Section 37(1) — Expenditure incurred from the date
of receiving contract till the grant of approval by RBI cannot be termed
as prior period expense — Such expense incurred is allowable as expense
incurred after the commencement of business.
Section 37(1) —
Percentage completion method – the figure of opening work-in-progress
cannot be termed as ‘prior period expense’ — Opening work in progress
needs to be taken into consideration to ascertain correct profits.
Facts:
The
assessee-company was incorporated in the Netherlands. It was awarded a
contract by the Indian Oil Corporation for Engineering Procurement and
Construction (EPC) on 24-2-1998. The approval for the setting up of the
project office in India was granted by the RBI in on 16-6-1998, but the
actual work of basic engineering had already commenced during the year
ending March 1998. During the intervening period i.e., 1-4-1998 to
16-6-1998, the assessee had incurred expenditure for the purpose of
execution of its project.
The return of income was filed
claiming a loss of Rs.3.24 crore. The assessee had further mentioned in
the notes to accounts of the Audit Report that expenses of
Rs.1,76,20,000 debited to profit and loss account were the ones incurred
by the head office before setting up project office in India. The
Assessing Officer noted that the expenditure was incurred before setting
up project in India and should be thus disallowed as prior-period
expenses.
Held:
1. The expenditure was incurred after
1-4-1998 i.e., during the year itself. Hence, it is wrong to call it as
prior-period expenditure.
2. Relying on the decision of CIT v.
Franco Tosi Ingenerate, (241 ITR 268) (Mad.), the ITAT noted that the
assessee was awarded contract on 24-2-1998. Any expense incurred after
this date relates to period after commencement of business. Hence, the
expenses would be allowable.
Facts:
The assessee was
following percentage completion method. It had an opening work in
progress of Rs.78,88,526. The assessee submitted that various expenses
were incurred during financial year 1997-98 for the purpose of bidding
for the aforesaid contract. The above-mentioned amount also included
various expenses incurred for basic engineering during the period ending
31-3-1998. The AO observed that the assessee had not filed any return
of income for the A.Y. 1998-99. It was therefore disallowed on the
ground that they were prior-period expenses.
Held:
1.
It is wrong to disallow the first year’s brought forward expenditure in
the second year by branding it as ‘prior-period expenditure’. The
profit cannot be finally determined unless the entire expense is
considered.
2. If the figure of the opening work-in-progress is
not taken into consideration, then the resultant figure of the profit
will be fully distorted. If the income and expenditure of the current
year is only considered, then there will arise difficulty in computing
the ultimate profit on completion of the project.
3. As regards
the requirement of filing return of income, it gets activated only when
there is any income chargeable to tax. As per AS-7, no profit is to be
recognised unless the work has reached a reasonable extent. As the
assessee had completed a very small percentage of the total work in the
preceding year, which is far below the prescribed percentage, there was
no requirement for it to offer any income for taxation in that year.
