M/S INTERNATIONAL SEAPORT DREDGING PRIVATE LIMITED,CHENNAI vs. DCIT, CORPORATE CIRCLE-2(2), CHENNAI

Without prejudice to the above, the lower authorities have, in facts and circumstances of the case and in law, erred in not considering that the provision was reversed and offered to tax in the subsequent assessment years.

Without prejudice to the above, the lower authorities have, in facts and circumstances of the case and in law, ought to have provided relief in the subsequent years where the reversal of provision was offered to tax by the Appellant As is evident, the sole issue that arises for our consideration is assessee’s claim of provision of losses.

The Ld. AR advanced arguments and placed on record financial statement for various years. It has been submitted that the losses have been created as per applicable Accounting Standards and the provision has been reversed in subsequent years. If the same is disallowed then it would amount to double taxation. The Ld. CIT-DR, on the other hand, supported the orders of lower authorities and submitted that no deduction could be allowed for mere provisions. Having heard rival submissions and upon perusal of case records, our adjudication would be as under. Assessment Proceedings 3. The assessee being resident corporate assessee is stated to be engaged in providing dredging and marine engineering services. The assessee claimed provision for expected losses on contract for Rs.1137.26 Lacs. However, the assessee did not furnish the basis for the same during the course of assessment proceedings and accordingly, the same were disallowed by Ld. AO while computing income under normal provisions as well as while computing Book Profits u/s 115JB. Appellate Proceedings 4.1 During appellate proceedings, the assessee submitted that the losses have been claimed as per Accounting Standard-7 (AS-7) issued by The Institute of Chartered Accountants of India which provide that the contract revenue and contract costs are to be recognized by reference to stage of completion of the contract at the reporting date. The assessee has to recognize / provide for likely losses immediately that would arise from the contracts. The working of the same was furnished by the assessee. In this year the project was stated to be completed to the extent of 43.09% and accordingly, projected losses, to that extent, were computed and claimed in the books of accounts. 4.2 The Ld. CIT(A) observed that the provision was for a contingent liability only which could not be allowed as per the decision of Hon’ble High Court of Telangana in the case of M/s. Healthware Pvt. Ltd. vs. ACIT (ITA No. 443 of 2005) which considered the decision of Hon’ble Supreme Court in the case of Bharat Earth Movers (245 ITR 428). In the decision of Bharat Earth Movers, it was held that if a business liability has arisen in the accounting year, then the deduction thereof should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should be capable of being estimated with reasonable certainty though the actual qualification may not be possible. If these requirements are satisfied, the liability is not a contingent one. The liability would be in- praesenti though it may have to be discharged at a future date. 4.3 The Ld. CIT(A) further held that in the present case, a provision was created for future losses which was unascertained and clearly a contingent liability. The very fact that this provision was offered to revenue in the subsequent years clearly evidences the fact that the provision made was not scientific and is not based on evidence. Thus, the provision made by the appellant was contingent and therefore, it would not partake the character of expenditure either u/s 28 or u/s 37 of the IT Act, 1961. The same also needs to be added to the book profits of the assessee for MAT purposes. Accordingly, the disallowance was confirmed against which the assessee is in further appeal before us. Our findings and Adjudication 5. In the written submissions, Ld. AR has submitted that the assessee has secured a dredging contract from M/s Kamarajar Port Limited at Kamarajar Port. The estimated duration of the contract was around 2 to 3 years. This contract concluded in FY 2017-18. The total revenue earned form the project was Rs.312.75 Crores and total cost was Rs.398.03 Crores. Accordingly, the assessee ultimately suffered loss of Rs.85.28 Crores in the project. It has further been submitted that the assessee was contractually obligated to complete the said contract. The assessee recorded revenue and contract cost based on Percentage of Completion Method ("POCM") as mandated by AS-7 issued by ICAI. The standard mandates that the in a scenario where it is probable that the total contract costs are expected to exceed the total contract revenue, the expected contract loss is to be immediately recorded as an expense. Following the same, the assessee has estimated the total contract cost to be Rs.238.72 Crores as against contract revenue of Rs.218.74 crores which leads to an expected loss of Rs.19.98 crores. During this year, the assessee has incurred actual contract cost of Rs.102.86 crores and has also recorded contract revenue of Rs.94.25 crores (based on POCM) thereby booking an actual loss of Rs.8.61 crores. The Ld. AR submitted that though actual revenue billed during the year was Rs.47.26 Crores, considering the fact that the project was completed to the extent of 43.09% during this year, the assessee booked additional revenue of Rs.46.99 Crores during this year. Further, out of total expected loss of Rs.19.98 Crores, the assessee has already recorded actual loss Rs.8.61 Crores and made provision for the balance expected loss of Rs.11.37 Crores. Hence, the provision has been created as per mandate of AS-7 and the same could not be held to be unascertained / contingent liability for the assessee. It is the submission that both revenue and expenditure as recorded by the assessee has been recognized as per percentage of completion method. The Ld. AR further submitted that the income computation and disclosure standards (ICDS) as notified by the Central Government vide Section 145(2) are applicable only from AY 2017-18 onwards and accordingly, the same would not have an impact on AY 2016-17. Reliance has been placed on the decision of Hon'ble Delhi High Court in the case of Triveni Engg & Industries Ltd [336 ITR 374] and the ruling of Pune Bench of the Hon'ble Tribunal in the case of Ashoka Buildcon Ltd. [170 TT J 19] for the submissions that the provision for contract losses would be an allowable deduction. Lastly, it has been submitted that out of impugned provision of Rs.11.37 Crores, the assessee has reversed provision to the extent of Rs.10.56 Crores in the subsequent year and offered the same to tax. Disallowing the provision in this year would amount to double taxation which is impermissible. The Ld. AR referred to the decision of Hon’ble Apex Court in the case of Excel Industries Ltd [358 ITR 295] to support these submissions. The Ld. CIT-DR, in its written submissions, supported the findings of Ld. CIT(A) and submitted that the provision made by the assessee was not an ascertained liability. The Ld. CIT-DR has referred to the ruling of the Hon'ble High Court of Madras in the case of FLSmidth v DCIT (456 ITR 300).

The appeal stand allowed. Order pronounced on 3rd September, 2024