Adhoc disallowance of expenses without finding any specific defects in books of account not justified
M/s Vijay Infrastructure Limited Vs ACIT (ITAT Lucknow)
Brief of the Case
ITAT Lucknow held In the case of M/s Vijay Infrastructure Limited vs. ACIT that on the basis of general observations, without pointing out even a single specific defect in the vouchers or books of accounts, ad hoc disallowance made by Assessing Officer is not justifiable. General observation of the A.O. that the vouchers are self-made cannot be a basis for addition. At best, it can be a starting point for enquiry but if the vouchers were defective, the Assessing Officer should have pointed out the defects and should have asked the assessee for a reasonable explanation, which is missing in current case, hence addition, is not justified.
Facts of the Case
Addition on account of seized material
During the course of search a register inventoried was found from the residence of Shri Abusad Ahmad and seized. The seized documents are a register belonging to the assessee (M/s Vijay Express Way Engineers Pvt. Ltd.) and which has entries of huge amounts received/paid from/to various persons. At some places name of one Shri Vikas Singh is mentioned. At other place entry like “DD received from Aligarh” is mentioned. On page 95 entry of cash payment totaling Rs.74,00,000/- and Rs.6,12,863/- to ‘Jhaji’ is made. On the same page entry of Rs.1,61,043/- against ‘S. S. Singh is mentioned.
According to the assessee these seized paper pages 95 and 97 are Annexure B-10 is a working paper made by the cashier of Sultanpur to reconcile the cash received by him and payments made. The amount of Rs.74,00,000/- was received over a period of time from head office at Lucknow which is being sourced out of cash available in the books of the assessee but it is seen that the assessee has not been able to demonstrate from his books of account as from where the cash has been withdrawn i.e. from which bank A/cs and to whom draft was given i.e. which parties and for which work site, the assessee has not establish any link of these papers. These documents found during search are not dumb paper these are speaking papers and reflect all the details about the transactions of the assessee, these documents does bear the names like ‘Sri Abusaad Ji’( major shareholder and director and promoter of the assessee company), Jha Ji and Vikas Singh both are working for the assessee.
Hence, after considering the above stated facts when the assessee gives an evasive reply to the Assessing Officer, the Assessing Officer has no choice but to make an estimation of the income which has to be reasonable and on the basis of material available on record. The total receipts through demand drafts/cheques, as mentioned on pages 95 & 97, is at Rs. 1,16,50,863/- (Rs. 80,12,863/-, being total of page 95 + Rs. 36,38,000/- being total of page 97), which is treated as undisclosed/unaccounted income of the assessee.
Disallowance of expenses on adhoc basis
This issue is regarding disallowance made by the Assessing Officer on ad hoc basis to the extent of 1% of total expenses debited by the assessee in profit & loss account. This disallowance was made by the Assessing Officer in all the seven assessment years i.e.assessment year 2005-06 to 2011-12 and in all these years, this disallowance has been deleted by CIT (A) and Revenue has raised this issue in all its seven appeals for these assessment years.
Claim of deduction u/s 80IA (4)
This claim was not allowed by the Assessing Officer for two reasons. The first reason is that the assessee’s case is of a civil contractor and therefore, as per explanation below 80IA(13) inserted by
Finance (No. 2) Act, 2009 with retrospective effect from 01/04/2000, the deduction u/s 80IA(4) is not allowable in case of a contractor and the assessee is a contractor and therefore, this deduction claimed by the assessee is not allowable to the assessee. The second aspect of this matter is non allowability of claim of the assessee u/s 80IA(4) because this claim is made by the assessee for the first time in the return filed by the assessee u/s 153A and no such claim was made in any return filed by the assessee u/s 139(1).
Contention of the Assessee
The ld. counsel for the assessee submitted that the authorities below were not justified in disallowing the bad debts and addition thereon. He submitted that the CIT (A) ought to have deleted the disallowance. The ld counsel for the assessee relied on the judgement of Hon’ble Apex Court rendered in the case of TRF Limited vs. CIT reported at (2010) 323 ITR 397 (SC).
Contention of the Revenue
The ld counsel of the revenue supported the order of the AO and submitted that the AO has given a clear finding that the assessee in written submission stated that the firm has claimed bad debt as Bil Metal Industries Ltd. has not paid due amount during preceding years as a result of which the assessee has written off the due amount. He submitted that the AO observed that on verification of ledger account of Bil Metal Industries for the Financial Year 2006-07 relevant to AY 2007-08 from the books of account of the assessee it was found that there was opening balance of Rs.1,63,819/-, during the year as against the due balance of Rs.1,63,819/-, Rs.63,788/- was paid by Bil Metal on 22/04/2006. During the year goods worth Rs.1,02,592/- was sold by the assessee and further payment of Rs.40,000/- was received by the assessee on 24/03/2007. He submitted that the AO observed that the assessee continued its business transactions with Bil Metal Industries Ltd.
He further submitted that the AR on behalf of the assessee agreed to the proposed addition of bad debt of Rs.1,14,336/-. The ld.Sr.DR submitted that under the facts of the present case, the judgement of Hon’ble Apex Court rendered in the case of TRF Limited vs. CIT reported at (2010) 323 ITR 397 (SC) is not applicable.
Held by CIT (A)
Addition on account of seized material
CIT (A) rejected the appeal of the assessee. It was held that The reply furnished by the assessee is not satisfactory inasmuch as it lacks evidence and tries to disown the facts of the impugned document. The nature and detail of entries show that the purpose of transactions mentioned on these pages is to buy demand drafts/cheques against cash payments. From the entries like ‘S.S. Singh’ (major share holder, director and promoter of the assessee company), ‘Sri Abusaad Ji ‘ (share holder, brother of Shri Naushad Ahmad, another major share holder, director and promoter of the assessee company), ‘Jha Ji’ and ‘Vikas Singh’, both working for the assessee, it is established that these persons, who are involved in the activities of the assessee company, helped the undisclosed income of the assessee company routed though demand drafts/cheques mentioned in the said document. The transactions mentioned on this page are related to the assessee company as the document was found from a premises belonging to the brother of Shri Naushad Ahmad, a promoter and chief managing director of the company and the impugned page itself mentions name of Shri S.S. Singh, another promoter and director of the company. The relationship of the document with (the assessee company is further established from the fact that name of the company itself is mentioned on the cover page of the impugned register. In view of overall facts of the case it is established that the assessee failed to offer satisfactory explanation on this issue. Hence, the value of transaction effected through this document is treated as assessee’s undisclosed income.
Disallowance of expenses on adhoc basis
CIT (A) allowed the appeal of the assessee. It was held that without giving any specific findings or rejection of books of account, no adhoc disallowance of expenses cannot be made.
Addition made on basis of valuation report of DVO
CIT (A) allowed the appeal of the assessee and delete the addition made by AO on the basis of report of DVO.
Disallowance u/s 14A
CIT (A) allowed the appeal of the assessee. It was held that there is no dividend income earned by the assessee, accordingly no disallowance u/s 14 A is maintainable.
Held by ITAT
Addition on account of seized material
We find that this issue has been decided by learned CIT (A) on the basis that from the entries in the seized materials, it is clear that these are entries relating to receipts of Demand Draft against cash payments. It is also noted by learned CIT (A) that on page No. 95, first entry dated 7/3/2005 reveals that demand draft of Rs.7,85,000/- was arranged from Sultanpur through one ‘Jhaji ‘ for which ‘Jhaji’ was paid Rs.7,87,639/- which included commission of Rs.2639/- (probably charged by the bank). It is further noted by learned CIT(A) that similar facts emerged from other entries also and vide questionnaire dated 08/02/2013 and subsequent queries, the assessee was required to explain nature and detail of such entries and how the same are recorded in the books of accounts. In reply, it was submitted by the assessee that, this is working paper made by the cashier of Sultanpur to reconcile the cash received by him and payments made.
Thereafter, it is observed by CIT (A) that the reply furnished by the assessee is not satisfactory inasmuch as it lacks evidence and tries to disown the facts of the impugned document. This categorical finding of CIT(A) could not be controverted by Learned A. R. of the assessee before us and therefore, we do not find any reason to interfere in the order of CIT(A) on this issue. When the assessee could not bring evidence to establish that the cash transactions shown in seized material is duly recorded in books of the assessee, it has to be accepted that unaccounted cash was channelized in books by showing bank draft receipts. Hence, there is no infirmity in the order of CIT (A) on this issue. Accordingly, this issue is decided against the assessee. Ground No. 1 for assessment year 2005-06 is rejected.
Disallowance of expenses on adhoc basis
It is observed by the Assessing Officer that the assessee has debited various expenses under construction expenses and administrative expenses. He has further noted that in explanation to genuineness of these expenses, books of accounts and some vouchers were produced but the vouchers produced are neither full nor verifiable inasmuch as complete identity of the payees is not mentioned therein. He has also noted that many vouchers are self-made debit vouchers without verifiable detail of payees. On the basis of these observations, he made disallowance on ad hoc basis to the extent of 1% of total expenses of Rs.5945.48 lac and in this manner, he made disallowance of Rs.59,45,488/-.
When the assessee carried the matter in appeal before CIT (A), he deleted the disallowance on the basis that the Assessing Officer did not give any finding that the expenditure incurred and claimed by the assessee is either capital in nature or personal in nature or wholly and exclusively not incurred for the purpose of business and this disallowance is made on the basis that the vouchers produced are neither full nor verifiable inasmuch as complete identity of the payees is not mentioned therein.
He has also noted that as per the A.O. many vouchers are self-made debit vouchers without verifiable detail of payees. Thereafter, he has also observed that the Assessing Officer could not point out any defect in any specific voucher nor did Assessing Officer invoke provisions of section 145(2) and the A.O. did not reject the books of accounts. Thereafter, he has held that in absence of specific defect, no ad hoc disallowance can be made.
He has also held that the general observation of the A.O. that the vouchers are self-made cannot be a basis for addition. At best, it can be a starting point for enquiry but if the vouchers were defective, the Assessing Officer should have pointed out the defects and should have asked the assessee for a reasonable explanation.
After considering the facts of the present case on this issue and the orders of the authorities below, we find no infirmity in the order of CIT (A) because on the basis of general observations, without pointing out even a single specific defect in the vouchers or books of accounts, ad hoc disallowance made by Assessing Officer is not justifiable and the same was rightly deleted by CIT (A). Hence, on this issue, we decline to interfere in the order of learned CIT (A). Accordingly, issue no. 2 is decided in favour of the assessee.
Claim of deduction u/s 80IA (4)
We find that a categorical finding has been given by CIT (A) that the assessee company is not a mere work contractor but has developed the road from existing 2 lane to 4 lane and while doing so, the assessee company has also made substantial investment by itself and also executed the development works and carried out civil-works on its own by using its own material and expertise and no material consumed in the roads and bridges were provided by the NHAI and UP PWD. This is also noted by CIT (A) that the maintenance of the existing facility during the period of development also was of the assessee company and so also was the risk during this period to maintain the infrastructure and after the completion of development of road and its handing over to the Government, the risk period of the assessee company was of 12 months for maintenance of the road.
As per explanation below sub section (4) of section 80IA, infrastructure facility includes a road including toll road, bridge or a rail system. This is not in dispute that the assessee has widened the road and therefore, activity of the assessee falls within the definition of infrastructure. The CIT (A) has also referred to several judicial pronouncements as per which it was held that there is no requirement that the assessee should have been the owner of the infrastructure facility. The facts in the case of Koya & Co. 32 CCH 43 (Hyderabad) are identical. In this case, it was held that the provisions of section 80IA shall not apply to a person who executes a works contract entered into with the undertaking or enterprise referred to in the section but where a person makes the investment and himself executes the development work, he carries out the civil construction work, he will be eligible for the tax benefit under section 80IA
It is clear from this case that if the contracts involves design, development, operating & maintenance, financial involvement and defect correction and liability period, then such contracts cannot be called as simple works contract to deny the deduction under s. 80IA and profit from the contracts which involves design, development, operating & maintenance, financial involvement, and defect correction and liability period is to be accepted as development and cannot be said to be contract simplicitor to apply the explanation. The findings of CIT (A) could not be controverted by learned DR of the revenue and therefore, this tribunal order rendered in the case of Koya & Co. is squarely applicable because the facts are similar. Considering this factual and legal position, we find no infirmity that the order of CIT (A) on this aspect that in the facts of the present case, it cannot be said that the assessee company was mere a contractor and not a developer. Therefore, on issue No. 3, we find no infirmity in the order of CIT (A). This issue is decided in favour of the assessee.
Further, we find that it is noted by CIT (A) that in assessment year 2007-08, the time limit to revise the return has expired on 31/03/2009 i.e. much before the date of search i.e. 14/09/2010 and similarly in assessment year 2008-09 also, the time limit to revise the return has expired on 31/03/2010 i.e. much before the date of search i.e. 14/09/2010 and therefore, the claim made by the assessee for the first time in these two years in the return of income filed u/s 153A cannot be considered as claim made in a return filed u/s 139(1) as required by section 80AC. Moreover as per the judgment of Hon’ble Apex Court rendered in the case of Sun Engg. As reported in 198 ITR 297 (SC), it was held that reassessment proceedings are for the benefit of revenue and not for the benefit of the assessee and therefore, no new claim can be made by the assessee in reassessment proceedings. On the same analogy, search and subsequent assessment proceedings u/s 153A are also for the benefit of revenue and not for the benefit of the assessee and therefore, no new claim can be made by the assessee in proceedings u/s 153A.
But the decision of CIT (A) is on this basis that in assessment year 2009-10, the time available for filing revised return of income to revise the return filed u/s 139 (1) had not expired on the date of search on 14.09.2010 as it was available up to 31/03/2011 and for assessment year 2010-11, the due date for filing return u/s 139 (1) was up to 31.10.2010 and for revising the return up to 31/03/2012 and the search has taken place before this i.e. on 14/09/2010. He has also noted that in both these years i.e. assessment year 2009-10 and 2010-11, the original return of income was filed by the assessee without claiming deduction u/s 80IA but within the time available u/s 139(1) because in assessment year 2009-10, the original return of income was filed by the assessee on 25/09/2009 whereas time available for filing the return was 31/10/2009 and in assessment year 2010-11, time available for revising the return was up to 31/03/2012 and the return u/s 133A was filed on 31/03/2012 i.e. within the time available for filing the revised return of income and till the date of search, due date of filing the return has not expired. Considering these facts that in these two years i.e. A.Y. 2007 – 08 & 08 – 09, where the time available for filing the revised return has expired before the date of search, CIT (A) has held that the claim made for deduction u/s 80IA(4) in the return filed by the assessee u/s 153A is not acceptable but in the later two years i.e. assessment year 2009-10 and 2010-11, since the time was available for filing the revised return/return of income u/s 139 (5)/ 139 (1) and the assessee could not file the revised return of income within the available time because of search, the return furnished in response to notice issued by the Assessing Officer u/s 153A should be considered as a return filed u/s 139(1) and therefore, on this issue also, we find no infirmity in the order of CIT(A).
Our decision is on this basis that where time was available for revising the return of income to revise the return originally filed u/s 139 (1) as in A. Y. 2009 – 10 or to file the return u/s 139 (1) as in A. Y. 2010 – 11, the return filed u/s 153A should be considered as a return filed u/s 139 (1) and hence all claim raised in these returns should be decided on merit but where the time available to file revised return has elapsed before search as in A.Y. 2007 – 08 and 2008 – 09, the new claim raised in the return filed u/s 153A is not acceptable.
Deletion of addition made on basis of valuation report of DVO
From the observations of CIT (A), it is seen that as per the judgment of Hon’ble Apex Court rendered in the case of Sargam Cinema v.Commissioner of Income-tax 328 ITR 513, reference by Assessing Officer to the D.V.O. without rejection of books of accounts is not valid. In the present case also, reference was made without rejection of books of accounts and therefore, the same is not valid. On merit also, he has given a finding that the Assessing Officer has not considered this aspect that this property was directly purchased by the assessee and then renovated and photograph of the building before renovation and after renovation was submitted before the Assessing Officer and the said investment was duly disclosed by the assessee in its income tax returns but the DVO report does not say that there is an extra investment over and above the declared amount. His report is only an estimate of the fair market value and not an estimate of investment. He has given a finding that the DVO’s valuation report is based on fair market value and this fair market value is relevant for Wealth Tax purposes but under section 69, the term used is unexplained investment in the property.
Learned D. R. of the Revenue could not point out any defect in this finding of CIT (A) on merit also and considering the totality of facts, we find no infirmity in the order of CIT (A) on this issue also. This issue is decided in favour of the assessee.
Disallowance u/s 14A
We find that the disallowance was made by the Assessing Officer u/s 14A as per Rule 8D in assessment year 2009-10 and 2010-11 and the same was deleted by CIT (A) on this basis that since there was no exempt income in these two years, no disallowance u/s 14A can be made. While holding so, CIT (A) has followed the judgment of Hon’ble Allahabad High Court rendered in the case of DCIT vs. Shivam Motors (P) Ltd. in I.T.A. No.17/Lkw/2012. We have taken a view in various judgments after considering this judgment of Hon’ble Allahabad High Court on this basis that since the judgment of Hon’ble Apex Court rendered in the case of Rajendra Prasad Moody 115 ITR 519 was not cited before Hon’ble Allahabad High Court in Shivam Motors and therefore, we have to follow the judgment of Hon’ble Apex Court in the case of Rajendra Prasad Moody. Asper the judgment of Hon’ble Apex Court ), it was held in the context of allowability of expenses u/s 57(iii) that actual earning of dividend income is not necessary for the purpose of allowing interest expenditure incurred for borrowing for making investment in shares. We have held that on the same analogy, for the purpose of making disallowance u/s 14A also, actual earning of dividend income is not necessary and if it is seen that the expenditure was incurred for earning dividend income, disallowance has to be made u/s 14At. Accordingly, on this issue, we reverse the order of CIT (A) and restore that of the Assessing Officer. This issue is decided against the assessee.
Accordingly all appeal disposed of.
