWANCE U/S.41(1) IS CONCERNED HE SUBMITTED THAT THE PARTIES WERE NOT FOUND AT THE GIVEN ADDRESSES. THERE WAS NO EVIDENCE TO SUGGEST THAT T HE AMOUNT IS PAYABLE TO THEM. THE ASSESSEE MIGHT HAVE PAID THEM FOR WHICH THEY HAVE EXPRESSED THEIR IGNORANCE REGARDING ANY AMOUNT RECEIVABLE FROM THE ASSESSEE. THEREFORE, THE ADDITION U/S.41(1 ) HAS TO BE SUSTAINED. HE ACCORDINGLY SUBMITTED THAT THE ORDER OF THE CIT(A) BE SET SIDE AND THAT OF THE AO BE RESTORED. 24. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECISIONS CITED BEFORE US. WE FIND THE AO DISALLOWED AN AMOUNT OF RS.19,20,878/- ON ACCOUNT O F NON GENUINE EXPENDITURE AND AN AMOUNT OF RS.5,52,954/- U/S.41(1 ). THE LD.CIT(A) GAVE RELIEF OF RS.8,62,001/- OUT OF THE E XPENSES DISALLOWED. SIMILARLY, HE ALSO GAVE RELIEF OF RS.2 ,67,953/- OUT OF THE ADDITION MADE BY THE AO U/S.41(1). THUS, HE SUSTAI NED AN AMOUNT OF RS.10,58,877/- OUT OF THE EXPENDITURE DISALLOWES BY THE AO AND AN AMOUNT OF RS.2,85,001/- OUT OF THE ADDITION MADE BY THE AO U/S.41(1). A SUMMARY OF SUCH DISALLOWANCE MADE BY THE AO AND PART RELIEF GIVEN BY THE CIT(A) HAS ALREADY BEEN RE PRODUCED AT PARA 10 OF THE IMPUGNED ORDER. 25. AGAINST SUCH PART RELIEF GIVEN BY THE CIT(A) BO TH THE ASSESSEE AS WELL AS THE REVENUE ARE IN APPEAL BEFORE US. 17 26. WE HAVE HEARD BOTH THE SIDES. IT IS AN ADMITTE D FACT THAT THE LABOUR CONTRACTORS APPEARED BEFORE THE AO AND THEIR STATEMENTS WERE RECORDED. FURTHER, TDS HAS ALSO BEEN DEDUCTED FROM SUCH PAYMENTS. HOWEVER, IT IS ALSO AN ADMITTED FACT THAT THE ASSES SEE WAS NOT IN A POSITION TO SUBSTANTIATE WITH FULL EVIDENCE REGARDI NG THE NATURE OF WORK DONE BY THE VARIOUS LABOUR CONTRACTORS. THE W HOLE PAYMENT HAS NOT BEEN PAID BY CHEQUES OR DEMAND DRAFTS OR PA Y ORDERS AND PAYMENTS HAVE ALSO BEEN MADE BY CASH AS STATED BY T HE ASSESSEE. THE VARIOUS DISCREPANCIES NOTED BY THE AO AS WELL A S CIT(A) COULD NOT BE CONTROVERTED BY THE LD. COUNSEL FOR THE ASSE SSEE. AT THE SAME TIME, DISALLOWANCE OF SUCH HUGE AMOUNT IN THE INSTA NT CASE WILL AMOUNT TO A PROFIT RESULT WHICH IS NOT POSSIBLE IN THIS LINE OF BUSINESS. THE ASSESSEE HAS ALREADY DECLARED GP RATE OF 15.88% BEFORE ANY DISALLOWANCE. FURTHER, THE ACCOUNTS OF THE ASSESSE E ARE NOT REJECTED BY INVOKING THE PROVISIONS OF SECTION 145 OF THE I. T. ACT. THEREFORE, THE DISALLOWANCE OF RS.19,20,878/- BY THE AO OUT OF WHICH AN AMOUNT OF RS.10,58,877/- HAS BEEN SUSTAINED BY THE CIT(A) IN OUR OPINION WILL GIVEN AN ABSURD RESULT WHICH IN OUR OP INION IS NOT POSSIBLE IN THIS LINE OF BUSINESS. FURTHER, WE ALS O FIND MERIT IN THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT DUE TO COMPULSION CASH PAYMENTS HAVE TO BE MADE TO THOSE L ABOUR CONTRACTORS FOR DISTRIBUTION AMONG THE LABOURERS. CONSIDERING THE TOTALITY OF THE FACTS OF THE CASE, WE ARE OF THE CO NSIDERED OPINION THAT A LUMPSUM ADDITION OF RS.5 LAKHS AS AGAINST RS.19,2 0,878/- DISALLOWED BY THE AO AND RS.10,58,877/- SUSTAINED B Y THE CIT(A) IN THE FACTS AND CIRCUMSTANCES OF THE CASE WILL MEET T HE ENDS OF JUSTICE. 18 WE HOLD AND DIRECT ACCORDINGLY. THE GROUNDS RAISED BY THE ASSESSEE ON THIS ISSUE ARE ACCORDINGLY PARTLY ALLOWED AND TH E GROUNDS RAISED BY THE REVENUE ARE DISMISSED. 27. NOW COMING TO THE DISALLOWANCE U/S.41/(1) WE FI ND AS AGAINST RS.5,52,984/- DISALLOWED BY THE AO THE CIT(A) SUSTA INED AN AMOUNT OF RS.2,85,001/- BY GIVING RELIEF OF RS.2,67,953/-. IT IS AN ADMITTED FACT THAT THE BOOKS ARE NOT REJECTED NOR THE PROVI SIONS OF SECTION 145 APPLIED. THE CREDITORS ARE APPEARING IN THE BOOKS OF THE ASSESSEE. 28. THE HONBLE GUJARAT HIGH COURT IN THE CASE OF B HOGILAL RAMJIBHAI ATARA (SUPRA) HAD AN OCCASION TO DECIDE S UCH AN ISSUE. IN THAT CASE, THE ASSESSEE FILED THE RETURN OF INCOME FOR THE A.Y. 2007- 08 AND HAD SHOWN CERTAIN AMOUNT BY WAY OF HIS DEBTS . DURING THE COURSE OF ASSESSMENT PROCEEDINGS HE SUPPLIED THE DE TAILS OF 27 DIFFERENT CREDITORS. THE AO ISSUED SUMMONS TO ALL THESE SO CALLED CREDITORS AND QUESTIONED THEM ABOUT THE ALLEGED CRE DIT TO THE ASSESSEE. NUMBER OF PARTIES WERE NOT FOUND AT THE GIVEN ADDRESS AND MANY OF THEM WHO APPEARED BEFORE THE AO STATED THAT THEY HAD NO CONNECTION WITH THE ASSESSEE. SOME OF THEM EVEN CO NVEYED THAT THEY DO NOT KNOW THE ASSESSEE. ON THE BASIS OF SUCH FIN DING AND CONSIDERING THAT THE DEBTS WERE OUTSTANDING SINCE S EVERAL YEARS, THE AO APPLIED THE PROVISIONS OF SECTION 41(1) AND ADDE D THE ENTIRE AMOUNT AS INCOME OF THE ASSESSEE AS DEEMED INCOME. WHILE DOING SO, HE HELD THAT THE LIABILITY HAD SEIZED TO EXIST WITHIN THE MEANING OF SECTION 41(1) AND THEREFORE THE SAME SHOULD BE DEEM ED TO BE THE INCOME OF THE ASSESSEE. THE CIT(A) UPHELD THE ORDE R OF THE AO. ON 19 SECOND APPEAL THE TRIBUNAL DELETED THE ADDITION ON THE GROUND THAT THERE WAS NO FINDING THAT THE IMPUGNED LIABILITIES WERE TRADING LIABILITIES IN RESPECT OF WHICH THE ASSESSEE HAD OB TAINED ANY BENEFIT OR ADVANTAGE EITHER BY WAY OF THEIR REMISSION OR C ESSATION IN THE YEAR UNDER APPEAL. THE ASSESSEE HAD NOT WRITTEN OF F THE AMOUNT OF LIABILITIES SHOWN IN THE ACCOUNTS. THE AO HAS NOT BROUGHT SUFFICIENT MATERIAL ON RECORD TO ESTABLISH AS TO HOW THE INGRE DIENTS WERE SATISFIED SO AS TO BRING THE IMPUGNED ADDITIONS WIT HIN ITS AMBIT. ON FURTHER APPEAL BY THE REVENUE THE HONBLE HIGH COUR T UPHELD THE ORDER OF THE TRIBUNAL AND DISMISSED THE APPEAL FILE D BY THE REVENUE BY OBSERVING AS UNDER : 8. WE ARE IN AGREEMENT WITH THE VIEW OF THE TRIBUN AL. SECTION 41(1) OF THE ACT AS DISCUSSED IN THE ABOVE THREE DECISI ONS WOULD APPLY IN A CASE WHERE THERE HAS BEEN REMISSION OR CESSATI ON OF LIABILITY DURING THE YEAR UNDER CONSIDERATION SUBJECT TO THE CONDITIONS CONTAINED IN THE STATUTE BEING FULFILLED. ADDITIONALLY, SUCH CESSATION OR REMISSION HAS TO BE DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION. IN THE PRESENT CASE, BOTH ELEMENTS ARE MISSING. THERE WAS NOTHIN G ON RECORD TO SUGGEST THERE WAS REMISSION OR CESSATION OF LIAB ILITY THAT TOO DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR 2007-08 WHICH WAS THE YEAR UNDER CONSIDERATION. IT IS UNDOUBTEDLY A CURIOUS CASE. EVEN THE LIABILITY ITSELF SEEMS UNDER SERIOUS DOUBT. THE ASSESSING OFFICER UNDERTOOK THE EXERC ISE TO VERIFY THE RECORDS OF THE SO CALLED CREDITORS. MANY OF THEM WERE NOT FOUND AT ALL IN THE GIVEN ADDRESS. SOME OF THEM ST ATED THAT THEY HAD NO DEALING WITH THE ASSESSEE. IN ONE OR TWO CASES, TH E RESPONSE WAS THAT THEY HAD NO DEALING WITH THE ASSESSEE NO R DID THEY KNOW HIM. OF COURSE, THESE INQUIRIES WERE MADE EX PARTE AND IN THAT VIEW OF THE MATTER, THE ASSESSEE WOULD BE ALLOW ED TO CONTEST SUCH FINDINGS. NEVERTHELESS, EVEN IF SUCH FACTS WE RE ESTABLISHED THROUGH BI-PARTE INQUIRIES, THE LIABILITY AS IT STANDS PERHAPS HOLDS THAT THERE WAS NO CESSATION OR REMISSION OF LIABILITY AND THAT THEREFORE, THE AMOUNT IN QUESTION CANNOT BE ADDED BACK AS A DEEMED INCOME UNDER SECTION 41(C) F THE ACT. THI S IS ONE OF THE STRANGE CASES WHERE EVEN IF THE DEBT ITSELF IS FOUND TO BE NON- GENUINE FROM THE VERY INCEPTION, AT LEAST IN TERMS OF SECTION 41(1) OF THE ACT THERE IS NO CURE FOR IT. BE THAT AS IT MAY , INSOFAR AS THE ORDERS OF THE REVENUE AUTHORITIES ARE CONCERNED, THE TRIBUNAL NOT HAVING MADE ANY ERROR, THIS TAX APPEAL IS DISMISSED. 20 29. RESPECTFULLY FOLLOWING THE ABOVE DECISION OF TH E HONBLE GUJARAT HIGH COURT, WE ARE OF THE CONSIDERED OPINIO N THAT NO DISALLOWANCE U/S.41(1) IN THE INSTANT CASE CAN BE M ADE. THE GROUNDS RAISED BY THE ASSESSEE ON THIS ISSUE ARE ACCORDINGL Y ALLOWED AND THE GROUNDS RAISED BY THE REVENUE ARE DISMISSED. 30. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED AND THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON 27-05-2015. SD/- SD/- (SUSHMA CHOWLA) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBE R PUNE DATED: 27 TH MAY, 2015 SATISH COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE 2. DEPARTMENT 3. THE CIT(A)-II, PUNE 4. THE CIT-II, PUNE 5. THE D.R, A PUNE BENCH 6. GUARD FILE BY ORDER // TRUE COPY // ASSISTANT REGISTRAR ITAT, PUNE BENCHES, PUNE