TMI Blog2013 (9) TMI 372X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 technical know - Decided against Revenue. Disallowance of revenue expenditure - Repayment of assets taken on finance lease - Held that:- principal repayment of assets taken on finance lease is clearly an expenditure of capital nature and the Assessing Officer has correctly allowed depreciation alone on such amount capialised. The CIT(A) has not given any valid reason for substantiating his finding, while allowing the claim of the assessee - Decided in favour of assessee. Disallowance of warranty provision - Held that:- item of disallowance, viz. warranty provision, is merely a provision and not an expenditure already incurred and laid out for the purpose of business. Unless the liability for such expenditure crystalises, assessee is not entitled to calim for deduction in respect of such expenditure. The CIT(A) has not given any valid reason for substantiating his finding, while allowing the claim of the assessee. We accordingly, s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 2007-08; dated 15.6.2011 and dated 30.3.2012 for the assessment year 2009-10. Since common issues are involved, these appeals are being disposed off with this common order for the sake of convenience. ITA No.1244/Hyd/2011 : Assessment year 2007-08 2. The first effective ground of the Revenue in this appeal is that the CIT(A) erred in deleting the addition made by the Assessing Officer under the head retention money of Rs.78,67,79,839. 3. Assessee is a company engaged in the business of manufacture of capital equipments for power plants, oil and gas industry and process industries and execution of engineering, procurement and construction contracts. It is also engaged in the business s of construction of roads, bridges and power plants in the infrastructure sector. For the assessment year, assessee furnished return of income on 31.10.2007 admitting a total income of Rs.17,73,85,630, as per normal computation and Rs.95,31,48,100 as book profit, as per the provisions of S.115JB. As against this, the Assessing Officer completed the assessment on a total income of Rs.100,02,99,840 as per normal computation, after making various additions and disallowances, vide order passed unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Co. Ltd. V/s. CIT(26 ITR 27), the CIT(A) deleted the addition of Rs.78,67,79,839 made by the Assessing Officer. 6. Aggrieved by the order of the CIT(A) on this aspect, Revenue is in appeal before us. 7. The Learned Departmental Representative, strongly supporting the order of the Assessing Officer, submitted that the CIT(A) was not justified in deleting the addition made by the Assessing Officer on account of retention money. He submitted that there was no denial of liability by the contractees, and there was mere postponement of payment of the retention money by them to the assessee, in accordance with the terms of the agreement. He submitted that there was receipt-payment mismatch, and the TDS was also effected by the contractees in relation to the retention money. Taking us through the terms of various agreements, it is pleaded that it is not 10% payable after 12 months in all cases and in some cases, it was only a month after the retention money is payable and in some cases, there was not even mention in that regard. He further submitted that the matter has to be examined on contract by contract and case by case basis, and no uniform basis is justified. It is also submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be brought to tax, irrespective of its actual receipt in that year since the assessee has been following mercantile system of accounting and TDS in relation to such retention money has also been deducted by the contractees. It is the case of the assessee that the retention money has been offered to tax in the relevant year in which the same has actually been received by it. We find that this issue has arisen for consideration before the Pune Bench of the Tribunal in the case of Dy. CIT V/s. Deccan Mechanical Chemical Industrial (P)Ltd., (supra), wherein the Tribunal after detailed consideration of the case-law relied upon by the parties before it, has decided the matter in the 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 accounting, the accrual of income takes place when the assessee gets unconditional legal right to receive money under the agreement [Paragraphs 5.4, 5.7, 5.8 and 5.11], (iii) receipt of money by itself do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e on signing the contract, (ii) further 75 per cent to be paid on production of invoice and satisfactory evidence of dispatch by the assessee, (iii) further 5 per cent of the price to be paid against 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 satisfactory completion of all contractual works including performance test and final acceptance. 7.2 The case of the learned Assessing Officer was that when on supply of material, payment upto 90 per cent 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 quantification of the full amount, 90 per cent thereof cannot be worked out and paid. Therefore, when the whole price was quantified, the amount receivable was also quantified 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 already* supplied and accepted, and the retention was merely for safeguarding the interest of the contractee. The acceptance of the full liability by the contractee amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Learned Counsel. 7.4 It was also the case of the learned DR that the assessee had changed its method of accounting in respect of accounting of retention money. The case of the learned Counsel was that the assessee has been consistently following mercantile method of accounting and there was no change in this regard. Earlier, the assessee had been showing etention 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 performance test is satisfactorily undertaken and accepted by the contractee. As pointed out earlier, he has also stated that, - (i) no provision is made for liability in case performance test fails and some expenditure may have to be incurred in the warranty period, and (ii) retention money has been offered for taxation the moment the performance test has been undertaken successfully and accepted by the contractee. Therefore, his case was that he has been following mercantile method 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 accounting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, no enforceable 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 the submission of bills. The assessee had no right to claim any part of the retention money till the verification of satisfactory execution of the contract. Therefore, the Tribunal was right in holding that the retention money in respect of the jobs completed by the assessee 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. CIT [1994] 48 ITD 141 (Bom.) (TM), the learned Member of the Tribunal as per the headnotes, held as under :- "Section 28(i) of the Income-tax Act, 1961 - Business deduction/loss - Allowability of - Assessment year 1990-91 - Assessee-company was engaged in manufacture of cables as per specifications of customers - According 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 goods subject to bank guarantee for that 10 per cent, stipu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e auditor has only to certify regarding truthfulness of accounts with reference to material available on record and not whether income accrued to the assessee or not. The other observations relating to change in the system of accounting, assessability of advances, etc. etc., have nothing to do with determination of the question involved before us and were wrongly taken into account by the Revenue authorities. Regarding the entries in the books of account, we may 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-General is that the assessee failed to debit the liability in its books of account and, therefore, it was debarred from claiming the same as deduction either under section 10(1) or under section 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 will lose the right of claiming or will be debarred from being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Assessing Officer is directed to pass appropriate orders in accordance with law and after giving reasonable opportunity of hearing to the assessee to substantiate its claim. 11. The next effective grievance of the Revenue in this appeal is that the CIT(A) erred in allowing the depreciation of Rs.7,87,806 on technical know-how. 12. Brief facts of the case in relation to this issue a4ree that the assessee claimed an amount ofRs.7,87,806 as depreciation at 25% on the amount paid by it towards technical know-how to M/s. Crane Environmental INC., USA. It was disallowed by the Assessing Officer on the ground that the payment made by the assessee is in the nature of technical fees and as a result, there has not been any acquisition of any tangible asset within the meaning of S.32(1)(iii) of the Act. 13. On appeal, the CIT(A) noted that as per Appendix to the income Tax Rules, depreciation is admissible in respect of know-how, patents, copy-rights, trade marks, licenses, franchises or any other business of commercial rights of similar nature being intangible rights acquired by the assessee, and this principle has been accepted by the Assessing Officer, who has also not disputed tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 technical know. We accordingly find no infirmity in the impugned order of the CIT(A), which is accordingly upheld, rejecting the ground of the Revenue in this appeal. 18. The next effective grievance of the Revenue in this appeal relates to disallowance of Rs.1,73,25,336, being principal repayment of assets taken on finance lease, as revenue expenditure. 19. The assessee claimed an amount of Rs.1,73,25,336 representing repayment of principal of assets taken on finance lease on the ground that it is a capital expenditure. The assessee claimed that the transaction in question is a finance lease and falls under Accounting Standard 19 issued by the Institute of Chartered Accountants of India, under which any fixed asset taken on finance lease is permitted to be capitalized in the books of account of the company and depreciation charged as per the Companies Act. However, for the calcul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f. Revenue's ground on this issue is allowed. 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, which has been deleted by the CIT(A). 25. Brief facts of the case in relation to this ground 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 unascertained 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 providing 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, assessee has been providing for a possible liability in respect of the contract which may or may not crystallize at a future date. Finding merit in the contentions of the assessee and taking note of the case-law relied upon by the assessee before him, more importantly the decision of the Bombay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ogies Limited and that the same was already included in the income of the assessee. Taking note of this position and also observing that in support of this claim, relevant ledger extracts were also filed and a perusal of the same showed that there was no omission to charge interest on the outstanding balance of the subsidiary, the CIT(A) deleted the addition made by the Assessing Officer. 33. Aggrieved by the order of the CIT(A) on this aspect, Revenue preferred the present appeal. 34. The learned Departmental Representative strongly relying on the order of the Assessing Officer submitted that the CIT(A) was not justified in granting relief to the assessee. Learned counsel for the assessee, on the other hand, strongly supported the order of the CIT(A). 35. We heard both sides and perused the material available on record. We are of the considered opinion that the CIT(A) has deleted the addition made by the Assessing Officer on account of the interest attributable to the advance made by the assessee to its subsidiary, accepting the contention of the assessee that it has already charged interest on the advance made to the subsidiary company, M/s. Progen Systems Technologies Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the Revenue's appeal for assessment year 2007-08, and our decisions in the context of the corresponding grounds in that appeal hold good even in the context of the above grounds of this appeal for assessment year 2008-09. Consequently, it is held as follows- (a) As for addition relating to retention money, for the reasons discussed in paras 9 and 10 above, we set aside impugned order of the CIT(A) and remit the matter to the file of the Assessing Officer, with a direction to verify the claim of the assessee of having offered the same to tax in the subsequent years in which the same has been received by the assessee, and accordingly redecide this issue in accordance with law and after giving reasonable opportunity of hearing to the assessee. Revenue's ground on this issue is allowed for statistical purposes. (b) As for the next issue relating to depreciation on technical know, for the detailed reasons discussed in para 17, we uphold the order of the CIT(A) and reject the ground of the Revenue in this appeal. (c) As for the next issue relating to treatment of principal repayment of assets taken on finance lease, for the detailed reasons discussed in para 23 above, we set asid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... obligation amounting to Rs.2,40,48,000/- represents an allowable deduction. 7) The learned CIT(A) erred in deleting the disallowance of interest of Rs.1,08,07,861 relatable to the borrowed funds diverted for giving interest free advances to subsidiary companies. 8) The learned CIT(A) erred in holding that the provision for contractual obligations of Rs.16,50,25,000/- represents an allowable deduction. The learned CIT(A) ought to have appreciated that the liability for payment of liquidated damages as per the terms of the contract would accrue only when the claim for the same is made by the contractee and the assessee has not furnished any evidence that such claims were made by the contractees during the previous year. 9) ...." 41. We heard both the parties and perused the material available on record. Factual background leading to the additions made by the Assessing Officer and deleted by the CIT(A), and disputed in grounds No.2 to 7 of this appeal are, except for the amounts involved, identical to the ones we have considered while dealing with the corresponding additions contested in the Revenue's appeal for assessment year 2007-08, and our decisions in the context of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue involved in ground No.8 of this appeal, the Assessing Officer added the same observing that this expenditure debited to the Profit Loss Account cannot be allowed as deduction during the year under appeal, as the assessee has not actually incurred the expenditure during the year under consideration, and it represents only provision for future liability. 43. On appeal before the CIT(A), explaining the 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 further 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 date was 28.2.2008, i.e. delivery took place after 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 concer ..... X X X X Extracts X X X X X X X X Extracts X X X X
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