2014 (9) TMI 313 - AT - Income Tax

Provisions made for costs incurred on completed contracts Held that - PCCC is based on identified liability, though it is only an estimate - the assessee had made provisions for eleven unfinished projects and in subsequent two years after completing the projects wrote off the provisions and offered the balance for taxation - the AO cannot take two stands-he cannot tax the assessee in later years for a part of transaction for which provision has been made for earlier years - In the commercial world provisions are made for contingencies and court are of view that same have to allowed - AS-7 recongises the principal of making provisions for certain expenses - It is a normal feature of business world that at the end of a particular AY, it may not be possible for an assessee to determine the probable future expenditure of an ongoing project or scheme - If it recongnises income from such project in that year, it will have to make some reasonable provisions for the expenditure to be incurred in subsequent year. Provision will vary from project to project and from year to year - It would also depend on stage of completion of the project. For that purpose assessee will have to rely on earlier years experience and report of the technical personnel following the decision in M/s. Rotork Controls India (P) Ltd. Versus Commissioner of Income Tax, Chennai 2009 (5) TMI 16 - SUPREME COURT OF INDIA - travelling cost of the engineers and technical staff, testing cost, supplies of replacement spares, site related costs, cost of completion of punch list work, cost of modification for uncompleted projects has to be considered while making provisions when an assessee carries out a business of providing diversified engineering services - the assessee had to make provisions for additional cost if sustainable production capability is not demonstrated within the guarantee period. There is nothing in the order of the FAA that could prove that provisions made by the assessee were not based on estimate given by experts - the assessee was following some system in estimating provisions - without pointing out major defects it was not proper on part of the FAA to state that system was - writing off of provisions in subsequent years cannot be basis for disallowing it - Accounting standards expect that assessee should write back such amounts in later years - he was not justified in confirming the disallowance without analysing the terms and conditions of the projects thread bare for which provisions were made Decided in favour of assessee. TDS credit not given Held that - The assessee is entitled to get credit of taxes paid in one of the years-either in year of payment or in the year of completion of contracts - AO is directed to verify the facts and give credit for taxes paid by the assessee Decided in favour of assessee. Software maintenance expenses disallowed Held that - As decided in assessee s own case for the earlier assessment year, it has been rightly held that the assessee has filed details of expenses debited under the head software development - the expenses booked are software maintenance expenses and all the expenses are either in the, nature of annual maintenance contracts, up gradation and installation of anti-virus, which cannot be held to be enduring in nature and called capital expenses thus, the expenditure incurred by the assessee for maintenance of software is to treated revenue expenditure Decided in favour of assessee. Bad debts written off Held that - The assessee had entered into an agreement with SG, that it had agreed to render services to S.G. that SG had jointly signed the mechanical completion of certificate on 23.05.2002 that it had engaged an advocate for pursuing the matter of recovery from S.G. - as the amount was actually written off in the books of accounts, there was no justification for the disallowance made/ confirmed by the AO/ FAA under the head bad-debts - after the amendment to section 36 of the Act, it is clear that if an assessee writes off any amount in its books of accounts, it has not to prove any other thing Decided in favour of assessee.

Issues Involved:
1. Disallowance of provisions made for costs incurred on completed contracts.
2. Credit for Tax Deducted at Source (TDS).
3. Disallowance of software maintenance expenses.
4. Disallowance of bad debts.
5. Levy of interest under Section 234B.

Issue-wise Detailed Analysis:

1. Disallowance of Provisions Made for Costs Incurred on Completed Contracts:
The first effective ground of appeal concerns the disallowance of provisions amounting to Rs. 8.14 crores made for costs incurred on completed contracts. The Assessing Officer (AO) disallowed these provisions, deeming them unascertained liabilities. The assessee argued that the provisions were made as per the regular method of accounting, based on technical assessments and projections by project managers. The First Appellate Authority (FAA) upheld the AO's decision, citing that the provisions were based on estimates and were written back in subsequent years. The Tribunal, however, reversed the FAA's order, noting that the provisions were based on identified liabilities and were consistent with the accounting standards. The Tribunal emphasized that provisions for contingencies are a normal feature in the business world and should be allowed. Therefore, the disallowance of Rs. 8.14 crores was unjustified, and the appeal was decided in favor of the assessee.

2. Credit for Tax Deducted at Source (TDS):
The next effective ground of appeal deals with the non-allowance of TDS credit amounting to Rs. 3.26 lakhs for the year 2003-04 and Rs. 33.84 lakhs for the year 2004-05. The AO had not allowed the TDS credit in earlier years, stating it would be allowed in the year of completion of the contract. The Tribunal directed the AO to verify the facts and give credit for the taxes paid by the assessee, thus allowing the appeal in part.

3. Disallowance of Software Maintenance Expenses:
The AO treated the software maintenance expenses of Rs. 1,62,86,823/- as capital expenditure, allowing depreciation instead. The FAA upheld this decision. However, the Tribunal noted that similar expenses were treated as revenue in nature in earlier years by the Tribunal and the jurisdictional High Court. The Tribunal held that the software maintenance expenses were revenue in nature and should be allowed as such, reversing the FAA's order and deciding the appeal in favor of the assessee.

4. Disallowance of Bad Debts:
The AO disallowed the bad debts of Rs. 41,87,324/-, stating that the debtor had denied any liability payable to the assessee. The FAA upheld this decision. The Tribunal, however, found that the assessee had entered into an agreement with the debtor, rendered services, and later decided not to pursue legal action for recovery. The Tribunal held that the bad debts were actually written off in the books of accounts and should be allowed as per the amended Section 36 of the Act. Thus, the disallowance was unjustified, and the appeal was decided in favor of the assessee.

5. Levy of Interest Under Section 234B:
The last ground of appeal concerns the levy of interest under Section 234B, which both the Departmental Representative (DR) and the Authorized Representative (AR) agreed was consequential in nature. Therefore, the Tribunal did not adjudicate this issue separately, allowing it for statistical purposes.

Conclusion:
The appeal filed by the assessee was partly allowed, with significant issues decided in favor of the assessee, including the disallowance of provisions for costs on completed contracts, software maintenance expenses, and bad debts. The Tribunal directed the AO to verify and allow the TDS credit and noted that the issue of interest under Section 234B was consequential.

← Previous Next →