2012 (9) TMI 222 - AT - Income Tax

Revision u/s 263 by CIT - CIT directing the AO to re-examine the outstanding liability in the names of HPCL and IOCL - Held that - as it is standard practice with the public sector undertaking like HPCL and IOCL that they sell their products only against advance payment in the shape of Demand Drafts, the doubt entertained by the CIT is quite justified. These facts are not at all examined by the AO while completing the assessment which is very much evident from assessment order itself - against assessee. Addition towards quality control charges - Held that - Since the assessee has executed work under Central and State Governments authorities only, the fact of deduction towards quality control can be easily ascertained from the concerned department under which the assessee executed the work. In the circumstances, therefore, addition can be made only after verifying facts from the concerned department - in favour of assessee for statistical purposes. Disallowance of deduction claim on Sub-contractor expenses - Held that - It is therefore necessary to ascertain whether in fact any work has been executed by sub-contractor for which payment was made to him by the assessee as these facts have not been properly brought on record - direction to the AO to make necessary enquiry in this regard - in favour of assessee for statistical purpose. Depreciation on the temporary staff quarters - Held that - once the AO has disallowed the expenditure claimed by holding it as a capital expenditure then the assessee is entitled to avail depreciation on such capital expenditure - in favour of assessee.

Issues Involved:
1. Validity of the order passed under Section 263 of the Income Tax Act.
2. Re-examination of outstanding liability in the names of HPCL and IOCL.
3. Excess claim of expenditure under purchases of bitumen.
4. Addition towards quality control charges.
5. Addition of sub-contract payment to Krishna Kumar Raju.
6. Deletion of addition made towards temporary staff quarters.
7. Deletion of addition made towards excess claim of consumption of bitumen.
8. Deletion of addition made towards expenditure under quality control.
9. Disallowance of commission on sub-contract works.
10. Disallowance of expenses on account of metal purchases.
11. Disallowance on account of labor charges.
12. Disallowance under Section 40A(3) of the IT Act.

Issue-wise Detailed Analysis:

1. Validity of the order passed under Section 263 of the Income Tax Act:
The assessee challenged the order under Section 263, arguing that the assessment was neither erroneous nor prejudicial to the interests of revenue. However, the CIT found that the Assessing Officer (AO) had not made proper inquiries and passed the assessment order without application of mind on specific issues. The Tribunal upheld the CIT's order, stating that the AO had not examined several key aspects, thus justifying the invocation of Section 263.

2. Re-examination of outstanding liability in the names of HPCL and IOCL:
The CIT directed the AO to re-examine the outstanding liabilities shown in the balance sheet for HPCL and IOCL. The assessee failed to reconcile the figures of outstanding liability with the accounts of HPCL and IOCL. The Tribunal found no infirmity in the CIT's direction for further inquiry by the AO.

3. Excess claim of expenditure under purchases of bitumen:
The CIT noted a significant increase in expenditure towards bitumen purchases compared to the previous year and directed the AO to make a detailed inquiry. The Tribunal upheld the CIT's direction, agreeing that the AO had not examined the reasons for the increased expenditure.

4. Addition towards quality control charges:
The CIT directed the AO to add Rs. 15,80,256 towards quality control charges, as there was no evidence of such deductions. The Tribunal modified the CIT's order, directing the AO to verify the claim of the assessee regarding recoveries towards quality control and allow the deduction if found correct.

5. Addition of sub-contract payment to Krishna Kumar Raju:
The CIT found that the payments to Krishna Kumar Raju did not reflect any work executed and directed the AO to add Rs. 45,36,282. The Tribunal directed the AO to verify whether any sub-contract work was executed by Krishna Kumar Raju and make necessary inquiries before making any addition.

6. Deletion of addition made towards temporary staff quarters:
The CIT(A) allowed depreciation on the temporary staff quarters, which the AO had treated as capital expenditure. The Tribunal upheld the CIT(A)'s decision, stating that the assessee is entitled to depreciation if the expenditure is considered capital.

7. Deletion of addition made towards excess claim of consumption of bitumen:
The CIT(A) deleted the addition of Rs. 83,49,434 made by the AO towards excess claim of bitumen consumption. The Tribunal agreed with the CIT(A), noting that the AO did not find any deficiencies in the assessee's books and the consumption of bitumen was necessary for road construction work.

8. Deletion of addition made towards expenditure under quality control:
The CIT(A) allowed the deduction of Rs. 15,80,256 towards quality control charges, finding that the amount was actually recovered by government departments from the bills of the assessee. The Tribunal upheld the CIT(A)'s decision but sustained the disallowance of Rs. 3,07,668 towards excess claim for sales tax payment.

9. Disallowance of commission on sub-contract works:
The AO disallowed Rs. 1,01,245 towards commission on sub-contract works in the original assessment. The Tribunal noted that the assessee had accepted the original assessment and did not file any appeal, thus the disallowance stands.

10. Disallowance of expenses on account of metal purchases:
The AO disallowed Rs. 3,73,957 towards metal purchases in the original assessment. The Tribunal upheld the disallowance, noting that the assessee had accepted the original assessment.

11. Disallowance on account of labor charges:
The AO disallowed Rs. 14,61,479 towards labor charges in the original assessment. The Tribunal upheld the disallowance, as the assessee had accepted the original assessment.

12. Disallowance under Section 40A(3) of the IT Act:
The AO disallowed Rs. 1,60,000 under Section 40A(3) in the original assessment. The Tribunal upheld the disallowance, noting that the assessee had accepted the original assessment.

Conclusion:
The Tribunal partly allowed the appeals filed by the assessee and the revenue for statistical purposes, directing further inquiries and verifications on specific issues while upholding certain disallowances made in the original assessment. The Tribunal emphasized the need for proper inquiries and verification of claims by the AO to ensure accurate assessments.

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