Whether Provision for Loss and Provision for Gratuity to be Considered in MAT Calculation?

Fact of the Case:

1. Assessee was operating on the contract base revenue recognition policy and follows the compliances required as per AS-7.
2. Assessee used to analyse the total cost incurred and total cost to be incurred at each year end and if any excess cost has been estimated to incurred then he used to make the provision for the same as “Provision for loss”
3. During the assessment proceedings, the AO has made an addition of “Provision for loss” and “Provision for Gratuity” created by assessee, to the income of assessing under section 115J(1A)(c), for the computation of tax liability under MAT provisions.
4. The Tribunal confirmed the additions made by the assessing authority under section 115J by adding back the foreseeable loss, which was an ascertainable liability and was reflected in the profit and loss account accepted by the Registrar of companies.

Held by the Hon’ble HIGH COURT OF KERALA:

1. Reference to the accounting standards, there is a high degree of uncertainty in determining the future loss of a running contract and final loss amount can be calculated at the time of completion of contract.

2. Further High court clarified that, clause (c) of Section 115J(1A) permits the Assessing Officer to add back the provisions made by the assessee, so as to reflect the correct profits and to determine the income as per Section 115J. Income which is not reflected for reasons only of provisions made with respect to contingent liabilities, are also brought to tax.
3. On the issue of “Provision for Loss” being added back for the purpose of determining the income under Section 115J, high court answered the same in favour of the Revenue and against the assessee.
4. For “provision for gratuity”. By clarifying the meaning of Gratuity, the high court stated that it is a component of superannuation benefits of an employee relatable to each year of service, on completion of which it accrues to the employee for which a valid provision, so it is falling outside ambit of Section 115J(1A)(C), answered in favour of the assessee and against the Revenue.

Conclusion:

The aid judgement shall give the better clarification over the inclusion or exclusion of certain provisions in the income while calculating the “MAT Income” and shall gives relief to the Indian taxpayer by allowing the provision for gratuity as a deductible provision for “MAT Income”

[2019] 111 taxmann.com 350 (Kerala)