TaxTMI 
TaxTMI 
2012 (5) TMI 436
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.... was made as books of account were rejected and net income was brought to tax. 3. Before the CIT(A), the assessee contested the rejection of books of account and filed voluminous details which were sent on remand to the A.O.. After considering the submissions, the remand report and counter submissions, the CIT(A) accepted the assessee's contention that books of account cannot be rejected. 4. The Revenue is aggrieved in both the years on the issue of estimation of income by rejecting the books of account. In both the appeals for assessment years 2005-06 and 2006-07, the Revenue is contesting the issue of rejection of book results by the A.O. and deleting the estimation so made by the CIT(A). The Revenue raised ground nos.1 and 2 accordingly in both the assessment years. The other grounds raised by the Revenue are on the issues on which the CIT(A) gave relief as the estimation was not upheld by the CIT(A). The assessee is contesting partial confirmation of the disallowances in ITA No. 4492/Mum/2009 for A.Y. 2005-06. The issues are dealt with as under:- Revenue's ground No.1 and 2 (A.Ys. 2005-06 and 2006-07): "1. On the facts and in the circumstances of the c....
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.... the closing year. iv) The reconciliation of the gross receipts shown in the trading A/c. with reference to the TDS certificates was not carried out by the appellant. v) Out of 29 parties to whom the notices u/s. 133(6) were issued, 15 parties did not respond to the notices issued to them. vi) The appellant has not produced the stock register and stock details in spite of repeated request." The said report was provided to the assessee who furnished detailed explanations including the copies of the bills, vouchers and ledger copies, which were extracted by the CIT(A) in para 3.3.3 of his order. Afterwards, the CIT(A) considered the detailed submissions of the A.R. and objections raised in the remand report and gave the following finding (some of the paras are extracted for brevity): Losses from the projects: "3.4.1. In the remand report, the main objection of the Assessing Officer was that the loss shown by the appellant was not genuine since the said loss was determined based on the excess claim of expenditure and that the nature of projects undertaken by the appellant cannot reflect loss in the business. The Assessing Off....
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....ounter effect of the increase or decrease in the overheads and hence cannot be taken as a base for determining the reasonableness and the correctness of the profits shown by the appellant from various projects. 3.5.1........ 3.5.2. Even on the ground of justification of losses, I have gone through the reasons given by the ld. AR in their written submissions justifying the loss suffered by them in the projects. It is seen that the losses are substantially due to the fact that there was a vast mismatch between the Price Adjustment actually received and actual additional costs incurred on account of rise in material prices in comparison with the base estimates/prices since the price adjustment mechanism provided in the contracts is based on variation in Wholesale Price Index and not on the actual price variation experienced by the appellant. 3.5.3........ 3.5.4. It is, therefore, held that the losses incurred by the appellant in their projects cannot be considered a valid reason for rejection of the books of accounts and resultant estimation of income. THE INCREASE IN THE COST OF MATERIALS, LABOUR ETC. 3.6. As seen from the remand r....
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....nd that the Assessing Officer has not considered the factual aspects correctly. I do not agree with the Assessing Officer that if in a running project, the RA bills are raised cost plus margin and the balance unfinished work is held as WIP, there cannot be any loss and that if any loss has occurred, it would occur in the closing year. The Assessing Officer did not consider the fact that if the cost of consumption has increased due to additional cost incurred by the appellant on various counts without corresponding increase in the income/revenue, the accounting of the R.A. bills even by the above method would show losses. This I because the cost and the margin as agreed upon with the contractee may not match the actual revenue due to lower revenue/income and higher cost. Moreover, the comparison of Rs.33.74 crores of loss with the turnover of Rs.59 crores to justify the valuation of WIP is also not correct since the loss of Rs.33.74 crores also includes the overhead expenses including idle manpower, cost of plants and machineries, hired construction equipments etc. which have contributed to the loss from the project. Without identifying any falsity in the claim of the overheads expe....
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....appellant and the confirmation from 10 parties were also filed before the Assessing Officer. It was submitted that page no. 1320 to 1533 of the paperbook which were submitted before the Assessing Officer contains the confirmation of account s received from 10 parties as stated to have not been received by the assessing officer. 3.13..... 3.14 I have perused the said confirmations filed by the appellant before the Assessing Officer. I find that though the confirmation letters for 5 of the parties were not received or returned unserved, it cannot be said that the appellant had not reflected the true and correct income from the business carried out. It is undisputed fact that confirmations from most of the parties were obtained by the Assessing Officer. Although the confirmations from 5 of the parties have not been received, the Assessing Officer has not brought anything on record to prove the incorrectness of the amounts shown in the name of those parties who have not responded. The Assessing Officer could have issued summons u/s.131 of the IT Act to them calling for their personal attendance or caused inquiries with the bank etc In any case, I have perused the ledger ac....
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....ion Pvt. Ltd. 296 ITR 45 (Gau.) and K.S. Bhatia (269 ITR 577) (P and H) and other decisions as extracted in para 3.19, the learned CIT(A) rejected Assessing Officer's action in rejecting the books of account and deleted the estimation of income by giving the following finding: - "3.22 In the result, I am of the opinion that the books results shown by the appellant is incorrectly rejected by the Assessing Officer and that without bringing on record any evidence to prove that the appellant had not shown the profits from the business correctly. The Assessing Officer has raised the issue of excess expenditure claimed. However, no evidence has been placed on record to prove that the said expenditure claimed was snot genuine or that the appellant has deliberately inflated the expenditure without actually incurring the same. In view of the above discussion, it is held that the income of the appellant cannot be estimated at all, without prejudice to the fact that an estimate @ 5% of the turnover is highly excessive and that the profit shown by the appellant should be accepted as correct subject to the various issues raised in the other grounds of appeal. The addition made by the ....
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....osses and submitted that merely because there are losses, the books of account cannot be rejected. He further submitted that the complete details of the parties, who have not responded, were furnished to the A.O. and no defects were pointed out. He also referred to the detailed paper book filed before the A.O. and CIT(A) to submit that the assessee has maintained stock registers and these details were furnished. He referred to the details extracted by the CIT(A) in para 3.3.3 running from page 4 to 16 of his order to submit that all the details were furnished to the A.O. in the remand proceedings to justify the genuineness of transactions of the assessee's accounts. He referred to the various details filed in the paper book to submit that the CIT(A) has examined each of these issues and came to the conclusion that there is no necessity to reject the books of account as complete details were furnished. He also submitted that the A.O. accepted the book results in assessment years 2007-08 and 2008-09 after completion of scrutiny assessment, copies of which were placed on record. He also distinguished the case law relied on by the D.R. to submitted that these will not apply to the fact....
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.... As the assessee has furnished complete details in both the assessment years before the CIT(A) and these details were sent to the A.O. on remand, we do not find any reason to differ from the findings of the CIT(A). The learned D.R. vehemently argued that the five defects pointed out by the A.O. were not examined by the CIT(A) and, therefore, there is need for rejection of the books of account. We do not see any reason to differ from the order of the CIT(A) as he has considered all the issues. As extracted above, the CIT(A) considered the issue headwise i.e. (a) losses suffered by the assessee in projects, (b) increase in cost of raw materials, (c) losses in running projects and escalation clause and (d) reconciliation of gross receipts with TDS, (e) accounts of non-responded parties, and (f) production of stock register. After considering the detailed order of the CIT(A), we agree with his findings. For these reasons, the Revenue's grounds in both the years are rejected. 8. The learned D.R. relied on the judgment of Hon'ble Allahabad High Court in the case of Awadesh Pratap Singh Abdul Rehman and Bros. vs. CIT 210 ITR 406 where the issue was rejection of books of account.....
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....ted. The assessee also justified why it has suffered losses by giving detailed reasons including the escalation clause, cost of increase in material and difficulty in implementing the road projects in Naxal-hit areas as a new venture. The facts of the above said case relied on by the D.R. do not apply to the facts of the assessee's case. The next case relied on by the D.R. is with reference to National Plastics Industries vs. ITO 309 ITR 191 (Bom). The issue in the above case is with reference to the finding of the A.O. that in the absence of stock register as also quantitative details of stock of finished goods, it was not possible to verify the correctness of stock shown by the assessee. The A.O. also found that there were instances of various leakages of revenue in the books of account and method of accounting applied was not proper. The Tribunal upheld the finding of the A.O. rejecting the book results and partly confirmed the addition on account of gross profit. The Hon'ble Bombay High Court, in appeal, concluded as under: - "AO being to verify the correctness of stock shown by the assessee as no stock register or quantitative details of the stock of finish....
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.... 10. In ITA No. 4679/Mum/2009 for A.Y. 2005-06, Revenue has raised the following grounds:- "3. On the facts and in the circumstances of the case, the CIT(A) erred in deleting the disallowance of Rs.1,64,87,000/- on account of bad debts. 4. On the facts and in the circumstances of the case, the CIT(A) erred in deleting the disallowances of the alleged claim of royalty payment of Rs.5,25,389/- without appreciating that the assessee does snot own any quarry." 5. On the facts and in the circumstances of the case, the CIT(A) erred in law, deleting the disallowance of Rs.14,28,652/- without appreciating the fact that the AO has made the disallowance not u/s.40A(3) but u/s.37(1) of the I.T. Act. 6. On the facts and in the circumstances of the case, the CIT(A) erred in restricting the disallowance out of Infotech expenses to 5% as against 20% disallowed by the Assessing Officer. 7. On the facts and in the circumstances of the case, the CIT(A) erred in restricting the disallowance on account of traveling expenses to 5% as against 10% disallowed by the Assessing Officer. 8. On the facts and in the circumstances of the case, the CIT(....
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.... of Kanoria Securities and Financial Services Ltd. 15 SOT 191 (Mum) which has considered the decision of Hon'ble Madras High Court in the case of South India Surgical Co. Ltd. (supra) and also the recent decision of Hon'ble Bombay High Court in the case of CIT vs. Star Chemicals (Bombay) P. Ltd. 220 CTR 319 (Bom). The CIT(A) allowed the amount by giving a finding as under:- "7.3. I have gone through the submissions of the appellant and the observations of the Assessing Officer in the assessment order. I find that as per the amended provisions of section 36(1)(vii) of the IT Act, the appellant is only required to write off the amounts in the books of accounts in order to claim the bad debts. The conditions prescribed u/s. 36(2) shows that the amounts so written off should have been taken in to account for the purpose of determining the income of the appellant. I find that the issue in the present case is squarely covered by the decision in the case of Kanoria Securities and Financial Services Ltd. - 15 SOT 1 9 1 (Mum.) which has duly considered the Madras High Court decision relied upon by the Assessing Officer and the decision of Bombay High Court in the case of CIT vs. S....
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....ng findings:- "8.2. I have gone through the submissions made by the appellant. I find that the provisions of Rule 6DD(b) states that the payment made to Government is not hit by the provisions of section 40A(3) and hence no disallowance can be made solely on this basis. I find that the appellant's case is covered by the exception provided in Rule 6DD and hence the disallowance made by the Assessing Officer is not warranted. Moreover, I also agree with the ld. AR that the said royalty is required to be paid only because the appellant did not own any quarry and that if the quarry is owned by the appellant, the question of payment of royalty would not arise. In any case, this aspect has no relevance to the disallowance of expenditure made in cash. In the light of the above discussion, the ground of appeal is allowed." 13. Since the amount was paid to the Government, there is no need to differ from the findings of the CIT(A). Accordingly Revenue's ground is rejected. 14. Ground No. 5 of Revenue is against deletion of disallowance of Rs.14,28,652/- by the CIT(A) on account of payment in cash made for staff salary, wages, etc. The said disallowance was made ....
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....expenditure on the reason that assessee has not furnished the vouchers. Before the CIT(A) it was contended that the A.O. has not given proper opportunity of being heard and was never confronted with the fact that he desired to verify the vouchers and addresses of parties. Assessee furnished the detailed submission including copy of the vouchers which are extracted by the CIT(A) in para 11.2. It was the submission that the A.O. disallowed Rs.1,39,34,137/- on account of Infotech expenses which are nothing but payment made for maintenance of telephone and internet lines to connect the Head office and different sites spread all-over India. Not only that the gross amount was also considered again for disallowing 20% of the expenditure which included the expenditure for Infotech expenses, which is nothing but double addition. It was contended that no disallowance can be made as assessee had maintained complete particulars including the vouchers. 15.1 The CIT(A) considered the issue and he was of the opinion that there was double disallowance of entire expenditure on Infotech(100%) as well as 20% disallowance of gross amount. He, however, examined the entire expenditure of misce....
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....venue's ground is rejected and assessee's ground is partly allowed. 16. Ground No. 7 pertains to traveling expenses of Rs.813.61 lakhs, out of which A.O. made a disallowance of 10% on the ground that the expenses are not fully verifiable. Before the CIT(A) it has submitted the details of monthly breakup of traveling expenses, traveling expenses of all sites for the period 01.08.2004 to 31.08.2004 and traveling expenditure of Site No. B2759, AA0I 1 and AA020 for the period 01.08.2004 to 31.08.2004 and head wise details of traveling expenses for the period 01.04.2004 to 31.03.2005 duly supported by bills/vouchers. The CIT(A) restricted the disallowance by giving the following finding:- "12.2 I have verified the details filed by the appellant before me and before the Assessing Officer during the remand proceedings. I find that the traveling expenses arc duly supported by various evidences. However, the possibility of the unverifiable expenses in such a huge quantum of expenditure cannot be ruled out. I have already held in the foregoing para that the nature of expense does not show that any ingenuine expense would have been claimed by the appellant more particularly, when....
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....by the Assessing Officer on the ground that assessee has offered the escalation claims under dispute amounting to Rs.15.22 crores and that since the balance Rs.4.32 crores out of the aggregate claim of Rs.19.54 crores was also identical, the said amount should also be held liable to tax in the year under consideration. Before the CIT(A) assessee has submitted that the matter related to escalation claim which was disputed in nature as narrated by the company as well as the statutory auditor. The escalation claim till the end of 31.3.2005 was Rs.1522 lakhs and the same was accounted for by assessee. The observation of the auditor is reproduced below: "4. The company has while computing the estimated loss for completion of a contract, included in its aggregate expected contractual revenue, an amount of Rs.1,954 lakhs relating to escalation claims which are currently being disputed by the customer. of this amount, Rs.1,522 lakhs has been recognised as revenue upto March 31, 2005. However, pending the ultimate outcome in respect of the dispute relating to this escalation claim, we are unable to comment on the adjustments, if any, that may be necessary to turnover, debtors, pro....
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....refore, it was rightly excluded by the assessee while accepting the income to the extent of Rs.15.22 crores. Unless the contractee accepts the escalation claim, no income can be stated to have accrued to the party as these are contractual receipts and not statutory receipts. In view of this, there is no reason to differ from the view taken by the CIT(A). We, therefore, confirm the order of the CIT(A) and reject the ground of the Revenue. 19. Ground No.10 pertains to the claim of temporary site installation expenses of Rs.1,06,72,800/- deleted by the CIT(A). The said expense was disallowed by the Assessing Officer on the ground that assessee has not submitted the required details, nature, quantum, genuineness and correctness of the said expenses and also that the said site expenses are for the sites which last for 5 to 10 years and hence the same are not allowable as deduction during the year. Before the CIT(A) the learned A.R. submitted that although assessee has submitted many details, complete details may not have been submitted during the assessment proceedings. Full details of Temporary Site Installation expenses have been filed during the remand proceedings vide subm....
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....d along with the name, mailing addresses, and transactions with them. The said information were duly verified by the Assessing Officer in the remand proceedings. It was therefore argued by the A.R. that the said balances are verified and that no discrepancy is noted by the Assessing Officer. The CIT(A) deleted the addition by giving a finding as under:- "18.3. I have gone through the submissions of the appellant, and the findings in the remand report. I find that though the details and information were not satisfactorily given to the Assessing Officer in the assessment proceedings, the said details were later submitted by the appellant during the remand proceedings (page No. 574 to 579, 671A to 704 and 758 to 779 of the paper Book dated 12th August, 2008). The Assessing Officer has also stated in his report that the sundry creditors above 50 lakhs could not he confirmed by the appellant. However, no specific defect or evidence is brought on record by the Assessing Officer to prove that the said creditors and the payments made to them are not genuine. I find that merely because assessee had made excess payment to the creditors in due course of business, it would not be a s....