T.V.Rajagopala Rao, -
(1.) THE appeal is filed by the Department, Whereas the cross-objection is filed by the assessee. Both of them relate to assessment year 1989-90 and they arose out of the order of the Dy. Commissioner of Income-tax (Appeals), Visakhapatnam dated 15-10-1990. THE deletion of the addition of Rs. 10,000 forms the subject-matter of the appeal.
(2.) The assessee was carrying on business in construction of ownership flats. The assessee commenced business on 1-9-1987 and filed income-tax return for the transitional previous year for 19 months up to 31-3-1989. During the previous year in question, the assessee took up two projects, namely, 'Hill view' and 'Parimala Bhawan'. The total turnover was Rs. 15,33,000. The gross profit declared was Rs. 1,08,612 and the net profit declared was Rs. 51,065. The assessee is a Commerce graduate with no prior experience in construction and that too in apartments. The assessee handed over civil works to two sub-contractors M/s. A. Gantayya and M/s. Sree Venkateswara Engineers. The assessee maintained books of account for his business. In the profit and loss account, a sum of Rs. 13,70,740 was debited and was shown as having been paid to subcontractors. The assessee entered into two sub-contracts as already stated above which are dated 29-4-1988 and 7-10-1988. The assessee filed details of sub-contract, payments in respect of the above two subcontractors. However, the assessee was unable to produce the subcontractors in spite of reasonable opportunities having been granted to him. The Income-tax Officer stated in his assessment order that details of actual construction took place at various stages is not known. As per the sub-contract agreements, the assessee was to pay Rs. 12,40,000 in total to Shri Thaneru Veera Rangaraj Kumar and Rs. 10,70,000 to Shri A. Gantaiah in various stages. However, the total payments made were only Rs. 13,70,740 out of the total sub-contract works of Rs. 23,10,000 of both the parties. The Assessing Officer states in his assessment order that the assessee is unable to derive his correct profit in respect of this period taking into account the work so far progressed till 31-3-1989 and payments actually to be made and payments made. There is no basis for work in progress estimated by the assessee at Rs. 14,116. The profit and loss account included items like development charges, registration charges, etc. Details for salaries and staff welfare debited at Rs. 18,747 were not available on record. Considering these defects and the ad hoc nature of payments made to sub-contractors without evaluating the actual work done and the work in progress, the Assessing Officer made a round sum addition of Rs. 30,000 to the income returned. Thus the Assessing Officer passed his assessment order dated 30-3-1990 under Section 143(3). The Deputy Commissioner of Income-tax (Appeals), Visakhapatnam, on appeal by the assessee, deleted the addition.
Before the Deputy Commissioner, it was argued that details about salary and other things were never asked to be produced and all other details were submitted which were not doubted. The Assessing Officer has not drawn any adverse inference from payments made to sub-contractors. Various reasons stated in the assessment order do not throw any specific light of defects in the accounts. Therefore, the addition made had no basis. The Deputy Commissioner (Appeals) held that the Assessing Officer had not noticed any specific defect which would have amounted to wrong statement of income. Therefore, he deleted the addition of Rs. 30,000 made by the Income-tax Officer. Aggrieved, the Revenue filed the present appeal.
(3.) I have heard Shri B.Rama Rao, the learned Departmental Representative. None appeared for the assessee though he was served with a notice for the adjourned date of hearing on 7-10-1993, by RPAD. According to the sub-contract terms, the assessee had to pay Rs. 12,40,000. However total payments made are Rs. 13,70,740 out of the total sub-contract works of Rs. 23,10,000 to both the sub-contractors. From the statement of accounts on record, the assessee was unable to say how much profit he derived in respect of the period up to 31-3-1989, taking into account the works so far progressed and the payments actually made and are yet to be made. Further there was no basis for the work in progress estimate made by the assessee at Rs. 14,116. The sub-contractors were not produced before the Assessing Officer even though several opportunities were granted to the assessee for that purpose. The fact that they were not produced was never denied by the assessee himself. However, he says in the statement of facts that the burden to produce them does not lie upon him and it is for the Income-tax Officer to summon them and examine them. At page 1532 of Chaturvedi & Pithisaria's 'Income-tax Law', Fourth Edition, Vol. 2, on the basis of the Madras High Court's decision in CIT v. India Cements Ltd.  98ITR 69, the law is stated to be that 'payment in excess of the amount which an assessee is liable to pay under the terms of an agreement is not an allowable deduction under Section 37(1)'. Here in this case, the assessee merely filed sub-contracts. The Assessing Officer wanted to verify how much payment was made under each of the subcontracts and whether such payments made are in excess of or in short of the payment contemplated to be made or agreed to be made under each of the sub-contracts. The Assessing Officer has got authority to verify the payments under the sub-contracts. This is clearly to be seen from India Cements LLd.'s case (supra). Further on the strength of the Supreme Court's decision, inter alia, in Lachmi narayan Madan Lal v. C/T  86 ITR 439 and Swadeshi Cotton Mills Co. Ltd. v. CIT  63 ITR 57, the learned authors at page 1532 of their 'Law of Income-tax' held as follows :
There might be an agreement under which an assessee has paid amounts to the other party. It is still open to the Assessing Officer to consider all the relevant circumstances and determine for himself whether the amount so paid has been laid out wholly and exclusively for the purpose of assessee's business.
In Lachminarayan Madan Lal's case [supra) some payments made to the selling agent as agency cdmmission were claimed as deduction under Section 37. The question was whether the Income-tax Officer had power to go behind the agreements and decide whether the payments purported to have been made were all made for purpose of business or not. The Hon'ble Supreme Court in the head note at page 440 held as follows :
The mere existence of an agreement between the assessee and its selling agents or payment of certain amounts as commission, assuming there was such payment, does not bind the Income-tax Officer to hold that the payment was made exclusively and wholly for the purpose of the assessee's business. Although there might be such an agreement in existence and the payments might have been made, it is still open to the Income-tax Officer to consider the relevant facts and determine for himself whether the commission said to have been paid to the selling agents or any part thereof is properly deductible under Section 37 of the Act.
The learned Departmental Representative also brought to my notice the decision of the Patna High Court in Ram Chandra Singh Ramnik Lal v. CIT  42 ITR 780. The principle of law followed by the Hon'ble Supreme Court stating category of cases where proviso to Section 13 of the Indian Income tax Act, 1922, should be applied was held to be as follows :
The principle has been applied by a Bench of this Court in Sri Sukh deodas Jalan v. Commissioner of Income-tax, where it was pointed out that if the method of accounting adopted by the assessee did not reflect the true profits of the preceding year, the proviso to Section 13 would apply and the income-tax authorities were entitled to proceed in accordance with that proviso and to compute the profits on such basis and in such manner as they may determine. The same view has been taken in a later decision of this Court in D.D. Kapoor v. Commissioner of Income-tax where the principle has been expressed in a similar manner. A similar view has been expressed by a Bench of the Nagpur High Court consisting of Sinha C.J., and Hidayatullah J., in Ghanshyamdas Permanandv. Commissioner of Income-tax where it was pointed out that if there was any material upon which the Income-tax Officer could say that the accounts made by the assessee were not properly maintained so as to enable the correct profits to be ascertained, then the application of the proviso to Section 13 of the Income-tax Act was a question of fact and not a question of law. At page 82 of the report the learned Judges stated as follows : 'In our judgment no question of law arises at all. The sufficiency of the accounts for this purpose is left by the proviso to the judgment of the officer, subject to appeals such as lie. The assessee has failed to satisfy the appellate authorities, and this Court must, therefore, accept the decision rendered.
Having regard to the principles of law enunciated above, I feel that the accounts of the assessee had not disclosed the correct profit derived by him in respect of the accounting period in question taking into consideration the works so far done till 31-3-1989 and the payments actually to be made and payments actually made by the assessee. I also agree with the Assessing Officer that there is no basis for work in progress estimated by the assessee at Rs. 14,116. I hold that the burden to prove the subcontracts, to bring the siib-contractors and examine them with reference to the sub-contracts entered into by them with the assessee, as also to satisfy the Assessing Officer with regard to the various payments received by them under the sub-contracts lay squarely upon the assessee and not on the Department. I also hold that despite several opportunities granted to the assessee, the assessee failed to produce them and, therefore, the Assessing Officer had reason to doubt the payments said to have been made under the sub-contracts. Further, the details for salaries and staff welfare expenses debited at Rs. 18,747 were not available on record and they were also not produced before the Income-tax Officer. For these reasons, it is a case of estimate of profit under Section 145(1) proviso. I disagree with the order of the Deputy Commissioner (Appeals) that there is no case for addition of Rs. 30,000 and I set aside his order. If the accounts of the sub-contractors were produced before the Deputy Commissioner (Appeals), then utmost, it is a matter where he could have remanded the matter to the Income-tax Officer but certainly it is not a case where he can delete the addition outright.;