TMI Blog2001 (8) TMI 286X X X X Extracts X X X X X X X X Extracts X X X X ..... le 8 are being reproduced as under: ----------------------------------------------------------------------- Rs. Rs. ----------------------------------------------------------------------- Provision for duty and taxes 58,963 Provisions for expenses 83,58,500 Salaries payable 1,94,831 Tax payable 2,34,010 ------------ 87,88,341. ----------------------------------------------------------------------- 3. After considering the explanation of the assessee in this regard, the factual position was summarised by Assessing Officer as under: "The facts found by me hitherto are summarised as under: (i) Classification for the provision for taxes made in the balance sheet was misleading. The provision mainly related to expenses. (ii) On31-3-1997, provision made for the expenses was nullified next day by passing reverse entries, and as per assessee, the provision for expenses is nullified and treated like a dummy account in books in the next ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... misplaced. Nowhere in the notification, it is permissive to create a dummy account at the end of the year and nullify in the next year to claim deduction for liability. Vague liability debited in the dummy account cannot be said to have been incurred." In view of the above discussion, it was held by him that claim of provisions for liabilities shown in the books in the guise of "provision for taxation" could not be sustained. According to him, it was only inserted to reduce the incidence of tax. The claim of Rs.83,58,500 on account of "provision for expenses" was, therefore, disallowed and the assessment was completed. The CIT(A) has also confirmed the disallowances for the reasons given by the Assessing Officer. Hence, the assessee has preferred this appeal before the Tribunal. 4. The ld. counsel for the assessee Mr. R. Ganeshan has assailed the order of CIT(A) by raising various contentions. Firstly, it was submitted by him that the head "Provisions for taxation" in the balance sheet was due to typographical mistake and in fact it was "provision for expenses" and, therefore, no adverse inference can be drawn from this factual aspect. In this connection, he drew our attention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ullified after the receipt of bills from the sub-contractors to whom the payment was due. According to the accounting system, whenever such invoices are received the provisions for expenses account is debited and the account of the respective parties are credited. If there is any excess or deficiency in the provisions for expenses account, the same has to be taken to the Profit and Loss A/c. If the entries are made in this manner, the liabilities claimed as deduction in the year under consideration cannot be said to be nullified in the next year. What is nullified only is the account of provisions for expenses. It was clarified by him that instead of adopting the provisions for expenses and crediting the parties account as and when the invoices are received, the assessee reversed the entry in first go on the first day of April, 1997 and thereafter again debited the sub-contract account and crediting the parties account as and when invoices were received in the subsequent year. According to him, the net effect remained the same and, therefore, no adverse inference could be drawn by the lower authorities on this account. He drew our attention to the entries made by the assessee. Ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of infrastructure relating to ports, bridges and highways etc. It is not in dispute that the mercantile or accrual system of accounting followed by the assessee is in consonance with the provisions of section 209(3) of the Companies Act, 1956, read with Notification No. 9949, dated25-1-1996issued by the Central Government under section 145(2) and the Accounting Standards prescribed by ICAI. Accounting Standard-7 as prescribed by the Institute allows the assessee to follow the percentage completion method in the case of contract activity. AS-9 allows the assessee to follow the proportionate completion method in the case of activity of rendering services. Relevant portion of AS-9, as stated by the assessee in the statement of facts before the CIT(A) is reproduced as under: "AS-9: In a transaction involving rendering of services, performance should be measured either under the completed service contract method or under the proportionate completion method, whichever relates the revenue to the work accomplished, such performance should be regarded as being achieved when no significant uncertainty exists regarding the amount of consideration that will be derived from rendering the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 43,05,437.00 TDS professional charges payable, Cr. 2,44,563.00 1997-98 Rs. (Being the Bill No. Com. 9606/RA-1, dated 2-4-1997 of COMACOE of Rs. 55,00,000 and Rs. 10,00,000 already booked in sub-contract at the time of payment as advance). J-351 Sub-contract Dr. 12,17,353.00 Engineers India Ltd. Cr. 11,51,920.00 TDS professional charges payable Cr. 65,433.00 (Being Bill No. ELC/3915/20.1 dated 18-3-1997 of EIL booked on ADB-Madras Ennore job and TDs deducted @ 5.375%). 6-5-1997 J-7 Sub-contract Dr. 1,05,680.00 Vam Management Service P. Ltd. Cr. 1,00,000.00 TDS professional charges payable Cr. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he sum of Rs.78.95 lacs was charged to P L account only in assessment year 1997-98 and it was only the excess amount which is charged in assessment year 1998-99 on the basis of the bills issued by the parties. The ledger account shows that actual expenses were to the extent of Rs.92,74,813 against the estimated amount of Rs.78.95 lacs for which the provisions were made in the year under consideration. The excess expenditure was of Rs.13,79,893 which was charged to P L account in the next year and not the entire amount of Rs.92,74,893. So what is nullified is the account of provisions for expenses and not the liability itself. Therefore, in our opinion, the Assessing Officer as well as CIT(A) merely erred in not appreciating the accounting system followed by the assessee. 9. As already stated, the provisions for expenses are made normally when invoices are not received against the expenditure incurred. So such provisions for expenses cannot stand forever in the balance street and, therefore, assessee is bound to reverse such entry on the receipt of invoices. In such case the assessee normally debits "provisions for expenses" account and credit the accounts of respective parties. I ..... X X X X Extracts X X X X X X X X Extracts X X X X
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