2016 (2) TMI 565 - AT - Income Tax

Tribunal upholds Income Tax decision on sub-contract expenses and Section 41(1) addition

The Asstt. Commissioner of Income-tax, Company Circle VI (3), Chennai Versus M/s SPL Infrastructure Pvt. Ltd

The tribunal upheld the Commissioner of Income Tax (Appeals)' decisions to restrict the disallowance to Rs. 44,10,821 out of Rs. 4,41,08,210 claimed as ... Disallowance of sub-contract expenses not supported by proper bills - Held that:- The only discrepancy noticed by the Assessing Officer is that the payments are not supported by the bills raised by the parties and only self-made vouchers were maintained by the assessee. In our opinion, considering the nature of work carried on by the assessee, there is no question of not incurring of expenditure by the assessee to carry on the road work contracts and the work is mentioned in the M book maintained by the assessee and counter signed by the sub contractors. However, there is chances of inflating the expenditure for which the CIT(A) has already disallowed 10% of the expenditure claimed by the assessee to the extent of ₹ 4,41,08,210/-. Hence, the contention of the ld. DR that the entire amount of ₹ 4,41,08,210/- is to be disallowed cannot be appreciated as held by the Tribunal in the case of EDAC Engineering Ltd vs ACIT, [2013 (9) TMI 1090 - ITAT CHENNAI] wherein held that if expenditure claimed was not supported by proper evidence and some deficiency persist in evidence, part expenditure is disallowed on estimated basis. Being so, by placing reliance on the above decision of the Tribunal, the CIT(A) is justified in disallowing only 10% of the sub-contract expenses not supported by proper bills.- Decided in favour of assessee in part. Addition made u/s 41(1) as cessation of liability - Held that:- Before coming to the conclusion by the Assessing Officer that the creditors were no more existing, it is incumbent upon the Assessing Officer to make necessary enquiry to bring on record material that the creditors were ceased to exist. He could have made necessary enquiry to this effect. The assessee herein is a limited company and as per the legal position the acknowledgement of the liability in favour of the creditors in its Balance Sheet extends the period of limitation for the purpose of sec. 18 of the Limitation Act. It is the assessee’s claim that the debts are subsisting and it continues to be liable to pay the creditors. Therefore, it is not open to the Assessing Officer to draw the conclusion that the creditors have remitted the liability or that the liability has otherwise ceased without evidence or material when the assessee acknowledges a liability in the Balance Sheet and Explanation 1 is not applicable. Since the creditors are continued to be appearing in the Balance Sheet from year to year and the accounts of the creditors have not been written back, the conclusion of the Assessing Officer that it was ceased to exist is not proper. Accordingly, in our opinion, the CIT(A) is justified in deleting the addition made by the Assessing Officer u/s 41(1) of the Act. This view of our is fortified by the judgment of the Delhi High Court in the case of CIT vs Hotline Electronics Ltd, [2011 (12) TMI 90 - DELHI HIGH COURT ] and CIT vs GP International Ltd, [2009 (12) TMI 33 - PUNJAB AND HARYANA HIGH COURT ]. Accordingly, the deletion made by the CIT(A) is confirmed. - Decided in favour of assessee. Issues Involved:1. Sustaining disallowance of Rs. 44,40,831 out of Rs. 4,41,08,210 made by the Assessing Officer.2. Deletion of addition made under Section 41(1) of the Income Tax Act as cessation of liability.Detailed Analysis:1. Sustaining Disallowance of Rs. 44,40,831 out of Rs. 4,41,08,210:The assessee claimed an expenditure of Rs. 4,41,08,210 under sub-contract expenses. The Assessing Officer (AO) required the assessee to furnish confirmations and details from 15 parties. The assessee provided confirmation letters and bank statements, explaining the nature of work and payments. However, the AO found discrepancies, such as entries in the M. Book without separate bills or invoices and non-appearance of parties in response to summons. Consequently, the AO disallowed expenses debited to 14 parties as non-genuine, amounting to Rs. 4,41,08,210.On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] restricted the disallowance to Rs. 44,10,821, observing that the appellant had furnished confirmations and some parties had provided income tax returns and bank accounts. The CIT(A) noted that the appellant carried out sub-contract work for road laying, which required manpower, and there was no evidence disproving the work execution. However, considering the possibility of inflated expenses, the CIT(A) accepted the appellant's offer to disallow 10% of the total expenditure, which was reasonable given the nature of the business and past acceptance of a 5% net profit ratio by the department.The tribunal upheld the CIT(A)'s decision, noting that the assessee's gross profit and net profit ratios were higher than in previous years. The tribunal found that payments were subject to TDS and made by cheques, and the M. Book was maintained and signed by sub-contractors. The tribunal concluded that while there might be inflated expenses, disallowing 10% was justified, and the entire disallowance of Rs. 4,41,08,210 was not warranted.2. Deletion of Addition Made under Section 41(1) as Cessation of Liability:The AO added Rs. 18,16,728 towards creditors, arguing that claims beyond three years were not valid under the Limitation Act. The CIT(A) observed that there was no cessation of liability as the assessee had not written off these amounts in its books. The CIT(A) held that Explanation 1 to Section 41(1)(4) was not applicable and deleted the addition.The tribunal upheld the CIT(A)'s decision, noting that the AO had not issued notices to creditors to confirm if they had given up their dues. The tribunal emphasized that the AO's presumption of cessation of liability was not supported by material evidence. The tribunal cited legal precedents, including the Delhi High Court's judgment in CIT vs Hotline Electronics Ltd and the Punjab & Haryana High Court's judgment in CIT vs GP International Ltd, to support its conclusion that the liabilities were still subsisting and acknowledged in the balance sheet, thus not ceased to exist.Conclusion:The tribunal dismissed the Revenue's appeal, confirming the CIT(A)'s decisions to restrict the disallowance to Rs. 44,10,821 and delete the addition made under Section 41(1) of the Income Tax Act.