BGR Energy Systems Limited, CHENNAI V. DCIT, CHENNAI

ITA 660/CHNY/2017

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 5751 (ITAT-CHENNAI)
• Duration Of Justice: 8 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-12-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2010-2011
• Appeal Filed On: 17-03-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S BHARATH IRS
• Assessee Lawyers: MRS JHARNA B HARILAL
• Keywords: Depreciation; Earning of tax free income
• Section: 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : CHENNAI . , , BEFORE SHRI ABRAHAM P.GEORGE, ACCOUNTANT MEMBER AND SHRI GEORGE MATHAN, JUDICIAL MEMBER ./ I.T.A. NO.660/MDS/2017 ! / ASSESSMENT YEAR : 2010-2011 M/S. BGR ENERGY SYSTEMS LTD NO.443, ANNA SALAI, TEYNAMPET, CHENNAI 600 018. VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 3(1) CHENNAI. ./ I.T.A. NO.954/MDS/2017 & C.O.NO.65/MDS/2017 ( IN ITA NO.954/MDS/2017 ) ! / ASSESSMENT YEAR : 2010-2011 THE DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 3(1) CHENNAI. VS. M/S. BGR ENERGY SYSTEMS LTD NO.443, ANNA SALAI, TEYNAMPET, CHENNAI 600 018 [PAN AABCG 2202J] ( / APPELLANT) ( /RESPONDENT/ CROSS OBJECTOR) ASSESSEE BY : MRS. JHARNA B. HARILAL, C.A '#$ % & /RESPONDENT BY : SHRI. S. BHARATH, IRS, CIT. ' ( % )* /DATE OF HEARING : 30-11-2017 +,! % )* /DATE OF PRONOUNCEMENT : 07-12-2017 ITA NOS.660 & 954/17 & C.O.65/2017 :- 2 -: / O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER: THESE ARE CROSS APPEALS FILED BY THE ASSESSEE AND REVENUE RESPECTIVELY FOR THE ASSESSMENT YEAR 2010-2011. ASS ESSEE HAS ALSO FILED A CROSS OBJECTION WHICH SUPPORTS THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS)-19, CHENNAI ON THE ISSUES WHICH WENT IN FAVOUR OF THE ASSESSEE. 2. APPEAL OF THE ASSESSEE IS TAKEN UP FIRST FOR DISPOS AL. ASSESSEE HAS TAKEN ALTOGETHER SIX GROUNDS OF WHICH GROUNDS NO.1, 2 & 6 ARE GENERAL IN NATURE NEEDING NO SPECIFIC ADJUDIC ATION. 3. VIDE ITS GROUND NO.3, GRIEVANCE RAISED BY THE ASSES SEE IS THAT DISALLOWANCE OF PROVISION FOR CONTRACTUAL OBLI GATIONS WAS CONFIRMED BY THE LD. COMMISSIONER OF INCOME TAX (AP PEALS). 4. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT SIMILAR ISSUE HAD COME UP BEFORE HYDERABAD BENCH OF THIS TRIBUNAL IN ASSESSEES OWN CASE IN ITA NO.985/HYD/2012, DATED 05.09.2013 FOR ASSESSMENT YEAR 2009-2010 AND IT WAS DECIDED IN FAVOUR OF THE ASSE SSEE. ACCORDING TO HER, ASSESSEE HAD TO PAY LIQUIDATED DAMAGES FOR NOT COMPLETING THE ITA NOS.660 & 954/17 & C.O.65/2017 :- 3 -: WORK UNDERTAKEN BY IT, IN TIME. CONTENTION OF THE L D. AUTHORISED REPRESENTATIVE WAS THAT THERE WERE SPECIFIC CLAUSES IN THE CONTRACTS ENTERED BY THE ASSESSEE WITH ITS CLIENTS, WHICH PRO VIDED FOR LIQUIDATED DAMAGES. 5. PER CONTRA, LD. DEPARTMENTAL REPRESENTATIVE SUBMIT TED THAT IN EARLIER YEARS, ASSESSEE HAD GIVEN A SPECIFIC WOR K-OUT OF THE LIQUIDATED DAMAGES WITH REFERENCE TO DELAY IN EACH OF THE PROJECT AND THE QUANTUM OF DAMAGES ARISING ON ACCOUNT OF SUCH D ELAY. AS PER THE LD. DEPARTMENTAL REPRESENTATIVE, SUCH WORK-OUT WAS NOT AVAILABLE FOR THE IMPUGNED ASSESSMENT YEAR. FURTHER, AS PER THE LD. DEPARTMENTAL REPRESENTATIVE THERE WAS NOTHING ON RECORD TO SHOW WHETHER THE DELAY WAS DUE TO ANY FAULT OF THE ASSESSEE OR THAT OF ITS CLIENTS. ACCORDING TO HIM, AT THE BEST THE ASSESSEE WOULD B E LIABLE FOR DAMAGES ONLY FOR THE DELAY DUE TO ITS OWN FAULT. L D. DEPARTMENTAL REPRESENTATIVE, REFERRING TO THE TABLE GIVEN IN PA RA 11 OF THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS), SUBMI TTED THAT AGAINST SIMILAR PROVISIONS MADE BY THE ASSESSEE IN THE EAR LIER YEARS, ACTUAL PAYMENTS EFFECTED BY IT WERE NEGLIGIBLE. THUS, ACC ORDING TO HIM, PROVISION CREATED BY THE ASSESSEE WAS UNSCIENTIFIC . AS PER THE LD. DEPARTMENTAL REPRESENTATIVE, DECISION OF THE HYDERA BAD TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2009-2010, RELIED ON BY THE ASSESSEE, WAS NOT APPLICABLE ON FACTS HERE. ITA NOS.660 & 954/17 & C.O.65/2017 :- 4 -: 6. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSE D THE ORDERS OF THE AUTHORITIES BELOW. ASSESSEE HAD DEBI TED A SUM OF D53,99,42,000/- AS PROVISION FOR CONTRACTUAL OBLIGA TION IN ITS PROFIT AND LOSS ACCOUNT. DURING THE COURSE OF HEARING, LD. ASS ESSING OFFICER HAD SPECIFICALLY ASKED THE ASSESSEE TO FURNISH AGREEME NTS ENTERED BY IT WITH ITS CLIENT AND THE DETAILS OF THE PROJECTS ON WHICH SUCH PROVISION WAS WORKED OUT. LD. ASSESSING OFFICER ALSO REQUIRED THE ASSESSEE TO FURNISH THE REASONS FOR THE DELAY IN EXECUTION OF T HE CONCERNED PROJECTS. ASSESSEE HAD FAILED TO FURNISH THE DETAI LS. ASSESSEE HAD SIMPLY RELIED ON THE JUDGMENT OF HONBLE APEX COURT IN THE CASE OF M/S.BHARAT EARTH MOVERS VS. CIT 245 ITR 431 . LD. ASSESSING OFFICER HAD DISALLOWED THE CLAIM FOR WANT OF DETAILS, INTER -ALIA NOTING THAT HONBLE APEX COURT JUDGMENT RELIED ON BY THE ASSES SEE WAS RELATED TO A PROVISION FOR LEAVE ENCASHMENT AND NOT ON ANY PR OVISION CREATED FOR POSSIBLE LIABILITY THAT MIGHT ARISE ON ACCOUNT OF D ELAY. WHEN THE MATTER REACHED THE LD. CIT(A), ASSESSEE HAD RELIE D ON THE DECISION OF THE HYDERABAD BENCH OF THE TRIBUNAL IN ASSESSEES O WN CASE FOR ASSESSMENT YEAR 2009-2010. LD. COMMISSIONER OF INC OME TAX (APPEALS), HAD AFTER CONSIDERING SUCH DECISION O F THE TRIBUNAL, SUSTAINED THE DISALLOWANCE WITH THE FOLLOWING OBSER VATIONS:- 12. THE FACTS ARE EXAMINED. IT IS REITERATED HERE THAT THE ASSESSEE HAS DECLARED A TOTAL INCOME OF RS . 14 CRORES FOR THE YEAR AND HAS CLAIMED A PROVISION ITA NOS.660 & 954/17 & C.O.65/2017 :- 5 -: FOR CONTRACTUAL OBLIGATION OF RS.54 CRORES LEADING TOWARDS IT. THE ACCUMULATED AMOUNT OF RETENTION MONIES NOT OFFERED TO TAX AS ON 31.03.2010 WAS ITSELF AN AMOUNT OF RS. 283.86 CRORES. THE ASSESSEE HAS STEADFASTLY MAINTAINED THAT THE PROVISION FOR CONTRACTUAL OBLIGATION IS REQUIRED IN VIEW OF THE SPECIFIC CONTRACT PROVISIONS ENABLING THE CONTRACTEE TO LEVY DAMAGES TOWARDS DELAY IN COMPLETION. THE ALLOWABILITY OF THIS PROVISION IS ANALYSED AS UNDER. 1. ERECTION AND PROCUREMENT CONTRACTS (EPC) OF THE NATURE THAT THE ASSESSEE HAS ENTERED INTO WOULD INVARIABLY HAVE CLAUSES TOWARDS PENALTY FOR DELAY IN COMPLETION. THIS IS TO ENSURE THE FULL COMMITMENT OF THE CONTRACTOR TOWARDS SCHEDULED COMPLETION OF THE CONTRACT. THE CONTRACTS ARE DELAYED ON ACCOUNT OF REASONS BEYOND THE CONTROL OF EITHER OF THE PARTIES OR FORCE MAJEURE REASONS. THE DELAY CAN ALSO BE ON ACCOUNT OF CONTRACTEE'S INABILITY AND FOR REASONS OF DELAY BY OTHER VENDORS OR SUPPORT STAFF-PROFESSIONALS. THE CONTRACTOR WOULD INVARIABLY POINT OUT THE DELAY CAUSED ON ACCOUNT OF REASONS OTHER THAN HIS OWN OMISSIONS OR COMMISSIONS. TO THIS EXTENT, THE PENALTIES FOR DELAY IN COMPLETION ARE OFTEN NOT LEVIED AS A RULE. 2. THE ASSESSEE HAS ALSO RECOGNIZED THE SAME. IN FACT, THE ASSESSEE HAS NOT CLAIMED ANY PROVISION FOR CONTRACTUAL OBLIGATION UPTO A.Y.2009-10 EVEN THOUGH THE ASSESSEE WAS 8 ILL BUSINESS FOR MORE THAN A DECADE PRIOR TO THAT. SIMILARLY, THE ASSESSEE HAS OPTED NOT TO CLAIM ANY PROVISION TOWARDS CONTRACTUAL OBLIGATION FOR A.Y.2014-15 & 2015-16. THE IRREGULAR PRACTICE OF CLAIMING PROVISION FOR CONTRACTUAL OBLIGATION IS PROOF ENOUGH OF ITS ARBITRARY AND UNNECESSARY NATURE. 3. EVEN THOUGH THE ASSESSEE HAS CREATED SUBSTANTIAL AMOUNTS OF PROVISION TOWARDS CONTRACTUAL OBLIGATION, THE PROVISION HAS NOT BEEN UTILISED FOR MAKING ANY PAYMENTS OF PENALTIES TOWARDS ITA NOS.660 & 954/17 & C.O.65/2017 :- 6 -: VIOLATION IN CONTRACTUAL OBLIGATION. HAVING RECOGNIZED THIS, THE ASSESSEE STOPPED CLAIMING PROVISION FOR A.Y.2014-15 & 2015-16 AND HAS, IN FACT, PART- REVERSED THE ACCUMULATED PROVISION UNDER THIS ACCOUNT. 4. THE ASSESSEE HAS NOT OFFERED THE RETENTION MONEY OF RS.283.86 CRORES UP TO 31.3.2010. ANY SHORT RECEIPT OF CONTRACTUAL PAYMENT IS EASILY OFFSET AGAINST THE RETENTION MONIES NOT OFFERED TO TAX. TO THIS EXTENT, ASSESSEE IS FULLY PROTECTED FROM ANY EXIGENCY OF HAVING TO PAY ANY PENALTY TOWARDS DELAY IN COMPLETION. 5. THE ASSESSEE HAS NOT GIVEN ANY BASIS FOR COMPUTING THE PROVISION FOR CONTRACTUAL OBLIGATION AT RS.53.99 CRORES. THE METHOD OF ARRIVING AT THIS FIGURE AND JUSTIFICATION FOR WHY THE PROVISION WAS AT RS.53.99 CRORES AND NOT AT RS.10 CRORES OR RS.100 CRORES HAS NOT BEEN GIVEN BY THE ASSESSEE. TO THIS EXTENT, THE PROVISION CREATED IS UNSCIENTIF IC. FACTS AND CIRCUMSTANCES AS ABOVE HAD NOT BEEN BROUGHT OUT BY THE AO IN HIS ORDERS FOR THE A.Y.07- 08 TO 09-10. THE LD.CIT(A) AND THE HON'BLE ITAT HAD NO OCCASION TO VERIFY THESE FACTS. WITH THESE FACT FINDINGS, THE ORDER OF THE HON'BLE ITAT FOR EARLIER YEARS IS HELD AS NOT APPLICABLE ON FACTS. O N ACCOUNT OF REASONS AS ABOVE, THE PROVISION FOR CONTRACTUAL OBLIGATION OF RS.53,99,42,000 IS HELD A S IRREGULAR, UNSCIENTIFIC AND UNWARRANTED. THE PROVISION IS UPHELD TO BE DISALLOWED. AT THIS JUNCTURE, IT WILL BE APPOSITE TO HAVE A L OOK AT WHAT WAS HELD BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2009-2010. THIS IS REPRODUCED HEREUNDER:- 42 AS FOR THE DISALLOWANCE OF PROVISION FOR CONTR ACTUAL OBLIGATION, ADDITION OF RS.16,50,25,000, BEING THE ISSUE INVOLVED IN GROUND NO.8 OF THIS APPEAL, THE ASSES SING OFFICER ADDED THE SAME OBSERVING THAT THIS EX PENDITURE DEBITED TO THE PROFIT & LOSS ACCOUNT CANNOT BE ALLOWED ITA NOS.660 & 954/17 & C.O.65/2017 :- 7 -: AS DEDUCTION DURING THE YEAR UNDER APPEAL, AS THE A SSESSEE HAS NOT ACTUALLY INCURRED THE EXPENDITURE DURING THE YEAR UNDER CONSIDERATION, AND IT REPRESENTS ONLY PRO VISION FOR FUTURE LIABILITY. 43. ON APPEAL BEFORE THE CIT(A), EXPLAINING T HE BACKGROUND FOR THIS CLAIM, IT WAS STATED THAT THE AMOUNTS REPRESENTED LIQUIDATED DAMAGES TO BE DISCHARGED IN THE EVENT OF ANY DELAY IN THE COMPLETION OF THE WORK, WHICH IS A COMMON PRACTICE IN LONG-TERM CONTRACTS. IT IS FU RTHER STATED THAT THE ASSESSEE COMPANY DURING THE YEAR HAD TO COMMISSION AND HAND OVER TWO PROJECTS, ONE TO TNEB AT VALATHUR AND ANOTHER TO MALCO, METTUR. IN THE CASE OF TNEB THE ACTUAL COMPLETION OF THE PROJECT WAS 31.8. 2008 WHEREAS AS PER THE PURCHASE ORDER, THE SCHEDULED DA TE WAS 28.2.2008, I.E. DELIVERY TOOK PLACEAFTER A DELA Y OF 24 WEEKS. SIMILARLY IN THE CASE OF MALCO, THE ACTU AL COMPLETION OF THE PROJECT WAS 26.2.2009 AS AGAINST THE SCHEDULED DATE OF 19.6.2008, THE DELAY BEING 32 WEE KS. REFERRING TO THE RELEVANT AGREEMENTS OF THE ASSESSE E WITH THE CONCERNED PARTIES, ATTENTION WAS INVITED TO COMPLETION GUARANTEE CLAUSE WHEREIN IT WAS MENTIONED THAT IN CASE OF DELAY IN DELIVERY OF EQUIPMENT FOR REASONS NOT ATTR IBUTABLE TO THE PURCHASER, THE SUPPLIER SHALL BE LIABLE TO PAY TO THE PURCHASER LIQUIDATED DAMAGES AND NOT BY WAY OF PENA LTY, AN AMOUNT CALCULATED AT THE RATE OF 1% OF THE SUPPLY C ONTRACT PRICE FOR EACH WEEK OF DELAY OR PART THEREOF, SUBJE CT TO A MAXIMUM OF7.5% OF SUPPLY CONTRACT PRICE. IT IS IN ACCORDANCE WITH THIS CONTRACTUAL OBLIGATION THA T THE ASSESSEE HAS CALCULATED THE LIQUIDATED DAMAGES FOR THE YEAR AT RS.16,250,25,000 IN RESPECT OF THE ABOVE TWO CONTRACTS. AS REGARDS THE DATE OF ACCRUAL OF THE LIABILITY, AS PER ASSESSEE, IT STARTED ON THE DATE ON WHICH THE C ONTRACTOR HAD AGREED TO DELIVER THE PROJECT AND ENDED ON THE DATE ON WHICH THE ACTUAL DELIVERY TOOK PLACE. IT WAS ALSO CONTENDED THAT THE AMOUNT HAS NOT ACTUALLY BEEN P AID DURING THE YEAR IS QUITE IRRELEVANT TO DECID E THE ALLOWABILITY OF THE EXPENDITURE IN A CASE WHERE MERCANTILE SYSTEM OF ACCOUNT IS FOLLOWED. THE CIT(A) FINDING MERIT IN THE CONTENTIONS OF THE ASSESSEE IN THE LIGHT OF THE JUDICIAL PRONOUNCEMENTS, HELD THE VIEW THAT THE CONTRACTUAL OBLIGATION HAD ACCRUED DURING THE YEAR ENDED 31.3.2009 THOUGH THE COMPANY HAD NOT ACTUALLY DISCHARGED THE SAME, AND ACCORDINGLY ALLOWED THE CLAIM OF THE ASS ESSEE. 44. AGGRIEVED BY THE VIEW TAKEN BY THE CIT(A ), REVENUE IS IN APPEAL ON THIS ASPECT. ITA NOS.660 & 954/17 & C.O.65/2017 :- 8 -: 45. THE LEARNED DEPARTMENTAL REPRESENTATIVE STRONGL Y RELYING ON THE ORDER OF THE ASSESSING OFFICER SUBMI TTED THAT THE CIT(A) IS NOT JUSTIFIED IN DELETING THE ADDITIO N MADE BY THE ASSESSING OFFICER. HE SUBMITTED THAT THE LIABIL ITY FOR LIQUIDATED DAMAGES HAS NEITHER ACCRUED NOR CR YSTALISED DURING THE YEAR UNDER APPEAL, AND MERELY BECAUSE DE LAY HAS OCCURRED IN THE EXECUTION OF THE JOB, IT CANNOT BE SAID THAT THE LIQUIDATED DAMAGES ARE AUTOMATIC AND ARE ALLOWABLE AS DEDUCTION. 46 . THE LEARNED COUNSEL FOR THE ASSESSEE, ON THE OTHER HAND, STRONGLY SUPPORTING THE ORDER OF THE CIT(A), SUBMITTED THAT IT IS IN TERMS OF THE VERY CONTRACT THAT LIQUI DATED DAMAGES ARE ATTRACTED FOR EACH WEEK OF DELAY IN THE EXEC UTION OF THE CONTRACT AND CONSEQUENTLY, BEING A CONTRAC TUAL OBLIGATION, SUCH LIQUIDATED DAMAGES ARE CLEARL Y ALLOWABLE AS DEDUCTION. 47.WE HAVE CONSIDERED THE RIVAL SUBMISSIONS A ND PERUSED THE ORDERS OF THE LOWER AUTHORITIES. SI NCE THE VERY CONTRACTS ENTERED INTO BY THE ASSESSEE WITH VARI OUS PARTIES FOR EXECUTION OF WORKS, CATEGORICALLY SPECIFY NOT ONLY THE LIABILITY TO LIQUIDATED DAMAGES, BUT EVEN MOD E OF COMPUTATION OF THE SAME FOR EACH WEEK OF DELAY IN T HE COMPLETION OF THE WORK, IT CANNOT BE SAID THAT THE LIABILITY TO LIQUIDATED DAMAGES HAS NOT CRYSTALISED. THE C IT(A) IN OUR CONSIDERED OPINION WAS JUSTIFIED IN ACCEPT ING THE CLAIM OF THE ASSESSEE IN THIS BEHALF AND DELETING THE ADD ITION MADE BY THE ASSESSING OFFICER. WE ACCORDINGLY UPHOLD TH E ORDER OF THE CIT(A) IN THIS BEHALF AND REJECT THE GROUND OF THE REVENUE ON THIS ISSUE. WHAT WE DISCERN FROM THE ABOVE ORDER OF THE TRIBU NAL IS THAT IN THE SAID YEAR, ASSESSEE COULD DEMONSTRATE THE DELAY IN COMPLETING TWO PROJECTS NAMELY ONE FOR TNEB AT VALATHUR AND ANOTHE R FOR MALCO, AT METTUR. ASSESSEE COULD SHOW THAT THERE WAS A TWENTY FOUR WEEKS DELAY IN EXECUTION OF TNEB PROJECT AND TWENTY TWO WEEKS D ELAY IN EXECUTION OF MALCO PROJECT. LD. COMMISSIONER OF INCOME TAX ( APPEALS) HAD IN THE SAID ASSESSMENT YEAR ACCEPTED THE CLAIM OF THE ASSESSEE, ITA NOS.660 & 954/17 & C.O.65/2017 :- 9 -: CONSIDERING COMPLETION CLAUSE IN THE RELEVANT AGREE MENT WITH THESE TWO PARTIES. HOWEVER, FOR THE IMPUGNED ASSESSMENT YEAR, THERE IS NOTHING ON RECORD TO SHOW HOW THE ASSESSEE HAD CALC ULATED THE LIQUIDATED DAMAGES OF D53,99,42,000/- DEBITED BY I T IN ITS PROFIT AND LOSS ACCOUNT. THAT APART, PROVISION MADE BY THE ASS ESSEE UNDER THE VERY SAME HEAD FOR VARIOUS YEARS, REFLECTS SCANT PA YMENTS AGAINST SUCH PROVISIONS. DETAILS OF THE PROVISIONS MADE BY THE ASSESSEE AND PAYMENTS MADE AGAINST SUCH PROVISIONS FOR VARIOUS Y EARS READ AS UNDER:- A.Y OPENING BALANCE ADD: PROVISION MADE DURING THE YEAR LESS: PROVISION UTILIZED LESS: PROVISION REVERSED CLOSING BALANCE 2008-09 -- -- -- -- -- 2009-10 -- 1,650 -- -- 1,650 2010-11 1,650 5,400 -- -- 7,050 2011-12 7,050 8,597 -- -- 15,647 2012-13 15,647 3,035 -- -- 18,682 2013-14 18,682 1,405 -- -11 20,076 2014-15 20,076 -- -1,927 -- 18,149 2015-16 18,149 -- -1,565 -2,352 14,232 2016-17 14,232 7,150 -2,129 -5,048 14,205 IN OUR OPINION IT IS APODICTIC THAT ACTUAL PAYMENT S AGAINST THE PROVISIONS MADE BY THE ASSESSEE FOR EARLIER YEAR WE RE NEGLIGIBLE UPTO ITA NOS.660 & 954/17 & C.O.65/2017 :- 10 -: ASSESSMENT YEAR 2013-14. LD. COUNSEL FOR THE ASSES SEE WAS UNABLE TO FURNISH ANY DETAILS REGARDING THE PROJECTS SO FAR C OMPLETED BY THE ASSESSEE WITH DELAY AND THE ACTUAL AMOUNT OF LIQUID ATED DAMAGES PAID FOR SUCH OVERRUN. WHILE THERE CAN BE NO QUARREL ON THE CLAIM OF THE ASSESSEE THAT ACTUAL LIQUIDATED DAMAGES PAYABLE ON ACCOUNT OF DELAY ATTRIBUTABLE TO IT, IS A CRYSTALLIZED LIABILITY, IN OUR OPINION REQUISITE DETAILS FOR SUPPORTING THE CLAIM MADE BY THE ASSES SEE IS NOT ON RECORD. NOT ONLY THE ASSESSEE HAS TO SHOW THAT THER E WAS INDEED A DELAY, IT IS ALSO REQUIRED TO SHOW WHAT PART OF SU CH DELAY WAS ATTRIBUTABLE TO ITS OWN FAULT AND WHAT CLAIM WAS MA DE BY THE CLIENT AS PER CONTRACTUAL PROVISION, FOR SUCH DAMAGES. IN T HE FACTS AND CIRCUMSTANCES OF THE CASE, WE ARE OF THE OPINION TH AT THE ISSUE REQUIRES A FRESH LOOK BY THE LD. ASSESSING OFFICER. WE THEREFORE SET ASIDE THE ORDERS OF THE LOWER AUTHORITIES AND REMIT THE ISSUE BACK TO THE FILE OF THE LD. ASSESSING OFFICER FOR CONSIDERA TION AFRESH IN ACCORDANCE WITH LAW. ASSESSEE SHALL GIVE ALL REQUIR ED DETAILS BEFORE THE LD. ASSESSING OFFICER. GROUND 3 IS ALLOWED FOR STAT ISTICAL PURPOSES. 7. VIDE ITS GROUND NO.4, GRIEVANCE RAISED BY THE ASSES SEE IS ON DISALLOWANCE OF D3,61,76,758/- BEING PROVISION FOR WARRANTY WHICH WAS CONFIRMED BY THE LD. COMMISSIONER OF INCOME TAX (APPEALS). ITA NOS.660 & 954/17 & C.O.65/2017 :- 11 -: 8. LD. COUNSEL FOR THE ASSESSEE FAIRLY ADMITTED THAT S IMILAR ISSUE WAS DECIDED AGAINST THE ASSESSEE, BY THE HYDERABAD BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR S 2007-08, 2008- 09 & 2009-2010 IN ITA NOS.1244 & 1513/HYD/2011, A ND ITA NO.985/HYD/2012, DATED 05.09.2013. ACCORDING TO H ER, ASSESSEE HAD FILED AN APPEAL BEFORE THE HONBLE ANDHRA PRADESH H IGH COURT AGAINST THE ABOVE DECISION AND THE MATTER WAS PENDING. 9. .. PER CONTRA, LD. DEPARTMENTAL REPRESENTATIVE STRONG LY SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 10. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSE D THE ORDERS OF THE AUTHORITIES BELOW. WHAT WAS HELD BY T HE HYDERABAD BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR AS SESSMENT YEARS 2007-08, 2008-09 & 2009-2010 IS REPRODUCED HEREUNDE R:- 24. THE NEXT ISSUE IN DISPUTE IN THIS APPEAL RELA TES TO DISALLOWANCE MADE BY THE ASSESSING OFFICER WIT H REGARD TO WARRANTY PROVISIONS OF RS.98,24,000, WHICH HAS BEEN DELETED BY THE CIT(A). 25.BRIEF FACTS OF THE CASE IN RELATION TO THIS GROU ND ARE THAT THE ASSESSEE DEBITED AN AMOUNT OF RS.98,24,000 UNDER THE HEAD SELLING EXPENSES/WARRANTY EXPENSES. THIS CLAIM OF THE ASSESSEE HAS BEEN DISALLOWED BY THE ASSESSING OFFICER ON THE GROUND THAT IT IS AN UNASCERTA INED LIABILITY, SINCE IT IS CONTINGENT IN NATURE AND AS SUCH NOT ALLOWABLE UNDER S.37 OF THE ACT. 26.ON APPEAL BEFORE THE CIT(A), IT WAS THE CONTENTION OF THE ASSESSEE THAT IT HAS BEEN PROVI DING ITA NOS.660 & 954/17 & C.O.65/2017 :- 12 -: FOR WARRANTY IN RESPECT OF ITS CONTRACTS. IT HAS BEEN RECOGNIZING CONTRACT REVENUE IN ACCORDANCE WITH ACCOUNTING STANDARD 7 DEALING WITH CONSTRUCTION CONTRACTS. IN ACCORDANCE WITH THIS STANDARD, ASSES SEE HAS BEEN PROVIDING FOR A POSSIBLE LIABILITY IN RESP ECT OF THE CONTRACT WHICH MAY OR MAY NOT CRYSTALLIZE AT A FUTURE DATE. FINDING MERIT IN THE CONTENTIONS OF THE ASS ESSEE AND TAKING NOTE OF THE CASE-LAW RELIED UPON BY THE ASSESSEE BEFORE HIM, MORE IMPORTANTLY THE DECISION OF THE BOMBAY HIGH COURT IN THE CASE OF CIT V/S . HINDITRON SERVICES PVT. LTD. (321 ITR 263), WHER EIN IT HAS BEEN HELD THAT WHERE THE ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING, ESTIMATE OF ACCRUED LIABILITY TO BE DISCHARGED AT A FUTURE DATE IS AN ALLOWABLE EXPENDITURE AND THUS PROVISION FOR ESTIMATED COSTS OF RENDERING WARRANTY SERVICES DEBI TED TO P&L ACCOUNT IS NOT A CONTINGENT LIABILITY AND TH E SAID EXPENDITURE IS ALLOWABLE UNDER S.37 OF THE ACT, ACCEPTED THE CONTENTIONS OF THE ASSESSEE ON THIS IS SUE, AND DELETED THE ADDITION MADE BY THE ASSESSING OFFI CER. 27.AGGRIEVED BY THE RELIEF GRANTED BY THE CIT(A) ON THIS ASPECT, REVENUE IS IN APPEAL BEFORE US. 28.THE LEARNED DEPARTMENTAL REPRESENTATIVE STRONGL Y RELYING ON THE ORDER OF THE ASSESSING OFFICER SUBMITTED THAT THE CIT(A) WAS NOT JUSTIFIED IN GRANTING RELIEF TO THE ASSESSEE. LEARNED CO UNSEL FOR THE ASSESSEE, ON THE OTHER HAND, STRONGLY SUPP ORTED THE ORDER OF THE CIT(A). 29.WE HEARD BOTH SIDES AND PERUSED THE MATER IAL AVAILABLE ON RECORD. WE ARE OF THE CONSIDERED OPI NION THAT THIS ITEM OF DISALLOWANCE, VIZ. WARRANTY PRO VISION, IS MERELY A PROVISION AND NOT AN EXPENDITURE ALREADY INCURRED AND LAID OUT FOR THE PURPOS E OF BUSINESS. UNLESS THE LIABILITY FOR SUCH EXPENDI TURE CRYSTALISES, ASSESSEE IS NOT ENTITLED TO CLAIM FOR DEDUCTION IN RESPECT OF SUCH EXPENDITURE. THE CIT (A) HAS NOT GIVEN ANY VALID REASON FOR SUBSTANTIATING H IS FINDING, WHILE ALLOWING THE CLAIM OF THE ASSESSEE. WE ACCORDINGLY, SET ASIDE THE IMPUGNED ORDER OF THE CI T(A), AND RESTORE THE DISALLOWANCE MADE BY THE ASSESSING OFFICER IN THIS BEHALF. REVENUES GROUND ON THIS IS SUE IS ALLOWED. ITA NOS.660 & 954/17 & C.O.65/2017 :- 13 -: WHAT WE FIND IS THAT FOR ASSESSMENT YEAR 2009-10 THOUGH THE CLAIM WAS ALLOWED BY THE LD. COMMISSIONER OF INCOME TAX ( APPEALS), THE TRIBUNAL HAD REVERSED SUCH FINDING OF THE LD. COMMI SSIONER OF INCOME TAX (APPEALS) AND UPHELD THE DISALLOWANCE FOR WARRA NTY PROVISIONS. NOTHING WAS SHOWN BEFORE US TO TAKE A DIFFERENT VIE W FOR THE IMPUGNED ASSESSMENT YEAR. GROUND NO.4 OF THE ASSESS EE STANDS DISMISSED. 11. VIDE ITS GROUND NO.5, GRIEVANCE RAISED BY THE ASSES SEE IS ON A DISALLOWANCE OF D27,29,950/- MADE U/S.14A OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT). 12. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE LD. COMMISSIONER OF INCOME TAX (APPEALS) HAD MADE THIS DISALLOWANCE, THOUGH LD. ASSESSING OFFICER HAD NOT INVOKED SEC. 1 4A OF THE ACT. ACCORDING TO HER, ASSESSEE HAD MADE A VOLUNTARY DI SALLOWANCE OF D2,38,999/- AS EXPENDITURE RELATABLE TO THE EXEMPT INCOME. AS PER THE LD. AUTHORISED REPRESENTATIVE, ASSESSEE CLAIME D EXEMPT INCOME OF D2,76,835/- ONLY AND DISALLOWANCE U/S.14A OF THE ACT HAD TO BE RESTRICTED TO SUCH AMOUNT. RELIANCE WAS PLACED ON T HE JUDGMENT OF HONBLE DELHI HIGH COURT IN THE CASE OF JOINT INVESTMENT P. LTD VS. CIT 372 ITR 694. ITA NOS.660 & 954/17 & C.O.65/2017 :- 14 -: 13. PER CONTRA, LD. DEPARTMENTAL REPRESENTATIVE SUBMIT TED THAT IRRESPECTIVE OF THE QUANTUM OF THE EXEMPT INCOME CL AIMED BY THE ASSESSEE DISALLOWANCE COULD BE MADE U/S.14A OF THE ACT. RELIANCE WAS PLACED IN CIRCULAR NO.5/2014, DATED 11.02.2014. 14. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSE D THE ORDERS OF THE AUTHORITIES BELOW. HONBLE DELHI HIGH COURT IN THE CASE OF JOINT INVESTMENT P. LTD (SUPRA) HELD AS UNDER AT PARAS 4 TO 9 OF ITS JUDGMENT. 4. THE INCOME-TAX APPELLATE TRIBUNAL UPHELD THE ORDERS OF THE AUTHORITIES BELOW AND HELD, INTER ALI A, THAT (PAGE 38 OF 33 ITR (TRIB )) : 'NOW, WE COME TO VARIOUS OTHER ARGUMENTS BY THE LEARNED COUNSEL WHEREIN HE HAS DISPUTED THE QUANTUM OF THE DISALLOWANCE WORKED OUT BY THE ASSESSING OFFICER. THE ASSESSEE'S COUNSEL HAS CONTENDED THAT THE VARIOUS EXPENSES, VIZ., FILING FEES, HOUSE TAX, CONVEYANCE, INSUR ANCE OF BUILDING AND CARS, ELECTRICITY, BUILDING REPAIR, PRINTING AND STA TIONERY, TELEPHONE EXPENSES, AUDIT FEES, OFFICE RENT, VEHICLES EXPENSES, DEPRECIATION, ETC., WERE NOT INCURRED FOR EARNING OF EXEMPT INCOME. FROM THE WORKING OF THE DISALLOWANCE BY THE ASSESSING OFFICER WHICH IS ALREADY REPRODUCED EARLIER IN OUR ORDER, IT WOULD BE EVIDENT THAT ALL THOSE EXPENSES HAVE NOT BEEN CONSIDERED BY THE ASSESSING OFFICER. IN PART (I), THE ASSESSING OFFICER HAS CONSIDERED RS. 2,97,440 WHICH THE ASSESSEE HIMSELF HAS ADMITTED AS A DIRECT EXPENDITURE INCURRED FOR EARNING THE EXEMPT INCOME, VIZ., SECURITIES TRANSACTION TAX, DEPOSITORY CHARGES AND CUSTODIAN FEES. IN PART (II), ONLY THE INTEREST HAS ITA NOS.660 & 954/17 & C.O.65/2017 :- 15 -: BEEN CONSIDERED AND IN PART (III) HALF PER CENT. OF THE AVERAGE INVESTMENT HAS BEEN CONSIDERED. THEREFORE, THESE EXPENSES WHICH THE ASSESSEE CLAIMED TO HAVE BEEN NOT INCURRED FOR EARNING OF EXEMPT INCOME HAVE NOT BEEN CONSIDERED BY THE ASSESSING OFFICER AT ALL. THE ASSESSEE HAS ALSO DISPUTED THE CORRECTNESS OF THE DISALLOWANCE OF INTEREST AT RS. 34,08,582. HOWEVER, WE FIND THAT THE DISALLOWANCE AS PER PART (III) ITSELF IS RS. 65,36,743. THE ASSESSEE'S COUNSEL HAS NOT DISPUTED THE VALUE OF INVESTMENT AS TAKEN BY THE ASSESSING OFFICER FOR THE PURPOSE OF COMPUTING THE DISALLOWANCE AT HALF PER CENT. AS PROVIDED BY RULE 8D(2)(III). THE DISALLOWANCE AT HALF PER CENT. OF THE INVESTMENT IS RS. 65,36,743 WHILE FINALLY, THE ASSESSING OFFICER RESTRICTED THE DISALLOWANCE TO RS. 52,56,197. THEREFORE, WHETHER THE WORKING OF THE DISALLOWANCE OF INTEREST AS PER RULE 8D(2)(II) IS CORRECT OR NOT IS OF ACA DEMIC INTEREST AND, THEREFORE, WE DO NOT WISH TO GO INTO THE DETAILS OF THE ASSESSEE'S ARGUMENTS WITH REGARD TO THE CORRECTNESS OF THE DIS ALLOWANCE OF INTEREST. AT THE COST OF REPETITION, WE REITERATE THAT THE DISALLOWANCE WORKED OUT BY THE ASSESSING OFFICER WHICH WAS THE AGGREGATE OF THREE COMPONENTS AS PRESCRIBED UNDER RULE 8D(2) WAS RS. 99,45,325. BUT, FINALLY, THE ASSESSING OFFICER RESTRICTED THE DIS ALLOWANCE TO RS. 52,56,197. THEREFORE, IN OUR OPINION, NO RELIEF IS DUE TO THE ASSESSEE FROM THE DISALLOWANCE MADE BY THE ASSESSING OFFICER AT RS. 52,56,197. THE SAME IS SUSTAINED AND THE ASSESSEE'S APPEAL IS DISMISSED.' 5. LEARNED COUNSEL URGES THAT THE MANDATE OF SECTION 14A (ESPECIALLY THE SECTION 14A(2)) ESCAPED THE ATTENTION OF THE INCOME-TAX APPELLATE TRIBUNAL AS WELL AS THAT OF THE ASSESSING OFFICER AND THE COMMISSIONER OF INCOME- TAX (APPEALS). IT WAS URGED THAT IN THE PRESENT CASE SINCE RS. 2,97,440 WAS VOLUNTEERED AS DISALLOWANCE, THE ASSESSING OFFICER WAS UNDER A DUTY TO FIRST CONSIDER THE MERI TS OF THAT CLAIM AND, THEREAFTER, FOR VALID GROUNDS, I F ANY, REJECT THE CONTENTION BEFORE PROCEEDING UNDER SECTION 14A(3) READ WITH RULE 8D(2). LEARNED COUNSEL HIGHLIGHTED THAT THE SUM VOLUNTEERED, I.E., ITA NOS.660 & 954/17 & C.O.65/2017 :- 16 -: RS. 2,97,440 WAS IN ADDITION TO AD HOC DISALLOWANCE WHICH WAS OFFERED AND ACCEPTED WITHOUT SCRUTINY BY THE ASSESSING OFFICER. 6. LEARNED COUNSEL FOR THE REVENUE CONTENDED THAT GIVEN THE STRUCTURE AND PHRASEOLOGY OF RULE 8D, THE INTERPRETATION OF THE COMMISSIONER OF INCOME- TAX (APPEALS) AND THE INCOME-TAX APPELLATE TRIBUNAL CANNOT BE FAULTED. 7. DURING THE COURSE OF HEARING, COUNSEL FOR THE PETITIONER HAD RELIED UPON A DECISION OF THIS COURT IN CIT V. TAIKISHA ENGINEERING INDIA LTD. (I. T. A. NO . 115 OF 2014, DECIDED ON NOVEMBER 25, 2014) [2015] 370 ITR 338 (DELHI). THE COURT HAD, IN THAT JUDGMENT, HIGHLIGHTED THE NECESSITY IN VIEW OF THE PECULIAR WORDING OF SECTION 14A(2) THAT COMPUTATION OR DISALLOWANCE OF THE ASSESSEE, OR CLAIM THAT NO EXPENDITURE WAS INCURRED FOR EARNING EXEMPT INCOME SHOULD BE EXAMINED WITH REFERENCE TO THE ACCOUNTS AND ONLY IF THE ASSESSEE'S EXPLANATION IS UNSATISFACTORY, CAN THE ASSESSING OFFICER PROCEED FURTHER. 8. THE COURT IN TAIKISHA ENGINEERING (SUPRA) PERTINENTLY OBSERVED (PAGE 347) : 'THUS, SECTION 14A(2) OF THE ACT AND RULE 8D(1) IN UNISON AND AFFIRMATIVELY RECORD THAT THE COMPUTATION OR DISALLOWANCE MADE BY THE ASSESSEE OR CLAIM THAT NO EXPENDITURE WAS INCURRED TO EARN EXEMPT INCOME MUST BE EXAMINED WITH REFERENCE TO THE ACCOUNTS, AND ONLY AND WHEN THE EXPLANATION/CLAIM OF THE ASSESSEE IS NOT SATISFACTORY, COMPUTATION UNDER SUB-RULE (2) TO RULE 8D OF THE RULES IS TO BE MADE. WE NEED NOT, THEREFORE, GO ON TO SUB-RULE (2) TO RULE 8D OF THE RULES UNTIL AND UNLESS THE ASSESSING OFFICER HAS FIRST RECORDED THE SATISFACTION, WHICH IS MANDATED BY SUB-SECTION (2) OF SECTION 14A OF THE ACT AND SUB-RULE (1) OF RULE 8D OF THE RULES.' ITA NOS.660 & 954/17 & C.O.65/2017 :- 17 -: 9. IN THE PRESENT CASE, THE ASSESSING OFFICER HAS NOT FIRSTLY DISCLOSED WHY THE APPELLANT-ASSESSEE'S CLAIM FOR ATTRIBUTING RS. 2,97,440 AS A DISALLOWANC E UNDER SECTION 14A HAD TO BE REJECTED. TAIKISHA SAYS THAT THE JURISDICTION TO PROCEED FURTHER AND DETERMINE AMOUNTS IS DERIVED AFTER EXAMINATION OF THE ACCOUNTS AND REJECTION IF ANY OF THE ASSESSEE'S CLAIM OR EXPLANATION. THE SECOND ASPECT IS THERE APPEARS TO HAVE BEEN NO SCRUTINY OF THE ACCOUNTS BY THE ASSESSING OFFICERAN ASPECT WHICH IS COMPLETELY UNNOTICED BY THE COMMISSIONER OF INCOME-TAX (APPEALS) AND THE INCOME-TAX APPELLATE TRIBUNAL. THE THIRD AND IN THE OPINION OF THIS COURT, IMPORTANT ANOMALY WHICH WE CANNOT BE UNMINDFUL IS THAT WHEREAS THE ENTIRE TAX EXEMPT INCOME IS RS. 48,90,000, THE DISALLOWANCE ULTIMATELY DIRECTED WORKS OUT TO NEARLY 110 PER CENT. OF THAT SUM, I.E., RS. 52,56,197. BY NO STRETCH OF IMAGINATION CAN SECTION 14A OR RULE 8D BE INTERPRETED SO AS TO MEAN THAT THE ENTIRE TAX EXEMPT INCOME IS TO BE DISALLOWED. THE WINDOW FOR DISALLOWANCE IS INDICATED IN SECTION 14A AND IS ONL Y TO THE EXTENT OF DISALLOWING EXPENDITURE 'INCURRED BY THE ASSESSEE IN RELATION TO THE TAX EXEMPT INCOME'. THIS PROPORTION OR PORTION OF THE TAX EXEMPT INCOME SURELY CANNOT SWALLOW THE ENTIRE AMOUNT AS HAS HAPPENED IN THIS CASE. HONBLE JURISDICTIONAL HIGH COURT, ALSO CONSIDERED AN ALMOST SIMILAR ISSUE IN THE CASE OF REGINDTON (INDIA) LTD VS. JCIT (2016) 97 CCH 219. THEIR LORDSHIPS OBSERVED AS UNDER IN PARAS 14 TO 1 6 OF THE JUDGMENT. 14. NOTHING MUCH TURNS ON THE USE OF THE WORD INC LUDABLE AND THE PHRASE UNDER THE ACT IN S. 14A AND WE ARE NOT PERSUADED TO ACCEPT THE EMPHASIS LAID OR THE INTERP RETATION OF THE SAME BY THE REVENUE. AN ASSESSMENT IN TERMS OF THE ITA NOS.660 & 954/17 & C.O.65/2017 :- 18 -: INCOME TAX ACT IS SPECIFIC TO AN ASSESSMENT YEAR AN D THE RELATED PREVIOUS YEAR. S.4 OF THE ACT, WHICH IMPOSE S THE CHARGE TO TAX READS THUS: CHARGE OF INCOME-TAX (1) WHERE ANY CENTRAL ACT ENACTS THAT INCOME TAX SHALL BE CHARGED FOR ANY ASSESSMENT YEAR AT ANY RATE OR RATES, INCOME-TAX AT THAT RATE OR THOSE RAT ES SHALL BE CHARGED FOR THAT YEAR IN ACCORDANCE WITH AND SUBJECT TO THE PROVISIONS (INCLUDING PROVISIONS FOR THE LEVY OF ADDITIONAL INCOME-TAX) OF, THIS ACT IN RESPECT OF THE TOTAL INCOME OF THE PREVIOUS YEAR OF EVERY PERSON: PROVIDED THAT WHERE BY VIRTUE OF ANY PROVISION OF THIS ACT INCOME-TAX IS TO BE CHARGED IN RESPECT OF THE INCOME OF A PERIOD OTHER THAN THE PREVIOUS YEAR, INCOME TAX SHALL BE CHARGED ACCORDINGLY. THUS, WHERE THE STATUTE INDENTED THAT INCOME SHALL BE RECOGNIZED FOR TAXATION IN RESPECT OF ANY PREVIOUS OTHER THAN THAT IMMEDIATELY PRECEDING THE RELEVANT ASSESSMENT YEAR, THE PROVISION SHALL EXPRESSLY STATE SO. THE PROVISIONS OF S.10 IN CHAPTER III OF THE ACT DEALING WITH INCOMES NOT INCLUDED IN TOTAL INCOME COMMENCES WITH THE PHRASE. IN COMPUTING THE TOTAL INCOME OF A PREVIOUS YEAR, ANY INCOME FALLING WITHIN ANY OF THE FOLLOWING CLAUSES SHALL NOT BE INCLUDED .....' 15. THE EXEMPTION EXTENDED TO DIVIDEND INCOME WOUL D RELATE ONLY TO THE PREVIOUS YEAR WHEN THE INCOME WAS EARNED AND NONE OTHER AND CONSEQUENTLY THE EXPENDI TURE INCURRED IN CONNECTION THEREWITH SHOULD ALSO BE DE ALT WITH IN THE SAME PREVIOUS YEAR. THUS, BY APPLICATION OF THE MATCHING CONCEPT, IN A YEAR WHERE THERE IS NO EXEMPT INCOME, THERE CANNOT BE A DISALLOWANCE OF EXPENDITURE IN RELATION TO SUCH ASSUMED INCOME. (MADRAS INDUSTRIAL INVESTMENT CORPO RATION LTD VS. CIT (225 ITR 802)). THE LANGUAGE OF S.14A ( 1) SHOULD BE READ IN THAT CONTEXT AND SUCH THAT IT ADVANCES T HE SCHEME OF THE ACT RATHER THAN DISTORT IT. ITA NOS.660 & 954/17 & C.O.65/2017 :- 19 -: 16. IN CONCLUSION, WE ARE OF THE VIEW THAT THE PROV ISIONS OF S. 14A READ WITH RULE 8D OF THE RULES CANNOT BE MADE APPLICABLE IN A VACUUM I.E. IN THE ABSENCE OF EXEMP T INCOME. THE QUESTIONS OF LAW ARE ANSWERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE DEPARTMENT AND THE APPEAL ALLOWED. NO COSTS. ACCORDINGLY, WE ARE OF THE OPINION THAT DISALLOWANC E U/S.14A OF THE ACT CANNOT EXCEED THE EXEMPT INCOME CLAIMED BY THE ASSE SSEE. WE RESTRICT THE DISALLOWANCE TO D2,76,835/-. GROUND N O.5 OF THE ASSESSEE IS PARTLY ALLOWED. 15. NOW, WE TAKE UP APPEAL OF THE REVENUE. REVENUE HAS TAKEN ALTOGETHER FOUR GROUNDS OF WHICH GROUNDS NO.1 & 4 A RE GENERAL IN NATURE NEEDING NO SPECIFIC ADJUDICATION. 16. VIDE ITS GROUND NO.2, REVENUE IS AGGRIEVED ON THE DELETION OF AN ADDITION OF D298,67,10,877/- MADE BY THE LD. ASSESSING OFFICER AN RETENTION MONEY. 17. LD. DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE LD. COMMISSIONER OF INCOME TAX (APPEALS) HAD DIRECTED I NCLUSION OF RETENTION MONEY AS PART OF INCOME, ON RECEIPT BASIS ANDNOT ON ACCRUAL BASIS. ACCORDING TO THE LD. DEPARTMENTAL REPRESENT ATIVE, ASSESSEE WAS ITA NOS.660 & 954/17 & C.O.65/2017 :- 20 -: POSTPONING ITS TAX LIABILITY BY STAGGERING AMOUNT S THROUGH THIS STRATEGY. 18. PER CONTRA, LD. AUTHORISED REPRESENTATIVE SUBMITTED THAT THE ISSUE STOOD SQUARELY COVERED IN FAVOUR OF THE ASSES SEE BY THE ORDER OF THE HYDERABAD BENCH OF THE TRIBUNAL IN ASSESSEES O WN CASE FOR ASSESSMENT YEAR 2007-08 IN ITA NO. 1244/HYD/2011, D ATED 05.09.2013. 19. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSE D THE ORDERS OF THE AUTHORITIES BELOW. WE FIND THAT THE QUESTION WHETHER RETENTION MONEY COULD BE CONSIDERED AS PART OF INCO ME HAD COME UP BEFORE THE HYDERABAD BENCH OF THE TRIBUNAL IN ASSES SEES OWN CASE FOR ASSESSMENT YEAR 2007-08. WHAT WAS HELD BY THE T RIBUNAL AT PARAS 9 & 10 OF THE ORDER IS REPRODUCED HEREUNDER:- 9. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS A ND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND OT HER MATERIAL ON RECORD. IT IS THE YEAR OF ASSESSABILI TY OF THE RETENTION MONEY THAT IS THE ISSUE THAT ARISES FOR CONSIDERATION. IT IS THE CASE OF THE ASSESSEE THAT SUCH RETENTION MONEY IS ASSESSABLE IN THE YEAR OF ITS AC TUAL RECEIPT IRRESPECTIVE OF THE ENTRIES IN THE BOOKS OF ACCOUNT, WHEREAS ACCORDING TO THE REVENUE IT IS THE YEAR IN WHICH THE RETENTION MONEY IS ACCOUNTED FOR IN THE BOOKS O F ACCOUNT, IN WHICH IT SHOULD BE BROUGHT TO TAX, IRRESPECTIVE OF ITS ACTUAL RECEIPT IN THAT Y EAR SINCE THE ASSESSEE HAS BEEN FOLLOWING MERCANTILE SYSTEM OF ITA NOS.660 & 954/17 & C.O.65/2017 :- 21 -: ACCOUNTING AND TDS IN RELATION TO SUCH RETENTION MO NEY HAS ALSO BEEN DEDUCTED BY THE CONTRACTEES. IT IS TH E CASE OF THE ASSESSEE THAT THE RETENTION MONEY HAS BEEN O FFERED TO TAX IN THE RELEVANT YEAR IN WHICH THE SAME HAS A CTUALLY BEEN RECEIVED BY IT. WE FIND THAT THIS ISSUE HAS A RISEN FOR CONSIDERATION BEFORE THE PUNE BENCH OF THE TRIBUNA L IN THE CASE OF DY. CIT V/S. DECCAN MECHANICAL & CHEMICAL INDUSTRIAL (P)LTD., (SUPRA), WHEREIN THE TRIBU NAL AFTER DETAILED CONSIDERATION OF THE CASE -LAW RELIED UPON BY THE PARTIES BEFORE IT, HAS DECIDED THE MATTER IN T HE FOLLOWING MANNER- 6. ON COMBINED READING OF THESE ORDERS, THE FOLLOWING PROPOSITIONS OF LAW EMERGE REGARDING MERCANTILE METHOD OF ACCOUNTING: (I) THE ACCRUAL OF INCOME TAKES PLACE WHEN RIGHT TO RECEIVE INCOME ARISES [PARAGRAPHS 5.1, 5.2, AND 5.3], (II)IN A CONTRACT, UNDER MERCANTILE METHOD OF ACCOU NTING, THE ACCRUAL OF INCOME TAKES PLACE WHEN THE A SSESSEE GETS UNCONDITIONAL LEGAL RIGHT TO RECEIVE MONE Y UNDER THE AGREEMENT [PARAGRAPHS 5.4, 5.7, 5.8 AND 5.11], (III) RECEIPT OF MONEY BY ITSELF DOES NOT L E AD TO ACCRUAL OF INCOME, ESPECIALLY WHEN THE ASSESSEE HAS NOT RENDERED CORRESPONDING SERVICE [PARAGRAPH 5.10], (IV) THE PRINCIPLE OF MATCHING OF INCOME AND CORRES PONDING EXPENDITURE MAY BE AN ACCOUNTANT'S VIEW, BUT UNDER THE LAW THE EXPENDITURE AND INCOME CAN BE TREATED DIFFERENTLY, DEPENDING UPON WHETHER ONE OR BOTH HAD ACCRUED OR NOT ON THE BASIS OF METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE. [PARAGRAPH 5.5]; AND, (V) RECEIPT OF RETENTION MONEY BY FURNISHING UNCONDITIONAL BANK GUARANTEE MAY OR MAY NOT AMOUNT THE ACCRUAL OF INCOME WHICH WILL HAVE TO BE CONSIDERED ON THE BASIS OF TERMS AND CONDITIONS OF THE CONTRACT. HOWEVER, FURNISHING OF UNCONDITIONAL BAN K GUARANTEE IS ATTENDANT WITH SIGNIFICANT RISKS, AND WHERE THE AGREEMENT PROVIDES FOR ACCEPTANCE TEST ITA NOS.660 & 954/17 & C.O.65/2017 :- 22 -: FOR SATISFACTORY PERFORMANCE IN LIEU OF WHICH CERTA IN MONEY WAS RETAINED BY THE CONTRACTEE, THAT AMOUNT WILL AC CRUE AS INCOME ONLY ON SATISFACTORY PERFORMANCE OF TH E TEST AND ACCEPTANCE BY THE CONTRACTEE [PARAGRAPH 5.9]. 7.1 WE MAY NOW CONSIDER THE FACTS OF THE INSTANT CA SE IN THE LIGHT OF VARIOUS CASE LAWS AND THEIR RAT IOS DISCUSSED IN THE PRECEDING PARAGRAPHS. VARIOUS TERMS AND CONDITIONS OF THE CONTRACT HAD BEEN NARRA TED BY THE ASSESSING OFFICER IN HIS ORDER FROM PAGE 6 ONWARD. THE ASSESSEE AGREED TO DELIVER THE AHP AND ALL O THER ACCESSORIES IN ALL RESPECTS FOR A CONTRACT PRICE OF RS. 12,59,06,940. AS PER THE CLAUSE 24, AL L PAYMENTS DURING THE CURRENCY OF THE CONTRACT WILL BE 'ON ACCOUNT PAYMENTS' ONLY AND THE FINAL PAYM ENT SHALL BE MADE ON COMPLETION OF GUARANTEE PERI OD OR EARLIER FULFILMENT BY THE ASSESSEE OF ALL HIS LI ABILITIES UNDER THE CONTRACT. CLAUSE 32 OF THE CONTRACT PROVI DES THAT PROPERTY IN ALL MATERIALS, EQUIPMENT AND ORS.SUPPLIES SHALL VEST IN AND BECOME THE PROPE RTY OF THE CONTRACTEE FROM THE DATE OF RECEIPT OF THE MATE RIAL. CLAUSE 13 PROVIDES THAT PLANT SHALL BE CONSIDE RED AS COMMISSION AFTER SUCCESSFUL COMPLETION OF THE PERFORMANCE TEST TO BE CARRIED OUT FOR 24 HO URS. IF THE ASSESSEE FAILS TO ESTABLISH THE GUARANTEED POWE R CONSUMPTION ENVISAGED, IT WILL UNDERTAKE TO RECTIFY THE PLANT WITHIN A PERIOD OF THREE MONTHS. HOWEVER, IF THAT IS NOT DONE, THE CONTRACTEE WILL HAVE THE RIGHT TO REC TIFY THE DEFECT ON ITS OWN AND THE COST OF RECTIFICA TION WILL BE COLLECTED FROM THE CONTRACTOR. THE PAYMENTS WERE TO BE MADE AS UNDER: (I) 15 PER CENT OF THE PRICE TO BE GIVEN AS ADVANCE ON SIGNING THE CONTRACT, (II) FURTHER 75 PER CENT TO BE PAID ON PRODUCTION O F INVOICE AND SATISFACTORY EVIDENCE OF DISPATCH BY THE ASSESS EE, (III) FURTHER 5 PER CENT OF THE PRICE TO BE PAID AG AINST THE TAKING OVER OF THE PLANT BY THE CONTRACTEE, AND (IV) FINAL 5 PER CENT OF THE PRICE IS TO BE PAID PRIOR TO COMPLETION OF GUARANTEE PERIOD BUT AFTER S ATISFACTORY COMPLETION OF ALL CONTRACTUAL WORKS INCLUDING PERFO RMANCE TEST AND FINAL ACCEPTANCE. ITA NOS.660 & 954/17 & C.O.65/2017 :- 23 -: 7.2 THE CASE OF THE LEARNED ASSESSING OFFICER WAS T HAT WHEN ON SUPPLY OF MATERIAL, PAYMENT UPTO 90 PER CEN T OF THE SUPPLIES WERE MADE BY THE CONTRACTEE, IT MEANT THAT THE FULL PAYMENT WAS QUANTIFIED AND ACCEPTED BY THE CONTRACTEE. THIS IS SO BECAUSE WITHOUT QUANTIFIC ATION OF THE FULL AMOUNT, 90 PER CENT THEREOF CANNOT BE WORK ED OUT AND PAID. THEREFORE, WHEN THE WHOLE PRICE WAS QUANTIFIED, THE AMOUNT RECEIVABLE WAS ALSO QUA NTIFIED AND, THEREFORE, WHOLE OF THE AMOUNT ACCRUED AS INCOME TO THE ASSESSEE. THE RETENTION OF 10 PER CENT OF THE MONEY WAS IN RESPECT OF MATERIAL ALRE ADY* SUPPLIED AND ACCEPTED, AND THE RETENTION WAS MEREL Y FOR SAFEGUARDING THE INTEREST OF THE CONTRACTEE. THE ACCEPTANCE OF THE FULL LIABILITY BY THE CONTRACTEE AMOUNTS TO ACCRUAL OF INCOME IN THE HANDS OF THE ASSESSEE. THIS VIEW WAS NOT UPHELD BY THE LEARNED CIT(A). 7.3 WE HAVE ALREADY CONSIDERED VARIOUS CASE LAWS WH ICH POINT OUT THAT IF RECEIPT OF RETENTION MONEY IS CONDITIONAL UPON PERFORMANCE OF A PART OF CONTR ACT, THIS MONEY WILL ACCRUE AS INCOME ONLY WHEN THAT PA RT OF THE CONTRACT HAS ALSO BEEN PERFORMED. WE HAVE A LSO SEEN THAT THE EXPENDITURE INCURRED IN SUPPLY OF THE WHOLE MATERIAL WAS FOR THE PURPOSE OF BUSINESS AND IT CON STITUTED A DEDUCTIBLE EXPENDITURE. ITS DEDUCTION DOES NOT D EPEND UPON THE CORRESPONDING RECEIPT. IN OTHER WORD S, THE PRINCIPLE OF MATCHING OF EXPENDITURE WITH RECEIPT D OES NOT REPRESENT CORRECT LEGAL APPROACH, THOUGH IT M AY BE AN ACCOUNTANT'S VIEW. HOWEVER, THAT IS ALSO NOT THE CA SE HERE, AS ACCOUNTING STANDARD NO. 9, ISSUED BY ICAI, LAYS DOWN THAT IF RECEIPT OF RETENTION MONEY IS HED GED UPON FUTURE CONTINGENCIES, IT SHOULD NOT BE RECOGNIZED A S INCOME. THUS, THE EXPENDITURE AND THE CORRESPOND ING RECEIPT MAY HAVE TO BE TREATED DIFFERENTLY, DEP ENDING UPON THE TERMS OF THE CONTRACT. THE CONTRACT PROVID ES THAT PROPERTY IN GOODS SHALL PASS TO THE CONTRACTEE AS S OON AS THOSE ARE SUPPLIED TO IT. THEREFORE, ON SUPPLY OF GOODS, THE EXPENDITURE HAS BEEN INCURRED BECAUSE THE ASSESSEE IS NO MORE OWNER OF THE GOODS. INSO FAR AS, RETENTION MONEY IS CONCERNED, IT WILL ACCRUE AS INC OME IN TWO EQUAL INSTALMENTS ON, (I) TAKING OVER THE PLANT BY THE CONTACTEE, AND (IT) COMPLETION OF PERFORMANCE TEST AND ITS ACCEPTA NCE BY ITA NOS.660 & 954/17 & C.O.65/2017 :- 24 -: THE CONTRACTEE. THE CONTRACT PROVIDES FOR RECT IFICATION OF THE DEFAULTS BY THE ASSESSEE WITHIN THREE MON THS AND IN CASE OF HIS FAILURE TO DO SO BY THE CONTRACTEE O N ITS OWN AT THE COST OF THE ASSESSEE. THEREFORE, THER E ARE SIGNIFICANT RISKS ASSOCIATED WITH THE ACCRUAL OF RETENTION MONEY AS INCOME. INSOFAR AS RETENTIO N MONEY IS CONCERNED, FURNISHING OF BANK GUARANTEE BY THE ASSESSEE TO THE CONTRACTEE AND RECEIPT OF RETENT ION MONEY IN LIEU THEREOF DOES NOT OBLITERATE THE RISKS ASSOCIATED WITH THIS MONEY. THEREFORE, EVEN IF THE ASSESSEE IS ENTITLED TO RECEIVE THE MONEY BY FURNISHING UNCONDITIONAL BANK GUARANTEE, THE R ISKS DO NOT ABATE. THERE IS A SIGNIFICANT RISK THAT THE MONEY MAY BE RECOVERED FROM THE BANK GUARANTEE WITHO UT REFERENCE TO THE ASSESSEE IN CASE PERFORMANCE TEST IS NOT PERFORMED SATISFACTORILY. THIS RISK IS NOT COV ERED BY MAKING ANY PROVISION IN BOOKS FOR THE WARRANTY AS S TATED BY THE LEARNED COUNSEL. 7.4 IT WAS ALSO THE CASE OF THE LEARNED DR THAT THE ASSESSEE HAD CHANGED ITS METHOD OF ACCOUNTING IN RE SPECT OF ACCOUNTING OF RETENTION MONEY. THE CASE OF THE L EARNED COUNSEL WAS THAT THE ASSESSEE HAS BEEN CONSISTE NTLY FOLLOWING MERCANTILE METHOD OF ACCOUNTING AND THER E WAS NO CHANGE IN THIS REGARD. EARLIER, THE ASSESSEE HAD BEEN SHOWING RETENTION MONEY AS INCOME ON THE MISTAKEN BELIEF THAT THE INCOME HAD ACCRUED TO IT. HOWEVER, IF CORRECT PRINCIPLES OF LAW ARE APPLIED, IT WILL BE SEEN THAT INCOME WILL ACCRUE ONLY WHEN PERFO RMANCE TEST IS SATISFACTORILY UNDERTAKEN AND ACCEPTED BY THE CONTRACTEE. AS POINTED OUT EARLIER, HE HAS ALSO ST ATED THAT, (I) NO PROVISION IS MADE FOR LIABILITY IN CASE PERFORMANCE TEST FAILS AND SOME EXPENDITURE MAY HAVE TO BE I NCURRED IN THE WARRANTY PERIOD, AND (II) RETENTION MONEY HAS BEEN OFFERED FOR TAXATION THE MOMENT THE PERFORMANCE TEST HAS BEEN UNDERTAKEN SUCCES SFULLY AND ACCEPTED BY THE CONTRACTEE. THEREFORE, HI S CASE WAS THAT HE HAS BEEN FOLLOWING MERCANTILE ME THOD OF ACCOUNTING, HIS PAST MISTAKEN BELIEF OF LAW CANNOT BE HELD OUT AGAINST HIM IN THIS YEAR, AND IT ALSO CANNOT BE CONCLUDED THAT HE HAS CHANGED METHOD OF ACCOUN TING WHEN HE FOLLOWED THE CORRECT LEGAL PRINCIPLES RE GARDING ACCRUAL OF INCOME WHILE FILING THE RETURN OF INC OME FOR THIS YEAR. LOOKING TO THE AFORESAID DISCUSSION WE ARE OF THE VIEW THAT THERE WAS NO CHANGE IN MET HOD OF ITA NOS.660 & 954/17 & C.O.65/2017 :- 25 -: ACCOUNTING, WHICH CONTINUED TO BE MERCANTILE M ETHOD OF ACCOUNTING. WE ARE ALSO OF THE VIEW THAT THE RETENTION MONEY DOES NOT ACCRUE AS INCOME MERELY ON RAISING THE BILL. IT ACCRUES AS INCOME AS PER PARAG RAPH 7.3 (SUPRA) OF THIS ORDER. THE ASSESSING OFFICER AND THE CIT(A) HAVE DEALT WITH THE RETENTION MO NEY AS ONE ITEM. BUT, IN FACT, IT ACCRUES AS INCOME ON HAP PENING OF TWO DISTINCT EVENTS. THE ASSESSING OFFICER MAY EXAMINE WHETHER ANY PART OF RETENTION MONEY A CCRUES AS INCOME IN THIS YEAR ON AFORESAID BASIS. IF HE IS OF THE VIEW THAT SOME PORTION ACCRUES AS INCOME THI S YEAR, HE MAY HEAR THE ASSESSEE AND TAX THAT PART PORTION ACCORDINGLY. SIMILARLY, THIS ISSUE ALSO CAME UP FOR CONSI DERATION BEFORE THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF C ORROSION CONTROL SERVICES (BOMBAY) P.LTD., (SUPRA), WHEREIN IT HAS BEEN HELD AS FOLLOWS 7. THE LEARNED COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO THE CASE OF SIMPLEX CONCRETE PILES (IN DIA) (P.) LTD (SUPRA).IN THAT CASE THE ASSESSEE CARRIED ON BU SINESS OF CONCRETE PILES ON CONTRACT BASIS AND WAS CREDITI NG 100 PER CENT OF JOB VALUE UPTO AND INCLUDING THE ASSESS MENT YEAR 1964-65. BUT FOR THE ASSESSMENT YEAR 1965-66, IT CREDITED ONLY 90 PER CENT; DEDUCTING THE RETENTION MONEY @ 10 PER CENT OF JOB VALUE WHICH RESULTED IN REDUCTION OF INCOME. THE ASSESSING OFFICER ADDED THE RET ENTION MONEY, BUT, ON APPEAL, THE AAC HELD THAT RETENT ION MONEY DID NOT ACCRUE OR ARISE IN THE RELEVAN T PERIOD IN WHICH THE JOB WAS EXECUTE D, BUT ON A LATER DATE. T HE TRIBUNAL REMANDED THE MATTER BACK FOR RE-EXAMINATIO N IN TERMS OF THE CONTRACT. ON A REFERENCE TO THE HON'BL E CALCUTTA HIGH COURT, IT WAS OBSERVED AS UNDER :- 'THAT HAVING REGARD TO THE TERMS AND CONDITI ONS OF THE CONTRACT, IT COULD NOT BE HELD THAT EITHER 10 PER C ENT OR 5 PER CENT, AS THE CASE MAY BE, BEING RETENTIO N MONEY, BECAME LEGALLY DUE TO THE ASSESSEE ON THE COMPLE TION OF THE WORK. ONLY AFTER THE ASSESSEE FULFILLE D THE OBLIGATIONS UNDER THE CONTRACT, THE RETENTION MONEY WOULD BE RELEASED AND THE ASSESSEE WOULD ACQU IRE THE RIGHT TO RECEIPT SUCH RETENTION MONEY. TH EREFORE, ON THE DATE WHEN THE BILLS WERE SUBMITTED, H AVING REGARD TO THE NATURE OF THE CONTRACT, NO ENF ORCEABLE ITA NOS.660 & 954/17 & C.O.65/2017 :- 26 -: LIABILITY ACCRUED OR AROSE AND, ACCORDINGLY, IT COULD NOT BE SAID THAT THE ASSESSEE HAD ANY RIGHT TO RECEIVE THE ENTIRE AMOUNT ON THE COMPLETION OF THE WORK OR ON T HE SUBMISSION OF BILLS. THE ASSESSEE HAD NO RIGHT TO C LAIM ANY PART OF THE RETENTION MONEY TILL THE VERIFICATI ON OF SATISFACTORY EXECUTION OF THE CONTRACT. THEREFORE, THE TRIBUNAL WAS RIGHT IN HOLDING THAT THE RETENTIO N MONEY IN RESPECT OF THE JOBS COMPLETED BY THE ASSESSE E DURING THE RELEVANT PREVIOUS YEAR SHOULD NOT BE TAKEN INTO ACCOUNT IN COMPUTING THE PROFITS OF THE ASSESSEE FOR THE ASSESSMENT YEAR IN QUESTION.' IN THE CASE OF ASSOCIATED CABLES (P.) LTD. V. DY. C IT [1994] 48 ITD 141 (BOM.) (TM), THE LEARNED MEM BER OF THE TRIBUNAL AS PER THE HEADNOTES, HELD AS UNDE R : 'SECTION 28(I) OF THE INCOME-TAX ACT, 1961 -B USINESS DEDUCTION/LOSS -ALLOWABILITY OF -ASSESSMENT YEAR 1 990-91 -ASSESSEE-COMPANY WAS ENGAGED IN MANUFACTURE OF CABLES AS PER SPECIFICATIONS OF CUSTOMERS -ACCORDI NG TO CONTRACT, WHILE 90 PER CENT OF COST OF CABLES WAS PAID UP TO TIME OF PRESENTATION OF DESPATCH DOCUMENTS . 10 PER CENT WAS PAID ON RECEIPT AND ACCEPTANCE OF GO ODS SUBJECT TO BANK GUARANTEE FOR THAT 10 PER CENT, STIPULATING THAT IN CASE OF ANY SHORTCOMING IN WORKMANSHIP, ETC., PURCHASES SHALL, WITHOUT REFER ENCE TO ASSESSEE, RECOVER AMOUNT FROM BANK -ASSESSEE-COMPAN Y CLAIMED THAT THIS 10 PER CENT, BEING RETENTI ON MONEY, HAD TO BE EXCLUDED IN COMPUTING ITS TOTAL INCOME AN D OUGHT TO BE ACCOUNTED FOR AFTER EXPIRY OF GUARANTEE PERIOD -WHETHER KEEPING IN MIND PRINCIPLE OF INCOME RECOGNITION WHICH IS BASIS OF MERCANTILE METHOD OF ACCOUNTING, AS LONG AS PERFORMANCE GUARANTEE REMA INED AND WAS ENFORCEABLE WITHOUT NOTICE TO ASSESSEE , INCOME FROM RETENTION MONEY COULD NOT BE RECO GNISED AND CONSEQUENTLY ASSESSEE'S CLAIM HAD TO BE ALLO WED - HELD, YES.' 7.1 IT CAN BE TAKEN TO BE WELL -SETTLED PRI NCIPLE THAT UNDER MERCANTILE SYSTEM OF ACCOUNTING, IT HAS TO BE SEEN WHETHER RIGHT TO RECEIVE AMOUNT HAS ACCRUED TO THE ASSESSEE OR NOT. THIS RIGHT MUST EMERGE FROM THE CO NTRACT BETWEEN THE PARTIES. FROM THE FACTS SET OUT HEREIN BEFORE, WE FIND THAT THE ENTIRE AMOUNT OF BILL DID NOT BECOME DUE IMMEDIATELY UPON ITS SUBMISSION, BUT 5 PER CNT AND 10 ITA NOS.660 & 954/17 & C.O.65/2017 :- 27 -: PER CENT OF THE BILL AMOUNTS, AS THE CASE MAY BE, W ERE WITHHELD AS SECURITY. HAVING REGARD TO THE TERMS O F CONTRACT, THERE CAN BE NO DISPUTE THAT THE ASSES SEE HAD NO RIGHT TO RECEIVE THE RETENTION MONEY WHICH WAS TO BECOME DUE ONLY ON COMPLETION OF THE ENTIRE CONTRAC T AND FURNISHING OF REQUISITE CERTIFICATE. THE PAYME NT OF RETENTION MONEY WAS DEFERRED AS PER THE CONT RACT IN SPITE OF JOB CARRIED AND BILLS SUBMITTED. THE PAY MENT OF RETENTION MONEY WAS CONTINGENT ON SATISFACTORY COMP LETION OF WORK AND ITS CERTIFICATION. TILL THEN THERE WAS NO ADMISSIBILITY OF THE LIABILITY AND NO RIGHT TO RECE IVE ANY PART OF THE RETENTION MONEY ACCRUED TO THE ASSESSEE. THE WORK WAS COMPLETED IN THE NEXT YEAR AND THEN ONLY INCOME ACCRUED TO THE ASSESSEE. THE RETE NTION MONEY WAS LIABLE TO BE TAXED IN THE NEXT YEAR. 8. THE LEARNED REVENUE AUTHORITIES WHILE MAKING AND UPHOLDING THE ADDITION WERE INFLUENCED BY EXTRA NEOUS CIRCUMSTANCES. UNDUE IMPORTANCE WAS GIVEN TO THE ENTRIES MADE BY THE ASSESSEE IN THE BOOKS OF ACCOUN T. THE INCOME, AS NOTED EARLIER, ACCRUES ON THE BASIS OF CONTRACT BETWEEN THE PARTIES AND NOT THE VIE W WHICH THE ASSESSEE HAS TAKEN OF THE ISSUE MANIFESTED THRO UGH ENTRIES IN THE BOOKS OF ACCOUNT. THEREFORE, CREDITI NG OF THE AMOUNT IN THE PRESENT CASE WAS TOTALLY IMMATERIAL. IT IS NOT THE JOB OF THE AUDITOR TO GIVE HIS DECISION ON T HE ACCRUAL OF INCOME. THE AUDITOR HAS ONLY TO CERTIFY R EGARDING TRUTHFULNESS OF ACCOUNTS WITH REFERENCE TO MATE RIAL AVAILABLE ON RECORD AND NOT WHETHER INCOME ACCRUED TO THE ASSESSEE OR NOT. THE OTHER OBSERVATIONS RELATING TO CHANGE IN THE SYSTEM OF ACCOUNTING, ASSESSABILIT Y OF ADVANCES, ETC. ETC., HAVE NOTHING TO DO WITH DETERMINATION OF THE QUESTION INVOLVED BEFORE US AN D WERE WRONGLY TAKEN INTO ACCOUNT BY THE REVENUE AUTHORITI ES. REGARDING THE ENTRIES IN THE BOOKS OF ACCOUNT, WE M AY SAFELY QUOTE THE FOLLOWING OBSERVATIONS OF THE HON' BLE SUPREME COURT IN THE CASE OF KEDARNATH JUTE MFG. CO . LTD. V. CIT [1971] 82 ITR 363 AT PAGE 367 :- 'THE MAIN CONTENTION OF THE LEARNED SOLICITOR-GENER AL IS THAT THE ASSESSEE FAILED TO DEBIT THE LIAB ILITY IN ITS BOOKS OF ACCOUNT AND, THEREFORE, IT WAS DEBARRED FROM CLAIMING THE SAME AS DEDUCTION EITHER UNDER SECTION 10(1) OR UNDER SECTION ITA NOS.660 & 954/17 & C.O.65/2017 :- 28 -: 10(2)(XV) OF THE ACT. WE ARE WHOLLY UNABLE TO APPRECIATE THE SUGGESTION THAT IF AN ASSESSEE UNDER SOME MISAPPREHENSION OR MISTAKE FAILS TO MAKE AN ENTRY IN THE BOOKS OF ACCOUNT AND ALTHOUGH, UNDER THE LAW, A DEDUCTION MUST BE ALLOWED BY THE INCOME-TAX OFFICER, THE ASSESSEE WIL L LOSE THE RIGHT OF CLAIMING OR WILL BE DEBAR RED FROM BEING ALLOWED THAT DEDUCTION. WHETHER THE ASSESSEE IS ENTITLED TO A PARTICULAR DEDUCTION OR N OT WILL DEPEND ON THE PROVISIONS OF LAW RELATING THERE TO AND NOT ON THE VIEW WHICH THE ASSESSEE MIGHT TAKE O F HIS RIGHTS NOR CAN THE EXISTENCE OR ABSENCE OF ENTR IES IN THE BOOKS OF ACCOUNT BE DECISIVE OR CONCLUSIVE I N THE MATTER AND NOT ON THE VIEW WHICH THE ASSESSEE MIGHT TAKE OF HIS RIGHTS NOR CAN THE EXISTENCE OR ABSENCE OF ENTRIES IN THE BOOKS OF ACCOUNT BE DECISIVE OR CONCLUSIVE IN THE MATTER. 9. THE ABOVE OBSERVATIONS REALLY CLINCH THE ISSUE. THE ACCRUAL OF INCOME HAS TO BE DETERMINED WITH REFERENCE TO CONTRACT BETWEEN THE PARTIES AND ABOUT THE TERMS AND CONDITIONS, NO DISPUTE HAS BEEN RAISED BY THE REVENUE. THE RETENTION MONEY DID NOT ACCRUE UND ER THE CONTRACT AND IT COULD NOT BE ASSESSED MERELY ON THE VIEW OF THE MATTER WHICH THE ASSESSEE HAD TAKEN INADVERTENTLY OR OTHERWISE. THE RETENTION MONEY AC CRUED IN THE PERIOD RELEVANT TO THE ASSESSMENT YEAR 1989 -90 AND SHOULD BE ASSESSED IN THAT YEAR. IT IS DIRECTED TO BE DELETED FROM THE ASSESSMENT OF THE YEAR UNDER CONSIDERATION. 10.IN THE ABSENCE OF ANY DECISION TO THE CONTRARY B ROUGHT TO OUR NOTICE, FOLLOWING THE CONSISTENT VIEW TAKEN BY THE TRIBUNAL IN THE ABOVE MATTERS, WE HOLD THAT THE RET ENTION MONEY HAS TO BE BROUGHT TO TAX IN THE YEAR IN WHICH THE SAME HAS ACTUALLY BEEN RECEIVED BY THE ASSESSEE FRO M THE CONTRACTEES. CONSEQUENTLY, WE FIND NO INFIRMITY I N THE VIEW TAKEN BY THE CIT(A) IN RELATION TO THE ISSUE R ELATING TO THE YEAR OF ASSESSABILITY OF THE RETENTION MONEY. HOWEVER, THE CLAIM OF THE ASSESSEE OF HAVING OFFERED THE RETENTION MONEY TO TAX IN THE YEAR IN WHICH THE SAME HAS ACTUALLY BEEN RECEIVED, IS REQUIRED TO BE ITA NOS.660 & 954/17 & C.O.65/2017 :- 29 -: ASCERTAINED, BEFORE THE ADDITION MADE IN THE YEA R UNDER APPEAL IS DELETED. WE ACCORDINGLY MODIFY TH E IMPUGNED ORDER OF THE CIT(A), AND SET ASIDE THE MAT TER TO THE FILE OF THE ASSESSING OFFICER, WITH A DIRECTION TO VERIFY THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE THAT T HE RETENTION MONIES HAVE IN FACT BEEN OFFERED TO TAX IN THE YEARS IN WHICH THE SAME HAVE ACTUALLY BEEN RECEIVED . FOR THIS LIMITED PURPOSE, WE SET ASIDE THE IMPUGNED ORD ER OF THE CIT(A) AND RESTORE THE MATTER TO THE FILE O F THE ASSESSING OFFICER FOR FRESH EXAMINATION OF TH E MATTER IN ACCORDANCE WITH LAW. HE SHALL ACCORDINGL Y REDETERMINE THE AMOUNT OF ADDITION, IF ANY WARRANT ED, AFTER DUE VERIFICATION OF THE CLAIM OF THE ASSESSEE, ON CASE TO CASE BASIS, WITH REGARD TO IT HAVING ALREADY OFFERED THE RETENTION MONEYS IN RESPECT OF EACH CONT RACT, TO TAX IN THE RESPECTIVE YEAR OF ITS ACTUAL RECEIPT. THE ASSESSING OFFICER IS DIRECTED TO PASS APPROPRIATE O RDERS IN ACCORDANCE WITH LAW AND AFTER GIVING REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE TO SUBSTANTI ATE ITS CLAIM. WHAT WE FIND IS THAT THE TRIBUNAL HAD SET ASIDE TH E ISSUE TO THE FILE OF THE LD. ASSESSING OFFICER FOR VERIFYING THE CORREC TNESS OF THE CLAIM OF THE ASSESSEE THAT RETENTION MONEY WAS OFFERED AS I NCOME IN THE YEARS IN WHICH THESE WERE RECEIVED. ACCORDINGLY, FOR TH E IMPUGNED ASSESSMENT YEAR ALSO, WE GIVE SIMILAR DIRECTIONS AS GIVEN BY THE TRIBUNAL AT PARAS 9 & 10 OF THE ORDER DATED 05.09.2 013 IN ITA NO.1244/HYD/2011. GROUNDNO.2 OF THE REVENUE IS PART LY ALLOWED FOR STATISTICAL PURPOSE. 20. VIDE ITS GROUND NO.3, REVENUE IS AGGRIEVED THAT THE LD. COMMISSIONER OF INCOME TAX (APPEALS) DIRECTED ALLOW ANCE OF DEPRECIATION ON TECHNICAL KNOW-HOW. ITA NOS.660 & 954/17 & C.O.65/2017 :- 30 -: 21. LD. DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT DEPRECIATION ON TECHNICAL KNOWHOW PROVIDED BY M/S. TM.E-S.P.A TERMOMECCANICA AND M/S. NOOTER/ ERIKSEN INC, USA WA S ALLOWED BY LD. COMMISSIONER OF INCOME TAX (APPEALS). ACCORDIN G TO HIM, DEPRECIATION COULD NOT BE GIVEN ON SUCH AMOUNT. 22. PER CONTRA, LD. AUTHORISED REPRESENTATIVE SUBMITTED THAT THE ISSUE REGARDING ALLOWABILITY OF DEPRECIATION ON TE CHNICAL KNOW-HOW HAD COME UP BEFORE THE HYDERABAD BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEARS 2007-08, 2008-09 AND 2009-10 IN ITA NOS.1244 & 1513/HYD/2011 AND ITA NO.985/HYD/2012. ACCORDING TO HIM, THE ISSUE STOOD DECIDED IN FAVOUR OF THE ASSES SEE BY TRIBUNAL THROUGH ITS ORDER DATED 05.09.2013. 23. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSE D THE ORDERS OF THE AUTHORITIES BELOW. THE QUESTION WHETH ER DEPRECIATION COULD BE ALLLOWED ON TECHNICAL KNOW-HOW, CONSIDER ING IT TO BE AN INTANGIBLE ASSET HAD COME UP BEFORE THE HYDERABAD B ENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR S 2007-08, 2008- 09 AND 2009-10 IN ITA NOS.1244 & 1513/HYD/2011 AND ITA NO.985/HYD/2012, DATED 05.09.2013. WHAT WAS HELD BY THE TRIBUNAL AT PARA 17 OF THE ORDER IS REPRODUCED HEREUNDER:- ITA NOS.660 & 954/17 & C.O.65/2017 :- 31 -: 17.WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES. IT IS EVIDENT FROM THE MATERIAL ON RECORD THAT THERE WAS TRANSFER OF TECHNICAL KNOW-HOW IN FAVOUR OF THE ASSESSEE COMPANY, WHEREBY THE ASSESSEE COMPANY THE CAME THE OWNER OF SUCH TECHNICAL KNOW-HOW, WHICH WAS USED BY IT IN ITS BUSINESS. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, WE AGRE E WITH THE CIT(A) THAT THE TWO INGREDIENTS FOR G RANT OF DEPRECIATION, VIZ. OWNERSHIP AND USER OF THE ASSET, ARE CLEARLY FULFILLED, AND THE ASSESSEE IS ENTITL ED FOR DEPRECIATION ON THE TECHNICAL KNOW. WE ACCORDIN GLY FIND NO INFIRMITY IN THE IMPUGNED ORDER OF THE CIT (A), WHICH IS ACCORDINGLY UPHELD, REJECTING THE GR OUND OF THE REVENUE IN THIS APPEAL . NO DOUBT, REVENUE HAS CLAIMED THAT ASSESSEE HAD NOT BECOME ABSOLUTE OWNER OF THE TECHNICAL KNOW-HOW AND THE S UPPLIER COMPANY CONTINUED TO ENJOY THE OWNERSHIP OF SUCH TECHNICAL KNOW-HOW. HOWEVER, IN OUR OPINION, ONCE ASSESSEE HAD PAID TH E MONEY AND ACQUIRED THE TECHNICAL KNOW-HOW, IT BECOME AN INTA NGIBLE ASSET, ELIGIBLE FOR CLAIMING DEPRECIATION U/S.32(II) OF T HE ACT. THE QUESTION WHETHER THE SAME VENDOR HAD GIVEN THE SAME TECHNICA L KNOW-HOW FOR OTHER PERSONS, IS IN OUR OPINION, IRRELEVANT IN D ECIDING THE QUESTION OF ELIGIBILITY OF THE ASSESSEE FOR CLAIMING DEPRECIATI ON. WE THEREFORE DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS) IN THIS REGARD. GROUND NO. 3 STANDS DISMISSED. ITA NOS.660 & 954/17 & C.O.65/2017 :- 32 -: 24. LD. AUTHORISED REPRESENTATIVE SUBMITTED THAT CROSS OBJECTIONS FILED BY THE ASSESSEE IS ONLY FOR SUPP ORTING THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS), IN SO FAR AS IT WENT IN ITS FAVOUR. 25. IN THE RESULT, APPEAL OF THE ASSESSEE AND REVENUE A RE PARTLY ALLOWED FOR STATISTICAL PURPOSES, WHEREAS CROSS OBJ ECTION OF THE ASSESSEE IS DISMISSED AS INFRUCTUOUS. ORDER PRONOUNCED ON THURSDAY, THE 7TH DAY OF DECEMB ER, 2017, AT CHENNAI. SD/- ( ) (GEORGE MATHAN) /JUDICIAL MEMBER SD/- ( . ! ' ) (ABRAHAM P. GEORGE) $ %& / ACCOUNTANT MEMBER - ( / CHENNAI . / DATED: 7TH DECEMBER, 2017. KV / % ')0 1 2 1!) / COPY TO: 1 . $ / APPELLANT 3. ' 3) ( ) / CIT(A) 5. 167 ')8 / DR 2. '#$ / RESPONDENT 4. ' 3) / CIT 6. 79 :( / GF