2015 (5) TMI 713 - AT - Income Tax

Addition under section 41(1) - amount of creditors remained unpaid for more than 3 years - CIT(A) deleted the addition - Held that - We find that no material was brought on record by the revenue to show that the liabilities ceased to exist and the assessee has obtained the benefits in respect of such liabilities by way of Remission or cessation thereof. Further it has been admitted by the Revenue that the assessee has not written off the outstanding liabilities in the books of account. In the above facts and circumstances of the case, the decision of the Hon ble High Court of Gujarat in the case of CIT vs. Nitin S. Garg (2012 (5) TMI 30 - Gujarat High Court) squarely applies. Therefore, we confirm the order of CIT(A) - Decided against revenue. Addition on account of excessive payments made for purchase of metal from the person specified under section 40A(2)(b) - CIT(A) deleted the addition - Held that - According to us, the lower authorities should have disallowed at the rate of 27% of purchase of metal from M/s MRB Builders Pvt. Ltd. and at the rate of 10.42% on purchases of grit from M/s MRB Builders Pvt. Ltd. Thus, both the lower authorities were not justified in their action. We find that the bifurcation of total purchases of ₹ 14,45,366/- as to how much for metal and how much was for grit has not been brought on record by either of the lower authorities and by either of the parties before us. We, therefore, set aside the orders of the lower authorities, and restore the matter to the file of the AO with direction to restrict the disallowance under section 40A(2) (b) to the extent of 27% in respect of purchases of metal from M/s MRB Builders Pvt. Ltd. and at the rate of 10.42% in respect of purchases of grit from M/s MRB Builders Pvt. Ltd - Decided partly in favour of revenue for statistical purpose. Disallowance of gratuity payment, legal & professional fees and misc. expenses - CIT(A) deleted the addition - Held that - in order to make sustainable disallowance, it must be shown on the basis of some material on record that the claim made by the assessee was incorrect or fraudulent. Accounts of the assessee are audited and the auditor has certified the correctness of the claim of the expenses. Hence, without any material, it would be incumbent on the A.O. to accept the claim. In the absence of any material defects in the claim, in his opinion, the A.O. was not justified in making the disallowance of ₹ 8,55,313/- and, therefore, he deleted the same. - Decided against revenue. Addition on retention money accrued to the assessee company - Held that - It is not in dispute that the assessee had not included retention money in its income on the ground that the money will be received after satisfactory completion of work and removal of defects. Till that time the right to receive the amount did not accrue to the assessee. We find that the Hon ble High Court of Gujarat in the case of the assessee itself in A.Y. 1992-93 held that where assessee was awarded a construction contract and in terms of contract certain amount was withheld by employer of contract towards retention money for satisfactory execution of contract by assessee, retention money was to be taxed in assessment year relevant to previous year in which it became payable to assessee as per terms of contract i.e., after defect liability was over and after engineer-in-charge certified that no liability was attached to assesse. Thus addition deleted - Decided in favour of assesse.

Issues Involved:
1. Deletion of addition under section 41(1) of the Act for unpaid creditors.
2. Deletion of addition on account of excessive payments under section 40A(2)(b) of the Act.
3. Deletion of addition on account of gratuity payment, legal & professional fees, and miscellaneous expenses.
4. Accrual of retention money to the assessee company.
5. Disallowance of voluntary retirement expenses.
6. Disallowance of commission payment under section 40A(2)(b) of the Act.
7. Disallowance of interest on advances to related parties.

Issue-wise Detailed Analysis:

1. Deletion of Addition under Section 41(1) of the Act for Unpaid Creditors:
The Revenue's grievance was that the CIT(A) erred in deleting the addition of Rs. 39,17,182/- made under section 41(1) for unpaid creditors. The A.O. observed that the obligation to pay was extinguished due to the expiry of the three-year limitation period. However, the CIT(A) held that the liabilities were acknowledged in the books, thus not barred by limitation. The Tribunal confirmed the CIT(A)'s order, noting no material evidence from the Revenue to show cessation of liability or benefit obtained by the assessee.

2. Deletion of Addition on Account of Excessive Payments under Section 40A(2)(b) of the Act:
The A.O. found excessive payments for metal and grit purchases from related parties. The CIT(A) reduced the disallowance, comparing the prices with unrelated parties. The Tribunal set aside the orders of the lower authorities and directed the A.O. to restrict disallowance to 27% for metal and 10.42% for grit, based on fair market value.

3. Deletion of Addition on Account of Gratuity Payment, Legal & Professional Fees, and Miscellaneous Expenses:
The A.O. disallowed Rs. 8,55,313/- for various expenses, including gratuity paid directly to employees. The CIT(A) deleted the disallowance, noting the expenses were audited and no defects were pointed out. The Tribunal upheld the CIT(A)'s order, finding no specific error in the CIT(A)'s findings.

4. Accrual of Retention Money to the Assessee Company:
The A.O. included Rs. 27,81,076/- as retention money in the assessee's income. The CIT(A) confirmed this. However, the Tribunal, following the Gujarat High Court's decision in the assessee's own case, held that retention money is taxable only when it becomes payable after satisfactory completion of work. The addition was deleted.

5. Disallowance of Voluntary Retirement Expenses:
The assessee claimed Rs. 10,000/- under voluntary retirement expenses, which the A.O. disallowed due to the absence of an approved scheme. The CIT(A) confirmed this. The assessee did not press this ground during the hearing, leading to its dismissal.

6. Disallowance of Commission Payment under Section 40A(2)(b) of the Act:
The A.O. disallowed Rs. 2,81,124/- paid as commission to a related party, noting the Karta of the HUF had died. The CIT(A) upheld this disallowance. The Tribunal confirmed the CIT(A)'s order, as the assessee had not appealed the similar disallowance for the previous year.

7. Disallowance of Interest on Advances to Related Parties:
The A.O. disallowed Rs. 2,33,648/- of interest on advances to related parties, noting no interest was charged on these advances. The CIT(A) confirmed this. The assessee did not press this ground before the CIT(A), leading to its dismissal by the Tribunal.

Conclusion:
The appeal of the Revenue was partly allowed for statistical purposes, and the appeal of the assessee was partly allowed. The Tribunal's decisions were based on the principles of acknowledgment of liabilities, fair market value comparisons, audited expenses, and precedents set by higher courts.

← Previous Next →