2014 (11) TMI 286 - AT - Income Tax

Retention money deleted Held that - The amount has been retained by the authorities as per the terms of contract for satisfaction of the various obligations and liabilities of the assessee under the contract - The assessee is recognizing the revenue from contract after reducing the amount retained by the authorities in pursuant to the terms of contract and offering the amount to tax on final settlement of account or on receipt of the retention money after deduction if any by the authorities - when the assessee is following this method of accounting regularly and consistently and which has been accepted by the AO in all the earlier years then the AO is not permitted to take a different view to de hors the principal of consistency until and unless the facts for the year warrants to take a different view also in CIT Vs. Associated Cables (P) Ltd. 2006 (8) TMI 135 - BOMBAY High Court it has been held that the right to receive the retention money is accrued only after the obligations under the contract are fulfilled and, therefore, it would not amount to an income of the assessee in the year in which the amount is retained Decided against revenue. Labour charges and site expenses deleted Held that - The assessee has made the expenses of ₹ 58,17,088/- in cash and all the vouchers on the cash payment are not verifiable, therefore, the disallowance made by AO on these two accounts amounting to ₹ 25,00,000/- is excessive and very high, thus, a reasonable disallowance on these two accounts would be ₹ 2.50 lacs the AO is directed to the disallowance to ₹ 2,00,000/- on account of labour charges and ₹ 50,000/- on account of site expenses Decided partly in favour of revenue. Addition of purchases expenses deleted Held that - The AO issued the summons u/s 131 to the suppliers of the assessee from whom the assessee made the purchases - without discussing anything about the evidence produced by the assessee in respect of the claim except pointing out some wrong PAN No., the AO had made the addition on the basis of the report of the inspector of income tax - when the assessee has produced income tax returns, VAT returns and all other relevant documents and evidence to show the genuineness of the business transaction and purchase made by the assessee from these parties then the burden is shifted on the AO to prove the contrary - the return of income and confirmation filed by the assessee in respect of the claim which is not found to be false - when the assessee has produced all relevant evidence which could have been produced in respect of the claim of the purchases then in the absence of any contrary record or finding to the effect that the record produced by the assessee was not correct or genuine, the disallowance made by the AO merely on the basis of the report of inspector is not sustainable the order of the CIT(A) is upheld Decided against revenue.

Issues Involved:
1. Deletion of addition of retention money to the turnover.
2. Deletion of addition on account of labour charges.
3. Deletion of addition on account of site expenses.
4. Deletion of addition on account of purchase expenses from three parties.
5. Consideration of additional evidences submitted during appellate proceedings.

Issue-wise Detailed Analysis:

1. Deletion of Addition of Retention Money to the Turnover:
The Assessing Officer (AO) added the retention money of Rs. 1,17,98,002 to the turnover, arguing that it had accrued during the period under question, as the assessee follows the mercantile system of accounting. The assessee contended that the retention money is kept to secure various obligations and is only recognized as income upon receipt. The CIT(A) deleted this addition, following various judicial precedents. The Tribunal upheld this deletion, emphasizing the principle of consistency, as the AO had accepted this method of accounting in previous years. The Tribunal cited the Hon'ble High Court's ruling in CIT Vs. Associated Cables (P) Ltd., which held that retention money accrues only upon fulfillment of contractual obligations.

2. Deletion of Addition on Account of Labour Charges:
The AO made an ad hoc disallowance of Rs. 20 lakh from the claimed labour charges of Rs. 8,05,16,058, citing cash payments and incomplete voucher production. The CIT(A) deleted this disallowance, noting that the expenses were consistent with previous years. The Tribunal, however, found the AO's disallowance excessive and reduced it to Rs. 2 lakh, acknowledging the necessity of cash payments in the assessee's line of work.

3. Deletion of Addition on Account of Site Expenses:
The AO disallowed Rs. 5 lakh from the claimed site expenses of Rs. 77,97,552 on an ad hoc basis, citing lack of evidence. The CIT(A) deleted this disallowance, again noting consistency with previous years. The Tribunal reduced the disallowance to Rs. 50,000, considering the nature of the assessee's business and the inevitability of cash payments.

4. Deletion of Addition on Account of Purchase Expenses from Three Parties:
The AO disallowed purchases from three parties amounting to Rs. 94,58,077, based on an inspector's report questioning the genuineness of these parties. The CIT(A) deleted this disallowance after considering the evidence provided by the assessee, including PAN, VAT details, and payment confirmations. The Tribunal upheld this deletion, noting that the AO had not disproved the evidence provided by the assessee and had relied solely on the inspector's report without further verification.

5. Consideration of Additional Evidences Submitted During Appellate Proceedings:
The AO argued that additional evidence submitted during the appellate proceedings was not provided during the assessment proceedings. The Tribunal did not find this argument sufficient to overturn the CIT(A)'s decision, as the evidence submitted was comprehensive and addressed the AO's concerns.

Conclusion:
The Tribunal partly allowed the revenue's appeal, reducing the disallowances on labour charges and site expenses to Rs. 2 lakh and Rs. 50,000, respectively, while upholding the CIT(A)'s deletions regarding retention money and purchase expenses. The judgment emphasizes the importance of consistency in accounting practices and the necessity of substantial evidence to support disallowances.

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