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2022 (2) TMI 277 - AT - Income TaxDisallowance of deduction on account of provision for liquidated damages - provision was made without any scientific or rational basis - CIT-A deleted addition - HELD THAT:- Since, the provision for liquidated damages has been made regularly and allowed in P&L account and since the unutilized portion has been reversed at a regular intervals from year to year, since, the ITAT for AY 2008-09, AY 2010-11, AY 2011-12, AY 2012-13 & AY 2013-14 has allowed provision for liquidated damages, the provision made during AY 2009-10 is on same basis as in all the years is hereby allowed. Provision for Warranty - assessee contended that the issue of warranty is a recurring provision made in the past several years and that in all the year from 2009-10 onwards by the various judicial authorities - HELD THAT:- Since, the provision for warranties has been made @ 3% and the unutilized portion has been reversed at a regular intervals from year to year, the appellant has been consistently following the policy of making provision for warranty as per the terms of the contract, the ITAT for AY 2008-09, AY 2010-11, AY 2011-12, AY 2012-13 & AY 2013-14 has allowed provision for warranty, the provision made during the instant year is on same basis as in all the years is hereby allowed. Advances and Deposits Written Off - assessee recognized amount of DEPB license and DEPB receivable at the time of export of certain items and the same was also credited as income in the P&L A/c of earlier years - AO held that the assessee has claimed DEPB license and DEPB receivable written off by debiting the P&L A/c during AY 2009-10 u/s. 36(1)(vii)/36(2) - assessee has claimed such deduction as business loss u/s. 28 - HELD THAT:- It is generally accepted principle that losses, other than capital losses, which arise out of and are incidental to the business of assessee must be necessarily deducted in the ascertainment of profits of the business u/s. 28 of the Act. The basis of various judgments of the Hon'ble Courts, in order that an item of loss can be taken into account in computing the profits of the business, it should fulfill the following conditions that it should be a real loss, not notional or fictitious, a loss on revenue account and not on capital account, it must have actually arisen and been incurred, not merely anticipated as certain to occur in future, it should be one that is incidental to the carrying on of the business and must arise or spring directly from or be incidental to the carrying out of an operation of the business; and there should be no prohibition in the Act, express or implied, against the deductibility thereof. Keeping in view, the facts and circumstances, provisions of the Act, the judgments of the various Courts, precedence narrated above, we hereby hold that the addition is liable to be deleted. Loss on Suspended Contracts - As per AO assessee had accounted for revenue from contracts to the tune of ₹ 32,83,80,000/- and on that basis AO concluded that provision, of ₹ 41,64,92,017/- is excessive - HELD THAT:- The reasoning given for disallowing ₹ 8,81,12,017/- is apparently not correct as the loss in respect of contracts with vendors cannot be restricted to the compensation received from customers on cancellation of contracts. The liability incurred towards vendors on cancellation of contracts and purchases made which after providing for scrap value has to be written off is allowable as business expenditure. Basis of creating the provision - assessee has claimed provision during the subject year since there was cancellation/suspension of some contracts by customers who are unable to obtain financing for those contracts - HELD THAT:- The assessee has enclosed details of cost in respect of material fully/partly processed/delivered by vendor after adjusting material cost already recognized in books of accounts and reducing realizable value of material. Such details include project code, vendor name PO no., item description, PO value and WIP value of items. This represents the net cost incurred by the assessee for materials in respect of which delivery has been taken by assessee from vendors. The above facts would substantiate that the provision has been made for material cost and/or compensation for cancellation/suspension of contracts which is incurred under contracts with its vendors entered pursuant to pre-existing commitments against supply contracts with customers, the latter having been subsequently cancelled/suspended. Hence, we hold that the provision is an allowable deduction. Appeal of revenue dismissed.
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