Neo Structo Construction Ltd.,, Surat v. The Addl.CIT.,Range-1,, Surat

ITA 3026/AHD/2009 | 2006-2007
Pronouncement Date: 24-02-2012 | Result: Allowed

Appeal Details

RSA Number 302620514 RSA 2009
Assessee PAN AAACN7717N
Bench Ahmedabad
Appeal Number ITA 3026/AHD/2009
Duration Of Justice 2 year(s) 3 month(s) 14 day(s)
Appellant Neo Structo Construction Ltd.,, Surat
Respondent The Addl.CIT.,Range-1,, Surat
Appeal Type Income Tax Appeal
Pronouncement Date 24-02-2012
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted C
Tribunal Order Date 24-02-2012
Date Of Final Hearing 21-02-2012
Next Hearing Date 21-02-2012
Assessment Year 2006-2007
Appeal Filed On 10-11-2009
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH C AHMEDABAD . !' BEFORE SHRI MUKUL KUMAR SHRAWAT JUDICIAL MEMBER AND SHRI A MOHON ALANKAMONY ACCOUNTANT MEMBER ./ ITA NO.3026/AHD/2009 $ %$ $ %$ $ %$ $ %$/ // / ASSESSMENT YEAR:-2006-07 NEO STRUCTO CONSTRUCTION LTD. A/1 A/4 NAYAN PARK ICHHAPORE P.O. SURAT 394 5120 PAN NO.AAACN7717N / V/S . ADDL. CIT RANGE- 1 SURAT &'/ APPELLANT .. ()&'/ RESPONDENT &'/ BY APPELLANT SHRI K.P. SHAH AR ()&' * + ! /BY RESPONDENT SHRI VINOD TANWANI SR-DR * -' / DATE OF HEARING 21-02-2012 .% * -' /DATE OF PRONOUNCEMENT 24 -02-2012 !/ !/ !/ !/ / // / O R D E R /PER MUKUL KUMAR SHRAWAT JUDICIAL MEMBER :- THIS APPEAL HAS BEEN FILED BY THE ASSESSEE ARISING FROM THE ORDER OF LD. COMMISSIONER OF INCOME-TAX (APPEALS)-I SURAT DATED 23-09-2009 FOR THE ASSESSMENT YEAR 2006-07. ITA NO.3026/AHD/2009 A.Y. 2006-07 NEO STRUCTO CONTN. LTD. V. ADL. CIT RNG-1 SRT PAGE 2 2. THE NUMBER OF GROUNDS HAVE BEEN RAISE HOWEVER THE ISSUE IS IN RESPECT OF A DISALLOWANCE OF RS.70 95 392/- REPRESE NTING THE PERFORMANCE BANK GUARANTEE WHICH WAS ENCASHED BY ONGC. THE ISSU E IS WHETHER IT WAS A CAPITAL EXPENDITURE OR IF BUSINESS LOSS THEN TO BE HELD AS REVENUE EXPENDITURE INCIDENTAL TO THE BUSINESS OF THE ASSESSEE. 3. FACTS IN BRIEF AS EMERGED FROM THE CORRESPONDING ASSESSMENT ORDER PASSED U/S. 143(3) OF I.T. ACT DATED 12-11-2008 WAS THAT ASSESSEE-COMPANY IS ENGAGED IN THE BUSINESS OF CONSTRUCTION AND EREC TION OF PLANT MAINLY IN RESPECT OF PUBLIC SECTOR UNITS LIKE ONGC HPCL KRI BHCO CRL ETC. THE ASSESSEE HAS ALSO UNDERTAKEN THE SAID WORK FOR PRIV ATE SECTOR LIKE RELIANCE ESSAR ISPAT ETC FOR THE YEAR UNDER CONSIDERATION. TOTAL TURNOVER WAS AT RS.68 56 71 539/- AND THE GROSS PROFIT (GP FOR SHOR T) AT RS.20 51 25 204/-. THE GP FOR THE YEAR UNDER CONSIDERATION WAS STATED TO BE 29.91% AS AGAINST THE GP RATE OF THE PAST YEAR AT 24.13%. IT WAS NOTE D BY THE ASSESSING OFFICER THAT A SUM OF RS.70 75 392/- WAS DEBITED TO PROFIT AND LOSS ACCOUNT IN RESPECT OF ENCASHMENT OF BANK GUARANTEE. IT WAS EXPLAINED T HAT THE ASSESSEE HAD ACCEPTED AN OFF-SHORE JOB WORK OF ONGC A PERFORMA NCE BANK GUARANTEE WAS GIVEN TO ONGC. DUE TO CERTAIN TECHNICAL REASONS THE ASSESSEE WAS NOT ABLE TO PERFORM OR EVEN TO START THE JOB. DUE TO NO N-PERFORMANCE THE SAID AMOUNT BEING 7.5% OF THE ANNUALIZED CONTRACT VALUE WAS ENCASHED BY THE ONGC. THE RELEVANT PORTION OF THE EXPLANATION IS RE PRODUCED BELOW:- ON AWARD OF THE CONTRACT THE COMPANYS TERM OF ENG INEERS VISITED VARIOUS OFFSHORE PLATFORMS OF ONGC TO EVALUATE & AC CESS THE WORK AND TO PLAN EXECUTION OF THE VARIOUS JOBS. HOWEVER ON DETAILED CHECK-UP THE CONDITIONS AND VARIOUS OTHER DETAILS INVOLVED W ITH THE JOB WERE VERY DIFFERENT FROM THE SCOPE OF WORK DEPICTED IN THE TE NDER DOCUMENTS AND IT TRANSPIRED THAT THE LACK OF PHYSICAL INSPECTION IN THE PRETENDER-STAGE HAD CREATED THIS ANOMALY. IT IS ALSO TRANSPIRED THA T THE EXISTING CONDITIONS MADE THE TENDERED RATES TOTALLY UNVIABLE BECAUSE OF THE VARIOUS HIDDEN FACTORS AND COSTS. THEREFORE THE CO MPANY TOOK-UP THE MATTER WITH ONGC VIDE LETTER DATED 26 TH APRIL 05 THAT IT WAS NOT POSSIBLE TO GO AHEAD WITH THE EXECUTION OF THE JOB DUE TO DIFFERENCE IN THE SCOPE OF WORK AWARD AND SPECIFIED IN THE TENDER DOCUMENTS AND ITA NO.3026/AHD/2009 A.Y. 2006-07 NEO STRUCTO CONTN. LTD. V. ADL. CIT RNG-1 SRT PAGE 3 REQUESTED ONGC TO TERMINATE THE CONTRACT AND RETURN THE BANK GUARANTEE. ONGC DID NOT TERMINATE THE BANK GUARANTEE BUT EN-C ASHED THE BANK GUARANTEE STATING THE NON PERFORMANCE OF THE CONTRA CT BY THE COMPANY. EVEN THOUGH IT WAS POSSIBLE TO HAVE PROCEED LEGALL Y IT IS EXTREMELY DIFFICULT TO FIGHT A LEGAL BATTLE WITH AN ORGANIZAT ION LIKE ONGC WHICH IS MAMMOTH AND HAVE BOTTOMLESS CASH RESERVES WHILE IT WOULD HAVE BROKEN-UP THE ORGANIZATION LIKE ASSESSEE-COMPANY. H ENCE THE ASSESSEE COMPANY TOOK THE LOSS OF RS.70.75 CRORES W HICH OTHERWISE WOULD HAVE RESULTED IN CRORES OF RUPEES OF LOSS IF THE CONTRACT WAS PERFORMED. THIS WAS CONSIDERED AS A PRUDENT BUSINES S DECISION AND THE BUSINESS LOSS WAS ACCEPTED BY THE ASSESSEE COMP ANY. THE ASSESSEE COMPANY WENT FORWARD BY DEPLOYING ITS ENGINEERS IN OTHER SECTORS WHICH HAD BORNE FRUIT SINCE THEN. THE NECESSARY XEROX COPY OF CORRESPONDENCE IS ENCLOSED HEREWITH FOR YOU R READY REFERENCE. 3.1) THE ASSESSING OFFICER WAS NOT CONVINCED AND HE HAS HELD THAT THE BANK GUARANTEE WAS NOT A BUSINESS EXPENDITURE TO BE ALLOWED U/S.37(1) OF IT ACT AND THAT IT WAS IN RESPECT OF A NON-PERFORMANCE OF THE CONTRACT HENCE PERTAINED TO THE WORK WHICH WAS NOT EXECUTED THER EFORE CAPITAL IN NATURE. THE SAID AMOUNT WAS DISALLOWED AND THE MATTER WAS CARRI ED BEFORE THE FIRST APPELLATE AUTHORITY. 4. THE LD. CIT(A) HAS HELD THAT ADMITTEDLY THE ASSE SSEE HAD NOT BEGIN THE WORK. THE CONTRACT WAS AWARDED ON 04-02-2005 AS PER THE BIDDING MADE BY THE ASSESSEE. ON VISIT OF TECHNICAL TEAM THE ASSE SSEE CAME TO KNOW THAT THE WORK COULD NOT BE STARTED SO THE ASSESSEE HAS ACCO RDINGLY INFORMED THE ONGC. AS PER THE TERMS OF THE CONTRACT THE ASSESSEE WAS REQUIRED TO MOBILIZED THE MAN POWER WITHIN 45 DAYS. SINCE THE A SSESSEE HAD NOT EVEN STARTED THE WORK THEREFORE THE NATURE OF THE EXPEND ITURE WAS NOTHING BUT A CAPITAL EXPENDITURE. LD. CIT(A) HAS REFERRED THE CA SE LAW OF HONBLE SUPREME COURT IN THE CASE OF SWADESHI COTTON MILLS CO. LTD. V. CIT (1967) 63 ITR 65 (SC) AND CONFIRMED WITH THE DISALLOWANCE. ITA NO.3026/AHD/2009 A.Y. 2006-07 NEO STRUCTO CONTN. LTD. V. ADL. CIT RNG-1 SRT PAGE 4 5. WITH THIS FACTUAL BACKGROUND WE HAVE HEARD BOTH THE SIDES. AS PER THE NOTIFICATION OF THE AWARD OF CONTRACT DATED 04-02-2 005 THE ASSESSEE WAS REQUIRED TO FURNISH A PERFORMANCE BANK GUARANTEE FOR AN AMOUNT OF RS.70 75 392/- I.E. @ 7.5% OF THE ANNUALIZED CONTRA CT VALUE. THE ASSESSEE IN-TURN AS PER TERMS OF THE AWARD OF THE CONTRACT HAD BEEN REQUESTED TO ISSUE A BANK GUARANTEE . ACCORDINGLY THE BANK VID E AN UNDERTAKEN DATED 07- 02-2005 FURNISHED PERFORMANCE GUARANTEE TO ONGC. THEREAFTER VIDE LETTER DATED 03-05-2005 ONGC HAS INFORMED THE TERMINATION OF THE CONTRACT AWARD AND INVOKED THE SAID GUARANTEE IN TERMS OF ONE OF T HE CLAUSE OF THE AWARD. RATHER THE ONGC HAS INFORMED THE ASSESSEE TO RESER VE ITS RIGHT TO LODGE THE CLAIM FOR DAMAGES ARISING DUE TO TERMINATION OF THE CONTRACT BY THE ASSESSEE. WITH THIS FACTUAL BACKGROUND WE ARE OF THE VIEW TH AT IT WAS WRONG ON THE PART OF THE REVENUE DEPARTMENT TO CONSIDER EACH CONTRACT AS A START OF NEW BUSINESS. THIS CONTRACT WAS PART OF THE BUSINESS AC TIVITY OF THE ASSESSEE. THE TERM CONTRACT IS ALTOGETHER A DIFFE RENT MEANING THAN THE TERM BUSINESS. A CONTRACT CAN BE A PART OF THE BUSINESS RATHER IN A BUSINESS THERE CAN BE EXISTENCE OF SEVERAL CONTR ACTS. UNDOUBTEDLY A HUGE TURNOVER WAS MADE DURING THE YEAR UNDER CONSID ERATION PERTAINING TO THE CIVIL AND ELECTRIC WORKS CARRIED ON BY THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION. THE REVENUE AUTHORITIES HAVE WRONGLY APPLIED THE LAW PRONOUNCED IN THE CASE OF SWADESHIS COTTON MILLS CO. LTD. (SUPRA) BECAUSE IN THAT CASE THE EXPENDITURE WAS INCURRED TO AVOID UNN ECESSARY INVESTMENT IN THE CAPITAL ASSET. IN THAT PRECEDENT THE EXPENDITU RE WAS HELD AS AN OUTSIDE THE ACCOUNT OF THE PROFITS AND GAINS OF THE ASSESSE E. CONTRARY TO THIS IN THE PRESENT CASE THE IMPUGNED EXPENDITURE DID NOT REPR ESENT AN INVESTMENT IN ANY CAPITAL ASSET. RATHER IN THE CASE OF JAMNA AUTO INDUSTRIES V. CIT (2008) 214 CTR 649 (P&H) (FB) THE HONBLE COURT HA S HELD THAT DAMAGES FOR BREACH OF CONTRACT IS ALLOWABLE AS BUSINESS EXP ENDITURE IF NOT INCURRED FOR CONTRAVENTION OF ANY LAW. LIKEWISE IN THE CASE OF CIT V. RAJARAM BANDEKAR (1994) 121 CTR 233 (BOM) THE HONBLE COURT HAS HE LD THAT THE PAYMENT MADE BY FIRM TO TERMINATE AND INCO NVENIENT CONTRACTUAL ITA NO.3026/AHD/2009 A.Y. 2006-07 NEO STRUCTO CONTN. LTD. V. ADL. CIT RNG-1 SRT PAGE 5 OBLIGATION IN TERMS OF A SETTLEMENT IS WHOLLY AND E XCLUSIVELY FOR THE PURPOSE OF ITS BUSINESS. WE THEREFORE HOLD THAT DURING THE CONTINUITY OF TH E BUSINESS IF IN A PARTICULAR CONTRACT THE ASSESSEE H AD TO COMPENSATE FOR HIS OWN DEFAULT BY OFFERING PERFORMANCE GUARANTEE WHICH WAS CONTRACTUAL OBLIGATION AND THAT THE SAID BUSINESS CONTINUED LAT ER ON THEN A DISALLOWANCE FOR A PARTICULAR CONTRACT BE NOT CONSIDERED SEPARAT ELY THAT TOO TO TREAT THE SAME AS A CAPITAL EXPENDITURE. IT WAS ALTOGETHER A WRONG NOTION ON THE PART OF THE A.O. HENCE WE HEREBY REVERSE THE FINDINGS OF T HE REVENUE AUTHORITIES AND DIRECT TO ALLOW THE CLAIM. 6. IN THE RESULT GROUNDS RAISED BY ASSESSEE ARE HEREB Y ALLOWED. 0 !/ * .% 1 2 24 /02/2012 '! 6 * 7 THIS ORDER PRONOUNCED IN OPEN COURT ON 24.2. 012 . ( . ) ( ) ( !' ) ( ) ( A. MOHAN ALANKAMONY) (MUKUL KUMAR SHAWART) (ACCOUNTANT MEMBER) (JUDICIAL MEMBER) 1 2- 24/02/2012 DKP* !/ !/ !/ !/ * ** * (9 (9 (9 (9 :!9% :!9% :!9% :!9% / COPY OF ORDER FORWARDED TO:- 1. &' / APPELLANT 2. ()&' / RESPONDENT 3. < / CONCERNED CIT 4. <- / CIT (A) 5. 9?7 ( / DR ITAT AHMEDABAD 6. 7A$ B0 / GUARD FILE. BY ORDER/ !/ ! //TRUE COPY// C/ D