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Income Tax Appellate Tribunal, VISAKHAPATNAM BENCH, VISAKHAPATNAM
Before: SHRI V. DURGA RAO& SHRI D.S. SUNDER SINGH
PER D.S. SUNDER SINGH, Accountant Member: These appeals are filed by the revenue against the order of the Commissioner of Income Tax (Appeals) [CIT(A)], Vijayawada vide I.T.A.No.546/CIT(A)/VJA/2013-14 dated 30.08.2016 and I.T.A. No.16/CIT(A)/VJA/2015-16 dated 15.03.2018 for the Assessment Year (A.Y.) 2011-12 and 2012-13 respectively.
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The common issue involved in the appeals for the A.Y. 2011-12 and 2012-13 is liquidated damages paid towards incomplete contracts. For the A.Y.2011-12, the assessee had agreed for the addition of liquidated damages and for the A.Y. 2012-13, the AO made the addition of liquidated damages for an amount of Rs.1,84,61,840/-.
Briefly stated the facts related to the case are that the assessee is a public limited company engaged in the business of manufacture of cement and engineering goods. The company is debiting liquidated damages to Profit & Loss account year after year on accrual basis and the department has allowed the expenditure relating to liquidated damages on completed contracts and disallowed the damages relatable to incomplete contracts. The issue was taken on appeal and the Special Bench has been constituted in the assessee’s own case to decide the issue with regard to the liquidity damages and the Hon’ble Special Bench decided the issue in favour of the assessee. The department has taken up the matter to the Hon’ble High Court of Andhra Pradesh and the Hon’ble High Court also has answered the issue in favour of the assessee and against the revenue. For the sake of clarity and convenience, we extract relevant part of the order of the
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Hon’ble High Court of Andhra Pradesh in the referred case No.342 of 1991 dated 08/08/2013 which reads as under : “9. In the case on hand, the terms of the contract with regard to payment of liquidated damages are quoted above. It would appear from the language thereof the moment the delivery period mentioned in the progress chart expires, the assessee is under obligation to bear the liquidated damages in a particular manner. The agreement specifically provides as to the liability of the liquidated damages on expiry of delivery period and it does not depend upon the actual delivery. To clarify otherwise, in our view, the aforesaid right in favour of the purchaser has been created under the agreement irrespective of the fact whether delivery is effected or not. Admittedly, the assessee is maintaining mercantile system of accounting. Since, the agreement is not in dispute, but only the method of quantification is disputed, the assessee has to incur the liability irrespective of actual payment. To test it otherwise, whether on the aforesaid clause, buyer is to disclose as in income on account of the liquidated damages by maintaining mercantile system of accounting or not. From the aforesaid clause, no doubt, in our view the payee is required to disclose as an income, as this term clearly stipulates the accrual of income. In our view, the terms clearly stipulate the obligation to make payment. Under the circumstances, we are of the view that the payment of liquidated damages or accrual thereof does not depend upon actual delivery of goods. Aforesaid method of making a provision is also legally permissible as it has been held by the Hon’ble Supreme Court of India in case of BILAHARI INVESTMENT P. LTD ). IN paragraph 20 of the said judgement, the Hon’ble Supreme Court stated the law as follows : “Every assessee is entitled to arrange its affairs and follow the method of accounting, which the department has earlier accepted. It is only in those cases, where the department records the finding that the method adopted by the assessee results in distortion of profits, the department can insist on substitution of the existing method.” It is not in dispute that the respondent assessee has consistently been maintaining mercantile system of accounting and there is no departure from it.” 4. Though for the A.Y. 2011-12, the assessee stated to have agreed for the addition, the Ld.AR submitted that there was miscommunication and the AO misunderstood the submission of the assessee. The assessee has
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never agreed for the addition since the issue is contested year after year before the appellate forums. The intention of the assessee was to make the disallowance subject to the assessee’s right of appeal, but not the acceptance for disallowance of the expenditure. The Ld.DR supported the orders of the AO.
We have heard both the parties and perused the material placed on record. It is a fact that the assessee has been agitating this issue right from the A.Y. 1982-83 onwards in different forums. Therefore, we agree with the contention of the assessee that there was a misunderstanding on the part of the AO with regard to acceptance disallowance of the expenditure. The assessee also submitted the affidavit to that extent. In the instant case, on identical facts on the same issue, the Special Bench has decided the issue in favour of the assessee and the Hon’ble High Court has upheld the order of the Tribunal and dismissed the appeal of the revenue. During the appeal hearing, the Ld.AR argued that the liability regarding the liquidity damages arose by virtue of terms of contract between the assessee and the customer and the delay in supply would attract the damages and the liability is ascertainable each year and the assessee is required to make payment of damages to the contractee. Such liability is debited to the Profit & Loss
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account under the head ‘liquidity damages’. Since, the issue is settled in favour of the assessee by Special Bench and also by Hon’ble High Court of Andhra Pradesh in the assessee’s own case, the assessee has requested to allow the same as deduction. On identical issue, for the A.Y.2010-11 in ITA No. 593/Viz/2014 dated 27.09.2016 this Tribunal has deleted the addition and dismissed the appeal of the revenue. Therefore, respectfully following the view taken by this Tribunal, Special Bench and Hon’ble High Court of Andhra Pradesh, we uphold the order of the Ld.CIT(A) and dismiss the appeal of the revenue on this ground.
The next issue in Ground No.2 for the A.Y. 2011-12 is relating to rental income and excess depreciation. During the assessment proceedings, the AO observed that the assessee has admitted the rental income of Rs.14,39,400/-, whereas the TDS certificates has shown the rental receipts of Rs.19,73,947/-, resulting in difference of Rs.5,34,547/-. In response to the letter issued by the AO, the assessee submitted that the sum of Rs.5,13,905/- was received as land rent from FCKCP which was offered as income from business in the Engineering Unit. Not being convinced with the explanation of the assessee, the AO made the addition of Rs.5,34,547/-.
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On appeal before the CIT(A), the assessee reconciled the difference and the Ld.CIT(A) found that the assessee had offered the difference amount of Rs.5,34,547/- under the head ‘business income’, therefore, deleted the addition.
Against the order of the Ld.CIT(A), the revenue has filed appeal before this Tribunal.
We have heard both the parties and perused the material placed on record. The Ld.CIT(A) given finding that the difference amount of Rs.5,34,000/- was offered as income from business in the Engineering Unit. For the sake of clarity and convenience, we extract relevant part of the order of the Ld.CIT(A) which reads as under : 5.1. Rental receipts as per TDS Certificates Rs.19,73,947 Rental receipts offered under the head Rs.14,39,400 “income from House property” ………………….. Difference Rs.5,34,547 - A Appellant submitted necessary reconciliation statement during assessment proceedings vide its letter dated 09.01.2014. Income received as land rent from FCKCP for storage of their Equipments which is offered as income from business in the Engg.Unit. Rs.5,13,905 Service Tax Rs. 51,552 ………………… Total Rs.5,65,457 – B
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The balance of Rs.30,910/- (B-A) (Rs.5,65,457 (-) Rs.5,34,547) related to a TDS certificate which was wrongly treated as rental income though payment was made to the contractors (vide TDS certificate No.2010/0000001357). Necessary reconciliation in this regard was submitted during assessment proceedings. Hence, the entire rental receipts have been offered to tax under the head ‘income from house property’ as well as income from business in the engineering unit. Necessary evidence in this regard is available in the schedules of P&L a/c. For the relevant period, under the head ‘Other Income’ (Rent Receipts). Hence, I direct the Assessing Officer to delete addition of Rs.5,34,547/- 8.1. From the above order of the Ld.CIT(A) and from the explanation of the assessee, it is found that the assessee had already admitted the rental income under the head ‘business’ in Engineering Unit and there was no difference. The department has not brought any material to controvert the finding of the Ld.CIT(A). Therefore, we do not find any reason to interfere with the order of the Ld.CIT(A) and the same is upheld. The appeal of the revenue on this ground for the A.Y.2011-12 is dismissed.
The next issue is disallowance of excess depreciation of Rs.2,38,653/- for the A.Y. 2011-12 and Rs.1,03,985/- for the A.Y. 2012-13. During the assessment proceedings, the AO found that the assessee has claimed the depreciation @50% on cars stated to be for commercial use. Since the cars were not used in the business of running them on hire, the AO viewed that higher depreciation is available only in the year in which the new plant and machinery was put to use and in the subsequent years, the depreciation has
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to be restricted to 15%. Accordingly, the AO disallowed the depreciation. The Ld.CIT(A) deleted the addition observing that having allowed the depreciation in the earlier years, there is no reason to restrict the depreciation @15% in the impugned assessment year without having any fresh material to show that the vehicle was not a commercial vehicle. For the sake of clarity and convenience, we extract the relevant part of the order of the Ld.CIT(A) which is available in page No.5 and 6 reads as under : “I fail to persuade myself to agree with the above contention of Assessing Officer. Once an asset is eligible for a particular rate of depreciation as per provisions of the Act read with Depreciation Table, then for subsequent Assessment Years, depreciation should be allowed on the same percentage on W.D.V. (Written Down Value). If the intention of the statute is to give higher depreciation only to first year of use, the same will be specifically mentioned in the Act. For instance, additional depreciation u/s 32(iia) etc. Appellant purchased the car on 30.03.2009. For the Assessment Years 2009-10 & 2010-11, appellant claimed 50% depreciation as per IT rules and depreciation table. For earlier years(i.e.) Assessment Years 2009-10 & 2010-11, the vehicle was considered as commercial vehicle and how the same vehicle ceased to be commercial vehicle for Assessment Year 2011-12 is not comprehensible. Further the word ‘commercial vehicles’ shall have the meanings assigned to them in Sec 2 of the Moto Vehicles Act, 1988 and not in the sense of being used on hire as interpreted by Assessing Officer. Hence, in my view, it is not proper to restrict the depreciation to 15% during the Assessment Year 2011-12. View of Assessing Officer in this regard, is in my considered opinion, not in tune with the provisions of the Act.” 10. We have heard both the parties and perused the material placed on record. For the A.Y. 2009-10 and 2010-11, the assessee had claimed the
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depreciation @50% and the AO allowed the depreciation as claimed by the assessee. In the instant assessment year, the AO restricted the depreciation holding that the cars are not put to commercial use. No evidence has been brought on record by the AO to establish that the cars were not being put to commercial use. During the appeal hearing also, no material was placed before the Tribunal to controvert the finding of the Ld.CIT(A). Therefore, we do not find any reason to interfere with the order of the Ld.CIT(A) and the same is upheld.
In the result, appeals of the revenue for the A.Y. 2011-12 and 2012- 13 are dismissed.
Order pronounced in the open court on 20th March, 2019.
Sd/- Sd/- (िी.दुगाा राि) (धड.एस. सुन्दर धसंह) (V. DURGA RAO) (D.S. SUNDER SINGH) न्याधयक सदस्य/JUDICIAL MEMBER लेखा सदस्य/ACCOUNTANT MEMBER नवशधखधपटणम /Visakhapatnam नदनधंक /Dated : 20.03.2019 L.Rama, SPS
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आदेश की प्रतितिति अग्रेतिि/Copy of the order forwarded to:- 1. ननधधाऩरती/ The Assessee- M/s KCP Limited, No.2, Ramakrishna Buildings Dr.P.V.Cherian Crescent, Egmore, Chennai 2. रधजस्व/ The Revenue – Asst.Commissioner of Income Tax, Circle-1(1) Vijayawada 3. The Pr.Commissioner of Income Tax, Vijayawada 4. The Commissioner of Income-Tax (Appeals), Vijayawada 5. तिभागीय प्रतितिति, आयकर अिीिीय अतिकरण, तिशाखािटणम /DR, ITAT, Visakhapatnam 6.गार्डफ़ाईि / Guard file आदेशािुसार / BY ORDER // True Copy //
Sr. Private Secretary ITAT, Visakhapatnam