TaxTMI 
TaxTMI 
2021 (3) TMI 672
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....n of income for the assessment year (AY) 2008-09 on 26.09.2008 declaring total income of Rs. 39,02,18,840/-. The assessee is engaged in the business of supply of processes; designing, construction and commissioning of complete plants for chemical fertilizers, petrochemicals, refining and other related industries. At the start of hearing, the Ld. counsel for the assessee submits that the assessee would not like to press the 5th and 10th to 14th grounds of appeal. Having considered the submission of the assessee, the above grounds of appeal are dismissed as not pressed. 3. The 1st to 4th ground of appeal, reproduced below, are discussed together, as they address a common issue: 1 The Ld. CIT(A) erred in confirming taxation of an amount of Rs. 63,09,36,232/- as income, in respect of contracts accounted under "Percentage of Completion" (POC) Method. 2 The Ld. CIT(A) failed to consider that the appellant was following a regular method of accounting sanctified by Accounting Standards. 3 The Ld. CIT(A) failed to consider that the addition made of Rs. 63,09,36,232/- has resulted in taxing gross receipts, without allowing deduction for expenditure required to earn such receipts. 4....
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.... above disallowance made by the AO. 6. Before us, the Ld. counsel for the assessee submits that the issues raised in the above grounds of appeal are decided in favour of the assessee by the order of the Tribunal- dated 09.04.2019 in assessee's own case for AY 2006- 07; dated 08.06.2020 in assessee's own case for AY 2007-08 and dated 07.08.2020 in assessee's own case for AY 2009-10. The Ld. Departmental Representative (DR) supports the order passed by the AO, which is confirmed by the Ld. CIT(A). 7. We have heard the rival submissions and perused the relevant materials on record. The reasons for our decisions are given below. We find that similar issue arose before the Tribunal in assessee's own case for AYs 2006-07, 2007-08 and 2009-10. We may refer here to the relevant paragraphs of the order of the Tribunal for AY 2006-07 (ITA No. 1691/Mum/2012) : "2.5 Ground Nos. 7 to 11: Income in respect of Contracts Accounted under Percentage of Completion Method. 2.5.1 By way of these grounds, the assessee is contesting the addition of Rs. 28.84 Crores which represent understatement of profits in respect of projects accounted under the project completion method. During assessment pro....
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....t incurred till the end of the accounting year Budgeted Cost It was explained that the revenues were recognized by applying this fraction to the contract value. However, to ensure that the project was sufficiently funded, the assessee raised progress billings from time to time based on pre-decided milestones. These bills were raised only for the purpose of meeting funding requirements and had nothing to do with determination of extent of completion of contract or recognition of revenue since recognition was done the basis of formula mentioned above so as to ensure matching cost and revenues. Our attention is drawn to the explanation furnished by the assessee before first appellate authority to justify progress billings under the projects. The Ld. Sr. Counsel further submitted that the objective of progress billing was to ensure working capital availability and it was nothing but advances from customers and therefore, could not be regarded as assessee's income. Reliance has been placed on the decision of this Tribunal rendered in IOT Infrastructure & Energy Services Ltd. [ITA No. 7035/M/2010 17/05/2013] which has been upheld by Hon'ble Bombay High Court in ITA No. 2296 of ....
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....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." 7.1 Facts being identical, we follow the above order of the Co-ordinate Bench and allow the 1st to 4th ground of appeal. 8. The 6th ground of appeal ....
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.... his predecessor-in-office for AY 2006-07 and confirmed the above addition made by the AO. 11. Before us, the Ld. counsel relies on the order of the Tribunal dated 09.04.2019 in assessee's own case for AY 2006-07 and order dated 07.08.2020 for AY 2009-10. On the other hand, the Ld. DR relies on the order of the Ld. CIT(A) confirming the above addition made by the AO. 12. We have heard the rival submissions and perused the relevant materials on record. Similar issue arose before the Tribunal in assessee's own case for AY 2006-07. The Tribunal vide order dated 09.04.2019 held as under : "2.6 Ground Nos. 12 to 13: Excess of Progress Billings- understatement of profit in respect of incomplete contracts obtained prior to 31/03/2003 and accounted under Completed Contract Method 2.6.1 This addition of Rs. 396.15 Lacs represents alleged understatement of profit in respect of incomplete contracts accounted under Completed Contract Method [CCM]. It was noted that as per accounting policies, the assessee was following Completed Contract Method[CCM]for contracts received / started up-to 31/03/2003 and for contracts after this cut-off date, percentage completion method was being followed....
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.... of Rs. 3,70,80,058/- by holding that the repairs and renovation carried out by the appellant led to major renovation, and was capital in nature. The 9th ground of appeal The Ld. CIT(A) failed to consider the expenditure on repairs was in respect of such items which could not be removed from licensed premises. 14. During the course of assessment proceedings, the AO noticed that the assessee is going for major expansion ; the expenses for such expansion and renovation are also claimed under the head "Repairs & Maintenance Expenses". The AO further found that the assessee has carried out major expansion and renovation work at Raj Plaza, Doghal Plaza and various other offices. The AO on examination of the following bills reached the following findings: Bill No. I 2007/3224- Bill describes expenses for panels, cables & switch gear, point wiring, electrical fittings and fans, floor raceways & UPS raw power wiring, networking passive, fibre work, fire alarm system, heat sensors system, miscellaneous . The total bill is Rs. 17,71,552/- inclusive of VAT of Rs. 1,26,495/-. Bill No. I 2007/3403 This bill has items regarding providing and fixing ceramic tiles in toilets, Black gr....
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....to Raj Plaza was to enable to demolish the old North Block building, looking into the nature of expenditure carried out at Raj Plaza, the appellant should have even capitalized the same expenditure towards the new North Block building because had the employees not moved out and occupied the temporary office premises for 33 months at Raj Plaza, the demolition of old building at North Block and construction of new building could not have taken place. Thus, there was a direct link between the movement of the employees and demolition and construction of the new building (North Block) and hence, in the above facts of the case, it is held that the amount spent by the appellant towards the accommodation of its 500 employees at Raj Plaza has a live nexus with the new asset coming into being at North Block which was owned by the appellant. Accordingly, it is held that even the expenditure of Rs. 1,72,82,818/- was in the nature of capital expenditure De-hors this finding, even otherwise, the expenditure carried out by the appellant as repairs and renovation was in the nature of capital expenditure leading to major renovation or erection of assets and hence, the findings given- by the Ld. AO ....
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.....50 crores for the work of repair and restoration of the structure ; and it further provided that there would be no increase in the rent payable by the assessee which continued to be Rs. 11,300/- per month. The Assessing Officer held that the assessee had secured rights for an area of 5000 sq. ft. on a payment of a sum of Rs. 1.50 crores and assessee was to become a member of a society or company. That according to the Assessing Officer, would constitute deemed ownership of the premises. The Assessing Officer, therefore, came to the conclusion that the expenditure of Rs. 1.50 crores was of capital in nature and had to be disallowed. The CIT(A), however, reversed the view taken by the Assessing Officer. The Tribunal, confirmed the order of the CIT(A). On appeal by the Revenue, the Hon'ble Bombay High Court held that : "The issue as to whether expenditure incurred by an assessee is of a revenue or capital nature has fallen for determination in various contexts, but in all decisions particularly of the Supreme Court what has been emphasized is that the matter has to be looked at from a commercial point of view. [Para 7] In CIT v. Madras Auto Service (P.) Ltd. [1998] 233 ITR 468/ 9....
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....ture is incurred by the assessee. In other words, it is necessary to emphasise that what Explanation I brings about is a deeming fiction by which expenditure of a capital nature incurred by the assessee for the purposes stipulated therein including inter alia for the construction of any structure or the work of renovation, extension or improvement can form the basis of a claim for depreciation as if the structure or work is a building owned by the assessee. But for the Explanation, an assessee would not be entitled to the benefit of depreciation even if the expenditure which was incurred was of a capital nature and the effect of the Explanation is to entitle the assessee to the benefit of the provisions of section 32, if the stipulations and conditions set out in the Explanation are fulfilled. The deeming fiction is for the purposes of the statutory provision in question. But the point to be emphasized is that the explanation operates in a situation where capital expenditure is incurred by the assessee. Unless the expenditure is of a capital nature, there would be no occasion to apply the deeming fiction that is carved out by Explanation I. In the instant case, the conclusion has a....
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....g owned by the assessee. But for the Explanation, an assessee would not be entitled to the benefit of depreciation even if the expenditure which was incurred was of a capital nature and the effect of the Explanation is to entitle the assessee to the benefit of the provisions of Section 32. 7. It is trite that explanation cannot read dehors the provision. The explanation is in aid to the provision. 8. The expenses as are culled out in the order of the Tribunal are sufficient to imply that same are Revenue in nature and not capital. The expenses are in the nature of building maintenance charges to the society, labour charges, charges for carpenter work, plumbing work, masonry work, pending labour charges and provisional fees. 9. The Tribunal has rightly considered the expenses as Revenue in nature. In the light of the above, no substantial question of law arises. The appeal as such is dismissed. No costs." 18. Then we turn to the case laws relied on by the Ld. DR. In Ballimal Naval Kishore (supra), the assessee carries on the business of exhibiting films in a theater called "Naval Talkies" at Panipat. He had purchased the said building in 1937. It was a ginning factory then. H....
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....nly definition of 'repairs' because it is only by reason of this definition of repairs that the expenditure is a revenue expenditure. If the amount spent was for the purpose of bringing into existence a new asset or obtaining a new advantage, then obviously such an expenditure would not be an expenditure of a revenue nature but it would be a capital expenditure, and it is clear that the deduction which, the Legislature has permitted under Section 10(2)(v) is a deduction where the expenditure is a revenue expenditure and not a capital expenditure." In taking the above view, the Bombay High Court dissented from the view taken by the Allahabad High Court in Ramkrishan Sunderlal vs. Commissioner of Income Tax, U.P. [(1951) 19 I.T.R..324] where it was held that the expression "current repairs" in Section 10(2)(v) was restricted to petty repairs only which are carried out periodically. The Learned Judge agreed with the view taken by the Patna High Court in Commissioner of Income Tax vs. Darbhanga Sugar Co. Ltd. [(1956) 29 I.T.T.21] and by the Madras High Court in Commissioner of Income Tax vs. Sri Rama Sugar Mills Ltd. [(1951) 21 I.T.R.191] In Liberty Cinema vs. Commissioner of I....
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....the asset and in the creation of an enduring benefit, the expenditure was a capital expenditure. The Hon'ble Bombay High Court held that : "This court held in the case of Gulamhussein Ebrahim Matcheswalla v. CIT [1974] 97 ITR 24 (Bom.), that the expression 'repair' must be understood in contradistinction to renewal or restoration and the test to be applied is to see whether as a result of the expenditure what is being done is to preserve and maintain an already existing asset. If the amount is spent for the purpose of bringing into existence a new asset or obtaining a new advantage then such an expenditure would not be revenue expenditure. The mere quantum of expenditure is not by itself decisive of the question whether it is of the nature of revenue or capital. A sum can be allowed as cost of repairs even though the expenditure in a particular year is heavy on account of the fact that it is undertaken to remedy the effect of several years of wear and tear or neglect and also in spite of the fact that such expenditure may not be necessary for several years to come after repairs have been effected. It is thus clear that what the court is required to find out is whether as a result....
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....e as also the expenditure being the architects' fees paid in connection therewith would have to be regarded as expenditure of a revenue nature. All that the assessee did in the instant case was to undertake the plaster repairing work out by adopting a new method called guniting process, and by incurring the expenditure by adopting such a process the assessee was merely maintaining and preserving an asset which it already possessed and thus though to some extent the life of the asset had been prolonged and the asset was made to give better service then it was doing in the past, the expenditure would have to be regarded as revenue expenditure." 18.2 In Vardhman Developers Ltd. (supra), the assessee is a builder and developer. It had taken an office premises on rent for a period of five years. As the said premises was old and not in use for a long time, it incurred some expenditure towards repair and renovation of the said premises to achieve its functional utility. Its claimed that expenditure was in respect of rented premises and, accordingly, allowable under section 30(a)(i). The revenue raised objection, that the nature and the volume of the expenditure would not qualify it....
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....y the revenue. [Para 6] The concept of 'repairs' and 'revenue expenditure' were considered as pari materia and co-extensive in as much as in the view of the Court, repair could not, by definition, include capital expenditure. [Para 6]" 19. The distillation of precedents must now be applied by us to the facts of the case. In CIT v. Gitanjali Mills Ltd. (2004) 265 ITR 681 (Mad.) , it is held that an expenditure that is not deductible u/s 30 to 36 can still be allowed as a deduction under the residuary section 37 of the Act. The residuary nature of the provision in section 37(1) will have to be given its full meaning. A legitimate claim in accordance with the principles of accountancy and according to well-established commercial practice and which must be taken into account in ascertaining the true profits and gains of business cannot be denied unless some statutory provision in clear words or by necessary implication negatives the adoption of such principle and practice as held in CIT v. High Land produce Co. Ltd (1976) 102 ITR 803 (Ker.) affirmed by the Hon'ble Supreme Court in (1986) 158 ITR 419. In CIT v. Madras Auto Service(P.) Ltd. (1998) 233 ITR 468 (SC), th....
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....vered in favour of the assessee by the decision of the Hon'ble Bombay High Court in the case of Sesa Goa Ltd. (supra) and Hon'ble Rajasthan High Court in the case of Chambal Fertilizers & Chemicals Ltd. (ITA No. 52 of 2018). As per the above decisions, the amount of education cess and higher & secondary education cess is not tax as covered u/s 40(a)(ii) and accordingly allowable as deduction in computing the income from business or profession. Following the above decisions, we admit and allow the additional ground of appeal filed by the assessee. In the result, the appeal filed by the assessee is allowed. ITA No. 4214/MUM/2016 (Revenue's Appeal) 24. The grounds of appeal filed by the Revenue read as under : i. Whether on the facts and circumstances of the case, the Ld. CIT(A) was correct in allowing the provision towards cost on completed contract and provision towards cost over runs on incomplete contracts both being unascertained and non-crystallized liabilities. ii. Whether on the facts and circumstances of the case, the Ld. CIT(A) was correct in relying only on the ITAT decision in assessee's case for A.Y. 2005-06 without appreciating the fact that the issue is not f....