Income Tax Appellate Tribunal - Ahmedabad
Prasanna Associates, Baroda vs Assessee on 22 January, 2208
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDAB AD BENCH, AHMEDABAD
CAMP AT V ADODAR A -03.11.2009 to 13.11.2009
BEFORE HON'BLE S/SHRI P.K.BANSAL, AM AND D.T.G ARASI A,JM.
ITA No. 1050/ Ahd/2008
(Assessment Year 2002-03)
M/s Prasanna Associates
P AN: ABQPJ7682J
Prasanna House,
Associated Society,
Opp Radha Krishna park
Akota
Baroda .... Appellant
V/s
DCIT, Circle 2,
Baroda ...Respondent
Appearance
Revenue by : Smt.Smita Sawant
Assessee by : Shri Lalit R Mehta
ORDER
Per BENCH This is an appeal filed by the assessee challenging the order of the learned CIT(A)-II, Baroda dated 22.01.2208 for the assessment year 2002-03 The assessee has raised the following grounds :
"1. The order of learned CIT(A) is against law and facts
2. the learned CIT(A) has erred in fact and in law in making an addition of Rs.25,01,736/- being 2 labour charges considering the same as non- genuine expenditure;
Without prejudice to the above, the learned CIT has erred in fact and in law, in not appreciating the argument of the appellant that the payment to the respective parties were made earlier and were later on regularized by way of making payments and accordingly resulted into merely imprope r accounting and not non-genuine expenditure.
Without prejudice to the above, the learned CIT has also erred in facts in not appreciating the fact the Gross profit disclosed by the appellant was comparable with comparable cases (including statutory rate of 8% prescribed under section 44AD and Accordingly even if the above regularity entails rejection of books it does not call for any further addition
3. The learned CIT has erred in facts and law in confirming the addition of Rs.257500/- invoking the provisions of section 41(1) of the Income Tax Act, 1961
4. `the learned CIT(A) has erred in charging interest u/s 234B and 234D of the IT Act, 1961;
5. The ld. CIT (A) has erred in fact and law in initiating penalty proceedings u/s 271 (1)( c ) of the IT Act, 1961."
2. Facts of the case in respect of the ground no.1 are that the AO noticed that the assessee got construction receipt of Rs..1,15,90,406/-. It is noticed by the AO that the assessee has shown labour charges paid to various sub-contractors as under :
3
Sr . No . - Nam e of t h e p ar t i es Co ntr ac t P a ym e nt d ur i ng am oun t F. Y. 2 0 01- 0 2 ( am ou nt de b it e d F. Y. 20 0 1- 02) 1 ( L 1) S ur es h A D ar b ar 1, 4 0, 55 0 / 1, 2 5, 00 0 /- 2 ( L 2) P ur s h o tt am K R at ho d 2, 1 2, 21 0 /- 1, 9 8, 91 0 /- 3 ( L 3) B hu p ats i nh So l a nk i 2, 1 9, 41 0 /- 2, 0 3, 55 0 /- 4 ( L 4) K an t ib h a i S P a te l 2, 9 3, 51 8 /- 2, 6 7, 81 8 /- 5 ( L 5) B ha v i n K Pa te l 79 , 80 0/-
6 ( L 6) V ik r am P P ar m ar 2, 9 3, 91 5 /- 2, 7 9, 91 5 /- 7 ( L 7) B hik h a bh a i S o la nk i 3, 3 1, 09 5 /- 3, 1 5, 81 5 /- 8( L 8) G a na p at bh a i S o l an i 1, 5 0, 00 0 /- 1, 5 0, 00 0 /- 9 ( L 9) Rm es hb h a i Pr aj a p at i 3, 1 4, 02 0 /- 3, 0 4, 12 0 /- 10 ( L1 0) B hu d ar b h a i Pr aj a p at i 2, 5 7, 50 0 /- 11 ( L1 1) M. S . De g ad wa l a 3, 1 4, 50 0 /- 1, 9 9, 50 0 /- 12 ( L1 2) K am les h I P ar m ar 4, 6 7, 21 8 /- 4, 6 7, 21 8 /-
3. The AO conducted the inquiry and ultimately came to the conclusion at pages 12 and 13 of the assessment order that Shri Kamlesh I Parmar is a trusted employee of the assessee Shri Himanshu B Joshi. The cheque to have been issued in the name of various persons for the labour contract were ultimately credited in the bank account of Shri Kamlesh I Parmar and from that account all the funds have gone to the account of the assessee that cheques were issued by him in favour of Jay Panchmahal Credit Society and the payments so made were to the extent of Rs.22,16,296 while the amount credited to the Jay Panchmahal Credit Society was Rs.22,16,700. The AO, therefore, treated the labour charges to the extent of Rs.25,01,736/- as bogus claim out of the labour charge amounting to Rs.53,77,258/- The pleas of the assessee that the assessee, in fact, has taken the loan from Jay Panchmahal Credit Cooperative Society, Baroda only to the extent of Rs.508000/- on 02.04.01, 4 Rs.519000 on 18.04.01, Rs.405000 on 05.05.01; Rs.193000 on 08.05.01Rs.340000 on 07.06.01 and Rs 120000 on 10.06.01 out of which ;the assessee has incurred the labour charges paid to the individual labour engaged for the construction as well as maintenance work of the road carried out by him as per the contract and entered into an agreement with Effluent Channel Project ( ECPL) was totally ignored and the matter carried before the CIT(A), who confirmed the action of the AO sustaining the disallowance by observing as under :
"2.3 I have considered the submissions of the counsel and facts of the case. Appellant in Para-4 of its reply accepted that outcome of the inquiry conducted by the Assessing Officer is correct. Therefore, it is not disputed that appellant could not prove the identity of the labour contractors and also the nature of services rendered by them. It is also not disputed that the payments made to them by cheque were returned back to the appellant's undisclosed bank account . This clearly disproves any payment made to the alleged labour contractors. Appellant claimed that despite the accepted fact that labour charges were claimed, the conclusion that labour payments are bogus can not be treated as correct. In support of this appellant claimed that it received contract through competitive bidding on which the gross profit to the extent assessed by Assessing Officer cannot be possible. In respect of appellants ECPL project where gross receipts were Rs.106.70 lacs, labour payments claimed were Rs.53.77 lacs against material charges Rs.23.09 lacs which was claimed to be in line with theoretical calculation. Out of the labour claim of Rs.53.77 lacs Assessing Officer considered bogus claim on account of labour to the extent of Rs.25,01,736/- which means Assessing Officer allowed labour charges to the extent more than Rs.28 lacs. Appellants claim that 5 payments to the labour contractors were made in cash immediately on conclusion of contract which was not shown in the books whereas cheque payments were shown in the books which has gone to Shri Kamlesh Parmar and finally came back to the appellant. There is no basis or evidence in support of payment to the labours in cash. For the purpose of claiming such bogus expenses and getting back the funds also, appellant maintained an undisclosed bank account so that Department cannot detect the bogus nature of expenses . It is only after such a detailed and exhaustive investigation by the Assessing Officer, appellants claim of bogus expenses in the form of labour charges was found and once the appellants was caught, the explanation given is of cash payment to the labour prior to cheque payment.
2.3.1. It is held by various court's decisions including Apex court that onus to established that expenses has been incurred for the purpose of business is on appellant and not on revenue. Here appellant claimed the expenses without providing any explanation to the finding of the Assessing Officer that the parties were non-existing, no services were rendered and payments made in their name were ultimately deposited in appellants undisclosed bank account . Even appellant accepted the results of inquiry without making any attempt or efforts to trace these labour contractors and produce them before Assessing officer. Clearly the case falls in the category of claim of bogus expenses not incurred for the purpose of business and clearly the case falls in the category of claim of bogus expenses not incurred for the purpose of business and clearly disallowance u/s.37(1) of I.T Act. Assessing Officer has not disallowed the entire labour expenses of Rs.53.77 lacs. He only disallowed those labour expenses to the extent of Rs. 25.02 lacs which were found to be bogus and about which appellant did not discharge its burden to explain the same. Therefore, it cannot be said that the Assessing Officer concluded without considering the facts in totality. Even after disallowance of Rs25.02 lacs, more than Rs.28 lacs labour expenses were allowed by the Assessing Officer which were genuinely incurred by the appellant in fulfillment of the contracts he has 6 undertaken. Therefore, the disallowance of expenses on merit and after considering the results of inquiries is correct and justified. The same are required to be confirmed under the provisions of I.T Act.
2.3.2 Coming to the appellants other argument that the projects taken were for preventive maintenance and repair works and that there was gap between execution of work and receipt of payment . Appellant also argued that if Assessing Officers contention is accepted then it could give net profit of 23.27% and such high net profit in bidding project is unimaginable and will given absurd results. I do not agree with the appellants argument simply because the work undertaken by the appellant are in the nature of repairs, maintenance and strengthening if existing roads. The profitability in such project can definitely be more than normal construction project . The margin of the appellant cannot be estimated or compared which is specific to the nature of work undertaken. In any case, if appellant claims that the profit is low, onus is on appellant to prove that it has incurred the expenses . Financial results and figures cannot determine the allowability of any expenses for which there are specific provisions in the Act. Therefore, appellants argument that 23% profit is absurd is without any basis and that cannot be taken as valid argument in the face of clear cut evidences of claim of bogus expenses by the appellant.
2.3.3 Appellants other argument that infirmity pointed out by the Assessing Officer are sufficient enough to reject the books of accounts and in that event the addition cannot be by picking the figure from the said books. Appellant also referred the provisions of section 44AD and various decision wherein it is held that once the books of accounts are rejected then the profit have to estimate on the basis of proper material available on record.
The provisions of section 44AD are for a specific class of assessee whose turnover are less than Rs.40 lacs and who have not maintained the accounts . Appellant has claimed various expenses 7 on the basis of accounts maintained by it. Appellant has claimed these expenses u/s.37(1) by I T Act. It is not a case of no books of accounts wherein the profit has to be estimated . Assessing officer has not rejected the appellants books and therefore it is not open for the appellants counsel to claim that profit should be estimated on rejection of books. What Assessing Officer has done is that he only examined the claim of expenses were not actually incurred for the purpose of business. Since books of accounts were not rejected, the question of estimating the profit does not arise. Appellant can't force the Department or the Assessing Office to reject the books of accounts. In the present of books of accounts, the profit reflected from the accounts has to be considered subject to verification of claim of expenses. If any expenses is found to be bogus and not incurred for the purpose of business, the same cannot be allowed u/s.37(7). For disallowing such expenses u/s.37(1) the rejection of books of accounts is not requirement and therefore what Assessing Officer has done as a result of inquiries into claim of labour expenses is as per law and I don't find any basis for estimating profit in the given situation . Accordingly the case laws given by the appellants counsel which are on rejection of books of accounts and estimation of profits are not applicable to the appellant 's case.
2.3.4. Considering the facts of the case and results of the inquiries and also submission of the appellant, I confirm the disallowance made by the Assessing Officer in view of the following reasons :
1. The expenses in the form of labour were claimed by the appellant and onus was on the appellant to prove and the same was not discharged at all in respect of the disallowed amount.
2. In the absence of appellant proving the expenses, Assessing Officer made inquiries and found that none of these labour contractors were existing on the given address which means their identity is not proved.8
3. Appellant did not give any information or evidence to prove the services rendered by them.
4. The payment made in their name had finally come back in this undisclosed bank account .
5. Appellant also did not produce Shri Kamlesh Parmar for examination before the Assessing Officer .
6. Appellants claim that the loan taken from the bank was withdrawn in cash and distributed among labour contractors and subsequently the same was regularized through cheque cleared in the account of Shri Kamlesh Parmar is not at all convincing .
When appellant had borrowings from bank, it could have very well made the payment by cheque to the labour contractors. There was no reason for the appellant is therefore without any basis and cannot be accepted.
7. The net profit of the appellant even after disallowance of bogus labour expenses would be 23% which is not abnormal in repairs and maintenance contracts.
8. Appellant gave month-wise billing of material and labour component and as per that in the month of April 2001, as against material component of Rs. 8,54,7136/-, the labour claim was Rs.32,42,093/- which is almost four times. The ratio between material and labour in other months was less than two times. Which means the labour expenses claimed in the first month itself were substantially bogus.
9. When a particular expense is found to be not incurred for business purpose, the said expense is disallowable and rejection of books of accounts is not required.
10. Appellant did not dispute the results of inquiry ad also did not submit any evidence that labour expenses were actually incurred.
9
Considering the above, I hold that appellant claimed bogus labour expense in the name of 10 labour contactors who were not found available and no services were rendered by them and therefore the disallowance of expense by the Assessing Offices is fully justified and hence the same is confirmed.
4. Before us, the learned AR contended that the assessee incurred labour cost in executing works contracts (pertaining to road strengthening and preventive maintenance and repairs) awarded by Effluent Channel Project (ECPL) for GIDC through competitive and totally transparent bidding process. These are labour oriented work. It was pointed out that similar work has been carried by the assessee from the assessment years 1999-2000 to assessment year 2004-05 and always the assessee has incurred the labour charges were never disallowed except in the impugned assessment year.
5. The chart showing the labour charges against the ECPL was also filed. The bills submitted by the assessee are prepared in detail and are thoroughly checked by the technical staff of ECPL and therefore, the payments is fully paid to the assessee. Since the assessee did not have sufficient fund to pay the labour charges, it took loan from Jay Panchmahal Co- operative Credit Society Ltd (JPC). This loan was repaid by the assessee subsequently, then the funds were transferred to the account of the various sub-contractors through the account 10 of Shri Kamlesh Parmar. The assessee did not pass any entry at the time of labour expenses were incurred on the advice of the Accountant. The entries were passed by issuing the entries against the various contractors ultimately the amount has come back to the account of Shri K I Parmar. The assessee has taken the loan from Jay Panchmahal Co- operative Credit Society Ltd (JPC) is apparent from pages 127 to 132 that the funds have been utilized for the payment of loan in this bank account from Jay Panchmahal Co-operative Credit Society Ltd (JPC) is apparent from the findings of the AO given at page 13 of the assessment order totaling loan was Rs.20,85,000/-. This clearly shows that the loan was a short term loan only to bridge the gap between the incurring of the labour expenses and the receipt money from ECPL after submission of the bills. Our attention was drawn to page 13 in which the details of the payment of loan and loan taken and it was paid to the sub-contractor and again given to the assessee. The AO mistakenly taken that this fund has come to the bank account but the fact is that the funds has given to the loan account of assessee. No new assets, or investment were acquired by the assessee neither has incurred new personal expenses. The books of account of the assessee were not rejected by the AO. The AO without establishing that the assessee has incurred actual expenses towards labour payment for ECPL has disallowed whole of the expenses . He 11 took us to page 123 of the paper book and pointed out that except this year the assessments were completed u/s 143(3) for the assessment year 2004-05 and 2005-06 and no disallowance was made. The details of all the labour expenses as well as contract from ECPL were also filed before us. It was vehemently stated since contract is labour oriented it cannot be carried without the help of labour force. If the AO is of the view that the assessee has not incurred the labour expenses, he should have also excluded labour receipt. Referring to page 123 of the paper book it was pointed out that the net profit earned in the business of the assessee in the assessment year ranging from 6% to 9% and if the disallowance is adequate to profit the revised net profit would be 23.27% which is very high and in fact unattainable, keeping in view the nature of the business of the assessee. Alternatively it was submitted that since the profit could be estimated at the 8% of the turnover according to the provisions of section 44AD of the Act. The reliance was also placed by the learned AR on the following decisions :
1. Dabros Industr ial Co.(P.)Ltd. V. CIT 108 ITR 424 ( Cal.)
2. Gemini Pictures Circuit Ltd. V. CIT 33 ITR 547 ( Mad.).
3. Badr inath Agarwal v. CIT 65 ITR 242 (All. )
4. CIT v. S Sen 17 ITR 355 (Orissa) 12
6. The learned DR, on the other hand, relied on the order of the AO and submitted that the AO made detailed inquiry and noted that all the sub-contractors to whom the assessee has generally paid labour payment in his books of account were bogus and all the funds have been come to its trusted employee Shri Kamlesh Parmar and from it the same has been transferred to the account of the assessee with JPC. The details are available in the paragraph 2.7 of the order of the AO. She agreed in view of the details submitted by the assessee towards labour expenses that the contract undertaken by the assessee was labour oriented and therefore it cannot be said that the assessee has not incurred any labour expenditures. But she said only part of labour expenses should be disallowed as the contract cannot be carried without labours. On the query from the Bench whether the AO has noticed that any investment being made by the assessee or any personal expenses being incurred by the assessee. She stated that no such facts has been recorded by the AO.
7. W e have heard both the parties, we have also perused the material on record. W e have also gone through the orders of the authorities below. W e have also gone through the decisions relied upon by both the parties. W e find that the assessee has claimed the labour charges. The AO disallowed the same to the Extent of Rs.25,01,736/-. Out of the labour 13 expenses claimed by the assessee in respect of contract with ECPL to carry out the road strengthening work and preventive maintenance and repairs. The case of the assessee is that the assessee has incurred the labour expenses on various dates by making cash payment to the laborers after taking the loan from JPC on different dates for which the copy of the bank account was placed before us and is forming part of this record at pages 127 to 132. It was pointed out that on the advice of the Accountant the assessee did not account for cash payment of the labour charges even though the amount was withdrawn from the loan Account as the loan was for the purposes of business. The assessee accounted for the labour payment by inducting certain labour contractors to whom the assessee has shown the payment being made through cheque ultimately the payment has come back to the account of Shri Kamlesh Parmar, the trusted employee of the assessee from there the assessee had paid the loan taken from JPC. We noticed that this fact is verifiable from the page 13 of the assessment order. W e noted that the AO has also come to this conclusion that the assessee has shown the payment to the sub-contractor to the extent of Rs.22,16,296/- and ultimately out of that payment through the account of Shri K I Parmar ;the assessee had paid the loan of JPC and all the funds have gone to loan account of JPC of Rs.22,16,700/- The AO instead of pointing out that the payment has gone to 14 the loan account has mentioned that the payment has gone to the bank account of the assessee. In fact, we noted from the copy of the bank statement that the payment has gone to the loan account of the assessee. W e also noted that the assessee has withdrawn the loan from loan account amounting to Rs.20,85,000/- on the various dates fro April 2001 to June 2001. The revenue has not brought any evidence on record whether this money has been spent/invested by the assessee. The assessee's contention is that this money has been spent by the assessee for making the payment to labour and at that point of time the payment were not recorded in the books of account on the advice of the Accountant. This fact is apparent on the basis of details on record. The contracts undertaken by the assessee is labour oriented contract and the assessee has been incurring heavy labour expenses by engaging day to day labour. The assessee has also not made any investment in any asset or incurred any personal expenses out of the withdrawals from loan account of JPC. Therefore, the only inference, in our opinion, will be that the assessee had incurred the amount after withdrawing from the loan account for the purposes of making the payment of labour expenses. It is settled principle of law apparent is real onus is on the person who alleges that apparent is not real. Once the assessee has submitted the evidence by way of bank account of JPC supporting his contention that the 15 assessee has taken loan for the payment of labour payment incurred by it. In our opinion, onus is on the revenue to prove that the assessee has not taken the loan nor he has incurred the labour expenses by taking the loan or the assessee has utilized this fund for any other purposes. But no such evidence was brought on record. The amount of Rs.22,16,700/- were utilized by the assessee for the payment of loan taken for labour charges. The assessing officer disallowed the labour expenses to the extent of Rs.25,01,731/- which were incurred by the assessee in respect of ECPL contract.
8. The ld. DR also agreed before us that the assessee might have incurred the labour payment for the payment of construction of the road, therefore, part of such expenses be allowed to the assessee. W e are of the view that if the contention of the assessee is to be accepted then this has to be in toto as all the funds were utilized by paying the loan taken by the assessee from JPC. This fact is apparent even from page 13 of the assessment order. There is no evidence on record that the assessee has incurred the labour expenses not for the purpose of business. Even, we have noticed that no disallowance for the labour expenses has been made by AO during the years 2004-05 and 2005-06 and even though the assessee had carried our or accepted the similar contract with ECPL and the assessee has incurred expenses for the same. 16 Under these circumstances, we set aside the order of the CIT(A) and delete the disallowance on account of labour charges o f Rs.25,01,736/-. Thus, this ground is allowed.
9. The third grounds of appeal pertains to confirming the addition of Rs.2,57,500/- invoking the provisions of section 41(1) of the Act.
10 W e heard both the parties on the issue and carefully considered the submissions advanced by the concerned parties. W e noted that that the assessee was having opening balance of Bhudarbhai Prajapati of Rs.2,57,500/-. No disallowance in respect of expenditure incurred by the assessee for Bhudarbhai Prajapati was made in he earlier year. The liability was outstanding on 1.4.2001. The assessee made payment through cheque. Therefore, it cannot be said that the liability has ceased during the year. W e are therefore, of the view that the provisions of section 41(1) are not applicable. W e, therefore, delete the disallowance of Rs.2,57,500/-
11 Therefore, ground no. 3 is therefore allowed. 12 The fourth ground of appeal pertain to charging interest u/s 234B and 234D of the Act. The charging of interest under section 234B is mandatory and consequential 17 in nature. Since we have decided the grounds of appeal in favour of the assessee, we accordingly direct the AO to recompute the interest u/s 234B after giving the effect to this order. Interest u/s 234 D cannot be levied as this section was inserted subsequently. Our aforesaid view is duly covered by the decision of the Special Bench of the Tribunal in the case of ITO V/s Ekta Promoters (P) Ltd reported in (2008) 305 ITR (AT) 1 Delhi (SB). W e accordingly delete interest levied u/s 234D
13. In the result, the appeal of the assessee is allowed as indicated above.
Order pronounced in the open court on 4.11.2009 Sd sd (D.T.G AR ASI A) (P.K.BANS AL) Judicial Member Accountant Member Baroda, On this 4 th day of Nov 2009 SRL6119 Copy of the order is forwarded to:-
1. Appellant 2 .Respondent
3. CIT(A)-concerned
4. Commissioner of Income Tax Concern
5. The DR, Varodara Bench, Vadodara
5. Guard File By Order True copy Deputy Registrar, ITAT, Ahmedabad