Project completion method deduction upheld for estimated liability and compliant TDS expenditure, with disallowance deleted.

Under the project completion method, estimated provision for unfinished ancillary work was treated as deductible where the project was substantially completed, revenue had been recognised, and the liability had accrued but could be reasonably estimated; the corresponding disallowance was therefore unsustainable. Disallowance under the tax deduction at source provisions also failed for raw material purchases, which were outside the usual TDS ambit, and for expenditure where tax had already been deducted and deposited within the permitted time. On those facts, the disputed additions were deleted and the assessee's case prevailed.

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Issues: (i) Whether provision for estimated expenditure made under the project completion method was allowable when the project had been substantially completed and the relevant payee was not identifiable; (ii) Whether disallowance could be sustained under the tax deduction at source provisions in respect of amounts relating to raw material purchases and expenses for which tax had been deducted within the permissible time.

Issue (i): Whether provision for estimated expenditure made under the project completion method was allowable when the project had been substantially completed and the relevant payee was not identifiable.

Analysis: The project completion method permits recognition of revenue and expenses on substantial completion of the project, and in that method provision for ancillary or unfinished work may be required to reflect true profit. Where the liability has arisen but is to be discharged later, and the expenditure is capable of reasonable estimation, it is not a contingent liability merely because quantification or actual payment is deferred. On the facts, the assessee had substantially completed the project and had accounted for the project revenue, so the estimated provision for remaining work was treated as a proper business deduction. Further, where the payee was not known, deduction of tax at source could not be worked out mechanically.

Conclusion: The provision for estimated expenditure was allowable and the corresponding disallowance was not justified.

Issue (ii): Whether disallowance could be sustained under the tax deduction at source provisions in respect of amounts relating to raw material purchases and expenses for which tax had been deducted within the permissible time.

Analysis: Amounts relating to purchase of raw material do not attract tax deduction at source in the same manner as contractual service payments. The record also showed that tax had been deducted and deposited within the permitted time in respect of part of the expenditure. In these circumstances, the basis for disallowance under the tax deduction at source provisions did not survive for those components.

Conclusion: The disallowance was not sustainable for the raw material component and for the component on which tax had been duly complied with.

Final Conclusion: The additions made on account of the disputed provisions were deleted, the assessee's appeal succeeded, and the Revenue's appeal failed.

Ratio Decidendi: Under the project completion method, estimated liability for unfinished ancillary work is deductible when the liability has accrued and can be reasonably estimated, and tax deduction at source cannot be insisted upon where the payee is not identifiable or where the expenditure is outside the ambit of tax deduction at source.

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