DCIT 2(2), MUMBAI vs. PARESH CONSTRUCTION & FOUNDATIONS P.LTD, MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा सद�य सद�य, राजे�� राजे�� केकेकेके अनुसार अनुसार /PER RAJENDRA, AM- लेखा लेखा लेखा सद�य सद�य राजे�� राजे�� अनुसार अनुसार Challenging the order dated 23.08.2012 of the CIT(A)-5,Mumbai the Assessing Officer(AO)has filed the present appeal,whereas the assessee had filed cross objection(CO).Assessee-company,a civil contractor,filed its return of income on 29/09/2008,declaring total income of Rs.1,66,82, 068/-.The return was processed u/s. 143(1) of the Act on 17.02.2010. The AO completed the assessment u/s.143(3)of the Act,on 27.12.2010,determining its income at Rs.8.86 crores. ITA/6850/Mum/2012: 2.First effective ground (GOA-2)of appeal is about deleting the addition on account of retention money.It was brought to our notice that the issue stands decided in favour of the assessee by the judgment of the Hon’ble Bombay High Court in Income Tax Appeal No.1381 of 2012,dated 5/3/2014,for the earlier assessment year.In its order, the Hon’ble Bombay High Court has referred to the case of Associated Cables Ltd., 286 ITR 596 (Bom.) decided on 7/8/2006.We are reproducing the relevant portion of the judgment and the same reads as under:- “6.We have carefully considered orders of authorities below, submission of Ld. Representatives of parties and the cases relied upon by Ld. CIT(A). We agree with Ld. CIT(A) that the amount retained by contractee to ensure proper performance of contract will accrue as income to contractee only upon taking over of plant and acceptance of performance test by contractee. The

M/s. Paresh Constructions & Foundations above proposition is supported by Hon’ble Calcutta High Court in the case of CIT VS Simplex Concrete Piles (India) P. Ltd. (supra). ITAT Pune Bench has also held in the case of National Heavy Engineering Co-Operative Ltd., Vs DCIT 105 ITD 48 that amount of retention money did not accrue to assessee as income till the performance of the contract is fulfilled and accepted by contractee. In view of above decision, we do not find any infirmity in the order of Ld. CIT(A) and hence we confirm order of Ld. CIT(A) by rejecting the ground of appeal taken by department.” Respectfully following the above, ground no.2, is decided against the AO. 3.Next ground of appeal is about unfinished contracts.During the assessment proceedings,the AO found that the assessee had credited an amount of Rs.38.77 crores in its P&L account,that it had added opening work-in-progress of Rs.2.40 crores and had reduced the closing WIP of Rs.1.65 crores,that it had estimated the stage of completion of different projects based on direct cost incurred on projects till 31/3/2008 and the total cost of project,that for that purpose it had reduced profit margin from the total contract value,that it had taken profit margin @ 8% with respect to certain contracts and that the rate of nil with respect to other contracts.After analysing the P&L account for the earlier and the current year,the AO issued a show cause notice to the assessee and directed it to explain as to why GP of 18.26% should not be taken for the year under consideration and as to why the turnover should not be increased by Rs.4.96 crores.Assessee filed a detailed submission in that regard.However,the AO added an amount of Rs.4,96,04,509 to the total income of the assessee. 3.1.Aggrieved by the order of the AO,the assessee filed an appeal before the First Appellate Authority(FAA) and made detailed submissions.It also filed additional evidences before him. After considering the remand report of the AO,dated 10/4/2012 and the rejoinders of the assessee,dated 8/8/2012 and 9/8/2012, he held that the assessee was maintaining regular books of account,that in respect of income to be recognised for incomplete contracts it was following the method as per accounting standard (AS-7) i.e., Percentage Completion Method (PCM),that it was following the method consistently from earlier years,that the AO had not doubted the complete - ness or the correctness of the Books of Account of the assessee,that the AO was of the view that GP percentage should be applied to arrive at the total estimated cost and not the NP margin as done by the assessee,that the method adopted by it was accepted by the AO in the earlier years, that there was no change in the facts and circumstances,that the AO applied GP margin without giving any cogent reason or without highlighting any change in the facts of the case.He referred to the cases of Gopal Purohit(336 ITR 287)of the Hon’ble Jurisdictional High Court and Kotak Securities Ltd.(15 taxmann.com 77) and held that the AO was not justified in adopting the different method for estimation of income in respect of the incomplete contracts;that the facts 2

M/s. Paresh Constructions & Foundations and circumstances for various years,including the year under appeal,were identical.Accordingly, he directed the AO to delete the addition. 3.2.During the course of hearing before us,the Departmental Representative(DR) relied upon the order of the AO.The (AR) supported the order of the first appellate authority (FAA). We have heard the rival submissions and perused the material on record.We find that assessee was following PCM for the incomplete projects for the last so many assessment years,that the AO had never objected to the method of accounting,that while rejecting the method applied by the assessee,the AO had not mentioned the reasons as to why the method could not be applied for the year under consideration.It is true that principle of res judicata does not apply to the Income- tax proceedings,but it is also equally true that rule of consistency applies to Income-tax proceed - ings.Hon’ble Bombay High Court in the case of Gopal Purohit(336ITR287)has held that that there should be uniformity in treatment and when facts and circumstances for different years were identical particularly in the case of the same assessee. In the case of Galileo Nederland BV,(367ITR319),the Hon’ble Delhi High Court has held as under: “Decision on an issue or question taken in earlier years though not binding should be followed and not ignored unless there are good and sufficient reasons to take a different view. Said principle is based upon rules of certainty and that a decision taken after due application of mind should be followed consistently as this lead to certainty, unless there are valid and good reasons for deviating and not accepting earlier decision.” The Hon’ble Bombay High Court in the matter of Aroni Commercials Ltd.(362 ITR 403) has dealt the issue of consistency as follow: Though the principle of res judicata is not applicable to tax matters as each year is separate and distinct,nevertheless where facts are identical from year to year,there has to be uniformity and in treatment.” Considering the above,we hold that FAA was justified deleting the addition made by the AO. 3.3.We find that the AO has not brought on record the facts that were different from the facts of earlier assessment years.If there was no change in the facts and circumstances of the case,then he was not justified in disturbing the book results of the assessee.The FAA has given categorical finding of fact that the books of assessee were maintained as per the mandate of AS-7.Therefore, in our opinion,the order of the FAA does not suffer from any legal or factual infirmity.Confirm - ing his order,we dismiss the ground no.3 against the AO. CO/07/Mum./2014 4.During the course of hearing before us,the AR of the assessee did not press first ground of the C.O.,hence, the same stands dismissed as not pressed. 3

M/s. Paresh Constructions & Foundations 5.Second ground of appeal is about confirming the addition of Rs.2.78 lakhs. During the assessment proceedings,the AO observed that a survey action u/s 133 of the Act was carried out at the business premises of the assessee, that the assessee had stated that outstanding creditors for a period of more than 3 years was of Rs.30 lakhs.The assessee admitted that some of the creditors were very old and the amounts were in dispute. It offered an additional income of Rs.30,00,000/- over and above the regular income for the year under consideration under the head ‘un-reconciled creditors’.A statement of Director of the assessee-company was recorded on 14.02.2008. While filing the return of income,it offered an amount of Rs.27.21 lakhs only.The AO directed the assessee to explain as to why an amount of Rs.30,00,000/-,as per the statement of 14.02.2008, should not be added to its total income.After considering the submission of the assessee, the AO held that assessee had not offered any explanation of reduced amount, that the Director had offered Rs.30,00,000/-as undisclosed income during survey proceedings.As a result, an amount of Rs.2.78 lakhs [Rs.30,00,000/- (-)Rs.27,21,993/-] was added to the income of the assessee.

5.1.During the appellate proceedings before the FAA,the assessee made detailed submissions. Considering the available material, he held that one of the Directors of the company had offered Rs.30,00,000/- for taxation,that AO was justified in making the addition of Rs.2.78 lakhs. He referred to the cases of Hotel Samrat[3 ITR 353] and K.C.K Deboo [313 ITR 186] and dismissed the ground of appeal,raised by the assessee.

5.2.Before us,the AR submitted that during the course of survey proceedings the assessee had stated that creditors approximately of Rs.30,00,000/- were appearing in the books of accounts wherein the amount was due, that the figure of Rs.30,00,000/- was not based on books of accounts, that the Director had stated that he would be submitting exact amount after consulting the regular books of accounts, that at the time of filing of return and age analysis of the creditors appearing in the Balance Sheet as on 31.03.2007 was carried out, that exact amount of the creditors in dispute was accordingly offered to tax. He referred to the statement recorded during the course of survey and stated that amount surrendered during the survey proceedings was estimated amount. The DR supported the order of the FAA.

5.3.We have heard the rival submissions and perused the materials before us.We find that a survey action, u/s.133A of the Act was carried out at the business premises of the assessee, that M/s. Paresh Constructions & Foundations one of the Directors offered Rs.30,00,000/- (approximately)for taxation on account of old creditors, that within a fortnight of the survey the assessee filed a letter stating that the exact amount of old creditors was arrived at, that while filing the return of income it offered Rs.27.21 lakhs as additional income. In our opinion,the addition should be based on some evidence. In the case under consideration, the assessee had clearly mentioned the additional income offered was based on some estimate.During the survey proceedings,the Director of the company could not refer to the regular books of accounts. After reconciling the financials the exact amount of the disputed creditors was shown in the return of income.Therefore, in our opinion, the FAA was not justified in confirming the addition of Rs.2.78 lakhs especially when the statements recorded during the survey proceedings talked of estimated income only.Ground No. 2 is decided in assessee’s favour.

6.Next ground of appeal is about disallowing the claim of Rs.84.86 lakhs on account of interest paid to the custom authorities.During the assessment proceedings,the AO found that interest expenditure,amounting to Rs.84,86,042/- was debited to the P & L account under the head ‘administrative expenses’.He directed it to file the details in that regard.He held that the assessee had paid interest to custom authorities that it had violated the law with regard to import of machine, that the penal interest/penalty paid by the assessee for violation of law was not allowable as a deduction as per the provisions of explanation to Section 37. (1) of the Act. Altern -atively,it was held that the interest pertained to earlier period, that same was not allowable. It was also opinion of the AO that penal interest was related to acquisition of machinery, that same was to be capitalised.

6.1.The assessee made submissions before the FAA during the appellate proceedings.He observed that the assessee had imported four machines to carry out the job work of Government of India /State Governments,that investigation conducted by Custom Authorities revealed that same were used for construction sites by outside Mumbai,that the Custom Authorities seized the machines for violating the exemption conditions,that the assessees had approached the Settlement Commission while accepting the duty demand of Rs.3.21 crores,that it had deposited Rs.3.21 crores together with interest @13%.He referred to the Explanations to Section 37(1) and held that the assessee had used the machinery for the purpose which was not committed by law, that it was violation of one of the conclusions imposed on it for acquiring machines. We refer to M/s. Paresh Constructions & Foundations the case of Prakash Cotton Mills (201 ITR 684) and Meddi Venkatram & Company Pvt. Ltd., (229 ITR 534) and confirmed the order of AO.

6.2.Before us,the AR submitted the assessee had approached the Settlement Commission of Customs and Central Excise,that the commission had deleted the penalty,that interest was levied for the violation of the conditions for the imported machinery,that the one of the Group entities have approached to the Hon’ble High Court on the same issue, that the Hon’ble Bombay High Court had held that interest paid by the assessee was of compensatory in nature, that Explanation to Section 37(1) of the Act was applicable to penal interest and not to compensatory interest.He relied upon the cases of Ahmedabad Cotton Mfg.Co.Ltd.(205 ITR163),Bharat C Gandhi( 46 SOT 258),ANZ Grindlays Bank Ltd.(13 SOT524)and HP State Forest Corporation(320 ITR 170).The DR stated that Custom Authorities had seized machine, it was clear cut violation of the machine, that expenditure was not allowed.

6.3.We have heard the rival submissions.We find that the identical issue i.e.use of machinery outside the state of Maharashtra and levy of penalty had travelled up to Settlement Commission and the Hon’ble Bombay High Court.The Commission deleted the penalty and the Hon’ble Court (Page No.111 of the paper book)held that the interest paid by the assessee was of compensatory nature i.e. it is not penal nature.We are of the opinion that after the order of the Commission and the judgment of the Hon’ble Court there is no justification for holding that the interest was penal interest and that the expenditure claimed by the assessee should not be allowed.Reversing the order of the FAA we decide the issue in favour of the assessee.Cases relied upon by the assessee,as mentioned in the earlier paragraph,also support our view that explanation 1 to section 37 was not applicable to the facts of the case.

As a result,appeal filed by the AO is dismissed and the CO of the assessee stands partly allowed.

फलतः िनधा�रती अिधकारी �ारा दािखल क� गई अपील नामंजूर क� जाती है और िनधा�रती का ��या!ेप अंशतः मंजूर $कया जाता है. Order pronounced in the open court on 04th April,2018. आदेश क� घोषणा खुले %यायालय म& $दनांक 04 अ�ैल, को क� गई । Sd/- Sd/- (RAMLAL NEGI) (RAJENDRA) �याियक सद�य / JUDICIAL MEMBER लेखा लेखा सद�य सद�य / ACCOUNTANT MEMBER लेखा लेखा सद�य सद�य मुंबई Mumbai; $दनांक/Dated : 04.04.2018 Roshani, Sr. PS/JV, Sr. PS आदेश क� क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order forwarded to : आदेश आदेश आदेश क� क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत 1.Appellant /अपीलाथ( 2. Respondent /��यथ( 6

M/s. Paresh Constructions & Foundations