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2022 (11) TMI 356 - AT - Income TaxRevision u/s 263 by CIT - disallowing the provision for foreseeable losses in the computation of book profits u/s. 115JB - HELD THAT - Assessee has created provisions for foreseeable loss for complying with the requirements of AS-7 and hence is an allowable deduction as it is only an ascertained liability. The provision for foreseeable loss being an ascertained liability, the same is treated as an allowable expenditure while computing book profits u/s115JB of the Act. We also find that the Ld. AR rightly placed reliance on the co-ordinate bench decision of this tribunal in the case of Summit Securities Ltd. 2020 (10) TMI 1343 - ITAT MUMBAI wherein this provision for foreseeable loss was accepted to be an ascertained liability and hence allowable as deduction. Moreover, even in the following judicial precedents, it has been held that provision for foreseeable loss created as per AS-7 is an allowable deduction u/s 37. It is trite law that there is no estoppel against the statute. PCIT is duty bound to bring on record that the said item would be an eligible item for adding back while computing book profits u/s. 115JB of the Act, which had admittedly not done by the Ld. PCIT in the instant case. PCIT has also not applied the ratio decidendi laid down in the case of Apollo Tyres Ltd. 2002 (5) TMI 5 - SUPREME COURT wherein the Ld. AO could not make any additions or deletions beyond what is prescribed in the list of items as per Explanation 1 to section 115JB(2) of the Act. In the instant case, there is no dispute that the said provision for foreseeable loss has been made in accordance with the guidelines and mandate provided in AS-7 issued by ICAI and hence we hold that the said provision is an ascertained liability and hence an allowable expenditure under section 115JB of the Act. It is pertinent to note that the said practice has been consistently followed by the assessee in the previous as well as subsequent years and has been also accepted by the Department except for the year under consideration. Hence, it could be seen that even on merits, the provision made for foreseeable losses would only be an ascertained liability and hence, it does not fall under any of the items listed in Explanation 1 to Section 115JB (2) of the Act warranting addition thereon. Hence, even on merits, this provision deserves to allowed while computing book profits u/s. 115JB of the Act. Appeal of the assessee is allowed.
Issues Involved:
1. Whether the Principal Commissioner of Income Tax (PCIT) was justified in assuming revision jurisdiction under Section 263 of the Income Tax Act in the given case. Issue-Wise Detailed Analysis: 1. Justification of PCIT's Revision Jurisdiction under Section 263: The primary issue to be decided in this appeal is whether the PCIT was justified in assuming revision jurisdiction under Section 263 of the Income Tax Act. The case revolves around the assessment year 2012-13, where the assessee, a domestic company engaged in civil construction, real estate, and trading of construction-related services, filed its original return of income electronically on 29/11/2012, declaring a total loss under normal provisions and book profit under Section 115JB of the Act. 1.1. Scrutiny Assessment and Reassessment Proceedings: The case was selected for scrutiny assessment under Section 143(2) of the Act, and the Assessing Officer (AO) made disallowances and additions while computing income under normal provisions of the Act. The assessee appealed against this order, which is pending before the Commissioner of Income Tax (Appeals). Subsequently, a notice under Section 148 of the Act was issued on 29/03/2019, reopening the assessment for A.Y. 2012-13. The reassessment order dated 09/12/2019 made further disallowances and retained the previously determined book profit. 1.2. PCIT's Notice under Section 263: The PCIT issued a notice under Section 263 on 18/03/2021, stating that the expenditure relating to the provision for foreseeable loss is an unascertained liability and should have been added back to book profit under Section 115JB during reassessment proceedings. The assessee responded to the notice, contesting the validity of the proceedings, and provided explanations supported by judicial precedents. 1.3. Tribunal's Findings on Original Assessment and Reassessment: The Tribunal found that the AO had duly applied his mind and enquired into all relevant aspects while framing the original scrutiny assessment order dated 20/04/2016. The Tribunal held that any error in the computation of book profits under Section 115JB of the Act should have been addressed within the time limit prescribed under Section 263(2) of the Act, i.e., on or before 31/03/2019. The reassessment proceedings initiated in 2019 were solely to address non-genuine payments made to contractors, and not adding the provision for foreseeable losses while computing book profits was an error present in the original assessment order dated 20/04/2016. 1.4. Legal Precedents and Doctrine of Merger: The Tribunal referred to the Supreme Court decision in Alagendran Finance Ltd., which held that the doctrine of merger does not apply where the subject matter of reassessment and original assessment is distinct. The Tribunal also cited the jurisdictional High Court's decision in Ashoka Buildcon Ltd., which affirmed that the limitation for invoking revision jurisdiction under Section 263 should be reckoned from the date of the original assessment order, not the reassessment order. 1.5. Merits of the Provision for Foreseeable Loss: On merits, the Tribunal found that the provision for foreseeable loss is an ascertained liability as per Accounting Standard (AS)-7 and should be treated as an allowable expenditure while computing book profits under Section 115JB of the Act. The Tribunal noted that the assessee consistently followed this practice in previous and subsequent years, and it was accepted by the Department except for the year under consideration. The Tribunal also referenced several judicial precedents supporting the allowance of the provision for foreseeable loss under Section 37 of the Act. Conclusion: The Tribunal concluded that the PCIT's action in treating the reassessment order as erroneous and prejudicial to the interest of the Revenue was incorrect. The Tribunal held that the revision jurisdiction under Section 263 was barred by limitation as it should be reckoned from the date of the original assessment order dated 20/04/2016. Consequently, the revision order passed by the PCIT under Section 263 was quashed. Even on merits, the Tribunal held that the provision for foreseeable losses is an ascertained liability and should be allowed while computing book profits under Section 115JB of the Act. The appeal of the assessee was allowed.
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