TMI Blog2023 (4) TMI 519X X X X Extracts X X X X X X X X Extracts X X X X ..... s no occasion for the AO to examine these factual aspects, as he had disallowed the claim holding it as contingent liability. This issue needs to be restored to the file of AO for examining the computation of the loss claimed by the assessee. Accordingly, we restore this issue to the file of the AO with the direction to examine the claim of the assessee by calling for the relevant details. Appeal filed by the assessee is treated as allowed for statistical purposes. - I.T.A. No. 4766/Mum/2017 - - - Dated:- 4-1-2023 - Shri B.R. Baskaran (AM) Shri Rahul Chaudhary (JM) For the Assessee : Shri Nitesh Joshi For the Department : Shri Mehul Jain ORDER Per B.R.Baskaran (AM) :- The assessee has filed this appeal challenging the order dated 07.04.2017 passed by Ld CIT(A)-5, Mumbai and it relates to the assessment year 2010-11. The assessee is aggrieved by the decision of Ld CIT(A) in confirming the disallowance of Provision for foreseeable loss of Rs. 45.83 crores claimed by the assessee during the year under consideration. 2. The facts relating to the above said issue are discussed in brief. The assessee company is a joint venture between M/s Larse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... completion method, contract revenue is recognised as revenue in the statement of profit and loss in the accounting periods in which the work is performed. Contract costs are usually recognised as an expense in the statement of profit and loss in the accounting periods in which the work to which they relate is performed. However, any expected excess of total contract costs over total contract revenue for the contract is recognised as an expense immediately in accordance with paragraph 35. Recognition of Expected Losses 35. When it is probable that total contract costs will exceed total contract revenue, the expected loss should be recognised as an expense immediately. 36. The amount of such a loss is determined irrespective of: (a) whether or not work has commenced on the contract; (b) the stage of completion of contract activity; or (c) the amount of profits expected to arise on other contracts which are not treated as a single construction contract in accordance with paragraph 8. 4. The claim of expected loss from a fixed price contract has been held to be allowable by the co-ordinate benches in the following cases:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s expected to arise on other contracts which are not treated as a single construction contract in accordance with paragraph 8. 26. The assessee following the above guidelines provided for the estimated loss in books of account. This issue about the claim of future loss on the basis of AS-7 was also examined by various Coordinate Benches of ITAT and claim of future losses on the basis of AS-7 was considered as allowable deduction while computing profit of the year. 27. In the case of Jacobs Engg. India (P.) Ltd. (supra) the Mumbai Tribunal has held that the provision for foreseeable losses under AS-7 is an allowable expenditure. In the facts of this case, the assessee who also prepared financial statements as per the provisions of AS -7 had claimed provision for foreseeable losses for A.Y. 2002-03 and A.Y. 2003-04 of Rs. 18,73,568/- and Rs. 5,83,038/- respectively. After analyzing the legal and factual position on the subject, the Tribunal allowed the claim of the appellant holding that such a provision is an allowable expense. The relevant extract of the decision is extracted below: - Having regard to the above legal and factual discussions, and following the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i. In Nainital Bank Ltd.'s case (supra) 62 ITR 638 (SC), one of the patrons of the assessee had pledged certain jewellery with the bank against which loan was taken by them. Certain dacoits stole the jewellery of the patron on July 11, 1951. In regard to the loss of the jewellery, the bank settled the claim of the patron and the difference was paid by the bank to the patron. In view of these facts, the issue was raised before the Hon'ble Supreme Court whether the amount paid by the bank to the patron was allowable business expenditure. The Apex Court held that the amounts paid by the bank were expenditure laid out for the purpose of business and hence the same was an allowable expense. ii. In Madras Industrial Investment Corpn. Ltd.'s case (supra), the Hon'ble Supreme Court was concerned with allowability of discount on debentures. The Apex Court held that proportionate discount on debentures was allowable as expenditure on pro-rata basis over different accounting period. iii. In M.P. Financial Corpn.'s case (supra), the court was concerned with the same issue raised before the Apex Court in the case of madras Industrial Investment Corporation Ltd., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee in respect of different business activities. These standards are however not binding on the AO while computing income for the purpose of taxation. The income for the purpose of taxation is required to be computed under the provisions of the Income Tax Act. The computation of income under the Income Tax Act for different heads of income is required to be made under the provisions of sections 14 to 59 and computation of income under the head business is required to be made under the provisions of section 28 to section 44DB. In cases where the Act requires the income in respect of a particular business activity to be computed in a different manner, there are special provisions incorporated in the Act. For instance, for computation of income from civil construction in cases where the accounts have not been maintained as required under section 44AA(2)(i) and the turnover does not exceed Rs. 40.00 lacs, there is special provision under section 44AD to compute the income @8% of turnover or gross business receipts. Similarly there is special provision for computation of profit from retail business under section 44AF. There are also special provisions for computation of income for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; in case of Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53; and in case of Bharat Earth Movers v. CIT [2000] 245 ITR 428/112 Taxman 61 (SC). It has been made clear in these cases that for claiming deduction on account of any provision for liability, the incurring of liability during the year must be certain. In case of Calcutta Co. Ltd. (supra), the assessee had sold land with an undertaking to develop it within six months. The sale deed had been executed and on the sale deed date, the assessee had received part of the sale consideration and balance was to be received in installments in future. The assessee had also to develop the land within six months from the sale deed date. It was held that on the date of sale deed, income had accrued as per mercantile system even if part consideration was to be received later. Similarly on execution of sale deed, assessee incurred the liability to incur expenses to develop the land in future and therefore estimated expenditure on development of the land on a reasonable basis was held allowable as deduction. Precisely because of these reasons and the rulings mentioned above, the Accounting Standard AS-1 notified by the governmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the AS-1 mentions about making of provision for liabilities and not for deduction; that the mere making of provision as per AS-1 will not entitled to claim deduction, unless the liability is incurred. The co-ordinate bench has further distinguished the decisions rendered by earlier benches of the Tribunal by observing that the Tribunal even though observing that income has to be computed under the provisions of the Act allowed the claim in the understanding that there was no dispute about the allowability of the losses. The Tribunal further held that in the present case, the claim of the assessee has been strongly disputed and therefore, in our view, the issue has to be decided under the provisions of law and not as per Accounting Standard AS-7 which has not been notified by the Government. 6. We notice that the co-ordinate bench, in the above said case, was under the impression that the Tribunal has allowed the claim in the understanding that there was no dispute about allowability of loss. If there is no dispute on the matter, there was no necessity for the assessee to knock the doors of the Tribunal. On the contrary, in the various cases relied upon by the assessee, i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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