Vildirect: IncomeTax-caselaws-2010-VIL-875-DEL-DT

2010-VIL-875-DEL-DT

Equivalent Citation: [2011] 336 ITR 374 (Del)

DELHI HIGH COURT

346/2009

Date: 29.11.2010

COMMISSIONER OF INCOME TAX

TRIVENI ENGINEERING & INDUSTRIES LTD

Appellant represented by: Ms. Prem Lata Bansal,
Respondent represented by:Mr. Ajay Vohra, Ms. Kavita Jha, Ms. Akansha Agarwal,Somnath Shukla

BENCH

A.K. SIKRI , REVA KHETRAPAL ,JJ.

JUDGMENT

(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 Rs. 139 lacs, the assessee had to actually incur expenditure of Rs. 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.

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