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Income Tax Appellate Tribunal, “B’’BENCH: BANGALORE
Before: SHRI B. R. BASKARAN & SMT. BEENA PILLAI
PER B.R. BASKARAN, ACCOUNTANT MEMBER:
The assessee has filed this appeal challenging the order dated 13.1.2020 passed by Ld. CIT(A)-3, Bengaluru and it relates to the assessment year 2016-17. The assessee is aggrieved by the decision of Ld. CIT(A) in confirming the addition of Rs.1.12 Crores made by the A.O.
The facts relating to the issue are stated in brief. The assessee is a Civil contractor and it filed its return of income for the year under consideration declaring a total income of Rs.9,31,740/-.
M/s. IndiInfrabuild Constructions Pvt. Ltd., Bangalore
Page 2 of 12 The assessee had declared its total turnover at Rs.1,65,99,621/- in its return of income and also claimed TDS credit of Rs.5,57,448/-. The A.O. noticed that the TDS certificates filed by the assessee for the aggregate TDS amount of Rs.5,57,448/- disclosed that the TDS has been made on an aggregate amount of contractual payments of Rs.2,78,72,229/-. Thus there was a difference of Rs.1,12,72,068/- between the contractual amount shown in the TDS certificates and that shown in the Profit and Loss account. Hence the A.O. asked the assessee to explain the difference between the turnovers. The assessee submitted that it has received an advance amount of Rs.74,32,104/- and the same was not included in the turnover. According to the AO, the assessee did not furnish any documentary evidence in support of this claim.
Since the assessee has claimed credit for entire TDS amount of Rs.5,57,448/-, the AO took the view that the assessee should have disclosed gross receipts of Rs.2,78,72,229/- shown in the TDS certificates as its turnover. Accordingly, he assessed the difference of Rs.1,12,72,608/- as income of the assessee. The Ld. CIT(A) also concurred with the view taken by the A.O. and hence, the assessee has filed this appeal before us.
The Ld. A.R. has filed his written submissions and also advanced his arguments. He submitted that the assessee, being a civil contractor, would raise invoices on its clients in several stages of construction, as per the agreement entered with its clients. Even though the assessee would be continuously executing the work, the invoice will be raised after completion of particular stage of construction and when the running bill is approved by the client. Accordingly, the assessee would recognize contract receipts only to the extent of invoices raised by it. However, since the assessee
M/s. IndiInfrabuild Constructions Pvt. Ltd., Bangalore
Page 3 of 12 would continue to execute the work, the unbilled expenses would be shown as work in progress, as per AS-7. In the mean time, the assessee would also be receiving advance payments from the clients and the same would be adjusted against the invoice raised. He submitted that the clients would be deducting TDS whenever the payments were made to the assessee. However, the assessee would account for the contract receipts only upon raising of invoices. Accordingly, he submitted that there will be mismatch between the amounts of contractual payments disclosed in the TDS certificates the amount of contract receipts recognized by the assessee as its income. He submitted that the amounts received by the assessee from its clients would be reflected either as “Contract receipts” or advance payment receipts or in work in progress. He submitted that the aggregate amounts of receipts reflected in the books of accounts in the above said three heads would exceed the aggregate amount of payments mentioned in the TDS certificates.
In the written submission, the Ld A.R has given details of amount recorded in the books of account. For the sake of convenience, we extract below the submissions made by Ld A.R in this regard. “When section 194C requires deduction on payments made as advance, the reasoning of the A.O. is without basis. It is for the A.O. to substantiate by calling for details of the “amounts paid/credited” from the 5 deductors mentioned in para 3 of the order to establish how much of the “amounts paid/credited” represent revenue and how much represent advance. He cannot conclude that Rs.2,78,72,229 is “gross receipts”. The A.O. has also ignored the Accounting Policy 6 “Revenue Recognition” on page 17, that Revenue from Work Contract are recognized on stage wise competition”. The significance of the increase in work in progress from Rs.89,75,730 as on 31.03.2015 to Rs.1,89,78,000 as on 31.3.2016 has been lost by the A.O. The financial statements uploaded by the Appellant on 29.09.2018 show that the appellant has offered revenue/income from contracts as under:
M/s. IndiInfrabuild Constructions Pvt. Ltd., Bangalore
Page 4 of 12 Note 13 Work Contract & Supplies 71,69,238 VAT collected 10,39,541 Works Contract Services 73,60,951 Service Tax Collected 10,29,891 1,65,99,621 Note 15 Increase in Contract Work in progress ____________ (Note 15) 1,00,02,270 Amount offered as income 2,66,01,891 Note 4(b) Increase in Advance received from customers (Note 4b) 74,32,104 Closing balance 17,01,238 Less: Opening Balance 57,30,866 Total of “Amount Credited/ Paid” reflected in financial Statements. 3,23,32,757 It appears the A.O. is not conversant with Financial Statements of a Contractor and due to “E-Proceedings” was restricted from being enlightened by the A.R. of the appellant on the nature of operations and book keeping of a contractor, particularly the ‘concept of cash and mercantile system of accounting’.
As the A.O. has not rejected the accounts under section 145, present action is not as per law.
The Ld reiterated the submissions made in the written submissions.
The Ld D.R, on the contrary, submitted that the assessee has claimed entire amount of TDS shown in the certificates. However, the assessee has not offered the entire amount of contract receipts shown in the TDS certificates. She submitted that the TDS credit shall be given only in the assessment year for which such income is assessable. This is stated so in Rule 37BA(3) of the I T Rules read with sec. 199(3) of the Act. Since the assessee has claimed entire
M/s. IndiInfrabuild Constructions Pvt. Ltd., Bangalore
Page 5 of 12 amount of TDS credit, the AO has assessed the entire contractual payments shown in the TDS certificates as income of the assessee. The Ld D.R submitted that the assessee has offered only general explanations before the AO with regard to the difference and did not reconcile the payments shown in TDS certificates with the books of account/the contractual receipts declared in the Profit and Loss account. The Ld D.R further submitted that, if the assessee is able to reconcile the contractual payments received by it with the income declared in the subsequent years, then the TDS credit should be restricted to the amount relatable to the contractual receipts assessed during the year under consideration and the remaining amount of TDS may be allowed in the year in which the corresponding contractual receipts have been declared.
In the rejoinder, the Ld A.R submitted that the assessee has furnished the details of reconciliation before the Ld CIT(A). He invited our attention to page 53 of the paper book. With regard to the submission of Ld D.R for allowing only proportionate amount of TDS credit, the Ld A.R submitted that there are certain case laws, which have held that the entire amount of TDS credit should be given irrespective of disclosure of corresponding income.
We heard rival contentions and perused the record. We notice that the AO has made the impugned addition for the reason that the assessee has claimed credit of entire amount of TDS shown in TDS certificates. In our view, it should be other way round. The AO can assess only the amount that constitutes income of the year under consideration. As per the provisions of sec.199(3) r.w. rule 37BA of I T Rules, the TDS credit can be deferred to any other year, in which the corresponding income is assessed.
M/s. IndiInfrabuild Constructions Pvt. Ltd., Bangalore
Page 6 of 12 9. Be that as it may, the point of dispute is whether the difference amount of Rs.1.12 crores is liable to be assessee during the year under consideration. The assessee is a civil contractor and hence it keeps on receiving advances from its clients. The assessee would be preparing running bills upon completion of agreed stage of construction. According to the accounting practice followed by the assessee, the invoice so raised and approved by the client, is recognized as contract receipts in the books of account. Hence there bound to be mismatch between the amount of contractual payments made by the client and the contract receipts accounted for by the assessee in the Profit and Loss account.
The assessee has claimed TDS amount of Rs.5,57,448/- during the year under consideration. The details of the same along with corresponding “contractual payments” have been tabulate as under by the AO:- TDS Gross Sl. Name of the TDS claimed in receipts (in No. deductor deducted the current Rs.) year 1 Iconica 36,868 36,868 18,43,382 Constructions 2 Prestige Estates 2,60,220 2,60,220 1,30,10,944 Projects Ltd. 3 Safalaakar 2,25,047 2,25,047 1,12,52,281 Buildtech 4 Skylark Arcadia 21,795 21,795 10,89,728 Pvt. Ltd. 5 Skylark Mansions 13,518 13,518 6,75,894 Pvt. Ltd. Total 5,57,448 5,57,448 2,78,72,229
We notice that the assessee has received the aggregate payments of Rs.2,78,72,229/- from five parties. We notice that the payment received from M/s Iconica Constructions is M/s. IndiInfrabuild Constructions Pvt. Ltd., Bangalore
Page 7 of 12 Rs.18,43,382/- and the assessee has reconciled the same at page 56 of the paper book as under:- Amount booked in Sales invoices - Rs.11,13,237 Advance amount - Rs. 7,30,145 ---------------- Total - Rs.18,43,382 ============ The assessee has also furnished ledger account copy of M/s Iconica Constructions at pages 57 -58 of the paper book, which shows credit balance of Rs.7,30,145/-, being the advance amount received by the assessee. We notice that the assessee has reconciled the receipt of Rs.18,43,382/- from M/s Iconica Constructions from its books of accounts. In our view, this is the right method of reconciling the payments and the amount shown in profit and loss account. However, the assessee has not furnished similar manner of reconciliation for four other parties mentioned in the table above. If the assessee is able to furnish individual reconciliation in the similar fashion for the remaining four parties, then the amount shown as advance in the books of accounts should not be considered as income of the assessee for the year under consideration.
We noticed that the assessee has furnished reconciliation statement in a consolidated manner as given below:- Amount booked in Sales invoices - 1,65,99,621 Increase in advances - 57,30,866 ---------------- 2,23,30,487 ============ We have noticed that the aggregate amount of payment received by the assessee during the year under consideration was Rs.2,78,72,229/-, while the amount actually reconciled in a summary manner was Rs.2,23,30,487/-. In any case, in our view, the reconciliation made in summary manner will not give correct
M/s. IndiInfrabuild Constructions Pvt. Ltd., Bangalore
Page 8 of 12 result. It is the duty of the assessee to reconcile the payments received from each of the parties, i.e., the assessee should furnish reconciliation statement for each of the parties. In fact, the assessee itself has reconciled the payments received from M/s Iconica Constructions in a proper manner. In our view, the assessee should reconcile the payments received from other four parties also in the similar fashion.
In the reconciliation statement furnished by the assessee in summary manner, the assessee has claimed that there is increase in “work-in-progress” amount to the tune of Rs.2,66,01,891/- and it is further stated that the above said WIP has been offered as income by the assessee. We are unable to agree with the said submission. The amount of “work in progress” cannot be considered as an item of income offered by the assessee. We explain the same. The amount of “Closing stock”/work in progress” is credited to the Profit and Loss account under “revenue cost matching principle”, i.e., in order to arrive at the correct profit, one is entitled to deduct only corresponding cost. In the normal practice, the purchases made during the year would be booked in the Purchases account and the entire amount shall be transferred to the Profit and Loss account. This kind of practice necessitates crediting of profit and loss account with Closing stock. We will explain this practice with a simple illustration.
For example, if a person has purchased 10,000 units at a cost of Rs.50/- per unit, then the purchases account will show a balance of Rs.5,00,000/- and the same shall be transferred to the Profit and loss account. If that person has sold only 7000 units, then he is not entitled to claim deduction of entire amount of Rs.5,00,000/-. Under revenue cost matching principle, he shall be M/s. IndiInfrabuild Constructions Pvt. Ltd., Bangalore
Page 9 of 12 entitled to deduct only cost relating to 7000 units, viz, Rs.3,50,000/- only. Since the assessee has transferred the entire amount of Rs.5,00,000/- to the debit of Profit and Loss account, it becomes necessary that the closing stock of 3000 units costing Rs.1,50,000/- is credited to the Profit and Loss account. In fact, the amount of Rs.1,50,000/- is getting netted with the purchase value of Rs.5,00,000/-, the net result of which is that the amount of purchases claimed as deduction would be Rs.3,50,000/- only. In this situation, the amount of Rs.1,50,000/- does not constitute income, rather it is a case of elimination of excess amount of purchases booked. Similar is the case with “work in progress” also. Hence the amount of work in progress cannot be treated as an item of income offered by the assessee.
In effect, the assessee has not reconciled the difference between the contractual payments shown in TDS certificates and the turnover shown in the Profit and Loss account except in the case of M/s Iconica Constructions. Even in the reconciliation statement furnished in a summary manner, a sum of Rs.55,41,742/- remain un-reconciled. We notice that the reconciliation statement furnished in a summary manner has also not been examined by the tax authorities. As noticed earlier, the difference has arisen mainly on account of timing difference in recognizing the contractual receipts as income. In any case, since these payments have been received through banking channels, it should be possible for the assessee to reconcile the receipts as was done in the case of M/s Iconica Constructions. Accordingly, in the interest of natural justice, we are of the view that the assessee may be provided with one more opportunity to reconcile the contractual payments shown in the TDS certificate furnished by a party with the entries made in the books of account. Accordingly, we direct
M/s. IndiInfrabuild Constructions Pvt. Ltd., Bangalore
Page 10 of 12 the assessee to prepare reconciliation statement for each of the remaining four parties, viz., M/s Prestige Estates Projects Ltd, M/s Safalaakar Buildtech, M/s Skylark Arcadia Pvt Ltd and M/s Skylark Mansions Pvt Ltd. The reconciliation statement furnished for each of the above said four parties would show how the payments received have been accounted for by the assessee, which will help the assessing officer to take proper view of the matter.
The Ld D.R submitted that the assessee shall be entitled to TDS credit of proportionate amount only, i.e., the amount proportionate to contractual receipts recognized as income. For example, the TDS amount deducted by M/s Iconica Constructions was Rs.36,868/- against the payment of Rs.18,43,382/-. We have noticed earlier that the assessee has offered a sum of Rs. 11,13,237/- only as its income and the balance amount of Rs.7,30,145/- has been shown as advance. Hence, out of the TDS amount of Rs.36,868/-, the assessee would get TDS credit proportionate to the amount of Rs.11,13,237/- and the credit for balance amount of TDS would be given in the year in which the balance contract receipt of Rs.7,30,145/- is offered as income.
The Ld D.R submitted that her submissions are in tune with the provisions of sec.199(3) r.w. rule 37BA of I T Rules. However, the Ld A.R has submitted that there are certain case laws, which have held that the entire amount of TDS credit should be given irrespective of disclosure of corresponding income. Accordingly he submitted that the issue of giving credit of TDS amount may be left open.
The submissions made by Ld D.R, prima facie, appear to be in accordance with the provisions of the Act and Rules. However, in M/s. IndiInfrabuild Constructions Pvt. Ltd., Bangalore
Page 11 of 12 view of the contentions of Ld A.R, we leave this issue to the wisdom of the assessing officer.
In view of the foregoing discussions, we are of the view that the issues contested before us require fresh examination. Accordingly, we set aside the order passed by Ld CIT(A) and restore all the issues to the file of the assessing officer for examining them in the light of discussions made supra. As directed earlier, the assessee shall furnish reconciliation statements for each of the parties in the similar fashion as furnished in the case of M/s Iconica Constructions along with the relevant ledger copies. After examining the reconciliation statements and duly considering any other information and explanations that may be furnished by the assessee, the AO may take appropriate decision in accordance with law.