2007 (12) TMI 469 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of expenditure on Amarkantak Thermal Power Project.
2. Disallowance u/s 438 related to Employees' and Employers' contributions to PF and ESI.

Summary:

Issue 1: Disallowance of Expenditure on Amarkantak Thermal Power Project

The assessee contested the disallowance of Rs. 6,64,01,149/- incurred towards the Amarkantak Thermal Power Project by the learned DCIT. The DCIT argued that such expenditure cannot be allowed unless there is a corresponding credit in the form of contract receipt or work in progress. The CIT(A) upheld this view, stating that the non-reflection of the project cost as work in progress is not in accordance with the mercantile system of accounting. The assessee argued that the Madhya Pradesh Electricity Board (MPEB) had arbitrarily terminated the project, making the expenditure an allowable expense under the Income-tax Act, 1961. The assessee further contended that the arbitration proceedings' outcome was uncertain, and thus, no enforceable right existed over the impugned amount. The learned CIT(A) did not accept this argument, emphasizing that the expenditure should be shown as work in progress or as an amount recoverable from MPEB. The Tribunal agreed with the CIT(A), noting that the assessee had not followed a consistent system of accounting and had written off prior period expenses in the impugned assessment year, which was not justified. Consequently, the Tribunal dismissed the issue regarding the loss of the project written off.

Issue 2: Disallowance u/s 438 Related to Employees' and Employers' Contributions to PF and ESI

The assessee also contested the disallowance of Rs. 87,619/- towards employees' contribution to PF, Rs. 1,612/- towards employees' contribution to ESI, Rs. 87,619/- towards employers' contribution to PF, and Rs. 4,363/- towards employers' contribution to ESI. The learned CIT(A) confirmed the disallowance framed by the AO. However, the Tribunal noted that the Hon'ble Karnataka High Court had settled this issue in favor of the assessee in the case of M/s Sabari Enterprises and others, holding that belated payments before the due date of filing the return would be allowed as a deduction under the amended provisions of section 43B. Therefore, the Tribunal allowed the issue related to the contribution of PF and ESI.

Conclusion:

The appeal was partly allowed, with the issue regarding the loss of the project written off being dismissed and the issue relating to the contribution of PF and ESI being allowed.