Once estimation of income is made, further disallowances under section 40(a)(ia) are unwarranted

 

 

[2010] 5 taxmann.com 61 (Hyd. - ITAT)

ITAT, HYDERABAD ‘A’ BENCH

Teja Constructions

v.

ACIT

ITA NO. 308/HYD/2009

October, 23, 2009

 

 

FACTS

 

The assessee, a partnership firm, filed its return of income for the asst. yr. 2005-06 on-1st Nov., 2005 admitting an income of Rs. 71,16,656. The assessment was completed under s.143(1) of the IT Act, determining the income at Rs. 10,88.55,722. The AO while completing the assessment rejected the book of accounts and estimated the total income at 10 per cent of the gross receipts. Therefore, he disallowed the payment made by the sub-contractors without deducting, the TDS by invoking provisions under s.:40(a)(ia) of the IT Act. On appeal, the CIT(A) confirmed the order of the AO. Aggrieved by this, the assessee is in appeal before us.

 

HELD

The bare provision of s. 40(a)(ia) provides for non-deduction of amount which remains payable to a-resident in respect of fees fro technical services etc. It is not applicable where expenditure is paid. It is applicable only in cases where the payments are due and outstanding. The word ‘payable’ is not defined though the word paid is defined under s. 43(2) to mean actually paid or incurred. Hence, by implication the word payable does not mean actually paid or incurred. Hence, by implication the word ‘payable’ does not include paid. The difference in the word paid and payable is also there in the rules for depositing the TDS and also for levy of interest under s. 234B where interest is worked out on the basis of tax actually deducted at source and not on the basis of tax deductible. Sec. 40(a)(ia) otherwise being a legal fiction needs to be construed strictly in view of the decision of Supreme Court in CIT vs. Mother India Refrigeration Industries. (P) Ltd. (1985) 48 CTR  (SC) 176: (1985) 155 ITR 711 (SC). The CBDT Circular No. 5 of 2005, dt. 15th July, 2005 [(2005) augment compliance of TDS provision in the case of residents and curb bogus payments to them. In the present case the payment is not in dispute and on the issue whether tax is to be deducted at source on such payments is not free from doubt. In any case, if the assessee has paid the impugned amount and (the amount is ) not payable at the end of the year on the date of balance sheet then the provisions of s. 40(a)(ia) are not applicable. It is only applicable in respect of “payable amount” shown in the balance sheet as outstanding expenses on which TDS has not been made. Further, tax is deductible under ss. 193, 194A, 194C, 194H and 194J either, at the time of payment or at the time of giving credit to the recipient. However, s. 40(a)(ia) is applicable only in respect of TDS capital defaults amount is “payable”. If amount is actually paid and tax is not deducted under the above section, s. 40(a)(ia) is not applicable. There is difference between the word ‘paid’ or ‘Payable’, the legislature used the word very carefully in s. 40(a)(ia) and in all its wisdom at the time of incorporating the section by way of Finance (No.2) Bill, 2004. it was inserted in s. 40(a)(ia) that the amount payable to contractor or sub-contractor liable for disallowance, its TDS not deducted. Sec. 40(a)(ia) has to be subjected to strict interpretation. Going by the rule of strict interpretation the default with reference to actual ‘payment’ of expenditure would not entail disallowance. This is because, the language used in the s. 40(a)(ia) is very simple, clear and unambiguous. Literal rule of interpretation has to be applied. The Speech of Finance Minister or even other provisions of the Act can be pressed into service if there is some ambiguity about the meaning of the section. But the same was not the case in the instant case. Even the principles of liberal interpretation cannot be applied where the language is clear, simple, and the meaning of the word is apparent. As such, the provisions of s. 40(a)(ia) are not applicable in the present facts of the case. The disallowance if any required to be made shall be restricted to the extent of payable shown in the balance sheet at the end of the year. However, this is not the case in the present case because once the estimation of income is made, further disallowances are unwarranted.

 

The above decision of the Andhra Pradesh High Court has been followed . and a similar view has been taken by the Special Bench (Kolkata) of this Tribunal in the case of ITO vs. Kenaram Sana & Subhash Saha (2008) 116 TTJ (Kol) (SB) 289 : (2008) 8 DTR (Kol)(SB)(Trib) 124: (2008) 301 ITR 171 (Kol)(SB)(AT). wherein disallowance made in terms of s. 40A(3) has been deleted. Respectfully following the decision of the jurisdictional High Court in the case of Indwell Constructions (supra), besides the Special Bench decision of this Tribunal noted above, we are of the considered opinion that the income of the assessee having been determined by resorting to estimation, there is no scope for any further disallowance either in terms of s. 40(a)(ia)/40A(3) or otherwise.

 

ORDER

HANDRA POOJARI. A.M. :

 

This appeal is directed against the order passed by the learned CIT(A)-VI, Hyderabad, dt. 16th Dec.. 2008 and it pertains to asst. yr. 2005-06.

2. Asscsscc raised the following grounds :

"1. The order of the AO is erroneous, unjust and contrary to the facts of the case.

2.   The AO erred in rejecting the books of account and in restoring to estimation of income.

3.   Tin AO erred in estimating net income at 10 per cent of the gross receipts without allowing the expenditure inwards depreciation, salary. remuneration and interest to partners.

 

4. The AO ought to have considered that the rate of 10 per cent adopted is much higher, in the circumstances of the assessee's case.

5.The AO erred in holding that the provisions of s. 194C have application to the facts of the case with regard to payments made to M/s Marvin Constructions (P) Ltd. and further erred in holding that the provisions of s. 40(a)(ia) are applicable in the circumstances.

6.The AO erred disallowing Rs. 8,33,28,307 by applying provisions of s. 40(a)(ia) particularly. when the books. of account arc rejected and estimation of income is resorted to.

7.The AO erred in charging interest under s. 234B of Rs. 1,22,64, 66."

4.         3.Brief facts of the case arc that the assessee, a partnership firm, filed its return of income for the asst. yr. 2005-06 on-1st Nov., 2005 admitting an income of Rs. 71,16,656. The assessment was completed under s.143(1) of the IT Act, determining the income at Rs. 10,88.55,722. The AO while completing the assessment rejected the book of accounts and estimated the total income at 10 per cent of the gross receipts. Therefore, he disallowed the payment made by the sub-contractors without deducting, the TDS by invoking provisions under s.:40(a)(ia) of the IT Act.

 

4.  On appeal, the CIT(A) confirmed the order of the AO. Aggrieved by this, the assessee is in appeal before us.

 

5. The learned Authorised Representative submitted that the assessee carried out the contract work in three ways. Firstly, executed contracts taken by the firm itself. Secondly, contract executed by the assessee taken from other contractors and acted as sub-contractor. Thirdly. contract taken by the assessee got executed by other sub-contractor. Hence, he submitted that the lower authorities are not justified in estimating uniform gross profit at 9 per cent on the entire gross receipts. He submitted that the assessee is getting 9 per cent on their own contracts executed by the firm itself and the assessee is getting only 8 per cent on the contracts got executed from other sub-contractors, since the assessee has to forgo certain profit of the contracts to the sub-contractors. Further in relation to the contracts taken from sub-contractors, the assessee is getting only 4 per cent profit. He submitted that in the earlier year 2004-05. the assessment was completed by applying the above rates. He relied on the judgment of Hon'ble Supreme Court in the case of Brij Bhushan Lal Parduman Kumar vs. CIT 1978 CTR (SC) 134 : (1978) 115 ITR 524 (SC) where it was held :

"reversing the decision of the High Court, that since in substance and in: reality the materials supplied by the Government always remained the property of the Government and the assessee merely had custody and fixed or incorporated them into the works, there was not even a theoretical possibility of any element of profit being involved in the turnover represented by the cost o! such materials. Though, ordinarily, when a works contract was put through or completed by a contractor, profit from the contract was determined on the value of the contract as a whole and not by considering the several items that would go to form such value of the contract where, as in this case, materials were supplied at fixed rates by the Government to the contractor solely for being used, fixed or incorporated in the works on the terms that they would remain the property of the Government and any surplus should be returned to the Government, the real total value of the entire contract would be the valued minus the cost of such materials so supplied. Since no element of profit was involved in the turnover represented by the cost of the materials supplied by the Government to the assessee. the income or profits derived by the assessee from such contracts had to be determined on the basis of the value of the contracts represented by the cash payments received by the assessee from the Government exclusive of the cost of the materials received for being used, fixed or incorporated in the works."

6.  On the other hand, the learned Departmental Representative) submitted that the books of account of the assessee are not reliable. The assessee has not produced the proper vouchers and bills in support of the claim of the assessee, hence the AO having no option other than, making an estimation of income as such, he estimated the income of the assessee. The AO after rejecting the books of account made a reasonable estimate of the income at a reasonable percentage of gross receipts at 10 per cent. However the CIT(A) reduced the same to the tune of 9 per cent and he supported the order of the CIT(A).

7.We have heard both the parties and perused the material on record. In the present case, the AO rejected the books of account on the reason that, the assessee has not maintained proper books of account and also failed to produced vouchers for verification and the expenditure claimed by the assessee are not substantiated. The assessee in earlier years also has not maintained the proper books of account. The assessee's past track records show that the assessee has neglected the presenting of the books of account in accordance with law. When the assessee claimed any expenditure, it is mandatory on the part of the assessee to produce the books of account supported by proper bills and vouchers. Since the assessee has not produced the proper books of account, true profits or loss cannot be deduced from the books of account of the assessee. The AO having no other option rejected the books of account and estimated the income at 10 per cent of gross receipts. But the position is that, the assessee is carrying on three kinds of contracts, as in earlier years, i.e.. (i) own contracts, (ii) contracts taken from the sub-contractors, (iii) contracts given to other parties on sub-contracts. The assessee had a higher rate of profit on the contracts executed by the assessee itself. In these contracts, the assessee agreed that his income is at 9 per cent of the gross receipts. Thus, accordingly the AO is directed to estimate the income on the contracts executed by the assessees own at 9 per cent. In case of contracts taken by assessee on sub-contract, the income to be estimated at 8 per cent of the gross receipts. In case of contracts given by the assessee to the 3rd party on sub-contract, income to be estimated at 4 per cent. This Is, because, when the assessee gives contract to the other parties on sub-contract, the assessee cannot keep the same percentage of profit at 9 per cent, it has to forgo certain portion of profit i.e.. around :5 per cent to the sub-contractors. Similar position in the case of contracts taken by assessee on sub-contract from other parties. Further, the assessee is entitled for depreciation and remuneration, and interests, to partners on the, profit estimated by AO at applicable rates, because the income estimated as above of the assessee is before the depreciation and interest and remuneration of the partners. Accordingly. we direct the AO to compute the income of the. assessee afresh. Accordingly, this ground of the assessee appeal is partly allowed.

 

8.Regarding ground No. 2 of the assessee, the learned Authorised Representative submitted that when the income is estimated by rejecting the books of account of the assessee that books of account cannot be relied further for the purpose of completing the assessment of the assessee. He submitted that once the AO has observed that books of account are not reliable , how the same books can be relied for other purpose for invoking other provisions of the Act?

 

9.     Further, he submitted, that for the assessment year under consideration; the AO resorted to rejection of books of account and estimation of income. In such circumstances, no separate additions can be made based on the books of account. If it seen from the assessment order that the AO estimated income on the gross receipts at 10 per cent including the amount paid to the sub-contractor after rejecting the books of account. The Authorised Representative submitted that the Hon'ble jurisdiction of High Court of Andhra Pradesh had an occasion to consider a similar issue in the case of Indwell Constructions vs. CJT (1999) 151 Cm (AP) 207 : (1998) 232ITR 776 (AP), wherein it is held that no separate addition under s. 40 of the Act can be made by the AO. when he rejected the books of account. A similar view is taken by the Allahabad High Court in the case of CIT vs. Banwarilal Banshidhar (1998) 148 CTR (All) 533 : (1998) 229 ITR 229 (All), wherein it is held that no separate addition under s. 40A(3) of the Act can be made when the gross profit is estimated by rejecting the books of account.

(b)'The Authorised Representative submitted that the provisions of s. 194C have no application to the payments made by a sub-contractor to another sub-contractor. The assessee's counsel submitted that the AO is not correct in holding that a contractor can be a sub-contractor:

He submitted that the expression contractor is explained in Expln. 1 to sub-s. (2) of the Act. It Is mentioned that contractor includes a person who undertakes works from Government of a foreign State or a foreign' enterprise or any body established outside India. This Explanation does not provide that the meaning assigned by the AO. it is submitted that sub-s. (1) clearly mentions that deduction has to be made @ 2 per cent by the person who enters into an agreement for carrying out any work. He submitted  that in  the instant case,  the Government of Andhra Pradesh entered into an agreement with Harvins Constructions (P) Ltd.. and therefore, the said company is a contractor. Thereafter, the said company entered  into  an  agreement  with  the assessee  herein.  This contract is covered by the provisions of sub-s. (2) of the s. 194C of the Act. Therefore, the said company, in compliance with the said provisions deducted tax at source at 1 per cent on the payments made by it to the assessee herein. He submitted that the next question is whether the provisions of s. 194C cover 'the payments made by the assessee here in (being a sub contractor) to another subcontractor. There is no such provision in s.194C providing for deduction of tax at source. Therefore the assessee is not under obligation to deduct tax at source.

Further, he submitted that insofar as deduction of tax at source concerned, the assessee merely acts as a n agent in  collecting the tax from the. payee and making payment to the Government: When the provisions if the Act do not delegate :such power deduction from the payments to be made, the payee would never agree for deduction of tax at source. Therefore, when there is no dear obligation attached to the assessee, it was not correct for the AO, to mention about the intention of the Parliament.

(c) Further submitted that the provisions of s. 40(a)(ia) are applicable only when the amounts remained payable. According to the said section 'any interest……. or amounts payable to a contractor or a sub-contractor. He submitted that it is clear from the provisions bf the said section that the disallowance can be made only when the TDS was not made in accordance with the provisions of the IT Act in respect of the amounts payable. The AO rejected the claim on the ground that according to s. 194C stipulates that the person making payment to a contractor or at the time of credit to the account has to deduct tax at source. According to the AO. once the TDS is required to be made. s. 40(a)(ia) comes into picture. This observation of the AO is not correct. The provisions of s. 194C mention two different situations, for deducting tax .at source….. (a) at the time of credit of such sum to the account of the contractor and (b) at the time of making payment to the contractor. Explanation 2 to s. 194C further elaborates what is the meaning of credit to the account. Scc.l94C itself bifurcates the amount paid and the amount payable which is credited to the account. Therefore, for deduction of tax at source, there is a specific mention in the section itself that tax is to be deducted at source even at the time of crediting the amount to the account. But s.40a(ia) mentions only the word 'payable’. The said section does not include the payments made to the payee. There is a specific purpose for such a provision. The amounts payable arise out of adjustment entries and, therefore, there is a need to have a control over the amount payable However, no such control is required. in respect of payments already made. However, no such control is required in respect of the payments already made. Therefore, the legislature clearly, meant to cover such cases where the adjustment entries were made and the amounts shown as payable and not where the payments were already made. Therefore, the learned Authorised Representative submitted that the provisions of s. 40a(ia) apply strictly only to the amounts payable and not the amounts paid.

He submitted that there is no scope for the AO to interpret the provisions of s.194C when they are very plain and unambiguous. The AO cannot read anything into statutory provision, the Hon’ble Supreme Court had an occasion to consider the question of interpretation of the provisions of the Act in the case of Padmasundrara Rao (Decd.) & Ors. Vs. State of Tamil Nadu & Ors. (2002) 176 CTR (SC) 104: (2002) 255 ITR 147 (SC) wherein it was held that the Court cannot interpret the provisions when they are palin.

 

The Supreme Court in the case, of Asstt. CIT v. Velliappa Textiles Ltd. (2003) 184 CTR (SC) 193 : (2003) 263 ITR 550(SC) held that the words in the statute are to be strictly interpreted and plugging loppholes is only for legislature and not for the Court.

 

10. On the other hand, the Departmental Representative submitted that, the rejection of books of account and estimate of the income is different form invoking provisions of s.40(a)(ia), and these two are entirely, mutually exclusive and he submitted that there is no bar in invoking the provisions under s. 40(a)(ia) after estimating the income of the assessee. He submitted that there is a failure by the assessee to deduct TDS under s. 194C of the IT Act, as such, invoking the provisions of s. 40(a)(ia) is justified.

 

11. We have heard both the parties and perused the material on record. In this case, main contention of the assessee's counsel is that once the books of account are rejected, income is estimated, the AO is precluded from invoking any other provisions of the IT Act to make further addition. The books of account of the assessee was not relied, it was rejected by the AO and the same was confirmed by the CIT(A) as well as by us. Now. based on the reliance on the same books, for the purpose of invoking the provisions of s. 40(a)(ia) is improper. The estimation of income takes care of the irregularities committed by the assessee. Further addition by invoking s. 40(a)(ia) amounts to punishing the assessee for a same offence on double occasions, which is not permitted by law. There is a connection between expenditure claimed by the assessee and making non-deduction of TDS. Since the books of account not verifiable, for which the assessee  books were rejected and income was determined. It was held in the case of CAT vs. Devi Prasad Vishwanath Prasad (1969) 72 ITR 194 (SC) where a particular business income of the assessee has been estimated and determined and in such a case, the AO precluded from adding any unexplained cash credit as undisclosed income of the, business.

12. Further, the argument of the learned counsel for the assessee is that, strict interpretation of statute to be made. He relied on the judgment of. Asstt. CIT vs. Velliappo. Textiles Ltd. (supra) wherein it was held:

"(iii) A Court cannot breach a casus omissus and no canon of construction permits the Court to supply a lacunae in a statute nor can Courts of law fill up the lacuna in an ill drafted and hasty legislation. Whether the omission is intentional or inadvertent is no concern of the Court. The duty of the Court is to decide what the law is an apply it, not to make it.

(iv) Since the function of the Court of law is jus dicere and no jus dare, the Court, of law cannot read the recommendations of the law| commission as justifying an interp4retation of the section in tune with them, even when the words of the section are plain and unambiguous.

 

We find force in this argument of the assessee’s counsel. Sec. 40(a)(ia) reads as under:

“40. Amounts not deductible : Notwithstanding anything to the contrary in ss. 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head ‘Profits and gains of business or profession –

(a)         in the case of any assessee

(i)                 ………

(ia) any interest, commission or brokerage; rent, royalty, fees: professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work) on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or. after deduction has not been paid.

(A)   in the case where the tax was deductible and was so deducted during the last month of the previous year, on or before the due date specified m sub-s. (1) of s. 139 or

(B)    in any other case, on or before the last………….

The bare provision of s. 40(a)(ia) provides for non-deduction of amount which remains payable to a-resident in respect of fees fro technical services etc. It is not applicable where expenditure is paid. It is applicable only in cases where the payments are due and outstanding. The word payable is not defined thought the word paid is defined under s. 43(2) to mean actually paid or incurred. Hence, by implication the word payable does not mean actually paid or incurred. Hence, by implication the word ‘payable’ does not include paid. The difference in the word paid and payable is also there in the rules for depositing the TDS and also for levy of interest under s. 234B where interest is worked out on the basis of tax actually deducted at source and not on the basis of tax deductible. Sec. 40(a)(ia) otherwise being a legal fiction needs to be construed strictly in view of the decision of Supreme Court in CIT vs. Mother India Refrigeration Industries. (P) Ltd. (1985) 48 CTR  (SC) 176: (1985) 155 ITR 711 (SC). The CBDT Circular No. 5 of 2005, dt. 15th July, 2005 [(2005) augment compliance of TDS provision in the case of residents and curb bogus payments to them. In the present case the payment is not in dispute and on the issue whether tax is to be deducted at source on such payments is not free from doubt. In any case, if the assessee has paid the impugned amount and (the amount is ) not payable at the end of the year on the date of balance sheet then the provisions of s. 40(a)(ia) are not applicable. It is only applicable in respect of “payable amount” shown in the balance sheet as outstanding expenses on which TDS has not been made. Further, tax is deductible under ss. 193, 194A, 194C, 194H and 194J either, at the time of payment or at the time of giving credit to the recipient. However, s. 40(a)(ia) is applicable only in respect of TDS capital defaults amount is “payable”. If amount is actually paid and tax is not deducted under the above section, s. 40(a)(ia) is not applicable. There is difference between the word ‘paid’ or ‘Payable’, the legislature used the word very carefully in s. 40(a)(ia) and in all its wisdom at the time of incorporating the section by way of Finance (No.2) Bill, 2004. it was inserted in s. 40(a)(ia) that the amount payable to contractor or sub-contractor liable for disallowance, its TDS not deducted. Sec. 40(a)(ia) has to be subjected to strict interpretation. Going by the rule of strict interpretation the default with reference to actual ‘payment’ of expenditure would not entail disallowance. This is because, the language used in the s. 40(a)(ia) is very simple, clear and unambiguous. Literal rule of interpretation has to be applied. The Speech of Finance Minister or even other provisions of the Act can be pressed into service if there is some ambiguity about the meaning of the section. But the same was not the case in the instant case. Even the principles of liberal interpretation cannot be applied where the language is clear, simple, and the meaning of the word is apparent. As such, the provisions of s. 40(a)(ia) are not applicable in the present facts of the case. The disallowance if any required to be made shall be restricted to the extent of payable shown in the balance sheet at the end of the year. However, this is not the case in the present case because once the estimation of income is made, further disallowances are unwarranted.

 

13. Further in the case of N. Ramachandra Reddy ITA No. 1372 of 2007 the Tribunal order dt. 6th March. 2009 held as follows on the similar circumstances.

"We have considered  the rival  submissions and perused the  material available on record. Undisputedly, there are defects and discrepancies in the hooks of account noted by the AO as well as the CFT(A). The AO on that ground has not rejected the books of account, but proceeding on the basis of returned income of Rs. 24.92,423. made substantial additions including statutory disallowance of Rs. 3,92.08.601 under s. 40(a)(ia) of the Act. Me thus, completed the assessment on a total income of Rs. 5.04.75.532 as against returned income of Rs. 24,92,428 on a total undisputed turnover of Rs. 8,14.78.527. When the AO Sound the books of account and other records maintained by the assessee to be defective, in all fairness, he should have rejected the same and proceeded to estimate the income as a reasonable percentage of turnover instead of preferringto start with  the returned income  and makes substantial item-wise, statutory/otherwise additions/ disallowances. Faced  with  substantially, exorbitant additions to the returned income of Rs. 24,92,428.  which resulted in the determination of assessee's income by- the AO at an abnormal rate, of 64 per cent of the gross receipts, in the course of appellate proceedings, the assessee filed an affidavit, proposing before the CIT(A) to reject the books of account for the defects and discrepancies noticed and estimate the net income from contracts @ 13 per cent of the gross receipts. Even though the AO has not rejected the books and estimated the income, since the powers of CIT(A) are coterminous with those of the AO, the CIT(A) in our considered view I was competent and justified  in  rejecting  the books  maintained by the assessee for the deficiencies therein, noticed even by the AO, and proceeding to determine the income at the rate  proposed  by the assessee.  After carefully examining the affidavit of the assessee. which has also been extracted by the CIT(A) on pp. 13 to 14 of impugned order, the CIT(A) accepting the proposal of the assessee estimated the income of that assessee at 13 per cent of the gross receipts computed at Rs. 8,14,78,527 and determined the total income including bank interest at Rs. 1,07,47,837.

 

On a careful consideration of the matter in the light of the totality of the facts and circumstances of the case, we find no infirmity in the impugned order of the CIT(A). In the first place, we may note that the assessee's line of business, viz.. execution of civil contracts, the rate of 13 per cent proposed by the assessee and accepted by the CIT(A) for estimation of assessee's net income from contracts is not only reasonable, but also on a higher side compared to the rate approved by this Tribunal in similar cases. If the assessee himself has come forward with  such a higher rate for estimation of profit, it is because he is faced with several other  statutory / otherwise additions made by the AO, which if sustained by the CIT(A). would result in determination of its income at a very substantially higher rate of 64 per cent or even more than 100 per cent if separate disallowance under s. 40A(3) is also considered. The fact that the assessee has made this offer for estimation of income at a higher rate of 13 per cent, is also evident from the rider he put in the concluding sentence of the penultimate para of his affidavit, which reads as follows:

 

This statement; and affirmation are made subject to the point that no other adverse inferences are drawn and no other proceedings under the IT Act for the said assessment consequent to the statement and affirmation are invoked.

On a close reading of the above provisions, it is observed that though the above provisions stipulate a statutory disallowance leaving no scope for any discretion or lenient view considering the peculiar circumstances under which payments caught by the scheme of s. 40(a)(ia) have been made, the non obstante clause. "Notwithstanding anything to the contrary in ss. 30 to 38, with which the provisions of s. 40 begin take the items of expenses covered by the provisions of ss. 30 to 38 alone within the ambit of s. 40. and any item of expenditure allowable under the provisions of the Act preceding 30, are not covered by the said statutory disallowances envisaged under s. 40. It may also be observed that if an assessee claims any expenditure as necessary to earn the business income and as such the same is allowable under s. 28; and not under s. 37, because s. 28 taxes profits of the business which can be worked out only after allowing expenditure, such expenditure goes out of the clutches of the disallowances in terms of the provisions of s. 40. In this view of the matter, an assessee may claim all his expenditure, except for those which are clearly covered by some other sections e.g.. s.30 covering rent, rates, taxes, insurance, etc.. As allowable under s. 28. It may further be observed that all the expenditure, just as labour charges in the instant case, which represents direct costs and therefore-adjustable against revenue for the purpose of determining the profit under s. 28(i) of the Act. Do not come within the provisions under s. 40(a)(ia). As such, it may be observed that it is only the deduction referred to in ss, 30 to 38 which would definitely fall for consideration of disallowance under s. 40 and they cannot be claimed as deduction under s. 28. This reasoning applies with equal force to the analogous provision. of s. 43. s. 44AD. s. 44AE. s. 44AF. s. 44B. s. 44BB. s. 44ABA. s. 44BBB. s. 44C s. 44D and so on which all relate to computation of business income and clearly start with a non obstante clause, which is similar to the one in s. 40. hut reading "Notwithstanding anything to the contrary in ss. 28 to 43C. In this view of the mailer, it may be observed that the provisions of s. 40(a)(ia) are applicable only lo items covered by s. 30 to s, 38 and not to s. 28 and all the direct cost/expenditure covered by s. 28 of the Act. are beyond the scope of disallowance under s. 40(a)(ia) of The Act.

As for the permissibility of the independent disallowance in terms of s. 40(a)(ia) after determining the income by resorting to estimation as a percentage of turnover/gross receipts, we find that in the case of Indwell Construction vs. CIT(1999) 151 CTR (AP) 207 : (1998) 232 ITR 776 (AP) it has been clearly held that where the books of account have been rejected, the Revenue cannot rely on the same books of account for addition of an exact amount of expenditure in the P&L a/c. It was also held in that case that when an estimate is made, it is In substitution of the income that is to be computed under s. 29 and in other words, all the deductions which are referred to under s. 29 are deemed to have been taken into account, while making such an estimate. This will also mean, the High Court observed, the embargo placed in s. 40 is also taken into account. It has been held in the concluding paras 4 and 5 of that decision as follows  4. The pattern of assessment under the IT Act is given by s. 29 which states that the income from profits and gains of business shall  be computed in accordance with the provisions contained in ss. 30 to 43D. Sec. 40 provides for certain disallowances in certain cases notwithstanding that those amounts are allowed generally under other sections. The computation under s. 29 is to be made under s. 145 on the basis of the books regularly maintained by the assessee. If those books are not correct or complete, the ITO may reject those books and estimate the income to the best of his judgment. When such an estimate is made it is in substitution of the income that is to be computed under s. 29. In other words, all the deductions which are referred to under s. 29 are deemed to have been taken into account while making such an estimate. This will also mean that the embargo placed in s. 450 is also taken into account.

 

5.         No doubt there is big difference between profit earned with own capital and profit earned with borrowed capital and such a difference could have been taken into account by the ITO while making an estimate. If the CIT had set aside the estimate on the ground that the vital fact that the business was carried on with own capital and not with borrowed capital has been ignored by the ITO, there may not have been any difficulty in upholding that order. But. when he proposes to add back an exact item in the P&L a/c, he was relying on the rejected books which he could not do as held by the Bench of this Court in Maddi Sudarsanam Oil Mills Co. vs. CIT (supra). There is also a further difficulty if s. 40, as argued by learned counsel, is to be taken into account even after making an estimate. When there are certain other deductions which are to be disallowed such as wealth-tax payment in s.4. can it be said that after making, an estimate, the wealth-tax charged in the P&L a/c should again be added back to the profit. This example, illustrates how the. Contention of the Revenue, that s. 40(b) makes a difference in the situation, is untenable………..

 

The above decision of the Andhra Pradesh High Court has been followed . and a similar view has been taken by the Special Bench (Kolkata) of this Tribunal in the case of ITO vs. Kenaram Sana & Subhash Saha (2008) 116 TTJ (Kol) (SB) 289 : (2008) 8 DTR (Kol)(SB)(Trib) 124: (2008) 301 ITR 171 (Kol)(SB)(AT). wherein disallowance made in terms of s. 40A(3) has been deleted. Respectfully following the decision of the jurisdictional High Court in the case of Indwell Constructions (supra), besides the Special Bench decision of this Tribunal noted above, we are of the considered opinion that the income of the assessee having been determined by resorting to estimation, there is no scope for any further disallowance either in terms of s. 40(a)(ia)/40A(3) or otherwise.

In the light of the above discussion, we uphold the impugned order of the CIT (A) and reject the grounds of the Revenue in this appeal.

 

13.  In this view of the matter, we are unable to uphold the action of CIT (A) in confirming the disallowance under s. 40(a)(ia) of the IT Act The same is deleted.

 

14.  In the result, the appeal of the assessee is partly allowed.