2007 (8) TMI 339 - HC - Income Tax

Deduction of business expenditure civil construction completion of contact application of accounting standard held that - as per Clause 21 of the Accounting Standard 7, expenditure could be allowed depending on the stage to which contract work was completed. The authorities below have rightly rejected the claim of the assessee on the estimated loss. The Tribunal had only remanded the claim to the assessing officer with a direction to determine the stage to which project was completed during the relevant year and allow the expenditure accordingly, which is permissible as per clause 21 of the Accounting Standard 7

Summary

Issues:
1. Allowance of provision for expenditure based on estimates under completed contract method of accounting.

Analysis:
The High Court of Madras heard an appeal filed by the revenue against the order of the Appellate Tribunal regarding the allowance of provision for expenditure by a non-resident company following the completed contract method of accounting for the assessment year 2001-2002. The assessing officer disallowed the provision for expenditure claimed by the company, stating that it was based on estimates and did not comply with Accounting Standard 7. The Commissioner of Income-tax (Appeals) upheld the assessing officer's decision, leading to an appeal before the Income-tax Appellate Tribunal. The Tribunal remanded the issue back to the assessing officer to determine the stage of completion of the project and allow expenditure accordingly, citing Clause 21 of Accounting Standard 7.

The revenue contended that provision for foreseeable losses is not allowable under the Income-tax Act, especially when the outcome of the contract cannot be reliably estimated. However, the High Court noted that Clause 21 of Accounting Standard 7 allows for expenditure to be allowed based on the stage of completion of the contract work. The Court observed that the authorities below were correct in rejecting the claim of the assessee for estimated losses. The Tribunal's decision to remand the issue to determine the project's completion stage and allow expenditure in accordance with Accounting Standard 7 was found to be in line with the law. Consequently, the Court dismissed the revenue's appeal, stating that no merit or question of law was found to entertain the appeal.

In conclusion, the High Court upheld the Tribunal's decision to remand the issue of provision for expenditure back to the assessing officer for determination based on the completion stage of the project, as allowed by Accounting Standard 7. The Court found no legal basis to support the revenue's appeal and hence dismissed it.