ACIT, Cri-1, Nellore V. M/s. B.G.R. Energy Systems Ltd., Nellore

ITA 1244/HYD/2011

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 69798 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 2 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-09-2013
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2007-2008
• Appeal Filed On: 29-06-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: P SOMASEKHARA REDDY
• Assessee Lawyers: T S AJAY
• Keywords: Depreciation; Revenue expenditure; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B', HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO.1244/HYD/11 : ASSESSMENT YEAR 2007 - 08 ITA NO.1513/HYD/11 : ASSESSMENT YEAR 2008 - 09 ITA NO.985/HYD/12 : ASSESSMENT YEAR 2009 - 10 ASSTT. COMMISSIONER OF I NCO ME - TAX CIRCLE 1, NELLORE. V/S. M/S. B.G.R. ENERGY SYSTEMS LTD., NELLORE. (PAN AAPCG 2202 I) (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI P.SOMASEKHARA REDDY, DR RESPONDENT BY : SHRI T.S.AJAY DATE OF HEARING 04.07.2013 DATE OF PRONOUNCEMENT 05.09.2013 O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER: TH ESE THREE APPEAL S BY THE REVENUE ARE DIRECTED AGAINST SEPARATE ORDERS OF THE CIT(A) GUNTUR DATED 31.03.2011 FOR THE ASSESSMENT YEAR 2007 - 08; DATED 15.6.2011 AND DATED 30.3.2012 FOR THE ASSESSMENT YEAR 2009 - 10. SINCE COMMON ISSUES ARE INVOLVED, THESE APPEALS ARE BEING DISPOSED OFF WITH THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE. ITA NO.1244/HYD/2011 : ASSESSMENT YEAR 2007 - 08 2. THE FIRST EFFECTIVE GROUND OF THE REVENUE IN THIS APPEAL IS THAT THE CIT(A) ERRED IN DELETING THE ADDITION MADE BY THE ASSESSING OFFICER UNDER THE H E AD RETENTIO N MONEY OF RS.78,67,79,839 . 3. ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURE OF CAPITAL EQUIPMENTS FOR POWER PLANTS, OIL AN D GAS INDUSTRY AND PROCESS INDUSTRIES AND EXECUTION OF ENGINEERING, PROCUREMENT AND ITA NO. 1244 & 1511 / HYD/201 1 & 985/HYD/12 M/S. B.G.R. ENERGY SYSTEMS LTD., NELLORE. 2 CONSTRUCTION CONTRACTS. IT IS ALSO ENGAGED IN THE BUSINESS S OF CONSTRUCTION OF ROADS, B R IDGES AND POW E R PLANTS IN THE INFRASTRUCTURE SECTOR. FO R THE ASSESSMENT YEAR, ASSESSEE FURNISHED RETURN OF INCOME ON 31.10.2007 ADMITTING A TOTAL INCOME OF RS.17,73, 85,630 , AS PER NORMAL COMPUTATION AND RS.95,31,48,100 AS BOOK PROFIT, AS PER THE PROVISIONS OF S.115JB. AS AGAINST THIS, THE ASSESSING OFFICER COMPLETED THE ASSESSMENT ON A TOTAL INCOME OF RS.100,02,99,840 AS PER NORMAL COMPUTATION, AFTER MAKING VARIOUS ADDITIONS AND DISALLOWANCES, VIDE ORDER PASSED UNDER S.143(3) OF THE ACT ON 31.12.2009. 4. THE ASSESSING OFFICER INTER ALIA MADE AN ADDITION OF RS.78,67,79,839, WHICH REPRESENTED THE RETENTION MONEY. THE A SSESSING OFFICER NOTED THAT THE ASSESSEE HAS BEEN TAKING CONTRADICTORY STANDS IN THE MATTER OF ACCOUNTING FO R THE RETENTION MONEY. THOUGH IT FOLLOWED MERCANTILE SYSTEM OF ACCOUN T IN G , IT HAD RECOGNIZED RETENTION MONEY TO THE EXTENT OF RS.78,67,79,889 AS REVENUE FOR THE PREVIOUS YEAR ENDE D ON 31.3.2 007 IN ITS ACCOUNTS, BUT CLAIMED THIS AS DEDUCTION WHILE ARRIVING AT THE TAXABLE INCOME. IT WAS THE CONTENTION OF THE ASSESSEE THAT THOUGH IT WAS FOLLOWING ACCRUAL SYSTEM OF ACCOUNTING, RETENTION MONEY WAS EARNED ONLY WHEN THE CONTRACT/DELIVERY OF GOODS A ND SERVICES IS SUCCESSFULLY COMPLETED AND WHEN THE PERFORMANCE GU A RANTEE WAS SUCCESSFUL. GOING BY THE ENTRIES IN THE BOOKS OF ACCOUNT, THE ASSESSING OFFICER MADE ADDITION OF RS.78,67,79,889, REJECTING THE CLAIM OF THE ASSESSEE FOR DEDUCTION OF THE RETENTI ON MONEY WHILE COMPUTING THE TAXABLE INCOME. 5. ON APPEAL, THE COMMISSIONER OF INCOME - TAX(APPEALS) RELYIN G ON THE DECISIONS OF THE APEX COURT IN THE CASE OF CIT V/S. INDIA DI S COUNT CO0. LTD. (75 ITR 191) AND GODHRA ELECTRIC COMPANY V/S. CIT(225 ITR 747 6) HELD THAT ENTRIES IN THE BOOKS OF AC C OUN T ARE NOT DECISIVE, AND THE VIEW TAKEN BY THE ASSESSING OFFICER IN THIS BEHALF CANNOT BE UPHELD. AS FOR THE QUESTION AS TO WHETHER THE RETENTION MONEY CAN B E SAID TO HAVE ITA NO. 1244 & 1511 / HYD/201 1 & 985/HYD/12 M/S. B.G.R. ENERGY SYSTEMS LTD., NELLORE. 3 ACTUALLY ACCRUED TO THE ASSESSEE, REFERRIN G TO THE CA S E LAW RELIED UPON BY THE ASSESSEE BEFORE HIM, WHICH ACCORDING TO HIM WAS STRAIGHT ON THE POINT, OBSERVED THAT ON THE DATE WHEN THE BILLS ARE SUBMITTED, NO ENFORCEABLE LIABILITY ACCRUED OR AROSE AND ACCORDINGLY, CIT(A) CANNOT B E SAID THAT THE ASSESSEE H A D ANY RIGHT TO RE C EIVE THE ENTIRE AMOUNT OF MONEY CLAIMED ON COMPLETION OF THE WORK OR ON SUBMISSION OF THE BILLS. HE NOTED THAT THE AMOUNT CLAIMED BECOMES ACTUALLY PAYABLE TO TH E CONTRACTOR NOT JUST AFTER COMPLETION O F THE WORK, BU T ONLY AFTER THE CON T RACTEE IS SATISFIED WITH THE WORK DONE BY TH E CON T RA C TOR, AND IT IS ONLY THEN TH A T THE CONTRACTOR GETS AN ENFORCEABLE CLAIM. WITH TH E SE OBSERVATIONS AND RELYING ON THE DECISION OF TH E MADRAS HIGH COURT IN THE CASE OF P& C CON S TRUC TION S PV T . LTD.(318 ITR 113), AND DISTINGUISHING THE DECI S IONS OF BOMBAY HIGH COU R T IN THE CA S E OF VISHNU AGENCIES (P)LTD. (144 ITR ) AND APEX COURT IN THE CASE OF E.D.SASSOON & CO. LTD. V/S. CIT(26 ITR 27), THE CIT(A) DELETED THE ADDITION OF R S .78,67,79, 839 MADE BY THE ASSESSING OFFICER. 6. AGGRIEVED BY THE ORDER OF THE CIT(A) ON THIS ASPECT, REVENUE IS IN APPEAL BEFORE US. 7. THE LEARNED DEPARTMENTAL REPRESENTATIVE, STRONGLY SUPPORTING THE ORDER OF THE ASSESSING OFFICER, SUBMITTED THAT THE CIT(A) WAS NO T JUSTIFIED IN DELETING THE ADDITION MADE BY THE ASSESSING OFFICER ON ACCOUNT OF RETENTION MONEY. HE SUBMITTED THAT THERE WAS NO DENIAL OF LIABILITY BY THE CONTRACTEES, AND THERE WAS MERE POSTPONEMENT OF PAYMENT OF THE RETENTION MONEY BY THEM TO TH E ASSESSEE, IN ACCORDANCE WITH THE TERMS OF THE AGREEMENT. HE SUBMITTED THAT THERE WAS RECEIPT - PAYMENT MISMATCH, AND THE TDS WAS ALSO EFFECTED BY THE CONTRACTEES IN RELATION TO THE RETENTION MONEY. TAKING US THROUGH THE TERMS OF VARIOUS AGREEMENTS, IT IS PLEADED THAT IT IS NOT 10% PAYABLE AFTER 12 MONTHS IN ALL CASES AND IN SOME CASES, IT WAS ONLY A MONTH AFTER THE RETENTION MONEY IS PAYABLE AND IN SOME CASES, THERE WAS NOT EVEN MENTION IN THAT REGARD. HE FURTHER ITA NO. 1244 & 1511 / HYD/201 1 & 985/HYD/12 M/S. B.G.R. ENERGY SYSTEMS LTD., NELLORE. 4 SUBMITTED THAT THE MATTER HAS TO BE EXAMI NED ON CONTRACT BY CONTRACT AND CASE BY CASE BASIS, AND NO UNIFORM BASIS IS JUSTIFIED. IT IS ALSO SUBMI T TED THAT WHAT IS ACTUALLY BEING ACCOUNTED IN THE BOOKS AND WHAT IS BEIN G ACTUALLY SHOWN AS INCOME FINALLY IN THE RETURN. IT IS NOT A SIMPLE CA S E OF SH O W IN G 90% AS IN C OM E AND KEEPIN G ASIDE 10% ON ACCOUNT OF RETENTION MONEY AND OFFERING IT AT THE END O F WARRANTY PERIOD. DISTINGUISHING THE CASE - LAW RELIED UPON BY THE ASSESSEE AND REFERRED TO IN THE IMPUGNED OR D ER OF THE CIT(A), IT IS SUBMITTED THAT PRINC IPLES ENUNCIATED IN THOSE DECISIONS HAVE TO BE EXAMINED IN THE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE ON HAND. SINCE THE FACTS IN THE PRESENT CASE ENVISAGE MERE POSTPONEMENT OF RETENTION MONEY AND DOES NOT RAISE ANY QUESTION AS TO THE LIABILITY TO PAY ITSELF, THE RATIO LAID DOWN IN THOSE DECISIONS, VIZ. ENTRIES IN THE BOOKS OF ACCOUNT ARE NOT CONCLUSIVE, DOES NOT APPLY TO THE FACTS OF THE PRESENT CASE. 8. THE LEARNED COUNSEL FOR THE ASSESSEE ON THE OTHER HAND, REITERATING THE CONTENTIONS UR GED BEFORE THE LOWER AUTHORITIES, STRONGLY SUPPORTED THE ORDER OF THE CIT(A), AND SUBMITTED THAT THERE IS NO MERIT IN THE GRIEVANCE OF THE REVENUE. REFERRING TO THE STATEMENTS OF INCOME FILED ALONGWITH THE RETURNS, IT IS SUBMITTED THAT THE ASSESSEE HAS CLAIMED THE E X CLUSION OF RETENTION MONEY, SINCE THE SAME HAS NOT ACCRUED, AND MERE ENTRIES IN TH E BOOKS OF ACCOUNT ARE NOT CONCLUSIVE OF ASSESSABILITY OF THE RETENTION MONEY IN THE RELEVANT YEARS , WHICH I N FACT HAS NOT REACHED THE HANDS OF THE ASSESSEE DURING THE YEARS UNDER APPEAL. PLACING RELIANCE ON THE DECISIONS OF THE CO - ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF DECCAN MECHANICAL & CHEMICAL INDUSTRIAL (P)LTD.(102 ITD 121) AND CORROSION CONTROL SER VICES (BOMBAY)(OP)LTD.,(70 ITD 109), IT IS SUBMITTED THAT UNDER SIMILAR CIRCUMSTANCES, VARIOUS ISSUES INCLUDING TDS BEING MADE ON THE RECEIPTS, HAVE BEEN CONSIDERED BY THE TRIBUNAL IN THOSE CASES, AND SIMILAR ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESS EE. ITA NO. 1244 & 1511 / HYD/201 1 & 985/HYD/12 M/S. B.G.R. ENERGY SYSTEMS LTD., NELLORE. 5 9. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND OTHER MATERIAL ON RECORD. IT IS THE YEAR OF ASSESSABILITY OF THE RETENTION MONEY THAT IS THE IS SUE THAT ARISES FOR CONSIDERATION. IT IS THE CASE OF THE ASSESSEE THAT SUCH RETENTION MONEY IS ASSESSABLE IN THE YEAR OF ITS ACTUAL RECEIPT IRRESPECTIVE OF THE ENTRIES IN THE BOOKS OF ACCOUNT, WHEREAS ACCORDING TO THE REVENUE IT IS THE YEAR IN WHICH THE R ETENTION MONEY IS ACCOUNTED FOR IN THE BOOKS OF ACCOUNT, IN WHICH IT SHOULD BE BROUGHT TO TAX, IRRESPECTIVE OF ITS ACTUAL RECEIPT IN THAT YEAR SINCE THE ASSESSEE HAS BEEN FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING AND TDS IN RELATION TO SUCH RETENTION MONE Y HAS ALSO BEEN DEDUCTED BY THE CO N T RACTEES. IT IS THE CASE OF THE ASSESSEE THAT THE RETENTION MONEY HAS BEEN OFFERED TO TAX IN THE RELEVANT YEAR IN WHICH THE SAME HAS ACTUALLY BEEN RECEIVED BY IT. WE FIND THAT THIS ISSUE HAS ARISEN FOR CONSIDERATION BE FORE THE PUNE B ENCH OF THE TRIBUNAL IN THE CA S E OF DY. CIT V/S. DECCAN MECHANICAL & CHEMICAL IN D USTRIAL (P)LTD., (SUPRA), WHEREIN THE TRIBUNAL AFTER DETAILED CONSID E RATION OF THE CA S E - LAW RELIED UPON BY THE PAR T IES BEFORE IT, HAS DECI D ED THE MATTER IN THE FOLLOWING MANNER - 6. ON COMBINED READING OF THESE ORDERS, THE FOLLOWING PROPOSITIONS OF LAW EMERGE REGARDING MERCANTILE METHOD OF ACCOUNTING: (I) THE ACCRUAL OF INCOME TAKES PLACE WHEN RIGHT TO RECEIVE INCOME ARISES [PARAGRAPHS 5.1, 5.2, AND 5.3], (II) IN A CONTRACT, UNDER MERCANTILE METHOD OF ACCOUNTING, THE ACCRUAL OF INCOME TAKES PLACE WHEN THE ASSESSEE GETS UNCONDITIONAL LEGAL RIGHT TO RECEIVE MONEY UNDER THE AGREEMENT [PARAGRAPHS 5.4, 5.7, 5.8 AND 5.11], (III) RECEIPT OF MONEY BY ITSELF DOES NOT LE AD TO ACCRUAL OF INCOME, ESPECIALLY WHEN THE ASSESSEE HAS NOT RENDERED CORRESPONDING SERVICE [PARAGRAPH 5.10], (IV) THE PRINCIPLE OF MATCHING OF INCOME AND CORRESPONDING EXPENDITURE MAY BE AN ACCOUNTANT'S VIEW, BUT UNDER THE LAW THE EXPENDITURE AND INCOME CAN BE TREATED DIFFERENTLY, DEPENDING UPON WHETHER ONE OR BOTH HAD ACCRUED OR NOT ON THE BASIS OF METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE. [PARAGRAPH 5.5]; AND, ITA NO. 1244 & 1511 / HYD/201 1 & 985/HYD/12 M/S. B.G.R. ENERGY SYSTEMS LTD., NELLORE. 6 (V) RECEIPT OF RETENTION MONEY BY FURNISHING UNCONDITIONAL BANK GUARANTEE MAY OR MAY NOT AMOUNT THE ACCRUAL OF INCOME WHICH WILL HAVE TO BE CONSIDERED ON THE BASIS OF TERMS AND CONDITIONS OF THE CONTRACT. HOWEVER, FURNISHING OF UNCONDITIONAL BANK GUARANTEE IS ATTENDANT WITH SIGNIFICANT RISKS, AND WHERE THE AGREEMENT PROVIDES FOR ACCEPTANCE TES T 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 D ELIVER 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 O F 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 T HE DATE OF RECEIPT OF THE MATERIAL. CLAUSE 13 PROVIDES THAT PLANT SHALL BE CONSIDERED AS COMMISSION AFTER SUCCESSFUL COMPLETION OF THE PERFORMANCE TEST TO BE CARRIED OUT FOR 24 HOURS. IF THE ASSESSEE FAILS TO ESTABLISH THE GUARANTEED POWER CONSUMPTION ENVI SAGED, IT WILL UNDERTAKE TO RECTIFY THE PLANT WITHIN A PERIOD OF THREE MONTHS. HOWEVER, IF THAT IS NOT DONE, THE CONTRACTEE WILL HAVE THE RIGHT TO RECTIFY THE DEFECT ON ITS OWN AND THE COST OF RECTIFICATION WILL BE COLLECTED FROM THE CONTRACTOR. THE PAYMEN TS WERE TO BE MADE AS UNDER: (I) 15 PER CENT OF THE PRICE TO BE GIVEN AS ADVANCE ON SIGNING THE CONTRACT, (II) FURTHER 75 PER CENT TO BE PAID ON PRODUCTION OF INVOICE AND SATISFACTORY EVIDENCE OF DISPATCH BY THE ASSESSEE, (III) FURTHER 5 PER CENT OF THE PR ICE TO BE PAID AGAINST THE TAKING OVER OF THE PLANT BY THE CONTRACTEE, AND (IV) FINAL 5 PER CENT OF THE PRICE IS TO BE PAID PRIOR TO COMPLETION OF GUARANTEE PERIOD BUT AFTER SATISFACTORY COMPLETION OF ALL CONTRACTUAL WORKS INCLUDING PERFORMANCE TEST AND FI NAL ACCEPTANCE. 7.2 THE CASE OF THE LEARNED ASSESSING OFFICER WAS THAT WHEN ON SUPPLY OF MATERIAL, PAYMENT UPTO 90 PER CENT OF THE SUPPLIES WERE MADE BY THE CONTRACTEE, IT MEANT THAT THE FULL PAYMENT WAS QUANTIFIED AND ACCEPTED BY THE CONTRACTEE. THIS IS S O BECAUSE WITHOUT QUANTIFICATION OF THE FULL AMOUNT, 90 PER CENT THEREOF CANNOT BE WORKED OUT AND PAID. THEREFORE, WHEN THE ITA NO. 1244 & 1511 / HYD/201 1 & 985/HYD/12 M/S. B.G.R. ENERGY SYSTEMS LTD., NELLORE. 7 WHOLE PRICE WAS QUANTIFIED, THE AMOUNT RECEIVABLE WAS ALSO QUANTIFIED AND, THEREFORE, WHOLE OF THE AMOUNT ACCRUED AS INCOME TO THE A SSESSEE. THE RETENTION OF 10 PER CENT OF THE MONEY WAS IN RESPECT OF MATERIAL ALREADY* SUPPLIED AND ACCEPTED, AND THE RETENTION WAS MERELY FOR SAFEGUARDING THE INTEREST OF THE CONTRACTEE. THE ACCEPTANCE OF THE FULL LIABILITY BY THE CONTRACTEE AMOUNTS TO AC CRUAL OF INCOME IN THE HANDS OF THE ASSESSEE. THIS VIEW WAS NOT UPHELD BY THE LEARNED CIT(A). 7.3 WE HAVE ALREADY CONSIDERED VARIOUS CASE LAWS WHICH POINT OUT THAT IF RECEIPT OF RETENTION MONEY IS CONDITIONAL UPON PERFORMANCE OF A PART OF CONTRACT, THIS MO NEY WILL ACCRUE AS INCOME ONLY WHEN THAT PART OF THE CONTRACT HAS ALSO BEEN PERFORMED. WE HAVE ALSO SEEN THAT THE EXPENDITURE INCURRED IN SUPPLY OF THE WHOLE MATERIAL WAS FOR THE PURPOSE OF BUSINESS AND IT CONSTITUTED A DEDUCTIBLE EXPENDITURE. ITS DEDUCTIO N DOES NOT DEPEND UPON THE CORRESPONDING RECEIPT. IN OTHER WORDS, THE PRINCIPLE OF MATCHING OF EXPENDITURE WITH RECEIPT DOES NOT REPRESENT CORRECT LEGAL 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 RECTIFICAT ION 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 A S RETENTION MONEY IS CONCERNED, FURNISHING OF BANK GUARANTEE BY THE ASSESSEE TO THE CONTRACTEE AND RECEIPT OF RETENTION MONEY IN LIEU THEREOF DOES NOT OBLITERATE THE RISKS ASSOCIATED WITH THIS MONEY. THEREFORE, EVEN IF THE ASSESSEE IS ENTITLED TO RECEIVE T HE MONEY BY FURNISHING UNCONDITIONAL BANK GUARANTEE, THE RISKS DO NOT ABATE. THERE IS A SIGNIFICANT RISK THAT THE MONEY MAY BE RECOVERED FROM THE BANK GUARANTEE WITHOUT REFERENCE TO THE ASSESSEE IN CASE PERFORMANCE TEST IS NOT PERFORMED SATISFACTORILY. THI S RISK IS NOT COVERED BY MAKING ANY PROVISION IN BOOKS FOR THE WARRANTY AS STATED BY THE LEARNED COUNSEL. 7.4 IT WAS ALSO THE CASE OF THE LEARNED DR THAT THE ASSESSEE HAD CHANGED ITS METHOD OF ACCOUNTING IN RESPECT OF ACCOUNTING OF RETENTION MONEY. THE CAS E OF THE LEARNED COUNSEL WAS THAT THE ASSESSEE HAS BEEN CONSISTENTLY FOLLOWING MERCANTILE METHOD OF ACCOUNTING AND THERE WAS NO CHANGE IN THIS REGARD. EARLIER, THE ASSESSEE HAD BEEN SHOWING ETENTION MONEY AS INCOME ON THE MISTAKEN BELIEF THAT THE INCOME HA D ACCRUED TO ITA NO. 1244 & 1511 / HYD/201 1 & 985/HYD/12 M/S. B.G.R. ENERGY SYSTEMS LTD., NELLORE. 8 IT. HOWEVER, IF CORRECT PRINCIPLES OF LAW ARE APPLIED, IT WILL BE SEEN THAT INCOME WILL ACCRUE ONLY WHEN PERFORMANCE TEST IS SATISFACTORILY UNDERTAKEN AND ACCEPTED BY THE CONTRACTEE. AS POINTED OUT EARLIER, HE HAS ALSO STATED THAT, - (I) NO PR OVISION IS MADE FOR LIABILITY IN CASE PERFORMANCE TEST FAILS AND SOME EXPENDITURE MAY HAVE TO BE INCURRED IN THE WARRANTY PERIOD, AND (II) RETENTION MONEY HAS BEEN OFFERED FOR TAXATION THE MOMENT THE PERFORMANCE TEST HAS BEEN UNDERTAKEN SUCCESSFULLY AND AC CEPTED BY THE CONTRACTEE. THEREFORE, HIS CASE WAS THAT HE HAS BEEN FOLLOWING MERCANTILE METHOD OF ACCOUNTING, HIS PAST MISTAKEN BELIEF OF LAW CANNOT BE HELD OUT AGAINST HIM IN THIS YEAR, AND IT ALSO CANNOT BE CONCLUDED THAT HE HAS CHANGED METHOD OF ACCOUNT ING WHEN HE FOLLOWED THE CORRECT LEGAL PRINCIPLES REGARDING ACCRUAL OF INCOME WHILE FILING THE RETURN OF INCOME FOR THIS YEAR. LOOKING TO THE AFORESAID DISCUSSION WE ARE OF THE VIEW THAT THERE WAS NO CHANGE IN METHOD OF ACCOUNTING, WHICH CONTINUED TO BE ME RCANTILE METHOD OF ACCOUNTING. WE ARE ALSO OF THE VIEW THAT THE RETENTION MONEY DOES NOT ACCRUE AS INCOME MERELY ON RAISING THE BILL. IT ACCRUES AS INCOME AS PER PARAGRAPH 7.3 (SUPRA) OF THIS ORDER. THE ASSESSING OFFICER AND THE CIT(A) HAVE DEALT WITH THE RETENTION MONEY AS ONE ITEM. BUT, IN FACT, IT ACCRUES AS INCOME ON HAPPENING OF TWO DISTINCT EVENTS. THE ASSESSING OFFICER MAY EXAMINE WHETHER ANY PART OF RETENTION MONEY ACCRUES AS INCOME IN THIS YEAR ON AFORESAID BASIS. IF HE IS OF THE VIEW THAT SOME POR TION 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 TH E CA S E OF CORROSION CONTROL SERVICES (BOMBAY) P. LTD., (SU PRA), WHEREIN IT HAS BEEN HELD AS FOLLO W S - 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 EXECUTE D, 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 CALCUTTA HIGH COURT, IT WAS OBSERVED AS UNDER : - 'THAT HAVING REGARD TO THE TERMS AND CONDITIONS OF THE CONTRACT, IT CO ULD NOT BE HELD THAT EITHER 10 PER CENT OR 5 PER CENT, AS THE CASE MAY BE, BEING RETENTION MONEY, BECAME LEGALLY DUE TO THE ASSESSEE ON THE COMPLETION OF THE WORK. ONLY AFTER THE ASSESSEE FULFILLED THE OBLIGATIONS UNDER THE ITA NO. 1244 & 1511 / HYD/201 1 & 985/HYD/12 M/S. B.G.R. ENERGY SYSTEMS LTD., NELLORE. 9 CONTRACT, THE RETENTION MONEY WO ULD BE RELEASED AND THE ASSESSEE WOULD ACQUIRE THE RIGHT TO RECEIPT SUCH RETENTION MONEY. THEREFORE, ON THE DATE WHEN THE BILLS WERE SUBMITTED, HAVING REGARD TO THE NATURE OF THE CONTRACT, NO ENFORCEABLE LIABILITY ACCRUED OR AROSE AND, ACCORDINGLY, IT COUL D NOT BE SAID THAT THE ASSESSEE HAD ANY RIGHT TO RECEIVE THE ENTIRE AMOUNT ON THE COMPLETION OF THE WORK OR ON THE SUBMISSION OF BILLS. THE ASSESSEE HAD NO RIGHT TO CLAIM ANY PART OF THE RETENTION MONEY TILL THE VERIFICATION OF SATISFACTORY EXECUTION OF TH E CONTRACT. THEREFORE, THE TRIBUNAL WAS RIGHT IN HOLDING THAT THE RETENTION MONEY IN RESPECT OF THE JOBS COMPLETED BY THE ASSESSEE DURING THE RELEVANT PREVIOUS YEAR SHOULD NOT BE TAKEN INTO ACCOUNT IN COMPUTING THE PROFITS OF THE ASSESSEE FOR THE ASSESSMEN T YEAR IN QUESTION.' IN THE CASE OF ASSOCIATED CABLES (P.) LTD. V. DY. CIT [1994] 48 ITD 141 (BOM.) (TM), THE LEARNED MEMBER OF THE TRIBUNAL AS PER THE HEADNOTES, HELD AS UNDER : - 'SECTION 28(I) OF THE INCOME - TAX ACT, 1961 - BUSINESS DEDUCTION/LOSS - ALLOW ABILITY OF - ASSESSMENT YEAR 1990 - 91 - ASSESSEE - COMPANY WAS ENGAGED IN MANUFACTURE OF CABLES AS PER SPECIFICATIONS OF CUSTOMERS - ACCORDING TO CONTRACT, WHILE 90 PER CENT OF COST OF CABLES WAS PAID UP TO TIME OF PRESENTATION OF DESPATCH DOCUMENTS. 10 PER C ENT WAS PAID ON RECEIPT AND ACCEPTANCE OF GOODS SUBJECT TO BANK GUARANTEE FOR THAT 10 PER CENT, STIPULATING THAT IN CASE OF ANY SHORTCOMING IN WORKMANSHIP, ETC., PURCHASES SHALL, WITHOUT REFERENCE TO ASSESSEE, RECOVER AMOUNT FROM BANK - ASSESSEE - COMPANY CL AIMED THAT THIS 10 PER CENT, BEING RETENTION MONEY, HAD TO BE EXCLUDED IN COMPUTING ITS TOTAL INCOME AND OUGHT TO BE ACCOUNTED FOR AFTER EXPIRY OF GUARANTEE PERIOD - WHETHER KEEPING IN MIND PRINCIPLE OF INCOME RECOGNITION WHICH IS BASIS OF MERCANTILE METHO D OF ACCOUNTING, AS LONG AS PERFORMANCE GUARANTEE REMAINED AND WAS ENFORCEABLE WITHOUT NOTICE TO ASSESSEE, INCOME FROM RETENTION MONEY COULD NOT BE RECOGNISED AND CONSEQUENTLY ASSESSEE'S CLAIM HAD TO BE ALLOWED - HELD, YES.' 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 T HAT THE ENTIRE AMOUNT OF BILL DID NOT BECOME DUE IMMEDIATELY UPON ITS SUBMISSION, BUT 5 PER CENT 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 AS SESSEE 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. ITA NO. 1244 & 1511 / HYD/201 1 & 985/HYD/12 M/S. B.G.R. ENERGY SYSTEMS LTD., NELLORE. 10 THE WO RK 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 YEAR. 8. THE LEARNED REVENUE AUTHORITIES WHILE MAKING AND UPHOLDING THE ADDITION WERE INFLUENCED BY EXTRANEOUS CIRCUMSTAN CES. UNDUE IMPORTANCE WAS GIVEN TO THE ENTRIES MADE BY THE ASSESSEE IN THE BOOKS OF ACCOUNT. THE INCOME, AS NOTED EARLIER, ACCRUES ON THE BASIS OF CONTRACT BETWEEN THE PARTIES AND NOT THE VIEW WHICH THE ASSESSEE HAS TAKEN OF THE ISSUE MANIFESTED THROUGH EN TRIES IN THE BOOKS OF ACCOUNT. THEREFORE, CREDITING OF THE AMOUNT IN THE PRESENT CASE WAS TOTALLY IMMATERIAL. IT IS NOT THE JOB OF THE AUDITOR TO GIVE HIS DECISION ON THE ACCRUAL OF INCOME. THE AUDITOR HAS ONLY TO CERTIFY REGARDING TRUTHFULNESS OF ACCOUNTS WITH REFERENCE TO MATERIAL AVAILABLE ON RECORD AND NOT WHETHER INCOME ACCRUED TO THE ASSESSEE OR NOT. THE OTHER OBSERVATIONS RELATING TO CHANGE IN THE SYSTEM OF ACCOUNTING, ASSESSABILITY OF ADVANCES, ETC. ETC., HAVE NOTHING TO DO WITH DETERMINATION OF THE QUESTION INVOLVED BEFORE US AND WERE WRONGLY TAKEN INTO ACCOUNT BY THE REVENUE AUTHORITIES. REGARDING THE ENTRIES IN THE BOOKS OF ACCOUNT, WE MAY SAFELY QUOTE THE FOLLOWING OBSERVATIONS OF THE HON'BLE SUPREME COURT IN THE CASE OF KEDARNATH JUTE MFG. CO. L TD. V. CIT [1971] 82 ITR 363 AT PAGE 367 : - 'THE MAIN CONTENTION OF THE LEARNED SOLICITOR - GENERAL IS THAT THE ASSESSEE FAILED TO DEBIT THE LIABILITY IN ITS BOOKS OF ACCOUNT AND, THEREFORE, IT WAS DEBARRED FROM CLAIMING THE SAME AS DEDUCTION EITHER UNDER SE CTION 10(1) OR UNDER SECTION 10(2)(XV) OF THE ACT. WE ARE WHOLLY UNABLE TO APPRECIATE THE SUGGESTION THAT IF AN ASSESSEE UNDER SOME MISAPPREHENSION OR MISTAKE FAILS TO MAKE AN ENTRY IN THE BOOKS OF ACCOUNT AND ALTHOUGH, UNDER THE LAW, A DEDUCTION MUST BE A LLOWED BY THE INCOME - TAX OFFICER, THE ASSESSEE WILL LOSE THE RIGHT OF CLAIMING OR WILL BE DEBARRED FROM BEING ALLOWED THAT DEDUCTION. WHETHER THE ASSESSEE IS ENTITLED TO A PARTICULAR DEDUCTION OR NOT WILL DEPEND ON THE PROVISIONS OF LAW RELATING THERETO AN D NOT ON THE VIEW WHICH THE ASSESSEE MIGHT TAKE OF HIS RIGHTS NOR CAN THE EXISTENCE OR ABSENCE OF ENTRIES IN THE BOOKS OF ACCOUNT BE DECISIVE OR CONCLUSIVE IN THE MATTER. 9. THE ABOVE OBSERVATIONS REALLY CLINCH THE ISSUE. THE ACCRUAL OF INCOME HAS TO BE DE TERMINED WITH REFERENCE TO CONTRACT 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. ITA NO. 1244 & 1511 / HYD/201 1 & 985/HYD/12 M/S. B.G.R. ENERGY SYSTEMS LTD., NELLORE. 11 1 0. 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 IMPUGNED ORDER OF THE CIT(A), AND SET ASIDE THE MA TTER TO THE FILE OF THE ASSESSING OFFICER, WITH A DIRECTION TO VERIFY THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE THAT THE RETENTION MONIES HAVE IN FACT BEEN OFFERED TO TAX IN THE YEARS IN WHICH THE SAME HAVE ACTUALLY BEEN RECEIVED. FOR THIS LIMITED PU RPOSE, WE SET ASIDE THE IMPUGNED ORDER OF THE CIT(A) AND RESTORE THE MATTER TO THE FILE OF THE ASSESSING OFFICER FOR FRESH EXAMINATION OF THE MATTR IN ACCORDANCE WITH LAW. HE SHALL ACCORDINGLY REDETERMINE THE AMOUNT OF ADDITION, IF ANY WARRANTED, AFTER DU E VERIFICATION OF THE CLAIM OF THE ASSESSEE, ON CASE TO CASE BASIS, WITH REGARD TO IT HAVING ALREADY OFFERED THE RETENTION MONEYS IN RESPECT OF EACH CONTRACT, TO TAX IN THE RESPECTIVE YEAR OF ITS ACTUAL RECEIPT. THE ASSESSING OFFICER IS DIRECTED TO PASS A PPROPRIATE ORDERS IN ACCORDANCE WITH LAW AND AFTER GIVING REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE TO SUBSTANTIATE ITS CLAIM. 11. THE NEXT EFFECTIVE GRIEVANCE OF THE REVENUE IN THIS APPEAL IS THAT THE CIT(A) ERRED IN ALLOWING THE DEPRECIATION OF RS.7,87,806 ON TECHNICAL KNOW - HOW. 12. BRIEF FACTS OF THE CASE IN RELATION TO THIS ISSUE A4REE THAT THE ASSESSEE CLAIMED AN AMOUNT OFRS.7,87,806 AS DEPRECIATION AT 25% ON THE AMOUNT PAID BY IT TOWARDS TE C HNICAL KNOW - HOW TO M/S. C RANE ITA NO. 1244 & 1511 / HYD/201 1 & 985/HYD/12 M/S. B.G.R. ENERGY SYSTEMS LTD., NELLORE. 12 EN VIRONMENTAL INC., USA. IT WAS DISALLOWED BY TH E ASSESSING OFFICER ON THE G R OUND THAT THE PAYMENT MADE BY TH E ASSESSEE IS IN THE NATURE OF TECHNICAL FEES AND AS A RESULT, THERE HAS NOT BEEN ANY ACQUISITION OF ANY TANGIBLE ASSET WITHIN THE MEANING OF S.32(1)(III) OF THE ACT. 13. ON APPEAL, THE CIT(A) NOTED THAT AS PER APPENDIX TO THE INCOME TAX RULES, DEPRECIATION IS ADMISSIBLE IN R E SPE C T OF KNOW - HOW, PATENTS, COPY - RIGHTS, TRADE M ARKS, L I CENSES, F R ANCHISES OR ANY OTHER BUSINESS OF COMMERCIAL RIGHTS OF SIMILAR NATURE BEIN G INTANGIBLE RIGHTS ACQUIRED BY THE ASSESSEE, AND THIS PRINCIPLE HAS BEEN AC C EPTED BY THE ASSESSING OFFICER, WHO HAS ALSO NOT DISPUTED THAT THE KNOW - HOW ACQUIRED BY THE ASSESSEE HAS BEEN USED BY IT. PLACING RELIANCE ON THE DECISION OF THE APEX COURT IN THE CA S E OF MYSORE MINERALS LIMITED V/S. CIT(239 ITR 775) AND OF TH E MADRAS HIGH COURT IN TH E CA S E OF CIT V/S. A.SIVASAILAM & ANOTHER(322 ITR 64), THE ASSESSING OFFI CER NOTED THAT FOR CLAIMING DEPRECIATION, IT IS NOT NECESSARY THAT THE ASSET SHOULD BE IN THE NAME OF THE ASSESSEE AND IT IS NOT NECESSARY THAT THE ASSESSEE SHOULD BE A COM P LETE OWNER. CON S IDERING THE FACTS OF THE CASE ON HAND, THE CIT(A) NOTED THAT THE T WO INGREDIENTS FOR GRANT OF DEPRECIATION, VIZ. OWN ER SHIP AND U S ER OF THE ASSET ARE FULFILLED AND AS SUCH THE ASSESSEE IS ENTITLED FOR GRANT OF DEPRECIATION ON TE C HNICAL KNOW - HOW. HE ACCORDINGLY DELETED THE ADDITION MADE BY THE ASSESSING OFFICER IN THIS BE HALF. 14. AGGRIEVED BY THE ORDER OF THE CIT(A) ON THIS ASPE C T, REVENUE PREFERRED THE PRESENT APPEAL. 15. THE LEARNED DEPARTMENTAL REPRESENTATIVE PLACING STRONG RELIANCE ON THE ORDER OF THE ASSESSING OFFICER SUBMITTED THAT THE ALLOWABILITY OF DEPR ECIATION ON THE KNOW HOW DEPENDS ON THE NATURE OF THE TECHNICAL KNOW. THIS ASPECT HAS BEEN PROPERLY EXAMINED BY THE ASSESSING OFFICER, WHO CORRECTLY DISALLOWED THE CLAIM OF THE ASSESSEE FOR DEPRECIATION ITA NO. 1244 & 1511 / HYD/201 1 & 985/HYD/12 M/S. B.G.R. ENERGY SYSTEMS LTD., NELLORE. 13 ON TECHNICAL KNOW - HOW. IN THE CIRCUMSTANCES, HE SU BMITTED THAT THE CIT(A) WAS NOT JUSTIFIED IN DISALLOWING THE CLAIM OF THE ASSESSEE WITH REGARD TO DEPRECIATION ON TECHNICAL KNOW - HOW. 1 6 . THE LEARNED COUNSEL FOR THE ASSESSEE, ON THE OTHER HAND, STRONGLY SUPPORTED THE ORDER OF THE CIT(A) AND SUBMITTED T HAT IT IS NOT NECESSARY IN TERMS OF S.32 OF THE ACT THAT THE ASSESSEE SHOULD BE EXCLUSIVE AND COMPLETE OWNER, AND THE EXPRESSION OWNER USED IN S.32 HAS TO BE CONSIDERED BY TAKING INTO ACCOUNT ALL ITS FACTS AND ASPECTS AND THE OWNER NEED NOT NECESSARILY B E A LAWFUL OWNER ENTITLED TO PASS ON THE TITLE OF THE PROPERTY TO ANOTHER. HE PLACED IN THIS BEHALF ON THE DECISION OF THE APEX COURT IN THE CASE OF MYSORE MINERALS LIMITED V/S. CIT(239 ITR 775) AND OF THE MARAS HIGH COURT IN THE CASE OF CIT V/S. SIVASA ILAM & ANOTHER (322 ITR 64), RELIED UPON BY THE CIT(A) IN THE IMPUGNED ORDER. 1 7 . WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES. IT IS EVIDENT FROM THE MA T ERIAL ON RECORD THAT THER E WAS TRANSFER OF TECHNICAL KNOW - HOW IN F A VOUR O F TH E ASSESSEE COMPANY, W HEREBY THE ASSESSEE COMPANY TH E CAME THE OWNER OF SUCH TECHNICAL KNOW - HOW, WHICH WAS USED BY IT IN ITS BUSINESS. I N THE FACTS AND CIR C UM S TANCES OF TH E CA S E, WE AGREE WITH THE CIT(A) THAT THE TWO INGREDIENTS FOR GRANT OF DEPRECIATION, VIZ. OWNERSHIP AND U S ER OF THE ASSET, ARE CLE A RLY FULFILLED, AND THE ASSESSEE IS ENTITLED FOR DEPRECIATION ON THE TECHNICAL KNOW. WE ACCORDINGLY FIND NO INFIRMITY IN THE IMPUGN E D ORDER OF THE CIT(A), WHICH IS ACCORDINGLY UPHELD , REJECTING THE G R OUND O F THE REVENUE IN THIS APPEAL. 1 8 . THE NEXT EFFECTIVE GRI E VANCE OF THE R E VENUE IN TH I S APPEAL REL A TES TO DISALLO W ANCE OF R S .1,73,25,336, BEING PRINCIPAL REPAYMENT O F ASS E TS TAKEN ON FINANCE LEASE, AS R E VENU E EXPENDITURE. ITA NO. 1244 & 1511 / HYD/201 1 & 985/HYD/12 M/S. B.G.R. ENERGY SYSTEMS LTD., NELLORE. 14 1 9 . THE ASSESSEE CLAIMED AN AMOUNT OF R S .1,73,25,336 REPR E SENTING REPAYMENT OF P RIN CIPAL OF ASSETS TAKEN ON FINANCE LEASE ON THE GROUND THAT I T IS A CAPITAL EXPENDITURE. THE ASSESSEE CLAIMED THAT THE TRANSACTION IN QUESTION IS A FINANCE LEASE AND FALLS UNDER ACCOUN T ING STANDARD 19 ISSUED BY THE INSTI T UTE OF CH A RTERED ACCOUNTANTS OF INDIA, UNDER WHICH ANY FI X ED ASSET TAKEN ON FIN A NCE LEASE IS PER MI T TED TO BE CAPITALIZED IN THE BOOKS OF ACCOUNT OF THE COMPANY AND DEPRECIATION CHARGED AS PER THE CO M PANI E S ACT. HOWEVER, FOR THE CALCULATION OF INCOME TAX DEPR E CIATION, THESE ASS E TS WERE REDUCED FROM THE BLOCK OF AS SE TS AND NO DEPRECIATION W A S CLAIMED AS PER THE CBDT CIRC U LAR N O .2/2001 DATED 9.2.2001. IT IS CLAIMED THAT UNDER THE INCOME - TAX A C T, IN ALL LEASING TRANS A C T IONS , WHILE THE OWNER OF THE A S SET IS ENTITLED TO THE D E P R E C IATION IF THE SAME IS USED IN THE BUSINESS UNDER S.32 OF THE INCOM E - T AX ACT, IN TH E CA S E OF FINANCE LEASE, THE PRINCIPAL AMOUNT P AID BY THE LESSEE IS PERMITTED TO BE CLAIMED AS DE D UC T ION UNDER S .371(1) OF THE ACT. ACCOR D INGLY THE CLAIM FOR DEDUCTION OF RS.1,73,25,336 TOWARDS PRINCIPAL REPAYMENT FOR AS S ETS TAKEN ON FINANCE LEASE, WAS MADE. THE ASSESSING OFFICER, FOUND NO MERIT IN THE CLAIM MADE BY THE ASSESSEE. HE NOTED THAT CIRCULAR 2 OF 2001 ISSUED BY THE CBDT HAS NO IMPACT ON THE ISSUE AS IT MERELY STATES THAT THE ACCOUNTING SYSTEM PRESCRIBED BY THE ICAI WOULD NO T HAVE ANY IMP LICATION ON THE A L LOWAN C E OF DEP RE CI A TION ON AS S ETS UN DE R THE PROVISION S O F THE AC T. HE FURTHER NOTED THAT THE REPAYMENT OF PRINCIPAL OF A S SETS TAKEN ON FINANCE LEASE IS IN TH E N A TURE OF CAPITAL EXPENDITURE AND DO NO T FALL WITHIN THE R E ALM OF NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE , AS REQUIRED BY S.37. HE ACCORDINGLY DISALLOWED THE CLAIM OF THE ASSESSEE AND MADE AN ADDITION OF RS.1,73,25,336. 20 . AGGRIEVED BY THE ADDITION THUS MADE, ASSESSEE PREFERRED APPEAL BEFORE THE CIT(A) ON THIS ISSUE AND THE CIT(A) ACCEPTING THE PLEA OF THE ASSESSEE DELETED THE ADDITION MADE BY THE ASSESSING OFFICER. ITA NO. 1244 & 1511 / HYD/201 1 & 985/HYD/12 M/S. B.G.R. ENERGY SYSTEMS LTD., NELLORE. 15 2 1 . AGGRIEVED BY THE ORDER OF THE CIT(A), REVENUE IS IN SECOND APPEAL BEFORE US. 2 2 . THE LEARNED DEPARTMENTAL REPRESENTATIVE STRONGLY RELYI NG ON THE ORDER OF THE ASSESSING OFFICER SUBMITTED THAT THE CIT(A) WAS NOT JUSTIFIED IN GRANTING RELIEF TO THE ASSESSEE. LEARNED COUNSEL FOR THE ASSESSEE , ON THE OTHER HAND, STRONGLY SUPPORTED THE ORDER OF THE CIT(A). 2 3 . WE HEARD BOTH SIDES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE ARE OF THE CONSIDERED OPINION THAT PRINCIPAL REPAYMENT OF ASSETS TAKEN ON FINANCE LEASE IS CLEARLY AN EXPENDITURE OF CAPITAL NATURE AND THE ASSESSING OFFICER HAS CORRECTLY ALLOWED DEPREC IATION ALONE ON SUCH AMOUNT CAPIALISED . THE CIT(A) HAS NOT GIVEN ANY VALID REASON FOR SUBSTANTIATING HIS FINDING, WHILE ALLOWING THE CLAIM OF THE ASSESSEE. WE ACCORDINGLY, SET ASIDE THE IMPUGNED ORDER OF THE CIT(A), AND RESTORE THE DISALLOWANCE MADE BY THE ASSESSING OFFICER IN THIS BEHALF. REVENUES GROUND ON THIS ISSUE IS ALLOWED. 2 4 . 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 DELE TED BY THE CIT(A). 2 5 . BRIEF FACTS OF THE CA S E IN RELATION TO THIS GROUND ARE THAT THE ASSESSEE DEBITED AN AMOUNT OF R S .98,24,000 UN D ER THE HEAD SELLIN G EXP E NSES/WARRANTY EXP E N S ES. THIS CLAIM O F TH E ASSESSEE HAS BE E N DISALLOWED BY THE ASSESSING OFFICER ON THE GROUND THAT IT IS AN UNASCERTAINED LIABILITY, SINCE IT IS CONTINGENT IN NATURE AND AS SUCH NO T ALLO W ABL E UNDER S.37 OF THE ACT. 2 6 . ON APPEAL BEFORE THE CIT(A), IT WAS THE CONTENTION OF THE ASSESSEE THAT IT HAS BEEN P R O V I D ING FOR WARRANTY IN RESP E CT OF I T S CONTRACTS. ITA NO. 1244 & 1511 / HYD/201 1 & 985/HYD/12 M/S. B.G.R. ENERGY SYSTEMS LTD., NELLORE. 16 IT HAS BEEN RECOGNIZING CONTRACT REVENUE IN ACCORDANCE WITH ACCOUNTING STANDARD 7 DEALIN G WITH CONSTRUCTION CONTRACTS. IN ACCORDANCE WITH THIS STANDARD, ASSESSEE HAS B E EN PROVIDING FOR A POSSIBLE LIABILITY IN RESPECT OF THE CONT RACT WHICH MAY OR MAY NOT CRYSTALLIZE AT A FUTURE DATE. FINDING MERIT IN THE CONTENTIONS OF THE ASSESSEE AND TAKING NOTE OF THE CASE - LAW RELIED UPON BY THE ASSESSEE BEFORE HIM, MORE IMPORTANTLY THE DECISION OF THE BOMBAY HIGH COU R T IN TH E CA S E OF CIT V/S . HIN D ITRON SERVI C ES PVT. LTD. (321 ITR 263), WH E REIN IT HAS BEEN HEL D THAT WHERE THE ASSESSEE WAS FOLLO W IN G MERCANTILE SYSTEM O F AC C OUNTIN G , ESTIM A TE OF ACCRUED LIABILITY TO BE DISCHARGED AT A FUTURE D A TE IS AN ALLOWABLE EXPENDITURE AND THUS PROVISION FOR ESTIMATED COSTS OF RENDERING WARRANTY SERVI C ES DEBITED TO P&L AC C OUNT IS NO T A CONTINGENT LIABILITY AND THE SAID EXPENDITURE IS ALLOWABLE UNDER S.37 OF THE ACT, ACCEPTED THE CONTENTIONS OF THE ASSESSEE ON THIS ISSUE, AND DELETED THE ADDITION MADE BY THE A SSESSING OFFICER. 2 7 . AGGRI E VED BY THE RELIEF GRANTED BY THE CIT(A) ON THIS ASPECT, REVENUE IS IN APPEAL BEFORE US. 2 8 . THE LEARNED DEPARTMENTAL REPRESENTATIVE STRONGLY RELYING ON THE ORDER OF THE ASSESSING OFFICER SUBMITTED THAT THE CIT(A) WAS NOT JUSTIFIED IN GRANTING RELIEF TO THE ASSESSEE. LEARNED COUNSEL FOR THE ASSESSEE, ON THE OTHER HAND, STRONGLY SUPPORTED THE ORDER OF THE CIT(A). 2 9 . WE HEARD BOTH SIDES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE ARE OF THE CONSIDERED OPINION THAT THIS ITEM OF DISALLOWANCE, VIZ. WARRANTY PROVISION, IS MERELY A PROVISION AND NOT AN EXPENDITURE ALREADY INCURRED AND LAID OUT FOR THE PURPOSE OF BUSINESS. UNLESS THE LIABILITY FOR SUCH EXPENDITURE CRYSTALISES, ASSESSEE IS NOT ENTITLED TO CALIM FOR D EDUCTION IN RESPECT OF SUCH EXPENDITURE. THE CIT(A) HAS NOT GIVEN ANY VALID REASON FOR SUBSTANTIATING HIS FINDING, WHILE ALLOWING THE CLAIM OF THE ASSESSEE. WE ACCORDINGLY, SET ASIDE THE IMPUGNED ORDER OF THE CIT(A), ITA NO. 1244 & 1511 / HYD/201 1 & 985/HYD/12 M/S. B.G.R. ENERGY SYSTEMS LTD., NELLORE. 17 AND RESTORE THE DISALLOWANCE MADE B Y THE ASSESSING OFFICER IN THIS BEHALF. REVENUES GROUND ON THIS ISSUE IS ALLOWED. 30 . THE NEXT ISSUE INVOLVED IN THIS APPEAL RELATES TO ADDITION OF AN AMOUNT OF RS.58,75,000, BEING INTEREST ON THE ADVANCE GIVEN TO PROGEN SYSTEMS & TECHNOLOGIES LTD., S UBSIDIARY OF THE ASSESSEE - COMPANY. 3 1 . BRIEF FACTS IN RELATION TO THIS ISSUE ARE THAT THE ASSESSING OFFICER TAKING NOTE THAT THE ASSESSEE WAS TO RECEIVE AN AMOUNT OF RS.745.67 LAKHS FROM ITS SUBSIDIARY COMPANY, M/S. PROGEN SYSTEMS & TECHNOLOGIES LIMITED , OBSERVED THAT THE ASSESSEE OUGHT TO HAVE CHARGED INTEREST ON THIS AMOUNT. WORKING OUT SUCH INTEREST CHARGEABLE AT RS.58.75 LAKHS, THE ASSESSING OFFICER MADE ADDITION IN THAT BEHALF. 3 2 . ON APPEAL BEFORE THE CIT(A), IT WAS POINTED OUT THAT INTEREST WAS ALR E ADY CHARGED ON TH E OUTSTANDING BALANCE IN THE CASE OF PROGEN SYSTEMS & TE C HNOLOGIES L IMITED AND THAT THE SAME WAS ALREADY IN C LU D ED IN THE IN C OM E O F THE ASSESSEE. TAKING NOTE OF THIS POSITION AND ALSO OBSERVING THAT IN SUPPORT OF THIS CLAIM, RELEVA NT LEDGER EXTRACTS WERE ALSO FILED AND A P ER USAL OF THE S AME SHO W ED T HAT THERE WAS NO OMISSION TO CHARGE IN T ER E ST ON THE OUTSTANDING BALANCE O F THE SUBSIDIARY, THE CIT(A) DELETED THE ADDITION MADE BY THE ASSESSING OFFICER. 3 3 . AGGRIEVED BY THE ORDER OF THE CIT(A) ON THIS ASPECT, REVENUE PREFERRED THE PRESENT APPEAL. 3 4 . THE LEARNED DEPARTMENTAL REPRESENTATIVE STRONGLY RELYING ON THE ORDER OF THE ASSESSING OFFICER SUBMITTED THAT THE CIT(A) WAS NOT JUSTIFIED IN GRANTING RELIEF TO THE ASSESSEE. LEARNE D COUNSEL FOR THE ASSESSEE, ON THE OTHER HAND, STRONGLY SUPPORTED THE ORDER OF THE CIT(A). ITA NO. 1244 & 1511 / HYD/201 1 & 985/HYD/12 M/S. B.G.R. ENERGY SYSTEMS LTD., NELLORE. 18 3 5 . WE HEARD BOTH SIDES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE ARE OF THE CONSIDERED OPINION THAT THE CIT(A) HAS DELETED THE ADDITION MADE BY THE ASSESSING OFFICER ON ACCOUNT OF THE INTEREST ATTRIBUTABLE TO THE ADVANCE MADE BY THE ASSESSEE TO ITS SUBSIDIARY, ACCEPTING THE CONTENTION OF THE ASSESSEE THAT IT HAS ALREADY CHARGED INTEREST ON THE ADVANCE MADE TO THE S UBSIDIARY COMPANY, M/S. PROGEN SYSTEMS & TECHNOLOGIES LTD. THIS FACT, WHICH WEIGHED WITH THE CIT(A) WHILE DELETING THE ADDITION MADE BY THE ASSESSING OFFICER, REQUIRES VERIFICATION AT THE END OF THE ASSESSING OFFICER, WHO HAS ARRIVED AT AN OPPOSITE CONCLU SION. WE ACCORDINGLY SET ASIDE THE IMPUGNED ORDER OF THE CIT(A) ON THIS ISSUE, AND RESTORE THE MATTER TO THE FILE IF THE ASSESSING OFFICER WITH A DIRECTION TO REDETERMINE THE ISSUE RELATING TO DISALLOWANCE OF INTEREST AFTER VERIFYING THE CORRECTNESS OF TH E CONTENTION OF THE ASSESSEE BEFORE THE CIT(A) THAT IT HAS ALREADY CHARGED INTEREST ON THE AMOUNTS ADVANCED TO THE SUBSIDIARY COMPANY. THE ASSESSING OFFICER SHALL PASS APPROPRIATE ORDERS ON VERIFICATION OF THE CONTENTIONS OF THE ASSESSEE ON THIS ASPECT, I N ACCORDANCE WITH LAW AND AFTER GIVING REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE 3 6 . IN THE RESULT, THIS APPEAL OF THE REVENUE FOR ASSESSMENT YEAR 2007 - 08 , BEING ITA NO.1344/HYD/2011 , IS TREATED AS PARTLY ALLOWED. ITA NO.1513/HYD/2011 : ASSESSMENT YEAR 2008 - 09 3 7 . EFFECTIVE GROUNDS OF THE REVENUE IN THIS APPEAL READ AS FOLLOWS - 1 . THE LEARNED CIT(A) ERRED BOTH ON FACTS AND IN LAW. 2 . ON THE FACTS AND IN TH E CIRCUMSTANCES O F THE CA S E, THE LEARNED CIT(A) ERRED IN DELETING THE ADDITION MADE UNDER THE HEAD RE T ENTION MONEY OF RS.204,86,13,040 / - . 3 . ON THE FACTS AND IN TH E CIRCUMSTANCES OF THE CA S E, THE LEARNED CIT(A) ERRED IN ALLOWING THE DEPRECIATION OF RS.94,09,102 / - ON TECHNICAL KNOW - HOW. ITA NO. 1244 & 1511 / HYD/201 1 & 985/HYD/12 M/S. B.G.R. ENERGY SYSTEMS LTD., NELLORE. 19 4 . ON THE FAC T S AND IN TH E CIR C UMSTANCES OF TH E CA S E THE LEARNED CIT(A) ERRED IN ALLOWING RS.1,48,761,238/ - , BEING THE PRINCIPAL REPAYM E N T O F ASSETS TAKEN ON FINANCE LEASE, AS REVENUE EXPENDITURE. 5 . ON THE FACTS AND IN TH E CIR C UM S TAN C ES OF THE CAE THE LEARNED CIT(A) ERRED IN ALLO W I N G AS EXPENDITURE AN AMOUNT FO RS.1,95,70,000/ - REPRESENTING WARRANTY PROVISIONS. 6 . ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA S E THE LEARNED CIT(A) ERRED IN DISALLO W IN G THE ADDITION MADE OF RS .5,70,727/0 BEING THE INTER E ST ON ADVAN C E GIVEN TO PROGEN SYSTEMS & TE C HNOLOGIES LTD., SU BSIDIARY OF THE ASSESSEE COMPANY. 7 . .. 8 . . 3 8 . WE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. FACTUAL BACKGROUND LEADING TO THE ADDITIONS MADE BY THE ASSESSING OFFICER AND DELETED BY THE CIT( A), AND DISPUTED IN THIS APPEAL ARE, EXCEPT FOR THE AMOUNTS INVOLVED, IDENTICAL TO THE ONES WE HAVE CONSIDERED WHILE DEALING WITH THE CORRESPONDING ADDITIONS CONTESTED IN THE REVENUES APPEAL FOR ASSESSMENT YEAR 2007 - 08, AND OUR DECISIONS IN THE CONTEXT O F THE CORRESPONDING GROUNDS IN THAT APPEAL HOLD GOOD EVEN IN THE CONTEXT OF THE ABOVE GROUNDS OF THIS APPEAL FOR ASSESSMENT YEAR 2008 - 09. CONSEQUENTLY, IT IS HELD AS FOLLOWS - (A) A S FOR ADDITION RELATING TO RETENTION MONEY, FOR THE REASONS DISCUSSED IN PARAS 9 AND 10 ABOVE, WE SET ASIDE IMPUGNED ORDER OF THE CIT(A) AND REMIT THE MATTER TO THE FILE OF THE ASSESSING OFFICER, WITH A DIRECTION TO VERIFY THE CLAIM OF THE ASSESSEE OF HAVING OFFERED THE SAME TO TAX IN THE SUBSEQUENT YEARS IN WHICH THE SAME HAS BEEN RECEIVED BY THE ASSESSEE, AND ACCORDINGLY REDECIDE THIS ISSUE IN ACCORDANCE WITH LAW AND AFTER GIVING REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. REVENUES GROUND ON THIS ISSUE IS ALLOWED FOR STATISTICAL PURPOSES. ITA NO. 1244 & 1511 / HYD/201 1 & 985/HYD/12 M/S. B.G.R. ENERGY SYSTEMS LTD., NELLORE. 20 (B) AS FOR THE NEXT ISSUE RELATING TO DEPRECIATION ON TECHNICAL KNOW, FOR THE DETAILED REASONS DISCUSSED IN PARA 1 7 , WE UPHOLD THE ORDER OF THE CIT(A) AND REJECT THE GROUND OF THE REVENUE IN THIS APPEAL. (C) AS FOR THE NEXT ISSUE RELATING TO TREA TMENT OF PRINCIPAL REPAYMENT OF ASSETS TAKEN ON FINANCE LEASE, FOR THE DETAILED REASONS DISCUSSED IN PARA 2 3 ABOVE, WE SET ASIDE THE IMPUGNED ORDER OF THE CIT(A), AND RESTORE THE DISALLOWANCE MADE BY THE ASSESSING OFFICER, DULY ALLOWING THE GROUND OF THE REVENUE ON THIS ISSUE. (D) AS FOR THE NEXT GROUND OF THE REVENUE RELATING TO ALLOWABILITY OF DEDUCTION IN RESPECT OF WARRANTY PROVISIONS, FOR THE DETAILED REASONS DISCUSSED IN PARA 2 9 ABOVE, WE SET ASIDE THE IMPUGNED ORDER OF THE CIT(A), AND RESTORE THE DISALLOWANCE MADE BY THE ASSESSING OFFICER, DULY ALLOWING THE GROUND OF THE REVENUE ON THIS ISSUE. (E) AS FOR THE NEXT GROUND RELATING TO THE ADDITION MADE REPRESENTING THE INTEREST ON AD V ANCE GIVEN TO PROGEN SYSTEMS & TECHNOLOGIES LTD., A SUBSID IARY OF THE ASSESSEE COMPANY, FOR THE DETAILED REASONS DISCUSSED IN PARA 3 5 HEREINABO V E, WE SET ASIDE THE IMPUGNED ORDER OF THE CIT(A) AND R E STORE THE MATTER TO THE FILE O F THE ASSESSING OFFICER, WITH A DIRECTION TO VERIFY THE CLAIM OF THE ASSESSEE OF HAV ING ALREADY CHARGED I NTER E ST ON SUCH AD V ANCES MADE TO THE SUBSIDIARY COMPANY, AND REDECIDE THE ISSUE OF ADDITION, IF ANY WARRANTED, IN ACCORDANCE WITH LAW AND AFTER GIVING DUE OPPORTUNITY O F H E ARING TO THE ASSESSEE. 3 9 . IN THE RESULT, THIS APPEAL OF TH E REVENUE FOR THE ASSESSMENT YEAR 2008 - 09, BEING ITA NO.1513/HYD/2011 , IS TREATED AS PARTLY ALLOWED. ITA NO. 1244 & 1511 / HYD/201 1 & 985/HYD/12 M/S. B.G.R. ENERGY SYSTEMS LTD., NELLORE. 21 ITA NO. 985 /HYD/201 2 : ASSESSMENT YEAR 200 9 - 1 0 40 . EFFECTIVE GROUNDS OF THE REVENUE IN THIS APPEAL READ AS FOLLOWS - 1) THE ORDER OF THE LEARNED CIT(A) IS ERRONEOUS BOTH ON FACTS AND IN LAW. 2) THE LEARNED CIT(A) ERRED IN DELETING THE ADDITION MADE UNDER THE HEA D RETENTION MONEY OF RS .2,08,62,80,000/ - 3) THE LEARNED CIT(A) OUGHT TO HAVE HELD THAT THE RETENTION MONEY HAS ALREADY ACCRUED TO THE A SSESSEE ON APPROVAL O F TH E CON T R A CT BILL BY THE CONTRACTEE AND ITS RETENTION BY TH E CONTRACTEE TILL THE COMPLETION OF T H E PERFORMANCE GUARANTEE PERIOD HAS NO B E ARING ON ITS ACCRUAL TO THE ASSESSEE. 4) THE LEARNED CIT(A) ERR E D IN ALLOWING THE D E PR E CIATION OF R S .1,68,91,291 ON TE C HNICAL KNOW - HOW WITHOUT APP R E C IATI N G THAT THE ESSENTIAL CONDITION REGARDING OWN ER SHIP OF THE INTANGIBLE ASS E T IS NO T FULFILLED IN THIS CA S E AS THE ASSESSEE HAD PAID THE TECHN I CAL FEES IN PURSUAN C E OF A LICNE S E AGREEM E NT ONLY. 5) THE LEARNED CIT(A) ERRED IN HOLDING THAT THE PRINCIPAL REPAYMENT IN RESPECT OF ASSETS TAKEN ON FINANCE LEASE AMOUNTING TO RS.1,63,04,265/ - CONSTITUTES REVENUE EXPENDITURE. 6) THE LEARNED CIT(A) ERRED IN HOLDING THAT PROVISION FOR WARRANTY OBLIGATION AMOU NTING TO RS.2,40,48,000/ - REPRESENTS AN ALLOWABLE DEDUCTION. 7) THE LEARNED CIT(A) ERRED IN DELETING THE DISALLOWANCE OF INTEREST OF RS.1,08,07,861 RELATABLE TO THE BORROWED FUNDS DIVERTED FOR GIVING INTEREST FREE ADVANCES TO SUBSIDIARY COMPANIES. 8) THE LEARNED CIT(A) ERRED IN HOLDING THAT THE PROVISION FOR CONTRACTUAL OBLIGATIONS OF RS.16,50,25,000/ - REPRESENTS AN ALLOWABLE DEDUCTION. THE LEARNED CIT(A) OUGHT TO HAVE APPRECIATED THAT THE LIABILITY FOR PAYMENT OF LIQUIDATED DAMAGES AS PER THE TERMS OF TH E CONTRACT WOULD ACCRUE ONLY WHEN THE CLAIM FOR THE SAME IS MADE BY THE CONTRACTEE AND THE ASSESSEE HAS NOT FURNISHED ANY EVIDENCE THAT SUCH CLAIMS WERE MADE BY THE CONTRACTEES DURING THE PREVIOUS YEAR. 9) . 4 1 . WE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. FACTUAL BACKGROUND LEADING TO THE ADDITIONS MADE BY THE ITA NO. 1244 & 1511 / HYD/201 1 & 985/HYD/12 M/S. B.G.R. ENERGY SYSTEMS LTD., NELLORE. 22 ASSESSING OFFICER AND DELETED BY THE CIT(A), AND DISPUTED IN GROUNDS NO.2 TO 7 OF THIS APPEAL ARE, EXCEPT FOR THE AMOUNTS INVO LVED, IDENTICAL TO THE ONES WE HAVE CONSIDERED WHILE DEALING WITH THE CORRESPONDING ADDITIONS CONTESTED IN THE REVENUES APPEAL FOR ASSESSMENT YEAR 2007 - 08, AND OUR DECISIONS IN THE CONTEXT OF THE CORRESPONDING GROUNDS IN THAT APPEAL HOLD GOOD EVEN IN THE CONTEXT OF THE ABOVE GROUNDS OF THIS APPEAL FOR ASSESSMENT YEAR 200 9 - 1 0. CONSEQUENTLY, IT IS HELD AS FOLLOWS - (A) AS FOR ADDITION RELATING TO RETENTION MONEY, FOR THE REASONS DISCUSSED IN PARAS 9 AND 10 ABOVE IN THE CONTEXT OF THE CORRESPONDING GROU ND FOR THE ASSESSMENT YEAR 2007 - 08 , WE SET ASIDE IMPUGNED ORDER OF THE CIT(A) AND REMIT THE MATTER TO THE FILE OF THE ASSESSING OFFICER, WITH A DIRECTION TO VERIFY THE CLAIM OF THE ASSESSEE OF HAVING OFFERED THE SAME TO TAX IN THE SUBSEQUENT YEARS IN WHIC H THE SAME HAS BEEN RECEIVED BY THE ASSESSEE, AND ACCORDINGLY REDECIDE THIS ISSUE IN ACCORDANCE WITH LAW AND AFTER GIVING REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. REVENUES GROUND ON THIS ISSUE IS ALLOWED FOR STATISTICAL PURPOSES. (B) AS FO R THE NEXT ISSUE RELATING TO DEPRECIATION ON TECHNICAL KNOW, FOR THE DETAILED REASONS DISCUSSED IN PARA 1 7 , WE UPHOLD THE ORDER OF THE CIT(A) AND REJECT THE GROUND OF THE REVENUE IN THIS APPEAL. (C) AS FOR THE NEXT ISSUE RELATING TO TREATMENT OF PRINC IPAL REPAYMENT OF ASSETS TAKEN ON FINANCE LEASE, FOR THE DETAILED REASONS DISCUSSED IN PARA 2 3 ABOVE, WE SET ASIDE THE IMPUGNED ORDER OF THE CIT(A), AND RESTORE THE DISALLOWANCE MADE BY THE ASSESSING OFFICER, DULY ALLOWING THE GROUND OF THE REVENUE ON THI S ISSUE. (D) AS FOR THE NEXT GROUND OF THE REVENUE RELATING TO ALLOWABILITY OF DEDUCTION IN RESPECT OF WARRANTY PROVISIONS, FOR THE DETAILED REASONS DISCUSSED IN PARA 2 9 ABOVE, WE SET ASIDE THE IMPUGNED ORDER OF THE ITA NO. 1244 & 1511 / HYD/201 1 & 985/HYD/12 M/S. B.G.R. ENERGY SYSTEMS LTD., NELLORE. 23 CIT(A), AND RESTORE THE DISALLOWAN CE MADE BY THE ASSESSING OFFICER, DULY ALLOWING THE GROUND OF THE REVENUE ON THIS ISSUE. (E) AS FOR THE NEXT GROUND RELATING TO THE ADDITION MADE REPRESENTING THE INTEREST ON AD V ANCE GIVEN TO PROGEN SYSTEMS & TECHNOLOGIES LTD., A SUBSIDIARY OF THE AS SESSEE COMPANY, FOR THE DETAILED REASONS DISCUSSED IN PARA 3 5 HEREINABO V E, WE SET ASIDE THE IMPUGNED ORDER OF THE CIT(A) AND R E STORE THE MATTER TO THE FILE O F THE ASSESSING OFFICER, WITH A DIRECTION TO VERIFY THE CLAIM OF THE ASSESSEE OF HAVING ALREADY CH ARGED I NTER E ST ON SUCH AD V ANCES MADE TO THE SUBSIDIARY COMPANY, AND REDECIDE THE ISSUE OF ADDITION, IF ANY WARRANTED, IN ACCORDANCE WITH LAW AND AFTER GIVING DUE OPPORTUNITY O F H E ARING TO THE ASSESSEE. 4 2 . AS FOR THE DISALLOWANCE OF PROVISION FOR CONTR ACTUAL OBLIGATION, ADDITION OF RS.16,50,25,000, BEING THE ISSUE INVOLVED IN GROUND NO.8 OF THIS APPEAL, THE ASSESSING OFFICER ADDED THE SAME OBSERVING THAT THIS EXPENDITURE DEBITED TO THE PROFIT & LOSS ACCOUNT CANNOT BE ALLOWED AS DEDUCTION DURING THE Y EA R UNDER APPEAL, AS THE ASSESSEE HAS NO T ACTUALLY INCURRED THE EXPENDITURE DURING THE Y E AR UNDER CON S I D E R ATION, AND IT REPR E SENTS ONLY PROVISION FOR FUTURE LIABILITY. 4 3 . ON APPEAL BEFORE THE CIT(A), E XPLAINING THE BACKGROUN D FOR THIS CLAIM, IT WAS STATED THAT THE AMOUNTS REPRESENTED LIQUIDATED DAMAGES TO BE DISCHARGED IN TH E EVENT OF ANY DELAY IN THE COM PL ETION OF THE WORK, WHICH IS A COMMON PRACTICE IN LONG - TERM CONTRACTS. IT IS FURTHER STATED THAT THE ASSESSEE COMPANY DURING THE Y E AR HAD TO CO MMISSION AND HAND OVER TWO PROJECTS, ONE TO TNEB AT VALATHUR AND ANOTHER TO MALCO, METTUR. I N T H E C A S E OF TNEB THE ACTUAL COMPLETION OF THE PROJE C T WAS 31.8.2008 WHEREAS AS P E R THE PURCH AS E ORDER, TH E SCHEDULED DATE WAS 28.2.2008, I.E. DELIVERY TOOK PL A CE AFTER A DELAY OF 24 WEEKS. SIMILARLY IN TH E CA S E OF ITA NO. 1244 & 1511 / HYD/201 1 & 985/HYD/12 M/S. B.G.R. ENERGY SYSTEMS LTD., NELLORE. 24 MALCO, THE ACTUAL COMPLETION OF THE PROJECT WAS 26.2.2009 AS AGAIN S T THE SCHEDULED DATE OF 19.6.2008, THE DELAY BEING 32 WEEKS. RE F ERRING TO THE RELEVANT AGREEMENTS OF THE ASSESSEE WITH THE CONC E RNED P ARTIES, ATTENTION W AS INVITED TO COMPLETION GUARANTEE CLAUSE WHEREIN IT WA S M E NTION E D THAT IN CASE OF DELAY IN DELIV E RY OF EQUIPMENT FOR REASONS NOT ATTRIBU T ABLE TO THE PURCHASER, THE SUPPLIER SHALL BE LIABLE TO PAY TO THE PURCHASER LIQUIDATED DAMAGES A ND NOT BY WAY OF PEN A LTY, AN AMOUN T CALCULATED AT THE RATE OF 1% OF THE SUPPLY CONTRACT PRICE FOR EACH WEEK OF DELAY OR P A RT THEREOF, SUBJECT TO A MAXIMUM O F 7.5% OF SUPPLY CONTRACT PRICE. IT IS IN ACCORDAN CE WITH THIS CONTRACTUAL OBLIGATION THAT THE ASSE SSEE HAS CALCUL A TED THE LI Q U I DATED DAMAGES FOR THE Y EA R AT RS.16,250,25,000 IN RESPECT OF THE ABO V E TWO CONTRACTS. AS REGARDS THE D A TE OF ACCRUAL OF THE LIABILITY, AS PER ASSESSEE, IT STARTED ON TH E D A TE ON WHI C H THE CONTRACTOR HAD AGREED TO DELIVER THE PROJECT AND END ED ON THE D A TE ON WHICH THE ACTUAL DELIVERY TOOK PLACE. IT WAS ALSO CONTENDED THAT THE AMOUNT HAS NO T ACTUALLY BEEN PAID DURING THE Y E AR IS QUITE IRRELEVANT TO DECIDE THE ALLOWABILITY O F THE EXPENDITURE IN A CA S E WH E RE MERCANTILE SYSTEM O F ACCOUNT IS FOLLOWED. THE CIT(A) FIN D IN G MERIT IN THE CON T ENTION S O F THE ASSESSEE IN THE LIGHT OF THE JUDICIAL PRONOUNCEMENTS, HELD THE VIEW THAT THE CONTRACTUAL OBLIGATION HAD ACCRUED DURIN G TH E Y E AR ENDED 31.3.2009 THOUGH THE COMPANY HAD NO T ACTUALLY DI S CHARGED THE SAME, AND ACCORDINGLY ALLOWED THE CLAIM OF THE ASSESSEE. 4 4 . AGGRIEVED BY THE VIEW TAKEN BY TH E CIT(A) , REVENUE IS IN APPEAL ON THIS ASPECT. 4 5 . THE LEARNED DEPARTMENTAL REPRESENTATIVE STRONGLY RELYING ON THE ORDER OF THE ASSESSING OF FICER SUBMITTED THAT THE CIT(A) IS NOT JUSTIFIED IN DELETING THE ADDITION MADE BY THE ASSESSING OFFICER. HE SUBMITTED THAT THE LIABILITY FOR LIQUIDATED DAMAGES HAS NEITHER ACCRUED NOR CRYSTALISED DURING THE YEAR UNDER APPEAL, AND MERELY BECAUSE DELAY HA S OCCURRED IN ITA NO. 1244 & 1511 / HYD/201 1 & 985/HYD/12 M/S. B.G.R. ENERGY SYSTEMS LTD., NELLORE. 25 THE EXECUTION OF THE JOB, IT CANNOT BE SAID THAT THE LIQUIDATED DAMAGES ARE AUTOMATIC AND ARE ALLOWABLE AS DEDUCTION. 4 6 . THE LEARNED COUNSEL FOR THE ASSESSEE, ON THE OTHER HAND, STRONGLY SUPPORTING THE ORDER OF THE CIT(A), SUBMITTED TH AT IT IS IN TERMS OF THE VERY CONTRACT THAT LIQUIDATED DAMAGES ARE ATTRACTED FOR EACH WEEK OF DELAY IN THE EXECUTION OF THE CONTRACT AND CONSEQUENTLY, BEING A CONTRACTUAL OBLIGATION, SUCH LIQUIDATED DAMAGES ARE CLEARLY ALLOWABLE AS DEDUCTION. 4 7 . W E HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PRUSED TEHE ORDERS OF THE LOWER AUTHORITIES. SINCE THE VERY CONTRACTS ENTERED INTO BY THE ASSESSEE WITH VARIOUS PARTIES FOR EXECUTION OF WORKS, CATEGORICALLY SPECIFY NOT ONLY THE LIABILITY TO LIQUIDATED DAMAGE S, BUT EVEN MODE OF COMPUTATION OF THE SAME FOR EACH WEEK OF DELAY IN THE COMPLETION OF THE WORK, IT CANNOT BE SAID THAT THE LIABILITY TO LIQUIDATED DAMAGES HAS NOT CRYSTALISED. THE CIT(A) IN OUR CONSIDERED OPINION WAS JUSTIFIED IN ACCEPTING THE CLAIM O F 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. 4 8 . IN THE RESULT, THIS APPEAL OF THE REVENUE FOR THE ASSESSMENT YEAR, BEING ITA NO.985/HYD/2012, IS TREATED AS PARTLY ALLOWED. 4 9 . TO SUM UP, ALL THE THREE APPEALS OF THE REVENUE ARE TREATED AS PARTLY ALLOWED. ORDER PRONOUNCED IN THE COURT ON 5 TH SEPTEMBER, 2013 SD/ - SD/ - ( SAKTIJIT DEY ) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED/ - 5 TH SEPTEMBER , 2013 ITA NO. 1244 & 1511 / HYD/201 1 & 985/HYD/12 M/S. B.G.R. ENERGY SYSTEMS LTD., NELLORE. 26 COPY FORWARDED TO: 1 M/S. B.G.R. ENERGY SYSTEMS LTD., PENNAMGUDA INDUSTRIAL ESTATE, RAMAPURAM VILLAGE, SULLURUPETA TALUK, NELLORE DIST. 2 ASST. COMMISSIONER OF INCOME - TAX CIRCLE 1, NELLORE 3 COMMISSIONER OF INCOME - TAX(APPEALS) GUNTUR 4 COMMISSIONER OF INCOME - TAX, GUNTUR 5 DEPARTMENTAL REPRESENTATIVE ITAT, HYDERABAD B.V.S