L & T MHPS BOILERS PRIVATE LIMITED , MUMBAI V. ACIT 2(2)(1), MUMBAI

ITA 4765/MUM/2017

AI Insights

The case involves L & T MHPS Boilers Private Limited and L & T MHPS Turbine Generators Private Limited, appellants, against the ACIT-2(2)(1) Mumbai, respondent, concerning the disallowance of provisions for foreseeable losses amounting to Rs.5,82,61,335 as per AS-7 on 'construction contracts' for the Assessment Year 2011-12. The primary legal contention revolves around whether foreseeable losses, recognized under the accounting standard AS-7, should be allowed as deductions under the Income Tax Act, 1961. The Assessing Officer disallowed the claim, considering the losses as not crystallized during the year, and this decision was upheld by the CIT(A). The Tribunal noted that the issue had been previously remanded for A.Y. 2010-11 and required a detailed examination of the factual aspects and merits of the claim.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 124823 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 10 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-06-2023
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 05-03-2023
• Assessment Year: 2011-2012
• Appeal Filed On: 04-07-2017
• Other Referred Cases: Kikabhai Premchand vs. CIT [1953] 24 ITR 506 (SC), ITO vs. Murlidhar Bhagwandas [1964] 52 ITR 335 (SC), Indian Molasses Co. Pvt. Ltd. vs. CIT [1959] 37 ITR 66 (SC), Shree Sajjan Mills Ltd. vs. CIT [1985] 156 ITR 585 (SC), Tuticorin Alkali Chemical & Fertilizers Ltd. vs. CIT 227 ITR 172 (SC)
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Transfer pricing
• Section: 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH, MUMBAI BEFORE SHRI PRASHANT MAHARISHI, AM AND MS. KAVITHA RAJAGOPAL, JM I TA N o. 476 5/ M u m / 20 17 ( A s s e ss me nt Y ea r: 20 1 1- 12 ) L & T MHPS Boilers Private Limited 2 nd Floor, L & T House, N. M. Marg, Ballard Estate, Fort, Mumbai-400 001 V s. ACIT-2(2)(1) Mumbai P A N / G I R N o. AA BC L 2 6 3 5 C (Appellant) : (Respondent) & IT A N o s . 4 767 / M u m/ 20 17 ( A s s e ss me nt Y ea r: 20 1 1- 12 ) L & T MHPS Turbine Generators Private Limited 2 nd Floor, L & T House, N. M. Marg, Ballard Estate, Fort, Mumbai-400 001 V s. ACIT-2(2)(1) Mumbai P A N / G I R N o. AA BC L 2 7 2 9 F (Appellant) : (Respondent) Assessee by : Shri Nitesh Joshi Revenue by : Smt. Shailja Rai & Shri Manoj Kumar Sinha D a te o f H e a r i n g : 06.03.2023 D ate of P ro n ou n ce me n t : 02.06.2023 O R D E R Per Kavitha Rajagopal, J M: IT A N o. 47 67/ Mu m/ 2 0 1 7 This appeal has been filed by the assessee, challenging the order of the learned Commissioner of Income Tax (Appeals)-5, Mumbai (‘ld.CIT(A) for short) passed u/s.143(3) of the Income Tax Act, 1961 (‘the Act'), pertaining to the Assessment Year (‘A.Y.’ for short) 2011-12. 2 ITA Nos. 4 7 6 5 & 4 7 6 7 / M u m / 2 0 1 7 ( A . Y . 2 0 1 1 - 1 2 ) 2. The assessee is engaged in the business of manufacturing super-critical steam turbines and generators and has a joint venture between Larsen & Tourbo Ltd. and Mitsubishi Heavy Industries Ltd. The assessee filed its return of income dated 30.11.2011, declaring total loss of Rs.(-)88,89,17,848/-. The assessee’s case was selected for scrutiny and the same was referred to Transfer Pricing Officer ('TPO' for short) for determination of arm’s length price as the international transaction of the assessee company exceeded Rs.15 crores. The ld. TPO held that the assessee’s international transaction was at arm’s length price and, therefore, no adjustment was made to the value of the international transaction. The Assessing Officer ('A.O.' for short) Rs.(- )83,06,56,513/- by disallowing the provision for foreseeable losses amounting to Rs.5,82,61,335/-. 3. The assessee was in appeal before the ld. CIT(A), challenging the order of the A.O. who upheld the order of the A.O. on the ground that the claim of the assessee on foreseeable losses as per the accounting standard will not come under the purview of total income as the same amounts to a future loss or profits. The ld. CIT(A) by relying on the decision of the Hon'ble Apex Court in the case of Kikabhai Premchand vs. CIT [1953] 24 ITR 506 (SC) and ITO vs. Murlidhar Bhagwandas [1964] 52 ITR 335 (SC), held that only profit and income which has been received, accrued or arisen in that year can be subjected to income tax and not future profits or losses. 4. The assessee is in appeal before us, challenging the impugned order of the ld. CIT(A). 5. It is observed that the assessee received two projects from L & T one for supply of 2*800 M V Thermal Power Project at Krishna Patnam, Andhra Pradesh on 05.09.2008 3 ITA Nos. 4 7 6 5 & 4 7 6 7 / M u m / 2 0 1 7 ( A . Y . 2 0 1 1 - 1 2 ) and another project to Jayprakash Power Ventures Ltd. for supply of 3*660 M V Sanagam Super Thermal Power Project. The assessee is said to have computed provision for foreseeable losses amounting to Rs.5,82,61,335/- as per the revised mandatory accounting standard 7 (AS 7) in its P & L account. The assessee further stated that if the total contract cost will exceed total contract revenue then the expected loss has to be recognized as an expenses in the period in which the contract is signed or a legal or constructive obligation is created and the same is determined whether or not work has commenced on the said contract and it is also irrelevant as to the stage of completion of the contract or the expected profit to arise on such other contracts. The ld. A.O. did not agree with the contention of the assessee and held that the deduction u/s. 37(1) of the Act can be allowed only during the year it was incurred for carrying on the business and as the same has not been crystallized during the year, it was not an allowable deduction. The ld. A.O. relied on the decision of the Hon'ble Apex Court in the case of Indian Molasses Co. Pvt. Ltd. vs. CIT [1959] 37 ITR 66 (SC) and Shree Sajjan Mills Ltd. vs. CIT [1985] 156 ITR 585 (SC), wherein it was held that only expenditures which was incurred or which was existing was liable for deduction and not any future expenses anticipated to be expended. The ld. A.O. relied on the tests laid down by the Hon'ble Apex Court in the above mentioned case and held that the assessee’s claim on foreseeable losses was not allowable u/s. 37(1) of the Act. The ld. CIT(A) confirmed the addition made by the A.O. on the ground that foreseeable losses do not come under the purview of the charging section or as total income. The ld. CIT(A) further held that though the assessee was eligible for the said claim as per the provisions of AS-7 for construction contracts issued by the Chartered Accountants of India (ICAI) w.e.f. 01.04.2003, the assessee was not 4 ITA Nos. 4 7 6 5 & 4 7 6 7 / M u m / 2 0 1 7 ( A . Y . 2 0 1 1 - 1 2 ) eligible for the same as per the provisions of the Income Tax as the same does not come under the purview of charging section. The ld. CIT(A) relied on the decision of Tuticorin Alkali Chemical & Fertilizers Ltd. vs. CIT 227 ITR 172 (SC), wherein it was held that the accounting standard cannot overrule the statutory provisions of the IT Act. The ld. CIT(A) stated that the assessee was not eligible for foreseeable losses, as the same has not been received accrued/arisen in that year and thereby rejected the assessee’s claim on the said ground. 6. The learned Authorised Representative (AR for short) for the assessee contended that the A.O. has merely denied the assessee’s claim on an assumption by not considering the provisions of the AS-7 by which the assessee was eligible to claim foreseeable losses. The ld. AR for the assessee further stated that the Tribunal in assessee’s case for A.Y. 2010-11 has remanded this issue back to the file of the A.O. to consider the claim of the assessee on merits. The ld. AR relied on the order of the Tribunal in ITA No. 4766/Mum/2017 vide order dated 04.01.2023 for A.Y. 2010-11. 7. The learned Departmental Representative ('ld. DR' for short) for the Revenue, on the other hand, relied on the order of the lower authorities. 8. We have heard the rival submissions and perused the materials on record. It is observed that the issue on foreseeable losses has been a recurring issue and the Tribunal for A.Y. 2010-11 has remanded this issue back to the file of the A.O. for considering the claim of the assessee on merits. The Tribunal has also stated that the A.O. has not examined various factual aspects of the case and thereby directed to consider those facts 5 ITA Nos. 4 7 6 5 & 4 7 6 7 / M u m / 2 0 1 7 ( A . Y . 2 0 1 1 - 1 2 ) for the purpose of deciding this issue. The relevant extract of the said decision is cited hereunder for ease of reference: 6. We notice that the co-ordinate bench, in the above said case, was under the impression that the Tribunal has allowed the claim in the understanding that there was no dispute about allowability of loss. If there is no dispute on the matter, there was no necessity for the assessee to knock the doors of the Tribunal. On the contrary, in the various cases relied upon by the assessee, it has been consistently held that the deduction of expected loss is required to be provided for in the books of accounts and is allowable as deduction. Under the accounting principles, the expected loss is deemed to have been “incurred” under the “Principle of Prudence” mentioned in AS-1 issued by CBDT also. Accordingly, following the decisions relied upon by the assessee, we hold that the assessee, in principle, is entitled for deduction of expected loss. 7. However, we notice that there was no occasion for the AO to examine the claim on merits, since the AO had disallowed the same holding it to be contingent in nature. Certain glaring facts emanate in this case, viz., (a) the assessee herein, being a joint venture of M/s Larsen & Toubro Limited and M/s Mitsubishi Heavy Industries Ltd, has obtained the impugned contract from one of its promoters, viz., M/s L & T Ltd, i.e., a related concern. There should not be any dispute that the transactions with related concerns require proper examination. (b) When the contract was awarded on 5th September, 2008, the contract revenue for “onshore supply” portion was determined as Rs.44.56 crores. (c) However, by 31.3.2010, i.e., within a period of 18 months, the cost has been claimed to have escalated to Rs.110.39 crores and a loss of Rs.65.83 crores was visualized. It is stated that the assessee could make a saving of Rs.20 crores in “offshore supply” portion of contract and hence the net loss visualized was Rs.45.83 crores. When the onshore supply portion of the revenue in the contract was fixed at Rs.44.56 crores, the assessee would have estimated the cost lesser than the above said revenue. However, the cost has been claimed to have been escalated to Rs.110.39 crores within a period of 18 months, which is almost 300%. The claim that the cost has escalated by 300% within a period of eighteen months is unheard and accordingly, shall raise doubt in the minds of any prudent person, though it may be probable also. Accordingly, it is the obligation of the assessee to explain before the AO as to how the cost has escalated by 300% from the original estimate. The burden of the assessee is further increased on the reason that the contract has been obtained by the assessee from its promoter, a related concern. 8. As noticed earlier, there was no occasion for the AO to examine these factual aspects, as he had disallowed the claim holding it as contingent liability. Accordingly, we are of the view that this issue needs to be restored to the file of AO for examining the computation of the loss claimed by the assessee. Accordingly, we restore this issue to the file of the AO with the direction to examine the claim of the assessee by calling for the relevant details. The order passed by Ld CIT(A) would stand modified accordingly. After examining the details furnished by the assessee, any other information and explanations that may be furnished by it, the AO may take appropriate decision in accordance with law. As the issue before us is also identical as that of A.Y. 2010-11, we are of the considered view that the same has to be remanded back to the A.O. for determination of the claim of the assessee on foreseeable losses. 9. In the result, the appeal filed by the assessee in ITA No. 4767/Mum/2017 is allowed for statistical purpose. 6 ITA Nos. 4 7 6 5 & 4 7 6 7 / M u m / 2 0 1 7 ( A . Y . 2 0 1 1 - 1 2 ) ITA No. 4765/Mum/2017 10. This appeal is also on identical facts as that of ITA No. 4767/Mum/2017, wherein the assessee has challenged the disallowance of the provisions for foreseeable loss amounting to Rs.45 crores made in accordance with AS-7 on ‘construction contracts’. During the appellate proceeding, the ld. AR for the assessee submitted that this appeal will not be pressed inorder to put an end to the litigation only for this assessment year. We have considered the submission of the assessee and, hence, this appeal is dismissed as not pressed. 11. In the result, the appeal filed by the assessee in ITA No. 4765/Mum/2017 is dismissed. Order pronounced in the open court on 02.06.2023. Sd/- Sd/- (Prashant Maharishi) (Kavitha Rajagopal) Accountant Member Judicial Member Mumbai; Dated : 02.06.2023 Roshani , Sr. PS Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. CIT - concerned 4. DR, ITAT, Mumbai 5. Guard File BY ORDER, (Dy./Asstt. Registrar) ITAT, Mumbai