Income Tax Appellate Tribunal - Ahmedabad
Deputy Commissioner Of Income Tax vs Project Technologists (P) Ltd. on 17 March, 2005
Equivalent citations: (2005)98TTJ(AHD)471
ORDER
A.L. Gehlot, A.M.
1. This appeal by the Revenue is directed against the order dt. 12th July, 1996 of CIT(A)-I, Baroda, for the asst. yr. 1993-94.
2. The first ground raised in this appeal is in respect of deleting the addition of Rs. 10,25,000 on account of sales promotion expenses.
2.1 During the assessment proceedings, the AO noticed that a sum of Rs. 11,46,385 has been claimed by the assessee as sales promotion expenses. The AO further noticed that out of the said expenses, the assessee has claimed the sum of Rs. 10,25,000 as having been paid to Bermaco Valves (P) Ltd. as marketing support charges. The AO disallowed the said expenses of Rs. 10,25,000 on the ground that the assessee has not submitted the details of the services rendered by the payee. However, in respect of balance amount of Rs. 1,21,385, the AO has treated the entire amount as entertainment expenses and has given the deduction of Rs. 65,693 allowable under Section 37(2). Thus, the AO disallowed a total amount of Rs. 10,80,693. The CIT(A) deleted the addition with the observation that the assessee has incurred the expenses of Rs. 10,25,000 for sales promotion and held that the said expenses were bona fide and reasonable. The CIT(A) accordingly deleted the addition of Rs. 10,25,000.
2.2 In respect of disallowance of Rs. 55,693 under Section 37(2), the CIT(A) observed that the AO has not given credit for the sum of Rs. 22,970 which has been disallowed by the assessee's tax auditors on account of entertainment expenses. He accordingly allowed the relief of Rs. 22,970.
2.3 The learned Departmental Representative supported the order of AO and submitted that the assessee has failed to prove the services rendered by the said party against which the payment was made. He further submitted that the assessee has simply explained the narration given in the debit note i.e. "being amount debited or account towards marketing support charges." The learned Departmental Representative submitted that the assessee has to prove the services rendered in respect of which the assessee has paid the payment. He further submitted that even if the payment is made by cheque which is also not sufficient to allow such expenses. In support of his contention, he relied upon the decisions reported in M. Ravji & Co. v. ITC (1996) 55 TTJ (Ahd) 625 and Patel Chemical Works v. CIT .
2.4 The learned Authorised Representative, on the other hand, supported the order of CIT(A) and submitted that the assessee has submitted all the details in this regard. The learned Authorised Representative pointed out p. 1 of assessee's paper book where copy of account of M/s Bermaco Valves (P) Ltd. is available. The payments were made on day-to-day basis through cheques. It is also the submission of learned Authorised Representative that it is not a case where the adjustment entry has been passed at the fag end of the accounting year. The learned Authorised Representative submitted that the assessee has explained before the AO about the services or work done by Bermaco Valves (P) Ltd. He drew our attention to pp. 10 and 11 of assessee's paper book and submitted that the payment to Bermaco Valves (P) Ltd. has resulted in the following job orders :
"Date Customer Nature of work Value of the job
30-10-1993 Bindal Agro Chem. Ltd. Fabrication and erection of 180 lakhs
off site piping
3040-1993 Bindal Agro Chem. Ltd. Light equipment piping 260 lakhs
erection job
5-11-1993 Bindal Agro Chem. Ltd. Urea Piping 540 lakhs
25-4-1992 Oswal Engg. & Projects Fabrication and structural 90 lakhs
steel work
26-3-1993 R.S. Engineers Ammonia storage tank
7-10-1992 Oswal Agro Mills Ltd. SS Reactor vessels-26 Nos. 182 lakhs
1252 lakhs
i.e. 12.52 crores"
The learned Authorised Representative submitted that copies of the relevant work orders/letter of intents, etc. were also submitted before the AO. The learned Authorised Representative submitted that the expenses were incurred by the assessee in commercial expediency and such expenses are allowable. It is also the submission of learned Authorised Representative that how the business is to be done is the job of the assessee and not of the AO. The learned Authorised Representative relied upon the decisions reported in Survir Enterprises (P) Ltd. v. ITO (1995) 51 TTJ (Del) 197, CIT v. N.M. Associates (2002) 256 ITR 141 (Mad), Aruna Mills Ltd: v. CIT and CIT v. Dhanraigirji Raja Narasingirji .
2.5 We have heard the learned representatives of the parties and perused the record. After considering the facts of the case, we notice that against the said payment of Rs. 10,25,000 being sales promotion expenses, the assessee got the job orders aggregating to Rs. 12.52 crores. It has been noticed from the order of the CIT(A) that these expenses have been incurred wholly and exclusively for the assessee's business. It has also been noticed that the assessee-company is engaged in the business of manufacturing equipments for chemical and other plants as also in the business of construction of chemical and other plants at various sites throughout the country. In this regard, we find force in the submission of learned Authorised Representative that these expenses have been incurred for commercial expediency as without such expenses the large volume of the assessee's business cannot be achieved. It has also been noticed that M/s Bermaco Valves (P) Ltd., has issued various bills/debit notes for the services rendered. On perusal of order of the CIT(A), we notice that the observation of the AO that the assessee has not produced any evidence for the services rendered by the payee is factually incorrect. In fact, the assessee has got business of above Rs. 12.52 crores from various companies which is an undisputed fact. After considering the totality of the facts of the case, we find that the CIT(A) has correctly deleted the addition. We accordingly confirm the order of the CIT(A) on this issue.
3. The second ground is pertaining to disallowance of deduction under Section 80-I on account of correct apportionment of expenses to various units.
3.1 The assessee has claimed the deduction of Rs. 5,78,305 under Section 80-I. During the assessment proceedings, AO noticed that the assessee has not apportioned the expenses under the head-office and manufacturing division. The AO observed that the assessee has debited the expenses on the basis of number of employees, administrative need, sales, etc. However, the AO mentioned that the assessee has not properly apportioned the said expenses and has disallowed the assessee's claim for deduction under Section 80-I on the ground that there would not be any profit if the expenses are properly apportioned between the head-office and manufacturing division. The CIT(A) after considering the submission of the assessee held that the assessee is entitled to deduction under Section 80-I. 3.2 The learned Departmental Representative supported the order of AO and submitted that the assessee has not made the proper apportionment of expenses and if a proper apportionment is made there would not be any profit in the manufacturing division with the result no deduction under Section 80-I would be allowable.
3.3 The learned Authorised Representative, on the other hand, supported the order of CIT(A) and submitted that assessee has apportioned the various expenses properly and that, the AO's observations to the contrary are factually incorrect. He further submitted that the assessee had apportioned various expenses depending upon the division to which said expenses actually belong. The assessee has apportioned the said expenses on a proper method. The learned Authorised Representative submitted that in a situation like the case of the assessee, expenses have to be apportioned on the basis of the number of employees, sales and relative administrative need of such expenses for the division. He further submitted that the assessee has debited only those expenses to the manufacturing division which relate to the manufacturing division and that it has not debited those expenses to the manufacturing division which do not pertain to the manufacturing division. The learned Authorised Representative submitted that the AO has not pointed out any specific expense which pertains to the manufacturing division, but which has not been debited to the manufacturing division.
3.4 We have heard the learned representatives of the parties and perused the record. We find that the AO has simply disallowed the claim of the assessee under Section 80-I on the basis of not correct apportionment of expenses whereas the CIT(A) has accepted the contention of the assessee and allowed the deduction under Section 80-I. The controversy before us is limited in the sense i.e., the proper apportionment of expenses between manufacturing units and others. For this purpose, it is relevant to state that the assessee is a private limited company and its books of account are subject to audit. The auditor is required to certify the P&L a/c as true and correct and in accordance with books of account. We find that in such a case the apportionment of expenses accepted by the auditor prima facie should be the correct apportionment, as the auditor has to examine each and every voucher and basis of apportionment before giving auditor's report and before certifying the final statements. Under the circumstances, we find it appropriate that the apportionment made by the technical person, i.e., the auditor is required to be accepted unless and until some contrary material or evidence is available on record or found by the AO. Therefore, we set aside the order of CIT(A) and send back this matter to the file of AO with the direction that to take the apportionment of expenses on the basis of audited finally statements and if there is no concrete material or evidence, he should accept the apportionment made by the auditor and allow the claim of the assessee accordingly.
4. The third ground is pertaining to the addition of Rs. 1,03,237 made on account of prior period expenses.
4.1 The AO made the addition of Rs. 1,03,237 on account of prior period expenses. The CIT(A) after considering the submission of the assessee deleted the addition following the judgment of jurisdictional High Court reported in Saurashtra Cement & Chemical Industries Ltd. v. CIT (1995) 213 ITR 523 (Guj).
4.2 The learned Departmental Representative supported the order of AO whereas the learned Authorised Representative supported the order of CIT(A).
4.3 We have heard the learned representatives of the parties and perused the record. The contention of the assessee before the CIT(A) that the assessee has claimed the said expenses in the accounting year under consideration since the same have been quantified and determined in the accounting year relevant to the assessment year under consideration. The Revenue has not controverted this fact by any evidence or material. After considering the facts of the case, we find that the expenses were quantified and determined in the accounting year. Such expenses are allowable. In view of that we do not find good reason in interfering the order of the CIT(A).
5. The fourth ground is in respect of deleting the addition of Rs. 38,14,044 being the income not accrued.
5.1 During the assessment proceeding, the AO has noticed that the assessee has claimed a sum of Rs. 38,14,044 as not forming part of the income with the following narration :
"Amount debited to the account of Indian Acrylics Ltd. and taken in the books as profit deducted from book profits as the same is not considered as income of Rs. 38,14,044."
The AO had noticed a note which is filed along with the return of income. The said note reads as under :
"The assessee undertook the contract for the construction and erection of the plant of Indian Acrylics Ltd. at Sangrur in Punjab. While the construction and erection work was in progress, the site was attacked by terrorists and a large number of persons including the engineers employed by the assessee and the technical consultants to the project were killed/wounded. As a result, the site was unattended for a long time. The assessee at the request of the owners restarted and completed the work. However, the consultants did not return to the site and the final bill raised by the assessee was not certified by the consultants and it does not appear to have been accounted for by the customer. The total amount outstanding in the name of the customer in the books of the assessee is Rs. 53,14,044. This amount is not accepted by customer and no replies to the assessee's communications are received from them. From the oral indications, it appears that the customer is not likely to accept the liability as per the bill raised by the assessee. The assessee is not likely to receive an amount in excess of Rs. 15 lakhs against the amount due. Keeping in mind the ratio of Tribunal's decision in the case of IAC v. Dredging Corporation of India Ltd. (1987) 27 TTJ (Hyd) 226 : (1987) 23 ITD 49 (Hyd), the assessee submits that though accounted for in the books of account, the amount of Rs. 38,14,044 has not accrued to the assessee. The said amount is therefore deleted from the computation of total income above. It is further submitted that unilateral claims do not give rise to accrual or receipt of income...."
The AO has rejected the assessee's contention on the ground that the said amount is in the nature of bad debts and that the said bad debts can be allowed only if the assessee writes off the said amount. The AO has mentioned that since the assessee has not written off the said amount and is still claiming the said amount as receivable from M/s Indian Acrylics Ltd., the said amount has to be treated as the assessee's income. The AO accordingly added the sum of Rs. 38,14,044 in the income of the assessee. The CIT(A) deleted the said addition with the following observation :
"In view of the detailed facts and appellant's submissions discussed above, it is clear that the appellant has unilaterally debited the account of IAL with the sum of Rs. 53,14,044 in its books of account, and has credited the sum of Rs. 53,14,044 to its income. However, as discussed above in detail, IAL has not only rejected the appellant's said claim of Rs. 53,14,044 for the inordinate delay in completion of the relevant work project which is still incomplete, but has raised the counter claim of Rs. 4.72 crores (including the penalty of Rs. 345 lakhs for the delay in the execution of work) against the appellant. It is also the appellant's contention that despite its best efforts, it has not received any amount out of the said sum of Rs. 53,14,044 so far. Moreover, in view of the principles laid down in the judgments reported as CIT v. Shoorji Vallabhdas & Co. , CIT v. A. Gajapathy Naidu , CIT v. Nadiad Electric Supply Co. Ltd. , CIT v. Motor Credit Co. (P) Ltd. and CIT v. Kerala State Drugs & Pharmaceutical Ltd. , it is held that mere passing of a unilateral entry in an assessee's books of account cannot give rise to any income when the said claim is challenged and rejected by the party concerned. Considering the facts and appellant's submissions discussed in detail above, and following the principles laid down in the judgments reported as CIT' v. Shoorji Vallabhdas & Co. (supra), CIT v. A. Gajapathy Naidu (supra), CIT v. Nadiad Electric Supply Co. Ltd. (supra), CIT v. Motor Credit Co. (P) Ltd. (supra) and CIT v. Kerala State Drugs & Pharmaceutical Ltd. (supra), it is held that, the alleged income of Rs. 38,14,044 has not accrued to the appellant during the accounting year relevant to the assessment year under consideration. Therefore, the AO is directed to allow the appellant's claim for deduction of the said sum of Rs. 38,14,044. Therefore, the appellant gets a relief of Rs. 38,14,044 in this regard."
5.2 The learned Departmental Representative supported the order of AO whereas the learned Authorised Representative supported the order of CIT(A).
5.3 We have heard the learned representatives of the parties and perused the record. The brief facts of the case are that in May, 1990, Indian Acrylics Ltd. awarded a contract to the assessee relating to the setting up of acrylic plant at Sangrur in Punjab. The estimated value of the said contract was Rs. 2,82,48,938 based on the estimated quantity of work to be done and unit price as indicated in the price schedule attached to the contract. Completion period of the work as per the terms of the contract was 9 months from the date of start of work. The assessee has commenced the said work in August, 1990. The assessee used to raise bills as per the terms of the contract and after adjusting the advance payment and withholding of the retention money and deducting the income-tax at source, the awarder used to pay the balance amount to the assessee. In November, 1991, the assessee had carried out the work of the aggregate value of Rs. 125 lakhs. As per the terms of the contract, timely supply of material and equipment was to be ensured by awarder. It was mutually agreed that site work will be completed in March, 1992. On 10th March, 1992, there was a terrorist attack at the work site in which 16 persons belonging to various contractors, IAL and 2 senior engineers of the assessee-company were killed and the construction manager of the assessee-company was wounded. It has been pointed out to the CIT(A) by the assessee that an expenditure of over Rs. 10 lakhs as compensation to the families of the deceased and in the medical treatment of the wounded persons was incurred by the assessee. Due to terrorist action, all the site sub-contractors deserted the project site. The assessee requested the awarder for payment for the said work and an innumerable letters have been written to IAL and the assessee's officials have visited IAL office and requested for the payment for the work done by it. However, the letters and visits have not yielded any result. The due payment of the assessee has been rejected by the awarder on the ground that the assessee has not completed the job as per the terms of the contract and in view of the inordinate delay in the execution of the project which is still incomplete. The awarder has denied the payment of Rs. 53,14,044. On the contrary, the awarder has made a counter claim of Rs. 4.72 crores including the penalty of Rs. 345 lakhs at the rate of Rs. one lakh per day for the delay in the execution of the work by the assessee. The assessee has though accounted for the amount of Rs. 53,14,044 showing debited to the account of the awarder in the books of account of the assessee. However, the awarder has not accepted the said claim of Rs. 53,14,044. It has been pointed out before the CIT(A) that the maximum amount that could be payable to the assessee was Rs. 15 lakhs. Accordingly, the income of Rs. 53,14,044 has been credited in assessee's books of account, the assessee has debited the sum of Rs. 38,14,044 (Rs. 53,14,044 - Rs. 15,00,000) from the total income on the ground that assessee's claim was unilateral claim not accepted and acted upon by the customers. The contention of the assessee that the said claim cannot form the basis of the assessee's income. After considering the facts of the case and after going carefully through the orders of lower authorities, we find that the CIT(A) has elaborately discussed the issue at length. He has also discussed the various judgments cited by the learned Authorised Representative. After considering the facts of the case, we find that the CIT(A) has correctly held that the said income has not been accrued to the assessee during the year under consideration, we find that the CIT(A)'s order is reasonable and we do not find any good reason in interfering it. We accordingly confirm the order of CIT(A) with certain modifications wherein he has deleted the addition of Rs. 38,14,044, subject to the modification that if any amount is received or realised by the assessee in subsequent year that will be subject to tax as per the provisions of the IT Act.
6. The fifth ground is pertaining to deleting the addition of Rs. 2,79,085 made under Section 40A(3) of the Act.
6.1 During the assessment proceedings, the AO noticed that the assessee has made the payments amounting to Rs. 3,47,344 to various parties for various expenses in cash. The AO has accepted the assessee's submission with respect to the cash payment of Rs. 12,250 and has made the addition of Rs. 3,35,094 for balance amount under Section 40A(3). The AO has also mentioned that assessee has not furnished any detail with regard to payments made to two of the parties. However, the AO did not mention the names of the said two parties. The CIT(A) deleted the addition to the extent of Rs. 2,79,055 with following observations :
"Considering the totality of the facts and appellant's submissions discussed above, and following the principles laid down in the judgments reported as Hasanand Pinjomal v. CIT . Girdharlal Goenka v. CIT and Attar Singh Gurmukh Singh, Etc. v. ITO , it is held that the cash payments amounting to Rs. 2,79,055 representing the payments made to sub-contractors for giving wages to the labourers have been made by the appellant in exceptional and unavoidable circumstances and therefore, the said payments are covered by the provisions of Rule 6DD(j) of the IT Rules, 1962 read with the CBDT's Circular No. 220 dt. 31st May, (1977) 108 ITR (St) 8. Accordingly, the addition of Rs. 2,79,055 made under Section 40A(3) stands deleted. Therefore, the appellant gets a relief of Rs. 2,79,055 in respect of addition made under Section 40A(3)."
6.2 We have heard the learned representatives of the parties and perused the record. We find that all the cash payments have been made in exceptional and unavoidable circumstances. The cash payments represent genuine business expenses and that most of the cash payments have been paid to the sub-contractors for payment to be made in cash to the labourers. Cash payments of Rs. 2,79,055 have been made to sub-contractors for paying wages to their employees. The contention of the assessee that the payments made in cash are duly covered by the exceptional and unavoidable circumstances as stipulated in Rule 6DD(j). We find that the CIT(A) before deleting the addition discussed various judgments including the judgment of Calcutta High Court reported in Girdharilal Goenka v. CIT wherein the object of Section 40A(3) has been discussed. The CIT(A) has also relied upon the judgment of Hon'ble Supreme Court in the case of Attar Singh Gurmukh Singh, Etc. v. ITO (1991) ITR 667-672 and 673 (SC). We find that before deleting the addition, the CIT(A) has discussed the relevant judgments and CBDT circular No. 220 dt. 31st May, 1997. After considering the facts of the case, we find that the CIT(A) has correctly deleted the addition made under Section 40A(3) as the cash payments made were in exceptional circumstances, i.e., payment to labourers and in accordance with CBDT circular cited supra. We do not find any error in the order of the CIT(A). Therefore, same is confirmed wherein the addition of Rs. 2,79,055 has been deleted.
7. In the result, the appeal is partly allowed for statistical purposes.