TaxTMI 
TaxTMI 
2019 (9) TMI 1134
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.... 3. In ground no.1, the assessee has challenged the disallowance of provision for expenditure amounting to Rs. 2,07,06,990. 4. Brief facts are, the assessee is a resident company. As stated by the Assessing Officer, it is engaged in the business of providing telecommunication equipment, service and solutions. Broadly, the assessee provides electronic private automated branch exchanges, call centre, data products, voice processing systems, low end EPABX, setting-up of Backbone network for cellular operators, teleconferencing, etc. For the assessment year under dispute, the assessee filed its return of income on 27th October 2005, declaring total income of Rs. 45,32,59,427. In the course of assessment proceedings, while verifying the annual report of the assessee, the Assessing Officer found that the assessee has made a provision for various expenditures incurred in respect of which bills were not received from the vendors as on 31st March 2005. The total of such expenditures worked out to Rs. 3,53,96,636. The Assessing Officer observed, in such situations where the bills are received after 31st March, but before filing of the return of income, the excess provision made is revers....
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.... made can be accepted as reasonable. Applying the said benchmark, learned Commissioner (Appeals) held that the provision made for unpaid expenditure and legal and professional fees since falls within the range of 10% of the actual expenditure incurred, they can be allowed. However, he observed, provision made for sundry creditor relating to sale commission, promotion, advertisement, exceeds the range of 10% of the actual expenditure incurred. Thus, he held that the said provision in excess of 10% of the actual expenditure cannot be allowed as business expenditure. Accordingly, he sustained the disallowance to the extent of Rs. 2,07,06,990. Further, learned Commissioner (Appeals) directed the Assessing Officer to grant consequential relief to the assessee in respect of such provision offered as income in assessment year 2013-14. 7. The learned Authorised Representative submitted, since the assessee follows mercantile system of accounting, it has to book all expenditures which have crystallized during the year. He submitted, as per Accounting Standard (AS)-1 notified under section 145(2) of the Act, which the assessee is required to follow, provision has to be made for all liabili....
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....sion has no basis at all, as neither is it in accordance with Accounting Standard notified under the Act nor any other accounting principle or law. Thus, he submitted, the addition sustained by learned Commissioner (Appeals) being purely on ad-hoc basis cannot be sustained. 10. The learned Departmental Representative submitted, though, the assessee has strenuously argued that the provision made is in accordance with commercial expediency and prudent business policy, however, neither before the Departmental Authorities nor even before the Tribunal, the assessee has furnished any material to demonstrate that the provision made is on best estimate and on scientific basis. The learned Departmental Representative submitted, since there was considerable difference between the provision made and actual expenditure incurred, it cannot be said that the provision made was on reasonable and scientific basis. In this context he referred to AS-29. He submitted, though, the range of 10% applied by learned Commissioner (Appeals) may not have been provided in the Accounting Standard or anywhere else, but it is only for the purpose of determining the best estimate qua the actual expenditure incu....
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....nt year. However, since the assessee is following mercantile system of account, the expenditures incurred during the year have to be accounted for in the books of account. Therefore, in absence of bills/invoices raised by the vendors, the assessee made provision for such expenditure in its books of account. There is no dispute that the provision made by the assessee is on estimate basis. Therefore, it has to be seen whether such estimate of provision made by the assessee is on reasonable and scientific basis and in accordance with business prudence. As could be seen from the facts discussed earlier, the assessee had made provision for expenditure under three distinct heads. While the Assessing Officer has added back the difference between the provision made and actual expenditure incurred under all the three heads, learned Commissioner (Appeals) has restricted such disallowance only in respect of provision made for sundry creditors relating to sales commission, promotion, advertisement, etc. Therefore, it requires consideration whether the provision made can be stated to be in accordance with AS-1 r/w section 145(2) of the Act. In this context, learned Authorised Representative ....
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....he assessee is entitled to make provision on estimate basis, however, such estimate has to be a best estimate. It transpires from record, the assessee is following the aforesaid method of accounting in respect of unbilled expenditure from past years and it has never been disputed by the Department. Additionally, AS-1 provides for creating provision for expenditure on estimate basis keeping in view business prudence and information available. In fact, learned 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. In our view, 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. would apply. More so, when the assessee is consistently following this accounting method from past years. In view of the aforesaid, we hold tha....
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....nditure incurred for first time on new premises taken on lease is capital in nature, hence, has to be capitalized. Accordingly, he directed the Assessing Officer to restrict the disallowance to the expenditure incurred in respect of leased premises at Hyderabad and Bangalore. 17. The learned Authorised Representative submitted, assessee has taken premises on lease at various places in India for office purpose. He submitted, for making the premises suitable for use assessee had carried out certain renovation work. He submitted, such renovation work undertaken is solely for the purpose of providing a good working environment to its staff. He submitted, the office has to be kept in a good condition as various meetings are held therein with the suppliers, customers and their representatives. Thus, he submitted, since the expenditure incurred is purely for the purpose of business, it has to be allowed as revenue expenditure. Further, drawing our attention to the details of expenditure as furnished in the paper book, the learned Authorised Representative submitted, the nature of expenditure would clearly reveal that they are not for deriving any enduring benefit. He submitted, merely ....
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.... towards repair/renovation of leased premise is of capital or revenue nature. On a perusal of the details of expenditure incurred, as submitted in the paper book, we are of the view that by incurring such expenditure, the assessee has not brought into existence any capital asset of enduring nature. A reference to Explanation-1 to section 32(1) of the Act, would reveal that it speaks of capital expenditure incurred towards construction of any structure or renovation or extension or improvement to the building. Thus, on a reading of the aforesaid provisions, it becomes clear that if any expenditure is incurred for construction of any structure or extension or improvement of the building taken on lease would be treated as capital expenditure. 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 b....
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....remises, however, it was not using it for the purpose of business. He submitted, though, the assessee was pursuing the landlord for refund of security deposit and has even filed a lawsuit, however, it was not hopeful of recovery of security deposit. Therefore, it claimed the security deposit as business loss. Countering the observations of learned Commissioner (Appeals), he submitted, merely because the assessee was in possession of the premises by keeping the keys, it cannot be said that the assessee was in occupation of premises and using it for the purpose of business. Thus, he submitted, assessee's claim of deduction should be allowed. In support of his contention, he relied upon the following decisions:- i) IBM World Trade Corporation v/s CIT, [1990] 186 ITR 412 (Bom.); ii) ACIT v/s Blue Dart Express Ltd., ITA no.6614/Mum./2007, dated 18.11.2009; iii) United Motors India Ltd. v/s ITO, [2010] 6 taxmann.com 32 (Mum.); and iv) Jethabhai Jirji Jethabhai Ramdas v/s CIT, [1979] 120 ITR 792 (Bom.). 25. The learned Departmental Representative strongly relying upon the observations of the Assessing Officer and learned Commissioner (Appeals) submit....
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....t 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. 28. In ground no.4, the assessee has challenged the disallowance of write off of tax deducted at source (TDS) amounting to Rs. 1,21,66,248. 29. Brief facts are, during the assessment proceedings, the Assessing Officer noticing that the assessee has claimed deduction on account of TDS written off of Rs. 1,21,66,248, called upon the assessee to justify the claim. In response, it was submitted by the assessee that since TDS certificates for the amount written off could not be obtained from the deductor even after continuous effort, the assessee has claimed it as revenue expenditure as it amounts to loss arising during the normal course of business. From the details available before him, the Assessing Officer noticed that the claim or write off of TDS pertains to seven assessment yea....
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....y of debt from customers as per section 36(1)(vii) r/w section 36(2) of the Act. The learned Authorised Representative submitted, all evidences relating to the TDS write off were furnished before the Assessing Officer. Therefore, it cannot be said that the assessee has not furnished the necessary details. As regards the reasoning of learned Commissioner (Appeals) that assessee's claim cannot be allowed in view of section 155(14) of the Act, the learned Authorised Representative submitted, even after taking note of such provision in assessee's own case for the assessment year 2004-05, the Tribunal has allowed assessee's claim of write off. Further, he submitted, the reasoning of learned Commissioner (Appeals) that write off is not allowable as the assessee has not claimed it in the computation of income, will not hold good in view of the decision of the Tribunal in assessee's own case in assessment year 1997-98. Further, in support of his contention he relied upon the decision of the Hon'ble P&H High Court in CIT v/s Shreyans Industries Ltd., [2008] 303 ITR 393 (P&H). 32. The learned Departmental Representative strongly relied upon the observations of the Assessing Officer and th....
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....efore, the contention of the learned Departmental Representative that the decision of Hon'ble P & H High Court, has been reversed by the Hon'ble Supreme Court, is not correct interpretation of the legal position, as the subject matter of dispute before the Hon'ble Supreme Court was on a different issue. In view of the aforesaid, we direct the Assessing Officer to allow assessee's claim of write off of TDS. Ground is allowed. 34. In ground no.5, the assessee has challenged the addition of Rs. 22.83 crore, made to its income on account of change in revenue recognition policy. 35. Brief facts are, as per the method of accounting followed by the assessee, it was recognising revenue on the basis of invoices raised which was considered as its sales/turnover. However, in the year under consideration, the assessee changed its method of revenue recognition by recognising revenue on the basis of completion of project. On verifying the facts and material on record, the Assessing Officer found that though the assessee was raising the invoices in the same manner as was done earlier, but it is accounting the sales/turnover only those invoices where the project is complete. The rest....
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....panies, the Assessing Officer observed, the assessee has not produced any documentary evidence to demonstrate the nature of global standard being followed. The Assessing Officer observed, the assessee cannot adopt a revenue recognition policy following global standard which will result in deferment/postponing the profit chargeable to tax. He observed, once the assessee raises the invoice in respect of a particular good or service, the sale is complete. Referring to the provisions of section 145 of the Act, the Assessing Officer observed, the method of accounting employed by the assessee must provide the true and fair view of profit/gains earned by the assessee. He observed, though the assessee is following the same mercantile system of accounting followed by it earlier, however, there is no justifiable reason to change the revenue recognition policy in the impugned assessment year. He observed, as a result of such change in the revenue recognition policy, the annual profits are not properly deduced. As a result, the accounts maintained by the assessee are not complete as significant amount of revenue which should have been offered to tax in the impugned assessment year has been omi....
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....rned Authorised Representative submitted, even the Assessing Officer has admitted that the assessee has not changed its method of accounting but has only changed the revenue recognition policy. He submitted, under section 145(2) of the Act, Accounting Standard-II relating to disclosure of prior period and extra ordinary items and changes in accounting policies have been notified. He submitted, as per the said Accounting Standard, a change in accounting policy can be made only if adoption of different accounting policy was required by the statute or if it is considered that the change would result in a more appropriate preparation or presentation of financial statements of the assessee. Referring to the Accounting Standard-9, the learned Authorised Representative submitted, it provides for proportionate completion method or completed service contract method as the method for recognising revenue in respect of rendering of services. He submitted, the change in revenue recognition policy was necessitated due to shift in the business strategy by shifting the focus from voice based solutions to converged communication solutions. He submitted, the change in revenue recognition policy was ....
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....icy is for bona fide reasons, it cannot be rejected. In this context, he relied upon the decision of the Tribunal, Mumbai Bench, in Toyo Engineering Corporation v/s DCIT, ITA no.6600/Mum./2002 and the decision of the Hon'ble Gujarat High Court in CIT v/s Mapin Publishing Pvt. Ltd., 42 taxmann.com 191. The learned Authorised Representative submitted, the unearned revenue relating to the projects not completed as on 31st March 2005, was recognized on completion of projects and offered to tax in the subsequent years. The learned Authorised Representative submitted, since the disputed income was subsequently offered to tax, there is no loss to the revenue as there is only a timing difference. In this context, he relied upon the decision of the Hon'ble Supreme Court in Excel Industries Ltd. (supra). On a query from the Bench as regards the provision of expenditure if relates to any project for which the revenue is being deferred, the learned Authorised Representative submitted that no such expenditure was claimed in respect of revenue deferred on account of non-completion of project. The learned Authorised Representative submitted, merely because the assessee has raised the invoices....
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....hat income has not accrued in respect of such sales and service when it comes to taxability under the Income Tax Act. The learned Departmental Representative submitted, in any case of the matter, there is no loss to the assessee as learned Commissioner (Appeals) has directed the Assessing Officer not to tax such income in the subsequent assessment years if it is offered by the assessee on completion of project. Thus, he submitted, addition made by the Assessing Officer was justified. In support of his contention, the learned Departmental Representative relied upon the following decisions:- i) Laxmipat Singhania v/s CIT, [1969] 72 ITR 291 (SC); ii) CIT v/s P. Mariappa Gounder, [1984]147 ITR 676 (Mad.); & iii) CIT v/s Kerala Financial Corporation, [1985] 155 ITR 246 (Ker.) 41. We have considered rival submissions and perused the material on record. We have also carefully applied our mind to the decisions relied upon before us by both the parties. The factual matrix clearly reveals that the assessee has not changed mercantile system of accounting consistently followed by it from the past years. However, it has changed its revenue recognition policy in the....
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....evenue recognition policy, however, it was not able to furnish any satisfactory reason for such change except stating that accounts are to be prepared as per global standard. Further, he has observed that the assessee has not produced any documentary evidence regarding the global standards allegedly followed by it and how it is relevant in the context of Indian Accounting Standard. It is also crucial to bear in mind, as regards Sales Tax and Service Tax the assessee is complying to the statutory requirement in terms with the earlier practice followed by it. In other words, it is paying Sales Tax and Service Tax on the basis of invoices raised towards sales and services. 43. In the aforesaid factual background, it requires to be examined whether the revenue recognition policy followed by the assessee is acceptable. No doubt, the assessee has contended that the change in revenue recognition policy is due to shift in business strategy and as per global standards followed by the Head Office. However, this cannot simply be a reason to change the revenue recognition policy consistently followed over the years. The assessee must furnish cogent material and explanation to justify the ch....
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....nly a timing difference relating to the income offered due to change in revenue recognition policy, we must observe, though it may be a fact that the assessee might have offered or may be offering the income on completion of projects in future years, however, as per assessee's own contention, it is completely dependent upon the completion certificate to be issued by the customers. As regards the decision of the Hon'ble Supreme Court in Excel Industries Ltd. (supra), as could be seen from the facts involved in the aforesaid decision, the income which the revenue wanted to assessee is benefit of duty entitlement to be received by the assessee on certain imports which has not taken place in the relevant assessment year but took place in the subsequent assessment years. The Hon'ble Supreme Court while dealing with the issue of accrual income laid down the following three tests:- i) Whether the income accrued to the assessee is real or hypothetical; ii) Whether there is a corresponding liability of the other party to pass on the benefits of duty free import to the assessee even without any imports having been made; and iii) The probability or improbabi....
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....infructuous is dismissed. 48. Ground no.3 raised by the Revenue is corresponding to ground no.2 of assessee's appeal in ITA no.8674/Mum./2011. In view of our decision therein, this ground has become infructuous, hence, dismissed. 49. In the result, Revenue's appeal is dismissed. ITA no.8675/Mum./2011 Assessee's Appeal - A.Y. 2006-07 50. Ground no.1, of this appeal is identical to ground no.1 of assessee's appeal being ITA no.8674/Mum./2011. Following our decision therein, ground raised is allowed. 51. In ground no.2, the assessee has challenged the disallowance of renovation expenditure. 52. This ground is similar to ground no.2 of assessee's appeal in ITA no.8674/Mum./2011. Following our decision therein, this ground is allowed. 53. The issue raised in ground no.3, is identical to ground no.5 of ITA no.8674/Mum./2011. Following our decision therein, we restore the issue to the Assessing Officer for de novo adjudication with similar direction. This ground is allowed for statistical purposes. 54. In the result, assessee's appeal is partly allowed. ITA no.7834/Mum./2011 Revenue's Appeal - A.Y. 2006-07 55. The grounds raised in this appeal are....