2018 (7) TMI 572 - AT - Income Tax

Estimation of income - Held that - During the course of examination on oath of the Directors of M/s. Safeco Projects, it was recorded that commission paid in such transactions was 1% of gross receipts inclusive of TDS. This gives the percentage of commission that the assessee charges. When the Assessing Officer relies on these statements to reject the contentions of the assessee, then the entire statements have to be considered as evidence. The estimation of commission at 5% of the turnover, in our view is excessive and has not basis. It is an arbitrary figure. The assessee had shown income of 2.4%, in this case inclusive of TDS. This is reasonable. Hence no further addition on this account needs to be made. Thus, the addition of ₹ 50,96,291/-, as sustained by the ld. CIT(A) is hereby deleted. Write off of bad debts u/s 36(1)(vii) - Held that - The assessee has written off debts receivable from M/s. Vivek Steels, Pawan Jhunjhunwala, in this bank account. It had also written off advance TDS deposit u/s 194C and u/s 194J of the Act. The entire amount was claimed as a deduction. Apparently, the write off of advance TDS deposit cannot be allowed u/s 36(1)(vii) of the Act. As regards write off of loans from Vivek Steels and Pawan Jhunjhunwala, in view of the judgement of the Hon ble Supreme Court in the case of T.R.F. Ltd vs Commissioner of Income Tax (2010 (2) TMI 211 - SUPREME COURT) the deduction should be allowed. Accordingly, this ground of the assessee is allowed in part. Income from lease of factory premises is to be assessed under the head income from property or under the head income from other sources - Held that - The factory building, is a part of the plant and building of the assessee. This is let out for commercial use. When the assessee earns income from utilization of this factory building, the income from the same is assessable under the head income from business . This entitles the assessee to claim depreciation on the factory building. Even otherwise, the block of assets concept was brought into the statute by the Finance Act, 1998. After the introduction of this block of assets concept, depreciation on written down value has to be allowed irrespective of the fact whether individual items of machinery has been introduced or not. We uphold this contention of the assessee. Hence this ground of the assessee is allowed. Disallowance of commission payment - Held that - Assessing Officer has without any basis estimated the expenditure incurred by the assessee at 50% and disallowed 50%. If the payment is not genuine then the entire expenditure claimed has to be disallowed. In this case, the assessee has produced evidence and discharged the burden of proof that lay on it and whereas the revenue has not controverted this evidence. Under these circumstances, such estimated disallowance cannot be sustained as the same is arbitrary. Hence this ground of the assessee is allowed.

Summary

Issues Involved:
1. Estimation of income from bogus sub-contract receipts and expenses.
2. Allowability of bad debts under Section 36(1)(vii) of the Income Tax Act.
3. Classification of income from the lease of factory premises.
4. Allowability of commission expenses (specific to Assessment Year 2011-12).

Detailed Analysis:

1. Estimation of Income from Bogus Sub-Contract Receipts and Expenses:
The assessee was involved in sub-contracting work to M/s Safeco Projects Pvt. Ltd. The Assessing Officer (AO) found that the sub-contracts were bogus, as confirmed by statements from the directors of M/s Safeco Projects, who admitted that no actual work was performed and that they provided accommodation entries for a commission. The AO concluded that the assessee did not execute any actual work and estimated the income from these transactions at 5% of the turnover, amounting to ?98,28,834. The First Appellate Authority upheld this but reduced the addition to ?50,96,291. The Tribunal held that the estimation at 5% was excessive and arbitrary, given that the commission rate was 1%. The Tribunal deleted the addition, accepting the disclosed income of 2.4%.

2. Allowability of Bad Debts under Section 36(1)(vii):
For the Assessment Year 2010-11, the assessee claimed bad debts from M/s Vivek Steels and Pawan Jhunjhunwala, and advance TDS deposits. The Tribunal allowed the write-off of bad debts following the Supreme Court judgment in T.R.F. Ltd vs Commissioner of Income Tax, but disallowed the write-off of advance TDS deposits. For the Assessment Year 2011-12, the Tribunal allowed the write-off of ?39,23,335 due from GPT Infraprojects Ltd., following the same precedent.

3. Classification of Income from Lease of Factory Premises:
The AO classified the income from leasing the factory building as "income from house property" because the building was let out without plant and machinery. The First Appellate Authority upheld this. The Tribunal, however, held that the factory building, being part of the plant and machinery, should be assessed under "income from business" and allowed depreciation on the block of assets. This view was consistently applied for the Assessment Years 2010-11, 2011-12, and 2012-13.

4. Allowability of Commission Expenses (Assessment Year 2011-12):
The assessee claimed commission payments to M/s Steel Crackers Pvt. Ltd. and M/s Hooghly Alloys & Steel Co. Pvt. Ltd. The AO disallowed 50% of these expenses on an estimated basis, doubting their genuineness. The First Appellate Authority confirmed this. The Tribunal found that the assessee had provided sufficient evidence of the transactions, and the AO's disallowance was arbitrary. The Tribunal allowed the full claim of commission expenses.

Conclusion:
The Tribunal allowed all the appeals of the assessee, providing relief on the issues of estimation of income from bogus sub-contracts, bad debts, classification of lease income, and commission expenses. The decisions were based on factual findings, adherence to legal precedents, and the principle of reasonableness in estimations and disallowances.