2005 (9) TMI 237 - AT - Income Tax

Credit For TDS - rendering technical services and project execution services - liability towards payment of tax - deduction for the prior period expenses - maintaining its books of account on accrual system - work-in-progress - HELD THAT - The execution of a project is a continuing process. The income/loss arising therefrom also generates contemporaneously/ simultaneously; even though such income/loss is finally measured as profit/loss only at the end of the project for the reason that the assessee is following project completion method for the recognition of profit/loss. In this context it is always useful to remember that Courts have held that income also includes loss. The set off of TDS would arise only when the income results in profits. Therefore it is all the more clear that the income whether profit or loss impregnated in the value of working in progress is finally summed up to be the profit/loss of the contract which is answerable to the assessment to be made on the assessee. Therefore we have to accept the proposition that in every assessment year even though the final result is ascertained only on the completion of the project an element of income is latent in the yearly working result. The distinction between the above conceptual profit and the ultimate de facto assessment of profit is because of the fine distinction existing between income and profits . Therefore we are of the considered opinion that the provisions of law contained in s. 199 do not stand in the way of the claim made by the assessee-company for credits in respect of TDS made during the relevant previous year. As such it is our finding that the AO should give credit for the TDS. This issue is therefore decided in favour of the assessee. Prior-period expenses - It is quite natural that there would be an amount of overflow of information after the close of the accounting year. Therefore to certain extent the claim of the assessee that the details of such expenditure were received only after the close of the accounting year could be accepted. It is a continuous process to incur expenditure and to account (for) in the books of account. Therefore even though they are treated technically as prior period expenses it relates to a continuous flow of expenditure. Therefore there is no justification in disallowing the above expenditure otherwise normally eligible for deduction. Therefore the assessing authority is directed to examine the details of expenses and allow the same wherever applicable on satisfaction of the genuineness of the expenditure. The second item of expenditure included in the disallowance is the final settlement of payments made to staff. As the payments made to staff could be finalized only on settlement the claim of the assessee is in order and the same has to be allowed as a deduction. The learned counsel appearing for the assessee-company himself fairly can ceded that the assessee-company should not have claimed deduction of the said amount. The said disallowance is confirmed. The bank advices relating to such debiting of interest were received belatedly and only because of that delay the assessee could not provide for such expenditure in the concerned assessment year. Therefore it is to be seen that such expenses really crystallized in the hands of the assessee during the relevant previous year. Therefore the claim far deduction is in order and the same has to be allowed. As seen from the above discussion the disallowance has been considered by us and the claim has been partly allowed. In result this appeal filed by the assessee is partly allowed.

Summary

Issues Involved:
1. Credit for Tax Deducted at Source (TDS) of Rs. 2,28,37,491.
2. Disallowance of prior-period expenses amounting to Rs. 24,23,000.

Detailed Analysis:

1. Credit for Tax Deducted at Source (TDS) of Rs. 2,28,37,491:
- Assessee's Argument: The assessee-company, engaged in technical services and project execution, maintained its books on an accrual basis and recognized profits on the completion or partial completion of projects. The company argued that income is earned contemporaneously with project progress, and thus, the TDS credit should be given in the assessment year when the income is earned, even if the project is completed later. They contended that the work-in-progress includes the income element, and TDS credit should be allowed as per Section 199 of the IT Act, 1961.
- Revenue's Argument: The Revenue contended that income for assessment purposes should be considered as per Section 2(24) of the IT Act, meaning 'assessable income.' Since the assessee followed the project completion method, the income would be assessable only in the year of project completion, making the TDS credit claim premature.
- Tribunal's Decision: The Tribunal found the assessee's arguments substantive and convincing, emphasizing that income is a continuous process embedded in business dynamics. The Tribunal noted that TDS is deducted from payments irrespective of whether they constitute income at that point. It held that the provisions of Section 199 do not prevent the assessee from claiming TDS credit for the relevant year. The Tribunal directed the AO to give credit for the TDS amounting to Rs. 2,28,37,491, deciding this issue in favor of the assessee.

2. Disallowance of Prior-Period Expenses Amounting to Rs. 24,23,000:
- Assessee's Argument: The assessee claimed that prior-period expenses were routine and delayed due to procedural and administrative reasons. These expenses included travel bills, hotel bills, motor hire, repairs, maintenance contracts, telephone bills, electricity bills, water charges, lease rentals, insurance premiums, etc. The assessee argued that these expenses were incurred by various site offices and communicated to the head office belatedly.
- Revenue's Argument: The AO disallowed these expenses, asserting that under the mercantile system of accounting, income and expenditure need to be recognized on an accrual basis, and prior-period expenses cannot be allowed in the current assessment year.
- Tribunal's Decision:
- Routine Office Expenses (Rs. 12,37,485.91): The Tribunal accepted that these expenses were part of a continuous flow and directed the AO to examine and allow them if genuine.
- Final Settlement Payments to Staff (Rs. 57,234): Allowed as they were finalized during the relevant year.
- Sub-Contractors Claims (Rs. 5,94,337): Allowed as the claims were finalized and crystallized during the relevant year.
- TDS Payments/Penalties (Rs. 2,75,296): Disallowed as conceded by the assessee.
- Interest Payments Overseas (Rs. 2,61,693.44): Allowed as the expenses crystallized during the relevant year.

The Tribunal partly allowed the claim for prior-period expenses, directing the AO to allow the expenses wherever applicable upon verification.

Conclusion:
The appeal was partly allowed. The Tribunal ruled in favor of the assessee regarding the TDS credit issue, directing the AO to grant the TDS credit of Rs. 2,28,37,491. On the issue of prior-period expenses, the Tribunal partly allowed the claim, directing the AO to verify and allow the expenses wherever applicable.