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Income Tax Appellate Tribunal, “A” BENCH: KOLKATA
Before: Shri M. Balaganesh, AM & Shri S. S. Viswanethra Ravi, JM]
ORDER
Per Shri M. Balaganesh, AM:
This appeal by assessee is arising out of revision order of Pr. CIT-1, Kolkata vide Memo No. Pr.CIT-1/Kol/U/s.263/F.Harley & Co./2015-16/12005-07 dated 07/11.03.2016. Assessment was framed by JCIT, Range-1, Kolkata u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) for Assessment Year 2011-12 vide his order dated 18.03.2014.
The only issue to be decided in this appeal is as to whether the ld CIT was right in invoking revisionary jurisdiction u/s 263 of the Act in the facts and circumstances of the case.
The brief facts of this issue is that the assessee is company incorporated on 7.8.1986 engaged in the business of manufacturing of engineering items and fire resistant cloth. It has two factories situated at 1) Shree Hari Complex, Opposite Jalan Complex, Gate No.1, Jangalpur, P.O. – Argori, P.s. Sankrai, Howrah – 711302 and 2) 3/2, South Tangra Road, Kolkata – 700046. The return of income for the Asst Year 2011-12 was electronically filed on 31.10.2011 declaring taxable income of Rs. 3,49,56,960/- . The case was selected for scrutiny and notices u/s 143(2) and 142(1) of the Act were issued and served on the assessee. Subsequently the case was assigned to JCIT, Range I, Kolkata by the CIT, Kolkata I vide his Order No. 58/2013-14 dated 26.9.2013. The authorized representative appeared from time to time before the ld JCIT (AO) , filed the requisite details and the assessment was completed u/s 143(3) of the Act on 18.3.2014 determining
2 F.Harley & Co. Pvt. Ltd.., AY 2011-12 the total income at Rs. 3,50,11,030/- . In the assessment, the disallowances u/s 36(1)(va) and u/s 14A of the Act were made. The ld CIT sought to revise the said assessment treating the same as erroneous in as much as it is prejudicial to the interests of the revenue on the ground that the assessee had debited a sum of Rs. 4,75,91,267/- towards ‘Provision for Purchases’ and that the same was not disallowed in the assessment which resulted in underassessment of income.
The assessee replied before the ld CIT that it is mainly in the business of Air Pollution Control Systems and execution of turnkey engineering projects. During the financial year 2010-11 relevant to Asst Year 2011-12 , the assessee had debited a sum of Rs. 4,75,91,267/- under the nomenclature ‘provision for purchase’ at the year end and stated that similar sum of Rs. 2,14,53,425/- was debited in the earlier year which was allowed as deduction and accepted by the revenue. It was stated that though the nomenclature used was ‘provision’ but in fact this is not the case of ‘unascertained liability’ but it is a case of ‘ascertained liability’. It was explained that the assessee took up engineering projects which were completed over a period of more than one accounting year and billing for a project was done as per billing schedule with their customers. While full billing for an item is done upon its part dispatch, that dispatch is not complete, as the final requirement at the site is dependent on the completion of detailed engineering and actual requirement at the site to suit conditions (e.g. piping, cables, stell supports, cable trays etc). As the projects are turnkey in nature, the assessee is required to dispatch additional quantities to complete the work without further billing. Therefore while the full billing for an item may be completed in one financial year, the full cost for that item could spread beyond one financial year. In order to match the item wise revenue concerning each project with the expected item wise expense / purchase, a ‘provision for purchase’ is made although the expenses are in relation to the financial year 2010-11 and for which the concerned revenue of the project has already been accounted for. It was explained that if the company did not follow this practice, it would be paying taxes on an unrealized / inflated profit in that year and having higher cost booking in the subsequent year, without a matching revenue. It was further stated that the assessee company has been following this practice year on year as it adopts the principle of revenue and cost recognition in the same financial year in consonance with the matching concept. The assessee placed
3 F.Harley & Co. Pvt. Ltd.., AY 2011-12 reliance on the decision of the Hon’ble Supreme Court in the case of Rotork Controls India (P) Ltd vs CIT reported in (2009) 314 ITR 62 (SC) wherein the following three conditions were laid down by the Hon’ble Apex Court for recognition of expenses :- (i) an enterprise has a present obligation as a result of past event ; (ii) it is probable that an outflow of resources will be required to settle obligation ; and (iii) a reliable estimate can be made of amount of the obligation – If these conditions are not met, no provision can be recognized as a provision – Thus provision has to be made based on reliable estimation of obligations.
4.1. It was emphasized that the assessee had not only fulfilled all the above three conditions but had gone beyond the point that it has not only scientifically estimated but made provisions in the accounts on the basis of the invoices received in the subsequent accounting year on account of those projects and actually incurred expenses on that account. In other words there is a determination of exact liability and not even estimated one. The assessee also placed reliance in support of its claim on the following decisions :-
(i) Hon’ble Madras High Court in the case of CIT vs Cholamandalam Investment & Finance Co. Ltd reported in (2009) 309 ITR 110 (Mad) ; (ii) Hon’ble Madras High Court in the case of CIT vs Rotork Controls India Ltd reported in (2007) 293 ITR 311 (Mad) ; (iii) Hon’ble Delhi High Court in the case of Consolidated Photo & Finvest Ltd vs CIT reported in (2006) 281 ITR 394 (Del) ; (iv) Hon’ble Delhi High Court in the case of CIT vs Whirlpool of India Ltd reported in (2011) 242 CTR 245 (Del) ; 4.2. Accordingly the assessee replied that there is no error in the claim of expenditure towards ‘provision for purchases’ made by the assessee. It was stated that the assessee had duly made the aforesaid submissions vide letter dated 7.3.2014 even before the ld JCIT (AO) during the course of assessment proceedings pursuant to the specific query raised by the ld AO in that regard. The assessment folder would stand testimony to the claim made by the assessee in this regard. It was also stated that the assessee had duly explained before the ld AO the revenue recognition in respect of each of the projects executed by it as under:-
5 F.Harley & Co. Pvt. Ltd.., AY 2011-12 4.3. It was stated that the assessee filed the following details before the ld AO :- (a) statement showing details of order value, sales turnover and closing provisions of Rs. 4,75,91,267/- for referred 3 jobs : Job No. 2828 , 2883 and 2885 ; (b) statement of estimated cost of materials for Mundra SEZ (Job No. 2828) , Adani Petronet (Job NO. 2883) and Adani Power (Job No.2885) ; (c ) statement of expenditure incurred post financial year 2010-11 for each of the above three projects ; (d) sales summary for the year ended 31.3.2011 to prove that the revenue had been recognized in respect of above three projects and (e) bill wise sales for the above referred three jobs 4.4. It was pleaded that the ld AO on due examination of the aforesaid documents and the replies of the assessee together with the related case laws had allowed the claim for ‘provision for purchases’ in the assessment. Since no addition was made in the assessment towards the same, there was no occasion for the ld AO to discuss about the same in the assessment order. Accordingly, it was pleaded that mere non-discussion in the assessment order about a particular item would not make the assessment order erroneous. It was further pleaded that since due examination has been carried out by the ld AO on the impugned issue of ‘provision for purchases’ and hence the action of the ld CIT in trying to substitute his own opinion on the same is not permitted and warranted within the meaning of section 263 of the Act.
The ld CIT observed that it is seen from the assessment records that the ld AO had neither asked any questions about the provisions nor the assessee had given any explanation or note about the same. Accordingly he concluded that the ld AO had not examined the issue and hence not formed any view on the same. He stated that the case laws relied upon by the ld AR are not applicable to the assessee and assessee had not fulfilled the three requirements specified in the decision of the Hon’ble Apex Court in the case of Rotork Controls India P Ltd vs CIT reported in (2009) 314 ITR 62 (SC). Based on these observations, he held that the order passed by the ld AO is erroneous and prejudicial to the interest of the revenue on the ground that no enquiries were made by the ld AO nor any explanation had been obtained by him. Accordingly the ld CIT passed an 6 F.Harley & Co. Pvt. Ltd.., AY 2011-12 order u/s 263 of the Act by directing the ld AO to do the adequate examination , keep the documentary evidence on record and take a correct view of the provisions shown in the Raw Materials account and come to a fresh conclusion. Aggrieved, the assessee is in appeal before us on the following grounds :- “
1. For that on the basis of materials on record there were no valid pre-conditions and pre- requisites for initiation of Section 263 of the Income Tax Act, 1961 and as such invocation of such proceedings by the Learned CIT is vitiated in law.
2. For that on facts and on the basis of materials on record, order of the Assessing Officer passed under section 143(3) of the Income Tax Act, 1961, is neither erroneous nor prejudicial to the interest of revenue so as to warrant exercise of power by the learned CIT under section 263 of the Income Tax Act, 1961.
3. For that in the facts and circumstances of the case the learned CIT erred in law by holding that "Provision for Purchases" should be disallowed.
4. For that in the facts and circumstances of the case the learned CIT erred in understanding the true nature of matching concept, which was properly treated by the Assessing Officer on the basis of materials on record.
5. For that the learned CIT erred in law in holding that the Assessment Order passed under section 143(3) of Income Tax Act, 1961, is erroneous and prejudicial to the interest of revenue and wrongly set aside the order of Assessing Officer on the specific issue, in the facts and circumstances of the case.
6. For that the impugned order passed by the learned CIT is otherwise illegal, unlawful and bad in law and is liable to be set aside.
7. That the appellant craves leave to add, alter, amend or withdraw any ground or grounds of appeal before or at the time of hearing of the appeal.”
The ld AR reiterated the submissions made before the lower authorities and vehemently objected to the incorrect statement made by the ld CIT in his order that the impugned issue of provision for purchases had not been examined by the ld AO. He placed reliance on the relevant pages of the paper book proving the fact that this issue was threadbare analysed and examined by the ld AO in the course of assessment proceedings and the ld AO was thoroughly convinced with the revenue recognition of the assessee with facts and figures and the related case laws relied upon. He argued that the ld CIT both from the show cause notice and from the revision order u/s 263 of the Act is only trying to substitute his own opinion against the opinion framed by the ld AO which is not permissible u/s 263 of the Act. He further stated that the issue under dispute among other decisions, is squarely covered in favour of the assessee by the decision of the Hon’ble Bombay High Court in the case of Taparia Tools Ltd vs JCIT reported in (2003) 260 ITR
7 F.Harley & Co. Pvt. Ltd.., AY 2011-12 102 (Bom) which recognized the matching principle in revenue recognition and referred to the relevant paragraph of the said judgement. Based on these arguments , he stated that the order of the ld AO cannot be termed as erroneous. In response to this, the ld DR vehemently relied on the order of the ld CIT.
We have heard the rival submissions and perused the materials available on record. We find that the assessee had made elaborate submissions before the ld JCIT (who was the then AO who framed the assessment u/s 143(3) of the Act) vide letter dated 7.3.2014 which are enclosed in pages 1 to 6 of the paper book. The assessee had also enclosed the detailed annexures before the ld AO containing (a) statement showing details of order value, sales turnover and closing provisions of Rs. 4,75,91,267/- for referred 3 jobs : Job No. 2828 , 2883 and 2885 ; (b) statement of estimated cost of materials for Mundra SEZ (Job No. 2828) , Adani Petronet (Job NO. 2883) and Adani Power (Job No.2885) ; (c ) statement of expenditure incurred post financial year 2010-11 for each of the above three projects ; (d) sales summary for the year ended 31.3.2011 to prove that the revenue had been recognized in respect of above three projects and (e) bill wise sales for the above referred three jobs . The ld AO having examined all these submissions together with the related documents had arrived at a conclusion that the assessee had made a bonafide claim towards provision for purchases in consonance with the matching concept in revenue recognition.
7.1. We find from the details enclosed in page 7 of the paper book which is enumerated hereinabove, that the assessee had booked revenue for the following projects as under:-
Mundra SEZ – 100% billing done at Rs 954 lacs Adani Petronet – 96% billing done at Rs 717.12 lacs Adani Power – 99% billing done at Rs 320.76 lacs.
Against these projects, he had booked the expenditure to the extent of percentage of completion of billing in accordance with the percentage of completion method followed by it for its projects. There is no dispute on the method of accounting viz percentage of completion method , followed by the assessee. The last column in the aforesaid table would indicate that the assessee had made provision for the expenses to be incurred in 8 F.Harley & Co. Pvt. Ltd.., AY 2011-12 respect of each of the projects to bring in line with the percentage of billing done to satisfy the matching concept of revenue recognition.
7.2. We agree with the contention of the ld AR that since there was no disallowance contemplated by the ld AO in this regard, there was no occasion for him to discuss about the same in the assessment order. The ld DR before us was not able to bring in any contrary evidence to prove that the requisite details were not filed before the ld JCIT (AO) by the assessee and accordingly not able to rebut the arguments of the ld AR in this regard. Hence the action of the ld AO cannot be construed as lack of enquiry by the ld CIT warranting revision u/s 263 of the Act. We find that the ld CIT was only trying to substitute his own opinion by reappraising the very same evidence available on record against the opinion of the ld AO. This in our considered opinion is not permissible u/s 263 of the Act. Reliance in this regard is placed on the decision of the Hon’ble Punjab & Haryana High Court in the case of CIT vs Deepak Mittal reported in 324 ITR 411 (P&H). We also find that the Hon’ble Bombay High Court in the case of CIT vs Development Credit Bank Ltd reported in 323 ITR 206 (Bom) had held that the ld CIT cannot suo moto revise an order on the ground that enquiry was not conducted when the assessment order was passed after considering all details called for and furnished by the assessee. We also find that the Hon’ble Delhi High Court in the case of CIT vs Honda Siel Power Products Ltd reported in 333 ITR 547 (Del) had held that the revision order was not correct as there was no material to indicate that the ld AO had not applied his mind to the provisions of the Act and there would be presumption that the assessment order had been passed u/s 143(3) of the Act by the ld AO after proper application of mind. We find that the Hon’ble Bombay High Court in the case of CIT vs Gabriel India reported in 203 ITR 108 (Bom) had held that the decision of the ld AO could not be held erroneous simply because he did not make an elaborate discussion. The ld CIT was in error in asking the ld AO to re- examine the matter and directing the ld AO to pass a fresh order. Recently the Hon’ble Delhi High Court in the case of NTPC Ltd vs CIT reported in 106 DTR 73 (Del) had held that where the ld AO passed the order after proper enquiry and the absence of discussion regarding the downward revision of sales figure did not make it any less vulnerable to correction u/s 263 of the Act.
9 F.Harley & Co. Pvt. Ltd.., AY 2011-12 7.3. We also find that the decision relied upon by the ld AR on the Hon’ble Bombay High Court in the case of Taparia Tools Ltd vs JCIT reported in (2003) 260 ITR 102 (Bom) on the principles of matching concept is squarely applicable to the facts of the instant case. It was held that :- A. Matching concept 22. The Mercantile System of Accounting is based on accrual. Basically, it is a Double- Entry System of accounting. Under the Mercantile System of Accounting, profits arising or accruing at the date of the transaction are liable to be taxed notwithstanding the fact that they are not actually received or deemed to be received under the Act. Under the Mercantile System of Accounting, therefore, book profits are liable to be taxed. The profits earned and credited in the books of account constitute the basis of computation of income. The system postulates the existence of tax insofar as monies due and payable by the parties to whom they are debited - Keshav Mills Ltd. v. CIT [1953] 23 ITR 230 (SC) at p.
Therefore, under the Mercantile System of Accounting, in order to determine the net income of an accounting year, the revenue and other incomes are matched with the cost of resources consumed [expenses]. Under the Mercantile System of Accounting, this Matching is required to be done on accrual basis. Under this Matching concept, revenue and income earned during an Accounting Period, irrespective of actual cash in-flow, is required to be compared with expenses incurred during the same period, irrespective of actual out-flow of cash. In this case, the assessee is following Mercantile System of Accounting. This Matching concept is very relevant to compute taxable income particularly in cases involving DRE. It has been recognised by numerous judgments. In the case of Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC) the facts were as follows : The assessee bought lands and sold them in plots. When the plots were sold the purchasers paid only a portion of the purchase price and undertook to pay the balance in instalments. The assessee, in turn, agreed to develop the plots within six months. In the relevant Accounting Year, the assessee actually received only Rs. 29,392 towards sale price of the lands, but, in accordance with the Mercantile System of Accounting followed by the assessee, it credited in its accounts Rs. 43,692 representing the full sale price of the lands. At the same time, it also debited Rs. 24,809 as expenditure for the development it had undertaken even though, no part of that amount was actually spent. The Department, therefore, disallowed the expenditure of Rs. 24,809 on the ground that the amount was not actually spent. The assessee ultimately succeeded in the Supreme Court. It was held by the Supreme Court that the expression "Profits or Gains" in section 10(1) of the Income-tax Act, 1922 should be understood in its commercial sense and there can be no computation of such profits and gains until the expenditure, which is necessary for the purposes of earning the receipts is deducted therefrom. Accordingly, the Supreme Court took the view that since the assessee was following Mercantile System of Accounting and since the assessee had credited the full sale price of lands in its accounts amounting to Rs. 43,692, the assessee was entitled to estimate the expenditure because, without such estimation of expenditure, it was not possible to compute profits and gains. This concept is also applied by the Supreme Court in the case of MIIC Ltd. under following observations: "Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books, over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of 10 F.Harley & Co. Pvt. Ltd.., AY 2011-12 ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Issuing debentures is an instance where, although the assessee has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of the debentures." (p. 803) Therefore, the Matching concept, which we have referred to is well recognised by various judgments of the Supreme Court. In this case, the issue is whether the entire expenditure distorts the profits of a particular year. In this case, we are concerned with computation of income and, therefore, Method of Accounting followed by the assessee is relevant because accrual of income is to be seen in the light of Method of Accounting.
7.4. We find from perusal of the aforesaid decisions it would clearly emerge that an assessment order is not capable of being revised if all the material facts relating to the assessment have been placed before the ld AO and necessary queries were raised and replied. The principles governing re-assessment proceedings that it is the duty of the assessee to place necessary facts before the ld AO and the correctness or otherwise is an inferential fact which should be drawn by the ld AO, in our considered opinion, equally applies to revision proceedings.
7.5. In view of our aforesaid findings in the facts and circumstances of the case and respectfully following the various judicial precedents relied upon hereinabove, we hold that the ld CIT erred in invoking revisionary jurisdiction u/s 263 of the Act and accordingly the same is hereby quashed. Accordingly the grounds raised by the assessee are allowed.
In the result, the appeal of the assessee is allowed.
Order is pronounced in the open court on 08.03.2017