SHRI DIPANKAR SAHOO,KOLKATA vs. ACIT, CIR-51, KOLKATA, KOLKATA

Ground no. 2 of appeal of assessee is against the action of Ld. CIT(A) in enhancing the disallowance originally made by the AO of Rs.13,92,209/- in respect of sundry creditors (Machine rental charges) to Rs.69,60,439/- by the Ld. CIT(A). Brief facts of the case are that the assessee is the proprietor of M/s. Matrushakti Suppliers which was engaged in mining operations. The assessee in order to do the mining had hired heavy earthmovers from 50 persons and the amounts due to the said machine rental charges payable was shown as sundry creditor to the tune of Rs.69,60,439/-. The AO selected twelve persons from the list randomly and letters were sent to confirm from their accounts. However, since no confirmation was received from these persons, the AO disallowed 20% of the amount by which an amount of Rs.13,92,209/- was treated as bogus claim. Aggrieved, assessee preferred an appeal before the Ld. CIT(A) who was of the opinion that since twelve persons out of 50 did not reply to the notice sent by the AO, the entire amount ought to have been disallowed. So, he issued enhancement notice on 01.03.2016 and thereafter he noted that the assessee failed to file any confirmation of the sundry creditors so he disallowed the entire amount and enhanced the same to Rs.69,60,439/-. Aggrieved by the aforesaid decision of the Ld. CIT(A), the assessee is before us.

We have heard rival submissions and gone through facts and circumstances of the case. The Ld. AR assailing the decision of the Ld. CIT(A) submitted that the assessee is into mining operations and had taken heavy earthmovers on hire basis. The amount which was outstanding and payable to those parties (machine rental charges) was shown as sundry creditors by the assessee and the said amount was to the tune of Rs.69, 60,439/-. The AO randomly selected twelve persons out of 50 sundry creditors and issued them notices asking for confirmation from them. However, since there was no confirmation from these parties the AO disallowed 20% of the said amount to the tune of Rs.13,92,209/-. On appeal, according to the Ld. AR, the Ld. CIT(A) simply asked for confirmation from the rest of the parties and gave them notice for enhancement dated 01.03.2016 and fixed the matter on 16.03.2016. It was brought to our knowledge that the assessee received the letter of enhancement only after few days i.e. after 07.03.2016 and, therefore, the assessee did not get enough time to furnish the confirmation from all the parties. The Ld. AR drew our attention to page 22 of the paper book where the total list of sundry creditors for outstanding rental charges for the relevant assessment year under consideration has been annexed. We have perused the same which shows that there are 48 sundry creditors and the total amount of Rs.69,60,439/- was outstanding payable to the sundry creditors. The Ld. AR took pains in showing that the assessee had squared up all the payments in the next assessment year which is evident from a perusal of pages 23 and 24. For e.g. we note that the amount outstanding from Shri Binod Kr. Verma as on 31.03.2010 was Rs.2,13,480/- and in the subsequent year (AY 2011-12) an additional amount of Rs.65,720/- was paid making the total at Rs.2,79,200/- and balance as on 31.03.2011 to the said sundry creditor was only Rs.45,720/-. Likewise, we find that the assessee had squared up the outstanding payment for this relevant assessment year in the next assessment year 2011-12. Therefore, we do not find any reason for making the disallowance in the light of the evidence on record and the fact that the payments have been made in the subsequent assessment year could not be contradicted by the Ld. DR, therefore, we are inclined to delete the addition made by the Ld. CIT(A). This ground of appeal of assessee is allowed.

Brief facts of the case are that in respect to meal charges claimed by the assessee to the tune of Rs.5,52,344/- the AO was of the opinion that these expenses are not related to the business of the assessee and, therefore, he disallowed the entire claim. The Ld. CIT(A) also confirmed the same. Aggrieved, the assessee is before us.

We have heard rival submissions and gone through facts and circumstances of the case. The Ld. AR submitted that the nature of work undertaken by the assessee is in very remote location involving long outstation work by the employees of the company. Since the mining operations are done in remote areas far away from the villages, the assessee in order to extract maximum work has to keep employees with him and for that had to provide food, tea and Tiffin to the employees in the absence of any restaurants near the mining area and without understanding the commercial expediency the authorities below have made disallowance @ 100% which is arbitrary exercise of power. Before us, the Ld. AR produced the meal charges ledger account of M/s. Matrushakti Suppliers which is seen from page 29 to 31 of the paper book, the date wise ledger account has been placed from 02.04.2009 to 31.03.2010 and a total amount of Rs.5,52,344/- has been claimed. We note that the assessee is into mining operations in remote areas and the assessee should take care of the workers i.e, mining labourers and provide them meal etc. to extract maximum work from them. For that purpose the assessee is providing the meals, tea and Tiffin to the employees. Since there is a nexus to the expenditure with the business the same is allowable and the expenditure incurred was due to commercial expediency as stated above and, therefore, we are inclined to allow the expenditure claimed in respect of meal charges and, therefore, the addition of Rs.5,52,344/- is directed to be deleted.

Coming to the other disallowances, the Ld. AR pointed out that all the disallowances have been made on an ad hoc basis of 30% of the claim. We note that in respect to site expenses 30% of the claim has been disallowed and for travelling and conveyance 30% of the claim has been disallowed, for commission 30% of the claim has been disallowed, for car oil 30% of the claim has been disallowed. We note that the AO has not pointed out any defects in the books of account or has not asked the assessee to produce any evidence before making the ad hoc disallowance as such itself is arbitrary exercise of power which is against the principle of Article 14 of the Constitution. Therefore, we are of the considered opinion that the ad hoc disallowances on the aforesaid disallowance need to be deleted and we order accordingly.

Regarding subscription, the assessee has claimed Rs.26,150/-. The AO fully disallowed the amount which, according to him, was no way related to the business activity of the assessee. The Ld. CIT(A) was pleased to confirm the same. Before us, the Ld. AR submitted that since the assessee’s business is carried out at remote areas and the assessee had to depend on the nearby villagers for purchase of food grains, labourers etc., therefore, in order to keep good relationship with the villagers, at times for festivals and other important functions some funds need to be given to these villagers for smooth functioning of the business of the assessee. From the aforesaid explanation of assessee, we note that expenditure incurred has nexus with the business of the assessee and, therefore, is an allowable expenditure. We note that the assessee in page 36 has kept the ledger account for expenses which happened on 17.07.2009, 21.08.2009, 01.09.2009 and 21.09.2009 to the tune of Rs.26,450/- taking note of the fact that the assessee is into mining business and executes work at far flung remote areas no doubt had to depend on the nearby villagers for support in running the canteen of the assessee and for having good and cordial relationship with the locals is necessary and had to give some amount for festivals etc. which is necessary for smooth functioning of the assessee’s business. Since the ld. DR could not controvert the facts, we are of the considered opinion to allow the claim of the assessee and direct deletion of addition of Rs.26,450/-.

In the result, appeal of assessee is partly allowed.