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Dy. Commissioner of Income Tax -28 (1) And Jt. Commissioner of Income Tax -22 (3) , Mumbai Versus M/s Ashtavinayaka Construction

2017 (10) TMI 591 - ITAT MUMBAI

Bogus purchases - addition upheld by CIT(A) by observing that the provisions of section 69C treating the purchases as unexplained expenditure was rightly applied - Held that:- AO doubted the entire purchases and added the same to the income of the assessee which was upheld by the ld. CIT(A) by observing that the provisions of section 69C of the Act treating the purchases as unexplained expenditure was rightly applied. In the case of bogus purchases, the practice followed by the beneficiaries are .....

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see by purchasing goods from the 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. .....

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n 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 instant case the assessee has no control over the retention money deducted by the contractees. Therefore, the assessee should be allowed deduction in the year of retention or in that year in which it comes to know about the said deductions nevertheless it is pertine .....

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ncome. 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. - Addition on TDS on VAT - Held that:- The customers normally intimate the assessee about the TDS on VAT vide certificate as per VAT rules but in many cases the .....

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e 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 year in which it first comes to know about the said deductions. In view of these facts, we are inclined to direct the AO to allow ₹ 39,87,561/- as admissible deduct .....

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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/ .....

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confirmed the action of A.O of denial of claim of TDS on VAT to the extent of ₹ 39,87,561/-. The said claim of ₹ 39,87,561/- may please be allowed. 3. Facts of the case in brief are that the assessee is engaged in the business of civil contractorship and has filed return of income on 30.9.2011 declaring total income of ₹ 5,02,78,345/- which was processed under section 143(1) of the Act. The case was selected for scrutiny and the statutory notices were issued u/s 143(2) and 142 .....

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e raised in the grounds of appeal no.1 is against the confirmation of the addition of ₹ 39,88,535/- by the ld.CIT(A) as made by the AO on account of bogus purchases. During the course of assessment proceedings, the AO found that the assessee has purchased material from three parties viz (a) EMCO Industries,(b) Mercury Enterprises and ( c ) Viraj Trading Co. which were declared as hawala operators in the list declared by the Sales Tax Department, Government of Maharashtra. Accordingly, the .....

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upplied by these parties were not as per the specifications as ordered and therefore the payment were withheld and were disputed. The purchases from M/s Viraj Trading 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 as .....

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e, 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 ₹ 39,88,535/-. Section 69C for making the additions by treating them as unexplained expenditure. The provisions of section 69C can be made applicab .....

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e is undoubtedly beneficiary of bogus purchase bills issued by these three parties as mentioned hereinabove to the tune of ₹ 39,88,535/-. In respect of first two parties viz. (a) EMCO Industries and (b) Mercury Enterprises, the payments were withheld due to defective materials which were duly entered into by the assessee in the stock register and also consumed in the construction at the various sites, whereas in respect of the third party viz Viraj Trading Co., the material was received an .....

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m the grey market thereby making the saving of non-payment of VAT and other incidental charges. We are not in agreement with the conclusion drawn by the ld.CIT(A) specifically when the assessee has filed the statement of receipt of materials and consumption thereof at the various sites and hence at the most a reasonable disallowance to cover the leakages of revenue and various types of savings made by the assessee by purchasing goods from the grey market could be made. In the similar cases, the .....

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rtains 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 .....

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ied by the assessee as under : We are into business of Power Transmission, requiring laying down cables In remote areas Since we ore into business wherein execution of contract is the main activity deduction of Retention Money IS unavoidable. The deduction becomes applicable even in cases where goods are supplied, as the quality of these goods has to be of required grade for satisfactory completion of the contract. The Sales are recorded at the Invoice value which is the requirement of Accountin .....

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tention Money will not be paid. The satisfactory completion DJ work not only depends on the work already done but also upon the work to be done in future. Thus taxing Retention Money would mean not adhering to the Mercantile System as envisaged in Income Tax. The following are cases wherein Retention Money is allowed as deduction: ClT v. Simplex Concrete Piles {India} Pvt.Ltd. 179 ITR 8) (Cal.) ClT v. Chanchani Bros (Contractors) Pvt. Ltd. 161 ITR 418 (Patna) Janatha Contract Co. v. CIT (105 ITR .....

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as under : 6.10 From these details submitted by the appellant, it has been observed not in all cases the retention money pertaining to the sales booked during the year under consideration has been claimed. In many cases, the retention money pertaining to the sales which were booked in the 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 s .....

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ation, 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 parties mainly government ag .....

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ld. AR submitted that the amount of retention money cannot be said to have accrued to the assessee in the AY 2011-12 for the reasons that the assessee has not obtained unconditional right to receive the money and there is no certainty as to its realization. The said retention money is not receivable unless the contractee is satisfied with the work of the assessee and the contract is successfully completed or operated satisfactorily for agreed period . Thus, there is an uncertainty as to collect .....

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at Apollo Industries Ltd. * Amarshiv Construction (P.) Ltd. vs. DCIT DIT ( International Taxation) vs. Ballast Nedam International * CIT vs. P & C Constructions (P.) Ltd. * CIT vs. Associated Cables Ltd. * CIT vs. East Coast Constructions & Ind. Ltd. * CIT vs. Ignifluid Boilers (I) Ltd. * CIT vs. Simplex Concrete Piles India (P.) Ltd. The ld. AR submitted that in the appellant's case, the right to receive the retention money did not arise during the year under consideration. This fac .....

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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, th .....

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contained in agreements with them. With respect to the portion of retention money which is held to be not deductible by the CIT (A) it is submitted that the fact that right to receive that amount has not accrued to the assessee has not been disputed. The only reason for not allowing deduction is that the corresponding bills were booked in the earlier years and not during the years under consideration. It is humbly submitted that in many cases, the appellant comes to know about retention money b .....

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year under consideration. The appellant should be allowed to reduce its taxable income by whole of the retention money irrespective of whether the corresponding invoice was booked in the year under consideration or earlier years. 9. The ld.DR relied on the order of the AO. The ld. DR submitted that even if the money is retained by the contractee under the terms of contract till satisfactory completion of contract and subsequent performance for a certain number of years would not be taken to mean .....

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see but retained as performance till the satisfactory completion of contract. Therefore, the same has rightly been assessed and brought to the tax by the AO. The ld. DR while taking us through the balance sheet and pointed out that the amount receivable under the head deposits retention money was only ₹ 2,19,00,293/- which is subsequently retained and claimed as nor received in the financial year 2010-11 out of the said bill for the FY 2010-11 meaning thereby the remaining retention money .....

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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 th .....

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bill towards satisfactory completion of contract as performance guarantee which would be received after certain number of years when the project is successfully operated. Thus, money retained by the customers is in fact the amount withheld for certain number of years depending upon the successful completion of contract or successfully running of the work executed for certain number of years. According to the ld.AR, the assessee has no right to receive the money till the time the contract is sati .....

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ther words according to the revenue the schedule of payment or accounts determines the point of taxability of the income and it is to be on the basis of mercantile system of accounting otherwise taxing the retention money in the years of receipt of money would change the system of accounting from mercantile to cash system. The issue before us that the money retain is taxable in the year in which it is retained or in which year it was received. * In the case of E. D. Sassoon And Company Ltd vs Th .....

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re must be a debt owed to him 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 b .....

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mined 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 appeal and whatever retention money had not been shown in that year and realized in the subsequent year had been shown as sale proceeds in that year and offered for tax. It is in these circumstances that the Commissioner (Appeals) was of the view that there was no need to disturb the method .....

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unting treatment to be accorded in such case therefore was not at issue. The assessee claiming entire expenditure and not excluding expenditure relatable to the withheld security deposit also would not be fatal to the interest of the assessee. The expenditure in toto was incurred. The question only was what would be the total amount that the assessee would receive for carrying out such construction. Ninety per cent of the amount was payable or already paid over. Ten per cent of the running accou .....

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lowing the Revenue's appeals. The question is answered in favour of the assessee. The judgment to the extent above in each of the respective appeals is reversed. Resultantly, the judgment of the CIT (A) is reinstated. As a result, consequential directions of the CIT (A) will also stand reinstated. We reproduce such directions, again here : However, the Assessing Officer is directed to tax the said retention money in the assessment year relevant to the 'previous year' in which retenti .....

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nder 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 e .....

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cash system where entries are made on the basis of actual receipts and actual outgoings or disbursements, or it may be the mercantile system where entries are made on accrual basis, that is to say, accrual of the right to receive payment and the accrual of the liability to disburse or pay. However, in both cases, unless there is real income, there cannot be any income tax. In the instant case also, there is no real income so far as ₹ 3 lacs are concerned because no debt has been created i .....

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l a debt is created in favour of the assessee, which is due by somebody, it cannot be said that the assessee has acquired a right to receive the income or that the income has accrued to him. A debt must have come into existence and the assessee must have acquired a right to receive the payment. In the instant case, the assessee did not get any right to receive a sum of ₹ 4 lacs which could have been retained by Godrej in pursuance of clause No. 14 of the contract. One has to look at the co .....

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n the dispute as to quality of the plant had arisen and the assessee had also felt that quality of the plant was not up to the mark and, 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 therefo .....

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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 of satisfactory execution of the contract is concluded and, therefore, if there is no immediate right to receive the retention money, the said amount cannot be said to h .....

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per clause 6.3.3 and 6.3.4 of the contract and during the year the assessee has merely transported the required goods to Nigeria and therefore there cannot be any question of completion of project at all during the year. We also find merit in the contention of the assessee that right to receive has not been disputed by the revenue but the ld CIT(A) rejected the claim/deduction to the tune of ₹ 2,12,22,495/- for the reasons that the corresponding bills were booked in the earlier years and .....

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etained 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, we are of he considered view that though the mercantile system of accounting provides for accounting and taxing of income on accrual basis but in the instant case the assessee has no control over the retention money ded .....

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7; 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 .....

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that the assessee suo motto added back TDS on VAT to the income to the tune of ₹ 68,54,483/-. The assessee raised the issue before the AO during the assessment proceedings but AO rejected the same on the ground that the claim is not made by way of revised return of income. In the appellate proceedings the ld. CIT(A), after verifying the claim of the assessee in the computation of income, found it to be correct. However, the ld. CIT(A) after calling for the details of these expenditures fro .....

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time of filing of the return of income on the wrong belief that it related to TDS under the Income Tax Act, whereas the same related to TDS on VAT Act and therefore represented the indirect expenses under contract qua payment of VAT and cannot be disallowed. 17. On the other hand, the ld. DR objected to the arguments of the ld.AR. The DR submitted before us that the assessee has suo motto disallowed the TDS on VAT while filing the return of income. The ld DR further stated that the claim of ass .....

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under the Sales Tax Act. The assessee claimed expenditure during the assessment proceedings qua TDS on VAT deducted by the contractees and not by way of revised return and therefore the said claim was not admitted by the AO. The ld CIT(A) allowed ₹ 28,66,922/- while denying the claim to the tune 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 cons .....

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wise 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 .....

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