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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 ..... ld 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 – following the decision in M/s. Rotork Controls India (P) Ltd. Versus Commissioner of Income Tax, Chennai [2009 (5) TMI 16 - SUPREME COURT OF INDIA] - travelling cost of the engineers and technical staff, testing cost, supplies of replacement spares, site related costs, cost of completion of punch list work, cost of modification for uncompleted projects has to be considered while making provisions when an assessee carries out a business of providing diversified engineering services - the assessee had to make provisions for additional cost if sustainable production capability is not demonstrated within the guarantee period. There is nothing in the order of the FAA that could prove that provisions made by the assessee were not based on estimate given by experts - the assessee was following some system in estimating provisions - without pointing out major defects it was not proper on part of the FAA to state that system was - writing off of provisions in subsequent years cannot be basis for disallowing it - Accounting sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The learned Commissioner of Income Tax (Appeals) erred in not considering that the provisions were made as per the regular method of accounting followed by the appellant. 3) The learned Commissioner of Income Tax (Appeals) failed to consider the detailed submissions made in case of provision made on RCF contract, including for liquidated damages payable. 4)The learned Commissioner of Income tax (Appeals) erred in not deleting provisions for costs on completed contracts amounting to ₹ 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 ₹ 3,89,823 (wrongly considered as ₹ 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts, amounting to ₹ 8.14 crores. During the assessment proceedings, the AO found that the assessee had claimed the expenses in the Profit Loss Account for the provisions made for contracts amounting to ₹ 8,14,68,380/-. He directed the company to explain the allowability of the provisions made. After considering the submissions of the assessee filed by it vide dated 18/11/2008, he held that submissions made by the assessee in respect of Paradeep Phosphates(PP), Andhara Sugar Ltd. (ASL), VVF Limited(VL), Asean Bintulu Fertilizer(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 ₹ 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 Auth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was further stated that there were several reasons for the complexities in making such provisions, that assessee was engaged in the diverse variety of industries, that nothing was repetitive, that it provided entire range of services, that projects were carried out in wide geographical area, that the services rendered by it were of high technical nature, that the company had the option of recognising the profits on final acceptance of the plant by the customer, that it was recognising profits in advance i.e. at the time of acceptance of the 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 provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 04,609/- had been written back in subsequent year, that in case of Grasim out of total provisions of ₹ 5,37,030/- an amount of ₹ 4,32,750/ was written back during the current year itself, that the major portion of the provisions had been written back in the current year or in the subsequent year which proved that there was no sound basis available with the assessee to make those provisions, that not only in the subsequent year the provisions created during the year had been written back in the current year itself which did stand to any reason, that except in the 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 ₹ 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity, though it is only an estimate. In the year under appeal the assessee had made provisions for eleven unfinished projects and in subsequent two years after completing the projects wrote off the provisions and offered the balance for taxation. We further find that in those years the assessee had written back the balance amount and same was taxed by the AO. In our opinion, the AO cannot take two stands-he cannot tax the assessee in later years for a part of transaction for which provision has been made for earlier years. In the commercial world provisions are made for contingencies 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wing some system in estimating provisions. Therefore, without pointing out major defects it was not proper on part of the FAA to state that system was . FAA has given his finding without giving the reasons. In our opinion writing off of provisions in subsequent years cannot be basis for disallowing it. Accounting standards expect that assessee should write back such amounts in later years. FAA has overlooked the fact that out of the provisions made by the assessee, ₹ 3.70 Crores were actually spent by the assessee in the subsequent years to complete the unfinished projects or to render further services. Therefore, in our opinion, he was not justified in confirming the disallowance of ₹ 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 ₹ 3.26 and ₹ 33.84 lakhs for the year 2003-04 and 2004-05 respectively. Before us, AR stated that TDS credit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the cost of the software purchased by the parent company was apportioned amongst its sister concern, that the basis of apportionment was not very clear. Following his own order for the year 2004-2005, he held that the expenditure incurred by the assessee was capital in nature. Accordingly, the addition made by AO was upheld. 4.2. Before us, AR stated that similar issue had arisen in earlier year, that the Tribunal had decided the issue in favour of the assessee. DR conceded that issue is covered against the revenue. We find that vide its order dated 08.08.2012(ITA/6511/Mum/2009-AY.2004-05) F bench of Mumbai Tribunal 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prescribed u/s. 36 for the write off were not satisfied, that the Bad Debts written off as claimed by it was not allowable as deduction. He upheld the addition made by the AO. 5.2. Before us, AR stated that services/goods were rendered/supplied to S.G. in pursuance of an agreement, that S.G. did not make payment to the assessee, that it had contemplated legal action against S.G., that later on a decision was taken by the Board of Directors not to file case before competent court, that assessee had written off the income as bad-debts. He referred to page no. 279-303,249-261 and 239 of the paper book. DR supported the 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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