THE issue before the Bench is - Whether when the assessee has been showing certain expenditure towards 'work-in-progress' for two years but not in the year of filing return because its contract was terminated and bank guarantee encashed, the expenditure written off in books is to be allowed. And the answer is YES.
Facts of the case
The assessee company was awarded a contract by Madhya Pradesh Electricity Board for rehabilitation job for the Amarkantak Thermal Power Station near Jabalpur in MP. An amount of
Rs.9,29,20,000/- was paid as advance. The assessee gave a bank guarantee for the said amount. The assessee commenced the work and incurred expenditure on the project. The total amount of expenditure incurred on the project was Rs..6,64,01,149/-. Assessee contended that MPEB arbitrarily terminated the contract and invoked the bank guarantee. The said contract was terminated by letter dated 8.10.2002. The assessee invoked the arbitration clause and put forth a claim. The amount of Rs..6,64,01,149/- included money spent on raw materials like tubes and pressure parts, consumables, freight and carriage and also bank charges, professional charges etc., in addition to the expenses on personnel, transport and communication and administrative expenses. However, more than 50% of the total amount was debited towards the material consumed for the contract work. The assessee debited the said amount being the cost of abandoned project towards the profit and loss account. In the notes appended, it was stated that the said amount had been charged as expenditure on abandoned project. The assessee also mentioned that the assessee had contested the invocation of bank guarantee by the MPEB before the court of Jabalpur. On the date of assessment order the arbitration award also had been passed on 23.9.2004 under which the assessee was granted substantial damages for the illegal invocation of the bank guarantee, cancellation of the contract etc., However, no amount had been paid by MPEB in terms of the award as they were contesting the award in an appeal before the court of Jabalpur. The AO was of the view that the assessee has been following mercantile method of accounting. As and when any expenditure was incurred on a contract, it should either result in corresponding receipts from the contract or it should be represented as WIP. The assessee had neither received any amount from MPEB nor was showing any WIP. The expenditure on a particular project cannot be merely allowed as an expenditure unless there is a corresponding credit in the form of contract receipt or work-in-progress. The assessee was claiming the entire expenditure as deductible expenditure since the contract had been abandoned. Although the assessee had abandoned the contract, the fact remains that they had made a claim in arbitration in respect of the expenditure incurred and had also claimed damages for the termination of the contract. This being the case, it cannot be said that the assessee was not entitled for any amount from MPEB. In fact, the amount spent should have been shown as WIP which was recoverable from the MPEB on the arbitration award. The assessee company had only debited the expenditure. The assessee had not shown the said amount as expenditure towards work-in-progress. The debit of expenditure was disallowed since there was no corresponding credit either by way of contract receipts or at the least equivalent amount of WIP.
On appeal, CIT(A) was of the view, though the assessee had shown in the accounts the amount spent towards expenditure for the AYs 1999-2000, 2000-2001 as WIP for the concerned years, yet the cost to the tune of Rs. 2,57,74,199/- incurred during the previous year 2001-2002 relevant to the AY in question had not been reflected as WIP. Instead the entire cumulative expenditure incurred up to 31.3.2002 on the impugned project amounting to Rs..6,64,01,150/- inclusive of expenditure of Rs..2,57,74,199/- incurred towards the previous year relevant to the AY had been written off as expenditure on abandoned project. This according to CIT(A) was improper. The assessee was not following any specific method of accounting. In any case the non reflection of the expenditure incurred on the said project as WIP during the previous year relevant to the assessment year in question was not in accordance with the mercantile system of accounting, thus resulting in a distorted disclosure of the profit/income from the said project. Therefore, CIT(A) dismissed the appeal. On further appeal, Tribunal held that the expenditure on a particular project cannot be merely allowed as an expenditure unless there was a corresponding credit in the form of contract receipt or WIP. The assessee had claimed that since the contract had been abandoned, the entire expenditure was a deductible expenditure. Although the assessee had abandoned the contract, the fact remains that they had made a claim in the arbitration case in respect of the expenditure incurred and had also claimed damages for the termination of the contract. Thus, it cannot be said that the assessee was not entitled for any amount from MPEB. Tribunal was of the view the assessee had not met its own consistent system of accounting to be followed for rightfully becoming the claimant for loss of three years in one year without incorporating the corresponding receivables to become entitled for write off under the provisions of section 36(i)(vii) and not u/s 37(1).
Before HC, the assessee's counsel had contended that the facts are not in dispute. The assessee has spent in all a sum of Rs..6,64,01,149/- towards the expenditure under the contract. Admittedly, it has not raised any bills nor payment is made. MPEB terminated the contract illegally, invoked the bank guarantee and received back the entire amount given as deposit. The amounts spent for the assessment years 2000-2001 and 2001-2002 was shown as work-in-progress. But in the year 2002-2003 when the contract was terminated including the amount spent during the said period the entire amount was claimed as expenditure. Though the assessee has succeeded in getting an award before the arbitrator, as it is under challenge before the High Court, it has not received any money even in terms of the award. It is only when assessee gets the amount in that assessment year, it could be taxed. Therefore, all the three authorities committed a serious error in not realizing that when the assessee has not received any payments and the payment made was taken back by encashment of bank guarantee, the contract was terminated, the assessee was entitled to claim the amounts spent towards contract as expenditure in law u/s 37(1) r/w 28 of the Act and therefore, he submits that the impugned orders are unsustainable. On the other hand, the counsel for the revenue submitted unless the assessee shows in his books of accounts the expenditure incurred in terms of the contract “as work-in-progress” it is not entitled to claim the said amounts as expenditure and therefore, he submits the order passed by the authorities is strictly in accordance with law and do not call for interference.
Held that,
++ as could be seen from the orders passed by the authorities, the Assessing Authority and the Tribunal proceeded on the assumption that the Assessing Authority has not shown in its accounts the expenditure incurred as representing work-in-progress. However, the first Appellate Authority has looked into the profit and loss account and was convinced that for the first two years the expenditure is shown as “work-in-progress” but for the year in question as the expenditure was not shown as work-in-progress and the entire expenditure was shown as expenditure the assessee is not entitled to the said benefit. The statement filed by the assessee before the first Appellate court showing the year wise cost of Amarkantak project is not disputed. Therefore, it clearly shows that for the years 1999-2000, 2000-2001 the amount spent towards expenditure is shown as “work-in-progress” in the books of accounts. It is only for the previous year 2001-02 the expenditure incurred is not shown as work-in-progress. The reason is, the contract was terminated. The bank guarantees had been invoked. No doubt the claim was put forth before the arbitrator. But in the near future there was no chance of getting any amount in that particular previous year and the amount paid had been taken away. Therefore, the assessee in that previous year has shown the entire amount incurred as expenditure and sought for writing off as business expenditure. This aspect has been missed by the first Appellate Authority. It is only in the relevant year the assessee has not shown the amount spent towards expenditure as work-in-progress. It is during that year the contract was terminated and he put forth the present claim. He could not have shown it as work-in-progress. Therefore, the finding that he is not entitled to the benefit is ex-facie illegal and cannot be sustained;
++ the Punjab & Haryana High Court in the case of Laxmi Ginning and Oil mills Vs CIT, Patiala, reported in (1971) 82 ITR page 959 in some what similar situation has held that the pendency of the litigation about the loss suffered cannot militate against the fact that the loss was suffered by the assessee-firm during the accounting year in question. The amount of that loss cannot be postponed in view of the pendency of the litigation referred to above. The Madras High Court in the case of George Maijo and Co. Vs. CIT (2003) 231 ITR page.237 held when there is a direct intimate connection between the business operation of the assessee and the loss that has fallen on the assessee, though the loss was occasioned by the act done by the seller, since the assessee is not stated to be a party to the fraud committed by the foreign seller, the loss would be allowable as deduction as the loss is incidental to the business carried on by the assessee. SC in the case of Ramchandar Shivnarayan Vs. CIT (1978) 111 ITR 263 has held that it is open to the assessee to claim the loss if it has a proximate connection with its business. Similarly it was held by the Apex Court in the case of Madras Industrial Investment Corporation Limited Vs CIT 2002-TIOL-290-SC-IT-LB that, where the liability was incurred which has to be discharged in a future date it will be a liability but however a contingent liability which may have to be discharged in future cannot be considered as expenditure. Therefore, if the assessee incurs a liability and when the contract under which that liability was incurred was terminated and when no amounts under the contract or in pursuance of a claim is receivable, he is entitled to claim the said amount incurred as expenditure in implementing the contract as a set off u/s 37(1) r/w 28 of the Act. In view of the aforesaid provision, though the assessee has incurred expenditure during the assessment years 2000-2001, 2001-02 and 2002-2003 during which period he has not received any amount as against the expenditure, if and when he receives the money in pursuance of the award which is already passed, if it is upheld by the High Court, the said amount is chargeable to income tax as the income of that previous year in which he receives the said amount whether the business in respect of which the deduction has been made is in existence in that year or not. Therefore, the interest of the revenue is fully protected. All the three authorities have not applied their mind to the factual aspects of the case and have not kept in mind the statutory provisions and thus committed a serious illegality in passing the impugned orders. The orders are not sustainable. Therefore, substantial questions of law raised in this appeal are answered in favour of the assessee and against the revenue. Thus, the appeal is allowed. The impugned orders passed by the three authorities are hereby set aside. The Assessing Authority is directed to allow the aforesaid amount as set off.
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