TMI Blog2017 (12) TMI 1845X X X X Extracts X X X X X X X X Extracts X X X X ..... ders of the lower authorities and remit the issue back to the file of the ld. Assessing Officer for consideration afresh in accordance with law. Disallowance being provision for warranty - HELD THAT:- 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. Commissioner of Income Tax (Appeals) and upheld the disallowance for warranty provisions. Nothing was shown before us to take a different view for the impugned assessment year. Ground of the assessee stands dismissed. Disallowance u/s.14A - HELD THAT:- Hon ble Delhi High Court in the case of Joint Investment P. Ltd [ 2015 (3) TMI 155 - DELHI HIGH COURT] disallowance u/s.14A of the Act cannot exceed the exempt income claimed by the assessee. We restrict the disallowance accordingly. Addition of retention money - Accrual of income in which year ? - HELD THAT:- We find that the question whether retention money could be considered as part of income had come up before the Hyderabad Bench of the Tribunal in assessee s own case for assessment year 2007-08 [ 2013 (9) TMI 372 - ITAT HYDERABAD] Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment year 2009-2010 and it was decided in favour of the assessee. According to her, assessee had to pay liquidated damages for not completing the work undertaken by it, in time. Contention of the ld. Authorised Representative was that there were specific clauses in the contracts entered by the assessee with its clients, which provided for liquidated damages. 5. Per contra, ld. Departmental Representative submitted that in earlier years, assessee had given a specific work-out of the liquidated damages with reference to delay in each of the project and the quantum of damages arising on account of such delay. 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 be liable for damages only for the delay due to its own fault. Ld. Departmental Representative, referring to the table given in para 11 of the order of the ld. Commissioner of Income Tax (Appeals), submitted that against similar provisions made by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly 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 obl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee 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 date was 28.2.2008, i.e. delivery took placeafter a delay of 24 weeks. Similarly in the case of MALCO, the actual completion of the project was 26.2.2009 as against the scheduled date of 19.6.2008, the delay being 32 weeks. Referring to the relevant agreements of the assessee 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 attributable to the purchaser, the supplier shall be liable to pay to the purchaser liquidated damages and not by way of penalty, an amount calculated at the rate of 1% of the supply contract price for each week of delay or part thereof, subject to a maximum of7.5% of supply contract price. It is in accordance with this contractual obligation that 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 accr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at in the said year, assessee could demonstrate the delay in completing two projects namely one for TNEB at Valathur and another for MALCO, at Mettur. Assessee could show that there was a twenty four weeks delay in execution of TNEB project and twenty two weeks delay in execution of MALCO project. Ld. Commissioner of Income Tax (Appeals) had in the said assessment year accepted the claim of the assessee, considering completion clause in the relevant agreement with these two parties. However, for the impugned assessment year, there is nothing on record to show how the assessee had calculated the liquidated damages of D53,99,42,000/- debited by it in its Profit and Loss account. That apart, provision made by the assessee under the very same head for various years, reflects scant payments against such provisions. Details of the provisions made by the assessee and payments made against such provisions for various years read as under:- A.Y Opening Balance Add: Provision made during the year Less: Provision utilized Less: Provision reversed Closing Balance 2008-09 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer. Ground 3 is allowed for statistical purposes. 7. Vide its ground No.4, grievance raised by the assessee is on disallowance of 3,61,76,758/- being provision for warranty which was confirmed by the ld. Commissioner of Income Tax (Appeals). 8. Ld. Counsel for the assessee fairly admitted that similar issue was decided against the assessee, by the Hyderabad Bench of the Tribunal in assessee s own case for assessment years 2007-08, 2008- 09 2009-2010 in ITA Nos.1244 1513/Hyd/2011, and ITA No.985/Hyd/2012, dated 05.09.2013. According to her, assessee had filed an appeal before the Hon ble Andhra Pradesh High Court against the above decision and the matter was pending. 9. ..Per contra, ld. Departmental Representative strongly supported the orders of the authorities below. 10. We have considered the rival contentions and perused the orders of the authorities below. What was held by the Hyderabad Bench of the Tribunal in assessee s own case for assessment years 2007-08, 2008-09 2009-2010 is reproduced hereunder:- 24. The next issue in dispute in this appeal relates to disallowance made by the Assessing Officer with regard to warranty provisions of Rs.98,24,000, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing his finding, while allowing the claim of the assessee. We accordingly, set aside the impugned order of the CIT(A), and restore the disallowance made by the Assessing Officer in this behalf. Revenue s ground on this issue is allowed . 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. Commissioner of Income Tax (Appeals) and upheld the disallowance for warranty provisions. Nothing was shown before us to take a different view for the impugned assessment year. Ground No.4 of the assessee stands dismissed. 11. Vide its ground No.5, grievance raised by the assessee is on a disallowance of 27,29,950/- 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. 14A of the Act. According to her, assessee had made a voluntary disallowance of D2,38,999/- as expenditure relatable to the exempt income. As per the ld. Authorised Representative, assessee claimed exempt income of D2,76, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ided 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r explanation. The second aspect is there appears to have been no scrutiny of the accounts by the Assessing Officer-an 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 only 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 . Hon ble 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 16 of the judgment. 14. Nothing much turns on the use of the word i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exceed the exempt income claimed by the assessee. We restrict the disallowance to D2,76,835/-. Ground No.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 are 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 inclusion of retention money as part of income, on receipt basis andnot on accrual basis. According to the ld. Departmental Representative, assessee was postponing its tax liability by staggering amounts through this strategy. 18. Per contra, ld. Authorised Representative submitted that the issue stood squarely covered in favour of the assessee by the order of the Hyderabad Bench of the Tribunal in assessee s own case for assessment year 2007-08 in ITA No. 1244/Hyd/2011, dated 05.09.2013. 19. We have considered the rival contentions and perused the orders of the authorities below. We find that the question w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aragraph 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 bank guarantee is attendant with significant risks, and where the agreement provides for acceptance test for satisfactory performance in lieu of which certain money was retained by the contractee, that amount will accrue as income only on satisfactory performance of the test and acceptance by the contractee [Paragraph 5.9]. 7.1 We may now consider the facts of the instant case in the light of various case laws and their ratios discussed in the preceding paragraphs. Various terms and conditions of the contract had been narrated by the Assessing Officer in his order from page 6 onward. The assessee agreed to deliver the AHP and all other accessories in all respects for a contract price of Rs. 12,59,06,940. As per the clause 24, all payments during the currency of the contract will be on account payments only and the final payment shall be made on completion of guarantee period or earlier fulfilment by the assessee of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upply of the whole material was for the purpose of business and it constituted a deductible expenditure. Its deduction does not depend upon the corresponding receipt. In other words, the principle of matching of expenditure with receipt does not represent correct legal approach, though it may be an accountant's view. However, that is also not the case here, as accounting standard No. 9, issued by ICAI, lays down that if receipt of retention money is hedged upon future contingencies, it should not be recognized as income. Thus, the expenditure and the corresponding receipt may have to be treated differently, depending upon the terms of the contract. The contract provides that property in goods shall pass to the contractee as soon 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. Insofar as, retention money is concerned, it will accrue as income in two equal instalments on, (i) taking over the plant by the contactee, and (it) completion of performance test and its acceptance by the contractee. The contract provides for rectification of the defaults by the assessee within three month ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as income as per paragraph 7.3 (supra) of this order. The Assessing Officer and the CIT(A) have dealt with the retention money as one item. But, in fact, it accrues as income on happening of two distinct events. The Assessing Officer may examine whether any part of retention money accrues as income in this year on aforesaid basis. If he is of the view that some portion accrues as income this year, he may hear the assessee and tax that part portion accordingly. Similarly, this issue also came up for consideration before the Mumbai bench of the Tribunal in the case of Corrosion 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 (India) (P.) Ltd (supra).In that case the assessee carried on business of concrete piles on contract basis and was crediting 100 per cent of job value upto and including the assessment 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 retention money, but, on appeal, the AAC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le method of accounting, as long as performance guarantee remained and was enforceable without notice to assessee, income from retention money could not be recognised and consequently assessee's claim had to be allowed - Held, yes. 7.1 It can be taken to be well -settled principle 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 contract between the parties. From the facts set out hereinbefore, we find that the entire amount of bill did not become due immediately upon its submission, but 5 per cnt and 10 per cent of the bill amounts, as the case may be, were withheld as security. Having regard to the terms of contract, there can be no dispute that the assessee had no right to receive the retention money which was to become due only on completion of the entire contract and furnishing of requisite certificate. The payment of retention money was deferred as per the contract in spite of job carried and bills submitted. The payment of retention money was contingent on satisfactory completion of work and its certification. Till then there was no admissibility of the li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xistence 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 under 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 accrued 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 brought to our notice, following the consistent view taken by the Tribunal in the above matters, we hold that the retention money has to be brought to tax in the year in which the same has actually been received by the assessee from the contractees. Consequently, we find no infirmity in the view taken by the CIT(A) in relation to the issue relating to the year of assessability of the retention money. However, the claim of the assessee of having offe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No.985/Hyd/2012. According to him, the issue stood decided in favour of the assessee by Tribunal through its order dated 05.09.2013. 23. We have considered the rival contentions and perused the orders of the authorities below. The question whether depreciation could be alllowed on technical know-how, considering it to be an intangible asset had come up before the Hyderabad Bench of the Tribunal in assessee s 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, dated 05.09.2013. What was held by the Tribunal at para 17 of the order is reproduced hereunder:- 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 agree with the CIT(A) that the two ingredients for grant of depreciation, viz. ownership and user of the asset, are clearly fulfilled, and the assessee is entitled for depreciation on the ..... 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