2023 (8) TMI 1192 - HC - Income Tax

Disallowance of future expenses claimed as deduction - unbillable expenses include reconstruction of roads damaged while constructing tunnels and during the other construction activities undertaken by the Assessee - Assessee made provision for expenses - AO disallowed the said provisions - CIT(A) allowed the same on the ground that the provision was not contingent one, but based on the matching expenditure on ascertained liability, also upheld by ITAT - HELD THAT - There is no grievance by the Revenue so far as the design aspect is concerned. With regard to the provision for expenses towards construction of roads and other civil works, the contention urged on behalf of the Revenue is that AO has not correctly examined the factual matrix. As right in his submission that AO in his order has extracted a copy of the communication between the Assessee and the department, which shows that the Assessee had enclosed technical documents, costs and computation for arriving at a provision for the respective years. This has been noted by the ITAT the impugned order. In addition, ITAT has recorded that AO has noted the details of expenditure in his order and the same has been extracted in ITAT s order also. As urged on behalf of the Revenue that for AY 2013-14 the matter was remanded to the AO. There is no parity insofar as an order of remand is concerned. It is based on the facts of each case. As even for the said AY 2013-14, after remand, AO has accepted the provision made by the Assessee. For the subsequent years, namely AY 2014-15 no disallowance has been made. There is no dispute with regard to the fact that the provision for expenses is made on pro rata basis based on the turnover with reference to total unbillable future expenses of the project. Decided in favour of assessee.

Summary

Issues involved:
The judgment involves challenges by the Revenue against orders passed by the ITAT for Assessment Years 2011-2012 and 2012-2013. The main issues are related to the disallowance of future expenses claimed as deduction by the assessing authority and the Tribunal's decision on the same.

Issue 1 - Dismissal of Appeals by Revenue:
The first issue revolves around whether the Tribunal was correct in dismissing the appeals by the Revenue concerning the disallowance of future expenses claimed as deduction. The Revenue argued that the Tribunal erred in relying on judgments where facts were not identical to the present case.

Details:
- The Tribunal dismissed the appeals by the Revenue based on the disallowance made by the assessing authority.
- The Revenue contended that the provision for future expenses was not substantiated based on past events, contrary to guidelines laid down by the court in a previous case.

Issue 2 - Provision for Future Expenses:
The second issue concerns the provision for future expenses claimed as deduction by the Assessee. The assessing authority disallowed these provisions, but the CIT(A) and ITAT upheld them, leading to a dispute between the parties.

Details:
- The Assessee, a consortium involved in a project, made provisions for future expenses based on the total project cost and turnover.
- The disallowed provisions were related to reconstruction of roads and other civil works, with the Revenue arguing that the assessing officer did not examine the factual matrix correctly.
- The Assessee's counsel argued that the provisions were based on technical estimates and costs provided to the AO, which were duly considered by the ITAT in their decision.

Judgment:
After considering the arguments from both sides, the High Court found no error in the orders passed by the ITAT. Consequently, the appeals were dismissed, and the substantial questions of law were answered in favor of the Assessee and against the Revenue. The court highlighted the importance of examining the factual matrix in such cases and emphasized the need for provisions to be substantiated based on relevant documentation and guidelines.