2021 (10) TMI 115 - AT - Income Tax

Provisions of anticipated losses - certainty in recognizing expenses - assessment framed as per AS-7 - HELD THAT - Hon ble Delhi High Court in case of Triveni Engineering Industries Ltd. 2010 (11) TMI 90 - DELHI HIGH COURT decided the identical issue by holding that, no doubt, unless the expenditure is actually incurred or it is accrued in the relevant years, it would not be allowed as a deduction. However, at the same time, in the given scenario, where in relation to the project works undertaken by the assessee, completed contract method of accounting is followed which is consistent with the Accounting Standard and these Accounting Standards also lay down the norms indicating the particular point of time when the provisions for all known liabilities and losses has to be made, the making of such a provision by the assessee appears to be justified more so when the assessee has recognized gain as well as on such project during the year itself. In the instant case, assessee has shown revenue gain for AY 2011-12. When completed contract method of accounting is undisputedly applied to consistently by the assessee in a long term project, the actual profit/loss will come on record in the year of completion of contract when all the undisputed losses and gains would be adjusted. When percentage completion method, which is in accordance with AS-7, has been consistently applied by the assessee and has been accepted by the Department and the expenditures incurred by the assessee are admissible one, we find no ground to interfere into the findings returned by the ld. CIT (A). Set off of the brought forward losses against the income from other sources - CIT-A allowed claim - HELD THAT - Perusal of the impugned order passed by the ld. CIT (A) goes to prove that this issue has been decided on the basis of facts brought on record by the parties to the appeals. When the core business of the assessee company is construction of power plant and purchasing the FDRs for availability of the easy funds for smooth functioning of the business, earning of interest on the FDRs on the funds invested from the business funds cannot be disallowed on the ground that earning interest on the FDRs is not part of the business of the assessee. Ld. CIT (A) has rightly decided that, although interest income has been shown as income from other sources it is still a part of the business income in nature as in all other assessment years and is available for set off of any losses from the previous year. So, investing surplus funds in FDRs during the business activities is part of primary business of the assessee company to make easy availability of funds for core activities and as such, interest income has been rightly treated as business income by the ld. CIT (A). Consequently, we find no ground to interfere into the findings returned by the ld. CIT (A) - Decided against revenue.

Summary

Issues Involved:
1. Deletion of addition made by the AO for anticipated/expected losses not actually incurred during the year.
2. Allowability of losses for future years as deductions, even if computed in conjunction with AS-7.
3. Set off of brought forward losses against income from other sources.

Issue-Wise Detailed Analysis:

1. Deletion of Addition for Anticipated/Expected Losses:
The Revenue challenged the deletion of additions for anticipated losses of ?35,68,94,401 and ?5,30,97,715 for AYs 2011-12 and 2012-13, respectively. The AO argued that anticipated losses not actually incurred during the year should not be allowed as deductions. However, the CIT(A) relied on the jurisdictional High Court of Delhi's decision in the case of Triveni Engineering & Industries Ltd. (336 ITR 374 Delhi), which allowed such provisions for anticipated losses under the completed contract method of accounting, consistent with AS-7. The Tribunal upheld CIT(A)'s decision, noting that the assessee consistently followed the percentage completion method, and such expenditures were admissible. The Tribunal found no reason to interfere with the CIT(A)'s findings, determining Grounds No. 1 & 2 against the Revenue for both assessment years.

2. Allowability of Losses for Future Years:
The Revenue contended that losses for future years could not be allowed as deductions even if computed as per AS-7, which has not been notified in the Act. The CIT(A) and Tribunal, however, held that the assessee's method of accounting, which included provisions for anticipated losses, was consistent and accepted by the Department. The Tribunal reiterated that the actual profit/loss would be evident upon the project's completion, making the exercise revenue-neutral. Thus, the Tribunal upheld the CIT(A)'s decision, determining Grounds No. 1 & 2 against the Revenue for both assessment years.

3. Set Off of Brought Forward Losses Against Income from Other Sources:
For AY 2012-13, the AO disallowed the set off of brought forward losses against income from other sources amounting to ?2,56,36,785, arguing that the assessee's business was construction of power plants and not earning interest from FDRs. The CIT(A) allowed the set off, finding that the interest income from FDRs, purchased during the course of business, was inextricably linked to the business operations. The Tribunal agreed, noting that the interest income was part of the business income as the FDRs were utilized for business purposes. The Tribunal upheld the CIT(A)'s findings that the interest income, although shown as income from other sources, was still part of the business income and available for set off against prior losses. Consequently, Ground No. 3 for AY 2012-13 was determined against the Revenue.

Conclusion:
The Tribunal dismissed the appeals for AYs 2011-12 and 2012-13 filed by the Revenue, upholding the CIT(A)'s decisions on all grounds. The provisions for anticipated losses were deemed allowable, and the set off of brought forward losses against income from other sources was justified. The Tribunal found no grounds to interfere with the CIT(A)'s findings, thereby ruling in favor of the assessee.