INCOME TAX ACT, 1961

Sedction 37(1)

Business expenditure - Allowability - Provision made for cost incurred on completed contracts -

Assessee-company engaged in supply of processes, designing, construction and commissioning of complete plants for chemicals, fertilizers, petrochemicals, refining and other related industries claimed deduction of provision made for cost incurred on completed contracts. AO disallowed deduction on the reasoning that provision was not made on a scientific basis and estimation of same was not backed by supporting documentary evidence. Also, a major portion of provision was reversed in the subsequent years. Held: Provision for costs on completed contracts made by assessee was based on identified and ascertained present liabilities on the basis of technical assessments and projections of project managers, who were experts in their field. Apart from that, practice of providing for all known liabilities on an estimate basis by assessee was in accordance with Accounting Standard-1 issued under section 145 vide CBDT Notification No. S.O. 69(E), dated 25-1-1996, as per which provisions should be made for all known liabilities and losses even though amount cannot be determined with certainty and represents only a best estimate in the light of available information. Also, provision made by assessee was in conformity with Accounting Standard-7 issued by the ICAI. Further, the assessee consistently by way of a regular method of accounting had been making such provision for costs on completed contracts, which would be reviewed by it each and every year and were immediately written back if the same were not required. Accordingly, disallowance of provision for costs incurred on completed contracts made by AO was not justified especially when it was not the case of AO that reversal of provision in subsequent year had not been offered to tax by the assessee.

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2007-08

INCOME TAX ACT, 1961

Section 37(1)

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