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Income Tax Appellate Tribunal, DELHI BENCH ‘B’, NEW DELHI
ORDER Per Bench: These appeals by the department are directed against the separate order dated 20.11.2012 & 26.05.2014 for the assessment years 2009-10 & 2010-11 respectively passed by the ld. CIT(A)-XIII, New Delhi.
Common issue is involved in these appeals which were heard together so these are being disposed off by this consolidated order for the sake of convenience and brevity.
2 Engineering Projects India Ltd. 3. At the first instance, we will deal with the appeal in ITA No. 709/Del/2013. The only ground raised in this appeal which reads as under: “1. On the facts and circumstance of the case and in law, the ld. CIT(A) has erred in deleting the addition of Rs.9,73,86,429/- made on account of prior period expenses.”
4. From the aforesaid ground, it is clear that only grievance of the department relates to the deletion of addition of Rs.9,73,86,429/- made by the AO on account of prior period expenses.
During the course of hearing, the ld. Counsel for the assessee at the very outset stated that this issue is covered vide order dated 26.05.2017 in 2652 & 2653/Del/2012 for the assessment years 2004-05, 2007-08 & 2008-09 in assessee’s own case (copy of the said order was furnished which is placed on record).
In his rival submissions the ld. DR although supported the order of the AO but could not controvert, the aforesaid contention of the ld. Counsel for the assessee.
We have considered the submissions of both the parties and perused the material available on the record. It is noticed 3 Engineering Projects India Ltd. that an identical issue having similar facts has already been adjudicated by this bench of the Tribunal vide order dated 26.05.2017 in ITA Nos. 2650, 2652 & 2653/Del/2012 and the relevant findings have been given in paras 9 to 12 which read as under: “9. Having considered the rival submissions in the light of entire material available on record, we find that it is no doubt true that the figures of prior period expenditure and provision for advances are discernible from the computation of income and the notes appended thereto, but a perusal of the original assessment order shows that there is no reference to the issue regarding allowability or otherwise of prior period expenses or regarding provision for advances. The assessment order nowhere speaks that the AO had taken a conscious decision or formed any opinion on both these issues nor was there any application of mind by the AO thereupon. In presence of these facts borne out on record, we do not find any justification to discard the decision reached by the ld. CIT(A) for sustaining the initiation of proceedings u/s. 147 in the instant case. For this view, support has rightly been taken from the decision of Hon’ble jurisdictional High Court in the case of Consolidated Photo And Finvest Ltd. vs. ACIT, 28 ITR 394 and of Hon’ble Gujrat High Court in the case of Praful Chunilal Patel vs. ACIT, 236 ITR 832 (Guj). The decisions relied on by the assessee are not found applicable, being based on different footing and distinguishable on the facts of the present case. Hon’ble jurisdictional High Court 4 Engineering Projects India Ltd. in the case of Consolidated Photo (supra) has observed as under: "The principle that a mere change of opinion cannot be a basis for reopening completed assessments would be applicable only to situations where the Assessing Officer has applied his mind and taken a conscious decision on a particular matter in issue. It will have no application where the order of assessment does not address itself to the aspect which is the basis for reopening of the assessment, as is the position in the present case. It is in that view inconsequential whether or not the material necessary for taking a decision was available to the Assessing Officer either generally or in the form of a reply to the questionnaire served upon the assessee. What is important is whether the Assessing Officer had based on the material available to him taken a view. If he had not done so, the proposed reopening cannot be assailed on the ground that the same is based only on a change of opinion." This decision is squarely applicable in the instant case, as the Assessing Officer has neither addressed both the issues in the original assessment order nor formed any opinion nor took any express decision thereupon. Therefore, respectfully following the decision of jurisdictional High Court, we sustain the conclusion reached by the ld. CIT(A) on this count. Accordingly, the cross-objection of the assessee deserves to fail.
5 Engineering Projects India Ltd.
10. Adverting to the merits of the addition raised by the Revenue in its appeal regarding prior period expenditure, we find no justification to discard the conclusion reached by the ld. First appellate authority after considering detailed submissions of the assessee. The observations of the ld. First appellate authority read as under: “7. On consideration of the submissions of the ld. Counsel as also the facts on record the following observations are made. (a). As per submissions of the ld. Counsel the disallowance of prior period expenses can be categorized as under : S.No. Particulars Amount (Rs.) (i) Expenses of Southern Regional office Rs.14,87,217/- (ii). Expenses of Northern Region Office Rs.5,17,079/- (iii) Prior period expenses of Rs. controlled projects 30,46,853/- (iv) Expenses pertaining to Rs. 4,41,742/- management consultancy projects (v) Corporate office expenses Rs. 6,08,144/- (vi) Western Regional office expenses Rs. 89,197/- (vii) Eastern region office expenses Rs. 50,337/- (viii) Hyderabad Regional Office expenses Rs. 43.365/- Total Rs.62,83,934/- The disallowance made by the AO is only of Rs. 62, 83,934/- is only with regard to the Prior Period Expenses claimed by the appellant. There is a Prior Period income of Rs. 19,99,877/-. The same has not been given set off by assessing officer and the same has been accepted by the assessing officer in the assessment order. If the "Prior Period Income is 6 Engineering Projects India Ltd. considered the net Prior Period Expenses comes to Rs. 42,84,059/-. On going through the details submitted by the appellant as per annexure-1 to his submission and schedule- 18 of the annual report the Prior Period Expenses of various claims and Controlled Projects is identifiable at Rs. 62,83,934/-. These prior period expenses pertains to the claims received or dispute settled during the F.Y. 2003-04 and also pertains to the controlled projects wherein the income has been estimated on the basis of percentage completion method. It is seen that expenses of Rs. 14,87,217/- pertaining to Southern Region Office and expenses of Rs. 517079/- pertaining to northern region office are not of controlled projects. However, these expenses have been included wrongly in the prior period expenditures. The expenses of Rs.14,87,217/- pertains to PIP, DIG i.e. setting of industrial growth centre at Polagam in Karaikal, Pondichery. These payments were released during the F.Y. 2003-04 which was pertaining to escalation and extra work, which are accounted for on cash basis. This claim was accepted during the year, therefore, the payment was made during the year. Similarly, the payment of Rs. 5,17,079/- pertains to the service tax, liability of the project styled as development of sector 37, Greater Noida. This liability was arisen during the year, therefore, same was recognized in F.Y. 2003- 04. Therefore, these expenses were not of earlier years but pertains to the F.Y. 2003-04 relevant to A.Y. 2004-05 and same were allowable in this year.
7 Engineering Projects India Ltd. It is also observed that amount of Rs.30,46,853/- represents Prior Period Expenses of Control Projects. It is claimed by the appellant that these expenses are admissible in view of the fact that appellant consistently and regularly showing the income as per the "percentage of completion method" while claiming the expenses, the appellant has also shown a corresponding amount (Representing percentage of profit) as income as the concept of reflecting income is embedded to the extent to which job is executed based on estimated cost. The appellant has explained that regular method of expenditure/revenue recognition is also governed by the fact that escalation and extra works not provided in the contract, insurance claim accounted for on cash basis, liquidated damages are not treated as payable/securable till final settlement, terminal benefits to employees are recognized in the year of payment, thereby resulting in inclusion of prior period expenses in the controlled projects. It is seen that broadly the reasons why prior period expenses have been booked in the controlled projects is that commercial decision relating to settlement of disputes and existing issues have been sorted out during the present financial year. Besides there are errors and omissions due to circumstances beyond the control of the concerned staff on account of non receipt of documents/approvals in respect of various sites being controlled by different regional offices. Thus settlement of these expenses have taken place during the accounting year ended 31.03.04 and therefore, these expenses have been claimed as per the accounting policy being regularly followed by the 8 Engineering Projects India Ltd. appellant company ever since its inception. Furthermore the orders passed u/s 264 in case of the assessee itself on 17.01.1985 for AYs. 1978-79, 1979- 80 & 1980-81 and on 24.12.1996 for AY 1992-93 on the issue of claim of prior period expenses have also been gone through which also support the claim of the appellant regarding the approach followed by the company in claim of prior period expense as well as credit of prior period receipts which are debited/credited in accordance with the consistent accounting policy followed by the appellant company. Be that as it may, as the method adopted by the appellant is in accordance with the regular method of accounting for revenue recognition and as in the percentage of completion method work done for the year is computed by aggregating the project cost till the end of a year and enhancing it by considering proportionate estimated profit, and as in the said calculation for A.Y. 2004-05 the cost of the projects includes the amount of Rs.30,46,853/- as prior period expenses for which corresponding income has been credited to the profit & loss account, in accordance with the matching principle of accountancy, the expenditure of Rs.30,46,853/- cannot be disallowed even though grouped under prior period expenses as the income arising out of the same has been offered for taxation during the year. Accordingly the Assessing Officer is directed to delete the disallowance to the extent of Rs.30,46,853/- which is identifiable with the details furnished by the appellant during the course of appellate proceedings.
The other expenses of corporate office, New Delhi and other regional offices which is not related to controlled projects and management consultancy project expenses or also allowable as liability to pay these expenses have arisen during the year because of the disputes or because of late receipts of claims. Therefore, such expenses are also allowable during the year, though they pertains to earlier year but liability was crystallized during the year. In view of the facts stated above the addition of Rs. 62,82,936/- made on account of prior period expenses is deleted.”
Based on the entire material available on record and the books of account of the assessee company, the ld. CIT(A) has recorded cogent reasoning to delete the impugned addition as above and the ld. DR could not be able to adduce any contrary material on record to disturb the above findings reached by the ld. CIT(A). So, we are in complete agreement with the findings reached by the ld. CIT(A) in the impugned order. Besides, the only thrust of the AO has been on the aspect that prior period expenditure is not an allowable expenditure in the mercantile system of accounting. However, the opinion of the AO is not sustainable in view of the opinion given by ld. CITs in own cases of the assessee vide orders passed u/s 264 dated 17.01.1985 for AYs. 1978-79, 1979-80 & 1980-81 and dated 24.12.1996 for AY 1992-93, holding that prior period expenses are allowable to the assessee. It is also not the case of the Revenue that there is any material 10 Engineering Projects India Ltd. change in the facts, circumstances, activities and the accounting policy adopted by the assessee during the year under consideration. Hence, the view formed by the AO is not sustainable at all. For this, we stand fortified by the decision of Hon’ble Jurisdictional High Court in the case of CIT vs. Jagatjit Industries Ltd., (2010) 194 Taxman 158 (Delhi), wherein the Hon’ble Court after considering catena of decisions, has held as under: “16. The present factual matrix has to be tested on the touchstone and anvil of the aforesaid enunciation of law. On a scrutiny of the facts that have been brought on record, it is discernible that the assessee has been claiming prior period expenses on the ground that the voucher of such expenses from the employees/branch employees were received after 31st March of the financial year. It has also come as a matter of fact that the assessee has branch offices throughout the country. The assessee has been debiting the expenditure spill over to the subsequent years and the Assessing Officer had been allowing the same. The said accounting practice has been consistently followed by the assessee and accepted by the department. If a particular accounting system has been followed and accepted and there is no acceptable reason to differ with the same, the doctrine of consistency would come into play. The said accounting system has been followed for a number of years and there is no proof that there has been any material change in the activities of the assessee as compared to the earlier years. Nothing has been brought on record to show that there has been distortion of profit or the books of account did not reflect the correct picture in the absence of any reason whatsoever, there was no warrant or justification to depart from the previous accounting 11 Engineering Projects India Ltd. system which was accepted by the department in respect of the previous years.
In view of our preceding analysis, we do not perceive any merit in this appeal and, accordingly the same stands dismissed without any order as to costs.”
In view of the explanations offered by the assessee, findings reached by the ld. CIT(A) which stand unrebutted on behalf of the Revenue and respectfully following the decision of Hon’ble jurisdictional High Court (supra), we are of the considered opinion that the ld. CIT(A) has rightly deleted the impugned addition made on account of disallowance of prior period expenditure. Not only this, it is worth consideration that the Assessing Officer in the original assessment order has taken the income of the assessee at Nil after setting off the brought forward unabsorbed losses and unabsorbed depreciation. It is also noted that the claim for the set off of the unabsorbed losses of Rs.59,72,70,719/- for A.Y. 1996-97 was utilized only to the extent of current years income of Rs.43,11,46,228/- and the balance unabsorbed loss of Rs.1,66,12,449/- (correct figure Rs.16,61,24,491/-) stood lost from being carried forward to the next year in terms of section 72(3) of the Act. Therefore, even if the alleged amount of Rs.62,83,936/- representing to prior period expenditure, for arguments’ sake, is held to be disallowable, yet it would not result in any addition/enhancement to the taxable income of the assessee, as past unabsorbed losses of assessment year 1996-97 which stood lost to the extent of Rs.1,66,12,449/- (correct figure Rs.16,61,24,491/-) was sufficient enough to absorb the impugned addition. Therefore, the addition made in the reassessment order is found not sustainable at all on this premise too.
12 Engineering Projects India Ltd. Accordingly, ground No. 1 of revenue’s appeal deserves to fail.” 8. Since the facts for the year under consideration are identical to the facts involved in the assessment years 2004-05, 2007-08 & 2008-09. So, respectfully following the aforesaid referred to order dated 26.05.2017 in ITA Nos. 2650, 2652 & 2653/Del/2012, we do not see merit in this appeal of the department.
In for the assessment year 2010- 11, the issue involved is similar having identical facts as was involved in assessment year 2009-10, therefore, our findings given in the former part of this order in respect of shall apply mutatis mutandis.
In the result, appeals of the department are dismissed. (Order Pronounced in the Court on 28/07/2017)