The ACIT, Cochin V. M/s.K.V. Joseph & Sons Engineering Contrctors, Cochin

ITA 446/COCH/2016

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 4406 (ITAT-COCHIN)
• Duration Of Justice: 1 year(s) 6 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-03-2018
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: DB
• Assessment Year: 2011-2012
• Appeal Filed On: 20-09-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A DHANARAJ
• Assessee Lawyers: RAVISH KUMAR K
• Keywords: Unexplained cash credit; Depreciation; Additional evidence; Reasonable cause; Capital expenditure
• Section: 37

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE S/SHRI CHANDRA POOJARI, AM & GEORGE GEORGE K., JM I .T . A. NO. 444/ / CO CH/ 2016 ASSESSMENT YEAR : 2011 - 12 M/S. K.V. JOSEPH & SONS ENGINEERING CONTRACTORS, KURIECKAL BUILDING, EDAPPALLY, KOCHI-682 024. [PAN: AADFK 0373P] VS. THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-1, NON- CORPORATE, KOCHI. (ASSESSEE - APPELLANT) (REVENUE - RESPONDENT) I .T.A. NO. 446 /COCH/ 2016 & C.O. NO. 43/COCH/2016 (ARSG. OUT OF ITA NO. 446/COCH/2016) ASSESSMENT YEAR : 2011 - 12 THE ASSIS TANT COMMISSIONER OF INCOME-TAX, CIRCLE-1, NON- CORPORATE, KOCHI. VS. M/S. K.V. JOSEPH & SONS ENGINEERING CONTRACTORS, KURIECKAL BUILDING, EDAPPALLY, KOCHI-682 024. [PAN: AADFK 0373P] (REVENUE - APPELLANT) (ASSESSEE - RESPONDENT) A SSESSEE BY SH RI RAVISH KUMAR K., CA REVENUE BY SHRI A. DHANARAJ, SR. DR D ATE OF HEARING 15 / 0 2 /2018 DATE OF PRONOUNCEMENT 22 / 0 3 /2018 I.T.A. NOS.444 & 446/C/2016 & C.O. NO. 43/C/2016 2 O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER: THESE CROSS APPEALS, ONE FILED BY THE ASSESSEE AND THE OTHER BY THE REVENUE ARE DIRECTED AGAINST THE ORDER OF THE CIT(A)-II, KO CHI DATED 28/06/2016 AND PERTAINS TO THE ASSESSMENT YEAR 2011-12. THE ASSESS EE 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 : ASSESSEES APPEAL 2. THE FIRST GROUND IN ASSESSEES 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 WA S THE PARTNER IN THE ASSESSEE-FIRM. THE SAID AMOUNT WAS NOT SHOWN AS IN COME 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 OTH ER THAN SUB-CONTRACT GIVEN TO I.T.A. NOS.444 & 446/C/2016 & C.O. NO. 43/C/2016 3 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 SUBMI TTED THAT WITHOUT COMPLETING THE WORK, THE ASSESSEE WOULD NOT HAVE RECEIVED THE PAYMENT FROM THE AWARDER AS THE RUNNING BILL IS PASSED AFTER PHYSICAL MEASUR EMENT BY THE AWARDER. INCOME FROM THE CONTRACT WAS OFFERED TO TAX AND COR RESPONDINGLY, THE EXPENDITURE IS TO BE ALLOWED. IT WAS SUBMITTED THA T THE ASSESSEE HAS EVEN DEDUCTED TDS ON THE PAYMENT MADE TO MR. K.J. PAUL A ND RECEIVED THE RELEVANT TAX DEDUCTION CERTIFICATE. 4. THE LD. AR SUBMITTED THAT THERE IS A VALID AG REEMENT 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 ASSESS EE. THE LD. AR RELIED ON THE JUDGMENT OF THE BOMBAY HIGH COURT IN THE CASE OF MA NEKLAL 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 DISAGREE S 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 ONL Y FOR THE PURPOSE OF 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 OF JUSTICE. THE ORDER SHOULD BE SELF-EXPLANATORY AND SHOULD NOT KEEP OTHER GUESSING FOR REASONS. THE REASONS PROVIDE A LIVE LINK BETWE EN THE CONCLUSION AND THE EVIDENCE. THAT VITAL LINK IS THE SAFEGUARD AGA INST ARBITRARINESS. IT GIVES I.T.A. NOS.444 & 446/C/2016 & C.O. NO. 43/C/2016 4 AN OPPORTUNITY TO THE HIGHER COURT TO SEE WHETHER O R NOT SUBORDINATE COURT OR AUTHORITY OR THE TRIBUNAL CONSIDERED THE RELEVAN T MATERIAL. 4.1 THE LD. AR SUBMITTED THAT THE LABOUR CHARGES I NCURRED BY THE ASSESSEE IS VERY LOW AS COMPARED TO THE TOTAL TURNOVER OF THE A SSESSEE 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 TAPARI A 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 S IT ITSELF IN THE ARM CHAIR OF THE BUSINESSMAN OR IN THE POSITION OF BOARD OF DIRECTOR S AND ASSUME THE ROLE TO DECIDE HOW MUCH REASONABLE EXPENDITURE HAVING REGAR D 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 SAM E IS TO BE CONFIRMED. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUS ED 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 EDAPA LLY, HIGH COURT. THE PLEA OF THE ASSESSEE IS THAT IT WAS INCURRED FOR THE PURPOS E OF BUSINESS. HOWEVER, THE I.T.A. NOS.444 & 446/C/2016 & C.O. NO. 43/C/2016 5 ASSESSEE HAS NOT PLACED THE RELEVANT DETAILS OF WOR K 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 AN D CORRESPONDING BILLS RAISED BY HIM. IT IS NOTICED BY THE LOWER AUTHORITIES THAT I T WAS NOT SHOWN AS AN INCOME IN THE HANDS OF MR. K.J. PAUL BY CREDITING IN THE PROF IT & LOSS ACCOUNT. HAD IT BEEN MR. K.J. PAUL CARRIED OUT THE WORK OF ROAD ENTRUSTE D TO HIM, HE SHOULD HAVE SHOWN THE SAME AS INCOME IN HIS HANDS AND CORRESPON DINGLY 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 ASSES SEE AS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS UNLESS IT W AS INCURRED FOR THE PURPOSE OF BUSINESS AND SUPPORTED BY BILLS AND VOUCHERS. THE MERE EXISTENCE OF AN AGREEMENT BETWEEN THE ASSESSEE AND THE SUB-CONTRACT OR 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 ASSE SSEES BUSINESS. ALTHOUGH THERE MIGHT BE SUCH AN AGREEMENT IN EXISTENCE AND T HE PAYMENT MIGHT HAVE BEEN MADE, IT IS STILL OPEN TO THE ASSESSING OFFICE R TO CONSIDER THE RELEVANT FACTS AND TO DETERMINE FOR HIMSELF WHETHER THE PAYMENT SA ID TO HAVE BEEN PAID TO THE SUB-CONTRACTOR OR ANY PART THEREOF IS PROPERLY DEDU CTIBLE. 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 C REDITING 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 SH OWN AS ADVANCE IN HIS HANDS I.T.A. NOS.444 & 446/C/2016 & C.O. NO. 43/C/2016 6 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 AU THORITIES AND THE CASE LAW RELIED ON BY THE ASSESSEES 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/- U NDER INTEREST AND BANK CHARGES. ON PRODUCTION OF BREAKUP OF THE SAME, IT W AS FOUND THAT ASSESSES HAD DEBITED RS.6,92.830/- AS CHARGES ON MOBILIZATION AD VANCE DEDUCTED BY AWARDERS. WHEN ASKED ABOUT THE NATURE OF SUCH CHARGES, THE LD . AR EXPLAINED THAT THESE WERE BASICALLY CHARGES BEING DEDUCTED BY THE AWARDE RS WHILE AWARDING THE CONTRACT. BUT THE ASSESSING OFFICER FOUND THIS CON TENTION 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 MEN TIONING OF TOTAL CONTRACT AMOUNT, ADVANCE GIVEN, COST OF MATERIALS SUPPLIED A ND TAXES COLLECTED. THE ABOVE SPECIMEN CLEARLY SHOWED ABOUT THE DIFFERENT L EGAL RECOVERIES MADE FROM I.T.A. NOS.444 & 446/C/2016 & C.O. NO. 43/C/2016 7 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 CLAIME D. 7.2 IT IS TO BE NOTED THAT THE AWARDERS WERE DEDU CTING MONEY FROM THE TOTAL CONTRACT AS INPUT TAX, WORKERS WELFARE FUND AND MAT ERIAL PURCHASE ETC. MENTIONING THE SAME IN THE BILLS ROSE, WHICH HAVE B EEN 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 EXPEN DITURE. WHEN THE LD. AR WAS CONFRONTED WITH ALL THESE EVIDENCES, HE EXPLAINED O FF 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 A SSESSES COULD NOT SUBSTANTIATE ITS CLAIM WITH ANY DOCUMENTARY PROOF H ENCE, IN VIEW OF THIS, THE ASSESSING OFFICER HELD THAT THE ABOVE EXPENDITURE O F RS.6,92,830/- WAS NOT A I.T.A. NOS.444 & 446/C/2016 & C.O. NO. 43/C/2016 8 GENUINE EXPENDITURE NOR IT WAS INCURRED FOR THE PUR POSE 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 DISALLOWA NCE OF INTEREST ON MOBILIZATION ADVANCE. 7.4 THE LD. AR SUBMITTED THAT INTEREST ON MOBILIZ ATION 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 COCHI N PORT TRUST . ACCORDING TO THE LD. AR THE INTEREST CHARG ES ON MOBILIZATION ADVANCE WAS DEDUCTED BY THE AWARDER. 7.5 THE LD. DR RELIED ON THE ORDER OF THE LOWER AU THORITIES. 7.6 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIAL ON RECORD. IT WAS SUBMITTED BY THE ASSESSEES COUNSEL THAT INTERE ST ON MOBILIZATION ADVANCE WAS DEDUCTED BY THE AWARDER AND IT IS TO BE CONSIDE RED AS EXPENDITURE WHETHER THE AWARDER HAS DEDUCTED THE INTEREST OUT OF THE AW ARDEE. THE AMOUNT HAS TO BE VERIFIED FROM THE TENDER AGREEMENT ENTERED INTO BY THE ASSESSEE WITH COCHIN PORT TRUST. THE ORAL ARGUMENT OF THE ASSESSEES CO UNSEL CANNOT ESTABLISH THAT THERE IS A CONDITION IN THE TENDER AGREEMENT TO DED UCT INTEREST TOWARDS MOBILIZATION OF ADVANCE GIVEN TO THE ASSESSEE BY TH E AWARDER. ACCORDINGLY, WE I.T.A. NOS.444 & 446/C/2016 & C.O. NO. 43/C/2016 9 REMIT THIS ISSUE TO THE FILE OF THE ASSESSING OFFIC ER TO EXAMINE THIS ISSUE WITH REFERENCE TO THE TENDER AGREEMENT ENTERED INTO BY T HE 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 STATISTIC AL PURPOSES. 8. THE NEXT TWO GROUNDS IS WITH REGARD TO DISALLO WANCE 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 N OT PRESSED BEFORE THE LOWER AUTHORITIES. HENCE THESE GROUNDS RAISED BY THE ASSE SSEE IS WITHOUT ANY REASONABLE CAUSE AND ARE TO BE REJECTED. 8.2 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSE D THE RECORD. AS RIGHTLY POINTED OUT BY THE LD. DR, THESE GROUNDS WERE NOT P RESSED BEFORE THE LOWER AUTHORITIES AS PER THE FINDING OF THE CIT(A) IN PAR A 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 PRES SED. ACCORDINGLY, THE APPEALS ON THESE GROUNDS ARE DISMI SSED. I.T.A. NOS.444 & 446/C/2016 & C.O. NO. 43/C/2016 10 BEFORE US THE ASSESSEE HAS NOT GIVEN ANY REASONABLE CAUSE FOR NOT PRESSING THESE GROUNDS BEFORE THE LOWER AUTHORITIES AND AGIT ATE THIS ISSUE BEFORE US. ACCORDINGLY, WE FIND NO REASON TO INTERFERE WITH TH E ORDER OF THE LOWER AUTHORITIES ON THESE ISSUES. IN VIEW OF THE ABOVE, THESE GROUND S ARE DISMISSED AS NOT EMANATING FROM THE ORDER OF THE CIT(A). THUS, THE A PPEAL OF THE ASSESSEE IN ITA NO. 444/COCH/2016 IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ITA NO. 446/COCH/2016 : REVENUES 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 CONTRAC T RECEIPTS WAS RS.82,77,36,995/- OUT OF THIS, AN AMOUNT OF RS.28,41,55,835/- WAS SU BCONTRACTED. THE ASSESSING OFFICER OBSERVED THAT THE SUB CONTRACT WORKED OUT T O 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, T HE CORRESPONDING EXPENSES SHOULD ALSO BE REDUCED. IT WAS NOTED THAT IN THE CA SE 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.T.A. NOS.444 & 446/C/2016 & C.O. NO. 43/C/2016 11 (I.E., TOTAL RECEIPTS - SUBCONTRACT AMOUNT). THE AS SESSING OFFICER NOTED THAT THE ASSESSEE WAS ALSO DEBITING RS.2,64,33,432/- AS MATE RIAL 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 AS SESSEE WAS BASICALLY INTO CONSTRUCTION WHERE MATERIALS ARE REQUIRED MORE IN N UMBER. THOUGH HE HAS LABOUR CONTRACT, HE SUBCONTRACTED THE SAME. WHEN TH E ASSESSEE WAS MAINLY ENGAGED IN THE WORKS WHERE MATERIALS ARE REQUIRED A ND DEBITING ALMOST 40% OF TOTAL RECEIPTS AS MATERIAL PURCHASE, THE NEED FOR D EBITING 20% OF TOTAL RECEIPTS AS-LABOUR CHARGES DOESN'T ARISE AT ALL. THE ASSESSI NG OFFICER NOTED THAT IT WAS INTO WORKS WHERE MATERIALS ARE MORE REQUIRED AND NO T THE LABOUR. THEREFORE IT WAS FOUND THAT THE ASSESSEE WAS CLAIMING MORE LABOU R 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 W AS VERY DIFFICULT TO EXAMINE. WHEN THE LD. AR WAS ASKED AS SO WHY DON'T THEY MAIN TAIN A PROPER WAGE REGISTER AS PER RULE 29(1) OF THE PF ACT, THE ASSES SEE 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 N OT MAINTAINING. IN THE ABSENCE OF PROPER WAGE REGISTER AND OTHER SUPPORTIN G DOCUMENTS, IT WAS DIFFICULT I.T.A. NOS.444 & 446/C/2016 & C.O. NO. 43/C/2016 12 TO ACCEPT AND VERIFY THE CLAIM OF THE ASSESSEE. SIN CE 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 QUE STIONABLE. THE ASSESSING OFFICER RELIED ON THE JUDGMENT OF JURISDICTIONAL KE RALA 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 EXPLANATIO N FOR THE CLAIMED EXPENSES, 20% OF SUCH LABOUR CHARGES CLAIMED (I.E. RS.10,58,0 6,975/- WHICH AMOUNTS TO RS. 2,11,6I.395/- WAS DISALLOWED AND BROUGHT TO TAX. 9.3 ON APPEAL, THE CIT(A) OBSERVED THAT THE ASSES SEE, 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 SER VICES. THE CIT(A) OBSERVED THAT DSR FOR THE CURRENT YEAR AS PER THE CPWD WAS B ETWEEN 32% TO 35%, AND AS PER RULE 10(2)(B) OF THE KVAT RULE THE COMMERCIA L TAX DEPARTMENT HAS FIXED THE RANGE OF LABOUR CHARGES AT 30% IN THE CASE OF S TRUCTURAL CONTRACT. ACCORDING TO THE CIT(A), THE ASSESSEE FURTHER ARGUED THAT I N THE STATE OF KERALA THE LABOUR CHARGES ARE VERY HIGH AND THEY HAVE BEEN MAINTAININ G THE WAGE STATEMENT OF EACH WORK SITE AND THE STATEMENTS HAVE GOT SIGNED B Y 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 C IT(A) THAT NO WORK CONTRACT I.T.A. NOS.444 & 446/C/2016 & C.O. NO. 43/C/2016 13 CAN BE EXECUTED WITHOUT INCURRING COST ON LABOUR. AFTER CONSIDERING THE FACTS AND SUBMISSIONS BY THE ASSESSEE, THE CIT(A) HELD TH AT DISALLOWANCE MADE BY THE AO WAS FAR OFF FROM THE FACTS AND BASED ON MERELY E STIMATES AND LOGICAL DERIVATIONS, AND DEVOID OF ANY FACTS GATHERED OR FI NDINGS 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 COUN T. 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 SIMIL AR BUSINESS. HE SUBMITTED THAT THE CIT(A) ALLOWED 20% LABOUR CHARGES ON AD-HOC BAS IS 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. C IT (222 TAXMAN 29) WHEREIN IT WAS HELD THAT WHEN THE ASSESSING OFFICER HAD REL IED UPON THE FACT THAT NO MATERIAL WAS PRODUCED TO PROVE THE SAID EXPENSE, TH EN IN THE ABSENCE OF ANY ADDITIONAL MATERIAL MADE AVAILABLE WITH THE APPELLA TE AUTHORITIES, THE ORDER OF THE APPELLATE AUTHORITY WAS PERVERSE AND NOT SUBSTANTIA TED BY ANY MATERIAL ON RECORD. I.T.A. NOS.444 & 446/C/2016 & C.O. NO. 43/C/2016 14 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 15.55% (AFTER REMOVING THE DISALLOWANCE) 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 T HE RANGE OF LABOUR CHARGES AT 30% IN THE CASE OF STRUCTURAL CONTRACT. ACCORDIN G TO THE LD. AR, THE RATE OF LABOUR IS MUCH HIGHER IN KERALA COMPARED TO OTHER S TATES. 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 TH E 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 DIS CUSSED AT ANY STAGES OF THE ASSESSMENT PROCEEDINGS AND HENCE THE ASSESSEE WAS N OT GIVEN AN OPPORTUNITY TO SUBSTANTIATE THE CASE. IT WAS SUBMITTED THAT CO NSIDERING THE VOLUME OF I.T.A. NOS.444 & 446/C/2016 & C.O. NO. 43/C/2016 15 TURNOVER INVOLVED LESS THAN 20% LABOUR CHARGES WAS VERY MUCH GENUINE AND DISALLOWANCE OF 20% OF THE LABOUR CHARGE WAS NOT CO RRECT. 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 145 1 OF 2009 DATED 22.10.2013) WAS ENTIRELY DIFFERENT AND HAS NO RELEV ANCE TO THIS CASE. IT WAS SUBMITTED THAT THE POINT DISCUSSED IN THE ABOVE CAS E WAS WHETHER UNEXPLAINED CASH CREDIT CAN BE ADDED MERELY BECAUSE THE CONFIRM ATION 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 TH E 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. A CCORDING TO THE LD. AR ANY EXPENDITURE NOT BEING EXPENDITURE OF THE NATURE DES CRIBED 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 EXCLUSIVE LY FOR THE PURPOSES OF THE BUSINESS OR PROFESSION SHALL BE ALLOWED IN COMPUTIN G THE INCOME CHARGEABLE UNDER THE HEAD ''PROFITS AND GAINS OF BUSINESS OR P ROFESSION '. HENCE THE LD. AR REQUESTED TO ALLOW THE ABOVE EXPENSES AS ALLOWABLE EXPENSES INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS UND ER THE PROVISIONS OF THE INCOME TAX-ACT. I.T.A. NOS.444 & 446/C/2016 & C.O. NO. 43/C/2016 16 9.10 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PER USED THE MATERIAL ON RECORD. THE MAIN CRUX OF THE ARGUMENT OF THE REVENUE IS THA T THE ASSESSEE HAD GIVEN CONTRACT WORK TO SUB-CONTRACTOR AND THE ASSESSEE C LAIMED 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 OFFIC ER WITH REFERENCE TO BILLS AND VOUCHERS PRODUCED BY THE ASSESSEE AND TO DISALLOW O NLY THAT PORTION OF LABOUR CHARGES EXPENDITURE WHICH IS EXCESSIVE WHEN COMPARE D TO SIMILAR BUSINESS. WITH THIS OBSERVATION, WE REMIT THIS ISSUE TO THE F ILE 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 PUR POSES. C.O. NO. 43/COCH/2016 10. THE CROSS OBJECTION FILED BY THE ASSESSEE IS S UPPORTIVE 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 BE COME INFRUCTUOUS AND THE SAME IS DISMISSED AS INFRUCTUOUS. I.T.A. NOS.444 & 446/C/2016 & C.O. NO. 43/C/2016 17 11. IN THE RESULT, THE APPEALS OF THE ASSESSEE AND REVENUE ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES AND THE CROSS OBJECTION FI LED BY THE ASSESSEE IS DISMISSED. . ORDER PRONOUNCED IN THE OPEN COURT ON THI S 22 ND MARCH, 2018. SD/- SD/- (GEORGE GEORGE K.) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: DATED: 22 ND MARCH, 2018 GJ COPY TO: 1. M/S. K.V. JOSEPH & SONS ENGINEERING CONTRACTORS, KURIECKAL BUILDING, EDAPPALLY, KOCHI-682 024. 2. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE -1, NON-CORPORATE, KOCHI. 3. 3. THE COMMISSIONER OF INCOME-TAX(APPEALS)-II, KOCH I 4. THE PR. COMMISSIONER OF INCOME-TAX, KOCHI 5. D.R., I.T.A.T., COCHIN BENCH, COCHIN. 6. GUARD FILE. BY ORDER (ASSISTANT REGISTRAR) I.T.A.T., COCHIN I.T.A. NOS.444 & 446/C/2016 & C.O. NO. 43/C/2016 18 I.T.A. NOS.444 & 446/C/2016 & C.O. NO. 43/C/2016 19 I.T.A. NOS.444 & 446/C/2016 & C.O. NO. 43/C/2016 20