Commissioner Of Income Tax vs Triveni Engineering & Industries ...
2010 Latest Caselaw 5391 Del

*           IN THE HIGH COURT OF DELHI AT NEW DELHI

+                            ITA No. 346 of 2009

                                          Reserved On: September 08, 2010
%                                       Pronounced On: November 29, 2010


      COMMISSIONER OF INCOME TAX                                 . . . Appellant

                           through :          Ms. Prem Lata Bansal, Advocate


                                 VERSUS


      TRIVENI ENGINEERING & INDUSTRIES LTD.                    . . .Respondent

                           through:           Mr. Ajay Vohra, Advocate with
                                              Ms. Kavita Jha, Ms. Akansha
                                              Aggarwal and Mr. Somnath
                                              Shukla, Advocates


CORAM :-
    HON'BLE MR. JUSTICE A.K. SIKRI
    HON'BLE MS. JUSTICE REVA KHETRAPAL

      1.    Whether Reporters of Local newspapers may be allowed
            to see the Judgment?
      2.    To be referred to the Reporter or not?
      3.    Whether the Judgment should be reported in the Digest?


A.K. SIKRI, J.

1. Though various questions of law were proposed in this appeal, the

appeal was admitted on the following substantial questions of law:

"(i) Whether ITAT was correct in law in allowing provision made by the assessee for future losses that may occur on account of different project works undertaken by it?

(ii) Whether ITAT was correct in law in holding that the provision for losses was allowable as the assessee was following completed contract method of accounting?"

2. The facts germane to the aforesaid questions need only be noted

and the same are capitulated hereunder.

3. This appeal pertains to the Assessment Year 2000-01. For this

Assessment Year, the respondent assessee had filed the return

declaring a loss @ `12.58 Crores. During the assessment

proceedings, the Assessing Officer (AO) noticed that the assessee

had debited a sum of `139 lacs to the Profit and Loss Account as

provision for losses, which occur for different projects undertaken

by it. These projects had been substantially completed during the

said year and revenue gain had also been recognized during the

year. The AO was of the view that the provision had been made

against a liability, which may arise in future due to any defect

noticed in the project and liabilities incurred by removing those

defects. According to him, such a liability to be incurred by a

future date, was a contingent liability and therefore, he refused to

acknowledge this liability and give the allowance thereof to the

assessee.

4. View of the AO was confirmed by the CIT (A) in the appeal

preferred by the assessee holding that this liability provided by the

assessee was of a contingent nature and was not allowable under

Section 37(1) of the Income Tax Act (hereinafter referred to as „the

Act‟).

5. Not satisfied with the view taken by the AO as well as CIT (A), the

assessee went in appeal before the Income Tax Appellate Tribunal

(hereinafter referred to as „the Tribunal‟). The Tribunal has

allowed the provision made by the assessee for aforesaid losses

on the ground that the assessee was following completed contract

method and provision had been made on account of losses, which

may occur for the different project works undertaken by it and

those projects having been substantially completed during the

year. It was more so when the assessee had also recognized

revenue gain on such project during this year itself. View of the

Tribunal, thus, was that this cannot be called as liability of

contingent nature and was allowable as business expenditure

having regard to the consistent method followed by the assessee.

This is how the Revenue is in appeal challenging the raison d'etre

and the conclusion recorded by the Tribunal.

6. It would be advisable first to take note of the basis on which the

aforesaid debit entry towards projected losses is made by the

assessee in the Profit and Loss Account. In this behalf, it is

explained on the basis that the respondent assessee is engaged,

inter alia, in the manufacture and sale of sugar, turbines, etc., and

in project related activities in the field of setting up of sugar

plants, water treatment plants and mini hydel power projects. The

assessee is following „revenue recognition‟ accounting policy

consistently, as per which profit on project related activities are

recognized on completion or on substantial completion of the

project. The year in which the projects are completed or

substantially completed, the final accounts in respect of those

projects are taken in that year and on that basis, it is ascertained

as to whether any profit/losses made on those projects. While

doing so in that particular year, the provision is also made for

foreseeable losses in respect of those projects which have been

substantially completed. Even the revenue gain is recognized in

that year. Therefore, the relevant previous year, in respect of

projects completed/substantially completed in that year, income in

respect thereof was credited to the profit and loss account, taking

into account unbilled revenue as well. While recognizing the

profit/loss in respect of the said projects, the respondent assessee

made provision for expenses to be incurred upto the stage of

completion to the extent of `1.39 Crores.

7. Learned counsel for the assessee explained that the estimates of

the expenses to be incurred up to the stage of completion was

based on the consistent accounting policy. This was so stated

under Clause (b)(iv) of Significant Accounting Policies forming part

of "Notes to Accounts and Significant Accounting Policies", is as

under:

"Revenue Recognition

... .....

iv) Profit on project related activities are recognized on completion or on substantial completion of the project. Provision is, however, made for foreseeable losses, if any, in respect of projects which have been substantially completed."

As per Accounting Standard (AS) 7 (Accounting of Construction

Contracts) as applicable at the relevant time under the completed

contact method, revenue is recognized only when the project is

complete or substantially complete. Till that date, all costs

incurred and accumulated as part of work in progress and on

account payments received are shown as current liabilities. In the

year, when the project is complete/substantially complete,

(i) Revenue on the project is recognized included balance

billing left,

(ii) All costs taken as part of work in progress are debited

to the profit and loss account and

(iii) additionally, anticipated costs till completion are also

debited to the profit and loss account,

to determine the profit/loss on the particular project. It is claimed

that the aforesaid method of accounting consistently and regularly

followed by the respondent assessee has been accepted by the

Revenue all along.

8. It is not in dispute that the AO accepted the method of

accounting. However, he did not allow the aforesaid expenses on

the ground that the same were contingent in nature.

9. Ms. P.L. Bansal, learned counsel appearing for the Revenue, was

vehement in her submission that the approach of the AO, as

affirmed by the CIT(A), were perfectly justified, legal and valid as

the same accorded with the provision of the Act. She argued that

as no such expenditure was in fact incurred in the said year and it

was only on the basis of some purported estimates that such an

expenditure may arise in future, which was claimed in this year

and this according to her, was not allowable under Section 36 or

Section 37 of the Act. Her submission in this behalf was that as

the expenses were yet to be incurred, the liability thereof could

not be said to have accrued so as to allow under the mercantile

system of accounting, as it was not a liability in praesenti. She

also pointed out that the explanation given by the respondent

assessee before the AO was that the assessee had provided for

"anticipated losses". Such anticipated losses or anticipated

expenses, which were unascertainable as on that date were

unallowable. She referred to the various decisions of the Supreme

Court and certain High Courts in support of her aforesaid

arguments. These are as under:

(i) Indian Molasses Company Pvt. Ltd. Vs. Commissioner of Income Tax [37 ITR 66 (SC)];

(ii) Shri Sajjan Mills Ltd. Vs. Commissioner of Income Tax [156 ITR 585 (SC)];

(iii) Commissioner of Income Tax Vs. Lachhman Das Mathura Das [124 ITR 411(All)],

(iv) Commissioner of Income Tax Vs. Seshasayee Industries Ltd. [242 ITR 691 (Mad)].

10. Mr. Ajay Vohra, learned counsel appearing for the assessee,

countered the aforesaid submissions of the learned counsel for

the Revenue. He supported the decision of the Tribunal by

articulating his submission with finesse, in the following manner:

1) There was a consistent and regular method accounting

followed by the assessee, which was recognized and

accepted by the Income Tax Department also for all

previous years. It was argued that under Section 28(i) of

the Act, profits and gains of business which was carried

on by the assessee at any time during the previous year

are chargeable under the head "profit and gains of

business or profession". For calculating these profits and

gains of business, Section 145 of the Act provided the

method of accounting, as per which such profits and

gains were computed in cash or mercantile system of

accounting regularly employed by the assessee. It was a

submission that no doubt, the AO was not satisfied about

the correctness or completeness of the accounts of the

assessee, or where the method of accounting had not

been followed by the assessee. In the present case, the

assessee had followed consistently mercantile method of

accounting. In respect of project related activities, the

assessee had consistently and regularly followed the

completed contract method in terms of Accounting

Standard (AS) 7 issued by the ICAI. This method had

been accepted by the Revenue all along. Even in this

year, this method was not rejected from which it would

be evident that the AO was satisfied with the correctness

and completeness of the accounts of the assessee and

further with the method of accounting regularly

employed as being scientific and rationale. In such

circumstances, argued the learned counsel for the

assessee that it is not open to the AO to deviate from the

regularly and consistently followed method of accounting

followed by the assessee and accepted by the Revenue.

He argued that the Courts have highlighted the primacy

of the method of accounting and held that the consistent

and regular method of accounting is supreme unless the

AO finds that accounts of the assessee are not correct or

complete or that the method of accounting is not

regularly followed/not in accordance with the notified

accounting standards. For this, he relied upon the

following judgments:

(i) CIT vs. Bilhari Investment P. Ltd. [299 ITR 1];

                     (ii)    CIT vs. Realest Builders        and       Services
                             Limited [307 ITR 202]

                     (iii)   CIT vs. Woodward Governor                India       P.
                             Limited [312 ITR 254]

2) His another facet of submission was based on the

proposition that being a company incorporated under the

Companies Act, it was obligatory on the part of the

assessee that it is the accounts must conform to the

mandatory accounting standards issued by the ICAI.

Referring to Para 16 of Accounting Standard-I relating to

"Disclosure of Accounting Policies". He submitted that

the same provides the accounting policy adopted by and

assessee should be such so as to represent a true and

fair view of the state of affairs of the business of the

assessee. Para 9 of the said Accounting Standard - I

further provides that the fundamental accounting

assumptions relating to going concern consistency and

accrual must be followed in preparation of the financial

statements. The expressions "going concern", "accrual"

and "consistency" have been defined in Para 10 which

reads as under:

"10. The following have been generally accepted as fundamental accounting assumptions:-

a. Going concern. The enterprise is normally viewed as a going concern, that is, as continuing in operation for the foreseeable future. It is assumed that the enterprise has neither the intention nor the necessity of liquidation or of curtailing materially the sale of the operations.

b. Consistency. It is assumed that accounting policies are consistent from one period to another.

c. Accrual refers to the assumption that revenues and costs are accrued, that is, recognized as they are earned or incurred (and not as money is received or paid) and recorded in the financial statements of the periods to which they relate"

Para 17 of the said Accounting Standard further provides

that selection and application of accounting policy must

be governed, inter alia, by "prudence", which has been

explained in the following terms:

"(i) Prudence: Provisions should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information."

He thus, argued that as per Section 145(2) of the Act, it

as mandatory that the assessee follows the accounting

standard that may be notified by the Central Government

and referred to the Notification No.SO 69(E) dated

25.1.1996. He submitted that the Central Government

had notified Accounting Standard - I relating to

Disclosure of Accounting Policies and therefore, following

the aforesaid Accounting Standard prescribed by ICAI

became mandatory even for the purposes of income tax

in view of the aforesaid provisions.

3) Invoking the principle of matching cost with revenue, it

was also the submission of Mr. Vohra that this principle

justified the manner in which accounts were maintained

by the assessee following revenue recognition in respect

of project related activities as otherwise the accounts

would give distorted figure of profits and losses. His

submission was that when the entire revenue from the

contract is recognized in the year under appeal, including

unbilled revenue for which invoices have been raised in

the succeeding year, on the principle of matching costs

with revenue, too, the expenditure to the incurred in

future, within the scope of the contract, has to be

provided for and allowed deduction against the revenues

from the contract. He also relied upon the case of the

Supreme Court in the case of the Supreme Court in the

case of Calcutta Company Limited Vs. Commissioner

of Income Tax [37 ITR 1] that the present case was

parallel to the said case where matching principle was

applied by the Apex Court.

4) Last weapon which is used by Mr. Vohra from his

armoury was that the issue raised by the Revenue, in any

case, was only academic as the entire exercise was

revenue neutral.

11. After considering the submissions, the counsel on the either side,

in the given facts, we are of the prima facie view that arguments

of the learned counsel for the assessee to prevail. The learned

counsel for the Revenue may be correct in stating the proposition

of law, generally. No doubt, unless the expenditure is actually

incurred or it is accrued in the relevant year, it would not be

allowed as deduction. Such a liability has to be in praesenti.

However at the same time, in the given scenario where in relation

to the project works undertaken by the assessee, completed

contract method of accounting is followed, which is consistent

with the Accounting Standards and these accounting standards

also lay down the norms indicating the particular point of time

when the provisions for all known liabilities and losses has to be

made, the making of such a provision by the assessee appears to

be justified moreso when the assessee had recognized gain as

well on such project during this year itself. This appears to be in

consonance with principle of matching cost and revenue as well.

However, in the projected scenario of this case after taking stock

of the entire situation, we are of the opinion that it is not

necessary to conclusively answer the aforesaid questions

formulated. It is because of the reason that we find that the

entire exercise is revenue neutral. It may be pointed out that it is

a matter of record that against the provision of `139 lacs, the

assessee had to actually incur expenditure of `218.03 lacs, i.e.,

more than the provision made. It is undisputed that the

expenditure incurred by the assessee on the project is admissible

deduction. The only dispute that the Revenue seeks to raise is

regarding the year of allowability of expenditure. Considering that

the assessee is a company assessed at uniform rate of tax, the

entire exercise of seeking to disturb the year of allowability of

expenditure is, in any case, revenue neutral.

12. We are reminded of the classic observations made by Justice

Tendolker in the case of the Commissioner of Income-tax,

Delhi, Ajmer, Rajasthan and Madhya Bharat Vs. Nagri Mills

Co. Ltd. [33 ITR 681], which reads as under:

"We have often wondered why the Income-tax authorities, in a matter such as this where the deduction is obviously a permissible deduction under the Income-tax Act, raise disputes as to the year in which the deduction should be allowed. The question as to the year in which a deduction is allowable may be material when the rate of tax chargeable on the assessee in two different years is different; but in the case of income of a company, tax is attracted at a uniform rate, and whether the deduction in respect of bonus was granted in the assessment year 1952-53 or in the assessment year corresponding to the accounting year 1952, that is in the assessment year 1953-54, should be a matter of no consequence to the Department; and one should have thought that the Department would not fritter away its energies in fighting matters of this kind. But, obviously, judging from the references that come up to us every now and then, the Department appears to delight in raising points of this character which do not affect the taxability of the assessee or the tax that the Department is likely to collect from him whether in one year or the other."

13. The aforesaid observations of the Bombay High Court were

reiterated by this Court in the case of Commissioner of Income

Tax Vs. Shri Ram Pistons and Rings Ltd. [220 CTR 404], as

under:

"Finally, we may only mention what has been articulated by the Bombay High Court in Commissioner of Income Tax, Delhi, Ajmer, Rajastha and Madhya Pradesh vs. Nagri Mills Co. Ltd. [1958] 33 ITR 681 as follows:

... .... .... ....

In the reference that is before us there is no doubt that the Assessee had incurred an expenditure. The only dispute is regarding the date on which the liability had crystallized. It appears that there was no change in the rate of tax for the Assessment Year 1983-84 with which we are concerned. The question, therefore, is only with regard to the year of deduction and it is a pity that all of us have to expand so much time and energy only to determine the year of taxability of the amount."

14. In such circumstances, we are of the view that insofar as present

appeal is concerned, substantial questions of law that need to be

answered does not arise. We, therefore, dismiss this appeal on

this ground alone.

(A.K. SIKRI) JUDGE

(REVA KHETRAPAL) JUDGE NOVEMBER 29, 2010 pmc