Deputy Commissioner of Income-tax, V. M/s. Fabtech Projects & Engineers Ltd., Pune

ITA 1149/PUN/2014

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 1976 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 11 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-05-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 29-12-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 29-05-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: HITENDRA NINAWE
• Keywords: Bad and doubtful debts
• Section: 6; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, PUN E , , !'#'' $ , % & BEFORE SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM / ITA NO. 1149/PN/2014 %' ( ')( / ASSESSMENT YEAR : 2009-10 DCIT, CENTRAL CIRCLE 2(2), PUNE ....... / APPELLANT ' / V/S. M/S. FABTECH PROJECTS & ENGINEERS LTD., J-504, MIDC, BHOSARI, PUNE-411026 PAN : AAACF7903Q / RESPONDENT ASSESSEE BY : SHRI NIKHIL PATHAK REVENUE BY : SHRI HITENDRA NINAWE / DATE OF HEARING : 03-03-2016 / DATE OF PRONOUNCEMENT : 02-05-2016 * / ORDER PER VIKAS AWASTHY, JM : THE PRESENT APPEAL BY THE REVENUE IS DIRECTED AGAINST T HE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS)-I, NASHIK DATED 27 -03-2014 FOR THE ASSESSMENT YEAR 2009-10. 2. THE BRIEF FACTS OF THE CASE AS EMANATING FROM RECORD S ARE: THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF EXECUTIN G LARGE SCALE TURNKEY CONTRACTS IN RESPECT OF ENGINEERING, PROCUREMEN T, COMMISSIONING (EPC) OF PROJECTS FOR PUBLIC SECTOR OIL COMPANIE S. THE 2 ITA NO. 1149/PN/2014, A.Y. 2009-10 ASSESSEE IS AWARDED CONTRACTS ON THE BASIS OF TENDERING AND BIDDING PROCESS. THE COMMISSIONING PROJECTS CONSTITUTE A SMALL B UT CRITICAL PART OF THE HUGE REFINERY PROJECTS BEING PUT UP BY THE OIL COMPANIES. THE DELAY IN EXECUTION OF THE PROJECT FOR ANY REASONS LEA D TO HUGE LOSSES. TO AVOID LEGAL DISPUTES A MECHANISM OF COMPENSATION FOR DELAY HAS BEEN SET OUT AND CLAUSE OF LIQUIDATED DAMAGES IS IN CORPORATED IN THE CONTRACTS. THE ASSESSEE IN ITS RETURN OF INCOME FOR ASSESSMENT YEAR 2009-10 HAS CLAIMED LIQUIDATED DAMAGES IN RESPECT OF PROJE CT EXECUTED AT HPCL VISAKHAPATNAM REFINERY ` 2,67,38,370/- AND IOCL GUJARAT REFINERY ` 1,06,73,000/-. THE ASSESSING OFFICER DISALLOWED THE PAYMENT OF LIQUIDATED DAMAGES IN RESPECT OF HPCL REFINERY ON THE GR OUND THAT THEY HAVE NOT CRYSTALLIZED IN THE ASSESSMENT YEAR UNDER APPEAL AND IN RESPECT OF LIQUIDATED DAMAGES PAID FOR GUJARAT REFINERY, THE ASSESSING OFFICER DISALLOWED ON THE GROUND THAT THE ASSESSEE HAS FAILE D TO GIVE THE DETAILS OF LIQUIDATED DAMAGES IMPOSED. AGGRIEVED BY THE ASSESSMENT ORDER DATED 30-12-2011, T HE ASSESSEE PREFERRED AN APPEAL BEFORE THE COMMISSIONER OF INCOME TAX (APPEALS). THE COMMISSIONER OF INCOME TAX (APPEALS) AFTER APPRECIATING THE FACTS OF THE CASE AND DOCUMENTS ON REC ORD ACCEPTED CONTENTIONS OF THE ASSESSEE AND ALLOWED THE ENTIRE CLAIM O F THE ASSESSEE. AGAINST THE FINDINGS OF COMMISSIONER OF INCOME T AX (APPEALS) THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL. 3. SHRI HITENDRA NINAWE REPRESENTING THE DEPARTMENT VEH EMENTLY DEFENDED THE ORDER OF ASSESSING OFFICER AND SUBMITTED THAT THE ASSE SSEE IS MAINTAINING RUNNING BILL ACCOUNT WITH HPCL VISAKHAPATNAM REFINERY. A PERUSAL OF THE RUNNING BILL DATED 18-09-2009 WO ULD SHOW THAT HPCL HAS IMPOSED LIQUIDATED DAMAGES OF ` 3,41,90,373/-. OUT OF 3 ITA NO. 1149/PN/2014, A.Y. 2009-10 THE SAID LIQUIDATED DAMAGES THE ASSESSEE HAS DEBITED AN AMOUNT OF ` 2,67,38,370/- IN THE PROFIT AND LOSS ACCOUNT FOR THE FINANCIAL YEAR 2008-09 AND THE REMAINING AMOUNT IN THE NEXT FINANCIAL YEA R. THE LIQUIDATED DAMAGES CAN BE CLAIMED ONLY IN THE YEAR IN WHICH THEY HAVE CRYSTALLIZED AND CANNOT BE APPORTIONED OVER THE YEARS IN WHICH THE WORK IS SPREAD. IN RESPECT OF LIQUIDATED DAMAGES PAID TO IOCL GUJARAT REFINERY, THE LD. DR SUBMITTED THAT THE ASSESSEE HAS NOT BEEN ABLE TO SHOW FROM THE RECORDS THAT LIQUIDATED DAMAGES WERE EVER CLAIMED. THE ASSESSEE HAS VOLUNTARILY WITHOUT ANY CLAIM MADE BY IOCL HAS SHOWN THE AMOUNT OF ` 1,06,73,000/- AS LIQUIDATED DAMAGES. THE LD. DR PRAYED FOR SETTING ASIDE THE IMPUGNED ORDER AND RESTORIN G THE FINDINGS OF ASSESSING OFFICER. 4. AU CONTRAIRE SHRI NIKHIL PATHAK APPEARING ON BEHALF OF THE ASSESSEE VEHEMENTLY SUPPORTED THE FINDINGS OF COMMISSIONE R OF INCOME TAX (APPEALS) AND PRAYED FOR DISMISSING THE APPEAL OF THE REVENUE. THE LD. AR REITERATED THE SUBMISSIONS MADE BEFORE THE COMMISSIO NER OF INCOME TAX (APPEALS). THE LD. AR CONTENDED THAT THE CON TRACT ORDERS EXECUTED BY THE ASSESSEE FOR THE OIL REFINERIES ARE IN RES PECT OF CRITICAL PARTS. TIME IS THE ESSENCE FOR EXECUTION OF SUCH PROJECT S. ANY DELAY IN SUPPLY OF CRITICAL SYSTEMS CAN LEAD TO DELAY IN OVERALL PRO JECT. SINCE, CAUSE OF DELAY CAN BE ATTRIBUTABLE TO EITHER OF THE CONTR ACTING PARTIES, A MECHANISM OF COMPENSATION FOR DELAY IN THE FORM OF LIQUIDATE D DAMAGES IS INCORPORATED OF THE CONTRACTS. THERE IS NO D ISPUTE ABOUT THE PAYMENT OF LIQUIDATED DAMAGES IN RESPECT OF HPCL VIZA G REFINERY. THE ONLY ISSUE IS WITH REGARD TO YEAR IN WHICH THE LIQUIDAT ED DAMAGES ARE TO BE CLAIMED. THE ASSESSEE HAS PAID TOTAL LIQUIDATED DAMAGES TO THE TUNE OF ` 3,41,90,373/-, OUT OF WHICH ` 2,67,38,370/- WERE CLAIMED IN ASSESSMENT YEAR 2009-10 AND THE REMAINING AMOUNT OF ` 74,52,003/- 4 ITA NO. 1149/PN/2014, A.Y. 2009-10 IN THE ASSESSMENT YEAR 2010-11. THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING. AS PER ACCOUNTING STANDARD I.E. AS- 1 AND AS-5 IT IS MANDATORY TO RECOGNIZE EXPENSES WHEN IT BECOMES D UE I.E. ON ACCRUAL BASIS. THE ASSESSEE HAS ACCORDINGLY, BIFURCATED T HE TOTAL LIQUIDATED DAMAGES IN FINANCIAL YEARS 2008-09 AND 2009-10. THE LD. AR IN SUPPORT OF HIS SUBMISSIONS ALSO PLACED RELIANCE ON THE DECISION OF CO-ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF THERMAX BABCOCK & WILCOX LTD. VS. ADDITIONAL COMMISSIONER OF INCOME TAX REPORTE D AS 7 DTR (AT) 162. 5. IN RESPECT OF LIQUIDATED DAMAGES OF IOCL, GUJARAT REFINE RY, THE LD. AR SUBMITTED THAT THE PROJECT COMMENCED ON 01-08-2 005. THE PROJECT WAS REQUIRED TO BE COMPLETE WITHIN ONE YEAR I.E. B Y 01-08-2006. HOWEVER, THE ASSESSEE COULD COMPLETE THE PROJECT IN JUN E, 2007. THE TENDER DOCUMENT CONTAINED THE CLAUSE OF LIQUIDATED DAMAG ES @10% OF THE CONTRACT VALUE IN CASE OF DELAY OF THE PROJECT. THE ASSESSEE HAD MADE SECURITY DEPOSIT OF ` 1,06,73,000/- AT THE TIME OF AWARDING OF CONTRACT. AFTER THE COMPLETION OF PROJECT THERE WAS NO COMMUNICATION FROM IOCL, GUJARAT REFINERY WITH REGARD TO LIQUIDATE DAMAGE S OR REFUND OF SECURITY DEPOSIT. THE ASSESSEE ON ITS OWN HAS WRITTE N OFF THE SECURITY DEPOSIT AMOUNT WHICH WAS APPROXIMATELY 2.5% OF THE CONTR ACT VALUE. THE SECURITY DEPOSITS MADE BY THE ASSESSEE HAD BECOME IRRECOVERABLE IN VIEW OF DELAY IN EXECUTION OF PROJECT AND THUS, HAD BECO ME BAD DEBTS. THE ASSESSEE IN SUPPORT OF HIS CONTENTIONS PLACED RELIANCE ON THE HON'BLE SUPREME COURT OF INDIA IN THE CASE OF T.R.F. L TD. VS. COMMISSIONER OF INCOME TAX REPORTED AS 323 ITR 397 (SC). 6. WE HAVE HEARD THE SUBMISSIONS MADE BY THE REPRESEN TATIVES OF RIVAL SIDES AND HAVE PERUSED THE ORDERS OF THE AUTHORITIE S BELOW. WE 5 ITA NO. 1149/PN/2014, A.Y. 2009-10 HAVE ALSO CONSIDERED THE DECISIONS ON WHICH THE LD. AR OF T HE ASSESSEE HAS PLACED RELIANCE IN SUPPORT OF HIS CONTENTIONS. THE REV ENUE IN ITS APPEAL HAS ASSAILED THE FINDINGS OF COMMISSIONER OF INCOME T AX (APPEALS) IN RESPECT OF LIQUIDATED DAMAGES CLAIMED BY THE ASS ESSEE IN RESPECT OF HPCL, VIZAG REFINERY ` 2,67,38,370/- AND IOCL, GUJARAT REFINERY ` 1,06,73,000/-. 7. IN RESPECT OF HPCL, VIZAG REFINERY THE CONTENTION OF TH E REVENUE IS THAT THE LIABILITY TO PAY LIQUIDATED DAMAGES HAD NOT CRYS TALLIZED IN THE IMPUGNED ASSESSMENT YEAR. THE ASSESSEE WAS LIABLE TO PA Y LIQUIDATED DAMAGES IN RESPECT OF HPCL, VIZAG REFINERY ` 3,41,90,373/-. THE ASSESSEE CLAIMED ` 2,67,38,370/- IN ASSESSMENT YEAR 2009-10 AND THE REMAINING AMOUNT IN ASSESSMENT YEAR 2010-11. THE PAYME NT OF LIQUIDATED DAMAGES HAS NOT BEEN DISPUTED BY THE REVENUE . THE ONLY DISPUTE IS THE YEAR OF ALLOWABILITY OF CLAIM. AS PER THE WO RK ORDER, TIME PERIOD FOR COMPLETION OF PROJECT WAS 15 MONTHS FROM THE D ATE OF LETTER OF INTENT I.E. 13-08-2007. THUS, THE PROJECT SHOULD HAVE BEEN COMPLETED ON OR BEFORE 13-11-2008 I.E. DURING THE FINANCIAL YEAR 2008- 09 (RELEVANT TO ASSESSMENT YEAR 2009-10). HOWEVER, THE PROJECT WAS NOT COMPLETED AND CONTINUED TILL THE NEXT YEAR I.E. UP TO 0 9-09-2009. ON ACCOUNT OF DELAY IN EXECUTION OF PROJECT THE PAYMENT OF LIQUIDATED DAMAGES WAS INEVITABLE. THE ASSESSEE IN ITS PROFIT AND LOSS ACCOUNT HAD RECOGNIZED THE INCOME FROM THE PROJECT TILL THE END OF THE PREVIOUS YEAR ` 65,39,98,000/- AND ALSO DEBITED THE CORRESPONDING LIQUIDATED DAMAGES OF ` 2,67,38,370/-. THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING AND HAS ACCORDINGLY RECOGNIZED EX PENSES WHICH HAVE BECOME DUE ON ACCRUAL BASIS. THE COMMISSIONER OF IN COME TAX (APPEALS) HAS OBSERVED THAT THE ASSESSEE HAS FOLLOWED AS- 1 AND AS-5. THE ASSESSEE COMPANY IS ALSO BOUND BY THE PROVISIONS OF SECTION 210A 6 ITA NO. 1149/PN/2014, A.Y. 2009-10 AND 211 OF THE COMPANIES ACT, 1956 TO GIVE TRUE AND FAIR VIEW OF THE PROFIT OR LOSS. THE COMMISSIONER OF INCOME TAX (APPEALS) HAS FURTHER FOLLOWED THE DECISIONS OF CO-ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF THERMAX BABCOCK & WILCOX LTD. VS. ADDITIONAL COMMISSIONER OF INCOME TAX (SUPRA) AND HUBER+SUHNER ELECTRONICS (P) LTD. VS. DCIT REPORTED AS 34 TAXMANN.COM 149 (DELHI) : 22 ITR (TRIB.) 596 (DELHI). THE CO-ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF THER MAX BABCOCK & WILCOX LTD. VS. ADDITIONAL COMMISSIONER OF INCOME TAX (SUPRA ) HELD AS UNDER: 23. ON ANALYSIS OF THE JUDGMENTS REFERRED TO ABOVE , THE POSITION OF LAW EMERGING THEREFROM IS THAT ONCE THE ASSESSEE IS MAI NTAINING ITS ACCOUNTS ON THE MERCANTILE SYSTEM, THE LIABILITY ALREADY ACC RUED IN A YEAR, THOUGH TO BE DISCHARGED AT A FUTURE DATE, WOULD BE A PROPE R DEDUCTION WHILE WORKING OUT THE PROFITS AND GAINS OF BUSINESS, REGA RD BEING HAD TO THE ACCEPTED PRINCIPLES OF COMMERCIAL PRACTICE AND ACCO UNTANCY. IT IS NOT AS IF SUCH DEDUCTION IS PERMISSIBLE ONLY IN THE CASE OF A MOUNTS ACTUALLY EXPENDED OR PAID. THE EXPRESSION 'THE LIABILITY ALR EADY ACCRUED IN A YEAR' SIGNIFIES THAT A BUSINESS LIABILITY MUST HAVE DEFIN ITELY ARISEN IN THAT ACCOUNTING YEAR. IN OTHER WORDS, FOR ALLOWING THE D EDUCTION OF A LIABILITY WHILE WORKING OUT THE PROFITS AND GAINS OF BUSINESS , A BUSINESS LIABILITY SHOULD HAVE DEFINITELY ARISEN IN THAT ACCOUNTING YE AR. WHAT SHOULD BE CERTAIN IS THE INCURRING OF THE LIABILITY. THE DEFI NITE LIABILITY MUST BE IN PRAESENTI AND NOT DE FUTURO. THE LIABILITY MUST HAV E ARISEN UNDER A DEFINITE OBLIGATION. THE OBLIGATION OF THE TRADER M UST NOT BE OF PURELY CONTINGENT IN NATURE FOR IT TO BE A PERMISSIBLE OUT GOING OR ALLOWANCE OR DEDUCTION IN THE YEAR OF ACCOUNT. IT IS FURTHER CLE AR THAT THE PUTTING ASIDE OF MONEY, WHICH MAY BECOME EXPENDITURE ON THE HAPPE NING OF AN EVENT, IS NOT ADMISSIBLE EXPENDITURE. THE EXPENDITURE WHIC H IS DEDUCTIBLE FOR INCOME-TAX PURPOSE IS ONE WHICH IS TOWARDS A DEFINI TE AND CERTAIN LIABILITY ACTUALLY EXISTING AT THE RELEVANT TIME. T HEREFORE, A PURE CONTINGENT LIABILITY DISTINGUISHED FROM A DEFINITE AND ACTUAL LIABILITY ARISING IN PRAESENTI, DOES NOT CONSTITUTE EXPENDITU RE AND CANNOT BE THE SUBJECT-MATTER OF DEDUCTION EVEN UNDER THE MERCANTI LE SYSTEM OF ACCOUNTING. THE OTHER CONDITION TO BE SATISFIED IS THAT THE DEFINITE LIABILITY IN PRAESENTI SHOULD ALSO BE CAPABLE OF BEING ESTIMA TED WITH REASONABLE CERTAINTY THOUGH THE ACTUAL QUANTIFICATION MAY NOT BE POSSIBLE. IF THESE CONDITIONS ARE SATISFIED, IT DOES NOT MAKE ANY DIFF ERENCE IF THE LIABILITY MAY HAVE TO BE DISCHARGED AT A FUTURE DATE, AND THE FUTURE DATE, ON 7 ITA NO. 1149/PN/2014, A.Y. 2009-10 WHICH THE LIABILITY SHALL HAVE TO BE DISCHARGED, IS NOT CERTAIN. IT IS ALSO CLEAR THAT A CONDITION SUBSEQUENT, THE FULFILMENT O F WHICH MAY RESULT IN THE REDUCTION OR EVEN EXTINCTION OF THE LIABILITY, WOULD NOT HAVE THE EFFECT OF CONVERTING THAT DEFINITE LIABILITY INTO A CONTIN GENT ONE. HOWEVER, AN ANSWER TO THE QUESTION AS TO WHETHER THE LIABILITY, IN RESPECT OF WHICH A DEDUCTION IS CLAIMED BY THE TAXPAYER, HAS DEFINITEL Y ARISEN, UNDER A DEFINITE OBLIGATION OF A TRADER, IN ANY ACCOUNTING YEAR, DEPENDS ON THE FACTS OF EACH AND EVERY CASE. THE TRIBUNAL FURTHER HELD THAT: 24.5 HAVING REGARD TO THE FACTS AND CIRCUMSTANCES OF THE CASE AND SUBMISSIONS OF BOTH THE PARTIES, THERE IS NO DISPUT E AS TO THE FACT THAT THE STIPULATION PROVIDING THE PAYMENT OF LIQUIDATED DAM AGES TO THE OTHER PARTY FOR DELAY IN COMPLETING THE WORK, IS A PART O F THE CONTRACT AGREEMENT ENTERED INTO BY BOTH THE PARTIES FOR EXEC UTING AND COMPLETING THE WORK. IN OTHER WORDS, THE CONDITION FOR PAYMENT OF LIQUIDATED DAMAGES FOR DELAY IN WORK IS IN-BUILT IN THE CONTRA CT AGREEMENT ITSELF. THEREFORE, THERE EXISTS AN UNDERTAKING GIVEN BY THE PARTIES TO EXECUTE THE WORK WITHIN SPECIFIED TIME, AND IF ANY DELAY IS CAU SED IN COMPLETING THE WORK WITHIN THE SPECIFIED TIME, THE DEFAULTER HAS A GREED TO PAY DAMAGES ON ACCOUNT THEREOF. THIS UNDERTAKING IS NOT FOUND T O BE CONDITIONAL. THUS, THIS UNDERTAKING IMPORTED A DEFINITE LIABILITY ON T HE ASSESSEE WHICH ACCRUED AS SOON AS THE DELAY IN EXECUTING THE WORKS HAD FIRST OCCURRED AND CONTINUED TILL THE WORK WAS FULLY COMPLETED, TH OUGH THAT LIABILITY WAS TO BE QUANTIFIED PRECISELY AND DISCHARGED AT A FUTU RE DATE. ON THIS ASPECT, WE MAY AGAIN USEFULLY REFER TO A DECISION O F THE HON'BLE SUPREME COURT IN THE CASE OF CALCUTTA CO. LTD. VS. CIT (SUP RA) WHERE THE ASSESSEE'S LIABILITY TOWARDS UNDERTAKING TO CARRY O UT DEVELOPMENT WORK WITHIN SIX MONTHS FROM THE DATE OF THE DEEDS OF SAL E WAS HELD TO HAVE BEEN ACCRUED ON THE DATES OF THE DEEDS OF SALE, THO UGH THAT LIABILITY WAS TO BE DISCHARGED AT A FUTURE DATE. IN THIS CASE, TH E HON'BLE SUPREME COURT FURTHER HELD THAT IT WAS AN ACCRUED LIABILITY , AND THE ESTIMATED EXPENDITURE WHICH WOULD BE INCURRED IN DISCHARGING THE SAME COULD BE DEDUCTED FROM THE PROFITS AND GAINS OF THE BUSINESS AND THE AMOUNT TO BE EXPENDED COULD BE DEBITED IN ACCOUNTS MAINTAINED IN THE MERCANTILE SYSTEM OF ACCOUNTING BEFORE IT WAS ACTUALLY DISBURS ED, AND THE DIFFICULTY IN THE ESTIMATION THEREOF DID NOT CONVERT THE ACCRU ED LIABILITY INTO A CONDITIONAL ONE, BECAUSE IT WAS ALWAYS OPEN TO THE IT AUTHORITIES CONCERNED TO ARRIVE AT A PROPER ESTIMATE THEREOF HA VING REGARD TO ALL THE CIRCUMSTANCES OF THE CASE. IN THIS CASE, THE HON'BL E SUPREME COURT HAS 8 ITA NO. 1149/PN/2014, A.Y. 2009-10 GIVEN EMPHASIS ON THE ASSESSEE'S OWN UNCONDITIONAL UNDERTAKING TO CARRY OUT DEVELOPMENT WORKS WITHIN SIX MONTHS FROM THE DATES OF THE DEEDS OF SALE WHEREBY THE ASSESSEE BOUNDED ITSELF A BSOLUTELY TO CARRY OUT THE SAME, THOUGH THE WORK WAS TO BE CARRIED OUT WITHIN SIX MONTHS FROM THE DEEDS OF SALE. THE VERY UNDERTAKING GIVEN BY THE ASSESSEE TO CARRY OUT THE DEVELOPMENT WORK WITHIN SIX MONTHS FR OM THE DATE OF DEEDS OF SALE HAS IMPORTED A LIABILITY ON THE ASSESSEE WH ICH ACCRUED ON THE DATES OF THE DEEDS OF SALE, THOUGH THAT LIABILITY W AS TO BE DISCHARGED AT A FUTURE DATE. IN THIS CASE, THE HON'BLE SUPREME COUR T HAS ALSO POINTED OUT THAT THE TAXABLE INCOME IS NOT ON GROSS RECEIPTS, B UT ON PROFITS AND GAINS OF THE BUSINESS. THE PROFITS SHOULD BE UNDERSTOOD I N ITS NATURAL AND PROPER SENSE, IN A SENSE WHICH NO COMMERCIAL MAN WO ULD MISUNDERSTAND. IT HAS TO BE REAL PROFITS. IT WAS FO R THIS REASON THAT A DEDUCTION OF A PROVISION IN RESPECT OF THE LIABILIT Y THE ASSESSEE HAD UNDERTAKEN BY WAY OF PROVIDING AMENITIES OR DEVELOP MENT WORK WITHIN SIX MONTHS FROM THE DATE OF DEED OF SALE WAS ALLOWE D AS A DEDUCTION. APPLYING THE SAME ANALOGY TO THE PRESENT CASE, WE F IND THAT THE ASSESSEE HAS IMPORTED A LIABILITY ON ITSELF TO PAY LIQUIDATED DAMAGES FOR THE DELAY IN COMPLETING THE WORK WITHIN THE SPECIFI ED TIME, AND AS SUCH, THE ESTIMATED EXPENDITURE WHICH WOULD BE INCURRED T OWARDS LIQUIDATED DAMAGES WOULD BE DEDUCTIBLE FROM THE RECEIPTS OF TH E YEAR. THIS CERTAIN ACT OR EVENT OF NOT COMPLETING THE WORK WITHIN STIP ULATED TIME HAS IMPORTED A DEFINITE AND ABSOLUTE LIABILITY ON THE A SSESSEE AND MERELY BECAUSE OF THE FACT THAT LIABILITY WOULD BE DISCHAR GED AT A FUTURE DATE AND, THERE IS A DIFFICULTY IN ESTIMATING THE CORREC T AMOUNT THEREOF WOULD NOT CONVERT THIS DEFINITE AND ABSOLUTE LIABILITY IN TO CONDITIONAL ONE AS HAS BEEN HELD HON'BLE SUPREME COURT IN THE CASES OF CAL CUTTA CO. LTD. VS. CIT (SUPRA), METAL BOX COMPANY OF INDIA LTD. VS. THEIR WORKMEN (SUPRA) AND BHARAT EARTH MOVERS VS. CIT (SUPRA). IN THIS VIEW O F THE MATTER, WE MAY, THEREFORE, SAY THAT THE REASONS GIVEN BY THE AO AS WELL AS BY THE CIT(A) FOR REJECTING THE ASSESSEE'S CLAIM ARE NOT IN CONSO NANCE WITH THE PRINCIPLES LAID DOWN BY HON'BLE SUPREME COURT IN TH E CASES OF CALCUTTA CO. LTD. VS. CIT (SUPRA) AND BHARAT EARTH MOVERS VS . CIT (SUPRA). THE VERY PRINCIPLES LAID DOWN BY THE HON'BLE SUPREME CO URT IN THE CASE OF CALCUTTA CO. LTD. VS. CIT (SUPRA) WERE ALSO FOLLOWE D BY THE KERALA HIGH COURT IN THE CASE OF CIT VS. INDIAN TRANSFORMERS LT D. (SUPRA) AND THE HON'BLE DELHI HIGH COURT IN CIT VS. VINITEC CORPORA TION (P) LTD. (SUPRA) WHILE DECIDING THE ASSESSEE'S CLAIM FOR LIABILITY T OWARDS WARRANTY CLAUSE PROVIDED IN THE SALE AGREEMENT ITSELF. IN THIS CASE , IT WAS HELD THAT THE TAXPAYER WAS IN THE YEAR OF SALE UNDER AN ACCRUED L EGAL OBLIGATION TO MAKE PAYMENTS UNDER WARRANTY CLAIMS, EVEN THOUGH IT MIGHT NOT BE REQUIRED TO DO SO UNTIL THE FOLLOWING YEAR. IT WAS FURTHER HELD THEREIN THAT 9 ITA NO. 1149/PN/2014, A.Y. 2009-10 IN COMPUTING THE PROFITS OR GAINS DERIVED BY TAXPAY ER IN ITS BUSINESS IN THE YEAR IN WHICH THE VEHICLES WERE SOLD THE TAXPAY ER WAS ENTITLED TO DEDUCT FROM ITS TOTAL INCOME THE PROVISION WHICH IT HAD MADE FOR THE COST OF ITS ANTICIPATED LIABILITIES UNDER OUTSTANDING WA RRANTIES IN RESPECT OF THE VEHICLES SOLD IN THAT YEAR. IN THE CASE OF WARR ANTY, ALTHOUGH IT CANNOT OF COURSE BE PREDICTED WHETHER ANY PARTICULAR VEHIC LE WILL TURNOUT TO BE DEFECTIVE OR HOW SERIOUS THE DEFECT WILL BE, THE TA XPAYER CAN MAKE A REASONABLY ACCURATE FORECAST BASED ON PREVIOUS EXPE RIENCE, OF WHAT WILL BE THE TOTAL COST OF REMEDIAL WORK FOR ALL THE VEHI CLES SOLD IN A GIVEN YEAR. IN THESE CASES, A VIEW WAS THEREFORE TAKEN THAT THE ANTICIPATED LIABILITIES UNDER UNEXPIRED WARRANTIES WHEN ESTIMATED WITH REFE RENCE TO STATISTICAL INFORMATION WOULD BE A CHARGE ON THE PROFIT ARISING FROM THE SALE OF THE GOODS IN RESPECT OF WHICH WARRANTY WAS GIVEN AND TH US, HAVE TO BE ALLOWED AS DEDUCTION. ON THE ISSUE OF CLAIM OF DEDU CTION ON ACCOUNT OF WARRANTY IN RESPECT OF THE GOODS SOLD IN A PARTICUL AR YEAR, A REFERENCE WAS ALSO MADE TO THE DECISION OF THE PRIVY COUNCIL IN THE CASE OF IRC VS. MITSUBISHI MOTORS NEW ZEALAND LTD. (SUPRA) BY THE H ON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. VINITEC CORPORATION (P ) LTD. (SUPRA). THE HON'BLE DELHI HIGH COURT AS WELL AS THE HON'BLE KER ALA HIGH COURT IN THE AFORESAID TWO CASES HAVE TAKEN NOTE OF THE PRINCIPL ES LAID DOWN BY THE HON'BLE SUPREME COURT IN THE CASES OF CALCUTTA CO. LTD. VS. CIT (SUPRA) AND BHARAT EARTH MOVERS VS. CIT (SUPRA). THEREFORE, APPLYING THE SAME ANALOGY AS APPLIED IN THE CASE OF WARRANTY BY THE H ON'BLE KERALA HIGH COURT, DELHI HIGH COURT AND THE PRIVY COUNCIL IN TH E CASES OF (I) CIT VS. INDIAN TRANSFORMERS LTD. (SUPRA), (II) CIT VS. VINI TEC CORPORATION (P) LTD. (SUPRA) AND (III) IRC VS. MITSUBISHI MOTORS NEW ZEA LAND LTD. (SUPRA) RESPECTIVELY, THE DISPUTE IN THE PRESENT CASE CAN B E EASILY RESOLVED IN FAVOUR OF THE ASSESSEE. IN THE PRESENT CASE, THE WO RKS HAVE BEEN EXECUTED AFTER THE EXPIRY OF THE STIPULATED PERIOD. THE STIPULATION AS TO THE PAYMENT OF LIQUIDATED DAMAGES TOWARDS DELAY IN EXECUTING THE CONTRACT WORK IS RELATED TO THE CONTRACT WORKS, REV ENUE THEREOF HAS BEEN ACCOUNTED FOR IN THE YEAR UNDER CONSIDERATION. ALTH OUGH EXACT QUANTIFICATION OF THE CLAIM OF LIQUIDATED DAMAGES M AY BE MADE AT A FUTURE DATE, THE ASSESSEE PAYER WAS, IN THE YEAR OF COMPLETING THE WORK, UNDER AN ACCRUED LEGAL OBLIGATION TO MAKE PAYMENTS UNDER THE LIQUIDATED DAMAGES CLAUSE, INASMUCH AS THE ASSESSEE'S OBLIGATI ON TO PAY LIQUIDATED DAMAGES FOR THE DELAY IN WORK DID ACCRUE ON THE DAT E WHEN THE DELAY WAS FIRST OCCURRED AND CONTINUED UPTO THE DATE OF C OMPLETION OF THE WORK, AND THUS, IN COMPUTING THE PROFIT AND GAINS DERIVED BY THE TAXPAYER FROM SUCH CONTRACT WORKS IN THE PRESENT YEAR, THE ASSESS EE TAXPAYER IS ENTITLED TO DEDUCT FROM THE PROFITS FROM THE AFORES AID CONTRACT WORKS A PROVISION, FOR THE COST OF THE ANTICIPATED LIQUIDAT ED DAMAGES INSOFAR AS 10 ITA NO. 1149/PN/2014, A.Y. 2009-10 THE SAME IS RELATED TO THE PERIOD OF DELAY FALLING WITHIN THE YEAR UNDER CONSIDERATION. IN VIEW OF THE FACTS OF THE CASE AND THE DECISION OF CO-OR DINATE BENCH, WE CONCUR WITH THE WELL REASONED FINDINGS OF THE COM MISSIONER OF INCOME TAX (APPEALS) AND DISMISS GROUND NO. 1 RAISED IN THE APPEAL BY THE REVENUE. 8. WITH REGARD TO DISALLOWANCE OF LIQUIDATED DAMAGES CLAIMED BY THE ASSESSEE IN RESPECT OF IOCL, GUJARAT REFINERY, THE REVENU E HAS NOT DISPUTED THAT THE PROJECT WAS COMPLETED BY THE ASSESS EE AFTER THE ELAPSE OF TIME LIMIT SPECIFIED IN THE CONTRACT. OSTENSIBLY, THE ASSESSEE WAS TO COMPLETE THE PROJECT BY 01-08-2006. THE ASSES SEE COMPLETED THE PROJECT IN JUNE, 2007 (25-10-2007 AS PER COMPLETION CERTIFICATE ISSUED BY IOCL, GUJARAT REFINERY). THE ASSESSEE HAS ALREA DY ACCOUNTED FOR THE INCOME FROM THE CONTRACT WITH IOCL, GUJARAT REFINE RY DURING THE FINANCIAL YEAR RELEVANT TO THE ASSESSMENT YEAR 2009-10. THE ASSESSEE HAD PAID SECURITY DEPOSITS OF ` 1,06,73,000/- I.E. 2.5% OF THE TOTAL CONTRACT VALUE. AS PER THE TERMS AND CONDITIONS OF THE CONTRACT IN CASE OF DELAY OF COMPLETION OF PROJECT THE ASSESSEE WAS LIABLE TO PAY LIQUIDATED DAMAGES @ 10% OF THE CONTRACT VALUE. AFTER THE COMPLETION OF PROJECT THERE WAS NO COMMUNICATION FROM IOCL, GUJARAT REFINERY EITHER IN RESPECT OF REFUND OF SECURITIES DEPOSITS OR CLAIM O F LIQUIDATED DAMAGES. THE ASSESSEE ON ITS OWN HAD WRITTEN OFF THE S ECURITY DEPOSIT AMOUNT AS LIQUIDATED DAMAGES. THE ASSESSEE HAD WRITTEN OFF THE SECURITY DEPOSITS AMOUNT AS BAD DEBTS ON ACCOUNT OF LIQ UIDATED DAMAGES AS THERE WAS NO CHANCE OF RECOVERY OF SAME IN VIEW OF THE DELAY IN EXECUTION OF PROJECT. WE ARE OF THE CONSIDERED VIEW THAT THE COMMISSIONER OF INCOME TAX (APPEALS) WAS JUSTIFIED IN ACCEPTIN G THE CLAIM OF THE ASSESSEE IN RESPECT OF WRITE OFF OF ` 1,06,73,000/- AS BAD 11 ITA NO. 1149/PN/2014, A.Y. 2009-10 DEBTS ON ACCOUNT OF LIQUIDATED DAMAGES AS NO AMOUNT WAS RECOVERABLE FROM IOCL, GUJARAT REFINERY IN RESPECT OF SECURITY DEPOSIT S. WE DO NOT FIND ANY MERIT IN GROUND NOS. 2 AND 3 RAISED IN THE APPEAL BY THE REVENUE. 9. IN THE RESULT, THE IMPUGNED ORDER IS UPHELD AND THE APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED ON MONDAY, THE 02 ND DAY OF MAY, 2016. SD/- SD/- ( . . / R.K. PANDA) ( ! ' / VIKAS AWASTHY) #' / ACCOUNTANT MEMBER $ % #' / JUDICIAL MEMBER / PUNE; &# / DATED : 02 ND MAY, 2016 RK *+,%-.#/#)- / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT. 2. / THE RESPONDENT. 3. ' () / THE CIT(A)-I, NASHIK 4. ' / THE CIT-V, PUNE 5. !*+ %%,- , ,- , . ./0 , / DR, ITAT, B BENCH, PUNE. 6. + 1 23 / GUARD FILE. // ! % // TRUE COPY// #4 / BY ORDER, %5 ,0 / PRIVATE SECRETARY, ,- , / ITAT, PUNE