M/s Tiong Seng Contractors Pvt. Ltd., CHENNAI V. ACIT, CHENNAI

ITA 276/CHNY/2009

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 8129 (ITAT-CHENNAI)
• Duration Of Justice: 6 year(s) 10 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-02-2016
• Appeal Filed By: Assessee
• Bench Allotted: D
• Next Hearing Date: 24-11-2015
• Assessment Year: 2005-2006
• Appeal Filed On: 06-03-2009
• Court: TRIBUNAL
• Department Lawyers: B NISCHALJCIT
• Assessee Lawyers: S SRIDHAR
• Section: 37

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI , ! . ' #$ BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G.PAVAN KUMAR, JUDICIAL MEMBER ./ I.T.A.NO.276 /MDS./2009 ( / ASSESSMENT YEAR :2005-06) M/S.TIONG SENG CONTRACTOS PVT. LTD , 174,FIRST CROSS STREET, HERITAGE JAYENDRA NAGAR, SEMBAKKAM, CHENNAI 600 073. VS. ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE-III(2), CHENNAI. PAN AACCT 0176 D ( %& / APPELLANT ) ( '(%& / RESPONDENT ) / APPELLANT BY : MR.S.SRIDHAR,ADVOCATE / RESPONDENT BY : MR.B.NISCHAL,JCIT, D.R ! / DATE OF HEARING : 24.11.2015 '# ! /DATE OF PRONOUNCEMENT : 05.02.2016 ) / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER: THIS APPEAL IS FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX(A)- III, CHENNAI DATED 21.11.2008 PERTAINING TO THE ASSESSMENT YEAR . ITA NO276./MDS/2009 2 2. THE FIRST GROUND RAISED BY THE ASSESSEE IN THIS APPEAL IS WITH REGARD TO DISALLOWANCE OF ` 15,19,31,420/- U/S.40(A)(IA) OF THE ACT AS THE CORRESPONDING AMOUNT PAYABLE TO THE SUB-CONTRAC TORS FOR WHICH TDS HAS NOT BEEN DEDUCTED/TDS HAS BEEN DEDUCTED BUT NOT PAID. 3.1 THE BRIEF FACTS OF THE CASE ARE THAT THE ASSE SSEE IS A PRIVATE LIMITED COMPANY, ENGAGED IN THE BUSINESS OF CIVIL C ONSTRUCTION FOR I.T.PARKS, FILED ITS RETURN OF INCOME ON 29.10.2005 ADMITTING A LOSS OF RS.61,35,449/- FOR THE ASSESSMENT YEAR 2005-06. DU RING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO FOUND THAT THE ASSESSEE CLAIMED PAYMENTS TO VARIOUS SUB-CONTRACTORS AS PROJ ECT EXPENSES AND THE ASSESSEE WAS LIABLE TO DEDUCT AND PAY TDS O N SUB-CONTRACT PAYMENTS WITHIN THE DUE DATE AS PER SECTION 194C. FURTHER THE A.O NOTICED THAT THE ASSESSEE COMPANY HAD NOT DEDUCTED TAX AT SOURCE OR NOT REMITTED WITHIN DUE DATE THE TDS COLLECTED FROM PAYMENT TO SUB- CONTRACTORS ON WHICH TAX IS DEDUCTION U/S.194C TO T HE TUNE OF ` 15,19,31,420/- BY INVOKING THE PROVISIONS OF SEC. 40(A)(IA) OF THE ACT, THE A.O DISALLOWED PAYMENTS DUE TO SUB-CONTRAC TORS. ITA NO276./MDS/2009 3 3.2. ON APPEAL, THE LD. CIT(A) CONFIRMED THE ORD ER OF THE A.O BY OBSERVING THAT THE CONTENTION OF THE LD.A.R THAT SE CTION 40(A)(IA) SHOULD BE RESTRICTED TO DEDUCTION CLAIMED U/S.30 TO 38, IS NOT CORRECT. HE WAS OF THE OPINION THAT THE MEANING OF NON-OBSTI NATE CLAUSE IN S.40 IS THAT EVEN IF SOMETHING IS ALLOWABLE U/S.30 TO 38 THAT WILL NOT BE ALLOWED IF THE IMPUGNED AMOUNT IS HIT BY SEC.40. FU RTHER HE OBSERVED THAT EVEN IF SUCH PAYMENTS VIZ. AMOUNTS PAYABLE TO CONTRACTOR OR SUB -CONTRACTOR ARE SPECIFICALLY ALLOWABLE DEDUCTION U/S.30 TO 38 OF THE ACT, IF THE PAYMENTS HIT BY S.40(A)(IA), THE SAME W ILL NOT BE ALLOWABLE AND LD.A.RS INTERPRETATION TO SEC.40(A)(IA) IS NOT CORRECT. HENCE, THE LD. CIT(A) REJECTION THE CONTENTION OF THE LD.A.R AND THEREFORE, HE CONFIRMED THE ACTION OF THE A.O. IN APPLYING THE PR OVISIONS OF THE SECTION 40(A)(IA) OF THE ACT. AGAINST THIS, THE AS SESSEE IS IN APPEAL BEFORE US. 4. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIALS ON RECORD. IN OUR OPINION, THE ISSUE IS SQUARELY COVE RED BY THE ORDER OF THE SPECIAL BENCH OF ITAT (VIZAG BENCH), IN THE CAS E OF MERILYN SHIPPING AND TRANSPORTERS VS. ADDL.CIT (136 ITD 23) (VIZAG SB), ITA NO276./MDS/2009 4 WHEREIN IT WAS HELD THAT THE PROVISIONS OF THE SECT ION 40(A)(IA) ARE APPLICABLE ONLY TO THE EXPENSES THAT ARE PAYABLE AND OUTSTANDING AT THE END OF THE CLOSE OF THE FINANCIAL YEAR RELEVANT TO THE ASSESSMENT YEAR AND NOT TO THE AMOUNT ALREADY PAID. THE SAME VIEW WAS TAKEN BY THE HIGH COURT OF ALLAHABAD IN THE CASE OF CIT V S. M/S.VECTOR SHIPPING SERVICES (P) LTD IN ITA NO.122 OF 2013 DAT ED 09.07.2013 BY HOLDING THAT SEC.40(A)(IA) IS NOT APPLICABLE WHEN T HERE IS NO OUTSTANDING BALANCE AT THE END OF THE CLOSE OF THE YEAR RELEVANT TO THE ASSESSMENT YEAR AND SLP FILED BY THE REVENUE IN SU PREME COURT OF INDIA IN CC NO.8068/2014 DATED 02.07.2014 IS ALSO D ISMISSED. BEING SO, IN OUR OPINION AN AMOUNT OUTSTANDING AT THE END OF THE CLOSE OF THE ASSESSMENT YEAR IS NOT TO BE ALLOWED AS BUSINES S EXPENDITURE IN VIEW OF PROVISIONS 40(A)(IA) OF THE ACT. SINCE WE HAVE FOLLOWED THE ORDER OF THE SPECIAL BENCH IN THE CASE OF MERILYN S HIPPING AND TRANSPORTERS VS. ADDL.CIT CITED SUPRA AND ALSO THE JUDGEMENT OF ALLAHABAD HIGH COURT IN THE CASE OF CIT VS. M/S.VEC TOR SHIPPING SERVICES (P) LTD CITED SUPRA, ALSO THE TRIBUNALS D ECISION RELIED BY THE LD.A.R IN THE CASE OF SHRI N.PALANIVELU VS. ITO, SA LEM REPORTED IN [2015] 40 ITR(TRIB.) 325(CHENNAI), WE HAVE NOT FOLL OWED THE VARIOUS ITA NO276./MDS/2009 5 DECISION CITED BY THE LD. DR VIZ., THE JUDGEMENT OF KERALA HIGH COURT IN THE CASE OF SHRI THOMAS GEORGE MUHOOT IN ITA NO. 278 OF 2014 DATED 3 RD DAY OF JULY 2015 AND THE DECISION OF THE TRIBUNAL IN THE CASE OF SHRI D.UMAPATHY IN ITA NO.2435/MDS./2014 DATED 14.08.2015. ACCORDINGLY, WE ARE REMITTING THE ISSUE BACK TO THE FILE OF THE LD. ASSESSING OFFICER TO CONSIDER THE ISSUE AFRESH IN T HE LIGHT OF THE ABOVE OBSERVATION.. 5. THIS GROUND IS PARTLY ALLOWED FOR STATISTICAL PU RPOSES. 6. THE NEXT GROUND IS WITH REGARD TO DISALLOWANC E OF RETENTION MONEY PAYABLE TO SUB-CONTRACTORS. 7. THE BRIEF FACTS OF THIS GROUND IS THAT THE ASSE SSEE CLAIMED AN AMOUNT OF RS.3,37,43,113/- BEING THE RETENTION MON EY PAYABLE TO SUB-CONTRACTORS. AFTER EXAMINING THE AGREEMENTS, T HE AO FOUND THAT THE LIABILITY TO PAY HALF OF THE RETENTION MONEY RE TAINED BY THE ASSESSEE ARISES ONLY AFTER THE SUCCESSFUL HANDING O VER THE PROJECT AND REMAINING HALF OF THE RETENTION MONEY ARISES AF TER MEETING OTHER CONDITIONS AS MENTIONED IN THE AGREEMENT. HENCE, TH E RETENTION MONEY PAYABLE TO THE SUB-CONTRACTORS CLAIMED AS EXP ENDITURE BY THE ASSESSEE WAS DISALLOWED BY THE A.O. ON APPEAL, LD . CIT(A) ITA NO276./MDS/2009 6 CONFIRMED THE ACTION OF THE LD. ASSESSING OFFICER B Y OBSERVING THAT RETENTION MONEY IS DEPENDENT ON PERFORMANCE OF CERT AIN ACTS AND FULFILLMENT OF CERTAIN CONDITIONS BECAUSE THE PAYEE DOES NOT HAVE ENFORCEABLE RIGHT AS HELD BY THE DECISIONS OF HONB LE MADRAS HIGH COURT REPORTED IN THE CASE OF CIT VS. IGNIFLUID B OILERS (I) LTD., [2006] 283 ITR 295 AND HONBLE CALCUTTA HIGH COURT IN THE CASE OF CIT VS. SIMPLEX CONCRETE PILES (INDIA) REPORTED IN [1989] 1 79 ITR 8. FURTHER, THE LD.CIT(A) OBSERVED THAT THE PAYEE DOES NOT HAVE ENFORCEABLE RIGHT BECAUSE LIABILITY TO PAY DOES NOT ARISE ON TH E DATE OF SUBMISSION OF SUCH BILLS. HE MADE IT CLEAR THAT IN THE PRESENT CASE LIABILITY IN RESPECT OF RETENTION MONEY HAS NOT ACCRUED OR ARISE N TO THE ASSESSEE. HENCE, HE CONFIRMED THE ADDITION MADE BY THE AO. AGAINST THIS, THIS ASSESSEE IS IN APPEAL BEFORE U S. 8. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. GENERALLY, THE EXPENDITURE WHICH IS ACTUALL Y INCURRED OR IS INCURRED IN A RELEVANT YEAR WOULD BE ALLOWED AS DED UCTION WHILE COMPUTING THE INCOME FROM BUSINESS. SUCH A LIABILI TY HAS TO BE IN PRAESENTI. HOWEVER, AT THE SAME TIME, IT RELATES T O THE WORKS UNDERTAKEN BY THE ASSESSEE, COMPLETED CONTRACT MET HOD OF ITA NO276./MDS/2009 7 ACCOUNTING IS FOLLOWED WHICH IS CONSISTENT WITH THE ACCOUNTING STANDARDS AND THESE ACCOUNTING STANDARDS ALSO LAID DOWN THE NORMS INDICTING THE PARTICULAR POINT OF TIME WHEN THE PRO VISIONS FOR ALL KNOWN LIABILITIES AND LOSSES HAVE TO BE MADE. THE MAKING OF SUCH A PROVISION BY THE ASSESSEE APPEARS TO BE JUSTIFIED M ORE SO WHEN THE ASSESSEE HAD RECOGNIZED GAIN AS WELL ON SUCH PROJEC T DURING THE ASSESSMENT YEAR UNDER CONSIDERATION. THIS APPEARS T O BE IN CONSONANCE WITH THE PRINCIPLE OF MATCHING COST AND REVENUE AS WELL. THE REASON GIVEN BY THE DEPARTMENT IS THAT THE RETE NTION MONEY WHICH IS RECEIVABLE WAS NOT RECOGNIZED AS INCOME AS SUCH, RETENTION PAYMENT ALSO CANNOT BE ALLOWED AS DEDUCTION WHILE C OMPUTING THE INCOME OF THE ASSESSEE. AS RIGHTLY ARGUED BY THE ASSESSEE, BOTH THESE ARE GOVERNED BY DIFFERENT ACCOUNTING STANDARD S. RETENTION PAYMENT IS GOVERNED BY AS-7 ISSUED BY ICAI, NEW DEL HI. ON THE OTHER HAND, RETENTION MONEY RECEIVABLE IS GOVERNED BY AS-9. WHAT IS APPLICABLE TO RETENTION MONEY RECEIVABLE CANNOT BE APPLIED TO RETENTION MONEY PAYABLE AS THESE ARE GOVERNED BY DI FFERENT ACCOUNTING STANDARD. FURTHER IT IS UNDISPUTED THAT WHENEVER ASSESSEE INCURRED EXPENDITURE ON THE PROJECT IT IS ADMISSIBLE FOR ITA NO276./MDS/2009 8 DEDUCTION. THE ONLY DISPUTE RAISED BY THE REVENUE IS REGARDING THE YEAR OF LIABILITY OF EXPENDITURE. CONSIDERING THAT THE ASSESSEE- COMPANY IS ASSESSED AT UNIFORM RATE OF TAX, THE ENT IRE EXERCISE OF SEEKING TO DISTURB THE YEAR OF ALLOWABILITY OF EXPE NDITURE IS, IN ANY CASE, REVENUE NEUTRAL. 8.1 FURTHER, IN OUR OPINION, THE PROVISION FOR ACCRUED LIABILITY WHICH HAS TO BE DISCHARGED AT A FUTURE DATE BY THE ASSES SEE IS AN ALLOWABLE EXPENDITURE. IN THE CASE OF CIT VS MICRO LAND LTD, 347 ITR 613[KARNATAKA HIGH COURT], THE ASSESSEE CLAIMED DE DUCTION U/S 37 OF THE ACT FOR PROVISION FOR FUTURE WARRANTY. THE ASSESSING OFFICER OPINED THAT PROVISION FOR FUTURE WARRANTY IS CONTIN GENT LIABILITY AND CANNOT BE ALLOWED. THE SUPREME COURT IN THE CASE O F ROTORK CONTROLS INDIA PVT. LTD VS CIT, 314 ITR 62, HELD TH AT THE PROVISION MADE BY THE ASSESSEE FOR WARRANTY CLAIMS ON THE BA SIS OF PAST EXPERIENCE IS ALLOWABLE DEDUCTION U/S 37 OF THE AC T. IN THE CASE OF BHARAT EARTH MOVERS VS CIT, 245 ITR 428, THE SUPREM E COURT HELD THAT WHERE THE ASSESSEE HAS INCURRED EXPENDITURE WH ICH IS MORE THAN THE PROVISION FOR WARRANTY OBLIGATION MADE IN THE B OOKS OF ACCOUNT, IT CANNOT BE SAID THAT THE PROVISION MADE BY THE ASSES SEE IS NOT ITA NO276./MDS/2009 9 CAPABLE OF BEING ESTIMATED WITH THE REASONABLE CERT AINTY THOUGH ACTUAL QUANTIFICATION WAS NOT POSSIBLE AND THEREFOR E, THE TRIBUNAL WAS JUSTIFIED IN ALLOWING THE DEDUCTION. THE DELHI HIG H COURT IN THE CASE OF CIT VS ERICSSION COMMUNICATIONS P. LTD, 318 ITR 340, HELD THAT PROVISION FOR WARRANTY CLAIMS ON SCIENTIFIC BASIS W HICH IS CONSISTENTLY APPLIED BY THE ASSESSEE FOR ITS BUSINESS WAS ALLO WABLE AS DEDUCTION. THE MADRAS HIGH COURT IN THE CASE OF CI T VS LUK INDIA PVT. LTD, 239 CTR 440, HELD THAT PROVISION FOR WARR ANTY CLAIMED BY APPLYING THE SETTLED PRINCIPLES OF HAVING REGARD TO THE FACT THAT CLAIM WAS BASED ON A SCIENTIFIC APPROACH AND IT WAS WORKE D OUT ON THE AVERAGE OF PREVIOUS YEARS WARRANTY SETTLEMENT IS A LLOWABLE EXPENDITURE. SAME VIEW WAS TAKEN BY THE JURISDICTI ONAL HIGH COURT IN THE CASE OF KONE ELEVATOR INDIA PVT. LTD VS ACIT, 3 40 ITR 46. FURTHER, THE SUPREME COURT IN THE CASE OF CALCUTTA CO. LTD VS CIT, 37 ITR 1, HELD THAT WHERE THE ASSESSEE WAS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING IS ENTITLED FOR DEDUCTION OF T HE EXPENDITURE WHICH IS INCIDENTAL TO THE BUSINESS ON ACCRUAL BASI S THOUGH IT WAS NOT ACTUALLY INCURRED DURING THE RELEVANT ACCOUNTING YE AR. ITA NO276./MDS/2009 10 8.2 THE KERALA HIGH COURT IN THE CASE OF CIT VS IND IAN TRANSFORMERS LTD, 270 ITR 259, HELD THAT PROVISION CREATED BY THE ASSESSEE FOR AFTER SALES SERVICES BASED ON WARRANTY WAS TOWARDS A DEFINITE AND ASCERTAINED LIABILITY. ON THE BASIS O F RELEVANT FACTS THE PROVISION CANNOT BE TREATED AS A CONTINGENT LIABILI TY AND THEREFORE, THE SAME WAS ALLOWABLE AS DEDUCTION. SAME VIEW WAS TAK EN 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 PRECLUDE D FROM REVISING THIS PROVISION AFTER TAKING INTO CONSIDERATION THAT WARRANTY PERIOD OF THE GOODS SOLD UNDER WARRANTY WAS EXCEEDING AND PRO VISION ALREADY PROVIDED IN A PARTICULAR YEAR IS FALLING SHORT OF T HE EXPECTED CLAIM THAT MAY BE RECEIVED. SUCH A PROVISION IS BASED ON SCIE NTIFIC STUDY AND ACTUARIAL BASIS AND TO BE ALLOWED AS BUSINESS EXPEN DITURE. HENCE, IN OUR OPINION, THE PROVISION FOR PAYMENT MADE BY THE ASSESSEE TOWARDS COMPLETED SUB-CONTRACT IS ALLOWABLE EXPENDITURE, IF THE ASSESSEE RECOGNIZED THE REVENUE FROM THE SAID CONTRACT AS IN COME IN THE ITA NO276./MDS/2009 11 ASSESSMENT YEAR UNDER CONSIDERATION AND FULFILLED T HE FOLLOWING CONDITIONS: (I) THE SUB-CONTRACT WORK GIVEN BY THE ASSESSEE SHO ULD HAVE BEEN COMPLETED. (II) THE SUB-CONTRACTOR MUST HAVE SUBMITTED HIS BIL LS FOR THE COMPLETION OF WORK FOR THE PAYMENT TO THE ASSESSEE. (III) THE ABOVE BILL SHOULD HAVE BEEN APPROVED BY T HE ASSESSEE FOR THE PAYMENT. (IV) THE ASSESSEE MUST HAVE PROVIDED FOR PAYMENT FO R THE ABOVE BILL IN ITS BOOKS OF ACCOUNTS. (V) THE ASSESSEE SHOULD HAVE DEDUCTED TDS ON SUCH PROVISIONS IN THE ASSESSMENT YEAR UNDER CONSIDERATI ON AND PAID THE SAME TO THE REVENUE AUTHORITIES IN TERMS O F SEC.194C R.W.40(A)(IA) OF THE ACT. 8.3 FURTHER, WE MAKE IT CLEAR THAT THE ASSESSEE C ANNOT CLAIM THE SAME EXPENDITURE ON ACTUAL PAYMENT BASIS, OTHERWISE IT AMOUNTS TO DOUBLE DEDUCTION ONE ON THE BASIS OF ACCRUAL AND ANOTHER ON THE BASIS OF ACTUAL PAYMENT. HENCE, WE DIRECT THE ASSE SSING OFFICER TO ALLOW THIS RETENTION MONEY PAYMENT ONLY ON ACCRUAL BASIS AND NOT ON ACTUAL PAYMENT BASIS. WITH THESE OBSERVATIONS, WE REMIT THIS ISSUE TO ITA NO276./MDS/2009 12 THE FILE OF THE ASSESSING OFFICER FOR QUANTIFICATIO N. THIS GROUND IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 9. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS A PARTLY ALLOWED FOR STATISTICAL PURPOSES ORDER PRONOUNCED ON FRIDAY, THE 05 TH OF FEBRUARY, 2016 AT CHENNAI. SD/- SD/- ( . ) (G.PAVAN KUMAR) ( ( $% & ) ) ' CHANDRA POOJARI () JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 05 TH FEBRUARY,2016 . K S SUNDARAM. *+)),-).- /COPY TO: ) 1. /APPELLANT 2. /RESPONDENT 3. ) /)'( /CIT(A) 4. ) / /CIT 5. -01 )2 /DR 6. 1)3 /GF