TaxTMI 
TaxTMI 
2019 (5) TMI 1669
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....leting the disallowance u/s 40(a)(ia) of the I. T. Act, 1961 amounting to Rs. 86,96,73,557/- ignoring the fact that the provisions of sec 40(a)(ia) are applicable in respect of expenses claimed as deduction under the head "Profit & Gains from business or Profession". 2. The CIT(A), Lucknow has erred in law and on facts in deleting the disallowance u/s 40(a)(ia) of the I.T. Act 1961 amounting to Rs. 86,96,73,557/- ignoring the fact section 40(a)(ia) read with section 194C of the I.T. Act is applicable in case of carrying out any work including supply of labour for carrying out any work. 3. The CIT(A), Lucknow, has erred in law and on facts in deleting the addition of Rs. 11,31,25,121/- without appreciating the fact that the credit balance in clients account is in respect of projects which were completed more than 15 years ago and hence there is cessation of liability. 4. The CIT(A), Lucknow has erred in law and on facts in directing the Assessing Officer to accept the revised computation of income and deleting the addition of Rs. 2,42,57,570/- on account of depreciation ignoring the fact that the assessee can revise its income only by filing revised return....
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....d funds without appreciating the fact that the assessee is following mercantile system of and therefore interest income of Rs. 26,95,93,097/- relating to A.Y. 2010-11 has to be assessed in the A.Y. 2010-11 only. 10.1 The CIT(A), Lucknôw has erred in law and on facts in deleting the addition of Rs. 26,95,93,097/- on account of interest income earned on client's unutilized funds without appreciating the fact that in A.Y. 2011-12, the assessee has considered Rs. 27,18 34,136/- as income in prior period adjustments in the P&L account but reduced this amount from income in computation of income. 11. The CIT(A), Lucknow has erred in law and on facts in deleting the addition of Rs. 1,38,77,000/- by observing that the amount of Rs. 1,38,77,000/- has been shown as income in subsequent year without appreciating the fact the above fact is not verifiable from the assessment record. 4. The facts of the case are that for the assessment year 20102011, the assessee had filed the return of income showing total Income of Rs. 225,87,22,062/-. The assessment was completed by the AO on an income of Rs. 422,01,39,715/-, making various additions, vide order passed ....
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....e assessee Corporation, as notified by the Government orders for the respective works; that the provision for labour cess was not debited to the profit & loss account; that thereby, the profitability of the assessee Corporation, in the form of centage being earned as gross profit, remained unaffected; that the assessee Corporation only acted as the collecting agency for collection of labour cess, which fact is evident from the Notification dated 1/7/2011 (pages 197 to 201 of the Special Audit Report); that this makes it clear that the collection and deposit of labour cess has no relation whatsoever with the profitability of the assessee Corporation; that the labour provision for labour cess does not stand debited to the profit & loss account; that the assessee is a wholly owned undertaking of the Government of Uttar Pradesh; that it undertakes Government works only; that the income earned by it is limited to the centage allowed by the Government by issuing Government orders from time to time; that the assessee prepares separate contract account for each work site in order to ascertain and demonstrate the centage to be charged from the work concerned; that all the operational expens....
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....s contention that the expenditure was incurred as a direct expenditure shown in the Contract Account, which was not disallowable; and that therefore, the order of the ld. CIT(A) on this issue being on all fours, the same be upheld and the grievance sought to be raised by the assessee be rejected as being shorn of merit. 8. Having considered the rival contentions in the light of the material placed on record, we find the grievance of the assessee to be justified. It is not in dispute that the assessee Corporation is a wholly owned undertaking of the Government of Uttar Pradesh. It is also unchallenged that the assessee Corporation, i.e., 'Uttar Pradesh Rajkiya Nirman Nigam Limited' (U.P.R.N.N.) undertakes Government works only. It is patent that the income earned by the assessee Corporation is by way of centage allowed by the Government by issuing Government orders from time to time. It receives orders for projects on behalf of the Government and it is allowed a profit or centage on a fixed percentage, which varies, as per Government orders, from 10% to 15% of the work done by it. This centage or profit is allowed to enable the Corporation to meet it....
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.... of profit or loss to the Revenue in the form of tax. the ld. CIT(A) has confirmed the disallowance, holding that this disallowance was correctly made by invoking the provisions of section 43B of the Act. It remains undisputed that the labour cess is part of the contract account. That being so, the assessee is correct in contending that the addition, if any, is maintainable only in the hands of the client of the assessee Corporation and not in the hands of the assessee. The provisions made for labour cess, do not stand debited to the profit & loss account and the profitability of the Corporation in the form of centage earned as gross profit, is not affected. The assessee Corporation is only a collecting agency for the purposes of the labour cess and deposit thereof with the Government account. Thus, the action of the ld. CIT(A) in confirming the addition for the provisions for labour cess, is reversed and the addition is deleted. The sole ground raised by the assessee in its appeal is allowed. 10. Now we will take up the appeal filed by the Department in ITA No.314/LKW/2017. 11. Ground Nos. 1 and 2 relate to the deletion of addition a....
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....entage is allowed to enable it to meet its administrative and other expenditure. The appellant carries out two types of work i.e. deposit work, which is cost, plus centage and tender work. During the assessment.ear2010-2011 under consideration, the appellant has credited an amount of R 3504;45,59,061/- as deposit work and Rs. 166,12,09,970/- as tender work to the Contract Account. All direct expenses have been debited to the Contact account. The gross profit worked out from the contract account, which is essentially the amount of centage allowed for work done and profit on tender work is transferred to the profit and loss account where all indirect expenses are debited to eventually work out the net profit of the appellant. The Contract account is basically a computation under section 28 of the Act. 5(5)(ii) The moot point is therefore that the labour expenses were part of direct expenses claimed in contract account and not indirect expenses in profit and loss a1count. In the contract account the appellant has shown labour charges of Rs. 564,49,92,323/- out of which an amount of Rs. 92,95,51,686/- (correct amount is Rs. 86,95,73,737/-) has been disallowed under secti....
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....ar 1990-91 and therefore, there is no reason to adopt a different approach in other assessment years. In this view of the matter, we are of the opinion that as far as the disallowance of Rs. 24,00,392/- is concerned, the same is not justified in the facts and circumstances of the case and therefore, in regard to this extent we confirm the findings of the Ld. C.I.T. (A). This ground is dismissed. 5(6)(ii) The said findings of the Hon'ble ITAT, Lucknow have been followed in the case of the appellant for the assessment year 2000-2001 in ITA No. 382/LUC/04 dated 18.12.2008 asunder - "Against this, the Ld. A. R. submitted that similar issue had, arose before the Tribunal in Assessment Year 1991-92 which was decided by the Tribunal vide its order dated 30 11 2006 in ITA No 714/LUC/02 wherein it is held that as per accounting procedure followed by the assessee and accepted by the Department in assessment year 1990-91, the direct cost are taken by the client which are debited and value of the work is credited by adding 15% as profit margin of the assessee. Thus, all the expenditure on material consumed is recovered from the clients along with 15% profit thereon. ....
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.... covered by any section preceding or succeeding Sections 30t o 38 of the Act are not covered by the statutory disallowances envisaged under Section 40 of the Act the instant case the labour expenses disallowed by the AO represent direct costs incurred by the appellant to earn income from the business under Section 28 of the Act. Therefore, such allowable expenditure will not come under the purview of Section 40 of the Act. In other words, direct expenses incurred by the assessee to earn income which is assessable against revenue for the purpose of determining the profits earned under Section 28(1) of the Act are not disallowable under section 40(a)(ia) of the Act 5(8)(i) The said issue was considered by the Hon'ble ITAT, Delhi in the case of ITO Vs. Aahar Consumer Products Pvt. Limited in ITA No. ITA No.1354/DEL/2010 (10 Taxmann.com 181) as under- Only when the claim of the assessee for deduction is u/s 32 to section 38, the provisions of Section 40(a) (ia) can be pressed into service to disallow such claims for deduction. At the cost of repetition, we may say that to invoke said provision of Section 40(a) (ia), first of all, the case should be made out ....
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...., it may be observed that the provisions of section 40(a)(ia) are applicable only to items covered by section 30 to section 38 and not to section 28 and all the direct cost/expenditure covered by section 28 are beyond the scope of disallowance under section 40(a)( ia). 5(9) In view of the discussion above and on examination of the method of accounting followed by the appellant which has been accepted in earlier assessment years and applying the decision of Hon'ble ITAT, Lucknow in case of the appellant supra I find that the labour expenses are direct cost incurred for earning of centage which is income of the appellant under section 28 of the Act. The disallowance under section 40(a)(ia) of the Act cannot be resorted to as discussed on expenditure incurred to earn income which is assessable against revenue, for the purpose of determining the profits earned Under Section 28(1) of the Act. The disallowance of Rs. 92,95,51,686/- (correct amount is Rs. 86,95,73,737/-) made by the A.O under section 40(a)(ia) of the Act is deleted giving relief to the appellant." 14. The ld. D.R. placed reliance on the order of the A.O and submitted that the ld. CIT(A) was no....
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....find that the ld. CIT(A) has dealt with the issue in detail and placing reliance on the order of the Tribunal in the assessee's own case for assessment year 1991-92, he deleted the addition made by the A.O under section 40(a)(ia) of the Act. He has given a categorical finding that in the assessee's case the labour expenses disallowed by the A.O represent direct costs incurred by the assessee to earn income from the business under section 28 of the Act, therefore, such allowable expenditure will not come under the purview of section 40 of the Act. 19. As per para 59 of the Working Manual, a contract account is to be prepared, which is a statement showing resulting profit or loss accruing during a construction period, which has a direct relation to the works dealt with in the business, which ascertains the cost of profit of the assessee Corporation. Thus, the contract account is, basically, accounting of work done where the gross profit worked out is the centage allowed towards the overheads and profits of the assessee Corporation. In the contract account, all direct costs, as are to be borne by the clients of the Corporation, are debited and the valu....
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....d. CIT(A), while dealing with the issue at hand for the year under consideration, i.e., addition made on account of no TDS on the provisions of labour charges made by the assessee in its books, has placed reliance on the Delhi Tribunal decision in the case of 'ITO vs. Aahar Consumer Products Pvt. Limited', 10 Taxmann.com 181 (Delhi) and that of the Hyderabad Tribunal in the case of 'M/s Teja Construction vs. ACIT', 39 SOT 13 (Hyd). The Department has not been able to controvert these decisions of the Tribunal, which are directly on the issue. In 'Aahar Consumer Products Pvt. Limited' (supra), it has been held that it is only when the claim of the assessee for deduction is under the provisions of sections 30 to 38, that the provisions of section 40(a)(ia) of the Act can come into play. In 'M/s Teja Construction vs. ACIT' (supra), it has been held that it is only provisions of sections 30 to 38, which get covered within the ambit of section 40, and any expenditure allowable under any other section, preceding section 30 or succeeding section 38, is not covered by the provisions of section 40 of the Act, as is made clear by the non obstante clause with which section 4....
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....tion to the works dealt with by the assessee in its business and which ascertains the gross profit. This has duly been taken into consideration by the ld. CIT(A) and the Department has not been able to successfully rebut the well reasoned finding of fact and law recorded by the ld. CIT(A). 24. Since the ld. CIT(A) has decided the issue in the right perspective, we do not find any reason to interfere with the order of the ld. CIT(A) on this issue. Accordingly, we confirm his order and reject ground Nos.1 and 2 of the Revenue. 25. Ground No.3 relates to deletion of addition of Rs. 11,31,25,121/-. 26. The facts are that the assessee has shown credit balance of Rs. 11,31,25,121/- in client merge account in respect of many projects, which were completed more than 15 years ago. A show cause notice was issued by the A.O to show cause as to why the above credit balance of Rs. 11,31,25,121/- should not be recognized as income from the completed projects. In reply, the assessee submitted that the debit balance or the credit balance pertains to the Government Departments and therefore, these amounts cannot be written off. The assessee also stated that when it ....
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....rder of the ld. CIT(A) on this issue and reject ground No.3 of the Revenue. 29. Ground No.4 is against the order of the ld. CIT(A) directing the A.O to accept the revised computation of income. 30. The A.O, rejecting the computation of income filed by the assessee on 6/9/2013, wherein assessee had added back depreciation of Rs. 8,10,79,044/- to the net profit in the computation, added Rs. 2,42,57,570/- to the total income of the assessee. 31. Before the ld. CIT(A), the assessee filed written submission challenging the action of the A.O. The ld. CIT(A) set aside the order of the A.O on this issue and directed the A.O to accept the revised computation of income where the anomaly described by the AO has been corrected and the depreciation as per Income Tax Act has been claimed and depreciation as per Companies Act has been added to the income, observing, as below: "9(4) I have examined the facts and circumstances of the case. I have examined the findings of the Assessing Officer and the submissions of the appellant. I find that there was certain anomaly in the computation of income relating to the depreciation as per Companies Act being added to income an....
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.... anomaly described by the AO has been corrected and the depreciation as per Income Tax Act has been claimed and depreciation as per the Companies Act has been added to the income. Since the issue relating to allowability of depreciation has been restored to the file of the A.O to decide the same afresh after accepting the revised computation, we do not find any infirmity in the order of the ld. CIT(A), therefore, we confirm the order of the ld. CIT(A) on this issue and reject ground No.4 of appeal of the Revenue. 33. Ground No.5 is against the order of the ld. CIT(A) directing the A.O to accept the revised computation of income wherein the assessee added back Rs. 11,96,948/- on account of loss on sale of fixed asset. 34. On this issue also, the grievance of the Revenue is against the order of the ld. CIT(A) in directing the A.O to accept the revised computation of income where the anomaly described by the AO has been corrected and the loss on sale of assets has been added to the income. As observed by us in para 32 above, since the issue relating to allowability of depreciation has been restored to the file of the A.O to decide the same after accepting....
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....made in the work done also, this being a case of contra entries only. The decision of the Hon'ble Tribunal is discussed at length in paragraph 5(6) above. Relying on the decision supra and finding that the income corresponding to the expenditure of Rs. 23,54,235/- has already been recognized in contract account of earlier years, the addition of Rs. 23,54,235/- made by the A.O is deleted giving relief to the appellant." 37. As observed by the ld. CIT(A), we find that the liability arose in the year under consideration, as is evident from the bill raised by the Electricity Department on 30/10/2019. Moreover, as claimed by the assessee, the amount pertains to the contract account and therefore, in case the addition is made, the equivalent amount is to be reduced from the work-in-progress. We, therefore, find no infirmity in the order of the ld. CIT(A) on this issue. Accordingly, we confirm his order on this issue and reject ground No.6 of the Revenue's appeal. 38. Ground Nos. 7 and 7.1 relate to the deletion of addition of Rs. 39,46,18,444/- on account of interest income. 39. The A.O made the addition of Rs. 39,46,18,444/- being interest on client fund a....
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.... per Government Order dated 11/4/1076 (supra). The ld. CIT(A) has rightly observed that the interest earned by the assessee on unutilized fund is credited to the respective accounts and are the income of the concerned clients and not of the assessee. We do not find any infirmity in the well reasoned order of the ld. CIT(A) on this issue. We accordingly confirm his order on this issue and reject ground Nos.7 & 7.1 of the Revenue. 42. Ground No.8 relates to the deletion of addition of Rs. 19,27,197/- on account of expenses relating to purchase of material. 43. The brief facts are that the assessee claimed expenses relating to purchase of material amounting to Rs. 19,27,197/- which relates to financial year 2008-09. On a query from the A.O, it was explained that some materials were delivered in the month of March, 2009 but all the bills aggregating to Rs. 19,27,197/- were raised by the supplier only on 9/4/2009 and on this date entry was passed in the books of the assessee and accordingly liability was also treated against the supplier of the material. Being not satisfied with the reply of the assessee, the A.O disallowed the expenses of Rs. 19,17,1....
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....ade by the A.O is deleted giving relief to the appellant." 45. We find that the ld. CIT(A) has deleted the addition placing reliance on the decisions of the Tribunal in the assessee's own case for assessment years 1991-92 and 2000-01 wherein identical issue has come up for consideration before the Tribunal and the Tribunal held that if any disallowance was to be made in the cost debited to the contract account, then corresponding reduction is required to be made in the work done also being a case of contra entry. Since the ld. CIT(A) has deleted the addition following the orders of the Tribunal in the assessee's own case in preceding years, we do not find any justification to interfere with the order of the ld. CIT(A), who has rightly deleted the addition placing reliance on the orders of the Tribunal. We accordingly confirm his order on this issue and reject ground No.8 taken by the Revenue. 46. Ground No.9 relates to the deletion of addition of Rs. 9,43,41,057/- on account of 'income wrongly credited in previous year written back'. 47. The brief facts are that the assessee debited an amount of Rs. 9,43,41,057/- on account of income wrongly credited in previou....
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....tion RPP Rampur Rs. 11,26,093/- Circuit House Saharanpur Rs. 25,481/- Staff Quarters Okhala Rs. 5,467/- Rs. 9,43,41,057/- I find that centage on the work of Rs. 2,13,04,810/- and Rs. 6,37,17,415/- has already been assessed to tax in the assessment year 2008-2009. The reversal entry has been passed as the CAG opined that the cost of construction was wrongly recognized in the assessment year 2008-2009. The remaining amount of Rs. 93,18,832/- is the excess centage shown in the assessment year 2008-2009. The AO has not given any finding that the centage thereon has not been offered to tax in the assessment year 2008-2009. On the contrary the addition has been made for the sole reason that the objection of CAG was not accepted at the first instant which was against commercial expediency. I find that once the centage has been offered to tax, there is no reason to disturb the contract account for the year under consideration by making a fictitious addition of Rs. 9,43,41,057/- as the income offered to tax in assessment year 2008-2009. The addition of Rs. 9,43,41,057/- made by the A.O....
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....unt is considered as income in Assessment Year 2011-2012 a corresponding reduction will have to be made in the subsequent year and therefore; the addition is revenue neutral as the amount stands offered to tax in Assessment Year 2011-012. Accordingly the addition of Rs. 26,95,93,097/- is deleted giving relief to the appellant for the sole reason that tax has been paid on the said amount in subsequent assessment year." 53. The ld. D.R. submitted that the interest accrued on FDRs of clients' fund is the income of the assessee, as the assessee is claiming TDS in respect of these FDRs, therefore, interest income of Rs. 26,95,93,097/- earned on clients' unutilized fund was the income of the assessee and the same has rightly been added to the income of the assessee by the A.O. He placed reliance upon the order of the A.O on this issue. 54. The ld. A.R. of the assessee submitted that the interest on Client unutilized Fund of Rs. 26,95,93,097/- has been added in the Audited Balance Sheet of A. Y. 2011-12 under the head "Prior Period Adjustment' and while computing the taxable income of A. Y. 2011-12, the same has been deducted. In support of his submission, the ld. A.....