TaxTMI 
TaxTMI 
2017 (12) TMI 1845
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....confirmed by the ld. Commissioner of Income Tax (Appeals). 4. Ld. Counsel for the assessee submitted that similar issue had come up before Hyderabad Bench of this Tribunal in assessee's own case in ITA No.985/Hyd/2012, dated 05.09.2013 for assessment year 2009-2010 and it was decided in favour of the assessee. According to her, assessee had to pay liquidated damages for not completing the work undertaken by it, in time. Contention of the ld. Authorised Representative was that there were specific clauses in the contracts entered by the assessee with its clients, which provided for liquidated damages. 5. Per contra, ld. Departmental Representative submitted that in earlier years, assessee had given a specific work-out of the liquidated damages with reference to delay in each of the project and the quantum of damages arising on account of such delay. As per the ld. Departmental Representative, such work-out was not available for the impugned assessment year. Further, as per the ld. Departmental Representative there was nothing on record to show whether the delay was due to any fault of the assessee or that of its clients. According to him, at the best the assessee would be liabl....
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....ntract provisions enabling the contractee to levy damages towards delay in completion. The allowability of this provision is analysed as under. 1.Erection and Procurement Contracts (EPC) of the nature that the assessee has entered into would invariably have clauses towards penalty for delay in completion. This is to ensure the full commitment of the contractor towards scheduled completion of the contract. The contracts are delayed on account of reasons beyond the control of either of the parties or force majeure reasons. The delay can also be on account of contractee's inability and for reasons of delay by other vendors or support staff-professionals. The contractor would invariably point out the delay caused on account of reasons other than his own omissions or commissions. To this extent, the penalties for delay in completion are often not levied as a rule. 2. The assessee has also recognized the same. In fact, the assessee has not claimed any provision for contractual obligation upto A.Y.2009-10 even though the assessee was 8 ill business for more than a decade prior to that. Similarly, the assessee has opted not to claim any provision towards contractual o....
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.... 43. On appeal before the CIT(A), explaining the background for this claim, it was stated that the amounts represented liquidated damages to be discharged in the event of any delay in the completion of the work, which is a common practice in long-term contracts. It is further stated that the assessee company during the year had to commission and hand over two projects, one to TNEB at Valathur and another to MALCO, Mettur. In the case of TNEB the actual completion of the project was 31.8.2008 whereas as per the purchase order, the scheduled date was 28.2.2008, i.e. delivery took placeafter a delay of 24 weeks. Similarly in the case of MALCO, the actual completion of the project was 26.2.2009 as against the scheduled date of 19.6.2008, the delay being 32 weeks. Referring to the relevant agreements of the assessee with the concerned parties, attention was invited to 'completion guarantee' clause wherein it was mentioned that in case of delay in delivery of equipment for reasons not attributable to the purchaser, the supplier shall be liable to pay to the purchaser liquidated damages and not by way of penalty, an amount calculated at the rate of 1% of the supply contract price f....
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.... our considered opinion was justified in accepting the claim of the assessee in this behalf and deleting the addition made by the Assessing Officer. We accordingly uphold the order of the CIT(A) in this behalf and reject the ground of the Revenue on this issue''. What we discern from the above order of the Tribunal is that in the said year, assessee could demonstrate the delay in completing two projects namely one for TNEB at Valathur and another for MALCO, at Mettur. Assessee could show that there was a twenty four weeks delay in execution of TNEB project and twenty two weeks delay in execution of MALCO project. Ld. Commissioner of Income Tax (Appeals) had in the said assessment year accepted the claim of the assessee, considering completion clause in the relevant agreement with these two parties. However, for the impugned assessment year, there is nothing on record to show how the assessee had calculated the liquidated damages of D53,99,42,000/- debited by it in its Profit and Loss account. That apart, provision made by the assessee under the very same head for various years, reflects scant payments against such provisions. Details of the provisions made by the assessee and pa....
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....os.1244 & 1513/Hyd/2011, and ITA No.985/Hyd/2012, dated 05.09.2013. According to her, assessee had filed an appeal before the Hon'ble Andhra Pradesh High Court against the above decision and the matter was pending. 9. ..Per contra, ld. Departmental Representative strongly supported the orders of the authorities below. 10. We have considered the rival contentions and perused the orders of the authorities below. What was held by the Hyderabad Bench of the Tribunal in assessee's own case for assessment years 2007-08, 2008-09 & 2009-2010 is reproduced hereunder:- ''24. The next issue in dispute in this appeal relates to disallowance made by the Assessing Officer with regard to warranty provisions of Rs.98,24,000, which has been deleted by the CIT(A). 25.Brief facts of the case in relation to this ground are that the assessee debited an amount of Rs.98,24,000 under the head 'selling expenses/warranty expenses. This claim of the assessee has been disallowed by the Assessing Officer on the ground that it is an unascertained liability, since it is contingent in nature and as such not allowable under S.37 of the Act. 26.On appeal before the CIT(A), it was th....
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....Income Tax (Appeals) and upheld the disallowance for warranty provisions. Nothing was shown before us to take a different view for the impugned assessment year. Ground No.4 of the assessee stands dismissed. 11. Vide its ground No.5, grievance raised by the assessee is on a disallowance of 27,29,950/- made u/s.14A of the Income Tax Act, 1961 (in short ''the Act''). 12. Ld. Counsel for the assessee submitted that the ld. Commissioner of Income Tax (Appeals) had made this disallowance, though ld. Assessing Officer had not invoked Sec. 14A of the Act. According to her, assessee had made a voluntary disallowance of D2,38,999/- as expenditure relatable to the exempt income. As per the ld. Authorised Representative, assessee claimed exempt income of D2,76,835/- only and disallowance u/s.14A of the Act had to be restricted to such amount. Reliance was placed on the judgment of Hon'ble Delhi High Court in the case of Joint Investment P. Ltd vs. CIT 372 ITR 694. 13. Per contra, ld. Departmental Representative submitted that irrespective of the quantum of the exempt income claimed by the assessee disallowance could be made u/s.14A of the Act. Reliance was placed in Circular No.5/2014....
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....of the dis allowance of interest. At the cost of repetition, we reiterate that the disallowance worked out by the Assessing Officer which was the aggregate of three components as prescribed under rule 8D(2) was Rs. 99,45,325. But, finally, the Assessing Officer restricted the dis allowance to Rs. 52,56,197. Therefore, in our opinion, no relief is due to the assessee from the disallowance made by the Assessing Officer at Rs. 52,56,197. The same is sustained and the assessee's appeal is dismissed." 5. Learned counsel urges that the mandate of section 14A (especially the section 14A(2)) escaped the attention of the Income-tax Appellate Tribunal as well as that of the Assessing Officer and the Commissioner of Income- tax (Appeals). It was urged that in the present case since Rs. 2,97,440 was volunteered as disallowance, the Assessing Officer was under a duty to first consider the merits of that claim and, thereafter, for valid grounds, if any, reject the contention before proceeding under section 14A(3) read with rule 8D(2). Learned counsel highlighted that the sum volunteered, i.e., Rs. 2,97,440 was in addition to ad hoc disallowance which was offered and accepted without....
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.... 48,90,000, the disallowance ultimately directed works out to nearly 110 per cent. of that sum, i.e., Rs. 52,56,197. By no stretch of imagination can section 14A or rule 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in section 14A and is only to the extent of disallowing expenditure "incurred by the assessee in relation to the tax exempt income". This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case''. Hon'ble Jurisdictional High Court, also considered an almost similar issue in the case of Regindton (India) Ltd vs. JCIT (2016) 97 CCH 219. Their lordships observed as under in paras 14 to 16 of the judgment. ''14. Nothing much turns on the use of the word includable and the phrase under the act in s. 14A and we are not persuaded to accept the emphasis laid or the interpretation of the same by the Revenue. An assessment in terms of the Income tax Act is specific to an assessment year and the related previous year. S.4 of the Act, which imposes the charge to tax reads thus: Charge of income-tax (1) Wher....
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...., Revenue is aggrieved on the deletion of an addition of D298,67,10,877/- made by the ld. Assessing Officer an retention money. 17. Ld. Departmental Representative submitted that the ld. Commissioner of Income Tax (Appeals) had directed inclusion of retention money as part of income, on receipt basis andnot on accrual basis. According to the ld. Departmental Representative, assessee was postponing its tax liability by staggering amounts through this strategy. 18. Per contra, ld. Authorised Representative submitted that the issue stood squarely covered in favour of the assessee by the order of the Hyderabad Bench of the Tribunal in assessee's own case for assessment year 2007-08 in ITA No. 1244/Hyd/2011, dated 05.09.2013. 19. We have considered the rival contentions and perused the orders of the authorities below. We find that the question whether retention money could be considered as part of income had come up before the Hyderabad Bench of the Tribunal in assessee's own case for assessment year 2007-08. What was held by the Tribunal at paras 9 & 10 of the order is reproduced hereunder:- ''9. We have considered the rival submissions and perused the orders of the l....
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.... significant risks, and where the agreement provides for acceptance test for satisfactory performance in lieu of which certain money was retained by the contractee, that amount will accrue as income only on satisfactory performance of the test and acceptance by the contractee [Paragraph 5.9]. 7.1 We may now consider the facts of the instant case in the light of various case laws and their ratios discussed in the preceding paragraphs. Various terms and conditions of the contract had been narrated by the Assessing Officer in his order from page 6 onward. The assessee agreed to deliver the AHP and all other accessories in all respects for a contract price of Rs. 12,59,06,940. As per the clause 24, all payments during the currency of the contract will be "on account payments" only and the final payment shall be made on completion of guarantee period or earlier fulfilment by the assessee of all his liabilities under the contract. Clause 32 of the contract provides that property in all materials, equipment and Ors.supplies shall vest in and become the property of the contractee from the date of receipt of the material. Clause 13 provides that plant shall be considered as commiss....
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....al approach, though it may be an accountant's view. However, that is also not the case here, as accounting standard No. 9, issued by ICAI, lays down that if receipt of retention money is hedged upon future contingencies, it should not be recognized as income. Thus, the expenditure and the corresponding receipt may have to be treated differently, depending upon the terms of the contract. The contract provides that property in goods shall pass to the contractee as soon as those are supplied to it. Therefore, on supply of goods, the expenditure has been incurred because the assessee is no more owner of the goods. Insofar as, retention money is concerned, it will accrue as income in two equal instalments on, (i) taking over the plant by the contactee, and (it) completion of performance test and its acceptance by the contractee. The contract provides for rectification of the defaults by the assessee within three months and in case of his failure to do so by the contractee on its own at the cost of the assessee. Therefore, there are significant risks associated with the accrual of retention money as income. Insofar as retention money is concerned, furnishing of bank guarante....
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....ny part of retention money accrues as income in this year on aforesaid basis. If he is of the view that some portion accrues as income this year, he may hear the assessee and tax that part portion accordingly. Similarly, this issue also came up for consideration before the Mumbai bench of the Tribunal in the case of Corrosion Control Services (Bombay) P.Ltd., (supra), wherein it has been held as follows "7. The learned Counsel for the assessee drew our attention to the case of Simplex Concrete Piles (India) (P.) Ltd (supra).In that case the assessee carried on business of concrete piles on contract basis and was crediting 100 per cent of job value upto and including the assessment year 1964-65. But for the assessment year 1965-66, it credited only 90 per cent; deducting the retention money @ 10 per cent of job value which resulted in reduction of income. The Assessing Officer added the retention money, but, on appeal, the AAC held that retention money did not accrue or arise in the relevant period in which the job was executed, but on a later date. The Tribunal remanded the matter back for re-examination in terms of the contract. On a reference to the Hon'ble Calcut....
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.... 7.1 It can be taken to be well -settled principle that under mercantile system of accounting, it has to be seen whether right to receive amount has accrued to the assessee or not. This right must emerge from the contract between the parties. From the facts set out hereinbefore, we find that the entire amount of bill did not become due immediately upon its submission, but 5 per cnt and 10 per cent of the bill amounts, as the case may be, were withheld as security. Having regard to the terms of contract, there can be no dispute that the assessee had no right to receive the retention money which was to become due only on completion of the entire contract and furnishing of requisite certificate. The payment of retention money was deferred as per the contract in spite of job carried and bills submitted. The payment of retention money was contingent on satisfactory completion of work and its certification. Till then there was no admissibility of the liability and no right to receive any part of the retention money accrued to the assessee. The work was completed in the next year and then only income accrued to the assessee. The retention money was liable to be taxed in the next y....
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....ntract between the parties and about the terms and conditions, no dispute has been raised by the Revenue. The retention money did not accrue under the contract and it could not be assessed merely on the view of the matter which the assessee had taken inadvertently or otherwise. The retention money accrued in the period relevant to the assessment year 1989-90 and should be assessed in that year. It is directed to be deleted from the assessment of the year under consideration." 10.In the absence of any decision to the contrary brought to our notice, following the consistent view taken by the Tribunal in the above matters, we hold that the retention money has to be brought to tax in the year in which the same has actually been received by the assessee from the contractees. Consequently, we find no infirmity in the view taken by the CIT(A) in relation to the issue relating to the year of assessability of the retention money. However, the claim of the assessee of having offered the retention money to tax in the year in which the same has actually been received, is required to be ascertained, before the addition made in the year under appeal is deleted. We accordingly modify the....
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....the authorities below. The question whether depreciation could be alllowed on technical know-how, considering it to be an intangible asset had come up before the Hyderabad Bench of the Tribunal in assessee's own case for assessment years 2007-08, 2008- 09 and 2009-10 in ITA Nos.1244 & 1513/Hyd/2011 and ITA No.985/Hyd/2012, dated 05.09.2013. What was held by the Tribunal at para 17 of the order is reproduced hereunder:- ''17.We have considered the rival submissions and perused the orders of the lower authorities. It is evident from the material on record that there was transfer of technical know-how in favour of the assessee company, whereby the assessee company the came the owner of such technical know-how, which was used by it in its business. In the facts and circumstances of the case, we agree with the CIT(A) that the two ingredients for grant of depreciation, viz. ownership and user of the asset, are clearly fulfilled, and the assessee is entitled for depreciation on the technical know. We accordingly find no infirmity in the impugned order of the CIT(A), which is accordingly upheld, rejecting the ground of the Revenue in this appeal''. No doubt, Revenue has c....