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Income Tax Appellate Tribunal, “B” BENCH, CHENNAI
Before: HON’BLE SHRI MAHAVIR SINGH, VP & HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM
आदेश / O R D E R Manoj Kumar Aggarwal (Accountant Member)
1.1 Aforesaid cross-appeals for Assessment Year (AY) 2017-18 arises out of an order passed by learned Commissioner of Income Tax (Appeals)-18, Chennai [CIT(A)] on 21-02-2023 in the matter of an assessment framed by the Ld. Assessing Officer [AO] u/s. 143(3) of the Act on 31-12-2019. 1.2 The Registry has noted delay of 142 days in revenue’s appeal, the condonation of which has been sought by Ld. Sr. DR. The Ld. AR has not raised any objection to the condonation of delay and accordingly, the delay is condoned and the appeal is admitted for adjudication on merits. 1.3 The assessee’s grounds of appeal read as under:-
1. The order of the commissioner of Income tax (Appeals), so far as it is prejudicial to the interest of the assessee, is contrary to law, facts of the case and material on record. 2.The Commissioner of Income tax (Appeals), in the facts and circumstances of the case, is not justified in sustaining the disallowance made by the Assessing Officer of the claim for deduction of Works contract taxes of Rs.12,31,36,451/- written off as expenditure during the year. The commissioner of Income tax (Appeals) failed to appreciate that the assessee could neither claim input credit due to lack of enough input or claim refund from VAT authorities due to transition to GST has no other choice but to write off as expenditure in the assessment year 2017-18. In any event, Commissioner of Income Tax Appeals ought to have considered and allowed the assessee's alternative claim for deduction of the expenses under section 37(1) of the act.
1.4 The revenue’s grounds of appeal read as under:-
1. The order of the Id. Commissioner of I.T. (Appeals) is erroneous on facts of the case and in law.
2. The learned CIT(A) erred in deleting the addition made u/s. 41(1) of the IT Act, amounting to Rs.77,90,10,324/- towards cessation of liability, since the advances received from related parties were lying with the assessee over a period of years, without being put into use for any activities. 2.1. The learned CIT(A) erred in deleting the addition made u/s. 41(1) of the IT Act, without appreciating the fact that assessee had not established with evidence in terms of contractual agreements, approvals and payments etc., before the Assessing · Officer, that the advances received were utilized for construction activities. 3 .The learned CIT(A) erred in deleting the 14A disallowance amounting to Rs. 34,41,750/-, and the disallowance was worked out as per the provisions of section 14A read with 8D of the IT Rules. 3.1 The ld. CIT(A) erred in deleting the disallowance made u/s. 14A of the IT Act, on the ground that no exempt income was earned by the assessee during the relevant assessment year, When there is no express provisions in Section 14A and Rule 8D of the IT Rules, towards such restriction of the disallowance to the exempt income earned or in case of non earning of exempt income no disallowance u/s. 14A can be made.
4. For these grounds and any other ground including amendment of grounds that may be raised during the course of the appeal proceedings, the order of Id. CIT(A) may be set aside and that of the Assessing Officer be restored.
1.5 As is evident, the sole issue in assessee’s appeal is deduction of Works Contract Tax (WCT). The issues in revenue’s appeal are two-fold i.e., cessation of liability u/s 41(1) and disallowance u/s 14A. 1.6 The Ld. CIT-DR advanced arguments in support of assessment order. The Ld. AR also advanced arguments and drew our attention to the findings of lower authorities. Having heard rival submissions and upon perusal of case records, our adjudication would be as under. The assessee being resident corporate assessee was assessed for this year u/s 143(3) vide order dated 31-12-2019.
Remission / Cessation of Liability u/s 41(1) 2.1 It transpired that the assessee received advances from M/s SRMIST and M/s Valliammai Society during this year for Rs.13.44 Crores. The total amount received as on 31-03-2017 was to the tune of Rs.77.90 Crores. The said advances were stated to be received as advance towards construction of certain building. However, the projects were interrupted due to late processing of building approval. It was further submitted that the advance would be adjusted against the current as well as future projects. However, rejecting the submissions of the assessee, Ld. AO held that there was cessation of liability and accordingly, the same was added u/s 41(1) of the Act. 2.2 The Ld. CIT(A), after considering assessee’s submissions as well as the remand report of Ld. AO, rendered factual findings as under: - 9.1.4 The appellant had also submitted copy of details furnished before AO on construction of the building in the subsequent years and adjustment of the advances against the bills raised on the said Parties, which is extracted below: Statement of MOB adjusted / returned of VS and SRMIST Valliammal Society Amt Rs. Amt Rs. MOB advance payable as on 31.3.2017 46449002
MOB advance received during FY 2017-18 82786041 TOTAL MOB advance payable (A) 129235043 FY Total billed Amt MOB adjusted / returned 2016-17 191113310 15327424 2017-18 554307949 57399547 2018-19 219502743 38418798 2019-20 33298240 0 2020-21 0 0 2021-22 (AS ON Sep.2021) 0 0 TOTAL MOB adjusted (B) 111145769 18089274 Balance MOB payable as on date (A-B) SRMIST 732561322 MOB advance payable as on 31.3.2017 (A) FY Total billed Amt MOB adjusted /returned 2016-17 361553405 0.00 2017-18 0 0.00 2018-19 12013310 73100000.00 2019-20 341321766 15612937.00 2020-21 187531182 86849491.00 2021-22 (AS ON Sep.2021) 57001733 8084278.00 TOTAL MOB adjusted (B) 183646706.00 548914616.00 Balance MOB payable as on date (A-B) It is seen from the details that the advances were being adjusted against the future bills raised and there was no case for cessation of liability in its entirety, The case laws relied on by the appellant also support the submissions made. It is also not the case of the AO that the said amount was earlier allowed as a deduction and the same was waived by the parties in its entirety. Thus, there is no cessation of liability in this case on the entire amount and the AO was therefore not justified in invoking the provisions of section 41(1) of the Act on the entire amount. It is also not the case of the AO that the debt was a time barred debt and in fact the appellant had received advances even during the current year. I therefore hold that the AO was not correct in applying the provisions of section, 41(1) of the Act to the appellant's case on the entire amounts. 9.1.5 Both the parties accept the liability of the appellant in respect of the advances received. In the remand report, the AO has not disputed the on-going construction activities for the two parties. However, the AO in the remand report noted the difference in the liability amount given by the two parties in their confirmation letters. With reference to SRMIST, the assessee shows the liability at Rs.73,25,61,325, the party shows the balance at Rs. 75,07,37,079. With reference to Valliammai Society, the assessee shows the liability at Rs.4,64,49,002, whereas the party states that only Rs.3,43,35,189 receivable by it from the assessee. In the rejoinder, the assessee has not reconciled the difference. In SRMIST, the assessee has shown only lesser liability and there is no case of invoking section 41(1). With reference to Valliammai Society, assessee has shown higher liability of Rs.1,21,13,813 (Rs.4,64,49,002 shown by assessee - Rs.3,43,35,189 shown by Valliammai Society) which the assesses has not reconciled during the remand proceedings or even in the rejoinder, which clearly shows that the liability to the extent of Rs.1,21,13,813 is not Payable by it to Valliammai Society and to that extent the liability ceased to exist. I therefore, sustain the addition u/s 41(1) to the extent of Rs.1,21,13,813/- and delete the balance Rs.76,68,96,511 and the grounds are partly allowed accordingly. The Ld. CIT(A) thus observed that the advances have ultimately been adjusted against business activities carried out by the assessee. Aggrieved as aforesaid, the revenue is in further appeal before us. 2.3 It is undisputed position by Ld. AO in the remand report that the impugned advances have been adjusted against the future bills raised by the assessee and accordingly, there is no case for cessation of liability in this year. There is no allegation that the advances were waived-off by any of the parties. It is also not the case of AO that the debt was a time barred debt. Another pertinent fact is that the assessee as well as payers accepts the liability. The Ld. AO, in the remand report, has not disputed about carrying out of construction activities for the two parties. All these findings are factual findings which could not be disputed by revenue. It is also a fact that the assessee, all along, continues to recognize this liability its books of accounts and accordingly, no case of remission or cessation of liability u/s 41(1) could be made out against the assessee. Therefore, concurring with uncontroverted factual findings rendered in the impugned order in terms of remand report of Ld. AO, we are of the considered opinion that no interference is called for in the impinged order, on this issue. In the result, the corresponding grounds raised by the revenue stand dismissed.
Disallowance u/s 14A 3.1 Since the assessee had made investments, Ld. AO proceeded to make disallowance u/s 14A. The assessee submitted that no exempt income was earned during the year and therefore, disallowance u/s 14A would not arise. However, Ld. AO computed disallowance of Rs.34.41 Lacs as per Rule 8D and added the same to the income of the assessee. The Ld. CIT(A), considering first appellate order in assessee’s own case for AY 2016-17, deleted the impugned disallowance. Aggrieved, the revenue is in further appeal before us. 3.2 We find that this issue is covered in assessee’s favor by the decision of Hon’ble High Court of Madras in the case of CIT vs. Chettinad Logistics P. Ltd. (80 Taxmann.com 221) holding that Section 14A cannot be invoked where no exempt income was earned by assessee in relevant assessment year. Respectfully following the same, we affirm the impugned order, on this issue. The corresponding grounds as well as the appeal of the revenue stand dismissed.
Disallowance of VAT 4.1 The assessee claimed amount of Rs.13.56 Crores as License fees and taxes. It was explained that this amount represent Works Contract Tax (WCT) recovered by the assessee’s clients whenever the payment is made to the assessee in respect of work given to the assessee. The WCT thus recovered by the parties are remitted by them to the government and the assessee could not claim it as input credit. Actually, the amount is refundable to the assessee by VAT authorities. The VAT assessment was completed and WCT refundable to the assessee was determined as Rs.13.56 Crores. Since the assessee could not get the refund of the same, this amount was booked as expense since the assessee would never get the refund of the same. The actual amount of WCT paid on behalf of the assessee came to be known to the assessee only during the financial year 2016-17 when the assessment was completed. The copy of ledger account in respect of VAT paid and VAT recoverable was also enclosed. The Ld. AO denied the deduction of the same on the ground that no supporting evidences were furnished by the assessee. 4.2 The assessee’s submissions, during appellate proceedings, were subjected to remand proceedings. The Ld. AO noted that WCT of Rs.12.31 Crores represents Works Contact Tax recovered by the assessee's clients whenever payment is made to the assessee in respect of the work given to the assessee. This WCT is remitted to the Government and the assessee could not claim it as input credit. Actually, the amount is refundable to the assessee by the VAT authorities. The VAT assessment was completed only during the financial year 2016-17 and the total WCT refundable to the assessee was determined at Rs.13.56 Crores. However, since the assessee could not get the refund of this amount, the same was booked as expenses during the year when the VAT assessment was completed. 4.3 During remand proceedings, the assessee submitted details of the letter dated 12.11.2015 as provided by the Commercial Tax Department in support of its claim of the actual works contract deducted on the Payments received for the respective financial years which could be tabulated as under:
Financial Amount Paid Tax deducted & % of Tax Total Amt .Rs year Paid Rs. 2009-10 1314629491 26292587 1.99 1340922078 2010-11 1174803923 23496077 1.99 1198300000 2011-12 1036044568 20720891 1.99 1056765460 2012-13 1294828236 25896552 1.99 1320724788 2013-14 948217908 18964353 2.01 967182261 Total 115370460 The Ld. AO noted that the amount of Rs.11.53 Crores has been deducted on the payments received by the assessee in financial years from 2009-10 to 2013-14. However, the assessee has not substantiated with proof that the assessee had not claimed the refund or any input credit on the above said work contracts tax payment made to Government. The assessee submitted GSTR copies highlighting the input tax credit available to prove that the amount of Rs.13.56 Crores had not been claimed as Input Tax credit during the AY 2017-18. From the same it is not ascertainable that the assessee has not claimed the refund of the tax already deducted. It would also be necessary to verify if the income already offered is inclusive of such WCT deducted. The assessee was confronted with the same and the assessee provided break-up of the expenses claimed under ‘License Fee and Taxes during FY 2016-17’ as under: -
FY Amount Received WCT Amount Income as per (MOB Adv. + RA Deducted book recorded Bill) 2010-11 1373731419 26935910 1840147848 2011-12 1172440140 20935495 1390168000 2012-13 1462057452 28837727 1159818096 2013-14 1057086578 21244546 1156157083 2014-15 1146876585 23487558 936641938 2015-16 85256331 1695215 88455958 Total WCT tax 123136451 Property/ other 1575502 tax CMDA-Approval 10901136 charges Total claimed 135613089 The Ld. AO observed that actual amount received was inclusive of the WCT amount deducted as verified from the ledger extracts submitted by the assessee. Also, the amount of income offered during a year is based on the amount of bill generated for that relevant year which includes the actual payment received during the year. Moreover, the assessee claimed that if in a year the amount in received in excess as mobilization advance, the same is claimed to be adjusted against the bill generated in the consecutive year. Therefore, prima facie the income offered appears to include the WCT deducted by the assessee. Yet it is observed that the actual amount of WCT deducted for the said years is unmatched for the relevant financial years and the assessee has not given clarification on the same. Even otherwise the assessee has not satisfactorily explained and substantiated the reason why the amount deducted was not claimed as refund / input credit. In its failure to do so, the assessee cannot debit the WCT deducted over the years as expenses made during the subject financial year. Therefore, the same was not allowable. On the alternative claim of bad debts, it was observed by Ld. AO that there was an outstanding liability of Rs.77.90 Crores as mobilization advance (WCT deducted) and claimed to be offered by the assessee to income in the following years as and when bills are generated on completion of the work. Considering that WCT is deducted @ 2% of the payment on the amount of mobilization advance, it is determined that an amount of Rs.1.55 Crores would not be allowable to be written off as bad debts since the same has not been offered as income in any of the assessment years. Moreover, this stand of the assessee is an afterthought and the amount has not been written off as bad debts in the books rather claimed as "rates and taxes" and hence the same could not be allowed. 4.4 The assessee controverted the findings of Ld. AO and submitted that this liability had accrued during this year only. The assessee had written-off amount of Rs.12.31 Crores under the head ‘rates and taxes’. This amount represents WCT recovered by the assessee's clients whenever payment is made to the assessee in respect of the work given to the assessee. This assessee could not claim it as input credit during the respective years due to lack of enough Input. During the months of June / July, 2017, VAT, Works contract and Service Tax were all merged into GST. At the time of transition, the assessee was to file a form called ‘Trans-1’ to claim input credit. Unfortunately, the said form did not contain any provision to migrate input credit of Works Contract to GST. Therefore, the assessee could neither claim refund from VAT authorities nor could it migrate recoverable amount to GST as Input credit. In view of this, the assessee had no choice but to book it as expenses during the year. It was also pointed out that Ld. AO, from verification of GST returns, rendered a finding that the assessee did not claim input tax credit. It was confirmed that no refund could be claimed due to transition to GST. Upon realizing that this input credit could not be migrated, the assessee had no choice but to book it as expenses. The said claim crystallized in this year only when the migration to GST took place and the assessee realized that it cannot claim input credit of Works Contract Tax with GST authorities, nor he could claim any refund from VAT authorities as the VAT had been abolished. On the alternative claim of bad debt, the assessee submitted that the amount was written off under the head ‘rates and taxes’. When the WCT itself was abolished and system migrated to GST, input credit could not be taken. 4.5 The Ld. CIT(A) noted that this deduction was denied on the ground that VAT payments pertained to earlier years and since the assessee was following mercantile system of accounting, the same could not be allowed to the assessee. The assessee contended that the expenditure was crystallized and ascertained only during the previous year relevant to AY 2017-18 and therefore, it should be allowed as a deduction in this year. In the alternatively, the assessee claimed that the amount should be allowed as a bad debt since the assessee was not able to claim the input credit. The Ld. CIT(A) noted that this amount represent WCT deducted by the clients of the assessee and remitted to the Government. As per VAT mechanism, the assessee is entitled to get input credit on the said remittances against any tax payable by the assessee. As such, there is no refund of VAT due to the assessee. Even if it is accepted as a refund due from the VAT authorities which the assessee could not claim, such amount due cannot be treated as an expenditure incurred by the assessee for the purpose of its business. In fact, the assessee did not incur any expenditure and the inability to claim the input credit could not be termed as expenditure incurred by the assessee. Therefore, there is no case of allowing it u/s 37. Further, the orders of the VAT authorities submitted for the financial years 2009-10 to 2013-14 dated 12.11.2015 only gives the details of TDS made by SRMIST. The total of TDS for these years amounted to Rs.11.53 Crores only. The date of the letter falls in the earlier previous year. There is no order filed by the appellant from VAT authorities stating that the appellant is entitled to refund of VAT from the authorities. Since no expenditure as such was incurred by the assessee either as VAT or any other tax, the claim of the appellant cannot be allowed u/s 37. The alternate claim that the same should be allowed as a bad debt could also not be accepted. The main condition for allowing any bad debt u/s 36(1)(vii) is that the amount should have been taken into account while computing the income and such amount should have become bad during the year. The VAT remitted by the clients of the appellant to the Government account would be eligible for input credit and not refundable at all. Further, even if the amount is refundable, it cannot be considered as bad debt and if the amount is really due to the appellant, it can be easily collected from the Government. Therefore, the disallowance was confirmed against which the assessee is in further appeal before us. Aggrieved as aforesaid, the assessee is in further appeal before us. Our findings and Adjudication 5. From the facts, it emerges that the assessee carries out works contract for its clients. For the same, the assessee receives mobilization advances which are subjected to Works Contract Tax (WCT) deductions at specified rates under VAT regime. The assessee carries out work and raises the bills as and when the work is completed and the advances so received are adjusted against the same. The bills generated by the assessee against work become revenue for the assessee. It is undisputed fact in the remand report that the assessee offer revenue on gross basis i.e. the same are inclusive of WCT deductions. The amount of WCT deducted by the clients during financial years 2010-11 to 2015-16 amounted to Rs.12.31 Crores which have already been tabulated in earlier paragraphs. The said amount featured as ‘VAT / WCT recoverable’ in the books of accounts and the left-over / unutilized amount continued to be carried forward by the assessee in the books of account. During transition from VAT to GST in the months of June / July, 2017 the assessee was required to file a form called ‘Trans-1’ to claim input credit. However, the said form had no provision to migrate input credit of WCT to GST. The VAT / GST assessment was also completed wherein the assessee was not granted any refund of the aforesaid amount. Thus, the assessee could neither claim refund with VAT authorities nor could it migrate the ‘VAT / GST recoverable’ to GST as Input credit. In such a case, this amount is nothing but amount lost by the assessee in the normal course of business and the assessee would have no choice but to claim expenditure of the same upon crystallization. This amount has crystallized only during this year and therefore notwithstanding the fact that the same pertain to earlier years, this being the year of crystallization, the deduction thereof would certainly be allowable to the assessee in this year only. Therefore, we direct Ld. AO to grant deduction of amount of Rs.12,31,46,451/- to the assessee. The assessee’s appeal stand allowed. Conclusion 6. The appeal of the revenue stand dismissed. The appeal of the assessee stand allowed in terms of our above order. Order pronounced on 12th March, 2024.