FERTILIZERS AND CHEMICALS TRAVANCORE LIMITED, vs. COMMISSIONER OF INCOME TAX,

ITA/43/2003HC KeralaKLHC01020395200309 October 2018Author: HONOURABLE MR.JUSTICE K.VINOD CHANDRAN,HONOURABLE MR. JUSTICE ASHOK MENON16 pages
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What were the facts?

The appeals concern the computation of income under Section 115J of the Income Tax Act, 1961, for the assessment year 1990-91. The assessee, Fertilizers and Chemicals Travancore Limited, had made provisions for foreseeable losses on ongoing contracts, which the Assessing Officer added back, considering them not ascertained liabilities. The assessee contended that these provisions were made in accordance with accounting standards (AS7) and accepted by the Registrar of Companies, citing Supreme Court decisions in Apollo Tyres and Bharat Earth Movers. The Tribunal, however, found that since the contracts were not completed or terminated, the amounts were anticipatory losses, not ascertained liabilities, and confirmed the additions. The High Court considered these appeals alongside others concerning provisions for gratuity and bad debts.

What did the High Court hold?

The High Court held that the losses on contracts can only be determined upon completion. Even as per accounting standards, there is a high degree of uncertainty in determining the future loss of a running contract. Clause (c) of the Explanation to Section 115J(1A) permits the Assessing Officer to add back provisions made for meeting liabilities other than ascertained liabilities, to reflect correct profits. The provision was intended to ensure minimum corporate tax. The Court found that the amounts computed by the assessee were anticipatory losses, not ascertained liabilities, as the contracts were not completed. The reliance on Apollo Tyres was deemed misplaced by the Tribunal, as the Assessing Officer's action was within the limited power under the Explanation to Section 115J. The Court answered the questions of law in favour of the Revenue and against the assessee, rejecting ITA No. 43/2003. For ITA 1/2007, the issue of foreseeable losses was decided against the assessee. However, for the provision for gratuity, the Court held it to be an ascertained liability and directed the Assessing Officer not to add it back. For ITA 2/2007, concerning provision for bad and doubtful debts under Section 115JA, the Court followed the Supreme Court judgment in CIT v. HCL Comnet Systems and Services Ltd and held in favour of the assessee.

What were the issues?

1. Whether the Tribunal was justified in confirming additions made by the assessing authority under Section 115J by adding back foreseeable loss, which is an ascertainable liability 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 by relying on 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 allows for the computation of profit and loss at every ascertainable stage of work, and this was accepted by the Registrar of Companies. They relied on Apollo Tyres, stating the Assessing Officer cannot go behind the P&L account certified by auditors and accepted by the Registrar. They also cited Bharat Earth Movers. The assessee contended that the provision for anticipated loss on existing contracts was permissible under Schedule VI of the Companies Act. Revenue's contentions: The revenue contended, and the Tribunal found, that the contracts were not completed or terminated, making the computed amounts anticipatory losses, ascertainable only upon contract closure. The Tribunal distinguished Apollo Tyres, stating the Assessing Officer's action was based on the Explanation to Section 115J(1A), specifically clause (c) regarding provisions for liabilities other than ascertained liabilities.

Which sections of the Income-tax Act were involved?

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

AI-generated summary — verify with the full judgment below

Cause title — parties, addresses and appearances
CR 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. 43 of 2003 AGAINST THE ORDER/JUDGMENT IN ITA 853/1995 of I.T.A.TRIBUNAL,COCHIN BENCH DATED 31-03-2003 FOR THE YEAR 1990-91 APPELLANT/S: FERTILIZERS AND CHEMICALS TRAVANCORE LIMITED, UDYOGAMANDAL. BY ADVS. SRI.E.K.NANDAKUMAR (SR.) SRI.ANIL D. NAIR SMT.PRIYA MAHESH SMT.PRIYA MANJOORAN RESPONDENT/S: COMMISSIONER OF INCOME TAX, COCHIN. BY ADVS. SRI.P.K.R.MENON SR.COUNSEL FOR IT THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 09.10.2018, ALONG WITH ITA.1/2007, ITA.2/2007, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ITA No.43/2003 ::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

The order continues below.

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