TaxTMI 
TaxTMI 
2001 (8) TMI 286
X X X X Extracts X X X X
X X X X Extracts X X X X
....balance sheet. The details as mentioned in Schedule 8 are being reproduced as under: ----------------------------------------------------------------------- Rs. Rs. ----------------------------------------------------------------------- Provision for duty and taxes 58,963 Provisions for expenses 83,58,500 Salaries payable 1,94,831 Tax payable ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....aims to follow mercantile system of accountancy and thereunder percentage of completion project method, there was no occasion to reverse professional fees receipts on the ground that the same has not been accepted by the other party. Even otherwise there were two projects under Cochin Port Trust. For one project, bill was preferred at the rate of 45% of the completed project and in another case it was 40% of the completed project. These bills were preferred by the assessee on19-2-1997. Thereafter, certain inputs on these project has undertaken. Ignoring these inputs in the revenue recognition, the assessee has only recognised revenue of 40% of the project. What about remaining 5% and the input after February, 1997? There is no explanation for this. This is not the end of the matter. Under Accounting Standards-9, it was obligatory on the assessee to disclose the circumstances under which the revenue recognition has been postponed. This has not been done. The Auditor in his report has also not made any reference to the reversal of the entries in this year as well as on the 1st day of the next financial year. Reference to notification under section 145(2) issued by the CBDT is wholly ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hich the costs incurred in order to perform the service upto the revenue stage are to be treated as expenses for earning those revenues. He also drew our attention to para 4 of the Notification No. 9949, dated 25-1-1996 issued by the Central Government which provides "provisions should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information." In view of the aforesaid materials, it was contended by him that assessee was entitled to deduction in respect of the expenses incurred upto the stage of revenue earned by the assessee since it was following percentage completed method as recognised by ICAI and notified by the Central Government. According to him, since invoice had not been received during the year under consideration, the assessee was bound to make provisions for the same and claimed the deduction for the said amount. Regarding the reversal of entry in the next year it was argued by him that both the lower authorities had not property appreciated the accounting system adopted by the assessee. According to him, the provisions for expenses account had to be ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....from the parties then at the end of the year the expenses accounts are debited and a corresponding amount is credited under the head "Provision for expenses". This principle is well recognised in all the accounting systems of mercantile. Reference can be made to Accounting Standards notified under section 145(2) by the Central Government vide Notification No. 9949, dated25-1-1996. In para No. 4, it has been stated "provisions should be made for all known liabilities and losses even though the amount cannot be determined with certainly and represents only a best estimate in the light of available information." So the assessee is entitled to the deduction if the liability is a known liability. That means if the liability is accrued then the assessee is entitled to debit such expenses and credit the same under the head "Provisions for Expenses" and claimed the deduction thereof. The only thing to be seen is that onus lies on the assessee to establish that the expenses represented by the "provisions" related to the year in which the deduction is claimed. 6. In the present case, the assessee is engaged in the business of providing engineering consultancy service's in the area of deve....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... on this account in the year under consideration was as under: ----------------------------------------------------------------------- 1996-97 Head of account - Subcontract Date Jv No. Description Amount(Rs.) 31-3-1997 J-324 Sub-contract. Dr. 78,95,000.00 Provision for expenses Cr. 78,95,000.00 (Being the provision for expenses made for month of March, 1997) ---------------------------------------------------------....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nbsp; Rs. (Being the Bill No. Com. 9606/RA-1, dated 2-4-1997 of COMACOE of Rs. 55,00,000 and Rs. 10,00,000 already booked in sub-contract at the time of payment as advance). J-351 Sub-contract Dr. &....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... dated 3-5-1997 of Vam Management Services P. Ltd., towards professional charges for Gangavarm Port bid project. 14-7-1997 J-118 Subcontract Dr. 85,000.00 IIT Madras Cr. 85,000.00 [Being the Bill No. Nil (Ref./  ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e books of the assessee as under: --------------------------------------------------------------------------- Sub-contract 1997-98 A/c --------------------------------------------------------------------------- Rs. Rs. --------------------------------------------------------------------------- 4-4-1997 Coastal Marine 45,50,000 1-4-1997 Provision for 78,95,000 Con. & Eng. Ltd. expenses 4-4-1997 EIL 12,17,353 6-5-1997 Vam Management &....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt and credit the accounts of respective parties. Instead of doing this, the assessee has first credited the expenses account i.e., sub-contract account on the first day of the next year and then again debited the sub-contract account at the receipt of bills from the parties and simultaneously crediting the accounts of such parties. That does not mean that entries made in the year under consideration were incorrect. By making such normal entries, the liabilities of the assessee to the extent of Rs.78.98 lacs was not nullified as would appear from the ledger entries mentioned above. It was only the excess amount, over and above Rs.78.85 lacs, which go to the Profit and Loss account for assessment year 1998-99. It is only the entry for "provision for expenses" which is considered as dummy entry, as such, entry is bound to be reversed and not the liabilities itself. Therefore, in our considered opinion, the Assessing Officer as well as CIT(A) was not justified in rejecting the claim of the assessee merely on this ground. 10. However, it is seen that on account of outright rejection of the assessee's claim on the wrong appreciation of entries, the Assessing Officer had not considere....