2016 (4) TMI 898 - AT - Income Tax

Disallowance invoking Section 40(a)(ia) - CIT(A) allowed the claim - Held that - The Revenue contentions have no merit in considering the fact that so many vouchers were impounded in the course of survey, but has not considered them. We are also not inclined to accept the Revenue s contentions that so much of expenditure was not incurred. Without the expenditure being incurred, the project could not be completed. In AY. 2005-06, the AO disallowed the expenditure as not vouched and also invoking Section 40(a)(ia) so much so on the turnover of 11.24 Crores, the income was determined at ₹ 3.76 Crores, which itself is very high in this line of business. In the given circumstances, the only option is to reject the books of accounts and estimate the income. In contract works, since, assessee has done work away from its area of operation, in Allahabad, estimation of income at 9% is reasonable. Further, if the ground 10 of Revenue in AY. 2006-07 is allowed, there will be reduction of turnover and consequent income. We are not able to understand why Revenue has taken that stand which will reduce the income. Be that as it may, we are of the opinion that Ld. CIT(A) has analysed the issues in detail and has come to correct decision in determining the issues and adjudicating rival contentions. We see no reason to differ from the findings, as Revenue has placed only arguments without any evidence in support. We find no merit in Revenue s grounds and accordingly, they are rejected. - Decided in favour of assessee

Issues Involved:
1. Acceptance of 'cash system of accounts' instead of mercantile system.
2. Rejection of books of accounts and estimation of income at 9%.
3. Deletion of additions made under sections 40A(3) and 40(a)(ia) of the Income Tax Act.
4. Enhancement of income in AY 2005-06 despite substantial relief.
5. Taxation of turnover in AY 2006-07 instead of AY 2007-08.
6. Cross-Objections by assessee on the applicability of section 40(a)(ia).

Issue-wise Detailed Analysis:

1. Acceptance of 'cash system of accounts' instead of mercantile system:
The Ld. Commissioner of Income Tax (Appeals) [CIT(A)] accepted the 'cash system of accounts' followed by the assessee, which was contested by the Revenue. The CIT(A) noted that the assessee firm, a civil contractor, had executed works and recorded income on a cash basis, which was consistent with their accounting practice. The CIT(A) found that the method of accounting was appropriate given the disputes and delayed payments from the contractee, Allahabad University.

2. Rejection of books of accounts and estimation of income at 9%:
The CIT(A) rejected the books of accounts due to significant discrepancies and estimated the income at 9% of the turnover. The CIT(A) found that the vouchers were not serially impounded but by the boxes containing them, leading to the conclusion that the books were unreliable. The CIT(A) referenced various judicial precedents to justify the rejection of books and estimation of income. The estimation at 9% was deemed reasonable given the nature of the business and the circumstances.

3. Deletion of additions made under sections 40A(3) and 40(a)(ia):
The CIT(A) deleted the additions made under sections 40A(3) and 40(a)(ia), noting that the payments were made to group leaders for convenience and not to subcontractors. The CIT(A) accepted the assessee's argument that the payments were made to individual workers through group leaders, thus not attracting the provisions of section 40(a)(ia). The CIT(A) also referenced judicial precedents to support the deletion of these additions.

4. Enhancement of income in AY 2005-06 despite substantial relief:
The CIT(A) enhanced the income for AY 2005-06 by including unrealized monies of Rs. 6.57 Crores based on a Memorandum of Understanding (MoU) with Allahabad University. The CIT(A) found that the method of accounting followed by the assessee was defective and resulted in underreporting of income. The enhancement was justified to bring the unrealized income to tax, ensuring that the true profits were reflected.

5. Taxation of turnover in AY 2006-07 instead of AY 2007-08:
The CIT(A) brought to tax a turnover of Rs. 6.54 Crores in AY 2006-07, which the Revenue argued should have been taxed in AY 2007-08. The CIT(A) found that the works were completed by 31-3-2006 and thus, the income should be recognized in AY 2006-07. The CIT(A) noted that the assessee had offered Rs. 30,00,000 in AY 2007-08, which was deducted from the enhanced turnover for AY 2006-07.

6. Cross-Objections by assessee on the applicability of section 40(a)(ia):
The assessee's cross-objections on the applicability of section 40(a)(ia) were rendered academic as the CIT(A) had already deleted the additions under this section. The CIT(A) found that there were no outstanding payments at the end of the year, thus the provisions of section 40(a)(ia) did not apply. The Tribunal upheld the CIT(A)'s order, making the cross-objections moot.

Conclusion:
The Tribunal upheld the order of the CIT(A), rejecting the Revenue's appeals and the assessee's cross-objections. The Tribunal found no merit in the Revenue's contentions and agreed with the CIT(A)'s detailed analysis and findings. The estimation of income at 9% was deemed reasonable, and the deletion of additions under sections 40A(3) and 40(a)(ia) was upheld. The enhancement of income for AY 2005-06 and the taxation of turnover in AY 2006-07 were also affirmed. The cross-objections by the assessee were dismissed as academic.

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