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TMI Blog2023 (1) TMI 177X X X X Extracts X X X X X X X X Extracts X X X X ..... ellate authority nor before the Income Tax Appellate Tribunal. The only explanation that was given by the appellant before the Assessing Officer in its reply dated 24.02.2015 before the Assessment Order was passed u/s 143(3) of the Income Tax Act, 1961 on 24.03.2015, was a mere reiteration of the contents of paragraph 21 of Accounting Standard (AS) 7 which has been extracted above. No further explanation has been given by the appellant. A reading of paragraph 5 of the order passed by the Appellate Commissioner also indicates that the appellant has not demonstrated its case despite specific opportunity being given and has merely relied on the Judgments settling the substantial questions of law. Barring reference to Accounting Standard (AS) 7 for recognition of estimated loss there is no explanation on the facts by the appellant. Therefore, the decisions allowing deductions in the peculiar facts of the case cited by the Hon ble Supreme Court in Rotork Controls India (P) Ltd. [ 2009 (5) TMI 16 - SUPREME COURT] as held therein would not come to the rescue of the appellant. In the light of the above discussion, the substantial questions of law is answered against the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Officer to consider afresh and accordingly, he prayed that the same may be followed and remit the matter back to the file of the Assessing Officer. 6. On the other hand, the ld. DR has submitted that there is no provision in the Act to estimate the ascertained liability and make a provision for it and therefore, pleaded that the Assessing Officer as well as ld. CIT(A) have rightly disallowed the same and strongly supported the order passed by the authorities below. 7. We have heard both the sides, perused the materials available on record and gone through the orders of authorities below. The case of the assessee is that as per the Schedule 12 to the financials Rs.4,38,99,923/- has been created as a provision for estimated future losses on contracts. The Assessing Officer has asked the assessee to justify the claim vide notice dated 05.02.2015. Vide letter dated 24.02.2015, the assessee has submitted that Para 21 of AS-7 stipulates that when the outcome of a construction contract can be estimated reliably, contract revenue and contract costs associated with the construction contract should be recognized as revenue and expenses respectively by reference to the stage of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preciating that provision for estimated loss on contracts is created on a scientific basis in accordance with the Accounting Standard (AS) 7 and as such it is an ascertained liability allowable as deduction under Section 37 of the Act ? (3) Whether, in law, the Tribunal was right in not following its own order in the case of the Appellant for AY 2005-06 in ITA.No.1697/Mds/2015, dated 30.08.2017 ? (4) Whether, in law, the Tribunal was justified in not considering the alternative ground of the Appellant that in case provision for estimated loss on contracts is disallowed in the year of creation of provision, then reversal/utilisation of such provisions should be allowed as a deduction in the years of reversal/utilisation? 3. The dispute in the present case relates to an estimated loss of Rs.1,14,45,495/-, claimed by the appellant as permissible deduction under Section 37 of the Income Tax Act. 4. The appellant had claimed the aforesaid estimated loss on the strength of Accounting Standards (AS) 7 of the Institute of Chartered Accountants, which was disallowed by the Assessing Officer, vide Assessment Order, dated 24.03.2015, for the aforesaid assessment year under Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 250(6) of the Act, dismissed the appeal, filed by the appellant. This view was affirmed by the Income Tax Appellate Tribunal vide the impugned order, dated 08.10.2021, as extracted above. 6. The specific case of the appellant is that the High Court has allowed the provision for loss on account of warranties vide its order dated 03.06.2013in FLSmidth Minerals (P.) Ltd. v. Deputy Commissioner of Income Tax (2013) 36 Taxmann.com 72 (Madras)in the appellant s own case. 7. Learned counsel for the appellant also placed reliance on a decision of the Tribunal in Assistant Commissioner of Income Tax v. ITD Cementation India Ltd . (2013) 36 Taxmann.com 74 (Mumbai- Trib.) and a decision of the Hon'ble Supreme Court in Rotork Controls India Limited (2009) 314 ITR 62 and a few other decisions. 8. Learned counsel for the appellant would submit that the provisions made for estimated loss is similar to the provision for warranty and is hence, an ascertained liability as per the scientific method and, therefore, the Assessing Officer, as also the Appellate Commissioner and the Appellate Tribunal have committed a grave error in disallowing the expenditure as a deductio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t also be actually written off and necessary book-keeping steps must be taken to record that the debt has been determined and writing off a trade debt as bad requires judgment on the part of the person carrying on the business taking into consideration all circumstances as to the likelihood and cost of its recovery before a decision is taken to write off the debt and that, for a bad debt to be properly written off, it must be bona fide written off and that the evidence should establish that.'' 11. It is submitted that the accounting standards are of no consequence, as held by this Court in the above said decision. That apart, it is submitted that unless there is a complete writing-off of the income from the books of accounts, questioning such deductions under Section 37 of the Act cannot be countenanced. Therefore, it is submitted that the appeal filed by the appellant is liable to be dismissed. 12. Learned Senior Standing Counsel for the Department has also relied upon the following decisions : (i) FFE Minerals India (P.) Ltd. v. CIT., (2018) 98 Taxmann.com 170 (Madras) (ii) Grundfos Pumpas India Ltd. v. CIT., (2018) 98 Taxmann.com 396 (Madras). 13. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ruction contract can be estimated reliably, contract revenue and contract costs associated with the construction contract should be recognised as revenue and expenses respectively by reference to the stage of completion of the contract activity at the reporting date. An expected loss on the construction contract should be recognised as an expense immediately in accordance with paragraph 35. When it is probable that total contract costs will exceed total contract revenue, the expected loss should be recognised as an expense immediately. 21. Paragraph 21 of the Accounting Standard (AS) 7 makes it clear that an expected loss for construction contract should be recognised as an expense immediately in accordance with paragraph 35. 22. As per paragraph 35 of Accounting Standards (AS) 7 expected loss should be recognised as an expense immediately when it is probable that total contract costs will exceed total contract revenue. 23. An expected loss in a construction contract can be recognised as an expense immediately in accordance with paragraph 35of the Accounting Standard (AS) 7 when the outcome of a construction contract can be estimated reliably. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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