ASST. COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-3(2), HYDERABAD vs. IL & FS ENGINEERING & CONSTRUCTIONS CO. LIMITED , HYDERABAD

The appellant craves leave to amend or alter any grounds(s) or add a new ground which may be necessary.

The appellant has raised the following grounds of appeal:

The order of the CIT(A) in sustaining the additions under the respective heads reflected under Ground No.1 is totally contrary to the facts and evidence on record as the entire expenditure incurred is deductible u/s 37 of the Income Tax Act, 1961.

The CIT(A) in respect of disallowance u/s 40(a)(ia) at Rs.3,99,29,316/- erred in giving a direction to verify and allow the claim instead of deleting the entire amount on the basis of evidence to support its expenditure.

Any other ground or grounds that may be urged at the time of hearing. 4. The brief facts of the case are that, the appellant, M/s IL&FS Engineering and Construction Co. Ltd.(formerly known as Maytas Infra Ltd.), Hyderabad is engaged in the business of civil construction, filed its return of income for the A.Y.2008-09, on 25.09.2008, declaring total income of Rs.109,89,17,386/-, claiming a refund of Rs.14,66,11,365/-. The appellant had also filed a revised return on 17.04.2009 in terms of provisions of section 139(5) of the Income Tax Act, 1961 (“the Act”) and declared a total income of Rs.110,63,44,274/- and claimed a refund of Rs.14,40,86,966/-. The return was further revised on 26.03.2010, by declaring a total income of Rs.90,36,99,564/- and claimed a refund of Rs.21,29,65,903/-. The case was selected for scrutiny and during the course of assessment proceedings, the A.O. noticed that, in the backdrop of confession made by Shri B. Ramalinga Raju, erstwhile Chairman of Satyam Computer Services Ltd., revealing the fact of manipulation of accounts of M/s Satyam Computer Services Ltd. and related entities, a reference was made for special audit u/s 142(2A) and M/s Somanchi & Co., Chartered Accountants, Hyderabad has been appointed for the purpose of audit of books of accounts of the appellant company. The A.O, further noticed that the special auditors have submitted their report in terms of section 142(2A) on 24.06.2011. The AO after considering relevant submissions of the assessee and taking into account special audit report, has completed the assessment and determined the total income of the assessee at Rs.140,51,60,729/-, by making the following additions :

Aggrieved by the order of the Ld.CIT(A), the assessee as well as the Revenue are in appeal before the Tribunal.

The first issue that came up for consideration from the appeal filed by the assessee is disallowance of cash payments u/s 40A(3) of the Act. During the course of assessment proceedings, the A.O., on the basis of special audit report in Annexure-I, noted that the Special Auditor reported particulars of payments in excess of Rs.20,000/- made otherwise than by a crossed cheque or draft, accordingly, called upon the assessee to explain as to why the payments shall not be disallowed u/s 40A(3) of the Act. In response, the appellant has classified the payments into various categories and submitted that certain payments reported by the special auditor do not attract the provisions of section 40A(3) of the Act. The appellant further submitted that in some cases, advances have been paid to employees for site expenses and the expenditure incurred for various purposes is not more than a sum of Rs.20,000/- as specified u/s 40A(3) of the Act. The A.O., after considering the submissions of the appellant and also taking note of special audit report, disallowed a sum of Rs.82,82,081/- u/s 40A(3) of the Act towards cash payment in respect of advances paid to employees in respect of various expenditures, inter site funds transfer and others. On appeal, the ld. CIT(A) for the reasons stated in their appellate order, sustained additions made towards advance to staff for expenditure and inter site fund transfers however, deleted the additions made by the A.O. towards payments categorized in “Others” on the ground that these payments are very small in nature and it does not exceed the limit specified u/s 40A(3) of the Act.

The learned counsel for the assessee, Shri, K.C.Devdas, CA, referring to special audit report submitted by the auditor and more particularly, Annexure-I, submitted that the special auditor reported all cash payments including advances, payment to employees for various expenditures incurred at site, even though the appellant has explained the reasons for payments of advances and how the provisions of section 40A(3) are not applicable in the given facts of the case. The learned counsel for the assessee, further submitted that the appellant has carried out civil contract works at different locations and for the purpose of various expenses, funds have been transferred to the employees as advances and after receipt of bills from the employees, the advances has been adjusted and if we consider the expenditure incurred by the assessee, in any case, the assessee has not spent any amount in excess of Rs.20,000/- for expenditure. Further, in respect of inter site fund transfer, it is not an expenditure debited to the Profit &Loss account and therefore, the Ld.CIT(A) ought not to have confirmed the additions made by the A.O. Therefore, he submitted that the additions made by the A.O. should be deleted.

The Ld.CIT-DR, Sri. Narendra Naik, on the other hand, supporting the order of the Ld.CIT(A) submitted that, there is no dispute with regard to the fact that the appellant had made payments in cash in excess of Rs.20,000/-, contrary to section 40A(3) of the Act. The appellant had failed to file relevant details and prove that expenditure incurred by the assessee against the said advance is less than the limit prescribed u/s 40A(3) of the Act. In the absence of any details, the A.O. has rightly disallowed the cash payments towards advances to employees for site expenses. The Ld.CIT(A), after considering the relevant facts has rightly sustained the additions made by the A.O. Therefore, he submitted that the order of the A.O. should be upheld.

We have heard both the parties, perused the material on record and gone through the orders of the authorities below. We have also carefully considered the relevant special audit report and more particularly, Annexure-I, which contains payments in excess of Rs.20,000/- made otherwise by a cheque or draft. There is no dispute with regard to the fact that the appellant has made advances of Rs.76,62,268/- to employees for site expenses. No doubt, advance payment itself per so does not attract disallowance u/s 40A(3) of the Act. However, fact remains that it is for the assessee to prove that against said advance, expenditure incurred at site is less than Rs.20,000/- and said payments do not attract the provisions of section 40A(3) of the Act. In the present case, there is no dispute with regard to the fact that the appellant has failed to file any evidence towards expenditures incurred at site, to prove that expenditure incurred is less than the amount prescribed u/s 40A(3) of the Act. The appellant has not proved the cash payments with relevant evidence, so as to exclude from the provisions of section 40A(3) of the Act. Further, there is no dispute with regard to the fact that the cash payment made by the assessee is in excess of limits prescribed under the provisions of section 40A(3) of the Act. Therefore, in our considered view, there is no error in the order of the Ld.CIT(A) to sustain the additions made by the A.O. towards addition of Rs.76,62,268/-towards advance to staff for expenditure.

In so far as inter site fund transfer, the appellant has transferred a sum of Rs.3,50,000/- on 22.05.2007 for various expenditures at Moanavi site. The above transfer is only between two divisions of the appellant for various expenditure. Therefore, in our considered view, unless the A.O. makes out a case that a sum of Rs.3,50,000/- cash payment made by the assessee is for payment of expenditure and the same has been debited to the Profit & Loss account, no disallowance can be made u/s 40A(3) of the Act. Therefore, we direct the A.O. to delete the disallowance of Rs.3,50,000/- made towards inter site fund transfer.

To sum up, out of additions sustained for Rs.80,12,268/-, the assessee gets relief of Rs.3,50,000/- and the balance of Rs.76,62,268/- is hereby confirmed.

The next issue that came up for consideration from assessee appeal is disallowance of Rs.15,50,000/- u/s 40A(3) of the Act. During the course of assessment proceedings, the A.O. noted that as per special audit report, the auditor has reported certain payments by self cheque and the same has been reported in Annexure-IA of special audit report. The A.O. called upon the assessee to explain as to why the payment made by self-cheque shall not disallowed u/s 40A(3) of the Act. In response, the appellant submitted that the company is into the business of civil construction and such payments are necessitated due to the circumstances that exist at the construction site and further, this being a genuine expenditure, no disallowance can be made on this expenditure. The A.O., after considering the submissions of the appellant observed that the appellant failed to explain the payments made in cash or self-cheque payments in excess of Rs.20,000/- along with details. Although the assessee explained that these are genuine payments, but the fact remains that the genuineness of payments does not absolve the assessee from disallowance of payments, in excess of the prescribed limit u/s 40A(3) of the Act, therefore, the A.O. disallowed the payments made through self-cheques amounting to Rs.15,50,000/- and added back to the total income.

On appeal, the Ld.CIT(A) sustained the additions made by the A.O.

The counsel for the assessee, referring to Annexure-IA of the Special Audit Report submitted that, certain transactions were reported as payments through self-cheques and observed that no entry in cash book was made. However, fact remains that the said self-cheques are cash withdrawn from the bank for the purpose of meeting the project site expenses and the same are reported under the head “expenditure” for which money has been drawn from the bank. The A.O., without appreciating the relevant facts, simply made additions towards cash drawn from bank, even though the assessee has explained the case with relevant evidence. Therefore, he submitted that the additions made by the A.O. should be deleted.

The Ld.DR on the other hand, supporting the order of the Ld.CIT(A) submitted that as per Annexure-IA, Special Auditor has reported cash cheque paid to K.P.Divakaran towards site excavation expenditure. The special auditor has also reported cash cheque paid to Chandrasekhar and Rameshan for various expenditures. Since the assessee has incurred various expenditure and paid through self-cheque in excess of Rs.20,000/-, the A.O. has rightly invoked the provisions of section 40A(3) of the Act. The Ld.CIT(A), after considering the relevant facts has rightly sustained the additions made by the A.O., therefore, the order of the Ld.CIT(A) should be sustained.

We have heard both the parties, perused the material on record and gone through the orders of the authorities below. We have also carefully considered the Annexure-1A to Special Audit Report, which contains the details of payments made in cash or self-cheque with the purpose referred to under remarks column. The special auditor reported various self-cheque payments including payments to K.P.Divakaran for the purpose of site excavation. The special auditor has also reported certain payments in the name of Rameshan and Chandrasekhar for the purpose of site expenses. From the reasons given by the Special Auditor, it appears that the appellant had incurred certain expenditure at site and payment has been made through self- cheque. The assessee has also failed to file any evidences to prove the nature of expenditure and also the purpose of payments. Further, the assessee had also failed to file any explanation why provisions of section 40A(3) cannot be invoked. Since there is clear evidences for payment in excess of Rs.20,000/- other than by way of crossed cheque or DD, in our considered view, there is no error in the reasons given by the A.O. to make additions under section 40A(3) of the Act. The Ld.CIT(A), after considering the relevant facts has rightly sustained the additions made by the A.O. Therefore, we are inclined to uphold the order of the Ld.CIT(A) and reject the grounds taken by the assessee.

The next issue that came up for consideration from assessee appeal is disallowance of certain expenditure u/s 40(a)(ia) of the Act for non-deduction of TDS u/s 194C of the Act. The learned counsel for the assessee referred to the order passed by the Ld.CIT(A) and submitted that the Ld.CIT(A) has remanded the issue back to the A.O. for verification and therefore, he does not wish to pressed the ground taken up by the assessee for disallowance of provisions written back for Rs.3,99,29,316/- and thus, ground of the assessee on this issue is dismissed as not pressed.

The next issue that came up for consideration from assessee appeal as well as from the Revenue appeal is disallowance of sum of Rs.4,30,29,920/- u/s 194C of the Act. During the course of assessment proceedings, the A.O. noted that as per Annexure-VB to the Special Audit Report, details of expenditure, totaling to Rs.6,22,08,205/-, on which TDS was not deducted u/s 194C were reported. In response to the show cause notice, the assessee company classified the items of Annexure-VB and explained that in some cases, transactions were reported twice on which TDS provisions are not applicable and in some cases, TDS has already been deducted. The assessee further classified some items on which TDS is not applicable, on the ground that the assessee has paid transportation charges along with cost of materials to the supplier and in turn, the supplier of raw materials has paid the transporter, therefore, TDS provisions are not applicable. The assessee had also classified others and submitted that these are small value items and are in the nature of expenditure like repairs and maintenance of vehicles, incidental works carried out at sites for day-to-day activities, travelling expenses etc. and on which TDS provisions are not applicable. The A.O. after considering the submissions of the assessee, accepted the explanation with regard to transactions reported twice and transactions, on which TDS was already deducted, however, disallowed the transactions on which TDS is not deducted, amounting to Rs.1,55,48,713/- and transactions reported under column ‘others’ for Rs.2,74,91,207/- and thus, made addition of Rs.4,30,39,920/- u/s 40(a)(i) of the Act.

On appeal, the appellant has further classified the transactions on which TDS is not applicable into four categories, whereby, payment towards project, payments towards purchase bills of raw material wherein the invoice containing transport charges, food expenses for Maytas Day Celebrations, handling charges paid to railways and provisions reversed. The assessee had also explained non applicability of TDS for transportation charges, expenses for Maytas Day Celebrations, handling charges to Railways and provisions reversed. The assessee further classified entries and argued that these are small value items and are incurred for repairs and maintenance of vehicles, travelling expenses etc. The Ld.CIT(A), after considering the relevant submissions of the assessee, partly allowed relief to the assessee, where, the Ld.CIT(A) allowed relief in respect of handling charges paid to railways for Rs.16,32,102/- and provisions reversed for Rs.27,64,178/- on the ground that for the above payments, provisions of section 194C are not applicable. However, the Ld.CIT(A) sustained the additions made towards disallowance of transport charges for Rs.1,00,76,106/- and food expenses for Maytas Day Celebrations for Rs.10,76,327/-. The Ld.CIT(A) had also sustained additions made towards disallowance of others for Rs.2,74,91,207/-.

The learned counsel for the assessee, referring to Annexure- VB to special audit report submitted that the A.O. had disallowed certain payments made for various expenditure only on the basis of special audit report, without considering the relevant details filed by the appellant, explaining the reasons for making payments without deduction of tax at source u/s 194C of the Act. The learned counsel for the assessee further submitted that the appellant had purchased goods on the basis of freight payment, which is included in the purchase bills submitted by the supplier. The appellant has only classified the transport charges for accounting purpose, however made payment to the suppliers against bills, therefore, the question of appellant making payment to transporters directly and application of section 194C of the Act on the said payment does not arise. The learned counsel for the assessee, further referring to the payments submitted that these are small payments, less than Rs.20,000/- in each case and incurred mostly for the purpose of repairs and maintenance of vehicles, travelling expenses and other day-to-day expenses at site. Since these are small items of expenditure, without there being any contractual obligation to deduct TDS, the appellant has not deducted TDS on such payments. Although these payments have been explained to the A.O., but the A.O. rejected the explanation and made additions. Therefore, he submitted that the additions made by the A.O. should be deleted.

The learned CIT-DR, supporting the order of the Ld.CIT(A) submitted that there is no dispute with regard to fact that the appellant had incurred transportation charges and the provisions of section 194C are applicable. However, the appellant had also failed to file relevant evidences and proved that the expenditure reported and incurred in column ‘others’ does not attract provisions of section 194C of the Act. In the absence of relevant details, the A.O. has rightly disallowed the expenditure reported by the special auditor for non-deduction of TDS. The Ld.CIT(A), after considering the relevant facts has rightly sustained the additions made by the A.O., therefore, the order of the Ld.CIT(A) should be upheld.

We have heard both the parties, perused the material on record and gone through the orders of the authorities below. We have carefully considered the relevant Annexure-VB of Special Audit Report, where, these payments have been reported by the auditor. Admittedly, the appellant has incurred a sum of Rs.1,00,76,106/- towards transportation charges and claimed that the above expenditure has been directly paid by third party, because, the appellant has purchased the material on freight payment basis and the same was included in the invoice against which the appellant has directly paid the amount to the suppliers. Provisions of section 194C applies to any person responsible for paying any sum for carrying out any work in pursuance of a contract between a contractor and a specified person at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash etc. Sub section 5 of section 194C deals with no deduction shall be made from the amount of any sum credited or paid or likely to be credited or paid to the account of, or to, the contractor, if such sum does not exceed thirty thousand rupees. In the present case, the A.O. disallowed the transport charges on the basis of special audit report, where the payment has been reported by the auditor and in all cases, the payment exceeds the specified limit of Rs.30,000/-, therefore, the appellant needs to deduct TDS on such payment either at the time of credit to the contractor or at the time of payment. The assessee argument that above amount is included in the invoice for supply of material and it has directly paid to the suppliers is only an argument, without there being any evidence. The appellant neither furnished any details nor confirmation from the transporter to prove that the transportation charges were directly paid by the supplier. In the absence of any details, the arguments of the appellant cannot be accepted. Since the payment referred to by the special auditor in Annexure-VB is in excess of limit prescribed for application of section 194C and further the appellant has failed to file relevant details substantiating its argument that the third party had paid the amount to the contractor, in our considered view, the A.O. has rightly disallowed transportation charges u/s 194C of the Act. The Ld.CIT(A), after considering relevant facts has rightly upheld the additions made by the A.O. Thus, we are inclined to uphold the additions made by the A.O. towards transportation charges of Rs.1,00,76,106/-.

In so far as the food expenses for Maytas Day celebrations for Rs.10,76,327/-, the appellant has conceded the issue at the time of argument and submitted that the appellant does not wish to press the ground, therefore, the additions made by the A.O. towards disallowance of food expenses for Maytas Day celebrations for Rs.10,76,327/- is confirmed.

In so far as the disallowance of an amount of Rs.2,74,91,207/- reported under other column by the special auditor, upon perusal of relevant Annexure, we find that the payments referred to by the special auditor are small items, which are less than Rs.20,000/- in each case and incurred for the purpose of site expenses like, repairs and maintenance of vehicles, travelling expenditure and other day-to-day expenses at site. In no case, the amount referred to therein by the auditor exceeds the threshold limit of Rs.30,000/- provided u/s 194C(5) of the Act for deduction of tax at source. Further, even though the A.O. failed to make out a case with relevant evidence that the amounts reported by the special auditor exceeds the threshold limit of Rs.30,000/- for invocation of section 194C. Since the amount incurred by the assessee under other column is small in nature and in no case exceeds the threshold limit of Rs.30,000/- in our considered view, the A.O. ought not to have disallowed the said payment for non- deduction of tax at source u/s 194C. The Ld.CIT(A) without considering the relevant facts, simply sustained the additions made by the A.O. Thus, we set aside the order of the Ld.CIT(A) on this issue and direct the A.O. to delete the additions of Rs. 2,74,91,207/- made u/s 194C of the Act.

The next issue that came up for consideration from the appeal of the assessee as well as the from the appeal filed by the Revenue is disallowance of certain expenditure u/s 40(a)(ia) for non-deduction of tax at source u/s 194A of the Act. During the course of assessment proceedings, the A.O. noted that as per Annexure VD of special audit report, certain transactions were reported as payments/credits pertaining to interest on which TDS was not deducted u/s 194A of the Act. In reply to the show-cause notice, the assessee furnished the following analysis of the items: Sl. Particulars Amount 1 Interest on Mobilization Advance 2,57,51,404 2 Interest paid to Supplier of Material 22,13,759 3. Interest on Term Loans 1,62,82,656 4. Interest paid to subcontractor 21,37,543 Grand Total 4,63,85,362

As per the submission of assessee, the above amount includes mobilization advance of Rs.2,57,51,404/- on which TDS provisions are not applicable, interest paid to supplier of material for Rs.22,13,759/- on which the appellant has paid to the creditors for delayed payments and since these are not in the nature of interest on loans, section 194A is not applicable. The appellant has further classified the amount into monthly EMIs paid to bank and financial institutions, on which the appellant has not deducted TDS, because the payments have been made on monthly EMI. The appellant has further classified the amount into interest paid to subcontractors for delayed payments on which the provisions of section 194A are not applicable. The A.O. after considering the submissions of the assessee disallowed Rs.4,63,85,362/- u/s 40(a)(ia) of the Act for non-deduction of TDS u/s 194A of the Act.

On appeal, the Ld.CIT(A) deleted the additions made towards interest payment on mobilization advance of Rs.2,57,51,404/- and also interest paid to suppliers of materials. However, confirmed the disallowance of interest on term loans and interest paid to subcontractors on the ground that on the above payments, provisions of section 194A are applicable and the assessee ought to have deducted TDS.

The learned counsel for the assessee, referring to disallowance made by the A.O. towards interest paid on term loans, submitted that the appellant has availed various loans from banks and financial institutions and the same has been repaid by monthly EMIs. Further the recipient of interest, being, banks and financial institutions might have offered the income to tax and paid taxes, in view of second proviso to section 40(a)(ia) of the Act no disallowance can be made. The Ld.CIT(A) without appreciating the relevant facts, simply sustained the additions made by the A.O. The learned counsel for the assessee further referring to interest paid to subcontractors submitted that the appellant has paid interest to subcontractors for delayed payments of bills, on which due to lack of knowledge of the site accountants, TDS has not been deducted. However, fact remains that recipients offer income related to said payment and consequently, in view of second proviso, expenditure cannot be disallowed u/s 40(a)(ia) of the Act.

The Ld.CIT-DR, on the other hand, supporting the order of the Ld.CIT(A) submitted that the appellant has paid interest on mobilization advance and the same has been recovered from the contract bills. Therefore, it is obligation of the appellant to deduct TDS on said interest, Further, the appellant has also paid interest to suppliers of materials on which section 194A is applicable. Similarly, the appellant has paid interest to banks and financial institutions, on which TDS u/s 194A is applicable. Since the appellant has not deducted the TDS, the A.O. has rightly made additions for non-deduction of TDS u/s 40(a)(ia) of the Act. The Ld.CIT(A) without considering the relevant facts, simply allowed relief in respect of mobilization advance and interest paid to suppliers of materials. Therefore, he submitted that the additions made by the A.O. should be upheld.

The learned counsel for the assessee in reply to the arguments of the Ld.CIT-DR submitted that the appellant has paid interest on mobilization advance and the same has been deducted from RA bills and therefore, the question of appellant making payment of interest u/s 194A is not applicable. Similarly, the appellant paid interest on suppliers bills for delayed payment of creditors, which is not in the nature of interest so as to apply the provisions of section 194A of the Act. The Ld.CIT(A) after considering the relevant facts has rightly deleted the additions made by the A.O. Therefore, he submitted that the order of the Ld.CIT(A) should be upheld.

We have heard both the parties, perused the material on record and gone through the orders of the authorities below. We have also carefully considered Annexure V-D of special audit report which contained the details of various payments including interest payment on mobilization advance, interest payment on supplier of materials, interest on term loans and interest paid to subcontractors. In so far as interest on mobilization advance, the arguments of the assessee that the appellant company receives mobilization advances from principles like IIT Chennai, IOC Ltd and Gujarat State Petronet and the principals have charged interest on mobilization advance and recovered from running bills submitted by the assessee. Since the assessee has not paid the amount to the principals as interest, the appellant has not deducted TDS on said payment. We find that the appellant has received mobilization advances from the principles for the execution of works contract, on which the principals have charged interest and recovered from the running bills. Although the interest charged by the principles is in the nature of interest on which provisions of section 194A is applicable, but the fact remains that going by the mode of recovery and purpose, in our considered view, the appellant cannot be fastened liability of disallowance u/s 40(a)(ia) of the Act, when the appellant has not made payment to the principals and the same has been recovered by the Principals in the running bills. Since the appellant has not paid the payment and the same has been recovered from the running bills, the interest paid by the appellant do not fall in the category of amount paid or credited to fall u/s 194A of the Act. The Ld.CIT(A) after considering the facts has rightly deleted the additions made by the A.O. and therefore, we uphold the order of the Ld.CIT(A) and delete the additions made by the A.O. of Rs.2,57,51,404/-.

Coming back to interest paid for Rs.22,13,759/-. The appellant has purchased materials, on which, it needs to make payment on or before the agreed period. The appellant has paid interest for delayed payment of creditors on which, interest of Rs.22,13,759/- has been paid. Although the interest partakes the nature of interest for which TDS needs to be deducted, but facts remains that the said payment is embedded with purchase of materials and the identity of the supplier is not in dispute. In our considered view, going by the facts, no disallowance can be made u/s 40(a)(ia) of the Act on said payment for non-deduction of TDS u/s 194A of the Act. Although the Ld.CIT-DR argued that the appellant paid interest and the same may be out of tax net, because, the recipient may not have offered the income to tax, in our considered view, the arguments of the Ld.CIT-DR fails because of the simple reason that, once the identity of the supplier is established and there is no dispute about the transactions, then , interest paid on said dues cannot be escaped from the tax net. Therefore, in our considered view, merely for the apprehension that the recipient may not have offered interest to tax is not a reason for disallowance of interest u/s 40(a)(ia) of the Act. The Ld.CIT(A) after considering the relevant facts has rightly deleted the additions made by the A.O, Therefore, we are inclined to uphold the findings of the ld. CIT(A) and direct the A.O. to delete the additions made towards interest payment on suppliers of material to the extent of Rs.22,13,759/-

Coming back to interest on term loans of Rs.1,62,82,656/- and interest paid to subcontractor of Rs.21,37,543/-. In so far as interest paid on term loans, it is appellant to pay interest by way of monthly EMIs of loans to banks and financial institutions on which the appellant ought to have deducted TDS either at the time of credit or at the time of making payment. Further, even assuming for a moment, EMIs have been decided at the time of borrowing itself, but the fact remains that the appellant can very well compute interest on the basis of EMI and bifurcate the amount into interest and principal, so as to deduct TDS on said interest as per section 194A of the Act. Since the appellant has failed to deduct TDS, in our considered view, the A.O. has righty disallowed the interest, therefore, to this extent, we are inclined to uphold the order of the Ld.CIT(A) and direct the A.O. to sustain the addition of Rs.1,62,82,656/-.

Similarly, in respect of interest paid to subcontractors, it is the appellant who has charged interest on subcontractors and therefore, in our considered view, the appellant ought to have deducted TDS either at the time of credit or at the time of payment. The arguments of the appellant that due to lack of knowledge of the site accountants TDS has not been deducted cannot be accepted. Since there is a clear violation of the provisions of section 194A of the Act on interest paid to subcontractors, the A.O. has rightly made addition u/s 40(a)(i) of the Act. The Ld.CIT(A) after considering relevant facts has rightly sustained the additions made by the A.O. Therefore, we are inclined to uphold the order of the Ld.CIT(A) and reject the ground taken up by the assessee as well the ground taken up by the revenue.

The next issue that came up for consideration from assessee’s appeal is payments/credits pertaining to rent on which TDS is not deducted u/s 194I of the Act and subsequent disallowance u/s 40(a)(ia) of the Act. During the assessment proceedings, the A.O. on the basis of Annexure V-E of special audit report observed that the special auditor has reported certain transactions on which TDS was not deducted u/s 194I. In reply to the show cause notice, the appellant has classified the payment into various categories and one such category is vehicle hire charges covered u/s 194C and the payment covered under others for Rs.1,34,21,819/-. The appellant explained that vehicle hire charges, which are covered u/s 194C of the Act, reported in this Annexure. These transactions relate to engaging vehicles at the site on one time basis and TDS is not deducted on these transactions due to lack of knowledge of the accountants. Similarly, in respect of other transactions, TDS is not deducted, due to lack of knowledge of the accountants working at the site. The A.O., after considering the submissions of the appellant, disallowed an amount of Rs. 1,87,44,670/- u/s 40(a)(ia) of the Act for non-deduction of tax u/s 194C of the Act.

On appeal, the Ld.CIT(A) sustained the additions made by the A.O. The learned counsel for the assessee submitted that the Ld.CIT(A) erred in sustaining the addition towards vehicle hire charges and other payments for non-deduction of TDS u/s 194C and 194I of the Act, even though the appellant has explained the reasons for failure to deduct TDS, therefore, he submitted that the additions made by the A.O. should be deleted.

The Ld.CIT-DR supported the order of the Ld.CIT(A) and submitted that the appellant has failed to explain the reasons for not deducting TDS on such payment and further the reasons given by the appellant do not absolve the assessee from disallowance u/s 40(a)(ia) of the Act. Ld.CIT(A) after considering the relevant facts has rightly sustained the additions made by the A.O., therefore, he submitted that the order of the Ld.CIT(A) should be upheld.

We have heard both the parties and considered relevant disallowance of vehicle hire charges and other payments for non- deduction of TDS u/s 194C and 194I of the Act and we find that, although the above payment attracts provisions of section 194C and 194I and in fact the appellant admitted that it failed to deduct TDS and explained the reasons that due to lack of knowledge of the accountants, TDS has not been deducted. In our considered view, the argument of the learned counsel for the assessee cannot be accepted, whether the accountant does have knowledge or not, but the fact remains that the payment made by the appellant falls u/s 194C and 194I of the Act, on which the appellant ought to have deducted TDS. Since the appellant failed to deduct TDS, the A.O. has rightly disallowed the payments u/s 40(a)(ia) of the Act. The Ld.CIT(A) after considering the relevant facts has rightly sustained the additions made by the A.O. Thus, we are inclined to uphold the findings of the Ld.CIT(A) and reject the grounds taken by the assessee.

The next issue that came up for consideration from assessee’s appeal is addition of Rs.15,81,830/-u/s 69C of the Act as unexplained expenditure. During the course of assessment proceedings, on the basis of special audit report Annexure-IX, the A.O. observed that certain cash payments were made in excess of cash availability. The A.O. called upon the assessee to explain the above cash payments in excess of cash availability. In response, the appellant submitted that the special auditor considered rough cash book maintained by the appellant company at different sites and reported negative cash balance, whereas, in the main cash book maintained by the appellant at entity level, there is no negative balance as considered by the special auditor. Further, the negative balance shown in the rough cash book is shown in different sites on account of transfer of funds from one site to another site for meeting the expenses. Therefore, the A.O. ought not to have made additions based on the basis of rough cash book maintained by the appellant.

The Ld.CIT-DR on the other hand, supporting the order of the Ld.CIT(A) submitted that the appellant could not explain the negative cash balance with relevant details and therefore, the A.O. has rightly treated the expenditure recorded in the books of accounts, without there being any source, as unexplained expenditure. The Ld.CIT(A) after considering the relevant facts has rightly sustained the additions made by the A.O. Thus, the order of the Ld.CIT(A) should be upheld.

We have heard both the parties and considered the relevant arguments of the learned counsel for the assessee and the learned CIT-DR present for the Revenue. We find that, the appellant never disputed negative cash balance reported by the auditor on the basis of rough cash book maintained at sites. Although appellant claims that the rough cash book has been consolidated in the main cash book maintained by the appellant at entity level, but no such cash book has been furnished to rebut the negative cash balance reported by the auditor. Further, once there is negative cash balance, it is presumed that expenditure has been recorded without any source. Therefore, we are of the considered view that there is no error in the reasons given by the A.O. to make addition of Rs.15,81,830/- u/s 69C of the Act as unexplained expenditure. The Ld.CIT(A) after considering the relevant facts has rightly sustained the additions made by the A.O. Thus, we are inclined to uphold the order of the Ld.CIT(A) and reject the grounds taken by the assessee.

The next issue that came up for consideration from appeal of the assessee is disallowance of unverifiable labour charges. During the course of assessment proceedings, on perusal of bank account pertaining to certain sites, viz., Maytas Hill Country Project, Nice Project, Bangalore and Trichy Project, huge cash withdrawals were noticed. Against which, the appellant has accounted various expenditures, like payment to labour advances, payments to gang leaders, payment against PRW labour bills, payment of ration advance, labour mobilization advance etc. The A.O. called upon the appellant to file relevant evidence in support of expenses. In response, the appellant has furnished cash payment vouchers towards labor bills, advances etc. The A.O. on the basis of bills submitted by the appellant observed that, the appellant has supported payment against PRW labour bill with huge roster of wages/labour containing signatures and thumb impression of the parties and payment vouchers. In many cases, there were no party signatures, and the rosters were initialed by the site in-charges. On overall examination of the evidence filed by the appellant, the appellant could not prove the cash withdrawal from bank against expenditure, therefore, rejected the explanation of the appellant and made ad hoc disallowance of 20% of the such expenditure of Rs.32,09,70,213/- and disallowed a sum of Rs.6,41,94,042/-.

The learned counsel for the assessee submitted that the Ld.CIT(A) erred in sustaining the additions made by the A.O. towards ad-hoc disallowance of 20% of various expenditure, even though the appellant has filed relevant vouchers including rosters for wages paid to various employees at site and proved that in this line of business, payment of wages and other expenses is common on the basis of self-made vouchers. Although the CIT(A) has scaled down the addition to 10%, but no reason has been given for ad- hoc disallowance of expenses. Therefore, he submitted that the additions sustained by the Ld.CIT(A) should be deleted.

The Ld.CIT-DR, supporting the order of the Ld.CIT(A) submitted that although the appellant has supported various expenditure paid through self-withdrawn cheques, but on perusal of relevant evidences, the A.O. observed that these are self-made vouchers without there being any supporting evidences. The Ld.CIT(A), after considering the practical aspect of construction industry and the nature of expenditure has rightly scaled down the disallowance to 10% of payments made by the appellant, without supporting evidence. Therefore, he submitted that the order of the Ld.CIT(A) should be upheld.

We have heard both the parties and considered relevant arguments of the counsel for the assessee and the counsel for the department. We have also carefully considered the nature of expenditure incurred by the assessee through self-cash withdrawals from bank under the head, labour advance payment to gang leaders, payment against PRW labour bills, payment of ration advance, mobilization advance etc. All these expenses have been incurred against self-made vouchers, without there being any supporting evidences. Although the appellant claims that these are day-to-day expenditure incurred at site and going by the construction industry and the practical difficulties in executing the work at various sites, it is necessary to incur expenditure, by way of self-cheque cash drawn from the bank, but it is for the assessee to justify the said expenditure with relevant evidences. Since the assessee has not justified the expenditure with relevant evidences, in our considered view, the Ld.CIT(A) rightly sustained the disallowance of expenditure at 10% of the said expenditure.

The next issue that came up for consideration from the appeal of the assessee is sub-contract payment to Bangalore Elevated Tollways Ltd. for Rs.517,60,800/-. During the course of assessment proceedings, the A.O. noted that the appellant has paid Rs.5,17,60,800/- as sub-contract payment to M/s Bangalore Elevated Tollways Ltd., a Special Purpose Vehicle of which the assessee company is a partner. The A.O. called upon the assessee to furnish the ledger account and the details of the above sub- contract payments. The assessee has not furnished any details. The A.O. obtained the income tax return filed by M/s Bangalore Elevated Tollways Ltd. for the A.Y.2008-09 and 2009-10 and found that the above company has not reported any revenue from sub-contract payment received from the assessee. Therefore, the A.O. made addition of Rs.5,17,60,800/- towards sub-contract payment made to Bangalore Elevated Tollways Ltd. as unproved sub-contract expenditure.

On appeal, the Ld.CIT(A) sustained the additions made by the A.O.

The learned counsel for the assessee submitted that the appellant has made payment to Bangalore Elevated Tollways Ltd. towards sub-contract expenditure and also deducted TDS on said payment as per section 194C of the Act. However, the above payment has been subsequently reversed and credited to Profit & Loss account for the F.Y.2009-10, relevant to A.Y.2010-11. Since the entry has been reversed for the A.Y.2010-11, the additions made by the A.O. for the assessment year under consideration should be deleted. In the alternative, if at all the addition made by the A.O. is sustained for any reason, direction may be given to the A.O. to reverse the credit to the Profit & Loss account for the A.Y.2010-11.

The Ld.CIT-DR on the other hand, submitted that the appellant has failed to file any explanation with regard to unproved sub-contract payment to Bangalore Elevated Tollways Ltd., although the appellant claims that it had reversed entry for the A.Y.2010-11, but no evidence has been furnished. The Ld.CIT(A) after considering the relevant facts has rightly sustained the additions made, therefore, he submitted that the additions made by the A.O. should be sustained.

We have heard both the parties, perused the material on record and gone through the orders of the authorities below. We have also carefully considered relevant arguments of the counsels for the assessee in light of the addition made towards sub-contract payment to Bangalore Elevated Tollways Ltd. The appellant never disputed the fact that it had made payment of Rs. 5,17,60,800/- towards sub-contract payment to Bangalore Elevated Tollways Ltd., after deducting TDS applicable as per section 194C of the Act. It is also an admitted fact that the above company has not reported the payment received from the assessee company as revenue for the A.Y.2008-09 or 2009-10. The argument of the counsel for the assessee is that the company has reversed the entry in F.Y.2009-10, relevant to the A.Y.2010-11 and also offered to tax, but appellant’s argument is not substantiated with return of income for the A.Y.2010-11. Therefore, in the absence of any details as to offering the income relating to said payment by reversing the entry for the F.Y.2009-10, relevant to the A.Y.2010- 11, in our considered view, the explanation of the assessee, cannot be accepted. Therefore, we are inclined to uphold the findings of the Ld.CIT(A) and reject the ground taken up by the assessee.

The next issue that came up for consideration from assessee’s appeal is disallowance of material purchase claimed in the revised return for Rs.15,29,99,757/-. During the course of assessment proceedings, the A.O. noted that, in the revised return filed on 26.03.2010, the assessee company, inter alia made a claim for expenditure amounting to Rs.15,29,99,757/-, being the purchase of materials booked in the F.Y.2008-09 and qualified as prior period expenses in the annual report for the F.Y.2008-09. The A.O. called upon the assessee to explain and also provide supporting evidences for purchase claimed in the revised return. In response, the assessee submitted that the purchase orders for materials were negotiated by letter of credit with Axis Bank. The material purchased reached the work site (GSPL, Gujarat) and was considered as part of a bill for the recognition of contract receipts for the financial year ending 31.03.2008. However, the said material was not debited to consumption account, since the debit for the payment is figured in the bank account subsequent to 01.04.2008, i.e. in the ensuing financial year. By the time, the error was detected, the finalization of accounts for the financial year ending 31.03.2008 was completed. Hence, the corresponding adjustment was rectified under prior period expenses in the F.Y.2008-09 and the same has been accounted for the year under consideration and claimed as purchases. The appellant has also furnished relevant bills/invoices pertaining to material purchase from M/s PSL Ltd. The A.O., after considering arguments of the assessee, noted that although the appellant claims to have purchased material from M/s PSL Ltd. in the month of January, February and March, 2008, but, failed to file supporting evidences like, delivery challan, proof of delivery of material in the F.Y.2007- 08. The assessee company accounted for the purchase of material during the F.Y.2008-09, subsequent to the financial year ending 31.03.2008. Therefore, rejected the explanation of the assessee and made addition of Rs.15,29,99,757 to the total income. On appeal, the Ld.CIT(A) sustained the additions made by the A.O.

The learned counsel for the assessee submitted that it is a fact on record that the bills submitted by the assessee for purchase of material shows, the appellant has purchased the material in the month of January, February and March 2008, however, the purchase has been accounted in the books of accounts in the ensuing financial year, i.e. 2008-09, because, the payment against the said purchases through letter of credit from Axis Bank has been reported after 01.04.2008. The above discrepancy was noticed during the course of audit of books of accounts for the F.Y.2008-09 and on the basis of audit note, the appellant had debited purchases under the head prior period expenses and claimed the expenses for the year under consideration. The A.O., although accepted the fact that the purchase bills show the entries for the F.Y.2007-08, but made additions only on the ground that no supporting evidence has been filed to prove delivery of materials. The Ld.CIT(A), without appreciating the relevant facts, simply sustained the additions made by the A.O., therefore, he submitted that the additions made by the A.O. should be deleted.

The Ld.CIT-DR, on the other hand, supporting the order of the Ld.CIT(A) submitted that except filing the purchase bills, the appellant could not file any other evidence to explain the purchases for the year ending 31.03.2008. Further, the appellant itself has accounted for the above purchases for the F.Y.2008-09, relevant to A.Y.2009-10 and from the above, it is very clear that the above purchases were made in the F.Y.2008-09 and not in the F.Y.2007-08. Since the appellant has not proved the purchases with other evidences, the A.O. has rightly disallowed the purchases claimed in the revised return. The Ld.CIT(A) after considering the relevant facts has rightly sustained the additions made by the A.O. Therefore, he submitted that the additions made by the A.O. should be upheld.

We have heard both the parties, perused the material on record and gone through the orders of the authorities below. There is no dispute with regard to the fact that, in the original return of income, the appellant has not claimed purchases to the tune of Rs.15,29,99,757/-. It is also an admitted fact that the appellant has claimed purchases of Rs.15,29,99,757/-in the revised return filed on 26.03.2010, on the basis of annual report for F.Y.2008-09, where, a note on accounts has been provided in respect of prior period expenses. In the said note, it was observed that the appellant has accounted purchases relating to F.Y.2007-08 in the F.Y.2008-09 and the same has been qualified as prior period expenses. The appellant has supported the purchases with bills/invoices from M/s PSL Ltd. The bills furnished by the assessee clearly shows purchases for the month of January, February and March, 2008. In fact, the A.O. has not disputed the fact that the evidences submitted by the assessee relates to purchases for the F.Y.2007-08. However, disallowed the purchases, only on the ground that the appellant has not furnished supporting evidences like, delivery challans and proof of supply of materials at site. We find that the appellant itself has accounted purchases to the tune of Rs.15,29,99,757/- in the F.Y.2008-09, relevant to A.Y.2009-10. Further, the payment made against above purchases has been paid by letter of credit issued by Axis Bank and the same has been paid in the month of April, 2008 onwards, relevant to F.Y.2008-09. Going by the books of accounts of the assessee and the payment made against the purchases, in our considered view, the appellant has rightly accounted the purchases in the F.Y.2008-09, because, the supply of materials has been effected in the F.Y.2008-09 itself, but, not in the F.Y.2007-08 as claimed by the assessee. Further, except furnishing the bills, the appellant has not filed any other evidence, including delivery challans and proof of supply of material in the F.Y.2007-08 and relevant entries in the stock registers, so as to account the stock of materials in the books of accounts for the financial year under consideration. In the absence of any evidence, merely on the basis of note provided in the Annual Report for the F.Y.2008-09, the claim of expenditure to the tune of Rs. 15,29,99,757/- in the revised return filed on 26.03.2010, cannot be accepted. The A.O., after considering the relevant facts, has rightly disallowed the purchases claimed by the assessee. The Ld.CIT(A) after considering the relevant facts has rightly sustained the additions made by the A.O. Thus, we are inclined to uphold the findings of the Ld.CIT(A) and reject the ground taken by the assessee.

In the result, the appeal filed by the assessee is partly allowed and the appeal filed by the Revenue is dismissed. Order pronounced in the Open Court on 11th February 2026.