The Delhi bench “A” of the Income Tax Appellate Authority (ITAT) recently ruled on a case involving Tax Deducted at Source (TDS) applicability on accounting provisions made towards unfinished work.
The assessee/appellant, Ajay Enterprises Private Limited, filed a return of income amounting to Rs. 92,06,590 for the Assessment Year 2017-18. The company followed the percentage of completion method (POCM) for revenue recognition in its construction business. During the assessment, the Assessing Officer (AO) disallowed Rs. 5,36,19,000 for provisions made towards unfinished work, noting that the provisions should be labeled as capital expenditure, and maintenance expenditure if incurred after the completion of the project.
The AO also made an addition of Rs.38,93,000 on account of a provision made for land development , noting failure to deduct TDS ( Tax Deducted at Source) for the same.
The assessee, aggrieved by the AO’s order, appealed against it before the Commissioner of Income (Appeals) [ CIT (A) ]. The CIT (A) found the observations of the AO to be erroneous, but examined the additions made from the applicability of provisions of TDS. It was observed that the AO had also made an addition by way of disallowance under Section 40A of Income Tax Act 1961 (ITA) which the CIT (A) sustained. Thus, AO’s disallowance under Section 40(a)(ia) and Section 43B was partially upheld. Unsatisfied by the decision, the assessee appealed against the CIT (A)’s order before ITAT.
The appellant contended that since the company had consistently followed the POCM method of accounting, the provisions for unfinished work should not attract TDS, and that it is impossible to deduct TDS on estimated provisions as the exact amounts could not be ascertained at the time of making provisions.
It was further argued that the CIT(A) failed to appreciate that there is no finding of the A.O that the estimation of total revenue and total expenditure necessary for determining profit under the POCM method were unfair, and that in absence of such findings no disallowance could be made under Section 40(a)(ia) at 30% of Rs.35,60,51,256/- and Rs.1,30,00,000/- under Section 43B out of the amounts provided towards the unfinished work.
It was also submitted that the disallowance made by AO under section 14A amounting to Rs.47,63,951/- was bad in law in view of the fact that there was no exempt income in the year under consideration.
The bench of ITAT comprising Mr GS Pannu and Mr Abhinav Sharma after hearing contentions from both sides, observed that there was no error in the findings of the CIT (A) in regard to both the counts of disallowances under Section 40A(ia) and section 40B of the ITA.
It was noted that once the assessee claims that while following POCM at 100% of the revenue of the project has been recognized, it was incumbent to also
account expenditures by deducting TDS instead of making provisions. However, as complete details of payment after the close of the accounts and TDS deducted and deposited there from in subsequent years was filed before the CIT (A) on 25.04.2022 and which have not been taken into consideration, it was found appropriate to restore the issue to that extent before the CIT (A).
It was also observed that the AO made a disallowance under Section 14A without considering the fact that there was no exempt income during the year and since it is a settled proposition of law that in the absence of exempt income, no disallowance can be made.
In light of the observations made, the appeal of assessee was partly allowed.
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