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TMI Blog2019 (4) TMI 873X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Non-grant of TDS Credit withdrawn - HELD THAT:- The assessee seeks certain directions to the lower authorities to grant TDS credit withdrawn in AY 2005-06.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 fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned Commissioner of Income Tax (Appeals) failed to consider that the addition made o ₹ 28,84,90,428/- has resulted in taxing gross receipts, without allowing deduction for expenditure required to earn such receipts. 10. Without prejudice to ground Nos. 7 to 9 above, the Assessing Officer erred in not allowing deduction (following his own method) where the sale proceeds recognized by the Appellant were higher than the billings done during the year. 11. The appellant submits the finding of the learned Commissioner of Income Tax (Appeals) that the appellant failed to produce evidence that monies under contract were received in advance, is with due respect, a perverse finding. 12. The learned Commissioner of Income Tax (Appeals) erred in taxing the excess of progress billings over inventories, amounting to ₹ 3,96,15,600/- as income, in respect of contracts accounted under the Completed Contract Method and which were incomplete as on 31st March, 2006. 13. The learned Commissioner of Income Tax (Appeals) erred in rejecting the regular method of accounting followed by the appellant and accepted by the department in the past. 14. The learned Commissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Cost overruns on completed contracts 1,92,34,146/- 6. Not Pressed NA 7 to 11 Income on Contracts accounted under Percentage of Completion Method 28,84,90,428/- 12 13 Excess of Progress Billings 3,96,15,600/- 14. Software Maintenance Expenses 1,11,10,064/- 15. TDS Credit withdrawn in AY 2005-06 3,82,678/- 16. Not Pressed NA 17. Not Pressed NA 18. Levy of interest u/s 234B NA Our ground-wise adjudication is given in the succeeding paragraphs. 2.3 Ground Nos. 1 to 4: Provision for costs on completed contracts 2.3.1 During assessment proceedings, it transpired that the assessee created provisions for costson completed contracts amounting to ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rly, under the cost-plusfees contracts , profits were recognized upon mechanical completion of the plant. The provisions were made mainly for re-engineering services to be provided and quantum of provision would relatively be lesser as compared to LSTK project since the company s liability under such contracts would be related to re-engineering services only. Mechanical completion was stated to be the stage at which the plant, after mechanical completion, was ready for acceptance of feed stock leading to production of guaranteed products. 2.3.4 On the basis of above, it was submitted that in both types of contracts future costs were still to be incurred by the company until the final acceptance of the plant by the client and sometime expenses were to be incurred even after final acceptance of the plant. 2.3.5 Regarding estimation of future costs, it was submitted that at year-end, the project implementation team consisting of project manager, lead engineers and engineering manager would evaluate the status of each project being executed by the company and estimate the costs likely to be incurred on each contracts / project. On the basis of technical evaluation, the team id ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were not mandatory but optional as per contractual terms. All the aforesaid factors led the Ld. first appellate authority to conclude that the provisions were made merely on the basis of surmises, suspicions, play safe based financial plans and were not capable of estimation with reasonable certainty and therefore, the same could not be allowed to the assessee. 2.3.7 The Ld. Sr. Counsel for Assessee [AR], Shri Percy Pardiwala, drawing our attention to the documents placed in the paper-book, submitted that the provisions were made on scientific basis in relation to each project as per input received from technical team. The assessee has made payment against these provisions in subsequent years and these provisions were reviewed each year-end and the excess provisions no longer required were written back in the profit loss account and offered to taxin those years and therefore, the transactions would ultimately be tax / revenue neutral in terms of decision of Hon ble Apex Court rendered in Excel Industries Ltd. [358 ITR 295]. The details of such payments and reversal on subsequent years has been placed on record. It is submitted that the stated issue arose for the first tim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he provisions were allowed only to the extent of utilization in a subsequent year, then the same would indirectly, tantamount to allowance of expenditure on cash basis as against the accrual principle of mercantile system of accounting. Reliance has been placed on the judgment of Hon ble Bombay High Court rendered in Shrikant Textiles Vs CIT [81 ITR 222]. Reliance has also been placed on the decision of Hon ble Apex Court rendered in Excel Industries Ltd. [358 ITR 295] decision of Hon ble Mumbai Tribunal rendered in Toyo Engineering Corp. Vs. DDIT [ITA No. 6600/Mum/2002 22/03/2004] for various submissions. 2.3.9 Per Contra, Ld. CIT-DR relied upon the orders of Tribunal in assessee s own case for AYs 2002-03 to 2004-05 and submitted that provision for unascertained liabilities could not be allowed to the assessee. It has been submitted that provisions have been estimated in an arbitrarily and unreasonable manner which are not as per settled principles of accounting. The CIT-DR also submitted that each year s tax was to be computed separately as per the provisions of act and therefore the plea of revenue neutrality could not be accepted. The case laws of Srikant Textiles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITA No. Order Dated Remarks 1. 2000-01 ITA 8053/Mum/2004 23/10/2007 Assessee s appeal on the issue allowed 2. 2002-03 ITA 1926/Mum/2006 10/09/2008 Assessee s appeal on the issue partly allowed 3. 2003-04 ITA 6510/Mum/2009 30/09/2011 Assessee s appeal on the issue partly allowed 4. 2004-05 ITA 6511/Mum/2009 08/08/2012 Assessee s appeal on the issue partly allowed 5. 2005-06 ITA 1690/Mum/2012 04/07/2014 Assessee s appeal on the issue allowed The observation / conclusion in the latest order of the Tribunal for AY 2005-06 could be extracted in the following manner: - 2.5. We have heard the rival submissions and perused the material before us. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tional acceptance of a plant. We find that the FAA has disallowed provisions on the basis that the assessee had written back the amounts in subsequent years.He has not analyzed the data of earlier years and subsequent years to determine the alleged unreasonableness of the provisions.It is a fact that res judicata is not applicable to income tax proceedings and every year is an independent unit,but rule of consistency contemplates that the AO should not suddenly disallow any item without assigning some reason.From the order of the AO/FAA we are unable to find as how the facts and circumstances for the year 2001-02 were different from the facts for the year under consideration.Assessee was following the same system of making provisions for uncompleted projects for last so many years.There in nothing in the order of the FAA that could prove that provisions made by the assessee were not based on estimate given by experts.We have perused the paper book-it is found that internal memos are signed by one person,but the estimate of provision was prepared by three/four competent authorities,dealing with financial and technical sides of the projects(page 83, 89,124,138 of the PB).Inshort ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal that out of such provisions of ₹ 949.35 Lacs, the assessee has incurred expenditure of ₹ 751.60 Lacs (which is more than 79% of the provisions) in the subsequent year and the excess provision i.e ₹ 393.14 Lacs have been offered to tax in AYs 2007-08 2008-09 by way of reversal. Further, the assessee is following consistent method of accounting and estimating the provisions on similar basis which is in line with the applicable accounting standards notified u/s 145(2) and as per statutory mandate. Nothing on record suggest that there was any change in method of accounting during impugned AY to recognize the revenue or expenses. 2.3.13 The assessee s submission before Ld. AO dated 06/11/2009 as placed from page nos. 55 onwards, reveal that project wise estimation were made by assessee for the expenditure to be incurred under each head. The same were arrived at after identifying expected cost required to be incurred in future on various projects. 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 m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll during impugned AY. Therefore, by reversing the stand of Ld. first appellate authority, we allow Ground Nos. 1 to 4 of the assessee s appeal. 2.4 Ground No. 5: Cost overruns on incomplete contracts 2.4.1 The cost overruns on incomplete projects for ₹ 192.34 Lacs stem from the fact that these costs represent expected loss to be incurred on a particular contract after considering the revenue generated from that contract, cost already incurred on the said project and estimated future costs to be incurred in future to complete the projects. It was submitted that such cost overruns in excess of the contract value which could not be recovered from the client was crystallized, identified, determined and the same was provided in the books in tune with Accounting Standard-7 [AS-7] issued by ICAI and hence, allowable to the assessee . The contract wise details of provisions for cost overruns on incomplete contracts was also provided before Ld.AO, the details of which has already been extracted in the impugned order on page no.7 . However, not convinced with assessee s submissions, the same was disallowed by Ld. AO. The Ld. CIT(A) confirmed the disallowance by relyin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were also debited in the profit loss account and therefore, there was understatement of income. In other words, in the opinion of Ld. AO, the billing done by the assessee under these projects were to be recognized as sales revenue in the books of account as against recognized by the assessee on the basis of percentage of completion method of accounting since progress billing was nothing but the actual work completed by the assessee under the project. Although the assessee defended the same vide reply dated 25/11/2009 by submitting that the revenue is recognized on the basis of percentage of completion method, however, not convinced, Ld. 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. Further, by adopting this method, the true sales were not being reflected in the books. Finally, disregarding the assessee s submissions, an amount of ₹ 28.84 Crores representing understatement of profits in respect of 28 contracts was disallowed and added to the income of the assessee.The details of the same has already ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lls were nothing but actual work done and the method adopted by assessee was faulty as it was cost based revenue while the correct method would be actual cost spent by the assessee. The progressive billing has to be as per value of each contract and not as per the cost of the contract. Our attention is drawn to the fact that the project was completed to the extent of 98.3% whereas the assessee has taken the completion to the extent of 96.8% only by taking the direct actual cost. The case law of IOT infrastructure has sought to be distinguished on the ground that in that case progressive billing was done not for the amount of work done but for the mobilization and other advances receivable by the assessee as against the fact of the present case where the billing has been done wholly on the basis of work completed and there was no advance involved. 2.5.4 However, Ld. Sr. Counsel, in the rejoinder, submitted that progress billing had nothing to do with the recognition of the revenue since revenue were recognize on the basis of percentage of work done to ensure matching of cost and revenues in accordance with the accounting standards and therefore, progress billing could not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cognize the revenue in the books of accounts. The dispute, under these grounds, is with respect to contracts started before 31/03/2003 wherein the assessee followed completed contract method. During assessment proceedings, it transpired that the assessee raised invoices against these 13 projects for ₹ 22.52 Crores and reflected the same on the liabilities side of the Balance Sheet. Similarly, the costs of ₹ 18.56 Crores were accumulated against these projects and reflected on the asset side of the Balance Sheet. The Ld. AO opined that though substantial work was done under these projects and invoices were also raised, no profit was shown against the same. Result antly, the differential of the two amounts i.e. ₹ 396.15 Lacs was added to the income of the assessee. The stand of Ld. AO, upon confirmation by first appellate authority, is under appeal before us. 2.6.2 Th Ld. Sr. Counsel submitted that the costs as well as revenues are recognized under these projects on completed contract method . These revenues as well as costs were accumulated in the similar manner for AYs 2004-05 2005-06 also which has been accepted by the revenue and therefore, there was no ..... 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