TaxTMI 
TaxTMI 
2023 (7) TMI 1667
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....osses which are not an ascertained liability and are contingent losses and therefore are not allowable under section 37 of the IT Act, 1961. 2. Brief facts of the case are that the assessee company was engaged in the business of civil contract including carrying out work of construction of roads and bridges, dams etc. for various Government and Non-Government organization. For the year under consideration, the assessee filed return of income on 30.11.2016 declaring total income of Rs. Nil under the normal provisions (after set off of brought forward losses) and book profit of Rs.96,69,03,000/- u/s 115JB of the Income-tax Act, 1961 (in short 'the Act'). The return of income filed by the assessee was selected for scrutiny and statutory notices under the Act were issued and complied with. During assessment proceedings, the Assessing Officer observed that the assessee has made certain investments in joint ventures and equity shares, the income arising out of which was not included in the total income of the assessee. After recording dissatisfaction to the claim of the assessee of incurring no expenses, the Assessing Officer invoked Rule 8D of the Income-tax Rules, 1962 (in s....
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....ms of section 37 of the Act and as to whether the accounting procedures (Accounting Standard 7) can override the provisions of the Act. It is noted that neither the amount represented by the "provision for foreseeable losses" is an expenditure incurred in the year under consideration, nor any ascertained liability has arisen in respect of the said amount. It is seen from the detailed working (as reproduced hereinbefore) on the basis of which the aforesaid amount is derived that the quantification of the same is based on "Estimated contract cost". First, by comparing the estimated contract cost with the value of the contract as per the contract agreement, the assessee works out the figure of estimated loss from the contract. Then, by applying the percentage completion method (percentage of cost incurred so far vis-a-vis the estimated cost) to the aforesaid estimated loss from the contract, the assessee determines the part as "actual loss" to be recognized till the present year and the remaining part is treated as "Foresceable losses". After deducting the part of such "foreseeable losses" as has already been debited in the earlier years, the assessee claims the remaining part as dedu....
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....on of the parties on the issue in dispute of disallowance u/s 14A of the Act. The ld CIT(A) has deleted the disallowance observing as under: "4.1 During the assessment proceedings, the A observed that the assessee had made certain investments in joint ventures and equity shares, the income arising out of which was not included in the total income. The assessee was asked to explain as to why disallowance us. 14A r.w. Rule 8D should not be made. In response, the assessee made certain submissions which were found to be unsatisfactory by the AO. The AO was of the view that expenditure in relation to income not includible in total income is to be disallowed us. 14A even when no exempt income is earned during the year. Therefore, disallowance u/s. 14A r.w. Rule 8D amounting to Rs. 21,74,000/- was made by the AO. 4.2 During the appellate proceedings, it was submitted by the appellant that the Hon'ble ITAT in appellant's own case for A. Ys. 2014-15 and 2015-16, on similar facts and circumstances, had decided the issue in favour of the appellant by deleting the disallowance u/s. 14A. The relevant portion of the Hon'ble ITAT order in ITA No. 5869 & 5870/Mum/2018....
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....elied on finding of the Tribunal in the case of the assessee in earlier years, deleted the disallowance. 6.1 Before us, the Ld. Departmental Representative (DR) submitted that foreseeable losses have been computed by the assessee on the basis of expenses which were though not incurred in the year under consideration, but were to be incurred in future years for completion of the relevant works contract project. According to the Ld. DR same was contingent expenditure and not ascertained liability for the year under consideration and thus it was not to be allowed u/s 37(1) of the Act. The Ld. DR further submitted that the assessee has not filed any details of those expenses which would be incurred in future years and in absence of which, even the estimate was without any foundation or documentary basis. The Ld. DR further submitted that the issue of allowability of foreseeable losses has to be seen vis-à-vis each year on the basis of facts of the claim made and the Ld. CIT(A) is not justified in deleting the disallowance merely following the Tribunal decision in earlier years without examining the facts of the year under consideration and applying the ratio of the said decis....
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.... (78.35) (75.19) (3.17) Less: Foreseeable Losses already recognised in FY 2014-15 (0.72) Foreseeable Losses recognised in the year under consideration (2.45) 6.2.1The ld Counsel referred to column 'J' of above table and submitted that foreseeable losses of Rs. 2.45 crores has been claimed as per the expected increase in cost of the project and resultant additional loss which will arise from project in future at the time of completion of the project. 6.2.2 The Ld. Counsel however submitted that corresponding to the estimated increase in projected total cost, the assessee has incurred cost on the said projects in the subsequent years and sometimes said cost actually incurred is more than the cost which was estimated in the year under consideration, therefore, there is no revenue loss in the claim of the foreseeable losses. The relevant details submitted by the assessee are reproduced as under: ITD Cementation India Limited A.Y .: 2016-17 Comparison of foreseeable loss provided in A.Y. 2016-17 with actual cost in next year (Rs. in Crores) Sr. No. Project No. Name of the Project Expected additional....
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....nt portion of the Hon'ble ITAT order in ITA No. 2991/Mum/2011 dated 17.05.2013, is reproduced as under :- "14. We have considered the rival submissions and perused the orders of the lower authorities. We have also the benefit of going through the AS-7 issued by ICAl. At the very outset, it would not be out of place to consider the provisions of Sec. 145 of the Act. Sec. 145(2) of the Act provides that the Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessee or in respect of any class of income. It is a fat that AS-7 has not been notified by the Central Government. This does not mean that the assessee is precluded from following AS-7. A perusal of the provisions of Sec. 145 show that Accounting Standards which have been notified by the Central Government have to be mandatorily followed by the assessee. But this does not mean that the assessee cannot follow other Accounting standards issued by ICAl. ICAI being the highest accounting body of the country, created by an Act of Parliament, Accounting Standards issued by it cannot be brushed aside lightly. On the contrary, if an assessee is follow....
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....y, Ground No. 5 of the appeal is allowed." 6.4 We note that the Tribunal (supra) has allowed the claim of 'foreseeable losses' on the ground that same was claimed following the accounting standard AS-7 of Institute of chartered Accountant of India (ICAI) without any factual finding whether the provision of the expenses were in the nature of ascertained liability. As far as allowance of provision of expenses u/s 37(1 ) of the Act, the Coordinate bench of Tribunal in the case of L'orial India I.T.A. No. 1198/Mum/2021 (A.Y. 2016-17) I.T.A. No. 802/Mum/2022 (A.Y. 2017-18) has analysed that accrual of liability of expenses is different from liability to pay and liability is ascertained, moment the liability of expense is accrued. The relevant finding is reproduced as under: "11. The next issue urged in AY 2016-17 relates to the disallowance of claim of Provision for expenses. The assessee had made "Provision for outstanding expenses" to the tune of Rs.96,28,68,265/- as per the requirement of mercantile system of accounting and claimed the same as deduction. Since it had not deducted tax at source from the above said provision claimed as deduction, the assessee vo....
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....g results of the business concern and it would not reflect true and fair profit of the year. We have noticed that the assessee has provided for expenses for which services have been availed by it, meaning thereby, the liability towards those expenses has already accrued to the assessee. However, the actual liability to pay shall arise only upon on production of bills by the service provider. Thus, there is distinction between "accrual of liability" and "liability to pay for expenses". There should not be any dispute that the "accrued L'Oreal India Private Limited 15 liability" cannot be considered as "unascertained liability". Accrued liability is an ascertained liability, but the liability to pay it has not arisen. We notice that the the tax officials have been carried away by the fact that the liability to pay shall arise upon the assessee only after the receipt of the relevant bills and have not considered its accrual. The fact that there was an obligation upon the assessee to pay for the liability as a result of past event cannot be denied. By belated receipt of bills, the payment only gets postponed, but not the liability that has already accrued to the assessee. It is als....
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....imates of contract revenue and contract costs. Therefore, the effect of a change in the estimate of contract Construction Contracts 77 revenue or contract costs, or the effect of a change in the estimate of the outcome of a contract, is accounted for as a change in accounting estimate (see Accounting Standard (AS) 5, Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies). The changed estimates are used in determination of the amount of revenue and expenses recognised in the statement of profit and loss in the period in which the change is made and in subsequent periods." 6.7 Thus, the estimate of change of total cost of the project needs to be taken for working of percentile of completion of contract as per AS-7. Those guidelines are in conformity with provision of various section of the Act, according to which wherever the assessee is following mercantile method of accounting, the income is to be assessed on receipt or accrual, whichever is earlier and similarly liability of the expenses also to be considered on accrual basis. Under the percentage completion of method, the revenues recognised from the project in proportion of the work complete....