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2016 (11) TMI 115 - ITAT MUMBAI

2016 (11) TMI 115 - ITAT MUMBAI - TMI - Estimation of net profit - comparison of trading profit of two different years - Held that:- Once in the survey year no adverse inference has been drawn, then as a logical corollary without any material or information on record qua this year, no addition on account of estimation of net profit can be made. We also agree with the contention of the Ld. Counsel that the trading result for the part of the year cannot be compared with the trading result of whole .....

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nder section 133A - Held that:- It is an admitted fact that, none of the two labour contractors whose statements were recorded were involved in any of the contract work relating to the assessment year under consideration and it has also been pointed out by the Ld. Counsel that, in fact, one of the contractors was never employed by the assessee company at all, therefore, we agree him that reliance placed on such statements does not corroborate the stand of the Department and in fact this material .....

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ound for drawing any adverse inference. Thus, we hold that, ad-hoc disallowance as sustained by the Ld. CIT(A) @ 5% cannot be upheld either on facts or in law and accordingly we direct the AO to delete the addition made on this score. - Disallowance of depreciation - assessee did not commence its wind-mil project and did not start the production in the year under consideration - Held that:- The finding of the authorities below that the assessee was not in the possession of the land to instal .....

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has been incorporated by us in the foregoing paragraphs. The commission certificate dated 15th July, 2010 was issued on basis of minutes of the meeting held on 31st March, 2010, wherein, it has been mentioned that date of commissioning of the said project viz. Wind-Mill is from 31st March, 2010. Another important fact which has been completely missed by the authorities below is that, revenue generated from the sale of power have been accepted as income of the project and it has been taxed also .....

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2010-11 itself. - Disallowance of finance cost on account of interest paid by the assessee for the purposes of Wind-Mill at Rajasthan - Held that:- No reason for disallowance of finance cost which is on account of interest paid for the purpose of Wind-Mill Project. Accordingly, we direct the AO to allow the interest on the loan taken for the purpose for installing wind-mill, because as stated above, the sale proceed of the power generation has been accepted and taxed in this year. - Dis .....

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of the exempt income and expenses debited in the accounts. It is then onus shifts to the AO to satisfy himself about the correctness of the claim of the assessee having regard to the accounts maintained by the assessee. Thus, looking to the facts of the case, we find that the disallowance made by the AO and as confirmed by the CIT(A) under Rule 8D(2)(iii) appears to be reasonable hence, the disallowance is confirmed. - Addition on account of liasioning fee paid - Held that:- From the facts a .....

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ed were produced and the service tax paid on such professional services rendered by it, were also shown. Further, it is also an admitted fact that no one from M/s Sahadev Project or Mr. Devkinandan Sehgal is a relative of the assessee within the scope and ambit of section 40A(b) and, therefore, there cannot be any question for considering that any payment to excessive or unreasonable. Once, the genuineness of the payments and the purpose for which it has been made is not doubted then the entire .....

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carried out by the assessee, wherein surveyors are required to certify loading and unloading the shipment and cargos, therefore, such a payment made to them cannot be held to be for non-business purpose. The payment made to the surveyors is fully corroborated by the bills raised by them and also payment made throughout account payee cheques after deducting TDS. Thus, the order of the CIT(A) in deleting the said disallowance is upheld - ITA No. : 334/Mum/2016, ITA No. : 430/Mum/2016 - Dated:- 31 .....

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s appeal, vide which following grounds have been raised:- 1. The appellate order dated October 23, 2015, passed by the learned Commissioner of Income Tax (Appeals) ( Ld CIT(A) ) under section 250 of the Income-tax Act, 1961 ( Act ) and the order passed by the learned Assessing Officer ( ld AO ) under section 143(3) of the Act are not in accordance with the law and are contrary to the facts and circumstances of the present case. 2. The Ld. CIT(A) / AO has passed the appellate order/assessment or .....

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on the facts and circumstances of the case and in law the Ld. CIT(A) /AO has erred in not allowing depreciation of ₹ 2,53,39,773 claimed on windmill at Rajasthan ignoring the evidence placed on record by the Appellant to prove conclusively that the windmill was commissioned during the year. 5. Based on the facts and circumstances of the case and in law the Ld. CIT(A) /AO has erred in disallowing finance cost amounting to ₹ 11,101 on account of interest paid on term loan. 6. Based on .....

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Mumbai and branch office at Gandhidham (Gujarat). The return of income for the AY 2010-11 was filed on 27thSeptember, 2010 with the DCIT 5(1) Mumbai, declaring total income of ₹ 1,56,59,350/-. During the pendency of the assessment proceedings, survey action under section 133A was carried out on 27th December, 2012 at the Branch office situated at Gandhidham, Gujarat. All the books of accounts were found to be maintained in the computerized Tally system and the books of account were found .....

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and ground no. 2 is not pressed. 4. The facts apropos, the first issue as raised in ground No.3 relating to ad-hoc disallowance of ₹ 1,93,72,170/- are that, during the course of survey it was noticed by the authorised officer that the assessee has suppressed GP/NP by inflating the cargo handling expenses by putting bogus entries at the end of the year. Therefore the Assessing Officer show caused the assessee as to why Net Profit (which was worked out as on the date of survey on 27th Dec 2 .....

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lready some bills were lying pending for booking in the accounts aggregating to ₹ 1,99,53,580/- and the survey team has already taken such bills and have also seized the same. Apart from that, the bills which were to be received against work done and booked up financial year to the date of survey were approximately ₹ 1.5 crores and this fact was duly intimated to the survey team. While calculating the GP ratio on the date of survey, the amount of expenses aggregating to ₹ 3,49, .....

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of survey, came to the conclusion that, the assessee was following a trend to inflate the cargo handling expenses by making entries at the end of the year and thereby suppressing GP/NP. Relying on the statistics gathered at the time of survey, the AO computed the Net Profit at ₹ 11,55,90,301 on a total turnover of ₹ 67,99,42,950 worked out at the net profit rate of 17% as against net profit disclosed by the Assessee at ₹ 8,26,89,167. Accordingly, amount of ₹ 3,29,01,134 ( .....

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mained to be posted and expenditures such as depreciation, interest cost on secured and unsecured loans, as well as certain provisions for expenses is made only at the end of the accounting period, which affects the net profit rate. Thus, on the date of survey itself (i.e., in the middle of the year), the net profit cannot be compared with the earlier preceding year. It was further pointed out that, there are different heads of refunds and the claim of labour expenses and it had nothing to do wi .....

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ansportation expenses including the other heads. The assessee also gave the working that for the identical period for the earlier year, receipts and expenses are to be compared, then the percentage of cargo handling receipts with respect to corresponding expenses would be approximately in the same range. This has been demonstrated in the submissions which has been incorporated by the CIT(A) at pages 9 and 10 of his order. 6. The Ld. CIT(A) after considering the entire gamut of facts, observed th .....

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5% from the expenditure debited under cargo handling, labour and transport charges of ₹ 38,74,43,418 to meet the ends of justice which worked out to ₹ 1,93,72,170/-. The relevant observation and finding of the CIT(A) in this regard reads as under:- I have carefully considered the facts of the case and the submissions of the Ld. AR. I have also gone through the decisions relied on by the AO and the Ld. AR. As seen from the working of the AO that he has estimated the profits of assessm .....

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realistically deleting the other type of services for working out net profit of the appellant company. It is also noticed that the AO has estimated net profit of the appellant company. It is also noticed that the AO has estimated net profit without finding any defects in the books of the appellant for AY 2010-11 and without rejecting them. It is evident that the AO has made a gross mistake by making disallowance on each head of expenditure like survey fee and liaisoning fee and at the same time .....

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ing the course of survey proceedings in the form of several bank letter heads (signed and unsigned) of labour contractors found from the premises and impounded, which includes the labour licenses issued etc and the statements recorded from labour contractors I find it reasonable to make an estimated disallowance of 5% from the expenditure debited under cargo handling labour and transport charges of ₹ 387,443,418 which works out to ₹ 1,93,72,170 to meet the ends of justice. Even thoug .....

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bove discussion the ground is partly allowed . 7. Before us Ld. Counsel for the assessee, Shri Ajit Kumar Jain, after narrating the facts of the case submitted that the net profit percentage was computed by the AO without pointing out any defect in the books of account and only on the basis of the survey report for a later year, which cannot be sustained either on facts or in law. He brought to our notice that in the year of Survey i.e. AY 2013-14 there was no adjustment made by the AO on the sa .....

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rough windmills and (iv) Other direct income. The AO has considered the GP/NP ratio of all the activities on consolidated basis. It was pointed out by him that the trading result for a part of the year was being compared with the trading result of the whole preceding accounting year and therefore, it is bound to reflect distorted results and position, because certain entries such as depreciation, interest cost on secured and unsecured loan as well as certain provision of expenses is made only at .....

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Total 387,443,418 It was further submitted by Mr. Jain that main reliance by the AO and ld. CIT(A) has been placed upon statements of only two labour contractors recorded at the time of the survey under Section 133A of the Act. In this regard he submitted that firstly, copies of such statements were not provided to the Assessee; secondly, statement recorded under Section 133A does not have any evidentiary value; and lastly, he pointed out that none of the labour contractors whose statements hav .....

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/NP, however got swayed away by the statements of the two labour contractors and erroneously made an ad-hoc disallowance which is unwarranted. It was thus pleaded that the addition deleted by the CIT(A) be confirmed and the ad-hoc disallowance made by the CIT(A) should be deleted. 8. The Ld. Departmental Representative on the other hand vehemently argued and emphasized on the modus operandi of the assessee, which goes to indicate that assessee was inflating the labour expenses to suppress its pr .....

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e modus operandi of a subsequent year cannot be imported to the preceding year without any evidence. 10. We have heard the rival submissions, gone through the relevant finding given in the impugned orders as well as material placed before us. The entire genesis of addition on account of net profit rate and ad-hoc disallowance of labour expenses is the information gathered during the course of survey conducted on 27th December, 2012 at the Branch Office situated at Gandhidham, that is, during the .....

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rading result cannot be casted or arrived at in the middle of the year, because most of the entries like, interest expenses, depreciation and certain administrative expenses are debited on the last day of the accounting year. It was also pointed out that, many bills were pending for incorporating it in the books of account. The Ld. CIT(A) had partly agreed with the assessee s contention and held that, estimation of net profit rate by the AO is completely incorrect for the reason that, firstly, t .....

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, because, firstly, net profit worked out on a particular date in the middle of the year will give a distorted picture for the same year itself due non posting of several expenses and provisions which are made only at the year end; and secondly, it cannot be imputed for a period prior to two financial years. Hence, reason cannot be the ground for drawing any inference for applying the same net profit rate for estimation in this year. To assess the true profit the AO is required to scrutinise and .....

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relating to the impugned assessment year 2010-11) was found, therefore, we agree with the conclusion of the Ld. CIT(A) that net profit rate cannot be estimated for this year for making any kind of addition. It has been brought on record by the Ld. Counsel that for the year of survey itself assessment under section 143(3) has been completed and no such addition either on estimation of net profit rate or on account of labour expenditure has been made. This fact clearly implies that, once in the s .....

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the last day of the accounting year. Thus, we reject the estimation of net profit by the AO and uphold the order of the CIT(A) on this point. 11. Now, coming to the ad-hoc disallowance on account of labour expenditure, it has been pointed out before us that, out of ₹ 37.78 crores expenditure on labour charges, only ₹ 4.63 crores pertains to labour charges for stevedoring, cargo handling and misc. activities and the majority of the payments have been made through account payee cheque .....

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is an admitted fact that, none of the two labour contractors whose statements were recorded were involved in any of the contract work relating to the assessment year under consideration and it has also been pointed out by the Ld. Counsel that, in fact, one of the contractors was never employed by the assessee company at all, therefore, we agree him that reliance placed on such statements does not corroborate the stand of the Department and in fact this material cannot be considered for making an .....

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nce. Thus, we hold that, ad-hoc disallowance as sustained by the Ld. CIT(A) @ 5% cannot be upheld either on facts or in law and accordingly we direct the AO to delete the addition made on this score. Thus, ground No.3 as raised by the assessee is allowed. 12. Now, we will take-up ground No.4, which relates to disallowance of depreciation of ₹ 2,53,39,773/- claimed by the assessee on the windmill installed at Rajasthan. The facts in brief qua this issue are that, the Assessee company is als .....

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ing the year as the Commissioning Certificate was itself dated 15thApril, 2010. It was thus concluded by him that the windmill project did not commence its operations in the year under consideration and therefore, assessee was not entitled to claim depreciation on the windmill in the AY 2010-11. However he held that the assessee can claim depreciation it in the subsequent year. 13. Before the ld. CIT(A), the assessee submitted that, AO has mainly relied upon one single fact that the land was reg .....

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s formally executed on July 8, 2010. This does not mean that there was no possession of the land with the main lessee and consequent with the assessee. In fact, the process of sub-lease deed of the land was already started and was clarified vide letter dated 15th February, 2010. It was also pointed out that, assessee has raised invoices on Rajasthan Vidyut Board in respect of sale of electricity, the details of which are as under:- Month Invoice No. Amount (Rs.) April, 2010 2010-11/002 1,17,503 .....

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of interest on term loan (Allahabad Bank stating providing of expenses of ₹ 11,101/- for windmill at Rajasthan on March 31, 2010; (d) Commissioning certificate dated April 15, 2010. It is stated that certificate that this commissioning certificate is issued on the basis of the minutes of meeting dated March 31, 2010; and (e) Copy of monthly power generation report for March, 2010 and Joint Energy Meter Reading taken on April 02, 2010 for the month of March 2010 of Suzion Energy Ltd. . A b .....

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preciation in the subsequent year only, as per law. 14. Before us, Mr. Ajit Jain submitted that the Assessing Officer as well as the ld. CIT(A) have not considered the documentary evidences submitted by the Assessee before them. It was pointed out by him that the power was generated for the month of March 2010 and the billing for the same was also done. In support our attention was invited to page 107 of the paper book for the power generation invoice and page 108 of the paper book for the power .....

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ly a legal formality pursuant to the Rajasthan Land Revenue Rules. The main lessee i.e. M/s. Suzlon Infrastructure limited had already given the possession of land as early as on May 31, 2007 and the said main lease deed was also formally executed only on July 8, 2010. The formal approval and subsequent registration of sub-lease agreement does not mean that there was no possession of the same with the main lessee and consequently with the Assessee. He invited our attention to page 76 of the pape .....

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out that the Commissioning Certificate is dated April 15, 2010, and this certificate has been issued on the basis of the minutes of meeting dated March 31, 2010. In a nutshell the case of the Ld. Counsel is before us is that, in the light of the evidences placed before the lower authorities, the conclusion drawn by the Assessing Officer/CIT(A) that the sub-lease agreement was made after the close of the accounting period and therefore, the Assessee was not in possession of land, is not correct. .....

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idences matter can be restored back to the file of the AO. 16. We have carefully considered the rival submissions and perused the relevant material placed on record. The sole ground for disallowing the claim on depreciation by the authorities below is that, assessee did not commence its wind-mil project and did not start the production in the year under consideration. The main reason given is that, firstly, the land on which the wind-mill was installed was registered on 22.11.2010 and assessee w .....

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below that the assessee was not in the possession of the land to install the Wind Mill as the registration of land was done in November, 2010, has no substance, because it has been brought on the record that assessee was in the possession of the land by virtue of sub-lease agreement and not only had installed the wind-mill project but also commenced the production from the month of March, 2010 onwards. This is evident from in the invoices raised right from April 2010 to July 2010 and other host .....

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have been accepted as income of the project and it has been taxed also in this year. Thus, we are unable to accept the finding and conclusion arrived at by the authorities below that no depreciation is allowable to the assessee and accordingly, we set aside the finding of CIT(A) and hold that not only the Wind-Mil was installed and commissioned in this financial year but also had started its operation on 31st March, 2010. Thus, assessee is entitled for claim of depreciation. The claim of deprec .....

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e was denied by the Assessing Officer/CIT(A) on the ground that since the Assessee had failed to prove that the Wind-Mill project had actually commenced operations during the year under consideration. Therefore, the question of allowing finance cost did not arise. 18. Before us, Ld. Counsel submitted that this ground is interconnected with the ground of depreciation on Wind-Mill project at Rajasthan. It was submitted by him that the interest on the loan taken for the purposes of installing the W .....

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purpose for installing wind-mill, because as stated above, the sale proceed of the power generation has been accepted and taxed in this year. Thus, ground no.5 is allowed. 20. Ground No. 6, relates to disallowance made by the AO u/s 14A for sums amounting to ₹ 19,552/-. During the assessment proceedings, the Assessee was asked to compute the disallowance under Section 14A of the Act, since the Assessee had earned dividend income of ₹ 35,800 during the year under consideration in the .....

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further AO had not made any disallowance on account of interest payments and had restricted only to dividend income of the Assessee. Thus, he confirmed the disallowance made by the AO. 22. Before us, the Ld. Counsel submitted that the authorities below have not recorded any finding in relation to any expenditure attributable for the earning of the exempt income which does not form part of the total income. He submitted that the assessee had received the dividend of ₹ 35,800/- and pointed .....

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ITR 81 (Bombay)), stating that recording of requisite satisfaction is sine qua non before making any disallowance under Section 14A. Therefore, in the absence of claim of any expenditure directly relating to exempt income, question of making any disallowance under Section 14A does not arise. The Departmental Representative on the other hand relied on the orders of the CIT(A) and Assessing Officer. 23. After considering the rival submissions and on perusal of the impugned orders, we find that the .....

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es debited in the accounts. It is then onus shifts to the AO to satisfy himself about the correctness of the claim of the assessee having regard to the accounts maintained by the assessee. Thus, looking to the facts of the case, we find that the disallowance made by the AO and as confirmed by the CIT(A) under Rule 8D(2)(iii) appears to be reasonable hence, the disallowance is confirmed. Accordingly, ground No.6 is treated as dismissed. 24. Now we will take-up revenue s appeal, vide which followi .....

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the Ld. CIT(A) erred in deleting the addition made by the A.O. of ₹ 53,17,741/- against the survey fees paid. 4. The appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of appeal. 5. The appellant prays that the order of CIT(A) on the above ground be set-aside and that of the assessing officer be restored . 25. Since we have already decided ground No.2 in while deciding the issue in ground No.3 .....

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tion of the Company, the assessee has been receiving liasoning services from M/s Sahadev Projects Pvt. Limited. These services were received under a written agreement dated 2nd September, 2004. In the course of the survey under section 133A, the authorized officer found bills of the said company i.e. M/s. Sahadev Projects Pvt. Ltd. with regard to the liaison work done by it. The authorized officer recorded the statement of Shri Harshad Gandhi, Director of the Assessee Company and it was explaine .....

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aused further direct enquiry through the DDIT, Inv. Wing VIII-2, Mumbai to ascertain the genuineness of the liaison fees paid to M/s. Sahadev Projects. The relevant facts have been discussed at Pages-6 to 8 of the assessment order. The DDIT opined that the payment made by the assesse to Sahdev Projects is very high. The AO based on the report of the DDIT has disallowed 50% of the payments made to Sahdev Projects. 27. Before the ld. CIT(A), the assessee s submission as incorporated by the CIT(A) .....

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pany such as PSL Limited having turnover of more than ₹ 2,000 crores since many years. (As per statement recorded) 3. In the course of the survey under section 133A, the authorized officer did find the bills from the said company i.e. M/s. Sahadev Projects Pvt. Ltd. in regard to the liaison work done by it. It was now the question of not using the services of M/s. Sahadev Projects Pvt. Ltd but the payments made our very high. It is only the personal opinion of the DDIT (Inv)/AO. 4. The aut .....

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ojects Pvt. Ltd, and it is certainly not a relative of the Appellant company within the meaning of section 40A(2)(b) of the Act. 6. The Appellant submits that the company M/s. Sahadev Projects Pvt. Ltd. have categorically confirmed that certain specific professional services were rendered and also gave detailed reply to each of the questions put forth by the DDIT in regard to the type of services rendered. 7. M/s. Sahadev Projects Pvt. Ltd. is engaged in the business of providing this kind of se .....

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e gross professional receipts shown by the said party is to the tune of ₹ 7,79,35,398 besides rent receipts of ₹ 40,09,500. In addition to the above, the said company has provided liaison services to various persons as under: 9. It is not a case of the DDIT (Inv) or the AO observing that there were cash withdrawals from the bank account of M/s. Sahadev Projects Limited which could have raised some doubts about the genuineness of the expenditure claimed. In fact as the Appellant has b .....

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outstanding balance of ₹ 1,13,68,440/- and the expenditure to this extent was not debited to P&L A/c for the year under appeal . 28. The Ld. CIT(A) after considering all the submissions filed by the Assessee, deleted the addition made by the AO. The relevant extract of the finding of CIT(A) is reproduced hereunder:- I have carefully considered the facts and circumstances of the case. As seen from the facts of the case, there was no dispute with regard to payment of liasoning fee by th .....

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sessment details of Sahadev Projects were filed and services to other companies, besides the Assessee Company, was never questioned. The explanation given by Ld. AR is self-explanatory and convincing. In view of these facts I fully agree with the learned AR that the disallowance of 50% of liasoning fee is uncalled for. The ground is allowed. 29. Before us, Ld. DR filed the copy of statement of Shri Harshad C Gandhi, MD of the assessee company and the also the copy of statement of Shri Devikanand .....

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Ltd. have categorically confirmed that certain specific professional services were rendered and also gave detailed reply to each of the questions put forth by the DDIT in regard to the type of services rendered. It was pointed out by him that there is no dispute about the fact that certain specific services were rendered by the said company but, the DDIT (Inv) felt that the payments has been made at higher rates without bringing in any material in support of his belief. It was argued that the re .....

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spicion about any tax evasion or doubting the genuineness of the expenditure by way of liaison charges paid. He drew our attention to Page No. 1 to 4 of the paper book which contains the agreement between the assessee and M/s Sahadev Projects Pvt. Ltd. and further drew our attention to page nos. 5 to 24 of the paper book to demonstrate that the payment have been made to Sahadev Projects by cheques and too after deducting the tax at source. Further, Sahadev Projects have levied service tax and pr .....

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ision of making an assessment as per the provisions of law and simply based his decision on conjuncture and surmises. The said company is not a relative of the Assessee within the meaning of section 40A(2)(b) and therefore, there is no question of holding that the payment is excessive or unreasonable. The Assessee before the authorities below had relied upon plethora of judgments which have been taken note at page 6 of the assessment order on which there is no comment from the AOs side. Thus hav .....

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heard the rival submissions and perused the relevant finding given in the impugned orders as well as material placed before us. The assessee is in the business of stevedoring relating to shipping business. It has been brought on record that, since inception, the assessee has been regularly receiving liasioning services under a written agreement dated 24th September, 2004 between the Assessee Company and M/s Sahadev Projects Pvt. Ltd. Such a payment had always been allowed, not only in the earlie .....

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s case is that the payment made to Mr. Sahadev Project is quite high and excessive and therefore, 50% of the payment has been disallowed. From the facts and material as discussed above, it is evidently clear that, M/s. Sahadev Project was providing this kind of services not only to the assessee but also to the various other customers in this line. As incorporated in the foregoing paragraphs, not only he has shown all such receipts from rendering of such services in his income-tax returns, but t .....

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ering that any payment to excessive or unreasonable. Once, the genuineness of the payments and the purpose for which it has been made is not doubted then the entire payment has confirmed by the party has to be allowed. Accordingly, we uphold the order of the CIT(A) in deleting the said disallowance. Thus, ground No.1 is treated as allowed. 32. Next ground relates to relates to the addition made by the AO on account of survey fee to the extent of ₹ 53,17,741/-. The facts in brief qua this a .....

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f bill raised by him on which payment of service tax has been paid and also TDS has been deducted. So, Ld. CIT(A) deleted the said addition after observing and holding as under:- I have carefully considered the submissions of the learned AR. As seen from the facts of the case the payments were made in cheques and duly accounted in the books of account. Required TDS was also made from the payments made to the surveyors I, therefore, do not find any irregularity in the payment. Further, the AO was .....

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