Disallowance based on Audit Report can be made only after asking assessee to explain the same

Shri Subhash Bose Vs. DCIT (ITAT Kolkata)

The main grievance of the assessee was that before making the dis allowance the assessee was never given an opportunity to explain the discrepancy which was made in the auditor’s report. According to the ld. Counsel, sec. 43B of the Act is attracted only when the amount in question are debited to the P&L Account for the relevant assessment year but not paid within the specified date. According to him, in this case the fact is that the concerned liability of Rs. 1,78,334/- was not out of the current year’s VAT expenses of Rs. 9,83,648/- but brought forward from the earlier year. For substantiating this contention, the Ld. AR drew our attention to ledger account available at page 76 of the paper book which is the VAT outstanding account wherein we observe as on 01.04.2009, the opening balance is shown as Rs. 1,79,337.50 and the closing balance is also shown as Rs. 1,78,334.50 an amount of Rs. 1,003/- was paid as per challan on 24.09.2009. Therefore, according to Ld. AR, the tax auditor claimed that the impugned unpaid VAT amounting to Rs.1,78,334/- was incurred in the previous year of 2009-10 was, therefore, not true at all but a mistake happened to the auditor and the assessee cannot be victimized for the error committed by the auditor. The Ld. AR submitted that in the year under consideration, a total VAT expenditure debited to the P&L Account was Rs. 9,83,648/- which is evident from page 77 of the paper book, which is the VAT ledger account for the period from 01.04.2009 to 31.03.2010 which shows that entire amount has been debited by various parties and therefore, there was no unpaid liability on this account. The Ld. AR brought to our notice that the entire dis allowance represents the VAT outstanding for the FY 2007-08 and 2006- 07 of Rs. 18,027/- and Rs. 1,60,307 respectively and in this matter the tax auditor duly reported concerned liabilities in their tax audit report i.e. C-21B(b) of F/No.3CD which was placed at pages 84, 85 and 100 of paper book. From page 85 it reveals that VAT not paid was to the tune of Rs. 18,027/- (For 3CD of AY 2008-09 starting from page 80) and from page 100 shows Rs. 1,60,307.50 not paid (which is Form No. 3CD for AY 2007-08 (starting from page 96 of paper book on-wards). Therefore, according to the Ld. AR, the impugned sum were also added back in the computation of income for those assessment years and the Ld. AR drew our attention to ITR Acknowledgement and computation pages 78, 79, 90 and 91 of the paper book from where we find the facts to be correct. Therefore, in the aforesaid facts and circumstances, the dis allowance on account of VAT not pad of Rs.1,78,334/- was made by the AO only because of erroneous auditor’s report and it has been brought to our notice how the error has occurred and we find that assessee’s contentions are backed by records, therefore, we being the final fact finding authority, find that it was the mistake of the auditor who has wrongly given the figures and made wrong observation because of which the AO made the dis allowance. However, the AO before making the dis allowance could have asked the assessee to explain before making the dis allowance. The Ld. CIT(A) has also erred in not appreciating the contention of the assessee in right perspective, therefore, we are inclined to delete the addition made by the AO and confirmed by the Ld. CIT(A).

Full Text of the ITAT Order is as follows:-

This is an appeal filed by the assessee against the order of Ld. CIT(A)-15, Kolkata dated 06.02.2015 for AY 2010-11.

2. The first ground of appeal is against the action of the Ld. CIT(A) in enhancing the assessment by way of disallowing entire expenses on account of labour charges of Rs. 99,35,275/- u/s. 69C of the Income-tax Act, 1961 (hereinafter referred to as the “Act”).

3. Brief facts of the case are that assessee carries on construction business mainly in the nature laying of underground piping, construction of reservoir, build up of iron & Arsenic Treatment Plant etc. in various projects of government departments and local authorities. The assessee maintains books of account, which are duly audited u/s. 44AB of the Act. The return for the relevant year was selected for scrutiny under CASS. During the assessment proceedings, the AO noted that the assessee claimed that an amount of Rs. 20,93,155/- as outstanding labour charges against total claim of labour charges amounting to 99,35,275/- pertaining to the AY 2010-11. The AO, therefore, asked the assessee to provide details of such outstanding and the AO noticed that in response to the same, list of outstanding labour charges incurred in this assessment year under consideration was submitted. The AO on a test check basis issued letters u/s. 133(6) of the Act to ten parties whose names and addresses are given in page 2 of the assessment order. However, the AO noticed that all the notices were returned unserved with the comments ‘no such persons, not known etc.’ Thereafter, the AO disallowed Rs. 12,65,216/- by making the following observation:

“The total amount of sundry creditors on account of labour charges was Rs.20,93, 155/-. As already stated none of the ten notices issued u/s. 133(6) could be served on the addressees. Thus assessee failed to submit any explanation in response to this office letter dated 18.02.2013. The opportunity was allowed to the assessee to produce the creditors which were not availed. The notices were issued on representative basis and return of the same citing reason of non-existence of the addresses in the addresses provided by the assessee himself, provides an indication that claim of the assessee regarding outstanding balance of Rs. 20,93,155/- was not on factual basis. However it is also not deniable that possibility or certain amount of payable as on 31.03.2010, on account of labour charges remains in this instant case also. Thus the undersigned decides that a part of assessee ‘s claim be allowed on estimate basis. The total amount of claim of expenses under the head labour charges was Rs. 99,35,275/-. The undersigned estimates outstanding amount to be 1/12th of claim of expenses under the head labour charges i.e. Rs. 82 7,939/- ( Rs. 99,35,275/- / 12) and disallow balance claim of outstanding labour charges and claim of corresponding expenditure of Rs. 12,65,216/- (Rs. 20,93, 155 less Rs. 827,939/-) treating the same as bogus expenditure.

Thus addition on this issue of bogus s/creditors on account of labour charges and claim of expenditure corresponding to the aforementioned s/creditors comes to Rs. 12,65,216/-.”

Aggrieved, assessee preferred an appeal before the Ld. CIT(A), who was pleased to enhance the assessment by disallowing the labour expenses for the entire year amounting to Rs. 99,35,275/- by making a finding that the entire labour cost has been met by the assessee from unaccounted money sources and, therefore, the entire sum of Rs. 99,35,275/- was brought to tax u/s. 69C of the Act and also held that no deduction for the same is permissible under any other section as provided by Explanation below to sec. 69C of the Act and thus, made an addition of Rs.99,35,275/- to the total income. Aggrieved by the aforesaid decision of the Ld. CIT(A) the assessee is before us.

4. We have heard rival submissions and carefully perused the material available on record. The AO noted that a sum of Rs. 20,93,155/- is payable as outstanding labour charges in respect of the current year’s dues which was the total amount of sundry creditor on account of labour charges. The AO issued on test check basis notice to ten parties u/s. 133(6) of the Act on the addresses given by the assessee. However, since the notice could not be served and it got returned back, the AO noted that the outstanding balance of Rs. 20,93,155/- may not be on actual basis, however, he was of the opinion which is reproduced in his own words:

“(a) However, it is also not discernible that possibility of certain amount of payable as on 31.03.2010 on account of labour charges remains in this instance case also. Thus the undersigned decides that a part of assessee ’s claim be allowed on estimate basis.”

Thereafter, we note that the AO estimated the outstanding amount to be 1/12^th of claim of expenses under the head labour charges i.e. Rs.827,939/- (Rs.99,35,275/- /12) and disallowed the balance claim of outstanding labour charges and thus, the claim of corresponding expenditure of Rs. 12,65,216/- was disallowed treating the same as bogus expenditure. On appeal, the Ld. CIT(A) enhanced the dis allowance by doing his own exercise and brought in the transaction of only PHE Directorate, Nadia Division into picture. The Ld. CIT(A) after perusing the ledger account of the said PHE Directorate, Nadia Division has given a chart in page 12 and had made an analysis about the liquid funds in the hands of the assessee to demonstrate and find that the assessee did not had cash in hand to disburse to the labourers. Thus, according to the Ld. CIT(A), since the labour charges have been paid, the said sum of money could have been from the unaccounted source of the assessee and, therefore, he disallowed the entire expenditure claimed by the assessee at Rs. 99,35,275/-. We find that the entire exercise of the Ld. CIT(A) is flawed, erroneous and is perverse. We note that the Ld. CIT(A) has conveniently not brought the entire fact on record and has only taken the payment received from PHE, Nadia Division to make the case that assessee did not have liquid cash in hand to disburse to labourers and disallow the entire claim u/s. 69 of the Act. For understanding the entire fact, we would like to reproduce the chart reproduced by Ld. CIT(A) at page 12 of his order, which are as under:

The Ld. CIT(A) has analyzed and has held a under:

“1. The client paid the opening sum due at Rs. 93,03,376/- on 08.04.2009, which was used by the assessee to pay its opening labour charges payable as on 01.04.2009.

2. Subsequently the assessee continued work on civil contracts of the year and the client paid the assessee Rs. l,25,75,814/- only on 24.09.2009 and the other credits on that date are contra entries for security deposit retained, TDS done, V AT done, Cess paid, performance securities retained etc. by the client. A further sum of Rs. 17,53,118/- as mobilization money could be said to have come the assessee’s way. Thus on 14.09.2009 the assessee received only Rs .l,43,28,932/- from the lent, directly or indirectly, but it also proves that by this date the assessee had raised bills of Rs. 1,75,31,177/- on the client. Subsequently the next payment from the client came only on 25.03.2010 at Rs. 1 crores plus mobilization amount of Rs. 15,66,032/- though the assessee claimed to have done further work for l,56,60,319/- till 30.03.2010.

3. The question that arises in such a case is how did the assessee meet his daily obligations towards men and material costs when its prime client has only paid him Rs. l,43,28,932/- till 24.09.2009 and Rs. l,15,66.032/- on 25.03.2010.

4) The billing on M/s PHE Directorate Nadia, amounts to Rs. 3,31,91,496/- during the previous year. The date-wise analyses indicates that the assessee continued to carry on his work without the finances. The position cannot be any different for other clients like KMDA which incidentally is declared as a sundry debtor to the tune of Rs. 34,39,537/- as at 31.03.2010. Thus even for the work done for KMDA the assessee did not receive the payments.”

5. We do not subscribe to the aforesaid views and conclusion of the Ld. CIT(A). We note that the total debtors collection during the year was Rs. 4,02,46,465/-, the amounts received are as follows:

From a perusal of the aforesaid debtor collection we note that the amount as on 9.04.2009 in the hands of the assessee is Rs. 29,300 + Rs. 93,03,376 + Rs. 29,92,254 which comes to Rs. 1,23,24,930/- so, even if the opening labour charges payable as on 01.04.2009 is taken then (Rs. 1,23,24,930 – Rs.77,80,920) is taken, then also the assessee has got Rs. 45,44,010/- as on 09.04.2009. Therefore, the Ld. CIT(A) erred in making an analysis that the assessee did not had any fund in his hand to provide for the labourers is per se perverse. The Ld. CIT(A) conveniently did not take into account the amount paid by KMDA to the assessee to the tune of Rs.29,92,254 as on 09.04.2009 and has simply taken the figure of Rs.93,03,376/- which the assessee received as on 08.04.2009 from PHE, Nadia and then also Ld. CIT(A) conveniently has stated that the said amount of Rs. 93,09,376/- was used by the assessee to pay its opening labour charges payable as on 01.04..2009, when the fact is that Rs. 77,80,920/- is only payable (as opening labour charges). So, the Ld. CIT(A) erred in making the calculations and omitted to bring in the other receipts which the assessee received from KMDA, PHE Barasat. We also note that on 10.09.2009, the assessee received Rs. 35,58,285/- from KMDA on 10.09.2009, which makes the assessee in possession of Rs. 35,58,285/- + Rs. 45,44,010/- = Rs. 81,02,295/- (i.e. after squaring up the labour charges as on 01.04.2009 of Rs. 77,80,920/-). So the assessee had enough fund in his hands as on 10.09.2009 itself. Moreover, we also note that the assessee had bank loan facility i.e. Cash Credit limit from UBI having a limit of Rs.37.50 lacs which is evident from a perusal of page 56 of paper book and we also note that the assessee was taken unsecured loan of Rs.65.76 lacs which is discernible from page 54 of the paper book. Thus, the assessee had enough cash in his hands to disburse an amount of Rs. 78,42, 120/- which was paid during the year out of the total amount incurred of Rs. 99,35,275/-. In the aforesaid facts, the Ld. CIT(A) ought not to have brought into tax the entire labour expenditure by applying sec. 69C of the Act by drawing inference that the assessee has disbursed the amount to the labour from his unaccounted sources. We also reproduce a chart herein below, which is reproduced by the Ld. CIT(A) in its order at page 10, which is as under:

We also note from the above chart that in the assessment year under consideration that there is an increase of the gross receipt from the construction business increased by 86% from the previous assessment year and the expenses claimed from the previous assessment year is only 6% extra to earn 86% more turnover is very well reasonable expenses and we allow the claim of the assessee and direct deletion of the addition ordered by the Ld. CIT(A) on account of outstanding labour charges.

6. Coming to the next ground of the assessee is against the action of the Ld. CIT(A) confirming the addition of Rs. 1,20,797/- as unexplained credit made by the AO u/s. 69C of the Act. Brief facts of the case is that the AO observed that the assessee has submitted a statement of sundry creditors for goods at from M/s. Gopal Hardware Store Rs. 1,20,797/-. The AO noted that the ledger copy provided by M/s. Gopal Hardware Stores pursuant to the notice u/s. 133(6) of the Act shows that the said amount of Rs. 1,20,797/- was paid in cash on different dates within the FY 2009-10 itself. Therefore, the AO treated the amount disbursed by the assessee in cash to the M/s. Gopal Hardware Stores as unexplained expenditure u/s. 69C of the Act. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A), who was pleased to confirm the same. Aggrieved, the assessee is before us.

7. We have heard rival submissions and gone through the facts and circumstances of the We note that the AO based on the ledger copy provided by M/s. Gopal Hardware Stores noted that the amount which the assessee has shown as sundry creditor outstanding in the name of M/s. Gopal Hardware Stores has been paid in cash on different dates in the FY itself, so he made the addition u/s. 69C of the Act as unexplained expenditure. The main grievance of the assessee is that the dues of Rs. 1,20,797/- was paid by another party namely, M/s. Jharna Electric Co., a proprietary concern of assessee’s wife on his (assessees) behalf to M/s. Gopal Hardware Store. In order to buttress his contention, the Ld. AR drew our attention to page 68 of the paper book, which is the ledger account of Jharna Electric Co. from which we note that Jharna Electric Co. has been provided with advance of Rs. 3 lacs as on 03.04.2009 from the Union Bank of India OD Account of the assessee. The Ld. AR drew our attention to page 69 of the paper book, from where we note that there was a closing balance of Rs.1,85,358/- and according to the Ld. AR, the amount of Rs.1,20,797/- to M/s. Gopal Hardware Stores has been disbursed from the said amount. The Ld. AR drew our attention to page 71 of the paper book which is confirmation of account from where we perused that payments have been given to M/s. Gopal Hardware Stores on 07.05.2009 Rs. 15,000/- on 18.06.2009 Rs. 18,000/-, on 29.06.2009 Rs. 12,000/-, on 14.08.2009 Rs. 10,000/-, on 12.09.2009 Rs. 7500/-, on 26.09.2009 Rs. 15,000/-, on 12. 10.2009 Rs. 18,000/-, on 14.11.2009 Rs. 15,000/- and on 12.02.2010 Rs. 10,297/-. Thus, according to Ld. Counsel, the entire amount of Rs. 1,20,797/- was paid from the amount of Rs. 3 lacs given by assessee by cheque on 13.04.2009 from his OD account. We note that the assessee’s wife Smt. Jharna Bose is the proprietor of M/s. Jharna Electric Co. and Smt. Jharna Bose is an income-tax assessee and has filed her return of income showing total income of Rs.5,25,916/-. The Balance Sheet of Smt. Jharna Bose proprietor of Jharna Electric Co., which is placed at page 74 of the paper book from where we note that she has shown to have taken from the assessee an amount of Rs. 64,561/-. The Ld. AR reconciled the figures and then demonstrated it by saying that the assessee had advanced a loan of Rs. 3 lacs on 13.04.2009 from his OD account from Union Bank of India which is discernible from page 68 of the paper book and closing balance of Mrs. Jharna Bose is at Rs. 1,85,358/- which is seen from page 69 of the paper book and when the payment of Rs. 1,20,797/- was disbursed from the said amount then remaining balance is Rs. 64,561/- which is tallying with that of the Balance Sheet of Smt. Jharna Bose which was filed along with the return of income of Smt. Jharna Bose which was filed on 29.03.2011 and the scrutiny assessment proceedings were initiated by issue of notice was on 15.09.2011, so, we can safely presume that this was not an afterthought by the assessee. Therefore, we find force in the contention of the Ld. AR and we, therefore, delete the addition made by the AO and confirmed by the Ld. CIT(A).

8. The next ground of appeal of the assessee is against the action of the Ld. CIT(A) in confirming the dis allowance of Rs.1,78,334/- made by AO on account of VAT payable. The AO on examination of annexure B of the Balance Sheet noted that the assessee has made provisions for VAT amounting to Rs. 1,78,334/-.The AO noted that the aforementioned liability on account of VAT was not paid within the due date or before the date of filing of the return u/s. 139(1) of the Act for AY 2010-11 as per the information provided in clause 21(B)(b) of the form 3CD. The AO noted that the assessee did not adjust the same in his computation submitted along with the return. Therefore, the unpaid liability of sales tax, VAT amounting to Rs.1,78,334/- was added u/s. 43B of the Act. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A), who was pleased to confirm the same. Aggrieved, assessee is before us.

9. We have heard rival submissions and gone through the facts and circumstances of the case. The main grievance of the assessee was that before making the dis allowance the assessee was never given an opportunity to explain the discrepancy which was made in the auditor’s report. According to the ld. Counsel, sec. 43B of the Act is attracted only when the amount in question are debited to the P&L Account for the relevant assessment year but not paid within the specified date. According to him, in this case the fact is that the concerned liability of Rs. 1,78,334/- was not out of the current year’s VAT expenses of Rs. 9,83,648/- but brought forward from the earlier year. For substantiating this contention, the Ld. AR drew our attention to ledger account available at page 76 of the paper book which is the VAT outstanding account wherein we observe as on 01.04.2009, the opening balance is shown as Rs. 1,79,337.50 and the closing balance is also shown as Rs. 1,78,334.50 an amount of Rs. 1,003/- was paid as per challan on 24.09.2009. Therefore, according to Ld. AR, the tax auditor claimed that the impugned unpaid VAT amounting to Rs.1,78,334/- was incurred in the previous year of 2009-10 was, therefore, not true at all but a mistake happened to the auditor and the assessee cannot be victimized for the error committed by the auditor. The Ld. AR submitted that in the year under consideration, a total VAT expenditure debited to the P&L Account was Rs. 9,83,648/- which is evident from page 77 of the paper book, which is the VAT ledger account for the period from 01.04.2009 to 31.03.2010 which shows that entire amount has been debited by various parties and therefore, there was no unpaid liability on this account. The Ld. AR brought to our notice that the entire dis allowance represents the VAT outstanding for the FY 2007-08 and 2006- 07 of Rs. 18,027/- and Rs. 1,60,307 respectively and in this matter the tax auditor duly reported concerned liabilities in their tax audit report i.e. C-21B(b) of F/No.3CD which was placed at pages 84, 85 and 100 of paper book. From page 85 it reveals that VAT not paid was to the tune of Rs. 18,027/- (For 3CD of AY 2008-09 starting from page 80) and from page 100 shows Rs. 1,60,307.50 not paid (which is Form No. 3CD for AY 2007-08 (starting from page 96 of paper book on-wards). Therefore, according to the Ld. AR, the impugned sum were also added back in the computation of income for those assessment years and the Ld. AR drew our attention to ITR Acknowledgement and computation pages 78, 79, 90 and 91 of the paper book from where we find the facts to be correct. Therefore, in the aforesaid facts and circumstances, the dis allowance on account of VAT not pad of Rs.1,78,334/- was made by the AO only because of erroneous auditor’s report and it has been brought to our notice how the error has occurred and we find that assessee’s contentions are backed by records, therefore, we being the final fact finding authority, find that it was the mistake of the auditor who has wrongly given the figures and made wrong observation because of which the AO made the dis allowance. However, the AO before making the dis allowance could have asked the assessee to explain before making the dis allowance. The Ld. CIT(A) has also erred in not appreciating the contention of the assessee in right perspective, therefore, we are inclined to delete the addition made by the AO and confirmed by the Ld. CIT(A).

10. In the result, the appeal of the assessee is allowed.

Order is pronounced in the open court on 22nd November, 2017