Disallowance for Advancement of interest-free loan for non-business purpose out of mixed funds

DCIT Vs Gayatri Construction (ITAT Ahmedabad)

Ld. counsel has submitted that advances were given to Ramjibhai and Company for business purpose and petrol and diesel was also purchased from them. The ld. Counsel has also contended that assessee was having interest free fund of Rs. 64,75,145/-. The ld. counsel has also placed reliance on the judicial pronouncement of the Hon’ble Bombay High Court in the case of Reliance Utilities 313 ITR 340 (Bom).

The assessee has not brought any material on record to substantiate that aforesaid huge amount of advance was extended to Ramji bhai and Company exclusively for the purpose of petrol and diesel. The ld. Departmental Representative has pointed out that loan amount was very old which was given in the earlier years and there was no sufficient interest free fund available with the assessee. During the course of course of appellate proceedings before us, the ld. counsel has stated that opening debit balance was Rs. 61,14,336/- and closing debit balance was Rs. 59,31,445/- and the interest free fund available with the assessee was Rs. 64,75,145/-. However, to controvert the submission of the ld. Departmental Representative the ld. counsel has not furnished any information and material to disprove the claim of the Ld. Departmental Representative that the loan amount was pertained to earlier years when the assessee was not having sufficient interest free fund. The cases relied upon by the assessee are distinguishable on facts. We do not find any merit in the ground of appeal of revenue after considering that the ld. CIT(A) has judiciously restricted the disallowance to the extent of Rs. 3,98,436/- on pro-rata basis as elaborated in his finding supra in this order after following the decision of Sanghiv Swiss Refills Pvt. Ltd. 85 (ITD) 59. In the light of the above facts and findings, both the appeals of the Revenue and assessee on this issue are dismissed.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

These two appeals filed by Revenue and assessee for A.Y. 2009-10, arise from order of the CIT(A), Gandhinagar, Ahmedabad dated 03-10­2012, in proceedings under section 143(3) of the Income Tax Act, 1961; in short “the Act”. Since similar issues involved in these ground of appeal directed against the order of ld. CIT(A) therefore for the sake of convenience both these appeals are adjudicated together as under.

ITA No. 25/Ahd/2013 A.Y. 2009-10 filed by Revenue and ITA No. 2816/Ahd/2012 filed by the assessee

2. The assessee has filed return of income on 30^th Sep, 2009 declaring total income of Rs. 7,67,740/-. The assessee firm was engaged in the business of govt. contractor for civil construction work. The case was selected for scrutiny by issuing of notice u/s. 143(2) of the Act on 18^th August, 2010. The relevant facts relating to the issues contested in the grounds of appeals are discussed as under:-

Ground No. 1 (Deleting addition of Rs. 2,22,175/- u/s. 40(a)(ia) for non-deduction of tax)

3. At the time of assessment, the Assessing Officer noticed that assessee has made interest payment to GE Capital and Tate Motors Ltd. without deduction of tax as prescribed u/s. 194A of the act, therefore, amount of Rs. 2,22,175/- was disallowed u/s. 40(a)(ia) of the Act and added to the total income of the assessee.

4. Aggrieved assessee has filed appeal before the ld. CIT(A). The ld. CIT(A) has deleted the addition following the decision of Merillyn Shipping and Transport ITAT Special Bench 20 com 244 holding that once the payments are made and no amount is payable as on 31/03 of the relevant previous year, no disallowance u/s. 40(a)(ia) can be made.

5. During the course of appellate proceeding before us, both the ld. counsel and ld. Departmental Representative have agreed that aforesaid issue of non-deduction of TDS is covered by the decision of Hon’ble High Court of Gujarat in the case of Sikandar Tunwar 33 com 133 and the same may be restored to the file of Assessing Officer for adjudicating afresh.

6. Heard both the sides and perused the material on record. With the assistance of ld. representatives, we have gone through the decision of the Hon’ble Gujarat High Court in the case of CIT-IV v. Sikanderkhan N. Tanwar wherein it is held that section 40(a)(ia) would cover not only the amounts which are payable as on 31^st March of a particular year but also which are payable at any time during the year. Accordingly, this issue is restored back to the file of Assessing Officer for adjudicating afresh as per the direction laid down in the decision of Hon’ble Gujarat High Court in the case of Sikandar Tunwar supra. Therefore this ground of appeal of the revenue is allowed for statistical purposes.

Ground No. 2 (Deleting disallowance of interest expenses of Rs. 7,63,307/-) of Revenue’s appeal and Ground No. 1 of assessee’s Appeal (confirming the disallowance of Rs. 3,98,436/-)

7. During the course of assessment the Assessing Officer noticed that assessee has made advances to M/s. Ramjibbai & Company on account of diesel and petrol expenses. M/s. Ramjibhai & Company was owned by one of the partners and no interest was charged from the said partnership firm. In the said account, debit balance as on 1^st April, 2008 was Rs. 61,14,436/-and the closing debit balance was Rs. 59,31,445/-. As per the P & L account there was interest payment of Rs. 41,82,598/- which was paid to banks and private finance companies. On the basis of aforesaid information the Assessing Officer observed that assessee has paid substantial amount of interest on the loan taken from outside parties however no interest has been charged on the amounts advanced to the related concern. The Assessing Officer has further observed that assessee has paid interest @ 19% to the outside parties therefore he has computed interest @ 19% on the interest free advances of Rs. 61,14,436/- provided to aforesaid related concern. Accordingly, an amount of Rs. 11,61,743/- was disallowed out of the interest expenses.

8. Aggrieved assessee has filed appeal before the ld. CIT(A). The ld. CIT(A) has restricted disallowance out of interest expenses to the amount of Rs. 3,98,436/-. The relevant part of the discussion made by the ld. CIT(A) on this issue is as under:-

“6.3 I have gone through the facts of the case. The appellant is t all disputing the finding of the AO that the amount has been diverted for non-business purpose. As far as the claim of non-interest bearing funds available with the appellant is concerned, the following facts are very pertinent:

i) the advance has been given to a partner’s proprietary concern who runs a petrol pump. No commensurate purchases of fuel are there. The appellant is not even disputing it. It is therefore, in nature of withdrawal of funds by partner from his capital and even over and above it. On the one hand the partner Shri Ramjibhai Chaudhary is being paid interest on his capital of Rs.24.45 lac and on the other hand he has withdrawn over Rs. 60 lac and no interest has been charged from him.

ii) all these credits which are claimed as interest free funds; are very old and there were huge investments at that time in the business as well as there was substantial sundry debtors outstanding. There were no funds available from these credits when the funds have been diverted to the partner’s concern.

iii) therefore, it can be safely said that loans taken on Interest mixed with other funds have been diverted for non-business purpose.

In the light of the above facts, on the one hand by manipulation of account, interest has been paid to the partner Shri Ramjibhai Chaudhary to the extent of Rs.2,23,486/- whereas, in effect he was having huge funds taken from the firm for his own purpose and there was a net debit balance in his account. Further, the case is not of simple interest free funds being more than non-business advance, in the light of the above observations of the fact that such funds were already lying utilized for other purposes. The cases relied upon by the appellant are therefore distinguishable on facts. The total interest paid is Rs.41,92,598/- and the total investments including that diverted to the partner is Rs.6.43 crore. On pro-rata basis, considering the mixed funds the interest is disallowed as computed hereunder:

Disallowance of interest

Rs. 41,92,598 x 61.14.736

6,43,43,095

= Rs. 3,98,436/-

Therefore, relying on the judgment of Hon’ble ITAT, Mumbai in the case of Sanghvi Swiss Refills (P.) Ltd (85 ITD 59), which has decided the case on similar facts, the disallowance of interest claimed to the extent of Rs. 3,98,436/- is confirmed. This would include the absolutely non-allowable interest paid to partner, Shri Ramjibhai Chaudhary to the extent of Rs.2,23,486/-whereas, in effect he was having huge funds taken from the firm for his own purpose and there was a net debit balance in his account. To sum up, the disallowance of Rs. 3,98,436/- is confirmed and the remaining disallowance is directed to be deleted.”

9. During the course of appellate proceedings before us, the ld. Departmental Representative has supported the order of Assessing Officer. On the other hand, the ld. counsel has submitted that advances were given to Ramjibhai and Company for business purpose and petrol and diesel was also purchased from them. The ld. Counsel has also contended that assessee was having interest free fund of Rs. 64,75,145/-. The ld. counsel has also placed reliance on the judicial pronouncement of the Hon’ble Bombay High Court in the case of Reliance Utilities 313 ITR 340 (Bom).

10. Heard both the sides and perused the material on record. The assessee has not brought any material on record to substantiate that aforesaid huge amount of advance was extended to Ramji bhai and Company exclusively for the purpose of petrol and diesel. The ld. Departmental Representative has pointed out that loan amount was very old which was given in the earlier years and there was no sufficient interest free fund available with the assessee. During the course of course of appellate proceedings before us, the ld. counsel has stated that opening debit balance was Rs. 61,14,336/- and closing debit balance was Rs. 59,31,445/- and the interest free fund available with the assessee was Rs. 64,75,145/-. However, to controvert the submission of the ld. Departmental Representative the ld. counsel has not furnished any information and material to disprove the claim of the Ld. Departmental Representative that the loan amount was pertained to earlier years when the assessee was not having sufficient interest free fund. The cases relied upon by the assessee are distinguishable on facts. We do not find any merit in the ground of appeal of revenue after considering that the ld. CIT(A) has judiciously restricted the disallowance to the extent of Rs. 3,98,436/- on pro-rata basis as elaborated in his finding supra in this order after following the decision of Sanghiv Swiss Refills Pvt. Ltd. 85 (ITD) 59. In the light of the above facts and findings, both the appeals of the Revenue and assessee on this issue are dismissed.

Ground No. 3 (Revenue’s ground of appeal against deleting addition u/s.  41(1) in respect of outstanding creditors shown in balance sheet of Rs.  3,75,18,118/-) and Assessee’s 2^nd ground of appeal in respect of confirming addition u/s. 41(1) of Rs. 8,39,727/-

11. During the course of assessment, the Assessing Officer noticed that as per balance sheet there was outstanding sundry credit balance to the amount of Rs. 3,83,57,845/-. The Assessing Officer has stated that assessee has failed to prove the genuineness of the outstanding liability. He has further submitted that because of delay in furnishing the information there was no time to verify the genuineness of the confirmations filed by the assessee. Therefore, treating the outstanding creditors as cessation of liability, the Assessing Officer has made addition of Rs. 3,83,57,845/- to the total income of the assessee.

12. Aggrieved assessee has filed appeal before the ld. CIT(A). The ld. CIT(A) has admitted additional evidences under rule 46A of the I.T. Rule comprising confirmations/copies of details etc. furnished by the assessee to prove the genuineness of the outstanding sundry creditors. The ld. CIT(A) has also called remand report from the Assessing Officer with direction to examine the sundry creditors from the angle (i) credit u/s. 68 including genuineness and paying capacity (b) allowbility of expenses claimed by assessee during the year being admitted by the creditors shown in the books of account. The Assessing Officer has submitted remand report to the ld. CIT(A) along with remarks reproduced at page no. 19 to 22 in the order of CIT(A). The copy of remand report was also forwarded to the assessee and assessee has reported that the Assessing Officer has not correctly reported the facts in the remand report and stated that all the credits were genuine and the addition cannot be made u/s. 41(1) unless there was a benefit of cessation of liability. The ld. CIT(A) has deleted the addition except in the case of Shri Bhemjibhai L Chaudhary to whom assessee has shown payable amount of Rs. 8,39,727/- as unsecured loan inadvertently reported under the head sundry creditors. After examination of the statement u/s. 131 of the Act and other material, the ld. CIT(A) observed that Bhemjibhai L. Chaudhary was a person of small means, closely related to the assessee and had never filed income tax return. Considering the facts and circumstances, the ld. CIT(A) has confirmed the addition to the unsecured loan amount of Rs. 8,39,727/- and deleted the remaining addition of Rs. 3,75,18,118/- (Rs. 3,83,57,845/- – Rs. 8,39,727/-) holding that looking to the details filed such addition is not justified u/s. 41(1) of the Act. Relevant part of the decision of ld. CIT(A) is as under:-

“7.5 I have gone through the facts of the case carefully. The AO ‘has conducted verification and enquiries with respect to all 25 creditors whose balance at the end of the year was more than Rs.5 lac. Notices u/s 133(6) were issued by the AO at the new addresses given by the appellant. They were delivered in most cases except 4. According to the AO, even out of these 3 have submitted confirmations by tapal. From the report it is found that most of the creditors have confirmed the balances and the fact that the money is due to them. As decided by the Supreme court in the case of Suguali Sugar Works Pvt. Ltd. (1999) 236 ITR 518 (SC ) in the absence of the creditor, it is not possible for the authority to come to a conclusion that the debt was barred and had become unenforceable. I have also noted the recent decision of Hon’ble Delhi High Court in case of Shri Vardhman Overseas Ltd ,343 ITR 408 wherein the case was decided in assessee’sfavour on same principals though in case of many claimed creditors even the address or trail was not available. Now, I will proceed to discuss the cases of the claimed creditors in groups, according to the facts of the cases

Out of the cases test checked by the AO, in all cases except as per SI.No.2 of the Remand Report, it has been held under the facts and circumstances discussed above that no addition is justified under law u/s 41(1) of the IT Act. The remaining case is that of Bhemjibhai L. Chaudhary. The appellant has in his submissions claimed that the amount of Rs.8,39,7277- is due to him and is an unsecured loan which was interest free and has been grouped under Sundry Creditors inadvertently. However, his statement was taken under section 131 and Bhemjibhai L. Chaudhary has stated that the payment was due for jobwork. He didn’t even remember the period to which it pertained. The person concerned is closely related to the partners of the firm. Even otherwise, Bhemjibhai L. Chaudhary appears to be a person of small means and has admitted that he has never filed his Income-tax Return. Why, in these circumstances he would lend such a big amount interest free for years together without even bothering to recover, cannot be believed. The assessee itself has clubbed the credit with sundry creditors and not unsecured loans. Therefore, in the entirety of circumstances and facts, I have reason to hold that in fact no amount is outstanding to be paid to Bhemjibhai L. Chaudhary and the statement has been given to support his relatives under social pressure; and still suffers from inconsistencies mentioned earlier. The addition of Rs. 8397277-is therefore, confirmed. The remaining addition of Rs. 375181187- (38357845 minus 839727) is directed to be deleted.”

13. During the course of appellate proceedings before us, the ld. Departmental Representative contended that the ld. CIT(A) has also deleted the addition in respect of those cases wherein on detail was available as reported in the remand report. Both the Departmental Representative and ld. counsel agreed that such six cases be restored to the file of Assessing Officer for necessary verification and examination.

14. Heard both the sides and perused the material on record. During the course of assessment the Assessing Officer has treated the outstanding sundry creditors as cessation of liability on the ground that assessee has failed to prove genuineness of the trade creditors. The ld. CIT(A) has restricted the addition to the extent of outstanding balance of Rs. 8,39,727/-pertaining to Shri Bhemjibhai L. Chaudhary wrongly classified as sundry creditor as the same was pertained to unsecured loan and that person had never filed income tax return and creditworthiness remained unproved. In respect of remaining cases, the ld. CIT(A) has deleted the addition holding that most of the creditors have confirmed the outstanding balance and the money was due to them. During the course of appellate proceedings, the ld. Departmental Representative has submitted that ld. CIT(A) has not considered that no details were available as per remark column in the remand report in respect of cases listed at serial no. 7 to 9, 12,15 and 23. The details of such cases are as under:-

After perusal of the information in respect of the aforesaid cases it is clear that complete information has not been furnished. On this issue both the representatives agreed to restore these cases to the file of the Assessing Officer for deciding afresh after examination/verification of the information. Therefore, we restore these cases to the file of Assessing Officer for deciding afresh after verification and examination of the details to be produced by the assessee. This ground of appeal of the revenue is partly allowed. In respect of ground 2 of the assessee of sustaining the addition to the extent of Rs. 8,39,727/- , the ld. counsel has submitted that the said person has confirmed that this amount was due to him and later the amount was paid to the lender in the subsequent year. In the light of the above fact and circumstances, we also restore this issue to the Assessing Officer for deciding this issue afresh after verification of the claim of the assessee that the amount was repaid to the lender in the subsequent year. In the result, this ground of appeal of the assessee is also allowed for statistical purposes.

Ground No. 4 (Deleting addition on depreciation of Rs. 3,90,458/-) of revenue

15. During the course of assessment, the Assessing Officer noticed that assessee has claimed depreciation on the Paver machine @ 15% for the year under consideration. On verification of the copies of bill, the Assessing Officer noticed that the said asset was in the name of HMS Construction Pvt. Ltd. and same was not owned by the assessee. Therefore, the Assessing Officer has disallowed the claim of depreciation of Rs. 2,25,264/-. The Assessing Officer has also observed that the aforesaid asset was purchased by HMS Construction Pvt. Ltd. therefore he has computed interest of Rs. 1,65,194/- on the loan amount and added to the total income of the assessee.

16. The assessee has filed appeal before the ld. CIT(A). The ld. CIT(A) has allowed the claim of assessee after following the decision of Hon’ble Gujarat High Court in the case of Deepak Nitrate Ltd. (2000) 249 ITR 825 and various decisions referred by the assessee.

17. Heard both the sides and perused the material on record. It is undisputed fact that HMS Construction Pvt. Ltd. had given the possession of the Paver Machine and stock transfer of Paver Machine was done in favour of Gayatri Construction Co. (assessee) and machine was used for the purpose of business. The assessee has made part payment of Rs. 7,61,533/- by various cheques and the amount due as on 31-03-2009 was Rs. 7,40,230/- as it was decided between them that the ownership paper would be provided to the assessee after making full payment of the consideration. In the light of facts and considering the finding of ld. CIT(A) based on the decision of Hon’ble Gujarat High Court in the case of CIT vs. Deepak Nitrate wherein it is held that since assessee acquired possession and was running factory on payment of a substantial part of price, assessee was entitled to grant of deprecation. In view of the above facts and findings, this ground of appeal of the Revenue is dismissed.

Ground No. 5 (Restricting GP addition @ 1.5 of GP out of 3.27% of GP) of Revenue and ground nos. 3 & 4 of assessee confirming the rejection of books of a/c u/s. 145 & confirming addition of G.P. @ 1.5 thereby confirming addition of Rs. 19,20,000/-

18. During the course assessment, the Assessing Officer noticed that assessee has shown gross profit at 7.27% on turnover of Rs. 12,74,56,609/-as against gross profit at 10.54% on turnover of Rs. 762,19,534/- in the preceding year. The Assessing Officer observed that there was sharp reduction in the gross profit compared to the earlier year, therefore, the assessee was asked to justify the reduction in the gross profit and provide detail of various projects, project wise income and expenses, detail of labour expenses, detail of diesel expenses as both these expenses were incurred in cash. The assessee was unable to provide project wise income and expenditure. Regarding reduction in goods profit, the assessee explained that the net income has been increased compared to last year. It is also submitted that during the year the work was carried out at below the amount of tender price and cost of labour expenses was also increased compared to the last year. The Assessing Officer has not accepted the reply of the assessee stating that assessee has reduced sub-contract expenses in the revised working of G.P. but the corresponding sub-contract income was not reduced. The Assessing Officer has stated that assessee was a contractor and in such cases the minimum amount of profit prescribed should be 8% of the gross profit. The entire labour expenses and diesel/petrol expenses were incurred in cash and no linking up of these expenses project wise done by the assessee. The assessee has failed to prove the genuineness of such expenses. The Assessing Officer has rejected the books of account u/s. 145(3) and made GP addition of 3.27% after taking the GP ratio of 10.54% shown in the earlier year and made addition of Rs. 41,67,831/- to the total income of the assessee. On verification, the Assessing Officer noticed that the assessee has debited sub-contract expenses of Rs. 2,45,10,477. The assessee could not link the sub-contract expenses to the various projects. The Assessing Officer has further noticed that assessee has claimed sub­contract expenses of Rs. 92,518/- on 04-04-2008, Rs. 10,61,545/- on 04-04­2006 and Rs. 2,84,551/- on 07-04-2008. The assessee was specifically asked to provide nature of these expenses and detail of work carried along with corresponding income created in the P & L Account. The Assessing Officer stated that the assessee has not submitted the required details and even the addresses of the sub-contractors were not furnished. Consequently, the Assessing Officer has treated the aforesaid sub-contract expenses of Rs. 92,518+ 16,61,545+ 2,84,551 totaling to Rs. 14,38,610/- as unexplained and added to the total income of the assessee.

19. Aggrieved assessee has filed appeal before the ld. CIT(A). The ld. CIT(A) has restricted the addition on account of GP addition to the extent of 1.5% of the turn over also covering the addition on account of sub-contract expenses of Rs. 14,38,610/-. The relevant part of the decision of ld. CIT(A) is reproduced as under:-

“9.3 I have gone through the facts of the case. It is observed that major expenses like labour, petrol & diesel and sub-contract expenses which are to the extent of Rs.3.57 crore. 2.22 crore and 2.45 crore respectively cannot be verified at all vis-a-vis the actual contract work done. This is a very major shortcoming in the books of account. The first two expenses are in cash. In the case of labour expenses, even the payees cannot be traced from the record and therefore, there cannot be any independent check. The appellant himself is saying that sub-contract expenses is booked on the date of payment to parties to whom sub contract work was allotted.

There is no check even whether the payments made in April are payments in advance or otherwise of work done earlier. When even the details of sub-contract work done is not known and when the expenses are being booked on cash basis when the method of accounting of the assessee is mercantile, I have got no doubt that accounts of the appellant are not correct as to give a reasonable picture of the profits and state of affairs and by admittedly following mixed system of accounting at least in respect of one major expense i.e. Sub-contract Expenses, it is not following correct system of accounting. The rejection of the books of account u/s 145(3) of the IT Act is upheld in the facts and circumstances of the case.

Now, coming to the estimation of profits. I agree that some part of fall in GP rate can be explained because of more percentage of work done being got done from outside on subcontracts and increase in percentage of expenses deducted by parties for whom the work has been done. Still, the net profit rates even after adding interest and remuneration to partners and adding back depreciation is only 3.42% which is not up to the mark with the standards of the trade. It will be still lower and below even 1 % if depreciation is not added back. The Hon’ble Hyderabad Bench of ITAT has been consistently holding, as in its recent decision in 1TA No.ll91/Hyd.2011 in ACIT V/s. Teja Constructions, Secunderabad for the assessment year 2006-07 vide order dated 17th February, 2012, that estimation of income at 9% in respect of the contracts taken by the assessee itself and executed by it; at 8% in respect of receipts from sub-contract works taken from others and executed by the assessee; and 4% of the gross receipts in respect of contracts given by the assessee to third parties on sub-contract basis, as reasonable. Even the Ahmedabad SMC Bench of ITAT in the case of Paras Construction, Gandhinagar in ITA No. 2742/Ahcl/2004 vide order dated 15/5/2009 has accepted 4% net profit on all receipts where over 70% of the work was given on sub-contracts. Looking to the entirety of circumstances, an addition of 1.5 % in GP rate (or N P Rate ,as both would naturally work as same) is deemed reasonable in the totality of circumstances, It would partly cover the fall in G P Rate claimed. The addition confirmed would be Rs.19,20,000/- (1.5 % of 12,74,56,608). As total receipts have been considered after rejecting books to estimate the profits, it covers addition required on sub contract expenses also. Therefore, instead of the additions of Rs.41,67,831/- and disallowance of Rs.14,38,610/- made by the AO; the addition is confirmed to the extent of Rs.19,20,000/-. Therefore, the appellant gets a relief of Rs.36,86,441/- on the two grounds of appeal.”

20. During the course of appellate proceedings before us, the ld. Departmental Representative has contended that the assessee has failed to furnish the project wise income/expenditure details and also failed to prove the genuineness of labour and diesel/petrol expenses with relevant supporting evidences. Regarding sub-contract expenses, he has pointed that the assessee was unable to prove the genuineness of such expenses and no required supporting details/information furnished. The ld. Departmental Representative sated that full amount of sub-contract expenses be disallowed. On the other hand, the ld. Authorized Representative has submitted that the main reason for fall in the GP was due to increased sub­contract expenses and the detailed reason for fall in GP was given at pages 30 to 34 of the order of the ld. CIT(A). He further stated that the ld. CIT(A) has confirmed the G.P. @ 1.5% only on the estimated basis. Regarding sub­contract expenses he has referred page 18 of the paper book and pages 87 to 89 of the paper book. The Ld. Authorized Representative has submitted that G.P. addition may be reduced to 1%.

21. Heard both the sides and perused the material on record. During the course of assessment, the Assessing Officer noticed short fall in the gross profit declared during the year as compared to the last year. The Assessing Officer has noticed substantial increased in the labour expenses and diesel/petrol expenses. Entire amount of labour expenses of Rs. 3.57 crores and diesel/petrol expenses of Rs. 2.22 crores were incurred in cash. The assessee has shown their inability to furnish the details of incurring of these expenses project-wise and also failed to submit relevant supporting evidences except self-made vouchers to prove the genuineness of incurring entire these expenses. Because of the aforesaid infirmity in the submission of the assessee the Assessing Officer could not verify and examine the correctness and genuineness of the claim of the assessee.

Regarding sub-contract expenses to the amount of Rs. 92518/- on 04­04-2018, Rs. 10,61,545/- on 07-04-2018 and Rs. 2,84,551/-, the Assessing Officer has observed that assessee has debited these expenses on the initial days of F.Y. 2008-09 in the month of April, however, the assessee has failed to explain the nature of expenses, details of work carried out and corresponding income credited in the P & L A/c. Even the assessee has failed to furnish the addresses of these subcontractors.

Because of the aforesaid lacuna in the compliance of the assessee, the Assessing Officer could not verify the genuineness of the claim of the assessee.

Keeping in view the briefly stated facts as above and the submission of the assessee made before the ld. CIT(A), the ld. CIT(A) has rightly observed that major expenses like labour, petrol diesel and sub-contract expenses to the extent of Rs. 3.57 crore, 2.22 crore and 2.45 crore cannot be verified at all vis-à-vis the actual contract work done.

Even the details of sub-contract expenses were not furnished which demonstrate that correctness of the claim of the assessee was not established.

We have gone through the page no. 18 of the paper book pertaining to the submission of the assessee on sub-contract expenses of Rs. 14,38,610/-. In the submission, the assessee has simply stated that the payment to the sub-contractors were made in advance and the work was completed later on. We have also gone through the pages 87 to 89 of the paper book showing only entries of payment made to the sub-contractors in the month of April 2008 of the Financial Year but the assessee has failed to furnish the primary details of nature of work and the income earned from these sub-contracts till 31-03-2009. Even the assessee has failed to furnish the addresses of these sub-contractors and other relevant details of their existence from which the Assessing Officer could have verified the genuineness of the claim of the assessee.

In the light of the aforesaid facts and circumstances the ld. CIT(A) has made addition of 1.5% in GP rate after placing reliance on the comparable judicial cases for estimating the income in respect of cases of contracts and sub-contracts as elaborated supra in the findings of the ld. CIT(A).

Considering the above facts and circumstances, we do not find any merit in the appeal of the Revenue on this issue as the ld. CIT(A) has judicially restricted the addition to the extent of 1.5 % G.P. rate after following the direction laid down in the various judicial findings relevant to the facts and circumstances pertained to the case of the assessee.

It is observed that no separate addition for sub-contract expenses is justified since these expenses ultimately also affect the gross profit therefore the ld. CIT(A) has rightly held that addition of 1.5% in G.P. would also covered addition of sub-contract expenses.

We also do not find any merit in the appeal and alternative contention of the assessee because of the following facts:-

(i) The assessee has failed to co-relate the incurring of entire expenses in cash to the different projects therefore labour expenses of Rs. 3.57 crores and diesel/petrol expenses of Rs. 2.20 crores could not be verified.

(ii) The assessee has failed to furnish basic detail i.e. project wise details corresponding income and expenditure.

(iii) To prove the genuineness of the sub-contract expenses claimed to be paid to the three sub-contractors in the initial period of F.Y. 2008-09 the assessee has not even furnish the primary detail as addresses of the sub­contractors. The copies of these ledger accounts of these sub-contractors placed at pages no. 87 to 88 contained only the entries of initial payment made in the month of April 2008. There was no further details of nature of contract work and income received from such sub-contract. There are no entries for the remaining period from April 2008 to 31^st March 2009. These facts demonstrate that the assessee has failed to substantiate the genuineness of this claim.

Considering the aforesaid facts and findings of the ld. CIT(A), we do not find any error in the decision of ld. CIT(A). Therefore, this ground of appeal of the assessee is dismissed.

In this result, the ground of appeal of the Revenue and assessee on this issue are dismissed.

22. In the result, appeal ITA 25/Ahd/2013 filed by revenue and appeal ITA 2816/Ahd/2012 filed by assessee are partly allowed for statistical purposes.

Order pronounced in the open court on 11-12-2020