The ACIT, Circle-4(1)., Visakhapatnam v. M/s Visakha Machinery P Ltd, Visakhapatnam

ITA NO.265 OF 2007 VISAKHA MACHINERY PRIVATE LIMITE D VIZAG PAGE 1 OF 11 IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH VISAKHAPATNAM BEFORE: SHRI SUNIL KUMAR YADAV JUDICIAL MEMBER AND SHRI BR BASKARAN ACCOUNTANT MEMBER ITA NO. 265/VIZAG/2007 ASSESSMENT YEAR:2004-05 ACIT CIRCLE-4(1) VISA KHAPATNAM VS. VISAKHA MACHINERY (P) LTD. VISAKHAPATNAM (APPELLANT) (RESPONDENT) PAN NO AABCV 4000 H APPELLANT BY: SHRI T.H. LUCAS PETER CIT (DR) RESPONDENT BY: SHRI C. SUBRAMANYAM CA ORDER PER SHRI B. R. BASKARAN ACCOUNTANT MEMBER: THE APPEAL OF THE REVENUE IS DIRECTED AGAINST THE ORDER DATED 22.03.2007 PASSED BY LEARNED CIT(A)-II VISAKHAPATN AM AND IT RELATES TO THE ASSESSMENT YEAR 2004-05. 2. THE REVENUE IS CHALLENGING THE DECISION OF THE L EARNED CIT (A) IN GRANTING RELIEF IN RESPECT OF FOLLOWING 2 ADDITIONS : I) ADDITION PERTAINING TO CONTRACT WORKS - RS.73 9 2 265/- II) DISALLOWANCE OF CLAIM TOWARDS BAD DEBTS- RS. 7 21 745/- 3. THE FACTS RELATING TO THE ISSUES ARE STATED IN B RIEF. THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF UNDERTAKING M ECHANICAL CONTRACT WORKS FOR PUBLIC SECTOR UNDERTAKINGS. DURING THE Y EAR UNDER CONSIDERATION THE ASSESSEE COMPANY DISCLOSED THE CONTRACT RECEIPT S TO THE TUNE OF RS.2.57 CRORES AND OTHER INCOME OF RS.5.47 LAKHS. IT WAS N OTICED THAT THE ASSESSEE DID NOT EXECUTE ANY CONTRACT WORK FROM THE YEAR 199 6 ONWARDS. IT WAS STATED THAT THERE WAS A DISPUTE WITH REGARD TO THE SETTLEMENT OF BILLS BETWEEN THE ASSESSEE AND THE VISAKHAPATNAM STEEL PL ANT IN CONNECTION WITH THE WORKS EXECUTED FOR BLAST FURNACE-1 AND BLA ST FURNACE-2. THE DISPUTE WAS REFERRED TO AN ARBITRATOR AND A PART OF ARBITRATORS AWARD WAS RECEIVED DURING THE YEAR UNDER CONSIDERATION AND TH E SAME WAS SHOWN AS ITA NO.265 OF 2007 VISAKHA MACHINERY PRIVATE LIMITE D VIZAG PAGE 2 OF 11 CONTRACT RECEIPTS. AGAINST THE SAID RECEIPTS THE A SSESSEE CLAIMED INTER ALIA FOLLOWING EXPENSES: WIP TO THE EXTENT OF CONTRACT RECEIPTS - RS. 73 92 285 ADMINISTRATIVE EXPENSES - RS. 10 83 024 FINANCE CHARGES - RS. 12 32 608 DEPRECIATION - RS. 50 586 4. SINCE THE ASSESSEE DID NOT EXECUTE ANY WORKS DUR ING THE YEAR UNDER CONSIDERATION THE ASSESSING OFFICER QUESTIONED THE CLAIM FOR DEDUCTION OF RS.73 92 285/- UNDER THE HEAD WORK IN PROGRESS (W IP). THE EXPLANATIONS FURNISHED BY THE ASSESSEE IN THAT REGARD ARE SUMMAR IZED BY THE ASSESSING OFFICER AS UNDER: IN RESPONSE IT WAS SUBMITTED BY THE ASSESSEE COMP ANY THAT IT EXECUTED FABRICATION AND ERECTION OF STRUCTURAL STEEL AND CLADDING WORKS OF SLAG STORAGE IN ZONE-D OF BLAST F URNACE-1 AND SIMILAR WORK OF BLAST FURNACE-2 UNDER TWO WORK ORDERS DATED 03-03-1986 AND 10-08-1987 ISSUED BY RASTRIYA ISPAT NIGAM LIMITED (VISAKHAPATNAM STEEL PLANT). THE TIME OF COMPETITION OF COMPLETION OF BOTH THE WORK CONTRACT S WAS FIXED AT 15 MONTHS AND 18 MONTHS RESPECTIVELY FROM THE DA TE OF LETTER OF INTENT TO BE FURNISHED BY THE ASSESSEE CO MPANY. IT WAS SUBMITTED BY THE ASSESSEE COMPANY THAT THE WORK S RELATING TO BLAST FURNACE-1 (BF-1) GOT DELAYED UP T O 31.03.2009 AND WORKS PERTAINING TO BLAST FURNACE-2( BF-2) GOT DELAYED UP TO 31.03.1992. THE REASONS FOR THE DELAY WERE STATED TO BE DUE TO EXECUTION OF MANY EXTRA AND INT ERRELATED JOB-WORKS WHICH WERE NOT INCLUDED IN THE WORK ORDER S ISSUED BUT HAD TO BE UNDERTAKEN BY THEM AS ANCILLARY JOBS. NATURALLY WHEN EXTRA WORKS WERE UNDERTAKEN WHICH WERE NOT COV ERED UNDER THE TERMS OF ORIGINAL WORK ORDERS ISSUED BY T HE CONTRACTEE CERTAIN DISPUTES AROSE BETWEEN THE PART IES I.E. THE CONTRACTEE AND THE CONTRACTOR ON THE TERMS OF PAYME NT FOR CONTRACT-WORKS UNDERTAKEN. IT WAS FURTHER SUBMITTED BY THE ASSESSEE COMPANY THAT THE SAID DISPUTES COULD NOT B E RESOLVED THROUGH NEGOTIATIONS AND ULTIMATELY THEY HAD TO RES ORT TO ARBITRATION. ACCORDINGLY CONSEQUENT TO THE AWARDS PASSED BY THE LEARNED ARBITRATOR JUSTICE T.N.C. RANGARAJAN V IDE AWARDS NO.TNCRJ/AWARD BF-1 AND TNCRJ/AWARD BF-II DATED 30.07.2003 THE ASSESSEE COMPANY RECEIVED AN AMOUNT OF RS.2 29 89 369 FROM VISAKHAPATNAM STEEL PLANT TOWAR DS PAYMENT OF ARBITRATION AWARD AMOUNTS PERTAINING TO WORKS EXECUTED BY IT IN RESPECT OF BLAST FURNACES I & II. ITA NO.265 OF 2007 VISAKHA MACHINERY PRIVATE LIMITE D VIZAG PAGE 3 OF 11 BLAST FURNACE-I BLAST FURNACE-II AMOUNT RECEIVED TOWARDS JOB EXECUTED RS.18 80 628 RS. 68 45 754 ADD: INTEREST FOR THE DELAYED PERIOD RS.43 21 465 RS.1 38 44 421 RS.62 02 093 RS.2 06 90 175 LESS: TDS RS. 9 24 454 RS. 29 78 445 RS.52 77 639 RS.1 77 11 730 ===================== THE SAID AMOUNT OF RS.2 29 89 369 (RS.52 77 639+RS.1 77 11 730) WAS STATED TO HAVE BE EN DEPOSITED BY THE ASSESSEE COMPANY IN ANDHRA BANK VISAKHAPATNAM. DURING THE COURSE OF ASSESSMENT PROC EEDINGS THE ASSESSEE COMPANY SUBMITTED BREAK-UP OF CONTRACT RECEIPTS DURING THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEA R 2004-05 AS UNDER: BLAST FURNACE-I BLAST FURNACE-II AMOUNT RECEIVED TOWARDS JOBS EXECUTED RS.18 80 628 RS. 68 45 754 LESS: AMOUNT ALREADY ACCOUNTED FOR IN 01-02 RS. 1 85 927 RS. 9 38 028 RS.16 94 701 RS. 59 07 726 ADD: INTEREST FOR THE DELAYED PERIOD RS.43 21 465 RS.1 38 44 421 RS.60 16 166 RS.1 97 52 147 ACCORDINGLY THE ASSESSEE COMPANY HAS SHOWN AN AMOU NT OF RS.2 57 63 313/- (RS.60 16 166 + RS.1 97 52 147) AS CONTRACT RECEIPTS DURING THE PREVIOUS YEAR RELEVANT TO ASSES SMENT YEAR 2004-05. FROM THE SAID AMOUNT IT CLAIMED DEDUCTION OF WORK-IN- PROGRESS OF RS.73 923 285 AS RELATABLE TO THE SAID CONTRACT RECEIPTS. WHEN THE ASSESSEE COMPANY WAS ASKED TO SUBSTANTIATE ITS CLAIM OF WORK-IN-PROGRESS WITH REF ERENCE TO ITS BOOKS OF ACCOUNT FOR THE RELEVANT PERIOD AND OTHER RELATED EVIDENCES IT FURNISHED YEAR-WISE DETAILS OF INVENT ORIES (CLOSING WORK) AS ESTIMATED BY THE MANAGEMENT AT COST DURING THE PERIOD FROM 31.03.1990 TO 31.03.2004 YEAR-WISE DET AILS OF CONTRACT WORK RECEIPTS ACCOUNTED BY IT DURING THE P ERIOD 31.03.1990 TO 31.03.2004 AND BALANCE SHEETS AS AT 3 1 ST MARCH 1990 TO 31 ST MARCH 2004). 4.1 ACCORDING TO THE ASSESSING OFFICER THE ASSE SSEE COULD NOT SUBMIT EXACT BILLS PERTAINING TO THE WORK-IN-PROGRESS BUT INSTEAD IT HAS FURNISHED THE DETAILS OF WORK-IN-PROGRESS ACCOUNT FROM 1990 T O 2004. IT WAS ALSO STATED THAT THE AMOUNT OF WORK IN PROGRESS WAS ESTI MATED BY THE MANAGEMENT FOR ACCOUNTING PURPOSES AND THE SAME WAS ALSO ACCEPTED BY THE AUDITORS. THE ASSESSING OFFICER DISALLOWED THE SAID CLAIM FOR THE REASONS THAT:- ITA NO.265 OF 2007 VISAKHA MACHINERY PRIVATE LIMITE D VIZAG PAGE 4 OF 11 (A) THE ASSESSEE COULD NOT FURNISH RELEVANT BILLS A ND VOUCHERS. (B) WIP AMOUNT IS ESTIMATED AND ACCOUNTED FOR AS PE R THE CERTIFICATE OF THE MANAGEMENT. (C) SINCE THE ASSESSEE IS FOLLOWING MERCANTILE SYST EM OF ACCOUNTING THE ASSESSEE WOULD HAVE CLAIMED THE EXPENSES IN EAR LIER YEAR. (D) THE ARBITRATION AWARD IS ALSO NOT BASED UPON T HE ACCOUNTS BUT BASED ON THE DIFFERENCES BETWEEN THE CONTRACTUAL AG REEMENTS AND THE BILLS RAISED BY THE ASSESSEE. THE ASSESSEE HAS FAILED TO SUBSTANTIATE THAT THE DEDUCTION OF WIP AS PER BOOKS OF ACCOUNT IS DEDUCTIBLE AGAINST THE ARBITRATION AWARD. (E) THE ASSESSEE COMPANY HAS FAILED TO GIVE BREAK UP DETAILS OF ITS WIP AMOUNT OUTSTANDING IN ITS BOOKS OF ACCOUNTS VIS -A-VIS THE BLAST FURNACE-1 BLAST FURNACE-2 AND OTHER WORKS. 4.2 BESIDES THE ABOVE THE ASSESSING OFFICER ON SC RUTINY OF ADMINISTRATIVE EXPENSES CLAIMED BY THE ASSESSEE NO TICED THAT A SUM OF RS.7 21 744/- HAS BEEN CLAIMED AS BAD DEBTS. THE AS SESSING OFFICER TOOK THE VIEW THAT THE ASSESSEE HAS WRITTEN OFF THE DEBI T BALANCES PRE-MATURELY AND IN HASTE AND ACCORDINGLY DISALLOWED THE SAID CL AIM ALSO. 5. THE ASSESSEE CARRIED THE MATTER BEFORE THE LEARN ED CIT (A). THE FIRST APPELLATE AUTHORITY NOTICED THAT THE ASSESSEE COMPANY IS VALUING THE WIP AS AT THE CLOSE OF THE ACCOUNTING YEAR AT 90% O F THE TOTAL VALUE OF WORK AND THE SAME IS TAKEN TO THE BALANCE SHEET AND P & L ACCOUNT. ITA NO.265 OF 2007 VISAKHA MACHINERY PRIVATE LIMITE D VIZAG PAGE 5 OF 11 THE LEARNED CIT (A) HAS EXTRACTED THE DETAILS OF WIP AS ON 31.03.2004 AS UNDER: S.NO NAME OF THE WORK CONTRACT NO. TOTAL VALUE OF WORK AMOUNT OF 90% 1 VALUE OF CLOSING WORK IN PROGRESS AS ON 31-3-2001 1 45 87 750 1 31 28 975 2 LESS VALUE OF WORK ACCOUNTED DURING 2001- 02 TOWARDS BLAST FURNACE-I & II WORKS BF - 1 VSP/CON-T/M-84 DATED 23.1.1987 AND BF-II VSP/ CON- T/M-107 DT. 11.11.1987 33 27 544 29 94 789 3 BALANCE AS ON 31.3.2002 1 12 60 205 1 01 34 185 4 LESS VALUE OF WORK ACCOUNTED DURING 2002-03 TOWARDS TPP WORKS TPP/VSP/CON - T/ M - 367 DT.18.01.1995 9 96 676 8 97 008 5 BALANCE AS ON 31.3.2003 1 02 63 529 92 37 177 6 LESS VALUE OF WORK ACCOUNTED DURING 2003- 04 TOWARDS BLAST FURNACE-I AND II WORKS BF - 1 VSP/CON - T /M - 84 DT. 23.1.1987 AND BF-II VSP/CON- T/M-107 DT.11.11.1987 82 13 627 73 92 265 7 BALANCE AS ON 31.3.2004 20 49 902 18 44 912 THE LEARNED CIT(A) ALLOWED THE CLAIM OF DEDUCTION O F WIP WITH THE FOLLOWING REASONS:- (A) THE ENTIRE AMOUNT OF WIP PERTAINS TO THE AMOUNT RECE IVABLE FROM VISAKHAPATNAM STEEL PLANT ONLY. HENCE THE OBSERVAT ION OF THE ASSESSING OFFICER THAT THE ASSESSEE DID NOT BIFURCA TE THE WIP AMOUNT BETWEEN BLAST FURNACE-1 AND BLAST FURNACE-2 BECOMES REDUNDANT. (B) WIP IS AKIN TO SUNDRY DEBTORS REPRESENTING AMOUNT RE CEIVABLE AGAINST WORKS EXECUTED BUT FOR WHICH PAYMENTS HAVE NOT BEEN RECEIVED. SINCE IT REPRESENTS AMOUNT RECEIVABLE I T SHOULD HAVE BEEN NORMALLY EXHIBITED IN THE CREDIT SIDE OF THE P & L ACCOUNT. HOWEVER IN THE INSTANT CASE IT HAS BEEN REDUCED FR OM THE COST OF MATERIAL CONSUMED. (C) THE OBVIOUS CONCLUSION IS THAT THE WIP AS AT THE E ND OF THE DIFFERENT YEARS WAS DISCLOSED AS INCOME OF THAT YE AR BY THE ASSESSEE COMPANY. (D) IT IS CLEAR THAT THE AMOUNTS RECEIVED BY THE ASSESS EE COMPANY ON ACCOUNT OF THE ARBITRATION PROCEEDINGS WAS ADJUS TED AGAINST THE WIP APPEARING UNDER THE HEAD CURRENT ASSETS TO T HE EXTENT WHAT HAS BEEN ALREADY ACCOUNTED FOR IN THE RESPECTI VE YEARS AND THE BALANCE AMOUNT RECEIVED OVER AND ABOVE WAS TAKE N TO THE P & L ACCOUNT BY OFFERING THE SAME AS INCOME IN THE R ESPECTIVE ASSESSMENT YEARS. ITA NO.265 OF 2007 VISAKHA MACHINERY PRIVATE LIMITE D VIZAG PAGE 6 OF 11 WITH REGARD TO THE DISALLOWANCE OF BAD DEBTS OF RS .7 21 745/- THE LEARNED CIT (A) DELETED THE SAME BY OBSERVING THAT AS PER THE AMENDED PROVISIONS OF SEC.36(1)(VII) OF THE ACT IT IS SUFFICIENT IF THE ASSESSEE WRITES OFF THE DEBT AS BAD IN THE BOOKS OF ACCOUNT. AGGRIEVED BY THE ORDER OF THE LEARNED CIT (A) THE REVENUE IS IN APPEAL BEFORE US. 6. WE HAVE HEARD THE RIVAL CONTENTIONS AND CAREFULL Y PERUSED THE RECORD. ON A PERUSAL OF THE ORDERS OF TAX AUTHORIT IES WE ARE OF THE VIEW THAT THEY HAVE NOT BEEN PROPERLY ENLIGHTENED ABOUT THE CONCEPT OF WORK IN PROGRESS (WIP). SO WE FEEL IT PERTINENT TO DWELL U PON IT BEFORE WE PROCEED TO ADDRESS THE ISSUES BEFORE US. THE EXECUTION OF CIVIL AND MECHANICAL CONTRACTS OF LARGE SCALE USUALLY TAKES MORE THAN ON E YEAR. HOWEVER AS PER THE AGREEMENT BETWEEN THE PARTIES THE CONTRACTORS WOULD RAISE THE BILL ONLY ON COMPLETION OF WORK AT A PARTICULAR STAGE. NORMA LLY THE PROJECTS SHALL BE CONTINUED TO BE EXECUTED BUT THE BILLS WOULD BE RA ISED ONLY ON COMPLETION OF PARTICULAR STAGE AS AGREED. THIS KIND OF BILLI NG SYSTEM GIVES RISE TO A PROBLEM AT THE TIME OF FINALIZATION OF THE ACCOUNTS AT THE YEAR END I.E. AS AT THE YEAR END A SITUATION WOULD ARISE THAT THE CONT RACTOR WOULD HAVE EXECUTED SOME WORKS FOR WHICH THE BILLING STAGE WO ULD NOT HAVE BEEN REACHED AND CONSEQUENTLY THE BILL WOULD NOT HAVE BE EN RAISED. THIS SITUATION IS TACKLED THROUGH THE CONSISTENT ACCOUNT ING PRACTICES. 6.1 IN THE ACCOUNTING POINT OF VIEW THE PROFIT IS ASCERTAINED BY MATCHING THE REVENUE WITH THE CORRESPONDING COSTS. THIS METH OD IS BASED ON THE PRINCIPLE CALLED MATCHING PRINCIPLE. ACCORDING T O THIS PRINCIPLE A PERSON IS ENTITLED TO DEDUCT ONLY THOSE EXPENSES WHICH ARE RE LATABLE TO THE REVENUE GENERATED DURING THAT YEAR. UNDER THIS PRINCIPLE ON LY ALL THE ACCRUED EXPENSES ARE BOOKED FOR UNDER MERCANTILE SYSTEM OF ACCOUNTING. ITA NO.265 OF 2007 VISAKHA MACHINERY PRIVATE LIMITE D VIZAG PAGE 7 OF 11 6.2 IN SO FAR AS A CONTRACTOR IS CONCERNED UNDE R THIS PRINCIPLE HE IS ENTITLED TO DEDUCT ONLY THE CORRESPONDING COSTS AND EXPENSES WHICH ARE RELATABLE TO THE REVENUE BOOKED BY HIM. UNDER ACCO UNTING PRINCIPLES ALL THE BILLS RAISED BY A CONTRACTOR WOULD BE CREDITED AS REVENUE RECEIPTS BY MAKING CORRESPONDING DEBIT TO THE ACCOUNT OF THE CO MPANY WHICH HAS AWARDED THE CONTRACT. AS STATED EARLIER AS AT TH E YEAR END THE CONTRACTOR WOULD HAVE EXECUTED A PART OF WORK FOR WHICH BILLS ARE YET TO BE RAISED AND THE EXPENSES RELATING TO THAT PART OF WORK WOULD HA VE BEEN BOOKED AS EXPENSES. HOWEVER UNDER THE MATCHING PRINCIPLE T HE CONTRACTOR IS ENTITLED TO DEDUCT ONLY THOSE EXPENSES WHICH ARE RELATABLE T O THE WORKS FOR WHICH BILLS HAVE BEEN RAISED. HENCE THE SAID PRINCIPLE NECESSITATES THE CONTRACTOR TO IDENTIFY THOSE EXPENSES AND COSTS FROM OUT OF R AW MATERIAL COSTS LABOUR COSTS EXPENSES ETC. WHICH ARE NOT RELATABLE TO TH E WORKS FOR WHICH BILLS HAVE BEEN RAISED AND THE AGGREGATE AMOUNT OF SUCH E XPENSES IS TERMED AS WORK-IN-PROGRESS. FOR ACCOUNTING PURPOSES THE AGGREGATE AMOUNT OF THE WORK IN PROGRESS SO IDENTIFIED SHALL EITHER B E CREDITED TO THE PROFIT AND LOSS ACCOUNT OR BE DEDUCTED FROM THE COST OF W ORKS. IN THE INSTANT CASE THE ASSESSEE HAS FOLLOWED THE SECOND METHOD. THE WORK IN PROGRESS IS AKIN TO THE CONCEPT OF CREDITING THE V ALUE OF CLOSING STOCK IN THE TRADING AND PROFIT & LOSS ACCOUNT IN THE CASE OF TR ADING AND MANUFACTURING CONCERNS. IN THE SUCCEEDING YEAR THE WORK-IN-PROGR ESS SO CREDITED TO PROFIT AND LOSS A/C/REDUCED FROM THE COST OF WORKS IN THE CURRENT YEAR SHALL BE TAKEN AS OPENING WIP IN P & L A/C OR ADDED TO THE CO ST OF THE WORK OF THE NEXT YEAR. AT THE END OF NEXT YEAR ALSO THE AGGRE GATE AMOUNT OF WIP SHALL BE IDENTIFIED AND THIS PROCESS SHALL BE CONTINUED E VERY YEAR. IN THIS PROCESS THE AMOUNT OF WORK IN PROGRESS SHALL BE CL AIMED AS EXPENDITURE AS AND WHEN THE CORRESPONDING REVENUE IS DISCLOSED. 7. THUS IT CAN BE SEEN THAT THE AMOUNT OF WIP REPRESENTS AGGREGATE AMOUNT OF VARIOUS COMPONENTS SUCH AS RAW MATERIAL LABOUR EXPENSES ETC. THAT HAD ALREADY BEEN BOOKED IN THE BOOKS OF ACCOUN T BUT FOR WHICH BILLS HAVE NOT BEEN RAISED. HENCE IT IS NOT A FRESH ITEM OF EXPENDITURE FOR WHICH ITA NO.265 OF 2007 VISAKHA MACHINERY PRIVATE LIMITE D VIZAG PAGE 8 OF 11 ONE CAN BRING EVIDENCES; RATHER IT IS GENERATED DUE TO ACCOUNTING PRINCIPLES. HENCE THE ASSESSING OFFICER IS NOT CORRECT IN OBSE RVING THAT (A) THE ASSESSEE COULD HAVE CLAIMED THE EXPENDITURE IN EARL IER YEARS AND (B) THE ASSESSEE HAS FAILED TO SUBSTANTIATE THE CLAIM WITH RELEVANT BILLS AND VOUCHERS. THE WIP HAS NECESSARILY TO BE ESTIMATED B Y THE MANAGEMENT ON THE BASIS OF THE TECHNICAL DETAILS AVAILABLE WITH T HEM AND HENCE THE OBSERVATIONS OF THE ASSESSING OFFICER ON THIS ASPEC T ARE ALSO DUE TO IMPROPER APPRECIATION OF THE CONCEPT OF WIP. 8. THE LEARNED CIT(A) IS ALSO WRONG IN OBSERVIN G THAT THE WIP HAD BEEN DISCLOSED AS INCOME OF THE EARLIER YEARS. AS STATE D EARLIER WIP AMOUNT IS CREDITED TO EITHER PROFIT AND LOSS ACCOUNT OR THE COST OF WORKS ACCOUNT NOT AS AN INCOME ELEMENT BUT AS A MEASURE OF REMOVAL O F THE EXPENSES CLAIM WHICH ARE NOT RELATABLE TO THE REVENUE CREDITED. 9. NOW LET US TURN TO THE FACTS IN THE INSTANT CASE . THE LEARNED CIT(A) HAS OBSERVED THAT THE ASSESSEE HAS EXECUTED WORKS F OR VISAKHAPATNAM STEEL PLANT IN CONNECTION WITH THE CONSTRUCTION OF BLAST FURNACE-I AND BLAST FURNACE-II AND THE AMOUNT OF RS.1 31 28 975/- SHOWN AS WIP AS ON 31.3.2001 PERTAINS TO THE ABOVE SAID TWO PROJECTS. HOWEVER FROM THE PERUSAL OF PAPER BOOK FILED BY THE ASSESSEE WE NOT ICE THAT THE ASSESSEE HAS QUANTIFIED THE WIP AMOUNT AS ON 31.3.99 AS UNDER : WIP IS TAKEN AS 90% A) BLAST FURNACE 1 23 51 8 57 B) BLAST FURNACE II 94 76 9 79 C) UGC SYSTEM FOR T.G-4 7 09 012 -------------- 1 25 37 848 1 12 84 063 D) CAST HOUSE EXHAUST STATION ETC 20 49 902 18 44 912 ---------------- ---------------- 1 45 87 750 1 31.28 975 ======== ======== THUS THE AMOUNT OF WIP PERTAINS NOT ONLY TO BLAST F URNACE-1 AND BLAST FURNACE-2 BUT ALSO TO TWO OTHER WORKS VIZ. UGC S YSTEM FOR T.G-4 AND CAST HOUSE EXHAUST STATION ETC. HOWEVER WE MAY ME NTION HERE THAT WE ITA NO.265 OF 2007 VISAKHA MACHINERY PRIVATE LIMITE D VIZAG PAGE 9 OF 11 HAVE NOT BEEN EXPLAINED WHETHER THE SAID TWO ADDITI ONAL PROJECTS FORM PART OF BLAST FURNACE PROJECT OR NOT. 10. ACCORDING TO THE ASSESSEE THESE WORKS WERE EXECUTED BEFORE 1996 AND SINCE THE DISPUTE AROSE BETWEEN THE ASSESSEE AN D THE VISAKHAPTNAM STEEL PLANT THE MATTER OF SETTLEMENT OF BILL WAS R EFERRED TO ARBITRATION. WE HAVE ALREADY OBSERVED THAT THE CONCEPT OF WIP COMES INTO PLAY ONLY DURING THE COURSE OF CONTINUANCE OF THE PROJECT. IF THE PR OJECT HAS BEEN COMPLETED AND ALL THE BILLS HAVE BEEN RAISED AND ACCOUNTED FO R THERE WILL NOT BE ANY QUESTION OF ASCERTAINING THE WIP AS AT THE YEAR END . IN THE NORMAL CIRCUMSTANCES A DISPUTE MAY ARISE BETWEEN THE PART IES ONLY WHEN THE OTHER PERSON FAILS TO PAY THE AMOUNT FOR THE INVOICE RAIS ED UPON HIM. IN THE INSTANT CASE IT IS NOT CLEAR (A) WHETHER THE CONCERNED PROJECT HAS BEEN COMPLETE D BY THE ASSESSEE OR NOT. (B) WHETHER THE ASSESSEE HAS RAISED THE INVOICES AF TER COMPLETION OF THE WORK OR NOT. IF THE INVOICE HAD BEEN RAISED BY THE ASSESSEE WHETHER THE SAME WAS ACCOUNTED FOR IN THE BOOKS OR NOT. (C) IF THE INVOICE HAS BEEN RAISED UP TO THE STAGE THE ASSESSEE HAD CARRIED OUT THE WORK AND THE SAME HAS ALSO BEEN ACC OUNTED FOR IN THE BOOKS THEN THERE WILL NOT BE ANY QUESTION OF DETER MINING THE WIP. (D) HOWEVER IF THE ASSESSEE DID NOT RAISE ANY BIL L FOR THE WORKS ALREADY COMPLETED BY HIM OR IF IT HAD NOT ACCOUNTED THE INVOICE SO RAISED THEN THE DISPUTED AMOUNT WOULD NOT HAVE BEEN TAKEN INTO THE GROSS RECEIPTS. IN THAT CASE THE DETERMINATION OF WIP WO ULD BECOME NECESSARY. WE ARE OF THE VIEW THAT ALL THESE FACTUAL ASPECTS N EED TO BE VERIFIED BY THE ASSESSING OFFICER INITIALLY. IF THE ASSESSING OFFIC ER FINDS THAT THE ASSESSEE HAD RAISED THE INVOICES IN RESPECT OF ALL THE WORKS EXECUTED BY THE ASSESSEE AND ALSO ACCOUNTED FOR THE SAME IN ITS BOOKS OF ACC OUNTS THEN IN OUR VIEW THE ASSESSEE SHOULD HAVE CLAIMED THE WIP AMOUNT IN T HE YEAR IN WHICH THE CORRESPONDING INVOICES WERE ACCOUNTED FOR AND HENCE THE ASSESSING OFFICER MAY DISALLOW THE PRESENT CLAIM MADE BY THE ASSESSEE . ITA NO.265 OF 2007 VISAKHA MACHINERY PRIVATE LIMITE D VIZAG PAGE 10 OF 11 11. IF THE ASSESSING OFFICER FINDS THAT THE ASSESSE E HAD NOT ACCOUNTED FOR ALL THE INVOICES IN THE EARLIER YEARS THEN THE ASS ESSEE IS ENTITLED TO DEDUCT THE PROPORTIONATE AMOUNT OF WIP AGAINST THE RECEIPTS AS AND WHEN THE SAME WERE OFFERED FOR TAXATION. IN THE INSTANT CAS E THE WIP AMOUNT OF RS.1 31 28 975/- SUBJECT TO THE CLARIFICATION THAT MAY BE OFFERED PERTAINS TO FOUR KIND OF WORKS AND THEY SHOULD BE APPROPRIAT ED IN PROPORTION TO THE AMOUNT OF CONTRACT RECEIPTS DECLARED BY THE ASSESSE E IN VARIOUS YEARS. ACCORDING TO THE ASSESSEE IT HAS RECEIVED PAYMENTS AS UNDER IN DIFFERENT FINANCIAL YEARS: NAME OF WORK 2001-02 20 02-03 2003-04 (ASST. YEAR 2002-03 2003-04 2004-05) BLAST FURNACE 1 5 89 844 - 16 94 700 BLAST FURNACE II 27 37 700 - 59 07 727 UGC SYSTEM FOR TG-4 - 9 96 676 - CAST HOUSE WORKS ETC - - - --------------- ------------ -------------- 33 27 544 9 96 676 76 02 4 27 ======== ======= ======= IT IS NOT CLEAR FROM THE RECORD WHETHER THE ASSESSEE HAS RECEIVED ALL THE PAYMENTS IN FULL SETTLEMENT OR SOME MORE AMOUNTS AR E YET TO BE RECEIVED. IN ANY CASE THE APPORTIONMENT OF THE WIP AMOUNT IN PROPORTION TO THE AMOUNT OF CONTRACT RECEIPTS RECEIVED BY THE ASSESSE E HAS NOT BEEN VERIFIED BY THE ASSESSING OFFICER OR THE LEARNED CIT(A). HE NCE IN OUR VIEW THE CLAIM OF RS.73 92 285/- NEEDS TO BE VERIFIED BY THE ASSESSING OFFICER. ACCORDINGLY WE SET ASIDE THE ORDER OF LEARNED CIT( A) ON THIS ISSUE AND RESTORE THE SAME TO THE FILE OF THE ASSESSING OFFIC ER WITH A DIRECTION TO IDENTIFY THE AMOUNT OF WIP WHICH IS RELATABLE TO TH E CONTRACT AMOUNTS CREDITED DURING THE YEAR UNDER CONSIDERATION AND AL LOW THE SAME AS EXPENDITURE. THE ASSESSEE IS ALSO DIRECTED TO FURN ISH ALL THE DETAILS THAT MAY BE CALLED FOR BY THE ASSESSING OFFICER IN THIS REGARD. 12. THE NEXT ISSUE RELATES TO THE DISALLOWANCE OF BAD DEBTS CLAIM OF RS.7 21 745/-. IN PRINCIPLE THE LEARNED CIT(A) IS C ORRECT IN STATING THAT THE ASSESSEE IS ENTITLED TO CLAIM BAD DEBTS ONCE THE CO RRESPONDING DEBT IS ITA NO.265 OF 2007 VISAKHA MACHINERY PRIVATE LIMITE D VIZAG PAGE 11 OF 11 WRITTEN OFF AS BAD IN THE BOOKS OF ACCOUNT. HOWEVE R AS PER SEC. 36(2) THE SAID DEDUCTION SHALL BE ALLOWED ONLY IF SUCH DEBT O R PART THEREOF HAS BEEN TAKEN INTO ACCOUNT IN COMPUTING THE INCOME OF THE A SSESSEE OF THE PREVIOUS YEAR IN WHICH THE AMOUNT OF SUCH DEBT OR PART THERE OF IS WRITTEN OFF OR OF AN EARLIER PREVIOUS YEAR. WE NOTICE THAT THE LEARNED CIT(A) HAS NOT ADDRESSED THIS PROVISION WHILE GRANTING RELIEF. HENCE WE AR E OF THE VIEW THAT THIS ASPECT ALSO NEEDS TO BE VERIFIED BY THE ASSESSING O FFICER. ACCORDINGLY WE SET ASIDE THE ORDER OF LEARNED CIT(A) ON THIS ISSUE ALSO AND REMIT THE SAME TO THE FILE OF THE ASSESSING OFFICER WITH A DIRECTI ON TO ALLOW THE CLAIM OF THE ASSESSEE IN TERMS OF SEC. 36(1)(VII) R.W.S 36(2). THE ASSESSEE IS ALSO DIRECTED TO FURNISH NECESSARY DETAILS THAT MAY BE C ALLED FOR BY THE ASSESSING OFFICER. 13. IN THE RESULT THE APPEAL OF THE REVENUE IS TREA TED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 10 TH FEBRUARY 2011. SD/- SD/- (SUNIL KUMAR YADAV) (B R BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER PVV/SPS VISAKHAPATNAM DATE:10-02-2011 COPY TO 1 THE ACIT CIRCLE - 4(1) VISAKHAPATNAM 2 M/S VISAKHA MACHINERY (P) LTD. 177 D - BLOCK AUTONAGAR VISAKHAPATNAM 3 4. THE CIT II VISAKHAPATNAM THE CIT(A) - II VISAKHAPATNAM 5 THE DR ITAT VISAKHAPATNAM. 6 GUARD FILE. BY ORDER SENIOR PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM