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Income Tax Appellate Tribunal, LUCKNOW BENCH “A”, LUCKNOW
Before: SHRI. A. D. JAIN & SHRI T. S. KAPOOR
PER A.D. JAIN, V.P.:
This is Revenue’s appeal against the order of the ld. CIT(A)-2, Lucknow, dated 9.8.2019 for Assessment Year 2014-15, raising the following grounds: 1. The Id. CIT(A) had erred in law and on facts in deleting the addition of Rs.13,64,34,077/- without appreciating the fact that the assessing officer made addition for not following percentage completion method for revenue recognition as given in Accounting Standard-AS-7 (Revised) and also, the assessee is deducting amounts from profits and crediting in retention reserve without any justification. 2. The Id. CIT(A) had erred in law and on facts in deleting the addition of Rs.54,44,29,313/- on account of interest income without appreciating the fact that the assessing officer made the addition of the interest income received from the FDRs in the name of the assessee, and the assessee had claimed TDS deducted by the bank on interest, which is
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against the provision of section 198 and 199 of Income Tax Act. 2. Apropos Ground no.1, the Assessing Officer noted that the assessee had been deducting profit from work-in-progress and had been crediting it to Retention Reserve. The Assessing Officer added the Retention Reserve of Rs.13,64,34,077/- to the income of the assessee, observing that the assessee, despite having been required to do so, had not prepared its Profit and Loss Account as per the revised AS-7; that the assessee had not been following the revised AS-7; that the revenue recognition had not been as per the revised AS-7; that the assessee had been deducting profits from the value of work done without justification and had been crediting such profit to the Retention Reserve; that no entries of Retention Reserve stood shown either in the Profit and Loss Account, or in the Balance Sheet of the assessee; and that in view of these facts, the books of account of the assessee stood rejected. 3. By virtue of the impugned order, the ld. CIT(A) deleted the addition made, amounting to Rs.13,64,34,077/-, on account of Retention Reserve, following the Tribunal order dated 28.2.2019, passed by the Lucknow Bench of the Tribunal in the assessee’s case for the Assessment Years 2010 – 11 to 2013 – 14, in ITA nos. 330 to 332 and 508/LKW/2016, whereby the Tribunal upheld the ld. CIT(A)’s order on this issue. 4. The ld. D.R. has contended, challenging the impugned order in this regard, that the ld. CIT(A), while erroneously deleting the addition of Rs.13,64,34,077/-, representing Retention Reserve, has failed to consider that the addition had correctly been made by the Assessing Officer, since the assessee
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had not been following the percentage completion method for revenue recognition, as given in the revised Accounting Standard AS-7; and that the ld. CIT(A) has also failed to take into consideration the fact that the assessee had been deducting amounts from profits and had been crediting the same in the Retention Reserve, without any justification. 5. The ld. Counsel for the assessee, on the other hand, has placed strong reliance on the impugned order. It has been submitted that the revised AS-7 was the Accounting Standard consistently being followed by the assessee while accounting for the income of the project; that it was very much in keeping with the requirements of AS-7, that when the project was more than 50% complete, the assessee recognised two thirds of the profits, whereas when the project was completed, the entire profit was accounted for; that it was in this manner, which is entirely as per the prescribed Accounting Standards, i.e., the revised AS-7, that the profits stood accounted for and offered for taxation accordingly; that as such, where the works had been 50% completed in the earlier years, two thirds of the profits thereon were recognised and offered for taxation; that similarly, when the projects stood completed in subsequent years, the entire profit was accounted for and offered to tax; that these profits were otherwise actually assessed by the Assessing Officer; that since there was no irregularity, much less any illegality in the method of accounting followed consistently by the assessee, perfectly in accordance with the revised AS-7, even the Statutory Auditors of the assessee had never taken any exception to such act of the assessee and no qualification had been entered by them to the creation of the reserve; and that so much so, even the
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Comptroller and Auditor General of India had also not given any adverse comment on this issue. The ld. Counsel for the assessee has urged that it was this system of accounting of the assessee that the ld. CIT(A) had taken into consideration while deleting the additions made by the Assessing Officer for the Assessment Years 2010 – 11 to 2013 – 14; that the Tribunal, vide its order dated 28.2.2019, passed in the assessee’s own case, for Assessment Years 2010 – 11 to 2013 – 14, rejected the Grounds taken by the Department in this regard, in the Department’s appeals for the said Assessment Years, confirming the deletion of the addition made for all these years. It has been contended that since the facts for the year under consideration have not undergone any change whatsoever, following the said Tribunal order, the ld. CIT(A) has correctly deleted the addition. It has, thus, been requested that the Ground taken by the Department carrying no merit, the same be rejected and the order of the ld. CIT(A) on this issue be confirmed. 6. We have heard the parties and have perused the material on record. The revised AS-7, as is undisputedly applicable to the year under consideration, reads as follows (relevant portion): “25. Under the percentage of completion method contract revenue is recognised as revenue in the statement of profit and loss in the accounting periods in which the work is performed Contract costs are usually recognised as an expense in the statement of profit and loss in the accounting periods in which the work to which they relate is performed. However, any expected excess of total contract costs over total contract revenue for the contract is recognised as an expense immediately in accordance with paraqraph 35.”
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The assessee Corporation is a U.P. Government Construction Agency. During the year, it was engaged in civil constructions, besides irrigation work. Its method of valuation of work-in-progress (incomplete works) at the close of the year, was specified in Clause B of the Schedule of the books forming part of the assessee’s Balance Sheet, under the head “significant accounting policy”. As per this policy, the profit on contracts concerning work-in-progress was recognised in the following manner. The work-in-progress was valued at contract price as per AS-7 (Revised). The provision was made for contingencies. When the progress of the work was below 50%, i.e., the project was in its initial stage, one half of the profit was deducted from the value of the work. If, on the other hand, the progress was 50% or more, but less than 100%, or, substantially completed, one third of the profit was deducted from the value of the work. The Retention Reserve created was deducted from the value of the work-in-progress. When the work was completed in the subsequent year, the Retention Reserve created was added in the profit of that year. Though the exact profits on to contract work would be known only on the completion of the work, under the percentage of completion method, the profit was took in proportion of the work completed. The reserve was created to meet future contingencies. 8. The above method of accounting does not stand disputed. Further, evidently, this policy has been consistently followed by the assessee. The same stood accepted by the Department in the earlier years prior to assessment year 2010 – 11. For assessment years 2010 – 11 to 2013 – 14, the ld. CIT(A) deleted the additions made by the Assessing Officer on this
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count. The Tribunal, vide its order (supra) dated 28.2.2019, has upheld the ld. CIT(A)’s action of deleting the additions. The year under consideration is Assessment Year 2014 – 15, i.e., the year immediately succeeding Assessment Year 2013 – 14. The facts have not been shown to have undergone any change whatsoever in the year under consideration. The Tribunal order (supra) dated 28.2.2019 has also not been shown to have been either reversed on appeal or otherwise, or have been stayed. 9. Besides the above, it goes without saying that if the Retention Reserve were allowed to be taxed, it would amount to taxing the same amount twice, which is not at all the purpose of the law. 10. In view of the above, finding no merit therein, Ground no.1 raised by the Department is rejected 11. Coming to Ground no.2, the Assessing Officer noted that the assessee had debited “Provision for Interests on Unutilised Funds”, of Rs.54,44,29,313/-. Having examined and rejected the stand of the assessee in this regard, the Assessing Officer disallowed this provision and added the amount of Rs.54,44,29,313/- to the income of the assessee, relying on the directions issued by the Additional CIT, Range 6, Lucknow, under section 144A of the I.T. Act. The ld. CIT(A) deleted the addition, giving rise to Ground no.2 before us. 12. The ld. D.R. has contended that while wrongly deleting the addition on account of interest income, the ld. CIT(A) failed to appreciate that the Assessing Officer had made addition of the interest income received by the assessee from FDRs in the name of the assessee and the assessee had claimed TDS deducted by
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the Bank on the interest, which is against the provisions of sections 198 and 199 of the I.T. Act. 13. The ld. Counsel for the assessee, per contra, has again placed reliance on the order under appeal and has contended that the ground raised by the Department again does not carry any merit, since the ld. CIT(A) has rightly followed the very same Tribunal order in the assessee’s case for assessment years 2010 – 11 to 2013 – 14, upholding the finding of the ld. CIT(A) that where the amount of interest on Central Grants has to be remitted back to the Government, the same cannot be treated as income of the assessee. 14. Here, the undisputed facts are that the Assessee Corporation is a Government Company by status, and has been declared as a Construction Agency for Government works. Advances are given to the assessee for execution of construction projects on behalf of the State Government in the name of deposits and funds for meeting the cost of construction of such projects. The unutilised funds are deposited in Banks. The interest income generated therefrom requires to be treated in a specific manner, that prescribed by the Government Order no.B- 1564/10 – 7/97, dated 2.3.1998. In accordance therewith, the interest earned on the unutilised funds requires to be deposited by the assessee in the Government Treasury. This interest is, therefore, the income of the Government and not of the assessee. For the deposit of the interest, an accounting head has separately been created by the Government, vide its order dated 12.12.2014. Out of the total interest earned during the year, of Rs.59,74,46,655/-, the amount of Rs.54, 44,29,313/- pertained to the interest and earned on unutilised funds of the
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Government. It was thus, that the provision for the same amount was created in the books of the assessee for the year under consideration. The interest of Rs.5,30,17,342/- (Rs.59,74,46,655 – Rs.54,44,29,313) was interest income of the assessee itself, i.e., the assessee’s interest income from its own funds. This interest income stood duly accounted for as the assessee’s income in its profit and loss account for the year under consideration. 15. The above undisputed factual position was, however, erroneously disregarded by the Assessing Officer, who held the interest to be the income of the assessee, from other sources, since in the view of the Assessing Officer, the assessee was in the business of carrying out construction of various projects rather than being in the business of earning interest on deposits. The Assessing Officer held that the interest remitted by the assessee to the Government was not its interest liability on loans or borrowings, but was the income of the assessee. 16. While making the addition as above, the Assessing Officer outrightly ignored the Government order (supra) dated 2.9.1998, directly pertaining to the assessee, which, to reiterate, is a Government Company by status, declared as a Construction Agency for Government works, to which, the State Government gives advances for execution of construction projects on its own behalf. As per this Government order dated 2.3.1998, the assessee was mandated by the State Government to deposit the interest earned on unutilised funds, in the Government Treasury. The said order, in no uncertain terms, states that such interest earned on unutilised money is the income of the Government. So much so, this very order informed that a separate accounting head had been created by the Government by the Office Order
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no.B-13713/BS – 2014 –12(2014, dated 12.12.2014, for deposit of interest. 17. The ld. CIT(A) has duly taken into consideration the aforesaid Government order dated 2.3.1998 to decide the matter in favour of the assessee. While doing so, the ld. CIT(A) relied, inter alia, on the decision of the Hon’ble Gujarat High Court in ‘CIT vs. SAR Infracon (P) Ltd.’, 222 taxman 294 (Guj.). Therein, the Central Government, while sanctioning grant in favour of that assessee, had stipulated that interest earned on the Central Grants already released would form part of the Central Grants limit. The Hon'ble Gujarat High Court held that considering the condition imposed by the Central Government, while releasing Grant in favour of the assessee, when the interest earned on the Central Grants already released was required to be forming part of the Central Grants, the Tribunal had rightly observed that the interest earned could not be the income of the assessee. The action of the Tribunal in deleting the addition made by the Assessing Officer was confirmed by the Hon’ble High Court. 18. The Assessing Officer, while distinguishing ‘CIT vs. SAR Infracon (P) Ltd.’ (supra), had observed that in that case, the interest earned was included and formed part of the Grants to the assessee. While doing so, however, the Assessing Officer failed to consider that it was while sanctioning Grant that the Central Government had stipulated that the interest earned on the Central Grants already released would form part of the Central Grants. 19. Once the interest accrued on the unutilised advances, it would obviously be the income of the Government, rather than
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that of the assessee and it became a liability attributable by the assessee to the Government, in due course. 20. The findings of the ld. CIT(A) in this regard were confirmed by the Tribunal, vide its aforementioned order dated 28.2.2019, for assessment years 2010 – 11 to 2013 – 14, in the assessee’s case. 21. Again, the facts have not undergone any change whatsoever with regard to this issue as well, for the year under consideration, which is the year immediately succeeding Assessment Years 2010-11 to 2013-14. Also, the said Tribunal order has not been stated reversed on appeal or otherwise, or even stayed. In this view of the matter, finding no error therein, the action of the ld. CIT(A) in deleting the addition of Rs.54,44,29,313/- on account of interest income, is hereby confirmed, following the aforesaid Tribunal order in the assessee’s own case for Assessment Years 2010 – 11 to 2013 – 14. Accordingly, Ground no.2 also stands rejected. 22. In the result, the appeal of the Revenue is dismissed Order pronounced in the open Court on 04/07/2022.
Sd/- Sd/- [T. S. KAPOOR] [A. D. JAIN] ACCOUNTANT MEMBER VICE PRESIDENT DATED:04/07/2022 JJ: Copy forwarded to: 1. Appellant 2. Respondent 3. CIT(A) 4. CIT 5. DR