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I-T - If there is no crystallized and ascertained liability which has arisen and merely a claim is filed by contractor of assessee in arbitration proceedings, then provision created for contract loss can't be allowed: ITAT

 

By TIOL News Service

CHENNAI, OCT 23, 2018: THE ISSUE IS - Whether if in relevant year there is no crystallized and ascertained liability which has arose and merely claim is filed by the contractor of the assessee in arbitration proceedings, then provision created for contract loss can be allowed - NO IS THE VERDICT.

Facts of the case

The assessee company, engaged in real estate business had filed its return of income for the relevant AY. During assessment, AO noted that assessee had created a provision of Rs. 1,35,05,446/- against contract loss. According to assessee such provision was created considering arbitration proceedings filed by one M/s. Garabandal Constructions Pvt. Ltd against it. The AO held that provision created was only contingent in nature. Such provision was written back in the subsequent years. Hence sum of Rs. 1,33,41,882/- out of the total provision of Rs. 1,35,05,446/- was disallowed by the AO. On appeal, CIT(A) allowed the claim to the extent of Rs. 1,25,00,000/- while sustaining the disallowance of merely Rs. 8,41,882/-. Aggrieved Revenue filed appeal before the Tribunal.

Tribunal held that,

++ sum of Rs. 1,25,00,000/- allowed by the CIT(A) out of the total claim of Rs. 1,35,05,446/- comprised of two items. First is amount of Rs. 70,00,000/- claimed as due to M/s. Garabandal Constructions and second is rental compensation of Rs.55,00,000/- claimed as payable to its customers. The question is whether these amounts were crystallized liability as on 31.03.2012. Application for appointment of Arbitrator was filed by M/s. Garabandal Constructions Pvt. Ltd on 1st day of July, 2013. No doubt in the said application, it is stated that M/s. Garabandal Constructions Pvt. Ltd had submitted its final bills valued at Rs.7,44,54,318/- as on 07.12.2011 against which they claimed receipt of Rs.6,38,26,100/- only;

++ there is nothing on record to show that M/s. Garabandal Constructions Pvt. Ltd had preferred any such claim on the assessee during the course of the relevant previous year or to show that assessee had agreed to such claim. On the other hand assessee had claimed liquidated damages from M/s. Garabandal Constructions Pvt. Ltd. No doubt, on 19.01.2016, there is a settlement entered by the assessee with M/s. Garabandal Constructions Pvt. Ltd whereby it agreed to pay a sum of Rs.75,00,000/- to M/s. Garabandal Constructions Pvt. Ltd. However, none of these, was crystallized liability to M/s. Garabandal Constructions Pvt. Ltd as on 31.03.2012. Just because a claim was filed by the contractor of the assessee, would not mean that assessee was legally bound to pay such amount. The maxim "debitum in praesenti solvendum in futuro" relied on by the Authorised Representative, can apply only if there is an ascertained liability for which amount is to be crystallized and paid later, and not to a situation where there is only a claim, with no acknowledged liability. It was held that CIT(A) fell in error in taking cognizance of the arbitration proceedings initiated well after the end of the relevant previous year, and coming to a conclusion that there was a crystallized liability of Rs. 70,00,000/- due from the assessee to M/s. Garabandal Constructions Pvt. Ltd as at the end of the relevant previous year.

(See 2018-TIOL-1891-ITAT-MAD)


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