Income Tax Appellate Tribunal - Gauhati
Abc India Ltd. vs Deputy Commissioner Of Income Tax on 29 November, 1996
ORDER
N. Pachuau, A. M.
1. This appeal is filed by the assessee and the relevant assessment year involved is 1990-91.
2. Ground Nos. 1 and 2 taken by the assessee are as below :
"1. That for the facts and under the circumstances the CIT(A), Guwahati, has erred in enhancing the total income on account of Budha statue contract by Rs. 43,20,360.
2. That for the facts and under the circumstances the CIT(A) has further erred in not deleting the addition of Rs. 26,60,476 as made by Dy. CIT in relation to aforesaid budha statue contract."
3. Briefly stated the facts of the case are that the assessee is a limited company and the AO made the assessment order under s. 143(3) of the IT Act, 1961. Return of income was filed on 28th Dec., 1990, showing total income of Rs. 66,73,100 which was subsequently revised by filing revised return of income on 27th June, 1991, showing total income at Rs. 67,51,100. The business of the assessee-company was transportation of goods as in the earlier years.
4. The AO found that the assessee had a contract for transportation and installation of a statue of Lord Budha by entering into a contract with the Government of Andhra Pradesh. The contract was for transportation of a monolithic statue of Lord Budha weighing about 450 tonnes to Hussainsagar at Hyderabad and erecting it on Gibraltor rock in the said lake. The first phase of the contract work was the transportation of the statue from Raigiri hill site to the shore of the above lake at Hyderabad. The second phase of the contract work was the transportation of the statue from the shore of Hussainsagar lake to the installation site and installation of the statue on the Gibraltor rock. The first phase of the contract was completed during the previous year ended 31st March, 1989, and receipt and expenses relating to the first phase of the contract were accounted for in the asst. yr. 1989-90.
5. The assessee-company during the relevant previous year ended 31st March, 1990, had taken up the second phase of the contract. An amount of Rs. 92,10,476 was received from the Government of Andhra Pradesh. The assessee also incurred a total expenditure of Rs. 1,35,30,836 in the course of carrying out the second phase of the contract. The assessee for the purpose of carrying the statue to the installation site acquired a barge on lease for the above purposes. The barge together with the statue, one trailor with excel and other items sunk in the lake and eight persons including two officials of the assessee-company were killed. During the course of assessment proceedings the assessee was asked to furnish the details of work-in-progress shown at Rs. 65,50,000 and expenses claimed at Rs. 69,80,836 as revenue expenditure with detailed explanatory note. As called for by the AO the assessee made submissions stating that the total expenses incurred by the assessee-company in the second phase of the contract upto 31st March, 1990, amounted to Rs. 1,35,30,836 which were debited in the P&L a/c. Out of the above expenses, an amount on mast construction, jetty construction, 'J' stick, salvage value of the barge, etc. consisting mainly of iron and steel fabrication considered as reusable was estimated by the assessee-company's engineer to Rs. 65,50,000 and this amount was credited in the P&L a/c under the head "work-in-progress". The assessee has submitted that the difference between the total expenditure incurred and the amount shown as work-in-progress i.e., Rs. 69,80,836 was a total loss to the assessee due to the accident. Accordingly, the loss has been claimed as a revenue expenditure. It was further stated that an amount of Rs. 92,10,746 received from the Government of Andhra Pradesh during the previous year have been treated as trade advance as the contract had not been completed during the year. The AO considered the facts and the submissions made by the assessee. He has taken a view that the basis on which Rs. 69,80,836 has been computed and claimed as a loss due to the accident is not acceptable as the assessee did not take the amount received at Rs. 92,10,746 into consideration against works done in course of carrying on the contract. The AO did not accept the contention of the assessee that the aforesaid amount received from the Government of Andhra Pradesh was in nature of advances as per contract by taking a view that the amount was received on completion of different stages of work in the course of contract against bills raised by the assessee. The payments were actually received against works done as per stage payment schedule agreed to between the parties. AO accordingly treated the amount of Rs. 92,10,746 as assessee's income during the previous year and the difference of Rs. 26,60,746 between the amount received and Rs. 65,50,000 credited in the P&L a/c was added to the income of the assessee.
6. Being aggrieved the assessee carried the matter in appeal before the CIT(A). The CIT(A) while considering ground No. 6 of the grounds of appeal by the assessee against an addition of Rs. 26.60 lakhs as income issued a notice under s. 251 for enhancement of the income by Rs. 69.80 lakhs. The reason as per the CIT(A) are that the assessee-company followed accrual system of accounting. The profit was shown on the basis of completion of job phase-wise in respect of jobs undertaken. In respect of phase 2 of the contract work, the assessee-company had shown Rs. 65.50 lakhs as work-in-progress but debited Rs. 69.80 lakhs to the P&L a/c, in this year and according to the CIT(A), this is erroneous and contrary to the accepted principle of accounting regarding work-in-progress. According to the CIT(A) the entire expenditure of Rs. 135.30 lakhs should have been shown as work-in-progress and the losses on account of accident cannot be claimed in this year as the job head not yet been completed and the full picture of profit or loss had not yet emerged. It was due to the above reason the CIT(A) took a view that the claim of expenditure at Rs. 69.80 lakhs connected with the loss has resulted in under-assessment due to which he proposed to enhance the income by disallowing the said amount in this year. Accordingly a show-cause notice was issued to the assessee. In response to which the assessee submitted its explanation and argument against the proposed enhancement of income. It was submitted inter alia, that the assessee follows accrual system of accounting and expenses cannot be charged to revenue till the job is complete. Similarly, the same position applied in respect of advance received against the job. It was stated that Rs. 92.10 lakhs was received as advance and duly shown as trade advance. Similarly, expenses in relation to completion of job estimated at Rs. 65.50 lakhs was carried forward as work-in-progress. An amount of Rs. 69.90 lakhs was dead loss due to accident which occurred on 10th March, 1990, and the loss was certain. It was stated that this amount was a part of the expenditure already incurred which the assessee would not have to reincur or spend again after salvage of the statue from the bed and transporting the same for installation at Gibraltor rock. The assessee also relied on the Chartered Accountant Institute's Accounting Standard No. 9 para 12 to the proposition that the revenue deduction claimed must relate to accomplishment of work in the assessee's case. The expenditure worth of Rs. 65.50 lakhs only relates to work to be accomplished and hence it was carried forward. Rs. 69.80 lakhs represented dead loss and cannot be related to works to be accomplished. The said amount cannot, therefore, be carried forward. It is, therefore, claimed that the loss being certain and not relatable to work to be performed against which advance of Rs. 92.10 lakhs was received has rightly been written off during the year as the loss was incurred during the course of completion of job during the accounting year. The CIT(A) considered the facts of the case and the submissions made on behalf of the assessee. Disagreeing with the submissions he has stated that the quotation from Chartered Accountant Institute, Accounting Standard No. 9 has not helped the assessee, inasmuch as under the said opinion performance should be measured either under the completed services contract method or under the proportionate completion method. Since the assessee has followed the completed service method in respect of first phase of the job, no deviation should be made in respect of the second phase of the job because that will involve a change of method without any basis. The opinion of Chartered Accountant Institute's accountancy cannot override the accepted norms of accounting of work-in-progress. He also did not accept the argument that the loss was not related to the work performance. The CIT(A) also has taken a view that the assessee has indirectly admitted that the second phase of the job was not yet completed and, therefore, claiming of the loss was patently wrong and untenable in law. The CIT(A) also did not accept the contention that for completion of the second phase of the job a new contract was made after the accident had occurred by taking a view that the contract of the second phase of the job was never terminated and the subsequent agreement was only supplementary and continuation of earlier contract. He, therefore, concluded that the loss incurred in the midst of the work cannot be allowed by accepted principle of accountancy. Rs. 69.80 lakhs was accordingly disallowed. The CIT(A) also found that the action of the AO also cannot be supported because the job was incomplete and no profit can be determined on the basis of advance received. He deleted the addition made by the AO. Further, he has enhanced the income by Rs. 43,20,360 being the difference between the loss claimed by the assessee and the addition made by the AO.
7. Being still aggrieved, the assessee came up in appeal before the Tribunal. Shri V. N. Purohit and Shri M. K. Paul, the learned counsel of the assessee while objecting to the order of the CIT(A) reiterated the facts of the case and submissions/arguments made before him. It is submitted that the facts of the case and the basis for claiming loss at Rs. 69.80 lakhs in connection with the execution of the second phase of the contract work with the Government of Andhra Pradesh were explained in details on the basis of the audited books of account of the assessee and other relevant document. In short, it is submitted that there is no justification on the part of the AO to make an addition of Rs. 26,60,476 to the total income of the assessee and the CIT(A) is also not justified in making an enhancement of the income of the assessee by Rs. 43,20,360 by disallowing the loss claimed by the assessee at Rs. 69.80 lakhs. In support of the argument the assessee has filed a paper book showing the details of moneys received from Andhra Pradesh Government, details of items considered as work-in-progress and details of total expenses incurred on phase two of the contract works, out of which work-in-progress was estimated, etc. in support of the claim that loss at Rs. 69.80 lakhs on account of accident during the normal business activities is an allowable revenue deduction. Reliance is placed on the decision of the Hon'ble Supreme Court in the case of CIT vs. S. C. Kothari (1971) 82 ITRS 794 (SC) to the proposition that loss is completely different from disbursement of expenses of a trader. Loss came upon the trader ab extra. It is also stated that a trading loss can be claimed only in the year in which it is incurred and there is no scope to allow it in later year. To this proposition reliance is placed on the decision of Madras High Court in the case of CIT vs. K. T. M. S. Mahmood (1969) 74 ITR 100 (Mad). It was also stated that a trading loss incurred in an earlier year but was not allowed for some reason was not eligible for deduction in any subsequent year in the computation of net profit of that year. To this proposition reliance was placed on the decision of the Hon'ble Madras High Court in the case of Devi Films Pvt. Ltd. vs. CIT (1970) 75 ITR 301 (Mad). It was, therefore, submitted by the learned counsel of the assessee that the addition originally made by the AO and by the CIT(A) (after enhancing the figure of disallowance) are liable to be deleted.
8. The learned Departmental Representative has opposed the submissions and argument made by the assessee's counsel by relying on the order of the CIT(A). It is submitted that the facts of the case, arguments advanced on behalf of the assessee and the method of accounting followed by the assessee in respect of the contract works and other relevant matters were duly considered by the CIT(A) in his appellate order. It is submitted that the profit/loss as a result of execution of contract works by the assessee has to be determined in the year of completion of the contract work. The CIT(A) is, therefore, perfectly justified in disallowing the loss claimed by the assessee and enhancing the total income of the assessee by that amount. In support of his argument the learned Departmental Representative has relied on the decision of the Hon'ble Supreme Court in the case of CIT vs. Indian Mica Supply co. P. Ltd. (1970) 77 ITR 20 (SC), in the case of Associated Banking Corpn. of India Ltd. vs. CIT (1965) 56 ITR 1 (SC) and the decision of the Hon'ble Punjab High Court in the case of Jamna Das Rameshwar Das vs. CIT (1952) 21 ITR 109 (Punj). It is contended that the order of the CIT(A) deserves to be sustained.
9. We have carefully considered the rival submissions, facts of the case and the materials on record as well as various judicial decisions cited and relied on. On going through the orders of the Revenue authorities and the paper book filed by the learned counsel of the assessee, we find that there is no dispute as regards the facts of the case. We also find that the assessee made detailed submission in support of the claim for showing Rs. 65.50 lakhs as work-in-progress and claiming loss at Rs. 69.80 lakhs in the present assessment year in respect of phase 2 to the contract for transportation of the statue and installation in Gibraltor rock. The AO after considering the facts of the case and the books of account of the assessee as well as the explanation and submissions made before him has not accepted the claim. He has taken a view that the amount of Rs. 92.10 lakhs (approximately) received by the assessee from the Government of Andhra Pradesh has to be taken as assessee's income for this year and the difference between the said amount and Rs. 65.50 lakhs credited in the P&L a/c as work-in-progress should be deducted from the above amount as a result of which he added Rs. 26,60,746 to the assessee's income. The assessee disputed the aforesaid addition by filing the appeal before the CIT(A). On the same set of facts the CIT(A) has taken a view that since the assessee followed accrual system of accounting in respect of phase 1 of the job works and had duly shown receipt and expenses in the asst. yr. 1980-90, there is no justification on the part of the assessee to make the claim as it did in respect of phase 2 of the contract work. According to the CIT(A) there should not be any deviation in respect of the second phase of the job work because that will involve a change of method without any basis. He has also stated that the claiming of loss when the job was half done is wrong and untenable in law. The CIT(A) for the detailed reasons stated at paras 2 to 6 of his appellate order has taken a view that loss incurred in the midst of the work cannot be allowed by any accepted principle of accountancy. He, therefore, disallowed the loss claimed by the assessee at Rs. 69.80 lakhs. By adjusting the addition made by the AO the CIT(A) has directed for net enhancement of Rs. 43,20,360. We find that the phase 2 of the contract job was transportation of the statue of Lord Budha from the shore of Hussainsagar lake to Gibraltor rock in the middle of the lake and installation thereof on rock site. It is not disputed that while the statue was being transported for installation an accident occurred on 10th March, 1990, as a result of which the barge in which the statue and other machines on board were sunk. It also resulted in the death of some workers. It is not disputed that the assessee received Rs. 92.10 lakhs against part 2 of the contract job which was reflected in the balance sheet as on 31st March, 1990. The total expenses incurred upto 31st March, 1990, relating to part 2 of the contract job was Rs. 135.30 lakhs. The assessee-company made a review of the expenditure incurred on 31st March, 1990, to find out as to what extent there was total loss of expenses incurred on the contract job and upto what extent the same is reusable i.e., expenses which would not be reincurred when the statue will be lifted from the bed of the lake and install and also expenses which would have to be reincurred. The above exercise was done to find out total loss suffered by the assessee during the accounting year. As a result of such review, expenses worth Rs. 65.50 lakhs was found to be of nature of work-in-progress. The said amount was accordingly shown as work-in-progress in P&L a/c. The balance amount of expenses incurred at Rs. 69.80 lakhs was charged to revenue account under various heads as it represented loss due to accident during normal business activities, as claimed by the assessee.
It may also be pointed out that the system of accounting consistently followed by the assessee for contract works was on completed contract basis. We find on careful appreciation of the facts of the case that there is considerable force in the appeal filed by the assessee. We also find that the AO and the CIT(A) made their finding and came to different conclusion on the same set of facts. On consideration of the facts and circumstances of the case and the arguments advanced by the rival parties, we find that the ratio of the various judicial decisions cited by the assessee's counsel support the claim to the proposition that loss suffered by a trader has to be considered in the year in which such loss has taken place. Their Lordships of the Hon'ble Madras High Court in the aforesaid judgement on the facts of those cases has clearly held that there is no scope to allow trading loss except in the year in which it took place. Such loss is not eligible for deduction in any subsequent year. The decision of the Hon'ble Supreme Court in the case of CIT vs. Indian Mica Supply Co. P. Ltd. (supra), cited by the learned Departmental Representative, is against the Revenue. The facts of the case considered by their Lordships can also be distinguished from the facts of the present case. Similarly, the facts considered by their Lordships in the case of Associated Banking Corpn. of India Ltd. vs. CIT (supra) relates to the business loss on account of embezzlement. The facts considered by their Lordships can, therefore, be distinguished from the facts of the present case. The decision in the case of Jamna Das Rameshwar Das (supra) can also be distinguished on facts as the facts considered by their Lordships was loss as a result of speculative transactions. The decision has, therefore, no application to the facts of the present case. On careful consideration of the facts and circumstances and arguments advanced by the rival parties and the various decisions cited by both sides, we are of the opinion that the claim of the assessee has to be allowed. As the claim of the assessee to have suffered loss of Rs. 69.80 lakhs as a result of sinking of the barge in Hussainsagar lake while executing its contract work is not disputed by the Revenue authorities, the claim has, therefore, to be accepted as real loss. It is also clearly a loss on revenue account which was actually suffered by the assessee and such loss was incidental to the execution of the contract works. It is also not disputed that the loss claimed by the assessee at Rs. 69.80 lakhs was on account of the fact that as per the review committee report, the materials valued at the above figure was a dead loss and there was no scope to reuse the various materials, etc. represented by the above amount. It can, therefore, be seen that there was no chance of recovery or restitution of the materials by the assessee. Under similar circumstances it has been held by their Lordships of the Hon'ble Calcutta High Court in the case of Khaitan & Co. vs. CIT (1979) 118 ITR 728 (Cal) that the assessee can claim the loss in the year in which it accrued. We find that this decision supports the case of the assessees. Similar decisions have been rendered by their Lordships of the Hon'ble Punjab High Court in the case of CIT vs. Tulsi Ram Karam Chand (1964) 52 ITR 180 (Punj) and their Lordships of the Hon'ble Madras High Court in the case of O. RM. OM. SP. Firm vs. CIT (1964) 52 ITR 907 (Mad). In view of the reasons stated above and respectfully following the aforesaid decisions of various High Court we hold that the claim of the assessee to have suffered a loss of Rs. 69.80 lakhs in this year has to be allowed. We, therefore, vacate the appellate order of the CIT(A) enhancing the total income of the assessee by Rs. 43,20,360. As regards ground No. 2 relating to addition made by the AO at Rs. 26,60,476, we find that the addition has already been deleted by the CIT(A) vide para 6 of his appellate order. We, therefore, do not find it necessary to adjudicate the matter. We accordingly direct the AO to allow the claim of the assessee.
10. The ground No. 3 is against disallowance of Rs. 64,374 out of claims provision made in the past year relevant to the asst. yr. 1987-88. The AO found that out of the claims provision of Rs. 17,02,946 made in the year ended 30th Sept., 1986, a total sum of Rs. 16,38,571 was paid upto 31st March, 1992, and the balance amount of Rs. 64,375 was still outstanding. It was stated on behalf of the assessee that the reason for non-payment was that the claims were still under negotiation or Court cases were pending. Merely because three years had passed, the claims liability did not cease. The claims liability was reviewed at the and of each year as per system regularly followed. The AO took a view that claims normally get time-barred after three years. The list of pending Court cases filed by the assessee was scrutinised and it was found that none of the claims appearing in the list related to the previous year ended 30th Sept., 1986. He also found that the valuer's report did not support the claim of the assessee. The AO accordingly added the amount of Rs. 64,375 to the assessee's income.
11. When the assessee carried the matter in appeal before the CIT(A), the CIT(A) took a view that the liability was contractual in nature and it can be allowed on the basis of settlement in the Court only. He, therefore, took a view that it should be allowed in the year of settlement in the Court and on actual ascertainment basis. The order of the AO was confirmed.
12. On behalf of the assessee it was submitted that the liability added by the Revenue authorities was not claimed as deduction in this year. The finding made by the CIT(A) is, therefore, not relevant in so far as the present assessment year under appeal is concerned. According to the learned counsel, the issue does not attract the provisions of s. 41(1) of the IT Act, 1961, though the AO apparently added the amount under the above section. It is submitted that the negotiations were going on and Court cases were also pending in respect of the claim and there was no cessation of liability. It was submitted that the cessation of liability can take place only on the bilateral acts of the parties i.e., the creditor and the debtor by a refusal of the debtor to honour his liability when pressed to pay the dues and to discharge the debt. In no case, the debtor could bring this liability to an end on his own. To this proposition reliance was placed on the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Sugauli Sugar Works P. Ltd. (1983) 140 ITR 286 (Cal), the decision of the Hon'ble Bombay High Court in the case of Gannon Dunkerley & Co. Ltd. vs. CIT (1976) 102 ITR 428 (Bom) and in the case of Kohinoor Mills Co. Ltd. vs. CIT (1963) 49 ITR 578 (Bom). It was also stated that the assessee-company had duly shown the claims provision in its balance sheet which means that the assessee had acknowledged the liability and in view of this fact is could not be said that the claim were time-barred. Reliance is placed on the decision of the Hon'ble Gujarat High Court in the case of Ambica Mills Ltd. vs. CIT (1964) 54 ITR 167 (Guj). The learned counsel for the assessee also relied on various judicial decisions during the course of hearing of appeal. It was submitted that in view of the legal position as discussed in the various decisions, the addition made by the Revenue authorities is liable to be deleted. The learned Departmental Representative supports the orders of the Revenue authorities.
13. On careful consideration of the facts of the case, orders of the Revenue authorities and the issue involved as well as the various judicial decisions cited by the learned counsel of the assessee, we are of the opinion that the assessee deserves to succeed on this point. It is not disputed that the amount added was not claimed as a deduction by the assessee in the present assessment year. The AO added the amount apparently out of the claim provision made by the assessee for the year ended 30th Sept., 1986, as he found that Rs. 64,375 was still outstanding. It was not disputed that the claims were outstanding as they are still under negotiation or Court cases are pending. No evidence whatsoever was brought on record by the Revenue authorities to establish that the liability of the assessee to pay the claim had since ceased or there was bilateral acts by both the creditors and the debtors to show that there was cessation of liability, etc. In view of the facts stated above, we find that the reliance placed on the various decisions cited by the assessee's counsel support the case of the assessee. We, therefore, hold that there was neither a remission or a cessation of the liability and the aforesaid amount cannot be included in the total income of the assessee. We accordingly vacate the orders of the Revenue authorities on this point.
14. Ground No. 4 is against disallowance of depreciation on building including office and residential ownership flats for which the company has paid in full, obtained possession and were being used. The claim of the assessee was disallowed by the AO for identical reason as in the preceding assessment year.
15. On appeal, the CIT(A) by following the appellate order of his predecessor in respect of asst. yr. 1987-88 confirmed the order of the AO.
16. We have heard the rival parties. We have also considered the issue and the paper book filed by the assessee-company. We find that the claim of the assessee has to be allowed on this point, by respectfully following the order of the Tribunal, Gauhati Bench, in the assessee's own case in, ITA No. 564 (Gau) of 1990, dt. 14th Jan., 1993, in respect of the asst. yr. 1987-88 where at paras 5 to 7 the issue was discussed and the claim of the assessee was allowed. We have gone through the aforesaid appellate order to which we fully agree. Respectfully following the said appellate order, the appeal on this point is allowed.
17. In the result, the appeal by the assessee is allowed.