2022 (7) TMI 273 - AT - Income Tax

Tribunal confirms CIT(A)'s decisions, rejects Revenue's appeal on interest income, bad debts. AS-7 method upheld.

Dy. Commissioner of Income Tax, Range-3, Lucknow Versus M/s U.P. Projects Corporation Ltd.

The Tribunal upheld the decisions of the ld. CIT(A) in three cases, dismissing the Revenue's appeal. The additions of interest income and bad debts were ... Provision for interest on unutilized fund in its P&L account - AO observed that provision of interest is not an allowable expenditure under the Income Tax Act as the assessee did not actually pay this amount of interest and yet debited it to its P&L account - HELD THAT:- U.P. Government, vide G.O. No.B-1/564/10- 7/97, dated 02.03.1998, specifically mentioned that whatever interest income accrues on the advances from the bank, would be remitted to the Government by the assessee. The assessee is a Government Company. It has been declared as a construction agency for Government works. It gets advance for execution of construction projects on behalf of the U.P. State Government. These funds are used by the assessee company for meeting the construction cost of the projects. The unutilized funds deposited in banks generate interest income, which, as per the aforesaid Government Order, is to be treated as the income of the Government and is required to be deposited in the Government Treasury. The assessee, as such, is under legal obligation to pay interest on the unutilized funds, to the respective Government Departments, and not only this, the U.P. Government, vide order dated 12.12.2014, has classified the accounting head for the deposit of interest in the Government Treasury. Hon'ble Gujarat High Court, in the case of ‘CIT vs. SAR Infracon (P) Ltd. [2014 (3) TMI 728 - GUJARAT HIGH COURT] while considering a similar stipulation of the Central Government, while sanctioning the grant in favour of that assessee, stipulated that interest earned on the Central Grant already utilized would form part of the Central Grant limit, held that the Tribunal was right in holding that the interest earned on the Central Grant already released could not be said to be the income of the assessee. This decision was followed by the ld. CIT(A) in the earlier years (supra) in the assessee’s own case and it has been held by the Tribunal to have been rightly so followed. The fact-situation during the year has admittedly remained unchanged. Addition of bad debts - CIT-A deleted the addition - DR has contended that the ld. CIT(A) failed to consider that the bad debts were never included by the assessee in the debtors and that this is against the requirement of Section 36(2)(i) - HELD THAT:- As the amount out of the bad debts, was the service tax component. This became unrealizable because of the objection raised by the CAG. It was, therefore, that the same was reduced from the income of the assessee and was treated as bad debt. As such, we do not find any error in the action of ld. CIT(A) in deleting the addition. It has not been shown as to how the assessee, a Government Company, was not bound by the objections raised by the CAG, which rendered the amount in question, claimed as bad debts, as unrealizable service tax payable. It was due to the CAG’s objection that no service tax was payable on Government contract, that the amount was treated as bad debts and reduced from the income of the assessee. Accordingly, Ground No.3 is also found to be shorn of merit and the same is rejected. Revenue recognition - assessee was deducting profit from work-in-progress and was crediting it to Retention Reserve; that the assessee was required to prepare its profit and loss account as per AS-7 (Revised); that the assessee was not following AS-7 (Revised) and Revenue recognition was not as per AS-7(Revised) - HELD THAT:- Issue decided in favour of assessee as relying on own case [2019 (3) TMI 560 - ITAT LUCKNOW] Issues Involved:1. Deletion of addition of interest income without appreciating TDS claimed.2. Claiming double benefit by not showing interest income but taking TDS credit.3. Deletion of addition of bad debts not included in debtors.4. Not following percentage completion method for revenue recognition.Issue 1 - Deletion of Addition of Interest Income without Appreciating TDS Claimed:In the case of ITA No. 331/Lkw/2020 for A.Y. 2016-17, the Revenue challenged the deletion of an addition of Rs. 17,13,85,262/- on account of interest income. The AO added the amount to the income of the assessee as the interest provision was not an allowable expenditure under the Income Tax Act. However, the ld. CIT(A) deleted the addition, citing a Tribunal order from previous years. The Revenue argued that the assessee enjoyed double benefit by not showing interest income but taking TDS credit. The Tribunal noted that the interest earned was to be remitted to the Government as per a Government order, and following a similar precedent, upheld the CIT(A)'s decision.Issue 2 - Claiming Double Benefit by Not Showing Interest Income but Taking TDS Credit:In ITA No. 374/Lkw/2020 for A.Y. 2015-16, similar issues were raised regarding the deletion of an addition of Rs. 57,96,84,591/- on account of interest income. The Tribunal applied the findings from the previous case (ITA No. 331/Lkw/2020) and rejected the grounds raised by the Revenue. Additionally, an addition of Rs. 2,98,05,040/- for bad debts not included in debtors was also challenged. The ld. CIT(A) deleted this addition, stating that the amount represented service tax payable for a project completed by the assessee and was reduced from the income due to objections from CAG. The Tribunal upheld the CIT(A)'s decision, finding no error in treating the amount as bad debts.Issue 3 - Deletion of Addition of Bad Debts Not Included in Debtors:In ITA No. 291/Lkw/2020 for A.Y. 2009-10, the Revenue added an amount of Rs. 15,01,87,602/- for not following AS-7 (Revised) for revenue recognition. The ld. CIT(A) deleted this addition, following a previous Tribunal order. The Tribunal confirmed the deletion, noting that the facts remained unchanged from the previous case and the Tribunal order had not been reversed or stayed. Therefore, the action of the ld. CIT(A) was upheld.Issue 4 - Not Following Percentage Completion Method for Revenue Recognition:The Revenue's appeal was dismissed in all three cases, as the Tribunal found no merit in the grounds raised. The judgments were based on previous Tribunal orders and legal provisions, confirming the decisions of the ld. CIT(A) in deleting the additions of interest income and bad debts, and in following the revenue recognition method as per AS-7 (Revised).(Order pronounced in the open court on 04/07/2022)