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Income Tax Appellate Tribunal, “A” BENCH : KOLKATA
Before: Hon’ble Shri A.T. Varkey, JM & Shri M.Balaganesh, AM ]
ORDER Per M.Balaganesh, AM
This appeal by the Revenue arises out of the order of the Learned Commissioner of Income Tax(Appeals)-12, Kolkata [in short the ld CIT(A)] in Appeal No. 12/CIT(A)- 12/Cir-42/MSD/2015-16 dated 29.07.2016 against the order passed by the DCIT, Circle-42, Murshidabad [ in short the ld AO] under section 263 / 143(3) of the Income Tax Act, 1961 (in short “the Act”) dated 30.03.2015 for the Assessment Year 2010- 11.
The first issue to be decided in this appeal is as to whether the ld. CIT(A) was justified in deleting the disallowance of labour charges and earth work charges made in M/s Udyog & Co. A.Yr. 2010-11 the sum of Rs. 1,20,54,550/- u/s 40a(ia) of the Act, in the facts and circumstances of the case.
The brief facts of this issue are that the assessee is a partnership firm engaged in the business of road contract and had filed its return of income for the assessment year 2010-11 on 29.06.2010 declaring total income of Rs. 34,27,040/-. The assessment was completed u/s 143(3) of the Act dated 21.06.2012 determining the total income of Rs. 40,07,540/-. Later this assessment was sought to be revised by the CIT u/s 263 of the Act wherein vide order dated 27.02.2014. The Ld. CIT(A) directed the AO to reexamine the issue on account of labour charges and earth work charges and compute the impugned disallowance thereon u/s 40a(ia) of the Act,, if any, among others. The assessee incurred labour charges of Rs. 64,03,663/- and earth work charges of Rs. 56,50,917/- during the year. When show caused by the ld. AO with regard to non- deduction of tax at source on the said payments, the assessee replied that these are labour charges paid to various labour Sardars/ Munshis who in turn passed on by distributing the monies/ wages to various labourers involved in the road contract work. It was submitted that the assessee had not engaged any labour contractor in lieu of which these payments were made. This labour sardars/ munshis are also labour heads working for the assessee through whom the wages were distributed to various labourers for the sake of convenience. In support of this, the assessee submitted a detailed wage sheet of various workers and also the ledger account of labour charges and earth work charges. The ld. AO did not accept the contentions of the assessee and proceeded to disallow the entire expenditure of Rs. 1,20,54,500/- (56,50,917 + 64,03,633) u/s 40a(ia) of the Act for non-deduction of tax at source u/s 194C of the Act.
3.1. The assessee submitted that earth work is a process which is necessary to be done on the surface where road is to be built. This surface has to be cleared of unwarranted materials and levelled and then it has to be treated with water so that the next process of 2
M/s Udyog & Co. A.Yr. 2010-11 road building is made with the help of machines which the assessee has. Thereafter workers would place building materials such as stone chips, coal tar etc. on the surface and then the moving rollers etc. are used to complete the road construction. The assessee never assigned any work connected with the road building to any person. The assessee paid wages who worked directly under it. In support of these wages, wage sheet was prepared by the assessee and payment is made to one labourer for onward distribution to the remaining labourers. It was also stated that road building was undertaken at seven places during the year. These roads pass through villages where there is no way out to go except by small interior ways i.e. footpaths passing through the villages. Quite obviously, the assessee has to look for workers for near about villages. There is no technical knowledge in the construction of roads insofar as earth moving is concerned and for placing baloo, bitumen etc. on the road itself. The balance of the work is done by machines and operators owned and employed by the assessee. It was submitted that workers are taken for the purpose of construction of the road basically from the near about villages and for the sake of proper use of such workers, the assessee used to give necessary instructions to one person (i.e. labour head) among the lot of workers, who would also be arranging for obtaining raw materials under the instructions of the assessee. It was also submitted that there were occasions when the supplier of the raw materials would also work as a worker with the assessee as because he would help to bring any workers for the purpose of work and quite naturally upon the accomplishment of work on a particular area out of the total road building length, wages could be distributed and entries are recorded by crediting the amount in the ledger account of such supplier of raw material to whom payments are made by the assessee in some fixed intervals. In other words, in these cases, payments were made for the supply of raw material and also towards outstanding wages to different workers from time to time which are duly recorded and noted in the Ledger maintained by the assessee.
M/s Udyog & Co. A.Yr. 2010-11 3.2. It was specifically brought to the notice of the ld. AO that the assessee was mainly engaged in road construction works in rural area of Malda, Murshidabad, Nadia and Birbhum districts and that they never assigned to any sub-contractor any job as the partners were looking personally after the execution of the work through local labourers employed in the rural area at the site and that these workers were paid weekly and hence no question of deduction of tax would arise.
The ld. CIT(A) appreciated the contentions of the assessee as stated above and deleted the disallowance by observing as under: “3.2 I have carefully considered the submissions of the appellant and the facts of the case. I have considered the nature of the business which has been undertaken by the assessee. Construction of roads is being made in remote villages & areas as is apparent from the description of the work undertaken by the assessee. It has been vehemently contended by the A/R that the assessee never entrusted any work relating to construction of the roads to any contractor. It has been urged that there is no specific direction in the order u/s 263 on this issue. Rather the ASSESSING AO has been directed to re-examine the issue. I have gone through the records which include the certificate issued by the Chartered Accountant certifying the wage sheets and amounts noted therein with the name of workers for labour charges and earthwork. The AR has relied heavily on a recent judgement of the Hon’ble The Calcutta High Court reported in 385 ITR 394 in the case of Jiauddin Mollah vs CIT where it has been observed ‘the persons to whom the payments had been made had been working on behalf of the assessee and not as sub-contractors and there was nothing on record to show that any work had been assigned to them by the assessee. The payment made to workers through the hands of the four persons was a payment made directly by the assessee to those persons’. I am convinced that in the absence of any contractor the submission of the assessee about payment of wages as recorded in the wage sheets has to be accepted. There are various workers to whom wages have been paid. In this view of the matter, I am of the opinion that the claim of the assessee in respect of the payment of wages is not hit by section 193C and as such duly acceptable. In my considered opinion, provisions of section 164C are not applicable in the facts and circumstances of the case of the assessee. Accordingly, the addition of Rs. 1,20,54,550/- is deleted.”
Aggrieved the revenue is in appeal before us.
M/s Udyog & Co. A.Yr. 2010-11 5. We have heard rival submissions. It is not in dispute that the assessee is engaged in road contract works in the remote parts of various villages. Obviously, for this purpose the assessee had to engage labourers from the nearby villages in view of the fact that there was no proper path way for rural work site. What assessee has actually done in the instant case is engaging various labourers for work at its site and for which payments are made to one labourer (labour heads) with a clear direction to distribute the same to various labourers either on daily or weekly basis , as the case may be. These payments are duly supported by voluminous wage sheets which are part of the records before the lower authorities and also supported by a certificate from a Chartered Accountant certifying the fact that the said payments were made to various workers towards labour charges and earth work charges. We hold that the assessee in the instant case had not engaged any labour contractor or any sub-contractor for making payment of labour charges and earth work charges. In this scenario, the provisions of section 194C cannot be made applicable in the facts and circumstances of the case. Accordingly, the ld. CIT(A) had rightly deleted the disallowance made in the sum of Rs. 1,20,54,550/- u/s 40a(ia) of the act which, in our considered opinion, requires no interference. Accordingly, ground no. 1 raised by the revenue is dismissed.
6. The next ground is to be decided in this regard the ld. CIT(A) was justified in deleting the disallowance of Rs. 2,13,37,312/- u/s 40A(3) of the Act, in the facts and circumstances of the case.
The brief facts of this issue is that the ld. AO observed that the assessee had made payments in cash for purchase of materials i.e. bitumen and stone chips etc. exceeding Rs. 20,000/-per day and the total of such payments made thereon worked to Rs. 2,13,37,812/-. He observed that the said payment is in violation of provisions of Section 40A(3) of the Act. When show caused in this regard, the assessee replied that the payments were made in cash on public holidays in support of which the assessee filed 5
M/s Udyog & Co. A.Yr. 2010-11 the complete details of payments together with the relevant dates and relevant calenders of the respective year to prove that the payments were made on public holidays. The ld. AO observed that there is a definite pattern followed in making cash payment which appeared to be deliberate and not the usual mode of payment on the said days being holiday even in business. Hence the assessee’s contentions were rejected by holding that the case does not fall under the exceptions provided Rule 6DD of the IT Rules. Accordingly, he disallowed a sum of Rs. 2,13,37,812/- u/s 40A(3) of the Act in the assessment. The assessee submitted that payments were made to various villagers for purchase of raw materials for the purpose of construction of road. These payments were made in cash on non-working days for banks i.e. Sunday and National holidays in some cases and payments were made in cash in places where there are no banking facilities since the site is situated in a remote villages. The assessee also submitted that the raw materials such as baloo, bitumen, stone chips etc. are to be procured locally from the nearby vicinity of the work site. It was stated that baloo is available nearby ponds and the small river beds along with the road to be built which has to be locally purchased and obviously there cannot be any payment for the same via bank because of non- existence of bank in the place. It was submitted that the payments were made in cash in remote areas of the villages where the building work was undertaken by the assessee and where there were no banking facilities and further the payments were made on national holidays and non-working days for banks, wherever applicable. The modus operandi was also explained by the assessee that the assessee’s office is at Berhampore and after the close of the week on Saturday, the assessee’s staff would visit the place of road building which is a remote village to make payments on Sunday. It was stated that the ld. AO had not doubted the fact that the said payments were made for acquiring raw materials. It was subsequently brought to the notice that there is always requirement on the part of the supplier of raw material to pay in cash and this is mainly due to the paramount fact that they are not having any bank account facility primarily because of their residence in the village and adjoining areas which has no banking facilities. It was 6
M/s Udyog & Co. A.Yr. 2010-11 submitted that if there is any delay/ any interruption in the supply of raw materials to the assessee its road construction project will be delayed which the assessee as a contractor working under local authorities and Government Departments would be answerable and the same would be entirely detrimental to the interests of the assessee. Accordingly, it was pleaded that the said payments, even though made in cash squarely falls in the various clauses provided in Rule 6DD of the Rules i.e. i) payments were made on national holidays and non-working days of banks and ii) payments were made to parties situated in remote villages where there are no banking facility and iii) payments were made out of business expediency of the assessee.
The Ld. CIT(A) deleted the disallowance by observing as under: “4.2 I have gone through the facts of the case and the submissions of the appellant. A reference to the audited statements of accounts shows that the assessee has been making purchase of various raw materials which include purchase of stone chips and sand. It is contended by the A/R that these materials and readily available near about the villages through which the road construction work passes. In the order u/s 263, I find that there is a chart noting name of the suppliers of these raw materials and there appear dates of payments along with the amounts which exceed Rs. 20,000/-. The contention of the assessee has been that since these materials i.e. Balu, bitumen were being purchased from the villagers in the areas through which road building was to pass and hence they were to be paid on cash to the suppliers. The details furnished show that some payment are made from time to time which are well within Rs. 20,000/- and that since the assessee was required to make payment of larger amounts towards supply of the raw materials the suppliers had required the assessee to make payments on Sundays which was also convenient for the assessee so that he would carry forward cash at the site and make payments to the villagers / suppliers of raw materials. Before the AO, this contention was made by the assessee and it was submitted that there were exceptional circumstances in the matter of payments of amounts exceeding Rs. 20,000/- in cash and that these exceptional circumstances related to the payment made in villages and places where there were no Banking facilities and also as because it was insisted upon by the suppliers. The Ld. CIT discussed this matter and issued directions to the AO to examine the issue of cash payments exceeding Rs. 20,000/- in view of provisions of Sec. 40A(3), to examine the genuineness of the expenditure. The genuineness of the payments made and the identity of the payee and the most and foremost requirements to invoke the exceptions carved out in Rule 6DD. Being so, if the assessee made the genuine cash payments and if is confirmed by the respective vendors that they have received payments and there was compulsion to the assessee to make the payment on account of business expediency the same 7
M/s Udyog & Co. A.Yr. 2010-11 cannot be considered under the provisions of Sec. 40A(3). Further, where the payment is made by the assessee to the vendors in a village or town which is not served by any Bank it is outside the purview of Sec. 40A(3) in view of Rule 6DD(j). [OM Shakti Agencies Madras Pvt. Ltd. vs DCIT (Chennai) – 136 DTR 181]. Than the payments made are genuine and that the identity of the payee is not in doubt and taking into consideration the facts and circumstances of the case relating to building of roads in interior areas of the villages and also taking into consideration the fact that as per the requirements of the suppliers of raw materials all used to assemble on Sundays for the sake of convenience, payments made on Sundays exceeding Rs. 20,000/- has also to be considered as not hit by the provisions of Sec. 40A(3) read with Rule 6DD(j). I am accordingly of the opinion that in the facts & circumstances of the case of the assessee the payments exceeding Rs. 20,000/- made in cash in remote village areas cannot be considered for disallowance. I have verified the dates relating to payments made in cash as noted in the table by the Ld. CIT in his order u/s 263 with reference to the relevant calendar and I find that such payments exceeding Rs. 20,000/- are made on Sundays. I am accordingly of the view that there is no justification in applying the provisions of Sec. 40A(3) in respect of cash payments exceeding Rs. 20,000/- to the suppliers of raw materials namely bitumen & sand etc. Accordingly, this ground of the assessee is allowed and the addition of Rs. 2,13,37,312/- is deleted.”
Aggrieved the revenue is in appeal before us.
We have heard the rival submissions. At the outset, we find that there is no dispute that the road construction work is carried out by the assessee at remotest villages in Malda, Murshidabad, Nadia and Birbhum districts. There is no dispute that the banking facilities are not available in some parts of these villages. The assessee had stated that the raw materials supplier insisted for making payments in cash in view of the fact that their residence are situated in the remotest villages where there are no banking facilities. Hence the assessee had to necessarily make payments only in cash out of business expediency/ business compulsions so as to ensure smooth supply of raw materials from the said supplier for the purpose of its road contract works in order to avoid any delay in execution of the said work allotted to the assessee by the Government and local authorities. There is no dispute that the payments were made on Sundays, public holidays etc by the assessee. None of the aforesaid findings given by the Ld. CIT(A)
M/s Udyog & Co. A.Yr. 2010-11 have been controverted by the revenue before us. Hence we do not find any infirmity in the order of the Ld. CIT(A) by granting relief to the assessee in this regard. Accordingly, ground no. 2 raised by the revenue is dismissed.
7. The last issue to be decided in this appeal is with regard to the Ld. CIT(A) was justified in deleting the ad hoc addition made by the ld. AO in the sum of Rs. 20 lacs. towards work-in-progress, in the facts and circumstances of the case.
The ld. AO observed that the assessee has purchased various materials and had used the same for the purpose of its road construction, had been periodically raising running account bills with the respective authorities and had duly disclosed contract receipts thereon. The ld. AO did not dispute the value of project or value of contract receipts disclosed by the assessee. But he observed that the assessee had not shown any opening work-in-progress or closing work-in-progress in respect of materials used by the assessee in its road contract work. He observed that there is every possibility that the some roads should be under completion and that the bill was not raised for the same. Accordingly, he estimated the value of work-in-progress as on 31.03.2010 to be Rs. 20 lacs and made an addition for the same in the assessment.
The assessee submitted that the aforesaid system of accounting was followed by it consistently for many years. It was pleaded that without the rejection of books of accounts of the assessee, there cannot be any addition on estimated basis. The Ld. CIT(A) deleted the addition by observing as under: “5.2 I have examined the facts & circumstances of the case. It is a fact that the assessee has been building roads since past some years and has been consistently following the system of accounting whereby receipts are duly recorded in the accounts and similarly purchase of raw materials is also accounted for. As a matter of fact, it is a continuing process and the assessee is maintaining its accounts accordingly. Under these circumstances, there is no reason on the part of the AO to deviate from the existing system of accounting being followed by the assessee year by year. That the total receipts from the road construction have been very correctly 9
M/s Udyog & Co. A.Yr. 2010-11 shown by the assessee in the accounts is not in dispute. Raw materials purchased are duly supported by the documentary evidences. The basis of this addition is with reference to the order of the Ld. CIT u/s 263 who directed the A.O. to verify the specific facts relating to construction receipts declared in the month of February & March 2010 site-wise and with reference to the purchase of raw materials to consider the closing stock of raw materials as on 31.03.2010. The A.O. has apparently made an estimated addition without assigning any basis with reference to the records. It has been vehemently contended by the A/R that the assessee has been to the business of construction of roads for the past many years and he has no opening work in progress and no closing work in progress. It has been submitted that this is the system of maintaining the accounts which is being followed consistently over many years and has been accepted as such. A method of accounting adopted by the tax payer consistently and regularly cannot be discarded by the Departmental authorities on the view that he should have adopted a different method of keeping accounts or of valuation (United Commercial Bank vs CIT 240 ITR 355) (SC). Thus I do not see any justifiable reason to deviate from the established and accepted system of accounting which the assessee has been following and, accordingly, I am of the opinion that the estimated addition of Rs. 20,00,000/- made by the A.O. under the head work-in-progress is not called for. In this view of the matter, the addition of Rs. 20,00,000/- is deleted.”
Aggrieved the revenue is in appeal before us.
We have heard rival submissions. At the outset we find that this addition towards work-in-progress has been made by the ld. AO on an estimated basis. We find that the entire books of accounts together with requisite details with supporting evidences were duly submitted by the assessee before the ld. AO which is not disputed by the ld. AO. We find that no defects were pointed out by the ld. AO in the said accounts or in the vouchers and evidences submitted by the assessee. Without rejecting the books of accounts, the ld. AO cannot resort to make any addition on an estimated basis. We find that the assessee has not been showing opening stock of work-in-progress and closing stock of work-in-progress in its books of accounts for the past many years and this system of accounting has been accepted in the past by the revenue. In any case, the M/s Udyog & Co. A.Yr. 2010-11 addition was made only on an estimation which cannot survive in the facts and circumstances of the case. Accordingly ground no. 3 raised by the revenue is dismissed.
Ground no. 4 raised by the revenue is general in nature and does not require any specific adjudication.
In the result, the appeal of the revenue is dismissed.
Order pronounced in the Court on 05.10.2018