Urmila RCP Projects Pvt Ltd, Ranchi V. DCIT CIRCLE-1, Ranchi

ITA 30/RAN/2017

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 8632 (ITAT-RANCHI)
• Duration Of Justice: 2 year(s) 11 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-01-2020
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Assessment Year: 2012-2013
• Appeal Filed On: 13-02-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: INDERJEET SINGH
• Assessee Lawyers: MANJEET VERMA
• Keywords: Capital asset; Depreciation; Question of law; Bad and doubtful debts; Commercial expediency; Revised return; Capital expenditure; Set aside
• Section: 143(3); 234B; 37(1); 192; 48; 13; 145; 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL RANCHI BENCH, RANCHI BEFORE SHRI PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER & SMT. MADHUMITA ROY, JUDICIAL MEMBER ./ I.T.A. NOS. 30/RAN/2017, 48/RAN/2018 & 341/RAN/2018 ( ASSESSMENT YEARS : 2012-13, 2013-14 & 2010-11) URMILA RCP PROJECTS PVT. LTD. RCP COMPLEX, KADRU, RANCHI, JHARKHAND -834002 / VS. DCIT CIRCLE 1, RANCHI-834002 ./ ./ PAN/GIR NO. : AACCR5201P ( APPELLANT ) .. ( / RESPONDENT ) / APPELLANT BY : SHRI MANJEET VERMA, A.R. / RESPONDENT BY : SHRI INDERJEET SINGH, SR.CIT.D.R. DATE OF HEARING 07/11/2019 !'# / DATE OF PRONOUNCEMENT 20/01/2020 / O R D E R PER PRADIP KUMAR KEDIA - AM: THE CAPTIONED APPEALS DIRECTED AT THE INSTANCE OF A SSESSEE ARISE FROM THE RESPECTIVE ORDERS OF THE COMMISSIONER OF INCOME TAX (APPEALS) (CIT(A)) AGAINST DIFFERENT ASSESSMENT YEARS AS TA BULATED BELOW: ITA NOS. NAME OF ASSESSEE AY CIT(A)S ORDER DATED AOS ORDER DATED AOS ORDER UNDER SECTION 30/RAN/17 URMILA RCP PROJECTS PVT. LTD. 2012-13 04.10.16 17.03.15 143(3) OF THE INCOME TAX ACT (IN SHORT THE ACT) 48/RAN/18 -DO- 2013-14 28.11.17 30.03.16 -DO- 341/RAN/18 -DO- 2010-11 28.08.18 -DO- 143(3) R.W.S. 263 OF THE ACT ITA NO. 30/RAN/17 & ORS. [URMILA RCP PVT. LTD. & DCIT] - 2 - 2. THE GRIEVANCES RAISED BEING COMMON, ALL THE CASE S WERE HEARD TOGETHER AND DISPOSED OF BY THE COMMON ORDER. 3. WE SHALL FIRST TAKE UP ASSESSEES APPEAL IN ITA NO. 30/RAN/2017 CONCERNING AY 2012-13. ITA NO. 30/RAN/2017-AY-2012-13 4. AS PER THE GROUNDS OF APPEAL, THE ASSESSEE HAS R AISED TWO FOLD GRIEVANCES (I) ADDITIONS MADE BY THE AO ON ACCOUNT OF DISALLOWANCE OF EXPENDITURE OF RS.1,07,35,959/- AND (II) CHARGEABIL ITY OF INTEREST UNDER S.234B ON ASSESSED INCOME AMOUNTING TO RS.17,66,016 /- INSTEAD OF CHARGEABILITY OF INTEREST ON RETURNED INCOME. 5. BRIEFLY STATED, THE ASSESSEE IS ENGAGED IN THE B USINESS OF WORKS CONTRACT IN THE NATURE OF CIVIL CONTRACT. THE RETU RN OF INCOME FILED BY THE ASSESSEE DECLARING TOTAL INCOME AT RS.1,23,66,979/- WAS SUBJECTED TO SCRUTINY ASSESSMENT. IN THE COURSE OF ASSESSMENT, THE AO INTER ALIA CONFRONTED THE ASSESSEE AS TO WHY EXPENDITURE DEBIT ED TO THE TUNE OF RS.1,07,35,959/- TOWARDS RETENTION MONEY/SECURITY D EPOSITED KID, EOT ETC. WHICH RESULTED IN REDUCTION OF TAXABLE INCOME SHOUL D NOT BE DISALLOWED. IN RESPONSE, THE ASSESSEE FILED A DETAILED REPLY TO SU BMIT THAT AS PER THE ACCOUNTING POLICY ADOPTED BY THE ASSESSEE, AN AMOUN T RETAINED/DEDUCTED BY THE CONTRACTEE TO ENSURE SATISFACTORY FULFILLMENT O F OBLIGATIONS ARISING FROM CONTRACT ENTERED INTO BY THE ASSESSEE WITH THE CONT RACTEE IS REDUCED FROM THE GROSS RECEIPT/TURN OVER WHILE DETERMINING THE T AXABLE INCOME. AS PER CONSISTENTLY FOLLOWING ACCOUNTING POLICY, THE ASSES SEE RECOGNIZED INCOME FROM THE RETENTION MONEY WITHHELD BY THE CONTRACTEE IN THE YEAR OF REALIZATION BY THE ASSESSEE FROM THE CONTRACTEE. T HE ASSESSEE JUSTIFIED THE AFORESAID ACCOUNTING POLICY ON THE PREMISE THAT HAV ING REGARD TO THE BUSINESS EXPERIENCE, REFUND OF SECURITY DEPOSITS/RE TENTION MONEY IS SOLEMNLY OBTAINED DUE TO VARIOUS CLAUSES IN THE CON TRACT, SUCH AS, QUALITY PARAMETERS, PERFORMANCES, GUARANTEE, TIMELY COMPLET ION AND LIQUIDATED DAMAGES CLAUSE AND SO ON AND SO FORTH. IT WAS FURT HER SUBMITTED THAT, AT TIMES, CERTAIN OBLIGATION ARISING FROM CONTRACTS, S UCH AS, CONTINUOUS ITA NO. 30/RAN/17 & ORS. [URMILA RCP PVT. LTD. & DCIT] - 3 - MAINTENANCE OF ASSETS FOR FIXED PERIOD BY THE ASSES SEE IS MORE COSTLY AGAINST THE AMOUNT OF SECURITY DEPOSITS RETAINED BY THE CONTRACTEE. IN SUCH CIRCUMSTANCES, THE ASSESSEE MAY OPT OUT AND FOREGO THE SECURITY DEPOSIT TO AVOID FULFILLMENT OF SUCH ONEROUS CONTRACTUAL OBLIG ATIONS. IT WAS THUS POINTED OUT THAT THE REFUND OF SECURITY DEPOSIT RET AINED AS WELL AS REFUND DATE, BOTH, BEING UNCERTAIN AND CONTINGENT, THE ACC OUNTING POLICY ADOPTED BY THE ASSESSEE IS FULLY JUSTIFIED TO DETERMINE THE TRUE INCOME EMANATING FROM THE CONTRACT IN A GIVEN FINANCIAL YEAR. 6. THE AO, HOWEVER, WAS NOT IMPRESSED WITH THE CLAI M OF PARALLEL EXPENDITURE TOWARDS SECURITY DEPOSIT/RETENTIONS MON EY AGAINST GROSS VALUE OF CONTRACT INCLUDING RETENTION MONEY. IT WAS OBSE RVED BY THE AO THAT THE EXPENDITURE CLAIMED BY THE ASSESSEE TOWARDS SUCH RE TENTION BY THE CONTRACTEE ARE CONTINGENT IN NATURE AND THUS THE AS SESSEE IS NOT ENTITLED TO DEDUCT SUCH EXPENDITURE FROM THE GROSS VALUE OF CON TRACT. THE AO ALSO OBSERVED THAT SUCH ACCOUNTANCY PRACTICES CANNOT OVE RRIDE THE PROVISIONS OF THE INCOME TAX ACT AND THE DEDUCTIBILITY IS REQUIRE D TO BE DECIDED ACCORDING TO THE PRINCIPLES OF LAW AND NOT IN ACCOR DANCE WITH SUCH ACCOUNTING PRACTICE. THE AO ACCORDINGLY DECLINED T O GIVE BENEFIT OF DEDUCTION TOWARDS RETENTION MONEY ETC. FROM THE GRO SS VALUE OF CONTRACT AND CONSEQUENTLY ADDED AN AMOUNT OF RS.1,07,35,959/ - TO THE TOTAL INCOME OF THE ASSESSEE EQUIVALENT TO SUCH SECURITY DEPOSIT /RETENTION MONEY. 7. AGGRIEVED, THE ASSESSEE PREFERRED APPEAL BEFORE THE CIT(A). THE CIT(A), HOWEVER, FOUND LITTLE MERIT IN THE PLEA OF THE ASSESSEE AND THUS DECLINED TO INTERFERE WITH THE ACTION OF THE AO MAK ING FOLLOWING OBSERVATIONS: [10] GROUND NO.4 OF THE APPELLANT IS RE GARDING THE ADDITION OF RS.1,07,35,959/- ON THE GROUND OF EXPENDITURE THAT IT WAS OF CONTINGENT NATURE. IN THIS REGARD THE APPELLANT SUBMITTED THA T RS.1,07,35,959/- DR. IN PROFIT AND LOSS ACCOUNT AS AN EXPENDITURE (SECUR ITY DEPOSIT AND OTHER DEDUCTION ETC.) AND RS.1,01,29,020/- CR. IN PROFIT AND LOSS ACCOUNT AS AN INCOME (REFUND OF SECURITY DEPOSIT AND OTHER DEDUCT ION) WAS CONFIRMED FIGURE/ACTUAL AMOUNT AND SAME HAS BEEN DEDUCTED OR REFUNDED BY THE DEDUCTOR/CONTRACTEE. THE APPELLANT CLAIMED THAT TH E SAME WAS ALSO VERIFIED BY THE LD. ASSESSING OFFICER DURING THE CO URSE OF SCRUTINY PROCEEDING US.143(3). THIS FIGURE/AMOUNT ARE NOT D EPENDING ON THE OUTCOME OF AN UNCERTAIN FUTURE EVENT SUCH AS A COUR T CASE. ITA NO. 30/RAN/17 & ORS. [URMILA RCP PVT. LTD. & DCIT] - 4 - [10.1] THE APPELLANT SUBMITTED THAT THE APPELLANT C ONSISTENTLY FOLLOWED THE ACCOUNTING POLICY SINCE BEGINNING IN WHICH 'ANY DED UCTION EXCEPT INCOME TAX WHICH IS REFUNDABLE OR NOT IN FUTURE SAME HAS B EEN TREATED AS AN EXPENDITURE AND IF SAME HAS BEEN RECEIVED/RECOVERED BY THE ASSESSEE IN RELATION TO ANY YEAR TREATED AS AN INCOME'. IT IS T HE SUBMISSION OF THE APPELLANT THAT IT IS THE PRIVILEGE/RIGHT OF A COMPA NY TO ADOPT ANY ACCOUNTING POLICY. FOR ADOPTION OF ACCOUNTING POLIC Y NO FORMAT OF ACCOUNTING POLICY OR SET OF ACCOUNTING POLICY IS AV AILABLE IN THE COMPANIES ACT, 1956 OR INCOME TAX ACT. 1961. ACCOUN TING STANDARD ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA IS APPLICABLE ON THE COMPANY FOR THE COMPANY ACCOUNTING AND FOR TAX PURPOSE ACCOUNTING STANDARD ISSUED BY THE CENTRAL GOVERNMENT U/S. 145. FOR OPTING OF ACCOUNTING THE APPELLANT CONSIDERED THE ACCOUNTING STANDARD ISSUED BY THE IC AI AND ADOPTED BY COMPANIES ACT, 1956 AND FO R TAX PURPOSES ALSO CONSIDERED THE STANDARD ISSUED BY THE CENTRAL GOVER NMENT U/S.145 OF INCOME TAX ACT, 1961. IT ALSO FOLLOWED THE KEY GOVE RNING POLICIES CONSISTENCY, MATERIALITY. TRUE AND FAIR, PRUDENCE/ CONSERVATISM, AND DISCLOSURE. THE APPELLANT RELIED ON SEVERAL CASE LAWS TO BUTTRE SS ITS POSITION WHICH INCLUDES :- A. [2012] 19 IAXMANN.COM 199 (DELHI [ REFERENCE NOT FOUND]. B. GAPPUMAL KANAHIYALAL V CIT[196L[ 42 ITR 446 (AL LAHABAD) FOR THE PROPOSITION THAT IF PROFITS ARE TO BE COMPU TED IN ACCORDANCE WITH THE METHOD OR ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSES, THEN IT IS TO THE METHOD OF ACCOUNTING THAT ONE MUST LOOK. AND IF THE METHOD OF ACCOUNTING REGULARLY EMPLOYED IS A METHOD WHEREBY LITIGATION EXPENDITURE IS, SO TO SAY, KEPT IN A SUS PENSE ACCOUNT AND IS BROUGHT INTO THE ACCOUNTS ONLY FOR T HE PURPOSE OF BEING CLAIMED AS EXPENDITURE WHEN THE FA TE OF THE LITIGATION IS CLEAR AND NOTHING CAN BE RECOVERED OU T OF THE SUM EXPENDED THEN IT OUGHT NOT TO MATTER WHETHER TH E EXPENDITURE WHICH HAS BEEN KEPT IN THE SUSPENSE ACC OUNT WAS ACTUALLY INCURRED IN EARLIER YEARS. C. UNITED COMMERCIAL BANK V CIT [1999] 106 TAXMAN 6 01 (SC) FOR THE PROPOSITION THAT ON THE BASIS OF THE METHOD OF ACCOUNTANCY REGULARLY EMPLOYED BY THE ASSESSEE. THE REAL INCOME IS POINTED OUT IN THE INCOME-TAX RETURN SUBM ITTED BY THE ASSESSEE. THIS CANNOT BE IGNORED BY HOLDING THA T IN A BALANCE SHEET WHICH IS REQUIRED TO BE STATUTORILY M AINTAINED IN A PARTICULAR FORM, MARKET VALUE OF THE SHARES AN D SECURITIES IS NOT MENTIONED OR IS MENTIONED IN BRAC KETS. D. GARDEN REACH SHIP BUILDERS AND ENGINEERS LTD. V CIT(A):- [2015] 61 TAXMANN.COM 193 FOR THE PROPOSITION THAT SINCE ASSESSEE WAS CONSISTENTLY FOLLOWING ABOVE PRACTICE AND THERE WAS NO CHANGE IN PRACTICE , VALUE OF GOODS BEING ST OCK IN TRANSIT WAS NOT LIABLE TO BE INCLUDED IN PURCHASE. E. COMMISSIONER OF INCOME TAX V BILAHARI INVESTME NT (P). LTD [2008] 168TAXMAN95(SC). ITA NO. 30/RAN/17 & ORS. [URMILA RCP PVT. LTD. & DCIT] - 5 - [10.2] THE LD. ASSESSING OFFICER IN THIS REGARD HAS STATED THAT THE APPELLANT HAD DEBITED A SUM OF TL,07,35,959/- IN TH E PROFIT & LOSS ACCOUNT. THE LD. ASSESSING OFFICER HELD THAT THE SA ID SUMS WERE CONTIGENT IN NATURE AND THEREFORE DID NOT CONSTITUTE AN EXPEN DITURE WHICH COULD BE ALLOWED UNDER THE INCOME TAX ACT. 1961. THE LD. ASS ESSING OFFICER FURTHER HELD THAT THERE WAS NO ACCRUAL OF LIABILITY ONLY AN ESTIMATE WAS MADE. RELIANCE WAS PLACED ON THE FOLLOWING JUDGEMEN TS OF THE HON'BLE SUPREME COURT. 1. M/S. TUTICORIN ALKALI CHEMICALS & FERTILISERS LTD. VS. CIT (SC) 227 ITR 172 2. SUTLEJ COTTON MILLS LTD. VS. CIT (SC) 116 I TR 1 3. CIT VS. BIRITISH PAINTS INDIA LTD. (SC) 18 8 ITR 144 4. CIT VS. UP STATE INDUSTRIAL DEVELOPMENT CORP ORATION (SC) 225 ITR 705 [10.3] I HAVE CONSIDERED THE SUBMISSIONS OF THE APP ELLANT AND HAVE PERUSED THE ASSESSMENT ORDER. THE FOLLOWING AMOUNTS WERE DEBITED BY THE APPELLANT : - SI. NO. EXPENSES AMOUNT 1 EXTENSION OF TIME 6,00,000/- 2 KEPT IN DEPOSIT 16,33,742/- 3 RETENTION MONEV DEDUCTED AT SOURCE 39,65,171/- 4 RETENTION MONEV DEDUCTED AT SOURCE 21,76,726/- 5 SECURITY DEPOSIT 23,60,320/- [10.4] I FIND THAT THE APPELLANT CLAIMS THAT IT WAS TO MAKE DEPOSITS OF AMOUNTS. IT IS ALSO THE CLAIM OF THE APPELLANT THAT THERE WERE TWO TYPES OF DEDUCTIONS MADE : - A. FROM THE RECEIPTS OF THE APPELLANT CERTAIN DEDUC TIONS ARE MADE BY THE CONTRACTEE (THIS INCLUDES THE SUMS MENT IONED IN ROWS I TO 4) B. SECURITY DEPOSIT OF THE APPELLANT PRIOR TO THE WORK ORDER (ROW NO. 5) [10.5] IT WOULD THUS BE SEEN THAT THE CLAIM OF THE APPELLANT IS THAT DEDUCTIONS AT SERIAL NOS.1 TO 4 WERE OF THE NATURE IN WHICH, WHILE MAKING PAYMENT THE CONTRACTEE DEDUCTS CERTAIN SUMS AS A KI ND OF 'SURETY FOR TIMELY COMPLETION OF THE PROJECT AS WELL AS THE QUA LITY OF THE WORK DONE. IN THE CASE OF DEDUCTION UNDER ROW 1 TO 4 THE APPELLAN T SHOWS THE ENTIRE AMOUNT AS RECEIPT ON THE CREDIT SIDE OF THE PROFIT AND LOSS ACCOUNT AND SHOWS THE DEDUCTIONS AS EXPENSES. THE DEPOSIT AS SH OWN IN ROW 5 IS OUT OF THE FUNDS AVAILABLE WITH THE APPELLANT WHICH IS ALS O KEPT AS PERFORMANCE GUARANTEE. [10.6] BEFORE THE CLAIM OF THE APPELLANT IS ANALYSE D IT WOULD BE RELEVANT TO SEE THE DOCUMENT BEING THE LETTER OF AWARD. ANY DED UCTION MADE CAN ONLY BE IN TERMS OF THE CONTRACT. NO CONTRACTEE WOULD BE LEGALLY EMPOWERED TO ITA NO. 30/RAN/17 & ORS. [URMILA RCP PVT. LTD. & DCIT] - 6 - MAKE DEDUCTION WHICH ARE NOT SANCTIONED BY THE CONT RACT. A SAMPLE LETTER NO. SGM/RAN/DVC-RTPS/12/577 DATED 12.07.2012 HAS BE EN FILED. ONGOING THROUGH THE SAME THE RELEVANT CLAUSE AS GER MANE TO THE APPEAL WAS : - 'AS PER THE GENERAL TERMS AND CONDITIONS GCC CLAUSE NO.9.0 OF THE TENDER DOCUMENT, A PERFORMANCE GUARANTEE BG OF RS.6 8. 30 LAKHS (RUPEES SIXTY EIGHT LAKHS AND THIRTY THOUSAND ONLY) IS EQUIVALENT TO 5% (FIVE PERCENT) OF THE CONTRACT VALUE FROM ANY NATIONALIZED BANK OR APPROVED SCHEDULE BANK SITUATED IN THE STAT E OF JHARKHAND WILL BE SUBMITTED TO NBCC WITHIN 30 DAYS FROM THE D ATE OF ISSUE OF LETTER, AS PER THE FORM APPENDED AS APPENDIX M OF G CC'. A SAMPLE COPY OF AGREEMENT WAS ALSO FILED. ARTICLE 3.0 OF THE AGREEMENT FOR CONSTRUCTION OF B TYPE QUARTERS (13 BLOCKS THRE E STORYED) AND C TYPE QUARTERS (G+1 IWO BLOCKS) AT DVC RTPS, RAGHUNA THPUR (WB) DATED 18.07.2012 READS:- 'THE SCOPE OF CONTRACT CONSIDERATION, TERMS OF PAYMENT, ADVANCE, SECURITY DEPOSIT, TAXES WHEREVER APPLICABL E, INSURANCE, AGREED TIME LINE SCHEDULE, COMPENSATION FOR DELAY AND ALL OTHER TERMS AND CONDITIONS CONTAINED IN NBCC LETTER OF IN TENT NO. NBCC'S SGM/RAN/DH/12/436 DATED 26.06.2012 ARE TO BE READ I N CONJUNCTION WITH THE AFORESAID CONTRACT DOCUMENTS. THE CONTRACT SHALL BE DULY PERFORMED BY THE CONTRACTOR STRICTLY AND FAITHFULLY WITH THE TERMS OF THE CONTRACT' [10.7] IT IS CLEAR THAT THE PERFORMANCE GUARANTEE H AD TO BE DEPOSITED WITHIN 30 DAYS OF THE AWARD OF THE CONTRACT. THE AP PELLANT HAS NOT SUBMITTED THE TERMS AND CONDITIONS OF THE NBCC CONT RACT STIPULATIONS AS STATED ABOVE. HOWEVER, IN ANOTHER SUCH APPEAL THE D OCUMENT WAS SUBMITTED. THE RELEVANT CLAUSES OF THE NBCC STIPULA TION IS EXTRACTED FROM THERE AS THEY ARE THE SAME FOR ALL CONTRACTS. THIS READS: ( RELEVANT PORTIONS HIGHLIGHTED) AGREEMENT THIS AGREEMENT MADE THE 171 DAY OF FEBRUARY 2020 BE TWEEN NATIONAL PROJECTS CONSTRUCTION CORPORATION LIMITED HAVING REGISTERED OFFICE AT 'RAJA HOUSE, 30-31, NEHRU PLAC E, NEW DELHI (HEREIN AFTER CALLED THE 'EMPLOYER') ON THE ONE PAR T AND A.P. BARIAR AND SONS, RATU ROAD, PO HEHAL, RANCHI, JHARK HAND (HEREIN AFTER CALLED THE ' CONTRACTOR' OF THE OTHER PART). 2. IN CONSIDERATION OF THE PAYMENT TO BE MADE BY TH E EMPLOYER TO THE CONTRACTOR AS HEREINAFTER MENTIONED, THE CON TRACTOR HEREBY COVENANTS WITH THE EMPLOVER TO EXECUTE THE COMPLETE THE WORKS AND REMEDV ANY DEFECTS THEREIN CONFORMITY IN ALL ASPECTS WITH THE PROVISIONS OF THE CONTRACT AND UNDERTAKING ROUTINE MAINTENANCE FOR FIVE YEARS. 3. THE EMPLOYER HEREBY COVENANTS TO PAY THE CONTRACTOR IN CONSIDERATION OF THE EXECUTION AND COMPLETION OF TH E WORKS AND THE REMEDYING THE DEFECTS WHEREIN AND UNDERTAKING R OUTING MAINTENANCE FOR FIVE YEARS THE CONTRACT PRICE OR SUCH OTHER SUM AS ITA NO. 30/RAN/17 & ORS. [URMILA RCP PVT. LTD. & DCIT] - 7 - MAY BECOME PAYABLE UNDER THE PROVISIONS OF THE CONT RACT AT THE TIME AND IN THE MANNER PRESCRIBED BY THE CONTRACT. PART I GENERAL CONDITIONS OF CONTRACT A. GENERAL 1. DEFINITIONS 1.1 TERMS WHICH ARE DEFINED IN THE CONTRACT DATA AR E NOT ALSO DEFINED IN THE CONDITIONS OF CONTRACT BUT KEEP THEI R DEFINED MEANINGS. CAPITAL INITIALS ARE USED TO IDENTIFY DEF INED TERMS. THE ADJUDICATOR IS THE PERSON APPOINTED JOINTLY BY THE EMPLOYER AND THE CONTRACTOR TO RESOLVE DISPUTES IN THE FIRST INSTANCE, AS PROVIDED IN THE CONTRACT DATA. BILL OF QUANTITIES MEANS THE PRICED AND COMPLETED B ILL OF QUANTITIES FORMING PART OF THE BID. COMPENSATION EVENTS ARE THOSE DEFINED IN CLAUSE 40 HEREUNDER. THE COMPLETION DATE IS THE DATE OF COMPLETION OF TH E WORKS AS CERTIFIED BY THE ENGINEER, IN ACCORDANCE WITH CLAUS E 48.1. THE CONTRACT IS THE CONTRACT BETWEEN THE EMPLOYER A ND THE CONTRACTOR TO EXECUTE, COMPLETE, AND MAINTAIN THE WORKS. IT CONSISTS OF THE DOCUMENTS LISTED IN CLAUSE 2.3 . THE CONTRACT DATA DEFINES THE DOCUMENTS AND OTHER I NFORMATION WHICH COMPRISE THE CONTRACT. THE CONTRACTOR IS A PERSON OR CORPORATE BODY WHOSE BID TO CARRY OUT THE WORKS, INCLUDING ROUTINE MAINTENANCE, HAS BEEN ACCEPTED BY THE EMPLOYER. THE CONTRACTOR'S BID IS THE COMPLETED BIDDING DOCUM ENT SUBMITTED BY THE CONTRACTOR TO THE EMPLOYER. THE CONTRACT PRICE IS THE PRICE STATED IN THE LETTE R OF ACCEPTANCE AND THEREAFTER AS ADJUSTED IN ACCORDANCE WITH THE P ROVISIONS OF THE CONTRACT. DAYS ARE CALENDAR DAYS: MONTHS ARE CALENDAR MONTHS. A DEFECT IS ANY PART OF THE WORKS NOT COMPLETED IN ACCORDANCE WITH THE CONTRACT. THE DEFECTS LIABILITY CERTIFICATE IS THE CERTIFICAT E ISSUED BY THE ENGINEER, AFTER THE DEFECT LIABILITY PERIOD HAS END ED AND UPON CORRECTION OF DEFECTS BY THE CONTRACTOR. THE DEFECT LIABILITY PERIOD IS FIVE YEARS CALCULATE D FROM THE COMPLETION DATE. ROUTINE MAINTENANCE IS THE MAINTENANCE OF ROADS FOR FIVE YEARS AS SPECIFIED IN THE CONTRACT DATA. ITA NO. 30/RAN/17 & ORS. [URMILA RCP PVT. LTD. & DCIT] - 8 - ROUTINE MAINTENANCE IS THE MAINTENANCE OF ROADS FOR FIVE YEARS AS SPECIFIED IN THE CONTRACT DATA 17.1 THE CONTRACTOR MAY COMMENCE EXECUTION OF THE W ORKS ON THE START DATE AND SHALL CARRY OUT THE WORKS AND ROUTIN E MAINTENANCE IN ACCORDANCE WITH THE PROGRAMME SUBMITTED BY THE C ONTRACTOR, AS UPDATED WITH THE APPROVAL OF THE ENGINEER, AND COMP LETE THEM BY THE INTENDED COMPLETION DATE. 3 2.1 (A) THE ENGINEER SHALL GIVE NOTICE TO THE CONTRACTOR O F ANY DEFECTS BEFORE THE END OF THE DEFECTS LIABILITY PERIOD, WHICH BEGINS AT COMPLETION [AND DEFINED- CONTRACT DATA] A ND ENDS AFTER FIVE YEARS. THE DEFECTS LIABILITY PERIOD SHALL BE E XTENDED FOR AS LONG AS DEFECTS REMAIN TO BE CORRECTED. (B) EVERY TIME NOTICE OF DEFECT/DEFECTS IS GIYEN, THE C ONTRACTOR SHALL CORRECT THE NOTIFIED DEFECT/DEFECTS WITHIN TH E DURATION \_OF TIME SPECIFIED BY THE ENGINEER'S NOTICE. 33.1 IF THE CONTRACTOR HAS NOT CORRECTED A DEFECT P ERTAINING TO THE DEFECT LIABILITY PERIOD UNDER CLAUSE 32.1 AND DEFIC IENCIES IN MAINTENANCE AS PER CLAUSE 32.2 OF THESE CONDITIONS OF CONTRACT, TO THE SATISFACTION OF THE ENGINEER, WITHIN THE TIME S PECIFIED IN THE ENGINEER'S NOTICE, THE ENGINEER WILL ASSESS THE COS T OF HAVING THE DEFECT OR DEFICIENCY CORRECTED, AND THE CONTRACTOR SHALL PAY THIS AMOUNT, ON CORRECTION OF THE DEFECT OR DEFICIENCY B Y ANOTHER AGENCY. 38.2 THE PAYMENT TO THE CONTRACTOR WILL BE AS FOLLO WS FOR ROUTINE MAINTENANCE OF THE WORKS: (A) THE CONTRACTOR SHALL SUBMIT TO THE ENGINEER A B ILL EVERY MONTH FOR THE ROUTINE MAINTENANCE OF THE ROADS FROM THE DATE THE MAINTENANCE PERIOD STARTS I.E. FROM COMPLETION DATE AS DEFINED IN CLAUSE 1.1. IT WILL BE SUPPORTED WITH A COPY OF THE RECORD OF CONTRACTOR'S MONTHLY INSPECTION AND OTHER INSTRUCTI ONS RECEIVED FROM THE ENGINEER. (B) THE PAYMENT WILL BE MADE SIX-MONTHLY FOR THE M ONTHLY BILLS RECEIVED DURING THE PREVIOUS SIX-MONTHS. (C) IF THE BILL FOR A MONTH IS NOT RECEIVED FROM TH E CONTRACTOR BY 10 TH DAY OF THE SUCCEEDING MONTH OR/AND IF THE ENGINEER HAS NOT CERTIFIED THAT THE CONTRACTOR HAS CARRIED OUT T HE MAINTENANCE, WORK FOR DEFECTS AND DEFICIENCIES BROUGHT TO HIS N OTICE UNDER CLAUSE 32.2. (D) WITHIN SPECIFIED PERIOD, NO PAYMEN T WILL BECOME DUE TO THE CONTRACTOR FOR THAT MONTH. (D) IF THE CONTRACTOR HAS FAILED TO CARRY OUT THE MAINTENANCE WITHIN THE PERIOD SPECIFIED BY THE ENGINEER IN A GI VEN MONTH, NO PAYMENT OF ANY KIND WILL BE DUE TO THE CONTRACTOR F OR THAT MONTH. 43.1 THE EMPLOYER SHALL RETAIN SECURITY DEPOSIT OF 5% AND PERFORMANCE SECURITY OF TWO AND A HALF PERCENT OF T HE AMOUNT FROM ITA NO. 30/RAN/17 & ORS. [URMILA RCP PVT. LTD. & DCIT] - 9 - EACH PAYMENT DUE TO THE CONTRACTOR UNTIL COMPLETION OF THE WHOLE OF THE CONSTRUCTION WORK. NO SECURITY DEPOSIT/RETEN TION SHALL BE RETAINED FROM THE PAYMENTS FOR ROUTINE MAINTENANCE OF WORKS. IN CASE, THE CONTRACTOR FURNISHES BANK GUARANTEE FOR T HE AMOUNT EQUAL TO PERFORMANCE SECURITY OF TWO AND A HALF PERCENT R ETAINED FROM EACH PAYMENT DUE TO CONTRACTOR, THE SAME AMOUNT SHA LL BE REPAID TO THE CONTRACTOR SUBJECT TO CONDITION THAT THE VAL IDITY OF BANK GUARANTEE IS AS PER PROVISION OF CLAUSE 46.2 OF GCC . 43.2 ON THE SATISFACTORY COMPLETION OF THE WHOLE OF THE CONSTRUCTION WORK HALF THE TOTAL AMOUNT RETAINED AS SECURITY DEPOSIT IS REPAID TO THE CONTRACTOR, ONE-FOURTH OF THE TOTAL AMOUNT RETAINED AS SECURITY DEPOSIT IS REPAID TO THE CONTR ACTOR AT THE END OF 2ND YEAR AFTER COMPLETION OF THE CONSTRUCTION WO RK AND BALANCE OF THE AMOUNT RETAINED AS SECURITY DEPOSIT IS REPAI D TO THE CONTRACTOR AT THE END OF 3RD YEARS AFTER COMPLETION OF THE CONSTRUCTION WORK SUBJECT TO CONDITION THAT THE ENG INEER HAS CERTIFIED THAT ALL DEFECTS NOTIFIED BY THE ENGINEER TO THE CONTRACTOR BEFORE THE END OF PERIOD PRESCRIBED FOR REPAYMENT HAVE BEEN CORRECTED. 43.4 THE PERFORMANCE SECURITY EQUAL TO THE FIVE PER CENT OF THE CONTRACT PRICE AND ADDITIONAL PERFORMANCE SECURITY FOR ROUTINE MAINTENANCE AS DETAILED IN CLAUSE 26.4 OF ITB IS RE PAID TO THE CONTRACTOR WHEN THE PERIOD OF FIVE YEARS FIXED FOR ROUTINE MAINTENANCE IS OVER AND THE ENGINEER HAS CERTIFIED THAT THE CONTRACTOR HAS SATISFACTORILY CARRIED OUT THE ROUTI NE MAINTENANCE OF THE WORKS. IF THE ROUTINE MAINTENANCE PART OF THE CONTRACT IS NOT CARRIED OUT BY THE CONTRACTOR AS PER THIS CONTRACT, THE EMPLOYE R WILL BE FREE JO CARRY OUT ROUTINE MAINTENANCE WORK AND THE AMOUN T REQUIRED FOR THIS WORK WILL BE RECOVERED FROM THE AMOUNTS OF THE CONTRACTOR WHATEVER IS DUE. [10.8] SALIENT FEATURES OF THE CONTRACT ARE : - A. THAT THE CONTRACT INCLUDES DEFECT LIABILITY AND REPAIRS AND MAINTENANCE. B. BOTH THE DEFECT LIABILITY AND REPAIRS MAINTENANC E BEGINS AT THE END OF THE COMPLETION OF THE WORK AND CONTINUES FOR A PERIOD OF FIVE YEARS THEREAFTER. C. THE CONTRACTOR CARRIES ON DEFECT RECTIFYING WORK AND ROUTINE MAINTENANCE FOR FIVE YEARS FROM THE COMPLETION DATE . D. THE DEFECTS IN THE EXECUTION OF CONTRACT WO ULD BE CORRECTED BY THE CONTRACTOR. IF HE FAILS TO TO SO IT WOULD BE GOT DONE BY SOME OTHER AGENCY AND THE CONTRACTOR SHALL HAVE TO PAY FOR THE SAME. E. CONTRACTOR SHALL GET PAID FOR ROUTINE MAIN TENANCE. F. THAT THE EMPLOYER SHALL RETAIN SECURITY DEPOS IT OF 5% AND PERFORMANCE SECURITY OF TWO AND A HALF PERCENT OF T HE AMOUNT ITA NO. 30/RAN/17 & ORS. [URMILA RCP PVT. LTD. & DCIT] - 10 - FROM EACH PAYMENT DUE TO THE CONTRACTOR UNTIL COMPL ETION OF THE WHOLE OF THE CONSTRUCTION WORK. G. THAT ON THE SATISFACTORY COMPLETION OF THE WHOLE OF THE CONSTRUCTION WORK HALF THE TOTAL AMOUNT RETAINED AS SECURITY DEPOSIT IS REPAID TO THE CONTRACTOR. [10.9] THE CLAIM OF THE APPELLANT IS THAT THE SECU RITY DEPOSIT NEVER GETS REFUNDED AND THEREFORE WAS AN OUT GO FOR THE A PPELLANT AND HENCE AN EXPENSE. IN A WAY THE APPELLANT CONTENDS THAT LOOKI NG INTO THE NATURE OF THE CONTRACT IT NEITHER RECTIFIES THE DEFECTS (FOR WHICH IT IS NOT ENTITLED TO ANY PAYMENT) NOR DOES IT CARRY ON ROUTINE MAINTENAN CE (FOR WHICH IT GETS PAID AS AND WHEN EXECUTED). [10.10] THE APPELLANT HAS TREATED THE SECURITY DEPO SIT AS AN EXPENSE UNDER SECTION 37 OF THE ACT. THE LAW REGARDING CLAI M OF EXPENSES IS CLEAR. THE ONUS IS CLEARLY ON THE APPELLANT TO SHOW THAT T HE EXPENSES WERE INCURRED AND THAT THEY WERE REVENUE IN NATURE WHILE AT THE SAME TIME THAT THEY WERE LAID OUT WHOLLY AND EXCLUSIVELY FOR THE P URPOSE OF BUSINESS. THE BURDEN OF PROVING THAT A PARTICULAR EXPENDITURE HAS BEEN LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS SO THAT THE ASSESSEE MAY BE ENTITLED TO CLAIM DEDUCTION IS ON T HE ASSESSES. IN THE CASE OF THE APPELLANT THE EXPENSE IN THE TRUE SENSE OF T HE TERM HAS NOT TAKEN PLACE. THE APPELLANT PLACES A SECURITY DEPOSIT IN T HE FORM OF A FD TO THE CONTRACTEE. ANTICIPATING THAT THE SAME WOLD NOT BE RETURNED THE APPELLANT TREATS THE SAME AS AN EXPENSE. THE QUESTION IS WHET HER THIS IS A REVENUE ITEM? [10.11] THE APPELLANT (LET US ASSUME) HAS CASH IN B ANK (WHICH IS AN ASSET) AND THE APPELLANT GETS THE FD FOR (PERFORMAN CE GUARANTEE AND SECURITY DEPOSIT) MADE OUT OF THE SAME. IN THIS CAS E THERE IS NO CHANGE IN THE OVER ALL BALANCE SHEET AS ONE FORM OF ASSET (CA SH IN BANK) GETS CONVERTED INTO A FD (ANOTHER FORM OF ASSET). LET US FURTHER ASSUME THAT THE APPELLANT GETS BACK THE FD IT ENCASHES IT AND C ONSEQUENTLY THE AMOUNT UNDER CASH IN BANK GOES UP. IN THIS WAY BOTH THE EN TRIES SQUARE UP EACH OTHER. NOW LET US ASSUME THAT 50% OF THE AMOUNT ONL Y IS RETURNED. IN THIS CASE THE CASH IN BANK INCREASES BY 50% ON ENCASHMEN T. THE LIABILITY SIDE IS BALANCED BY REDUCTION OF CAPITAL OF EQUAL AMOUNT (50%). IN AN EXTREME CASE (AS IS THE ASSUMPTION OF THE APPELLANT) THE FD IS FOREFEITED. IN THAT CASE THE ENTIRE AMOUNT IS A LOSS WHICH REDUCES THE CAPITAL BY THE SAME AMOUNT. IN OTHER WORDS THE LOSS IS ON CAPITAL ACCOU NT AND NO EFFECT OF IT WOULD BE ON THE PROFIT AND LOSS ACCOUNT. ACCORDINGL Y THE SAME CANNOT BE ALLOWED AS ITS IMPACT WOULD BE ON THE CAPITAL SIDE. [10.12] NOW LET US ASSUME THAT FIVE FRIENDS JOIN TO GETHER TO FORM A FIRM 'A' EACH CONTRIBUTING 10 LAKHS. AS THE FIRST INSTANCE THE BALANCE SHEET WOULD SHOW RS.50 LAKHS AS PARTNERS CAPITAL ON THE LIABILITY SIDE AND RS.50 LAKHS IN BANK AS AN ASSET. NOW ASSUME THAT TH E FIRM IS AWARDED A CONTRACT OF RS.5 CRS. FOR WHICH IT HAS TO MAKE A FD OF RS.25 LAKHS (@5%) AND PLACE IT AT THE DISPOSAL OF THE CONTRACTEE. WIT H THIS THE BALANCE SHEET WOULD HAVE TWO ENTRIES ONE. CASH IN BANK OF RS.25 L AKHS AND THE OTHER RS.25 LAKHS AS FD (BOTH AS ASSET) BALANCED BY THE C APITAL OF RS.50 LAKHS ON THE LIABILITY SIDE. NOW, (SHORN OF ALL COMPLEXIT IES OF THE BALANCE SHEET) AS PER THE APPELLANT, THE ENTRIES WOULD MEAN CASH I N BANK OF RS.25 LAKHS AND CAPITAL OF RS.25 LAKHS (AS THE BALANCE IS TREAT ED AS A LOSS). THE BALANCE AMOUNT WOULD BE TAKEN TO THE PROFIT & LOSS ACCOUNT AS A LOSS. ITA NO. 30/RAN/17 & ORS. [URMILA RCP PVT. LTD. & DCIT] - 11 - NO\V SUPPOSING THAT THE FD WAS PLACED AT THE DISPOS AL OF THE CONTRACTEE ON 31 ST MARCH AND NO WORK ACTUALLY HAD STARTED. IN THAT CA SE THE APPELLANT, AS PER ITS ACCOUNTING SYSTEM, WOULD CLAI M A LOSS OF RS.25 LAKHS. CLEARLY, THIS IS NOT A LOSS ALLOWABLE U/S.37 OF THE ACT. AS HELD IN THE CASE OF SUTLEJ COTTON MILLS LTD V CIT [1979] 116 ITR 1 ( SC) 'WHETHER THE LOSS SUFFERED BY THE ASSESSEE WAS A TRADING LOSS OR NOT WOULD DEPEND ON WHETHER THE LOSS WAS IN RESPECT OF A TRADING ASSET OR A CAPITAL ASSET. IN THE FORMER CASE, IT WOULD BE A TRADING LOSS BUR NOT SO IN THE LATTER.' IN THE CASE OF THE APPELLANT IT DEFINITELY IS NOT A TRADIN G LOSS. [10.13] NOW LET US EXAMINE THE ENTRY FROM THE POINT OF VIEW THAT THE APPELLANT HAS UNDERSTOOD. IT HAS BEEN HELD IN INDIA N MOLASSES CO. LTD. V CIT [1959] 37 ITR 66 (SC) THAT THERE ARE CERTAIN PR INCIPLES OF A FUNDAMENTAL CHARACTER. THE FIRST IS THAT CAPITAL EX PENDITURE CANNOT BE ATTRIBUTED TO REVENUE AND VICE VERSA. SECONDLY, IT IS EQUALLY CLEAR THAT A PAYMENT IN A LUMP SUM DOES NOT NECESSARILY MAKE THE PAYMENT A CAPITAL ONE. IT MAY STILL POSSESS REVENUE CHARACTER IN THE SAME WAY AS A SERIES OF PAYMENTS. THIRDLY, IF THERE IS A LUMP SUM PAYMENT B UT THERE IS NO POSSIBILITY OF A RECURRENCE, IT IS PROBABLY OF A CA PITAL NATURE, THOUGH THIS IS BY NO MEANS A DECISIVE TEST. FOURTHLY, IF THE PA YMENT OF A LUMP SUM CLOSES THE LIABILITY TO MAKE REPEATED AND PERIODIC PAYMENTS IN THE FUTURE, IT MAY GENERALLY BE REGARDED AS A PAYMENT OF A REVE NUE CHARACTER AND LASTLY, IF THE OWNERSHIP OF THE MONEY WHETHER IN PO INT OF FACT OR BY A RESULTING TRUST BE STILL IN THE TAXPAYER, THEN THER E IS ACQUISITION OF A CAPITAL ASSET AND NOT AN EXPENDITURE OF A REVENUE C HARACTER. [10.14] SIDE BY SIDE WITH THESE PRINCIPLES, THERE A RE OTHERS WHICH ARC ALSO FUNDAMENTAL. THE INCOME-TAX LAW DOES NOT ALLOW AS EXPENSES ALL THE DEDUCTIONS A PRUDENT TRADER WOULD MAKE IN COMPUTING HIS PROFITS. THE MONEY MAY BE EXPENDED ON GROUNDS OF COMMERCIAL EXPE DIENCY BUT NOT OF NECESSITY. THE TEST OF NECESSITY IS WHETHER THE INT ENTION WAS TO EARN TRADING RECEIPTS OR TO AVOID FUTURE RECURRING PAYME NTS OF A REVENUE CHARACTER. EXPENDITURE IN THIS SENSE IS EQUAL TO DI SBURSEMENT WHICH, TO USE A HOMELY PHRASE, MEANS SOMETHING WHICH COMES OU T OF THE TRADER'S POCKET. THUS, IN FINDING OUT WHAT PROFITS THERE BE. THE NORMAL ACCOUNTANCY PRACTICE MAY BE TO ALLOW AS EXPENSE ANY SUM IN RESP ECT OF LIABILITIES WHICH HAVE ACCRUED OVER THE ACCOUNTING PERIOD AND T O DEDUCT SUCH SUMS FROM PROFITS. BUT THE INCOME-TAX LAWS DO NOT TAKE E VEN, SUCH ALLOWANCE AS LEGITIMATE FOR PURPOSES OF TAX. A DISTINCTION IS MA DE BETWEEN AN ACTUAL LIABILITY IN PRAESENTI AND A LIABILITY DE FUTURO WH ICH, FOR THE TIME BEING, IS ONLY CONTINGENT. THE FORMER IS DEDUCTIBLE BUT NOT T HE LATTER. [10.15] IN UNITED COMMERCIAL BANK LTD. V CIT [1999] 240 ITR 355 (SC) IT WAS HELD THAT FOR THE PURPOSE OF INCOME-TAX WHICHEVER METHOD IS ADOPTED BY THE ASSESSEE. A TRUE PICTURE OF THE PROF ITS AND GAINS, THAT IS TO SAY, THE REAL INCOME IS TO BE DISCLOSED. FOR DETERM INING THE REAL INCOME, THE ENTRIES IN A BALANCE SHEET REQUIRED TO BE MAINT AINED IN THE STATUTORY FORM MAY NOT BE DECISIVE OR CONCLUSIVE. IN SUCH CAS ES, IT IS OPEN TO THE ITO AS WELL AS THE ASSESSEE TO POINT OUT THE TRUE A ND PROPER INCOME WHILE SUBMITTING THE INCOME-TAX RETURN. [10.16] IN CIT V ROTORK CONTROLS INDIA LTD. [2009] 314 ITR 62 (SC) IT WAS HELD THAT A PROVISION IS A LIABILITY WHICH C AN BE MEASURED ONLY BV USING A SUBSTANTIAL DEGREE OF ESTIMATION. A PROVISI ON IS RECOGNIZED WHEN: (A) AN ENTERPRISE HAS A PRESENT OBLIGATION AS A RES ULT OF A PAST EVENT: (B) IT IS PROBABLE THAT AN OUTFLOW OF RESOURCES WILL BE REQUIRED TO SETTLE THE ITA NO. 30/RAN/17 & ORS. [URMILA RCP PVT. LTD. & DCIT] - 12 - OBLIGATION; AND (C) A RELIABLE ESTIMATE CAN BE MADE OF THE AMOUNT OF THE OBLIGATION. IF THESE CONDITIONS ARE NOT MET, NO PRO VISION CAN BE RECOGNIZED. [PARA 10] LIABILITY IS DEFINED AS A PRESENT OBLIGATION ARISIN G FROM PAST EVENTS, THE SETTLEMENT OF WHICH IS EXPECTED TO RESULT IN AN OUT FLOW OF RESOURCES FROM THE ENTERPRISE EMBODYING ECONOMIC BENEFITS. [PARA 1 1] A PAST EVENT THAT LEADS TO A PRESENT OBLIGATION IS CALLED AS AN OBLIGATING EVENT WHICH IS AN EVENT THAT CREATES AN OBLIGATION WHICH RESULTS IN AN OUTFLOW OF RESOURCES. IT IS ONLY THOSE OBLIGATIONS ARISING FROM PAST EVENTS WHICH EXIST INDEPENDENTLY OF THE FUTURE CONDUCT OF THE BUSINESS OF THE ENTERPRISE, THAT ARE RECOGNIZED AS A PROVISION. FOR A LIABILITY TO QUALIFY FOR RECOGNITION, THERE MUST BE NOT ONLY PRESENT OBL IGATION BUT ALSO THE PROBABILITY OF AN OUTFLOW OF RESOURCES TO SETTLE TH AT OBLIGATION. WHERE THERE ARE A NUMBER OF OBLIGATIONS (E.G.. PRODUCT WA RRANTIES OR SIMILAR CONTRACTS), THE PROBABILITY THAT AN OUTFLOW WILL BE REQUIRED IN SETTLEMENT IS DETERMINED BY CONSIDERING THE SAID OBLIGATIONS AS A WHOLE. IN THIS CONNECTION, IT MAY BE NOTED THAT IN THE CASE OF A M ANUFACTURE, AND SALE OF ONE SINGLE ITEM, THE PROVISION FOR WARRANTY CAN CON STITUTE A CONTINGENT LIABILITY NOT ENTITLED TO DEDUCTION UNDER SECTION 3 7. HOWEVER, WHEN THERE IS MANUFACTURE AND SALE OF AN ARMY OF ITEMS RUNNING INTO THOUSANDS OF UNITS OF SOPHISTICATED GOODS, THE PAST EVENT OF DEF ECTS BEING DETECTED IN SOME OF SUCH ITEMS LEADS TO A PRESENT OBLIGATION WH ICH RESULTS IN AN ENTERPRISE HAVING NO ALTERNATIVE BUT TO SETTLE THAT OBLIGATION. IN THE INSTANT CASE, THE ASSESSEE HAD BEEN MANUFACTURING A ND SELLING VALVE ACTUATORS. IT WAS IN THE BUSINESS FROM THE ASSESSM ENT YEARS 1983-84 ONWARDS. VALVE ACTUATORS ARE SOPHISTICATED GOODS. O VER THE YEARS, THE ASSESSEE HAD BEEN MANUFACTURING VALVE ACTUATORS IN LARGE NUMBERS. THE STATISTICAL DATA INDICATED THAT EVERY YEAR SOME OF THE MANUFACTURED ACTUATORS WERE FOUND TO BE DEFECTIVE. THE STATI STICAL DATA OVER THE YEARS ALSO INDICATED THAT BEING SOPHISTICATED ITEMS NO CU STOMER WAS PREPARED TO BUY VALVE ACTUATORS WITHOUT A WARRANTY. THEREFORE, WARRANTY BECAME AN INTEGRAL PART OF THE SALE PRICE OF THE VALVE ACTUAT OR(S). IN OTHER WORDS, WARRANTY STOOD ATTACHED TO THE SALE PRICE OF THE PR ODUCT. THEREFORE, WARRANTY PROVISION NEEDED TO BE RECOGNIZED BECAUSE THE ASSESSEE WAS AN ENTERPRISE HAVING A PRESENT OBLIGATION AS A RESULT OF PAST EVENTS RESULTING IN AN OUTFLOW OF RESOURCES. LASTLY, A RELIABLE ESTI MATE COULD BE MADE OF THE AMOUNT OF THE OBLIGATION. IN SHORT, ALL THE THR EE CONDITIONS FOR RECOGNITION OF A PROVISION WERE SATISFIED IN THE IN STANT CASE. [PARA 12] IN THE INSTANT CASE, ONE WAS CONCERNED WITH PRODUCT WARRANTIES. TO GIVE AN EXAMPLE OF PRODUCT WARRANTIES, A COMPANY DEALING IN COMPUTERS GIVES WARRANTY FOR A PERIOD OF 36 MONTHS FROM THE DATE OF SUPPLY. THE SAID COMPANY CONSIDERS FOLLOWING OPTIONS : (A) ACCOUNT F OR WARRANTY EXPENSE IN THE YEAR IN WHICH IT IS INCURRED; (B) IT MAKES A PROVISION FOR WARRANTY ONLY WHEN THE CUSTOMER MAKES A CLAIM; AND (C) IT PR OVIDES FOR WARRANTY AT 2 PER CENT OF TURNOVER OF THE COMPANY BASED ON PAST EXPERIENCE (HISTORICAL TREND). THE FIRST OPTION IS UNSUSTAINABLE SINCE IT WOULD TANTAMOUNT TO ACCOUNTING FOR WARRANTY EXPENSES ON CASH BASIS, WHI CH IS PROHIBITED BOTH UNDER THE COMPANIES ACT, 1956 AS WELL AS BY THE ACC OUNTING STANDARDS WHICH REQUIRE ACCRUAL CONCEPT TO HE FOLLOWED. IN TH E INSTANT CASE, THE REVENUE WAS INSISTING ON THE FIRST OPTION WHICH IS ERRONEOUS AS IT RULES OUT THE ACCRUAL CONCEPT. THE SECOND OPTION IS ALSO INAP PROPRIATE, SINCE IT DOES NOT REFLECT THE EXPECTED WARRANTY COSTS IN RESPECT OF REVENUE ALREADY RECOGNIZED (ACCRUED). IN OTHER WORDS, IT IS NOT BAS ED ON A MATCHING CONCEPT. UNDER THE MATCHING CONCEPT, IF REVENUE IS RECOGNIZED, THE COST INCURRED TO EARN FIAT REVENUE INCLUDING WARRANTY CO STS HAS TO BE FULLY PROVIDED FOR. IN THE INSTANT CASE, WHEN VALVE ACTUA TORS WERE SOLD AND THE ITA NO. 30/RAN/17 & ORS. [URMILA RCP PVT. LTD. & DCIT] - 13 - WARRANTY COST WAS AN INTEGRAL PART OF THAT SALE PRI CE, THEN THE ASSESSEE HAD TO PROVIDE FOR SUCH WARRANTY COST IN ITS ACCOUN T FOR THE RELEVANT YEAR, OTHERWISE THE MATCHING CONCEPT WOULD FAIL. IN SUCH A CASE, THE SECOND OPTION IS ALSO INAPPROPRIATE. UNDER THE CIRCUMSTA NCES, THE THIRD OPTION IS THE MOST APPROPRIATE BECAUSE IT FULFILS ACCRUAL CONCEPT AS WELL AS THE MATCHING CONCEPT. FOR DETERMINING AN APPROPRIATE HI STORICAL TREND, IT IS IMPORTANT THAT THE COMPANY HAS A PROPER ACCOUNTING SYSTEM FOR CAPTURING RELATIONSHIP BETWEEN THE NATURE OF THE SALES, THE W ARRANTY PROVISIONS MADE AND THE ACTUAL EXPENSES INCURRED AGAINST IT SUBSEQU ENTLY. THUS, THE DECISION ON THE WARRANTY PROVISION SHOULD BE BASED ON PAST EXPERIENCE OF THE COMPANY. A DETAILED ASSESSMENT OF THE WARRANT Y PROVISIONING POLICY IS REQUIRED, PARTICULARLY IF THE EXPERIENCE SUGG ESTS THAT WARRANTY PROVISIONS ARE GENERALLY REVERSED IF THEY REMAIN UN UTILIZED AT THE END OF THE PERIOD PRESCRIBED IN THE WARRANTY. THEREFORE, THE COMPANY SHOULD SCRUTINIZE THE HISTORICAL TREND OF WARRANTY PROVISI ONS MADE AND THE ACTUAL EXPENSES INCURRED AGAINST IT. ON THIS BASIS, A SEN SIBLE ESTIMATE SHOULD BE MADE. THE WARRANT)' PROVISION FOR THE PRODUCTS SHOU LD BE BASED ON THE ESTIMATE AT THE YEAR END OF FUTURE WARRANTY EXPENSE S. SUCH ESTIMATES NEED REASSESSMENT EVERY YEAR. AS ONE REACHES CLOSE TO TH E END OF THE WARRANTY PERIOD, THE PROBABILITY THAT THE WARRANTY EXPENSES WILL BE INCURRED IS CONSIDERABLY REDUCED AND THAT SHOULD BE REFLECTED I N THE ESTIMATION MADE. WHETHER THIS SHOULD BE DONE THROUGH A PRO RATA REVE RSAL OR OTHERWISE WOULD REQUIRE ASSESSMENT OF HISTORICAL TREND. IF WA RRANTY PROVISIONS ARE BASED ON EXPERIENCE AND HISTORICAL TREND(S) AND IF THE WORKING IS ROBUST, THEN THE QUESTION OF REVERSAL IN [HE SUBSEQUENT TWO YEARS, IN THE ABOVE EXAMPLE, MAY NOT ARISE IN A SIGNIFICANT WAY. HENCE, ON THE FACTS AND CIRCUMSTANCES OF THE INSTANT CASE, PROVISION FOR WA RRANTY WAS RIGHTLY MADE BY THE ASSESSEE BECAUSE IT HAD INCURRED A PRES ENT OBLIGATION AS A RESULT OF PAST EVENTS. THERE WAS ALSO AN OUTFLOW OF RESOURCES. A RELIABLE ESTIMATE OF THE OBLIGATION WAS ALSO POSSIBLE. THERE FORE, THE ASSESSEE HAD INCURRED A LIABILITY DURING THE RELEVANT ASSESSMENT YEARS AND IT WAS ENTITLED TO DEDUCTION UNDER SECTION 37. THEREFORE, ALL THE THREE CONDITIONS FOR RECOGNIZING A LIABILITY FOR THE PURPOSE OF PROV ISIONING STOOD SATISFIED IN THE INSTANT CASE. THERE ARE FOUR IMPORTANT ASPEC TS OF PROVISIONING, VIZ., PROVISIONING WHICH RELATES TO PRESENT OBLIGATION: I T ARISES OUT OF OBLIGATING EVENTS: IT INVOLVES OUTFLOW OF RESOURCES ; AND LASTLY, IT INVOLVES RELIABLE ESTIMATION OF AN OBLIGATION- KEEPING IN MI ND ALL THE FOUR ASPECTS, THE HIGH COURT SHOULD NOT TO HAVE INTERFERED WITH T HE DECISION OF THE TRIBUNAL IN THE INSTANT CASE. [PARA I3] FROM ANALYSIS OF THE VARIOUS DECISION OF THE SUPREM E COURT, IN WHICH A SIMILAR ISSUE WAS DECIDED, THE PRINCIPLE WHICH EMER GES IS THAT IF THE HISTORICAL TREND INDICATES THAT A LARGE NUMBER OF S OPHISTICATED GOODS WERE BEING MANUFACTURED IN THE PAST AND IF THE FACTS EST ABLISHED SHOW THAT DEFECTS EXISTED IN SOME OF THE ITEMS MANUFACTURED A ND SOLD, THEN THE PROVISION MADE FOR WARRANTY IN RESPECT OF THE ARMY OF SUCH SOPHISTICATED GOODS WOULD BE ENTITLED TO DEDUCTION FROM THE GROSS RECEIPTS UNDER SECTION 37. IT WOULD ALL DEPEND ON THE DATA SYSTEMATICALLY MAINTAINED BV THE ASSESSEE. [PARA 17] [10.17] IN BHARAT EARTH MOVERS V. CIT [2000] 245 IT R 428(SC), THE APEX COURT HAD CATEGORICALLY HELD THAT IF A BUSINES S LIABILITY HAS ARISEN IN THE ACCOUNTING YEAR, THE DEDUCTION SHOULD BE ALLOWE D EVEN IF SUCH A LIABILITY MAY HAVE TO BE QUANTIFIED AND DISCHARGED AT A FUTURE DATE. FOLLOWING PASSAGE FROM THE AFORESAID JUDGMENT IS WO RTH A QUOTE : - 'THE LAW IS SETTLED: IF A BUSINESS LIABILITY HAS DE FINITELY ARISEN IN THE ACCOUNTING YEAR, THE DEDUCTION SHOULD BE ALLOWE D ALTHOUGH THE ITA NO. 30/RAN/17 & ORS. [URMILA RCP PVT. LTD. & DCIT] - 14 - LIABILITY MAY HAVE TO BE QUANTIFIED AND DISCHARGED AT A FUTURE DATE. WHAT SHOULD BE CERTAIN IS THE INCURRING OF THE LIAB ILITY. IT SHOULD ALSO BE CAPABLE OF BEING ESTIMATED WITH REASONABLE CERTAINTY THOUGH THE ACTUAL QUANTIFICATION MAY NOT BE POSSIBL E. IF THESE REQUIREMENTS ARE SATISFIED THE LIABILITY IS NOT A C ONTINGENT ONE. THE LIABILITY IS IN PRAESENTI THOUGH IT WILL BE DISCHAR GED AT A FUTURE DATE. IT DOES NOT MAKE ANY DIFFERENCE IF THE FUTURE DATE ON WHICH THE LIABILITY SHALL HAVE TO BE DISCHARGED IS NOT CERTAI N.' [10.18] IN CIT V WOODWORD GOVERNOR INDIA (P) LTD. [ 2009] 312 ITR 254(SC) IT WAS HELD THAT THE WORD 'EXPENDITURE ' IS NOT DEFINED IN THE ACT. THE WORD 'EXPENDITURE' IS, THEREFORE, REQUIRED TO B E UNDERSTOOD IN THE CONTEXT IN WHICH IT LI USED. SECTION 37 ENJOINS THA T ANY EXPENDITURE NOT BEING EXPENDITURE OF THE NATURE DESCRIBED IN SECTIO NS 30 TO 36 LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS, SHOULD BE ALLOWED IN COMPUTING THE INCOME CHARGEABLE UNDER TH E HEAD 'PROFITS AND GAINS OF BUSINESS'. IN SECTIONS 30 TO 36, THE EXPRE SSION 'EXPENSES INCURRED' AS WE!! AS 'ALLOWANCES AND DEPRECIATION' HAVE ALSO BEEN USED. FOR EXAMPLE, DEPRECIATION AND ALLOWANCES ARE DEALT WITH IN SECTION 32. THEREFORE, THE PARLIAMENT HAS USED THE EXPRESSION ' ANY EXPENDITURE' IN SECTION 37 TO COVER BOTH. THEREFORE, THE EXPRESSION 'EXPENDITURE' AS USED IN SECTION 37 MAY, IN THE CIRCUMSTANCES OF A PARTIC ULAR CASE, COVER AN AMOUNT WHICH IS REALLY A 'LOSS', EVEN THOUGH SAID A MOUNT HAS NOT GONE OUT FROM THE POCKET OF THE ASSESSEE. [PARA 13] THE PROVISIONS OF SECTION 145 RECOGNISE THE RIGHTS OF A TRADER TO ADOPT EITHER THE CASH SYSTEM OR THE MERCANTILE SYSTEM OF ACCOUNTING. THE QUANTUM OF ALLOWANCES PERMITTED TO BE DEDUCTED UNDE R DIVERSE HEADS UNDER SECTIONS 30 TO 43C FROM THE INCOME, PROFITS A ND GAINS OF A BUSINESS WOULD DIFFER ACCORDING TO THE SYSTEM ADOPTED. THIS IS MADE DEAR BY DEFINING THE WORD 'PAID' IN SECTION 43(2), WHICH IS USED IN SEVERAL SECTIONS FROM SECTIONS 30 TO 43C. AS MEANING ACTUALLY PAID O R INCURRED ACCORDING TO THE METHOD OF ACCOUNTING UPON THE BASIS OF WHICH PROFITS OR GAINS ARE COMPUTED UNDER SECTION 28/29. THAT IS WHY, IN DECID ING THE QUESTION, AS TO WHETHER THE WORD 'EXPENDITURE' IN SECTION 37(1) INC LUDES THE WORD 'LOSS', ONE HAS TO READ SECTION 37(1) WITH SECTIONS 28, 29 AND 145(1). ACCOUNTS REGULARLY MAINTAINED IN THE COURSE OF BUSINESS ARE TO BE TAKEN AS CORRECT, UNLESS THERE ARE STRONG AND SUFFICIENT REASONS TO I NDICATE THAT THEY ARE UNRELIABLE. UNDER SECTION 28(I). ONE NEEDS TO DECID E THE PROFITS AND GAINS OF ANY BUSINESS WHICH IS CARRIED ON BY THE ASSESSEE DURING THE PREVIOUS YEAR. THEREFORE, ONE HAS TO TAKE INTO ACCOUNT STOCK -IN-TRADE FOR DETERMINATION OF PROFITS. THE ACT MAKES NO PROVISIO N WITH REGARD TO VALUATION OF STOCK. BUT THE ORDINARY PRINCIPLE OF C OMMERCIAL ACCOUNTING REQUIRES THAT M THE PROFIT AND LOSS ACCOUNT, THE VA LUE OF THE STOCK-IN-TRADE AT THE BEGINNING AND AT THE END OF THE YEAR SHOULD BE ENTERED AT COST OR MARKET PRICE, WHICHEVER IS LOWER. THIS IS HOW BUSIN ESS PROFITS ARISING DURING THE YEAR NEED TO BE COMPUTED. THIS IS ONE MO RE REASON FOR READING SECTION 37(1) WITH SECTION 145. FOR VALUING THE CLO SING STOCK AT THE END OF A PARTICULAR YEAR, THE VALUE PREVAILING ON THE LAST DATE IS RELEVANT, BECAUSE PROFITS/LOSS IS EMBEDDED IN THE CLOSING STO CK. WHILE ANTICIPATED LOSS IS TAKEN INTO ACCOUNT, ANTICIPATED PROFIT IN T HE SHAPE OF APPRECIATED VALUE OF THE CLOSING STOCK IS NOT BROUGHT INTO ACCO UNT, AS NO PRUDENT TRADER WOULD CARE TO SHOW INCREASE IN PROFITS BEFOR E ACTUAL REALIZATION. THIS IS THE THEORY UNDERLYING THE RULE THAT THE CLO SING STOCK IS TO BE VALUED AT COST OR MARKET PRICE, WHICHEVER IS THE LOWER. AS PROFITS FOR INCOME-TAX PURPOSE ARE TO BE COMPUTED IN ACCORDANCE WITH ORDIN ARY PRINCIPLES OF ITA NO. 30/RAN/17 & ORS. [URMILA RCP PVT. LTD. & DCIT] - 15 - COMMERCIAL ACCOUNTING, UNLESS SUCH PRINCIPLES STAND SUPERSEDED OR MODIFIED BY LEGISLATIVE ENACTMENTS, UNREALIZED PROF ITS IN THE SHAPE OF APPRECIATED VALUE OF GOODS REMAINING UNSOLD AT THE END OF THE ACCOUNTING YEAR AND CARRIED OVER TO THE FOLLOWING YEAR'S ACCOU NT IN A CONTINUING BUSINESS ARE NOT BROUGHT TO THE CHARGE AS A MATTER OF PRACTICE, THOUGH LOSS DUE TO FALL IN THE PRICE BELOW COST IS ALLOWED EVEN THOUGH SUCH, LOSS HAS NOT BEEN REALIZED ACTUALLY. THE SAID SYSTEM OF COMM ERCIAL ACCOUNTING CAN BE SUPERSEDED OR MODIFIED BY LEGISLATIVE ENACTMENT. UNDER SECTION 145(2), THE CENTRAL GOVERNMENT IS EMPOWERED TO NOTIFY FROM TIME-TO-TIME THE ACCOUNTING STANDARDS TO BE FOLLOWED BY ANY CLASS OF THE ASSESSEES OR IN RESPECT OF ANY CLASS OF INCOME. ACCORDINGLY, UNDER SECTION 209 OF THE COMPANIES ACT. MERCANTILE SYSTEM OF ACCOUNTING HAS BEEN MADE MANDATORY FOR COMPANIES. IN OTHER WORDS, ACCOUNTING STANDARD, WHICH IS CONTINUOUSLY ADOPTED BY AN ASSESSEE, CAN HE SUPERSE DED OR MODIFIED BY LEGISLATIVE INTERVENTION. HOWEVER, BUT FOR SUCH INT ERVENTION OR IN CASES FALLING UNDER SECTION 145(3), THE METHOD, OF ACCOUN TING UNDERTAKEN BY THE ASSESSEE CONTINUOUSLY IS SUPREME. IN THE INSTANT CA SE, THERE WAS NO FINDING GIVEN BY THE ASSESSING OFFICER ON THE CORRECTNESS O R COMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE. EQUALLY, THERE WAS NO FIN DING GIVEN BY THE ASSESSING OFFICER STATING THAT THE ASSESSEE HAD NOT COMPLIED WITH THE ACCOUNTING STANDARDS, [PARA 14] [10.19] IN CALCUTTA COMPANY LTD V CTT [1959] 37 ITR 1 (SC) THE APEX COURT HELD THAT THERE WAS NO DOUBT THAT THE UN DERTAKING TO CARRY OUT THE DEVELOPMENTS WITHIN SIX MONTHS FROM THE DATES O F THE DEEDS OF SALE WAS INCORPORATED THEREIN AND THAT UNDERTAKING WAS UNCON DITIONAL, THE ASSESSEE APPELLANT BINDING ITSELF ABSOLUTELY TO CARRY OUT TH E SAME. IT WAS NOT DEPENDENT ON ANY CONDITION BEING FULFILLED OR THE H APPENING OF ANY EVENT, THE ONLY CONDITION BEING THAT IT WAS TO BE CARRIED OUT WITHIN SIX MONTHS WHICH IN VIEW OF THE FACT THAT THE TIME WAS NOT OF THE ESSENCE OF (HE CONTRACT MEANT A REASONABLE TIME. WHATEVER MIGHT BE CONSIDERED A REASONABLE TIME UNDE R THE CIRCUMSTANCES OF THE CASE, THE SETTING UP OF THAT TIME LIMIT DID NOT PRESCRIBE ANY CONDITION FOR THE CARRYING OUT OF THAT UNDERTAKING AND THE UNDERTAKING WAS ABSOLUTE IN TERMS. IF THAT UNDERTAKING IMPORTED ANY LIABILITY ON THE A PPELLANT THE LIABILITY HAD ALREADY ACCRUED ON THE DATES OF THE DEEDS OF SA LE, THOUGH THAT LIABILITY WAS TO BE DISCHARGED AT A FUTURE DATE. IT WAS THUS AN ACCRUED LIABILITY AND THE ESTIMATED EXPENDITURE WHICH WOULD BE INCURRED IN DISCHARGING THE SAME COULD VERY, WELL BE DEDUCTED F ROM THE PROFITS AND GAINS OF THE BUSINESS. IN AS MUCH AS THE LIABILITY WHICH HAD THUS ACCRUED DURING THE ACCOUNTING YEAR WAS TO BE DISCHARGED AT A FUTURE DATE THE AMOU NT TO BE EXPENDED IN THE DISCHARGE OF THAT LIABILITY WOULD HAVE TO BE ES TIMATED IN ORDER THAT UNDER THE MERCANTILE SYSTEM OF ACCOUNTING THE AMOUN T COULD BE DEBITED BEFORE IT WAS ACTUALLY DISBURSED. THE DIFFICULTY IN THE ESTIMATION THEREOF AGAIN WOUL D NOT CONVERT AN ACCRUED LIABILITY INTO A CONDITIONAL ONE, BECAUSE I T IS ALWAYS OPEN TO THE INCOME-TAX AUTHORITIES CONCERNED TO ARRIVE AT A PRO PER ESTIMATE THEREOF HAVING REGARD TO ALL THE CIRCUMSTANCES OF THE CASE. [10.20] ANALYSIS OF CASES SHOWS THAT A LIABILITY I S DEFINED AS A PRESENT OBLIGATION ARISING FROM PAST EVENTS, THE SE TTLEMENT OF WHICH IS EXPECTED TO RESULT IN AN OUTFLOW OF RESOURCES FROM THE ENTERPRISE EMBODYING ECONOMIC BENEFITS. FOR A LIABILITY TO QUA LIFY FOR RECOGNITION, THERE MUST BE NOT ONLY PRESENT OBLIGATION BUT ALS O THE PROBABILITY OF AN ITA NO. 30/RAN/17 & ORS. [URMILA RCP PVT. LTD. & DCIT] - 16 - OUTFLOW OF RESOURCES TO SETTLE THAT OBLIGATION. WHE RE THERE ARE A NUMBER OF OBLIGATIONS (E.G., PRODUCT WARRANTIES OR SIMILAR CONTRACTS), THE PROBABILITY THAT AN OUTFLOW WILL BE REQUIRED IN SET TLEMENT IS DETERMINED BY CONSIDERING THE SAID OBLIGATIONS AS A WHOLE. UNDER THE MATCHING CONCEPT, IF REVENUE IS RECOGNIZED, THE COST INCURRED TO EARN THAT REVENUE INCLUDING WARRANTY COSTS HAS TO BE FULLY PROVIDED FOR. [10.21] IN THE CASE OF THE APPELLANT IT IS NOT THAT THE APPELLANT HAS PROVIDED FOR A CERTAIN SUM (SAY 10% OF THE CONTRACT VALUE) AS A LIABILITY FOR FUTURE EXPENSES ON 'DEFECT LIABILITY'. (IT MUST BE REMEMBERED THAT IT IS ONLY WITH DEFECT LIABILITY THAT THE APPELLANT DOES NOT GET PAID. FOR ROUTINE MAINTENANCE IT GETS PAID AS PER THE CONTRACT. BOTH THE PERIODS RUN FOR FIVE YEARS AFTER THE COMPLETION DATE. MOREOVER, THE PERF ORMANCE GUARANTEE SUM IS TO BE PAID WITHIN 30 DAYS OF THE AWARD OF TH E CONTRACT AND THEREFORE CANNOT BE MADE OUT OF ANY RUNNING BILL AS CLAIMED BY THE APPELLANT). IF THAT WAS THE CASE, AS IT SATISFIED T HE CONDITIONS LAID DOWN IN ROTORK CONTROLS (SUPRA) IT WOULD BE ALLOWED THE LIA BILITY. IN THE CASE OF THE APPELLANT IT HAS TREATED THE FD AS ALREADY BEEN FOREFIETED AND HENCE, ACCORDING TO THE APPELLANT, AN EXPENSE ALLOWABLE U/ S.37(L) OF THE ACT. THIS ALSO DOES NOT SATISFY THE 'MATCHING PRINCIPLES' AS STATED IN THE CASE OF ROTORK CONTROLS (SUPRA) AS ''UNDER THE MATCHING CON CEPT, IF REVENUE IS RECOGNIZED, THE COST INCURRED 10 EARN THAT REVENUE INCLUDING WARRANTY COSTS HAS TO BE FULLY PROVIDED FAR. ' IN THE CASE O F THE APPELLANT THE REVENUE RECOGNISED DOES NOT MATCH WITH THE FUNDS AV AILABLE WITH THE APPELLANT OUT OF WHICH FD WAS MADE. THE SOURCE OF R EVENUE AND THE FD ARE TWO DISPARATE ITEMS. ONE ON THE REVENUE SIDE AN D THE OTHER ON THE CAPITAL SIDE. [10.22] IN THE CASE OF SUTLEJ COTTON MILLS LTD. V C D [1979] 116 ITR 1 (SC) THE RATIO WAS THAT THE WAY IN WHICH ENTRIES ARE MADE BY AN ASSESSEE IN HIS BOOKS OF ACCOUNT IS NOT DETERMINATIVE OF THE QUESTION WHETHER THE ASSESSEE HAS EARNED ANY PROFIT OR SUFFERED ANY LOSS . THE ASSESSEE MAY, BY MAKING ENTRIES WHICH ARE NOT IN CONFORMITY WITH THE PROPER ACCOUNTANCY PRINCIPLES, CONCEAL PROFIT OR SHOW LOSS AND THE ENT RIES MADE BY HIM CANNOT, THEREFORE, BE REGARDED AS CONCLUSIVE ONE WA Y OR THE OTHER. IT WAS HELD THAT 'WHETHER THE LOSS SUFFERED BY THE ASSESSE E WAS A TRADING LOSS OR NOT WOULD DEPEND ON WHETHER THE LOSS WAS IN RESPECT OF A TRADING ASSET OR A CAPITAL ASSET. IN THE FORMER CASE, IT WOULD BE A TRADING LOSS BUT NOT SO IN THE LATTER.' AS HELD ABOVE THE LOSS IN THE CASE OF THE APPELLANT IS THAT OF A CAPITAL ASSET AND THEREFORE NOT ALLOWABLE. [INCIDE NTLY THIS CASE LAW WAS CITED BY THE APPELLANT IN ITS FAVOUR] [10.23] IT WOULD ALSO BE RELEVANT TO ANALYSE THE CA SE LAWS CITED BY THE APPELLANT SO AS TO UNDERSTAND ITS POINT OF VIEW . THE FIRST CASE IS THAT OF WOODWARD GOVERNORS (SUPRA). IN THAT CASE THE HON'BL E SC HAS NOTED THAT 'IN CONCLUSION, IT MAY BE SLATED THAT IN ORDER TO F IND OUT IF AN EXPENDITURE IS DEDUCTIBLE, THE FOLLOWING FACTORS HAVE TO BE TAK EN INTO ACCOUNT (I) WHETHER THE SYSTEM OF ACCOUNTING FOLLOWED BY THE AS SESSEE IS MERCANTILE SYSTEM, WHICH BRINGS INTO DEBIT THE EXPENDITURE AMO UNT FOR WHICH A LEGAL LIABILITY HAS BEEN INCURRED BEFORE IT IS ACTUALLY D ISBURSED AND BRINGS INTO CREDIT WHAT IS DUE, IMMEDIATELY IT BECOMES DUE AND BEFORE I! IS ACTUALLY RECEIVED; (II) WHETHER THE SAME SYSTEM IS FOLLOWED BY THE ASSESSEE FROM THE VERY BEGINNING AND IF THERE WAS A CHANGE IN THE SYSTEM, WHETHER THE CHANGE WAS BONAFIDE; (III) WHETHER THE ASSESSEE HAS GIVEN THE SAME TREATMENT TO LOSSES CLAIMED TO HAVE ACCRUED AND TO THE GAINS THAT MAY ACCRUE TO IT; (IV) WHETHER THE ASSESSEE HAS BEEN CO NSISTENT AND DEFINITE IN ITA NO. 30/RAN/17 & ORS. [URMILA RCP PVT. LTD. & DCIT] - 17 - MAKING ENTRIES IN THE ACCOUNT BOOKS IN RESPECT OF L OSSES AND GAINS; (V) WHETHER THE METHOD ADOPTED BY (HE ASSESSEE FOR MAKI NG ENTRIES IN THE BOOKS BOTH IN RESPECT OF LOSSES AND GAINS AS PER NA TIONALLY ACCEPTED ACCOUNTING STANDARDS; (VI ) WHETHER THE SYSTEM ADOP TED BY THE ASSESSEE IS FAIR AND REASONABLE OR IS ADOPTED ONLY WITH A VIEW TO REDUCE THE INCIDENCE OF TAXATION. ' [10.24] THE APEX COURT IN THE ABOVE CASE HAS ALLOWE D FOR LIABILITIES AS EXPENSES IF CERTAIN CONDITIONS ARE FULFILLED. HO WEVER, THE SAME HAS TO BE IN RESPECT OF 'DEDUCTIBLE EXPENSES'. THE MOOT QU ESTION IS WHETHER THE BOOKING OF LOSS OF THE FD (ITS ENCASHMENT FOR NON F ULFILLMENT OF THE CONDITIONS OF THE CONTRACT) CAN BE TERMED AS AN ' D EDUCTIBLE EXPENSE'? AS EXPLAINED ABOVE THE ENTRY IS NOT AN ' ASCERTAINED L IABILITY' THE EXPENSE OF WHICH HAD NOT ARISEN BUT WAS LIKELY TO ARISE IN THE FUTURE. IN THE CASE OF THE APPELLANT IT WAS AN ITEM OF : ASSET' WHICH THE APPELLANT BOOKED AS 'EXPENSE'. THEREFORE, THE PRINCIPLES OF WOODWORD (S UPRA) WOULD NOT BE APPLICABLE. [10.25] SECOND CASE LAW RELIED UPON BY THE APPELLAN T IS THAT OF INDIAN MOLLASES CO. LTD. V CIT [1959] 37 ITR 66 (SC ). IN THIS CASE H WAS HELD THAT: - 'THERE ARE CERTAIN PRINCIPLES OF A FUNDAMENTAL CHAR ACTER. THE FIRST IS THAT CAPITAL EXPENDITURE CANNOT BE ATTRIBUTED TO REVENUE AND VICE VERSA. SECONDLY, IT IS EQUALLY CLEAR THAT A PAYMENT IN A LUMP SUM DOES NOT NECESSARILY MAKE THE PAYMENT A CAPITAL ONE . IT MAY STILL POSSESS REVENUE CHARACTER IN THE SAME WAY AS A SERI ES OF PAYMENTS. THIRDLY, IF THERE IS A LUMP SUM PAYMENT BUT THERE I S NO POSSIBILITY OF A RECURRENCE, IT IS PROBABLY OF A CAPITAL NATURE , THOUGH THIS IS BY NO MEANS A DECISIVE TEST. FOURTHLY, IF THE PAYMENT OF A LUMP SUM CLOSES THE LIABILITY TO MAKE REPEATED AND PERIODIC PAYMENTS IN THE FUTURE, IT MAY GENERALLY BE REGARDED AS A PAYMENT O F A REVENUE CHARACTER AND LASTLY, IF THE OWNERSHIP OF THE MONEY WHETHER IN POINT OF FACT OR BY A RESULTING TRUST BE STILL IN THE TAX PAYER, THEN THERE IS ACQUISITION OF A CAPITAL ASSET AND NOT AN EXPENDITU RE OF A REVENUE CHARACTER. SIDE BY SIDE WITH THESE PRINCIPLES, THERE ARE OTHER S WHICH ARE ALSO FUNDAMENTAL. THE INCOME-TAX LAW DOES NOT ALLOW AS E XPENSES A/I THE DEDUCTIONS A PRUDENT TRADER WOULD MAKE IN COMPUTING HIS PROFITS. THE MONEY MAY BE EXPENDED ON GROUNDS OF COMMERCIAL EXPEDIENCY BUT NOT OF NECESSITY. THE TEST OF NECESSITY IS WHET HER THE INTENTION WAS TO EARN TRADING RECEIPTS OR TO AVOID FUTURE REC URRING PAYMENTS OF A REVENUE CHARACTER. EXPENDITURE IN THIS SENSE I S EQUAL TO DISBURSEMENT WHICH, TO USE A HOMELY PHRASE, MEANS S OMETHING WHICH COMES OUT OF THE TRADER'S POCKET. THUS, IN FINDING OUT WHAT PROFITS THERE BE, THE NOR MAL ACCOUNTANCY PRACTICE-MAY BE TO ALLOW AS EXPENSE ANY SUM IN RESP ECT OF LIABILITIES WHICH HAVE ACCRUED OVER THE ACCOUNTING PERIOD AND TO DEDUCT SUCH SUMS FROM PROFITS. BUT THE INCOME-TAX L AWS DO NOT TAKE EVERY SUCH ALLOWANCE AS LEGITIMATE JOT-PURPOSES OF TAX. A DISTINCTION IS MADE BETWEEN AN ACTUAL LIABILITY IN PRAESENTI AND A LIABILITY DE FUTURO WHICH, FOR THE TIME BEING, IS O NLY CONTINGENT. THE FORMER IS DEDUCTIBLE BUT NOT THE LATTER. THE RECURRING LIABILITY OF PENSION WHICH IS COMPRES SED INTO A LUMP PAYMENT SHOULD ITSELF BE A LEGAL OBLIGATION, AND TH AT, IF CONTINGENT, THE PRESENT VALUE OF THE FUTURE PAYMENTS SHOULD BE FAIRLY ESTIMABLE. ITA NO. 30/RAN/17 & ORS. [URMILA RCP PVT. LTD. & DCIT] - 18 - IF THE PENSION ITSELF BE NOT PAYABLE AS AN OBLIGATI ON, AND-IF THERE BE A POSSIBILITY-THAT NO SUCH, PAYMENT MAY BE NECESSAR Y IN THE FUTURE, THE WHOLE OF THE AMOUNT CANNOT BE DEDUCTED BUT ONLY THE PRESENT VALUE OF THE FUTURE LIABILITY, IF IT CAN BE ESTIMAT ED. AS TO THE QUESTION WHETHER [HE PAYMENTS MADE TOWARD S THE POLICY WERE 'EXPENDITURE' WITHIN SECTION 10(XV) OF THE 192 2 ACT, 'EXPENDITURE' IS EQUAL TO 'EXPENSE' AND 'EXPENSE' I S MONEY LAID OUT BY CALCULATION AND INTENTION THOUGH IN MANY USE S OF THE WORD THIS ELEMENT MAY NOT BE PRESENT. BUT THE IDEA OF 'S PENDING' IN THE SENSE OF 'PAYING OUT OR AWAY' MONEY IS THE PRIMARV MEANING. 'EXPENDITURE' IS THUS WHAT IS 'PAID OUR OR AWAY' AN D IS SOMETHING WHICH IS GONE IRRETRIEVABLY. TO BE AN ALLOWANCE WITHIN CLAUSE (XV) OF SECTION 10 (2) OF THE 1922 ACT. THE MONEY PAID OUT OR AWAY MUST BE (A) PAID OU T WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS AND FUR THER (B) MUST NOT BE (I) CAPITAL EXPENDITURE, (II) PERSONAL EXPENSES OR (III) AN ALLOWANCE OF THE CHARACTER DESCRIBED IN CLAUSES (I) TO (XIV).' [10.26] IN THE ABOVE CASE THE APEX COURT HAS HELD T HAT 'EXPENDITURE' IS EQUAL TO 'EXPENSE' AND 'EXPENSE' I S MONEY LAID OUT BY CALCULATION AND INTENTION THOUGH IN MANY USE S OF THE WORD THIS ELEMENT MAY NOT BE PRESENT. BUT THE IDEA OF 'S PENDING' IN THE SENSE OF 'PAYING OUT OR AWAY' MONEY IS THE PRIMARY MEANING. 'EXPENDITURE' IS THUS WHAT IS 'PAID OUT OR AWAY' AN D IS SOMETHING WHICH IS GONE IRRETRIEVABLY. TO BE AN ALLOWANCE WIT HIN CLAUSE (XV) OF SECTION 10(2) OF THE 1922 ACT, THE MONEY PAID OU T OR AWAY MUST BE (A) PAID OUT WHOLLY AND EXCLUSIVELY FOR THE PURP OSE OF THE BUSINESS AND FURTHER (B) MUST NOT BE (I) CAPITAL EX PENDITURE.. THE CASE OF THE APPELLANT WITH REGARD TO THE BOOKING OF ANTICIPATED LOSS OF MONEY OF THE FD IS NOT REVENUE IN NATURE AND THE REFORE CANNOT BE SAID TO BE AN ALLOWABLE LIABILITY. [10.27] IN THE CASE OF MP FINANCIAL CORPORATION V C TT [1987] 165 ITR 765 (MP) THE RULING WAS THAT 'AS REG ARDS THE DEDUCTION OF THE AMOUNT OF DISCOUNT ON THE BONDS, T HE SAME PRINCIPLES AS ARE APPLICABLE IN THE CASE OF ISSUE O F DEBENTURES AT DISCOUNT, WOULD BE ATTRACTED IN THE CASE OF ISSUE O F BONDS AT A DISCOUNT. THE AMOUNT OF DISCOUNT IN EFFECT, REPRESE NTS DEFERRED INTEREST- LOOKED AT AS SUCH, A PROPORTIONATE AMOUNT OF DISCOUNT CAN BE WRITTEN OFF OUT OF REVENUE EVERY YEAR, DURING TH E PERIOD THE BONDS WOULD REMAIN OUTSTANDING- THEREFORE, THOUGH T HE ASSESSEE WOULD NOT BE JUSTIFIED IN CLAIMING DEDUCTION OF THE ENTIRE AMOUNT OF DISCOUNT IN THE ACCOUNTING YEAR IN QUESTION, IT WOU LD NEVERTHELESS BE ENTITLED TO PROPORTIONATE DEDUCTION SPREAD OVER THE PERIOD, FOR WHICH THE BONDS WOULD RAMAIN OUTSTANDING. 'THIS CAS E HAS BEEN APPROVED BY THE APEX COURT IN THE CASE OF MADRAS IN DUSTRIAL CORPORATION V CIT 225 ITR 802. [10.28] THIS CASE TOO DOES NOT HELP THE APPELLANT A S THE ALLOWABLE AMOUNT WAS DEFERRED INTEREST' WHICH WAS A REVENUE ITEM. [10.29] THE CASE OF UNITED COMMERCIAL BANK V CIT [1 999] 240 TTR 355 (SC) TOO THE FACTS WERE VERY DIFFERENT. IN THAT CASE 'FOR REASONS, THE CENTRAL GOVERNMENT, IN EXERCISE O F THE POWERS CONFERRED BY SECTION 53 OF THE BANKING REGULATION A CT, AND ON THE RECOMMENDATION OF THE RBI, PERMITTED THE ASSESSEE N OT TO DISCLOSE THE MARKET VALUE OF ITS INVESTMENT IN THE BALANCE S HEET REQUIRED TO ITA NO. 30/RAN/17 & ORS. [URMILA RCP PVT. LTD. & DCIT] - 19 - BE MAINTAINED AS PER THE STATUTORY FORM. BUT AS THE ASSESSEE WAS MAINTAINING ITS ACCOUNTS ON MERCANTILE SYSTEM, IT W AS ENTITLED TO SHOW ITS REAL INCOME BY TAKING INTO ACCOUNT THE MAR KET VALUE OF SUCH INVESTMENTS IN ARRIVING AT THE REAL TAXABLE IN COME. ON THAT BASIS, THEREFORE, THE ASSESSING OFFICER HAD TAXED T HE ASSESSEE. ' [10.30] THE APPELLANT HAS ALSO RELIED UPON THE CASE OF ROTORK CONTROLS (SUPRA). AS DISCUSSED ABOVE THE CASE LAW D OES NOT HELP THE APPELLANT. [10.31] BASED ON THE ABOVE IT IS HELD THAT THE AMOU NT OF RS.1,07,35,959/-CLAIMED AS EXPENSES WAS NOT AN ALLO WABLE EXPENSE AND THE SAME WAS RIGHTLY DISALLOWED BY THE LD. ASSE SSING OFFICER. GROUND OF APPEAL IS DISMISSED . [10.32] WHILE ON THE SUBJECT IT WOULD ALSO BE IMPOR TANT TO CONSIDER THE ALTERNATE CONTENTION OF THE APPELLANT WHICH IS THAT; ON THE ONE HAND THE LD. ASSESSING OFFICER DID NOT ALLO W THE EXPENSES ON SECURITY DEPOSIT AS EXPENSES, SHE TAXED THE SECU RITY DEPOSIT RECEIPT SHOWN BY THE APPELLANT AS INCOME. IT IS THE SUBMISSION OF THE APPELLANT THAT BY FOLLOWING A CONSISTENT METHOD OF ACCOUNTING AND IN THE ENDEAVOR TO REFLECT TRUE PROFIT OF ITS B USINESS, IT HAD OFFERED THE REFUND AS INCOME OF THE YEAR. [10.33] NO DISCUSSION OF THE ISSUE HAS BEEN MADE BY THE LD- ASSESSING OFFICER IN HER ORDER. [10.34] I HAVE CONSIDERED THE SUBMISSION OF THE APP ELLANT. I FIND THAT UNDER THE HEAD 'OTHER INCOME' - SCHEDULE 4.1 OF THE BALANCE SHEET THE APPELLANT HAD OFFERED INCOMES UND ER THE HEADS: OTHER DEDUCTIONS RS.6,13,703/- AND SECURITY DEPOSIT REFUND RS.95,15,317/- TOTALLING RS.1,01,29,020/-. THE QUES TION IS CAN A DEDUCTION BE ALLOWED SINCE THE APPELLANT HAD OFFERE D THE REFUND OF DEPOSIT OF INCOME. AS DISCUSSED ABOVE, IN MY VIEW T HE PAYMENT OF SECURITY DEPOSIT WAS MADE OUT OF THE FUNDS (CAPITAL ) AVAILABLE WITH THE APPELLANT AND THEREFORE, WAS NOT AN ALLOWABLE E XPENSES OF BUSINESS. SIMILARLY, THE REFUNDS NOW OFFERED FOR TA X. AS A NECESSARY COROLLOARY, WOULD ALSO NOT CONSTITUTE INCOME. HOWEV ER, AS THE APEX COURT HAS HELD IN THE CASE OF GOETZE (INDIA) LTD. V CIT [2006] 283 ITR 306 ANY CLAIM OF DEDUCTION (IN THIS CASE INCOME OFFERED) HAS TO BE MADE BY THE ASSESSEE BY FILING A REVISED RETURN. ACCORDINGLY, IN VIEW OF THE JUDGMENT OF THE APEX COURT NO RELIEF CA N BE GRANTED TO THE APPELLANT. THIS GROUND OF THE APPELLANT IS DISMISSED . 8. FURTHER AGGRIEVED BY THE DENIAL OF RELIEF CLAIME D TOWARDS TAXABILITY OF RETENTION MONEY ETC. ON RECEIPT BASIS, THE ASSES SEE PREFERRED APPEAL BEFORE THE TRIBUNAL. 9. THE LEARNED AR FOR THE ASSESSEE BROADLY REITERAT ED VARIOUS SUBMISSIONS MADE BEFORE THE LOWER AUTHORITIES AND C LAIMED THAT THE EXPENDITURE CLAIMED IN THE P&L ACCOUNT TOWARDS RETE NTION MONEY IS ITA NO. 30/RAN/17 & ORS. [URMILA RCP PVT. LTD. & DCIT] - 20 - NOTHING BUT REPRESENTS A DEDUCTION OUT OF GROSS BIL LS SINCE THE INCOME TO THE EXTENT OF RETENTION MONEY LYING AT THE LIEN AND COM MAND OF RESPECTIVE CONTRACTEES AS DEPOSIT IS A HIGHLY CONTINGENT RECEI VABLE AND REALIZATION THEREOF HINGES UPON THE FULFILLMENT OF SEVERE OBLIG ATIONS EMANATING FROM RESPECTIVE CONTRACTS. IT WAS FURTHER SUBMITTED ON BEHALF OF THE ASSESSEE THAT THE AMOUNT SO RETAINED BY THE CONTRACTEE ARE D ULY OFFERED FOR TAXATION IN THE YEAR OF ACTUAL REALIZATION ON FULFILLMENT OF TERMS ON CONTRACT AND THUS THE ACT OF ASSESSEE DO NOT CAUSE ANY PREJUDICE TO A SSESSEE. THE LEARNED AR FOR THE ASSESSEE SUBMITTED THAT SUCH ACCOUNTING PRA CTICE ADOPTED BY THE ASSESSEE IS IN TUNE WITH THE BUSINESS COMPLEXITY IN VOLVED AS WELL AS IN SYNC WITH WELL-ESTABLISHED LAW THAT INCOME IS CHARGEABLE TO TAX ON ACCRUAL BASIS BUT HOWEVER THE ACCRUAL OF INCOME IS DEPENDENT UPON THE RIGHT TO RECEIVE SUCH INCOME AND THE POINT OF TIME WHEN IT BECOMES L EGALLY DUE TO THE ASSESSEE. IT WAS POINTED OUT THAT THE ASSESSEE HAS CONSISTENTLY TAKEN STAND BEFORE THE LOWER AUTHORITIES THAT THE RIGHT TO REC EIVE ON THE MONEY RETAINED HAS NOT ACCRUED TO THE ASSESSEE MERELY ON RAISING INVOICE AS PER THE CONTRACT VALUE BUT IS DEPENDENT ON ACTUAL DISCH ARGE OF CONTRACTUAL OBLIGATION TO THE SATISFACTION OF THE CONTRACTEE. THE INCOME THUS INCLUDED IN THE GROSS RECEIPT TO THE EXTENT OF RETENTION MON EY IS BESET WITH CONTINGENCY AND IS SQUARELY DEPENDENT UPON FUTURE H APPENINGS AND EVENTS. THE LEARNED AR FOR THE ASSESSEE THUS SUBMITTED THAT THERE IS NO REASON FOR THE DEPARTURE FROM THE CONSISTENTLY FOLLOWED ACCOUN TING POLICY BY MIS- APPRECIATING THE FACTS AS WELL AS SETTLED LAW. THE LEARNED AR LASTLY ADDED THAT SUCH ACCOUNTING PRACTICE NOT ONLY REFLECTS TRU E INCOME ACCRUED IN THE HANDS OF ASSESSEE BUT ALSO IS REVENUE NEUTRAL AS TH E INCOME TOWARDS RETENTION MONEY IS DULY OFFERED FOR TAXATION IN THE RESPECTIVE YEARS OF RECEIPT. 10. THE LEARNED DR, ON THE OTHER HAND, RELIED UPON THE ORDERS OF THE LOWER AUTHORITIES. 11. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS. THE ASSESSEE IN THE INSTANT CASE IS ENGAGED IN THE BUSINESS OF WORK S CONTRACT MAINLY CIVIL CONTRACT (BUILDING). THE SUBSTANTIVE CONTROVERSY I N THE INSTANT APPEAL IS ITA NO. 30/RAN/17 & ORS. [URMILA RCP PVT. LTD. & DCIT] - 21 - TOWARDS POINT OF TIME OF TAXABILITY OF RETENTION MO NEY/SECURITY DEPOSIT DEDUCTED AND WITHHELD BY RESPECTIVE CONTRACTEES IN A WORK CONTRACT AS A LIEN TO ENSURE COMPLETE EXECUTION OF TERMS OF CONTR ACT. IT IS THE CASE OF ASSESSEE THAT INCOME ON SUCH RETENTION MONEY IS ACC RUED ON COMPLETE DISCHARGE OF CONTRACTUAL OBLIGATIONS TO THE SATISFA CTION OF CONTRACTEE AND THUS CHARGEABLE TO TAX ONLY AT THE TIME OF ACTUAL R EALIZATION. AS STATED, IT IS THE ORDINARY PRACTICE IN SUCH BUSINESS OF CIVIL CON TRACT THAT CONTRACTEE DEDUCTS CERTAIN PERCENTAGE OF GROSS BILL RAISED BY THE ASSESSEE TOWARDS RETENTION MONEY/SECURITY DEPOSITS AS PER TERMS OF C ONTRACT. THE AMOUNT SO DEDUCTED IS WITHHELD BY THE CONTRACTEE AND IS REALI ZED TO THE ASSESSEE ONLY UPON THE CONTRACTEE BEING SATISFIED ABOUT THE COMPL ETION OF THE WORK ENTRUSTED TO CONTRACTOR (ASSESSEE HEREIN) AND OTHER TERMS MENTIONED IN THE CONTRACT ARE SATISFIED BY THE CONTRACTOR. AS FURTH ER STATED, THE RETENTION MONEY /SECURITY DEPOSIT SO WITHHELD BY THE CONTRACT EE IS DEBITED IN THE P&L ACCOUNT AND DEDUCTED FROM THE GROSS RECEIPTS. SUCH RECEIPT IS TREATED AS INCOME TO THE ASSESSEE ONLY ON ACTUAL REALIZATION T HEREOF ON FULFILLMENT OF TERMS OF CONTRACT AS PER THE ACCOUNTING POLICY CONS ISTENCY FOLLOWED BY THE ASSESSEE. AS POINTED OUT, IN THE CIVIL CONTRACT BU SINESS, CERTAIN PORTION OF THE MONEY OUT OF BILL RAISED BY THE ASSESSEE ARE RE TAINED BY THE CONTRACTEE AS A SECURITY DEPOSIT TO SAFEGUARD THEIR BUSINESS I NTERESTS AND MONEY SO RETAINED ARE REALIZED BY THE CONTRACTOR ASSESSEE SU BSEQUENTLY ON SATISFACTORY EXECUTION OF CONTRACT AS PER THE TERMS AGREED. IT IS THUS THE CASE OF THE ASSESSEE THAT SUCH AMOUNT RETAINED BY T HE CONTRACTS ARE CONTINGENT UPON FULFILLMENT OF TERMS OF CONTRACT AN D AS A COROLLARY, RIGHT TO RECEIVE PAYMENTS OF RETENTION MONEY/SECURITY DEPOSI T ETC. DEPEND ON SATISFACTION OF THE THIRD PARTY I.E. CONTRACTEE TOW ARDS EXECUTION AND COMPLETION OF CONTRACT AS PER TERMS OF CONTRACT. I T IS THUS THE CASE OF THE ASSESSEE THAT INCOME EMBEDDED IN THE GROSS BILL RAI SED ON THE CONTRACTEE DID NOT ACCRUE TO THE ASSESSEE IN THE YEAR OF RAISI NG INVOICE TO THE EXTENT OF AMOUNT DEDUCTED TOWARDS RETENTION MONEY ETC. TILL T HE TIME THE RIGHT TO RECEIVE SUCH INCOME RETAINED ACTUALLY ARISE OR ACC RUE TO THE ASSESSEE. THE ASSESSEE ACQUIRES A RIGHT TO RECEIVE THE AMOUNT RET AINED BY THE CONTRACTEE ONLY AT A LATER STAGE SUBJECT TO THE FULFILLMENT OF TERMS OF CONTRACT TO THE SATISFACTION OF THE CONTRACTEE. AS PER THE ASSESSE E, THE GROSS SALES/RECEIPTS ITA NO. 30/RAN/17 & ORS. [URMILA RCP PVT. LTD. & DCIT] - 22 - ARE RECORDED AS INCOME OF THE ASSESSEE IN THE P&L A CCOUNT INCLUDING RETENTION MONEY/SECURITY DEPOSIT, KID ETC. AS DEDUC TED FROM THE INVOICE RAISED TO AVOID MIS-MATCH OF GROSS AMOUNT ON WHICH TAX HAS BEEN DEDUCTED BY THE CONTRACTEE AT APPLICABLE RATES. HOWEVER, TH E ASSESSEE HAS ADOPTED THE ACCOUNTING PROCEDURE WHEREBY RETENTION MONEY / SECURITY DEPOSIT ETC. ARE DEBITED/REDUCED SEPARATELY FROM SUCH GROSS INCO ME WHICH ENCOMPASSES RETENTION MONEY ETC. WHILE DETERMINING THE TAXABLE PROFITS. THE RETENTION MONEY/SECURITY DEPOSITS SO WITHHELD ARE LATER RECOG NIZED AS INCOME IN THE RESPECTIVE YEARS AS AND WHEN THE MONEY SO RETAINED IS ACTUALLY REALIZED BY THE REVENUE. THIS METHOD OF ACCOUNTING IS STATED T O BE FOLLOWED FOR LAST MANY YEARS TO DETERMINE THE TRUE PROFITS OF THE ASS ESSEE. THE REVENUE, ON THE OTHER HAND, SEEKS TO REJECT THIS ACCOUNTING PRA CTICE FOLLOWED BY THE ASSESSEE ON THE GROUND THAT THE EXPENDITURE TOWARDS RETENTION MONEY / SECURITY DEPOSIT CLAIMED BY THE ASSESSEE ARE CONTIN GENT AND THE ASSESSEE IS OBLIGED TO PAY TAXES ON INCOME DETERMINED WITH REFE RENCE TO INVOICES RAISED BY THE ASSESSEE IN PURSUANCE OF CONTRACTEE R EGARDLESS OF CERTAIN PORTION THEREOF BEING RETAINED BY THE CONTRACTEE IN THE ORDINARY COURSE OF BUSINESS. 12. WE FIND INHERENT FALLACY IN THE APPROACH ADOPTE D BY THE REVENUE WHILE DISTURBING THE INCOME DECLARED BY THE ASSESSE E. THE ASSESSEE HEREIN SEEKS TO RECORD THE INCOME WHEN IT COMES INTO EXIST ENCE IN THE RELEVANT PREVIOUS YEAR. THE REAL TEST FOR TAXABILITY OF INC OME IS THAT IF THE AMOUNT IS TO BE TAXABLE AS INCOME, THE BASIC CONCEPTION TO BE KEPT IN VIEW IS THAT THE RIGHT TO RECEIVE THE INCOME MUST COME INTO EXISTE NCE IN THE RELEVANT PREVIOUS YEAR. THE INCOME ACCRUES WHEN IT BECOMES LEGALLY DUE TO THE ASSESSEE. THE DATE OF ACTUAL RECEIPT, OF COURSE, I S NOT DETERMINATIVE FOR TAXABILITY OF INCOME UNDER MERCANTILE SYSTEM OF ACC OUNTING. MERE RAISING OF INVOICE ON THE CONTRACTEE WOULD NOT IPSO FACTO TANTAMOUNT TO ACCRUAL OF INCOME. THE ASSESSEE IN THE INSTANT CASE, CLAIMS T HAT A CERTAIN PORTION OF BILL HAS BEEN KEPT AS A LIEN IN THE CUSTODY OF THE CONTRACTEE TILL THE FULFILLMENT OF THE CONDITIONS SPECIFIED IN THE CONT RACT. NATURALLY, SUCH RETENTION MONEY WOULD ACCRUE ONLY WHERE THE TERMS O F THE CONTRACT STANDS FULFILLED. IN THE ABSENCE OF ITS ACCRUAL, THE INCO ME CANNOT BE TAXED UNDER ITA NO. 30/RAN/17 & ORS. [URMILA RCP PVT. LTD. & DCIT] - 23 - MERCANTILE SYSTEM OF ACCOUNTING ON A HYPOTHETICAL B ASIS. WE FIND CONSIDERABLE FORCE IN THE AFORESAID PLEA OF THE ASS ESSEE. IT IS NOT THE CASE OF THE REVENUE THAT THE WORK UNDER THE CONTRACT HAS BEEN COMPLETELY FULFILLED. THE UNREALIZED PORTION OF THE BILLS RAI SED BY THE CONTRACTOR ASSESSEE IS IN THE LEAGUE OF CONTINGENT INCOME UNTI L AND UNLESS THE TERMS AND CONDITIONS OF THE CONTRACT STANDS FULFILLED. W E FIND COMPLETE MERIT IN THE ARGUMENT LAID ON BEHALF OF THE ASSESSEE ON THIS SCORE. WHEN SEEN DIFFERENTLY, WE ALSO FIND SUBSTANCE IN THE CASE MAD E OUT THAT THE ASSESSEE HAS BOOKED THE UNREALIZED PORTION OF THE BILL IN TH E YEAR OF REALIZATION AS AND WHEN HAPPENED. THEREFORE, THE ACTION OF THE AS SESSEE DOES NOT CAUSE ANY PREJUDICE TO THE REVENUE AND IS TAX NEUTRAL. I N SUCH CIRCUMSTANCES, WHEN SEEN IN COMBINATION, WE ARE INCLINED TO ACCEPT THE CLAIM OF THE ASSESSEE FOR NON-TAXABILITY OF UNREALIZED INCOME KE PT IN THE CUSTODY OF THE CONTRACTEE AS PER THE TERMS OF THE CONTRACT. FOR T HE REASONS NARRATED, WE SET ASIDE THE ORDER OF THE CIT(A) AND DIRECT THE AO TO DELETE THE DISALLOWANCE OF EXPENDITURE OF RS.1,07,35,959/- ON THIS SCORE. 13. THE SECOND ISSUE PERTAINS TO CHARGEABILITY OF I NTEREST UNDER S.234B OF THE ACT AMOUNTING TO RS.17,66,016/-. 14. WE FIND THAT IDENTICAL ISSUE HAS COME UP BEFORE THE CO-ORDINATE BENCH OF ITAT IN ITO VS. M/S. ANAND VIHAR CONSTRUCT ION PVT. LTD. ITA NO. 335/RAN/2017 ORDER DATED 28.11.2018 WHEREIN THE ISS UE WAS DEALT WITH AS UNDER: 16. WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL ON RECORD. PRIMA FACIE THE DISPUTED ISSUE, BEING CHARG ING OF INTEREST U/S.234A & 234B AS ENVISAGED BY LD. AR, IS COVERED BY THE DECISION OF HOB'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF AJ AY PRAKASH VERMA IN ITA NO.38 OF 2010 REPORTED IN 2013(1) TMI 140. THE HON'BLE COURT IN PARA23&24 HELD AS UNDER :- '23. LEARNED COUNSEL FOR THE APPELLANT SUBMITTED TH AT IT HAS BEEN ORDERED BY THE AO THAT INTEREST BE CHARGED AS PER R ULE. INTEREST CAN BE LEVIED UNDER SECTION 234A AND 234B OF THE ACT. I T IS SUBMITTED THAT IN VIEW OF THE JUDGMENT OF FULL BENCH OF RANCH I BENCH OF PATNA HIGH COURT DELIVERED IN THE CASE OF SMT. TEJ KUMARI VRS. COMMISSIONER OF INCOME-TAX REPORTED IN [2001] THE I NTEREST CANNOT BE LEVIED OVER THE ASSESSED INCOME AND IT CAN BE LE VIED ONLY ON THE INCOME DECLARED IN THE RETURN. THE REVENUE PREFERRE D SLP BEFORE HON'BLE SUPREME COURT AGAINST THE SAID JUDGMENT OF THE FULL BENCH ITA NO. 30/RAN/17 & ORS. [URMILA RCP PVT. LTD. & DCIT] - 24 - OF PATNA HIGH COURT, WHICH WAS DISMISSED BY THE HON 'BLE SUPREME COURT ON MERITS VIDE ORDER DATED 01.08.2000 BY SAYI NG THAT THERE IS NO MERIT IN THE APPEAL. 24. LEARNED COUNSEL FOR THE REVENUE COULD NOT DISPU TE THIS LEGAL POSITION. THEREFORE, SO FAR AS QUESTION OF LAW INVOLVED IN TH IS APPEAL THAT WHETHER THE INTEREST COULD HAVE BEEN LEVIED AGAINST THE ASSESSED INCOME OF THE ASSESSEE UNDER SECTIONS 234A AND 234B IS CONCERNED, IN VIEW OF THE FULL BENCH JUDGMENT OF RANCHI BENCH OF PATNA HIGH COURT DELIVERED IN THE CASE OF SMT. TEJ. KUMARI, TH E REVENUE CAN LEVY THE INTEREST ONLY ON THE TOTAL INCOME DECLARED IN THE RETURNS AND NOT ON THE INCOME ASSESSED AND DETERMINED BY TH E AO TO THAT EXTENT. THE ORDERS PASSED BY THE AUTHORITIES BELOW ARE ACCORDINGLY MODIFIED AND INTEREST SHALL BE CHARGEABLE IN THE LI GHT OF THE FULL BENCH JUDGMENT, REFERRED ABOVE.' 17. LD. AR ALSO PLACED RELIANCE ON THE DECISION OF COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF SHRI GIRDHARI LAL SHARMA VS . ITO, WARD-1(4), JAMSHEDPUR IN ITA NO. 31/RAN/2013 BY AN ORDER DATED 07.05.2012 IN PARA NO. 6 RELYING UPON THE ABOVE DECISION OF THE HON'BL E JHARKHAND HIGH COURT HELD :- 'WE ACCORDINGLY FOLLOWING THE ABOVE DECISION, DIREC T THE ASSESSING OFFICER TO RE-COMPUTE THE INTEREST UNDER SECTION 23 48 ON THE BASIS OF THE TOTAL INCOME DECLARED BY THE ASSESSEE IN THE RETURN FILED.' 18. WE RESPECTFULLY FOLLOWING THE DECISION OF THE J URISDICTIONAL HIGH COURT AND THE DECISION OF COORDINATE BENCH OF THE T RIBUNAL DIRECT THE AO TO RECOMPUTED THE INTEREST U/S.234B ON THE BASIS OF TOTAL INCOME DECLARED BY THE ASSESSEE IN THE RETURN FILED. THIS GROUND OF CROSS OBJECTION OF THE ASSESSEE IS ALLOWED. 15. FOR THE REASONING NOTED ABOVE, THE AO IS DIRECT ED TO DELETE THE LEVY OF INTEREST UNDER S.234B OF THE ACT. 16. IN THE RESULT, THE GROUND RAISED BY THE ASSESSE E IS ALLOWED. 17. IN THE RESULT, THE APPEAL OF THE ASSESSEE ALLOW ED. ITA NO. 48/RAN/2018 AY 2013-14 18. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE RE AD AS UNDER: 1. RS.64,64,521/- WAS DISALLOWED BY ASSESSING OFFI CER ON THE PLEA OF BEING CONTINGENT NATURE WHICH IS AGAINST THE DEFINI TION OF CONTINGENT NATURE AND BAD IN LAW WITHOUT EXPLAINING AS HOW THE EXPENDITURE IS CONTINGENT WHEN THE ASSESSEE HAS F OLLOWED ACCOUNTING POLICY AS PRESCRIBED BY ICAI AND THE STA NDARD ISSUED BY CENTRAL GOVERNMENT U/S 145 OF THE INCOME TAX ACT, C ONSISTENTLY, ITA NO. 30/RAN/17 & ORS. [URMILA RCP PVT. LTD. & DCIT] - 25 - YEAR AFTER YEAR. THE ASSESSEE HAS TREATED ALL THE AMOUNTS DEDUCTED BY THE DEPARTMENT AT SOURCE AS BAD DEBTS. SO THE S AME SHOULD BE DELETED. 2. THE ASSESSING OFFICER HAS WRONGFULLY LEVIED INTE REST OF RS.8,02,887/- ON THE AMOUNT OF TAX CALCULATED ON TH E ABOVE DISALLOWANCE OF EXPENSES AS STATED AT POINT NO.1. 19. THE GRIEVANCE RAISED AS PER GROUND NO.1 IS IDEN TICAL TO FIRST GRIEVANCE OF THE ASSESSEE IN ITA NO.30/RAN/20117 CO NCERNED AY 2012-13. IN PARITY WITH THE CONCLUSIONS DRAWN THEREIN, THE A FORESAID ISSUE IS CONCLUDED IN FAVOUR OF ASSESSEE. GROUND NO.1 IS ALL OWED. 20. GROUND NO.2 IS ALSO ADJUDICATED IN FAVOUR OF AS SESSEE IN TERMS OF PARA 13-15 (SUPRA). 21. IN THE RESULT, APPEAL OF THE ASSESSEE IN ITA NO . 48/RAN/2018 FOR AY 2013-14 IS ALLOWED. ITA NO. 341/RAN/2018 AY 2010-11 22. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE RE AD AS UNDER: 1. ASSESSING OFFICER ADDED RETENTION MONEY / SECU RITY DEPOSIT, KID ETC, DEDUCTED FROM BILL ON THE GROUND OF ASSESSES FOLLOW ED WRONG ACCOUNTING POLICY, WITHOUT CONSIDERING THE REASON B EHIND ADOPTION OF ACCOUNTING POLICY AND RIGHT TO RECEIVE PAYMENTS OF THE RETENTION MONEY/SECURITY DEPOSIT ETC. DEPEND ON SATISFACTION OF THE CONTRACTREE AS PER TERMS OF CONTRACT AND COMPLETION OF CONTRACT. SO, ADDITION MADE BY ASSESSING OFFICER RS. 20596503/- I LLEGAL OR BAD IN LAW, SO, ADDITION MADE BY ASSESSING SHOULD BE DELET ED. 2. ASSESSEE DR. IN PROFIT AND LOSS ACCOUNT UNDER THE HEADS RETENTION MONEY/ SECURITY DEPOSIT RS. 16193579/-AND RS. CR. I N PROFIT AND LOSS ACCOUNT RS. 4766708/-,BUT ASSESSING OFFICER AD DED RS. 20596503/-, DIFFERENCE OF DR. RS.21244818/- AND CR. RS. 648315/- OF RETENTION MONEY IN P & L ACCOUNT RELATED TO A Y 11-12. SO, RS.9169632/- EXCESS ADDED BY THE ASSESSING OFFICER. SO, ADDITION MADE BY ASSESSING OFFICER IS NOT CORRECT, SO SHOULD BE DELETED. 23. THE GRIEVANCE RAISED AS PER GROUND NO.1 IS IDEN TICAL TO FIRST GRIEVANCE OF THE ASSESSEE IN ITA NO.30/RAN/20117 CO NCERNED AY 2012-13. IN PARITY WITH THE CONCLUSIONS DRAWN THEREIN, THE A FORESAID ISSUE IS CONCLUDED IN FAVOUR OF ASSESSEE. GROUND NO.1 IS ALL OWED. ITA NO. 30/RAN/17 & ORS. [URMILA RCP PVT. LTD. & DCIT] - 26 - 24. GROUND NO.2 IS ALSO ADJUDICATED IN FAVOUR OF AS SESSEE IN TERMS OF PARA 13-15 (SUPRA). 25. IN THE RESULT, APPEAL OF THE ASSESSEE IN ITA NO . 341/RAN/2018 FOR AY 2010-11 IS ALLOWED. 26. IN THE COMBINED RESULT, ALL THE APPEALS OF THE ASSESSEE ARE ALLOWED. SD/- SD/- (MADHUMITA ROY) (PRADIP KUMAR KEDIA) JUDICIAL MEMBER ACCOUNTANT MEMBER RANCHI: DATED 20/01/2020 TRUE COPY S. K. SINHA / COPY OF ORDER FORWARDED TO:- &. / REVENUE 2. / ASSESSEE (. )*+ , / CONCERNED CIT 4. ,- / CIT (A) /. 012 33*+4 *+#4 / DR, ITAT, RANCHI 6. 278 9 / GUARD FILE. BY ORDER, SR. PRIVATE SECRETARY ITAT, AHMEDABAD THIS ORDER PRONOUNCED IN OPEN COURT ON 20/01/202 0