DCIT CORPORATE CIRCLE 1 (1), CHENNAI vs. M/S EAST COAST CONSTRUCTIONS & INDUSTRIES LIMITED, CHENNAI

O R D E R

PER DUVVURU RL REDDY, JUDICIAL MEMBER:

2.1 With regard to the disallowance of expenditure relatable to retention money, during the year, the assessee has excluded a sum of ₹.33,80,43,934/- as withheld amount. The corresponding expenditure has not been excluded. During the year, the total expenditure incurred was ₹.706.47 crores as against an income of ₹.722.79 crores. The net profit is 2.26%. Only this proportion of the withheld amount of ₹.33.80 crores relates to profits and the balance is the embedded expense. If this ratio is adopted, the expenditure incurred in respect of the withheld amount excluded from taxation is ₹.33,04,04,141/-. This amount was, therefore, excluded from the total expenditure of the year. During the course of revisionary proceedings, the Assessing Officer observed that during the year under consideration, a sum of ₹.7,98,96,430/- pertaining to the assessment year 2009-10 has been offered as release of withheld amount. In the previous year, the expenditure in respect of this amount was not allowed based on the reasoning above. The exclusion was done by adopting the profit ratio which was 2.49% for that year. The expenditure constituting 97.51% was excluded in that year. Since the amount shave been offered to tax now, the corresponding expenditure is now given credit. This comes to ₹.7,79,07,009 (97.51% of ₹.7,79,07,009). Thus, the Assessing Officer determined the net inclusion of expenditure at ₹.25,24,97,133/- [₹.33,04,04,141 – ₹.7,79,07,009] and brought to tax.

3. On appeal, by following appellate order for the assessment years 2013-14 & 2014-15, the ld. CIT(A) directed the Assessing Officer to delete the disallowance.

“2. The only common issue raised in both the Revenue’s appeal is with regard to deletion of disallowance made on the expenses pertaining to the retention of moneys withheld.

be material when the rate of tax chargeable on the assessee in two different years is different; but in the case of income of a company, tax is attracted at a uniform rate, and whether the deduction in respect of bonus was granted in the assessment year 1952-53 or in the assessment year corresponding to the accounting year 1952, that is in the assessment year 1953-54, should be a matter of no consequence to the Department; and one should have thought that the Department would not fritter away its energies in fighting matters of this kind. But, obviously, judging from the references that come up to us every now and then, the Department appears to delight in raising points of this character which do not affect the taxability of the assessee or the tax that the Department is likely to collect from him whether in one year or the other." 12.1 The aforesaid observation of the Bombay High Court was reiterated by the Delhi High Court in the case of CIT vs Shri Ram Pistos and Rings Ltd, 220 CTR 404, as under: "Finally, we may only mention what has been articulated by the Bombay High Court in CIT v. Nagri Mills Co. Ltd. [1958] 33 ITR 681 (Bom) as follows : . . In the reference that is before us there is no doubt that the assessee had incurred an expenditure. The only dispute is regarding the date on which the liability had crystallized. It appears that there was no change in the rate of tax for the assessment year 1983-84 with which we are concerned. The question, therefore, is only with regard to the year of deduction and it is a pity that all of us have to expand so much time and energy only to determine the year of taxability of the amount." 12.2 Further, in our opinion, the provision for accrued liability which has to be discharged at a future date by the assessee is an allowable expenditure. In the case of CIT vs Micro Land Ltd, 347 ITR 613[Karnataka High Court], the assessee claimed deduction u/s 37 of the Act for provision for future warranty. The Assessing Officer opined that provision for future warranty is contingent liability and cannot be allowed. The Supreme Court in the case of Rotork Controls India Pvt. Ltd vs CIT, 314 ITR 62, held that the provision made by the assessee for warranty claims on the basis of past experience is allowable deduction u/s 37 of the Act. In the case of Bharat Earth Movers vs CIT, 245 ITR 428, the Supreme Court held that where the assessee has incurred expenditure which is more than the provision for warranty obligation made in the books of account, it cannot be said that the provision made by the assessee is not capable of being estimated with the reasonable certainty though actual quantification was not possible and therefore, the Tribunal was justified in allowing the deduction. The Delhi High Court in the case of CIT vs Ericssion Communications P. Ltd, 318 ITR 340, held that provision for warranty claims on scientific basis which is consistently applied by the assessee for its business was allowable as deduction. The Madras High Court in the case of CIT vs Luk India Pvt. Ltd, 239 CTR 440, held that provision for warranty claimed by applying the settled principles of having regard to the fact that claim was based on a scientific approach and it was worked out on the average of previous year’s warranty settlement is allowable expenditure. Same view was taken by the jurisdictional High Court in the case of Kone Elevator India Pvt. Ltd vs ACIT, 340 ITR 46. Further, the Supreme Court in the case of Calcutta Co. Ltd vs CIT, 37 ITR 1, held that where the assessee was following the mercantile system of accounting is entitled for deduction of the expenditure which is incidental to the business on accrual basis though it was not actually incurred during the relevant accounting year. The Kerala High Court in the case of CIT vs Indian Transformers Ltd, 270 ITR 259, held that provision created by the assessee for after sales services based on warranty was towards a definite and ascertained liability. On the basis of relevant facts the provision cannot be treated as a contingent liability and therefore, the same was allowable as deduction. Same view was taken by the Delhi High Court in the case of CIT vs Whirlpool of India Ltd, 242 CTR 245, wherein held that the assessee consistently making provision for warranty on the basis of actuarial valuation in respect of machines sold during the year could not be precluded from revising this provision after taking into consideration that warranty period of the goods sold under warranty was exceeding and provision already provided in a particular year is falling short of the expected claim that may be received. Such a provision is based on scientific study and actuarial basis and to be allowed as a business expenditure. Hence, in our opinion, the provision for payment made by the assessee towards sub-contract is allowable expenditure as the assessee recognized the revenue from the said contract as income in the assessment year under consideration. Further, we make it clear that the assessee cannot claim the same expenditure on actual payment basis, otherwise it amounts to double deduction – one on the basis of accrual and another on the basis of actual payment. Hence, we direct the Assessing Officer to allow this retention money payment only on accrual basis and not on actual payment basis. With these observations, we remit this issue to the file of the Assessing Officer for quantification. This ground is partly allowed.”

In view of the above order of the Tribunal, we remit the issue to the file of AO on similar line.” By following the above decision in assessee’s own case for the assessment year 2011-12 vide its order dated 14.02.2018, the Tribunal has remitted the issue to the file of the Assessing Officer. Similarly, for the assessment year under consideration also, we remit the matter back to the file of the Assessing Officer for fresh consideration in line with the decision of the Tribunal dated 30.11.2016. Thus, the ground raised by the Revenue is allowed for statistical purposes.