TMI Blog2012 (5) TMI 436X X X X Extracts X X X X X X X X Extracts X X X X ..... t the respective places - The assessee also justified why it has suffered losses by giving detailed reasons including the escalation clause, cost of increase in material and difficulty in implementing the road projects in Naxal-hit areas as a new venture - Decided in favor of the assessee - ITA No. 4492/Mum/2009, ITA No. 4679 and 4680/Mum/2009 - - - Dated:- 25-10-2011 - D.K. Agarwal, B. Ramakotaiah, JJ. Vijay Mehta for the Appellant Sanjiv Dutt for the Respondent ORDER B. Ramakotaiah: These are appeals by the Revenue for assessment years 2005-06 and 2006-07 and cross objection by the assessee for A.Y. 2005-06. Since common issues are involved, these appeals were heard together and are disposed of by this common order. 2. The assessee is in the business of civil, mining, marine and specialist engineering and construction activity. For the asst. year 2005-06, the assessee declared loss at Rs.3,99,75,980/-. For asst. year 2006-07, the assessee declared loss of Rs.21,44,28,218/-. The A.O., in the scrutiny assessment, rejected the books of account and estimated the income at 5% of the gross turnover of the company. While doing so in A.Y. 2005-06, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order as to why he has considered these issues for rejecting the books of account. Before the CIT(A), the assessee contended that the assessee was not given sufficient opportunities of hearing and that the assessee was also suffering from difficulties inasmuch as the records pertaining to the year under consideration were destroyed in water logging during July 2005 and further the issue relating to the increase in cost and expenses was only raised on 4- 12-2007 and time given was short considering the volume and nature of business coupled with the nature of projects undertaken during the year. The details furnished by the assessee were sent on remand to the A.O. who submitted his report vide letter dated 06.03.2009. The findings of the A.O. in the remand report are summarized by the CIT(A) as under:- "3.3.2. The findings of the Assessing Officer in the remand report as summarized as under:- i) Some of the projects are showing losses which cannot be accepted as the projects undertaken by the company were having the escalation clause. ii) The increase in the cost of materials, etc. is also not satisfactorily explained. iii) In a running project, there cannot be any l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... showing profit have shown substantially lower cost and comparative higher profitability. The Assessing Officer had also compared the 5 top loss making projects with the 5 profit making projects and held that proportionate cost in the loss making projects is substantially higher than the proportionate cost in the profit making projects. 3.4.3............. 3.4.4............. 3.5. I have gone through the said submissions and the arguments made by the ld. AR at the time of hearings. I find that the analysis done by the Assessing Officer is not correct since the said analysis has been done in respect of the net profit and loss and not in respect of the gross/operating profit/loss. The Assessing Officer has done the analysis in respect of the profits from every project after considering the overheads and administrative expenses instead of comparing the gross/operating margins. Correct comparison ought to have been done in respect of the operating margins of the projects and not in respect of the net profit of the projects (i.e. after reducing the overheads). The overheads being the fixed and period cost, cannot be co-related with the volume of business and hence the comparison ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that in a running project, if the RA bills are raised at cost plus margin and the balance unfinished work is held as WIP, there cannot be any loss, If any loss has occurred, it would occur in the closing year. In this context, the conclusion is drawn by the A.O. that the WIP is undervalued by the appellant and, accordingly, the net loss of Rs.33.74 crores out of the total Rs.59 crores is shown from 2 road projects i.e. AP/4A and 4B. 3.8. I have gone through the said findings of the Assessing Officer and the detailed submissions made before me by the ld. AR. It was explained that Running Account Bills (R.A. Bills) is an application to the customer for payment of work carried out in a particular month. R.A. Bills are not raised as cost plus profit but the same are raised on the basis of BOQ rates irrespective of actual cost incurred by the appellant. The Contractee certifies the payment based on R.A. Bills which are framed in line of Bill of Quantities (B.O.Q) available in the contract. Customer and Rates applicable in the contract conditions as per the payment term clause. All R.A. Bills are on account payment and, therefore, any error or omission in a particular R.A. Bill can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the AR that since part of the amounts subjected to TDS are shown as advance received, the TDS claim cannot match with the gross receipts since part of the amount on which TDS was deducted was either included in advances or the advances on which TDS was deducted in the last year is included in the turnover during the year. No discrepancy is noted on verification of such reconciliation as filed before me. Hence, I do not find any defect in the said claim of TDS and the income offered to tax. Nonetheless, the said discrepancy cannot lead to rejection of the books of accounts. OUT OF 29 PARTIES, 15 PARTIES DID NOT RESPOND TO THE NOTICES u/s. 133(6). 3.12 The Assessing Officer has also stated that since the appellant did not obtain confirmation of the parties in whose names expenses were booked, the notices u/s.133(6) were issues to various selected parties. However, according to the Assessing Officer, out of 29 notices, 15 parties did not respond to the notices issued to them. The appellant was therefore asked as to why the said 15 parties did not respond to the notices u/s. 133(6) of the Act. It was argued by the ld. AR that most of the parties who did not send their confi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d it was noticed that the appellant had filed the details called or which is evidence from the paper book filed before the Assessing Officer and produced before me. Hence, the rejection of the book results even on the said amount is incorrect. ESCALATION CLAIM NOT ACCOUNTED FOR 3.16 The Assessing Officer has also held that the appellant had not accounted for the escalation claims of Rs.4.32 crores (out of the total escalation claims of Rs.19.54 crores) and has deferred the same to the subsequent year. This is also one of the reason for the Assessing Officer for rejecting the book results. I have perused the tax audit report wherein such an observation is made. I do not find any merit in the contentions of the Assessing Officer that no offering the income from escalation claim amounting to Rs.4.32 crores results into defective books of accounts and consequent estimation of income. This is more particularly correct since the Assessing Officer himself has made separate addition in respect of the said escalation claim which is dealt with by me in ground of appeal No.19. After elaborately discussing these issues and legal principles established by the decision of Madnani Construct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Pratap Singh Abdul Rehman and Bros. vs. CIT 210 ITR 406 (All.) 2. National Plastics Industries vs. ITO 309 TR 191 (Bom). 6. The learned A.R., in reply, submitted that the A.O. was misled by the fact that there were huge losses in this year as compared to profits in earlier year. It was his submission that the assessee ventured into Road building contracts and has suffered huge losses in those contracts. It was his submission that sector-wise profits as submitted before the CIT(A) do indicate that the assessee continues to have profits in the other projects, whereas it has suffered losses in road building contracts. The details are as under:- ITD Cementation India Limited Assessment year : 2005-06 Projectwise profit and loss earned during the F Y 2004-05 Job code Turnover (Rs. in lakhs) Loss (Rs. in lakhs) B2805 3,137 (1,733) B2806 2,769 (1,641) AA011 8,093 (540) AA014 7,029 (168) Total Road Project 21,029 (4,082) Non Road Projects 29,149 2,804 Grand Total 50,177 (1,27 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144." The provision empowers the A.O. to reject the books of account and estimate income as provided under section 144 only if he is satisfied about the correctness and completeness of accounts of assessee or accounting standards notified have not been followed by the assessee. As seen from the order of the A.O., there is no finding that the books of account are not correct or complete. There is also no finding that the method of accounting followed by the assessee is not in accordance with the standards notified. The major plank for rejection of the books of account seems to be the unverifiable nature of expenditure and non-maintenance of stock register. The CIT(A) has not only considered the above issues but also other issues raised by the A.O. in the remand proceedings. As seen from the remand report placed on record, the A.O., instead of examining the voluminous details filed before him and giving a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nference that all is not well with the books and the same cannot be relied upon assess the income profits or gains of an assessee. In such a situation the authorities would be justified to reject the account books under s. 145(2) and to make the assessment in the manner contemplated in those provisions. Taking all these aspects and the material into consideration, the Tribunal has found as a fact that the claim of the assessee for acceptance of the account books was not sustainable. On the findings of fact recorded by the Tribunal, its order does not give rise to any question of law." As can be seen from the above, it is difficult to catalogue the various types of defects in the account books of an assessee which may render rejection of account books on the ground that the accounts are not complete or correct from which the correct profit cannot be deduced. It is not the issue in the assessee's case. The assessee has maintained complete books of account including vouchers and also justified the increase in cost, reasons for suffering losses and also the fact that stock registers were maintained at the respective places. Just because the assessee has suffered losses, it does not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or payment made to Cemindia Education Trust without assigning proper reasons for disallowance. 2) The CIT(A) was not justified in disallowing 5% of Rs.9,49,13,999/- for Infotech Expenses and Miscellaneous Expenses incurred by your appellant as your appellant's accounts are duly audited and the expense has been incurred for the business expediency. Therefore, the same should be allowed in full. 3) The CIT(A) was not justified in disallowing 5% of Rs.8,13,61,000/- for Traveling Expenses incurred by your appellant as your appellant's accounts are duly audited and the expense has been incurred for the business expediency. Therefore, the same should be allowed in full. 4) The CIT (A) was not justified in disallowing 5% of Rs.1,86,83,000/- for Postage and Telegraph Expenses incurred by your appellant as your appellant's accounts are duly audited and the expense has been incurred for the business expediency. Therefore, the same should be allowed in full." During the course of argument the learned counsel did not press ground No. 1, which is treated as withdrawn. Ground No. 2, 3 and 4 are discussed alongwith the relevant grounds in Revenue appeal for AY 2005-06. 10. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtains to disallowance of Rs.1,64,87,000/- on account of bad debts. The said disallowance was made by the Assessing Officer on the ground that the said amounts written off as bad debts were from reputed companies like Jaiprakash Associates, Tata Electric, LJNPT, Exe. Engineer Minor Irrigation and so on. It is also stated that the assessee, has not established as to how the said debt has become bad and hence the claim of bad debt is not allowable as deduction. The Assessing Officer has relied upon the decision in the case of South India Surgical Co. Ltd. v. ACIT (Mad HC) to support the stand taken. Before the CIT(A) it was submitted that the bad debts were claimed in respect of the excess claim of contract payments on account which were not approved and paid by various parties. It was also submitted that the amounts claimed as bad debts were already offered as income and hence the conditions laid down under section 36(2) were also complied with since as per the amended provisions, the assessee is not required to explain that the debt has become bad. In support, assessee has relied upon the decision in the case of Kanoria Securities and Financial Services Ltd. 15 SOT 191 (Mum) which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T 323 ITR 397(SC) will apply to the facts of the case. 11.3 After considering the arguments of the learned D.R. and the learned counsel we see no reason to interfere with the findings of the CIT(A) as these amounts were taken into account in earlier years and there are disputes with reference to the receivables. The excess claims of contract payment, which cannot be received were to be written off. The order of the CIT(A) is, therefore, confirmed. Revenue's ground is rejected. 12. Ground No. 4 pertains to the issue of payment made in cash of Rs.5,25,389/- for payment of quarry royalty. The said payment was disallowed on the ground that the payment was made in cash exceeding the prescribed limits and that assessee does not own any quarry. Assessee has submitted that since the payment was made to the Government, the payment for royalty in cash cannot be disallowed. Assessee submitted before the CIT(A) that the question of owning the quarry does not arise and if the assessee owned any quarry, the payment of royalty would not arise. The CIT(A) allowed the claim by giving the following findings:- "8.2. I have gone through the submissions made by the appellant. I find that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n accordance with the provisions of section 40A at the relevant point of time since section 40A(3) required disallowance of only 20% of the total expenses and not the entire expenditure. In the result, I find that the disallowance is not warranted as the same amounts to double disallowance. Accordingly, this ground of appeal is allowed." 14.1 After considering the arguments of both the counsels, we do not see any reason to interfere with the order of the CIT(A). The CIT(A) not only examined the facts but also the provisions of section 40A(3) which require disallowance of 20% of the total expenditure. Since assessee has already disallowed the amount there is no need for further disallowance as contented by the Revenue. The ground is, therefore, rejected. 15. Ground No. 6 pertaining to the disallowance of Rs.1,39,34,137/- being Infotech expenses out of the total miscellaneous expenses of Rs.9,49,13,999/-. While completing the assessment the A.O. not only disallowed the entire Infotech expenses but also disallowed 20% of the total miscellaneous expenditure on the reason that assessee has not furnished the vouchers. Before the CIT(A) it was contended that the A.O. has not given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in nature. There is also no finding that any capital expenditure has been claimed as revenue expenditure in Infotech expenditure. Therefore, we are not in agreement with the findings of the CIT(A) in restricting the expenditure to 5% even on Infotech expenditure. With reference to the balance expenditure out of the miscellaneous expenditure, considering the extent of expenditure, nature of expenditure, details furnished on record, we are of the view that there is some possibility of non-verifiable nature in the expenditure so claimed. Therefore, while upholding that some restriction is required we agree with the findings of the CIT(A) that 5% of the expenditure will meet the ends of justice. Therefore, while rejecting the ground raised by the Revenue in restricting the expenditure on infotech, we allow assessee's ground partially in deleting 5% restriction of Infotech expenses. The A.O. is directed to restrict the disallowance of 5% on the aggregate expenditure of miscellaneous expenses excluding the Infotech expenditure. Accordingly Revenue's ground is rejected and assessee's ground is partly allowed. 16. Ground No. 7 pertains to traveling expenses of Rs.813.61 lakhs, out of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ils restricted the amount to a reasonable percentage. In view of this both Revenue and assessee's grounds on this issue are rejected. 17. Ground No. 8 pertains to disallowance of Rs.18,68,300/- being 10% of aggregate postage and telegraph expenses of Rs.186.83 lakhs made by the A.O. but restricted by the CIT(A) to 5% of the total expenditure in line with his decision to restrict the miscellaneous expenditure and traveling expenditure. Considering the facts of the case and arguments of the rival parties we do not see any reason to interfere with the order of the CIT(A). Therefore, the disallowance of 5% is confirmed. Accordingly Revenue's ground No. 8 and assessee's ground No. 4 are rejected. 18. In respect of ground No. 9 the Revenue is objecting to the direction of CIT(A) that the escalation claim of Rs.4.32 crores cannot be taxed in the hands of the assessee in the year under consideration as the work in respect of such claim was not completed in this year. The addition of Rs.4,32,00,000/- was made by the Assessing Officer on the ground that assessee has offered the escalation claims under dispute amounting to Rs.15.22 crores and that since the balance Rs.4.32 crores out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m of Rs.4.32 crores is not carried out. Unless the work corresponding to the balance claim of Rs.4.32 crores is also carried out, it cannot be said that the said amount has accrued to the appellant. This would be contrary to the real income theory under the law where the appellant can be taxed only in respect of the income for which the right to receive the said income had accrued. Admittedly, the nature of transaction shows that the appellant does not have the right to receive the said income. Moreover, I also find that the appellant has offered the said amount of Rs.4.32 crores during A.Y. 2006-07 and no prejudice is caused to the department. In the light of the above findings and reasons, I am of the view that the said amount of Rs.4.32 crores cannot be taxed in the hands of the appellant. In the result, this ground of appeal is allowed." 18.2 After considering the rival submissions, we are of the view that the balance claim of Rs.4.32 crores has not accrued to the assessee. Therefore, it was rightly excluded by the assessee while accepting the income to the extent of Rs.15.22 crores. Unless the contractee accepts the escalation claim, no income can be stated to have accrued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d any reason to interfere with the learned CIT(A)'s order in deleting the disallowance of Rs.1,06,72,800/- out of temporary site expenses. Even otherwise, if it is to be considered as capital expenditure, the same is also eligible for 100% depreciation being temporary structures. Looking it either way, the amount is to be allowed as deduction. Hence, his order in this regard is confirmed and ground no.10 of the Revenue is rejected. 20. Ground No. 11 pertains to addition of Rs.3,67,11,191/- made on account of unexplained transactions with 22 parties. The A.O. held that assessee did not furnish the details of the said 22 parties and hence the payments could not be verified. Before the CIT(A) assessee had initially submitted that assessee was not allowed sufficient time and that the details already on record were not verified properly. It was also submitted that during the remand proceedings, assessee had submitted the details relating to 22 parties as mentioned along with the name, mailing addresses, and transactions with them. The said information were duly verified by the Assessing Officer in the remand proceedings. It was therefore argued by the A.R. that the said balances are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o he also invoked the provisions of section 40(a)(ia) on certain amounts stated to be amounts on which TDS was not deducted. The CIT(A) did not approve rejection of books of account, therefore estimation of income at 5% stands deleted. With reference to the disallowance under section 40(a)(ia), it was the contention that assessee itself has disallowed an amount of Rs.25,25,87,526/- and the amount of Rs.3,38,27,593/- disallowed by the A.O. was part of the already disallowed by the assessee while filing the return of income. These aspects were remanded to the A.O., who was directed to examine the issue factually. The A.O., however, rejected the contention stating that assessee has not furnished details. Assessee also contended that provisions of section 40(a)(ia) has been amended retrospectively w.e.f. A.Y. 2005-06 and any payment made before filing of return the tax deducted at source is to be excluded from condition under section 40(a)(ia). On this issue the A.O. has not offered any comments. The CIT(A), however examined the issue, reconciled all tax deducted at source in detail while considering the issue of examination of rejection of books of account and he considered this issue ..... X X X X Extracts X X X X X X X X Extracts X X X X
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