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Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI MANOJ KUMAR AGGARWAL
per Accounting Standard (AS)–1 notified under section 145(2) of the Act, which the assessee is required to follow, provision has to be made for all liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of the available information. He submitted, following the guidelines of AS-1, the assessee has to provide for all expenditures incurred during the year including the expenditure in respect of which invoices were not received. Referring to Note–13 to the Notes to Account, the learned Authorised Representative submitted, the provision made was on the basis of estimate made by the company considering the facts and circumstances of each case. Thus, he submitted, the provision made by the assessee on a best estimate basis is in terms of AS-1 and section 145(2) of the Act, hence, in accordance with law. He submitted, in such circumstances, the provision for expenditure cannot be treated as contingent liability. In support of such contention, he relied upon the following decisions:–
i) Bharat Earth Movers v/s CIT, [2000] 245 ITR 428 (SC); ii) Metal Box of India Ltd. v/s Their Workmen, [1972] 73 ITR 53 (SC); iii) Calcutta Co. Ltd. v/s CIT, [1959] 37 ITR 001 (SC); and iv) Rotork Controls (India) Pvt. Ltd. v/s CIT, [2009] 314 ITR 62 (SC).
Drawing our attention to the details furnished in the paper book, the learned Authorised Representative submitted, there are several
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heads of expenditure under the provision for sundry creditor and provision for unpaid expenditure where the actual expenditure is either matching with or exceeded the provision made. Therefore, he submitted, the aforesaid facts show that the provision made by the assessee was after due application of mind and on scientific basis. He submitted, since the assessee follows the same method of accounting consistently even with regard to provision for expenditure and it has been accepted by the Department in the preceding assessment years, it should not be disallowed in the impugned assessment year.
The learned Authorised Representative submitted, the reasoning of the Assessing Officer that the assessee should have made the reversal of the provision in the current year is unacceptable, because the assessee being a listed company, could not have kept its books of account open till the date of filing of return of income. Further, he submitted, the threshold limit of 10% applied by learned Commissioner (Appeals) to disallow a part of the provision has no basis at all, as neither is it in accordance with Accounting Standard notified under the Act nor any other accounting principle or law. Thus, he submitted, the addition sustained by learned Commissioner (Appeals) being purely on ad–hoc basis cannot be sustained.
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The learned Departmental Representative submitted, though, the assessee has strenuously argued that the provision made is in accordance with commercial expediency and prudent business policy, however, neither before the Departmental Authorities nor even before the Tribunal, the assessee has furnished any material to demonstrate that the provision made is on best estimate and on scientific basis. The learned Departmental Representative submitted, since there was considerable difference between the provision made and actual expenditure incurred, it cannot be said that the provision made was on reasonable and scientific basis. In this context he referred to AS-29. He submitted, though, the range of 10% applied by learned Commissioner (Appeals) may not have been provided in the Accounting Standard or anywhere else, but it is only for the purpose of determining the best estimate qua the actual expenditure incurred. He submitted, merely because the provision made in the earlier assessment years were accepted due to lack of enquiry, it cannot be accepted in every year. He submitted, the estimate of provision by the assessee since is not on the basis of any scientific data, the allowance of such expenditure in past years will not act as res judicata for deciding the issue in the impugned assessment year. Thus, he submitted, there is no reason to interfere with the decision of learned Commissioner (Appeals).
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In rejoinder, the learned Authorised Representative submitted, reliance placed by the learned Departmental Representative on AS-29 relating to the provisions, contingent liability and contingent assets does not make assessee’s case weaker, rather, it supports assessee’s case. He submitted, AS-29 mandates that the provision should be made in the accounts for expenditure incurred during the year based on reasonable estimate. He submitted, referring to AS in Note–13 of Schedule–21 of the annual account it has been specifically stated that the provision for expenditure is based on the estimate made by the company considering the past experience. Without prejudice, the learned Authorised Representative submitted, since the excess provision made was reversed by the assessee in the subsequent assessment year and offered as income, no prejudice is caused to the Department as the Department is not deprived of legitimate tax dues and there is only a timing difference. Therefore, no disallowance should be made in the impugned assessment year. In support of such contention, he relied upon the decision of the Hon'ble Supreme Court in CIT v/s Excel Industries Ltd., [2013] 358 ITR 295 (SC).
We have considered rival submissions and perused the material on record. We have also applied our mind to the decisions relied upon by the parties. There is no dispute between the parties with regard to
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the basic facts relating to the disputed addition. The core issue, which is required to be examined is, whether the provision for expenditure made by the assessee is in accordance with Accounting Standards and legal provisions. It is a fact on record that in respect of some goods/services received/availed by the assessee towards the end of the financial year, the bills/invoices were not raised by the concerned parties within the financial year but were raised in the subsequent year. However, since the assessee is following mercantile system of account, the expenditures incurred during the year have to be accounted for in the books of account. Therefore, in absence of bills/invoices raised by the vendors, the assessee made provision for such expenditure in its books of account. There is no dispute that the provision made by the assessee is on estimate basis. Therefore, it has to be seen whether such estimate of provision made by the assessee is on reasonable and scientific basis and in accordance with business prudence. As could be seen from the facts discussed earlier, the assessee had made provision for expenditure under three distinct heads. While the Assessing Officer has added back the difference between the provision made and actual expenditure incurred under all the three heads, learned Commissioner (Appeals) has restricted such disallowance only in respect of provision made for sundry creditors relating to sales commission, promotion, advertisement, etc.
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Therefore, it requires consideration whether the provision made can be stated to be in accordance with AS-1 r/w section 145(2) of the Act. In this context, learned Authorised Representative has specifically referred to Para–16 and 17 of AS-1. For ease of reference, we reproduce the aforesaid paragraph herein below:–
“Considerations in the Selection of Accounting Policies 16. The primary consideration in the selection of accounting policies by an enterprise is that the financial statements prepared and presented on the basis of such accounting policies should represent a true and fair view of the state of affairs of the enterprise as at the balance sheet date and of the profit or loss for the period ended on that date. 17. For this purpose, the major considerations governing the selection and application of accounting policies are:— a. Prudence In view of the uncertainty attached to future events, profits are not anticipated but recognised only when realised though not necessarily in cash. Provision is 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. b. Substance over Form The accounting treatment and presentation in financial statements of transactions and events should be governed by their substance and not merely by the legal form. c. Materiality Financial statements should disclose all “material” items, i.e. items the knowledge of which might influence the decisions of the user of the financial statements.”
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A careful reading of the aforesaid paragraphs would reveal that as per Para–16 of AS-1, the Accounting Policy to be selected by the enterprise should represent a true and fair view of the state–of–affair of the enterprise as at the Balance Sheet date and of the profit. Para– 17(a) provides that for all known liabilities and losses, which cannot be determined or quantified with certainty, the enterprise by using business prudence can make provision in the light of available information on the basis of a best estimate. Thus, a reading of AS-1 makes it clear that the liability for expenditure incurred during the year if cannot be determined with certainty, the assessee can make a provision for such liability on best estimate on the basis of available information. Thus, though, there cannot be any doubt that for expenditure incurred during the year which cannot be determined with certainty, since the vendors have not raised bills/invoices, the assessee is entitled to make provision on estimate basis, however, such estimate has to be a best estimate. It transpires from record, the assessee is following the aforesaid method of accounting in respect of unbilled expenditure from past years and it has never been disputed by the Department. Additionally, AS-1 provides for creating provision for expenditure on estimate basis keeping in view business prudence and information available. In fact, learned Commissioner (Appeals) also not only recognizes the necessity of making provision for unbilled
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expenditure but has also allowed provision for expenditure not exceeding 10% of the actual expenditure. In our view, there is no such thumb rule either in Accounting Standards or elsewhere to restrict the provision to within the range of 10% of the actual expenditure. It is worth mentioning; the assessee has reversed the provision in the subsequent year and offered to tax. This fact has not been disputed by the Department. Therefore, the ratio laid down in case of CIT V/s Excel Industries Ltd. would apply. More so, when the assessee is consistently following this accounting method from past years. In view of the aforesaid, we hold that the part disallowance sustained by learned Commissioner (Appeals) also deserves to be deleted. Therefore, learned Commissioner (Appeals) direction to grant consequential relief in subsequent assessment year becomes infructuous. This ground is allowed.
In ground no,.2, the assessee has challenged the disallowance of renovation expenditure amounting to ` 36,56,133.
Brief facts are, during the assessment proceedings, the Assessing Officer noticing that the assessee has debited an amount of ` 50,14,955, towards expenditure on repairs and maintenance of office premises called upon the assessee to furnish the break–up of such expenditure and explain its allowability. In response, the assessee
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furnished the details and submitted that since such expenditure was incurred towards regular and routine repair and maintenance of premises taken on lease for assessee’s office, it is allowable as expenditure. The Assessing Officer, however, did not accept assessee’s claim. He observed, leased premises have been taken by the assessee on long term basis. Therefore, any expenditure incurred gives an enduring benefit to the assessee. Further, he observed, in the office premises newly taken on lease at Hyderabad and Bangalore, the assessee has incurred huge expenditure for furniture, fittings and fixture which cannot be considered as routine repair and maintenance. Thus, he held that the expenditure incurred by the assessee has to be capitalized. Accordingly, by disallowing the claim of the assessee, the Assessing Officer capitalized the expenditure claimed towards repair and maintenance and allowed depreciation @ 10%. The assessee challenged the aforesaid disallowance before the first appellate authority.
Learned Commissioner (Appeals), after considering the submissions of the assessee in the context of facts and material on record, found that repair and maintenance expenditures were mainly incurred on sanitary work, interior designing and flooring, etc. Looking at the nature and quantum of expenditure, he observed that by
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incurring such expenditure, the assessee has not brought into existence any asset of enduring nature. However, in respect of office premises taken on lease at Hyderabad and Bangalore, which were newly taken on lease, the assessee has incurred expenditure on furniture, fittings and fixtures, etc. Thus, he was of the view that the expenditure incurred for first time on new premises taken on lease is capital in nature, hence, has to be capitalized. Accordingly, he directed the Assessing Officer to restrict the disallowance to the expenditure incurred in respect of leased premises at Hyderabad and Bangalore.
The learned Authorised Representative submitted, assessee has taken premises on lease at various places in India for office purpose. He submitted, for making the premises suitable for use assessee had carried out certain renovation work. He submitted, such renovation work undertaken is solely for the purpose of providing a good working environment to its staff. He submitted, the office has to be kept in a good condition as various meetings are held therein with the suppliers, customers and their representatives. Thus, he submitted, since the expenditure incurred is purely for the purpose of business, it has to be allowed as revenue expenditure. Further, drawing our attention to the details of expenditure as furnished in the paper book, the learned Authorised Representative submitted, the nature of expenditure would
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clearly reveal that they are not for deriving any enduring benefit. He submitted, merely because the premises at Hyderabad and Bangalore were newly taken on lease it cannot be said that any expenditure incurred in respect of these premises is capital in nature. He submitted, though Explanation–1 to section 32(1)(ii) of the Act provides for depreciation in respect of any addition, renovation or extension to a building not owned by the assessee but holds lease hold rights, however, it will only apply if the expenditure is capital in nature. In support of his contention, the learned Authorised Representative relied upon the following decisions:–
i) CIT v/s HEDE Consultancy Pvt. Ltd., [2002] 258 ITR 380 (Bom.); ii) CIT v/s Talathi and Panthaky Associated Pvt. Ltd., [2012] 343 ITR 309 (Bom.); and iii) Urban Infrastructure Venture Capital Ltd. v/s DCIT, [2014] 150 ITD 502 (Mum.).
He submitted, the decision of the Tribunal in Urban Infrastructure Venture Capital Ltd. (supra) was upheld by the Hon'ble Jurisdictional High Court while dismissing Revenue’s appeal in ITA no.65/2015, dated 17th July 2017. Thus, he submitted, the deduction claimed by the assessee has to be allowed in full.
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The learned Departmental Representative submitted, the expenditure incurred by the assessee on repair/renovation of leased premise cannot be considered to be of revenue nature as by incurring such expenditure, the assessee has derived enduring benefit. He submitted, the very fact that the assessee has incurred huge expenditure towards furniture, fittings, fixture, etc. in the newly leased premises indicate that they are not regular repair and maintenance expenditure but incurred for creating assets of enduring nature. Thus, he submitted learned Commissioner (Appeals) should not have granted even partial relief to the assessee. Therefore, the disallowance made by the Assessing Officer should be restored. In support of his contention, the learned Departmental Representative relied upon the following decisions:–
i) RPG Enterprises Ltd. v/s DCIT, [2016] 386 ITR 401 (Bom.); ii) Vardhman Developers Ltd. v/s ITO, [2015] 68 SOT 107 (Mum.) (URO); and iii) ITO v/s Pritam Juice, [2010] 124 ITD 237 (Mum.).
We have considered rival submissions and perused the material on record. We have also applied our mind to the decisions relied upon. The issue before us is, whether the expenditure incurred by the assessee towards repair/renovation of leased premise is of capital or revenue nature. On a perusal of the details of expenditure incurred, as
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submitted in the paper book, we are of the view that by incurring such expenditure, the assessee has not brought into existence any capital asset of enduring nature. A reference to Explanation–1 to section 32(1) of the Act, would reveal that it speaks of capital expenditure incurred towards construction of any structure or renovation or extension or improvement to the building. Thus, on a reading of the aforesaid provisions, it becomes clear that if any expenditure is incurred for construction of any structure or extension or improvement of the building taken on lease would be treated as capital expenditure. The nature of expenditure incurred by the assessee in respect of the leased premises and more particularly the premises at Hyderabad and Bangalore are not of the nature of constructing new structure, extension or improvement of building. Therefore, Explanation–1 to section 32(1) of the Act would not be applicable to the facts of the present case. Though, there cannot be any quarrel with regard to the proposition laid down in the decisions cited before us, however, the nature of expenditure incurred by the assessee with reference to facts of each case would decide whether it is capital or revenue in nature. In the facts of the present case, after examining the details of expenditure incurred by the assessee, we are of the view that it is of revenue nature, hence, has to be allowed. Accordingly, we do so. The
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decision of learned Commissioner (Appeals) on this issue is, therefore, set aside. Ground raised is allowed.
In ground no.3, the assessee has challenged the disallowance of write off of security deposit amounting to ` 59,26,246, in respect of lease hold premises.
Brief facts are, while examining the aforesaid claim of the assessee in the course of assessment proceedings, the Assessing Officer noticed that the assessee had taken on lease office premises at Nariman Point for a period of three years with provision for further renewal on mutual consent. As per the terms of the agreement, the assessee was to furnish a security deposit of ` 67,20,000 to the landlord. The lease agreement was terminated on 8th November 1999. However, upon termination of lease agreement, the security deposit was not refunded to the assessee. Due to non–refund of security deposit, the assessee kept possession of the premises and also filed a lawsuit against the landlord for recovery of the security deposit. However, in the year under consideration the assessee wrote–off the security deposit of ` 59,26,246, in its books after making adjustment towards unpaid rent and claimed it as deduction. Considering the fact that the assessee filed a lawsuit for recovery of the security deposit, the Assessing Officer held that since the assessee was unable to prove
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that the security deposit has become irrecoverable, it cannot be written–off. Accordingly, he disallowed assessee’s claim of deduction. Being aggrieved with such disallowance, the assessee preferred appeal before the first appellate authority.
Learned Commissioner (Appeals), after considering the submissions of the assessee and on perusal of material on record, observed that non–recovery of security deposit cannot be considered as a business loss since the assessee was still in possession of the premises. Therefore, he disallowed assessee’s claim.
The learned Authorised Representative submitted, though, the assessee was in possession of the premises, however, it was not using it for the purpose of business. He submitted, though, the assessee was pursuing the landlord for refund of security deposit and has even filed a lawsuit, however, it was not hopeful of recovery of security deposit. Therefore, it claimed the security deposit as business loss. Countering the observations of learned Commissioner (Appeals), he submitted, merely because the assessee was in possession of the premises by keeping the keys, it cannot be said that the assessee was in occupation of premises and using it for the purpose of business. Thus, he submitted, assessee’s claim of deduction should be allowed. In support of his contention, he relied upon the following decisions:–
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i) IBM World Trade Corporation v/s CIT, [1990] 186 ITR 412 (Bom.); ii) ACIT v/s Blue Dart Express Ltd., ITA no.6614/Mum./2007, dated 18.11.2009; iii) United Motors India Ltd. v/s ITO, [2010] 6 taxmann.com 32 (Mum.); and iv) Jethabhai Jirji Jethabhai Ramdas v/s CIT, [1979] 120 ITR 792 (Bom.).
The learned Departmental Representative strongly relying upon the observations of the Assessing Officer and learned Commissioner (Appeals) submitted, since there is no dispute to the fact that the assessee was in possession of the premises, it cannot be said that it has lost hope of recovery of the security deposit. More so, when the litigation for recovery of security deposit was going on in the court of law. Thus, he submitted, assessee’s claim has been rightly rejected by the Departmental Authorities.
We have considered rival submissions and perused the material on record. We have also applied our mind to the decisions relied upon. There is no dispute with regard to the primary facts that the assessee has taken on lease the subject premise on furnishing security deposit of ` 59,26,246. Subsequently, though, the lease agreement was terminated, however, the security deposit was not refunded to the assessee. It is also a fact that due to non–refund of the security
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deposits the assessee has not only kept the premises under its possession but has also taken legal steps for recovery of the security deposit by filing a lawsuit. Thus, the contention of the assessee that it was not hopeful of recovery of the security deposit appears to be farfetched, more so, when he is having possession of a far more valuable asset than the security deposit. Further, when the assessee has filed a lawsuit for recovery of security deposit, it cannot be said that he has lost all its hope of recovery of the security deposit.
However, there is another angle to the issue. It needs to be mentioned, on a query from the Bench regarding the status of the lawsuit filed by the assessee for recovery of the security deposit, the learned Authorised Representative submitted, subsequently, a settlement was reached with the landlord and as per the terms of settlement, the assessee received an amount of ` 1,12,00,000, from the landlord and vacated the premises. He submitted, the amount was received in June 2015 and offered as income in the assessment year 2016–17. Thus, he submitted, since the amount has already been offered as income, it should not be taxed in the impugned assessment year. Thus, from the aforesaid facts, it becomes clear that the contention of the assessee that he was not hopeful of recovering the security deposit is not true. Rather, by occupying the premises under
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his possession, the assessee was in a more advantageous position to recover the security deposit. At the same time, assessee’s contention that the security deposit was offered to tax in assessment year 2016– 17 cannot also be ignored. However, considering the fact that these are completely new facts brought to the notice of the Tribunal in course of hearing, we are inclined to restore the issue to Assessing Officer to verify the relevant facts and allow consequential benefit to the assessee. This ground is allowed for statistical purposes.
In ground no.4, the assessee has challenged the disallowance of write off of tax deducted at source (TDS) amounting to ` 1,21,66,248.
Brief facts are, during the assessment proceedings, the Assessing Officer noticing that the assessee has claimed deduction on account of TDS written off of ` 1,21,66,248, called upon the assessee to justify the claim. In response, it was submitted by the assessee that since TDS certificates for the amount written off could not be obtained from the deductor even after continuous effort, the assessee has claimed it as revenue expenditure as it amounts to loss arising during the normal course of business. From the details available before him, the Assessing Officer noticed that the claim or write off of TDS pertains to seven assessment years starting from the year 1998–99 to 2003–04. He observed, the assessee had claimed credit for TDS not only in the
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return of income filed for the respective assessment years but also by filing rectification applications under section 154 of the Act. He observed, no details could be furnished by the assessee to demonstrate that credit for TDS was refused by the Assessing Officer. Thus, he observed, in absence of necessary evidences to prove that the TDS was not allowed to the assessee, the write off of TDS cannot be allowed to the assessee. Further, he observed, non–furnishing of TDS certificate cannot be treated as debt due to the assessee from the persons who have deducted tax at source. Therefore, provision of section 36(1)(vii) of the Act cannot be applied. Accordingly, he disallowed assessee’s claim of write off. Being aggrieved with the aforesaid decision of the Assessing Officer, the assessee preferred appeal before the first appellate authority.
The learned Commissioner (Appeals) agreed that withholding of tax by the deductor amounts to debt owed by him to the deductee and in the event of non–receipt of such debt, deduction would be eligible to the assessee under section 36(1)(vii) of the Act, as the conditions prescribed therein are fulfilled. However, he held that assessee’s claim cannot be allowed in view of the provisions of section 155(14) of the Act. He observed, as per the said provision the claim of TDS can be entertained only within two years from the assessment year in which
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such income was assessable. He held that since the assessee has not claimed the deduction in the computation of income filed along with the return of income, it cannot be allowed to the assessee. Further, he held that if the Assessing Officer would have allowed assessee’s claim which is not part of the computation of income, it would have resulted in assessing the income below the returned income which could not have been done. Accordingly, he disallowed assessee’s claim.
The learned Authorised Representative submitted, the gross income shown by the assessee includes the TDS amount. Hence, gross income credited to the Profit & Loss account has already been offered to tax in the earlier years. Therefore, he submitted, non–receipt of TDS amounts to business loss as it was deducted from the income of the assessee. Thus, it partakes the character of non–recovery of debt from customers as per section 36(1)(vii) r/w section 36(2) of the Act. The learned Authorised Representative submitted, all evidences relating to the TDS write off were furnished before the Assessing Officer. Therefore, it cannot be said that the assessee has not furnished the necessary details. As regards the reasoning of learned Commissioner (Appeals) that assessee’s claim cannot be allowed in view of section 155(14) of the Act, the learned Authorised Representative submitted, even after taking note of such provision in
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assessee’s own case for the assessment year 2004–05, the Tribunal has allowed assessee’s claim of write off. Further, he submitted, the reasoning of learned Commissioner (Appeals) that write off is not allowable as the assessee has not claimed it in the computation of income, will not hold good in view of the decision of the Tribunal in assessee’s own case in assessment year 1997–98. Further, in support of his contention he relied upon the decision of the Hon’ble P&H High Court in CIT v/s Shreyans Industries Ltd., [2008] 303 ITR 393 (P&H).
The learned Departmental Representative strongly relied upon the observations of the Assessing Officer and the learned Commissioner (Appeals). Further, he submitted, the decision of the Hon’ble P & H High Court in Shreyans Industries Ltd. (supra) was reversed by the Hon'ble Supreme Court.
We have considered rival submissions and perused material on record. We have also applied our mind to the decisions relied upon. As could be seen from the facts emanating from record, though, tax was deducted at source in earlier assessment years, however, the assessee could not get credit of such TDS amount due to non–furnishing of TDS certificate by deductors. Undisputedly, the TDS amount is nothing but a part of income accruing to the assessee. It is also a fact that the assessee has offered the gross income including TDS in the respective
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assessment years. Therefore, to that extent, non–allowance of TDS credit to the assessee due to non–receipt of TDS certificates amounts to loss of income. Further, it has been held in the decision cited by the learned Authorised Representative that non–furnishing of TDS certificate amounts to a debt due to deductee which can be allowed under section 36(1)(vii) of the Act. In fact, learned Commissioner (Appeals) has also accepted the aforesaid legal position. The grounds on which he has rejected assessee’s claim are, firstly, it is not within the time prescribed under section 155(14) of the Act and secondly, the assessee has not claimed such deduction in the computation of income. In our view, the aforesaid reasoning of learned Commissioner (Appeals) is not sustainable. Once it is held that assessee’s claim of write off is allowable under section 36(1)(vii) of the Act, then the provisions of section 155(14) of the Act would not apply. In fact, in assessee’s own case in assessment year 2004–05, the Tribunal has decided the issue in favour of the assessee. Similarly, while deciding assessee’s appeal in ITA no.6782/Mum./2004, dated 14th July 2015, in assessment year 1997–98, the Tribunal has allowed assessee’s claim of write off of TDS not received. While doing so, the Tribunal has observed that the assessee can raise such claim subsequently. Further, the Hon’ble P & H High Court in Shreyans Industries Ltd., (supra) has held that the write off of TDS is allowable. The decision of
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the Hon’ble P & H High Court in the aforesaid case with regard to write off of TDS was not a subject matter of dispute before the Hon'ble Supreme Court, therefore, the contention of the learned Departmental Representative that the decision of Hon’ble P & H High Court, has been reversed by the Hon'ble Supreme Court, is not correct interpretation of the legal position, as the subject matter of dispute before the Hon'ble Supreme Court was on a different issue. In view of the aforesaid, we direct the Assessing Officer to allow assessee’s claim of write off of TDS. Ground is allowed.
In ground no.5, the assessee has challenged the addition of ` 22.83 crore, made to its income on account of change in revenue recognition policy.
Brief facts are, as per the method of accounting followed by the assessee, it was recognising revenue on the basis of invoices raised which was considered as its sales/turnover. However, in the year under consideration, the assessee changed its method of revenue recognition by recognising revenue on the basis of completion of project. On verifying the facts and material on record, the Assessing Officer found that though the assessee was raising the invoices in the same manner as was done earlier, but it is accounting the sales/turnover only those invoices where the project is complete. The
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rest of the invoices are accounted under the head unearned revenue and shown as liability in the Balance Sheet. As a result of the aforesaid revenue recognition method adopted by the assessee, the gross revenue/income from operations was reduced by ` 91.37 crore resulting in reporting of lower profit to the tune of ` 22.83 crore. Therefore, he called upon the assessee to justify the change in revenue recognition policy. In response, it was submitted by the assessee that there is no change in the method of accounting vis–a– vis the preceding assessment years except change in revenue recognition policy. Further explaining, it was submitted that the change in revenue recognition policy was due to the fact that the assessee has shifted his focus from providing specific voice equipment solutions to providing converged communication solutions to the clients as part of the business strategy in order to increase profitability and serve them better and cater to their needs. It was submitted, converged communication solutions means providing integrated service to the clients based on their needs in order to provide complete communication solutions which includes integration of voice, data and messaging and catering to industry specific solution. It was submitted, w.e.f. 1st April 2004, income from sale of goods/installation and commissioning charges/software activation is accounted on completion of sale/installation and commission on receipt of software installation
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certificate. The Assessing Officer, however, was not convinced with the submissions of the assessee. He observed, whenever invoices were raised on the customers they were considered as sales in the books of the assessee as per the provisions of Sales Tax Act. Similarly, when the invoice is raised for rendering services, service tax is paid on such transactions. He observed, only for the purpose of income tax, the assessee transfers part of the revenue to a separate account named as ‘unearned revenue’ which is shown in the liability side of the Balance Sheet and not offered to tax. Thus, he observed, the assessee is following different accounting methods for Sales Tax/Service Tax and Income Tax. Countering the contention of the assessee that the change in revenue recognition was due to global standard and making it uniform with similar revenue recognition policy adopted by the Head Office and other group companies, the Assessing Officer observed, the assessee has not produced any documentary evidence to demonstrate the nature of global standard being followed. The Assessing Officer observed, the assessee cannot adopt a revenue recognition policy following global standard which will result in deferment/postponing the profit chargeable to tax. He observed, once the assessee raises the invoice in respect of a particular good or service, the sale is complete. Referring to the provisions of section 145 of the Act, the Assessing Officer observed, the method of accounting employed by the assessee
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must provide the true and fair view of profit/gains earned by the assessee. He observed, though the assessee is following the same mercantile system of accounting followed by it earlier, however, there is no justifiable reason to change the revenue recognition policy in the impugned assessment year. He observed, as a result of such change in the revenue recognition policy, the annual profits are not properly deduced. As a result, the accounts maintained by the assessee are not complete as significant amount of revenue which should have been offered to tax in the impugned assessment year has been omitted. Thus, invoking the provision of section 145(2) of the Act, the Assessing Officer brought to tax an amount of ` 22.83 crore towards net profit sales offered during the year. Being aggrieved with the aforesaid addition, the assessee preferred appeal before the first appellate authority.
After considering the submissions of the assessee learned Commissioner (Appeals) agreed with the decision of the Assessing Officer and sustained the addition. However, he directed the Assessing Officer to reduce the income of the assessee to that extent in the subsequent assessment year if the assessee offers it or has offered it on the basis of project completion method.
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The learned Authorised Representative submitted, the assessee is in the business of providing telecommunication equipment, service and solution including Electronic Private Automatic Branch Exchanges, Call Centre, data products, voice processing, low end EPABX, set–up of Backbone network for cellular operators, teleconferencing solutions, etc. He submitted, as per the revenue recognition followed by assessee earlier, all these activities/solutions were considered on standalone basis which in trade parlance is known as voice equipment solutions. However, w.e.f. 1st April 2004, the assessee changed its focus from voice equipment solutions to providing converged communication solutions as per the business strategy adopted by its Head Office in USA. He submitted, as per the new business strategy adopted by the assessee, it is providing integrated services comprising of integration voice, data and messaging and catering to industry specific solutions. He submitted, since it became integrated services from providing equipment, installation, commissioning, software activation, only on completion of the project and on receiving completion certificate of the project from the customer, the assessee recognizes revenue though invoices are raised on the basis of supply of goods or service rendered. To further explain the revenue recognition policy adopted by the assessee and the accounting entries made in the books of account in this regard, the learned Authorised
37 AGC Network Ltd. (Formerly known as Avaya Global Connect Ltd.)
Representative took us through the financial statements and other documents placed in the paper book. He submitted, the change in revenue recognition policy is as per the global accounting standard followed by very reputed companies. The learned Authorised Representative submitted, even the Assessing Officer has admitted that the assessee has not changed its method of accounting but has only changed the revenue recognition policy. He submitted, under section 145(2) of the Act, Accounting Standard–II relating to disclosure of prior period and extra ordinary items and changes in accounting policies have been notified. He submitted, as per the said Accounting Standard, a change in accounting policy can be made only if adoption of different accounting policy was required by the statute or if it is considered that the change would result in a more appropriate preparation or presentation of financial statements of the assessee. Referring to the Accounting Standard–9, the learned Authorised Representative submitted, it provides for proportionate completion method or completed service contract method as the method for recognising revenue in respect of rendering of services. He submitted, the change in revenue recognition policy was necessitated due to shift in the business strategy by shifting the focus from voice based solutions to converged communication solutions. He submitted, the change in revenue recognition policy was also approved by Board of
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Directors who considered the project completion method a prudent policy to follow which was also accepted by the auditor. The learned Authorised Representative submitted, the measure of taxation under Sales Tax, Service Tax and Income Tax are different, as the levy of tax depends upon the specific criteria specified under the charging provision of the particular statute. Therefore, merely because the assessee has recognized sales under the Sales Tax Act or has paid service tax would not necessarily mean that income has also accrued under the Income Tax Act. Therefore, the taxability under the Sales Tax Act or Service Tax Act cannot be a reason to tax a particular item of income. In support, he relied upon the decision of the Hon'ble Supreme Court in CIT v/s Venkateshwara Hatcheries Pvt. Ltd., 103 ITR 503 (SC). The learned Authorised Representative submitted, merely because there was a loss of revenue in the year of change in revenue recognition policy, addition cannot be made, if the change was otherwise bona fide and the new method adopted is one of the recognized methods and followed consistently. In support of this contention, the learned Authorised Representative relied upon the following decisions:–
i) CIT v/s Delta Plantation Ltd., 114 CTR 271 (Cal.); ii) CIT v/s Atul Products Ltd., 225 ITR 85 (Del.);
39 AGC Network Ltd. (Formerly known as Avaya Global Connect Ltd.)
iii) CIT v/s Kesoram Industries & Cotton Mills Ltd., 204 ITR 154 (Cal.); and iv) CIT v/s West Cost Paper Mills Ltd., 193 ITR 349 (Bom.).
The learned Authorised Representative submitted, the assessee has adopted project completion method which has been accepted as valid method for recognising revenue. He submitted, the same revenue recognition policy is also followed by other reputed companies like IBM Ltd. and Cisco Ltd. having similar business operation like the assessee. To support his contention that project completion method is a recognized method for revenue recognition, he relied upon the following decisions:–
i) CIT v/s Bilahari Investments Pvt. Ltd., 299 ITR 001 (SC); and ii) CIT v/s Nathpajhakri Joint Venture, 808 ITR 15 (Bom.).
He submitted, out of unearned revenue of ` 91.37 crore shown in the Balance Sheet, the assessee had actually received an amount of ` 33.59 crore from the customers. He submitted, once the change in revenue recognition policy is for bona fide reasons, it cannot be rejected. In this context, he relied upon the decision of the Tribunal, Mumbai Bench, in Toyo Engineering Corporation v/s DCIT, ITA no.6600/Mum./2002 and the decision of the Hon’ble Gujarat High Court in CIT v/s Mapin Publishing Pvt. Ltd., 42 taxmann.com 191. The
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learned Authorised Representative submitted, the unearned revenue relating to the projects not completed as on 31st March 2005, was recognized on completion of projects and offered to tax in the subsequent years. The learned Authorised Representative submitted, since the disputed income was subsequently offered to tax, there is no loss to the revenue as there is only a timing difference. In this context, he relied upon the decision of the Hon'ble Supreme Court in Excel Industries Ltd. (supra). On a query from the Bench as regards the provision of expenditure if relates to any project for which the revenue is being deferred, the learned Authorised Representative submitted that no such expenditure was claimed in respect of revenue deferred on account of non–completion of project. The learned Authorised Representative submitted, merely because the assessee has raised the invoices, it cannot be said that income has accrued until the project is complete. He submitted, invoices raised can be considered as a mode of receiving progressive payment which may not have income element embedded therein. Rebutting the allegation of learned Commissioner (Appeals) that the assessee failed to justify the change in revenue recognition policy followed earlier, the learned Authorised Representative submitted, since the assessee shifted its focus from voice equipment provider to complete communication solutions provider, it necessitated a change in revenue recognition policy as the
41 AGC Network Ltd. (Formerly known as Avaya Global Connect Ltd.)
same resulted in a more appropriate preparation or presentation of the financial statements by the assessee as per Accounting Standard–II.
The learned Departmental Representative strongly relying upon the observations of the Assessing Officer and learned Commissioner (Appeals) submitted, there is no reason for the assessee to only change the revenue recognition policy in this year though it has not changed the method of accounting. He submitted, there should be consistency in the approach of the assessee in the method of revenue recognition otherwise it will result in loss of revenue, which has happened in this case. He submitted, earlier the assessee was recognising revenue on the basis of invoices raised. It has discarded the method in the impugned assessment year and recognising revenue on the basis of completion of project that too depending on the completion certificate to be issued by the customer. He submitted, until customer issues completion certificate, the assessee would not recognize revenue even though he might have completed the project. He submitted, the aforesaid method of revenue recognition is absurd and cannot be considered to be a more appropriate preparation or presentation of the financial statements of the assessee necessitating change in the accounting policy. The learned Departmental Representative submitted, merely because the Head Office has
42 AGC Network Ltd. (Formerly known as Avaya Global Connect Ltd.)
changed its accounting policy does not necessarily mean that the assessee should also change its revenue recognition policy thereby deferring a substantial part of the profit which otherwise is taxable in the impugned assessment year. He submitted, when the assessee is recognising sales effected and services rendered while complying to the provisions of Sales Tax Act and Service Tax Act, it cannot say that income has not accrued in respect of such sales and service when it comes to taxability under the Income Tax Act. The learned Departmental Representative submitted, in any case of the matter, there is no loss to the assessee as learned Commissioner (Appeals) has directed the Assessing Officer not to tax such income in the subsequent assessment years if it is offered by the assessee on completion of project. Thus, he submitted, addition made by the Assessing Officer was justified. In support of his contention, the learned Departmental Representative relied upon the following decisions:–
Laxmipat Singhania v/s CIT, [1969] 72 ITR 291 (SC); i) ii) CIT v/s P. Mariappa Gounder, [1984]147 ITR 676 (Mad.); & iii) CIT v/s Kerala Financial Corporation, [1985] 155 ITR 246 (Ker.)
We have considered rival submissions and perused the material on record. We have also carefully applied our mind to the decisions
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relied upon before us by both the parties. The factual matrix clearly reveals that the assessee has not changed mercantile system of accounting consistently followed by it from the past years. However, it has changed its revenue recognition policy in the impugned assessment year. It is evident, in the past years, the assessee was recognising revenue on the basis of invoices raised for sales effected and service rendered. However, in the impugned assessment year, the assessee has adopted a new system under which it recognizes revenue on the basis of completion of project and on receiving completion certificate from the customers. Undisputedly, due to the change in revenue recognition policy as aforesaid, quite a substantial part of the revenue, which otherwise would have been shown in the impugned assessment year as per the revenue recognition policy consistently followed, has been deferred to subsequent assessment years which resulted in less profit shown of ` 22.83 crore. To justify the change in revenue recognition policy, it is the contention of the assessee that in the year under consideration it has shifted its focus from providing specific voice equipment solutions to converged communication solutions as per the business strategy adopted by its Head Office in USA. It is also submitted that the new revenue recognition policy adopted by the assessee is in tune with similar policy adopted by the Head Office and which is also followed by various other reputed
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organizations/entities. As per section 145(1) of the Act, income chargeable under the head profits and gains of business and profession has to be computed by employing either cash or mercantile system of accounting regularly employed by the assessee. Of course, sub–section (2) of section 145 of the Act prescribes the Accounting Standards to be followed by any class of assessee or any class of income has to be notified by the Central Government. Whereas, sub– section (3) of section 145 of the Act prescribes that if the Assessing Officer is not satisfied with the correctness or completeness of the accounts of the assessee or where the method of accounting provided in sub–section (1) has not been regularly followed by the assessee or income has not been computed in accordance with Accounting Standard notified under sub–section (2), he may proceed to make an assessment to the best of his judgment as provided under section 144 of the Act.
It is evident, after examining the factual aspect and the submissions of the assessee the Assessing Officer has observed in the assessment order, though, the assessee to justify with valid reasons the change in revenue recognition policy, however, it was not able to furnish any satisfactory reason for such change except stating that accounts are to be prepared as per global standard. Further, he has
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observed that the assessee has not produced any documentary evidence regarding the global standards allegedly followed by it and how it is relevant in the context of Indian Accounting Standard. It is also crucial to bear in mind, as regards Sales Tax and Service Tax the assessee is complying to the statutory requirement in terms with the earlier practice followed by it. In other words, it is paying Sales Tax and Service Tax on the basis of invoices raised towards sales and services.
In the aforesaid factual background, it requires to be examined whether the revenue recognition policy followed by the assessee is acceptable. No doubt, the assessee has contended that the change in revenue recognition policy is due to shift in business strategy and as per global standards followed by the Head Office. However, this cannot simply be a reason to change the revenue recognition policy consistently followed over the years. The assessee must furnish cogent material and explanation to justify the change in revenue recognition policy. More so, when such revenue recognition policy has substantially reduced the profit shown by the assessee in the impugned assessment year. The assessee must establish on record why the change in revenue recognition policy, claimed to be in accordance with the alleged global standards, is relevant for
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chargeability of assessee’s income to tax in India, as, such income has to be computed in terms with the provisions of the Indian Income Tax Act and Accounting Standards notified therein. Further, as per the new revenue recognition policy revenue is to be recognized on completion of project and that too on receipt of completion certificate from the customer. It is relevant to observe, the assessee continues to raise bills/invoices on customers on standalone basis as it was consistently doing in the preceding assessment years. However, it is recognising revenue only in respect of completed projects, whereas, showing the rest of the revenue in the Balance Sheet as unearned revenue. In this process, the assessee though is following mercantile system of accounting but it is effectively deferring substantial part of its revenue and profit to future assessment years. Therefore, the onus is all the more on the assessee to justify the change in revenue recognition policy through cogent material and explanation. Though, the assessee may be correct in saying that provisions of Sales Tax and Service Tax laws cannot be imported to determine assessee’s tax liability under the Income Tax Act, however, it is also equally true that in the preceding assessment years, the assessee was recognising revenue for income tax purpose on the basis invoices raised towards sales and services. Therefore, when the assessee was following a consistent method over years, it has to demonstrate the compelling circumstances which
47 AGC Network Ltd. (Formerly known as Avaya Global Connect Ltd.)
necessitated change in revenue recognition policy. Therefore, the decisions relied upon by learned Authorised Representative cannot be applied uniformly to assessee’s case without examining the factual aspect. Similarly, though, project completion method has been accepted as a recognized method for revenue recognition, however, the assessee must establish on record that the change in revenue recognition policy from invoice based to project completion method is for bona fide reasons.
As regards assessee’s contention that there is only a timing difference relating to the income offered due to change in revenue recognition policy, we must observe, though it may be a fact that the assessee might have offered or may be offering the income on completion of projects in future years, however, as per assessee’s own contention, it is completely dependent upon the completion certificate to be issued by the customers. As regards the decision of the Hon'ble Supreme Court in Excel Industries Ltd. (supra), as could be seen from the facts involved in the aforesaid decision, the income which the revenue wanted to assessee is benefit of duty entitlement to be received by the assessee on certain imports which has not taken place in the relevant assessment year but took place in the subsequent
48 AGC Network Ltd. (Formerly known as Avaya Global Connect Ltd.)
assessment years. The Hon'ble Supreme Court while dealing with the issue of accrual income laid down the following three tests:–
i) Whether the income accrued to the assessee is real or hypothetical;
ii) Whether there is a corresponding liability of the other party to pass on the benefits of duty free import to the assessee even without any imports having been made; and
iii) The probability or improbability of realization of the benefits by the assessee considered from a realistic and practical point of view.
In the facts of the said case, admittedly, the assessee had not imported the goods in the relevant assessment year. Therefore, the question of availing benefits relating to duty entitlement did not arise. Whereas, in the facts of assessee’s case, the assessee has not only raised invoices relating to sales and services rendered but it has also paid Sales Tax/Service Tax on such sales/services. Therefore, the facts in assessee’s case cannot be equated with the facts involved in Excel Industries Ltd. (supra). Since, the other decisions cited before us do not squarely fit in to the facts of assessee’s case, we do not intend to
49 AGC Network Ltd. (Formerly known as Avaya Global Connect Ltd.)
deliberate much on such decisions. Therefore, on over all consideration of facts and material on record, we are of the view that the issue requires further examination by the Assessing Officer as the assessee needs to establish with cogent material and evidence that the change in revenue recognition policy is for bona fide reasons and necessary for carrying on its business activities in a more efficient manner. Further, the assessee has to establish that the change in revenue recognition policy is in conformity with the provisions contained under section 145(1) and (2) of the Act. With the aforesaid observations, we are inclined to restore the issue to the Assessing Officer for de novo adjudication after due and sufficient opportunity of being heard to the assessee. It is made clear, the Assessing Officer must decide the issue independently and strictly in accordance with law and judicial precedents to be cited before him without being influenced by any of the observations made by learned Commissioner (Appeals). If the assessee can establish that the change in revenue recognition policy is for bonafide and valid reasons, occasion for any addition on this count would not arise. The Ground raised is allowed for statistical purposes.
In the result, assessee’s appeal is partly allowed.
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ITA no.7833/Mum./2011 Revenue’s Appeal – A.Y. 2005–06 47. The issue raised by the Revenue in grounds no.1 and 2, is corresponding to the issue raised in ground no.1 of assessee’s appeal in ITA no.8674/Mum./2011. In view of our decision therein, no separate adjudication in respect of these grounds is necessary. The grounds having infructuous is dismissed.
Ground no.3 raised by the Revenue is corresponding to ground no.2 of assessee’s appeal in ITA no.8674/Mum./2011. In view of our decision therein, this ground has become infructuous, hence, dismissed.
In the result, Revenue’s appeal is dismissed.
ITA no.8675/Mum./2011 Assessee’s Appeal – A.Y. 2006–07
Ground no.1, of this appeal is identical to ground no.1 of assessee’s appeal being ITA no.8674/Mum./2011. Following our decision therein, ground raised is allowed.
In ground no.2, the assessee has challenged the disallowance of renovation expenditure.
This ground is similar to ground no.2 of assessee’s appeal in ITA no.8674/Mum./2011. Following our decision therein, this ground is allowed.
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The issue raised in ground no.3, is identical to ground no.5 of ITA no.8674/Mum./2011. Following our decision therein, we restore the issue to the Assessing Officer for de novo adjudication with similar direction. This ground is allowed for statistical purposes.
In the result, assessee’s appeal is partly allowed.
ITA no.7834/Mum./2011 Revenue’s Appeal – A.Y. 2006–07
The grounds raised in this appeal are identical to the grounds raised in ITA no.7834/Mum./2011. Following our decision therein, these grounds are dismissed.
In the result, Revenue’s appeal is dismissed.
ITA no.8676/Mum./2011 Assessee’s Appeal – A.Y. 2007–08
Ground no.1, of this appeal is identical to ground no.1 of assessee’s appeal being ITA no.8674/Mum./2011. Following our decision therein, ground raised is allowed.
In ground no.2, the assessee has challenged the disallowance of renovation expenditure.
52 AGC Network Ltd. (Formerly known as Avaya Global Connect Ltd.)
This ground is similar to ground no.2 of assessee’s appeal in ITA no.8674/Mum./2011. Following our decision therein, this ground is allowed.
The issue raised in ground no.3, is identical to ground no.5 of ITA no.8674/Mum./2011. Following our decision therein, we restore the issue to the Assessing Officer for de novo adjudication with similar direction. This ground is allowed for statistical purposes.
In the result, assessee’s appeal is partly allowed.
ITA no.7835/Mum./2011 Revenue’s Appeal – A.Y. 2007–08
Grounds raised in this appeal by the Revenue are identical to the grounds raised in ITA no.7833/Mum./2011. Following our decision therein, these grounds are dismissed.
In the result, Revenue’s appeal is dismissed.
ITA no.5434/Mum./2012 Assessee’s Appeal – A.Y. 2008–09
The issue raised in ground no.1, is with regard to disallowance of provision for expenditure.
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This ground is identical to ground no.1 of ITA no.8674/Mum./ 2011. Following our decision therein, this ground is allowed. The additional ground having become infructuous is dismissed.
In ground no.2, the assessee has challenged the disallowance of renovation expenditure.
This ground is identical to ground no.2 of ITA no.8674/Mum./ 2011. Following our decision therein, this ground is allowed.
In ground no.3, the assessee has challenged the addition made on account of change in revenue recognition policy.
This ground is identical to ground no.5 of ITA no.8674/Mum./ 2011. Following our decision therein, the issue is restored to the Assessing Officer for de novo adjudication with similar direction. This ground is allowed for statistical.
In the result, assessee’s appeal is partly allowed.
ITA no.5157/Mum./2012 Revenue’s Appeal – A.Y. 2008–09
Grounds raised in this appeal by the Revenue are identical to the grounds raised in ITA no.7833/Mum./2011. Following our decision therein, these grounds are dismissed.
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In the result, Revenue’s appeal is dismissed.
ITA no.5362/Mum./2014 Revenue’s Appeal – A.Y. 2009–10
The issue raised in ground no.1, is with regard to disallowance of provision for expenditure.
This ground is identical to ground no.1, raised by the assessee in ITA no.8674/Mum./2011. Following our decision therein, the additional ground raised by the assessee is allowed.
In ground no.2, the assessee has challenged the disallowance of renovation expenditure.
This ground is identical to ground no.2 of ITA no.8674/Mum./ 2011. Following our decision therein, this ground is allowed.
In ground no.3, the assessee has challenged the addition made on account of change in revenue recognition policy.
This ground is identical to ground no.5 of ITA no.8674/Mum./ 2011. Following our decision therein, the issue is restored to the Assessing Officer for de novo adjudication with similar direction. This ground is allowed for statistical.
In the result, assessee’s appeal is partly allowed.
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ITA no.5607/Mum./2014 Revenue’s Appeal – A.Y. 2009–10
Grounds raised in this appeal by the Revenue are identical to the grounds raised in ITA no.7833/Mum./2011. Following our decision therein, these grounds are dismissed.
In the result, Revenue’s appeal is dismissed.
To sum up, assessee’s appeals are partly allowed and Revenue’s appeals are dismissed. Order pronounced in the open Court on 30.08.2019
Sd/- Sd/- MANOJ KUMAR AGGARWAL SAKTIJIT DEY ACCOUNTANT MEMBER JUDICIAL MEMBER
MUMBAI, DATED: 30.08.2019 Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The CIT(A); (4) The CIT, Mumbai City concerned; (5) The DR, ITAT, Mumbai; (6) Guard file. True Copy By Order Pradeep J. Chowdhury Sr. Private Secretary
Assistant Registrar ITAT, Mumbai