ITD CEMINDIA JV,MUMBAI vs. THE DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 5(1), MUMBAI, MUMBAI

The AO rubbished the contention of the assessee that the entire contingency expenditure is accounted in the books of accounts, though the AO categorically admitted that the total cost figure in the CTC report matches the total cost figure in the books of accounts, the cost booked under each head is different in the CTC report and the books of accounts.

The basis for not accepting the contention of the assessee by the AO is at page 31 of the assessment order, which is extracted for ready reference:- “10. The submission filed by the assessee has been considered, but not found acceptable on the following grounds: i. The assessee has not followed the SOP for issuing PO/WO in various entities, which was followed in issuing PO/WO in other expenses. The assessee has submitted that SOP has not been followed in some instances before issuing PO/WO due to exigencies of work. The reason given by assessee is not acceptable because SOP has been followed in other cases other than these bogus transactions. Also, assessee failed to provide any reason for such exigencies to divert the regular procedure followed to issue the PO/WO. Further, it is noticed that the amount involved is very high and in standard practice expenditure and exigencies get proper approval from concerned authorities. The assessee failed to submit any documentary evidence to support the claim of assessee that SOP has been diverted in issuing PO/WO for the above referred expenses due to exigencies like nature of exigencies, prior or post approval for such exigencies, any standard practice followed for expenses due to exigencies. ii. The assessee shown its inability to produce vendor wise list for contingency expenses. iii. The assessee shown its inability to provide books of account wherein contingency expenses has been maintained. iv. The assessee shown its inability to provide break up of liaisoning expenses. and contingency expenses. v. The assessee has failed to submit the delivery challan/stock register/e-way bill/labour register of parties to whom notices u/s 133(6) were issued.

In view of the above, it is found that the assessee has followed SOP for issuing WO/PO and the same is considered as sacred for the organization, which was not followed before issuing WO/PO in some of the cases. Also, the assessee has failed to submit vendorwise list of contingency expenses, books of account where contingency expenses were maintained and breakup of contingency expenses and liaising expenses. As the assessee has failed to prove the genuineness of its claim towards contingency expenses amounting to Rs. 1,18,00,000/-, the same is hereby disallowed and added to the total income of the assessee. Penalty proceedings u/s 271(1)(c) is initiated separately for concealment of income.”

Similar view has been taken in the captioned appeals during the assessment proceedings, though the quantum may differ.

The additions were challenged before the ld. CIT(A) and the ld. CIT(A) after considering the facts and submissions, held as under:- “14. 22. In view of the above, I am unable to agree with the contention of the appellant that the entire expenses recorded in the books of account are genuine and that they do not include any part of expenses which are not allowable u/s 37(1) of the Act. There are more than enough evidences to prove otherwise. At the same time, it is seen that the persons concerned have repeatedly emphasized in the respective statement that such expenses form a small portion of the expense. The few evidences cited above do not warrant 100% disallowance of contingency expenses. In I.T.T.A.No.21 of 2013 dated 23.07.2013 in the case of CIT vs Sri Kamlekar Shankar Lal, the Hon'ble AP HC held that "The rate of estimation of profit is always discretionary. On consideration of the fact, sometimes the profit is estimated at 5% and sometimes it is estimated at 3%. It depends upon the appreciation of each and every fact of every individual case." It was further held that Court should not interfere with such discretion, unless the exercise of discretion was absolutely arbitrary. Thus, the estimation of profits or disallowance depends on facts and circumstances of each of the case.

In view of the above discussion, I am unable to agree with the stand of the AO that the entire expenses are to be disallowed. At the same time, there is no merit in the claim of the appellant that all the expenses are genuine. While some of them could still pass the test of business expediency, it is obvious that few others would not fulfill the conditions laid down in S. 37(1) of the Act. The extent of disallowance would depend on the nature and quantum of evidences in each case. Considering the facts of the case, I am of the view that the disallowance of 2.5% would suffice. During the year, the AO has disallowed a sum of Rs. 1,18,00,000/- on account of contingency expenses. The same is restricted to Rs. 2,95,000/-. The appellant gets a relief of Rs. 1,15,05,000/-. The disallowance is made u/s 37(1) of the Act.” We have given a thoughtful consideration to the order of the authorities below. Let us first understand the basis of CTC. As mentioned elsewhere, the assessee is into infrastructure development extensively engaged in construction work across the country with ongoing projects across the country. As it happens in this line of business, the business-man makes a budgeted figure of project cost and after few months of execution of the work, the budgeted figures are revised. As it always happens, the actual expenditure is always higher than the budgeted figure and the actual expenditure is recorded in the books of accounts. There is no dispute that the total expenditure recorded in the CTC is reported as accounted expenditure.

The entire addition revolves around the contingency expenditure recorded in the CTC report. As mentioned above, the contingency expenditure is mentioned at the time of preparation of the budget but when the actual figures are known, the same are recorded in the books of accounts. Therefore, it cannot be said that that the contingency figure are not recorded in the books of accounts. In fact, the AO himself admitted this fact at para 4 of his order where he has categorically accepted that the total cost figure in the CTC report matches the total cost figure of the books of accounts.

Since the figure of contingency has been recorded against the figure of total expenditure incurred, it is illogical to assume that the assessee has booked bogus expenditure and generated cash outflow from it. Moreover, the impounded material shows the expenditure on mercantile basis and no cash expenditure, therefore, the presumption of the AO that the assessee has generated cash out of bogus expenditure, is without any basis.

It is pertinent to refer to the provisions of Section 132(4A) of the Act relevant for search and seizure cases, which reads as under:- [(4-A) Where any books of account, other documents, money, bullion, jewellery or other valuable article or thing are or is found in the possession or control of any person in the course of a search, it may be presumed- (i)that such books of account, other documents, money, bullion, jewellery or other valuable article or thing belong or belongs to such person; (ii)that the contents of such books of account and other documents are true; and (iii)that the signature and every other part of such books of account and other documents which purport to be in the handwriting of any particular person or which may reasonably be assumed to have been signed by, or to be in the handwriting of, any particular person, are in that person's handwriting, and in the case of a document stamped, executed or attested, that it was duly stamped and executed or attested by the person by whom it purports to have been so executed or attested.]"

Thus, the presumption is only in search cases where it is presumed that the contents of such books of account and other documents are true whereas, the appeals under consideration are cases of survey operations where there is no such scope of presumption. This means that in the cases of survey operations, the onus is on the revenue to bring the cogent material evidence on record to show that the assessee has incurred expenditure which are not recorded in the books of accounts. As mentioned elsewhere, in the appeals under consideration, all the expenditure has been found to be recorded in the books of accounts and no error or infirmity has been pointed out by the AO nor by the ld. CIT(A). Even the books of accounts have been accepted and no defect has been pointed out.

The allegation that the assessee has not followed the Standard Operating Procedure (SOP) is not relevant as long as the impugned expenditure are found recorded in the regular books of account maintained by the assessee.

Though the ld. First Appellate Authority has admitted that the entire expenses cannot be disallowed yet, he himself went on to estimate the disallowance which is again not a proper procedure. Once the expenses have been found to be fully recorded in the books of accounts, the same cannot be disallowed only on the whims and surmises of the revenue authorities.

Considering in totality the facts of the case in hand in light of the documentary evidence referred during the course of proceedings, we do not find any merit in the impugned additions. We direct the AO to delete the additions from the captioned appeals.

Other issues in the captioned appeals have not been pressed, therefore, the same are dismissed as not pressed.

In the result, the captioned appeals by the assessee are partly allowed. Order pronounced in the Court on 22nd October, 2024 at Mumbai. (RAJ KUMAR CHAUHAN) ACCOUNTANT MEMBER Mumbai, Dated 22/10/2024", "summary": { "facts": "The assessee, an AOP engaged in infrastructure development, had its books of accounts subjected to a survey action. The Assessing Officer (AO) alleged that the assessee had incurred unaccounted cash expenses and generated cash by debiting fictitious expenditures, particularly concerning 'contingency' expenses.", "held": "The Tribunal observed that the survey operations did not permit the same presumption as search cases, and the onus was on the revenue to prove unrecorded expenditures. The Tribunal noted that the AO himself admitted that the total cost in the CTC report matched the books of accounts, and the contingency expenses were recorded. The First Appellate Authority (CIT(A)) had restricted the disallowance to 2.5% instead of the full amount.", "result": "Partly Allowed", "sections": [ "133A", "37(1)", "132(4A)", "271(1)(c)" ], "issues": "Whether the 'contingency' expenses claimed by the assessee, identified during a survey, were genuine and properly recorded in the books of account, or if they represented bogus expenditure." } }