THE COMMISSIONER OF INCOME TAX V. M/S JOHN BROWN TECHNOLOGIES'

ITA/458/2008

AI Insights

The case revolves around an appeal by the Revenue against the decision of the Income Tax Appellate Tribunal (ITAT), which allowed the deduction of unrealized profits by M/s. John Brown Technologies (India) Pvt. Ltd. under Section 80HHB of the Income Tax Act, 1961. The assessee had initially claimed a deduction for profits from a project that was later abandoned, and upon realizing that some of the income was not receivable, reversed that income in the subsequent year. The Revenue contended that this reversal amounted to a double benefit, as the deduction had already been claimed in the earlier year. However, the Tribunal and the High Court found that the reversal was in accordance with the principles of accounting and did not constitute a double benefit, as the deduction was not claimed again for the reversed amount.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 736303 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 23-06-2014
• Assessment Year: misc
• Other Referred Cases: COMMISSIONER OF INCOME TAX & ANR. vs. JOHN BROWN TECHNOLOGIES INDIA (P) LIMITED
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: A SHANKAR; M LAVA
• Assessee Lawyers: K V ARAVIND
• Keywords: Deduction; Foreign Exchange; Income Tax; Percentage completion method; Percentage completion method; Unrealized profit
• Section: 145; 80HHB; 260-A

Judgement Text

" - 1 - IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 23RD DAY OF JUNE, 2014 PRESENT THE HON’BLE MR.JUSTICE N.KUMAR AND THE HON’BLE MR.JUSTICE B.MANOHAR INCOME TAX APPEAL NO.458 OF 2008 BETWEEN: 1. THE COMMISSIONER OF INCOME TAX C.R.BUILDING QUEENS ROAD BANGALORE 2. THE DEPUTY COMMISSIONER OF INCOME TAX C.R.BUILDING QUEENS ROAD BANGALORE … APPELLANTS (BY SRI.K.V.ARAVIND, ADVOCATE) AND: M/S. JOHN BROWN TECHNOLOGIES (INDIA) PVT. LTD. NO.19, PRIMEROSE ROAD BANGALORE … RESPONDENT (BY SRI.A.SHANKAR AND M.LAVA, ADVOCATES) - 2 - THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF INCOME TAX ACT, 1961 ARISING OUT OF ORDER DATED 16.11.2007 PASSED IN ITA NO.1581/BANG/2005 FOR THE ASSESSMENT YEAR 2000- 2001 PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN AND TO ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT BANGALORE IN ITA NO.1581/BANG/2005 DATED 16.11.2007 CONFIRM THE ORDERS OF THE APPELLATE COMMISSIONER AND DEPUTY COMMISSIONER OF INCOME TAX, BANGALORE. THIS APPEAL COMING ON FOR HEARING THIS DAY, N.KUMAR J., DELIVERED THE FOLLOWING:- JUDGMENT This appeal is by the Revenue against the order passed by the Tribunal holding that the assessee cannot be denied the deduction of unrealized profit on the ground that in the previous year, he had claimed deduction under Section 80HHB of the Income Tax Act, 1961. 2. During the financial year 1998-99, the assessee had taken up a detailed engineering work for construction of Multi Project Pipeline System in South East Asia and this project is numbered 9104. The - 3 - assessee has recognized revenue to the extent of Rs.1,50,74,698/- which resulted in a net profit of Rs.50,13,244/-. He claimed 80HHB deduction of Rs.25,06,622/- during the assessment year 1999-2000. Due to various reasons, the project was stopped mid- way and hence the assesee abandoned the project. During the year no revenue has been shown in respect to the project. However, assessee has not received the full revenue which has been credited in the earlier year. The assessee was following Percentage Completion Contract Method of Accounting. Therefore, the assessee during the year, reversed in an amount of Rs.36,70,287/- from the turnover of the year which represents the amount credited, but not received. The Assessing Authority held that the reversal of income is not in accordance with the Principles of Accountancy. The earlier year income cannot be reversed except for claiming under the head ‘bad debts’. The reversal of - 4 - income during the current year will result in the excess claim of deduction under Section 80HHB to the earlier year to the tune of Rs.18,35,144/-. If that is allowed, there will be an escape of Rs.18,35,144/- in the earlier year. Therefore, the Assessing Authority disallowed the reversal of income and added an amount of Rs.36,70,287/-. Aggrieved by the said order, the assessee preferred an appeal. 3. The Commissioner of Income Tax Appeals held, the excess revenue to the tune of Rs.36,70,287/- which was booked in the earlier year and also suffered tax in the said earlier year, which became unrealizable during the caption assessment year, on account of stoppage of project was reversed in accordance with the normal method of accounting followed by the assessee, which is Percentage Completion Method. As per the accounting for construction contract, the assessee has considered the said amount as not received and accordingly, the - 5 - same was reduced from the current year’s income. In that effect, the assessee had written off the same in his books of accounts which has resulted in reduced turn over, as well as, the impugned amount receivable from concerned party. Therefore, the alternative claim of assessee whether the said amount is allowable as bad debt, is therefore in order. Accordingly, the appeal and the order of the Assessing Authority was set aside. Aggrieved by the said order, the Revenue preferred an appeal to the Tribunal. 4. The Tribunal held that if the amount is not realizable and has already been considered while estimating the income, then the same is to be allowed as deduction. As per 80HHB(3)(iii), the assessee was required to bring 50% of the profit and gains from the project under consideration as foreign exchange into India. If that condition is satisfied, then the deduction under Section 80HHB has been allowed as per the law. - 6 - There is no requirement in law for claiming deduction under Section 80HHB. The entire profit should be brought into India in the form of foreign exchange. It observes that the Assessing Authority feels that amounts were inflated in earlier year to claim higher deduction under Section 80HHB and has material to support such finding, then he is free to take remedial measure as per law. It also held that the assessee cannot be denied deduction in respect of the amount which is unrealizable. Aggrieved by the said order, Revenue is in appeal before this Court. 5. This appeal was admitted to consider the following substantial questions of law on 30.1.2009. (i) Whether the Appellate Authorities were correct in holding that the assessee would be entitled to reverse the entry made in the earlier assessment year in respect of an amount of Rs.36,70,287/- declared as its income and deduction - 7 - claimed under Section 80HHB of the Act? (ii) Whether the Appellate Authorities were correct in holding that the assessee would be entitled to reverse the entry by basing its finding on the earlier assessment years as it is following percentage completion method of accounting which is not permissible in accordance with amended Section 145 of the Act for het current assessment year? (iii) Whether the Appellate Authorities were correct in holding that the assessee producing designs and drawings in its engineering units would amount to production of an article or thing and therefore would be entitled to claim deduction under Section. 80IA of the Act? 6. The learned counsel for Revenue assailing the impugned order contended that when once the benefit - 8 - of deduction under Section 80HHB has been availed by the assessee, he is not entitled to deduction in the subsequent year on the ground that he has not received the said amount. If it is permitted, it amounts to double benefit to the assessee, which is not permissible in law. 7. Per contra, learned counsel for the assessee submitted that once the conditions stipulated under Section 80HHB are fulfilled, the assessee is entitled to the benefit of deduction under the said provision, as the assessee is following percentage completion contract method. Even though he has not received the income/profit he had declared it so in his accounts, but when he did not receive the said amount it is treated as bad debts and written off in his account. Once that condition is satisfied in the subsequent year, he is entitled to the deduction of the said amount and that is precisely what has been done and followed by the - 9 - Authority. Therefore, he submitted that the impugned judgments does not call for any interference. 8. In the light of the afore stated facts and rival contentions, it is not in dispute that the assessee has declared revenue to the extent of Rs.1,50,74,698/-. He has shown the net profit of Rs.50,13,244/-. He claims deduction of Rs.25,06,622/- during the assessment year 1999-2000. This claim is in accordance with law, which is not in dispute. However, the project was stopped mid way which resulted in assessee abandoning the project. During the subsequent year, no revenue has been shown in respect of the project. He also did not receive the full revenue, which has been credited in the earlier year. Therefore, the assessee during the subsequent year, reversed in amount of Rs.36,70,287/- from the turnover of the year which represents the amount credited, but not received. When the said amount was reversed and deduction claimed, - 10 - the assessee did not put forth any claim under Section 80HHB to that extent in the subsequent year on that amount and therefore, it cannot be said that the assessee had double benefit. When once according to percentage completion contract method of accounting adopted by the assessee, he is expected to declare the revenue as well as the profit even in respect of amounts which he has not received, merely because, he claimed deduction under Section 80HHB, he cannot be denied of reversal of entry and deduction of the amount which he did not receive, which was the subject matter of earlier years return by claiming such deduction. The claim of 80HHB deduction is also given up to that extent. There is no double benefit as contended by the Revenue. Therefore, the order passed by the Appellate Authorities are strictly in accordance with law and no case for interference is made out. Hence, the substantial - 11 - questions of law 1 and 2 are answered in favour of the assessee and against the Revenue. 9. In so far as, substantial question of law No.3 is concerned, it is covered by the judgment of this Court in the case of COMMISSIONER OF INCOME TAX & ANR. vs. JOHN BROWN TECHNOLOGIES INDIA (P) LIMITED reported in (2012) 77 DTR (KAR) 58. The said substantial question of law is answered in favour of assessee and against the Revenue. Accordingly, we answer the said question also. In the result, there is no merit. The appeal is dismissed. Sd/- JUDGE Sd/- JUDGE AHB "