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2020 (2) TMI 346
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....order. 3. We shall first take up assessee's appeal in ITA No. 30/Ran/2017 concerning AY 2012-13. ITA No. 30/Ran/2017-AY-2012-13 4. As per the grounds of appeal, the assessee has raised two fold grievances (i) additions made by the AO on account of disallowance of expenditure of Rs. 1,07,35,959/- and (ii) chargeability of interest under s.234B on assessed income amounting to Rs. 17,66,016/- instead of chargeability of interest on returned income. 5. Briefly stated, the assessee is engaged in the business of works contract in the nature of civil contract. The return of income filed by the assessee declaring total income at Rs. 1,23,66,979/- was subjected to scrutiny assessment. In the course of assessment, the AO inter alia confronted the assessee as to why expenditure debited to the tune of Rs. 1,07,35,959/- towards retention money/security deposited KID, EOT etc. which resulted in reduction of taxable income should not be disallowed. In response, the assessee filed a detailed reply to submit that as per the accounting policy adopted by the assessee, an amount retained/deducted by the contractee to ensure satisfactory fulfillment of obligations arising from contract ente....
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....eclined to interfere with the action of the AO making following observations: "[10] Ground No.4 of the appellant is regarding the addition of Rs. 1,07,35,959/- on the ground of expenditure that it was of contingent nature. In this regard the appellant submitted that Rs. 1,07,35,959/- Dr. in profit and loss account as an expenditure (security deposit and other deduction etc.) and Rs. 1,01,29,020/- Cr. in profit and loss account as an income (refund of Security deposit and other deduction) was confirmed figure/actual amount and same has been deducted or refunded by the deductor/contractee. The appellant claimed that the same was also verified by the Ld. Assessing Officer during the course of Scrutiny proceeding us.143(3). This figure/amount are not depending on the outcome of an uncertain future event such as a court case. [10.1] The appellant submitted that the appellant consistently followed the accounting policy since beginning in which "any deduction except income tax which is refundable or not in future same has been treated as an expenditure and if same has been received/recovered by the assessee in relation to any year treated as an income". It is the submiss....
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.... , value of goods being stock in transit was not liable to be included in purchase. e. Commissioner of Income tax v Bilahari Investment (P). Ltd [2008] 168taxman95(SC). [10.2] The Ld. Assessing Officer in this regard has stated that the appellant had debited a sum of Tl,07,35,959/- in the Profit & Loss Account. The Ld. Assessing Officer held that the said sums were contigent in nature and therefore did not constitute an expenditure which could be allowed under the Income Tax Act. 1961. The Ld. Assessing Officer further held that there was no accrual of liability only an estimate was made. Reliance was placed on the following judgements of the Hon'ble Supreme Court. 1. M/s. Tuticorin Alkali Chemicals & Fertilisers Ltd. Vs. CIT (SC) 227 ITR 172 2. Sutlej Cotton Mills Ltd. Vs. CIT (SC) 116 ITR 1 3. CIT Vs. Biritish Paints India Ltd. (SC) 188 ITR 144 4. CIT Vs. UP State Industrial Development Corporation (SC) 225 ITR 705 [10.3] I have considered the submissions of the appellant and have perused the assessment order. The following amounts were debited by the appellant : - SI. No. Expenses Amount 1 Extensio....
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....ct consideration, terms of payment, advance, security deposit, taxes wherever applicable, insurance, agreed time line schedule, compensation for delay and all other terms and conditions contained in NBCC letter of intent no. NBCC's SGM/RAN/DH/12/436 dated 26.06.2012 are to be read in conjunction with the aforesaid contract documents. The contract shall be duly performed by the Contractor strictly and faithfully with the terms of the contract" [10.7] It is clear that the Performance Guarantee had to be deposited within 30 days of the Award of the Contract. The appellant has not submitted the terms and conditions of the NBCC contract stipulations as stated above. However, in another such appeal the document was submitted. The relevant clauses of the NBCC stipulation is extracted from there as they are the same for all contracts. This reads: ( relevant portions highlighted) AGREEMENT This agreement made the 171 day of February 2020 between National Projects Construction Corporation Limited having registered office at "Raja House, 30-31, Nehru Place, New Delhi (herein after called the 'employer") on the one part and A.P. Bariar and Sons, Ratu Road, PO Hehal....
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....The Defects Liability Certificate is the certificate issued by the Engineer, after the Defect Liability Period has ended and upon correction of Defects by the Contractor. The Defect Liability Period is five years calculated from the Completion Date. Routine Maintenance is the maintenance of roads for five years as specified in the Contract Data. Routine maintenance is the maintenance of roads for five years as specified in the Contract Data 17.1 The Contractor may commence execution of the Works on the Start Date and shall carry out the Works and Routine Maintenance in accordance with the Programme submitted by the Contractor, as updated with the approval of the Engineer, and complete them by the intended Completion Date. 3 2.1 (a) The Engineer shall give notice to the Contractor of any Defects before the end of the Defects Liability Period, which begins at Completion [and defined- Contract Data] and ends after five years. The Defects Liability Period shall be extended for as long as Defects remain to be corrected. (b) Every time notice of Defect/Defects is giyen, the Contractor shall correct the notified Defect/Defects within t....
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....alf the total amount retained as security deposit is repaid to the Contractor, one-fourth of the total amount retained as security deposit is repaid to the Contractor at the end of 2nd year after completion of the construction work and balance of the amount retained as security deposit is repaid to the contractor at the end of 3rd years after completion of the construction work subject to condition that the Engineer has certified that all defects notified by the Engineer to the Contractor before the end of period prescribed for repayment have been corrected. 43.4 The performance security equal to the five percent of the contract price and additional performance security for Routine Maintenance as detailed in Clause 26.4 of ITB is repaid to the Contractor when the period of five years fixed for Routine Maintenance is over and the Engineer has certified that the contractor has satisfactorily carried out the Routine Maintenance of the works. If the Routine Maintenance part of the contract is not carried out by the Contractor as per this contract, the Employer will be free Jo carry out Routine Maintenance work and the amount required for this work will be recovered fr....
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....uestion is whether this is a revenue item? [10.11] The appellant (let us assume) has cash in bank (which is an asset) and the appellant gets the FD for (Performance Guarantee and Security Deposit) made out of the same. In this case there is no change in the over all balance sheet as one form of asset (cash in bank) gets converted into a FD (another form of asset). Let us further assume that the appellant gets back the FD it encashes it and consequently the amount under cash in bank goes up. In this way both the entries square up each other. Now let us assume that 50% of the amount only is returned. In this case the cash in bank increases by 50% on encashment. The liability side is balanced by reduction of capital of equal amount (50%). In an extreme case (as is the assumption of the appellant) the FD is forefeited. In that case the entire amount is a loss which reduces the capital by the same amount. In other words the loss is on capital account and no effect of it would be on the profit and loss account. Accordingly the same cannot be allowed as its impact would be on the capital side. [10.12] Now let us assume that five friends join together to form a firm '....
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....ing trust be still in the taxpayer, then there is acquisition of a capital asset and not an expenditure of a revenue character. [10.14] Side by side with these principles, there are others which arc also fundamental. The income-tax law does not allow as expenses all the deductions a prudent trader would make in computing his profits. The money may be expended on grounds of commercial expediency but not of necessity. The test of necessity is whether the intention was to earn trading receipts or to avoid future recurring payments of a revenue character. Expenditure in this sense is equal to disbursement which, to use a homely phrase, means something which comes out of the trader's pocket. Thus, in finding out what profits there be. the normal accountancy practice may be to allow as expense any sum in respect of liabilities which have accrued over the accounting period and to deduct such sums from profits. But the income-tax laws do not take even, such allowance as legitimate for purposes of tax. A distinction is made between an actual liability in praesenti and a liability de futuro which, for the time being, is only contingent. The former is deductible but not the latte....
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....f such items leads to a present obligation which results in an enterprise having no alternative but to settle that obligation. In the instant case, the assessee had been manufacturing and selling valve actuators. It was in the business from the assessment years 1983-84 onwards. Valve actuators are sophisticated goods. Over the years, the assessee had been manufacturing valve actuators in large numbers. The statistical data indicated that every year some of the manufactured actuators were found to be defective. The statistical data over the years also indicated that being sophisticated items no customer was prepared to buy valve actuators without a warranty. Therefore, warranty became an integral part of the sale price of the valve actuator(s). In other words, warranty stood attached to the sale price of the product. Therefore, warranty provision needed to be recognized because the assessee was an enterprise having a present obligation as a result of past events resulting in an outflow of resources. Lastly, a reliable estimate could be made of the amount of the obligation. In short, all the three conditions for recognition of a provision were satisfied in the instant case. [Para 12]....
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....incurred against it. On this basis, a sensible estimate should be made. The warrant)' provision for the products should be based on the estimate at the year end of future warranty expenses. Such estimates need reassessment every year. As one reaches close to the end of the warranty period, the probability that the warranty expenses will be incurred is considerably reduced and that should be reflected in the estimation made. Whether this should be done through a pro rata reversal or otherwise would require assessment of historical trend. If warranty provisions are based on experience and historical trend(s) and if the working is robust, then the question of reversal in [he subsequent two years, in the above example, may not arise in a significant way. Hence, on the facts and circumstances of the instant case, provision for warranty was rightly made by the assessee because it had incurred a present obligation as a result of past events. There was also an outflow of resources. A reliable estimate of the obligation was also possible. Therefore, the assessee had incurred a liability during the relevant assessment years and it was entitled to deduction under section 37. Ther....
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....ch it Li used. Section 37 enjoins that any expenditure not being expenditure of the nature described in sections 30 to 36 laid out or expended wholly and exclusively for the purpose of the business, should be allowed in computing the income chargeable under the head 'profits and gains of business'. In sections 30 to 36, the expression 'expenses incurred' as we!! as 'allowances and depreciation' have also been used. For example, depreciation and allowances are dealt with in section 32. Therefore, the Parliament has used the expression 'any expenditure' in section 37 to cover both. Therefore, the expression 'expenditure' as used in section 37 may, in the circumstances of a particular case, cover an amount which is really a 'loss', even though said amount has not gone out from the pocket of the assessee. [Para 13] The provisions of section 145 recognise the rights of a trader to adopt either the cash system or the mercantile system of accounting. The quantum of allowances permitted to be deducted under diverse heads under sections 30 to 43C from the income, profits and gains of a business would differ according to the s....
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....ot been realized actually. The said system of commercial accounting can be superseded or modified by legislative enactment. Under section 145(2), the Central Government is empowered to notify from time-to-time the Accounting Standards to be followed by any class of the assessees or in respect of any class of income. Accordingly, under section 209 of the Companies Act. mercantile system of accounting has been made mandatory for companies. In other words, Accounting Standard, which is continuously adopted by an assessee, can he superseded or modified by legislative intervention. However, but for such intervention or in cases falling under section 145(3), the method, of accounting undertaken by the assessee continuously is supreme. In the instant case, there was no finding given by the Assessing Officer on the correctness or completeness of the accounts of the assessee. Equally, there was no finding given by the Assessing Officer stating that the assessee had not complied with the Accounting Standards, [Para 14] [10.19] In Calcutta Company Ltd v CTT [1959] 37 ITR 1 (SC) the apex court held that there was no doubt that the undertaking to carry out the developments within six m....
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....ranty costs has to be fully provided for. [10.21] In the case of the appellant it is not that the appellant has provided for a certain sum (say 10% of the contract value) as a liability for future expenses on 'defect liability'. (It must be remembered that it is only with defect liability that the appellant does not get paid. For routine maintenance it gets paid as per the contract. Both the periods run for five years after the completion date. Moreover, the Performance Guarantee sum is to be paid within 30 days of the Award of the contract and therefore cannot be made out of any running bill as claimed by the appellant). If that was the case, as it satisfied the conditions laid down in Rotork Controls (supra) it would be allowed the liability. In the case of the appellant it has treated the FD as already been forefieted and hence, according to the appellant, an expense allowable u/s.37(l) of the Act. This also does not satisfy the 'matching principles' as stated in the case of Rotork Controls (supra) as "'Under the matching concept, if revenue is recognized, the cost incurred 10 earn that revenue Including warranty costs has to be fully provided far. "....
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....er nationally accepted Accounting Standards; (vi ) whether the system adopted by the assessee is fair and reasonable or is adopted only with a view to reduce the incidence of taxation. " [10.24] The Apex Court in the above case has allowed for liabilities as expenses if certain conditions are fulfilled. However, the same has to be in respect of 'deductible expenses". The moot question is whether the booking of loss of the FD (its encashment for non fulfillment of the conditions of the contract) can be termed as an " deductible expense'? As explained above the entry is not an " ascertained liability" the expense of which had not arisen but was likely to arise in the future. In the case of the appellant it was an item of : asset" which the appellant booked as "expense'. Therefore, the principles of Woodword (supra) would not be applicable. [10.25] Second case law relied upon by the appellant is that of Indian Mollases Co. Ltd. v CIT [1959] 37 ITR 66 (SC). In this case h was held that: - "There are certain principles of a fundamental character. The first is that capital expenditure cannot be attributed to revenue and vice versa. Secondly, it is e....
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....ure" within section 10(xv) of the 1922 Act, "Expenditure" is equal to "expense" and "expense" is money laid out by calculation and intention though in many uses of the word this element may not be present. But the idea of "spending" in the sense of "paying out or away" money is the primarv meaning. "Expenditure" is thus what is "paid our or away" and is something which is gone irretrievably. To be an allowance within clause (xv) of section 10(2) of the 1922 Act. the money paid out or away must be (a) paid out wholly and exclusively for the purpose of the business and further (b) must not be (i) capital expenditure, (ii) personal expenses or (iii) an allowance of the character described in clauses (i) to (xiv)." [10.26] In the above case the apex court has held that "Expenditure" is equal to "expense" and "expense" is money laid out by calculation and intention though in many uses of the word this element may not be present. But the idea of "spending" in the sense of "paying out or away" money is the primary meaning. "Expenditure" is thus what is "paid out or away" and Is something which is gone irretrievably. To be an allowance within clause (xv)....
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....enses was not an allowable expense and the same was rightly disallowed by the Ld. Assessing Officer. Ground of appeal is dismissed. [10.32] While on the subject it would also be important to consider the alternate contention of the appellant which is that; on the one hand the Ld. Assessing Officer did not allow the expenses on security deposit as expenses, she taxed the security deposit receipt shown by the appellant as income. It is the submission of the appellant that by following a consistent method of accounting and in the endeavor to reflect true profit of its business, it had offered the refund as income of the year. [10.33] No discussion of the issue has been made by the Ld- Assessing Officer in her order. [10.34] I have considered the submission of the appellant. I find that under the head 'other income' - Schedule 4.1 of the Balance Sheet the appellant had offered incomes under the heads: 'Other deductions' Rs. 6,13,703/- and 'Security Deposit Refund' Rs. 95,15,317/- totalling Rs. 1,01,29,020/-. The question is can a deduction be allowed since the appellant had offered the refund of deposit of income. As discussed above, in my vi....
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....uarely dependent upon future happenings and events. The learned AR for the assessee thus submitted that there is no reason for the departure from the consistently followed accounting policy by mis appreciating the facts as well as settled law. The learned AR lastly added that such accounting practice not only reflects true income accrued in the hands of assessee but also is revenue neutral as the income towards retention money is duly offered for taxation in the respective years of receipt. 10. The learned DR, on the other hand, relied upon the orders of the lower authorities. 11. We have carefully considered the rival submissions. The assessee in the instant case is engaged in the business of works contract mainly civil contract (building). The substantive controversy in the instant appeal is towards point of time of taxability of retention money/security deposit deducted and withheld by respective contractees in a work contract as a lien to ensure complete execution of terms of contract. It is the case of assessee that income on such retention money is accrued on complete discharge of contractual obligations to the satisfaction of contractee and thus chargeable to tax on....
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....has adopted the accounting procedure whereby retention money / security deposit etc. are debited/reduced separately from such gross income which encompasses retention money etc. while determining the taxable profits. The retention money/security deposits so withheld are later recognized as income in the respective years as and when the money so retained is actually realized by the Revenue. This method of accounting is stated to be followed for last many years to determine the true profits of the assessee. The Revenue, on the other hand, seeks to reject this accounting practice followed by the assessee on the ground that the expenditure towards retention money / security deposit claimed by the assessee are contingent and the assessee is obliged to pay taxes on income determined with reference to invoices raised by the assessee in pursuance of contractee regardless of certain portion thereof being retained by the contractee in the ordinary course of business. 12. We find inherent fallacy in the approach adopted by the Revenue while disturbing the income declared by the assessee. The assessee herein seeks to record the income when it comes into existence in the relevant previous ye....
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....ns and perused the material on record. Prima facie the disputed issue, being charging of interest u/s.234A & 234B as envisaged by ld. AR, is covered by the decision of Hob'ble jurisdictional High Court in the case of Ajay Prakash Verma in ITA No.38 of 2010 reported in 2013(1) TMI 140. The Hon'ble Court in Para23&24 held as under :- "23. Learned counsel for the appellant submitted that it has been ordered by the AO that interest be charged as per rule. Interest can be levied under Section 234A and 234B of the Act. It is submitted that in view of the judgment of Full Bench of Ranchi Bench of Patna High Court delivered in the case of Smt. Tej Kumari Vrs. Commissioner of Income-tax reported in [2001] the interest cannot be levied over the assessed income and it can be levied only on the income declared in the return. The revenue preferred SLP before Hon'ble Supreme Court against the said judgment of the Full Bench of Patna High Court, which was dismissed by the Hon'ble Supreme Court on merits vide order dated 01.08.2000 by saying that there is no merit in the appeal. 24. Learned counsel for the revenue could not dispute this legal position. Th....