L&T SUCG JV CC27,NEW DELHI vs. ADDL.CIT, RANGE-62, NEW DELHI

PER BHAVNESH SAINI, J.M.

Both the cross-appeals are directed against the Order of the Ld. CIT(A)-20, New Delhi, Dated 30.03.2018, for the A.Y. 2014-2015. Assessee’s appeal is filed on following grounds :

“GROUND-1 Addition of Negative Inventory of Rs. 7,70,79,009/- The Commissioner of Appeal - 20 (Delhi) [ CIT(A)] erred in law and on facts of the case by confirming an amount of Rs. 7,70,79,009/- on account of negative inventory without appreciating the fact that there is no negative inventory as at 31.03.2013.

The appellant respectfully prays that the directions of the CIT (A) to the AO be quashed and AO be directed to delete the addition of Rs. 7,70,79,009/- on account of Inventory .

GROUND No.2 Addition of Rs.4,77,817/-. The CIT(A) erred in law and on facts of the case by confirming an amount of Rs.4,77,817/- on account of mismatch in the physical and book balance of diesel

3 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. without appreciating the explanations submitted by the appellant.

The appellant respectfully prays that the directions of the CIT (A) to the AO be quashed and AO be directed to delete the addition of Rs.4,77,817/- on account of Diesel.

GROUND- 3 Addition of Rs.2,40,00,000/- The CIT(A) erred in law and on facts of the case by confirming an amount of Rs.2,40,00,000/- on account of mismatch in the physical and book balance of Steel as reported by the Special Auditor without appreciating the explanations submitted by the appellant.

The appellant respectfully prays that the directions of the CIT (A) to the AO be quashed and AO be directed to delete the addition of Rs.2,40,00,000/- on account alleged discrepancy in the stock of Steel.

Ground 4 - Addition of Rs.25,00,000/-. The CIT(A) erred in law and on facts of the case by confirming an amount of Rs. 25,00,000/- on account of alleged stock of scrap determined based on theoretical computation without appreciating the explanations submitted by the appellant.

4 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. The appellant respectfully prays that the directions of the CIT (A) to the AO be quashed and AO be directed to delete the addition of Rs. 25,00,000/- on account of alleged discrepancy in stock of scrap. GROUND-5 Disallowance of amortization expenses of Rs.1,54,12,773/-

The CIT(A) erred in law and on facts of the case by confirming disallowance of Rs.1,54,12,773/- by treating the same as depreciation as against the amortization of expenses. In doing so, the CIT(A) failed to appreciate the fact that the appellant had in fact amortized these expenses over the lifetime of the project.

The appellant respectfully prays that the directions of the CIT(A) to the A.O. be quashed and A.O. be directed to allow an amount of Rs.1,54,12,773/- on account of amortization expenses.

GROUND -6 Disallowance of depreciation on alleged Excess payment for acquiring Fixed Assets of Rs.18,52,44,595/-

The CIT(A) erred in law and on facts of the case by confirming disallowance of depreciation claimed on

5 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. alleged excess payment of Rs.18,52,44,595/- made for acquiring Tunnel Boring Machine ('TBM') and related equipments from M/s Shanghai Pudong Machinery Complete Equipment Co. Ltd. In doing so, the CIT(A) failed to appreciate the benefits pointed out by the appellant in deferring the payment and also the fact that price had been agreed without obligation for opening of Letter of Credit.

The appellant respectfully prays that the directions of the CIT (A) to the AO to disallow depreciation claimed on alleged excess payment of Rs.18,52,44,595/- be quashed.

Without prejudice to the above, the CIT(A) erred in law and on facts of the case by holding the payment to be excess at an ad-hoc rate of 25% on the value of the transactions with Shanghai Pudong Machinery Complete Equipment Co. Ltd.

GROUND- 7 Addition on account of Spares of Rs.6,94,66,924/-

The CIT(A) erred in law and on facts of the case by confirming the disallowance of expenses on account of machinery spares of Rs.6,94,66,924/- by treating the same as capital in nature. In doing so, the CIT(A) failed to appreciate that spares purchased were replacement

6 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. spares and were used to replace the worn off spares. The CIT(A) further erred in not appreciating the fact that these spares did not increase the capacity of TBMs and were meant for maintenance of TBMs.

The appellant respectfully prays that the directions of the CIT (A) to the AO be quashed and AO be directed to allow expenses incurred on account of machinery spares as a revenue expense.

GROUND -8 Disallowance of amortization expenses of Rs.4,90,78,282/-

The CIT(A) erred in law and on facts of the case by confirming the disallowance of amortization expenses of Rs.4,90,78,282/- being the difference between amortization expenses claimed by appellant based on the lifetime of the project as per books vis-a-vis depreciation calculated under Income Tax Rules, 1962.

The appellant respectfully prays that the directions of the CIT (A) to the AO be quashed and AO be directed to allow deduction of Rs.4,90,78,282/- on account of amortization expenses.

7 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. GROUND- 9 Addition on account of Foreign Exchange Gain of Rs.4,15,68,750/-

The CIT(A) erred in law and on facts of the case by confirming an amount of Rs.4,15,68,750/- on account of foreign exchange gain on restatement of liabilities on account of capital purchase. In doing so, the CIT(A) disregarded the fact that gain on translation/ conversion of foreign currency liability in respect of purchase of capital asset was capital receipt not subject to tax.

The appellant respectfully prays that the directions of the CIT (A) to the AO be quashed and AO be directed to delete the addition of Rs.4,15,68,750/-.

GROUND -10 Disallowance of Design expenses of Rs. 5,51,31,704/- The CIT(A) erred in law and on facts of the case by confirming the disallowance of design expenses of Rs.5,51,31,704/- by treating it to be deferred revenue expenditure. In doing so, the CIT(A) failed to appreciate that making design and approval thereof is an initial activity for the purpose of execution of the project. Accordingly, the CIT(A) ought to have appreciated that expenditure towards design charges was allowable as deduction in the year of incurrence.

8 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. The appellant respectfully prays that the directions of the CIT (A) to the AO be quashed and AO be directed to allow deduction of Rs.5,51,31,704/- on account of Design Expenses.

GROUND -11 Disallowance of bank guarantee expenses of Rs.2,22,37,267/-

The CIT(A) erred in law and on facts of the case by confirming the disallowance of bank guarantee charges of Rs.2,22,37,267/- which comprises of Rs.1,84,77,400/- actually spent by the appellant and treated by AO as deferred revenue expenses and Rs.37,59,867/- as payable by the JV Partner, SUCG and not liable to be borne by the appellant.

The CIT(A) erred in inadvertently quantifying the disallowance as Rs.2,22,37,267/- (refer to Page 138 of the appellate order). In doing so, he contradicted his own decision to grant the deduction of expenses to the extent paid the appellant of Rs.1,84,77,400/- (refer to Page 137 of the appellate order for quantification of the amount). The CIT(A) further erred in erroneously quantifying the actual allowance at Rs.37,59,867/- (Refer Page 138 of the appellate order) instead of correct amount of Rs.1,84,77,400/-.

9 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. The appellant respectfully prays that the directions of the CIT (A) to the AO be quashed and AO be directed to allow charging to P&L account an amount of Rs.2,22,37,267/- on account of Bank Guarantee Charges. GROUND -12 Disallowance of expenses of Rs. 9,99,67,544/-

The CIT(A) erred in law and on facts of the case by confirming disallowance of expenses amounting to Rs.9,99,67,544/- by treating it to be prior period expenditure without any basis by ignoring the accounting practice followed by the appellant.

The appellant respectfully prays that the directions of the CIT (A) to the AO be quashed and AO be directed to delete the disallowance of Rs.9,99,67,544/-.

GROUND -13 Disallowance of expenses of Rs. 50,00,000/-

The CIT(A) erred in law and on facts of the case by confirming ad-hoc disallowance to the extent of Rs.50,00,000/- by treating it as perquisites in the hands of employees and accordingly the appellant failed to deduct TDS thereon. In doing so, the CIT(A) disregarded the details of expenditure submitted by the appellant such as staff meal expenses, food expenses,

10 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. rent and car hire charges incurred for all employees. The CIT(A) accordingly failed to appreciate that expenses incurred by the appellant were towards staff welfare and not in the nature of perquisites.

The appellant respectfully prays that the directions of the CIT (A) to the AO be quashed and AO be directed to delete the disallowance of Rs.50,00,000/-.

GROUND -14 Addition of Rs. 90,29,913/-

The CIT(A) erred in law and on facts of the case by confirming addition of Rs.90,29,913/- on account alleged mismatch in balance confirmation of vendor M/s S.B. Protech disregarding the revised reconciliation of balance as per books of appellant and the confirmation.

The appellant respectfully prays that the directions of the CIT (A) to the AO be quashed and AO be directed to delete the addition of Rs.90,29,913/-.

GROUND-15 Addition of Rs.8,66,87,701/-.

The CIT(A) erred in law and on facts of the case by confirming addition of Rs.8,66,87,701/- on account of alleged mismatch in the balance confirmation sought from approx. 300 vendors on the following logic :

11 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. a. Discrepancy in reconciliation statements filed by the appellant in respect of difference of Rs.4,12,78,764/-.

b. Non-submission of confirmations of vendors amounting to Rs.4,54,08,937/-.

The appellant respectfully prays that the directions of the CIT (A) to the AO be quashed and AO be directed to delete the addition of Rs.8,66,87,701/-.

GROUND – 16 Addition of Rs.34,00,000/-

The CIT(A) erred in law and on facts of the case by confirming addition of Rs.34,00,000/- on account of alleged mismatch in balance of L&T as per the books of appellant vis-a-vis the value of investment as per books of L&T. In doing so, CIT(A) disregarded the fact that investments made in the appellant were recorded in the books of L&T under the head 'Trade Receivables' in accordance with Net Asset Method.

The appellant respectfully prays that the directions of the CIT (A) to the AO be quashed and AO be directed to delete the addition of Rs.34,00,000/-.

12 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. GROUND 17

Addition of Rs.44,68,235/-.

The CIT(A) erred in law and on facts of the case in confirming addition of notional interest income of Rs.44,68,235/- on the ground that JV partner failed to infuse funds in the appellant. In doing so, the CIT(A) erred in disregarding the terms of JV Agreement wherein the JV partner was not required to infuse funds. The CIT(A) failed to appreciate that this addition to income is not supported by any provision of the Act.

The appellant respectfully prays that the directions of the CIT (A) to the AO be quashed and AO be directed to delete the addition of Rs.44,68,235/-.

Ground – 18. Disallowance of expenses of Rs.12,01,000/-. The CIT(A) erred in law erred in law and on facts of the case by confirming disallowance of an expense of Rs.12,01,000/- incurred on gifts given to clients and business associates disregarding the same as a normal business practice. The appellant respectfully prays that the directions of the CIT (A) to the AO be quashed and AO be directed to delete the disallowance of Rs.12,01,000/-.

13 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. GROUND -19 Addition on account determination of ALP in respect of transaction with AE of Rs.25,90,46,464/-

The CIT(A) erred in law and on facts of the case by confirming addition to the extent of Rs.25,90,46,464/- in respect of transactions with an Associate Enterprise viz. M/s L&T Geostructure LLP by determining the Arm's Length Price ('ALP') of the transaction on an ad- hoc basis in contravention of the provisions of the Income Tax Act, 1961.

The appellant respectfully prays that the directions of the CIT(A) to the AO be quashed and AO be directed to delete the disallowance of Rs.25,90,46,464/-.

Without prejudice to the above, the CIT(A) erred in determining ALP of the entire by merely resorting to of ALP determined by him pertaining to labour charges. In doing so, the CIT(A) ought to have appreciated that the contract awarded to L&T Geostructure LLP was a composite contract for execution of the project involving material and labour.

14 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. GROUND - 20 Request for leave to add, alter, amend and/ or supplement the grounds of appeal

The appellant craves leave to add, alter, amend and/ or supplement any ground or grounds if necessary, at the time of hearing of the appeal.”

(1) Large difference in the closing stock shown in Balance sheet and Profit & Loss account of current year as per Return of Income.

(2) Mismatch in amount paid to related persons under section 40A(2)(b) reported in Audit report and ITR.

15 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. 2.1. Statutory notices were issued for completion of the assessment. During the year under consideration, the assessee is engaged in a Joint Venture in the business of Design & Construction of Tunnel which is awarded by Delhi Metro Rail Corporation (DMRC). The A.O. observed that assessee had not provided completion information at assessment stage, therefore, having regard to the nature / complexity of accounts, volume of the accounts, doubt of the correctness of the accounts, multiplicity of transactions and in the interest of revenue, a show cause notice to the assessee was given as to why the books of accounts may not be referred for special audit under section 142(2A) of the I.T. Act, 1961. The A.O. after getting approval of Pr. CIT, New Delhi referred the matter for special audit. The assessee filed a petition before Hon’ble Delhi High Court which was dismissed. Further, the empanelled auditor M/s ASAP & Associates submitted its audit report vide dated 05.06.2017. The basic observation of the audit report is reproduced in the assessment order. In the Special Audit so reproduced in the assessment order, the Auditor has noted that assessee

16 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. is a Joint Venture (in short “JV”) comprising of two Members having the participating interest (i.e., profit/loss sharing ratio) as under :

Sl.No. Name of Member Participating Interest. a. Shanghai Urban Construction 32.0% (Group) Corporation, (SUCG) b. Larsen & Toubro Limited (L&T) 68.0%

2.2. Delhi Metro Rail Corporation Limited (“DMRC") in short) had invited bids for the design and construction of tunnel from end of underground ramp (near Shankar Vihar Metro Station) to Hauz Khas Metro Station and underground ramp near Shankar Vihar metro station and Underground metro stations at Vasant Vihar, Munirka, R.K Puram, IIT and Hauz Khas on Janakpuri west- Botanical Garden Corridor of Delhi MRTS Project of Phase-III The above parties entered Into a Pre-Bid Unincorporated JV Agreement on 30th April 2012 to jointly submit the bid for the Project and to jointly execute the works in the event of award of the contract to them. Subsequently a Joint Venture Agreement was also signed on 05.11.2012 by the said parties to

17 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. formalize their mutual understanding. Finally, DMRC issued a Letter of Acceptance dated 01.11.2012 In favor of the JV for design and construction of the Tunnel Project. In the Special Audit report as reproduced in the assessment order, the Auditor has pointed-out certain items which have not been clarified by the assessee. The A.O. on the basis of the observations made in the special Audit report issued a detailed show cause notice to the assessee. The A.O. after considering the explanation of assessee on each items pointed out by the Special Auditor noted that assessee did not cooperate and no plausible answers have been given to the query raised by the Auditor, made certain additions. The A.O. assessed the income of assessee at Rs.297,18,46,560/- vide assessment order under section 143(3)/142(2A) of the I.T. Act, 1961 Dated 04.08.2017. The assessee challenged all the additions before the Ld. CIT(A) and the appeal of Assessee was allowed partly. The assessee is in appeal on above grounds of appeals. We deal all the grounds separately along with common grounds raised by Revenue.

18 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. 3. We have heard the Learned Representatives of both the parties and perused the material available on record and gone through the findings of the authorities below.

ITA.No.4351/Del./2018 – Assessee’s Appeal – A.Y. 2014-15

19 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. completion method while recognizing the revenue. Learned Counsel for the Assessee, therefore, submitted that this addition would be academic in nature. The assessee also filed written submissions on this issue which reads as under.

20 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. return of income for the assessment year 2013-14 was filed declaring nil income.

21 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. comprising of other income amounting to Rs.1,56,66,920/-.

22 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. 7. That the total expenditure of Rs.430,05,37,654/-, on the basis of which percentage of completion was worked out for the F.Y. 2013-14 includes total expenditures of Rs.27,30,48,673 incurred in the F.Y. 2012-13. In the F.Y. 2012-13, 25% completion of the project was not achieved; therefore closing Work-in-progress was recognised as revenue to the extent of total expenditure incurred in that year.

23 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. 9. Alternatively, the opening WIP of Rs.27,30,48,673/- could have been shown under expense in the profit & loss account for the year ended 31-03-2014 and therefore not reducing the same from revenue recognised the profit would have still been the same.

5.1. In support of the same, the assessee also filed a chart of preceding assessment years, assessment year under appeal as well as subsequent assessment years to show as to how the revenue has been recognised on Percentage Completion Method. The same is reads as under:

24 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi.

L & T SUCG JV CC 27 Delhi

As on March 31, As on March 31, As on March 31, As on March 31, 2013 2014. 2015. 2016 Revised Contract 12,60,86,50,700 Value (A) 12,60,86,50,700 12,94,62,49,412 13,04,40,61,740 Revised Estimated 12,41,95,20,939 Contract Cost (B) 12,41,95,20,939 12,91,49,03,647 13,45,16,06,509 Estimated Profit 18,91,29,761 Margin (C) = (A) - (B) 18,91,29,761 3,13,45,765 (40,75,44,769)

Total Cost incurred till the end of financial 27,30,48,673 year (D) 4,30,05,37,654 9,95,83,65,195 12,86,38,95,727 - Cost incurred in the previous financial years (E) 27,30,48,673 4,30,05,37,654 9,95,83,65,195 Cost incurred during 27,30,48,673 the financial year (F) = (D) - (E) 4,02,74,88,981 5,65,78,27,541 2,90,55,30,531 Cost of Completion 2.20% (%age ) (G) = (D) / (B) 34.63% 77.11% 95.63%

(H) = (A) * (G ) - Total Revenue as per Refer Note 27,30,48,673 POCM 4,36,60,28,076 9,98,25,35,915 12,47,41,60,664 Revenue recognised in previous financial - years (1) 27,30,48,673 4,36,60,28,076 9,98,25,35,915 Revenue recognised during the financial 27,30,48,673 year (J) = (H)-(I) 4,09,29,79,403 5,61,65,07,839 2,49,16,24,749 Invoices raised during - the financial year (K) 3,29,51,03,593 8,58,31,40,998 11,07,51,75,004 27,30,48,673 Closing WIP (L) = (H) - (K) 1,07,09,24,483 1,39,93,94,917 1,39,89,85,660 Note : In the financial year 2012-13, JV recognised 100%

cost incurred as revenue as the minimum percentage of

completion was not achieved as per Accounting Standard-7

5.2. The assessee filed copies of the balance-sheet for

all these years in support of the above statement which was

provided to the Ld. D.R. for his comments also. The A.O.

made the addition of Rs.7,70,79,009/- on the ground that

the Special Auditor has mentioned in his Special Audit

25 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. Report [“SAR”] that in the inventory ledger, there is a negative balance of this amount which was not taken into account by the assessee. The assessee, however, submitted before the A.O. during the course of assessment proceedings that on receipt of material, Material Receipt Note (“MRN”) is prepared which is then entered into the inventory module of the system. The inventory recognises the receipt of material and displays that into stock as on that time. At this stage, as per the stores, material is ready for issue. The MRN so prepared go through various controls of approval i.e., reconciliation with the purchase order prepared through the system. On completion of the approval process, receipt of the material gets entered into the accounting module of EIP system and it recognises the liability by debiting the stock in trade and crediting the vendors liability. In the initial stages of the mobilization due to shortage of time the stores get issued from the inventory module before that receipt of material gets recognised in the Accounting System. This process some time results in stock account showing negative amounts as it represents the issue of stock. The inventory

26 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. module will never accept the issue unless it has that material in its stock at that particular movement. As the recording of the MRN goes through various controls some times it gets delayed and thereby resulting in late recording of the stock into accounting system. However, as and when the MRN gets approved the receipt and ultimately the stock gets recognised into system and correctly reflects the stock in hand. Based on this premise after the recording of entries, stock in hand reflected an amount of Rs.3,71,19,081/- as on 31.03.2013 and not a negative figure of Rs.7,70,79,009/- as pointed out by the Special Auditor. The assessee tried to explain this issue many times clearly explaining the flow of entries into the system but some how they were bent upon reporting the said figure of issue in isolation.

5.3. The A.O. however did not accept the reasons given by the assessee and made the addition. The assessee challenged the addition before the Ld. CIT(A) explaining therein the same facts that there was no negative stock. The Ld. CIT(A) reproduced the clarification of the Special Auditor in the impugned order reiterating the same facts that there

27 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. was a negative balance of stock in main depot A/c ledger as on 31.03.2013. The Special Auditor also referred to reply of the assessee as to how the difference of negative inventory adjusted in the books. The A.O. in the remand report also stated and reiterated that there was a negative balance as on 31.03.2013. The Ld. CIT(A) asked the assessee to produce ledger account of main depot account and other materials of stock and details of sundry creditors. The written submissions of the assessee filed before the Ld. CIT(A) is reproduced at pages 118 to 120 of the impugned order in which the assessee reiterated the same facts and explained that the figures given by the A.O. in its report are wrong and actual defects shows that there was no negative balance. The copies of ledger account and financial statement on 31.03.2013 were also filed. Whatever was the closing stock as on 31.03.2013 is the opening stock as on 01.04.2013. It was also explained that closing as on 31.03.2013 in respect of sundry creditors was Rs.[-]12,55,31,618/- and not Rs.[- ]20,26,10,627/- as reported by the Special Auditor. The assessee filed copy of the ledger account of sundry creditors

28 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. as on 31.03.2013 and 31.03.2014 in support of the above explanation. The Special Auditor is trying to justify the difference between Rs.20,26,10,627/- and Rs.12,55,31,618 as being written off in books. Whereas the fact is amount of Rs.7,70,79,009/- worth purchases of material was booked in 31.03.2013 thereby reducing the balance as on 31.03.2013 from Rs.20,26,10,627/- to Rs.12,55,31,618/-. This led to increase in value of stock inventory by Rs.7,70,79,009/- thereby making the inventory positive as on 31.03.2013 and reducing the creditors by the same amount. It was submitted that since sundry creditors balance was reduced by the impugned amount, therefore, there was no differences. The assessee also filed copy of the main depot stock ledger for preceding assessment year as well as assessment year under appeal which is reproduced in the impugned order in which the assessee explained that there was a debit and credit entry of the impugned amount of Rs.7,70,79,009/- as on 31.03.2013 and that reversal entry of the same amount was made in the books, copy of which is filed at page-120 of the impugned order.

29 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi.

5.4. The Ld. CIT(A) instead of deciding the issue on merit noted that no such claim or documentary evidences could be produced before the Special Auditor or before A.O. during the course of assessment proceedings and no explanation is given regarding the contra entry made. The Ld. CIT(A) going by the Special Audit Report [“SAR”] and findings of the A.O. confirmed the addition. 6. The Learned Counsel for the Assessee reiterated the submissions made before the authorities below. He has referred to PB-A1/4 which is P & L A/c of assessee to show assessee declared profit of Rs.8,11,57,341/-. PB-A1/11 and 19 as on 31.03.2013 shows closing inventory at Rs.3,71,19,081/- in Schedules-G & M. He has, therefore, submitted that there was no negative stock. It is an accepted proposition in accounting that the closing stock of the previous year is considered as opening stock of the subsequent year. An examination of Schedule-M at page-19 of the PB-A1 would reveal that opening stock in the balance- sheet as on 31.03.2013 has been reckoned at the figure of Rs.3,71,19,081/-. Therefore, there is no infirmity in the

30 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. financial figures in both the balance-sheets. PB-A1/32 is the assessment order for preceding A.Y. 2013-2014 under section 143(3) Dated 18.03.2016 in which some routine disallowance of expenses have been made. The A.O. accepted the books of account of assessee and the bank statements. PB-1 to 6 are the report of the Special Auditor. PB-24 is trial balance as on 31.03.2013 showing stock on site at Rs.3,71,19,081/-. PB-26 to 42 is details of purchases of Rs.7,70,79,009/- which is supported by bills and vouchers, copies of the same are filed on record. PB-43 and 44 are the details of advances given to creditors/suppliers outstanding before adjustment of material received prior to 31.03.2013 and approved internally after 31.03.2013 in a sum of Rs.20,26,10,627/-. PB-45 is the details of creditors/ suppliers supplied material prior to 31.03.2013 and approved internally after 31.03.2013 in a sum of Rs.7,70,79,009/-. PB-46 to 48 are the details of advances given to creditors/suppliers outstanding in the balance- sheet as on 31.03.2013 in a sum of Rs.12,55,31,619/- which tally with PB-7, Schedule-H of the balance-sheet.

31 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. Learned Counsel for the Assessee, therefore, submitted that this entry would have no impact on taxability of income subjected to taxes. He has submitted that as regards the observation of Special Auditor, it may be explained that closing creditors as on 31.03.2013 was Rs.[-]20,26,10,627/-, therefore, there was an advance recoverable from the sundry creditors as on 31.03.2013. Against these advances, certain material was received and was lying with the assessee on 31.03.2013. An amount of Rs.7,70,79,009/- was booked as purchases and correspondingly the debit balance in the sundry creditor’s account was reduced by corresponding amount. Thus, the closing debit balance in sundry creditor’s accounts as on 31.03.2013 is reflected at Rs.12,55,31,168/- which can be checked with the figure reported in Schedule- 11 of the audited balance-sheet filed at page-15 of PB-A1. Therefore, the negative stock of Rs.[-]3,99,59,928/- got converted into a positive figure of Rs.3,71,19,081/- which have been shown in the balance-sheet. The details are noted in the balance-sheet and entries are passed as on 31.03.2013 of the impugned amount, therefore, there is no

32 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. negative stock. Learned Counsel for the Assessee referred to Page-6 of the remand report filed by the A.O. during proceedings before the Tribunal in which the A.O. has stated that assessee insisted for copy of the trial balance compiled by the Auditors should be provided to it. The A.O. however stated that the trial balance is an internal document and the conclusion of the Special Auditor had been communicated to the assessee. There was no reason why the copy of the same was required by the assessee. Learned Counsel for the Assessee submitted that copy of the trial balances prepared by the Special Auditor was not supplied to the assessee which is sole basis to make addition. Therefore, there was no default on the part of assessee in replying before the Special Auditor or the A.O. The assessee filed purchases entered into the books supported by bills and vouchers. He has, therefore, submitted that there was no difference in the accounts or in the balance-sheet. Since the assessee followed Percentage of Completion Method (“POCM”) and offered income accordingly, therefore, this addition could not be made against the assessee.

33 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. 7. On the other hand, Ld. D.R. relied upon the Orders of the authorities below and submitted that the trial balance of the Special Auditor was not supplied to the assessee. The assessee did not cooperate with the Special Auditor or the A.O. Ld. D.R. submitted that assessee failed to explain the transactions and no proper verification or investigation could be done for default of the assessee. The Ld. D.R, therefore, suggested that in view of the above fact matter may be set aside to the file of A.O. for fresh consideration.

34 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. assessee. However, two small additions on account of disallowances of expenses have been made. It is, thus, clear that in preceding A.Y. 2013-2014 the A.O. accepted the book results declared by the assessee which includes the closing balance of the stock as on 31.03.2013 in a sum of Rs.3,71,19,081/-. The assessee also filed copy of the trial balance as on 31.03.2013 which also support the fact that stock at site have been declared in a sum of Rs.3,71,19,081/-. The assessee has also filed other details of purchases advances given to suppliers and details of advances given to creditors/suppliers and how the entries have been made in the books of account which are supported by the bills and vouchers. It appears that Special Auditor has considered the issue of negative balance as on 31.03.2013 which could not be subject matter of dispute in assessment year under appeal i.e., 2014-2015 as the A.O. has accepted all the figures of preceding A.Y. 2013-2014 in the assessment order under section 143(3). The assessee explained the reasons for making the contra entry because of the purchases received could not be recorded in the books

35 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. of account as that same were not approved. The assessee further explained that there was advance recoverable from sundry creditors as on 31.03.2013. Against these advances certain material was received and lying with the assessee on 31.03.2013. The amount of Rs.7,70,79,009/- was booked as purchases and corresponding debit balance in the sundry creditor’s account was reduced by corresponding amount. Thus the closing debit balance in sundry creditor’s account as on 31.03.2013 was reflected at Rs.12,55,31,168/- which is also mentioned in the audited accounts. In view of these facts, contra entry was made in the books of account on 31.03.2013 which also belong to the preceding assessment year and could not be subject matter of dispute in assessment year under appeal i.e. 2014.2015. Thus, the explanation of assessee is plausible and reasonable which should not have been rejected by the authorities below. Since trial balance compiled by the Auditor was not provided to the assessee considering it to be an internal document at assessment stage, therefore, it cannot be used in evidence against the assessee so as to make this addition. Further, it

36 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. is well settled law that entries made in the books of account are not determinative of question whether the assessee has earned any profit or suffered any losses. What is necessary is to consider, is the true nature of transaction and whether in fact it has resulted in profit or loss to the assessee. If income does not result at all, there cannot be taxed even though in book keeping an entry made by virtue of hypothetical income which does not materialize. Thus, the Income Tax Act does not recognise hypothetical or notional income which is not received or accrued to the assessee. We rely upon Judgments of Hon’ble Supreme Court in the cases of Sutlez Cotton Mills vs. CIT 116 ITR 1 (SC); Tuticorin Alcali Chemicals and Fertilizers Ltd., 227 ITR 172 (SC) and Godhra Electricity Co. Ltd., 225 ITR 746 (SC). If this addition is considered in assessment year under appeal and stock position is taken differently, it has to be given effect in closing stock of this year, resultantly, opening stock of next assessment year would be enhanced by same amount. It would be tax neutral exercise only. The explanation of assessee is accepted that there was no justification to make

37 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. this addition. Same is liable to be deleted. It may also be noted here that for the first time it is come on record that assessee adopted Percentage of Completion Method [“POCM”] for recognizing the revenue, details of the same are noted above. It would, therefore, show that when assessee followed POCM for recognizing the revenue, then the total cost incurred by assessee during assessment year under appeal, shall have to be verified by the A.O. in order to verify the income determined by the assessee for assessment year under appeal. The other details of preceding assessment year as well as subsequent years have also been reproduced above which support the explanation of assessee that revenue was recognised on POCM method. We may note certain salient feature of POCM as under.

8.1. The percentage of completion method is an accounting method in which the revenues and expenses of long-term contracts are recognized as a percentage of the work completed during the period. This is in contrast to the completed contract method, which defers the reporting of income and expenses until a project is completed. The

38 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. percentage-of-completion method of accounting is common for the construction industry. Under this method, contract revenue is matched with the contract costs incurred in reaching the stage of completion, resulting in the reporting of revenue, expenses and profit which can be attributed to the proportion of work completed. This method provides useful information on the extent of contract activity and performance during a period. Under the percentage of completion method, contract revenue is recognised as revenue in the statement of profit and loss in the accounting periods in which the work is performed. Contract costs are usually recognised as an expense in the statement of profit and loss in the accounting periods in which the work to which they relate is performed. The percentage of completion method of accounting requires the reporting of revenues and expenses on a period-by-period basis, as determined by the percentage of the contract that has been fulfilled. The current income and expenses are compared with the total estimated costs to determine the tax liability for the year. For example, a project that is 20% complete in year one and

39 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. 35% complete in year two would only have the incremental 15% of revenue recognized in the second year. The recognition of income and expenses on this work-in-progress basis applies to the income statement. The steps needed for the percentage of completion method are as follows :

40 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. result in the current accounting period. 5. Calculate the cost of earned revenue in the same manner. This means multiplying the same percentage of completion by the total estimated contract cost and subtracting the amount of cost already recognized to arrive at the cost of earned revenue to be recognized in the current accounting period.

8.2. It may also be noted here that the chart reproduced above would reveal the revised contract value which would require incurring of substantial amount towards cost. Therefore, it would not be possible to assessee to earn income of Rs.297.18 crores in assessment year under appeal as is computed by the A.O. in the assessment order. The entirety of the facts and circumstances and total cost of the project shall have to be seen and considered by the authorities below. Since the POCM is pleaded for the first time which have an impact on this addition and other project completion expenses disallowed by the authorities below and these additions are left with academic discussion

41 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. only, therefore, we are of the view that the matter requires reconsideration at the level of the A.O. We, accordingly, set aside the Orders of the authorities below and restore the matter in issue to the file of A.O. with a direction to verify POCM adopted by the assessee and the cost incurred by the assessee in completing the contract with contract value as per observation made in this order. The A.O. shall give reasonable, sufficient opportunity of being heard to the assessee. In the result, Ground No.1 of the appeal of Assessee is allowed for statistical purposes.

8.3. On Ground No.2, assessee challenged the addition of Rs.4,77,817/- on account of mismatch in the physical and book balance of diesel. The A.O. has mentioned that in the Special Audit Report [“SAR”] there is a difference of 8610.86 litres of diesel which was unexplained as per the detailed discussion made by the A.O. in the assessment order and by taking the rate of Rs.5,549/- the addition of Rs.4,77,817/- was made by the A.O. The assessee filed written submissions before Ld. CIT(A) and it was mentioned that Special Auditor has considered one cost centre which

42 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. was 717 litre and ignored the others. However, the Ld. CIT(A) noted that assessee did not file matching figure, therefore, addition was confirmed.

8.4. Learned Counsel for the Assessee referred to PB- 183 which is reply filed before the authorities below in which it was explained that the diesel stock as per stock statement as on 31.03.2014 was 5000 litres. This comprise of 717 litres of Cost Centre Code LS 125002 and 4283 Cost Centre Code LS125001. He has referred to PB-A1/172 and 173 in support of this contention that this much stock was available to assessee. Learned Counsel for the Assessee, therefore, submitted that since assessee reconciled difference of 4283 litres, therefore, assessee would not be pressing for the remaining difference of 4328 litres of diesel which will be aggregating to Rs.2,40,160/-.

43 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. 10. After considering the rival submission and in the light of documents available on record i.e., PB-A1/172 and 173 it is clear that assessee has been able to reconcile the difference of 4283 litres, therefore, to that extent addition is liable to be deleted. However, for the remaining amount, Learned Counsel for the Assessee did not press this ground for a sum of Rs.2,40,160/-. We, accordingly, set aside the part addition and restrict the addition of Rs.2,40,160/-. Ground No.2 of appeal of Assessee is partly allowed.

44 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. profit of the actual weight on a particular date. The A.O. did not accept the explanation of assessee. The Ld. CIT(A) on the same reasoning confirmed the addition.

11.1. Learned Counsel for the Assessee reiterated the submissions made before the authorities below and submitted that in the assessment order an alleged table has been reproduced at page-18 whereby the difference of about 600 MT has been worked out between book stock and the physical stock. The same is reads as under :

As per stock As per physical Difference statement (as per verification's on Particulars Annexure 4 at page 25th March 2014) no. 45 of special (Annexure 20 at audit report page no. 122 of special audit report 10mm dia 55.45 MT 101.74 MT -46.29 MT 8 mm dia 47.05 MT 32.58 MT 14.47 MT 12 mm dia 354.93 MT 446.29 MT -91.36 MT 16 mm dia 312.49 MT 335.96 MT -23.47 MT 20 mm dia 352.58 MT 270.33MT 82.25 MT 25 mm dia 149.49 MT 466.96 MT -317.47 MT 32 mm dia 377.52 MT 597.74 MT -220.02 MT Grand Total -601.89 MT

45 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. 11.2. The A.O. made the addition by holding that assessee has booked higher expenses of the matching amount by booking excess consumption of TMT bars. Apart from the above hypothesis, there is no other reason, evidence or material in the orders to make the addition. He has submitted that details mentioned in the above table are appearing in the Annexure filed in the Paper Book. As per the above table, the figures indicated in Column-A are as per stock statement in Annexure-4 and figures mentioned in Column-B are as per physical verification report as on 25.03.2014 and difference is worked out as per Column-C. The comparison made in the table in the Special Audit Report is totally incorrect. Such an incorrect comparison was bound to lead absurd results. On examination of Annexure-20 referred above would show that physical quantity as on 25.03.2014 TMT bars has been compared with the book stock and the resultant difference is 428.32 MT on account of scrap generated. Thus the physical stock was short and not in excess as incorrectly computed in the Special Audit Report. In the Special Audit Report, the book

46 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. stock worked-out in Annexure-20 in line Item-4 has been treated as physical verification stock thereby creating an artificial negative stock. He has submitted that any excess quantity in the physical stock cannot automatically lead to a conclusion that there is an excess consumption of material and that excess expenses have been inflated. Learned Counsel for the Assessee referred to PB-52 to 54. In Page-54 the difference between theoretical and actual stock in 428.32 MT have been mentioned. He has submitted that Special Audit Report was filed later on for A.Y. 2014-2015, therefore, addition is wholly unjustified.

47 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. 14. We have considered the rival submissions. The A.O. has reproduced the above table which is the basis for making the addition as prepared by the Special Auditor. The A.O. on that basis noted that the above instance indicated excess issue of stock in books of account resulting in excess expenditure by the assessee. However, the above table would show that physical quantity of the stock as on 25.03.2014 TMT bars has been compared with the book stock and the resulting difference was 428.32 MT on account of scrap generated. Therefore, the physical stock was short and not in excess as noted by the Auditor. The assessee company has filed re-enforcement details at page-54 of the PB explaining the above issue in which the differences between theoretical and actual stock have been mentioned in 428.23 MT and scrap at 2.30%. The assessee explained before A.O. that TMT Bar suppliers give the weight of the supplies with 2% to 5% margin in the actual weight and this weight of the TMT Bar supplied is called theoretical weight i.e., the reason for using this term in the reconciliation statement of TMT Bar. The assessee also explained that the same facts are

48 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. mentioned in the Special Audit Report of physical quantity vs. theoretical quantity. It was also explained that it is a normal practice. The assessee also explained that TMT is not used in the same length in which it is supplied, rather it was cut into various sizes as per requirements. This process result in some of the permitted wastage. The above explanation of assessee have not been rebutted by the authorities below or the Special Auditor. The same facts are mentioned in the reconciliation statement at page-54 of the PB. Even by the nature of the item i.e., TMT used in construction would also supports the explanation of assessee that TMT could not be used in the same shape as have been supplied by the supplier. The assessee also explained that TMT bar suppliers given the weight of supplies with 2 to 5% margin in actual weight. Since all these facts have not been controverted by the authorities below, therefore, it appears to be an adhoc addition without any basis or material on record. Further, the A.O. merely presumed that there is an excess issue of stock in the books of the assessee resulting in excess expenditure by the

49 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. assessee for which no evidence has been brought on record. Further any excess quantity in physical stock cannot automatically lead to conclusion that there is excess consumption of material to inflate expenses. Therefore, it appears that the addition is based on merely on presumptive reconciliation which is not justified. We, accordingly, set aside the Orders of the authorities below and delete the addition. Ground No.3 of the appeal of Assessee is allowed.

50 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi.

51 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. the Special Auditor is highlighting deficit in physical quantity, therefore, contradictory allegation have been made in the physical stock which cannot exist. The sale of scrap in subsequent year have been shown as income and accounted for in A.Y. 2015-2016. Learned Counsel for the Assessee referred to PB-61 to 66 to show sale of scrap.

52 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. subsequent year. The A.O. has given contradictory finding on Ground Nos. 3 and 4 on the identical issue. The A.O. has merely relied upon audit report for making the addition without bringing any evidence or material on record. Therefore, no addition could be sustained of this nature. We, accordingly, set aside the Orders of the authorities below and delete the entire addition. Ground No.4 of the appeal of Assessee is allowed.

19.1. The A.O. made the above addition as assessee was amortizing the assets like T.Vs, Refrigerators, Air- Conditioners, furnitures etc., @ 5% per month i.e., 60% per annum against the normal depreciation rate which was to be allowed @ 10% per annum and difference of the same was added by the A.O. The assessee submitted that since Joint Venture has been formed for limited purpose for executing the project for DMRC, the assets employed for the project

53 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. cannot be held long term benefit. The assessee has mentioned that statement of temporary structure is enclosed. The Ld. CIT(A), however, did not accept the contention of assessee because assessee is not entitled under Income Tax Act and Rules to claim excess depreciation. The addition was, therefore, confirmed.

54 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. 81 of the PB. He has submitted that this issue needs reconsideration for computing the exact amount of eligible depreciation. Ld. D.R. also suggested that matter may be sent back to the file of A.O. to ascertain the correct amount of depreciation.

55 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. 22. On Ground No.6, the assessee challenged the disallowance of depreciation on account of excess payment for acquiring fixed assets of Rs.18,52,44,595/-.

22.1. The A.O. made the addition of Rs.30 crores on the ground that Special Auditor has proposed this addition as the Tunnel Boring Machine (“TBM”) purchased from Shanghai Pudong Machinery Complete Equipment Co. Ltd., a China based company for Rs.59,71,20,670/- during the year under consideration which got capitalized on 30.01,2014, This TBM was purchased without any "Letter of Credit" which implies that there is a fiduciary relationship between the assessee and the party. The A.O. also observed the findings of the Special Auditor that assessee was importing consumables from the German Enterprise, Herrenknecht, which is subsidiary in India in the name of "Herrenknecht India Pvt. Ltd", but despite this, assessee has imported TBM from Shanghai Pudong, for which 90% of payment was to be made after getting the shipping documents, but till the year end, no payment was made showing the fiduciary relationship between the assessee and

56 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. the Company. The assessee at the appellate stage mentioned that SUCG i.e., member of the JV has long-standing relations with the vendor Shanghai Pudong Machinery Complete Equipment Co. Ltd who agreed to supply TBM without Letter of Credit and quotation of the German Company which was USD 9.75 million with LC Condition was not economical over the proposal of USD 9.8. Without L.C. as it was beneficial to the assessee. Similar discrepancies were pointed-out by the A.O. regarding TBM purchase from “Hubei Tiandi for Rs.32,43,95,142/- and 3rd TBM purchased from one of the JV of L & T i.e., related party for Rs.28,18,18,901/- and that the website of this company is actually a betting site which is taken from warranty certificate by Special Auditor. Further it was also observed that two batching plants were purchased from Jinan Jufu, the L1 party, while another batching plant was imported from SG Electric which is higher than the price quoted by the L1. On the basis of this, Special Auditor observed that assessee has arbitrarily factored into the transactions with the related parties and he proposed for an

57 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. addition of Rs.30 crores which is 25% of the total value of the transaction. The A.O. accordingly made the addition after detailed discussion.

22.2. The assessee challenged the addition before the Ld. CIT(A) and written submissions was filed, copy of which is given to the Special Auditor and the A.O. for comments. The assessee has mentioned that there is a commercial rationale for this transaction and repeated the reply given before A.O. Further, the Special Auditor has mentioned that assessee has neither explicitly stated nor submitted evidence in relation to independent status of Shanghai Pudong. Further, the Special Auditor has mentioned that quotation submitted by the assessee to the Auditor are different from one submitted during the appellate proceedings. The A.O. in the remand proceedings reiterated the facts stated in the assessment order and also explained that the remittance against imports should be completed not less than six months from the date of shipment. Therefore, there is a violation of FEMA. The Ld. CIT(A) noted that assessee has not produced any details of relationship with this companies

58 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. neither this exercise have been done by the A.O. Assessee was asked to produce details and asked to give details of shareholders having substantial interest in the Member of JV SUCG and the Company viz., Shanghai - Pudong. The assessee in the written submissions has mentioned and claimed that in order to establish that Shanghai Urban Construction (Group) Corporation and Shanghai – Pudong are not related parties, Enclosed herewith the shareholding of both the companies as sent by the respective Companies. It would establish that both are not related companies. The shareholding pattern was also given which is reproduced in the appellate order. The Ld. CIT(A) however, did not accept the contention of the assessee. The Ld. CIT(A) noted that assessee has claimed that it was not related to the party because it was actually owned by State own Assets Supervision and Administration Commission (SASAC) only. For this, the information is gathered from different websites and relevant information is noted in the Order. It is noted that Shanghai – Pudong Company Limited was established in April, 1992 approved the establishment of the original

59 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. Shanghai City Economic Commission is the large State Owned Enterprise under Shanghai Machinery Complete Equipment (Group) Company Ltd., The explanation of assessee was, therefore, not accepted. The Ld. CIT(A) uphold the findings of the Special Auditor and the A.O. that excess payment has been made to these companies. Further, no T.P. study have been provided and full information have not been given to the Auditor. The Ld. CIT(A) in the background of these facts further noted that the question would arise whether the estimate made by the Special Auditor and the A.O. is correct or not. The Ld. CIT(A) considering the fact that purchase was made in relation to fixed assets from the Associate Concern i.e., Shanghai – Pudong, the A.O. should have disallow only depreciation part. The Ld. CIT(A), accordingly, directed the A.O. to disallow 25% of the depreciation in relation to transactions made with Shanghai – Pudong and disallow Rs.18,52,44,595/- which was considered as excess payment to the Associated Concern and rest of the addition was deleted.

60 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. 22.3. Learned Counsel for the Assessee reiterated the submissions made before the authorities below and submitted that admittedly the assessee purchased the capital asset. No expenses have been claimed in P & L A/c. The Ld. CIT(A) disallowed part of the depreciation. PB-89 is chart explaining relationship between the SUCG (Partners of L & T SUCG JV) and Shanghai – Pudong Machinery Complete Equipment Company Ltd., It was explained that there was no relationship between assessee and Shanghai – Pudong. He has further submitted that there was no basis for A.O. or the Ld. CIT(A) to make the addition. He has submitted that the Ld. CIT(A) accepted the contention of assessee that this issue relates to purchase of fixed assets. No evidence has been brought on record for excess payment made to this party. He has submitted that the price offered by the German Company Herrenknecht for TBM was USD 9.75 million with L.C and that offered by the Shanghai – Pudong was USD 9.78 million without L.C. The authorities below disregarded the interest savings and the L.C. cost which were influenced by mere difference of USD 0.03

61 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. million. The assessee made savings in the interest and working capital as the party was not paid till 31.03.2014. Copies of quotation of both the parties are filed in the paper book at PB-A1 189 to 196 and 198 to 200. The A.O. without any reasons doubted the genuineness of M/s. Hubei Tiandi on the basis of allegation that website of the party is betting website only. As regards lesser number of RTMs in respect of machinery purchased from L & T JV, it may be noted that correspondingly the price computed was also less by an amount of Rs.4 crores. Further German company Herrenknecht has set-up manufacturing plant in China and TBM purchased from Shanghai – Pudong was manufactured for this plant. There is a time gap between installation and commissioning in both the cases. There is no difference between custom duty exemption in both the cases. There were no basis for the authorities below to make any addition. TBM was purchased during F.Y. 2012-2013 for which assessment under section 143(3) had already been completed after examining the T.P. report which includes purchase of this machinery. Learned Counsel for the

62 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. Assessee without prejudice to the above also submitted that Shanghai – Pudong is not a related party. It was submitted that 100% shareholding in the J.V. Partner Shanghai Urban Construction (Group) Corporation is held by Shanghai State Asset Supervision and Commission (SASAC). Whereas, the shareholder of Shanghai – Pudong is held by Shanghai Machinery Complete Equipment (Group) Corporation Ltd., The fact that shareholder of both the entities are Government organisations cannot lead to a conclusion that these are related parties. Learned Counsel for the Assessee, therefore, submitted that the addition is without any justification.

63 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. 24. We have considered the rival submissions. The authorities below considered this issue in the light of Special Audit Report which reported that assessee purchased fixed assets at unfavourable price. It was noted that M/s. Shanghai Pudong is related party to the assessee, but, the details submitted on record clearly suggest that one of the J.V. of assessee SUCG was controlled by SASAC who had controlled other entities as mentioned at page-89 of the PB and ultimately, Far-reaching controlled company is, Shanghai – Pudong. Therefore, assessee is not directly related to the seller party. The assessee purchased the capital asset for business purpose, for which, no expenses have been claimed in the P &L A/c. No definite evidence or material has been brought on record as to how the assessee made excessive payment to the seller for purchase of TBM. The assessee has explained that difference in the price of German Company Herrenknecht and M/s. Shanghai – Pudong was merely USD 0.03 million. The authorities below have not considered that the transaction with Shanghai – Pudong was without L.C. and in that event assessee would

64 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. have saved the interest and L.C. cost. Further there was a difference between the installation of machinery and commissioning as Shanghai – Pudong specially manufacture TBM for assessee’s requirements. The details of all invoices/bills etc., are brought on record which clearly reveal that assessee has paid reasonable price for purchase of TBM to M/s. Shanghai – Pudong. The assessee has, therefore, been able to explain that assessee has paid reasonable price for purchase of TBM. The authorities below have not brought any evidence or material on record to justify their finding. The findings of the authorities below are based on mere presumption and surmises. The A.O. cannot step into the shoes of a businessman to determine the price. The assessee also explained that TBM was purchased in preceding assessment year in which assessment under section 143(3) have already been completed. Therefore, such an item could not be disputed in assessment year under appeal. The Ld. CIT(A) without any basis or justification held that assessee has paid excess payment for purchase of TBM. The Ld. CIT(A) without any justification has disallowed

65 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. depreciation @ 25%. It may also be noted that while deciding Ground No.15 in this appeal, the Ld. CIT(A) noted that all the transactions with M/s. Shanghai – Pudong Machinery Complete Equipment Ltd., have been confirmed by the Commissioner of Customs (Imports) and all the invoices were found genuine and as per prevailing rates. Considering the totality of the facts and circumstances of the case, we do not find any justification for the authorities below to make any addition against the assessee. We, accordingly, set aside the Orders of the authorities below and delete the entire addition. Ground No.6 of the appeal of Assessee is allowed. However, Ground No.2 of the Departmental Appeal is dismissed.

66 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. particular class of fixed asset. The Special Auditor has mentioned that in the case of TBM which is primary fixed asset and its spares needed to be capitalized, therefore, assessee has wrongly claimed it to be revenue expenditure. The reply of the assessee before A.O. was that J.V. has adopted policy of not removing the original spares from the gross block and the replacement spares are charged to revenue in the year of purchase which was not accepted by the A.O. and disallow the same amount after allowing depreciation. The assessee in the written submissions before the Ld. CIT(A) has claimed that spares are purchased and utilized for replacement and did not increase the capacity of TBM which were meant for maintenance of TBM, therefore, it should be allowed. The Ld. CIT(A) however, dismissed this ground of appeal of assessee.

25.1. Learned Counsel for the Assessee submitted that TBM machine was used for boring tunnel. Original spares are taken as capital and replacements were claimed as revenue expenditure. The details of the same are given at page-93 of the PB. It would not enhance the capacity of TBM

67 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. machinery. He has submitted that TBM was used for mechanized tunneling to carry-out tunnel boring. The said operation involves the cutting the ground with the help of cutter head which is fixed in front of the TBM, removing, excavated material from cutter head chamber to the back of the machine, ring building and filling the annular space between the rings and the cut ground with grout. All the operations are carried out with the help of back-up system installed in the shields and gantries i.e., lube system, Grease system, belt conveyor system, hydraulic system, water system etc., The above systems are comprised of different components like pumps, motors, hoses, switches sensors, transmitters, belts, rollers pulleys, pressures gauges etc., These items are replaced from time to time for completing the operation. He has, therefore, submitted that these were revenue expenditure in nature and could not be termed as capital expenditure. He has relied upon Judgment of Hon’ble Gujarat High Court in the case of CIT vs. Banco Aluminium Ltd., 93 taxmann.com 52 in which it was held that “where assessee engaged in business of manufacturing of

68 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. Aluminium extruded sections, claimed deduction of expenditure incurred on tools and dies, in view of the fact said tools and dies were consumable in nature, amount spent on the same was to be allowed as business expenditure. In this case, it was noted by the Tribunal that due to frequent change in design of products and heavy wear and tear at the time of use, life of dies and tools was very short. Learned Counsel for the Assessee submitted that authorities below should have allowed the claim of expenditure as revenue in nature.

69 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. charged to revenue in the year of purchase. The contention of assessee before Ld. CIT(A) had been that spares are purchased and utilised for replacement and did not increase the capacity of TBM. The same were meant for maintenance of TBM. The contention of assessee was not found incorrect. The assessee filed details of TBM consumable spare parts at page-93 of the PB which gives item description which were claimed as consumables which are bolt, stock sensor, hydro cylenders, belt, pipe, cable, single disc cutter etc., The nature of these items thus shows that these are consumable in nature and need for day-to-day wear and tear. The nature of tunnel boring machine itself shows that it is doing a specified job of cutting the ground, removing the excavated material and make a tunnel. In this process, the back-up consumable items are frequently required for completing the operation related to the business activity of the assessee. The assessee did not remove the original spares from the block of assets, therefore, replacement of the items have been rightly claimed as revenue expenditure in nature. Considering the nature of the machine and the items

70 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. replaced in the machinery, it is clear that the TMB spare parts are consumable in nature, therefore, assessee rightly claimed it to be revenue expenditure. The authorities below, therefore, were not justified in denying the claim of expenses under section 37 of the I.T. Act. We, accordingly, set aside the Orders of the authorities below and delete the entire addition. Ground No.7 of the appeal of Assessee is allowed.

28.1. The A.O. made this addition which is the difference between depreciation claimed by assessee as per books and depreciation calculated as per Income Tax Rules. The Special Auditor has observed that assessee has provided depreciation based on useful life of the asset over the contractual period of the project and the rate prescribed in Rule-5 of the Income Tax Rules are not followed. Whereas, it is mandatory for all the Companies to prepare their annual accounts in accordance with the mandatory Accounting Standard issued by the ICAI, yet adjustments declared to the

71 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. P & L A/c are required to be made in order to arrive at assessable income as per the Act and Rules. The Special Auditor has also mentioned that the contention of the assessee that it has not charged depreciation, but, in fact amortized the cost of the asset is not acceptable under section 37 of the I.T. Act as the capital expenditure is not allowable. The Special Auditor has worked-out allowable depreciation of Rs.9.34 crores as against claim of Rs.14.25 crores and excess claim of depreciation of the impugned amount was disallowed.

28.2. The assessee reiterated the submissions made before the Ld. CIT(A). It was also submitted that disallowance should be restricted to Rs.2,94,44,949/- as per calculation given before A.O. The Ld. CIT(A) accordingly directed the A.O. to look into the alternate plea raised by the assessee and allow depreciation to the assessee as per Income Tax Act and Rules, as applicable during the assessment year under appeal. Since no calculation of the claim so made in alternate contention was given, therefore, claim of assessee was rejected. Learned Counsel for the

72 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. Assessee submitted that A.O. may allow the depreciation as per Rules. He has also submitted application of assessee under section 154 is also pending before A.O.

73 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. 31.1. The A.O. made this addition based on observation of the Special Auditor that regarding foreign exchange gain as on 31.03.2014, the assessee was required to restate the foreign currency value into Indian currency as per AS-11. During the course of assessment proceedings, assessee has given reply relating to the provisions of Section 43A of the I.T. Act, which was not accepted by the A.O. on the ground that Section 43A applies to the exchange reference determined at the time of payment for the equipment or at the time of actual repayment of its loan. Whereas, the process of ascertaining the exchange rate difference (profit or loss) at the end of each financial year is not governed by Section 43A. During the appellate proceedings assessee filed written submissions in which it was claimed that in respect of foreign exchange currency transaction, AS-11 is regularly followed by the assessee. Assessee has claimed again that on transaction of foreign currency liability in respect of purchase of capital asset, it is the capital receipt and not subject to tax in the hands of the assessee. The Ld. CIT(A), however, did not accept the contention of assessee and

74 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. noted that assessee has wrongly relied upon provisions of Section 43A which should be applied at the time of payment of capital expenditure and not for the year end valuation of foreign exchange. The Ld. CIT(A), therefore, confirmed the addition.

75 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. subject to tax in the hands of the assessee. He has relied upon Judgment of the Hon’ble Supreme Court in the case of Sutlez Cotton Mills Ltd., 116 ITR 1 (SC) in which it was held as under :

"Whether the loss suffered by the assessee was a trading loss or not would depend on whether the loss was in respect of a trading asset or a capital asset. In the former case, it would be a trading loss but not so in the latter.

The law is well settled that where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business. But, if on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature. Now, in the instant case, no finding was given by the tribunal as to whether the sums were

76 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. held by the assessee in West Pakistan on capital account or revenue account and whether they were part of fixed capital or of circulating capital embarked and adventured in the business in West Pakistan. If the amounts in question were employed in the business in West Pakistan and formed part of the circulating capital of that business, the loss resulting to the assessee on remission of those two amounts in India, on account of alteration in the rate of exchange, would be a trading loss, but if, instead, those amounts were held on capital account and were part of fixed capital, the loss would plainly be a capital loss. The question whether the loss suffered by the assessee was a trading loss or a capital loss could not, therefore, be answered unless it was first determined whether the amounts in question were held by the assessee on capital account or on revenue account or, to put it differently, as part of fixed capita! or of circulating capital.”

32.1. He has further relied upon Judgment in the case of CIT vs. Jagatjeet Industries Ltd., 199 taxmann.com 54 in

77 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. which it was held that “the foreign exchange fluctuation gain accrue on account of money raised through issue of equity share and it was held that fluctuation gain is to be treated as capital receipt in the event of such share capital has been collected in foreign exchange irrespective of end use of share capital”. Learned Counsel for the Assessee without prejudice to the above submissions submitted that in case it is held that provisions of Section 43A are not applicable since there was no actual settlement and liability during the year, then, there would not be any need to pass any accounting entry at the close of the year and same entry would have to be based on date of settlement of the outstanding liability. In such a scenario, the fluctuation gain cannot be brought to tax in the hands of assessee being on account of capital transaction. He has also relied upon Judgment of Hon’ble Supreme Court in the case of CIT vs. Woodword Governor Pvt. Ltd., 312 ITR 254 (SC).

78 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. Section 43A are attracted only at the time of actual payment and do not apply to year end adjustment for exchange rate differences.

79 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. assessee made a book entry at the end of the year with reference to capital asset on account of foreign exchange fluctuation gain which was capitalized. Thus the gain on transaction of foreign currency liability was in respect of capital asset which should have been considered as capital receipt only. Further even if Section 43A would not apply to the matter in issue because no actual settlement of liability has happened during the assessment year under appeal, therefore, book entries would not be relevant to determine the income of assessee. It is well settled Law that book entries are not determinative of income of assessee whether income of assessee is taxable or not, it has to be decided as per Law. We rely upon Judgment of Hon’ble Supreme Court in the case of Sutlez Cotton Mills Ltd., vs. CIT (supra) and Tuticorn Alcali Chemicals & Fertilizers Ltd., (supra). Even if in this case assessee has made an entry of gain on transaction of foreign currency liability in respect of capital asset at the year end, which would not be income of the assessee, therefore, no addition could be made against the assessee of this nature. We, accordingly, set aside the

80 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. Orders of the authorities below and delete the entire addition. Ground No.9 of the appeal of Assessee is allowed.

35.1. The A.O. disallowed the above amount towards design charges as the Special Auditor has observed that certain expenses of deferred nature were charged fully to Profit & Loss Account such as design charges are in the nature of deferred revenue expenditure which is incurred for Rs.7,71,84,385/- and this expenses has to be spread over the life of the project which was fully claimed in the initial year of the operation of the JV. The assessee submitted before the A.O. that design is made and approval by DMRC in the initial stage is taken and on approval of this only the execution of work started, therefore, it should be allowed at the start of the execution itself and it would not fall in the category of deferred revenue expenditure. The A.O. did not accept the contention of the assessee on the ground that there is no separate billing on the client towards the design

81 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. and this activity is part of substantial cost related to the entire project and the project is based on project completion method, therefore, addition was made. The Ld. CIT(A) on the same reasoning, confirmed the addition.

82 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. expenditure, notwithstanding the fact that part of such expenditure was carried to balance-sheet as deferred revenue expenditure. Same view is taken in the case of ACIT vs. Medicaman Biotech Ltd., 1 SOT 347, JCIT vs. Charka Pharmaceuticals 4 SOT 393 and CIT vs. Modi Oliveti Ltd., 38 taxmann.com 113.

83 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. revenue expenditure. Any expenditure of revenue nature is fully allowable in the year in which it was incurred. It is not in dispute that the expenses in question is revenue in nature. The assessee claimed that amount was incurred on account of design charges which is approved by DMRC in the initial stage. When the design is approved only then the execution of the work would start, therefore, design charges shall have to be incurred once for start of the execution of the project. Therefore, it could not be treated as deferred revenue expenditure in nature. The decisions relied upon by the Learned Counsel for the Assessee squarely apply to the facts and circumstances of the case. We, accordingly, set aside the Orders of the authorities below and delete the entire addition. In the result, Ground No.10 of the appeal of Assessee is allowed.

84 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. that assessee had debited Rs.2,67,28.095/- as bank guarantee charges, out of which, charges of Rs.1,84,74,400/- pertains to subsequent years and charges amounting to Rs.37,59,867/- provided by SUCG should not have been debited in the P & L A/c of the JV as per the Agreement. The A.O. did not accept the plea of the assessee that in Clause 13.1 of the Agreement any fronting guarantee cost paid to local branch shall be paid directly by UJV. The assessee in the written submissions has repeated this submission made before A.O. During the course of appellate proceedings, assessee was asked to give clarification regarding fronting bank guarantee which was given by the assessee. The Ld. CIT(A) considering the explanation of assessee, did not find any justification in disallowing this amount which is paid by the assessee and the amount of Rs.37,59,867/- was allowed to the assessee. However, the bank guarantee charges of Rs.2,22,37,267/- which is claimed by assessee but pertains to liability of JV was not allowed in view of Terms of the Agreement. This ground was partly allowed by the Ld. CIT(A). The assessee is in appeal on

85 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. the above ground and Revenue is in appeal on Ground No.6 challenging deletion of the addition.

86 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. claimed by the assessee JV but pertain to liability of JV partner as per Agreement. It was submitted that amount of Rs.1.84 crores could not be treated as deferred revenue expenditure. It was submitted that bank guarantee charges may have been paid for duration of more than one year and once the same is incurred, the same are not recoverable once charged by the Bank. Therefore, it could not be deferred revenue expenditure. An amount of Rs.37,59,867/- have been disallowed by the authorities below because same was to be borne by the JV partner. It was submitted that Clause 13.1 of the Agreement clearly provides that any fronting guarantee cost paid to the local Bank shall be paid directly by the JV. Since the entire amount is paid by the JV, therefore, no disallowance could be made. Learned Counsel for the Assessee, therefore, submitted that no addition should have been maintained. In support of the contention, he has relied upon Judgment of the Hon’ble Madras High Court in the case of Sivakami Mills Ltd., vs. CIT [1979] 120 ITR 211 (Madras) in which it was held as under :

87 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi.

“Where the assessee-company purchased for its business some machinery from abroad on deferred payment basis and had to pay some commission to a bank which had guaranteed the installment payments by it :

Held that the expenditure incurred for the purchase of the machinery was undoubtedly a capital expenditure, for it brought in an asset of enduring advantage. But the guarantee commission stood on a different footing. By itself, it did not bring into existence any asset of an enduring nature; nor did it bring in any other advantage of an enduring benefit. The acquisition of the machinery on installment terms was only a business exigency. If interest paid on a credit purchase of machinery could be held to be revenue expenditure, one failed to see how guarantee commission paid to a bank for obtaining easy terms for acquisition of the machinery could be regarded as capital payments.”

40.2. He has submitted that the aforesaid decision has been confirmed by the Hon’ble Supreme Court by dismissing

88 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. the Departmental Appeal in the case CIT vs. Sivakami Mills Ltd., reported in [1997] 227 ITR 465 (SC).

89 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. amount consisting of two parts as explained above. The assessee has referred to JV Agreement which clearly provide that any fronting guarantee cost paid to the local Bank shall be paid directly by the JV, therefore, there was no justification to sustain any of the addition on this issue. It is well settled Law that guarantee expenses paid by the assessee was a revenue expenditure and an allowable deduction. Judgment in the case of Sivakami Mills Ltd. vs. CIT [1979] 120 ITR 211 (Mad.) clearly apply to the facts of this case. Following the same, we set aside the Orders of the authorities below and delete the entire addition. In the result, Ground No.11 of the assessee is allowed and Ground No.6 of the Departmental Appeal is dismissed.

90 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. considering it to be prior period expenditure. The assessee submitted before the Ld. CIT(A) that assessee follows common accounting practice of reversing the provisions created at the end of the previous financial year on the First Day of the Next Financial Year. The amounts booked on receipt of invoices during financial year are charged to the P & L A/c which has the effect of knocking off the same against credit in the expenses account. Thus, there is no impact on the profit of the current financial year and this does not lead to prior period expenses being debited to P & L A/c. The A.O. did not accept the contention of assessee and the Ld. CIT(A) on the same reasoning confirmed the addition.

43.1. Learned Counsel for the Assessee submitted that there are no prior period expenses because it is first year of business operation of assessee, so, no prior period expenses could be considered. It was submitted that during preceding year the activity on the project awarded by the DMRC was commenced. Project did not achieve a completion level of 25% and therefore, revenue was not recognised under Project on Completion Method [“POCM”]. During assessment

91 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. year under appeal 25% completion was achieved and, therefore, revenue was recognised by applying POCM. It is on account of this fact the amount incurred on purchases and sub-contracts during F.Y. 2012-2013 were claimed as expenditure in which year, in which, POCM was applied for the first time. These expenses can by no stretch of imagination be termed as expenses pertaining to prior period, therefore, no disallowance could be made.

92 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. authorities below and delete the entire addition. In the result, Ground No.12 of the appeal of the Assessee is allowed.

93 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. 47. Learned Counsel for the Assessee reiterated the submissions made before the authorities below and submitted that perquisite is definied in Section 17(2) of the I.T. Act which includes value of rent free or concessional rent accommodation provided by the employer, value of any benefit/amenity granted free or at concessional rate to specified employees, any sum paid by the employer in respect of an obligation, which was actually payable by the assessee, any sum paid by the employer for assurance on life of the employee or to effect contract for an annuity and value of any other fringe benefit as may be prescribed. He has submitted that assessee has incurred expenses for business purpose which are allowable deduction. He has submitted that findings of the authorities below are incorrect. The assessee incurred food expenses for staff outside office. These are the expenses reimbursed to the expats staff against food including snacks if he is out of the Office on an official work. It is not a fixed allowance paid to the staff. The assessee provides lunch, evening snack/ dinner to the staff on duty again irrespective of expat or

94 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. local. The expenses on this account are debited to the account under the Head “Staff Mess Expenses” which are not perquisite in nature. No specific car is allotted to any expats staff. These are hire charges pertains to car taken on hire for movement of staff including expats from site to site - site to DMRC office and other official work. No car is allotted to any employee or expats. Guest house have been maintained by the assessee for accommodating the staff on temporary basis at the time of joining or coming to the city. From the nature of these expenses, it is apparent that same have been incurred during discharging of official duties by the staff in the course of execution of the project. The authorities below have not been able to point out how these expenditure were perquisite in nature. Learned Counsel for the Assessee submitted that it is an adhoc addition. In Section 40(a)(ia) of the I.T. Act, no disallowance could be made on account of payment of salary. Therefore, no addition could be made on this Head.

95 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. 48. On the other hand, Ld. D.R. relied upon the Orders of the authorities below and submitted that A.O. has verified the information before making the addition. Since no TDS was deducted, so disallowance was correctly made.

96 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. specific reasoning for making part addition. The assessee explained before A.O. that these expenses were incurred upon the staff for the purpose of business and explanation of assessee have not been disputed by the A.O. The nature of these expenses apparently shows that same have been incurred during the official duties by the staff in the course of execution of the project. The nature of business of the assessee clearly show that many staff shall have to be present at the project at different places and levels. The project is executed in odd hours also, therefore, if small amount have been incurred on staff for the purpose of business which have not been disputed by the A.O. it would not fall within the definition of “perquisite” for the staff. It may also be noted here that the Special Auditor has admitted that these are allowable as business expenses, therefore, it should have been pointed out in the Orders as to how these were perquisite in nature. It is also observed by the Special Auditor that these perquisites should be added to the salary of the employees for computation of TDS liability. In Section 40(a)(ia) the word “salary” have not been

97 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. used so as to make disallowance on account of non- deduction of TDS. Therefore, there was no justification for the authorities below to make adhoc addition of Rs.50 lakhs. We, accordingly, set aside the Orders of the authorities below and delete the entire addition. In the result, Ground No.13 of the appeal of Assessee is allowed.

98 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. confirmation as fresh evidence was also filed. From perusal of the confirmation filed by the assessee, it was gathered that this confirmation is different from the vendor which was given to the Special Auditor. The Ld. CIT(A) noted that it is apparent that it is not clear from the reconciliation why the bill was not entered for the amount of Rs.71,99,538/- and why advance TDS of Rs.44,18,253/- was not booked by the vendor. Such a vague reconciliation deserve to be rejected. Further fresh evidence was not filed along with application under Rule 46A. The Ld. CIT(A), therefore, found that difference has not been reconciled. It was also noted that as per SAR the party has not booked TDS amount of Rs.17,04,402/-, work order of Rs.80,21,028/- as well as advance shown by the assessee of Rs.90,29,913/-. Hence, this addition was confirmed by the Ld. CIT(A).

99 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. Latest confirmation was also filed. Copies of the same are filed at PB-A2-474 to 479. He has submitted that in the assessment order addition has been made for failure to provide vendors balance confirmation whereas Appellate Order upholds the said addition on the ground that payment of this amount which is booked by the assessee as expenses is not supported by confirmation from the vendor. A close examination of the reconciliation appearing on page-479 of PB-A2 would reveal that invoice of Rs.71,99,538/- raised by the vendor M/s. SB Protech Pvt. Ltd., have been booked by the assessee in next financial year on June, 2014. Therefore, the CIT(A) have fell in error in holding that purchases have been booked by the higher amount. The assessee has reconciled all the figures.

100 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi.

101 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. order to come to the just decision in the matter. A.O. shall give reasonable, sufficient opportunity of being heard to the assessee. In the result, Ground No.14 of the appeal of Assessee is allowed for statistical purposes.

102 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. assessee by email as these confirmations could not be provided before Special Auditor or during the course of assessment proceedings, A.O. made the aforesaid addition.

103 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. case of some of the parties were mentioned by the A.O. on merits also. The assessee filed rejoinder to the remand report. As the A.O. has not given reply on merit on all the confirmations, the report from the A.O. was sought. The A.O. has given his comments on all the 36 confirmations. The assessee also filed rejoinder. The Ld. CIT(A) considering the confirmation of the record, remand report and rejoinder of the assessee, considered each and every aspect and sustained the addition of Rs.8,66,87,701/- and deleted the remaining substantial addition. The Assessee as well as Revenue are in appeal on this ground. The findings of the Ld. CIT(A) at Pages 143 to 148 of the appellate order in paras 22.18.2 (a) to (f) are reproduced as under :

(a) “In the case of the Shanghai Pudong Machinery Complete Equipment Co. Ltd., the Assessing Officer in the remand report has mentioned that as per books of the appellant, the balance of this company is of Rs.74,09,78,381/- whereas as per the confirmation given by the vendor this is Rs.72,64,59,354/- and there is a difference of

104 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. Rs.1,45,19,027/-. However, the Assessing Officer has claimed that all the bills have not been attached with the confirmation, the confirmation of the party is not original and the reconciliation which is given is neither signed nor stamped and not verified by the vendor or by the appellant. The Assessing Officer has also mentioned that the appellant has to take RBI rate for conversion of foreign currency as on 31/03/2014 hence, the rate given in the reconciliation is also not acceptable on merit.

When this was confronted to the appellant in the rejoinder 19/03/2018, the appellant has given the RBI rate as on 31/03/2014 obtained from the website which is Rs.60.998/- and not Rs.59.92/- as taken by the Assessing Officer. As the Assessing Officer has objected that no bills and vouchers regarding the purchase of machinery from Shanghai Pudong was given by the appellant, during the course of appellate

105 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. proceedings, the appellant was asked to produce the invoices and the bill of entries of custom clearance of this party. Regarding, the shortage of bills the appellant has mentioned that these bills and vouchers have already been given to the Assessing Officer and Special Auditor at the time of special audit and these vouchers are again given during the course of appellate proceedings by a separate letter dated 19/03/2018 mentioned supra in Para 16.

As the appellant has given these invoices along with the custom clearance and no inquiry was conducted by the Assessing Officer regarding the verification of the same and the Special Auditor has also given his observation in the special audit against the genuineness of this transaction, a letter was written to the Commissioner of Custom (Import) for verification of these invoices which was given by the appellant along with the bills of entries vide letter

106 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. dated 22/03/2018. In response, the Commissioner of Customs have confirmed all these transactions by e-mail as well as by his letter received in this office by speed post and screen shorts of all the bills of entries pertaining to these invoices have been given.

The result of this inquiry is also informed to the Assessing Officer for verification during the course of appellate proceedings. From this, it is gathered that the claim made by the appellant regarding the import of machinery and related spare parts from Shanghai Pudong Machinery Complete Equipment Co. Ltd. cannot be doubted and the addition made by the Assessing Officer of Rs.74.09 crores on this account deserves to be deleted.

This is also relevant that the appellant has claimed that the expense of these machineries which was imported from Shanghai Pudong Machinery Complete Equipment Co. Ltd. are

107 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. booked under the head ‘Fixed Asset’ in the books of the appellant on which the appellant has only claimed depreciation during the year under appeal. On this account also the Assessing Officer has erred in making the addition of Rs.74,09,78,381.9 as the appellant has only claimed depreciation and not debited entire amount under revenue head.

(b) Further in the case of discrepancies mentioned by the Assessing Officer for Sl. No. 1 & 2 the difference of Rs.3,36,19,936.54 (1,45,19,027.58 + 1,91,00,908.96) is only for RBI rate which is taken by Assessing Officer as Rs.59.92 and by appellant as Rs.60.998. However, the rate taken by the appellant is verified from the website of RBI and the rate of RBI is Rs.60.998/- from 28/03/2014 to 31/03/2014 and on this account also there is no difference in the rate as given by the Assessing Officer in the remand report dated 09/01/2018 mentioned supra in para 7. Hence, no addition is

108 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi.

called for on account of rate difference of these parties

and the appellant will get relief on this account.

(c) In the remand report dated 13/03/2018, the

Assessing Officer has given reply on merit of all the

36 parties and discrepancies have been pointed

out. In this light, remand report of the Assessing

Officer given in Annexure-A mentioned supra in

para 12, the confirmations of all the parties and the

rejoinder of the appellant mentioned supra in para

15 are analyzed. However, from the details given

by the Assessing Officer at Sl.No. 1 to 36 in the

remand report in Annexure – A, it is gathered that

appellant has shown less credit balance than

shown by the vendors in the following cases :

Amount as per Amount as Sl.No. Name of the vendor books of the per books of Difference appellant vendor 1. Ultratech Cement 52242995.04 65070329 (12,827,333.96) 2. L & T Geostructure LLP 28614654 118644050 (90,029,396.00) 3. BASF INDIA LTD (NEW DELHI) 18075892.1 20573772 (2,497,879.90) 4. SHREE GOPALA GRIT CO. 15122800.7 15713472.9 (590,672.20) 5. ORIENTAL FERRO ALLOYS P.LTD. 7097972.9 7097973 (0.10) 6. A.S. TRADERS 4509360.4 4847009 (337,648.60) 7. CONDAT CHINA CHEMICALS CO.LTD. 3959956 3959956.06 (0.06) 8. DEXTRA INDIA P.LTD. 4120071.4 4506134 (386,062.60) 9. ADOADDITIVES TECHNOLOGIES P. LTD. 3671971.8 3785928.84 (113,957.04) 10. VEEJAY SERVICE STATION 3247959 6960237.99 (3,712,278.99) 11. SHIVAM MINERAL SUPPLIERS 283081.7 43670258 (1,536,212.30) 12. MANGLAM ENTERPRISES 2654598.2 3449577 (794,978.80) 13. COMPETENT ENGINEERING CO. 2514128.2 2944232 (430,103.80) 14. K3G ISPAT P.LTD. 2504811 2960613 (455,802.00)

109 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi.

Hence, the amount of Rs.32,94,90,752.8 which is

added by the Assessing Officer on account of

these vendors deserve to be deleted as the credit

balance shown by the applicant is less than the

balance shown by these vendors in the

confirmation.

(d) Further, the Assessing Officer in Annexure – A

and Annexure – D in the remand report dated

13/03/2018 has mentioned about the

discrepancies in the confirmation letters such as

bills are not attached, the copy of ledger is not

attached, PAN and address is not given and

reconciliation as well as the ledgers are not

stamped or signed. These discrepancies are not

110 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. repeated here for the sake of brevity. When this has been given to the appellant, in the rejoinder dated 19/03/2018, the appellant has given the reply that reconciliation is not signed by the appellant, we indicate to sign/stamp all the reconciliations and consider that these are signed and stamp by the appellant. Surprisingly such statement on the part of the appellant is not acceptable as the matter of reconciliation of the vendor’s account is raised since the period of special audit which was not done by the appellant. Further, during the course of assessment proceedings also the appellant has failed to do this before the Assessing Officer. Now, with the application under Rule 46A these are filed as additional evidences and the differences in the account is reconciled by the appellant showing computerized ledger account as per his books and unless this reconciliation statement is signed by the appellant this has no

111 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi.

evidentiary value. The appellant has also

confirmed that whenever vendor has enclosed

ledger account along with confirmation this was

forwarded otherwise the ledger account as per

books of the appellant is given. This is not

acceptable as in all the confirmations of the

vendors, it is mentioned that ledger is enclosed

which is not furnished by the appellant reasons

best known to them. In this light, the

reconciliation of the appellant in the case of

following parties cannot be accepted as it suffers

from various discrepancies which could not be

explained by the appellant even at appellate

stage. The details are as below :

Amount as per Amount as per S.No Name of the Vendor books of the books of vendor Difference appellant 1. JSW Steel Ltd. 47302834.2 208238.06 26479028.20 2. Amberg. TTI Eng. Pvt. Ltd. 14349402 486830 13862572 3. Tondon Consultants Pvt. Ltd. 38,74,006 3864995 9011 4. Jet-First Intl. Log Pvt. Ltd. 35,92,539 3581777.92 10761.08 5. CT Nova Equipment Pvt. Ltd. 14,98,465 5,81,073 9,17,392 TOTAL 7,06,17,246.20 87,22,913.98 4,12,78,764.28

112 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. In the light of the above, the excess credit shown by the appellant as per the confirmation of the vendors of Rs.4,12,78,764.28 deserves to be confirmed as unexplained credit u/s68 of the Act.

(e) Further the appellant has filed the confirmation for the amount of Rs.121,98,95,398/.- out of Rs.126,53,04,335/.-, hence, the difference of Rs.4,54,08,937/- (126,53,04,335 – 121,98,95,398) for which no confirmation could be given by the appellant even at appellate stage deserves to be confirmed. (f) In this light, the addition made by the Assessing Officer of Rs.126,53,04,335/- is restricted to Rs.8,66,87,701.28 (4,12,78,764.28 + 4,54,08,937) and the appellant will get relief accordingly.”

113 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. balances as per books of the respective vendors as mentioned in para (d) supra. He has also submitted that as regards non-filing of the confirmations of various vendors for a sum of Rs.4,54,08,937/- the same can also be filed. He has submitted that apart from the above submissions, the provisions of Section 68 cannot be applied in the case of trade creditors. It needs to be appreciated that out of total creditors aggregating to Rs.126.53 crores, confirmations to the extent of Rs.117.86 crores have been filed. The A.O. having accepted the purchases of the assessee, even if certain parties did not furnish confirmations would not mean that it was concealed income or deemed income of the assessee which could be subjected to tax under section 68 of the I.T. Act, 1961. He has submitted that since purchases have been disclosed by assessee from vendors and substantial purchases have been confirmed, therefore, no addition under section 68 could be made. In support of his contention, he has relied upon the following decisions :

(i) Zazsons Exports Ltd., vs. CIT 88 taxmann.com 617 (Alld.) (HC)

114 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. (ii) Raghubir Singh vs. DCIT 83 taxmann.com 187 (iii) DCIT vs. Divine International 16 taxmann.com 262 (iv) Bhagyanagar Oil Industries vs. ITO – ITA.No.1178/Hyd/2012 (Hyderabad (Bench). (v) ITO vs. Smt. Umadevi Shankarappa Thimmaiah 49 taxmann.com 496.

57.1. Learned Counsel for the Assessee submitted that Ld. CIT(A) correctly deleted the substantial addition and on the proposition of the above decisions, the Ld. CIT(A) should have deleted the remaining addition as well.

115 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. opportunity to examine the sundry creditors, therefore, matter may be remanded to the A.O. for fresh verification and investigation.

116 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. matter which is also not in challenge in the Departmental Appeal. The Ld. CIT(A) considered each and every case specifically and in the case of Shanghai – Pudong, confirmation was given which is supported by bills, invoices and bills of entries of custom clearance. Commissioner of Customs (Import) has also verified all the entries and confirmed all the transactions as genuine between the parties in which no doubts have been raised by the A.O. Therefore, there was no basis to consider the discrepancies in that case, therefore, addition of Rs.74.09 crore was correctly deleted. Further, assessee has claimed depreciation only on this item, therefore, there could not be any discrepancy in their account. As regards other difference of Rs.3.36 crores, it was mainly on account of RBI rate which have been clarified by the RBI through their website, in which, no discrepancy have been pointed out by the Ld. D.R. The Ld. CIT(A) has also considered the cases of 26 vendors specifically in his findings and found that credit balance shown by the assessee was less than the balance shown by these vendors in their confirmations. This fact is also not

117 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. disputed through any evidence or material on record. On the basis of these finding of fact recorded by the Ld. CIT(A), we are of the view that Ld. CIT(A) correctly deleted the substantial addition. No material have been brought on record to contradict the finding of fact recorded by the Ld. CIT(A). Therefore, Departmental Appeal has no merit and Ground No.3 of the appeal of the Department is dismissed.

59.1. As regards appeal of assessee, Ld. CIT(A) found that assessee could not reconcile difference of Rs.4.12 crores and for the rest of the amount of Rs.4.54 crores, no confirmation have been filed. The Ld. D.R, therefore, rightly contended that since difference could not be reconciled and no confirmation have been filed, therefore, no interference is required in the matter. However, Learned Counsel for the Assessee has relied upon several decisions noted above in which it was held that when assessee disclosed purchases from the vendors, part of which have not been confirmed by them, no addition under section 68 of the I.T. Act, could be made. However, no such plea was taken before the authorities below and no such issue have been decided by

118 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. the authorities below, therefore, this issue requires reconsideration at the level of the A.O. We, accordingly, set aside the Orders of the authorities below to the extent of addition sustained by the Ld. CIT(A) of Rs.8,66,87,704/- and restore this issue to the file of A.O. with a direction to re- decide this issue in the light of decisions relied upon by the Learned Counsel for the Assessee as per Law. A.O. shall give reasonable, sufficient opportunity of being heard to the assessee. In the result, Ground No.15 of the appeal of Assessee is allowed for statistical purposes.

119 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. shown in the return of L & T is the investment by L & T in J.V. which is not accepted by the A.O. The assessee filed written submissions before the Ld. CIT(A) and has taken a new plea that the difference of Rs.34 lakhs is shown under the Head “Receivables” and no reason to the same was given by the assessee. The Special Auditor mentioned that this is a fresh evidence and no comments have been made in the audit report. The A.O. also in the remand report did not support the explanation of assessee. In this regard, the confirmation given by the L & T was also taken into consideration which is reproduced in the appellate order (PB-2A-516) in which it was explained that “At Heavy Civil we account UJV profits and investment under net asset method. Hence, we have considered the net asset from UJV as out investment instead of total amount funded. The difference between the amount funded in UJV and net asset is grouped under “due to from UJV” under current account.” Bifurcation of same is also given. The Ld. CIT(A) did not accept the contention of assessee and confirmed the addition.

120 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi.

121 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. the investment. The Ld. CIT(A) noted that it was a new plea taken before him, therefore, addition was confirmed. There were no bar for the assessee to explain the issue by filing confirmation of the difference. Therefore, the matter requires reconsideration at the level of the A.O. We, accordingly, set aside the Orders of the authorities below and restore this issue to the file of A.O. with a direction to re-decide this issue in the light of confirmation filed by assessee from L & T to explain the above issue. A.O. shall verify break-up of the amount in question as mentioned in the confirmation. A.O. shall give reasonable, sufficient opportunity of being heard to the assessee. In the result, Ground No.16 of the Assessee is allowed for statistical purposes.

122 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. made. On this, A.O. has calculated 7.5% interest which comes to Rs.44,68,235/- as notional interest which were disallowed by the A.O. The A.O. has not accepted the submission of the assessee made during the course of assessment proceedings that the fund has to be given to the JV as per Supervisory Board as it is clearly mentioned in the JV Agreement that funds shall be made available in proportion but only the time and manner will be decided by the Supervisory Board. The assessee challenged this addition before the Ld. CIT(A) and claimed that addition on account of notional interest is not governed by the provisions of the Act. The Ld. CIT(A) did not accept the contention of assessee and confirmed the addition and dismissed this ground of assessee.

123 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. permissible as per provisions of the Act. On close examination of the audited P & L A/c would reveal that assessee has in fact declared a negative expenditure of Rs.2.26 crores on account of interest. Therefore, in fact, the lower authorities have brought to tax of notional income which is not permissible in Law as is held by the Apex Court in the case of CIT vs. Godhra Electricity Supply Co., 225 ITR 746 (SC). He has referred to A1/26 in support of the above contention.

124 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. a trader to make maximum profit.” The assessee explained before the authorities below that it is for the Supervisory Board as per JV Agreement to see that funds are made available by both the members of the JV. The entire proceedings are supervised by the Supervisory Board, therefore, merely because one member of the JV has not contributed their capital in the JV is no ground of charging notional interest on the capital which is not contributed by the member of the JV. There is no provision under the Income Tax Act to charge notional interest in such circumstances. Learned Counsel for the Assessee also demonstrated that in fact assessee has declared negative expenditure of Rs.2,26,95,787/- on account of interest (PB A1/26). Therefore, there is no justification of charging notional interest which were not due or collected by the assessee. We, accordingly, set aside the Orders of the authorities below and delete the entire addition. Ground No.17 of the appeal of Assessee is allowed.

125 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. gift. The A.O. disallowed this amount on account of customary gift given to the clients and business associates at the time of Diwali. From the details submitted by the assessee, it was noted that the above gifts includes the gold purchase for gifting and no documentary evidences for the purchase of such gift could be given by the assessee. The Ld. CIT(A) also confirmed the addition, despite assessee produced copies of the vouchers to show that it has purchased gold coins for giving as gift.

126 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi.

127 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. 73. The A.O. has made the addition of Rs.58,28,54,544/- on the ground that the Special Auditor has observed that the transactions with the related concerned i.e., L & T Geo Structures is made where contract was awarded on available terms and actual comparison has never taken place as the contract is awarded to the Associated Concern on 10.12.2012 whereas the quotation of one of the Vendor was obtained on 14.12.2012. Besides this assessee has declared CUP method Arms Length Price (“ALP”) which is based on quotation received from the Vendors, whereas, the CUP method evaluate the ALP by comparing the price and addition of the similar transaction between the taxable and unrelated party or between two unrelated parties. During the course of assessment proceedings, assessee has mentioned that this contract was given to the Associated Concern as the quotations of other contractors i.e., IPEX Infrastructure Pvt. Ltd., and Valecha Engineering Ltd., were found to be higher than the Associated Concern. However, the allegation of the Auditor was not controverted. The A.O. rejected T.P. study and

128 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. added back the entire amount of Rs.58,28,54,544/- made to the Associated Concern to the total income of the assessee.

73.1. During the course of appellate proceedings, the assessee filed written submissions claimed therein that quotation of building Diaphragm was called from these parties i.e., IPEX Infrastructure Pvt. Ltd., and Valecha Engineering Ltd., and related party L &T Geo Structure LLP and detailed T.P. study was also undertaken and submitted to the A.O. The T.P. study contains quotations, comparative statement and basis for Awarding the contract to related party. But the A.O. has not taken into account and disallowed the entire transaction value and made the addition of the entire amount. The assessee also pointed out that even the Special Auditor did not recommend for making any disallowance on this issue. During the course of appellate proceedings, the assessee was asked to produce the T.P. Study papers which was filed by the assessee which contain forwarding letter of quotation, without quotations of both the parties. Further the comparison is given in a chart and TP study which is not legible. The assessee filed same

129 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. through email but without quotation. Same was asked to be given by Special Auditor. However, the Special Auditor has given a letter of intent of the work order given to all the three parties. This reveal that there is a marked difference in the comparison given by the assessee in the T.P. study and actual work order which is given to IPEX Infrastructure Pvt. Ltd., and Valecha Engineering Ltd., which is the only for labour i.e., for installation charges whereas the contract Awarded to the Associated Concern L & T Geo Structure is in relation to charges for supply of material as well as labour charges. Further, the rates quoted in T.P. study is entirely different from the letter of intent of actual work order. The details as per letter of intent given by the assessee to these companies are reproduced at pages 153 to 156 of the impugned order. The Ld. CIT(A) considering the chart as per letter of intent and chart given in the T.P. study noted the following facts in the chart below :

130 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi.

Valecha IPEX L & T Geo Particulars Rate as Rate as Rate as Rate as Rate as Rate as Percentage per TP per letter per TP per letter per TP per letter of excess study of intent study of intent study of intent payment to L & T as per letter of intent of L- 1 Installing cast in situ 5,677 5166 5569 5100 5407 9536 87% in soil 800mm thick (item 1.1a) Installing No cast in situ 6,477 - 6354 - 6169 11263 comparison in soil is possible. 1000mm thick (item 1.1a) Installing - - No cast in situ 19000 12380 - - comparison in soil is possible. 800mm thick (item 1.1b) Installing No cast in situ - - - - - - comparison in soil possible 1000mm thick (item 1.1b) Charges for No concreting 6,213 700 6,095 660 65,917 - comparison (item 1.2) possible. No comparison is possible Charges for as the rate placing in 60,962 5,751 59,801 5,975 58,059 58,059 given in the position letter TMT (item ofintent 1.3) includes charts for supply and labour to L&T whereas in the other two cases it is only charges for labour.

131 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. 73.2. The Ld. CIT(A) from the above chart noted that T.P. study is based on wrong facts and comparison is claimed to have been made on the basis of the quotations and these quotations are not part of the T.P. study and the letter of intent shows that actual work order given to the Associated Concern is on entirely different rate which is shown in T.P. study and the actual work given to the associated concern relates to labour as well as supply of the material but, what was given to other concerns only for labour and it cannot be ascertained whether comparison chart is even made on the basis of quotation. The Ld. CIT(A) also noted that DMRC for making Metro Station has given contract to various parties on identical work, therefore, T.P. study could have been made on real transaction by market survey. However, such study was not done. The Ld. CIT(A), therefore, held that CUP method cannot be applied in such case. The Ld. CIT(A) also referred to Rule10B of I.T. Rules and noted that this Rule provides that the comparison can be done only with actual transaction and not with the quotations. The Ld. CIT(A) relied upon decisions of the ITAT

132 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. in the case of Sino Steel India Pvt. Ltd., 159 TTJ 581 (Del.) and Noble Resources and Trading India Pvt. Ltd., 64 SOT 4 (Delhi.). The Ld. CIT(A), however, found that the findings of the A.O. are not correct because entire amount have been added. The Ld. CIT(A) considering the above discussion found excess payment to the Associated Concern in a sum of Rs.25,90,46,464/- and deleted the remaining addition. His findings in para 22.23.8 and 22.23.9 is reproduced as under – [at pages 159 and 160 of the Order].

22.23.8. However, at the same time, I am convinced that the Assessing officer is not correct in making the addition of the entire transaction of Rs.58,28,54,544/- as the Assessing Officer has not doubted the work done by the associated concern, hence, there is no basis of making the addition of the entire amount which is paid by the appellant to the associated concern. However, as the appellant has failed to give the correct Arm’s length price, a fair and reasonable estimate is the only method which can be used to arrive the excess payment made to the associated concern by the appellant.

133 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi.

22.23.9. From the letter of intent given by the appellant to these concerns it is apparent that there is the actual transactions of the labour cost only which is comparable amongst all these three parties including the associated concern as per the chart mentioned in para 22.23.4 which is 87% more as compared to other two parties. Hence, the fair estimate can be made that the cost of the work which is given to the associated concern is approximately high by at least 80%. Hence, the Arm’s length price for the associated concern is Rs.32,38,08,080/- (58,28,54,544x100/180). In this light, I am constrained to observe that the appellant has made excess payment to the associated concern of Rs.25,90,46,464/- (58,28,54,544 - 32,38,08,080). In this light, the addition made by the AO of Rs.58,28,54,544/- is restricted to Rs.25,90,46,464/- and the appellant will get relief accordingly.”

73.3. Both the parties are in cross appeals.

134 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. 74. Learned Counsel for the Assessee reiterated the submissions made before the authorities below. He has submitted that the authorities below considered this issue with regard to determination of ALP for A.E which is wholly incorrect. The assessee was awarded work of construction of thickness of wall of the tunnel. The assessee availed work of the three entities out of which L & T Geo structure is related party. The work which was given to IPEX Infrastructure Pvt. Ltd., and Valecha Engineering Ltd., is only for labour i.e., for civil work, but, the work order which is given to L & T Geo is in relation to charges for supply of material as well as for labour charges incurred on civil work. The addition is made on the basis of the comparison given in the table reproduced in this order showing the rates as per T.P. study and as per letter of intent. The addition is made on the basis of comparison given in this table. In Sl.No.1 “Installing cost (-) in (-) Situ in Soil 800 mm thick.” 87% increase in the letter of intent as compared to the rate as per T.P. study is due to inclusion of material in the price quoted as per letter of intent. On this basis, addition is made to entire amount of

135 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. the work awarded to L & T geo at 80% without taking into consideration the material involved in the price quoted and no comparison is possible in other variables of the work contract. The final bills of all the above three entities is filed on record for comparison. The work of installing cast in SITU appearing in Column No.10 of the final bill of L & T Geo, the rate at which the work was contracted was Rs.8824.81% which includes shuttering, reinforcement, fixing and concrete placing and this rate was inclusive of material. Similarly work appearing in Column No.9 of the final bill of IPEX Infrastructure Pvt. Ltd., the rate was Rs.5100/- which was excluding the reinforcement, concrete work and material. Similarly, the same work in Column No.9 of final bill of Valecha Engineering Ltd., the rate as Rs.5166/- which was excluding the reinforcement concrete work and material. These facts clearly shows that the price quoted by L & T Geo was not comparable with the price quoted by the other companies. Since cost was higher, therefore, work was awarded to A.E.. The Ld. CIT(A) noted this fact at page-157 of the order. The Ld. CIT(A) considering this fact, reduced

136 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. the substantial addition. The assessee followed CUP method consistently, but, the Ld. CIT(A) did not apply any method and made the addition merely on estimate. PB-215 to 217 are the details filed before the A.O. at remand proceedings. It is difficult that out of total work of Rs.58.28 crores, assessee would earn the profit of Rs.25.90 crores as estimated by the Ld. CIT(A). The Special Auditor did not recommend for any addition. There were no basis for making this addition. No evidence of any excess payment to A.E have been found against the assessee, therefore, entire addition is wholly unjustified.

137 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. 76. We have considered the rival submissions and do not find any justification to sustain any addition. The facts as noted above are undisputed that assessee was awarded contract by DMRC and this issue relates to construction of wall of the tunnel meant for DMRC. The assessee awarded the work to three parties. One of them is related party namely L & T Geo Structure. In this case the work was awarded to this party for labour as well as for supply of the material. However, in the cases of other parties IPEX Infrastructure Pvt. Ltd., and Valecha Engineering Ltd., they have been assigned labour work, therefore, there cannot be any comparison of the rates in all these cases. The assessee has produced final bills of all these parties on record which supports the explanation of assessee in this regard. The Ld. CIT(A) at page 152 of the appellate order has also recorded the same submissions of the assessee which are also mentioned in the T.P. study which was filed before the Ld. CIT(A). Since assessee claimed that there was a marked difference in the comparison of the rates of both the parties with reference to the work awarded to them, therefore, there

138 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. cannot be any comparison. At page 157 of the appellate order, the Ld. CIT(A) similarly noted that actual work order given to the associated concern is on entirely different rate which is shown in T.P. study and the actual work given to the associated concern related to labour as well as for supply of material. The Special Auditor did not recommend for any addition on this issue. The A.O. merely on estimate basis without bringing any evidence on record against the assessee of any excess payment made to related party, made the addition without any just reasons. The assessee could not earn the profit of Rs.25.90 crores out of total payment of Rs.58.28 crores as per nature of the contract awarded to it by DMRC. It may also be noted here that assessee has followed CUP method. But, the authorities below without applying any other method has made the addition merely on estimate. The Ld. CIT(A) in principle has accepted that the amount given to the related party is reasonable and justified. However, for the rest of the amount sustained, no basis have been shown as to why this addition has been made against the assessee. It may also be noted here that admittedly

139 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. assessee followed POCM method for the purpose of recognizing the revenue and paid the taxes on the same which method is also applied consistently in subsequent years. The details of same are noted above which clearly supports explanation of assessee that since this issue relates to the main contract work awarded to the assessee, therefore, addition of this nature should not have been sustained by the authorities below because assessee has been following the POCM method consistently. Ultimately, everything is settled in subsequent year when the entire contract work have been completed by the assessee. We may further note that considering the total amount of the contract along with revised contract value, it is difficult to accept the department’s contention that assessee would earn huge profit out of the same. It appears that Special Auditor without looking the entirety of the facts and circumstances of the case made the addition in haste without going through the composite work of the assessee in the light of POCM method adopted by the assessee. We, accordingly, do not find any justification to sustain even the

140 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. part addition on this issue because authorities below have failed to make out a case as to how determination of ALP was justified in this case. In view of the above discussion, we set aside the Orders of the authorities below and delete the entire addition. In the result, Ground No.19 of the appeal of Assessee is allowed and Ground No.5 of the appeal of the Department is dismissed. Appeal of Assessee partly allowed.

ITA.No.4457/Del./2018 - Revenue Appeal

141 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. submitted before the Ld. CIT(A) that regular physical verification of the stock was made and assessee has already credited Rs.16,66,70,541/- as closing entry in the P & L A/c so again addition of Rs.16.17 crores amount to doble taxation of the closing entry.

142 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. CIT(A) found that there is no lapse on the part of the assessee of physical verification. Therefore, the Ld. CIT(A) deleted the addition.

143 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. by the Ld. CIT(A). Ground No.1 of the Departmental Appeal is dismissed.

83.1. The assessee challenged the addition before the Ld. CIT(A) and it was claimed in the written submissions that all the details like PAN, address, VAT and Service Tax,

144 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. Registration etc., were filed before A.O. and these are the small sub-contractors and the A.O. had disallowed the expenses without any basis. It was also submitted that assessee made the payments by account payee cheques. The Ld. CIT(A) found that A.O. has not verified the genuineness of these payments and only doubted the payments on surmises and presumption which is not acceptable. The Ld. CIT(A) accordingly deleted the addition.

145 ITA.No.4351 & 4457/Del./2018 L & T SUCG JV CC 27, New Delhi. identity of all the parties have been established. This adhoc addition was made merely on surmises and presumptions. The Ld. D.R. did not produce any evidence or material to contradict the finding of fact recorded by the Ld. CIT(A). The Ld. CIT(A), therefore, correctly deleted the addition. Ground No.4 of the appeal of the Department is dismissed.

Order pronounced in the open Court. Sd/- Sd/- (O.P. KANT) (BHAVNESH SAINI) ACCOUNTANT MEMBER JUDICIAL MEMBER Delhi, Dated 10th July, 2019 VBP/- Copy to 1. The appellant 2. The respondent 3. CIT(A) concerned 4. CIT concerned 5. D.R. ITAT “D” Bench 6. Guard File //By Order//

Asst. Registrar : ITAT : Delhi Benches : Delhi.