2005-VIL-374-ITAT-

Equivalent Citation: TTJ 100, 373, [2006] 5 SOT 616 (MUM.)

Income Tax Appellate Tribunal BOMBAY

I.T.A. NO. 3275 (MUM.) OF 2002

Date: 13.09.2005

TOYO ENGG. INDIA LIMITED.

Vs

JOINT COMMISSIONER OF INCOME-TAX.

BENCH

Member(s)  : DR. O. K. NARAYANAN., SMT. P. MADHAVI DEVI.

JUDGMENT

This is an appeal filed by the assessee for the asst. yr. 1999-2000. The appeal is directed against the order passed by the CIT(A) at Mumbai on 7th March, 2002 and arises out of the assessment completed under s. 143(3) of the IT Act, 1961.

2. The assessee is a company engaged in the business of providing technical services and executing construction of projects mainly in the area of fertilizers, petrochemicals, gas and petroleum, synthetic fibres, pharmaceuticals, cement, captive power generation, etc. The assessee-company filed its return of income on 29th Dec., 1999 declaring a total income of Rs. 12,45,04,801.

3. In the course of assessment proceedings, the AO has sought further details on the method of accounting employed by the assessee in reporting its income/loss. The assessee-company has stated before the assessing authority that it was following project completion method for recognizing income/loss. The assessee-company recognized its income on the basis of the percentage of completion as certified by the competent personnel of the assessee-company, in respect of technical services rendered. Where the contract was for technical services along with cost guarantee and work execution, the profit is accounted in the year of completion of the project. The expenses incurred by the assessee-company for carrying on the work would be carried forward as work-in-progress till the completion of the project, Under both the methods, the assessee company used to make provisions for losses already incurred/recognized in the course of completion of the contract.

4. On the basis of the above method of accounting regularly employed by the assessee-company, the AO examined the TDS credit amount claimed by the assessee in finalizing its liability towards payment of tax, While examining such TDS accounts, the AO noticed that many of the projects like Haldia Petrochemicals, Chambal Fertilizers & Chemicals, MRPL, etc, had completed only in the financial year 1999-2000, accountable for the asst. yr: 2000-01 and not for the impugned asst. Yr: 1999-2000. The AO has listed out 7 such cases involving a TDS amount of Rs. 2,28,37,491. The AO found that the said amount of TDS has been claimed as credit by the assessee-company for the impugned assessment year even though the corresponding contracts were completed only during the previous year relevant to the asst, yr. 2000-01 and income accrued only for the said assessment year.

5. Therefore, the AO sought the explanation of the assessee-company on how credit for the TDS amount of Rs. 2,28,37,491 could be given when the income corresponding to those projects vis-a-vis TDS have not become assessable and income not recognized. The explanation was sought by the AO in the light of the provision contained in s. 199 of the IT Act, 1961. The assessee explained that the assessee-company has been offering its income in a consistent method in terms of the provisions contained in s. 145 of the IT Act, 1961 and, therefore, the credit for the TDS amount from year-to-year need to be given continuously for those assessment years and requested the assessing authority to grant the credit for TDS accordingly. But the AO did not accept the explanation of the assessee on the ground that corresponding income was not assessable during the impugned assessment year. He relied on the provisions of s. 199 where it has been provided that credit for the TDS shall be given in the assessment made under this Act for the assessment year for which such income is assessable. Accordingly, the assessing authority denied the benefit of credit of TDS to the extent of Rs. 2,28,37,491. He further held that the credit for the TDS could be availed by the assessee in those assessment years when the corresponding income would be assessed to tax.

6. In the course of assessment, the AO has also noticed that the assessee-company has debited an amount of Rs. 24,23,000 relating to prior period expenses. The assessee-company explained that prior period expenses are of routine nature in the business carried on by the assessee and the payments were delayed because of procedural delay and due to various administrative reasons. The AO did not accept the above explanation. He held that in the mercantile system of accounting, income as well as expenditure need to be recognised on accrual/due basis and, therefore, the expenses relating to earlier assessment year could not be allowed in the impugned assessment years. Accordingly, the said amount of Rs. 24,23,000 has been added back to the income of the assessee.

7. Both the issues were taken in first appeal before the CIT(A). The CIT(A) confirmed both the issues against the assessee holding that the assessee was not entitled for the credit of TDS to the extent of Rs. 2,28,37,491 for the impugned assessment year as well as the assessee was not entitled for claiming deduction for the prior period expenses amounting to Rs. 24,23,000.

8. It is against the above that the assessee-company has come in second appeal before us. Following are the grounds raised by the assessee in this appeal:

"1. CIT(A) erred in confirming the withdrawal of the credit of TDS (of) Rs. 2,28,37,491.

2. The CIT(A), erred in confirming the disallowance of prior-period expenses of Rs. 24,23,000."

9. Shri Phiroze Andhyarujina, the learned senior counsel appearing for the assessee-company argued the case at length. Regarding the issue of TDS credit, the contentions of the learned senior counsel are as follows:

9.1 The assessee-company is carrying on the business of rendering technical services and project execution services. The assessee-company is maintaining its books of account on accrual system. The profits on contracts entered into by the assessee-company have been recognized on completion or partial completion of the assignment and offered for taxation accordingly. It does not mean that income from a project is earned only at the completion of the project. Income is earned by the assessee-company simultaneously with the progress in the project execution in a contemporaneous manner. That is why the assessee-company is accounting the investments and expenditure in work-in-progress account and being carried forward from assessment year to assessment year till the completion of the project. That is why the assessee-company is crediting the value of work-in-progress in the credit side of its P&L a/c. The work-in-progress reflected in the accounts of the assessee-company is impregnated with the cost and expenditure of the project plus the amount of income earned out of the project till such stage. The income is, therefore, earned from year-to-year even though the income is recognized as profits only on the completion of the project and, thereafter offered for assessment. The AO has made a conceptual error in not appreciating the fine distinction between "income" and "profits". What is offered by the assessee for assessment is 'profits and gains of the business' carried on by it on the basis of the project completion method. But then, ultimate end result of the business is made up of the income accrued to the assessee during the intervening period of the implementation or construction period of the projects.

9.2 Therefore, the learned senior counsel contended that there is no conflict between the claim for credit of TDS made by the assessee-company and the provisions of law contained in s. 199 of the IT Act, 1961. He invited our attention to the provisions of s. 199 where it has been provided that credit for TDS shall be given to the assessee for the amount so deducted on the production of the certificate furnished under s. 203 in the assessment made in the Act in the assessment year in which such income is assessable. The learned counsel submitted that such income is impregnated in the value of the work-in-progress and is always assessable in those assessment years of the intervening period even though the ultimate profit is recognized on completion of the project. Therefore, it is his case that the assessee-company has earned income for the impugned assessment year and that amount of income has already been impregnated in the work-in-progress value reflected in its accounts and, therefore, the claim for credit of TDS was rightfully made by the assessee-company. The learned counsel contended that the assessee has complied with all the conditions laid down in s. 199 of the Act. TDS has been made at the time of payment. Such tax deduction has been paid over to the credit of the Central Government. Those deductions have been treated as tax. Certificates of deductions provided under s. 203 have been produced before the AO. Income accrued during the relevant previous year has been subject-matter of assessment as the income was impregnate in the value of work-in-progress credited in the accounts. Therefore, as the assessee has complied with all the conditions laid down for claiming the TDS credit as provided in s. 199 of the Act, the action of the lower authorities are against law.

9.3 The learned senior counsel further contended that tax has been deducted at source from every payments received by the assessee-company irrespective of the consideration whether such receipts amounted to income or not. Even in the case of advances given to the assessee-company, tax has been deducted at source. The income for the purpose of assessment would be computed only at the time of completion of the project and, therefore, the TDS does not have any exclusive nexus with the element of income as such. In order to explain this proposition, the learned counsel relied on the decision of the Supreme Court in the case of Transmission Corporation of AP Ltd. & Anr. vs. CIT (1999) 155 CTR (SC) 489 : (1999) 239 ITR 587 (SC) at p. 593. The learned senior counsel also relied on the decision of the Supreme Court in the case of Bhagwan Dass Jain vs. Union of India & Ors. (1981) 21 CTR (SC) 339 : (1981) 128 ITR 315 (SC) where the Court has held that in its ordinary economic sense, the expression "income" includes not merely what is received or what comes in by exploiting the use of a property but also what one saves using it oneself. The Court held that which can be converted into income can be reasonably regarded as giving rise to income. Therefore, the learned counsel submitted that the work-in-progress of the assessee-company consisted an element of income which rotates from assessment year to assessment year. He also relied on the decision of the Supreme Court in the case of CIT vs. G.R. Karthikeyan (1993) 112 CTR (SC) 302 : (1993) 201 ITR 866 (SC) at p. 874 where the Court has held that the word "income" is of widest amplitude and it must be given its natural and grammatical meaning.

10. Shri G.R. Reddy, the learned Departmental Representative appearing for the Revenue contended that "income" for the purpose of assessment should be considered in the light of the law contained in s. 2(24) and income means 'assessable income' and nothing else. In the present case, the assessee-company is following project completion method and the income is recognized only on the completion of the project and, therefore, the income arising out of the project would be assessable only in the year of completion and the demand for credit of the TDS made by the assessee-company was premature and, therefore, the AO was justified in not giving such credit in the light of the provisions of law contained in s. 199 of the IT Act, 1961.

11. We considered the matter in detail. As held by the Hon'ble Supreme Court in the case of Bhagwan Dass Jain vs. Union of India & Ors. the expression "income" includes not merely what is received or what comes in by exploiting use of a property but also what one saves by using it by oneself and also which can be converted into income. Likewise, the nexus between the deduction of tax at source and the assessable income is not apparent in every assessment year as held by the Supreme Court in the case of Transmission Corporation of AP Ltd. & Anr. which is evident from the fact that every amount from which TDS is made does not constitute income. As held by the Supreme Court in the case of CIT vs. C.R. Karthikeyan, the word income is of the widest amplitude and it must be given its natural and grammatical meaning. When the facts of the present case are considered in the light of the above principles laid down in the judicial pronouncements, we find that the arguments of the learned senior counsel are substantive and convincing. First of all it is to be seen that tax is deducted at source from every piecemeal payment even though every such piecemeal payment did not reflect 'income' as such. Earning of income is a continuous, indivisible process embedded in the business dynamics. The income is recognized for a particular period, statutorily for one year on the basis of the method employed by an assessee. The income or loss of an assessee is the cumulative result of the working carried on by the assessee and reasonably measured for that particular assessment year. Therefore, there is no immediate nexus between the income as such and the TDS made out of a particular payment. Tax deduction at source is basically a machinery provision for collecting tax on the potential income of the assessee. There is no such conclusive presumption that tax is invariably deducted always out of income; that is why the expression "tax deducted at source" has been used in the Act, rather than "tax deducted from income".

12. The pith and substance of the above discussion is that it may not be possible all the time to correlate a specific amount of TDS with a specific amount of income earned by an assessee in a particular assessment year. If at all such a nexus is required, such nexus is rather notional or conceptual rather than specific or immediate. When the law has used the words in s. 199 of the IT Act that "credit shall be given to the TDS on production of the certificate for the assessment year for which such income is assessable; it implied that the nexus between TDS and the corresponding income element would remain rather notional/conceptual.

13. When the present issue is viewed in the right perspective, we are bound to accept the contention of the learned senior counsel that the work-in-progress credited by the assessee-company every year in its books of account is impregnated with the element of income which would finally culminate into the summation of the profits on the completion of the projects which would be offered for assessment. Therefore, one is bound to take note of the expression "income" and the expression "profits" in its contextual perspective as explained by the learned senior counsel. The execution of a project is a continuing process. The income/loss arising therefrom also generates contemporaneously/ simultaneously; even though such income/loss is finally measured as profit/loss only at the end of the project for the reason that the assessee is following project completion method for the recognition of profit/loss. In this context, it is always useful to remember that Courts have held that 'income' also includes loss. The set off of TDS would arise only when the income results in profits. Therefore, it is all the more clear that the income whether profit or loss impregnated in the value of working in progress is finally summed up to be the profit/loss of the contract which is answerable to the assessment to be made on the assessee. Therefore, we have to accept the proposition that in every assessment year, even though the final result is ascertained only on the completion of the project, an element of income is latent in the yearly working result. The distinction between the above conceptual profit and the ultimate de facto assessment of profit is because of the fine distinction existing between "income" and "profits".

14. Therefore, in the facts and circumstances of the case, we are of the considered opinion that the provisions of law contained in s. 199 do not stand in the way of the claim made by the assessee-company for credits in respect of TDS made during the relevant previous year. As such, it is our finding that the AO should give credit for the TDS amounting to Rs. 2,28,37,491. This issue is, therefore, decided in favour of the assessee.

15. Next we will consider the disallowance of Rs. 24,23,000 made by the assessing authority for the reason of prior-period expenses. The first item included in the above amount is various routine office expenses incurred by the assessee and relating to head office and various sites located at different parts of India, which totalled to Rs. 12,37,485.91. These expenses include travel bills, hotel bills, motor hire and repairs, payments towards maintenance contract, arrears of telephone bills, electricity bills, water charges, property dues, arrears of lease rental, insurance premium, etc. etc. Many of the expenditure classified under the above heads were, in fact, incurred by various site offices of the assessee-company situated in different parts of India. Therefore, the final communication of incurring of those expenses are transmitted to the head office quite belatedly after the assessee consolidated those expenditure at head office level. This is not a phenomena of the impugned assessment year alone. This is a consistent practice followed by the assessee-company. Even though a previous year is directly cut off on 31st March of every year, the actual carrying on of business which is a live process, cannot be cut off as exactly especially in an organization like that of the assessee where activities are carried out through various site offices. Therefore, it is quite natural that there would be, an amount of overflow of information after the close of the accounting year. Therefore, to certain extent, the claim of the assessee that the details of such expenditure were received only after the close of the accounting year, could be accepted. It is a continuous process to incur expenditure and to account (for) in the books of account. Therefore, even though they are treated technically, as prior period expenses, it relates to a continuous flow of expenditure. Therefore, there is no justification in disallowing the above expenditure, otherwise normally eligible for deduction. Therefore, the assessing authority is directed to examine the details of expenses amounting to Rs. 12,37,485.91 and allow the same wherever applicable on satisfaction of the genuineness of the expenditure.

16. The second item of expenditure included in the disallowance is the final settlement of payments made to staff amounting to Rs. 57,234. As the payments made to staff could be finalized only on settlement, the claim of the assessee is in order and the same has to be allowed as a deduction.

17. Another amount included in the above disallowance is Rs. 5,94,337 relating to sub- contractors claims. The amount was paid during the relevant previous year as the claim was finalized and crystallized during the relevant previous year. As the final liability itself was ascertained in the relevant previous year, the corresponding payment should also be allowed as an expenditure.

18. Another amount included in the disallowance is Rs.2,75,296 relatihg to TDS payments/penalties relating to salaries and perks. The learned 'counsel appearing for the assessee-company himself fairly can ceded that the assessee-company should not have claimed deduction of the said amount of Rs. 2,75,295. The said disallowance is confirmed.

19. Another amount included in the said disallowance is Rs. 2,61,693.44 which related to interest payment made overseas. The bank advices relating to such debiting of interest were received belatedly and only because of that delay the assessee could not provide for such expenditure in the concerned assessment year. Therefore, it is to be seen that such expenses really crystallized in the hands of the assessee during the relevant previous year. Therefore, the claim far deduction is in order and the same has to be allowed.

20. As seen from the above discussion, the disallowance of Rs. 24,23,000 has been considered by us and the claim has been partly allowed.

21. In result, this appeal filed by the assessee is partly allowed.

 

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