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2019 (4) TMI 873 - AT - Income TaxProvision for costs on completed contracts - Liability under the project and estimates have been made project wise - HELD THAT - The elaborate working of the same along with relevant contracts entered into by the assessee with the customers has already been placed in the paper-book which establishes the fact that the estimates were not mere guess work or made out of thin air. Another undisputed fact is that the assessee has incurred actual expenditure in subsequent years against these estimations which itself prove that the assessee had certain liability under these contracts. It is altogether different aspect that the matter of estimation may not be accurate one or commensurate with actual expenditure incurred by the assessee in future years. It may only necessitate the assessee to adjust the same suitably in subsequent years on the basis of actual outcome. So long as the provisions were made on scientific basis and the basis of the same was substantiated by the assessee, there could be no occasion to disallow the same. It is also noteworthy point that subsequent reversal in future years has been offered to tax by the assessee which lend credence to tax neutrality plea raised by Ld. AR. Proceeding further, it is undisputed position that part of the provisions has always been allowed to the assessee by the Tribunal right from AY 2001-02 onwards 2011 (9) TMI 1183 - ITAT MUMBAI ; 2012 (8) TMI 983 - ITAT MUMBAI . In the impugned AY, we find that complete project wise provisions made by the assessee has been placed on record and provision made under each project has been uniquely identified. CIT-DR has placed reliance on the decision of Delhi Tribunal rendered in IOT Infrastructure & Energy Services Ltd Vs ITO 2013 (11) TMI 358 - ITAT MUMBAI , is factually different. The due consideration of above factual matrix leads us to inevitable conclusion that the impugned provisions made by the assessee were allowable in full during impugned AY. Cost overruns on incomplete contracts - HELD THAT - It is undisputed fact that such provisions were made by the assessee in AY 2005-06 which has been allowed by Ld. AO himself. Secondly, out of these provisions of ₹ 192.34 Lacs, an amount of ₹ 134.11 Lacs has actually been utilized / paid by the assessee in subsequent years (which is more than 69% of the provisions) and balance amount i.e. ₹ 58.23 Lacs has been offered to tax in subsequent years. Moreover, the assessee has already placed on record project wise estimation and nothing on record suggest that there was any change in method of accounting being followed by the assessee. This being the case, the impugned additions could not be sustained. We order so. Ground of the appeal stands allowed. Income in respect of Contracts Accounted under Percentage of Completion Method - AO opined that revenue recognized in the books wasless than progress billing and therefore, the PCM adopted by the assessee as per AS-7 to recognize the revenue did not represent real profits earned by the assessee - HELD THAT - 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. We order so. Accordingly, ground of assessee s appeal stands allowed. Excess of Progress Billings under statement of profit in respect of incomplete contracts obtained prior to 31/03/2003 and accounted under Completed Contract Method - HELD THAT - 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 Software Maintenance Expenses - Revenue or capital expenditure - HELD THAT - we find that when the expenditure is in the nature of annual maintenance charges, the same could not be held to be capital in nature. Keeping in view the fact that the issue stood covered in assessee s favor by the orders of Tribunal for earlier years, we hold the expenditure to be revenue in nature and hence, fully allowable to the assessee. Consequently, the depreciation allowed against the same shall stand reversed. This ground stand allowed. Non-grant of TDS Credit withdrawn - HELD THAT - The assessee seeks certain directions to the lower authorities to grant TDS credit withdrawn in AY 2005-06. Our attention is drawn to the fact that rectification application u/s 154 has already been filed by the assessee and the first appellate authority had already instructed Ld. AO for expeditious disposal of the same. Reiterating the same, Ld. AO is directed to verify the assessee s claim in this regard and allow the credit, as permissible under the law. This ground stand allowed for statistical purposes.
Issues Involved:
1. Provision for costs on completed contracts. 2. Cost overruns on incomplete contracts. 3. Income on contracts accounted under the Percentage of Completion Method (POC). 4. Excess of progress billings under the Completed Contract Method (CCM). 5. Disallowance of software maintenance expenses. 6. Non-grant of TDS credit withdrawn in AY 2005-06. 7. Levy of interest under Section 234B. Issue-wise Detailed Analysis: 1. Provision for Costs on Completed Contracts: The assessee created provisions for costs on completed contracts amounting to ?9,49,35,320/-. The Assessing Officer (AO) disallowed these provisions, deeming them unascertained liabilities without sufficient documentary evidence. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this disallowance, noting that the provisions were not made on a scientific basis and substantial portions were reversed in subsequent years. The assessee argued that the provisions were made based on technical estimates and were in line with applicable accounting standards. The Tribunal observed that the provisions were allowable since they were based on scientific estimates and consistent accounting methods. The Tribunal allowed the provisions in full, reversing the CIT(A)'s decision. 2. Cost Overruns on Incomplete Contracts: The assessee claimed ?1,92,34,146/- for cost overruns on incomplete contracts, representing expected losses. The AO and CIT(A) disallowed this claim, relying on a previous Tribunal order for AY 2003-04. The Tribunal noted that similar provisions were allowed in AY 2005-06 and that a significant portion of the provisions was utilized in subsequent years. The Tribunal allowed the claim, reversing the CIT(A)'s decision. 3. Income on Contracts Accounted under the Percentage of Completion Method (POC): The AO added ?28.84 Crores to the assessee's income, representing the difference between progress billings and sales revenue recognized under the POC method. The AO argued that progress billings should reflect actual work done and thus should be recognized as revenue. The assessee contended that progress billings were for funding purposes and not for revenue recognition, which was done based on the percentage of completion. The Tribunal upheld the assessee's method, noting that it was consistent with accounting standards and previously accepted by the revenue. The Tribunal deleted the addition. 4. Excess of Progress Billings under the Completed Contract Method (CCM): The AO added ?3,96,15,600/- to the assessee's income, representing the difference between progress billings and accumulated costs under CCM for contracts started before 31/03/2003. The CIT(A) confirmed this addition. The Tribunal found that the assessee consistently followed CCM, and the revenue had accepted this method in previous years. The Tribunal deleted the addition, noting no revenue leakage. 5. Disallowance of Software Maintenance Expenses: The AO treated software maintenance expenses of ?1,11,10,064/- as capital expenditure, allowing depreciation instead. The assessee argued that these were annual maintenance charges and thus revenue in nature. The Tribunal found that similar expenses were allowed as revenue expenditure in previous years and reversed the AO's decision, allowing the expenses as revenue expenditure. 6. Non-grant of TDS Credit Withdrawn in AY 2005-06: The assessee sought directions for the grant of TDS credit withdrawn in AY 2005-06. The Tribunal directed the AO to verify and allow the credit as per the law, allowing this ground for statistical purposes. 7. Levy of Interest under Section 234B: The interest under Section 234B was deemed consequential and not addressed in detail by the Tribunal. Conclusion: The appeal was partly allowed, with the Tribunal providing relief on several grounds, including the allowance of provisions for costs on completed contracts, cost overruns on incomplete contracts, and software maintenance expenses. The Tribunal also deleted additions related to income on contracts under the POC method and excess progress billings under the CCM. Directions were given to the AO regarding TDS credit.
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