ACIT, Hyderabad V. M/s Sai Sudheer Constructions, Anantapur

ITA 1760/HYD/2008

• Counselvise Citation: [2010] 119 COUNSELVISE.COM (IT) 5825 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 2 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-03-2010
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 01-02-2010
• Assessment Year: 2005-2006
• Appeal Filed On: 19-12-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: VASUNDHARA SINHA
• Assessee Lawyers: S RAMA RAO
• Keywords: Revenue expenditure

Judgement Text

IN THE INCOME-TAX APPELLATE TRIBUNAL HYDERABAD BENCH 'B' BEFORE SHRI N.R.S.GANESAN AND SHRI AKBER BASHA I.T.A.NO.1760/HYD/2008 ASSESSMENT YEAR 2005-06 ASST. CIT, CIRCLE 1, ANANATAPUR. .. APPELLANT VERSUS M/S SAI SUDHEER CONSTRUCTIONS (NOW KNOWN AS SAI SUD HEER INFRASTRUCTURES LTD.), ANANTAPUR. ..RESPONDENT (PAN AALFS7566A) APPELLANT BY : SMT. VASUNDHARA SINHA RESPONDENT BY : SHRI S.RAMA RAO O R D E R PER N.R.S.GANESAN, JUDICIAL MEMBER: THIS APPEAL OF THE REVENUE IS DIRECTED AGAINST THE ORDER OF THE CIT (APPEALS), TIRUPATI, DATED 15-10-2008, FOR THE ASST . YEAR 2005-06. THE ONLY ISSUE THAT ARISES FOR CONSIDERATION IS DELETION OF ADDITION MADE BY THE ASSESSING OFFICER TO THE EXTENT OF RS.11,46,65,229. 2. SMT. VASUNDHARA SINHA, LEARNED DEPARTMENTAL REPR ESENTATIVE, SUBMITTED THAT THE ASSESSEE IS A CONTRACTOR. FOR THE ASST. YE AR UNDER CONSIDERATION, THE ASSESSEE CLAIMED EXPENSES UNDER VARIOUS ACCOUNTS IN CLUDING PURCHASE OF MATERIAL TO THE EXTENT OF RS.7,59,73,092 ON 31-3-20 05. THE AO DISALLOWED THE CLAIM OF THE ASSESSEE IN RESPECT OF PURCHASE OF MAT ERIAL TO THE EXTENT OF RS.7,59,73,092 ON THE GROUND THAT THE ASSESSEE PROD UCED THE BILL FROM THE PROSPECTIVE SELLER RAISED ON THE LAST DAY OF THE RE LEVANT FINANCIAL YEAR. ACCORDING TO THE LEARNED DEPARTMENTAL REPRESENTATIVE, SINCE T HE BILL WAS RAISED FOR PURCHASE OF MATERIAL ON THE LAST DAY OF THE FINANCI AL YEAR I.E. 31-3-2005, THE 2 ASSESSEE COULD NOT HAVE UTILIZED THAT MATERIAL IN E XECUTION OF THE CONTRACT. SINCE THE BILL ITSELF WAS OBTAINED ON 31-3-2005, AC CORDING TO THE LEARNED DEPARTMENTAL REPRESENTATIVE, THE GOODS HAVE BEEN RE CEIVED BY THE ASSESSEE IN THE SUBSEQUENT FINANCIAL YEAR. THEREFORE, THE EXECU TION OF THE CONTRACT BY UTILIZING THE SAID MATERIAL STARTED IN THE NEXT FIN ANCIAL YEAR. ACCORDING TO THE LEARNED DEPARTMENTAL REPRESENTATIVE, THE ASSESSEE A DMITTEDLY FOLLOWED MERCANTILE SYSTEM OF ACCOUNTING. THEREFORE, THE GOO DS RECEIVED AFTER THE END OF THE FINANCIAL YEAR CANNOT BE CLAIMED AS EXPENDITURE . HOWEVER, ON APPEAL BY THE ASSESSEE, THE CIT (A) FOUND THAT THE ASSESSEE WAS M AINTAINED ACCOUNTS IN ACCORDANCE WITH ACCOUNTING STANDARD AS-7. ACCORDING TO THE LEARNED DEPARTMENTAL REPRESENTATIVE, AS-7 IS APPLICABLE ONL Y TO CONSTRUCTION CONTRACTS AND NOT TO THE TYPE OF CONTRACTS EXECUTED BY THE AS SESSEE. THE LEARNED DEPARTMENTAL REPRESENTATIVE FURTHER SUBMITTED THAT THE CIT (A) HAS FOLLOWED THE ACCOUNTING PRINCIPLES IN AS-9 OVERLOOKING THE DEFIN ITION OF 'REVENUE' AS DEFINED IN AS-9 ITSELF. ACCORDING TO THE LEARNED DEPARTMENT AL REPRESENTATIVE, THE CIT (A) HAS OVERLOOKED THE DEFINITION GIVEN IN AS-9 AND THE EXPLANATION OF THE TERM 'COMMON ELEMENT'. 3. THE LEARNED DEPARTMENTAL REPRESENTATIVE FURTHER POINTED OUT THAT SINCE THE MATERIAL SAID TO BE PURCHASED ON 31-3-2005 HAD NOT REACHED THE ASSESSEE BEFORE 31-3-2005, THE CLAIM OF EXPENDITURE FOR PURC HASE OF THAT MATERIAL CANNOT BE ALLOWED WHILE COMPUTING THE INCOME FOR THE ASST. YEAR UNDER CONSIDERATION. REFERRING TO THE ASSESSMENT ORDER, THE LEARNED DEPA RTMENTAL REPRESENTATIVE POINTED OUT THAT SINCE THE ASSESSEE FAILED TO PROVE THAT THE EXPENDITURE WAS INCURRED DURING THE FINANCIAL YEAR UNDER CONSIDERAT ION, THE CLAIM OF EXPENDITURE 3 CANNOT BE ALLOWED. THE LEARNED DEPARTMENTAL REPRESE NTATIVE FURTHER SUBMITTED THAT SHE IS PLACING HER RELIANCE ON THE OBSERVATION S MADE BY THE AO AND ALSO THE GROUNDS OF APPEAL RAISED BY THE DEPARTMENT BEFO RE THIS TRIBUNAL. 4. ON THE CONTRARY, SHRI S.RAMA RAO, LEARNED COUNSE L FOR THE ASSESSEE, SUBMITTED THAT THE ASSESSEE MAINLY EXECUTED WORK ON SUB-CONTRACT BASIS. ACCORDING TO THE LEARNED COUNSEL, THE MAIN CONTRACT OR IS IVRC. IVRCL OBTAINED WORK FROM INDIAN NAVY AND GAVE THE SAME TO THE ASSE SSEE FOR EXECUTION ON SUB-CONTRACT BASIS. THE LEARNED COUNSEL FURTHER POI NTED OUT THAT THE ASSESSEE IS CONSISTENTLY FOLLOWING PERCENTAGE OF COMPLETION MET HOD OF ACCOUNTING FOR ITS CONTRACTS. THE ASSESSEE IS ALSO CONSISTENTLY FOLLOW ING ACCRUAL METHOD OF ACCOUNTING. THE LEARNED COUNSEL FURTHER POINTED OUT THAT THE ASSESSEE HAS BEEN RECOGNISING REVENUE IN THE ACCOUNTING PERIOD IN WHI CH THE WORK IS PERFORMED AND THE CONTRACT COSTS ARE RECOGNISED A EXPENDITURE IN THE ACCOUNTING PERIOD IN WHICH THE WORK IS PERFORMED. 5. THE LEARNED COUNSEL FOR THE ASSESSEE FURTHER SUB MITTED THAT IVRCL ALSO OBTAINED CONTRACTS FROM KARNATAKA URBAN WATER SUPPL Y AND DRAINAGE BOARD (IN SHORT KUWS&DB) AND THE SAID WORK WAS ALSO GIVEN TO THE ASSESSEE FOR EXECUTION ON SUB-CONTRACT BASIS. ACCORDING TO THE L EARNED COUNSEL, THE ASSESSEE PLACED ORDERS FOR SUPPLY OF MS PIPES FROM WELSPUN G UJARAT STAHL ROHREN LTD., MUMBAI, BY A LETTER DATED 11-2-2005. THE SAID COMPA NY RAISED AN INVOICE ON 31-3-2005 FOR A SUM OF RS.9,75,00,000. AS PER THE I NVOICE, THE GOODS WERE TO BE SENT TO IVRCL, TUMMARGUDDI PUMP HOUSE, GOKAK ROA D, BELGAUM. THE SAID GOODS WERE DESPATCHED AFTER INSPECTION. THE ASSESSE E ALSO RAISED A BILL FOR AN 4 AMOUNT OF RS.7,59,06,221 AGAINST IVRCL ON 31-3-2005 . IN TURN, IVRCL RAISED A BILL AGAINST THE EXECUTIVE ENGINEER, KUWS&DB FOR A SUM OF RS.8,09,58,000. 6. THE LEARNED COUNSEL FURTHER SUBMITTED THAT THE A SSESSEE DEBITED THE AMOUNT OF RS.9,75,00,000 BEING THE COST OF PIPES AN D CREDITED TO THE PROFIT AND LOSS ACCOUNT THE BILLS RAISED AGAINST IVRCL TO THE EXTENT OF RS.7,59,06,221. REFERRING TO PAGE 33 OF THE PAPER BOOK, THE LEARNED COUNSEL SUBMITTED THAT THIS IS THE COPY OF THE INVITATION FOR BID GIVEN BY KUWS &DB INVITING COMPETITIVE BIDDING. REFERRING TO PAGE 38 OF THE PAPER BOOK, TH E LEARNED COUNSEL POINTED OUT THAT 55% OF THE QUOTED RATES WAS TO BE PAID AGA INST SUPPLY OF BARE PIPES AND DUE THIRD PARTY INSPECTION. SUBSEQUENTLY, THE A BOVE SAID CONDITION WAS MODIFIED AND INSTEAD OF 55% OF QUOTES RATES 60% OF QUOTED RATES AGAINST SUPPLY OF BARE PIPES AND DUE THIRD PARTY INSPECTION WAS TO BE MADE. REFERRING TO PAGE 47 OF THE PAPER BOOK, THE LEARNED COUNSEL S UBMITTED THAT THIS IS THE COPY OF THE BILL RAISED BY THE ASSESSEE AGAINST IVR CL FOR RS.7,59,06,221. THE LEARNED COUNSEL FURTHER POINTED OUT THAT THE MATERI AL WAS INSPECTED ON 22-3- 2005. IF THE MATERIAL WAS NOT USED BY THE ASSESSEE IN EXECUTING THE CONTRACT, THE ASSESSEE WOULD NOT HAVE RAISED THE BILL AGAINST THE PRINCIPAL CONTRACTOR. THEREFORE, ACCORDING TO THE LEARNED COUNSEL, THE GO ODS WERE DELIVERED BEFORE THE END OF THE FINANCIAL YEAR AND THE CIT (A), AFTE R CONSIDERING THE ACCOUNTING STANDARD ADOPTED BY THE ASSESSEE, ALLOWED THE EXPEN DITURE INCURRED IN PURCHASING THE GOODS. 7. THE LEARNED COUNSEL FOR THE ASSESSEE FURTHER SUB MITTED THAT THE ASSESSEE COMPANY IS FOLLOWING PERCENTAGE COMPLETION METHOD O F ACCOUNTING BECAUSE THE CONTRACT GENERALLY SPILLS OVER TO A NUMBER OF YEARS . THEREFORE, THE PROFIT OR LOSS 5 IN EACH WILL NOT BE EQUAL WHILE EXECUTING THE CONTR ACT WORK. THE LEARNED COUNSEL FURTHER SUBMITTED THAT THE ADDITION TO WORK-IN-PROG RESS WILL DISTURB THE REGULAR METHOD OF ACCOUNTING EMPLOYED BY THE ASSESSEE AND A CCEPTED BY THE DEPARTMENT IN EARLIER ASSESSMENT YEARS. DEBITING TH E EXPENDITURE IN RESPECT OF PURCHASED MATERIAL AND CLAIMING THE SAME AS REVENUE EXPENDITURE ARE IN TERMS OF MATCHING CONCEPT OF ACCOUNTING SINCE THE ASSESSE E RECOGNISED THE INCOME ON ACCOUNT OF SUPPLY OF MATERIAL AND SIMULTANEOUSLY RE COGNISED THE PURCHASE AND TRANSPORTATION EXPENSES OF THE SAME AS REVENUE EXPE NDITURE. THEREFORE, ACCORDING TO THE LEARNED COUNSEL, THE CIT (A) HAS R IGHTLY ALLOWED THE EXPENDITURE CLAIMED BY THE ASSESSEE. 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITH ER SIDE AND ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD. THE ONLY ISSUE TH AT ARISES FOR CONSIDERATION IS DISALLOWANCE MADE BY THE AO TO THE EXTENT OF RS.11, 46,65,229. DURING THE APPEAL PROCEEDINGS BEFORE THE CIT (A), THE CIT (A) CALLED FOR A REMAND REPORT FROM THE AO ON THE BASIS OF THE WRITTEN SUBMISSIONS FILED BY THE ASSESSEE. THE AO, AFTER EXAMINING THE WRITTEN SUBMISSIONS OF THE ASSESSEE, FOUND THAT THE ASSESSEE COULD NOT FURNISH ANY DETAILS REGARDING TH E DELIVERY OF THE MATERIAL SAID TO BE PURCHASED ON THE BASIS OF THE INVOICE DA TED 31-3-2005. THE CONTENTION OF THE ASSESSEE IS THAT THEY ARE ADOPTIN G A CONSISTENT METHOD OF ACCOUNTING AND SINCE THE CORRESPONDING REVENUE WAS INCLUDED IN THE GROSS RECEIPTS ADMITTED AS INCOME, THE EXPENDITURE FOR PU RCHASE OF MATERIAL ON THE BASIS OF THE INVOICE HAS TO BE ALLOWED. THE AO ALSO FOUND THAT SINCE THE MATERIAL NEVER REACHED BEFORE 31-3-2005, THE QUESTION OF THI RD PARTY INSPECTION DOES NOT ARISE. THE AO ALSO FOUND THAT THE AMOUNT SAID TO HA VE BEEN RECEIVED BY THE 6 ASSESSEE TO THE EXTENT OF 60% OF THE MATERIAL PURCH ASED ON THE BASIS OF THE AGREEMENT, WAS NOT VERIFIABLE. THE AO FURTHER FOUND THAT NO PAYMENT COULD HAVE BEEN MADE WITHOUT EXECUTING THE WORK IN THE LI GHT OF THE CONDITIONS LAID DOWN IN THE AGREEMENT. THE ASSESSEE CLAIMS THAT THI RD PARTY INSPECTION WAS MADE ON 22-3-2005 AND THE ASSESSEE COULD NOT HAVE R AISED THE BILL AGAINST THE PRINCIPAL CONTRACTOR IF THE MATERIALS WERE NOT USED . THE QUESTION THAT ARISES FOR CONSIDERATION IS, WHEN THE ASSESSEE CLAIMED THE COS T OF PURCHASE OF MATERIAL ON THE BASIS OF THE INVOICE DATED 31-3-2005, CAN IT BE ALLOWED AS EXPENDITURE WHILE COMPUTING THE INCOME FOR THE ASST. YEAR UNDER CONSI DERATION? 9. THE AO DISALLOWED THE CLAIM OF THE ASSESSEE ON T HE GROUND THAT THE INVOICE ITSELF WAS RAISED ON THE LAST DAY OF THE AC COUNTING YEAR AND THE GOODS WERE SUPPLIED BY THE SUPPLIER ONLY IN THE SUBSEQUEN T FINANCIAL YEAR AND, THEREFORE, IT CANNOT BE CLAIMED AS EXPENDITURE. IT APPEARS FROM THE ORDER OF THE CIT (A) THAT THE ASSESSEE EXPLAINED THAT THE GOODS WERE INSPECTED AT THE PREMISES OF THE SUPPLIER ON 22-3-2005 AND THE SAME WERE DELIVERED AT THE PROJECT SITE IN THE FIRST WEEK OF APRIL 2005. THE C IT (A) ALSO FOUND THAT THE TRANSPORT FOR SUPPLY OF THE GOODS WAS ORGANISED BY THE SUPPLIER SINCE THE INVOICE AMOUNT WAS INCLUSIVE OF FREIGHT CHARGES. TH E ASSESSEE CONTENDED BEFORE THE CIT (A) THAT UTILISATION OF THE MATERIAL IN SUB -CONTRACT WORK WAS NOT A RELEVANT FACTOR SINCE A BILL WAS RAISED ON THE MAIN CONTRACTOR ON 31-3-2005 ITSELF. SUBSEQUENTLY, THE MATERIALS WERE UTILISED I N THE SUB-CONTRACT. 10. ADMITTEDLY, THE ASSESSEE IS FOLLOWING MERCANTIL E SYSTEM OF ACCOUNTING. THEREFORE, ANY PAYMENT DUE DURING THE RELEVANT FINA NCIAL YEAR HAS TO BE ALLOWED WHILE COMPUTING THE TOTAL INCOME. IN THIS CASE, THE GOODS WERE SUPPLIED IN THE 7 FIRST WEEK OF APRIL 2005, I.E. SUBSEQUENT TO THE FI NANCIAL YEAR RELEVANT FOR THE ASST. YEAR UNDER CONSIDERATION. THE QUESTION THAT A CTUALLY ARISES FOR CONSIDERATION IS WHEN THE LIABILITY TO PAY THE AMOU NT AROSE FOR PURCHASE OF THE GOODS. IF THE LIABILITY AROSE ON OR BEFORE 31-3-200 5, THE EXPENDITURE HAS TO BE ALLOWED FOR THE ASST. YEAR UNDER CONSIDERATION. IF FOR ANY REASON THE LIABILITY FOR PAYMENT AROSE BEYOND 31-3-2005, THE SAME CANNOT BE ALLOWED FOR THE ASST. YEAR UNDER CONSIDERATION. 11. WE HAVE CAREFULLY GONE THROUGH THE ORDER OF THE CIT (A). THE CIT (A), AFTER EXTRACTING THE REMAND REPORT FILED BY THE AO, FOUND THAT THE ASSESSEE HAD PRODUCED SUFFICIENT MATERIAL FOR THE PURCHASE AND, THEREFORE, THERE WAS NO REASON TO DISPUTE THE GENUINENESS OF THE PURCHASE. THE CIT (A) FURTHER FOUND THAT THE AO HAD NOT CONTROVERTED THE SUBMISSION OF THE ASSESSEE IN THE WRITTEN SUBMISSIONS. THEREFORE, HE ALLOWED THE CLAIM OF THE ASSESSEE TO THE EXTENT OF RS.11.57 CRORES. BOTH THE AO AND THE CIT (A) HAVE N OT DISCUSSED ABOUT THE DATE ON WHICH THE LIABILITY TO PAY THE AMOUNT AROSE TO THE ASSESSEE. IN OTHER WORDS, BOTH THE AUTHORITIES BELOW HAVE NOT FOUND OU T THE DATE ON WHICH THE AMOUNT WAS ACTUALLY DUE. SINCE THE ASSESSEE WAS ADM ITTEDLY FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING, THE EXPENDITURE WH ICH ACCRUED/AROSE TO THE ASSESSEE ON THE LAST DATE OF THE FINANCIAL YEAR, I. E. 31-3-2005, HAS TO BE ALLOWED. THEREFORE, THE LOWER AUTHORITIES ARE UNDER AN OBLIGATION TO FIND OUT WHETHER THE AMOUNT OF RS.11.57 CRORES AROSE OR ACCR UED TO THE ASSESSEE IN RESPECT OF THE PURCHASE OF MS PIPES AS CLAIMED. WHI LE CONSIDERING THE ACTUAL DATE ON WHICH THE LIABILITY AROSE/ACCRUED TO THE AS SESSEE, WE HAVE TO TAKE INTO CONSIDERATION ALL THE RELEVANT FACTORS SUCH AS THE DATE OF PLACING THE ORDER FOR 8 SUPPLY OF MATERIAL, THE DATE OF INSPECTION, THE DAT E OF RAISING OF INVOICE AND THE DATE OF ACTUAL DELIVERY. THOUGH THE ASSESSEE CLAIME D BEFORE THE CIT (A) THAT THE GOODS WERE DELIVERED IN THE FIRST WEEK OF APRIL 200 5, NO MATERIAL WAS PRODUCED BEFORE THE AO OR THE CIT (A) TO SUPPORT THE CONTENT ION. AS SEEN FROM THE ORDER OF THE CIT (A), THE INVOICE AMOUNT WAS INCLUSIVE OF FREIGHT CHARGES. THEREFORE, THE SUPPLY OF GOODS AT THE PROJECT SITE APPEARS TO BE THE RESPONSIBILITY OF THE SUPPLIER. HOWEVER, COPY OF THE INVOICE HAS NOT BEEN FILED BEFORE THIS TRIBUNAL. THEREFORE, WE ARE UNABLE TO SAY WHETHER THE RESPONS IBILITY OF SUPPLY OF MATERIAL IS OF THE SUPPLIER OR IT IS A RESPONSIBILITY OF THE ASSESSEE TO TAKE DELIVERY OF THE GOODS AT THE PREMISES OF THE SUPPLIER. HOWEVER, THE FACT NEEDS TO BE EXAMINED ON THE BASIS OF THE PURCHASE ORDER PLACED BY THE AS SESSEE AND THE INVOICE RAISED BY THE SUPPLIER. IN THE ABSENCE OF SUFFICIEN T MATERIAL, THIS TRIBUNAL IS NOT IN A POSITION TO FIND OUT THE DATE ON WHICH THE LIA BILITY ACTUALLY ACCRUED/AROSE TO THE ASSESSEE FOR PAYMENT IN RESPECT OF THE PURCHASE . THEREFORE, IN OUR OPINION, THE MATTER NEEDS TO BE RE-CONSIDERED BY THE AO AND IT HAS TO BE FOUND OUT WHEN THE ACTUAL LIABILITY TO PAY THE AMOUNT ACCRUED /AROSE TO THE ASSESSEE. THE AO SHALL BRING ON RECORD THE ACTUAL DATE ON WHICH T HE ASSESSEE PLACED ORDER FOR THE SUPPLY OF MATERIAL ALONG WITH THE TERMS AND CON DITIONS, THE ACTUAL DATE ON WHICH THE GOODS WERE SUPPLIED AND THE DATE ON WHICH THE AMOUNT ACTUALLY BECAME DUE FOR PAYMENT AND THEREAFTER DECIDE THE IS SUE AFRESH IN ACCORDANCE WITH LAW AFTER GIVING A REASONABLE OPPORTUNITY TO T HE ASSESSEE. WE MAKE IT CLEAR THAT THE AO SHALL EXAMINE THE ISSUE INDEPENDENTLY W ITHOUT BEING INFLUENCED BY ANY OF THE OBSERVATIONS OF THE CIT (A) IN THE IMPUG NED ORDER AND THIS TRIBUNAL. 9 WITH THE ABOVE OBSERVATIONS, WE SET ASIDE THE ORDER S OF THE LOWER AUTHORITIES AND REMIT THE MATTER BACK TO THE FILE OF THE ASSESS ING OFFICER. 12. IN THE RESULT, THE APPEAL OF THE REVENUE IS ALL OWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE COURT ON 3.3.2010 SD/- SD/- (AKBER BASHA) (N.R.S.GANESAN) ACCOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, 3.3.2010. RRRAO. COPY OF THE ORDER FORWARDED TO:- 1. SAI SUDHEER INFRASTRUCTURES LTD., 27, VIDYUT NAGAR, ANANTAPUR 515 001, ANANTAPUR DIST. 2. ACIT, CIRCLE 1, ANANTAPUR. 3. CIT, TIRUPATI. 4. CIT (A), TIRUPATI. 5. DR, ITAT, HYDERABAD.