PROSPECT ENGINEERING WORKS ,MUMBAI vs. DCIT CIRCLE 41(4)(1), MUMBAI

In the instant case, the Assessing Officer [in short, “AO”], vide assessment order dated 23.03.2015, made the following disallowances:

Thus, the Assessee being aggrieved preferred the instant appeal.

We have heard the parties and considered the rival submissions and perused the material available on record. For brevity and convenience, we deem it appropriate to decide the appeal issue-wise.

The 1st issue pertained to the disallowance of Rs.22,40,000/- on account of partners’ remuneration. The authorities below restricted the partners’ remuneration to Rs.2,28,000/-, comprising Rs.1,20,000/- paid to Mr. Anant Chintaman Apte, Rs. 60,000/- paid to Mr. Ashish Apte HUF and Rs.48,000/- paid to Mrs. Sapna Ashish Apte, on the premise that only the said amount was authorised by the Partnership Deed and that the excess payment was inadmissible under section 40(b)(ii) of the Act.

Whereas, Clause 6 of the Partnership Deed dated 13.04.2002, after specifying the remuneration payable to the

The 2nd issue related to the disallowance of interest and bank charges on the term loan, amounting to Rs.29,66,107/-. The authorities below held that the term loan had been utilised for the purchase of fixed assets and, therefore, the interest incurred, prior to the assets being put to use was required to be capitalised in view of the proviso to section 36(1)(iii) of the Act. Whereas, the Assessee demonstrated that the term loans had been in existence since the F.Y. 2009-10, while the construction of the Highway

The Assessee had also earned profits of Rs.70,93,144/-, Rs.16,47,51,673/- and Rs.17,58,27,448/- during the A.Ys. 2011-12, 2012-13 and 2013-14, respectively. Thus, the profits earned during the respective years were sufficient to cover the funds infused in the Highway Projects. Further, it was not in dispute that the Assessee had sufficient own funds to meet the requirement of funds for the construction of the Highway Projects. Therefore, in view of the judgments of the Hon’ble Jurisdictional High Court in CIT v. Reliance Utilities and Power Ltd. (2009) 178 Taxman 135 (Bombay High Court) and HDFC Bank Ltd. v. DCIT (2016) 67 taxmann.com 42 (Bombay High Court), the disallowance of Rs.29,66,107/- is unsustainable and, accordingly, deleted.

The 3rd issue related to the commission expenses amounting to Rs. 35,298/-. The Assessee did not press the ground relating to the said disallowance. Therefore, the same required no adjudication and thus is dismissed as not pressed.

The 4th or last issue pertained to the ad-hoc disallowance of Rs.3,12,775/-, being 10% of the total expenses of Rs.31,27,753/-, comprising the following expenses: -

The authorities below made the above disallowance on the ground that several expenses had been incurred in cash, were supported by self-made vouchers and were not fully verifiable for want of third-party bills, vouchers and invoices. Further, the Assessee had not maintained log books or telephone call details and, therefore, personal use of motor cars and telephones could not be ruled out.

Though the aforesaid expenses appeared to be reasonable considering the turnover and income shown by the Assessee, however, considering the peculiar facts and circumstances, particularly that the expenses had, more or less, been incurred in cash, the Assessee had not maintained the log books of the vehicles or the details of telephone calls and had also not established that the telephones were used exclusively for the business of the Assessee-firm, we, in the interest of substantial justice, deem it appropriate to restrict the ad-hoc disallowance to 5% of the total expenses of Rs.31,27,753/-. Accordingly, the AO is directed to sustain the disallowance at 5% of the total expenses and delete the remaining disallowance.

Thus, on the basis of the aforesaid analysis and determinations, the appeal filed by the Assessee, is partly allowed.

In the result, the Assessee’s appeal stand partly allowed.