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

A survey action u/s 133A of the Act was carried out in ITD Cem group and related entities on 26/10/2021. During the course of survey operation it is found that the assessee is following a unique method of accounting and the same is followed by the assessee group entities to I.T.A. No. 4556/Mum/2024 I.T.A. No. 4566/Mum/2024 I.T.A. No. 4563/Mum/2024 I.T.A. No. 4558/Mum/2024 3 record unaccounted cash expenses which is deployed to secure work contracts from the contractee organizations. It was noticed that the assessee prepares Cost to Completion (CTC) reports which provide pen picture of the actual cost incurred for the project under each expense head – both Estimated costs and also the actual costs. The AO was of the opinion that the evidence found in a survey discovered the term “Contingency” used to denote those expenses which are not recorded in the books of account and are spent in cash for non-business purposes. On this presumption, the AO alleged that the assessee has incurred certain unaccounted expense in cash that is bogus expenditure and such cash have been generated by debiting fictitious expenditure in the ledger account/books of accounts. The AO further presumed that the contingency expenses shown in the CTC reports are adjusted in various costing heads of the books of accounts by passing “adjustment entries” which are 1) booking of artificial expenditure from shell entities and 2) booking of over-invoiced expenditure from regular vendors. The AO further alleged that the assessee has booked various bogus expenses in order to generate cash for meeting ‘contingency’ expenses. 6.1. 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.

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. 14.23. 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 I.T.A. No. 4566/Mum/2024 I.T.A. No. 4563/Mum/2 6 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. 11. 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. 12. 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:-