ACIT CIRCLE 10(1), NEW DELHI vs. IRCON INTERNATIONAL LTD, NEW DELHI

The case of AY 2018-19/ITA No.1104/Del/2023 is taken as a lead case.

The relevant facts giving rise to the appeal of AY 2018-19 are that the respondent assessee, a Government of India undertaking, is engaged in the execution of Civil Engineering, Electrical, Communication and Turnkey contract, in India as well as abroad. The assessee filed its Income Tax Return (‘ITR’) of the relevant year on 25.09.2018 declaring income of Rs.458,30,63,770/-. The case was picked up for scrutiny and consequential assessment was completed at income of Rs.524,61,81,030/- under normal provisions of the Act and Rs.483,81,10,179/- under Section 115JB of the Act. The Assessing Officer (‘AO’) made following additions/disallowances in AY 2018-19: - 3

The Ld. CIT-DR, placing reliance on the assessment order prayed for allowing the appeal by setting aside the impugned order.

At the outset, the Ld. Counsel submitted that the issues of (i) claim of deduction under section 80IA of the Act, (ii) disallowance of provision of maintenance, (iii) disallowance u/s 14A r.w. rule 8D, (iv) unwinding of provisions against maintenance and demobilization and (v) addition under MAT were covered by the decisions of the Co-ordinate Benches in the assessee’s own case in order dated 07.02.2023 and order dated 28.01.2022. He further placed reliance on orders of the Coordinate Bench in the assessee’s own case for AYs 2001- 02, 2004-05, 2005-06-, 2006-07, 2014-15, 2015-16 and 2016-17.

We have heard both parties and have perused the material available on record. i. Disallowance of claim of deduction under Section 80IA of the Act:

The first issue is in respect of the claim of deduction under section 80IA of the Act. We find that identical issue arose in assessee's own case in AYs 2016-17 and the co-ordinate bench of the Tribunal in and 2062/Del/2018 has decided the issue in favour of the assessee by observing as under: -

The claim of deduction came up for adjudication for the first time in Assessment Year 2000-01 and the co-ordinate bench in held as under: "3.5 Considering the arguments advanced by the parties and after going through the orders and material placed before us, we hold as under" Regarding the claim of deduction u/s 80IA, it is seen that appellant is a company and has entered into contracts with various Central Government, State Government, State Government and Local Authority and other statutory bodies. A close reading of the agreement (for instance agreement with MSRDC enclosed in the paper book) clearly shows that appellant developed the infrastructure facility and has not acted merely as contractor as sought to be made out by Assessing Officer and CIT (Appeals). The Oxford dictionary defines the term developer as a person that designs and crate new products, whereas contractor is a person or a company that has a contract to do work or to provide goods or services. Various clauses of the above referred agreement to which reference has been made by us little below would show that the construction rail over bridge projection (ROB) 23 awarded by MSRDC to the appellant is nothing but development of infrastructure facility, which was to be legally handed over to the Railways and MSRDC after the payment was received. Various clauses of the agreement would show that the jobs done by the appellant were planning, execution, construction and making the infrastructure facility ready for operations. Ld. Assessing Officer has not pointed out any specific clauses of any agreement, which shows that all attributes of development were not present. Making a bald assertion that assessee was a contractor does not serve any purpose. Merely using the terms contractor in the agreement would not make any difference as what has to be seen is the substance. Anybody who Ircon International Ltd. enters into a contract is closely called a contractor but that does not mean that such person entering into the contract cannot be developer. The other agreement with MSRDC shown to us as one as instance clearly shows mat appellant was engaged in investigation, planning, organizing and construction of road over bridge within the stipulated time. If the activities undertaken by the appellant cannot be termed as development, we are afraid then what can be called development? Therefore, we do not have any hesitation in holding in view of the arguments advanced from the sides of both parties and decisions relied upon that appellant was developing infrastructure facility and claimed deduction u/s 80IA in respect of income derived from the development of infrastructure facilities. Explanation inserted below section 80IA(13) does not prevent developers in claiming deduction u/s 80IA(4). Similarly showing the receipts as work receipts in the books of accounts of the appellant alone cannot determine the character of the appellant which in our opinion was that of development. The argument of revenue that infrastructure facility should be owned by the appellant is also misplaced in view of ITO vs. Cable 24 Constructions 354 ITR 13 (Guj.) and various decisions relied upon by the Ld. Counsel for the appellant. We also note that the Ld. CIT (DR) tried to raise issues which were not even the case of the assessing officer and this in our considered opinion is clearly impressible. Case laws relied by the revenue are clearly misplaced on facts and are clearly distinguishable. Special bench decision in the case of B. T. Patil (Mum.) 126 TTJ 577 was recalled later on as it did not consider the binding decision of Hon'ble Bombay High Court in the case of ABG 322 ITR 323 (Bom). According to the assessment order, copies of all the agreements were before Assessing Officer yet assessing officer chose to make sweeping observation that the assessee is not developer. Such sweeping and bald assertion cannot be approved by us. Therefore, taking into the facts of the present case, we are the considered view that appellant is entitled to claim deduction 80IA, which was wrongly denied. We set aside the order of the ld. CIT (Appeals) and direct the Assessing Officer to allow deduction u/s 80IA has claimed by the appellant. Ground No. 1 is allowed."

The second issue is in respect of the disallowance of provision for maintenance. We find that identical issue arose in assessee's own case in AYs 2016-17 and the co-ordinate bench of the Tribunal in has decided the issue in favour of the assessee by observing as under: -

Aggrieved by the order of AO, assessee carried the matter before Ld. CIT(A).

CIT(A) noted that identical issue arose in assessee's own case in A.Ys. 2012-13, 2013-14, 2014-15 & 2015-16, and the issue was decided in the favour of the assessee. He following the decision in assessee's own case for earlier years deleted the disallowance made by AO and further held that the addition made cannot be added for the purpose of working out book profit under MAT. He accordingly decided the issue in assessee's favour.

Aggrieved by the order of Ld. CIT(A), Revenue is now in appeal before us.

Before us, learned DR supported order of AO, learned AR on the other hand reiterated the submissions made before AO and CIT(A) and further submitted that identical issue arose in assessee's own case for 2014-15 and the co-ordinate bench of the Tribunal has decided the issue in favour of the assessee by dismissing the ground of Revenue. He pointed to para 11 to 14 at page no. 261 of the paper book. He therefore submitted that no interference to the order of CIT(A) is called for.

We have heard the rival submissions and perused the material on record. The issue in the present ground is w.r.t disallowance of provision for maintenance made by AO that deleted by CIT(A). We find that on Ircon International Ltd. identical issue the co-ordinate Bench of Tribunal in A.Y. 2014-15 has decided the issue by observing as under: - “9. The assessee has challenged disallowance of provision for maintenance for the project executed by the assessee amounting to Rs.105,96,46,297/- The Assessing Officer has held that this provision has been made on estimated basis and unascertained liability. The assessee submitted that it has to maintain or repair the defects in the projects executed by it during the defect liability period as specified in the contract agreement. The assessee claimed that these are mandatory expenses and provision has been made on the basis of its past experience and on scientific basis, therefore, such provision is an allowable expenditure.

It was submitted that the provision for maintenance expenditure is provided to cover the company's expenditure to liability towards defect rectification and/or maintenance incurred by the company after completion of the contract. Such provision is made taking into account contractual provisions, operating turnover for the year, type of project, period of maintenance, contractual obligations of the subcontractors and other relevant factors, if any. As per the agreement with the client, the company is liable to maintain the works executed by it even after the projects are completed and handed over to the clients, for a period of 12 or 24 months from the date of completion. During this period, all the defects are to be rectified free of cost even though the Company has already handed over completed project to the client. The total project cost i.e. contract receipts, have already been received from the client in respect of the said projects before handing over the same to the client and no separate consideration is receivable During the year an amount of Rs.2,27,42,328/- has been provided for non- DTAA project and Rs.7,18,000/- for DTAA projects.

We find that the same matter of provision for maintenance stands adjudicated by the Co-ordinate Bench of the Tribunal The assessee has been providing for expenses to be incurred on demobilization, maintenance and other expenses since by inception of the Company. The same has been allowed by the Department all along excep t in the Assessment Years 1985-86, 1995-96 & 2001-02, 2002-03, 2003-04, 2004- 05 and 2005-06. In these years, the A.O. disallowed the aforesaid provisions. Further, in appeal before the Ld. C IT(A), in the assessment year 1985-86, 1995-96 and 2001-02 and 2002-03, these were allowed on the basis of the aforesaid judicial analysis.

Since, the decision of the ld. CIT(A) is based on the decision of the earlier years which stands upheld, we decline to interfere with the order of the ld. CIT(A) on this issue.”

The CIT-DR has not brought any material on the record to demonstrate any distinguishing feature in the facts of the case in the year under consideration and that of earlier years nor he has placed any material on the record demonstrate that orders of the coordinate bench in assessee's own case for earlier years have been ever been set aside/overruled/stayed by Ircon International Ltd. the Hon’ble Supreme court and or by the Hon’ble High Court. In such facts and circumstances, we find no reason to interfere with the order of the Ld. CIT(A) on this issue. Thus, this ground of the Revenue stands dismissed in both years. iii. Disallowance under section 14A of the Act:

We have heard both parties and have perused the material available on record. We are of the considered view that the issue of disallowance under section 14A of the act is squarely covered by the decision of the Co-ordinate bench in the & 6488/Del/2019 for AY 2016-17. We therefore, respectfully following the decision of the Coordinate bench in the & 6488/Del/2019 for AY 2016-17, decline to interfere with the order of the Ld. CIT(A) on this issue. The respective ground raised in this regard by the Revenue thus stands dismissed accordingly.

The next issue is in respect of the disallowance of unwinding of provisions against maintenance and demonetization Rs.1,36,65,459/-. The Tax Auditor has pointed out increase in profit of Rs.1,80,80,198/- on account of provisions. However, the assessee has offered income of Rs.44,14,738/- out of Rs.1,80,80,198/-. The difference thereof; Rs.1,36,65,459/- (Rs.1,80,80,198/- minus Rs.44,14,738/-) had been treated as provision in the books of account by the assessee. The sum of Rs.1,36,65,459/- was disallowed by the AO on the reasoning that the claimed provision of Rs.1,36,65,459/- in the books of account was in the nature undeterminable contingent liability as the same is not based on any scientific principle/reasoning and in accordance with the provisions of the Act. However, the same was allowed by the Ld. CIT(A) treating the provision similar to the above-mentioned issue of “Disallowance of provision for maintenance”. The Ld. CIT-DR contented that the Ld. CIT(A)’s finding did not demonstrate that the AO’s reasoning was unjustified. He contended that the income could be worked out in accordance with the provisions of the Act and the accounting principles followed by the assessee. On the other hand, the Ld. Counsel argued that the said provision was in the nature of warranty and the same had been worked out based on the scientific formula and any surplus provision of the warranty had been offered for tax. It was further Ircon International Ltd. submitted that the provision of Rs.44,14,738/- out of Rs.1,80,80,198/- as mentioned above had already been offered for tax in the relevant year.

We have heard both parties and have perused the material available on record. The CIT-DR has not brought any material on the record to contradict the finding of the Ld. CIT(A) on this score. We are of the considered view that this issue is similar to the above-mentioned issue of “Disallowance of provision for maintenance”. We therefore, respectfully following the decision of the Coordinate bench in the & 6488/Del/2019 for AY 2016- 17, decline to interfere with the order of the Ld. CIT(A) on this issue also. The respective ground raised in this regard by the Revenue thus stands dismissed accordingly. v. Addition of Rs.31,57,16,297/- for computing book profit for/under MAT/115JB of the Act:

The next issue is that whether the above disallowances aggregating to Rs.31,57,16,297/- has to be considered for computing book profit under 115JB of the Act. We have heard both parties and have perused the material available on record. We are of the considered view that this issue is squarely covered by the decision of the Co-ordinate bench in the & 6488/Del/2019 for AY 2016-17. We therefore, respectfully following the decision of the Coordinate bench in the & 6488/Del/2019 for AY 2016-17, decline to interfere with the order of the Ld. CIT(A) on this Ircon International Ltd. issue. Since the finding of the Ld. CIT(A) deleting the disallowances aggregating to Rs.31,57,16,297/- has already been upheld by us; therefore, alternatively also the same cannot be added back to compute the book profit under 115JB of the Act. The respective ground raised in this regard by the Revenue thus stands dismissed accordingly.

The above finding with respect to the issues of (i) deduction under section 80IA of the Act and (ii) the disallowance of provisions for maintenance will apply mutatis mutandis in this appeal also.

The last issue is in respect of the disallowance of advances of Rs.1,99,31,448/- written off. The AO disallowed the advances of Rs.1,99,31,448/- on the reasoning that the same had never been offered as income in preceding years and the nature of advances were capital. However, the same, placing reliance on the case laws; Mysore Sugar Co. Ltd. reported in 46 ITR 649 (SC), Harsad J Choksi 25 taxmann.com567 (Bom) and Badri Das Daga 34 ITR 10, was allowed by the Ld. CIT(A) treating the same as business loss.

We have heard both parties and have perused the material available on record. The CIT-DR has not brought any material on the record to contradict the finding of the Ld. CIT(A). We find that the advances have been given in the normal course of business, which became unrecoverable. We find merit Ircon International Ltd. in the finding of the Ld. CIT(A) that this loss is in the nature of business loss and is thus allowable. Thus, this ground of the Revenue stands dismissed in both years.

In the result, both appeals of the Revenue are dismissed as above.