Asia Power Projects Pvt. Ltd., Formerly Ansaldo Services (P) Ltd. V. The Deputy Commissioner of Income Tax, Circle 11(1), Bangalore

ITA/481/2008

AI Insights

The case involves M/s. Asia Power Projects Pvt. Ltd., the appellant, who challenged the orders of the lower authorities disallowing its claim for expenditure under section 37(1) of the Income Tax Act, 1961, related to an abandoned project for the Madhya Pradesh Electricity Board (MPEB). The project was terminated, and a bank guarantee was invoked by MPEB, leading the assessee to claim the expenditure as a loss in the profit and loss account. The lower authorities denied the claim on the grounds that the assessee did not show the expenditure as work-in-progress and did not follow a consistent system of accounting. The High Court, referencing various precedents, concluded that the assessee was entitled to the deduction claimed, as the expenditure was directly related to the business operations and the loss incurred was during the accounting year in question.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 794138 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 05-08-2014
• Assessment Year: misc
• Other Referred Cases: Laxmi Ginning and Oil mills Vs Commissioner of Income Tax, Patiala, George Maijo and Co. Vs. Commissioner of Income Tax, Ramchandar Shivnarayan Vs. CIT, Madras Industrial Investment Corporation Limited Vs Commissioner of Income Tax
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: K V ARAVIND
• Assessee Lawyers: NISHANT TAKKAR
• Keywords: Arbitration award; Bank guarantee; Income tax appeal; Mercantile system of accounting; Expenditure on Abandoned Project
• Section: 37(1); 41(1)(a); 36(i)(vii); 260-A

Judgement Text

" 1 IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 5th DAY OF AUGUST 2014 PRESENT THE HON’BLE MR.JUSTICE N.KUMAR AND THE HON’BLE MRS.JUSTICE RATHNAKALA I.T.A.No.481/2008 BETWEEN: M/s.Asia Power Projects Pvt. Ltd., Formerly Ansaldo Services (P) Ltd., No.6, Lakeside Residency, No.41, Annaswamy Mudaliar Road, By its Director, Bangalore. …APPELLANT (By Sri.Nishant Takkar, Adv., for Smt.Vani.H., Adv.,) AND: The Deputy Commissioner of Income Tax, Circle 11(1), Bangalore. …RESPONDENT (By Sri.K.V.Aravind, Adv.,) ******* 2 This ITA is filed under section 260-A of I.T.Act, 1961 arising out of the Order dated 10.12.2007 passed in ITA No.602/BANG/2006 for the Assessment Year 2002-2003, praying that this Court may be pleased to formulate the substantial questions of law stated therein, allow the appeal and set aside the Order passed by the ITAT, Bangalore in ITA No.602/BANG/2006 dated 10.12.2007 relating to assessment year 2002-2003, in the interest of justice and equity. This appeal coming on for Hearing this day, N.KUMAR. J., delivered the following: J U D G M E N T This appeal is preferred by the assessee challenging the order passed by the lower authorities disallowing its claim for expenditure u/s 37(1) of the Income Tax Act, 1961. 2. The assessee company was awarded a contract by Madhya Pradesh Electricity Board (for short ‘MPEB’) for rehabiliatation job for the Amarkantak Thermal Power 3 Station near Jabalpur in Madhya Pradesh. An amount of `.9,29,20,000/- was paid as advance. The assessee gave a bank guarantee for the said amount. The assessee commenced the work and incurred expenditure on the project. The total amount of expenditure incurred on the project is `.6,64,01,149/-. The case of the assessee is, the MPEB arbitrarily terminated the contract and invoked the bank guarantee. The said contract was terminated by letter dated 8.10.2002. The assessee invoked the arbitration clause and put forth a claim. The amount of `.6,64,01,149/- included money spent on raw materials like tubes and pressure parts, consumables, freight and carriage and also bank charges, professional charges etc., in addition to the expenses on personnel, transport and communication and administrative expenses. However, more than 50% of the total amount was debited towards the material consumed for the contract work. The assessee debited the said amount being the cost of abandoned 4 project towards the profit and loss account. In the notes appended, it is stated that the said amount has been charged as expenditure on abandoned project. The assessee also mentioned that the assessee has contested the invocation of bank guarantee by the MPEB before the court of Jabalpur. On the date of the assessment order the arbitration award also had been passed on 23.9.2004 under which the assessee was granted substantial damages for the illegal invocation of the bank guarantee, cancellation of the contract etc., However, no amount has been paid by MPEB in terms of the award as they were contesting the award in an appeal before the court of Jabalpur. The Assessing Authority was of the view that the assessee has been following mercantile method of accounting. As and when any expenditure is incurred on a contract, it should either result in corresponding receipts from the contract or it should be represented as work-in-progress. The assessee has neither received any amount from MPEB nor is showing 5 any work-in-progress. The expenditure on a particular project cannot be merely allowed as an expenditure unless there is a corresponding credit in the form of contract receipt or work-in-progress. The assessee is claiming the entire expenditure as deductible expenditure since the contract has been abandoned. Although the assessee has abandoned the contract, the fact remains that they have made a claim in arbitration in respect of the expenditure incurred and has also claimed damages for the termination of the contract. This being the case, it cannot be said that the assessee is not entitled for any amount from MPEB. In fact, the amount spent should have been shown as work-in- progress which is recoverable from the MPEB on the arbitration award. The assessee company has only debited the expenditure. The assessee has not shown the said amount as expenditure towards work-in-progress. The debit of expenditure was disallowed since there is no corresponding credit either by way of contract receipts or at 6 the least equivalent amount of work-in-progress. Aggrieved by the said order, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals)- I, Bangalore. 3. In the course of the appeal proceedings, the assessee has furnished a statement showing year wise cost of project from 1.4.2000 to 31.3.2002 and treatment of the same in the books of accounts. The Appellate Authority was of the view, though the assessee has shown in the accounts the amount spent towards expenditure for the assessment years 1999-2000, 2000-2001 as work-in-progress for the concerned years, yet the cost to the tune of `.2,57,74,199/- incurred during the previous year 2001-2002 relevant to the assessment year in question has not been reflected as work-in-progress. Instead the entire cumulative expenditure incurred up to 31.3.2002 on the impugned project amounting to `.6,64,01,150/- inclusive of expenditure of `.2,57,74,199/- incurred towards the 7 previous year relevant to the assessment year in question has been written off/charged off as expenditure on abandoned project. This according to the Appellate Authority is improper. The assessee is not following any specific method of accounting. In any case the non reflection of the expenditure incurred on the said project as work-in-progress during the previous year relevant to the assessment year in question is not in accordance with the mercantile system of accounting, thus resulting in a distorted disclosure of the profit/income from the said project. Therefore, it dismissed the appeal. 4. Aggrieved by the said order, the assessee preferred an appeal before the Tribunal. The Tribunal was of the view that, the expenditure on a particular project cannot be merely allowed as an expenditure unless there is a corresponding credit in the form of contract receipt or work-in-progress. The assessee has claimed that since the contract has been abandoned, the entire expenditure is a 8 deductible expenditure. Although the assessee has abandoned the contract, the fact remains that they have made a claim in the arbitration case in respect of the expenditure incurred and has also claimed damages for the termination of the contract. This being the case, it cannot be said that the assessee is not entitled for any amount from MPEB. In fact, the amount spent should have been shown as work-in-progress which is recoverable from the MPEB on the basis of arbitration award. The assessee company has only debited the expenditure. The contractor can be taxed either on the project completed or on billing method. In respect of this particular contract, the assessee has followed neither of the methods. The true profits of the assessee in respect of this project cannot be ascertained as the assessee has not disclosed any receipts or work-in- progress from this contract and has only debited the expenditure. More so, since the assessee has made a claim for damages from MPEB in regard to the contract work done and in regard to the invocation of the bank guarantee on termination of the contract, the assessee ought to have 9 shown the expenditure as work-in-progress. The termination of the contract in the middle of its tenure would have opened claims and counter claims for a receipt which can never be lost sight of as the assessee has not been able to specify the reasonableness of recovering the amount including the said project having won at the arbitration stage. We see no reason why the assessee should maintain the claim in the subsequent years also till such claim resulted in a receipt. By writing off this amount in the impugned asessement year, the assessee appears to have washed its hands off by claiming loss on account of its business activity by placing reliance on various citations which facts are not applicable to the facts of the assessee’s case before us. The assessee was required to carry forward the total amount incurred for the project as a claim because it was the contractee who terminated the contract and the assessee was rendering business services. Therefore, it could not be said that by invoking bank guarantee for the amount given as advance to the assessee had been agitated in the year of the amount written off itself. When 10 the issue is subjudice, it is more the reason that the amount incurred as a business activity for the contractee by the assessee for a particular contract agreed upon with the contractee, the amount remains as an amount owed by the contractee. In so far as writing off, this amount cannot be said to have been written off against any particular business activity carried out by the assessee because the contract amount lying with the bank against bank guarantee was sought to be invoked by the contractee which the contractor was awarded by the arbitration court. Therefore, the tribunal was of the view the assessee has not met its own consistent system of accounting to be followed for rightfully becoming the claimant for loss of three years in one year without incorporating the corresponding receivables to become entitled for write off under the provisions of section 36(i)(vii) and not u/s 37(1) of the Act. 5. Aggrieved by the said order, the assessee has preferred this appeal. 11 6. This appeal came to be admitted on 28.9.2010 to consider the following substantial questions of law: 1. Whether on the facts and circumstances of the case, the Appellate Tribunal was right in holding that the deduction of expenditure/loss incurred by the appellant towards the abandoned project was not allowable since the appellant had not recorded any corresponding credit either as contract receipts or as work-in-progress? 2. Whether on the facts and circumstances of the case, the Appellate Tribunal is right in holding that the appellant had not disclosed true profits in respect of the abandoned project as the appellant has not disclosed any receipts or work-in-progress, but only debited the expenditure/loss? 3. Whether on the facts and circumstances of the case, the Appellate Tribunal is right in confirming the orders of the authorities below to the effect that the appellant had not followed consistent system of accounting 12 and hence appellant is not eligible to claim deduction of trading loss? 4. Whether on the facts and circumstances of the case, the Appellate Tribunal is right in holding that the appellant had an enforceable right to receive the damages once the arbitration proceeding commences irrespective of the result of such adjudication? 7. The learned counsel for the assessee assailing the impugned order contended that the facts are not in dispute. The assessee has spent in all a sum of `.6,64,01,149/- towards the expenditure under the contract. Admittedly, it has not raised any bills nor payment is made. MPEB terminated the contract illegally, invoked the bank guarantee and received back the entire amount given as deposit. The amounts spent for the assessment years 2000-2001 and 2001-2002 was shown as work-in-progress. But in the year 2002-2003 when the contract was terminated including the amount spent during the said period the entire amount was claimed as expenditure. 13 Though the assessee has succeeded in getting an award before the arbitrator, as it is under challenge before the High Court, it has not received any money even in terms of the award. It is only when assessee gets the amount in that assessment year, it could be taxed. Therefore, all the three authorities committed a serious error in not realizing that when the assessee has not received any payments and the payment made was taken back by encashment of bank guarantee, the contract was terminated, the assessee was entitled to claim the amounts spent towards contract as expenditure in law u/s 37(1) r/w 28 of the Act and therefore, he submits that the impugned orders are unsustainable. 8. Per contra, the learned counsel for the revenue submitted unless the assessee shows in his books of accounts the expenditure incurred in terms of the contract “as work-in-progress” it is not entitled to claim the said amounts as expenditure and therefore, he submits the 14 order passed by the authorities is strictly in accordance with law and do not call for interference. 9. As could be seen from the orders passed by the authorities, the Assessing Authority and the Tribunal proceeded on the assumption that the Assessing Authority has not shown in its accounts the expenditure incurred as representing work-in-progress. However, the first Appellate Authority has looked into the profit and loss account and was convinced that for the first two years the expenditure is shown as “work-in-progress” but for the year in question as the expenditure was not shown as work-in-progress and the entire expenditure was shown as expenditure the assessee is not entitled to the said benefit. The statement filed by the assessee before the first Appellate court showing the year wise cost of Amarkantak project from 1.4.1999 to 31.3.2002 and the statement of the books of accounts is as under: 15 Year wise cost of Amarkantak Project from 1st April 2000 to 31st March 2002 and treatment in books of account. S.N. F.Y. Cost incurred for the Amarkantak Project Cumulative cost incurred for the Amarkantak Project Treatment in books of account Reference to Account Head 1 99-00 21,585,906 21,585,906 Treated as work-in- progress Refer Annexure –I. 2 00-01 19,041,045 40,626,951 “ “ 3 01-02 25,774,199 66,401,150 Written off as Cost of Sales Work Bills & Services Refer P & L A/c. for the FY 01-02. Annexure I Break-up of Work-in-Progress Work-in-Progress Account Heads FY Amarkantak Project (MPEB) Samalkot Project (BSES) Neyveli Contract (NLC) Akrimota Project (GMDC) Total Work- in-Progress 99-00 21,585,906 1,172,494 - - 22,758,400 00-01 40,626,951 - 23,816,169 - 64,443,120 01-02 - - 13,956,228 13,483,410 27,439,638 10. The said statement is not disputed. Therefore, it clearly shows that for the years 1999-2000, 2000-2001 the 16 amount spent towards expenditure is shown as “work-in- progress” in the books of accounts. It is only for the previous year 2001-02 the expenditure incurred is not shown as work-in-progress. The reason is, the contract was terminated. The bank guarantees had been invoked. No doubt the claim was put forth before the arbitrator. But in the near future there was no chance of getting any amount in that particular previous year and the amount paid had been taken away. Therefore, the assessee in that previous year has shown the entire amount incurred as expenditure and sought for writing off as business expenditure. This aspect has been missed by the first Appellate Authority. It is only in the relevant year the assessee has not shown the amount spent towards expenditure as work-in-progress. It is during that year the contract was terminated and he put forth the present claim. He could not have shown it as work-in-progress. Therefore, 17 the finding that he is not entitled to the benefit is ex-facie illegal and cannot be sustained. 11. The Punjab & Haryana High Court in the case of Laxmi Ginning and Oil mills Vs Commissioner of Income Tax, Patiala, reported in (1971) 82 ITR page 959 in some what similar situation has held as under: “The pendency of the litigation about the loss suffered cannot militate against the fact that the loss was suffered by the assessee-firm during the accounting year in question. The amount of that loss cannot be postponed in view of the pendency of the litigation referred to above.” 12. The Madras High Court in the case of George Maijo and Co. Vs. Commissioner of Income Tax (2003) 231 ITR page.237 held when there is a direct intimate connection between the business operation of the assessee and the loss that has fallen on the assessee, though the loss was occasioned by the act done by the seller, since the 18 assessee is not stated to be a party to the fraud committed by the foreign seller, the loss would be allowable as deduction as the loss is incidental to the business carried on by the assessee. 13. The Supreme Court in the case of Ramchandar Shivnarayan Vs. CIT (1978) 111 ITR 263 has held that it is open to the assessee to claim the loss if it has a proximate connection with its business. Similarly it was held by the Apex Court in the case of Madras Industrial Investment Corporation Limited Vs Commissioner of Income Tax reported in (1997) 225 ITR 802 that, where the liability was incurred which has to be discharged in a future date it will be a liability but however a contingent liability which may have to be discharged in future cannot be considered as expenditure. 14. Therefore, if the assessee incurs a liability and when the contract under which that liability was incurred was terminated and when no amounts under the contract or 19 in pursuance of a claim is receivable, he is entitled to claim the said amount incurred as expenditure in implementing the contract as a set off u/s 37(1) r/w 28 of the Act. 15. In fact section 41(1)(a) of the Act reads as under: 41.(1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year,— (a) the first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or 20 16. In view of the aforesaid provision, though the assessee has incurred expenditure during the assessment years 2000-2001, 2001-02 and 2002-2003 during which period he has not received any amount as against the expenditure, if and when he receives the money in pursuance of the award which is already passed, if it is upheld by the High Court, the said amount is chargeable to income tax as the income of that previous year in which he receives the said amount whether the business in respect of which the deduction has been made is in existence in that year or not. Therefore, the interest of the revenue is fully protected. All the three authorities have not applied their mind to the factual aspects of the case and have not kept in mind the statutory provisions and thus committed a serious illegality in passing the impugned orders. The orders are not sustainable. Therefore, substantial questions of law raised in this appeal are answered in favour of the assessee 21 and against the revenue. In that view of the matter, we pass the following order: The appeal is allowed. The impugned orders passed by the three authorities are hereby set aside. The Assessing Authority is directed to allow the aforesaid amount as set off. Sd/- JUDGE Sd/- JUDGE Dvr. "