2013 (9) TMI 372 - AT - Income Tax

Taxability of retention money - taxable in the year of receipt or on accrual basis - assessee is following mercantile system of accounting - Held 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. - 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. - matter remanded back - Following decision of Kedarnath Jute Mfg. Co. Ltd. v. CIT 1971 (8) TMI 10 - SUPREME Court and Dy. CIT V/s. Deccan Mechanical & Chemical Industrial (P)Ltd., (2005 (6) TMI 267 - ITAT PUNE-B) - Decided in favour of Revenue. Depreciation on technical know how - Held that - 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 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, set aside the impugned order of the CIT(A), and restore the disallowance made by the Assessing Officer in this behalf - Decided in favour of Revenue. Disallowance of advance given to subsidiary - Held that - 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 Ltd. This fact, which weighed with the CIT(A) while deleting the addition made by the Assessing Officer, requires verification at the end of the Assessing Officer, who has arrived at an opposite conclusion. We accordingly set aside the impugned order of the CIT(A) on this issue, and restore the matter to the file if the Assessing Officer with a direction to redetermine the issue relating to disallowance of interest after verifying the correctness of the contention of the assessee before the CIT(A) that it has already charged interest on the amounts advanced to the subsidiary company. The Assessing Officer shall pass appropriate orders on verification of the contentions of the assessee on this aspect, in accordance with law and after giving reasonable opportunity of hearing to the assessee - Decided in favour of Revenue. Liability for payment of liquidated damages - accrual of liability - Held that - Since the very contracts entered into by the assessee with various parties for execution of works, categorically specify not only the liability to liquidated damages, but even mode of computation of the same for each week of delay in the completion of the work, it cannot be said that the liability to liquidated damages has not crystalised. - The CIT(A) in our considered opinion was justified in accepting the claim of the assessee in this behalf and deleting the addition made by the Assessing Officer. - Decided in favor of assessee.

Issues Involved:
1. Deletion of addition made by the Assessing Officer under the head retention money.
2. Allowance of depreciation on technical know-how.
3. Treatment of principal repayment of assets taken on finance lease as revenue expenditure.
4. Allowability of warranty provisions as an expenditure.
5. Addition of interest on the advance given to a subsidiary company.
6. Allowability of provision for contractual obligations.

Issue-wise Detailed Analysis:

1. Deletion of Addition under Retention Money:
The Revenue contested the deletion of the addition made by the Assessing Officer concerning retention money. The assessee, a company engaged in manufacturing and construction, followed the mercantile system of accounting but claimed that retention money, recognized in the books, should be deducted while computing taxable income as it only accrues when the contract is successfully completed. The CIT(A) relied on judicial precedents to rule that entries in the books are not decisive and retention money does not accrue until the contractor has an enforceable claim. The Tribunal upheld the CIT(A)'s decision but remanded the matter to the Assessing Officer to verify if the retention money was offered to tax in the year it was actually received.

2. Allowance of Depreciation on Technical Know-how:
The assessee claimed depreciation on technical know-how, which the Assessing Officer disallowed, arguing it was a technical fee and not a tangible asset. The CIT(A) allowed the claim, noting that technical know-how is an intangible asset eligible for depreciation under the Income Tax Rules. The Tribunal upheld the CIT(A)'s decision, emphasizing that ownership and usage of the asset were established.

3. Treatment of Principal Repayment of Assets on Finance Lease:
The assessee claimed the principal repayment of assets taken on finance lease as revenue expenditure. The Assessing Officer disallowed this, treating it as a capital expenditure. The CIT(A) allowed the claim, but the Tribunal reversed this decision, holding that principal repayment is capital in nature and only depreciation should be allowed.

4. Allowability of Warranty Provisions:
The assessee provided for warranty expenses, which the Assessing Officer disallowed as unascertained liabilities. The CIT(A) allowed the claim, citing judicial precedents that estimate of accrued liability is allowable under the mercantile system. The Tribunal reversed the CIT(A)'s decision, ruling that warranty provisions are contingent liabilities and not allowable until they crystallize.

5. Addition of Interest on Advance to Subsidiary:
The Assessing Officer added interest on advances given to the subsidiary, assuming no interest was charged. The CIT(A) deleted the addition, noting that interest was indeed charged and included in the income. The Tribunal remanded the matter to the Assessing Officer for verification of the assessee's claim.

6. Allowability of Provision for Contractual Obligations:
For the assessment year 2009-10, the Assessing Officer disallowed a provision for liquidated damages, considering it a future liability. The CIT(A) allowed the provision, noting it was a contractual obligation due to delays in project completion. The Tribunal upheld the CIT(A)'s decision, recognizing the liability as having crystallized per the contract terms.

Conclusion:
The Tribunal's judgments across the appeals were mixed, with some decisions favoring the Revenue and others the assessee. Key points included the remand of retention money and interest on advances issues for further verification, upholding depreciation on technical know-how, and recognizing contractual obligations for liquidated damages while disallowing warranty provisions and principal repayments on finance leases as revenue expenses.

← Previous Next →