HC slams AO for rejecting claim for deduction of provision by treating it as contingent liability
a) Assessee filed its return claiming deduction of provision made for project expenses in respect of work carried out by contractor. Assessing Officer (AO) rejected claim for deduction taking a view that provision for expenses made by assessee was merely a contingent liability.
b) On appeal, CIT(A) had allowed claim of assessee which was duly allowed by ITAT as well. Aggrieved-revenue filed the instant appeal before the High Court.
The High Court held in favour of assessee as under:
1) The assessee had pointed out that the provision had been made in view of the work done by the contractor in its on-going project worth Rs. 12 crore. The assessee stated that though the work had been completed by the contractor, but bills were not raised in wake of some dispute with the contractor for the quality of construction. The liability in respect of work already done had been determined on the basis of contract/prevalent rates and past experience, asserted the assessee.
2) In view of the facts obtaining in the instant case, as long as as work done was not in dispute, the assessee was justified in making estimate of work already done and made a provision in this regard.
3) Further, it was found that amount which had been debited in profit and loss account as provision for project expenses had duly been credited in closing stock. Thus,, it had no impact on profit. It was also found that assessee had deducted TDS on amount of provision made, hence, it could not be said that liability was a contingent liability.
4) Therefore, no substantial question of law arose from Tribunal’s order allowing assessee’s claim for deduction.