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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 ..... concerning AY 2012-13. ITA No. 30/Ran/2017-AY-2012-13 4. As per the grounds of appeal, the assessee has raised two fold grievances (i) additions made by the AO on account of disallowance of expenditure of Rs. 1,07,35,959/- and (ii) chargeability of interest under s.234B on assessed income amounting to Rs. 17,66,016/- instead of chargeability of interest on returned income. 5. Briefly stated, the assessee is engaged in the business of works contract in the nature of civil contract. The return of income filed by the assessee declaring total income at Rs. 1,23,66,979/- was subjected to scrutiny assessment. In the course of assessment, the AO inter alia confronted the assessee as to why expenditure debited to the tune of Rs. 1,07,35,959/- towards retention money/security deposited KID, EOT etc. which resulted in reduction of taxable income should not be disallowed. In response, the assessee filed a detailed reply to submit that as per the accounting policy adopted by the assessee, an amount retained/deducted by the contractee to ensure satisfactory fulfillment of obligations arising from contract entered into by the assessee with the contractee is reduced from the gross receipt/tur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ground No.4 of the appellant is regarding the addition of Rs. 1,07,35,959/- on the ground of expenditure that it was of contingent nature. In this regard the appellant submitted that Rs. 1,07,35,959/- Dr. in profit and loss account as an expenditure (security deposit and other deduction etc.) and Rs. 1,01,29,020/- Cr. in profit and loss account as an income (refund of Security deposit and other deduction) was confirmed figure/actual amount and same has been deducted or refunded by the deductor/contractee. The appellant claimed that the same was also verified by the Ld. Assessing Officer during the course of Scrutiny proceeding us.143(3). This figure/amount are not depending on the outcome of an uncertain future event such as a court case. [10.1] The appellant submitted that the appellant consistently followed the accounting policy since beginning in which "any deduction except income tax which is refundable or not in future same has been treated as an expenditure and if same has been received/recovered by the assessee in relation to any year treated as an income". It is the submission of the appellant that it is the privilege/right of a company to adopt any accounting policy. For ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt (P). Ltd [2008] 168taxman95(SC). [10.2] The Ld. Assessing Officer in this regard has stated that the appellant had debited a sum of Tl,07,35,959/- in the Profit & Loss Account. The Ld. Assessing Officer held that the said sums were contigent in nature and therefore did not constitute an expenditure which could be allowed under the Income Tax Act. 1961. The Ld. Assessing Officer further held that there was no accrual of liability only an estimate was made. Reliance was placed on the following judgements of the Hon'ble Supreme Court. 1. M/s. Tuticorin Alkali Chemicals & Fertilisers Ltd. Vs. CIT (SC) 227 ITR 172 2. Sutlej Cotton Mills Ltd. Vs. CIT (SC) 116 ITR 1 3. CIT Vs. Biritish Paints India Ltd. (SC) 188 ITR 144 4. CIT Vs. UP State Industrial Development Corporation (SC) 225 ITR 705 [10.3] I have considered the submissions of the appellant and have perused the assessment order. The following amounts were debited by the appellant : - 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to be read in conjunction with the aforesaid contract documents. The contract shall be duly performed by the Contractor strictly and faithfully with the terms of the contract" [10.7] It is clear that the Performance 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or 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 clause 32.2 of these Conditions of Contract, to the satisfaction of the Engineer, within the time specified in the Engineer's notice, the Engineer will assess the cost of having the Defect or deficiency corrected, and the Contra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 : - a. that the contract includes defect liability and repairs and maintenance. b. both the defect liability and repairs maintenance begins at the end of the completion of the work and continues for a period of five years thereafter. c. the contractor carries on defect rectifying work and routine maintenance for five years from the completion date. d. the defects in the execution of contract would be correct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly 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 'A' each contributing ^10 lakhs. As the first instance the balance sheet would show Rs. 50 lakhs as partners capital on the liability side and Rs. 50 lakhs in bank as an asset. Now assume that the firm is awarded a contract of Rs. 5 crs. for which it has to make a FD of Rs. 25 lakhs (@5%) and place it at the disposal of the contractee. With this the balance sheet would have two entries one. cash in bank of Rs. 25 lakhs and the other Rs. 25 lakhs as FD (both as asset) balanced by the capital of Rs. 50 lakhs on the liability side. Now, (shorn of all complexities of the balance sheet) as per the app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 being, is only contingent. The former is deductible but not the latter. [10.15] In United Commercial Bank Ltd. v CIT [1999] 240 ITR 355 (SC) it was held that for the purpose of income-tax whichever method is adopted by the assessee. a true picture of the profits and gains, that is to say, the real income is to be disclosed. For determining the real income, the entries in a balance sheet required to be maintained in the statutory form may not be decisive or conclusive. In such cases, it is open to the ITO as well as the assessee to point out the true and proper income while submitting the income-tax return. [10.16] In CIT v Rotork Controls India Ltd. [2009] 314 ITR 62 (SC) it was held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thout 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, all the three conditions for recognition of a provision were satisfied in the instant case. [Para 12] In the instant case, one was concerned with product warranties. To give an example of product warranties, a company dealing in computers gives warranty for a period of 36 months from the date of supply. The said company considers following options : (a) account for warranty expense in the year in which it is incurred; (b) it makes a provision for warranty only when the customer makes a claim; and (c) it provides for warranty at 2 per cent of turnover of the company based on past experience (historical trend). The first option is unsustainable since it would tantamount to accounting for warranty expenses on cash basis, which is prohibited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessee had incurred a liability during the relevant assessment years and it was entitled to deduction under section 37. Therefore, all the three conditions for recognizing a liability for the purpose of provisioning stood satisfied in the instant case. There are four important aspects of provisioning, viz., provisioning which relates to present obligation: it arises out of obligating events: it involves outflow of resources; and lastly, it involves reliable estimation of an obligation- Keeping in mind all the four aspects, the High Court should not to have interfered with the decision of the Tribunal in the instant case. [Para I3] From analysis of the various decision of the Supreme Court, in which a similar issue was decided, the principle which emerges is that if the hist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 of accounting. The quantum of allowances permitted to be deducted under diverse heads under sections 30 to 43C from the income, profits and gains of a business would differ according to the system adopted. This is made dear by defining the word 'paid' in section 43(2), which is used in several sections from sections 30 to 43C. as meaning actually paid or incurred according to the method of accounting upon the basis of which profits or gains are computed under section 28/29. That is why, in deciding the question, as to whether the word 'expenditure' in section 37(1) includes the word 'loss', one has to read section 37(1) with sections 28, 29 and 145(1). Accounts regularly maintained in the course of business are to be taken as correct, unless there are strong and sufficient reasons to indicate that they are unreliable. Under section 28(i). one needs to decide the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inuously 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 Accounting Standards, [Para 14] [10.19] In Calcutta Company Ltd v CTT [1959] 37 ITR 1 (SC) the apex court held that there was no doubt that the undertaking to carry out the developments within six months from the dates of the deeds of sale was incorporated therein and that undertaking was unconditional, the assessee appellant binding itself absolutely to carry out the same. It was not dependent on any condition being fulfilled or the happening of any event, the only condition being that it was to be carried out within six months which in view of the fact that the time was not of the essence of (he contract meant a reasonable time. Whatever might be considered a reasonable time under the circumstances of the case, the setting up of that time limit did not prescribe any condition for the carrying out of that undertaking and the undertaking was absolute in terms. If that undertaking imported any liability on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity. 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. This also does not satisfy the 'matching principles' as stated in the case of Rotork Controls (supra) as "'Under the matching concept, if revenue is recognized, the cost incurred 10 earn that revenue Including warranty costs has to be fully provided far. " In the case of the appellant the revenue recognised does not match with the funds available with the appellant out of which FD was made. The source of revenue and the FD are two disparate items. one on the revenue side and the other on the capital side. [10.22] In the case of Sutlej Cotton Mills Ltd. v CD [1979] 116 ITR 1 (SC) the ratio was that the way in which entries are made by an assessee in his books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. The assessee may, by making entries which are not in conformity with the proper accountancy principles, conceal profit or show loss and the entries made by him cannot, therefore, be regarded as conclusive one way or the other. It was held th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pense'. Therefore, the principles of Woodword (supra) would not be applicable. [10.25] Second case law relied upon by the appellant is that of Indian Mollases Co. Ltd. v CIT [1959] 37 ITR 66 (SC). In this case h was held that: - "There are certain principles of a fundamental character. The first is that capital expenditure cannot be attributed to revenue and vice versa. Secondly, it is equally clear that a payment in a lump sum does not necessarily make the payment a capital one. It may still possess revenue character in the same way as a series of payments. Thirdly, if there is a lump sum payment but there is no possibility of a recurrence, it is probably of a capital nature, though this is by no means a decisive test. Fourthly, if the payment of a lump sum closes the liability to make repeated and periodic payments in the future, it may generally be regarded as a payment of a revenue character and lastly, if the ownership 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. Side by side with these principles, there are others which are also fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lation 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 primary meaning. "Expenditure" is thus what is "paid out 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.. The case of the appellant with regard to the booking of anticipated loss of money of the FD is not revenue in nature and therefore cannot be said to be an allowable liability. [10.27] In the case of MP Financial Corporation v CTT [1987] 165 ITR 765 (MP) the ruling was that "As regards the deduction of the amount of discount on the bonds, the same principles as are applicable in the case of issue of debentures at discount, would be attracted in the case of issue of bonds at a discount. The amount of discount in effect, represents deferred interest- Looked at as such, a proportionate amount of discount can be written off out of revenue every year, during the period the bonds would rema ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eads: 'Other deductions' Rs. 6,13,703/- and 'Security Deposit Refund' Rs. 95,15,317/- totalling Rs. 1,01,29,020/-. The question is can a deduction be allowed since the appellant had offered the refund of deposit of income. As discussed above, in my view the payment of security deposit was made out of the funds (capital) available with the appellant and therefore, was not an allowable expenses of business. Similarly, the refunds now offered for tax. as a necessary corolloary, would also not constitute income. However, as the apex court has held in the case of Goetze (India) Ltd. v CIT [2006] 283 ITR 306 any claim of deduction (in this case income offered) has to be made by the assessee by filing a revised return. Accordingly, in view of the judgment of the apex court no relief can be granted to the appellant. This ground of the appellant is dismissed." 8. Further aggrieved by the denial of relief claimed towards taxability of retention money etc. on receipt basis, the assessee preferred appeal before the Tribunal. 9. The learned AR for the assessee broadly reiterated various submissions made before the lower authorities and claimed that the expenditure claimed in the P&L account t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ien to ensure complete execution of terms of contract. It is the case of assessee that income on such retention money is accrued on complete discharge of contractual obligations to the satisfaction of contractee and thus chargeable to tax only at the time of actual realization. As stated, it is the ordinary practice in such business of civil contract that contractee deducts certain percentage of gross bill raised by the assessee towards retention money/security deposits as per terms of contract. The amount so deducted is withheld by the contractee and is realized to the assessee only upon the contractee being satisfied about the completion of the work entrusted to contractor (assessee herein) and other terms mentioned in the contract are satisfied by the contractor. As further stated, the retention money /security deposit so withheld by the contractee is debited in the P&L account and deducted from the gross receipts. Such receipt is treated as income to the assessee only on actual realization thereof on fulfillment of terms of contract as per the accounting policy consistency followed by the assessee. As pointed out, in the civil contract business, certain portion of the money out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of business. 12. We find inherent fallacy in the approach adopted by the Revenue while disturbing the income declared by the assessee. The assessee herein seeks to record the income when it comes into existence in the relevant previous year. The real test for taxability of income is that if the amount is to be taxable as income, the basic conception to be kept in view is that the 'right to receive' the income must come into existence in the relevant previous year. The income accrues when it becomes legally due to the assessee. The date of actual receipt, of course, is not determinative for taxability of income under mercantile system of accounting. Mere raising of invoice on the contractee would not ipso facto tantamount to accrual of income. The assessee in the instant case, claims that a certain portion of bill has been kept as a lien in the custody of the contractee till the fulfillment of the conditions specified in the contract. Naturally, such retention money would accrue only where the terms of the contract stands fulfilled. In the absence of its accrual, the income cannot be taxed under mercantile system of accounting on a hypothetical basis. We find considerable force in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missed by the Hon'ble Supreme Court on merits vide order dated 01.08.2000 by saying that there is no merit in the appeal. 24. Learned counsel for the revenue could not dispute this legal position. Therefore, so far as question of law involved in this appeal that whether the interest could have been levied against the assessed income of the assessee under Sections 234A and 234B is concerned, in view of the Full Bench judgment of Ranchi Bench of Patna High Court delivered in the case of Smt. Tej. Kumari, the revenue can levy the interest only on the total income declared in the returns and not on the income assessed and determined by the AO to that extent. The orders passed by the authorities below are accordingly modified and interest shall be chargeable in the light of the Full Bench judgment, referred above." 17. Ld. AR also placed reliance on the decision of coordinate bench of the Tribunal in the case of Shri Girdhari Lal Sharma vs. ITO, Ward-1(4), Jamshedpur in ITA No. 31/Ran/2013 by an order dated 07.05.2012 in para No. 6 relying upon the above decision of the Hon'ble Jharkhand High Court held :- "We accordingly following the above decision, direct the Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpletion of contract. So, addition made by assessing officer Rs. 20596503/- illegal or bad in law, so, addition made by assessing should be deleted.
2. Assessee Dr. in profit and loss account under the heads retention money/ security deposit Rs. 16193579/-and Rs. Cr. In profit and loss account Rs. 4766708/-,But assessing officer added Rs. 20596503/-, Difference of Dr. Rs. 21244818/- and Cr. Rs. 648315/- Of retention money in P & L account related to A Y 11-12. So, Rs. 9169632/- excess added by the assessing officer. So, addition made by assessing officer is not correct, so should be deleted."
23. 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.
24. Ground No.2 is also adjudicated in favour of assessee in terms of para 13-15 (supra).
25. In the result, Appeal of the assessee in ITA No. 341/Ran/2018 for AY 2010-11 is allowed.
26. In the combined result, all the appeals of the assessee are allowed.
This Order pronounced in Open Court on 20/01/2020 X X X X Extracts X X X X X X X X Extracts X X X X
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