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2019 (3) TMI 1556 - HC - Income TaxAgricultural income disallowance - no evidence produced in respect of the yield, sale amount, expenses etc. - amount disallowed as agricultural income was allowed to be adjusted against the accepted cash balance as allowed by the Settlement Commission - HELD THAT - The issue would be regulated by the finding of the Settlement Commission. If the Settlement Commission's order is sustained, we find no reason to defer from the order of the Tribunal which confirmed the First Appellate Authority's order. If the Settlement Commission declares its own order to be void on grounds of fraud and misrepresentation, necessarily, the amount which is allowed to be adjusted against the accepted cash balance as on 31.3.2001, would have to be treated as income from other sources, since no evidence is forthcoming as to the agricultural income derived by the assessee and then the CIT Appeal's order dis-allowing 90% would have to be sustained. In that context no question of law arises in the year since the issue would be reduced to one of estimation. Accrual of income - after defect liability period or contract completion date - HELD THAT - we do not think that there was any accrual on the completion of contract. The specific terms of the agreement provided that the amounts due to the awardee would be retained after completion for a specific period to ensure that if defects arise in the work executed, the same is rectified with the retained amounts which would also be the responsibility of the awardee to rectify as per the specific terms. The amounts are not set apart by the assessee for an apprehended defect. By the specific terms of the contract itself, the awarder is entitled to retain the said amounts so as to rectify any defects arising in the period in which as per the terms of the contract the amount is retained. There can be no accrual found on the completion of contract, since the assessee's right to such amount would depend on there being no defects arising in the subsequent period during which the awarder is enabled retention of such amounts. The accrual if at all happens, occurs only on completion of the retention period. We hence answer the first question of law against the Revenue and in favour of the assessee. Disallowance regarding work-in-progress and the bills receivable - HELD THAT - Accountant Member had remanded most of the issues for consideration before the AO. The Judicial Member and the Third Member, however, deferred since there were certain consequences arising from the order of the Settlement Commission. Even de hors the Settlement Commission's order, we find that the order of the Accountant Member was only on the various adjustments made. There arises no question of law and the issues revolve around facts. The consequence arising from the order of the Settlement Commission as recognised by the Judicial Member and the Third Member, necessarily has to be accepted by the Department in making assessments for the subsequent years, subject, however, to the Settlement Commission's order being sustained. We, however, answer the question of law framed by us in favour of the assessee and against the Revenue. If at all the order of the Settlement Commission is set aside, then on this question, the Revenue could file an application before the Tribunal for restoring the appeal to consider questions afresh. Allowance of loss claimed on account of termination of contract when arbitration proceedings are pending and have not become final - HELD THAT - The assessee entered into a contract and also furnished a bank guarantee for satisfactory execution of the contract. The contract was cancelled by the awarder and the bank guarantee was encashed. An arbitration proceeding is pending between the awarder and the awardee. Revenue claims that till the arbitration proceedings is concluded the assessee cannot claim the amount as business loss. As of now, the assessee does not have the amounts with it and the bank guarantee has been encashed and it is a loss occurred in the subject year. If at all in conclusion of the arbitration proceedings, the assessee receives any amount it could be adjusted in the loss of that year. Hence, we answer the said question of law in favour of the assessee Disallowance of 5% of the expenditure - HELD THAT - While the CIT (Appeals), following the order of the Tribunal for the earlier assessment year in the case of the assessee itself, confined the disallowance to 1%. The Tribunal confirmed the same. We do not find any reason to interfere with that since it gives rise to no question of law. Penalty u/s 271(1)(c) - HELD THAT - If the Settlement Commission's order is sustained, then the consequence flowing from that order for the subsequent years has to be accepted by the Department. In such circumstance, no penalty can be imposed on the assessee for reason of there being no addition possible. Hence, the orders of penalty are to be set aside. We set aside the orders issued by the lower authorities, answering the question of law in favour of the assessee and against the Revenue. However, we make a reservation, different from that made in the quantum appeals, that if at all the Settlement Commission's order is declared void, then necessarily the penalty imposed under Section 271(1)(c) have to be reconsidered by the AO, on the basis of the additions sustained. However, the issue of retention amount being taxed in the year of completion of contract has been held in favour of the assessee by us, independent of the order of the Settlement Commission, which portion would have to be, even then reduced.
Issues Involved:
1. Disallowance of agricultural income. 2. Treatment of retention amounts in contract completion. 3. Additions based on work-in-progress and bills receivable. 4. Loss claimed due to termination of contract amidst pending arbitration. 5. Modification of disallowance of expenditure. 6. Imposition of penalty under Section 271(1)(c). Issue-wise Detailed Analysis: 1. Disallowance of Agricultural Income: The appeal for AY 2003-04 involved the disallowance of agricultural income declared by the assessee. The AO allowed only ?5,00,000 out of ?24,98,737 due to lack of evidence. The Commissioner of Appeals accepted ?10,00,000 as agricultural income. The Tribunal remanded the case, and the CIT (Appeals) adjusted the disallowed amount against the accepted cash balance from a previous block assessment. The Tribunal's majority decision, influenced by the Settlement Commission's order, was upheld. The Revenue's pending application to declare the Settlement Commission's order void on grounds of fraud and misrepresentation was noted. The court concluded that the issue hinges on the Settlement Commission's order. If sustained, the Tribunal's order stands; if voided, the disallowed amount would be treated as income from other sources. 2. Treatment of Retention Amounts in Contract Completion: The issue was whether retention amounts should be treated as accrued income upon contract completion. The Tribunal's majority followed its earlier decision favoring the assessee, despite the Accountant Member's dissent. The court agreed with the Accountant Member on the principle of accrual but found no accrual at contract completion due to specific contract terms allowing retention for defect liability. The right to the retained amount accrues only after the defect liability period. Thus, the court answered this question in favor of the assessee. 3. Additions Based on Work-in-Progress and Bills Receivable: The Tribunal's majority decision, influenced by the Settlement Commission's order, was upheld. The court found no substantial question of law as the issues were factual. The court emphasized that the Settlement Commission's order must be considered in subsequent assessments, subject to its validity. The Revenue retains the right to approach the Tribunal if the Settlement Commission's order is declared void. 4. Loss Claimed Due to Termination of Contract Amidst Pending Arbitration: For AY 2007-08, the issue was whether the Tribunal correctly allowed a loss claim due to contract termination while arbitration was pending. The court upheld the Tribunal's decision, stating the loss occurred when the bank guarantee was encashed. Any recovery from arbitration could be adjusted in the year of receipt. The question was answered in favor of the assessee. 5. Modification of Disallowance of Expenditure: For AY 2008-09, the AO's 5% expenditure disallowance was reduced to 1% by the CIT (Appeals) and confirmed by the Tribunal. The court found no reason to interfere, as it raised no substantial question of law. 6. Imposition of Penalty Under Section 271(1)(c): The assessee's appeals against the Tribunal's affirmation of penalties for AYs 2002-03 to 2005-06 were considered. Penalties were imposed based on additions related to retention amounts and work-in-progress. The court upheld the Tribunal's decision, noting that penalties cannot be imposed if the Settlement Commission's order is sustained. The orders of penalty were set aside, with a reservation for reconsideration if the Settlement Commission's order is voided. The court also noted that the issue of retention amounts was decided independently in favor of the assessee. Conclusion: The appeals were disposed of with specific directions based on the Settlement Commission's order and the court's independent findings on retention amounts. The Revenue's right to reconsider penalties and additions if the Settlement Commission's order is voided was preserved. The court consistently ruled in favor of the assessee on the primary issues, subject to the validity of the Settlement Commission's order.
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