UHDE INDIA P. LTD, MUMBAI V. ADDL CIT RG 10(3), MUMBAI

ITA 1690/MUM/2012

• Counselvise Citation: 169019914 RSA 2012
• Duration Of Justice: 2 year(s) 3 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-07-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: F
• Next Hearing Date: 30-06-2014
• Assessment Year: 2005-2006
• Appeal Filed On: 12-03-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: RAJESH RANJAN PRASAD
• Assessee Lawyers: FIROZE B A NDHYARUJINA
• Keywords: Depreciation; Rectification of order; Rule of consistency; Bad and doubtful debts; Capital expenditure
• Section: 145; 234B

Judgement Text

, INCOME TAX APPELLATE TRIBUNAL,MUMBAI - F BENCH. . , !'# !$%&' , %! () BEFORE S/SH.D.MANMOHAN,VICE-PRESIDE NT & RAJENDRA,ACCOUNTANT MEMBER /. ITA NO.1690/MUM/2012, ! ! ! ! * * * * / ASSESSMENT YEAR-2006-07 UHDE INDIA PRIVATE LIMITED, UDHE HOUSE, L.B.S.MARG, VIKHROLI(WEST), MUMBAI-83 ! ! ! ! / VS. ADDL. COMMISSIONER OF INCOME TAX- RANGE-10(3), MUMBAI )+! )+! )+! )+! %! %! %! %! . PAN : AAACU1416H ( !+, / APPELLANT) ( -.+, / RESPONDENT) !$) / 0 % / REVENUE BY : SHRI RAJESH RANJAN PRASAD !12 !12 !12 !12 0 0 0 0 % %% % / ASSESSEE BY : SHRI FIROZE B.ANDHYARUJINA ! ! ! ! / // / 2! 2! 2! 2! / DATE OF HEARING : 30.06-2014 3* ! / 2! / DATE OF PRONOUNCEMENT : 04.07-2014 , 1961 / // / !! !! !! !! 254 )1( % %% % &242 &242 &242 &242 (%5 (%5 (%5 (%5 ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) PER RAJENDRA,AM %! %! %! %! () () () () !$% !$% !$% !$%&' &'&' &' % %% % ! ! ! ! : CHALLENGING THE ORDERS DATED 16/12/2014 OF THE CIT( A)-22,MUMBAI ASSESSEE HAS RAISED FOLLOWING GROUNDS OF APPEAL: 1)THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN CONFIRMING DISALLOWANCE OF PROVISIONS MADE FOR COSTS INCURRED ON COMPLETED CON TRACTS AMOUNTING TO RS. 8,14,68,380/-. 2)THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN NOT CONSIDERING THAT THE PROVISIONS WERE MADE AS PER THE REGULAR METHOD OF ACCOUNTING F OLLOWED BY THE APPELLANT. 3)THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) FAILED TO CONSIDER THE DETAILED SUBMISSIONS MADE IN CASE OF PROVISION MADE ON RCF CONTRACT, INC LUDING FOR LIQUIDATED DAMAGES PAYABLE. 4)THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN NOT DELETING PROVISIONS FOR COSTS ON COMPLETED CONTRACTS AMOUNTING TO RS.1,43,62,964/- W HICH HAS BEEN DISALLOWED IN EARLIER ASSESSMENT YEARS AND WHICH WERE UTILIZED/WRITTEN BA CK IN THE CURRENT YEAR. 5)THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN CONFIRMING THE WITHDRAWAL OF CREDIT FOR TDS OF RS.3,89,823 (WRONGLY CONSIDERED AS RS.6, 05,368 IN THE COMPUTATION PURSUANT TO ORDER U/S.143(3) AND RECTIFIED VIDE ORDER U/S.154 DATED 1 0.02.2009). 6)THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN NOT DIRECTING THE ASSESSING OFFICER TO ALLOW CREDIT FOR TAX DEDUCTED AT SOURCE WHICH HA VE BEEN DISALLOWED IN EARLIER YEARS ON THE GROUND THAT IT WOULD BE ALLOWED IN THE YEAR OF COMP LETION OF CONTRACT. ASSESSMENT YEAR AMOUNT 2003-04 3,26,910 2004-05 33,84,649 7)THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN IGNORING THE FACT THAT IN RESPECT OF TDS CREDIT OF RS.33,84,649/- THE ASSESSING OFFICER HAD PASSED A RECTIFICATION ORDER DATED 29TH MARCH, 2007 AND THEN SILENTLY WITHDRAWN THE SAID TD S CREDIT AT THE TIME OF THE COMPUTATION, PURSUANT TO ORDER U/S. 143(3). 8)THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN DISALLOWING SOFTWARE MAINTENANCE EXPENSES AMOUNTING TO RS.1,62,86,823/- ON THE GROUN D THAT THE SAME WAS CAPITAL EXPENDITURE. HAVING REGARD TO THE FACTS AND CIRCUMSTANCES OF THE CASE THE APPELLANT SUBMITS THAT THE ASSESSING OFFICER BE DIRECTED TO TREAT THE SAID EXPENDITURE A S REVENUE IN NATURE AND DELETE THE DISALLOWANCE. 9)THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN DISALLOWING BAD DEBTS AMOUNTING 2 ITA NO. 1690/MUM/2012 UHDE INDIA PRIVATE LIMITED TO RS.41,87,324/-. 10)THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN HOLDING THAT THE APPELLANT WAS NOT IN A POSITION TO REBUT THE FINDINGS OF THE ASSESSIN G OFFICER. THE APPELLANT SUBMITS THE SAID FINDING IS PERVERSE AND THAT THE LEARNED COMMISSIONER OF IN COME TAX (APPEALS) FAILED TO CONSIDER THE ISSUE IN ITS PROPER PERSPECTIVE. 11)THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN CONFIRMING LEVY OF INTEREST U/S.234B. THE APPELLANT CRAVES LEAVE TO ADD TO, ALTER, AMEND OR WITHDRAW ALL OR ANY OF THE FOREGOING GROUNDS OF APPEAL HEREIN AND TO SUBMIT SUCH STATEMENTS, DOC UMENTS AND PAPERS AS MAY BE CONSIDERED NECESSARY EITHER AT OR BEFORE THE APPEAL HEARING. DURING THE COURSE OF HEARING BEFORE US, AUTHORISED REPRESENTATIVE (AR) OF THE ASSESSEE DID NOT PRESS GROUNDS OF APPEAL NO.4 AND 5,HENCE SAME STAND DISMISSED AS NOT PRESSED.HE FURTHER STATED THAT GROUND NO 1 TO 3 DEAL WITH ONE ISSUE ONLY. 2. ASSESSEE COMPANY,ENGAGED IN THE BUSINESS OF DESIGNI NG, CONSTRUCTION AND COMMISSIONING OF PROJECTS,FILED ITS RETURN OF INCOME ON 29/10/2005 D ECLARING TOTAL INCOME OF RS.18,50,83,315/-. ASSESSING OFFICER(AO) MADE ASSESSMENT U/S.143(3) OF THE ACT ON 08/12/2008 DETERMINING THE INCOME OF ASSESSEE AT RS.26,30,26,570/-. 2.1. FIRST EFFECTIVE GROUND OF APPEAL IS ABOUT DISALLOWA NCE OF PROVISIONS MADE FOR COST INCURRED ON COMPLETED CONTRACTS, AMOUNTING TO RS.8.14 CRORES.DU RING THE ASSESSMENT PROCEEDINGS,THE AO FOUND THAT THE ASSESSEE HAD CLAIMED THE EXPENSES IN THE PROFIT & LOSS ACCOUNT FOR THE PROVISIONS MADE FOR CONTRACTS AMOUNTING TO RS.8,14,68,380/-. H E DIRECTED THE COMPANY TO EXPLAIN THE ALLOWABILITY OF THE PROVISIONS MADE.AFTER CONSIDERI NG THE SUBMISSIONS OF THE ASSESSEE FILED BY IT VIDE DATED 18/11/2008,HE HELD THAT SUBMISSIONS MADE BY THE ASSESSEE IN RESPECT OF PARADEEP PHOSPHATES(PP),ANDHARA SUGAR LTD.(ASL),VVF LIMITED( VL),ASEAN BINTULU FERTILIZER(ABF), UHDE GMBH-SAFCO IV(UGS)REVEALED THAT IN NONE OF THE PROJECTS ALLOWABILITY OF MAKING PAYMENT WAS ACTUALLY CRYSTALLIZED DURING THE YEAR U NDER CONSIDERATION FOR WHICH THE PROVISION HAD BEEN MADE,THAT IN PRECEDING YEAR ALSO SIMILAR PROVI SIONS WERE MADE BY THE COMPANY AGAINST DIFFERENT PROJECTS AND WERE DISALLOWED BY THE THEN AO,THAT G BENCH OF MUMBAI TRIBUNAL HAD DISMISSED THE APPEAL OF THE ASSESSEE FOR THE A.Y.20 02-03.FINALLY, HE HELD THAT PROVISIONS AMOUNTING TO RS.8.14 CRORES HAD TO BE DISALLOWED BE ING UNASCERTAINED LIABILITIES. 2.2. AGGRIEVED BY THE ORDER OF THE AO,THE ASSESSEE PREFE RRED AN APPEAL BEFORE FIRST APPELLATE AUTHORITY(FAA).BEFORE HIM,IT WAS STATED THAT THE AS SESSEE-COMPANY WAS ENGAGED IN THE BUSINESS OF PROVIDING OF ENTIRE RANGE OF ENGINEERING SERVICE S,IT INVOLVED DESIGN, CONSTRUCTION AND COMMISS -IONING OF PLANTS FOR THE CHEMICALS,PETRO-CHEMICAL, FERTILIZERS,REFINERIES AND PHARMACEUTICAL INDUSTRIES,THAT ENGINEERING SERVICES PROVIDED BY IT MAINLY COMPRISED OF LICENSES KNOW HOW/BASIC ENGINEERING/DETAILED ENGINEERING/LUMPSUM TRUNKEY CO NTRACTS (LSTK) PROJECTS/SUPERVISING THE CONTRACTS,THAT ENGINEERING COST WAS ESTIMATED BASED ON EFFORTS TO BE DEPLOYED FROM DIFFERENT DISCIPLINES,THAT BASED ON SUCH ESTIMATED MAN HOURS DECISION ABOUT COST WAS TAKENT,THAT ESTIMATION OF MAN HOURS WAS BASED ON EXPERIENCE,THAT ENGINEERI NG COST WAS ARRIVED AT ON WHICH THE ENGINEERING RISK ELEMENT WAS FACTORED IN, THAT IN S UBCONTRACTED MATTERS SUBCONTRACTING RISK ELEMENT WAS ALSO FACTORED IN,THAT CONSTRUCTION EXEC UTED BY IT WERE NORMALLY EXECUTED WITHIN THE PERIOD OF SIX MONTHS TO TWO YEARS,THAT IN SOME CASE S CONTRACTS MIGHT STRETCH MUCH LONGER,THAT IN LSTK CONTRACTS INCOME WAS RECOGNISED ON COMMISSIONI NG OF PLANT,THAT AFTER COMMISSIONING OF THE PLANT IT WOULD CONDUCT GUARANTEE TEST RUNS BEFO RE ACCEPTANCE OF THE PLANT BY THE CUSTOMER, THAT IT RECOGNISED THE PROFIT AND LSTK CONTRACTS ON COMMISSIONING OF PLANT, WHICH EVENT TAKE PLACE MUCH BEFORE THE ACCEPTANCE BY THE CLIENT,THAT IT WAS ESSENTIAL FOR THE COMPANY TO PROVIDE FOR COST PROVISION WHICH WERE LIKELY TO BE INCURRED DUR ING THE PERIOD OF COMMISSIONING OF THE PLANT TO 3 ITA NO. 1690/MUM/2012 UHDE INDIA PRIVATE LIMITED ACCEPTANCE OF THE COMPANY BY THE CUSTOMER,THAT SUCH COST GENERALLY INCLUDED PROJECTS SPECIFIC EXPENSES WHERE THE CLIENTS WOULD BE GIVING CONDITIO NAL ACCEPTANCE SUBJECT TO COMPLETION OF CERTAIN CONDITIONS AND IT DEPENDED ON REPLACEMENT I N THE MANNER/NOTIFICATION OF THE CUSTOM - ER,THAT IT WAS REQUIRED TO BE INCUR SUCH COST AND P ROFIT FOR THE SAME WAS BASED ON THE PUNCH LIST GIVEN BY THE CLIENT,THAT IT WAS NECESSARY TO MAKE P ROVISION FOR ADDITIONAL COST IF SUSTAINABLE PRODUCTION CAPABILITY WAS NOT DEMONSTRATED WITHIN T HE GUARANTEE PERIOD,THAT IN SUCH CONTRACTS, THE LIABILITY OF ASSESSEE WAS UNLIMITED, THAT IN THE CA SE OF COST-PLUS-FEE-CONTRACT (CPFC)PROFITS WERE RECOGNISED ON THE MECHANICAL COMPLETION OF THE PLAN TS,THAT PROVISIONS WERE MADE MAINLY FOR REENGINEERING SERVICES, THAT QUANTUM OF SUCH PROVI SIONS WAS RELATIVELY LESSER AS COMPARE TO LSTK PROJECTS.IT WAS FURTHER STATED THAT THERE WERE SEVERAL REASONS FOR THE COMPLEXITIES IN MAKING SUCH PROVISIONS,THAT ASSESSEE WAS ENGAGED IN THE DI VERSE VARIETY OF INDUSTRIES,THAT NOTHING WAS REPETITIVE, THAT IT PROVIDED ENTIRE RANGE OF SERVIC ES,THAT PROJECTS WERE CARRIED OUT IN WIDE GEOGRAPHICAL AREA,THAT THE SERVICES RENDERED BY IT WERE OF HIGH TECHNICAL NATURE, THAT THE COMPANY HAD THE OPTION OF RECOGNISING THE PROFITS ON FINAL ACCEPTANCE OF THE PLANT BY THE CUSTOMER,THAT IT WAS RECOGNISING PROFITS IN ADVANCE I.E. AT THE TIM E OF ACCEPTANCE OF THE PLANT BY THE CLIENT,THAT IT WAS NECESSARY TO PROVIDE FOR COST ON SUCH CONTRACTS FOR THE PERIOD FROM COMMISSIONING OF THE PLANT TO FINAL ACCEPTANCE OF THE PLANT BY THE CLIEN T, THAT IF THE COST OF COMPLETED CONTRACTS WERE NOT TO BE ALLOWED THEN THE PROFITS ON SUCH CONTRACTS SH OULD NOT BE TAXED.ASSESSEE ALSO PROVIDED AGGREGATE COST PROVISIONS ON COMPLETED CONTRACTS ON FOLLOWING PROJECTS: GUJARAT STATE FERTILISERS CORPORATION(GSFC),RASHTRI YA CHEMICAL FERTILISERS LTD(RCF),PPL, ASL, VL,ABF,UGS,UHDE BADSODEN(UB),UHDE GMBH-RAFNES(UGR), USV LTD,UHDE GMBH(UG) AND UHDE GMBH-FPC TAIWAN (UGF). THE ASSESSEE ALSO ARGUED THAT PROVISIONS WERE CREAT ED ONLY AFTER THOROUGH ANALYSIS OF STATUS OF THE PROJECT BY THE PROJECT IMPLEMENTATION TEAM,THAT MET HOD OF ACCOUNTING FOR PROVISIONS FOR COSTS ON COMPLETED CONTRACTS(PCCC)WAS FOLLOWED CONSISTENT LY AND IS ACCEPTED BY THE DEPARTMENT UP TO A.Y.2000-01,THAT PCCC WERE BASED ON IDENTIFIED A ND ASCERTAINED PRESENT LIABILITIES AND ON THE BASIS OF TECHNICAL ASSESSMENTS AND PROJECTIONS OF P ROJECT MANAGER WHO WERE EXPERTS IN THE FIELD, THAT AFORESAID PRACTICE OF PROVIDING FOR ALL KNOWN LIABILITIES ON AN ESTIMATION BASIS WAS ALSO IN ACCORDANCE WITH ACCOUNTING STANDARD-1 ISSUED U/S 14 5 VIDE CBDT NOTIFICATION NO.S.O.69(E) DATED 25/01/1996. 2.3. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE A ND THE ORDERS OF THE TRIBUNAL FOR EARLIER YEARS (AY.S.2001-2002 AND 2002-2003),HE HELD THAT F OR ALLOWANCE OF ANY PROVISION LIABILITY SHOULD BE ASCERTAINED DURING THE YEAR AND SHOULD BE CAPABLE OF ESTIMATION WITH REASONABLE CERTAINTY,THAT NO EVIDENCE WAS PRODUCED BEFORE HIM THAT WHILE MAKING QUANTIFICATION FOR PROVISIONS PM,LEAD ENGINEER,FINANCE MANAGER AND COM MERCIAL MANAGER JOINTLY ESTIMATED THE COST THOUGH THE ASSESSEE HAD MADE SUCH A CLAIM,THAT ESTIMATES WERE PREPARED BY ONLY ONE PERSON,THAT THE ASSESSEE ITSELF HAD ADMITTED THAT D UE TO COMPLEXITIES ESTIMATE WAS BEING MADE,THAT IN MAJORITY CASES THE PROVISIONS HAD BEEN WRITTEN B ACK INCLUDING SUBSTANTIAL PORTION OF THE PROVISIONS MADE,THAT IN CASE OF PPL(66-0089) PROVIS ION OF RS.12,30,4L5/-WAS MADE,THAT OUT WHICH RS.10,30,415/ HAD BEEN WRITTEN BACK IN SUBSEQUENT Y EAR,THAT IN THE CASE OF UB(66-2351) THE TOTAL PROVISION RS.3,57,120/ HAD BEEN WRITTEN BACK IN THE CURRENT YEAR ITSELF,THAT IN CASE OF VL(66- 6277)OUT OF THE PROVISION OF RS.20, 06,168/ AN AMOU NT OF RS.19,01,154/- HAD BEEN WRITTEN BACK IN THE CURRENT YEAR AS WELL AS IN THE SUBSEQUENT YEAR, THAT IN UG (66-6298) OUT OF PROVISIONS OF RS.10,84,134/-AN AMOUNT OF RS.9, 45,530/- WAS WRITT EN BACK IN THE CURRENT YEAR ITSELF,THAT IN CASE OF UHDE GMBH (66-6304) OUT OF PROVISIONS OF RS.5,87 ,664/ AN AMOUNT OF RS.5,47914/ WAS WRITTEN BACK DURING THE CURRENT YEAR ITSELF,THAT IN CASE OF RCF OUT OF TOTAL PROVISIONS OF RS.6,49, 95,736/ AN AMOUNT OF RS.3,37, 80, 290/-WAS WRITTEN BACK DUR ING THE CURRENT YEAR ITSELF ,THAT IN USV LTD. (66-6305) OUT OF PROVISIONS OF RS.486,609/- AN AMOU NT OF RS.4,04,609/- HAD BEEN WRITTEN BACK IN SUBSEQUENT YEAR,THAT IN CASE OF GRASIM OUT OF TOTAL PROVISIONS OF RS.5,37,030/- AN AMOUNT OF 4 ITA NO. 1690/MUM/2012 UHDE INDIA PRIVATE LIMITED RS.4,32,750/ WAS WRITTEN BACK DURING THE CURRENT YE AR ITSELF,THAT THE MAJOR PORTION OF THE PROVISIONS HAD BEEN WRITTEN BACK IN THE CURRENT YEA R OR IN THE SUBSEQUENT YEAR WHICH PROVED THAT THERE WAS NO SOUND BASIS AVAILABLE WITH THE ASSESSE E TO MAKE THOSE PROVISIONS,THAT NOT ONLY IN THE SUBSEQUENT YEAR THE PROVISIONS CREATED DURING THE Y EAR HAD BEEN WRITTEN BACK IN THE CURRENT YEAR ITSELF WHICH DID STAND TO ANY REASON,THAT EXCEPT IN THE CASE OF RCF REGARDING OTHER PROVISIONS THE ASSESSEE HAD STATED THAT THEY WERE BASED ON TECHNIC AL ESTIMATES MADE BY THE PROJECT MANAGER(PM),THAT THE EVIDENCE WAS INTERNAL NOTES P REPARED BY THE ENGINEERS AND SAME WAS WITHOUT ANY SOUND BASIS. DISCUSSING THE PROVISIONS MADE IN THE CASE OF RCF,HE HELD THAT RECTIFICATIONS WERE NOT PENDING THAT NECESSITATED CRATING PROVISIONS ON 31.03.2005.REGARDING PROVISIONS OF RS. 1.82 CRORES FOR CIVIL ERECTION TH E ASSESSEE HAS FURNISHED RUNNING BILLS FOR EXTRA CLAIM MADE AFTER MARCH.ABOUT THE BILLS,FAA HELD THA T THOSE BILLS WERE DATED 08.02.2005 AND HENCE SINCE THE BILLS WERE RECEIVED BY THE APPELLAN T DURING THE FINANCIAL YEAR ITSELF,THAT THERE WAS NO REASON TO MAKE PROVISIONS FOR THE SAME,THAT THE PROVISIONS WERE BASED ON SURMISES,SUSPICIONS, PLAYSAFE BASED FINANCIAL PLANS AND WERE NOT CAPABLE OF ESTIMATION WITH REASONABLE CERTAINTY. ACCORDINGLY,HE HELD THAT THE AO WAS JUSTIFIED IN MA KING DISALLOWANCE OF PROVISIONS. 2.4 .BEFORE US AR ARGUED THAT THE ASSESSEE WAS ENGAGED IN THE EXECUTING LSTK AND COST PLUS FEE CONTRACTS(CPFC),THAT IN LSTK PROJECT IT WAS RECOGNI SING INCOME ON COMMISSIONING OF A PLANT, THAT AT COMMISSIONING STAGE PLANT WOULD START,THAT AFTER COMMISSIONING IT HAD TO RUN GUARANTEE TEST RUN(GTR),THAT CUSTOMERS WOULD ACCEPT THE PLANT MUCH AFTER THE COMMISSIONING ,THAT ASSESSEE HAD TO PROVIDE FOR COST PROVISIONS THAT WO ULD LIKELY TO BE INCURRED BETWEEN COMMISSIONING AND ACCEPTANCE, ,THAT IN CPFC PROFITS WERE RECOGNISED ON THE MECHANICAL COMPLETION OF THE PLANT,THAT IN SUCH CONTRACTS PROV ISIONS WERE MADE FOR RE-ENGINEERING SERVICES,THAT PROVISIONS MADE FOR CPFC WERE LESSER AS COMPARED TO LSTK JOBS,THAT IN SUCH CONTR - ACTS ALSO THE ASSESSEE HAS TO MAKE PROVISIONS FOR F UTURE EXPENDITURE,THAT DURING THE YEAR END PM, LEAD ENGINEERS AND ENGINEERING MANAGERS WOULD EVALU ATE THE STATUS OF THE PROJECTS,THAT EVALUATION OF BALANCE WORK IS DONE BY PROJECT IMPLE MENTATION TEAM,THAT PM,LEAD ENGINEERS (LE),COMMERCIAL MANAGER(CM)AND FINANCE MANAGER(FM)J OINTLY ESTIMATE THE COST PROVISIONS TO BE MADE FOR THE CONTRACTS,IN CASE OF INCOMPLETE CON TRACTS PROJECT IMPLEMENTATION TEAM WOULD MAKE ESTIMATE AND SAME WOULE BE APPROVED BY THE HEA DS OF PROJECT,COMMERCIAL AND FINANCE DEPARTMENTS,THAT IN EARLIER YEARS PROVISIONS MADE B Y THE ASSESSEE WERE ACCEPTED BY THE DEPARTMENT.HE REFERRED TO PAGE NO.73-86 OF THE PB.D EPARTMENTAL REPRESENTATIVE STATED THAT THERE WAS NO SCIENTIFIC BASE FOR MAKING PROVISIONS, THAT VOUCHERS SUBMITTED BY THE ASSESSEE CONTAIN EXPENDITURE LIKE TRAVELLING AND AUDIT EXPENDITURE,T HAT SUCH ITEMS WERE NOT RELATED WITH PROJECTS,THAT PROVISIONS WERE ON EXTREMELY HIGHER S IDE,THAT OUT OF THE TOTAL PROVISIONS ONLY 45% WERE SPENT OVER A PERIOD OF TWO YEARS,THAT 20% INCO ME OF THE ASSESSEE WAS NOT TAXED IN THE RELEVANT YEAR,THAT PROVISIONS WERE MADE WITHOUT ANY SCIENTIFIC BASIS. 2.5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US. IN OUR OPINION PCCC IS BASED ON IDENTIFIED LIABILITY,THOUGH IT IS ONLY AN ESTIMATE.IN THE YEAR UNDER APPEAL THE ASSESSEE HAD MADE PROVISIONS FOR ELEVEN UNFINISHED PROJECTS AND IN SUBSEQUENT TWO YEARS AFTER COMPLETING THE PROJECTS WROTE OFF THE PROVISIONS AND OFFERED T HE BALANCE FOR TAXATION.WE FURTHER FIND THAT IN THOSE YEARS THE ASSESSEE HAD WRITTEN BACK THE BALAN CE AMOUNT AND SAME WAS TAXED BY THE AO.IN OUR OPINION,THE AO CANNOT TAKE TWO STANDS-HE CANNOT TAX THE ASSESSEE IN LATER YEARS FOR A PART OF TRANSACTION FOR WHICH PROVISION HAS BEEN MADE FOR E ARLIER YEARS.IN THE COMMERCIAL WORLD PROVISIONS ARE MADE FOR CONTINGENCIES AND COURT ARE OF VIEW THAT SAME HAVE TO ALLOWED.AS-7 RECONGISES THE PRINCIPAL OF MAKING PROVISIONS FOR C ERTAIN EXPENSES.IT IS A NORMAL FEATURE OF BUSINESS WORLD THAT AT THE END OF A PARTICULAR AY., IT MAY NOT BE POSSIBLE FOR AN ASSESSEE TO DETERMINE THE PROBABLE FUTURE EXPENDITURE OF AN ONG OING PROJECT OR SCHEME.IF IT RECONGNISES INCOME FROM SUCH PROJECT IN THAT YEAR,IT WILL HAVE TO MAKE SOME REASONABLE PROVISIONS FOR THE 5 ITA NO. 1690/MUM/2012 UHDE INDIA PRIVATE LIMITED EXPENDITURE TO BE INCURRED IN SUBSEQUENT YEAR.PROVI SION WILL VARY FROM PROJECT TO PROJECT AND FROM YEAR TO YEAR.IT WOULD ALSO DEPEND ON STAGE OF COMPL ETION OF THE PROJECT.FOR THAT PURPOSE ASSESSEE WILL HAVE TO RELY ON EARLIER YEARS EXPERIENCE AND REPORT OF THE TECHNICAL PERSONNEL.QUESTION OF PROVISIONS FOR WARRANTY WAS DISCUSSED AT LENGTH BY THE HONBLE APEX COURT IN THE MATTER OF ROTORK CONTROLS INDIA P. LTD.(314 ITR62).WE ARE AWA RE THAT WARRANTY CANNOT BE EQUATED WITH PROVISIONS MADE FOR THE PROJECTS TO BE COMPLETED BY AN ASSESSEE,BUT THE PRINCIPLE LAID DOWN BY THE HONBLE COURT ARE APPLICABLE TO THE CASE UNDER CONS IDERATION.PROVISION AFTER ALL IS ONLY AN ESTIMATION OF PROBABLE EXPENDITURE TO BE INCURRED A FTER THE END OF A PARTICULAR YEAR.BESIDES,IN OUR OPINION TRAVELLING COST OF THE ENGINEERS AND TECHNI CAL STAFF,TESTING COST,SUPPLIES OF REPLACEMENT SPARES,SITE RELATED COSTS,COST OF COMPLETION OF PUN CH LIST WORK,COST OF MODIFICATION FOR UNCOMPLETED PROJECTS HAS TO BE CONSIDERED WHILE MAK ING PROVISIONS WHEN AN ASSESSEE CARRIES OUT A BUSINESS OF PROVIDING DIVERSIFIED ENGINEERING SER VICES.WE FIND THAT THE ASSESSEE HAD TO MAKE PROVISIONS FOR ADDITIONAL COST IF SUSTAINABLE PRODU CTION CAPABILITY IS NOT DEMONSTRATED WITHIN THE GUARANTEE PERIOD.IN SUCH CASES COST PROVISIONS HAD TO BE MADE EVEN AFTER ACCEPTANCE/CONDITIONAL ACCEPTANCE OF A PLANT. WE FIND THAT THE FAA HAS DISALLOWED PROVISIONS ON T HE BASIS THAT THE ASSESSEE HAD WRITTEN BACK THE AMOUNTS IN SUBSEQUENT YEARS.HE HAS NOT ANALYSED THE DATA OF EARLIER YEARS AND SUBSEQUENT YEARS TO DETERMINE THE ALLEGED UNREASONABLENESS OF THE PROVISIONS.IT IS A FACT THAT RES JUDICTA IS NOT APPLICABLE TO INCOME TAX PROCEEDINGS AND EVERY YEAR IS AN INDEPENDENT UNIT,BUT RULE OF CONSISTENCY CONTEMPLATES THAT THE AO SHOULD NOT SUDDENLY DISALL OW ANY ITEM WITHOUT ASSIGNING SOME REASON.FROM THE ORDER OF THE AO/FAA WE ARE UNABLE T O FIND AS HOW THE FACTS AND CIRCUMSTANCES FOR THE YEAR 2001-02 WERE DIFFERENT FROM THE FACTS FOR THE YEAR UNDER CONSIDERATION.ASSESSEE WAS FOLLOWING THE SAME SYSTEM OF MAKING PROVISIONS FOR UNCOMPLETED PROJECTS FOR LAST SO MANY YEARS.THERE IN NOTHING IN THE ORDER OF THE FAA THAT COULD PROVE THAT PROVISIONS MADE BY THE ASSESSEE WERE NOT BASED ON ESTIMATE GIVEN BY EXPERT S.WE HAVE PERUSED THE PAPER BOOK-IT IS FOUND THAT INTERNAL MEMOS ARE SIGNED BY ONE PERSON,BUT TH E ESTIMATE OF PROVISION WAS PREPARED BY THREE/FOUR COMPETENT AUTHORITIES,DEALING WITH FINAN CIAL AND TECHNICAL SIDES OF THE PROJECTS(PAGE 83, 89,124,138 OF THE PB).IN SHORT,THE ASSESSEE WAS FO LLOWING SOME SYSTEM IN ESTIMATING PROVISIONS. THEREFORE,WITHOUT POINTING OUT MAJOR DEFECTS IT WAS NOT PROPER ON PART OF THE FAA TO STATE THAT SYSTEM WAS . FAA HAS GIVEN HIS FINDING WITHOUT GIVI NG THE REASONS.IN OUR OPINION WRITING OFF OF PROVISIONS IN SUBSEQUENT YEARS CANNOT BE BASIS FOR DISALLOWING IT.ACCOUNTING STANDARDS EXPECT THAT ASSESSEE SHOULD WRITE BACK SUCH AMOUNTS IN LATER YE ARS.FAA HAS OVERLOOKED THE FACT THAT OUT OF THE PROVISIONS MADE BY THE ASSESSEE,RS.3.70 CRORES WERE ACTUALLY SPENT BY THE ASSESSEE IN THE SUBSEQUENT YEARS TO COMPLETE THE UNFINISHED PROJECT S OR TO RENDER FURTHER SERVICES.THEREFORE, IN OUR OPINION, HE WAS NOT JUSTIFIED IN CONFIRMING THE DISALLOWANCE OF RS. 8.14 CRORES,WITHOUT ANALYSING THE TERMS AND CONDITIONS OF THE PROJECTS THREADBARE FOR WHICH PROVISIONS WERE MADE DURING THE YEAR UNDER APPPEL.REVERSING HIS ORDER WE DECIDE FIRST EFFECTIVE GROUND OF APPEAL (GROUND NO. 1-3) IN FAVOUR OF THE ASSESSEE. 3. NEXT EFFECTIVE GROUND OF APPEAL (GROUNDS NO.6-7)DEA LS WITH NOT GIVING CREDIT FOR TDS AND THE AMOUNTS INVOLVED ARE RS.3.26 AND RS.33.84 LAKHS FOR THE YEAR 2003-04 AND 2004-05 RESPECTIVELY. BEFORE US,AR STATED THAT TDS CREDIT WAS NOT ALLOWED BY THE AO IN EARLIER TWO YEARS ON THE GROUND THAT IT WOULD BE ALLOWED IN THE YEAR OF COMPLETION OF CONTRACT,THAT SAME WAS NOT ALLOWED IN THE YEAR UNDER APPEAL THOUGH THE CONTRACTS WERE COMPLET ED,THAT IN RESPECT OF TDS CREDIT OF RS.33,84,649/- THE AO HAD PASSED A RECTIFICATION OR DER ON 29.03.2007,THAT AT THE TIME OF THE COMPUTATION SAID AMOUNT WAS NOT CONSIDERED,THAT FAA HAD NOT GIVEN ANY DIRECTION THOUGH A SPECIFIC GROUND WAS RAISED BEFORE HIM.HE REFERRED T O THE RECTIFICATION ORDER AND THE TAX CALCULATION WITH REGARD TO RS.33.84 LAKHS.DR LEFT THE ISSUE TO THE DISCRETION OF THE BENCH. 6 ITA NO. 1690/MUM/2012 UHDE INDIA PRIVATE LIMITED 3.1. AFTER PERUSING THE MATERIAL,WE ARE OF THE OPINION T HAT THE ASSESSEE IS ENTITLED TO GET CREDIT OF TAXES PAID IN ONE OF THE YEARS-EITHER IN YEAR OF PA YMENT OR IN THE YEAR OF COMPLETION OF CONTRACTS.AO IS DIRECTED TO VERIFY THE FACTS AND GI VE CREDIT FOR TAXES PAID BY THE ASSESSEE. GROUNDS OF APPEAL NO.6AND 7 ARE ALLOWED IN FAVOUR OF THE ASSESSEE,IN PART. 4. NEXT EFFECTIVE GROUND OF APPEAL (GAO NO.8)IS ABOUT DISALLOWANCE OF SOFTWARE MAINTENANCE EXPENSES.AO,DURING THE COURSE OF ASSESSMENT PROCEED INGS,NOTED THAT ASSESSEE COMPANY HAD CLAIMED RS.1,62,86,823/-TOWARD COMPUTER SOFTWARE EX PENSES.HE WAS THE OPINION THAT THE EXPENDITURE IN QUESTION HAD TO BE TREATED AS CAPITA L EXPENDITURE.IT WAS STATED BEFORE AO THAT THOSE EXPENSES WERE MADE TOWARDS ANNUAL MAINTENANCE CHARG ES,THAT SAME WERE REVENUE IN NATURE SINCE THE BENEFIT WOULD OCCUR ONLY FOR ONE YEAR. AO HOWEV ER, WAS NOT CONVINCED WITH THE ARGUMENTS MADE AND HELD THAT THE ASSESSEE WAS ENJOYING ENDURI NG BENEFIT FROM THE SOFTWARE PURCHASED FOR THE LONG PERIOD. THE AO ALSO NOTED THAT THE ASSESSE ES PURCHASES WERE FROM ASSOCIATE CONCERNS FROM WHOM IT HAD PURCHASED MACHINERY IN PAST WHICH DID NOT PROVE THE REGULAR MAINTENANCE OF EXPENDITURE.ACCORDINGLY, HE TREATED THE EXPENDITURE AS CAPITAL RELYING ON FOLLOWING JUDGMENTS ARAVALICONSTRUCTION CO. P. LTD.(259ITR30) AND ALLO WED DEPRECIATION @ 25% THEREON. 4.1. IN THE APPELLATE PROCEEDINGS,FAA AFTER CONSIDERING THE ARGUMENTS OF THE ASSESSEE,ASSESSMENT ORDER AND THE REMAND REPORT HELD THAT THE MAJOR POR TION OF THE EXPENDITURE WAS THE PAYMENT MADE TO THE PARENT COMPANY,THAT BILLS ISSUED TO THE ASSESSEE BY THE PARENT COMPANY DID NOT MENTION THAT LIFE OF THE SOFTWARE PURCHASED WAS LIM ITED TO ONE YEAR,THAT IT WAS NOT CLEAR AS TO HOW THE COST OF THE SOFTWARE PURCHASED BY THE PARENT CO MPANY WAS APPORTIONED AMONGST ITS SISTER CONCERN, THAT THE BASIS OF APPORTIONMENT WAS NOT V ERY CLEAR.FOLLOWING HIS OWN ORDER FOR THE YEAR 2004-2005,HE HELD THAT THE EXPENDITURE INCURRED BY THE ASSESSEE WAS CAPITAL IN NATURE. ACCORDINGLY, THE ADDITION MADE BY AO WAS UPHELD. 4.2. BEFORE US,AR STATED THAT SIMILAR ISSUE HAD ARISEN I N EARLIER YEAR,THAT THE TRIBUNAL HAD DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE.DR CONCEDED THA T ISSUE IS COVERED AGAINST THE REVENUE.WE FIND THAT VIDE ITS ORDER DATED 08.08.2012(ITA/6511/MUM/2 009-AY.2004-05) F BENCH OF MUMBAI TRIBUNAL DELIBERATED UPON AND DECIDED THE ISSUE OF SOFTWARE EXPENDITURE IN FAVOUR OF THE ASSESSEE.FAA HAD UPHELD THE DISALLOWANCE REFERRING TO THE ORDER PASSED BY HIM FOR THE YEAR 2004- 05.AS THE SAID ORDER HAS BEEN REVERSED BY THE TRIBU ANL.WE WOULD LIKE TO REPRODUCE THE RELEVANT PORTION OF THE SAID ORDER AND SAME READS AS UNDER : 10.GROUND NO.4 PERTAINS TO THE DISALLOWANCE OF RS. 59,26,204/-BEING SOFTWARE DEVELOPMENT, HOLDING THE SAME TO BE CAPITAL IN NATURE. 11.THE ASSESSEE HAS FILED DETAILS OF EXPENSES DEBIT ED UNDER THE HEAD SOFTWARE DEVELOPMENT (PB 84).FROM THE HEADING ITSELF, WE FIND, THE EXPENSES BOOKED ARE SOFTWARE MAINTENANCE EXPENSES AND ALL THE EXPENSES ARE EITHER IN THE, NATURE OF ANNUA L MTAINTENANCE CONTRACTS, UP GRADATION AND INSTALLATION OF ANTI VIRUS,WHICH ACCORDING TO US CA NNOT IN ANY CIRCUMSTANCE BE HELD TO BE ENDURING IN NATURE AND CALLED CAPITAL EXPENSES THESE ARE EXP ENSES WHICH ARE USED FOR SMOOTH RUNNING OF THE COMPUTERS THUS, WE HOLD THE SAME TO BE ALLOWABLE. WE FURTHER FIND THAT THE APPEAL FILED BY THE DEPART MENT AGAINST THE ORDER OF THE TRIBUNAL FOR THE YEAR 2004-05,BEFORE THE HONBLE JURISDICTIONAL HIGH COURT WITH REGARD TO SOFTWARE MAINTENANCE EXPENSES,WAS DISMISSED BY THE COURT(PG.224-226 OF T HE PB).RESPECTFULLY,FOLLOWING THE SAME WE HOLD THAT EXPENDITURE INCURRED BY THE ASSESSEE FOR MAINTENANCE OF SOFTWARE IS TO TREATED REVENUER EXPENDITURE FOR THE YEAR UNDER APPEAL ALSO. GROUND OF APPEAL NO. 8 IS DECIDED IN FAVOUR OF THE ASSESSEE-COMPANY. 5. NEXT EFFECTIVE GROUND OF APPEAL (GROUNDS NO.9-10)PE RTAINS TO WRITING OFF OF BAD DEBTS.AO, DURING THE COURSE OF ASSESSMENT PROCEEDINGS NOTED T HAT THE ASSESSEE-COMPANY HAD DEBITED A SUM OF RS.41,L0,422/- AS BAD DEBTS DURING THE YEAR.EXPL AINING THIS,IT WAS SUBMITTED BEFORE AO THAT THE AMOUNT IN QUESTION WAS RELATED TO THE TRANSACTION E NTERED IN TO WITH M/S. STERLING GELATIN (SG).ON 7 ITA NO. 1690/MUM/2012 UHDE INDIA PRIVATE LIMITED VERIFICATION WITH SG U/S.133(6) OF THE ACT,THE AO W AS INFORMED BY THE SAID COMPANY THAT THE AMOUNT OF RS.3,64,049/- WHICH WAS PAYABLE BY ASSESS EE TO THEM WAS WRITTEN OFF BY THEM AND THE AMOUNT OFRS.41,87,324/-WAS NEVER PAYABLE BY THEM TO THE ASSESSEE.THE ASSESSEE HOWEVER, STATED THAT ITS CLAIM WAS CORRECT AND SAME SHOULD BE ALLOW ED. THE AO HOWEVER, WAS NOT CONVINCED AND MADE THE DISALLOWANCE. 5.1. DURING THE APPELLATE PROCEEDINGS,THE ASSESSEE FURNI SHED CERTAIN SUBMISSIONS WHICH WAS SENT TO THE AO FOR VERIFICATION BY THE FAA.AFTER VERIFICATI ON,THE AO HIS IN REMAND REPORT STATED THAT ON COMPARISON OF THE DETAILS FILED BY THE ASSESSEE AND BILLS RECEIVED FROM SG MOST OF THE ENTRIES WERE NOT MATCHING AND HENCE BAD DEBTS HAD RIGHTLY BEEN D ISALLOWED.FAA HELD THAT THE ASSESSEE WAS NOT IN A POSITION TO REBUT THE FINDINGS OF THE AO T HAT THE SAID PARTY HAD DENIED ANY LIABILITY PAYABLE TO THE ASSESSEE,THAT NO AMOUNT WAS RECEIVAB LE FROM THE DEBTOR,THAT THERE COULD NOT HAVE BEEN ANY WRITE OFF OF THE SAID AMOUNT,THAT THE CON DITIONS PRESCRIBED U/S. 36 FOR THE WRITE OFF WERE NOT SATISFIED,THAT THE BAD DEBTS WRITTEN OFF AS CLA IMED BY IT WAS NOT ALLOWABLE AS DEDUCTION.HE UPHELD THE ADDITION MADE BY THE AO. 5.2. BEFORE US,AR STATED THAT SERVICES/GOODS WERE RENDER ED/SUPPLIED TO S.G. IN PURSUANCE OF AN AGREEMENT, THAT S.G. DID NOT MAKE PAYMENT TO THE AS SESSEE, THAT IT HAD CONTEMPLATED LEGAL ACTION AGAINST S.G., THAT LATER ON A DECISION WAS TAKEN BY THE BOARD OF DIRECTORS NOT TO FILE CASE BEFORE COMPETENT COURT,THAT ASSESSEE HAD WRITTEN OFF THE I NCOME AS BAD-DEBTS.HE REFERRED TO PAGE NO. 279-303,249-261 AND 239 OF THE PAPER BOOK.DR SUPPOR TED THE ORDER OF THE FAA. 5.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US. WE FIND THAT VIDE ITS AGREEMENT DATED.12.06.2001 THE ASSESSEE HAD ENTERED INTO AN AGREEMENT WITH SG,THAT IT HAD AGREED TO RENDER SERVICES TO S.G. (PAGE NO.285,286OF PB),T HAT SG HAD JOINTLY SIGNED THE MECHANICAL COMPLETION OF CERTIFICATE ON 23.05.2002(PG.303OF PB ),THAT IT HAD ENGAGED AN ADVOCATE FOR PURSUING THE MATTER OF RECOVERY FROM S.G.(PAGE.239- 41 OF PB),THAT LATER ON A DECISION WAS TAKEN BY THE ASSESSEE NOT TO PURSUE THE MATTER IN THE COU RT OF LAW, THAT THE ASSESSEE HAD MADE NECESSARY ENTRIES IN THE BOOKS OF ACCOUNTS.AS THE AMOUNT WAS ACTUALLY WRITTEN OFF IN THE BOOKS OF ACCOUNTS, SO, IN OUR OPINION THERE WAS NO JUSTIFICATION FOR T HE DISALLOWANCE MADE/ CONFIRMED BY THE AO/ FAA UNDER THE HEAD BAD-DEBTS.AFTER THE AMENDMENT TO SECTION 36 OF THE ACT,COURTS ARE OF UNANIMOUS VIEW THAT IF AN ASSESSEE WRITES OFF ANY A MOUNT IN ITS BOOKS OF ACCOUNTS, IT HAS NOT TO PROVE ANY OTHER THING.IN THE CASE BEFORE US, WE FIN D THAT THE DECISION OF WRITING OFF OF THE AMOUNT IN QUESTION WAS TAKEN IN PECULIAR CIRCUMSTANCES.THE RERFORE,REVERSING THE ORDER OF THE FAA,WE HOLD THAT CLAIM MADE BY THE ASSESSEE,UNDER THE HEAD BAD-DEBTS WRITTEN OFF , SHOULD BE ALLOWED. GROUNDS NO.9 & 10 ARE DECIDED IN FAVOUR OF THE ASSE SSEE. 6. LAST GROUND OF APPEAL IS ABOUT CONFIRMING THE LEVY OF INTEREST U/S. 234B OF THE ACT.DURING THE COURSE OF HEARING BEFORE US, DR AND AR AGREED THAT ISSUE WAS OF CONSEQUENTIAL IN NATURE. SO, WE ARE NOT ADJUDICATING IT SEPARATELY. IT STANDS ALLOW ED FOR STATISTICAL PURPOSES. AS A RESULT, APPEAL FILED BY THE ASSESSEE STANDS PARTLY ALLOWED. 26 !12 7!! (!8 / 4 V VV VA'KR% A'KR% A'KR% A'KR% )92 / $!2 : . ORDER PRONOUNCED IN THE OPEN COURT ON 4TH JULY, 2014 . (%5 / 3* ! % &!! ; <(! 4 $! , 201 4 / 4 = SD/- SD/- ( . / D.MANMOHAN) ( !$%&' !$%&' !$%&' !$%&' / RAJENDRA) !'# / VICE PRESIDENT %! %! %! %! () () () () /ACCOUNTANT MEMBER / MUMBAI, <(! /DATE: 04.07.2014. SK (%5 (%5 (%5 (%5 / // / -2> -2> -2> -2> ?%>* ?%>* ?%>* ?%>*2 22 2 / COPY OF THE ORDER FORWARDED TO : 8 ITA NO. 1690/MUM/2012 UHDE INDIA PRIVATE LIMITED 1. ASSESSEE / !+, 2. RESPONDENT / -.+, 3. THE CONCERNED CIT(A)/ @ A , 4. THE CONCERNED CIT / @ A 5. DR F BENCH, ITAT, MUMBAI / >B!4 -2 , . . &!! . 6. GUARD FILE/ 4! ! .!>2 .!>2 .!>2 .!>2 -2 -2-2 -2 //TRUE COPY// (%5!! / BY ORDER, / ! $! DY./ASST. REGISTRAR , /ITAT, MUMBAI