TMI Blog2019 (9) TMI 1134X X X X Extracts X X X X X X X X Extracts X X X X ..... iew of the aforesaid, we hold that the part disallowance sustained by learned Commissioner (Appeals) also deserves to be deleted. Therefore, learned Commissioner (Appeals) direction to grant consequential relief in subsequent assessment year becomes infructuous. Disallowance of renovation expenditure - expenditure in respect of the leased premises - HELD THAT:- The nature of expenditure incurred by the assessee in respect of the leased premises and more particularly the premises at Hyderabad and Bangalore are not of the nature of constructing new structure, extension or improvement of building. Therefore, Explanation 1 to section 32(1) of the Act would not be applicable to the facts of the present case. Though, there cannot be any quarrel with regard to the proposition laid down in the decisions cited before us, however, the nature of expenditure incurred by the assessee with reference to facts of each case would decide whether it is capital or revenue in nature. In the facts of the present case, after examining the details of expenditure incurred by the assessee, we are of the view that it is of revenue nature, hence, has to be allowed. Disallowance of write off of securi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n our view, the aforesaid reasoning of learned Commissioner (Appeals) is not sustainable. Once it is held that assessee s claim of write off is allowable under section 36(1)(vii) of the Act, then the provisions of section 155(14) of the Act would not apply - We direct the Assessing Officer to allow assessee s claim of write off of TDS. Ground is allowed. Addition made to its income on account of change in revenue recognition policy - HELD THAT:- Issue requires further examination by the Assessing Officer as the assessee needs to establish with cogent material and evidence that the change in revenue recognition policy is for bona fide reasons and necessary for carrying on its business activities in a more efficient manner - assessee has to establish that the change in revenue recognition policy is in conformity with the provisions contained under section 145(1) and (2). With the aforesaid observations, we are inclined to restore the issue to the Assessing Officer for de novo adjudication after due and sufficient opportunity of being heard to the assessee. If the assessee can establish that the change in revenue recognition policy is for bonafide and valid reasons, occasion f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are debited to the Profit Loss Account. However, in assessee s case, the excess provision is reversed in the subsequent year. As a result, the entire expenditure in the nature of provision is claimed as deduction in current year. Being of the view that the method followed by the assessee does not give a true and fair view of the profit of the company, the Assessing Officer called upon the assessee to furnish the details of actual expenditure incurred vis a vis the provision made in the books of account. After perusing the details furnished by the assessee, the following facts emerged: 1. Provision for unpaid expenditure ₹ 10,15,97,058 Expenditure actually incurred ₹ 9,84,95,535 Excess provision made ₹ 31,01,523 2. Provision made for sundry creditors relating to sales commission, promotion, advertisement, etc. ₹ 13,54,61,007 Expenditure actually incurred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmissioner (Appeals) directed the Assessing Officer to grant consequential relief to the assessee in respect of such provision offered as income in assessment year 2013 14. 7. The learned Authorised Representative submitted, since the assessee follows mercantile system of accounting, it has to book all expenditures which have crystallized during the year. He submitted, as per Accounting Standard (AS) 1 notified under section 145(2) of the Act, which the assessee is required to follow, provision has to be made for all liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of the available information. He submitted, following the guidelines of AS-1, the assessee has to provide for all expenditures incurred during the year including the expenditure in respect of which invoices were not received. Referring to Note 13 to the Notes to Account, the learned Authorised Representative submitted, the provision made was on the basis of estimate made by the company considering the facts and circumstances of each case. Thus, he submitted, the provision made by the assessee on a best estimate basis is in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any material to demonstrate that the provision made is on best estimate and on scientific basis. The learned Departmental Representative submitted, since there was considerable difference between the provision made and actual expenditure incurred, it cannot be said that the provision made was on reasonable and scientific basis. In this context he referred to AS-29. He submitted, though, the range of 10% applied by learned Commissioner (Appeals) may not have been provided in the Accounting Standard or anywhere else, but it is only for the purpose of determining the best estimate qua the actual expenditure incurred. He submitted, merely because the provision made in the earlier assessment years were accepted due to lack of enquiry, it cannot be accepted in every year. He submitted, the estimate of provision by the assessee since is not on the basis of any scientific data, the allowance of such expenditure in past years will not act as res judicata for deciding the issue in the impugned assessment year. Thus, he submitted, there is no reason to interfere with the decision of learned Commissioner (Appeals). 11. In rejoinder, the learned Authorised Representative submit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As could be seen from the facts discussed earlier, the assessee had made provision for expenditure under three distinct heads. While the Assessing Officer has added back the difference between the provision made and actual expenditure incurred under all the three heads, learned Commissioner (Appeals) has restricted such disallowance only in respect of provision made for sundry creditors relating to sales commission, promotion, advertisement, etc. Therefore, it requires consideration whether the provision made can be stated to be in accordance with AS-1 r/w section 145(2) of the Act. In this context, learned Authorised Representative has specifically referred to Para 16 and 17 of AS-1. For ease of reference, we reproduce the aforesaid paragraph herein below: Considerations in the Selection of Accounting Policies 16. The primary consideration in the selection of accounting policies by an enterprise is that the financial statements prepared and presented on the basis of such accounting policies should represent a true and fair view of the state of affairs of the enterprise as at the balance sheet date and of the profit or loss for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned Commissioner (Appeals) also not only recognizes the necessity of making provision for unbilled expenditure but has also allowed provision for expenditure not exceeding 10% of the actual expenditure. In our view, there is no such thumb rule either in Accounting Standards or elsewhere to restrict the provision to within the range of 10% of the actual expenditure. It is worth mentioning; the assessee has reversed the provision in the subsequent year and offered to tax. This fact has not been disputed by the Department. Therefore, the ratio laid down in case of CIT V/s Excel Industries Ltd. would apply. More so, when the assessee is consistently following this accounting method from past years. In view of the aforesaid, we hold that the part disallowance sustained by learned Commissioner (Appeals) also deserves to be deleted. Therefore, learned Commissioner (Appeals) direction to grant consequential relief in subsequent assessment year becomes infructuous. This ground is allowed. 14. In ground no,.2, the assessee has challenged the disallowance of renovation expenditure amounting to ₹ 36,56,133. 15. Brief facts are, during the assessment pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India for office purpose. He submitted, for making the premises suitable for use assessee had carried out certain renovation work. He submitted, such renovation work undertaken is solely for the purpose of providing a good working environment to its staff. He submitted, the office has to be kept in a good condition as various meetings are held therein with the suppliers, customers and their representatives. Thus, he submitted, since the expenditure incurred is purely for the purpose of business, it has to be allowed as revenue expenditure. Further, drawing our attention to the details of expenditure as furnished in the paper book, the learned Authorised Representative submitted, the nature of expenditure would clearly reveal that they are not for deriving any enduring benefit. He submitted, merely because the premises at Hyderabad and Bangalore were newly taken on lease it cannot be said that any expenditure incurred in respect of these premises is capital in nature. He submitted, though Explanation 1 to section 32(1)(ii) of the Act provides for depreciation in respect of any addition, renovation or extension to a building not owned by the assessee but holds lease hold rights, ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rence to Explanation 1 to section 32(1) of the Act, would reveal that it speaks of capital expenditure incurred towards construction of any structure or renovation or extension or improvement to the building. Thus, on a reading of the aforesaid provisions, it becomes clear that if any expenditure is incurred for construction of any structure or extension or improvement of the building taken on lease would be treated as capital expenditure. The nature of expenditure incurred by the assessee in respect of the leased premises and more particularly the premises at Hyderabad and Bangalore are not of the nature of constructing new structure, extension or improvement of building. Therefore, Explanation 1 to section 32(1) of the Act would not be applicable to the facts of the present case. Though, there cannot be any quarrel with regard to the proposition laid down in the decisions cited before us, however, the nature of expenditure incurred by the assessee with reference to facts of each case would decide whether it is capital or revenue in nature. In the facts of the present case, after examining the details of expenditure incurred by the assessee, we are of the view that it is of revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty deposit. Therefore, it claimed the security deposit as business loss. Countering the observations of learned Commissioner (Appeals), he submitted, merely because the assessee was in possession of the premises by keeping the keys, it cannot be said that the assessee was in occupation of premises and using it for the purpose of business. Thus, he submitted, assessee s claim of deduction should be allowed. In support of his contention, he relied upon the following decisions: i) IBM World Trade Corporation v/s CIT, [1990] 186 ITR 412 (Bom.); ii) ACIT v/s Blue Dart Express Ltd., ITA no.6614/Mum./2007, dated 18.11.2009; iii) United Motors India Ltd. v/s ITO, [2010] 6 taxmann.com 32 (Mum.); and iv) Jethabhai Jirji Jethabhai Ramdas v/s CIT, [1979] 120 ITR 792 (Bom.). 25. The learned Departmental Representative strongly relying upon the observations of the Assessing Officer and learned Commissioner (Appeals) submitted, since there is no dispute to the fact that the assessee was in possession of the premises, it cannot be said that it has lost hope of recovery of the security deposit. More so, when the litiga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... brought to the notice of the Tribunal in course of hearing, we are inclined to restore the issue to Assessing Officer to verify the relevant facts and allow consequential benefit to the assessee. This ground is allowed for statistical purposes. 28. In ground no.4, the assessee has challenged the disallowance of write off of tax deducted at source (TDS) amounting to ₹ 1,21,66,248. 29. Brief facts are, during the assessment proceedings, the Assessing Officer noticing that the assessee has claimed deduction on account of TDS written off of ₹ 1,21,66,248, called upon the assessee to justify the claim. In response, it was submitted by the assessee that since TDS certificates for the amount written off could not be obtained from the deductor even after continuous effort, the assessee has claimed it as revenue expenditure as it amounts to loss arising during the normal course of business. From the details available before him, the Assessing Officer noticed that the claim or write off of TDS pertains to seven assessment years starting from the year 1998 99 to 2003 04. He observed, the assessee had claimed credit for TDS not only in the return o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thorised Representative submitted, all evidences relating to the TDS write off were furnished before the Assessing Officer. Therefore, it cannot be said that the assessee has not furnished the necessary details. As regards the reasoning of learned Commissioner (Appeals) that assessee s claim cannot be allowed in view of section 155(14) of the Act, the learned Authorised Representative submitted, even after taking note of such provision in assessee s own case for the assessment year 2004 05, the Tribunal has allowed assessee s claim of write off. Further, he submitted, the reasoning of learned Commissioner (Appeals) that write off is not allowable as the assessee has not claimed it in the computation of income, will not hold good in view of the decision of the Tribunal in assessee s own case in assessment year 1997 98. Further, in support of his contention he relied upon the decision of the Hon ble P H High Court in CIT v/s Shreyans Industries Ltd., [2008] 303 ITR 393 (P H). 32. The learned Departmental Representative strongly relied upon the observations of the Assessing Officer and the learned Commissioner (Appeals). Further, he submitted, the decision of the Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision of Hon ble P H High Court, has been reversed by the Hon'ble Supreme Court, is not correct interpretation of the legal position, as the subject matter of dispute before the Hon'ble Supreme Court was on a different issue. In view of the aforesaid, we direct the Assessing Officer to allow assessee s claim of write off of TDS. Ground is allowed. 34. In ground no.5, the assessee has challenged the addition of ₹ 22.83 crore, made to its income on account of change in revenue recognition policy. 35. Brief facts are, as per the method of accounting followed by the assessee, it was recognising revenue on the basis of invoices raised which was considered as its sales/turnover. However, in the year under consideration, the assessee changed its method of revenue recognition by recognising revenue on the basis of completion of project. On verifying the facts and material on record, the Assessing Officer found that though the assessee was raising the invoices in the same manner as was done earlier, but it is accounting the sales/turnover only those invoices where the project is complete. The rest of the invoices are accounted under the h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... served, the assessee has not produced any documentary evidence to demonstrate the nature of global standard being followed. The Assessing Officer observed, the assessee cannot adopt a revenue recognition policy following global standard which will result in deferment/postponing the profit chargeable to tax. He observed, once the assessee raises the invoice in respect of a particular good or service, the sale is complete. Referring to the provisions of section 145 of the Act, the Assessing Officer observed, the method of accounting employed by the assessee must provide the true and fair view of profit/gains earned by the assessee. He observed, though the assessee is following the same mercantile system of accounting followed by it earlier, however, there is no justifiable reason to change the revenue recognition policy in the impugned assessment year. He observed, as a result of such change in the revenue recognition policy, the annual profits are not properly deduced. As a result, the accounts maintained by the assessee are not complete as significant amount of revenue which should have been offered to tax in the impugned assessment year has been omitted. Thus, invoking the provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned Authorised Representative submitted, even the Assessing Officer has admitted that the assessee has not changed its method of accounting but has only changed the revenue recognition policy. He submitted, under section 145(2) of the Act, Accounting Standard II relating to disclosure of prior period and extra ordinary items and changes in accounting policies have been notified. He submitted, as per the said Accounting Standard, a change in accounting policy can be made only if adoption of different accounting policy was required by the statute or if it is considered that the change would result in a more appropriate preparation or presentation of financial statements of the assessee. Referring to the Accounting Standard 9, the learned Authorised Representative submitted, it provides for proportionate completion method or completed service contract method as the method for recognising revenue in respect of rendering of services. He submitted, the change in revenue recognition policy was necessitated due to shift in the business strategy by shifting the focus from voice based solutions to converged communication solutions. He submitted, the change in revenue recognition policy wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore from the customers. He submitted, once the change in revenue recognition policy is for bona fide reasons, it cannot be rejected. In this context, he relied upon the decision of the Tribunal, Mumbai Bench, in Toyo Engineering Corporation v/s DCIT, ITA no.6600/Mum./2002 and the decision of the Hon ble Gujarat High Court in CIT v/s Mapin Publishing Pvt. Ltd., 42 taxmann.com 191. The learned Authorised Representative submitted, the unearned revenue relating to the projects not completed as on 31st March 2005, was recognized on completion of projects and offered to tax in the subsequent years. The learned Authorised Representative submitted, since the disputed income was subsequently offered to tax, there is no loss to the revenue as there is only a timing difference. In this context, he relied upon the decision of the Hon'ble Supreme Court in Excel Industries Ltd. (supra). On a query from the Bench as regards the provision of expenditure if relates to any project for which the revenue is being deferred, the learned Authorised Representative submitted that no such expenditure was claimed in respect of revenue deferred on account of non completion of project. The learned Author ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es rendered while complying to the provisions of Sales Tax Act and Service Tax Act, it cannot say that income has not accrued in respect of such sales and service when it comes to taxability under the Income Tax Act. The learned Departmental Representative submitted, in any case of the matter, there is no loss to the assessee as learned Commissioner (Appeals) has directed the Assessing Officer not to tax such income in the subsequent assessment years if it is offered by the assessee on completion of project. Thus, he submitted, addition made by the Assessing Officer was justified. In support of his contention, the learned Departmental Representative relied upon the following decisions: i) Laxmipat Singhania v/s CIT, [1969] 72 ITR 291 (SC); ii) CIT v/s P. Mariappa Gounder, [1984]147 ITR 676 (Mad.); iii) CIT v/s Kerala Financial Corporation, [1985] 155 ITR 246 (Ker.) 41. We have considered rival submissions and perused the material on record. We have also carefully applied our mind to the decisions relied upon before us by both the parties. The factual matrix clearly reveals that the assessee has not changed mercant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submissions of the assessee the Assessing Officer has observed in the assessment order, though, the assessee to justify with valid reasons the change in revenue recognition policy, however, it was not able to furnish any satisfactory reason for such change except stating that accounts are to be prepared as per global standard. Further, he has observed that the assessee has not produced any documentary evidence regarding the global standards allegedly followed by it and how it is relevant in the context of Indian Accounting Standard. It is also crucial to bear in mind, as regards Sales Tax and Service Tax the assessee is complying to the statutory requirement in terms with the earlier practice followed by it. In other words, it is paying Sales Tax and Service Tax on the basis of invoices raised towards sales and services. 43. In the aforesaid factual background, it requires to be examined whether the revenue recognition policy followed by the assessee is acceptable. No doubt, the assessee has contended that the change in revenue recognition policy is due to shift in business strategy and as per global standards followed by the Head Office. However, this cannot simp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the change in revenue recognition policy from invoice based to project completion method is for bona fide reasons. 44. As regards assessee s contention that there is only a timing difference relating to the income offered due to change in revenue recognition policy, we must observe, though it may be a fact that the assessee might have offered or may be offering the income on completion of projects in future years, however, as per assessee s own contention, it is completely dependent upon the completion certificate to be issued by the customers. As regards the decision of the Hon'ble Supreme Court in Excel Industries Ltd. (supra), as could be seen from the facts involved in the aforesaid decision, the income which the revenue wanted to assessee is benefit of duty entitlement to be received by the assessee on certain imports which has not taken place in the relevant assessment year but took place in the subsequent assessment years. The Hon'ble Supreme Court while dealing with the issue of accrual income laid down the following three tests: i) Whether the income accrued to the assessee is real or hypothetical; ii) Whether t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Revenue in grounds no.1 and 2, is corresponding to the issue raised in ground no.1 of assessee s appeal in ITA no.8674/Mum./2011. In view of our decision therein, no separate adjudication in respect of these grounds is necessary. The grounds having infructuous is dismissed. 48. Ground no.3 raised by the Revenue is corresponding to ground no.2 of assessee s appeal in ITA no.8674/Mum./2011. In view of our decision therein, this ground has become infructuous, hence, dismissed. 49. In the result, Revenue s appeal is dismissed. ITA no.8675/Mum./2011 Assessee s Appeal A.Y. 2006 07 50. Ground no.1, of this appeal is identical to ground no.1 of assessee s appeal being ITA no.8674/Mum./2011. Following our decision therein, ground raised is allowed. 51. In ground no.2, the assessee has challenged the disallowance of renovation expenditure. 52. This ground is similar to ground no.2 of assessee s appeal in ITA no.8674/Mum./2011. Following our decision therein, this ground is allowed. 53. The issue raised in ground no.3, is identical to ground no.5 of ITA no.8674/Mum./2011. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed. 68. In ground no.3, the assessee has challenged the addition made on account of change in revenue recognition policy. 69. This ground is identical to ground no.5 of ITA no.8674/Mum./ 2011. Following our decision therein, the issue is restored to the Assessing Officer for de novo adjudication with similar direction. This ground is allowed for statistical. 70. In the result, assessee s appeal is partly allowed. ITA no.5157/Mum./2012 Revenue s Appeal A.Y. 2008 09 71. Grounds raised in this appeal by the Revenue are identical to the grounds raised in ITA no.7833/Mum./2011. Following our decision therein, these grounds are dismissed. 72. In the result, Revenue s appeal is dismissed. ITA no.5362/Mum./2014 Revenue s Appeal A.Y. 2009 10 73. The issue raised in ground no.1, is with regard to disallowance of provision for expenditure. 74. This ground is identical to ground no.1, raised by the assessee in ITA no.8674/Mum./2011. Following our decision therein, the additional ground raised by the assessee is allowed. 75. In grou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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