LABH CONSTRUCTION & INDUSTRIES LTD.,,AHMEDABAD vs. THE ACIT, CIRCLE-4,, AHMEDABAD

आदेश/O R D E R

PER AMARJIT SINGH - AM:

(A.Y. 2002-03) (Revenue’s Appeal):-

“1. i) The Ld.CIT(A) has erred in law and on facts in directing the AO to allow the claim of the assessee for bad debts of Rs.1,03,54,617/- without appreciating the fact that the AO rejected the assessee's claim for the prime reason that no evidence was furnished by the assessee to prove that the amount being claimed as bad debts offered as income in earlier year. ii) The Ld. CIT(A) has erred in law and on facts in allowing the assessee’s claim of bad debts of Rs.55,99,506/- accepting the assessee's submission that the amount was offered while filing the revised return when no such claim was made by the assessee in the first appellate stage and the assessee also failed to produce any evidence of filing the revised return.

2. The Ld. CIT(A) has erred in law and on facts in deleting the addition made on account of disallowance of Rs.4,69,735/- being capital expenditure as certified by the auditor, accepting the assessee's submission that the expenditure is revenue in nature.

3. The Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs. 17,81,469/- made in the work-in-progress relatable to administrative expenses incurred by the assessee.

4. The Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs.2,51,60,000/- made in the work-in-progress on account of proportionate interest payable by the assessee on bank loan obtained. & 1745/AHD/2014 & 2010/Ahd/2015 A.Ys. 2002-03 &2003-04 5. On the facts and in the circumstances of the case, the Ld. CIT(A) ought to have upheld the order of the Assessing Officer.

Ground No. 1& 1.1:- Claim of bad debt of Rs. 1,03,54,617:-

We have heard the rival contention on this issue. After perusal of the finding of the Ld. CIT(A) it is noticed that each item of bad debt claimed by the assessee and disallowed by the AO was discussed elaborately in the finding of the Ld. CIT(A). The relevant part of the finding of the CIT(A) is reproduced as under:-

“2.3 Decision: I have carefully considered the facts of the case, the assessment order and the written submission of the appellant. The appellant had claimed certain bad debts in the return of income which have been disallowed by the AO. A disallowance of Rs.2,24,73,405/- has been made which consisted of bad debts in respect of three different items. Each item, for which the bad debt has been claimed and disallowed by the AO, is discussed separately for the sake of convenience and clarity.

1. Bad debts in respect of Shilalekh project: - The AO had made disallowance of Rs. 1,56,64,843/- in respect of Shilalekh Project, as in his opinion the appellant did not furnish any evidence to show that amount was offered as income in earlier years. Further no copies of account to show whether the amount had actually been written off or not and also that the genuineness of write off was also doubted by the AO. It has been claimed by the appellant that it had accounted the income from Shilalekh project in the form of organizing fees and remuneration for the project at the rate of 12% and 8% respectively. But at the time of showing the income it did not verify whether the appellant was entitled to such remuneration as per the terms ofdevelopment agreement. There were differences in computation of work in progress which was accounted by the appellant after considering the income element whereas the Chartered Accountant of the project accounted the work in progress without considering the organizing fees and remuneration. On discovering the difference the issue was raised by the appellant for the first time in A.Y. 96 - 97 and 98 -99. While the appeals were pending, the appellant filed a revised return under section 264 for A.Y.I997-98. The revision petition under section 264 was allowed by CIT and he directed to exclude the income shown hypothetical basis from the return as well as assessed income of the appellant. On that basis the appellant got relief in the years for which the appeal was filed before CIT(A). Subsequently the similar relief was allowed in assessment year 1999 -2000 also. The matter for these years went before honourable ITAT and the appellant succeeded before ITAT for A.Ys. 1996 - 97, 1997 - 98, 1998 - 99 and 1999 -2000. The appellant has explained that the entire income which was offered in those years was not excluded as there was 4 & 1745/AHD/2014 & 2010/Ahd/2015 A.Ys. 2002-03 &2003-04 some difference between the working of the Chartered Accountant and the appellant and certain amount still remained in the books of account of the company as receivable on account of the profit. It is these profits, which have not been written off in earlier years, which are now claimed by the appellant as bad debt during the year under consideration. Theappellant has given a working showing the difference of income shown in the books of accounts and the amount claimed under revision in earlier years and the difference which is still remaining in the books of accounts. For the sake of convenience and clarity the chart given by the appellant is reproduced hereunder. A.Y. 8% 12% Total as 8% Remunerati Total as Difference Organising Remunera per Books Organising on as per perCA Fees as per tion as per Fees as per CA Certificate Books & Books & CA Certificate Assessed Assessed Certificate 1995-96* 1118558 2116473 3235031 1118558 2116473 3235031 0 1996-97 4860083 11131874 15991957 4860083 11131394 15991477 480 1997-98 2841227 16324814 2841227 15790984 533830 19166041 18632211 1998-99 12131101 10174927 22306028 12131101 9114247 21245348 1 060680 1999-00 5603372 5145660 10749032 5603372 3187314 8790686 1958346 2000-01** 2609774 956476 2609774 0 956476 3566250 2609774 Total 29164115 45850223 75014339 29164115 41340411 70504527 4509812 The appellant has also explained that in amount of Rs. 2609774/- for A.Y. 2000 - 01 was also added back by it for the current assessment year with the assumption that the amount was based on CA certificate and would be excluded from the returned income of 2000 - 01 by the AO during the course of assessment proceedings, but the request of the appellant was not accepted and accordingly the same was not allowed. Therefore, this amount is also therefore, written off. The appellant has accordingly given a final table showing the amount of income which pertained to different assessment years which are now been written off by him as bad debt: -

A.Y. Total amount written Amount for which relief has Difference to be allowed off as per Books been availed in as Bad Debts in the year earlierassessments either of actual written off in the through appeal of through books revision order 1995-96 3235031 0 3235301 1996-97 15991957 15991477 480 1997-98 19166041 21245348 1060680 1999-00 10749032 8790686 1958346 2000-01 3566250 0 3566250

Total 75014338 64659722 10354617 & 1745/AHD/2014 & 2010/Ahd/2015 A.Ys. 2002-03 &2003-04 It is seen from the above table that there is a variation between the claim of the appellant which was at Rs. 1,56,64,843/- whereas the total from the above table comes to Rs. 1,03,54,617/-. Therefore, there is a difference of Rs. 53,10,226/-. The appellant has explained that this difference is arising as there were some differences in adoption of various figures. For the sake of clarity the chart given by the appellant is reproduced hereunder:- A.Y. for which income Amount which was Amount which was Amount Short pertains required to be added actually added back in added back in back in STI STI STI 1996-97 15991477 15991477 0 199798 18632211 18632211 0 1998-99 21245348 21245348 0 1999-00 8790686 870686 7920000 2000-01 0 2609774 (2609774) Total 64659722 59349496 5310226 The appellant has explained that the variation was due to adoption of figure of Rs. 26,09,774/- in competition of income which was not required to be considered as no relief was granted by the AO for 2000-01. It is further submitted that for A.Y. 1999- 00 the differenceoccurred due to typographical mistake wherein the amount of Rs.87,90,686/- was taken as against the current amount of Rs.8,70,686/-for A.Y.I999- 2000 was taken. Therefore, the claim of deduction which should be actually allowed comes to Rs. 10354617/-.

After considering the entire gamut of facts, the orders of ITAT for earlier assessment years as well as the other related orders, it is noted that the appellant has already shown the income which is now being written off by it in its profit and loss account in earlier years. Part of the income shown in profit and loss accounts have been reduced by way of revision of returns. The income which has not been reduced in earlier year is still being shown as outstanding and receivable from Shilalekh project. .Since the income is not being realized from that project the appellant wants to write that off in the current year as bad debt.

The law related to write off of bad debt has since been settled by the honourable Supreme Court by the decision in the case of TRF Ltd 323 ITR 327. It has been held by the honourable Supreme Court that after 01/04/1989 it was not necessary for the appellant to establish that the debt, in fact, has become irrecoverable. It was enough if the bad debt is written off as irrecoverable in the accounts of the appellant. Therefore, the appellant has to only establish now that the amount has actually been written off in the books of accounts. It is noted that the amounts have duly been written off in the books of accounts and therefore, respectfully following the judgment of honourable Supreme Court in the case of TRF Ltd the claim of the appellant in respect of bad debts is to be allowed. The facts which are relevant for the present issue are whether the amount which is being written off in the current year was offered by the appellant in the return of income in earlier year, it is still shown as receivable in the books of accounts of the company in the current financial year and the appellant has duly written off the same in the books of accounts. All these conditions are being satisfied and therefore, the claim of bad debt of the appellant to the extent of Rs. 1,03,54,617/- is directed to be allowed in principle. The AO is further directed to verify, from records, once again whether the 6 & 1745/AHD/2014 & 2010/Ahd/2015 A.Ys. 2002-03 &2003-04 amounts that have now been written off were shown by it in the income in earlier year and part of it has been allowed n those years and only the remaining amount is now being written off. The addition made by the AO to this extent is directed to be deleted.”

The Ld. CIT(A) has discussed the various difference of income shown in the books of account and the amount claimed under revision in the earlier years and the difference which was still remaining in the books of account. The Ld. CIT(A) has also placed reliance on the decision of the Hon’ble Supreme Court in the case of TRF Ltd. 323 ITR 327 that the assessee has to only that the amount has actually been returned in the books of account. It is clear from the finding of the Ld. CIT(A) that the amount which was written off in the year under consideration was offered by the assessee in the return income in earlier year and same was steel shown as receivable in the books of account of the assessee. In addition to the above the Ld. CIT(A) has directed the AO to verify from record once again whether the amount that have not been written off was shown by the assessee as income in the earlier year and part of it has been allowed in those year and only the remaining amount was now being written off. In view of the above direction of the Ld. CIT(A), we do not find any merit in the appeal of the Revenue. Therefore, the same is dismissed.

Ground No. 2:- Addition of Rs. 4,69,735 being capital expenditure:- 5. At the time of assessment the AO has noticed that assessee company has claimed an amount of Rs. 4,69,735/- as Revenue expenditure. On verification of the detail filed AO was of the view that nature of aforesaid expenditure was of capital nature. Therefore, he has disallowed the claim of expenditure treating as capital expenditure and added to the total income of the assessee.

6. Aggrieved assessee has filed appeal before the Ld. CIT(A). Ld. CIT(A) has deleted the disallowance on verification of the supporting material furnish by the assessee which demonstrate that the expenditure was of Revenue nature pertaining to routine repair and maintenance as elaborated at Page No. 27 of the CIT(A) 7 & 1745/AHD/2014 & 2010/Ahd/2015 A.Ys. 2002-03 &2003-04 order. In the light of the above facts we do not find any substance in the appeal of the Revenue. The same is dismissed.

Ground No. 3:- Addition of Rs. 17,81,469 as work-in-progress:-

We have heard the rival contention on this issue. It is noticed that aforesaid administrative expenditure was of the following nature:-

Nature of expenses Amount Payment to staff 3719791 Payment to Directors 981509 Travelling & Conveyance 741525 Electricity Expenses 258440 Postage, Telegram and Telephone 426438 Printing & Stationery 255509 Membership Fees and Subscription 3389 Legal & Professional Expenses 1665633 Rent, Rates & Taxes 1774907 Repairs & Maintenance 1810599 Insurance 2740 Other Expenses 219283 Donation 16700 Total 11876462 & 1745/AHD/2014 & 2010/Ahd/2015 A.Ys. 2002-03 &2003-04 After perusal of the nature of aforesaid expenditure it is observed that this expenditure were not connected to the construction project undertaken by the assessee. The Ld. CIT(A) has elaborated in his finding that these expenses were mainly related to the Head Office which cannot be allocated to any specific construction activity. In the light of the above facts and findings of CIT(A) we observed that these expenses were in the mandatory nature and have nothing to do with the construction project undertaken by the assessee company. Therefore, we do not find any infirmity in the decision of Ld. CIT(A). Accordingly, this appeal of the Revenue is dismissed.

Ground No. 4:- Addition of Rs. 2,52,60,000 in the work-in-progress on account of interest payable:-

We have heard the rival contention on this issue and perused the material on record. It is undisputed fact that assessee has not provided the interest expenses in the Profit and Loss Account in respect of several term loan availed by the assessee. The assessee has explained to the AO that such interest expenses would be claimed on actual payment basis. The AO was of the view that why not debiting the interest on term loan to the Profit and Loss Account the assessee company has reduced the value of work-in-progress. Therefore, on the basis of detail of interest given by the assessee company AO has made addition of 32.21% of the interest not provided in the books of account and made addition of Rs. 251.6 lakh out of the total interest of Rs. 788.11 lakh toward the work-in-progress. During the appellate proceeding before Ld. CIT(A) the assessee has submitted that the interest liability which was not provided for secured loan on having to do with the Sun City Project and this project was exclusively finance by Rajkot Nagrik Sahakari Bank Ltd. and partly by Gruh Finance. Therefore, the interest which was not provided cannot be allocated to the value of work-in-progress on the basis of hypothetical working. It is noticed that Ld. CIT(A) has stated that assessee has borrowed money from Rajkot Nagrik Sahakari Bank Ltd. and the interest payment on debt loan has already been accounted for in the work-in-progress related to Sun City Project. With the assistance of Ld. Representative we have gone through the material on record and it is observed that in respect of loan obtained from Rajkot Nagrik Sahakari Bank Ltd. and Gruh Finance Ltd. toward Sun City Project as mentioned at Page No. 81 of the order of the CIT(A) the detail of interest amount accounted in the books of account has not been specified in the report of the auditor. Therefore, we are of the view, that it will be appropriated to restore this issue to the file of AO for deciding the same a Denovo after verification of the detail of loan and amount of interest accounted by the assessee for the work-in-progress. Therefore, appeal of Revenue is allowed for statistical purpose. & 1745/AHD/2014 & 2010/Ahd/2015 A.Ys. 2002-03 &2003-04 11. In the result, appeal of the Revenue is partly allowed for statistical purpose.

(A.Y. 2002-03)(Assessee’s Appeal):-

1. The Ld. CIT(A) erred on facts and in law in confirming disallowance of Rs. 1,29,115/- (Rs. 89,075/- + 40,040/-) by invoking provisions of section 40A(3) of the Act. 2. The Ld. CIT(A) erred on facts and in law in not directing to the Assessing Officer to make adjustment in the opening work in progress of next assessment year for sustained addition of Rs. 54,21,853/-. 3. The Ld. CIT(A) erred on facts and in law in confirming disallowance of Rs. 1,20,000/- by invoking section 14A of the Act.

Ground No. 1:- Disallowance of Rs. 1,29,115 u/s. 40A(3) of the Act:-

We have heard the rival contention on this issue. The assessee has stated that these payments were made in cash as the assessee was passing through a liquidity crisis and there was pressure of banking institutions and it is most of bank accounts were attached. After perusal of the material on record we consider that the assessee has failed to demonstrate the circumstances according to Rule 6DD of the IT Rule. The circumstances have under which it has been covered for making the payment in cash. After considering the provision of Rule 6DD and submission 11 & 1745/AHD/2014 & 2010/Ahd/2015 A.Ys. 2002-03 &2003-04 of the assessee we consider that assessee’s case is not covered under the specific provision of Rule 6DD. Therefore, we do not find any error in the decision of CIT(A). Accordingly, this appeal of the assessee is dismissed.

Ground No. 2:- Adjustment of opening work-in-progress:-

We have heard the rival contention on this issue. The AOP had made addition of Rs. 54,21,853/- in the work-in-progress as the assessee had not included the proportionate cases of loan and interest in the work-in-progress value at the end of the year. The assessee had debited expenditure pertaining to construction of road to the project but had not considered the same for computation of work-in-progress of flats. Out of the aforesaid addition the Ld. CIT(A) has deleted the addition to the extent of Rs. 29,36,700/- on the ground that said addition was made in assessment year 2001-02 on the same ground. It is also noticed that the assessee has submitted before the AO that it has no objection in making adjustment in the work-in-progress provided appropriate adjustment in the opening stock of work-in-progress of subsequent year should be also allowed to be made. After taking into consideration the Ld. CIT(A) has held that since the 12 & 1745/AHD/2014 & 2010/Ahd/2015 A.Ys. 2002-03 &2003-04 assessee himself has agreed for such adjustment provided the credit should be given in the subsequent year the action of the AO by including the proportionate cost of interest and construction of road was justified. In the light of the facts and circumstances, we do not find any merit in the appeal of the assessee. Therefore, the same is dismissed.

Ground No. 3:- Disallowance of Rs. 1,20,000 u/s. 14A:-

We have heard the rival contention. During the course of appellate proceeding before us the Ld. CIT(A) has contended that assessee has earned dividend income which is less than Rs. 1,20,000/-. IN view of the above and after considering the various decision of Co-ordinate Bench of ITAT Ahmedabad we restore this issue to the file of the AO to restrict the disallowance u/s. 14A to the extent of dividend income earned by the assessee. Therefore, this ground of appeal is allowed for statistical purpose.

Ground No. 4:- Disallowance of personal expenses of Rs. 3,75,373:-

ITA Nos. 1926 & 1745/AHD/2014 & 2010/Ahd/2015 A.Ys. 2002-03 &2003-04 (A.Y.2003-04) (Assessee’s Appeal):-

1. The Ld. CIT(A) erred n facts and in law in confirming addition made u/s. 68 amounting to Rs. 8,40,164/- accounted in the name of Smt. Sushila Kak. 2. The Ld. CIT(A) erred on facts and in law in confirming addition of Rs. 39,47,052/- in the value of work in progress by including administrative expenses incurred by the appellant. 3. The Ld. CIT(A) erred on facts and in law in confirming disallowance of Rs. 5,86,641/- u/s. 40A(3) being electricity payments made to Gujarat Electricity Board.

Ground No. 1:- Addition of Rs. 8,40,164 u/s. 68 of the Act:- 21. During the course of assessment the AO has noticed that assessee has received unsecured loan of Rs. 8,40,164/- from Smt. Sushila Kak. The assessee was asked to produce confirmation letter and proof the genuineness of the transaction and creditworthiness of the party. Since the assessee has not furnished confirmation letter along with PAN and Smt. Sushila Kak who was the wife of project consultant, therefore, the amount was added u/s. 68 of the Act as assessee given furnished evidence to proof the creditworthiness of the party and genuineness of the transaction.

We have heard the rival contention on this issue and considered that since the assessee has failed to furnish the confirmation letter and the PAN of the lender therefore, we observed that creditworthiness of the aforesaid loan transaction was & 1745/AHD/2014 & 2010/Ahd/2015 A.Ys. 2002-03 &2003-04 not proved by the assessee. Therefore, we do not find any error in the decision of the Ld. CIT(A). Accordingly, this appeal of the assessee is dismissed.

Ground No. 2:- Addition of Rs. 39,47,052 as work-in-progress:-

We have heard the rival contention and perused the material on record. The Ld. CIT(A) has held that it is clear from the accounts of the assessee that administrative expenses has been incurred for specific project therefore, the same has to be considered for computing the work-in-progress of the particular project. We observe that these administrative expenses have direct nexus with the construction of particular project therefore such expenses have rightly been included in the closing work-in-progress of the project. These administrative expenses were originated on account of construction of the projects referred in this order which clearly demonstrate that such expenses have direct nexus and direct bearing in relation to construction of the project. Therefore, we do not find any infirmity in the decision of Ld. CIT(A) in including these expenses in valuation of closing stock of work-in-progress. However, we direct the AO to make adjustment in value of opening work-in-progress of subsequent assessment year accordingly. Therefore, this ground of appeal of the assessee is partly allowed. & 1745/AHD/2014 & 2010/Ahd/2015 A.Ys. 2002-03 &2003-04 Ground No. 3:- Disallowance of Rs. 5,86,641 u/s. 40A(3):-

We have heard the rival contention on this issue and noticed that assessee has failed to demonstrate the circumstances under which it has made cash payment to the aforesaid party how it is covered under Rule 6DD of the I.T. Rule. Therefore, we do not find any merit in the file of the assessee. The same is dismissed.

This Order pronounced in Open Court on 30/07/2019