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TMI Blog2014 (9) TMI 313X X X X Extracts X X X X X X X X Extracts X X X X ..... ounting to Rs. 1,43,62,964/- which has been disallowed in earlier assessment years and which were utilized/written back in the current year. 5)The learned Commissioner of Income tax (Appeals) erred in confirming the withdrawal of credit for TDS of Rs. 3,89,823 (wrongly considered as Rs. 6,05,368 in the computation pursuant to order u/s. 143(3) and rectified vide order u/s. 154 dated 10.02.2009). 6)The learned Commissioner of Income tax (Appeals) erred in not directing the Assessing Officer to allow credit for tax deducted at source which have been disallowed in earlier years on the ground that it would be allowed in the year of completion of contract. Assessment Year Amount 2003-04 3,26,910 2004-05 33,84,649 7)The learned Commissioner of Income tax (Appeals) erred in ignoring the fact that in respect of TDS credit of Rs. 33,84,649/- the Assessing Officer had passed a rectification order dated 29th March, 2007 and then silently withdrawn the said TDS credit at the time of the computation, pursuant to order u/s. 143(3). 8)The learned Commissioner of Income Tax (Appeals) er ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtilizer(ABF), Uhde GmbH-SAFCO IV(UGS)revealed that in none of the projects allowability of making payment was actually crystallized during the year under consideration for which the provision had been made, that in preceding year also similar provisions were made by the company against different projects and were disallowed by the then AO, that 'G' Bench of Mumbai Tribunal had dismissed the appeal of the assessee for the A.Y. 2002-03. Finally, he held that provisions amounting to Rs. 8.14 Crores had to be disallowed being unascertained liabilities. 2.2. Aggrieved by the order of the AO, the assessee preferred an appeal before First Appellate Authority(FAA). Before him, it was stated that the assessee-company was engaged in the business of providing of entire range of engineering services, it involved design, construction and commiss -ioning of plants for the chemicals, petro-chemical, Fertilizers, Refineries and pharmaceutical industries, that engineering services provided by it mainly comprised of licenses know how/basic engineering/detailed engineering/Lumpsum Trunkey contracts (LSTK) projects/supervising the contracts, that engineering cost was estimated based on efforts to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he plant by the client, that it was necessary to provide for cost on such contracts for the period from commissioning of the plant to final acceptance of the plant by the client, that if the cost of completed contracts were not to be allowed then the profits on such contracts should not be taxed. Assessee also provided aggregate cost provisions on completed contracts on following projects: Gujarat State Fertilisers Corporation (GSFC), Rashtriya Chemical Fertilisers Ltd (RCF), PPL, ASL, VL , ABF, UGS, Uhde Badsoden (UB), Uhde GmbH-Rafnes (UGR), USV Ltd, Uhde GmbH (UG) and Uhde GmbH-FPC Taiwan (UGF). The assessee also argued that provisions were created only after thorough analysis of status of the project by the Project Implementation Team, that method of accounting for Provisions for Costs on Completed Contracts (PCCC)was followed consistently and is accepted by the Department up to A.Y. 2000-01, that PCCC were based on identified and ascertained present liabilities and on the basis of technical assessments and projections of project manager who were experts in the field, that aforesaid practice of providing for all known liabilities on an es ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of RCF regarding other provisions the assessee had stated that they were based on technical estimates made by the Project Manager(PM), that the evidence was internal notes prepared by the engineers and same was without any sound basis. Discussing the provisions made in the case of RCF, he held that rectifications were not pending that necessitated crating provisions on 31.03.2005. Regarding provisions of Rs. 1.82 crores for civil erection the assessee has furnished running bills for extra claim made after March. About the bills, FAA held that those bills were dated 08.02.2005 and hence since the bills were received by the appellant during the financial year itself, that there was no reason to make provisions for the same, that the provisions were based on surmises, suspicions, playsafe based financial plans and were not capable of estimation with reasonable certainty. Accordingly, he held that the AO was justified in making disallowance of provisions. 2.4. Before us AR argued that the assessee was engaged in the executing LSTK and Cost Plus Fee Contracts(CPFC), that in LSTK project it was recognising income on commissioning of a plant, that at commissioning stage plant would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and court are of view that same have to allowed. AS-7 recongises the principal of making provisions for certain expenses. It is a normal feature of business world that at the end of a particular AY., it may not be possible for an assessee to determine the probable future expenditure of an ongoing project or scheme. If it recongnises income from such project in that year, it will have to make some reasonable provisions for the expenditure to be incurred in subsequent year. Provision will vary from project to project and from year to year. It would also depend on stage of completion of the project. For that purpose assessee will have to rely on earlier years' experience and report of the technical personnel. Question of provisions for warranty was discussed at length by the Hon'ble Apex Court in the matter of Rotork Controls India P. Ltd.(314 ITR 62). We are aware that warranty cannot be equated with provisions made for the projects to be completed by an assessee, but the principle laid down by the Hon'ble Court are applicable to the case under consideration. Provision after all is only an estimation of probable expenditure to be incurred after the end of a particular year. Besides ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder further services. Therefore, in our opinion, he was not justified in confirming the disallowance of Rs. 8.14 Crores, without analysing the terms and conditions of the projects threadbare for which provisions were made during the year under apppel. Reversing his order we decide first effective ground of appeal (ground no. 1-3) in favour of the assessee. 3. Next effective ground of appeal (grounds no. 6-7)deals with not giving credit for TDS and the amounts involved are Rs. 3.26 and Rs. 33.84 lakhs for the year 2003-04 and 2004-05 respectively. Before us, AR stated that TDS credit was not allowed by the AO in earlier two years on the ground that it would be allowed in the year of completion of contract, that same was not allowed in the year under appeal though the contracts were completed, that in respect of TDS credit of Rs. 33,84,649/- the AO had passed a rectification order on 29.03.2007, that at the time of the computation said amount was not considered, that FAA had not given any direction though a specific ground was raised before him. He referred to the rectification order and the tax calculation with regard to Rs. 33.84 lakhs. DR left the issue to the discretion of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deliberated upon and decided the issue of Software Expenditure in favour of the assessee. FAA had upheld the disallowance referring to the order passed by him for the year 2004- 05. As the said order has been reversed by the Tribuanl. We would like to reproduce the relevant portion of the said order and same reads as under : "10. Ground No. 4 pertains to the disallowance of Rs. 59,26,204/-being software development, holding the same to be capital in nature. 11. The assessee has filed details of expenses debited under the head software development (PB 84). From the heading itself, we find, the expenses booked are software maintenance expenses and all the expenses are either in the, nature of annual mtaintenance contracts, up gradation and installation of anti virus,which according to us cannot in any circumstance be held to be enduring in nature and called capital expenses These are expenses which are used for smooth running of the Computers Thus, we hold the same to be allowable." We further find that the appeal filed by the department against the order of the Tribunal for the year 2004-05, before the Hon'ble jurisdictional High Court with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e order of the FAA. 5.3. We have heard the rival submissions and perused the material before us. We find that vide its agreement dated. 12.06.2001 the assessee had entered into an agreement with SG, that it had agreed to render services to S.G. (page no. 285,286of PB), that SG had jointly signed the mechanical completion of certificate on 23.05.2002(pg. 303of PB), that it had engaged an advocate for pursuing the matter of recovery from S.G. (page. 239-41 of PB), that later on a decision was taken by the assessee not to pursue the matter in the court of law, that the assessee had made necessary entries in the books of accounts. As the amount was actually written off in the books of accounts, so, in our opinion there was no justification for the disallowance made/ confirmed by the AO/ FAA under the head bad-debts. After the amendment to section 36 of the Act, courts are of unanimous view that if an assessee writes off any amount in its books of accounts, it has not to prove any other thing. In the case before us, we find that the decision of writing off of the amount in question was taken in peculiar circumstances. Thererfore, reversing the order of the FAA, we hold that claim made ..... X X X X Extracts X X X X X X X X Extracts X X X X
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