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Income Tax Appellate Tribunal, “A” BENCH, PUNE
Before: SHRI S.S.GODARA, JM & SHRI DR. DIPAK P. RIPOTE, AM
आदेश / ORDER PER S. S. GODARA, JM :
This Revenue’s appeal for A.Y. 2012-13 arises against the CIT(A) Pune’s order, dated 27/02/2017 passed in case Nos. CIT(A),Pune - 1/10243/2015-16 involving proceeding u/s. 143(3) of the Income Tax Act, 1961 ; in short “the Act”.
Heard both the parties. Case file perused.
Indicon Construction Pvt. Ltd.,
Coming to the Revenue’s sole substantive grievance that the assessing Officer had rightly disallowed the assessee’s claim of reduction of work in progress “WIP” from Rs.2,05,20,630/- to Rs. “NIL” and the CIT(A) has erred in law and on facts in reversing the same, we note that lower appellate discussion to this effect reads as under .
“7. I have carefully considered the facts of the case as well as reply of the appellant. I have also perused the translated version of the correspondence with Govt. Departments in connection with Aurangabad project work. From the perusal of the above documents as well as submissions filed in this regard, it is seen that these contracts were allotted in April 2006 and the original timeline for completion was in 2008. The project got delayed due to various reasons and penalty was imposed for the delay. However, subsequently the same was waived off and extension was granted upto 30/4/2011. The appellant could not complete the project even upto extended period of 30/4/2011. In view of this delay penalty was levied again on 4/11/2011 and one contract was terminated in December 2011 and the remaining two contracts were terminated in July 2012. Further the security deposit was forfeited by the Govt. Departments and penalty was demanded for the cost of remaining work to be completed by another contractor.
In this background cost of closing WIP was taken at Nil. It is also seen that the appellant is following accounting Standards-7 in respect of construction contracts and the action of the appellant is reducing the closing WIP to Nil as in the conformity with AS-7. Clause 26 of the AS-7 (revised 2002) is reproduced for ready reference:
Indicon Construction Pvt. Ltd.,
“26. A contractor may have incurred contract costs that relate to future activity on the contract. Such contract costs are recognized as an asset provided it is probably that they will be recovered. Such costs represent an amount due from the customer and are often classified as contract work in progress."
Thus, from the reading of the Para, it is quite clear that such cost i.e. WIP can be considered as an asset only when there is probability of the same being recovered. In the present case there was no probability of such recovery and therefore, it is quite clear that reduction of closing WIP as on 31/03/2012 in respect of Aurangabad Project to Nil was justified the above circumstances and the same was also in conformity with AS7.
It is important that the AO has not all doubted the above factual matrix of the case and the only ground of objection of the AO is that before exercising its options before various higher authorities against termination notice, the appellant cannot rush for concluding that chances of recovery in respect of remaining WIP is Nil. The AO's remark in this regard has some point but it must be appreciated that the appellant is best suited to evaluate the situation and take a decision in such cases keeping business interest in mind. In this case, the appellant decided not to pursue the matter further and chose to reduce the closing WIP to Nil keeping in mind the business exigencies. It has been held by various courts that the AO cannot sit over the judgment/ decision of a businessman imposing his wisdom over the business decision of assessee. Therefore, reason for not accepting the claim of the appellant is not correct. It is further seen that the issue is also covered in favour of the appellant by decision of Hon. Karnataka High Court in the case of Asia Power Projects P. Ltd, vs DCIT f20141 49 taxmann.com 428; wherein the claim of the assessee was allowed by the High Court on similar facts. For the sake of clarity, relevant portion of the order is reproduced as under:
Indicon Construction Pvt. Ltd.,
“Therefore, if the assessee incurs a liability and when the contract under which that liability was incurred was terminated and when no amounts under the contract or in pursuance of a claim is receivable, he is entitled to claim the said amount incurred as expenditure in implementing the contract as a set off u/s 37(1) r/w 28 of the Act.
In fact section 41(1 )(a) of the Act reads as under:
"41 Profits chargeable to tax.— (1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year,
(a) the first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or"
In view of the aforesaid provision, though the assessee has incurred expenditure during the assessment years 2000-2001, 2001- 02 and 2002-2003 during which period he has not received any amount as against the expenditure, if and when he receives the money in pursuance of the award which is already passed, if it is upheld by the High Court, the said amount is chargeable to income tax as the income of that previous year in which he receives the said
Indicon Construction Pvt. Ltd., amount whether the business in respect of which the deduction has been made is in existence in that year or not. Therefore, the interest of the revenue is fully protected. All the three authorities have not applied their mind to the factual aspects of the case and have not kept in mind the statutory provisions and thus committed a serious illegality in passing the impugned orders. The orders are not sustainable. Therefore, substantial questions of law raised in this appeal are answered in favour of assessee and against the revenue. In that view of the matter, we pass the following order :
The appeal is allowed. The impugned orders passed by the three authorities are hereby set aside. The Assessing Authority is directed to allow the aforesaid amount as set off.”
Therefore, on facts and circumstances of the case as well as relying upon the above decision of Hon. Karnataka High Court it is held that the AO was not justified in rejecting the claim of the appellant regarding reduction of closing WIP to Nil as on 31/3/2012. it would not be out of place to mention that if any amount is received in future in respect of the said contract, the appellant will be required to offer the same u/s 41(1) of the I.T. Act, 1961 for taxation. Accordingly, AO is directed to delete the addition of Rs.2,05,20,630/- made in this regard and grounds No.l and 2 are allowed.”
3. We have given our thoughtful consideration to rival stands against and in favour of the CIT(A)’s foregoing discussion. Mr. Walimbe vehemently reiterated the Revenue’s pleadings that the assessee’s impugned reduction in its working progress has been wrongly allowed without there being any cogent
Indicon Construction Pvt. Ltd., material on record so far as the corresponding “Aurangabad bypass” project is concerned.
We find no merit in the Revenue’s instant arguments. There is hardly any dispute that the assessee had indeed undertaken to construct the foregoing road project involving three phases/sites at different places. It had sought to reduce the said work in progress on the ground that the authorities concerned had terminated the tender document(s) itself. The said intimation coming from the office of the Executive Engineer form part of records at pages 3 to 22. The assessee also appears to filed its appeal which stood dismissed as per learned counsel’s statement at the Bar.
Mr. Walimbe sought to butter on the point we are in assessment year 2012-2013 having accounting period 31st March 2012 whereas the above stated authority had issued cancellation (s) dated 12.07.2012 i.e. relevant to A.Y. 2013-14. We don’t find any merit in the Revenue’s arguments as not only it has come on record the assessee had followed accounting standard AS-7 specifically applicable in case of a contractor but also its impugned deduction of work in progress is indeed based on reasonable probability as per the foregoing correspondence coming from the office concern (supra). We quote Chainrup Sampatram vs CIT (1953) 24 ITR 481(SC) that an expenditure can very well be booked at the first sign of reasonable probability which very much exists in given facts and circumstances. We thus affirm the Indicon Construction Pvt. Ltd., learned CIT(A)’s findings reversing the impugned disallowance reduction of work in progress.
No other grounds has been pressed before us.
This Revenue’s appeal is dismissed in above terms.
Order pronounced in the Open Court on this 26th day of July, 2022.
Sd/- Sd/- (DR.DIPAK P.RIPOTE) (S.S. GODARA) लेखध सदस्य/ ACCOUNTANT MEMBER न्यधनयक सदस्य/JUDICIAL MEMBER पपणे / Pune; ददनधांक / Dated : 26th July, 2022. Ashwini आदेश की प्रनतनलनप अग्रेनषत / Copy of the Order forwarded to : अपऩलधथी / The Appellant. 1. प्रत्यथी / The Respondent. 2.
The CIT(A) Pune.
4. The Pr.CIT -1 Pune. 5. नवभधगऩय प्रनतनननध, आयकर अपऩलऩय अनधकरण, “ए” बेंच, पपणे / DR, ITAT, “A” Bench, Pune. गधर्ा फ़धइल / Guard File. आदेशधनपसधर / BY ORDER, 6. // True Copy // Senior Private Secretary आयकर अपऩलऩय अनधकरण, पपणे / ITAT, Pune.
Indicon Construction Pvt. Ltd.,
S.No. Details Date Initials 1 Draft dictated on 09.06.2022 2 Draft placed before author 25.07.2022 Draft proposed & placed before the Second 3 Member 4 Draft discussed/approved by Second Member 5 Approved Draft comes to the Sr. PS/PS 6 Kept for pronouncement on 7 Date of uploading of Order 8 File sent to Bench Clerk 9 Date on which the file goes to the Head Clerk 10 Date on which file goes to the A.R. 11 Date of Dispatch of order