M/S. DEEP CONSTRUCTION CO.,ROHTAK vs. ACIT, SONEPAT

The facts of the case in brief are that the assessee filed the return of income on 15.10.2010 declaring net income of Rs.14,73,360/- which was processed u/s 143(1) of the Income Tax Act, 1961 (hereinafter referred to as the Act). Later on, the case was selected for scrutiny. During the course of assessment proceedings the AO noticed that the net profit rate by the assessee for the year under consideration was at 1.46% 2 Deep Construction Co. as compared to the earlier years net profit rate of 0.72%. He also noticed that the details of the expenses debited in the profit and loss account filed by the assessee revealed that an amount of Rs.4,86,459/- was debited under the head recovery by the department and the assessee had failed to submit the details for those. He considered the recoveries by the department as the penalty and made the disallowance. Accordingly, addition of Rs.4,86,459/- was made.

Being aggrieved the assessee carried the matter to the ld. CIT(A) and submitted that the amount had been recovered by the department on account of electricity charges, de-escalation price of materials etc. It was further submitted that a certificate had been issued by the paying department regarding the details of deduction made and reasons thereof which was submitted to the AO at the time of assessment proceedings. It was also submitted that the AO did not sought any explanation in that connection while making the assessment. The ld. CIT(A) however did not find merit in the submissions of the assessee by observing as under: “A perusal of the submissions made by the appellant and the facts on record show that the latter had furnished the details of deductions at the assessment in which mention is made of the amount under the head “Recovery”. Even before me as per the documents filed the heading for the said amount of Rs.4,86,459/- has been designated as ‘Miscellaneous’ by the Executive Engineer Provincial Division No. II PWD, Sonepat. There is nothing on record to indicate that it was not in the nature of a penalty. Therefore, the addition was justified. I confirm the same. This ground of appeal is dismissed.”

Now the assessee is in appeal. The ld. Counsel for the assessee reiterated the submissions made before the authorities below and furnished the copy of profit and loss account showing that the amount of Rs.4,86,459/- was debited in the profit and loss account under the head recovery by the department and copy of a certificate issued by Executive Engineer, Provincial Division No. II, PWD, B&R, Sonepat revealed that the recovery was on account electricity charges and de-escalation in prices of materials etc. He further submitted that recoveries were made by the department on account of expenses and de-escalation in prices of materials supplied by the department which was in accordance with the agreement. Therefore, the deduction was allowable and rightly claimed by the assessee.

In her rival submissions the ld. Senior DR submitted that the nature of the recovery was not clear and that what were the terms and conditions in the agreement needs to be verified by the AO.

I have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it appears that neither the AO nor the ld. CIT(A) appreciated the facts in right prospective. The claim of the assessee is that the detail of the certificate obtained from the department was furnished to the AO which revealed the details of deduction made and reason thereof. However, the AO had not considered the same and the ld. CIT(A) although admitted that the amount deducted was under the head recovery in the certificate 4 Deep Construction Co. issued by Executive Engineer, Provincial Division No. II, PWD, B&R, Sonepat but he confirmed the addition made by the AO. In the present case, it is not clear as to how the recovery made by the department was in the nature of penalty. I, therefore, deem it appropriate to set aside this limited issue relating to addition of Rs.4,86,459/- to the file of the AO to be decided afresh in accordance with law and if it is found that recovery was made by the department as per the terms and conditions of the contract awarded to the assessee then the recoveries made on account of material/expenses etc. which were utilized by the assessee to fulfill the contract and it was the responsibility of the assessee to incur those expenses then the benefit of the said deduction is to be allowed to the assessee. In other words, no addition can be made if the recovery was made by the department as per the agreement and related to the contract fulfilled by the assessee.