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

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 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 Financial Years 2014-15 and 2015-16, the same cannot be brought to tax again and it has to be allowed as bad debt.

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 assessee really committed breach of contractual terms and conditions or services to be rendered or violated the terms of contract cannot be taken as final and any attempt of the assessee to get it tested in a judicial forum cannot be termed as defendant’s offence. Here we have to keep it in mind that payment of fine or penalty is different from incurring a litigation expense before such penalty or sentence is finally passed. After the judicial forum speaks finally confirming the penalty, the subsequent payment alone can be treated as sentence for offence, but not litigation expense. We, therefore, are of the considered opinion that the litigation expenses incurred by the assessee to defend their stand against the Circular passed by the NHAI, debarring the assessee from participating in any work connected with NHAI for a period of one year for breach of contractual obligation is allowable expense.

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 submitted that the assessee could gather ledger confirmations from three parties and is willing to produce such relevant information before the learned Assessing Officer provided an opportunity is granted.

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 manhours spent on that count and therefore, apart from the allowable expenditure under section 44C to the tune of Rs.1,80,90,376/-, this particular business development expense of Rs.1,91,23,625/- has also to be allowed since this is exclusively attributable to the requirement of assessee only. She further submitted that an identical issue had arisen in assessee’s own case for the assessment year 2021-22 and after considering the issue in extenso in the light of the decision of coordinate bench in the case of DDIT Vs.Samsung Engg.Co.Ltd (2011) 43 SOT 38, Fraport A.G. Frankfurt Airport Services Worldwise Vs. ACIT/ADIT [2023] 151 taxmann.com 370 and Addl.DIT Vs. Bank of Bahrain & Kuwait [2011] 44 SOT 693 and the Hon'ble High Court of Bombay in the case of CIT Vs Emirates Commercial Bank Ltd.[2004] 134 Taxman 682 (Bombay) reached a conclusion that when the assessee proves that certain expenditure exclusively incurred for the Indian project and are not in nature of overheads by producing time sheet on daily basis for each employee in the organization by recording man hours on daily basis, Revenue has to exclude such expenses from the revenue under section 44C of the Act.

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 nature of overheads, the Revenue has to examine the time sheet on daily basis for each employee in the organization by recording the manhours on daily basis and if such exclusive nature of such expenditure is established then such expense has to be excluded from the purview of section 44C of the Act. In this case, it is evident from the record that since the authorities have taken a stand that salaries and perks to the employees fall under section 44C of the Act and did not proceed further to verify the evidence in the light of the decisions of the coordinate Bench in the case of Samsung Engg.Co.Ltd. (supra), we deem it just and proper to restore this issue to the learned Assessing Officer to verify this fact and if it is found that such expenses were exclusively attributable to the Indian project not to make any disallowance under section 44C of the Act. Ground No.5 is allowed in above terms.

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.