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TMI Blog2013 (2) TMI 774X X X X Extracts X X X X X X X X Extracts X X X X ..... eting the addition of ₹ 14,28,460/- made by the AO on account of disallowance out of contract payment made to sub contractor, Shri Yogendra Singh Jadon ignoring the facts & circumstances of the case, especially that Shri Jadon did not attend the office in compliance to the summons u/s 131 of the Act issued to him to verify the payment. 3. That the ld. CIT(A) has erred in law and on facts in directing the AO to work out the addition only on the sum of ₹ 57,59,910/- against the amount of ₹ 86,59,985/- as closing work in progress by applying GP rate without appreciating the facts & circumstances of the case, especially that the assessee has not furnished evidences to justify that the expenses to the tune of ₹ 61,53,841/- pertaining to the period prior to 12.03.2008. 4. That order of Ld. CIT(A) being erroneous in law and on facts deserves to be quashed and that the order of AO to be restored. 5. The appellant craves, leaves to add or alter any or more ground or grounds of appeal as may be deemed fit at the time of hearing of appeal." ITA No.157/Agr/2012 - by the Assessee 3. The grounds raised by the Assessee in it's appeal are as under :- "1. That the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng reconciliation furnished by the assessee. The assessee furnished details of expenses for the remaining period also, the summary of which noted by the CIT(A) is as under :- (page nos.19 & 20) "The expenditure pertains to the period from 12.03.2008 to 31.03.2008 is ₹ 95,01,079.00 as detail given below :- Material purchase Rs.63,29,719.00 Cartage ₹ 29,120.00 Repair & Maintenance ₹ 2,131.00 Expenditure for the period 12.03.08 to 31.03.08 as per above Chart Rs.31,40,109.00 Total: Rs.95,01,079.00 Less: Payment received by the assessee as per A.O. calculation Rs.65,19,013.00 WIP Rs.29,82,066.00 WIP and closing stock shown by the assessee Rs.62,35,833.00 Unexplained/undisclosed WIP NIL" 7. The CIT(A) has deleted the addition with the following observations:- (paragraph no.4.2, page no.20) "4.2 I have considered the rival contentions and find that the AO has made the addition by a simple arithmetical calculation i.e. he has considered total expenditure debited after 12.03.2008 and from that he has subtracted payments received from the contractees after 12.03.2008 and the WIP shown by the assessee and of the resultant figure he has made the addition. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed. The A.O. and CIT(A) both are not correct in applying G.P. rate on work-inprogress. The A.O. is not correct in applying Accounting Standard-7 as there is no such requirement in Accounting Standard-7 for applying G.P. rate on work-inprogress. The CIT(A) in principle accepted the A.O.'s view that G.P. rate is applied in work-in-progress. However, he restricted to calculate the G.P. rate only on R.57,59,910/- work-in-progress shown y the assessee as he deleted the addition on account of work-in-progress ₹ 29,00,075/- made by the A.O. The Revenue is in appeal in reducing the amount of work-in-progress by the CIT(A) through ground no.1 and direction given in this regard in ground no.3. The assessee challenged this direction of CIT(A) on the ground that the G.P. rate is not applicable in respect of work-in-progress. It is settled law in respect of valuation of closing stock/work-in-progress that cost or market value whichever is lower. The profit element is not required to be added by valuing the closing stock or work- in-progress. In the light of the fact, we are of the considered view that the A.O. and CIT(A) both are incorrect in taking the view that while making valuation o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ything on record to justify that the payments made to the Jadon were excessive or were not for work undertaken by him. If some of the payments were suspect then it was open to the AO to verify them, no such exercise has been done by the AO. Therefore, the addition made by the AO is deleted." 15. We have heard the ld. Representatives of the parties and records perused. The A.O. did not dispute about the fact that Shri Yogendra Singh Jadon has carried out sub-contract work of the assessee. The A.O. on the basis of presumption that generally labour expenses in this line of business comes to 30% whereas the payment made to Shri Yogendra Singh Jadon was excessive. When the A.O. himself accepted that Shri Yogendra Singh Jadon has carried out sub-contract work, merely on the basis of presumption, addition cannot be done. The A.O. is also not correct in making addition on account that cash payment was made to Shri Yogendra Singh Jadon whereas the other conditions of the agreement including deduction of tax at source and others, in this regard the A.O. did not point out any contrary material. After considering the totality of the facts of the case, we confirm the order of CIT(A) as the A.O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also found false as no payment were received by him at site as evident from the self made vouchers (placed on scrutiny folder). The payment has also been made from Agra head office while on those dates he was supposedly working at Lalkuan. (vii) During the recording of the statement it also came to the notice that two Supervisor Staff were also employed by the assessee namely Shri Nitin and Shri Shailendra to look after the work at site for a salary of ₹ 3,500/- per month. Since, Mr. Sanjay Agarwal also worked as a supervisor he is entitled for a salary of ₹ 3,500/- per month. As he provided his services for five months therefore he is entitled for a payment of ₹ 17500/- however the assessee has paid him an amount of ₹ 2175000/-. Since the Sanjay Agarwal is a real brother of partner Uma Devi. (viii) No plausible explanation has been furnished by the assessee with respect to various issues raised in show-cause. (ix) Even assuming that Shri Sanjay Agarwal has received the payment as claimed in impugned affidavit even then case of revenue is admissibility of payment in the light of section 40A(2) not under section 37. The moot question is reasonableness ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the sub-contractors could not have undertaken the work as claimed by them. It is also admitted fact that subcontractors are relatives of the assessee as required under section 40A(2)(b) of the Act. Shri Sanjay Agarwal is son of partner Smt. Uma Devi, Shri Subodh Agarwal is also son of partner Smt. Uma Devi and Shri R.R. Agarwal is husband of the partner Smt. Uma Devi. The above details have been noted from the assessee's Paper Book at page no.258. In the light of the fact and the material available on record, in principle, we agree that the sub-contract was not carried out by the above sub-contractors and in this regard the finding of the Revenue authorities is confirmed. However, it is also admitted fact that the assessee has carried out contract work, may be not from these sub-contractors, but by other parties or by otherwise. On considering the totality of the facts of the case, we notice a comparative chart of G.P. which has been reproduced by the CIT(A) at page no.2 of his order. We notice that the assessee has shown comparatively lower G.P. rate of 11.2% as against 15.60% in the immediately preceding year i.e. A.Y. 2007-08. Under the facts and circumstances, we find sub ..... 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