TaxTMI 
TaxTMI 
2021 (10) TMI 696
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....f the case, the Ld. CIT(A) has erred in law and on facts in deleting the prior period expenses of Rs. 26,39,87,000/-, made by the AO without appreciating the fact that the above expenses were debited against the accounting guidelines mentioned in AS-5 of ICAI and they were not crystallized during the relevant assessment year. 2. That on the facts and in the circumstances of the case, the Ld. CIT (A) has erred in law in deleting the disallowance of prior period expenses of Rs. 7,77,66,000/- out of total disallowance of total disallowance of Rs. 26,39,87,000/- without appreciating the fact that the assessee failed to submit any evidence that the above amount was added back u/s 43B in the return of income before the AO. 3. That on the facts and in the circumstances of the case , the Ld. CIT (A) has erred in law and on facts in holding that since the above expenditure is allowed as per the Companies Act hence it is not contingent in nature as income is computed as per Income Tax Act and not as per Companies Act for the purpose of income tax assessment. 4. That the order of the CIT(A) is perverse, erroneous and is not tenable on facts and in law. 5. T....
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....the addition was deleted. Such order was passed on 29.04.2016. The ld AO is aggrieved with the order. 7. At the time of hearing the assessee raised a ground invoking Rule 27 of the Act that the ld AO has erred in making the addition to the assessment order passed u/s 143(3) read with section 153C of the Act in non abetted assessment order without any incriminating documents found during the course of search. The ld AR relied upon several judicial precedents and submitted that the assessee can invoke this arguments and the appeal is pending before the coordinate bench. 8. On this issue he submitted that the notice is issued u/s 153C of the Act on 05.11.2009 and therefore, it is the deemed date of search in view of the decision of the Hon'ble Delhi High Court in CIT Vs. RRJ Securities Ltd 380 ITR 612. As on the date of search the assessment was completed u/s 143(3) read with section 147 of the Act by order dated 31.12.2008 and therefore, it was a concluded assessment. He further referred to the assessment order and submitted that the addition has been made on the basis of perusal of the profit and loss account itself and without any incriminating material found during the c....
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....ecided against him. The Appellant - assessee, as a Respondent before the ITAT was entitled to agitate the jurisdictional issue relating to the validity of the reassessment proceedings. We are, therefore, of the considered opinion that the impugned order passed by the ITAT suffers from perversity in so far as it refused to allow the Appellant - assessee (Respondent before the Tribunal) to urge the grounds by way of an oral application under Rule 27. The question of law as framed is answered in favour of the Appellant - assessee and resultantly the impugned order is set aside. The matter is remanded back before the ITAT with a direction to hear the matter afresh by allowing the Appellant- assessee to raise the additional grounds, under Rule 27 of the ITAT Rules, pertaining to issues relating to the assumption of jurisdiction and the validity of the reassessment proceedings under Section 153C of the Act." 11. Thus, We find that the assessee can invoke Rule 27 when the issue has been decided against the assessee. 12. In the present case, we find that the assessment was completed u/s 143(3) of the Act read with section 148 of the Act by order dated 31.12.2 008 and the notice u/s 1....
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....ent on the date of search. This assessment should have been tinkered with , only if there is any incriminating material belonging to the assessee found during the course of search. We find that the ld AO has made an addition only on the basis of perusal of the profit and loss account which was already part of the assessment record earlier. Therefore, it is clear that the addition has not made on the basis of any incriminating material found during the course of search. Thus issue is squarely covered by the decision of the Hon'ble Delhi High Court in PCIT Vs. Kabul Chawla (2015) 93 CCH 0210 DelHC, (2015) 126 DTR 0130 (Del), (2015) 281 CTR 0045 (Del), (2016) 380 ITR 0573 (Delhi), (2015) 234 TAXMAN 0300 (Delhi) and of the Hon'ble Supreme Court in case of CIT Vs. Sinhgadh Technical Educational Society V DCIT (2018) 103 CCH 0256 ISCC Thus, the addition could not have been made and hence deserved to be deleted. 14. Even on the merits of the case, the ld CIT(A) has categorically held that the expenditure crystallized during the year and therefore, they are allowable as business expenditure during the year. The decision of the ld CIT(A) is also based on several decisions of the ....
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....red in law and on facts in deleting the disallowance of prior period expenses of Rs. 2,06,000/- without appreciating the facts the above expenses were debited against the accounting guidelines mentioned in AS-5 of ICAI and they were not crystallized during the relevant assessment year. 5. That the order of the CIT(A) is perverse, erroneous and is not tenable on facts and in law. 6. That the grounds of appeals are without prejudice to each other." 19. Briefly stated the facts of the case shows that that the assessee filed return of income on 27.11.2003 declaring loss of Rs. 16,56,77,673/-. The case of the assessee was picked up for scrutiny and assessment u/s 143(3) and assessment was made at a net loss of Rs. 3,39,67,803/- wherein, disallowance of Rs. 13,17,09,870/- was made. Subsequently, an order u/s 154 was also passed on 24.04.2006 where the loss was determined finally at Rs. 10,60,77,803/-. 20. Search took place at HFCL Group of companies on 10.05.2007. Therefore, proceedings u/s 153C were initiated by issue of notice u/s 153C of the Act on 09.10.2009 against which the assessee filed return of income on 05.11.2009 declaring loss or Rs. 16,56,77,673/- as....
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....06, therefore, as on the date of search i.e. issue of notice u/s 153C of the Act on 05.11.2009, this assessment was not pending but concluded assessment which could have been disturbed only if there is an incriminating material found during the course of search. In the present case, all the additions have been made which was also originally made u/s 143(3) of the Act. Thus, it is apparent that the additions have been made in absence of any incriminating material found during the course of search therefore, these additions deserves to be deleted. 27. Otherwise, on the merits of the case the ld DR could not show us any infirmity in the order of the ld CIT(A). With respect to the first ground of appeal of Rs. 4,11,02,000/- where the provision was made for obsolete inventory is identical to the provision made by the assessee for earlier years which was allowed by the ld AO in earlier years. Even otherwise, the assessee has made the provision for non moving inventories by reducing the carrying value of such inventories. It is not the claim of the ld AO that it is an ad hoc provision. These obsolete inventories are written off by reducing the carrying cost of inventory. In view of thi....
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....nd had only made provision. 2. That on the facts and in the circumstances of the case, the Ld. CIT (A) has erred in law and on facts in holding that since the above expenditure is allowed as per the Companies Act and hence is not contingent in nature as income is computed as per Income Tax Act and not as per the Companies Act for the purpose of Income Tax Assessment. 3. That the order of the CIT(A) is perverse, erroneous and is not tenable on facts and in law. 4. That the grounds of appeals are without prejudice to each other." 33. Shortly stated the fact of the case shows that the assessee filed return of income on 28.10.2004 declared loss of Rs. 26,26,30,920/-. This return was not picked up for scrutiny however, the last date of issue of notice u/s 143((2) of the Act expired on 30.09.2005. A search took place on HFCL Group on 10.05.2007 and a notice came to be issued u/s 153C of the Act on the assessee on 05.11.2009. Subsequently, the assessment u/s 153C read with section 153A was passed on 18.12.2009 determining net loss of Rs. 13,84,88,497/-. The ld CIT(A) made following three disallowances:- a. Disallowances on account of provision of obs....
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....en on the merits addition does not deserve to be made, we upheld the order of the ld CIT(A) and dismiss the appeal of the ld AO. ITA No. 3955/Del/2016 Assessment Year 2005-06 40. This appeal is filed by the ld AO for Assessment Year 2005-06 against the order passed by the Commissioner of income tax (appeals) - I , New Delhi dated 29/4/2016. 41. The learned AO has raised the following grounds of appeal in ITA No. 3955/Del/2016 for Assessment Year 2005-06:- "1. That on the facts and in the circumstances of the case , the Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs. 5,00,21,000/-, made by the AO on account of provision for inventory by holding that the provision for inventory was contingent in nature, without appreciating the fact that the assessee had not written off the inventory and had only made provision. 2. That on the facts and in the circumstances of the case, the Ld. CIT (A) has erred in law and on facts in holding that since the above expenditure is allowed as per the Companies Act and hence is not contingent in nature as income is computed as per Income Tax Act and not as per the Companies Act for the purpose of Inco....
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....tions deleted by the ld CIT(A). 45. At the time of hearing, the ld AR raised a ground invoking provisions of Rule 27 of ITAT Rules stating that the notice u/s 153C was issued on 05.11.2009. On that date the assessment for Assessment Year 2005-06 got concluded and was not pending. He submitted that the above assessment could have been tinkered with only if there is any incriminating material found during the course of search. He submitted that the last date for issue of notice u/s 143(2) in that case has already expired on 30.09.2006. He stated that as none of the addition/ disallowances made by the ld AO is based on any incriminating material those have been correctly deleted by the ld CIT(A). On the merits of the case he submitted that the ld CIT(A) has correctly deleted the addition. The ld CIT DR vehemently objected to the arguments of the ld AR and further on the merits of the issue relied upon the orders of the ld AO. 46. Coming to the ground of the ld AR under Rule 27 of the ITAT Rules we find that search took place on 10.05.2007 on HFCL Group of companies and notice u/s 153C of the Act was issued on 05.11.2009. Therefore, on 05.11.2009 is date of search in case of the ....
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....e ld AO has not relied upon any incriminating evidence found during the course of search and only on the information contained in the return of income. Therefore, on this ground itself all the three additions have been correctly deleted by the ld CIT(A). Even otherwise on the merits of the case of the assessee the first disallowance of Rs. 5,00,21,000/- on account for provision for inventory of non obsolete stock. Identical issue was also there in earlier year in the case of assessee wherein, after giving detailed reasons we have upheld the order of the ld CIT(A) in deleting the above additions. For the similar reasons, as there is no change in the facts, we confirm the order of the ld CIT(A) deleting the disallowances made on provision for non moving items of Rs. 5,00,21,000/-. Accordingly, ground Nos. 1 and 2 of the appeal are dismissed. 50. Coming to the ground No. 4 of the appeal with respect to disallowance of prior period expenditure of Rs. 1,48,63,000/- we find that these disallowances are similar to the disallowances made in the case of the assessee for earlier years. The ld CIT(A) has deleted the disallowance in those years and we have upheld the order of the ld CIT(A) ....
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....the Act, only an ascertained liability is admissible for deduction and there is no scope for deduction of anticipated liabilities. The scope of section 37 and the position with regard to admissibility of expenditures claimed under the head 'provisions' have been discussed in the previous paragraphs and in view of the elaborated discussions in this regard, claim of the assessee for provision of liquidated damages amounting to Rs. 19,20,44,000 is disallowed. Addition of Rs. 19,20,44,000/- is hereby made. '' The appellant has submitted detailed submission against the additions made in the assessment order, gist of which is given below : "The Liquidated Damages debited to the Profit and Loss Account amounts to Rs. 1920.64 lakhs. The details are as follows: Rs. In lakhs 1. Actual LD recovered by BSNL 677.70 2. Provision for LD for NIB Project s upplies to BSNL 1150.97 3. Provision for LD for EWSD Switching equipments 91.97 TOTAL 1920.64 Supplies to BSNL • The Liquidated Damages debited to the Profit and Loss Account represents damages levied and recovered by BSNL, fo....
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....Project supplies to BSNL 1150.97 3. Provision for LD for EWSD Switching equipments Supplies to BSNL 91.97 TOTAL 1920.64 Vide Clause 18 of BSNL Purchase order dated 03.08.2004, copy enclosed as Annexure A2 in the submission, it is stated that appellant shall be liable for liquidated damage as per clause 18 of Annexure A2 of Purchase order. Liquidated damages are leviable for delay in supply of the goods. The rate of liquidated damage is specified in Clause 18(b) of the purchase order. As per clause 18(b) liquidated damage will be payable for delay in supply i.e. at the rate of 0.5% for each week or part there of upto 10 weeks and thereafter at the rate of 0.7% for each week and part thereof. During the year the appellant has decided to accrue the liquidated damages against the supp'y a -es: made to the customer as against the hitherto follow practice of accounting for SJCr expenditure as and when the same was deducted from the payments received aga.ns: the invoices for supplies made. It has been clarified in Note C7 of the Audited Accounts in the year under consideration due to this change charge to the Profit & Loss A/c on account of liquida....
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....goods within stipulated period was liable to pay liquidated damages to purchaser, payment of such liquidated damages was allowable as revenue expenditure - Held, yes [Paras 16 & 17] [In favour of assessee]" Reliance is also placed on Bombay High Court judgment in the case of CIT Vs. R.D. Sharma & Co. 11 taxman 137 and held as under: "Section 145 of the income-tax act, 1961-Method of accounting-Year in which liability/expenditure deductible-During assessment year 1967-68, notices served on assessee by military authorities for levying penalty for non-completion of contract in time- assessee following mercantile system of accounting, accepted liability and made a provision for it in its profit and loss account of assessment year 1967-68-Whether liability was deductible in assessment year 1967-68-Held, on facts, yes Section 37(1) of the income-tax act, 1961-Business expenditure-Whether damages/penalty paid by assessee-contractor to government for non-completion of contract work in time is deductible-held, yes Facts The assessee, being military contractors, while computing the net profit for the assessment year 1967-68, took into account a ce....
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....nses was based on information that some of equipments supplied by company required repair and replacement and technical team estimated such expenses for making provision in account, claim being based on materials and information of technical team, would certainly be allowable - Held, yes [Para 11] [In favour of assessee]" The ratio of these judgments is squarely applicable to the appellant's case and the liquidated damages have been incurred by the appellant wholly and exclusively for the business purpose and same is allowable as an business expenditure on the basis of crystallization during the year. This ground of appeal is allowed." 52. The ld DR could not show us any reason that the liquidated damages are not incurred wholly and exclusively for the business purpose of business during the year. We also noted that the liquidated damages has been allowed to the assessee since Assessment Year 1998-99 till Assessment Year 2003-04 on the identical facts and circumstances. We also find that Whenever damages are to be paid by assessee for breach of contract, such damages were treated to be normal expenses of business, and where assessee had to pay damages to other party....
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..../- on 28.11.2006 which was processed u/s 143(1) on 14.02.2008. Subsequently, the assessment was famed u/s 143(3) of the Act on 31.12.2008 at the return income of Rs. 4,10,08,858/-.. 58. Search took place on HFCL Group of companies on 10.05.2007 and notice u/s 153C of the Act was issued to the assessee on 05.11.2009. Subsequently, assessment u/s 153C read with section 153A of the Act was passed by the ld AO on 18.12.2009, wherein, the total loss of the assessee was determined at Rs. 4,10,08,858/-. The ld AO made three disallowance as under:- a. Addition on account of provision of none obsolete inventory of Rs. 43,67,000/- b. Disallowances of prior period expenditure of Rs. 1,48,63,000/- c. Addition on account liquidated damages of Rs. 2,23,86,000/-. 59. The assessee preferred an appeal before the ld CIT(A) who deleted all the three disallowances and therefore, the ld AO aggrieved with that order has preferred this appeal. 60. At the time of hearing the ld AR submitted that all the three additions were made by the ld AO without referring to any incriminating material found during the course of search therefore, he invoked the provisions of Rule 27 ....
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....minating found during the course of search in this concluded assessment and further on the merits of the case of the disallowances same are covered against revenue by the orders of the earlier years. 66. In the result, appeal No. 3956/Del/2016 filed by the ld AO for Assessment Year 2006-07 is dismissed. ITA No. 3957/Del/2016 Assessment Year 2008-09 67. This appeal is filed by the ld AO against the order of the ld CIT(A)-1, New Delhi dated 29.04.2016. 68. The revenue has raised the following grounds of appeal in ITA No. 3957/Del/2016 for Assessment Year 2008-09:- "1. That on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law and on facts in deleting the disallowance of Rs. 76,92,000/-, made by AO by holding that the provision for inventory was contingent in nature, without appreciating the fact that the assessee had not written off the inventory and had made only provision. 2. That on the facts and in the circumstances of the case, the Ld. CIT (A) has erred in law and on facts in holding that since the above expenditure is allowed as per the Companies Act hence it is not contingent in nature as income is computed as per t....
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....therefore, even otherwise the ld CIT(A) has deleted the addition correctly. On the merits of disallowances he relied upon the order of the ld CIT(A). 72. The ld DR supported the order of the ld AO and objected to the invocation of Rule 27 of ITAT Rules by the ld AO. 73. We have carefully considered the rival contentions and perused the orders of the lower authorities. Admittedly in this case as in earlier years the last date of issue of notice u/s 143(3) was 30.09.2009 and the notice u/s 153C as agreed by the party was issued on 05.11.2009. Therefore, as on the date of issue of notice u/s 153C this is a concluded assessment. This assessment could have been disturbed only on the basis of incriminating material found during the course of search. We do not find any reference to incriminating material in the assessment order or no such incriminating materials were shown to us. Thereof, the issue is squarely covered in favour of the assessee by the decision of the Hon'ble Delhi High Court as well as Hon'ble Supreme Court in case of Singharh Technical Educational Society 397 ITR 344. Hence on this issue also the addition have been correctly deleted by the ld CIT(A). 74. ....
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....ture, without appreciating the fact that the above expenditure as not ascertained liability and was contingent in nature. 2. That the order of the CIT(A) is perverse, erroneous and is not tenable on facts and in law. 3. That the grounds of appeals are without prejudice to each other. 79. Briefly stated the facts of the case shows that the assessee filed its return of income u/s 139(1) on 30.09.2009 declaring loss of Rs. 67,12,07,667/-. The ld AO passed the assessment order u/s 143(3) of the Act on 12.12.2011 assessing the loss of Rs. 63,35,46,380/- by making a disallowances of Rs. 3,76,61,287/- on account of liquidated damages. 80. The assessee preferred an appeal before the ld CIT(A) who deleted the above disallowances and therefore, the ld AO in appeal before us. 81. The ld CIT DR vehemently supported the order of the ld AO and stated that the ld AO has disallowed the same for the reason that from the perusal of the contract between BSNL and the assessee is very much aware of the fact that if there is case of delay in supply of the goods the assessee will have to pay the liquidated damages to BSNL. Therefore, despite knowing this fact the assessee commi....
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....Ill) 4 Digital Loop Carrier 16 Aug. 2002 2466.65 9.12 Refer Clause 16.1 & 16.2 ofAnnex-B of PO (copy enclosed- Annex. IV) 5 Other equipments 46 P.O. as per list encl. ~ 39.16 List - Annex- V 376.61 From the above purchase order, it may be noted that the clauses referred to in the remarks column, refers to the Liquidated damages provided in the purchase order i.e. "Should the supplier fails to deliver the store or any consignment thereof with the period of prescribed for delivery, the purchaser shall be entitled to recover 0.5% of the value of the delayed supply for each week of delay or part thereof for the period up to 10 (TEN) weeks and thereafter at the rate of 0.7% of the value of delayed supplies for each week of delay or part thereof for another. Ten are incidental to carry on business and allowable as business expenditure." 3.1 The plea of the assessee has been examined. From the perusal of Contracts between the assessee company and the BSNL, it is evident that the assessee was very much aware of the fact that in case of delayed supply, it would have to pay the liquidat....
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....fter at the rate of 0.7% for each week of delay or part thereof for another 10 weeks. For S.No: (1) above, the copy of the BSNL Purchase Order dated 15/04/2008 for STM 1 Equipments is enclosed which specifies LD deduction vide Clause 6.1 (Page 2 )of the PO (Annexure 1). For S.No: (2) above, For S.No: (1), the copy of the BSNL Purchase Order dated 27/12/2007 for IFWT Equipments is enclosed which specifies LD deduction vide Clause 16.1 & 16.2 of Annex- C (Page 13) of PO ( Annexure 2 ). For S. No: (3) above, the copy of the BSNL Purchase Order dated 21/02/2003 for Cordect Equipments is enclosed which specifies LD deduction vide Clause 16.1 & 16.2 of Section-Ill (Page 18 )ofPO ( Annexure 3 ). For S. No: (4) above, the copy of the BSNL Purchase Order dated 16/08/2002 for Digital Loop Carrier Equipment is enclosed which specifies LD deduction vide Clause 16.1 & 16.2 of Annex -B (Page 21 )ofthe PO ( Annexure 4 ). For S. No: (5) above, the deduction consists of many BSNL Purchase Orders. In these purchase orders also, LD Deduction clause apply for delay in supply. Accordingly, for the delayed supplies during the year, BSNL had levied an....
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....09 STM-1 ADM & CPE Equipments 12,146,278.00 (2) 76573 31-Mar-09 IFWT Equipments 13,681,013.00 (3) 76573 31-Mar-09 CORDECT Equipments 71,06,018.00 (4) 76573 31-Mar-09 Digital Loop Carrier Equipments 9,12,025.00 (5) 76573 31-Mar-09 Other Products 38,15,953.00 3,76,61,287.00 The Liquidated damages debited to the Profit and Loss Account represents damages levied by BSNL, the customer, for delay in delivery of the goods beyond the delivery date specified in the Purchase Order. As per BSNL terms of Purchase Order, it is stated that if deliveries to be made after the expiry of the contracted delivery period, the purchaser shall recover Liquidated Damages at 0.5% of the value of the delayed supply for every week of delay or part thereof for a period upto 10 weeks and thereafter at the rate of 0.7% for each week of delay or part thereof for another 10 weeks. The Liquidated damages mentioned at SI. No.1 in the table represents the liquidated damages paid towards the purchase order of BSNL dated 15.04.2008 for STM 1 Equipments. The copy of the purchase order has been filed by the appellant as Anne....
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.... supply of items mentioned at S.No (5) of the table i.e. other products the appellant has to pay liquidated damages of Rs. 38,15,953/- for delay in supply of other products. For these products also the liquidated damages were paid as per contractual agreement. As per the above contractual agreement for the delayed supplies during the year, BSNL had levied and recovered liquidated damages amounting to Rs. 376.61 Lakhs as detailed above. This amount recovered by BSNL for delay in supply is allowable as the expenses incurred is wholly for the purpose of business. AR further submitted that the aforesaid expenses are not for violation of any law. If delivery is not made in time as per the Purchase Order, the buyer has the right to deduct the sum as per the terms of the PO to compensate the loss which may occur to the purchaser. This is a generally accepted practice in all types of industries and hence Liquidated damages are in the nature of normal business expenditure. The liquidated damages debited to Profit & Loss A/c represents the damages recovered by BSNL, the customer, for delay in delivery of goods beyond the delivery date specified in the purchase orde....
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....within stipulated period was liable to pay liquidated damages to purchaser, payment of such liquidated damages was allowable as revenue expenditure - Held, yes [Paras 16 & 17] [In favour of assessee]" Reliance is also placed on Bombay High Court judgment in the case of CIT Vs. R.D. Sharma & Co. 11 taxman 137 and held as under: 'Section 145 of the income-tax act, 1961-Method of accounting-Year in which liability/expenditure deductible-During assessment year 1967-68, notices served on assessee by military authorities for levying penalty for non-completion of contract in time-assessee following mercantile system of accounting, accepted liability and made a provision for it in its profit and loss account of assessment year 1967-68- Whether liability was deductible in assessment year 1967-68-Held, on facts, yes Section 37(1) of the income-tax act, 1961-Business expenditure-Whether damages/penalty paid by assessee-contractor to government for non-completion of contract work in time is deductible-held, yes Facts The assessee, being military contractors, while computing the net profit for the assessment year 1967-68, took into account a cert....
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....based on information that some of equipments supplied by company required repair and replacement and technical team estimated such expenses for making provision in account, claim being based on materials and information of technical team, would certainly be allowable - Held, yes [Para 11] [In favour of assessee]" The ratio of these judgments is squarely applicable to the appellant's case and the liquidated damages have been incurred by the appellant wholly and exclusively for the business purpose and same is allowable as business expenditure during the year. This ground of appeal is allowed." 84. we find that the liquidated damages are part of the purchase contract entered into by the assessee with BSNL. There are contract obligation and not penal in nature. The ld CIT(A) has correctly deleted it to be a business expenditure. This issue also arose in the appeal of the assessee for earlier years wherein, we have upheld the order of the ld CIT(A). No infirmity was pointed out in the order of the ld CIT(A). It was also not shown to us that how the contractual obligation could be penal in nature. In the result, we confirm the order of the ld CIT(A) in deleting the above....