Addition on account of undisclosed income cannot be made where assessee had furnished the entire details to justify its claim that there is no understatement of any receipt.

1. This appeal by the assessee arises out of the order of the Learned Commissioner of Income Tax(Appeals)-5, Kolkata [in short the ld CIT(A)] in Appeal No. 38/CIT(A)- 5/Wd-13(2)/15-16 dated 22.04.2015 against the order passed by the ITO, Ward-13(2), KOlkata [ in short the ld AO] under section 143(3) (of Income Tax Act, 1961) (in short “the Act”) dated 31.03.2015 for the Assessment Year 2012-13.

2. The first issue to be decided in this appeal is as to whether the Ld. CIT(A) was justified in deleting the addition of Rs. 2,22,68,725/- made u/s 69 (of Income Tax Act, 1961) for understatement of contractual receipts, in the facts and circumstances of the case.

3. The brief facts of this issue is that the assessee company is engaged in civil construction and had filed its return of income for the assessment year 2012-13 on 25.09.2012 declaring total income of Rs. 52,591/-. During the year under consideration, the assessee company had executed a works in terms of tender agreement vide work order dated 25.07.2010 entered into with M/s Murti Housing & Finance Pvt. Ltd. The ld. AO observed from the audited accounts of the assessee that it had declared income under the head ‘revenue from operation’ amounting to Rs. 5,55,85,086/- comprising of the following :

(i) Receipts against the work in progress (WIP) Rs. 3,37,16,754/-

(ii) Receipts on sale of WIP Rs. 2,18,16,646/-

(iii) Sales Trading Rs. 51,686/-

Total Rs. 5,55,85,086/-

The ld. AO observed that the tax deducted by M/s Murti Housing & Finance Pvt. Ltd. was Rs. 11,19,766/- u/s 194C (of Income Tax Act, 1961) which corresponds to the contractual receipt of Rs. 5,59,85,479/- as per form 26AS. Apart from this TDS was Rs. 14,699/- was deducted towards hire charges received u/s 194(i) (of Income Tax Act, 1961) from the gross amount of Rs. 7,34,860/- towards rental income received against the machinery gain on hire. This TDS was Rs. 14,699/- was also received from M/s Murti Housing & Finance Pvt. Ltd. The ld.

AO found that the assessee had reflected receipts from contractual job only to the tune of Rs. 3,37,16,754/- as against that reflected in form 26AS at Rs. 5,59,85,479/-.

Thereby the ld. AO show caused the assessee as to why the differential sum of Rs. 2,22,68,725/- (5,59,85,479 – 3,37,16,754) be brought to tax on account of understatement of contractual receipts. The assessee replied that pursuant to agreement between assessee and M/s Murti Housing & Finance Pvt. Ltd., the assessee comes execution of work order since July/August, 2010. The work order specifically mentioned the work or civil, plumbing, electrical and H.V.A.C. for construction of hostel, supportive staff quarters, dormitory blocks, buildings at Birubandh, district-Bokaro on specification mutually agreed upon. The assessee replied that it had claimed to have incurred expenditure under the head construction expenses to the tune of Rs. 2,32,38,913/-, the details of the same are enclosed in note 21 of the audited financial statements. The assessee had reflected closing stock of work-in-progress at Rs. 65,90,629/- and opening stock of work-in-progress of Rs. 59,10,329/- as per note 14 of the audited financial statements. It was specifically brought to the notice of the ld. AO that the assessee had brought in the accounts to different nomenclatures viz.

i) Receipts against work-in-progress (Rs. 3,37,16,754/-)

ii) Receipts on sale of work-in-progress ( Rs. 2,18,16,646/-)

The assessee stated that in book keeping, work-in-progress reference to the monetary value of work that has not been paid for because it has not yet been completed. The assessee insisted that sale of work-in-progress should be construed to raw material such as sand, stone and bricks which were also made sale to the same party i.e. M/s Murti Housing & Finance Pvt. Ltd. In fact, the assessee stated that it is sub-contractor and had supplied these raw materials to M/s Murti Housing & Finance Pvt. Ltd., for which it had received consideration from them which were shown separately by the assessee in addition to contractual receipts. This explanation was not found satisfactorily by the ld. AO because the ld AO observed that M/s Murti Housing & Finance Pvt. Ltd. had filed TDS annual return stating that the sum of Rs. 5,59,85,479/- was paid to the assessee towards the works executed till 31.03.2012 u/s 194C (of Income Tax Act, 1961). The ld. AO also observed that nowhere agreement dated 25.07.2010 there is mentioned that the assessee would supply raw materials like sand, bricks and stone chips to M/s Murti Housing & Finance Pvt. Ltd., accordingly, the ld. AO conclude that the assessee had understated its contractual receipts from M/s Murti Housing & Finance Pvt. Ltd. to the tune of Rs. 2,22,68,725/- and added the sum in the assessment.

3.1. The assessee pleaded that it had disclosed from revenue at Rs. 5,55,85,086/- received from M/s Murti Housing & Finance Pvt. Ltd.. It was also stated that M/s Murti Housing & Finance Pvt. Ltd. as deducted the tax at source on total payments made to the assessee towards contractual payments and for supply of raw materials including service tax and VAT portion. However, the income shown in the profit and loss account is exclusive of service tax and VAT. Accordingly, it was pleaded that no understatement of contractual receipt or any other receipt had happened in the profit and loss account filed by the assessee. It was also brought to the notice of the ld. AO that the revenue recognition had been made in accordance with Accounting Stands 7 (AS7) issued by the Institute of Chartered Accountant of India for ‘construction contracts’. It was also pointed out that revenue has been recognized in accordance with AS9 issued by ICAI on ‘revenue recognition’.

4. The Ld. CIT(A) granted relief to the assessee by observing as under: “The AO's decision to add the difference apparently existing between the TDS certificate amounts and the sales against contract shown in the appellant's profit and loss account is not based on concrete findings but on the basis of apparent mistake in categorizing the receipts in the profit and loss account or books of accounts of the appellant that contract considerations were also partly shown as sales of work-in- progress. On examination of the papers submitted in appeal and submission made before the A.O, it seems that the appellant has loosely shown receipts against two heads, one against contract and the other part against sales of work-in-progress. The AR claimed-t-hat the part shown against sales of work-in-progress represented materials supplied by the appellant for executing work for the contractee an it was supplied in term of the contract signed between the two parties. The appellant did make a claim before the AO that all the amounts received from the contractee was disclosed in its books of accounts for the charge of income tax, In the given facts and circumstances, it was required for the AO to demonstrate whether consideration received from the contractee exceeded the one disclosed in the books of accounts.

The AO has given no such finding. He has simply found fault in showing of sales on account of work-in-progress by wrongly observing that the appellant was not required to supply the materials towards the work undertaken as per the contract signed. It has been claimed in the assessment and appeal stage that the appellant received considerations only from one contractee being Murti Housing and Finance Ltd. It appears to be a case here the appellant has not given proper names to account heads and has artificially created two heads and given wrong names to the heads. The AO has to examine the question whether the appellant disclosed all considerations for the charge of income tax. From the contract document it can be seen that the appellant did have an obligation to supply some materials for executing works. It seems that the appellant has only executed n the work of the existing contractee, Murti Housing and Finance Ltd and has not traded or offered service with I to 3rd party. In such a case the AO should have verified whether all the sale consideration was disclosed by the appellant or not, considering the two heads together which represent, according to the appellant , money receipts from the contractee, Murti Housing and Finance.

It is no correct for the AO to hold that contract amounts were understated. The whole addition is based on the wrong premises that the appellant did not offer the whole of the contract receipt, even if it claimed credit for all the TDS deducted by the contract e, Murti Housing and Finance Co. Ltd.

Furthermore, if the whole of the considerations are shown as income realized in the profit and loss account. it is difficult to hold that the appellant did not follow AS-7 Accounting Standard. Addition of more than Rs. 2 crores on contract receipts of about RS.5.55 crores is an abnormal addition as it leads to abnormally large amount of profit on contractual amounts. In any case one cannot go blindly by the TDS certificates, which have to be reconciled to business activity and the accounts of the appellant.

There is no material to suggest that the contractual receipts were understated by the appellant by not considering a par of the contract consideration from Murti Housing and Finance Ltd. The AO's action [=, therefore, cannot be sustained. The ground related to the addition of Rs.2,22,68,725/- is therefore, allowed. The ground nos. 2(a)] of appeal is thus allowed.”

Aggrieved the revenue is in appeal before us on the following ground: 1. Whether on the basis of facts and circumstances of the case and in law, Ld. CIT(A) erred in deleting the addition of Rs. 2,22,68,725/- made u/s 69 (of Income Tax Act, 1961) for understatement of contractual receipt without appreciating the fact finding of the AO.

5. We have heard the rival submission and perused the material available on record including the paper book filed by the assessee comprising of pages 1 to 99 we find from the pages 57 to 87 of the paper book containing the entire agreement dated 25.07.2010 including the work order issued by M/s Murti Housing & Finance Pvt. Ltd. specifying scope of services and terms and conditions to be complied thereon. From the said agreement we find under clause (2) enclosed in page 58 of the paper book as under:

“2.0. RATES/PRICE, TAXES AND COST

2.1. The rates quoted of Rs. 1200/- per sq. ft. shall be for the finished work and shall be inclusive of all materials and labour, equipment, shuttering and centring, scaffoldings and consumables etc. but exclusive of cement and steel. Any volume of work exceeding the scheduled quantity as per the drawings issued to contractor at the time of tender is to be treated as extra item. The above quoted rated are inclusive of ESI, PF, freight, Excise Duty & royalty etc. but exclusive of taxes like service tax, VAT etc which will be paid extra to the Contractor ,WCT & TDS will be deducted as per the provisions of the respective act and laws of the land. No claim on this account other than what had mentioned in this Work Order will be entertained due to any reason whatsoever.

Quoted rates shall also include any or all wastages etc. as applicable and the rates quoted are firm till the completion of work including the extended period. No claim shall however be entertained in case of increase basic rates of materials and labour etc. In other words NO ESCALATION of prices/rates is acceptable during the execution or work.

Your quote of Rs. 1200/- per sq. ft. as mentioned above shall not include the following:

All HVAC works Loose Furniture Wardrobes

The contractor shall at their own expense, arrange for insurance policies such as workmen compensation policy and contractor’s all risk policy effective from the date of commencement of work until final completion of work, which will be certified by Architect/PMC appointed by us. Also rate quoted shall include the costs of supplying photographs showing the work-in-progress from various angles as decided by the Architect. Two sets of photographs to be supplied by the contractor i.e. one set to the Architect and one set to us. The photographs should contain the date of photograph taken printed on it.”

From the above, it is very clear that the assessee is mandated to supply materials and labours, equipment, scaffolding and consumable exclusive cement and steel. Hence it is factually incorrect on the part of the ld. DR to state that there is no stipulation in the agreement dated 25.07.2010 warranting the assessee to supply any materials for which consideration in the sum of Rs. 2,18,16,646/- was received and Rs. 51,686/- towards sale of trading goods were received from M/s Murti Housing & Finance Pvt. Ltd.. The ld. AO had not given any finding to the effect that the entire sum paid to the assessee by M/s Murti Housing & Finance Pvt. Ltd. were only in respect of contractual payments, except placing reliance on the figures reflected in form no. 26AS subjecting the entire payments to deduction of tax at source. Factually we find that the assessee had received 3.37 crores towards contractual receipts and Rs. 2.18 crores towards sale of materials from M/s Murti Housing & Finance Pvt. Ltd. and both are duly paid under the head ‘revenue for operation’. We also find from page 51 of the paper book containing the details of various materials that were supplied by the assessee to M/s Murti Housing & Finance Pvt. Ltd. for the smooth execution of the project containing the details of opening stock, purchases, materials consumed and closing stock thereon. The assessee had also furnished the entire details of M/s Murti Housing & Finance Pvt. Ltd. to justify its claim that there is no understatement of any receipt from M/s Murti Housing & Finance Pvt. Ltd., the details of which are enclosed in page 43 of the paper book. For the sake of convenience the said details are reproduced hereunder:

In view of these facts which are starring on us, we have no hesitation to uphold the finding of Ld. CIT(A) in this regard. Accordingly, ground no. 1 raised by the revenue is dismissed.

6. The next ground to be decided in this appeal is as to whether the Ld. CIT(A) was justified in deleting the addition of Rs. 27,43,417/- u/s 69 (of Income Tax Act, 1961) towards undisclosed investment, in the facts and circumstances of the case.

7. The brief facts of this issue are that the ld. AO observed that the assessee had made sale of work-in-progress (materials and others) amounting to Rs. 2,18,16,646/-. The assessee filed a statement of details of cost of materials purchase, cost material consume, opening stock and closing stock thereon. It was submitted that the materials i.e. sand, stone chips and bricks were purchased from M/s Raj Trimurti Plaza Makers Pvt. Ltd. and the cost price of those items totaling to Rs. 2,0584,843/- was stated to have been consumed. The assessee gave details of materials consumed in respect of sand, stone chips, bricks, electrical goods, hardware wood, supply wood, safety net, chemicals, miscellaneous materials, plumbing and sanitary items wooden materials and floor materials. The assessee gave the breakup of opening stock of work-in-progress as on 01.04.2011 as under:

Sand Rs. 15,56,913/-

Stone chips Rs. 43,53,408/-

Total Rs. 59,10,321/-

7.1. The assessee furnished the details of closing stock of work-in-progress as on 31.03.2012 as under:

Fire equipment Rs. 14,04,574/-

Sanitory and plumbing materials Rs. 16,06,194/-

Fixture and Footings Rs. 20,23,952/-

Door frames Rs. 15,55,909/-

Sand NIL Stone Chips NIL Bricks NIL

Total Rs.65,90,629/-

The ld. AO observed that as per consumption of stone and firm’s expenditure incurred by the assessee was Rs. 3,62,495/- as against the purchase of various materials other than sand, stone chips and bricks for Rs. 42,09,707/-. Accordingly, he arrived at the closing stock of such materials as on 31.03.2012 at Rs. 38,47,212/- (4209707 –

363495). This closing stock of Rs. 38,47,212/- was compared by the ld. AO with the closing stock of WIP shown by the assessee at Rs. 65,90,629/- which resulted in a difference of Rs. 27,43,417/-. The ld. AO treated this difference of Rs. 27,43,417/- as undisclosed investment made by the assessee and brought the same to tax u/s 69 (of Income Tax Act, 1961) and completed the assessment. The assessee stated that the entire stock summery were presented in a tabular form in which as under:

Opening Stock Rs. 59,10,320/- Add:

Purchase Rs. 2,54,74,859/- Less:

Consumption Rs. 2,47,94,550/-

Closing stock Rs. 65,90,629/-

It was specifically brought to the notice that other materials consumption of Rs. 42,90,707/- is included in the total materials consumption of Rs. 2,47,94,550/- (supra).

It was pointed out that a sum of Rs. 3,62,495/- towards consumption of store and spare were debited separately in the profit and loss account and not included in the aforesaid total cost of materials consumption. It was argued that the ld. AO’s action of choosing Mthe figure of other items consumed in the sum of Rs. 42,90,707/- and deducting only cost of stores and spares of Rs. 3,62,495/- is patently wrong. It was also pointed out that the ld. AO erred in stating that the evidence for purchases were not shown by the assessee. In fact, the original purchase bills were furnished by the assessee before the ld. AO and purchase of stone chips, sand and bricks from M/s Raj Trimurti Plaza Makers Pvt. Ltd. were cross-verified by the ld. AO by issuing summons u/s 131 (of Income Tax Act, 1961) to the said party. The assessee pleaded before the Ld. CIT(A) that there was no undisclosed investment warranting any addition in the sum of Rs. 27,43,417/- and prayed for deletion of the same.

8. The Ld. CIT(A) granted relief to the assessee by observing as under:

“8. The closing stock of WIP of Rs. 65,90,629/- has been taken from the accounts itself.

If the closing stock was Rs. 38,47,212/- as per the AO and figure taken in the profit and loss account as closing stock is Rs. 65,90,629/- then the appellant already offered more than the stock as derived by the AO. Further the addition of Rs. 27,43,414/- is not based on any logic as the stock shown in the books and audited profit and loss account cannot be termed as undisclosed investment and if the computed stock was less than the shown stock then by the excess or difference already higher amount was appearing in the profit and loss account.

9. The AO’s finding is not correct. His reason that the said amount was undisclosed investments is also not correct. As his finding that stock was in excess of the stock derived by the AO, is not correct, it cannot be the basis for addition as that would mean that the income offered was already higher by the said amount than the one suggested by the AO on account of stock computation. The addition cannot be sustained and the ground [Gr. No. 2(b)] of appeal is allowed.”

Aggrieved the revenue is in appeal before us on the following ground:

2. Whether on the basis of facts and circumstances of the case and in law, Ld. CIT(A) erred in deleting the addition of Rs. 27,43,417/- made u/s 69 (of Income Tax Act, 1961) for undisclosed investment in the absence of evidence of purchase ignoring the observations of the AO.

9. We have heard the rival submissions and perused the material available on record.

We find that the entire details of purchases of various materials together with the bills were duly submitted before the ld. AO. We also find that the assessee had filed a detailed stock summery of various materials comprising of opening stock, purchases, cost of materials consumption and closing stock thereon as under:

It was also specifically brought to the notice of the ld. AO that purchases of other items i.e. other than (sand, stone chips and bricks) to the tune of Rs. 42,09,707/- is duly included in the total cost of materials consumed in the total sum of Rs. 2,47,94,550/-

This fact is also evident from the aforesaid stock summery. We find that ultimately the assessee has shown in the closing stock of Rs. 65,90,629/- based on the proper details that were submitted before the ld. AO and which are supported by proper evidences.

The ld. AO made arithmetical conclusion and arrived at the closing stock of material figures at Rs. 38,47,212/- only in respect of certain items and compared the same as total closing stock figure of Rs. 65,90,629/- and made an addition of Rs. 27,43,417/- as undisclosed investment. This, in our considered opinion, is absolutely no warranty in view of the complete details of various materials used by the assessee in the execution of the contract as could be evident from the aforesaid stock summery. Hence we hold that there is not case that has been made out by the revenue before us for sustaining the addition towards undisclosed investment u/s 69 (of Income Tax Act, 1961) in the sum of Rs. 27,43,417/-.

In these facts and circumstances, we do not find any justifiable reason to interfere in the order of Ld. CIT(A) and accordingly, ground no. 2 raised by the revenue is dismissed.

10. Ground no. 3 raised by the revenue is general in nature and does not require any specific adjudication.

11. In the result, the appeal of the revenue is dismissed.

Order pronounced in the Court on 04.05.2018

Sd/- Sd/-

[S.S. Godara] [ M.Balaganesh ]

Judicial Member Accountant Member

Dated : 04.05.2018