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2019 (5) TMI 1669 - AT - Income TaxAddition of direct expenses incurred on behalf of the client shown in the Contract Account - whether the addition on account of Labour Cess should not be made? - disallowance invoking the provisions of section 43B - HELD THAT - Labour cess is part of the contract account. That being so the assessee is correct in contending that the addition if any is maintainable only in the hands of the client of the assessee Corporation and not in the hands of the assessee. The provisions made for labour cess do not stand debited to the profit loss account and the profitability of the Corporation in the form of centage earned as gross profit is not affected. The assessee Corporation is only a collecting agency for the purposes of the labour cess and deposit thereof with the Government account. Thus the action of the ld. CIT(A) in confirming the addition for the provisions for labour cess is reversed and the addition is deleted. The sole ground raised by the assessee in its appeal is allowed. Addition u/s 40(a)(ia) - non-deduction and deposit of tax with the Central Government within due date on the provisions of labour charges made by the assessee s various units in various districts of Uttar Pradesh - HELD THAT - Section 40(a)(ia) is clearly not applicable to the facts of the present case wherein the claim of the assessee is that all the provisions made represent labour charges such provisions having been made by the assessee in its books of account without debiting the profit loss account. As settled in Aahar Consumer Products Pvt. Limited 2011 (2) TMI 488 - ITAT DELHI in order to enable invoking the provisions of section 40(a)(ia) the assessee should first be shown as contemplating deductions under sections 32 to 38 which provisions contained in the non obstante clause beginning section 40 attract disallowability to deductions in these provisions on which tax is deductible and no TDS has been made by the assessee. Then as settled in M/s Teja Construction vs. ACIT (supra) all the expenditure which represents direct costs and hence is adjustable against the revenue for the purpose of determining profit under section 28(i) of the Act does not come within the provisions of section 40(a)(ia) of the Act. CIT(A) has correctly deleted the addition wrongly made. The labour charges were only provisions made by the assessee in its books. The Contract Account containing these provisions had necessarily to be prepared by the assessee Corporation in keeping with the requirement of its Working Manual. This contract account did not affect the profitability of the assessee. In fact the profit loss account of the assessee was never debited with the labour charges in question. The Contract Account merely reflected the resulting profit or loss accruing during a construction period having a direct relation to the works dealt with by the assessee in its business and which ascertains the gross profit. This has duly been taken into consideration by the CIT(A) and the Department has not been able to successfully rebut the well reasoned finding of fact and law recorded by the ld. CIT(A). Addition of long standing credits in the books of accounts of the appellant - HELD THAT - No infirmity in the order of the ld. CIT(A) on this issue. As observed by the ld. CIT(A) the A.O has nowhere given any finding that the liability in respect of the aforesaid credit balances has ceased to exist. Moreover once the books of account of the assessee are accepted and the contract account is not disturbed there is no justification to sustain the addition for the reason that these balances were old and unconfirmed. We therefore confirm the order of the ld. CIT(A) on this issue and reject ground No.3 of the Revenue. CIT(A) directing the A.O to accept the revised computation of income - HELD THAT - CIT(A) has set aside the order of the ld. CIT(A) on this issue and restored the matter to the file of the A.O with a direction to accept the revised computation of income where the anomaly described by the AO has been corrected and the depreciation as per Income Tax Act has been claimed and depreciation as per the Companies Act has been added to the income. Since the issue relating to allowability of depreciation has been restored to the file of the A.O to decide the same afresh after accepting the revised computation we do not find any infirmity in the order of the ld. CIT(A) therefore we confirm the order of the ld. CIT(A) on this issue and reject ground No.4 of appeal of the Revenue. Loss on sale of fixed asset - CIT(A) directing the A.O to accept the revised computation of income wherein the assessee added loss on sale of fixed asset - HELD THAT - As observed by us in para 32 above since the issue relating to allowability of depreciation has been restored to the file of the A.O to decide the same after accepting the revised computation we do not find any infirmity in the order of the ld. CIT(A) therefore we confirm the order of the ld. CIT(A) on this issue and reject ground No.5 of appeal of the Revenue. Addition on account of prior period expenses - HELD THAT - As claimed by the assessee the amount pertains to the contract account and therefore in case the addition is made the equivalent amount is to be reduced from the work-in-progress. We therefore find no infirmity in the order of the ld. CIT(A) on this issue. Accordingly we confirm his order on this issue and reject ground No.6 of the Revenue s appeal. Accrual of income - interest on client fund as income of the assessee - HELD THAT - Amount shown in the balance sheet as interest accrued on deposits was the running balance of the accrued interest on the funds of the clients of the assessee. The assessee maintains its books of account on mercantile basis and it makes provision of interest on accrual basis. The assessee also credits such interest to the respective clients accounts as per Government Order dated 11/4/1076 (supra). CIT(A) has rightly observed that the interest earned by the assessee on unutilized fund is credited to the respective accounts and are the income of the concerned clients and not of the assessee. No infirmity in the well reasoned order of the ld. CIT(A) on this issue. Addition on account of expenses relating to purchase of material - HELD THAT - CIT(A) has deleted the addition placing reliance on the decisions of the Tribunal in the assessee s own case for assessment yeaRs. 1991-92 and 2000-01 wherein identical issue has come up for consideration before the Tribunal and the Tribunal held that if any disallowance was to be made in the cost debited to the contract account then corresponding reduction is required to be made in the work done also being a case of contra entry. No justification to interfere with the order of the ld. CIT(A) who has rightly deleted the addition Addition on account of income wrongly credited in previous year written back - HELD THAT - as observed by the ld. CIT(A) that centage on the work of Rs. 2, 13, 04, 810/- and Rs. 6, 37, 17, 415/- has already been assessed to tax in the assessment year 2008-2009; that the reversal entry has been passed as the CAG opined that the cost of construction was wrongly recognized in the assessment year 2008-2009; and that the remaining amount of Rs. 93, 18, 832/- is the excess centage shown in the assessment year 2008-2009. Once the centage has been offered to tax there is no reason to disturb the contract account for the year under consideration by making addition of Rs. 9, 43, 41, 057/- as the income was offered to tax in assessment year 2008-2009. Therefore no interference is called for in the order of the ld. CIT(A) on this issue. - Decided against revenue Addition on account of interest income earned on clients unutilized funds - HELD THAT - Amount shown as prior period adjustment by the assessee in its profit loss account for assessment year 2011-12. A perusal of the Income Computation Statement of the assessee for assessment year 2011-12 shows the amount of Rs. 26, 95, 93, 097/- in the profit loss account. Since the amount received by the assessee as interest on FDRs on the funds received as advance from the clients has duly been credited in the respective accounts of the clients the ld. CIT(A) was justified in deleting the addition made by the A.O. We accordingly confirm the order of the ld. CIT(A) on this issue and reject grounds of the Revenue. Addition on the basis of the comments of the statutory auditor - as commented that the said amounts were part of the work done during the year whereas the submission of the assessee was that the same have already been accounted for in assessment year 2011-12 - HELD THAT - We find no error in the order of the ld. CIT(A) in deleting the addition as the same has been shown by the assessee as income in the subsequent year. We therefore confirm the order of the ld. CIT(A) on this issue and reject ground of the Revenue.
Issues Involved:
1. Addition on account of Labour Cess. 2. Deletion of disallowance under section 40(a)(ia) of the Income Tax Act, 1961. 3. Addition of credit balance in clients' accounts as cessation of liability. 4. Acceptance of revised computation of income and related depreciation. 5. Addition of prior period expenses. 6. Addition of interest income on clients' unutilized funds. 7. Addition of expenses relating to purchase of material. 8. Addition of "income wrongly credited in previous year written back." Issue-wise Detailed Analysis: 1. Addition on account of Labour Cess: The assessee argued that the labour cess provision was not debited to the profit & loss account but was part of the contract account, thus not affecting profitability. The Tribunal found the assessee's contention justified, noting that the assessee acted as a collecting agency for the labour cess, which was later deposited with the government. The addition was deleted as it did not affect the profitability of the assessee corporation. 2. Deletion of disallowance under section 40(a)(ia): The AO added Rs. 86,96,73,557 for non-deduction of TDS on labour charges. The CIT(A) deleted this, noting that the expenses were direct and part of the contract account, not falling under sections 30 to 38 of the Act. The Tribunal upheld this, citing previous Tribunal decisions and the specific nature of the expenses as direct costs under section 28, not subject to disallowance under section 40(a)(ia). 3. Addition of credit balance in clients' accounts as cessation of liability: The AO added Rs. 11,31,25,121, considering it as income from completed projects. The CIT(A) deleted this addition, noting the AO did not prove the liability ceased to exist. The Tribunal upheld this, emphasizing that the credit balances were long-standing and related to government departments, thus not justifying the addition. 4. Acceptance of revised computation of income and related depreciation: The AO rejected the revised computation of income, leading to an addition of Rs. 2,42,57,570. The CIT(A) directed the AO to accept the revised computation, noting the error correction in depreciation claims. The Tribunal upheld this, emphasizing the principle of consistency and the correction of anomalies in the revised computation. 5. Addition of prior period expenses: The AO disallowed Rs. 23,54,235 as prior period expenses. The CIT(A) deleted this, noting the expenses crystallized in the current year and were part of the contract account. The Tribunal upheld this, citing previous Tribunal decisions and the necessity of corresponding reduction in work-in-progress. 6. Addition of interest income on clients' unutilized funds: The AO added Rs. 39,46,18,444 as interest income. The CIT(A) deleted this, noting the interest was credited to clients' accounts as per government orders. The Tribunal upheld this, emphasizing the interest was not the assessee's income but that of the clients. 7. Addition of expenses relating to purchase of material: The AO disallowed Rs. 19,27,197 for expenses related to the previous year. The CIT(A) deleted this, noting the expenses were part of the contract account and any addition would require a corresponding reduction in work-in-progress. The Tribunal upheld this, citing consistency with previous Tribunal decisions. 8. Addition of "income wrongly credited in previous year written back": The AO added Rs. 9,43,41,057 for income written back. The CIT(A) deleted this, noting the income was already taxed in the previous year and reversed as per CAG directions. The Tribunal upheld this, emphasizing the income was already offered to tax in the previous year. Conclusion: The Tribunal allowed the assessee's appeal and dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on all issues. The judgment emphasized the principles of consistency, proper accounting practices, and the specific nature of expenses and income in the context of government contracts.
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