TaxTMI 
TaxTMI 
2024 (12) TMI 898
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....as "the Act"). 2. Although these appeals pertain to different assessment years, the primary issues are identical except for the assessment years and quantum. Therefore, all these appeals were heard together. For the sake of convenience, we proceed to dispose of all these appeals of the Assessee and the Revenue by a consolidated order. Facts of the case: 3. The assessee is a limited company engaged in the business of civil construction focused on infrastructure development. The assessee filed its return of income for the respective assessment years. Some of the returns were also revised. A search proceedings u/s. 132 of the Act was conducted on the assessee on 17-11-2011 at the registered premises and proceedings u/s. 153A of the Act were initiated. The summary of return of income filed and assessment completed are tabulated below: A.Y. Date of Filing Original Return of Income Date of Filing Revised Return of Income Section under which AO passed the order Date of Order of AO Date of Order of CIT(A) 2007-08 31/10/2007 10-01-2008, 04-06-2008, 19-03-2009 143(3) 21/12/2009 05/10/2011 2008-09 29/09/2008 20-03-2009, 09-04-2009 143(3), 144 r.w.s. 153A(1)(b) 27-12-2....
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.... the estimation of inflated subcontractor expenses, questioning the genuineness of these transactions due to lack of confirmations. The CIT(A) provided partial relief, restricting additions only to amounts where confirmations from subcontractors were unavailable. Arbitration Award The AO treated an arbitration award as income. The CIT(A) deleted this addition, holding that it was not revenue in nature and thus not taxable. Bad Debts Written Off The AO disallowed the bad debt write-off, arguing that the conditions under Section 36(1)(vii) were not met. The CIT(A) allowed the write-off, finding that the debt had indeed become irrecoverable. Bogus Purchases The AO disallowed certain purchases, considering them bogus transactions without supporting documentation. The CIT(A), however, allowed the purchases as genuine after reviewing evidence submitted by the assessee. Gift, Boni, and Chandla Expenses The AO disallowed these expenses as non-business in nature. The CIT(A) partially allowed the expenses as promotional in nature but confirmed a portion as non-business. U/S 40(a)(i) for Non-deduction of TDS The AO disallowed expenses under Section 40(a)(i) for non-compliance w....
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....16 33,34,815 Assessee 2.1 2011-12 ITA 1746/Ahd/2016 18,34,735 Assessee 3.1 Penalty for Leave Encashment 2007-08 ITA 2603/Ahd/2013 25,59,312 Assessee 1 2008-09 ITA 2604/Ahd/2013 28,51,368 Assessee 1 Disallowance under Section 14A 2008-09 ITA 2036/Ahd/2011 2,07,727 Assessee 1 2011-12 ITA 248/Ahd/2016 82,86,127 Revenue 4 Disallowance of Gift/Boni/Chandla Expenses 2007-08 ITA 2815/Ahd/2011 3,00,000 Assessee 1 Addition u/s 40(a)(ia) for Import of Materials 2010-11 ITA 1747/Ahd/2016 1,26,97,906 Assessee 2.1 6. The assessee also raised following additional ground of appeal in case of A.Y. 2009-10 and A.Y. 2010-11 (ITA No. 1746 and 1747/Ahd/2016):- Appellant craves leave to raise this additional ground of appeal before the Hon'ble ITAT. This is a legal ground and therefore as per the decision of Hon'ble Supreme Court in the case of National Thermal Power (229 ITR 383) & in case of Sinhgad Technical Education Society (397 TR 344) can be raised before the Hon'ble ITAT. 1. Both the lower authorities erred in law and on facts in framing assessment under section 143(3) r.w.s. 153A ignoring fact that there was no incriminating material a....
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....or mislead investigators. The purchases from vendors who are not verifiable are bogus purchases and therefore the AO has made an addition on the basis of comparable gross profits. 9.1. In the rejoinder, the AR stated that not a single party, from the number of suppliers, came forward and stated that they have issued bogus bills which indicate that the AO has assumed that these parties have issued bogus bills. The AR reiterated that there is no mention of any such list of vendors who issued bogus bills in the material founds during the course of search. The DR agreed to the fact that such list as mentioned by the AO in his order was not founds during the course of search and there is no mention of any incriminating material or statement in the orders of AO. 9.2. The DR pointed out that the assessee has filed revised return hence the date of filing revised return should be a decisive date to determine whether the particular year is abated or unabated. The DR also argued that intimation u/s 143(1) is not an assessment order therefor there was no assessment and hence the respective years are abated. The AR, on the other hand, stated that the time limit specified u/s 143(2) of the Act....
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....ses of completed or "unabated" assessments, additions under section 153A must be founded on incriminating evidence discovered during the search. The Hon'ble Apex Court ruled that section 153A of the Act proceedings allow reassessment of completed assessments only when new material indicating undisclosed income is unearthed in a search. In the absence of such material, the completed assessments remain valid and cannot be disturbed solely based on routine information previously disclosed by the assessee. This precedent is directly applicable, as the DR in this case failed to demonstrate any incriminating material found during the search that would justify reassessment. The DR's argument that non-responsive vendors constitute incriminating material is speculative, as no specific evidence of bogus transactions was cited. The findings in the case of Abhisar Buildwell (supra), thus, reinforce the AR's position that completed assessments should remain intact when no new incriminating material is discovered. 10.3. In the case of Vijaykumar D. Agarwal (supra), the Co-ordinate Bench dealt with the scope of section 153A if the Act assessments where no incriminating material was discovered in....
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....d or unabated assessments under section 153A of the Act cannot be reopened solely based on routine or previously disclosed information. 10.6. Accordingly, we find that the section 153A of the Act assessment for A.Y. 2009-10 and A.Y. 2010-11, where no incriminating material was found, is invalid. The assessments for these unabated years are quashed, and the additional ground raised by the assessee is allowed. 11. The Revenue has also raised legal grounds relating to section 153A of the Act in IT(SS)A No.245/Ahd/2016, which are consolidated as below - 11.1. Whether the CIT(A) erred in law and on facts in restricting the assessment under Section 153A of the Act to incriminating material found during the search, despite the provision requiring assessment of the total income without restriction and the presence of incriminating material from search and post-search investigations, which revealed that the vendors and sub-contractors were non-genuine, forming the basis of the assessment. 11.2. Upon persusal of the CIT(A)'s order, we note that the CIT(A) allowed the appeal on the basis that no assessment proceedings were pending on the date of the search, thereby resulting in non-abatem....
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....at the assessee's role is primarily contractual and does not meet the requirements of a developer under Section 80IA of the Act. They refer to the Explanation to Section 80IA of the Act, which explicitly excludes entities engaged solely in works contracts from claiming the deduction. For each relevant assessment year, the Revenue has challenged the CIT(A)'s decision to allow the Section 80IA of the Act deduction, claiming that CIT(A) failed to recognize the contractual nature of the assessee's work and incorrectly interpreted the law in allowing the deduction. 12.3. The assessee contends that it meets the necessary developer criteria under Section 80IA of the Act, as its projects involve infrastructure development and are not limited to mere contractual work. In cases where CIT(A) partially upheld the deduction, the assessee argues that CIT(A) erred in not allowing the deduction on the entire income of eligible undertakings. The assessee maintains that the deduction should be calculated based on the total income assessed after accounting for any additions or disallowances. The assessee emphasizes compliance with Section 80IA of the Act provisions, such as maintaining separate ....
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....sessee executed specific, well-defined civil construction activities according to the project plans and specifications created by MPSH. Moreover, MPSH supervised the work, suggesting that the assessee had no role in planning or designing the project. The AO interpreted this as further evidence that the assessee was merely a contractor rather than a developer responsible for the entire infrastructure project. * The AO referenced a contractual clause in the agreement (Volume-II, Section VI - Technical Specifications), which required the assessee to seek clarification on specifications from MPSH engineers before proceeding with any work. According to the AO, this clause confirmed that the assessee's role is purely executory, with limited autonomy, thus reinforcing the classification of the assessee as a contractor rather than a developer. * The AO contended that the assessee failed to prove involvement in the project's design, planning, or financing. The AO emphasized that these responsibilities are essential characteristics of a developer. Instead, the assessee merely executed tasks based on instructions from MPSH. * The AO highlighted that the income derived by the assesse....
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....urana Engineering Ltd. (ITA No. 2308/Ahd/2011 dated 19-04-2024). The DR also placed reliance on the decision of the co-ordinate bench in case of M/s NEC NCC Maytas - JV Vs. DCIT, Circle 6(1), Hyderabad (ITA No. 430 to 432/Hyd/2018 dated 12- 05-2021) 13.2. The Authorised Representative (AR) of the assessee, submitted the list of projects executed by the assessee during the assessment years under consideration. The same is reproduced hereunder for the sake of clarity: - Sr. No. Assessment Year Projects 1 2007-08 - Madhya Pradesh Road Sector - Storm Water Drainage System 2 2008-09 - Madhya Pradesh Road Sector - Storm Water Drainage System 3 2009-10 - M.P. State Highway- Badnawar to Thandla - Pimpri Chhindwad Municipal Corporation Flyover 4 2010-11 - Supplying, Laying, Jointing, Testing and Commissioning of Distribution Network in Bhopal - RCC Storm Water Drainage System - Flyover at Bhosari - Madleshwar-Karwad Maharashtra Border Road 5 2011-12 - Pipeline Project of Bhopal Municipal Corporation - Pimpri Chhindwad Municipal Corporation Flyover - IMC-3 Indore Municipal Corporation - Water Pipeline Project - Flyover at Panvel Bus Depot 6 2012-13 - IMC-2 I....
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....ture facility qualifies as a "developer" and is therefore eligible for the deduction. The CIT(A) asserted that the term "developer" should be broadly interpreted and includes entities that may not operate or maintain the project but have taken on significant responsibilities in developing it. * The CIT(A) outlined the legislative history of Section 80IA, discussing how successive Finance Acts (notably in 2000 and 2001) expanded the deduction to benefit enterprises only engaged in developing, not necessarily operating or maintaining, infrastructure projects. The 2000 amendment, in particular, introduced flexibility by making the terms "developing," "operating," and "maintaining" mutually exclusive, allowing entities to qualify for the deduction even if they only perform one of these activities. * The CIT(A) acknowledged the assessee's contention that the projects undertaken by the assessee, such as road rehabilitation and stormwater drainage systems, etc. required the assessee to deploy significant resources, undertake planning, mobilize equipment, and ensure quality control. The CIT(A) concluded that this showed the assessee's active involvement in infrastructure development, g....
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....amining the submissions of both the Departmental Representative (DR) and the Authorized Representative (AR), as well as noting the judicial precedents presented, including Katira Construction Ltd. v. ACIT, M.S. Khurana Engineering Ltd. v. ACIT, and Montecarlo Ltd. v. Principal CIT, we are tasked with determining whether the assessee qualifies for the deduction under Section 80IA(4) of the Act. The primary point of contention is whether the assessee acted as a "developer" within the meaning of the section, thus eligible for the deduction, or merely as a "contractor," which would disqualify it from this benefit. Both the Departmental Representative (DR) and the Authorized Representative (AR) presented judicial precedents, including Katira Construction Ltd. v. ACIT (supra), M.S. Khurana Engineering Ltd. v. ACIT, and the Hon'ble Gujarat High Court's decision in the case of Montecarlo Ltd. v. Principal CIT (supra). A thorough analysis of these cases is necessary to assess the responsibilities, risks, and controls borne by the assessee, especially in light of the jurisdictional precedent set by Montecarlo Ltd., which aligns closely with the principles established in Katira Construction L....
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.... Employment and Management of Skilled Workforce (Clause 13.1(c) in Katira): Both Katira and Montecarlo Ltd. emphasize that developers must recruit and manage skilled personnel. In this case, the assessee engaged project managers, engineers, and other skilled professionals, taking responsibility for all manpower requirements. This mirrors the approach upheld in Montecarlo Ltd., where the Co-ordinate Bench observed that managing personnel indicated significant managerial control- characteristics of a developer. 14.6. Technical Know-How and Expertise (Clause 13.1(d) in Katira): The Katira and Montecarlo Ltd. decisions both require that developers possess technical expertise, deploying skills essential to infrastructure development. The assessee's experience in similar projects and its use of technical knowledge in the MPSH project aligns well with the standards set in these decisions, showing that it actively contributed specialized expertise to the project. 14.7. Financial Responsibility and Risk Bearing (Clause 13.1(e) in Katira): As outlined in both Katira and Montecarlo Ltd., developers assume entrepreneurial and financial risks. The assessee here arranged financing independentl....
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....ecarlo Ltd. mandate safety and environmental compliance, which the assessee fulfilled through extensive safety protocols and environmental protections, aligning with the standards expected of a developer. 15. The DR relied on two key decisions: M.S. Khurana Engineering Ltd. v. ACIT and NEC NCC Maytas JV. However, these decisions are distinguishable from the present case, and neither restricts the applicability of Section 80IA(4) of the Act in light of the jurisdictional precedent established in Montecarlo Ltd. v. Principal CIT, which adopts a broader interpretation in favour of infrastructure development. In M.S. Khurana Engineering, the Co-ordinate Bench restored the matter to the CIT(A) due to incomplete consideration of facts by the CIT(A), who had not fully analyzed the roles and risks undertaken by the assessee. The CIT(A) had classified the assessee as a contractor without examining its managerial responsibilities, financial risks, or control over project execution, leading the Co-ordinate Bench to require a re-evaluation. Unlike Khurana Engineering, the CIT(A) in the present case conducted a comprehensive review of the assessee's obligations, financial risks, and control, c....
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.... facilities benefiting the public, confirming its status as a developer. The CIT(A) highlighted that the assessee bore significant financial and operational risks, including providing performance guarantees, facing potential liquidated damages for delays, and being liable for retention money. These elements evidenced the assessee's entrepreneurial risk, a hallmark of developer activities under Section 80IA. The CIT(A) referenced the legislative history and amendments to Section 80IA of the Act, particularly the Finance Act of 2000, which progressively liberalized the section to encourage private sector participation in infrastructure. Notably, this amendment clarified that "developing," "operating and maintaining," or any combination of these functions qualifies for deductions. The CIT(A) found that this liberalization intended to include entities like the assessee, whose activities contribute directly to public infrastructure creation. Emphasizing the entrepreneurial and operational risks borne by the assessee, the CIT(A) concluded that the assessee's responsibilities aligned more closely with those of a developer rather than a contractor. The assessee's involvement in project out....
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....7 778.33 511.67 Inventory Turnover (Times) 17.23 8.88 16.19 19.58 10.56 Receivables Turnover (Times) 2.99 3.3 3.03 2.65 2.11 Cash and Bank Balance 4,156.87 1,626.06 1,174.60 1,551.94 2,717.37 16.3. The financial parameters above reflect the overall business risk associated with the business of the assessee. Given the characteristics of a developer, the business risk profile illustrates the following critical points:- Financial and Leverage Risk: * The company's debt-to-equity ratio, peaking at 0.96 in 2009, demonstrates substantial leverage, indicative of a developer taking on significant financial obligations to fund long-term projects. This high leverage level aligns with the financial risk a developer assumes, as developers typically engage in substantial upfront investment and long project cycles. The subsequent decrease in leverage suggests strategic risk management, reinforcing the financial commitment typical of developers. Operational Risk: * Low profit margins, fluctuating between 2.83% and 3.25%, highlight the cost-intensive nature of infrastructure projects and the narrow margins within which developers operate. The company's low profitabi....
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....ating unplanned liabilities that can reduce overall project profitability and erode return on investment. Joint venture guarantees add an additional layer of risk by tying the developer's financial health to that of its partners; any default or underperformance by a joint venture partner could disrupt project financing and jeopardize the project's timeline, impacting expected returns. 16.6. Based on the financial parameters and business risk elements, it is apparent that the assessee operates as a developer rather than merely a contractor. The risk profile-characterized by substantial leverage, operational responsibility, liquidity constraints, and market dependency- supports the classification of the assessee as a developer under Section 80IA of the Act. By assuming extensive financial, operational, and market risks, the assessee aligns with the statutory definition of a developer, undertaking comprehensive responsibilities in infrastructure creation. 16.7. The financial statements serve as indicators of the business's nature, scope, and the substantive responsibilities borne by the assessee, which collectively affirm that the assessee's activities qualify under the broa....
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....ances are made by the AO. The AR also contended that this interpretation aligns with the legislative intent of providing deductions based on the "total income" as assessed, rather than on the income computed prior to adjustments. 16.13. Under Section 80IA(1) of the Act, the deduction is allowed in respect of "profits and gains derived from the eligible business." Section 80IA(5) of the Act further stipulates that for computing the deduction, the eligible business is treated as the "only source of income," and income attributable to the eligible undertaking should be calculated in isolation. However, judicial interpretations have clarified that the term "total income" for deduction purposes is often based on the final assessed income, reflecting the eligible business's actual income post-assessment adjustments. 16.14. Upon examining the provisions and judicial precedents, we agree with the assessee's interpretation that Section 80IA of the Act deductions should apply to the total income of the eligible unit as assessed by the AO, including any additions or disallowances made during the assessment process. The legislative intent of Section 80IA of the Act is to incentivize infrastr....
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....ed these transactions through documentary evidence and that the CIT(A) was correct in deleting the additions. In some cases, the assessee also argued that any addition, if warranted, should be limited only to the gross profit element. Disallowance of purchases was primarily noted in AY 2013- 14 and other subsequent years. The Revenue contended that the purchases were not substantiated by sufficient documentation and treated some purchases as bogus. The AO disallowed the expenses related to these purchases, questioning their authenticity and alleging that the transactions lacked the necessary supporting evidence. The assessee argued that all purchases were genuine, backed by proper documentation, and were necessary for its business operations. The assessee also provided 'account payee cheques' and other records as evidence of these transactions to counter the Revenue's claims. 18.2. During the course of assessment proceedings u/s. 153A of the Act, the AO detailed the suspected method of expense inflation through fictitious payments to subcontractors. The AO suspected this inflation occurred via "bogus expenses," especially through subcontractors, many of whom could not be verif....
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....ractors and Rs. 1.78 crore in bogus purchases), the assessee's books did not meet the statutory standards for completeness and accuracy. The AO invoked section 145(3) of the Act on the grounds that the expenses listed could not be verified as genuine and concluded that the books were unreliable, and it would be inappropriate to compute income based on these accounts. Given the rejection of the assessee's accounts, the AO applied a comparative approach using Gross Profit (GP) margins from similar companies. Six companies in the same field reported average GP margins of 22.89%, against which the AO estimated a revised GP of 22.89% for the assessee. This estimation approach resulted in an additional GP for each assessment year enlisted initially. 18.4. The CIT(A), for the A.Y. 2008-09, noted that the AO failed to distinguish between vendors that were partially compliant and those that were not. For example, while the AO acknowledged that 319 out of 411 vendors (Annexure-D) filed returns, he still labelled this entire group as suspicious. The CIT(A) identified that the AO considered some compliance from vendors as adequate evidence but dismissed other comparable evidence without justi....
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....he AO's rejection appeared unreasonable. 18.5. For the Assessment Years 2009-10 onwards, the CIT(A) focused on the inconsistencies observed in the AO's treatment of evidence furnished by the assessee. The CIT(A) observed that the AO accepted confirmations and refund status for 33 vendors as genuine, along with refund evidence for 286 vendors from the NSDL website. Despite this, for a subset of vendors, the AO rejected similar types of evidence without providing adequate reasoning or distinguishing factors, creating inconsistency in the assessment process. The CIT(A) observed that the AO's approach was arbitrary as similar evidence was accepted for some vendors but rejected for others, often without providing clear justification. The CIT(A) found that if evidence was accepted for certain vendors, identical evidence for other vendors should logically be treated similarly, unless the AO had specific reasons for differentiation. After reviewing the evidence provided, the CIT(A) upheld the gross profit addition for certain vendors due to the lack of satisfactory evidence supporting the transactions with these parties. The addition was confirmed for the following parties where the asses....
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....ted to AO during the assessment proceedings. 20.1. Regarding the additions confirmed by the CIT(A) on account of vendors enlisted above, the AR submitted that the assessee has already submitted detailed submission relating to these parties. In case of Saroj Kumar Sinha, it was submitted that this person with PAN - BPKPS4715K has never worked for the assessee company and in case of 'Subramani' the details like copy of work order, bills, ledger copies, copy of PAN and address were submitted during the course of assessment proceedings on 29-11-2013, 20-12- 2013 and 20-01-2014. Regarding Khandelwal Traders, the AR explained that the notice was sent to party with same name from Ratlam and details have been submitted in case of Khandelwal Traders from Delhi from whom steel was purchased by the assessee. The AR further clarified that the assessee submitted details of status of refund issued in case of other parties along with other details. The AR took us through the various lists and confirmed that the names of these parties are appearing in the list of details already provided. 21. Upon a comprehensive perusal of submissions, evidence, and legal precedents, we addressed each ground ra....
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.... the corresponding amounts to the Gross Profit (GP). The CIT(A) upheld this addition on the grounds that the evidence provided by the assessee was inadequate to substantiate the authenticity of transactions with these parties. We have considered the arguments presented by both the Revenue and the Assessee in relation to these transactions. The assessee submitted various documents to support the genuineness of transactions with these 7 vendors, which included bills and invoices for the services provided by the vendors, payment proofs, such as bank statements evidencing payments made via 'account payee cheques', Tax Deducted at Source (TDS) records to establish that tax was deducted on payments made to these vendors, PAN details, addresses. We observe that these documents were crucial evidence supporting the assessee's claim that these were genuine business expenses. The AO accepted similar types of evidence (such as invoices, TDS, and confirmations) for certain vendors but rejected identical documentation for the 7 vendors in question without providing a clear or cogent reason for this distinction. 21.4. We note that selective acceptance and rejection of evidence for vendors withou....
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....dequate. In the case of AMG Infrastructure Pvt. Ltd., for instance, notices were returned unserved, and thus the AO doubted the existence of the entity itself. The AO pointed out that in some cases, such as AMG Infrastructure Pvt. Ltd., the assessee failed to provide a verified address or reliable contact details. This added to the AO's suspicion, as the existence of these entities could not be independently verified through address confirmation. Although the payments were made through 'account payee cheques', the AO did not consider this alone as sufficient evidence of the genuineness of transactions. The AO argued that even with such payments, there was no proof that these amounts were not returned in cash to the assessee, implying that the cheques could be a façade for non-genuine transactions. The AO noted that while the assessee submitted TDS certificates, Form 16, and other related documents, these alone were not conclusive proof of genuine transactions. The AO maintained that TDS deductions and their claims for refunds did not independently substantiate the genuineness of the underlying work or transactions claimed to have been done by these vendors. The AO disallowed....
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....notices, was insufficient grounds to question the genuineness of large-scale transactions. The CIT(A) took into account the scale of the assessee's business operations, which involved over Rs. 2200 crore in turnover and approximately 2000 contractors across various sites. The CIT(A) acknowledged that managing a large number of vendors might lead to logistical issues, and failing to get responses from some does not automatically imply that the transactions were non-genuine. Given the evidence and supporting case laws, the CIT(A) concluded that the AO's disallowance was not justified. The CIT(A) allowed the assessee's ground of appeal and directed that the disallowance of Rs. 2,25,05,524/- be deleted. 24. We have carefully considered the rival contentions, perused the orders of the AO and the CIT(A), as well as the submissions made by the DR and the AR who relied on the orders of respective lower authorities. Upon an independent evaluation of the records and rival contentions, we are inclined to concur with the findings of the CIT(A) as the AO's disallowance is primarily grounded in assumptions, without any definitive evidence proving that the payments were routed back to the assess....
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....g table: - Common Issue /Disallowance Assessment Year ITA No. Amount (Rs.) Type of Appeal Ground No. Provision for Defect Liability (Warranty Expenses) 2007-08 ITA 3269/Ahd/2011 3,56,48,498 Revenue Ground 1 2008-09 ITA 2353/Ahd/2014 6,12,08,221 Revenue Ground 2 2009-10 ITA 246/Ahd/2016 7,99,10,015 Revenue Ground 4 The Revenue in all above appeals argued that the Provision for Defect Liability represented a contingent liability that had not crystallized during the year. The Revenue contends that the provision does not meet the criteria of an allowable expense since it is uncertain and could or could not arise, thus treating it as contingent and disallowable. The assessee defended the Provision for Defect Liability as an ascertained liability, arguing that it relates to obligations for warranty expenses associated with infrastructure projects. The assessee posited that these costs are reasonably estimated based on prior experience and contractual obligations, therefore qualifying as a legitimate deduction. The assessee also argued that the provision is necessary for maintaining the quality and durability of infrastructure, an integral part of its business ....
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....ility coverage through retention money or bank guarantees, the AO deemed the provision redundant. Citing the Hon'ble Supreme Court's guidelines in Rotork India (P) Ltd. [2009] 314 ITR 62 (SC) and other judicial precedents, the AO determined that the provision lacks the required certainty and reliable estimation, disallowing the amount and initiating penalty proceedings for inaccurate reporting. 26.2. The AR placed reliance of the order of the CIT(A), who relied on the order of his predecessor on identical facts in A.Y. 2006-07. The CIT(A) deleted the addition made by the AO regarding the provision for defect liability expenses, citing consistent treatment in prior years (A.Y. 2005-06 and A.Y. 2006-07), where similar additions had been deleted. In A.Y. 2006-07, the CIT(A) observed that the assessee's contracts included a defect liability clause, requiring the assessee to rectify post-construction defects. The assessee created provisions for these liabilities at 0.75% of turnover, which were utilized as claims arose, and the CIT(A) deemed this method reasonable and based on past experience. The CIT(A) referenced judicial precedents, including Bharat Earth Movers v. CIT (245 ITR 428,....
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.... tax motivation further justified the assessee's approach. 29.1. In light of the Hon'ble High Court's judgements, the scientific basis and established practice adopted by the assessee, and the accepted commercial principles underpinning the defect liability provision, we hold that the Revenue's appeal lacks substantive grounds. Therefore, the appeals on this ground are dismissed, affirming the position that the provision for defect liability is a legitimate deduction under the Act. Grounds relating to disallowance of Leave Encashment 30. The grounds of assessee are tabulated below:- Common Issue/Disallowance A.Y. ITA No. Amount (Rs.) Type of Appeal Ground No. Disallowance of Leave Encashment 2007-08 ITA 2815/Ahd/2011 77,12,196 Assessee 2 2008-09 ITA 2036/Ahd/2011 81,81,115 Assessee 3 2009- 10 ITA 1746/Ahd/2016 33,34,815 Assessee 2.1 2011-12 ITA 1748/Ahd/2016 18,34,735 Assessee 3.1 30.1. Under these grounds, the assessee contested the disallowance of the leave encashment provision made by the AO, arguing that it is a legitimate and ascertained liability associated with employee benefits, accrued based on employee service and thus should be allowabl....
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....ntly stayed the Calcutta High Court's judgment in Exide Industries, requiring that Section 43B(f) of the Act be treated as still effective, although taxpayers could raise a claim for deduction in their return. This meant that the assessee was required to comply with the actual payment criterion of Section 43B(f) of the Act, pending a final resolution from the Hon'ble Supreme Court. However, the CIT(A) allowed a partial deduction for payments made before the due date for filing the return in case of A.Y. 2008-09, aligning with the statutory exception in Section 43B of the Act. 31.1. During the course of hearing before us, the AR conceded that the issue is decided by the Hon'ble Apex Court against the Assessee in case of Exide Industries Ltd. [425 ITR 1 (SC)]. 32. We have carefully considered the submissions made by the assessee, the findings of the AO, and the appellate order of the CIT(A). In addition, we have examined the relevant judicial pronouncements, including the authoritative decision of the Hon'ble Supreme Court in case of Exide Industries Ltd. [425 ITR 1 (SC)], which directly addresses the applicability of Section 43B(f) of the Act regarding provisions for leave encashm....
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....ceedings, the AO observed that the assessee has earned a variety of exempt income like dividend, exempt income from JV companies and Income from projects earning exempt income u/s 80IA of the Act. The AO interpreted that because these incomes are exempt from tax, the assessee is likely incurring expenses to generate this income. Therefore, the AO questioned the absence of a disallowance under Section 14A of the Act and concluded that the assessee has not demonstrated that no expenses were incurred to earn this exempt income. The AO also observed that the assessee has not provided the necessary nexus between the interest-free funds and exempt income. The AO noted that expenses such as bank charges and guarantee fees could be attributed to the investments made for earning exempt income, thereby justifying a Section 14A of the Act disallowance. The AO detailed the application of Rule 8D of the Rules to compute the disallowance and followed the same. The assessment year wise disallowance is tabulated as follows:- Components A.Y. 2008-09 A.Y. 2011-12 Direct Expenses Attributable to Exempt Income Nil Nil Indirect Interest Expenses (Rule 8D(2)(ii)) Rs. 1,82,152 Rs. 62,73,105 ....
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....bulated as:- Particulars Amount (Rs. in Lakhs) Share Holders' Funds A.Y. 2008-09 A.Y. 2011-12 Share Capital 4339.03 2611.83 Reserves and Surplus 12989.51 34850.41 Total 17328.54 37462.24 Investments 51.15 8690.14 38.1. The AR, considering the availability of sufficient own funds, argued that there should not be any disallowance on account of interest. The DR, on the other hand, relied on the order of AO and stated that the AO has reasoned the disallowance on of interest stating that the assessee's investments likely reduced available liquid funds, creating a potential need for borrowing. 38.2. The AR placed reliance on various judicial precedents including the decision of Hon'ble Jurisdictional High Court in case of PCIT - 2, Vadodara Vs. Shreno Ltd. [2019] 102 taxmann.com 129, where it was held that the application of section 14A of the I.T. Act, 1961 read with Rule 8D of the Income Tax Rules, 1962 is not automatic when the assessee used mixed funds for investment in securities earning tax free income. 39. Upon consideraing the contentions of rival parties and perusal of the material available on record, we find that the primary issue in these a....
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....e of Rs. 82,86,127/-, finding that the investments were driven by business purposes, funded by own surplus, with no proximate connection to earning exempt income. 40. We allow the appeal of the assessee for A.Y. 2008-09 and dismisses the appeal of the Revenue for A.Y. 2011-12. Accordingly, the grounds raised by the assessee in A.Y. 2008-09 and by the Revenue in A.Y. 2011-12 are decided in favour of the assessee. Ground on disallowance Gift/Boni/Chandla Expenses - Assessee's appeal ITA 2815/Ahd/2011 for A.Y. 2007-08 41. During the relevant assessment year, the assessee claimed expenses totaling Rs. 16,32,609/- under the heads gift, boni, and chandla. The AO required the assessee to provide vouchers, receipts, and additional supporting documents to justify the amounts claimed, as well as to identify the parties to whom these expenses were paid. In response, the assessee submitted some account details. However, the AO found that the documentation was incomplete, and no clear evidence was provided showing to whom the payments were made and how these expenses related to business needs. Given the incomplete documentation, the AO viewed the expenses with caution, disallowing 50% of the....
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....smiss the ground raised by the assessee. Ground Related to Addition u/s 40(a)(ia) for Import of Materials of Rs. 1,26,97,906/- for A.Y. 2010-11 in ITA 1747/Ahd/2016 45. During the course of assessment proceedings, the AO observed that the assessee contracted with Bemo Project Engineering LLC for the design, supply, and installation of roofing for an indoor cycling Velodrome at the Indira Gandhi Stadium in New Delhi. As per the terms of the Memorandum of Understanding (MoU), Bemo Project Engineering LLC was solely responsible for the entire scope of work, which included designing, supplying materials, and installation services. The contract was indivisible and could not be split into material and service components. The AO further observed that, according to the Double Taxation Avoidance Agreement (DTAA) between India and UAE, a permanent establishment could be deemed to exist if a construction site or project exceeded nine months. Since Bemo Project Engineering LLC was engaged in India for more than one and a half years, the AO concluded that it had a PE in India. This finding would make the non-resident entity subject to Indian tax laws for this project, necessitating TDS on pay....
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....specifically relating to claims for leave encashment, disallowance under Section 14A of the Act, and disallowance due to TDS default. The AO levied the penalty for furnishing inaccurate particulars on various disallowances details of which along with grounds of appeal are tabulated below:- Details Nature of Disallowance Amount of Disallowance (Rs.) A.Y. 2007-08, ITA No. 2603/Ahd/2013, Penalty Amount Levied: Rs. 25,59,312, Ground No. 1 Disallowance of Gift/Boni/Chandla Expenses 3,00,000 Leave Encashment 72,66,336 Non-deduction and Short Deduction of TDS 37,088 A.Y. 2008-09, ITA No. 2604/Ahd/2013, Penalty Amount Levied: Rs. 28,51,368, Ground No. 1 Disallowance under Section 14A 2,07,727 Leave Encashment 81,81,115 49. In the appellate proceedings for A.Y. 2007-08, the CIT(A) confirmed the penalty levied by the AO. The CIT(A) scrutinised the assessee's accounting practices, particularly the creation of provisions for leave encashment. He observed that the assessee only provided for leave encashment in the year under consideration based on an actuarial valuation, which appears to be done for the first time. CIT(A) found discrepancies in the assessee's accountin....
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.... Products Pvt. Ltd. [230 CTR 320 (SC)], contending that no penalty under Section 271(1)(c) of the Act should apply as no inaccurate particulars were furnished in the return of income. The CIT(A) observed that the Supreme Court decision in Reliance Petro Products was distinguishable as it applied to AY 2001-02, when Rule 8D of the IT Rules, was not yet in force. In the present case (AY 2008-09), Rule 8D of the IT Rules was applicable, and the assessee had made substantial investments that generated exempt income, which warranted allocation of expenses under Section 14A of the Act. 52.2. The assessee claimed a deduction for a provision of leave encashment, citing past actuarial valuation and judgments including Exide Industries Ltd. by the Hon'ble Calcutta High Court [292 ITR 470]. The CIT(A) noted that the Hon'ble Supreme Court had admitted a Special Leave Petition (SLP) against the Exide decision, indicating that its applicability was in question. Additionally, the CIT(A) highlighted that the facts of Exide differed significantly as no proper disclosure was made in the books for leave encashment provisions by the assessee. 53. During the course of hearing before us, the AR assert....
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....vident that the penalties imposed under Section 271(1)(c) of the Act, by the AO and subsequently confirmed by the CIT(A) do not stand on firm legal grounds. The assessee's claims, particularly regarding leave encashment, disallowance under Section 14A of the Act, and TDS defaults, are based on bona fide interpretations of legal provisions, and the reliance on established judicial precedents further strengthens the case. 56.1. The assessee had made full disclosure of the leave encashment provision in its financial statements and as a note in the return of income. The records show that the provision was calculated based on actuarial valuation, indicating a genuine attempt to recognize this liability in the accounts rather than any intent to evade taxes. The assessee's reliance on the Hon'ble Calcutta High Court's decision in CIT vs. Exide Industries Ltd. [292 ITR 470] to support the deductibility of the leave encashment provision was reasonable and in good faith. Although an SLP was admitted against this decision, it remains a binding precedent until the Hon'ble Supreme Court rules otherwise. Therefore, the assessee's claim was based on a plausible interpretation of law, which s....
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.... 57.2. The CIT(A) applied the decision in the case of Sri Gokulam Hotels India Pvt. Ltd., which upheld the penalty under Section 271(1)(c) of the Act despite the Nalwa Sons ruling. However, this decision does not apply here, as the facts and the legal position under MAT in the present case are distinct. The reliance on Sri Gokulam Hotels by the CIT(A) was, therefore, misplaced and does not override the binding Hon'ble Supreme Court decision in the case of Nalwa Sons. 57.3. The AO's basis for the penalty under Section 271(1)(c) of the Act rests on the assumption of inaccurate particulars or concealment. However, the records reflect that the assessee consistently disclosed its claims in the financial statements and made provisions in a transparent manner. The CIT(A) has not demonstrated that the assessee's claims were without merit or intended to mislead. The claims for deductions, though disallowed, do not amount to concealment or inaccuracy under the standards set by the Hon'ble Supreme Court. 58. In light of the above findings and the judicial precedents supporting the assessee's case, it is concluded that the penalty under Section 271(1)(c) of the Act is unjustified in both AY ....