Income Tax Appellate Tribunal - Mumbai
Iot Infrastructure & Energy Services ... vs Assessee on 17 May, 2013
आयकर अपील य अ धकरण ""डी यायपीठ मब
ंु ई म।
IN THE INCOME TAX APPELLATE TRIBUNAL "D" BENCH, MUMBAI
ी पी.एम. जगताप, लेखा सद य एवं डॉ. एस.ट .एम. पवलन या यक सद य के सम ।
BEFORE SHRI P.M. JAGTAP, AM AND Dr. S.T.M. PAVALAN, JM
आयकर अपील सं./I.T.A. No.1901 /Mum/2009
( नधारण वष / Assessment Year : 2004-05
Asstt. Commissioner of बनाम/ IOT Infrastructure &
Income Tax, Rg. 10(3), Energy Services Ltd.
Vs.
451, Aayakar Bhavan, (Formerly Indian Oil
4 t h Floor, M.K. Marg, Tanking Limited)
Mumbai - 400 020. 103, Spectra,
Hiranandani Gardens,
Powai, Mumbai- 4 0 0 0 7 6 .
थायी ले खा सं . /PAN : AAACI6794E
(अपीलाथ /Appellant) .. ( यथ / Respondent)
आयकर अपील सं./I.T.A. No.2585 /Mum/2009
( नधारण वष / Assessment Year : 2004-05
IOT Infrastructure & बनाम/ Income Tax Officer-
Energy Services Ltd. Vs. 10(3)(1),
(Formerly Indian Oil 4 t h Floor,
Tanking Limited) Aayakar Bhavan,
103, Spectra, M.K. Marg,
Hiranandani Gardens, Mumbai 400 020.
Powai, Mumbai- 4 0 0 0 7 6 .
थायी ले खा सं . /PAN : AAACI6794E
(अपीलाथ /Appellant) .. ( यथ / Respondent)
आयकर अपील सं./I.T.A. No.3477 /Mum/2009
( नधारण वष / Assessment Year : 2005-06
IOT Infrastructure & बनाम/ Income Tax Officer-
Energy Services Ltd., 10(3)(1),
Vs.
(Formerly Indian Oil 4 t h Floor,
Tanking Limited) Aayakar Bhavan,
103, Spectra, M.K. Marg,
Hiranandani Gardens, Mumbai 400 020.
Powai
Mumbai - 400 076.
2
ITA No. 1901/M/09, 2585/M/09,
3477/M/09,3241/M/09, 2208/M/10,
7035/M/10,7430/M/11
थायी ले खा सं . /PAN : AAACI6794E
(अपीलाथ /Appellant) .. ( यथ / Respondent)
आयकर अपील सं./I.T.A. No.3241 /Mum/2009
( नधारण वष / Assessment Year : 2005-06
Asstt. Commissioner of बनाम/ IOT Infrastructure &
Income Tax, Vs. Energy Services Limited,
Range 10(3), (Formerly Indian Oil
451, Aayakar Bhavan, Tanking Limited)
4 t h Floor, M.K. Marg,
Mumbai - 400 020. 103, Spectra,
Hiranandani Gardens,
Powai
Mumbai - 400 076.
थायी ले खा सं . /PAN : AAACI6794E
(अपीलाथ /Appellant) .. ( यथ / Respondent)
आयकर अपील सं./I.T.A. No.2208 /Mum/2010
( नधारण वष / Assessment Year : 2006-07
IOT Infrastructure & बनाम/ Income Tax Officer-
Energy Services 10(3)(1),
Vs.
Limited, 4 t h Floor,
(Formerly Indian Oil Aayakar Bhavan,
Tanking Limited) M.K. Marg,
103, Spectra, Mumbai 400 020.
Hiranandani Gardens,
Powai
Mumbai - 400 076.
थायी ले खा सं . /PAN : AAACI6794E
(अपीलाथ /Appellant) .. ( यथ / Respondent)
आयकर अपील सं./I.T.A. No.7035 /Mum/2010
( नधारण वष / Assessment Year : 2007-08
IOT Infrastructure & बनाम/ Income Tax Officer-
Energy Services 10(3)(1), 4 t h Floor,
Vs.
Limited, Aayakar Bhavan,
(Formerly Indian Oil M.K. Marg,
Tanking Limited) Mumbai 400 020.
103, Spectra,
Hiranandani Gardens,
Powai, M u m b ai - 4 0 0 0 7 6.
थायी ले खा सं . /PAN : AAACI6794E
3
ITA No. 1901/M/09, 2585/M/09,
3477/M/09,3241/M/09, 2208/M/10,
7035/M/10,7430/M/11
(अपीलाथ /Appellant) .. ( यथ / Respondent)
आयकर अपील सं./I.T.A. No.7430 /Mum/2011
( नधारण वष / Assessment Year : 2008-09
IOT Infrastructure & बनाम/ Income Tax Officer-
Energy Services 10(3)(1),
Vs.
Limited, 4 t h Floor,
(Formerly Indian Oil Aayakar Bhavan,
Tanking Limited) M.K. Marg,
103, Spectra, Mumbai 400 020.
Hiranandani Gardens,
Powai
Mumbai - 400 076.
थायी ले खा सं . /PAN : AAACI6794E
(अपीलाथ /Appellant) .. ( यथ / Respondent)
Department by : Shri Girija Dayal
Assessee by : Shri Percy J. Pardiwalla
Ms. Vasanti Patel
ु वाई क तार ख / Date of Hearing
सन : 05-04-2013
घोषणा क तार ख /Date of Pronouncement : 17-05-2013
आदे श / O R D E R
PER P.M. JAGTAP, A.M. :
Out of these seven appeals, four appeals are cross appeals for assessment years 2004-05 and 2005-06 whereas the other three appeals are the appeals filed by the assessee for assessment years 2006-07, 2007-08 and 2008-09. Since some common issues are involved in all these appeals, the same have been heard together and are being disposed of by this single composite order for the sake of convenience.
2. First, we shall take up the cross appeals filed for assessment year 2004-05 being ITA No. 2585/Mum/2009 which is the assessee's appeal and ITA No. 1901/Mum/2009 which is the Revenue's appeal. The same are directed against the order of the ld. CIT(A) -10, Mumbai dtd. 23-01-2009.
4 ITA No. 1901/M/09, 2585/M/09,3477/M/09,3241/M/09, 2208/M/10, 7035/M/10,7430/M/11
3. Ground No. 1 of the appeal of the assessee as well as that of the appeal of the Revenue for A.Y. 2004-05 involve a common issue relating to the disallowance of Rs. 2.77 crores made by the A.O. on account of provision made by the assessee for warranty which has been sustained by the ld. CIT(A) to the extent of 0.20% of the revenue recognized by the assessee in A.Y. 2004-
05.
4. The assessee in the present case is a company which is engaged in the business of construction of oil terminal, providing engineering services and performed operation and maintenance of the terminals. The return of income for A.Y. 2004-05 was filed by it on 29-10-2004 declaring total income at Rs. Nil under the normal provisions of the Act and book profit of Rs. 23,35,18,636/- u/s 115 JB of the Act. In the P&L account filed along with the said return, a sum of Rs. 2,77,45,147/- was debited by the assessee on account of provision made for the performance warranty and other contractual liability. The case of the assessee before A.O. was that the said provision is made as per Accounting Standard- 7I (AS-7), which deals with accounting for construction contract, issued by the Institute of Chartered Accountants of India (ICAI). It was submitted that as required by the said AS- 7, while recognizing income under percentage of completion method, an appropriate allowance for future enforceable factor has to be made on either a specific or percentage basis. It was contended that enforceable factor included fulfillment of performance warranty on the completed contract and accordingly the assessee recognizing income on percentage completion method has made the provision for performance warranty @ 1-2% of the contract value in progress. This contention of the assessee was not found acceptable by the A.O. According to him, the provision made for performance warranty was nothing but the provision for liability which was not ascertainable and the same was made merely in anticipation of some future 5 ITA No. 1901/M/09, 2585/M/09, 3477/M/09,3241/M/09, 2208/M/10, 7035/M/10,7430/M/11 expenses. He held that the said provision thus was not allowable as deduction under the Income Tax Act although the same was claimed to be made by the assessee as per the Accounting Standard - 7 (AS-7) issued by the Institute of Chartered Accountants of India (ICAI). He also relied on the provisions of section 36(1)(vii) of the Act to hold that the provision can be claimed as expenses only when the same has been irrecoverably written off in the books of account. Accordingly the entire provision of Rs. 2.77 crores made by the assessee for performance warranty was disallowed by the A.O.
5. The disallowance made by the A.O. on account of provision made by it for performance warranty was disputed by the assessee in an appeal filed before the ld. CIT(A) and it was submitted on behalf of the assessee before him that during the year under consideration being the 4th year of its business activity, four contracts for construction of oil storage tank were undertaken and as per the warranty clause of the said contract, the assessee was liable to make good any defect in its work after the completion of the contract. It was submitted that the assessee was liable to give a security deposit of 10% of the contract value for timely and proper performance of the contract which was to be released only on completion of 12 months from the date of completion of work. It was contended that provision therefore was made for performance warranty @ 1 to 2% of the contract value completed during the relevant period which was in accordance with AS- 7 issued by ICAI. It was claimed that the special provision was quantified on the basis of technical assessment of the defects which would arise under the contract and a working giving details of such quantification was also furnished by the assessee before the ld. CIT(A). It was contended that the provision made for warranty thus was for ascertained liability and the same having been quantified on scientific basis was allowable as deduction.
6. After considering the submissions made on behalf of the assessee on this issue in the light of the material available on record, the ld. CIT(A) found 6 ITA No. 1901/M/09, 2585/M/09, 3477/M/09,3241/M/09, 2208/M/10, 7035/M/10,7430/M/11 that a similar issue was decided by the Tribunal in assessee's own case for A.Y. 2001-02. He noted that although the provision made for performance warranty to the extent of 5% of the contract value completed during the relevant period was allowed by the Tribunal relying on the report of the Independent Technical Advisor of the assessee, it was observed by the Tribunal that a warranty provision based upon past data with the assessee would be sufficient to justify the provision and since A.Y. 2001-02 was the first year of operation of the assessee company for which past data was not available, the Tribunal relied upon the report of Independent Technical Advisor furnished by the assessee. Since the year under consideration was the 4th year of the operation of the assessee company, the ld. CIT(A) proceeded to examine the issue relating to the provision made by the assessee for performance warranty in the light of the past data of the assessee's case available for the 3-4 years and decided the issue on such examination vide para No. 1.4 and 1.5 of his impugned order as under:-
From the above cited decision of the Tribunal, which is based upon several Supreme Court and High Court decisions, the position of law that emerges is that a warranty provision is allowable as an accrued liability provided it is based upon past and future data. Keeping in view the above order of the Tribunal, let us now examine the facts in the current year. The appellant has given the following with regard to the warrantee provisioning:
Sr. Name of Total Revenue Provision Warranty Actual No the contract recognized percentage provision liability customer value percentage of revenue for the incurred completion recognized year in method subseque nt years
1. IOCL, 181890 879620040 2% 17906165 Nil Mathura 0000
2. Nuclear 281700 111940199 1% 1119402 Nil Power 000 Corpn
3. Indian Oil 220247 197768610 2% 3955372 Nil Mauritius 213
4. IOCL 102900 79285513 1% 795328 Nil (Guj. 213 7 ITA No. 1901/M/09, 2585/M/09, 3477/M/09,3241/M/09, 2208/M/10, 7035/M/10,7430/M/11 Refinery)
5. IOCL 979209 30492583 1% 304926 Nil PXPTA 47
6. IOCL(offsi 418592 103559823 1% 1035598 Nil te II) 654
7. Mangalore 205728 20572814 1% 205728 0.73% Refinery 14
8. Guj. State 141260 14126031 1% 141260 0.1% Petro. 31
9. Various 54516564 customers
15. In order to examine the correctness of the provision, the appellant was asked to give the actual figures of warranty liability incurred during the period 2000- 01 and 2003-04. Form the details supplied by the appellant, the following picture emerges. That till date the appellant has worked on 11 contracts out of which 4 contracts have been completed till FY 2003-04. The details with regard to these contracts is as follows:
Sr.No. Name of the Total contract Provision Actual
customer value (Rs. in percentage of warranty
crore) revenue liability
recognized incurred (in
Rs)/%
1. IBP 16.57 5% 952428
CO.Ltd.,Asoj (0.546%)
2. IOC,Dumad 47.48 5% Nil
3. IOC, Mathura 82.31 5% Nil
4. Indian Oil 22.02 5% Nil
Mauritus
5. Average 42.09 5% 0.1365%
From the above tables, picture that emerges is that, with regard to project completed till 31-03-2004, on which 5% provision for warrantee was made, the actual warranty liability incurred is only 0.1365%. With regard to the current projects, on which 1 to 2% provision was made which have been completed in subsequent years, the actual liability incurred on account of warranty is almost nil. In the circumstances, I find no justification in allowing the provision for warranty at the rates of 1 to 2% as claimed by the appellant.
Keeping past and future data in mind, I feel that provision @ 0.2% of the contract value completed, would meet the end of justice. The A.O. is directed to allow provision for warranty at the rate of 0.2% as against 1 to 2% claimed. This ground of appeal is therefore, partly allowed.
8 ITA No. 1901/M/09, 2585/M/09,3477/M/09,3241/M/09, 2208/M/10, 7035/M/10,7430/M/11 The ld. CIT(A) thus held on the basis of past data that provision for warranty @ 0.20% of the contract value completed was fair and reasonable and restricted the disallowance made by the A.O. to that extent.
7. The ld. counsel for the assessee submitted that the assessee is in the business of setting up of tank terminals which was commenced in the previous year relevant to A.Y. 2001-02. He submitted that keeping in view the warranty clause of the contract for setting up of tank terminals, provision @ 5% was made by the assessee for performance warranty in A.Y. 2001-02 as required by AS-7 issued by the ICAI and the same was allowed by the Tribunal. He submitted that in the year under consideration i.e. A.Y. 2004- 05, provision for warranty was made by the assessee @ 1-2% on the value of contract completed upto 31st March, 2004 based on the past data and the same being less than similar provision of 5% allowed by the Tribunal in A.Y. 2001-02 should be allowed being reasonable. He invited our attention to the relevant portion of written submission filed before the ld. CIT(A) at page 32-33 of the assessee's paper book and submitted that the basis of the provision made for warranty @ 1-2% in A.Y. 2004-05 was duly explained by the assessee. He contended that keeping in view the said basis given by the assessee as well as the order of the Tribunal in assessee's own case for A.Y. 2001-02 allowing the provision for warranty at 5%, the provision made for warranty in A.Y. 2004-05 at 1-2% should be allowed.
8. The ld. D.R., on the other hand, submitted that the provision for warranty should be based on the factual data of the earlier years and since such data was not available in A.Y. 2001-02 being the first year of assessee's operation, the Tribunal allowed the provision for warranty made @ 5% in that year. He contended that the year under consideration i.e. 2004-05 is the 4th year of operation of the assessee and the assessee therefore has to justify the provision made for warranty on the basis of past data which is now available 9 ITA No. 1901/M/09, 2585/M/09, 3477/M/09,3241/M/09, 2208/M/10, 7035/M/10,7430/M/11 atleast for the first three years. He contended that the assessee, however, has not made any attempt to justify the provision made by it on the basis of past data and urged that such data may be taken into consideration to decide the issue relating to the allowability of provision for warranty in the year under consideration.
9. We have considered the rival submissions and also perused the relevant material available on record. It is observed that although the provision made by the assessee for warranty @ 5% was allowed by the Tribunal for A.Y. 2001- 02 which was the first year of the assessee's operation, it was observed by the Tribunal in its order for 2001-02 that such provision should be made on the basis of relevant past data. In A.Y. 2001-02, being the first year of assessee's operation, past data was not available but the year under consideration is the 4th year of the operation of the assessee and the past data now being available atleast for the first three years, we agree with the contention of the ld. D.R. that such past data should be taken into consideration to decide this issue. As per our direction, the assessee has furnished the relevant data in this regard for the past three years as well as for the subsequent eight years giving details of provision made for warranty in each year, warranty expenses actually incurred in each year and the reversal of warranty provision made in each year. The said details are as under:-
Sr. Assessm No. of Revenue %of Gross Reversal of Warranty No. ent year Contra recognized via- warrant Warranty warranty expenses cts a-vis warrant provision provision (Rs.) provision (Rs.) provision (Rs.) on revenue (Refer recognized Note below) (1) (2) (3) (4) (5) (6) (7) (8) 1 2001-02 2 942,847,372 5.00% 48,372,135 - -
2. 2002-03 3 386,015,719 18,071,019 - -
3. 2003-04 3 158,913,730 5.00% 5,305,629 (64,039,720) -
4. 2004-05 8 1,437,365,613 1.00% - 27,745,184 -
2.00%
5. 2005-06 11 2,179,705,801 1.00% - 30,991,242 (10,638,202) 1,941,887 2.00%
6. 2006-07 9 1,110,780,148 0.10%- 7,417,675 (30,208,158) 1,573,334 1.00%
7. 2007-08 31 3,611,692,269 0.20%- 12,027,421 (27,421) -
10 ITA No. 1901/M/09, 2585/M/09,3477/M/09,3241/M/09, 2208/M/10, 7035/M/10,7430/M/11 0.50%
8. 2008-09 22 7,538,139,584 0.25%- 28,296,542 - -
1.00%
9. 2009-10 21 8,805,276,517 0.25%- 29,588,295 (31,979,280) 869,495 0.50%
10. 2010-11 22 8,739,027,394 0.25%- 23,332,258 (13,189,500) -
0.50%
11. 2011-12 20 10,654,822,678 0.25%- 32,784,082 (4,917,051) -
0.50%
12. 2012-13 19 14,404,696,612 0.25%- 48,416,926 (1,107,721) -
0.50% A perusal of the above details shows that no expenditure was incurred by the assessee on warranty in the first three years i.e 2001-02, 2002-03 & 2003-04 as well as in the year under consideration i.e A.Y. 2004-05. In the absence of any expenditure incurred on warranty in assessment years 2001-02, 2002-03 & 2003-04, the provision made @ 5% for warranty in assessment years 2001- 02 & 2002-03 was substantially reversed by the assessee in A.Y. 2003-04. It is thus clear that when the provision for warranty was made by the assessee for A.Y. 2004-05, it was aware that no expenditure on warranty was actually required to be incurred in the earlier years i.e. assessment years 2001-02, 2002-03 & 2003-04 as well as in the year under consideration i.e. 2004-05. It was also aware that the provision made for 2001-02 & 2002-03 @ 5% was required to be substantially reversed in A.Y. 2003-04 and no warranty expenditure was incurred even in the year under consideration i.e. 2004-05. Still a provision of Rs. 2.77 crores was made by the assessee being 1-2% of the value of work completed which, in our opinion, cannot be justified on the basis of the past data and the ld. counsel for the assessee has not been able to controvert this position when it was confronted to him.
10. It is, no doubt, true that warranty expenditure of Rs. 19.41 lacs and Rs. 15.73 lacs was incurred by the assessee in A.Y. 2005-06 and 2006-07. However, the said expenditure actually incurred by the assessee in the subsequent year, in our opinion, can only justify and support the view taken by the ld. CIT(A) that provision to the extent of 0.2% of the value of work 11 ITA No. 1901/M/09, 2585/M/09, 3477/M/09,3241/M/09, 2208/M/10, 7035/M/10,7430/M/11 completed is fair and reasonable in the facts of the case. As regards the contention raised on behalf of the assessee that the provision made for warranty in A.Y. 2004-05 to the extent found to be excess has been reversed and offered to tax in the subsequent years, we are of the view that such reversal of provision in the subsequent year cannot justify the provision maid in the year under consideration, the correctness of which is to be decided mainly on the basis of past data relating to expenditure actually incurred on warranty. In our opinion, once the deduction on account of provision is not allowed to the extent it is found to be excess, the reversal of provision in the subsequent year to that extent cannot give rise to any income and if the assessee has offered such income in the subsequent years, it can seek appropriate relief from the A.O. who shall allow the same in accordance with law. As such, considering all the facts of the case, we are of the view that the provision made by the assessee for warranty was rightly allowed by the ld. CIT(A) only to the extent of 0.2% of the value completed in the year under consideration being fair and reasonable and upholding his impugned order on this issue, we dismiss ground No. 1 of assessee's appeal as well as Revenue's appeal.
11. In ground No. 2 of the assessee's appeal as well as Revenue's appeal, the main issue involved is relating to the disallowance of Rs. 2.77 crores made by the A.O. on account of provision for warranty while computing the income of the assessee u/s 115JB of the Act which has been sustained by the ld. CIT(A) to the extent of 0.20% of the value of work completed.
12. The ld. counsel for the assessee submitted that the provision for warranty was made by the assessee on the basis of the warranty clause contained in the relevant contract and the same being a contractual obligation, it was in the nature of ascertained liability which was allowable as deduction as per Explanation 1(c) to section 115 JB of the Act.
12 ITA No. 1901/M/09, 2585/M/09,3477/M/09,3241/M/09, 2208/M/10, 7035/M/10,7430/M/11
13. The ld. D.R., on the other hand, submitted that this issue is consequential to the issue involved in ground No. 1 of the assessee's appeal as well as Revenue's appeal inasmuch as the provision for warranty to the extent it is held to be allowable while computing the income of the assessee under the normal provisions of the Act can only be treated as ascertained liability and the balance amount of provision has to be added back for the purpose of computing book profit u/s 115JB of the Act as an un-ascertained liability.
14. After considering the rival submissions and perusing the material available on record, we find merit in the contention of the ld. D.R. Having held that the provision made for warranty by the assessee is fair and reasonable only to the extent of 0.2% of the value of work completed during the year under consideration on the basis of past data, we are of the view that the said provision to that extent alone can be said to be the ascertained liability of the assessee and the balance provision, which is found to be excessive on the basis of past data clearly represents unascertained liability which is liable to be added back while computing the book profit of the assessee u/s 115JB of the Act. We therefore find no infirmity in the order of the ld. CIT(A) allowing the provision for warranty only to the extent of 0.2% of the value of work completed while computing the income of the assessee u/s 115JB of the Act and dismiss ground No. 2 of assessee's appeal as well as that of Revenue's appeal.
15. Ground No. 3 raised by the assessee pointing out certain factual error in the order of the ld. CIT(A) in computing the percentage of actual liability incurred on warranty in the subsequent years in respect of the contract of Managalore Refinery and Petrochemicals Ltd. has become infructuous keeping in view our decision rendered above on the issue of allowability of 13 ITA No. 1901/M/09, 2585/M/09, 3477/M/09,3241/M/09, 2208/M/10, 7035/M/10,7430/M/11 provision for warranty involved in ground No. 1 which is based on the relevant factual data furnished by the assessee himself. This ground of the assessee is therefore dismissed.
16. The issue raised in ground No. 4 of the assessee's appeal relates to the disallowance of Rs. 2,66,53,121/- made by the A.O. and confirmed by the ld. CIT(A) on account of proportionate deduction claimed in respect of expenditure incurred in the earlier years on "right to way" while the issue involved in ground No. 5 of the assessee's appeal relates to the disallowance of Rs. 44,12,06,710/- made by the A.O. and confirmed by the ld. CIT(A) on account of proportionate deduction claimed by the assessee for expenditure incurred in earlier years towards premium and other charges paid in respect of leasehold land.
17. Along with the return of income filed for the year under consideration i.e. 2004-05, a note was furnished by the assessee stating that the income declared in the said return was without prejudice to its claim in respect of premium paid on leasehold land and payment of "right to way" charges. It was stated that the company has not claimed depreciation by capitalizing the said amount. It was submitted that an amount of Rs. 44,12,06,710/- paid as premium and other charges on leasehold land and Rs. 2,66,53,121/- as "right to way" charges in respect of earlier years was allowable as deductions on proportionate basis. Since this note furnished by the assessee was not taken into consideration by the A.O. while framing the assessment order, the assessee raised its grievance before the ld. CIT(A) by claiming that the expenditure of Rs. 2.66 crores on "right to way" should be allowed to be amortised over the lease period and expenditure representing the amortization of leasehold premium should be allowed as deduction u/s 37(1) of the Act. As an alternative, it was also claimed by the assessee that depreciation should be allowed on the said expenditure. This contention of 14 ITA No. 1901/M/09, 2585/M/09, 3477/M/09,3241/M/09, 2208/M/10, 7035/M/10,7430/M/11 the assessee was not accepted by the ld. CIT(A) keeping in view the decision of the Tribunal in assessee's own case for A.Y. 1999-2000 wherein similar claim was disallowed by the Tribunal relying on the decision of the Special Bench of the Tribunal in the case of DCIT vs. Mukand Ltd. reported in 13 SOT 558 (Mum)[SB] .
18. We have heard the arguments of both the sides and also perused the relevant material available on record. As regards the charges paid by the assessee for "right to way", the ld. Counsel for the assessee has submitted that the "right to way" acquired by the assessee is nothing but casement right. He submitted that this issue was involved in the initial year i.e. 2002- 03 and the appeal for the said year on the similar issue is pending before the Tribunal. He has contended that this issue involved in the year under consideration therefore may be restored to the file of the A.O. with a direction to decide the same in the light of the decision to be rendered by the Tribunal in A.Y. 2002-03. He has contended that a similar direction has been given by the Tribunal in the case of Avaya Global Connect Ltd. reported in (2008) 26 SOT 397 (Mum) wherein the matter was remanded by the Tribunal to the ld. CIT(A) for deciding the issue after taking into consideration the decision on the similar issue as involved in the earlier years which was pending at the relevant time. Keeping in view the said decision of the Tribunal and no objection of the ld. D.R. in this regard, we restore this issue to the file of the A.O. for deciding the same afresh in accordance with law after taking into consideration the decision of the Tribunal for A.Y. 2002-03.
19. As regards the premium and other charges paid in respect of leasehold land, the ld. Counsel for the assessee has submitted that although a similar issue has been decided by the Tribunal against the assessee in A.Y. 1999- 2000, the decision of Hon'ble Gujarat High Court in the case of Sun Pharmaceuticals Ind. Ltd. reported in (2010) 329 ITR 479 rendered 15 ITA No. 1901/M/09, 2585/M/09, 3477/M/09,3241/M/09, 2208/M/10, 7035/M/10,7430/M/11 subsequently on a similar issue is in favour of the assessee. A perusal of the judgment passed by the Hon'ble Gujarat High Court in the said case shows that the Tribunal in that case had found on analysis of the relevant lease agreement that the land in question was not acquired by the assessee. The lease Deed was registered because as per the Registration Act it was compulsory to do so. There was no change in the ownership of the land and the lease rent payable was very nominal. Keeping in view all these facts, it was held by the Tribunal that the benefit accrued to the assessee was only in the nature of an advantage for carrying on the business by paying nominal rent of the land and by obtaining the land on lease, the capital structure of the assessee did not undergo any change. Keeping in view all these findings of fact recorded by the Tribunal, which were not specifically disputed by the Revenue, the Hon'ble Gujarat High Court did not find any infirmity in the order of the Tribunal deleting the disallowance made on account of lease rent paid by the assessee to GIC treating the same as Revenue expenditure. In our opinion, before the ratio of the decision of Hon'ble Gujarat High Court in the case of Sun Pharmaceuticals Ind. Ltd. (supra) is applied in the present case, the relevant facts are required to be verified, we therefore restore this issue to the file of the A.O. for deciding the same afresh in the light of the decision of Hon'ble Gujarat High Court in the case of Sun Pharmaceuticals Ind. Ltd. (supra) after verifying the relevant facts. Ground No. 4 & 5 of the assessee's appeal are accordingly treated as allowed for statistical purpose.
20. Ground No. 6 raised by the assessee involving the issue of disallowance of Rs. 8,48,403/- made by the A.O. and confirmed by the ld. CIT(A) on account of unpaid service tax has not been pressed by the ld. Counsel for the assessee at the time of hearing before us. The same is accordingly dismissed as not pressed.
16 ITA No. 1901/M/09, 2585/M/09,3477/M/09,3241/M/09, 2208/M/10, 7035/M/10,7430/M/11
21. In ground No. 7, the assessee has challenged the action of the ld. CIT(A) in not directing the A.O. to grant interest u/s 244-A of the Act.
22. The order passed by the A.O. u/s 154 of the Act on 28-2-2007 resulted in the refund of Rs. 4,95,034/- on which interest u/s 244A, according to the assessee, was not granted by the A.O. This issue therefore was raised by the assessee in the appeal filed before the ld. CIT(A) against the order passed by the A.O. u/s 143(3) of the Act. However, keeping in view that this issue was arising from the order passed by the A.O. u/s 154 of the Act and not from the order u/s 143(3) which was the subject matter of appeal before the ld. CIT(A), the ld. CIT(A) did not entertain the same and dismissed the ground raised by the assessee on this issue. Before us, the ld. Counsel for the assessee has not been able to dispute this position that the issue relating to grant of interest u/s 244A of the Act arose from the order passed by the A.O. u/s 154 of the Act not from the order passed by the A.O. u/s 143(3) from which the present proceeding are emanated. We therefore find no infirmity in the order of the ld. CIT(A) in not entertaining this issue raised by the assessee and upholding the same, we dismiss ground No. 7 of the assessee's appeal.
23. Ground No. 8 of the assessee's appeal and ground No. 3 of the Revenue's appeal involve a common issue relating to disallowance made by the A.O. on account of club expenses which has been deleted by the ld. CIT(A).
24. In the assessment completed, disallowance of Rs. 3,20,728/- was made by the A.O. on account of club expenses claimed by the assessee treating the same as capital in nature. The ld. CIT(A) deleted the said disallowance relying on the decision of Hon'ble Bombay High Court in the case of Otis Elevator Co. (India) Ltd. vs. CIT reported in (1992) 195 ITR 682. In ground No. 3 raised in its appeal, the Revenue has challenged the order of the ld. CIT(A) giving relief 17 ITA No. 1901/M/09, 2585/M/09, 3477/M/09,3241/M/09, 2208/M/10, 7035/M/10,7430/M/11 to the assessee on this issue only on the basis that the decision of the Hon'ble Bombay High Court in the case of the Otis Elevators (supra) has not been accepted by them and the SLP filed against the said decision is pending. However, nothing has been brought on record at the time of hearing before us to show that the decision of the Hon'ble Bombay High Court in the case of Otis Elevator Co. (India) Ltd. (supra) has been reversed by the Hon'ble Supreme Court till date. We therefore uphold the impugned order of the ld. CIT(A) deleting the disallowance made by the A.O. on account of club expenses following the said decision of Hon'ble jurisdictional High Court, which is binding on us, and dismiss ground No. 3 of Revenue's appeal.
25. In ground No. 8 raised in its appeal, the assessee has only pointed out a factual mistake that the club expenses have been considered by the A.O. as well as by the ld. CIT(A) at Rs. 3,20,728/- as against actual amount of Rs. 1,88,093/- incurred by it. Although this issue as raised by the assessee has virtually become infructuous as a result of deletion of the entire disallowance made by the A.O. on account of club expenses, we find from the relevant record placed before us that club expenses only to the extent of Rs. 1,88,093/- were actually incurred and claimed by the assessee. We therefore allow ground No. 8 of assessee's appeal.
26. In ground No. 9 of its appeal, the assessee has pointed out another factual mistake in the impugned order of the ld. CIT(A) in stating that four contracts were undertaken by the assessee for construction of Oil Storage Tanks as against eleven such contracts undertaken by the assessee and since the same is found to be correct from the relevant record, we direct that the said mistake be corrected. Ground No. 9 of the assessee's appeal is accordingly allowed.
18 ITA No. 1901/M/09, 2585/M/09,3477/M/09,3241/M/09, 2208/M/10, 7035/M/10,7430/M/11
27. Now, we take up the cross appeals filed for A.Y. 2005-06 being ITA No. 3477/Mum/2009 (assessee's appeal) and ITA No. 3241/Mum/2009 (Revenue's appeal) which are directed against the order of ld. CIT(A) - 10, Mumbai dtd. 9-3-2009.
28. Ground No. 1 of the assessee's appeal as well as ground No. 1 of the Revenue's appeal involve a common issue relating to the disallowance made by the A.O. on account of provision made for warranty which has been partly sustained by the ld. CIT(A).
29. We have heard the arguments of both the sides and also perused the relevant material available on record. In the previous year relevant to A.Y. 2005-06, provision for warranty was made by the assessee at Rs. 3,32,75,085/- while expenses actually incurred on warranty were at Rs. 19,41,887/-. The assessee had also reversed excess provision made for warranty in the earlier years to the extent of Rs. 1,06,38,202/- in A.Y. 2005-
06. According to the A.O., the net expense on account of provision for warranty thus was claimed by the assessee at Rs. 2,03,53,041/- and treating the same as un-ascertained liability as done in A.Y. 2004-05, he disallowed the said amount and added back to the total income of the assessee. On appeal, the ld. CIT(A) found on the basis of details furnished by the assessee that actual warranty expenses accruing in relation to 11 contracts completed up to March 2005 were at 0.8755% of the value of work completed. By applying the said ratio, he directed the A.O. to allow the provision made by the assessee for warranty to the extent of Rs. 2,38,40,888/- being 0.8755% of the value of work completed amounting to Rs. 272.31 crores. Since the excess provision made on account of warranty in the earlier year was reversed by the assessee partly and there were some actual expense incurred on warranty in the year under consideration, these two items amounting to Rs.
19 ITA No. 1901/M/09, 2585/M/09,3477/M/09,3241/M/09, 2208/M/10, 7035/M/10,7430/M/11 1,29,22,044/- were considered by the ld. CIT(A) and net provision made to the extent of Rs. 1,09,87,844/- was held to be allowable by him for A.Y. 2005-06.
30. We have heard the arguments of both the sides and also perused the relevant material on record. It is observed that a similar issue involved in A.Y. 2004-05 has already been decided by us holding that the provision for warranty to the extent of 0.20% of the value of work completed was reasonable as held by the ld. CIT(A) on the basis of the relevant past data. From the details furnished by the assessee at the time of hearing before us, we have noted that there was no expenditure incurred on warranty by the assessee for assessment years 2001-02, 2002-03, 2003-04 and 2004-05 and even in the year under consideration i.e 2005-06, such expenditure incurred was only Rs. 19,47,887/-. It is also noticed that such expenditure incurred by the assessee in the immediately succeeding year i.e. 2006-07 was only Rs. 15,73,334/- while no such expenditure was actually incurred in assessment years 2007-08 and 2008-09. A contention raised in this regard on behalf of the assessee is that the expenditure incurred on warranty on several occasions, has been debited to the reckoned expense account instead of debiting the same to warranty expenditure account. If at all it is so, we are of the view that no proper accounting has been done by the assessee inasmuch as expenditure incurred on warranty is debited to the reckoned expense account and provision made for warranty is also debited to the P&L account which is patently wrong and cannot be accepted. In any case, the onus in this regard is on the assessee to show the details of warranty expenses actually incurred by furnishing the relevant details to justify the provision made by it and the assessee has clearly failed to discharge its onus. We therefore have no option but to decide this issue on the basis of details furnished by the assessee which clearly shows that the provision made by the assessee for warranty at 1-2% of the value of work completed is unreasonable and excessive. In the immediately preceding year i.e. A.Y. 2004-05, we have 20 ITA No. 1901/M/09, 2585/M/09, 3477/M/09,3241/M/09, 2208/M/10, 7035/M/10,7430/M/11 already held that the provision for warranty made by the assessee only to the extent of 0.20% was fair and reasonable on the basis of the past data. Since there is no material change in the relevant facts involved in A.Y. 2005-06 to justify any further relief to the assessee on this issue, we follow our decision in A.Y. 2004-05 and allow the provision for warranty only to the extent of 0.20% of the value of work completed. As regards the excess provision made in the earlier years which has been written back in the subsequent year and offered to tax by the assessee, we have already held while deciding the similar issue for A.Y. 2004-05 that the reversal of provision only to the extent allowed as deduction in the earlier years can be treated as income of the assessee and if any excess income has been offered by the assessee on this count, he may seek appropriate relief from the A.O. who is directed to allow the same in accordance with law. The impugned order of the ld. CIT(A) on this issue is accordingly modified dismissing ground No. 1 of assessee's appeal and allowing partly ground No. 1 of Revenue's appeal.
31. Ground No. 2 of the assessee's appeal as well as appeal of the Revenue involve a common issue relating to the disallowance of provision for warranty made by the A.O. while computing the book profit of the assessee as per the provisions of section 115JB of the Act which is partly sustained by the ld. CIT(A).
32. After considering the rival submissions and perusing the relevant material on record, it is observed that this issue is similar to the one involved in A.Y. 2004-05 which has already been decided by us. Following our conclusion drawn in A.Y. 2004-05 , we hold that the provision for warranty to the extent allowed in computation of income of the assessee as per the normal provisions of the Act has to be treated as ascertained liability which can be allowed in computing the book profit of the assessee as per provisions of 21 ITA No. 1901/M/09, 2585/M/09, 3477/M/09,3241/M/09, 2208/M/10, 7035/M/10,7430/M/11 section 115 JB of the Act. The excess provision represents unascertained liability which has to be disallowed and added back while computing such book profit. The impugned order of the ld. CIT(A) on this issue is accordingly modified dismissing ground No. 2 of assessee's appeal and allowing partly ground No. 2 of the Revenue's appeal.
33. The issues involved in ground No. 3 & 4 of the assessee's appeal relating to the disallowance made by the A.O. and confirmed by the ld. CIT(A) on account of proportionate deduction claimed by the assessee in respect of expenditure incurred on "right to way" and on premium and other charges paid in respect of leasehold land are similar to the one involved in A.Y. 2004-
05. Following our conclusion drawn in A.Y. 2004-05, we restore both these issues to the file of the A.O. for deciding the same afresh as per the same directions as given in A.Y. 2004-05.
34. The grievance raised by the assessee in ground No. 5 of its appeal is that the ld. CIT(A) has not decided the issue specifically raised in the ground challenging the action of the A.O. in applying provisions of section 36(1)(vii) of the Act while supporting the disallowance made on account of provision for warranty.
35. We have heard the arguments of both the sides and also perused the relevant material available on record. In our opinion, the issue relating to the assessee's claim for provision for warranty having been decided by the ld. CIT(A) as well as by us on merit independent of provisions of section 36(1)(vii) of the Act, the issue relating the applicability of the provisions of section 36(1)(vii) has become virtually infructuous. We therefore do not find it necessary or expedient to remit the matter back to the file of ld. CIT(A) for deciding the same even though we find merit in the stand taken by the assessee that the provisions of section 36(1)(vii) of the Act, which specifically 22 ITA No. 1901/M/09, 2585/M/09, 3477/M/09,3241/M/09, 2208/M/10, 7035/M/10,7430/M/11 deal with the allowability of provision for bad and doubtful debt, have no application while deciding the issue of allowability of provision for warranty. Ground No. 5 of assessee's appeal is accordingly dismissed as infructuous.
36. In the result, appeal of the assessee for A.Y. 2004-05 being ITA No. 3477/Mum/2009 is treated as partly allowed for statistical purpose while appeal of the Revenue for A.Y 2005-06 being ITA No. 3241/Mum/2009 is partly allowed.
37. Now, we shall take up the appeal of the assessee for A.Y. 2006-07 being ITA No. 2208/Mum/2010 which is directed against the order of ld. CIT(A) - 22, Mumbai dtd. 19-1-2007.
38. Ground No. 1 to 5 of this appeal involve a common issue relating to the disallowance of Rs. 8,23,274/- made by the A.O. and confirmed by the ld. CIT(A) u/s 14A of the Act r.w.r. 8-D of the income Tax rules, 1962. During the year under consideration, the assessee had earned dividend income of Rs. 49,91,262/- and income from mutual funds of Rs. 23,796/- which were exempt u/s 10(34) of the Act. No disallowance on account of expenses incurred in relation to the said income however was made by the assessee as required by the provisions of section 14A of the Act. The A.O., therefore, worked out such expenses incurred by the assessee in relation to earning of exempt income at Rs. 8,23,274/- by applying Rule 8-D of the Income Tax Rules, 1962 and made a disallowance to that extent u/s 14A of the Act. On appeal, the ld. CIT(A) confirmed the said disallowance relying on the decision of the Special Bench of ITAT in the case of Daga Capital Management P. Ltd. 119 TTJ 289 wherein it was held that Rule 8-D was applicable with retrospective effect.
39. We have heard the arguments of both the sides and also perused the relevant material placed on record. As held by the Hon'ble Bombay High 23 ITA No. 1901/M/09, 2585/M/09, 3477/M/09,3241/M/09, 2208/M/10, 7035/M/10,7430/M/11 Court in the case of Godrej and Boyce Mfg.Co. Ltd. reversing the decision of Special Bench of ITAT in the case of Daga Capital Management P. Ltd. (supra) Rule 8-D is applicable only prospectively i.e. from A.Y. 2008-09. As further held by the Hon'ble Bombay High Court in the case of Godrej and Boyce Mfg.Co. Ltd. (supra) the disallowance u/s 14A for the years prior to A.Y. 2008-09 has to be made on some reasonable basis. In this connection, it is observed that the exempt income earned by the assessee is 0.244% of the total income earned by it and accordingly the general administrative expenses to the extent of Rs. 1,13,385/- being 0.244% of the total general administrative expenses of Rs. 4.64 crores can reasonably attributed to the earning of exempt income on pro rata basis. This amount also comes to about 2% of the exempt income earned by the assessee. The ld. Counsel for the assessee has also agreed that this is a reasonable basis to quantify the disallowance of expense to be made u/s 14A of the Act and since the ld. D.R. has also not raised any material objection in this regard, we find it fair and reasonable to sustain the disallowance u/s 14A of the Act to the extent of Rs. 1,13,383/-. The relevant grounds of assessee's appeal are thus partly allowed.
40. The remaining grounds i.e. ground No. 6 to 11 raised by the assessee in its appeal for A.Y. 2006-07 read as under:-
"6. The learned CIT (A) erred in not specifically directing the Income Tax Officer to exclude from the total income an amount of `.3,02,08,158 being excess warranty provision pertaining to AYs 2004-05 and 2005-06 written back during the previous year relevant to the AY 2006-07. The learned CIT (A) ought to have appreciated that the said warranty provision was not allowed as deduction in the year of provision and hence its reversal also ought not to be charged to tax.
7. The learned CIT (A) erred in not specifically directing the Income Tax Officer to reduce an amount of `.3,02,08,158 in computing book profit under section 115JB being excess warranty provision pertaining to AYs 2004-05 and 2005-06 written back during the previous year relevant to the AY 2006-07. The learned CIT (A) ought to have appreciated that the said warranty provision was added back in computing book profit 24 ITA No. 1901/M/09, 2585/M/09, 3477/M/09,3241/M/09, 2208/M/10, 7035/M/10,7430/M/11 of the relevant AYs as being unascertained liability and hence as per provisions of clause (i) of Explanation 1 to section 115JB(2), reversal of such provision ought to have been excluded in computing book profit for the relevant AY.
Expenditure on development and other charges on leasehold land and expenditure on right of way.
8. The learned CIT (A) erred in not specifically directing the Income Tax Officer to allow proportionate deduction for expenditure of `.2,66,53,121 incurred in earlier years on right of way.
9. The learned CIT (A) erred in not specifically directing the Income Tax Officer to allow proportionate deduction for expenditure of `.44,12,06,710 incurred in earlier years towards premium and other charges on leasehold land.
Unabsorbed depreciation and capital loss.
10. The learned CIT (A) erred in not specifically directing the Income Tax Officer to quantify and allow the amount of unabsorbed depreciation and capital loss to be carried forward for set off in the subsequent AYs.
TDS Credit
11. The learned CIT (A) erred in not specifically directing the Income Tax Officer to grant credit for TDS of `.58,05,557."
41. As submitted by the ld. Counsel for the assessee, the issues involved in ground No. 6 to 11 have not been decided by the ld. CIT(A) vide his impugned order on the ground that the application filed by the assessee u/s 154 for rectification before the A.O. on the similar issues was pending at the relevant time and this position clearly evident from the impugned order of the ld. CIT(A) has not been disputed even by the ld. D.R. Keeping in view of the same, the ld. Representatives of both the sides have urged that the mater may be remanded back to the file of the ld. CIT(A) to decide all these issues on merit. Accordingly, the ld. CIT(A) is directed to consider and decide the issues involved in ground No. 6 to 11 of the assessee's appeal which had been raised in the appeal filed by the assessee before him but remained to be decided on 25 ITA No. 1901/M/09, 2585/M/09, 3477/M/09,3241/M/09, 2208/M/10, 7035/M/10,7430/M/11 merit. Ground No. 6 to 11 of assessee's appeal are accordingly treated as allowed for statistical purpose.
42. In the result, assesse's appeal for A.Y. 2006-07 is partly allowed.
43. Now, we shall take up the appeal of the assessee for A.Y. 2007-08 in ITA No. 7035/Mum/2010 which is directed against the order of the ld. CIT(A) 22, Mumbai dtd. 17-8-2010.
44. Ground No. 1,2,3 & 6 of this appeal of the assessee involve a common issue relating to disallowance of Rs. 28,36,926/- made by the A.O. and confirmed by the ld. CIT(A) u/s 14 A r.w.r. 8-D of the Income Tax Rules, 1962.
45. As agreed by the ld. Representatives of both the sides, this issue involved in A.Y. 2007-08 as well as all the material facts relevant thereto are similar to the one involved in A.Y. 2006-07 which has already been decided by us in the foregoing portion of this order. We therefore follow our conclusion drawn in A.Y. 2006-07 and sustain the disallowance made u/s 14A of the Act to the extent of Rs. 5,57,165/- on account of general and administrative expenses attributable to earning of exempt income as worked out on pro rata basis, being fair and reasonable. The relevant grounds of the assessee's appeal are thus partly allowed.
46. Ground No. 4 & 5 raised by the assessee in its appeal for A.Y. 2007-08 are not pressed by the ld. Counsel for the assessee at the time of hearing. The same are accordingly dismissed as not pressed.
47. The common issue raised in ground No. 7 & 8 of this appeal relating to the addition to be made on account of disallowance u/s 14A of the Act while computing profit u/s 115JB of the Act is consequential as agreed by the ld.
26 ITA No. 1901/M/09, 2585/M/09,3477/M/09,3241/M/09, 2208/M/10, 7035/M/10,7430/M/11 Representatives of both the sides. Accordingly, the addition made on account of disallowance u/s 14A while computing the book profit u/s 115JB is sustained to the extent of Rs. 5,57,165/- and ground No. 7 & 8 are partly allowed.
48. As regards ground No. 9 to 14, it is observed that a common issue involved therein relating to the deduction claimed by the assessee on account of provision for warranty is similar to the one involved in earlier years i.e. A.Y. 2004-05 and 2005-06 which has already been decided by us in the foregoing portion of this order. Following the conclusion drawn in the said years on the similar issue, we direct the A.O. to allow the provision of 0.20% to 0.50% made by the assessee on the value of work completed for warranty to the extent of 0.20%. Grounds No. 9 to 14 are thus partly allowed.
49. Ground No. 15 to 22 of the assessee's appeal for A.Y. 2007-08 involve a common issue relating to the addition of Rs. 10.86 crores made by the A.O. and confirmed by the ld. CIT(A) representing the amount due to customers (advance billing).
50. During the course of assessment proceedings, it was noticed by the A.O. that the assessee has shown amount due to the customers at Rs. 10.86 crores as on 31-3-2007. On further verification, he found that the said amount represented the difference between progress billings as done by the assessee up to 31-3-2007 and the revenue booked up to that date in respect of three contractors. According to him, the said difference was nothing but the under statement of profits and accordingly the assessee was called upon by him to offer its explanation in the matter. In reply, it was submitted that the percentage completion method was being followed by the assessee for recognizing the revenue from construction contracts as per AS-7 issued by the ICAI. It was submitted that the progress billing, on the other hand, was 27 ITA No. 1901/M/09, 2585/M/09, 3477/M/09,3241/M/09, 2208/M/10, 7035/M/10,7430/M/11 inclusive of advances received from the customers which did amount not necessarily reflect the work performance. It was explained that the contractor, for example, may be allowed to raise the bill upon mobilisation of construction equipment like cranes etc. but the said cannot have any reflection in the revenue recognition. Another example was also given by the assessee stating that a contractor may also be allowed to raise the bill upon finalization of drawings or on finalization of long lead items, however the same cannot be recognized as revenue in the books of account. It was contended on behalf of the assessee that this situation, however, would prevail only temporarily during the course of execution of the contracts but finally there would be no difference between the progress billing and amount recognized as revenue by the time of completion of the contracts. It was pointed out that out of Rs. 10.80 crores, a sum of Rs. 9.62 crores was due to one customer namely Indian Oil Sky Tank Limited and the same was mainly on account of progress bill raised by the assessee as per the contract for 15% advance payment of the contract value.
51. The submissions made on behalf of the assessee on this issue were not found acceptable by the A.O. According to him, all the amounts of progress billing raised by the assessee should have reflected in the total sales recorded in the books of account and the amount due to the customers as shown by the assessee was nothing but the under statement of its profits by the assessee. He therefore did not accept the method of percentage of completion claimed to be followed by the assessee relying on the various judicial pronouncements discussed in the assessment order and added a sum of Rs. 10.86 crores shown by the assessee as amount due to the customers to the total income of the assessee.
52. The additions made by the A.O. to its total income on account of amount due to the customers on account of progress billing was disputed by 28 ITA No. 1901/M/09, 2585/M/09, 3477/M/09,3241/M/09, 2208/M/10, 7035/M/10,7430/M/11 the assessee in an appeal filed before the ld. CIT (A) and the submissions made before the A.O. on this issue were reiterated on behalf of the assessee before the ld. CIT(A). The ld. CIT(A) however did not find merit in the same and confirmed the addition made by the A.O. on this issue for the following reasons given in para No. 5.3 of his impugned order:-
"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 A.O. during assessment proceedings noted that Appellant has not offered for tax an amount of . 10,86,35,165/- being difference between progress billing as on 31- ` 03-2007 and the cumulative revenue booked as per the accounts as on 31-03-2007 in respect of three contracts referred to in the assessment order. The assessee explained before the A.O. that under percentage completion method revenue is recognized as and when the work is performed while progress payments are the amounts received from the customers which are not necessarily reflected by the work performed. It was further explained that the assessee had agreed with the contractee that billing will be made as per milestone achieved as per contract which will be same as per revenue recognized during the year. A.O. however, did not accept the explanation holding that the amounts is respect of aggregate progress billings of 3 contracts have already been received by the assessee and in mercantile system of accounting this should have been offered for tax. The A.O. also relied upon several decisions wherein it was held that if receipt is a trading receipt even if it is not accounted for by the appellant same may be assessed by A.O. that the matter of taxability cannot be decided on the basis of entries which the assessee may choose to make in its account but has to be decided in accordance with the provision of law and also that the method of accounting followed by the assessee is not sacrosanct. I have 29 ITA No. 1901/M/09, 2585/M/09, 3477/M/09,3241/M/09, 2208/M/10, 7035/M/10,7430/M/11 considered the facts of the case and I am unable to agree with the contention of the appellant. The revenue has to be recognized at the earliest point of time on due or receipt basis whichever is earlier. In this case the appellant has already received the amount from 3 parties which it should have offered for taxation. What amount is to be offered for taxation cannot be a matter to be decided mutually by the appellant and the contractee as claimed by the appellant. The Appellant further claims that identical procedure has been followed in subsequent assessment year. However, appellant in my opinion cannot claim it to be a ground for not showing correct taxable income in the current year. In view of these facts, I am of the considered opinion that A.O. has rightly taxed the difference of `.10,86,35,165/-
being under statement of profit which is upheld.
53. The ld. counsel for the assessee mainly reiterated before us the submissions made before the authorities below on behalf of the assessee on this issue in order to explain the difference between the progress billing and revenue recognized shown as amount due to the customers. He submitted that the assessee has consistently followed percentage of completion method for recognizing its income from the contractors which is worked out on the basis of the cost actually incurred. He submitted that the progress billing, on the other hand, is done even for mobilization of advance etc. receivable by the assessee as per relevant contract which has no effect on the revenue recognition. In this regard, he invited our attention to the work order placed by Indian Oil Sky Tanking Ltd. placed at page No. 267 to 270 of the assessee's paper book and submitted that advance payment of 15% was receivable by the assessee of the contract price of Rs. 69.82 crores against the corporate guarantee. He submitted that this advance payment received by the assessee as per progress billing was not forming part of the income of the assessee and the same therefore was not reflected in the income recognized by the assessee by following percentage of completion method.
30 ITA No. 1901/M/09, 2585/M/09,3477/M/09,3241/M/09, 2208/M/10, 7035/M/10,7430/M/11
54. He invited our attention to the copy of submissions dtd. 16-12-2009 filed before the A.O. placed at page No. 259-262 of the assessee's paper book explaining the difference in the amount of advance billing and the income recognized by the assessee shown as amount due to the customer and strongly relied on the same. He also referred to the relevant portion of the written submissions filed before the ld. CIT(A) at page 32 of the assessee's paper book to show that if the value of contracts already executed is taken into consideration, the cumulative revenue recognized by the assessee is much more than the cumulative progress billing. He contended that as per the method followed by the assessee to recognize the income as per the percentage of completion method, the entire revenue from the contract is finally recognized on completion of the contract and the amount due to the customers also gets finally adjusted. Relying on the decision of Hon'ble Punjab & Haryana High Court in the case of CIT vs. Punjab Tractors Co- Operative Multi-Purpose Society Ltd. 234 ITR 105, he contended that if the receipt is before the accrual of income, it is in the nature of advance which can not be treated as income at the point of receipt.
55. The ld. D.R., on the other hand, submitted that the assessee has mainly executed the works contract for Public Sector Undertaking (PSU) and no PSU would make any payment without there being any work done by the assessee. He submitted that it is very difficult to accept that the assessee received the money from the PSU against the contract by raising progress billing but did not spend the same immediately. He contended that this situation is possible only when there is a case of non-performance of contract in which Accounting Standard has no application.
31 ITA No. 1901/M/09, 2585/M/09,3477/M/09,3241/M/09, 2208/M/10, 7035/M/10,7430/M/11
56. We have considered the rival submissions and also perused the relevant material available on record. It is observed that the difference in the amount of progress billing and revenue recognized by the assessee in relation to three contracts shows as "amount due to customers" was explained by the assessee before the A.O. as well as before the ld. CIT(A) by filing a detailed written submission. It appears that neither of them however has been able to appreciate the same in the correct prospective. As explained by the assessee, progress billing was done not only for the amount of work done but also for mobilization and other advances receivable by it as per the terms of the relevant contract. The revenue from the said contracts was recognized by the assessee by following the percentage of completion method and the said method as well as the basis adopted by the assessee to ascertain the percentage of work done was accepted by the department in the earlier years. The mobilization and other advances received by the assessee by raising progress billings did not represent income of the assessee at the time of raising the progress bills and the same therefore had no effect whatsoever on the income of the assessee, which was recognized by following consistently a well recognized method of percentage of completion. As rightly submitted on behalf of the assessee before the authorities below as well as before us, the entire revenue from the contracts executed by the assessee was finally recognized on the completion of the relevant contracts as per the method consistently followed by the assessee and the mobilization and other advances received by the assessee as per progress billings were liable to get adjusted on such completion. For example, the major difference in the amount of progress billing and revenue recognized by the assessee during the year under consideration amounting to Rs. 9.62 crores was in respect of the contract executed by the assessee for M/s Indian Oil Sky Tanking Ltd. which essentially represented 15% of advance payment of the contract price of Rs. 69.82 crores received by the assessee as per work order dtd. 12-8-2006. The 32 ITA No. 1901/M/09, 2585/M/09, 3477/M/09,3241/M/09, 2208/M/10, 7035/M/10,7430/M/11 said amount representing advance received against contracts thus was rightly shown by the assessee as "amount due to customer" which was liable to be adjusted against the balance work done in the subsequent years which represents income of the assessee for that year as per the percentage completion method followed by the assessee. The amount due to the customers as shown by the assessee thus was nothing but receipt of advance before accrual of income and as held by the Hon'ble Punjab & Haryana High Court in the case of Punjab Tractors Co-Operative Multi-Purpose Society Ltd., 234 ITR 105, the said amount representing advance against the work cannot be treated as income of the assessee at the point of receipt. We are therefore of the view that the addition of Rs. 10.86 crores made by the A.O. and confirmed by the ld. CIT(A) on this issue is not sustainable and deleting the same, we allow ground No. 15 to 22 of the assessee's appeal for A.Y. 2007-08.
57. Ground No. 23 relating to the claim of the assessee for set off of the unabsorbed depreciation of earlier years is not pressed by the ld. Counsel for the assessee at the time of hearing before us. The same is accordingly dismissed as not pressed.
58. As regards ground No. 24 and 25, it is observed that the issues involved therein relating to the assessee's claim for proportionate deduction on account of expenditure incurred in the earlier years on "right to way" and on premium and other charges paid on lease hold land are similar to the one involved in A.Y. 2004-05 which have already decided by us in the foregoing portion of this order. Following the conclusion drawn in A.Y. 2004-05 we restore this issue to the file of the A.O. for deciding the same as per the same directions as given in A.Y. 2004-05.
59. By way of ground No. 26, the assessee is seeking a direction of the A.O. to quantify and allow the amount of capital loss to be carried forward for set 33 ITA No. 1901/M/09, 2585/M/09, 3477/M/09,3241/M/09, 2208/M/10, 7035/M/10,7430/M/11 off in the subsequent assessment years. Accordingly we direct the A.O. to consider the claim of the assessee on this issue and decide the same in accordance with law after verifying the relevant record.
60. Ground No. 27 relating to assessee's claim for granting of credit on account of TDS amounting to Rs. 1,71,97,827/- is not pressed by the ld. Counsel for the assessee at the time of hearing before us. The same is accordingly dismissed as not pressed.
61. Now, we shall take up the appeal of the assessee for A.Y. 2008-09 being ITA No. 7430/Mum/2011 which is directed against the order of ld. CIT(A) -22, Mumbai dtd. 24-8-2011.
62. Ground No. 1 to 6 of this appeal involve a common issue relating to the disallowance of Rs. 3,07,55,182/- made by the A.O. u/s 14A and confirmed by the ld.CIT(A) as against the disallowance of Rs. 11 lacs offered by the assessee.
63. During the year under consideration, the assessee company had received dividend income of Rs. 1,25,06,262/- on the shares held in the subsidiary companies and dividend income of Rs. 3,18,75,787/- from the mutual funds. The said dividend income was claimed to be exempt by the assessee in the return of income filed for the year under consideration and disallowance of Rs. 11 lacs was made suo motu on account of expenses claimed to be incurred in relation to the said exempt income u/s 14A of the Act. The said disallowance was worked out by the assessee on the basis of salary paid to its employees amounting to Rs. 6,83,509/- who were claimed to be working in the Accounts department and engaged partly in the activity of making of the investment in mutual funds and the balance expenditure was estimated at 0.52% of certain expenses such as telephone expenses, electricity charges, printing charges, general and administrative charges and 34 ITA No. 1901/M/09, 2585/M/09, 3477/M/09,3241/M/09, 2208/M/10, 7035/M/10,7430/M/11 conveyance charges. The claim of the assessee of having incurred expenses only to the extent of Rs. 11 lacs in relation to the earning of exempt income was not accepted by the A.O. According to him, the assessee had made huge borrowings for its business activity and in the absence of any separate books of account kept for the investment activity earning exempt income, it was a case of common and mixed funds from which investment in shares and mutual funds was made by the assessee. He also held that the basis adopted by the assessee for estimating the expenses incurred in relation to the earning of exempt income at Rs. 11 lacs was not acceptable in the absence of any supporting details furnished by the assessee. He therefore applied Rule 8-D and worked out the disallowance to be made out of interest u/s 14A of the Act at Rs. 2,64,58,407/- and out of expenses at Rs. 31,96,775/- and disallowance to that extent was made by him in addition to the disallowance of Rs. 11 lacs already offered by the assessee u/s 14 A of the Act.
64. The disallowance made by the A.O. u/s 14A of the Act was disputed by the assessee in an appeal filed before the ld. CIT(A). It was submitted before the ld. CIT(A) that the entire investment in shares and mutual funds was made by the assessee out of internal accruals and fund generated in the past and there was no utilization of any borrowed funds for making the said investment. It was contended that no disallowance out of interest expenses therefore was called for u/s 14A of the Act. It was also contended that the disallowance of Rs. 11 lacs offered by the assessee on account of expenses incurred in relation to the earning of exempt income was fair and reasonable and there was no reason to enhance the same. The ld. CIT(A) did not find merit in the submissions made by the assessee on this issue. According to him, certain investment in shares was made by the assessee during the year under consideration out of cash credit account with SBI on which interest was being paid. He held that the assessee had also failed to explain out of which surplus funds, the other investment in mutual funds etc. was made.
35 ITA No. 1901/M/09, 2585/M/09,3477/M/09,3241/M/09, 2208/M/10, 7035/M/10,7430/M/11 He held that Rule 8-D was applicable to the year under consideration and the A.O. therefore was fully justified in computing the disallowance u/s 14A of the Act by applying the said Rule. Accordingly, the disallowance made by the A.O. on this issue was confirmed by the ld. CIT(A).
65. The ld. Counsel for the assessee invited our attention to the written submissions filed before the A.O. as well as before the ld. CIT(A) on this issue (copies placed at page No. 3 to 5 and 66 to 69 of assessee's paper book) to show that a detailed working was given showing the own funds available with the assessee for making corresponding investment in shares and mutual funds. He also invited our attention to the annual accounts of the assessee placed at page No. 409 to 414 of the assessee's paper book to show that own funds of Rs. 379 crores were available to the assessee which were sufficient to make investment of Rs. 505.88 crores in shares and mutual funds. He pointed out that the current year's profit itself Rs. Was 34.28 crores as shown in the P&L account. He contended that the investment in shares and mutual funds thus was made by the assessee out of its own funds and no disallowance out of interest u/s 14A of the Act was called for. As regards the disallowance made by the A.O. out of other expenses by applying Rule 8-D, he contended that such disallowance to the extent of Rs. 11 lacs was offered by the assesse suo motu and there being nothing to show that the A.O. was not satisfied with the same, Rule 8-D cannot be invoked. Alternatively, the ld. counsel for the assessee contended that if the disallowance out of expenses is to be made by applying Rule 8-D, the disallowance of Rs. 11 lacs offered by the assessee needs to be adjusted or reduced from such disallowance.
66. The ld. D.R. contended that assessee having maintained common and mixed funds, interest expenditure on borrowed funds as attributable to the earning of exempt income was rightly disallowed by the A.O. u/s 14A of the Act on the basis given in Rule 8-D. He contended that the said Rule 8-D is 36 ITA No. 1901/M/09, 2585/M/09, 3477/M/09,3241/M/09, 2208/M/10, 7035/M/10,7430/M/11 applicable to the year under consideration i.e 2008-09 and quantum of disallowance to be made out of expenses u/s 14A of the Act was rightly worked out by the A.O. by applying the same.
67. We have considered the rival submissions and also perused the relevant material available on record. A perusal of the balance sheet of the assessee for the year under consideration shows that own funds of Rs. 379 crores were available with the assessee which were sufficient to cover the investment of Rs. 50.88 crores made in shares and mutual funds. Even the current years profit after tax was Rs. 34.28 crores and if the depreciation claimed by the assessee at Rs. 18.07 crores is added back, the internal accrual of funds for the year under consideration itself was to the tune of Rs. 52.35 crores which is more than the investment of Rs. 50.88 crores made by the assessee in shares and mutual funds as on 31-3-2008. It is observed that a detail working was filed by the assessee before the A.O. as well as before the ld. CIT(A) showing the availability of own funds for making investment in shares and mutual funds but still disallowance u/s 14A of the Act was made out of interest on the ground that in the absence of separate books of account maintained by the assessee for its investment activity, it was a case of common funds warranting disallowance u/s 14A of the Act. In the case of CIT vs. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bom.), the Hon'ble Bombay High Court has held that when there is a common pool of funds, presumption would arise that investment yielding tax free returns is made by the assessee out of its own funds. Keeping in view this decision of Hon'ble jurisdictional High Court, we hold that the investment in shares and mutual funds was made by the assessee out of its own funds and there being no utilization of borrowed funds to make the said investment, the disallowance u/s 14A of the Act out of interest is not called for.
37 ITA No. 1901/M/09, 2585/M/09,3477/M/09,3241/M/09, 2208/M/10, 7035/M/10,7430/M/11
68. As regards the disallowance out of other expenses, it is observed that a sum of Rs. 11 lacs offered by the assessee on account of such disallowance was not found acceptable by the A.O. as per the clear finding recorded on page 3 of the assessment order. Specific reasons were also given by him for not accepting the basis adopted by the assessee to work out such disallowance at Rs. 11 lacs and keeping in view the said reasons, we are of the view that the disallowance of Rs. 31,96,775/- made by the A.O. out of other expenses by applying Rule 8D was fully justified and there is no reason to interfere with the impugned order of the ld. CIT(A) confirming the same. We, however, find merit in the alternative contention of the ld. counsel for the assessee that the disallowance of Rs. 11 lacs offered by the assessee suo motu is required to be adjusted/reduced from the disallowance so worked out by applying Rule 8D. Accordingly, we sustain the disallowance of Rs. 2,96,55,182/- made by the A.O. u/s 14A of the Act and confirmed by the ld. CIT(A) to the extent of Rs. 21,96,775/- and allow partly ground No. 1 to 6 of the assessee's appeal.
69. Ground No. 7 & 8 relating to the assessee's alternative claim on the issue of disallowance u/s 14-A are not pressed by the ld. counsel for the assessee at the time of hearing before us. The same are accordingly dismissed as not pressed.
70. As regards ground No. 9 to 13, it is observed that a common issue involved therein relating to the deduction claimed by the assessee on account of provision for warranty is similar to the one involved in the earlier years i.e. assessment years 2004-05, 2005-06 and 2007-08 which has already been decided by us. There is, however, certain change in the relevant facts as involved in A.Y. 2008-09 as compared to assessment years 2004-05, 2005-06 and 2007-08. In assessment years 2004-05, 2005-06 and 2007-08, provision for warranty to the extent of 0.20% of the value of work completed has been 38 ITA No. 1901/M/09, 2585/M/09, 3477/M/09,3241/M/09, 2208/M/10, 7035/M/10,7430/M/11 allowed by us keeping in view the quantum of warranty expenditure actually incurred by the assessee in assessment years 2005-06 & 2006-07. In so far as A.Y. 2008-09 is concerned, there is, however, no expenditure incurred on warranty in that year or even in the immediately preceding year i.e. A.Y. 2007-08. The expenditure incurred on warranty in the immediately succeeding year i.e. A.Y. 2009-2010 is also minimal. Keeping in view these relevant facts and figures, we are of the view that the provision of warranty even to the extent of 0.20% as allowed by us in the earlier years would be excessive and unreasonable. The assessee in fact has increased the provision for warranty to 0.25 to 1% in A.Y. 2008-09 which is not justified at all. Having regard to all the relevant facts of the case, we are of the view that it would be fair and reasonable to allow the provision for warranty only to the extent of 0.10% of the value of work completed for A.Y. 2008-09. The relevant grounds of the assessee's appeal are thus partly allowed.
71. As regards ground No. 14 to 21, it is observed that the issue involved therein relating to the addition made by the A.O. and confirmed by the ld. CIT(A) on account of the amount due to customers as a result of progress (advance) billing is similar to the one involved in A.Y. 2007-08 which has already been decided by us in the foregoing portion of this order. Following our conclusion drawn in A.Y.2007-08, we delete the addition made by the A.O. and confirmed by the ld. CIT(A) on account of amount due to customers and allow ground No. 14 to 21 of the assessee's appeal.
72. Ground No. 22 relating to assessee's alternative claim on the issue of addition made on account of amount due to customers has become infructuous as a result of deletion of the said addition by us and the same is accordingly dismissed.
39 ITA No. 1901/M/09, 2585/M/09,3477/M/09,3241/M/09, 2208/M/10, 7035/M/10,7430/M/11
73. The issue raised in ground No. 23 relates to the disallowance of assessee's claim for proportionate deduction in respect of expenditure of ` 2,66,53,121/- incurred in the earlier years on "right of way" while the issue involved in ground no. 24 relates to disallowance of assessee's claim for proportionate deduction on account of expenditure of `- 44,12,06,710/-
incurred in the earlier years towards premium and other charges paid on leasehold land.
74. After considering the rival submission and perusing the relevant material available on record, it is observed that both these issues raised by the assessee in ground no. 23 & 24 of its appeal for A.Y. 2008-09 are similar to the one involved in A.Y. 2004-05 which have already been decided by us in the foregoing portion of this order. Following our conclusion drawn in A.Y. 2004-05, we restore both these issues to the file of the A.O. for deciding the same afresh as per the same direction as given in A.Y. 2004-05. Ground no. 23 & 24 are accordingly allowed for statistical purposes.
75. In ground No. 25, the limited relief which is sought by the assessee is that a direction may be given to the A.O. to grant credit for TDS. Accordingly we direct the A.O. to consider and allow the claim of the assessee for TDS in accordance with law after verifying the relevant documentary evidence.
76. The grievance of the assessee as raised in ground No. 26 is that the ld. CIT(A) ought to have directed the A.O. to compute interest u/s 234B of the Act based on the returned income. In this regard, it is observed that a direction was given by the ld. CIT(A) vide his impugned order to the A.O. to charge interest u/s 234C of the Act after verification as per law and keeping in view this direction given by the ld. CIT(A), we are of the view that the 40 ITA No. 1901/M/09, 2585/M/09, 3477/M/09,3241/M/09, 2208/M/10, 7035/M/10,7430/M/11 assessee cannot be said to have any grievance on this issue as projected in ground no. 26. We, therefore, dismiss the said ground.
77. In the result, appeals of the assessee for assessment years 2004-05, 2006-07, 2007-08 & 2008-09 as well as Revenue's appeal for A.Y. 2005-06 are partly allowed while the assessee's appeal for A.Y. 2005-06 is treated as partly allowed for statistical purpose. The Revenue's appeal for A.Y. 2004-05 is dismissed.
Order pronounced in the open court on 17-05-2013.
.
आदे श क घोषणा खल
ु े यायालय म दनांकः17-05-2013 को क गई ।
Sd/- sd/-
(Dr. S.T.M. PAVALAN) (P.M. JAGTAP)
या यक सद य JUDICIAL MEMBER लेखा सद य / ACCOUNTANT MEMBER
मुंबई Mumbai; दनांक Dated 17-05-2013
व. न.स./ RK , Sr. PS
आदे श क त ल प अ े षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent.
3. आयकर आयु त(अपील) / The CIT(A), concerned, Mumbai.
4. आयकर आयु त / CIT - concerned, Mumbai
5. वभागीय त न ध, आयकर अपील य अ धकरण, मुंबई / DR, ITAT, Mumbai D Bench
6. गाड फाईल / Guard file.
ु ार/ BY ORDER,
आदे शानस
स या पत त //True Copy//
उप/सहायक पंजीकार (Dy./Asstt. Registrar)
आयकर अपील य अ धकरण, मुंबई / ITAT, Mumbai