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TMI Blog2013 (11) TMI 358X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of 0.20% of the value of work completed - Held that:- said provision to that extent alone can be said to be the ascertained liability of the assessee and the balance provision, which is found to be excessive on the basis of past data clearly represents unascertained liability which is liable to be added back while computing the book profit of the assessee u/s 115JB of the Act. Disallowance of advance billing - accrual of income on progressive billing - Held that:- difference in the amount of progress billing and revenue recognized by the assessee in relation to three contracts shows as “amount due to customers” was explained by the assessee before the A.O. as well as before the ld. CIT(A) by filing a detailed written submission. It appears that neither of them however has been able to appreciate the same in the correct prospective. As explained by the assessee, progress billing was done not only for the amount of work done but also for mobilization and other advances receivable by it as per the terms of the relevant contract. The revenue from the said contracts was recognized by the assessee by following the percentage of completion method and the said method as well as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch is the assessee s appeal and ITA No. 1901/Mum/2009 which is the Revenue s appeal. The same are directed against the order of the ld. CIT(A) -10, Mumbai dtd. 23-01-2009. 3. Ground No. 1 of the appeal of the assessee as well as that of the appeal of the Revenue for A.Y. 2004-05 involve a common issue relating to the disallowance of Rs. 2.77 crores made by the A.O. on account of provision made by the assessee for warranty which has been sustained by the ld. CIT(A) to the extent of 0.20% of the revenue recognized by the assessee in A.Y. 2004-05. 4. The assessee in the present case is a company which is engaged in the business of construction of oil terminal, providing engineering services and performed operation and maintenance of the terminals. The return of income for A.Y. 2004-05 was filed by it on 29-10-2004 declaring total income at Rs.Nil under the normal provisions of the Act and book profit of Rs.23,35,18,636/- u/s 115 JB of the Act. In the P L account filed along with the said return, a sum of Rs.2,77,45,147/- was debited by the assessee on account of provision made for the performance warranty and other contractual liability. The case of the assessee before A.O. was th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arranty @ 1 to 2% of the contract value completed during the relevant period which was in accordance with AS-7 issued by ICAI. It was claimed that the special provision was quantified on the basis of technical assessment of the defects which would arise under the contract and a working giving details of such quantification was also furnished by the assessee before the ld. CIT(A). It was contended that the provision made for warranty thus was for ascertained liability and the same having been quantified on scientific basis was allowable as deduction. 6. After considering the submissions made on behalf of the assessee on this issue in the light of the material available on record, the ld. CIT(A) found that a similar issue was decided by the Tribunal in assessee s own case for A.Y. 2001-02. He noted that although the provision made for performance warranty to the extent of 5% of the contract value completed during the relevant period was allowed by the Tribunal relying on the report of the Independent Technical Advisor of the assessee, it was observed by the Tribunal that a warranty provision based upon past data with the assessee would be sufficient to justify the provision and sin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orm the details supplied by the appellant, the following picture emerges. That till date the appellant has worked on 11 contracts out of which 4 contracts have been completed till FY 2003-04. The details with regard to these contracts is as follows: Sr.No. Name of the customer Total contract value (Rs. in crore) Provision percentage of revenue recognized Actual warranty liability incurred (in Rs)/% 1. IBP CO.Ltd., Asoj 16.57 5% 952428 (0.546%) 2. IOC, Dumad 47.48 5% Nil 3. IOC, Mathura 82.31 5% Nil 4. Indian Oil Mauritus 22.02 5% Nil 5. Average 42.09 5% 0.1365% From the above tables, picture that emerges is that, with regard to project completed till 31-03-2004, on which 5% provision for warrantee was made, the actual warranty liability incurred is only 0.1365%. With regard to the current projects, on which 1 to 2% provision was made which have been completed in subsequent years, the actual liability incurred on account of warranty is almost nil. In the circumstanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de for warranty on the basis of past data which is now available atleast for the first three years. He contended that the assessee, however, has not made any attempt to justify the provision made by it on the basis of past data and urged that such data may be taken into consideration to decide the issue relating to the allowability of provision for warranty in the year under consideration. 9. We have considered the rival submissions and also perused the relevant material available on record. It is observed that although the provision made by the assessee for warranty @ 5% was allowed by the Tribunal for A.Y. 2001-02 which was the first year of the assessee s operation, it was observed by the Tribunal in its order for 2001-02 that such provision should be made on the basis of relevant past data. In A.Y. 2001-02, being the first year of assessee s operation, past data was not available but the year under consideration is the 4th year of the operation of the assessee and the past data now being available atleast for the first three years, we agree with the contention of the ld. D.R. that such past data should be taken into consideration to decide this issue. As per our direction, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment years 2001- 02 2002-03 was substantially reversed by the assessee in A.Y. 2003-04. It is thus clear that when the provision for warranty was made by the assessee for A.Y. 2004-05, it was aware that no expenditure on warranty was actually required to be incurred in the earlier years i.e. assessment years 2001-02, 2002-03 2003-04 as well as in the year under consideration i.e. 2004-05. It was also aware that the provision made for 2001-02 2002-03 @ 5% was required to be substantially reversed in A.Y. 2003-04 and no warranty expenditure was incurred even in the year under consideration i.e. 2004-05. Still a provision of Rs. 2.77 crores was made by the assessee being 1-2% of the value of work completed which, in our opinion, cannot be justified on the basis of the past data and the ld. counsel for the assessee has not been able to controvert this position when it was confronted to him. 10. It is, no doubt, true that warranty expenditure of Rs. 19.41 lacs and Rs. 15.73 lacs was incurred by the assessee in A.Y. 2005-06 and 2006-07. However, the said expenditure actually incurred by the assessee in the subsequent year, in our opinion, can only justify and support the v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the normal provisions of the Act can only be treated as ascertained liability and the balance amount of provision has to be added back for the purpose of computing book profit u/s 115JB of the Act as an un-ascertained liability. 14. After considering the rival submissions and perusing the material available on record, we find merit in the contention of the ld. D.R. Having held that the provision made for warranty by the assessee is fair and reasonable only to the extent of 0.2% of the value of work completed during the year under consideration on the basis of past data, we are of the view that the said provision to that extent alone can be said to be the ascertained liability of the assessee and the balance provision, which is found to be excessive on the basis of past data clearly represents unascertained liability which is liable to be added back while computing the book profit of the assessee u/s 115JB of the Act. We therefore find no infirmity in the order of the ld. CIT(A) allowing the provision for warranty only to the extent of 0.2% of the value of work completed while computing the income of the assessee u/s 115JB of the Act and dismiss ground No. 2 of assessee s ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee was not accepted by the ld. CIT(A) keeping in view the decision of the Tribunal in assessee s own case for A.Y. 1999-2000 wherein similar claim was disallowed by the Tribunal relying on the decision of the Special Bench of the Tribunal in the case of DCIT vs. Mukand Ltd. reported in 13 SOT 558 (Mum)[SB]. 18. We have heard the arguments of both the sides and also perused the relevant material available on record. As regards the charges paid by the assessee for right to way , the ld. Counsel for the assessee has submitted that the right to way acquired by the assessee is nothing but casement right. He submitted that this issue was involved in the initial year i.e. 2002- 03 and the appeal for the said year on the similar issue is pending before the Tribunal. He has contended that this issue involved in the year under consideration therefore may be restored to the file of the A.O. with a direction to decide the same in the light of the decision to be rendered by the Tribunal in A.Y. 2002-03. He has contended that a similar direction has been given by the Tribunal in the case of Avaya Global Connect Ltd. reported in (2008) 26 SOT 397 (Mum) wherein the matter was remand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts. Ground No. 4 5 of the assessee s appeal are accordingly treated as allowed for statistical purpose. 20. Ground No. 6 raised by the assessee involving the issue of disallowance of Rs. 8,48,403/- made by the A.O. and confirmed by the ld. CIT(A) on account of unpaid service tax has not been pressed by the ld. Counsel for the assessee at the time of hearing before us. The same is accordingly dismissed as not pressed. 21. In ground No. 7, the assessee has challenged the action of the ld. CIT(A) in not directing the A.O. to grant interest u/s 244-A of the Act. 22. The order passed by the A.O. u/s 154 of the Act on 28-2-2007 resulted in the refund of Rs. 4,95,034/- on which interest u/s 244A, according to the assessee, was not granted by the A.O. This issue therefore was raised by the assessee in the appeal filed before the ld. CIT(A) against the order passed by the A.O. u/s 143(3) of the Act. However, keeping in view that this issue was arising from the order passed by the A.O. u/s 154 of the Act and not from the order u/s 143(3) which was the subject matter of appeal before the ld. CIT(A), the ld. CIT(A) did not entertain the same and dismissed the ground raised by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant record placed before us that club expenses only to the extent of Rs. 1,88,093/- were actually incurred and claimed by the assessee. We therefore allow ground No. 8 of assessee s appeal. 26. In ground No. 9 of its appeal, the assessee has pointed out another factual mistake in the impugned order of the ld. CIT(A) in stating that four contracts were undertaken by the assessee for construction of Oil Storage Tanks as against eleven such contracts undertaken by the assessee and since the same is found to be correct from the relevant record, we direct that the said mistake be corrected. Ground No. 9 of the assessee s appeal is accordingly allowed. 27. Now, we take up the cross appeals filed for A.Y. 2005-06 being ITA No. 3477/Mum/2009 (assessee s appeal) and ITA No. 3241/Mum/2009 (Revenue s appeal) which are directed against the order of ld. CIT(A) 10, Mumbai dtd. 9-3-2009. 28. Ground No. 1 of the assessee s appeal as well as ground No. 1 of the Revenue s appeal involve a common issue relating to the disallowance made by the A.O. on account of provision made for warranty which has been partly sustained by the ld. CIT(A). 29. We have heard the arguments of both the sid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 07-08 and 2008-09. A contention raised in this regard on behalf of the assessee is that the expenditure incurred on warranty on several occasions, has been debited to the reckoned expense account instead of debiting the same to warranty expenditure account. If at all it is so, we are of the view that no proper accounting has been done by the assessee inasmuch as expenditure incurred on warranty is debited to the reckoned expense account and provision made for warranty is also debited to the P L account which is patently wrong and cannot be accepted. In any case, the onus in this regard is on the assessee to show the details of warranty expenses actually incurred by furnishing the relevant details to justify the provision made by it and the assessee has clearly failed to discharge its onus. We therefore have no option but to decide this issue on the basis of details furnished by the assessee which clearly shows that the provision made by the assessee for warranty at 1-2% of the value of work completed is unreasonable and excessive. In the immediately preceding year i.e. A.Y. 2004-05, we have already held that the provision for warranty made by the assessee only to the extent of 0.20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on claimed by the assessee in respect of expenditure incurred on right to way and on premium and other charges paid in respect of leasehold land are similar to the one involved in A.Y. 2004-05. Following our conclusion drawn in A.Y. 2004-05, we restore both these issues to the file of the A.O. for deciding the same afresh as per the same directions as given in A.Y. 2004-05. 34. The grievance raised by the assessee in ground No. 5 of its appeal is that the ld. CIT(A) has not decided the issue specifically raised in the ground challenging the action of the A.O. in applying provisions of section 36(1)(vii) of the Act while supporting the disallowance made on account of provision for warranty. 35. We have heard the arguments of both the sides and also perused the relevant material available on record. In our opinion, the issue relating to the assessee s claim for provision for warranty having been decided by the ld. CIT(A) as well as by us on merit independent of provisions of section 36(1)(vii) of the Act, the issue relating the applicability of the provisions of section 36(1)(vii) has become virtually infructuous. We therefore do not find it necessary or expedient to remit the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A.Y. 2008-09 has to be made on some reasonable basis. In this connection, it is observed that the exempt income earned by the assessee is 0.244% of the total income earned by it and accordingly the general administrative expenses to the extent of Rs.1,13,385/- being 0.244% of the total general administrative expenses of Rs. 4.64 crores can reasonably attributed to the earning of exempt income on pro rata basis. This amount also comes to about 2% of the exempt income earned by the assessee. The ld. Counsel for the assessee has also agreed that this is a reasonable basis to quantify the disallowance of expense to be made u/s 14A of the Act and since the ld. D.R. has also not raised any material objection in this regard, we find it fair and reasonable to sustain the disallowance u/s 14A of the Act to the extent of Rs.1,13,383/-. The relevant grounds of assessee s appeal are thus partly allowed. 40. The remaining grounds i.e. ground No. 6 to 11 raised by the assessee in its appeal for A.Y. 2006-07 read as under:- 6. The learned CIT (A) erred in not specifically directing the Income Tax Officer to exclude from the total income an amount of Rs.3,02,08,158 being excess warranty p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ides have urged that the mater may be remanded back to the file of the ld. CIT(A) to decide all these issues on merit. Accordingly, the ld. CIT(A) is directed to consider and decide the issues involved in ground No. 6 to 11 of the assessee s appeal which had been raised in the appeal filed by the assessee before him but remained to be decided on merit. Ground No. 6 to 11 of assessee s appeal are accordingly treated as allowed for statistical purpose. 42. In the result, assesse s appeal for A.Y. 2006-07 is partly allowed. 43. Now, we shall take up the appeal of the assessee for A.Y. 2007-08 in ITA No. 7035/Mum/2010 which is directed against the order of the ld. CIT(A) 22, Mumbai dtd. 17-8-2010. 44. Ground No. 1,2,3 6 of this appeal of the assessee involve a common issue relating to disallowance of Rs. 28,36,926/- made by the A.O. and confirmed by the ld. CIT(A) u/s 14 A r.w.r. 8-D of the Income Tax Rules, 1962. 45. As agreed by the ld. Representatives of both the sides, this issue involved in A.Y. 2007-08 as well as all the material facts relevant thereto are similar to the one involved in A.Y. 2006-07 which has already been decided by us in the foregoing portion of this o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o offer its explanation in the matter. In reply, it was submitted that the percentage completion method was being followed by the assessee for recognizing the revenue from construction contracts as per AS-7 issued by the ICAI. It was submitted that the progress billing, on the other hand, was inclusive of advances received from the customers which did amount not necessarily reflect the work performance. It was explained that the contractor, for example, may be allowed to raise the bill upon mobilisation of construction equipment like cranes etc. but the said cannot have any reflection in the revenue recognition. Another example was also given by the assessee stating that a contractor may also be allowed to raise the bill upon finalization of drawings or on finalization of long lead items, however the same cannot be recognized as revenue in the books of account. It was contended on behalf of the assessee that this situation, however, would prevail only temporarily during the course of execution of the contracts but finally there would be no difference between the progress billing and amount recognized as revenue by the time of completion of the contracts. It was pointed out that out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A.O. however, did not accept the explanation holding that the amounts is respect of aggregate progress billings of 3 contracts have already been received by the assessee and in mercantile system of accounting this should have been offered for tax. The A.O. also relied upon several decisions wherein it was held that if receipt is a trading receipt even if it is not accounted for by the appellant same may be assessed by A.O. that the matter of taxability cannot be decided on the basis of entries which the assessee may choose to make in its account but has to be decided in accordance with the provision of law and also that the method of accounting followed by the assessee is not sacrosanct. I have considered the facts of the case and I am unable to agree with the contention of the appellant. The revenue has to be recognized at the earliest point of time on due or receipt basis whichever is earlier. In this case the appellant has already received the amount from 3 parties which it should have offered for taxation. What amount is to be offered for taxation cannot be a matter to be decided mutually by the appellant and the contractee as claimed by the appellant. The Appellant further cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, the entire revenue from the contract is finally recognized on completion of the contract and the amount due to the customers also gets finally adjusted. Relying on the decision of Hon ble Punjab Haryana High Court in the case of CIT vs. Punjab Tractors Co- Operative Multi-Purpose Society Ltd. 234 ITR 105, he contended that if the receipt is before the accrual of income, it is in the nature of advance which can not be treated as income at the point of receipt. 55. The ld. D.R., on the other hand, submitted that the assessee has mainly executed the works contract for Public Sector Undertaking (PSU) and no PSU would make any payment without there being any work done by the assessee. He submitted that it is very difficult to accept that the assessee received the money from the PSU against the contract by raising progress billing but did not spend the same immediately. He contended that this situation is possible only when there is a case of non-performance of contract in which Accounting Standard has no application. 56. We have considered the rival submissions and also perused the relevant material available on record. It is observed that the difference in the amount of progre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thus was nothing but receipt of advance before accrual of income and as held by the Hon ble Punjab Haryana High Court in the case of Punjab Tractors Co-Operative Multi-Purpose Society Ltd., 234 ITR 105, the said amount representing advance against the work cannot be treated as income of the assessee at the point of receipt. We are therefore of the view that the addition of Rs. 10.86 crores made by the A.O. and confirmed by the ld. CIT(A) on this issue is not sustainable and deleting the same, we allow ground No. 15 to 22 of the assessee s appeal for A.Y. 2007-08. 57. Ground No. 23 relating to the claim of the assessee for set off of the unabsorbed depreciation of earlier years is not pressed by the ld. Counsel for the assessee at the time of hearing before us. The same is accordingly dismissed as not pressed. 58. As regards ground No. 24 and 25, it is observed that the issues involved therein relating to the assessee s claim for proportionate deduction on account of expenditure incurred in the earlier years on right to way and on premium and other charges paid on lease hold land are similar to the one involved in A.Y. 2004-05 which have already decided by us in the foregoi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wings for its business activity and in the absence of any separate books of account kept for the investment activity earning exempt income, it was a case of common and mixed funds from which investment in shares and mutual funds was made by the assessee. He also held that the basis adopted by the assessee for estimating the expenses incurred in relation to the earning of exempt income at Rs.11 lacs was not acceptable in the absence of any supporting details furnished by the assessee. He therefore applied Rule 8-D and worked out the disallowance to be made out of interest u/s 14A of the Act at Rs. 2,64,58,407/- and out of expenses at Rs.31,96,775/- and disallowance to that extent was made by him in addition to the disallowance of Rs. 11 lacs already offered by the assessee u/s 14 A of the Act. 64. The disallowance made by the A.O. u/s 14A of the Act was disputed by the assessee in an appeal filed before the ld. CIT(A). It was submitted before the ld. CIT(A) that the entire investment in shares and mutual funds was made by the assessee out of internal accruals and fund generated in the past and there was no utilization of any borrowed funds for making the said investment. It was co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the disallowance of Rs. 11 lacs offered by the assessee needs to be adjusted or reduced from such disallowance. 66. The ld. D.R. contended that assessee having maintained common and mixed funds, interest expenditure on borrowed funds as attributable to the earning of exempt income was rightly disallowed by the A.O. u/s 14A of the Act on the basis given in Rule 8-D. He contended that the said Rule 8-D is applicable to the year under consideration i.e 2008-09 and quantum of disallowance to be made out of expenses u/s 14A of the Act was rightly worked out by the A.O. by applying the same. 67. We have considered the rival submissions and also perused the relevant material available on record. A perusal of the balance sheet of the assessee for the year under consideration shows that own funds of Rs. 379 crores were available with the assessee which were sufficient to cover the investment of Rs. 50.88 crores made in shares and mutual funds. Even the current years profit after tax was Rs. 34.28 crores and if the depreciation claimed by the assessee at Rs. 18.07 crores is added back, the internal accrual of funds for the year under consideration itself was to the tune of Rs. 52.35 cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e issue of disallowance u/s 14-A are not pressed by the ld. counsel for the assessee at the time of hearing before us. The same are accordingly dismissed as not pressed. 70. As regards ground No. 9 to 13, it is observed that a common issue involved therein relating to the deduction claimed by the assessee on account of provision for warranty is similar to the one involved in the earlier years i.e. assessment years 2004-05, 2005-06 and 2007-08 which has already been decided by us. There is, however, certain change in the relevant facts as involved in A.Y. 2008-09 as compared to assessment years 2004-05, 2005-06 and 2007-08. In assessment years 2004-05, 2005-06 and 2007-08, provision for warranty to the extent of 0.20% of the value of work completed has been allowed by us keeping in view the quantum of warranty expenditure actually incurred by the assessee in assessment years 2005-06 2006-07. In so far as A.Y. 2008-09 is concerned, there is, however, no expenditure incurred on warranty in that year or even in the immediately preceding year i.e. A.Y. 2007-08. The expenditure incurred on warranty in the immediately succeeding year i.e. A.Y. 2009-2010 is also minimal. Keeping in vie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2004-05. Ground no. 23 24 are accordingly allowed for statistical purposes. 75. In ground No. 25, the limited relief which is sought by the assessee is that a direction may be given to the A.O. to grant credit for TDS. Accordingly we direct the A.O. to consider and allow the claim of the assessee for TDS in accordance with law after verifying the relevant documentary evidence. 76. The grievance of the assessee as raised in ground No. 26 is that the ld. CIT(A) ought to have directed the A.O. to compute interest u/s 234B of the Act based on the returned income. In this regard, it is observed that a direction was given by the ld. CIT(A) vide his impugned order to the A.O. to charge interest u/s 234C of the Act after verification as per law and keeping in view this direction given by the ld. CIT(A), we are of the view that the assessee cannot be said to have any grievance on this issue as projected in ground no. 26. We, therefore, dismiss the said ground. 77. In the result, appeals of the Revenue for assessment years 2004-05, 2006-07, 2007-08 2008-09 as well as assessee s appeal for A.Y. 2005-06 are partly allowed while the assessee s appeal for A.Y. 2005-06 is treated as pa ..... 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