My developer client has debited a provision for loss on onerous sale contracts. The Assessing Officer has disallowed it under s.36(1)(xviii) and s.40A(13). What is the argument?
The argument is to show that the amount is not an expected loss at all but cost that has already accrued against revenue already recognised. The Tribunal held that from AY 2017-18 the disallowance rests on three connected provisions — s.36(1)(xviii), which permits a marked to market or other expected loss only if computed in accordance with the ICDS; s.40A(13), which disallows any such loss except to the extent allowable under s.36(1)(xviii); and para 4(ii) of ICDS I, which bars recognition of expected losses unless another ICDS permits it — and that ICDS X does not recognise provisions for onerous executory contracts. It then restored the issue to the Assessing Officer to verify the assessee's project-wise computation, directing deletion if the claim is made out and, if not, determination of how much is an expected loss hit by s.40A(13).
Decided by the ITAT (Prashant Maharishi (Vice-President) and Keshav Dubey (Judicial Member)) on 2026-07-14, reported as ITA Nos.2865 and 2866/Bang/2025, Assessment Years 2017-18 and 2018-19 (Income Tax Appellate Tribunal, Bangalore). It bears on section 36(1)(xviii), section 40A(13), section 145, section 145(2), section 143(3), section ICDS I, section ICDS X of the Income Tax Act 1961, in Deductions & Disallowances, Assessment & Scrutiny and How Tax Law Is Read matters.
This is the clearest working through of the Finance Act 2018 marked-to-market provisions that the library has, and it shows exactly where the case is won or lost. The assessee argued that s.36(1)(xviii) was enacted to restore the deductibility of expected losses that the ICDS had taken away, that reading the ICDS as a blanket prohibition makes the section otiose, and that CBDT Circular No. 10/2017 answer 12 shows no ICDS governs real estate developers. The Tribunal rejected the last point at para 50: the circular states only that no specific ICDS has been notified for real estate developers and that the relevant provisions of the Act and the ICDS shall apply as may be applicable — it does not exempt developers from the ICDS framework, and ICDS I applies to all assessees computing business income on the mercantile system. What saved the claim from outright disallowance was the recharacterisation: if the amount is the cost still to be recognised against revenue already recognised under the percentage of completion method, it is not an expected loss and s.40A(13) does not reach it. The Tribunal also recorded that the lower authorities had never called for or examined the project-wise working, and that the assessee had not volunteered it.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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The assessee is a real estate developer maintaining its books on the percentage completion method. For AY 2017-18 it debited Rs.119,56,53,057 as a provision for losses on onerous contracts — sale contracts where the estimated total cost had come to exceed the expected revenue — made, it said, in accordance with AS 29 and Ind AS 37. The Assessing Officer held that the Income Computation and Disclosure Standards notified in September 2016 became applicable from AY 2017-18, that the Finance Act 2018 had introduced s.43AA and s.43CB, substituted s.145A and inserted s.36(1)(xviii) dealing with marked to market losses, and that s.40A(13) disallows such losses except as allowable under s.36(1)(xviii); he concluded that the principle of prudence had been expressly overridden by the Finance Act 2018 and disallowed the provision. The Commissioner (Appeals) confirmed the disallowance, holding that ICDS III does not allow recognition of foreseeable or expected losses as contract cost until actually incurred and that ICDS X does not permit creation of a provision for onerous contracts. Before the Tribunal the assessee argued that s.36(1)(xviii) was enacted to restore deductibility, that reading the ICDS as a blanket prohibition would render it otiose, that Circular No. 10/2017 answer 12 shows no ICDS governs real estate developers, and that the provision was project-wise and based on reliable data. The Departmental Representative relied on s.36(1)(xviii) and s.40A(13) and on para 102 of Chamber of Tax Consultants, submitting that after the retrospective amendments that decision does not assist the assessee. When the bench asked how the figure was computed, the assessee produced project-wise charts for five named projects and claimed that a further cost of Rs.248,98,49,648 remained to be incurred in relation to revenue already recognised. For AY 2018-19 an identical disallowance of Rs.36,20,60,000 was made.
Both appeals were partly allowed; ITA No.2865/Bang/2025 for AY 2017-18 was partly allowed for statistical purposes (paras 69 and 112). On this issue the grounds were restored to the file of the Assessing Officer and allowed as indicated (para 67). The assessee was directed to produce complete project-wise and contract-wise details, including cost already incurred and recognised in the books and cost required to be recognised for each unit; the Assessing Officer was directed to examine the claim that a further cost of Rs.248,98,49,648 is required to be incurred in relation to revenue already recognised; if on verification the claim is found correct the disallowance of Rs.119,56,53,057 shall be deleted; and if he is not satisfied with the project-wise computation or the quantum, he shall determine the expenditure allowable and identify whether any part of the claim represents an expected loss hit by s.40A(13), computing the disallowance accordingly (para 66).
The Tribunal held that the disallowance rests on three connected provisions applicable from AY 2017-18: s.36(1)(xviii), which permits deduction of any marked to market loss or other expected loss only if computed in accordance with the ICDS notified under s.145(2); s.40A(13), which disallows any marked to market loss or other expected loss except to the extent allowable under s.36(1)(xviii); and para 4(ii) of ICDS I, which provides that expected losses shall not be recognised unless their recognition is permitted by another ICDS (para 44). It rejected the argument built on Circular No. 10/2017: the circular states that no specific ICDS has been notified for real estate developers and that the relevant provisions of the Act and the ICDS shall apply to such transactions as may be applicable, and does not exempt real estate developers from the ICDS framework altogether; ICDS I, which applies to all assessees computing business income under the mercantile system, prohibits recognition of expected losses unless another ICDS permits such recognition, and ICDS X does not recognise provisions for onerous executory contracts, applying to all business without any exception (para 50). On the facts it found that the lower authorities had neither called for the project-wise charts nor examined the basis of the provision, that the assessee had not voluntarily placed the complete working before them, and that the amount was therefore neither properly characterised nor quantified and no verification had been undertaken (para 62); it accordingly set the matter up for verification with the directions at para 66.
ICDS I, which applies to all assesses computing business income under the mercantile system, prohibits recognition of expected losses unless another ICDS permits such recognition; ICDS X does not recognize provisions for onerous executory contracts. It applies to all business without any exception.
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Handle my notice → Ask a CA on WhatsAppThe argument is to show that the amount is not an expected loss at all but cost that has already accrued against revenue already recognised. The Tribunal held that from AY 2017-18 the disallowance rests on three connected provisions — s.36(1)(xviii), which permits a marked to market or other expected loss only if computed in accordance with the ICDS; s.40A(13), which disallows any such loss except to the extent allowable under s.36(1)(xviii); and para 4(ii) of ICDS I, which bars recognition of expected losses unless another ICDS permits it — and that ICDS X does not recognise provisions for onerous executory contracts. It then restored the issue to the Assessing Officer to verify the assessee's project-wise computation, directing deletion if the claim is made out and, if not, determination of how much is an expected loss hit by s.40A(13). This was decided by the ITAT (Prashant Maharishi (Vice-President) and Keshav Dubey (Judicial Member)) and bears on section 36(1)(xviii), section 40A(13), section 145, section 145(2), section 143(3), section ICDS I, section ICDS X of the Income Tax Act 1961. It is reported as ITA Nos.2865 and 2866/Bang/2025, Assessment Years 2017-18 and 2018-19 (Income Tax Appellate Tribunal, Bangalore). This is the clearest working through of the Finance Act 2018 marked-to-market provisions that the library has, and it shows exactly where the case is won or lost. The assessee argued that s.36(1)(xviii) was enacted to restore the deductibility of expected losses that the ICDS had taken away, that reading the ICDS as a blanket prohibition makes the section otiose, and that CBDT Circular No. 10/2017 answer 12 shows no ICDS governs real estate developers. The Tribunal rejected the last point at para 50: the circular states only that no specific ICDS has been notified for real estate developers and that the relevant provisions of the Act and the ICDS shall apply as may be applicable — it does not exempt developers from the ICDS framework, and ICDS I applies to all assessees computing business income on the mercantile system. What saved the claim from outright disallowance was the recharacterisation: if the amount is the cost still to be recognised against revenue already recognised under the percentage of completion method, it is not an expected loss and s.40A(13) does not reach it. The Tribunal also recorded that the lower authorities had never called for or examined the project-wise working, and that the assessee had not volunteered it. If it applies to you, the first step is this: Do not argue prudence. From AY 2017-18 s.40A(13) is a flat bar and the only gateway is s.36(1)(xviii), which requires the loss to be computed in accordance with the ICDS.
The assessee is a real estate developer maintaining its books on the percentage completion method. For AY 2017-18 it debited Rs.119,56,53,057 as a provision for losses on onerous contracts — sale contracts where the estimated total cost had come to exceed the expected revenue — made, it said, in accordance with AS 29 and Ind AS 37. The Assessing Officer held that the Income Computation and Disclosure Standards notified in September 2016 became applicable from AY 2017-18, that the Finance Act 2018 had introduced s.43AA and s.43CB, substituted s.145A and inserted s.36(1)(xviii) dealing with marked to market losses, and that s.40A(13) disallows such losses except as allowable under s.36(1)(xviii); he concluded that the principle of prudence had been expressly overridden by the Finance Act 2018 and disallowed the provision. The Commissioner (Appeals) confirmed the disallowance, holding that ICDS III does not allow recognition of foreseeable or expected losses as contract cost until actually incurred and that ICDS X does not permit creation of a provision for onerous contracts. Before the Tribunal the assessee argued that s.36(1)(xviii) was enacted to restore deductibility, that reading the ICDS as a blanket prohibition would render it otiose, that Circular No. 10/2017 answer 12 shows no ICDS governs real estate developers, and that the provision was project-wise and based on reliable data. The Departmental Representative relied on s.36(1)(xviii) and s.40A(13) and on para 102 of Chamber of Tax Consultants, submitting that after the retrospective amendments that decision does not assist the assessee. When the bench asked how the figure was computed, the assessee produced project-wise charts for five named projects and claimed that a further cost of Rs.248,98,49,648 remained to be incurred in relation to revenue already recognised. For AY 2018-19 an identical disallowance of Rs.36,20,60,000 was made. The matter was decided on 2026-07-14 by the ITAT (Prashant Maharishi (Vice-President) and Keshav Dubey (Judicial Member)). On those facts the ITAT held as follows. Both appeals were partly allowed; ITA No.2865/Bang/2025 for AY 2017-18 was partly allowed for statistical purposes (paras 69 and 112). On this issue the grounds were restored to the file of the Assessing Officer and allowed as indicated (para 67). The assessee was directed to produce complete project-wise and contract-wise details, including cost already incurred and recognised in the books and cost required to be recognised for each unit; the Assessing Officer was directed to examine the claim that a further cost of Rs.248,98,49,648 is required to be incurred in relation to revenue already recognised; if on verification the claim is found correct the disallowance of Rs.119,56,53,057 shall be deleted; and if he is not satisfied with the project-wise computation or the quantum, he shall determine the expenditure allowable and identify whether any part of the claim represents an expected loss hit by s.40A(13), computing the disallowance accordingly (para 66).
The Tribunal held that the disallowance rests on three connected provisions applicable from AY 2017-18: s.36(1)(xviii), which permits deduction of any marked to market loss or other expected loss only if computed in accordance with the ICDS notified under s.145(2); s.40A(13), which disallows any marked to market loss or other expected loss except to the extent allowable under s.36(1)(xviii); and para 4(ii) of ICDS I, which provides that expected losses shall not be recognised unless their recognition is permitted by another ICDS (para 44). It rejected the argument built on Circular No. 10/2017: the circular states that no specific ICDS has been notified for real estate developers and that the relevant provisions of the Act and the ICDS shall apply to such transactions as may be applicable, and does not exempt real estate developers from the ICDS framework altogether; ICDS I, which applies to all assessees computing business income under the mercantile system, prohibits recognition of expected losses unless another ICDS permits such recognition, and ICDS X does not recognise provisions for onerous executory contracts, applying to all business without any exception (para 50). On the facts it found that the lower authorities had neither called for the project-wise charts nor examined the basis of the provision, that the assessee had not voluntarily placed the complete working before them, and that the amount was therefore neither properly characterised nor quantified and no verification had been undertaken (para 62); it accordingly set the matter up for verification with the directions at para 66. In the words reproduced by the source cited on this page: "ICDS I, which applies to all assesses computing business income under the mercantile system, prohibits recognition of expected losses unless another ICDS permits such recognition; ICDS X does not recognize provisions for onerous executory contracts. It applies to all business without any exception."
It was decided by the ITAT on 2026-07-14 and is reported as ITA Nos.2865 and 2866/Bang/2025, Assessment Years 2017-18 and 2018-19 (Income Tax Appellate Tribunal, Bangalore). Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 36(1)(xviii), section 40A(13), section 145, section 145(2), section 143(3), section ICDS I, section ICDS X, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. Both appeals were partly allowed; ITA No.2865/Bang/2025 for AY 2017-18 was partly allowed for statistical purposes (paras 69 and 112). On this issue the grounds were restored to the file of the Assessing Officer and allowed as indicated (para 67). The assessee was directed to produce complete project-wise and contract-wise details, including cost already incurred and recognised in the books and cost required to be recognised for each unit; the Assessing Officer was directed to examine the claim that a further cost of Rs.248,98,49,648 is required to be incurred in relation to revenue already recognised; if on verification the claim is found correct the disallowance of Rs.119,56,53,057 shall be deleted; and if he is not satisfied with the project-wise computation or the quantum, he shall determine the expenditure allowable and identify whether any part of the claim represents an expected loss hit by s.40A(13), computing the disallowance accordingly (para 66). It arises in Deductions & Disallowances, Assessment & Scrutiny and How Tax Law Is Read matters, on section 36(1)(xviii), section 40A(13), section 145, section 145(2), section 143(3), section ICDS I, section ICDS X of the Income Tax Act 1961, and was decided by Prashant Maharishi (Vice-President) and Keshav Dubey (Judicial Member). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Recharacterise where you honestly can: produce project-wise and contract-wise workings showing cost already incurred and recognised, and cost still to be recognised against revenue already recognised, so that the debit is accrued cost and not an anticipated loss. Put the working before the Assessing Officer, not for the first time before the Tribunal; the failure to do so is what cost the assessee a decision on the merits here. Do not rely on Circular No. 10/2017 answer 12 as an exemption for real estate developers — this bench read it the other way, and ICDS I applies to all business without exception. Check ICDS X before claiming any provision: it permits a provision only where there is a present obligation from a past event, an outflow of resources to settle it is reasonably certain, and the amount can be reasonably estimated.
Validity check could not be completed. Validity check could not be completed. The order is dated 14 July 2026 and no later treatment could exist or was searched for; I did not check whether an appeal has been filed. Paragraphs 45 to 49, 51 to 61 and 63 to 65 of the order could not be retrieved, so the Tribunal's full reasoning between para 44 and para 66 has not been read. The statutory basis — s.36(1)(xviii) and s.40A(13), inserted by ss.10 and 11 of the Finance Act 2018 with retrospective effect from 1 April 2017 — was independently verified on the text of the Finance Act 2018. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
This is a common order in two appeals, ITA No.2865/Bang/2025 for AY 2017-18 and ITA No.2866/Bang/2025 for AY 2018-19; both were partly allowed (paras 69, 111 and 112) and the order runs to 112 paragraphs. The onerous contract provision is Rs.119,56,53,057 in AY 2017-18 and Rs.36,20,60,000 in AY 2018-19. The paragraphs relied on here are 44, 50, 62, 66 and 67 for AY 2017-18. Paragraphs 20 to 23 and 36 to 39 set out the parties' submissions, not the Tribunal's conclusions, and paragraph 21 records the Assessing Officer's reasoning; none of them should be cited as the Tribunal's own view. I could NOT retrieve paragraphs 45 to 49 and 51 to 61 and 63 to 65, so the full chain of the Tribunal's reasoning between para 44 and para 66 has not been read; what is stated here is confined to paras 44, 50, 62 and 66. The order records the appellate order appealed against for AY 2018-19 as passed by the 'Principal Commissioner of Income Tax (Appeals)-11, Bangalore' at para 70 and by 'the learned CIT(A)' elsewhere. The date of the order, 14 July 2026, is within three months of the date this entry was written. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Both appeals were partly allowed; ITA No.2865/Bang/2025 for AY 2017-18 was partly allowed for statistical purposes (paras 69 and 112). On this issue the grounds were restored to the file of the Assessing Officer and allowed as indicated (para 67). The assessee was directed to produce complete project-wise and contract-wise details, including cost already incurred and recognised in the books and cost required to be recognised for each unit; the Assessing Officer was directed to examine the claim that a further cost of Rs.248,98,49,648 is required to be incurred in relation to revenue already recognised; if on verification the claim is found correct the disallowance of Rs.119,56,53,057 shall be deleted; and if he is not satisfied with the project-wise computation or the quantum, he shall determine the expenditure allowable and identify whether any part of the claim represents an expected loss hit by s.40A(13), computing the disallowance accordingly (para 66).
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