2019 (1) TMI 270 - AT - Income Tax

Deduction u/s 37 - Provision for exepenses - Treatment made by the assessee in respect of estimated expenditures, like, Exp.on minor/miscellaneous work, in its books of accounts - method of accounting - Held that - Since in project completion method, the entire expenses and entire sales should be shown, therefore, it is necessary for the assessee to make provision for estimated expenditures which are to be incurred in subsequent years on account of minor/miscellaneous work. If the assessee does not make provision for estimated expenditures, like, exp. on minor/miscellaneous work, then in that case assessee will not able to show true profit and loss, in its profit and loss account. In project completion method, the assessee prepares profit and loss account and other financial statements once in life of a project, therefore, these estimated expenditures, like, exp. on minor/miscellaneous work, can not be shown next year. Another important point is that in project completion method, the assessee has shown entire sales/Revenue therefore he is entitled to record the entire expenses which had incurred by him or to be incurred to earn the said entire sales/Revenue. Therefore, in order to derive the true net profit in project completion method it is necessary to show these estimated expenditures, like,Exp. on minor/miscellaneous work. Hence, we accept the treatment made by the assessee in respect of estimated expenditures, like, Exp.on minor/miscellaneous work, in its books of accounts. Deduction of TDS on the estimated expenditures, like, Exp. on minor/miscellaneous work - Held that - So far the sum of ₹ 94,51,860/- is concerned, we note that the assessee has deducted TDS and paid before 31.09.2012 i.e. before the due date of submission of return of income for assessment year 2012-13, therefore by no any stretch of imagination, the disallowance should be attracted i.e. the disallowance made by the Assessing Officer is directed to be deleted based on the fact that the assessee made the compliance and paid TDS on or before submissions of the return of income. So far the balance amount of ₹ 2,15,30,312/- is concerned, as we have explained that since the assessee is following the project completion method and in project completion method the assessee prepares financial statement, profit and loss account and balance sheet once in life of project and some ancillary works which may remain pending will get completed in subsequent years. Since the assessee made provision for these expenses to compute the true net profit and the payee is not known, therefore, deduction of TDS is not possible, hence the disallowance is not attracted. We are unable to uphold the stand of the Revenue, therefore we direct the Assessing officer to delete the additions. We also uphold the order of the ld. CIT(A) in respect of deletion of amount of ₹ 1,69,36,702/-, since this amount pertains to purchase of raw materials therefore no TDS is attracted. Hence, we dismiss the appeal filed by the revenue

Summary

Issues Involved:
1. Whether the delay in Revenue's appeal should be condoned.
2. Whether the disallowance of ?4,79,18,880 made by the Assessing Officer was justified.
3. Whether the CIT(A) was correct in partly allowing the assessee's claim and deleting the addition of ?1,69,36,708.
4. Whether the assessee's provision for expenses was justified under the project completion method.
5. Whether TDS was required to be deducted on the estimated expenses.

Issue-wise Detailed Analysis:

1. Delay in Revenue's Appeal:
The Revenue's appeal was delayed by 2 days. The Tribunal condoned the delay after hearing both parties and admitted the appeal for hearing.

2. Disallowance of ?4,79,18,880 by the Assessing Officer:
The Assessing Officer disallowed ?4,79,18,880 claimed by the assessee as expenses, arguing that the expenses were not incurred during the assessment year 2012-13 and related to subsequent years. The AO noted that the bills for these expenses were received after 31/03/2012 and payments were made in AY 2013-14 and AY 2014-15. The AO also mentioned that TDS was deducted on these bills beyond the end of AY 2012-13.

3. CIT(A)'s Partial Allowance of Assessee's Claim:
The CIT(A) partly allowed the assessee's claim by deleting the addition of ?1,69,36,708, which pertained to the purchase of building material and did not require TDS deduction. The CIT(A) sustained the addition of ?94,51,860 and ?2,15,30,312 out of the total disallowance of ?4,79,18,880.

4. Provision for Expenses under Project Completion Method:
The assessee followed the project completion method, recognizing revenue and expenses when a substantial portion of the project was completed. The Tribunal noted that this method requires making provisions for estimated expenses for minor/miscellaneous work to be completed in subsequent years to present a true and fair view of the financial statements. The Tribunal accepted the assessee's treatment of estimated expenses in its books, as it was necessary for deriving the true net profit.

5. TDS on Estimated Expenses:
The Tribunal held that since the expenses were estimated and the payee was not known, it was not possible for the assessee to deduct TDS on these estimated expenses. The Tribunal referred to the judgment in Apollo Tyres Ltd. vs. DCIT, which stated that TDS provisions could not be applied when the payee was not identifiable.

Conclusion:
The Tribunal upheld the CIT(A)'s deletion of ?1,69,36,708 and directed the deletion of the remaining additions of ?94,51,860 and ?2,15,30,312. The Tribunal dismissed the Revenue's appeal and allowed the assessee's appeal, concluding that the assessee's method of accounting and provisions for estimated expenses were justified and that TDS was not required on these provisions. The order was pronounced in the open court on 31/12/2018.