DCIT, CIR-10(1), KOLKATA, KOLKATA vs. M/S SWAMINA INTERNATIONAL (P) LTD., KOLKATA

Both these appeal preferred by the revenue and the Cross Objection preferred by the assessee are against the order of the Ld. CIT(A)-4, Kolkata dated 18.01.2016 for AY 2012- 13.

2 & CO No.53 of 2016 M/s. Swamina International Pvt. Ltd, AY 2012-13 2.1. Briefly stated facts are that from the tax audit report the AO found that the assessee has not paid the employee’s contribution towards Provident Fund within the prescribed due dates as per Provident Fund Act. During the course of hearing the assessee was asked to explain as to why the late payment of PF should not be added to the total income. In response, the assessee stated that as per settled principles of law if the payments have been made within the due date of filing of the return of income as per the Act, the payment made cannot be added. However, the AO rejected the submission of the assessee for the reason that the amendment made in the Act was only in respect of employer contribution which was covered under section 43B of the Income-tax Act, 1961 (herein before and after referred to as the “Act”) and that no such amendment was in respect of employee’s contribution which is covered u/s. 36(1)(va) of the Act. He, therefore, disallowed the claim of the assessee. Aggrieved, assessee preferred an appeal before the Ld. CIT(A), who deleted the disallowance as made by the AO. Aggrieved, revenue is before us.

2.2. We have heard rival submissions and gone through the facts and circumstances of the case. We note that the assessee has deposited the employee’s contribution to employee’s relevant account before the due date of filing of return as per the Act. The due date as prescribed in sec. 43B(b) of the Act is in respect to remittance of the contribution made to PF should be made by the assessee any time before filing of return as stipulated under section 139(1) of the Act. The assessee, when it claims deduction has to have evidence to establish the fact of remittance of PF contribution made before the return is filed as per section 139(1) of the Act. If the assessee has remitted the PF before the return of income was filed as per sec. 139(1) of the Act, the AO ought not to have proceeded on the basis that due date as mentioned in sec. 36(1)(va) of the Act is the due date fixed by the PF Act, whereas the due date has to be read in conjunction with sec. 43B(b) of the Act and by reading so, the due date as mentioned in sec. 36(1)(va) of the Act is due date as mentioned in sec. 43B(b) of the Act i.e. before filing the return for the year under consideration. The Ld. DR could not bring anything to controvert the factual finding of the Ld. CIT(A) that the PF contributions have been remitted by the assessee before the return of income was filed as prescribed u/s. 139(1) of the Act. In such a scenario, we do not find any infirmity in the “5.1 At the appellate stage, the AR of the appellant argued on the matter and the written submission along with a paper book. On consideration of the submission of the AR in this regard, I find that the matter is well settled by decisions of various judicial forums wherein it was ruled that as long as the deposits on account of PF/ESI were made before the filing of the return, the same would be allowable as deduction. The Hon’ble Calcutta High Court in the case of CIT Vs. Vijay Shree Ltd. held, after referring to the decision of the Hon’ble Supreme Court rendered in the case of CIT Vs. Alom Extrusion Ltd. that the deposit of the Employees contribution to Provident Fund and ESI would be allowable if the same is deposited within the due date of filing return of income. In view of the foregoing I do not find any premise to sustain the action of the AO when the said impugned amount was said to be deposited before the due date of filing of the return. The AO shall verify this fact and allow the deduction accordingly. Consequently, the proportionate administrative expenses disallowed of Rs.14,98,352/- also stands deleted accordingly.” 2.3. Therefore, for the reason stated aforesaid, we concur with the view of the Ld. CIT(A) as discussed above and, therefore, we dismiss this ground of appeal of the revenue and ground no. 1 of the assessee’s cross objection is in support of the order of Ld. CIT(A) hence, the same is dismissed being infructuous.

3. Ground nos. 2 and 3 of revenue’s appeal are against the action of Ld. CIT(A) in giving relief to the assessee by restricting the addition to 50% under the head ‘entertainment expenses’ & on account of ‘gift expenses’ whereas the Cross Objections of assessee are for the Ld. CIT(A) not giving full relief to the assessee on these issues.

3.1 Briefly stated facts are that from the P&L Account the AO observed that the assessee has claimed expenditure of Rs. 14,21,000/- and Rs.1,01,747/- on account of entertainment expenditure and gift expenses respectively. According to AO, the assessee was unable to establish the proof of expenditure by producing the supporting bill, vouchers or documentation etc. Hence, he disallowed the claim of the assessee and added back the same to his income. On appeal, the Ld. CIT(A) found it reasonable to disallow 50% of both the expenditure claimed by the assessee. Aggrieved, the revenue and assessee are before us by filing appeal and cross objection respectively.

3.2. We have heard rival submissions and gone through the facts and circumstances of the case. We note that the assessee provides services to companies such as Indian Oil, Reliance Industries, Essar Projects and Bharat Oman Refineries. The assessee is a service provider

4 & CO No.53 of 2016 M/s. Swamina International Pvt. Ltd, AY 2012-13 and also executes contract work for installing towers, commissioning of towers and supply of labourers etc. The sites for execution are spread all over India even in remote parts of India. The assessee has turnover of Rs.61.48 cr. consists mainly of job-work receipts from the reputed companies which are situated in SEZ area and non-SEZ areas. As per sec. 37(1) of the Act, the expenditure incurred and claimed by an assessee should have been expended wholly and exclusively for business incurred in the previous year for business carried out by the assessee but it should not be capital expenditure, personal in nature and for an unlawful purpose. We note that the assessee had claimed the entertainment expenses for looking after clients, engineers, officials and other dignitaries while they visit the site of projects. We note that out of the claim of entertainment expenditure of Rs.14.21 lacs under this head Rs.14.05 lacs have been paid by cheque and the rest only i.e. Rs.16,000/- have been paid in cash. Taking into consideration the nature and turnover (Rs.61.48 cr.) of business undertaken by the assessee in running its business undertaking, likewise the gift expenditure incurred are also incurred by the assessee for visiting dignitaries to give away mementoes etc. so an amount of Rs.1,01,747/- was expended for the purpose of business so, we agree with the Ld. CIT(A) that the expenses are essentially required of running of the business of the assessee. We also note that assessee’s accounts are subject to audit u/s. 44AD of the Act and the AO has not found any defects in the books maintained by the assessee. In such a scenario, the expenditure claimed should have been allowed when the assessee had submitted before the AO the ledger copy of the entertainment expenditure and vouchers which contained details of expenses incurred at different sites where contract jobs were carried out. Therefore, taking into consideration all these facts, the AO was not justified in disallowing the entire claim and for the same reason the Ld. CIT(A) ought not to have restricted the expenditure on ad hoc basis without any cogent grounds to do so. Therefore, we are of the opinion that the entire expenditure being incurred wholly and exclusively for business need to be allowed and, therefore, we set aside the order of the Ld. CIT(A) and direct deletion of the addition made on both these counts. Therefore, revenue’s grounds are dismissed and the grounds of assessee’s Cross Objection are allowed.

5 & CO No.53 of 2016 M/s. Swamina International Pvt. Ltd, AY 2012-13 4.1 Briefly stated facts are that it was observed by the AO that the assessee sold property as per agreement entered into with the buyer at Rs.61,80,000/- but the consideration was shown at Rs.59,40,000/- as per the accounts of the assessee. Therefore, according to AO, there was understatement of capital gains by Rs.2,36,000/-. Therefore, the AO issued notice u/s. 133(6) of the Act to M/s. Lemongrass Advisors (through whom the property was sold) and to the Director of Registration & Stamp Revenue, Kolkata to find out the valuation of the property. However, as the adequate details of property and the authenticated sale agreements were not received in due time, the AO resorted to making an ad hoc addition of Rs.10,00,000/-. On appeal, the Ld. CIT(A) deleted the ad hoc addition as made by AO. Aggrieved, revenue is before us and assessee has filed cross objection in support of the order of Ld. CIT(A).

4.2. We have heard rival submissions and gone through the facts and circumstances of the case. We note that the assessee had sold a flat during the year and has shown an income of Rs.35,63,135/- which was reflected as Misc. income under the head ‘other income’. The AO noted that the assessee when asked for the details of the receipts under the head ‘other income’ it has declared that Rs.35,63,135/- was the consideration for sale of property held by the assessee company. The AO noted that the sale consideration as per the agreement was to the tune of Rs.61,80,000/- but as per the profit booked by the assessee, i.e capital gain has been shown on the basis of the sale consideration at Rs.59,40,000/- thus the AO noted that there was an understatement in respect to capital gains to the tune of Rs.2,36,000/- (Rs.61,80,000 – Rs.59,40,000/-). In order to ascertain the veracity of the sale consideration of the property the AO issued notice u/s. 133(6) of the Act to the broker (M/s. Lemongrass Advisors) of the property and also to the Director of the Registration & Stamp Revenue, Kolkata, which was not timely replied by them and this fact AO acknowledges. Therefore, he made an ad hoc addition of Rs. 10 lacs which has been deleted by the Ld. CIT(A). It was brought to our notice by the Ld. AR that the miss-match of Rs.2,36,000/- was on account of the assessee giving brokerage and other incidental charges to effect the transfer of the property. We do not understand how the AO has made the estimation of Rs. 10 lacs to disallow the same. We note that the books of account have not been rejected. The assessee has produced the agreement/sale deed to support its claim of sale of the property and the Ld. CIT(A) has rightly observed that an ad hoc addition cannot be 6 & CO No.53 of 2016 M/s. Swamina International Pvt. Ltd, AY 2012-13 sustained. We note that the AO has arbitrarily made an addition of Rs. 10 lacs which the Ld. DR has not been able to justify. When the assessee has produced the records to support the transfer of property and the other documents to substantiate that Rs.2,36,000/- has been paid as brokerage and other incidental charges to effect the transfer of property, the disallowance of Rs. 10 lacs is clearly an arbitrary exercise of power which cannot be sustained and, therefore, the Ld. CIT(A) has rightly deleted the same which we confirm. This ground of appeal of revenue is dismissed and the ground of cross objection of assessee is also dismissed being infructuous.

5. Ground no. 5 of revenue’s appeal is against the action of Ld. CIT(A) in deleting the addition of Rs. 6,01,193/- under the head donation and ground no. 5 of assessee’s Cross Objection is in support of the order of Ld. CIT(A).

5.1. Briefly stated facts are that the AO disallowed the claim of the assessee since no documentary evidences were produced by the assessee to substantiate its claim that Rs.6,01,193/- was expended on business exigencies. On appeal, the Ld. CIT(A) deleted the addition as made by the AO by following the decision of Hon’ble Apex Court in the case of CIT Vs. Bata India Ltd. 201 ITR 884 and another judgment of Hon’ble Karnataka High Court in the case of Mysore Kirloskar Ltd. Vs. CIT 166 ITR 836. Aggrieved, revenue is before us and assessee has filed cross objection in support of the order of Ld. CIT(A) .

5.2. We have heard rival submissions and gone through the facts and circumstances of the case. We note that the assessee claimed to have incurred expenses to the tune of Rs.6,01,193/- under the head ‘donation’ which was disallowed by the AO. On appeal, the Ld. CIT(A) deleted the same. We note that the Ld. CIT(A) has taken note that the said expenses have been accounted for in its books of account as well as in its ledger account which were produced before the AO. It is not the case of the AO that the said expenses were not incurred for the purpose of the business. Taking into consideration the fact that the assessee is a service provider and supplies labourers for installation of towers and commissioning of towers in remote areas of the country and for smooth functioning of its business had to give contribution to the local organizations so that no hindrances occurs in its smooth operation of project sites and from such business activity the assessee could not have made a turnover of more than Rs.61.48 cr. Therefore, taking into consideration the 7 & CO No.53 of 2016 M/s. Swamina International Pvt. Ltd, AY 2012-13 entire facts and circumstances of the case of the assessee, we do not want to interfere with the order of the Ld. CIT(A) and, therefore, we dismiss this ground of appeal of the revenue and the ground of cross objection of assessee is also dismissed being infructuous.

6. Ground no. 6 of revenue’s appeal and ground no. 6 of assessee’s cross objection is against the action of Ld. CIT(A) in restricting the addition to 5% under the head traveling expenses which was made by the AO at 10%.

6.1. Briefly stated facts are that the AO found that the assessee claimed an amount of Rs.70,40,492/- on account of travelling and conveyance incurred. During the course of hearing the assessee was asked to produce proof of the expenses claimed. According to AO, the assessee was unable to produce any supporting bill, vouchers or documentary evidence in support of the claim. Hence, he disallowed 10% of the travelling and conveyance expenses of Rs.70,40,492/- and added back the same to the income of the assessee. Aggrieved, revenue preferred an appeal before the Ld. CIT(A), who restricted the disallowance to 5% against 10% made by AO. Aggrieved revenue is before us and also the assessee is against the action of Ld. CIT(A) in restricting the disallowance at 5% and filed this cross objection before us.

6.2 We have heard rival submissions and gone through the facts and circumstances of the case. We note that the assessee claimed travelling and conveyance expenses of Rs.70,40,494/-. The AO disallowed 10% of the expenses for want of proper documentation. It was not the case of the AO that expenditure claimed to have been incurred for travelling was not on account of business but only for want of supporting documents he resorted to ad hoc disallowance of 10% of the claims. On appeal, the Ld. CIT(A) made a finding that ledger copies with narration and evidence has been produced before the AO on the issue and the ad hoc disallowance was made by him since there was cash payment to employees of the company. It was submitted before the Ld. CIT(A) that since the project sites were in far flung places and in case of emergency/urgency the employees had to move on short notices from one place to another and further when they incur expenses it had to be disbursed in cash and it was because of this reason that cash payment of small amount got disbursed to employees to meet the business necessities. However, we agree with the Ld. DR that when expenses are incurred evidence to substantiate the same has to be produced before the 8 & CO No.53 of 2016 M/s. Swamina International Pvt. Ltd, AY 2012-13 AO/CITA in case if the assessee fails the AO is at liberty to disallow the claim item wise. But it has to be kept in mind that disallowance should not be passed on ad hoc basis which action offend Article 14 of the Constitution of India being an arbitrary action. Therefore, both the AO as well as Ld. CIT(A) erred in disallowing the expenditure claimed on ad hoc basis and, therefore, we delete the addition sustained by the Ld. CIT(A) also. Therefore, ground of appeal of revenue is dismissed and this ground of cross objection of assessee is allowed.

7. Ground no. 7 of revenue’s appeal and ground no. 7 of assessee’s cross objection are against the action of Ld. CIT(A) in restricting the addition to Rs. 50,000/- under the head bank charges.

7.1 Briefly stated facts are that according to AO, as per the assessee’s admission that business payments have been made through credit cards which are in the name of the directors of the company but have been claimed as business related, but the details of the credit card showed that expenditure of personal nature incurred through credit card amounting to Rs. 1,00,000/-. Hence, the AO disallowed Rs. 1,00,000/- and added back the same to the income of the assessee as the expenditure being personal in nature. Aggrieved, assessee preferred an appeal before the Ld. CIT(A), who restricted the disallowance to Rs.50,000/- as possibility of expenses of personal nature cannot be ruled out. Aggrieved against the said partial disallowance both the revenue and assessee are in appeal and cross objection before us.

7.2. We have heard rival submissions and gone through the facts and circumstances of the case. We note that the AO noted that the Directors of the company had incurred certain personal expenditure while using credit card. Therefore, he estimated Rs. 1 lac to be disallowed and it was added to the income of the assessee. Before the Ld. CIT(A), the assessee submitted that during business some payments were made from the credit card which are in the name of the director of the company and was booked under the head bank charges. The AO was of the opinion that the expenditure incurred from credit card is of personal in nature and, therefore, he estimated the disallowance of Rs. 1 lac. The Ld. CIT(A) sustained R. 50,000/-. We note that no serious efforts have been made by the assessee to show that the credit cards were only used solely for business purpose. If the 9 & CO No.53 of 2016 M/s. Swamina International Pvt. Ltd, AY 2012-13 expenditure is incurred wholly and exclusively for business purposes and if it is not used for any personal purposes, it is allowable u/s. 37(1) of the Act. Since the assessee has not been able to demonstrate that the credit card in the name of the director of the company has been used wholly and exclusively for business purposes the claim of the assessee cannot be accepted. However, we note that both the authorities below has resorted to estimation without rejecting the books of account maintained by the assessee. We reiterate that if the assessee fails to support its expenditure with supporting material in the form of bills/vouchers the AO is at liberty to disallow the same item wise and also the assessee has to satisfy the AO that the expenditure claimed satisfies the requirement of sec. 37(1) of the Act. So, we set aside the orders of Ld. CIT(A) and AO and remand the matter back to AO for de novo assessment on this issue. Therefore, this ground of revenue and the ground of cross objection of assessee are allowed for statistical purposes.