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2023 (4) TMI 519
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....tnam, Andhra Pradesh on 5th September, 2008. The contract value consisted of offshore supply valued at JPY 15,325,128,000 and onshore supply valued at INR 445,602,305. It is stated that it is the first project of the assessee. During the year ending 31.3.2010, i.e., in the very next year of the contract, the assessee expected loss from the "onshore supply" portion of the contract. It is stated that the assessee also could make saving of Rs.20 crores in the "Offshore supply" portion of the contract by way of sub-contracting the work. Accordingly, the assessee estimated the loss from the project as under:- Total estimated cost for "Onshore supply" 110.39 crores Less:- Contract value 44.56 crores 65.83 crores Less:- Savings in cost from Offshore supply 20.00 crores Resultant foreseeable loss 45.83 crores The assessee provided in the books of account of the Financial Year 2009-10 relevant to the assessment year 2010-11. The claim was made as per Accounting Standard 7 relating to Construction Contracts. The AO, however, held it to be a contingent liability and accordingly disallowed the claim. The Ld CIT(A) also confirmed the disallowance. 4. W....
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....ence, we extract below the relevant observations made by the co-ordinate bench in the case of Dredging International N V (supra):- "24. We have considered the issue and examined the various arguments and papers placed on record. The assessee justified its claim of future losses not only before the A.O. but also before the DRP by giving detailed factual position as well as legal arguments. We are surprised to note that instead of countering all these arguments and submissions the DRP rejected the entire explanation with a single sentence that assessee did not file proper reply. However, the DRP failed to explain what is 'proper reply' and how it expects the 'proper reply'. Since no reasons were given in rejecting assessee's explanation, we are unable to understand what the DRP meant by stating that assessee did not file proper reply. As far as the factual position is concerned assessee has given detailed explanation for estimating the future losses which in fact it had suffered and the final loss was already determined by the A.O. in the next assessment year, the order of which does not contain any disallowance. There is evidence on record that assessee ....
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....n of Mumbai Tribunal in the case of Mazagaon Dock Ltd. (supra) was also in favour of allowing future losses. In this case, assessee, as per method of accounting in case of contracts where loss was anticipated reckoned the entire loss, based on estimated realizable values and estimated cost of contracts in the first year itself. The A.O. disallowed assessee's claim observing that this being only a provision made on estimated basis, cannot be allowed. The Tribunal held as below: - "He seems to have swayed more by revenue loss than by the correct principle to be applied. The matching principle of accounting is not of much significance in the present context because if the loss has been property estimated in the year in which the contract has been entered into then it has to be allowed in that very year and cannot be spread over the period of contract. The matching principle is of relevance where income and expenditure, both are to be considered together. However, in the present case, the effect of valuation of WIP will automatically affect the profits of subsequent years accordingly. We, accordingly, do not find any reason for not accepting in principle assessee's cla....
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....rlosker Ltd.'s case (supra), the issue which was raised before the Court was whether donation given by the assessee can be claimed under section 37(1). In this case, assessee-company had promoted a trust which had constructed school to provide education for the children of the employees and ex-employees of the assessee company. During the year, assessee company donated Rs. 62,000/- to meet the expenditure of the school. Assessee claimed deduction of this expense under section 37(1) of the Act. The Court observed that sections 37(1) and 80G are not mutually exclusive. In other words, the Court observed donation if laid out wholly and exclusively for the purpose of business should be allowed under section 37(1) of the Act. Accordingly, the Court in the present case allowed deduction of Rs. 62,000/- to assessee. 29. Keeping the principle laid down on this issue in various coordinate bench decisions, we are of the opinion that assessee's claim for provision for loss, which was made in accordance with the guidelines of AS-7 and duly debited in the audited accounts of the company is an allowable expenditure. Therefore, DRP was not correct in rejecting the same without as....
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....jects. It is no where provided in the Act that income from construction projects has to be completed in the manner prescribed in AS-7. Therefore, the income from rehabilitation projects is required to be computed under the normal provisions of the Act. The Accounting Standard, AS-7 has also not been notified by the Government. Therefore, there is no case for computation of income for the purpose of taxation to be made as per Accounting Standard AS-7. When pointed out, the ld. A.R for the assessee submitted that even the Accounting Standard AS-1 notified by the Government provides for allowance of loss in respect of all known liabilities and therefore, provisions for losses has to be allowed as per the notified AS-1. .................... 2.11.3 A careful perusal of the Accounting Standards AS-1 & AS-2 notified above shows that these are only regarding disclosure of accounting policies and disclosure of prior period expenses and extraordinary items and changes in accounting policies. These provide that the assessee should disclose all significant accounting policies or any changes in accounting policies. It further provides that the accounting policy should be such ....
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....f Mazagon Dock Ltd. ( supra) and decision of the Tribunal in the case of Jacobs Engineering India (P.) Ltd. (supra), in which the previous decision of the Tribunal has been followed. Thus reliance is basically on the decision of the Tribunal in the case of Mazagon Dock (P.) Ltd. (supra). In that case also, the deduction had been claimed on account of anticipated loss as per Accounting Standard AS-7. The assessee had claimed the loss by switching over the method of accounting of income to AS-7. The Tribunal observed in the order that merely because change in method was bona fide, it could not lead to the inference that income was also deductible properly under the Act. Thus, even in that case the Tribunal held that income has to be computed under the provisions of the Act. However, Tribunal had also observed that there was no dispute in principle that estimated losses were allowable. The Tribunal therefore, held that the loss could not be considered as bogus as held by CIT(A) because the same had been computed as per the Accounting Standard AS- 7. The Tribunal had restored the issue to the AO for properly estimating the loss. It thus appears that the Tribunal even though observing t....
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....S-1 issued by CBDT also. Accordingly, following the decisions relied upon by the assessee, we hold that the assessee, in principle, is entitled for deduction of expected loss. 7. However, we notice that there was no occasion for the AO to examine the claim on merits, since the AO had disallowed the same holding it to be contingent in nature. Certain glaring facts emanate in this case, viz., (a) the assessee herein, being a joint venture of M/s Larsen & Toubro Limited and M/s Mitsubishi Heavy Industries Ltd, has obtained the impugned contract from one of its promoters, viz., M/s L & T Ltd, i.e., a related concern. There should not be any dispute that the transactions with related concerns require proper examination. (b) When the contract was awarded on 5th September, 2008, the contract revenue for "onshore supply" portion was determined as Rs.44.56 crores. (c) However, by 31.3.2010, i.e., within a period of 18 months, the cost has been claimed to have escalated to Rs.110.39 crores and a loss of Rs.65.83 crores was visualized. It is stated that the assessee could make a saving of Rs.20 crores in "offshore supply" portion of contract and hence the net los....