Yarlagadda Srinivasa Rao,, Hyderabad vs Assessee

The aforesaid appeal of the assessee is directed against order dated 30/10/2013 passed by ld. CIT-VI, Hyderabad u/s 263 of the Act pertaining to AY 2010-11.

2. The effective grounds raised by assessee are as under:

"2. The ld. CIT erred in holding that the amount spent by the appellant of Rs. 21,25,516 towards incentives to the staff is not an allowable expenditure.

3. The ld. CIT erred in holding that the order of the AO passed u/s 143(3) on 15/11/2012 was erroneous and prejudicial to the interest of revenue.

4. The ld. CIT ought to have seen that the amount paid towards incentives is an allowable expenditure and the AO rightly allowed such amount as the amount spent is inextricably connected with the business activity of the appellant.

5. The ld. CIT erred in holding that the order of assessment is erroneous so as to enable him to pass the order u/s 263 of the IT Act."

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3. Briefly the facts are, assessee is an individual deriving income from labour contracts. For the AY under dispute, assessee filed his return of income on 30/09/10 declaring total income of Rs. 37,52,620. Assessment in case of assessee was completed u/s 143(3) of the Act, vide assessment order dated 15/11/2012, by determining total income at Rs. 38,52,620. Ld. CIT while examining the assessment records of assessee for the impugned AY, in exercise of power u/s 263, found that out of the gross contract receipts of Rs. 6,20,55,686 received from M/s Divis Laboratories Ltd., assessee has claimed expenditure to the tune of Rs. 6,07,63,958 including wages to the tune of Rs. 5,32,66,679, employer's PF contribution to the tune of Rs. 13,73,124, Employer's ESI contribution to the tune of Rs. 20,02,915, and FDS incentives of Rs. 21,25,516. On examining the records, ld. CIT prima-facie was of the view that AO during the course of assessment proceeding did not verify the genuineness of the expenditure claimed under the above heads as well as details of payments claimed to have been made towards ESI and EPF. Therefore, being of the view that the assessment order passed is erroneous and prejudicial to the interests of revenue, ld. CIT issued a show cause notice u/s 263 on 24/09/13 raising the following issues:

"1. During the year, you have received gross contract receipts of Rs. 6,20,55,686. Against these receipts, you have shown expenditure to the tune of Rs. 6,07,63,958 leaving a net profit of Rs. 12,91,728. The AO completed the assessment without verifying the genuineness of the expenditure incurred towards wages etc. In fact, you have shown loss against contract receipts. For the AY 2008-09, you have shown net profit @ 5.6%

2. In the P&L account, you have credited an amount of Rs. 34,72,159 towards 'other income'. The AO failed to call for the details of other income admitted and the expenditure relating to other income.

3. In the balance sheet, you have shown a sum of Rs. 2,58,574 towards EPF payable and Rs. 2,55,079 towards ESI payable. The AO failed to verify the same with reference to the provisions of sec. 43B of the Act."

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4. In response to the show cause notice issued by ld. CIT, assessee in his reply dated 08/10/13 submitted that as per the new contract labour agreement M/s Divis Laboratories Ltd. has inserted new clauses such as mandatory obtaining of insurance policy, compliance to bonus act, gratuity etc. Hence, the profit margin during the year has come down to 2.12% from 5.6%. Assessee also explained in detail on all the issues raised by ld. CIT in the show cause notice.

5. Ld. CIT after considering the submissions of assessee and examining the facts and materials on record, noted that assessee has incurred a sum of Rs. 21,25,516 towards FDS incentives paid to the staff during the year. He observed that from the informations submitted by assessee, it came to light that assessee was under no obligation to incur this expenditure in addition to the salaries structure payable to the employees. In his role as labour supplier to Divis Laboratories Ltd., ld. CIT observed, if at all assessee has to incur this expenditure the same has to be reimbursed from M/s Divis Laboratories Ltd., which has been approved as FDA by the competitive authority. Thus, it was held by ld. CIT, as assessee has incurred the expenditure without any obligation , the same is required to be disallowed. Ld. CIT was of the view that AO while completing the assessment u/s 143(3) has not examined this issue, which has made the assessment order erroneous as well as prejudicial to the interests of revenue. Accordingly, he decided to set aside the assessment order passed by AO and directed him to re-do the same by implementing his directions.

6. Ld. AR drawing our attention to the Contract Labour Agreement, submitted before us that as per the agreement the billing for supply of labour will be on the basis of actual salary plus 16.5% service charges. It was submitted that out of 16.5% service charges, assessee is incurring the expenditure towards ESI and PF, Bonus and 4 ITA No. 167 0/Hyd/20 13 Yarlag add a Srinivasa Ra o

FDA Incentives, insurance premium paid to employees and administrative expenses. Thus, it was submitted that the conclusion drawn by ld. CIT that there was no obligation on the part of assessee to pay FDA incentives is without any basis and not borne out from the record. Ld. AR referring to P&L account, submitted that assessee has actually incurred the expenditure during the year, hence, ld. CIT was not correct in disallowing the same. Ld. AR further submitted that even in the show cause notice, this issue was never raised by ld. CIT. Thus, it was submitted that as assessee has actually incurred expenditure in terms with contract labour agreement, ld. CIT was not justified in directing AO to disallow the same.

7. Ld. DR, on the other hand, relied on the order of ld. CIT.

8. We have considered the submissions of the parties and perused the orders of revenue authorities as well as other materials on record. As can be seen from the issues raised in the show cause notice u/s 263, ld. CIT has basically raised doubt with regarding to incurring of expenditure by assessee considering the low profit returned during the year. He has also raised the issue of non-examination of nature of receivable from M/s Divis Laboratories Ltd. as well as the amount shown as payable towards wages. He also observed that AO has not verified the claim of EPF payable and ESI payable with reference to the provisions of section 43B of the Act. It is further evident from the facts and materials on record that after receiving assessee's reply to the show cause notice, ld. CIT did not find any material to hold the assessment order as erroneous and prejudicial to the interests of revenue for non-consideration of the aforesaid issues. However, ld. CIT set aside the impugned assessment order only for the reason that FDA incentives of Rs. 21,25,516 was not payable by assessee, as per the labour supply agreement, hence, there was no reason to incur such expenditure in addition to the salary payable to employees. However, on going through the contract labour agreement, a copy of 5 ITA No. 167 0/Hyd/20 13 Yarlag add a Srinivasa Ra o

which is at page 15 of the paper book, it is seen that in addition to the salary, assessee is to receive 16.5% on wages towards administrative expenses. Further, on examination of the bills raised by assessee on the principal, it is evident that apart from the contract labour charges, assessee has raised 16.5% extra towards administrative charges. Therefore, the claim of assessee that it has incurred certain expenditure including FDA incentive out of the aforesaid administrative charges @ 16.5% on wages, cannot be ignored or disbelieved unless there is material on record to prove that assessee has not incurred those expenditure. As it appears from the order of ld. CIT, he has come to his conclusion on incurring of FDA incentives on mere assumption and surmises rather than on evidence. Moreover, when the ld. CIT has not found any irregularity or discrepancy in any of the expenditures claimed, he should not have doubted the incurring of expenditure of Rs. 21,25,516 which is a very meager amount considering the gross contract receipts during the year and overall expenditure incurred by assessee. Therefore, in our view, ld. CIT only for bringing to tax the amount of Rs. 21,25,516 should not have considered the assessment order as erroneous and prejudicial to the interests of revenue in a proceeding u/s 263 of the Act. In the aforesaid view of the matter, we set aside the impugned order of ld. CIT and restore the assessment order passed by AO.

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

Pronounced in the open court on 07/01/2015.

Sd/- Sd/- (B. RAMAKOTAIAH) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER

Hyderabad, Dated: 7 th January, 2015 kv 6 ITA No. 167 0/Hyd/20 13 Yarlag add a Srinivasa Ra o

Copy to:-

1) Shri Yarlagadda Srinivasa Rao, C/o Sri S. Rama Rao, Advocate, Flat No. 102, Shriya's Elegance, H.No. 3-6-643, St. No. 9, Himayatnagar, Hyderabad - 500 029.

2) ITO, Ward - 9(4), Hyderabad.

3) CIT-VI, Hyderabad

4) Addl. CIT, Range - 9, Hyderabad

5) The Departmental Representative, I.T.A.T., Hyderabad.