2019 (9) TMI 1134 - AT - Income Tax

Assessee's Appeals Partially Allowed, Revenue's Appeals Rejected

The Tribunal partially allowed the assessee's appeals, granting relief on the disallowance of provision for expenditure, renovation expenditure, write-off ... Disallowance of provision for expenditure - assessee consistently following this accounting method from past years - HELD THAT:- Additionally, AS-1 provides for creating provision for expenditure on estimate basis keeping in view business prudence and information available. Commissioner (Appeals) also not only recognizes the necessity of making provision for unbilled expenditure but has also allowed provision for expenditure not exceeding 10% of the actual expenditure - there is no such thumb rule either in Accounting Standards or elsewhere to restrict the provision to within the range of 10% of the actual expenditure. It is worth mentioning; the assessee has reversed the provision in the subsequent year and offered to tax. This fact has not been disputed by the Department. Therefore, the ratio laid down in case of CIT V/s Excel Industries Ltd. [2013 (10) TMI 324 - SUPREME COURT] would apply. More so, when the assessee is consistently following this accounting method from past years. In view of the aforesaid, we hold that the part disallowance sustained by learned Commissioner (Appeals) also deserves to be deleted. Therefore, learned Commissioner (Appeals) direction to grant consequential relief in subsequent assessment year becomes infructuous. Disallowance of renovation expenditure - expenditure in respect of the leased premises - HELD THAT:- The nature of expenditure incurred by the assessee in respect of the leased premises and more particularly the premises at Hyderabad and Bangalore are not of the nature of constructing new structure, extension or improvement of building. Therefore, Explanation–1 to section 32(1) of the Act would not be applicable to the facts of the present case. Though, there cannot be any quarrel with regard to the proposition laid down in the decisions cited before us, however, the nature of expenditure incurred by the assessee with reference to facts of each case would decide whether it is capital or revenue in nature. In the facts of the present case, after examining the details of expenditure incurred by the assessee, we are of the view that it is of revenue nature, hence, has to be allowed. Disallowance of write off of security deposit in respect of lease hold premises - HELD THAT:- Due to non–refund of the security deposits the assessee has not only kept the premises under its possession but has also taken legal steps for recovery of the security deposit by filing a lawsuit. Thus, the contention of the assessee that it was not hopeful of recovery of the security deposit appears to be farfetched, more so, when he is having possession of a far more valuable asset than the security deposit. Further, when the assessee has filed a lawsuit for recovery of security deposit, it cannot be said that he has lost all its hope of recovery of the security deposit. Contention of the assessee that he was not hopeful of recovering the security deposit is not true. Rather, by occupying the premises under his possession, the assessee was in a more advantageous position to recover the security deposit. At the same time, assessee’s contention that the security deposit was offered to tax in assessment year 2016–17 cannot also be ignored. However, considering the fact that these are completely new facts brought to the notice of the Tribunal in course of hearing, we are inclined to restore the issue to Assessing Officer to verify the relevant facts and allow consequential benefit to the assessee. This ground is allowed for statistical purposes. Disallowance of write off of tax deducted at source (TDS) - HELD THAT:- As could be seen from the facts emanating from record, though, tax was deducted at source in earlier assessment years, however, the assessee could not get credit of such TDS amount due to non–furnishing of TDS certificate by deductors. Undisputedly, the TDS amount is nothing but a part of income accruing to the assessee. It is also a fact that the assessee has offered the gross income including TDS in the respective assessment years. Therefore, to that extent, non–allowance of TDS credit to the assessee due to non–receipt of TDS certificates amounts to loss of income - non–furnishing of TDS certificate amounts to a debt due to deductee which can be allowed under section 36(1)(vii) - Commissioner (Appeals) has also accepted the aforesaid legal position. The grounds on which he has rejected assessee’s claim are, firstly, it is not within the time prescribed under section 155(14) of the Act and secondly, the assessee has not claimed such deduction in the computation of income. In our view, the aforesaid reasoning of learned Commissioner (Appeals) is not sustainable. Once it is held that assessee’s claim of write off is allowable under section 36(1)(vii) of the Act, then the provisions of section 155(14) of the Act would not apply - We direct the Assessing Officer to allow assessee’s claim of write off of TDS. Ground is allowed. Addition made to its income on account of change in revenue recognition policy - HELD THAT:- Issue requires further examination by the Assessing Officer as the assessee needs to establish with cogent material and evidence that the change in revenue recognition policy is for bona fide reasons and necessary for carrying on its business activities in a more efficient manner - assessee has to establish that the change in revenue recognition policy is in conformity with the provisions contained under section 145(1) and (2). With the aforesaid observations, we are inclined to restore the issue to the Assessing Officer for de novo adjudication after due and sufficient opportunity of being heard to the assessee. If the assessee can establish that the change in revenue recognition policy is for bonafide and valid reasons, occasion for any addition on this count would not arise. The Ground raised is allowed for statistical purposes. Issues Involved:1. Disallowance of provision for expenditure.2. Disallowance of renovation expenditure.3. Disallowance of write-off of security deposit.4. Disallowance of write-off of TDS.5. Addition due to change in revenue recognition policy.Issue-Wise Detailed Analysis:1. Disallowance of Provision for Expenditure:The assessee challenged the disallowance of a provision for expenditure amounting to Rs. 2,07,06,990. The Assessing Officer (AO) found that the provision made by the assessee for various expenditures was excessive compared to the actual expenditures incurred, treating the excess provision as a contingent liability. The Commissioner of Income Tax (Appeals) [CIT(A)] allowed provisions within a 10% range of actual expenditures but disallowed the excess. The Tribunal held that the provision made by the assessee was in accordance with AS-1 and section 145(2) of the Act and should be allowed as the method was consistently followed and accepted in prior years. Therefore, the disallowance sustained by CIT(A) was deleted.2. Disallowance of Renovation Expenditure:The AO disallowed the repair and maintenance expenditure of Rs. 50,14,955, treating it as capital expenditure, as it provided an enduring benefit to the assessee. The CIT(A) partially allowed the expenditure, treating it as revenue expenditure except for new premises at Hyderabad and Bangalore. The Tribunal, after examining the nature of the expenditure, held that it was of revenue nature and allowed the deduction in full, setting aside the decision of CIT(A).3. Disallowance of Write-Off of Security Deposit:The assessee wrote off a security deposit of Rs. 59,26,246, which was not refunded by the landlord upon termination of a lease agreement. The AO disallowed the write-off as the assessee was still in possession of the premises and had filed a lawsuit for recovery. The CIT(A) upheld the disallowance. The Tribunal restored the issue to the AO for verification, noting that the assessee had subsequently settled with the landlord and received an amount, which was offered as income in a later year.4. Disallowance of Write-Off of TDS:The assessee claimed a write-off of TDS amounting to Rs. 1,21,66,248, as TDS certificates were not obtained from deductors. The AO disallowed the claim, stating that the write-off did not meet the conditions of section 36(1)(vii). The CIT(A) also disallowed the claim, citing section 155(14). The Tribunal allowed the write-off, noting that the gross income included the TDS amount and the non-receipt of TDS certificates amounted to a business loss.5. Addition Due to Change in Revenue Recognition Policy:The assessee changed its revenue recognition policy from invoice-based to project completion-based, resulting in a lower profit of Rs. 22.83 crore. The AO added back the deferred revenue, invoking section 145(2), as the change was not justified. The CIT(A) sustained the addition but directed the AO to reduce the income in subsequent years if offered by the assessee. The Tribunal restored the issue to the AO for further examination, requiring the assessee to justify the change in policy with cogent material and evidence.Conclusion:The Tribunal allowed the assessee's appeals partly, providing relief on the issues of provision for expenditure, renovation expenditure, write-off of security deposit, and write-off of TDS. The issue of revenue recognition policy was remanded to the AO for de novo adjudication. The Revenue's appeals were dismissed.