ITO, WD-29(3), KOLKATA, KOLKATA vs. M/S MAAKALI ENTERPRISE, KOLKATA

This is an appeal filed by the Revenue against the order dated 22.09.2010 passed by the Commissioner of Income Tax-(A)-8, Kolkata for A.Y.2008-09.

In the remand report dated 27.7.2011 it was mentioned that one notice sent to one of the parties was returned unserved existence of which the assessee clarified from the register and further substantiated the same by submitting the VAT registration certificate of the said party and in other two cases there were some petty amount differences. Ld. CIT(A) further asserts that those parties exist and they had transactions with the assessee and the purchase was substantiated. He deleted the adhoc disallowance.

The ld. DR argued that from the very initiation of the proceeding there was no cooperation on the part of the assessee. He relied upon the remand report dated 22.07.2011 where from it appears that the assessee has given a list of 19 parties for the total purchase amount . Notices were issued to 15 parties by the AO , out of which 6 parties did not give any reply though considerable time was given to them. By a letter dated 11.07.2011 the assessee was asked to produce ledger, bill, voucher and cash book to substantiate his claims of purchase. These documents were produced by the AR on 21.07.2011 for verification purpose. There was no reply from the seller parties. He further pointed out that notice was sent to M/s Bhadrak Builders and the same was returned unserved with the postal remark “not known”. Subsequently the AR produced the ledger of one party M/s. B.Builders and claimed that by mistake the same was given as M/s. Bhadrak Builders. Such information was given only after confronting with the facts mentioned above. However, the genuineness of the claim could not be verified. According to him the CIT(A) has picked up and shown some of the parties and deleted the addition made by the AO.

The ld. Counsel appearing on behalf of the assessee submitted that the return for A.Y.2008-09 was duly filed in time and the AO has not pointed out any discrepancy in the books of account. He also relied upon the remand report dated 22.07.2011 where it appears that a list of 19 parties was provided vide letter dated 28.04.2011 out of which 15 were issued notices by the AO. The required documents being the ledger as well as the VAT registration certificate of M/s. Bhadrak Builders M/s Maakali Enterprise A.Y.2008-09 4 was produced before the AO to prove the existence of B.Builders and therefore the addition of Rs.10,37,732/- is unjust and liable to be deleted.

We have considered the rival submissions and gone through the records of the case. We are of the opinion that the details of these parties were properly provided before the AO and the existence of those parties cannot be questioned. The statement made by the AO in this regard that “the assessee did not furnish the evidence/bills and vouchers in respect of materials purchased” is not tenable. In fact when the details of the required documents were furnished the disallowance of 20% of the total expenses claimed by the assessee considering this as bogus expenses is not justified. We uphold the observation made by the ld. CIT(A) in this regard. Consequently the expenses claimed to the tune of Rs.10,37,732/- cannot be treated as bogus. Thus we dismiss the ground no.1 raised by the revenue and confirm the order of CIT(A).

Ground No.2 relates to the deletion of addition of Rs.71,81,150/- on account of labour charges. From the trading account it is seen that an amount of Rs.51,88,662/- was debited on account of labour charges. During the scrutiny proceedings the assessee was asked to produce supporting evidence whether TDS has been deducted in respect of labour charges claimed. The AO has also mentioned that the assessee did not furnish any supporting evidence neither explained whether TDS was made on labour charges. AO concluded that the assessee has not made any TDS on labour charges and thereby violated the provision of section 194C of the Act r.w. s. 40(a)(ia) of the Act and ultimately disallowed the said expenses claimed and added back to the total income of the assessee.

The CIT(A) in his order held that section 194C is not applicable in the instant case. He further added that the assessee is engaged in civil construction activity and thus obviously labour is required and is a major factor. Since the assessee itself is doing civil construction activity it is the assessee who engages the labourers. Therefore there was no contract. The laour payments are made respectively to the respective labours which is appearing from the records and not disbelieved by the CIT(A). He did not justify the action of the AO of disbelieving the labour charges as a M/s Maakali Enterprise A.Y.2008-09 5 result of “unserved “ letters those were sent to all the 83 labourers. The CIT(A) further added that the labourers are on the move and working in different cities/different projects/different hirers and also are illiterate/low literacy. Therefore sending of letters is just perfunctory infructuous mode as that enquiry has been conducted. In the practical real life of business it is not the assessee’s prime requirement/responsibility to act as a census agent and verify the residential address when in majority of cases will be that labourers do not have long enough period of residential address. The assessee itself pays the wages to the labourers.

We have considered the rival submissions and perused the relevant records. It is evident from the remand report dated 22.07.2011 that the AR by a letter dated 03.06.2011 submitted that no sub contract was given for labour expenses and all payments was made to the daily labours and therefore no TDS was deducted. The AR further provided the names, address and amount-wise break up of a total number of 83 labourers. Notice was duly served upon 83 labourers by the then AO but no reply from any of the labourers came to the hand of the AO, 24 notices were returned unserved with the postal remark “not known “ or “not claimed “. This fact was brought to the notice of the assessee and the AR was asked to substantiate by producing bills, vouchers, cash book in support of these expenses. By a letter dated 21.07.2011 the AR stated that daily labourers are of migratory in nature and might have shifted from the earlier address. The weekly payment register of labourers was produced. He further added that the total payments made to all the labourers in a week are entered in the register and subsequently in cash book. Both the ledger and cash book were produced before the AO. The documents and accounts were test checked at that end. From the verification of the weekly payment register, it is found that name and address of all 83 labourers were written serially in the register and all have acknowledged receipt of money by putting thumb impression on register.

The ld. DR supported the order passed by the AO and further contended that the presence of the names of 83 labourers in the register by itself cannot justify that they were given wages.

The ld. Counsel appearing on behalf of the assessee argued in detail. He took us through the details of labour charges paid, being part of the record in the paper book. He further added that the AO has failed to establish that any sub-contract was engaged in the payment of labour charges. It is the assessee, who is engaged in the civil construction where labour charges constitute the significant part of the cost of such construction. The disallowance of his claim of expenses on labour charges for violation of section 40(a)(ia) of the Act by the AO is unlawful. Since there is no contract or sub-contract, the case neither falls under the purview of section 194C of the Act. According to him, the disallowance of the expenses claimed and added back to the total income of the assessee by the AO is not tenable and liable to be set aside.

We have heard the parties and perused the records placed in the paper book before us. We have gone through the details of the labour charges paid in the year under consideration. We have also seen the weekly register of wages which is maintained by the assessee. We have seen the ledger and the cash book which have been placed before the AO. It appears from the register that the names and addresses of all 83 labourers are written serially in the register and all have received the money by putting thumb impression on the same. It is a fact that the labours are paid by the assessee directly and not through contract or sub-contract. Therefore section 194C of the Act is not attracted. We have also perused the profit and loss account for the year ended 31.03.2008 and the amount of works bill is of Rs.1,37,60,588/- out of which labour charges are to the tune of Rs.71,81,150/-. Therefore we do not find any infirmity in the order of CIT(A) and confirm the same. Thus ground No.2 raised by the revenue is dismissed.

Ground No.3 relates to the deletion of addition of Rs.53,15,886/- on account of sundry creditors. While disallowing the amount of Rs.53,15,886/- under the head “sundry creditors by the AO it is observed that during the scrutiny proceedings the assessee was asked to furnish the details i.e. name and address of the sundry creditors which was not furnished. Considering this fact the AO came to the conclusion that the M/s Maakali Enterprise A.Y.2008-09 7 sundry creditors of Rs.53,15,886/- claimed by the assessee is bogus and disallowed the same and added to the total income of the assessee.

On the contrary the CIT(A)while dealing with this particular aspect of the matter specifically formed an opinion that the AO is expected to show which of the purchases/.expenses are doubtful/bogus and only thereafter can proceed to disallow such purchase/expense. There cannot be a blanket disallowance of the entire sundry creditors which tantamounts to disbelieving that the assessee ever carried on business. He further added that the AO had issued letters to the creditors and it was reported that in two cases the letters were returned unserved and in three cases were some balance differences. The existence of the party was proved by the VAT registration number provided by the assessee later on. The other party is an individual and after considering the nature of business of the assessee he found no justification for disbelieving the assessee just because it has claimed that letters came unserved. In regard to the other issue where the balance differences is concerned it is a very petty amount of a few thousand rupees only.

The ld. DR supported the order of the AO dated 29.12.2010 in this regard. He reiterated that there was no cooperation on the part of the assessee while he was asked to furnish the names and address of the sundry creditors. Neither any reconciliation was filed during the assessment proceedings pending before the AO. He further added that whatever the assessee could not place on record before the AO the same was placed by him during the remand proceedings for improving the case in his favour. The details of these creditors according to him was provided before the CIT(A).

The AR in support of his case submitted that the reasons for differences in balance payable to the creditors in the case of M/s Ray Fo Run, M/s Sanitary Sales, M/s. South Sanitary Sales are due to non reconciliation of the balance for a long period and wrong entries in their books. Therefore the liabilities cannot be considered as bogus. He relied upon the remand report whereupon it appears that the assessee has given a list of 14 parties for total purchase amount. The AO issued notices to 11 parties out of which four parties did not give any reply to the notice. By letter dated M/s Maakali Enterprise A.Y.2008-09 8 11.07.2011 the assessee was asked to produce ledger in support of his claim. The documents were produced by the AR on 21.07.2011 for verification purpose. Further that the existence of one of the parties namely B.Builders was also proved by the assessee by producing the ledger & VAT registration certificate. The other unserved party is an individual and the balance differences in respect of the other 3 parties are petty amount which was substantiated by the assessee as due to non reconciliation of balance.

We have considered the rival submissions and also perused the relevant material available on record. It is observed that the amount of sundry creditors in question was treated by the AO as the income of the assessee by holding the relevant creditors as bogus since the assessee had failed to furnish the relevant details called for by the AO in respect of the said creditors. During the course of appellate proceedings before ld. CIT(A), it was contended on behalf of the assesee that proper and sufficient opportunity was not given by the AO to furnish the said details and being satisfied with the same, the ld. CIT(A) allowed the assessee to furnish the relevant details in respect of the concerned creditors. The said details were also forwarded by the ld. CIT(A) to the AO for verification. Accordingly notices were issued by the AO to some of the creditors in order to cross verify the claim of the assessee and since the response to the said notices from the concerned creditors was not to the satisfaction of the AO, he submitted adverse remand report to the ld. CIT(A) on this issue. When this adverse remand report of the AO was confronted to the assessee by the ld. CIT(A), the assessee filed his rejoinder and on the basis of the same, the ld. CIT(A) treated the sundry creditors as genuine after having found that the existence of the said creditors was duly established by the assessee by filing the relevant details such as VAT registration etc. He also found that the difference in the balance of three creditors as pointed out by the AO was very small and the same was due to unreconciled accounts as pointed by the assessee. He also found that the genuineness of corresponding purchases made by the assessee from the said creditors was not doubted by the AO. According to the ld. CIT(A), the AO was not justified in treating the concerned creditors as bogus without doubting the genuineness of the M/s Maakali Enterprise A.Y.2008-09 9 corresponding purchases made by the assessee from the said creditors. On the basis of all these findings of fact recorded by him, the ld. CIT(A) treated the concerned creditors as genuine and deleted the addition made by the AO by treating the same as bogus. After having considered all the facts of the case as found by the ld. CIT(A) and remained uncontroverted by the revenue, we find no justifiable reason to interfere with the impugned order of the ld. CIT(A) giving relief to the assessee on this issue and upholding the same, we dismiss ground no.3 of the revenue’s appeal.

In the result, the appeal of the revenue is dismissed.