2006 (1) TMI 165 - AT - Income Tax

Issues Involved:
1. Addition of Rs. 1,35,000 on account of closing stock of work-in-progress.
2. Addition of Rs. 34,109 on account of material supplied by the contractee Department.
3. Addition of Rs. 46,173 as interest on FDRs.
4. Addition of Rs. 4,688 as interest on refund received from the IT Department.

Issue-wise Detailed Analysis:

1. Addition of Rs. 1,35,000 on account of closing stock of work-in-progress:

The assessee, a civil contractor, filed a return declaring an income of Rs. 1,78,140, following the mercantile system of accounting. The AO observed that substantial expenses were debited for payments received in April and May 1998, including Rs. 1,35,000 on 24th April 1998. The AO added Rs. 1,35,000 to the closing stock of work-in-progress as it was not reflected on the credit side of the trading account. The CIT(A) upheld this addition, noting the short time gap from the end of the accounting year and the improbability of no work-in-progress existing on 31st March 1998. The Tribunal agreed with the CIT(A) but directed the AO to exclude this amount in the succeeding assessment year to avoid double taxation. Thus, the ground of appeal was dismissed.

2. Addition of Rs. 34,109 on account of material supplied by the contractee Department:

The AO added Rs. 34,109, noting a discrepancy in the cost of material supplied by the contractee Department as per the TDS certificate. The CIT(A) upheld this addition, concluding that the assessee underutilized the material supplied. However, the Tribunal found no evidence supporting the CIT(A)'s finding and noted that any underutilization should be addressed by the contractee Department, not the AO. Therefore, the Tribunal set aside the CIT(A)'s order and deleted the addition, allowing this ground of appeal.

3. Addition of Rs. 46,173 as interest on FDRs:

The AO noted a discrepancy between the interest on FDRs shown by the assessee (Rs. 99,714) and the amount as per the TDS certificate (Rs. 1,39,542), resulting in an addition of Rs. 39,828, which the CIT(A) enhanced to Rs. 46,173. The assessee argued this was due to the difference between accrual and receipt basis of accounting. The Tribunal, noting the lack of reconciliation, set aside the CIT(A)'s order and remanded the issue to the AO to allow relief if the assessee could reconcile the difference. Thus, this ground of appeal was allowed for statistical purposes.

4. Addition of Rs. 4,688 as interest on refund received from the IT Department:

The AO added Rs. 4,688 as interest on a refund issued on 31st March 1998, which the assessee claimed was accounted for in the subsequent year. The CIT(A) upheld this addition. The Tribunal found merit in the assessee's contention that the refund voucher dated 31st March 1998 does not imply receipt on the same date. Given the time gap between issue and receipt, the Tribunal concluded that income could not accrue until receipt. Thus, the Tribunal set aside the CIT(A)'s order and deleted the addition, allowing this ground of appeal.

Conclusion:

The appeal was partly allowed, with the Tribunal providing relief on the additions related to material supplied by the contractee Department and interest on refund, while remanding the issue of interest on FDRs for further reconciliation and upholding the addition for the closing stock of work-in-progress with directions to avoid double taxation in the subsequent year.

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