Order dt 7.8.2020 in TCA 766 of 2017 CIT v. SPL Infrastructure Pvt. Ltd. 1/22 IN HIGH COURT OF JUDICATURE AT MADRAS DATED: 7.8.2020 CORAM HON'BLE DR.JUSTICE VINEET KOTHARI AND HON'BLE MR.JUSTICE KRISHNAN RAMASAMY T.C.A.No.766 of 2017 Commissioner of Income Tax Chennai. Appellant vs M/s.SPL Infrastructure Pvt. Ltd., No.15, Kasthuri Rangan Street, Alwarpet, Chennai-18. Respondent Tax Case Appeal filed under Section 260-A of Income Tax Act, 1961 against order of Income Tax Appellate Tribunal, Madras C Bench dated 14.1.2016 in in I.T.A.No.2488/Mds/2014. For Appellant : Mr.J.Narayanasamy, Senior Standing Counsel For Respondent : Mr.M.P.Senthilkumar ORDER (Made by Dr.Vineet Kothari,J) Court was held by Video Conference, as per Resolution of Full Court dated 3 July 2020, by Judges at their respective residences and counsel, staff of Court appearing from their respective residences. 2. Revenue has preferred this Appeal under Section 260A of http://www.judis.nic.in Order dt 7.8.2020 in TCA 766 of 2017 CIT v. SPL Infrastructure Pvt. Ltd. 2/22 Act, aggrieved by order dated 14.1.2016 passed by learned Tribunal for Assessment Year 2010-11. 3. Respondent/Assessee is Contractor, who carried out work of road laying in Thermal Power Plant, Rathnagiri, to tune of Rs.3300 lakhs. learned Assessing Authority made addition of Rs.4,41,08,210/- in hands of Assessee on ground that 14 of Sub Contractors to whom sub contracts were assigned by Respondent/Assessee/ Contractor were not produced before Assessing Authority upon summons being issued to them and thereupon, disbelieving their existence and sub contract work carried out by them, entire payments made to them were disallowed by Assessing Authority and they were added back to income of Assessee. 4. On appeal by Assessee before learned Commissioner of Income Tax (Appeals), said addition was restricted to 10% of total sum of Rs.4,41,08,210/- on agreement of Assessee and thus, relief to extent of 90% was granted by Commissioner of Income Tax (Appeals), which order was upheld by learned Tribunal by order impugned before us. 5. following substantial questions of law are suggested in Memorandum of Appeal filed by revenue:- "(i) Whether Tribunal was correct in restricting disallowance to 10% of expenditure of Rs.4,41,08,210/- http://www.judis.nic.in Order dt 7.8.2020 in TCA 766 of 2017 CIT v. SPL Infrastructure Pvt. Ltd. 3/22 incurred towards subcontractors even though assessee had failed to prove identity, credibility and genuineness of sub contractors? (ii) Whether Tribunal was right in not appreciating findings of assessing officer that contractors were nonexistent, inexperienced, incompetent and bogus and assessee had claimed said expenditure only to reduce income and tax incidence on income. (iii) Whether on facts and in circumstances of case, Income Tax Appellate Tribunal was right in holding that liability of assessee to pay back to creditors had not ceased even after 3 years time limit provided under Limitation Act and thereby holding that no addition can be made on account of cessation liability u/s 41 (1)?" 6. relevant findings of learned Tribunal on said issue, including extract of order passed by learned Commissioner of Income Tax (Appeals), are quoted below for ready reference: "4. On appeal, CIT(A) has restricted disallowance to Rs.44,10,821/- as against disallowance of Rs.4,41,08,210/- by observing as under: " 6.1.2. I have considered findings of assessing officer and also submission made by http://www.judis.nic.in Order dt 7.8.2020 in TCA 766 of 2017 CIT v. SPL Infrastructure Pvt. Ltd. 4/22 AR of appellant in course of appellate proceedings along with cited case laws on this issue carefully. It is not disputed that all 14 persons have furnished confirmation and some of parties in response to summons issued to them have furnished copies of Income Tax returns and also copies of bank accounts. Some of parties have also confirmed that they do not have invoice copies and maintain only M. Book which was retained by assessee i.e M/s.SPL Infrastructure Private limited. copy of M. Book placed before me give details of work done for particular period, measurement up to date of work done with signature of supervisor of company. 11 parties have sent details from far of places to assessing officer through courier. One party namely M/s.Sakthi Kanna Constructions Private limited appeared before assessing officer and transactions with this party were accepted by assessing officer. letters issued by assessing officer were remain uncomplied with only two parties. It is also fact that appellant carried http://www.judis.nic.in Order dt 7.8.2020 in TCA 766 of 2017 CIT v. SPL Infrastructure Pvt. Ltd. 5/22 out sub contract work with EDAC Engineering limited for laying road work at remote places for purpose of Thermal Power Plant, JSW Energy (Rathnagiri limited), Nandiwadi Maharashtra State. For laying out road work man power is necessarily required. There is no evidence available on record that appellant had not executed road work at Thermal Power Plant, Rathnagiri. most of labour contractors were either relatives of appellant or known to appellant. entire disallowance made by assessing officer in respective expense debited in name 14 parties cannot be accepted without disproving confirmations received, disproving payments made to them beyond doubt, disproving execution of work order. However there is possibility of inflation of expenses in respect of road work carried out by appellant as whole. In earlier A.Ys, department accepted 5% of turnover declared by appellant after detection of inflation of expenses by carrying out survey action. In year under http://www.judis.nic.in Order dt 7.8.2020 in TCA 766 of 2017 CIT v. SPL Infrastructure Pvt. Ltd. 6/22 consideration, there was increase in GP and Net profit ratio declared by appellant as compared to GP and Net profit ratio declared in earlier years. However net profit declared by appellant at 3.83% is less than 5% of Net profit accepted by department in earlier years. 5% of Net profit on turnover of Rs. 3334.16 lacs comes to Rs.166.7 lacs. appellant had declared Rs.127.53 lacs as Net profit. difference comes to about Rs.39.178 lacs. In course of appellant proceedings, AR of appellant had come out to offer 10% of disallowance of Rs.4,41,08,210.00 which comes to about Rs.44,10,821.00 on basis of decision of Honorable ITAT, Chennai B BENCH reported in (2014) 159 TTJ (Chennai) 526 and also on basis of decision of Honorable Gujarat High Court reported in [2013] 355 TR290 (Guj). In case cited by AR of appellant decided by Chennai B BENCH, similar road work was entrusted to two persons namely Sri.N.Erulappan and Sri S.Kesavan by EDAC Engineering limited and http://www.judis.nic.in Order dt 7.8.2020 in TCA 766 of 2017 CIT v. SPL Infrastructure Pvt. Ltd. 7/22 assessing officer recorded statement of two persons who admitted that they had not carried out any work of nature mentioned. In spite of denial of work carried out by Sri N.Erulappan and Sri S.Kesavan, on examination of facts, Honorable tribunal came to conclusion that entire disallowance made by assessing officer cannot be sustained and restricted disallowance to 25% of total claim of Rs. 22.10 crores. Honorable Gujarat High Court in case of Bholanath Poli Fab Pvt. Ltd., reported in [2013] 355 ITR 290 held that tribunal having examined evidence on record came to conclusion that assessee did purchase cloth and sell finished fabrics, as natural corollary, not amount covered under such purchase but profit element embedded would be subject to tax. In instant case parties have not denied payments made to them and also have not denied work carried out by them. existence of parties and payments are also not disproved. only fact was that parties have not http://www.judis.nic.in Order dt 7.8.2020 in TCA 766 of 2017 CIT v. SPL Infrastructure Pvt. Ltd. 8/22 appeared before assessing officer for summons issued to them but have given confirmation to assessing officer. Since all parties are known to appellant, appellant would have taken to adequate steps for producing before assessing officer for examinations. net profit ratio declared by appellant in year under consideration is also less as compared to net profit computed by assessing officer in earlier years which was also accepted by appellant. Looking to facts of case in totality and legal position on this issue, I am convinced that offer of 10% of total disallowance of Rs.4,41,08,210.00 made by appellant during course of appellate proceedings as additional income over and above retuned income is reasonable. offer of 10% of total disallowance would lead to net profit ratio more than 5% of turnover which was any way accepted by assessing officer in earlier years. Therefore, assessing officer is directed to restrict disallowance to Rs. 44,10,821.00 as http://www.judis.nic.in Order dt 7.8.2020 in TCA 766 of 2017 CIT v. SPL Infrastructure Pvt. Ltd. 9/22 against disallowance of Rs.4,41,08,210.00. grounds of appeal raised by appellant on this issue are treated as disposed off accordingly." . Against above, Revenue is in appeal before us. 5. . We have heard both parties and perused material on record. In this case, it is admitted fact that 14 persons have furnished confirmation and some of parties in response to summons issued to them have furnished copies of income-tax return and also copies of bank account. Some of parties also confirmed that they do not have invoice copies and maintain only Method book which was returned by assessee. copy of M.Book gave details of work done for particular period, measurement up to date of work with signature of supervisor of company. 11 parties have sent details from far off places to Assessing Officer through courier. However, there was no response from two parties. assessee has taken road laying work and also completed that work. Most of payments are not supported by bills issued by above parties. On above reasons, Assessing Officer disallowed Rs.4,41,08,210/-. However, http://www.judis.nic.in Order dt 7.8.2020 in TCA 766 of 2017 CIT v. SPL Infrastructure Pvt. Ltd. 10/22 CIT(A) considering nature of business of assessee and also chances of inflated expenses, sustained disallowance to 10% of above expenditure. As seen from fact brought on record that assessee's total turnover for assessment year under consideration is at Rs.3334.16 lakhs against which assessee declared gross profit of 14.21% and net profit at 3.83%. When we compare turnover of gross profit and net profit of present assessment year with other assessment years it is at higher side. This can be seen from below mentioned table: Rs. in lakhs Y.E. 31.3.05 31.3.06 31.3.07 31.3.08 31.3.09 31.3.10 Turn over 3133.38 2760.71 3527.99 6680.59 11585.3 3334.16 0 G.P. 253.47 247.37 352.46 436.04 625.25 473.93 Depn. 52.96 57.65 87.09 104.58 96.44 159.49 Interest 68.94 80.95 166.81 197.47 190.04 186.91 N.P. 131.57 108.77 98.56 133.99 338.77 127.53 GP as % of 8.09 8.96 9.99 6.52 5.40 14.21 T.O. N.P as % of 4.20 3.94 2.79 2.01 2.92 3.83 T.O. Further, it is also admitted fact that payment to above parties was subject to TDS and paid by cheques http://www.judis.nic.in Order dt 7.8.2020 in TCA 766 of 2017 CIT v. SPL Infrastructure Pvt. Ltd. 11/22 and assessee has maintained M. book which is signed by sub-contractors. only discrepancy noticed by Assessing Officer is that payments are not supported by bills raised by parties and only self-made vouchers were maintained by assessee. In our opinion, considering nature of work carried on by assessee, there is no question of not incurring of expenditure by assessee to carry on road work contracts and work is mentioned in M book maintained by assessee and counter signed by sub contractors. However, there is chances of inflating expenditure for which CIT(A) has, already disallowed 10% of expenditure claimed by assessee to extent of Rs.4,41,08,210/-. Hence, contention of ld. DR that entire amount of Rs.4,41,08,210/- is to be disallowed cannot be appreciated as held by Tribunal in case of EDAC Engineering Ltd vs ACIT, 149 ITD 341, wherein held that if expenditure claimed was not supported by proper evidence and some deficiency persist in evidence, part expenditure is disallowed on estimated basis. Being so, by placing reliance on above decision of http://www.judis.nic.in Order dt 7.8.2020 in TCA 766 of 2017 CIT v. SPL Infrastructure Pvt. Ltd. 12/22 Tribunal, CIT(A) is justified in disallowing only 10% of sub-contract expenses not supported by proper bills. This ground of Revenue is dismissed. 6. next ground is with regard to deletion of addition made u/s 41(1) of Act as cessation of liability. 7. facts of this issue are that Assessing Officer made addition of Rs.18,16,728/- towards creditors as they are outstanding for more than three years and any claim beyond three years is not good in law as per Limitation Act. However, CIT(A) observed that there is no cessation of liability as on date of accounts since assessee has not written off these amounts in its books of account. According to CIT(A), Explanation 1 sec. 41(1)(4) also to apply to facts of this case. Accordingly, he deleted addition against which Revenue is in appeal before us. 8. We have heard both parties and perused material available on record. In present case, Assessing Officer has not issued any notice to creditors to confirm from them whether they have given up their dues from assessee. assessee has also not written back these amounts in its books of account. http://www.judis.nic.in Order dt 7.8.2020 in TCA 766 of 2017 CIT v. SPL Infrastructure Pvt. Ltd. 13/22 Except for fact that amounts are outstanding, there was no material evidence to show that there was remission or cessation of liability. It is Assessing Officer who has presumed that liability in respect of these creditors was ceased to exist. Before coming to conclusion by Assessing Officer that creditors were no more existing, it is incumbent upon Assessing Officer to make necessary enquiry to bring on record material that creditors were ceased to exist. He could have made necessary enquiry to this effect. assessee herein, is limited company and as per legal position acknowledgement of liability in favour of creditors in its Balance Sheet extends period of limitation for purpose of sec.18 of Limitation Act. It is assessee's claim that debts are subsisting and it continues to be liable to pay creditors. Therefore, it is not open to Assessing Officer to draw conclusion that creditors have remitted liability or that liability has otherwise ceased without evidence or material when assessee acknowledges liability in Balance Sheet and Explanation 1 is not applicable. Since creditors are http://www.judis.nic.in Order dt 7.8.2020 in TCA 766 of 2017 CIT v. SPL Infrastructure Pvt. Ltd. 14/22 continued to be appearing in Balance Sheet from year to year and accounts of creditors have not been written back, conclusion of Assessing Officer that it was ceased to exist is not proper. Accordingly, in our opinion, CIT(A) is justified in deleting addition made by Assessing Officer u/s 41(1) of Act. This view of our is fortified by judgment of Delhi High Court in case of CIT vs Hotline Electronics Ltd, [2012] 80 CCH 156, and Punjab & Haryana High Court judgment in case of CIT vs GP International Ltd, 325 ITR 25. Accordingly, deletion made by CIT(A) is confirmed. 9. In result, appeal of Revenue is dismissed" 7. learned Senior Standing Counsel Mr.J.Narayanasamy appearing for Appellant/Revenue submitted that for want of production of Sub Contractors before Assessing Authority, and one of them being 94 years old, Assessing Authority was justified in believing that payments made to those Sub contractors were not actual expenditure incurred by respondent/assessee Contractor and therefore, he was justified in disallowing same and adding back same as income of Assessee. He also submitted that though learned Commissioner of Income Tax (Appeals) had found that 11 out of these 14 sub contractors had http://www.judis.nic.in Order dt 7.8.2020 in TCA 766 of 2017 CIT v. SPL Infrastructure Pvt. Ltd. 15/22 not appeared before Assessing Authority but submitted their confirmation forms, payments made to them tallied with TDS (Tax Deducted at Source) claimed by Respondent/Assessee Company. However, since these persons were not produced before Assessing Authority, no proper verification could be carried out by Assessing Authority for such payments made to them, and merely on basis of Measurement Books (M Book) maintained by Respondent Contractor Company, allowance could not be made. 8. Upon court's question, however, learned Senior Standing Counsel for Appellant/Revenue was unable to satisfy as to how work, in absence of sub contractors, was really carried out by Respondent/ Assessee Company and why estimate of Gross Profit/Net Profit by Appellate Authority could not be made, and no satisfactory answer could be given by learned counsel for Revenue. 9. learned counsel for Respondent/Assessee, however, submitted that agreement to extent of 10% disallowance was made by Assessee to buy peace and such disallowance has definitely given much better compared result of Net Profit over 5% and Gross Profit over 10% in present assessment year compared to previous years, which were given in form of table by learned Tribunal in impugned order extracted above. Therefore, he submitted that fact finding Bodies at appellate levels have given proper, cogent and reasonable estimation of http://www.judis.nic.in Order dt 7.8.2020 in TCA 766 of 2017 CIT v. SPL Infrastructure Pvt. Ltd. 16/22 profits in hands of contractor Assessee and said findings do not give rise to any question of law, much less substantial question of law, requiring consideration by this Court. 10. On other issue of disallowance under Section 41(1) of Act to extent of Rs.18,16,728/-, relief has been given by both Appellate Authorities also, giving their findings, as they found that amount in question did not become bad merely on expiry of three years of limitation and there was no cessation of liability in hands of Assessee. 11. Having heard learned counsel for parties, we are of clear opinion that impugned order of learned Tribunal does not give rise to any question of law much less substantial question of law. 12. bare perusal of compared results of Gross Profit and Net Profit by Assessee given in para 7 of Tribunal's order clearly shows that said Gross Profit at rate of 14.21% and Net Profit at rate of 3.83% declared by Assessee, with addition of 10% agreed by Assessee before learned Commissioner of Income Tax (Appeals), resulted in much better result of profits declared by Assessee in present Assessment Year viz., A.Y.2010-11 as compared to previous years. Net Profit rate in previous three years was less than 3%, whereas Assessee himself declared net profit at rate of 3.83% before aforesaid addition of 10% of Rs.4,41,08,210/-. Therefore, http://www.judis.nic.in Order dt 7.8.2020 in TCA 766 of 2017 CIT v. SPL Infrastructure Pvt. Ltd. 17/22 estimation of profit by Appellate Authorities even on premise taken by Assessing Authority that some of sub contractors could not be produced before Assessing Authority, does not result in any perversity in findings of learned Commissioner of Income Tax (Appeals) as well as learned Tribunal. 13. It is well known that where books of accounts maintained by contractors are not accepted by Department, estimation of profit made on basis of history of Gross Profit rate and Net Profit rate of Assessee in previous years or comparable cases of contractors can be made. Once such profit rates are compared, additions on account of non confirmation or non production of sub contractors, etc. is totally irrelevant and cannot be made. 14. In hierarchy of fact finding bodies created under Income Tax Act, obviously findings of Assessing Authority stand superseded for all purposes, by findings of higher appellate authorities. Unless glaring perversity in findings of appellate authorities are pointed out and established by Revenue in Appeals filed by them under Section 260A of Act, there is nothing for High Court or Constitutional Courts to do in such matters. findings of fact arrived at by Authorities below are binding on High Court under Section 260A of Act, unless perversity as aforesaid is clearly visible, established and proved. http://www.judis.nic.in Order dt 7.8.2020 in TCA 766 of 2017 CIT v. SPL Infrastructure Pvt. Ltd. 18/22 15. As aforesaid, as against perversity in these findings, we see better taxable income finally taxed in hands of Assessee, albeit with agreement to disallowance to extent of 10% of payments made to sub contractors, which Assessee appears to have agreed under compulsion of circumstances to avoid litigation and to buy peace. 16. In fact, results declared by Assessee of net profit rate at rate of 3.83% was much better as compared to previous three years and only marginally less than previous two years of 2005-06 and 2006- 07, which were at rate of 4.20% and 3.94%. In these circumstances, no disallowance was called for. Still, if Assessee agreed to such addition to apparently buy peace with Department, we fail to understand as to why Revenue has filed these Appeals to drag cases further in High Court incurring loss of man hours and cost of litigation. Such unnecessary litigation on part of Revenue Authorities deserves to be strongly deprecated, but, Revenue Authorities do not seem to be seeing sense behind this and keep on filing Appeals under Section 260A of Act, as matter of routine. 17. Though provisions of Section 260A of Act are intended only to settle substantial questions of law arising from order of Tribunal, such appeals, against pure findings of facts, are also filed in absolutely reckless manner. We strongly deprecate this practice of Revenue Authorities, as there seems to be no application of mind by http://www.judis.nic.in Order dt 7.8.2020 in TCA 766 of 2017 CIT v. SPL Infrastructure Pvt. Ltd. 19/22 higher Authorities in sanctioning filing of these appeals before High Court. We would have imposed exemplary costs in present case also to compensate Respondent/Assessee, who had to incur such litigation expenditure at all levels of appellate forums, three in number, beyond Assessing Authority, viz., before Commissioner of Income Tax (Appeals), before Income Tax Appellate Tribunal and before High Court. However, we are not imposing said costs with clear warning to Revenue Authorities in this regard. They should, as responsible Authorities, try to give quietus to litigation instead of mindlessly increasing same before Constitutional Courts. Even to dismiss such frivolous appeals, precious time of court is taken. In present case itself, during Covid times, when we are hearing urgent matters through Video Conferencing, such matters are brought before us to be heard at least for hour and then to pass such detailed order. 18. We expect and have sanguine hope that Revenue Authorities will see absence of reasonableness in filing such Appeals in future. On one hand, Central Board of Direct Taxes keeps on issuing of litigation policies and as of now, latest CBDT instructions talks of withdrawal of Appeals with Revenue stake of less than Rupees One Crore. On other hand, by such arbitrary additions made by Assessing Authority, merely because Revenue's stake may be more than Rupees One Crore for Revenue Department, validity of substantial question of law arising in http://www.judis.nic.in Order dt 7.8.2020 in TCA 766 of 2017 CIT v. SPL Infrastructure Pvt. Ltd. 20/22 matter ought to have been examined by responsible authorities of Revenue Department, before filing such Appeals before this Court. 19. In these circumstances, while not imposing cost on Appellant/Revenue with hope that they will not file such unnecessary Appeals in future, we dismiss this Appeal in favour of Respondent/ Assessee, while holding that no question of law arises in present Appeal at all. No costs. 20. Registry is directed to send copy of this order to Chairman, Central Board of Direct Taxes (CBDT), New Delhi, and to Secretary, Ministry of Finance, Government of India, New Delhi and also to President, Income Tax Appellate Tribunal, for information and needful. (V.K.J.) (K.R.,J.) 7.8.2020 ssk/kpl Index:Yes Internet:Yes To 1. Income Tax Appellate Tribunal, C Bench, Madras. 2. Commissioner of Income Tax Chennai. 3. Asst. Commissioner of Income Tax, Company Circle VI(3), Chennai. 4. M/s.SPL Infrastructure Pvt. Ltd., No.15, Kasthuri Rangan Street, Alwarpet, Chennai-18. http://www.judis.nic.in Order dt 7.8.2020 in TCA 766 of 2017 CIT v. SPL Infrastructure Pvt. Ltd. 21/22 5. Chairman, Central Board of Direct Taxes (CBDT), 9th Floor, Lok Nayak Bhawan, Khan Market New Delhi 110 003. 6. Secretary, Ministry of Finance, Government of India, New Delhi. 7. President Income Tax Appellate Tribunal 3rd & 4th Floor, Pratishtha Bhawan Maharshi Karve Marg Mumbai 400 020. http://www.judis.nic.in Order dt 7.8.2020 in TCA 766 of 2017 CIT v. SPL Infrastructure Pvt. Ltd. 22/22 Dr.VINEET KOTHARI, J. and KRISHNAN RAMASAMY, J. ssk. T.C.A.No.766 of 2017 7.8.2020 http://www.judis.nic.in Commissioner of Income-tax, Chennai v. SPL Infrastructure Pvt. Ltd