9911796707
TMI Blog2019 (9) TMI 1134X X X X Extracts X X X X X X X X Extracts X X X X ..... f CIT V/s Excel Industries Ltd. [ 2013 (10) TMI 324 - SUPREME COURT] would apply. More so, when the assessee is consistently following this accounting method from past years. In view of the aforesaid, we hold that the part disallowance sustained by learned Commissioner (Appeals) also deserves to be deleted. Therefore, learned Commissioner (Appeals) direction to grant consequential relief in subsequent assessment year becomes infructuous. Disallowance of renovation expenditure - expenditure in respect of the leased premises - HELD THAT:- The nature of expenditure incurred by the assessee in respect of the leased premises and more particularly the premises at Hyderabad and Bangalore are not of the nature of constructing new structure, extension or improvement of building. Therefore, Explanation 1 to section 32(1) of the Act would not be applicable to the facts of the present case. Though, there cannot be any quarrel with regard to the proposition laid down in the decisions cited before us, however, the nature of expenditure incurred by the assessee with reference to facts of each case would decide whether it is capital or revenue in nature. In the facts of the present case, after exa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not within the time prescribed under section 155(14) of the Act and secondly, the assessee has not claimed such deduction in the computation of income. In our view, the aforesaid reasoning of learned Commissioner (Appeals) is not sustainable. Once it is held that assessee s claim of write off is allowable under section 36(1)(vii) of the Act, then the provisions of section 155(14) of the Act would not apply - We direct the Assessing Officer to allow assessee s claim of write off of TDS. Ground is allowed. Addition made to its income on account of change in revenue recognition policy - HELD THAT:- Issue requires further examination by the Assessing Officer as the assessee needs to establish with cogent material and evidence that the change in revenue recognition policy is for bona fide reasons and necessary for carrying on its business activities in a more efficient manner - assessee has to establish that the change in revenue recognition policy is in conformity with the provisions contained under section 145(1) and (2). With the aforesaid observations, we are inclined to restore the issue to the Assessing Officer for de novo adjudication after due and sufficient opportunity of bei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear. As a result, the entire expenditure in the nature of provision is claimed as deduction in current year. Being of the view that the method followed by the assessee does not give a true and fair view of the profit of the company, the Assessing Officer called upon the assessee to furnish the details of actual expenditure incurred vis-a-vis the provision made in the books of account. After perusing the details furnished by the assessee, the following facts emerged:- 1. Provision for unpaid expenditure ₹ 10,15,97,058 Expenditure actually incurred ₹ 9,84,95,535 Excess provision made ₹ 31,01,523 2. Provision made for sundry creditors relating to sales commission, promotion, advertisement, etc. ₹ 13,54,61,007 Expenditure actually incurred ₹ 10,43,22,197 Excess provision made ₹ 3,11,38,810 3. Provision for legal and professional fees ₹ 1,10,20,000 Expenditure actually incurred ₹ 98,63,697 Excess provisions made ₹ 11,56,303 5. Being of the view that the excess provision made is in the nature of contingent liability, the Assessing Officer disallowed the same and added back to the income of the assessee. Being ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, following the guidelines of AS-1, the assessee has to provide for all expenditures incurred during the year including the expenditure in respect of which invoices were not received. Referring to Note-13 to the Notes to Account, the learned Authorised Representative submitted, the provision made was on the basis of estimate made by the company considering the facts and circumstances of each case. Thus, he submitted, the provision made by the assessee on a best estimate basis is in terms of AS-1 and section 145(2) of the Act, hence, in accordance with law. He submitted, in such circumstances, the provision for expenditure cannot be treated as contingent liability. In support of such contention, he relied upon the following decisions:- i) Bharat Earth Movers v/s CIT, [2000] 245 ITR 428 (SC); ii) Metal Box of India Ltd. v/s Their Workmen, [1972] 73 ITR 53 (SC); iii) Calcutta Co. Ltd. v/s CIT, [1959] 37 ITR 001 (SC); and iv) Rotork Controls (India) Pvt. Ltd. v/s CIT, [2009] 314 ITR 62 (SC). 8. Drawing our attention to the details furnished in the paper book, the learned Authorised Representative submitted, there are several heads of expenditure under the provision for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provision by the assessee since is not on the basis of any scientific data, the allowance of such expenditure in past years will not act as res judicata for deciding the issue in the impugned assessment year. Thus, he submitted, there is no reason to interfere with the decision of learned Commissioner (Appeals). 11. In rejoinder, the learned Authorised Representative submitted, reliance placed by the learned Departmental Representative on AS-29 relating to the provisions, contingent liability and contingent assets does not make assessee's case weaker, rather, it supports assessee's case. He submitted, AS-29 mandates that the provision should be made in the accounts for expenditure incurred during the year based on reasonable estimate. He submitted, referring to AS in Note-13 of Schedule-21 of the annual account it has been specifically stated that the provision for expenditure is based on the estimate made by the company considering the past experience. Without prejudice, the learned Authorised Representative submitted, since the excess provision made was reversed by the assessee in the subsequent assessment year and offered as income, no prejudice is caused to the Department as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The primary consideration in the selection of accounting policies by an enterprise is that the financial statements prepared and presented on the basis of such accounting policies should represent a true and fair view of the state of affairs of the enterprise as at the balance sheet date and of the profit or loss for the period ended on that date. 17. For this purpose, the major considerations governing the selection and application of accounting policies are:- a. Prudence In view of the uncertainty attached to future events, profits are not anticipated but recognised only when realised though not necessarily in cash. Provision is made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information. b. Substance over Form The accounting treatment and presentation in financial statements of transactions and events should be governed by their substance and not merely by the legal form. c. Materiality Financial statements should disclose all "material" items, i.e. items the knowledge of which might influence the decisions of the user of the financial statements." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s allowed. 14. In ground no,.2, the assessee has challenged the disallowance of renovation expenditure amounting to ₹ 36,56,133. 15. Brief facts are, during the assessment proceedings, the Assessing Officer noticing that the assessee has debited an amount of ₹ 50,14,955, towards expenditure on repairs and maintenance of office premises called upon the assessee to furnish the break-up of such expenditure and explain its allowability. In response, the assessee furnished the details and submitted that since such expenditure was incurred towards regular and routine repair and maintenance of premises taken on lease for assessee's office, it is allowable as expenditure. The Assessing Officer, however, did not accept assessee's claim. He observed, leased premises have been taken by the assessee on long term basis. Therefore, any expenditure incurred gives an enduring benefit to the assessee. Further, he observed, in the office premises newly taken on lease at Hyderabad and Bangalore, the assessee has incurred huge expenditure for furniture, fittings and fixture which cannot be considered as routine repair and maintenance. Thus, he held that the expenditure incurred by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provides for depreciation in respect of any addition, renovation or extension to a building not owned by the assessee but holds lease hold rights, however, it will only apply if the expenditure is capital in nature. In support of his contention, the learned Authorised Representative relied upon the following decisions:- i) CIT v/s HEDE Consultancy Pvt. Ltd., [2002] 258 ITR 380 (Bom.); ii) CIT v/s Talathi and Panthaky Associated Pvt. Ltd., [2012] 343 ITR 309 (Bom.); and iii) Urban Infrastructure Venture Capital Ltd. v/s DCIT, [2014] 150 ITD 502 (Mum.). 18. He submitted, the decision of the Tribunal in Urban Infrastructure Venture Capital Ltd. (supra) was upheld by the Hon'ble Jurisdictional High Court while dismissing Revenue's appeal in ITA no.65/2015, dated 17th July 2017. Thus, he submitted, the deduction claimed by the assessee has to be allowed in full. 19. The learned Departmental Representative submitted, the expenditure incurred by the assessee on repair/renovation of leased premise cannot be considered to be of revenue nature as by incurring such expenditure, the assessee has derived enduring benefit. He submitted, the very fact that the assessee has incur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he view that it is of revenue nature, hence, has to be allowed. Accordingly, we do so. The decision of learned Commissioner (Appeals) on this issue is, therefore, set aside. Ground raised is allowed. 21. In ground no.3, the assessee has challenged the disallowance of write off of security deposit amounting to ₹ 59,26,246, in respect of lease hold premises. 22. Brief facts are, while examining the aforesaid claim of the assessee in the course of assessment proceedings, the Assessing Officer noticed that the assessee had taken on lease office premises at Nariman Point for a period of three years with provision for further renewal on mutual consent. As per the terms of the agreement, the assessee was to furnish a security deposit of ₹ 67,20,000 to the landlord. The lease agreement was terminated on 8th November 1999. However, upon termination of lease agreement, the security deposit was not refunded to the assessee. Due to non-refund of security deposit, the assessee kept possession of the premises and also filed a lawsuit against the landlord for recovery of the security deposit. However, in the year under consideration the assessee wrote-off the security deposit of & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee's claim has been rightly rejected by the Departmental Authorities. 26. We have considered rival submissions and perused the material on record. We have also applied our mind to the decisions relied upon. There is no dispute with regard to the primary facts that the assessee has taken on lease the subject premise on furnishing security deposit of ₹ 59,26,246. Subsequently, though, the lease agreement was terminated, however, the security deposit was not refunded to the assessee. It is also a fact that due to non-refund of the security deposits the assessee has not only kept the premises under its possession but has also taken legal steps for recovery of the security deposit by filing a lawsuit. Thus, the contention of the assessee that it was not hopeful of recovery of the security deposit appears to be farfetched, more so, when he is having possession of a far more valuable asset than the security deposit. Further, when the assessee has filed a lawsuit for recovery of security deposit, it cannot be said that he has lost all its hope of recovery of the security deposit. 27. However, there is another angle to the issue. It needs to be mentioned, on a query from the Bench ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... furnished by the assessee to demonstrate that credit for TDS was refused by the Assessing Officer. Thus, he observed, in absence of necessary evidences to prove that the TDS was not allowed to the assessee, the write off of TDS cannot be allowed to the assessee. Further, he observed, non-furnishing of TDS certificate cannot be treated as debt due to the assessee from the persons who have deducted tax at source. Therefore, provision of section 36(1)(vii) of the Act cannot be applied. Accordingly, he disallowed assessee's claim of write off. Being aggrieved with the aforesaid decision of the Assessing Officer, the assessee preferred appeal before the first appellate authority. 30. The learned Commissioner (Appeals) agreed that withholding of tax by the deductor amounts to debt owed by him to the deductee and in the event of non-receipt of such debt, deduction would be eligible to the assessee under section 36(1)(vii) of the Act, as the conditions prescribed therein are fulfilled. However, he held that assessee's claim cannot be allowed in view of the provisions of section 155(14) of the Act. He observed, as per the said provision the claim of TDS can be entertained only within two ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to the decisions relied upon. As could be seen from the facts emanating from record, though, tax was deducted at source in earlier assessment years, however, the assessee could not get credit of such TDS amount due to non-furnishing of TDS certificate by deductors. Undisputedly, the TDS amount is nothing but a part of income accruing to the assessee. It is also a fact that the assessee has offered the gross income including TDS in the respective assessment years. Therefore, to that extent, non-allowance of TDS credit to the assessee due to non-receipt of TDS certificates amounts to loss of income. Further, it has been held in the decision cited by the learned Authorised Representative that non-furnishing of TDS certificate amounts to a debt due to deductee which can be allowed under section 36(1)(vii) of the Act. In fact, learned Commissioner (Appeals) has also accepted the aforesaid legal position. The grounds on which he has rejected assessee's claim are, firstly, it is not within the time prescribed under section 155(14) of the Act and secondly, the assessee has not claimed such deduction in the computation of income. In our view, the aforesaid reasoning of learned Commissione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of lower profit to the tune of ₹ 22.83 crore. Therefore, he called upon the assessee to justify the change in revenue recognition policy. In response, it was submitted by the assessee that there is no change in the method of accounting vis-a-vis the preceding assessment years except change in revenue recognition policy. Further explaining, it was submitted that the change in revenue recognition policy was due to the fact that the assessee has shifted his focus from providing specific voice equipment solutions to providing converged communication solutions to the clients as part of the business strategy in order to increase profitability and serve them better and cater to their needs. It was submitted, converged communication solutions means providing integrated service to the clients based on their needs in order to provide complete communication solutions which includes integration of voice, data and messaging and catering to industry specific solution. It was submitted, w.e.f. 1st April 2004, income from sale of goods/installation and commissioning charges/software activation is accounted on completion of sale/installation and commission on receipt of software installat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellate authority. 36. After considering the submissions of the assessee learned Commissioner (Appeals) agreed with the decision of the Assessing Officer and sustained the addition. However, he directed the Assessing Officer to reduce the income of the assessee to that extent in the subsequent assessment year if the assessee offers it or has offered it on the basis of project completion method. 37. The learned Authorised Representative submitted, the assessee is in the business of providing telecommunication equipment, service and solution including Electronic Private Automatic Branch Exchanges, Call Centre, data products, voice processing, low end EPABX, set-up of Backbone network for cellular operators, teleconferencing solutions, etc. He submitted, as per the revenue recognition followed by assessee earlier, all these activities/solutions were considered on standalone basis which in trade parlance is known as voice equipment solutions. However, w.e.f. 1st April 2004, the assessee changed its focus from voice equipment solutions to providing converged communication solutions as per the business strategy adopted by its Head Office in USA. He submitted, as per the new busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rent, as the levy of tax depends upon the specific criteria specified under the charging provision of the particular statute. Therefore, merely because the assessee has recognized sales under the Sales Tax Act or has paid service tax would not necessarily mean that income has also accrued under the Income Tax Act. Therefore, the taxability under the Sales Tax Act or Service Tax Act cannot be a reason to tax a particular item of income. In support, he relied upon the decision of the Hon'ble Supreme Court in CIT v/s Venkateshwara Hatcheries Pvt. Ltd., 103 ITR 503 (SC). The learned Authorised Representative submitted, merely because there was a loss of revenue in the year of change in revenue recognition policy, addition cannot be made, if the change was otherwise bona fide and the new method adopted is one of the recognized methods and followed consistently. In support of this contention, the learned Authorised Representative relied upon the following decisions:- i) CIT v/s Delta Plantation Ltd., 114 CTR 271 (Cal.); ii) CIT v/s Atul Products Ltd., 225 ITR 85 (Del.); iii) CIT v/s Kesoram Industries & Cotton Mills Ltd., 204 ITR 154 (Cal.); and iv) CIT v/s West Cost Pape ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... justify the change in revenue recognition policy followed earlier, the learned Authorised Representative submitted, since the assessee shifted its focus from voice equipment provider to complete communication solutions provider, it necessitated a change in revenue recognition policy as the same resulted in a more appropriate preparation or presentation of the financial statements by the assessee as per Accounting Standard-II. 40. The learned Departmental Representative strongly relying upon the observations of the Assessing Officer and learned Commissioner (Appeals) submitted, there is no reason for the assessee to only change the revenue recognition policy in this year though it has not changed the method of accounting. He submitted, there should be consistency in the approach of the assessee in the method of revenue recognition otherwise it will result in loss of revenue, which has happened in this case. He submitted, earlier the assessee was recognising revenue on the basis of invoices raised. It has discarded the method in the impugned assessment year and recognising revenue on the basis of completion of project that too depending on the completion certificate to be issued b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd on receiving completion certificate from the customers. Undisputedly, due to the change in revenue recognition policy as aforesaid, quite a substantial part of the revenue, which otherwise would have been shown in the impugned assessment year as per the revenue recognition policy consistently followed, has been deferred to subsequent assessment years which resulted in less profit shown of ₹ 22.83 crore. To justify the change in revenue recognition policy, it is the contention of the assessee that in the year under consideration it has shifted its focus from providing specific voice equipment solutions to converged communication solutions as per the business strategy adopted by its Head Office in USA. It is also submitted that the new revenue recognition policy adopted by the assessee is in tune with similar policy adopted by the Head Office and which is also followed by various other reputed organizations/entities. As per section 145(1) of the Act, income chargeable under the head profits and gains of business and profession has to be computed by employing either cash or mercantile system of accounting regularly employed by the assessee. Of course, sub-section (2) of secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s relevant for chargeability of assessee's income to tax in India, as, such income has to be computed in terms with the provisions of the Indian Income Tax Act and Accounting Standards notified therein. Further, as per the new revenue recognition policy revenue is to be recognized on completion of project and that too on receipt of completion certificate from the customer. It is relevant to observe, the assessee continues to raise bills/invoices on customers on standalone basis as it was consistently doing in the preceding assessment years. However, it is recognising revenue only in respect of completed projects, whereas, showing the rest of the revenue in the Balance Sheet as unearned revenue. In this process, the assessee though is following mercantile system of accounting but it is effectively deferring substantial part of its revenue and profit to future assessment years. Therefore, the onus is all the more on the assessee to justify the change in revenue recognition policy through cogent material and explanation. Though, the assessee may be correct in saying that provisions of Sales Tax and Service Tax laws cannot be imported to determine assessee's tax liability under the Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of assessee's case, the assessee has not only raised invoices relating to sales and services rendered but it has also paid Sales Tax/Service Tax on such sales/services. Therefore, the facts in assessee's case cannot be equated with the facts involved in Excel Industries Ltd. (supra). Since, the other decisions cited before us do not squarely fit in to the facts of assessee's case, we do not intend to deliberate much on such decisions. Therefore, on over all consideration of facts and material on record, we are of the view that the issue requires further examination by the Assessing Officer as the assessee needs to establish with cogent material and evidence that the change in revenue recognition policy is for bona fide reasons and necessary for carrying on its business activities in a more efficient manner. Further, the assessee has to establish that the change in revenue recognition policy is in conformity with the provisions contained under section 145(1) and (2) of the Act. With the aforesaid observations, we are inclined to restore the issue to the Assessing Officer for de novo adjudication after due and sufficient opportunity of being heard to the assessee. It is made clear, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in, ground raised is allowed. 58. In ground no.2, the assessee has challenged the disallowance of renovation expenditure. 59. This ground is similar to ground no.2 of assessee's appeal in ITA no.8674/Mum./2011. Following our decision therein, this ground is allowed. 60. The issue raised in ground no.3, is identical to ground no.5 of ITA no.8674/Mum./2011. Following our decision therein, we restore the issue to the Assessing Officer for de novo adjudication with similar direction. This ground is allowed for statistical purposes. 61. In the result, assessee's appeal is partly allowed. ITA no.7835/Mum./2011 Revenue's Appeal - A.Y. 2007-08 62. Grounds raised in this appeal by the Revenue are identical to the grounds raised in ITA no.7833/Mum./2011. Following our decision therein, these grounds are dismissed. 63. In the result, Revenue's appeal is dismissed. ITA no.5434/Mum./2012 Assessee's Appeal - A.Y. 2008-09 64. The issue raised in ground no.1, is with regard to disallowance of provision for expenditure. 65. This ground is identical to ground no.1 of ITA no.8674/Mum./ 2011. Following our decision therein, this ground is allowed. The additional ground having bec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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