DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE - 1,, SOLAPUR vs. M/S. PATIL AND CO,, SOLAPUR

2. On the facts and in the circumstances of the case, the Ld. CIT (A) has erred in deciding the issue without remanding the matter to the AO for verification of additional evidence produced by the assessee u/s. 46A of the I.T. Rules, 1962.

3. Both the learned representatives invited our attention to the CIT (A)’s detailed discussion deleting the impugned work-in-progress addition of Rs.2,59,07,898/- as under: -

“4. The appellant is engaged in contract business. The assessee has e-filed return of income on 23.09.2016 declaring total income of Rs. 2,78,97,900/-. The survey action u/s 133A of the Act was carried in the business premises of the appellant on 30/1/2015 during which documents pertaining to A.Y.2015-16 were impounded and the appellant had made a declaration of 1.52 Crores under different heads (unaccounted expenditure voucher Rs.1,28,56,490/- and bitumen stock Rs. 19,74,000/-). The appellant had executed various contracts during the year. One of the contract was pertaining to laying of 14 km road on NH9 between Pune-Solapur-Hyderabad from Km 244/000 to 258/000, based on the agreement No.B-2/C/01 for 2012-13, entered with National Highway Division, Solapur. The said work was allotted to the appellant vide work order No.B-2/C/01/ for 2012-13/3717 dtd.27/9/2012 and the stipulated date of completion was 26/10/2013 but the same was extend upto 25/6/2014 in view of the non-shifting of electrical poles and line shifting etc. The total contract amount awarded to the appellant was for Rs.7,05,54,968/- which was 19% below the tender amount of Rs.7,97,83,558/-. The appellant had submitted four RA Bills in respect of the above work up to 20/6/2014. The Vth and final RA bill was for an amount of Rs.2,75,99,764/- including the escalation amount of Rs. 33,49,927/-. The said bill was not accounted in the F.Y., 2014-15 but was accounted in the F.Y. 2015-16, The AO made an inquiry with the Executive Engineer, National Highway Division, Solapur, who had replied to the AO stating that the said contract work was completed on 25/6/2014, as per the completion certificate but to due to approval from the Ministry, the bill was not passed for payment in F.Y. 2014-15. The bill was subsequently was passed in March 2016 after the approval from the Competent Authority and had furnished a copy of the completion certificate. Based on this information, the AO issued a show cause notice dtd.22/12/2017 to the appellant as to why the Vth and final RA Bill was 3 ITA 1426/Pun/2019 & CO 12/Pun/2022 M/s. Patil and Company not accounted either as sale or work in progress in the F.Y. 2014-15, as all the expenses pertaining to the contract have already been incurred and with the proposal to add the amount to the total income. In reply, the appellant claimed that as per the tender condition, the appellant is required to maintain the road with rectification if any in defect liability period. Only after the completion of the rectifications, the appellant was paid the amount and also claimed that an amount of Rs.1,10,40,000/- was spent on the defects during the F.Y. 2015-16. The appellant also claimed that the disclosure made during the survey was also pertaining to this RA Bill. The appellant filed a clarification letter issued by the Executive Engineer, NH- Division, Solapur dtd.25/12/2017 in which it was mentioned that the defects were brought to the notice of the contractor and the said defects were rectified in the F.Y. 2015-16. The AO rejected the claim of the appellant holding that the expenses which are debited in the F.Y. 2015-16 are on works which are already completed on 25/6/2014 and the defect period runs subsequent to the completion of the contract. Holding thus, the AO has treated an amount of Rs.2,59,07,899/-, as work in progress for the year out of the RA Bill amount of Rs.2,75,99,764/- by considering 6.13% as net profit on the transaction. 4.1 The AO also made an addition of Rs. 1,26,278/- being the interest received from Bank of India and MSEDCL which were not offered in the return of income filed. The AO has also disallowed an amount of Rs.1,66,459/- out of the mess expenses to plug the possibility of leakage or revenue. He has also disallowed an amount of Rs.1,798/-, being the interest on late payment debited to the P & L account holding that it is not allowable expenditure u/s 37 of the Act. The AO passed the assessment order u/s 143(3) assessing the income at Rs.5,41,00,330/- vide order dtd.31/12/2017.

5. The appellant relied on the clarification letter issued by the NHD for the proposition that the said RA Bill has not been certified by the appropriate authority in view of the defects noticed. Therefore, it was claimed that only certified RA bill are considered for booking the income. It was also claimed that it had incurred an amount of Rs.1,10.40,000/- over the period 1/6/2015 to 31/7/2015 for improving the quality of the road and only on carrying out such repair work, the Vth and the final RA bill was approved by the Executive Engineer on 10/12/2015 for which payments were made in March 2016. 5.1 In the original submissions dtd.30/11/2018 made by the deceased AR, it was claimed that the appellant followed a consistent practice of recording the income only on actual receipt of consideration and accordingly the amount received on the Vth RA bill was shown as income in the A.Y. 2016-17. He relied on the Form No.26AS which shows the TDS deducted on the said amount for the proposition that the TDS could not have been claimed if the income is offered in A.Y.2015-16. In the said submission, it was claimed that no work in progress was shown against the above Vth RA bill. This aspect was clarified by the present AR. In the revised submission, the appellant claimed that the original AR had failed to notice that a closing stock amount of Rs.1,48,30,490/- was included in the work in progress of Rs.3,91,59,564/- shown under the head ‘Asiatic Textile Park, Kumbhari’. A certificate to this extent by the auditor was also 4 ITA 1426/Pun/2019 & CO 12/Pun/2022 M/s. Patil and Company filed. It was also further clarified that the work in progress of the Asiatic Textile Park was only of Rs.2,43,29,074/- as on 31/3/2015 and to which further expenses of Rs.32,43,333/- were incurred during F.Y. 2015-16, resulting in the total cost at Rs.2,75,72,407/- against the contract value of Rs.2,98,69,360/- resulting in a profit of 7.69% on the said contract. It was claimed that these facts clearly indicate that the work in progress shown of Rs.3,91,59,564/- against Asiatic Textile Park as on 31/3/2015 could not have been exclusively related to Asiatic Textile Park considering the contract amount itself. 5.2 The alternative submission of the appellant was that the addition of Rs.2,59,07,898/- made during the year as closing work in progress has to be allowed as opening work in progress for the A.Y. 2016-17 which would reduce the income of the subsequent year by similar amount. Since the tax rates are same for both the A.Y. 2015-16 & 2016-17, the effect is tax neutral and mere waste of time and resources and relied on the Bombay High Court decision in Nagari Mill Company Ltd reported in 33 ITR 681 (Bom) for the proposition.

6. The various claims and the certifications have been examined. It is clear from the facts that the appellant has been shown work in progress in respect of the incomplete projects as seen from the P & L account and balance sheet of A.Y.2015-16 where the work in progress had been reflected at Rs.20,82,00,000/- and similar work in progress amounts are also reflected for A.Y.2014-15 & 2016-17. Thus, the original claim made by the erstwhile AR is apparently not based on the facts available on record. It is also emerges that the appellant is booking the revenue only when the RA Bill are certified by the concerned authorities. The expenses incurred on uncertified RA Bills are being reflected as work in progress. The confusion of the erstwhile AR has lead to the addition of the work in progress on the ground that no such work in progress has been shown. The facts now brought on record clearly indicate that the work in progress relating to the NH9 project was reflected in the work in progress of Asiatic Textile Park and the amount of work in progress relating to NH-9 is Rs. 1,48,30,490/- and the appellant had incurred an amount of Rs. 1,10,40,000/- in the F.Y. 2015-16 and thus the total expenditure incurred in the last phase is Rs.2,58,70,490/- on which the appellant has realized an amount of Rs.2,75,99,764/- resulting in a profit of 6.27%. Therefore, there is no merit in making the addition on the ground of work in progress in the A.Y. 2015-16. 6.1 Further, there is also merit in the alternative claim of the appellant that the addition on account of work in progress in the appellant’s case for the A.Y. 2015-16 is tax neutral as the said work in progress has to be allowed as opening work in progress for A.Y. 2016-17 which would decrease the profit of A.Y. 2016-17 by the amount of addition made for A.Y. 2015-16, as the income offered for A.Y. 2016-17 Rs.1,52,37,740/- on which tax has been paid at the same rate.”

5 ITA 1426/Pun/2019 & CO 12/Pun/2022 M/s. Patil and Company verification thereof at the Assessing Officer’s end thereby violating Rule 46A of the Income Tax Rules. Faced with this situation Mr. Puranik was fair enough at the Bar that the assessee had indeed filed additional details before the CIT (A) regarding the impugned work-in-progress for the first time in lower appellate proceedings only. We appreciate learned counsel’s fair statement and deem it appropriate to restore the Revenue’s instant second substantive ground back to the Assessing Officer for his afresh factual verification of the assessee’s relevant details as per law within three effective opportunities of hearing in consequential proceedings. Ordered accordingly. This Revenue’s appeal in succeeds for statistical purposes.