Home Case Index All Cases Income Tax Income Tax + AT Income Tax - 2009 (10) TMI AT This
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2009 (10) TMI 640 - AT - Income TaxDisallowance of expenditure u/s 40(a)( ia) - Computation of income chargeable under the head ‘Profits and gains of business or profession’ - Methods of accounting - nature of business activities - Whether the AO can make any addition in total income on account of disallowing expenditure u/s 40(a), in a case where assessee follows ‘completed contract method’- AO noticed from audit report that the assessee made late payment of TDS - AO made the addition as same is not allowable u/s 40(a)( ia) - CIT(A) confirmed the action of the AO. HELD THAT:- We find that certain expenditures are not allowable if the assessee failed to deduct tax or after deduction same was not paid in time. Basically, income chargeable under the head ‘Profits and gains of business or profession’ or ‘Income from other sources’, be computed in accordance with cash or mercantile system of accounting regularly employed by the assessee. “Completed contract method” is one such method. Similarly, “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 period. As per the accepted accounting principle, it is accumulated under one head of account, ‘work-in-progress’. The project constituted the stock-in-trade of the assessee. The project did not constitute a fixed asset of the assessee. In the last accounting period when work is completed, the profit and loss account is prepared, that ‘work-in-progress’ account is to be transferred in profit & loss account. Thus, the “completed contract method” determines profits/loss only when contract is completed. Opening balance of work-in-progress of individual project will go up in the relevant year. When these projects were completed, in that year, income has to be computed after considering increased opening work-in-progress and receipts of the relevant project. Accordingly, in the year when these projects were completed, income on account of those projects is be computed after considering increased opening balance of work-in-progress due to addition of expenses for the period of project in work-in-progress. Contrary, if certain expenditures are not allowable under the Act, the work-in-progress will not increased by that amount. Such expenses are to exclude from the work-in-progress if same were included by the assessee. For the above purposes, the AO has to examine the work-in-progress account in each assessment year. If on examination, AO found that the work-in-progress shown in books of account is not correct, the AO is empowered to correct the same. In other words, it can be said that work-in-progress is just like one side of profit & loss account, i.e., debit side, the AO can have all powers to examine this debit side of profit & loss account including the power of examination of allowability/disallowability of expenditure u/s 40(a). In the case under consideration, we find that AO has rightly noted that the expenditure claimed by the assessee which are subject to TDS liability but TDS was no paid in time; therefore, these were disallowable u/s 40(a). The correct procedure in “completed contract method” is that instead of making addition, AO should correct the amount of work-in-progress by reducing or enhancing work-in-progress as the case may be. Such corrected WIP will be finally considered in profit and loss account/contract account for the year in which work is completed. The result of calculation of correct profit in case of “completed contract method” could be attained by this procedure. In the case under consideration, AO made addition in all the projects including incomplete projects, which is not warranted. Such addition in total income is warranted only in respect of project which is completed during the year. The ld AR has conceded the additions in respect of completed works. Necessary calculation is required after verification from original record. The original record is not readily available at this stage under the circumstances we send back this matter to the file of the AO with direction to delete the additions made in total income in respect of incomplete projects. However, the addition in respect of completed project is to confirm subject to verification of calculation of the amount. AO is further directed to correct the amount of work-in-progress of incomplete works/projects in accordance with the above discussion and after providing opportunity of hearing to the assessee. In the result, the appeal of the assessee is partly allowed for statistical purposes.
|