2013 (11) TMI 358 - AT - Income Tax

Disallowance of warranty provision - CIT allowed warranty provision to extent of 0.2% - Held that - reversal of provision in the subsequent year cannot justify the provision maid in the year under consideration, the correctness of which is to be decided mainly on the basis of past data relating to expenditure actually incurred on warranty - once the deduction on account of provision is not allowed to the extent it is found to be excess, the reversal of provision in the subsequent year to that extent cannot give rise to any income and if the assessee has offered such income in the subsequent years, it can seek appropriate relief from the A.O. who shall allow the same in accordance with law - provision made by the assessee for warranty was rightly allowed by the ld. CIT(A) only to the extent of 0.2% of the value completed in the year under consideration being fair and reasonable - Decided against Revenue. Disallowance of provision for warranty while computing the income of the assessee u/s 115JB - CIT(A) sustained to the extent of 0.20% of the value of work completed - Held that - said provision to that extent alone can be said to be the ascertained liability of the assessee and the balance provision, which is found to be excessive on the basis of past data clearly represents unascertained liability which is liable to be added back while computing the book profit of the assessee u/s 115JB of the Act. Disallowance of advance billing - accrual of income on progressive billing - Held that - difference in the amount of progress billing and revenue recognized by the assessee in relation to three contracts shows as amount due to customers was explained by the assessee before the A.O. as well as before the ld. CIT(A) by filing a detailed written submission. It appears that neither of them however has been able to appreciate the same in the correct prospective. As explained by the assessee, progress billing was done not only for the amount of work done but also for mobilization and other advances receivable by it as per the terms of the relevant contract. The revenue from the said contracts was recognized by the assessee by following the percentage of completion method and the said method as well as the basis adopted by the assessee to ascertain the percentage of work done was accepted by the department in the earlier years. The mobilization and other advances received by the assessee by raising progress billings did not represent income of the assessee at the time of raising the progress bills and the same therefore had no effect whatsoever on the income of the assessee, which was recognized by following consistently a well recognized method of percentage of completion. As rightly submitted on behalf of the assessee before the authorities below as well as before us, the entire revenue from the contracts executed by the assessee was finally recognized on the completion of the relevant contracts as per the method consistently followed by the assessee and the mobilization and other advances received by the assessee as per progress billings were liable to get adjusted on such completion - The amount due to the customers as shown by the assessee thus was nothing but receipt of advance before accrual of income - Following decision of CIT v. Punjab Tractors Co-Operative Multi-Purpose Society Ltd. 1997 (8) TMI 37 - PUNJAB AND HARYANA High Court - Decided against Revenue. Disallowance u/s 14A - held that - investment in shares and mutual funds was made by the assessee out of its own funds and there being no utilization of borrowed funds to make the said investment, the disallowance u/s 14A of the Act out of interest is not called for - Following decision of CIT vs. Reliance Utilities and Power Ltd. 2009 (1) TMI 4 - HIGH COURT BOMBAY - Decided against Revenue.

Issues Involved:
1. Disallowance of provision for warranty.
2. Disallowance under section 115JB.
3. Disallowance of proportionate deduction for "right to way" and leasehold land expenses.
4. Disallowance of unpaid service tax.
5. Interest under section 244A.
6. Disallowance of club expenses.
7. Disallowance under section 14A.
8. Addition of amount due to customers (advance billing).
9. Set off of unabsorbed depreciation and capital loss.
10. Credit for TDS.

Issue-wise Detailed Analysis:

1. Disallowance of Provision for Warranty:
The assessee, engaged in construction and engineering services, made a provision for warranty based on AS-7 issued by ICAI. The AO disallowed the provision, treating it as unascertainable liability. The CIT(A) allowed the provision to the extent of 0.20% of the contract value based on past data, which was upheld by the Tribunal. The Tribunal noted that no warranty expenditure was incurred in the past years, and the provision made was excessive.

2. Disallowance under Section 115JB:
The provision for warranty was also disallowed while computing book profit under section 115JB. The Tribunal upheld the CIT(A)'s decision to allow the provision only to the extent of 0.20% as an ascertained liability, with the balance treated as unascertainable and added back to book profit.

3. Disallowance of Proportionate Deduction for "Right to Way" and Leasehold Land Expenses:
The assessee claimed proportionate deduction for expenses incurred in earlier years on "right to way" and leasehold land. The CIT(A) disallowed the claims based on a previous Tribunal decision. The Tribunal restored the issue to the AO for fresh consideration in light of the decision in the case of Sun Pharmaceuticals Ind. Ltd., requiring verification of relevant facts.

4. Disallowance of Unpaid Service Tax:
The assessee did not press this ground during the hearing, and it was dismissed as not pressed.

5. Interest under Section 244A:
The CIT(A) did not entertain the issue of interest under section 244A as it arose from an order under section 154, not from the order under section 143(3). The Tribunal upheld this decision.

6. Disallowance of Club Expenses:
The AO disallowed club expenses treating them as capital in nature. The CIT(A) deleted the disallowance based on the Bombay High Court decision in Otis Elevator Co. (India) Ltd., which was upheld by the Tribunal.

7. Disallowance under Section 14A:
The AO made a disallowance under section 14A using Rule 8D, which was confirmed by the CIT(A). The Tribunal, following the Bombay High Court decision in Godrej and Boyce Mfg. Co. Ltd., held that Rule 8D applies prospectively from AY 2008-09 and sustained a reasonable disallowance based on general administrative expenses attributable to exempt income.

8. Addition of Amount Due to Customers (Advance Billing):
The AO added the amount due to customers as understatement of profits. The Tribunal, however, accepted the assessee's explanation that the amount represented advances and not income, and deleted the addition.

9. Set Off of Unabsorbed Depreciation and Capital Loss:
The Tribunal directed the AO to quantify and allow the amount of unabsorbed depreciation and capital loss to be carried forward for set off in subsequent years.

10. Credit for TDS:
The Tribunal directed the AO to grant credit for TDS after verifying the relevant documentary evidence.

Conclusion:
The Tribunal's judgment addressed multiple issues involving disallowances and deductions claimed by the assessee, providing detailed reasoning and directions for each issue based on applicable laws, accounting standards, and past data. The Tribunal upheld some of the CIT(A)'s decisions, modified others, and remanded certain issues back to the AO for fresh consideration.

← Previous Next →