THE FERTILISERS&CHEMICALS TRAVANCORE LTD vs. COMMISSIONER OF INCOME TAX, KOCHI

ITA/1/2007HC KeralaKLHC01024995200709 October 2018Author: HONOURABLE MR.JUSTICE K.VINOD CHANDRAN,HONOURABLE MR. JUSTICE ASHOK MENON16 pages
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What were the facts?

The assessee, The Fertilisers & Chemicals Travancore Ltd., is in appeal before the High Court of Kerala against an order of the Income Tax Appellate Tribunal (ITAT), Cochin Bench. The appeals concern assessment years where Section 115J of the Income Tax Act, 1961, was applicable. The primary dispute revolves around the computation of profit and loss under Section 115J, specifically concerning the addition back of foreseeable losses on contracts by the Assessing Officer (AO). The assessee's division, FEDO, prepares its accounts based on accounting procedure AS7, which accounts for foreseeable losses on contracts. The AO added back these foreseeable losses, considering them not as ascertained liabilities. The ITAT confirmed these additions, finding that the contracts were not completed and the losses were anticipatory.

What did the High Court hold?

The High Court held that foreseeable losses on contracts, which are not yet completed, cannot be considered ascertained liabilities. The Tribunal's finding that these were anticipatory losses, ascertainable only upon contract closure, was upheld. The Court reasoned that Clause (c) of the Explanation to Section 115J(1A) permits the AO to add back provisions made for meeting liabilities other than ascertained liabilities. The purpose of Section 115J and its Explanation is to ensure a minimum corporate tax by bringing to tax profits that are not reflected due to provisions for contingent liabilities. The Court distinguished the present case from Apollo Tyres, stating that the AO's action was based on the Explanation to Section 115J, not an attempt to go behind the books of account. The Court also noted that accounting standards indicate a high degree of uncertainty in determining foreseeable losses on uncompleted contracts. Therefore, the questions of law were answered in favour of the Revenue and against the assessee regarding the addition of foreseeable losses.

What were the issues?

1. Whether the Tribunal was justified in confirming the additions made by the assessing authority under Section 115J of the Income Tax Act, 1961, by adding back the foreseeable loss, which is an ascertainable liability and is reflected in the Profit and Loss account accepted by the Registrar of Companies? 2. Whether the Tribunal was correct in affirming the addition made by the Assessing Officer going by the decision of the Hon'ble Supreme Court in Apollo Tyres v. Commissioner of Income Tax? Assessee's contentions: The assessee argued that accounting procedure AS7 specifically mandates the computation of profit and loss at every ascertainable stage of work, in accordance with accounting principles. This procedure has been accepted by the Registrar of Companies and the Profit and Loss account prepared under the Companies Act. The assessee relied on the Supreme Court's decision in Apollo Tyres v. Commissioner of Income Tax, stating that the AO cannot go behind the Profit and Loss account certified by auditors and accepted by statutory authorities. They also relied on Bharat Earth Movers v. Commissioner of Income Tax. Revenue's contentions: The revenue contended that the foreseeable losses were not ascertained liabilities, as the contracts were not completed. The ITAT found that the amounts computed by the assessee were only anticipatory losses, ascertainable only upon contract closure. The Tribunal distinguished the case from Bharat Earth Movers and Apollo Tyres.

Which sections of the Income-tax Act were involved?

Section 115J,Section 115J(1A),Section 260A,Section 115JA

AI-generated summary — verify with the full judgment below

Cause title — parties, addresses and appearances
IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE ASHOK MENON TUESDAY ,THE 09TH DAY OF OCTOBER 2018 / 17TH ASWINA, 1940 ITA.No. 1 of 2007 AGAINST THE ORDER/JUDGMENT IN ITA 706/1995 of I.T.A.TRIBUNAL,COCHIN BENCH APPELLANT/S: THE FERTILISERS&CHEMICALS TRAVANCORE LTD TRAVANCORE LTD., UDYOGAMANDAL. BY ADVS.SRI.E.K.NANDAKUMAR (SR.) SRI.ANIL D. NAIR RESPONDENT/S: COMMISSIONER OF INCOME TAX, KOCHI BY ADVS. SRI.P.K.R.MENON SR.COUNSEL GOI TAXES SRI.S.ARUN RAJ THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 09.10.2018, ALONG WITH ITA.43/2003 & 2/2007, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ITA No.1/2007 ::2 :: CR ITA Nos.43/2003, 1/2007 & 2/2007

JUDGMENT Vinod Chandran, J The above appeals are considered together though slightly different issues arise. The main issue arise on the computation of profit and loss under Section 115J as it existed in the assessment years. The questions of law arising in ITA No.43/32003 are framed as follows:

1.

Whether the Tribunal was justified in confirming the additions made by the assessing authority under Section 115J of the Income Tax Act, 1961 by adding

The order continues below.

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