THE PR. COMMISSIONER OF INCOME-TAX-CIT(A) vs. M/S CEC, SOMA CICI JV

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ITA/126/2020HC KarnatakaKAHC01052088201921 March 2023Bench: P.S.DINESH KUMAR,C.M. POONACHA8 pages
AI SummaryDismissed

What did the High Court hold?

The High Court considered the rival contentions and the records. It noted that the unbillable expenses amounted to Rs. 58.62 crores, comprising Rs. 28.91 crores for designing and Rs. 29.69 crores for road construction. The Revenue had no grievance regarding the design aspect. Regarding the provision for road construction, the Revenue argued that the AO had not correctly examined the factual matrix. However, the Court found that the AO's order extracted a communication showing the assessee had enclosed technical documents, costs, and computations for the provision, a fact noted by the ITAT. The ITAT also recorded that the AO had noted the details of expenditure. The Court rejected the Revenue's argument for remand based on the AY 2013-14 order, stating that remand orders are fact-specific. It further noted that even for AY 2013-14, after remand, the AO accepted the provision, and for subsequent years (AY 2014-15), no disallowance was made. The Court found no error in the ITAT's orders, concluding that the provision for expenses was made on a pro rata basis based on turnover with reference to total unbillable future expenses. The appeals were dismissed, and the substantial questions of law were answered in favour of the assessee.

What were the facts?

The Revenue has filed these appeals challenging the orders of the Income Tax Appellate Tribunal (ITAT) for Assessment Years (AY) 2011-12 and 2012-13. The assessee, M/s CEC SOMA CICI JV, a consortium, secured a contract for designing and constructing tunnels and civil works for BMRCL. The total project cost was Rs. 9,95,20,00,000/-, with projected future unbillable expenses of Rs. 58,62,00,000/-. These unbillable expenses include reconstruction of roads and footpaths damaged during construction. The assessee made provisions for these expenses based on turnover. The Assessing Officer (AO) disallowed these provisions. The CIT(A) allowed them, holding they were based on ascertained liabilities. The ITAT upheld the CIT(A)'s orders.

What were the issues?

1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in dismissing the Revenue's appeals by setting aside the disallowance made by the assessing authority in respect of future expenses claimed as deduction, by relying on the judgments in Calcutta Co. Ltd v/s CIT and BEML Ltd, when the facts in the present case are not identical? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in setting aside the disallowance made by the assessing authority in respect of future expenses claimed as deduction, by erroneously holding that provision for future expenses is allowable, ignoring that the provision was not based on a past event and its quantification was not substantiated before the assessing authority, contrary to the principles laid down in BEML Ltd for allowing estimated future liabilities under the mercantile system of accounting? Assessee's contentions: The assessee argued that since the Revenue accepted the provision for design expenses, the only remaining issue is the provision for road construction. The assessee provided technical estimates and cost computations to the AO, which were also noted by the ITAT. Similar provisions for AY 2013-14 were allowed by the AO after remand, and no disallowance was made for AY 2014-15. The provision was made on a pro rata basis based on turnover. Revenue's contentions: The Revenue contended that while the provision for design expenses might be allowable, the provision for road construction requires examination of actual expenditure by the AO. The Revenue cited that for AY 2013-14, the matter was remanded to the AO to examine the factual matrix, and prayed for a similar remand in these appeals.

Which sections of the Income-tax Act were involved?

Section 260-A

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, BENGALURU IN ITA NO. 126/BANG/2016 DATED 03/05/2019 FOR

Before: Honble Apex Court in the case of BEML Ltd (reported

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ITA No. 48 of 2020 C/W ITA No. 126 of 2020

IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 21ST DAY OF MARCH, 2023 PRESENT THE HON'BLE MR JUSTICE P.S.DINESH KUMAR AND THE HON'BLE MR JUSTICE C.M. POONACHA INCOME TAX APPEAL NO. 48 OF 2020 C/W INCOME TAX APPEAL NO. 126 OF 2020

IN ITA NO.48/2020

BETWEEN:

1.

THE PR. COMMISSIONER OF INCOME-TAX CIT (A) 5TH FLOOR, BMTC BUILDING 80 FEET ROAD KORMANGALA BENGALURU - 560095

2.

THE ASST COMMISSIONER OF INCOME TAX CIRCLE -1 (2) (1), 2ND FLOOR, BMTC BUILDING, 80 FEET ROAD, KORAMANGALA BENGALURU - 560095 …APPELLANTS (BY SRI. DILIP M, STANDING ADVOCATE FOR SRI ARAVIND K V.,ADVOCATE)

AND:

1.

M/X CES SOMA CICI JV OPP GATE NO 20 NEAR M CHINNASWAMY STADIUM M G ROAD, BENGALURU - 560001 PAN AAAAC8081E …RESPONDENT (BY SRI. A SHANKAR, SENIOR ADVOCATE FOR SRI LAVA M.,ADVOCATE)

Digitally signed by NIRMALADEVI Location: HIGH COURT OF KARNATAKA

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ITA No. 48 of 2020 C/W ITA No. 126 of 2020

THIS INCOME TAX APPEAL IS FILED UNDER SEC.260-A OF INCOME TAX ACT 1961, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW AND ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, BENGALURU IN ITA NO. 126/BANG/2016 DATED 03/05/2019 FOR ASSESSMENT YEAR 2011-2012 ANNEXURE-C CONFIRMING THE ORDER OF THE APPELLATE COMMISSIONER AND CONFIRM THE ORDER PASSED BY THE ASST. COMMISSIONER OF INCOME TAX, CIRCLE-1(2)(1), BENGALURU AND ETC.

IN ITA NO.126/2020

BETWEEN:

1.

THE PR. COMMISSIONER OF INCOME-TAX, CIT(A) 5TH FLOOR, BMTC BUILDING, 80 FEET ROAD, KORMANGALA, BENGALURU-560095

2.

THE ASST COMMISSIONER OF INCOME TAX CIRCLE-1(2)(1), 2ND FLOOR, BMTC BUILDING, 80 FEET ROAD, KORMANGALA, BENGALURU-560095 …APPELLANTS (BY SRI. DILIP M, STANDING ADVOCATE FOR SRI ARAVIND K V., SENIOR STANDING ADVOCATE)

AND:

1.

M/S CEC, SOMA CICI JV OPP GATE NO.20 NEAR M CHINNASWAMY STADIUM, M.G.ROAD, BENGALURU-560001 PAN AAAAC 8081E …RESPONDENT (BY SRI. A SHANKAR, SENIOR ADVOCATE FOR SRI ANNAMALAI S.,ADVOCATE)

THIS INCOME TAX APPEAL IS FILED UNDER SEC.260-A OF INCOME TAX ACT 1961, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW AND ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, BENGALURU IN ITA NO. 1822/BANG/2016 DATED 03/05/2019 FOR ASSESSMENT YEAR 2012- 2013 ANNEXURE-C CONFIRMING THE ORDER OF THE APPELLATE

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ITA No. 48 of 2020 C/W ITA No. 126 of 2020

COMMISSIONER AND CONFIRM THE ORDER PASSED BY THE ASST. COMMISSIONER OF INCOME TAX, CIRCLE-1(2)(1), BENGALURU AND ETC.

THESE APPEALS COMING ON FOR FINAL HEARING, THIS DAY P.S. DINESH KUMAR J., DELIVERED THE FOLLOWING:

JUDGMENT

These appeals by the Revenue challenging the orders dated 03/05/2019 passed in ITA NOs. 126/BANG/2016 for AY1 2011-2012 and 1822/BANG/2016 for AY 2012-13, respectively passed by the ITAT2, "C" Bench, Bangalore, have been admitted to consider following common questions of law in both the appeals:

"1. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in dismissing the appeals preferred by Revenue by setting the disallowance made by assessing authority in respect of future expenses claimed as deduction by relying on the judgment passed by Hon'ble Apex Court in case of Calcutta Co. Ltd v/s CIT and another case namely, BEML Ltd (Reported in 245 ITR page 428) when the facts in the present case are not identical. 2. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in setting aside the disallowance made by assessing authority in respect of future expenses claimed as deduction by erroneously holding that provision for future expenses in the case of the assessee is an allowable expenses ignoring the fact that the provision claimed was not on the basis of past event, quantification of the same

1 Assessment Year 2 Income tax Appellate Tribunal, Bengaluru Bench

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ITA No. 48 of 2020 C/W ITA No. 126 of 2020

was not substantiated before assessing authority which are the guidelines/principles laid down by the Hon'ble Apex Court in the case of BEML Ltd (reported in 245 ITR page 428) for allowing estimated future liabilities with regard to assessee's following mercantile system of accounting."

2.

Heard Shri.Dilip, learned Standing Counsel for the Revenue and Shri.Shankar, learned Senior Counsel for the Assessee.

3.

Brief facts of the case are, Assessee is a consortium participated in the tender floated by BMRCL (Bangalore Metro Rail Corporation Limited) and bagged a contract for designing, construction of tunnels and other civil works. The total project cost is Rs.9,95,20,00,000/-. The total projected future expenses (unbillable) is Rs.58,62,00,000/-.

The unbillable expenses include reconstruction of roads damaged while constructing tunnels and during the other construction activities undertaken by the Assessee. Out of the total unbillable expenses, Rs.28.91 crores is towards the cost of designing and Rs.29.69 crores is towards rebuilding of roads, foot paths, etc., damaged during the construction work. The unbillable expenses are

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ITA No. 48 of 2020 C/W ITA No. 126 of 2020

inbuilt in the contract and payment for the same is made by the contractor and not BMRCL.

4.

Based on the turnover, the Assessee - contractor makes provision for expenses. For AY 2011-12 Assessee made provision for expenses as on 31.3.2011 of Rs.6,66,64,500/- and for AY 2012-13 Rs.12,12,28,476/-. The AO3 disallowed the said provisions. The CIT(A) allowed the same on the ground that the provision was not contingent one, but based on the matching expenditure on ascertained liability. CIT(A)’s order has been upheld by the ITAT by dismissing the Revenue’s Appeals.

5.

Shri.Dilip submitted that so far as the design aspect is concerned, the provision made by the Assessee will have to be allowed. But so far as the provision made towards construction of roads, etc., requires examination of actual expenditure by the AO. It is submitted that in similar circumstances for AY 2013-14, ITAT has remanded the matter to AO to examine the factual matrix. Accordingly, he prayed for allowing these appeals and to remand the matter to the AO for reconsideration.

3 Assessing Officer

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ITA No. 48 of 2020 C/W ITA No. 126 of 2020

6.

Shri.Shankar for the Assessee submitted that since the component towards design has been accepted by the Revenue, the only thing that remains for consideration is the component towards construction of roads and other civil works. The Assessee, based on the turnover for AY 2011-12 and 2012-13, had made corresponding provisions for expenses as on 31.3.2011 and 31.3.2012. Adverting to the AO’s order, he pointed out that the Assessee had enclosed the entire technical estimate and the cost in execution of the jobs for the respective years. Thus, the entire record was before the AO and the same has been rightly observed by the ITAT in para 12 of the impugned order. It is submitted that similar provision made for AY 2013-14 has been allowed by the AO and no disallowance was ordered for AY 2014-15 also.

7.

We have carefully considered the rival contentions and perused the records.

8.

The undisputed facts of the case are, the unbillable expenses is Rs.58.62 crores. Out of that, Rs.28.91 crores is towards designing and Rs.29.69 crores is towards

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ITA No. 48 of 2020 C/W ITA No. 126 of 2020

construction of roads, etc. There is no grievance by the Revenue so far as the design aspect is concerned. With regard to the provision for expenses towards construction of roads and other civil works, the contention urged on behalf of the Revenue is that the AO has not correctly examined the factual matrix.

9.

Shri.Shankar is right in his submission that AO in his order has extracted a copy of the communication between the Assessee and the department, which shows that the Assessee had enclosed technical documents, costs and computation for arriving at a provision for the respective years. This has been noted by the ITAT in para 12 of the impugned order. In addition, ITAT has recorded that AO has noted the details of expenditure in his order and the same has been extracted in ITAT’s order also.

10.

It was urged on behalf of the Revenue that for AY 2013-14 the matter was remanded to the AO. There is no parity insofar as an order of remand is concerned. It is based on the facts of each case. Further, even for the said AY 2013-14, after remand, AO has accepted the provision

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ITA No. 48 of 2020 C/W ITA No. 126 of 2020

made by the Assessee. For the subsequent years, namely AY 2014-15 no disallowance has been made. There is no dispute with regard to the fact that the provision for expenses is made on pro rata basis based on the turnover with reference to total unbillable future expenses of the project.

11.

In view of the above, we find no error in the orders passed by the ITAT. Resultantly, the following: ORDER

(i) Appeals are dismissed;

(ii) The substantial questions of law are answered in favour of the Assessee and against the Revenue.

No costs.

Sd/- JUDGE

Sd/- JUDGE nd List No.: 4 Sl No.: 2

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