2013 (8) TMI 481 - AT - Income Tax

Computation of income from contract receipts - contract completion method - issuance of provisional acceptance certificate - Held that - fees received for the contract work was being offered by the assessee by following the percentage completion method and the said method consistently following by the assessee was accepted by the Department in the earlier year. As per the said method, 98.54% of the total contract work was shown to be completed by the assessee upto 31-3-2006 and accordingly the corresponding income was offered to tax in the year under consideration. The A.O. as well as the ld. CIT(A), however, took the contract as fully completed up to 31-3-2006 mainly on the basis of provisional acceptance certificate issued by the owners taking a stand that the assessee having become entitled to receive the entire contract fees on the issue of provisional acceptance certificate, income to that extent had accrued to the assessee and the same was taxable in the year under consideration - The said list, is sufficient to show that the work as per the contract was not completed by the assessee up to the date of issuance of provisional acceptance certificate and the assessee was still not relieved of the obligations under the contract as made clear in the certificate itself. The provisional acceptance certificate also made it clear that the same did not constitute final acceptance of the work and as per clause 25.1 of the contract, the assessee was entitled to apply to the owner for its final acceptance certificate upon completion of pending items identified in the provisional acceptance certificate to the satisfaction of the owner. The said final acceptance certificate was issued by the owner only on 26-3-2007 and even the said certificate indicating the effective final date as 8-10-2006 was subject to certain defect and deficiencies as set out in the Appendix A to the certificate which were required to be rectified by the contractor - Therefore, it is held that contract work was finally completed in the subsequent year and the disclosure made by the assessee of its income by showing 98.54% work completed upto 31-03-2006 and offering the income relating to the balance work in the subsequent year i.e. A.Y. 2007- 08 was in consonance with the method of accounting consistently followed by it to recognize its income from execution of contract work - Decided in favour of assessee. Disallowance of professional fees u/s 40(a)(ia) - Provision for Auditor s remuneration - Held that - if the auditor s remuneration and the services availed in transfer pricing matter were related to the year under consideration, the same cannot be disallowed on the ground that the relevant services were rendered after the end of the previous year - Decided in favour of assessee. As regards the applicability of section 40(a)(ia) of the act, assessee has relied on the decision in the case of Pfizer Limited (2012 (11) TMI 164 - ITAT MUMBAI) wherein it was held, following the decision in the case of IDBI vs. ITO (2006 (7) TMI 248 - ITAT BOMBAY-H), that when payee is not identifiable at the time of making provision, no TDS need to be made. - the stand of the assessee that the concerned payees were not identifiable at the time of making the provision is required to be verified keeping in view that the auditors generally are appointed in the relevant financial year itself. - Matter remanded back. Disallowance u/s 40(a)(ia) - Held that - It is also not the case that assessee has not deducted any amount. Assessee has indeed deducted tax under section 192 and so we are of the opinion that provisions of section 40(a)(ia) also do not apply as the said provision can be invoked only in the event of non deduction of tax but not for lesser deduction of tax - Following decision of DCIT vs. Chandabhoy & Jassobhoy 2011 (7) TMI 956 - ITAT MUMBAI - Decided in favour of assessee.

Issues Involved:
1. Addition of contract receipts.
2. Alternative claim for expenditure allowance.
3. Addition of professional fees.
4. Disallowance under section 40(a)(ia) for short deduction of tax on rent.
5. Consequential issue on income offered in a subsequent year.

Detailed Analysis:

1. Addition of Contract Receipts:
The primary issue in the appeals was the addition of Rs. 1,74,80,406/- and Rs. 2,67,38,378/- to the income of the assessees on account of contract receipts. The assessees argued that the income should be recognized based on the percentage completion method, which was consistently followed and accepted by the Department in previous years. The Assessing Officer (A.O.) and the Commissioner of Income Tax (Appeals) (CIT(A)) contended that the entire contract value became due upon the issuance of the provisional acceptance certificate. However, the Tribunal found that the provisional acceptance certificate included pending work, indicating that the contract was not fully completed. Therefore, the Tribunal held that the income was correctly recognized by the assessee based on the percentage completion method, and the additions made by the A.O. and confirmed by the CIT(A) were deleted.

2. Alternative Claim for Expenditure Allowance:
The alternative claim by the assessee was that if the contract receipts were held to be taxable in the year under consideration, the related expenditure should also be allowed. Since the Tribunal decided that the contract receipts were chargeable to tax in the subsequent year, this ground became infructuous and was dismissed.

3. Addition of Professional Fees:
The A.O. disallowed provisions made by the assessee for auditor's remuneration and transfer pricing services, treating them as contingent liabilities. The CIT(A) upheld the disallowance. The Tribunal, however, directed the A.O. to verify if the provisions were related to the services of the year under consideration. The Tribunal also referenced a decision that no TDS is required when the payee is not identifiable at the time of making the provision. This issue was restored to the A.O. for fresh verification.

4. Disallowance under Section 40(a)(ia) for Short Deduction of Tax on Rent:
The Tribunal noted that the issue of disallowance under section 40(a)(ia) for short deduction of tax on rent was covered by a previous decision, which held that section 40(a)(ia) is applicable only when there is no deduction of tax, not in cases of short deduction. Consequently, the disallowance made by the A.O. and confirmed by the CIT(A) was deleted.

5. Consequential Issue on Income Offered in a Subsequent Year:
The Revenue's appeal for A.Y. 2008-09 involved the issue of whether the CIT(A) was correct in directing the A.O. to reduce/delete the income offered by the assessee for the impugned assessment year. The Tribunal, having deleted the addition of contract receipts for A.Y. 2006-07, agreed that the income should be taxed in subsequent years as offered by the assessee. Therefore, the Tribunal set aside the CIT(A)'s order for A.Y. 2008-09 and restored the A.O.'s order, allowing the Revenue's appeal.

Conclusion:
The appeals of the assessees were partly allowed, and the appeal of the Revenue was allowed. The Tribunal's decisions were based on the consistent application of the percentage completion method for recognizing income and the proper verification of provisions for professional fees. The Tribunal also upheld the principle that section 40(a)(ia) applies only in cases of no deduction of tax, not short deduction.

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