Case Law Details
M/s. K.V. Joseph & Sons Engineering Contractors Vs ACIT (ITAT Cochin)
In this case the assessee paid Rs. 200 lakhs as an advance payment to Mr. K.J. Paul to carry out sub contract work of road at Edapally, High Court. The plea of the assessee is that it was incurred for the purpose of business. However, the assessee has not placed the relevant details of work carried out by Mr. K.J. Paul with reference to this payment. It is the primary duty of the assessee to give details of the work carried out by Mr. K.J. Paul and corresponding bills raised by him. It is noticed by the lower authorities that it was not shown as an income in the hands of Mr. K.J. Paul by crediting in the Profit & Loss account. Had it been Mr. K.J. Paul carried out the work of road entrusted to him, he should have shown the same as income in his hands and correspondingly issue a bill towards that work to the assessee. All the payments made by the assessee cannot be treated as an expenditure in the hands of the assessee as incurred wholly and exclusively for the purpose of business unless it was incurred for the purpose of business and supported by bills and vouchers. The mere existence of an agreement between the assessee and the sub-contractor or making a payment by a cheque, does not bind the Assessing Officer to hold that the payment was made exclusively and wholly for the purpose of assessee’s business. Although there might be such an agreement in existence and the payment might have been made, it is still open to the Assessing Officer to consider the relevant facts and to determine for himself whether the payment said to have been paid to the sub-contractor or any part thereof is properly deductible. In the present case, though the assessee made payment of Rs. 2 crores to Mr. K. J. Paul, it was not shown as income in the hands of Mr. K.J. Paul by crediting the said amount in his P&L account and also no bills were raised with reference to this payment against the assessee. On the other hand, it was shown as advance in his hands and no corresponding bills were raised against the assessee. In such circumstances, it is not possible to hold that the assessee actually incurred expenditure wholly and exclusively for the purpose of business. Hence, we do not find any infirmity in the order of the lower authorities and the case law relied on by the assessee’s Counsel is of no assistance to the assessee as the facts of this case are entirely different from the facts of the present case. Accordingly, this ground of appeal of the assessee is rejected.
FULL TEXT OF THE ITAT JUDGMENT
These cross appeals, one filed by the assessee and the other by the Revenue are directed against the order of the CIT(A)-II, Kochi dated 28/06/2016 and pertains to the assessment year 2011-12. The assessee has also filed Cross Objection in C.O. No. 43/Coch/2016 against Revenue’s appeal in ITA No. 446/coch/2016 for the assessment year 2011-12.
ITA No. 444/Coch/2016 : Assessee’s appeal
2. The first ground in assessee’s appeal is with regard to disallowance of Rs.200 lakhs paid to Mr. K.J. Paul towards mobilization of advances claimed by the assessee as sub-contract expenditure. According to the Ld. AR, mobilization advance was given for meeting the sub-contract work given to one of the related concerns of the Group, namely Mr. K. J. Paul who was the partner in the assessee-firm. The said amount was not shown as income in the profit and loss account of the proprietary concern, Mr. K.J. Paul. As such, it was disallowed in the hands of the assessee. On appeal, the CIT(A) confirmed the disallowance.
3. Against this, the assessee is in appeal before us. The Ld. AR submitted that the assessee has taken road work at Edapally, High Court and incurred expenditure of Rs.16,14,359/- as labour charges other than sub-contract given to Shri K.J. Paul. He drew our attention to break up of cost centre which is placed at pgs. 67-68 of the paper book. The Ld. AR submitted that without completing the work, the assessee would not have received the payment from the awarder as the running bill is passed after physical measurement by the awarder. Income from the contract was offered to tax and correspondingly, the expenditure is to be allowed. It was submitted that the assessee has even deducted TDS on the payment made to Mr. K.J. Paul and received the relevant tax deduction certificate.
4. The Ld. AR submitted that there is a valid agreement between Mr. K.J. Paul and the sub-contractor. According to the assessee, there is no reason to disallow the expenditure in the hands of the assessee. The Ld. AR relied on the judgment of the Bombay High Court in the case of Maneklal D. Shah vs. P.K. Gupta and others (267 ITR 340) wherein it was held that it is incumbent upon the authority to give reasons as to why it disagrees with the reasons and findings of the authority. The relevant observation of the High Court is as follows:
“A right to reasons is, therefore, an indispensable part of a sound system of judicial review. A reasoned decision is not only for the purpose o f showing that the citizen is receiving justice, but also a valid discipline for the authority itself. Therefore, stating of reasons is one of the essentials o f justice. ”
The order should be self-explanatory and should not keep other guessing for reasons. The reasons provide a live link between the conclusion and the evidence. That vital link is the safeguard against arbitrariness. It gives an opportunity to the higher court to see whether or not subordinate court or authority or the Tribunal considered the relevant material.”
4.1 The Ld. AR submitted that the labour charges incurred by the assessee is very low as compared to the total turnover of the assessee and it would be allowable as it is directly related to the business of the assessee. He relied on the judgment of the Supreme Court in the case of Taparia Tools Ltd. vs. JCIT (372 ITR 605) wherein it was held that expenses incurred wholly and exclusively for the purpose of business is to be allowed. He also relied on the judgment of the Supreme Court in the case of S.A. Builders Ltd. vs. CIT (288 ITR 1) wherein it was held that revenue cannot justifiably claim to sit itself in the arm chair of the businessman or in the position of board of directors and assume the role to decide how much reasonable expenditure having regard to the circumstances of the case.
5. The Ld. DR submitted that the mobilization of advances made by the assessee is itself an advance payment and cannot be called expenditure in the revenue field. Hence it was disallowed and the same is to be confirmed.
6. We have heard the rival submissions and perused the material on record. In this case the assessee paid Rs. 200 lakhs as an advance payment to Mr. K.J. Paul to carry out sub contract work of road at Edapally, High Court. The plea of the assessee is that it was incurred for the purpose of business. However, the assessee has not placed the relevant details of work carried out by Mr. K.J. Paul with reference to this payment. It is the primary duty of the assessee to give details of the work carried out by Mr. K.J. Paul and corresponding bills raised by him. It is noticed by the lower authorities that it was not shown as an income in the hands of Mr. K.J. Paul by crediting in the Profit & Loss account. Had it been Mr. K.J. Paul carried out the work of road entrusted to him, he should have shown the same as income in his hands and correspondingly issue a bill towards that work to the assessee. All the payments made by the assessee cannot be treated as an expenditure in the hands of the assessee as incurred wholly and exclusively for the purpose of business unless it was incurred for the purpose of business and supported by bills and vouchers. The mere existence of an agreement between the assessee and the sub-contractor or making a payment by a cheque, does not bind the Assessing Officer to hold that the payment was made exclusively and wholly for the purpose of assessee’s business. Although there might be such an agreement in existence and the payment might have been made, it is still open to the Assessing Officer to consider the relevant facts and to determine for himself whether the payment said to have been paid to the sub-contractor or any part thereof is properly deductible. In the present case, though the assessee made payment of Rs. 2 crores to Mr. K. J. Paul, it was not shown as income in the hands of Mr. K.J. Paul by crediting the said amount in his P&L account and also no bills were raised with reference to this payment against the assessee. On the other hand, it was shown as advance in his hands and no corresponding bills were raised against the assessee. In such circumstances, it is not possible to hold that the assessee actually incurred expenditure wholly and exclusively for the purpose of business. Hence, we do not find any infirmity in the order of the lower authorities and the case law relied on by the assessee’s Counsel is of no assistance to the assessee as the facts of this case are entirely different from the facts of the present case. Accordingly, this ground of appeal of the assessee is rejected.
7. The next ground is related to the disallowance of interest on mobilization of advances.
7.1 It is observed by the Assessing Officer that during the proceedings, it was found that assesses had debited Rs. 1,94,22,635/- under interest and bank charges. On production of breakup of the same, it was found that assesses had debited Rs.6,92.830/- as charges on mobilization advance deducted by awarders. When asked about the nature of such charges, the Ld. AR explained that these were basically charges being deducted by the awarders while awarding the contract. But the Assessing Officer found this contention of the Ld. AR to be non-genuine. This is because, in all the statements provided by the awarders to the assessee, there has been specific and clear mentioning of total contract amount, advance given, cost of materials supplied and taxes collected. The above specimen clearly showed about the different legal recoveries made from the contract bill given to assesses under the head “Details of Recoveries to be made”. Though it mentioned about different types of recoveries, it never mentioned about the charges on mobilization advance. It only mentioned mobilization advance is 10% of total contract bill which is very much different from the charges on mobilization advance as claimed by the assesses. When the Ld. AR was confronted with this, the Ld. AR could not produce any documents or evidence of whatsoever to prove the expenses claimed.
7.2 It is to be noted that the awarders were deducting money from the total contract as input tax, workers welfare fund and material purchase etc. mentioning the same in the bills rose, which have been claimed by the assesses in its P & L A/c as well. However, it was observed that the charges on mobilization advance as claimed by assessee was not mentioned anywhere in the bills raised by the awarders nor the assessee could adduce any evidence of whatsoever to prove that it had incurred this expenditure. When the Ld. AR was confronted with all these evidences, he explained off the record, that it was basically the bribe given lo different authorities for releasing the bill amount. Though off the record statements will not have any legal sanctity, it is to be under-stood that the statement carry value as the assesses could not substantiate its claim with any documentary proof Hence, in view of this, the Assessing Officer held that the above expenditure of Rs.6,92,830/- was not a genuine expenditure nor it was incurred for the purpose of business. Hence, the sum of Rs.6,92,830/- was disallowed and brought to tax.
7.3 On appeal, the CIT(A) confirmed the disallowance of interest on mobilization advance.
7.4 The Ld. AR submitted that interest on mobilization advance was deducted by the awarded amounting to Rs.6,92,830.00. It was submitted that it was evident from the specimen of the statement of Cochin Port Trust . According to the Ld. AR the interest charges on mobilization advance was deducted by the awarder.
7.5 The Ld. DR relied on the order of the lower authorities.
7.6 We have heard the rival submissions and perused the material on record. It was submitted by the assessee’s Counsel that interest on mobilization advance was deducted by the awarder and it is to be considered as expenditure whether the awarder has deducted the interest out of the awardee. The amount has to be verified from the tender agreement entered into by the assessee with Cochin Port Trust. The oral argument of the assessee’s Counsel cannot establish that there is a condition in the tender agreement to deduct interest towards mobilization of advance given to the assessee by the awarder. Accordingly, we remit this issue to the file of the Assessing Officer to examine this issue with reference to the tender agreement entered into by the assessee with Cochin Port Trust. The Assessing Officer has to consider this issue afresh. Thus this ground of appeal of the assessee is allowed for statistical purposes.
8. The next two grounds is with regard to disallowance of depreciation on car – Rs.2,74,057/- and Disallowance of JCB hire charges – Rs,2,13,263 /-.
8.1 The Ld. DR submitted that these grounds were not pressed before the lower authorities. Hence these grounds raised by the assessee is without any reasonable cause and are to be rejected.
8.2 We have heard the rival contentions and perused the record. As rightly pointed out by the Ld. DR, these grounds were not pressed before the lower authorities as per the finding of the CIT(A) in para 11 and 11.1 which reads as follows:
“11. Ground No.7 & 8 : Disallowance of depreciation on car – Rs.2,74,057/-Disallowance of JCB hire charges – Rs,2,13,263/-
11.1 During the course of appeal proceedings, it has been submitted that the appeals on these two grounds are not being pressed.
Accordingly, the appeals on these grounds are dismissed. ”
Before us the assessee has not given any reasonable cause for not pressing these grounds before the lower authorities and agitate this issue before us. Accordingly, we find no reason to interfere with the order of the lower authorities on these issues. In view of the above, these grounds are dismissed as not emanating from the order of the CIT(A). Thus, the appeal of the assessee in ITA No. 444/Coch/2016 is partly allowed for statistical purposes.
ITA No. 446/Coch/2016 : Revenue’s appeal
9. The Revenue has raised the ground with regard to allowability of the claim of 20% labour charges without any additional evidence produced by the assessee at the first appellate stage.
9.1 The facts of the issue are that total contract receipts was Rs.82,77,36,995/-Out of this, an amount of Rs.28,41,55,835/- was subcontracted. The Assessing Officer observed that the sub contract worked out to be 35% of the total contract amount. According to the Assessing Officer, such a sum of work is subcontract, the total sub contract works out to be 35% of total contract amount. When such a sum of work is subcontracted, the corresponding expenses should also be reduced. It was noted that in the case of assessee, it was not done. The Assessing Officer noted that assesses was debiting Rs. 10,58,06.975/-as labour charges which is exactly 20% of the total net receipts of the assessee (i.e., total receipts – subcontract amount). The Assessing Officer noted that the assessee was also debiting Rs.2,64,33,432/- as material purchase which was again 40% of total net receipts of the assessee (i.e., total receipts-sub contract amount). According to the Assessing Officer, the assessee was basically into construction where materials are required more in number. Though he has labour contract, he subcontracted the same. When the assessee was mainly engaged in the works where materials are required and debiting almost 40% of total receipts as material purchase, the need for debiting 20% of total receipts as-labour charges doesn’t arise at all. The Assessing Officer noted that it was into works where materials are more required and not the labour. Therefore it was found that the assessee was claiming more labour charges.
9.2 In order to verify the claim of the assessee, the Assessing Officer called for the ledger and supporting documents of the same. On verification, it was found that assesses was having only self made vouchers to substantiate its claim of labour charges and most of these vouchers were not even properly signed by the recipients. As a result, the genuineness of these was very difficult to examine. When the Ld. AR was asked as so why don’t they maintain a proper wage register as per Rule 29(1) of the PF Act, the assessee explained that if they maintain, it would be additional burden on them to pay PF and ESI. Moreover, the labourers were also not regular, so they were not maintaining. In the absence of proper wage register and other supporting documents, it was difficult to accept and verify the claim of the assessee. Since the assessee was already debiting 40% of total receipts as material purchase, then the need for debiting 20% of total receipts as labour charges is very questionable. The Assessing Officer relied on the judgment of jurisdictional Kerala High Court, dated 22.10.2013, in the case of E.S. Jose vs. CIT. Since the assesses had not produced any sufficient proof as well as explanation for the claimed expenses, 20% of such labour charges claimed (i.e. Rs.10,58,06,975/- which amounts to Rs. 2,11,6I.395/- was disallowed and brought to tax.
9.3 On appeal, the CIT(A) observed that the assessee, however, in the working had shown that the labour charges allowable as per Service Tax Department was upto 40%, including the profit margin and other services. The CIT(A) observed that DSR for the current year as per the CPWD was between 32% to 35%, and as per Rule 10(2)(b) of the KVAT Rule the Commercial Tax Department has fixed the range of labour charges at 30% in the case of structural contract. According to the CIT(A), the assessee further argued that in the State of Kerala the labour charges are very high and they have been maintaining the wage statement of each work site and the statements have got signed by the labourers as and when the payments were made. This matter was never discussed at any stage of assessment proceedings and the AO had, based on estimates, disallowed 20% of such labour charges. It was pleaded before the CIT(A) that no work contract can be executed without incurring cost on labour. After considering the facts and submissions by the assessee, the CIT(A) held that disallowance made by the AO was far off from the facts and based on merely estimates and logical derivations, and devoid of any facts gathered or findings brought on record, contrary to the claims made by the assessee. Thus the CIT(A) deleted te addition made by the Assessing Officer on this count.
9.4 Against this, the Revenue is in appeal before us.
9.5 The Ld. DR submitted that the assessee claimed that the labour charges were incurred by the assessee itself. He submitted that the sub contract charges are received at a higher rate as compared to similar business. He submitted that the CIT(A) allowed 20% labour charges on ad-hoc basis without any further materials which is excessive. For the proposition, he relied on the judgment of the Kerala High Court in the case of E.S. Jose vs. CIT (222 Taxman 29) wherein it was held that when the Assessing Officer had relied upon the fact that no material was produced to prove the said expense, then in the absence of any additional material made available with the appellate authorities, the order of the appellate authority was perverse and not substantiated by any material on record.
9.6 On the other hand, the ld. AR submitted that regarding disallowance of Labour charges Rs.2,11,61,395/-, the assessee has actually incurred the amount to execute the work property.
| Total Turnover | Rs.8277.37L |
| Amount sub contracted | Rs.2841.56L |
| Net Turnover done directly | Rs.5435.81L |
| Labour Charges | Rs.10057.07L |
| Labour as a percentage of TO | 19.45% |
| Labour as a percentage of TO (After removing the disallowance) | 15.55% |
| Allowable Labour as per Service Tax Rule 2 A | 40% |
| Allowable Labour as per KVAT Rule 10 (2)(b)(14) | 30% |
9.7 Ld. AR submitted that as per the provisions (Rule 2 A of Valuation rules) the service tax department allowed labour Charges up to 40% including the profit margin and other services. It was submitted that as per Rule 10 (2)(b) of the KVAT rule the Commercial Tax department has fixed the range of labour charges at 30% in the case of Structural Contract. According to the Ld. AR, the rate of labour is much higher in Kerala compared to other states. It was submitted that the assessee was maintaining wage statement of each work sites and the statements are signed by the labours as and when the payments were made. The Ld. AR submitted that the assessee had incurred the labour charges wholly and exclusively for the purposes of the business.
9.8 According to the ld. AR the Matter was not discussed at any stages of the Assessment proceedings and hence the assessee was not given an opportunity to substantiate the case. It was submitted that considering the volume of turnover involved less than 20% labour charges was very much genuine and disallowance of 20% of the labour charge was not correct.
9.9 The Ld. AR submitted that the judgment relied upon in the case of Commissioner of Income Tax Vs. E.S. Jose (ITA No 1451 of 2009 dated 22.10.2013) was entirely different and has no relevance to this case. It was submitted that the point discussed in the above case was whether unexplained cash credit can be added merely because the confirmation letter was not given, which is totally different from the present case. The Ld. AR submitted that in this case it is a direct expense attributable to the turnover and without labour no works contract can be executed properly. Therefore it was submitted that U/s 37 of the Income Tax Act it is an allowable expense. According to the Ld. AR any expenditure not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession “. Hence the Ld. AR requested to allow the above expenses as allowable expenses incurred wholly and exclusively for the purpose of the business under the provisions of the Income Tax-Act.
9.10 We have heard the rival submissions and perused the material on record. The main crux of the argument of the Revenue is that the assessee had given contract work to sub-contractor and the assessee claimed labour charges which is comparatively on a higher side. In our opinion, the issue of incurring of labour charges is to be re-examined by the Assessing Officer with reference to bills and vouchers produced by the assessee and to disallow only that portion of labour charges expenditure which is excessive when compared to similar business. With this observation, we remit this issue to the file of the Assessing Officer for fresh consideration. Thus this ground of appeal of the Revenue is partly allowed for statistical purposes. Hence the appeal of the Revenue in ITA No. 446/Coch/2016 is partly allowed for statistical purposes.
C.O. No. 43/Coch/2016
10. The Cross Objection filed by the assessee is supportive of the CIT(A) order which does not require any separate adjudication. As we have disposed of the Revenue appeal, the CO filed by the assessee has become infructuous and the same is dismissed as infructuous.
11. In the result, the appeals of the assessee and Revenue are partly allowed for statistical purposes and the Cross Objection filed by the assessee is dismissed.
