M/S. Zelan Projects Pvt.Ltd.,, ... vs Department Of Income Tax

Dy. Commissioner of Income- vs. M/s Zelan Projects Pvt. Ltd., tax, Circle - 3(3), Hyderabad. Hyderabad.

PAN - AAACZ2295B

(Appellant) (Respondent)

Revenue by : Shri Rajat Mitra Assessee by : P. Murali Mohan Rao

Date of hearing 09-06-2015 Date of pronouncement -06-2015

O RDE R

PER SAKTIJIT DEY, J.M.:

This appeal by the department is directed against order dated 15/03/2011 of ld. CIT(A), Guntur for AY 2006-07.

2. The solitary issue arising for consideration is in relation to decision of ld. CIT(A) in deleting the addition made by AO on estimating income @ 8% on contract receipts.

3. Briefly the facts relating to this issue are, assessee a company is engaged in business of execution of contract. For the AY under consideration, assessee filed its return of income on 13/11/06 declaring loss of Rs. 65,48,374. During the assessment proceeding, AO noticed that assessee in the relevant PY has obtained contract work relating to erection and procurement of 200 & 300 MW thermal 2 ITA No. 946 /Hyd/2012 Zelan Project Pvt. Ltd.

power project and has sub-contracted the same to other contractors. Further, he found that during the relevant PY assessee has obtained engineering, procurement and construction of EPC contract from Lanco Amarkantak Power Pvt. Ltd. (LAPPL) for 300 MW thermal project at Korba District, Chattisgarh. From the details available on record, AO noticed that during the year, assessee has received payments of Rs. 14.49 crores from LAPPL on different dates as under:

07/05/2005 Rs. 2,41,48,750 29/07/05 Rs. 4,82,07,500 21/09/2005 Rs. 7,25,43,750

On verifying TDS certificate, AO noticed that the payments made were on account of professional and technical services. He found that assessee has received 103.63 crores towards mobilization advances and at the same time has given loans and advances to sub- contractors amounting to Rs. 28.66 crores. Whereas at the end of the year, assessee has disclosed work-in-progress at Rs. 16.22 crores. Considering the aforesaid facts, AO issued a show cause notice to assessee to explain why income should not be estimated on the work in progress shown during the year. In response to the said show cause notice, assessee submitted, the amount received from LAPPL is only mobilization advance though of course, the contractee has deducted tax on such advance as it pertains to professional and technical services and TDS provision is equally applicable to advance payments also. However, as far as assessee is concerned, since the amount received is only an advance, the same was not shown as income. It was further submitted by assessee that bills were raised by assessee towards work executed only in FY 2006-07 and once bills were raised LAPPL started recovering the advance amount from the contract bills. Thus, it was submitted by assessee that advance cannot be treated as amount received towards contract receipt, hence, there cannot be any estimation of income. AO, however, was 3 ITA No. 946 /Hyd/2012 Zelan Project Pvt. Ltd.

not convinced with the submissions of assessee. He observed that assessee has given on sub-contract whatever work it had obtained from LAPPL and assessee has also paid entire bills to the sub- contractors, hence, assessee is only submitting the bills to the contractee for the work done by sub-contractors. He opined that as the work has already been completed, income has to be estimated on work-in-progress. AO referring to the AS-7 of ICAI as well as a number of judicial authorities, ultimately, held that income @ 8% has to be estimated on the total expenditure of Rs. 16,22,21,839 shown as work-in-progress by assessee and accordingly completed the assessment. Being aggrieved of the assessment order, so passed, assessee preferred appeal before ld. CIT(A).

4. In course of hearing of appeal before ld. CIT(A), assessee apart from challenging the estimation of income on various other grounds contended that during the relevant PY assessee has only received 15% of the total contract value as mobilization advance. It was submitted that assessee has started raising bills only in FY 2006-07 and LAPPL also started recovering the advance amount from bills raised by assessee. It was submitted by assessee that once assessee has raised bills, and amounts towards contract executed was received, it has started recognizing revenue and has shown income in assessment year 2007-08. As far as allegation of AO that amounts received by assessee from LAPPL was paid to the sub-contractors, assessee submitted that the payments made to sub-contractors were towards consultancy and advisory services and engineering, erection and commissioning expenditure based on the sub-contract agreements separately entered with them. Assessee submitted that since the contract was not fully executed during the relevant FY, assessee has not raised any bill on the contractee and entire expenditure was shown as work-in-progress. Assessee also submitted that entire work-in-progress of Rs. 16.22 crores has been brought forward as opening work-in-progress in P&L A/c for the subsequent 4 ITA No. 946 /Hyd/2012 Zelan Project Pvt. Ltd.

AY in which corresponding income arising from the bills raised on the contractee was shown.

5. Ld. CIT(A) after considering the submissions of assessee and going through the materials on record available before him, deleted the addition made by AO on account of estimation of income on contract work by holding as under:

"4.2. I have considered the submissions made by the appellant, gone through the order of the AO and also perused every other information placed be There is no dispute that the appellant is an EPC (Engineering, Procurement and Commissioning) contractor, rendering work to Lanco Amarkantak Power Private Ltd., (LAPPL). The appellant has given some works to other players subcontracts. For the year under consideration the appellant received advances from contractor in the months of July 2005 and March 2006 & by March 2006 the works were under progress. As per records the works assigned to the appellant by the Contractor Were completed in June 2006. After completion of works, bills were submitted and finally handed over the possession and accordingly offered income in the next financial year relevant to the assessment year 2007-08. Thus for the year under consideration as the project was under

progress, the appellant has drawn work in progress account and also prepared a balance sheet. Seeing the state of affairs, the AO Was of the view that as major works have been completed, it must result in income and as the appellant has not prepared the profit and loss account, rightly so, the AO has Subjected the 8% on advances received from LAPPL for the year ending 31/03/2006 to tax, which is under challenge now. Either in the accounting principles or as is known in general parlance, income or curbing out income from advances is unheard of. For such a Proposition, no cogent material has been brought on record. Thus, fundamentally the AO Was in error in curbing out element of income from advances received as on 31.03.2006. It is also on record that in the next financial year relevant to the AY 2007-08, the appellant upon completion, erection, commission of the project has handed over the same to the contractor and also upon submission of bills to the contractor the final amount payable to the appellant was also 5 ITA No. 946 /Hyd/2012 Zelan Project Pvt. Ltd.

determined and paid; and as a result the appellant has worked out the profit for the year ending 2007 and filed a return. Thus, income from this project accrued to the appellant in the next assessment year and accordingly the appellant has also filed the return. Thus, since no cogent material has been brought on record by the AO for curbing out income from the advances received for the year ending 31.03.2006, the action of the AO is not sustainable. In the circumstances, the AO is directed to delete the same."

6. We have considered the submissions of the parties and perused the orders of revenue authorities as well as other materials on record. As can be seen, only on the basis of TDS certificate enclosed by assessee in the return of income, AO has concluded that the amount received by assessee from LAPPL is a contract receipt and accordingly proceeded to estimate the income. However, as can be seen from the terms of the relevant agreement between assessee and LAPPL, assessee is to receive 15% of the total contract amount as mobilization advance. Though, it may be a fact that in the TDS certificate, deductee has mentioned it as payment towards professional charges but, that itself is not conclusive enough to prove the fact that amount received was not advance but towards work executed. Assessee has also through documentary evidence demonstrated that during the relevant PY it has not raised any bills on the contractee towards contract work entrusted to it, but, has started raising bills in next FY after completion of the contract work and has also recognized income accordingly in the said FY. These facts have not been controverted by ld. DR. Therefore, when it is a fact on record that during the impugned AY assessee has only received mobilization advances being 15% of the total contract price and has not raised any bill on the contractee towards a portion of the work executed. Moreover, when assessee has shown the income on the contract work in the succeeding AY, which also includes work-in- progress of 16.22 crores, on which income has been estimated by AO in the impugned AY, in our view, there is no justifiable reason in 6 ITA No. 946 /Hyd/2012 Zelan Project Pvt. Ltd.

interfering with the order of ld. CIT(A). In any case of the matter, there is no prejudice caused to revenue as the income assessable on the contract receipt has been offered by assessee for taxation, though, in a different assessment year. In the aforesaid facts and circumstances, there being no infirmity in the order of ld. CIT(A), we uphold the same by dismissing the grounds raised.

7. In the result, appeal of the department is dismissed.

Pronounced in the open court on 12 th June, 2015.

Sd/- Sd/- (P.M. JAGTAP) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER

Hyderabad, Dated: 12 th June, 2015 kv

Copy to:-

1) DCIT, Circle - 3(3), 7 th Floor, B Block, IT Towers, AC Guards, Hyderabad

2) M/s Zelan Projects Pvt. Ltd., Plot No. 4, Software Units Layout, Hitech City, Madhapur, Hyderabad - 500 081.

3) CIT(A), Guntur

4) CIT-III, Hyderabad

5) The Departmental Representative, I.T.A.T., Hyderabad.