PER ANNAPURNA MEHROTRA A.M. This appeal has been filed by the assessee against the order of CIT(A) Chandigarh dt. 17/11/2014.

2. The assessee has raised the following grounds of appeal:

2. That on the facts, circumstances and legal position of the case, the Worthy CIT(A) has erred in confirming an addition of Rs. 31,13,971/- u/s 40A(3) of the Income Tax Act, 1961 even when the cash payment was covered in special exception under the Act as well as Rules. Further, the Worthy CIT(A) as well as the Ld. AO have also erred in not appreciating the fact most of the cash payments in question did not exceed Rs. 20,000/- on a day.

3. That on the facts, circumstances and legal position of the case, the Worthy CIT(A) has erred in confirming an addition of Rs. 2,00,000/- on adhoc basis by erroneously holding such addition is justified when the %age of scrap generation of the appellant contractor is lower as compared to preceding year even when no specific discrepancy was found or noticed in the books of the appellant.

4. That on the facts, circumstances and legal position of the case, the Worthy CIT(A) has erred in confirming an addition of Rs. 67,962/- u/s 14A r.w.r. 8D of the Income Tax Rules, 1962 even when no exempt income was earned or claimed by the appellant.

5. That on the facts, circumstances and legal position of the case, the Worthy CIT(A) has erred in confirming an addition of Rs. 37,71,296/- which was made by the Ld. AO by disallowing 0.5% of total expenditure incurred on various sites only on the ground that site-wise profitability is not same when no specific defect was found in books or records or site-wise profitability statement.

3. Briefly stated the assessee is a civil construction company engaged in construction of irrigation works, like dam, canals, river embankment, mining work and small Road Projects. During the impugned assessment year, the assessee filed its return of income declaring income of Rs. 6,16,09,500/-. Thereafter assessment u/s 143(3) was framed on the assessee, vide order dt. 27/01/2014 on income of Rs. 6,89,23,856/- after making the following disallowance / additions. Excess Depreciation Rs. 1,64,890/- Disallowance u/s 40A(3) Rs. 31,13,971/- Estimation of income from scrap Rs. 2,48,197/- Disallowance u/s 14A Rs. 67,692/- Disallowance u/s 36(i)(iii) Rs. 16,000/- Disallowance of site Expenses Rs. 3771296/- The matter was carried in appeal before the Ld. CIT(A) who vide his order dt. 17/11/2014 deleted the disallowance / additions made on account of excess depreciation, and upheld the disallowance / addition made on account of cash payments u/s 40A(3), income from scrap sale, expenses u/s 14A, interest u/s 36(i)(iii) and site expenses.

4. Aggrieved by the same, the assessee filed the present appeal before us.

5. In Ground No. 2 the assessee has agitated against the addition made u/s 40A(3) of Rs. 31,13,971/-.

6. Brief facts relating to the issue are that the Assessing Officer asked the assessee to furnish details of payment made in cash in excess of Rs. 20,000/- on a single day and the assessee had confirmed that no such payment had been made during the year under consideration, but the Assessing Officer noticed that such payments had, in fact, been made in contravention to the provisions of section 40A(3) of the Income Tax Act (hereinafter referred to as Act). When questioned on the issue, the assessee had submitted that these payments were made for purchase of good quality and tested soil for project requirement to agriculturists, whose lands were close to the projects and since the sites were in remote location, where these persons had no bank accounts, the payments were made in cash. The Assessing Officer analysed the provisions of Rule 6DD of the Income Tax Rule, 1962 (hereinafter referred to as Rules) and concluded that the payments were not covered by the exceptions given in Rule 6DD of the Rules. It was further noticed by the Assessing Officer that the payments were made to some middle men and so were subject to tax deduction of tax at source, which had not been done and addresses of the persons to whom the payments were made, had not been provided. He accordingly allowed two amounts, which were below Rs. 20,000/- and disallowed rest of the amount of Rs. 31,13,971/- u/s 40A(3) of the Act.

7. Before the Ld. CIT(A) no submission were filed by the assessee and the disallowance made was upheld for the reason that the assessees case was squarely covered under the provisions of section 40A(3) of the Act and was not saved by the exception provided under Rule 6DD of the Income Tax Rules, 1962. Ld. CIT (A) held at para 4.2.1 to 4.2.3 of his order as follows.

4.2.1 The appellant had taken plea before the Assessing Officer that the payments were made in remote locations where these persons had no Bank accounts and so its case was covered by the provisions of Rule 6DD. The relevant rule in this regard is Rule 6DD(g), which is produced below for the sale of ready reference.

6DD. Cases and circumstances.. (g) where the payment is made in a village or town, which on the date of such payment is not served by any bank to any person who ordinarily resides , or is carrying on any business, profession or vocation, in any such village or town

Thus, a payment is covered under Rule 6DD(g), it it is made; i. In a village or town which on the date of such payment is not served by any bank; and ii. The payment is made to a person who ordinarily resides or carries on the business in any such village or town.

4.2.2 Both the above condition have to be satisfied simultaneously. In other words, if the payment is made to a person who is running a business from a premises in a town, where the banking facilities are easily available, then the fact that the payment is made in a remote village will not bring the transaction in the ambit of the rule 6DD(g). The logic behind the rule is clear. If both the seller and the buyer are doing business in a city, they cannot be allowed to go out of the purview of section 40A(3)by claiming that the cash payment for some reasons was made in a remote village where banking facilities are not available. Thus a collusive arrangement between the buyer and seller to circumvent section 40A(3) has been thwarted by rule 6DD(g) of the Rules.

4.2.3 Moreover, in the instant case, the appellant has also not provided the addresses of the persons to whom payments have been made and so the claim of the appellant that the payments are covered by Rule 6DD(g) cannot be verified. In fact, it is quite possible that the these persons do not exist or payments are not at all genuine. He as it may, the whole of the impugned payment is not covered by the exception provided in Rule 6DD and so is hit by the provisions of section 40A(3) of the Act. The disallowance made is accordingly upheld. Ground of appeal No. 2 is dismissed.

8. Aggrieved by the same, the assessee field the present appeal before us.

9. Before us Ld. AR argued that all the impugned payments were in the context of purchase of soil and were made to middlemen, who in turn made the payments to the concerned persons from whom soil was purchased. Ld. AR stated that this fact was in the knowledge of both the AO and the CIT(A). Ld. AR stated that payments to middlemen were not covered under the provisions of section 40A(3). Ld. AR relied upon the decision of the Madras High Court in the case of CIT Vs. Sri Shanmuga Ginning Factory (2013) 355 ITR 0096 in this regard. Ld. DR on the other hand stated that no details of the persons to whom payments were made was provided by the assessee and hence it could not be verified that the persons were indeed middlemen Ld. DR further stated that even if payments were made to middlemen, the provisions of section 40A(3) were attracted so long as the payments exceeded Rs. 20,000/- in cash.

10. We have heard the rival submissions and perused the orders of the authorities below as also the documents provided.

11. We find that the following payments were identified by the AO being in violation of the provision of Section 40A(3). SL.No. Name of the Person Date of Payment Amount Entries Total Amount 1 Sh. Gurminder Singh 06.04.2010 13.06.2010 15000 x 9= 1,35,000/- 17000 x 1 9 1 1,35,000/- 17,000/-

2. Sh. Ajit Singh 05.05.2010 19,000 x 1 = 19,000/- 1 19,000/-

3. Sh. Gurdeep 15.05.2010 07.08.2010 5000 x 4= 20,000 5396 x 1= 5396 19,000 X 9= 171000 19500 x 2= 39,000 5 6 25396/- 2,10,000/-

4. Sh. Dharmender 15.05.2010 15,000 X 10 =1,50,000/- 10 1,50,000/-

5. Sh. Jagtar Singh 14.06.2010 10.08.2010 18.08.2010 19,000 X 2 = 38000 12000 X 1 = 12000 8000 X 5 = 40000 19000 X 4 = 76000 15000 X 1= 15000 3 5 5 50,000/- 40,000/- 91,000/-

6. Sh. Babu Singh 22.06.2010 19000 X 2 = 38000 13600 X 1= 13600 3 51,600/-

7. Sh. Satpal Singh 22.06.2010 19000 X 5= 95000 15000 X 1 = 15000 6 110000/-

8. Sh. Pal Prit 01.07.2010 08.07.2010 19000 X 1 = 19000 18175 X 1 = 18175 19000 X 4 = 76000 16440 X 1= 16440 2 5 37175/- 92440/-

9. Sh. Tara Chand 07.07.2010 08.07.2010 18000 X 1 = 18000 14000 X 1 = 14000 19500 X 13= 253500 12660 x 1 = 12660 2 14 32000 266160 10 Sh. Love Singh 08.07.2010 26.08.2010 19500 X 31 = 604500 15500 X 1 = 15500 19000 X 5 = 95000 15000 X 1= 15000 32 6 620000/- 110000/- 11 Sh. Harjeet Singh 08.07.2010 19000 X 5 = 95000 12260 X 1 = 12260 6 107260/- 12 Sh. Amar Singh 08.07.2010 19500 X 15 = 292500 15840 X 1 = 15840 14 308340

13. Sh. Pal Singh 09.07.2010 19000 X 5 = 95000 12600 X 1= 12600 6 107600 14 Sh. Kulwinder Singh 09.08.2010 20000 X 2 = 40000 10000 X 1 = 10000 3 50000/- 15 Sh. Rajwinder Singh 18.08.2010 19500 X 26 = 507000 13000 X 1 = 13000 8 520000/- Total 3149971/- Out of the above the AO excluded payment of Rs. 17,000/- & Rs. 19,000/- at S.No. 1 & 2 and disallowed the balance u/s 40A(3).

12. During assessment proceedings the assessee explained vide its letter dt. 25.01.2014 that the payments were made for purchasing soil from agriculturists whose land was close to the projects and since the sites were in remote location where the agriculturists had no bank accounts, the payments were made in cash. The AO after considering the assessees submission held that the payments were made to middlemen whose addresses had not been made available. He further rejected the assessees contention that the payees had no bank accounts, disbelieving it, and disallowed the expenses by applying the provisions of section 40A(3) vide his order passed on 27.01.2014. It is clear from the above chronology of events that the AO held that the assessee had not provided details of the payee middlemen without confronting the same to him and without giving adequate opportunity to the assessee. Having arrived at a finding of fact that the payments were made to middlemen the AO could not have doubted the genuineness of the same without giving the assessee an opportunity to prove the same. This becomes all the more important and pertinent in view of the fact that this finding was pertinent to the issue of disallowance of expenses u/s 40A(3), since payments to middlemen and agents are excluded from the purview of section 40A(3) read with Rule 6DD(i). A perusal of Rule 6DD(i) shows that, no disallowance under section 40A(3) shall be made where any payment in a sum exceeding twenty thousand rupees is made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft in cases where payment is made by any person to his agent who is required to make payment in cash for goods or services on behalf of such persons. Even the Ld.CIT(A) we find did not consider this aspect of the matter while adjudicating this issue.

13. In the light of the above we consider it fit to remit the matter back to the file of the AO to determine whether the payments were actually made to middlemen and thereafter to decide the issue in accordance with law. The assessee may be given due opportunity of hearing.

14. This ground of appeal of the assessee is therefore allowed for statistical purposes.

15. Ground No. 3. raised by the assessee is against the addition of Rs. 2,00,000 made on account of scrap sale.

16. Brief facts relating to the issue are that the appellant had shown income from sale of scrap at Rs. 7,47,981/- in this year as against Rs. 8,17,320/- in the preceding year, whereas turnover had increased to Rs. 99 crores from Rs. 83 crores in the preceding year. The Assessing Officer was of the view that generation of scrap should be proportionate to the turnover and so he asked the appellant to justify lower scrap value and the appellant had submitted that this was the actual amount. The Assessing Officer was not satisfied with the explanation of the appellant and estimated scrap @0.1% of the turnover to match with the scrap value disclosed in the preceding year of .098%. Addition of Rs. 2,48,197/- was accordingly made.

17. In appeal before the Ld. CIT(A), no submissions were filed by the assessee. The Ld. CIT(A) thereafter restricted the addition to Rs. 2,00,000/- disagreeing with the view of the AO that scrap generation should be the same or more than preceding year and estimating scrap generation to be in excess by Rs. 2,00,000/-.

18. Before us Ld. AR reiterated the submissions made before the A.O. and sated that the scrap sale shown was the actual figure and there could be no direct correlation between sales and scrap generated as asserted by the A.O. The Ld. DR on the other hand relied upon the order of the A.O. Undisputedly the Income of the assessee has increased from 83,36,77,316/- in the preceding year to Rs. 99,61,78,224/- in the impugned year. The business activity of the assessee has shown a substantial increase. Admittedly scrap generation in the form of wastage of steels, cement bags, oil filter, iron rods, tyres & tubes consumable goods, worn out copper, electricity wires, etc. is a normal feature in the assessee line of business. It logically follows that the with increase in business activity, the scrap generation also increases. The assessee, we find on the other hand has shown a reduction in scrap sales from 8,17,320/- in the preceding year to Rs. 7,47,981/- in the impugned year. We further find that no justifiable reason has been given for the same. Therefore addition on account of scrap sale is warranted but at the same time we agree with the Ld. CIT(A) that the same need not be in direct proportion to turnover of the assessee. Further considering the facts and circumstances of the case we find that the disallowance upheld by the Ld. CIT(A) is on the higher side and consider an addition of Rs. 1,00,000/- to be appropriate and just.

19. In view of the same we restrict the addition made on account of scrap sale to Rs. 1,00,000/-.

20. This ground of appeal of the assessee is therefore partly allowed.

21. Ground No. 4 raised by the assessee was not pressed before us and the same is therefore treated as dismissed.

22. Ground No. 5 raised by the assessee is against an addition of Rs. 37,71296/- made of expenses incurred on various sites.

23. Brief facts relating to the issue are that the Assessing Officer had called for the sitewise expenses incurred by the assessee and noticed that the expenses debited were not proportionate to the income disclosed in respect of various sites. The Assessing Officer found that the expenditure receipt ratio varied between 55% and 112% and profit-turnover ratio between 4.5% and 44.72% and so he asked the appellant to explain the inconsistency. The appellant had filed its reply as under:

As regards site wise profit and loss reported in our statement, we here by clarify that there are some expenditure which are booked in head office, like depreciation, interest on these machineries loan, working capital interest, bank guarantee commission, consultancy/legal fees, Directors salary their travelling expense, head office telephone expenses and EPF expenses etc. As the machineries along with manpower are frequently moving from one site to another as per needs of the project. Moreover day by day cost of construction is increasing due to inflation & stiff competition are very faced by us during tender, many times in order to be in race we had to bid tenders even below the estimated cost. The delay in project increased the cost of construction, like cement, sand aggregates etc. moreover in Punjab, Haryana & Himachal there is stay order in mining activities by High Courts, which resulted shortage of materials like sand & aggregates, the prices had increased more than 6 times, with lesser availability, we have to arrange the same from Jammu, as this project was for national importance to completed in time. There was more pressure / burden to complete the project in time by the railways. The expenses booked to various site are on actual basis which correlates with the receipts from the work done during that financial year. However overall profit of the company has been in increase as compare to previous letter, which we had clarified in our previous letter dated 20.01.2014

(sic)

8.1.1 The Assessing Officer was not satisfied with the explanation of the appellant, since the appellant could not reconcile the discrepancies noticed. He accordingly disallowed 0.5% of the expenditure incurred at sites (excluding head office expenses) and made addition of Rs. 37,71,296/-. Ld. CIT(A) upheld the addition made for the reason that the assessee could not explain the inconsistency in the expenditure- receipt ratio and profit turnover ratio and further since in the preceding year the assessee had agreed for similar addition of 0.5% of the expenses.

24. Before us Ld. AR pleaded that the disallowance made on adhoc basis was unjustified more so in view of the fact that all books of accounts of the assessee were audited and no discrepancy had been pointed out in the same, the books were produced before the AO and no specific instance warranting disallowance of any expenses incurred on site was pointed out by the AO. Ld AR stated that the assessee had offered an explanation for the variation in profit/ turnover ratio and expenditure / income Ratio for the various site vide its letter dt. 25.01.2014 but, without considering the same, Ld. AO had arbitrarily rejected the explanation of the assessee and made an adhoc disallowance. Ld. AR contended that there were loss in certain projects / site since in the face of stiff competition tender were bid below estimated cost or delay in execution of project increased the cost of completion or due to stay in mining activities in Punjab, Haryana & Himachal, material like sand and aggregates had to be procured from Jammu which increased the cost of project. Ld. AR further stated that high profitability in certain projects was attributable to non-allocation of certain expenses booked to Head Office like depreciation, interest etc. Ld. AR also stated that merely because the addition was agreed to in the preceding year, the same could not be made in the impugned year also since each year was a separate year and the principle of res- judicata did not apply to income tax proceedings.

25. Ld. DR on the other hand relied upon the order of the AO and CIT(A).

26. We have heard the rival submission carefully and perused the material placed on record before us.

27. We find that expenses incurred on various construction sites of the assessee have been disallowed @ 5% of the total expenses since the assessee could not give a proper explanation for variation in Profit / Turnover Ratio and expenditure / income ratio of various sites. We further find that the assessee had offered an explanation for the same vide his letter dt. 25.01.2014 reproduced above. Ld. AO found the same untenable as no reconciliation could be made on the plea of mixed expenses and thereafter proceeded to pass the order on 27.01.2014. Clearly the AO had neither considered nor appreciated the entire explanation given by the assesee. He merely picked up one aspect of the same i.e; mixed expenses and concluded that the explanation was not tenable, without stating as to how the explanation was not tenable. If there was any further clarification required the AO could have very well specifically put the same to the assessee and sought further explanation. But we find that the Ld. AO without affording any further opportunity to the assessee passed the assessment order. The AO having not taken into consideration the entire explanation given by the assessee and further not having given proper opportunity to adduce further explanation in support of its contention, the conclusion arrived that the expenses incurred were not commensurate with the income earned is unwarranted and unjustified. Ld. CIT(A) also, we find, simply accepted the finding of the AO without considering the fact that the finding of the AO were inconclusive and required further investigation. In view of the above, we consider it fit to restore the issue back to the file of the AO for examining the issue afresh after giving due opportunity of hearing to the assessee and thereafter decide the matter in accordance with law.

28. This ground of appeal is therefore allowed for statistical purposes.

29. The appeal of the assessee is partly allowed. Order pronounced in the open court. 04/03/2016 Sd/- Sd/- (H.L. KARWA) (ANNAPURNA MEHROTRA) VICE PRESIDENT ACCOUNTANT MEMBER Dated : 04/03/2016 AG Copy to: The Appellant, The Respondent, The CIT, The CIT(A), The DR