2020 (8) TMI 842 - AT - Income Tax

Disallowance of the provisions for costs completed and contracts - HELD THAT - As decided in own case for the A. Y. 2005-06 2014 (9) TMI 313 - ITAT MUMBAI assessee was following some system in estimating provisions. Therefore, without pointing out major defects it was not proper on part of the FAA to state that system was . FAA has given his finding without giving the reasons. In our opinion 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 - No justification in confirming the disallowance without analysing the terms and conditions of the projects threadbare for which provisions were made during the year under apppeal. Disallowance for cost overruns on incomplete contracts - HELD THAT - As decided in own case for the A. Y. 2005-06 2014 (9) TMI 313 - ITAT MUMBAI FAA has given his finding without giving the reasons. In our opinion 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. FAA has overlooked the fact that out of the provisions made by the assessee, ₹ 3. 70 Crores were actually spent by the assessee in the subsequent years to complete the unfinished projects or to render further services. Therefore, in our opinion, he was not justified in confirming the disallowance. Method of accounted under Percentage of Completion Method - HELD THAT - CIT(A) while upholding the addition in question had not given any independent finding and had merely relied upon his order passed while disposing off the appeal of the assessee for the immediately preceding year i. e A. Y 2006-07 2019 (4) TMI 873 - ITAT MUMBAI . We have perused the order passed by the Tribunal while disposing off the appeal of the assessee for A. Y 2006-07 wherein identical facts were involved, and finding ourselves to be in agreement with the view therein taken, respectfully follow the same. Resultantly, the order passed by the CIT(A) is set aside and the addition made by the A. O is vacated . Disallowance of Excess of Progress Billings on completed contracts project - HELD THAT - As the assessee has accumulated cost as well as revenue under these projects in the Balance Sheet by following completed contract method. The revenue has accepted such accumulation during AYs 2004-05 2005-06 and this is the third year of accumulation under the projects. It is not the case of the revenue that the income under these projects have not been offered to tax in subsequent years. No case of revenue leakage has been established before us.Therefore, the action of revenue in disturbing the consistent method of accounting being followed by the assessee could not be held to be justified. Hence, we delete the impugned additions and allow these grounds of appeal.

Issues Involved:

1. Disallowance of provision for costs incurred on completed contracts.
2. Method of accounting followed by the assessee.
3. Disallowance of provisions for cost overruns on incomplete contracts.
4. Non-deletion of provisions for costs on completed contracts disallowed in earlier years.
5. Taxation of income under the "Percentage of Completion" (POC) Method.
6. Non-consideration of regular accounting methods by the appellant.
7. Taxation of gross receipts without allowing deductions for expenditures.
8. Deduction for sale proceeds recognized higher than billings.
9. Rejection of the appellant's adherence to AS-7 for accounting revenue.
10. Non-deletion of excess progress billings over sales recognized under POC.
11. Taxation of income under the "Completed Contract Method" where progress billings exceeded costs.
12. Rejection of regular accounting methods accepted in the past.
13. Non-deletion of excess progress billings over costs incurred under the Completed Contract Method.
14. Non-granting of depreciation deduction on software expenses disallowed as capital expenditure.
15. Levy of interest under sections 234B and 234D of the Act.

Detailed Analysis:

Issue Nos. 1 & 2:
The assessee challenged the disallowance of provisions for costs on completed contracts. The tribunal referenced its decision in the assessee's own case for A.Y. 2005-06 (ITA No. 1690/M/2012), where it held that provisions based on identified liabilities, though estimates, are valid. The tribunal emphasized that provisions for future expenditures on ongoing projects are standard in business and should be allowed. The tribunal ruled in favor of the assessee, noting that the disallowance was inconsistent with past accepted practices.

Issue No. 3:
The assessee contested the disallowance of provisions for cost overruns on incomplete contracts. The tribunal again referred to its decision for A.Y. 2005-06, reiterating that provisions for future expenditures are a normal business practice and should be allowed. The tribunal ruled in favor of the assessee, emphasizing consistency in accounting practices.

Issue No. 4:
The assessee argued that the issue of non-deletion of provisions for costs on completed contracts disallowed in earlier years was pending before the ITAT for A.Y. 2008-09. The tribunal decided to await the outcome of the pending case.

Issue Nos. 5 to 9:
The assessee challenged the taxation of income under the "Percentage of Completion" (POC) Method and related accounting issues. The tribunal referred to its decisions for A.Ys. 2006-07 and 2007-08, where it upheld the assessee's consistent method of accounting. The tribunal noted that the assessee's method of recognizing revenue based on the percentage of completion was accepted in prior years and found no reason to deviate. The tribunal ruled in favor of the assessee.

Issue No. 10:
The assessee argued that the issue of non-deletion of excess progress billings over sales recognized under POC was pending before the ITAT for A.Y. 2008-09. The tribunal decided to await the outcome of the pending case.

Issue Nos. 11 & 12:
The assessee contested the disallowance of excess progress billings on completed contracts. The tribunal referred to its decision for A.Y. 2006-07, where it held that the consistent method of accounting should not be disturbed. The tribunal ruled in favor of the assessee, emphasizing the importance of consistency and the absence of revenue leakage.

Issue No. 13:
The assessee challenged the disallowance of depreciation on repair expenses classified as capital expenditures. The tribunal noted that the issue was pending in another case (ITA No. 3775/M/2016 & 4214/M/2016) and decided to await the outcome.

Issue No. 14:
The issue of non-granting of depreciation deduction on software expenses was not pressed by the assessee. The tribunal ruled in favor of the revenue.

Issue No. 15:
The issue of levying interest under sections 234B and 234D was deemed consequential and did not require adjudication.

Conclusion:
The appeal filed by the assessee was partly allowed, with several issues decided in favor of the assessee based on consistency in accounting practices and past tribunal decisions.

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