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  Dr. Gautam Sen vs. CCIT (Bombay High Court)
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UHDE India Private Limited, Udhe House, L.B.S.Marg, Vikhroli(West), Mumbai-83 Vs. Addl. Commissioner of Income Tax- Range-10(3), Mumbai
July, 08th 2014
        Before S/Sh.D.Manmohan,Vice-President & Rajendra,Accountant Member
         /.ITA No.1690/Mum/2012,[ [/Assessment Year-2006-07
       UHDE India Private Limited, Udhe   / Addl. Commissioner of Income
       House, L.B.S.Marg, Vikhroli(West),       Tax- Range-10(3), Mumbai
             . PAN : AAACU1416H
                     (/ Appellant)                             (× / Respondent)

                       / Revenue by                               : Shri Rajesh Ranjan Prasad
                     [   / Assessee by                            : Shri Firoze B.Andhyarujina
                     / Date of Hearing                              :   30.06-2014
                      / Date of Pronouncement :                         04.07-2014
                  , 1961   ( 1 ) 254   Û[    
                     Order u/s.254(1)of the Income-tax Act,1961(Act)
Per Rajendra,AM     Û]                          :
Challenging the orders dated 16/12/2014 of the CIT(A)-22,Mumbai assessee has raised following
grounds of appeal:
       1)The learned Commissioner of Income Tax (Appeals) erred in confirming disallowance of
       provisions made for costs incurred on completed contracts amounting to Rs. 8,14,68,380/-.
       2)The learned Commissioner of Income Tax (Appeals) erred in not considering that the provisions
       were made as per the regular method of accounting followed by the appellant.
       3)The learned Commissioner of Income Tax (Appeals) failed to consider the detailed submissions
       made in case of provision made on RCF contract, including for liquidated damages payable.
       4)The learned Commissioner of Income tax (Appeals) erred in not deleting provisions for costs on
       completed contracts amounting to Rs.1,43,62,964/- which has been disallowed in earlier
       assessment years and which were utilized/written back in the current year.
       5)The learned Commissioner of Income tax (Appeals) erred in confirming the withdrawal of credit
       for TDS of Rs.3,89,823 (wrongly considered as Rs.6,05,368 in the computation pursuant to order
       u/s.143(3) and rectified vide order u/s.154 dated 10.02.2009).
       6)The learned Commissioner of Income tax (Appeals) erred in not directing the Assessing Officer
       to allow credit for tax deducted at source which have been disallowed in earlier years on the
       ground that it would be allowed in the year of completion of contract.

                                 Assessment Year           Amount
                                   2003-04                    3,26,910
                                   2004-05                   33,84,649
       7)The learned Commissioner of Income tax (Appeals) erred in ignoring the fact that in respect of
       TDS credit of Rs.33,84,649/- the Assessing Officer had passed a rectification order dated 29th
       March, 2007 and then silently withdrawn the said TDS credit at the time of the computation,
       pursuant to order u/s. 143(3).
       8)The learned Commissioner of Income Tax (Appeals) erred in disallowing software maintenance
       expenses amounting to Rs.1,62,86,823/- on the ground that the same was capital expenditure.
       Having regard to the facts and circumstances of the case the appellant submits that the Assessing
       Officer be directed to treat the said expenditure as revenue in nature and delete the disallowance.
       9)The learned Commissioner of Income Tax (Appeals) erred in disallowing bad debts amounting
                                        2                  ITA No. 1690/Mum/2012 U H D E I n d i a P r i v a t e L i m i t e d

       to Rs.41,87,324/-.
       10)The learned Commissioner of Income tax (Appeals) erred in holding that the appellant was not
       in a position to rebut the findings of the Assessing Officer. The appellant submits the said finding
       is perverse and that the learned Commissioner of Income tax (Appeals) failed to consider the issue
       in its proper perspective.
       11)The learned Commissioner of Income tax (Appeals) erred in confirming levy of interest
       The appellant craves leave to add to, alter, amend or withdraw all or any of the foregoing grounds
       of appeal herein and to submit such statements, documents and papers as may be considered
       necessary either at or before the appeal hearing."

During the course of hearing before us, Authorised Representative (AR) of the assessee did not
press grounds of appeal no.4 and 5,hence same stand dismissed as not pressed.He further stated
that ground no 1 to 3 deal with one issue only.

2.Assessee company,engaged in the business of designing, construction and commissioning of
projects,filed its return of income on 29/10/2005 declaring total income of Rs.18,50,83,315/-.
Assessing Officer(AO) made assessment u/s.143(3) of the Act on 08/12/2008 determining the
income of assessee at Rs.26,30,26,570/-.

2.1.First effective ground of appeal is about disallowance of provisions made for cost incurred on
completed contracts, amounting to Rs.8.14 crores.During the assessment proceedings,the AO
found that the assessee had claimed the expenses in the Profit & Loss Account for the provisions
made for contracts amounting to Rs.8,14,68,380/-. He directed the company to explain the
allowability of the provisions made.After considering the submissions of the assessee filed by it
vide dated 18/11/2008,he held that submissions made by the assessee in respect of Paradeep
Phosphates(PP),Andhara Sugar Ltd.(ASL),VVF Limited(VL),Asean Bintulu Fertilizer(ABF),
Uhde GmbH-SAFCO IV(UGS)revealed that in none of the projects allowability of making
payment was actually crystallized during the year under consideration for which the provision had
been made,that in preceding year also similar provisions were made by the company against
different projects and were disallowed by the then AO,that `G' Bench of Mumbai Tribunal had
dismissed the appeal of the assessee for the A.Y.2002-03.Finally, he held that provisions
amounting to Rs.8.14 Crores had to be disallowed being unascertained liabilities.

2.2.Aggrieved by the order of the AO,the assessee preferred an appeal before First Appellate
Authority(FAA).Before him,it was stated that the assessee-company was engaged in the business
of providing of entire range of engineering services,it involved design, construction and commiss
-ioning of plants for the chemicals,petro-chemical,Fertilizers,Refineries and pharmaceutical
industries,that engineering services provided by it mainly comprised of licenses know how/basic
engineering/detailed engineering/Lumpsum Trunkey contracts (LSTK) projects/supervising the
contracts,that engineering cost was estimated based on efforts to be deployed from different
disciplines,that based on such estimated man hours decision about cost was takent,that estimation
of man hours was based on experience,that engineering cost was arrived at on which the
engineering risk element was factored in, that in subcontracted matters subcontracting risk
element was also factored in,that construction executed by it were normally executed within the
period of six months to two years,that in some cases contracts might stretch much longer,that in
LSTK contracts income was recognised on commissioning of plant,that after commissioning of
the plant it would conduct Guarantee Test Runs before acceptance of the plant by the customer,
that it recognised the profit and LSTK contracts on commissioning of plant, which event take
place much before the acceptance by the client,that it was essential for the company to provide for
cost provision which were likely to be incurred during the period of commissioning of the plant to
                                       3                 ITA No. 1690/Mum/2012 U H D E I n d i a P r i v a t e L i m i t e d

acceptance of the company by the customer,that such cost generally included projects specific
expenses where the clients would be giving conditional acceptance subject to completion of
certain conditions and it depended on replacement in the manner/notification of the custom -
er,that it was required to be incur such cost and profit for the same was based on the punch list
given by the client,that it was necessary to make provision for additional cost if sustainable
production capability was not demonstrated within the guarantee period,that in such contracts, the
liability of assessee was unlimited, that in the case of cost-plus-fee-contract (CPFC)profits were
recognised on the mechanical completion of the plants,that provisions were made mainly for
reengineering services, that quantum of such provisions was relatively lesser as compare to
LSTK projects.It was further stated that there were several reasons for the complexities in making
such provisions,that assessee was engaged in the diverse variety of industries,that nothing was
repetitive, that it provided entire range of services,that projects were carried out in wide
geographical area,that the services rendered by it were of high technical nature, that the company
had the option of recognising the profits on final acceptance of the plant by the customer,that it
was recognising profits in advance i.e. at the time of acceptance of the plant by the client,that it
was necessary to provide for cost on such contracts for the period from commissioning of the
plant to final acceptance of the plant by the client, that if the cost of completed contracts were not
to be allowed then the profits on such contracts should not be taxed.Assessee also provided
aggregate cost provisions on completed contracts on following projects:
Gujarat State Fertilisers Corporation(GSFC),Rashtriya Chemical Fertilisers Ltd(RCF),PPL, ASL,
VL,ABF,UGS,Uhde Badsoden(UB),Uhde GmbH-Rafnes(UGR),USV Ltd,Uhde GmbH(UG) and
Uhde GmbH-FPC Taiwan (UGF).
The assessee also argued that provisions were created only after thorough analysis of status of the
project by the Project Implementation Team,that method of accounting for Provisions for Costs
on Completed Contracts(PCCC)was followed consistently and is accepted by the Department up
to A.Y.2000-01,that PCCC were based on identified and ascertained present liabilities and on the
basis of technical assessments and projections of project manager who were experts in the field,
that aforesaid practice of providing for all known liabilities on an estimation basis was also in
accordance with Accounting Standard-1 issued u/s 145 vide CBDT Notification No.S.O.69(E)
dated 25/01/1996.

2.3.After considering the submissions of the assessee and the orders of the Tribunal for earlier
years (AY.s.2001-2002 and 2002-2003),he held that for allowance of any provision liability
should be ascertained during the year and should be capable of estimation with reasonable
certainty,that no evidence was produced before him that while making quantification for
provisions PM,Lead Engineer,Finance Manager and Commercial Manager jointly estimated the
cost though the assessee had made such a claim,that estimates were prepared by only one
person,that the assessee itself had admitted that due to complexities estimate was being made,that
in majority cases the provisions had been written back including substantial portion of the
provisions made,that in case of PPL(66-0089) provision of Rs.12,30,4l5/-was made,that out which
Rs.10,30,415/ had been written back in subsequent year,that in the case of UB(66-2351) the total
provision Rs.3,57,120/ had been written back in the current year itself,that in case of VL(66-
6277)out of the provision of Rs.20, 06,168/ an amount of Rs.19,01,154/- had been written back in
the current year as well as in the subsequent year,that in UG (66-6298) out of provisions of
Rs.10,84,134/-an amount of Rs.9, 45,530/- was written back in the current year itself,that in case
of Uhde GmbH (66-6304) out of provisions of Rs.5,87,664/ an amount of Rs.5,47914/ was written
back during the current year itself,that in case of RCF out of total provisions of Rs.6,49, 95,736/
an amount of Rs.3,37, 80, 290/-was written back during the current year itself ,that in USV Ltd.
(66-6305) out of provisions of Rs.486,609/- an amount of Rs.4,04,609/- had been written back in
subsequent year,that in case of Grasim out of total provisions of Rs.5,37,030/- an amount of
                                      4                ITA No. 1690/Mum/2012 U H D E I n d i a P r i v a t e L i m i t e d

Rs.4,32,750/ was written back during the current year itself,that the major portion of the
provisions had been written back in the current year or in the subsequent year which proved that
there was no sound basis available with the assessee to make those provisions,that not only in the
subsequent year the provisions created during the year had been written back in the current year
itself which did stand to any reason,that except in the case of RCF regarding other provisions the
assessee had stated that they were based on technical estimates made by the Project
Manager(PM),that the evidence was internal notes prepared by the engineers and same was
without any sound basis. Discussing the provisions made in the case of RCF,he held that
rectifications were not pending that necessitated crating provisions on 31.03.2005.Regarding
provisions of Rs. 1.82 crores for civil erection the assessee has furnished running bills for extra
claim made after March.About the bills,FAA held that those bills were dated 08.02.2005 and
hence since the bills were received by the appellant during the financial year itself,that there was
no reason to make provisions for the same,that the provisions were based on surmises,suspicions,
playsafe based financial plans and were not capable of estimation with reasonable certainty.
Accordingly,he held that the AO was justified in making disallowance of provisions.

2.4.Before us AR argued that the assessee was engaged in the executing LSTK and Cost Plus Fee
Contracts(CPFC),that in LSTK project it was recognising income on commissioning of a plant,
that at commissioning stage plant would start,that after commissioning it had to run Guarantee
Test Run(GTR),that customers would accept the plant much after the commissioning ,that
assessee had to provide for cost provisions that would likely to be incurred between
commissioning and acceptance, ,that in CPFC profits were recognised on the mechanical
completion of the plant,that in such contracts provisions were made for re-engineering
services,that provisions made for CPFC were lesser as compared to LSTK jobs,that in such contr -
acts also the assessee has to make provisions for future expenditure,that during the year end PM,
Lead Engineers and Engineering Managers would evaluate the status of the projects,that
evaluation of balance work is done by project implementation team,that PM,Lead Engineers
(LE),Commercial Manager(CM)and Finance Manager(FM)jointly estimate the cost provisions to
be made for the contracts,in case of incomplete contracts project implementation team would
make estimate and same woule be approved by the heads of Project,Commercial and Finance
departments,that in earlier years provisions made by the assessee were accepted by the
department.He referred to page no.73-86 of the PB.Departmental Representative stated that there
was no scientific base for making provisions, that vouchers submitted by the assessee contain
expenditure like travelling and audit expenditure,that such items were not related with
projects,that provisions were on extremely higher side,that out of the total provisions only 45%
were spent over a period of two years,that 20% income of the assessee was not taxed in the
relevant year,that provisions were made without any scientific basis.

2.5.We have heard the rival submissions and perused the material before us. In our opinion PCCC
is based on identified liability,though it is only an estimate.In the year under appeal the assessee
had made provisions for eleven unfinished projects and in subsequent two years after completing
the projects wrote off the provisions and offered the balance for taxation.We further find that in
those years the assessee had written back the balance amount and same was taxed by the AO.In
our opinion,the AO cannot take two stands-he cannot tax the assessee in later years for a part of
transaction for which provision has been made for earlier years.In the commercial world
provisions are made for contingencies and court are of view that same have to allowed.AS-7
recongises the principal of making provisions for certain expenses.It is a normal feature of
business world that at the end of a particular AY., it may not be possible for an assessee to
determine the probable future expenditure of an ongoing project or scheme.If it recongnises
income from such project in that year,it will have to make some reasonable provisions for the
                                      5                  ITA No. 1690/Mum/2012 U H D E I n d i a P r i v a t e L i m i t e d

expenditure to be incurred in subsequent year.Provision will vary from project to project and from
year to year.It would also depend on stage of completion of the project.For that purpose assessee
will have to rely on earlier years' experience and report of the technical personnel.Question of
provisions for warranty was discussed at length by the Hon'ble Apex Court in the matter of
Rotork Controls India P. Ltd.(314 ITR62).We are aware that warranty cannot be equated with
provisions made for the projects to be completed by an assessee,but the principle laid down by the
Hon'ble Court are applicable to the case under consideration.Provision after all is only an
estimation of probable expenditure to be incurred after the end of a particular year.Besides,in our
opinion travelling cost of the engineers and technical staff,testing cost,supplies of replacement
spares,site related costs,cost of completion of punch list work,cost of modification for
uncompleted projects has to be considered while making provisions when an assessee carries out
a business of providing diversified engineering services.We find that the assessee had to make
provisions for additional cost if sustainable production capability is not demonstrated within the
guarantee period.In such cases cost provisions had to be made even after acceptance/conditional
acceptance of a plant.

We find that the FAA has disallowed provisions on the basis that the assessee had written back
the amounts in subsequent years.He has not analysed the data of earlier years and subsequent
years to determine the alleged unreasonableness of the provisions.It is a fact that res judicta is not
applicable to income tax proceedings and every year is an independent unit,but rule of consistency
contemplates that the AO should not suddenly disallow any item without assigning some
reason.From the order of the AO/FAA we are unable to find as how the facts and circumstances
for the year 2001-02 were different from the facts for the year under consideration.Assessee was
following the same system of making provisions for uncompleted projects for last so many
years.There in nothing in the order of the FAA that could prove that provisions made by the
assessee were not based on estimate given by experts.We have perused the paper book-it is found
that internal memos are signed by one person,but the estimate of provision was prepared by
three/four competent authorities,dealing with financial and technical sides of the projects(page 83,
89,124,138 of the PB).In short,the assessee was following some system in estimating provisions.
Therefore,without pointing out major defects it was not proper on part of the FAA to state that
system was . FAA has given his finding without giving the reasons.In our opinion writing off of
provisions in subsequent years cannot be basis for disallowing it.Accounting standards expect that
assessee should write back such amounts in later years.FAA has overlooked the fact that out of
the provisions made by the assessee,Rs.3.70 Crores were actually spent by the assessee in the
subsequent years to complete the unfinished projects or to render further services.Therefore, in
our opinion, he was not justified in confirming the disallowance of Rs. 8.14 Crores,without
analysing the terms and conditions of the projects threadbare for which provisions were made
during the year under apppel.Reversing his order we decide first effective ground of appeal
(ground no. 1-3) in favour of the assessee.

3.Next effective ground of appeal (grounds no.6-7)deals with not giving credit for TDS and the
amounts involved are Rs.3.26 and Rs.33.84 lakhs for the year 2003-04 and 2004-05 respectively.
Before us,AR stated that TDS credit was not allowed by the AO in earlier two years on the ground
that it would be allowed in the year of completion of contract,that same was not allowed in the
year under appeal though the contracts were completed,that in respect of TDS credit of
Rs.33,84,649/- the AO had passed a rectification order on 29.03.2007,that at the time of the
computation said amount was not considered,that FAA had not given any direction though a
specific ground was raised before him.He referred to the rectification order and the tax calculation
with regard to Rs.33.84 lakhs.DR left the issue to the discretion of the Bench.
                                       6                  ITA No. 1690/Mum/2012 U H D E I n d i a P r i v a t e L i m i t e d

3.1.After perusing the material,we are of the opinion that the assessee is entitled to get credit of
taxes paid in one of the years-either in year of payment or in the year of completion of
contracts.AO is directed to verify the facts and give credit for taxes paid by the assessee.
Grounds of appeal no.6and 7 are allowed in favour of the assessee,in part.

4.Next effective ground of appeal (GAO No.8)is about disallowance of software maintenance
expenses.AO,during the course of assessment proceedings,noted that assessee company had
claimed Rs.1,62,86,823/-toward computer software expenses.He was the opinion that the
expenditure in question had to be treated as capital expenditure.It was stated before AO that those
expenses were made towards annual maintenance charges,that same were revenue in nature since
the benefit would occur only for one year. AO however, was not convinced with the arguments
made and held that the assessee was enjoying enduring benefit from the software purchased for
the long period. The AO also noted that the assessee's purchases were from associate concerns
from whom it had purchased machinery in past which did not prove the regular maintenance of
expenditure.Accordingly, he treated the expenditure as capital relying on following judgments
Aravali'Construction Co. P. Ltd.(259ITR30) and allowed depreciation @ 25% thereon.
4.1.In the appellate proceedings,FAA after considering the arguments of the assessee,assessment
order and the Remand Report held that the major portion of the expenditure was the payment
made to the parent company,that bills issued to the assessee by the parent company did not
mention that life of the software purchased was limited to one year,that it was not clear as to how
the cost of the software purchased by the parent company was apportioned amongst its sister
concern, that the basis of apportionment was not very clear.Following his own order for the year
2004-2005,he held that the expenditure incurred by the assessee was capital in nature.
Accordingly, the addition made by AO was upheld.

4.2.Before us,AR stated that similar issue had arisen in earlier year,that the Tribunal had decided
the issue in favour of the assessee.DR conceded that issue is covered against the revenue.We find
that vide its order dated 08.08.2012(ITA/6511/Mum/2009-AY.2004-05) `F' bench of Mumbai
Tribunal deliberated upon and decided the issue of Software Expenditure in favour of the
assessee.FAA had upheld the disallowance referring to the order passed by him for the year 2004-
05.As the said order has been reversed by the Tribuanl.We would like to reproduce the relevant
portion of the said order and same reads as under :
       "10.Ground No.4 pertains to the disallowance of Rs. 59,26,204/-being software development,
       holding the same to be capital in nature.
       11.The assessee has filed details of expenses debited under the head software development (PB
       84).From the heading itself, we find, the expenses booked are software maintenance expenses and
       all the expenses are either in the, nature of annual mtaintenance contracts, up gradation and
       installation of anti virus,which according to us cannot in any circumstance be held to be enduring
       in nature and called capital expenses These are expenses which are used for smooth running of the
       Computers Thus, we hold the same to be allowable."
We further find that the appeal filed by the department against the order of the Tribunal for the
year 2004-05,before the Hon'ble jurisdictional High Court with regard to software maintenance
expenses,was dismissed by the Court(Pg.224-226 of the PB).Respectfully,following the same we
hold that expenditure incurred by the assessee for maintenance of software is to treated revenuer
expenditure for the year under appeal also.
Ground of appeal no. 8 is decided in favour of the assessee-company.

5.Next effective ground of appeal (grounds no.9-10)pertains to writing off of bad debts.AO,
during the course of assessment proceedings noted that the assessee-company had debited a sum
of Rs.41,l0,422/- as bad debts during the year.Explaining this,it was submitted before AO that the
amount in question was related to the transaction entered in to with M/s. Sterling Gelatin (SG).On
                                      7                 ITA No. 1690/Mum/2012 U H D E I n d i a P r i v a t e L i m i t e d

verification with SG u/s.133(6) of the Act,the AO was informed by the said company that the
amount of Rs.3,64,049/- which was payable by assessee to them was written off by them and the
amount ofRs.41,87,324/-was never payable by them to the assessee.The assessee however, stated
that its claim was correct and same should be allowed. The AO however, was not convinced and
made the disallowance.
5.1.During the appellate proceedings,the assessee furnished certain submissions which was sent to
the AO for verification by the FAA.After verification,the AO his in remand report stated that on
comparison of the details filed by the assessee and bills received from SG most of the entries were
not matching and hence Bad Debts had rightly been disallowed.FAA held that the assessee was
not in a position to rebut the findings of the AO that the said party had denied any liability
payable to the assessee,that no amount was receivable from the debtor,that there could not have
been any write off of the said amount,that the conditions prescribed u/s. 36 for the write off were
not satisfied,that the Bad Debts written off as claimed by it was not allowable as deduction.He
upheld the addition made by the AO.
5.2.Before us,AR stated that services/goods were rendered/supplied to S.G. in pursuance of an
agreement, that S.G. did not make payment to the assessee, that it had contemplated legal action
against S.G., that later on a decision was taken by the Board of Directors not to file case before
competent court,that assessee had written off the income as bad-debts.He referred to page no.
279-303,249-261 and 239 of the paper book.DR supported the order of the FAA.
5.3.We have heard the rival submissions and perused the material before us. We find that vide its
agreement dated.12.06.2001 the assessee had entered into an agreement with SG,that it had agreed
to render services to S.G. (page no.285,286of PB),that SG had jointly signed the mechanical
completion of certificate on 23.05.2002(pg.303of PB),that it had engaged an advocate for
pursuing the matter of recovery from S.G.(page.239-41 of PB),that later on a decision was taken
by the assessee not to pursue the matter in the court of law, that the assessee had made necessary
entries in the books of accounts.As the amount was actually written off in the books of accounts,
so, in our opinion there was no justification for the disallowance made/ confirmed by the AO/
FAA under the head bad-debts.After the amendment to section 36 of the Act,courts are of
unanimous view that if an assessee writes off any amount in its books of accounts, it has not to
prove any other thing.In the case before us, we find that the decision of writing off of the amount
in question was taken in peculiar circumstances.Thererfore,reversing the order of the FAA,we
hold that claim made by the assessee,under the head bad-debts written off , should be allowed.
Grounds no.9 & 10 are decided in favour of the assessee.

6.Last ground of appeal is about confirming the levy of interest u/s. 234B of the Act.During the
course of hearing before us, DR and AR agreed that issue was of consequential in nature. So, we
are not adjudicating it separately. It stands allowed for statistical purposes.

                As a result, appeal filed by the assessee stands partly allowed.
                    Order pronounced in the open court on 4th July, 2014.
        ( . /D.Manmohan)                                               (Û]/Rajendra)
       Ú¢ /VICE PRESIDENT                              /ACCOUNTANT MEMBER
/Mumbai,/Date: 04.07.2014.
    /Copy of the Order forwarded to :
                    8        ITA No. 1690/Mum/2012 U H D E I n d i a P r i v a t e L i m i t e d

1. Assessee /                    2. Respondent /×
3. The concerned CIT(A)/   ,4.The concerned CIT /  
5. DR "F" Bench, ITAT, Mumbai /   ,..Û.
6. Guard File/[ 
                   ×  //True Copy//
                                / BY ORDER,
                           /  Dy./Asst. Registrar
                           ,   /ITAT, Mumbai
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