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

ITA/2/2007HC KeralaKLHC01024996200709 October 2018Author: HONOURABLE MR.JUSTICE K.VINOD CHANDRAN,HONOURABLE MR. JUSTICE ASHOK MENON16 pages
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What were the facts?

The appeals by The Fertilisers & Chemicals Travancore Ltd. (assessee) challenge orders of the Income Tax Appellate Tribunal (Tribunal) concerning assessment years under Section 115J of the Income Tax Act, 1961. The primary dispute revolves around the addition back of foreseeable losses on contracts by the Assessing Officer (AO) and confirmed by the Tribunal. The assessee argued that these losses were computed according to accounting procedures (AS7) and accepted by the Registrar of Companies, citing Supreme Court decisions in Apollo Tyres and Bharat Earth Movers. The Tribunal, however, found that these were anticipatory losses, ascertainable only upon contract completion, and thus added back as per Section 115J(1A)(c). The appeals also involve issues of provision for gratuity and provision for bad and doubtful debts.

What did the High Court hold?

The High Court held that foreseeable losses on uncompleted contracts are not ascertained liabilities. The Tribunal's finding that these were anticipatory losses, ascertainable only upon contract completion, was upheld. The Court reasoned that Section 115J(1A)(c) permits the AO to add back amounts set aside to provisions made for liabilities other than ascertained liabilities. The Court distinguished the present case from Bharat Earth Movers, where provisions were for ascertained liabilities like earned leave. While Apollo Tyres affirmed the AO's limited power to go behind the P&L account, it also clarified that this power includes making additions as per the Explanation to Section 115J. Therefore, the additions made by the AO under Section 115J(1A)(c) were justified. The questions of law were answered in favour of the Revenue and against the assessee. For ITA 1/2007, the issue of foreseeable losses was decided against the assessee. However, for the provision for gratuity, it was held to be an ascertained liability, falling outside Section 115J(1A)(c), and thus the addition was directed to be deleted. 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., holding in favour of the assessee and directing deletion of additions.

What were the issues?

1. Whether the Tribunal was justified in confirming the additions made by the AO 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, turning on Section 115J(1A)(c)? 2. Whether the Tribunal was correct in affirming the addition made by the AO based on the decision in Apollo Tyres v. CIT, turning on Section 115J(1A)(c)? Assessee's contentions: - Foreseeable losses are computed as per accounting procedure AS7, reflecting profit/loss at ascertainable stages of work. - These provisions are accepted by the Registrar of Companies and reflected in the Profit and Loss account prepared under the Companies Act. - Citing Apollo Tyres, the AO cannot go behind the P&L account certified by auditors and accepted by statutory authorities. - Citing Bharat Earth Movers, provisions for foreseeable losses on contracts are permissible deductions under Schedule VI of the Companies Act, 1956. - The company was aware of losses on existing contracts and made provisions for anticipated losses based on technical analysis. Revenue's contentions: - The Tribunal found that contracts were not completed or terminated, making the computed amounts anticipatory losses only ascertainable upon contract closure. - Bharat Earth Movers is distinct on facts as it dealt with ascertained liabilities like earned leave encashment. - Apollo Tyres supports the AO's limited power under the Explanation to Section 115J to make additions for provisions made for liabilities other than ascertained liabilities.

Which sections of the Income-tax Act were involved?

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

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. 2 of 2007 AGAINST THE ORDER/JUDGMENT IN ITA 38/2005 of I.T.A.TRIBUNAL,COCHIN BENCH DATED 26-06-2006 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 KOCHI. SRI P K R MENON, SR. COUNSEL GOI TAXES THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 09.10.2018, ALONG WITH ITA.43/2003 & 1/2007, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ITA No.2/2007 ::2 :: ITA Nos.43/2003, 1/2007 & 2/2007 CR

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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