Income Tax Appellate Tribunal - Kolkata
Usha Ranjan Sarkar vs Assistant Commissioner Of Income Tax on 19 March, 2007
Equivalent citations: (2007)109TTJ(KOL)673
ORDER
M.V. Nayar, A.M.
1. This is an appeal filed by the assessee against the order dt. 19th July, 2006 of the CIT(A)-XVII, Kolkata, for asst. yr. 2003-04. In this appeal by the assessee, the following grounds have been raised:
1. That the learned CIT(A) misunderstood the clarification and submission of the appellant and erred in confirming the addition of Rs. 84,10,927 at Amta Work, Rs. 46,90,650 at Alipurduar Work which may kindly be deleted.
2. The accounts of the assessee are audited and principles of accountancy have been followed correctly and the learned CIT(A) erred in understanding the clarification.
3. In respect of addition of work-in-progress amounting to Rs. 57,28,926, it is stated that the process of measuring and calculation is wrong and the learned CIT(A) erred in properly appreciating the fact and confirming the addition; the same may kindly be deleted.
2. The first two grounds are against sustenance of additions of Rs. 84,10,927 in respect of Government sub-contract works for Amta-Jhikara Road and Rs. 46,90,650 for Alipurduar Siltorsa Bridge by the CIT(A). The facts, in brief, relating to these additions are that the assessee carries on contract business under the name and style of M/s Neo Build Corporation. Vide agreement dt. 1st June, 2001 by and between the assessee and M/s Mackintosh Burn Ltd. (in short MBL), M/s MBL awarded sub-contract Government work of construction of RCC double lane road bridge along Amta-Jhikira Road, Howrah. As per the agreement, rates for the entire work shall be at par as per the specified P.W.--(Roads) Schedule effective from 15th Dec., 1999. The agreement also stipulates payment against assessee's. RA bills and final bill to be settled and made clear to the assessee on back-to-back with the corresponding payment to MBL by its client, i.e. Government of West Bengal. With regard to Alipurduar contract, vide agreement dt. 8th March, 2002, the assessee was awarded with the said work by MBL @ 7.50 per cent below the priced schedule of the Department. Regarding payment, the agreement says payment against assessee's RA bills and final bill duly certified and recommended by MBL's site-incharge and the payment will be settled and made clear to the assessee on back-to-back with the corresponding payment to MBL by its client, i.e. Government of West Bengal.
3. Insofar as first addition of Rs. 84,10,927 is concerned, the same represents difference between the full value of 6th RA bill amounting to Rs. 1,53,77,927 and the ad hoc receipt by the assessee of Rs. 69,67,000 against the same bill. The AO found that Amta-Jhikira work was allotted in earlier year. First RA bill for the same was raised on 8th Oct., 2001. The assessee has recognized revenue of Rs. 2,94,29,944 in respect of the said work in financial year 2001-02 by raising 1st to 4th bills. During the previous year relevant to assessment year under appeal, the assessee raised 5th RA bill for Rs. 1,34,94,130 on 2nd Aug., 2002 and 6th RA bill for Rs. 1,53,77,927 on 27th March, 2003. Full amount of 5th RA bill has been considered as turnover for the year but against 6th RA bill, only the ad hoc receipt amounting to Rs. 69,67,000 has been treated as turnover for the year under appeal. The assessee was asked to explain the reason for not recognizing the full amount of the value of 6th RA bill regarding Amta project as turnover for the year. In response, the explanation was as under:
In the 6th RA bill, the accounts wing of the Lower Damodhar Division (I & W Dte) put a remark that they had not checked the bill and the quantity of the bill might change. Accordingly, the executive engineer released ad hoc payment around 58 per cent of the amount of the RA bill. As per "back-to-back" agreement between Neo Built Corporation and Mackintosh Burn Ltd., Mackintosh Burn Ltd. released 58 per cent of our claim after deducting the cost of supplying of Departmental materials, IT, ST, as per terms and issued a certificate to us. On that basis we had taken those figures in our account. That bill finally passed by the Department on 9th Dec., 2003 after the date of completion our account and audit i.e. 30th Sept., 2003. So, the question of including this bill for that financial year 2002-03 does not arise.
The said explanation of the assessee did not find favour with the AO. The AO obtained copies of bills from MBL and on consideration thereof, he alleged that the assessee was not disclosing the entire bill amount even though bills were raised during the accounting period relevant to the assessment year under appeal. According to the AO, under the mercantile system of accounting, gross bill values should be recognized as revenue, because tax was deducted at source @ 1.05 per cent on the gross bill values of all the bills including 6th RA bill amounting to Rs. 1,53,13,927. He thus held that as the assessee has failed to consider the full value of the bill as income for the year, the difference of Rs. 84,10,927 (Rs. 1,53,77,927 - Rs. 69,67,000) is treated as the income of the assessee for the year under appeal and, accordingly, added back the same to the total income of the assessee.
3.1 Regarding the second addition of Rs. 46,90,656 in respect of Alipurduar project, facts of the case and explanation of the assessee are more or less similar. The AO found that the assessee had raised single bill on 9th Aug., 2002 for Rs. 2,70,90,656 against which the assessee received Rs. 1,41,00,000 and Rs. 83,00,000 as revenue for the year and did not recognize the difference amount of Rs. 46,90,656 as income for the year. According to the assessee, he had accounted for Rs. 2,24,00,000 which was received within the relevant accounting period and duly supported by TDS certificates. The explanation of the assessee before the AO was as below:
In 1st RA bill, the accounts wing of Alipurduar Division (I&W Dte) put a remark that they had not checked the bill and the quantity of the bill might change. Accordingly, the executive engineer released ad hoc payment around 52.61 per cent and 30.64 per cent of the amount of the 1st RA bill on 10th March, 2003 and 25th March, 2003, respectively As per agreement between Neo Built Corporation and Mackintosh Burn Ltd., Mackintosh Burn Ltd. has released payments proportionately after deduction of the cost of supplying of Departmental materials, IT, ST, as per terms and issued a certificate to us. On that basis we had taken those figures in our account. That bill finally passed by the Department on 7th Oct., 2003 after the date of completion our account and audit i.e. 30th Sept., 2003. So, the question of including this bill for that financial year 2002-03 does not arise.
The AO for the reasons as for Amta project, treated the difference of Rs. 46,90,656 [Rs. 2,70,90,656 - Rs. 2,24,00,000] as assessee's income for the year under appeal and added back the same to his income.
4. The assessee came in appeal before the CIT(A) and explained the case with several judicial pronouncements. The assessee submitted that he did not make any bill as presumed by the AO. The Government department for whom he worked was to determine the amount payable. The assessee does not have any right to receive anything till the payment is made to him. The assessee knows the amount due to him when he receives the payment. The assessee has accounted for all payments approved within the relevant accounting period. The payments are supported by TDS certificates issued. Referring to agreement, the assessee submitted that unless the bill is settled, income does not accrue even if it is presumed that the bill had been drawn. Relying on certain case law, the assessee further submitted that mere submission of bill is not enough for taxing the probable income when it depends upon contingencies even in mercantile system of accounting. The CIT(A) after detailed discussion on the issue upheld the addition made by the AO in respect of Amta project amounting to Rs. 84,10,927 with the following observation:
However, in my view, the appellant as a sub-contractor and his status not being under any dispute, his right to receive income in respect of the subcontracts accrued during the previous year relevant to this assessment year, needs to be examined with reference to his agreement with the MBL. On perusal of the relevant agreement, I find that the appellant receives net payments (after deduction of agreed percentage) from MBL on back-to-back basis as and when it receives payments from the Government department.
Hence, insofar as the bill amount is concerned, on acceptance of the bill, such bill amount becomes due to the appellant, subject to deduction of agreed percentages of MBL. In that analogy, if the argument of the appellant is taken on its face value, as a contractor of Government department, income will at first accrue in the hand of MBL and it will be liable to be assessed at first on the total contract receipt as it receives entire bill amounts from the Government department, whereas as per agreement, the MBL receives only the agreed percentages on account of Amta and Alipurduar projects on which it is assessable. Here the crux of the issue is whether income from these subcontracts accrues to the appellant or to the MBL. The appellant has disclosed gross bill values in several years; hence, there is no dispute on the accrual of income in the hand of the appellant and assessibility thereof in the hand of the appellant. It is rather strange to believe that from and out of the same bill, certain amount of income accrued in an accounting year and remaining income of the same bill accrued in another accounting period, relevant to two separate assessment years, even though the works for which the bill was raised were completed in a particular previous year and the system of accounting as certified to be followed was mercantile system of accounting. It is also rather strange that the appellant sought to justify carry forward of certain portion of income accrued in earlier year to a subsequent year through closing work-in-progress while there is no credit for the value of unconsumed materials in its trading account (should be contract account and not a trading account as the appellant is a contract and not a trader) P&L a/c.
In that view of the matter, it is obvious that as and when the appellant crystallizes the accrued income by raising bills against these sub-contracts, the appellant is legally entitled to receive the accrued income as per the bills, subject to certain documents, if any, out of the gross bill amounts. Mere postponement of the receipt of payment, due to an arrangement between the appellant and MBL, will not postpone, detract or efface accrual of income, over which the appellant had rightful claim to receive as it had already accrued. In view of the legal and factual positions, relying on the decisions as cited above, the addition made by the appellant is confirmed. This ground fails.
4.1 The stand of the assessee in respect of Alipurduar project was similar to that of Amta project. The CIT(A) found that the AO made the addition on identical grounds as in the case of Amta sub-contract. He, therefore, following his reasonings adopted for addition in respect of Amta sub-contract upheld the addition of Rs. 46,90,650 in respect of Alipurduar sub-contract also. Being aggrieved, the assessee is in appeal.
5. The learned Counsel for the assessee narrated the facts of the case with reference to several documents placed in the paper book filed before us, which, inter alia, included copies of contract by and between MBL and assessee, RA bills for the aforesaid two sub-contract projects, ad hoc payments received against RA bills, bills passed by the Government of West Bengal, certificate of TDS, etc. His submissions in regard to Amta project are summarized as under:
(a) The appellant raised and submitted the 6th RA bill for Rs. 1,53,77,927 during the assessment year under consideration.
(b) That neither M/s Mackintosh Burn Ltd. (contractor) nor Government of West Bengal (customer) sent an intimation of the passing of the bill by 31st March, 2003 i.e., last day of the accounting year.
(c) That the contractor did not confirm to the learned AO that they have intimated the passing of the bill within 31st March, 2003.
(d) That the system of accounting of "gross receipt" is that although bills may be raised and sent to the parties, however till the bills raised are approved by them are not taken into consideration for being included within "gross receipt".
(e) That the act of the learned AO in obtaining the information from the contractor, without giving an opportunity to the appellant, was against the rule of natural justice.
(f) In the absence of the intimation either from the contractor or Government of West Bengal, the appellant took the sum of Rs. 69,67,000 (being the ad hoc payment released) since they were sure that their bill will be passed for at least that much amount.
(g) It is a settled position that in Government contract the assessee becomes entitled to payment from the Government only when the assessee's bill drawn for the contracted work is accepted and approved by the principal and till such time the Government does not become debtor of the assessee. Reliance was placed on a Third Member case of Tribunal, Kolkata, in the case of Dy. CIT v. Associated Alcohols & Breweries Ltd. (2003) 80 TTJ (Kol)(TM) 837 : (1999) 240 ITR 103 (Kol)(TM)(AT).
Similar submissions were made for addition of Rs. 46,90,650 in respect of Alipurduar project. It was, therefore, submitted that under the given facts, circumstances of the case and established position in law, the additions made of Rs. 84,10,927 and Rs. 46,90,650 for Amta and Alipurduar projects, respectively should be deleted.
6. The learned Departmental Representative, on the other hand, relied upon the orders of the Revenue authorities and submitted that the CIT(A) after carefully considering the facts of the case, nature of payment, accounting policy under mercantile system of accounting, etc. has rightly upheld the addition and the same deserves to be upheld.
7. We have heard the rival contentions of the parties and perused the material available on record including the paper book containing 71 pages. It is an admitted position that the assessee follows mercantile system of accounting. There is also no dispute about sub-contract offered to the assessee by MBL for performing Government projects on the terms and conditions applicable to the said contractor company. During the accounting year relevant to the assessment year under appeal, the assessee raised RA bill for a total sum of Rs. 1,53,77,927 on MBL for the work done on its behalf in respect of Amta project. Out of the said RA bill, the said MBL released as advance payment towards the said Amta project in favour of the assessee for a sum of Rs. 69,67,000 vide payment advice dt. 27th March, 2003 (p. 48 of the paper book) and, accordingly, on the belief that at least this much of amount will be passed, the assessee accounted for this ad hoc payment of Rs. 69,67,000 in his books of account and the remaining billed amount of Rs. 84,10,927 [Rs. 1,53,77,927 - Rs. 69,67,000], as per mercantile system of accounting, was not accounted for during the year under appeal. The payment by the contractee, i.e. MBL, was on back basis, i.e. payment of the amount as received by MBL after deducting mutually agreed percentages. It is also evident from p. 3 of the assessment order, which is to quote as under:
Information and copy of bill was called for from Mackintosh Burn Ltd. and filed by them on 8th March, 2006. On perusal of the 6th RA bill raised by the assessee on 27th March, 2003, it is seen that payment has been recommended by the site incharge on 31st March, 2003 which is within the financial year. It is also seen that the contractee had deducted full value of the materials supplied by them for the aforesaid billed work and deducted sales-tax @ 2 per cent from the billed amount for the purpose of payment to the assessee. The reason for payment of Rs. 69,67,000 as recorded on the said bill is that 'We have received 58 per cent ad hoc payment from I & W Dte., so 58 per cent of Rs. 120,13,431 i.e. Rs. 69,67,000 is recommended for payment.
The AO, therefore, did not dispute the quantum of gross bill for the project and actual receipt thereof. However, he in addition to the advance payment as above also included the balance due from contractor company (MBL) of Rs. 84,10,927 as total receipt of the assessee for the Amta project and included the same in its income. In this way, the AO took the gross amount of bill raised on MBL as assessee's income for this year. Similar was the position in respect of Alipurduar sub-contract project wherein addition made was of Rs. 46,90,650. As per agreement for Amta project (pp. 8-11 of the paper book), some clauses and conditions imposed by MBL regarding rates and payment are as under:
Rates
(a) Rates for the entire work shall be AT PAR the priced schedule of probable items with approximate quantities and rates which is inclusive of cost of all materials, labour, tools and plants, machinery, transportation charges, hire charges of machinery, cost of consumables and all other charges including statutory obligation, workmen compensation, insurance coverage, taxes, duties, royalties, incidental charges, miscellaneous expenses, etc.
(b) For item(s) of work not covered by the aforesaid priced schedule but covered by the schedule of rates of P.W. (Roads) Department, Government of West Bengal, your rates shall be AT PAR those specified in the said P.W. (Roads) schedule effective from 15th Dec., 1999.
Payment
(a) Payment against your RA bills and final bill shall be settled and made clear to you on 'back-to-back' with our corresponding payment to us by our client.
(b) Release of security deposit will also be on 'back-to-back' basis.
(c) Sales-tax and income-tax will be deducted from your RA bill(s) as per rule in vogue. Any increase of such taxes, duties, royalties, etc. by the Government shall not be reimbursed to you.
On pp. 12 to 15, the assessee has filed copy of contract in respect of Alipurduar project. A few of the clauses on rates and payments are as under:
Rates
(i) Your rate will be 7.50 per cent (seven point five zero) below the priced schedule of the Department.
(ii) For work-items not covered by the aforesaid priced schedule but covered by the schedule of rates of Member (Execution), North Bengal Flood Control Commission, Jalpaiguri, your rate shall be 7.50 per cent below the said schedule of rates effective on 15th Nov., 2000.
Payment Payment against your RA bills and final bill, duly certified and recommended by our site incharge, will be settled and made to you back-to-back with the corresponding payment given to us by the Department. Release of security deposit will also be on back-to-back basis. No mobilization advance shall, however, be made admissible to you.
It is thus evident that for Amta project, rate was at par and payment back-to-back. For Alipurduar project, the rate was below the priced schedule of the Department and payment term was back-to-back. The assessee undertook Government contracts through MBL. The assessee submitted estimate of work done through RA bill, subject to approval and finalization by the principal. We find that the receipts are credited when these are actually received after passing of the bill, on which TDS is deducted by the Government. In mercantile system of accounting, for accrual of income, it requires acceptance of the other side. The assessee raised estimate on 27th March, 2003 and as per recommendation of site incharge, MBL granted as advance 58 per cent of the amount which amounted to Rs. 69,67,000. It is an admitted position that in Government job the assessee does not have any right to receive any amount against the work executed by him till the bill is approved by the Government. In mercantile system of accounting, mere raising of bill is not important. It is right to receive which is important. That is to say, it is the real income and not hypothetical income which has to be subjected to tax. As stated above, payment against bill raised is ascertained when it is verified and finally approved by the Government. Till such time uncertainty remains about the actual amount receivable against the work executed. Therefore, the unrealized amount cannot be added as income of the assessee. Reference in this connection is made to the decision of Kolkata Bench of Tribunal in the case of ITO v. Prakash Roadlines Corporation (1992) 43 TTJ (Cal) 392 : (1992) 40 ITD 406 (Cal), wherein it has been held as under:
Unless an actual 'debt due' by somebody is created in favour of the assessee it cannot be said that he has acquired a right to receive the income or that the income had accrued to it. It, therefore, follows that mere making of a claim without any corresponding right either as per contract or as per law is not a debt due to the assessee by the other party on which a claim is made and, therefore, there is no income accrued to the assessee. Thus, there must be something tangible, something in the nature of a debt or something in the nature of an obligation to pay an ascertained amount to an assessee and till then it cannot be said that the income had accrued or arisen to a person.
8. From the above discussion, it is established that till the work is accepted and bill is approved, the assessee does not become entitled to receive any payment and till such time the Government does not become assessee's debtor. Thus, the accrual of income takes place only when the work of the assessee is accepted and bill is approved and not before that. Admittedly, the assessee follows mercantile system of accounting. In mercantile system of accounting, the assessee is required to account for its income only when it is accrued or received. In this case, accrual takes place on the acceptance of the work and clearance of bill and thus to say that the amount got accrued on mere raising of the bill is not correct. In a similar case of Third Member, Tribunal, Kolkata, reported in (2003) 80 TTJ (Kol)(TM) 837 : (1999) 240 ITR 103 (Kol)(TM)(AT) in the case of By. CIT v. Associated Alcohols & Breweries Ltd. (supra), it was held that a supplementary bill raised by the assessee on the Government not passed by the State Government did not create a debt. Thus, only when the bill was passed by the State Government by fixing the price, the accrual takes place and only such amount, therefore, becomes debt. The balance amount accounted for by the assessee was not a debt. It was a loss incidental to business. In this case also, therefore, the Hon'ble Tribunal having clearly held that the accrual of income takes place only when the Government accepts the bill and not before that, the AO's action in having assessed the aforesaid amount merely because the bills were raised, is not in accordance with the accepted procedure of accounting and hence unjustified.
9. Further, the assessee follows mercantile system of accounting. Receipts are credited when the same are actually received after passing of the bill on which TDS under Section 194C is deducted by the Government. Sec. 194C(1) reads as under:
194C (1) Any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and--
(a) the Central Government or any State Government; or
(b) ...
shall, at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to--
(i) one per cent in case of advertising,
(ii) in any other case two per cent, of such sum as income-tax on income comprised therein.
Thus, it is clear from Section 194C that tax at source is deducted at the time of credit of such sum to the account of contractor or on actual payment. In the case before us, it is an accepted position that no TDS has been deducted on the entire amount of bill raised. Therefore, in effect, no amount was credited or paid to the contractor on which TDS could be deducted. From the bill raised and payment advice placed in the paper book, this fact is evident. In view of the above, we have no hesitation to hold that mere raising of bill does not tantamount to accrual of income. The assessee has correctly accounted the income on accrual following the mercantile system of accounting and we find, on the facts and in the circumstances of the case, no infirmity in it. We, therefore, quash the orders of the Revenue authorities on this issue and allow the claim of the assessee in respect of his Amta project.
10. In regard to Alipurduar project, facts and circumstances are identical. For the detailed reasons discussed hereinabove in respect of Amta project, we direct deletion of addition of Rs. 46,90,650 made to the total income of the assessee for the year under appeal.
11. The next ground relates to addition of Rs. 57,28,926 on account of work-in-progress. The AO made the said addition by taking the difference between the opening figure of Rs. 2,39,97,705 and closing figure of Rs. 2,97,26,231 on the ground of non-submission of details of pending works and cost attributed to the same. According to the AO, the opening work-in-progress was only with respect to the three contracts, i.e. (i) Amta Works (Makintosh Burn Ltd.), (ii) T.T. South (KMDA), (iii) T.T. South (Appron) amounting to Rs. 2,39,97,705. He deducted therefrom the work executed during the year amounting to Rs. 1,93,04,788 (without considering the 6th RA bill of Rs. 1,53,77,927 for Amta project) and compared the end result i.e. Rs. 46,92,917 with the opening work-in-progress and found the same as lower. He, therefore, made an addition of Rs. 57,28,526 being the difference between opening and closing work-in-progress and added the same to the total income of the assessee for the year under appeal.
12. On appeal, the CIT(A) sustained the addition with the following observation:
Thus, the valuations of WIP shown in the account whether it is the valuation of opening WIP or that of the closing WIP these are not at all reliable and, hence, the values of opening and closing WIP shown in the account of this assessment year cannot be accepted as correct, as according to the auditor, work-in-progress was valued at cost and the value thereof was as certified by the proprietor (balance sheet). Thus, the auditor has merely relied on what was certified by the proprietor and has not audited appellant's entire account on the basis of any evidence insofar as the valuation of WIP is concerned and had qualified his audit report merely on the basis of the certificate of the proprietor. In view of what has been discussed above, I am not inclined to delete this addition as because the valuation of WIP was not based on any record or materials whatsoever besides, it included even the part of the income billed in respect of the completed works which, in fact, and in law, accrued during the previous year relevant to this AT the other part of which had duly been authorized for payment and that the appellant had failed to declare the value of unconsumed materials whatsoever. Accordingly, the addition made by the AO in this ground is also sustained. This ground fails.
13. We have heard the parties and considered their rival submissions. We have also perused the orders of the authorities below and other documents placed on record. The assessee's learned Counsel contended that the action of the authorities below has resulted in the double taxation of the same income since the closing work-in-progress was more than the opening work-in-progress. We find substantial force in this submission of the assessee. Opening stock was at a lower figure in comparison to closing stock. The AO has charged tax on the higher amount of closing work-in-progress. Therefore, again charging of tax on the difference between the opening work-in-progress and closing work-in-progress will render double taxation on the same amount, which is not permissible in law. In view of the above, we hold that once the closing work-in-progress has been taken as opening work-in-progress in the immediately subsequent financial year and tax has been charged on that closing balance, charging of tax on the differential amount between the two will tantamount to double taxation, once on the entire amount of closing figure and other on the difference between the opening and closing balance of work-in-progress. That being not permissible in law, we direct deletion of addition of Rs. 57,28,526 made to the total income of the assessee. The assessee succeeds on this ground.
14. In the result, the appeal of the assessee is allowed.