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Income Tax Appellate Tribunal, DELHI BENCH ‘F’ : NEW DELHI
Before: SHRI KULDIP SINGH & SHRI PRASHANT MAHARISHI
PER KULDIP SINGH, JUDICIAL MEMBER :
Since common questions of facts and law have been raised in both the aforesaid appeals, the same are being disposed off by way of consolidated order to avoid repetition of discussion. referred to as ‘the Revenue’) by filing the present appeal sought to set aside the impugned orders dated 31.05.2017 & 05.06.2017 passed by the Commissioner of Income - tax (Appeals)-36, New Delhi qua the AYs 2011-12 & 2012-13 respectively on the grounds inter alia that:-
“ (AY 2011-12) 1. On the facts and under the circumstances of the case, the Ld. CIT (A) has erred in deleting the addition of Rs.35,68,94,401/- made by the AO, as the anticipated/expected losses has not been actually incurred but the assessee during the year.
2. On the facts and under the circumstances of the case, the Ld. CIT (A) has erred in law that the losses for future years cannot be allowed as deduction even if the same have been computed in conjunction with AS-7 notified by ICAI, as AS-7 has not been notified in the Act.” (AY 2012-13) 1. On the facts and under the circumstances of the case, the Ld. CIT (A) has erred in deleting the addition of Rs.5,30,97,715/- made by the AO, as the anticipated/expected losses has not been actually incurred but the assessee during the year.
On the facts and under the circumstances of the case, the Ld. CIT (A) has erred in law that the losses for future years cannot be allowed as deduction even if the same have been computed in conjunction with AS-7 notified by ICAI, as AS-7 has not been notified in the Act.
3. On the facts and under the circumstances of the case, the Ld. CIT (A) has erred in allowing to set off the b/f loss against the income from other sources to the tune of Rs.2,56,36,785/-. As the business of the assessee is construction of power plants and not to earn interest by investing in FDRs etc.”
Assessee company is a wholly owned subsidiary of Power Machine Russia working as a EPC company for large power of plant, outside procurement whereby the assessee procures various goods and material locally in India and supplies the same under its contract with end-customers at pre-agreed prices and construction in respect of which assessee largely works with independent sub-contractor.
During the scrutiny proceedings, Assessing Officer (AO) noticed that the assessee has debited provisions of anticipated losses of Rs.70,01,34,762/- & Rs.5,30,97,715/- for AYs 2011-12 & 2012-13 respectively to its profit & loss account and claimed its deduction in computation of business income and thereby framed the assessment at the total income of Rs.15,09,28,150/- & Rs.15,23,13,590/- for AYs 2011-12 & 2012-13 respectively.
In AY 2012-13, AO also disallowed claim of the assessee to set off the brought forward losses against income from the other sources to the tune of Rs.2,56,36,785/-.
Assessee carried the matter before the ld. CIT (A) by way of filing the appeals who has deleted the additions by partly allowing the appeals. Feeling aggrieved by the orders passed by the ld. CIT (A), the Revenue has come up before the Tribunal by way of filing the present appeals. parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
GROUNDS NO.1 & 2 FOR ASSESSMENT YEAR 2011-12 GROUNDS NO.1 & 2 FOR ASSESSMENT YEAR 2012-13 8. Ld. DR for the Revenue challenging the impugned order passed by the ld. CIT(A) while referring to para (b) on the second last page of AO’s order for AY 2011-12 contended that the case of CIT vs. Triveni Engineering & Industries Ltd. (2011) 336 ITR 374 (Del.) is distinguishable as it is not binding on the AO to frame the assessment as per AS-7. Ld. DR further contended that if there is certainty in recognizing expenses, only then these are allowable.
Even otherwise, there is always an escalation clause in the contract.
However, on the other hand, ld. AR for the assessee to repel the arguments addressed by the ld. DR for the Revenue relied upon the orders passed by the ld. CIT (A) and contended that this issue is no longer res integra as this issue is already decided in favour of the assessee since AY 2006-07 by the Tribunal vide order dated 05.02.2016 in erstwhile entity of the assessee company, namely, DCIT vs. M/s. LMZ Energy India Ltd. in ITA & 17815/Del/2011 for AYs 2006-07, 2007- 08 & 2008-09 respectively which order has been confirmed by the Hon’ble Delhi High Court vide order dated 28.07.2016 in ITA 399/2016, ITA 400/2016 & ITA 426/2016.
Ld. CIT (A) decided the present issue in favour of the assessee by returning following findings :-
“6.3. The third issue in appeal is regarding disallowance of provision for anticipated losses. (i) On this issue the assessee has strongly relied on various decisions of different High Court and ITAT in its favour and mainly on the case of jurisdictional High Court of Delhi in the case of Triveni Engg. and Industries Ltd. vide order dated 29.11.2010 for AY 2000-01 (336 ITR 374 Delhi). The relevant portion of the order are as under: "1. Though various questions of law were proposed in this appeal, the appeal was admitted on the following substantial questions of law: i. Whether ITAT was correct in law in allowing provision made by the assessee for future losses that may occur on account of different project works undertaken by it? ii. Whether ITAT was correct in law in holding that the provision for losses was allowable as the assessee was following completed contract method of accounting? “ “ 11. The learned Counsel for the revenue may be correct in stating the proposition of law, generally. No doubt, unless the expenditure is actually incurred or it is accrued in the relevant year. It would not be allowed as a deduction. Such a liability has to be in praesenti. However, at the same time, in the given scenario where in relation to the project works undertaken by the assessee, completed contract method of accounting is followed ./2017 ITA No.5334/Del./2017 which is consistent with the Accounting Standard and these accounting standards also lay down the norms indicating the particular point of time when the provision for all known liabilities end tosses has to be made, the making of such a provision by the assessee appears to be justified more so when the assessee had recognised gain as well on such project during this year Itself. This appears to be in consonance with principle of matching cost and revenue as well. However, in the projected scenario of this case after taking stock of the entire situation, we are of the opinion that it is not necessary to conclusively answer the aforesaid questions formulated. It is because of the reason that we find that the entire exercise is revenue neutral. It may be pointed out that it is a matter of record that against the provision of 139 lacs, the assessee has to actually incur expenditure of 218.03 lacs i.e .more than the provision made. It is undisputed that the expenditure incurred by the assessee on the project is admissible deduction. The only dispute that the revenue seeks to raise is regarding the year of allowability of expenditure. Considering that the assessee is a company assessed at uniform rate of tax, the entire exercise of seeking to disturb the year of allowability of expenditure is, in any case, revenue neutral. . . .
In such circumstances we are of the view that insofar as present appeal is concerned substantial questions of law that need to be answered does not arise. We, therefore, dismiss his appeal on this ground alone.”
(ii) The other case laws quoted by the assessee also have adjudicated in a similar manner in case of long term contracts following the method of accounting as per AS-7. It is felt that even if the contention of the AO is considered, the net result would be that the entire exercise will only disturb the year of allowability of expenditure which is revenue neutral. The true profit/loss, will emerge in the year of completion of contract when all the anticipated losses and gains would be adjusted. It is seen that even in ether years of the project being in progress, the revenue gain is also being recognised. Same has been done in this year also where the revenue gain is shown as Rs 22 crore.
(iii) It is not in dispute that the AO has accepted the method of accounting. The only ground of expenditure not being allowed was holding that the same was contingent in nature as no such actual expenditure was incurred in the said year and was only on the basis of estimates. However, it is observed that the assessee ./2017 ITA No.5334/Del./2017 has been following, consistent and regular method of accounting which was uniform through the years and also being accepted by the department. The method can be rejected by the AO only if he finds that the accounting of the assessee is not correct or is Incomplete or that the method has been changed without any justification. (iv) In my opinion therefore, the order of the Hon'ble High Court in the above mentioned case squarely applies to the facts of the assessee's case also. In view of the above discussion and the facts of the case, it is held that assessee's claim for provisions for anticipated loss which was made in accordance with the guidelines of AS-7 and duly debited in the audited accounts of the company is allowable expenditure.”
Ld. CIT (A) decided this issue by following the decision rendered by Hon’ble High Court in case of CIT vs. Triveni Engineering & Industries Ltd. (supra).
Hon’ble Delhi High Court in case of Triveni Engineering & Industries Ltd. (supra) decided the identical issue by holding that, “no doubt, unless the expenditure is actually incurred or it is accrued in the relevant years, it would not be allowed as a deduction. However, at the same time, in the given scenario, where in relation to the project works undertaken by the assessee, completed contract method of accounting is followed which is consistent with the Accounting Standard and these Accounting Standards also lay down the norms indicating the particular point of time when the provisions for all known liabilities and losses has to be made, the making of such a provision by the assessee appears to be justified more so when the assessee has recognized gain as assessee has shown revenue gain of Rs.22 crores for AY 2011-12.
When “completed contract method of accounting” is undisputedly applied to consistently by the assessee in a long term project, the actual profit/loss will come on record in the year of completion of contract when all the undisputed losses and gains would be adjusted.
Moreover, when percentage completion method, which is in accordance with AS-7, has been consistently applied by the assessee and has been accepted by the Department and the expenditures incurred by the assessee are admissible one, we find no ground to interfere into the findings returned by the ld. CIT (A).
Consequently, Grounds No.1 & 2 of AYs 2011-12 & 2012-13 are determined against the Revenue.
GROUND NO.3 OF ASSESSMENT YEAR 2012-13 14. Ld. CIT (A) allowed the set off of the brought forward losses against the income from other sources to the tune of Rs.2,56,36,785. Ld.DR for the Revenue challenging the impugned disallowance contended that since the assessee is into the business of construction of power plants and not to earn the interest by investing in FDRs, ld. CIT(A) has erred in allowing the same. arguments addressed by the ld. DR for the Revenue relied upon the order passed by the ld. CIT (A).
Undisputedly, the assessee has earned interest income of Rs.2,56,36,785/- from FDRs purchased during the course of business. It is the case of the assessee that for smooth running of its core business activities, funds are required on short notice and moreover all the fixed deposits have been purchased out of the business funds available with the assessee and has been utilized for actual business purpose. Ld. CIT (A) allowed the set off of brought forward losses returning the following findings :-
“6.3 The assessee has classified in its Return of Income an amount of Rs.2,56,36,785/- as "income from other sources". The AO has therefore not allowed set off against this income of the business loss of earlier years. The assessee's contention is that this was classified as income from other sources by mistake and since claim was made by it and set off was also done, the decision in the case of Goetze India Pvt. Ltd. of the Hon'ble Supreme Court will not apply as it is not a fresh claim. Further, the assessee has also claimed that interest was on the FDs which constituted margin money for providing bank guarantee to the customers and in this manner was inextricably linked with the business of the assessee. It was also claimed that even if it is treated as income from other sources, the set off is still available as per the case laws submitted. (i). Going strictly by the interpretation made by the AO it appears that the income from fixed deposit may not be available for set off as it is income from other sources and not from business or profession as envisaged by section 72 of the Act. Had the business of the assessee been related to investment, the contention of the assessee would have been right. It has been mentioned in the assessment order in para 7.3 (iii) that “during the course of the assessment proceedings when confronted with situation of non availability of set off such income against brought forward losses, the assessee came up with a afterthought that the interest actually constituted 'business income'. Upon going through the submission ./2017 ITA No.5334/Del./2017 made by the assessee, however, it is clear that this may not be the correct position. As submitted by the assessee it has been claiming the interest as income from business in all other AYs and it was allowed as such. The same has also been treated as income from business and available for adjustment for set off of losses even for AY 2011-12 in which no such addition was made. It cannot therefore be on second thought that this plea has been put forward by the assessee. (ii) Assessee has put forward a number of decisions of jurisdictional High Court and the Hon'ble Supreme Court wherein it has been clearly held that the income from interest earned from FDs made for bank guarantee etc if inextricably linked with the main business may be treated as available for set off losses. (iii) In the decision in the case of SNAM Progetti SPA 10 taxman 86, the Hon'ble High Court of Delhi held as under (only relevant portion): "7. Normally on the placing of funds in banks or short term or long term deposits, the interest income derived from those sources would be 'income from other sources' but there have been cases in which such income has been treated as income from business notwithstanding the fact that it is interest income………............ The question to be seen in such a case is whether the interest income is derived also from what may be described as 'business activity'. If it is so derived, then the mere fact that it is taxed under a different section will make no difference. 8. ………The assessee claimed that it has funds which it derived from business and which are used only in business and for no other purpose. If they are spare funds, then they are deposited in banks and, hence, it is clear that this income is also business income ……. The company has not come from Italy to make bank deposits in India but has come to carry on business. If at any time it has spare funds it prefers not to keep the same idle but makes deposits in banks which give some income. This also is, therefore, business income, and for the purpose of set-off has not to be treated as separate from business income ……. 9. …..Set off had to be granted and could not be refused merely because interest income is taxed under a separate head. " (iv) The decision in the above case also applies to the case of the assessee specifically where the income has been treated as income from other sources. Even in such a case the Hon'ble High Court has allowed the set off. The other case law quoted by the assessee ./2017 ITA No.5334/Del./2017 support the contention of the assessee that where the deposit of money is directly linked with the business activity it would be held as having an inextricable nexus with the business. In the case of the assessee it is obvious that the appellant had commenced the operation of the contract and that furnishing of bank guarantee was sine qua non for execution of the project. Hence, FDs were compulsorily required to be maintained to obtain such bank guarantee or provide LCs to suppliers. The AO has also mentioned in his order that apart from the deposit where bank held as margin money for bank guarantee there was an amount of Rs. 9.2 crore mentioned as other bank deposit which are due to realization within 12 months from the date of reporting. These are not related to the margin money and therefore the claim of the assessee regarding FDs made for margin money will not apply and therefore the interest earned on this deposit will still be income from other sources. Again, this would appear to be a valid argument to not allow the set off of business losses against interest income on Rs. 9.2 crore. The assessee has however contended that these are available funds with it and were released from previous liens and were still kept in FDs to meet future urgent business exigencies though not immediately for margin money. The decision earlier quoted in the case of SNAM Progetti SPA applies on this issue also. In 'the case of the assessee, obviously, the company has not come from Russia to earn interest on deposits placed as FDs. It was only when some spare funds were available during the business activities, it was kept as FDs to give some income and not lie idle and therefore it should also be treated as business income. It has also been claimed by the assessee that the funds are not used anywhere else apart from the business. In view of the above discussion, it is held that although the interest income has been shown as 'income from other sources', it is still a part of business income in nature as in all other assessment years and is available for set off of any losses from previous years. It is seen that similar interest was claimed and allowed as business income in all other A.Ys. The disallowance may therefore be deleted and set off may be allowed as per Rules.”
Perusal of the impugned order passed by the ld. CIT (A) goes to prove that this issue has been decided on the basis of facts brought on record by the parties to the appeals. When the core business of the assessee company is construction of power plant and purchasing the FDRs for availability of the easy funds for on the funds invested from the business funds cannot be disallowed on the ground that earning interest on the FDRs is not part of the business of the assessee.
Ld. CIT (A) has rightly decided that, “although interest income has been shown as income from other sources it is still a part of the business income in nature as in all other assessment years and is available for set off of any losses from the previous year.” So, investing surplus funds in FDRs during the business activities is part of primary business of the assessee company to make easy availability of funds for core activities and as such, interest income has been rightly treated as business income by the ld. CIT (A). Consequently, we find no ground to interfere into the findings returned by the ld. CIT (A), hence Ground No.3 of Assessment Year 2012-13 is determined against the Revenue. 17. Resultantly, both the appeals for AYs 2011-12 & 2012-13 filed by the Revenue are dismissed. Order pronounced in open court on this 30th day of September, 2021. Sd/- sd/- (PRASHANT MAHARISHI) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated the 30th day of September, 2021 TS