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Income Tax Appellate Tribunal, DELHI BENCH ‘G’, NEW DELHI
Before: SH. N. K. BILLAIYA & MS. ASTHA CHANDRA
PER N. K. BILLAIYA, AM:
This appeal by the assessee is preferred against the order of the CIT(A)-23, New Delhi dated 09.07.2019 pertaining to A.Y.2014-15.
2. The grievance of the assessee read as under :- 1. The Ld. CIT(A) has erred in law and on facts in confirming the disallowance of Rs. 29,02,414/- made u/s 14A read with Rule 8D of the Income Tax Rules, 1962. The disallowance is wrong and bad in law and deserves to be deleted.
The appellant contends that no expenditure has been incurred for earning the tax free income. The Ld. CIT(A) as well as AO has not found any expenditure having incurred for earning the tax free income as is evident on examination of books and vouchers. No such nexus has been established. There is no satisfaction recorded by the AO in the assessment order.Hence no disallowance u/s 14A should be made.
3. Without prejudice, the CIT(A) as well as AO has erred in rejecting the voluntary disallowance of Rs. 1,35,000/- made by the appellant. The CIT(A) as well as AO has rejected the above working without any reason nor has found any expenditure having incurred for earning the tax free income. Therefore there is no case for making any disallowance u/s 14A.
4. The Ld. CIT(A) has erred in law and on facts in upholding the disallowance of Rs.9,21,236/- in respect of warranty expenses, made by AO. The disallowance is without any basis and hence deserves to be deleted.
The appellant contends that the entire claim of warranty provision is emanating from the terms of the contract, it is a contractual obligation. The appellant has been consistently following AS-7 in the duly certified audited accounts and therefore the provisions should be allowed in full as claimed. The CIT(A) as well as AO having accepted the existence of risk provision, should not have restricted the claim to 4.69% of the contract value. The sum of Rs. 9,21,236/- should also be allowed to the assessee.
6. The appellant contends that the provision towards liability is made by the company considering the nature of business, nature of the product and the risk involved in such project. Therefore such risk provision is based on scientific working and should be allowed as it is contractual obligation. 7. The appellant further contends that the CIT(A) or AO has not brought any material for alleging excess claim of risk provision. The AO has only made an arithmetical working and arrived at a simple average of earlier years risk provisions, that too, in respect of contracts which are not at all comparable with the contract under consideration. Hence there is no basis for making the disallowance of Rs. 9,21,236/- and has to be deleted.
Without prejudice, the appellant submits that the above addition will result in double taxation as the unutilized provision, if any, has been reversed by the appellant in subsequent years and offered for tax. This fact is mentioned by Ld. CIT(A) in its order. Therefore also, the addition made of Rs. 9,21,236/- deserves to be deleted.
9. The above grounds are independent and without prejudice to one another.
10. The appellant prays that he may be allowed to add, amend alter and forego any of the grounds at the time of hearing.
Briefly stated the facts of the case are that the assessee electronically filed its return of income on 27.11.2014 declaring total income of Rs. 9.16 crores. The return was revised on 23.01.2016 which was processed u/s. 143 (1) of the Act. The case was selected for scrutiny assessment through CASS and accordingly statutory notices were issued and served upon the assessee.
The assessee is engaged in the business of engineering and contracting sector and offering technology, basic engineering, detailed engineering, project management, procurement and construction services and contracting capability covering a wide spectrum of the process industries. 5. During the course of the scrutiny assessment proceedings the assessee was asked to explain as to why expenses relating to the exempt income should not be disallowed in accordance to the provisions of section 14A of the Act r.w.s. 8D. The assessee submitted the following reply :- "The assessee submits that as no expenditure has been incurred by the assessee in earning the tax free income, therefore no disallowance should be made ids 14A read with rule 8D.
The assessee has not incurred any expenditure due to the following reasons:
Non-interest bearing funds are placed to Mutual Funds. i.
There is no separate investment department to monitor the ii. investments. Therefore, there is no employee cost for making the investments. iii. The assessee is not an investment company but consultancy and project handling company. All the expenses are incurred towards these activities. iv. Assessee does not have any interest bearing funds. As can be seen from the Profit & Loss account there is no debit of any interest expenditure in relation to investments. v. The dividends are credited automatically and are re- invested. Therefore, there is no administrative cost involved for obtaining the dividends.
In view of the above submissions there are no expenses which can be attributed for earning the tax free dividend. "
The reply of the assessee was considered and dismissed by the AO without recording any reasons and proceeded by invoking the formula given under rule 8D and computed the disallowance at Rs.29,02,414/-.
Proceeding further while examining the P & L account the AO found that the assessee has claimed contingency expenses of Rs.90,31,496/- under the head project expenses. Assessee was asked to explain why provisions for warranties of Rs.90,31,496/- should not be added to income of the assessee being contingent in nature. Assessee filed a detailed reply which was dismissed by the AO:-
“As per the details provided by the assessee of the total provisioning, the major provisions pertain to project no. 1-3002 of Rs. 6431496/- and project no. 1-3007 of Rs. 2600000/-. Hence, total warranty provision relating to these two projects is Rs. Rs. 9031496/-. In the earlier year my predecessors have considered this issue and discussed at length in respect of the allow ability of the claim of the assessee. According to the said order the, the assessee’s claim of risk provision in respect of the projects is 5.47% for the project 1-3002 and 1.53% for the project 1-3007 of the contract value whereas the AO has held 4.69% as reasonable claim to be allowed to the assessee. Thus 0.78% of the contract value for project I-3002 has been held to be excessive based on the historical data of the assessee. However, for the project 1-3007 the percentage is below 4.69% and hence not to be disallowed following the earlier year order. The claim of the assessee in respect of the said contracts is restricted to 4.69% of the contract value for the project 1-3002 and the excess is disallowed. The working is as under:
Rs. 6431496/- * 0.7841 / 5.4741 = Rs,921236/- Hence, Rs.921236/-which has been found to be excessive is disallowed as in the past for the year under consideration. Penalty proceedings u/s 271(l)(c ) are initiated for furnishing inaccurate particulars of income and concealment of income. (Addition - Rs.921236/-)
8. Assessee challenged both the additions before the CIT(A) but without any success.
Before us the Counsel for the assessee vehemently stated that both the issues have been decided by this Tribunal in assessee’s own case in earlier assessment years in favour of the assessee and against the revenue.
The DR could not bring any distinguishing decision in favour of the revenue.
We have given a careful consideration to the orders of the authorities below. We have also the benefit of the order of this Tribunal in and 199/Del/2016 for A.Y 2011-12 and 2012-13. While deciding the dispute relating to the disallowance u/s.14A the coordinate Bench held as under :- “19. As stated in the above order the learned assessing officer recorded the general observation regarding earning of exempt income. The honourable Delhi high court further held that this cannot be accepted as a recording of the assessing officer of satisfaction regarding the claim of the assessee after examining its accounts. Apparently in this case also the learned assessing officer has reached at the conclusion without recording the satisfaction on examination of books of accounts. Accordingly the issue is squarely covered by the decision of the honourable Delhi High Court. Hence, respectfully following the same, reversing the order of the lower authorities, we direct the learned assessing officer to delete the disallowance u/s 14 A of the income tax act. Accordingly ground number 1-3 of the appeal of the assessee is allowed.”
11. On finding parity of facts respectfully following the findings of the Coordinate Bench (supra) we direct the AO to delete the impugned disallowance grounds No.1, 2 and 3 are allowed.
In so far as disallowance on account of claim of warranty is concerned the coordinate Bench while deciding the appeal for A.Y.2011-12 and 2012-13 (supra) has held as under :- “We have carefully considered the rival contentions and also perused the orders of the authorities. The assessee has made a provision for warrant expenditure and given a detailed working of such risk provision. Looking at the working of the warranty it is found that the assessee is executing the project in Saudi Arabia for the purpose of estimation of risk the assessee has bifurcated the same into supply risk, construction risk, commercial risk, execution risk and man hour risk. Based on this the assessee made a provision for the warranties. The Id AO accepted the claim of the assessee on the principle of the risk, however exempt the claim of the assessee form FY 2001-02 onwards and thus stated that that assessee for this year has claimed 6.42% is higher compared to historical trends and therefore, he calculated simple average by adding by the percentage and reached at the average 4.69% and thus disallowed 1.73% of the contract value. Same was also confirmed by the Id CIT(A). on examination of the assessee we find that the claim made by the assessee is prejudicial and risk wise. The above claim was also made after converting in applying year end rate of foreign exchange and also reducing it that back to back warranty available from vendors. However it is also apparent that whenever the warranty provisions were no longer require the same was also reversed in accordance with the accounting standard 28 issued by ICAI. The approach of the Id AO in taking the past history of the percentage and considering the simple average of the same is not acceptable for the reason that the business risk changes with each of the contract and also it does not remain similar ever year. Even otherwise merely applying the law of average to the accounting estimate is not a correct approach. Accordingly, we direct the Id AO to delete the disallowance on account of warranty expenditure of Rs. 94855236/-. Accordingly ground No. 4 to 7 of the appeal are allowed.”
On finding parity of facts ground No.4 to 8 are allowed.
In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on 11.04.2023.