2019 (7) TMI 426 - AT - Income Tax

Addition of unexplained expenses - Labour Charges - payment to the sub-contractors and deducted TDS thereon - in some case no TDS due to payment less than the threshold limit - HELD THAT - Genuineness of the muster rolls were though doubted, the books of accounts were never rejected by the AO. Besides this the assessee explained the reason for decline in net profit during the AO which was never doubted by the AO. The assessee filed Auditors certificate certifying that said mistake was that of wrong classification and also produced muster rolls of the labourers in photocopy as well as in original. This was never considered by the AO as well as the CIT(A). Therefore, it will be appropriate to remand back this issue to the file of AO to verify the genuineness of the assessee s claim in light of the muster rolls and the auditor s certificate. Thus, Ground No. 1 is partly allowed for statistical purpose. Ad hoc disallowance of wages @ 10% - Labour Expenses - there is an increase in the labour expenses in the month of February March - HELD THAT - Assessee has given month wise details of labour charges and the same is quoted by the AO on Page 4 Para 15 of the Assessment Order. As per these month-wise details, it is evident that the AO has ignored that there are payments in the month of November, May January and therefore it cannot be said that there is sudden increase in the amount of labour charges. Besides this, the Assessing Officer also ignored that the company has been regularly maintaining books of accounts which are duly audited and the same has been accepted by the Assessing Officer. There is no adverse finding of the AO in relation to these documents. It is a well settled law that the ad hoc additions cannot be made in the hands with the company. AO as well as the CIT(A) was not correct in making this addition. Ground No. 2 is allowed. Ad hoc disallowance of 20% of Machine Running Expense - increase in the expenses in the month of March, These expenses are high considering the size of operation of the company and Assessee has purchased 'valve manifold however could not provide any detail or explanation to explain the nature of the item - HELD THAT - AO completely ignored the fact that assessee has submitted copy of bill of Valve Manifold Machine ₹ 619,645/-. The assessee also submitted the Parts wise structure of Hydraulic Assembly in which Valve Manifold used as only a Part . AR pointed out that the said parts are used in Hydraulic Assembly. Part at Serial no.3 is Valve Manifold which can also be verified from structural diagram of Hydraulic Assembly. From the details fixed by the assessee. Therefore, from the above observations, the Ld. AR pointed that Valve Manifold is a part which is used in running of Machine. From the perusal of records it can be seen that the company has been regularly maintaining books of accounts there are duly audited and the same has been accepted by the Assessing Officer there is no adverse finding of the Assessing Officer in relation to these documents. AO as well as the CIT(A) was not correct in making this addition. Ground No. 3 is allowed Addition in respect of non-reconciliation of balance of Creditors - HELD THAT - The documents submitted by the Assessee during the assessment proceedings were not at all considered by the AP as well as by the CIT(A). Therefore, it will be appropriate to remand back this issue to the file of the Assessing Officer and decide it a fresh. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Ground No. 4 is partly allowed for statistical purpose. Disallowance of Machinery Hire Charges-DG Sets Hire charges as bogus - AO observed that these charges are bogus as there is no detail of service tax, telephone number and there is no entry for TDS - failure to furnish any evidence in support of the claim that payment were made by A/c Payee Cheque - HELD THAT - From the perusal of records it can be seen that there is name, address of the vendor mentioned on the bill and merely not mentioning telephone number cannot be reason for treating the invoice as bogus. The the Assessing Officer and the CIT (A) has not at all considered the aspect that in the confirmation given by Creditor i.e. Chaudhary Generator and Elec. Services the same is duly signed. Thus, it is evident that payment was made through A/c Payee Cheque, and the details of cheque was also shown in confirmation. Thus, Ground No. 5 is allowed. Addition on account of difference between contract revenue as per 26AS and credited to profit and loss account - Addition on account of undervaluation of WIP - HELD THAT - From the records it can be seen that the Assessee submitted before the AO the difference of ₹ 2,14,28,277/- which was on account of Service Tax, Work-in-progress and retention Money. All the differences were duly explained along with all necessary supporting evidences. AO allowed credit of work-in-progress of ₹ 1,40,54,583/- only and added the balance amount of ₹ 73,73,696/- which represents service tax of ₹ 72,75,803/- and retention money of ₹ 97,978/- without taking into cognizance of the evidences produced by the Assessee. Besides this, assessee has valued Closing stock of WIP at ₹ 1,01,30,003/- excluding Service Tax and Gross Profit as against the amount of ₹ 1,40,54,583/- appearing in From 26AS. This aspect was also ignored by the AOr. The CIT(A) also has not taken into consideration these evidences and simply confirmed the additions. Therefore, Ground is allowed. Enhancing the value of closing WIP - adding sum on account of Service Tax and on account of gross profit to be earned - AO in this issue has added the difference of WIP as per Form 26AS and the amount of WIP declared by the assessee in its books - HELD THAT - AO in this issue has added the difference of ₹ 1,40,54,583/- of WIP as per Form 26AS and the amount of WIP of ₹ 1,01,30,003/- declared by the assessee in its books which comes to ₹ 39,24,580/- which amount to double addition since the amount of ₹ 37,63,820/- has already been added by him in previous issue. But we have taken a view in the previous issue that this amount cannot be added for the reasons set out therein, therefore, Ground is allowed. Nature of expenditure - purchase of machine - revenue or capital expenditure - HELD THAT - From the records it can be seen that there is no dispute by the Assessing Officer that the assessee is holding heavy machinery in its construction business and considering the nature of assessee s business frequent use of the spare parts of the machinery. Thus, it is an admitted fact. The assessee in his reply filed before AO has given justification for each item purchased during the Assessment Proceedings and the AO as well as the CIT(A) did not point out any contradictory records to that effect. Details of Machinery parts/ attachments etc. used in repairing of machinery above ₹ 1 lakh along with copy of bill was submitted before the Assessing Officer. AO identified five bills amounting to ₹ 37,72,886/- and asked the assessee to show cause why the same be not capitalized for which the assessee filed the reply. Being a contractor who deals in laying of pipelines for sewer and cables, it is necessity to replace the broken parts which are damaged in transportation and has to purchase the new parts for carrying out the work. However, the Assessing Officer treated the purchase of machine spare parts as a capital expenditure instead of revenue expenditure on the basis that these are heavy parts of machine and added the amount of ₹ 32,09,510/- after deducting depreciation @15% on the value of ₹ 37,72,886/- which is not correct as it is an integral part of the business of the assessee. Therefore this ground is allowed. Ad hoc disallowance of 5% of Labour Charges paid - AO disallowed 5% of the total expenditure of ₹ 3,35,31,286/-on the basis that the copies of vouchers produced were unsigned and thus assessee failed to prove genuineness - HELD THAT - From the perusal of records it can be seen that there is no doubt raised by the Assessing Officer that these labour charges have not been paid by the assessee and vouchers of the same has been produced before the Assessing Officer. The copy of ledger A/c of Labour Expenses were submitted before the Assessing Officer which was ignored by the Assessing Officer as well as by the CIT(A). The fact remains that the company has been regularly maintaining books of accounts which are duly audited and the same has been accepted by the Assessing Officer. Therefore, it will be appropriate to remand back this issue to the file of the Assessing Officer for fresh adjudication - Ground allowed for statistical purpose. Addition treating 50% of electricity expenses as personal expenses of directors - common expenses for the residence of directors and office premise - based on earlier year - HELD THAT - For the year under consideration, facts are different as assessee has suo-motto not claimed Electricity Expenses for the premises at A1/31, Janakpuri, New Delhi, the registered office of the company. The assessee has claimed Electricity Expenses only with respect to administrative office of the company at A1/B-6, Local Shopping Complex, Janakpuri, New Delhi where directors are not reside. Therefore, Electricity Expenses disallowed by the AO entirely on the basis that electricity expenses are common expenses for the residence of directors and office premise while ignoring the fact that Assessee has not claimed any expense for the residence where registered office is situated and the same is upheld by the CIT(A) is not correct. Thus, Ground is allowed.

Summary

Issues Involved:
1. Unexplained Labour Charges
2. Ad hoc Disallowance of Wages
3. Ad hoc Disallowance of Machine Running Expenses
4. Non-Reconciliation of Creditors
5. Bogus Machinery Hire Charges
6. Difference in Contract Revenue
7. Enhancement of Closing Work in Progress
8. Treatment of Machine Spare Parts as Capital Expenditure
9. Ad hoc Disallowance of Labour Charges
10. Personal Expenses of Directors

Detailed Analysis:

1. Unexplained Labour Charges:
The assessee claimed labour charges of ?48,82,520/- which were treated as unexplained expenses by the Assessing Officer (AO) due to doubts about the genuineness of the muster rolls. The CIT(A) upheld the addition. The tribunal noted that the books of accounts were not rejected, and the assessee provided an auditor's certificate and original muster rolls. The issue was remanded back to the AO for verification of the genuineness of the muster rolls and auditor's certificate.

2. Ad hoc Disallowance of Wages:
The AO disallowed 10% of the total wages expenditure amounting to ?47,61,266/- due to a sudden increase in labour expenses in February and March. The CIT(A) sustained this disallowance. The tribunal found that the AO ignored other months with high expenses and noted that the books of accounts were duly audited. The ad hoc addition was deleted.

3. Ad hoc Disallowance of Machine Running Expenses:
The AO disallowed 20% of machine running expenses amounting to ?42,25,120/- due to increased expenses in March and doubts about the nature of certain purchases. The CIT(A) confirmed this disallowance. The tribunal observed that the assessee provided necessary details and bills, and the books were audited. The ad hoc addition was deleted.

4. Non-Reconciliation of Creditors:
The AO added ?79,25,891/- due to non-reconciliation of creditors' balances. The CIT(A) did not address this ground. The tribunal remanded the issue back to the AO for fresh adjudication, ensuring the assessee is given an opportunity of hearing.

5. Bogus Machinery Hire Charges:
The AO treated machinery hire charges of ?1,16,000/- as bogus due to lack of details like service tax and TDS entries. The CIT(A) upheld the addition. The tribunal noted that the vendor's details were provided, and payments were made through account payee cheques. The addition was deleted.

6. Difference in Contract Revenue:
The AO added ?1,11,37,516/- due to differences between contract revenue as per Form 26AS and the profit and loss account. The CIT(A) confirmed the addition. The tribunal found that the assessee provided reconciliation and supporting documents which were ignored by the AO. The addition was deleted.

7. Enhancement of Closing Work in Progress:
The AO enhanced the closing work in progress by ?39,24,580/- by adding service tax and gross profit. The CIT(A) agreed with the AO. The tribunal noted that this resulted in double addition since similar amounts were already added. The addition was deleted.

8. Treatment of Machine Spare Parts as Capital Expenditure:
The AO treated the purchase of machine spare parts amounting to ?32,09,510/- as capital expenditure. The CIT(A) confirmed this treatment. The tribunal observed that the assessee provided justification for each item, and frequent use of spare parts was necessary for the business. The addition was deleted.

9. Ad hoc Disallowance of Labour Charges:
The AO disallowed 5% of labour charges amounting to ?16,76,565/- due to unsigned vouchers. The CIT(A) confirmed this disallowance. The tribunal noted that the books were audited, and the vouchers were produced. The issue was remanded back to the AO for fresh adjudication.

10. Personal Expenses of Directors:
The AO treated 50% of electricity expenses as personal expenses of directors and disallowed ?87,640/-. The CIT(A) upheld this disallowance. The tribunal found that the assessee did not claim electricity expenses for the registered office, which was the directors' residence. The addition was deleted.

Conclusion:
The tribunal partly allowed the appeals for statistical purposes, remanding certain issues back to the AO for fresh adjudication while deleting several ad hoc additions and disallowances made by the AO and confirmed by the CIT(A). The judgment emphasizes the importance of proper verification and consideration of evidence provided by the assessee.