ITD CEMENTATION INDIA LIMITED ,MUMBAI vs. DCIT CENTRAL CIRCLE 5(1), MUMBAI

PER PRASHANT MAHARISHI, AM:

ITA No.2090/Mum/2023 is filed by the Dy. Commissioner of 01. Income Tax-5(1), Mumbai (the learned Assessing Officer) and ITA No. 1400/Mum/2023 is filed by ITD Cementation India Ltd. (assessee / appellant) being cross appeals for A.Y. 2017- 18 against the appellate order passed by the Commissioner of Income-tax (Appeals)-53, Mumbai, dated 2nd March, 2023, wherein the e-appeal filed by the assessee against the assessment order passed under Section 143(3) of the Income- tax Act, 1961 (the Act) dated 31st December, 2019, was partly allowed. Therefore, both the parties were aggrieved by the appellate order.

In ITA No. 1400/Mum/2023, assessee has raised following 02. grounds of appeal:-

“Ground 1. The Hon'ble Commissioner of Income tax (Appeals)-53 ['Hon'ble CIT(A)-53'] has erred in upholding the disallowance made by the Learned Assessing Office ['Ld. AO'] of the deduction claimed under Section 80-IA of the Act amounting to Rs. 1,69,27,38,721 in respect of the contracts entered into with non- government entities without appreciating the fact that the said contract is originally awarded by the Government to these parties.

Ground2. The Hon'ble CIT(A) - 53 has erred in confirming the action of the Ld. AO in computing the book profits under Section

“1. On the facts and circumstances of the case and in law, Ld. CIT(A) erred in deleting the addition of Rs.29,32,554/- u/s.14A of the IT Act, 1961 r.w. Rule 8D without appreciating the facts that the expenses such as administrative expenses and other expenses incurred facilitate the earning of all income including exempt income, and hence disallowance u/s.14A r.w. Rule 8D of the IT Rules.

The brief fact of the case shows that the assessee is a company 04. engaged in the business of civil, mining, marine and engineering and construction activities. It undertakes constructions of dams, projects, highways, etc. The assessee e- filed the return of income on 30th November 2017, at total income of ₹nil and book profit under Section 115JB of the Income-tax Act, 1961 (the Act) of ₹123,38,64,000/- was shown. The return was selected for scrutiny.

During assessment proceedings :- 05.

i. It was found that the assessee has made certain investments and income arising from that are not chargeable to tax and therefore, assessee was questioned about disallowance under Section 14A of the Income-tax Act, 1961 (the Act). The assessee stated that it has not earned any exempt income and has earned loss from unincorporated joint venture which is covered under Section 86 of The Act. It was further stated that the assessee has not incurred any expenditure towards earning exempt income. The learned Assessing Officer applied provisions of Rule 8D and made disallowance under Section 14A of the Act of 0.5% of annual average of opening and closing balances of investment of ₹29,32,554/-.

iii. The assessee has claimed deduction under Section 80IA of the Act of ₹209.30 crore in respect of 12 projects. The learned Assessing Officer found that out of those six projects are in the nature of working received from Government whereas other six projects are non- Government entities. He found that in respect of contract with Government, 80IA deduction of ₹40.03

Accordingly, the assessment order under Section 143(3) of the 06. Act was passed on 31st December 2019, at a total income of ₹167,50,429/- and book profit was computed by making a disallowance or addition of disallowance under Section 14A of the Act and foreseeable losses at ₹127,89,99,022/-.

Assessee aggrieved with the assessment order preferred the 07. appeal before the learned Commissioner of Income tax (Appeals). The Appellate Order states that

ii. With respect to the deduction of foreseeable losses provision, he deleted the disallowance following the order of the co-ordinate Bench in the assessee‟s own case for A.Y. 2004-05 in ITA No.2991/Mum/2011, dated 17thMay 2013.

iii. With respect to the deduction under Section 80IA of the Act, the learned CIT (A) examined the claim of the assessee, he held that the assessee has not been recognized and authorized by the Government authority to carried out the work and therefore, there is no agreement between the government and assessee. He held that strict interpretation needs to be applied and therefore, he rejected the contention of the assessee that the condition of the agreement with the Government should be relaxed and non-fulfillment of the same will not deny the assessee for deduction under Section 80IA of the Act. During the course of proceedings on 10th January 2023, the assessee was directed to submit the scope etc. Of the contract work done and to demonstrate whether the assessee is merely a sub-contractor or developer. The assessee did not furnish any such information and therefore, he held that

iv. On issue of computation of Book profit where assessee claimed deduction on account of Implementation of First adoption of Ind As holding that such claim was raised before ld. AO without filing any revised return and before him assessee could not substantiate the claim.

Aggrieved by the above appellate order, both the parties are in 08. appeal.

With respect to the first ground of appeal, the learned 010. Departmental Representative vehemently supported the order

On careful consideration of the rival contentions and on the 011. basis of orders of the co-ordinate Benches in assessee‟s own case for A.Y. 2014-15 and 2015-16, in ITA No.5869 and 5870/Mum/2018 dated 21st April 2021, the learned CIT (A) has deleted the disallowance of ₹29,32,554/- under Section 14A read with section 8D(2)(iii) of the Act. It was the reasoning of the co-ordinate bench that the amount of investment shown in the joint ventures is the share of profit of the joint venture with respect to the amount shown under the head of investment. It was held to be a current account transaction for loans given by the assessee to the joint ventures. Therefore, the co-ordinate Bench held that the provision of Section 14A of the Act fails and no disallowance can be made. The learned CIT (A) has followed the decision of the co-ordinate Bench.

Before us, Both the parties confirmed that there is no change 012. in the facts and circumstances of the case and therefore, we respectfully following the decision of the co-ordinate Bench in assessee‟s own case confirmed the order of the learned Commissioner of Income tax (Appeals). Thus, ground no.1 of the appeal is dismissed.

Ground no. 2 of the appeal is against the deletion of the 013. disallowance of provision for foreseeable losses claimed by

The learned Departmental Representative vehemently 014. submitted that though in the case of the assessee for earlier years starting from 2004-05 till 2015-16, the co-ordinate Bench has allowed the claim but for A.Y. 2016-17, the co- ordinate Bench in ITA No.642/Mum/2023 dated 31st July 2023 has held otherwise. He referred to paragraph no.6 of the order. He submits that the argument of the learned Departmental Representative shows that foreseeable losses have been computed by the assessee on the basis of expenses which were not incurred in the year under consideration but to be incurred in future years for completion of the relevant works contract project. Therefore, it was contended that expenditure is not an ascertained liability for the year under

The learned Authorized Representative vehemently submitted 015. that assessee has been allowed the deduction in all these earlier years. He submits that for A.Y. 2004-05 onwards till A.Y. 2015-16, the assessee is consistently allowed the deduction on the same set of facts. He submits that the assessee is following an Accounting standard and consistent policy of revenue recognition according to which the revenue from constriction contract is always recognized on the basis of Percentage Completion Method (PCM). If it is accepted that the contract will make a loss the estimated loss is immediately provided for in the books of account. This policy is backed by the principles of prudence in accounting. He also referred to page no.92 of the Paper Book wherein on account of 16 contracts, the foreseeable losses of ₹4.22 crores were recognized. He explained the chart and the methodology of the provision. He submitted that these losses are neither contingent and nor merely a provision but accounted for on the basis of accepted accounting practices. He referred to the AS 7 issued by the Institute of Chartered Accountants of India on construction contracts and referred to the paragraph no.22 thereof to show that when the outcome of the construction contract can be estimated reliably, then revenue and their expenses thereof should be accounted at the stage of contract activity at the time of reporting date and if there is a loss then

We have carefully considered the rival contentions and 016. perused the orders of lower authorities. We have also considered the various decisionsof coordinate benches in case of the assessee wherein identical claim of the assessee is allowed. We have also been informed that revenue is in appeal against that decision of the coordinate bench before honorable High court and issue is admitted. We have also considered the decision of coordinate bench in case of assessee itself where in it held that earlier orders of coordinate bench are incorrect and claim of the assessee is not allowable. We find that in AY 2016-17 ITAT in ITA No. 642/MUM/2023 dated 26/07/2023 has confirmed disallowance of claim of the assessee for following reason :-

i. Foreseeable loss in expenditure claimed as deduction u/s 37(1) of the Act which is yet to be incurred and not incurred during the year, therefore such expenses are not allowable in this year but allowable in the year in which it is incurred.

iii. Earlier decision of ITAT are not applicable as those deductions does not record a factual finding that whether such expenditure is ascertained liability [ Para 6.4 of the decision }

We find that issue in case of 1198/Mum/2021 in Loreal 017. was disallowance of claim of Provision for expenses. The assessee had made “Provision for outstanding expenses” to the tune of Rs.96,28,68,265/- as per the requirement of mercantile system of accounting and claimed the same as deduction. Since it had not deducted tax at source from the above said provision claimed as deduction, the assessee voluntarily disallowed 30% of the above said claim u/s 40(a)(ia) of the Act. The AO treated the above said provision as „unascertained liability‟ and accordingly took the view that the same is not allowable as deduction. Thus, it was not the case of the deductibility of foreseeable losses but deduction of normal expenses.

Foreseeable loss is a claim u/s 28 as it is not a claim of 018. expenses u/s 37 (1) of The Act. It is determined by looking at total revenue generated , less cost of expenses to be

Undisputedly Accounting standard 7 applies to the assessee, 019. in para no 21 it provides that When the outcome of a construction contract can be estimated reliably, contract revenue and contract costs associated with the construction contract should be recognized as revenue and expenses respectively by reference to the stage of completion of the contract activity at the reporting date. An expected loss on the construction contract should be recognized as an expense immediately in accordance with paragraph 35.

Further in Para no 35 and 36 it provides for „Recognition of 020. Expected Losses‟ stating that When it is probable that total contract costs will exceed total contract revenue, the expected loss should be recognised as an expense immediately.

Determination of Income as per As-7 „ Construction Contract' 023. is also judicially accepted in Panchsheel Colonizers (P.) Ltd.[2019] 111 taxmann.com 460 (SC) By Honourable Supreme court .

However now the issue of quantification arises, on perusal of 025. orders of lower authorities, we do not find that any of the authorities have examined quantification of the claim of the assessee. Assessee has submitted a chart before us where in the loss is stated to be quantified. However, we do not find any back up documents produced before us, so that we can quantify the same. In absence of such complete information available with us, we restore the issue before the ld. AO to grant deduction on the above issue by verifying the claim of the assessee with supporting documents. Assessee is directed to quantify such claim and substantiate before the ld. AO , he may verify the same and allow the claim in accordance with the law.

Accordingly Ground no 2 of the appeal is dismissed and for 026. verification of quantum restored to the file of The Ld. AO.

In the result, appeal of the ld. AO is dismissed subject to 027. quantification of loss in Ground 2 .

" The Commissioner of income tax (appeals) – 53 has erred in upholding the disallowance made by the learned assessing officer of the deduction claimed under section 80 IA of the act amounting to ₹ 1,230,024,019/– of contacts and 13 to 20 following non-government entities without appreciating the fact that the said contract was originally awarded by the government to these parties:-

serial project name of the client Amount (Rs) number number

1 35515DM Bharat Mumbai 99,00,01, 47,263 container terminal private limited

2 33714DM Nhava Sheva India 23,98,76,756 Gateway terminal private limited

Total 123 24,0219/-

assessee has filed additional evidence with a request to admit 029. the sameby letter dated 16/8/2023 wherein it is stated that the learned CIT – A has order forwarded details as per order dated 10 January 2023 not furnish copies of the agreement which were lying in the court on and same were taking longer time

The learned authorized representative submitted that identical 030. issue arose in the case of the assessee for assessment year 2018 – 19 wherein the coordinate bench admitted those evidence and referred the matter back to the file of the learned CIT – A to consider them. Therefore, these evidence may be admitted and matter may be restored back to the file of the learned CIT – A accordingly.

The learned departmental representative vehemently objected 031. to the same and submitted that theseevidence, could have been furnished before the learned CIT – A. Therefore, now those evidences should not be admitted at all.

We have carefully considered the rival contentions and 032. perused the application for admission of additional evidence. We also find that identical issue arose in case of assessee in ITA No 1401/M/ 2023 for Ay 2018-19 decided on 22-02- 2024 where identical application for admission of additional evidences were made and coordinate bench admitted the same are restored issue bask to the file of the ld. CIT (A) directing to just examine the additional evidences and decide the issue, if such additional evidences makes any difference to his judgement, after giving an opportunity of hearing to the assessee. It has been held as under :-

“09. On this ground, assessee also made a prayer for admission of the additional evidence under Rule 29 of

Both the parties agreed that issue in this appeal is similar to 034. AY 2018-19, their arguments and submission are also the same, and additional evidence are also identical, Therefore, we follow this order of ITAT for AY 2018-19, with similar direction restore it back to the dl CIT (A). Thus, ground no 1 of the appeal is allowed accordingly.

The learned departmental representative submitted that the 037. claim was not made by the assessee before the learned assessing officer by filing a revised return and further before the learned CIT – A assessee could not substantiate the same and therefore the disallowance is made.Therefore,disallowance is proper.

We have carefully considered the rival contention and perused 038. the orders of the lower authorities. It is an admitted fact that the assessee originally did not claim either of the above deductions from the book profit computation under section 115JB of the act. However,before the ld. assessing officer assessee made this claim by way of a letter, the learned

In the result, an appeal filed by the assessee is allowed for 039. statistical purposes.

Order pronounced in the open court on 16.05.2024.

Sd/- Sd/- (AMIT SHUKLA) (PRASHANT MAHARISHI) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) Mumbai, Dated: 16.05.2024 Sudip Sarkar, Sr.PS/ Dragon Copy of the Order forwarded to: 1. The Appellant 2. The Respondent 3. CIT 4. DR, ITAT, Mumbai 5. Guard file. BY ORDER, True Copy//

Sr. Private Secretary/ Asst. Registrar Income Tax Appellate Tribunal, Mumbai