TaxTMI 
TaxTMI 
2014 (10) TMI 109
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.... MPEB arbitrarily terminated the contract and invoked the bank guarantee. The said contract was terminated by letter dated 8.10.2002. The assessee invoked the arbitration clause and put forth a claim. The amount of Rs..6,64,01,149/- included money spent on raw materials like tubes and pressure parts, consumables, freight and carriage and also bank charges, professional charges etc., in addition to the expenses on personnel, transport and communication and administrative expenses. However, more than 50% of the total amount was debited towards the material consumed for the contract work. The assessee debited the said amount being the cost of abandoned project towards the profit and loss account. In the notes appended, it is stated that the said amount has been charged as expenditure on abandoned project. The assessee also mentioned that the assessee has contested the invocation of bank guarantee by the MPEB before the court of Jabalpur. On the date of the assessment order the arbitration award also had been passed on 23.9.2004 under which the assessee was granted substantial damages for the illegal invocation of the bank guarantee, cancellation of the contract etc., However, no amoun....
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....of Rs..2,57,74,199/- incurred towards the previous year relevant to the assessment year in question has been written off/charged off as expenditure on abandoned project. This according to the Appellate Authority is improper. The assessee is not following any specific method of accounting. In any case the non reflection of the expenditure incurred on the said project as work-in-progress during the previous year relevant to the assessment year in question is not in accordance with the mercantile system of accounting, thus resulting in a distorted disclosure of the profit/income from the said project. Therefore, it dismissed the appeal. 4. Aggrieved by the said order, the assessee preferred an appeal before the Tribunal. The Tribunal was of the view that, the expenditure on a particular project cannot be merely allowed as an expenditure unless there is a corresponding credit in the form of contract receipt or work-in-progress. The assessee has claimed that since the contract has been abandoned, the entire expenditure is a deductible expenditure. Although the assessee has abandoned the contract, the fact remains that they have made a claim in the arbitration case in respect of the e....
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....ot be said to have been written off against any particular business activity carried out by the assessee because the contract amount lying with the bank against bank guarantee was sought to be invoked by the contractee which the contractor was awarded by the arbitration court. Therefore, the tribunal was of the view the assessee has not met its own consistent system of accounting to be followed for rightfully becoming the claimant for loss of three years in one year without incorporating the corresponding receivables to become entitled for write off under the provisions of section 36(i)(vii) and not u/s 37(1) of the Act. 5. Aggrieved by the said order, the assessee has preferred this appeal. 6. This appeal came to be admitted on 28.9.2010 to consider the following substantial questions of law: 1. Whether on the facts and circumstances of the case, the Appellate Tribunal was right in holding that the deduction of expenditure/loss incurred by the appellant towards the abandoned project was not allowable since the appellant had not recorded any corresponding credit either as contract receipts or as work-in-progress? 2. Whether on the f....
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....ot entitled to claim the said amounts as expenditure and therefore, he submits the order passed by the authorities is strictly in accordance with law and do not call for interference. 9. As could be seen from the orders passed by the authorities, the Assessing Authority and the Tribunal proceeded on the assumption that the Assessing Authority has not shown in its accounts the expenditure incurred as representing work-in-progress. However, the first Appellate Authority has looked into the profit and loss account and was convinced that for the first two years the expenditure is shown as "work-in-progress" but for the year in question as the expenditure was not shown as work-in-progress and the entire expenditure was shown as expenditure the assessee is not entitled to the said benefit. The statement filed by the assessee before the first Appellate court showing the year wise cost of Amarkantak project from 1.4.1999 to 31.3.2002 and the statement of the books of accounts is as under: Year wise cost of Amarkantak Project from 1^st April 2000 to 31^st March 2002 and treatment in books of account. S.N. F.Y. Cost incurred for the Amarkantak Project Cumulative cost incurr....
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....ing the accounting year in question. The amount of that loss cannot be postponed in view of the pendency of the litigation referred to above." 12. The Madras High Court in the case of George Maijo and Co. Vs. Commissioner of Income Tax (2003) 231 ITR page.237 held when there is a direct intimate connection between the business operation of the assessee and the loss that has fallen on the assessee, though the loss was occasioned by the act done by the seller, since the assessee is not stated to be a party to the fraud committed by the foreign seller, the loss would be allowable as deduction as the loss is incidental to the business carried on by the assessee. 13. The Supreme Court in the case of Ramchandar Shivnarayan Vs. CIT (1978) 111 ITR 263 has held that it is open to the assessee to claim the loss if it has a proximate connection with its business. Similarly it was held by the Apex Court in the case of Madras Industrial Investment Corporation Limited Vs Commissioner of Income Tax reported in (1997) 225 ITR 802 that, where the liability was incurred which has to be discharged in a future date it will be a liability but however a contingent liability which may have to....