TaxTMI 
TaxTMI 
2013 (11) TMI 358
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....bai dtd. 23-01-2009. 3. Ground No. 1 of the appeal of the assessee as well as that of the appeal of the Revenue for A.Y. 2004-05 involve a common issue relating to the disallowance of Rs. 2.77 crores made by the A.O. on account of provision made by the assessee for warranty which has been sustained by the ld. CIT(A) to the extent of 0.20% of the revenue recognized by the assessee in A.Y. 2004-05. 4. The assessee in the present case is a company which is engaged in the business of construction of oil terminal, providing engineering services and performed operation and maintenance of the terminals. The return of income for A.Y. 2004-05 was filed by it on 29-10-2004 declaring total income at Rs.Nil under the normal provisions of the Act and book profit of Rs.23,35,18,636/- u/s 115 JB of the Act. In the P&L account filed along with the said return, a sum of Rs.2,77,45,147/- was debited by the assessee on account of provision made for the performance warranty and other contractual liability. The case of the assessee before A.O. was that the said provision is made as per Accounting Standard- 7I (AS-7), which deals with accounting for construction contract, issued by the Institute o....
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....he special provision was quantified on the basis of technical assessment of the defects which would arise under the contract and a working giving details of such quantification was also furnished by the assessee before the ld. CIT(A). It was contended that the provision made for warranty thus was for ascertained liability and the same having been quantified on scientific basis was allowable as deduction. 6. After considering the submissions made on behalf of the assessee on this issue in the light of the material available on record, the ld. CIT(A) found that a similar issue was decided by the Tribunal in assessee's own case for A.Y. 2001-02. He noted that although the provision made for performance warranty to the extent of 5% of the contract value completed during the relevant period was allowed by the Tribunal relying on the report of the Independent Technical Advisor of the assessee, it was observed by the Tribunal that a warranty provision based upon past data with the assessee would be sufficient to justify the provision and since A.Y. 2001-02 was the first year of operation of the assessee company for which past data was not available, the Tribunal relied upon the report ....
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.... recognized Actual warranty liability incurred (in Rs)/% 1. IBP CO.Ltd., Asoj 16.57 5% 952428 (0.546%) 2. IOC, Dumad 47.48 5% Nil 3. IOC, Mathura 82.31 5% Nil 4. Indian Oil Mauritus 22.02 5% Nil 5. Average 42.09 5% 0.1365% From the above tables, picture that emerges is that, with regard to project completed till 31-03-2004, on which 5% provision for warrantee was made, the actual warranty liability incurred is only 0.1365%. With regard to the current projects, on which 1 to 2% provision was made which have been completed in subsequent years, the actual liability incurred on account of warranty is almost nil. In the circumstances, I find no justification in allowing the provision for warranty at the rates of 1 to 2% as claimed by the appellant. Keeping past and future data in mind, I feel that provision @ 0.2% of the contract value completed, would meet the end of justice. The A.O. is directed to allow provision for warranty at the rate of 0.2% as against 1 to 2% claimed. This ground of appeal is therefore, partly allowed. The ld. CIT(A) thus held on the basis of past data that....
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....e relevant material available on record. It is observed that although the provision made by the assessee for warranty @ 5% was allowed by the Tribunal for A.Y. 2001-02 which was the first year of the assessee's operation, it was observed by the Tribunal in its order for 2001-02 that such provision should be made on the basis of relevant past data. In A.Y. 2001-02, being the first year of assessee's operation, past data was not available but the year under consideration is the 4th year of the operation of the assessee and the past data now being available atleast for the first three years, we agree with the contention of the ld. D.R. that such past data should be taken into consideration to decide this issue. As per our direction, the assessee has furnished the relevant data in this regard for the past three years as well as for the subsequent eight years giving details of provision made for warranty in each year, warranty expenses actually incurred in each year and the reversal of warranty provision made in each year. The said details are as under:- Sr. No. Assessment year No. of Contra cts Revenue recognized via-a- vis warrant provision (Rs.) %of warrant provision o....
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....been able to controvert this position when it was confronted to him. 10. It is, no doubt, true that warranty expenditure of Rs. 19.41 lacs and Rs. 15.73 lacs was incurred by the assessee in A.Y. 2005-06 and 2006-07. However, the said expenditure actually incurred by the assessee in the subsequent year, in our opinion, can only justify and support the view taken by the ld. CIT(A) that provision to the extent of 0.2% of the value of work completed is fair and reasonable in the facts of the case. As regards the contention raised on behalf of the assessee that the provision made for warranty in A.Y. 2004-05 to the extent found to be excess has been reversed and offered to tax in the subsequent years, we are of the view that such reversal of provision in the subsequent year cannot justify the provision maid in the year under consideration, the correctness of which is to be decided mainly on the basis of past data relating to expenditure actually incurred on warranty. In our opinion, once the deduction on account of provision is not allowed to the extent it is found to be excess, the reversal of provision in the subsequent year to that extent cannot give rise to any income and if the ....
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....ch is liable to be added back while computing the book profit of the assessee u/s 115JB of the Act. We therefore find no infirmity in the order of the ld. CIT(A) allowing the provision for warranty only to the extent of 0.2% of the value of work completed while computing the income of the assessee u/s 115JB of the Act and dismiss ground No. 2 of assessee's appeal as well as that of Revenue's appeal. 15. Ground No. 3 raised by the assessee pointing out certain factual error in the order of the ld. CIT(A) in computing the percentage of actual liability incurred on warranty in the subsequent years in respect of the contract of Managalore Refinery and Petrochemicals Ltd. has become infructuous keeping in view our decision rendered above on the issue of allowability of provision for warranty involved in ground No.1 which is based on the relevant factual data furnished by the assessee himself. This ground of the assessee is therefore dismissed. 16. The issue raised in ground No. 4 of the assessee's appeal relates to the disallowance of Rs. 2,66,53,121/- made by the A.O. and confirmed by the ld. CIT(A) on account of proportionate deduction claimed in respect of expenditure incurred ....
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....ar under consideration therefore may be restored to the file of the A.O. with a direction to decide the same in the light of the decision to be rendered by the Tribunal in A.Y. 2002-03. He has contended that a similar direction has been given by the Tribunal in the case of Avaya Global Connect Ltd. reported in (2008) 26 SOT 397 (Mum) wherein the matter was remanded by the Tribunal to the ld. CIT(A) for deciding the issue after taking into consideration the decision on the similar issue as involved in the earlier years which was pending at the relevant time. Keeping in view the said decision of the Tribunal and no objection of the ld. D.R. in this regard, we restore this issue to the file of the A.O. for deciding the same afresh in accordance with law after taking into consideration the decision of the Tribunal for A.Y. 2002-03. 19. As regards the premium and other charges paid in respect of leasehold land, the ld. Counsel for the assessee has submitted that although a similar issue has been decided by the Tribunal against the assessee in A.Y. 1999- 2000, the decision of Hon'ble Gujarat High Court in the case of Sun Pharmaceuticals Ind. Ltd. reported in (2010) 329 ITR 479 rendere....
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....ed before the ld. CIT(A) against the order passed by the A.O. u/s 143(3) of the Act. However, keeping in view that this issue was arising from the order passed by the A.O. u/s 154 of the Act and not from the order u/s 143(3) which was the subject matter of appeal before the ld. CIT(A), the ld. CIT(A) did not entertain the same and dismissed the ground raised by the assessee on this issue. Before us, the ld. Counsel for the assessee has not been able to dispute this position that the issue relating to grant of interest u/s 244A of the Act arose from the order passed by the A.O. u/s 154 of the Act not from the order passed by the A.O. u/s 143(3) from which the present proceeding are emanated. We therefore find no infirmity in the order of the ld. CIT(A) in not entertaining this issue raised by the assessee and upholding the same, we dismiss ground No. 7 of the assessee's appeal. 23. Ground No. 8 of the assessee's appeal and ground No. 3 of the Revenue's appeal involve a common issue relating to disallowance made by the A.O. on account of club expenses which has been deleted by the ld. CIT(A). 24. In the assessment completed, disallowance of Rs.3,20,728/- was made by the A.O. on....
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....e directed against the order of ld. CIT(A) - 10, Mumbai dtd. 9-3-2009. 28. Ground No. 1 of the assessee's appeal as well as ground No. 1 of the Revenue's appeal involve a common issue relating to the disallowance made by the A.O. on account of provision made for warranty which has been partly sustained by the ld. CIT(A). 29. We have heard the arguments of both the sides and also perused the relevant material available on record. In the previous year relevant to A.Y. 2005-06, provision for warranty was made by the assessee at Rs.3,32,75,085/- while expenses actually incurred on warranty were at Rs.19,41,887/-. The assessee had also reversed excess provision made for warranty in the earlier years to the extent of Rs. 1,06,38,202/- in A.Y. 2005- 06. According to the A.O., the net expense on account of provision for warranty thus was claimed by the assessee at Rs.2,03,53,041/- and treating the same as un-ascertained liability as done in A.Y. 2004-05, he disallowed the said amount and added back to the total income of the assessee. On appeal, the ld. CIT(A) found on the basis of details furnished by the assessee that actual warranty expenses accruing in relation to 11 contracts co....
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....ption but to decide this issue on the basis of details furnished by the assessee which clearly shows that the provision made by the assessee for warranty at 1-2% of the value of work completed is unreasonable and excessive. In the immediately preceding year i.e. A.Y. 2004-05, we have already held that the provision for warranty made by the assessee only to the extent of 0.20% was fair and reasonable on the basis of the past data. Since there is no material change in the relevant facts involved in A.Y. 2005-06 to justify any further relief to the assessee on this issue, we follow our decision in A.Y. 2004-05 and allow the provision for warranty only to the extent of 0.20% of the value of work completed. As regards the excess provision made in the earlier years which has been written back in the subsequent year and offered to tax by the assessee, we have already held while deciding the similar issue for A.Y. 2004-05 that the reversal of provision only to the extent allowed as deduction in the earlier years can be treated as income of the assessee and if any excess income has been offered by the assessee on this count, he may seek appropriate relief from the A.O. who is directed to al....
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....our opinion, the issue relating to the assessee's claim for provision for warranty having been decided by the ld. CIT(A) as well as by us on merit independent of provisions of section 36(1)(vii) of the Act, the issue relating the applicability of the provisions of section 36(1)(vii) has become virtually infructuous. We therefore do not find it necessary or expedient to remit the matter back to the file of ld. CIT(A) for deciding the same even though we find merit in the stand taken by the assessee that the provisions of section 36(1)(vii) of the Act, which specifically deal with the allowability of provision for bad and doubtful debt, have no application while deciding the issue of allowability of provision for warranty. Ground No. 5 of assessee's appeal is accordingly dismissed as infructuous. 36. In the result, appeal of the assessee for A.Y. 2004-05 being ITA No. 3477/Mum/2009 is treated as partly allowed for statistical purpose while appeal of the Revenue for A.Y 2005-06 being ITA No. 3241/Mum/2009 is partly allowed. 37. Now, we shall take up the appeal of the assessee for A.Y. 2006-07 being ITA No. 2208/Mum/2010 which is directed against the order of ld. CIT(A)-22, Mumba....
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....extent of Rs.1,13,383/-. The relevant grounds of assessee's appeal are thus partly allowed. 40. The remaining grounds i.e. ground No. 6 to 11 raised by the assessee in its appeal for A.Y. 2006-07 read as under:- "6. The learned CIT (A) erred in not specifically directing the Income Tax Officer to exclude from the total income an amount of Rs.3,02,08,158 being excess warranty provision pertaining to AYs 2004-05 and 2005-06 written back during the previous year relevant to the AY 2006-07. The learned CIT (A) ought to have appreciated that the said warranty provision was not allowed as deduction in the year of provision and hence its reversal also ought not to be charged to tax. 7. The learned CIT (A) erred in not specifically directing the Income Tax Officer to reduce an amount of Rs.3,02,08,158 in computing book profit under section 115JB being excess warranty provision pertaining to AYs 2004-05 and 2005-06 written back during the previous year relevant to the AY 2006-07. The learned CIT (A) ought to have appreciated that the said warranty provision was added back in computing book profit of the relevant AYs as being unascertained liability and hen....
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....appeal of the assessee involve a common issue relating to disallowance of Rs. 28,36,926/- made by the A.O. and confirmed by the ld. CIT(A) u/s 14 A r.w.r. 8-D of the Income Tax Rules, 1962. 45. As agreed by the ld. Representatives of both the sides, this issue involved in A.Y. 2007-08 as well as all the material facts relevant thereto are similar to the one involved in A.Y. 2006-07 which has already been decided by us in the foregoing portion of this order. We therefore follow our conclusion drawn in A.Y. 2006-07 and sustain the disallowance made u/s 14A of the Act to the extent of Rs.5,57,165/- on account of general and administrative expenses attributable to earning of exempt income as worked out on pro rata basis, being fair and reasonable. The relevant grounds of the assessee's appeal are thus partly allowed. 46. Ground No. 4 & 5 raised by the assessee in its appeal for A.Y. 2007-08 are not pressed by the ld. Counsel for the assessee at the time of hearing. The same are accordingly dismissed as not pressed. 47. The common issue raised in ground No. 7 & 8 of this appeal relating to the addition to be made on account of disallowance u/s 14A of the Act while computing pro....
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....finalization of drawings or on finalization of long lead items, however the same cannot be recognized as revenue in the books of account. It was contended on behalf of the assessee that this situation, however, would prevail only temporarily during the course of execution of the contracts but finally there would be no difference between the progress billing and amount recognized as revenue by the time of completion of the contracts. It was pointed out that out of Rs.10.80 crores, a sum of Rs.9.62 crores was due to one customer namely Indian Oil Sky Tank Limited and the same was mainly on account of progress bill raised by the assessee as per the contract for 15% advance payment of the contract value. 51. The submissions made on behalf of the assessee on this issue were not found acceptable by the A.O. According to him, all the amounts of progress billing raised by the assessee should have reflected in the total sales recorded in the books of account and the amount due to the customers as shown by the assessee was nothing but the under statement of its profits by the assessee. He therefore did not accept the method of percentage of completion claimed to be followed by the assesse....
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....s of the case and I am unable to agree with the contention of the appellant. The revenue has to be recognized at the earliest point of time on due or receipt basis whichever is earlier. In this case the appellant has already received the amount from 3 parties which it should have offered for taxation. What amount is to be offered for taxation cannot be a matter to be decided mutually by the appellant and the contractee as claimed by the appellant. The Appellant further claims that identical procedure has been followed in subsequent assessment year. However, appellant in my opinion cannot claim it to be a ground for not showing correct taxable income in the current year. In view of these facts, I am of the considered opinion that A.O. has rightly taxed the difference of Rs .10,86,35,165/- being under statement of profit which is upheld. 53. The ld. counsel for the assessee mainly reiterated before us the submissions made before the authorities below on behalf of the assessee on this issue in order to explain the difference between the progress billing and revenue recognized shown as amount due to the customers. He submitted that the assessee has consistently followed percentage o....
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....very difficult to accept that the assessee received the money from the PSU against the contract by raising progress billing but did not spend the same immediately. He contended that this situation is possible only when there is a case of non-performance of contract in which Accounting Standard has no application. 56. We have considered the rival submissions and also perused the relevant material available on record. It is observed that the difference in the amount of progress billing and revenue recognized by the assessee in relation to three contracts shows as "amount due to customers" was explained by the assessee before the A.O. as well as before the ld. CIT(A) by filing a detailed written submission. It appears that neither of them however has been able to appreciate the same in the correct prospective. As explained by the assessee, progress billing was done not only for the amount of work done but also for mobilization and other advances receivable by it as per the terms of the relevant contract. The revenue from the said contracts was recognized by the assessee by following the percentage of completion method and the said method as well as the basis adopted by the assessee....
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....ounsel for the assessee at the time of hearing before us. The same is accordingly dismissed as not pressed. 58. As regards ground No. 24 and 25, it is observed that the issues involved therein relating to the assessee's claim for proportionate deduction on account of expenditure incurred in the earlier years on "right to way" and on premium and other charges paid on lease hold land are similar to the one involved in A.Y. 2004-05 which have already decided by us in the foregoing portion of this order. Following the conclusion drawn in A.Y. 2004-05 we restore this issue to the file of the A.O. for deciding the same as per the same directions as given in A.Y. 2004-05. 59. By way of ground No. 26, the assessee is seeking a direction of the A.O. to quantify and allow the amount of capital loss to be carried forward for set off in the subsequent assessment years. Accordingly we direct the A.O. to consider the claim of the assessee on this issue and decide the same in accordance with law after verifying the relevant record. 60. Ground No. 27 relating to assessee's claim for granting of credit on account of TDS amounting to Rs. 1,71,97,827/- is not pressed by the ld. Counsel for t....
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....ion to the disallowance of Rs. 11 lacs already offered by the assessee u/s 14 A of the Act. 64. The disallowance made by the A.O. u/s 14A of the Act was disputed by the assessee in an appeal filed before the ld. CIT(A). It was submitted before the ld. CIT(A) that the entire investment in shares and mutual funds was made by the assessee out of internal accruals and fund generated in the past and there was no utilization of any borrowed funds for making the said investment. It was contended that no disallowance out of interest expenses therefore was called for u/s 14A of the Act. It was also contended that the disallowance of Rs. 11 lacs offered by the assessee on account of expenses incurred in relation to the earning of exempt income was fair and reasonable and there was no reason to enhance the same. The ld. CIT(A) did not find merit in the submissions made by the assessee on this issue. According to him, certain investment in shares was made by the assessee during the year under consideration out of cash credit account with SBI on which interest was being paid. He held that the assessee had also failed to explain out of which surplus funds, the other investment in mutual funds....
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....rusal of the balance sheet of the assessee for the year under consideration shows that own funds of Rs. 379 crores were available with the assessee which were sufficient to cover the investment of Rs. 50.88 crores made in shares and mutual funds. Even the current years profit after tax was Rs. 34.28 crores and if the depreciation claimed by the assessee at Rs. 18.07 crores is added back, the internal accrual of funds for the year under consideration itself was to the tune of Rs. 52.35 crores which is more than the investment of Rs. 50.88 crores made by the assessee in shares and mutual funds as on 31-3-2008. It is observed that a detail working was filed by the assessee before the A.O. as well as before the ld. CIT(A) showing the availability of own funds for making investment in shares and mutual funds but still disallowance u/s 14A of the Act was made out of interest on the ground that in the absence of separate books of account maintained by the assessee for its investment activity, it was a case of common funds warranting disallowance u/s 14A of the Act. In the case of CIT vs. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bom.), the Hon'ble Bombay High Court has held th....
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.... to the extent of 0.20% of the value of work completed has been allowed by us keeping in view the quantum of warranty expenditure actually incurred by the assessee in assessment years 2005-06 & 2006-07. In so far as A.Y. 2008-09 is concerned, there is, however, no expenditure incurred on warranty in that year or even in the immediately preceding year i.e. A.Y. 2007-08. The expenditure incurred on warranty in the immediately succeeding year i.e. A.Y. 2009-2010 is also minimal. Keeping in view these relevant facts and figures, we are of the view that the provision of warranty even to the extent of 0.20% as allowed by us in the earlier years would be excessive and unreasonable. The assessee in fact has increased the provision for warranty to 0.25 to 1% in A.Y. 2008-09 which is not justified at all. Having regard to all the relevant facts of the case, we are of the view that it would be fair and reasonable to allow the provision for warranty only to the extent of 0.10% of the value of work completed for A.Y. 2008-09. The relevant grounds of the assessee's appeal are thus partly allowed. 71. As regards ground No. 14 to 21, it is observed that the issue involved therein relating to th....