2012 (12) TMI 295 - AT - Income Tax

Expenditure incurred on land development - Failure to deduct tax as required u/s 194C - applicability of provisions of sec 40(a)(ia) - project completion method adopted by assessee in dispute - Rejection of Books of account - held that - from the P&L Account, which was filed by the assessee at the time of hearing that it has not claimed the above amount of Rs. 44,01,500/- as expenditure and did not debit the same to the P&L A/c. When the assessee did not claim the said expenditure/payments by debiting P&L A/c, the question of disallowing this amount by invoking the provisions of section 40(a)(ia) does not arise. further view of revenue that in case of completed contract method AO is empowered to examine the expenditures incurred during the year which increases the opening work-in-progress or addition in work-in-progress. But one does not agree with the view of revenue that addition is to be made in total income, if some expenditure were found not allowable. The correct procedure in completed contract method is that instead of making addition, the AO should correct the amount of work-in-progress by reducing or enhancing workin- progress as the case may be. Such corrected WIP will be finally considered in P&L a/c /contract account for the year in which work is completed - AO made addition in all the projects including incomplete projects, which is not warranted - no infirmity in the order of the CIT(A) in deleting the addition of Rs. 44,01,500/- made by the AO invoking the provisions of section 40(a)(ia) of the Act, thus, the same is hereby upheld dismissing the ground of the revenue. Decision in the case of Savala Associates Versus Income-tax Officer, Navi Mumbai 2009(10) TMI 640 - ITAT MUMBAI followed.

Summary

Issues:
1. Disallowance of expenditure incurred on land development due to failure to deduct tax under section 194C.
2. Disallowance under section 40(a)(ia) and subsequent appeal before CIT(A).
3. CIT(A)'s decision to delete the addition of disallowed expenditure.
4. Revenue's appeal challenging CIT(A)'s decision.

Issue 1: Disallowance of Expenditure:
The appellant, a firm engaged in the business of development and sale of plots, filed a return declaring income for the assessment year 2007-08. The assessing officer disallowed an expenditure of Rs. 44,01,500 incurred on land development due to failure to deduct tax under section 194C. This disallowed amount was added back to the total income of the appellant, invoking section 40(a)(ia) of the IT Act.

Issue 2: Disallowance under Section 40(a)(ia) and Appeal:
The assessee appealed before the CIT(A), providing details of the expenditure incurred on land development. The appellant contended that since the amounts were not claimed as expenditures in the profit and loss account, the disallowance under section 40(a)(ia) was unwarranted. The CIT(A) referred to relevant case law and held that disallowing the expenditure without proper claim in the profit and loss account was not justified. Consequently, the CIT(A) deleted the addition of Rs. 44,01,500 made by the assessing officer.

Issue 3: CIT(A)'s Decision:
The CIT(A) based the decision on the principle that disallowance under section 40(a)(ia) requires a valid claim of expenditure in the profit and loss account. The CIT(A) emphasized that without such a claim, disallowance would not be sustainable. Citing a case precedent, the CIT(A) concluded that the assessing officer's action lacked proper application of mind, leading to the deletion of the disallowed amount.

Issue 4: Revenue's Appeal:
The revenue appealed against the CIT(A)'s decision, arguing various grounds including the nature of the expenditure, the method of accounting, and the need for further verification. The appellate tribunal considered the arguments presented by both parties, reviewed the orders of the authorities below, and upheld the CIT(A)'s decision. The tribunal emphasized that without a valid claim in the profit and loss account, the disallowance under section 40(a)(ia) was not justified, thereby dismissing the revenue's appeal.

In conclusion, the appellate tribunal upheld the CIT(A)'s decision to delete the disallowed expenditure, emphasizing the importance of proper claim and accounting treatment for expenditures to avoid disallowances under relevant provisions of the IT Act.