TMI Blog2009 (2) TMI 507X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia. 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 purp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment year 1996-97. "1. Ld. CIT(A) erred in confirming the addition of Rs. 491.48 lakhs. The Ld. CIT(A) erred in confirming that there was undervaluation of work-in-progress resulting in understatement of profits. Ld. CIT(A) failed to appreciate that the difference in valuation of Rs. 491.48 lakhs had arose as the appellants had valued the work-in-progress as per AS 7 issued by the ICAI. 2. The Ld. CIT(A) erred in not allowing the deduction of Rs. 26.55 lakhs towards the decrease in the value of the surplus material left over on completion of projects not included in inventory. This was added to the income in the earlier assessment years for increase in the value of the surplus materials." 3. The assessee had filed its return declaring total income at Rs. Nil . The assessment was completed under section 143(3) at a total income of Rs. 12,16,82,810, inter alia, making addition on account of decrease in value of work-in-progress at Rs. 491.48 lakhs. Ld. CIT(A) confirmed the addition. Being aggrieved with order of Ld. CIT(A), the assessee is in appeal before us. 4. Brief facts, apropos Ground No. 1, are that Assessing Officer noticed from Sl. No. 23 notes to account tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essitated the change in the valuation of work-in-progress. Information in the following proforma may be furnished in respect of fixed price construction contract. Copy of contract also may be enclosed : Value of contract Billing done Expenditure incurred Work-in- progress shown as By 31-3-1995 31-3-1996 as on 31-3-1995 31-3-1996 on 31-3-1995 31-3-1996" After considering the assessee s submissions, the Assessing Officer observed that assessee s claim was not acceptable as the assessee had not furnished any cogent reasons for change in the valuation of these contracts. He further observed that the only reason given by the assessee was that it was felt necessary to review the company s existing accounting policy as per Accounting Standard-No. 7 (AS-7) of the Institute of Chartered Accountants of India (ICAI). He further observed that as per changed method of accounting, in case of contracts where loss is anticipated, the entire loss was reckoned based on estimated realizable values and estimated cost of contracts. The assessee took the entire loss in the very first year. However, all along in the prev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e held as correct loss. He further observed that there was no cost escalation clause incorporated in the contract agreement and hence, the loss had been created against the provisions of the AS-7. He noticed similar discrepancy in regard to contract with Indian Oil Co. Ltd., entered on 11-12-1995 and also with regard to agreement with NEPC Micon Ltd. After considering the variation in figures furnished before the Assessing Officer and before him, he confirmed the Assessing Officer s action for the reasons given in para 7 of his order in which, he, inter alia, observed that the loss was not allowable to the assessee as the assessee was not entitled to claim any anticipatory loss in view of the decision of the Hon ble Bombay High Court in the case of CIT v. Kamani Metals Alloys Ltd. [1994] 208 ITR 1017-1022 . Further, the loss being notional one, was also not allowable in view of the decision of the Hon ble Orissa High Court in the case of Tripty Drinks (P.) Ltd. v. CIT [1978] 112 ITR 721. He further observed that the loss was bogus loss as the assessee had not been able to prove the genuineness in view of variation in different figures. 6. Ld. Counsel for the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rary to the Accounting Standard No. 7 published by the Institute of Chartered Accountants of India to consider for recognition of the entire loss on a project ab initio. He, therefore, requested the Director (Finance) to draft a board paper for the approval of the Directors, for adopting the Accounting Standard No. 7." Ld. Counsel for the assessee submitted that in view of mandatory requirements for implementing AS-7, the assessee company implemented AS-7 in financial year 1995-96 and it incorporated following note in its accounts: "The company has adopted the Accounting policy as contained in Accounting Standard No. 7 issued by Institute of Chartered Accountants of India for the valuation of work-in-progress in case of fixed price construction contracts, whereby in case of contracts where loss is anticipated the entire loss is reckoned based on estimated realizable value and estimated cost of construction. In the earlier years, the estimated loss was reckoned on a pro rata basis with reference to the expenditure incurred vis-a-vis the estimated total cost for completion. As a result of this change, the profit for the year and work-in-progress as at the year end is lower ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een quantified is not clear. He further submitted that the assessee s claim is contrary to the well accepted matching principle of accounting. In this regard, he referred to the decision of the Hon ble Bombay High Court in the case of Taparia Tools Ltd. v. Jt. CIT [2003] 260 ITR 102, wherein, this principle had been recognized by the Hon ble Bombay High Court. 8. In the rejoinder, Ld. Counsel referred to the decision of the Hon ble Bombay High Court in the case of CIT v. Bhor Industries Ltd. [2003] 264 ITR 180, wherein, payment under Voluntary Retirement Scheme was allowed in its entirety in the year in which it was incurred though in the books it was spread over a period of 60 months. 9. We have considered the rival submissions and perused the record of the case. The short dispute is whether the anticipated loss on the valuation of fixed price contract, in view of the mandatory requirements of AS-7, is to be allowed in the year in which the contract has been entered into or it is to be spread over a period of contract, as was done by the assessee in earlier years. As far as the change in the method of valuation of work-in-progress is concerned, it cannot be dispute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sent context because if the loss has been properly estimated in the year in which the contract has been entered into then it has to be allowed in that very year and cannot be spread over the period of contract. 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 Ld. CIT(A) for correct estimation of loss, we restore the matter to the file of the Assessing Officer to examine the correctness of amount claimed. This ground is, accordingly, treated as allowed for statistical purposes. 10. Brief facts apropos Ground No. 2 are that the assessee vide its letter dated 20-1-1998 filed during assessment proceedings, had claimed deduction Rs. 26.55 lakhs towards decrease in the value of surplus materials left over on completion of projects not included in the inventory. This was added to the income in the earlier assessment years for increase in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ings that these amounts actually fulfilled the above test laid down by the Hon ble Supreme Court. 16. We have considered the rival submissions and perused the record of the case. Assessee-company vide its letter dated 25-11-1999, submitted before Assessing Officer, 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 State- ments for employers" issued by the Institute of Chartered Accountants of India. The Assessing Officer 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 ( supra ), wherein, it has been 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 receip ..... X X X X Extracts X X X X X X X X Extracts X X X X
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