M/S SCANTEC (INDIA) PVT. LTD.,NOIDA vs. DCIT, NOIDA

“1. That in the facts and circumstances of the case and in law the order passed by Ld. Commissioner of Income Tax (A), hereinafter referred as CIT(A) is in contravention to the provisions of law and hence is void ab initio.

The brief facts of the case are that the assessee company is engaged in the business of electro-mechanical and civil engineering contractor and carried out the erection of Extra High Voltage Overhead transmission lines, installation of underground EHV power cables, Microbe and telecom towers, repair and maintenance of EHV transmission and distribution equipments for electrification. The assessee filed its return of income, declaring total income of Rs.18,09,015/-. The case was selected for scrutiny under the compulsory scrutiny guidelines. The assessee worked at different places. The assessee has declared his turnover of Rs.6,26,98,140/- as against Rs.7,13,83,337/- of the last year besides the other income of Rs.2,10,252/- as against Rs.10,34,421/- of last year. Against these receipts, the assessee has declared net profit of Rs.71,82,906/- against profit of Rs.1,02,75,509/- in the last year. The assessee against the said profit made the provision for doubtful debts of Rs.11,34,395/- and declared the net profit in the P/L A/c Rs.60,48,511/-, though in the computation the assessee added back the provisions of Rs.11,34,395/- beside the other provision of gratuity/leave encashment and unpaid bonus etc totaling to Rs.12,56,793/-, but claimed bad debts of Rs.58,65,647/- for which the provision was made in the earlier year and declared net profit of Rs.16,56,296/- from the business activities beside the interest income of Rs.1,52,719/-.

During the assessment proceedings, the assessee was asked to produce the books of account and other details. The appellant produced books of account and details as required by the Assessing Officer. From the perusal of the same, it is noticed by the AO that the assessee has got executed the work at different sites directly as well as through sub-contractors. Under the Head project expenses, the appellant has shown wages of Rs.1,40,08,148/- and sub- contractors cost of Rs.1,04,45,540/- has been claimed in profit and loss account. He further noticed that the assessee has incurred the expenses through imprest accounts maintained by various persons/in-charge of the sites and expenses are shown to have been incurred through cash though the payments to sub-contractors includes cheques/drafts also. He also noticed that the assessee has shown the sub-contract work from various parties which includes the sub-contracts names, but were not got verified during the course of assessment proceedings for the assessment year 2003-04. The AO issued show cause notice to the assessee in respect of following five parties, which were not got verified in assessment proceedings for the assessment year 2003-04. The details of payments to the five parties which has been added by the AO are as under :

The ld. Assessing Officer disallowed the total amounts as per column No. 5 of Rs.10,47,507/- in which the opening balance was also included of Rs.3,52,833/- on the ground that since all the above five parties did not respond the notice u/s. 133(6) in the assessment proceedings for the assessment year 2003-04, nor the assessee could produce any confirmation thereof, therefore, the payments made to them was not genuine and verifiable during this year.

On the scrutiny of wages payments, the Assessing Officer noted that during the year, a sum of Rs.1,40,08,148/- has been incurred towards wages as against Rs.1,16,41,903/- in the last year. He further noted that a sum of Rs.1,04,45,540/- has been paid to the sub-contractors. The AO after comparing the figures of previous year noted that overall expenses have been increased to the extent 39% as compared to 36.56% in the last year to the total work executed in the current year and last year respectively. These facts were also brought to the notice of the assessee and was confronted as to why the payments made under this head, that too through imprest account of the of the site incharge who have made the expenses in cash, should not be considered as the expenses inflated under the head wages to reduce the tax incidence. The assessee relied upon its reply. Considering the reply of the assessee and increase in the wages, the wages claimed by the assessee inclusive of payments to sub-contractors of last year at 36.56% comes to Rs.2,29,22,442/- in the ratio of last year’s expenses. Therefore, taking into account the expenses to the subcontractors being unverifiable and payment made through imprest account as well as GP ratio declared better in comparison to the last year and the extra expenses borne by the assessee on account of insurance of project which is Rs.18,36,698/- in comparison to Rs.3,55,598/- in the last year, the overall addition in the net profit besides the addition against the above parties was made at Rs.5,00,000/- which also covered the excess expenditure of wages. Aggrieved by this order of AO, the assessee appealed before the first appellate authority who confirmed the order of the Assessing Officer. The assessee is in appeal before ITAT.

The ld. AR submitted that the sub-contractors are genuine. They have done work with the appellant for more than one year. They are raising bills and accordingly, the assessee has made payment either by cash or cheques/DDs. The Assessing Officer without issuing notice to the parties, but on the basis of last year, disallowed the claim of the expenditure on the basis of conjectures and surmises. Even their closing balance for last year has been disallowed, which is contrary to law. The ld. AO has made mathematical calculation and accordingly on average basis disallowed the claim of wages without looking to the facts of the case and bills and vouchers submitted before him. If the Assessing Officer had any doubt in the payments of wages, he should have specified that which payment is not genuine, but he did not do so. The assessee has executed the work at different places. Therefore, the imprest account was sanctioned to the in-charge of that site and out of that imprest account, he has paid the labour expenses as and when required.

The ld. DR relied on the order of the lower authorities.

After hearing both the parties and perused the material available on record, we noted that the ld. Assessing Officer has disallowed the expenditure of Rs.10,47,507/- of contract work got done through above five parties. In the above amount, a sum of Rs.3,52,833/- is included of the previous year. The Assessing Officer has wrongly made addition on the basis that all the five parties were not found genuine in the last year on issuing notices u/s. 133(6) and therefore, the said parties cannot be said to be genuine in this year also.

In respect of estimated addition of Rs.5,00,000/- on account of wages payment, without any basis, he made simply a mathematical calculation and compared the current year’s figures from the previous year’s figures, i.e., quantum of turnover and expenditure incurred and lump sum disallowance has been made of Rs.5 lacs. He did not examine any specific vouchers, bills, submitted before him and did not point out any defect in the payment of wages. The appellant has done works at different places and therefore, site in- charge has made payment to the labourers and relevant vouchers were placed before the Assessing Officer. The Income-tax Act prohibits adhoc disallowance of expenditure as also held by Hon’ble higher courts and by coordinate Benches of ITAT in several decisions. Unless the AO points out that a particular expenditure is of disallowable nature, no disallowance could be made by the AO on adhoc basis. Accordingly, this issue is decided in favour of the assessee and this ground of appeal is allowed.

In the result, the appeal of the assessee is allowed.