9911796707
TMI Blog2021 (12) TMI 819X X X X Extracts X X X X X X X X Extracts X X X X ..... ing grounds of appeal: 1. That the Ld. Commissioner of Income Tax (Appeal)-2, Lucknow had erred in law and facts in deleting the addition of Rs. 88,61,308/- on account of prior period expenses ignoring the fact that the assessee is following mercantile system of accounting and only those prior period expenses which crystallized during the year can be claimed. 2. That the Ld. CIT(A)-2, Lucknow had erred in law and facts in deleting the addition of Rs. 37,35,99,000/- on account of interest on "Client Interest Account" without appreciating the facts that the assessee is claiming TDS relating to FDR's of unutilized fund but is not showing the interest income of FDR's in its income which is against provisions of Section-198 and 199 of Income Tax Act 1961. 4. Apropos the sole ground raised by the assessee relating to addition under section 43B of the Act, the ld. CIT(A), while confirming the addition of Rs. 2,15,56,614/-, observed as under: "8.1 Ground of appeal no.3 - Addition of Rs. 2,15,56,614/- u/s 43B: The appellant has claimed these expenses under the Operating Expenses to tune of Rs. 24,26,10,007/-. Proof of payment of Labour Cess was filed to the extent of Rs. 22 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mined the facts and circumstances of the case. I have examined the findings of the Assessing Officer and the submissions of the appellant. The AO has disallowed labour cess of Rs. 8,44,07,080/- under section 43B of the Act which the appellant claims was not disallowable as labour cess was claimed as direct expenditure in the contract account. I find that there is a marked difference in section 40(a) (ia) of the Act and section 43B of the Act. Whereas section 40(a) (ia) of the Act starts with a non obstante clause and restricts disallowance of an expenditure claimed under section 30 to section 38 of the Act; no such exclusion is envisaged in section 43B of the Act which is applicable to even the expenditure incurred for earning income under section 28 of the Act as well. The expenditure disallowed under section 43B of the Act is allowable in the year of payment. The claim of the appellant that expenditure was incurred as direct expenditure in contract account and therefore not disallowable; is therefore as direct expenditure in contract Act is applicable to section 29 of the Act also as per concluding lines of the provision contained in the Act, 7(5) I find that the appellant has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve expenses are then deducted from the centage / gross profit and the net is offered for tax; that the provision for Labour Cess has not been debited to the profit and loss account; and that hence, there is no justification to invoke the provisions of section 43B of the Income Tax Act, 1961. 7. It has further been argued by the ld. Counsel for the assessee, that the provisions of section 43B deal with situations where expenses are debited to the profit and loss account but not paid as on the date of filing of return of income as prescribed u/s 139(1) of the Income Tax Act, 1961; that in the present case, by making provision for Labour Cess, the assessee Corporation has neither reduced its profitability in any way, nor has it claimed the same as expenditure; that in law and in the peculiar circumstances of the present case, there is no justification for making any disallowance by invoking the provisions of section 43B of the I. T. Act, 1961 on account of provision made for Labour Cess; that in the assessment year 2000-01, similar additions were made by the Assessing Officer in the assessee's case by way of making disallowances of expenses debited to the Contract Account, in which, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion dated 20/11/2009, which forms pages 193 to 196 of the Special Audit Report of the assessee; that in pursuance of this Notification, the assessee Corporation issued Circular dated 19/2/2010 (page 192 of the Special Audit Report); that through this Circular, it was informed that all the unit heads/General Managers were required to make provision for labour cess @ 1% of the cost of construction of the concerned work sanctioned by the Government and which was in progress; that it was specifically stated further in the Circular that the estimate be accordingly revised and the revised estimate be sent to the concerned Government Department, so that provisions of labour cess, as being made by the assessee Corporation, may be collected from the concerned Government Department and be deposited in the Government account; that since this process took time, the Corporation made a provision of Rs. 8,44,07,080/- in its books and the payment thereof was made in the subsequent year; that the total provision consists of the provision made by 159 works, which fact stands reflected by the special auditors in the Special Audit Report (pages 189 to 191 thereof); that the provision was not charged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit of the assessee Corporation has not got reduced by such provision; that the provision was also not claimed as an expenditure; and that in assessment year 2000-01, vide order dated 18/12/2008, passed in ITA No.382/LKW/2004, similar additions made by the A.O, by disallowance of expenses debited to the profit & loss account, were deleted by the ITAT, holding that no addition could be made by disallowing the expenses debited to the contract account; that it was further observed by the ITAT that since the assessee Corporation had already recognized the income on the expenses debited to the contract account as per Government notifications issued from time to time, disallowance of the expenses was not called for; and that therefore, the disallowance in question be deleted. The ld. A.R. of the assessee has directed our attention to APB pages 139 to 149, which are the copies of the audited balance sheet, profit & loss account and computation chart of the assessee for assessment year 2010-11, as placed before the authorities below. 7. The ld. D.R., on the other hand, has placed strong reliance on the impugned order. It has been reiterated that sections 40(a)(ia) and 43B of the Act a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r para 59 of the Working Manual, a contract account is to be prepared, which is a statement showing resulting profit or loss accruing during a construction period, which has a direct relation to the works dealt with in the business, which ascertains the cost of profit of the assessee Corporation. Thus, the contract account is, basically, accounting of work done where the gross profit worked out is the centage allowed towards the overheads and profits of the assessee Corporation. In the contract account, all direct costs, as are to be borne by the clients of the Corporation, are debited and the value of the work done is credited by adding 15% towards centage charges. As such, in case any disallowance is to be made in the cost debited to the contract account, a corresponding deduction is also required to be made in the cost debited to the work done, as this is a case of contra entries only. This accounting procedure of the assessee Corporation stands accepted by the Department in assessment year 1990-91, as taken note of by the Tribunal in the assessee's case for assessment year 1991-92, in its order dated 30/11/2006, passed in ITA No.714/LKW/2002. For assessment year 2000-01, the Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal, wherein also, the Tribunal decided the issue in favour of the assessee. Therefore, respectfully following the order of the Tribunal in the assessee's own case for the preceding years, i.e., assessment years 2010-11, 2011-12 and 2012-13, the grievance of the assessee is found to be justified and is accepted as such. Accordingly, the ground of appeal taken by the assessee is allowed and the addition of Rs. 2,15,56,614/- is deleted. ITA No.218/LKW/2019: 11. Coming to the grounds taken by the Department in its appeal, the Revenue, through ground no.1, has assailed the order of the ld. CIT(A) in deleting the addition of Rs. 88,61,308/- on account of prior period expenses. 12. The ld. CIT(A) deleted the addition of Rs. 88,61,308/- being the prior period expenses, observing as under: "7.1 Grounds of appeal no. 1 and 2 - Addition of Prior Period Expenses Rs. 88,61,308/-: Appellant had shown Prior Period expenses of Rs. 88,61,308/- in the Contract Account. Appellant filed written submissions on allowability of same. AO held that as per mercantile system of accounting the appellant has wrongly claimed these expenses now i.e. at time of making payment. These expenses were added ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment year 1991-92 which was decided by the Tribunal vide its order dated 30.11.2006 in ITA No 714/Luc/02 wherein it is held that as per accounting procedure followed by the assessee and accepted by the Department in assessment year 1990-91, the direct cost are taken by the client which are debited and value of the work if credited by adding 15% as profit margin of the assessee. Thus, all the expenditure on material consumed is recovered from the clients alongwith 15% profit thereon. So, even if there is any inflation in expenses in material consumed, the same is recovered alongwith 15% profit thereon from the clients hence, there is no loss of profit or no loss to the Revenue in the form of tax. Since the Tribunal has already taken a view on this subject, the issue is covered in favour of the assesee." 7.5 The appellant further contended that issue has been decided by Ld. CIT(A)-II, Lucknow (predecessor of undersigned) in appellants own case for AY 2010-11 vide order dated 10.03.2017 in favour of the appellant. The relevant portion of order is as under: "10(4) I have examined the facts and circumstances of the case. I have examined the findings of the Assessing Officer an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld. CIT(A)-lI, Lucknow in cases of appellant for AY 2011-12 and AY 2012-13 vide orders dated 10.03.2017 and 14.03.2017. 7.7 In view of the above mentioned facts and relying on the orders of Hon'ble ITAT, Lucknow in the case of appellant for AY 1991-92 and AY 2000-2001 and orders of Ld. CIT(A)-II, Lucknow in the cases of appellant for AY 2010-11, 2011-12 and 2012-13 on identical issue, the addition of Prior Period Expenses of Rs. 88,61,308/- is hereby deleted. Grounds of appeal no. 1 and 2 are allowed." 13. At the outset, the ld. Counsel for the assessee submitted that the issue is squarely covered by the order of the Lucknow Bench of the Tribunal in the assessee's own case for assessment years 2010-11, 2011-12 and 2012-13, wherein an identical issue raised by the Revenue was rejected by the Tribunal and it had confirmed the order of the ld. CIT(A), deleting the addition made by the Assessing Officer. The ld. Counsel for the assessee has invited our attention to paragraphs 35, 36 & 37 of the order of the Tribunal, dated 17.5.2019, in ITA Nos.317/LKW/2017 and 314/LKW/2017, for assessment year 2010-11. 14. We have heard both the parties and have perused the material on record. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been followed in case of the appellant for the assessment year 2000-2001 in ITA No 382/LUC/04 dated 18/12/2008. While deciding a similar disallowance of prior period expenses the Hon'ble Court held that if any disallowance was to be made in the cost debited to the Contract account then corresponding reduction is required to be made in the work done also, this being a case of contra entries only. The decision of the Hon'ble Tribunal is discussed at length in paragraph 5(6) above. Relying on the decision supra and finding that the income corresponding to the expenditure of Rs. 23,54,235/- has already been recognized in contract account of earlier years, the addition of Rs. 23,54,235/- made by the A.O is deleted giving relief to the appellant. 37. As observed by the ld. CIT(A), we find that the liability arose in the year under consideration, as is evident from the bill raised by the Electricity Department on 30/10/2019. Moreover, as claimed by the assessee, the amount pertains to the contract account and therefore, in case the addition is made, the equivalent amount is to be reduced from the work-in-progress. We, therefore, find no infirmity in the order of the ld. CIT(A) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fund as income of the assessee, without appreciating the Government Order that interest on client funds is to be added in client fund. 40. The ld. CIT(A) deleted the addition, observing, as below:- "12(4) I have examined the facts and circumstances of the case. I have examined the findings of the Assessing Officer and the submissions of the appellant. I find that the amount of Rs. 39,46,18,444/- shown in the balance sheet as interest accrued on deposits is the running balance of accrued interest on the funds of the clients of the appellant. This amount is inclusive of opening balance not received during the year as well as the interest accrued on the assessee's own funds, which have already been assessed to tax. The appellant undertakes construction work against advances received from the clients. Expenses are met by withdrawing the funds from the bank accounts wherein the funds were deposited. These are running accounts and the balance left in the bank account earns interest. The clients also keep margin money with the appellant in the form of fixed deposits which earns interest. The appellant maintains its books of accounts on mercantile basis and it makes provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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