ACIT,Cir.3, Pune, Pune V. M/s. Prithvi Developers, Pune

ITA 444/PUN/2009

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 49820 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 1 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-05-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 29-03-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 17-04-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: HEMANTKUMAR C LEUVA
• Assessee Lawyers: LALIT AGRAWAL
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE SHRI I C SUDHIR, JUDICIAL MEMBER AND SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER I.T.A. NO. 444 & 1074/PN/09 (ASSTT. YEARS: 2005-06 & 2006-07) ASSTT. COMMISSIONER OF I.T. .. APPELLANT CIR.3, PUNE VS. PRITHVI DEVELOPERS, .. RESP ONDENT 12 NIRANKAR APARTMENTS, 1133/5, FERGUSSON COLLEGE RD, SHIVAJINAGAR, PUNE PAN AABFP3985A APPELLANT BY: SHRI HEMANT KUMAR C LEUVA RESPONDENT BY: S/SHRI LALIT AGRAWAL & JAYANT BHA TT ORDER PER I C SUDHIR, J.M IN THESE APPEALS, THE REVENUE HAS BASICALLY QUESTI ONED THE FIRST APPELLATE ORDER WHEREBY THE LD. CIT(A) HAS RESTRICTED THE DI SALLOWANCE BY FOLLOWING GROSS MARGIN ANALYSIS METHOD AS AGAINST THE DISALLOWANCE MADE BY THE AO IN RESPECT OF THE SUB-CONTRACT PAYMENTS MADE TO RELATED PARTIE S COVERED U/S 40A(2)(B) OF THE INCOME-TAX ACT, 1961 (IN SHORT THE ACT), WHEN THE ASSESSEE ITSELF IS UNABLE TO SUBSTANTIATE THE RATES FOR WORK DONE BY THE SUB- CONTRACTORS. 2. WE HAVE HEARD AND CONSIDERED THE ARGUMENTS ADVAN CED BY THE PARTIES, IN VIEW OF ORDERS OF THE AUTHORITIES BELOW, MATERIAL A VAILABLE ON RECORD AND THE DECISIONS RELIED UPON. 3. THE FACTS, IN BRIEF, ARE THAT THE ASSESSEE ENGAG ED IN THE BUSINESS OF CIVIL CONTRACTOR WAS DOING IRRIGATION EARTHWORKS AND ALLI ED CIVIL WORK CONTRACTS OF THE GOVERNMENT AND SEMI-GOVERNMENT AGENCY. DURING THE Y EAR UNDER CONSIDERATION, THE ASSESSEE HAD EXECUTED VARIOUS SUCH PROJECTS AND HAD TAKEN ASSISTANCE OF 2 SUB-CONTRACTORS ALSO. DURING THE ASSESSMENT PROCEED INGS, THE AO OBSERVED THAT THE ASSESSEE FIRM HAD SUB-CONTRACTED VARIOUS WORK T O ITS RELATED PARTIES. THE AO ISSUED SHOW CAUSE NOTICE AND ASKED FOR THE DETAILS. SINCE THE ASSESSEE COULD NOT ESTABLISH THE CLAIM BY PRODUCING CERTAIN DETAIL S CALLED FOR FROM THOSE PARTIES, THE AO ASSUMED THAT THE ASSESSEE HAD MERELY BOOKED THE EXPENDITURE WITH A VIEW TO REDUCE TAX. THE AO ACCORDINGLY DISALLOWED T HE ENTIRE EXPENDITURE CLAIMED TO HAVE BEEN INCURRED ON THE WORK EXECUTED BY THE SUB-CONTRACTORS AND ADDED THE SAME IN THE INCOME OF THE ASSESSEE. IN TH E ASSESSMENT YEAR 2005-06, RS 94,44,567/- WAS CLAIMED TO HAVE BEEN PAID TO THE SUB-CONTRACTORS TO EXECUTE THE WORK ASSIGNED TO THEM. THE ENTIRE AMOUNT WAS DI SALLOWED AND ADDED BY THE AO IN THE INCOME OF THE ASSESSEE. LIKE-WISE IN THE ASSESSMENT YEAR 2006-07, THE AO ADDED THE ENTIRE CLAIMED AMOUNT PAID TO THE SUB-CONTRACTOR AT RS 68,40,951/-. AFTER DISCUSSING THE CASES OF THE PART IES IN DETAIL, THE LD CIT (A) HAS REDUCED THE ADDITION OF RS 94,44,567/- MADE IN THE ASSESSMENT YEAR 2005-06 TO RS 7,63,337/- AND IN THE ASSESSMENT YEAR 2006-07, T HE ADDITION OF RS 68,40,951/- HAS BEEN REDUCED TO RS 5,14,798/-. THIS ACTION OF THE LD CIT (A) HAS BEEN QUESTIONED BY THE REVENUE ON SEVERAL GROUNDS I NVOLVING THE SOLE ISSUE AS TO WHETHER THE LD CIT (A) WAS JUSTIFIED IN REDUCING THE ADDITIONS TO THE ABOVE EXTENT DURING THE YEARS UNDER CONSIDERATION. 4. IN SUPPORT OF THE GROUND, THE LD DR HAS MAINLY R ELIED UPON THE ASSESSMENT ORDER ON THE ISSUE. HE SUBMITTED THAT THE AO HAD MA DE ADDITIONS IN QUESTION U/S 40A(2)(B) READ WITH SEC. 2(41) OF THE ACT BUT THE L EARNED CIT(A) HAS REDUCED THE ADDITIONS SUBSTANTIALLY WITHOUT APPRECIATING THAT T HE ASSESSEE COULD NOT DISCHARGE ITS ONUS TO ESTABLISH THE GENUINENESS OF THE CLAIM MADE BY IT. THE LD CIT (A) ALSO IGNORED THIS MATERIAL FACT THAT THE AS SESSEE HAS NOT DISPUTED THE RELATIONSHIP BETWEEN IT AND THE SUB-CONTRACTORS. IN THE ASSESSMENT YEAR 2005-06, 5 SUCH SUB-CONTRACTORS WERE THERE, WHEREAS IN ASSES SMENT YEAR 2006-07, 4 SUCH 3 SUB-CONTRACTORS WERE THERE TO WHOM HUGE AMOUNT WAS CLAIMED TO HAVE BEEN PAID AGAINST THE ALLEGED SUB-CONTRACT. 5. THE LD. AR, ON THE OTHER HAND, TRIED TO JUSTIFY THE FIRST APPELLATE ORDER WITH THE SUBMISSION THAT CONTRARY TO THE ASSESSMENT ORDE R, THE LD CIT(A) HAS PASSED A DETAILED ORDER WHEREIN POSITION OF EACH OF THE SUB- CONTRACTORS TO WHOM THE ASSESSEE CLAIMED TO HAVE MADE PAYMENT IN EXECUTION OF THE WORK ASSIGNED THEM HAS BEEN DISCUSSED. THE LD CIT(A) HAS ALSO DIS CUSSED THE OBJECTION OF THE AO AND THE SUBMISSION OF THE ASSESSEE REBUTTING THO SE OBJECTIONS AND THEN HAS COME TO A JUST AND PROPER CONCLUSION. WHEREVER HE F ELT THAT SOME RELATION WAS THERE BETWEEN THE ASSESSEE AND THE SUB-CONTRACTOR, THE LD CIT (A) HAS MADE DISALLOWANCE. HE SUBMITTED FURTHER THAT THE AO HAD MADE DISALLOWANCE IN QUESTION WITHOUT GOING INTO THE MERIT OF THE CASE A ND WITHOUT COMPARING THE GROSS PROFIT AND THE NET PROFIT RATIO DECLARED BY THE ASS ESSEE. HE SUBMITTED THAT THE ASSESSEE HAS SHOWN NET PROFIT OF 7.51% IN THE ASSES SMENT YEAR 2005-06 AS AGAINST 5.82% AND 4.38% EARNED IN THE PRECEDING PRE VIOUS YEARS. LIKE-WISE IN THE ASSESSMENT YEAR 2006-07, IT HAS SHOWN NET PROFI T RATE OF 6.4% AFTER PARTNERS REMUNERATION AND INTEREST AND 8.94% BEFORE THE SAME . THE LD AR ALSO POINTED OUT THAT IN THE ASSESSEES CASE ITSELF IN THE ASSES SMENT YEAR 2002-03, A SCRUTINY ASSESSMENT U/S 143(3) WAS CARRIED OUT WHEREIN BARRI NG FEW PETTY DISALLOWANCE, THE NET PROFIT SHOWN BY THE ASSESSEE AT 5.78% WAS A CCEPTED. HE SUBMITTED FURTHER THAT IF THE ADDITION MADE BY THE AO IN THE ASSESSMENT YEAR 2005-06 IS ACCEPTED, THEN THE NET PROFIT WORKS OUT TO 30% OF T HE TURNOVER, WHICH IS UNIMAGINABLE. LIKEWISE, IF THE DISALLOWANCE MADE BY THE AO IN ASSESSMENT YEAR 2006-07 IS ACCEPTED, THE NET PROFIT WOULD WORK OUT AT 22.38% OF THE TURNOVER, WHICH IS AGAIN UNIMAGINABLE BECAUSE EVEN FOR GROSS PROFIT THIS RATIO IS DIFFICULT TO ACHIEVE IN THIS LINE OF BUSINESS. THE LD AR FURTHER SUBMITTED THAT ALONGWITH THE SUBMISSION THE ASSESSEE HAD GIVEN DETAILS OF THE WO RK CARRIED OUT BY DIFFERENT SUB-CONTRACTORS. IN THE ASSESSMENT YEAR 2005-06 ON THE SUB-CONTRACT AMOUNT OF 4 RS 94,44,567/-, A MARGIN OF RS 15,41,462/- WAS EARN ED WHICH WORKED OUT TO 16.32% WHICH CLEARLY INDICATES THAT THE PAYMENT MAD E FOR THE WORK ALLOTTED TO THESE PARTIES WAS AT ARMS LENGTH. IN THE ASSESSMEN T YEAR 2006-07, OVERALL GROSS PROFIT MARGIN SHOWN BY THE ASSESSEE WAS 22% AND MAR GIN FROM THE PERSONS COVERED UNDER SECTION 40A(2)(B) WORKED OUT ONLY TO 12.60% ON THE ARMS LENGTH PRINCIPLE. THE OVERALL GROSS PROFIT PERCENTAGE SHOW N BY THE ASSESSEE DURING THE YEAR, ON THE OTHER HAND, WAS 22.76%. HE CLAIMED THA T HAD THE WORK NOT BEEN SUB-CONTRACTED TO THESE PARTIES BUT TO SOME OTHER P ARTIES, THE GROSS PROFIT MARGIN WOULD NOT HAVE BEEN DIFFERENT. HE SUBMITTED FURTHER THAT IN THE ASSESSMENT YEAR 2006-07 THE SUB-CONTRACT WORK AMOUNT AS COMPARED TO THE TOTAL CONTRACT RECEIPTS AS COMPARED TO THE TOTAL CONTRACT RECEIPTS IS REDUC ED CONSIDERABLY, BEING ONLY RS 68,40,957/- AGAINST THE TOTAL CONTRACT RECEIPTS OF RS 5,08,96,209/-. THE ASSESSEE HAD ALSO FURNISHED DETAILS OF THE SUB-CONTRACTORS A ND THE AMOUNT OF WORKS SUB- CONTRACTED TO THEM. IT WAS ALSO POINTED OUT THAT IN THE ASSESSMENT YEAR 2005-06 OUT OF THE 5 SUB-CONTRACTORS, 3 SUB-CONTRACTORS WER E NOT RELATED TO THE ASSESSEE WITHIN THE MEANING OF SECTION 2(41) OF THE ACT. LIK EWISE IN THE ASSESSMENT YEAR 2006-07 OUT OF 4 PARTIES THE POSITION WAS THE SAME AS IN LAST YEAR. IT IS NOT THE CASE OF THE AO THAT HIGHER RATE IN COMPARISON TO TH E MARKET RATE HAS BEEN PAID TO THESE SUB-CONTRACTORS BY THE ASSESSEE. PARTY-WISE D ETAILS AND THEIR RELATION WITH THE ASSESSEE, IF ANY, WAS ALSO FURNISHED BEFORE THE AUTHORITIES BELOW. CONSIDERING ALL THESE MATERIAL ASPECTS, THE LD CIT( A) HAS RIGHTLY REDUCED THE ADDITIONS. 6. HAVING GONE THROUGH THE ORDERS OF THE AUTHORITIE S BELOW, WE FIND THAT THE LD CIT(A) HAS ASSED A VERY COMPREHENSIVE AND REASON ED ORDER DEALING WITH EACH AND EVERY IMPORTANT ASPECT OF THE MATTER INCLUDING REBUTTAL OF THE ASSESSEE TO THE OBJECTIONS OF THE AO. HE HAS DISCUSSED ABOUT EACH O F THE SUB-CONTRACTORS TO WHOM THE ASSESSEE HAS MADE PAYMENT AGAINST THE WORK S ASSIGNED TO THEM BY THE ASSESSEE AS SUB-CONTRACT. FOR THE SAKE OF BREVI TY, WE ARE NOT DISCUSSING ALL 5 THE DETAILS RELATED TO THE CLAIMED PAYMENT TO SUB-C ONTRACTORS AS DISCUSSED BY THE CIT(A) IN HIS DETAILED ORDER. IN THE ASSESSMENT YEA R 2005-06, THE ASSESSEE CLAIMED THAT OUT OF 5 SUB-CONTRACTORS, I.E. PRITHVI EXCAVATORS P LTD., SUBHAM CONSTRUCTION, NILESH KOTHAWADE, PRITESH G. LAD AND PRANESH G LAD, THE LAST THREE SUB-CONTRACTORS WERE NOT RELATED WITHIN THE M EANING OF SECTION 2(41) OF THE ACT. THE LD CIT(A), HOWEVER, FOUND THAT THEY WERE R ELATED AND WERE COVERED UNDER SECTION 40A(2)(A). HENCE HE HAS MADE DISALLOW ANCE OF RS 78,026/-, RS 5,02,272/- AND RS 1,83,039/- RESPECTIVELY (RS 7,63, 337/- IN TOTOL) RELATING TO THE PAYMENT MADE TO THOSE THREE PERSONS. HE JUSTIFIED H IS ACTION WITH THIS OBSERVATION THAT AS A RESULT OF THIS DISALLOWANCE, THE OVERALL GROSS MARGIN ON SUB- CONTRACT BECOMES 21% AS AGAINST 14% SHOWN BY THE AS SESSEE. ALSO OVERALL NET PROFIT FOR THE ENTIRE BUSINESS (BEFORE PARTNERS RE MUNERATION AND INTEREST) COMES TO 9.35% AS AGAINST 7.51% SHOWN BY THE ASSESSEE IN THE RETURN AND NET PROFIT (AFTER SALARY AND INTEREST TO PARTNERS) BECOMES 8.3 2% AGAINST 6.49% SHOWN IN THE RETURN. LIKEWISE IN THE ASSESSMENT YEAR 2006-07 , THE CIT(A) HAS RESTRICTED THE DISALLOWANCE OUT OF THE PAYMENT MADE TO SUB-CON TRACTORS FOUND IN THE CATEGORY OF SECTION 40A(2)(B) AT RS 1,96,986/-, RS 1,05,450/-, AND RS 2,12,362/- RESPECTIVELY (RS 5,14,729/- IN TOTOL). THE DISALLOW ANCE HAS BEEN MADE DURING THIS YEAR AGAINST THE PAYMENT MADE TO THREE PARTIES, I.E . SHRI PRITESH G LAD, SHRI PRANESH G LAD AND SHRI NILESH KOTHAWADE. THE MATERI AL FACTS ESPECIALLY TRADING RESULT SHOWN BY THE ASSESSEE DURING THE ASSESSMENT YEARS UNDER CONSIDERATION AS DISCUSSED ABOVE HAS NOT BEEN DISPUTED BY THE REV ENUE, WE, THEREFORE, ARE OF THE VIEW THAT THE CIT(A), KEEPING IN MIND THE TOTAL ITY OF THE FACTS AND CIRCUMSTANCES OF THE CASE AS DISCUSSED BY HIM IN DE TAIL, HAS RIGHTLY RESTRICTED THE ADDITION AS IT APPEARS JUSTIFIABLE ALSO ON THE BASI S THAT IF THE DISALLOWANCE MADE BY THE AO DURING THE YEARS UNDER CONSIDERATION IS A CCEPTED IT WOULD RESULT INTO AN UNIMAGINABLY HIGH NET PROFIT OF 30% DURING THE ASSE SSMENT YEAR 2005-06 AND 22.38% IN THE ASSESSMENT YEAR 2006-07. AND ABOVE AL L, IT IS NOT THE CASE OF THE 6 AO AS TO HOW HIGHER RATE IN COMPARISON TO THE MARKE T RATE HAS BEEN PAID TO THESE SUB-CONTRACTORS THE ASSESSEE. UNDER THESE CIR CUMSTANCES, WE DO NOT FIND REASON TO INTERFERE WITH THE FIRST APPELLATE ORDER ON THE ISSUE WHICH AS DISCUSSED ABOVE IS COMPREHENSIVE AND REASONED ONE. THE SAME I S UPHELD. THE GROUNDS INVOLVING THE ISSUE ARE ACCORDINGLY REJECTED. 7. IN THE RESULT, THE APPEALS OF THE REVENUE ARE DI SMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 31 ST DAY OF MAY, 2011. SD/- SD/- (D KARUNAKARA RAO) (I.C. SUDHIR) ACCOUNTANT MEMBER JUDICIAL MEMBER PUNE: DATED: 31 ST MAY, 2011 B COPY OF THE ORDER IS FORWARDED TO : 1. ASSESSEE 2. ACIT, CIR.3, PUNE 3. THE CIT(A), II PUNE 4. THE CIT, II PUNE 5. THE D.R, B BENCH, PUNE 6. GUARD FILE TRUE COPY BY ORDER ASSISTANT REGISTRAR ITAT, PUNE BENCHES, PUNE