Income Tax Appellate Tribunal - Indore
Prakash Asphalting & Toll Highways (I) ... vs Assessee on 3 September, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL,
INDORE BENCH, INDORE
BEFORE SHRI JOGINDER SINGH, J.M. AND SHRI R.C.SHARMA, A.M.
PAN NO. : AABCP0398N
I.T.A.No. 580/Ind/2012
A.Y. : 2008-09
M/s. Prakash ACIT,
Asphalting & Toll vs. 5(1),
Highways (I) Limited, Indore.
76, Mall Road,
Mhow,
Appellant Respondent
Appellant by : Shri Anil Kamal Garg, C. A.
Respondent by : Smt. Mridula Bajpai, CIT DR
Date of Hearing : 03.09.2013
Date of : 30.09.2013
pronouncement
ORDER
PER R. C. SHARMA, A.M.
This is an appeal filed by the assessee against the order passed by the CIT(A), dated 04.09.2012 for the assessment year 2008-09 in the matter of order passed u/s 143(3) of the Income-tax Act, 1961.
2. Following grounds have been taken by the assessee :-
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1. That, the ld. CIT(A) grossly erred, both on facts and in law, in upholding the addition of Rs. 1,76,38,517/-
made by the ld. Assessing Officer, by making disallowance u/s 14A of the Income-tax Act, 1961, in respect of interest attributable to the investment made by the appellant in shares of SPV Companies without considering the material fact that the investments in SPV Companies were made by the appellant only for the purpose of its business expediency and, therefore, the provisions of Section 14A were not applicable in respect of such investments specially in a circumstance when the income from such investments resulted in taxable income in the hands of the appellant in subsequent years.
2. That, the ld. CIT(A) grossly erred, both on facts and in law, in confirming the action of the ld. Assessing Officer in not granting credit for TDS of a sum of Rs. 52,54,091/-, which was not only erroneously deducted but was also paid to the credit of the Central Government, on behalf of the appellant, by the deductors. 2
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3(a) That, the ld. CIT(A) grossly erred in invoking the provisions of Section 251(1) read with ss. 251(2) & 250(4) of the Income-tax Act, 1961, in the appellant's case which has resulted in discovery of a new source of income which was never a subject matter of the appeal before him.
(b) That, without prejudice to the above, the direction given by the ld. CIT(A) for making enhancement of income of the appellant by a sum of Rs. 6,84,24,000/- is unjustified, unwarranted, arbitrary, excessive and bad in law.
(c) That, without prejudice to the above, the learned CIT(A) grossly erred, both on facts and in law, in directing enhancement of income of the appellant by a sum of Rs.
6,84,24,000/- by assuming a higher contract receipts than shown by the appellant company in its audited financial statements without considering the material fact that the appellant was maintaining regular books of account by employing mercantile system of accounting and therefore, in absence of rejection of such books of 3
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account under the provisions of section 145(3) of the Act, the business income of the appellant was compulsorily required to be computed only on the basis of its books of account in view of the provisions of section 145(1) of the Income-Tax Act,1961.
(d) That, without prejudice to the above, the learned CIT(A) grossly erred in not considering the material fact that the income of Rs. 6,84,24,000/- to which direction of enhancement pertains, was not the real income of the appellant and such income had neither accrued to the appellant nor it had actually been received by the appellant, during the previous year relevant to the assessment year under consideration.
(e) That, without prejudice to the above, the learned CIT(A) grossly erred in not considering the material fact that the claim made by the appellant to its principal in respect of the impugned sum of Rs. 6,84,24,000/- on account of certain additional work as well as escalation of price, was not acknowledged by the principal company namely 'Path Oriental Highways Limited' and further the 4
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principal company was under no contractual obligation to acknowledge the claim so raised by the appellant.
(f) That, without prejudice to the above, the learned CIT(A) grossly erred in not considering the material fact that the additional work in respect of which the claim was raised by the appellant was performed by the appellant company in earlier years only and therefore, even on the principal of accrual, the subject sum of Rs.
6,84,24,000/- could not have been said to have accrued to the appellant during the previous year relevant to the assessment year under consideration and consequently, any enhancement of income for the assessment year under consideration would be unjustified, unwarranted , arbitrary and against the settled position of law.
3. The Rival contentions have been heard and records perused. The assessee company is engaged in business of construction/operation and maintenance of infrastructure project of roads and bridge under B.O. T. Scheme.
4. During the course of scrutiny assessment, the Assessing Officer found that assessee had made investment in equity capitals 5
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of group companies as well as in the mutual funds. He further noted that during the year there is fresh investment of Rs. 7.87 crores. Accordingly, by invoking provisions of Section 14A, he worked out interest of Rs. 1,76,38,517/- as disallowable. The Assessing Officer has discussed the issue at page 3 to 7 of the order. By the impugned order, the ld. CIT(A) confirmed the action of Assessing Officer against which the assessee is in further appeal before us.
5. Shri Anil Kamal Garg, C. A., appeared on behalf of assessee and contended that entire new investment was made by the assessee company out of interest free funds being cash accrual of the year, therefore, there is no justification to invoke the provisions of Section 14A for making disallowance of interest u/s 14A. The ld. Authorized Representative further contended that the provisions of sub-section (2) of Section 14A of the Act, would come into operation only in a situation where both the basic conditions viz.(i) the assessee has incurred certain expenditure and (ii) such expenditure have been incurred in relation to the income which does not form part of the total income, as enjoined under the provisions of sub-section (1) of Section 14A; get fulfilled and further 6
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both the conditions have to be fulfilled cumulatively and if any one of these conditions are not met out then case of an assessee would not fall within the ambit of the provisions of Section 14A of the Act. It is only when the case of an assessee falls under sub-Section (1) of Section 14A of the Act, the computation machinery as set out in sub Section (2) of Section 14A would come into motion and then & thereafter only an Assessing Officer , after giving a finding to this effect, can determine the amount of disallowance in accordance with the method prescribed i.e. in accordance with the Rule 8D of the Income Tax Rules, 1962. However, in the case of the assessee, the ld. Assessing Officer has made the impugned disallowance by invoking the provisions of sub Section (2) of Section 14A r/w Rule 8D of the IT Rules, 1962, without first giving a finding to the effect that the assessee has incurred any expenditure for earning any exempt income which is not permissible in the lower authorities. For such proposition, reliance is placed on the decision of the Hon'ble High Court of Punjab & Haryana in the cases of CIT vs. Avon Cycles Limited,(2012) 81 CCH 188 ( P & H ) Page No.1 & 2] and CIT vs. Hero Cycles Limited, (2010) 323 ITR 518 ( P & H ) [kindly refer page no. 160 to 162 of JCB]. In view of such facts, the 7
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action of the ld. Assessing Officer and its approval by the ld. CIT(A) deserve to be knocked-down on this count alone.
6. Without prejudice to the above it was submitted by ld. Authorized Representative that in the instant case, the entire investments in shares of the group companies have been made by the assessee company only out of the interest free funds being internal accruals for the current year and, therefore, there was no justification for invoking provisions of Section. 14A of the Act in respect of interest expenses claimed by the assessee in its books of accounts. For our such assertion, attention was invited to Schedule
-6 of the Audited Financial Statements of the assessee company as placed at page no. 61 of the compilation, which indicate that the assessee company was having opening investments amounting to Rs. 34,66,13,178/- and the closing investments amounting to Rs. 42,43,50,000/- thereby registering a net increase in the investment by a sum of Rs. 7,77,36,822/- only. If to such net investment of Rs. 7,77,36,822/-, amount of disinvestment in quoted shares of non- group companies at Rs. 9,50,678/- is added, the amount of fresh investment in companies would work out at Rs. 7,86,87,500/- only. Further, as per Audited profit and loss account of the assessee 8
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company for the relevant previous year, as placed at page no.56 of the paper book, the net profit of the company after depreciation and tax has been shown at Rs.8,39,12,704/- and after making adjustments for non-cash items being depreciation and reversal of excess provision of tax for earlier years at Rs.4,88,81,353/- and Rs.2,36,037/- respectively the net cash profit of the assessee company, for the previous year under consideration, works out to be at Rs.13,25,58,020/-. Thus, in view of the above facts, it was submitted that the authorities below grossly erred in completely brushing aside the explanation of the assessee to the effect that the entire investments in shares of the group companies have been made by the assessee company only out of the interest-free funds being internal accruals for the current year. It is submitted that once the investments having been made out of the internal accruals without making any borrowing for such investments, there was no justification for invoking the provisions of s. 14A of the Act qua the amount of interest expenses claimed by the assessee. For such proposition, reliance is placed on following judicial pronouncements:
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i) J.K. Industries Ltd. vs. CIT (2011) 61 DTR (Cal)153 [JCB Page No. 3 to 9]
ii) CIT vs. Motor Sales Ltd. (2008) 304 ITR 123 (All) [JCB Page No. 10 & 11]
iii) CIT vs. H.B. Stock Holdings Ltd. (2010) 325 ITR 316 (Del) [JCB Page No. 12 to 15].
As per ld. Authorized Representative , the income from the investments in group companies is not only taxable but the assessee has also offered income from such investments in its return of income for subsequent years.
Our attention was also invited to the computation of interest under rule 8D, as made by the Assessing Officer and it was pointed out that the learned Assessing Officer has taken the amount of investment on first day of the relevant previous year at Rs. 34,66,13,178/- which gets completely tallies with the amount of investment shown in the audited financial statements under the column of previous year i.e. as at 31-03-2007 [kindly refer PB Page No. 61]. Likewise, the learned Assessing Officer has taken the amount of investment on last day of the relevant previous year at Rs. 42,43,50,000/- which also gets fully tallied with the amount of 10
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investments shown in the audited balance-sheet as of 31-03-2008. As per details of investments, on both the dates, i.e. 31-03-2007 and 31-03-2008, the assessee was having investment in shares/ share application money of Oriental Pathways (Agra) Pvt. Ltd. and Oriental Pathways (Indore) Pvt. Ltd. respectively at Rs.5,04,90,000/- and Rs. 11,70,00,000/-. As per ld. Authorized Representative , the Assessing Officer has made the impugned disallowance qua these investments by impliedly holding that income from such investments does not form part of the total income of the assessee.
7. Our attention was also invited to the fact that during the previous year relevant to assessment year 2010-11, a substantial income amounting to Rs.20,40,60,000/- from sale of investment in shares of the above named two companies was not only shown by the appellant company in its audited profit & loss account for the year ended as on 31-03-2010 but the same was also offered by it in its return of income for the assessment year 2010-11 as taxable long-term/short-term capital gain. As per audited financial statements of the assessee company for the financial year ended 2009-10, as placed at Page No.94 to 115 of the Paper Book, it is 11
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clear that the assessee company has shown income amounting to Rs. 20,40,60,000/- as profit on sale of Shares under Schedule 12 of Other Income. Further, the veracity of the claim as regard to deriving of profit on sale of shares of the group companies can also be verified from Schedule 06 of Investments as placed at page no. 104 of the paper book. From the computation of taxable income of the assessee for assessment year 2010-11 as placed at page no. 91 of the paper book, it can further be gathered that the assessee company has duly shown income amounting to Rs. 15,83,27,550/-
and Rs. 2,06,96,882/- respectively as Long-term Capital Gain from sale of shares n Oriental Pathways (Indore) Pvt. Ltd. and short-term Capital Gain from sale of shares in Oriental Pathways (Agra) Pvt. Ltd. In nutshell, the claim of the assessee to the effect that income from investments in group companies is not exempted gets fully fortified by the documentary evidences and the return of income which were also placed on the learned Assessing Officer while framing the assessment for the assessment year under consideration.
8. As per ld. Authorized Representative any investment in shares of a closely held company is capable of yielding basically two 12
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types of income viz.(i) dividend income and (ii) Realization of the Gain on sale of such shares. Although, the income from dividend is out of the purview of the total income in view of the provisions of s. 10(34) of the Act but gain on sale of such shares is not so. It is submitted that sale of shares in a closely held company is not subjected to securities transaction tax and therefore, any income arising from transfer of shares in such companies is not exempted under s.10(38) of the Act. As per ld. Authorized Representative merely because the income from dividend earned on investments in shares of group companies is exempted, it cannot be said that income from making such investments is completely exempt so as to bring the provisions of sub-section (1) of section 14A into operation. On the contrary, the assessee has shown a sizeable amount of income in subsequent years from making the subject investments and amount of income is quite higher even after taking into consideration any hypothetical amount of interest attributable to such investments. Investment in group companies have been made as business prudence and commercial necessities, therefore, even if tested from the view point of provisions of Section 36(1)(iii) of 13
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the Income-tax Act, 1961, no disallowance of interest expenditure can be made.
9. On the other hand, the ld. CIT DR relied on the order of lower authorities and contended that the assessee had diverted interest bearing fund for non-business purposes, therefore, the Assessing Officer was justified in invoking the provisions of Section 14A for disallowance of interest expenditure incurred by the assessee during the year under consideration.
10. We have considered the rival submissions and have gone through the orders of the authorities below and found from record that the assessee has made investment in shares of group companies as a matter of commercial expediency. We also found that the assessee was having huge reserve as well as surplus funds available out of its profit. However, to show that investment in shares of Associate concerns have been made out of non interest bearing funds, is on the assessee and burden lies on him to demonstrate before the Departmental Authorities that no interest bearing fund has been used. It is also a matter of record that since investment has been made under commercial necessities, the proposition laid down by the Hon'ble Supreme Court in the case of 14
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S. A. Builders Limited, 288 ITR 1, is required to be considered before disallowing interest expenditure having been incurred on the funds borrowed for the purpose of business. We also found that investment in group companies were having taxable income and assessee has offered substantial long term and short term capital gains in the returns of subsequent years. Keeping in view totality of facts and circumstances of the case, we restore the matter back to the file of Assessing Officer for deciding afresh in terms of our above observations and the judicial pronouncements cited by the ld. Authorized Representative , as discussed hereinabove. We direct accordingly.
11. Next grievance of assessee relates to non-grant of credit for TDS was Rs. 52,54,091/-. The assessee is also aggrieved for enhancement of income by the CIT(A) amounting to Rs. 6,84,24,000/-.
12. With regard to disallowance of credit for TDS relevant observation of the Assessing Officer was as under :-
" On the perusal of TDS certificates it is noticed that TDS has been deducted by MPRDC for payment Rs.
22,49,23,793/-, while the assessee has declared receipts of 15
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Rs. 6,14,81,445/- only. The assessee was asked to explain the reasons for this difference. In the reply the assessee produced the copy of bills maintained in the office of MPRDC and claimed that the amount of the bills submitted and passed are only for Rs. 6,14,81,445/- and the balance amount is mobilization advance and advance against material. It is stated that as per TDS provisions the TDS has been deducted but as the bills have not been raised as such the same are not included in gross receipts. It is claimed that the assessee has shown the exact difference amount of Rs. 16,34,42,348/- as mobilization and material advance under the head advances from customers.
Similarly, it is also found that TDS has been deducted by Path Oriental Highway Limited on 9,05,15,830/- while the assessee has declared the income of Rs. 2,21,87,295/- only. It is stated that the amount 6,84,24,000 belonged to claim of escalation in price etc which was not accepted by the government as such no payment was received by the assessee from Path Oriental Highway Limited, however 16
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the company has wrongly issued TDS to the company. The assessee has submitted a certificate from Path Oriental Highway Limited in this regards.
13. By the impugned order, the ld. CIT(A) confirmed the action of Assessing Officer for disallowance of assessee's claim of T. D. S. of Rs. 52,54,091/-. The ld. CIT(A) also gave a notice for enhancement by observing that the assessee has raised proforma invoice to POHL for additional work/escalation cost. As per CIT(A) as soon the assessee has raised bill on POHL regarding escalation of price, the same should be treated as income liable to tax in the assessment year under consideration, as the assessee was following mercantile system of accounting. The ld. CIT(A) also observed that POHL has deducted tax on the amount of proforma invoice, therefore, the income arose in the hands of the assessee during the year under consideration. The ld. CIT(A) also stated that the assessee has submitted detailed and elaborated submission with regard to terms and conditions of the contract executed by the assessee, according to which no income accrue in the hands of the assessee. As per CIT(A) POHL has raised a further claim on the basis of such bill with Ministry of Surface and Road Transport. 17
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14. In view of the above discussion, the ld. CIT(A) has enhanced the assessment.
15. The contention of the ld. Authorized Representative was as under :-
"2.1 It is further submitted that since the appellant company has maintained regular books of account in its ordinary course of business by employing mercantile system of accounting and, therefore, under the provisions of sub-section (1) of s.145 of the of the Income-Tax Act, 1961, its income is required to be computed only on the basis of its regular books of account. It is submitted that the appellant company has not only maintained regular books of account but it has also got such books of account duly audited by a firm of qualified Chartered Accountants both under the Companies Act, 1956 as well as under the provisions of s. 44AB of the Income-tax Act, 1961. It shall be appreciated by Your Honours that the learned assessing officer, after examining the books of account, has found the same as correct and 18
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complete and as also in accordance with the notified Accounting Standards and it was, therefore, he did not reject the books of account of the appellant company by invoking the provisions of sub-section (3) of s.145 of the Income-tax Act. It is a settled law that unless and until books of account, regularly maintained by an assessee are rejected under the provisions of s.145(3), trading results depicted from such books cannot be disturbed.
2.2 Without prejudice to the above, it is submitted that under the provisions of s.4 of the Income-tax Act, income-tax is charged for any assessment year in respect of total income of any person for a previous year and such income-tax is charged on the total income as contemplated under the provisions of s. 5 of the Income-Tax Act, 1961. Under the provisions of s. 5 of the Income-Tax Act, the total income of any previous year of a person who is resident includes all income from whatever source derived which is either received or deemed to be received or accrues or 19
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arises or deemed to accrue or arise to him in India during the relevant previous year. It would thus be appreciated by Your Honours that receipt/accrual/event of arising of income in the hands of the person in the relevant previous year is a sine qua non for bringing the income to charge within the ambit of the provisions of s. 4 of the Income-tax Act, 1961. In a case where no income has either been received or accrued to an assessee in a previous year, the question of levying of any income-tax would not arise at all. In the instant case, the alleged amount of Rs. 6,84,24,000/- has neither been received nor got accrued to the appellant during the relevant previous year and, therefore, any enhancement on this count was neither justified nor warranted.
2.3 Your Honours, it is an admitted and undisputed fact that the impugned sum of Rs. 684,24,000/-
was not received by the appellant from M/s. Path Oriental Highway Ltd. [in short, "PHOL"] during the 20
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relevant previous year. It shall be pertinent to note that not a single penny has ever been received by appellant out of the impugned sum even till today. 2.4 Now, before examining the issue of accrual of alleged income of Rs. 6,84,24,000/- in the hands of the appellant company on account of contract receipts from PHOL, it shall be appropriate to have a look at the nature of contract entered into by the appellant company with POHL. Your Honours, the appellant company entered into one EPC Contract on 26th July, 2005 with POHL for executing the project of construction and operation & maintenance of Rewa by-pass on NH-7 from KM229/2 to 243/6 near Rewa in the State of Madhya Pradesh on BOT basis which was awarded to POHL by Ministry of Surface Road Transport & Highways [in short,"MORT&H"] under an agreement dated 23-06-
2005 entered into between MORT&H and POHL. A copy of the EPC contract, as entered into by the appellant with POHL, is placed at page No. 139 to 21
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206 of our paper book. On a perusal of the contract, some of the terms relevant for the issue in hand can be noted as under:
(a) DEFINITION [Please refer clause 1.1 at internal Page No.3] "Contract Price" means the sum stated in Appendix 1, being the total consideration for fulfilling the contractor's obligation under the contract.
"Contractor" means Prakash Asphalting & Toll Highways (India) Ltd.
"Owner" means the Path Oriental Highways Pvt. Ltd.
(b) GENERAL OBLIGATION OF THE CONTRACTOR [Please refer clause 4.1 at internal Page No.16 & 17] "The contractor shall carry to the work as set out in Appendix 1 of this agreement read with Schedule A to U of the construction Agreement and including without limitation. (C) shall carry out the Works so that the Facility may be fully, efficiently, economically and safely used, operated and maintained with the minimum interruption for maintenance and repair and otherwise for the purposes specified or referred to in the Contract 22
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(and the documents referred, to in it);
(D) shall carry out the Works so that the replacement of the Facility system components and equipment will be at reasonable cost and capable of completion within a reasonable period and so that the Owner will be able to realize the benefits of upgrades to manufactured Plant and to computer hardware and software; (E) shall exercise the skill, care and diligence in providing the Works to Be expected of a fully qualified, competent and first class Contractor experienced in providing on a turnkey basis, works and services similar in nature and extent to the Works:"
[emphasis supplied] (F) shall provide the Works so that the facility will be fit for the purpose intended and can be operated in accordance with applicable laws in force.
[emphasis supplied] (G) shall provide the Works in accordance with (and so that the Facility will meet all applicable requirements of) the Project Contracts and the documents referred to in them;
(c) MATTERS AFFECTING THE EXECUTION OF THE WORKS [Please refer clause 4.14 at internal Page No. 23] 23
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"The Contractor shall be deemed to have satisfied as to the correctness and sufficiency if the Contract Price. Unless otherwise specifically stated in the Contract, the Contract Price shall cover all its obligations under the Contract and all things necessary for the provision of the Works."
[emphasis supplied] CONTRACT PRICE, PAYMENT AND CLAIMS [Please refer clause 12 at internal Page No. 41] "12.1 The Contract Price The Contract Price is the total fixed, lump sum, turnkey price payable to the Contractor for the Construction, Operation and Maintenance Works and its obligation under the Contract. The payment shall be made in the name of contractor and such payments would constitute valid discharge to the Owner on behalf of the Contractor. The Contract Price cannot be increased and the Contractor is not entitled to additional payment except as specified in the Contract. Payment of the Contract Price will be made in the manner specified in Appendix 1 of this Contract agreement. However for any extension granted to the Owner by the Steering Group the Contractor shall be entitled to the benefit 24
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and the same will be paid to the Contractor within 30 days of receipt of letter from the Steering Group and after due scrutiny by owner. " [emphasis supplied]
(e) CHANGES IN COST [Please refer clause 12.2 at internal Page No.4l] "12.2 Changes in Cost If the Cost to the Contractor of performing its obligations under the Contract is varied as a result of;
(A) Variations (except a Variation in respect of which an increase in the Contract Price has been agreed or determined under Clause 13); (B) any event giving rise to an express entitlement to an addition/deletion to the Contract Price under any of clause of this Contract, provided that the Contractor is not in breach thereof; (C) breach of the Owner.
(D) any Change in law after the Base Date having a Material Adverse Effect on the Works or the working practices of the Contractor for carrying out the Works.
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(E) Delay in the Commencement Date beyond 120 days then except to the extent that the delay is caused or contributed to by any act or omission of the Contractor an escalation as per actual days of delay inflation at the rate of the current CPI for the period of such delay shall be applied.
(F) Prolonged suspensions provided for under Clause 8.8 hereof. (G) Extension of Time for Completion in accordance with the clause 8, 3 1) the Contractor will, subject to the following provision of this Clause 12, be entitled to an increase in the Contract Price.
However the Contractor shall be responsible for getting the variation order, escalation and the other claims approved from MORT&H. In case some of the variations allowed herein are not allowed to the Owner under the terms of concession agreement then the sum paid against the same would be settled by the Owner and in case of dispute by the Independent consultant. Additional sum paid for the increase in contract price for variations which are allowed under the terms of concession agreement to the concessionaire subject to approval of MORT&H, shall not exceed in any case the amount of variation approved by the MORT&H whether directly in the 26
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form of cash payment to the concessionaire or in the form of increase in concession period."
[emphasis supplied] "12.3 Notice of claims If the Contractor considers that it may have grounds to claim an increase in the Contract Price, it must (in addition to compliance with any other relevant procedure or obligation) inform the Owner's Representative within 28 days after the date of the event-giving rise to the claim. The information must include details of the Clause of the Contract under which the claim is made, the circumstances in which the claim arises and details of the records of the Contractor will maintain to substantiate the claim."
[emphasis supplied "12.7 Determination The Owner's representative will determine the amount of any increase in the contract price due under this clause 12."
(t) VARIATIONS [Please refer clause 13 at internal Page No.43] 13.1 Right To Vary During Contract Period Variations may be initiated by the Owner's representative at any 27
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time during the contract period, either by instruction or by a request from the Contractor to submit a proposal.
Any extra work as instructed by the Steering Group shall be paid extra in the manner as under,
1. The items which were included in the original work shall be paid at agreed rate plus escalation, as per actual up to date of execution. The item not included in the original works shall be paid at prevailing market price.
2. For delay in work due to non availability of Site or part thereof for non compliance of GOI or STG obligation or any other reason not attributable to the EPC Contractor, the time of execution shall be extended.
3. The Contract price shall be adjusted to include escalation in cost due to the above delay based on escalation amount agreed by Steering Group for the same."
[emphasis supplied]
(g) DEFAULT OF CONTRACTOR [Please refer clause 14 at internal Page 45] "14.1 Notice to Correct Without prejudice to Clause 14.2 if the Contractor fails to carry out any of his obligations, or is not executing the Works in accordance 28
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with this contract, the Owner's Representative may give notice to the Contractor requiring him to make good such failure and remedy the same within a specified reasonable time.
14.2 Expulsion ............................
14.3 Payment following termination ...........................
If the Owner rejects the works under the clause 14.2 the Owner will not be obliged to make any further payment to the Contractor under the contract and the Contractor must pay to the Owner aggregate of all amounts previously paid to the Contractor together and the costs and expenses of dismantling the works, clearing the project site and returning plant, Materials, equipment and other materials to the Contractor or otherwise disposing of them in accordance with the Contractor's instructions.
...........................
(h) Appendix - 1 [Please refer internal Page No. 63 to 67] (B) CONTRACT VALUE:
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A total consideration of Rs. 48.67 Crores (Rupees Forty Eight Crores and Sixty Seven Lakhs Only) shall be payable to the Contractor for its work scope under this contract subject to changes for the components of work scope as is enumerated below. This consideration shall be divided and paid for each components of the work scope under this contract as under:-
For Construction work The value of construction work under this contract shall amount to Rs.45.72 Crores as per B.O.Q. of the concession agreement. The value is gross of TDS and sales tax/Works Contract tax, royalty, commercial tax but net of any other tax under any other applicable statute of the country. The payment is also net of any variation in rates of taxes that happen during the period of construction. For any additional work as instructed by Owner/Steering Group a separate amount shall be paid to the Contractor which will be decided by mutual consent. [emphasis supplied] 2.5 Your Honours, in pursuance of the EPC contract entered into by the appellant with POHL, as aforesaid, the appellant company commenced the execution of work during the financial year relevant 30
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to A.Y. 2006-07 and completed the construction part of the contract during the financial year relevant to the assessment year under consideration i.e, on 27-04-2007. After completion of the construction, operation and maintenance of the project obligation of the appellant got commenced. During the course of execution of the said contract, the appellant company raised bills from time to time upon POHL and correspondingly recognized the income from such contract in its books of account, by employing mercantile system of accounting, which has duly been incorporated in the audited financial statements for the relevant financial year. The year-wise break-up of the revenue from the contract, as recognized by the appellant, is given as under:
Financial Year Assessment Year Amount (Rs.) 2005-06 2006-07 12,14,01,933 2006-07 2007-08 31,46,29,591 2007-08 2008-09 02,21,87,295 [under consideration] [under consideration] TOTAL 45,82,18,819 It shall not be out of place to mention here that the receipts shown by the appellant from POHL get fully tallied with the amount of payment shown by POHL in their letter of confirmation which has also been made a part of the remand report dated 12-06-2012 submitted by the learned AO to 31
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learned CIT(A) as Annexure-2 [kindly refer PB page No.20]. In other words, there is no variation in the amount of contract payment recorded by POHL in their books of account and contract receipts shown by the appellant in its regular books of account.
2.6 Your Honours, as stated in preceding paras, the appellant was awarded EPC Contract to execute the project of construction and operation & maintenance of Rewa By-pass on NH-7 near Rewa in the State of Madhya Pradesh on BOT basis from KM 292/2 to 243/6 as per the scope of work as contained in Appendix-I of the contract. However, due to certain technical compulsions, the appellant company had to' incur certain additional cost which, in its turn, was attributable to the increase in width of two canals viz. "Keoty Canal" and "Purva Canal" falling in the National Highway under construction and construction of one more under-pass and grade separator.
Such additional work was' executed by the appellant company during the financial year relevant to the A.Y. 2007-08 and not during the financial year under review. Although it was not certain, but still the appellant company felt that due to non- cooperation on the part of the MOSRTH there resulted some 32
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delay in execution of the contract which, in its turn, resulted into escalation of cost of construction in the hands of the appellant company. Although, as per the terms of clause 12.3 of the Contract, any claim for increase in the contract price was required to be lodged by the appellant company with the POHL within a period of 28 days after the date of event giving rise to the claim and the company could not comply with such clause but still for taking a chance, during the financial year relevant to the assessment year under consideration i.e. A.V. 2008-09, the appellant company decided to raise a claim for additional work and escalation upon the. POHL. Accordingly, the appellant company raised a proforma bill, on tentative basis, on 27-04-2007, upon POHL making claim for estimated additional work, estimated utility shifting cost and estimated additional escalation cost for a sum of Rs. 6,64,08.950/-. 2.7 However, the POHL did not acknowledge the claim of the appellant company and rather they, out rightly rejected the claim of the appellant company, made through proforma bill, on the following counts:
(a) The appellant company claimed the period of event giving 33
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rise to the claim as from 01-04-2006 to 31-12-2006, but the claim was lodged as late as on 27-04-2007 whereas as per the clause 12.3 of the EPC Contract, the appellant company should have lodged the claim within 28 days after the date of event giving rise to the claim.
(b) The appellant company has been awarded the contract on turnkey basis as per the clause 4.1(E) of the EPC Contract and, therefore, the entire cost for execution of the project work was to be borne by the appellant company only. The POHL further stressed that as per clause 4.1 (F) of the EPC contract, the appellant company was under an obligation to provide the works so that the facility will be fit for the purpose intended and can be operated in accordance with applicable laws in force.
The POHL version was that the technical variation was made only with a view to make the highway facility fit for the intended purpose and therefore, additional work, if any, done by them was well within their original scope of work for which no extra price was stipulated to be paid.
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(c) The POHL relied upon the clause 12.1 of the EPC Contract which provides that the contract price is the total fixed lump sum turnkey price payable to the contractor for the construction, operation & maintenance works and its obligation under the contract. Further, in terms of clause 12.1, the contract price cannot be increased and the contractor is not entitled to additional payment except as specified in the contract.
(d) The POHL further relied upon the last para of clause 12.1 of the EPC contract in which it is stated that the contractor shall be responsible for getting the variation order, escalation and other claims approved from MORT &H. The agitation of the POHL was that primarily it was responsibility of the appellant company only to get the variation order for the additional cost and escalation approved from the MORT&H and without getting such approval the appellant company was not entitled even to lodge, much less of receipt of any claim from the POHL. Since the appellant company neither got such variation approved nor assessed from the MORT &H, according to the POHL, the appellant company was not having any contractual right or claim over the POHL.
(e) The POHL further asserted that in any event, any amount 35
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for increase in the contract price can be determined by the representative of POHL only, as per clause 12.7 of the EPC contract and the appellant company was not eligible to lodge or raise any tenable claim unless and until any such determination is made by the POHL's representative.
(f) The POHL also averted that as per clause 13.1 of the EPC contract, the contract price can be adjusted for escalation in cost due to delay only when it is instructed by the Steering Group formulated by the MORT&H. For this averment, they also referred clause of Contract Value for Construction work as contained in the Appendix 1 of the EPC contract. As per the POHL, even if the claim for additional work and escalation is admitted by MORT&H, the contractor shall be eligible to get only such amount as is decided by mutual consent and the appellant company has no contractual right to lodge any claim for any certain amount against the POHL.
2.8 After getting the note of rejection of claim from the POHL, the appellant company sought legal opinion from various legal experts who also supported and endorsed the various points of rejection stated by the POHL. The appellant company was 36
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advised that as per the terms of the EPC contract, the appellant company should first pursue the POHL for making a claim upon the MORT&H and only after admission of the claim by MORT&H and determination of amount by the POHL's representative, the appellant company would be in a position to lodge a claim upon the POHL. Thus, the appellant company was made to understand that the claim lodged by it upon the POHL was not only pre-matured one but even the amount of claim was not ascertainable. Under these circumstances, the appellant company reversed the proforma bill erroneously recorded earlier in its accounts book.
2.9 Your Honours, although the technical wing of the POHL rejected the claim of the appellant company on the various grounds as noted above, but the accounts wing of the POHL, under a wrong notion, merely on the basis of proforma invoice raised by the appellant company, passed the accounting entries in their books of account and also made the deduction of tax at source without any authority and sanctity. After having deducted the tax, they paid the same 37
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to the credit of the Treasury and issued certificate of TDS in the prescribed form to the appellant company. However, subsequently, the appellant company raised its objection on making of TDS on the ground that without actually admitting the claim for additional work/escalation and without making any payment against such claim, the POHL was not justified in making the said TDS. The POHL having made the TDS was not prepared to suffer any loss on this count and even they were not prepared to lodge their claim for refund of TDS erroneously paid by them from the Income-Tax Department and, therefore, they insisted the appellant company to lodge the claim of refund of TDS in their own case on the basis of certificate of TDS issued by POHL. However, the POHL got itself agreed to revise the return of TDS for the amount of contract payment shown in the original return and accordingly they revised their return of TDS. It shall be appreciated by Your Honours that the appellant company being an entity on the receiving hand, was having no option but to accept the proposition of the POHL and it was therefore that despite not getting acknowledgement for its 38
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claim or any money there-against, the appellant Company was compelled to adopt the route of TDS refund through the Income tax department only by way of making claims on the basis of the TDS Certificate issued by the POHL. In such circumstances, Your Honours would appreciate that no fault can be found with the act of the appellant company in lodging the claim and in any event, merely on the basis of lodging of claim of TDS .the appellant company should not have been put to the rigors of any unwanted enhancement. 2.10 Your Honours would also appreciate that since a claim was lodged by the appellant company against the POHL and, therefore, despite outright rejection of such claim by the POHL, under the accepted accounting and disclosure norms, the POHL was under an obligation to make a suitable disclosure to this effect in their audited financial statements. Under these circumstances only, the POHL made the suitable disclosure as regard to the claim of the appellant in their financial statements under the head 'Notes to the Accounts - Contingent Liability' as per the details given at Annexure-3 of the AO's Remand Report dated 12-06-2012 [kindly refer PB page No. 39
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21]. It is submitted that in any event, the appellant company was having no control over the POHL and merely on the basis of disclosure by the POHL, no adverse inference was deserved to be drawn against the appellant company. Further, the disclosure under the contingent liability without making any suitable provision itself goes to prove that the claim of the appellant was not acknowledged by the POHL.
2.11 In view of the above facts and circumstances of the case, it shall be appreciated by Your Honours that the impugned amount of Rs. 6,84,24,OOO/- being the amount of un-admitted claim of the appellant against POHL neither got accrued nor arisen in the hands of the appellant company during the relevant previous year. It is submitted that the appellant is a company and it is statutorily required to prepare its financial statements in accordance with the accounting standards notified by The Institute of Chartered Accountants of India [in short ICAI] only.
Since the appellant is a company engaged in the business of undertaking construction contracts and, therefore, the Accounting Standard-AS-7 issued by the ICAI squarely applies to it. A copy of the Accounting Standards AS-7 is placed at 40
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page No.233 to 250 of our paper book. In the AS- 7, the various aspects relating to the Contract Revenue and Contract Costs have been envisaged. In para 10, it has been clearly stated that the Contract Revenue should comprise:
(a) the initial amount of revenue agreed in the contract; and
(b) variation in contract work, claims and incentive payments:
(i) to the extent that it is probable that they will result in revenue; and
(ii) they are capable of being reliably measured.
On a plain reading of the para 10, it becomes abundantly clear that in the case of a construction contractor, the contract revenue would accrue or arise only in respect of the initial amount of revenue agreed in the contract. However, in respect of variations, claims and incentives the revenue would accrue and arise only in a situation when there is not only some probability of acceptance of claim but also when such variation, claims or incentive are reliably measurable. It would be appreciated by Your Honour that both the conditions enjoined in respect of variation, claims and incentive payments are cumulative and unless and until both the conditions are met out together, no revenue in respect of such variations, claims and incentive can be recognized in the books of account. 41
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Your Honours, the terms "variation" and "claims" have respectively been described in the Accounting Standard AS-7 at paras 12 and
13. Under para 12, a variation is an instruction by the customer for a change in the scope of the work to be performed under the contract. A variation may lead to an increase or a decrease in contract revenue. A variation is included in contract revenue when it is probable that the customer will approve the variation and the amount of revenue arising from the variation and the amount of revenue can be reliably measured. Under para 13, a claim is an amount that the contractor seeks to collect from the customer or another party as reimbursement for costs not included in the contract price. A claim may arise from, for example, customer caused delays, errors in specifications or design and disputed variations in contract work. The measurement of the amounts of revenue from claims is subject to a high level of uncertainty and often depends on the outcome of negotiations and, therefore, claims are only included in contract revenue when negotiations have reached an advanced stage, such that it is probable that the customer will accept the claim and the amount that it is probable will be accepted by the customer can be measured reliably.
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On a combined reading of paras 10, 12 and 13, it may safely be concluded that any revenue in respect of the variation or claim can be recognized only when both the conditions i.e. probability of approving the variation/claim by the customer and reliable measurement of the amount of revenue get full filled. In respect of the claim, there is a further requirement that negotiation should have reached to an advanced stage. In the instant case, the claim of the appellant company has been rejected by the POHL at threshold only and even the process of negotiation has not got commenced during the year under consideration. Besides, under the various clauses of the EPe contract, as discussed above, even the amount of revenue cannot be reliably measured. It shall be appreciated by Your Honour that first of all the POHL would acknowledge the claim of the appellant company only if the MORT&H accepts the claim. Secondly, the amount of the claim shall be determined by the MORT &H and the representatives of the POHL and the appellant has no say in the determination of the amount of claim. Finally, even if the claim is accepted by the MORT&H the mode of payment/ reimbursement is not certain. The mode of compensating the claim for additional cost/ escalation by MORT &H can either be in the 43
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terms of money or in terms of extension of concession period to POHL as per last para of clause 12.2 of the EPC contract. In a situation where the concession period is extended to POHL again the controversy and dispute would arise as regard to the measurement of the monetary value of the benefits accruing to the POHL due to the extension of the concession period of recovering the Toll. In these circumstances, there cannot be two views on the issue that the prematured claim lodged by the appellant company was full of the uncertainties both as regard to its acceptance by the POHL and the measurement of the magnitude of the claim. This being the situation, no income could be said to have accrued to the appellant company, during the relevant previous year, under AS-7 notified by the ICAI. Even if the issue in hand is viewed from another Accounting Standard i.e. AS-9, notified by the ICAI, no revenue can be recognized if the revenue is not measurable and it is unreasonable to expect ultimate collection [kindly refer copy of Accounting Standard AS-9 placed at PB page No.251 to 262]. It is reiterated that till date the claim of the appellant company has neither been acknowledged by the POHL nor the claim of the POHL has been assessed and determined by the MORT&H. Such fact is evident 44
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from the minutes of the Steering Group formulated by MORT&H, dated 04-02-2011 a copy whereof is placed at Page No.226 to 232 of our paper book.
In view of the above facts and circumstances of the case, it shall be appreciated by Your Honours that the subject amount of Rs. 6,84,24,000/- was neither received by the appellant nor it got accrued to the appellant during the relevant previous year and, therefore, such amount cannot be subjected to tax under the provisions of s. 5 r/w s. 4 of the Income-Tax Act, 1961. Consequently, the enhancement so made by the learned CIT(A) deserves to be deleted on the factual matrix of the case too."
16. On the other hand, the ld. CIT DR relied on the order of the Assessing Officer with regard to non-inclusion of income attributable to T. D. S. of Rs. 52.54 lakhs and on the order of CIT(A) with respect to enhancement of income made by the CIT(A).
17. Rival contentions have been considered and records perused. We found that T.D. S. has been deducted by MPRDC for payment of Rs. 22.49 crores, while the assessee has declared receipt of Rs. 6.14 crores only. As per assessee, the amount of bill 45
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submitted and passed are only of Rs. 6.14 crores and the balance amount was of mobilization advance and advance against material, which has been shown as liability in the balance sheet. As per our considered view, TDS is liable to be deducted in respect of income paid or credited in favour of the assessee and not in respect of advance given to the assessee. Even if the deductor has wrongly deducted tax on the amount paid as advance and issued certificate of TDS on such payment, the assessee is entitled to get credit of this T. D. S. in its computation of income. However, while giving credit for such TDS, the Assessing Officer is required to verify as to whether such TDS was deducted on the income accrued and/or received by the assessee. In case T.D.S. has been wrongly deducted on the advances, income attributable to which accrue in the subsequent year, the assessee is entitled to take benefit of such TDS in subsequent year. However, facts are not clear as to whether TDS was deducted on the income accrued/received by the assessee or on the advances, which did not form part of the assessee's income during the year under consideration. In the interest of justice, the matter is restored back to the file of A.O. for deciding afresh in terms of our above discussion.
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18. The ld. CIT(A) has enhanced the assessment on the plea that proforma bill was raised with respect to claim of escalation in price/cost. As per assessee, only proforma invoice was raised, which was not accepted by the contractee as such nor any payment was received by the assessee from Path Oriental Highways Limited. Against this enhancement, assessee is before us.
19. Rival contentions have been considered and records perused. From the record, we found that the assessee company had entered in to E.P.C. contract on 25th July, 2005, with M/s. Path Oriental Highways Limited ( in short - POHL ) for executing the project of construction and operation and maintenance of Rewa By Pass, on B.O.T.basis, which was awarded to POHL by Ministry of Surface Road Transport and Highways ( in short MORT & H) under an agreement dated 23.6.2005 entered into between MORT&H and POHL. We had gone through the terms and conditions contract executed between MORT&H and POHL. During the course of execution of the said contract, the appellant company raised bills from time to time upon POHL and correspondingly recognized the income from such contract in its books of account, by employing mercantile system of accounting, which has duly been incorporated 47
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in the audited financial statements for the relevant financial year. The year-wise break-up of the revenue from the contract, as recognized by the assessee, is given as under:
Financial Year Assessment Year Amount (Rs.) 2005-06 2006-07 12,14,01,933 2006-07 2007-08 31,46,29,591 2007-08 2008-09 02,21,87,295 [under consideration] [under consideration] TOTAL 45,82,18,819
20. From the record, we found that the above receipt of income by assessee from POHL is fully tallying with the amount of payments shown by POHL in their letter of confirmation, which has also been made a part of remand report dated 12.6.2012 submitted by the Assessing Officer to the ld. CIT(A). Thus, there was no variation in the amount of contract payment received by the assessee from POHL and recorded in the regular books of account. While framing assessment u/s 143(3), the Assessing Officer has not doubted any receipts from POHL which were duly accounted for by assessee as per system of accounting regularly followed. During appellate proceedings, CIT(A) observed that assessee has raised 48
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additional claim on account of escalation cost, therefore, liable to tax on such amount. From the record, we found that during the year under consideration, the assessee has raised proforma invoice on POHL in respect of escalation cost/shifting work/additional work. The proforma invoice raised by the assessee were rejected by POHL and nothing was paid to the assessee during the year under consideration. While rejecting the claim of assessee, POHL relied upon clause 12.1 of EPC Contract, which provides that the contract price is the total fixed lump sum turnkey price payable to the contractor for the construction, operation & maintenance works and its obligation under the contract. Further, in terms of clause 12.1, the contract price cannot be increased and the contractor is not entitled to additional payment except as specified in the contract. Thus, the impugned amount of proforma invoice raised by the assessee was un-admitted claim of assessee, income attributable to such proforma invoice neither got accrued in the hands of assessee company, nor any payment was arose nor any amount was actually received by assessee company during relevant assessment year under consideration. Since the assessee company is engaged in the business of undertaking construction contract, 49
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therefore, Accounting Standard AS-7 issued by I.C.A.I. squarely applies to it. As per the accounting standard, in case of construction contractor, the contract revenue would accrue or arise only in respect of initial amount of revenue agreed in the contract. However, in respect of variations of claim and incentive, the revenue would accrue and arise only in the situation, when there is not only probability of acceptance of claim but also when variations, claim or inventive are reliably measurable. Both the conditions enjoyed in respect of variations, claim or incentive payment are cumulative and unless both the conditions are met out together, no revenue claim or incentive can be recognized in the books of account. In the instant case, the claim of the assessee company has been rejected by POHL at thrash hold only and even the process of negotiations have not got commenced during the year under consideration. Furthermore, under clauses of EPC Contract, even the amount of revenue in respect of proforma invoice were not reliably measurable. It is also pertinent to mention that POHL would acknowledge the claim of assessee company only if the MORT&H accepts the counter claim of POHL. Thus, the prematurity claim lodged by the assessee company was full of un-certainty both as regards to its acceptance 50
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by POHL and the measurement of magnitude of the claim. It is matter of record that during the year under consideration, nothing was received by assessee from POHL against these proforma invoices, therefore, no income accrued, arose or received by the assessee with respect to the proforma invoice raised. On specifically asking by the Bench, it came to our notice that till date, nothing was received by the assessee nor the claim of the assessee was acknowledged by POHL nor the claim of POHL has been assessed and determined by MORT&H. All these facts are evident as per material placed on record.
21. As per our considered view, under the provisions of Income-tax Act, income tax is charged for any assessment year in respect of total income of any person for previous year and such income tax is charged for total income as contemplated under the provisions of Section 5. Under the provisions of Section 5, total income of any previous year of a person which is resident includes of income from whatever source derived, which is either received or deemed to be received or accrues or arises or deemed to accrue or arise in India during the relevant previous year. Thus, accrual or receipt of income by a person is a sine qua non for bringing the income to charge within the ambit of provisions of Section 4 of Income-tax Act, 1961. Under a case where no income has either been received or accrued to assessee in a previous year, the 51
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question of levying any income tax does not arise at all. Furthermore, mere wrong deduction of tax at source by contractee will not give right to the contractor to receive that income. In the instant case before us, the alleged amount of proforma invoice has neither been received nor accrued to the assessee during the relevant assessment year under consideration. Therefore, there is no justification in the action of CIT(A) for bringing to tax net such amount during the year under consideration. However, the Department is at liberty to tax such income in the year of actual receipt, in any subsequent year. Accordingly, we restore the matter back to the file of Assessing Officer to verify and tax this income in the year of actual receipt. We direct accordingly.
22. In the result, the appeal is allowed in part for statistical purposes.
This order has been pronounced in the open court on 30th September, 2013.
Sd/- sd/-
(JOGINDER SINGH) (R. C. SHARMA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated : 30th September, 2013.
CPU*
624279
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