BGR ENERGY SYSTEMS LIMITED,CHENNAI vs. DCIT, CHENNAI

आदेश / O R D E R

PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER:

Assessee has taken altogether six grounds of which grounds No.1, 2 & 6 are general in nature needing no specific adjudication.

Vide its ground No.3, grievance raised by the assessee is 3. that disallowance of provision for contractual obligations was confirmed by the ld. Commissioner of Income Tax (Appeals).

Ld. Counsel for the assessee submitted that similar issue had 4. come up before Hyderabad Bench of this Tribunal in assessee’s own case in dated 05.09.2013 for assessment year 2009-2010 and it was decided in favour of the assessee. According to her, assessee had to pay liquidated damages for not completing the & 954/17 :- 3 -: & C.O.65/2017 work undertaken by it, in time. Contention of the ld. Authorised Representative was that there were specific clauses in the contracts entered by the assessee with its clients, which provided for liquidated damages.

According to him, at the best the assessee would be liable for damages only for the delay due to its own fault. Ld. Departmental Representative, referring to the table given in para 11 of the order of the ld. Commissioner of Income Tax (Appeals), submitted that against similar provisions made by the assessee in the earlier years, actual payments effected by it were negligible. Thus, according to him, provision created by the assessee was unscientific. As per the ld. Departmental Representative, decision of the Hyderabad Tribunal in assessee’s own case for assessment year 2009-2010, relied on by the assessee, was not applicable on facts here. & 954/17 :- 4 -: & C.O.65/2017

6. We have considered the rival contentions and perused the orders of the authorities below. Assessee had debited a sum of �53,99,42,000/- as provision for contractual obligation in its Profit and Loss account. During the course of hearing, ld. Assessing Officer had specifically asked the assessee to furnish agreements entered by it with its client and the details of the projects on which such provision was worked out. Ld. Assessing Officer also required the assessee to furnish the reasons for the delay in execution of the concerned projects. Assessee had failed to furnish the details. Assessee had simply relied on the judgment of Hon’ble Apex Court in the case of M/s.Bharat Earth Movers vs. CIT 245 ITR 431. Ld. Assessing Officer had disallowed the claim for want of details, inter-alia noting that Hon’ble Apex Court judgment relied on by the assessee was related to a provision for leave encashment and not on any provision created for possible liability that might arise on account of delay. When the matter reached the ld. CIT(A), assessee had relied on the decision of the Hyderabad Bench of the Tribunal in assessee’s own case for assessment year 2009-2010. Ld. Commissioner of Income Tax (Appeals), had after considering such decision of the Tribunal, sustained the disallowance with the following observations:- ‘’12. The facts are examined. It is reiterated here that the assessee has declared a total income of Rs. 14 crores for the year and has claimed a provision & 954/17 :- 5 -: & C.O.65/2017

for contractual obligation of Rs.54 crores leading towards it. The accumulated amount of retention monies not offered to tax as on 31.03.2010 was itself an amount of Rs. 283.86 crores. The assessee has steadfastly maintained that the provision for contractual obligation is required in view of the specific contract provisions enabling the contractee to levy damages towards delay in completion. The allowability of this provision is analysed as under.

1.Erection and Procurement Contracts (EPC) of the nature that the assessee has entered into would invariably have clauses towards penalty for delay in completion. This is to ensure the full commitment of the contractor towards scheduled completion of the contract. The contracts are delayed on account of reasons beyond the control of either of the parties or force majeure reasons. The delay can also be on account of contractee's inability and for reasons of delay by other vendors or support staff-professionals. The contractor would invariably point out the delay caused on account of reasons other than his own omissions or commissions. To this extent, the penalties for delay in completion are often not levied as a rule. 2.The assessee has also recognized the same. In fact, the assessee has not claimed any provision for contractual obligation upto A.Y.2009-10 even though the assessee was 8 ill business for more than a decade prior to that. Similarly, the assessee has opted not to claim any provision towards contractual obligation for A.Y.2014-15 & 2015-16. The irregular practice of claiming provision for contractual obligation is proof enough of its arbitrary and unnecessary nature. 3.Even though the assessee has created substantial amounts of provision towards contractual obligation, the provision has not been utilised for making any payments of penalties towards & 954/17 :- 6 -: & C.O.65/2017 violation in contractual obligation. Having recognized this, the assessee stopped claiming provision for A.Y.2014-15 & 2015-16 and has, in fact, part- reversed the accumulated provision under this account. 4.The assessee has not offered the retention money of Rs.283.86 crores up to 31.3.2010. Any short receipt of contractual payment is easily offset against the retention monies not offered to tax. To this extent, assessee is fully protected from any exigency of having to pay any penalty towards delay in completion. 5.The assessee has not given any basis for computing the provision for contractual obligation at Rs.53.99 crores. The method of arriving at this figure and justification for why the provision was at Rs.53.99 crores and not at Rs.10 crores or Rs.100 crores has not been given by the assessee. To this extent, the provision created is unscientific.

Facts and circumstances as above had not been brought out by the AO in his orders for the A.Y.07- 08 to 09-10. The Ld.CIT(A) and the Hon'ble ITAT had no occasion to verify these facts. With these fact findings, the order of the Hon'ble ITAT for earlier years is held as not applicable on facts. On account of reasons as above, the provision for contractual obligation of Rs.53,99,42,000 is held as irregular, unscientific and unwarranted. The provision is upheld to be disallowed’’.

At this juncture, it will be apposite to have a look at what was held by the Tribunal in assessee’s own case for assessment year 2009-2010.

This is reproduced hereunder:-

‘’42 As for the disallowance of provision for contractual obligation, addition of Rs.16,50,25,000, being the issue involved in ground No.8 of this appeal, the Assessing Officer added the same observing that this expenditure debited to the Profit & Loss Account cannot be allowed & 954/17 :- 7 -: & C.O.65/2017 as deduction during the year under appeal, as the assessee has not actually incurred the expenditure during the year under consideration, and it represents only provision for future liability.

& 954/17 :- 8 -: & C.O.65/2017

What we discern from the above order of the Tribunal is that in the said year, assessee could demonstrate the delay in completing two projects namely one for TNEB at Valathur and another for MALCO, at Mettur. Assessee could show that there was a twenty four weeks delay in execution of TNEB project and twenty two weeks delay in execution of MALCO project. Ld. Commissioner of Income Tax (Appeals) had in the said assessment year accepted the claim of the assessee, & 954/17 :- 9 -: & C.O.65/2017 considering completion clause in the relevant agreement with these two parties. However, for the impugned assessment year, there is nothing on record to show how the assessee had calculated the liquidated damages of �53,99,42,000/- debited by it in its Profit and Loss account. That apart, provision made by the assessee under the very same head for various years, reflects scant payments against such provisions. Details of the provisions made by the assessee and payments made against such provisions for various years read as under:-

A.Y Opening Add: Less: Less: Closing Balance Provision Provision Provision Balance made during utilized reversed the year 2008-09 -- -- -- -- -- 2009-10 -- 1,650 -- -- 1,650 2010-11 1,650 5,400 -- -- 7,050 2011-12 7,050 8,597 -- -- 15,647 2012-13 15,647 3,035 -- -- 18,682 2013-14 18,682 1,405 -- -11 20,076 2014-15 20,076 -- -1,927 -- 18,149 2015-16 18,149 -- -1,565 -2,352 14,232 2016-17 14,232 7,150 -2,129 -5,048 14,205 In our opinion it is apodictic that actual payments against the provisions made by the assessee for earlier year were negligible upto & 954/17 :- 10 -: & C.O.65/2017 assessment year 2013-14. Ld. Counsel for the assessee was unable to furnish any details regarding the projects so far completed by the assessee with delay and the actual amount of liquidated damages paid for such overrun. While there can be no quarrel on the claim of the assessee that actual liquidated damages payable on account of delay attributable to it, is a crystallized liability, in our opinion requisite details for supporting the claim made by the assessee is not on record. Not only the assessee has to show that there was indeed a delay, it is also required to show what part of such delay was attributable to its own fault and what claim was made by the client as

per contractual provision, for such damages. In the facts and circumstances of the case, we are of the opinion that the issue requires a fresh look by the ld. Assessing Officer. We therefore set aside the orders of the lower authorities and remit the issue back to the file of the ld. Assessing Officer for consideration afresh in accordance with law. Assessee shall give all required details before the ld. Assessing Officer. Ground 3 is allowed for statistical purposes.

Vide its ground No.4, grievance raised by the assessee is on 7. disallowance of �3,61,76,758/- being provision for warranty which was confirmed by the ld. Commissioner of Income Tax (Appeals). & 954/17 :- 11 -: & C.O.65/2017

Ld. Counsel for the assessee fairly admitted that similar issue 8. was decided against the assessee, by the Hyderabad Bench of the Tribunal in assessee’s own case for assessment years 2007-08, 2008- 09 & 2009-2010 in & 1513/Hyd/2011, and ITA No.985/Hyd/2012, dated 05.09.2013. According to her, assessee had filed an appeal before the Hon’ble Andhra Pradesh High Court against the above decision and the matter was pending.

..Per contra, ld. Departmental Representative strongly 9. supported the orders of the authorities below.

‘’24. The next issue in dispute in this appeal relates to disallowance made by the Assessing Officer with regard to warranty provisions of Rs.98,24,000, which has been deleted by the CIT(A). 25.Brief facts of the case in relation to this ground are that the assessee debited an amount of Rs.98,24,000 under the head ‘selling expenses/warranty expenses. This claim of the assessee has been disallowed by the Assessing Officer on the ground that it is an unascertained liability, since it is contingent in nature and as such not allowable under S.37 of the Act. 26.On appeal before the CIT(A), it was the contention of the assessee that it has been providing & 954/17 :- 12 -: & C.O.65/2017 for warranty in respect of its contracts. It has been recognizing contract revenue in accordance with Accounting Standard 7 dealing with construction contracts. In accordance with this Standard, assessee has been providing for a possible liability in respect of the contract which may or may not crystallize at a future date. Finding merit in the contentions of the assessee and taking note of the case-law relied upon by the assessee before him, more importantly the decision of the Bombay High Court in the case of CIT V/s . Hinditron Services Pvt. Ltd. (321 ITR 263), wherein it has been held that where the assessee was following mercantile system of accounting, estimate of accrued liability to be discharged at a future date is an allowable expenditure and thus provision for estimated costs of rendering warranty services debited to P&L Account is not a contingent liability and the said expenditure is allowable under S.37 of the Act, accepted the contentions of the assessee on this issue, and deleted the addition made by the Assessing Officer. 27.Aggrieved by the relief granted by the CIT(A) on this aspect, Revenue is in appeal before us. 28.The learned Departmental Representative strongly relying on the order of the Assessing Officer submitted that the CIT(A) was not justified in granting relief to the assessee. Learned counsel for the assessee, on the other hand, strongly supported the order of the CIT(A). 29.We heard both sides and perused the material available on record. We are of the considered opinion that this item of disallowance, viz. warranty provision, is merely a provision and not an expenditure already incurred and laid out for the purpose of business. Unless the liability for such expenditure crystalises, assessee is not entitled to claim for deduction in respect of such expenditure. The CIT(A) has not given any valid reason for substantiating his finding, while allowing the claim of the assessee. We accordingly, set aside the impugned order of the CIT(A), and restore the disallowance made by the Assessing Officer in this behalf. Revenue’s ground on this issue is allowed’’.

& 954/17 :- 13 -: & C.O.65/2017 What we find is that for assessment year 2009-10 though the claim was allowed by the ld. Commissioner of Income Tax (Appeals), the Tribunal had reversed such finding of the ld. Commissioner of Income Tax (Appeals) and upheld the disallowance for warranty provisions.

Nothing was shown before us to take a different view for the impugned assessment year. Ground No.4 of the assessee stands dismissed.

Ld. Counsel for the assessee submitted that the ld. 12.

Commissioner of Income Tax (Appeals) had made this disallowance, though ld. Assessing Officer had not invoked Sec. 14A of the Act.

According to her, assessee had made a voluntary disallowance of �2,38,999/- as expenditure relatable to the exempt income. As per the ld. Authorised Representative, assessee claimed exempt income of �2,76,835/- only and disallowance u/s.14A of the Act had to be restricted to such amount. Reliance was placed on the judgment of Hon’ble Delhi High Court in the case of Joint Investment P. Ltd vs. CIT 372 ITR 694. & 954/17 :- 14 -: & C.O.65/2017

Per contra, ld. Departmental Representative submitted that 13.

irrespective of the quantum of the exempt income claimed by the assessee disallowance could be made u/s.14A of the Act. Reliance was placed in Circular No.5/2014, dated 11.02.2014.

We have considered the rival contentions and perused the 14. orders of the authorities below. Hon’ble Delhi High Court in the case of Joint Investment P. Ltd (supra) held as under at paras 4 to 9 of its judgment.

‘’4. The Income-tax Appellate Tribunal upheld the orders of the authorities below and held, inter alia, that (page 38 of 33 ITR (Trib)) : "Now, we come to various other arguments by the learned counsel wherein he has disputed the quantum of the disallowance worked out by the Assessing Officer. The assessee's counsel has contended that the various expenses, viz., filing fees, house tax, conveyance, insur ance of building and cars, electricity, building repair, printing and sta tionery, telephone expenses, audit fees, office rent, vehicles expenses, depreciation, etc., were not incurred for earning of exempt income. From the working of the disallowance by the Assessing Officer which is already reproduced earlier in our order, it would be evident that all those expenses have not been considered by the Assessing Officer. In Part (i), the Assessing Officer has considered Rs. 2,97,440 which the assessee himself has admitted as a direct expenditure incurred for earning the exempt income, viz., securities transaction tax, depository charges and custodian fees. In Part (ii), only the interest has & 954/17 :- 15 -: & C.O.65/2017 been considered and in Part (iii) half per cent. of the average investment has been considered. Therefore, these expenses which the assessee claimed to have been not incurred for earning of exempt income have not been considered by the Assessing Officer at all. The assessee has also disputed the correctness of the disallowance of interest at Rs. 34,08,582. However, we find that the disallowance as per Part (iii) itself is Rs. 65,36,743. The assessee's counsel has not disputed the value of investment as taken by the Assessing Officer for the purpose of computing the disallowance at half per cent. as provided by rule 8D(2)(iii). The disallowance at half per cent. of the investment is Rs. 65,36,743 while finally, the Assessing Officer restricted the disallowance to Rs. 52,56,197. Therefore, whether the working of the disallowance of interest as per rule 8D(2)(ii) is correct or not is of aca demic interest and, therefore, we do not wish to go into the details of the assessee's arguments with regard to the correctness of the dis allowance of interest. At the cost of repetition, we reiterate that the disallowance worked out by the Assessing Officer which was the aggregate of three components as prescribed under rule 8D(2) was Rs. 99,45,325. But, finally, the Assessing Officer restricted the dis allowance to Rs. 52,56,197. Therefore, in our opinion, no relief is due to the assessee from the disallowance made by the Assessing Officer at Rs. 52,56,197. The same is sustained and the assessee's appeal is dismissed."

5. Learned counsel urges that the mandate of section 14A (especially the section 14A(2)) escaped the attention of the Income-tax Appellate Tribunal as well as that of the Assessing Officer and the Commissioner of Income- tax (Appeals). It was urged that in the present case since Rs. 2,97,440 was volunteered as disallowance, the Assessing Officer was under a duty to first consider the merits of that claim and, thereafter, for valid grounds, if any, reject the contention before proceeding under section 14A(3) read with rule 8D(2). Learned counsel highlighted that the sum volunteered, i.e., & 954/17 :- 16 -: & C.O.65/2017 Rs. 2,97,440 was in addition to ad hoc disallowance which was offered and accepted without scrutiny by the Assessing Officer.

8. The court in Taikisha Engineering (supra) pertinently observed (page 347) : "Thus, section 14A(2) of the Act and rule 8D(1) in unison and affirmatively record that the computation or disallowance made by the assessee or claim that no expenditure was incurred to earn exempt income must be examined with reference to the accounts, and only and when the explanation/claim of the assessee is not satisfactory, computation under sub-rule (2) to rule 8D of the Rules is to be made. We need not, therefore, go on to sub-rule (2) to rule 8D of the Rules until and unless the Assessing Officer has first recorded the satisfaction, which is mandated by sub-section (2) of section 14A of the Act and sub-rule (1) of rule 8D of the Rules."

& 954/17 :- 17 -: & C.O.65/2017

9. In the present case, the Assessing Officer has not firstly disclosed why the appellant-assessee's claim for attributing Rs. 2,97,440 as a disallowance under section 14A had to be rejected. Taikisha says that the jurisdiction to proceed further and determine amounts is derived after examination of the accounts and rejection if any of the assessee's claim or explanation. The second aspect is there appears to have been no scrutiny of the accounts by the Assessing Officer—an aspect which is completely unnoticed by the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal. The third and in the opinion of this court, important anomaly which we cannot be unmindful is that whereas the entire tax exempt income is Rs. 48,90,000, the disallowance ultimately directed works out to nearly 110 per cent. of that sum, i.e., Rs. 52,56,197. By no stretch of imagination can section 14A or rule 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in section 14A and is only to the extent of disallowing expenditure "incurred by the assessee in relation to the tax exempt income". This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case’’.

Hon’ble Jurisdictional High Court, also considered an almost similar issue in the case of Regindton (India) Ltd vs. JCIT (2016) 97 CCH

‘’14. Nothing much turns on the use of the word includable� and the phrase under the act� in s. 14A and we are not persuaded to accept the emphasis laid or the interpretation of the same by the Revenue. An assessment in terms of the & 954/17 :- 18 -: & C.O.65/2017

Income tax Act is specific to an assessment year and the related previous year. S.4 of the Act, which imposes the charge to tax reads thus:

Charge of income-tax (1) Where any Central Act enacts that income �tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with and subject to the provisions (including provisions for the levy of additional income-tax) of, this Act in respect of the total income of the previous year of every person:

Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income tax shall be charged accordingly. Thus, where the statute indented that income shall be recognized for taxation in respect of any previous other than that immediately preceding the relevant assessment year, the provision shall expressly state so. The provisions of s.10 in Chapter III of the Act dealing with Incomes not included in total income� commences with the phrase. In computing the total income of a previous year, any income falling within any of the following clauses shall not be included .....'

15. The exemption extended to dividend income would relate only to the previous year when the income was earned and none other and consequently the expenditure incurred in connection therewith should also be dealt with in the same previous year. Thus, by application of the matching concept, in a year where there is no exempt income, there cannot be a disallowance of expenditure in relation to such assumed income. (Madras Industrial Investment Corporation Ltd vs. CIT (225 ITR 802)). The language of s.14A (1) should be read in that context and such that it advances the scheme of the Act rather than distort it.

& 954/17 :- 19 -: & C.O.65/2017

Accordingly, we are of the opinion that disallowance u/s.14A of the Act cannot exceed the exempt income claimed by the assessee. We restrict the disallowance to �2,76,835/-. Ground No.5 of the assessee is partly allowed.

Vide its ground No.2, Revenue is aggrieved on the deletion 16. of an addition of �298,67,10,877/- made by the ld. Assessing Officer an retention money.

‘’9. We have considered the rival submissions and perused the orders of the lower authorities and other material on record. It is the year of assessability of the retention money that is the issue that arises for consideration. It is the case of the assessee that such retention money is assessable in the year of its actual receipt irrespective of the entries in the books of account, whereas according to the Revenue it is the year in which the retention money is accounted for in the books of account, in which it should be brought to tax, irrespective of its actual receipt in that year since the assessee has been following mercantile system of & 954/17 :- 21 -: & C.O.65/2017 accounting and TDS in relation to such retention money has also been deducted by the contractees. It is the case of the assessee that the retention money has been offered to tax in the relevant year in which the same has actually been received by it. We find that this issue has arisen for consideration before the Pune Bench of the Tribunal in the case of Dy. CIT V/s. Deccan Mechanical & Chemical Industrial (P)Ltd., (supra), wherein the Tribunal after detailed consideration of the case -law relied upon by the parties before it, has decided the matter in the following manner-

“6. On combined reading of these orders, the following propositions of law emerge regarding mercantile method of accounting:

(i) the accrual of income takes place when right to receive income arises [Paragraphs 5.1, 5.2, and 5.3],

(ii)in a contract, under mercantile method of accounting, the accrual of income takes place when the assessee gets unconditional legal right to receive money under the agreement [Paragraphs 5.4, 5.7, 5.8 and 5.11],

(iii) receipt of money by itself does not le ad to accrual of income, especially when the assessee has not rendered corresponding service [Paragraph 5.10],

(iv) the principle of matching of income and corresponding expenditure may be an accountant's view, but under the law the expenditure and income can be treated differently, depending upon whether one or both had accrued or not on the basis of method of accounting followed by the assessee. [Paragraph 5.5]; and,

(v) receipt of retention money by furnishing unconditional bank guarantee may or may not amount the accrual of income which will have to be considered on the basis of terms and conditions of the contract. However, furnishing of unconditional bank guarantee is attendant with significant risks, and where the agreement provides for acceptance test & 954/17 :- 22 -: & C.O.65/2017 for satisfactory performance in lieu of which certain money was retained by the contractee, that amount will accrue as income only on satisfactory performance of the test and acceptance by the contractee [Paragraph 5.9].

7.1 We may now consider the facts of the instant case in the light of various case laws and their ratios discussed in the preceding paragraphs. Various terms and conditions of the contract had been narrated by the Assessing Officer in his order from page 6 onward. The assessee agreed to deliver the AHP and all other accessories in all respects for a contract price of Rs. 12,59,06,940. As per the clause 24, all payments during the currency of the contract will be "on account payments" only and the final payment shall be made on completion of guarantee period or earlier fulfilment by the assessee of all his liabilities under the contract. Clause 32 of the contract provides that property in all materials, equipment and Ors.supplies shall vest in and become the property of the contractee from the date of receipt of the material. Clause 13 provides that plant shall be considered as commission after successful completion of the performance test to be carried out for 24 hours. If the assessee fails to establish the guaranteed power consumption envisaged, it will undertake to rectify the plant within a period of three months. However, if that is not done, the contractee will have the right to rectify the defect on its own and the cost of rectification will be collected from the contractor. The payments were to be made as under:

(i) 15 per cent of the price to be given as advance on signing the contract,

(ii) further 75 per cent to be paid on production of invoice and satisfactory evidence of dispatch by the assessee,

(iii) further 5 per cent of the price to be paid against the taking over of the plant by the contractee, and (iv) final 5 per cent of the price is to be paid prior to completion of guarantee period but after satisfactory completion of all contractual works including performance test and final acceptance.

& 954/17 :- 23 -: & C.O.65/2017

7.2 The case of the learned Assessing Officer was that when on supply of material, payment upto 90 per cent of the supplies were made by the contractee, it meant that the full payment was quantified and accepted by the contractee. This is so because without quantification of the full amount, 90 per cent thereof cannot be worked out and paid. Therefore, when the whole price was quantified, the amount receivable was also quantified and, therefore, whole of the amount accrued as Income to the assessee. The retention of 10 per cent of the money was in respect of material already* supplied and accepted, and the retention was merely for safeguarding the interest of the contractee. The acceptance of the full liability by the contractee amounts to accrual of income in the hands of the assessee. This view was not upheld by the learned CIT(A).

7.3 We have already considered various case laws which point out that if receipt of retention money is conditional upon performance of a part of contract, this money will accrue as income only when that part of the contract has also been performed. We have also seen that the expenditure incurred in supply of the whole material was for the purpose of business and it constituted a deductible expenditure. Its deduction does not depend upon the corresponding receipt. In other words, the principle of matching of expenditure with receipt does not represent correct legal approach, though it may be an accountant's view. However, that is also not the case here, as accounting standard No. 9, issued by ICAI, lays down that if receipt of retention money is hedged upon future contingencies, it should not be recognized as income. Thus, the expenditure and the corresponding receipt may have to be treated differently, depending upon the terms of the contract. The contract provides that property in goods shall pass to the contractee as soon as those are supplied to it. Therefore, on supply of goods, the expenditure has been incurred because the assessee is no more owner of the goods. Insofar as, retention money is concerned, it will accrue as income in two equal instalments on,

(i) taking over the plant by the contactee, and (it) completion of performance test and its acceptance by & 954/17 :- 24 -: & C.O.65/2017 the contractee. The contract provides for rectification of the defaults by the assessee within three months and in case of his failure to do so by the contractee on its own at the cost of the assessee. Therefore, there are significant risks associated with the accrual of retention money as income. Insofar as retention money is concerned, furnishing of bank guarantee by the assessee to the contractee and receipt of retention money in lieu thereof does not obliterate the risks associated with this money. Therefore, even if the assessee is entitled to receive the money by furnishing unconditional bank guarantee, the risks do not abate. There is a significant risk that the money may be recovered from the bank guarantee without reference to the assessee in case performance test is not performed satisfactorily. This risk is not covered by making any provision in books for the warranty as stated by the Learned Counsel.

7.4 It was also the case of the learned DR that the assessee had changed its method of accounting in respect of accounting of retention money. The case of the learned Counsel was that the assessee has been consistently following mercantile method of accounting and there was no change in this regard. Earlier, the assessee had been showing retention money as income on the mistaken belief that the income had accrued to it. However, if correct principles of law are applied, it will be seen that income will accrue only when performance test is satisfactorily undertaken and accepted by the contractee. As pointed out earlier, he has also stated that, (i) no provision is made for liability in case performance test fails and some expenditure may have to be incurred in the warranty period, and (ii) retention money has been offered for taxation the moment the performance test has been undertaken successfully and accepted by the contractee. Therefore, his case was that he has been following mercantile method of accounting, his past mistaken belief of law cannot be held out against him in this year, and it also cannot be concluded that he has changed method of accounting when he followed the correct legal principles regarding accrual of income while filing the return of income for this year. Looking to the aforesaid discussion we are of the view that there was no change in method of & 954/17 :- 25 -: & C.O.65/2017 accounting, which continued to be mercantile method of accounting. We are also of the view that the retention money does not accrue as income merely on raising the bill. It accrues as income as per paragraph 7.3 (supra) of this order. The Assessing Officer and the CIT(A) have dealt with the retention money as one item. But, in fact, it accrues as income on happening of two distinct events. The Assessing Officer may examine whether any part of retention money accrues as income in this year on aforesaid basis. If he is of the view that some portion accrues as income this year, he may hear the assessee and tax that part portion accordingly. Similarly, this issue also came up for consideration before the Mumbai bench of the Tribunal in the case of Corrosion Control Services (Bombay) P.Ltd., (supra), wherein it has been held as follows “7. The learned Counsel for the assessee drew our attention to the case of Simplex Concrete Piles (India) (P.) Ltd (supra).In that case the assessee carried on business of concrete piles on contract basis and was crediting 100 per cent of job value upto and including the assessment year 1964-65. But for the assessment year 1965-66, it credited only 90 per cent; deducting the retention money @ 10 per cent of job value which resulted in reduction of income. The Assessing Officer added the retention money, but, on appeal, the AAC held that retention money did not accrue or arise in the relevant period in which the job was execute d, but on a later date. The Tribunal remanded the matter back for re-examination in terms of the contract. On a reference to the Hon'ble Calcutta High Court, it was observed as under :-

"that having regard to the terms and conditions of the contract, it could not be held that either 10 per cent or 5 per cent, as the case may be, being retention money, became legally due to the assessee on the completion of the work. Only after the assessee fulfilled the obligations under the contract, the retention money would be released and the assessee would acquire the right to receipt such retention money. Therefore, on the date when the bills were submitted, having regard to the nature of the contract, no enforceable & 954/17 :- 26 -: & C.O.65/2017 liability accrued or arose and, accordingly, it could not be said that the assessee had any right to receive the entire amount on the completion of the work or on the submission of bills. The assessee had no right to claim any part of the retention money till the verification of satisfactory execution of the contract. Therefore, the Tribunal was right in holding that the retention money in respect of the jobs completed by the assessee during the relevant previous year should not be taken into account in computing the profits of the assessee for the assessment year in question."

In the case of Associated Cables (P.) Ltd. v. Dy. CIT [1994] 48 ITD 141 (Bom.) (TM), the learned Member of the Tribunal as per the headnotes, held as under :

"Section 28(i) of the Income-tax Act, 1961 -Business deduction/loss -Allowability of -Assessment year 1990-91 -Assessee-company was engaged in manufacture of cables as per specifications of customers -According to contract, while 90 per cent of cost of cables was paid up to time of presentation of despatch documents. 10 per cent was paid on receipt and acceptance of goods subject to bank guarantee for that 10 per cent, stipulating that in case of any shortcoming in workmanship, etc., purchases shall, without reference to assessee, recover amount from bank -Assessee-company claimed that this 10 per cent, being retention money, had to be excluded in computing its total income and ought to be accounted for after expiry of guarantee period -Whether keeping in mind principle of income recognition which is basis of mercantile method of accounting, as long as performance guarantee remained and was enforceable without notice to assessee, income from retention money could not be recognised and consequently assessee's claim had to be allowed - Held, yes."

7.1 It can be taken to be well -settled principle that under mercantile system of accounting, it has to be seen whether right to receive amount has accrued to the assessee or not. This right must emerge from the contract between the parties. From the facts set out hereinbefore, we find that the entire amount of bill did not become due immediately upon its submission, but 5 per cnt and 10 & 954/17 :- 27 -: & C.O.65/2017

per cent of the bill amounts, as the case may be, were withheld as security. Having regard to the terms of contract, there can be no dispute that the assessee had no right to receive the retention money which was to become due only on completion of the entire contract and furnishing of requisite certificate. The payment of retention money was deferred as per the contract in spite of job carried and bills submitted. The payment of retention money was contingent on satisfactory completion of work and its certification. Till then there was no admissibility of the liability and no right to receive any part of the retention money accrued to the assessee.

The work was completed in the next year and then only income accrued to the assessee. The retention money was liable to be taxed in the next year.

"The main contention of the learned Solicitor-General is that the assessee failed to debit the liability in its books of account and, therefore, it was debarred from claiming the same as deduction either under section 10(1) or under section & 954/17 :- 28 -: & C.O.65/2017

10(2)(xv) of the Act. We are wholly unable to appreciate the suggestion that if an assessee under some misapprehension or mistake fails to make an entry in the books of account and although, under the law, a deduction must be allowed by the Income-tax Officer, the assessee will lose the right of claiming or will be debarred from being allowed that deduction. Whether the assessee is entitled to a particular deduction or not will depend on the provisions of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter.

10.In the absence of any decision to the contrary brought to our notice, following the consistent view taken by the Tribunal in the above matters, we hold that the retention money has to be brought to tax in the year in which the same has actually been received by the assessee from the contractees. Consequently, we find no infirmity in the view taken by the CIT(A) in relation to the issue relating to the year of assessability of the retention money. However, the claim of the assessee of having offered the retention money to tax in the year in which the same has actually been received, is required to be & 954/17 :- 29 -: & C.O.65/2017 ascertained, before the addition made in the year under appeal is deleted. We accordingly modify the impugned order of the CIT(A), and set aside the matter to the file of the Assessing Officer, with a direction to verify the correctness of the claim of the assessee that the retention monies have in fact been offered to tax in the years in which the same have actually been received. For this limited purpose, we set aside the impugned order of the CIT(A) and restore the matter to the file of the Assessing Officer for fresh examination of the matter in accordance with law. He shall accordingly redetermine the amount of addition, if any warranted, after due verification of the claim of the assessee, on case to case basis, with regard to it having already offered the retention moneys in respect of each contract, to tax in the respective year of its actual receipt. The Assessing Officer is directed to pass appropriate orders in accordance with law and after giving reasonable opportunity of hearing to the assessee to substantiate its claim’’.

What we find is that the Tribunal had set aside the issue to the file of the ld. Assessing Officer for verifying the correctness of the claim of the assessee that retention money was offered as income in the years in which these were received. Accordingly, for the impugned assessment year also, we give similar directions as given by the Tribunal at paras 9 & 10 of the order dated 05.09.2013 in ITA No.1244/Hyd/2011. GroundNo.2 of the Revenue is partly allowed for statistical purpose.

Ld. Departmental Representative submitted that 21. depreciation on technical knowhow provided by M/s. TM.E-S.P.A Termomeccanica and M/s. Nooter/ Eriksen Inc, USA was allowed by ld. Commissioner of Income Tax (Appeals). According to him, depreciation could not be given on such amount.

Per contra, ld. Authorised Representative submitted that the 22.

issue regarding allowability of depreciation on technical know-how had come up before the Hyderabad Bench of the Tribunal in assessee’s own case for assessment years 2007-08, 2008-09 and 2009-10 in & 1513/Hyd/2011 and ITA No.985/Hyd/2012. According to him, the issue stood decided in favour of the assessee by Tribunal through its order dated 05.09.2013.

‘’17.We have considered the rival submissions and perused the orders of the lower authorities. It is evident from the material on record that there was transfer of technical know-how in favour of the assessee company, whereby the assessee company the came the owner of such technical know-how, which was used by it in its business. In the facts and circumstances of the case, we agree with the CIT(A) that the two ingredients for grant of depreciation, viz. ownership and user of the asset, are clearly fulfilled, and the assessee is entitled for depreciation on the technical know. We accordingly find no infirmity in the impugned order of the CIT(A), which is accordingly upheld, rejecting the ground of the Revenue in this appeal’’.

No doubt, Revenue has claimed that assessee had not become absolute owner of the technical know-how and the supplier company continued to enjoy the ownership of such technical know-how.

However, in our opinion, once assessee had paid the money and acquired the technical know-how, it become an intangible asset, eligible for claiming depreciation u/s.32(ii) of the Act. The question whether the same vendor had given the same technical know-how for other persons, is in our opinion, irrelevant in deciding the question of eligibility of the assessee for claiming depreciation. We therefore do not find any reason to interfere with the order of the ld. Commissioner of Income Tax (Appeals) in this regard. Ground No.3 stands dismissed. & 954/17 :- 32 -: & C.O.65/2017

In the result, appeal of the assessee and Revenue are partly 25. allowed for statistical purposes, whereas Cross objection of the assessee is dismissed as infructuous.

Order pronounced on Thursday, the 7th day of December, 2017, at Chennai.