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Income Tax Appellate Tribunal, “B” BENCH, CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI S. JAYARAMAN
आदेश/ O R D E R
PER S. JAYARAMAN, ACCOUNTANT MEMBER:
The assessee filed this appeal against the order of the Commissioner of Income Tax (Appeals)-6, Chennai in dated 30.11.2017 for assessment year 2014-15.
M/s. Enexio Power Cooling Solutions India Pvt. Ltd., Formerly known as M/s. Gea Cooling Tower Technologies (India) P. Ltd., the assessee, is engaged in the business of designing, engineering, supply, erection and commissioning of Cooling Tower and Air Cooled condensers. While making the assessment for assessment year 2014-15, the Assessing Officer disallowed proportionate expenditure at Rs. 20,06,590/- in respect of retention money of Rs. 27,78,43,680/- not received and not included as income in the total income.
Disallowed interest on TDS at Rs. 21,526/- and restricted depreciation on software license @ 25% as against assessee’s claim at 60%. Aggrieved, the assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) dismissed the appeal. Aggrieved against the order, the assessee filed this appeal.
On the issue of proportionate expenditure disallowed on the retention money, the Ld. AR submitted that the assessee is following mercantile system of accounting. It excluded Rs. 27,78,43,680/-, being retention money withheld by its clients, in its receipts, as per the terms of the contract entered with them and the retention money is offered to tax in the year of receipt of retention money. The entire amount of expenditure incurred by the assessee is allowable on the basis of incurrence of liability. On this issue, in its own case for the assessment year 2013-14, this tribunal in dated 24.05.2018 has allowed the assessee’s plea and hence, the Ld. AR pleaded to allow the appeal. Per contra, the Ld. DR supported the orders of the lower authorities.
We heard the rival submissions. Since, the co-ordinate bench considered this issue, the facts and law being similar, the relevant portion of the order of the co-ordinate bench is extracted as under:
“5. The ld. Counsel for the assessee argued that the ld. CIT(A) has considered various decisions of the Courts and also considered the decision of the Tribunal in assessee’s own case for the assessment year 2007-08 as well as his own decision for the assessment year 2012-13 and passed the order. Therefore, the order passed by the ld. CIT(A) should be confirmed.
6. On the other hand, the ld. DR submits that the ld. CIT(A) failed to accept the views taken by the Assessing Officer and simply followed the decisions of the Tribunal for the assessment year 2007-08 while deciding the appeal for the assessment year 2012-13, which was not accepted by the Department and preferred further appeal before the Tribunal for the assessment year 2012-13. It was further submissions that while adjudicating the appeal for the assessment year 2012-13 in dated 22.06.2017, the Tribunal observed that the expenditure relatable to the money withheld was not the subject matter before the Tribunal for the assessment year 2007-08 and set aside the order of the ld. CIT(A) for re-adjudication of the issue of allowability of expenditure relatable to money withheld in the computation under normal provisions and thus, the issue has not reached its finality. Therefore, the ld. DR submitted that the order of the ld. CIT(A) may be set aside and the issue may be decided on merits.
7. We have heard both the sides, perused the materials available on record and gone through the orders of authorities below. The Assessing Officer disallowed the expenses relatable to the withheld amount in the computation under normal provisions on the ground that during the year, the expenditure incurred by the assessee was D.181,32,92,489/- as against an income of D.197,18,44,146/-. The net profit works out to 8.04%. Therefore, only this amount ought to have been excluded from the total income. If this ratio is adopted, the expenditure incurred in respect of the withheld amount excluded from taxation comes to D. 14,81,88,478/-. Accordingly, the Assessing Officer excluded the above amount from the total expenditure of the year. On appeal, while deleting the disallowance made by the Assessing Officer, the ld. CIT(A) followed the decision of the Tribunal for the assessment year 2007-08 as well as his own decision for the assessment year 2012-13. Against the order of the ld. CIT(A) dated 24.10.2016 in assessee’s own case for the assessment year 2012-13, while observing that the expenditure relatable to the money withheld was not the subject matter before the Tribunal for the assessment year 2007-08, the Tribunal has held as under: “5. As rightly submitted by the ld. DR, the order of this Tribunal for the assessment year 2007-08 is only in respect of money withheld/retained for due performance of contract. The expenditure relatable to the money withheld was not the subject matter before this Tribunal for the assessment year 2007-08. Therefore, this Tribunal is of the considered opinion that the CIT(A) has to reconsider whether the expenditure relatable to money withheld is allowable deduction or not. Since that point was not considered, the issue needs to be reconsidered by the CIT(A) at the first instance. Accordingly, the order of the CIT(A) is set aside and the issue raised by the assessee is remitted back to the file of the CIT(A). The CIT(A) shall reconsider the issue and thereafter decide the same in accordance with law, after giving a reasonable opportunity to the assessee.” Once the expenditure relatable to the money withheld was not the subject matter before this Tribunal for the assessment year 2007-08 as could be evident from the order passed by the Tribunal for the assessment year 2007-08, we are of the considered opinion that the ld. CIT(A) went in wrong to following the order passed by him for the assessment year, where, the issue is not subject matter in appeal. Hence, we proceeded to decide the issue on merits.
The assessee company has been following the mercantile system of accounting in books of accounts. The assessee entered into contracts with various customers for construction contracts for cooling towers and air cool condensers; wherein there is a specific clause that a percentage of the contract price would be retained by the buyer and it would be paid after a particular period subject to the satisfactory completion of the contract. The payment of retention money was deferred as per the contract, in spite of job carried and bills submitted. The payment of retention money is contingent on satisfactory completion of work and its certification. It was the contention of the ld. Counsel that the retention money has been offered to tax in the year of receipt of the retention money and the expenses are to be allowed as and when incurred because the contract work is one whole work and thus, the entire amount of expenditure is allowable on the basis of incurrence of the liability.
9. Generally, the expenditure which is actually incurred or is incurred in a relevant year would be allowed as deduction while computing the income from business. Such a liability has to be in praesenti. However, at the same time, it
relates to the works undertaken by the assessee, completed contract method of accounting is followed which is consistent with the Accounting Standards and these Accounting Standards also laid down the norms indicting the particular point of time when the provisions for all known liabilities and losses have to be made. The making of such a provision by the assessee appears to be justified more so when the assessee had recognized gain as well on such project during the assessment year under consideration. This appears to be in consonance with the principle of matching cost and revenue as well. The reason given by the Department is that the retention money which is receivable was not recognized as income as such, retention payment also cannot be allowed as deduction while computing the income of the assessee. As rightly argued by the assessee, both these are governed by different Accounting Standards. Retention payment is governed by AS-7 issued by ICAI, New Delhi. On the other hand, retention money receivable is governed by AS-9. What is applicable to retention money receivable cannot be applied to retention money payable as these are governed by different Accounting Standard. Further, it is undisputed fact that whenever assessee incurred expenditure on the project, it is admissible for deduction. The only dispute raised by the Revenue is regarding the year of liability of expenditure. Considering that the assessee-company is assessed at uniform rate of tax, the entire exercise of seeking to disturb the year of allowability of expenditure is, in any case, revenue neutral. We are reminded of the classic observation made by the Bombay High Court in the case of CIT v. Nagri Mills Co. Ltd, 33 ITR 681 which reads as under: “ We have often wondered why the income-tax authorities, in a matter such as this where the deduction is obviously a permissible deduction under the Income-tax Act, raise disputes as to the year in which the deduction should be allowed. The question as to the year in which a deduction is allowable may 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.”
The aforesaid observation of the Bombay High Court was reiterated by the Delhi High Court in the case of CIT v. Shri Ram Pistons 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.”
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 v. Micro Land Ltd., 347 ITR 613[Karnataka High Court], the assessee claimed deduction under section 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 Hon’ble Supreme Court in the case of Rotork Controls India Pvt., Ltd. v. CIT 314 ITR 62, held that the provision made by the assessee for warranty claims on the basis of past experience is allowable deduction under section 37 of the Act. In the case of Bharat Earth Movers v. CIT 245 ITR 428, the Hon’ble 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 Hon’ble Delhi High Court in the case of CIT v. Ericsson 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 Hon’ble Madras High Court in the case of CIT v. 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 Hon’ble Jurisdictional High Court in the case of Kone Elevator India Pvt. Ltd. v. ACIT, 340 ITR 46. Further, the Hon’ble Supreme Court in the case of Calcutta Co. Ltd v. 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 Hon’ble Kerala High Court in the case of CIT v. 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 Hon’ble Delhi High Court in the case of CIT v. 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 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.”
Following the above decision, we remit the issue to the AO on the similar lines.
The corresponding grounds of the assessee are partly allowed.
With regard to the disallowance of interest on TDS, the Ld. AR submitted that the Ld. CIT(A) erred in confirming the disallowance. Per contra, the Ld. DR submitted that the interest on TDS is akin to income tax which is not an allowable deduction and hence, the Ld. CIT(A) confirmed the disallowance, which may be sustained.
We heard the rival submissions. We find merit in the submissions made by the Ld. DR and hence, we do not find any reason to interfere with the order of the Ld. CIT(A). The corresponding grounds of the appeal of the assessee is dismissed.
On the issue of restriction of depreciation on software license, the Ld. AR submitted that the Ld. CIT(A) erred in confirming the depreciation on software license @ 25% as against the assessee’s claim of 60%. Per contra, the Ld. DR submitted that the assessee claimed depreciation on purchase of Trueup MS office license as a computer software during the second half of the previous year and claimed depreciation @ 30% on the cost of the said software. Since, the assessee treated it as intangible asset and shown the same in its books of accounts, the Ld. AO allowed 12.5% depreciation i.e., 50% of 25% applicable to intangible assets. Aggrieved, the assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) after considering the definition of “computer software” under depreciation schedule as under:
“Computer software means any computer programme recorded on any disc, tape perforated media; or other information storage device.”
Held that MS Office license purchased by the assessee may not fall within the above definition as it is not developed by the assessee but a readymade purchase effected from the open market and accordingly confirmed the disallowance. Hence, the order of the Ld. CIT(A) may be sustained.
8. We heard the rival submissions. Since, the assessee itself has treated the Trueup MS Office license as part of the intangible asset and shown in its books as such, the Ld. AO has allowed depreciation @ 12.5% (50% of 25% applicable to intangible assets) as the assets were purchased and used in the second half of the year. The assessee challenged the order and the Ld. CIT(A) confirmed. The assessee has not placed any material to dislodge the findings recorded by the Ld. CIT(A) and hence, the corresponding grounds of the assessee failed.
In the result, the assessee’s appeal is partly allowed.
Order pronounced on Monday, the 06th day of August, 2018 at Chennai.