2018 (10) TMI 1303 - HC - Income Tax

Tribunal decisions on Income Tax Act treatment of contract accounting losses, gratuity, and bad debts provision

FERTILIZERS AND CHEMICALS TRAVANCORE LIMITED, UDYOGAMANDAL Versus COMMISSIONER OF INCOME TAX, COCHIN

FERTILIZERS AND CHEMICALS TRAVANCORE LIMITED, UDYOGAMANDAL Versus COMMISSIONER OF INCOME TAX, COCHIN - [2019] 414 ITR 338 (Ker) Issues:1. Computation of profit and loss under Section 115J of the Income Tax Act, 1961.2. Addition of foreseeable losses in contract accounting.3. Provision for gratuity as an ascertained liability.4. Treatment of provision for bad and doubtful debts under Section 115JA.Analysis:1. The main issue in the judgment pertains to the computation of profit and loss under Section 115J of the Income Tax Act, 1961. The questions of law framed in ITA No.43/32003 revolve around whether the additions made by the assessing authority under Section 115J were justified. The Tribunal confirmed the additions made by the assessing authority, leading to a dispute regarding the treatment of foreseeable losses in contract accounting.2. The judgment delves into the treatment of foreseeable losses in contract accounting. The assessee contended that the accounting procedures, specifically AS7, allow for the computation of profit and loss at every ascertainable stage of work. However, the assessing officer added back the foreseeable losses, arguing that they were not ascertainable liabilities. The Tribunal upheld the additions, stating that the losses could only be ascertained upon completion of the contracts.3. Another issue addressed in the judgment is the provision for gratuity as an ascertained liability. The court determined that gratuity, although not payable in the previous year, constitutes an ascertained liability as it is related to each employee's service year. The provision for gratuity earned in a particular year is considered an ascertained liability falling outside the purview of Section 115J(1A).4. The judgment also discusses the treatment of provision for bad and doubtful debts under Section 115JA. Referring to a Supreme Court judgment, the court ruled in favor of the assessee, directing the assessing officer not to make any addition with respect to the provision for bad and doubtful debts in the computation of income under Section 115JA. The decision in ITA No.2/2007 was allowed, while ITA 1/2007 was partly allowed, and ITA No.43/2003 was rejected.In conclusion, the judgment provides detailed analysis and rulings on various issues related to the computation of profit and loss, treatment of foreseeable losses in contract accounting, provision for gratuity, and provision for bad and doubtful debts under relevant sections of the Income Tax Act, 1961.