IN INCOME TAX APPELLATE TRIBUNAL, DELHI BENCH G NEW DELHI BEFORE : SHRI I.C. SUDHIR, JUDICIAL MEMBER & SHRI L.P. SAHU, ACCOUNTANT MEMBER ITA No. 2030/Del./2009 Asstt. Year : 2004-05 Scantec (India) Pvt. Ltd., vs. D.C.I.T., Circle, Dadri Road, P.O. Kuleshra, Noida. Greater Noida, Noida. (PAN: AAHCS 4330H) (Appellant) (Respondent) Appellant by : Sh. Yogesh K. Jagia, Advocate Respondent by : Sh. B. Ramanjaneyula, Sr. DR Date of hearing : 23.08.2016 Date of pronouncement : 16.09.2016 ORDER Per L.P. Sahu, Accountant Member: This is appeal filed by assessee against order of ld. CIT(A), Ghaziabad dated 17.02.2009 for assessment year 2004-05 on following grounds : 1. That in facts and circumstances of case and in law order passed by Ld. Commissioner of Income Tax (A), hereinafter referred as CIT(A) is in contravention to provisions of law and hence is void ab initio. 2. That in facts and circumstances of case and in law Ld. CIT(A) erred in upholding disallowance of Rs.10,47,507/- representing amount paid to sub contractors by treating them 2 ITA No.2030/Del./2009 bogus transactions based on assessment order passed for assessment year 2003-04. 3. That in facts and circumstances of case and in law Ld. CIT(A) erred in directing Ld. Assessing officer to rectify order passed for disallowance on account of alleged bogus transactions of Rs.10,47,507/-. 4. That in facts and circumstances of case and in law Ld. CIT(A) erred in upholding disallowance of wages claimed by appellant of Rs. 5 lac because of increase in claim of wages by 2.44% over previous year. 5. That in facts and circumstances of case and in law Ld. CIT(A) erred in observing that appellant failed to furnish any cogent materials/evidence to controvert finding of Assessing Officer. 2. brief facts of case are that assessee company is engaged in business of electro-mechanical and civil engineering contractor and carried out erection of Extra High Voltage Overhead transmission lines, installation of underground EHV power cables, Microbe and telecom towers, repair and maintenance of EHV transmission and distribution equipments for electrification. assessee filed its return of income, declaring total income of Rs.18,09,015/-. case was selected for scrutiny under compulsory scrutiny guidelines. assessee worked at different places. assessee has declared his turnover of Rs.6,26,98,140/- as against Rs.7,13,83,337/- of last year besides other income of Rs.2,10,252/- as against Rs.10,34,421/- of last year. Against these receipts, assessee has declared net profit of 3 ITA No.2030/Del./2009 Rs.71,82,906/- against profit of Rs.1,02,75,509/- in last year. assessee against said profit made provision for doubtful debts of Rs.11,34,395/- and declared net profit in P/L A/c Rs.60,48,511/-, though in computation assessee added back provisions of Rs.11,34,395/- beside other provision of gratuity/leave encashment and unpaid bonus etc totaling to Rs.12,56,793/-, but claimed bad debts of Rs.58,65,647/- for which provision was made in earlier year and declared net profit of Rs.16,56,296/- from business activities beside interest income of Rs.1,52,719/-. 3. During assessment proceedings, assessee was asked to produce books of account and other details. appellant produced books of account and details as required by Assessing Officer. From perusal of same, it is noticed by AO that assessee has got executed work at different sites directly as well as through sub-contractors. Under Head project expenses, appellant has shown wages of Rs.1,40,08,148/- and sub- contractors cost of Rs.1,04,45,540/- has been claimed in profit and loss account. He further noticed that assessee has incurred expenses through imprest accounts maintained by various persons/in-charge of sites and expenses are shown to have been incurred through cash though 4 ITA No.2030/Del./2009 payments to sub-contractors includes cheques/drafts also. He also noticed that assessee has shown sub-contract work from various parties which includes sub-contracts names, but were not got verified during course of assessment proceedings for assessment year 2003-04. AO issued show cause notice to assessee in respect of following five parties, which were not got verified in assessment proceedings for assessment year 2003-04. details of payments to five parties which has been added by AO are as under : S.No. Name of Opening Amount Total amt. Paid in cash Paid by party balance credited paid cheque/DD during year (1) (2) (3) (4) (5) (6) (7) 1. Jai Murti 103814 54608 145000 58000 87000 Construction 2. S. Soman 240280 70003 236000 86000 150000 3. R.K.Construction 53305 164851 187070 2000 185070 4. K.Greeshan Pillai 43731 38421 52152 27202 24950 5. Suresh Baby 102343 24950 46500 21500 25000 Sharma 4. ld. Assessing Officer disallowed total amounts as per column No. 5 of Rs.10,47,507/- in which opening balance was also included of Rs.3,52,833/- on ground that since all above five parties did not respond notice u/s. 133(6) in assessment proceedings for assessment year 2003-04, nor assessee could produce any confirmation 5 ITA No.2030/Del./2009 thereof, therefore, payments made to them was not genuine and verifiable during this year. 5. On scrutiny of wages payments, Assessing Officer noted that during year, sum of Rs.1,40,08,148/- has been incurred towards wages as against Rs.1,16,41,903/- in last year. He further noted that sum of Rs.1,04,45,540/- has been paid to sub-contractors. AO after comparing figures of previous year noted that overall expenses have been increased to extent 39% as compared to 36.56% in last year to total work executed in current year and last year respectively. These facts were also brought to notice of assessee and was confronted as to why payments made under this head, that too through imprest account of of site incharge who have made expenses in cash, should not be considered as expenses inflated under head wages to reduce tax incidence. assessee relied upon its reply. Considering reply of assessee and increase in wages, wages claimed by assessee inclusive of payments to sub-contractors of last year at 36.56% comes to Rs.2,29,22,442/- in ratio of last year s expenses. Therefore, taking into account expenses to subcontractors being unverifiable and payment made through imprest account as well as GP ratio declared better in 6 ITA No.2030/Del./2009 comparison to last year and extra expenses borne by assessee on account of insurance of project which is Rs.18,36,698/- in comparison to Rs.3,55,598/- in last year, overall addition in net profit besides addition against above parties was made at Rs.5,00,000/- which also covered excess expenditure of wages. Aggrieved by this order of AO, assessee appealed before first appellate authority who confirmed order of Assessing Officer. assessee is in appeal before ITAT. 6. ld. AR submitted that sub-contractors are genuine. They have done work with appellant for more than one year. They are raising bills and accordingly, assessee has made payment either by cash or cheques/DDs. Assessing Officer without issuing notice to parties, but on basis of last year, disallowed claim of expenditure on basis of conjectures and surmises. Even their closing balance for last year has been disallowed, which is contrary to law. ld. AO has made mathematical calculation and accordingly on average basis disallowed claim of wages without looking to facts of case and bills and vouchers submitted before him. If Assessing Officer had any doubt in payments of wages, he should have specified that which payment is not genuine, but he did not do so. assessee has executed work at different places. Therefore, 7 ITA No.2030/Del./2009 imprest account was sanctioned to in-charge of that site and out of that imprest account, he has paid labour expenses as and when required. During assessment year, there was total payment made for Rs.1,04,45,540/- to sub-contractors in which some of labour payments have also been included and TDS has been deducted from payments to sub-contractors. He submitted list of TDS deducted and payments made to sub-contractors before us. 7. ld. DR relied on order of lower authorities. 8. After hearing both parties and perused material available on record, we noted that ld. Assessing Officer has disallowed expenditure of Rs.10,47,507/- of contract work got done through above five parties. In above amount, sum of Rs.3,52,833/- is included of previous year. Assessing Officer has wrongly made addition on basis that all five parties were not found genuine in last year on issuing notices u/s. 133(6) and therefore, said parties cannot be said to be genuine in this year also. AO, however, did not make any investigation in year under consideration to verify genuineness of payments made to sub- contractors. Therefore, addition is not justified. appellant has placed 8 ITA No.2030/Del./2009 copies of bills raised by sub-contractors, copies of their ledger account, and Forms No. 16A issued to them. After going through above documents, we find that some of payments reflected in ledger account are made through DD and some of it through cash. Assessing Officer could have verified payments through banking channels, but he did not do so. He merely relied on order of previous year 2003-04 and disallowed payments made to contractors whereas every year is separate unit. Therefore, this ground of appeal is allowed. 9. In respect of estimated addition of Rs.5,00,000/- on account of wages payment, without any basis, he made simply mathematical calculation and compared current year s figures from previous year s figures, i.e., quantum of turnover and expenditure incurred and lump sum disallowance has been made of Rs.5 lacs. He did not examine any specific vouchers, bills, submitted before him and did not point out any defect in payment of wages. appellant has done works at different places and therefore, site in- charge has made payment to labourers and relevant vouchers were placed before Assessing Officer. Income-tax Act prohibits adhoc disallowance of expenditure as also held by Hon ble higher courts and by coordinate Benches of ITAT in several decisions. Unless AO points out that 9 ITA No.2030/Del./2009 particular expenditure is of disallowable nature, no disallowance could be made by AO on adhoc basis. Accordingly, this issue is decided in favour of assessee and this ground of appeal is allowed. 10. In result, appeal of assessee is allowed. Order pronounced in open court on 16.09.2016. Sd/- Sd/- (I.C. SUDHIR) (L.P. SAHU) Judicial Member Accountant Member Dated : 16.09.2016 aks/- Copy of order forwarded to: (1) appellant (2) respondent (3) Commissioner (4) CIT(A) (5) Departmental Representative (6) Guard File By order Assistant. Registrar Income Tax Appellate Tribunal Delhi Benches, New Delhi Scantec (India) Pvt. Ltd. v. D.C.I.T., Circle, Noida