2015 (9) TMI 1103 - AT - Income Tax

Recognition of Income: Completion of Work and Billing are Key

The ITAT upheld the CIT(A)'s decision to delete the AO's addition, ruling that income should be recognized when work is completed and bills are submitted, ... Estimation of income @ 8% on contract receipts - CIT(A) deleted the addition - Held that:- As can be seen, only on the basis of TDS certificate enclosed by assessee in the return of income, AO has concluded that the amount received by assessee from LAPPL is a contract receipt and accordingly proceeded to estimate the income. However, as can be seen from the terms of the relevant agreement between assessee and LAPPL, assessee is to receive 15% of the total contract amount as mobilization advance. Though, it may be a fact that in the TDS certificate, deductee has mentioned it as payment towards professional charges but, that itself is not conclusive enough to prove the fact that amount received was not advance but towards work executed. When it is a fact on record that during the impugned AY assessee has only received mobilization advances being 15% of the total contract price and has not raised any bill on the contractee towards a portion of the work executed. Moreover, when assessee has shown the income on the contract work in the succeeding AY, which also includes work-inprogress of 16.22 crores, on which income has been estimated by AO in the impugned AY, in our view, there is no justifiable reason in interfering with the order of ld. CIT(A). In any case of the matter, there is no prejudice caused to revenue as the income assessable on the contract receipt has been offered by assessee for taxation, though, in a different assessment year. - Decided against revenue. Issues:1. Estimation of income @ 8% on contract receipts for AY 2006-07.Analysis:The primary issue in this case pertains to the estimation of income by the Assessing Officer (AO) at a rate of 8% on contract receipts for the assessment year 2006-07. The AO had observed that the assessee, engaged in the execution of contracts, had received payments from a contractor for a thermal power project. The AO contended that since the work had been completed and bills raised, income should be estimated on the work-in-progress amount. The AO relied on AS-7 of ICAI and various judicial authorities to support the estimation of income at 8% on the total expenditure shown as work-in-progress by the assessee.During the appeal before the Commissioner of Income Tax (Appeals) [CIT(A)], the assessee argued that the payments received were mobilization advances and not contract receipts. The assessee maintained that income recognition was deferred until bills were raised and work completed in the subsequent assessment year. The CIT(A) analyzed the facts and materials before him and concluded that the AO erred in estimating income from advances received as contract receipts. The CIT(A) noted that the project was under progress during the relevant year, and the income was recognized in the subsequent year when the work was completed and bills submitted.The ITAT, after considering the submissions and records, upheld the CIT(A)'s decision to delete the addition made by the AO. The ITAT emphasized that the assessee had received mobilization advances, had not billed the contractee during the relevant assessment year, and had recognized income in the succeeding year. The ITAT found no justification to interfere with the CIT(A)'s order, stating that there was no prejudice to the revenue as the income on the contract receipt had been offered for taxation in a different assessment year. Consequently, the ITAT dismissed the department's appeal, affirming the CIT(A)'s decision.In conclusion, the ITAT's judgment focused on the distinction between mobilization advances and contract receipts, emphasizing the timing of income recognition based on the completion of work and billing. The decision underscored the importance of considering the specific terms of agreements and factual circumstances in determining the appropriate assessment of income from contract activities.