K. Srinivas Naidu v. Assistant Commissioner of Income-tax

Chandra Poojari, A.M. :

This appeal preferred by the assessee is directed against the order passed by the CIT(A)-IV, Hyderabad, dt. 13th March, 2009 and pertains to the asst. yr. 2005-06.

2. The assessee raised the following grounds :

1.The CIT(A) erred both on law and on facts in sustaining the addition made by the AO.

2.The assessee submits that the nature of transaction is such that it is an independent and distinct 'contract' as distinguished from 'subcontract' and as such the assessee's case is covered by the provisions of s. 194C(1) and not by the provisions of s. 194C(2) and therefore the provisions of s. 40(a)( ia) would not apply to the case of the assessee.

3.The assessee submits that the facts and circumstances of his case have not been properly appreciated by the AO as well as the learned first appellate authority.

4.The assessee prays that his case be held as an independent 'contract' and not Annexure 'sub-contract' and the addition of Rs. 43,31,010 made under s. 40(a)( ia) for the asst. yr. 2005-06 be deleted.

3. Brief facts of the case are that the assessee is an individual having his own trucks and is engaged in the business of transportation. During the course of assessment proceedings, the AO called for the details of TDS. It was noticed that the assessee had not deducted any tax on hire charges paid amounting to Rs. 82,18,905. Accordingly, the AO was of the opinion that there was a contravention of the provisions of s. 40(a)( ia). It was contended before AO that the provisions of TDS were not applicable to the assessee.

4. The learned Authorised Representative submitted that s. 40(a)( ia) is applicable only in the cases of payments made as per s. 194C wherein sub-s. (1) relates to contractors and sub-s. (2) to sub-contractors. The payments made as hire charges by the assessee however, were not payments for any sub-contract but for contract falling under sub-s. (1) as the assessee had only hired the trucks. It was claimed that the assessee's contract of delivering cement to specified destinations had not been subcontracted out to the truck owner. The assessee claimed that this was an independent contract between him and the truck owner, as distinguished from sub-contract of the work he had undertaken regarding delivery of cement from M/s Priyadarshini Cements.

4.1 The learned Authorised Representative submitted that since the assessee's case was that of contract under s. 194C(1) and not a subcontract under s. 194C(2), the assessee being an individual s. 194C(1) could be applicable to him only from 1st June, 2007, in view of the amendment by the Finance Act, 2007. The assessee therefore, claimed that he was not liable to deduct any TDS and therefore the provisions of s. 40(a)( ia) regarding disallowance of such expenditure on account of no deduction of TDS should not be applicable.

4.2 Further submitted that the assessee claimed that s. 40(a)( ia) applies to cases in which hire charges are 'payable' whereas in the assessee's case the amounts had been 'already paid'.

5. The assessee's counsel averred that the Finance (No. 2) Act, 2004, had made TDS obligatory in respect of payments towards contract and subcontract if the aggregate was more than Rs. 50,000 on a single payment was more than Rs. 20,000 only from 1st Oct., 2004 (sic) . Prior to that TDS was to be deducted only in case of single payment exceeding Rs. 20,000 and not to aggregate of payments exceeding Rs. 20,000.

5.1 The Authorised Representative submitted that the TDS is applicable on aggregate payments exceeding Rs. 50,000 from 1st Oct., 2004. The AO noted that after 30th Oct., 2004, the assessee had paid a total of Rs. 52,38,085 out of which Rs. 43,31,010 were the payments made exceeding Rs. 50,000 on aggregate per truck/lorry. Hence the said amount was considered as liable for TDS.

5.2 He further submitted that the AO felt that hire charges have been paid not by way of a contract under s. 194C(1) but in respect of a subcontract under s. 194C(2) as the assessee was paying the same to the lorry owner for delivery of the goods to a destination as per his own contract with M/s Priyadarshini Cements. The AO opined that if the assessee was only hiring the vehicles i.e., lorries, he would have been required to provide the driver and the fuel on his own towards the same. However, the books of accounts did not show any such entries, nor were there any agreements to this effect. The AO therefore, felt that the assessee was not just hiring vehicles but there was a deal of delivery of goods on behalf of the assessee, as brokerage for hiring charges had also been paid. The AO felt that this is the normal practice in transport business wherein deals with other lorry owners are made for delivery of goods through a broker operating in an 'Adda' who has a list of vehicle owners with him and provides as and when needed by a person.

5.3 He further submitted that in the ledger, trip expenses, lorry numbers on which hire charges were paid had not been reflected. Had only the lorry been hired, the assessee would have been incurring expenses in the course of a trip order taken by the vehicle in the same manner, as he was incurring expenses on lorries owned by him.

5.4 He further submitted that since the hire charges paid by the assessee were a sub-contract under s. 194C(2), the assessee being an individual, who also falls within the purview of s. 44AD, was liable to deduct tax on such hire charges payment, if a single transaction with one party exceeded Rs. 20,000 before 30th Sept., 2004 and if besides the single transaction exceeding Rs. 20,000 aggregate transaction in a year exceeded Rs. 50,000 in a year after 30th Sept., 2004 on which TDS was not done, were held as disallowable.

6. The Departmental Representative submitted that hire trucks from other truck owners for the purpose of carrying out the work taken by the assessee as a 'contractor' from M/s Priyadarshini Cements Ltd. etc. In respect of the trips taken by the said truck owners, the assessee does not provide his own driver, fuel etc. He does not even record trip-wise expenses, along with lorry numbers, in the manner like he records in respect of the trips made to the truck owned by him. Instead, the payment is made to the truck owners for the whole package of the work carried out by the truck owner. The truck owners, using the truck, driver, fuel and meeting the expenses and deliver the goods as per the directions of the assessee and are paid for the entire deal. He submitted that the assessee while hiring the trucks, enters into a deal of delivery of goods and such deliveries are made in pursuance of the contract entered into by the assessee with M/s Priyadarshini Cements etc. The truck owner delivers the goods to the destinations as specified by the assessee which itself is dictated by the terms of the contract so taken by the assessee.

6.1 The Departmental Representative further submitted that the nature of these transactions between the assessee and the truck owners itself does not remain disputed as the assessee himself agrees that the contract between him and the truck owners is in the nature of an 'independent contract'. It is therefore, clear that just in order to take the benefit of the fact that s. 194C(1) has been amended w.e.f. 1st June, 2007 an attempt has been made to contend that the said transactions were in the nature of a 'contract' and not 'sub-contract' which falls under s. 194C(2). However, from the facts it is clear that all the truck owners had carried out the works on behalf of the assessee in terms of the assessee's contract with the contractee. He submitted that under the circumstances, that the provisions of s. 194C(2) were applicable to the assessee individual, who also falls under the purview of s. 44AD and accordingly the assessee was liable to deduct tax at source in respect of the hire charges payments, wherever a single transaction with one party exceed Rs. 20,000 before 30th Sept., 2004 and wherever, after the said date, a single transaction exceeded Rs. 20,000 or the aggregate of transactions with one party in a year exceeded Rs. 50,000. He submitted that it is not alone the outstanding payments but the entire expenditure incurred which falls within the purview of s. 40(a)( ia).

6.2 The Departmental Representative relied on the following judgments :

(i) Southern Agro Engine (P) Ltd. v. Union of India [2008] 215 CTR (Mad) 470 : [2008] 4 DTR (Mad) 253 : [2008] 170 Taxman 468 (Mad); and

(ii) Dey's Medical (UP) (P) Ltd. v. Union of India [2008] 216 CTR (All) 83 :. [2008] 4 DTR (All) 235.

6.3 He submitted that sub-cls. (i), (ia ) and (ib) substituted for sub-cl. (i) to s. 40 by the Finance (No. 2) Act, 2004 w.e.f. 1st April, 2005 and also drew our attention to the memorandum explaining the clauses which reads as follows :

"Clause 11 of the Bill to seek to amend s. 40 of the IT Act relating to amounts not deductible. The proposed amendment seeks to insert a new sub-cl. (ia) in cl. ( a) of the said section so as to provide that any interest, commission or brokerage, fees for professional services or fees^: for technical services, payable to a resident or amount credited or paid to a contractor or sub-contractor being a resident for carrying out any work (including supply of labour for carrying out any work) on which tax has not been deducted or, after deduction has not been paid before the expiry of the time prescribed under sub-s. (1) of s. 200 and in accordance with the other provisions of Chapter XVII-B shall not be allowed as deduction in computing the income chargeable under the head 'Profits and gains of business or profession'. It is further proposed to provide that where in respect of any such sum, tax has been deducted under Chapter XVII-B or paid in any subsequent year, such sum shall be allowed as deduction in computing the income of the previous year in which such tax has been paid. It is also proposed to define the expressions 'commission or brokerage', 'fees for technical services', 'professional services' and 'work' used in the proposed new cl. (ia)."

This amendment will take effect from 1st April, 2005, and will, accordingly, apply in relation to the asst. yr. 2005-06 and subsequent years.

6.4 Further he submitted that a statute is a creature of the legislature. Every statute has its preamble; it has objects and reasons for which it was enacted. To find out the correct meaning of a particular provision of the statute, it is the duty of the Court of law to examine not only the words of the said provision but also the background in which such law is enacted. Every statute must be given a logical meaning and harmonious construction. The words used in the statute are not used for nothing. Each and every word has its significance. It is a duty of the judiciary to interpret the same for its implementation as and when they are approached. For this purpose, he relied on judgment of Calcutta High Court in the case of Bhagwati Prasad Kedia v. Commissioner Of Income-Tax [2001] 167 CTR (Cal) 336 : [2001] 248 ITR 562 (Cal).

6.5 Further, the Departmental Representative relied on the order of the Tribunal, Jodhpur Bench, in the case of Shree Choudhary Transport Co. v. ITO [2008] 119 TTJ (Jd) 3 : [2008] 14 DTR (Jd)(Trib) 217 : [2009] 27 SOT 76 (Jd)(URO) wherein it was held that :

"The company was free to hire trucks from market at prevailing prices and the amount of expenses incurred, if any, was to be debited to the assessee's account terming him to be a transporter. The assessee merely acted as an independent contractor while carrying on the aforesaid works contract awarded to it. Admittedly, the assessee did not own trucks of its own for carrying out such transportation contract and had engaged the services of other truck owners/operators for lifting goods from the premises of 'G' Ltd. And transporting the same to various sites in Rajasthan and goods receipt/Bilty was prepared and the same was to be taken as a contract between the assessee and such truck owners/operators. A clarification to that effect given vide the Board's Circular No. 715, dt. 8th Aug., 1995 [[1995] 127 CTR (St) 13 ] had been brought on record by the Revenue and was strongly relied upon by the AO as well so as to consider the goods carried under particular goods receipt/Bilty as a separate contract. The assignment of such contract by the assessee to the truck operators/owners was rightly taken as a subcontract for carrying out the job awarded to the assessee by 'G' Ltd. Provisions of s. 194C were duly attracted to such payments which had been made/credited or were likely to be paid on account of obligation under each goods receipt/Bilty. The AO had found that the payments made and credited with respect to each of such contracts involving aggregate payment of Rs. 20,000 on a particular day amounted to Rs. 57,11.625. In the light of clear provisions contained in s. 194C and having regard to the fact that both the amounts actually paid or credited or likely to be paid on account of each contract had exceeded Rs. 20,000 on a single day, s. 194C had rightly been found applicable. Therefore, there was no wrong committed by the CIT(A) in holding that the assessee had committed default in making deduction with respect to payments aggregating to Rs. 57,11,625 without deduction of tax at source.

7. On the other hand, the learned Authorised Representative relied on the order of the Co-ordinate Bench of Hyderabad, in the case of Tej Constructions in ITA No. 308/Hyd/2009, dt. 23rd Oct., 2009 for the asst. yr. 2005-06 wherein the issue was decided in favour of the assessee.

8. We have heard both the parties and perused the material on record. In the present case, the main contention of the assessee's counsel is that s. 194C(1) is applicable and s. 194C(2) is not applicable. The AO held that the assessee is liable for deduction of tax under s. 1940(2) of the IT Act on the premise that the assessee was having agreement with the parties as a sub-contractor through whom truck were arranged for transportation of goods. Neither the AO nor the CIT(A) recorded any findings of fact that there was any oral or written agreement between the assessee and transporters for carriage of goods or there has been tripartite agreement between the assessee, M/s Priyadarsini Cements and truck owners, nor it has been proved that any sum of money regarding freight charges was paid to them in pursuance of contract for specific period, quantity or price. In the absence of these facts, we are unable to give any findings to the applicability of the s. 1940(1). The assessee is pleading before us that s. 1940(1) is applicable without placing any documents to prove that he has entered into an agreement as a contractor with only truck owners and not as a sub-contractor and the assessee's arguments are only in air. In view of this fact, we are not in a position to uphold this argument of the assessee and the same is dismissed.

9. The other argument of the learned counsel of the assessee is that the s. 40(a)(ia ) applies to cases in which the hire charges are 'payable' and not applicable to the amounts which have been already paid. In our opinion, this issue already decided by the Co-ordinate Bench in the case of Tej Constructions in ITA No. 308/Hyd/2009 for the asst. yr. 2005-06 vide order dt. 23rd Oct., 2009 wherein it was held as follows :

"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 precluded - from invoking any other provisions of the IT Act to make further addition. We find force in this argument. 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 taken 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's- books were rejected and income was determined. It was held in the case of Commissioner Of Income Tax, U.P v. 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 v. Velliappa Textiles Ltd. [2003] 184 CTR (SC) 193 : [2003] 263 ITR 550 ( SC) 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 and apply it, not to make it.

(iv) Since the function of the Court of law is jus dicere and not jus dare, the Court of law cannot read the recommendations of the Law Commission as justifying an interpretation 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 for 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 XVTI-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 in 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 for 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 include paid or incurred. 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 v. 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] 197 CTR (St) 1] has also clarified that the provision of the s. 40(a) (ia ) is to 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 payment is not free from doubt. In any case, if the assessee has paid the impugned amount and not payable at the end of the year on the date of balance sheet, then the provisions of s. 40(a)( ia) 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 on payable to contractor or subcontractor 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, we are of the view that 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 Shri N. Ramachandra Reddy in ITA No. 1372/2007, the Tribunal order vide 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 books of account noted by the AO as well as the CIT(A). The AO on that ground has not rejected the books of account, but proceeding on the basis of returned income of Rs. 24,92,428, made substantial additions including statutory disallowance of Rs. 3,92,08,601 under s. 40(a)( ia) of the Act. He 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 found 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 preferring to 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 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 the 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. 1,07,47,807.'

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 in 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 fate 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 s. 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(f) 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 deductions 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 provisions 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, but reading 'notwithstanding anything to the contrary in ss. 28 to 43C. In this view of the matter, it may be observed that the provisions of s. 40(a)( ia) are applicable only to 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 Constructions v. Commissioner Of Income-Tax. [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 Millls Co. v. 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 v. Kenaram Saha & Subhash Saha [2008] 116 TTJ (Kol)(SB) 289 : [2008] 8 DTR (Kol)(SB)(Trib) 124 : [2008] 301 ITR 171 (Kol)(SB), 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."

10. Respectfully following ratio laid down by the Co-ordinate Bench, Hyderabad in the case of Tej Constructions cited (supra) we are inclined to allow the appeal of the assessee on issue relating to the applicability of s. 40(a)(ia ). Similar view has been taken in the case of Jaipur Vidyut Jaipur Vidyut Vitran Nigam Ltd. v. Income Tax [2009] 123 TTJ (Jp) 888 : [2009] 26 DTR (Jp)(Trib) 79. Further, the judgment relied by the Departmental Representative are relating to the upholding the constitutional validity of the provisions of s. 40(a)(ia ) and not relating to the applicability of s, 40(a)( ia).

11. In the result the appeal of the assessee is partly allowed.