Unreported business receipts – Only a percentage of the profit embedded can be taxed
Facts and issues of the case
The learned CIT-A erred in confirming the addition made by the AO in part amounting to Rs.12,01,860.00 and Rs.80,259.00 instead of deleting the same in entirety.The assessee in the present case is an individual and is a proprietor of the firm namely M/s Vijay trading Co. and Vasuki Trading Co. The assessee is also a partner in the partnership firm. The AO during the assessment proceedings found that the assessee has, inter-alia, not shown certain receipts/income from various parties despite the fact that these parties have deducted the TDS in the name of the assessee as evident from form 26AS.
On question by the AO, the assessee submitted that it has executed the contract which was awarded by the company namely IVRCL LTD. based in Hyderabad for an amount of Rs. 20,91,670.00 which was outsourced to various parties. As such, the assessee against such project has earned an income of Rs.8,90,000 which has been duly accounted in the books of accounts and offered to tax. As such the assessee has outsourced the work at a cost of Rs.12,01,860 against the value of the contract awarded to it for Rs. 20,91,670.00 only. Accordingly, the assessee contended that he has already accounted the project receipt in the books of accounts for Rs.20,91,670 only.
The assessee, likewise, submitted that the entire amount of gross receipt of Rs.80,259.00 from Bajaj Allianz life insurance company Ltd cannot be made subject matter of addition. According to the assessee, the element of profit embedded in such commission received from Bajaj Allianz life insurance company Ltd should be made subject to tax. However the AO disregarded the contention of the assessee on the reasoning that there was no agreement furnished by the assessee in support of the contract outsourced to various parties amounting to ₹ 12,01,860.00 only. Furthermore, the payment for outsourcing the work was made in cash and without deducting the TDS. Thus, the AO was pleased to make the addition of Rs.20,91,670.00 to the total income of the assessee.
The AO, likewise, against the receipt of commission of Rs.80,259.00 from the Bajaj Allianz life insurance company Ltd was of the view that the assessee has already claimed expenses on account of maintaining his office at Wankaner. Thus, as per the AO, there cannot be allowed any other deduction against such income in the name of the expenses. Accordingly the learned AO was pleased to confirm the addition of Rs.80,259.00 to the total income of the assessee.
Observation by the court
Court had heard the rival contentions of both the parties and perused the materials available on record. From the preceding discussion we note that it was alleged by the AO that the assessee has received a contractual amount from the party namely for an amount of Rs.20,91,670.00which was not disclosed in the books of accounts. Accordingly the same was added to the total income of the assessee. However the learned CIT-A found that out of the contractual amount of Rs.20,91,670.00, a sum of Rs.8,90,000 has already been accounted for in the books of accounts of the assessee which was offered to tax. Thus, the balance amount of Rs.12,01,860 which has been claimed as an expense by the assessee was subject matter of dispute. As the assessee failed to furnish the supporting evidences for the so-called expenses of Rs.12,01,860.00, the learned CIT-A confirmed the addition for 2 reasons. Firstly, there was no documentary evidence in support of such expenses and therefore the same cannot be allowed as deduction under the provisions of section 37 of the Act. Secondly, the assessee has not deducted the TDS on such expenses amounting to Rs.12,01,860under the provisions of section 40(a)(ia) of the Act. Thus, the learned CIT-A confirmed the addition made by the AO to the tune of Rs.12,01,860.00 after giving part relief of Rs.8,90,000.00 only.
From the preceding discussion, court note that there is no ambiguity to the fact that the amount received by the assessee from the company namely IVRCL LTD. for Rs.20,91,760.00represents the contract receipt/business receipts. Thus the entire amount cannot be added to the total income of the assessee. In our considered view only a percentage of profit embedded in such amount of contractual receipts can be brought to tax. In this regard we find support and guidance from the order of the Hon’ble Gujarat High Court in the case of CIT vs. President Industries reported in 258 ITR 654 where it was directed to make the addition only to the extent of gross profit of undisclosed business receipts.
However, in the given facts and circumstances court noted that the assessee has already offered an income of Rs.8,90,000 against such contract receipt of Rs.20,91,760 which constitute 42% approximately. Accordingly, we are of the view that no further addition can be made under the provisions of section 37 of the Act despite the fact that the assessee failed to furnish the supporting evidences.It is also an admitted position that the assessee failed to deduct the TDS in respect of the contractual payments made by him onoutsourcing basis. Before reaching to the conclusion that the assessee failed to deduct the TDS under the provisions of section 194C of the Actr.w.s. 40(a)(ia) of the Act, it is pertinent to see whether the provisions of TDS are applicable to the assessee being an individual.
In other words the provisions of TDS shall be applicable in case of an individual if its books of accounts are subject to audit in pursuance to the provisions of section 44AB of the Act. But there is no such finding qua to this provision of law. Until, it is brought on record that the assessee was subject to the provisions of section 194C of the Act, we are of the view that no disallowance can be made of the expenses claimed by the assessee under the provisions of section 194C of the Act read with section 40(a)(ia) of the Act on account of non-deduction of TDS. In view of the above, we disagree with the finding of the learned CIT-A and direct the AO to delete the addition made by him.
With respect to the addition of Rs.80,259.00 made by the authorities below, we note that the learned counsel for the assessee has not advanced any argument in the written submission filed by him. In the absence of any written submission on this issue from the side of the assessee, we do not want to disturb the finding of the authorities below. Hence, we confirm the addition made by the authorities below for Rs.80,259.00 only. Hence, the ground of appeal of the assessee is dismissed.
The appeal filed by the assessee is partly allowed by the court.Amitsinh-Nababha-Rana-Vs-ITO-ITAT-Rajkot