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TMI Blog2022 (12) TMI 540X X X X Extracts X X X X X X X X Extracts X X X X ..... t pointing any specific instance of non production of bills / vouchers etc can not disallow the expenditure on ad-hoc basis especially when the assessee s accounts were duly audited and the auditors had not pointed out any specific discrepancy in the bills/ vouchers of the assessee. Considering all we deem it proper to restore the issue denovo to the file of AO with a direction to verify each and every bills and voucher and make only specific addition where he finds that the assessee failed to substantiate the expenditure by producing necessary evidence to his satisfaction. In our opinion, the AO can not make any ad-hoc disallowance without pointing out the specific instances i.e AO can disallow the expenditure on actual basis, in case assessee failed to produce the evidence in support of its case. Needless to say the AO shall decide the issue as per fact and law after following the principle of natural justice.Hence, the ground raised by revenue is allowed for statistical purposes. Unexplained work in progress - CIT-A deleted the addition - HELD THAT:- Considering submissions of the assessee and also on account of fact that the ld.CIT(A) had passed a non-speaking, cryptic and perf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1-12 to 2015-16. Both the Revenue and assessee raised identical grounds in the above appeals, therefore, the grounds raised by the Revenue for the A.Y 2012-13 in ITA No.553/Hyd/2020 is taken as a lead case and the grounds raised therein is reproduced below: "1. The ld.CIT(A) erred both in law and on facts of the case in allowing relief to the assessee. 2. The Id CIT(A) erred in deleting the disallowance of Rs.12,40,36,185/- towards Operating & Maintenance expenses, when the Assessing Officer has clearly mentioned in the assessment order that during the search and post-search enquiries the appellant failed to furnish all the bills/vouchers, hence a detailed show cause notice was issued to the assessee company wherein all the facts relating to the bogus/accommodation entries of purchase bills/unexplained & unverifiable expenses with various vendors have been pointed. 3. The ld CIT(A) erred in deleting the addition of Rs. 4,54,98,600/- towards unexplained work-in-progress capitalized in books without appreciating the fact that a detailed show cause notice was issued covering the issues of search involving claim of non-genuine/bogus purchases/ unexplained & unverifiable expenses, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... harges and manpower costs etc. along with repairs and maintenance charges claimed under head operating/maintenance expenses and were perused during search for necessary reconciliation of such claim of expenses in P&L a/c with etc. Accordingly supporting bills/vouchers during the search, assessee company was asked to submit bills/vouchers and other relevant supporting ledger extracts etc as applicable in support of the assessee's clam of huge expenses under civil work/ labour wok expenses for maintenance, repair and manpower related payment proofs as applicable for F.Ys 2009-10 to 2014-15. With reference to this assessee could not submit all bills and vouchers for necessary verification/ reconciliation with relevant vouchers and ledger extracts explaining the various sites involved in incurring such expenses of repair and maintenance involving unskilled labor with earth works, security supervision etc. As assessee could not submit all the details as sought in search and post search proceedings, a detailed show cause letter was issued to the assessee to submit the same in full as applicable a per 1.T.Act as claimed in the Return of Income applicable for Asst. Year 2010-11 to 2016 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es to Rs.12,40,36,185/- is disallowed as expenses attributable to inflation of expenditure under various expenditures involving civil works bills, earth works, transportation and installation works etc. Addition: Rs. 12,40,36,185 /-. Penalty proceedings u/s. 271(1)(c) are initiated separately for submission of inaccurate particulars of income". 4. The learned CIT (A) while dealing with the issue had deleted the addition of 20% of the total amount confirmed by the Assessing Officer by holding as under: "5. I have considered the assessment order and submissions of the appellant. It is seen that the addition made by the Assessing Officer is not based on any material seized during the course of search. Apparently there is no finding as to inflation of expenses or debiting bogus expenditure by the appellant company. Further, it is seen that the appellant maintains vouches etc at various placed and on sample basis evidences were produced before the Assessing Officer. There is no specific adverse finding of the Assessing Officer. The observations are general without pointing out any specific deficiencies The appellant is a corporate which is owned/run under professional management. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ious places and on sample basis evidences are produced before the AO and there is no specific adverse finding of the AO. The learned CIT(A) observed that the Appellant is a corporate which is owned/run under professional management and the estimate disallowance at 20% has no basis. Accordingly, the learned CIT(A) deleted the adjustment proposed by the AO. 2.1.4. The Revenue has now raised a ground before your goodself against the deletion of the disallowance made by stating that in absence of the Appellant to furnish all the bills/vouchers, a detailed show cause notice was issued wherein facts relating to bogus/ accommodation entries of purchase bills/unexplained and unverifiable expenses with various vendors have been pointed. 2.2. Submission We wish to provide our detailed submission as below against the ground raised by the Revenue in connection with the disallowance of the operating and maintenance expenses: 2.2.1. The learned AO has disallowed 20% of total expense on ad hoc basis and the ground raised by the Revenue that the bogus/ accommodation entries of purchase bills/unexplained and unverifiable expenses with various vendors have been pointed in a show-cause noti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss of the assessee, disallowance of the same on ad hoc basis is incorrect. Therefore, expenditure incurred in the ordinary course of business, which is deductible under the provisions of the Act, shall not be disallowed on ad hoc basis without full and proper examination of the books of accounts. ·Where the tax officer has not rejected the books of accounts and similar nature of expenses were allowed in the past scrutiny assessments, disallowance made on ad hoc basis is not tenable. The tax officers ought to place reliance on the audited financial statements, certified as true and fair by the statutory auditors after due verification of the deductions claimed by the assessee in the profit and loss account with the books of accounts. A summary of the judicial precedents outlining the above principles is provided vide Annexure 2 for kind reference of your goodself. Further the learned AO disallowed the expense without carefully examining the documents furnished during the proceedings. " 7. We have heard the rival contentions and perused the material available on record. We find that the AO in the instant case, had disallowed 20% of the site maintenance and repair char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... involve huge expenses covering huge data involving various bills and vouchers of minor expenses grouped under each site/project expenses so as to arrive at total expenses as claimed. On perusal of certain bills/vouchers as made available, it is noticeable that some of them are improperly vouched without full details such as address, recipient name, payee signature and name, full description oi maintenance/ security work involved, repairs undertaken and so on and so forth making it not amenable for complete verification with proper reconciliation of such expenses under different sites/projects undertaken by assessee during the year. Accordingly considering all these discrepancies of improper vouching coupled with non-reconciliation of each item of bills vis-à-vis each claim of expenses under these heads, it would be difficult to consider entire expenditure as claimed as supported with proper bills and vouchers as debited in P&L account. Considering these discrepancies to meet the ends of justice, keeping in view of assessee's facts of case, nature of business of telecommunications having substantial erection sites involving labor expenses partly expenses of Rs.62,01,80,92 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e search proceedings it was mentioned that the assessee failed to substantiate the expenditure mentioned in the bills / vouchers. Similarly, the decision in the case of I.I.C. Systems 44 taxmann.com 169 is also not applicable to the facts of the case on hand as in the present case, the Assessing Officer has brought on record the discrepancy in the bills and vouchers on test check basis. However, he has failed to quantify the expenditure which is required to be disallowed in the absence of supporting bills / vouchers / evidence. Hence, the ground raised by revenue is allowed for statistical purposes. 10. Ground No.2 raised by the Revenue is with respect to deleting the addition of Rs.4,54,98,600/- towards unexplained work in progress. In this regard the learned DR drew the attention of the Bench to Para 4.2 of the assessment order which read as under: "4.0(ii) Disallowance of unexplained work-in-progress capitalized in books as claimed. Further, during the verification of similar expenses as above as claimed under capital work-in-progress as attributable to tower erection etc., assessee was requested to give all supporting proofs of expenses claimed under capital work-in-progre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c. whenever a new tower comes into existence. 3.1.2. For the previous year 2013-14 relevant to Assessment Year 2014-15, the Appellant has capitalized certain portion of operating and maintenance expense and other expenses amounting to Rs. 96,28,868. 3.1.3. The Appellant has not deducted TDS on the expenditure amounting to Rs. 96,28,868. However, no disallowance were made under section 40(a)(ia) of the Act since no deduction was claimed while computing the taxable income in respect of capitalized work-in-progress (`CWIP). 3.1.4. The learned AO has disallowed amount of Rs. 96,28,868 for the following reasons; * Vouchers and bills were not made available to cross verify the genuineness of claim. * Expenditure of capital nature is akin to investments and same needs to be justified with supporting sources and also due adherence to the provisions of the I.T. Act including the TDS, maintenance of supporting bills and vouchers etc. 3.1.5. Further the learned AO contended that the genuine investment with explainable sources is neither verifiable nor has support of law. Order of the learned CIT(A) 3.1.6. The learned CIT(A) after carefully examining the submissions by the Appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e reliance on various judicial precedents' wherein it was held that * under section 69, only such value of the investments may be deemed to be the income of the assessee for the financial year, if they are not recorded in the books of account. * In the absence of any corroborative evidence establishing receipts and payments outside the regular books of account, it cannot be alleged that investments have been made which are not recorded. * Unless it is first established beyond doubt that there is an investment which is not recorded by the Assessee in its books, no occasion to explain about the nature and source of the investment can arise. Summary of judicial precedents outlining above principles is enclosed vide Annexure 3. 3.2.7. In view of the above, the Appellant wishes to submit that the contention of the learned AO to treat the CWIP amount as unexplained investment is not justified and devoid of merits. Notwithstanding and without prejudice to the above, 3.2.8. The Appellant wishes to place reliance on the following judicial decisions which have held that an expenditure not claimed by the assessee in the Profit & Loss A/c cannot be disallowed: The Hon'ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in disallowing the entire expenditure stating that TDS has not been deducted for the aforesaid payment for the subject assessment year without considering the fact that CWIP was not claimed as deductible expense while computing the taxable income. 3.2.14. In this regard, it is submitted that no disallowance is warranted under section 40(a)(ia) of the Act towards non deduction of tax at source on capitalized expenditure since the same is not claimed as deduction while computing the taxable income. The disallowance under section 40 can only be made towards the expenditure which is claimed as deduction while computing income and cannot be made on capital expense as the same is not claimed as revenue expenditure." 14. We have heard the rival contentions and perused the material available on record. It is also the submission of the learned AR that if given an opportunity, the assessee is in a position to substantiate with evidence to the satisfaction of the AO regarding actual expenditure incurred for the raising the capital assets. Even in the written submissions filed before us, the assessee at Para 3.2.10 has categorically submitted as under : "3.2.10 In this regard, we wis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns as called for vide its letter dated 04.05.2018. More or less reiterating the submissions made earlier For A.Y 2011-12 and A.Y. 2015-16. 5.3 After careful examination of assessee's submissions and also keeping in view the disallowances made on this issue for other A.Y.s i.e AY 2011-12 and 2015-16, assessee's claim is not acceptable as per I.T. Act in view of following reasoning: It is a fact on record that this is a clear provision which is a set aside amount for incurring in future years in the event of site restoration cost likely or unlikely to be incurred in the event of abandoning any tower sides in the interest of business. It is a fact on record that assessee has not incurred any such expenditure till date and could not submit any bills and vouchers and plain reading of above note/ facts clearly establishes that assessee is conveniently creating a provision for future possible likely or unlikely liability and claiming the same as present year attributable expenditure. This way of accounting/ claims are not allowable as per mercantile method of accounting read with the provisions of the I. T. Act as it isa mere provision which is neither accrued nor an ascer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndatory accounting standards and income computation and disclosure standard (ICDS). The decision of the Hon'ble Supreme Court in the case of CIT Vs. Bharat Earth Movers Ltd (supra) and in case of M/s. Calcutta Co Ltd vs. CIT (Supra) are applicable t the facts of the case and are in favour of the appellant. Addition is not justified solely on the ground that the appellant has made provision. The Assessing Officer has not brought any material on record to show that the estimation of liability made by the appellant is incorrect or not genuine. Since the liability arose on a/c of lease deeds executed by the appellant and no finding by Assessing Officer to the contrary, the expenditure claimed by the appellant is allowable and the same is allowed. The addition made by the Assessing Officer is deleted. The appellant succeeds on the above ground". 18. It was the submission of the learned DR that the term of the lease deed was for sufficient long time and therefore, site restoration charges cannot be allowed on provisional basis for making the provisions based on the actuarial as no site restoration expenditure was incurred by the assessee during the A.Y under consideration. 19. Per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting the above disallowance, which was allowed by the CIT(A) in favor of the Appellant. 4.1.6. Aggrieved by the decision of the learned CIT(A), the Revenue has filed appeal before the Hon'ble Tribunal stating that the learned CIT(A) did not verify the reasonable certainty of the site restoration costs and not referring the matter for remand proceedings for verification. 4.2. Submission 4.2.1. We submit that the learned CIT(A) considered the submissions of the Appellant that the claim for deduction towards site restoration expenses is as per the mandatory accounting standards and Income Computation and Disclosure Standards. Accordingly, the learned CIT(A) has held that provision created for site restoration cost is an ascertained liability. Further, the learned CIT(A) observed that the learned AO had not brought any material on record to show that the estimation of liability as made by the Appellant is incorrect or not genuine and since the liability arose on account of the lease deeds executed by the Appellant and there was no finding by the AO to the contrary, the expenditure shall be allowed. 4.2.2. The learned CIT(A) also referred to the decision of Hon'ble S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under; "Present obligation" is an obligation if, based on the evidence available, its existence at the end of the previous year is considered reasonably certain. The accounting standard 29 defines 'a probable event' outflow to mean an event which is more likely than not to occur. Further, the provisions of the Act/ AS does not define the term 'reasonable certainty'. Accordingly one can place reliance on general parlance and judicial precedents to understand the meaning of reasonable certainty; The Law Lexicon dictionary provides that "reasonable certainty" means "on a fair and reasonable construction may be called certain, without restoring to possible facts which do not appear". "Reasonable certainty" is the being free from "reasonable doubt" The expression "reasonable" means what is just and fair [S. Raghbir Singh v. Sandhawalia v. CIT [1958] 34 ITR 719 (Punjab)] . The Honourable Supreme Court held that "if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. Wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was to be discharged at a future date. It was an accrued liability and estimated expenditure which would be incurred on discharging the same could be deducted from the profits and gains of the business. The difficulty in the estimation thereof did not convert the accrued liability into a conditional one. Profits or gains had to be understood in a commercial sense. 4.2.11. In the case of Rotork Controls India (P.) Ltd. v. CIT4 the assessee-company was engaged in selling certain products. At the time of sale, the company provided a standard warranty that in the event of certain part becoming defective within prescribed period, the company would rectify or replace the defective parts free of charge. This warranty was given under certain conditions stipulated in the warranty clause. The Assessing Officer disallowed the provision created for warranty on the ground that the liability was merely a contingent liability and hence not allowable as deduction u/s 37 of the Act. When the matter finally came up before the Hon'ble Supreme Court, it entitled the assessee to deduction on the "accrual" concept by holding that a provision is recognized when : "(a) an enterprise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der the Companies Act and Accounting standard prescribed thereunder, ICDS as well as judicial precedents under the Act are satisfied/ complied in the present case and accordingly, the provision for Site Restoration expenses is allowable as deduction. The Appellant wishes to submit that provision created in respect of site restoration cost meets all the recognition criteria as demonstrated below: Particulars Condition as per AS . Condition as per ICDS Accordingly, the liability to restore the site arises when the Appellant takes land on lease and erects the towers. It is reasonably certain that an outflow of resource would be required to settle the obligation; The Appellant would be required to incur expenses for restoring the sites. Further, estimation of expenses are made having regard to the average material and labour cost required for such work. It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation Without prejudice to the above, the subsequent expenses incurred for restoration of sites clearly demonstrate incurring of expenses by the Appellant. A reliable estimate can be made of the amount of obligation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prevented by sufficient cause from producing before the [Assessing Officer] any evidence which is relevant to any ground of appeal ; or (d) where. the [Assessing Officer] has made the order appealed against without giving sufficient opportunity to the appellant to adduce evidence relevant to any ground of appeal. (2) No evidence shall be admitted under sub-rule (1) unless the [Deputy Commissioner (Appeals)] [or, as the case may be, the Commissioner (Appeals)] records in writing the reasons for its admission. (1) The [Deputy Commissioner (Appeals)] [or, as the case may be, the Commissioner (Appeals)] shall not take into account any evidence produced under sub-rule (1) unless the [Assessing Officer] has been allowed a reasonable opportunity- (a) to examine the evidence or document or to cross-examine the witness produced by the appellant, or (b)to produce any evidence or document or any witness in rebuttal of the additional evidence produced by the appellant." (2) Nothing contained in this rule shall affect the power of the [Deputy Commissioner (Appeals)] [or, as the case may be, the Commissioner (Appeals)] to direct the production of any document, or the examinatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and, in such exceptional circumstances the requirement of sub-rule (3) of rule 46A may be dispensed with." 4.2.22. Given the above ruling of the Hon'ble Jurisdictional ITAT, we submit that where the additional evidence is clinching and provides clarity and does not require report of the AO, there would arise no necessity in forwarding the same to the AO. 4.2.23. Accordingly, the above decision would squarely apply to the facts of the present case as the Appellant had only furnished the lease agreements to the learned CIT(A) to draw his attention to the clause which specifies that the Appellant is under the obligation to restore the leased land to its original condition upon vacating the land. 4.2.24. Notwithstanding the above, the Appellant wishes to submit that the learned CIT(A), primarily allowed the ground in favor of the Appellant by referring to the legal arguments that the expenditure was allowable pursuant to the Accounting Standard and ICDS requirements to be complied with and by placing reliance on the decision of Bharat Earth Movers Ltd and M/s Calcutta Co. Ltd (supra). The learned CIT(A) did not refer to any clause from the agreement furnished as additi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng] Officer to make further inquiry and report the result of the same to the 81[***] 82[Commissioner (Appeals)]. Similarly, Rule 46A of Income Tax Rules provides as under: 46A. (1) The appellant shall not be entitled to produce before the [Deputy Commissioner (Appeals)] [or, as the case may be, the Commissioner (Appeals)], any evidence, whether oral or documentary, other than the evidence produced by him during the course of proceedings before the [Assessing Officer], except in the following circumstances, namely :- (a) where the [Assessing Officer] has refused to admit evidence which ought to have been admitted ; or (b) where the appellant was prevented by sufficient cause from producing the evidence which he was called upon to produce by the [Assessing Officer] ; or (c) where the appellant was prevented by sufficient cause from producing before the [Assessing Officer] any evidence which is relevant to any ground of appeal ; or (d) where the [Assessing Officer] has made the order appealed against without giving sufficient opportunity to the appellant to adduce evidence relevant to any ground of appeal. (2) No evidence shall be admitted under sub-rule (1) unless th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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