2024 (6) TMI 271 - AT - Income Tax

Disallowance u/s 40(a)(ia)/43B - Addition towards the provisions made for unfinished work and claimed as expenditure - CIT (A) examined the additions made by the AO from the applicability of provisions of TDS - AO had also made an addition by way of disallowance u/s 40A of the Act which was sustained by the learned CIT (Appeals) - CIT(A) holding that the provisions of section 40(a)(ia)/43B are attracted on the provisions made towards unfinished work in respect of projects whose revenue has been accounted for as completed project under POCM Method - in the light of provisions of section 194C held that 30% of these expenses is liable to be sustained for the reason that TDS was not deducted, Whether when following and accepted method of accounting which is POCM Method in this case, the assessee estimates and makes accounting provisions towards the unfinished work, the provisions of TDS under Section 40(a)(ia) of the Act are attracted or not.? - HELD THAT - We are of the considered view that there is no error in the findings of the CIT (Appeals) in regard to both the counts of disallowances under Section 40A(ia) and section 40B of the Act. Once the assessee claims that while following percentage of completion method at 100% of the revenue of the project has been recognized, it was incumbent to also account, expenditures by deducting TDS instead of making provisions. As complete details of payment after the close of the accounts and TDS deducted and deposited there from in subsequent years was filed before the learned CIT (Appeals) on 25.04.2022 and which have not been taken into consideration. We consider it appropriate to restore the issue to that extent before the CIT (Appeals). Accordingly, ground nos. 1 to 4 raised by the assessee are not sustainable on merits except to the extent required to be considered in the light of aforesaid directions by the learned CIT (Appeals). Addition u/s 14A - HELD THAT - As admitted states of affairs that AO made a disallowance without considering the fact that there was no exempt income during the year and for it, it is settled proposition of law that in the absence of exempt income, no disallowance can be made. Accordingly, the appeal of assessee is partly allowed.

Summary

Issues involved:
The judgment involves issues related to disallowance of expenses, applicability of provisions of TDS under Section 40(a)(ia) and Section 43B of the Income-Tax Act, disallowance under Section 40A, and disallowance under Section 14A.

Disallowance of Expenses:
The Assessing Officer disallowed expenses claimed by the Assessee for unfinished work in a construction project, citing reasons such as capital expenditure, provisions made after project completion, and non-deduction of TDS. The CIT (Appeals) found the AO's observations erroneous and considered the disallowance inappropriate. However, the CIT (Appeals) sustained a disallowance under Section 40A of the Act. The Assessee raised grounds challenging the disallowance, arguing that the provisions of TDS were not applicable as per the method of accounting followed consistently. The AR submitted that the disallowance was not sustainable if the Assessee was following an accepted accounting method. The Departmental Representative disagreed, stating no error in the lower authorities' findings.

Applicability of TDS Provisions:
The main question was whether provisions of TDS under Section 40(a)(ia) were applicable when the Assessee estimated costs for unfinished work using the POCM Method. The AR argued that such estimates, made after recognizing 100% of project revenue, should not be subject to TDS as exact amounts cannot be calculated. The CIT (Appeals) examined the details provided by the Assessee and concluded that certain expenses were liable for TDS deduction under Section 194C. The CIT (Appeals) upheld a partial disallowance under Section 40(a)(ia) due to non-deduction of TDS.

Disallowed Expenses under Section 40A and Section 43B:
The CIT (Appeals) considered specific expenses like UP VAT tax and labor cess as not allowable under Section 43B. The Assessee submitted detailed explanations and requested a restriction on the disallowance amount. The CIT (Appeals) analyzed the expenses and concluded that a portion was liable for TDS deduction, sustaining a disallowance under Section 40(a)(ia) for non-deduction of TDS.

Exempt Income Disallowance:
The Assessing Officer made a disallowance under Section 14A without considering the absence of exempt income during the year. The judgment recognized that in the absence of exempt income, no disallowance should be made. Consequently, the appeal of the Assessee was partly allowed.

Conclusion:
The judgment partly allowed the Assessee's appeal, noting errors in the disallowances made and directing a reconsideration of certain aspects by the CIT (Appeals). The judgment emphasized the importance of considering the specific circumstances and applicable provisions while making disallowances related to expenses and TDS deductions.