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TMI Blog2020 (2) TMI 346X X X X Extracts X X X X X X X X Extracts X X X X ..... e unrealized portion of the bill in the year of realization as and when happened. Therefore, the action of the assessee does not cause any prejudice to the Revenue and is tax neutral. In such circumstances, when seen in combination, we are inclined to accept the claim of the assessee for non-taxability of unrealized income kept in the custody of the contractee as per the terms of the contract. For the reasons narrated, we set aside the order of the CIT(A) and direct the AO to delete the disallowance of expenditure Chargeability of interest u/s 234B - HELD THAT:- As relying on M/S ANAND VIHAR CONSTRUCTION PVT. LTD. AND VICE-VERSA. [ 2018 (11) TMI 1738 - ITAT RANCHI] AO is directed to delete the levy of interest under s.234B of the Act. - I.T.A. Nos. 30/Ran/2017, 48/Ran/2018 & 341/Ran/2018 - - - Dated:- 20-1-2020 - Shri Pradip Kumar Kedia, Accountant Member And Smt. Madhumita Roy, Judicial Member For the Appellant : Shri Manjeet Verma, A.R. For the Respondent : Shri Inderjeet Singh, Sr.CIT.D.R. ORDER PER PRADIP KUMAR KEDIA - AM: The captioned appeals directed at the instance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmining the taxable income. As per consistently following accounting policy, the assessee recognized income from the retention money withheld by the contractee in the year of realization by the assessee from the contractee. The assessee justified the aforesaid accounting policy on the premise that having regard to the business experience, refund of security deposits/retention money is solemnly obtained due to various clauses in the contract, such as, quality parameters, performances, guarantee, timely completion and liquidated damages clause and so on and so forth. It was further submitted that, at times, certain obligation arising from contracts, such as, continuous maintenance of assets for fixed period by the assessee is more costly against the amount of security deposits retained by the contractee. In such circumstances, the assessee may opt out and forego the security deposit to avoid fulfillment of such onerous contractual obligations. It was thus pointed out that the refund of security deposit retained as well as refund date, both, being uncertain and contingent, the accounting policy adopted by the assessee is fully justified to determine the true income emanating from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any to adopt any accounting policy. For adoption of accounting policy no format of accounting policy or set of accounting policy is available in the Companies Act, 1956 or Income Tax Act. 1961. Accounting standard issued by the Institute of chartered accountants of India is applicable on the company for the company accounting and for tax purpose Accounting Standard issued by the Central Government u/s. 145. For opting of accounting the appellant considered the Accounting Standard issued by the IC AI and adopted by Companies Act, 1956 and for tax purposes also considered the standard issued by the Central Government u/s.145 of Income Tax Act, 1961. It also followed the key governing policies Consistency, Materiality. True and fair, Prudence/ Conservatism, and Disclosure. The appellant relied on several case laws to buttress its position which includes :- a. [2012] 19 iaxmann.com 199 (Delhi [ reference not found]. b. Gappumal Kanahiyalal v CIT[196l[ 42 ITR 446 (Allahabad) for the proposition that if profits are to be computed in accordance with the method or accounting regularly employed by the assesses, then it is to the metho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant : - SI. No. Expenses Amount 1 Extension of Time 6,00,000/- 2 Kept in deposit 16,33,742/- 3 Retention monev deducted at source 39,65,171/- 4 Retention monev deducted at source 21,76,726/- 5 Security deposit 23,60,320/- [10.4] I find that the appellant claims that it was to make deposits of amounts. It is also the claim of the appellant that there were two types of deductions made : - a. from the receipts of the appellant certain deductions are made by the contractee (this includes the sums mentioned in rows I to 4) b. security deposit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mance Guarantee had to be deposited within 30 days of the Award of the Contract. The appellant has not submitted the terms and conditions of the NBCC contract stipulations as stated above. However, in another such appeal the document was submitted. The relevant clauses of the NBCC stipulation is extracted from there as they are the same for all contracts. This reads: ( relevant portions highlighted) AGREEMENT This agreement made the 171 day of February 2020 between National Projects Construction Corporation Limited having registered office at Raja House, 30-31, Nehru Place, New Delhi (herein after called the 'employer ) on the one part and A.P. Bariar and Sons, Ratu Road, PO Hehal, Ranchi, Jharkhand (herein after called the ' contractor' of the other part). 2. In consideration of the payment to be made by the Employer to the contractor as hereinafter mentioned, the contractor hereby covenants with the Emplover to execute the complete the works and remedv any defects therein conformity in all aspects with the provisions of the contract and undertaking routine maintenance for five years. 3. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utine Maintenance is the maintenance of roads for five years as specified in the Contract Data. Routine maintenance is the maintenance of roads for five years as specified in the Contract Data 17.1 The Contractor may commence execution of the Works on the Start Date and shall carry out the Works and Routine Maintenance in accordance with the Programme submitted by the Contractor, as updated with the approval of the Engineer, and complete them by the intended Completion Date. 3 2.1 (a) The Engineer shall give notice to the Contractor of any Defects before the end of the Defects Liability Period, which begins at Completion [and defined- Contract Data] and ends after five years. The Defects Liability Period shall be extended for as long as Defects remain to be corrected. (b) Every time notice of Defect/Defects is giyen, the Contractor shall correct the notified Defect/Defects within the duration \_of time specified by the Engineer's notice. 33.1 If the Contractor has not corrected a Defect pertaining to the Defect Liability Period under clause 32.1 and deficiencies in maintenance as per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the Contractor at the end of 2nd year after completion of the construction work and balance of the amount retained as security deposit is repaid to the contractor at the end of 3rd years after completion of the construction work subject to condition that the Engineer has certified that all defects notified by the Engineer to the Contractor before the end of period prescribed for repayment have been corrected. 43.4 The performance security equal to the five percent of the contract price and additional performance security for Routine Maintenance as detailed in Clause 26.4 of ITB is repaid to the Contractor when the period of five years fixed for Routine Maintenance is over and the Engineer has certified that the contractor has satisfactorily carried out the Routine Maintenance of the works. If the Routine Maintenance part of the contract is not carried out by the Contractor as per this contract, the Employer will be free Jo carry out Routine Maintenance work and the amount required for this work will be recovered from the amounts of the Contractor whatever is due. [10.8] Salient features of the contract are : - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his is a revenue item? [10.11] The appellant (let us assume) has cash in bank (which is an asset) and the appellant gets the FD for (Performance Guarantee and Security Deposit) made out of the same. In this case there is no change in the over all balance sheet as one form of asset (cash in bank) gets converted into a FD (another form of asset). Let us further assume that the appellant gets back the FD it encashes it and consequently the amount under cash in bank goes up. In this way both the entries square up each other. Now let us assume that 50% of the amount only is returned. In this case the cash in bank increases by 50% on encashment. The liability side is balanced by reduction of capital of equal amount (50%). In an extreme case (as is the assumption of the appellant) the FD is forefeited. In that case the entire amount is a loss which reduces the capital by the same amount. In other words the loss is on capital account and no effect of it would be on the profit and loss account. Accordingly the same cannot be allowed as its impact would be on the capital side. [10.12] Now let us assume that five friends join together to form a firm ' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nership of the money whether in point of fact or by a resulting trust be still in the taxpayer, then there is acquisition of a capital asset and not an expenditure of a revenue character. [10.14] Side by side with these principles, there are others which arc also fundamental. The income-tax law does not allow as expenses all the deductions a prudent trader would make in computing his profits. The money may be expended on grounds of commercial expediency but not of necessity. The test of necessity is whether the intention was to earn trading receipts or to avoid future recurring payments of a revenue character. Expenditure in this sense is equal to disbursement which, to use a homely phrase, means something which comes out of the trader's pocket. Thus, in finding out what profits there be. the normal accountancy practice may be to allow as expense any sum in respect of liabilities which have accrued over the accounting period and to deduct such sums from profits. But the income-tax laws do not take even, such allowance as legitimate for purposes of tax. A distinction is made between an actual liability in praesenti and a liability de futuro which, for the time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g into thousands of units of sophisticated goods, the past event of defects being detected in some of such items leads to a present obligation which results in an enterprise having no alternative but to settle that obligation. In the instant case, the assessee had been manufacturing and selling valve actuators. It was in the business from the assessment years 1983-84 onwards. Valve actuators are sophisticated goods. Over the years, the assessee had been manufacturing valve actuators in large numbers. The statistical data indicated that every year some of the manufactured actuators were found to be defective. The statistical data over the years also indicated that being sophisticated items no customer was prepared to buy valve actuators without a warranty. Therefore, warranty became an integral part of the sale price of the valve actuator(s). In other words, warranty stood attached to the sale price of the product. Therefore, warranty provision needed to be recognized because the assessee was an enterprise having a present obligation as a result of past events resulting in an outflow of resources. Lastly, a reliable estimate could be made of the amount of the obligation. In short, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore, the company should scrutinize the historical trend of warranty provisions made and the actual expenses incurred against it. On this basis, a sensible estimate should be made. The warrant)' provision for the products should be based on the estimate at the year end of future warranty expenses. Such estimates need reassessment every year. As one reaches close to the end of the warranty period, the probability that the warranty expenses will be incurred is considerably reduced and that should be reflected in the estimation made. Whether this should be done through a pro rata reversal or otherwise would require assessment of historical trend. If warranty provisions are based on experience and historical trend(s) and if the working is robust, then the question of reversal in [he subsequent two years, in the above example, may not arise in a significant way. Hence, on the facts and circumstances of the instant case, provision for warranty was rightly made by the assessee because it had incurred a present obligation as a result of past events. There was also an outflow of resources. A reliable estimate of the obligation was also possible. Therefore, the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he word 'expenditure ' is not defined in the Act. The word 'expenditure' is, therefore, required to be understood in the context in which it Li used. Section 37 enjoins that any expenditure not being expenditure of the nature described in sections 30 to 36 laid out or expended wholly and exclusively for the purpose of the business, should be allowed in computing the income chargeable under the head 'profits and gains of business'. In sections 30 to 36, the expression 'expenses incurred' as we!! as 'allowances and depreciation' have also been used. For example, depreciation and allowances are dealt with in section 32. Therefore, the Parliament has used the expression 'any expenditure' in section 37 to cover both. Therefore, the expression 'expenditure' as used in section 37 may, in the circumstances of a particular case, cover an amount which is really a 'loss', even though said amount has not gone out from the pocket of the assessee. [Para 13] The provisions of section 145 recognise the rights of a trader to adopt either the cash system or the mercantile system o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the following year's account in a continuing business are not brought to the charge as a matter of practice, though loss due to fall in the price below cost is allowed even though such, loss has not been realized actually. The said system of commercial accounting can be superseded or modified by legislative enactment. Under section 145(2), the Central Government is empowered to notify from time-to-time the Accounting Standards to be followed by any class of the assessees or in respect of any class of income. Accordingly, under section 209 of the Companies Act. mercantile system of accounting has been made mandatory for companies. In other words, Accounting Standard, which is continuously adopted by an assessee, can he superseded or modified by legislative intervention. However, but for such intervention or in cases falling under section 145(3), the method, of accounting undertaken by the assessee continuously is supreme. In the instant case, there was no finding given by the Assessing Officer on the correctness or completeness of the accounts of the assessee. Equally, there was no finding given by the Assessing Officer stating that the assessee had not complied with the Account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nties or similar contracts), the probability that an outflow will be required in settlement is determined by considering the said obligations as a whole. Under the matching concept, if revenue is recognized, the cost incurred to earn that revenue including warranty costs has to be fully provided for. [10.21] In the case of the appellant it is not that the appellant has provided for a certain sum (say 10% of the contract value) as a liability for future expenses on 'defect liability'. (It must be remembered that it is only with defect liability that the appellant does not get paid. For routine maintenance it gets paid as per the contract. Both the periods run for five years after the completion date. Moreover, the Performance Guarantee sum is to be paid within 30 days of the Award of the contract and therefore cannot be made out of any running bill as claimed by the appellant). If that was the case, as it satisfied the conditions laid down in Rotork Controls (supra) it would be allowed the liability. In the case of the appellant it has treated the FD as already been forefieted and hence, according to the appellant, an expense allowable u/s.37(l) of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and to the gains that may accrue to it; (iv) whether the assessee has been consistent and definite in making entries in the account books in respect of losses and gains; (v) whether The method adopted by (he assessee for making entries in the books both in respect of losses and gains as per nationally accepted Accounting Standards; (vi ) whether the system adopted by the assessee is fair and reasonable or is adopted only with a view to reduce the incidence of taxation. [10.24] The Apex Court in the above case has allowed for liabilities as expenses if certain conditions are fulfilled. However, the same has to be in respect of 'deductible expenses . The moot question is whether the booking of loss of the FD (its encashment for non fulfillment of the conditions of the contract) can be termed as an deductible expense'? As explained above the entry is not an ascertained liability the expense of which had not arisen but was likely to arise in the future. In the case of the appellant it was an item of : asset which the appellant booked as expense'. Therefore, the principles of Woodword (supra) would not be applicable. [10.25] Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be fairly estimable. If the pension itself be not payable as an obligation, and-if there be a possibility-that no such, payment may be necessary in the future, the whole of the amount cannot be deducted but only the present value of the future liability, if it can be estimated. As to the question whether [he payments made towards the policy were expenditure within section 10(xv) of the 1922 Act, Expenditure is equal to expense and expense is money laid out by calculation and intention though in many uses of the word this element may not be present. But the idea of spending in the sense of paying out or away money is the primarv meaning. Expenditure is thus what is paid our or away and is something which is gone irretrievably. To be an allowance within clause (xv) of section 10(2) of the 1922 Act. the money paid out or away must be (a) paid out wholly and exclusively for the purpose of the business and further (b) must not be (i) capital expenditure, (ii) personal expenses or (iii) an allowance of the character described in clauses (i) to (xiv). [10.26] In the above c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... system, it was entitled to show its real income by taking into account the market value of such investments in arriving at the real taxable income. On that basis, therefore, the Assessing Officer had taxed the assessee. [10.30] The appellant has also relied upon the case of Rotork Controls (supra). As discussed above the case law does not help the appellant. [10.31] Based on the above it is held that the amount of ₹ 1,07,35,959/-claimed as expenses was not an allowable expense and the same was rightly disallowed by the Ld. Assessing Officer. Ground of appeal is dismissed. [10.32] While on the subject it would also be important to consider the alternate contention of the appellant which is that; on the one hand the Ld. Assessing Officer did not allow the expenses on security deposit as expenses, she taxed the security deposit receipt shown by the appellant as income. It is the submission of the appellant that by following a consistent method of accounting and in the endeavor to reflect true profit of its business, it had offered the refund as income of the year. [10.33] No discuss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pendent upon the right to receive such income and the point of time when it becomes legally due to the assessee. It was pointed out that the assessee has consistently taken stand before the lower authorities that the right to receive on the money retained has not accrued to the assessee merely on raising invoice as per the contract value but is dependent on actual discharge of contractual obligation to the satisfaction of the contractee. The income thus included in the gross receipt to the extent of retention money is beset with contingency and is squarely dependent upon future happenings and events. The learned AR for the assessee thus submitted that there is no reason for the departure from the consistently followed accounting policy by mis appreciating the facts as well as settled law. The learned AR lastly added that such accounting practice not only reflects true income accrued in the hands of assessee but also is revenue neutral as the income towards retention money is duly offered for taxation in the respective years of receipt. 10. The learned DR, on the other hand, relied upon the orders of the lower authorities. 11. We have carefully considered th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such income retained actually arise or accrue to the assessee. The assessee acquires a right to receive the amount retained by the contractee only at a later stage subject to the fulfillment of terms of contract to the satisfaction of the contractee. As per the assessee, the gross sales/receipts are recorded as income of the assessee in the P L account including retention money/security deposit, KID etc. as deducted from the invoice raised to avoid mis-match of gross amount on which tax has been deducted by the contractee at applicable rates. However, the assessee has adopted the accounting procedure whereby retention money / security deposit etc. are debited/reduced separately from such gross income which encompasses retention money etc. while determining the taxable profits. The retention money/security deposits so withheld are later recognized as income in the respective years as and when the money so retained is actually realized by the Revenue. This method of accounting is stated to be followed for last many years to determine the true profits of the assessee. The Revenue, on the other hand, seeks to reject this accounting practice followed by the assessee on the ground that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as per the terms of the contract. For the reasons narrated, we set aside the order of the CIT(A) and direct the AO to delete the disallowance of expenditure of ₹ 1,07,35,959/- on this score. 13. The second issue pertains to chargeability of interest under s.234B of the Act amounting to ₹ 17,66,016/-. 14. We find that identical issue has come up before the co-ordinate bench of ITAT in ITO vs. M/s. Anand Vihar Construction Pvt. Ltd. ITA No. 335/Ran/2017 order dated 28.11.2018 wherein the issue was dealt with as under: 16. We have heard rival submissions and perused the material on record. Prima facie the disputed issue, being charging of interest u/s.234A 234B as envisaged by ld. AR, is covered by the decision of Hob'ble jurisdictional High Court in the case of Ajay Prakash Verma in ITA No.38 of 2010 reported in 2013(1) TMI 140. The Hon'ble Court in Para23 24 held as under :- 23. Learned counsel for the appellant submitted that it has been ordered by the AO that interest be charged as per rule. Interest can be levied under Section 234A and 234B of the Act. It is submitted that in view of the judgment of Full Bench ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 48/Ran/2018 AY 2013-14 18. The grounds of appeal raised by the assessee read as under: 1. ₹ 64,64,521/- was disallowed by assessing officer on the plea of being Contingent nature which is against the definition of contingent nature and bad in law without explaining as how the expenditure is Contingent when the assessee has followed accounting policy as prescribed by ICAI and the standard issued by central government U/s 145 of the Income Tax Act, consistently, year after year. The assessee has treated all the amounts deducted by the department at source as Bad debts. So the same should be deleted. 2. The Assessing Officer has wrongfully levied interest of ₹ 8,02,887/- on the amount of tax calculated on the above disallowance of expenses as stated at point no.1. 19. The grievance raised as per Ground No.1 is identical to first grievance of the assessee in ITA No.30/Ran/20117 concerned AY 2012-13. In parity with the conclusions drawn therein, the aforesaid issue is concluded in favour of assessee. Ground No.1 is allowed. 20. Ground No.2 is also adjudicated in favour of assessee in terms of par ..... X X X X Extracts X X X X X X X X Extracts X X X X
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