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Before: SHRI G. D. AGRAWAL & SMT SUCHITRA KAMBLE
This appeal is filed by the Revenue against the order dated 21/09/2010 passed by CIT(A) XVI, New Delhi.
2. The grounds of appeal are as under:-
“1. That on the facts and circumstances of the case as well as in law the CIT(A) has erred in deleting the disallowance of Rs. 240.52 lacs on the issue of disallowance made by the A.O on account of expenditure towards preparatory work.
2. That on the facts and circumstances of the case as well as in law the CIT(A) has erred in deleting the disallowance of Rs.240.52 lacs on the issue of Work in Progress expenses.
3. That on the facts and circumstances of the case as well as in law the CIT(A) has erred in deleting the disallowance of Rs.49.31 lacs made by the A.O on account of prior period expenses.
The assessee company is a Government of India Undertaking under Ministry of Urban Development and is engaged in the business of execution of various types of civil/electrical/infrastructural/housing and environmental projects all over India and abroad pertaining to State/Central Governments/Public Sector Undertakings. The assessee company is engaged on consistent basis in execution of various projects. The assessee incurred various expenses termed as expenditure towards preparatory work in its normal course of business. The details of the expenses incurred are as under:-
S. No. Nature of Expenses Pertaining to which project Amount
Consultancy & Survey Work (Preparatory Pradhan Mantri Gram Sadak Yojna in 348.14 Lacs work such as soil testing, survey & the stte of Tripura (Agartala) consultancy)
Consultancy & Survey Work (Preparatory ONGC Mumbai 4.63 Lacs work such as soil testing, survey & consultancy)
3. Consultancy & Survey Work (Preparatory ONGC Delhi 7.27 Lacs work such as soil testing, survey & consultancy)
Consultancy & Survey Work (Preparatory SWM Tejpur 0.75 Lacs work such as soil testing, survey & consultancy)
360.79 Lacs
4. The assessee company is carrying out the projects for past many years pertaining to PMGSY Tripura. The perusal of these details was submitted by the assessee before the authorities for the financial years 2004-05 to 2008-09. The assessee company booked aggregate income under the project to the tune of Rs. 492.43 crores. Thus, the assessee company incurred the expenses and booked the income on ongoing basis in different years. The sample copies of work orders awarded to the assessee company and the copies of the evidences showing nature of payments made to various consultants were produced before the authorities. The Assessing Officer disallowed two third being Rs. 240.52 lacs and made addition to the income of the assessee towards the cost of preliminary expense i.e. expenditure on preparatory work.
The assessee also claimed in its Profit and Loss Account, Rs. 76.27 lacs on account of prior period expenditure. The same was disallowed to the extent of Rs. 49.31 lacs related to the payments as piece rate of labour and made and addition by the Assessing Officer.
The assessee filed appeal before the CIT(A). The CIT(A) partly allowed the appeal, thereby allowing above mentioned disallowance made by the Assessing Officer in favour of the asssessee. The CIT(A) held that since the preparatory expenses either did not pertain to any particular project or were incurred prior to securing a 4 project and were incurred by the assessee during the year, the action of the assessing officer was not justified. As relates to prior period expenses towards the payment as piece rate of labour, the CIT(A) relied upon the judgment of the ITAT, Delhi Benches in case of Sudarshan Overseas Ltd. Vs. DCIT (ITA No. 1404/DEL/2004 dated 17.08.2007).
7. The Ld. DR relied upon the Assessment Order and submitted that the Assessing Officer has rightly disallowed the preparatory expenditure to the extent of two third being Rs. 240.52 lacs. As relates to prior period expenses, the Ld. DR submits that the expenditure can be allowed only in the year to which such expenses relate in mercantile system of accounting. The Assessing Officer has given a reasoning in Para 3.6 of the assessment order and in para 5.7 of the assessment order. Thus, the Ld. DR submitted that the CIT(A) failed to take cognizance of the said finding of the Assessing Officer and the order of the CIT(A) be set aside.
The Ld. AR further pointed out that the assessee company is building more than 100 roads at more than 100 locations and blocks in Tripura’s villages and the work has been going on simultaneously. The expenditure of Rs. 348.14 lacs was incurred commonly for roads at many locations. Thus under these, circumstances, the said expenditure could not be attributed to the single road/project. Since the Assessee company is in the business of execution of the project and income from these projects is the main source of income of the assessee company, the expenses
The Ld. AR submitted that the expenses disallowed by Assessing Officer aggregating to Rs.49.31 lacs are on account of payment to subcontractors in lieu of work performed by them. These expenses pertain to the work done by the subcontractors beyond the original work order issued to them (sub-contractors). The expenditure was crystallized in the year in which the bill was submitted by the sub-contractor and clients have certified and accepted the extra work/claims by the sub-contractor. The assessee company raised bill upon concerned customer (i.e. PSU/Ministry/other government agency) only when the bill of expenses for extra work done by the sub contractor was passed by the assessee company. Thus, the assessee company booked income against these expenses only in the year in which these expenses were crystallized and therefore in this case, the crystallization of expenses as well as accrual of income takes place in the same year. In the impugned year also, the assessee credited the income to the tune of Rs.76.53 lacs against the aforesaid expenses as per details given before the authorities. Thus, in fact and as per law, it is not a case of prior period expenses. It may further be noted that the income of the appellant has been assessed at positive figure in prior years as well as in subsequent years and the taxes have been paid regularly. Under these circumstances, there was no motive or gain
6 with the appellant company to show these expenses in a particular year. The Ld. AR also relied on the judgment of Hon’ble Delhi High Court in the case of Vishnu Industrial Gases 22 ITR/1998 (Delhi H.C) holding that “Where the department had not disputed that the expenditure was deductible in principle but was only disputing the year in which the deduction could be allowed, held, castigating the department, that as the tax rates were the same in both the years, department should not fritter away its energies in raising questions as to the year of deductibility/taxability.”
The Ld. AR further submitted that in the earlier Assessment Years, similar expenses were debited and these were disallowed but allowed by CIT(A) in Assessment Years 1986-87, 1987-88, 1988-89, 1989-90, 1990-91, 1991-92, 1992-93 and 2002-03.
The Ld. AR further submitted that in view of judgment of Hon’ble ITAT in the case of M/s Sudarshan Overseas Ltd., if any expenditure has to be disallowed, the corresponding income also cannot be taxed. Therefore, if prior period expenses of Rs. 49.31 lacs are disallowed, the income corresponding to these expenses i.e Rs. 76.53 lacs also cannot be taxed since if the expenses are disallowed being prior period, the corresponding income also admittedly pertaining to prior period also cannot be taxed.
The Ld. AR submitted that the CIT(A) has rightly taken into account the contentions of the assessee before the CIT(A), in fact the CIT(A) in Para 2.2 have given a detailed reasoning explaining
7 therein. As related to Ground No. 3, the CIT (A) has relied on the Sudarshan Overseas decision which is squarely covering the assessee’s case.
We have perused all the records and heard both the parties. The preparatory expenses are necessity in a construction work and cannot be bifurcated from the actual construction work. Thus, the Ld. DR’s contention fails and the said receipt has to be treated as revenue receipts only. The reliance of the Assessing Officer on Section 35D of the Act is not relevant in the present case. Section 35D provides for amortization of certain preliminary expenses incurred by an assessee before commencement of his business or after the commencement of his business but in connection with the extension of the undertaking or setting up a new unit. The assessee herein neither commenced its business during the assessment year in question nor did it incur the expenses in question for setting up any new unit or for extension of its undertaking. The expenses incurred for obtaining feasibility report, on the possibility of setting up projects, etc. is revenue in nature. This view has been taken by the various high courts which was considered by the CIT(A) in para 2.2. Thus the preparatory expenditure are Revenue in nature. As relates to prior period expenses the same is covered by the judgment of Hon’ble ITAT in the case of M/s Sudarshan Overseas Ltd. when any expenditure is disallowed, the corresponding income also cannot be taxed. Therefore, if prior period expenses of Rs. 49.31 lacs are disallowed, the income corresponding to these expenses i.e. Rs. 76.53 lacs also cannot be taxed. The judgment of Hon’ble Delhi High Court in the case of Vishnu Industrial Gases 22 ITR/1998 (Delhi H.C) also confirmed the said view by holding that where the department had not disputed that the expenditure was deductible in principle but was only disputing the year in which the deduction could be allowed, held, castigating the department, that as the tax rates were the same in both the years, department should not fritter away its energies in raising questions as to the year of deductibility/taxability.
In result, the appeal of the Revenue is dismissed.
The order is pronounced in the open court on 08th of April, 2016.