2020 (6) TMI 532 - AT - Income Tax

Bogus contractual expenditure - Addition for direct expenses material only on estimation and without any basis - HELD THAT - It is very clear that payment made to M/s Metcon India is a bogus expenditure which was routed through own associated company in order to reduce profit from sale of land at Nagpur. The AO had also obtained external information and conducted field enquiry which clearly proves the fact of not carrying out any development work at Nagpur Land. In fact the position of land was unchanged when compared to date of purchase and date of inspection and this fact was further strengthened by the letter of Jt. MD, MSHCL. The ld. CIT(A) has ignored all these facts while allowing relief to the assessee. Disallowance of direct expenses materials - HELD THAT - There is no bar under any law for purchases from associate/ sister concern and when there is no bar under law, the AO cannot disallow entire expenditure for the simple reason that it has been purchased from associate concern. But, what is to be seen is whether such purchase is at arm s length and it was made for the purpose of business of the assessee or not. In this case, there is no doubt of whatsoever with regard to purchases of materials for the purpose of development of land. In fact, the assessee has established nexus between materials purchase and land development at Nagpur. The ld. CIT(A), having accepted the fact that development work has been executed, has disallowed 50% adhac expense without assigning any reasons. When 50% direct expense is genuine, then remaining 50% cannot be non-genuine merely because it was purchased from associate concern. Therefore, we are of the considered view that the AO as well as the ld. CIT(A) were erred in disallowing direct expenses materials purchase. Hence, we direct the AO to delete additions made towards direct expenses materials. Additions made towards contract charges - HELD THAT - Order passed u/s 245D(4) in the case of the assessee firm has clearly recorded categorical findings that accommodation bills taken by M/s Metcon India is in connection with works undertaken for contract with assessee firm for development work at Nagpur land. Therefore, once addition on total expenditure was having been made in the name M/s Metcon India, the Revenue recommending making additions of similar amount in the case of the assessee was out rightly rejected by the ITSC. M/s Metcon India has already offered expenses related to Nagpur land as its income and the nexus of the same having been accepted by the Income Tax Settlement Commission and the Commissioner of Income Tax in his rule 9 report. We are of the considered view that on this count also, the addition made by the AO cannot be sustained. The ld. CIT(A) after considering relevant facts, has rightly deleted additions made by the AO towards contract charges paid to M/s Metcon India. We do not find any error or infirmity in the findings of the ld. CIT(A) and hence, we are inclined to uphold findings of the ld. CIT(A) and direct the ld. AO to delete additions made towards contract charge. Disallowances of compensation to ex-partners and salary and wage expenses - HELD THAT - The fact that claims was allowed in earlier year does not ipso facto lead to a conclusion that the same shall be allowed in subsequent years. No reasons to interfere with findings of the ld. AO as well as the ld. CIT(A) and hence, we confirm addition made towards compensation to ex-partners. In so far as salary and wages is concerned, the ld. CIT(A) has recorded a clear findings that the assessee did not furnished any cogent evidences to prove payment of salary to huge number of employees, when there is no business activity after sale of land at Nagpur. Mere submitting PAN and other details of employees and deduction of TDS alone would not sufficient enough to prove payment of salary. Facts remain unchanged - assessee did not controvert findings recorded by the ld. AO as well as the ld. CIT(A) with any cogent evidences. Therefore, we are of the considered view that there is no error in the findings of the ld. CIT(A) and hence, we are inclined to uphold order of the ld. CIT(A) and confirmed additions made by the AO towards salary and wages.

Summary

Issues Involved:
1. Disallowance of ?31.42 crores on account of bogus contractual expenditure.
2. Disallowance of 50% of direct expenditure amounting to ?4.5 crores.
3. Disallowance of ?4.5 crores out of ?9 crores made by the Assessing Officer (AO) for direct expenses material.
4. Disallowance of ?71 lakhs for compensation paid to retiring partners.
5. Disallowance of ?30 lakhs in respect of salary and wages.

Detailed Analysis:

Issue 1: Disallowance of ?31.42 crores on account of bogus contractual expenditure
The Revenue contended that the Commissioner of Income Tax (Appeals) [CIT(A)] erred in allowing the expenditure of ?31.42 crores for bogus contractual expenditure. The CIT(A) held that the tax paid by M/s Metcon India at the maximum marginal rate grants immunity to the assessee. The CIT(A) found that the AO made additions based on suspicion and surmise, ignoring the evidences filed by the assessee, including photographs and letters confirming the work done. The Settlement Commission's order confirmed that the accommodation bills taken by M/s Metcon India were related to the development work undertaken by the assessee. The Tribunal upheld the CIT(A)'s decision, stating that the AO's additions were not supported by concrete evidence.

Issue 2: Disallowance of 50% of direct expenditure amounting to ?4.5 crores
The CIT(A) partially allowed the appeal by confirming 50% of the disallowance of purchases made amounting to ?4.5 crores out of ?9 crores, citing the lack of a categorical reason for substantial purchases from group concerns. The Tribunal found that the AO and CIT(A) erred in disallowing the direct expenses, as the assessee had furnished complete details and established a nexus between the materials purchased and the land development. The Tribunal directed the AO to delete the additions made towards direct expenses materials amounting to ?9 crores.

Issue 3: Disallowance of ?4.5 crores out of ?9 crores made by the AO for direct expenses material
The AO disallowed the direct expenses materials purchases on the grounds that the expenditure was not incurred wholly and exclusively for the business, was excessive and unreasonable, and questioned the prudence of such expenditure. The Tribunal found that the assessee had furnished complete details, including bills from suppliers, and established the nexus between the materials purchased and the land development. The Tribunal directed the AO to delete the additions made towards direct expenses materials amounting to ?9 crores.

Issue 4: Disallowance of ?71 lakhs for compensation paid to retiring partners
The CIT(A) confirmed the addition of ?71 lakhs for compensation paid to retiring partners, stating that the payment was not incurred wholly and exclusively for the purpose of business. The Tribunal upheld the CIT(A)'s decision, agreeing that settling personal disputes with the firm's funds cannot be considered as a business expense.

Issue 5: Disallowance of ?30 lakhs in respect of salary and wages
The CIT(A) confirmed the addition of ?30 lakhs for salary and wages, noting that the assessee did not furnish cogent evidence to prove the payment of salary to a large number of employees when there was no business activity after the sale of land. The Tribunal upheld the CIT(A)'s decision, finding no error in the CIT(A)'s findings.

Conclusion:
The Tribunal dismissed the appeal filed by the Revenue and partly allowed the appeal filed by the assessee. The Tribunal directed the AO to delete the additions made towards direct expenses materials amounting to ?9 crores and upheld the CIT(A)'s decision on other issues.