2016 (11) TMI 115 - AT - Income Tax

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 of preceding accounting year, because various expenditures like, interest, depreciation and host of other expenditures are debited or provided on 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. Ad-hoc disallowance on account of labour expenditure - entire reason for making the disallowance on account of labour expenditure is the statement of two labour contractors recorded at the time of survey under 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 cannot be considered for making any kind of disallowance on account of labour expenses. This fact has been noted by the Ld. CIT(A) also as incorporated above by us. However, ld. CIT(A) has proceeded to make the ad-hoc disallowance @ 5% simply on the reason that it reflects a modus operandi that, assessee might be inflating the labour expenditure. Once the material relied upon itself has been disapproved or found to be irrelevant qua the present assessment year, then it cannot be the basis or ground 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 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 of other material and evidence filed before the authorities below which 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 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 depreciation on the Wind-Mill is directed to be allowed in the assessment year 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. Disallowance u/s 14A - Held that - only disallowance which has been made by the AO is on account of indirect expenditure under Rule 8D(2)(iii) of ₹ 19,552/-. The assessee had shown investment of ₹ 55.25 lakhs for which it has not attributed any expenditure for earning of the dividend income nor it had been demonstrated that, why no expenditure can be held to be attributable. The primary and initial onus is upon the assessee to demonstrate that no expenditure is attributable for earning 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 and material available 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 the entire details of regular assessment of M/s Sahadev Project were also filed before the authorities below to substantiate. Not only that, the details of TDS deducted 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 payment has confirmed by the party has to be allowed. Accordingly, we uphold the order of the CIT(A) in deleting the said disallowance. Addition on account of survey fee - disallowance on the basis of some telephonic conversions made with the ACIT, Gandhidham - Held that - No merits in the addition made by the AO, firstly, he has made the addition simply on the basis of some telephonic conversation and hence such an addition has no legs to stand; secondly, looking to the nature of activity 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

Summary

Issues Involved:
1. Ad-hoc disallowance of ?1,93,72,170 from expenditure under "cargo handling, labour and transport charges."
2. Disallowance of depreciation of ?2,53,39,773 claimed on windmill at Rajasthan.
3. Disallowance of finance cost amounting to ?11,101 on account of interest paid on term loan.
4. Disallowance of ?19,552 under Section 14A read with Rule 8D.
5. Addition of ?1,05,84,936 against the liasoning fees paid to M/s. Sahadev Projects Pvt. Ltd.
6. Addition of ?53,17,741 against the survey fees paid.

Detailed Analysis:

1. Ad-hoc Disallowance from Cargo Handling, Labour, and Transport Charges:
The assessee argued that the disallowance was based on assumptions without evidence. The AO applied a net profit rate of 17% based on a survey conducted in a subsequent year, which the CIT(A) partly agreed with but made an ad-hoc disallowance of 5% to ?1,93,72,170. The Tribunal found that the AO's estimation was incorrect as it was based on mid-year data and not on defects in the books of accounts. The Tribunal also noted that the statements of labour contractors were not relevant to the assessment year in question. Therefore, the Tribunal directed the AO to delete the ad-hoc disallowance.

2. Disallowance of Depreciation on Windmill:
The AO disallowed depreciation on the windmill, claiming it was not operational during the year. The assessee provided evidence of power generation and invoices raised in March 2010. The Tribunal found that the windmill was commissioned and operational within the financial year and directed the AO to allow the depreciation claim.

3. Disallowance of Finance Cost:
The AO disallowed the finance cost related to the windmill project, which was linked to the disallowed depreciation. The Tribunal, having allowed the depreciation, also directed the AO to allow the finance cost of ?11,101.

4. Disallowance under Section 14A:
The AO made a disallowance of ?19,552 under Section 14A read with Rule 8D for the dividend income of ?35,800. The Tribunal found the disallowance reasonable as the assessee did not demonstrate that no expenditure was attributable to earning the exempt income. Thus, the disallowance was upheld.

5. Addition of Liasoning Fees:
The AO disallowed 50% of the liasoning fees paid to M/s. Sahadev Projects Pvt. Ltd., claiming it was excessive. The CIT(A) deleted the addition, noting that the services were rendered under a written agreement, payments were made through cheques, and TDS was deducted. The Tribunal upheld the CIT(A)'s decision, finding no evidence of excessive payment or non-genuine transactions.

6. Addition of Survey Fees:
The AO disallowed survey fees based on a telephonic conversation. The CIT(A) deleted the addition, noting that payments were made through cheques, TDS was deducted, and service tax was paid. The Tribunal upheld the CIT(A)'s decision, finding the AO's basis for disallowance unsustainable.

Conclusion:
The Tribunal allowed the assessee's appeal partly, directing the deletion of ad-hoc disallowance and disallowance of depreciation and finance cost, while upholding the disallowance under Section 14A. The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s deletion of additions for liasoning and survey fees.