UHDE INDIA P.LTD,MUMBAI vs. ADDL CIT RG 10(3), MUMBAI

The captioned appeal filed by the assessee is directed against the order passed by the Commissioner of Income-tax (Appeals)- 22, Mumbai [for short ―CIT(A)‖], dated 11.01.2012, which in turn arises from the assessment order passed by the Assessing Officer [for short ―A.O‖] under Sec. 143(3) of the Income Tax Act, 1961 [for short ‗Act‘] for A.Y. 2007-08. The assessee has assailed the impugned order on the following grounds of appeal before us : ―1. The learned Commissioner of Income tax (Appeals) erred in disallowing provision for costs incurred on completed contracts amounting to Rs. 3,67,61,993/-.

The learned Commissioner of Income tax (Appeals) failed to consider the detailed facts submitted in case of provision made on Uhde Gmbh-SAFC contract, including the liquidated damages payable.

Briefly stated, the assessee company which is engaged in the business of supply of processes, designing, construction and commissioning of complete plants for chemicals, fertilizers, (formerly known as Uhde India Pvt Limited) – A.Y 2007-08 3 Thyssenkrupp Industrial Solutions (India) Private Limted Vs. Addl. CIT10(3), Mumbai petrochemicals, refining and other related industries had e-filed its return of income for A.Y 2007- 08 on 26.10.2007, declaring an income of Rs. 23,49,77,390/-. The return of income filed by the assessee was processed as such u/s 143(1) of the Act. Subsequently, the income of the assessee was assessed by the A.O vide his order passed u/s 143(3), dated 27.12.2010 at Rs. 49,99,23,265/- after making the following additions/disallowances: Sr. No. Particulars of addition/disallowance Amount 1. Disallowance of provision for costs incurred on completed Rs. 3,67,61,993/- contracts. 2. Disallowance of provision for cost overruns on incompleted Rs. 62,62,342/- contracts.

The assessee being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. We have heard the authorised representatives for both the parties, perused the orders of the lower authorities and the material available on record and also the judicial pronouncements relied upon by them. As multiple issues are involved in the present appeal, therefore, the same are being taken up in a chronological manner, as under: (A). DISALLOWANCE OF PROVISION FOR COSTS INCURRED ON COMPLETED CONTRACTS : Rs. 3,67,61,993 (formerly known as Uhde India Pvt Limited) – A.Y 2007-08 4 Thyssenkrupp Industrial Solutions (India) Private Limted Vs. Addl. CIT10(3), Mumbai

In the course of the assessment proceedings it was observed by the A.O that the assessee had made a provision for cost on completed contracts of Rs. 3,67,61,993/-. On being called upon to justify the same, the assessee in support thereof filed an exhaustive reply dated 11.11.2010. It was the claim of the assessee that it was engaged in the business of engineering consultancy and contract execution including Lumpsum Turnkey Projects [for short ―LSTK‖]. Further, it was submitted that it was following the ―Percentage of Completion‖(POC) method for contracts received on or after 1st April, 2003. It was submitted by the assessee that it makes provisions for costs on completed contracts when it is probable that an outflow of resources would be required to settle an obligation, in respect of which a reliable estimate can be made. However, the A.O was not persuaded to accept the aforesaid explanation of the assessee as regards making of provision for cost on completed contracts of Rs. 3,67,61,993/-. It was observed by the A.O that in none of the projects the liability was ascertained or had crystallised during the year. Further, it was noticed by him that in the preceding years also similar types of provisions were made by the assessee company against different projects which were disallowed by the A.O and thereafter confirmed in appeals. Also, it was observed by the A.O that the ITAT ‗G‘ Bench in the assesse‘s own case for A.Y 2002-03, had vide its order dated 10.09.2008 dismissed its appeal and confirmed the disallowance of provision for cost on contracts. In the backdrop of his aforesaid observations the provision for cost on completed contracts of Rs. 3,67,61,993/ was disallowed by the A.O. 5.1 Aggrieved, the assessee assailed the disallowance of provision for cost on completed contracts before the CIT(A). In its attempt to justify the making of provision for cost on complete contracts, it was submitted by the assessee that it carried out two types of contracts viz. (i). Lumpsum Turnkey Projects [for short ―LSTK projects‖]; and (ii). Cost plus fees contracts. Insofar LSTK projects were concerned, it was submitted by the assessee that revenue was recognised on commissioning of the plant i.e at the stage at which the plant is started and commissioning operations are commenced to demonstrate the guaranteed parameters to the client. Also, commissioning would mean feeding the raw-material (feedstock) for the first time into the plant following mechanical completion and lining up of various sections of the plant leading to operation for production. As claimed by the assessee, after commissioning of the plant it would conduct (formerly known as Uhde India Pvt Limited) – A.Y 2007-08 5 Thyssenkrupp Industrial Solutions (India) Private Limted Vs. Addl. CIT10(3), Mumbai guaranteed test runs and demonstrate the technical parameters as would have been guaranteed under the contract viz. consumption of raw material, production capacity, meeting effluent norms etc. before the plant would be finally accepted by the client It was the claim of the assessee, that since the profit on the aforementioned projects would be recognised upon commissioning of the plant i.e much before its final acceptance by the client, therefore, it was but essential for the assessee to provide for estimated costs which were likely to be incurred during the period falling between commissioning and the final acceptance of the plant by the client. As claimed by the assessee, the said costs would take within its sweep project specific travelling costs of the engineers, testing costs, supplies of replacement spares, replacement costs, modification costs etc. Also, as stated by the assessee, it was necessary to make provisions for additional costs if sustainable production capability was not demonstrated within the guaranteed period. 5.2 As regards the ―Cost plus fee contracts‖, it was submitted by the assessee that the revenue was recognized upon mechanical completion of the plant. Mechanical completion was stated to be the stage at which the plant after mechanical completion would be ready for acceptance of feed stock leading to production of guaranteed products. It was explained by the assessee that the provisions were made mainly for re-engineering services to be provided. As the assesse‘s liability in cost-plus fee contracts would only be related to providing of re-engineering services, therefore, the quantum of provision would comparatively be lesser as compared to LSTK contracts. 5.3. In the backdrop of its aforesaid submissions, it was the claim of the assessee that in both types of contracts costs were still to be incurred by the assessee in future i.e until the final acceptance of the plant by the client, and in certain cases expenses would have to be incurred even after the final acceptance of the plant by the client. 5.4 As regards the basis for estimation of the future costs, it was submitted by the assessee that at the year-end the project implementation team consisting of project managers, lead engineers and engineering managers would evaluate the status of each project that was being executed by the company and would therein estimate the costs likely to be incurred on each contract/project. On the basis of technical evaluation, the team would identify the additional number (formerly known as Uhde India Pvt Limited) – A.Y 2007-08 6 Thyssenkrupp Industrial Solutions (India) Private Limted Vs. Addl. CIT10(3), Mumbai of engineering hours required to be provided under the contract, the additional costs expected to be incurred on account of travelling, site related expenses, expenses for replacement/modification of equipment etc. Also, it was submitted by the assessee that as it was engaged in designing, construction and commissioning of plants for a diverse variety of industries and the services were highly technical in nature and the projects were carried out over a very wide geographical area, therefore, the same made the process of estimation complex. Since recognition of profits was done much in advance to the final acceptance of the plant by the client, therefore, as claimed by the assessee it was necessary to provide for the costs for each of such project which was likely to be incurred in future before final acceptance of the plant by the client. On a perusal of the records, we find that the assessee in its reply had placed on record a contract wise breakup of the provisions made by it during the year, which had been reproduced by the CIT(A) at Page 5-10 of his order. Also, support was drawn by the assessee from the fact that similar accounting methodology was being followed by it in earlier years, and the creation of provisions was in line with the applicable guidelines and accounting standards issued by the Institute of Chartered Accountants of India (ICAI). However, the CIT(A) after deliberating on the contentions advanced by the assessee was not persuaded to subscribe to the same. It was observed by the CIT(A) that the Tribunal vide its order passed in the assessee‘s own case for A.Y 2002-03, dated 10.09.2008, after relying on the judgments of the Hon‘ble Supreme Court in the case of Metal Box Company of India Ltd. Vs. Their Workmen (1969) 73 ITR 53 (SC) and Bharat Earth Movers Vs. CIT (2000) 245 ITR 428 (SC), had observed, that incurring of liability should be certain during the year and should be capable of estimation with reasonable certainty. In other words, the requirements of the principle to be followed for making of a provision were viz. (a). the certainty of the arising of the liability; and (b). on quantum aspect, the estimation must be based on the reasonableness and arbitrariness should be avoided in such estimation. It was also observed, that though the assessee had claimed that while making quantification for provisions, Project manager, Lead Engineers, Commercial Manager and Finance Manager jointly estimated the cost of provisions, however, no such evidence in support of such claim was ever placed on record. In fact, it was noticed by the CIT(A) that the evidences produced by the assessee were mere estimates made by a single person. It was also (formerly known as Uhde India Pvt Limited) – A.Y 2007-08 7 Thyssenkrupp Industrial Solutions (India) Private Limted Vs. Addl. CIT10(3), Mumbai observed by the CIT(A) that in few projects substantial provisions made against completed contracts were reversed/written back in the subsequent years. In the backdrop of his aforesaid observations, the CIT(A) concluded that as the provisions for costs incurred on completed contracts were unascertained liabilities, therefore, the same could not be allowed to the assessee. 5.5 The Ld. Authorised representative (for short ―A.R‖) for the assessee, submitted, that the issue pertaining to the assesses‘s claim as regards allowability of provisions for costs incurred on completed contracts was squarely covered by the order of the Tribunal in the assesse‘s own case for A.Y 2005-06, dated 04.07.2014 and A.Y 2006-07, ITA 1691/Mum/2012, dated 09.04.2019. It was averred by the ld. A.R, that the facts and issue pertaining to the assessee‘s claim for provision for costs incurred on completed contracts involving identical facts was there before the Tribunal in the preceding years, which was decided in favour of the assessee in the respective appeals. In order to buttress his aforesaid claim, the ld. A.R took us through the observations in context of the issue under consideration recorded in aforesaid orders of the Tribunal in the assesse‘s own case for A.Y 2005-06 and A.Y 2006-07. As regards the reliance placed by the CIT(A) on the fact that the disallowance of provisions for costs incurred on completed contracts was upheld by the Tribunal in the case of the assessee for A.Y 2002-03, it was submitted by the ld. A.R that though the Tribunal had observed that making of a provision by the assessee in principle was justified, however, as the assessee had failed to provide the requisite information to prove that the liabilities were identifiable, determined and ascertained, therefore, the Tribunal in absence of such information had not agreed with the quantification of provision and had allowed the provision to the extent the same was utilised subsequently. It was submitted by the ld. A.R that the facts involved in the case of the assessee for the year under consideration in context of the aforesaid issue were clearly distinguishable as against those for A.Y 2002-03. 5.6 Per contra, the ld. D.R relied on the orders of the lower authorities. It was submitted by the ld. D.R that as the incurring of liability pertaining to the assessee‘s claim of provisions for costs incurred on completed contracts was neither certain nor capable of estimation with reasonable certainty, therefore, both the lower authorities after exhaustive deliberations on the said aspect had (formerly known as Uhde India Pvt Limited) – A.Y 2007-08 8 Thyssenkrupp Industrial Solutions (India) Private Limted Vs. Addl. CIT10(3), Mumbai disallowed the same. However, it was fairly admitted by the ld. D.R that the aforesaid issue was squarely covered by the order of the Tribunal in the assesse‘s own case for the immediately preceding year i.e A.Y 2006-07. 5.7. We have given a thoughtful consideration to the aforesaid issue in the backdrop of the contentions advanced by the authorised representatives for both the parties, and have also perused the material available on record and the judicial pronouncements relied upon by them. On a perusal of the records, we find, that the present issue arose for the first time during A.Y 2001-02 which had reached upto the level of this Tribunal which had allowed the claim in its entirety, on the ground, that the liability was identified, determined and ascertained on the basis of technical assessment. As observed by us hereinabove, the Tribunal while disposing off the appeal of the assessee for A.Y 2002-03, had held, that making of a provision by the assessee in principle, was justified. However, since the assessee was unable to provide the requisite information to prove that the liabilities were identifiable, determined and ascertained, therefore, for the said reason the Tribunal had not agreed with the quantification of provision in the absence of information, and had allowed the same only to the extent it was actually utilized subsequently. For A.Y 2003-04, the Tribunal allowed a deduction in respect of provisions where explanations & workings were submitted and balance provisions were disallowed in the absence of requisite information. Similar view was also taken by the Tribunal in the case of the assessee for AY 2004-05. Our attention was drawn towards the fact that the assessee‘s appeal against this order of Tribunal for AYs 2002-03, 2003-04 & 2004-05 had already been admitted by Hon‘ble High Court of Bombay, while for the revenue‘s appeal for A.Y 2004-05 had already been dismissed. For A.Y 2005-06, the Tribunal allowed the claim of the assessee upon finding that the provisions were made on a scientific basis. While adjudicating the appeal for AY 2005-06, the decisions passed in earlier years were duly considered by the Tribunal. On a similar footing, the Tribunal vide its recent order in the assesses own case for A.Y 2006-07, had followed its earlier view for A.Y 2005-06, and allowed the deduction of provisions in its entirety, observing as under: “2.3.11 We have heard the rival contentions and perused relevant material on record including documents placed in the paper-book & judicial pronouncements relied upon by (formerly known as Uhde India Pvt Limited) – A.Y 2007-08 9 Thyssenkrupp Industrial Solutions (India) Private Limted Vs. Addl. CIT10(3), Mumbai respective representatives. Since the issue is recurring in nature, for ease of understanding, at the outset, the status of appeal filed by the assessee in past years before the Tribunal could be tabulated in the following manner: - No. A.Y Remarks dated 1. 2000-01 ITA 8053/Mum/2004 23/10/20 Assesses appeal on the issue 07 allowed 2. 2002-03 ITA 1926/Mum/2006 10/09/20 Assesses appeal on the issue 08 partly allowed 3. 2003-04 ITA 6510/Mum/2009 30/09/20 Assesses appeal on the issue 11 partly allowed 4. 2004-05 ITA 6511/Mum/2009 08/08/20 Assesses appeal on the issue 12 partly allowed 5. 2005-06 ITA 1690/Mum/2012 04/07/20 Assesses appeal on the issue 14 allowed The observation/conclusion in the latest order of the Tribunal for A.Y 2005-06 could be extracted in the following manner :- “2.5. We have heard the rival submissions and perused the material before us. In our opinion PCCC is based on identified liability, though it is only an estimate. In the year under appeal the assessee had made provisions for eleven unfinished projects and in subsequent two years after completing the projects wrote off the provisions and offered the balance for taxation. We further find that in those years the assessee had written back the balance amount and same was taxed by the AO. In our opinion, the AO cannot take two stands-he cannot tax the assessee in later years for a part of transaction for which provision has been made for earlier years. In the commercial world provisions are made for contingencies and court are of view that same have to allowed.AS-7 recognizes the principal of making provisions for certain expenses. It is a normal feature of business world that at the end of a particular AY., it may not be possible for an assessee to determine the probable future expenditure of an ongoing project or scheme. If it recognizes income from such project in that year, it will have to make some reasonable provisions for the expenditure to be incurred in subsequent year. Provision will vary from project to project and from year to year. It would also depend on stage of completion of the project. For that purpose, assessee will have to rely on earlier years’ experience and report of the technical personnel. Question of provisions for warranty was discussed at length by the Hon’ble Apex Court in the matter of Rotork Controls India P. Ltd.(314 ITR62).We are aware that warranty cannot be equated with provisions made for the projects to be completed by an assessee, but the principle laid down by the Hon’ble Court are applicable to the case under consideration. Provision after all is only an estimation of probable expenditure to be incurred after the end of a particular year. Besides, in our opinion travelling cost of the engineers and technical staff, testing cost, supplies of replacement spares, site related costs, cost of completion of punch list work, cost of modification for uncompleted projects has to be considered while making provisions when an assessee carries out a business of providing diversified engineering services. We find that the assessee had to make provisions for additional cost if sustainable production capability is (formerly known as Uhde India Pvt Limited) – A.Y 2007-08 10 Thyssenkrupp Industrial Solutions (India) Private Limted Vs. Addl. CIT10(3), Mumbai not demonstrated within the guarantee period. In such cases cost provisions had to be made even after acceptance/conditional acceptance of a plant. We find that the FAA has disallowed provisions on the basis that the assessee had written back the amounts in subsequent years. He has not analyzed the data of earlier years and subsequent years to determine the alleged unreasonableness of the provisions. It is a fact that res judicata is not applicable to income tax proceedings and every year is an independent unit, but rule of consistency contemplates that the AO should not suddenly disallow any item without assigning some reason. From the order of the AO/FAA we are unable to find as how the facts and circumstances for the year 2001-02 were different from the facts for the year under consideration. Assessee was following the same system of making provisions for uncompleted projects for last so many years. There in nothing in the order of the FAA that could prove that provisions made by the assessee were not based on estimate given by experts. We have perused the paper book-it is found that internal memos are signed by one person, but the estimate of provision was prepared by three/four competent authorities, dealing with financial and technical sides of the projects(page 83, 89,124,138 of the PB).In short, the assessee was following some system in estimating provisions. Therefore, without pointing out major defects it was not proper on part of the FAA to state that system was. FAA has given his finding without giving the reasons. In our opinion writing off of provisions in subsequent years cannot be basis for disallowing it. Accounting standards expect that assessee should write back such amounts in later years. FAA has overlooked the fact that out of the provisions made by the assessee, Rs.3.70 Crores were actually spent by the assessee in the subsequent years to complete the unfinished projects or to render further services. Therefore, in our opinion, he was not justified in confirming the disallowance of Rs. 8.14 Crores, without analyzing the terms and conditions of the projects threadbare for which provisions were made during the year under appeal. Reversing his order, we decide first effective ground of appeal (ground no. 1-3) in favor of the assessee. 2.3.12 Upon careful consideration of factual matrix, the undisputed position that emerges is the fact the assessee’s complex nature of business require estimation of future expenditure to be incurred on the projects and create a provision thereof since the revenue from the project is recognized after commissioning of the plant whereas some expenditure is certainly required to be incurred by the assessee between the stage of commissioning of the plant and final acceptance of the plant by the customer. In our opinion, these estimations are mere projections which may or may not crystallized in the subsequent years and the provisions may require suitable adjustment by way of further debit to profit & loss account of subsequent years or reversal by way of credit to profit & loss account in subsequent years. The prime reason to disallow the provisions by first appellate authority is the fact that the estimates were not made on any scientific basis, the same are without requisite documentary evidences and a major portion of the same has been reversed in the subsequent years. However, the said reasoning, in itself, could not deprive the assessee to claim legitimate business expenditure under mercantile system of accounting following matching concept of income. Nothing on record suggest that reversal in the subsequent years has not been offered to tax by the assessee. The details as placed on record, reveal that out of such provisions of Rs.949.35 Lacs, the assessee has incurred expenditure of Rs.751.60 Lacs (which is more than 79% of the provisions) in the subsequent year and the excess provision i.e Rs.393.14 Lacs have (formerly known as Uhde India Pvt Limited) – A.Y 2007-08 11 Thyssenkrupp Industrial Solutions (India) Private Limted Vs. Addl. CIT10(3), Mumbai been offered to tax in AYs 2007-08 & 2008-09 by way of reversal. Further, the assessee is following consistent method of accounting and estimating the provisions on similar basis which is in line with the applicable accounting standards notified u/s 145(2) and as per statutory mandate. Nothing on record suggest that there was any change in method of accounting during impugned AY to recognize the revenue or expenses. 2.3.13 The assessee’s submission before Ld. AO dated 06/11/2009 as placed from page nos. 55 onwards, reveal that project wise estimation were made by assessee for the expenditure to be incurred under each head. The same were arrived at after identifying expected cost required to be incurred in future on various projects. The elaborate working of the same along with relevant contracts entered into by the assessee with the customers has already been placed in the paper-book which establishes the fact that the estimates were not mere guess work or made out of thin air. Another undisputed fact is that the assessee has incurred actual expenditure in subsequent years against these estimations which itself prove that the assessee had certain liability under these contracts. It is altogether different aspect that the matter of estimation may not be accurate one or commensurate with actual expenditure incurred by the assessee in future years. It may only necessitate the assessee to adjust the same suitably in subsequent years on the basis of actual outcome. So long as the provisions were made on scientific basis and the basis of the same was substantiated by the assessee, there could be no occasion to disallow the same. It is also noteworthy point that subsequent reversal in future years has been offered to tax by the assessee which lend credence to tax neutrality plea raised by Ld. AR. 2.3.14 Proceeding further, it is undisputed position that part of the provisions has always been allowed to the assessee by the Tribunal right from AY 2001-02 onwards which is evident from the table given at para 2.3.11. The claim has fully been allowed in AY 2001- 01 & in AY 2005-06 whereas part claim, to the extent details have been furnished by the assessee, has been allowed for AYs 2002-03 to 2004-05. In the impugned AY, we find that complete project wise provisions made by the assessee has been placed on record and provision made under each project has been uniquely identified. 2.3.15 The Ld. CIT-DR has placed reliance on the decision of Delhi Tribunal rendered in IOT Infrastructure & Energy Services Ltd Vs ITO [ITA No. 2585/Mum/2009 dated 17/05/2013], the perusal of which reveal that in that case, the assessee had made adhoc provision of 5% for warranty expenditure whereas the past data revealed that no warranty expenditure was incurred by the assessee in the earlier years and therefore, the Tribunal upheld the stand of Ld. first appellate authority in restricting the same to 0.2% only. However, the facts in the present case is that the assessee has certain liability under the project and estimates have been made project wise, the working of which has been placed on record, Therefore, we find this case law to be factually different. 2.3.16 The due consideration of above factual matrix leads us to inevitable conclusion that the impugned provisions made by the assessee were allowable in full during impugned AY. Therefore, by reversing the stand of Ld. first appellate authority, we allow Ground Nos. 1 to 4 of the assessee’s appeal.” On a perusal of the records, we find that though the revenue would be recognized by the assessee on commissioning of a plant, however, in the backdrop of the complex nature of its business (formerly known as Uhde India Pvt Limited) – A.Y 2007-08 12 Thyssenkrupp Industrial Solutions (India) Private Limted Vs. Addl. CIT10(3), Mumbai certain expenditure would certainly be required to be incurred between the stage of commissioning of the plant and final acceptance of the same by its customer. As such, the assessed had to carry out estimation of such future expenditure and create a provision for cost on the completed projects. As is discernible from the orders of the lower authorities the aforesaid provision had been disallowed by them primarily for the reason that they were not made on a scientific basis and the estimation of the same was not backed by supporting documentary evidence. Also, it was observed by the lower authorities that a major portion of the provision was reversed in the subsequent years. In our considered view the aforesaid reasoning of the lower authorities would not justify disallowance of the provision made by the assessee. It is not the case of the revenue that the reversal of the provision in the subsequent year had not been offered to tax by the assessee. On a perusal of the records, we find that the provision for costs on completed contracts made by the assessee are based on identified and ascertained present liabilities on the basis of technical assessments and projections of the project managers, who are experts in their field. Apart from that, the aforesaid practice of providing for all known liabilities on an estimate basis by the assessee is in accordance with the Accounting Standard-1 issued u/s 145 vide CBDT Notification No. S.O 69(E), dated 25.01.1996, as per which provisions should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information. Also, the provision made by the assessee is in conformity with Accounting Standard-7 issued by the ICAI. Further, we find that the assessee consistently by way of a regular method of accounting had been making such provision for costs on completed contracts, which would be reviewed by it each and every year and were immediately written back if the same were not required. We further find that the issue as regards allowability of the provision for costs incurred on completed contracts is a recurring issue which in the preceding years involving identical facts had travelled upto theTribunal. As observed by us hereinabove, the issue as regards the allowability of provision for costs on completed contracts is squarely covered by the order passed by the Tribunal in the assessee‘s own case for the immediately preceding year i.e A.Y 2006-07 in wherein after exhaustive deliberations it was observed that the assessee‘s claim for provision for costs on completed (formerly known as Uhde India Pvt Limited) – A.Y 2007-08 13 Thyssenkrupp Industrial Solutions (India) Private Limted Vs. Addl. CIT10(3), Mumbai contracts was in order. Accordingly, on the basis of our aforesaid observations and respectfully following the aforesaid order passed by the Tribunal in the assessee‘s own case for A.Y 2006-07, we set aside the order of the CIT(A) and vacate the disallowance of provision for costs incurred on completed contracts of Rs. 3,67,61,993/- made by the A.O. Grounds No. 1 to 4 are allowed in terms of our aforesaid observations. (B). DISALLOWANCE OF COSTS OVERRUNS ON INCOMPLETE CONTRACTS: Rs.62,62,342/- 6. In the course of the assessment proceedings it was observed by the A.O that the assessee had made a provision of Rs. 62,62,342/- for cost overruns on incomplete contracts i.e accounting for expected loss to be incurred on a particular contract. On being called upon to explain the nature of the aforesaid provision, it was claimed by the assessee that while the project would be in progress, the total cost of the project as of date (say March 31, 2007) would be identified. Further, depending upon the expected work to be done for the Project, the project implementation team would estimate the expected costs which were yet to be incurred after considering the engineering hours and supplies etc. Accordingly, the total estimated cost would therein be arrived i.e actual cost incurred till date (+) estimated cost yet to be incurred for completing the project, which would then be compared against the ―Contract revenue‖ i.e the total contract value agreed by the assessee with its client. As the assessee could not bill the client beyond the contract value, therefore, the cost overruns in excess of the contract value which cannot be recovered from the client being in the nature of a crystallized, identified, determined and ascertained loss would therein be immediately provided in the accounts. It was the claim of the assessee, that providing for the cost overruns on incomplete contracts was as per the mandatory requirements of AS-7(revised) – Para 35, which provided that if it is probable, for a particular contract, that the contract cost would exceed the contract revenue, the expected loss should be recognized as an expense immediately. Further, such loss is to be determined irrespective of viz. (a). whether or not work has commenced on the contract; (b). the stage of completion of contract activity; or (iii). the amount of profits expected to arise on other contracts which are not treated as a single construction contract in accordance with paragraph 8. In the backdrop of the aforesaid facts the assessee furnished the (formerly known as Uhde India Pvt Limited) – A.Y 2007-08 14 Thyssenkrupp Industrial Solutions (India) Private Limted Vs. Addl. CIT10(3), Mumbai contract-wise details of provisions for cost overruns on incomplete contracts. However, the A.O did not find favour with the aforesaid claim of the assessee and disallowed the same. 6.1 Aggrieved, the assessee assailed the aforesaid disallowance before the CIT(A). It was observed by the CIT(A) that a similar claim of provision for project loss on incomplete contracts had came up before the Tribunal in the assesse‘s own case for A.Y 2003-04, wherein the disallowance of the same so made by the A.O was upheld. Observing, that the facts involved in the appeal of the assessee were identical as against those which were there before the Tribunal in its appeal for A.Y 2003-04, ITA No. 6510/Mum/2009, the CIT(A) upheld the disallowance made by the A.O. 6.2 The assessee being aggrieved with the upholding of the disallowance of the provision for cost overruns on incomplete contracts by the CIT(A), has carried the matter in appeal before us. It was submitted by the ld. A.R that the issue was squarely covered by the order of the Tribunal in the assesse‘s own case for the immediately preceding year i.e A.Y 2006-07, ITA No. 1691/Mum/2019, dated 09.04.2019. In order to buttress his aforesaid claim the ld. A.R took us through the observations recorded by the Tribunal in context of the issue under consideration in its aforesaid order, which reads as under: “2.4.3 After careful perusal of material on record, we find substantial force in the arguments of Ld.AR. It is undisputed fact that such provisions were made by the assessee in AY 2005-06 which has been allowed by Ld. AO himself. Secondly, out of these provisions of Rs.192.34 Lacs, an amount of Rs.134.11 Lacs has actually been utilized/paid by the assessee in subsequent years (which is more than 69% of the provisions) and balance amount i.e. Rs.58.23 Lacs has been offered to tax in subsequent years. Moreover, the assessee has already placed on record project wise estimation and nothing on record suggest that there was any change in method of accounting being followed by the assessee. This being the case, the impugned additions could not be sustained. We order so. Ground No. 5 of the appeal stands allowed.”

The Grounds of appeal

We find that the aforesaid issue after exhaustive deliberations had been answered by a coordinate bench of the Tribunal viz. ITAT, Mumbai ‗F‘ Bench in DCIT, Central Circle-3(2), Mumbai Vs. JSW Limited & Ors. [ITA No. 6264/Mum/18; dated 14/05/2020, wherein it was observed as under: ―Let us in this light revert to the prevailing situation in the country. On 24th March, 2020, Hon‘ble Prime Minister of India took the bold step of imposing a nationwide lockdown, for 21 days, to prevent the spread of Covid 19 epidemic, and this lockdown was extended from time to time. The epidemic situation being grave, there was not much of a relaxation in subsequent lockdowns also. In any case, there was unprecedented disruption of judicial wok all over the country. As a matter of fact, it has been such an unprecedented situation, causing disruption in the functioning of judicial machinery, that Hon‘ble Supreme Court of India, in an unprecedented order in the history of India and vide order dated 6.5.2020 read with order dated 23.3.2020, extended the limitation to exclude not only this lockdown period but also a few more days prior to, and after, the lockdown by observing that ―In case the limitation expired after 15.03.2020 then the period from 15.03.2020 till the date on which the lockdown is lifted in the jurisdictional area where the dispute lies or where the cause of action arises shall be extended for a period of 15 days after the lifting of lockdown‖. Hon‘ble Bombay High Court, in an order dated 15th April 2020, has, besides extending the validity of all interim orders, has also observed that, ―It is also clarified that while calculating time for disposal of matters made time-bound by this Court, the period for which the order dated 26th March 2020 continues to operate shall be added and time shall stand extended accordingly‖, and also observed that ―arrangement continued by an order dated 26th March 2020 till 30th April 2020 (formerly known as Uhde India Pvt Limited) – A.Y 2007-08 23 Thyssenkrupp Industrial Solutions (India) Private Limted Vs. Addl. CIT10(3), Mumbai shall continue further till 15th June 2020‖. It has been an unprecedented situation not only in India but all over the world. Government of India has, vide notification dated 19th February 2020, taken the stand that, the coronavirus ―should be considered a case of natural calamity and FMC (i.e. force majeure clause) maybe invoked, wherever considered appropriate, following the due procedure…‖. The term ‗force majeure‘ has been defined in Black‘s Law Dictionary, as ‗an event or effect that can be neither anticipated nor controlled‘ When such is the position, and it is officially so notified by the Government of India and the Covid-19 epidemic has been notified as a disaster under the National Disaster Management Act, 2005, and also in the light of the discussions above, the period during which lockdown was in force can be anything but an ―ordinary‖ period.

In the light of the above discussions, we are of the considered view that rather than taking a pedantic view of the rule requiring pronouncement of orders within 90 days, disregarding the important fact that the entire country was in lockdown, we should compute the period of 90 days by excluding at least the period during which the lockdown was in force. We must factor ground realities in mind while interpreting the time limit for the pronouncement of the order. Law is not brooding omnipotence in the sky. It is a pragmatic tool of the social order. The tenets of law being enacted on the basis of pragmatism, and that is how the law is required to interpreted. The interpretation so assigned by us is not only in consonance with the letter and spirit of rule 34(5) but is also a pragmatic approach at a time when a disaster, notified under the Disaster Management Act 2005, is causing unprecedented disruption in the functioning of our justice delivery system. Undoubtedly, in the case of Otters Club Vs DIT [(2017) 392 ITR 244 (Bom)], Hon‘ble Bombay High Court did not approve an order being passed by the Tribunal beyond a period of 90 days, but then in the present situation Hon‘ble Bombay High Court itself has, vide judgment dated 15th April 2020, held that directed ―while calculating the time for disposal of matters made time bound by this Court, the period for which the order dated 26th March 2020 continues to operate shall be added and time shall stand extended accordingly‖. The extraordinary steps taken suo motu by the Hon‘ble High Court and Hon‘ble Supreme Court also indicate that this period of lockdown cannot be treated as an ordinary period during which the normal time limits are to remain in force. In our considered view, even without the words ―ordinarily‖, in the light of the above analysis of the legal position, the period during which lockout was in force is to excluded for the purpose of time limits set out in rule 34(5) of the Appellate Tribunal Rules, 1963. Viewed thus, the exception, to 90-day time-limit for pronouncement of orders, inherent in rule 34(5)(c), with respect to the pronouncement of orders within ninety days, clearly comes into play in the present case.‖ We have given a thoughtful consideration to the aforesaid observations of the tribunal and finding ourselves to be in agreement with the same, therein respectfully follow the same. As such, we are of the considered view that the period during which the lockout was in force shall stand excluded for the purpose of working out the time limit for pronouncement of orders, as envisaged in Rule 34(5) of the Appellate Tribunal Rules, 1963.

Resultantly, the appeal filed by the assessee is allowed in terms of our aforesaid observations.