9911796707
TMI Blog2020 (7) TMI 189X 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 reversal of the provision in the subsequent year had not been offered to tax by the assessee. On a perusal of the records, we find that the provision for costs on completed contracts made by the assessee are based on identified and ascertained present liabilities on the basis of technical assessments and projections of the project managers, who are experts in their field. Practice of providing for all known liabilities on an estimate basis by the assessee is in accordance with the Accounting Standard-1 issued u/s 145 vide CBDT Notification No. S.O 69(E), dated 25.01.1996, as per which provisions should be 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. Provision made by the assessee is in conformity with Accounting Standard-7 issued by the ICAI. Further, we find that the assessee consistently by way of a regular method of accounting had been making such provision for costs on completed contracts, which would be reviewed by it each and every year and were immediately written back if the same were not required. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing income under the project has not been offered by the assessee in subsequent years, following the same method of accounting. Simply because progress billing was more than the stage of percentage of completion, the same, in itself, could not be the basis to usurp the consistent method of accounting being followed by the assessee. Therefore, the additions made by the revenue, under the circumstances, could not be sustained. Nature of expenditure - computer software charges - revenue or capital expenditure - A.O treated treated the same as a capital expenditure and allowed depreciation @60% on such capitalized value - HELD THAT:- As decided in own case [ 2019 (4) TMI 873 - ITAT MUMBAI] 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. Levy of interest u/s 234B - HELD THAT:- As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome tax (Appeals) erred in not considering that the appellant was following a regular method of accounting, sanctified by Accounting Standards. 9. The learned Commissioner of Income tax (Appeals) failed to consider that the addition made of ₹ 22,19,88,173/- 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 recognised by the Appellant were higher than the billings done during the year. 11. The learned Commissioner of Income tax (Appeals) erred in not deleting excess of progress billings over sales recognized in respect of contracts accounted under the Percentage of Completion Method amounting to ₹ 15,43,26,923/- which has been disallowed in the immediately preceding assessment year and which were offered to tax as sales in the current year. 12. The learned Commissioner of Income tax (Appeals) erred in not allowing deduction (following own method) in respect of contracts accounted under the Completed Contract Method and which were incomplet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tentions advanced by the assessee upheld the aforementioned additions/disallowances. 4. The assessee being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. We have heard the authorised representatives for both the parties, perused the orders of the lower authorities and the material available on record and also the judicial pronouncements relied upon by them. As multiple issues are involved in the present appeal, therefore, the same are being taken up in a chronological manner, as under: ( A). DISALLOWANCE OF PROVISION FOR COSTS INCURRED ON COMPLETED CONTRACTS : ₹ 3,67,61,993 5. In the course of the assessment proceedings it was observed by the A.O that the assessee had made a provision for cost on completed contracts of ₹ 3,67,61,993/-. On being called upon to justify the same, the assessee in support thereof filed an exhaustive reply dated 11.11.2010. It was the claim of the assessee that it was engaged in the business of engineering consultancy and contract execution including Lumpsum Turnkey Projects [for short LSTK ]. Further, it was submitted that it was following the Percentage of Completion (POC) method for contracts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , that since the profit on the aforementioned projects would be recognised upon commissioning of the plant i.e much before its final acceptance by the client, therefore, it was but essential for the assessee to provide for estimated costs which were likely to be incurred during the period falling between commissioning and the final acceptance of the plant by the client. As claimed by the assessee, the said costs would take within its sweep project specific travelling costs of the engineers, testing costs, supplies of replacement spares, replacement costs, modification costs etc. Also, as stated by the assessee, it was necessary to make provisions for additional costs if sustainable production capability was not demonstrated within the guaranteed period. 5.2 As regards the Cost plus fee contracts , it was submitted by the assessee that the revenue was recognized upon mechanical completion of the plant. Mechanical completion was stated to be the stage at which the plant after mechanical completion would be ready for acceptance of feed stock leading to production of guaranteed products. It was explained by the assessee that the provisions were made mainly for re-engineering servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtered Accountants of India (ICAI). However, the CIT(A) after deliberating on the contentions advanced by the assessee was not persuaded to subscribe to the same. It was observed by the CIT(A) that the Tribunal vide its order passed in the assessee s own case for A.Y 2002-03, dated 10.09.2008, after relying on the judgments of the Hon ble Supreme Court in the case of Metal Box Company of India Ltd. Vs. Their Workmen (1969) 73 ITR 53 (SC) and Bharat Earth Movers Vs. CIT (2000) 245 ITR 428 (SC), had observed, that incurring of liability should be certain during the year and should be capable of estimation with reasonable certainty. In other words, the requirements of the principle to be followed for making of a provision were viz. (a). the certainty of the arising of the liability; and (b). on quantum aspect, the estimation must be based on the reasonableness and arbitrariness should be avoided in such estimation. It was also observed, that though the assessee had claimed that while making quantification for provisions, Project manager, Lead Engineers, Commercial Manager and Finance Manager jointly estimated the cost of provisions, however, no such evidence in support of such clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ld. D.R relied on the orders of the lower authorities. It was submitted by the ld. D.R that as the incurring of liability pertaining to the assessee s claim of provisions for costs incurred on completed contracts was neither certain nor capable of estimation with reasonable certainty, therefore, both the lower authorities after exhaustive deliberations on the said aspect had disallowed the same. However, it was fairly admitted by the ld. D.R that the aforesaid issue was squarely covered by the order of the Tribunal in the assesse s own case for the immediately preceding year i.e A.Y 2006-07. 5.7. We have given a thoughtful consideration to the aforesaid issue in the backdrop of the contentions advanced by the authorised representatives for both the parties, and have also perused the material available on record and the judicial pronouncements relied upon by them. On a perusal of the records, we find, that the present issue arose for the first time during A.Y 2001-02 which had reached upto the level of this Tribunal which had allowed the claim in its entirety, on the ground, that the liability was identified, determined and ascertained on the basis of technical assessment. As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assesses appeal on the issue partly allowed 3. 2003-04 ITA 6510/Mum/2009 30/09/2011 Assesses appeal on the issue partly allowed 4. 2004-05 ITA 6511/Mum/2009 08/08/2012 Assesses appeal on the issue partly allowed 5. 2005-06 ITA 1690/Mum/2012 04/07/2014 Assesses appeal on the issue allowed The observation/conclusion in the latest order of the Tribunal for A.Y 2005-06 could be extracted in the following manner :- 2.5. We have heard the rival submissions and perused the material before us. In our opinion PCCC is based on identified liability, 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, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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).In short, the assessee was following 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 mere guess work or made out of thin air. Another undisputed fact is that the assessee has incurred actual expenditure in subsequent years against these estimations which itself prove that the assessee had certain liability under these contracts. It is altogether different aspect that the matter of estimation may not be accurate one or commensurate with actual expenditure incurred by the assessee in fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the stage of commissioning of the plant and final acceptance of the same by its customer. As such, the assessed had to carry out estimation of such future expenditure and create a provision for cost on the completed projects. As is discernible from the orders of the lower authorities the aforesaid provision had been disallowed by them primarily for the reason that they were not made on a scientific basis and the estimation of the same was not backed by supporting documentary evidence. Also, it was observed by the lower authorities that a major portion of the provision was reversed in the subsequent years. In our considered view the aforesaid reasoning of the lower authorities would not justify disallowance of the provision made by the assessee. It is not the case of the revenue that the reversal of the provision in the subsequent year had not been offered to tax by the assessee. On a perusal of the records, we find that the provision for costs on completed contracts made by the assessee are based on identified and ascertained present liabilities on the basis of technical assessments and projections of the project managers, who are experts in their field. Apart from that, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... say March 31, 2007) would be identified. Further, depending upon the expected work to be done for the Project, the project implementation team would estimate the expected costs which were yet to be incurred after considering the engineering hours and supplies etc. Accordingly, the total estimated cost would therein be arrived i.e actual cost incurred till date (+) estimated cost yet to be incurred for completing the project, which would then be compared against the Contract revenue i.e the total contract value agreed by the assessee with its client. As the assessee could not bill the client beyond the contract value, therefore, the cost overruns in excess of the contract value which cannot be recovered from the client being in the nature of a crystallized, identified, determined and ascertained loss would therein be immediately provided in the accounts. It was the claim of the assessee, that providing for the cost overruns on incomplete contracts was as per the mandatory requirements of AS-7(revised) Para 35, which provided that if it is probable, for a particular contract, that the contract cost would exceed the contract revenue, the expected loss should be recognized as an ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and nothing on record suggest that there was any change in method of accounting being followed by the assessee. This being the case, the impugned additions could not be sustained. We order so. Ground No. 5 of the appeal stands allowed. 6.3 We have perused the aforesaid observations of the Tribunal in the assessee s own case for A.Y 2006-07, ITA 1691/Mum/2019, dated 09.04.2019, and find that the facts therein involved in context of the issue under consideration are in parity with those for the year under consideration. Insofar reliance placed by the CIT(A) on the order of the Tribunal for A.Y 2003-04, ITA No. 6510/Mum/2009, dated 30.09.2011 is concerned, we find that though the Tribunal had approved the claim of the assessee in principle, but then, it was only on account of absence of the relevant information that part relief was allowed. As for the appeal of the assessee against the order of the Tribunal for A.Y 2003-04, we find that the same had been admitted by the Hon ble High Court. 6.4 Further, on a perusal of the orders of the lower authorities, we find, that the assessee had furnished before them complete project wise estimation for the year under consideration, an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e contract revenue was matched with the contract costs incurred in reaching the stage of completion, resulting in the reporting of revenue, expense and profit which could be attributed to the proportion of work completed. It was the claim of the assessee that AS-7 contemplated recognition of all expenditure pertaining to the stage of construction reached at the end of the financial year, and the recognition of revenue by applying the percentage of work completed to the total contract value. It was further submitted by the assesee that the profit figure for the period would be the difference between the revenue so recognized and the costs incurred for completing the project up to that stage. Further, it was submitted by the assessee that billing pattern would not have any effect on the revenue recognition unless it represented the actual work completed. As regards the amount of billing in excess or short of revenue recognized, it was the claim of the assesee that the same would be reflected as an advance received (current liability) or amounts receivable (current asset), as the case may be. In sum and substance, it was the claim of the assessee that the stage of completion of a co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be ascertained on the basis of the assesse s method, then the income must be computed upon such basis and in such manner as the A.O may determine. On the basis of his aforesaid observations the A.O made an addition of the amount received by the assessee against Progress Billings on incomplete contracts (reduced by such amounts already received till 31.03.2006 and taxed as income in A.Y 2006-07) amounting to ₹ 22,19,88,173/- to the returned income. 8.1 Aggrieved, the assessee assailed the aforesaid addition in respect of alleged understatement of profits in respect of the projects accounted under the POC Method in appeal before the CIT(A). However, the CIT(A) observed that an identical addition that was made by the A.O in the assesse own case for the immediately preceding year i.e A.Y 2006-07 was on appeal upheld by him, vide his order dated 16.12.2011. Observing, that the facts and the issue involved in the case of the assessee for the year under consideration remained the same, the CIT(A) following his own order for A.Y 2006-07 upheld the addition of ₹ 22,19,88,173/- made by the A.O. 8.2 The assessee being aggrieved with the order of the CIT(a) has carried the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the assessee. Therefore, the additions made by the revenue, under the circumstances, could not be sustained. We order so. Accordingly, ground Nos. 7 to 11 of assessee s appeal stands allowed. As observed by us hereinabove, the issue involved in the present appeal remains the same as was there before the Tribunal in the assesse s own case for the immediately preceding year i.e A.Y 2006-07. At this stage, it would be relevant to point out that the CIT(A) while upholding the addition in question had not given any independent finding and had merely relied upon his order passed while disposing off the appeal of the assessee for the immediately preceding year i.e A.Y 2006-07. We have perused the order passed by the Tribunal while disposing off the appeal of the assessee for A.Y 2006-07 wherein identical facts were involved, and finding ourselves to be in agreement with the view therein taken, respectfully follow the same. Resultantly, the order passed by the CIT(A) is set aside and the addition of ₹ 22,19,88,173/- made by the A.O is vacated. Grounds No. 7 to 10 are allowed. 9. The Grounds of appeal Nos. 11 to 13 as per the concession of the ld A.R are dismissed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A.Y 2006-07 in ITA No. 1691/Mum/2012, dated 09.04.2019. The Tribunal in its aforesaid order had set aside the order of the CIT(A) and vacated the disallowance of computer software charges made by the A.O, observing as under: 2.7.2 The Ld. Sr. Counsel submitted that these expenditures were in the nature of annual payments for maintenance of various software being used by the assessee and therefore, the same were revenue in nature. Our attention is drawn to the fact that similar issue in earlier years stood squarely covered in assessee s favor by the orders of the Tribunal. Further, the appeal filed by the revenue against the order of the Tribunal for AY 2004-05 was also dismissed by Hon ble Bombay High Court. 2.7.3 Upon careful consideration, 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall give a date for pronouncement. In a case where no date of pronouncement is given by the Bench, every endeavour shall be made by the Bench to pronounce the order within 60 days from the date on which the hearing of the case was concluded but, where it is not practicable so to do on the ground of exceptional and extraordinary circumstances of the case, the Bench shall fix a future day for pronouncement of the order, and such date shall not ordinarily be a day beyond a further period of 30 days and due notice of the day so fixed shall be given on the notice board. As such, ordinarily the order on an appeal should be pronounced by the bench within no more than 90 days from the date of concluding the hearing. It is, however, important to note that the expression ordinarily has been used in the said rule itself. This rule was inserted as a result of directions of Hon ble High Court in the case of Shivsagar Veg Restaurant Vs ACIT [(2009) 317 ITR 433 (Bom)] wherein it was inter alia, observed as under: We, therefore, direct the President of the Appellate Tribunal to frame and lay down the guidelines in the similar lines as are laid down by the Apex Court in the case of Anil R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon ble Bombay High Court, in an order dated 15th April 2020, has, besides extending the validity of all interim orders, has also observed that, It is also clarified that while calculating time for disposal of matters made time-bound by this Court, the period for which the order dated 26th March 2020 continues to operate shall be added and time shall stand extended accordingly , and also observed that arrangement continued by an order dated 26th March 2020 till 30th April 2020 shall continue further till 15th June 2020 . It has been an unprecedented situation not only in India but all over the world. Government of India has, vide notification dated 19th February 2020, taken the stand that, the coronavirus should be considered a case of natural calamity and FMC (i.e. force majeure clause) maybe invoked, wherever considered appropriate, following the due procedure . The term force majeure has been defined in Black s Law Dictionary, as an event or effect that can be neither anticipated nor controlled When such is the position, and it is officially so notified by the Government of India and the Covid-19 epidemic has been notified as a disaster under the National Disaster Manage ..... X X X X Extracts X X X X X X X X Extracts X X X X
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