2017 (11) TMI 1420 - HC - Income Tax

Assessment of income - assessee has received the amount of Arbitration Award and has disclosed only the net profit on these receipts by applying the NP rate - Mercantile system of accounting - contingent liability - subsequent years expenses which are claimed ought not to be allowed in the relevant year - Held that - From the record it is very clear that the assessee while submitting his credential before the AO relied on the audit report for the A.Y. 1990-91 & 1993-94 which he alleged to have not claimed expenses. However, no finding has been arrived by the AO and if we look at the average which has been applied by the AO and tribunal, the same are not consistent. In that view of the matter, we are of the opinion that while considering the statement for A.Y. 1990-91 & 1993-94, the AO ought not to have been given finding whether the expenses are claimed or not instead of deciding the issue which is not relevant and simply deducted the amount which is claimed in the income. In our considered opinion, CIT while considering the same has rightly held the profit rate and allowed the claim of the appellant as reproduced hereinabove. The tribunal has committed serious error in concluding that subsequent years expenses which are claimed ought not to be allowed in the relevant year . In view thereof, the income which has been incurred in the year 2006-07 is required to be allowed as expenses were not claimed in the earlier year. Since, no finding arrived by the AO whether the expenses are claimed or not for the A.Y. 2004-05. - Decided in favour of the assessee

Summary

Issues Involved:
1. Whether the tribunal was justified in treating the entire income of ? 8,13,194/- as income for the assessment year in question.

Detailed Analysis:

Issue 1: Tribunal's Treatment of Entire Income as Income for the Assessment Year in Question
Facts:
- The assessee, a Civil Contractor, maintained books of accounts on a mercantile system. His books were rejected, and a net profit rate was applied on gross contract receipts for the assessment years 1990-91 and 1993-94.
- The assessee received arbitration awards during the assessment year 2006-07 amounting to ? 7,08,360/- for A.Y. 1990-91 and ? 1,80,540/- for A.Y. 1993-94.
- The assessee applied the net profit rates of 8.5% and 8.57% respectively, as per the audit reports of the relevant years.

Assessing Officer's Findings:
- The AO did not accept the assessee's claim that expenses related to the arbitration awards were not claimed in the respective years.
- The AO concluded that the entire arbitration award receipts should be treated as income for A.Y. 2006-07, adding ? 8,13,194/- to the total returned income of the assessee.

CIT(A)'s Decision:
- The CIT(A) deleted the addition of ? 8,13,194/-, reasoning that the expenses pertaining to the arbitration awards were not included in the audited profit and loss accounts for A.Y. 1990-91 and 1993-94.
- The CIT(A) found no merit in the AO's observation that the assessee followed a hybrid system of accounting.

Tribunal's Observations:
- The Tribunal upheld the AO's decision, stating that the assessee failed to provide evidence that expenses related to the arbitration awards were not claimed in A.Y. 1990-91 and 1993-94.
- The Tribunal noted that the decision of the Apex Court in Govind Choudhary and Sons was not applicable, as it pertained to interest being considered as business receipts.

High Court's Analysis:
- The High Court reviewed the decisions and found that the CIT(A) had correctly allowed the claim of the appellant by applying the net profit rates.
- The High Court cited several precedents, including CIT vs. Govinda Choudhury & Sons, which held that interest awarded is part of business receipts and should not be treated as income from other sources.
- The High Court concluded that the income incurred in the year 2006-07 should be allowed as expenses were not claimed in the earlier years.
- The High Court found the Tribunal's conclusion erroneous and sided with the CIT(A)'s decision to delete the addition of ? 8,13,194/-.

Conclusion:
- The High Court allowed the appeal, deciding in favor of the assessee and against the department. The question of law was answered by holding that the tribunal was not justified in treating the entire income of ? 8,13,194/- as income for the assessment year in question.