2018 (10) TMI 1303 - HC - Income Tax

MAT - additions u/s 115J - provisions for liability towards incomplete projects - whether in the nature of foreseeable loss, which is an ascertainable liability and is reflected in the Profit And Loss account accepted by the Registrar of Companies - Held that - In the present case, the company on the finalisation of accounts in a particular previous year, computes the profit and loss of each contract, up to the stage at which it has been completed. This cannot be said to be an ascertained liability especially since the contract is not completed and the loss or profit can be finally determined only on completion of the contract, at which point, definitely the assessee can claim it. AO while computing the income under Section 115-J has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The Assessing Officer thereafter has the limited power of making increases and reductions as provided for in the Explanation to the said section. To put it differently, the Assessing Officer does not have the jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in the Explanation to Section 115-J. We are of the opinion that the losses can be determined only at the completion of the contract and even as per the accounting standards, there is a high degree of uncertainty in determining the future loss of a running contract. Clause (c) of Section 115J(1A) permits the Assessing Officer to add back the provisions made so as to reflect the correct profits and to determine the income as per Section 115J as has been noticed in Apollo Tyres(2002 (5) TMI 5 - SUPREME COURT). The provision was introduced to bring to tax companies who adjust their accounts in such a manner resulting in zero tax phenomenon. The attempt of such a computation, as made by the legislature, is to ensure payment of a minimum corporate tax on the profits as declared in its own accounts. The Explanation permits additions to be made so that the actual profits derived is taxed. What is not reflected for reasons only of provisions made with respect to contingent liabilities, are also brought to tax. Whether the provision for bad and doubtful debts could be added back for the purpose of determining the income under Section 115JA? - Held that - Assessing Officer is directed not to make any addition with respect to the provision for bad and doubtful debts, insofar as the computation of income under Section 115JA of the Income Tax Act for the subject year. See Commissioner of Income Tax v. HCL Comnet Systems and Services Ltd 2008 (9) TMI 18 - SUPREME COURT .

Summary

Issues:
1. Computation of profit and loss under Section 115J of the Income Tax Act, 1961.
2. Addition of foreseeable losses in contract accounting.
3. Provision for gratuity as an ascertained liability.
4. Treatment of provision for bad and doubtful debts under Section 115JA.

Analysis:
1. The main issue in the judgment pertains to the computation of profit and loss under Section 115J of the Income Tax Act, 1961. The questions of law framed in ITA No.43/32003 revolve around whether the additions made by the assessing authority under Section 115J were justified. The Tribunal confirmed the additions made by the assessing authority, leading to a dispute regarding the treatment of foreseeable losses in contract accounting.

2. The judgment delves into the treatment of foreseeable losses in contract accounting. The assessee contended that the accounting procedures, specifically AS7, allow for the computation of profit and loss at every ascertainable stage of work. However, the assessing officer added back the foreseeable losses, arguing that they were not ascertainable liabilities. The Tribunal upheld the additions, stating that the losses could only be ascertained upon completion of the contracts.

3. Another issue addressed in the judgment is the provision for gratuity as an ascertained liability. The court determined that gratuity, although not payable in the previous year, constitutes an ascertained liability as it is related to each employee's service year. The provision for gratuity earned in a particular year is considered an ascertained liability falling outside the purview of Section 115J(1A).

4. The judgment also discusses the treatment of provision for bad and doubtful debts under Section 115JA. Referring to a Supreme Court judgment, the court ruled in favor of the assessee, directing the assessing officer not to make any addition with respect to the provision for bad and doubtful debts in the computation of income under Section 115JA. The decision in ITA No.2/2007 was allowed, while ITA 1/2007 was partly allowed, and ITA No.43/2003 was rejected.

In conclusion, the judgment provides detailed analysis and rulings on various issues related to the computation of profit and loss, treatment of foreseeable losses in contract accounting, provision for gratuity, and provision for bad and doubtful debts under relevant sections of the Income Tax Act, 1961.