TMI Blog2007 (12) TMI 469X X X X Extracts X X X X X X X X Extracts X X X X ..... employees towards PF. Employees contribution to ESI ₹ 1,612/-. The learned DCIT erred in disallowing a sum of ₹ 1,612/- representing the contribution made by the employees towards ESI. Employers contribution to PF ₹ 87,619/- representing the contribution made by the assessee towards PF. Employers contribution to ESI ₹ 4,363/-. The learned DCIT erred in disallowing a sum of ₹ 4,363/- representing the contribution made by the assessee towards ESI. 2. On the two issues involved in the said grounds the learned counsel pointed out that the learned CIT(A) erred in upholding the action of the AO in disallowing the claim of ₹ 6,64,01,149/- incurred by the assessee towards the amarkantak Thermal Power Project in Madhya Pradesh. He erred in stating that the expenditure on the project is to be shown as work in progress. The CIT(A) erred in stating that the non-reflection of the project cost as a work in progress is not in accordance with the mercantile system of accounting followed by the assessee. The learned CIT(A) ought to have observed that the Madhya Pradesh Electricity Board (MPEB) had arbitrarily terminated the project and accordingly the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been placed in the paper book at page - 113. The contract was finally terminated by MPEB vide their notice dated 9.1.2002 and a notice for arbitration was pursued A copy of the arbitration award has been placed in the paper book at pages 119 to 180 dated 23.9.2004, the decision going in favour of the assessee. The learned counsel pointed out that the main thrust of the authorities below to disallow this claim is on account of the assessee not rendering income for the said contract either by way of work in progress or by a debtor in so far as it was claimed as a loss in the year when the contract was arbitrarily abandoned having crystallized in the impugned assessment year before which the amount incurred for this Power project was being shown as work in progress for the assessment years 2000-01 and 2001-02, as also noted by the learned CIT(A) in page - 10 of his order. Therefore, the test to be applied to claim this expenditure in the year when the contract was terminated has to be in accordance with the various decisions cited in the case laws which hold that once on expenditure has been incurred which is the trading operation of the assessee has to be allowed as deduction in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds covered in favour of the assessee by the cited decisions. 5. The learned DR arguing the first issue pointed out that the AO had made elaborate note regarding the assessee following mercantile system of accounting which clearly indicated that the said amount incurred by the assessee in pursuance to agreement of contract was from the assessment year 2000-01 and was carried forward as work in progress for the immediately preceding two assessment years was written off in the impugned assessment year as a business loss and was not in accordance with the mercantile system accounting. The assessee himself noticed the contract was abandoned by the contractee vide its notice given on 3.9.2001. Therefore an enforceable right over the business loss incurred by the assessee on this contract arose in the impugned assessment year has been abruptly written off by the assessee against revenue was not in tune with the mercantile system of accounting as claiming of loss from the income of the impugned assessment year could not have rendered income by way of an arbitration award in the assessment year 2005-06. The very fact that the assessee proceeded for arbitration was rightly found as improp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... invoked bank guarantee. The company then contested the invocation of the bank guarantee and filed an arbitration suit against the MPEB. During the course of hearing, the assessee has filed the copy of the letter of MPEB dated 8.10.2002 terminating the contract agreement. The assessee has also given break up of the expenditure incurred on the contract totaling ₹ 6,64,01,149/- out of which major amount consists of monies spent on raw material like tubes and pressure parts, consumables freight and carriage etc., etc., The assessee has also incurred certain expenses like bank charges, professional charges etc. in addition to the expenses on personnel, transport and communication and administrative expenses. On verification of the expenses it is seen that more than 50% of the total amount debited is towards the material consumed for the contract work. The assessee has debited the amount of ₹ 6,64,01,149/- being the cost of abandoned project to the profit and loss account. In the notes attached to and forming part of the accounts at item No. 8, the assessee has mentioned about the termination of the contract by MPEB and had stated that the cost incurred on the project both ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt spent should have been shown as work in progress which is recoverable from the MPEB on the 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 in progress from this contract and has only debited the expenditure. More so, since the assessee has made claim 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. If the assessee wanted to show only the expenditure on this project the same should have been debited to the profit and loss account as and when the assessee's claim in arbitration is settled and the arbitration amount is received. The amount spent should have been kept aside and shown it as amount receivable from the project in which case the assessee's income would have been correctly shown ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... suant to the contract part of which had been executed by the assessee. The contractee has further appealed against the arbitration award to the assessee which clearly indicates that the assessee took cognizance of the events having occurred after the closing of the financial year but chose to write off the complete amount in the profit and loss account as against contractee perusing the matter in a court. We are unable to consider this as an acceptable proposition because the authorities below have repeatedly called for the income against which this loss was to be claimed was shown as receivable for the first two years but was completely written off alongwith the amounts incurred in the impugned assessment year even when the expenses are being challenged. This clearly indicates that under the mercantile system of accounting, the assessee had written off prior period expenses in this year as well as which the AO and the learned CIT(A) rightly pointed out was a claim to be based on capital amount which cannot take another shape as a claim of revenue loss before the income-tax authorities. The termination of the contract in the middle of its tenure would have opened claims and counter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, the assessee could not take advantage of an incomplete contract terminated arbitrarily. For each assessment year a separate, true and fair income has to be computed against which the assessee has not been able to establish was the true loss incurred in the year under appeal. The expenditure was incurred for the earlier two assessment years as per the facts on record could not be written off in the year under appeal against cost of bills, sales and services. The sales, the bills and services have not been credited which is the case of the revenue. Therefore, we do not find any merit in the arguments of the learned counsel for the assessee as the assessee has not met its own consistent system of accounting to be followed for rightfully becoming the claimant of loss of three years in one year without incorporating the corresponding receivables to become entitle for write off under the provisions of section 36(i)(vii) and not u/s 37(1) as per the facts and circumstances of the assessee's case enumerated by the AO and the learned CIT(A). 9. In the light of the above, the issue with respect to the loss of project written off as agitated by the assessee is dismissed and the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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