SHELADIA ASSOCIATES INC,HYDERABAD vs. ADIT(INT TAXN)-2,HYD, HYDERABAD

Brief facts of the case are that the assessee is a permanent establishment of foreign company located in USA and is engaged in the business of engineering and engineering consultancy services. It filed its return of income for the assessment year 2020-21 on 30/10/2020, declaring an income of Rs.81,85,490/-. Learned Assessing Officer while concluding the assessment proceedings, made the above additions. Learned DRP also upheld those additions.

We shall now deal with these additions in details. Disallowance of Rs.16,97,639/- relates to trade receivable from NHAI in Nashik PO. According to the assessee, it already offered revenue relating to Financial Years 2014-15 and 2015-16 as evidenced by the sales ledger, ledger copy of NHAI, PO wise Profit & Loss account and Consol Profit & Loss account as well as income tax returns for the assessment years 2015-16 and 2016-17. NHAI subsequently held that the assessee raised invoices at a higher amount than the original contract rate and therefore realized only less amount than the invoice amount resulting in short settlement of Rs.1,28,301/- by letter dated 26/06/2019. So also, there was short payment to the tune of Rs.15,81,393/- on the ground that the assessee demobilized itself from the project without the consent of NHAI.

Learned AR submitted that the assessee took these amounts into consideration in the Financial Years 2014-15 and 2015-16 and offered the same to tax and therefore when the amount is not received from NHAI, the same was to be treated as bad debt and accordingly claimed deduction in respect of the same. She submitted that an identical issue was covered in the assessment year 2021-22 in ITA No.537/Hyd/2023 and the Tribunal had taken a view that since it is a verifiable fact as to whether or not the assessee offered the amounts covering the short payments also in the

Though the learned DR vehemently contended that since the assessee committed breach of contract, NHAI withheld the amounts, therefore, such short payment amounts to levy of penalty and the same cannot be allowed as deduction.

On careful consideration of the matter, we are of the opinion that if really the assessee took the entire amount into consideration and offered the same to tax during the relevant Financial Year and subsequently, there was short payment there of, on verification of this fact from the books of the assessee, the learned Assessing Officer has to allow the amount as deduction. While following the view taken for the Assessment year 2021- 22, we restore the issue to the file of the learned Assessing Officer for verification as stated above, and to allow the deduction since, otherwise, it amounts to taxation of amount that was never received.

The second addition in question is of Rs.46,40,500/-, which according to the assessee was incurred towards legal fee paid to defend the action of NHAI in debarring the assessee from participating in any work connected with NHAI for a period of one year on account of deficiency in services rendered in Pali highway. In so far as the spending of this amount or its connection with the attempt of the assessee to defend itself from the action of the NHAI is concerned, absolutely, there is no dispute.

According to the authorities, such expenditure incurred was for the purpose for which it falls in the category of offence within the ambit of section 37 of the Act and therefore the same cannot be allowed.

On perusal of the order of the Hon'ble Delhi High Court, we find that towards the omission and deficiency of services NHAI passed a Circular debarring the assessee from participating in any work connected with NHAI for a period of one year and for such breach of contractual terms only, such a circular was passed. The opinion of NHAI was not final as to whether the

Coming to the third addition of Rs.32,43,680/-, according to the assessee, it was incurred towards project expenses for engaging third party service providers. It was disallowed on the ground that the claim was not substantiated by furnishing confirmations and other material.

Learned AR submitted that when the learned Assessing Officer conducted enquiries in remand proceedings and called for the confirmations from the third party vendors to the tune of Rs.12,70,23,533/-, all responded, but only four persons to whom an amount of Rs.32,43,680/- was paid did not respond and therefore, the addition is made. Grievance of the assessee is that though the four third party vendors did not respond, the fact remains that the assessee produced some other supporting evidence to prove the genuineness of the services rendered by such persons also, but since the work at that particular location, namely, Chittisgarh PO was complete and such four consultants were not engaged by the assessee quite for some time and could not locate them within reasonable time, the details and confirmation letters could not be furnished by the assessee. She further submitted that in view of the winding up of the work at some locations, only skeleton staff were retained and that is one of the reasons why the information could not be obtained swiftly. She

We have heard the learned DR also on this aspect and the learned DR submitted that the assessee could not produce such confirmations and other material not only during the assessment proceedings, but also during the first appellate and remand proceedings resulted in disallowance of such payments which are made to particular four parties, who did not respond to the notices issued during the remand proceedings.

On consideration of the factual situation, we are of the opinion that when once the assessee engaged third parties in order to avoid certain management problems by engaging permanent staff on their own, when the need ends and contract with third parties gets terminated, it would be but natural that the professional relationship between the assessee and the third party service providers would end and whether or not the assessee could trace out the whereabouts of such third party service providers becomes a question of fact. When the assessee pleaded that only skeleton staff remained at the project office after the project work is accomplished, it would be natural for them to take more time to trace out the erstwhile service providers and to obtain the confirmations and information from them. In these circumstances, we accept the contention of the assessee and restore the issue to the file of the Assessing Officer to receive the confirmations to be filed by the assessee and to seek any further information so required and to take a view according to the law. Ground No.3 is answered in the above terms.

Now coming to the last addition of Rs.1,81,67,730/- claimed as direct expense recorded as business development expense in the financial statements and disallowance under section 44C of the Act is concerned, the learned AR submitted that head office of the assessee while incurring certain expenses specifically relating to the business development by engaging personnel and allocated the proportionate expense basing on the

Learned DR vehemently relied on the orders of the authorities and submitted that in this case, the expense in question was incurred by way of payment of salaries, wages or any other perks and therefore, covered by explanation of (iv) section 44C of the Act and, therefore, falls in the ambit of section 44C of the Act. Learned DR further argued that the learned Assessing Officer found that this amount of Rs.1,60,78,394/- is disallowable not only under section 44C of the Act, but also under section 40(a)(i) of the Act, but the assessee challenged the disallowance under section 44C of the Act, but not under section 40(a)(i) of the Act. According to her, not taking a ground under section 40(a)(i) of the Act amount to acceptance of disallowance under section 40(a)(i) of the Act and, therefore, such an addition cannot be deleted.

We have gone through the record in the light of the submissions and found that if the assessee proves that certain expense was exclusively incurred for the Indian project by the head office and such expense is not

In the result, appeal of the assessee is allowed for statistical purpose.

Ground No.1,2,3, 6 and 7 are general and consequential in nature and they do not require any adjudication at this stage. Order pronounced in the open court on this the 16th day of October, 2024.