M/S.Flsmidth Private Limited vs The Deputy Commissioner Of Income Tax on 21 December, 2022

[Cites 16, Cited by 0]

Madras High Court

M/S.Flsmidth Private Limited vs The Deputy Commissioner Of Income Tax on 21 December, 2022

The appellant has filed this appeal under Section 260-A of the Income Tax Act, 1961, against the impugned order dated 08.10.2021 passed by the Income Tax Appellate Tribunal (hereinafter referred to as ITAT for brevity), Chennai 'B' Bench, in I.T.A.No.1366/CHNY/2017.

The dispute in the present appeal pertains to the Assessment Year 2011- 2012. Operative Portion of the impugned order of ITAT reads as under:

"4. On appeal before the ld. CIT(A), the assessee has relied on the decision of the Hon'ble Supreme Court in the case of Rotork Controls India Limited (2009) 314 ITR 62 and submitted that the provision for estimation of loss on contracts is an ascertained liability and is an allowable expenditure under section 37 of the Act. By considering the above decision of the Hon'ble Supreme Court, the ld. CIT(A) has observed that the assessee has not been able to demonstrate in this appeal with reference to the facts despite the specific opportunity given, as to how it considered the provision of estimated loss on contract to be an ascertained liability. Instead, it has loaded its submissions with a plethora of judgments, which can only be helping the cause of the assessee if the assessee is able to demonstrate its applicability to the facts and circumstances of its own case. With https://www.mhc.tn.gov.in/judis the above observations, the ld. CIT(A) 3/21 TCA.No.240/2022 confirmed the order of the Assessing Officer.

5. On being aggrieved, the assessee is in appeal before the Tribunal. Before us, the ld. Counsel for the assessee has submitted that the loss estimated by the assessee is an ascertained liability and submitted that simply because the loss is estimated, it cannot be said that it is an unascertained liability. In his gist of submissions, ld. Counsel for the assessee has submitted that in assessee's own case in earlier assessment year 2005-06 vide order in I.T.A.No. 1697/Mds/2015 dated 03.08.2017, the Tribunal remitted the matter back to the file of the Assessing Officer to consider afresh and accordingly, he prayed that the same may be followed and remit the matter back to the file of the Assessing Officer.

6. On the other hand, the ld. DR has submitted that there is no provision in the Act to estimate the ascertained liability and make a provision for it and therefore, pleaded that the Assessing Officer as well as ld. CIT(A) have rightly disallowed the same and strongly supported the order passed by the authorities below.

7. We have heard both the sides, perused the materials available on record and gone through the orders of authorities below. The case of the assessee is that as per the Schedule 12 to the financials Rs.4,38,99,923/- has been created as a provision for estimated future losses on contracts. The Assessing Officer has asked the assessee to justify the claim vide notice dated 05.02.2015. Vide letter dated 24.02.2015, the assessee has submitted that Para 21 of AS-7 stipulates that when the outcome of a https://www.mhc.tn.gov.in/judis construction contract can be estimated 4/21 TCA.No.240/2022 reliably, contract revenue and contract costs associated with the construction contract should be recognized as revenue and expenses respectively by reference to the stage of completion of the contract activity at the reporting date and an expected loss on the construction contract should be recognized as an expense immediately in accordance with paragraph 35 of AS-7. The Assessing Officer has considered the explanation of the assessee and observed that the said loss on an estimate, which is bound to vary due to variation in input costs. Accounting Standards are binding on the Company in so far as the preparation of books are concerned, but, are not binding for Income Tax purposes. Further, the Assessing Officer, by following the decision in the case of EDAC Engineering Limited [2013] 30 Taxmann.com 355 (Chennai -Trib.), disallowed the same and the same was confirmed by the ld. CIT(A). The assessee, neither before the Assessing Officer nor before the ld. CIT(A) substantiated the provision made by it is an ascertained liability. Even before us, the assessee has not been able to explain as to what was the necessity for the assessee to make such a provision. The ld. Counsel for the assessee has simply stated that the provision made by the assessee is an ascertained liability. If at all, it is an ascertained liability, it is the onus on the assessee to establish that the liability is an ascertained liability. No material was placed on record before the Tribunal. Under these facts and circumstances of the case, we are of the opinion that the provision made by the assessee for a loss on contract is not an ascertained liability and it is a simple provision made by the assessee which is not allowable https://www.mhc.tn.gov.in/judis under section 37 of the Act.

5/21 TCA.No.240/2022

8. So far as case law placed by the assessee are concerned, the decision in the case of Rotork Controls India Limited v. CIT (supra) has no application to the facts of the present case. In the order passed by the Tribunal for the AY 2005-06 dated 03.08.2017, the issue dealt by the ITAT relates to provision of warranty and therefore, in our opinion, the issue under consideration need not be remitted back to the Assessing Officer. In view of the above, the ground raised by the assessee is dismissed."

2. Following substantial questions of law were framed for being answered in this appeal :

(1)Whether, in law, the Tribunal was right in not allowing provision for estimated loss on contracts as a business expenditure under Section 37 of the Act ? (2) Whether, in law, the Tribunal was right in not appreciating that provision for estimated loss on contracts is created on a scientific basis in accordance with the Accounting Standard (AS) 7 and as such it is an ascertained liability allowable as deduction under Section 37 of the Act ?

(3) Whether, in law, the Tribunal was right in not following its own order in the case of the Appellant for AY 2005-06 in ITA.No.1697/Mds/2015, dated 30.08.2017 ?

(4) Whether, in law, the Tribunal was justified in not considering the alternative ground of the Appellant that in case provision for estimated loss on contracts is disallowed in the year of creation of provision, then reversal/utilisation of such provisions should be allowed as a deduction in the years of https://www.mhc.tn.gov.in/judis reversal/utilisation?

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3. The dispute in the present case relates to an estimated loss of Rs.1,14,45,495/-, claimed by the appellant as permissible deduction under Section 37 of the Income Tax Act.

4. The appellant had claimed the aforesaid estimated loss on the strength of Accounting Standards (AS) 7 of the Institute of Chartered Accountants, which was disallowed by the Assessing Officer, vide Assessment Order, dated 24.03.2015, for the aforesaid assessment year under Section 143(3) of the Act. The relevant portion of the said order reads as under :

"Provision for estimated loss of contracts: As per Schedule 12 to the financials, Rs.4,38,99,923 has been created as a provision for estimated future losses on contracts. Vide the notice u/s.142(1) dated

05.02.2015, the assessee was asked to justify the claim. Vide letter dated 24.02.2015, the assessee stated as follows:

"Para 21 of AS-7 stipulates that when the outcome of a construction contract can be estimated reliably, contract revenue and contract costs associated with the construction contract should be recognized as revenue and expenses respectively by reference to the stage of completion of the https://www.mhc.tn.gov.in/judis 7/21 TCA.No.240/2022 contract activity at the reporting date. An expected loss on the construction contract should be recognized as an expense immediately in accordance with paragraph 35 of AS-7.

In view of the above, wherever the company expects that it is going to incur a loss on a contract, it ascertains the expected loss and provides for the same in the books of account. The company makes a proper estimate of the relevant cost and revenue and accordingly recognizes the loss. As this is an ascertained provision, the same is not been disallowed in the computation total income".

The submission has been considered. The fact is that the said loss on an estimate, which is bound to vary due to variation in input costs. Accounting Standards are binding on the Company, in so far as the preparation of books are concerned but are not binding for Income Tax purposes. AS-7 in any case has not been notified by the Board and so reliance on the said code to claim deduction under the Income Tax Act is not permissible. In any case, the jurisdictional ITAT while deciding an exactly similar issue, has held that since there was no legal right on any person for claiming for claiming a cost which was still to be incurred, the said loss could not be allowed. This decision was rendered in the case of EDAC Engineering Limited [2013] 30 Taxmann.com 355 (Chennai - Trib.). Therefore, the provision created in this year of Rs.1,14,45,495 is disallowed.

Disallowance : Rs.1,14,45,495 https://www.mhc.tn.gov.in/judis 8/21 TCA.No.240/2022

5. The above decision of the Assessing Officer was taken on appeal before the Appellate Commissioner in I.T.A.No.149/CIT(A)-6/2015-16.

The Appellate Commissioner, vide his order, dated 13.04.2017, in the aforesaid appeal, under Section 250(6) of the Act, dismissed the appeal, filed by the appellant. This view was affirmed by the Income Tax Appellate Tribunal vide the impugned order, dated 08.10.2021, as extracted above.

6. The specific case of the appellant is that the High Court has allowed the provision for loss on account of warranties vide its order dated 03.06.2013inFLSmidth Minerals (P.) Ltd. v. Deputy Commissioner of Income Tax(2013) 36 Taxmann.com 72 (Madras)in the appellant’s own case.

7. Learned counsel for the appellant also placed reliance on a decision of the Tribunal in Assistant Commissioner of Income Tax v.

ITD Cementation India Ltd. (2013) 36 Taxmann.com 74 (Mumbai-

Trib.) and a decision of the Hon'ble Supreme Court in Rotork Controls India Limited (2009) 314 ITR 62 and a few other decisions. https://www.mhc.tn.gov.in/judis 9/21 TCA.No.240/2022

8. Learned counsel for the appellant would submit that the provisions made for estimated loss is similar to the provision for warranty and is hence, an ascertained liability as per the scientific method and, therefore, the Assessing Officer, as also the Appellate Commissioner and the Appellate Tribunal have committed a grave error in disallowing the expenditure as a deduction.

9. Learned counsel for the appellant has relied upon the following decisions of the Hon'ble Supreme Court :

(i) Oil & Natural Gas Corpn. Ltd. v.

Commissioner of Income Tax, Dehradun, (2010) 189 Taxman 292 (SC);

(ii) Commissioner of Income-tax, Bangalore v. K.Raheja Hotels & Estate (P.) Ltd.,(2014) 51 Taxmann.com 258 (SC).

10. The impugned order has been defended by the learned counsel for the Revenue and a specific reliance is placed on a decision of this Court in TVS Finance and Services Ltd. v. Joint Commissioner of Income Tax (2009) 318 ITR 435 (Madras). A specific reference has been made to Paras 24 to 26, wherein it has been answered as follows :

https://www.mhc.tn.gov.in/judis 10/21 TCA.No.240/2022

24. In T.C.(A) No.141 of 2007 Sundaram Finance Ltd.

v. Asst. CIT, dated February 27, 2007, wherein the following substantial questions of law were raised :

"(i) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the appellant is not entitled to deduction of the 'provision' made in respect of non- performing assets which are considered irrecoverable?

(ii) Whether the Appellate Tribunal was justified in not appreciating that the provision made in respect of non-performing assets if not allowable as a bad debt is allowable as a business loss?"

25. This Court rejected the appellant's contention placing reliance on T.N.Power Finance and Infrastructure Development Corporation Ltd. v. Joint CIT (2006) 280 ITR 491 (Mad) wherein it is held that merely because the Reserve Bank of India has given a direction to the assessee to provide for non-performing assets (NPA in short) the same cannot override the mandatory provisions of the Act as the provisions of NPA are predominantly capital in nature, and held that, there was no substantial question of law that arose for consideration.

26. In CIT v. Ahmedabad Electricity Co.Ltd. (2003) 262 ITR 97, the Gujarat High Court held that the debt in question had become a bad debt and whether the https://www.mhc.tn.gov.in/judis deduction was admissible in the context 11/21 TCA.No.240/2022 of section 36 (1) (vii) and sub-section (2) of section 36 of the Act and held that in most cases the debt is a bad debt should suffice, when there are circumstances or material to indicate the reasonableness of the decision. But to support the claim for deduction it is not enough that the debt is bad. The bad debt must also be actually written off and necessary book- keeping steps must be taken to record that the debt has been determined and writing off a trade debt as bad requires judgment on the part of the person carrying on the business taking into consideration all circumstances as to the likelihood and cost of its recovery before a decision is taken to write off the debt and that, for a bad debt to be properly written off, it must be bona fide written off and that the evidence should establish that.''

11. It is submitted that the accounting standards are of no consequence, as held by this Court in the above said decision. That apart, it is submitted that unless there is a complete writing-off of the income from the books of accounts, questioning such deductions under Section 37 of the Act cannot be countenanced. Therefore, it is submitted that the appeal filed by the appellant is liable to be dismissed.

12. Learned Senior Standing Counsel for the Department has also https://www.mhc.tn.gov.in/judis 12/21 TCA.No.240/2022 relied upon the following decisions :

(i) FFE Minerals India (P.) Ltd. v. CIT., (2018) 98 Taxmann.com 170 (Madras)

(ii) Grundfos Pumpas India Ltd. v. CIT., (2018) 98 Taxmann.com 396 (Madras).

13. By way of a Re-joinder, learned counsel for the appellant would submit that neither the original authority nor the Appellate Commissioner nor the Appellate Tribunal have called upon the appellant to explain as to why a sum of Rs.1,14,45,495/- should not be treated as ascertained liability for the purpose of permissible deduction in computing the total income of the appellant and, therefore, the case may be remitted back to the original authority so that the appellant can meet out all the issues arising out of the case.

14. That apart, it is submitted that any disallowance will lead to non-renewal of the previous assessment years and current assessment year and, therefore, on this count also, the impugned order should go.

https://www.mhc.tn.gov.in/judis 13/21 TCA.No.240/2022

15. We have considered the arguments advanced by the learned counsel for the appellant and the Senior Standing counsel for the respondent. We have also considered the decisions cited by the learned counsel for the appellant and the learned Senior Standing Counsel for the respondent.

16. The question that arises for consideration is whether the appellant was entitled to write-off projected loss and claim deduction under Section 37 of the Income Tax Act, 1961 in terms of Accounting Standard (AS) 7.

17. The pivotal issue to be answered in this appeal is whether the provision made by the appellant in its books of account regarding the estimated loss on the ongoing project can be allowed or not by applying Paras 21 and 35 of the Accounting Standard (AS) 7?

18. The law as to whether such projected loss can be allowed under Section 37 of the Income Tax Act, 1961 has now been settled in terms of the decision cited by the learned counsel for the appellant and the https://www.mhc.tn.gov.in/judis 14/21 TCA.No.240/2022 respondent. It can be allowed. However, it would require a proper explanation by an assessee.

19. Though the Assessing Officer has held that such an explanation cannot be allowed both the CIT(A) and the Tribunal has held that such an explanation may be considered provided the assessee is able to factually demonstrate as to how the impugned provision is an ascertained liability beyond a mere projection in the accounting statements.

20. To answer the point in issue, it will be useful to refer to Paras 21 and 35 Accounting Standard (AS) 7. They are extracted below:-

Para 21 Para 35 When the outcome of a When it is probable that total construction contract can be contract costs will exceed total estimated reliably, contract contract revenue, the expected revenue and contract costs loss should be recognised as an associated with the construction expense immediately. contract should be recognised as revenue and expenses respectively by reference to the stage of completion of the contract activity at the reporting date. An expected loss on the construction contract should be https://www.mhc.tn.gov.in/judis 15/21 TCA.No.240/2022 Para 21 Para 35 recognised as an expense immediately in accordance with paragraph 35.

21. Paragraph 21 of the Accounting Standard (AS) 7 makes it clear that an expected loss for construction contract should be recognised as an expense immediately in accordance with paragraph 35.

22. As per paragraph 35 of Accounting Standards (AS) 7 expected loss should be recognised as an expense immediately when it is probable that total contract costs will exceed total contract revenue.

23. An expected loss in a construction contract can be recognised as an expense immediately in accordance with paragraph 35of the Accounting Standard (AS) 7 when the outcome of a construction contract can be estimated reliably. The contract revenue and contract costs associated with the construction contract can be recognised as a revenue and expenses respectively with reference to the stage of completion of the contract activity at the reporting date.

24. However, as per para 35 of the Accounting Standard (AS) 7, https://www.mhc.tn.gov.in/judis 16/21 TCA.No.240/2022 only when it is probable that total contract costs i.e. the expense will exceed total contract revenue, the expected loss can be recognised as an expense immediately.

25. The claim of the appellant has been denied by the Assessing Officer which decision was affirmed by the Commissioner of Income Tax (Appeals) and later confirmed by the Income Tax Appellate Tribunal in its impugned order extracted above.

26. The facts on record indicate that the gross income of the appellant in the balance sheet was Rs.20,11,69,35,935/-.

27. After deduction of Rs.1,14,45,495/-towards estimated loss on contracts, the appellant had offered a sum of Rs.167,03,70,570/- as the net income for payment of tax in the income tax returns. The amount of Rs.1,14,45,459/- has been arrived based on the provisions made in the balance sheet for the previous period and the current period.

https://www.mhc.tn.gov.in/judis

28. However, the appellant has not explained how the total contract 17/21 TCA.No.240/2022 costs will exceed total contract revenue despite being specifically asked to explain. The appellant has neither explained the same before the lower authority nor before the first appellate authority nor before the Income Tax Appellate Tribunal.

29. The only explanation that was given by the appellant before the Assessing Officer in its reply dated 24.02.2015 before the Assessment Order was passed under Section 143(3) of the Income Tax Act, 1961 on 24.03.2015, was a mere reiteration of the contents of paragraph 21 of Accounting Standard (AS) 7 which has been extracted above. No further explanation has been given by the appellant.

30. A reading of paragraph 5 of the order passed by the Appellate Commissioner also indicates that the appellant has not demonstrated its case despite specific opportunity being given and has merely relied on the Judgments settling the substantial questions of law. Barring reference to Accounting Standard (AS) 7 for recognition of estimated loss at Rs.1,14,45,495/- there is no explanation on the facts by the appellant. https://www.mhc.tn.gov.in/judis 18/21 TCA.No.240/2022

31. Therefore, the decisions allowing deductions in the peculiar facts of the case cited by the Hon’ble Supreme Court in Rotork Controls India (P) Ltd. V. Commissioner of Income Tax, Chennai (2009) 180 Taxman 422 (SC), as held therein would not come to the rescue of the appellant.

32. In the light of the above discussion, the substantial questions of law is answered against the appellant. We therefore, do not find any merits in the above appeal filed by the appellant. The appeal filed by the appellant therefore is liable to be dismissed.

33. However, it is made clear that, in case the appellant has indeed incurred any loss during the succeeding financial years, it is open for the appellant to claim deduction on the actual loss subject to right to reopen the assessment in accordance with law.

34. This Tax Case Appeal is dismissed with the above observations. No costs.

https://www.mhc.tn.gov.in/judis 19/21 TCA.No.240/2022 (S.V.N.,J.) (C.S.N.,J.) 21.12.2022 Index : Yes/No Internet : Yes/No Speaking/Non-speaking Order kkd To

1. The Deputy Commissioner of Income Tax, Corporate Circle 2 (1), 121, Mahatma Gandhi Road, Nungambakkam, Chennai-600 034.

2. The Income Tax Appellate Tribunal, Chennai 'B' Bench, https://www.mhc.tn.gov.in/judis 20/21 TCA.No.240/2022 S.VAIDYANATHAN,J.

AND C.SARAVANAN,J.

kkd Pre-delivery Judgment in T.C.A.No.240 of 2022 https://www.mhc.tn.gov.in/judis 21/21 TCA.No.240/2022 21.12.2022 https://www.mhc.tn.gov.in/judis

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