Shri Divyakant Nanjibhai Patel, Baroda V. The ACIT.,Circle-3, Baroda

ITA 3371/AHD/2010

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 1723 (ITAT-AHMEDABAD)
• Duration Of Justice: 5 year(s) 4 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-05-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 08-03-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 21-12-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: NARENDRA SINGH
• Keywords: Unexplained cash credit; Business expenditure; Non-deduction of tax; Fair market value
• Section: 44AD; 143(3); 142(1); 194C; 37; 154; 68

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, AHMEDABAD BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI MANISH BORAD, ACCOUNTANT MEMBER ./ ITA NOS. 3371/AHD/2010 & 1888/AHD/2014 / ASSESSMENT YEAR: 2007-08 SHRI DIVYAKANT NANJIBHAI PATEL, 4, ATMAJYOTI NAGAR, ELLORA PARK, BARODA PAN : ADBPP 0842 M VS. ACIT, CIRCLE-3, BARODA [ / (APPELLANT) / (RESPONDENT) ASSESSEE BY : SMT. ARTI N. SHAH, AR REVENUE BY : SHRI NARENDRA SINGH, SR. DR. ! '# / DATE OF HEARING : 08/03/2016 / DATE OF PRONOUNCEMENT: 02/05/2016 $%/ O R D E R PER MANISH BORAD, ACCOUNTANT MEMBER: THESE TWO APPEALS ARE DIRECTED AT THE INSTANCE OF THE ASSESSEE; ONE RELATING TO QUANTUM ADDITION FOR THE ASSESSMENT YEAR 2007- 08 IS DIRECTED AGAINST THE ORDER OF LD. COMMISSIONER OF INCOME-TAX (AP PEALS)-II, BARODA DATED 29.09.2010 WHEREIN THE ASSESSMENT U/S 143(3) OF THE INCOME-TAX A CT (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 INCOME-TAX(APPEALS)-II, BARODA DATED 03.03.2014 AN D THE PENALTY U/S 271(1)(C) WAS FRAMED ON 30.03.2012 BY DCIT, CIRCLE-3, BARODA. 2. FIRST, WE WILL TAKE UP ITA NO.3371/AHD/2010. THE ASSESSEE H AS RAISED FOLLOWING GROUNDS IN THIS APPEAL:- 1. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS)-II, B ARODA HAS ERRED IN LAW AND ON FACTS OF THE CASE BY CONFIRMING THE ADDITION OF RS.21,01,300/- IN RESPECT OF DEPOSITS RECEIVED FROM SANJAY N. PATEL OF RS.7 ,51,300, FROM ITA NOS. 3371/AHD/2010 & 1888/AHD/2014 SHRI DIVYAKANT NANJIBHAI PATEL VS. ACIT AY : 2007-08 - 2 JAYABEN PATEL OF RS.8,50,000/- AND FROM BHARTIBEN PATEL O F RS.5,00,000/- U/S 68 OF THE INCOME-TAX ACT, 1961. 2. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS)-II, B ARODA HAS ERRED IN LAW AND ON FACTS OF THE CASE BY CONFIRMING THE DISALLOWAN CE OF RS.3,79,616/- IN RESPECT OF INTEREST PAID TO DEPOSITORS. 3. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS)-II, B ARODA HAS ERRED IN LAW AND ON FACTS OF THE CASE BY CONFIRMING THE DISALLOWANC E OF RS.22,70,824/- @ 15% OF RS.1,51,38,829/- PAID TO FIVE SUB-CONTRACTORS. 4. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS)-II, B ARODA HAS ERRED IN LAW AND ON FACTS OF THE CASE BY CONFIRMING THE DISALLOWANC E OF RS.43,18,175/- MADE U/S 40(IA) OF THE INCOME-TAX ACT, 1961 HOLDING THE SAME A S COMMISSION PAID BY THE APPELLANT TO PATEL INFRASTRUCTURE PVT LTD AND FOR NON-DEDUCTION OF TAX AT SOURCE THERE FROM. 3. BRIEFLY STATED FACTS, AS CULLED OUT FROM THE RECORDS, ARE THAT THE ASSESSEE IS AN INDIVIDUAL, ENGAGED IN THE BUSINESS OF CIVIL CONSTR UCTION WORK BY TAKING SUB- CONTRACTS FROM VARIOUS CONTRACTORS. RETURN OF INCOME F OR ASSESSMENT YEAR 2007-08 WAS FILED ON 31.10.2007 AT AN INCOME OF RS.16,52,490/- AND SHOWING GROSS TURNOVER DURING THE YEAR AT RS.5,19,75,858/-. THE CASE W AS 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 ASSES SMENT PROCEEDINGS, THE LD. ASSESSING OFFICER, WHILE EXAMININ G THE BOOKS OF ACCOUNTS, OBSERVED THAT THE ASSESSEE HAS TAKEN UNSECURED LOANS FRO M CERTAIN PARTIES WITH WHOM THE ASSESSEE WAS INVOLVED IN BUSINESS ACTIVITIES ALSO AND THESE IMPUGNED PARTIES WERE SUB-CONTRACTORS TO WHOM ASSESSEE PAID FOR GETTING THE WORK DONE AND FURTHER, OUT OF THESE VERY PAYMENTS ONLY, UNSECURED LOAN WAS TAKEN BY THE ASSESSEE. THE LD. ASSESSING OFFICER FURTHER OBSERVED T HAT THE ASSESSEE ON ONE HAND IS TRYING TO CLAIM EXPENDITURE BY WAY OF PAYING S UB-CONTRACT CHARGES TO THE IMPUGNED PARTIES WHICH ARE MOSTLY RELATED PARTIES T O THE ASSESSEE AS PER PROVISIONS OF SECTION 40A(2)(A) OF THE ACT AND FURTHER T AKING THE SAME AMOUNT AS UNSECURED LOAN DIRECTLY OR INDIRECTLY AND THEN AGAIN CLAIMING INTEREST EXPENDITURE ON THESE UNSECURED LOANS. TAKING THESE OB SERVATIONS IN HIS MIND, ITA NOS. 3371/AHD/2010 & 1888/AHD/2014 SHRI DIVYAKANT NANJIBHAI PATEL VS. ACIT AY : 2007-08 - 3 THE LD. ASSESSING OFFICER ASSESSED THE INCOME AT RS.1,08,43,953/ -, AFTER MAKING FOLLOWING THREE ADDITIONS:- I. ADDITION U/S 68 OF THE ACT FOR UNEXPLAINED / UNSECURE D LOANS AT RS.21,01,300/- AND INTEREST OF RS.3,79,616/- CLAIMED ON THE UNEXPLAINED CASH CREDITORS TOGETHER MAKING AN ADDITION OF RS.24,80,916/-. II ADDITION OF RS.22,70,824/- BY WAY OF DISALLOWANCE OF 15% OF SUB - CONTRACT CHARGES PAID TO RELATED PARTIES AT RS.1,51,38,829/- III DISALLOWANCE OF RS.43,18,175/- U/S 40(A)(IA) FOR NON-DEDUCTION OF TDS U/S 194H OF THE ACT ON THE DEEMED COMMISSION PAYME NT OF RS.43,18,175/-. 4. AGGRIEVED, THE ASSESSEE WENT IN APPEAL BEFORE THE LD . CIT(A) AND THE SAME WAS DISMISSED. 5. AGGRIEVED, THE ASSESSEE IS NOW IN APPEAL BEFORE THE TRIBU NAL. 6. FIRST, WE WILL TAKE UP GROUND NOS. 1 & 2 WHICH READ AS UNDER:- 1. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS)-II, B ARODA HAS ERRED IN LAW AND ON FACTS OF THE CASE BY CONFIRMING THE ADDITION OF RS.21,01,300/- IN RESPECT OF DEPOSITS RECEIVED FROM SANJAY N. PATEL OF RS.7 ,51,300, FROM JAYABEN PATEL OF RS.8,50,000/- AND FROM BHARTIBEN PATEL O F RS.5,00,000/- U/S 68 OF THE INCOME-TAX ACT, 1961. 2. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS)-II, B ARODA HAS ERRED IN LAW AND ON FACTS OF THE CASE BY CONFIRMING THE DISALLOWAN CE OF RS.3,79,616/- IN RESPECT OF INTEREST PAID TO DEPOSITORS. 6.1 THE LD. AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE MAD E FOLLOWING SUBMISSIONS WITH REGARD TO THE ADDITION OF DEPOSITS O F RS.21,01,300/- U/S. 68 OF THE INCOME-TAX ACT. 2.1 THE ASSESSING OFFICER HAS MADE ADDITIONS OF (I) RS.7,51,300/ - RECEIVED FROM SHRI SANJAY N. PATEL (II) RS.8,50,000/- RECEIVED FROM JAYABEN P. PATEL AND (III) RS.5,00,000/- FROM BHARTIBEN D. PATEL TOTALING TO RS.21,01,300/- AS UNEXPLAINED CASH CREDITS U/S 68 OF THE INCOM E 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 ITA NOS. 3371/AHD/2010 & 1888/AHD/2014 SHRI DIVYAKANT NANJIBHAI PATEL VS. ACIT AY : 2007-08 - 4 RS.7,51,300/- WITH CORPORATION BANK AS ON 01.04.2006 WAS OUT OF LABOUR PAYMENTS RECEIVED BY THE SAID HUF IN MARCH 2006. THE SAID HUF WAS WITHDRAWN RS.5,00,000 ON 13.07.2006 FOR GIVING LOAN TO SHRI SURESHBHAI AND THEREAFTER ON 14/07/2006 WITHDRAWN RS.2,00,000/- FOR MEETING BUSINESS EXPENSES AND RS.51,300/- WAS LYING IN THEIR BA NK-ACCOUNT AS BALANCE. 2.1.2 IT IS FURTHER SUBMITTED THAT COPY OF ACCOUNT OF SHRI SANJAY N. PATEL HUF FROM BOOKS OF THE APPELLANT HAS BEEN FILED FROM F.Y. 2004-05 TO 2006-07 WHICH SHOWS THAT SANJAY N. PATEL HUF WAS DOING SUB-CONTRACT WORK OF THE APPELLANT AND VARIOUS PAYMENTS WERE MADE TO THEM BY C HEQUES. COPY OF BANK STATEMENT OF SHRI SANJAY N. PATEL HUF FROM COR PORATION BANK IS ALSO SUBMITTED WHEREIN AMOUNT RECEIVED BY WAY OF SUBCONT RACT 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 T HE CORPORATION BANK THAT BALANCE OF RS.7,51,300/- WHICH STOOD TO THE CREDIT OF AC COUNT OF SANJAY N. PATEL HUF IS THE OPENING BALANCE AS ON 01/04/2 006. THE SAID BALANCE DOES NOT BELONG TO THE APPELLANT AND, THEREFORE, ADDIT ION BY WAY OF CASH CREDIT OF SUCH BALANCE STANDING IN THE NAME OF SANJ AY N. PATEL HUF WITH CORPORATION BANK CANNOT BE TREATED AS CASH CREDIT IN THE CASE OF THE APPELLANT. 2.2.1 AS REGARDS ADDITION BY WAY OF CASH CREDIT IN THE NAME OF JAYABEN N. PATEL AMOUNTING TO RS.8,50,000/- OUT OF TOTAL LOAN OF RS.10,00, 000/- ADVANCED BY JAYABEN PATEL TO THE APPELLANT, IT IS SUBMITTED THAT LOAN OF RS.5,00,000/- WAS RECEIVED BY CHEQUE ON 10/7/2006 BY THE APPELLAN T AND LOAN OF RS.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 FI LED. 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) RS. 3,00,000 31/03/2006 LOAN FROM D.N.PATEL (HUF) RS. 2,00,000 14/07/2006 LOAN FROM SUDHIR N. PATEL (HUF) RS. 2,50,000 14/07/2006 LOAN FROM D.N.PATEL (HUF) RS. 2,50,000 ----------------- TOTAL. RS.10,00,000 2.2.3 THUS, SOURCE OF LOAN ADVANCED BY JAYABEN N. PATEL HAS BEE N DULY EXPLAINED. THEREFORE, ADDITION MADE BY THE ASSESSING OFFICER BY WAY OF CASH CREDIT U/S 68 OF THE INCOME TAX ACT, 1961 OF AMOUNT OF RS.8,50,000/- OUT OF RS.10,00,000/- IS TOTALLY UNJUSTIFIABLE AND NEEDS TO BE DELETED. ITA NOS. 3371/AHD/2010 & 1888/AHD/2014 SHRI DIVYAKANT NANJIBHAI PATEL VS. ACIT AY : 2007-08 - 5 2.3.1 AS REGARDS ADDITION BY WAY OF CASH CREDIT IN THE NAME OF BHARTIBEN D.. PATEL AMOUNTING TO RS.5,00,000/- ADVANCED BY BHARTIBEN D. PAT EL TO THE APPELLANT, IT IS SUBMITTED THAT LOAN BY WAY OF CHEQUE OF RS.5,00,000/- WAS RECEIVED ON 10/7/2006 BY THE APPELLANT. THIS PAYMENT IS DULY REFL ECTED AS WITHDRAWAL IN THE COPY OF BANK ACCOUNT OF BHARTIBEN D.. PATE L WITH CANARA BANK. FURTHER, CONFIRMATION OF BHARTIBEN D. PAT EL ALONG WITH PAN NO. J AND COPY OF INCOME-TAX RETURN HAVE ALSO BEEN FI LED. SOURCE OF DEPOSIT MADE IN THE ACCOUNT OF BHARTIBEN D. PATEL HAVE BE EN DULY EXPLAINED AS UNDER : 31/03/2006 LOAN FROM SUDHIR N. PATEL (HUF) RS. 2,00,000 31/03/2006 LOAN FROM D.N.PATEL (HUF) RS. 3,00,000 ----------------- TOTAL RS. 5,00,000 2.3.2 THUS, SOURCE OF LOAN RECEIVED FROM BHARTIBEN D. PATE L HAS BEEN DULY EXPLAINED. THEREFORE, ADDITION MADE BY THE ASSESSING OFFI CER BY WAY OF CASH CREDIT U/S 68 OF THE INCOME TAX ACT, 1961 OF AMOUNT OF R S.5,00,000/-- IS TOTALLY UNJUSTIFIABLE AND NEEDS TO BE DELETED. FOR THIS PURPOSE, WE 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 SU BMITTED AS UNDER WITH REGARD TO THE DISALLOWANCE OF INTEREST OF RS.3,79,616/- ON LOAN.:- 3.1 THE ASSESSING OFFICER HAS DISALLOWED INTEREST OF RS. 1,67,898/- IN RESPECT OF LOAN OF RS. 8,50,000/-- FROM JAYABEN N. PATEL AND RS.2,1 1,718 /-- IN RESPECT OF LOAN OF RS. 5,00,000/-- FROM BHARTIBEN D. PATEL. IT IS SUB MITTED THAT AS STATED ABOVE, LOANS FROM BOTH THE PARTIES ARE GENUINE AND ARE DULY PROVED BY THE APPELLANT. THEREFORE, CONSEQUENTIAL DISALLOWANCE OF IN TEREST OF RS. 3,79,616/- IN RESPECT OF ABOVE CHARGES BE DELETED. WE BEG TO POINT OUT THAT THERE BEING MISTAKE IN CALCULATION OF INTEREST TO BOTH, BY ORDER U/S 154 DAT ED 02/03/2010, DISALLOWANCE HAS BEEN REDUCED TO RS.73,593/- AND RS.43,562/- RESPECTIVE LY. 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 MA TERIAL ON RECORD. TWO ISSUES ARE RAISED BEFORE US BY WAY OF THESE GROUN DS AGAINST THE ORDER OF LD. ITA NOS. 3371/AHD/2010 & 1888/AHD/2014 SHRI DIVYAKANT NANJIBHAI PATEL VS. ACIT AY : 2007-08 - 6 CIT(A) TOWARDS ADDITION OF RS.21,01,300/- U/S 68 OF THE ACT AND DISALLOWANCE OF INTEREST OF RS.3,79,616/- CLAIMED BY THE ASSESSEE ON THE IMPUGNED UNSECURED LOANS OF RS.21,01,300/-. AS REGARD THE ADDITION OF RS.21,01,300/-, THE SAME HAS BEEN MADE U/S 68 OF THE ACT FOR UNSECURED LOANS FROM FOLLOWING PAR TIES:- I) SANJAY N. PATEL HUF - RS.7,51,300 II) JAYABEN P. PATEL - RS.8,50,000 III) BHARTIBEN D. PATEL - RS.5,00,000 -------------- RS.21,01,300 ========= FROM GOING THROUGH THE RECORDS, WE FIND THAT THE ADD ITION OF RS.7,51,300/- MADE IN THE CASE OF SANJAY N. PATEL HUF IS NOT THE AMOUNT OF UNSECURED LOAN TAKEN BY THE ASSESSEE DURING THE YEAR, BU T THIS IS A CLOSING BANK BALANCE IN THE BANK ACCOUNT OF SANJAY N. PATEL HUF WHICH L D. ASSESSING OFFICER BELIEVES THAT THIS AMOUNT WAS PREVIOUSLY GIVEN BY THE ASSESSEE DURING ASSESSMENT YEAR 2006-07 TO SANJAY N. PATEL HUF TOWARDS SUB-C ONTRACT CHARGES AND DURING THE YEAR UNDER APPEAL THIS WAS A PART OF UNSECU RED LOAN TAKEN BY THE ASSESSEE. SIMILARLY, IN THE CASE OF JAYABEN P. PATEL, OU T OF THE TOTAL UNSECURED LOAN TAKEN DURING THE YEAR AT RS.10,00,000/-, ADDIT ION OF RS.8,50,000/- HAS BEEN MADE BY LD. ASSESSING OFFICER; HOWEVER, IN THE CASE OF BHARTI D. PATEL, UNSECURED LOAN OF RS.5,00,000/- RECEIVED DURI NG THE YEAR HAS BEEN DISALLOWED U/S 68 OF THE ACT. WE FURTHER OBSERVE T HAT THERE WAS AN OPENING CREDIT BALANCE ON UNSECURED LOAN STANDING IN T HE BOOKS OF ACCOUNTS OF THE ASSESSEE IN THE NAME OF SANJAY N. PATEL HUF AT RS.9,20,553/ -, IN THE NAME OF JAYABEN N. PATEL AT RS.6,06,151/- AND IN THE CASE OF BHARTI D. PA TEL AT RS.14,09,318/-. THIS MEANS THAT ALL THESE PARTIES HAVE NOT GIVE N UNSECURED LOANS TO THE ASSESSEE FOR THE FIRST TIME, RATHER THEY H AVE A REGULAR CREDIT BALANCE OF UNSECURED LOANS GIVEN TO THE ASSESSEE SINCE PAST WH ICH GETS STRENGTHEN BY THE COPIES OF THE LEDGER ACCOUNT AVAILABLE IN THE PAPER-BOOK. ITA NOS. 3371/AHD/2010 & 1888/AHD/2014 SHRI DIVYAKANT NANJIBHAI PATEL VS. ACIT AY : 2007-08 - 7 7.1 WE FURTHER OBSERVE THAT THE LD. ASSESSING OFFICER, WH ILE GOING AHEAD WITH THE IMPUGNED ADDITION OF RS.21,01,300/-, WAS HAVING A VIEW IN HI S MIND THAT THE ASSESSEE HAS GIVEN SUB-CONTRACT TO THE RELATED PARTI ES COVERED 40A(2)(A) IN SUCH A WAY THAT THESE RELATED PARTIES WILL SHOW THE SU B-CONTRACT CHARGES RECEIVED BY THEM IN THEIR RESPECTIVE REGULAR RETURN OF INCOME AND WILL SHOW INCOME @ 8% BY COVERING THEMSELVES UNDER THE PROVISI ONS OF SECTION 44AD OF THE INCOME-TAX ACT AND ON THE OTHER HAND, THE ASSESSEE W ILL CLAIM THEM AS AN EXPENDITURE AGAINST HIS TOTAL RECEIPTS AS CIVIL CONTRACT WORK. THE LD. ASSESSING OFFICER ALSO OBSERVED THAT ALL THESE PARTIES RECEIVED T HE PAYMENT FOR THE SUB- CONTRACT CHARGES FROM THE ASSESSEE AND AFTER UTILIZING A VERY MINOR PART OF THE AMOUNT RECEIVED TOWARDS BUSINESS EXPENDITURE, BALANCE W AS 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 S OME 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 PARTIES, I.E., JAYABEN N. PATEL AND BHARTI PATEL FINALLY TRANSFERRED THE MONEY BACK TO THE ACCOUNT OF TH E ASSESSEE AS AN UNSECURED LOAN AND IN VIEW OF THE ASSESSING OFFICER, T HE PAYMENT MADE TO SUDHIR KR. N. PATEL HUF AND D. N. PATEL HUF HAS CLAIMED AS AN EXPENDITURE AS SUB-CONTRACT CHARGES AND THIS EXPENDITURE WAS FURTHER R OUTED THROUGH JAYABEN PATEL AND BHARTI PATEL FINALLY CAME BACK TO THE ASSESSEE S ACCOUNT AS UNSECURED LOANS. SIMILARLY, IN THE CASE OF SANJAY N. PATEL HUF, THE L D. ASSESSING OFFICER OBSERVED THAT OUT OF THE PAYMENTS MADE TOWARDS SUB-CONT RACT CHARGES DURING THE ASSESSMENT YEAR 2006-07, MOST OF THE AMOUNT REMAINED UN UTILIZED UPTO 31 ST MARCH 2006 AND THE BANK BALANCE IN THE ACCOUNT OF SANJAY N PAT EL HUF STOOD AT RS.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 FIRST IT CLAIMS THE AMOU NT AS AN EXPENDITURE PAID TO THE RELATED PARTIES AND THEN AGAIN ROUTING THE SAME AMO UNT AS UNSECURED ITA NOS. 3371/AHD/2010 & 1888/AHD/2014 SHRI DIVYAKANT NANJIBHAI PATEL VS. ACIT AY : 2007-08 - 8 LOAN IN ITS BUSINESS, THEREBY INTENTIONALLY REDUCING ITS ACTUAL PROFITS BY WAY OF MAKING SUCH ADJUSTMENTS. 7.2 WE FIND THAT THERE IS NO DISPUTE TO THE FACT FROM T HE SIDE OF THE REVENUE BEFORE BOTH THE LOWER AUTHORITIES THAT THE IDENTITY AND GENUINENESS OF TRANSACTIONS HAVE BEEN PROVED BEYOND DOUBT IN THE CASES OF SANJAY N. PATEL HUF, JAYABEN N. PATEL AND BHARTI PATEL, AS THE AMOUNTS RECEI VED AS UNSECURED LOANS ARE THROUGH ACCOUNTS PAYEE CHEQUE AND REGULAR RETU RNS OF INCOME ARE BEING FILED BY THESE THREE PARTIES AND THEIR RELATED P ROOFS ARE PLACED ON RECORD. THE ONLY BASIS FOR MAKING THIS ADDITION BY THE LD. ASSE SSING OFFICER WAS LACK OF CREDITWORTHINESS, BECAUSE, AS PER LD. ASSESSING OFFICER, THESE PARTIES DID NOT HAD SUFFICIENT AVAILABILITY OF FINANCE FOR INCURRING TH E EXPENDITURE FOR COMPLETION OF SUB-CONTRACT WORK GIVEN TO THEM AND JUS T BY TAKING THE SHELTER OF PROVISIONS OF SECTION 44AD THEY ARE ABLE TO SHOW THE IN COME @ 8% ON SUB- CONTRACT CHARGES RECEIVED ON THE ASSESSEE AND NO OTHER REGULAR SOURCE OF INCOME THEREBY PAYING A VERY MEAGER AMOUNT OF TAX AND THAT TOO GETS ADJUSTED AGAINST THE TAX DEDUCTED AT SOURCE BY THE ASSESSEE ON THE SUB- CONTRACT CHARGES PAID TO THESE PARTIES. 7.3 WE FURTHER OBSERVE THAT, WHILE COMPLETING THE ASSESSM ENT, THE LD. ASSESSING OFFICER HAS NOT TOUCHED UPON THE ACTUAL ACTI VITIES CARRIED OUT BY THE ASSESSEE AND HAS NOT APPRECIATED 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 P ATEL INFRASTRUCTURE PVT LTD, VRAJ & VAJ CONSTRUCTIONS, ESSAR CONSTRUCTION (INDI A) LIMITED. THE LD. ASSESSING OFFICER HAS ALSO NOT APPRECIATED THAT THERE AR E DETAILED WORK ORDERS FROM THESE THREE PARTIES FROM WHOM CONTRACT WORK HAS B EEN RECEIVED AND THE SAME HAVE BEEN COMPLETED BY THE ASSESSEE TO THEIR SATIS FACTION, WHICH MEANS THAT THERE IS NO OBJECTION ON THE PART OF THE LD. ASSE SSING OFFICER ON THE ACTUAL BUSINESS ACTIVITIES PERFORMED BY THE APPELLANT. THE LD . ASSESSING OFFICER OUGHT TO HAVE APPRECIATED THAT THE IMPUGNED UNSECURED LOANS R ECEIVED FROM SANJAY ITA NOS. 3371/AHD/2010 & 1888/AHD/2014 SHRI DIVYAKANT NANJIBHAI PATEL VS. ACIT AY : 2007-08 - 9 PATEL HUF, JAYENBEN PATEL AND BHARTI PATEL AT RS.7,51,300/-, RS.8,50,000/- AND RS.5,00,000/- RESPECTIVELY ARE FINDING THEIR SOURCE FROM THE REGULAR BOOKS OF ACCOUNTS OF THESE PARTIES THROUGH ACCOUNT PAYEE CHEQUES FROM THE BANK ACCOUNTS REGULARLY USED FOR CARRYING ON BUSINESS ACTIVI TIES AND THEY WERE PLACED ON RECORD DURING THE ASSESSMENT PROCEEDINGS ALS O AND NO DEFECT WAS POINTED OUT. FURTHER, ALL THE THREE CASH CREDITORS WE RE CALLED FOR GIVING STATEMENTS BEFORE THE ASSESSING AUTHORITIES AND THEY AL L 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. ASSES SING OFFICER ALSO SHOULD HAVE APPRECIATED THAT ALL THESE PARTIES WERE APPEARING UND ER UNSECURED LOAN LIST ON THE OPENING OF THE YEAR UNDER APPEAL AND NO ADDI TION WAS MADE DURING THE ASSESSMENT COMPLETED U/S 143(3) OF THE ACT FOR ASSES SMENT YEARS 2005-06 AND 2006-07 WHICH FURTHER SUPPORTS THE VIEW THAT THE IDEN TITY, GENUINENESS AND CREDITWORTHINESS OF THESE THREE CASH CREDITORS HAVE B EEN ACCEPTED BY THE REVENUE IN PAST YEARS ALSO, WHEREIN SIMILAR TRANSACTIONS WERE CARRIED OUT AND UNSECURED LOANS WERE GIVEN. 7.4 WE ARE, THEREFORE, OF THE VIEW THAT THE APPELLANT HAS BE EN ABLE TO PROVE THE IDENTITY, GENUINENESS AND CREDITWORTHINESS OF SANJ AY PATEL HUF, JAYABEN PATEL AND BHARTI PATEL REPEATEDLY AND CERTAINLY, WHEN THER E IS A PROVISION OF SHOWING INCOME @ 8% ON THE CIVIL CONSTRUCTION RECEIP TS U/S 44AD OF THE ACT, THEN THE PARTIES TAKING SUB-CONTRACT WORK ARE FREE ENOU GH TO GET THEMSELVES COVERED UNDER THE PROVISIONS EMBEDDED IN THE STATUTE . THE LD. ASSESSING OFFICER HAS NOT RAISED ANY DOUBT IN THE BOOKS OF ACCOUN TS AS THE SAME HAVE NOT BEEN REJECTED U/S 145(3) OF THE ACT AND NO SPECIFIC DEFE CT IN THE ACTUAL WORKING OF THE APPELLANT HAS BEEN POINTED OUT IN ITS BOOKS OF ACCOUNTS AND ABOVE ALL CONSTRUCTION WORK HAS BEEN COMPLETED TO THE SATISFACT ION OF CONTRACT AWARDERS, THEN IN SUCH SITUATION LD. ASSESSING OFFICER WAS NOT C ORRECT IN MAKING THE ADDITION OF RS.20,01,300/-. WE ACCORDINGLY DELETE THE SAME AND ALLOWED THE GROUND OF THE ASSESSEE. ITA NOS. 3371/AHD/2010 & 1888/AHD/2014 SHRI DIVYAKANT NANJIBHAI PATEL VS. ACIT AY : 2007-08 - 10 7.5 GROUND NO.2, WHICH RELATES TO DISALLOWANCE OF RS.3,79,616/- IN RESPECT OF INTEREST PAID TO DEPOSITORS, IS ALSO GOING IN FAVOUR OF THE ASSESSEE AS THE SAME IS CONSEQUENTIAL, BECAUSE AS WE HAVE ALREADY HELD THAT NO ADDI TION IS CALLED FOR TOWARDS THE UNSECURED LOANS OF RS.20,01,300, THEN CERTAINLY ASSES SEE WILL BE ELIGIBLE FOR CLAIMING INTEREST OF RS.3,79,616/- IN RESPEC T OF INTEREST PAID TO DEPOSITORS. ACCORDINGLY, THIS GROUND OF THE ASSESSEE IS ALSO ALLOWED. 8. GROUND NO. 3 OF THE ASSESSEES APPEAL READS AS UNDER:- THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS)-II, B ARODA HAS ERRED IN LAW AND ON FACTS OF THE CASE BY CONFIRMING THE DISALLOWANCE O F RS.22,70,824/- @ 15% OF RS.1,51,38,829/- PAID TO FIVE SUB-CONTRACTORS. 8.1 IN THIS REGARD, THE LD. AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE SUBMITTED AS UNDER:- 4.1 THE ASSESSING OFFICER VIDE LETTER DATED 21/12/2009 CALLED UP ON THE APPELLANT TO EXPLAIN AS TO WHY 15% OF THE LABOUR EXPENSES TO FIVE PARTIES SHOULD NOT BE DISALLOWED. 4.2 THE APPELLANT, VIDE LETTER DATED 24/12/2009, DULY EXPLAINED T HAT ALL THE LABOUR PAYMENTS WERE GENUINE AND WERE INCURRED WITH REFER ENCE TO SUB-CONTRACT WORK CARRIED OUT BY THE APPELLANT. THE PAYMENTS MADE WERE A T RATES LOWER THAN THE PREVAILING MARKET RATE AT THE RELEVANT TIME. IT WAS A LSO 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) RS. 29,72,529/- (II) SANJAY N. PATEL (HUF) RS. 30,22,313/- (III) SUDHIR N. PATEL (HUF) RS. 30,12,416/- (IV) N.B.PATEL (HUF) RS. 31,54,921/- (V) BHARAT N. HIRPARA RS. 29,76,650/- ----------------- RS. 1,51,3 8,829/- OUT OF THE ABOVE PARTIES, BHARAT N. HIRPARA IS NOT RELATED U/S 40 A(2)(A) 4.4 THE APPELLANT ENCLOSES HEREWITH A CHART SHOWING COMPARI SON OF RATES QUOTED BY THE ABOVE PARTIES WITH THE RATES QUOTED BY OTHER PA RTIES WHICH WERE ITA NOS. 3371/AHD/2010 & 1888/AHD/2014 SHRI DIVYAKANT NANJIBHAI PATEL VS. ACIT AY : 2007-08 - 11 GIVEN DURING THE ASSESSMENT PROCEEDINGS FOR A.Y.2005-06 AND THE' ASSESSING OFFICER AFTER CONSIDERING THE SAME HAS ACCEPTED PAYMENTS TO RELATED PARTIES AS BEING REASONABLE AND NO ADDITION WAS MADE ON THIS ACCOUN T 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 WHEREI N NO SUCH ADDITION HAS BEEN MADE BY THE ASSESSING OFFICER AFTER THE SCRUTINY. 4.5 IT IS, THEREFORE, SUBMITTED THAT PAYMENTS TO SUB-CONT RACT LABOUR ARE ALL GENUINE AND RATE PAID ARE REASONABLE CONSIDERING THE P REVAILING MARKET RATE AND, THEREFORE, IT IS SUBMITTED THAT AD-HOC DISALLOWANCE WITHOUT ANY BASIS OF 15% OF RS.22,70,8247- BE SET ASIDE. 8.2 THE LD. DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, SUPPORTED THE ORDERS OF THE LOWER AUTHORITIES. 9. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MA TERIAL ON RECORD. THE ISSUE BEFORE US IN THIS GROUND IS AGAINST THE ORD ER OF THE LD. CIT(A) IN CONFIRMING THE DISALLOWANCE OF RS.22,70,824/- CALCULATED @ 15% O F RS.1,51,38,829/- PAID TO SUB-CONTRACTORS BEING RELATED PARTIES U/S 40A(2)(A) OF THE INCOME-TAX ACT. DURING THE COURSE OF ASSESSMENT PR OCEEDINGS, LD. ASSESSING OFFICER OBSERVED THAT PAYMENT OF RS.1,51,38,829/- TOWARDS LABOU R CHARGES HAS BEEN MADE TO THE FOLLOWING FIVE PARTIES:- I) D.N. PATEL HUF - RS.29,72,529/- II) SANJAY KR. N. PATEL HUF - RS.30,22,313/- III)SUDHIR KR. N. PATEL HUF - RS.30,12,416/- IV)N.B. PATEL HUF - RS.31,54,921/- V) BHARAT HIRAPARA - RS.29,76,650/- ---------------- -- TOTAL - RS.1,51,38,829/- ------------------- OUT OF THE FIVE PARTIES, BHARAT HIRAPARA IS NOT A RELATE D PARTY U/S 40A(2)(A) OF THE INCOME-TAX ACT AS SUBMITTED BY THE LD. A UTHORIZED REPRESENTATIVE WHICH REDUCES THE IMPUGNED PAYMENT TO RELATED PARTIES TO RS.1,21,62,179/-. THE ONLY REASON GIVEN BY THE LD. ASSESSING O FFICER IN ITS ORDER WAS THAT SINCE THE PAYMENTS ARE MADE TO RELATED OR KNOW N PARTIES, THE ASSESSEE CAN RELY ON THEM AND CAN REQUEST THEM TO WAIT FOR THE DUE PAYMENTS AND ITA NOS. 3371/AHD/2010 & 1888/AHD/2014 SHRI DIVYAKANT NANJIBHAI PATEL VS. ACIT AY : 2007-08 - 12 THEREFORE, TOOK A VIEW THAT 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 RS.22,70,824/-. THIS HAS BEEN A SETTLED VIEW THAT THE EXPENDITURE INCURRED IN A BUSINESS OR PROFESSION FOR WHICH PAYME NT HAS BEEN OR IS TO BE MADE TO THE TAX PAYERS RELATIVES OR ASSOCIATE CONCERNS I S LIABLE TO BE DISALLOWED IN COMPUTING THE PROFITS OF THE BUSINESS OR PROFESS ION TO THE EXTENT THE EXPENDITURE IS CONSIDERED TO BE EXCESSIVE OR UNREASO NABLE AND FURTHER THE REASONABLENESS OF ANY EXPENDITURE IS TO BE JUDGED HAVIN G REGARD TO THE FAIR MARKET VALUE OF THE GOODS, SERVICES OR FACILITIES FOR WHICH THE PAYMENT IS MADE OR ACCRUING TO, THE TAX PAYER FROM THE EXPENDITURE. FOR MAKING ANY SUCH ADDITION, IT WILL BE NECESSARY FOR THE ASSESSING OFFIC ER TO SCRUTINIZE THE REASONABLENESS OF THE EXPENDITURE AND TO EXERCISE HIS JUDGMENT IN A REASONABLE AND FAIR MANNER AND TO SATISFY THAT THERE IS NO ATTEMPT T O 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 AS CERTAIN THAT THESE RELATED PARTIES HAS BEEN PAID ON A HIGHER RATE OR EXCESS AMOUNT IN COMPARISON TO THE GENERAL MARKET RATE. WE ALSO OBSERVE TH AT THE DETAILED RATE- WISE CHART IS AVAILABLE ON RECORD WHICH THE RELATED PART IES 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-CONTRAC TORS TO RELATED PARTIES HAVE BEEN MADE U/S 40A(2)(B) OF THE ACT DURING THE ASSESS MENT PROCEEDINGS COMPLETED U/S 143(3) OF THE ACT FOR ASSESSMENT YEAR 2005-06 AND 2006-07. IN SUCH SITUATION, WHEN THERE IS A COMPLETE ABSENCE OF SP ECIFIC WORKING WHICH SHOULD HAVE BEEN CARRIED ON BY THE LD. ASSESSING OFFI CER TO ARRIVE AT A DECISION THAT EXCESSIVE PAYMENTS HAVE BEEN MADE TO THE RELATED PAR TIES IN COMPARISON WITH THE FAIR MARKET RATES AS WELL AS COMPARISON WITH THE RATES O F WORK AWARDED BY THE APPELLANT TO ITS OTHER SUB-CONTRACTORS AND ALSO I N THE GIVEN SITUATION ITA NOS. 3371/AHD/2010 & 1888/AHD/2014 SHRI DIVYAKANT NANJIBHAI PATEL VS. ACIT AY : 2007-08 - 13 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, THERE FORE, DELETE THE ADDITION OF RS.22,70,824/- MADE BY THE LD. ASSESSING OFFICER AND ALLOW THIS GROUND OF APPEAL OF THE ASSESSEE. 10. LAST GROUND OF THE ASSESSEES APPEAL READS AS UNDER:- THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS)-II, B ARODA HAS ERRED IN LAW AND ON FACTS OF THE CASE BY CONFIRMING THE DISALLOWANCE OF RS.43,18,175/- MADE U/S 40(IA) OF THE INCOME-TAX ACT, 1961 HOLDING THE SAME AS C OMMISSION PAID BY THE APPELLANT TO PATEL INFRASTRUCTURE PVT LTD AND FOR NON-DEDUCTION OF TAX AT SOURCE THERE FROM. 10.1 THE LD. ASSESSING OFFICER, WHILE MAKING ADDITION OF RS.43,18,175/- TOWARDS NON-DEDUCTION OF TDS U/S 194H ON THE DEEMED COM MISSION PAYMENT MADE BY THE ASSESSEE TO PATEL INFRASTRUCTURE PVT LTD (P IPL) (WHO IS THE MAIN CONTRACTOR AND THE APPELLANT HAS TAKEN THE SUB-CONTRACT WO RK FOR THE WHOLE CONTRACT WORK TAKEN BY PIPL FROM GOVERNMENT), HAS OBSER VED AS UNDER IN THE ASSESSMENT ORDER:- PIPL IS SHOWING THE WORK DONE IN HIS BOOKS. HE HAS DEDUCTED TDS ON THE FULL AMOUNT. ASSESSEE HAS ATTACHED THE SAME TDS CERTI FICATE FOR THE PURPOSE OF SHOWING PREPAID TAXES. IN HIS AUDITED BOOKS ALSO, HE IS T AKING THE ENTIRE AMOUNT AS WORK DONE AND FROM THERE HE IS SUBSTRACTING SUB-CONTR ACT CHARGES. IN THE WHOLE DISCUSSION, IT IS PIPL WHICH GETS A CLEAN CHIT AND NO T THE ASSESSEE. IF PIPL IS GIVING CONTRACT ON BACK TO BACK BASIS THEN HE IS CHA RGING THE COMMISSION THROUGH WHATEVER NAME HE MIGHT CHOOSE AND INSTEAD OF TAKING F ROM THE ASSESSEE AFTER PAYING THE ENTIRE AMOUNT, 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 SU CH INCOME TO THE ACCOUNT OF PAYEE OR AT THE TIME OF PAYMENT. WHICHEVER IS EARLIER, DEDU CT INCOME TAX THEREON AT THE RATE OF 10%. THEREFORE THE SAID AMOUNT OF RS.43,18,175/- SHOWN AS SUBCONTRACT EXPENSE IS ADDED TO THE INCOME OF THE ASSESSEE. ITA NOS. 3371/AHD/2010 & 1888/AHD/2014 SHRI DIVYAKANT NANJIBHAI PATEL VS. ACIT AY : 2007-08 - 14 10.2 WHEN THE ASSESSEE WENT IN APPEAL BEFORE THE LD. CIT(A ) AGAINST THE IMPUGNED ADDITION, THE GROUND OF THE ASSESSEE WAS REJE CTED AND ADDITION OF RS.43,18,175/- WAS CONFIRMED BY THE LD. CIT(A) BY OBSERVING AS UNDER: - 3.3. I HAVE GIVEN CAREFUL CONSIDERATION TO THE FACTS AS NOTE D ABOVE AND THE SUBMISSIONS OF THE APPELLANT. ACTUAL AMOUNT DEDUCTED FR OM THREE BILLS @ 10.5% IS RS.32,16,044/- AND NOT RS.22,00,235/- THE ASSESSING OFFIC ER MAY LOOK INTO IT. BE AS IT MAY, IT HAS BEEN ARGUED THAT IT HAD TAKEN CONTR ACT AT BACK-TO-BACK BASIS FROM M/S. PIPL WHICH IN TURN HAD TAKEN CONTRACT WITH THE G OVERNMENT. THE APPELLANT'S CONTENTION IS NOT CONSIDERED TRUE. WHEN GO VERNMENT GIVES A CONTRACT IT IS BASED ON SEVERAL FACTORS AND A CONTRAC TOR HAS TO SATISFY THOSE CONDITIONS. APPARENTLY CONTRACTOR CANNOT PASS THE FULL CO NTRACT 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 SET PROCEDURE OF AWARDING CONTRACT BY GOVERNMENT AGENCIES AND WHAT THE APPE LLANT IS CANVASSING DOES NOT FIT INTO THAT PROCEDURE. THE APPELLANT HAS NOT PRODUCED CONTRACT AGREEMENT BETWEEN PIPL AND THE GOVERNMENT OR ANY DOCUMENT TO ESTABLISH THAT PIPL HAS INFORMED THE GOVERNMENT THAT IT HAS PASSED ON THE CONTRACT TO A SUB CONTRACTOR IN TOTALITY. IN THE ABSENCE OF THESE DOCU MENTS IT HAD TO BE PRESUMED THAT FOR THE PURPOSE OF GOVERNMENT THERE IS NO SUB CONTRACT AND THE WORK IS EXECUTED AS IF THE PIPL IS WORKING ITSELF. IN O THER WORDS THE APPELLANT IS WORKING ON THE SITE CAMOUFLAGING AS PIPL, SO FAR AS T HE GOVERNMENT IS CONCERNED. THIS CAN HAPPEN ONLY WHEN PIPL IS PAID COMMI SSION TO PASS ON THE CONTRACT TO THE APPELLANT. THE SECOND POSSIBLE SCENAR IO IS THAT CONTRACT HAS BEEN PASSED ON THE APPELLANT AFTER TAKING GOVERNMENT APPRO VAL. 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 RETAINED BY M/S. PIPL IS NOTHING BUT A COMMISSION PAID BY THE APPELLANT FOR PA SSING ON THE CONTRACT WORK TO THE APPELLANT. THE FACT THAT MONEY HAD COME FIRST IN TO THE HAND OF PIPL WOULD NOT ALTER THE BASIC NATURE OF THE TRANSACTION. SINCE T HE TRANSACTION BETWEEN PIPL AND THE APPELLANT IS NOT IN THE NATURE OF A PROPER SUB CONTRACT, THE ARGUMENT OF THE APPELLANT IS NOT SUSTAINABLE. IT IS NOT EXPLAINE D THAT IF THE MONEY RETAINED BY THE PIPL IS NOT IN THE NATURE OF COMMISSION, THEN WHAT IT IS. AFT ER ALL PIPL IS NOT DOING ANYTHING ELSE EXCEPT ACTING IN REALITY AS A FRON TMAN OF THE APPELLANT BEFORE THE PRINCIPAL CONTRACTEE. THE ASSESSING OFFICER HAS RIG HTLY POINTED OUT THAT THERE HAS BEEN DEFAULT IN SO FAR AS THE TDS PROVISIONS ARE CO NCERNED 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 RS.43,18,175/- U/S 40(IA) OF TH E ACT, THE LD. AUTHORIZED REPRESENTATIVE SUBMITTED AS UNDER:- ITA NOS. 3371/AHD/2010 & 1888/AHD/2014 SHRI DIVYAKANT NANJIBHAI PATEL VS. ACIT AY : 2007-08 - 15 5.1 THE ASSESSING OFFICER HAS STATED THAT THE APPELLAN T HAS ENTERED INTO SUB- CONTRACT AGREEMENT WITH PATEL INFRASTRUCTURE PVT. LTD. (P IPL) ON BACK TO BACK BASIS AND DEDUCTION FROM GROSS BILL RECEIVED BY PIPL REP RESENTED COMMISSION ON WHICH THE APPELLANT HAS FAILED TO DEDUCT TDS U/S 194H OF THE I.T. ACT, 1961 AND, THEREFORE, PAYMENT DEDUCTED FROM GROSS BILLING WAS LIABLE TO BE DISALLOWED U/S 40(IA) OF THE I.T. ACT, 1961. 5.2 IT IS SUBMITTED THAT PIPL IS THE MAIN CONTRACTOR AND THE APPELLANT HAS TAKEN SUBCONTRACT FROM THEM. AS PER THE SUB-CONTRACT AGREEM ENT, 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-CONTRA CT AGREEMENT ENTERED INTO WITH PIPL IS SUBMITTED IN THE PAPER BOOK AT PAGE NOS. 54 TO 56. IT IS CLEAR FROM THE AGREEMENT THAT THE APPELLANT IS WORKI NG AS SUB-CONTRACTOR TO PIPL AND THE INCOME TAX WAS TO BE DEDUCTED IN RESPECT OF N ET AMOUNT OF BILLING I.E. AFTER DEDUCTION OF 10.50 % FROM THE GROSS BILL AMOUNT. 5.3 IT IS FURTHER SUBMITTED THAT THERE IS NO DIRECT CO NTRACT AGREEMENT BETWEEN THE APPELLANT AND THE GOVERNMENT AND, THEREFORE, QUESTION OF GIVING COMMISSION ON THE AMOUNT AT 10.50% (DEDUCTED FROM THE BILL BY PIPL) DOES NOT ARISE AT ALL. ON THE CONTRARY, CONTRACT WITH GOVERNMENT IS ENTERED WITH B Y PIPL, PAYMENT FROM GOVERNMENT IS RECEIVED BY PIPL AND THE SAME IS PASSE D 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 SEC TION 194C, WHILE ON THE OTHER HAND, THE ASSESSING OFFICER WANTS TO TREAT REDUCTI ON IN GROSS AMOUNT RECEIVED FROM THE GOVERNMENT BY PIPL AS COMMISSION PAID B Y THE APPELLANT TO PIPL. BY NO STRETCH OF IMAGINATION, PIPL IS THE AGENT O F THE APPELLANT AND THERE IS NO QUESTION OF MAKING ANY PAYMENT OF COMMISSION TO PIPL. THEREFORE, QUESTION OF APPLYING PROVISIONS OF SECTION 194H DOES NOT ARISE A T ALL. 10.5 ON THE OTHER HAND, THE LD. DEPARTMENTAL REPRESENTATIV E SUPPORTED THE ORDERS OF THE LOWER AUTHORITIES. 11. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MA TERIAL PLACED ON RECORD. THE ISSUE RAISED IN THIS GROUND IS AGAINST TH E ACTION OF THE LD. CIT(A) IN CONFIRMING THE ADDITION OF RS.43,18,175/- ON ACCOUNT OF DISALL OWANCE U/S 40(A)(IA) OF THE ACT FOR NON-DEDUCTION OF TDS U/S 194H O F THE ACT ON THE DEEMED COMMISSION WHICH THE APPELLANT HAS INDIRECTLY G IVEN TO THE CONTRACT AWARDER. ITA NOS. 3371/AHD/2010 & 1888/AHD/2014 SHRI DIVYAKANT NANJIBHAI PATEL VS. ACIT AY : 2007-08 - 16 11.1 FROM GOING THROUGH THE RECORD, WE OBSERVE THAT A VER Y PECULIAR TYPE OF ADDITION HAS BEEN MADE BY LD. ASSESSING OFFICER WHICH H AS BEEN FURTHER CONFIRMED BY THE LD. CIT(A). REASON FOR THE PECULIARNE SS IS THAT IN THE GIVEN FACTS A CONTRACTOR NAMED PATEL INFRASTRUCTURE PVT LTD ( PIPL) WAS AWARDED A CONTRACT FROM THE GOVERNMENT AND PIPL ENTERED INTO A SUB-CONTRACT WITH THE APPELLANT AND SUB-CONTRACTED THE WORK ON BACK TO BACK BASI S AT 89.5% OF THE ORIGINAL CONTRACT VALUE. THEREAFTER, THE APPELLANT COMPL ETED THE SUB-CONTRACT WORK AND IN THE AUDITED FINANCIAL STATEMENTS IT HAD SH OWN 89.5% OF THE ORIGINAL CONTRACT VALUE AS ITS GROSS REVENUE HEADS. ON THE OTHER HAND, PIPL TREATED THE 89.5% OF THE CONTRACT VALUE AS ITS EXPENDITURE AND ACCORDING LY DEDUCTED TAX AT SOURCE @ 1 % U/S 194C OF THE ACT. COPY OF SUCH AGREEMEN T ENTERED INTO WITH PIPL IS PLACED IN THE PAPER-BOOK WHICH UNDOUBTEDLY MAK ES IT CLEAR THAT THE APPELLANT IS WORKING AS A SUB-CONTRACTOR TO PIPL. NOW, S URPRISINGLY 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 (BECAU SE THE SAME HAS BEEN SHOWN AS INCOME BY PIPL) REPRESENTS COMMISSION WHICH THE APPELLANT HAS INDIRECTLY PAID TO PIPL FOR GETTING THE SUB-CONTRACT FROM PIPL AND THEN LD. ASSESSING OFFICER FURTHER OBSERVED THAT ON THIS DEEM ED COMMISSION THE APPELLANT SHOULD HAVE DEDUCTED TDS U/S 194H OF THE ACT AND AS THE SAME HAS NOT BEEN DONE, THERE CALLS FOR A DISALLOWANCE U/S 40(A)(IA) OF THE INC OME-TAX ACT. 11.2 WE FAILED TO UNDERSTAND THAT HOW SUCH TYPE OF ADDITION OR DISALLOWANCE CAN BE MADE BY LD. ASSESSING OFFICER WITHOUT APPRECIATI NG THE FACT THAT THE COMPLETE VALUE OF CONTRACT RECEIVED BY PIPL FROM THE GOVERNMENT HAS BEEN SHOWN AS REVENUE IN ITS BOOKS OF ACCOUNTS AND THEREAFTE R COMPLETE CONTRACT HAS BEEN SUB-CONTRACTED TO THE APPELLANT AT 89.5% OF THE CONTR ACT PRICE BY WAY OF WHICH 10.5% REMAINED WITH PIPL AS A PART OF ITS PROFIT WHI CH 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-CO NTRACT, THE APPELLANT HAS CARRIED ON OTHER CONTRACT WORK ALSO AND GROSS TURNOVER OF RS.5,19,71,858/- HAS ITA NOS. 3371/AHD/2010 & 1888/AHD/2014 SHRI DIVYAKANT NANJIBHAI PATEL VS. ACIT AY : 2007-08 - 17 BEEN ACHIEVED BY THE APPELLANT DURING THE YEAR UNDER APP EAL AND A NET PROFIT OF RS.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 D EEMED COMMISSION PAYMENT HAS BEEN CALCULATED AT RS.43,18,175/- AND GOING A STEP FU RTHER HOW CAN A PROVISION OF SECTION 40(A)(IA) CAN BE APPLIED FOR NON-DE DUCTION OF DEDUCTION U/S 194H OF THE ACT ON THIS DEEMED COMMISSION OF RS.43,18,1 75/-, EVEN WHEN NO SUCH EXPENDITURE HAS BEEN CLAIMED BY THE ASSESSEE IN ITS PROFIT AND LOSS ACCOUNT. 11.3 UNDER THESE CIRCUMSTANCES, WE ARE OF THE VIEW THAT NO ADDITION IS CALLED FOR BY WAY OF DISALLOWANCE U/S 40(A)(IA) OF THE ACT FOR R S.43,18,175/-. ACCORDINGLY, WE ALLOW THE GROUND OF APPEAL OF THE ASSESSEE. 12. THIS APPEAL FILED BY THE ASSESSEE IS ALLOWED. 13. NOW WE TAKE UP ITA NO.1888/AHD/2014. THE ASSESSEE HAS FILED THIS APPEAL AGAINST THE ORDER OF THE LD. CIT(A)-II, BARODA DAT ED 03.03.2014 CONFIRMING THE PENALTY OF RS.22,29,300/- IMPOSED U/S 271(1)(C) BY THE LD. ASSESSING OFFICER ON THE ADDITION OF RS.66,89,516/- U/S 154 OF THE ACT (I.E., DISALLOWANCE U/S 68 OF THE ACT OF RS.22,18,457/- + DISALLOWANCE U/S 37 OF THE ACT OF RS.22,70,824/- + DISALLOWANCE OUT OF COMMISSION RS.22,00,235/ -). AS WE HAVE ALREADY DELETED THESE QUANTUM ADDITIONS WHILE DECID ING THE ASSESSEES APPEAL IN ITA NO. 337/AHD/2010, THEN IN SUCH SITUATION, TH E PENALTY U/S 271(1)(C) WILL NOT SURVIVE AND WE ACCORDINGLY DELETE THE SAME. 14. IN THE RESULT, BOTH THE APPEALS FILED BY THE ASSESSEE ARE ALLOWED. ORDER PRONOUNCED IN THE COURT ON 2 ND MAY 2016 AT AHMEDABAD. SD/- SD/- (RAJPAL YADAV) JUDICIAL MEMBER (MANISH BORAD) ACCOUNTANT MEMBER AHMEDABAD; DATED, 2 /5/2016 **BT ITA NOS. 3371/AHD/2010 & 1888/AHD/2014 SHRI DIVYAKANT NANJIBHAI PATEL VS. ACIT AY : 2007-08 - 18 $% ! &''( )$(*'/ COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ++ ' ,' / CONCERNED CIT 4. ,' ) ( / THE CIT(A)- 5. (/0 &'& , , 123 /DR,ITAT, AHMEDABAD, 6. 045 6 / GUARD FILE. $% / BY ORDER, TRUE COPY +1 (ASSTT.REGISTRAR) ITAT, AHMEDABAD 1. DATE OF DICTATION 26.04.2016.. 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER : ..27.04.2016 3. OTHER MEMBER .. 4. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.P. S./P.S . 5. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE D ICTATING MEMBER FOR PRONOUNCEMENT .. 6. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR.P.S./P.S . 7. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 2/5/2016 8. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER.. 10. DATE OF DESPATCH OF THE ORDER