Income Tax Appellate Tribunal - Mumbai
Maharashtra Power Transmission ... vs Acit 10(3), Mumbai on 28 May, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES "B", MUMBAI
Before Shri Pawan Singh, Judicial Member
& Shri Rajesh Kumar, Accountant Member
ITA Nos. 595/Mum/2012 Assessment Year : 2008 - 09
2013/Mum/2015 Assessment Year : 2010 -11
M/s. Maharashtra Power ACIT - 10(3),
Transmission Structures Pvt. Mumbai
Ltd., Vs.
190, L.B.S. Marg, Bhandup (W)
Mumbai - 400 078
PAN: AADCM3245M
(Appellant) Respondent)
Appellant By : Shri Pramod Kumar Parida
Respondent By : Shri T.A. Khan
Date of Hearing :22/05/2018 Date of Pronouncement : 28/05/2018
ORDER
Per Rajesh Kumar, Accountant Member
These appeals are by the assessee against orders of the CIT(A), Mumbai, for A.Y. 2008-09 & 2010-11. Since common issue is involved in all these appeals, they were heard together and are being disposed of by this common order for the sake of convenience.
ITA Nos. 595/Mum/2012
2. The issue raised in Ground No.1 is not pressed and therefore dismissed as not pressed.
2ITA No.595/Mum/2012 & 2013/Mum/2015
Maharashtra Power Transmission .
3. The issue raised in Ground No.2 is against confirmation of disallowance of interest u/s.36(1)(iii) of the Act by capitalising the same under WIP pertaining to WADA Project.
4. Facts in brief are that AO during the assessment proceedings observed that the work in progress as on 31/03/2008 has increased to Rs.13.41 Crores from 7.92 Crores as on 31/03/2007. Besides ,the assessee has claimed huge interest cost in the P & L Account on the borrowed funds. The AO noted that the interest attributable to assets not capitalised should be disallowed and capitalised in WIP and therefore issued show-cause notice as to why the interest as claimed in the P & L A/C proportionate to the WIP should not be disallowed and capitalised under WIP. The assessee‟s reply vide letter dated 28/12/2010 submitting therein that plant at WADA has commenced its commercial production and the commercial activity was undertaken throughout the year whereas the unit at Rourkee was still under progress. The assessee submitted to the AO that interest pertaining to WADA project is admissible as Revenue expenditure whereas the expenditure on Rourkee Project has to be capitalised and has been capitalised. The submissions of the assessee did not find favour of the AO and he finally noted that capital WIP in respect of WADA project as on 31/03/2007 was Rs.61,18,416/- which increased to Rs.77,86,334/- as on 31/03/2008 meaning thereby that WIP was not put to use till the year end and accordingly, calculated disallowance 3 ITA No.595/Mum/2012 & 2013/Mum/2015 Maharashtra Power Transmission .
u/s.36(1)(iii) at Rs.7,46,505/- @12% per annum and added the same in the income of the assessee.
5. Aggrieved by the order of the AO, the assessee preferred appeal before the CIT(A) who upheld the action of the AO by observing and holding as under:-
"2.4. I have considered the facts of the case, perused the assessment order and submissions made by the appellant and also discussed the case with the A.R of the appellant. However, I do not agree with the contention of the appellant since no evidence has been brought on record by the appellant to substantiate that the capital WIP of WADA project was put to use by 31/03/2008. In view of this, the capitalisation of interest made by the A.O. is upheld."
6. Learned AR vehemently submitted before us that the WADA project was fully operational and therefore, the action of the AO in disallowing the interest u/s.36(1)(iii) of the Act was not justified as this was based on the wrong finding of the facts by CIT(A). Learned AR submitted that the net increase in WIP was Rs.16,67,918/- as on 31/03/2008 vis-à-vis the amount at the beginning of the year was on account of purchase of spare parts in order to meet the emergencies. Learned AR argued that since there was no capitalisation pending in respect of the WADA project as the same was fully operational during the year, no disallowance was called for in respect of interest on the WIP. The learned AR took us through the copy of the audited annual balance sheet and profit and loss account and tried to reason his 4 ITA No.595/Mum/2012 & 2013/Mum/2015 Maharashtra Power Transmission .
contentions on the issue. Finally, learned AR submitted that the action of the First Appellate Authority in confirming the order of the AO was wrong as being based upon the wrong facts beside being cryptic. Learned AR referred to the paper book filed for the instant assessment year in which assessee has filed the evidences of commencement of production such as certificate of Udyog Setu qua the start of the production activity w.e.f. 17/08/2004, excise certificate issued by the Central Excise Authority, certificate issued by the District Industry Centre alongwith copies of electricity bills and the assessment order of previous years evidencing the fact that the plant was fully operational. Finally, learned AR found that in view of the said facts, the action of CIT(A) was totally wrong and facts of the case should reversed and appeal of the assessee on this account should be allowed.
7. Learned DR on the other hand, relied on the ground raised by the Revenue and the order of the authorities below.
8. We have heard rival submissions and perused the record as placed before us carefully. We observe that the WADA plant of the assessee is fully operational during the year as is observed from the records before us as filed by the assessee in the paper book. We have perused the copies of the assessment order relating to earlier years, certificate issued by the Government authorities and electricity charges etc. The fact that plant of WADA was fully operational and thus the action of CIT(A) affirming the order 5 ITA No.595/Mum/2012 & 2013/Mum/2015 Maharashtra Power Transmission .
of AO can not be justified. We further feel that in a plant of this magnitude, the minor capitalisations are always there in the books of accounts which are pending for adjustment under various heads and for that matter referring the revision of Section 36(1)(iii) of the Act for making disallowances cannot be reasoned in any way and has to be deleted. In view of the above, we direct the AO to delete the disallowance by setting aside the order of the CIT(A) on this issue.
9. The issue raised in Ground No.3 is against the confirmation of disallowance of Rs.2,31,66,730/- by CIT(A) as made by the AO on account of provision of liquidated damages without appreciating the fact that the liquidated damages are as per the terms of contract between contractees and assessee. The facts in brief are that assessee has executed contractual work for various Government Organisations such as NTPC, PSEB, BGCIL & GETCO etc. For timely completion of contract / ensuring the quality of the product without any defect, it is customary to generally provide for by way of a clause in the agreement qua liquidated damages which are chargeable at certain percentage of the total work value if assessee fails to execute the work in terms of the contract. In the assessee's case, it is provided at 5% of the contract value. During the year, the contractees found some defects in the work done by the assessee and levied 5% of the liquidated damages in various contracts, the details whereof is given elsewhere in this order. Thus, 6 ITA No.595/Mum/2012 & 2013/Mum/2015 Maharashtra Power Transmission .
levy of liquidated damages is in the normal course of business of the assessee and the assessee charged the same to the P & L account as and when levied by the customers. Pertinent to note that any receipts against the liquidated damages are offered to tax as and when the same are received. The AO during the course of assessment found from the books of accounts that assessee has claimed liquidated damages under the head 'selling and distribution' expenses to the tune of Rs.2,31,66,730/- and vide letter dated 28/12/2010 assessee has submitted before the AO that liquidated damages were the provisions for the liquidated damages levied by the customers in books of accounts for the non-fulfilment of any terms and conditions of the project/defective execution which are normally in the nature of delay in the execution of project / deviation in the quality as agreed at the time of contract. The AO observed that a sum of Rs.2,31,66,730/- debited to the P & L account was mere provision without any justification which has resulted into deferment of tax incidence. Finally, the AO rejected the contention of the assessee and added the same to the income of the assessee.
10. In the appellate proceedings, learned CIT(A) also dismissed the appeal of the assessee after considering the contentions and submissions made during the course of appellate proceedings by observing and holding as under:-
7ITA No.595/Mum/2012 & 2013/Mum/2015
Maharashtra Power Transmission .
"3.3 I have considered the facts of the case, perused the assessment order and submissions made by the appellant and also discussed the case with the A/R of the appellant. The appellant has- admitted that the entire amount of Rs.2.31 crores which was allocated as provision for liquidated damage has been offered for tax in subsequent year. This itself is sufficient to prove that there was no sound basis available with the appellant 10 make the provision which also indicates that the liability \v is unascertained. Further on perusal of the so called calculation sheet provided by the appellant, the details has been provided as under:
MIM'S. Blumdup Summarised details for LD/Penalty provisions as on 31.3.08 Sr. Project LD provision as on Remarks No. 31.3.08 (dispatches till 31.3.08 Tonnage Amount M-12 UPCL 1617 4056872 M-13 UPCL 250 187377 M-32 UPCL 295 1168647 2164 5412896 M-16 957 780217 IVRCL/SEWA M-21 1126 2557314 Restricted to 5% of contract IVRCL/VAPI value M-23 961 2181137 Restricted to 5% of contract IVRCL/TR1CHY 175 430538 value M-27 IVRCL/BSEB M-29 1122 2759083 Restricted to 5% of contract IVRCL/BSEB value M-39 2257 698879 IVRCL/UPPCL 6598 9407168 8 ITA No.595/Mum/2012 & 2013/Mum/2015 Maharashtra Power Transmission .
M- 3467 7876100 Restricted to 5% of contract
I9EMC/PGCIL Value
M-24 PSEB 199 439223
M-45 GETCO 457 31343
12883 23166730
From the above chart it may be noted that the appellant has not provided any basis for calculation of provision for the projects at Sr.No.l, 2, 3, 4,6, 8, 10 &
11. In case of projects at Sr.No.5, 7 & 9 the basis is staled to be 5% of the contract only. Appellant failed to provide the basis of this 5% to be justifiable as provision, for example, past history or actual damages. In fact as stated above, no damages had to be paid by the appellant in subsequent years, In following case laws it was held by Hon. Courts that provisions made depending on uncertain future events are contingent liability and hence not allowable as deduction :-
(i) ITO Vs. EMCO Transformers Ltd. (321 ITO 260} (Bom).
(ii) Srinivas Computers Ltd. Vs. ACITM07 1TD 357) (Chennai).
(iii) CIT Vs. Rotork Controls India (293 ITR 311) (Madras).
(iv) Indian Molasses Co. Vs. CIT (37 ITR 66) (SC).
In view of these facts and legal position, I am convinced that the observation of the A.O. that the liability was unascertained has force and consequently, the disallowance on account of provision amounting to Rs.2,31,66,730/- made by the A.O. is upheld."
11. Learned AR vehemently submitted before us that the CIT(A) has erred on facts by affirming the order of AO as he has failed to appreciate the fact that the assessee was carrying on the business of manufacturing of transmission line towers and was rendering the services to the Government bodies which levied the liquidity damages as per the terms in the contracts. The ld AR further stated that it is in the normal course of business that these damages are levied by the customers on account of delayed execution / 9 ITA No.595/Mum/2012 & 2013/Mum/2015 Maharashtra Power Transmission .
minor defects and deficiencies in the execution of work / material. Learned AR brought to the notice of the bench that such liquidated damages are accounted for as and when these are levied by the customers of the assessee only and not otherwise. It was also submitted that whatever is received out of these deductions by the customers is offered to tax by reversing the provisions already created in the books. Learned AR submitted that in A.Y.2005-06, 2006-07 and 2007-08 in the scrutiny assessments, the provisions for liquidated damages and reversal of the provisions after the receipt from the customers against such liquidated damages were accepted by the AO. The ld AR tried to prove his contentions by referring to the assessment orders for these respective years as filed in the paper book. Learned AR submitted that the main ground for disallowing the said provisions for liquidated damages was that there was no justification/ explanation offered by the assessee whereas as a matter of fact, the said damages were provided in the contract itself and accounted for when invoked by the contractee, as and when work executed is inspected. Learned AR submitted that the said the practice of assessee was not resulted in any tax evasion in any way as the same is based upon the terms of the contracts and was not a contingent or uncertain liability of the assessee. Learned AR relied on the series of the decisions viz., (2013) 27 ITR (Trib) 791 (Hyd.) Asst. CIT vs. B.G.R. Energy Systems Ltd., 218 ITR 1995 (SC) Associated Power Co. Ltd., vs. CIT, 255 ITR 563(SC) CIT vs. Katputli Rural Entpr., 192 ITR 221 10 ITA No.595/Mum/2012 & 2013/Mum/2015 Maharashtra Power Transmission .
(SC) CIT vs. Bharat Carbon, 62 ITR 363 (SC) Kedarnath Jute Mfg.Co. vs. CIT. Learned AR also referred to the page No.4 of the paper book in which the detailed calculation of liquidated damages amounting to Rs. 2,31,66,730/- was filed and submitted that all these were placed before the lower authorities also. Learned AR also furnished copies of assessment orders for various years to show that the assessee has offered to tax the amount received against the liquidated damages as and when the same was received from the customers. Finally, the learned AR brought before the Bench that the order of CIT(A) needs to be reversed as the same is against the system of accounting of the assessee and principle of consistency.
12. Learned DR on the other hand relied on the grounds of appeal and order of CIT(A). The ld DR submitted by accounting the provisions for liquidated damages, the assessee was deferring the tax liability to the succeeding years and thus relied heavily on the order of the AO and CIT(A).
13. After hearing rival contentions and perusing the material carefully as placed before us, we observe that assessee was in the business of manufacturing of transmission towers and rendering services to the Government bodies as per the terms of contracts as is seen from the terms of the contract as filed in the paper book from page No. 7 to 22. We find that the liquidated damages were levied by the customers/contractees as per the terms of the contracts subject to maximum of 5% of the contract value. It is 11 ITA No.595/Mum/2012 & 2013/Mum/2015 Maharashtra Power Transmission .
also undisputed that assessee has been accounting for the liquidated damages as and when levied by the customers on the basis of contract value for delayed execution /minor defects of the material. Any sum received against these liquidated damages by the assessee in future, after settling the querries/defects with the contractees, were offered to tax as and when received. This is clear from the details of liquidated damages furnished by the assessee and also the assessment orders for three years as filed by the assessee during the course of hearing before us. The page 4 of the paper book reveals that the calculation of these damages is based upon various contracts and invocation of the said clause by the contractees and is not mere a provision as has been observed by the authorities below. Under these circumstances, we are not in a position to agree with the conclusion drawn by the CIT(A) that these are not admissible especially when the same is consistent practice followed by the assessee from earlier years. The case of the assessee is squarely covered by the decision of the Co-ordinate Bench in case of ACIT vs. B.G.R. Energy Systems Ltd., (supra) in which it has been held that such type of damages with delay in completion of work were admissible expenses. In view of the facts and ratio laid by the above decision, we are inclined to direct the AO to delete the disallowance of Rs. 2,31,66,730/-.
14. In the result, appeal is allowed.
12ITA No.595/Mum/2012 & 2013/Mum/2015
Maharashtra Power Transmission .
ITA No. 2013.Mum/2015
15. The issue raised in Ground No.1 is not pressed and therefore is being dismissed as not pressed.
16. The issue raised in Ground No.2 is identical to one as decided by us in Ground No.2 in ITA No.595/Mum/2012 (supra) wherein we have deleted the disallowance as made by the AO u/s.36(1)(iii) of the Act. Therefore, our decision in ITA No.595/Mum/2012 on the said issue would mutatis mutandis apply to this ground as well and accordingly the AO is directed to delete the addition of Rs.15,08,580/-.
17. The issue raised in Ground No.3 is against the confirmation of disallowance of proportionate interest of Rs.2,63,34,688/- u/s.37(1) for diversion of borrowed interest bearing funds by CIT(A) as made by the AO without any basis by ignoring the fact that assessee owned funds were substantial and sufficient and such hypothetical disallowance is wrong and uncalled for.
18. The facts in brief are that AO during the course of assessment proceedings observed that assessee has given loan to the tune of Rs.11.42 Crores as on 31/03/2010 whereas assessee has also debited a sum of Rs.7.21 Crores on account of interest and finance charges in the P & L Account. According to the AO, the said loans and advances were out of interest bearing funds and the assessee was called upon to justify the business 13 ITA No.595/Mum/2012 & 2013/Mum/2015 Maharashtra Power Transmission .
exigencies / expediencies for the same failing which the same would be added to the income of the assessee. The AO finally added a sum of Rs.2,63,34,688/- on the proportionate basis by taking these total borrowed funds at Rs.28.84 Crores, interest expenditure of 7.21 Crores and loan & Advances of Rs.11.42 Crores/-. In the appellate proceeding, CIT(A) dismissed the appeal of the assessee by observing and holding as under:-
"I have carefully considered the submissions and the impugned assessment order. It is a fact the appellant had own funds such as reserves and surplus, cash in hand etc., But it has also got huge borrowed funds which are interest bearing. However, in the absence of any evidence to show the direct nexus that only non interest bearing funds have been diverted as interest free loans and advance the contention of the appellant that disallowance u/s. 27(1) or 36(1)(iii) cannot be made has no basis and hence not acceptable. Since the funds are mixed inextricably, the possibility of interest bearing funds being diverted for interest free advance and loans cannot be ruled out. Therefore, the interest disallowed by the AO is sustained. The ground raised is dismissed."
19. Learned AR argued before us that the CIT(A) has wrongly confirmed the disallowance of Rs.2,63,34,688/- by ignoring the facts on record. Learned AR pointed out that in para 4.1 of the CIT(A) order, the amount of loan advances was mentioned as Rs.112,42,75,339/- as on 31/03/2010 whereas as a matter of fact, the correct amount is Rs.11.42 Crores. Learned AR submitted that the said loan advances comprised of Rs.6.91 Crores as advance to suppliers in the regular course of business and Rs.4.52 Crores on account of advances recoverable in cash or in kind.
14ITA No.595/Mum/2012 & 2013/Mum/2015
Maharashtra Power Transmission .
20. Learned AR submitted that out of the advances to suppliers Rs.4.52 Crores was receivable from M/s. Arunodaya Sales Corporation to which the payment of only Rs.21.25 Crores has been made through LC against the purchases of 22.81 Crores. Learned AR stated that the said amount was finally due against the sales made of Rs.13.29 Crores against which Rs.7.25 Crores were received and thus the same was not out of the borrowed funds as observed by the authorities below. Rs.72.09 lakhs was outstanding from A.T. Textiles Pvt. Ltd., which was receivable against the supply of material which was adjusted in the next year. Similarly other advance of Rs.1.67 Crores was given to various suppliers against the supply of material. Learned AR submitted that since all these amounts due from various parties were only in connection with the business of the assessee wholly and exclusively and therefore, they have a business / commercial expediency. As regards funds receivable cash or in kind, learned AR submitted that out of Rs.4.52 Crores, Rs.339.09 lacs were towards the statutory dues receivable from various Government deptts such as service tax refund, VAT refund, deposit with Central Excise Authorities, TDS / Income Tax etc., and the remaining Rs.25.15 lacs represented security deposits with various persons, Rs. 23.67 lacs was on account of interest receivable from various banks (accrued interest) , Rs.9.87 lakhs as loan given to employees & Rs.9.73 lakhs as imprest to employees for business purposes and Rs.44.58 Lakhs were 15 ITA No.595/Mum/2012 & 2013/Mum/2015 Maharashtra Power Transmission .
advances to various parties for business purposes. Learned AR submitted that since all these advances were for the business purposes, therefore, disallowance as confirmed by the CIT(A) on amount proportionate to advances on the ground that interest bearing funds were advances to various parties without charging any interest therefrom is against the facts. In the alternate submissions, learned AR submitted that assessee own interest free funds were sufficient to cover these so called loans and advances by referring to the copy of the balance sheet filed in the paper book. Learned AR submitted that in view of these facts, the order of the CIT(A) needs to be reversed and the ground raised by assessee should be allowed.
21. We have heard the rival contentions and perused the material placed before us. We found that the amount of loans and advances of Rs.11.42 Crores comprised of Rs.6.91 Crores as advances to suppliers and Rs.4.52 Crores as advances recoverable in case or in kind. Details of these advances are as under:-
The following amounts pertains to statutory dues receivable from government authorities:
Service Tax - Rs 26.16 Lacs
VAT Refund - Rs 1.53 Lacs
Deposit with Central Excise Authorities - Rs 164.10 Lacs TDS/Income Tax -Rs 34.42 Lacs VAT Refund receivable 2008-09 -Rs 62.49 Lacs VAT Refund receivable 2009-10 -Rs 50.33 lacs Rs 339.08 Lacs.16 ITA No.595/Mum/2012 & 2013/Mum/2015
Maharashtra Power Transmission .
Out of balance Rs 1.13 Crores, Rs 25.15 Lacs is Security Deposits given to various persons, Rs 23.67 Lacs is Interest receivable from various Bank (accrued Interest), Rs 9.87 Lacs is loan given to Employees , Rs 9.73 Lacs is Imprest given to Staff for various business related purpose, Balance Rs 44.58 Lacs is given to Various other parties for business purpose. Detai's attached for your ready reference.
22. As is clear from the above , the advances to suppliers of Rs.6.91 Crores are in fact is receivable from the customers/suppiers against the supply of material and are advances in the normal course of business. For example Rs.4.52 Crores receivable from Arunodaya Steel Corporation was against this sale of material of Rs.13.29 Crores against which payment of Rs.7.25 Crores was already received. Similarly 72.09 lacs is outstanding from AT Textiles Ltd., which was against the supply of material and was adjusted in the next year. Rs.1.67 crores was given to more than 90 suppliers in the normal course of business and out of which none of the parties was related to the assessee. Further, we observe that advances recoverable in cash or in kind amounting to Rs.4.52 Crores mainly comprised of the money recoverable from various Government Departments such as Service Tax Refund Rs.26.16 lakhs, VAT refund of Rs.1.53 Lakhs, Deposit with Central Excise Authorities Rs.164.10 Lakhs, TDS/ Income Tax refund Rs.34.42 Lakhs, Security deposits of various persons Rs.25.15 lakhs, interest receivable from various banks on account of interest accrued Rs.23.67 lakhs, loans to employees Rs.9.87 17 ITA No.595/Mum/2012 & 2013/Mum/2015 Maharashtra Power Transmission .
lakhs, imprest given to staff for various business related purposes Rs.9.73 Lakhs and Rs.44.58 lakhs to various parties for business of the assessee. From the above, we observe that in none of the cases, the advances were made by the assessee for non-business purposes and there is valid and genuine business expediency for making such transactions in the ordinary course of business. Even otherwise the assessee has sufficient own funds available and even on that count no disallowance is called for. Under these circumstances, we are of the view that addition so made by CIT(A) is wrong and has to be deleted. Accordingly, we direct the AO to delete the disallowance. In the result appeal of the assessee is allowed.
23. In the result, the appeals of the assessee are allowed.
Order pronounced in the open court on this day of 28/05/2018.
Sd/- Sd/-
(PAWAN SINGH) (RAJESH KUMAR)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai, Dated : 28/05 /2018.
Karuna, Sr.PS
Copy of the Order forwarded to :
1. The Appellant.
2. The Respondent.
3. The CIT(A), Mumbai.
4. The CIT
5. The DR, „A‟ Bench, ITAT, Mumbai BY ORDER
//True Copy// (Assistant Registrar)
Income Tax Appellate Tribunal, Mumbai