ACIT, CHENNAI V. East Coast Constructions & Industries Limited, CHENNAI

ITA 1180/CHNY/2016

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 7940 (ITAT-CHENNAI)
• Duration Of Justice: 7 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2016
• Appeal Filed By: Department
• Bench Allotted: A
• Assessment Year: 2009-2010
• Appeal Filed On: 29-04-2016
• Court: TRIBUNAL
• Department Lawyers: PATHAVALTHA PEERYACITD R
• Assessee Lawyers: G BASKAR
• Section: 37

Judgement Text

C , , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : CHENNAI , ! ' . #$ % &' BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY , JUDICIAL MEMBER ./ I.T.A.NOS.1176 & 1180/MDS./2016 / ASSESSMENT YEARS :2011-12 & 2009-10 THE ACIT, CORPORATE CIRCLE 2(1), CHENNAI 600 034. VS. M/S.EAST COAST CONSULTANTS & INFRASTRUCURE LTD., BUHARI BUILDINGS, 4 MOORES ROAD, CHENNAI. [PAN AAACE 9097 J ] ( () / APPELLANT) ( *+() /RESPONDENT) / APPELLANT BY : MR.PATHAVALTHA PEERYA,CIT,D.R /RESPONDENT BY : MR.G.BASKAR,ADVOCATE / DATE OF HEARING : 08 - 11 - 201 6 / DATE OF PRONOUNCEMENT : 30 - 11 - 2016 , / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THESE TWO APPEAL OF THE REVENUE ARE DIRECTED AGA INST THE DIFFERENT ORDERS OF THE COMMISSIONER OF INCOME-TAX (APPEALS)-6, CHENNAI FOR ASSESSMENT YEARS 2011-12 & 2009-10 DAT ED 18.02.16 & 24.02.2016 RESPECTIVELY. ITA NOS.1176,1180/MDS./16 :- 2 -: 2. THE ONLY COMMON ISSUE RAISED IN BOTH THE REVENU ES APPEAL IS WITH REGARD TO DELETION OF DISALLOWANCE MADE ON THE EXPENSES PERTAINING TO THE RETENTION OF MONEYS WITHHELD. 3. AFTER HEARING BOTH THE PARTIES, SIMILAR ISSUE C AME BEFORE THIS TRIBUNAL IN THE CASE OF M/S CONSOLIDATED CONSTRUCTION CONSORTIUM LTD., IN ./ I.T.A.NOS. 1824/MDS/2011, 875, 701 & 702/MDS/2014 V IDE ORDER DATED 06.01.2016 WHEREIN HELD THAT:- 12. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. GENERALLY, THE EXPENDITURE W HICH IS ACTUALLY INCURRED OR IS INCURRED IN A RELEVANT YEAR WOULD BE ALLOWED AS DEDUCTION WHILE COMPUTING THE INCOME FRO M BUSINESS. SUCH A LIABILITY HAS TO BE IN PRAESENTI. HOWEVER, AT THE SAME TIME, IT RELATES TO THE WORKS UNDERTAKE N BY THE ASSESSEE, COMPLETED CONTRACT METHOD OF ACCOUNTING I S FOLLOWED WHICH IS CONSISTENT WITH THE ACCOUNTING ST ANDARDS AND THESE ACCOUNTING STANDARDS ALSO LAID DOWN THE N ORMS INDICTING THE PARTICULAR POINT OF TIME WHEN THE PRO VISIONS FOR ALL KNOWN LIABILITIES AND LOSSES HAVE TO BE MAD E. THE MAKING OF SUCH A PROVISION BY THE ASSESSEE APPEARS TO BE JUSTIFIED MORE SO WHEN THE ASSESSEE HAD RECOGNIZED GAIN AS WELL ON SUCH PROJECT DURING THE ASSESSMENT YEAR UNDER CONSIDERATION. THIS APPEARS TO BE IN CONSONANCE WIT H THE PRINCIPLE OF MATCHING COST AND REVENUE AS WELL. T HE REASON GIVEN BY THE DEPARTMENT IS THAT THE RETENTIO N MONEY WHICH IS RECEIVABLE WAS NOT RECOGNIZED AS INC OME ITA NOS.1176,1180/MDS./16 :- 3 -: AS SUCH, RETENTION PAYMENT ALSO CANNOT BE ALLOWED A S DEDUCTION WHILE COMPUTING THE INCOME OF THE ASSESS EE. AS RIGHTLY ARGUED BY THE ASSESSEE, BOTH THESE ARE GOVERNED BY DIFFERENT ACCOUNTING STANDARDS. RETENT ION PAYMENT IS GOVERNED BY AS-7 ISSUED BY ICAI, NEW DEL HI. ON THE OTHER HAND, RETENTION MONEY RECEIVABLE IS GO VERNED BY AS-9. WHAT IS APPLICABLE TO RETENTION MONEY REC EIVABLE CANNOT BE APPLIED TO RETENTION MONEY PAYABLE AS THE SE ARE GOVERNED BY DIFFERENT ACCOUNTING STANDARD. FURTHER IT IS UNDISPUTED THAT WHENEVER ASSESSEE INCURRED EXPENDIT URE ON THE PROJECT IT IS ADMISSIBLE FOR DEDUCTION. THE ONLY DISPUTE RAISED BY THE REVENUE IS REGARDING THE YEAR OF LIABILITY OF EXPENDITURE. CONSIDERING THAT THE ASS ESSEE- COMPANY IS ASSESSED AT UNIFORM RATE OF TAX, THE ENT IRE EXERCISE OF SEEKING TO DISTURB THE YEAR OF ALLOWABI LITY OF EXPENDITURE IS, IN ANY CASE, REVENUE NEUTRAL. WE A RE REMINDED OF THE CLASSIC OBSERVATION MADE BY THE BOM BAY HIGH COURT IN THE CASE OF CIT VS NAGRI MILLS CO. LT D, 33 ITR 681 WHICH READS AS UNDER: WE HAVE OFTEN WONDERED WHY THE INCOME-TAX AUTHORITIES, IN A MATTER SUCH AS THIS WHERE THE DEDUCTION IS OBVIOUSLY A PERMISSIBLE DEDUCTION UNDE R THE INCOME-TAX ACT, RAISE DISPUTES AS TO THE YEAR I N WHICH THE DEDUCTION SHOULD BE ALLOWED. THE QUESTION AS TO THE YEAR IN WHICH A DEDUCTION IS ALLOWABLE MAY B E MATERIAL WHEN THE RATE OF TAX CHARGEABLE ON THE ASSESSEE IN TWO DIFFERENT YEARS IS DIFFERENT; BUT I N THE CASE OF INCOME OF A COMPANY, TAX IS ATTRACTED AT A UNIFORM RATE, AND WHETHER THE DEDUCTION IN RESPECT OF BONUS WAS GRANTED IN THE ASSESSMENT YEAR 1952-53 OR IN THE ASSESSMENT YEAR CORRESPONDING TO THE ACCOUNTING YEAR 1952, THAT IS IN THE ASSESSMENT YEA R 1953-54, SHOULD BE A MATTER OF NO CONSEQUENCE TO TH E ITA NOS.1176,1180/MDS./16 :- 4 -: DEPARTMENT; AND ONE SHOULD HAVE THOUGHT THAT THE DEPARTMENT WOULD NOT FRITTER AWAY ITS ENERGIES IN FIGHTING MATTERS OF THIS KIND. BUT, OBVIOUSLY, JUDG ING FROM THE REFERENCES THAT COME UP TO US EVERY NOW AN D THEN, THE DEPARTMENT APPEARS TO DELIGHT IN RAISING POINTS OF THIS CHARACTER WHICH DO NOT AFFECT THE TAXABILITY OF THE ASSESSEE OR THE TAX THAT THE DEPARTMENT IS LIKELY TO COLLECT FROM HIM WHETHER IN ONE YEAR OR THE OTHER.' 12.1 THE AFORESAID OBSERVATION OF THE BOMBAY HIGH COU RT WAS REITERATED BY THE DELHI HIGH COURT IN THE CASE OF CIT VS SHRI RAM PISTOS AND RINGS LTD, 220 CTR 404, AS UND ER: 'FINALLY, WE MAY ONLY MENTION WHAT HAS BEEN ARTICULATED BY THE BOMBAY HIGH COURT IN CIT V. NAGRI MILLS CO. LTD. [1958] 33 ITR 681 (BOM) AS FOLLOWS : . . . IN THE REFERENCE THAT IS BEFORE US THERE IS NO DOUBT THAT THE ASSESSEE HAD INCURRED AN EXPENDITURE. THE ONLY DISPUTE IS REGARDING THE DATE ON WHICH THE LIABILITY HAD CRYSTALLIZED. IT APPEARS THAT THERE WAS NO CHANGE IN THE RATE OF TAX FOR THE ASSESSMENT YEAR 1983-84 WITH WHICH WE ARE CONCERNED. THE QUESTION, THEREFORE, IS ONLY WITH REGARD TO THE YEAR OF DEDUCTION AND IT IS A PITY THAT ALL OF US HAVE TO EXPAND SO MUCH TIME AND ENERGY ONLY TO DETERMINE THE YEAR OF TAXABILITY OF THE AMOUNT.' 12.2 FURTHER, IN OUR OPINION, THE PROVISION FOR ACC RUED LIABILITY WHICH HAS TO BE DISCHARGED AT A FUTURE DA TE BY THE ASSESSEE IS AN ALLOWABLE EXPENDITURE. IN THE CASE OF CIT VS MICRO LAND LTD, 347 ITR 613[KARNATAKA HIGH COURT], THE ASSESSEE CLAIMED DEDUCTION U/S 37 OF THE ACT FOR P ROVISION ITA NOS.1176,1180/MDS./16 :- 5 -: FOR FUTURE WARRANTY. THE ASSESSING OFFICER OPINED THAT PROVISION FOR FUTURE WARRANTY IS CONTINGENT LIABILI TY AND CANNOT BE ALLOWED. THE SUPREME COURT IN THE CASE OF ROTOR K CONTROLS INDIA PVT. LTD VS CIT, 314 ITR 62, HELD THAT THE PR OVISION MADE BY THE ASSESSEE FOR WARRANTY CLAIMS ON THE BA SIS OF PAST EXPERIENCE IS ALLOWABLE DEDUCTION U/S 37 OF T HE ACT. IN THE CASE OF BHARAT EARTH MOVERS VS CIT, 245 ITR 428 , THE SUPREME COURT HELD THAT WHERE THE ASSESSEE HAS INC URRED EXPENDITURE WHICH IS MORE THAN THE PROVISION FOR WA RRANTY OBLIGATION MADE IN THE BOOKS OF ACCOUNT, IT CANNOT BE SAID THAT THE PROVISION MADE BY THE ASSESSEE IS NOT CAP ABLE OF BEING ESTIMATED WITH THE REASONABLE CERTAINTY THOU GH ACTUAL QUANTIFICATION WAS NOT POSSIBLE AND THEREFORE, THE TRIBUNAL WAS JUSTIFIED IN ALLOWING THE DEDUCTION. THE DELHI HIGH COURT IN THE CASE OF CIT VS ERICSSION COMMUNICATIONS P. L TD, 318 ITR 340, HELD THAT PROVISION FOR WARRANTY CLAIMS ON SCIENTIFIC BASIS WHICH IS CONSISTENTLY APPLIED BY THE ASSESSE E FOR ITS BUSINESS WAS ALLOWABLE AS DEDUCTION. THE MADRAS HI GH COURT IN THE CASE OF CIT VS LUK INDIA PVT. LTD, 239 CTR 4 40, HELD THAT PROVISION FOR WARRANTY CLAIMED BY APPLYING THE SETTLED PRINCIPLES OF HAVING REGARD TO THE FACT THAT CLAIM WAS BASED ON A SCIENTIFIC APPROACH AND IT WAS WORKED OUT ON THE AVERAGE OF PREVIOUS YEARS WARRANTY SETTLEMENT IS ALLOWABLE EX PENDITURE. SAME VIEW WAS TAKEN BY THE JURISDICTIONAL HIGH COU RT IN THE CASE OF KONE ELEVATOR INDIA PVT. LTD VS ACIT, 340 I TR 46. FURTHER, THE SUPREME COURT IN THE CASE OF CALCUTTA CO. LTD VS CIT, 37 ITR 1, HELD THAT WHERE THE ASSESSEE WAS FO LLOWING THE MERCANTILE SYSTEM OF ACCOUNTING IS ENTITLED FOR DEDUCTION OF THE EXPENDITURE WHICH IS INCIDENTAL TO THE BUSIN ESS ON ITA NOS.1176,1180/MDS./16 :- 6 -: ACCRUAL BASIS THOUGH IT WAS NOT ACTUALLY INCURRED D URING THE RELEVANT ACCOUNTING YEAR. THE KERALA HIGH COURT I N THE CASE OF CIT VS INDIAN TRANSFORMERS LTD, 270 ITR 259, HEL D THAT PROVISION CREATED BY THE ASSESSEE FOR AFTER SALES SERVICES BASED ON WARRANTY WAS TOWARDS A DEFINITE AND ASCERT AINED LIABILITY. ON THE BASIS OF RELEVANT FACTS THE PROV ISION CANNOT BE TREATED AS A CONTINGENT LIABILITY AND THEREFORE, TH E SAME WAS ALLOWABLE AS DEDUCTION. SAME VIEW WAS TAKEN BY THE DELHI HIGH COURT IN THE CASE OF CIT VS WHIRLPOOL OF INDIA LTD, 242 CTR 245, WHEREIN HELD THAT THE ASSESSEE CONSISTENT LY MAKING PROVISION FOR WARRANTY ON THE BASIS OF ACTUARIAL V ALUATION IN RESPECT OF MACHINES SOLD DURING THE YEAR COULD NOT BE PRECLUDED FROM REVISING THIS PROVISION AFTER TAKING INTO CONSIDERATION THAT WARRANTY PERIOD OF THE GOODS SOL D UNDER WARRANTY WAS EXCEEDING AND PROVISION ALREADY PROVID ED IN A PARTICULAR YEAR IS FALLING SHORT OF THE EXPECTED CL AIM THAT MAY BE RECEIVED. SUCH A PROVISION IS BASED ON SCIENTIF IC STUDY AND ACTUARIAL BASIS AND TO BE ALLOWED AS A BUSINESS EXP ENDITURE. HENCE, IN OUR OPINION, THE PROVISION FOR PAYMENT MA DE BY THE ASSESSEE TOWARDS SUB-CONTRACT IS ALLOWABLE EXPENDIT URE AS THE ASSESSEE RECOGNIZED THE REVENUE FROM THE SAID CONTR ACT AS INCOME IN THE ASSESSMENT YEAR UNDER CONSIDERATION. FURTHER, WE MAKE IT CLEAR THAT THE ASSESSEE CANNOT CLAIM TH E SAME EXPENDITURE ON ACTUAL PAYMENT BASIS, OTHERWISE IT A MOUNTS TO DOUBLE DEDUCTION ONE ON THE BASIS OF ACCRUAL AND ANOTHER ON THE BASIS OF ACTUAL PAYMENT. HENCE, WE DIRECT T HE ASSESSING OFFICER TO ALLOW THIS RETENTION MONEY PAY MENT ONLY ON ACCRUAL BASIS AND NOT ON ACTUAL PAYMENT BASIS. WITH THESE ITA NOS.1176,1180/MDS./16 :- 7 -: OBSERVATIONS, WE REMIT THIS ISSUE TO THE FILE OF TH E ASSESSING OFFICER FOR QUANTIFICATION. THIS GROUND IS PARTLY ALLOWED. IN VIEW OF THE ABOVE ORDER OF THE TRIBUNAL, WE RE MIT THE ISSUE TO THE FILE OF AO ON SIMILAR LINE. 4. IN THE RESULT, BOTH THE APPEALS OF THE REVENUE ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON 30 TH NOVEMBER, 2016, AT CHENNAI. SD/ - SD/ - ! ' # . $ %& ' ( DUVVURU RL REDDY ) ) % / JUDICIAL MEMBER ( ) (CHANDRA POOJARI) / ACCOUNTANT MEMBER () / CHENNAI *+ / DATED: 30 TH NOVEMBER, 2016 K S SUNDARAM +,-- ./-0/ / COPY TO: - 1 . / APPELLANT 3. - 1-!' / CIT(A) 5. /23- 4 / DR 2. / RESPONDENT 4. - 1 / CIT 6. 3&-5 / GF