MR. RAVINDER SAWHNEY,NEW DELHI vs. DCIT, NEW DELHI

In various grounds of appeal, the assessee has challenged the following additions : (i). Disallowance of wages Rs.16,20,954/- (ii). Disallowance of petty contract payments Rs.16,74,266/- (iii). Disallowance of hire charges Rs.15,59,374/- (iv). Disallowance of telephone expenses Rs. 47,440/- (v). Disallowance of vehicle running &

The facts, in brief, are that the assessee is engaged in the business of civil construction like construction of factories and residences. The assessee was required to furnish comparative gross profit/net profit chart for various assessment years, which was submitted by the assessee and had duly been incorporated in the assessment order. The ld. Assessing Officer on examination of books of account and details, did not disturb the trading result and accepted the turnover as well as GP/NP ratios for the year under consideration. However, he proceeded to make various disallowances of expenses debited under various heads.

As regards the disallowance on account of wages, the Assessing Officer noted that the assessee had debited expenses of Rs.25,18,911/- on account of wages which is approximately 4.561% of the contract receipts and consultancy fees, which was at Rs.5,52,19,817/-. He found that there is increase in the expenses as compared to the earlier year in terms of percentage to turnover and asked the assessee to produce the entire details. The assessee in support, had produced wage register, muster roll, salary slips etc. and also gave reason for increase in the wages cost along with complete details of wages and catena of other evidences. It was also stated that the assessee is covered under the provisions of Provident Fund Act and the assessee is paying PF as per PF Rules. Therefore, the genuineness of wages cannot be doubted. The ld. Assessing Officer observed that in some of the cases, labourers have put their thumb impression and therefore, their identity is not established and some of the payments were made in cash. In some cases, only initial name of the persons has been mentioned and neither any information regarding EPF account numbers is mentioned for the individual labourers in the wages register and muster roll and accordingly, he restricted the wages to Rs.8,11,547/- and the difference of Rs.17,07,364/- was added.

The ld. CIT(A) observed that the criteria taken by the Assessing Officer was on account of disallowable expenditure vis a vis increase of turnover and if that criteria is adopted, the disallowance should be Rs.16,02,594/-. Accordingly, he restricted the disallowance to Rs.16,02,594 from Rs.17,07,364/-.

After considering the submissions of both the parties, we find that first of all, there cannot be any comparison from the last year specifically in the case of civil contractors, because it depnds upon the nature of contract work executed due to its own specification, type of structure, place of execution, creditworthiness of the contractor etc. Therefore, the GP ratio of each contract would be different and cannot be compared with other contracts. Ld. Counsel for the assessee had also pointed out that in the earlier year, the assessee has earned other higher incomes and if the said income is excluded from the profit of preceding year, then the GP rate of earlier year would be lesser. One very important factor for increase of cost of construction as well as hire charges, payment to sub-contractor was that, there was delay in completion of Nagpur project, which was a big project and the assessee had to complete the project in the time line and the bid was at the rock bottom rates of the tender. He had also tried to explain various other reasons for increase in the wages from the earlier year and how the delay in execution of project has led to increase in the labour cost and other items. Apart from that, he submitted that monthwise details of wages paid, copy of muster roll, photo copies of the muster rolls maintained at the sites, photocopies of annual PF returns were placed on record which goes to show that each and every labour was identifiable with their complete names, address, PF details etc. Thus, such an adhoc disallowance based on comparison of GP ratio and turnover of earlier year cannot be made. Ld. DR on the other hand relied upon the reasoning given in the impugned orders.

After considering the facts and material on record, we find that all the relevant details and evidences have been filed along with the explanation as to why there was rise in the labour cost and wages. However, without pointing out any specific defect or discrepancy, adhoc disallowance on estimate basis has been made merely on surmises that in most of the cases, laboures have put their thumb impression and some of the payments have been made in cash etc. Such general observation cannot be a ground for disallowance if the assessee had submitted muster roll, wages register along with PF details and annual PF return, wherein each and every labour is identifiable with complete names, addresses etc. Therefore, merely because some of the labourers are illiterate and put their thumb impression and received wages in cash cannot justify the disallowance of expenditure. Moreover, when assessee has given detail explanation regarding nature of contract work and explained the reasons for increase in percentage of wages from earlier year, then without any contrary material or fact last years figure cannot be the parameter for disallowance. Accordingly, the disallowance of Rs.16,20,954/- is deleted.

So far as the disallowance of petty contractors payment is concerned, the assessee had debited a sum of Rs.1,34,07,301/- as petty contractors payments, which was 24.28% of the contract receipts. The Assessing Officer held that these expenses were 19.80% of the contract receipts in earlier year. Thus, he observed that there was excess claim of expenses in this year of Rs.30,15,807/-. Accordingly he restricted the disallowance @4.48% being increase of expenses to Rs. 24,73,777/-. 9. The ld. CIT(A) had reduced the said disallowance by giving part relief to the extent of 12.91% and sustained the addition of Rs. 16,74,266/-. 10. Before us, the ld. counsel had submitted that party-wise details of expenses including the names, address, PAN, amount, TDS, nature of work undertaken along with photocopies of the bills of subcontractors were submitted, which are placed in the paper book also. In neither of any such details of expenses, any discrepancy or defect has been pointed out by the authorities below. Apart from that, it was submitted that the TDS has been deducted @ 1% in the case of individual and 2% in the case of company, and the ld. CIT(A) has completely misunderstood by holding that the TDS rates were 5%. He also pointed out that the bills of material of Rs. 21,06,754/- were included in the petty contractor payments which should be reduced to ascertain the correct amount of sub-contract payments. Lastly, it was submitted that all the payments were made by cheques and none of the parties were related to the appellant. 11. The ld. DR on the contrary, relied upon the orders of the Assessing Officer and CIT(A).

After considering the submissions made by the parties and on perusal of the material placed on record, we find that it is not the case where the Assessing Officer has disputed the genuineness of the expenses, i.e., either they were bogus or were not incurred for the purpose of business. No independent inquiry has been conducted from the sub-contractors to rebut the claim of the assessee when all the evidences as mentioned by the ld. counsel were placed before the Assessing Officer. From the perusal of the details submitted in the paper book, it is seen that the assessee has given party-wise details, mentioning the names and addresses, PAN, amount, TDS, nature of work undertaken along with photocopies of the bills of subcontractors. No defect or discrepancy has been pointed out in these details. The assessee has also given the reasons and explanation for slight increase in the payments to petty contractors owing to delay in Nagpal project and various other factors which have not been taken into consideration. Under these facts and background and without there being any adverse material or discrepancy found, such adhoc disallowance cannot be sustained. Here, the assessee’s trading result including the GP/NP rates has been accepted and therefore, such an adhoc disallowance cannot be sustained whence there is neither any adverse material nor any defect in the books of accounts or the details furnished by the assessee have been found. Adhoc disallowance, simply by comparing the ratio/percentage of similar expenses in earlier years cannot be resorted to. Accordingly, such a disallowance is directed to be deleted.

Similarly, regarding disallowance of hire charges of Rs.15,59,374/- on estimate basis, the Assessing Officer held that hire charges shown by the assessee are 3.415% of the contract receipt, i.e., 18,86,024/- as against 0.55% in the preceding year. Thus, these expenses are higher by 2.891% and based on this, he disallowed the said expenses. The ld. CIT(A) too has also confirmed the said addition on the ground that there is no proper explanation for the increase in hire charges. The assessee before the authorities below has duly explained the reasons for increase in hire charges specifically with regard to certain projects relating to Nagpur construction site and also given entire details along with documentary evidences. Again, no valid reason has been given by the Assessing Officer and the ld. CIT(A) except for comparing the increase in hire charges with the last year. Simply because there is increase in expenses, it does not ipso facto lead to conclusion that part of the expenditure is bogus or non-genuine or the expenditure has not been incurred wholly for the purpose of business. Therefore, no disallowance can be made unless certain defects or discrepancies are pointed out in the evidences and the details furnished. Therefore, on the similar reason given above, no adhoc disallowance is sustainable and accordingly, the same is directed to be deleted.

Coming to the disallowance on account of telephone expenses and vehicle running expenses, we find that the Assessing Officer has made disallowance of 20% which has been reduced by the ld. CIT(A). Under the head telephone expenses, the Assessing Officer has disallowed 20% on the ground of personal use and that the assessee did not maintain the details of calls. The ld. CIT(A) has disallowed entire expenditure relating to the phone installed at the residence, but has reduced the disallowance of balance expenses to 5% and accordingly, sustained the addition on account of telephone expenses at Rs.47,440/- as against Rs. 68,087/- disallowed by the Assessing Officer.

After considering the rival submissions, we find that the assessee has claimed an amount of Rs. 3,40,436/- under the head telephone expenses as business expenses. The Assessing Officer disallowed 20% on the entire amount claimed on the ground of personal use. It has been submitted before the authorities below that out of total amount of Rs.3,40,436/-, amount of Rs.68,186/- was spent on land line phone installed at the business premises and the amount of Rs.1,75,623/- was paid towards telephone expenses of the employees; and only Rs. 96,629/- was paid for assessee’s mobile phone. The ld. CIT(A) has disallowed the amount of Rs.35,046/- on account of telephone installed at the residence of the assessee and also on mobile phone and also made adhoc disallowance of 5% on the balance claim. In so far as the expenditure relating to land line phones installed at the business premises and the amount paid to the employees is concerned, same cannot be held to be for personal use or for non-business purpose. If at all, there could be some element of personal use, then same could be out of the expenses of Rs.96,629/- incurred on the telephone used by the assessee as a proprietor. However, entire expenses cannot be said to be for personal use and accordingly, we hold that 20% of the amount of Rs.96,629/- towards telephone expenses of assessee for mobile and phone installed at the residence can be said to be for personal use or for non- business purpose and accordingly, the disallowance confirmed under telephone expenses works out to Rs.19,326/-.

Similarly, with regard to disallowance of vehicle running expenses, the assessee has claimed following expenditure : 1. Vehicle running & Maintenance Rs.5,47,241/- 2. Depreciation on Motor car Rs.3,57,243/- Total Amount Rs.9,04,484/-

Again, the Assessing Officer has disallowed 20% on account of personal use whereas the ld. CIT(A) has restricted the disallowance to 10%. It was submitted before the authorities below that the assessee had five cars and one car was used by the assessee, which too was for the business purpose, and other vehicles were used by the employees of the company. Looking to the fact that most of the cars were used by the employees and one car by the assessee, therefore some personal element used by the proprietor cannot be ruled out and accordingly, over all disallowance is restricted to 5%. Consequently, the amount of Rs.17,862/- is disallowed.

In so far as disallowance of depreciation is concerned, since this is statutory disallowance and motor cars were used for the purpose of business for more than 180 days, the depreciation has to be allowed in full. Therefore, the disallowance of depreciation is deleted .

In the result, the appeal is partly allowed.