2020 (7) TMI 189 - AT - Income Tax

Appeal Succeeds: Disallowances Vacated, Precedents Followed. Accounting Methods Upheld. Provisions Allowed. Interest Upheld.

Thyssenkrupp Indutrial Solutions (India) Private Limited (formerly known as Uhde India Private Limited) Versus Additional Commissioner Of Income-tax 10 (3) ; Mumbai

The Tribunal allowed the appeal, vacating disallowances and additions by the A.O. and CIT(A). Precedents from prior years were followed, recognizing the ... Provision for cost on completed contracts on completed contracts - expenses incurred between the stage of commissioning of the plant and final acceptance of the same by its customer - provision had been disallowed by them primarily for the reason that they were not made on a scientific basis and the estimation of the same was not backed by supporting documentary evidence - HELD THAT:- Revenue would be recognized by the assessee on commissioning of a plant, however, in the backdrop of the complex nature of its business certain expenditure would certainly be required to be incurred between the stage of commissioning of the plant and final acceptance of the same by its customer. Assessee had to carry out estimation of such future expenditure and create a provision for cost on the completed projects. A major portion of the provision was reversed in the subsequent years - reasoning of the lower authorities would not justify disallowance of the provision made by the assessee. It is not the case of the revenue that the reversal of the provision in the subsequent year had not been offered to tax by the assessee. On a perusal of the records, we find that the provision for costs on completed contracts made by the assessee are based on identified and ascertained present liabilities on the basis of technical assessments and projections of the project managers, who are experts in their field. Practice of providing for all known liabilities on an estimate basis by the assessee is in accordance with the Accounting Standard-1 issued u/s 145 vide CBDT Notification No. S.O 69(E), dated 25.01.1996, as per which provisions should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information. Provision made by the assessee is in conformity with Accounting Standard-7 issued by the ICAI. Further, we find that the assessee consistently by way of a regular method of accounting had been making such provision for costs on completed contracts, which would be reviewed by it each and every year and were immediately written back if the same were not required. Issue as regards allowability of the provision for costs incurred on completed contracts is a recurring issue which in the preceding years involving identical facts had travelled upto the Tribunal. As observed by us hereinabove, the issue as regards the allowability of provision for costs on completed contracts is squarely covered by the order passed by the Tribunal in the assessee’s own case for the immediately preceding year i.e A.Y 2006-07 [2019 (4) TMI 873 - ITAT MUMBAI] wherein after exhaustive deliberations it was observed that the assessee’s claim for provision for costs on completed contracts was in order - We vacate the disallowance of provision for costs incurred on completed contracts. Disallowance of cost overruns on incomplete contracts - assessee had made a provision for cost overruns on incomplete contracts i.e accounting for expected loss to be incurred on a particular contract - HELD THAT:- We find, that the assessee had furnished before them complete project wise estimation for the year under consideration, and there is nothing discernible from the record which would suggest that there was any change in the method of accounting being followed by the assessee. Insofar the case of the assessee for A.Y 2004-05 is concerned, we find that the claim of the assessee in context of the issue under consideration was allowed by the Tribunal. As regards A.Y 2005-06, a similar claim of the assessee was allowed by the A.O himself. Accordingly, in terms of our aforesaid observations and finding no reason to take a different view delete the disallowance of provision for cost overruns on incomplete contracts Revenue recognition - accounting process - profits in respect of the projects accounted under the percentage completion method - HELD THAT:- As decided in own case [2019 (4) TMI 873 - ITAT MUMBAI] assessee is following consistent method of accounting to recognize the revenue under these contracts. The percentage of completion of the project has been worked out as per total cost incurred on the project to date vis-à-vis total budgeted cost and that fraction is applied to the contract value for the purpose of revenue recognition. Similar formulae have been adopted by the assessee in preceding two years which has been accepted by the revenue. No case of revenue leakage has been established before us. Nothing on record suggest that remaining income under the project has not been offered by the assessee in subsequent years, following the same method of accounting. Simply because progress billing was more than the stage of percentage of completion, the same, in itself, could not be the basis to usurp the consistent method of accounting being followed by the assessee. Therefore, the additions made by the revenue, under the circumstances, could not be sustained. Nature of expenditure - computer software charges - revenue or capital expenditure - A.O treated treated the same as a capital expenditure and allowed depreciation @60% on such capitalized value - HELD THAT:- As decided in own case [2019 (4) TMI 873 - ITAT MUMBAI] we find that when the expenditure is in the nature of annual maintenance charges, the same could not be held to be capital in nature. Keeping in view the fact that the issue stood covered in assessee’s favor by the orders of Tribunal for earlier years, we hold the expenditure to be revenue in nature and hence, fully allowable to the assessee. Consequently, the depreciation allowed against the same shall stand reversed. This ground stand allowed. Levy of interest u/s 234B - HELD THAT:- As the levy of interest u/s 234B is mandatory as per the judgment of the Hon’ble Supreme Court in CIT Vs. Anjum M.H Ghaswala & Ors [2001 (10) TMI 4 - SUPREME COURT] therefore, the A.O is directed to rework out the same after giving appellate effect to this order. Issues Involved:1. Disallowance of provision for costs incurred on completed contracts.2. Disallowance of provisions for cost overruns on incomplete contracts.3. Addition in respect of projects accounted under the 'Percentage Completion Method.'4. Disallowance of software maintenance expenses.5. Levy of interest under section 234B.Detailed Analysis:(A) Disallowance of Provision for Costs Incurred on Completed Contracts: Rs. 3,67,61,993/-The assessee had made a provision for costs on completed contracts, which was disallowed by the A.O. on the grounds that the liabilities were not ascertained or crystallized during the year. The CIT(A) upheld this disallowance, referencing the Tribunal's decision in the assessee's own case for A.Y. 2002-03, which required liabilities to be certain and capable of estimation with reasonable certainty. However, the Tribunal for A.Y. 2005-06 and A.Y. 2006-07 had allowed such provisions, recognizing the complex nature of the assessee's business and the need for provisions based on technical assessments. The Tribunal, following its earlier decisions, allowed the provision for costs incurred on completed contracts for the current year as well.(B) Disallowance of Provisions for Cost Overruns on Incomplete Contracts: Rs. 62,62,342/-The assessee had made provisions for cost overruns on incomplete contracts, which were disallowed by the A.O. and upheld by the CIT(A) based on a similar disallowance for A.Y. 2003-04. However, the Tribunal for A.Y. 2006-07 had allowed such provisions, noting that the provisions were made on a scientific basis and were substantially utilized in subsequent years. Following this precedent, the Tribunal allowed the provision for cost overruns on incomplete contracts for the current year.(C) Addition in Respect of Projects Accounted Under 'Percentage Completion Method': Rs. 22,19,88,173/-The A.O. added the amount of progress billings exceeding sales revenue recognized by the assessee, arguing that the stage of completion should be based on actual sales rather than costs. The CIT(A) upheld this addition, referencing his own order for A.Y. 2006-07. However, the Tribunal for A.Y. 2006-07 had set aside this addition, recognizing the assessee's consistent method of revenue recognition under AS-7. The Tribunal followed this decision and vacated the addition for the current year.(D) Disallowance of Software Maintenance Expenses: Rs. 1,09,77,210/-The A.O. treated software maintenance expenses as capital expenditure, allowing depreciation instead. The CIT(A) upheld this recharacterization, referencing his own order for A.Y. 2006-07. However, the Tribunal for A.Y. 2006-07 had set aside this disallowance, recognizing the expenses as revenue in nature. Following this precedent, the Tribunal vacated the disallowance for the current year.(E) Levy of Interest Under Section 234BThe Tribunal noted that the levy of interest under section 234B is mandatory as per the Supreme Court's judgment in CIT Vs. Anjum M.H. Ghaswala & Ors. The A.O. was directed to rework the interest after giving effect to the Tribunal's order.Procedural Note:The order was pronounced beyond the 90-day period due to the COVID-19 lockdown, which was considered an extraordinary circumstance. The Tribunal referenced the Bombay High Court's directions and the Supreme Court's orders extending limitations due to the pandemic, thereby justifying the delayed pronouncement.Conclusion:The Tribunal allowed the appeal filed by the assessee, vacating the disallowances and additions made by the A.O. and upheld by the CIT(A), following precedents from earlier years and recognizing the complex nature of the assessee's business and consistent accounting methods.