2018 (4) TMI 326 - AT - Income Tax

Accrual of income - Addition on account of retention money - Held that - As decided in assessee s own case for previous AY held thatamount of retention money did not accrue to assessee as income till the performance of the contract is fulfilled and accepted by contractee. - Decided against revenue G.P. determination - unfinished contracts - method of accounting - Held that - We find that assessee was following PCM for the incomplete projects for the last so many assessment years, that the AO had never objected to the method of accounting, that while rejecting the method applied by the assessee, the AO had not mentioned the reasons as to why the method could not be applied for the year under consideration. It is true that principle of res judicata does not apply to the Incometax proceedings, but it is also equally true that rule of consistency applies to Income-tax proceedings. If there was no change in the facts and circumstances of the case, then he was not justified in disturbing the book results of the assessee. The FAA has given categorical finding of fact that the books of assessee were maintained as per the mandate of AS-7.- Decided against revenue Addition of outstanding creditors - survey action u/s 133 - one of the Directors offered ₹ 30, 00, 000/- (approximately)for taxation on account of old creditors - Held that - The addition should be based on some evidence. In the case under consideration, the assessee had clearly mentioned the additional income offered was based on some estimate. During the survey proceedings, the Director of the company could not refer to the regular books of accounts. After reconciling the financials the exact amount of the disputed creditors was shown in the return of income. Therefore, in our opinion, the FAA was not justified in confirming the addition of ₹ 2. 78 lakhs especially when the statements recorded during the survey proceedings talked of estimated income only. - Decided in assessee s favour. Disallowance of interest paid to the custom authorities - Held that - We find that the identical issue i. e. use of machinery outside the state of Maharashtra and levy of penalty had travelled up to Settlement Commission and the Hon ble Bombay High Court. The Commission deleted the penalty and the Hon ble Court held that the interest paid by the assessee was of compensatory nature i. e. it is not penal nature. We are of the opinion that after the order of the Commission and the judgment of the Hon ble Court there is no justification for holding that the interest was penal interest and that the expenditure claimed by the assessee should not be allowed. Reversing the order of the FAA we decide the issue in favour of the assessee.

Issues Involved:
1. Deletion of addition on account of retention money.
2. Addition related to unfinished contracts.
3. Confirmation of addition of ?2.78 lakhs.
4. Disallowance of claim of ?84.86 lakhs on account of interest paid to customs authorities.

Issue-Wise Detailed Analysis:

1. Deletion of Addition on Account of Retention Money:
The first effective ground of appeal concerns the deletion of the addition on account of retention money. The Tribunal noted that the issue had already been decided in favor of the assessee by the Hon’ble Bombay High Court in Income Tax Appeal No. 1381 of 2012, dated 5/3/2014, for an earlier assessment year. The Bombay High Court had referenced the case of Associated Cables Ltd., 286 ITR 596 (Bom.), which established that the amount retained by the contractee to ensure proper performance of the contract would accrue as income only upon the acceptance of the performance test by the contractee. The Tribunal, respecting this precedent, decided ground no. 2 against the Assessing Officer (AO).

2. Addition Related to Unfinished Contracts:
The next ground of appeal pertains to the addition related to unfinished contracts. The AO had added an amount of ?4.96 crores to the total income of the assessee, arguing that the gross profit (GP) percentage should be applied to arrive at the total estimated cost, rather than the net profit (NP) margin as done by the assessee. The First Appellate Authority (FAA) found that the assessee was following the Percentage Completion Method (PCM) as per accounting standard (AS-7) consistently from earlier years, and the AO had not objected to this method previously. The FAA directed the AO to delete the addition, citing the principle of consistency and referencing cases such as Gopal Purohit (336 ITR 287) and Kotak Securities Ltd. (15 taxmann.com 77). The Tribunal upheld the FAA's decision, noting that the AO had not provided any reasons for rejecting the method applied by the assessee for the year under consideration.

3. Confirmation of Addition of ?2.78 Lakhs:
The second ground of appeal in the cross-objection (CO) is about confirming the addition of ?2.78 lakhs. During the assessment proceedings, the AO observed that the assessee had admitted to outstanding creditors for a period of more than three years amounting to ?30 lakhs during a survey action. However, the assessee offered only ?27.21 lakhs in its return of income. The AO added the difference of ?2.78 lakhs to the income of the assessee. The FAA upheld the AO's decision, referencing cases such as Hotel Samrat [3 ITR 353] and K.C.K. Deboo [313 ITR 186]. However, the Tribunal found that the amount surrendered during the survey was an estimate and that the exact amount of disputed creditors was ?27.21 lakhs as per the regular books of accounts. Thus, the Tribunal decided this ground in favor of the assessee.

4. Disallowance of Claim of ?84.86 Lakhs on Account of Interest Paid to Customs Authorities:
The final issue concerns the disallowance of a claim of ?84.86 lakhs on account of interest paid to customs authorities. The AO had disallowed this interest expenditure, considering it as penal interest for the violation of law, which is not allowable as per the provisions of explanation to Section 37(1) of the Act. The FAA confirmed the AO's order, referencing the case of Prakash Cotton Mills (201 ITR 684) and Meddi Venkatram & Company Pvt. Ltd. (229 ITR 534). However, the Tribunal noted that the Settlement Commission had deleted the penalty and the Hon’ble Bombay High Court had held that the interest paid was compensatory in nature, not penal. Therefore, the Tribunal reversed the order of the FAA and decided the issue in favor of the assessee, stating that explanation 1 to section 37 was not applicable to the facts of the case.

Conclusion:
The appeal filed by the AO was dismissed, and the CO of the assessee was partly allowed. The Tribunal's order was pronounced in the open court on 04th April, 2018.

← Previous Next →