Tribunal rules in favor of assessee on various tax issues, dismissing AO's appeal.

The AO's appeal was dismissed, and the assessee's cross-objection was partly allowed. The Tribunal ruled in favor of the assessee regarding the deletion of addition on account of retention money, addition related to unfinished contracts, and confirmation of an addition of Rs. 2.78 lakhs. The Tribunal also sided with the assessee in the disallowance of a claim of Rs. 84.86 lakhs on account of interest paid to customs authorities, stating that the interest was compensatory, not penal. The Tribunal's decision was pronounced on 04th April, 2018.

---

---

Issues Involved:
1. Deletion of addition on account of retention money.
2. Addition related to unfinished contracts.
3. Confirmation of addition of Rs. 2.78 lakhs.
4. Disallowance of claim of Rs. 84.86 lakhs on account of interest paid to customs authorities.

Issue-Wise Detailed Analysis:

1. Deletion of Addition on Account of Retention Money:
The first effective ground of appeal concerns the deletion of the addition on account of retention money. The Tribunal noted that the issue had already been decided in favor of the assessee by the Hon’ble Bombay High Court in Income Tax Appeal No. 1381 of 2012, dated 5/3/2014, for an earlier assessment year. The Bombay High Court had referenced the case of Associated Cables Ltd., 286 ITR 596 (Bom.), which established that the amount retained by the contractee to ensure proper performance of the contract would accrue as income only upon the acceptance of the performance test by the contractee. The Tribunal, respecting this precedent, decided ground no. 2 against the Assessing Officer (AO).

2. Addition Related to Unfinished Contracts:
The next ground of appeal pertains to the addition related to unfinished contracts. The AO had added an amount of Rs. 4.96 crores to the total income of the assessee, arguing that the gross profit (GP) percentage should be applied to arrive at the total estimated cost, rather than the net profit (NP) margin as done by the assessee. The First Appellate Authority (FAA) found that the assessee was following the Percentage Completion Method (PCM) as per accounting standard (AS-7) consistently from earlier years, and the AO had not objected to this method previously. The FAA directed the AO to delete the addition, citing the principle of consistency and referencing cases such as Gopal Purohit (336 ITR 287) and Kotak Securities Ltd. (15 taxmann.com 77). The Tribunal upheld the FAA's decision, noting that the AO had not provided any reasons for rejecting the method applied by the assessee for the year under consideration.

3. Confirmation of Addition of Rs. 2.78 Lakhs:
The second ground of appeal in the cross-objection (CO) is about confirming the addition of Rs. 2.78 lakhs. During the assessment proceedings, the AO observed that the assessee had admitted to outstanding creditors for a period of more than three years amounting to Rs. 30 lakhs during a survey action. However, the assessee offered only Rs. 27.21 lakhs in its return of income. The AO added the difference of Rs. 2.78 lakhs to the income of the assessee. The FAA upheld the AO's decision, referencing cases such as Hotel Samrat [3 ITR 353] and K.C.K. Deboo [313 ITR 186]. However, the Tribunal found that the amount surrendered during the survey was an estimate and that the exact amount of disputed creditors was Rs. 27.21 lakhs as per the regular books of accounts. Thus, the Tribunal decided this ground in favor of the assessee.

4. Disallowance of Claim of Rs. 84.86 Lakhs on Account of Interest Paid to Customs Authorities:
The final issue concerns the disallowance of a claim of Rs. 84.86 lakhs on account of interest paid to customs authorities. The AO had disallowed this interest expenditure, considering it as penal interest for the violation of law, which is not allowable as per the provisions of explanation to Section 37(1) of the Act. The FAA confirmed the AO's order, referencing the case of Prakash Cotton Mills (201 ITR 684) and Meddi Venkatram & Company Pvt. Ltd. (229 ITR 534). However, the Tribunal noted that the Settlement Commission had deleted the penalty and the Hon’ble Bombay High Court had held that the interest paid was compensatory in nature, not penal. Therefore, the Tribunal reversed the order of the FAA and decided the issue in favor of the assessee, stating that explanation 1 to section 37 was not applicable to the facts of the case.

Conclusion:
The appeal filed by the AO was dismissed, and the CO of the assessee was partly allowed. The Tribunal's order was pronounced in the open court on 04th April, 2018.

---