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TMI Blog2022 (1) TMI 878X X X X Extracts X X X X X X X X Extracts X X X X ..... abour and other costs to address these unplanned events, the provision of loss has been created. This is the only submission made before us. The above submission was neither placed before AO nor before the ld. CIT(A). In so far as the above statement is concerned, the ld. Counsel has not explained any basis as to how the material cost and labour cost are increased. Except stating the above, the ld. Counsel for the assessee has not explained any scientific basis for which the assessee is going to incur such huge expenditure as a loss. There is no change in the terms and conditions of the contract entered into and subsequently executed and same amount has been received. The assessee has not placed any material on record to show that any increase in the cost of material and cost of labour and other services to anticipate future loss. Apart from the above, the assessee has not incurred any loss and the assessee gain profit much more in the subsequent years. In fact, the assessee reversed the provision made in this year under consideration in subsequent two financial years. Therefore, the above facts clearly show that there is no basis for the assessee to make the provision and it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 012-13 declaring total income of ₹ 1,25,40,710/-. The case was selected for scrutiny through CASS. After following due procedure, an assessment was completed. In the assessment order, on perusal of the financials of the assessee, the A.O has noted that the assessee had debited an amount of ₹ 12,31,40,818/- to the P L statement as provision for losses. The assessee was asked to explain the nature of the provision made and if any disallowance was made in the statement of income, given that the expenditure booked is only a provision and not an actual expenditure. The assessee has explained that no disallowance was made but since the assessee has suffered losses, such a provision was made in the books. The Assessing Officer, however, not convinced with the computation of the assessee and according to the Assessing Officer, the amount debited to P L account is on account of a provision and not an actual expenditure. The same is not in conformity with prudent accounting principles and does not depict a true picture of the income of the assessee. Hence, the said expenditure is disallowed and added back to income of the assessee. 4. On appeal before the Ld. CIT(A), the Ld. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which is evident from the audited financial statements and accordingly, the assessee has made a provision for losses as per AS-7. 5.2 He further pointed out from the AS-7(21), against the contract revenue and expenses and recognition of expected losses, he submitted that when it is a probable that total contract costs will exceed total contract revenue, the expected loss should be recognised as an expense immediately. He also pointed out from the paper book page No.53 that as per CBDT Circular No.9949, dated 21/01/1996, which provides that accounting policies adopted by an assessee should be such so as to represent a true and fair view of the state of affairs of the business, profession or vocation in the financial statements prepared and presented on the basis of such accounting policies. The major considerations governing the selection and application of accounting policies are the following namely: (i) Provisions should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information and submitted that the provisions for loss made by the assessee is also supported ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osses. Therefore, the Assessing Officer has disallowed the same. On appeal, the ld. CIT(A) confirmed the order of the Assessing Officer. 7.1 In this case, we find that the assessee has not given any scientific basis for the provision made either before the Assessing Officer or before the ld. CIT(A) or even before the Tribunal. The main argument of the assessee is that due to various unforeseen events which occurred during the course of project execution, certain unplanned costs had to be incurred by the assessee to complete the project. These costs including significant increases in material, labour and other costs to address these unplanned events, the provision of loss has been created. This is the only submission made before us. The above submission was neither placed before the Assessing Officer nor before the ld. CIT(A). In so far as the above statement is concerned, the ld. Counsel has not explained any basis as to how the material cost and labour cost are increased. Except stating the above, the ld. Counsel for the assessee has not explained any scientific basis for which the assessee is going to incur such huge expenditure of ₹ 12.31 crores as a loss. 7.2 We fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sponding obligation under the warranty clause(s) attached to such sales. In the above case, the provision made are for warranty and the same was made in realistic manner and therefore, the Hon ble Supreme Court upheld the scientific method adopted by the assessee. In the present case, no scientific method was adopted by the assessee to estimate the loss. Therefore, the case law relied on by the assessee has no application to the facts of the present case. 8.1 In the case of CIT v. Woodward Governor India Private Limited (supra), the substantial question of law arises for determination before the Hon ble Supreme Court are (i) Whether, on the facts and circumstances of the case and in law, the additional liability arising on account of fluctuation in the rate of exchange in respect of loans taken for revenue purposes could be allowed as deduction under Section 37(1) in the year of fluctuation in the rate of exchange or whether the same could only be allowed in the year of repayment of such loans? and (ii) Whether the assessee is entitled to adjust the actual cost of imported assets acquired in foreign currency on account of fluctuation in the rate of exchange at each balance sh ..... X X X X Extracts X X X X X X X X Extracts X X X X
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