TaxTMI 
TaxTMI 
2020 (8) TMI 842
X X X X Extracts X X X X
X X X X Extracts X X X X
....Tax - 10(3) erred in disallowing provisions for cost overruns on incomplete contracts - Rs. 49, 87, 665/-. 4. The learned Deputy Commissioner of Income Tax - 10(3) erred in not deleting provisions for costs on completed contracts amounting to Rs. 4, 29, 30, 847/- which has been disallowed in earlier assessment years and were utilized/written back in the current year. 5. The learned Deputy Commissioner of Income Tax - 10(3) erred in confirming taxation of an amount of Rs. 79, 15, 01, 432/-. as income, in respect of contracts accounted under "Percentage of Completion" (POC) Method. 6. The learned Deputy Commissioner of Income Tax - 10(3) erred in not considering that the appellant was following a regular method of accounting, sanctified by Accounting Standards. 7. The learned Deputy Commissioner of Income Tax - 10(3) failed to consider that the addition made of Rs. 79, 15, 01, 432/- has resulted in taxing gross receipts, without allowing deduction for expenditure required to earn such receipts. 8 Without prejudice to ground Nos. 5 to 7 above, the Assessing Officer erred in not allowing deduction (following his own method) where the sale pr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f complete plants for chemicals fertilizers, petrochemicals, refining and other industries. During the year under consideration, the assessee has shown the sales & services of Rs. 359, 62, 07, 121/- and Miscellaneous at Rs. 24, 06, 36, 937/-. Net profit was shown at Rs. 38, 14, 39, 719/-. The draft assessment was passed on 08. 02. 2013. Thereafter, the assessee filed the objection before the DRP-II, Mumbai. The direction was given on 01. 11. 2013 and thereafter the assessment was completed by assessing the total income in sum of Rs. 1, 31, 64, 33, 503/- and tax was calculated in sum of Rs. 39, 49, 30, 050/- and book profit u/s 115JB was computed and assessed in sum of Rs. 39, 27, 94, 467/- tax @ 15% of Rs. 5, 89, 19, 170/-. Feeling aggrieved, the assessee has filed the present appeal before us. ISSUE NOS. 1 & 2 4. Under these issues the assessee has challenged the disallowance of the provisions for costs completed and contracts. At the outset, the Ld. Representative of the assessee has argued that the issue has squarely been covered by the decision of the Hon'ble ITAT in the assessee's own case for the A. Y. 2005-06 bearing ITA. No. 1690/M/2012 dated 04. 07. 2014. However,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed costs, cost of completion of punch list work, cost of modification for uncompleted projects has to be considered while making provisions when an assessee carries out a business of providing diversified engineering services. We find that the assessee had to make provisions 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 analysed the data of earlier years and subsequent years to determine the alleged unreasonableness of the provisions. It is a fact that res judicta 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 provision....
X X X X Extracts X X X X
X X X X Extracts X X X X
....perused the material before us. In our opinion PCCC is based on identified liability, though it is only an estimate. In the year under appeal the assessee had made provisions for eleven unfinished projects and in subsequent two years after completing the projects wrote off the provisions and offered the balance for taxation. We further find that in those years the assessee had written back the balance amount and same was taxed by the AO. In our opinion, the AO cannot take two stands-he cannot tax the assessee in later years for a part of transaction for which provision has been made for earlier years. In the commercial world provisions are made for contingencies and court are of view that same have to allowed. AS-7 recongises the principal of making provisions for certain expenses. It is a normal feature of business world that at the end of a particular AY. , it may not be possible for an assessee to determine the probable future expenditure of an ongoing project or scheme. If it recongnises income from such project in that year, it will have to make some reasonable provisions for the expenditure to be incurred in subsequent year. Provision will vary from project to project and fro....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d technical sides of the projects(page 83, 89, 124, 138 of the PB). In short, the assessee was following some system in estimating provisions. Therefore, without pointing out major defects it was not proper on part of the FAA to state that system was . FAA has given his finding without giving the reasons. In our opinion writing off of provisions in subsequent years cannot be basis for disallowing it. Accounting standards expect that assessee should write back such amounts in later years. FAA has overlooked the fact that out of the provisions made by the assessee, Rs. 3. 70 Crores were actually spent by the assessee in the subsequent years to complete the unfinished projects or to render further services. Therefore, in our opinion, he was not justified in confirming the disallowance of Rs. 8. 14 Crores, without analysing the terms and conditions of the projects threadbare for which provisions were made during the year under apppel. Reversing his order we decide first effective ground of appeal (ground no. 1-3) in favour of the assessee. " 7. Thereafter, the issue has been decided in favour of the assessee in the assessee's own case for the A. Y. 2006-07 & 2007-08 bearing....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pon careful consideration, the undisputed position that emerges is that the assessee is following consistent method of accounting to recognize the revenue under these contracts. The percentage of completion of the project has been worked out as per total cost incurred on the project to date vis-à-vis total budgeted cost and that fraction is applied to the contract value for the purpose of revenue recognition. Similar formulae have been adopted by the assessee in preceding two years which has been accepted by the revenue. No case of revenue leakage has been established before us. Nothing on record suggest that remaining income under the project has not been offered by the assessee in subsequent years, following the same method of accounting. Simply because progress billing was more than the stage of percentage of completion, the same, in itself, could not be the basis to usurp the consistent method of accounting being followed by the assessee. Therefore, the additions made by the revenue, under the circumstances, could not be sustained. We order so. Accordingly, ground Nos. 7 to 11 of assessee‟s appeal stands allowed. " As observed by us hereinabove, the issue ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ntracts started before 31/03/2003 wherein the assessee followed completed contract method. During assessment proceedings, it transpired that the assessee raised invoices against these 13 projects for Rs. 22. 52 Crores and reflected the same on the liabilities side of the Balance Sheet. Similarly, the costs of Rs. 18. 56 Crores were accumulated against these projects and reflected on the asset side of the Balance Sheet. The Ld. AO opined that though substantial work was done under these projects and invoices were also raised, no profit was shown against the same. Resultantly, the differential of the two amounts i. e. Rs. 396. 15 Lacs was added to the income of the assessee. The stand of Ld. AO, upon confirmation by first appellate authority, is under appeal before us. 2. 6. 2 Th Ld. Sr. Counsel submitted that the costs as well as revenues are recognized under these projects on completed contract method. These revenues as well as costs were accumulated in the similar manner for AYs 2004-05 & 2005-06 also which has been accepted by the revenue and therefore, there was no reason to disturb the same in this AY. Per contra, Ld. CIT-DR submitted that, upon change of meth....