By TIOL News Service

ERNAKULAM, NOV 06, 2018: THE ISSUE BEFORE THE BENCH IS - Whether forseeable loss can be claimed in respect of a contract which is yet to be executed. NO IS THE VERDICT.

Facts of the case

The assessee company entered into contracts during the relevant AY & the profits & losses were ascertained as per Accounting Standard-7. At every stage of the work, the expenditure incurred would be calculated, as well as the expenses that could be incurred. Should the actual expenses incurred exceeded what is due to the company as per the contract, then such amount would be treated as forseeable loss. On assessment, the AO made additions u/s 115J of such amount on grounds that the same could not be ascertained liability. On subsequent appeal, the Tribunal sustained such findings of the AO.

On appeal, the Tribunal 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;

++ Even the statement and standards of accounting as issued by the Chartered Accountants of India would indicate that there is a high degree of uncertainty in determining the foreseeable loss in a contract which is not completed. In the case of the assessee it is submitted that in certain assessment years there was a remand by the Tribunal, differing from the view taken here and the Assessing Officer had computed the ascertainable loss and allowed it in certain cases. The actions of the Assessing Officer would not deter or fetter the process of answering questions of law framed under Section 260A of the Act;

++ Thus 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 v. Commissioner of Income Tax. 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.

(See 2018-TIOL-2350-HC-KERALA-IT)