TMI Blog2014 (9) TMI 194X X X X Extracts X X X X X X X X Extracts X X X X ..... contracts, the assessee can follow either the project completion method or the percentage completion method - the order of the CIT(A) is upheld – Decided against revenue. Deduction u/s 40(a)(ia) - Payment made for purchase of technical know-how – Tax withholding obligations u/s 194A of the Act not discharged – Held that:- Following the decision in Rajeev Kumar Agarwal Versus Additional Commissioner of Income Tax [2014 (6) TMI 79 - ITAT AGRA] - The net effect of the amendments is that the disallowance u/s 40(a)(ia) shall not be attracted in the situations in which even if the assessee has not deducted tax at source from the related payments for expenditure but the recipient of the monies has taken into account the receipts in computation of income, paid due taxes, if any, on the income so computed and has filed his income tax return u/s 139(1) - it is beyond doubt that the underlying objective of section 40(a)(ia) was to disallow deduction in respect of expenditure in a situation in which the income embedded in related payments remains untaxed due to non-deduction of tax at source by the assessee - section 40(a)(ia) cannot be seen as intended to be a penal provision to punish the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the First Appellate Authority after obtaining remand report from the Assessing Officer. The admission of additional evidence by the ld. CIT(A) is accepted by the revenue. The First Appellate Authority granted part relief for the A.Y. 2008-09. 2. Aggrieved Revenue as well as the assessee are in appeal for the A.Y. 2008-09. 2.1 The grounds of revenue are as follows: 1. The ld. CIT(A) has erred on facts and in law in deleting addition of ₹ 1,35,97,000/- on account of profits reworked for sub-project, Meerut. 2. The ld.CIT(A) has erred on facts and in law in deleting addition of ₹ 1,11,97,000/- on account of profits reworked for sub-project, Meerut built up. 3. The ld. CIT(A) has erred on facts and in law in deleting addition of ₹ 17,11,40,000/- on account of profits subproject Ghaziabad plotted. 4. The ld. CIT(A) has erred on facts and in law in deleting addition of ₹ 2,75,71,810/- on account of profits subproject Karnal Ph-1, Plotted. 5. The ld. CIT(A) has erred on facts and in law in deleting addition of ₹ 2,75,49,170/- on account of profits subproject Karnal, Group Housing. 2.2 The assessee is in appeal on the following groun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld to be retrospectively applicable and the same parameters, consideration and principles also applied to the amendment under consideration of the second proviso. 2. That without prejudice to and independent of the aforesaid ground, the ld. CIT(Appeals) has erred in law in not accepting the ground of appeal that, even otherwise, payment having been made by then appellant during the relevant previous year and no part thereof remaining unpaid on 31.3.2009, the same could not be disallowed u/s 40(a)(ia) and by not following the decision of the Vishakhapatnam Special Bench of the Hon ble ITAT in Merilyn Shipping Trnasports vs. Addl. CIT (2012) 136 ITD 23 and the decision of the Hon ble ITAT Hyderabad Bench A in Teja Constructions vs. ACIT (2010) 39 SOT 13 (HYD) (URO) duly cited before him. 3.1 That without prejudice to and independent of the foregoing grounds, the ld.CIT(Appeals) has erred both on facts and in law in confirming the disallowance of ₹ 4,76,30,766/- u/s 40(a)(ia) being payment made for purchase of technical know how by the appellant company from Ansal Properties Infrastructure Limited. His finding that then technical know how provided by Ansal Propertie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... timated when Revenue gets crystallized. Not recognizing revenue till 30% or 50% completion of the project, results into postponement of tax liability. This Benchmark as per the ld. DR is an erroneous. 5.1 She further submitted that comparable case adopted by the CIT(A) was of the sister concern of the assessee and hence they are not reliable. Different benchmarks are adopted and by different reputed companies which as per the ld. DR are correct comparables and profit can be recognized after completion of 20 to 25% of the project. She disputed the manner of calculation of profits of sub-project (a) (b) of Meerut, as well as of Ghaziabad plots projects. 6. The rival contentions heard on a careful consideration of the facts and circumstances of the case and a perusal of the papers on record and the orders of the authorities below, we hold as follows. 7. The ld. CIT(A) in our considered opinion was right in holding that a) AS-7 is not applicable to Real Estate b) Bench mark for recognizing revenues adopted by the assessee are reasonable, c) The rule of consistency applies in this case, d) In order to invoke sec. 145(3), the AO must necessarily express dissatisfaction about t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Court in Commissioner of Income Tax vs. Bilahari Investment P Ltd. (2008) 299 ITR 1 (SC) with the following observations: Recognition / identification of income under the 1961 Act is attainable by several methods of accounting. It may be noted that the same result could be attained by any one of the accounting methods. The completed contract method is one such method. Similarly, the percentage of completion method is another such method. Under the completed contract method, the revenue is not recognized until the contract is complete. Under the said method, costs are accumulated during the course of the contract. The profit and loss is established in the last accounting period and transferred to the profit and loss account. The said method determines results only when the contract is completed. This method leads to objective assessment of the results of the contract. On the other hand, the percentage of completion method tries to attain periodic recognition of income in order to reflect current performance. The amount of revenue recognized under the method is determined by reference to the stage of completion of the contract. The stage of completion can be looked at under thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sides, it will involve recalculations of year-wise profits in earlier and later years, total taxable profits remaining the same. Under the facts and circumstances as mentioned above and respectfully following the decision of the Hon ble Jurisdictional High Court as cited supra and the Rule of Consistency. I find that the impugned additions cannot be sustained. The same are, therefore, deleted. 9.1 This view is consistent with the view taken by the Tribunal in the case of M/s Sabh Infrastructure Limited. Hence we uphold the same. 9.2 Moreover the Hon ble Supreme Court in the case of CIT vs. Excel Industries Limited, [2013] 358 ITR 295 held as follows: As the method of computation of profits have not been disturbed by the Revenue either for the earlier assessment years or for the later assessment years. The method cannot be disturbed in this particular assessment year. 9.3 Hence, we upheld the order of the CIT(Appeals) and dismissed the appeal of the Revenue. 10. ITA No. 2972(Del)2012: This is appeal filed by the assessee. The main issue is disallowance u/s 40(a)(ia). The assessee moved an application under Rule 11 of the ITAT Rules to file the following addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ering overall objective of boosting TDS compliance . Not only the conclusions arrived at by the special bench were disapproved but the very fundamental assumption underlying its approach, i.e. on the issue of the object of Section 40(a)(ia), was rejected too. In any event, even going by Bharti Shipyard decision (supra), what we have to really examine is whether 2012 amendment, inserting second proviso to Section 40(a)(ia), deals with an intended consequence or with an unintended consequence . 7. When we look at the overall scheme of the section as it exists now and the bigger picture as it emerges after insertion of second proviso to section 40(a)(ia), it is beyond doubt that the underlying objective of section 40(a)(ia) was to disallow deduction in respect of expenditure in a situation in which the income embedded in related payments remains untaxed due to non deduction of tax at source by the assessee. In other words, deductibility of expenditure is made contingent upon the income, if any, embedded in such expenditure being brought to tax, if applicable. In effect, thus, a deduction for expenditure is not allowed to the assessees, in cases where assessees had tax withholdin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hands of the recipients of the payments. Such a policy motivated deduction restrictions should, therefore, not come into play when an assessee is able to establish that there is no actual loss of revenue. This disallowance does deincentivize not deducting tax at source, when such tax deductions are due, but, so far as the legal framework is concerned, this provision is not for the purpose of penalizing for the tax deduction at source lapses. There are separate penal provisions to that effect. Deincentivizing a lapse and punishing a lapse are two different things and have distinctly different, and sometimes mutually exclusive, connotations. When we appreciate the object of scheme of section 40(a)(ia), as on the statute, and to examine whether or not, on a fair, just and equitable interpretation of law- as is the guidance from Hon ble Delhi High Court on interpretation of this legal provision, in our humble understanding, it could not be an intended consequence to disallow the expenditure, due to non deduction of tax at source, even in a situation in which corresponding income is brought to tax in the hands of the recipient. The scheme of Section 40(a)(ia), as we see it, is aimed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n respect of such income and regarding filing of the related income tax returns by the recipients. While giving effect to these directions, the Assessing Officer shall give due and fair opportunity of hearing to the assessee, decide the matter in accordance with the law and by way of a speaking order. We order so. 13. Respectfully following the same, we set aside the issue to the file of AO for the limited purpose of verification. The AO shall verify whether the payee has filed his return of income and paid of the taxes within stipulated time. If it has done so no disallowance shall be made. 14. In the result, the appeal of the assessee is allowed in part. 15. ITA No. 877/Del/2013: This is an appeal filed by the assessee on the issue of disallowance u/s 40(a)(ia). Both parties agreed that the same issue has arisen in the previous year and hence their arguments are same. 16. Consistent with a view taken from the same issue earlier the A.Y. 2008-09 in ITA No. 2972(Del) of 2012, we set aside the matter to the file of AO for fresh adjudication. The AO shall apply the ratio of the decision of the ITAT in the case of Rajiv Kumar Aggarwal (supra). 17. In the result, the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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