2019 (7) TMI 797 - AT - Income Tax

Addition on account of negative inventory - assessee has been following the percentage of completion method while recognizing the revenue - HELD THAT - As revised contract value which would require incurring of substantial amount towards cost. Therefore it would not be possible to assessee to earn income of 297.18 crores in assessment year under appeal as is computed by the A.O. in the assessment order. The entirety of the facts and circumstances and total cost of the project shall have to be seen and considered by the authorities below. Since the POCM is pleaded for the first time which have an impact on this addition and other project completion expenses disallowed by the authorities below and these additions are left with academic discussion only therefore we are of the view that the matter requires reconsideration at the level of the A.O - thus set aside the Orders of the authorities below and restore the matter in issue to the file of A.O. with directions - Ground No.1 of the appeal of Assessee is allowed for statistical purposes. Addition on account of mismatch in the physical and book balance of diesel - as mentioned that in the Special Audit Report SAR there is a difference of 8610.86 litres of diesel which was unexplained - HELD THAT - After considering the rival submission and in the light of documents available on record i.e. PB-A1/172 and 173 it is clear that assessee has been able to reconcile the difference of 4283 litres therefore to that extent addition is liable to be deleted. However for the remaining amount Learned Counsel for the Assessee did not press this ground for a sum of 2, 40, 160/-. We accordingly set aside the part addition and restrict the addition of 2, 40, 160/-. Ground of appeal of Assessee is partly allowed. Addition on account of mismatch in physical and book balance of steel - A.O. made this addition on the ground that there is a difference in the balance of TMT as per stock statement given by the Special Auditor and as per physical verification the detail of which is given by the A.O. in the assessment order - HELD THAT - The assessee also explained that TMT is not used in the same length in which it is supplied rather it was cut into various sizes as per requirements. This process result in some of the permitted wastage. The above explanation of assessee have not been rebutted by the authorities below or the Special Audit. Even by the nature of the item i.e. TMT used in construction would also supports the explanation of assessee that TMT could not be used in the same shape as have been supplied by the supplier. The assessee also explained that TMT bar suppliers given the weight of supplies with 2 to 5% margin in actual weight. Since all these facts have not been controverted by the authorities below therefore it appears to be an adhoc addition without any basis or material on record. Further the A.O. merely presumed that there is an excess issue of stock in the books of the assessee resulting in excess expenditure by the assessee for which no evidence has been brought on record. Further any excess quantity in physical stock cannot automatically lead to conclusion that there is excess consumption of material to inflate expenses. Therefore it appears that the addition is based on merely on presumptive reconciliation which is not justified. We accordingly set aside the Orders of the authorities below and delete the addition Addition on account of alleged stock of scrap determined based on theoretical consumption - A.O. made the above addition as the Special Auditor has identified in SAR that there is a difference of 88.50MT on physical verification report of TMT submitted before Special Auditor - HELD THAT - This ground is co-related with Ground No.3 above in which we have deleted the addition on account of theoretical and actual stock which is the basis for making this addition as well. The assessee has produced sufficient evidence on record to prove that in subsequent year assessee has sold further scrap which have been accounted for as income in subsequent year. The A.O. has given contradictory finding on Ground Nos. 3 and 4 on the identical issue. The A.O. has merely relied upon audit report for making the addition without bringing any evidence or material on record. Therefore no addition could be sustained of this nature. Disallowance of amortization expenses - as assessee was amortizing the assets like T.Vs Refrigerators Air- Conditioners furnitures etc. @ 5% per month i.e. 60% per annum against the normal depreciation rate which was to be allowed @ 10% per annum and difference of the same was added by the A.O - HELD THAT - the matter requires reconsideration at the level of the A.O. because the A.O. shall have to verify the exact item and exact depreciation allowable as per rules. The assessee has filed complete details in the paper book which requires verification at the end of the A.O. as to on which item specific depreciation is allowable to the assessee as per rules. We accordingly set aside the orders of the authorities below and restore this issue to the file of A.O. with a direction to consider each item on which depreciation is claimed and allow depreciation to assessee as per rules Disallowance of depreciation on account of excess payment for acquiring fixed assets - HELD THAT - There was a difference between the installation of machinery and commissioning as Shanghai Pudong specially manufacture TBM for assessee s requirements. The details of all invoices/bills etc. are brought on record which clearly reveal that assessee has paid reasonable price for purchase of TBM to M/s. Shanghai Pudong. The assessee has therefore been able to explain that assessee has paid reasonable price for purchase of TBM. The authorities below have not brought any evidence or material on record to justify their finding. The findings of the authorities below are based on mere presumption and surmises. The A.O. cannot step into the shoes of a businessman to determine the price. The assessee also explained that TBM was purchased in preceding assessment year in which assessment u/s 143(3) have already been completed. Therefore such an item could not be disputed in assessment year under appeal. CIT(A) without any basis or justification held that assessee has paid excess payment for purchase of TBM. CIT(A) without any justification has disallowed depreciation @ 25%. Expenditure on TMB spare parts - expenditure on replacing consumable spares - allowable revenue expenditure or not? - HELD THAT - The assessee filed details of TBM consumable spare parts which gives item description which were claimed as consumables which are bolt stock sensor hydro cylenders belt pipe cable single disc cutter etc. The nature of these items thus shows that these are consumable in nature and need for day-to-day wear and tear. The nature of tunnel boring machine itself shows that it is doing a specified job of cutting the ground removing the excavated material and make a tunnel. In this process the back-up consumable items are frequently required for completing the operation related to the business activity of the assessee. The assessee did not remove the original spares from the block of assets therefore replacement of the items have been rightly claimed as revenue expenditure in nature. Considering the nature of the machine and the items replaced in the machinery it is clear that the TMB spare parts are consumable in nature therefore assessee rightly claimed it to be revenue expenditure. Disallowance of amortization expenses - A.O. made this addition which is the difference between depreciation claimed by assessee as per books and depreciation calculated as per Income Tax Rules. - HELD THAT - CIT(A) has already directed the A.O. to look into the alternate claim of assessee and allow depreciation to assessee as per Income Tax Act and Rules. Therefore no further interference is required in the matter. A.O. is therefore directed to verify the items on which depreciation is claimed and also decide application u/s 154 as per Law and allow depreciation as per I.T. Act and Rules. Addition on account of foreign exchange gain - HELD THAT - Assessee made a book entry at the end of the year with reference to capital asset on account of foreign exchange fluctuation gain which was capitalized. Thus the gain on transaction of foreign currency liability was in respect of capital asset which should have been considered as capital receipt only. Further even if Section 43A would not apply to the matter in issue because no actual settlement of liability has happened during the assessment year under appeal therefore book entries would not be relevant to determine the income of assessee. It is well settled Law that book entries are not determinative of income of assessee whether income of assessee is taxable or not it has to be decided as per Law. We rely upon Judgment of Sutlez Cotton Mills Ltd. vs. CIT 1978 (9) TMI 1 - SUPREME COURT and Tuticorn Alcali Chemicals Fertilizers Ltd 1997 (7) TMI 4 - SUPREME COURT - Even if in this case assessee has made an entry of gain on transaction of foreign currency liability in respect of capital asset at the year end which would not be income of the assessee therefore no addition could be made against the assessee of this nature. We accordingly set aside the Orders of the authorities below and delete the entire addition Disallowance of design expenses - A.O. disallowed the above amount towards design charges as the Special Auditor has observed that certain expenses of deferred nature were charged fully to Profit Loss Account such as design charges are in the nature of deferred revenue expenditure and this expenses has to be spread over the life of the project which was fully claimed in the initial year of the operation of the JV. - HELD THAT - The assessee claimed that amount was incurred on account of design charges which is approved by DMRC in the initial stage. When the design is approved only then the execution of the work would start therefore design charges shall have to be incurred once for start of the execution of the project. Therefore it could not be treated as deferred revenue expenditure in nature - we delete the entire addition Disallowance of bank guarantee expenses - HELD THAT - The assessee has explained all the reasons under which the amount have been spent for business purposes. The Ld. CIT(A) allowed part relief to the assessee for sum of 37, 59, 867/-. Still the entire amount of 2.22 crores had been disallowed which was total amount consisting of two parts as explained above. The assessee has referred to JV Agreement which clearly provide that any fronting guarantee cost paid to the local Bank shall be paid directly by the JV therefore there was no justification to sustain any of the addition on this issue. It is well settled Law that guarantee expenses paid by the assessee was a revenue expenditure and an allowable deduction. Judgment in the case of Sivakami Mills Ltd. vs. CIT 1979 (2) TMI 51 - MADRAS HIGH COURT clearly apply to the facts of this case. Following the same we set aside the Orders of the authorities below and delete the entire addition. Disallowance of prior period expenditure - HELD THAT - No justification to sustain the addition. It is a fact that it is practically first year of business of assessee when revenue was recognised under POCM. Therefore there could not be any prior period expenses as explained by the assessee. The assessee also explained method of accounting which has no impact on revenue recognition. Thus there was no basis by the authorities below to make or sustain any addition. We accordingly set aside the Orders of the authorities below and delete the entire addition Non deduction of tds - Disallowance in respect of expenses incurred on four items i.e. Food expenses for staff outside Office staff mess expenses rent co-lease BUNG project related rent guest house and car hire charges - expenses spent by the assessee on Chinees expats as per the observation of the Special Auditor which is in the nature of perquisites in the hands of the employees and should have been added to the salary for computation of TDS liability - HELD THAT - It may also be noted here that the Special Auditor has admitted that these are allowable as business expenses therefore it should have been pointed out in the Orders as to how these were perquisite in nature. It is also observed by the Special Auditor that these perquisites should be added to the salary of the employees for computation of TDS liability. In Section 40(a)(ia) the word salary have not been used so as to make disallowance on account of non-deduction of TDS. Therefore there was no justification for the authorities below to make adhoc addition Addition on account of mismatching balance confirmation of vendor - HELD THAT - The assessee produced copies of bills and vouchers along with bank statements to explain that entries in the books of account of assessee are correct. However the party has filed the confirmation in which there was a difference but ultimately entries have been made in the subsequent year. The explanation of assessee appears to be plausible to show that there may not be any mismatch but we are of the view that the matter requires reconsideration because of the two different confirmations have been filed by the party. In case any need the A.O. could have also examined the concerned party for verification of all the entries in the books of account of assessee. We accordingly set aside the Orders of the authorities below and restore the matter in issue to the file of A.O. with a direction to re-decide this issue Addition u/s 68 - HELD THAT - CIT(A) considered each and every case specifically and in the case of Shanghai Pudong confirmation was given which is supported by bills invoices and bills of entries of custom clearance. Commissioner of Customs (Import) has also verified all the entries and confirmed all the transactions as genuine between the parties in which no doubts have been raised by the A.O. Therefore there was no basis to consider the discrepancies in that case therefore addition of 74.09 crore was correctly deleted. Assessee has claimed depreciation only on this item therefore there could not be any discrepancy in their account. As regards other difference of 3.36 crores it was mainly on account of RBI rate which have been clarified by the RBI through their website in which no discrepancy have been pointed out by the Ld. D.R. CIT(A) has also considered the cases of 26 vendors specifically in his findings and found that credit balance shown by the assessee was less than the balance shown by these vendors in their confirmations. This fact is also not disputed through any evidence or material on record. On the basis of these finding of fact recorded by the Ld. CIT(A) we are of the view that Ld. CIT(A) correctly deleted the substantial addition Unexplained investment - addition on the ground that investment shown by the assessee from its Member L T is 13 crores whereas investment shown by the L T in J.V. is of 12.66 crores and on this account the Special Auditor has proposed the addition - HELD THAT - There were no bar for the assessee to explain the issue by filing confirmation of the difference. Therefore the matter requires reconsideration at the level of the A.O. We accordingly set aside the Orders of the authorities below and restore this issue to the file of A.O. with a direction to re-decide this issue in the light of confirmation filed by assessee from L T to explain the above issue. Addition on account of notional interest - A.O. made this addition which is the notional interest on the ground that one of the member of JV i.e. L T has provided initial investment of 13 crores whereas the capital contribution which were required to be made by other member SUCG of 5, 95, 86, 471/- has not been made - HELD THAT - The assessee explained before the authorities below that it is for the Supervisory Board as per JV Agreement to see that funds are made available by both the members of the JV. The entire proceedings are supervised by the Supervisory Board therefore merely because one member of the JV has not contributed their capital in the JV is no ground of charging notional interest on the capital which is not contributed by the member of the JV. There is no provision under the Income Tax Act to charge notional interest in such circumstances. Learned Counsel for the Assessee also demonstrated that in fact assessee has declared negative expenditure of 2, 26, 95, 787/- on account of interest (PB A1/26). Therefore there is no justification of charging notional interest which were not due or collected by the assessee. Addition on account of customary gift - customary gift given to the clients and business associates at the time of Diwali - no documentary evidences have been filed for Diwali gifts so purchased - HELD THAT - Some bills and vouchers were produced before the authorities below copies of which are also filed in the paper book. The Diwali gifts have been purchased through banking channel. The Diwali gifts given to the clients and other associates for business purposes are allowable expenditure. We therefore set aside the Orders of the authorities below and delete the entire addition Determination of ALP in respect of transaction with AE - Assessee has been following the POCM method - HELD THAT - Since this issue relates to the main contract work awarded to the assessee therefore addition of this nature should not have been sustained by the authorities below because assessee has been following the POCM method consistently. Ultimately everything is settled in subsequent year when the entire contract work have been completed by the assessee. We may further note that considering the total amount of the contract along with revised contract value it is difficult to accept the department s contention that assessee would earn huge profit out of the same. It appears that Special Auditor without looking the entirety of the facts and circumstances of the case made the addition in haste without going through the composite work of the assessee in the light of POCM method adopted by the assessee. We accordingly do not find any justification to sustain even the part addition on this issue because authorities below have failed to make out a case as to how determination of ALP was justified in this case. In view of the above discussion we set aside the Orders of the authorities below and delete the entire addition. Unexplained stock - addition on the ground that Special Auditor has mentioned in SAR that no physical verification actually took place regarding stock in the case of the assessee - HELD THAT - CIT(A) correctly deleted the addition. The assessee explained before the Ld. CIT(A) that regular physical verification of stock was made and assessee has already credited 16.66 crores as closing entry in P L A/c therefore it would be double addition. CIT(A) found that there were no basis for the A.O. or Special Auditor to make the addition. It was an adhoc addition merely on presumption. D.R. could not produce any evidence or material to contradict the finding of fact recorded by the Ld. CIT(A) Unexplained sub-contract - A.O. made the addition on the ground that Special Auditor has observed that assessee has sub-contracted few activities like catering travelling etc. to small individual contractors and bills of these subcontractors was not produced - HELD THAT - The assessee produced complete details before the authorities below on which no enquiry have been made by the A.O. The Ld. CIT(A) after going through the details on record found that assessee made the payment through account payee cheques and identity of all the parties have been established. This adhoc addition was made merely on surmises and presumptions. D.R. did not produce any evidence or material to contradict the finding of fact recorded by the Ld. CIT(A) therefore correctly deleted the addition

Summary

Issues Involved:
1. Addition of Negative Inventory.
2. Addition due to mismatch in physical and book balance of diesel.
3. Addition due to mismatch in physical and book balance of steel.
4. Addition due to alleged stock of scrap.
5. Disallowance of amortization expenses.
6. Disallowance of depreciation on alleged excess payment for acquiring fixed assets.
7. Disallowance of expenses on account of machinery spares.
8. Disallowance of amortization expenses.
9. Addition on account of foreign exchange gain.
10. Disallowance of design expenses.
11. Disallowance of bank guarantee expenses.
12. Disallowance of prior period expenses.
13. Disallowance of expenses treated as perquisites.
14. Addition due to mismatch in balance confirmation of vendor.
15. Addition due to mismatch in balance confirmations under section 68.
16. Addition due to mismatch in investment balance.
17. Addition of notional interest income.
18. Disallowance of expenses on gifts.
19. Addition on account of determination of ALP in respect of transaction with AE.

Detailed Analysis:

1. Addition of Negative Inventory:
The Tribunal observed that the assessee followed the Percentage of Completion Method (POCM) for recognizing revenue, and the alleged negative inventory was due to a timing difference in the recording of material receipts. The Tribunal found that the assessee provided sufficient evidence to support the inventory figures and deleted the addition. The matter was remanded to the AO for verification of POCM.

2. Addition due to mismatch in physical and book balance of diesel:
The Tribunal noted that the assessee reconciled the difference for 4283 liters of diesel and did not press for the remaining difference of 4328 liters. The Tribunal restricted the addition to ?2,40,160/-.

3. Addition due to mismatch in physical and book balance of steel:
The Tribunal found that the difference in stock was due to theoretical versus actual stock measurement and normal wastage during use. The addition was based on presumptions without concrete evidence. The Tribunal deleted the addition.

4. Addition due to alleged stock of scrap:
The Tribunal observed that the addition was based on theoretical calculations and the sale of scrap in subsequent years was accounted for. The Tribunal deleted the addition.

5. Disallowance of amortization expenses:
The Tribunal remanded the issue to the AO to verify the exact items and allow depreciation as per rules. The AO was directed to consider each item on which depreciation was claimed.

6. Disallowance of depreciation on alleged excess payment for acquiring fixed assets:
The Tribunal found no basis for the addition as the assessee provided sufficient evidence of the reasonableness of the purchase price of the Tunnel Boring Machine (TBM). The Tribunal deleted the entire addition.

7. Disallowance of expenses on account of machinery spares:
The Tribunal held that the spares were consumable in nature and necessary for the maintenance of TBMs. The expenses were revenue in nature and allowable under section 37 of the Act. The Tribunal deleted the addition.

8. Disallowance of amortization expenses:
The Tribunal directed the AO to verify the items and allow depreciation as per Income Tax Rules, considering the assessee's application under section 154.

9. Addition on account of foreign exchange gain:
The Tribunal held that the gain on foreign exchange fluctuation related to capital assets was a capital receipt and not taxable. The Tribunal deleted the addition.

10. Disallowance of design expenses:
The Tribunal held that design expenses were revenue in nature and incurred at the start of the project. The concept of deferred revenue expenditure was not applicable. The Tribunal deleted the addition.

11. Disallowance of bank guarantee expenses:
The Tribunal found that the expenses were revenue in nature and allowable. The Tribunal deleted the entire addition.

12. Disallowance of prior period expenses:
The Tribunal noted that it was the first year of business operations under POCM, and there were no prior period expenses. The Tribunal deleted the addition.

13. Disallowance of expenses treated as perquisites:
The Tribunal found that the expenses were incurred for business purposes and not perquisites. The Tribunal deleted the addition.

14. Addition due to mismatch in balance confirmation of vendor:
The Tribunal remanded the issue to the AO for verification of documentary evidence and reconciliation of the vendor's account.

15. Addition due to mismatch in balance confirmations under section 68:
The Tribunal remanded the issue to the AO to reconsider in light of judicial decisions and provide an opportunity for the assessee to reconcile the differences.

16. Addition due to mismatch in investment balance:
The Tribunal remanded the issue to the AO to verify the confirmation from L&T and the breakup of the amount in question.

17. Addition of notional interest income:
The Tribunal held that there was no provision to charge notional interest and deleted the addition.

18. Disallowance of expenses on gifts:
The Tribunal found that the gifts were purchased for business purposes and allowable. The Tribunal deleted the addition.

19. Addition on account of determination of ALP in respect of transaction with AE:
The Tribunal found that the addition was based on incorrect comparison and estimates without evidence of excess payment. The Tribunal deleted the entire addition.