Income Tax Appellate Tribunal - Delhi
Dy. Commissioner Of Income Tax vs Lurgi India Co. Ltd. on 24 August, 2007
Equivalent citations: [2008]114ITD1(DELHI), [2008]302ITR67(DELHI)
ORDER
K.G. Bansal, Accountant Member
1. Both these appeals of the revenue raise common grounds. The appeals were argued in a consolidated manner by the learned DR and the learned Counsel for the assessee. Therefore, we find it convenient to pass a consolidated order.
2. Ground No. 1 is that on the facts and in the circumstances of the case, the learned CIT(A) erred in holding that the receipt of Rs. 13.00 crore by the assessee as a non-refundable grant from its parent company was a capital receipt, whereas the receipt was actually revenue in nature as the payment was made to compensate the assessee for trading loss
3. In this connection, the learned DR took us through the assessment order. It was pointed out that the assessee received a sum of Rs. 13.00 crore from its parent company M/s Lurgi A.G., which was credited to profit & loss account by way of a capital grant. However, in the computation, this amount was reduced from the income, and a note was also appended to the return stating inter-alia that in the relevant previous year, the assessee received Rs. 13.00 crore from Lurgi A.G. for recoupment of its losses. The same is a capital grant not chargeable to tax under the Act, in view of the decisions of Hon'ble Delhi High Court in the case of Handicrafts & Handloom Exports Corporation v. CIT, ; Hon'ble Bombay High Court in the case of CIT v. Indian Textile Engineers Pvt. Ltd. and Hon'ble Calcutta High Court in the case of CIT v. Stewarts & Lloyds of India Ltd. . In the course of assessment, the assessee was required to elaborate further on this issue with respect to the nature of the transaction. It was elaborated that Lurgi A.G., Frankfurt was holding 99.7% share in the assessee company, which gave a grant of Rs. 13.00 crore to the assessee company for recoupment of losses. The assessee company was executing turn-key project for Haldia Petrochemicals Ltd. (HPL), in which the Government of West Bengal was a major shareholder. The assessee incurred substantial losses in execution of this turn-key project. The assessee was not in a financial position to bear such losses and, therefore, it faced major liquidity problem. In order to sustain its existence in the market, the assessee company requested the parent company to render financial help. In response to the request, the parent company repatriated the aforesaid amount. The assessee also furnished the copies of request letter from the assessee company to Lurgi A.G., Foreign Inward Remittance Certificate (FIRC) in respect of the aforesaid amount and judgments relied upon for its claim that the receipt was a capital receipt, not liable to tax under the Act. The assessee also filed further submissions on 28.2.2002, narrating the circumstances which led to the aforesa d funding of Rs. 13.00 crore. Various communications between the assessee and its parent company indicating the progress in negotiations for the funding were also filed.
4. The learned DR pointed out that various evidences filed by the assessee were examined by the Assessing Officer. It emerged that the a sessee had obtained the contract regarding turn-key project with HPL worth Rs. 110 crore in the year 1998. The assessee made a financial forecost which showed that there will be acute shortage of funds in the coming years. Therefore, it requested the parent company to,--(i) furnish guarantees for availing credit facilities from the bank, and (ii) extend long-term support by way of equity enhancement. Consequently, the parent company provided corporate guarantee to ANZ Grindlays Bank, which enhanced the credit facility to Rs. 16.00 crore in the year 1999. However, the financial position of the assessee further worsened and it even contemplated the stoppage of work due to fund crunch. After repeated requests for financial support, the parent company conducted a review of its operational viability. Upon doing so, it stood guarantee to the UTI Bank for issue of debentures worth Rs. 20.00 crore. The assessee's request for equity enhancement was found to be untenable, but after deliberations, the parent company agreed to remit a sum of Rs. 13.00 crore as non-refundable capital grant. This money was received on 18 8.1999.
5. It was also pointed out that the Assessing Officer considered the facts of the case in the light of the decision of Hon'ble Delhi High Court in the case of Handicrafts & Handloom Exports Corporation of India (supra). In that case, the Hon'ble Court found that the payment was in the nature of gift or voluntary payment; it was motivated by personal relationship; and it did not stem from any business consideration. Therefore, it was held that the receipt was non-trading in nature. Coming to the facts of this case, it was pointed out that the impugned amount was not a gift. As a matter of fact no gift deed was drawn. The onus to prove the gift was on the assessee, as held by Hon'ble Delhi High Court in the case of K.L. Agarwal v. CIT (1990) 190 ITR 303. The payment was also not voluntary in nature for the reason that there was a protracted correspondence and meetings between the two parties. Various suggestions were made by both the parties and the assessee insisted on payment in some form or the other. The assessee even threatene to stop its business operations in India. Thus, Lurgi AG. was (sic) into furnishing guarantees for credit facilities and repatriated the aforesaid money. The payment stemmed out of business consideratio for the reason that the Lurgi A.G. was holding 99.7% (sic) in the assessee company and was, thus, commercially related to the assessee. Lurgi A.G. not only made this payment but also stood counter guarantee for enhancing the credit facilities. Two clients of the assessee, namely, UIL and MSL encashed bank guarantees of Rs. 12.4 crore for alleged non-performance of the contracts by the assessee company. The assessee also had business relationship with other associate concerns, namely, Lurgi Oel Gas Chemie and Lurgi Anlagabau Chemnitz for various projects. It had also undertaken refinery expansion projects in Germany and Mexico for its parent company. In the case of Handicrafts & Handloom Exports Corporation of India, the business activity of the export of the subsidiary company was wholly financed by the holding company. The losses were incurred in the export business from year to year, which were recouped by the holding company. Such was not the case here as the assessee had diverse sources for its funds. While the losses were recouped by the holding company in the case decided by the Hon'ble Delhi High Court, the payment was made in this case to meet immediate liquidity requirement, which no doubt arose on account of recurring losses and also for the purpose of acquiring a new office in India. Thus, it was held that the facts of that case and this case are distinguishable and, therefore, the ratio of that case was not applicable to the facts of the present case. The learned DR pointed out that the assessee had also relied on the decision in the case of Stewards & Lloyds of India Ltd. (supra). In that case, the Hon'ble Calcutta High Court had observed that there had been no business transaction between the assessee company and the U.K. company, being the holding company, during the year of payment. The payment was unsolicited and without expectation and, therefore, it was held that it was in the nature of a windfall. It was pointed out that the facts of that case and this case are also distinguishable for the reason that there was intimate business connection between the assessee and the holding company and also between them and a number of other group companies. The assessee company was established in the year 1954 as a marketing office for Lurgi group of companies, Farankfurt. With the rapid industrial growth in India, the assessee company undertook substantial expansion programme in 1990 and set up an engineering base for executing various projects. The assessee executed turn-key contracts by using technologies of the other company of the Lurgi group. Thus, the assessee acted in close cooperation with various group companies. In this year, various payments have been made to the associate company as technical know-how fees or consultation fees. It is also mentioned in the notes to the accounts that the Directors considered it appropriate to prepare the accounts on the going concern basis in view of continued support from the parent company. Thus, it was held that there was a close connection between the assessee company and its parent company. It was further held that the receipt was not unsolicited and without expectation. The parent company and other associate companies had substantial stakes in the assessee company as amongst them there was a relationship of close dependence. In such circumstances, the payment could not be said to be a windfall.
6. The assessee had also relied on the decision in the case of Indian Textile Engineers Pvt. Ltd. & Another (supra), in which subvention payments were made by the holding company and other associate companies to the assessee company against losses, which were treated as bad and doubtful debts. The Hon'ble Bombay High Court pointed out that subvention payment related to the deficit, expressly made in an agreement between the paying company and the payee company, governed by Section 20 of the Finance Act, 1953 (U.K). It was further pointed out that there was no corresponding legislation in India. It was also pointed out that if the debts in respect of which payments have not been made cannot be considered as deductible under the Income-tax Act, then, payment which has been made to reimburse the company in respect of non-allowable bad debt, can also not be treated as a trading receipt. Therefore, the receipt was held to be de-hors the trading activity of the company, which could not be taken as income. The Assessing Officer was of the view that the ratio of that case was that if the loss was not allowed, the recoupment thereof could also not be taxed and this ratio supported the case of the revenue for the reason that the losses which have been recouped by the assessee have been allowed as trading losses. It was also held that a voluntary periodic or recurrent payment will be in the nature of income, as held by Hon'ble Gujarat High Court in the case of CIT v. G.H. Bhagat .
7. The learned DR pointed out that in coming to the conclusion that the mpugned amount was receipt of revenue nature, the Assessing Officer also considered two more decisions rendered by the Hon'ble Supreme Court in the case of P.H. Divecha v. CIT and P. Krishna Menon v. CIT . It was pointed out by the Assessing Officer that it was held in the case of P.H. Divecha that if the payment was not received to compensate for loss of profit of a business, the receipt cannot be properly termed as income. Therefore, conversely if the receipt was for recoupment of past losses, then, the receipt will be income in nature. The Hon'ble Court had held that there may be no legal obligation for the holding company to pay the sums to the assessee. That by itself will not negate the charge to income-tax. The decision was followed Hon'ble Patna High Court in the case of CIT v. Bokaro Steel Ltd. (No. 1), , in which it was pointed out that the receipt may not necessarily arise from any business activity, investment, outlay or any enforceable obligation to pay.
8. The learned DR argued that while the cases cited by the assessee were distinguishable on facts, the cases relied upon by the Assessing Officer supported the view that the impugned amount was a revenue receipt. The amount was credited to profit & loss account for recouping the loss. Therefore, the Assessing Officer rightly brought the (sic) amount to tax in the hands of the assessee. It was further argued that the learned CIT(A) ignored factual and legal position and erroneously held that the amount was a capital receipt.
9. Before proceeding with the submissions made on behalf of the assessee, we may briefly summarize the ratio of the cases relied upon by the A.O. It was his case that the impugned amount was not a gift made by the parent company to the subsidiary company in view of the decision in the case of K.L. Aggarwal (supra). The facts of that case were that the assessee claimed receipt of a gift of Rs. 50,000/-. The Assessing Officer disbelieved the contention and made the addition of the amount to the income of the assessee. The submission on behalf of the assessee was that the donor was not examined by the Assessing Officer. The Hon'ble Court pointed out that the onus to prove the validity of the gift was on the assessee. It was for the assessee to produce the donor for being examined. There was no grievance that such an opportunity was not granted. The question of summoning the donor could arise if the assessee had informed the Assessing Officer that he was not in a position to seek the presence of the donor and summons may be issued to him. No such request was made by the assessee.
10. Therefore, the Hon'ble Court held that the Tribunal was right in not accepting the story of the gift, which in any case is a question of fact. The Assessing Officer had also relied on the decision in the case of Shri G.H. Bhagat (supra) for the proposition that periodic and recurring voluntary payments afford a ground for the conclusion that the receipt was in the nature of income. The facts of that case were that the assessee was a direct descendent of a saint, Jalarambapa, who had opened a centre for free distribution of food to the poor in his village. The centre was known as Annakshetra. In due course of time, the centre became popular place of visit by the devotees. After the death of the saint, the place continued to be treated as a sacred place by them. His descendents placed his portrait along side idols of Ram, Laxman and Sita. Visitors were allowed darshan of the relics, portrait and the idols. They made offering in front of the relics of Jalarambapa. Large sums were also received from different places in India and abroad by way of money-orders, postal orders, cheques, drafts etc. The activity of feeding the poor continued after the death of the saint. The ITO sought to assess the surplus income of the centre as the income of the assessee for assessment years 1966-67 to 1969-70. The Tribunal gave a finding that most of the offerings came from the people outside and such offerings were not made at the time of arti or puja performed by the assessee. Thus, the offerings did not arise out of the exploitation of the centre with a view to producing income.
11. Thus, the offerings did not arise out of any business or profession or vocation exercised by the assessee. The offerings were purely voluntary in nature or gifts to Jalarambapa. The Hon'ble Court held that the amount received could not be regarded as income of the assessee as they depended wholly on the goodwill of the offerers. The offerings were not made to the assessee but at the relics of Jalarambapa out of reverence for the deceased saint. The offerings were not made in return of any services rendered by the assessee. Further, it was held that Jalaram gudee was not a temple as the elaborate rituals for installation of the idols were not carried out. There was no evidence that there was dedication of the property for the use and worship of idols. Thus, the institution was not a private religious endowment. Even if it is assumed that it was a private religious endowment, the family of the assessee and not the assessee alone would be the beneficiary of the offerings. Thus, the surplus in the hands of the assessee was not income. The Assessing Officer had also referred to the decision of Hon'ble Supreme Court in the case of P.H. Divecha (supra). In that case, the assessee was holding exclusive rights in a particular terr tory to sell electric lamps manufactured by Philips, for which he was entitled to certain commissions and discount for breakage etc. The agreement remained in existence for 16 years. Thereafter Philips decided to take over distribution of lamps on its own also in that territory and served a notice to the assessee for termination of the agreement. As a result of discussion between the two parties, Philips inter-alia agreed to pay in instalments of Rs. Rs. 40,000/- p.a for a period of there years to each partner of the firm. It was recorded that this remuneration would be in addition to the profits of the firm which they may realize as a regular lamp dealer. The question was whether the impugned amount was assessable as income.
12. The Hon'ble Court pointed out that a monopoly right of purchase and sale existed in favour of the assessee, which was n advantage of enduring nature. There was no evidence that the amount payable to the partners represented the likely profits of the next three years if the agreement was not terminaled. Thus, the payment could not be regarded as the payment for the (sic) rendered by the assessee to Philips and for that purpose the descript on of the amount as remuneration in addition to ordinary profits was immaterial. Since the amounts could not be related to any business done or loss of profit, the payment did not bear the character of income.
13. The Hon'ble Court opined that in determining whether a payment is compensation for loss of a capital asset or income, one should have regard to the nature and quality of the payment. If the payment was not received as compensation for loss of profits of business, it could not be taken as income in the hands of recipient. For a payment to constitute profits or gains, there must be a source and a connection must exist between the quality of receipt and the source. Therefore, it must be found out as to why the payment was made. In this connection, greater attention should be attached to the nature of receipt in the hands of recipient. In arriving at the conclusion of income, the periodicity of payment or its description as remuneration may not be the sole deciding factor. He had also referred to the decision in the case of P. Krishna Menon (supra). In that case, the assessee was spending his time in studying Vedanta philosophy and teaching it.
14. of his disciples regularly came to him and stayed there for a few months at a time. He attended his lectures and instructions. He transferred the money standing to his credit in an account at Bombay amounting to more than Rs. 2.00 lakh to the assessee's account at Bombay. He also credited sums to this account periodically. The question was whether the receipts constituted income in the hands of the assessee. The Hon'ble Court pointed out that teaching was a vocation if not a profession. If any business, profession or vocation produced income, it was properly taxable even if the vocation was not carried out with a motive to produce income. The teachings made by him was the main cause of payment made by the disciple. The income could not be termed as casual or non-recurring, for which it has to be shown that it had not arisen from exercise of a vocation.
15. In reply, the learned Counsel for the assessee referred to page 20 of the order of the learned CIT(A), where it was mentioned the loss reimbursed by the holding company had not occurred due to transactions undertaken by the subsidiary company and the holding company on behalf of the holding company. According to him, this finding was central to his case that in absence of any such business connection, the receipt was in the nature of a capital receipt. He referred to page 2 of the paper book, being a notice Under Section 142(1) of the Act, in which it was pointed out that the assessee had received capital grant of Rs. 13.00 crore for recoupment of losses, which was considered as a capital receipt not chargeable to tax under the Act, by placing reliance on the decision in the case of Handicrafts & Handloom Exports Corporation. The assessee was requested to furnish the agreement and details in respect of the receipt and state why it may not be taken as a revenue receipt.
16. Then, he referred to page 4 of the paper book, being the FIRC dated 18.8.1999, showing the purpose of remittance as stated by the remitter to be "non-refundable capital grant". He referred to page 5 of the paper book, which shows that in all the years from assessment year 1997-98 to assessment year 2002-03, the assessee had incurred losses. He also referred to page 6 of the paper book, being a letter dated 12.8.1999 written by Lurgi A.G. to the assessee stating that the management has approved a non-refundable grant of Rs. 130 million to Lurgi India Co. Ltd. formeeting its liquidity requirement arising due to losses incurred. He also referred to pages 88 to 163 of the paper book, being the correspondence between the assessee and the holding company regarding the fund requirements of the assessee. In particular, he referred to page 100, being the debenture subscription agreement of the year 1999 between the assessee and Times Bank Ltd. for Rs. 10.00 crore and page 15, being subscription , agreement between the assessee and ICICI Banking Corporation Ltd. of the year 1999 regarding debenture subscription of Rs. 10.00 crore. It was pointed out that the whole of this correspondence was not in relation to the business between the assessee and its holding company but it was about requirement of fluids by the assessee company.
17. He referred to the decision of Hon'ble Supreme Court in the case of Parimisetti Seetharamamma v. CIT , in which it was pointed out that sections 3 and 4 of the 1922 Act imposed a tax on all in omes. However, the Act did not regard all receipts to be incomes liable to tax. The initial burden for taxing any receipt to be income is on the revenue. However, where a receipt is in the nature of income, the burden to prove that it is not taxable is on the assessee. It was further pointed out that where a claim is made that a receipt did not fall under the taxing provision, and all facts regarding the receipts have been disclosed, the authorities were not entitled to raise an inference that the receipt was taxable on the ground that the assessee failed to lead all evidence in support of the contention that it was not within the taxing provision. In this connection, he referred to the discussion on pages 2 and 3 of the order of the learned CIT(A), being the submissions made before her to the effect that due to losses, the capital of the assessee had eroded, non-refundable capital grant of rs. 13.00 crore was received from the holding company as evidenced by the FIRC and the receipt was not liable to tax, in view of the decision of Hon'ble Delhi High Court in the case of Handicrafts & Handloom Export Corporation (supra). Thus, his case was that all the facts had been disclosed and it was for the revenue to initially discharge the onus that the receipt was in the nature of income.
18. The earned counsel referred to the assessee's submissions before the learned CIT(A) and her findings in the matter. In particular, it was pointed out that the FIRC clearly showed the purpose of remittance to be "non-refundable capital grant". There was no evidence to the contrary. Therefore, the Assessing Officer should have accepted the claim that the receipt was a capital grant. Further, the payment was a voluntary one as a request from the recipient will hot make the payment to be non-voluntary on the part of the payer. Therefore, the allegation that Lurgi A.G. was coerced to make the payment was without any substance. There was a relationship of holding company and subsidiary company between the payer and the assessee, but that was not a commercial relationship arising out of commercial transactions between the two. In spite of voluminous correspondence filed before the Assessing Officer, he was not able to refer any commercial transaction between the holding and the subsidiary company. In these circumstances, the question was whether, the receipt was in capital field or revenue field? He referred to the decision in the case of P.Krishna Menon (supra), relied upon by the Assessing Officer and pointed out that the facts of that case and the facts of this case are quite distinguishable. Therefore, the ratio of that case is not applicable to the facts of this case. On a query from the Bench, it was pointed out that the decision in the case of CIT v. Wazir Sultan & Sons , was referred in the context of the fact that the assessee had received certain money in lieu of the termination of commission agency in territories outside Hyderabad. The majority judgment in that case was that the receipt was in the capital field as the territory of commercial operation was a part of fixed capital of the assessee's business. It was also immaterial whether the agreement was terminable at will and was not of an enduring character.
19. It was argued that the facts of the case are squarely covered by the decision of Hon'ble Delhi High Court in the case of Handicrafts & Handloom Export Corporation, 133 ITR 590. The facts of that case were that the assessee was a wholly owned subsidiary of the State Trading Corporation of India Ltd. (STC). The assessee incurred losses, which were reimbursed by the STC. The question was whether the losses could be said to be wiped out for the purpose of income-tax on account of reimbursement made by the STC. The Hon'ble Court pointed out that the assessee company had incurred losses. It so happened that the STC, having regard to its relation with the assessee company, agreed to discharge the liability of the assessee and reimburse it to the extent of the losses incurred. The case is analogous to the case of a person agreeing to meet the loss incurred by another person in carrying on the business and to discharge the debt incurred by him out of consideration of affection or regard, such as a father meeting losses incurred by his son in carrying on a business. The losses incurred by the assessee could not have been ignored merely because they were made good by the holding company. It was further pointed out that the position will be clearer if a converse situation is considered, in which the Corporation made profit and claimed that the profit should not be assessed because they have been transferred to the holding company. Such a contention would clearly not be tenable for the reason that making over the profits to the holding company would merely be a case of application of income and not the expenditure incurred for earning the income. Therefore, in the converse situation obtained in the case of the assessee, the loss had been clearly incurred which cannot be ignored merely because it had been recouped by another person. Further, hee referred to the decision in the case of Handicrafts & Handloom Export Corporation of India 140 ITR 532, relating to assessment year 1970-71. The holding company agreed to recoup the losses and give a further cash assistance @ 6% of the foreign exchange earning. The Hon'ble Court held that the reimbursement of losses and cash assistance were not part of the assessee's trading receipt. For this purpose, the decision at 133 ITR 590 was followed.
20. The learned Counsel pointed out that the case of G.H. Bhagat (supra) had no application to the facts of this case, because the issue in that case was whether, the receipt by the centre was income in the hands of the assessee? The Hon'ble Court came to the conclusion that even if the offerings were income, the beneficiary was the family of the assessee and, therefore, the assessee could not be taxed on the surplus arising out of the activities of the centre. Referring to the case of P.H. Divecha (supra), it was pointed out that in that case the payer and the payee had a commercial relationship, being that of the principal and the agent for sale of Philips electric bulbs. Even then, the amount received on termination of the agreement was held not to be taxable as it had no relationship with past or future earnings of the assessee. No doubt the nomenclature of the payment is not material, but then, the (sic) given by the payer in the assessee's case was correct as born out from the facts of the case and the decision of Hon'ble Delhi High Court in the case of Handicrafts & Handloom Export Corporation of India (supra).
21. We have considered the facts of the case and rival submissions. We find that there is only one paragraph in the order of the Assessing Officer, which makes out a case that there was a business relationship between the assessee and the holding company. On page 5, the Assessing Officer mentioned that the holding company had given counter guarantees for increase in credit facilities and it also stood a kind of guarantor for issue of debentures by providing stand-by LC. Both these factors point out towards the fact that the liquidity position of the assessee was not good and the holding company assisted it in obtaining credit by standing guarantees. It is further mentioned that the guarantees of Rs. 12.4 crore were encashed by UIL and MSL for alleged non-performance of the contract by the assessee. The payment was made by the tinker; of the holding company. This fact also points towards the fact that the assessee was not in a position to perform its part of the contract or make payment to the aforesaid companies under its agreement with them. These facts do not lead to a conclusion that there was business transactions between the assessee company and the holding company. It is also mentioned that the assessee had business connection with associate concerns, namely, Lurgi Oel Gas Chemie and Lurgi Anlugabau Chemnitz and consultation fees and technical know-how fees were paid to them for various projects. The assessee had also undertaken refinery expansion projects in Germany and Mexico for Lurgi Oel Gas Cheinie. This, according to the A.O, proved that there was a business consideration. On perusing this part of the order, it is seen that no business connection has been brought out between the assessee and the holding company as only the names of the associated concerns have been mentioned. Further, it is not shown that transactions with these associated concerns were not at arm's length leading to the loss to the assessee company in the past. It is also not shown that such a loss was wholly or partly reimbursed by the holding company. We could have accepted the argument wholly or partly if it had been shown that the assessee suffered losses in the past on account of transactions with the holding company or associated companies not being conducted at arm's length, which were reimbursed by the holding company and that the impugned sum or a sum lesser of the impugned sum represented such reimbursement of losses. Therefore, in absence of any detail of any loss having been incurred in transactions with associated concerns, we are of the view that mere observations cannot form a solid foundation for holding that the whole or part of the impugned amount represented reimbursement of loss earlier incurred by the assessee and, therefore, it was in the nature of a business receipt.
22. We have already described the cases of G.H. Bhagat, P.H. Divecha and P. Krishna Menon in some detail while summarizing the arguments of the learned DEL We are of the view that the facts of the case of G.H. Bhagat were entirely different, relating to offerings made before relics of the saint. The Court held that the surplus realized from the activities of the centre could not be held to be the income of the assessee in any case. In the case of P.H. Divecha, there was a relationship of principal and the agent and the assessee received money for termination of commission agency. Even then, the Court held that the receipt was in capital field. In the case of P. Krishna Menon, the assessee was carrying on the vocation of teaching and the monies were received from a disciple, thus, there was a quid pro quo, which is non-existent in this case. The decision in the case of K.L. Aggarwal (supra) does not seem to have any bearing on this case as in that case the assessee was not able to prove the gift, the onus of which was on him. In this case, the money has been received through banking channel and the FIRC clearly states that the receipt was non-refundable capital grant. Therefore, we are of the view that various cases relied upon by the Assessing Officer and the learned DR before us do hot advance the case of the revenue.
23. On the other hand, the two decisions of Hon'ble Delhi High Court in the case of Handicrafts & Handloom Export Corporation clearly lay down that if the holding company reimburses the losses of the subsidiary company, then, such reimbursements are not in the revenue field. We find that the case of Wazir Sultan & Sons (supra) has no bearing on the decision in this case. Thus, we are of the view that the revenue has not been able to establish in the first instance that the receipt is in the nature of income, the burden of which lied on it. We are also of the view that the receipts are in the capital field in view of the decisions in the case of Handicrafts & Handloom Export Corporation. In the result, ground no. 1 is dismissed.
24. Ground No. 2 is to the effect that on the facts and in the circumstances of the case, the ld. CIT(A) erred in holding that business income of the assessee company, amounting to Rs. 35.20 lakh on account of receipt from running bills, is not a revenue receipt. In this connection, the learned DR drew our attention towards paragraph "G" at page 11 of the assessment order regarding "Method of accounting". It is mentioned that in the return of income as well as in the audit report, the method of accounting was described as "mercantile". In the notes to the account, it was mentioned that the revenue from the contract is recognized on a percentage of completion method. However, the profit is not recognized unless the work on the contract has progressed to a reasonable extent. It was explained to the Assessing Officer that the assessee has followed Accounting Standards-7 (AS-7), issued by Institute of Chartered Accountants of India (ICAI) in this behalf. In view thereof, the revenue and the corresponding expenditure was not accounted for till the contract reached the stage of 25% completion. The surplus on such contracts was not taken to profit & loss account, but was credited to the balance sheet. The Assessing Officer pointed out that after the amendment to Section 145(1) w.e.f. 1.4.1997, the assessee could follow either mercantile or cash method of accounting. When the bills are raised and the monies are realized, the income accrued to the assessee but was not accounted for in the profit & loss account till 25% of the contract work was completed. A reference was made to the decision of Hon'ble Delhi High Court in the case of Tirath Ram Ahuja Pvt. Ltd. v. CIT , in which it was pointed out that one need not wait for completion of the project in order to ascertain the income. It will be open to the revenue to estimate the profit on the basis of receipts of each year even though the contract is not completed in that year. Further, a reference was made to the decision of Hon'ble Patna High Court in the case of Shri Sukhdev Dass Jalan v. CIT , in which it was pointed out that profits in uncompleted contract are also taxable in the relevant accounting year. References were also made to the decisions of Hon'ble Supreme Court in the case of E.D.Sasoon v. CIT (1944)26 ITR 27 and Morvi Industries Ltd. v. CIT , in which it was inter-alia pointed out that the accrual of income does not depend upon entries made in the books of account as it occurs at the time of making the transaction. Thus, it was held that the income embedded in the receipts, carried to the balance-sheet in respect of aforesaid kind of contracts, was liable to be taxed in this year. Such receipts amounted to Rs. 3,52,09,000/-. The Assessing Officer estimated profit on these receipts at Rs. 35.20 lakh, at the rate of 10% of the receipt, and added this amount to the income. The learned DR pointed out that since the assessee was following mercantile system of accounting, the income embedded in the aforesaid receipts was liable to be taxed in this year. As the exact working of income from the receipts was not furnished by the assessee, the Assessing Officer rightly estimated the income at 10% of the receipts. Therefore, it was agitated that the order of the Assessing Officer may be confirmed and the order of the learned CIT(A) in this behalf may be set aside.
25. In reply, the learned Counsel pointed out that there were receipts, but the question is whether, any income accrued to the assessee in respect of these receipts? In this connection, he referred to the order of Hon'ble ITAT, Bombay Bench "A", Bombay in the case of Champion Construction Co. v. First ITO (1983) ,5 ITD 495. In that case, the assessee executed a project for construction and sale of a multi-storeyed building. The construction was completed in the previous year relevant to assessment year 1978-79, and 80% of the area was sold by that time. The assessee filed return for assessment years 1977-78 and 1978-79 showing nil income. It was mentioned that the income could not be assessed until the whole project was completed. The ITO prepared a draft assessment order by applying net profit rate of 15%, which was forwarded to the Inspecting Asstt. Commissioner along with the objections of the assessee. However, under the instructions of the IAC Under Section 144-A, the ITO prepared one more draft order, in which the income was computed by applying the rate of 30%. The Hon'ble Tribunal pointed out that the proposition that profits from a single project cannot be ascertained till the project has come to an end, is not an absolute proposition. Under the Income-tax Act, each year is a separate year and unless it is impossible to compute the profits or loss of each year reasonably, the profits should be computed year-wise and tax accordingly. In the previous year relevant to assessment year 1977-78, neither the project was completed nor even half of the building was sold. The sale proceeds were far lesser than the expenditure incurred on the project. Therefore, it would be appropriate that no profit & loss was estimated for that year. However, in the previous year relevant to assessment year 1978-79, the project had been completed and 80% of the area had been sold. Therefore, it was feasible to reasonably estimate the profits. Further, he referred to the decision of Hon'ble Delhi High Court in the case of CIT v. Woodward Governor India Pvt. Ltd. and Ors. (2007) 210 CTR 354, a case dealing with the admissibility of increased liability arising on account of fluctuation in the rate of foreign exchange. In paragraph 15 at page 367, the Hon'ble Court mentioned that the Hon'ble Supreme has, in the case of Challapali Sugars Ltd., put its seal of approval on adopting the Accounting Standards while interpreting Section 10(2)(vi), (via), (vib) and Section 10(5) of the 1922 Act, while interpreting the expression "actual cost". It was further pointed out that the expression "actual cost" has not been defined and, therefore, it would be necessary to ascertain the connotation of the above expression in accordance with normal rule of accountancy prevailing in commerce and industry. More recently, this was reiterated by Hon'ble Supreme Court in the case of Indo-Nippon Ltd. He also referred to the decision of Hon'ble Delhi High Court in the case of Tirath Ram Ahuja (P) Ltd. (supra), in which it was held that in the case of a contract, one need not wait till the contract was completed in order to ascertain the income and was open to the revenue to estimate profits on the basis of receipts of each year although the contract was not complete. It was pointed our that the question whether, the Tribunal was justified in holding that neither profit nor loss was to be taken into account in the assessment year involved, an inference from basic or primary facts and in the circumstances of the case. Thus it did not involve any point of law. It was pointed out by him that the assessee had been following the aforesaid method of accounting for the last five years, as explained to the Assessing Officer and the learned CIT(A). In any case, the assessee has been suffering losses consistently, including in this year and, therefore, no profit could have been estimated from the receipts.
26. We have considered the facts of the case and rival submissions. The decision of Hon'ble Delhi High Court in the case of Woodward Governor was that the increase in the liability on revenue account due to fluctuation in the rate of foreign currency prevailing on the last day of the financial year is not a notional liability and, therefore, it is deductible in computing the income. In this connection, it was pointed out that since the expression "actual cost" has not been defined, the expression will have to be understood in the normal commercial sense and the no mal rales of accountancy prevailing in commerce and industry. Thus, the normal rules of construction or the Accounting Standards can be taken into account in a case where certain term has not been defined. That by itself does not mean that all Accounting Standards have to be followed irrespective of the state of law. In the case of Champion Construction Co., the Hon'ble Tribunal came to the conclusion that when the project has been completed and more than 80% of the area has been sold, the profits can be computed as in such a situation it could be taken that the project has been completed. The assessee has not followed project completion method in so far as the maintenance of books are concerned. It starts recognizing income from the receipts in the year in which a contract has progressed beyond 25% of completion, for which there does not seems to be any authority in the law. AS-7 provides that the profits should not be recognized unless 20% to 25% of the work is completed. The assessee has adopted 25% as bench-mark for recognizing profit. The case of the learned Counsel was that the billing schedule was based on pre-agreed payment terms and not linked with work done on the projects, under which it may happen that the bills are raised when no work is done or it may also happen that substantial work has not been done but the bill has not been raised. Therefore, it was thought fit that the income should be recognized when at least 25% of the work on a project has been completed. On consideration of the aforesaid argument, the difficulty pointed out by the learned Counsel in mis-match between the work done and the receipts may also be there when 25% of the work of a contract has been completed. Therefore, there does not seem to be any reason to take 25% as the starting point unless it is shown that once this stage is achieved, there would be a perfect match between the bills, receipts and the work done. Nonetheless, it was also the case of the learned Counsel that this method had been used for the last five years and disturbing this method of accounting will lead to adjustment of profits of earlier and subsequent years. In any case, no profit could be attributed to the receipts as the assessee has incurred losses consistently, including in this year. After considering these arguments, we are of the view that having accepted a particular method, though not being a perfect method, it was not open to the revenue to disturb the same in this year. In any case, the income attributable to the receipts would work out to be a loss as the assessee has consistently incurred losses. Therefore, we are of the view that no adjustment was required to be made to the profits declared by the assessee on this account. In the result, this ground is also dismissed.
27. Ground No. 3 is to the effect that on the facts and in the circumstances of the case, the CIT(A) erred in deleting the addition of Rs. 13,26,724/-, even though the same was in the nature of a provision for expenses. In this connection, the learned DR referred to page 13 of the assessment order where this issue has been discussed under the head "Provision for expenses". It is mentioned that the assessee debited an amount of Rs. 1,00,68,514/- to the project expenses as "provision for expenses". This amount included a sum of Rs. 13,26,724/-, which did not accrue till 31.3.2000. It was held that this provision was made to meet certain anticipated expenditure which had not accrued till the last date of the previous year. Thus, the amount was disallowed. The case of the learned DR was that the liability did not accrue or arise in this year and, therefore, it was rightly disallowed by the Assessing Officer.
28. In reply, the learned Counsel referred to pages 80 and 81 of the paper book, being a part of written submissions filed before the learned CIT(A). It was clarified that before the Assessing Officer it was pointed out that a sum of Rs. 33,26,724/- was carried forward, out of which Rs. 20.00 lakh was warranty provision and Rs. 13,26,724/- was provision for other expenses. This did not lead to a conclusion that the impugned liability did not accrue till 31.3.2000. The amount was disallowed by the Assessing Officer without allowing the assessee an opportunity to explain the issue. The impugned provision was in respect of Indo-Gulf project and Kellogs project amounting to Rs. 1,59,514/-and Rs. 11,67,210/- respectively. Out of this amount, a sum of Rs. 11,67,210/- was actually utilized or paid before 30.9.2000, the details of which were also furnished. In order to support his contention, reliance was placed on the , decision of Hon'ble Supreme Court in the case of Calcutta Co. Ltd. v. CIT 37 ITR 1, in which it was inter-alia held that the undertaking to carry out development within six months from the date of sale was unconditional, binding the assessee in absolute term. Thus, the liability accrued on the date of sale although it may have to be discharged at a future date. The same was deductible in computing the income. It was also held that the difficulty in estimating the liability will not convert an accrued liability into a contingent liability and it will always be open to the revenue authorities to arrise at a proper estimate thereof, having regard to circumstances of the case. The learned Counsel pointed out that the liability was estimated on a reasonable basis, as out of the provision of Rs. 13,26,724/-, expenditure of Rs. 11,67,210/- was incurred before 30.9.2000. The balance amount was offered to tax in the assessment of next year.
29. We have considered the facts of the case and rival submissions. We are of the view that if any liability is fastened on the assessee even in the case of a completed project, then, such liability accrues or arises on the date when the project is completed. It may be difficult at that point to exactly work out the liability. However, if it can be estimated on a reasonable basis, such estimate will be accrued liability and not a contingent or expected liability. The assessee had estimated its liability in respect of two projects at Rs. 13,24,724/-, against which the expenditure of Rs. 11,67,210/- was incurred within six months from the end of the previous year. In these circumstances, the estimation of liability can be termed as reasonable. It was also the case of the learned Counsel that the balance amount has been offered for taxation as provision of Section 41(1) will become applicable in respect of the balance amount. Subject to verification of the offering of the balance amount for taxation, it is held that the liability was an accrued liability In case the balance amount has been offered for tax, it is also held that the same represented deductible expenditure. However, if it is found that the balance amount has not been offered for tax in the subsequent year, then, the allowance shall be restricted to Rs. 11,67,210/-. In the result, this ground is also dismissed, as discussed above. In the result, the appeal of the revenue is dismissed.
ITA No. 4104(Del)/2004- A.Y. 2001-02
30. In this appeal, the revenue has raised two grounds, which are similar to the, grounds raised in ITA No. 4697(Del)/2003(supra), except for the amounts involved. In this year, the assessee received a sum of Rs. 8,91,71,860/- as non-refundable grant from Lurgi A.G., which was claimed as capital receipt. The Assessing Officer had also made an addition of Rs. 27.60 lakh, being the estimated profit on account of progressive billing. Relying on our order in the aforesaid appeal for assessment year 2000-01, these grounds are dismissed. In the result, appeals of the revenue for both the years are dismissed.
Order pronounced in the open court on August 24, 2007.