TaxTMI 
TaxTMI 
2020 (7) TMI 189
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..... The learned Commissioner of Income tax (Appeals) erred in not considering that the provisions were made as per the regular method of accounting followed by the appellant. 3. The learned Commissioner of Income tax (Appeals) failed to consider the detailed facts submitted in case of provision made on Uhde Gmbh-SAFC contract, including the liquidated damages payable. 4. The learned Commissioner of Income tax (Appeals) erred in holding that provision for liquidated damages was not crystallized as the appellant had applied for waiver of the same. 5. The learned Commissioner of Income tax (Appeals) erred in disallowing provisions for cost overruns on incomplete contracts - Rs. 62,62,342/-. 6. The learned Commissioner of Income tax (Appeals) erred in not deleting provisions for costs on completed contracts amounting to Rs. 7,74,57,588/-which has been disallowed in earlier assessment years and were utilized/written back in the current year. 7. The learned Commissioner of Income tax (Appeals) erred in confirming taxation of an amount of Rs. 22,19,88,173/-, as income, in respect of contracts accounted under 'Percentage of Completion (POC) Method....
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....of income filed by the assessee was processed as such u/s 143(1) of the Act. Subsequently, the income of the assessee was assessed by the A.O vide his order passed u/s 143(3), dated 27.12.2010 at Rs. 49,99,23,265/- after making the following additions/disallowances: Sr. No. Particulars of addition/disallowance Amount 1. Disallowance of provision for costs incurred on completed contracts. Rs. 3,67,61,993/- 2. Disallowance of provision for cost overruns on incompleted contracts. Rs. 62,62,342/- 3. Addition of the amount accounted under 'Percentage of Completion' (POC) Method as income of the assessee. Rs. 22,19,88,173/- 4. Disallowance of software maintenance expenses by treating it as capital expenditure.(subject to allowing of consequential depreciation on the capitalized value) Rs. 1,09,77,210/- 3. Aggrieved, the assessee assailed the aforesaid additions/disallowances before the CIT(A). However, the CIT(A) not finding favour with the contentions advanced by the assessee upheld the aforementioned additions/disallowances. 4. The assessee being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. We h....
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....arried out two types of contracts viz. (i). Lumpsum Turnkey Projects [for short 'LSTK projects']; and (ii). Cost plus fees contracts. Insofar LSTK projects were concerned, it was submitted by the assessee that revenue was recognised on commissioning of the plant i.e at the stage at which the plant is started and commissioning operations are commenced to demonstrate the guaranteed parameters to the client. Also, commissioning would mean feeding the raw-material (feedstock) for the first time into the plant following mechanical completion and lining up of various sections of the plant leading to operation for production. As claimed by the assessee, after commissioning of the plant it would conduct guaranteed test runs and demonstrate the technical parameters as would have been guaranteed under the contract viz. consumption of raw material, production capacity, meeting effluent norms etc. before the plant would be finally accepted by the client It was the claim of the assessee, that since the profit on the aforementioned projects would be recognised upon commissioning of the plant i.e much before its final acceptance by the client, therefore, it was but essential for the assessee t....
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....y of industries and the services were highly technical in nature and the projects were carried out over a very wide geographical area, therefore, the same made the process of estimation complex. Since recognition of profits was done much in advance to the final acceptance of the plant by the client, therefore, as claimed by the assessee it was necessary to provide for the costs for each of such project which was likely to be incurred in future before final acceptance of the plant by the client. On a perusal of the records, we find that the assessee in its reply had placed on record a contract wise breakup of the provisions made by it during the year, which had been reproduced by the CIT(A) at Page 5-10 of his order. Also, support was drawn by the assessee from the fact that similar accounting methodology was being followed by it in earlier years, and the creation of provisions was in line with the applicable guidelines and accounting standards issued by the Institute of Chartered Accountants of India (ICAI). However, the CIT(A) after deliberating on the contentions advanced by the assessee was not persuaded to subscribe to the same. It was observed by the CIT(A) that the Tribuna....
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....the Tribunal in the assesse's own case for A.Y 2005-06 and A.Y 2006-07. As regards the reliance placed by the CIT(A) on the fact that the disallowance of provisions for costs incurred on completed contracts was upheld by the Tribunal in the case of the assessee for A.Y 2002-03, it was submitted by the ld. A.R that though the Tribunal had observed that making of a provision by the assessee in principle was justified, however, as the assessee had failed to provide the requisite information to prove that the liabilities were identifiable, determined and ascertained, therefore, the Tribunal in absence of such information had not agreed with the quantification of provision and had allowed the provision to the extent the same was utilised subsequently. It was submitted by the ld. A.R that the facts involved in the case of the assessee for the year under consideration in context of the aforesaid issue were clearly distinguishable as against those for A.Y 2002-03. 5.6 Per contra, the ld. D.R relied on the orders of the lower authorities. It was submitted by the ld. D.R that as the incurring of liability pertaining to the assessee's claim of provisions for costs incurred on completed con....
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....nt order in the assesses own case for A.Y 2006-07, ITA No. 1691/Mum/2012, had followed its earlier view for A.Y 2005-06, and allowed the deduction of provisions in its entirety, observing as under: "2.3.11 We have heard the rival contentions and perused relevant material on record including documents placed in the paper-book & judicial pronouncements relied upon by respective representatives. Since the issue is recurring in nature, for ease of understanding, at the outset, the status of appeal filed by the assessee in past years before the Tribunal could be tabulated in the following manner: - No. A.Y ITA No. Order dated Remarks 1. 2000-01 ITA 8053/Mum/2004 23/10/2007 Assesses appeal on the issue allowed 2. 2002-03 ITA 1926/Mum/2006 10/09/2008 Assesses appeal on the issue partly allowed 3. 2003-04 ITA 6510/Mum/2009 30/09/2011 Assesses appeal on the issue partly allowed 4. 2004-05 ITA 6511/Mum/2009 08/08/2012 Assesses appeal on the issue partly allowed 5. 2005-06 ITA 1690/Mum/2012 04/07/2014 Assesses appeal on the issue allowed The observation/conclusion in the latest order of....
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....ovisions for additional cost if sustainable production capability is not demonstrated within the guarantee period. In such cases cost provisions had to be made even after acceptance/conditional acceptance of a plant. We find that the FAA has disallowed provisions on the basis that the assessee had written back the amounts in subsequent years. He has not analyzed the data of earlier years and subsequent years to determine the alleged unreasonableness of the provisions. It is a fact that res judicata is not applicable to income tax proceedings and every year is an independent unit, but rule of consistency contemplates that the AO should not suddenly disallow any item without assigning some reason. From the order of the AO/FAA we are unable to find as how the facts and circumstances for the year 2001-02 were different from the facts for the year under consideration. Assessee was following the same system of making provisions for uncompleted projects for last so many years. There in nothing in the order of the FAA that could prove that provisions made by the assessee were not based on estimate given by experts. We have perused the paper book-it is found that internal memos are signed b....
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....tem of accounting following matching concept of income. Nothing on record suggest that reversal in the subsequent years has not been offered to tax by the assessee. The details as placed on record, reveal that out of such provisions of Rs. 949.35 Lacs, the assessee has incurred expenditure of Rs. 751.60 Lacs (which is more than 79% of the provisions) in the subsequent year and the excess provision i.e Rs. 393.14 Lacs have been offered to tax in AYs 2007-08 & 2008-09 by way of reversal. Further, the assessee is following consistent method of accounting and estimating the provisions on similar basis which is in line with the applicable accounting standards notified u/s 145(2) and as per statutory mandate. Nothing on record suggest that there was any change in method of accounting during impugned AY to recognize the revenue or expenses. 2.3.13 The assessee's submission before Ld. AO dated 06/11/2009 as placed from page nos. 55 onwards, reveal that project wise estimation were made by assessee for the expenditure to be incurred under each head. The same were arrived at after identifying expected cost required to be incurred in future on various projects. The elaborate working ....
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....d this case law to be factually different. 2.3.16 The due consideration of above factual matrix leads us to inevitable conclusion that the impugned provisions made by the assessee were allowable in full during impugned AY. Therefore, by reversing the stand of Ld. first appellate authority, we allow Ground Nos. 1 to 4 of the assessee's appeal." On a perusal of the records, we find that though the 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. As such, the assessed had to carry out estimation of such future expenditure and create a provision for cost on the completed projects. As is discernible from the orders of the lower authorities the aforesaid 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. Also, it was observed by the lower authorities that a major portion of the provision was ....
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.... A.O. Grounds No. 1 to 4 are allowed in terms of our aforesaid observations. (B). DISALLOWANCE OF COSTS OVERRUNS ON INCOMPLETE CONTRACTS: Rs. 62,62,342/- 6. In the course of the assessment proceedings it was observed by the A.O that the assessee had made a provision of Rs. 62,62,342/- for cost overruns on incomplete contracts i.e accounting for expected loss to be incurred on a particular contract. On being called upon to explain the nature of the aforesaid provision, it was claimed by the assessee that while the project would be in progress, the total cost of the project as of date (say March 31, 2007) would be identified. Further, depending upon the expected work to be done for the Project, the project implementation team would estimate the expected costs which were yet to be incurred after considering the engineering hours and supplies etc. Accordingly, the total estimated cost would therein be arrived i.e actual cost incurred till date (+) estimated cost yet to be incurred for completing the project, which would then be compared against the 'Contract revenue' i.e the total contract value agreed by the assessee with its client. As the assessee could not bill the client ....
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.... "2.4.3 After careful perusal of material on record, we find substantial force in the arguments of Ld.AR. It is undisputed fact that such provisions were made by the assessee in AY 2005-06 which has been allowed by Ld. AO himself. Secondly, out of these provisions of Rs. 192.34 Lacs, an amount of Rs. 134.11 Lacs has actually been utilized/paid by the assessee in subsequent years (which is more than 69% of the provisions) and balance amount i.e. Rs. 58.23 Lacs has been offered to tax in subsequent years. Moreover, the assessee has already placed on record project wise estimation and nothing on record suggest that there was any change in method of accounting being followed by the assessee. This being the case, the impugned additions could not be sustained. We order so. Ground No. 5 of the appeal stands allowed." 6.3 We have perused the aforesaid observations of the Tribunal in the assessee's own case for A.Y 2006-07, ITA 1691/Mum/2019, dated 09.04.2019, and find that the facts therein involved in context of the issue under consideration are in parity with those for the year under consideration. Insofar reliance placed by the CIT(A) on the order of the Tribunal for A.Y ....
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....s profit and loss account. On being queried as regards the understatement of the sales revenue, it was submitted by the assessee that as per AS-7 it was mandatorily required to follow POC Method of accounting for revenue recognition on contracts entered into by it w.e.f 01.04.2003. It was submitted by the assessee that as per the POC Method the percentage of completion was arrived at by taking the ratio of 'actual direct costs' incurred till the reporting date to 'total expected direct costs' on the contract. Accordingly, it was submitted that under the said method the 'contract revenue' was matched with the contract costs incurred in reaching the stage of completion, resulting in the reporting of revenue, expense and profit which could be attributed to the proportion of work completed. It was the claim of the assessee that AS-7 contemplated recognition of all expenditure pertaining to the stage of construction reached at the end of the financial year, and the recognition of revenue by applying the percentage of work completed to the total contract value. It was further submitted by the assesee that the profit figure for the period would be the difference between the revenue so rec....
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....e mercantile system of accounting, all the invoices i.e the progress billings raised by the assessee should have been reflected in the total sales in its books of accounts as on 31.03.2007. The A.O held a conviction that the ratio of actual sales till the reporting date to the sale price of the project would give the correct figure of percentage completion of the project. Relying on a host of judicial pronouncements, it was observed by the A.O that the method of accounting followed by the assessee was not to be held as sacrosanct, and in case the true income could not be ascertained on the basis of the assesse's method, then the income must be computed upon such basis and in such manner as the A.O may determine. On the basis of his aforesaid observations the A.O made an addition of the amount received by the assessee against Progress Billings on incomplete contracts (reduced by such amounts already received till 31.03.2006 and taxed as income in A.Y 2006-07) amounting to Rs. 22,19,88,173/- to the returned income. 8.1 Aggrieved, the assessee assailed the aforesaid addition in respect of alleged understatement of profits in respect of the projects accounted under the POC Method in....
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....tract 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. We order so. Accordingly, ground Nos. 7 to 11 of assessee's appeal stands allowed." As observed by us hereinabove, the issue involved in the present appeal remains the same as was there before the Tribunal in the assesse's own case for the immediately preceding year i.e A.Y 2006-07. At this stage, it would be relevant to point out that the CIT(A) while upholding the addition in question had not given any independent finding and had merely relied upon his order passed while disposing off the a....
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.... covered by the order passed by the Tribunal in the assesses own case for A.Y 2006-07 in ITA No. 1691/Mum/2012, dated 09.04.2019, wherein the disallowance of computer software expenses was vacated. In order to support his aforesaid claim the ld. A.R drew our attention to the observations of the Tribunal in context of the issue under consideration in ITA No. 1691/Mum/2012, dated 09.04.2019. Per contra, the ld. D.R could not rebut the claim of the counsel for the assessee. 10.3 We have perused the order passed by the Tribunal in the assesse's own appeal for A.Y 2006-07 in ITA No. 1691/Mum/2012, dated 09.04.2019. The Tribunal in its aforesaid order had 'set aside' the order of the CIT(A) and vacated the disallowance of computer software charges made by the A.O, observing as under: "2.7.2 The Ld. Sr. Counsel submitted that these expenditures were in the nature of annual payments for maintenance of various software being used by the assessee and therefore, the same were revenue in nature. Our attention is drawn to the fact that similar issue in earlier years stood squarely covered in assessee's favor by the orders of the Tribunal. Further, the appeal filed by the revenue aga....
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....aring of the captioned appeal was concluded on 16/01/2020, however, this order is being pronounced much after the expiry of 90 days from the date of conclusion of hearing. We find that Rule 34(5) of the Income-tax Appellate Tribunal Rules, 1962, which envisages the procedure for pronouncement of orders, provides as follows: (5) The pronouncement may be in any of the following manners:- (a) The Bench may pronounce the order immediately upon the conclusion of the hearing. (b) In case where the order is not pronounced immediately on the conclusion of the hearing, the Bench shall give a date for pronouncement. In a case where no date of pronouncement is given by the Bench, every endeavour shall be made by the Bench to pronounce the order within 60 days from the date on which the hearing of the case was concluded but, where it is not practicable so to do on the ground of exceptional and extraordinary circumstances of the case, the Bench shall fix a future day for pronouncement of the order, and such date shall not ordinarily be a day beyond a further period of 30 days and due notice of the day so fixed shall be given on the notice board. As such, 'ordinarily' the order on an appeal shou....
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....l machinery, that Hon'ble Supreme Court of India, in an unprecedented order in the history of India and vide order dated 6.5.2020 read with order dated 23.3.2020, extended the limitation to exclude not only this lockdown period but also a few more days prior to, and after, the lockdown by observing that 'In case the limitation expired after 15.03.2020 then the period from 15.03.2020 till the date on which the lockdown is lifted in the jurisdictional area where the dispute lies or where the cause of action arises shall be extended for a period of 15 days after the lifting of lockdown'. Hon'ble Bombay High Court, in an order dated 15th April 2020, has, besides extending the validity of all interim orders, has also observed that, 'It is also clarified that while calculating time for disposal of matters made time-bound by this Court, the period for which the order dated 26th March 2020 continues to operate shall be added and time shall stand extended accordingly', and also observed that 'arrangement continued by an order dated 26th March 2020 till 30th April 2020 shall continue further till 15th June 2020'. It has been an unprecedented situation not only in India but all over ....