2021 (10) TMI 1388 - AT - Income Tax

Provision for estimated loss of contracts - ascertained liability - AO observed that the said loss on an estimate which is bound to vary due to variation in input costs - HELD THAT - Accounting Standards are binding on the Company in so far as the preparation of books are concerned but are not binding for Income Tax purposes. Further the Assessing Officer by following the decision in the case of EDAC Engineering Limited 2013 (11) TMI 164 - ITAT CHENNAI disallowed the same and the same was confirmed by the ld. CIT(A). The assessee neither before the Assessing Officer nor before the ld. CIT(A) substantiated the provision made by it is an ascertained liability. Even before us the assessee has not been able to explain as to what was the necessity for the assessee to make such a provision. Assessee has simply stated that the provision made by the assessee is an ascertained liability. If at all it is an ascertained liability it is the onus on the assessee to establish that the liability is an ascertained liability. No material was placed on record before the Tribunal. We are of the opinion that the provision made by the assessee for a loss on contract is not an ascertained liability and it is a simple provision made by the assessee which is not allowable u/s 37. So far as case law placed by the assessee are concerned the decision in the case of Rotork Controls India Limited. 2009 (5) TMI 16 - SUPREME COURT has no application to the facts of the present case. In the order passed by the Tribunal for the AY 2005-06 dated 03.08.2017 the issue dealt by the ITAT relates to provision of warranty and therefore in our opinion the issue under consideration need not be remitted back to the Assessing Officer. In view of the above the ground raised by the assessee is dismissed. Provision made in respect of various expenditures - HELD THAT - The assessee has made a provision - However no explanation was given before the Assessing Officer. Even before the ld. CIT(A) the assessee has not given any explanation the reason for making such provisions of expenses. Even before us the assessee has not been able to explain the reason for making such provisions. We are of the opinion that the provision created by the assessee in respect of various expenses is an unascertained liability and not allowable as an expenditure for the assessment year under consideration. Therefore we confirm the order passed by the ld. CIT(A). So far as alternative submission is concerned we direct the Assessing Officer to verify as to whether the assessee has reversed the provision and the same is offered for taxation for the assessment year 2012-13 and decide the alternative plea in accordance with law. This ground is partly allowed.

Summary

Issues:
1. Disallowance of deduction under section 14A of the Income Tax Act
2. Disallowance of provision of estimated loss on contracts
3. Disallowance of provisions for administrative expenses, consultancy expenses, and Zambia branch expenses

Issue 1: Disallowance of deduction under section 14A of the Income Tax Act
The appeal related to the disallowance of deduction under section 14A of the Income Tax Act was dismissed as the counsel for the assessee did not press the ground for appeal.

Issue 2: Disallowance of provision of estimated loss on contracts
The assessee made a provision for estimated loss on contracts which was disallowed by the Assessing Officer and confirmed by the CIT(A). The Tribunal noted that the provision made by the assessee was not an ascertained liability and therefore not allowable under section 37 of the Act. The Tribunal dismissed the appeal, stating that the provision was not substantiated as an ascertained liability.

Issue 3: Disallowance of provisions for administrative expenses, consultancy expenses, and Zambia branch expenses
The Assessing Officer disallowed provisions made for various expenses as the assessee failed to provide explanations for the liabilities being ascertained and the basis for making such provisions. The CIT(A) confirmed the disallowance. The Tribunal upheld the decision, stating that the provisions for expenses were unascertained liabilities and not allowable as expenditures for the assessment year. However, the Tribunal directed the Assessing Officer to verify if the provision was reversed and offered for taxation in the subsequent year for possible deletion to avoid double taxation.

In conclusion, the appeal was partly allowed by the Tribunal, confirming the disallowance of certain provisions while directing further verification by the Assessing Officer for potential relief from double taxation.