2021 (3) TMI 672 - AT - Income Tax

Accrual of Income - Method of accounting - taxation of an amount as income, in respect of contracts accounted under Percentage of Completion (POC) Method - appellant was following a regular method of accounting sanctified by Accounting Standards - HELD THAT - As decided in own case 2019 (4) TMI 873 - ITAT MUMBAI the undisputed position that emerges is that the assessee is following consistent method of accounting to recognize the revenue under these contracts. The percentage of completion of the project has been worked out as per total cost incurred on the project to date vis- -vis total budgeted cost and that fraction is applied to the contract value for the purpose of revenue recognition. Similar formulae have been adopted by the assessee in preceding two years which has been accepted by the revenue. No case of revenue leakage has been established before us. Nothing on record suggest that remaining income under the project has not been offered by the assessee in subsequent years, following the same method of accounting. Simply because progress billing was more than the stage of percentage of completion, the same, in itself, could not be the basis to usurp the consistent method of accounting being followed by the assessee. Therefore, the additions made by the revenue, under the circumstances, could not be sustained. Addition on account of under-statement of profits - AO rejected the completed contract method of accounts followed by the assessee - HELD THAT - As decided in own case 2019 (4) TMI 873 - ITAT MUMBAI we find that 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. Disallowance of expenditure towards Repair and Maintenance - addition holding that the repairs and renovation carried out by the appellant led to major renovation, and was capital in nature - whether repair is in the nature of revenue expenditure or capital expenditure? - HELD THAT - In the instant case, the said expenditure has been incurred by the assessee for maintaining its business, for increasing its efficiency and for preserving its already existing asset. Thus the expenditure hereinabove is revenue in nature and therefore allowable. Disallowance u/s 40(a)(ia) ability incurred on account of Education Cess and Higher and Secondary Education Cess - HELD THAT - The above additional ground is squarely covered in favour of the assessee by the decision of the Hon ble Bombay High Court in the case of Sesa Goa Ltd. 2020 (3) TMI 347 - BOMBAY HIGH COURT and Chambal Fertilizers Chemicals Ltd. 2018 (10) TMI 589 - RAJASTHAN HIGH COURT . As per the above decisions, the amount of education cess and higher secondary education cess is not tax as covered u/s 40(a)(ii) and accordingly allowable as deduction in computing the income from business or profession. Following the above decisions, we admit and allow the additional ground of appeal filed by the assessee.

Summary

Issues Involved:
1. Taxation of income under the "Percentage of Completion" (POC) Method.
2. Taxation of excess of progress billings over inventories under the "Completed Contract Method" (CCM).
3. Disallowance of expenditure towards Repair and Maintenance.
4. Levy of interest under sections 234B and 234D.
5. Deductibility of Education Cess and Higher and Secondary Education Cess.
6. Allowance of provisions towards cost on completed and incomplete contracts.

Detailed Analysis:

1. Taxation of Income under the "Percentage of Completion" (POC) Method:
The assessee's first four grounds of appeal pertained to the confirmation by the CIT(A) of the taxation of ?63,09,36,232/- as income under the POC method. The assessee argued that it followed a regular accounting method sanctioned by Accounting Standards, which was not considered by the CIT(A). The Tribunal found that the issue was previously decided in favor of the assessee in its own cases for AYs 2006-07, 2007-08, and 2009-10, where it was held that the consistent method of accounting followed by the assessee should not be disturbed. The Tribunal allowed these grounds of appeal, following the precedent set in earlier years.

2. Taxation of Excess of Progress Billings over Inventories under the "Completed Contract Method" (CCM):
The 6th and 7th grounds of appeal addressed the CIT(A)'s decision to tax ?5,62,02,457/- as income under the CCM for contracts incomplete as of 31st March 2008. The Tribunal referred to its earlier decision for AY 2006-07, where it was held that the consistent method of accounting followed by the assessee should not be disturbed. The Tribunal deleted the addition made by the AO and allowed these grounds of appeal.

3. Disallowance of Expenditure towards Repair and Maintenance:
The 8th and 9th grounds of appeal concerned the disallowance of ?3,70,80,058/- towards repair and maintenance, which the CIT(A) held as capital in nature. The Tribunal examined various case laws, including CIT v. Talathi & Panthaky Associated (P.) Ltd., CIT v. Urban Infrastructure Venture Capital Ltd., and others, concluding that the expenditure was for maintaining the business, increasing efficiency, and preserving existing assets. The Tribunal allowed these grounds of appeal, determining the expenditure as revenue in nature.

4. Levy of Interest under Sections 234B and 234D:
The 15th ground of appeal related to the levy of interest under sections 234B and 234D, which was deemed consequential in nature by the Tribunal.

5. Deductibility of Education Cess and Higher and Secondary Education Cess:
The additional ground of appeal filed by the assessee pertained to the disallowance of ?38,25,296/- on account of Education Cess and Higher and Secondary Education Cess. The Tribunal admitted this additional ground and allowed it based on the decisions of the Hon'ble Bombay High Court in Sesa Goa Ltd. and the Hon'ble Rajasthan High Court in Chambal Fertilizers & Chemicals Ltd., which held that such cess is not tax covered under section 40(a)(ii) and is allowable as a deduction.

6. Allowance of Provisions towards Cost on Completed and Incomplete Contracts:
The Revenue's appeal contested the CIT(A)'s allowance of provisions towards cost on completed contracts and cost overruns on incomplete contracts. The Tribunal upheld the CIT(A)'s decision, referencing the binding nature of the Tribunal's orders as established by the Hon'ble Madhya Pradesh High Court in Agrawal Warehousing and Leasing Ltd. v. CIT and the Supreme Court in UoI v. Kamlakshi Finance Corporation Ltd. The appeal by the Revenue was dismissed.

Conclusion:
The appeal filed by the assessee was allowed, and the appeal filed by the Revenue was dismissed. The Tribunal's decision emphasized the importance of following consistent accounting methods and recognized the legitimacy of the assessee's claims regarding revenue and capital expenditures.