2016 (7) TMI 903 - AT - Income Tax

Revision u/s 263 - provision for future losses on construction - Held that - AO is deemed to have applied his mind to the claim of the assessee for deduction. We are of the view that this stand taken by the assessee cannot be sustained. The basis on which the loss was arrived has not been enquired into by the AO. As to whether AS-7 will apply to the case of the assesee and as to whether the computation of the loss done by the assessee in accordance with AS-7 is a matter which ought to have been enquired into by the AO. His failure to make an enquiry on these aspects and accepting the claim of the assessee for deduction was erroneous and prejudicial to the interest of the revenue. The law is well settled that if the AO fails to make an enquiry on an issue, which in the given facts and circumstances of the case, calls for an enquiry then the order of the AO should held to be erroneous and prejudicial to the interest of the revenue.ITO being not only an adjudicator but also an investigator, he cannot remain passive in the face of a return which is apparently in order but calls for further enquiry in the facts and circumstances of the case and the word erroneous in s. 263 includes the failure to make such an enquiry. We are therefore of the view that exercise of jurisdiction u/s 263 of the Act in respect of provision for future losses on construction contract was fully justified. Payments being in the nature of accommodation entry - Held that - CIT was justified in invoking the jurisdiction u/s 263 of the Act even in respect of the payments made to M/s. Sintex Infra Projects Ltd.n the given facts and circumstances we do not find any ground to interfere in the order of CIT. As rightly contended by the CIT DR before us, the assessee is at liberty to put forth all contentions with regard to the allowability of the provision for future losses on construction contract and also as to how the payments made to M/s. Sintex Infra projects Ltd is not in the nature of accommodation entries and are genuine. The AO will look into the submissions of the assessee and after taking into consideration the evidence and materials before him, he is free to come to the conclusion as to whether the claim made by the assessee has to be accepted or not, uninfluenced by the fact that the assessment is being made to direction u/s.263 of the Act. With these observations, we dismiss the appeal of the assessee.

Summary

Issues Involved:
1. Deduction of provision for future losses on construction contracts.
2. Alleged bogus expenditure of ?5.42 crores paid to M/s. Sintex Infra Projects Ltd.

Issue-wise Detailed Analysis:

1. Deduction of Provision for Future Losses on Construction Contracts:
The assessee, a company engaged in construction, had debited ?14,83,51,419/- in its Profit and Loss Account as a provision for future losses on construction contracts. The CIT issued a show-cause notice under Section 263 of the Income Tax Act, 1961, alleging that this was an anticipated and unascertained liability and could not be allowed as a deduction under the mercantile system of accounting. The assessee responded by referencing Accounting Standard-7 (AS-7) and judicial pronouncements, arguing that the provision was allowable. However, the CIT found that the Assessing Officer (AO) had not made any enquiry into the nature of the transaction, the contract, or the circumstances leading to the provision. The CIT held the assessment order to be erroneous and prejudicial to the interest of the revenue due to the failure to ascertain the real nature of the provision. The Tribunal upheld the CIT's order, emphasizing that the AO's failure to make necessary enquiries rendered the assessment erroneous. It cited the decision of the Delhi High Court in Gee Vee Enterprises, which held that the AO must investigate further if a return calls for enquiry.

2. Alleged Bogus Expenditure of ?5.42 Crores Paid to M/s. Sintex Infra Projects Ltd:
The CIT also alleged that the assessee had taken accommodation entries in the nature of bogus expenditure amounting to ?5.42 crores from M/s. Sintex Infra Projects Ltd. The assessee contended that payments were made through banking channels with TDS deductions and that the AO could not have investigated the genuineness of the expenditure as the information was received after the assessment was completed. However, the CIT found no material evidence to conclusively establish that M/s. Sintex Infra Projects Ltd. had rendered services in lieu of the payment. The CIT noted that the AO had not examined the bank statements or conducted any enquiry to ascertain the genuineness of the transaction. The Tribunal agreed with the CIT, stating that the information available at the time of invoking Section 263 could be considered, including material obtained after the assessment. The Tribunal cited the Supreme Court's decision in CIT vs. Shree Manjunathesware Packing Products & Camphor Works, which allowed the consideration of new material in revisional proceedings.

Conclusion:
The Tribunal upheld the CIT's order setting aside the AO's assessment and directing fresh enquiries into both the provision for future losses and the alleged bogus expenditure. The Tribunal emphasized that the AO must conduct thorough enquiries and consider all evidence before accepting the assessee's claims. The appeal of the assessee was dismissed, allowing the AO to reassess the claims based on proper investigation and evidence.