ACIT, CIRCLE-1(1), NEW DELHI vs. ACC INDIA PVT. LTD., DELHI

On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of Rs,90,109/- made under Rule 40A(3) of the Act by allowing the additional evidence in disregard to the Rule 46A of the I.T. Rule 1962 as the case of the company is not covered under any of the circumstances as enumerated in Rule 46A of the I.T. Rules, 1962.

On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in not appreciating the ratio of judgment of Hon’ble Allahabad High Court in the case of Bimal Kumar Anant Kumar vs. CIT 28 ITR 278 wherein the Hon’ble Court has held that application under Rule 46A must be made for admission of additional evidences with reasons showing the purposes of the additional evidences and also reasons for not producing it earlier.”

Brief facts of the case are that the assessee had e-filed the return of income on 30.09.2015 declaring total income of Rs. 6,50,60,960/-. The case was selected for scrutiny under CASS. The assessment was completed u/s 143(3) of the Income Tax Act, 1961 vide order dated 21.12.2017 and income was assessed at income of Rs.12,19,73,790/-. Against the above order, assessee preferred the appeal before the Ld. CIT(A), who vide his impugned order dated 16.02.2023 has deleted the additions made by AO. Aggrieved with the order of the Ld. CIT(A), Revenue is in appeal before the Tribunal.

The next issue on the issue of disallowance of Rs. 6,39,401/- on account of difference in book balance of Mr. Manoj Kumar Jha and Sh. Bam Bam Mandal is concerned, we find that Ld. CIT(A) noted that on perusal of the details (Page number: 26 and 50 & 51 of the paper book), it was found that the difference is due to TDS and retention money. In the remand report the AO has reported that on perusal of reconciliation statement furnished by the assessee company the same is found correct. The AO has reported that during the course of assessment proceedings, the assessee company has furnished ledger account of both the entities which contained TDS and Retention Money and in confirmation these entities have mentioned only the amount which they have actually received or receivable during the year. In the remand report, the AO has given categorical finding that reconciliation statement furnished by the appellant company is found to be correct. Considering the observation of the AO in the remand report and the facts of the case, the AO was directed to delete the addition of Rs. 6,39,401/- on account of difference in book balance of Mr. Manoj Kr. Jha and Shri Bam Bam Mandal, hence, this ground was correctly decided in favour of the assessee. In view of the aforesaid factual matrix, we do not find any infirmity in the finding of the ld. CIT(A) on this issue, therefore, we uphold the same and reject the issue in dispute raised by the Revenue.

The next issue on the disallowance of Rs. 17,74,720/- made on account of temporary site installation is concerned, we note that in the remand report the AO has stated that after giving various opportunities for furnishing of the details claimed by the appellant company regarding Temporary Site Installation. The assessee company did not file any details viz-a-viz working of the same during the course of assessment proceedings. The assessee company has furnished the same before the CIT(A). In the remand report the AO has also stated that on perusal of the same, it is noticed that assessee company incurred total expenses under the head Temporary Site installation (Pre-Paid Expenses) during the F.Y. 2013-14 amounting to Rs. 53,24,161/- which was further allocated to the onward F.Ys and out of such expenses, the amount of Rs. 17,74,720/- has been allocated to the F.Y. 2014-15 relevant to A.Y. 2015-16. The AO has also reported that the assessee company also furnished the ledger account of such expenses. As regards the allowability of expenses, the AO has reported that on going through the facts and nature of business of the assessee company, the said expenses are necessities for operation of business but it is not possible to verify the exact expenses debited by the appellant company for the assessment year in question. Ld. CIT(A) noted that at the initial stage of project, temporary structure is constructed for Site Labour Camp/Office, Store, Pantry etc. These expenses have been termed as "Temporary Site Installation" (TSI). During F.Y. 2013-14, the assessee company has incurred TSI expenses of Rs. 53,24,161/- and allocated it to different financial years as under: Rs 9,48,139/- in F.Y. 2013-14, Rs 17,74,720/- in F.Y. 2014-15, Rs 17,74,720/- in F.Y. 2015-16 and Rs 8,26,582/- in F.Y. 2016-17. As per the provision of the Act, purely temporary erections, such as wooden structures are eligible for depreciation @ 100% upto AY 2016-17 whereas the appellant has allocated temporary site installation expenses over a period of four years so as to arrive at the correct profit from a project in a particular year. Considering the nature of the business of the assessee company, Ld. CIT(A) agreed with the observation of the AO in the remand report that the said expenses are necessities for operation of business of the appellant company. Considering the submission of the assessee and the observation of the AO in the remand report, Ld. CIT(A) was of the view that the disallowance of Rs 17,74,720/- on account of the temporary site installation expenses cannot be sustained in the instant case. Accordingly, the AO was rightly directed to delete the disallowance of Rs 17,74,720/- on account of the temporary site installation expenses, hence, this ground of appeal

In the result, the Revenue’s appeal is dismissed.

Now we deal with Assessee’s cross objection CO No. 72/Del/2023 wherein the following grounds have been raised:- “On the facts and in the circumstances of the case and in law the Ld. CIT(A) erred in confirming the following additions proposed by the Assessing Officer:-

Aggrieved the assessee is before the Tribunal. We noted from the assessee’s paper book that the assessee has filed the details of expenses claimed and debited in the books of accounts under the head amortization of dormant and unusable assets like structures, small assets and equipments on account of closure of various project sites like Ariana project at Bombay. The assessee has given details of these unused assets claimed on account of foreclosure of various projects. The details are as under:

We noted that the CIT(A) has not doubted the genuineness of these claims and only basis for confirming the disallowance is that these items claimed by the assessee under the head “amortization of expenses” is actually in the nature of capital loss and cannot be allowed as revenue expenses u/s 37(1) of the Act. At this point, the learned counsel for the assessee relied on the decision of Hon’ble Bombay High Court in the case of Lord’s Dairy Farm Ltd. vs. CIT (1955) 27 ITR 700 (Bom.) and stated in that case Hon’ble Bombay High Court has considered the issue that nomenclature does not matter whether it is a loss claimed under trading head or it is claimed as bad debts. According to the learned counsel for the assessee, Hon’ble Bombay High Court was dealing with the provisions of Section 10(1)(xv) as well as the provisions of Section 10(2)(xi). Hon’ble Bombay High Court answered this question while stating that in the given facts that the embezzlement committed by the employee is a trading loss and falls u/s 10(2)(xv) of the Income Tax Act, 1922. Hon’ble Bombay High Court observed as under: “5. Then it is suggested that even if the case falls under section 10 (2) (xv) the relevant time for claiming the deduction is not when the loss occurred but when the loss was written off. In the first place, in our opinion, the case cannot fall under section 10 (2) (xv). Section 10 (2) (xv) deals with any expenditure laid out or expended wholly or exclusively for the purpose of business, profession or vocation. Therefore the deduction contemplated by section 10 (2) (xv) must arise out of a voluntary act on the part of the assessee. He must spend and amount for the purpose of the business, profession or vacation and then claim that amount as having been spent wholly and exclusively for the purpose of business, profession or vocation. When the money is lost to the business as a result of embezzlement, there is no expenditure on the part of the employer. It is true that there is loss to the business, but that los is entirely involuntary, and although the loss may arise in the course of the business or be incidental to the business, it cannot be said that the amount represented by the loss was an amount spent wholly and exclusively for the purpose of the business, profession or vocation. Therefore we must differ from the view taken by the Tribunal that a case of embezzlement falls under section 10 (2) 12 (xv). But does it then follow that an assessee who suffers a loss in his business due to an embezzlement by his employee can get no relief, because the various cases of deductions dealt with under section 10 do not cover such a case ? The answer is very simple. As has been often pointed out, the object of section 10 is to ascertain the true profits and gains of an assessee. The profits must be ascertained from a commercial point of view. The sub-section (2) of section 10 deals with certain specific cases of permissible deductions. But even apart from these Permissible deductions, if there is any loss which from the commercial point of view can be considered to be a trading loss, then that loss must be deducted before the true profits can be ascertained. If therefore we take the view that a loss caused to a businessman by reason of the defalcations committed by his employee is a trading loss, then he would be entitled to deduct that loss although such a loss may not fall within the ambit of any of the deductions mentioned in sub- section (2) of section 10.”

When this was confronted to learned CIT-DR, he could not controvert as to whether this has to be claimed as a capital loss or it is expenses under the head “amortization”. Learned CIT-DR argued that even if it is a capital loss to be claimed, the deduction can be allowed on account of any capital gains and not otherwise.

In reply, learned counsel for the assessee stated that the write off of dormant and unused structure, small assets and equipments on account of closure of sites cannot be considered as capital loss rather it is to be considered as revenue loss because the assessee has not sold any assets on account of any capital assets rather this is a business asset being a depreciable assets, the loss has to be allowed from the current year income.

After hearing both the sides and going through the facts, we noted that as far as genuineness of the claim of dormant and unusable asset is not in doubt. The assessee has wrongly booked the claim of dormant and unusable assets under the head “amortization of expenses” rather this is a revenue loss. Once this is a revenue loss it has to be deducted from profits and loss account 13 of the business. Hence, we allow the claim of assessee and this issue is in assessee’s cross objection is allowed.

The next issue in this cross objection of assessee is regarding disallowance confirmed by CIT(A) on account of increase in work in progress of Rs.26,78,981/-.

Brief facts related to the issue of increase in work in progress added by the AO are that the Assessing Officer noticed from the details furnished by the assessee that there is debit of an amount of Rs.26,78,981/- under the head “net increase/decrease work in progress. The AO required the assessee to explain the same. The assessee explained that the billing is made after the completion of BOQ items in assessee’s construction project, at the particular date there is always some activity which is yet to be completed. Accordingly, at the end of the year work in progress is prepared for such incomplete activity and therefore, increase in net work in progress means work in progress of previous year consumed during the year and that is why it is debited from the profits and loss account in the current year. Accordingly, the assessee claimed this as Revenue expenditure. The Assessing Officer after examining reply of the assessee noted that the expenditure is payable by the assessee to sub- contractor who raises a bill on the assessee after completion of activity and as admitted by assessee, since the activity itself is not complete and invoices in this regard has not been raised by the concerned vendor on the assessee, there is no question of recognizing this expenditure in this financial year. Therefore, the AO disallowed the same.

Aggrieved the assessee preferred appeal before the CIT(A). The CIT(A) confirmed the action of the AO by considering the observation of the AO that as per the claim of assessee that since this is a consumption and hence it is 14 allowable as Revenue expenditure, the said expenditure is payable by the assessee to a sub-contractor on raising of the bill and not at the time of recognizing this as work in progress. Hence, he confirmed the addition. Aggrieved the assessee is before the Tribunal.

We have heard the rival contentions and gone through the facts and circumstances of the case. Before us, the ld. Counsel for the assessee argued that the Assessing Officer as well as CIT(A) failed to understand the nature of head of account inspite of explanation filed by the assessee that in the construction business there are certain activities or projects which are not completed by the end of the financial year and because of the non-completion of the said project, the bill in this regard could not be raised rather the incomplete work is put under the head “work in progress”. The construction project where the billing is made after the completion of BOQ item at a particular date, there is always some activity which is yet to be completed and accordingly the bill cannot be raised for that activity till it is completed. As such at the year end, the work in progress is being prepared for such incomplete project and if there is increase in work in progress of previous year consumed items during the year, the same is debited to profit and loss account of the current year. Ld. Counsel for the assessee argued that as per the accounting policy and accepted accounting principles the difference of opening work in progress and the closing work in progress is shown as net income or expenditure in the profit and loss account. In case there is excess work in progress it will be claimed as Revenue expenditure in case it is decrease in profit or it comes in negative, a figure will be taken in the profit and will be shown as profit in the profit and loss account. It is a consistent policy adopted by the assessee since long and all along has been accepted. On the other hand, the ld. Sr. DR relied on the assessment order and the order of CIT(A). 15

We have heard rival contentions and gone through the facts and circumstances of the case. We noted that as per explanation of the assessee from the beginning before AO as well as before CIT(A) and noted from the facts that assessee is consistently following the method of accounting in case of decrease in work in progress it will be taken as profit and in case there is excess work in progress at the end of the year, the same can be claimed as Revenue expenditure. It does affect the taxability of the income accordingly. Hence, we find that the claim of assessee is allowable and we order accordingly.

Coming to assessee’s appeal it is noted that the AO levied the penalty u/s 271(1)(c) and confirmed by CIT(A) holding the assessee guilty of furnishing of inaccurate particulars of income in respect of the time of amortization expenses amounting to Rs.38,82,175/- and on account of increase in work in progress amounting to Rs.26,78,981/-.

It is noted that while adjudicating assessee’s Cross Objection in CO No. 72/Del/2023, as above, we have already deleted these two additions and hence the penalty u/s 271(1)(c) will not survive. Accordingly penalty is deleted.