2014 (5) TMI 522 - AT - Income Tax

Disallowance of 50% of payment made to contractor Contractor has stopped doing the work - Held that - The Tribunal had directed the AO to estimate the expenditure reasonably even if the assessee was not able to produce the bill - neither the AO nor the FAA has given any reason for restricting the expenditure at 50% - the assessee is following project complete method and as per the method it has to consider the expenditure in a peculiar manner - By restricting the expenditure to 50% AO has admitted that some expenditure was incurred by it for business purposes - the estimate of AO has been challenged by the assessee - the AO and the FAA have accepted that 50% expenditure under the head labour charges was justified - the assessee is following project complete method of accounting - on completion of the project all the expenses have to be accounted for - the expenses are restricted to 12. 5 lakhs Decided partly in favour of Assessee.

Summary

Issues:
1. Disallowance of 50% payment to Contractor
2. Estimation of expenditure for labour charges
3. Application of project completion method in accounting

Analysis:

Issue 1: Disallowance of 50% payment to Contractor
The appellant challenged the CIT(A)'s order upholding the disallowance of 50% payment made to the Contractor. The Contractor had stopped working for the appellant, leading to the dispute. The appellant argued that the Contractor had confirmed receiving the payment without reservation. The ITAT directed the AO to examine the matter afresh and obtain details of the work done by the Contractor. However, as the necessary bills for verification were not produced by the appellant, the AO disallowed 50% of the total expenditure. The Tribunal noted that the appellant followed the project completion method and should account for all expenses upon project completion. The AO's decision to disallow the payment without proper proof was challenged, and the appellant's claim was allowed in part, restricting the disallowance to 12.5 lakhs.

Issue 2: Estimation of expenditure for labour charges
The AO disallowed a portion of the labour charges claimed by the appellant, as the necessary bills for verification were not provided. The FAA upheld this decision, stating that the genuineness of services rendered by the Contractor was not proved without bills. The AR argued that the AO did not provide a basis for estimating the expenditure and that the Contractor had indeed worked for the appellant. The ITAT found that the AO and FAA had not justified restricting the expenditure to 50% and allowed the appellant's appeal in part, reducing the disallowance to 12.5 lakhs.

Issue 3: Application of project completion method in accounting
The appellant followed the project completion method in accounting. The Tribunal emphasized that under this method, all expenses incurred till project completion should be allowed in the year of completion. The AO's decision to restrict the expenditure to 50% was challenged, as it did not fully account for the expenses incurred during the project. The ITAT considered the peculiar manner in which expenses should be considered under the project completion method and reduced the disallowance to 12.5 lakhs to meet the ends of justice.

In conclusion, the ITAT partially allowed the appeal filed by the appellant, reducing the disallowance of estimated expenditure to 12.5 lakhs, considering the application of the project completion method and the lack of proper proof for the expenses claimed by the appellant.