IN INCOME TAX APPELLATE TRIBUNAL PUNE BENCH , PUNE BEFORE SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM ITA Nos.1592 to 1594/PN/2014 Assessment Years : 2003-04, 04-05 & 06-07 Pandhe Constructions Pvt. Appellant Ltd.,157, Railway Lines, Sushila Apartment, Solapur 431 001 PAN :AAACP9228Q v/s ACIT, Circle-1, Solapur Respondent ITA Nos.1949 to 1951/PN/2014 Assessment Years : 2007-08, 08-09 & 09-10 Pandhe Constructions Pvt. Appellant Ltd.,157, Railway Lines, Sushila Apartment, Solapur 431 001 PAN :AAACP9228Q v/s ACIT, Circle-1, Solapur espondent Appellant by : Shri Vipin Gujrathi Respondent by : Shri Suhas S.Kulkarni Date of Hearing :03.10.2016 Date of Pronouncement:07.10.2016 ORDER PER R.K.PANDA, AM : ITA Nos. 1592 to 1594/PN/2014 filed by assessee are directed against separate orders dated 12-06-2014 of CIT(A)- III, Pune relating to Assessment Years 2003-04, 2004-05 and 2006- 07 respectively. ITA Nos. 1949 to 1951/PN/2014 filed by assessee are directed against separate orders dated 14-07-2014 2 ITA Nos.1592 to 1594 & 1949 to 1951/PN/2014 of CIT(A)-III, Pune relating to Assessment Years 2007-08 2008-09 & 2009-10 respectively. For sake of convenience, all these appeals were heard together and are being disposed of by this common order : ITA No.1592/PN/2014 (A.Y. 2003-04) : 2. In Ground of appeal No.1 assessee has challenged order of CIT(A) in confirming disallowance of interest of Rs.10,40,369/- made by AO. 3. Facts of case, in brief, are that assessee is company engaged in business of Builder and Developer. It filed its return of income on 29-11-2003 declaring total income of Rs.6,55,250/-. During course of assessment proceedings AO observed from balance sheet and profit and loss account that assessee company has raised secured loans of Rs.7.54 crores and unsecured loans of Rs.0.45 crores and has debited amount of Rs.71,47,656/- as interest paid to banks and different parties. At same time, assessee company has advanced amount of Rs.3.5 crores to different persons including M/s. A.V. Pandhe, sister concern of assessee and relatives of Directors covered u/s.40A(2)(b) without any interest. He, therefore, asked assessee to explain as to why proportionate interest should not be disallowed as per provisions of section 36(1)(iii) of I.T. Act. It was explained by assessee that out of total advance made amount of Rs.43,41,040/- is in nature of trade advance. So far as amount of Rs.2,40,53,697/- appearing as advance due form M/s. A.V. Pandhe,sister concern of assessee is concerned, it was submitted that said account was in credit during major part of year 3 ITA Nos.1592 to 1594 & 1949 to 1951/PN/2014 and assessee had credited interest of Rs.2,10,594/- on such credit balance after deducting TDS of Rs.22,112/-. details of other advances on which no interest was charged was stated to be as under : Name of person Amount of advance Awanti Society B 2,79,868 Awanti Society C 6,00,000 Pandhe A.V. HUF 17,635 Son-Ankur Exports Pvt. Ltd. 17,20,000 M/s. A.V. Pande 11,18,034 (Shiv Stone) R.A. Pandhe 23,47,762 Total 60,83,299 4. It was argued that first set of advance aggregated to Rs.43,14,040/- was in nature of trade advances and same would be settled in regular course of business of company. As regards other advances amounting to Rs.60,83,299/- is concerned it was submitted that these were given out of own free funds available with assessee of Rs.508.97 lakhs as on 31-03-2003. It was accordingly argued that no borrowed funds were diverted for making interest free advances and same were utilized for purposes for which it was borrowed and interest free advances were out of own funds. It was accordingly argued that there is no justification in making any disallowance of interest u/s.36(1)(iii). 5. However, AO was not satisfied with explanation given by assessee. As regards claim of trade advances amounting to Rs.43.14 lakhs is concerned, AO noted that details furnished by assessee were cryptic and did not elaborate on nature of advances and were also not supported by any 4 ITA Nos.1592 to 1594 & 1949 to 1951/PN/2014 evidences. As per AO, assessee failed to prove that such advances were made out of commercial expediency. Similarly, it was noted by AO that out of other advances given, at least sum of Rs.69.35 lakhs were advanced to various persons without charging any interest and at least part of borrowed funds were utilized for making interest free advances. 6. AO also found that secured loans by assessee had gone up to Rs.7.54 crores in year as against Rs.3.99 crores in preceding year. Similarly, advances were also found to have gone upto Rs.3.25 crores in year from Rs.11 lakhs in preceding year. He noted that loan of Rs.2 crores made in OD account 79 had been utilized for purposes of making non-business advances. Highlighting that assessee had been charged interest @15% on advances made to its sister concern, M/s. A.V. Pandhe, AO held that there was no justification for assessee in not charging interest on other advances given, especially when it was paying huge interest on borrowings made. interest chargeable on such interest free advances given @15% was quantified by AO at Rs.10,40,369/- and same was added to income of assessee. 7. Before CIT(A) it was submitted that various borrowings made by assessee from banks were deployed in business of assessee and no part of it was diverted to make interest free advances and that major portion of advances in question were made in earlier years. assessee filed elaborate written submission detailing manner in which borrowings were made and position of advances given details of which are as under : 5 ITA Nos.1592 to 1594 & 1949 to 1951/PN/2014 Name of bank Type of Balance at Balance at facility/ end of Account beginning year No. of year Kavita Urban Coop. Bank OD 3 18,85,790 6,31,862 Manorama Urban Coop. Bank Hyp 71 1,80,84,898 3,07,89,653 Manorama Urban Coop. Bank OD 71 -- 95,15,375 Manorama Urban Coop. Bank OD 79 -- 2,00,00,050 Sahastrarjun Nagari Sahari Term Loan 64,22,090 22,16,425 Patsanstha Yashwant Kamgar Sahakari Hyp 166 49,99,442 49,08,403 Bank Ltd. 8. As regards loan from Kavita Urban Coop. OD 3 account and Sahastrarjun Nagari Sahakari Patsanstha Ltd. are concerned, it was submitted that there was repayment of Rs.12,53,928/- and Rs.42,05,665/- respectively. Hypothecation limit of Rs.50 lakhs from Yashwant Kangar Sahakri Bank Ltd. continued to be availed from last year. Thus, it was explained that there were no fresh borrowings in these loan accounts. Loan from Manorama Urban Coop. Bank OD 79 of Rs.200 lakhs was obtained on 31-03-2003, i.e. at end of year only and proceeds of loan were credited in Manorama Urban Coop. Bank Ltd. Hypothecation account 71. Similarly Loan of Rs.90 lakhs in Manorama Urban Coop. Bank OD account 71 was obtained in November 2002 and proceeds were deposited in Manorama Urban Coop. Bank Hypothecation 71 account only. limit in Manorama Urban Boop. Bank Hyp account 71 was increased from Rs.200 lakhs to Rs.300 lakhs during year under review. It was thus explained that fresh loans obtained during year under review were used for business purposes of assessee and there was no diversion of funds from these borrowings. 6 ITA Nos.1592 to 1594 & 1949 to 1951/PN/2014 9. assessee submitted that extracts of ledger account of these loan accounts and copies of statement of accounts from banks were produced before AO during course of assessment proceedings along with all other books of account. transactions appearing in these loan accounts reflect that loans were utilized for business purposes of assessee. Thus assessee had discharged its duty to prove that loans availed were utilized for purpose of business purposes and complied with decision in case reported in 61 ITR 480 (Madras). contention of AO that assessee company failed to prove that loans were utilized for business purposes is not factually correct and is not justified. Therefore there is no justification for disallowance of interest made by Addl.CIT. Since assessee company has complied with provisions clause (iii) of section 36(1) of I.T. Act, therefore, there is no justification for disallowance of interest of Rs.10,40,369/-. 10. assessee furnished details of advances made by company on which proportionate interest has been disallowed by AO which are as under : Name of person to Balance at Amount Amount Balance as at whom advances were start of advanced recovered/adjusted end of given year during during year year 01-04-2002 year 31-03-2003 Karampuri Dattatraya 8,50,000 0 0 8,50,000 M Kumar & Associates 0 5,00,000 0 5,00,000 Pvt. Ltd. Shah Fishery 4,00,000 0 0 4,00,000 Son-Ankur Exports Pvt. 17,35,000 10,000 25,000 17,20,000 Ltd. M/s. A.V. Pandhe Shiv 4,75,688 7,59,772 1,17,426 11,18,034 Stone Crusher Pandhe R.A. 22,81,500 2,33,062 1,66,800 23,47,762 Total 57,42,188 15,02,834 3,09,226 69,35,796 11. It was argued that major portion of advance of Rs.57,42,188/- is made in earlier years. During year under review, only Rs.15,02,834/- are paid and Rs.3,09,226/- are 7 ITA Nos.1592 to 1594 & 1949 to 1951/PN/2014 recovered. balance outstanding at end of year is only Rs.69,35,796/-. It was stated that loans availed from banks stated above show that these were availed from bank in earlier period and were continued to be availed during year under consideration. Interest on these loans were allowed in earlier years and there was no disallowance of interest in any of earlier years. This clearly proves that there is no nexus between funds borrowed on interest and advances made by assessee. Relying on various decisions it was submitted that there is no justification for any disallowance of interest. 12. So far as amount of Rs.2.40 crores advanced to M/s. A.V. Pandhe, sister concern is concerned, it was argued that balance in this account was almost credited during year and day to day working of interest @15% per annum resulted into interest payable to them at Rs.2,10,594/- which is accepted by AO and there is no disallowance on this account. So far as advances given to 6 parties on account of which interest is sought to be disallowed is concerned assessee gave following details : Sr. Name of person to Balance as at Purpose for which No. whom advances were end of advances were given given year 31-03-2003 1 Karampuri Dattatraya 850000 Purchase of property, deal being not materialised 2 M Kumar & Associates 5,00,000 Against project fees Pvt. Ltd. 3 Shah Fishery 4,00,000 Fees for project 4 M/s. A.V. Pandhe Shiv 11,18,034 Advance for stone metal Stone Crusher during year material purchased Rs.21,57,244 in separate purchase account 5 Son-Ankur Exports Pvt. 17,20,000 Advances from last year Ltd. 6 Pandhe R.A. 23,47,762 Advances from last year Total 69,35,796 8 ITA Nos.1592 to 1594 & 1949 to 1951/PN/2014 13. It was argued that out of above 6 parties Party Nos. 1 to 3 are not falling within definition of specified persons and are total outsiders. Further, advances related to Party Nos. 1 to 4 were strictly for purposes of business. total of amount is Rs.28,68,034/- and disallowance of interest on these advances is not at all justified. It was argued that since own funds of company are much in excess of amounts advanced, therefore, there is no justification for any disallowance. 14. However, CIT(A) was also not satisfied with explanation given by assessee. He observed that out of interest free advances given of Rs.69,35 lakhs, major advance of Rs.23,47,762/- was given to Smt. R.A. Pandhe, wife of Shri Anil Pandhe, Director of assessee company. Though assessee argued that impugned advance was given during regular course of business it remains to be mere assertion as no documentary evidences were furnished either during assessment proceedings or in present proceedings to back such claim. It is also not clear what were circumstances which justified parting of with huge amount in favour of wife of director of company nor what was business interest served by assessee in giving such loan on which no interest is charged. 15. As regards other advances are concerned Ld.CIT(A) noted that claim that such advances were given towards on account payments to M/s Son-Ankur Exports Pvt. Ltd. amounting to Rs. 17,20,000/- and M/s. A.V. Pandhe (Shiv Stone) is not backed by any statement as to why substantial sums of money were advanced to sister concerns and what was business 9 ITA Nos.1592 to 1594 & 1949 to 1951/PN/2014 purpose. Similarly claim that advances were made towards purchase of land remains unsubstantiated in absence of relevant details such as copy of agreements if any, details of land etc. In such circumstances, claim that advances in question were given out of commercial expediency lacks substance. Further, it has already been established by AO that many of loans and borrowings from bank has been utilized in earlier years for making non-business advances. On other hand, it is seen that assessee has made substantial borrowings from its sister concern, M/s. A.V. Pandhe, on which it has been paying interest at 15%. Nothing has been brought on record to establish that there was no nexus between advances made and borrowings made. Had money been not advanced to sister concerns, it would have been available to assessee for its business purposes and to that extent, it may not have been necessary for assessee to borrow funds from banks/financial institutions, thereby reducing assessee s outgo on account interest liability on borrowings made. On face of failure of assessee in establishing any business expediency in advancing amounts in question on which no interest was charged, corresponding interest expenditure claimed on borrowings to such extent cannot be allowed as deduction in view of provisions of section 36(1)(iii) of I.T. Act. Relying on various decisions he held that there was no apparent commercial expediency in making interest free advances to wife of Director as well as to other parties. 10 ITA Nos.1592 to 1594 & 1949 to 1951/PN/2014 16. So far as decision of Hon ble Bombay High Court in case of Reliance Utilities and Power Ltd. reported in 313 ITR 340 is concerned he observed that Hon ble Bombay High court did not admit or adjudicate issue relating to commercial expediency raised before it by revenue since counsel for revenue did not press this issue at time of hearing. Rejecting various explanations given by assessee and distinguishing various decisions relied before him Ld.CIT(A) upheld disallowance of Rs.10,40,369/- made by AO. 17. Aggrieved with such order of CIT(A) assessee is in appeal before us. 18. Ld. Counsel for assessee filed following chart to show that non-interest bearing/surplus funds are available for giving interest free advances to sister concerns and different parties : Statement showing Non Interest Bearing Funds Available & Interest Free Advances & Surplus Funds Sr Particulars AY 02-03 AY 03-04 AY 04-05 AY 05-06 AY 06-07 AY 07-08 AY 08-09 AY 09-10 Shareholders Fund Paid up share Capital 20000 450000 450000 5000000 5000000 5000000 5000000 5000000 Share Application money 1710000 1280000 1280000 0 0 0 0 0 General Reserve 45000 45000 45000 45000 45000 45000 45000 45000 Profit and Loss A/c 1434669 15044924 33744663 61076555 83349267 103621863 138990378 171987122 Sub-total 3209669 16819924 35519663 66121555 88394267 108666863 144035378 177032122 B Non Interest bearing advances received from Deposit from Directors 5260669 4444793 3544793 3544793 0 0 0 0 Sub-total B 5260669 4444793 3544793 3544793 0 0 0 0 Total Non interest bearing C 8470338 21264717 39064456 69666348 88394267 108666863 144035378 177032122 funds + B D Less Non interest bearing advances given to A) Trade Advances 2486670 4314040 7346562 0 2450000 2450000 0 0 B) Non Trade Advances 2614870 6083301 7978215 0 8218222 7247578 0 0 Sub-total D 5101540 10397341 15324777 0 10668222 9697578 0 0 Surplus of Non Interest E 3368798 10867376 23739679 69666348 77726045 98969285 144035378 177032122 bearing funds (C-D) 11 ITA Nos.1592 to 1594 & 1949 to 1951/PN/2014 19. Referring to above chart he submitted that sufficient interest free funds are available to give interest free advances. Referring to decision of Hon ble Bombay High Court in case of Reliance Utilities and Power Ltd. reported in 313 ITR 340 and decision of Pune Bench of Tribunal in case of A.V. Pandhe Vs. ACIT vide ITA No.937/PN/2014 and bunch of other appeals order dated 15-04-2016 he submitted that under identical facts and circumstances Tribunal has deleted disallowance of interest. He submitted that Tribunal vide ITA No.936/PN/2014 order dated 28-10-2015 in case of A.V. Pandhe Vs. ACIT has also deleted such disallowance of interests u/s.36(1)(iii). He accordingly submitted that this being covered matter ground raised by assessee should be allowed. 20. Ld. Departmental Representative on other hand heavily relied on order of CIT(A). He submitted that Ld.CIT(A) while adjudicating issue has given valid reasons for confirming disallowance of interest made by AO. assessee could not justify commercial expediency of giving such interest free loans out of interest bearing funds. He also relied on decision of Pune Bench of Tribunal in case of M/s. Nimbkar Seeds Pvt. Ltd. Vs. DCIT vide ITA No.1458/PN/2011 order dated 29-11-2013 and submitted that Tribunal at Para 10.3 of order has given certain observations which is relevant for adjudicating this case. 21. Referring to para 10.3 of above order cited (Supra) Ld. Departmental Representative submitted that Tribunal in said decision has not accepted argument of assessee that it has sufficient interest free funds and therefore in view of decision of 12 ITA Nos.1592 to 1594 & 1949 to 1951/PN/2014 Hon ble Bombay High Court in case of Reliance Utilities and Power Ltd. (Supra) no disallowance should be made. It was observed that assessee has not proved nature of commercial expediency as to how money has been utilized by said company. It was accordingly held in aforementioned decision that decision relied on by Ld. Counsel for assessee is distinguishable and not applicable to facts of present case. He accordingly submitted that order of CIT(A) be upheld. 22. We have considered rival arguments made by both sides, perused orders of AO and CIT(A) and paper book filed on behalf of assessee. We have also considered various decisions cited before us. We find AO disallowed amount of Rs.10,40,369/- u/s.36(1)(iii) on ground that assessee has given interest free loans to sister concerns and related parties out of interest bearing funds and assessee could not justify for not charging any interest on advances given. We find Ld.CIT(A) upheld action of AO on ground that assessee could not explain commercial expediency of giving such interest free advances out of interest bearing funds. 23. So far as reliance on decision of Hon ble Bombay High Court in case of Reliance Utilities and Power Ltd. reported in 313 ITR 340 is concerned Ld.CIT(A) observed that Hon ble Bombay High Court did not adjudicate issue relating to commercial expediency as revenue did not press this issue at time of hearing. It is submission of Ld. Counsel for assessee that it had sufficient interest free advances available with it for making interest free advances. Further in case of sister 13 ITA Nos.1592 to 1594 & 1949 to 1951/PN/2014 concern of assessee Tribunal has already deleted such disallowance of interest. Therefore, no disallowance is called for. 24. We find merit in above argument of Ld. Counsel for assessee. From chart filed by assessee which has already been reproduced in preceding paragraphs we find assessee had sufficient interest free funds available with it at beginning of year. Apart from this assessee has also earned sufficient profit during year. We find in case of A.V. Pandhe vide ITA No.937/PN/2014 order dated 15-04-2016 identical issue had come up wherein AO made disallowance of Rs.18,91,108/- being interest attributable to interest free advances given to sister concerns. CIT(A) confirmed addition. On further appeal by assessee Tribunal decided issue in favour of assessee by observing as under : 8. Ground No.4 concerns disallowance of interest of Rs.18,91,108/- being interest attributable to advance given to sister concerns. 8.1 Shri Vipin Gujarathi, Ld. Authorized Representative for assessee submitted that assessee has interest free funds in form of capital contribution of partners and interest free loans of Rs.307.72 lacs at its disposal as against interest free advances given Rs.128.55 lacs which includes advances to M/s Son Ankur Exports Pvt. Ltd. Rs.111.91 lacs and other advances Rs.16.64 lacs. He adverted our attention to tabular statement showing interest free funds available at disposal of assessee and interest free advances made as appearing on page 1 of Paper Book concerning all years in appeal. consolidated tabular statement is reproduced hereunder :- ----- ... _.-- _- ----- .. _ ..... _-- - -_ .. _- -- .. . Year ended Year ended Year ended Year ended Year ended Year ended Year ended Year ended Year ended 31.03.2001 31.03.2002 31.03.2003 31 03.2004 31.03.2005 31.03.2006 31.03.2007 31.03.2008 31.03.2009 Partner's Capital 22990718 30514262 35931013 44569250 39762364 38790244 43080055 125730198 266870793 B Non Interest bearing advances received from Pandhe Construction Pvt Ltd 3689779 0 0 0 0 0 0 0 0 Pandhe RA 79425 79425 0 0 0 0 0 0 0 Pandhe V Individual 0 0 0 0 5880938 0 0 0 0 Deposit from Tenant 178875 178875 178875 178875 178875 178875 178875 178875 262875 Interest free Unsecured loans 0 0 0 0 0 0 0 0 0 Sub-total B 3948079 258300 178875 178875 6059813 178875 178875 178875 262875 14 ITA Nos.1592 to 1594 & 1949 to 1951/PN/2014 C Total Non interest bearing funds A+ B 26938797 30772562 36109888 44748125 45822177 38969119 43258930 125909073 267133668 D Less Non interest bearing advances given to Son-Ankur Exports Pvt Ltd 10152244 11191500 14373680 15010664 15605372 9910155 1620155 1620155 1620155 Pandhe V HUF 1611584 1664223 1685443 5071393 71529 24141 120214 612442 749258 Pandhe V Individual 0 0 0 0 0 1944436 5854851 0 0 Pandhe RA 605538 0 0 0 0 0 0 0 0 Other Advances 2706376 2706376 2319244 2319244 2319244 2264244 Sub-total D 12369366 12855723 16059123 22788433 18383277 14197976 9914464 4551841 4633657 E Surplus of Non Interest bearing funds (C-D 14569431 17916839 20050765 21959692 27438900 24771143 33344466 121357232 262500011 8.2 Ld. Authorized Representative for assessee submitted that in view of fact that assessee possessed sufficient interest free funds of its own comprising of partner s capital and other funds, presumption stands established in favour of assessee that interest free advances to sister concerns were made by assessee out of interest free funds available with it. Therefore, no part of interest of borrowings can be disallowed on basis that interest free advances were given out of interest bearing funds. 8.3 We find on facts that issue is squarely covered by decision of Hon ble Bombay High Court in case of CIT vs. Reliance Utilities & Power Ltd., (2009) 313 ITR 340 (Bom). We also find that Pune Bench of Tribunal in assessee s own case in ITA No.936/PN/2014 relating to assessment year 2001-02, order dated 28.10.2015 had occasion to deal with identical issue and has decided issue in favour of assessee. Following same, we find merit in claim of assessee. 8.4 In result, Ground No.4 is of assessee s appeal is allowed. 25. Since in instant case also admittedly assessee has sufficient own funds and free reserves, fact brought before AO and CIT(A) and not controverted by either of them, therefore, respectfully following decision of Tribunal in sister concern we hold that no disallowance u/s.36(1)(iii) is called for under facts and circumstances of case. We accordingly set aside order of CIT(A) and allow ground raised by assessee on this issue. 26. Identical grounds have been taken by assessee for A.Yrs. 2004-05, 2006-07 and 2007-08, details of disallowances made are given below : 15 ITA Nos.1592 to 1594 & 1949 to 1951/PN/2014 ITA No. Asst. Year Disallowance ITA No.1593/PN/2014 2004-05 21,45,469/- ITA No.1594/PN/2014 2006-07 16,00,233/- ITA No.1949/ON/2014 2007-08 14,60,902/- 27. Following our reasonings given above grounds raised by assessee on this issue for above assessment years are also allowed. 28. In ground of appeal No.2 assessee has challenged order of CIT(A) in confirming disallowance of Rs.15,86,000/- out of disallowance of Rs.31,72,304/- made by AO out of Manpwoer/Labour charges. 29. Facts of case, in brief, are that AO on scrutiny of trading account submitted by assessee noted that assessee had claimed expenditure of Rs.3,17,23,043/- on account of wages. Further, assessee has also claimed amount of Rs.4,89,22,470/- for material purchases. Thus, amount of wages works out to 65% of material consumed which according to AO is on higher side. He, therefore, asked assessee to justify manpower expenses incurred by it. 30. assessee submitted that due to different types of bulk quantity work is done speedily at lower cost of labour at Bidi Gharkul whereas on other sites speed of completion changes for each job. Due to research and development, cost of labour has been reduced substantially. Further, cost of material and sand is reduced as assessee is having its own quarry and crusher and it has also obtained auction of sand at river with only transportation cost. However, from bills and vouchers, 16 ITA Nos.1592 to 1594 & 1949 to 1951/PN/2014 muster registers etc maintained for purpose of labour payment AO noted that there are number of deficiencies, i.e. name of site, nature of work, period of work, when work is done, actual measurement of work etc. These vital points are missing. Further, signatures of different persons in muster have been made by same person only. registers as well as vouchers do not give full and correct picture of wages. AO further held that assessee might have made unaccounted purchases to escape some other liability like sales tax. Considering all these aspects and explanation submitted by assessee AO held that expenditure claimed by assessee is not commensurate with material consumed. He, therefore, disallowed 10% of labour charges of such expenses and thereby made disallowance of Rs.31,72,304/-. 31. Before CIT(A) assessee gave break up of manpower expenses which is reproduced by CIT(A) at para 16 of his order. It was submitted that cost of labour to cost of material cannot be standard in statistical method or percentage for particular period. general number of labour involvement may be ranging within 25% to 40% but same cannot be applied to each and every case. hard and fast ratio will always give absurd result if facts are not apprised properly. type of construction in which assessee company is engaged consists B and C class building that too proportion of C class building is very high as compared to B class, where costly materials are rarely used. Therefore, cost of material is low and cost of labour as compared with material cost is high. In view of large site for constructing 10,000 dwelling units assessee has made its own arrangement of 17 ITA Nos.1592 to 1594 & 1949 to 1951/PN/2014 transport of material and sand. Therefore, cost of transportation is increased whereas cost of material is reduced. If sand and stone is purchased from market it will include cost of transport. In such cases cost of metal and sand is very low but cost of transportation is very high. Assessee company has produced all records including payment vouchers for labour cost. labour expenses were incurred and paid by site incharge after verifying attendance, type and quantity of work done and by applying predetermined rates. technical persons further verified these expenses at head office and upon such verification and approval payments were made and recorded in books, verified and approved vouchers duly support all expenses. tax at source is duly deducted and paid wherever applicable. 32. It was submitted that observation of AO that labour expenditure claimed by assessee is not commensurate with cost of material is without apprising properly technical details. It was accordingly argued that disallowance of expenditure of Rs.31,72,304/- is unjustified and arbitrary and should be deleted. 33. Based on arguments advanced by assessee Ld.CIT(A) restricted such disallowance to 50% by observing as under: 3.3 submissions of appellant are carefully examined with reference to facts of case and material available on record. addition has been made by Assessing Officer, primarily on basis of observation that manpower expenses claimed by appellant was in gross disproportion to expenses claimed on material consumed and that many of corresponding vouchers maintained are found to be defective. justification being given by appellant for higher cost of labour is that during year, it was engaged in mega 18 ITA Nos.1592 to 1594 & 1949 to 1951/PN/2014 housing project, namely, Bidi Gharkul consisting of about 10,000 tenements which was more or less labour intensive project inasmuch as most of construction material required i.e. bricks, door & window frames and other similar parts were being manufactured by appellant itself using labour. It is also being contended that basic raw material like sand, metal and other construction material could be obtained at cheaper rates due to captive production or bulk purchase. appellant stated that due to above factors, there was higher expenditure on labour compared to material cost. 3.3.1 argument being advanced by appellant, through appealing, is far from convincing. major project in respect of which major part of expenditure claimed is said to be attributable, namely, Bidi Gharkul is held to be eligible for deduction u/s.80IB(10). break up of gross profit earned by appellant from different projects are stated to be as under : Bidi Gharkul Project Other sites Overall position 19.82% 12.97% 13.84% Thus, it is not case of mere increase in proportion of labour expenses over material cost but overall profit ratio is also much higher in Bidi Gharkul project vis-a-vis other projects. Admittedly, Bidi Gharkul project is Government sponsored project and construction is subject to several criteria, rules and regulations. selling price of each tenement constructed under scheme is fixed at Rs.60,000/- and by appellant's own admission, it is expected to earn only minimum amount of profit out of project. However, as noted above, appellant has shown gross profit of 19.82% in said project, which is substantially higher than profit percentage shown for other projects. Though appellant has given scores of reasons for relatively less expenditure incurred on account of material. for Bidi Gharkul project, like using of cheap material, manufacturing of cement blocks in on its own, use of sand from captive sites etc., still it does not justify higher percentage of profit shown in Bidi Gharkul scheme, given low margin due to constraints in selling price. Further, there is no logic in argument that raw material from captive sources like sand, metal etc. were being used only for Bidi Gharkul project and not anywhere else. There is nothing on record to suggest that all such captive material were being used for above particular sites only and same were not being used in other sites also. All these factors, coupled with fact that profit percentage in 80IB(10) eligible project clearly indicate that there has been attempt to shift expenditure is how much quantum of expenditure on labour manpower could be said to be loaded on to non-eligible projects. 3.3.2 other reason cited by Assessing Officer for making disallowance is regarding evidentiary value of document maintained in support of expenditure claimed. Most of such documentary evidences are self made vouchers on which signature of recipients is obtained. expenses furnished by appellant shows that out of total expenditure claimed of Rs.3,17,23,043/-, major portion amounting to Rs.2,47,16,716/- have been paid to sub- contractors which is by and large not disputed by Assessing Officer. Thus, flaws pointed out by Assessing Officer can be logically assumed to be confined to only portion of expenditure, mainly 19 ITA Nos.1592 to 1594 & 1949 to 1951/PN/2014 relating to other non-eligible projects of appellant. Therefore, disallowance made by Assessing Officer at 10% of manpower expenses claimed by appellant is on higher side and same needs to be suitably reduced. 3.3.3 Considering various aspects discussed above and having considered totality of facts and circumstances of case, I am of considered view that it would be fair and reasonable, if quantum of disallowance made by Assessing Officer is. restricted to 50% of amount disallowed. Accordingly, disallowance is restricted to Rs.15,86,000/- as against Rs.31,72,3034/- made by Assessing Officer. appellant gets consequential relief of Rs.15,86,304/-. 34. Aggrieved with such order of CIT(A) assessee is in appeal before us. 35. Ld. Counsel for assessee submitted that disallowance has been made by AO on ground that labour payments are excessive as compared to material purchased and there are discrepancies in maintenance of vouchers and registers. He submitted that since major portion of Rs.2,47,16,716/- is paid to sub-contractors and same is not disputed either by AO or CIT(A), therefore, disallowance can be made only out of balance amount of Rs.70,07,327/-. He submitted that confirmation of disallowance of Rs.15,86,304/- amounts to 22.46% of balance labour expenses which is not only high but exorbitant. He accordingly submitted that disallowance, if any, may be restricted with reference to Rs.70,06,327/- only. He further submitted that expenditure incurred out of Rs.70,06,327/- is on 80IB(10) project. 36. Ld. Departmental Representative on other hand heavily relied on order of CIT(A). 20 ITA Nos.1592 to 1594 & 1949 to 1951/PN/2014 37. We have considered rival arguments made by both sides, perused orders of AO and CIT(A) and paper book filed on behalf of assessee. We find AO made disallowance of Rs.31,72,304/- being 10% of total labour expenses of Rs.3,17,23,043/- on ground (a) that labour expenses claimed are on higher side as compared to material consumed. (b) material consumption of Rs.4.89 crores and labour expenses of Rs.3.17 crores forms 65% of material consumption (c) number of deficiencies in vouchers as well as registers and (d) assessee might have made unaccounted purchases to escape liability to sales tax. We find Ld.CIT(A) restricted such disallowance to 50% of disallowance made by AO. It is submission of Ld. Counsel for assessee that since amount of Rs.2,47,16,716/- has been paid to sub-contractors out of labour expenses of Rs.3,17,23,043/- and since sub-contract expenses have not been doubted by AO or CIT(A), therefore, disallowance on adhoc basis on whole of labour expenses is uncalled for and unjustified. 38. We find merit in above submission of Ld. Counsel for assessee. Since amount of Rs.2,47,16,716/- has been paid to sub contractors, statement made by Ld. Counsel for assessee at bar and not controverted by Ld. Departmental Representative, therefore, we find merit in submission of Ld. Counsel for assessee that disallowance, if any, can be made out of balance of Rs.70,06,327/- which contain number of deficiencies. Since disallowance of Rs.15,86,304/- amounts to 22.46% of balance labour expenses of Rs.70,07,327/- which in our opinion is on higher side, therefore, considering totality 21 ITA Nos.1592 to 1594 & 1949 to 1951/PN/2014 of facts of case, we are of considered opinion that disallowance of Rs.10 lakhs on adhoc basis out of balance amount of Rs.70,06,327/- will meet ends of justice. We hold and direct accordingly. Ground of appeal No.2 by assessee is accordingly partly allowed. 39. assessee has also raised two additional grounds for A.Yrs. 2003-04 and 2004-05. However, Ld. Counsel for assessee at time of hearing did not press these additional grounds for which Ld. Departmental Representative has no objection. Accordingly, additional grounds raised by assessee for A.Yrs.2003-04 and 2004-05 are dismissed as not pressed . 40. second issue raised by assessee in ITA No.1593/PN/2014 for A.Y. 2004-05 relates to order of CIT(A) in partly sustaining disallowance of labour payments. 41. After hearing both sides, we find AO made disallowance of Rs.8,41,334/- being 20% of labour charges of Rs.42,06,771/- relating to other sites on ground that assessee has claimed labour payment of Rs.220 lakhs as against material purchased of Rs.361 lakhs which comes to 61% of material consumed. Further, there is massive fall in gross profit ratio as compared to gross profit of 13.3% for A.Y. 2003-04. We find Ld.CIT(A) noted that labour payments of other sites are Rs.76.61 lakhs and accordingly he reduced disallowance to 10% of labour payments of other sites. It is submission of Ld. Counsel for assessee that labour expenses amount to 30 to 35% of total cost of construction. total cost of construction is Rs.13,391 lakhs against which labour expenses are about Rs.220 lakhs. Therefore, 22 ITA Nos.1592 to 1594 & 1949 to 1951/PN/2014 labour expenses are 16% and not 61% as stated by AO. Further, it is also his submission that comparison of labour payments with material consumption is incorrect and disallowance of 20% was very high. Even though Ld.CIT(A) has restricted such disallowance to 10% he submitted that same is also very high. 42. It is submission of Ld. Departmental Representative that CIT(A) has already reduced disallowance to 10% of expenses. Therefore, no further relief is called for. 43. After hearing both sides, we find AO disallowed amount of Rs.8,41,335/- being 20% of labour expenses/manpower expenses in respect of other sites. We find Ld.CIT(A) has already restricted such disallowance to 10% which under facts and circumstances of case is proper and justified. Since Ld.CIT(A) has already given substantial relief to assessee on this issue by sustaining amount of Rs.4,20,677/- only, therefore, we find no infirmity in order of CIT(A). Accordingly, same is upheld and ground raised by assessee on this issue is dismissed. 44. third issue by assessee in grounds of appeal for ITA No.1593/PN/2014 for A.Y. 2004-05 relates to order of CIT(A) in confirming addition of Rs.35,992/- made on account of belated payment of employees contribution to PF. 45. Facts of case, in brief, are that AO made disallowance of Rs.50,656/- u/s.36(1)(va) r.w.s. 2(24)(x) of I.T. Act being belated payment of employees contribution of PF. Before CIT(A) it 23 ITA Nos.1592 to 1594 & 1949 to 1951/PN/2014 was submitted that assessee was under bonafide belied that there is no delay. However, in opinion of auditor there was delay in payments and therefore auditor reported delay in audit report u/s.44AB of Act. Relying on various decisions it was submitted that contribution to PF, ESI etc., even if paid belatedly but paid before due date of filing of return of income is allowable as deduction. It was further submitted that provisions of section 43B have overriding effect and even if disallowance u/s.2(24)(x) r.w.s. 36(1)(va) is presumed to be correct still assessee is eligible for deduction for PF payments made before due date of filing of return in terms of provisions of section 43B of I.T. Act. 46. However, CIT(A) was not fully satisfied with arguments advanced by assessee. Relying on decision of Hon ble Gujarat High Court in case of Gujarat State Road Corporation Vide Tax Appeal No.637/2013 and bunch of other appeals order dated 26-12-2013 he held that belated payment of employees contribution to PF amounting to Rs.35,992/- is income of assessee u/s.2(24)(x) r.w. Explanation to section 36(1) (va) of Act. He, however, deleted amount of Rs.14,664/- being portion of employer s contribution to PF and ESI. 47. Aggrieved with such order of CIT(A) assessee is in appeal before us. 48. After hearing both sides, we find issue stands decided in favour of assessee by decision of Hon ble Bombay High Court in case of CIT Vs. Ghatge Patil Transports Ltd. reported in 368 ITR 749 where it has been held that deduction for payment of employees contribution cannot be disallowed in case of contribution 24 ITA Nos.1592 to 1594 & 1949 to 1951/PN/2014 to employees welfare funds stood paid on or before due date of filing of return. Since admittedly in instant case employees contribution to PF and ESI have been deposited before due date of filing of return, therefore, following decision of Hon ble jurisdictional High Court in case of Ghatge Patil Transports Ltd. (Supra) order of CIT(A) is set aside and ground raised by assessee is allowed. 49. So far as grounds of appeal No. 1 & 2 in ITA No.1594/PN/2014 for A.Y. 2006-07 are concerned Ld. Counsel for assessee did not press grounds of appeal No.1 and 2 for which Ld. Departmental Representative has no objection. Accordingly, above grounds are dismissed as not pressed . 50. So far as grounds of appeal No.3 is concerned, same relates to disallowance of interest u/s.36(1)(iii) amounting to Rs.16,00,233/-. same has already been adjudicated while deciding ground of appeal No. 1 in ITA No.1592/PN/2014 at Para 20 of this order. Following same reasoning, this ground by assessee is allowed. 51. Now coming to grounds of appeal No. 4 which relates to disallowance of Rs.5,67,768/- out of manpower/labour payment, we find AO disallowed amount of Rs.5,68,768/- on account of manpower expenses being 2% of expenses of Rs.2,84,38,411/-. In appeal Ld.CIT(A) sustained addition made by AO. It is case of Ld. Counsel for assessee that no discrepancies have been noticed by AO in vouchers or registers maintained and payments to contractors of Rs.2,51,94,130/- are fully verifiable. According to him, if there could be any issue that is with 25 ITA Nos.1592 to 1594 & 1949 to 1951/PN/2014 respect to departmental labour of Rs.32,44,281/-. Therefore, disallowance is about 17.33% which is very high. 52. After considering totality of facts of case, we are of considered opinion that disallowance of Rs.5,67,768/- appears to be on higher side. Therefore, following reasons given while deciding ITA No.1592/PN/2014 we are of considered opinion that disallowance of Rs.3 lakhs on estimate will meet ends of justice. We hold and direct accordingly. This ground by assessee is accordingly partly allowed. 53. So far as ITA No.1949/PN/2014 for A.Y. 2007-08 is concerned, first ground relates to disallowance of interest of Rs.14,60,902/- which has already been decided along with ITA No.1592/PN/2014 for A.Y. 2003-04. 54. So far as second ground is concerned same relates to order of CIT(A) in confirming disallowance of Rs.3,80,804/- out of manpower/labour payments. 55. After hearing both sides, we find AO made disallowance of Rs.3,80,808/- being 2% of labour expenses of Rs.1,90,40,425/- on ground that such expenses are on higher side which has been upheld by CIT(A). Following our reasons given in preceding paragraphs, we are of considered opinion that disallowance of Rs.2 lakhs on adhoc basis will meet ends of justice. We hold and direct accordingly. This ground by assessee is accordingly partly allowed. 26 ITA Nos.1592 to 1594 & 1949 to 1951/PN/2014 56. So far as grounds of appeal in ITA Nos. 1950/PN/2014 and 1951/PN/2014 for A.Yrs. 2008-09 and 2009-10 are concerned Ld. Counsel for assessee did not press grounds raised by assessee because of smallness of amount for which Ld. Departmental has no objection. Accordingly, grounds raised by assessee for above appeals are dismissed as not pressed . 57. In result, ITA Nos. 1592 to 1594/PN/2014 and ITA No.1949/PN/2014 are partly allowed. ITA No. 1950/PN/2014 and ITA No.1951/PN/2014 are dismissed. Order pronounced in open court on 07-10-2016. Sd/- Sd/- (VIKAS AWASTHY) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER Pune; " Dated : 07th October, 2016. Copy of Order forwarded to : 1. Appellant 2. Respondent 3. CIT(A)-III, Pune 4. CIT-III, Pune DR, 5. ITAT, Pune; 5. Guard file. BY ORDER, //True Copy // ( Sr. Private Secretary ( ITAT, Pune Pandhe Constructions Pvt. Ltd. v. ACIT, Circle-1, Solapur