2018 (12) TMI 1215 - AT - Income Tax

Rejection of books of accounts u/s 145(3) - claim of unvouched expenditure - expenditure on sub-contract - part of contract executed by consortium members - accrual of income where issue has been referred to arbitration - Held that - Assessing Officer is not right in rejecting the books of accounts of the assessee for the reason that the ld AO could not appreciate the nature of the business of the assessee and purpose of entering into consortium contract. He did not consider that assessee was only a pass through entity between the principle and the consortium members for the purpose of the above infrastructure project. The amount paid to the consortium members are also supported by the separate contracts entered into between AOP and consortium members for executing there part of the work. In fact each member was separately responsible for their own work - Decided against revenue Accrual of income - Realization of the claim of the assessee as it was referred to arbitration - Held that - Bill raised by the assessee but not accepted by GAIL. The issue is whether the income accrues in the hands of the assessee despite it being disputed by the payee. It is also an accepted fact that there was a dispute and matter was referred to arbitration. Therefore, it was not sure whether the assessee has acquired right to receive the above income. Income can be held to accrue only when the assessee acquires a right to receive that income. Unless, the assessee acquired that right it merely remains a claim and not income. The mere raising a claim or a bill does not by itself create any legally enforceable right to receive any income. The Hon ble Supreme Court in Godhra Electricity Vs. CIT 1997 (4) TMI 4 - SUPREME COURT has held that unilateral increase in the rates of electricity shown as receipt in the books which could be realized due to protracted litigation did not result in an accrual of income, hence, such amount was not assessable. Therefore, in the present case there was no certainty of realization of the claim of the assessee as it was referred to arbitration, we confirm the finding of the ld CIT(A) in holding that such amount of ₹ 26.10 crore did not have any right to receive acquired by the assessee and hence, cannot be held as income chargeable to tax in the hands of the assessee.- Decided against revenue Set off of loss of AOP - Held that - Undisputedly the assessee is a part of consortium which received a contract from GAIL for laying pipeline. Each of the consortium member also entered into sub-contracting agreement with the AOP for carrying out the above work and also sharing the gross receipts. Admittedly, the work has been executed by the members of the AOP by sharing of the gross receipts and incurring necessary expenditure to execute that contract, if any loss or income earned by them is chargeable to tax in their hands only. Therefore, we do not find any infirmity in the order of the ld CIT(A) in allowing the loss to the assessee. In view of this the only ground raised in appeal of the revenue is dismissed.

Summary

Issues Involved:
1. Rejection of books of accounts under Section 145(3) of the Income Tax Act.
2. Disallowance of contract expenses.
3. Taxability of income withheld by GAIL and referred to arbitration.
4. Allowance of set-off of loss of AOP in the hands of its member.

Issue-wise Detailed Analysis:

1. Rejection of Books of Accounts under Section 145(3) of the Income Tax Act:
The Assessing Officer (AO) rejected the books of accounts of the assessee, a consortium formed for laying a pipeline, under Section 145(3) of the Income Tax Act. The AO determined the net profit at 8% of the gross receipts due to the inability of the assessee to produce details of expenses incurred by consortium members. However, the Commissioner of Income Tax (Appeals) [CIT(A)] accepted the contention of the assessee that complete books of accounts and necessary details were maintained and that the AO failed to appreciate the nature of the contracts. The CIT(A) held that the books of accounts could not be rejected merely on the grounds stated by the AO. The Tribunal upheld the CIT(A)'s decision, emphasizing that the AO did not consider the nature of the business and the purpose of the consortium contract, and thus, the rejection of books was not justified.

2. Disallowance of Contract Expenses:
The AO disallowed the entire contract expenses of ?33,05,43,749, whereas the CIT(A) restricted the disallowance to ?77,10,535. The CIT(A) noted that the payments made to consortium members for the work done were supported by agreements and that the appellant had no control over the members to produce bills/vouchers for the expenses incurred. The Tribunal agreed with the CIT(A), stating that the AO did not appreciate the nature of the business and the pre-determined contractual arrangement between the appellant and consortium members. The Tribunal cited various case laws supporting the view that non-availability of vouchers for sub-contracted work cannot be a reason for rejecting the books of accounts or disallowing the expenses.

3. Taxability of Income Withheld by GAIL and Referred to Arbitration:
The AO included the amount of ?26,10,57,290 withheld by GAIL in the total income of the assessee, arguing that under the mercantile system, the income should be included once the bill is raised. However, the CIT(A) held that the amount did not accrue to the assessee as it was subjudice and referred to arbitration, and thus, there was uncertainty regarding its receipt. The Tribunal upheld the CIT(A)'s decision, stating that income can only be held to accrue when the assessee acquires a right to receive it. Since the amount was disputed and referred to arbitration, the assessee did not have a right to receive it during the relevant assessment year. The Tribunal cited the Supreme Court's decision in E.D. Sassoon & Co. Ltd. v. CIT and other relevant case laws to support its conclusion.

4. Allowance of Set-off of Loss of AOP in the Hands of Its Member:
In a separate appeal, the AO disallowed the loss of ?5,74,98,232 incurred by a member of the AOP, arguing that the income and expenditure of an AOP cannot be assessed in the hands of its member. The CIT(A) allowed the set-off, noting that the income and expenditure were determined by a separate agreement between the assessee and the AOP, and 99.9% of the receipts were distributed among the members for the work done by them. The Tribunal upheld the CIT(A)'s decision, stating that the work was executed by the members, and any loss or income earned by them is chargeable to tax in their hands only.

Conclusion:
The Tribunal dismissed both appeals filed by the revenue, upholding the CIT(A)'s decisions on all issues. The rejection of books of accounts was not justified, the disallowance of contract expenses was restricted appropriately, the withheld amount by GAIL was not taxable as income for the relevant year, and the loss incurred by the AOP member was allowable in the hands of the member. The Tribunal's decision was pronounced in the open court on 20/12/2018.