2019 (1) TMI 1764 - AT - Income Tax

Accrual of income - undisclosed contract receipt - difference in income declared by the assessee and income represented in form 26AS - Liquidated Damages for belated execution of the contract - Whether should be allowed as an expense from the alleged contract receipt - HELD THAT - Difference above is representing the liquidated damages deducted by the Gujarat Council of primary education. AO was very much aware of the address of Gujarat Council of primary education. In case of any doubt, it was the duty of the AO to take the confirmation from the Gujarat Council of primary education. But we note that none of the authorities below has used the powers given under section 133(6) and 131 of the Act to verify the contention of the assessee. As referred the bank statement of the assessee and found that the exact amount of payment received as approved in the bills was reflecting therein. Thus it is clear that there was nothing received by the assessee over and above the bills approved by the Gujarat Council of primary education. No allegation of the Revenue that the assessee has received the amount of difference as discussed above outside the books of accounts. The books of accounts of the assessee during the relevant period were audited, and no defect of whatsoever was pointed out by the auditor of the assessee. There cannot be any addition merely on account of the difference between the income shown by the assessee in its financial statements and income shown in the form 26AS. In holding so, we find support and guidance from the order of Ravindra Pratap Thareja 2015 (10) TMI 1487 - ITAT JABALPUR wherein held that merely because a payment is reflected in AS-26 and is shown to have been made to the assessee, it cannot be brought to tax in his hands when the said money is not received by the assessee. Even if the said difference is treated as the income of the assessee, then also it is entitled to claim the same amount of liquidated damage as expenses under section 37(1) resulting no tax liability in the hands of the assessee. See MAZDA LTD. 2017 (9) TMI 1038 - GUJARAT HIGH COURT - addition deleted - Decided in favour of assessee Disallowance of payment made to the subcontractor - notices issued under section 133(6) of the Act were not either served to them or there was no compliance - AO held that the payment made by the assessee was not representing the genuine transactions - HELD THAT - Assessee has furnished the copies of the PAN of all the parties along with the jurisdiction. Thus we are of the view that the AO before holding that the payment made by the assessee is not genuine, he should have verified from the respective AO having jurisdiction over the assessee. But the AO failed to do so. Assessee has filed the copies of income tax return acknowledgment along with the computation of income in the case of Shri Mahammed Husen Syed Assessee has made payment to Nimesh builders and Mahammed Husen Syed after deduction of the TDS. The assessee in respect of these parties has also filed the confirmation. Addition was made by the AO on the ground that notices under section 133(6) of the Act were either not served or served, but no compliance was made - AO was in possession of the PAN of all the parties along with the jurisdiction then before making any disallowance it was the duty of the AO to verify the same from the AOs having jurisdiction over the assessee. AO did not doubt the reasonableness of the expenses. Thus in our considered view, the other details filed by the assessee cannot be just brushed aside without any cogent reasons to conclude that the expenses claimed by the assessee are not genuine. In view of the above, we reverse the order of authorities below. Accordingly, we set aside the order of learned CIT (A) and direct the AO to delete the addition made - Decided in favour of assessee.

Summary

Issues Involved:
1. Addition of ?19,06,739/- as undisclosed contract receipt.
2. Disallowance of expenses amounting to ?20,38,708/-.
3. Levy of interest under section 234A/B/C of the Income Tax Act.
4. Initiation of penalty under section 271(1)(c) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Addition of ?19,06,739/- as Undisclosed Contract Receipt:
The assessee, a partnership firm engaged in building construction, declared gross receipts of ?8,04,04,739/- in its profit and loss account, which included gross income from construction activity and interest income. However, the Assessing Officer (AO) noted a discrepancy in the gross receipts as per Form 26AS, which showed ?8,23,11,478/-, resulting in a difference of ?19,06,739/-. The assessee explained that this discrepancy was due to liquidated damages deducted by the Gujarat Council of Primary Education for late execution of work. The AO disagreed, stating that the assessee failed to provide a copy of the contract showing the clause for liquidated damages, claimed the full TDS amount, and treated the liquidated damages as akin to retention money, thus taxable in the current year under the mercantile system of accounting. The CIT(A) upheld the AO's decision, but on appeal, the Tribunal found that the difference was indeed due to liquidated damages deducted by the Gujarat Council of Primary Education. The Tribunal noted that the AO did not verify the contention with the Gujarat Council and that the assessee's bank statements reflected only the net amount received. The Tribunal concluded that the addition was unjustified and directed the AO to delete the addition of ?19,06,739/-.

2. Disallowance of Expenses Amounting to ?20,38,708/-:
The assessee claimed expenses of ?20,38,708/- paid to subcontractors for executing work assigned by the Gujarat Council of Primary Education. The AO issued notices under section 133(6) to verify these payments, but two notices were not served, and one subcontractor did not respond. The AO disallowed the expenses, citing the assessee's failure to prove their genuineness. The CIT(A) upheld the AO's decision. On appeal, the Tribunal noted that the assessee provided PAN details, bank statements, and confirmations for the subcontractors. The Tribunal emphasized that the AO should have verified the subcontractors' details from their respective AOs. The Tribunal found that the AO's reliance on non-service of notices was insufficient to disallow the expenses and directed the AO to delete the disallowance of ?20,38,708/-.

3. Levy of Interest under Section 234A/B/C of the Income Tax Act:
The assessee contested the levy of interest under sections 234A, 234B, and 234C of the Income Tax Act. However, the Tribunal did not provide a detailed analysis or ruling on this issue in the judgment.

4. Initiation of Penalty under Section 271(1)(c) of the Income Tax Act:
The assessee also contested the initiation of penalty under section 271(1)(c) of the Income Tax Act. Similar to the interest issue, the Tribunal did not provide a detailed analysis or ruling on this matter in the judgment.

Conclusion:
The Tribunal allowed the appeal filed by the assessee, reversing the lower authorities' decisions on the addition of ?19,06,739/- as undisclosed income and the disallowance of ?20,38,708/- in expenses. The Tribunal directed the AO to delete both the addition and the disallowance. The issues regarding the levy of interest and initiation of penalty were not explicitly addressed in the Tribunal's detailed analysis. The order was pronounced on 01/01/2019 at Ahmedabad.