Case Law Details

Case Name : DCIT Vs Sheth & Sura Engineers Private Ltd. (ITAT Pune)
Appeal Number : ITA No. 1306/PUN/2016
Date of Judgement/Order : 21/10/2020
Related Assessment Year : 2010-11
Courts : All ITAT (7790) ITAT Pune (272)

DCIT Vs Sheth & Sura Engineers Private Ltd. (ITAT Pune)

It is an undisputed fact that the entire turnover of the assessee is exclusively from Government Department and the said turnover has not been disputed by the Assessing Officer. The Assessing Officer has also not considered the debtors of other divisions and only considered debtors of contracting division. It has been brought on facts that as a matter of practice, no Government Department issues any confirmation, an issue which has been raised by the Assessing Officer. The Assessing Officer has just made an estimated calculation and actual figures of various deductions such as TDS, Works contract Tax, Security deposit, royalty, Secured Advances (EMD), and Retention money has not been considered. These facts were not refuted by the Ld. DR at the time of hearing. The Assessing Officer resorted to some strange calculation finding out mismatch in the account of sundry debtors in view of the accounts derived at for the subsequent assessment year. When the Assessing Officer is accepting the turnover, sales are not disputed and the Assessing Officer has also not considered the actual figure of various deductions as afore-stated, in such scenario, we are of the considered view that the Ld. CIT(Appeals) was correct in deleting the addition on this issue. In view of the same addition made by AO could not be sustained.

FULL TEXT OF THE ITAT JUDGEMENT

This appeal preferred by the Revenue emanates from the order of the Ld. CIT(Appeals)-2, Pune dated 05.01.2016 for the assessment year 2010-11 as per the following grounds of appeal on record:

“1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is correct in deleting the additions made by the AO on account of suppression of debtors amounting to Rs.8,32,44,990/- without proper explanation/reconciliation?

2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is correct in deleting the additions made by the AO on account of mismatch in Work-in-Progress amounting to Rs.7,32,73,273/-.

3. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is correct in restricting the disallowance to Rs.25,14,015/-of the additions made by the AO on account of Labour Payment to Rs.2,96,19,146/-.

4. For this and such other reasons as may be urged at the time of hearing, the order of the CIT(A) may be vacated and that of the Assessing Officer be restored.

5. The appellant craves leave to add, amend, alter or delete any of the above grounds of appeal during the course of appellate proceedings before the Hon’ble Tribunal.”

2. The brief facts in this case are that the assessee is a private company engaged in carrying out the business of execution of turnkey jobs/projects of water supply schemes awarded by various Governments/ Governments Undertaking like Maharashtra Jeevan Pradhikaran, Maharashtra Industrial Development Corporation, Public Works Department- Goa State, Maharashtra Krishna Valley Development Corporation, Tapi Irrigation Development Corporation etc. The turnkey job includes laying of pipelines ranging from 100mm diameter to 3,000mm diameter of mild steel, PSC Pipes and AC pipes, PVC pipes and all other allied activities/works etc. Mainly the work includes laying of pipelines for raw water, potable water, sewage and ash slurry, excavation and welding, guniting of pipes, buildings and dam walls, construction of bridges, driving of piles, fabrication of pipes etc.

3. The assessee company filed its return of income for the assessment year 2010-11 at Rs.5,82,63,820/-. The Assessing Officer vide order dated 31.03.2013 assessed assessee’s total income at Rs.24,44,01,229/- with the addition of Rs.18,61,37,409/-. The said addition consists of addition on account of suppression of Debtors at Rs.5,32,44,990/-, Work in progress Rs.7,32,73,273/- and disallowance on account of labour charges at Rs.2,96,19,146/-.

4. Ground No.1 in the Revenue’s appeal pertains to the deletion of addition made by the Assessing Officer on account of suppression of debtors amounting to Rs.8,32,44,990/- by the Ld. CIT(Appeals).

5. During the assessment proceedings, the Assessing Officer noticed that during the year under consideration, the assessee undertook 30 projects but debtors were reflected in only of the projects viz. RRWS Scheme for Shegaon Town aided by the Central Government UIDSSNT. According to the Assessing Officer the debtors as shown in the project wise details submitted by the assessee were not tallying with the assessee’s books of accounts. The Assessing Officer found that the closing debtors as per assessee’s books of accounts stood at Rs.4,66,15,241/- as on 31.03.2010 and the debtors as per project wise details was shown at Rs.63,45,909/-. According to the Assessing Officer there was a mismatch between the figures of debtors. The Assessing Officer also found that during the year under consideration, the assessee raised total invoices to the tune of Rs.81,85,02,375/- but received net payment of only Rs.67,57,96,906/-. Hence, the Assessing Officer recomputed the assessee’s figure of debtors by adding to the opening figure of debtors, the amount of invoices raised by the assessee during the year (Rs. 81,85,02,375/-), as reduced by an estimate of amounts (pegged at 95%) received by the assessee ( Rs.67,57,96,906/-) during the year and further reduced by an estimate (5%) of tax deducted at source. According to the Assessing Officer by computing an estimate of the assessee’s figure of debtors in this manner, the correct figure of debtors would be Rs.12,98,60,231/- and hence, the figure of debtors of Rs.4,66,15,241/- shown in the assessee’s Balance Sheet as on 31.03.2010 was deficient by an amount of Rs.8,32,44,990/-. According to the Assessing Officer, the assessee had understated the amount of debtors by an amount of Rs.8,32,44,990/- and the said amount was added to the income of the assessee.

6. At the time of hearing, the Ld. DR vehemently contended that the Ld. CIT(Appeals) has not specifically reasoned his order and he has accepted the explanation of the assessee without giving any reasons. That even, no explanations were called for from the assessee rather the Assessing Officer deduced the calculation on analyzing the chart/books of account submitted by the assessee and not on estimation. The Ld. DR further submitted that reconciliation of books of account submitted by the assessee was not correct, therefore, for verification of this reconciliation on this issue, the matter may be restored to the file of the Assessing Officer.

7. Per contra, the Ld. AR for the assessee reiterated the submissions placed before the Assessing Officer as well as before the Ld. CIT(Appeals) that the assessee gets works from Government Department/ contracts for escalation projects. The assessee has a contracting division and also a manufacturing division. Major manufacturing products of the assessee are consumed for the assessee’s contracting divisional works. That further, the Assessing Officer has not doubted the sales and the turnover have not been disputed by the Assessing Officer.

7.1. The Ld. AR further submitted that when sales are not doubted, turnover has also not been disputed, the debtors are arising from sales only, in such scenario; there cannot be any addition on understatement of debtors. The Assessing Officer has rejected the books of accounts and again coming to the books of account after pointing out differences in respect of sundry debtors. The Assessing Officer has also estimated 5% of payments. So, on estimation addition has been made whereas the assessee has given all the details of bills etc. so there has been an actual payment.

8. The Ld. CIT(Appeals) on this issue has held as follows:

“7.2 I have considered the facts of the issue as mentioned in the assessment order as well as in the submission filed on behalf of the appellant. It is seen that there is a difference between the appellant’s figure of amounts reduced from the aggregate of opening balance of debtors and the gross sales during the year and the one adopted by the AO. The AO has not reduced various amounts like TDS, Works Contract Tax, Security Deposit, Royalty, Secured Advances (EMD), Retention money. As a result there is a difference in the reconciliation done by the Appellant & the AO. The reconciliation, as made by the Appellant is produced in its submissions, reproduced above. Thus the case of the Appellant is that the AO has not reduced all the amounts that ought to have been reduced in order to arrive at the correct figure of debtors which has resulted in the addition.

7.2.1 Considering all facts as appeared from both i.e. in the order of the AO and the learned A.R., I am of the considered view that the stand of the Assessing Officer is based on certain assumptions and estimate which does not stand the test of the Law. The entire turnover of the appellant is exclusively from the Government Department and the turnover has not been disputed by .the Assessing Officer. The Assessing Officer has also failed to consider the debtors of other divisions and only considered the debtors of contracting division. Also, as a matter of practice no Government Department issues any confirmation, an issue which has been raised by the Assessing Officer. The Assessing Officer has just made an estimated calculation and actual figures of various deductions such as TDS, Works Contract Tax, Security Deposit, Royalty, Secured Advances (EMD), Retention money has not been considered. In view of all these facts, I find logic in the contention of the appellant and accordingly the additions made on account of suppression of debtors amounting to Rs.8,32,44,990/- is deleted. This ground is accordingly allowed.”

9. We have heard the rival contentions and considered the relevant materials available on record. We have also given considerable thought to the findings arrived at by the Sub-ordinate Authorities. It is an undisputed fact that the entire turnover of the assessee is exclusively from Government Department and the said turnover has not been disputed by the Assessing Officer. The Assessing Officer has also not considered the debtors of other divisions and only considered debtors of contracting division. It has been brought on facts that as a matter of practice, no Government Department issues any confirmation, an issue which has been raised by the Assessing Officer. The Assessing Officer has just made an estimated calculation and actual figures of various deductions such as TDS, Works contract Tax, Security deposit, royalty, Secured Advances (EMD), and Retention money has not been considered. These facts were not refuted by the Ld. DR at the time of hearing. The Assessing Officer resorted to some strange calculation finding out mismatch in the account of sundry debtors in view of the accounts derived at for the subsequent assessment year. When the Assessing Officer is accepting the turnover, sales are not disputed and the Assessing Officer has also not considered the actual figure of various deductions as afore-stated, in such scenario, we are of the considered view that the Ld. CIT(Appeals) was correct in deleting the addition on this issue. Therefore, there is no need for any interference with the findings of the First Appellate Authority. Thus, Ground No.1 raised in appeal by the Revenue is dismissed.

10. Ground No.2 pertains to the deletion of addition made by the Assessing Officer on account of mismatch in work in progress amounting to Rs.7,32,73,273/- by the Ld. CIT(Appeals).

11. The facts on this issue are that the Assessing Officer found mismatch between the closing WIP (work in progress) as shown in project wise details submitted by the assessee and the assessee’s books of account. The assessee’s books of account as on 31.03.2010 showed closing WIP at Rs.7,89,78,640/- whereas the project wise details submitted by the assessee stood at Rs.6,54,28,578/-. The Assessing Officer further observed that out of the 30 projects undertaken by the assessee during the relevant year, the assessee had shown NIL’ closing WIP in more than 50% of the projects and significantly lower closing WIP in other projects. According to the Assessing Officer, it is inconceivable that no work is pending /done after the last bill was raised. According to the Assessing Officer there is an understatement of closing WIP and hence, the Assessing Officer took recourse to estimation of WIP by reverse computation on the basis of average profit margin of 17.06% shown by the assessee for the assessment year 2011-12. The Assessing Officer selected a few projects for re-computing the WIP as shown in the assessment order at Pages 12, 13 and 14 and held that the WIP is understated to the extent of Rs.7,32,73,273/- and added the same to the income of the assessee.

12. The assessee in this regard has made detailed written submissions before the Revenue Authorities and submitted that work in progress of the assessee company is related to manufacturing division and contracting division. The Assessing Officer in Para 13, Page 9 has stated that as per Schedule H of the Balance Sheet as on 31st March, 2010 the closing WIP is shown at Rs.6,89,78,640/- whereas as per project wise details submitted by the company it amounted to Rs.6,54,28,578/-. It was submitted by the assessee that the project wise details of WIP were related to the contracting division only amounting to Rs.6,54,28,578/- and after adding the WIP of manufacturing division amounting to Rs.35,50,062/- , it correctly tallies with Rs.6,89,78,640/- as appearing in Schedule H of the Balance Sheet.

13. At the time of hearing, the Ld. DR heavily placed reliance on the findings of the Assessing Officer.

14. Per contra, the Ld. AR submitted that the addition made by the Assessing Officer is on the basis of profit calculation made by the assessee in subsequent assessment year 2011-12. The Assessing Officer has considered only 17 projects out of 30-35 projects undertaken by the assessee and has held that there is an understatement of WIP. This sort of exercise, if allowed, gives absurd business results.

15. The Ld. CIT(Appeals) on this issue has held as follows:

“8.7. I have carefully considered the contention of the appellant. In the lights of the facts submitted, I am of the view that the AO while passing the order has not considered thoroughly the facts in totality. As stated supra, the appellant providing its services exclusively to various Government Departments/undertakings and the turnover has been taken as reflected in Form No.26AS. There is no suppression of turnover and the same has not been disputed by the Assessing Officer as well. The Assessing Officer has based her conclusion by selecting some particular sites and by taking recourse to reverse calculation on the basis of subsequent years profitability, the A.O has failed to consider specifics of each project. The facts such as escalation in some projects were not considered. In the case of amount of escalation, there is no corresponding expenditure against the same and therefore it wouldn’t have any impact on WIP. The Assessing Officer has not considered the figures and accounts of all the sites. In fact, the estimation made by the Assessing Officer is based on some guess work which has got no basis. I am inclined to agree with the contentions put forth on behalf of the appellant that if the estimation made by the Assessing Officer is accepted then it will lead to absurd business results. In any case, adoption of accounts of subsequent years cannot be the basis for calculating work-in-progress of the year. I therefore find merit in the argument that reduction in gross- profit cannot be the basis of increasing the value of work-in-progress. Accordingly, there is no merit in the addition made to the work-in-progress by the Assessing Officer of Rs.7,32,73,273/-. The addition is therefore deleted. This ground is allowed.”

16. We have perused the case records and heard the rival contentions. We have also given considerable thought to the findings of the Sub-ordinate Authorities. It has already been observed that the assessee is providing its services awarded by various Government Department/undertakings and turnover has been reflected in Form 26AS. There is no suppression of turnover and the same has not been disputed by the Assessing Officer as well. The Assessing Officer arrived at a conclusion by selecting some particular sites and taking recourse to reverse calculation on the basis of subsequent years profitability. On the facts on records, the Assessing Officer failed to consider specifies of each project. The facts such as escalation in some projects, were not considered. In the case of amount of escalation, there is no corresponding expenditure against the same and therefore, it would not have any impact on WIP. That further, the Assessing Officer has not considered the figures and accounts of all the sites. Adoption of accounts of subsequent years cannot be the basis for calculating work in progress of the year. In view of our above observations, we do not find any reason to interfere with the findings of the Ld. CIT(Appeals) and therefore, relief provided to the assessee is sustained. Thus, Ground No.2 raised in appeal by the Revenue is dismissed.

17. Ground No.3 pertains to the fact that the Ld. CIT(Appeals) has restricted the disallowance at Rs.25,14,015/- of the additions made by the Assessing Officer on account of labour payment at Rs.2,96,19,146/-.

18. The facts on this issue are that Assessing Officer found that the assessee had incurred labour expenses to the tune of Rs.59,23,82,931/-under the head ‘site expenses’. The said expenditure works out to 75% of the total expenses incurred during the relevant year. The Assessing Officer noted that during financial year 2008-09, the said expenditure was Rs.37.30 crores which was 61.9% of the total expenses of that particular year. The Assessing Officer, therefore asked the assessee to produce documents in support of such claim of expenses. The Assessing Officer noted that the assessee had produced self-made vouchers. The Assessing Officer further found that some of the vouchers did not bear the signatures of the recipient, the handwriting on the vouchers appeared to be same and the vouchers appeared to be fabricated. Accordingly, the Assessing Officer disallowed, on ad-hoc basis, 5% of the expenditure and added an amount of Rs.2,96,19,146/- to the income of the assessee.

19. At the very outset, the Ld. DR submitted that the Assessing Officer disallowed 5% of the entire site expenses. The Ld. CIT(Appeals) on the issue held that disallowance can be made only with respect to the labour charges and therefore, rest of the other disallowances were deleted by the Ld. CIT(Appeals). He restricted the disallowance to 5% of the labour charges only. That when on this issue, the assessee went to an appeal before the Pune Bench of the Tribunal vide ITA Nos.457 & 458/PUN/2016 for the assessment years 2010-11 & 2011-12, the Tribunal vide its order dated 15.12.2017, Para 11 held that even 5% of disallowance of labour charges was excessive and that was reduced to 3% of the labour charges by observing as follows:

“11. We have heard the rival contentions and perused the record. The assessee had incurred labour expenses at various sites totaling Rs.5.02 crores. The Revenue has not controverted the findings of CIT(A) in this regard. Now, the question which arises in the present appeal is disallowance made out of said labour charges by the authorities below. The reason for disallowance is discrepancies noted in the vouchers maintained, wherein writing on the vouchers appeared to be the same person. Further, the assessee had failed to maintain any muster roll or wage register. Also, no amount was deducted on account of Provident Fund and ESIC. The payees were also not verifiable. The case of assessee was that majorly payment was made through cheque. In the totality of the above said facts and circumstances, we find merit in the aforesaid disallowance made by the authorities below. However, we restrict the same to 3% of labour charges.”

19.1 The Ld. DR, therefore, submitted that this ground is covered one, since on the disallowance of 5% on the entire „site expenses‟ by the Assessing Officer, the Ld. CIT(Appeals) has given relief for all other expenses under the head site expenses and had upheld the disallowance to 5% only on labour charges. Now that also was held to be excessive by the Tribunal which was reduced to 3%.

20. In view of above, we are of the considered view that the ground of the Revenue was against restricting of disallowance to 5% of labour charges by the Ld. CIT(Appeals). However, with the order of the Tribunal (supra.), this 5% disallowance on labour charges has been overturned and instead 3% disallowance on labour charges has been retained. In such scenario, the ground of appeal by the Revenue before us on this issue needs to be dismissed. We order accordingly. Thus, Ground No.3 raised in appeal by the Revenue is dismissed.

21. In the result, appeal of the Revenue is dismissed.

Order pronounced on 21st day of October, 2020.

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