Case Law Details
Brief of the Case
ITAT Pune held in the case The ACIT vs. M/s. Ambarwadikar & Co., Engineers & Contractors that It is clear that the bill raised by the assessee has been accepted by the department and for whatever reason some amount was not paid during F.Y. 2001-02 but the fact remains that there is no such dispute as claimed by the assessee. No documentary evidence has been filed by the assessee during assessment proceedings or appeal proceedings or even before us to substantiate the contention that some dispute was going on between the assessee and department. Since the assessee is following mercantile system of accounting and the assessee himself has shown in the belated original return of income the figure of WIP as per the bills raised by it on the Government department and also the assessee has not incurred any further expenditure on such amount received in subsequent year, therefore, the order of the CIT (A) reducing the WIP from Rs.4.94 crores to Rs.3 crores for A.Y. 2001-02 in our opinion cannot be accepted. Merely because assessee has offered the same to tax in A.Y. 2004-05 cannot be a ground to reduce the correct WIP from Rs.4.94 crores to Rs.3 crores. We accordingly set aside the order of the CIT (A) and the grounds raised by the revenue are allowed.
Facts of the Case
The assessee is a partnership firm engaged in the business of Civil Construction. It filed its return of income on 20-02-2002 u/s.139(4) declaring total income of Rs. 94,56,820/- which was duly processed u/s. 143(1), on 15-06-2002 determining the tax payable by the assessee at Rs.22,28,630/-. The assessee filed a revised return of income on 20-01-2003 declaring a loss of Rs.2,63,95,650/- which was erroneously processed u/s.143(1) on the same day determining a refund of Rs.21,77,337/-. No notice u/s.143(2) (ii) of the Act was issued on the basis of the first return filed on 20-02-2002. However, on the basis of the revised return filed on 20-01-2003 a notice u/s 143(2)(ii) was issued on 27-05-2003 which was served on the assessee on 28-05-2003. The Assessing Officer later moved a petition u/s.263 to the CIT who vide order passed u/s.263 of the Act dated 26-08-2003 held that the second return furnished on 20-01-2003 was not a valid return and cancelled the second intimation dated 20-01-2003.
Subsequently, the assessee moved a petition u/s.264 on 03-09-2003 before the CIT wherein the assessee sought revision of intimation dated 15-06-2002. It was submitted that as per the accounting policy consistently followed by the assessee, the assessee treats the work done as work-in progress and the same is measured and accounted for after reducing the gross profit as per the books on the work done. In the month of March 2001, the assessee had raised a running account bill for a sum of Rs.5,88,69,955/-. As per the practice followed in the past, the assessee reduced certain amount as percentage from this amount on account of gross profit and value of work-in-progress as on 31-03-2001 was arrived at by it at Rs.4.94 crores in respect of the Ghatprabha site.
It was claimed that this running account bill of the assessee raised in March 2001 was not cleared by the Executive Engineer concerned throughout the F.Y. 2001-02. It was further claimed that the Executive Engineer without assigning any reason scaled down the value of said running account bill on 31-05-2002 from Rs.5,88,69,955/- to Rs.3 crores. According to the assessee, since the value of running bill raised in the month of March 2001 has been scaled down to Rs. 3 crores, therefore, the value of the work-in-progress was required to be revised. Accordingly, the assessee filed a revised return. Based on the directions of the CIT, the Assessing Officer proceeded to make fresh assessment in respect of A.Yrs. 2001-02 to 2003-04. The main issue involved was the time and valuation of work-in-progress as on 31-03-2001 at Rs.3 crores or at Rs.4.94 crores.
Contention of the Assessee
The ld counsel of the assessee submitted that he was following a particular method of accounting consistently. He submitted that the assessee in the A.Y. 2004-05 has offered the contract receipts which have been accepted by the AO in the order passed u/s.143(3) and there is no loss to the Revenue. Referring to the decision of the Hon’ble Patna High Court in the case of CIT Vs. Chanchani Brothers (Contractors) Pvt. Ltd. he submitted that Hon’ble High Court has held that in the case of contractor carrying out a Government contract and regularly following mercantile system of accounting, the income accrues only when the bills are admitted by the contractee and not when the bills are raised. He submitted that in the said decision the Hon’ble High Court referred to the decision of the Hon’ble Bombay High Court in the case of Vishnu Agencies Pvt. Ltd. Vs. CIT reported in 48 ITR 444 (Bom.). He submitted that in the said decision, the Hon’ble High Court has held that the income accrued at the time when the bills were accepted and its accrual had no reference to the time when it would be actually received. The mere assertion of a claim on the part of the Government for damages for breach of contract was not sufficient to make the claim enforceable one or to affect the accrual of the income to the assessee.
He submitted that the Hon’ble Patna High Court in the said decision has also referred to the decision of the Hon’ble Bombay High Court in the case of CIT Vs. ACC reported in 48 ITR 1 wherein it has been held that the presentation of the bills by the assessee was only a claim by the assessee and unless the claim is admitted and accepted by the Government department income will not accrue. He accordingly submitted that since the bill raised by the assessee has finally been accepted by the Government department in the A.Y. 2004-05 and the assessee has already offered the same to tax in the A.Y. 2004-05, therefore, there is no loss to the Revenue. According to him since the order of the CIT (A) is in consonance with law, therefore, the same has to be upheld and the grounds raised by the Revenue should be dismissed.
Contention of the Revenue
The ld counsel of the revenue submitted that when the assessee filed the original return, which was a belated one, he cannot file a revised return. He submitted that the assessee in the original return of income has declared the WIP in respect of Ghatprabha Project at Rs.4,94,00,000/-. Further, the assessee follows mercantile system of accounting; therefore, the value of WIP shown originally at Rs.4.94 crores for the Ghatprabha Project has to be treated as correct. Referring to the certificate issued by the Executive Engineer he submitted that there is no such dispute as such and once the assessee has booked the expenditure in the profit and loss account and valued the WIP at a particular figure which was duly certified by the auditors, therefore, the assessee should not be permitted to reduce the same just to suit his requirement. He submitted that the CIT (A) without considering the accounting principles allowed the claim of the assessee by substituting the revised WIP which is not permissible in law.
Held by CIT (A)
CIT (A) held that the belated return filed by the assessee cannot be revised and the return filed originally is the valid return. However, at the same time, the correct value of WIP for Ghatprabha project for A.Y. 2001-02 is Rs.3 crores and not Rs.4.94 crores. Therefore, even if the original return is not a valid return the assessee is liable for tax in A.Y. 2001-02 on the WIP of Rs.3 crores and not Rs.4.94 crores for the Ghatprabha project. Since the assessee has considered the amount of Rs.1.94 crores during A.Y. 2004-05 the same has to be considered only in A.Y. 2004-05 and not in A.Y. 2001-02.
Relying on various decisions, she held that the income has to be taxed in the year in which the assessee gets the right to receive that income or in other words the income will be said to accrue to the assessee when the assessee gets the right to receive that income whether it is paid later or during the same year. Relying on various decisions she noted that in the A.Y. 2001-02 the assessee has right to receive an amount of Rs.3 crores only and in respect of the balance amount of Rs.2.8 crores the claim had not become bills receivable and therefore this amount cannot be treated as WIP unless the work done in respect of this amount has been accepted by the appropriate authority.
So far as the situation in respect of A.Y. 2002-03 and 2003- 04 are concerned, she noted that as per the work done certificate given by the Executive Engineer, the work in respect of bill No.15B, 16A and 16B has been completed to the satisfaction in the year relevant to A.Y. 2004-05. Hence, the income in respect of these bills accrued to the assessee in A.Y. 2004-05 only. Since the income of Rs.4.28 crores has already been offered by the assessee and taxes have been paid by way of TDS, therefore, she held that same cannot be taxed in the year A.Y. 2002-03 and 2003-04. Even otherwise also, she noted that it is the settled principle of law that closing stock has to be valued either at cost or market prices whichever is less. In the instant case the assessee was following this method of accounting regularly. Initially, when assessee submitted the bill he followed the WIP at estimated net realization value. Afterwards, i.e. when the bill was sanctioned at Rs.3 crores the assessee corrected his WIP at the net realizable value which was Rs.3 crores only. The assessee did this in view of method of accounting followed by him consistently, i.e. valuation of stock at cost or market value whichever is less.
Held by ITAT
ITAT held that CIT (A) allowed the claim of the assessee holding that the correct value of WIP is Rs.3 crores and not Rs.4.94 crores for the Ghatprabha Project. According to her the amount of Rs.1.94 crores has to be considered in the A.Y. 2004- 05 in which the assessee was vested with the right to receive the income. Further, It is the case of the Revenue that when the assessee is following mercantile system of accounting, has raised the bill of Rs.5.88 crores out of which an amount of Rs.3 crores was paid by the department in the month of May 2002 and the amount of Rs.2.88 crores in the month of July 2003, therefore, the assessee cannot reduce the WIP of Ghatprabha project on the ground that same was disputed. It is also case of the Revenue that when the assessee has received the difference amount of Rs.2.88 crores in subsequent year without incurring any further expenditure to the so called disputed work, therefore, it is not known as to under what circumstances the dispute arose and without any additional work how remaining amount was released especially when the assessee is following mercantile system of accounting. We find merit in the above argument of the Ld. Departmental Representative.
It is clear that the bill raised by the assessee has been accepted by the department and for whatever reason an amount of Rs.2.88 crores was not paid during F.Y. 2001-02 but the fact remains that there is no such dispute as claimed by the assessee. No documentary evidence/correspondence has been filed by the assessee during assessment proceedings or appeal proceedings or even before us to substantiate the contention that some dispute was going on between the assessee and department. It is also to be noted that the assessee has not incurred any further expenditure in subsequent years for receipt of the above amount. We do not find merit in the submission of the Ld. Counsel for the assessee that since the assessee has offered the income in the A.Y. 2004-05 and since there is no loss to the revenue the order of the CIT (A) should be upheld. Here, in the instant case the question is not relating to loss to the Revenue. It relates to the taxability of the income in a particular year. In the instant case the assessee follows mercantile system of accounting, has debited all the expenditure to the profit and loss account during the impugned assessment year, has valued the WIP at a particular figure, got its accounts audited and filed the return of income belatedly. Having done so the question that arises is whether the assessee be allowed to value the WIP at a reduced figure merely on receipt basis. The answer in our opinion in the facts of the present case is negative, i.e. in favour of the Revenue and against the assessee.
Since the assessee is following mercantile system of accounting and since the assessee himself has shown in the belated original return of income the figure of WIP as per the bills raised by it on the Government department and since the assessee has not incurred any further expenditure on such amount received in subsequent year, therefore, the order of the CIT (A) reducing the WIP from Rs.4.94 crores to Rs.3 crores for A.Y. 2001-02 in our opinion cannot be accepted. Merely because assessee has offered the same to tax in A.Y. 2004-05 cannot be a ground to reduce the correct WIP from Rs.4.94 crores to Rs.3 crores. We accordingly set aside the order of the CIT (A) and the grounds raised by the revenue are allowed.
Accordingly appeal of the revenue allowed.
