2019 (7) TMI 528 - AT - Income Tax

Correct method of accounting u/s 145 (1) - whether the assessee is free to choose proper method of accounting or not ? - whether the assessee is following this method regularly or not - HELD THAT - The method of accounting adopted by the taxpayer consistently in regularly cannot be discarded by the revenue on the view that he should have adopted a different method of keeping accounts but the concept of real income is certainly applicable in judging whether there has been an income or not and such principle must be applied with care and within their recognized limits. It is further held that the income has really accrued or arisen to the assessee must be judged in the light of the reality of the situation and if the method of accounting employed by the assessee, real income of the assessee cannot be properly deduced there from, the income tax officer may determine the income as per his wisdom - CIT vs. Macmillan Co 1957 (10) TMI 5 - SUPREME COURT has held that the choice of the method of accounting lies with the assessee. The only precondition is that assessee must show that he has followed the method regularly for his own purposes. On careful analysis of the section 5 of the act, it is amply clear that income of the assessee is chargeable to tax when it accrues and arises. The assessee has right to offer such income if the same is though accrued but not received, to offer it for taxation on receipt basis. In this case, the bills that are not received by the assessee are not at all admitted by the person who is supposed to pay it. - no obligation of payment on the shoulder of Organizing Committee. Thus the outstanding payments, on the facts of the case, has neither accrued to the assessee, nor received by it. Not accepting the books of accounts maintained by the assessee on Cash basis and stated that the profit of the assessee cannot be deduced from it - real income - In the present case assessee itself has shown that though it has raised the bills but some of the bills have not been received till now because of protracted litigation which itself proves that even in the mercantile system of accounting such income has not accrued. Nothing more could have been shown as an income then what is received by the assessee. It is not the case of the revenue that assessee has not shown income what has been received by it. It is also not the case of the revenue that expenditure claimed by the assessee has not been paid. In view of this, both receipts and outflow of cash are undisputed - cash method of accounting, which is followed by the assessee for the impugned assessment year as well as subsequently, cannot be rejected and the income of the assessee should not be computed on mercantile method of accounting. Accordingly, ground number 1 of the appeal of the assessee is allowed. Addition of Illegal gratification paid by the assessee - During the course of search proceedings, one email dated 16/06/2010 sent by Mr. Binu Nanu to the GL events France was found and seized - HELD THAT - Arbitration Tribunal has clearly negated the accusations of fraud, corrupt practices, collusion and cartelization leveled against the Appellant Company (Claimant). Also it is to be seen that from the award above, it is derived that the said accusation against the Appellant was purely and solely based on the Shunglu Committee Report, FIR lodged by the CBI based on which the search was conducted on the Appellant Company and pursuant to which in the assessment above addition was made. In view of above facts and without commenting on any other report or investigation, it is apparent that charges against the assessee of paying illegal gratification and its consequent addition u/s 69 is without any evidence of incurring such expenses. Thus ground no 2 of the appeal is allowed. TP adjustment - ALP of International Transactions - TPO after summarily rejecting the TP study wherein TNMM was used to determine the arm‟s length price of the international transaction, he applied CUP method - HELD THAT - Method applied by TPO is not in consonance with law and therefore, the method applied by the appellant being illustrated by sufficient documents and evidences on record deserves to be accepted. The learned dispute resolution panel has also upheld the above ALP of transaction only on the protective basis without giving any reason that why they are agreeing with the finding of the learned transfer-pricing officer to apply the cup method. Even during proceedings before them, no enquiries were made with respect to the arm‟s-length price of these international transactions when complete details are available before them. No reasons are shown before us by the learned CIT DR that comparable selected by the assessee does not have the similar FAR analysis. He further also could not show us that taking the current year data of the above comparable; the margin of the assessee is not quite high then those comparables. In view of this, we do not find any reason to uphold the adjustment proposed by the learned transfer-pricing officer to the arm‟s-length price of the international transactions of the assessee. Accordingly, ground number 3 of the appeal of the assessee is allowed. Disallowance of differential amount of bill seized - HELD THAT - Payment of such bills were also made by account payee cheque and which were already on record at the time of search as well as produced before the learned assessing officer. The bank statement of the assessee also showed that those bills have been discharged by the assessee. Before the AO assessee also produced the original copies of the invoices. It is also fact that assessee was awarded the contract of the two clusters of the Commonwealth games which is at different sites. The one site was games , the other site was at the Noida express highway and the another cluster activities were being carried out at 5 different sites. The explanation of the assessee also cannot be discarded that the bills in relation to such materials and services were also received at site only at the time of delivery of material services. Further, despite the production of the original invoices and the overwhelming evidence of payment of these parties through account payee cheques showing their names, addresses, permanent account Nos the learned assessing officer did not make any further enquiry that whether such bills were raised by those parties are not, in absence of this enquiry, merely because these bills were not seized at the time of search, the addition has been made. It is not in the hands of the assessee that what documents must be seized by the search party and what documents must be left out. Addition cannot be sustained. Thus, ground number 4 of the appeal of the assessee is allowed. Disallowance of part-time expenses - addition u/s 40A(3) - HELD THAT - AO has compared the appellant with M/s Pico Deepali Overlays Consortium without providing the relevant details of this party to the appellant. Admittedly, no opportunity was given to the appellant to examine/ cross-examine the relevant officials of M/s M/ Pico Deepali Overlays Consortium to challenge the comparison drawn with M/s Pico Deepali Overlays Consortium. AO should have at least compared the requirement of Foreign Technical experts of that company with the appellant. It is also a cardinal principle that any material used against the assessee, should be confronted to the assessee with reasonable opportunity of explaining it. This has not been done. Therefore, in view of overwhelming evidences produced by the assessee of presence of foreign expatriates, with their passport detail and expenses details coupled with the liability of assessee to bear it, it cannot be said that these expenses were not incurred wholly and exclusively for the purposes of the business of the assessee - ground number 5 of the appeal of the assessee is allowed. Disallowance of the bogus purchases - onus to prove - HELD THAT - After the appellant duly discharged its onus to prove the transaction as genuine, the onus shifts to the Ld. AO to disprove the appellant with due evidence and reasons. However, in the instant case the Ld. AO did not provide any reason or any evidences and on complete surmise held that the bills produced by the appellant are bogus. Further, the learned assessing officer has not commented anything on the amount of purchases made by the assessee from the party existing at the same address with the Garg Road lines. The learned assessing officer also did not grant any opportunity of cross-examination of the partner of M/s Garg Road lines to the assessee. The facts in the present case are similar to the facts in case of M/s Nitin Enterprises . Therefore we direct the learned assessing officer to delete the disallowance of INR 5 87058/ because of purchases made from Garg Road lines treated by him as a bogus purchases. Accordingly, ground number 6 of the appeal of the assessee is allowed. Addition of professional fees paid by the assessee - bogu bills produced - HELD THAT - AO ignoring all the details and documents on record and without providing any reason held that the bills are bogus as the appellant was involved in receiving bogus bills, which was uncorroborated. Even otherwise, the Ld. AO made the addition of professional fees three times. Firstly, the professional fees of ₹ 1,03,15,369/- was disallowed while dealing with it separately under para 19(g) of the assessment order. Secondly, the professional fees of ₹ 1,03,15,369/- were again disallowed while disallowing entire expense in para 28 of the assessment order. Further, same amount of professional fees is also included in the addition made because of Bills seized, sundry creditors, and expense liability. Further, the expenses of ₹ 28,52,376/- allowed by the Ld. AO in para 16 of Draft order was also ignored by him while computing total income. In view of above facts, the disallowance out of the professional fees cannot be withheld. Accordingly, we direct the learned AO to delete the above disallowance. Hence, ground number 7 of the appeal of the assessee is allowed Excess of expenditure on travelling and conveyance - HELD THAT - No adverse inference can be drawn simply because some other party has allegedly incurred expenditure less than the appellant has. The appellant, by no stretch of reasoning, can be required to follow on identical business models to that of M/s Pico Depali Overlays Consortium, and the failure to do so cannot be a consideration for disregarding the appellant‟s expenditure. Even otherwise, none of the expenditures has been incurred on the related parties or for non business purposes. On identical reasoning, we already deleted disallowance of expenditure on per diem expenditure. Accordingly we direct the learned assessing officer to delete the disallowance - ground number 8 of the appeal of the assessee is allowed. Addition of related party payments treated as bogus expenditure - AO made addition alleging that bills could not be relied upon as the appellant was engaged in the practice of receiving bogus bills - HELD THAT - Reason provided by the AO is not acceptable for making addition u/s 40A(2)(b). AO is required to provide the comparable cases that the same is not at arm‟s length or in excess of the fair market value of such services, which was not done. Further, the addition made by the AO of ₹ 15,57,987/- against the bill seized instead of paid amount of ₹ 26,55,954/- shows the non-application of mind by the AO. AO did not verify the amount of actual payment of ₹ 26,55,954/-, the details of which were already on record before the Ld. AO. He was only concerned with the bill seized value of ₹ 15,57,987/-. This very clearly shows that the A.O. did not proceed in accordance with law. Accordingly, for the reasons provided in deleting the disallowance in case of Meroform P Ltd, we also direct the ld AO to delete the above disallowance. Accordingly ground no 9 of the appeal is allowed. Addition u/s 69C on negative cash balance - HELD THAT - On careful reading of these orders of the lower authorities we found that the cashbook of the assessee showed negative balance on certain days and therefore the addition is made of such negative balance as expenditure have been incurred by the assessee without having known source of such income. We have also considered the explanation given by the assessee but we are not convinced. Accordingly, we confirm the order of the learned assessing officer on this issue. Ground number 10 of the appeal of the assessee is dismissed Disallowance of revenue expenditure treated as capital expenditure - HELD THAT - Assessee is engaged in the business of the event organization and has been part of the Organization, which conducted the Commonwealth games 2010. Looking at the nature of the business of the assessee the Fire detection alarm which has been fitted at the various places cannot be held to be the item of the capital expenditure as it related to fire alarms, heat detector, smoke detector et cetera which are deployed at the various project sites. The assessee has also incurred expenditure on the traffic barriers and shown it is a consumables. Further the expenditure cannot also be considered as a capital expenditure which is incurred on the dynamometer for the purpose of the business of the company. Therefore the AO is directed to delete the above disallowance and treat the above expenditure as revenue in nature Furniture as needs to be understood that assessee is in the business of organizing such events and it never purchased these furniture with a view to have any enduring benefit. Merely because it is titled as furniture, it cannot be held to be capital expenditure. Its user in the hands of the assessee must be evaluated. Thus, it cannot be held as capital expenditure. Purchase of motor car it has been correctly treated by the learned assessing officer and the learned dispute resolution panel as capital expenditure. The assessee is entitled for the depreciation thereon at the respective rates. Merely because of the reason that assessee has sold these items as a scrap does not make them revenue expenditure. Ground number 11 of the appeal of the assessee is partly allowed. Disallowance on payment of services of security guard - HELD THAT - AO has incorrectly considered that expenditure was a security deposit is completely based on surmise and suspicion. The invoice of security service provides complete details of what kind of service was taken and for what purpose it was taken. Further, the Ld. AO also did not provide any evidence for treating this expenditure as security deposit, however, all the details and documents available with the appellant truly justify that the payment was made for security services provided at CWG, 2010 which are genuinely for the purpose of business. In view of this we direct the learned assessing officer to delete the disallowance - ground number 12 of the appeal is allowed. Addition towards the value of the closing stock - addition u/s 68 - HELD THAT - Assessee has shown that the above stock is already credited to the profit and loss account and therefore it is already gone to swell the profits of the assessee for the year. The assessee has also submitted the details of the closing stock stating the items, quantity, rate, and amount of the closing stock and despite the above information available with the assessing officer he made the addition u/s 68 - No reason to sustain the above addition for the reason that 1st of all it is a double addition and 2nd it cannot be added when the assessee has given a complete details of the quantity and the items along with the rates and the amount of the closing stock carried forward to the next year, the stock has also been sold by the assessee in next year and receipt of such sale has already been disclosed in the subsequent year. In view of this ground number 13 of the appeal of the assessee is allowed. Addition towards the advances recoverable - HELD THAT - Sum included custom duty refundable of which was paid by the assessee to the government of India. Further sum of assignment credit refund was with respect to the Senate credit on service tax. Further sum was commercial taxes paid by the assessee under protest to U P since tax authorities. Advance to an employee for the expenses incurred by her for the business of the assessee company. Since the advances were not utilized it was outstanding as in advance. Further sum is outstanding receivable on sale of motorcar which was sold as scrap. As the motor car has been held to be capital expenditure by us in earlier ground of appeal therefore the above amount has already gone to the credit of the block of the asset of the motor car. In view of this we find that the learned assessing officer has wrongly made an addition to the total income of the assessee of the above sum. In view of this ground, number 14 of the appeal of the assessee is allowed Addition of sundry creditors and value of the balance sheet - item of the other liabilities - HELD THAT - As the assessee has produced all relevant details available with respect to the above sundry creditors and other expenses outstanding and the learned assessing officer has not made any enquiry to prove that these are non- genuine liabilities, the addition in the hands of the assessee cannot be sustained. Accordingly, we direct the learned AO to delete the disallowance - ground number 15 of the appeal of the assessee is allowed Disallowance of statutory liabilities - disallowance u/s 37/69C - HELD THAT - We do not find any reason to sustain the disallowance u/s 37/69C with respect to the tax deduction at source payable. The above amount is the amount of tax deducted by the assessee on various payments of the salaries, interest, payment to contractors and rent to various service providers. This amount has not been claimed by the assessee as deduction from the total income. Therefore the learned assessing officer is directed to delete the disallowance to the total income of the assessee. With respect to the service tax payable provisions of section 43B of the income tax act apply to every assessee irrespective of the method of accounting employed by them. If those sums have been paid by the assessee before the due date of the filing of the return of income for the impugned assessment year, both these sums are required to be granted as deduction to the assessee. Even otherwise, the above addition cannot be sustained u/s 37/69C. Therefore, the above ground of appeal is sent back to the file of the learned assessing officer with a direction to grant deduction of tax deduction at payable and to verify the provisions of section 43B with respect to VAT and CST as well as service tax payable, if assessee has claimed the deduction thereof - Ground 16 of the appeal of the assessee is allowed with above directions. Addition of unsecured loan - addition u/s 68 - HELD THAT - assessee has discharged its onus cast up on it u/s 68 - AO has not carried out any inquiry on the same. Thus, addition was made incorrectly by the AO and did not have any valid reason to disprove the documents submitted by the assessee. Therefore, it is clear that assessee has established identity, creditworthiness, and genuineness of the transactions by submitting adequate evidences, which has not been disapproved by the learned assessing officer by cogent inquiries. - delete the addition u/s 68 - ground number 17 of the appeal is allowed. Addition being alleged difference between the purported target costs - addition u/s 69A - HELD THAT - Merely looking at the price of the material the addition cannot be made in the hands of the assessee. Even otherwise the learned assessing officer has invoked the provisions of section 69A of the act which can only be invoked in those cases where the money in question is not recorded in the books of accounts of the taxpayer. In the present case the assessee has moved the total sale consideration, the total purchase cost on by the assessee and therefore there is nothing which is excluded. Hence, the provisions of section 69A of the act cannot be applied. In view of this we direct the learned assessing officer to delete the addition being the difference between the purported target cost and the consideration to be received from the organizing committee by the assessee under section 69A of the act. Accordingly, ground number 18 of the appeal of the assessee is allowed. Addition being the alleged difference between the price quoted by the appellant to organizing committee in comparison to the price allegedly quoted by other vendors - HELD THAT - Assessee has executed projects related to Commonwealth Games. The allegation of the Ld. AO is that the Assessee has charged more consideration for these projects in comparison to other vendors. Even if it is presumed that, the allegation of the Ld. AO is correct, still charging of higher consideration is undoubtedly an item of income for the Assessee, which has been duly recorded in the books of accounts of the Assessee as per the Method of Accounting and not an expenditure incurred by the Assessee. Therefore, the condition precedent to the application of provisions of Section 69C is not fulfilled in the instant case. In view of the above action of the ld AO in making the addition invoking the provisions of Section 69C is not sustainable. Thus, we direct the AO to delete the same. Ground no 19 of the appeal is allowed. Disallowance of total expenditure incurred by the assessee - AO has disallowed the total expenditure incurred by the assessee despite making individual disallowances of all the expenses - HELD THAT - established that the appellant had maintained proper books of accounts and all the transaction in respect of income, expenditure, assets and liabilities are duly recorded in the books. AO also accepted that the appellant had maintained proper books of accounts as all the additions and disallowances were made according to the amount reflected in the books. Total expenditure also includes the expenditure such as salaries and bonus, bank charges, rates and taxes, interest expenditure, insurance and other several expenditures, which are to be verified separately. It was the responsibility of the assessing officer to verify the expenditure individually head wise. However, instead of doing so the Ld. AO assessed on overall basis and disallowed whole of the expenditure. Finding of ld DRP is that definitely 100% expenses cannot be held bogus. Definitely, no business can be done without incurring any expenditure. However, they have directed to make the disallowance of ₹ 35.85 Crores, but on what basis there is no finding. The only reason given is that at least the sum of ₹ 35.85 crores paid to the OC and DDA have been recouped through the bogus billing in the books of accounts. DRP also did not care to find out the actual bogus expenditure, if any incurred by the assessee. No merit in the disallowance made by the ld AO and sustained by the ld DRP. Accordingly Ground no 20 of the appeal is allowed.

Summary

Issues Involved:
1. Rejection of Cash Method of Accounting.
2. Addition of ?35,85,00,000/- for Alleged Illegal Gratification.
3. Transfer Pricing Adjustment of ?58,43,94,894/-.
4. Addition of ?11,22,32,956/- for Seized Invoices.
5. Addition of ?2,14,59,000/- for Per Diem Expenses.
6. Addition of ?31,71,400/- for Bogus Purchases.
7. Addition of ?1,03,15,369/- for Professional Fees.
8. Addition of ?5,39,23,603/- for Travelling & Conveyance.
9. Addition of ?4,90,08,835/- for Related Party Transactions.
10. Addition of ?1,22,696/- for Negative Cash Balance.
11. Addition of ?1,18,24,175/- for Capital Expenditure.
12. Addition of ?1,22,626/- for Security Services.
13. Addition of ?15,47,141/- for Closing Stock.
14. Addition of ?11,58,75,146/- for Advances Recoverable.
15. Addition of ?4,65,78,484/- and ?6,98,13,499/- for Sundry Creditors and Other Liabilities.
16. Addition of ?15,53,10,286/- for Statutory Liabilities.
17. Addition of ?1,05,10,000/- for Unsecured Loans.
18. Addition of ?30,32,55,951/- for Alleged Difference in Target Costs.
19. Addition of ?34,10,40,959/- for Price Difference with Other Vendors.
20. Addition of ?1,29,27,50,026/- for Total Expenditure.
21. General Grounds.
22. Penalty Proceedings under Section 271(1)(c).
23. Penalty Proceedings under Section 271G.

Detailed Analysis:

1. Rejection of Cash Method of Accounting:
The Tribunal analyzed the choice of accounting methods under Section 145 of the Income Tax Act, 1961. The Tribunal emphasized that the choice between cash and mercantile systems lies with the assessee, provided it is consistently followed. The Tribunal found that the assessee consistently followed the cash method from the commencement of its operations. The Tribunal rejected the AO's argument that the nature of the business required an accrual method and held that the cash method provided a true picture of the assessee’s income. The Tribunal allowed the assessee's appeal on this ground.

2. Addition of ?35,85,00,000/- for Alleged Illegal Gratification:
The Tribunal scrutinized the evidence, including emails and handwritten notes, and found no direct evidence of illegal gratification. The Tribunal noted that the Arbitral Tribunal and the CBI did not find conclusive evidence of bribery. The Tribunal held that the addition was based on conjectures and surmises without corroborative evidence. The Tribunal deleted the addition.

3. Transfer Pricing Adjustment of ?58,43,94,894/-:
The Tribunal examined the Transfer Pricing Officer’s (TPO) methodology and found that the TPO rejected the assessee’s documentation without adequate reasons. The Tribunal noted that the assessee provided detailed documentation and used the Transactional Net Margin Method (TNMM), which was appropriate given the nature of transactions. The Tribunal found that the TPO did not provide comparable data to support the adjustment. The Tribunal deleted the adjustment and allowed the appeal.

4. Addition of ?11,22,32,956/- for Seized Invoices:
The Tribunal found that the assessee produced original bills and payment details, which were not adequately examined by the AO. The Tribunal held that the AO’s addition was based on the non-seizure of bills, which was not a valid reason. The Tribunal deleted the addition.

5. Addition of ?2,14,59,000/- for Per Diem Expenses:
The Tribunal noted that the assessee provided detailed evidence of foreign expatriates' presence and expenses. The Tribunal found that the AO’s comparison with another contractor without providing cross-examination was unjustified. The Tribunal deleted the addition.

6. Addition of ?31,71,400/- for Bogus Purchases:
The Tribunal referred to a related case where the statement of Nitin Enterprises was found non-credible. The Tribunal held that the AO did not provide cross-examination opportunities and relied on unverified statements. The Tribunal deleted the addition.

7. Addition of ?1,03,15,369/- for Professional Fees:
The Tribunal found that the AO disallowed the expenses without verifying the bills and based on assumptions. The Tribunal held that the expenses were genuine and incurred for business purposes. The Tribunal deleted the addition.

8. Addition of ?5,39,23,603/- for Travelling & Conveyance:
The Tribunal noted that the AO did not verify the detailed evidence provided by the assessee. The Tribunal found that the AO’s comparison with another contractor was unjustified. The Tribunal deleted the addition.

9. Addition of ?4,90,08,835/- for Related Party Transactions:
The Tribunal found that the AO did not provide comparable cases to prove excessiveness under Section 40A(2). The Tribunal noted that the transactions were assessed in the hands of the recipient and taxed accordingly. The Tribunal deleted the addition.

10. Addition of ?1,22,696/- for Negative Cash Balance:
The Tribunal found that the negative cash balance was due to clerical errors, which were rectified in the final accounts. The Tribunal upheld the AO’s addition.

11. Addition of ?1,18,24,175/- for Capital Expenditure:
The Tribunal differentiated between capital and revenue expenditure based on the nature of items and their usage. The Tribunal allowed the appeal for most items but upheld the addition for the motorcar.

12. Addition of ?1,22,626/- for Security Services:
The Tribunal found that the AO incorrectly treated the payment for security services as a security deposit. The Tribunal deleted the addition.

13. Addition of ?15,47,141/- for Closing Stock:
The Tribunal found that the closing stock was already credited to the profit and loss account, and the addition would result in double taxation. The Tribunal deleted the addition.

14. Addition of ?11,58,75,146/- for Advances Recoverable:
The Tribunal found that the advances were related to taxes and duties paid, which were not income or expenses. The Tribunal deleted the addition.

15. Addition of ?4,65,78,484/- and ?6,98,13,499/- for Sundry Creditors and Other Liabilities:
The Tribunal found that the AO did not verify the detailed evidence provided by the assessee. The Tribunal held that the addition was unjustified and deleted it.

16. Addition of ?15,53,10,286/- for Statutory Liabilities:
The Tribunal held that statutory liabilities are covered under Section 43B and should be allowed if paid before the due date of filing the return. The Tribunal directed the AO to verify and allow the deduction.

17. Addition of ?1,05,10,000/- for Unsecured Loans:
The Tribunal found that the assessee provided sufficient evidence to prove the genuineness of the loans. The Tribunal deleted the addition.

18. Addition of ?30,32,55,951/- for Alleged Difference in Target Costs:
The Tribunal found that the AO’s addition was based on selective comparison and did not consider the overall contract terms. The Tribunal deleted the addition.

19. Addition of ?34,10,40,959/- for Price Difference with Other Vendors:
The Tribunal found that the AO’s addition was based on selective comparison and did not consider the overall contract terms. The Tribunal deleted the addition.

20. Addition of ?1,29,27,50,026/- for Total Expenditure:
The Tribunal found that the AO disallowed the entire expenditure without proper verification and despite making specific disallowances. The Tribunal deleted the addition.

21. General Grounds:
The Tribunal dismissed this ground as it was general in nature.

22. Penalty Proceedings under Section 271(1)(c):
The Tribunal dismissed this ground as premature.

23. Penalty Proceedings under Section 271G:
The Tribunal dismissed this ground as premature.

Conclusion:
The Tribunal allowed most of the grounds of appeal, deleting significant additions made by the AO and providing detailed reasoning for each issue. The Tribunal emphasized the need for proper verification and evidence before making additions.