HCC Samsung Joint Venture Vs ACIT (ITAT Mumbai)
Held that there is no observation of the AO that quantity of construction work-in-progress is more than the quantity valued as per first set of financial statement. Accordingly, addition deleted
Facts-
AO made addition for the sum of ₹3229.26 lakhs to the returned income, relevant to the construction WIP reported in second set of audited financial statement. It may be noted here that the Assessing Officer did not reject the books of account of the assessee in terms of section 145(3) of the Act.
Conclusion-
We find that the Revenue has not disputed the fact of examination of books of accounts by the Assessing Officer. In our opinion, if in books of account any expenditure corresponding to the additional amount of construction of WIP is not found debited, then the amount is only in the nature of notional valuation which has been carried out by the joint venture partner for the purpose of consolidating in its books of account and which cannot be made a basis for addition in the hands of the assessee.
We note that the Hon’ble Rajasthan High Court in the case of CIT v. Laxmi Engineer Industries held that no addition could be made for higher valuation of the stock hypothecated to Bank if the AO had not been able to point out any discrepancy in the quantity of stock hypothecated to the Bank and the quantity of stock as per books of account.
In this case also there is no observation of the AO that quantity of construction work-in-progress is more than the quantity valued as per first set of financial statement. In view of the above, we set aside the order of the Ld. CIT(A) on the issue-in-dispute and delete the addition made by the Assessing Officer.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
These two appeals by the assessee are directed against two separate orders, each dated 27.08.2019, passed by the Ld. Commissioner of Income Tax (Appeals)-40, Mumbai [in short ‘the Ld. CIT(A)’] for assessment year 2014 -15 and 2015 -16. Being common ground involved, permitting from same set of facts, both these appeals were heard together and disposed off by way of this consolidated order for convenience and avoid repetition of facts.
ITA No. 7372/MUM/2019
Assessment Year: 2014 -15
2. First, we take up appeal of the asses see for assessment year 2014-15. The relevant ground s raised by the assessee are reproduced as under:
1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in upholding the action of the Ld. AO in brining to tax closing construction WIP of ₹32,29, 26,445/-. The addition be deleted.
In the alternative, the same be directed to be allowed as a deduction in AY 2015-16 as cost of opening construction WIP.
Amount of tax and interest u/s 234A and 234B be directly to be consequently recomputed.
2. On the facts and circumstances of the case and in lad, the Ld. CIT(A) erred in confirming the disallowance of ₹5,65,933/- u/s 40(a)(ia) on reimbursement of salary of deputed staff paid to a sister concern, Alphine Samsung HCC Joint Venture.
3. The fact in brief of the case are that assessee is a joint venture (Association of persons for the purpose of status under the Income Tax Act, 1961) formed between M/s Hindustan Construction Company Ltd. (HCC) and Samsung C & T Corporation, Korea (Samsung) for the purpose of execution of design and construction of tunnels as part of Delhi MRTS Project of Delhi Metro Rail Corporation. The assessee filed its return of income on 24.11.2014 claiming loss of ₹24,31,31,346/ -. The return of income filed by the assessee was selected for scrutiny and statutory notices issued under the Act were complied. In the assessment completed u/s 143(3) of the Act on 30.12.2016, the Assessing Officer made various additions to the returned income and assessed the total income at ₹9,45,17,862/-. On further appeal, the Ld. CIT(A) allowed part relief to the assessee.
4. Aggrieved, the assessee is in appeal before the Tribunal raising the grounds as reproduced above.
4.1 Before us, the assessee filed a Paper book containing pages 1 to 108 including copy of cases relied upon.
5. The Ground No. 1 of the appeal relates to addition of ₹32,29,26,445/- in respect of closing construction work-in-progress (WIP). The facts qua, the assessee issue-in-dispute are that the return of income was filed by the assessee on the basis of one set of audited financial statement i.e. balance sheet, profit and loss account, computation of income, wherein during the assessment year consideration loss of ₹22.30 crores was reported. But during the scrutiny proceeding before the Ld. Assessing Officer, another set of audited financial statement was filed, where profit of ₹9.99 crores was reflected. Before the Assessing Officer vide letter dated 23.12.2016, the assessee explained that second set of financial statement was prepared for the purpose of Management Information System (MIS) accounting purpose. The assessee explained that the MIS accounts have only one difference of valuation of construction WIP of ₹32.29 crores. The Assessing Officer observed that in second set of financial statement the assessee has credited construction WIP of ₹3229.26 lakhs, which was also reflected in inventories shown of ₹1154.49 lakhs in the balance sheet as on 31.03.2014. The Ld. AO further observed that first set of audited financial statement on the basis of which return of income has been filed, the construction WIP of ₹3229.26 lakhs has been excluded from credit in profit and loss account and thus the assessee has accordingly computed loss of ₹2230.14 lakh s. The Assessing Officer is of the view that if said WIP is treated as revenue in nature and included in the current year expenses , then naturally same has been correctly credited to the profit and loss account and closing stock in second financial statement .
5.1 In view of the above observation, the Assessing Officer concluded that (i) the assessee has not furnished any reasons as to why second set of financial statement was prepared and that too was duly audited by the said auditor who signed the first financial statement, (ii) the assessee has not furnished details of construction WIP of ₹3229.26 lakhs.
5.2 Finally, the Assessing Officer made addition for the sum of ₹3229.26 lakhs to the returned income, relevant to the construction WIP reported in second set of audited financial statement. It may be noted here that the Assessing Officer did not reject the books of account of the assessee in terms of section 145(3) of the Act.
6. Before the Ld. CIT(A), the assessee relied on the decision of Hon’ble Madras High Court in the case of CIT v. Shriram Transport Finance (ITA No. 621 of 2013) wherein the Hon’ble High Court has held that maintenance of two separate books of account for the purpose of Company Act and Income Tax Act was perfectly in order. In the set, for the purpose of Companies Act provision for doubtful debt was made whereas in the set for the purpose of Income-tax Act, the same doubtful debt was written off. It was also submitted by the assessee that the Assessing Officer has duly verified the books of account of the assessee however the AO neither found any additional expenditure claimed by the assessee as per WIP of ₹3229.26 lakhs nor any fault in the accounting in terms of section 145 of the Act. The Ld. CIT(A) however upheld the addition holding that the return of income filed was not in line with the second set of accounts filed during the assessment.
7. Before us, the Ld. Counsel of the assessee has submitted that the said audited MIS financial statement was drawn up only to provide audited financial statements to Hindustan Construction Company Ltd. (HCC), one of the joint venture partner. It was submitted that HCC had disclosed in its mandatory published consolidated financial statement, interest in the joint venture on the basis of audited MIS financial statement. It was submitted that MIS financial statement had been drawn up so as to reflect various elements such as contract WIP , construction cost carried over as WIP as also pure construction material carried over as part of inventory as on 31.03.2014. It was submitted that the disputed amount of ₹32.24 crores of construction WIP was recor ded only in the audited MIS financial statement for the limited purpose of consolidating MIS financial statement of the assessee JV into the audited published financial statement of HCC. According to the assessee, the difference between the two statements was that whereas financial statement of the assessee JV were correctly recognized at cost but for consolidation in the financial statement of the HCC, even the budgeted profit was added to the inventory and therefore, the amount of ₹32.29 crores represents notional or budgeted profit, which were never earned in the year under assessment. During the hearing dated 09.06.2022, the Ld. Counsel of the assessee was asked to furnish a reconciliation of two sets of financial statement from the auditor who has signed both the audited statements. The Ld. Counsel of the assessee submitted the said reconciliation duly signed by the auditor. The relevant part of the said reconciliation is reproduced as under:
“7. As represented to me, as per HCC’s accounting policy, budgeted profit from the project was required to be recognized and loaded on to the inventory of Construction WIP irrespective of the actual % of profit/loss from the project at the year-end. Having regard to the representation that the said project was finally budgeted to have a profit of 6.75% of the Contract value, a sum of Rs. 999.13 lacs, being 6.75% of value of work done till 31 March 2014 viz. Rs. 14801.90 lacs, was required to be reflected in the MIS Financial Statements as profit for the year, thereby requiring Closing Construction WIP to be additionally valued at Rs. 3239.36 lacs being budgeted profit on inventory. The Annexure attached to this certificate reconciles the two sets of accounts which shows that the only difference is the addition of Construction WIP of Rs.3229.26 Lakhs under the head Inventories both in the Management Balance Sheet and in the Management Profit & Loss Account. This has resulted in the loss of Rs. 2230.14 Lakhs in the regular Profit & Loss Account being converted into a profit of R$. 999.13 Lakhs, requiring provision for taxation of Rs. 372.02 Lakhs in the profit & loss account, which is duly reflected in the Management Balance Sheet under the head Loans and Advances Schedule VI. The relevant entry was recorded only in the Management Financial Statements being
Construction WIP A/c (Asset)………….. Dr Rs 3229.26 Lakhs
To Construction WIP A/c (P&L)……… Rs. 3229.26 Lakhs
8. As explained by the Management, that though the financial statements show a loss of Rs.22.30 crores, the same is primarily on account of period costs such as employee costs, Office and site expenses, financial expenses and depreciation together aggregating to Rs. 28.56 crores. Furthermore, the project has in fact ended in a loss to the joint venture.
9. I reiterate that, the audited Financial Statements of the JV have been correctly drawn consistent with accounting policies followed by it and that Management financial statements were prepared, on the representation by the Management, for the limited purpose of consolidation of the joint venture’s interest into the books of Hindustan Construction Company (HCC) in order to align accounting policies in line with method of accounting followed by HCC.
10. I confirm that there is no other difference between the two sets of financial statements
7.1 A comperative balance sheet and profit loss account of both the set of financial statement submitted by the auditor is also reproduced for ready reference :
