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Income Tax Appellate Tribunal, MUMBAI BENCH “C” MUMBAI
Before: SHRI OM PRAKASH KANT & SHRI NARENDER KUMAR CHOUDHRY
This appeal by the Revenue is directed against order dated 22.12.2022 passed by the Ld. Commissioner of Income-tax (Appeals)-53, Mumbai [in short ‘the Ld. CIT(A)’] for assessment year 2016-17, raising following grounds:
1. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs.21,74,000/- u/s.14A of the IT Act, 1961 r.w. Rule 8D expenses and other expenses incurred facilitate
M/s ITD Cementation India Ltd. 2 M/s ITD Cementation India Ltd. the earning of all income including exempt income, the earning of all income including exempt income, the earning of all income including exempt income, and hence disallowance u/s 14A r.w. Rule 8D of the and hence disallowance u/s 14A r.w. Rule 8D of the and hence disallowance u/s 14A r.w. Rule 8D of the IT Rules. IT Rules.
2. On the facts and circumstances of the case and in On the facts and circumstances of the case and in On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of aw, the Ld. CIT(A) erred in deleting the addition of aw, the Ld. CIT(A) erred in deleting the addition of Rs.2,45,07,479/ Rs.2,45,07,479/- on on account account of of provisions provisions for for unforeseen losses which are not an ascertained unforeseen losses which are not an ascertained unforeseen losses which are not an ascertained liability and are contingent losses and therefore are liability and are contingent losses and therefore are liability and are contingent losses and therefore are not allowable under section 37 of the IT Act, 1961. not allowable under section 37 of the IT Act, 1961. not allowable under section 37 of the IT Act, 1961.
Brief facts of the case are that the assessee company was rief facts of the case are that the assessee company was rief facts of the case are that the assessee company was engaged in the business of civil contract including carrying out engaged in the business of civil contract including carrying out engaged in the business of civil contract including carrying out work of construction of roads and bridges work of construction of roads and bridges, dams etc. for various dams etc. for various Government and Non Government and Non-Government organization. For the year under Government organization. For the year under consideration, the assessee filed return of income on 30.11.2016 eration, the assessee filed return of income on 30.11.2016 eration, the assessee filed return of income on 30.11.2016 declaring total income of Rs. Nil under the normal provisions (after declaring total income of Rs. Nil under the normal provisions declaring total income of Rs. Nil under the normal provisions set off of of brought brought forward forward losses losses) and and book book profit profit of of Rs.96,69,03,000/- u/s 115JB of the Income u/s 115JB of the Income-tax Act, 1961 (in short tax Act, 1961 (in short ‘the Act’). The return of income filed by the assessee was selected ’). The return of income filed by the assessee was selected ’). The return of income filed by the assessee was selected for scrutiny and statutory notices under the Act were issued and for scrutiny and statutory notices under the Act were issued and for scrutiny and statutory notices under the Act were issued and complied with. During assessment proceedings, the Assessing complied with. During assessment proceedings, the Assessing complied with. During assessment proceedings, the Assessing Officer observed that the assessee has made certain investments in Officer observed that the assessee has made certain investments Officer observed that the assessee has made certain investments joint ventures and equity shares, the income arising out of which t ventures and equity shares, the income arising out of which t ventures and equity shares, the income arising out of which was not included in the total income of the assessee. After recording was not included in the total income of the assessee. After recording was not included in the total income of the assessee. After recording dissatisfaction to the claim of the assessee of incurring no dissatisfaction to the claim of the assessee of incurring no dissatisfaction to the claim of the assessee of incurring no expenses, the Assessing Officer invoked Rule 8D of the Income-tax expenses, the Assessing Officer invoked Rule 8D of the Income expenses, the Assessing Officer invoked Rule 8D of the Income Rules, 1962 (in short ‘the Rules’) and made disallowance @ 0.5% of Rules, 1962 (in short ‘the Rules’) and made disallowance @ 0.5% of Rules, 1962 (in short ‘the Rules’) and made disallowance @ 0.5% of the average value of the investments eligible for earning exempted the average value of the investments eligible for earning exempted the average value of the investments eligible for earning exempted income which was computed at Rs.21,74,000/-. The said income which was computed at Rs.21,74,000/ income which was computed at Rs.21,74,000/
M/s ITD Cementation India Ltd. 3 M/s ITD Cementation India Ltd. disallowance was made under the normal provisions of the Act as disallowance was made under the normal provisions of the Act as disallowance was made under the normal provisions of the Act as well as for computing book profit u/s 115JB of the Act. The Ld. ell as for computing book profit u/s 115JB of the Act. The Ld. ell as for computing book profit u/s 115JB of the Act. The Ld. Assessing Officer further observed that the assessee in the profit Assessing Officer further observed that the assessee in the profit Assessing Officer further observed that the assessee in the profit and loss debited an amount of Rs.2,45,0 and loss debited an amount of Rs.2,45,07,479/- on account of provision for ‘foreseeable foreseeable losses’ under the account account head ‘other expense’. Regarding the allowability of the egarding the allowability of the ‘foreseeable losses’, ‘foreseeable losses’, it was explained by the assessee that in some of the contracts carried was explained by the assessee that in some of the contract was explained by the assessee that in some of the contract out by the company, the , the total cost to be incurred on the projects on the projects, was estimated to exceed exceed the original contract value contract value of the said projects and therefore and therefore assessee company was of the view that it was of the view that it would be incurring losses on t losses on those projects in future years. It was hose projects in future years. It was submitted that the assessee was following Accounting Standard-7 submitted that the assessee was following Accounting Standard submitted that the assessee was following Accounting Standard (AS-7) issued by the Institute of Chartered Acc 7) issued by the Institute of Chartered Accountant of India. ountant of India. Due to requirement under AS to requirement under AS-7, this loss was required to be disclosed 7, this loss was required to be disclosed separately as foreseeable contract loss in the profit and loss separately as foreseeable contract loss in the profit and loss separately as foreseeable contract loss in the profit and loss account. Further it was submitted that the assessee was following Further it was submitted that the assessee was following Further it was submitted that the assessee was following percentage completion method year after percentage completion method year after year and there was no year and there was no change in the method of the accounting followed. change in the method of the accounting followed. According to the According to the assessee the foreseeable loss is on account of ascertained liability of assessee the foreseeable loss is on account of ascertained liability of assessee the foreseeable loss is on account of ascertained liability of provisions of expenses. provisions of expenses.
2.1 After considering the submission of the assessee, the Ld. After considering the submission of the assessee, the Ld. After considering the submission of the assessee, the Ld. Assessing Officer rejected g Officer rejected its contentions, observing as under: observing as under:
“4.2 The submission of the assessee has been considered 4.2 The submission of the assessee has been considered 4.2 The submission of the assessee has been considered but not found acceptable. At the outset, it is noted that the but not found acceptable. At the outset, it is noted that the but not found acceptable. At the outset, it is noted that the issue of unforeseen/foreseeable/future losses was subject issue of unforeseen/foreseeable/future losses was subject issue of unforeseen/foreseeable/future losses was subject
M/s ITD Cementation India Ltd. 4 M/s ITD Cementation India Ltd. matter of appeal before the Hon'ble ITAT for Assessment matter of appeal before the Hon'ble ITAT for Assessment matter of appeal before the Hon'ble ITAT for Assessment Year 2004-05 in the assessee's own case, wherein the 05 in the assessee's own case, wherein the 05 in the assessee's own case, wherein the Hon'ble ITAT had held that the claim of such losses is Hon'ble ITAT had held that the claim of such losses is Hon'ble ITAT had held that the claim of such losses is allowable to the assessee. Subsequently, the appeal of the allowable to the assessee. Subsequently, the appeal of the allowable to the assessee. Subsequently, the appeal of the Revenue challenging the said deci Revenue challenging the said decision of Hon'ble ITAT has sion of Hon'ble ITAT has been admitted before the Hon'ble Bombay High Court as been admitted before the Hon'ble Bombay High Court as been admitted before the Hon'ble Bombay High Court as per the order of the Hon'ble High Court dated 03.04.2017 in per the order of the Hon'ble High Court dated 03.04.2017 in per the order of the Hon'ble High Court dated 03.04.2017 in ITXA/620/2014, wherein the Hon'ble High Court has ITXA/620/2014, wherein the Hon'ble High Court has ITXA/620/2014, wherein the Hon'ble High Court has admitted the substantial Ouestions of Law as to whether admitted the substantial Ouestions of Law as to whether admitted the substantial Ouestions of Law as to whether such losses being in the nature of contingent expenditure being in the nature of contingent expenditure are permissible in terms of section 37 of the Act and as to are permissible in terms of section 37 of the Act and as to are permissible in terms of section 37 of the Act and as to whether the accounting procedures (Accounting Standard 7) whether the accounting procedures (Accounting Standard 7) whether the accounting procedures (Accounting Standard 7) can override the provisions of the Act. It is noted that can override the provisions of the Act. It is noted that can override the provisions of the Act. It is noted that neither the amount represented by neither the amount represented by the "provision for the "provision for foreseeable losses" is an expenditure incurred in the year foreseeable losses" is an expenditure incurred in the year foreseeable losses" is an expenditure incurred in the year under consideration, nor any ascertained liability has under consideration, nor any ascertained liability has under consideration, nor any ascertained liability has arisen in respect of the said amount. It is seen from the arisen in respect of the said amount. It is seen from the arisen in respect of the said amount. It is seen from the detailed working (as reproduced hereinbefore) on the basis detailed working (as reproduced hereinbefore) on the basis detailed working (as reproduced hereinbefore) on the basis of which the aforesaid amount is derived that the ch the aforesaid amount is derived that the ch the aforesaid amount is derived that the quantification of the same is based on "Estimated contract quantification of the same is based on "Estimated contract quantification of the same is based on "Estimated contract cost". First, by comparing the estimated contract cost with cost". First, by comparing the estimated contract cost with cost". First, by comparing the estimated contract cost with the value of the contract as per the contract agreement, the the value of the contract as per the contract agreement, the the value of the contract as per the contract agreement, the assessee works out the figure of assessee works out the figure of estimated loss from the estimated loss from the contract. Then, by applying the percentage completion contract. Then, by applying the percentage completion contract. Then, by applying the percentage completion method (percentage of cost incurred so far vis method (percentage of cost incurred so far vis method (percentage of cost incurred so far vis-a-vis the estimated cost) to the aforesaid estimated loss from the estimated cost) to the aforesaid estimated loss from the estimated cost) to the aforesaid estimated loss from the contract, the assessee determines the part as "actual loss" contract, the assessee determines the part as "actual loss" contract, the assessee determines the part as "actual loss" to be recognized till the present year and the remaining part be recognized till the present year and the remaining part be recognized till the present year and the remaining part is treated as "Foresceable losses". After deducting the part is treated as "Foresceable losses". After deducting the part is treated as "Foresceable losses". After deducting the part of such "foreseeable losses" as has already been debited in of such "foreseeable losses" as has already been debited in of such "foreseeable losses" as has already been debited in the earlier years, the assessee claims the remaining part as the earlier years, the assessee claims the remaining part as the earlier years, the assessee claims the remaining part as deductible expe deductible expenditure in the current year in the form of nditure in the current year in the form of "provision for foresceable losses". It is thus seen that the "provision for foresceable losses". It is thus seen that the "provision for foresceable losses". It is thus seen that the amount of "provision for foreseeable losses" is worked out amount of "provision for foreseeable losses" is worked out amount of "provision for foreseeable losses" is worked out on the basis of estimates only. Further, the same represents on the basis of estimates only. Further, the same represents on the basis of estimates only. Further, the same represents likely losses to be incurred in likely losses to be incurred in future years as the project future years as the project progresses. While preparing the Books of Accounts of the progresses. While preparing the Books of Accounts of the progresses. While preparing the Books of Accounts of the company, the same may be debited in the Profit and Loss company, the same may be debited in the Profit and Loss company, the same may be debited in the Profit and Loss account as per the requirements of AS account as per the requirements of AS-7 which primarily 7 which primarily seems to be rooted in the prudence principle. However, seems to be rooted in the prudence principle. However, seems to be rooted in the prudence principle. However, allowing the same as a permissible deduction for wing the same as a permissible deduction for wing the same as a permissible deduction for computation of income of the current year for tax purposes computation of income of the current year for tax purposes computation of income of the current year for tax purposes is not acceptable, since it is merely an estimate of the likely is not acceptable, since it is merely an estimate of the likely is not acceptable, since it is merely an estimate of the likely
M/s ITD Cementation India Ltd. 5 M/s ITD Cementation India Ltd. losses that may be incurred in the future years. The same losses that may be incurred in the future years. The same losses that may be incurred in the future years. The same cannot be accepted to be an al cannot be accepted to be an allowable deduction for lowable deduction for computing the business income of current year and is liable computing the business income of current year and is liable computing the business income of current year and is liable to be disallowed under section 37 of the Act.In view of the to be disallowed under section 37 of the Act.In view of the to be disallowed under section 37 of the Act.In view of the above discussion, the claim on account of 'provision for above discussion, the claim on account of 'provision for above discussion, the claim on account of 'provision for foresceable losses' amounting to Rs. 2,45,07,479/ foresceable losses' amounting to Rs. 2,45,07,479/ foresceable losses' amounting to Rs. 2,45,07,479/- is hereby disallowed and added to the total income of the eby disallowed and added to the total income of the eby disallowed and added to the total income of the assessee. Penalty proceedings under section 271(1)(c) of the assessee. Penalty proceedings under section 271(1)(c) of the assessee. Penalty proceedings under section 271(1)(c) of the Income-tax Act, 1961 are initiated separately for furnishing tax Act, 1961 are initiated separately for furnishing tax Act, 1961 are initiated separately for furnishing inaccurate particulars of income. inaccurate particulars of income.”
On further appeal, the Ld. CIT(A) allowed re On further appeal, the Ld. CIT(A) allowed relief to the assessee lief to the assessee both on the account of disallowance in respect of 14A as well as both on the account of disallowance in respect of 14A as well as both on the account of disallowance in respect of 14A as well as disallowance of foreseeable foreseeable losses. Aggrieved, the Revenue is in Aggrieved, the Revenue is in appeal before the Tribunal raising the grounds as reproduced appeal before the Tribunal raising the grounds as reproduced appeal before the Tribunal raising the grounds as reproduced above.
Before us, the Ld. Counsel of the Before us, the Ld. Counsel of the assessee has filed a Paper assessee has filed a Paper Book containing pages 1 to 368. Book containing pages 1 to 368.
In ground No. 1, the Revenue In ground No. 1, the Revenue has challenged deletion of challenged deletion of disallowance of Rs.21,74,000/ disallowance of Rs.21,74,000/- u/s 14A of the Act.
5.1 The Ld. CIT(A) in para 4.1 of the impugned order has recorded The Ld. CIT(A) in para 4.1 of the impugned order has recorded The Ld. CIT(A) in para 4.1 of the impugned order has recorded that during the year under consideration, ar under consideration, there was no exempted there was no exempted income was earned by the assessee and thus no disallowance u/s income was earned by the assessee and thus no disallowance u/s income was earned by the assessee and thus no disallowance u/s 14A has been made by the Assessee. The Assessing officer made 14A has been made by the Assessee. The Assessing officer made 14A has been made by the Assessee. The Assessing officer made disallowance u/s 14A of the Act as according to him expenditure in disallowance u/s 14A of the Act as according to him disallowance u/s 14A of the Act as according to him relation to income not included in total income was to be disallowed e not included in total income was to be disallowed e not included in total income was to be disallowed u/s 14A of the Act in cases even no exempted income was earned u/s 14A of the Act in cases even no exempted income was earned u/s 14A of the Act in cases even no exempted income was earned during the relevant year. T during the relevant year. The Ld. CIT(A, however , , however , relied on the M/s ITD Cementation India Ltd. 6 M/s ITD Cementation India Ltd. decision of the Coordinate Bench of ITAT in decision of the Coordinate Bench of ITAT in assessee’s own case for assessee’s own case for assessment years 2014 2014-15 and 2015-16.
5.2 We have heard rival submission of the parties on the issue in We have heard rival submission of the parties on the issue in We have heard rival submission of the parties on the issue in dispute of disallowance u/s 14A of the Act. dispute of disallowance u/s 14A of the Act. The ld CIT(A) has The ld CIT(A) has deleted the disallowance observing as under: deleted the disallowance observing as under:
“4.1 During the assessment proceedings, the A 1 During the assessment proceedings, the A observed 1 During the assessment proceedings, the A that the assessee had made certain investments in joint that the assessee had made certain investments in joint that the assessee had made certain investments in joint ventures and equity shares, the income arising out of which ventures and equity shares, the income arising out of which ventures and equity shares, the income arising out of which was not included in the total income. The assessee was was not included in the total income. The assessee was was not included in the total income. The assessee was asked to explain as to why disallowance us. 14A r.w. Rule asked to explain as to why disallowance us. 14A r.w. Rule asked to explain as to why disallowance us. 14A r.w. Rule 8D should not be m 8D should not be made. In response, the assessee made ade. In response, the assessee made certain submissions which were found to be unsatisfactory certain submissions which were found to be unsatisfactory certain submissions which were found to be unsatisfactory by the AO. The AO was of the view that expenditure in by the AO. The AO was of the view that expenditure in by the AO. The AO was of the view that expenditure in relation to income not includible in total income is to be relation to income not includible in total income is to be relation to income not includible in total income is to be disallowed us. 14A even when no exempt income is disallowed us. 14A even when no exempt income is disallowed us. 14A even when no exempt income is earned during the year. Therefore, disallowance u/s. 14A r.w. Rule during the year. Therefore, disallowance u/s. 14A r.w. Rule during the year. Therefore, disallowance u/s. 14A r.w. Rule 8D amounting to Rs. 8D amounting to Rs. 21,74,000/- was made by the AO. was made by the AO. 4.2 During the appellate proceedings, it was submitted by During the appellate proceedings, it was submitted by During the appellate proceedings, it was submitted by the appellant that the Hon'ble ITAT in appellant's own case the appellant that the Hon'ble ITAT in appellant's own case the appellant that the Hon'ble ITAT in appellant's own case for A. Ys. 2014 for A. Ys. 2014-15 and 2015-16, on similar facts and 16, on similar facts and circumstances, had decided the issue in favour of the circumstances, had decided the issue in favour of the circumstances, had decided the issue in favour of the appellant by deleting the disallowance u/s. 14A. The appellant by deleting the disallowance u/s. 14A. The appellant by deleting the disallowance u/s. 14A. The relevant portion of the Hon'ble ITAT order in portion of the Hon'ble ITAT order in ITA No. relevant portion of the Hon'ble ITAT order in ITA No. 5869 & 5870/Mum/2018 dated 21.04.2021, is reproduced as 5870/Mum/2018 dated 21.04.2021, is reproduced as 5870/Mum/2018 dated 21.04.2021, is reproduced as under:- "..it could be seen that assessee had not made any "..it could be seen that assessee had not made any "..it could be seen that assessee had not made any physical investment in joint ventures and the figures physical investment in joint ventures and the figures physical investment in joint ventures and the figures represent in the investment schedule is nothing but represent in the investment schedule is nothing but represent in the investment schedule is nothing but the share of profit from joint ventures over all the the share of profit from joint ventures over all the the share of profit from joint ventures over all the years and hence, the entire computation mechanism years and hence, the entire computation mec years and hence, the entire computation mec provided in Rule 8D(2) of the Rules fails as the provided in Rule 8D(2) of the Rules fails as the provided in Rule 8D(2) of the Rules fails as the substance of the transaction would prevail over its substance of the transaction would prevail over its substance of the transaction would prevail over its form. Though the assessee had shown that the form. Though the assessee had shown that the form. Though the assessee had shown that the accumulated share of profits from joint ventures accumulated share of profits from joint ventures accumulated share of profits from joint ventures under the head investment', it is effectively a current under the head investment', it is effectively a curren under the head investment', it is effectively a curren account transaction or loans given to the joint account transaction or loans given to the joint account transaction or loans given to the joint
M/s ITD Cementation India Ltd. 7 M/s ITD Cementation India Ltd. ventures by the assessee and the same does not ventures by the assessee and the same does not ventures by the assessee and the same does not partake the character of actual investments, if any, partake the character of actual investments, if any, partake the character of actual investments, if any, made by the assessee in the joint venture. Hence, we made by the assessee in the joint venture. Hence, we made by the assessee in the joint venture. Hence, we hold that the entire computation mechanism of Rule hold that the entire computation mechanism of Rule hold that the entire computation mechanism of Rule 8D(2) of the Rules fails and hence, there could not be (2) of the Rules fails and hence, there could not be (2) of the Rules fails and hence, there could not be any disallowance us. 14A of the Act that could be disallowance us. 14A of the Act that could be disallowance us. 14A of the Act that could be made in the facts and circumstances of the instant made in the facts and circumstances of the instant made in the facts and circumstances of the instant case. Accordingly, Ground Nos. 2 & 3 raised by the case. Accordingly, Ground Nos. 2 & 3 raised by the case. Accordingly, Ground Nos. 2 & 3 raised by the assessee for both the years are allowed." assessee for both the years are allowed." 4.2.1 As the issue is identical to that of the year under the issue is identical to that of the year under the issue is identical to that of the year under consideration, I have no reason to deviate from the findings consideration, I have no reason to deviate from the findings consideration, I have no reason to deviate from the findings of the Hon'ble ITAT. Therefore, respectfully following the of the Hon'ble ITAT. Therefore, respectfully following the of the Hon'ble ITAT. Therefore, respectfully following the decision of the Hon'ble ITAT, the disallowance of Rs. decision of the Hon'ble ITAT, the disallowance of Rs. decision of the Hon'ble ITAT, the disallowance of Rs. 21,74,000/- u/s. 14A is deleted. Accordingly, Ground Nos. 1 to 4 of the appeal are allowed. Accordingly, Ground Nos. 1 to 4 of the appeal are allowed. Accordingly, Ground Nos. 1 to 4 of the appeal are allowed.” 5.3 We find that during the year under consideration no exempt We find that during the year under consideration no exempt We find that during the year under consideration no exempt income has been earned by the assessee and therefore, following income has been earned by the assessee and therefore, following income has been earned by the assessee and therefore, following the finding of the Hon’ble Delhi High Court in the case of the finding of the Hon’ble Delhi High Court in the case of the finding of the Hon’ble Delhi High Court in the case of Cheminvest Ltd. v. CIT Ltd. v. CIT (2009) 317 ITR 86, no disallowance can no disallowance can be made in the case of the assessee. Accordingly, we uphold the be made in the case of the assessee. Accordingly, we uphold the be made in the case of the assessee. Accordingly, we uphold the disallowance deleted by disallowance deleted by the Ld. CIT(A) on the issue in dispute and the Ld. CIT(A) on the issue in dispute and ground No. 1 of the ap ground No. 1 of the appeal of the Revenue is accordingly dismissed. peal of the Revenue is accordingly dismissed.
The ground No. 2 of the appeal of the assessee relates to The ground No. 2 of the appeal of the assessee relates to The ground No. 2 of the appeal of the assessee relates to disallowance of Rs.2,45,07,479/ disallowance of Rs.2,45,07,479/- u/s 37(1) of the Act in respect of u/s 37(1) of the Act in respect of provision for ‘foreseeable foreseeable losses’. It is the contention of the . It is the contention of the Assessing Officer that Assessing Officer that foreseeable losses worked out on the basis of losses worked out on the basis of estimate for future expenses estimate for future expenses, which being unascertained which being unascertained liability, same are not allowable u/s 37(1) of the Act. not allowable u/s 37(1) of the Act. However, t However, the Ld. CIT(A) following the finding of his predecessor in the case of the assessee of his predecessor in the case of the assessee
M/s ITD Cementation India Ltd. 8 M/s ITD Cementation India Ltd. for assessment year 2004 for assessment year 2004-05 , wherein he has relied on finding of wherein he has relied on finding of the Tribunal in the case of the assessee the Tribunal in the case of the assessee in earlier years in earlier years , deleted the disallowance.
6.1 Before Before Before us, us, us, the the the Ld. Ld. Ld. Departmental Departmental Departmental Representative Representative Representative (DR) (DR (DR submitted that foreseeable foreseeable losses have been computed by the losses have been computed by the assessee on the basis of expenses which were though not incurred assessee on the basis of expenses which were though not incurred assessee on the basis of expenses which were though not incurred in the year under consideration in the year under consideration, but were to be incurred in but were to be incurred in future years for completion of the relevant works contract project. years for completion of the relevant works contract project. years for completion of the relevant works contract project. According to the Ld. DR same was contingent expenditure and not ccording to the Ld. DR same was contingent expenditure and not ccording to the Ld. DR same was contingent expenditure and not ascertained liability for the year under consideration and thus it ascertained liability for the year under consideration ascertained liability for the year under consideration was not to be allowed u/s 37(1) of the Act. The Ld. DR further was not to be allowed u/s 37(1) of the Act. The Ld. DR further was not to be allowed u/s 37(1) of the Act. The Ld. DR further submitted that the assessee has submitted that the assessee has not filed any details of those filed any details of those expenses which would be incurred in future years and in absence of expenses which would be incurred in future years and in absence of expenses which would be incurred in future years and in absence of which, even the estimate was without any foundation or even the estimate was without any foundation or even the estimate was without any foundation or documentary basis. The Ld. DR further submitted that the issue of documentary basis. The Ld. DR further submitted that the issue of documentary basis. The Ld. DR further submitted that the issue of allowability of foreseeable foreseeable losses has to be seen vis- -à-vis each year on the basis of facts of facts of the claim made and the Ld. CIT(A) is not of the claim made and the Ld. CIT(A) is not justified in deleting the disallowance merely following the Tribunal justified in deleting the disallowance merely following the Tribunal justified in deleting the disallowance merely following the Tribunal decision in earlier years without examining the facts of the year decision in earlier years without examining the facts of the year decision in earlier years without examining the facts of the year under consideration and applying the ratio of the said decision over under consideration and applying the ratio of the sai under consideration and applying the ratio of the sai the facts of the year under consideration. the facts of the year under consideration. He submitted that issue He submitted that issue in dispute should be restored back to the file of the assessing officer in dispute should be restored back to the file of the assessing officer in dispute should be restored back to the file of the assessing officer for verification of the estimation of actual expenses. for verification of the estimation of actual expenses.
M/s ITD Cementation India Ltd. 9 M/s ITD Cementation India Ltd.
6.2 The Ld. Counsel of the assessee on the o The Ld. Counsel of the assessee on the other hand provided ther hand provided working of ‘foreseeable foreseeable losses’ for the year under consideration as for the year under consideration as under :
6.2.1 The ld Counsel The ld Counsel referred to column ‘J’ of above table and to column ‘J’ of above table and submitted that foreseeable foreseeable losses of Rs. 2.45 crores ha losses of Rs. 2.45 crores has been claimed as per the expected increase in cost of the project and as per the expected increase in cost of the project and as per the expected increase in cost of the project and resultant additional additional loss which will arise from project in future at arise from project in future at the time of completion of the project. the time of completion of the project.
6.2.2 The Ld. Counsel however submitted that corresponding The Ld. Counsel however submitted that The Ld. Counsel however submitted that to the estimated increase in increase in projected total cost, the cost, the assessee has incurred cost on the said project cost on the said projects in the subsequent years and in the subsequent years and sometimes said cost said cost actually incurred is more than the cost which incurred is more than the cost which was estimated in the year under was estimated in the year under consideration, therefore , therefore, there is M/s ITD Cementation India Ltd. 10 M/s ITD Cementation India Ltd. no revenue loss in th in the claim of the foreseeable losses. The relevant losses. The relevant details submitted by the assessee are details submitted by the assessee are reproduced as under: reproduced as under:
6.2.3 The Ld. Counsel further submitted that the assessee is The Ld. Counsel further submitted that the assessee is The Ld. Counsel further submitted that the assessee is otherwise eligible for deduction u/s 80IA of the Act and deduction otherwise eligible for deduction u/s 80IA of the Act and deduction otherwise eligible for deduction u/s 80IA of the Act and deduction to the extent of Rs.209.30 crores was available in the year under s.209.30 crores was available in the year under s.209.30 crores was available in the year under consideration, thus the entire thus the entire exercise by the Revenue was by the Revenue was tax neutral. Further, the Ld Counsel relied on decision . Further, the Ld Counsel relied on decision in the case of . Further, the Ld Counsel relied on decision the CIT v. Harikishan Jethalal Patel r T v. Harikishan Jethalal Patel reported in ITR 168 472 eported in ITR 168 472 ( Gujarat) and submitted that it would not be permissible to grant a and submitted that it would not be permissible to grant a and submitted that it would not be permissible to grant a second inning to the revenue for verification or examination of the second inning to the revenue for verification or examination of the second inning to the revenue for verification or examination of the estimated expenses in respect of each project for carrying out mere estimated expenses in respect of each project for carrying out mere estimated expenses in respect of each project for carrying out mere fishing inquiry.
M/s ITD Cementation India Ltd. 11 M/s ITD Cementation India Ltd.
6.3 We have heard rival submission of the parties on the issue in We have heard rival submission of the parties on the issue in We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. It is dispute and perused the relevant material on record. It is dispute and perused the relevant material on record. It is undisputed that the undisputed that the foreseeable losses are arising from the losses are arising from the estimation or projection of estimation or projection of expenses in respect of each project expenses in respect of each project, which are yet to be incurred and undisputedly not incurred in the yet to be incurred and undisputedly not incurred in the yet to be incurred and undisputedly not incurred in the year under consideration year under consideration. The first contention of the assessee is contention of the assessee is that since the identical that since the identical foreseeable losses have been allowed to the been allowed to the assessee in earlier years by the assessee in earlier years by the Tribunal, therefore, following Tribunal, therefore, following the rule of the consistency ule of the consistency, said losses should be allowed to the said losses should be allowed to the assessee in the year under consideration also. assessee in the year under consideration also. The finding of the The finding of the Tribunal in 2991/Mum/2011 for AY 2004- -05, deleting the disallowance of ‘foreseeable loss’ is reproduced disallowance of ‘foreseeable loss’ is reproduced by the ld CI by the ld CIT(A) in para 5.2 of the impugned order is extracted para 5.2 of the impugned order is extracted for ready reference as for ready reference as under:
“5.2 During the appellate proceedings, it was submitted by 5.2 During the appellate proceedings, it was submitted by 5.2 During the appellate proceedings, it was submitted by the appellant that the Hon'ble ITAT in appellant's own case the appellant that the Hon'ble ITAT in appellant's own case the appellant that the Hon'ble ITAT in appellant's own case for A.. 2004 for A.. 2004-05, on similar facts and circumstances, ha 05, on similar facts and circumstances, had decided the issue in favour of the appellant by deleting the decided the issue in favour of the appellant by deleting the decided the issue in favour of the appellant by deleting the disallowance u/s. 37(1). The relevant portion of the Hon'ble disallowance u/s. 37(1). The relevant portion of the Hon'ble disallowance u/s. 37(1). The relevant portion of the Hon'ble ITAT order in order in ITA No. 2991/Mum/2011 dated 17.05.2013, is 2991/Mum/2011 dated 17.05.2013, is reproduced as under: reproduced as under:- "14. We have considered the rival submissions and "14. We have considered the rival submissions and "14. We have considered the rival submissions and perused the orders of the lower authorities. We have perused the orders of the lower authorities. We have perused the orders of the lower authorities. We have also the benefit of going through the AS also the benefit of going through the AS-7 issued by 7 issued by ICAl. At the very outset, it would not be out of place to ICAl. At the very outset, it would not be out of place to ICAl. At the very outset, it would not be out of place to consider the provisions of Sec. 145 of the Act. Sec. consider the provisions of Sec. 145 of the consider the provisions of Sec. 145 of the 145(2) of the Act provides that the Central Government 145(2) of the Act provides that the Central Government 145(2) of the Act provides that the Central Government may notify in the Official Gazette from time to time may notify in the Official Gazette from time to time may notify in the Official Gazette from time to time accounting standards to be followed by any class of accounting standards to be followed by any class of accounting standards to be followed by any class of assessees or in respect of any class of income. It is a assessees or in respect of any class of income. It is a assessees or in respect of any class of income. It is a fat that AS fat that AS-7 has not been notified by the Central tified by the Central
M/s ITD Cementation India Ltd. 12 M/s ITD Cementation India Ltd.
Government. This does not mean that the assessee is Government. This does not mean that the assessee is Government. This does not mean that the assessee is precluded from following AS precluded from following AS-7. A perusal of the perusal of the provisions provisions provisions of of of Sec. Sec. Sec. 145 145 145 show show show that that that Accounting Accounting Accounting Standards which have been notified by the Central Standards which have been notified by the Central Standards which have been notified by the Central Government have to be mandatorily followed by the Government have to be mandatorily follow Government have to be mandatorily follow assessee. But this does not mean that the assessee assessee. But this does not mean that the assessee assessee. But this does not mean that the assessee cannot follow other Accounting standards issued by cannot follow other Accounting standards issued by cannot follow other Accounting standards issued by ICAl. ICAI being the highest accounting body of the ICAI being the highest accounting body of the ICAI being the highest accounting body of the country, created by an Act of Parliament, Accounting country, created by an Act of Parliament, Accounting country, created by an Act of Parliament, Accounting Standards issued by it cannot be brushed aside Standards issued by it cannot be brushe Standards issued by it cannot be brushe lightly. On the contrary, if an assessee is following the lightly. On the contrary, if an assessee is following the lightly. On the contrary, if an assessee is following the Accounting Standards issued by ICAl, it would give Accounting Standards issued by ICAl, it would give Accounting Standards issued by ICAl, it would give more credibility and authenticity to its account. AS-7, more credibility and authenticity to its account. AS more credibility and authenticity to its account. AS inter-alia, provides: alia, provides: …………………………………………….. ……………………………………………..
It is not in dispute that the assesse 15. It is not in dispute that the assessee is executing e is executing fixed price contract which means that the contractor fixed price contract which means that the contractor fixed price contract which means that the contractor has agreed to a fixed contract price or rate in some has agreed to a fixed contract price or rate in some has agreed to a fixed contract price or rate in some cases subject to cost escalation prices. As per AS-7, cases subject to cost escalation prices. As per AS cases subject to cost escalation prices. As per AS the assessee is entitled to make provision for the assessee is entitled to make provision for the assessee is entitled to make provision for foreseeable losses. foreseeable losses. …………………………………… ………………………………………………… 18. A similar view has been taken by the Tribunal in 18. A similar view has been taken by the Tribunal in 18. A similar view has been taken by the Tribunal in the case of Jacobs Engineering India P. Itd. (2009 TO the case of Jacobs Engineering India P. Itd. (2009 TO the case of Jacobs Engineering India P. Itd. (2009 TO 533) wherein the assessee's claims of foreseeable 533) wherein the assessee's claims of foreseeable 533) wherein the assessee's claims of foreseeable losses losses losses were allowed irrespective of method of were allowed irrespective of method of were allowed irrespective of method of accounting in terms of AS accounting in terms of AS-7. In the case of Dre 7. In the case of Dredging International in 48 International in 48 SOT 430 (2011), the issue before SOT 430 (2011), the issue before the Tribunal was whether us. 37(1) of the Act provision the Tribunal was whether us. 37(1) of the Act provision the Tribunal was whether us. 37(1) of the Act provision for foreseeable for foreseeable for foreseeable loss loss loss made made made in in in accordance accordance accordance with with with guidelines of AS guidelines of AS-7 and duly debited in audited 7 and duly debited in audited accounts of company is an allowable expenditure. The accounts of company is an allowable expenditure. accounts of company is an allowable expenditure. Tribunal decided the case in favour of the assessee Tribunal decided the case in favour of the assessee Tribunal decided the case in favour of the assessee and held 'yes' it is an allowable expenditure. The and held 'yes' it is an allowable expenditure. The and held 'yes' it is an allowable expenditure. The Tribunal while deciding this issue has also considered Tribunal while deciding this issue has also considered Tribunal while deciding this issue has also considered the decision of Mazagaon Dock (29 SOT 356). the decision of Mazagaon Dock (29 SOT 356). the decision of Mazagaon Dock (29 SOT 356).
Considering the facts of the case in the light of the 19. Considering the facts of the case in the light 19. Considering the facts of the case in the light accounting standards and the decisions of the accounting standards and the decisions of the accounting standards and the decisions of the Tribunal (supra), and as no distinguishing cases have Tribunal (supra), and as no distinguishing cases have Tribunal (supra), and as no distinguishing cases have M/s ITD Cementation India Ltd. 13 M/s ITD Cementation India Ltd.
been brought on records by the revenue, reversing the been brought on records by the revenue, reversing the been brought on records by the revenue, reversing the findings of the Ld. CIT(A), we direct the AO to findings of the Ld. CIT(A), we direct the AO to findings of the Ld. CIT(A), we direct the AO to recomputed the business profits by allowing the losses recomputed the business profits by allowing th recomputed the business profits by allowing th provided by the assessee in its books. The appeal filed provided by the assessee in its books. The appeal fi provided by the assessee in its books. The appeal fi by the assessee is allowed.” by the assessee is allowed.” 5.2.1 As the issue is identical to that of the year under 5.2.1 As the issue is identical to that of the year under 5.2.1 As the issue is identical to that of the year under consideration, I have no reason to deviate from the findings consideration, I have no reason to deviate from the findings consideration, I have no reason to deviate from the findings of the Hon'ble ITAT. Therefore, respectfull of the Hon'ble ITAT. Therefore, respectfully following the following the decision of the Hon'ble ITAT, the disallowance of Rs. decision of the Hon'ble ITAT, the disallowance of Rs. decision of the Hon'ble ITAT, the disallowance of Rs. 2,45,07,479/ 2,45,07,479/- U/S. 37(1) is deleted. It is however clarified 37(1) is deleted. It is however clarified that the appellant shall not be entitled to avail deduction of that the appellant shall not be entitled to avail deduction of that the appellant shall not be entitled to avail deduction of this amount in any other year, as it would tantamount to this amount in any other year, as it would tantamount to this amount in any other year, as it would tantamount to double deduction. Should such a benefit have been availed e deduction. Should such a benefit have been availed e deduction. Should such a benefit have been availed by the appellant, the same shall be brought to the notice of by the appellant, the same shall be brought to the notice of by the appellant, the same shall be brought to the notice of the AO and may be withdrawn. the AO and may be withdrawn. Accordingly, Ground No. 5 of the appeal is allowed. Accordingly, Ground No. 5 of the appeal is allowed. Accordingly, Ground No. 5 of the appeal is allowed.” 6.4 We note that the Tribunal (supra) has allowed the claim note that the Tribunal (supra) has allowed the claim of note that the Tribunal (supra) has allowed the claim ‘foreseeable losses’ on the ground that on the ground that same was claimed following same was claimed following the accounting standard AS the accounting standard AS-7 of Institute of chartered Accountant Institute of chartered Accountant of India (ICAI) without any factual finding whether the f India (ICAI) without any factual finding whether the provision of f India (ICAI) without any factual finding whether the the expenses were in the nature of in the nature of ascertained liab ascertained liability. As far as allowance of provision of e allowance of provision of expenses u/s 37(1 ) of the Act, xpenses u/s 37(1 ) of the Act, the Coordinate bench of Tribunal in the case of Coordinate bench of Tribunal in the case of L’orial India L’orial India (A.Y. 2016 1198/Mum/2021 (A.Y. 2016-17) I.T.A. No. 802/Mum/2022 (A.Y. 17) I.T.A. No. 802/Mum/2022 (A.Y. 2017-18) has analysed that accrual of liability as analysed that accrual of liability of expenses is as analysed that accrual of liability different from liability to p different from liability to pay and liability is ascertained ay and liability is ascertained, moment the liability of expense is accrued. The relevant finding is the liability of expense is accrued. The relevant finding is the liability of expense is accrued. The relevant finding is reproduced as under: reproduced as under:
“11. The next issue urged in AY 2016 11. The next issue urged in AY 2016-17 relates to the 17 relates to the disallowance of claim of Provision disallowance of claim of Provision for expenses. The assessee had for expenses. The assessee had made “Provision for outstanding expenses” to the tune of made “Provision for outstanding expenses” to the tune of made “Provision for outstanding expenses” to the tune of M/s ITD Cementation India Ltd. 14 M/s ITD Cementation India Ltd.
Rs.96,28,68,265/ Rs.96,28,68,265/- as per the requirement of mercantile system of as per the requirement of mercantile system of accounting and claimed the same as deduction. Since it had not accounting and claimed the same as deduction. Since it had not accounting and claimed the same as deduction. Since it had not deducted tax at source from the above sa deducted tax at source from the above said provision claimed as id provision claimed as deduction, the assessee voluntarily disallowed 30% of the above deduction, the assessee voluntarily disallowed 30% of the above deduction, the assessee voluntarily disallowed 30% of the above said claim u/s 40(a)(ia) of the Act. The AO treated the above said said claim u/s 40(a)(ia) of the Act. The AO treated the above said said claim u/s 40(a)(ia) of the Act. The AO treated the above said provision as ‘unascertained liability’ and accordingly took the provision as ‘unascertained liability’ and accordingly took the provision as ‘unascertained liability’ and accordingly took the view that the same is not allowable a view that the same is not allowable as deduction. The AO noticed s deduction. The AO noticed that the assessee has voluntarily disallowed 30% of the expenses that the assessee has voluntarily disallowed 30% of the expenses that the assessee has voluntarily disallowed 30% of the expenses u/s 40(a)(ia) of the Act and further a sum of Rs.68,04,24,906/- u/s 40(a)(ia) of the Act and further a sum of Rs.68,04,24,906/ u/s 40(a)(ia) of the Act and further a sum of Rs.68,04,24,906/ has been included in the Transfer pricing adjustment. Accordingly, has been included in the Transfer pricing adjustment. Accordingly, has been included in the Transfer pricing adjustment. Accordingly, the AO deducted the above said a the AO deducted the above said amount of Rs.68.04 crores from mount of Rs.68.04 crores from the claim of Rs.96.28 crores and from the balance so arrived, he the claim of Rs.96.28 crores and from the balance so arrived, he the claim of Rs.96.28 crores and from the balance so arrived, he allowed further deduction of 30% (voluntarily disallowed u/s allowed further deduction of 30% (voluntarily disallowed u/s allowed further deduction of 30% (voluntarily disallowed u/s 40(a)(ia) of the Act) and accordingly disallowed net balance of 40(a)(ia) of the Act) and accordingly disallowed net balance of 40(a)(ia) of the Act) and accordingly disallowed net balance of Rs.19,77,10,351/ Rs.19,77,10,351/-. The Ld DRP also confirmed the same. L’Oreal onfirmed the same. L’Oreal India Private Limited 14 India Private Limited 14 12. We heard the parties on this issue and perused the record.
12. We heard the parties on this issue and perused the record.
We heard the parties on this issue and perused the record. The assessee has made provision for expenses for the services The assessee has made provision for expenses for the services The assessee has made provision for expenses for the services availed by it by the year end, for which bills have not yet been availed by it by the year end, for which bills have not yet been availed by it by the year end, for which bills have not yet been received. However, the tax authorities have noticed that the received. However, the tax authorities have noticed that the ever, the tax authorities have noticed that the “liability to pay” the expense shall arise only when the bills are “liability to pay” the expense shall arise only when the bills are “liability to pay” the expense shall arise only when the bills are received by the assessee. Since the bills have not been received, received by the assessee. Since the bills have not been received, received by the assessee. Since the bills have not been received, there was no liability to pay the expenses. Accordingly, the tax there was no liability to pay the expenses. Accordingly, the tax there was no liability to pay the expenses. Accordingly, the tax authorities have taken the view that, in the absence of any s have taken the view that, in the absence of any s have taken the view that, in the absence of any liability to pay for these expenses as at the year end, the liability to pay for these expenses as at the year end, the liability to pay for these expenses as at the year end, the provision for expenses so created by the assessee shall fall under provision for expenses so created by the assessee shall fall under provision for expenses so created by the assessee shall fall under the category of “unascertained liability” and accordingly not the category of “unascertained liability” and accordingly not the category of “unascertained liability” and accordingly not allowable as dedu allowable as deduction.
There is no dispute with regard to the fact that the assessee is 13. There is no dispute with regard to the fact that the assessee is 13. There is no dispute with regard to the fact that the assessee is following “mercantile system of accounting”. Under the mercantile following “mercantile system of accounting”. Under the mercantile following “mercantile system of accounting”. Under the mercantile system of accounting and also as per the requirement of AS-29 system of accounting and also as per the requirement of AS system of accounting and also as per the requirement of AS issued by the Institute of Chartered Accountants of issued by the Institute of Chartered Accountants of India (ICAI), a provision for expenses should be made when: provision for expenses should be made when:- a. an enterprise a. an enterprise has a present obligation as a result of past event. b. it is probable has a present obligation as a result of past event. b. it is probable has a present obligation as a result of past event. b. it is probable that an outflow of resources embodying economic benefits will be that an outflow of resources embodying economic benefits will be that an outflow of resources embodying economic benefits will be required to settle the obligation, and c. required to settle the obligation, and c. a reliable estimate can be a reliable estimate can be made of the amount of obligation. Hence it is imperative for a made of the amount of obligation. Hence it is imperative for a made of the amount of obligation. Hence it is imperative for a concern, following mercantile system of accounting, to provide for concern, following mercantile system of accounting, to provide for concern, following mercantile system of accounting, to provide for all known expenses and losses as at the year end, even if the all known expenses and losses as at the year end, even if the all known expenses and losses as at the year end, even if the relevant bills have not been received relevant bills have not been received. As per standard accounting . As per standard accounting practices, not providing for known expenses/losses would, in fact, practices, not providing for known expenses/losses would, in fact, practices, not providing for known expenses/losses would, in fact,
M/s ITD Cementation India Ltd. 15 M/s ITD Cementation India Ltd. distort the operating results of the business concern and it would distort the operating results of the business concern and it would distort the operating results of the business concern and it would not reflect true and fair profit of the year. We have noticed that the not reflect true and fair profit of the year. We have noticed that the not reflect true and fair profit of the year. We have noticed that the assessee has provided assessee has provided for expenses for which services have been for expenses for which services have been availed by it, meaning thereby, the liability towards those availed by it, meaning thereby, the liability towards those availed by it, meaning thereby, the liability towards those expenses has already accrued to the assessee. However, the expenses has already accrued to the assessee. However, the expenses has already accrued to the assessee. However, the actual liability to pay shall arise only upon on production of bills actual liability to pay shall arise only upon on production of bills actual liability to pay shall arise only upon on production of bills by the service provider. T by the service provider. Thus, there is distinction between “accrual hus, there is distinction between “accrual of liability” and “liability to pay for expenses”. There should not be of liability” and “liability to pay for expenses”. There should not be of liability” and “liability to pay for expenses”. There should not be any dispute that the “accrued L’Oreal India Private Limited 15 any dispute that the “accrued L’Oreal India Private Limited 15 any dispute that the “accrued L’Oreal India Private Limited 15 liability” cannot be considered as “unascertained liability”. liability” cannot be considered as “unascertained liability”. liability” cannot be considered as “unascertained liability”. Accrued liability Accrued liability is an ascertained liability, but the liability to pay is an ascertained liability, but the liability to pay it has not arisen. We notice that the the tax officials have been it has not arisen. We notice that the the tax officials have been it has not arisen. We notice that the the tax officials have been carried away by the fact that the liability to pay shall arise upon carried away by the fact that the liability to pay shall arise upon carried away by the fact that the liability to pay shall arise upon the assessee only after the receipt of the relevant bills and have the assessee only after the receipt of the relevant bills and have the assessee only after the receipt of the relevant bills and have not considered its accrual. The fact that there was an obligation not considered its accrual. The fact that there was an obligation not considered its accrual. The fact that there was an obligation upon the assessee to pay for the liability as a result of past event upon the assessee to pay for the liability as a result of past event upon the assessee to pay for the liability as a result of past event cannot be denied. By belated receipt of bills, the payment only cannot be denied. By belated receipt of bills, the payment only cannot be denied. By belated receipt of bills, the payment only gets postponed, but not the liability that has already accrued to gets postponed, but not the liability that has already ac gets postponed, but not the liability that has already ac the assessee. It is also fact that the assessee has been providing the assessee. It is also fact that the assessee has been providing the assessee. It is also fact that the assessee has been providing for known expenses and losses year after year and the said for known expenses and losses year after year and the said for known expenses and losses year after year and the said provision has been verified by the statutory auditors of the provision has been verified by the statutory auditors of the provision has been verified by the statutory auditors of the assessee company. The Ld A.R submitted that the provision for assessee company. The Ld A.R submitted that the provision fo assessee company. The Ld A.R submitted that the provision fo expenses so created has been accepted by the AO in the past. expenses so created has been accepted by the AO in the past. expenses so created has been accepted by the AO in the past. Accordingly, we are of the view that the tax authorities are not Accordingly, we are of the view that the tax authorities are not Accordingly, we are of the view that the tax authorities are not justified in holding that the Provision for expenses is an justified in holding that the Provision for expenses is an justified in holding that the Provision for expenses is an unasertained liability. As per the accounting principles discussed unasertained liability. As per the accounting principles discussed unasertained liability. As per the accounting principles discussed above, it is an ascertained liability and the same is eligible for ove, it is an ascertained liability and the same is eligible for ove, it is an ascertained liability and the same is eligible for deduction while computing total income. Accordingly, we direct the deduction while computing total income. Accordingly, we direct the deduction while computing total income. Accordingly, we direct the AO to delete the disallowance of Provision for expenses.” AO to delete the disallowance of Provision for expenses AO to delete the disallowance of Provision for expenses 6.5 The Tribunal in above decision in above decision has held the for ascertained has held the for ascertained liability, the liability to incur expenses should be accrued and liability, the liability to incur expenses should be accrued and liability, the liability to incur expenses should be accrued and raising of bills for expenses is not mandatory. For expenses to raising of bills for expenses is not mandatory. For expenses to raising of bills for expenses is not mandatory. For expenses to accrued, the services must have been rendered by the supplier accrued, the services must have been rendered by the supplier accrued, the services must have been rendered by the supplier party under terms of agreement with the assessee. Thus the party under terms of agreement with the assessee. Thus the party under terms of agreement with the assessee. Thus the expenditure has to be crystallized in the year under consideration iture has to be crystallized in the year under consideration iture has to be crystallized in the year under consideration for eligible for deduction u/s 37(1) of the Act. for eligible for deduction u/s 37(1) of the Act.
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6.6 Be the position of allowability of provision of expenses as per Be the position of allowability of provision of expenses as per Be the position of allowability of provision of expenses as per the precedent mentioned above, however, on the precedent mentioned above, however, on perusal of the facts of perusal of the facts of the year under consideration, we find that issue in dispute is the year under consideration, we find that issue in dispute is the year under consideration, we find that issue in dispute is slightly different from the provision of expenses. In the case slightly different from the provision of expenses. In the case slightly different from the provision of expenses. In the case assessee is following percentage completion method for recognising assessee is following percentage completion method for recognising assessee is following percentage completion method for recognising profit or loss from the construction p profit or loss from the construction projects. The Institute of rojects. The Institute of chartered accountants of India chartered accountants of India(ICAI) has issued a detailed has issued a detailed guidelines guidelines guidelines regarding regarding regarding recognising recognising recognising profit profit profit following following following percentage percentage percentage completion method in the form of AS in the form of AS-7. Relevant clauses of said AS Relevant clauses of said AS- 7 are reproduced as under: 7 are reproduced as under:
“Recognition of Expected Losses Expected Losses 35. When it is probable that total contract costs will exceed total contract 35. When it is probable that total contract costs will exceed total contract 35. When it is probable that total contract costs will exceed total contract revenue, the expected loss should be recognised as an expense revenue, the expected loss should be recognised as an expense revenue, the expected loss should be recognised as an expense immediately.
The amount of such a loss is determined irrespective of: (a) whether or 36. The amount of such a loss is determined irrespective of: (a) whether or 36. The amount of such a loss is determined irrespective of: (a) whether or not work has commenced on the contract; (b) the stage of completion of as commenced on the contract; (b) the stage of completion of as commenced on the contract; (b) the stage of completion of contract activity; or (c) the amount of profits expected to arise on other contract activity; or (c) the amount of profits expected to arise on other contract activity; or (c) the amount of profits expected to arise on other contracts which are not treated as a single construction contract in contracts which are not treated as a single construction contract in contracts which are not treated as a single construction contract in accordance with paragraph 8. accordance with paragraph 8. Changes in Estimates Changes in Estimates 37. The percentage of completion method is applied on a cumulative basis 37. The percentage of completion method is applied on a cumulative basis 37. The percentage of completion method is applied on a cumulative basis in each accounting period to the current estimates of contract revenue and in each accounting period to the current estimates of contract revenue and in each accounting period to the current estimates of contract revenue and contract costs. Therefore, the effect of a change in the estimate of contract contract costs. Therefore, the effect of a change in the estimate of contract contract costs. Therefore, the effect of a change in the estimate of contract Construction Contracts 77 rev Construction Contracts 77 revenue or contract costs, or the effect of a enue or contract costs, or the effect of a change in the estimate of the outcome of a contract, is accounted for as a change in the estimate of the outcome of a contract, is accounted for as a change in the estimate of the outcome of a contract, is accounted for as a change in accounting estimate (see Accounting Standard (AS) 5, Net Profit or change in accounting estimate (see Accounting Standard (AS) 5, Net Profit or change in accounting estimate (see Accounting Standard (AS) 5, Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies). Loss for the Period, Prior Period Items and Changes in Accoun Loss for the Period, Prior Period Items and Changes in Accoun The changed estimates are used in determination of the amount of revenue The changed estimates are used in determination of the amount of revenue The changed estimates are used in determination of the amount of revenue and expenses recognised in the statement of profit and loss in the period in and expenses recognised in the statement of profit and loss in the period in and expenses recognised in the statement of profit and loss in the period in which the change is made and in subsequent periods.” which the change is made and in subsequent periods.
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6.7 Thus, the estimate of change of t Thus, the estimate of change of total cost of the project needs otal cost of the project needs to be taken for working of percentile of completion of contract as per to be taken for working of percentile of completion of contract as per to be taken for working of percentile of completion of contract as per AS-7. Those guidelines are in conformity Those guidelines are in conformity with provision of provision of various section of the Act, according to which wherever the assessee is section of the Act, according to which wherever the assessee is section of the Act, according to which wherever the assessee is following mercantile me following mercantile method of accounting, the income is to be the income is to be assessed on receipt or accrual assessed on receipt or accrual, whichever is earlier and similarly whichever is earlier and similarly liability of the expenses also to be considered on accrual basis. liability of the expenses also to be considered on accrual basis. liability of the expenses also to be considered on accrual basis. Under the percentage completion of Under the percentage completion of method, the revenues recognised from the project recognised from the project in proportion of the work completed and in proportion of the work completed and accordingly profit or loss from the project is accordingly profit or loss from the project is reported. reported. The assessee following the percentage of following the percentage of completion method has recognised the has recognised the profit or loss from the relevant construction projects, which have profit or loss from the relevant construction projects, which have profit or loss from the relevant construction projects, which have been summarised in the table above. For the year under ed in the table above. For the year under ed in the table above. For the year under consideration, the assessee has further escalated the cost of the consideration, the assessee has further escalated the cost of the consideration, the assessee has further escalated the cost of the projects and reworked the profit or loss to be recognised from the projects and reworked the profit or loss to be recognised from the projects and reworked the profit or loss to be recognised from the projects following the AS following the AS-7 as per clause 35 reproduced above as per clause 35 reproduced above. In other words, the assessee has further estimated the loss from those e assessee has further estimated the loss from those e assessee has further estimated the loss from those projects in future years. On perusal of the table of computation of projects in future years. On perusal of the table of computation of projects in future years. On perusal of the table of computation of foreseeable loss of Rs. 2.45 crores submitted by the assessee, we foreseeable loss of Rs. 2.45 crores submitted by the assessee, we foreseeable loss of Rs. 2.45 crores submitted by the assessee, we find that column ‘E’ is detail of expected cost to be incurred for find that column ‘E’ is detail of expected cost to be incurred for find that column ‘E’ is detail of expected cost to be incurred for completion of the project in future years. Taking into consideration mpletion of the project in future years. Taking into consideration mpletion of the project in future years. Taking into consideration this projected total cost of each project shown in column ‘E’, the this projected total cost of each project shown in column ‘E’, the this projected total cost of each project shown in column ‘E’, the assessee has recognized profit or loss from each project upto the assessee has recognized profit or loss from each project upto the assessee has recognized profit or loss from each project upto the year end in column year end in column ‘I’ of the above table applying the percentage of the above table applying the percentage completion method. Thus estimated cost on the project to be Thus estimated cost on the project to be M/s ITD Cementation India Ltd. 18 M/s ITD Cementation India Ltd. incurred in future years has been taken for computing percentage incurred in future years has been taken for computing percentage incurred in future years has been taken for computing percentage profit or loss for the year under consideration. profit or loss for the year under consideration. But for the purpose But for the purpose of income-tax, assessee has claimed total loss or profit from the sessee has claimed total loss or profit from the sessee has claimed total loss or profit from the project, which would arise on 100% completion of project as per project, which would arise on 100% completion of project as per project, which would arise on 100% completion of project as per column ‘G’ of the above table. Thi lumn ‘G’ of the above table. This additional loss has been claimed s additional loss has been claimed from each project in the year under consideration in the year under consideration, which has been , which has been termed as ‘foreseeable loss’ as computed in column ‘J’ of the above s ‘foreseeable loss’ as computed in column ‘J’ of the above s ‘foreseeable loss’ as computed in column ‘J’ of the above table. This claim is however This claim is however neither supported by supported by the AS-7 nor allowable under the provisions of the Act as held by the Tribunal in allowable under the provisions of the Act as held by the Tribunal in allowable under the provisions of the Act as held by the Tribunal in the case of ‘L’orial India L’orial India (supra)’. We also note the assessee h We also note the assessee has enhanced the projected cost to be incurred in future years as per enhanced the projected cost to be incurred in future years as per enhanced the projected cost to be incurred in future years as per column ‘E’ of the table, which has varied the denominator for of the table, which has varied the denominator for of the table, which has varied the denominator for computation of percentile of work or project completed ( for the computation of percentile of work or project completed ( for the computation of percentile of work or project completed ( for the purpose of recognizing profit/loss under percentage completion purpose of recognizing profit/loss under percentage completi purpose of recognizing profit/loss under percentage completi method of Contracts) also resulting into increase in total loss from method of Contracts) also resulting into increase in total loss from method of Contracts) also resulting into increase in total loss from the project. But, when being asked by the bench to provide details the project. But, when being asked by the bench to provide details the project. But, when being asked by the bench to provide details of such estimation, the ld Counsel expressed his inability in , the ld Counsel expressed his inability in , the ld Counsel expressed his inability in providing such details. This providing such details. This “foreseeable loss” has yet has yet not been accrued because assessee has not completed the 100% work of the accrued because assessee has not completed the 100% work of the accrued because assessee has not completed the 100% work of the project. This amount of foreseeable loss will accrue only on project. This amount of foreseeable loss will accrue only on project. This amount of foreseeable loss will accrue only on completion of the project and it completion of the project and it is premature at this stage. The premature at this stage. The claim of yet to be accrued loss is even against the principles of claim of yet to be accrued loss is even against the pri claim of yet to be accrued loss is even against the pri recognizing profit/loss under the percentage completion method. recognizing profit/loss under the percentage completion method. recognizing profit/loss under the percentage completion method. The decision of the Tribunal (supra) in earlier years is without The decision of the Tribunal (supra) in earlier years is without The decision of the Tribunal (supra) in earlier years is without considering the facts of the case in hand, therefore we are not considering the facts of the case in hand, therefore we are not considering the facts of the case in hand, therefore we are not M/s ITD Cementation India Ltd. 19 M/s ITD Cementation India Ltd. relying upon the same. As far as Rule of consistency cited by the relying upon the same. As far as Rule of consistenc relying upon the same. As far as Rule of consistenc learned counsel of the assessee is concerned, we find that the learned counsel of the assessee is concerned, we find that the learned counsel of the assessee is concerned, we find that the Hon’ble Supreme Court in the case of Distributors (Baroda) Pvt. Ltd. Hon’ble Supreme Court in the case of Distributors (Baroda) Pvt. Ltd. Hon’ble Supreme Court in the case of Distributors (Baroda) Pvt. Ltd. 155 ITR 120 has held that there is no heroism in continuing the 155 ITR 120 has held that there is no heroism in continuing the 155 ITR 120 has held that there is no heroism in continuing the error and it should be rectified at earliest. error and it should be rectified at earliest. Accordingly Accordingly, we reject the contention of the assessee for allowing the contention of the assessee for allowing the foreseeable foreseeable losses as ascertained liability under the provisions of section 37 of the Act. ascertained liability under the provisions of section 37 of the Act. ascertained liability under the provisions of section 37 of the Act.
6.8 As far as second contention of the learned counsel of incurring As far as second contention of the learned counsel of incurring As far as second contention of the learned counsel of incurring of expenses in the subseq of expenses in the subsequent years, is concerned we are of the uent years, is concerned we are of the opinion that the claim of opinion that the claim of foreseeable loss is allowable in the year of loss is allowable in the year of incurring of the expenses and not in the year prior to that. As far as incurring of the expenses and not in the year prior to that. As far as incurring of the expenses and not in the year prior to that. As far as contention of the revenue neutral exercise, same can be ascertained contention of the revenue neutral exercise, same can be ascertained contention of the revenue neutral exercise, same can be ascertained only after due verification by the Assessing Officer of the impact of ter due verification by the Assessing Officer of the impact of ter due verification by the Assessing Officer of the impact of allowing or not allowing the foreseeable losses. No such allowing or not allowing the foreseeable losses. No such allowing or not allowing the foreseeable losses. No such computational calculation computational calculation has been filed before in support of the been filed before in support of the contention of having no revenue impact and therefore we contention of having no revenue impact and therefore we contention of having no revenue impact and therefore we accordingly reject the contention of the learned counsel of the ject the contention of the learned counsel of the ject the contention of the learned counsel of the assessee.
6.9 As far as the decis s far as the decision cited by the Ld. Counsel in the case of the Ld. Counsel in the case of Harikishan Jethalal Patel (supra) is concerned, we find that facts Harikishan Jethalal Patel (supra) is concerned, we find that facts Harikishan Jethalal Patel (supra) is concerned, we find that facts which are essential for delivery of justice cannot be ignored merely which are essential for delivery of justice cannot be ignored merely which are essential for delivery of justice cannot be ignored merely for the reasons that lower authorities for the reasons that lower authorities have not brought the same on not brought the same on the record. However i However in the instant case, we are not restoring the we are not restoring the issue in dispute to the file of the Assessing issue in dispute to the file of the Assessing Officer, Officer, because as far
M/s ITD Cementation India Ltd. 20 M/s ITD Cementation India Ltd. facts of the year under consideration are facts of the year under consideration are concerned concerned no further verification required. Hence ratio in the case cited by the assessee is . Hence ratio in the case cited by the assessee is . Hence ratio in the case cited by the assessee is not applicable over the facts of the case. plicable over the facts of the case. The ground No. 2 of the The ground No. 2 of the appeal of the Revenue is accordingly allowed. appeal of the Revenue is accordingly allowed.
In the result, the appeal of the Revenue is partly allowed. In the result, the appeal of the Revenue is partly allowed. In the result, the appeal of the Revenue is partly allowed.