Addition of Mobilization Advances based on gross receipts as per 26AS statement deleted as mobilization advance was offered to tax over the life of the project
ABCAUS Case Law Citation:
ABCAUS 3763 (2023) (06) ITAT
In the instant case, the Department had challenged the order passed by the CIT(A) in deleting the addition made by the Assessing Officer (AO) on account of disallowance of Mobilization Advances, allowing the TDS credit on Mobilization Advances and deleting addition on account of disallowance of salary and wages.
The respondent assessee was a company engaged in the business of construction and allied services.
For the relevant assessment years, the return of assessee was taken up for scrutiny assessment. During the year under consideration the assessee had received advance amount from clients/customers at the beginning of project to enable it to deploy machinery and manpower in sufficient quantity at work site awarded to the assessee.
The mobilization advance was initially recognized as a liability by the assessee and based on the work done and approved by the client, the amount was billed to the customer and mobilization advance was adjusted as part of revenue/ billing and recognized as income over the period of project.
The assessee had followed this accounting method consistently in line with recognized Percentage of Completion Method (POCM) followed in terms of Accounting Standards-7.
The Assessing Officer noticed a difference in the receipt reflected in Form 26AS as compared to the amount reflected in the profit and loss account. Assessee claimed that the same was primarily on account of mobilization advances received by the assessee and initially recognized as liability by the assessee.
However, the AO was not satisfied and made an addition of 20% of the Mobilization, advances as undisclosed income u/s 68 r.w. section 155BBE of the Act.
Addition of TDS on mobilization advances and adhoc addition of 5% of expenses comprising of salary & wages, spares and power & fuels was made alleging that the same was not forming part of Work in Progress (WIP) resulting in adjustment as undisclosed income of the assessee.
In appeal the CIT(A) deleted the additions on account of mobilization advance and disallowance of salary and wages. The issue with regard to TDS on mobilization advance was also partly decided in favour of the assessee by giving proportionate credit.
The Tribunal observed that the genuineness, identity and creditworthiness of the parties making mobilization advances was never questioned so no addition could have been made by the AO by invoking provisions of section 68 of the Act.
Further, the Tribunal opined that there was no justification to make an adhoc disallowance u/s 68 of the Act. The AO was supposed to either accept mobilization advance as a whole on the basis of running account or to a disbelieve the whole. Ad hoc disallowance without pointing out any shortcoming in accounting method or books is not sustainable.
Further, the Tribunal noted that before the AO the assessee had placed relevant piece of evidence and all the detailed facts and documents relating to mobilization advances which were not duly considered and have been relied by the CIT(A).
The Tribunal further observed that the AO had also failed to appreciate that although initially mobilization advance was recognized as liability ultimately over the period of project the same was recognized as revenue and the entire mobilization advance was offered to tax over the life of the project. This was the consistent accounting practice of the assessee which had never been questioned before.
With regard to TDS credit on mobilisation advance, the claim of the assesses was that mobilization advances received during the year on which TDS gets deducted stands offered as income of the same year and stand offered in the form of WIP.
The Tribunal observed that the CIT(A) had duly taken into consideration the position of mobilization advances received during the year and the fact that when the AO had given TDS credit in ITNS 150 and therein had disallowed TDS credit it cannot be added as income of the assessee as the same leads to double taxation.
However, the cross objection of the assessee claiming TDS of the entire mobilisation advance instead of proportionate credit given by CIT(A) was not pressed before the Tribunal.
With respect to the ground of CIT(A) deleting disallowance of salary and wages ignoring the fact that assessee has violated matching principle of accounting by claiming excess expenditure in proportion to the revenue offered to taxation, the Tribunal observed that the case of the AO was that major expenses on account of wages, salary spares etc. were directly debited to the profit and loss account in totality and had not been included as part of WIP credited to the P&L Account.
The Tribunal noted that Ld. CIT(A) has rightly concluded that AO had mistaken in referring to note of the P & L account which only reflected the position of opening materials, purchases and closing materials. The position of WIP is not shown in that note but part of other note. The method of valuation of WIP had been consistently followed by the assessee over years and had been accepted in preceding as well as succeeding years. The same was also in accordance with accounting standards. Therefore, the disallowance on adhoc basis without any rational had been rightly deleted by CIT(A) and no interference was called for, said the Tribunal.
Accordingly, the appeal of the assessee was allowed.
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