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2016 (2) TMI 745 - AT - Income TaxReceipt from trial run of berth hire charges - whether treated as business income - Held that - In the instant case the income generated during trial run is very much connected with the business of the assessee hence the question of recognizing the income does not arise as the commercial operation has not began. In view of above we reverse the order of the ld. CIT(A) - Decided in favour of assessee Addition on the basis of TDS certificate - Work in progress - Held that - AO has found out that the assessee has understated his income on basis of the discrepancy noticed in the TDS certificate. On the other hand the ld. AR submitted that the assessee has taken advance from the party during the year against which the amount of work in progress was shown in the balance sheet of the assessee. The ld. AR further submitted that such work in progress has been offered to tax in the subsequent year. The ld. AR has submitted the financial statement of the subsequent year of the assessee in support of his claim. Now the question before us is to check whether the income of the assessee has been offered to tax or not. So for this purpose we are restoring the file to the AO with the direction to check whether the income of the assessee has been disclosed in the subsequent year or not. If yes then delete the addition made by the assessee. - Decided in favour of assessee for statistical purposes.
Issues Involved:
1. Treatment of receipt from trial run of berth hire charges as business income. 2. Treatment of work-in-progress on account of TDS certificate. Issue-wise Detailed Analysis: 1. Treatment of Receipt from Trial Run of Berth Hire Charges as Business Income: The first issue raised by the assessee was regarding the treatment of Rs. 3,17,02,632/- earned from the trial run of berth hire charges as business income. The assessee, a Private Ltd. Company engaged in port development, conducted a trial run of berth no. 4A at Haldia Dock Complex before starting commercial operations. The trial run income included Rs. 3,00,18,070/- from cargo handling charges and Rs. 16,84,562/- from berth hire charges. The assessee adjusted this income against pre-operative expenses, claiming it as 'preoperative income'. However, the AO treated this income as business income, relying on the Supreme Court judgment in Tutikorin Alkali Chemicals & Fertilizers Ltd. v. CIT 227 ITR 172 (SC), which held that interest earned on short-term investments should be assessed as income from other sources. The CIT(A) upheld the AO's decision, stating that the trial run income was a commercial activity resulting in earning income and could not be termed as pre-operative income. Upon appeal, the Tribunal reversed the CIT(A)'s decision, noting that the trial run was a pre-condition before the start of commercial operations and was meant to check for flaws in the system. The Tribunal cited the Delhi High Court's judgment in Commissioner of Income Tax Vs. Nestor Pharmaceuticals Limited 322 ITR 631, which distinguished between trial production and commercial production. The Tribunal concluded that the trial run income should be adjusted against pre-operative expenses, as it was incidental to the building of assets for setting up the berth. 2. Treatment of Work-in-Progress on Account of TDS Certificate: The second issue involved the treatment of work-in-progress amounting to Rs. 2,22,23,527/- on account of TDS certificates. The AO observed a discrepancy between the income declared by the assessee (Rs. 7,34,25,493/-) and the income as per TDS certificates (Rs. 12,13,61,939/-). The assessee explained that the difference arose because TDS was deducted on work-in-progress, which was not shown as revenue during the year but booked in the subsequent year. The AO, however, added the discrepancy amount to the total income, as the assessee was in receipt of such income. The CIT(A) upheld the AO's decision, stating that the entire amount received was towards cargo handling operations and no evidence was provided to indicate that the amount represented work-in-progress. The Tribunal, however, found the AO's approach one-sided and noted that the assessee had provided an explanation regarding the discrepancy and had disclosed the work-in-progress in the subsequent year. The Tribunal restored the file to the AO to verify whether the income was disclosed in the subsequent year and directed the AO to delete the addition if the income was indeed disclosed. Conclusion: The Tribunal allowed the appeal of the assessee on the first issue, directing the adjustment of trial run income against pre-operative expenses. On the second issue, the Tribunal allowed the appeal for statistical purposes, directing the AO to verify the disclosure of income in the subsequent year and delete the addition if verified. The appeal was partly allowed for statistical purposes.
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