2021 (6) TMI 665 - AT - Income Tax

Disallowance of project expenses - Addition on the ground as no project-wise accounting was available and no work-in-progress was reported - Addition towards unsubstantiated project expenses - CIT-A deleted the addition even though the assessee failed to bring any material before the Ld. CIT(A) to substantiate the genuineness of such expenses - HELD THAT - It is undisputed that addition has been made by the Assessing Officer following the findings of his predecessor and the Learned CIT(A) has also deleted the addition following her predecessor s decision in AY 2012-13 wherein held that on our examination of the method of accounting applied by the assessee, it appears that when the assessee has received billing as per milestone and from the milestone till the close of the year there are no expenditure identified by the Id AO then there cannot be any work in progress in the business of the assessee. The Id AO could not find out that whether there is such expenditure exists or not. It was also not found by the Id AO that the assessee has incurred substantial expenditure. If the milestone before the close of the year. As the assessee is engaged in the business of consultancy services definitely there can be sum over lap of the expenses between two years. However that does not give any rise to the AO to disallow the expenditure @10% and treat it as work in progress. We do not find any reason to deviate from this reason given by the Id CIT(A) in deleting the above disallowance.Appeal of the Revenue is dismissed.

Summary

Issues Involved:
1. Deletion of disallowance of project expenses amounting to ?15,38,00,157/- due to lack of substantiation by the assessee.
2. Examination of whether the assessee's accounting method and project-wise expense reporting were adequate and compliant with relevant accounting standards.

Issue-Wise Detailed Analysis:

1. Deletion of Disallowance of Project Expenses:
The Revenue's appeal contested the deletion of ?15,38,00,157/- in project expenses by the CIT(A), arguing that the assessee failed to substantiate these expenses. The Assessing Officer (AO) had disallowed 10% of the expenses, citing the absence of project-wise accounting and unreported work-in-progress. The CIT(A) rejected this disallowance, noting that the AO had not identified specific discrepancies or defects in the assessee's accounts. The CIT(A) emphasized that the AO had accepted the books of accounts but not the results derived from them, which was inconsistent. The CIT(A) further highlighted that the AO's approach effectively amounted to rejecting the books without formally doing so, which is not permissible without identifying specific defects.

2. Adequacy of Accounting Method and Project-wise Expense Reporting:
The CIT(A) found that the assessee's method of accounting, which recognized income on an accrual basis and expenses as incurred, was consistent with accounting standards and previous assessments. The CIT(A) pointed out that the AO had not examined the details of specific projects to verify the proportionality of expenses to income. The CIT(A) also noted that the nature of the assessee's business, which involved consultancy services, did not necessitate project-wise accounting or the valuation of work-in-progress, as per Accounting Standard (AS-2) issued by the ICAI. The CIT(A) concluded that the AO's estimation of 10% of expenses as closing work-in-progress was unwarranted and not supported by any identified discrepancies in the accounts.

Tribunal's Decision:
The Tribunal upheld the CIT(A)'s decision, agreeing that the AO had not provided sufficient grounds for disallowing the expenses. The Tribunal noted that the issue had already been decided in favor of the assessee in previous assessment years (2010-11 and 2011-12), where similar disallowances were made by the AO and subsequently deleted by the CIT(A). The Tribunal reiterated that the AO's approach of disallowing expenses on an ad-hoc basis without identifying specific discrepancies was not justified. The Tribunal also emphasized that the assessee's method of accounting and the absence of work-in-progress were appropriate for a consultancy service provider.

Conclusion:
The appeal by the Revenue was dismissed, and the deletion of the disallowance of ?15,38,00,157/- in project expenses was upheld. The Tribunal confirmed that the assessee's accounting practices were consistent with relevant standards and that the AO's disallowance was not substantiated by specific findings of discrepancies in the accounts.