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2009 (2) TMI 507 - AT - Income TaxDisallowance of “Provision for foreseeable loss” - Claim was made as per Accounting Standard 7 relating to Construction Contracts - Method of accounting - difference in the figures of cost incurred shown at the time of assessment proceedings and shown at the time of hearing of the appeal - AO, disallowed the assessee’s claim observing that this being only a provision made on estimated basis cannot be allowed and loss actually incurred is to be allowed in the year in which it had taken place under the Income-tax Act - CIT held that the loss was bogus loss as the assessee had not been able to prove the genuineness in view of variation in different figures. HELD THAT:- In view of mandatory requirements of AS-7, change in the method of valuation of work-in-progress was a bona fide, particularly in view of the qualification made in this regard by statutory auditors as well as by Comptroller & Auditor General of India. It is not disputed that the department in earlier years has allowed the loss on estimated basis having regard to the expenditure actually incurred in various years. Therefore, in principle, it is not disputed that the estimated loss under the present and circumstances is an allowable deduction. However, merely because the change in method of accounting is bona fide, it would not lead to the inference that the income is also deducible properly under the Income-tax Act. This aspect is very evident from 1st proviso to section 145 as it stood prior to amendment 1995 with effect from 1-4-1997 The matching principle is of relevance where income and expenditure, both are to be considered together. However, in the present case, the effect of valuation of WIP will automatically affect the profits of subsequent years accordingly. We, accordingly, do not find any reason for not accepting in principle the assessee’s claim as being allowable. However, in view of discrepancies pointed out by CIT(A) for correct estimation of loss, we restore the matter to the file of AO to examine the correctness of amount claimed. This ground is, accordingly, treated as allowed for statistical purposes. Disallowance on provision for leave encashment - HELD THAT:- Assessee-company, submitted before AO, stated that the provision for leave salary encashment was on accrual basis and was in accordance with Accounting Standard 15 viz., "accounting for retirement benefits in Financial Statements for employers" issued by ICAI. The AO has not brought on record any facts from which it could be inferred that assessee had not complied with the requirements of AS-15. We, therefore, do not find any basis for not applying the ratio laid down in the case of Bharat Earth Movers[2000 (8) TMI 4 - SUPREME COURT], held that the provision made by the assessee-company for meeting the liability incurred by it under the leave encashment scheme proportionate with the entitlement earned by the employees of the company, inclusive of the officers and staff subject to the ceiling on accumulation as applicable on the relevant date, was entitled to deduction out of the gross receipts of the accounting year during which, the provision is made for the liability. It was further held that the liability was not a contingent liability. Respectfully following the decision of the Hon’ble Supreme Court in the case, we direct AO to allow the deduction as claimed by the assessee in respect of provision for leave encashment. This ground is, accordingly, allowed.
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