TMI Blog2021 (6) TMI 665X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure. If the milestone before the close of the year. As the assessee is engaged in the business of consultancy services definitely there can be sum over lap of the expenses between two years. However that does not give any rise to the AO to disallow the expenditure @10% and treat it as work in progress. We do not find any reason to deviate from this reason given by the Id CIT(A) in deleting the above disallowance.Appeal of the Revenue is dismissed. - ITA No.2335/Del/2017 - - - Dated:- 16-6-2021 - Shri Kul Bharat, Judicial Member And Shri O.P. Kant, Accountant Member For the Appellant : Shri Nirbhay Mehta, Adv. For the Respondent : Dr. Prabha Kant, CIT ORDER PER O.P. KANT, AM: This appeal by the Revenue is directed against order dated 21/02/2017 passed by the Learned Commissioner of Income Tax (Appeals)-5, Delhi [in short the Ld. CIT(A) ] for assessment year 2013-14 raising following grounds: 1. The Ld. CIT(A) has erred in law and on facts in deleting the of ₹ 15,38,00,157/- by way of disallowance of project expenses which the assessee failed to substantiate. 2. The Ld. CIT(A) has erred in law and on facts in deleting addition of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat there could be no attribution of work in progress without finding any defects in the accounts maintained, the accounting standards do not mandate a service provider to make valuation of closing work in progress and from the point of view of the concept of matching costs vis-a-vis revenue also, there was no infirmity in the accounting policy followed. Since the AO has not brought any new fact on record I consider it appropriate to also rely upon the operative portion of the appellate order for A.Y. 2012-13 which reads as under: 3.3 ..The AO was furnished the project wise details of expenses and incomes earned during the year. He has not found any discrepancies between the incomes earned and the expenditures incurred. It was necessary on the part of the Assessing officer to examine each individual contract separately and after such examination, if he came to the conclusion that the correct contract costs has not been booked and matched against the revenue recognized, he could have come to the conclusion that the accounts of the appellant did not depict the correct picture of profits. Only then, he could have proceeded to reject the books of accounts and estimate the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e income received. 3.4.1 The appellant has undertaken 5 man-month or man-days jobs wherein revenue of ₹ 3.64 crores has been recognized. The billing is done to the respective clients at the end of each month in respect of the salaries/sub counseltant costs. In these circumstances, I find that there would be no occasion to have any work in progress as on 31.03.2012 and no disallowance in respect of expenses incurred or attributable against these jobs seems warranted. The appellant has also undertaken a 765 KVA transmission line project from Maharashtra Eastern Grid Power Transmission Corporation which it sub-contracted to the Adani Group. Revenue of ₹ 74.72 crores has been shown and expenditure of ₹ 72.53 crores was paid to them. The remaining 64 jobs are client specific and the technical staff/counseltants work as per the specification of the clients. Generally speaking, the activities are completed as scheduled and invoiced at the end of the month. 3.5 I have also perused the order of my learned predecessor for the AY 2010-11 wherein the issue regarding Accounting Standards and the concept of matching the cost with revenue was extensively disc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions of the Appellant can be summarized as under:- (a) Project wise accounting is not feasible and moreover not mandatorily required in respoct of nature of business carried on by the Assessee Company. Indian GAAP (Generally Accepted Accounting Principles) do not require an Enterprise to maintain project wise accounts. Also the Indian GAAP does not require an assessee who is a service provider to make valuation of dosing WIP as specifically retentioned in AS-2 (Accounting Standard -2) issued by ICAI dealing with valuation of Inventories. (b) Question of allocating a portion of expenses as Closing WIP does not arise as all expenses are either in the nature of fixed overheads which are bound to be incurred irrespective of accrual of income or are such expenses are not having any positive correlation with accrual of income. Moreover owing to peculiarity of the projects executed by the Appellant chances of any Closing WIP are not there as discussed in Para 17. (c) Rule of consistency has to be followed while computing the income chargeable under the head Profit or gains from business or profession as no interference has been made by the assessing officers in the past on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in element of expenditure is again payments related to services rendered i.e., in the form of Establishment Expenses, Administration Marketing Overheads, Payments to sub-counseltants, Financial Charges etc. There could be no element of any stock-in-trade or work-inprogress in case of mere rendering of services, for the reason that there is nothing tangible to value as on a particular date of valuation. There is nothing tangible in hand which can be sold to realize its value. Services are rendered and fees or charges for the same are receivable is the only tangible thing, but there is no stock, no material, nothing at all in hand which can be valued and credited in books of accounts at the year end. Unlike in a trading or manufacturing concern, where in the normal trade cycle before debtors on account of sale arise, concern would have stock-in-hand, whereas in case of a service concern, expense incurred is directly converted into debtors and there is no intermediary stage when tangible stock is in hand. As per the method of accounting regularly employed, if the assessee follows mercantile method of accounting, both the income and the expenditure is booked on accrual, whereas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounts. The Mumbai High Court rejected the contention of the Department and held that expense is allowable in the year in which it is incurred, irrespective of its treatment in books of account of debiting it over a number of years. As held in the said case, the concept of matching cannot be applied in income-tax proceedings for carry forward of costs, if the expense has been incurred, in accordance with the method of accounting followed. In the present case, the assessing officer, by applying the principle of matching cost with revenue, has proposed to carry forward cost already incurred which is at variance with specific provisions of S. 37(1) and S. 43(1). The Appellant has incurred various costs as per the method of accounting followed by it and is, therefore, allowable as deduction and the same cannot be postponed to next year on the ground that revenue is not recognized. Thus, the assessing officer has grossly erred in introducing the artificial concept of dosing WIP in the case of Appellant who is a service provider. Even otherwise the Appellant is correct in contending that looking to the nature of expenses Establishment Expenses, Administrative Overheads, Financial Cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessment order alleging mismatch in expenses corresponding revenue stand explained as per submissions of the Appellant discussed in para 22 23 of this order. 32.On the basis of above discussion and findings ad hoc addition made by the Assessing Officer resorting to estimation is not tenable at law. Hence, addition of ₹ 4,05,02,738/- is deleted. 3.4.1 Having perused the order, I am in full agreement with my predecessor that project wise accounting is neither feasible nor mandatory in respect of service providers and there could be no element of stock in trade or work in progress that was mandatory unlike, that of a trading or manufacturing concern. In the circumstances, it is held that the AO has erred in applying an adhoc amount of expenditure incurred for allocation of work in progress. Ground no. 2 to 2.2 are allowed. 2.1 Aggrieved, the Revenue is in appeal before the Tribunal raising the grounds as reproduced above. 3. Before us, the parties appeared through Video Conferencing facility and filed paper-book electronically. 4. At the outset, the learned Counsel of the assessee submitted that the issue-in-dispute is covered in favour of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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