Narasimha Reddy V. Challa Kodanda Ram

ITC/8/2003

AI Insights

The case revolves around a dispute concerning the assessment of income tax on contract amounts received by the applicant from the Karnataka Housing Board, Gulbarga. The applicant, after receiving the contract, subcontracted the work to several persons and reported a lower income in his tax returns, which was contested by the tax authorities. The initial appeal by the applicant was successful, but subsequent appeals by the Department led to a complex legal battle over the correct assessment of income tax on the subcontracted amounts. The core legal questions pertain to the assessment of income in the hands of the subcontractors versus the main contractor and the relevance of various considerations in determining the tax liability.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 796036 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 23-09-2014
• Assessment Year: misc
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: J V PRASAD
• Assessee Lawyers: SHIVA KARTHIKEYA
• Keywords: Appeal; Assessment Year; Commissioner (Appeals); Income Tax; Income tax appellate tribunal; Sub-contract; Tax Levy; Civil Contract
• Section: 256(1); 256(2)

Judgement Text

"THE HON’BLE SRI JUSTICE L.NARASIMHA REDDY AND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM I.T.C.No.8 of 2003 ORDER: (per the Hon’ble Sri Justice L.Narasimha Reddy) This I.T.C is filed by the assessee under Section 256(2) of the Income Tax Act, 1961 (for short ‘the Act’). The applicant was awarded a civil contract by the Karnataka Housing Board, Gulbarga. The value of the contract was Rs.28,97,650/-. The case of the applicant is that on account of paucity of time and funds, he has awarded sub contracts to several persons and the amount paid to them was Rs.27,18,820/-. In the returns filed for the Assessment Year 1990-91, the applicant has shown income of Rs.53,080/-. The Assessing Officer did not agree with that and levied tax at 12.5% of the value of the contract. The applicant carried the matter in appeal before the Commissioner (Appeals) and the same was allowed through order dated 02.09.1993. The Department challenged the order of the Commissioner by filing I.T.A.No.1752/Hyd/93. The appeal was allowed through order dated 18.03.1998. The applicant filed Reference Application No.61/Vizag/1998 under Section 256(1) of the Act, before the Income Tax Appellate Tribunal, Visakhapatnam, with a request to refer the following questions to this Court for answer: 1. Whether on the facts and in the circumstances of the case, the Honourable Income-tax Appellate Tribunal is justified in holding that the contract amounts received by the assessee from the Executive Engineer, Karnataka Housing Board, Gulbarga are to be considered for assessment in the hands of the assessee, inspite of the fact that the assessee entrusted the work to the sub-contractors in accordance with the agreements entered into. 2. Whether the Honourable Income-tax Appellate Tribunal is justified in coming to such a conclusion basing on irrelevant considerations ignoring more relevant considerations like (a) agreements entered into by the assessee with the sub-contractors, (b) depositions of the sub-contractors, wherein they stated that they undertook the sub-contract works and (c) filing of returns of income by the sub-contractors admitting the income from the sub-contract works. 3. Whether the Honourable Income-tax Appellate Tribunal is justified in ignoring the evidence produced before the I.T authorities and in coming to a conclusion that the net income of the assessee would be 12.5% of the net contract receipts received by the assessee from the Executive Engineer, Karnataka Housing Board, Gulbarga. Through its order dated 15.01.2001, the Tribunal has dismissed the application. Hence, this I.T.C. before this Court. Heard Sri Shiva Karthikeya, learned counsel for the applicant and Sri J.V. Prasad, learned counsel for the respondent. The factual background that led to filing of this I.T.C has already been furnished. A perusal of the questions, which are sought to be referred, may at the first blush, give an impression that they are pure questions of fact. However, on a close analysis, it emerges that the matter is not that simple. The applicant has furnished the names of the sub contractors as well as the copies of the agreements. It was also pleaded that the sub contractors are themselves the assesses and they have shown the amounts received by them under such sub contracts, in their returns. This fact was not seriously doubted or disputed. The Commissioner took note of the relevant record and allowed the appeal. The thrust before the Tribunal was mostly on the capacity of the sub contractors. At more places than one, it was observed that the financial capacity of the sub contractors does not permit them of undertaking works of that magnitude. Such observations can be made in respect of anyone and everyone. There is no index to determine the capacity of an individual. Ultimately, one has to be guided by the returns or books of account. The Tribunal did not make an endeavour to verify whether the sub contractors or any of them were assesses and they have shown the amounts referable in the sub contracts awarded by the applicant in the returns submitted by them. The rejection of the claim of the applicant may bring about a situation where the amount paid by the Housing Board under the contract is assessed in the hands of the sub contractors as well as in the hands of the applicant. The law does not permit such a course. On the answers emerging from the questions referred to above, a clear picture, referable to relevant questions of law, would emerge. We, therefore, allow the I.T.C and set aside the order passed by the Tribunal in the Reference Application. The Tribunal is directed to refer the questions to this Court for answer. There shall be no order as to costs. The miscellaneous petitions filed in this I.T.C shall also stand disposed of. ____________________ L.NARASIMHA REDDY, J _____________________ CHALLA KODANDA RAM, J Date: 23.09.2014 va "