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TMI Blog2021 (3) TMI 672X X X X Extracts X X X X X X X X Extracts X X X X ..... established before us. Nothing on record suggest that remaining 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. Addition on account of under-statement of profits - AO rejected the completed contract method of accounts followed by the assessee - HELD THAT:- As decided in own case [ 2019 (4) TMI 873 - ITAT MUMBAI] we find that the assessee has accumulated cost as well as revenue under these projects in the Balance Sheet by following completed contract method. The revenue has accepted such accumulation during AYs 2004-05 2005-06 and this is the third year of accumulation under the projects. It is not the case of the revenue that the income under these projects have not been offered to tax in subsequent years. No case of revenue leakage has been established before us. Therefore, the action of revenue in dist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of ₹ 39,02,18,840/-. The assessee is engaged in the business of supply of processes; designing, construction and commissioning of complete plants for chemical fertilizers, petrochemicals, refining and other related industries. At the start of hearing, the Ld. counsel for the assessee submits that the assessee would not like to press the 5th and 10th to 14th grounds of appeal. Having considered the submission of the assessee, the above grounds of appeal are dismissed as not pressed. 3. The 1st to 4th ground of appeal, reproduced below, are discussed together, as they address a common issue: 1 The Ld. CIT(A) erred in confirming taxation of an amount of ₹ 63,09,36,232/- as income, in respect of contracts accounted under Percentage of Completion (POC) Method. 2 The Ld. CIT(A) failed to consider that the appellant was following a regular method of accounting sanctified by Accounting Standards. 3 The Ld. CIT(A) failed to consider that the addition made of ₹ 63,09,36,232/- has resulted in taxing gross receipts, without allowing deduction for expenditure required to earn such receipts. 4 Without prejudice to ground Nos 1 to 3 above, the Ld. CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. In appeal, the Ld. CIT(A) followed the order of his predecessor-in-office for the earlier assessment year 2006-07 and confirmed the above disallowance made by the AO. 6. Before us, the Ld. counsel for the assessee submits that the issues raised in the above grounds of appeal are decided in favour of the assessee by the order of the Tribunal- dated 09.04.2019 in assessee s own case for AY 2006- 07; dated 08.06.2020 in assessee s own case for AY 2007-08 and dated 07.08.2020 in assessee s own case for AY 2009-10. The Ld. Departmental Representative (DR) supports the order passed by the AO, which is confirmed by the Ld. CIT(A). 7. We have heard the rival submissions and perused the relevant materials on record. The reasons for our decisions are given below. We find that similar issue arose before the Tribunal in assessee s own case for AYs 2006-07, 2007-08 and 2009-10. We may refer here to the relevant paragraphs of the order of the Tribunal for AY 2006-07 (ITA No. 1691/Mum/2012) : 2.5 Ground Nos. 7 to 11: Income in respect of Contracts Accounted under Percentage of Completion Method. 2.5.1 By way of these grounds, the assessee is contesting the addition of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecognized on the basis of stage of percentage of completion of contracts. To determine the percentage of completion, the following formula was adopted: - Total Cost incurred till the end of the accounting year Budgeted Cost It was explained that the revenues were recognized by applying this fraction to the contract value. However, to ensure that the project was sufficiently funded, the assessee raised progress billings from time to time based on pre-decided milestones. These bills were raised only for the purpose of meeting funding requirements and had nothing to do with determination of extent of completion of contract or recognition of revenue since recognition was done the basis of formula mentioned above so as to ensure matching cost and revenues. Our attention is drawn to the explanation furnished by the assessee before first appellate authority to justify progress billings under the projects. The Ld. Sr. Counsel further submitted that the objective of progress billing was to ensure working capital availability and it was nothing but advances from customers and therefore, could not be regarded as assessee's income. Reliance has been placed on the decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f accounting was being followed by the assessee since AY 2004-05 onwards. 2.5.5 Upon careful consideration, the undisputed position that emerges is that the assessee is following consistent method of accounting to recognize the revenue under these contracts. The percentage of completion of the project has been worked out as per total cost incurred on the project to date vis- -vis total budgeted cost and that fraction is applied to the contract value for the purpose of revenue recognition. Similar formulae have been adopted by the assessee in preceding two years which has been accepted by the revenue. No case of revenue leakage has been established before us. Nothing on record suggest that remaining 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. We order so. Accordingly, ground Nos. 7 to 11 of assessee' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss of Progress Billing over Costs incurred as on 31.03.2006, already taxed as income in AY 2006-07 (opening balance) 39,259,180 Total 56,202,457 The AO rejected the completed contract method of accounts followed by the assessee and made an addition of ₹ 5,62,02,457/- treating it as on account of under-statement of profits. 10. In appeal, the Ld. CIT(A) followed the order of his predecessor-in-office for AY 2006-07 and confirmed the above addition made by the AO. 11. Before us, the Ld. counsel relies on the order of the Tribunal dated 09.04.2019 in assessee s own case for AY 2006-07 and order dated 07.08.2020 for AY 2009-10. On the other hand, the Ld. DR relies on the order of the Ld. CIT(A) confirming the above addition made by the AO. 12. We have heard the rival submissions and perused the relevant materials on record. Similar issue arose before the Tribunal in assessee s own case for AY 2006-07. The Tribunal vide order dated 09.04.2019 held as under : 2.6 Ground Nos. 12 to 13: Excess of Progress Billings- understatement of profit in respect of incomplete contracts obtained prior ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disturbing the consistent method of accounting being followed by the assessee could not be held to be justified. Hence, we delete the impugned additions and allow these grounds of appeal. 12.1 Facts being identical, we follow the above order of the Co-ordinate Bench and delete the addition of ₹ 5,62,02,457/- made by the AO. Accordingly, the 6th 7th ground of appeal are allowed. 13. The 8th ground of appeal The Ld. CIT(A) erred in disallowing expenditure towards Repair and Maintenance of ₹ 3,70,80,058/- by holding that the repairs and renovation carried out by the appellant led to major renovation, and was capital in nature. The 9th ground of appeal The Ld. CIT(A) failed to consider the expenditure on repairs was in respect of such items which could not be removed from licensed premises. 14. During the course of assessment proceedings, the AO noticed that the assessee is going for major expansion ; the expenses for such expansion and renovation are also claimed under the head Repairs Maintenance Expenses . The AO further found that the assessee has carried out major expansion and renovation work at Raj Plaza, Doghal Plaza and various other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o accommodate 500 persons in the premises spread over approx. 28,800 sq. ft. The appellant itself admits that Raj Plaza was an old building and although an office premises existed there, the same were not in a layout which was suitable to accommodate the appellant's employees and hence, repairs and renovation were carried out to ensure use of the same to the benefit of appellant's business. The appellant also stated that in April,2010, the entire amount of ₹ 38 crore spent towards construction of the new building (North Block) was capitalized. As the movement of 500 employees to Raj Plaza was to enable to demolish the old North Block building, looking into the nature of expenditure carried out at Raj Plaza, the appellant should have even capitalized the same expenditure towards the new North Block building because had the employees not moved out and occupied the temporary office premises for 33 months at Raj Plaza, the demolition of old building at North Block and construction of new building could not have taken place. Thus, there was a direct link between the movement of the employees and demolition and construction of the new building (North Block) and hence, in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding. A court receiver was appointed and the assessee being a tenant in the building continued to pay rent to the receiver. In that suit, consent terms were entered into under which a developer was to repair and re-construct the building at his costs, and, therefore, to handover certain portion (area) to the co-owners. The consent terms contemplated that either a co-operative society, a limited company or a condominium comprising of the tenants, occupants and co-owners shall be formed. Under the terms, tenancy of the assessee was confirmed; and the assessee assumed an obligation to contribute a sum of ₹ 1.50 crores for the work of repair and restoration of the structure ; and it further provided that there would be no increase in the rent payable by the assessee which continued to be ₹ 11,300/- per month. The Assessing Officer held that the assessee had secured rights for an area of 5000 sq. ft. on a payment of a sum of ₹ 1.50 crores and assessee was to become a member of a society or company. That according to the Assessing Officer, would constitute deemed ownership of the premises. The Assessing Officer, therefore, came to the conclusion that the expenditure of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stipulates that where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, the provisions of the clause shall apply as if the said structure or work is a building owned by the assessee. In order that Explanation I is attracted, it is necessary that any capital expenditure is incurred by the assessee. In other words, it is necessary to emphasise that what Explanation I brings about is a deeming fiction by which expenditure of a capital nature incurred by the assessee for the purposes stipulated therein including inter alia for the construction of any structure or the work of renovation, extension or improvement can form the basis of a claim for depreciation as if the structure or work is a building owned by the assessee. But for the Explanation, an assessee would not be entitled to the benefit of depreciation ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was a subject matter of interpretation and consideration of this Court in case of Talathi and Panthaky Associates Pvt Ltd. (supra). This Court has observed that in order that Explanation-I is attracted, it is necessary that any capital expenditure is incurred by the assessee. It is necessary to emphasis that what Explanation I brings about is a deeming fiction by which expenditure of a capital nature incurred by the assessee for the purposes stipulated therein including inter alia for the construction of any structure or the work of renovation, extension or improvement can form the basis of a claim for depreciation as if the structure or work is a building owned by the assessee. But for the Explanation, an assessee would not be entitled to the benefit of depreciation even if the expenditure which was incurred was of a capital nature and the effect of the Explanation is to entitle the assessee to the benefit of the provisions of Section 32. 7. It is trite that explanation cannot read dehors the provision. The explanation is in aid to the provision. 8. The expenses as are culled out in the order of the Tribunal are sufficient to imply that same are Revenue in nature and not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed Chief Justice observed that they are such repairs as are attended to as and when need arises and that the question when a building, machinery etc. requires repairs and when the need arises must be decided not by any academic or theoretical test but by the test of commercial expediency. The Learned Chief Justice observed: The simple test that must be constantly borne in mind is that as a result of the expenditure which is claimed as an expenditure or repairs what is really being done is to preserve and maintain an already existing asset. The object of the expenditure is not to bring a new asset into existence, nor is its object the obtaining of a new or fresh advantage. This can be the only definition of repairs' because it is only by reason of this definition of repairs that the expenditure is a revenue expenditure. If the amount spent was for the purpose of bringing into existence a new asset or obtaining a new advantage, then obviously such an expenditure would not be an expenditure of a revenue nature but it would be a capital expenditure, and it is clear that the deduction which, the Legislature has permitted under Section 10(2)(v) is a deduction where the ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the assessee incurred an expenditure of ₹ 59,000 in the form of payment made to M/s. John Fleming Co. for guniting work carried on in its building known as Oxford House and also a sum of ₹ 3,680 as fees paid to the architects in connection with guniting work undertaken on the advice of the architects. The assessee claimed both the items as expenditure incurred for repairs to their building. The Income-tax Officer observed that the repairs in question could not be called current repairs but that the assessee had undertaken major structural repairs which had the effect of prolonging the life of the building for a least 15 years and as the repairs resulted in extension of the period of the serviceableness of the asset and in the creation of an enduring benefit, the expenditure was a capital expenditure. The Hon ble Bombay High Court held that : This court held in the case of Gulamhussein Ebrahim Matcheswalla v. CIT [1974] 97 ITR 24 (Bom.), that the expression repair must be understood in contradistinction to renewal or restoration and the test to be applied is to see whether as a result of the expenditure what is being done is to preserve and maintain an alr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said to have been brought into existence by reason of expenditure incurred for doing the guinting work. As a result of guniting work done the assessee had not changed the nature of the asset, viz., the building as a whole, and the same in no way increased the accommodation or earning capacity of the building; in that sense no new advantage of enduring benefit had been brought into existence. The repairs also could not be regarded as heavy structural repairs, for, according to the assessee's architects, what could not be achieved by the ordinary method of plastering was achieved by a sophisticated method of process of guniting. In this view of the matter, it seemed very clear that the expenditure incurred for guniting work done as also the expenditure being the architects' fees paid in connection therewith would have to be regarded as expenditure of a revenue nature. All that the assessee did in the instant case was to undertake the plaster repairing work out by adopting a new method called guniting process, and by incurring the expenditure by adopting such a process the assessee was merely maintaining and preserving an asset which it already possessed and thus though ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... premises in the instant case was admittedly not in use for a long time and, thus, in a dysfunctional, if not dilapidated, state prior to it being acquired by the assessee. The expenditure incurred on refurbishment and renovation of an old premises, in an inoperable state, so as to make it fit for use. It cannot be classified as 'repairs'; since expenditure was incurred to render it in a functional state and, therefore, is clearly in the capital field. The ingredients and prerequisites of a capital expenditure would remain the same, and not undergo any change depending on the object matter of the expenditure, i.e., whether an owned or leased premises, and which itself is the premise of Explanation 1 to section 32(1)(ii), invoked by the revenue. [Para 6] The concept of 'repairs' and 'revenue expenditure' were considered as pari materia and co-extensive in as much as in the view of the Court, repair could not, by definition, include capital expenditure. [Para 6] 19. The distillation of precedents must now be applied by us to the facts of the case. In CIT v. Gitanjali Mills Ltd. (2004) 265 ITR 681 (Mad.) , it is held that an expenditure that is not de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the judgment of the Hon ble Bombay High Court in Sesa Goa Ltd. v. JCIT (ITA No. 17 and 18 of 2013 dated 28th February 2020). 22. The Ld. DR objects to the admission of the above additional ground stating that the original appeal was filed by the assessee on 30.05.2016, whereas, the above additional ground was filed on 31.07.2020 after four years. The Ld. counsel argues that the order of the Hon ble Bombay High Court in Sesa Goa is dated 28.02.2020 and after going through the above judgment, the assessee has filed the above additional ground and the same may be admitted for adjudication. 23. We have heard the rival submissions and perused the relevant materials on record. The order in Sesa Goa (supra) is dated 28.02.2020. The above additional ground is squarely covered in favour of the assessee by the decision of the Hon ble Bombay High Court in the case of Sesa Goa Ltd. (supra) and Hon ble Rajasthan High Court in the case of Chambal Fertilizers Chemicals Ltd. (ITA No. 52 of 2018). As per the above decisions, the amount of education cess and higher secondary education cess is not tax as covered u/s 40(a)(ii) and accordingly allowable as deduction in computing the income ..... X X X X Extracts X X X X X X X X Extracts X X X X
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