2022 (2) TMI 277 - AT - Income Tax

Disallowance of deduction on account of provision for liquidated damages - provision was made without any scientific or rational basis - CIT-A deleted addition - HELD THAT - Since, the provision for liquidated damages has been made regularly and allowed in P L account and since the unutilized portion has been reversed at a regular intervals from year to year, since, the ITAT for AY 2008-09, AY 2010-11, AY 2011-12, AY 2012-13 AY 2013-14 has allowed provision for liquidated damages, the provision made during AY 2009-10 is on same basis as in all the years is hereby allowed. Provision for Warranty - assessee contended that the issue of warranty is a recurring provision made in the past several years and that in all the year from 2009-10 onwards by the various judicial authorities - HELD THAT - Since, the provision for warranties has been made @ 3% and the unutilized portion has been reversed at a regular intervals from year to year, the appellant has been consistently following the policy of making provision for warranty as per the terms of the contract, the ITAT for AY 2008-09, AY 2010-11, AY 2011-12, AY 2012-13 AY 2013-14 has allowed provision for warranty, the provision made during the instant year is on same basis as in all the years is hereby allowed. Advances and Deposits Written Off - assessee recognized amount of DEPB license and DEPB receivable at the time of export of certain items and the same was also credited as income in the P L A/c of earlier years - AO held that the assessee has claimed DEPB license and DEPB receivable written off by debiting the P L A/c during AY 2009-10 u/s. 36(1)(vii)/36(2) - assessee has claimed such deduction as business loss u/s. 28 - HELD THAT - It is generally accepted principle that losses, other than capital losses, which arise out of and are incidental to the business of assessee must be necessarily deducted in the ascertainment of profits of the business u/s. 28 of the Act. The basis of various judgments of the Hon'ble Courts, in order that an item of loss can be taken into account in computing the profits of the business, it should fulfill the following conditions that it should be a real loss, not notional or fictitious, a loss on revenue account and not on capital account, it must have actually arisen and been incurred, not merely anticipated as certain to occur in future, it should be one that is incidental to the carrying on of the business and must arise or spring directly from or be incidental to the carrying out of an operation of the business; and there should be no prohibition in the Act, express or implied, against the deductibility thereof. Keeping in view, the facts and circumstances, provisions of the Act, the judgments of the various Courts, precedence narrated above, we hereby hold that the addition is liable to be deleted. Loss on Suspended Contracts - As per AO assessee had accounted for revenue from contracts to the tune of ₹ 32,83,80,000/- and on that basis AO concluded that provision, of ₹ 41,64,92,017/- is excessive - HELD THAT - The reasoning given for disallowing ₹ 8,81,12,017/- is apparently not correct as the loss in respect of contracts with vendors cannot be restricted to the compensation received from customers on cancellation of contracts. The liability incurred towards vendors on cancellation of contracts and purchases made which after providing for scrap value has to be written off is allowable as business expenditure. Basis of creating the provision - assessee has claimed provision during the subject year since there was cancellation/suspension of some contracts by customers who are unable to obtain financing for those contracts - HELD THAT - The assessee has enclosed details of cost in respect of material fully/partly processed/delivered by vendor after adjusting material cost already recognized in books of accounts and reducing realizable value of material. Such details include project code, vendor name PO no., item description, PO value and WIP value of items. This represents the net cost incurred by the assessee for materials in respect of which delivery has been taken by assessee from vendors. The above facts would substantiate that the provision has been made for material cost and/or compensation for cancellation/suspension of contracts which is incurred under contracts with its vendors entered pursuant to pre-existing commitments against supply contracts with customers, the latter having been subsequently cancelled/suspended. Hence, we hold that the provision is an allowable deduction. Appeal of revenue dismissed.

Summary

Issues Involved:
1. Liquidated Damages
2. Provision for Warranty
3. Advances and Deposits Written Off
4. Loss on Suspended Contracts

Detailed Analysis:

1. Liquidated Damages:
The primary issue was whether the CIT(A) erred in deleting the disallowance of ?15,22,91,304/- claimed as a deduction for liquidated damages. The revenue argued that the provision was made without a scientific or rational basis. The tribunal referred to its earlier decision for AY 2014-15, where it was established that the provision for liquidated damages was based on the period of delay and the percentage of the contract value as per the agreement. The tribunal noted that the assessee had consistently followed this method and reversed the unutilized portion regularly. Given the consistency and the fact that the provision was allowed in previous years (AY 2008-09, AY 2010-11, AY 2011-12, AY 2012-13, and AY 2013-14), the tribunal upheld the CIT(A)'s decision to allow the provision for liquidated damages for AY 2009-10.

2. Provision for Warranty:
The issue was whether the CIT(A) erred in deleting the addition of ?10,22,90,817/- made by the AO on account of disallowance of provisions for warranties. The tribunal noted that the provision for warranty was a recurring provision made in past years and consistently allowed by various judicial authorities. The tribunal referred to the Co-ordinate Bench of ITAT's decisions for AY 2008-09, AY 2010-11, AY 2011-12, AY 2012-13, and AY 2013-14, which upheld the provision for warranty based on historical trends and experience. The tribunal concluded that the provision made during the instant year was on the same basis as in previous years and allowed the provision for warranty.

3. Advances and Deposits Written Off:
The issue was whether the CIT(A) erred in deleting the disallowance of ?33,02,179/- claimed by the assessee as a deduction for advances and deposits written off. The tribunal noted that the assessee had written off DEPB licenses and receivables, which were earlier recognized as income. The tribunal referred to previous decisions for AY 2010-11, AY 2012-13, AY 2013-14, and the directions of the DRP for AY 2011-12 and AY 2014-15, which allowed the deduction of advances and deposits written off. The tribunal held that the write-off was a real business loss and allowable under section 28 of the Act.

4. Loss on Suspended Contracts:
The issue was whether the CIT(A) erred in deleting the disallowance of ?8,81,12,017/- claimed by the assessee as a deduction for loss on suspended contracts. The tribunal noted that the assessee had debited ?41,64,92,017/- for loss on suspended/cancelled contracts due to the cancellation of customer contracts and the subsequent need to cancel vendor contracts. The AO disallowed a portion of this amount, arguing that the provision was excessive. However, the tribunal found that the loss incurred due to vendor contracts could not be restricted to the compensation received from customers and that the liability towards vendors was a normal business expense. The tribunal referred to various judicial precedents, including decisions from the Delhi High Court, Rajasthan High Court, and Bombay High Court, which supported the allowance of such business losses. The tribunal concluded that the provision for loss on suspended contracts was an allowable deduction.

Conclusion:
The tribunal dismissed the revenue's appeal, allowing the provisions for liquidated damages, warranty, advances and deposits written off, and loss on suspended contracts. The order was pronounced in the open court on 28/01/2022.