Income Tax Appellate Tribunal - Ahmedabad
Karpara Project Engg., Surat vs Department Of Income Tax on 2 February, 2012
1
IN THE INCOME TAX APPELLATE TRIBUNAL
'C' BENCH - AHMEDABAD
(BEFORE SHRI BHAVNESH SAINI, JM AND SHRI A. MOHAN ALANKAMONY, AM)
ITA No.1080/Ahd/2008
A. Y.: 2004-05
The A. C. I. T., Circle-3, Vs M/s. Karpara Prject,
Surat 36,Milan Bungalow,
Opp. Valentine Cinema,
Surat - Dumas Road, Suat
PA No. AAEFK 2935 Q
(Appellant) (Respondent)
C. O. No. 99/Ahd/2008
(In ITA No.1080/Ahd/2008:A.Y.: 2004-05)
M/s. Karpara Prject, Vs The A. C. I. T., Circle-3,
36,Milan Bungalow, Surat
Opp. Valentine Cinema,
Surat - Dumas Road, Suat
PA No. AAEFK 2935 Q
(Appellant) (Respondent)
Department by Shri Vinod Tanwani, Sr. DR
Assessee by Shri J. P. Shah, AR
2
Date of hearing: 02-02-2012
Date of pronouncement: 10-02-2012
ORDER
PER A. MOHAN ALANKAMONY: These are appeal and cross appeal, filed by the Revenue and by the assessee for the assessment year 2004-05 respectively in ITA 1080 and CO 99, aggrieved by the order of Ld. CIT(A) in CAS/II/338/06-07 passed U/s 250 r. w Section 143(3) of the Act on 31/12/2007. For the sake of convenience both the appeal and cross appeal are heard together for adjudication by a common order.
ITA-1080/A/08
2. The Revenue has raised eleven grounds in its appeal where in ground No.10 & 11 are general in nature and do not survive for adjudication. The other grounds are listed herein for consideration:-
"1. On the facts and circumstances of the case, the learned CIT(A) erred in deleting addition of Rs.42,88,013/- in respect of Thermax Beawar Site and of Rs.9,50,000/- in respect of ACC Ltd. Made on account of contract receipts not shown by the assessee.
2. On the facts and circumstances of the case, the learned CIT(A) erred in deleting the addition of Rs.12,47,346/- made by the A. O. on account of undervaluation of closing stock.
3. On the facts and circumstances of the case, the learned CIT(A) erred in deleting the addition of Rs.17,16,416/- made by the A. O. on account of outstanding interest payable.3
4. On the facts and circumstances of the case, the learned CIT(A) erred in deleting the addition of Rs.13,29,561/- made by the A. O. on account of disallowance of wages.
5. On the facts and circumstances of the case, the learned CIT(A) erred in deleting the addition of Rs.29,010/- out of total addition of Rs.58,621/- made by the A. O. on account of Beawar site expenses.
6. On the facts and circumstances of the case, the learned CIT(A) erred in deleting the addition of Rs.4,89,809/- made by the A. O. on account of rent and rates.
7. On the facts and circumstances of the case, the learned CIT(A) erred in deleting the addition of Rs.1,69,291/- made by the A. O. on account of labour welfare, labour charges and office expenses.
8. On the facts and circumstances of the case, the learned CIT(A) erred in deleting the addition of Rs.40,65,003/- made by the A.O. on account of non-existing and bogus sub contract expenses.
9. On the facts and circumstances of the case, the learned CIT(A) erred in deleting the addition of Rs.11,71,094/- made by the A. O. on account of payments made out of books of account from unexplained sources."
CO-99/A/08
3. The assessee has raised sixteen grounds in its cross appeal, however at the time of hearing barring ground No.12 Ld. AR did not press the other grounds, therefore all the grounds baring ground No.12 are dismissed as not pressed. Ground No12 is reproduced herein below for adjudication.
4"12. On facts and circumstances of the case, the learned CIT(A) has grossly erred in upholding the disallowance of expenses of Rs.3,94,249/- for the month for April,2003 and May 2003 by not admitting additional evidences being the evidences for incurring such expenses, which needs to be deleted in the interest of natural justice and equity since the complete records/evidences for incurring such expenses are available and produced for verification."
4. The assessee is a firm engaged in the business of engineering works contract filed its return of income for the relevant assessment year on 31-10-2004 declaring an income of Rs.11.99 lacs along with audited profit & loss account, balance sheet, tax audit report u/s 44AB of the IT Act. Initially the return was processed u/s 143 (1) and subsequently the case was taken for scrutiny and assessment was completed u/s 143(3|) of the Act on 22-12-2006 wherein various additions were made. The assessee aggrieved by the order of the AO preferred appeal before the learned CIT(A) who in turn allowed the appeal of the assessee partly. Aggrieved by the order of the learned CIT(A) both the Revenue and the assessee are on appeal and cross appeal before us.
REVENUE'S APPEAL NO.1080/AHD/2008
5. Ground No.1 - (A) Deletion of the addition of Rs.42,88,013/- in respect of Thermax Beaware Site, and, (B) Rs.9,50,000/- in respect of ACC Ltd.:
5A) Thermax Beaware Site - Deletion of Rs.42,88,013/-: The learned AO observed that the assessee had disclosed total contract receipts of Rs.1,68,578/- from M/s. Thermax Beaware, while as an amount of Rs.44,56,591/- ought to have been disclosed. Thus, there was a short disclosure of Rs.42,88,013/- with respect to contract receipts. The assessee submitted before the AO that negotiations were going on with the contractee for reconciliation. However, the learned AO made an addition of Rs.42,88,013/- as undisclosed income since the assessee had not disclosed this amount as its turnover. When the matter cropped up before the learned CIT(A), the learned CIT(A) deleted this addition with the following observations:
"7.3 With regard to the receipts from Thermax, Beaware Site, it has been reported by the AO that during the preceding assessment year, the Assessee had disclosed a sum of Rs.16,81,857, as receipts from M/s. Thermax Babcock and Wilcox Ltd., another sum of Rs.16,75,564 had been disclosed in the same year as receipts from M/s. Thermax Ltd., Beaware. Both the Companies were engaged in the development of a project at Beawar for which they had contracted the Assessee. Thus, while the Assessee accounted for the receipts from the job done on the side, the payments were made separately by the two companies and tax was deducted at source accordingly. Such receipts toalled Rs.33,57,421/-. It has been further confirmed by the AO in his remand report that another sum of Rs.12,70,847 was shown to have been received from M/s. Thermax Ltd., Beaware Account, during the year under consideration. The total receipts disclosed by the Assessee from the said contract was therefore, Rs.46,28,268/-, whereas, the AO had worked out the payments receivable by the Assessee from M/s. Thermax Ltd. At Rs.44,56,591/-. This meant that during these two years, the Assessee had made an excess disclosure of Rs.1,71,677. 7.3 However, after having furnished such a detailed report which included date-wise and bill-wise entries of various amounts in the ledger, the AO has very curiously observed in the remand report that the Assessee's claim that the sum of Rs.33,57,121 had been 6 accounted for in the preceding assessment year was to factually correct. This conclusion of the AO does not correspond to the detailed finding recorded by him in the remand report. Such a comment is therefore ignored. However, the details clearly show that the Assessee had not only accounted for the receipts from Thermax as reflected in the TDS certificates, but the disclosure was in excess of the amounts reflected in the TDS certificate. This was perhaps because, as claimed by the AR, the Assessee accounted for contractual amounts in the ledger account of different contractees at the time of raising RA bills. However, the payments were made by the contractees after approving the same, which often resulted various amounts being deducted so that the amounts ultimately received by the Assessee, may not have tallied with the amounts accounted for by the Assessee. The Tax is deducted on the amount disbursed by the contractees. Consequently, not only would there be a difference in the years in which the receipts are accounted for by the Assessee and the year in which payment is actually received after deduction of tax, but there would also be a difference in the amounts accounted for and the amounts actually received. The AO is directed to delete the addition of Rs.42,88,013."
6. We have heard the rival submissions and perused the records produced before us. In a situation where running bills are raised, it often happens that TDS is deducted at the time of payment of the bills which may even pertain to previous years contract work. Since the TDS certificates are issued by the deductees quite often late, difficulties arise to the recipients for the purpose of accounting of the contract proceeds. The learned CIT(A) on examining the matter had arrived at a conclusion that the assessee has not only accounted for the contract receipts from Thermax as reflected in the TDS certificates, but the disclosure was in excess of the amounts reflected in the TDS certificates. Therefore, looking at the facts and circumstances of the case and overall analysis of the issue, we are of the firm belief that the order of the learned CIT(A) 7 need not be disturbed at this stage. Therefore, this issue raised by the revenue is dismissed.
7. B) M/s. ACC Ltd. - Deletion of addition Rs.9,50,000/-: The learned AO observed that the assessee has claimed an amount of Rs.9,50,000/- as deduction on the ground that for this amount contract receipt was irrecoverable from M/s. ACC Ltd. The learned AO disallowed the claim of the assessee and made an addition of Rs.9,50,000/- due to the following reasons:-
i) The assessee did not furnish confirmation letter from M/s.
ACC Ltd.
ii) The assessee was not able to prove that this amount is irrecoverable.
iii) The assessee did not furnish the address of the party for the AO to make enquiry.
8. When the matter was cropped up before the learned CIT(A), the learned CIT(A) deleted the addition made by the AO for Rs.9,50,000/- with the following observations:
"7.8 The last addition made by the AO on the basis of TDS certificates was a sum of Rs.9,50,000 allegedly received from M/s. ACC Ltd. The Assesse submitted before the AO that this sum was not receivable. The AO however made the addition on the ground that requisite evidence, including confirmatory letter from the said party, had not been furnished. The AH has claimed that the contract with the said party had concluded on 16.10.2002. Subsequently, as per the terms of the contract, a claim of Rs.9,50,000 had been made and booked as income on 31.3.2003 as 'over-run compensation'. This means that the said sum had already been disclosed in the preceding year. However, since M/s.8
ACC Limited did not accept the Assessee's claim, the amount had subsequently been written off during the year under consideration. The AR has furnished a copy of the ledger account of M/s. ACC Ltd. in the books of the Assessee to substantiate his claim. The claim of the AR has been supported by the AO in the remand report. He has further confirmed that vide voucher No.666, the Assessee had written off the said sum on 31.3.2004 so that the resultant balance with the said company was Nil. In such view of the mater, I have no other option but to delete the addition of the sum of Rs.9,50,000."
9. We have heard the rival submissions and perused the material on record. From the facts of the case, it is apparent that it is a case of bad debts. The assessee has written off this amount from its books of accounts during the relevant assessment year. The same was offered for tax during the assessment year 2003-04. This issue is directly covered by the decision rendered by the Hon'ble Apex Court in the case of T. R. F. Ltd. V/s CIT, 323 ITR 397, wherein it was held that "It is not necessary for the assessee to establish that debt in fact has become irrecoverable. It is enough if the bad debt written off as irrecoverable in the account of the assessee." Therefore, this issue raised by the revenue is dismissed. Thus Ground No.1 of the Revenue is dismissed.
10. Ground No.2 - deletion of addition of Rs.12,47,346/- made on account of undervaluation of closing stock : During the course of assessment proceedings the learned AO observed that the assessee has not disclosed its work in progress for the period 26th March to 31st March of the relevant previous year. The learned AO further observed that the assessee had booked expenditure during this period of 26th March to 31st March for an amount of Rs.12,47,346/-. The assessee 9 explained that the measurements were taken for the period from 26th of the month to the subsequent 25th of the month and running bills were raised. This method is consistently followed by the assessee year after year. The learned AO was not convinced with the reply of the assessee and made an addition of Rs.12,47,346/- treating it as undisclosed work in progress as on 31-03-2004. The assessee carried the matter before the learned CIT(A). The learned CIT(A) deleted the addition with the following observations:
"15. In the remand report, after considering the explanation of the Assessee regarding its method of accounting, consistently adopted over the years and accepted by the Department, the AO however observed that the Assessee was found to offer the income of the whole year under consideration. I do not accept the contention of the AO. As a going concern, the Assessee had been raising the RA bills on the contractees on the 27th of every month. The bills covered the period ended on 26-25th of each month. Thus, the RA bills raised on 27.7.2004 covered the period 26th February to 25th March. The remaining period of 6 days upto 31.3.2004 would have been covered in the RA bill raised on 27.4.2004. There was thus no scope for showing the WIP for the six days of the financial year. It would have made no sense since the work done during the period would have been included in the bill raised on 27.4.2004. Secondly, whatever would have been shown as closing WIP for the six days, would have to be shown as the opening WIP as on 1.4.2004. Most importantly, the Assessee had been following the same method of accounting ever since its inception, and the same had been accepted by the Department over the years even in scrutiny assessment proceedings. There was therefore, no reason for the AO to enforce a change without any ground whatsoever. The action of the AO was thus without any logic or rationale. He is directed to delete the addition of the sum of Rs.12,37,346/-."
11. We have heard the rival submissions and perused the material on record. It is a consistent practice of the assessee to raise running bills with respect to the contracts not completed as on 25th of any given 10 month. Accordingly, the assessee has raised bills for the work done as on 25th of March, 2004. Strictly speaking, the assessee should have provided for the expenditure incurred from 26th March to 31st March, 2004 as work in progress as claimed by the Ld.AO. However, the assessee has been consistently following the method of accounting as stated above. Further from the facts and circumstances of the case, it is evident that:-
(i) No amount of contract receipts will go un-taxed because the contract receipt of Rs.12,37,346/- being closing work in progress is disclosed as receipts for the subsequent assessment year.
(ii) Similar treatment is given for the closing work in progress for the preceding year.
(iii) Comparing the GP ratio offered by the assessee at 12.42% for the relevant assessment year to 10.09% offered during the preceding assessment year, the overall effect will be negligible.
The learned CIT(A) has also taken note of these facts and graciously deleted the addition made by the learned AO. In these circumstances, we do not find any reason to alter the decision rendered by the learned CIT(A). Therefore, this ground raised by revenue is dismissed.
12. Ground No.3 - Deletion of addition of Rs.17,16,416/- being outstanding interest payable : The learned AO noticed that the assessee had disclosed an amount of Rs.17,16,416/- being outstanding interest payable. It was further observed by the learned AO that the assessee had disclosed outstanding interest payable of Rs.14,22,268/- for the assessment year 2001-02, Rs.14,88,839/- for the assessment year 11 2002-03 and Rs.16,35,710/- for assessment year 2003-04. The learned AO directed the assessee to furnish confirmation letters from the parties with whom the outstanding interest of Rs.17,16,416/- was due. The assessee failed to furnish the confirmation letters. Therefore, the learned AO made an addition of the entire amount of Rs.17,16,416/- holding it to be a bogus and non-existent liability deliberately brought into the books of accounts with an intention to reduced profits year after year. The assessee took up the matter before the learned CIT(A). The learned CIT(A) after careful and detailed consideration deleted the addition of Rs.17,16,416/- made by the AO with the following observations:
"19. First of all, I find that the AO did not take care to mention the section under which he disallowed the sum of Rs.17,16,416 as a bogus/non-existing liability. From the details furnished by the AR, it is seen that this sum was the opening balance as on 1.4.2003 of the "outstanding interest account". During the year, the Assessee made a payment of Rs.93,205 while further liability of Rs.32,500 had arisen so that, the closing balance in the said account at the end of the year under consideration was Rs.16,75,711. The AO disallowed only the opening balance on the ground that the Assessee's claim under the said head had been increasing from year to year, and that, the Assessee had failed to furnish confirmatory letters from the parties to who such interest was payable. It has been explained by the AR that this account represented interest payable on loans most of which had been taken from the spouse of the Managing Director. While the Assessee accounts for the loans under the loan account, it maintains a separate account for the interest payable on such loans. TDS had been deducted on such interest payable/paid and the details of such deductions had been furnished before the AO. Therefore, it could not be said that the interest liabilities were bogus. More importantly, the loans on such interest had become payable had been taken in earlier years when the genuineness of the loans has been accepted in assessment proceedings u/s 143 (3) for the AYs 2003-04 and 2002-03. Apparently, the AO failed to take into consideration this aspect of the matter. If the loans themselves had been accepted as genuine after scrutiny and 12 verification, there was no reason why the interest payable on such loans in a subsequent year should be disallowed on the simple ground that confirmatory letters had not been furnished from the concerned parties. Further, the AO, made the disallowance as a non-existing/bogus liability which would mean that according to the AO such liability did not exist. In order to make an addition the provisions of Sec. 41(1) would have to be applied. In order to apply the provisions of the said section, the conditions as laid down therein would have to be fulfilled. Since, such conditions were not met or fulfilled nor were they established by the AO, he was not within his powers to make such a disallowance. The addition of the sum of Rs.17,16,416 will therefore, stand deleted."
13. We have heard the rival submissions and carefully perused the submissions and materials produced before us. It is pertinent to note that the assessee firm availed loan from family members of the partners from time to time. Outstanding interest from these family members varied from Rs.14,22,268/- from the assessment year ending as on 31- 3-2001 steadily increasing approximately not beyond an amount of Rs.1,00,000/- per annum every year and thus resulting in a closing balance of Rs.17,16,416/- for the year ending 31-03-2004. It is apparent from the order of the learned AO that he has not doubted the existence of the loans. Further, from the remand report of the learned AO it is evident that the learned AO is informed that the major portion of the outstanding interest to the extent of Rs.10,50,000/- was due to the spouse of the Managing Director, Mr. J. Chandra. It was also brought to his notice of the learned AO that tax has been deducted at source on the interest payment duly. From these facts and from the observation of the learned CIT(A) we are of the considered view that the order of the learned CIT(A) should be sustained on this issue. Therefore, this ground raised by the revenue is dismissed.
1314. Ground No.4 - Disallowance of Rs.13,29,561/-out of wages: On analysing the wages payment made by the assessee, the learned AO observed that there is no correlation between the income credited in a particular month with the wages shown for that month. Further, it was noted that the wages claimed as percentage of total receipts for the assessment year 2002-03 was 34.17%, assessment year 2003-04 was 35.34%, however, for the assessment year 2004-05 it was 51.32%. It was further noticed that the assessee had contributed to provident fund Rs.8,60,146/-. The total wages debited to profit & loss account was Rs.2,65,91,228/-. The learned AO opined since most of the workers do not have wages of more than Rs.6,500/- per month, the assessee should have deducted 12% of workers' wages towards PF, thus amounting to Rs.31,90,947/-. According to the Ld.AO, with respect to this discrepancy, the assessee was not able to furnish convincing explanation. Further, since the claim of the assessee was not verifiable, the identity and address of the labourers could not be established, non- maintenance of attendance sheet etc., the learned AO made an addition of 5% on the total wages debited to the profit & loss account (5% of Rs.2,65,91,228/-) amounting to Rs.13,29,561/-. This issue was brought before the learned CIT(A) by the assessee. The learned CIT(A) considered the issue elaborately deleted this addition of Rs.13,29,561/- made by the learned AO without any hesitation. His detailed findings are reproduced herein below for reference:
"24. The main ground on which the AO sought to make the disallowance was that during the year under consideration, the expenditure claimed under the head of Wages as a percentage of the total receipts was much higher than in the preceding years, which meant that the expenditure claimed was in excess of what should have normally been claimed. In order to buttress this view, the AO attempted and marshalled 14 various grounds. The first ground taken by him was that salaries were paid in part or in more than one instalment, as a result of which, some amounts were entered in round figures while on subsequent dates it was an odd figure. The AR's explanation is that, sometimes wages were paid on- account and on lumpsum basis. Subsequently after verifying the number of days and hours put in by a particular worker, the final amount would be paid. This appears to be a plausible explanation. Such a method is often adopted by employers, especially in the case of the Assessee who had been working on contract basis at various sites spread across the country where control and supervision would have been difficult. The second ground taken by him was that there was no co-relation between the income credited in a particular month and the wages claimed for that month. In some months of the year wages claimed was 40.52% of the receipts while in another month it was 44.49%. In the month of March it was 66.41%. I am of the view that this is not a reasonable ground. If the Assessee employs a larger number of workers in the month of say January, his wags bill will go high. However, the effect of such increased deployment would be felt in the next month or the month after. Since the RA bill is raised towards the end of each month on the completion of a certain stage of work, the number of employees or workers deployed in a particular month could not be co-related or compared with the receipts of the same month. In any case, it was not the case the AO that the wags claimed by the Assessee were not actually paid or that the claim of the Assessee was bogus. The third ground taken by the AO was that, the Assessee had shown PF contribution of only Rs.8,60,146 as against total expenditure on wages of Rs.2,65,91,228. Since, under the PF Act, contribution @12% is required to be made for workers earning wages less than Rs.6,500 per month and since, most of the workers employed by the Assessee earned less than Rs.6,500 p.m. , the Assessee should have made a total contribution of Rs.31,90,947. It is the AR's argument that such contribution is required to be made under the PF Act if the employee or the worker is on the roll for the entire 12 months. In any case, if the PF contributions were indeed made lesser than what should have been made by the Assessee, it would have been a default under the PF Act, and could not be used as 15 an indicator for excessive claim of wags. The contribution made under the PF Act is allowable as a deduction u/s. 43B. It should serve no purpose for the Assessee to claim a much lower sum than what should have been payable as per the calculations of the A.O. 24.1 Finally, coming to the finding of the AO that the expenditure claimed under the head of wags was 51.32% of the total receipts during the year as compared to 35.34% in the A. Y. 2003-04 and 34.17% in the AY 2002-03, it has been contended by the AR that the Assessee incurs expenditure under three sub-heads being wages and salary, payment for piece-rate work and payment for sub-contacts. During the year, the expenditure incurred on payments to sub-contractors had reduced to 12.84% as compared to 26.54% in the preceding year. Similarly, the expenditure on piece-rate work had decreased to 1.07% as compared to 2.13% in the preceding year, even though, the wages and salary expenditure had increased to 50.32% during the year as compared to 35.34% in the immediately preceding year. Overall, the total percentage of such payments in relation to the total receipts was 64.23% during the year, as against 64.04% in the preceding year and 51.56% the year before. The increase was thus, only of 0.22%. On the other hand, I find that apart from making a summary observation regarding the increase in wages as a percentage of total receipt, the AO did not give any other finding and simply made a disallowance of 5% of the total wage bill. I find merit in the submissions of the AR. There is no doubt about the fact that salary and wags are paid to regular employees and the Assessee would have to provide for increase their wages on account of increments, special allowances, and site compensatory allowances. Such increases would not have any relation to the contract receipts, which may not increase at all. In fact, the AO appears to have gone simply by ratios which may not always be workable. During the AY 2002-03, the percentage of wages and salary to the total turnover of Rs.3,72,75,104 was 34.17%. In AY 2003-04, the turnover more than doubled to Rs.7,86,94,462 and the percentage of wages and salary to the turnover increased approximately by 1.17% to 35.34%. During the year under consideration, the turnover fell drastically to Rs.5,28,41,277, with the majority of 16 the employees being regular employees or workers who not only had to be retained but also had to be granted increase in salaries and allowances. The percentage of wages and salary therefore went upto 50.32%. Percentages and ratios can always be misleading and cannot always be taken as a ground to take the view that the expenditure claimed was excessive. Taking all such facts and circumstances into account, I have come to the conclusion that there was no basis for the AO to disallow 5% of the wages claimed, and he is therefore directed to delete the addition of the sum of Rs.13,29,561/-
15. We have heard the rival submissions and perused the material on record. It is evident from the order of the learned AO that the learned AO made an ad hoc addition of Rs.13,29,561/- based on the calculation of 5% on the total wages debited to the profit & loss account. It appears that the learned AO has not made a proper analysis of the issue. From the submission of the assessee it is apparent that the average percentage of wages payment with respect to total turnover works out to 64.23%. This figure is somewhat static right from the assessment year 2002-03. Further, the assessee has rightly explained that PF contribution @12% is required to be made for workers earning wages less than Rs.6,500/- per month and the same was also not deductible in the case of temporary workers. Therefore, the PF contribution cannot be directly worked out at 12% of the total wages debited in the profit & loss account and infer any information from the same. Further, it is pertinent to note that the gross profit of the assessee has increased to 12.42% for the assessment year 2004-05 from 10.94% for the assessment year 2003-04. Considering the detailed findings of the learned CIT(A) and from our discussions above, we also do not have any hesitation to 17 uphold the order of the learned CIT(A) on this issue. Therefore, this ground raised by the revenue is dismissed.
16. Ground No.5 - Deleting the addition of Rs.29,010/- being 50% of Beawar Site expenses: The Ld.AO noticed that bills and vouchers were not available for the expenses incurred by the assessee on Beawar Site towards Office expenses Rs.3,658/-, Repairs & Maintenance Rs.9,373/-, Rent & Rates Rs.13,870/-, Labour Charges Rs.2,175/-, Labour Welfare Rs.3,945/- Travelling expenses Rs.10,982/-, Transportation charges Rs.8,560/-, and Telephone & Telex Rs.5,458/- aggregating to Rs.58,021/-. Since the assessee expressed its inability to produce the bills and vouchers the Ld.AO disallowed the entire expenditure and added to the income of the assessee. When the issue was brought before the Ld. CIT(A), the Ld. CIT(A) restricted the addition to 50% of the total expenditure thus confirmed the addition to Rs.29,011/- with the following observation:-
"35. I have carefully considered both the positions. It has been accepted by the AR that the relevant bills and vouchers cannot be produced even now. However, I do not accept the claim that the same were destroyed in the flood which took place in Surat since, there was no flood at Beawar and all the vouchers of such petty expenses would have been kept and maintained at the site itself. However, I also feel that the AO should not have disallowed all the expenses in full. In the interest of equity and justice therefore, I direct the AO to restrict eth disallowance to 50%, which means that the disallowance would be restricted to Rs.29,010, while the Assessee would get relief of an equivalent amount."
17. We have heard both the parties and perused the materials on record and taken note of the written submissions. From the order of the 18 Ld.CIT(A) it is evident that the nature of the expenditures incurred are not doubted but the additions are sustained to 50% of the expenditures because of the reason for non-production of bills and vouchers. In these circumstances we are of the considered view that the order of the Ld.CIT(A) does not be required to be interfered. Thus this ground raised by the Revenue is dismissed.
18. Ground No.6: Deletion of addition of Rs.4,89,809/- being rent and rates. During the course of assessment on scrutinizing the rent and rates debited by the assesse in its profit & loss account it was observed by the AO that the assessee had paid in cash Rs.4,89,809/- towards rent in respect of accommodation taken for workers. The assessee was asked to furnish copy of the rent agreement, address of the landlord and details of accommodation taken on rent and names and particulars of the workers who has stayed in the rented accommodation. Since, the assessee could not produce any of the particulars asked for, the learned AO made an addition of Rs.4,89,809/- holding the claim of rental payment to be bogus and ingenuine. When the matter was taken up for consideration before the learned CIT(A) this addition of Rs.4,89,809/- was deleted with the following observations:
"43. I have carefully considered the matter. From the details of contract receipts itself it was quite apparent that the Assessee had been engaged in executing contracts at several sites some of which were located in remote places. Firstly, to begin work on any site the Assessee would necessarily have to provide accommodation to all the workers especially those who are brought in from outside. For this purpose, the Assessee could not be expected to construct accommodation at every site and would be forced to take such accommodation on hire. Where the urban and semi-urban areas itself the landlords take the major part of the rent in cash, the villagers in such places could not be expected to 19 accept the rental payment in any other manner than in cash. Also there would have been no scope to enter into any formal agreement with the villagers and local landlords most of whom would be illiterate and there would be no facility for notarising or registering an agreement. On the flip side, if the Assessee had indeed sought to make a bogus claim it could have easily prepared bogus agreements on its own and could have put any ones signature as landlord. Almost certainly, the AO would not have made inquiries with the local people in various places to verify the genuineness of such rental agreement. In other words, given the situation which prevailed in such sites, there could be no doubt about the claim made by the Assesse. It is necessary in such situation to look at the total picture and take a holistic view instead of taking for evidence which simply could not be there. Further, the total expenditure claimed towards rent for accommodation was only Rs.4,89,809 and considering the large number of sites in which the Assessee had been operating, I am of the view that the expenditure claimed was most reasonable. Therefore, according to me, there was no justification for making any disallowance out of such expenses claimed by the Assessee. The addition of the sum of Rs.4,89,809 will therefore consequently stand deleted."
19. We have heard the rival submission, perused the orders of the authorities below and considered the material on record. The learned CIT(A) has considered the issue in detail. It is apparent from record that the assessee was engaged in executing engineering works contract at the site of assessee's clients and some of the sites were located in remote areas. In such situation it is obvious that the assessee would have to provide accommodation to its workers at site. It is a common practice that in such scenario accommodations are rented out in the neighbouring villages or semi-urban areas situated near the site. In such remote areas normally the landlords furnish temporary structures for accommodation and at times permanent structures. Further, in such remote areas the landlords insist on cash payment and the payments made per accommodation are generally nominal. Considering the facts 20 and circumstances of the case, we are in conformity with the findings of the learned CIT(A). Therefore, this ground raised by the revenue is dismissed.
20. Ground No.7: (A) Deletion of addition of Rs.1,69,291/- being labour welfare expenses, labour charges and office expenses.
21. The assesse had claimed deduction on account of labour welfare expenses Rs.3,24,556/-, labour charges Rs.3,24,554/-, office expenses Rs.1,97,347/- aggregating to Rs.8,46,457/-. While test checking the bills and vouchers for the expenses it was noticed that some of the cash vouchers were not supported by any bills, therefore, the learned AO made a disallowance of 20% on the aggregate sum of Rs.8,46,457/- amounting to Rs.1,69,291/-. The learned CIT(A) deleted this addition of Rs.1,69,291/- with the following observations:
"47. The disallowances made by the AO were on the same ground that the disallowances of Rent and Rates had been made. These expenses were incurred at remote sites on labourers, staff, technicians and engineers. They were obviously petty expenses for which no local person would raise any bill. On the part of the Assessee however, it would have been of utmost importance to keep strict control otherwise, it would result in wasteful expenditure and consequent loses to the Assessee. Therefore, the AO ought to have taken into consideration the ground level situation at such sites and should not have made the disallowance on the simple ground that the expense claimed were not supported by bills, especially when, the expenses were duly audited. I am of the view therefore, that there was no merit in the action taken by the AO and consequently, he is directed to delete the addition of the sum of Rs.1,69,291."
22. After hearing both the sides and looking at the nature of business of the assessee being execution of engineering job works at the clients' 21 site mostly in remote areas, we are of the opinion that the learned CIT(A) has rightly come to the conclusion and deleted the addition of Rs.1,69,291/- made on account of absence of few bills and vouchers. Therefore, this ground raised by the revenue is dismissed.
23. Ground No.8: Deletion of addition of Rs.40,65,003/- being payment to three sub-contractors.
24. The learned AO issued notice u/s 133(6) to three sub-contractors of the assessee to whom aggregating a sum of Rs.40,65,003/- was paid by the assessee, details of which are as follows:
(1) M/s. Cauver Construction Co. Rs.4,85,792/-
(2) M/s. Mansa Engineering Rs.11,50,325/-
(3) M/s. S. N. Engineering Rs.24,28,886/-
These notices issued to the parties returned un-served. The learned AO directed the assesse to furnish the new addresses. However, the assessee could not furnish the new address of the above sub-
contractors and was also not in a position to produce confirmation letters from the above parties. The learned AO for these reasons considered the payments to be bogus and ingenuine and made addition of Rs.40,65,003/- in the total income of the assessee since this amount was debited to the profit & loss account of the assessee. The learned CIT(A) considered the issue in detail and with the following observations deleted the addition of Rs.40,65,003/-.
22"51. I find that the AO made the disallowance on basically two grounds, firstly, because the letters u/s. 133(6) were returned unseved and secondly, no confirmative letter was furnished from any of the parties. On his part, the AR has argued that mew addresses of the said parties had been provided to the AO and an offer had been made to provide assistance in case the AO wished to issue commission. It has also been argued that confirmation letters had been furnished before the AO. In support of his contentions, the AR has furnished copies of letters addressed to the AO in course of assessment proceedings. It has also been argued that the Assessee had to necessarily depend on local contractors and other sub-contractors in executing various contracts at different sites. All such sub-contractors were regularly assessed to tax and had proper PAN which had been duly furnished before the AO. Tax had been deducted at source and such tax had been deposited in the Govt. account. The Assessee had filed the annual TDS return reflecting such deductions and deposits. These had been presented before the AO. It has also been claimed that the proprietor of M/s. Mansa Engineering had personally appeared before the AO and had confirmed the transaction with the Assessee. From the verification of the copies of the letters addressed to the AO, I find that confirmation letters had been furnished from M/s. Kaveri Construction Co. It was from these confirmation letters the AO obtained addresses and issued the letters u/s. 133(6). However, he failed to follow it up either with fresh letters under the same section or by issue of summons, especially when the Assessee had provided new addresses of all the three parties. Though it has been claimed that the proprietor of M/s. Mansa Engineering had appeared before the AO, I do not find any evidence to support such claim. In any case, while on one hand the AO failed to carry out his inquiries to its logical end, on the other hand, the Assessee had failed to furnish all requisite evidence including the details of payments made by account- payee cheques. These could have also been traced from the banks to identify their ultimate destinations. Tax had been deducted at source and the annual TDS returns filed by the Assessee had been produced. These were conclusive evidence which the AO could not ignore. Their assessment status could have been verified from their PAN which had been provided by the Assessee. Instead of carrying through with such inquiries which were extremely relevant for the purpose of ascertaining as to whether or not the payments to the sub-contractors were genuine, 23 the AO simply made the disallowance on the basis of letters u/s 133(6) not being served on the said parties. Most importantly, the AO failed to take advantage of the opportunity of a second innings offered to him by way of the remand proceedings on two occasions. He could have easily concluded the inquiries and investigations which were left incomplete by his predecessor. Given the facts and circumstances concerning this particular issue, I am of the view that the Assessee had discharged its initial burden of proving the genuineness of the claim. The burden of proof had been shifted to the AO who failed to discharge such burden. Consequently, there appears to be no merit in the action taken by the AO which was based on incomplete and unsustained inquiries. He is therefore directed to delete the addition of the sum of Rs.40,65,003."
25. We have heard the rival submissions and carefully perused the materials on record and the written submissions produced before us. From the order of the learned CIT(A) it is apparent that the assessee has furnished the following details:
(1) PAN A/c numbers of all the 3 sub-contractors.
(2) Confirmation letters from the two sub-contractors M/s. Mansa Engineering and M/s. S. N. Engineering.
(3) Details of account payee cheques by which payment was made to all these three sub-contractors.
(4) New address of all the three sub-contractors.
(5) Details of tax deducted at source for all the three sub-contractors for the payments made to them.
From the above, it is apparent that the assessee has furnished enough materials to the learned AO for him to make proper enquiries. Further, the assessee has even produced the proprietor of M/s. Mansa 24 Engineering before the learned AO. Considering all these facts, we are left with no other option but to sustain the order of the learned CIT(A). Therefore, this issue raised by the revenue is dismissed.
26. Ground No.9: Deletion of addition of Rs.11,71,094/- being payment made out of books from unexplained sources.
27. The learned AO noticed that the assessee has disclosed Rs.17,77,094/- sic Rs.11,77.094/- in the balance sheet dated 31-03- 2004 under the head "loan from other parties". The assessee was asked to furnish confirmation letters from these parties to verify the genuineness and existence of the liability as on 31-03-2004. However, the assessee did not furnish confirmation statement from the persons who have advanced the loans. Therefore, the learned AO made an addition of Rs.11,77,094/- since the assessee has failed to furnish any evidence to prove existence of the liability as on 31-03-2004. The learned CIT(A) deleted the addition made by the AO because the entire amount pertained to earlier period and therefore, addition could not be sustained u/s 68 of the IT Act.
28. We have heard the rival submissions and perused the material on record. The following facts emerge from the written submission submitted by the appellant before us:
(1) During the year under consideration, the assessee had carried forward old unsecured loans of earlier years under the head "Loan 25 from other parties" in its balance sheet, the summary of which is as follows.
Descriptions Amount
Opening Balance as on 01-04-2003 18,77,094
Less: Repayments made during the year 1,00,000
Closing Balance as on 31-03-2004 17,77,094
(2) The said details were submitted to the learned AO for which he observed that the assesse has failed to furnish any evidence of existence of the said liability and also the name and address of the persons and accordingly, he made an addition of the closing balance of Rs.11,71,094/- when the actual closing balance is Rs.17,77,094/-
(3) The following detail in respect of the said loans carried forward from the earlier years was submitted tot eh learned CIT(A) which was remanded for verification to the learned AO.
Sr. Name of the Depositors Amount (Rs.) Year of Loan No. 1 Janu V. Nair 10,50,000 1998-99 & 2001-02 2 Mr. Radha Krishnan 80,000 1998-99 3 Dr. Soma Sundaram 50,000 1998-99 4 Dr. Jaychandran 5,00,000 2001-02 26 5 Other Small Loans 97,094 Prior to 1998 Total 17,77,094 (4) The Hon'ble Bench may note that not only in the assessment order but also in the remand report, the learned AO has accepted the fact that unsecured loans bought forward from the earlier years.
From the above submissions, it appears that learned AO had failed to make requisite inquiries before furnishing the remand report in spite of the assessee having furnished sufficient details of the loan depositors. In such circumstances, the assessee cannot be held to be at default. Therefore, we hold the issue in favour of the assessee and sustain the deletion made by the learned CIT(A). Therefore, this ground raised by the revenue is also dismissed.
29. In the result, the appeal of the revenue is dismissed.
C. O. No. 99/Ahd/2008(In ITA No.1080/Ahd/2008)
30. The only surviving ground raised in the Cross Objection was that the learned CIT(A) erred in disallowing the claim of Rs.3,94,249/- for want of proper bills and vouchers. During the course of assessment the learned AO noticed certain bills and vouches were missing in regard to various expenditures and therefore, to that extent of Rs.3,94,249/- disallowance was made. When the matter cropped up before the learned 27 CIT(A) the assessee attempted to furnish the bills and vouchers, however, the same were not admitted by the learned CIT(A) who in turn confirmed the order of the learned AO. Even though, the learned AR argued before us that the bills and vouchers are now in the possession of the assessee and the learned CIT(A) was not justified in admitting the additional evidence, we are not convinced with the submissions of the learned AR because even at this stage before us the same were not produced. Therefore, we uphold the order of the learned CIT(A). Accordingly, this ground raised by the assessee is dismissed.
31. In the result, Cross Objection of the assessee is dismissed.
32. In the result, the appeal of the revenue as well as the Cross Objection of the assessee, both are dismissed.
Sd/- Sd/-
(BHAVNESH SAINI) (A. MOHAN ALANKAMONY)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Lakshmikant Deka/-
Deka/-
28
Copy of the order forwarded to:
1. The Appellant
2. The Respondent
3. The CIT concerned
4. The CIT(A) concerned
5. The DR, ITAT, Ahmedabad
6. Guard File
BY ORDER
Dy. Registrar, ITAT, Ahmedabad