Income Tax Appellate Tribunal - Mumbai
Morgan Construction Co. (India) Pvt. ... vs Department Of Income Tax
1
IN THE INCOME TAX APPELLATE TRIBUNAL
"B" Bench, Mumbai
Before Shri D.Manmohan (VP) and Shri Rajendra Singh(AM)
ITA No.5156/M/2007
Assessment Year 2003-04
M/s.Morgan Construction Co. (India) Pvt.Ltd. The ITO Ward 3(2)(2),
Plot No.A-490 , Road U, Aayakar Bhavan, M.K.Road
Opp. DGP Windsor Churchgate, Mumbai 400 020.
Wagle Industrial Estate, Thane 400 604.
PAN : AAAC, 6828 M
Appellant Respondent
ITA No.5298/M/2007
Assessment Year 2003-04
ITA No.4180/M/2008
Assessment Year 2004-05
The Dy.CIT 3(2), M/s. Morgan Construction Co..
Room No.608, 6th floor, Thane
Aayakar Bhavan,Mumbai 20
Appellant Respondent
Assessee by : Shri Nitesh Joshi
Revenue by : Shri R.S.Srivastava
ORDER
PER RAJENDRA SINGH (AM) These cross appeals for the assessment year 2003-04 and the appeal of the revenue for assessment year 2004-05 are directed against orders dated 23.5.2007 and 23.8.2008 of CIT(A). As there is some common issue involved, these appeals which were heard together are being disposed off by a single consolidated order for the sake of convenience.
2
2. We first take up the appeals for assessment year 2003-04 in ITA Nos.5156/M/2007 and 5298/M/2007. The dispute raised in these appeals relate to addition on account of disallowance out of foreign travel expenditure, local travel and conveyance and on account of employees' contribution to provident fund.
2.1 We first take up the dispute in relation to disallowance of foreign travel expenditure which is common in both the appeals. The assessee for the relevant year had claimed expenditure of Rs.51,63,867/- on account of traveling and conveyance which included a sum of Rs.27,99,201 on account of foreign traveling. The AO vide notice under section 142(1) dated 6.10.2005 had asked for details of foreign travel expenses, copies of air ticket and copies of passport etc. The assessee did not submit complete details. The AO therefore vide letter dated 23.2.2006 again asked the assessee to file complete details in a given format along with bills and vouchers and also asked to furnish the copies of passport of the persons who had travelled abroad. The assessee filed only the list of expenses in the requisite format but did not furnish the documentary evidence such as copies of passport and primary evidence like bills and vouchers. The AO also pointed out discrepancy in the total foreign travel expenses submitted by the assessee vide letter dated 24.1.2006 at Rs.26,06,254/- whereas the details filed by letter dated 27.3.2006 showed the total expenses at Rs.27,99,201/-. The assessee explained the same due to inadvertent mistake. The AO observed that in spite of sufficient opportunities the assessee did not submit the evidence such as bills and vouchers, passports, copies of air tickets, bills in respect of boarding and lodging, overseas letters/ communication from the foreign parties to whom the assessee had contacted for the purpose of business etc. despite specific requisition made. AO therefore 3 held that the claim of foreign travel expenditure was not genuine and accordingly disallowed the entire claim.
2.2 The assessee disputed the decision of the AO and submitted before CIT(A) that the AO had issued notices under section 142(2)/142(1) dated 11.10.2004, 6.10.2005 and 18.11.2005 in which certain details had been asked for. The query relating to the passport was raised for the first time in the notice dated 6.10.2005 which was repeated again in the notice dated 18.11.2005. Thereafter the AO was transferred and the present AO did not raise any query regarding the passport. Even notice dated 22.3.2006 which required the assessee to file certain details and evidence on 27.3.2006 did not make any mention of passport copies. As regards the discrepancy in the quantum of expenses, the assessee vide letter filed before the AO on 27.3.2006 had explained that the discrepancy was because of the fact that the traveling expenses amounting to Rs.1,92,946/- relating to the project account were inadvertently omitted to be attached. In regard to bills and vouchers, the assessee vide letter dated 5.12.2006 submitted before the CIT(A) that these were destroyed in heavy rains on 26.7.2005 as the bills and vouchers had been kept in the godown at Bhiwandi which was flooded. The assessee filed copy of letter dated 4.8.2005 issued by the grampanchayat Kalher certifiying that godown of the appellant was situated in the limits of Kalher Village which has submerged in water by 7 to 10 feet on 26.7.2005. A copy of Panchanama signed by Narpoli Police station also mentioned the spoilage of certain documents/ papers kept by the assessee inside the drawer of the table in the godoown. The assessee however submitted the copies of credit notes issued by M/s. Mystic Travels Pvt. Ltd. regarding the purchase of tickets for the foreign visit. The assessee explained that due to spoilage of documents the assessee 4 could not produce the bills and vouchers. The assessee requested for admitting the credit note issued by M/s. Mystic Travels Pvt. Ltd. and the copies of the passports of the officials traveling abroad as additional evidence on the ground there was sufficient cause for the assessee for not producing the same before the AO.
2.3 CIT(A) forwarded the additional evidences submitted by the assessee to the AO for his comments in view of the provisions of rule 46A(3). The AO submitted report vide letter dated 27.3.2007 in which the following points were made.
(i) The assessee had been asked to furnish evidence such as copies of bills and vouchers, passport, any invitation/ communication from the foreign party regarding foreign visit etc. which was not submitted despite ample opportunities provided.
(ii) The assessee never made any claim regarding loss of bills and vouchers in the floods during assessment proceedings and such plea has been taken only during the appellate proceedings. In case the bills and vouchers etc were destroyed in floods the assessee must have been aware of it and it was strange the assessee never raised this plea during the assessment proceedings which continued over a long period of time.
(iii) The assessee during the assessment proceedings had submitted the copies of all the bills in respect of export sales, invoices of fixed assets, copy of sales tax return etc. and only the bills and vouchers and other evidence in respect of traveling expenses had 5 not been given. It was therefore difficult to accept the claim of loss of documents in floods which was only an afterthought.
(iv) A perusal of the Panchnama showed that as per the informant documents such as purchase/sale register/ bills/, receipts, stock register, daily production books and several other items were reported to have destroyed in the floods. However as per the Panchnama signed by the Narpoli Police station only three computers, one stabilizer and paper/ documents kept inside small drawer of a table were destroyed. It was very difficult to be convinced that large and voluminous documents reported by the informant could be kept inside the drawer of the table. There was also no evidence to show that the said documents were actually kept in the table. It was thus difficult to accept the claim of the assessee that the documents were destroyed in floods.
(v) The books of accounts were required to be kept at the registered office and therefore there was no possibility of the same being kept in the godown.
(vi) The onus was on the assessee to prove that the expenses on traveling were incurred wholly and exclusively for the purpose of business. Even if the credit notes of the travel agent and the copies of passport were accepted as additional evidence these did not establish that the expenses were incurred wholly and exclusively for the purpose of business.
2.4 CIT(A) on perusal of records and after considering the remand report, observed that the AO with the notice dated 6.10.2005 under section 6 142(1) had enclosed the questionnaire and the query raised as per item No.36 was as under :
"Please provide the details of travel & conveyance expenses:
Also please file details of foreign travel expenses by providing the names of the persons travelled, their designation in the company, place of travel, duration of tour, purpose of tour, amount of expenditure. (Enclose copy of Passport of these persons.)"
2.5 The CIT(A) noted that the AO again vide letter dated 3.1.2006 asked the assessee to file the details and evidence requisitioned. But the assessee filed the details only partly and did not file the copies of passport and supporting evidence in respect of foreign travel. The AO finally asked the assessee vide letter dated 22.3.2006 to furnish complete documentary evidence and all related details and papers in respect of foreign traveling. But the same was not filed. The assessee filed the copies of credit notes of the travel agent regarding purchase of ticket and copies of the passports only during the appellate proceedings. The assessee claimed only during the appellate proceedings that the supporting evidences were destroyed in floods on 26.7.2005. No such claim had been made before the AO. Nor any such claim was made in the statement of facts filed in the memorandum of appeal before the CIT(A). The CIT(A) therefore did not find the claim of loss of bills and vouchers and documents in floods as acceptable. The claim of the assessee that the AO never required the assessee to produce documentary evidence in the form of bills and vouchers, copies of air ticket, copies of passport etc was against the facts on record. CIT(A) also observed that additional evidences under clause (b) of rule 46(1) could be admitted only when the assessee was prevented by sufficient cause 7 from producing the same before the AO. In this case the AO had asked the assessee to produce the copies of passports vide notice dated 6.10.2005 which was about six months before the assessment was completed. The assessee was also specifically asked to furnish documentary evidences such as relevant bills and vouchers vide notice dated 22.3.2006. The assessee never took the plea of the documents being lost in floods before the AO. CIT(A) therefore held that the assessee had not been prevented by sufficient cause from producing the evidence before the AO and he therefore did not admit the additional evidence in the form of copies of passports and the copies of credit notes of the travel agent.
2.6 CIT(A) however observed that entire expenditure could not be disallowed as the assessee who was engaged in project management activities such as setting up of steel mills and running of various engineering services to its clients most of which were located outside India was required to incur some expenditure on foreign travel. In the absence of proper supporting evidences the expenses had to be estimated. CIT(A) placed reliance on the judgment of Hon'ble High Court of Madras in case of Sudarshan Estate Pvt. Ltd. Vs State of Tamil Nadu (211 ITR 273) and on the judgment of Hon'ble High Court of Rajasthan in case of CIT Vs Narendra Mohan Palimal (271 ITR 347) in which it was held that in the absence of bills and vouchers the AO had no option than to estimate the expenses. CIT(A) also observed that almost entire foreign travel expenditure had been incurred by the assessee through M/s.Mystic Travel Pvt. Ltd. which was one of the sister concerns of the assessee. Considering the facts and circumstances of the case, CIT(A) estimated the expenditure which could be reasonably claimed to be incurred on foreign travel at 50% of the claim and accordingly confirmed the disallowance of Rs.13,99,201/-. Aggrieved by the 8 said decision both the parties are in appeal. The assessee has disputed the decision of CIT(A) in not allowing the expenses fully whereas the revenue is aggrieved with the relief allowed by CIT(A).
2.7 Before us the Learned AR for the assessee reiterated the submissions made before lower authorities that the documentary evidences such as bills and vouchers could not be produced before the AO as the same were destroyed in floods. It was pointed out that the AO in the notice dated 6.10.2005 had not asked for production of bills and vouchers as was clear from the questionnaire placed at page 32/33 of the paper book. It was also pointed out that only vide letter dated 22.3.2006 which was served on the assessee on 23.3.2006 the AO had asked for documentary evidence of foreign traveling along with all related bills and vouchers. The assessee had therefore no sufficient time as the assessment order had been passed on 27.3.2006 the date when the details and evidences were required to be filed. It was also submitted that the very fact that the CIT(A) had asked the AO to submit remand report in respect of additional evidence showed that he had already admitted additional evidence and therefore not considering the same was not correct. The full details of traveling expenses had been given from the ledger account which was available on the computer. However the primary evidence for the reasons stated earlier could not be given.
2.8 The Learned AR for the assessee also submitted that the assessee was engaged in the business of executing turn key projects, supplying rolling mills spares pertaining to the steel industries and running of consultancy services. The assessee was dealing in highly sophisticated items. Once the enquiry culminated into a sale order, technical team visited the concerned clients and 9 had to make considerable talk/discussion in order to understand the specific dimension of the spares required so as to manufacture these items. Even during the manufacturing the employees of the assessee were required to frequently visit the vendor's premises in India and abroad to ensure that manufacturing was done as per the agreed specifications. The installation and commissioning of the plant was also a highly specialized job which required skilled and experienced technicians/ engineers who had to remain physically present at the plant for some time. Even after delivery of spare parts, the technical team was required to be in touch with the customer. Therefore considerable traveling was required in the business of the assessee and the expenditure claimed was not abnormal. It was also stated that the books of account were audited.
2.9 The Learned AR further pointed out that the foreign travel expenditure had been allowed by the department in the earlier year as well as in the subsequent years and some of the assessments had been made after scrutiny under section 143(3) of the I.T.Act. The details in this regard were submitted as under :
A.Y Foreign Local Total Total Order u/s
traveling traveling amount amount
expenses expenses claimed allowed
1997-98 289914 10874 300788 300788 143(1)
1998-99 687250 1243666 1930916 1930916 143(3)
1999-00 2374381 707317 3081698 3081698 143(1)
2000-01 1717964 827535 2545499 2545499 143(1)
2001-02 3413550 1090706 4504256 4504256 143(3)
2002-03 2741733 2115578 4857311 4857311 143(1)
2003-04 2799201 2364666 5163867
2.10 It was pointed out that in assessment year 2001-02 higher expenditure on foreign travel had been allowed when the turnover was lower whereas in the impugned year the expenditure claimed was less when the turnover was high at Rs.12.55 crores. It was accordingly urged that the claim of the assessee 10 should be allowed. Finally, it was also argued that the issue may be decided on the basis of submissions made and material available on record including the additional evidences filed before CIT(A) and that he was not pleading for restoring the matter to AO/CIT(A) for fresh opportunity.
2.11 The Learned DR on the other hand strongly supported the order of AO. It was argued that only the occurring of floods was established but not the destruction of the documents. It was pointed out that it was strange that only selected document which were crucial for the income-tax assessment were destroyed and not others. The assessee had also not taken any plea of loss of documents in floods before AO and therefore it was only an afterthought. It was also submitted that books of accounts were required to be kept at the Registered Office which was at Colaba and not in the godown. In the absence of supporting evidence, the foreign travel expenditure had been rightly disallowed by the AO. It was also submitted that most of the sales were admittedly through the sister concern and therefore only limited expenditure was required to be incurred by the assessee on traveling. On this ground also the claim of expenditure could not be justified. He placed reliance on the findings given by the AO. The Learned DR also pointed out that in the absence of details and evidence, it could not be ascertained as to how much expenditure was on business and how much personal in nature even if foreign traveling had taken place.
2.12 In reply the Learned AR for the assessee stated that under section 209 of the Companies Act only the books of accounts were required to be kept at the Registered Office and not the bills and vouchers. There was thus no violation of the Companies Act. The bills and vouchers were kept in the godown 11 which had been flooded. The claim of the assessee considering the past record had to be allowed. As regards the arguments of the Learned DR that personal expenses could not be allowed, the Learned AR pointed out that there was no mention of personal expenses on travel by the AO or CIT(A) and therefore the argument was without any merit.
2.13 We have perused the records and considered the rival contentions carefully. The dispute is regarding disallowance of foreign travel expenses of Rs.27,99,201/- claimed by the assessee. It is a settled legal position that for claiming any deduction on account of any expenditure, burden is on the assessee to establish that the expenditure had been incurred wholly and exclusively for the purpose of business. The assessee in this case filed only details of expenditure but the evidence in the form of bills and vouchers and other documents such as copies of tickets and passports were not produced. The claim of the assessee is that bills and vouchers and other original documents which were kept in a godown at Bhiwandi were lost in flood that occurred on 26.7.2005. The assessee filed certificate from the gram panchayat regarding the floods at Bhiwandi where godown of the assessee was situated. The assessee also filed copy of panchnama signed by the police officer of Narpoli police station mentioning spoilage of certain documents/ papers. Both AO and CIT(A) have not accepted the claim of the assessee that bills and vouchers and documents were lost in floods. It has been noted by them that the panchanama mentioned the spoilage of document kept inside the drawer of the table in the godown and it was difficult to believe that such voluminous document could be kept in the drawer of the table. Moreover it has also noted that the assessee had filed copies of bills in respect of export sales, invoices of fixed assets and other vouchers etc. but only the bills and vouchers and 12 documents relating to the traveling were stated to be lost which was unbelievable. The assessee also made no claim regarding bills and vouchers in floods at the time of assessment proceedings nor any such claim has been made in the statement of facts filed before the CIT(A).
2.14 The Learned AR for the assessee has submitted that bills and vouchers were specifically asked for only on 22.3.2006 to be produced on 27.3.2006 and due to shortage of time the assessee had not mentioned the loss of documents in the floods. We do not find any merit in the plea of the assessee. The non availability of bills and vouchers would have definitely gone against the assessee and therefore we do not find any valid reason for the assessee not to mention this vital fact on the date of hearing on 27.3.2006 as not much time and effort was required for making such plea before the AO. Moreover even if the assessee failed to mention this fact before the AO the assessee could incorporate the same in the statement of facts filed before the CIT(A) which was also not done. Considering the entirety of facts and circumstances as mentioned above and brought on record by the authorities below we are convinced that the claim that bills and vouchers and other documents were lost in floods is not established. There is no direct evidence of loss of these documents and the various facts and circumstances mentioned about do not support the case of the assessee. We therefore agree with the finding of the authorities below that the claim of the assessee that bills and vouchers were lost in floods is not established.
2.15 The assessee produced additional evidence before the CIT(A) in the form of credit notes issued by M/s. Mystic Travels Pvt. Ltd. regarding the foreign traveling and also copies of the passports of the officials making the foreign 13 trips. It may be noted that M/s. Mystic Travels Pvt. Ltd. is a sister concern of the assessee. CIT(A) has not admitted these additional evidences on the ground that there was no sufficient cause for not filing the same before the AO. It has been noted by the CIT(A) that the AO had called for the copies of passport vide letter dated 6.10.2005. Though the officer originally calling the copies of passports was subsequently transferred, this could not be a ground for the assessee to take the plea that sufficient time had not been given. As regards the credit notes issued by the sister concern, there was no reason for not producing the same. CIT(A) has therefore not admitted the additional evidence. The Learned AR for the assessee argued that the very fact that CIT(A) called for remand report from the AO on the additional evidence showed that he had admitted the same because report can be called for from the AO only after admitting the additional evidence. We are unable to accept such arguments. There is no requirement in the rule 46A that remand report can be called only after admitting the additional evidence. The rule makes it clear that additional evidence can be admitted only after recording reasons for admission in the writing and, after admitting, the additional evidence cannot be used without giving reasonable opportunity to the AO to examine the evidence and to produce further evidence in rebuttal of such evidence. CIT(A) has not admitted the evidence. In fact he has given reasons for not admitting the evidence. In such a situation it cannot be held that CIT(A) had admitted the evidence only on the ground that he had called for a report from the AO. 2.16 Considering the facts and circumstances of the case we do not see any major infirmity in the order of CIT(A) in not admitting the additional evidence particularly when such evidences even if admitted does not establish that the foreign travel expenditure had been incurred wholly and exclusively for the 14 purpose of business. The copies of passports can only show that persons had visited abroad but these do not establish that the visits have been undertaken for the purpose of business. Similarly the copies of credit notes issued by travel agent does not establish that the travel had actually been taken or the expenditure had been actually incurred wholly and exclusively for the purpose of business. The assessee had not produced bills and vouchers in respect of boarding and lodging overseas nor any letter/communication had been filed from the foreign parties showing that the persons visiting abroad had actually worked for the purpose of business. The AO has given a clear finding on this which has not been controverted. The assessee has claimed that the employees had to frequently visit abroad to ensure that the product manufactured were as per specifications and they had also to associate with installation and commissioning of plant and other specialized work. The assessee could have produced the letter from the foreign concern showing visit by the officials of the company for the purpose of business. No such evidence has been filed before the lower authorities or even before us. The fact that books of account were audited is also of no help to the assessee as the auditors do not inquire into the genuineness of vouchers or about the fact whether the expenditure has been incurred wholly and exclusively for the purpose of business. There is thus no proper evidence to establish that foreign travel had been undertaken and even if undertaken the same had been done wholly and exclusively for the purpose of business. In such a situation when there is no proper evidence available the expenditure has to be estimated based on the material available on record including the past record of the assessee. 2.17 Considering the nature of business of the assessee some expenditure on foreign travel is inevitable which has been accepted even by CIT(A). The 15 question is only of estimate. It is a settled legal position that when proper evidence is not available expenditure/income can be determined on estimate after giving reasonable basis. In this case CIT(A) has allowed the foreign travel expenditure at 50% but no basis for such estimate has been given. In our view the foreign travel expenditure has to be linked to the income arising from the foreign concerns as the persons visiting abroad are claimed to have worked closely with those concerns. It is possible that some income relating to this year may have been received next year but it will be offset by the income received during the year relating to the work done in the preceding year and on the whole the traveling expenditure which is claimed to be closely linked to the business activity will be relatable to the income earned during the year. The assessee has filed the copy of audited accounts from which figures of gross receipts of business, foreign income as well as foreign travel expenditure is available for the period from assessment year 2002-03 to 2004-05. The foreign exchange income from exports of goods in assessment year 2003-04 was Rs.4.02 crores compared to Rs.6.93 crores in assessment year 2002-03. Similarly foreign exchange income from services abroad during assessment year 2003-04 was Rs.43.47 lacs compared to Rs.26.98 lacs in assessment year 2002-03. Thus the foreign exchange income during the year has steeply declined compared to assessment year 2002-03. However the foreign travel expenditure has slightly gone upto Rs.27,99,201/- compared to Rs.27,41,733/- in assessment year 2002-03. The foreign travel expenditure if computed in the same ratio as in the last year comes to Rs.16,94,543/-. However considering that the expenditure may not fall exactly in the ratio of gross receipts abroad after making allowance for cost escalation, the foreign travel expenditure this year can be reasonably allowed at Rs.20,00,000/-. We therefore allow expenditure of Rs.20,00,000/- and allow the ground of the assessee partly. 16
3. The second dispute is regarding disallowance out of local traveling and conveyance. The assessee had claimed expenditure of Rs.23,64,666/- on local traveling and conveyance. The AO had asked for details and supporting evidences. The assessee however could not produce supporting bills and vouchers. The AO had also raised the query as to whether the persons who had undertaken the traveling were employed with any other concern or not on which no submission was made by the assessee. As per the AO this also indicated that the expenses may not have been actually incurred by the assessee for its business. The AO also noted that most of sales had been effected through the sister concern M/s. Pradman Engineering Agency Pvt. Ltd. and therefore only limited expenses were required to be incurred by the assessee. Moreover since the expenditure was not supported by corroborative evidence the AO disallowed 50% of the claim amounting to Rs.11,82,333/-. In appeal, the assessee submitted that disallowance of 50% of expenditure was based on pure conjectures. The assessee had filed details as well as purpose of expenditure. The expenditure claimed had nothing to do with the procurement of business through M/s. Pradman Engineering Agency Pvt. Ltd. who was being paid commission @ 3.5% for procurement of business. CIT(A) was however not convinced by the argument. Considering the fact that most of sales were made through M/s. Pradman Engineering Agency Pv.t Ltd. and there were no supporting evidence, CIT(A) confirmed the disallowance @ 50% aggrieved by which the assessee is in appeal before the tribunal.
3.1 Before us the Learned AR reiterates the same submission as made in case of foreign travel expenditure and argued that bills and vouchers could not be produced because the same were destroyed in floods. It was also submitted 17 that M/s.Pradman Engineering Agency Pvt. Ltd. was only responsible for procuring orders and expenditure on traveling and conveyance was required to be incurred by the assessee in connection with the business considering the nature of business as argued in case of foreign traveling expenses. 3.2 We have perused the records and considered the rival contentions carefully. The dispute is regarding disallowance out of local traveling and conveyance. The assessee has claimed the expenditure of Rs.23,64,666/-. There is no dispute that bills and vouchers relating to such expenditure are not available. The expenditure has therefore to be considered on estimate considering all the relevant factors. The authorities below have noted that most of the sales have been affected through the sister concern of the assessee viz M/s. Pradman Engineering Agency Pvt. Ltd. and accordingly have allowed only 50% of the expenditure. The case of the assessee is that M/s.Pradman Engineering Agency Pvt. Ltd. was being paid commission @ 3.5% only for procuring orders and not for any other activity on behalf of the assessee. Such claim has made even before the CIT(A). The revenue has not produced any material to controvert the claim that the sister concern was only procuring orders and expenditure on traveling and conveyance in connection with the business had been incurred by the assessee. Therefore the claim that the sister concern was only procuring orders has to be accepted. However since proper evidence in respect of incurring of expenditure is not available the allowability of expenditure has to be considered on estimate taking into account all the relevant factors. We find that in the immediate proceeding year i.e. A.Y.2002- 03 gross income of the assessee was Rs.12.23 crores and after excluding the foreign exchange income of Rs.7.20 crores, the gross income from the domestic operation was about Rs.5 crores. The expenditure on local travel and 18 conveyance in assessment year 2002-03 was Rs.21,15,578/-. In the present assessment year i.e. 2003-04 the gross receipt of Rs.12.27 crores and after excluding the foreign exchange income of Rs.4.45 crores the domestic income is about Rs.8 crores which is substantially higher than the corresponding figure for immediate preceding year. Thus the assessee has claimed expenditure on traveling and conveyance of Rs.23,64,666/- on gross domestic receipt of Rs.8 crore compared to expenditure of Rs.21,15,578/- on domestic receipt of only Rs.5 crore in the immediate preceding year. The claim is thus reasonable and no disallowance is called for. The order of CIT(A) on this point is set aside and the addition made is deleted.
4. The third dispute which is relevant only to the appeal of the assessee is regarding addition under section 43B of the Income-tax Act on account of employees' contribution to provident fund. The AO noted that the assessee had deposited contributions to the provident fund by both the employees and employers as per details given below :
Month Employee's Employer's Date of payment
contribution contribution
Aug.02 2646 3001 23.9.2002
Sept.02 2679 3039 18.10.2002
Dec.02 3165 3590 16.1.2003
Mar.03 3070 3483 18.4.2003
TOTAL 11560 13113
4.1 The AO noted that employee's contribution was required to be deposited
within the due date and in case of default the same was required to be treated as income under section 2(24)(x) r.w.s.36(1)(va). Accordingly he added a sum of Rs.11,560/- to the total income of the assessee. In appeal CIT(A) agreed with the AO that employees' contribution deposited beyond due date had to be treated as income of the assessee. CIT(A) placed reliance on the decision of 19 Mumbai Bench of Tribunal in case of I.M.P. Power Ltd. Vs ITO (107 TTJ 522) and the decision in case of DCIT Vs Gandhar Oil Refinery (I) Ltd. (2006) (104 TTJ 630). Aggrieved by the said decision the assessee is in appeal before the tribunal.
4.2 Before us the Learned AR for the assessee submitted that the issue was covered in favour of the assessee by the judgment of Hon'ble High Court of Delhi in case of CIT Vs Aimil Ltd. (321 ITR 508) in which Hon'ble High Court following the judgment of Hon'ble Supreme Court in case of CIT Vs Vinay Cement (213 CTR 268) have held that even employee's contribution to provident fund is covered by the amended provisions of section 43B as per which the claim has to be allowed in case the deposit had been made before the due date of filing the return of income for the relevant year. It was also submitted that there were several decisions of the tribunal in which the decision of the Delhi High Court (supra) has been followed. The Learned DR on the other hand placed reliance on the orders of authorities below. 4.3 We have perused the records and considered the rival contentions carefully. The dispute is regarding the addition on account of late deposit of employee's contribution to provident fund. Under the provisions of section 36(1)(va), employee's contribution to provident fund if not deposited within the due date which is the 15th day of the following month is required to be treated as income of the assessee. A further grace period of five days has been allowed under the internal instructions of the authorities under the statute. There have been divergent views on the issue whether employee's contribution to provident fund will be covered by the provisions of section 43B or not. In case it is treated as covered under section 43B, the claim as per the amended 20 provisions of section 43B applicable from assessment year 2003-04 has to be allowed if the amount is deposited before the due date of filing the return of income. There are decisions of the tribunal holding that employee's contribution to provident fund is not covered by the section 43B and in case deposit is not made within the grace period which is the 20th day of the following month the amount has to be treated as income of the assessee. However recently the Hon'ble High Court of Delhi in case of CIT Vs Aimil Ltd. (supra) following the judgment of Hon'ble Supreme Court in case of CIT Vs Vinay Cement Ltd (supra) have taken the view that employee's contribution to provident fund will be covered by section 43B and no addition can be made in case the contribution is deposited before the due date of filing of the return of income. The learned AR for the assessee has relied on the said judgment. No contrary judgment of any High Court or Apex Court has been brought to our notice on this issue. Therefore respectfully following the judgment of Hon'ble High Court of Delhi in case of CIT Vs Aimil Ltd. (supra) we set aside the order of CIT(A) and allowed the claim of the assessee as deposit had been made before the due date of filing the return of income.
5. The appeal of the revenue in ITA No.4180/M/2008 for assessment year 2004-05. The only dispute raised by the revenue in this appeal is regarding deletion of addition made by AO on account of disallowance of traveling expenses. The assessee had claimed total expenditure of Rs.1,05,65,801/- under the head "traveling and conveyance" which included a sum of Rs.70,79,020/- on account of foreign traveling expenses. The facts relating to the disallowance of such expenses are identical to those in case of assessment year 2003-04 which we have already dealt with and the only difference being that in this year during the assessment proceedings itself the 21 assessee submitted that original bills and vouchers and other documents relating to the traveling expenses had been destroyed in the floods on 26.7.2005. The AO during the assessment proceedings had asked the assessee to file complete details of foreign travel expenses giving the name of the persons travelled, destinations of traveling, expenditure involved etc. The AO also asked for copies of the passports as well as bills and vouchers including the bills in respect of overseas boarding and lodging, letters/communication from the foreign parties whom the assessee had contacted for the purpose of business or in connection with foreign visits etc. The assessee did not file the various evidences/ documents called for on the ground that the same were destroyed in the floods.
5.1 The assessee, however, as in assessment year 2003-04 filed copies of credit notes from travel agent as well as copies of Panchanama regarding the flood in the area. AO however did not believe the plea of damage of documents in floods as the assessee had produced all details relating to purchase and sales stock etc. including sale bills and general vouchers and it was unbelievable that only the bills and documents relating to traveling and conveyance were lost. AO noted from the details given by the assessee that the columns relating to travel destinations were blank at many places. The assessee could not file even copies of passports and air tickets. AO also noted that the major sales of the assessee were effected through the sister concern M/s. Pradma Engineering Agency Pvt. Ltd. to whom the assessee was paying commission @ 3.5%. Out of total sales of Rs.17.40 crores during the year, the sales worth Rs.13.81 crores had been done through the sister concern which indicated that not much efforts were needed by the assessee through traveling and conveyance for getting business. In any case the AO further observed that foreign travel expenses 22 were not supported by proper evidence. AO therefore held that foreign travel expenses were not genuine and thus held them inadmissible. In regard to local traveling and conveyance expenses, AO observed that though the assessee gave the list of expenses, the supporting evidences had not been filed. The assessee was also silent on the query of the AO whether the persons who had undertaken the traveling were employed with any other concern or not. However the AO observed that some traveling expenses may have incurred. He estimated such expenses at Rs.10,56,580/-. Thus the AO disallowed the entire foreign travel expenses and out of local traveling and conveyance, he allowed the claim only at Rs.10,56,580/-.
5.2 In appeal CIT(A) after hearing the assessee and on perusal of records held that the plea of destruction of records in floods had to be accepted. Therefore he observed that the assessee could not be expected to file the primary evidence regarding traveling expenses and that the allowability had to be decided on proper analysis of facts of the case. CIT(A) further observed that the assessee was engaged in the business of executing turn key projects, supplying rolling mills spares pertaining to the steel industries and running of consultancy services. The assessee was dealing in highly sophisticated items and providing highly specialized job in connection with installation and commissioning of plant. Frequent traveling was therefore required for attending to the various technical needs of the clients, for discussion with the clients etc. As regards the sales through sister concern CIT(A) observed that the latter was only procuring order and it did not help reduce the expenditure on traveling and conveyance. As regards the query of the AO that the assessee did not reply as to whether the persons traveling were employed with some other concern, CIT(A) observed that even if some one was employed with other concern 23 expenditure had to be allowed if traveling was for the purpose of business of the assessee. With regard to non submission of even the copies of passports CIT(A) was satisfied with the plea of the assessee that the query was raised only in November 2006 and therefore for obtaining copies which involved time consuming process sufficient time was not available and that copies of passports had been submitted in connection with the earlier assessment years. CIT(A) observed that in his opinion non submission of copies of passports could not be ground for making disallowance. The assessee had given details of travel and AO could have verified whether persons had traveled or not but no such verification was made. Moreover CIT(A) further observed that the primary evidences being lost in flood allowability of the claim had to be decided on the basis of business requirement of the assessee. He noted total turnover of the assessee during the year was Rs.15.30 crores and in addition the assessee had earned professional fees of Rs.49,54,405/- giving the total figure of receipts at Rs.15.80 crores. Total traveling expenditure of Rs.1,05,65,801/- was 6.68% of the total receipts. Therefore considering the nature of business which required extensive traveling the claim of expenditure was justified. He therefore allowed the expenditure fully and deleted the addition made by the AO. Aggrieved by the said decision the revenue is in appeal before the tribunal. 5.3 Before us the Learned AR for the assessee reiterated the same submissions in respect of expenditure on traveling and conveyance including foreign traveling as in case of A.Y.2003-04. The Learned DR also supported the order of AO on the same reasoning as done in assessment year 2003-04. 5.4 We have perused the records and considered the rival contentions carefully. The dispute is regarding disallowance of traveling and conveyance 24 expenses. The assessee had claimed total expenditure of Rs.1,05,65,801/- which consisted of foreign traveling expenditure of Rs.70,79,020/- and local traveling and conveyance expenditure of Rs.34,86,781/-. There is no dispute that bills and vouchers and other documents such as copies of air tickets in respect of traveling and conveyance expenses including the foreign traveling are not available. The assessee has claimed that the same were lost in flood which has not been accepted by the AO. The assessee could also not produce the copies of passports of the officials before the AO. The AO had therefore disallowed the entire foreign traveling expenditure and in respect of local traveling and conveyance he has allowed only a sum of Rs.10,56,580/-. CIT(A) has accepted the claim of the assesse about loss of bills and vouchers and other documents in floods. We have already considered this issue while dealing with the appeal for assessment year 2003-04 and upheld the view of the AO that the claim of the assessee that the bills and vouchers and documents were lost in flood is not established. In this year, the assessee had also not produced the copies of passports which was done in A.Y.2003-04 atleast before the CIT(A). It has been submitted that copies of passports had been filed in earlier years but it has not been explained as to how copies of passports filed in earlier years contained the entries for the current year. The credit note issued by the travel agent who is the sister concern of the assessee does not establish the travel had actually been undertaken. In any case as we have held earlier incurring of expenditure wholly and exclusively for the purpose of business cannot be established only on the basis of copies of passports and copies of credit notes of the travel agent which is the sister concern of the assessee. 5.5 The claim of foreign or local travel is thus not supported by proper evidence and even if traveling had been undertaken, there is no proper 25 evidence to show the same had been done wholly and exclusively for the purpose of business. In case officials had really worked abroad or locally in connection with various projects or other specialized work being executed by the assessee the assessee could have easily produced certificates from those concerns regarding the traveling and visit by the officials which had not been done. Bills and vouchers for overseas boarding and lodging have also not been produced. These finding of AO have not been controverted before us. However considering the nature of business, some expenditure on traveling and conveyance as held earlier is inevitable which has to be estimated considering the nature of business and material on record. CIT(A) has held that gross receipts of business including the foreign exchange income for this year was Rs.15.80 crores and the total traveling expenditure of Rs.1,05,65,801/- came to 6.68% of the total receipts which the CIT(A) has found reasonable. 5.6 We are unable to accept the order of CIT(A) as the same is without any basis. In our view as held earlier in A.Y.2003-04 the foreign travel expenditure has to be correlated to the foreign exchange income and local expenditure with respect to local income as separate details are available. The Learned AR when queried about the income from foreign operations referred to the details available in the audited accounts placed on record. We find that the total foreign traveling expenditure this year was Rs.70,79,020/- when the total foreign exchange income was Rs.2.45 cores consisting of income from the export of goods of Rs.2.11 crores and foreign exchange income from services of Rs.20.34 lacs. Compared to that the total foreign exchange income from export of goods and services in the immediate previous assessment year i.e A.Y.2002-03 was Rs.4.45 crores when the foreign traveling expenditure claimed was only Rs.27,99,201/-. This year when foreign exchange income 26 has almost reduced to half compared to immediate preceding year, expenditure has increased to about 2 ½ times. In the immediate preceding year i.e. A.Y.2003-04 we have allowed the foreign travel expenditure at Rs.20,00,000/-. The expenditure this year has to be substantially lower as the foreign income has declined substantially. In our view it would be reasonable to estimate foreign travel expenditure this year at Rs.15,00,000/-. We accordingly allow the foreign travel expenditure this year at Rs.15,00,000/-. As regards the domestic traveling and conveyance the assessee has claimed expenditure of Rs.34,86,781/- compared to Rs.23,64,666/- in the immediate preceding year. The gross receipts of business this year are Rs.17.40 crores and after excluding foreign income of Rs.2.45 crores, the domestic receipts are at about Rs.15.00 crore compared to Rs.8.00 crores in the immediate preceding year. Thus the domestic receipts have almost doubled. Considering the above situation, the claim of expenditure on domestic travel and conveyance is reasonable and no disallowance is called for. The claim is therefore allowed.
6. In the result the appeal of the assessee for A.Yr.2003-04 is partly allowed. The appeal of the revenue in A.Y.2003-04 is dismissed whereas that in A.Y.2004-05 is partly allowed.
7. The order was pronounced in open court on 19.01.2011.
Sd/- Sd/-
( D. MANMOHAN) (RAJENDRA SINGH)
VICE PRESIDENT ACCOUNTANT MEMBER
Date : 19.01.2011
At :Mumbai
Copy to :
1. The Appellant
2. The Respondent
27
3. The CIT(A), Mumbai concerned
4. The CIT, Mumbai City concerned
5. The DR "B" Bench, ITAT, Mumbai
// True Copy//
By Order
Assistant Registrar
ITAT, Mumbai Benches, Mumbai
Alk