2022 (8) TMI 1267 - AT - Income Tax

Addition in respect of closing construction work-in-progress (WIP) - difference in valuation in two sets - According to assessee, it has valued the construction WIP for the purpose of MIS financial statement at a higher value for the purpose of consolidation with the financial statement of joint venture partner i.e. M/s HCC Ltd.- HELD THAT - We find that the Revenue has not disputed the fact of examination of books of accounts by the Assessing Officer. In our opinion, if in books of account any expenditure corresponding to the additional amount of construction of WIP is not found debited, then the amount is only in the nature of notional valuation which has been carried out by the joint venture partner for the purpose of consolidating in its books of account and which cannot be made a basis for addition in the hands of the assessee. When there is no change in number of items of inventory of construction WIP as shown in the first set of financial statement as well as second set (MIS account) of financial statement, then only difference is that in MIS account construction WIP has been valued higher by the amount of Rs.32.29 crores only, for the purpose of consolidated account of the venture partner. As in the case of CIT v. Laxmi Engineer Industries 2008 (3) TMI 288 - RAJASTHAN HIGH COURT held that no addition could be made for higher valuation of the stock hypothecated to Bank if the AO had not been able to point out any discrepancy in the quantity of stock hypothecated to the Bank and the quantity of stock as per books of account. In this case also there is no observation of the AO that quantity of construction work-in-progress is more than the quantity valued as per first set of financial statement. In view of the above, we set aside the order of the Ld. CIT(A) on the issue-in-dispute and delete the addition made by the Assessing Officer. Disallowance u/s 40(a)(ia) - non-deduction of tax at source on reimbursement of employee cost/salary by the assessee to related party - CIT(A) has sustained the disallowance in view of no evidence submitted by the assessee that same was taxed in the hands of the employees either on the payment made by it or by the related party - HELD THAT - In view of submission of the assessee, the matter is restored back to the file of the Ld. Assessing Officer for verification, whether tax has been deducted by the employer M/s Alphine Samsung HCC JV in respect of salary amount reimbursed by the assessee in relation to employee Mr. Srivastav or tax has already been paid by the seconded employee on reimbursement amount. The ground raised by the assessee is accordingly allowed for statistical purpose.

Summary

Issues Involved:
1. Addition of Rs. 32,29,26,445/- in respect of closing construction work-in-progress (WIP) for AY 2014-15.
2. Disallowance of Rs. 5,65,933/- under Section 40(a)(ia) for reimbursement of salary for AY 2014-15.
3. Deduction of Rs. 32,29,26,445/- as opening WIP for AY 2015-16 if not allowed in AY 2014-15.

Issue-wise Detailed Analysis:

1. Addition of Rs. 32,29,26,445/- in Respect of Closing Construction Work-in-Progress (WIP) for AY 2014-15:

The assessee, a joint venture formed for the execution of the Delhi MRTS Project, filed its return of income reporting a loss of Rs. 24,31,31,346/-. During scrutiny proceedings, a second set of audited financial statements was submitted, showing a profit of Rs. 9.99 crores due to the inclusion of construction WIP valued at Rs. 32.29 crores. The assessee explained that this second set was prepared for Management Information System (MIS) purposes and included notional or budgeted profit for consolidation with Hindustan Construction Company Ltd. (HCC).

The Assessing Officer (AO) added Rs. 32.29 crores to the returned income, questioning the reason for the second set of financial statements and the details of the construction WIP. The AO did not reject the books of account under Section 145(3) of the Act.

The CIT(A) upheld the addition, stating that the return of income was not aligned with the second set of accounts.

The Tribunal found that the additional WIP amount was merely a valuation difference for MIS purposes and not an actual expenditure. It was noted that the AO had examined the books of accounts and found no additional expenditure corresponding to the WIP amount. The Tribunal referenced the Hon'ble Rajasthan High Court's decision in CIT v. Laxmi Engineer Industries, which held that no addition could be made for higher stock valuation if the quantity remained unchanged. Consequently, the Tribunal deleted the addition made by the AO.

2. Disallowance of Rs. 5,65,933/- Under Section 40(a)(ia) for Reimbursement of Salary for AY 2014-15:

The AO disallowed Rs. 5,65,933/- under Section 40(a)(ia) for non-deduction of tax at source on the reimbursement of salary to M/s Alphine Samsung HCC Joint Venture. The assessee argued that there was no employer-employee relationship and that the reimbursement was on a cost-to-cost basis, with tax deducted at source by the employer.

The CIT(A) upheld the disallowance, noting that the assessee did not provide evidence that the tax was deducted or paid by the related party or the employees.

The Tribunal, acknowledging the assessee's willingness to provide necessary evidence, remanded the matter back to the AO for verification of whether tax had been deducted by the related party or paid by the employees. The ground was allowed for statistical purposes.

3. Deduction of Rs. 32,29,26,445/- as Opening WIP for AY 2015-16 if Not Allowed in AY 2014-15:

The assessee claimed that if the addition of Rs. 32,29,26,445/- was not allowed in AY 2014-15, it should be allowed as a deduction in AY 2015-16 as opening WIP.

Since the Tribunal allowed the relief for AY 2014-15, this ground for AY 2015-16 was dismissed as infructuous.

Conclusion:

The appeals for AY 2014-15 and 2015-16 were allowed for statistical purposes, with the Tribunal providing relief on the addition of closing construction WIP and remanding the disallowance of salary reimbursement for further verification.