Monday, November 3, 2014

Expenses incurred on abandoned projects are allowable under sec. 37(1)

Where assessee had incurred a liability under a contract, which was terminated and, therefore, no amount under contract or in pursuance of a claim was receivable, assessee was entitled to claim said amount as business expenditure.


a)The Madhya Pradesh Electricity Board ('MPEB') awarded a contract to assessee-company for revival of a Thermal Power Station and paid certain amount as an advance.

b)The assessee gave a bank guarantee for such amount. The MPEB arbitrarily terminated the contract and invoked the bank guarantee. The assessee debited the amount, being the cost of abandoned project, in the profit and loss account.

c)The assessing authority was of the view that the assessee had been following mercantile method of accounting, thus, the expenditure on a particular project could not be allowed as an expenditure, unless there was a corresponding credit in the form of contract receipt or work-in-progress.

d)The CIT (A) as well as the Tribunal confirmed said disallowance. The aggrieved assessee filed the instant appeal.

The High Court held in favour of assessee as under:

1)If the assessee incurred a liability when the contract was terminated and when no amounts under the contract or in pursuance of a claim were receivable, assessee was entitled to claim the said amount as expenditure for implementing the contract as a set off under section 37(1), read with section 28.

2)Though the assessee had incurred expenditure during the year in which he had not received any amount, yet when he would receive the money in pursuance of the award, the said amount would be chargeable to tax whether the business would be in existence or not in that year. Therefore, the interest of the revenue was fully protected.

3)Thus, assessee was entitled to claim the cost of abandoned project as business expenditure under Section 37(1). - ASIA POWER PROJECTS (P.) LTD. V. DY. CIT [2014] 49 428 (Karnataka)