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TMI Blog2017 (12) TMI 1845X X X X Extracts X X X X X X X X Extracts X X X X ..... e Tax (Appeals). 4. Ld. Counsel for the assessee submitted that similar issue had come up before Hyderabad Bench of this Tribunal in assessee's 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 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 ow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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 claimi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts 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 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 accordanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer. We accordingly uphold the 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 Tribunal is that 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: Provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rongly 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, 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 possibl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 D2,76,835/- only and disallowance u/s.14A of the Act had to be restricted to such amount. Reliance was placed on the judgment of Hon'ble Delhi High Court in the case of Joint Investment P. Ltd vs. CIT 372 ITR 694. 13. Per contra, ld. Departmental Representative submitted that irrespective of the quantum of the exempt income claimed 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 perused the orders of the authorities below. Hon'ble 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 merits of that claim and, thereafter, for valid grounds, if any, reject the contention before proceeding under section 14A(3) read with rule 8D(2). Learned counsel highlighted that the sum volunteered, i.e., 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 decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee 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 includable and the phrase under the act in s. 14A and we are not persuaded to accept the emphasis laid or the interpretation of the same by the Revenue. An assessment in terms of the Income tax Act is specific to an assessment year and the related previous year. S.4 of the Act, which imposes 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 rates 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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. What was held by the Tribunal at paras 9 & 10 of the order is reproduced hereunder:- ''9. We have considered the rival submissions and perused the orders of the lower authorities and other material on record. It is the year of assessability 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 actual 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 of account, in which it should be brou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrated 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 all his liabilities under the contract. Clause 32 of the contract provides that property in all materials, equipment and Ors.supplies shall vest in and become the property of the contractee from the date of receipt of the material. Clause 13 provides that plant shall be considered as commission after successful completion of the performance test to be carried out for 24 hours. If the assessee fails to establish the guaranteed power 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 rectify the defect on its own and the cost of rectification 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 months and in case of his failure to do so by the contractee on its own at the cost of the assessee. Therefore, there are significant risks associated with the accrual of retention money as income. Insofar as retention money is concerned, furnishing of bank guarantee by the assessee to the contractee and receipt of retention 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 risks do not abate. There is a significant risk that the money may be recovered from the bank guarantee without reference to the assessee in case performance test is not performed satisfactorily. This risk is not covered by making any provision in books for the warranty as stated by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee 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 held that retention money did not accrue or arise in the relevant period in which the job was executed, but on a later date. The Tribunal remanded the matter back for re-examination in terms of the contract. On a reference to the Hon'ble Calcutta High Court, it was observed as under :- "that having regard to the terms and conditions of the contract, it could not be held that either 10 per cent or 5 per cent, as the case may be, being retention money, became legally due to the assessee on the completion of the work. Only after the assessee fulfilled the obligations under the contract, the retention money would be released and the assessee would acquire the right to receipt such retention money. Therefore, on the date when the bills were submitted, having regard to the nature of the contract, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 liability and no right to receive 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 retention money was liable to be taxed in the next year. 8. The learned Revenue authorities while making and upholding the addition were influenced by extraneous circumstances. Undue importance was given to the entries made by the assessee in the books of account. The income, as noted earlier, accrues on the basis of contract between the parties and not the view which the assessee has taken of the issue manifested through entries in the books of account. Therefore, crediting of the amount in the present case was totally immaterial. It is not the job of the Auditor to give his decision on the accrual of income. The auditor h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal 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 offered the retention money to tax in the year in which the same has actually been received, is required to be ascertained, before the addition made in the year under appeal is deleted. We accordingly modify the impugned order of the CIT(A), and set aside the matter to the file of the Assessing Officer, with a direction to verify the correctness of the claim of the assessee that the 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 order of the CIT(A) and restore the matter to the file of the Assessing Officer for fresh examination of the matter in accordance with law. He shall accordingly re-determine the amount of addition, if any warranted, after due verification of the claim of the assessee, on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vour 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 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''. No doubt, Revenue has claimed that assessee had not become absolute owner of the technical know-how and the supplier company continued to enjoy the ownership of such technical know-how. However, in our opinion, once assessee had paid the money and acquired the technical know-how, it become an intangible asset, eligible for claiming depreciation u/s.32(ii) of the Act. The question whether the same vendor had given the same technical know-how for other persons, is in our opinion, irrelevant in deciding the question of eligibility of the assessee for claiming depreciation. We therefore do not find any reason to interfere with the order of the ld ..... X X X X Extracts X X X X X X X X Extracts X X X X
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