TMI Blog2009 (6) TMI 897X X X X Extracts X X X X X X X X Extracts X X X X ..... k for the Haldia refinery project on turnkey basis. The return of income was filed declaring loss of ₹ 3.24 crores and odd. In the notes to accounts of the audit report it was mentioned that the expenses debited to the profit and loss account for the period include net charges of ₹ 1,76,20,000 incurred by the head office before setting up of the project office in India. The Assessing Officer observed that nothing was brought on record as to how this expenditure was allowable. He noted that this expenditure was incurred before setting up of the project in India. Disallowance to this extent was made in the assessment order. The learned Commissioner of Incometax (Appeals) however deleted the addition by observing that the assessee was awarded contract on February 24, 1998. The approval for setting up of the project office in India was granted by the Reserve Bank of India only in June 1998 and the actual work in the form of basic engineering, etc., commenced during the year ending March 1998 itself. During the intervening period, i.e., April 1, 1998 to June 16, 1998 the assessee had incurred this expenditure for the purpose of execution of its Indian project. After consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s deduction from the total project value for computing the income. The matching concept requires that the revenue has to be matched with the costs. The hon'ble Madras High Court in the case of CIT v. Franco Tosi Ingegneria [2000] 241 ITR 268 was confronted with almost similar circumstances inasmuch as the approval of the Reserve Bank of India for establishing its project office was granted subsequently. The Assessing Officer disallowed the expenditure on the ground that when such expenditure was incurred, the permission of the Reserve Bank of India was not in force. The hon'ble High Court noted that the assessee commenced its business activities in India when it secured the letter of intent from Neyveli Lignite Corporation and the requirement of permission from the Reserve Bank of India for establishing the project office in India where all steps were taken with the compliance of all legal requirements. It was therefore, held that the assessee was entitled to deduction of expenditure incurred by it after the commencement of its operation, i.e., from the date of securing of letter of intent from an Indian concern for carrying out the relevant work. Adverting to the facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the prior period expenses could not be allowed as deduction. In the first appeal the learned Commissioner of Income-tax (Appeals) observed that the assessee was following percentage completion method as prescribed in the Account- ing Standard 7 issued by the Institute of Chartered Accountants of India. He deleted the addition on the ground that corresponding to the opening work-in-progress of ₹ 78,88,526, the assessee had offered to tax an amount of ₹ 19,56,87,000 as closing work-in-progress. He further did not find any substance in the other finding of the Assessing Officer about nonfiling of the return of income for the preceding year. We have heard the rival submissions in the light of material placed before us. There is no controversy on the fact that the sum of ₹ 78.88 lakhs represents the expenditure incurred by the assessee in the immediately preceding year in relation to the contract which was awarded to the assessee on February 24, 1998. The learned Commissioner of Income-tax (Appeals) has recorded a categorical finding that the assessee was following percentage completion method. A copy of the letter dated January 23, 2002 addressed to the Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thod, will be ₹ 50 (i.e. 35 per cent. of ₹ 1,000 minus cost of ₹ 300 incurred). Similarly if further sum of ₹ 200 is incurred in the second year with 60 per cent. completion, then the profit of the second year will be ₹ 100 (i.e. 65 per cent. of ₹ 1,000 minus costs incurred in both the years aggregating to ₹ 500 minus the profit of ₹ 50 offered for taxation in the first year). In the like manner in the third year when the project is completed with the further cost of ₹ 200, the profit to be offered will be accordingly computed at ₹ 150 (i.e. ₹ 1,000 minus the costs incurred in three years at ₹ 700 and profit of ₹ 150 declared in the earlier two years). In contrast to it under the project completion method, there is no requirement for computing the income periodically but the entire profit of ₹ 300 will be offered for taxation only in the third year, i.e., when the project is completed. Thus it is evident that under both the above referred methods, the costs incurred in the project are accumulated on year to year basis till the project is finally completed. In other words the costs incurred in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act during the previous year exceeds the maximum amount which is not chargeable to income-tax. Thus the requirement for filing the return is activated only when there is some income chargeable to tax. If there is no income, then the law does not cast a duty upon a person to file the return of income. The obligation to file the loss return under section 139(3) arises if the assessee has sustained loss in any previous year under the head Profits and gains of business or profession or under the head Capital gains and claims that the loss or any part thereof should be carried forward for set off in the subsequent years. In such a situation the loss return is required to be filed on or before the due date as prescribed under section 139(1). But for claiming the benefit of carry forwards of loss, etc., there is no requirement to file return if the assessee has incurred a loss. The assessee claims that it did not file any return for the preceding year because there was no income chargeable to tax. The reason for not showing any profit in the immediately preceding year from the contract is that a very small part of it was completed. It is evident from the fact that the opening wo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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