TMI Blog2017 (10) TMI 591X X X X Extracts X X X X X X X X Extracts X X X X ..... e grey market could be made. In the similar cases, the Co-ordinate Benches of the Tribunal have taken a consistent view of directing addition ranging from 5% to 12.5% depending upon the facts of the case. In the present case, we are of the view that it would be fair and reasonable to make the addition towards gross profit at the rate of 12.5% of the said purchases. Accordingly, we set aside the order of CIT(A) on this issue and direct the AO to make addition at 12.5% of the bogus purchases. Addition in respect of retention money - Held that:- In the case of the assessee, most of the customers are government agencies where the exacts details of retention money are not even available with the assessee. We find merit in the contention of the assessee that the assessee has not received money retained by the contractees and also that some retention could not be accounted due to non availability of details and information with the assessee. It is only when these details were available with the assessee the necessary entries were made in the books of accounts. Therefore, though the mercantile system of accounting provides for accounting and taxing of income on accrual basis but in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated:- 9-10-2017 - SHRI D. T. GARASIA, JM AND SHRI RAJESH KUMAR, AM For The Assessee : Shri Bhadresh Doshi For The Revenue : Shri T A Khan ORDER PER RAJESH KUMAR, A. M: The captioned are cross-appeals by the assessee and revenue pertaining to assessment year 2011-12 directed against the order of ld Commissioner of Income Tax-(A)-26 dated 23.3.2015 passed u/s 143(3) of the Income Tax Act (hereinafter called the Act). 2. First we shall take up the appeal bearing no.3883/Mum/2015 by the assessee wherein following grounds have been taken: 1. The Ld. CIT(A) has erred in confirming the action of A.O of adding ₹ 39,88,535/- on account of alleged bogus purchases. The said addition of ₹ 39,88,535/- may please be deleted. 2. The Ld. CIT(A) has erred in restricting the claim of the appellant of retention money only to the extent of ₹ 4,76,62,505/-. Thus, the CIT(A) has thereby confirmed the action of A.O of denial of retention money to the extent of ₹ 2,12,22,495/-. The said claim of retention money of ₹ 2,12,22,495/- may please be allowed. 3. The Ld. CIT(A) has erred in confirming the action of A.O of disallo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Co were made by cheques and the bank statement evidencing the payment was filed before the AO. The assessee also filed consumption statement before the AO showing that the material actually received from the suppliers and was consumed at the work site of the assessee. However, the AO was not satisfied with the submissions of the assessee on the ground that the assessee failed to prove the genuineness of the purchases from these parties and also the Income Tax Inspector deputed to verify the purchases on the addresses supplied by the assessee reported that none of the parties was existed on the addresses furnished by the assessee. Finally the entire addition was made to the income of the assessee. In the appellate proceedings, the ld. CIT(A) confirmed the addition by observing and holding as under : 5.5 In view of the above, inference of preponderance of probabilities can be drawn from the materials on records. The appellant has attempted to inflate U1e purchases artificially by obtaining the accommodation bills from the hawala parties. Therefore, I agree with the view taken by the AO that the appellant cannot be allowed a deduction of the purchases amounting to ₹ 39,8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds gross profit at the rate of 12.5% of the said purchases. Accordingly, we set aside the order of CIT(A) on this issue and direct the AO to make addition at 12.5% of the bogus purchases. Ground no.1 is partly allowed. 6. Grounds of appeal no.2 pertains to part confirmation of addition in respect of retention money to the extent of ₹ 2,12,22,495/- by the Ld. CIT(A) out of addition of ₹ 6,88,85,000/- made by the AO and thus not deleting the entire addition. 7. Facts in brief are that the assessee is engaged in the business of civil contractor ship on turnkey/EPC basis relating power stations. In the business of the assessee, it is contractual as per the terms of the contract that certain % is retained as retention money out of contract bill towards satisfactory performance guarantee. During the year while filing the return of income, the assessee reduced such retention money of ₹ 6,88,85,000/- from the income in the statement of computation of income nevertheless the same was shown as revenue in the profit and loss account The details of the said retention money is incorporated in the assessment order at page 4. The assessee was asked by the AO to justify t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prior years have been claimed in the year under consideration. If the corresponding revenue has been offered to tax not in this year but in the earlier years then how can the retention money pertaining to the same can be claimed as a deduction in this year. Further, the appellant has included deductions on account of various other reasons also under the name of retention money. What are the reasons for such various other deductions and whether such deductions can be considered for lowering the income or not have not been explained by the appellant at all. 6.11 Therefore, from the tabular statement furnished by the appellant along with the detailed enclosures for each of the transactions under consideration, have been extracted in the CIT(A) s order at pages 17,18 and 19 for the sake of brevity we are not reproducing below: 8. The ld. AR vehemently submitted that the order passed by the ld.CIT(A) in confirming the addition of ₹ 2,12,22,495/- is completely wrong and against the facts on records. The assessee is engaged into the business of execution of contracts on Turnkey/EPC basis related to power stations. It has entered into various contracts with several partie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the year under consideration. The agreement executed with this party clearly mentions the payment terms whereby 10% of the contract consideration is not receivable immediately but at a future date and after commissioning of the project. The relevant terms are reproduced below: 6.3.3 Five percent (5%) of the contract price shall be paid after the commissioning of the works and the issuance of the initial taking over certificate. 6.3.4 Five percent (5%) of the contract price shall be paid after the completion of the works and warranty period and issuance of the final completion certificate The ld. AR submitted that Further, the same agreements also provide for the corresponding warranty period which is 12 months from the date of the initial take-over by the Employer i.e. Power Holding Co. of Nigeria. During the year under consideration, the assessee has merely shipped the required goods to Nigeria and question of completion of the relevant project does not arise at all. Similar is the case with respect to other contracts where some portion of the contract has been retained by the customers on account of similar terms contained in agreements with them. With respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2010-11 meaning thereby the remaining retention money is possibly shown under the head sundry deposits. It is computed in the submission of total income and deduction has been claimed of ₹ 6,88,85,000/- at the time of filing of return of income when the amounts of assessee were already finalized. The ld. DR also stated that such type of deduction were not claimed in the past by the assessee and according to the mercantile system of accounting the sales and purchases have to be accounted for and receipts brought to tax whether or not actually received. 10. The ld. DR showed various agreements of contracts entered into by the assessee and submitted that even if the contract agreement provided for deduction of 5-10 % of the work done by the assessee even then accordingly to the mercantile system of accounting the schedule of material to be determined the time of accrual of income. Finally, the ld. DR prayed before the bench that the order of AO should be restored as the revenue has challenged the appeal against the relief allowed by the CIT(A) to the tune of ₹ 4,76,62,505/-. 11. We have carefully considered the rival submissions and perused the material including the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... im by somebody. There must be as is otherwise expressed debitum in praesenti, solvendum in futuro. Unless and until there is created in favour of the assessee a debt due by somebody it cannot be said that he has acquired a right to receive the income or that income has accrued to him. * In the case of CIT V/s Gujarat Apollo Industries Ltd it has been held by the Hon bleHIGH COURT OF GUJARAT: 5. Insofar as the first question is concerned, a perusal of the order passed by the Commissioner (Appeals) shows that after analyzing the terms of payments of purchase orders in respect of various parties, has given categorical finding that the retention of 10% money of total sales was due to specific terms and conditions for final payment mentioned in the customer purchase order. It was further held that the assessee - company had been following this system of accounting for the last several years and was accepted by the department. The Commissioner (Appeals) further examined as to whether the assessee had made any deviation from the usual practice followed by it in the earlier years with an intention to evade tax and found that there was no such change during the year under ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after the defect liability is over and after the Engineer-in-Charge certifies that no liability attaches to the appellant. Appeals are allowed to the above extent. * In the case of Director of Income-tax ( International Taxation) v.Ballast Nedam International the Hon ble Gujarat High Court held that : 6. Having heard learned counsel for the Revenue and having perused the documents on record, we find that the issue under consideration is squarely covered by the decision of this Court in the case of Anup Engineering Ltd. v. CIT [2001] 247 ITR 457/114 Taxman 584 (Guj.). 7. In the said case the agreement that the assessee entered into for execution of a contract for supply and erection of plant specified that full amount would not be paid if the plant was defective. The assessee had debited the sum of ₹ 3 lakhs by crediting the same to the warranty account as some dispute had arisen with respect to the execution of the contract. In such background, the Court considered whether such amount represented assessee's accrued income. In this context, it was held and observed as under: For the purpose of ascertaining whether income had, in fact, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, believing that Godrej might ultimately retain ₹ 3 lacs or under the warranty clause the assessee might have to pay ₹ 3 lacs, the assessee made a provision for ₹ 3 lacs by deducting the said amount from the sales account. In fact, in the previous year in question, the assessee had no vested right to receive ₹ 4 lacs and therefore it cannot be said that income to that extent had accrued to the assessee. We can test the above conclusion in a different manner too. Whether Godrej was liable to pay ₹ 4 lacs to the assessee in spite of the fact that quality of the plant was admittedly not up to the mark? Did the assessee get a vested right to get the said amount? Answer to these questions would be in negative and, therefore, as observed hereinabove, it cannot be said that income had accrued to the assessee. A similar question had arisen in case of CIT v. Simplex Concrete Piles (India) Pvt. Ltd. 179 ITR 8 (Cal.). Having regard to the facts and circumstances of the case, it was held in that case that, when there is a clause with regard to retention money, the assessee gets no right to claim any part of the retention money till the verification ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion has to be taxed as and when received by the assessee. Accordingly, we are not agreement with the conclusion of CIT(A) that the deduction of retention money which pertained to earlier years is not allowable and accordingly direct the AO to allow claim of retention money of ₹ 2,12,22,495/-. Accordingly, this ground of assessee is allowed. 13. The issue raised in ground no.3 is against the confirmation of disallowance of interest to the tune of ₹ 16,86,094/- u/s 40(a)(ia) of the Act. 14. We have heard the rival contention and perused the material placed before us. In our opinion the disallowance u/s 40(a)(ia) of the Act on account of interest can be made only if the payee has not offered the receipts in his return of income. We, therefore, feel that the issue has to be sent back to the file of the AO to verify the same in terms of second proviso to section 40(a)(ia) of the Act and accordingly the AO is directed to decide the same as per facts and law after giving reasonable hearing to the assessee. This ground is allowed for statistical purposes. 15. Ground of appeal no.4 is against the part confirmation of on account TDS on VAT to the extent of ₹ 39,87, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... une of ₹ 39,87,561/- on the ground that the same did not pertain to the year under consideration. We find merit in the contention of the ld.AR that the amount retained during the year under consideration is not recoverable from the customers. The customers normally intimate the assessee about the TDS on VAT vide certificate as per VAT rules but in many cases the contractors come to know when the payments are received from the customers after reducing the amount of TDS. Thus, the short recovery of bill amount due to deduction of TDS under VAT Act is accounted for in the books of account as and when it comes to the notice of the assessee and accordingly claimed as expenditure. Even otherwise the deduction of such type of taxes is available upon its payment as per the provisions of section 43B of the Act. If we consider the claim from another angle that the said claim crystallized during the year as the assessee came to know about the said deduction only during the year under consideration as the customer failed to issue any deduction certificate and as a result was not claimed by the assessee in those years. In our considered view the assessee should be allowed the claim in the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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