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Income Tax Appellate Tribunal, HYDERABAD BENCHES “A”: HYDERABAD
Before: SHRI SATBEER SINGH GODARA & SHRI LAXMI PRASAD SAHU
O R D E R PER L.P. SAHU, A.M.: These are the cross appeals filed by the assessee as well as revenue are directed against CIT(A) - 12,
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Hyderabad’s separate orders dated 31/08/2020 for AYs 2012-13 & 2013-14 involving proceedings u/s 143(3) r.w.s. 153A of the Income Tax Act, 1961 ; in short “the Act. for AY 2012-13 2. Briefly the facts of the case are that the assessee filed its return of income for the AY 2012-13 on 29/09/2012 declaring total income of Rs. 48,04,09,560/-. Subsequently, the case was selected for scrutiny under CASS and a notice u/s 143(2) was issued and duly served on the assessee by the AO. After examining the material on record and the information furnished, The AO completed the assessment u/s 143(3) by making the following additions/ disallowances: 1. Disallowance of claim u/s 80IA – Rs. 47,66,23,235/- 2. Disallowance of interest expenditure u/s 14A – Rs. 50,26,69,200/- 3. Addition towards inflated expenditure by way of Sub-contract payments - Rs. 5,45,60,000/- 3. When the assessee preferred an appeal before the CIT(A), the CIT(A) partly allowed the appeal of the assessee.
Aggrieved by the order of CIT(A), the assessee is in appeal before the ITAT.
As regards the issue of addition of Rs. 5,45,60,000/- towards inflated expenditure by way of sub-contract
:- 3 -: ITA Nos.. 608/Hyd/2020 and others Madhucon Projects Ltd., Hyd. payments, which is raised as ground Nos . 2 to 10, the AO made the addition by observing, inter-alia, as under:
1. 1. The issue of maintaining bank account at New Delhi where there is no work site of the subcontractor and where the assessee is maintaining office remains unexplained.
2. The issue of immediate withdrawal of cash on receipt of remittance from the assessee from the subcontractors account remains unexplained.
3. The issue of withdrawing cash by the employee of assessee from the account of subcontractors remains unexplained.
4. That the subcontractors could not produce books of accounts to support their claim that the cash was withdrawn to meet the expenditure on account of labour payment and hiring charges, which is also remains unexplained.
5. Even the fact that the subcontractors could not produce any TDS details against the payments made also rernains unexplained.
In absence of books of accounts, it also remains unexplained whether cash payments exceeded the permissible limit as per provisions of Sec. 40a(ia) of the Act or not.
Almost the entire amount of remittances were withdrawn in cash, 't remains unexplained, whether the subcontractors enjoyed any profit from the project. In view of the detailed discussion, the total amount of cash withdrawal from the above mentioned subcontractors are treated as inflation of expenditure by the assessee in the name of subcontractors. The total
:- 4 -: ITA Nos.. 608/Hyd/2020 and others Madhucon Projects Ltd., Hyd. of such cash withdrawals comes to Rs. 5,45,60,000/- which is treated as inflated expenditure in the hands of the assessee and added to the total income of the assessee,"
6. The CIT(A) upheld the addition made by the AO by holding that the modus operandi of inflating expenses by way of bogus sub-contract payments was detected and the assessee used its confidante persons and other concerns to make inflated sub-contract payments and withdrawing the surplus funds made through its trusted employees.
7. Before us, the ld. AR of the assessee submitted that the AO has made the addition on the ground that the assessee has inflated its expenditure by way of payments to sub-contractors and, therefore, the same was disallowed u/s 37(1) of the Act. He submitted that the addition made under the head “profits and gains from business or profession”. He, therefore, submitted that the addition made by the AO is covered by the CBDT Circular No. 37/2016, dated 2nd November, 2016 that the assessee is eligible for deduction u/s 80 IA of the Act. He, therefore, contended that the CIT(A) is not justified in denying deduction u/s 80IA on the inflated expenditure as held by the AO. He further submitted that in case of sub- contractors, the same amount has been offered as turnover and which has been accepted by the revenue authorities. Once the expenditure is disallowed, it is automatically
:- 5 -: ITA Nos.. 608/Hyd/2020 and others Madhucon Projects Ltd., Hyd. enhanced the profit of the assessee and the enhanced amount is eligible for deduction u/s 80IA)(4) in the case of the assessee.
The ld. DR, on the other hand, strongly relying on the orders of revenue authorities, submitted that the assessee is not eligible for claiming deduction under Chapter VI-A u/s 80IA against the addition made by the AO, as the issue has been elaborately dealt by both the lower authorities in their orders. He contended that the assessee is engaged in the malpractice for siphoning the amounts by way of inflating the expenditure and making payments to group companies. The cash has been withdrawn by the employees of the assessee company from the sub-contractors accounts. He, therefore, submitted that there is a direct nexus between the inflated expenditure from the other companies. He submitted that during the course of search proceedings, statements were recorded by the search team in which the employees of the assessee company have accepted that inflated monies were withdrawn from the sub-contractors bank account. He submitted that the assessee has opened bank accounts in Delhi and Hyderabad for smooth controlling of the bank accounts of the sub- contractors. He submitted that in view of the detailed findings of the lower authorities in their orders, the assessee is not eligible for claiming deduction u/s 80IA on the inflated expenditure as these expenses are bogus in :- 6 -: ITA Nos.. 608/Hyd/2020 and others Madhucon Projects Ltd., Hyd.
nature. He, therefore, requested the Bench that the order of the CIT(A) is to be upheld on this count.
We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. We find that similar issue came up for consideration before the coordinate bench of this Tribunal in assessee’s own case for earlier AYs 2007- 08, 2009-10, 2010-11 & 2011-12 in to 1875/Hyd/2019 vide order dated 06/01/2022 wherein the coordinate bench has observed as under:
“9. We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. We observe that search was conducted on the assessee and its group cases on 04/03/2011 and further search was conducted on 07/03/2011 as per para No. 6 of the assessment order and the statements recorded by the search team, which have been recorded by the AO in his order. For deciding the issue before us, first we have to see the assessment order on the basis of which the additions made by the AO as per para 11, which is reproduced below for the sake of clarity: “11. During the previous year relevant to the AY 2007-08, it is observed that an amount of Rs. 50 lakhs was withdrawn from the bank account of M/s Maa Highways maintained at Axis Bank, Begumpet, Greenlands by Sri Raju Magrulkar vide Instrument No. 914303. In light of the detailed narrations in the preceding paragraphs, this amount of Rs. 50 lakhs is treated as inflated expenditure by way of subcontract payments. Accordingly, the same is added.”
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9.1 The basis for making the addition as noted above, the AO has made the addition only on the basis of inflated expenditure by way of subcontract payments, which is in the nature of disallowance u/s 37(1) of the Act. On the above order of the AO, we find that nowhere mentioned that it is other than the business expenditure of the assessee. We observe from the arguments and paper book submitted by the assessee quoted supra, the amounts received by the sub-contractors have been offered as their turnover and the turnovers had been accepted by the revenue authorities. Therefore, it clearly shows that the payments made by the assessee to sub-contractors is a business expenditure of the assessee. 9.2 We accept the arguments advanced by the ld. AR of the assessee that the Board’s Circular No. 37/2016 dated 02/11/2016 is applicable to the case of the assessee. For the sake of clarity, we reproduce the contents in the Circular as under:
CIRCULAR NO.37/2016 [F.NO.279/MISC./140/2015/ITJ] 80-IA OF THE INCOME-TAX ACT, 1961 - DEDUCTIONS - PROFITS AND GAINS FROM INFRASTRUCTURE DEVELOPMENT UNDERTAKINGS - CHAPTER VIA DEDUCTIONS ON ENHANCED PROFITS CIRCULAR NO.37/2016 [F.NO.279/MISC./140/2015/ITJ], DATED 2-11-2016 Chapter VI-A of the Income-tax Act, 1961 ("the Act"), provides for deductions in respect of certain incomes. In computing the profits and gains of a business activity, the Assessing Officer may make certain disallowances, such as disallowances pertaining to sections 32, 40(a)(ia), 40A(3), 43B etc., of the Act. At times disallowance out of specific expenditure claimed may also be made. The effect of such disallowances is an increase in the profits. Doubts have been raised as to whether such higher profits would also result in claim for a higher profit-linked deduction under Chapter VI-A.
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The issue of the claim of higher deduction on the enhanced profits has been a contentious one. However, the courts have generally held that if the expenditure disallowed is related to the business activity against which the Chapter VI-A deduction has been claimed, the deduction needs to be allowed on the enhanced profits. Some illustrative cases upholding this view are as follows: (i) If an expenditure incurred by assessee for the purpose of developing a housing project was not allowable on account of non-deduction of TDS under law, such disallowance would ultimately increase assessee's profits from business of developing housing project. The ultimate profits of assessee after adjusting disallowance under section 40(a)(ia) of the Act would qualify for deduction under section 80-IB of the Act. This view was taken by the courts in the following cases: 1 Income-tax Officer-Ward 5(1) v. Keval Construction [2013] 33 taxmann.com 277 (Guj.) 2 Commissioner of Income-tax-IV, Nagpur v. Sunil Vishwambharnath Tiwari [2016] 63 taxmann.com 241 (Bom.) (ii) If deduction under section 40A(3) of the Act is not allowed, the same would have to be added to the profits of the undertaking on which the assessee would be entitled for deduction under section 80-IB of the Act. This view was taken by the court in the following case: ♦ Principal CIT, Kanpur v. Surya Merchants Ltd. [2016] 72 taxmann.com 16 (All.). The above views have attained finality as these judgments of the High Courts of Bombay, Gujarat and Allahabad have been accepted by the Department.
3. In view of the above, the Board has accepted the settled position that the disallowances made under sections 32, 40(a)(ia), 40A(3), 43B, etc. of the Act and other specific disallowances, related to the business activity against which the Chapter VI-A deduction has been claimed, result in enhancement of the profits of the eligible business, and that deduction under Chapter VI-A is admissible on the profits so enhanced by the disallowance.
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4. Accordingly, henceforth, appeals may not be filed on this ground by officers of the Department and appeals already filed in Courts/Tribunals may be withdrawn/not pressed upon. The above may be brought to the notice of all concerned. 9.3 On perusal of the said Circular, it is clear that at times disallowance out of specific expenditure claimed may also be made. The effect of such disallowances is an increase in the profits. The issue of the claim of higher deduction on the enhanced profits has been a contentious one. However, the courts have generally held that if the expenditure disallowed is related to the business activity against which the Chapter VI-A deduction has been claimed, the deduction needs to be allowed on the enhanced profits. The assessee is also eligible to claim for deduction u/s 80IA on the profit earned from its business. The issue before us is also regarding the enhancement of the profit of the assessee which is covered by the said Circular quoted supra and, therefore, the assessee is eligible to claim deduction u/s 80IA of the Act. Considering the totality of the facts and circumstances of the case, we set aside the order of the CIT(A) and direct the AO to allow the assessee’s claim of deduction u/s 80IA of the Act on the enhanced expenditure towards the payment to sub-contractors, which was disallowed by the AO and confirmed by the CIT(A) in all the appeals under consideration. All other grounds raised by the assessee in all the appeals, were not pressed before us, therefore, the same are dismissed as not pressed. 9.3 In view of our above observations, we allow the grounds raised by the assessee with regard to inflated expenditure by way of sub-contract payments in all the appeals under consideration.
9.1 As the issue in dispute is materially identical to the case decided by the coordinate bench in assessee’s own case cited supra, following the conclusions drawn therein, we direct the AO to give/allow the deduction u/s 80IA(4) of Rs. 5,45,60,000/-, the expenditure of which was incurred
:- 10 -: ITA Nos.. 608/Hyd/2020 and others Madhucon Projects Ltd., Hyd. towards sub-contract payments. In view of this, the ground is allowed.
With regard to the issue of disallowance u/s 14A, which is raised as ground No. 11, the AO noticed from the balance sheet of the assessee that the assessee had made investments in equity shares for an amount of Rs. 1,14,423.26 lakhs in the subsidiary companies. Further, he noticed that the assessee had given long term loans/advances to group companies which total upto Rs. 14,543.59 lakhs. Further, the assessee had given another loan of Rs. 2385.39 lakhs to M/s madhucon Granites Ltd. From the details submitted by the assessee, the AO observed that most of the loans/advances given to the group companies are interest free loans, against interest bearing loans of Rs. 384151.93 lakhs taken from various banks and non banking financial institutions. Besides there were short term borrowings from various banks amounting to Rs. 38227.18 lakhs. Considering all the facts, the AO asked the assessee to explain as to why the provisions of section 14A should not applicable to the assessee. After considering the assessee’s reply and relying on various case laws, the AO disallowed an amount of Rs. 50,26,69,200/- u/s 14A of the Act.
The CIT(A) after relying on various cases of ITAT as well as High Courts and Supreme Court, held that :- 11 -: ITA Nos.. 608/Hyd/2020 and others Madhucon Projects Ltd., Hyd.
disallowance u/s 14A read with rule 8D cannot exceed the exempt income claimed by the assessee. He, therefore restricted the disallowance to the extent of dividend received by the assessee i.e. Rs. 1,48,970/- and directed the AO to delete the balance amount of Rs. 50,25,20,230/-.
After hearing both the parties and perusing the material on record as well as the orders of revenue authorities, we do not find any infirmity in the order of the CIT(A) in restricting the disallowance and, therefore, upholding the order of CIT(A), we dismiss the ground raised by the assessee on this issue.
In the result, appeal of the assessee is partly allowed.
The facts of the case, briefly stated, are that the assessee company filed its return of income for the A.Y. 2013-14 on 29.09.2013 declaring total income of Rs. 13,42,56,510/after claiming the deduction u/s. 80IA of the Act. The case had been selected for scrutiny under (ASS and the order u/s. 143(3) of the IT Act was passed on 06.12.2016 determining the income at Rs. 81,15,76,061/-. Subsequently, the case of the assessee was selected for revisionary proceedings u/s. 263 by the Pr.C1T(Central), Hyderabad on 26.10.2018 with a direction to examine the :- 12 -: ITA Nos.. 608/Hyd/2020 and others Madhucon Projects Ltd., Hyd.
issue of claim of deduction u/s. 80lA of the Act. Notice u/s. 142(1) was issued on 01.08.2019 to the assessee calling for objections against the proposed disallowance u/s. 80lA of Rs. 2406.93 lakhs. After examining the material on record and the information furnished, assessment was completed by the Assessing Officer u/s. 143(3) r.w.s. 263 of the Act determining the total income of the assessee company at Rs. 1,05,22,69,061/- after restricting the claim of deduction u/s. 80lA of the Act by Rs. 24,06,93,000/-.
When the assessee preferred an appeal before the CIT(A), the CIT(A) partly allowed the appeal of the assessee.
Before the ITAT, the assessee raised the following grounds of appeal:
1. The Ld. CIT(A) erred in partly allowing the appeal. (a) The Ld. CIT(A) erred in confirming the disallowance of deduction claimed u/s 80lA of the Act to the extent of Rs.2,48,96,334/-. (b) The Ld. CIT(A) ought to have allowed the MAT credit for Rs.2,48,96,334/which has been included in the deduction claimed u/s 80lA of the Act. (c) Without prejudice, CIT(A) ought to have appreciated the fact that MAT credit of Rs. 2,48,96,334/- cannot be added to the total income of the assessee.
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Tne appellant may, add or alter or amend or modify or substitute or delete and / or rescind all or any of the grounds of appeal at any time before or at the time of hearing of the appeal.”`
17. The CIT(A) confirmed the addition by observing as under: “5.14 Other income of Rs. 25,394,320/-: It is seen that the same comprises of two elements. One is of MAT credit for A.Y. 2012-13of Rs. 2,48,96,334/- and second is of sundry incomes that are part of contractual obligations amounting to Rs. 4,97,986/-. These sundry incomes are in the nature of income received from the sales, loading charges and comprises large number of small incomes which are directly linked to the execution of eligible projects. Therefore the other incomes of Rs. 4,97,986/- is held to be eligible for deduction u/s. 8OIA. However, MAT credit is held not to be eligible for deduction u/s. 80lA as it is not directly linked to the eligible business but only comes into operation due to statutory provision. 5.14.1 The Hon'ble Supreme Court in Liberty India vs. Commissioner of Incometax (317 ITR 218) (SC) (2009) held that benefits accrued on account of statutory provisions in Customs Act / Schemes framed by the Government are not so derived from industrial undertakings and do not form part of net profits of eligible industrial undertaking for the purpose of section 801A. Therefore, the MAT credit being a credit arrived due to the statutory provisions in the Act is not eligible for benefit of deduction u/s 801A. Therefore, the deduction on MAT credit of Rs. 2,48,96,334/- is directed to be withdrawn. Accordingly, disallowance of Rs.2,48,96,334/- is confirmed.”
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We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. The finding of the CIT(A) that the MAT credit is held not to be eligible for deduction u/s 80IA as it is not directly linked to the eligible business but only comes into operation due to statutory provision. He relied on the decision of the Hon’ble Supreme Court in the case of Liberty India Vs. CIT cited supra. Therefore, we find no reason to interfere with the decision and CIT(A) and upholding the same, we dismiss the grounds raised by the assessee on this count.
In the result, appeal of the assessee is dismissed. & 636/Hyd/2020 – by revenue for AYs 2012- 13 & 2013-14
In both the appeals, the revenue has raised a ground that the CIT(A) erred in deleting the addition made by the AO u/s 80IA of the Act.
The facts as taken from AY 2012-13 that the assessee claimed deduction to the tune of Rs. 47,66,23,2235/-. The AO disallowed the same on the ground that the assessee failed to produce supporting to details.
The CIT(A) allowed the assessee’s claim by observing as under:
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“6.5 I have carefully considered the submissions of the appellant, the order of the Assessing Officer, the additional grounds raised as well as the comments of the Assessing Officer thereon. As far as the claim of deduction u/s. 80lA is concerned, it is an undisputed fact that the claim has been allowed for the AYs 2007- 08 and 2008-09, and also, subsequently, for AY 2013-14. The then CIT(A)-12, my predecessor, while adjudicating the appeal for Asst. Year 2009-10, 2010-11 and 2011-12 held that the appellant company is eligible to claim the deduction u/s. 80lA of the Act. The facts of the case for the appeal under consideration are identical to the preceding years and the claim of deduction u/s. 80lA of the Act is made on the same infrastructural projects which were claimed and allowed in the preceding and succeeding years. Nothing has been brought on record to establish that the projects undertaken by the appellant during the AY under consideration were different from the projects undertaken in preceding or succeeding years. Nothing to this effect has been brought out by the AO during remand proceedings also.”
We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. The CIT(A) allowed the claim of the assessee following the decision of his predecessor in assessee’s own case for earlier AYs. Before us, the ld. DR has not brought any contrary decision in this regard. Therefore, we uphold the order of CIT(A) and dismiss the ground raised by the revenue on this issue in both the appeals under consideration.
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In the result, both the appeals of the revenue are dismissed.
To sum up, appeal in is partly allowed, appeals in ITA Nos. 609, 635 & 636/Hyd/2020 are dismissed in above terms. A copy of this common order be placed in the respective case files. Pronounced in the open court on 11th January, 2022