2013 (2) TMI 774 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of addition of Rs. 29,00,075/- by CIT(A).
2. Deletion of addition of Rs. 14,28,460/- on account of disallowance out of contract payment made to sub-contractor.
3. Direction by CIT(A) to work out addition on Rs. 57,59,910/- as closing work-in-progress by applying GP rate.
4. Rejection of books of accounts u/s 145.
5. Disallowance of payments made to sub-contractors u/s 40A(2)(b).
6. Interpretation of Accounting Standard-7.

Summary:

Issue 1: Deletion of addition of Rs. 29,00,075/- by CIT(A)
The A.O. added Rs. 29,00,075/- stating that the assessee showed lesser work-in-progress/closing stock. The CIT(A) deleted the addition after accepting the reconciliation furnished by the assessee, noting that part of the expenditure debited related to an earlier period. The Tribunal confirmed the CIT(A)'s order, stating that the A.O.'s calculation was not acceptable as it did not consider figures for the entire period.

Issue 2: Deletion of addition of Rs. 14,28,460/- on account of disallowance out of contract payment made to sub-contractor
The A.O. disallowed Rs. 14,28,460/- paid to sub-contractor Shri Yogendra Singh Jadon, stating it was excessive and not verifiable. The CIT(A) deleted the addition, noting that the A.O. failed to justify that the payments were excessive or not for work undertaken. The Tribunal confirmed the CIT(A)'s order, as the A.O. did not provide contrary material to dispute the payment.

Issue 3: Direction by CIT(A) to work out addition on Rs. 57,59,910/- as closing work-in-progress by applying GP rate
The A.O. applied an 11.2% profit rate on work-in-progress, which the CIT(A) restricted to Rs. 57,59,910/-. The Tribunal found both A.O. and CIT(A) incorrect in applying GP rate on work-in-progress, stating that profit element is not required to be added in work-in-progress as per Accounting Standard-7 and the Supreme Court ruling in Chainrup Sampatram vs. CIT. Thus, the Tribunal set aside the orders of the CIT(A) and A.O. on this issue.

Issue 4: Rejection of books of accounts u/s 145
The CIT(A) confirmed the A.O.'s rejection of books of accounts u/s 145. The Tribunal upheld the CIT(A)'s order as the assessee did not argue much on this issue.

Issue 5: Disallowance of payments made to sub-contractors u/s 40A(2)(b)
The A.O. disallowed payments made to sub-contractors Shri Sanjay Agarwal, Shri Subodh Agarwal, and Shri R.R. Agarwal, stating they were not genuine sub-contractors and invoking section 40A(2)(b). The CIT(A) confirmed the disallowance. The Tribunal agreed that the sub-contractors did not carry out the work but noted that the contract work was carried out by other means. The Tribunal disallowed 20% of the expenditure claimed as payment to sub-contractors, confirming an addition of Rs. 12,35,225/- and deleting the balance addition of Rs. 49,40,901/-.

Issue 6: Interpretation of Accounting Standard-7
The A.O. and CIT(A) applied GP rate on work-in-progress based on Accounting Standard-7. The Tribunal found no such requirement in Accounting Standard-7 and ruled that profit element is not required to be added in work-in-progress, setting aside the orders of the CIT(A) and A.O. on this issue.

Conclusion:
The appeal filed by the Revenue was dismissed, and the appeal filed by the assessee was partly allowed.