TMI Blog2014 (10) TMI 109X X X X Extracts X X X X X X X X Extracts X X X X ..... Commissioner of Income-Tax, Patiala [1970 (12) TMI 17 - PUNJAB AND HARYANA High Court] - if the assessee incurs a liability and when the contract under which that liability was incurred was terminated and when no amounts under the contract or in pursuance of a claim is receivable, he is entitled to claim the said amount incurred as expenditure in implementing the contract as a set off u/s 37(1) r/w 28 of the Act - though the assessee has incurred expenditure during the AYs 2000-2001, 2001-02 and 2002-2003 during which period he has not received any amount as against the expenditure, if and when he receives the money in pursuance of the award which is already passed, if it is upheld by the High Court, the amount is chargeable to income tax as the income of that previous year in which he receives the said amount whether the business in respect of which the deduction has been made is in existence in that year or not - the interest of the revenue is fully protected - All the three authorities have not applied their mind to the factual aspects of the case and have not kept in mind the statutory provisions and thus committed a serious illegality in passing the orders – thus, the order o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g. As and when any expenditure is incurred on a contract, it should either result in corresponding receipts from the contract or it should be represented as work-in-progress. The assessee has neither received any amount from MPEB nor is showing any work-in-progress. The expenditure on a particular project cannot be merely allowed as an expenditure unless there is a corresponding credit in the form of contract receipt or work-in-progress. The assessee is claiming the entire expenditure as deductible expenditure since the contract has been abandoned. Although the assessee has abandoned the contract, the fact remains that they have made a claim in arbitration in respect of the expenditure incurred and has also claimed damages for the termination of the contract. This being the case, it cannot be said that the assessee is not entitled for any amount from MPEB. In fact, the amount spent should have been shown as work-inprogress which is recoverable from the MPEB on the arbitration award. The assessee company has only debited the expenditure. The assessee has not shown the said amount as expenditure towards work-in-progress. The debit of expenditure was disallowed since there is no corre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own as work-in-progress which is recoverable from the MPEB on the basis of arbitration award. The assessee company has only debited the expenditure. The contractor can be taxed either on the project completed or on billing method. In respect of this particular contract, the assessee has followed neither of the methods. The true profits of the assessee in respect of this project cannot be ascertained as the assessee has not disclosed any receipts or work-inprogress from this contract and has only debited the expenditure. More so, since the assessee has made a claim for damages from MPEB in regard to the contract work done and in regard to the invocation of the bank guarantee on termination of the contract, the assessee ought to have shown the expenditure as work-in-progress. The termination of the contract in the middle of its tenure would have opened claims and counter claims for a receipt which can never be lost sight of as the assessee has not been able to specify the reasonableness of recovering the amount including the said project having won at the arbitration stage. We see no reason why the assessee should maintain the claim in the subsequent years also till such claim result ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture/loss? 3. Whether on the facts and circumstances of the case, the Appellate Tribunal is right in confirming the orders of the authorities below to the effect that the appellant had not followed consistent system of accounting and hence appellant is not eligible to claim deduction of trading loss? 4. Whether on the facts and circumstances of the case, the Appellate Tribunal is right in holding that the appellant had an enforceable right to receive the damages once the arbitration proceeding commences irrespective of the result of such adjudication? 7. The learned counsel for the assessee assailing the impugned order contended that the facts are not in dispute. The assessee has spent in all a sum of Rs..6,64,01,149/- towards the expenditure under the contract. Admittedly, it has not raised any bills nor payment is made. MPEB terminated the contract illegally, invoked the bank guarantee and received back the entire amount given as deposit. The amounts spent for the assessment years 2000-2001 and 2001-2002 was shown as work-in-progress. But in the year 2002-2003 when the contract was terminated including the amount spent during the said period the entire amount w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Treated as work-in-progress Refer Annexure-I. 2 00-01 19,041,045 40,626,951 3 01-02 25,774,199 66,401,150 Written off as Cost of Sales Work Bills Services Refer P L A/c. for the FY 01-02 Annexure I Break-up of Work-in-Progress FY Work-in-Progress Account Heads Amarkantak Project (MPEB) Samalkot Project (BSES) Neyveli Contract (NLC) Akrimota Project (GMDC) Total Work-in-Progress 99-00 21,585,906 1,172,494 - - 22,758,400 00-01 40,626,951 - 23,816,169 64,443,120 01-02 - - 13,956,228 13,483,410 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with its business. Similarly it was held by the Apex Court in the case of Madras Industrial Investment Corporation Limited Vs Commissioner of Income Tax reported in (1997) 225 ITR 802 that, where the liability was incurred which has to be discharged in a future date it will be a liability but however a contingent liability which may have to be discharged in future cannot be considered as expenditure. 14. Therefore, if the assessee incurs a liability and when the contract under which that liability was incurred was terminated and when no amounts under the contract or in pursuance of a claim is receivable, he is entitled to claim the said amount incurred as expenditure in implementing the contract as a set off u/s 37(1) r/w 28 of the Act. 15. In fact section 41(1)(a) of the Act reads as under: 41.(1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year,- (a) the first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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