2012 (10) TMI 181 - HC - Income Tax

Court rules in favor of assessee on deductible expenses and project provisions, dismissing Revenue's claims.

The court held in favor of the assessee on all issues. The expenses incurred on the maintenance of accommodation in Iraq for employees were deemed ... Deductibility of maintenance expenses as business expenditure versus accommodation 'guest house' exclusion under Section 37(4) and Section 37(5) - requirement of 'tour' or 'visit' in deeming provision for accommodation to be a guest house - allowability of depreciation on motor cars used abroad and scope of the proviso to Section 32(1)(ii) - relevance of Parliamentary intent, Finance Minister's speech and administrative circular in statutory interpretation of depreciation provisions - acceptance of percentage-completion accounting and allowability of provisions for completion expenses and expenses on completed projectsDeductibility of maintenance expenses as business expenditure versus accommodation 'guest house' exclusion under Section 37(4) and Section 37(5) - requirement of 'tour' or 'visit' in deeming provision for accommodation to be a guest house - Expenses incurred on maintenance of accommodation provided to employees and executives in Iraq are not disallowable under Section 37(4) and Section 37(5) as they do not constitute 'guest house' accommodation within the meaning of those provisions. - HELD THAT: - The Court held that the deeming provision in sub section (5) must be read with the qualifying expressions 'on tour' or 'on visit' in order to confine the exclusion to accommodation used by persons on a transitory or temporary basis. Where accommodation is provided as part of execution of a long term project (here, supply of labour and temporary accommodation for workers in Iraq) and not as lodging for persons visiting on tour or visit, the accommodation does not fall within the 'guest house' exclusion. Reading the provisions otherwise would render the qualifying words meaningless and broaden the exclusion beyond parliamentary intent. The Tribunal's reliance on its earlier orders and its conclusion sustaining allowability of the expense was affirmed; the question is answered against the Revenue and for the assessee. [Paras 1, 2, 3, 4]The Tribunal was correct in holding that the maintenance expenses for employee accommodation in Iraq are allowable; the 'guest house' exclusion does not apply where accommodation is for project staff rather than persons on 'tour' or 'visit'.Allowability of depreciation on motor cars used abroad and scope of the proviso to Section 32(1)(ii) - relevance of Parliamentary intent, Finance Minister's speech and administrative circular in statutory interpretation of depreciation provisions - Depreciation claimed on motor cars purchased and used in Iraq for carrying on the assessee's business abroad is allowable. - HELD THAT: - The Court agreed with the view that the proviso to Section 32(1)(ii) was not intended to deny depreciation to Indian concerns using cars in the course of business carried on abroad. The Finance Minister's speech and Circular No. 621 were held to demonstrate that hardship to taxpayers using foreign cars in their foreign business was intended to be remedied, and earlier judicial decisions (including the Punjab & Haryana High Court) support allowing depreciation where cars are used for business at foreign sites. Since the vehicles were used for business operations abroad and depreciation is directly attributable to business use, the Tribunal's allowance of depreciation was upheld. [Paras 5, 6, 7, 8, 9]Claim for depreciation on motor cars used in Iraq is allowable; the proviso does not exclude depreciation for cars used in the assessee's foreign business.Application of precedent in statutory interpretation - The substantial question referred to the Court is answered in favour of the assessee as covered by the Supreme Court decision in CIT v. Podar Cement Pvt. Ltd. - HELD THAT: - The Court held that the referred substantial question is governed by the Supreme Court's decision in CIT v. Podar Cement Pvt. Ltd., and accordingly answered the reference in favour of the assessee and against the Revenue. [Paras 10]Reference answered for the assessee in accordance with the cited Supreme Court authority.Acceptance of percentage-completion accounting and allowability of provisions for completion expenses and expenses on completed projects - Expenses shown as 'provision for completion expenses' and 'expenses on completed projects' are allowable despite the Department's non-acceptance of the assessee's accounting system. - HELD THAT: - The Court examined the assessee's consistent practice of recognizing project profits on the percentage completion basis, the method of making provisions when progress reached specified thresholds, and the subsequent adjustments when actual costs varied. The Assessing Officer's characterisation of such provisions as contingent liabilities was rejected: in the absence of a specific departure from the assessee's established accounting practices and given judicial precedents (including this Court's decision in CIT v. Triveni Engineering and Industries Ltd.), the Tribunal and Commissioner (Appeals) were justified in upholding the allowability of the amounts. The Revenue's reliance on Calcutta Company Ltd. was considered but did not warrant overturning the factual and accounting conclusions. [Paras 12, 13, 14, 15, 16]The Tribunal correctly held that the provisions for completion expenses and expenses on completed projects are allowable; the assessee's percentage completion accounting and related provisions are acceptable for tax purposes in the circumstances of the case.Final Conclusion: All questions referred were answered in favour of the assessee and against the Revenue: (i) maintenance expenses for employee accommodation in Iraq are allowable and not excluded as 'guest house' expenditure, (ii) depreciation on motor cars used in Iraq is allowable, (iii) the referred substantial question is covered by precedent in favour of the assessee, and (iv) provisions for completion expenses and expenses on completed projects are allowable under the assessee's percentage completion accounting method. The reference is disposed of accordingly. Issues Involved:1. Deductibility of expenses incurred on the maintenance of accommodation provided to employees in Iraq.2. Allowability of depreciation on motor cars purchased and used in Iraq.3. Allowability of expenses claimed under provisions for completed expenses and expenses incurred on completed projects.Issue-wise Detailed Analysis:1. Deductibility of Expenses on Maintenance of Accommodation in Iraq:Question: Whether the ITAT is correct in holding that expenses incurred on the maintenance of accommodation provided to its employees and executives in Iraq is not disallowableRs.Analysis: The assessee claimed Rs. 2,09,859/- for the relevant accounting year. The Tribunal referred to its earlier orders for assessment years 1985-86 and 1986-87, which were in favor of the assessee. The Revenue contended that under Section 37(4) and Section 37(5) of the Income Tax Act, 1961, these expenses were not deductible, arguing that 'residence by whatever name called' includes all kinds of accommodation used for transit. The Court noted that the term 'tour' or 'visit' is crucial for interpreting the expression 'guest house' under Section 37(4). The accommodation provided in Iraq was for the entire duration of the project, not merely for transitory purposes. Thus, the expenses were not for a 'guest house' as intended by the provisions. The Court concluded that the expenses were correctly allowed by the Tribunal.Conclusion: The question is answered against the Revenue and in favor of the assessee.2. Allowability of Depreciation on Motor Cars in Iraq:Question: Whether the depreciation claimed on motor cars purchased and used in Iraq is allowable to the assesseeRs.Analysis: The assessee claimed depreciation for cars used outside India for business activities in Iraq for assessment years 1987-88 and 1988-89. The Revenue argued that the second proviso to Section 32(1)(ii) denied depreciation for cars used outside India. The assessee countered with the Finance Minister's speech and Circular no. 621, which indicated that depreciation should be allowed for foreign cars used in business abroad. The Punjab & Haryana High Court had previously ruled in favor of allowing such depreciation. The Court agreed with this view, noting that the expenses incurred for the upkeep of the vehicles were business expenses, and the depreciation was directly related to business use.Conclusion: The question is answered against the Revenue and in favor of the assessee.3. Allowability of Expenses on Completed Projects:Question: Whether the expenses claimed by the assessee under the heads provisions for completed expenses and expenses incurred on completed projects are allowable even though the Department has not accepted the system of accounting followed by the assesseeRs.Analysis: The assessee, a builder and promoter, followed a percentage completion method for accounting profits from multi-storey projects. The AO disallowed expenses claimed under provisions for completed expenses and expenses incurred on completed projects, arguing that these were contingent liabilities. The Tribunal upheld the CIT (Appeals) decision, noting that the assessee's accounting method was consistent and accepted by the Income Tax Department. The Court referred to its own decision in CIT Vs. Triveni Engineering and Industries Limited, supporting the method of accounting used by the assessee.Conclusion: The question is answered in favor of the assessee and against the Revenue.Final Judgment:All questions framed in this reference are answered in favor of the assessee and against the Revenue. The reference is accordingly disposed of.