Newton Engineering & Chemicals Ltd.,, ... vs Assessee

IN THE INCOME TAX APPELLATE TRIBUNAL " D " BENCH, AHMEDABAD (BEFORE SHRI SHAILENDRA Kr. YADAV, J.M. & SHRI ANIL CHATURVEDI, A.M.)

I.T. A. No. 2124/AHD/2011 (Assessment Year: 2003-04)

Newton Engineering & V/S The I.T.O., Ward-4(1), Chemicals Ltd. 864/B-4, Baroda GIDC Makarpura, Baroda -390010

(Appellant) (Respondent)

PAN: AAACH 5391Q

Appellant by : Smt. Urvashi Sodhan, A.R. Respondent by : Smt. Sonia Kumar, Sr. D.R.

(आदे श)/ORDER

Date of hearing : 28-04-2015 Date of Pronouncement : 07 -05-2015

PER SHRI ANIL CHATURVEDI,A.M.

1. This appeal filed by the Assessee is against the order of CIT(A)-III, Baroda dated 13.06.2011 for A.Y. 2003-04.

2. The relevant facts as culled out from the material on record are as under.

3. Assessee is a company stated to be engaged in the business of construction

activity undertaking turnkey contracts involving fabrication, piping works etc. Assessee filed its return of income for A.Y. 2003-04 on 01.12.2003 2 ITA No 2124/AHD/2011 . A.Y. 2003-04 showing total loss of Rs. 3,33,11,290/-. The case was selected for scrutiny and thereafter the assessment was framed under section 143(3) vide order dated 31.03.2006 and the total loss was determined at Rs. 1,92,58,800/-. Aggrieved by the order of A.O., Assessee carried the matter before ld. CIT(A) who vide order dated 13.06.2011 granted partial relief to the Assessee. Aggrieved by the aforesaid order of ld. CIT(A), Assessee is now in appeal before us and has raised the following grounds;-

1. Ld. CIT (A) grossly erred in law and on facts in confirming disallowance of Rs. 2, 97, 284/- made by AO out of deferred revenue expenses claimed by the appellant. Both the lower authorities have erred in not appreciating the contention of the appellant that the modification expenses that is neither capital or personal was amortized and spread over the period of 5 years as per matching principle of revenue / expense. Ld. CIT (A) ought to have allowed the claim by quashing the order of AO.

2. Ld. CIT (A) grossly erred in law and on facts in confirming disallowance of Rs. 1, 90, 622/- made by AO of gift and presentation expenses ignoring the submissions of the appellant that the expenses were laid out of commercial expediency in the ordinary course of business. Ld. CIT (A) ought to have deleted such disallowance of legitimate expenses.

3. Ld. CIT (A) erred in law and on facts in confirming addition made of membership fees of Rs. 29,925/- as well adhoc disallowance of 10% out of miscellaneous expenses by AO without appreciating various submissions, documentary evidence and arguments of the appellant that the expenses were incurred during the normal course of business and no disallowance on ad hoc basis was called for. This action of Ld. CIT (A) contrary to provision of law deserves to be quashed.

4. Ld. CIT (A) further erred in law and on facts in confirming addition made by AO of Rs. 66, 93, 121/- on account of alleged suppression of contract receipts. Both the lower authorities erred in not appreciating the fact that TDS affected on mobilization of advance leads to mismatch of income reflected in Profit & Loss a/c vis a vis income reflecting in TDS certificates. Ld. CIT (A) ought to have reversed the finding of AO and deleted the addition.

1st ground is with respect to disallowance on account of deferred revenue expenses.

4. During the course of assessment proceedings, A.O noticed that Assessee has debited Rs. 2,97,284 as deferred revenue expenditure which was on account of modification expenses incurred to improve productivity and quality of the 3 ITA No 2124/AHD/2011 . A.Y. 2003-04 products and therefore it was treated as deferred revenue expenditure and was written off over a period of 5 years. A.O was of the view that since he expenditure did not pertain to the year under consideration it was not allowable as business expenses. He accordingly disallowed the claim of the Assessee. Aggrieved by the order of A.O., Assessee carried the matter before ld. CIT(A) who upheld the order of A.O by holding as under:-

5.2 I have given my careful consideration to the facts of the case as also the observation of the AO and the arguments advanced by the AR. Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. (Supra) has held that facts of the case may justify an assessee's decision to spread and claim the expenses incurred in a particular year to ensuing years if the benefit is expected to be derived over a period of years. But no such facts have been brought by the appellant in the present case either before the A.O or during the appellate proceedings except the notes of account attached to the return. In the absence of details of such facts, contentions of assessee are not acceptable. Hence this ground of appeal is dismissed.

5. Aggrieved by the aforesaid order of ld. CIT(A), Assessee is now in appeal before us.

6. Before us ld. A.R. reiterated the submissions made before A.O and ld.

CIT(A). She further placed reliance on the decision of Hon'ble Apex Court in the case of Madras Industrial Investment Corporation Ltd. vs. CIT (1997) 225 ITR 802. She therefore submitted that the claim of the Assessee be allowed. The ld. D.R. on the other hand submitted that Assessee has not brought on record any material on record to support its contention of matching the revenues with the expenses incurred nor submitted the details of the expenses. She thus supported the order of A.O and ld. CIT(A).

7. We have heard the rival submissions and perused the material on record. We find that ld. CIT(A) while upholding the action of A.O has noted that no 4 ITA No 2124/AHD/2011 . A.Y. 2003-04 details to support the contention of the Assessee were filed before him or before ld. CIT(A) and therefore the ratio of the decision of Hon'ble Apex Court in the case of Madras Industrial Investment Corporation (supra) could not apply to the facts of the Assessee. Before us, also Assessee has not placed any material on record to support its contention of it satisfying the principle of "matching concept" nor could controvert the observations by ld. CIT(A). In view of the aforesaid facts, we find no reason to interfere with the order of ld. CIT(A) and thus this ground of Assessee is dismissed.

Ground no. 2 is with respect to disallowance made on account of gift and presentation expenses.

8. During the course of assessment proceedings, A.O noticed that Assessee has debited expenses on account of gift and presentation expenses. He further noticed that the expenses were incurred through credit cards at different sites and part of the expenses were in cash. He also noticed that the details of recipient and the gifts and presentation items were not furnished though Assessee was asked to furnish the same. He accordingly disallowed 20% of the expenses amounting to Rs. 38,124/-. Aggrieved by the order of A.O., Assessee carried the matter before ld. CIT(A) who upheld the order of A.O by holding as under:-

9.2 I have considered the facts of the case as also the observation of the A.O and the arguments advanced by the A.R. So far as the disallowance of Rs. 1,90,622/- (Rs. 1,60,202/- + Rs. 29,420/-) is concerned, in the absence of details of recipients, the same are totally unverifiable and hence cannot be allowed as a deduction u/s. 37(1). Hence he addition of these amounts are upheld.

5 ITA No 2124/AHD/2011 . A.Y. 2003-04

9. Aggrieved by the aforesaid order of ld. CIT(A), Assessee is now in appeal before us.

10. Before us ld. A.R. reiterated the submissions made before A.O and ld. CIT(A) and further submitted that the expenses were incurred in the normal course of business and were incurred to facilitate to increase its business. It was further submitted that the assessee's accounts are regularly audited under the Companies Act and no adverse comments have been made by the auditors so as to warrant an adhoc disallowance. She further pointed to the copy of the ledger placed at page 66 to 68 of the paper book. She therefore submitted that the entire expenditure needs to be allowed. The ld. D.R. on the other hand supported the order of A.O and ld. CIT(A).

11. We have heard the rival submissions and perused the material on record. We find that A.O while disallowing adhoc expenses has noted that no details of the expenditure were submitted by the Assessee though the Assessee was specifically called to submit the same. Before us also Assessee has not submitted the details except for furnishing the copy of the ledger account which according to the ld. A.R. contains the entire details. On perusing the details placed at page 66 to 68 of the paper book , we find that it is a copy of the ledger account of Gift and Presentation articles. On perusing the ledger account it is seen that the amount mainly paid to Mr. N. Gopinath for the purpose of gift. Apart from the narration of the entry, no details as called for by the A.O has been placed before us. However, considering that the Assessee is a public Ltd. Co. and considering the nature of the business of the Assessee and considering the totality of facts,we are of the view that the disallowance if made at 10% of the expenditure would meet the ends of 6 ITA No 2124/AHD/2011 . A.Y. 2003-04 justice as against 20% made by the A.O. We thus direct accordingly. In the result, this ground of Assessee is partly allowed.

3rd ground is with respect to adhoc disallowance.

12. On perusing the details of miscellaneous expenses, A.O noticed that Assessee has incurred Rs. 74,420/- on account of advertisement and publicity expenses and from the details he noticed that the entire expenditure except Rs. 2,920/- was in the nature of donation and was not for advertisement and publicity. He accordingly disallowed Rs. 71,500/- He also noticed that Assessee has claimed 29,925/- towards membership and subscription expenses of American Express Credit Card of Shri N. Gopinath, the Managing Director of the Company. He was of the view that the aforesaid expenditure was of personal in nature and therefore not allowable. With respect to the other miscellaneous expenses in respect to the Engineering and Chemical Division, he noticed that though Assessee was asked to furnish the details of the expenses, the same were not furnished except for the monthly bifurcation and from the details submitted. he noticed that the majority of the expenses were incurred in cash. He accordingly considered 10% of the expenses amounting to Rs. 1,01,451/- as not allowable and disallowed the same. Aggrieved by the order of A.O., Assessee carried the matter before ld. CIT(A) who upheld the order of A.O by holding as under:-

"9.2...So far as the addition of Rs 71,500/- is concerned, from the Ledger copy filed by the assessee, it is seen that these have been paid for publishing of advertisements in souvenirs of puja mandals, Vadodara Telephone directory etc. Hence, following the decision in ground No.5 above, it is held that these are allowable expenses and accordingly addition on this account is deleted.

7 ITA No 2124/AHD/2011 . A.Y. 2003-04

So far as addition of Rs 29,925/- relating to membership fees of American Express Credit Card is concerned, this card is in the name of the Managing Director. Assessee is claiming that he is using it for making payments for various expenses incurred for the appellant. But no details of such expenses have been filed to rule out that the credit card is not being used by the Managing Director for his personal purposes too. Under section 37(1) of the Act, only an expenditure laid out or expended wholly and exclusively for purposes of business is allowable. In absence of details, this expenditure of Rs 29,925/- cannot be held to be wholly and exclusively for purposes of business. Hence, the AO's action of disallowing this expenditure is upheld.

So far as ad hoc disallowance of 10% out of miscellaneous expenses of Rs 10,15,024/-( Rs 8,13,463/- + Rs 2,01,556/-) is concerned, a perusal of ledger accounts filed by the assessee shows that several expenses are not verifiable like amounts of Rs 15,000, Rs 15,000/- and Rs 42,000/- debited towards payments for Vishwakarma puja on 11.07.2002 and 13.07.2002 and then again amounts of Rs 15,000/- & Rs 10,000/- for same purposes on 22.08.2002 and 23.06.2002. Some expenses are in the nature of payment to union leader, incidental expenses during factory inspector's inspection etc. which are prima facie not allowable. Hence the A.O's action of adding of Rs. 1,01,451/- is upheld.

13. Aggrieved by the aforesaid order of ld. CIT(A), Assessee is now in appeal before us.

14. Before us ld. A.R. reiterated the submissions made before A.O and ld. CIT(A). She further submitted that the Managing Director was required to travel to various places in connection with the business of the Assessee and was required to incur expenses for the purpose of the business of the Assessee and in such circumstances, the membership fees for American Express Credit Card was for the purpose of business. With respect to other expenses it was submitted that the expenses have been incurred for the purpose of business and therefore the same is allowable. The ld. D.R. on the other hand supported the order of A.O and ld. CIT(A).

15. We have heard the rival submissions and perused the material on record. We find that the expenses in relation to the membership fees of American Express Credit Card was disallowed in the absence of the details. With 8 ITA No 2124/AHD/2011 . A.Y. 2003-04 respect to the adhoc disallowance at 10% we find that the action of A.O was upheld by ld. CIT(A). Considering the totality of the facts and the type of business which the Assessee is into, we are of the view that the ends of justice shall be met by making a lump sum addition and in such circumstances we direct that the addition be restricted to Rs. 50,000/- on adhoc basis. In the result, this ground of Assessee is partly allowed.

4th ground is with respect to addition of Rs. 66,93,121/- on account of suppression of contract receipts on adhoc basis.

16. On perusing the TDS certificate filed along with the return of income, A.O noticed that the total contract receipts as per TDS certificate worked out to RS. 26,33,80,328/- whereas in the Profit and Loss account Assessee had credited contract receipts of Rs. 25,66,87,207/-. The Assessee was therefore asked to reconcile the discrepancy of Rs. 66,93,121/- between the contract receipts as per TDS certificates and the amount credited in the Profit and Loss account. In the absence of any reconciliation or details furnished by the Assessee, A.O considered the difference of Rs. 66,93,121/- as income of the Assessee. Aggrieved by the order of A.O., Assessee carried the matter before ld. CIT(A) who upheld the order of A.O by holding as under:-

12.1 Before me, it has been argued that the appellant company is engaged in the business of erection, fabrication, installation and commissioning of sophisticated plant and machinery for fertilizers, chemicals and other industries for which contracts are undertaken from various companies as also government concerns. Against these orders, to meet with the liquidity needs for mobilization of men and machine to execute the contract, the company is getting advance money against such orders which gets adjusted towards final payments. The long term contracts necessitate raising of periodic invoices on customers/clients which is chargeable to tax and subject to TDS and accordingly, TDS has been effected on the mobilization of advance received by the appellant as also on the payments related to the periodic/running invoices. The said mobilization advance is reflected as a liability and hence not credited as income 9 ITA No 2124/AHD/2011 . A.Y. 2003-04 of the appellant reflected in the profit and loss account whereas the periodic /running invoices raised are credited to income account and get reflected in the profit and loss account. As the customers/clients effect TDS on payments relating to mobilization advances as also the periodic invoices, there occurs a mismatch in a particular year when compared to income/ amount reflected in the TDS certificates and that accounted for as income in the profit and loss account. Because of this reason, as per TDS certificates the receipts aggregated to Rs 2,63,33,280/- whereas as per amount credited in the profit and loss account it is Rs 25,66,87,207 leading to the difference of Rs 66,93,121/-, This temporary difference automatically gets sorted out over a period of time when a particular contract is fully executed and accounts are duly adjusted and settled between the parties. Since the appellant had offered for taxation a higher amount of income viz a viz that reflected in the TDS certificates and as adjusted for the mobilization advances included, therein, hence , there appears to be no reason for the AO to make the addition of Rs 66,93,121/- on account of suppression of contract receipts. In view of the above factual position, the appellant requested that A.O be directed to delete the addition.

12.2 I have gone through the facts of the case, as also the observation of the AO and the arguments advanced by the AR. It is true that the appellant has received an amount of Rs 26,33,80,328/-on which TDS has been made by the payers and the entire TDS has been claimed by the assessee in the previous year relevant to assessment year under appeal.

As per section 199 of the I.T. Act, as it stood for the relevant assessment year, the credit for TDS was allowable in the year in which the income subjected to such TDS was assessable. It was admitted by the AR vide order sheet noting dated 25.05.2011 that entire TDS on payments received during the ( F.Y. 2002-03 has been claimed by the assessee in its return of income for A.Y. 2003-04. Thus, assessee has itself held the entire receipt taxable in the current year.

12.3 Moreover, the appellant could not reconcile the difference of Rs 66,93,121/- either before the AO or during the appeal proceedings. In the given factual position, the conclusion of the AO that since the appellant company has claimed and been allowed corresponding credit for the TDS on these receipts and has also booked the expenditure relating to these receipts in its books of account, hence the entire receipt is taxable in the AY 2002-03 itself, is correct. Hence the addition made by the AO is upheld. Thus, this ground of appeal is dismissed.

17. Aggrieved by the aforesaid order of ld. CIT(A), Assessee is now in appeal before us.

18. Before us ld. A.R. reiterated the submissions made before A.O and ld. CIT(A) and further submitted that Assessee had received mobilization advance of Rs. 1,06,47,370/- during the year which was subjected to TDS by the customers and which was credited to the Profit and Loss account in a 10 ITA No 2124/AHD/2011 . A.Y. 2003-04 phased manner upon completion of the contract and in subsequent financial years. It was further submitted that Assessee receives mobilization advance for requisition of the contracts and the mobilization advance is reflected as liability in the Balance Sheet and the mobilization advance gets adjusted against the final payment. She further submitted that the aforesaid method of accounting has been consistently followed by the Assessee. She further placed reliance on the decision of the Tribunal in the case of Radiant Engineer ITA No. 229/AHD/2011 order dated 19.12.2014 and the decision of Hon'ble Gujarat High Court in the case of CIT vs. Narayansingh Gulabsinghji and G.J. Vijapura & Co. Tax Appeal No. 775/AHD/2009 order dated 28.03.2015. She therefore submitted that the addition which has been made by the Assessee be deleted. In the alternate, she submitted that Assessee be granted one more opportunity so that Assessee can reconcile the difference before the lower authorities. The ld. D.R. on the other hand supported the order of A.O and ld. CIT(A).

19. We have heard the rival submissions and perused the material on record. In the present case, the addition between the contract receipts shown as per the TDS certificate and the amount credited by the Assessee in its Profit and Loss account was considered as income of the A.O. A.O had noted that the Assessee could not reconcile the difference between the TDS certificates and the Profit and Loss account. We also find that ld. CIT(A) has also noted that Assessee could not reconcile the difference either before A.O or before him. Before us, ld. A.R. has submitted that the difference was on account of mobilization advance which has been offered to tax in subsequent years and it was further submitted that if the Assessee is granted one more opportunity it would be in a position to reconcile the difference. The ld. A.R. further 11 ITA No 2124/AHD/2011 . A.Y. 2003-04 submitted that aforesaid method of accounting has been consistently followed by the Assessee and has been accepted by the Revenue authorities. Considering the aforesaid submissions of the Assessee, we are of the view that in the interest of justice one more opportunity be granted to the Assessee so that the Assessee could reconcile the contract receipts before A.O. We therefore remit the issue to the file of A.O to decide the issue afresh after considering the submissions of the Assessee and in accordance with law. The Assessee is also directed to co-operate by promptly furnishing all the required details called for by the A.O. In case the Assessee fails to furnish the required details, the A.O shall be free to decide the matter on the basis of material available on record. We thus direct accordingly. In the result, this ground of Assessee is allowed for statistical purposes.

20. In the result, the appeal of Assessee is partly allowed for statistical purposes.

Order pronounced in Open Court on 07- 05 - 2015.

Sd/- Sd/- (SHAILENDRA Kr. YADAV) (ANIL CHATURVEDI) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad. TRUE COPY Rajesh

Copy of the Order forwarded to:- 1. The Appellant. 2. The Respondent. 3. The CIT (Appeals) - 4. The CIT concerned. 5. The DR., ITAT, Ahmedabad. 6. Guard File.