I.T.A.No.19/KOL/2015 Assessment year: 2010-2011 Page 1 of 8 IN INCOME TAX APPELLATE TRIBUNAL, KOLKATA A(SMC) BENCH, KOLKATA Before Shri P.M. Jagtap, Accountant Member I.T .A. No. 19/KOL / 2015 Assessment Year: 2010-2011 M/s. Royal Mittal, Appellant 18, R.N. Mukherjee Road, 6 t h Floor, Kolkata-700 001 [PAN: AAAAR 6857 P] -Vs.- Income Tax Officer, .Respondent Ward-36(1 ), Kolkata, Aayakar Bhawan, Po orva, 110, Shanti Palli, E. M. By-Pass, Kolkata-700 107 Appearances by: Shri S.M. Surana, Advocate, for assessee Shri A.K. Singh, JCIT, D.R., for Department Date of concluding th e hearing : Au gust 10, 2016 Date of pronouncing order : October 21, 2016 O R D E R This appeal filed by assessee is directed against order of ld. Commissioner of Income Tax (Appeals)-XX, Kolkata dated 25.07.2014 and solitary issue arising out of same relates to addition of Rs.16,59,316/- made by Assessing Officer and confirmed by ld. CIT(Appeals) on account of disallowance of expenses claimed by assessee on salary. 2. assessee in present case is A.O.P., which is engaged in business as Railway Contractor. return of income for year under consideration was filed by it on 19.08.2010 declaring total income I . T. . N o. 1 9 / KO L . / 2 0 1 5 Assessment year: 2010-2011 Page 2 of 8 of Rs.4,74,190/-. In Profit & Loss Account filed along with said return, sum of Rs.16,59,316/- was debited by assessee on account of salary expenses. During course of assessment proceedings, following submissions were made by assessee in support of its claim for salary expenses:- In respect of employees employed by us we are enclosing salary sheet of payments month wise, statutory deduction were not applicable as per salary scale given by us further there is no applicability of professional tax in Jharkhand. Regarding appointment letters, Bio data etc since project is complete relevant file records and other documents were shifted from site office to temporary place and therefore not readily available, we will provide same in due course. We are also enclosing details of employees who have continued in our JV in financial year 2010- 11.' In respect of your query regarding employment of 17 odd nos. of persons we have employed 15 supervisors because one out of Seventeen is accountant and other computer operator. employment of supervisor or other staff are necessary in views of clause no. 13 of agreement between Royal Mittal JV and M/s Royal Infra Constru wherein it is stipulated that in case progress of work or quality thereof is not upto mark then Royal Mittal JV will have right to take over work in as where is condition within ten days of notice". With such stipulation in contract where time is essence of project if it is not supervised properly and in case project got delayed then we as contractor would suffer losses due to cancellation of contractor severe pecuniary penalties, which will affect not only this project but all future prospects with railways . above submission made by assessee was not found acceptable by Assessing Officer and rejecting same, he proceeded to disallow salary expenses claimed by assessee mainly for following reasons given in assessment order:- 1. assessee has discussed only non-applicability of professional tax in Jharkhand. But it has escaped to ex lain reason(s) for non-deduction of employees' and I . T. . N o. 1 9 / KO L . / 2 0 1 5 Assessment year: 2010-2011 Page 3 of 8 employer's contribution towards provident fund, ESI, etc. in respect of salary paid to above said persons to whom assessee has claimed to have engaged as employee during F.Y. 2009-10. Thus it is apparent that assessee had not engaged any employee for supervision/accounting/computer works during F.Y. 2009-10 and thus question of any deduction towards provident fund and ESI does not arise. 2. On perusal of monthly salary sheets provided by assessee it is seen that salary sheets do not provide any information as to when salary was disbursed and when employees enrolled therein received their salary. salary were shown paid without using 'revenue stamp of Rs.1/-, which is necessary to be used while making payment exceeding Rs.5,000/-. face of salary sheets itself reveal that they were manufactured only for submitting them in this office. 3. assesssee's claim that their appointment letters, Bio data etc are not readily available since project is complete and thus relevant file records and other documents were shifted from site office to temporary place is apparently not convincing as to why relevant records had to be shifted to temporary place and not to head office of assessee being situated at Kolkata. Thus seeking time for submission of requisitioned documents is nothing but buying time for manufacturing same for submission before undersigned. 4. assessee's claim that to keep tab on progress and quality of work employment of supervisor or other staff were necessary in views of clause no. 13 of agreement between Royal Mittal JV and M/s Royal Infraconstru Ltd does also not carry much weight in view of fact that M/s Royal Infraconstru Limited is not only sub-contractor of project but also main member (partner) of assessee AOP having 85% share of profit and thus idea of engaging any employee only for keeping eye on effectiveness and competent of its own main partner having 85% share in its profit is not convincing at all. 5. assesse failed to submit any evidence regarding identity of employees, their education and I . T. . N o. 1 9 / KO L . / 2 0 1 5 Assessment year: 2010-2011 Page 4 of 8 evidence regarding works they carried out for assesse 'AOP' during financial year 2009-10. 6. assessee could not produce/submit any evidence which could prove clearly that it had engaged persons as supervisor/computer staff and accountant, and received due services from them. Payments to them were also claimed to have been made in cash only . 3. disallowance made by Assessing Officer on account of salary was disputed by assessee in appeal filed before ld. CIT(Appeals) and during course of appellate proceedings before him, following submissions were made by assessee in support of its claim for deduction on account of salary expenses:- "The appeal is directed against order of AO passed u/s. 143(3) of I.T. Act, 1961. only ground of appeal is disallowance of entire salary of Rs. 16,59,316/- paid during year to employees. facts of case are that assessee as AOP was constituted by two entities viz. Royal Infra Constro limited and Mittal Bros. Engs and Contractors. This AOP entered into contract with Railways to carry out certain projects at different sites. contract was undertaken towards end of A.Yr. 2009-10 when pertaining to F.Y. 2008-09. In that year only piling work was undertaken, bills for advances were made on Railways and assessee received certain payment which were accounted for as income. Since however no work on surface level was executed no supervision was required and further there was practically no withdrawal from bank nor any correspondence, no employee was kept. contract was entered into on 2.12.2008 and actual work was started in Jan. 2009. Therefore, neither any salary was paid nor any claim for salary was made in accounts in assessment year 2009-10. This shows genuinity of assessee JV that salary was claimed only in year when employees were kept and salary was paid. However, full swing work started during assessment year in question on surface and it was felt that supervisory staff both for contract work as well as for accounting work and for computer operations have to be kept so that work is executed as per I . T. . N o. 1 9 / KO L . / 2 0 1 5 Assessment year: 2010-2011 Page 5 of 8 contract. assessee employed some supervisory staff, accountant and computer supervisor and total claim of salary was Rs.16,59,316/-. assessee filed details of persons to whom salary was paid but on being asked by ITO to produce employees it was informed that assessee Joint Venture duly executed contract in Sept. 2011, there was no other fresh contract was taken JV was dissolved and therefore employees were terminated. However, names and addresses of employees as required by AO were filed. AO still doubted payment of salary and issued summon U/s. 133(6) to employees to addresses given. It appears from assessment order that summons were duly served on 8 employees out of 17 persons employee/employees and in fact 3 of them also confirmed having received salary. Still AO for one reason or other has disallowed said salary/remuneration to employees. It is submitted that assessee duly produced salary register before AO as well as cash book showing date of payment of salary to employees. bank statement of assessee was also produced to show cash withdrawals. Before AO it was also shown that assessee had to make correspondences, submit bills to contractee, collect cheques and put same into bank and make disbursement as may be required for business purposes. two Joint Venture partners were not human beings to look after Joint Venture business and therefore services of employees was necessity. If it is presumed that no employees were kept then how business could be conducted, bank account can be operated, supervision can be done is big question? Not only that appellant was maintaining two computers which means computer operator was there. appellant was also maintaining cash book and ledger which could not have been maintained unless employees were kept and not only that returns of income as well as different statement have to be filed before number of authorities which were statutorily required to carry on business. Therefore AO cannot say that there was no employee at all. Moreover total turnover during year was Rs.5,42,96,090/- and therefore payment of salary to extent of Rs.16,91,570/- on account of payment to Supervisory staff, computer operator, Accountant(all designated as Supervisors) and peon all being administrative staff was fully proved and expenses incurred were reasonable considering turnover, I . T. . N o. 1 9 / KO L . / 2 0 1 5 Assessment year: 2010-2011 Page 6 of 8 nature of work as well as execution of contract work. It is pertinent to note that summons were duly served on 50% of persons even after expiry of about 2 years which shows that employees were existing and further 3 of them duly confirmed having received salary. In view of above disallowance of salary made by AO, which was proved and was quite fair and reasonable may be deleted. It may here be stated that AO has duly allowed expenses under head travelling and conveyance These expenses were Incurred by same very employees. Hence, disallowance made by AO may be deleted." 4. above submissions made by assessee were not found acceptable by ld. CIT(A). According to him, entire contract work to be undertaken by assessee was given to sub-contractors for execution and there was thus no need for assessee to incur any expenditure on salary. He accordingly confirmed disallowance made by Assessing Officer on account of salary expenses. Aggrieved by order of ld. CIT(Appeals), assessee has preferred this appeal before Tribunal. 5. ld. counsel for assessee submitted that total works contract to be undertaken by assessee was sub-contracted on 85%:15% basis and in order to supervise execution of said work by sub-contractors, assessee had engaged or employed 15 Supervisors during year under consideration. He submitted in addition to said Supervisory Staff, one Accountant and one Computer Operator were also employed by assessee for purpose of its business. He also submitted that some of employees in response to notices issued by Assessing Officer had accepted fact of employment of assessee and even Assessing Officer while completing assessment had allowed expenditure claimed by assessee on account of travelling and conveyance of all persons I . T. . N o. 1 9 / KO L . / 2 0 1 5 Assessment year: 2010-2011 Page 7 of 8 employed by assessee. He submitted that there were eight major contracts of construction of Bridges executed by assessee in year under consideration and keeping in view same, expenses incurred by assessee on salary was fully allowable being expenditure incurred wholly and exclusively for purpose of its business. 6. ld. D.R., on other hand, strongly relied on orders of authorities below in support of Revenue s case on this issue and submitted that adverse findings specifically recorded by Assessing Officer may be taken into consideration while deciding issue involved in this appeal of assessee. 7. I have considered rival submissions and also perused relevant material available on record. It is observed that major contracts of execution of civil work including construction of bridges were received and undertaken by assessee during year under consideration. No doubt, said contracts were got executed by assessee through sub- contractors on 85% : 15% basis. However, keeping in view that said contracts were in name of assessee, it was responsibility of assessee to ensure quality of work as well as completion of work in time. 15% of total contract receipts were received by assessee for this purpose and in order to ensure quality of work as well as timely completion, certain persons were required to be engaged or employed by assessee to do supervision of work on its behalf. expenses incurred on payment of salary to such persons thus were incurred by assessee for purpose of its business and same, in my opinion, cannot be entirely disallowed even though adverse findings recorded by Assessing Officer in this regard are sufficient to show that expenses claimed by assessee on salary were not fully verifiable. Having regard to all these facts and circumstances of this case, I am of view that it would be fair and reasonable to disallow 25% of expenses incurred by assessee on account of salary for unverifiable element involved therein. Accordingly, I modify I . T. . N o. 1 9 / KO L . / 2 0 1 5 Assessment year: 2010-2011 Page 8 of 8 impugned order of ld. CIT(Appeals) on this issue and direct Assessing Officer to restrict disallowance made on account of salary to 25%. 8. In result, appeal of assessee is partly allowed. Order pronounced in open Court on October 21, 2016. Sd/- (P.M. Jagtap) Accountant Member Kolkata, 21 s t day of October, 2016 Copies to : (1) M/s. Royal Mi ttal, 18, R.N. Mukherjee Road, 6 t h Floor, Kolkata-700 001 (2) Income Tax Officer, Ward-36(1 ), Kolkata, Aayakar Bhawan, Po orva, 110, Shanti Palli, E. M. By-Pass, Kolkata-700 107 (3) Commissioner of Income Tax(Appeals)-XX, Kolkata; (4) Commissio ner of Income Tax- , (5) Depart ment al Represent ative (6) Guard File By order Assistant Registrar, Income Tax Appellate Tribunal, Kolkata Benches, Kolkata Laha/Sr. P.S. M/s. Royal Mittal v. Income-tax Officer, Ward-36(1), Kolkata