DCIT - 5(1), MUMBAI vs. ESSAR BULK TERMINAL LTD., MUMBAI

The only issue in this appeal of Revenue is against the order of CIT(A) deleting the disallowance of salary expenses amounting to Rs.1,16,28,911/- (being 50% of salary expenditure of Rs.2,32,55,901/-) incurred by the assessee in connection with its business of cargo handling operations. For this revenue has raised following ground No.1.

Briefly, stated facts are that assessee has charged total salary cost at Rs.7,03,11,282/- during the financial year 2009-10 and claimed deduction on account of salary wages at Rs.2.32 crores in the P&L A/c and balance Rs.4,70,53,459/- was debited to current work in progress and not claimed as deduction. According to AO, the assessee earned Cargo Handling Income from Essar Logistics Ltd. and claimed the same as salary establishment expenses at Rs.2.32 crore and charged to the P&L A/c. Before AO assessee explained that the total salary of the office staff involved in the operation activity and Rs.7,03,11,282/- during the year. Out of this, the salary expenses of Rs.2,32,57,8231- has been debited to Profit & Loss Account while Rs.4, 70,53,459/- has been debited to CWIP. The Company has identified the personal who were involved in operations (cargo handling activity) and those who were involved in the construction activity and computed the CTC (cost to the Company) of these employees. The total CTC of these employees amounted to Rs.7.53 crores out of which Rs.2.47 crores pertained to those who were involved in operations and Rs.5.06 crores pertained to the employees who are involved in the construction activity of the company. Applying this ratio i.e. 33:67, the total salary expense of Rs.7,03,11,282 has split between P & L (Rs.2,32,57,823) and CWIP (Rs.4, 70,53,459) and accordingly claimed was made.

The AO was not convincing with the explanation of the assessee and he disallowed 50% of salary claimed in the P&L account amounting to Rs.1.16 crores by observing as under: - “The submission filed by the assessee is perused but found not fully acceptable. As discussed above, assessee has debited salary and establishment expenses of Rs.2.32 crores to the P & L A/c. in addition to the manning and management expenses of Rs.196 crores and other expenses of Rs.55,00,000/ -against cargo handling income earned from Essar Logistics Ltd. In its reply, assessee stated that out of total salary expenses, an amount of Rs.4,70,53,459/- is debited to CWJP. The assessee has failed to discharge its duty to prove that the expenses incurred are exclusively for the purpose of income earned in face of the fact that manning and management expenses in the nature of salary is already claimed against cargo handling income. Further it may be mentioned that the assessee has not submitted any log-sheet bifurcating salary expense for CWIP and that against cargo handling activities, it is also noted that assesse is having common salaried employees both for the purpose CWIP and revenue generating cargo handling activity and therefore, it is not possible to verify the same. Also debiting huge amount of salary against the only one receipt of cargo handling is not justified in so far as it has drastically reduced the taxable income from cargo handling income during the year under consideration. Considering the above, 50% of salary claimed in P&L A/c is disallowed and added to the total income of the assessee. Accordingly, an amount of Rs.1,16,28,911/- is disallowed and added to the total income of the assessee.” Aggrieved, preferred appeal before CIT(A).

The CIT(A) deleting the disallowance of salary vide para 5.2 as under: - AO has disallowed 50% of the salary expenditure on the grounds that it is not proved by the assessee that the salary and establishment expenses of Rs.2.32 crores claimed against the cargo handling income were incurred exclusively for cargo handling work. The AO has not doubted the genuineness of the salary expenditure, rather he has disallowed 50% of the expenses because the appellant was also indulged in port development activities and expenditure relating to this activity are being capitalized by the appellant, therefore it is the doubt of the AO that assessee has claimed more salary on income generating project and less to the capital project. It is the claim of the appellant that it has properly bifurcated employee-wise expenditure relating to revenue generating activities of cargo handling and relating to the capital work-in- progress. Under these circumstances, once the appellant has clearly bifurcated the expenditure relating to two distinct activities i.e. revenue generating and capital work-in-progress, then onus shifts on the AO to disprove the claim of the appellant that it has reduced the expenditure on capital account and inflated the expenditure on revenue account. In the instant case, it is seen that the AO has summarily rejected the claim of the appellant, which is only a guess work and unsubstantiated apprehension of the AO. Under these circumstances, the disallowance of 50% salary without any convincing material, does not appear justified, hence the same is directed to be deleted.” Aggrieved, now Revenue is before Tribunal.

We have heard the rival contentions and gone through the facts and circumstances of the case. We find from the facts of the case that the assessee during the F.Y. 2009-10 was in the process of setting up an all-weather deep draft dry bulk port at Hazira in Gujarat capable of handling up to 1,05,000 Dead Weight Tonnes (DWT) bulk carriers to facilitate import of iron ore pellets, limestone, steel products and other dry bulk cargoes and export of finished steel and other dry bulk products. The facilities would include a dedicated all weather channel, 550 meters long jetty, ship unloaders, storage facilities for cargo, conveyors for transportation of materials to stack yard. In addition to the construction activity as mentioned above, the assessee started the business of cargo handling operations during FY 2009-10. During the year, the assessee entered into a contract with Essar Logistics Ltd, for carrying out cargo handling activity of bulk material at Essar Hazira Terminal (old terminal of Essar Steel Ltd). The assessee was responsible for discharge of bulk material cargo (comprising of iron ore & pellets, limestone, coal, fines etc) from light carriage vessels berthed at the terminal wider the hook and conveying the same through various equipment including conveyor belts at Essar Terminal and storing at appropriate place at open stockyard. During the FY 2009-10 the assessee handled cargo of 8.3 IMMT comprising of bulk material and finished goods. In order to carry out its cargo handling business the assessee bad contracted external parties and incurred manning expenses of Rs.1,96,08,640 This amount has been debited to Profit and loss account. Similarly, in order to carry out the dredging activity required for construction of the project the assessee had incurred manning charges for crew amounting to Rs.4,68,16,672/-. This amount has been debited to CWJP which is shown in the Balance Sheet. Accordingly, the total salary cost of the office staff of the assessee for the F.Y. 2009-10 amounted to Rs.7,03,11,282/-. Out of this amount, the salary expenses of Rs.2,32,57,823/- has been debited to Profit & Loss Account while Rs.4,70,53,459/- has been debited to Capital Work in Progress (CWIP). The assessee had identified the personnel who were involved in operations (cargo handling activity) and those who were involved in the construction activity and computed the CIC (cost to the Company) of these employees. The total CTC of these employees amounted to Rs.753 crores out of which Rs.2.47 crores pertained to those who were involved in the business of cargo handling operations and Rs.506 crores pertained to the employees who are involved in the construction work. Applying this ratio i.e. 33:67, based on the ratio of 2.47::5.06, the total salary expense of Rs.7,03,11,282/- has split between P&L. (Rs.2,32,57823/-) and CWIP (Rs.4,70,533459/-).

We find from the above facts that the assessee has identified the personals who were involved in cargo handling activity and those who were involved in cost construction activity and computed the salary cost of these employees. The assessee has debited total cost to the assessee on account of these employees amounting to Rs. 7.53 crores out of which an amount of Rs. 2.47 crores pertains to those, who were involved in the business of cargo handling operation and Rs.5.06 crores pertains to the employees who were involved in the construction work. The AO has not doubted the genuineness of the claim of expenses. It is also note that the case of the AO that the assessee failed to prove the expenditure or fail to produce cogent and convincing evidence in support of the claim of expenditure and therefore, there is no good reason to disallow the expenditure claimed by the assessee on adhoc basis. It is also not in doubt that the expenditure is not for the purpose of business. The only reason for disallowance of expenses was that the assessee is unable to submit any log-sheet bifurcating salary expenses for CWIP and the claim made against cargo handling activities. In reply to this the assessee has to explain that on the basis of ratio of receipt the expenditure has been split between the P&L and CWIP. In view of these facts, we find no infirmity in the order of CIT(A) and hence the same is confirmed. Hence, this issue of Revenue’s appeal is dismissed.

In the result, the appeal of the Revenue is dismissed. Order pronounced in the open court on 23-11-2016.