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TMI Blog2013 (9) TMI 1300X X X X Extracts X X X X X X X X Extracts X X X X ..... ere not applicable in respect of such investments specially in a circumstance when the income from such investments resulted in taxable income in the hands of the appellant in subsequent years. 2. That, the ld. CIT(A) grossly erred, both on facts and in law, in confirming the action of the ld. Assessing Officer in not granting credit for TDS of a sum of Rs. 52,54,091/-, which was not only erroneously deducted but was also paid to the credit of the Central Government, on behalf of the appellant, by the deductors. 3(a) That, the ld. CIT(A) grossly erred in invoking the provisions of Section 251(1) read with ss. 251(2) 250(4) of the Income-tax Act, 1961, in the appellant s case which has resulted in discovery of a new source of income which was never a subject matter of the appeal before him. (b) That, without prejudice to the above, the direction given by the ld. CIT(A) for making enhancement of income of the appellant by a sum of Rs. 6,84,24,000/- is unjustified, unwarranted, arbitrary, excessive and bad in law. (c) That, without prejudice to the above, the learned CIT(A) grossly erred, both on facts and in law, in directing enhancement of income of the appellant by a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rse of scrutiny assessment, the Assessing Officer found that assessee had made investment in equity capitals of group companies as well as in the mutual funds. He further noted that during the year there is fresh investment of Rs. 7.87 crores. Accordingly, by invoking provisions of Section 14A, he worked out interest of Rs. 1,76,38,517/- as disallowable. The Assessing Officer has discussed the issue at page 3 to 7 of the order. By the impugned order, the ld. CIT(A) confirmed the action of Assessing Officer against which the assessee is in further appeal before us. 5. Shri Anil Kamal Garg, C. A., appeared on behalf of assessee and contended that entire new investment was made by the assessee company out of interest free funds being cash accrual of the year, therefore, there is no justification to invoke the provisions of Section 14A for making disallowance of interest u/s 14A. The ld. Authorized Representative further contended that the provisions of sub-section (2) of Section 14A of the Act, would come into operation only in a situation where both the basic conditions viz.(i) the assessee has incurred certain expenditure and (ii) such expenditure have been incurred in relation t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y registering a net increase in the investment by a sum of Rs. 7,77,36,822/- only. If to such net investment of Rs. 7,77,36,822/-, amount of disinvestment in quoted shares of nongroup companies at Rs. 9,50,678/- is added, the amount of fresh investment in companies would work out at Rs. 7,86,87,500/- only. Further, as per Audited profit and loss account of the assessee company for the relevant previous year, as placed at page no.56 of the paper book, the net profit of the company after depreciation and tax has been shown at Rs.8,39,12,704/- and after making adjustments for non-cash items being depreciation and reversal of excess provision of tax for earlier years at Rs.4,88,81,353/- and Rs.2,36,037/- respectively the net cash profit of the assessee company, for the previous year under consideration, works out to be at Rs.13,25,58,020/-. Thus, in view of the above facts, it was submitted that the authorities below grossly erred in completely brushing aside the explanation of the assessee to the effect that the entire investments in shares of the group companies have been made by the assessee company only out of the interest-free funds being internal accruals for the current year. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -2010 but the same was also offered by it in its return of income for the assessment year 2010-11 as taxable long-term/short-term capital gain. As per audited financial statements of the assessee company for the financial year ended 2009-10, as placed at Page No.94 to 115 of the Paper Book, it is clear that the assessee company has shown income amounting to Rs. 20,40,60,000/- as profit on sale of Shares under Schedule 12 of Other Income. Further, the veracity of the claim as regard to deriving of profit on sale of shares of the group companies can also be verified from Schedule 06 of Investments as placed at page no. 104 of the paper book. From the computation of taxable income of the assessee for assessment year 2010-11 as placed at page no. 91 of the paper book, it can further be gathered that the assessee company has duly shown income amounting to Rs. 15,83,27,550/- and Rs. 2,06,96,882/- respectively as Long-term Capital Gain from sale of shares n Oriental Pathways (Indore) Pvt. Ltd. and short-term Capital Gain from sale of shares in Oriental Pathways (Agra) Pvt. Ltd. In nutshell, the claim of the assessee to the effect that income from investments in group companies is not exem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stment in shares of Associate concerns have been made out of non interest bearing funds, is on the assessee and burden lies on him to demonstrate before the Departmental Authorities that no interest bearing fund has been used. It is also a matter of record that since investment has been made under commercial necessities, the proposition laid down by the Hon'ble Supreme Court in the case of S. A. Builders Limited, 288 ITR 1, is required to be considered before disallowing interest expenditure having been incurred on the funds borrowed for the purpose of business. We also found that investment in group companies were having taxable income and assessee has offered substantial long term and short term capital gains in the returns of subsequent years. Keeping in view totality of facts and circumstances of the case, we restore the matter back to the file of Assessing Officer for deciding afresh in terms of our above observations and the judicial pronouncements cited by the ld. Authorized Representative, as discussed hereinabove. We direct accordingly. 11. Next grievance of assessee relates to non-grant of credit for TDS was Rs. 52,54,091/-. The assessee is also aggrieved for enhan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n with regard to terms and conditions of the contract executed by the assessee, according to which no income accrue in the hands of the assessee. As per CIT(A) POHL has raised a further claim on the basis of such bill with Ministry of Surface and Road Transport. 14. In view of the above discussion, the ld. CIT(A) has enhanced the assessment. 15. The contention of the ld. Authorized Representative was as under :- 2.1 It is further submitted that since the appellant company has maintained regular books of account in its ordinary course of business by employing mercantile system of accounting and, therefore, under the provisions of sub-section (1) of s. 145 of the of the Income-Tax Act, 1961, its income is required to be computed only on the basis of its regular books of account. It is submitted that the appellant company has not only maintained regular books of account but it has also got such books of account duly audited by a firm of qualified Chartered Accountants both under the Companies Act, 1956 as well as under the provisions of s. 44AB of the Income-tax Act, 1961. It shall be appreciated by Your Honours that the learned assessing officer, after examining the books ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ok at the nature of contract entered into by the appellant company with POHL. Your Honours, the appellant company entered into one EPC Contract on 26th July, 2005 with POHL for executing the project of construction and operation maintenance of Rewa by-pass on NH-7 from KM229/2 to 243/6 near Rewa in the State of Madhya Pradesh on BOT basis which was awarded to POHL by Ministry of Surface Road Transport Highways [in short, MORT H ] under an agreement dated 23-06- 2005 entered into between MORT H and POHL. A copy of the EPC contract, as entered into by the appellant with POHL, is placed at page No. 139 to 206 of our paper book. On a perusal of the contract, some of the terms relevant for the issue in hand can be noted as under: (a) DEFINITION [Please refer clause 1.1 at internal Page No.3] Contract Price means the sum stated in Appendix 1, being the total consideration for fulfilling the contractor s obligation under the contract. Contractor means Prakash Asphalting Toll Highways (India) Ltd. Owner means the Path Oriental Highways Pvt. Ltd. (b) GENERAL OBLIGATION OF THE CONTRACTOR [Please refer clause 4.1 at internal Page No.16 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the Contractor is not entitled to additional payment except as specified in the Contract. Payment of the Contract Price will be made in the manner specified in Appendix 1 of this Contract agreement. However for any extension granted to the Owner by the Steering Group the Contractor shall be entitled to the benefit and the same will be paid to the Contractor within 30 days of receipt of letter from the Steering Group and after due scrutiny by owner. [emphasis supplied] (e) CHANGES IN COST [Please refer clause 12.2 at internal Page No. 41] 12.2 Changes in Cost If the Cost to the Contractor of performing its obligations under the Contract is varied as a result of; (A) Variations (except a Variation in respect of which an increase in the Contract Price has been agreed or determined under Clause 13); (B) any event giving rise to an express entitlement to an addition/deletion to the Contract Price under any of clause of this Contract, provided that the Contractor is not in breach thereof; (C) breach of the Owner. (D) any Change in law after the Base Date having a Material Adverse Effect on the Works or the working practices of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the Contractor to submit a proposal. Any extra work as instructed by the Steering Group shall be paid extra in the manner as under, 1. The items which were included in the original work shall be paid at agreed rate plus escalation, as per actual up to date of execution. The item not included in the original works shall be paid at prevailing market price. 2. For delay in work due to non availability of Site or part thereof for non compliance of GOI or STG obligation or any other reason not attributable to the EPC Contractor, the time of execution shall be extended. 3. The Contract price shall be adjusted to include escalation in cost due to the above delay based on escalation amount agreed by Steering Group for the same. [emphasis supplied] (g) DEFAULT OF CONTRACTOR [Please refer clause 14 at internal Page 45] 14.1 Notice to Correct Without prejudice to Clause 14.2 if the Contractor fails to carry out any of his obligations, or is not executing the Works in accordance with this contract, the Owner's Representative may give notice to the Contractor requiring him to make good such failure and remedy the same within a specified r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loying mercantile system of accounting, which has duly been incorporated in the audited financial statements for the relevant financial year. The year-wise break-up of the revenue from the contract, as recognized by the appellant, is given as under: Financial Year Assessment Year Amount (Rs.) 2005-06 2006-07 12,14,01,933 2006-07 2007-08 31,46,29,591 2007-08 [under consideration] 2008-09 [under consideration] 02,21,87,295 TOTAL 45,82,18,819 It shall not be out of place to mention here that the receipts shown by the appellant from POHL get fully tallied with the amount of payment shown by POHL in their letter of confirmation which has also been made a part of the remand report dated 12-06-2012 submitted by the learned AO to learned CIT(A) as Annexure-2 [kindly refer PB page No.20]. In other words, there is no variation in the amount of contract payment recorded by POHL in their books o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntract, the appellant company should have lodged the claim within 28 days after the date of event giving rise to the claim. (b) The appellant company has been awarded the contract on turnkey basis as per the clause 4.1(E) of the EPC Contract and, therefore, the entire cost for execution of the project work was to be borne by the appellant company only. The POHL further stressed that as per clause 4.1 (F) of the EPC contract, the appellant company was under an obligation to provide the works so that the facility will be fit for the purpose intended and can be operated in accordance with applicable laws in force. The POHL version was that the technical variation was made only with a view to make the highway facility fit for the intended purpose and therefore, additional work, if any, done by them was well within their original scope of work for which no extra price was stipulated to be paid. (c) The POHL relied upon the clause 12.1 of the EPC Contract which provides that the contract price is the total fixed lump sum turnkey price payable to the contractor for the construction, operation maintenance works and its obligation under the contract. Further, in terms of claus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ative, the appellant company would be in a position to lodge a claim upon the POHL. Thus, the appellant company was made to understand that the claim lodged by it upon the POHL was not only pre-matured one but even the amount of claim was not ascertainable. Under these circumstances, the appellant company reversed the proforma bill erroneously recorded earlier in its accounts book. 2.9 Your Honours, although the technical wing of the POHL rejected the claim of the appellant company on the various grounds as noted above, but the accounts wing of the POHL, under a wrong notion, merely on the basis of proforma invoice raised by the appellant company, passed the accounting entries in their books of account and also made the deduction of tax at source without any authority and sanctity. After having deducted the tax, they paid the same to the credit of the Treasury and issued certificate of TDS in the prescribed form to the appellant company. However, subsequently, the appellant company raised its objection on making of TDS on the ground that without actually admitting the claim for additional work/escalation and without making any payment against such claim, the POHL was not just ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the POHL. 2.11 In view of the above facts and circumstances of the case, it shall be appreciated by Your Honours that the impugned amount of Rs. 6,84,24,OOO/- being the amount of un-admitted claim of the appellant against POHL neither got accrued nor arisen in the hands of the appellant company during the relevant previous year. It is submitted that the appellant is a company and it is statutorily required to prepare its financial statements in accordance with the accounting standards notified by The Institute of Chartered Accountants of India [in short ICAI] only. Since the appellant is a company engaged in the business of undertaking construction contracts and, therefore, the Accounting Standard-AS-7 issued by the ICAI squarely applies to it. A copy of the Accounting Standards AS-7 is placed at page No.233 to 250 of our paper book. In the AS- 7, the various aspects relating to the Contract Revenue and Contract Costs have been envisaged. In para 10, it has been clearly stated that the Contract Revenue should comprise: (a) the initial amount of revenue agreed in the contract; and (b) variation in contract work, claims and incentive payments: (i) to the ext ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roving the variation/claim by the customer and reliable measurement of the amount of revenue get full filled. In respect of the claim, there is a further requirement that negotiation should have reached to an advanced stage. In the instant case, the claim of the appellant company has been rejected by the POHL at threshold only and even the process of negotiation has not got commenced during the year under consideration. Besides, under the various clauses of the EPe contract, as discussed above, even the amount of revenue cannot be reliably measured. It shall be appreciated by Your Honour that first of all the POHL would acknowledge the claim of the appellant company only if the MORT H accepts the claim. Secondly, the amount of the claim shall be determined by the MORT H and the representatives of the POHL and the appellant has no say in the determination of the amount of claim. Finally, even if the claim is accepted by the MORT H the mode of payment/ reimbursement is not certain. The mode of compensating the claim for additional cost/ escalation by MORT H can either be in the terms of money or in terms of extension of concession period to POHL as per last para of clause 12.2 of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e balance amount was of mobilization advance and advance against material, which has been shown as liability in the balance sheet. As per our considered view, TDS is liable to be deducted in respect of income paid or credited in favour of the assessee and not in respect of advance given to the assessee. Even if the deductor has wrongly deducted tax on the amount paid as advance and issued certificate of TDS on such payment, the assessee is entitled to get credit of this T. D. S. in its computation of income. However, while giving credit for such TDS, the Assessing Officer is required to verify as to whether such TDS was deducted on the income accrued and/or received by the assessee. In case T.D.S. has been wrongly deducted on the advances, income attributable to which accrue in the subsequent year, the assessee is entitled to take benefit of such TDS in subsequent year. However, facts are not clear as to whether TDS was deducted on the income accrued/received by the assessee or on the advances, which did not form part of the assessee s income during the year under consideration. In the interest of justice, the matter is restored back to the file of A.O. for deciding afresh in terms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raming assessment u/s 143(3), the Assessing Officer has not doubted any receipts from POHL which were duly accounted for by assessee as per system of accounting regularly followed. During appellate proceedings, CIT(A) observed that assessee has raised additional claim on account of escalation cost, therefore, liable to tax on such amount. From the record, we found that during the year under consideration, the assessee has raised proforma invoice on POHL in respect of escalation cost/shifting work/additional work. The proforma invoice raised by the assessee were rejected by POHL and nothing was paid to the assessee during the year under consideration. While rejecting the claim of assessee, POHL relied upon clause 12.1 of EPC Contract, which provides that the contract price is the total fixed lump sum turnkey price payable to the contractor for the construction, operation maintenance works and its obligation under the contract. Further, in terms of clause 12.1, the contract price cannot be increased and the contractor is not entitled to additional payment except as specified in the contract. Thus, the impugned amount of proforma invoice raised by the assessee was un-admitted cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income of any person for previous year and such income tax is charged for total income as contemplated under the provisions of Section 5. Under the provisions of Section 5, total income of any previous year of a person which is resident includes of income from whatever source derived, which is either received or deemed to be received or accrues or arises or deemed to accrue or arise in India during the relevant previous year. Thus, accrual or receipt of income by a person is a sine qua non for bringing the income to charge within the ambit of provisions of Section 4 of Income-tax Act, 1961. Under a case where no income has either been received or accrued to assessee in a previous year, the question of levying any income tax does not arise at all. Furthermore, mere wrong deduction of tax at source by contractee will not give right to the contractor to receive that income. In the instant case before us, the alleged amount of proforma invoice has neither been received nor accrued to the assessee during the relevant assessment year under consideration. Therefore, there is no justification in the action of CIT(A) for bringing to tax net such amount during the year under consideration. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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