2018 (12) TMI 1597 - HC - Income Tax

Provision created for payment of compensation to Garbandal Constructions - contract loss - Whether an unascertained liability not allowable as business expenditure? - Held that - The details furnished by the assessee company were referred to and the break-up details were also culled out in the order passed by the CIT(A). It is not clear as to whether those materials were available with the AO, which, according to the assessee, were very much available and were furnished along with the letter dated 13.3.2015. A remand report could have been called for by the CIT(A) from the AO to examine the correctness of the break-up details furnished since, in the letter dated 13.3.2015, there are no clear figures given except to state that the provision was made in the relevant assessment year on account of the arbitration petition filed by the contractor. We find that in the said letter, there is also a mention about the amounts, which were written back and offered as income in the subsequent assessment years namely assessment year 2013-14 and 2014-15. There are other details, which appeared to have been enclosed along with the said letter dated 13.3.2015, but they have not been referred to by the Assessing Officer in the assessment order dated 23.3.2015. Therefore, a fresh exercise needs to be done by the AO by perusing all the documents produced by the assessee and the Assessing Officer should ascertain as to whether the provision made during the relevant assessment year was an ascertained liability or a contingent liability. The appeal filed by the assessee is allowed, the impugned order passed by the Tribunal is set aside and the matter is remanded to the Assessing Officer to verify all the records and decide the question as mentioned above. The substantial questions of law left open.

Summary

Issues:
1. Determination of provision for payment of compensation to Garbandal Constructions as an ascertained or unascertained liability.
2. Assessment of liability to pay compensation as ascertained or unascertained based on compliance with contract terms.
3. Evaluation of provision for rental compensation as an ascertained or unascertained liability.

Analysis:
1. The primary issue in this case is whether the provision made by the assessee for contract loss is an ascertained or contingent liability. The assessee created a provision for contract loss, which the Assessing Officer considered contingent. The CIT(A) examined the details and concluded that the provision was an ascertained liability, supported by a reliable estimate. The Tribunal reviewed ledger entries and multiple versions presented by the assessee, including arbitration proceedings initiated by the contractor. The High Court found discrepancies in the assessment and remanded the matter to the Assessing Officer for a thorough review to determine the nature of the liability accurately.

2. The second issue involves the liability to pay compensation, which the assessee claimed became ascertained upon failure to comply with contract terms. The CIT(A) found the provision for rental compensation acceptable as a reliable estimate, citing the decision in Rotork Controls India (P) Limited Vs. CIT. The Tribunal scrutinized the contractor's application for arbitration and counterclaims by the assessee. The High Court emphasized the need for the Assessing Officer to reexamine all documents to ascertain if the provision made was indeed an ascertained liability or contingent, especially considering the subsequent years' adjustments.

3. Lastly, the assessment of the provision for rental compensation as an ascertained or unascertained liability was a key issue. The CIT(A) supported the provision as an ascertained liability based on reliable estimates. The Tribunal's scrutiny of ledger entries and legal proceedings highlighted discrepancies in the assessee's submissions. The High Court directed the Assessing Officer to conduct a fresh review of all documents to determine the nature of the provision accurately, emphasizing the importance of a detailed examination to establish the liability's status definitively.

In conclusion, the High Court allowed the appeal, set aside the Tribunal's order, and remanded the matter to the Assessing Officer for a comprehensive reassessment of the provisions made by the assessee to determine if they constitute ascertained or contingent liabilities. The court stressed the importance of a detailed examination of all relevant documents to arrive at a precise conclusion regarding the nature of the liabilities in question.