ITO 9(2)(1), MUMBAI vs. BHADRECHA CONSTRUCTION P.LTD, MUMBAI

These are two appeals by Revenue for Assessment Year [AY] 2007-2008 which assails quantum and penalty order of Ld. Commissioner of Income Tax (Appeals)-16 [CIT(A)], Mumbai both dated 27/02/2015. First we take up revenue’s appeal which contest the quantum order of Ld. CIT(A) qua deletion of certain additions. This is second round of appeal before us.

Briefly stated, the assessee being resident corporate assessee, was subjected to an assessment u/s 144 vide Assessing Officer [AO] order dated 21/12/2009 wherein the total income of the assessee was determined at Rs.1,27,39,000/- after certain disallowances as against returned income of Rs. ‘Nil’ under normal provisions and Rs.38,82,231/- under MAT provisions filed by assessee on 31/10/2007. Since, none appeared for assessee, the assessment was made on the basis of best judgment u/s 144 after making addition of unsecured loans for Rs. 60.00 Lacs, Sundry Creditors for Rs.46.21 Lacs and adhoc disallowance of expenses for Rs. 60.0 Lacs. The same was contested with partial success before Ld. CIT(A) vide order dated 20/06/2011, who after calling for remand report from AO, deleted addition with respect to sundry creditors and restricted adhoc disallowance of expenses to Rs.92,000/-. However, Ld. CIT(A) enhanced addition for unsecured loans from Rs.60.00 Lacs to Rs.94.42 Lacs and also made fresh addition of Rs.202.42 crores for violation of provisions of Section 40(a)(ia). Aggrieved, the assessee contested both the enhancements before Tribunal vide ITA No. 6771/Mum/2011 order dated 07/05/2014. The Tribunal finding that the enhancements were made without issuance of notice u/s 251(2) of the Income Tax Act, 1961, remitted the matter back to the file of Ld. CIT(A) to decide the matter as per law. The Ld. CIT(A) pursuant to the said directions, deleted both the additions vide order dated 27/02/2015 passed u/s 254(1) after considering the various submissions / contentions of the assessee. & 3305/M/2015 Bhadrecha Construction Private Limited Assessment Year 2007-08 Before Ld. CIT(A), it was contended that the assessee was allotted a contract for repair / remodeling of a society namely M/s Vasundhara Co-operative Housing Society Limited [‘customer Society’] which inter-alia consisted of civil construction, interior work, carpentry and painting work and received an advance of Rs.60.00 Lacs from the customer society in two equal installments during the impugned AY which was reflected as unsecured loans in the Balance Sheet. However, the assessee company followed mercantile system of accounting and followed ‘Project Completion Method’ as per Accounting Standard-7 issued by The Institute of Chartered Accountants of India (ICAI) where the revenue was recognized in the books only when the contract was completed / substantially completed. Further, the assessee neither booked nor debited any expenditure relating to the said project till recognition of revenue on matching principles. Finally, the assessee raised full and final bill of Rs. 323.00 Lacs against the customer society in the very next AY and accordingly, recognized the revenues thereof in that year. In support, the assessee filed copy of full and final bill, financial statements for AY 2008-09, project-wise income and expenses, copy of TDS certificate issued by the customer society and Form 26AS. After considering the various submissions / documentary evidences and placing reliance on various judicial pronouncements, Ld. CIT(A) concluded that the said receipts were offered to tax in AY-2008-09 as per the accounting policies followed by the assessee and theerfore, the additions were not warranted for in the circumstances. Regarding disallowance u/s 40(a)(ia), the assessee contended that it engaged various sub-contractors to carry out the work and as per agreement with them, the liability to pay / bear TDS was on the assessee and as per the agreement, the sub-contractors were to be paid on ‘net of taxes’ basis and this situation was covered by the provisions of Section 195A.The assessee further contended that it deposited TDS of Rs.3,99,772/- on 31/03/2007 after grossing up the payments made to all such sub-contractors and furnished copy of statement reflecting the calculations of TDS payments before Ld. CIT(A). The Ld. CIT(A), after perusing all these contentions / documentary evidences came to the conclusion that the assessee was covered by the & 3305/M/2015 Bhadrecha Construction Private Limited Assessment Year 2007-08 provisions of Section 195A and therefore, not liable for disallowance u/s 40(a)(ia) and therefore, deleted the impugned additions of Rs.2,02,42,706/-. Aggrieved, the revenue is in appeal before us against both the relief provided by the Ld. CIT(A). 3. The Ld. DR drew our attention to the fact that the assessee was following mercantile system of accounting and therefore, was required to offer the income on accrual basis and could no defer the same to next AY. The confirmation from the customer society clearly reflected that the assessee had already carried out the work to the extent of Rs.94,42,869/- during impugned AY and therefore, the same should have been offered as income in the impugned AY only. Further, the assessee failed to deduct TDS from the sub-contractor’s payment in accordance with the provisions of Section 194C and therefore, was liable for disallowance u/s 40(a)(ia) notwithstanding the fact that the assessee paid the TDS from his own pocket. Per Contra, Ld. AR placed reliance on the findings of Ld. CIT(A) to contend that it was nowhere in dispute that the assessee was consistently following ‘Project completion method’ and following the same, the income was recognized in the next AY and therefore, the same could not be disturbed keeping in view the regular accounting policy followed by the assessee. Moreover, there was no loss to the revenue as full income was offered to tax and the assessee already substantiated the same with cogent material before Ld. CIT(A). Regarding disallowances u/s 40(a)(ia), it was contended that the assessee was covered by the provisions of Section 195A in view of agreements with the sub-contractors as rightly found by the Ld. CIT(A) and therefore, the impugned disallowance was not warranted for in view of the fact the assessee deposited due TDS before filing of its return of income. 4. We have heard the rival contentions and perused relevant material on record. Upon perusal of impugned order, we find that Ld. CIT(A) noted the accounting policy followed by the assessee and came to conclusion that the whole of the project income was offered to tax in the very next AY i.e. 2008-2009. The assessee was successful in demonstrating with documentary evidences that following the ‘Project completion method’, it recognized the revenue upon completion of the project and the same is an ITA Nos. 3304 & 3305/M/2015 Bhadrecha Construction Private Limited Assessment Year 2007-08 admitted fact. Therefore, notwithstanding the accounting method followed by the assessee, we are of the opinion that once the full income has been offered to tax in the very next AY and the same is not in dispute then we see no reason to disturb the assessment of impugned AY as well as next AY. Hence, the conclusion arrived at by Ld. CIT(A) do not call for any interference on our part. This ground of revenue’s appeal stand dismissed.

So far as regarding disallowance u/s 40(a)(ia) is concerned, we note that the assessee has borne the TDS liability on behalf of the sub-contractor and adduced evidences in the form of agreements with the sub-contractor before Ld. CIT(A). It also emanates from the impugned order that the assessee had deposited TDS of Rs. 3,99,772/- on 31/03/2007. Ld. CIT(A) after considering the submissions and documentary evidences, reached to a conclusion that the assessee was covered by the provisions of Section 195A. The revenue has nowhere disputed the agreement or disputed the fact of payment of TDS by the assessee. This being the position, we agree with the conclusions reached by Ld. CIT(A) in this regard and see no reason to interfere with the same. This ground of revenue’s appeal also stands dismissed. In nutshell, the quantum appeal filed by the revenue stands dismissed.

Now we take up revenue’s second appeal which assails the order of Ld. CIT(A) qua deletion of penalty u/s 271(1)(c). Since we have already confirmed the order of Ld. CIT(A) in deleting the quantum addition made by Ld. AO, the same being consequential in nature, also deserves deletion. Since, deletion of quantum addition has been confirmed by us, the penalty levied against the same do not survive. Hence, we dismiss revenue’s appeal, the same being consequential to our order regarding quantum addition. It is observed that the Ld. CIT(A) in the impugned order has directed the AO to re-compute penalty on addition of Rs.92,000/- made against ‘unsecured creditors’, which has already attained finality as the assessee is not in appeal. Since, the matter has already attained finality, no findings / directions are given by us against the same and therefore, the same shall be dealt with by AO as per law. & 3305/M/2015 Bhadrecha Construction Private Limited Assessment Year 2007-08 In nutshell both the appeals filed by revenue stands dismissed. 7.