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Prakash Engineers, 104, Charishma Centre, 1st floor, 19th Road,Chembur,Mumbai-400071 Vs. Jt.Commissioner of Income Tax -22(2),4th floor,Vashi Railway Station Building,Vashi,Navi Mumbai-400705
February, 18th 2015
                    ,                  ""          
      IN THE INCOME TAX APPELLATE TRIBUNAL "C" BENCH, MUMBAI

BEFORE HON'BLE S/SHRI H.L. KARWA, PRESIDENT AND B.R.BASKARAN (AM)
         .. ,                        .. ,   
                   ./I.T.A. No.5925/Mum/2012
                (   / Assessment Year :2009-10)


  Prakash Engineers,          /      Jt.Commissioner of Income Tax -
  104, Charishma Centre,      Vs.    22(2),
  1st floor, 19th Road,              4th floor,
  Chembur,
  Mumbai-400071
                                     Vashi Railway Station Building,
                                     Vashi,
                                     Navi Mumbai-400705
        ( /Appellant)          ..    (    / Respondent)



                   ./I.T.A. No.6130/Mum/2012
                (   / Assessment Year :2009-10)


  Jt.Commissioner of Income   /      Prakash Engineers,
  Tax -22(2),                 Vs.    104, Charishma Centre,
  4th floor,                         1st floor, 19th Road,
                                     Chembur,
  Vashi Railway Station              Mumbai-400071
  Building,
  Vashi,
  Navi Mumbai-400705
        ( /Appellant)          ..    (    / Respondent)



               . /   . / PAN/GIRNo. :AAGFP5386C



            / Assessee by       :    Shri Y.P.Trivedi and
                                     Ms.Usha Dalal
              /Revenue by :          Shri Premanad J.


              / Date of Hearing
                                         : 31.12.2014
             /Date of Pronouncement : 13.2. 2015
                                    2                     5925 & 6130/M/12



                               / O R D E R

Per B.R.BASKARAN, Accountant Member:

      These cross appeals are directed against the order dated 25.7.2012

passed by Ld CIT(A)-33, Mumbai and they relate to the assessment year

2009-10.


2.    The assessee is in appeal in challenging the order of Ld CIT (A) in

confirming the addition of Labour charges of Rs.4.16 crores paid by way of

cheques. The revenue is aggrieved by the decision of Ld CIT(A) in

restricting the addition of labour charges paid by way of cash to 10% of

the expenses. The revenue is also aggrieved by the decision of Ld CIT(A)

in deleting the disallowance of Rs.5,60,000/- made from Repairs and

Maintenance expenses.

3.    We heard the parties and perused the record. The assessee firm is a

civil contractor engaged in undertaking road construction work, mainly for

Municipal Corporation of Greater Mumbai. It filed its return of income for

the year under consideration declaring a total income of Rs.3.48 crores.

The assessing officer, during the course of assessment proceedings,

examined one of the partners of the firm as well as one of its employees.

The AO noticed that the assessee has claimed expenditure of Rs.10.38

crores as Labour charges and Rs.7.57 crores as job work charges. The AO

noticed that the job work charges were also essentially labour charges

only. Thus, the assessee had claimed a sum of Rs.17.95 crores as labour
                                    3                      5925 & 6130/M/12



expenses which accounted for 39.30% of the civil contract receipts. Major

amount of expenses were also found to have been incurred in cash.

4.   In the statement taken from one of the partners named Shri Nand K

Bijlani u/s 131 of the Act, he admitted that there were deficiencies in the

vouchers. The relevant observations made by the AO are extracted below

for the sake of convenience:-

      "3.5 It was pointed out to Shri Bijlani during his deposition u/s 131
      on 25.11.2011 that apart from the labour charges paid in cash,
      there were discrepancies in the labour charges paid by cheques too.
      It was brought to his notice that enquiries conducted u/s 142(2) of
      the Act at the premises of some of the recipients of labour charges
      (paid by cheques) revealed that the payees were men of little means
      and were employed as the assessee's drivers / road roller operators
      etc. on meager salaries, besides, many of them had denied receiving
      the labour charges from the assessee by cheques. They had
      affirmed that whatever amount was deposited as cheques in their
      accounts (mainly with Vijaya Bank, Chembur branch), was
      withdrawn in cash by employees of the assessee and that the
      proceeds of these cheques never reached them (i.e., the labourers
      concerned)."

When the partner of the assessee was confronted with the findings of the

AO, he offered additional income of Rs.2.00 crores for AY 2009-10,

apparently to cover up the deficiencies. The Assessing officer accordingly

added to the total income the sum of Rs.2.00 crores offered by the

assessee in the sworn statement.

5.    The AO examined the labour charges incurred by way of cash and

noticed that the assessee did not possess primary evidence to support the

claim to the tune of Rs.1,97,66,687/-. Hence, the offer of Rs.2.00 crores
                                    4                     5925 & 6130/M/12



made by the assessee was considered by the AO as having made on

account of unproved cash expenses incurred towards labour charges.

Further, the AO proceeded to discuss the details of enquiries made by him

in respect of payments made by way of cheque. In paragraph 4.7 of the

order, the AO came to the conclusion that the payments to the extent of

Rs.4,16,71,407/- made to 12 parties cannot be considered to be genuine.

The AO arrived at such a conclusion mainly for the reason that the

relevant cheques were seen to have been encashed by the assessee's

employees or the payees were not available at the given address.

Accordingly, the AO disallowed the labour expenses to the tune of

Rs.4,16,71,407/-.





6.    The AO noticed that the assessee has paid a sum of Rs.5,60,000/-

to M/s New India Equipment Co. and claimed the same as revenue

expenditure. The AO noticed that the above said payment was made

towards purchase of `100 ton concrete silo'. Hence the AO treated it as

Capital expenditure and accordingly disallowed the claim of Rs.5,60,000/-.

However, he allowed depreciation of Rs.84,000/- computed at the rate of

15% thereon.

7.    In the appellate proceedings, the Ld CIT(A) confirmed the

disallowance of labour charges incurred by way of cheque, which

amounted to Rs.4,16,71,407/-. With regard to the observation of the AO

that the labour charges incurred by way of cash was not supported by
                                     5                      5925 & 6130/M/12



primary evidence to the tune of Rs.1,97,66,687/-, the Ld CIT(A) held that

the addition on account of the same should be restricted to Rs.43,84,104/-

and accordingly granted relief to the tune of Rs.1,53,82,583/-. However,

he did not render any decision on the telescoping benefit given by the AO

against the offer of Rs.2.00 crores made by the assessee. The Ld CIT(A)

held that the expenditure of Rs.5,60,000/- incurred on concrete silo is

allowable as revenue expenditure.

8.    Aggrieved by the orders passed by Ld CIT(A), both the parties have

filed these appeals before us. We have heard the parties extensively and

perused the record. A perusal of statement recorded from the partner u/s

131 of the Act would show that the assessee has offered a sum of Rs.2.00

crores for the labour charges incurred by way of cash as well as by way of

cheque. However, the AO only has presumed that the said offer was in

the context of labour charges incurred by way of cash only. It is pertinent

to note that the Ld CIT(A) has verified by the audited financial statements

and have given a finding that the financial statement was showing liability

as labour charges payable. However, the Ld CIT(A) declined to accept the

same on the reasoning that the assessee has failed to establish the nexus

between the bank withdrawals and the cash payments. Further, they were

supported by self made vouchers. However, the Ld CIT(A) also held that

the claim of the assessee could not be rejected in toto. Accordingly he held

that the disallowance of Rs.1,97,66,687/- should be restricted to
                                     6                      5925 & 6130/M/12



Rs.43,84,104/-. Accordingly he gave a relief of Rs.1,53,82,583/-.

However, the Ld CIT(A) has failed to discuss about the telescoping benefit

given by the assessing officer. We have already noticed that the Ld CIT(A)

has confirmed the addition of labour charges of Rs.4,16,71,407/-.

9.    The main contention of the Ld A.R was that the impugned additions

have been made only on presumptions without correctly appreciating the

facts prevailing in the case. He submitted that the disallowances made by

the AO treating them as bogus in nature, if considered to be correct for a

moment, would give astronomical profit to the assessee, which any

contractor could not have realized. He submitted that the net profit

determined by the AO would result in a G.P rate of 34.89% and net profit

rate of Rs.21.12%, as against the average net profit of about 6% declared

by the assessee in the past.     He further submitted that the industry

average was only around 9% only. Accordingly the Ld A.R contended that

the tax authorities have made the impugned additions only on

presumptions and surmises.

10.   The Ld D.R, while supporting the order of Ld CIT(A) with regard to

the confirmation of addition of Rs.4.16 crores, contended that the Ld

CIT(A) should not have granted relief in respect of cash expenditure, when

the assessee itself had offered Rs.2.00 crores as income.
                                    7                     5925 & 6130/M/12



11.   It can be seen that the entire addition revolves around the labour

expenses only. As noticed earlier, the assessee has offered Rs.2.00 crores

to cover up the deficiencies in respect of labour charges incurred by way

of cash as well as cheque. With regard to the cheque expenses, the

contention of the assessee is that the cheque expenses have been

properly verified and the practice followed has not been properly

appreciated. In support of the same, the assessee has worked out the G.P

ratio, N.P ratio and rate of profit declared by comparable cases. When we

compare the profit ratios and comparable cases, we find some force in the

contentions of the assessee. It is an admitted fact that the assessee is

executing mainly road contract works, wherein the labour expenses are

tend to be high. Hence, we are of the view the disallowance of entire

expenses incurred by way of cheque may not be right proposition, because

the assessee could not have executed the project without incurring labour

expenses. However, the investigation carried out by the AO has revealed

a lot of deficiencies in the methodologies adopted by the assessee. We

have already noticed that the assessee itself has offered a sum of Rs.2.00

crores to cover up deficiencies in respect of both cash and cheque

payments. Hence the AO was not right in presuming that the above said

offer would cover only cash payments. We have already noticed that the

Ld CIT(A) also did not agree with the view taken by the AO that the entire

cash expenses, which are not supported by primary evidences, should be
                                      8                       5925 & 6130/M/12






disallowed. Under these set of facts, we are of the view that the present

dispute should be settled by making some estimates.

12.   Hence on a conspectus of the matter, we are of the view that the

dispute relating to disallowance of part of labour expenses would meet the

ends of justice, if we restrict the disallowance to Rs.2.00 crores (being the

amount offered by the assessee) plus 10% of the labour expenses

incurred by way of cheque. We order accordingly. The decision rendered

by the Ld CIT(A) on this issue would stand modified accordingly. Hence,

the grounds 1 & 2 raised by the revenue would stand allowed, since the

additional income of Rs.2.00 crores offered by the assessee would cover

up lack of supporting vouchers in respect of cash payments. The grounds

urged by the assessee would stand partly allowed, since in the facts and

circumstances of the case, it may not be proper to disallow entire

expenses incurred by way of cheque.


13.   The next issue urged by the revenue relates to the deletion of

disallowance of Rs.5,60,000/-. We notice that the assessee has incurred

the expenses towards purchase of concrete silo. The Ld CIT(A) noticed

that it formed part of "ready mix concrete plant" having no independent

functioning. Before us, the Ld A.R submitted that the said part is required

to be replaced frequently. Accordingly, the Ld CIT(A) held that the same

is revenue expenditure. On consideration of the above facts, we do not

find any infirmity in the order of Ld CIT(A) on this issue.
                                      9                      5925 & 6130/M/12



14.    In the result, the appeals filed both by the assessee and the revenue
are partly allowed.
       The above order was pronounced in the open court on 13th Feb, 2015.

            13th                       Feb, 2015    


  sd                                           sd
(.. / H.L. KARWA)                         (..  ,/ B.R. BASKARAN)
  / PRESIDENT                               /Accountant Member
  Mumbai:13th Feb,2015.


. ../ SRL , Sr. PS

        /Copy of the Order forwarded to :
1.  / The Appellant
2.  / The Respondent.
3.      () / The CIT(A)- concerned
4.       / CIT concerned
5.       ,     ,                   /
      DR, ITAT, Mumbai concerned
6.      / Guard file.


                                                          / BY ORDER,
             true copy
                                                   (Asstt. Registrar)
                                      ,   /ITAT, Mumbai

 
 
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