TMI Blog2010 (11) TMI 90X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of law were proposed in this appeal, the appeal was admitted on the following substantial questions of law: "(i) Whether ITAT was correct in law in allowing provision made by the assessee for future losses that may occur on account of different project works undertaken by it? (ii) Whether ITAT was correct in law in holding that the provision for losses was allowable as the assessee was following completed contract method of accounting?" 2. The facts germane to the aforesaid questions need only be noted and the same are capitulated hereunder. 3. This appeal pertains to the Assessment Year 2000-01. For this Assessment Year, the respondent assessee had filed the return declaring a loss @ ₹ 12.58 Crores. During the assessment proceedings, the Assessing Officer (AO) noticed that the assessee had debited a sum of ₹ 139 lacs to the Profit and Loss Account as provision for losses, which occur for different projects undertaken by it. These projects had been substantially completed during the said year and revenue gain had also been recognized during the year. The AO was of the view that the provision had been made against a liability, which may arise in future due to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... those projects. While doing so in that particular year, the provision is also made for foreseeable losses in respect of those projects which have been substantially completed. Even the revenue gain is recognized in that year. Therefore, the relevant previous year, in respect of projects completed/substantially completed in that year, income in respect thereof was credited to the profit and loss account, taking into account unbilled revenue as well. While recognizing the profit/loss in respect of the said projects, the respondent assessee made provision for expenses to be incurred upto the stage of completion to the extent of ₹ 1.39 Crores. 7. Learned counsel for the assessee explained that the estimates of the expenses to be incurred up to the stage of completion was based on the consistent accounting policy. This was so stated under Clause (b)(iv) of Significant Accounting Policies forming part of "Notes to Accounts and Significant Accounting Policies", is as under: "Revenue Recognition .. iv) Profit on project related activities are recognized on completion or on substantial completion of the project. Provision is, however, made for foreseeable losses, if any, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Commissioner of Income Tax [37 ITR 66 (SC)]; (ii) Shri Sajjan Mills Ltd. Vs. Commissioner of Income Tax [156 ITR 585 (SC)]; (iii) Commissioner of Income Tax Vs. Lachhman Das Mathura Das [124 ITR 411(All)], (iv) Commissioner of Income Tax Vs. Seshasayee Industries Ltd. [242 ITR 691 (Mad)]. 10. Mr. Ajay Vohra, learned counsel appearing for the assessee, countered the aforesaid submissions of the learned counsel for the Revenue. He supported the decision of the Tribunal by articulating his submission with finesse, in the following manner: 1) There was a consistent and regular method accounting followed by the assessee, which was recognized and accepted by the Income Tax Department also for all previous years. It was argued that under Section 28(i) of the Act, profits and gains of business which was carried on by the assessee at any time during the previous year are chargeable under the head "profit and gains of business or profession". For calculating these profits and gains of business, Section 145 of the Act provided the method of accounting, as per which such profits and gains were computed in cash or mercantile system of accounting regularly employed by the assessee. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essions "going concern", "accrual" and "consistency" have been defined in Para 10 which reads as under: "10. The following have been generally accepted as fundamental accounting assumptions:- a. Going concern. The enterprise is normally viewed as a going concern, that is, as continuing in operation for the foreseeable future. It is assumed that the enterprise has neither the intention nor the necessity of liquidation or of curtailing materially the sale of the operations. b. Consistency. It is assumed that accounting policies are consistent from one period to another. c. Accrual refers to the assumption that revenues and costs are accrued, that is, recognized as they are earned or incurred (and not as money is received or paid) and recorded in the financial statements of the periods to which they relate" Para 17 of the said Accounting Standard further provides that selection and application of accounting policy must be governed, inter alia, by "prudence", which has been explained in the following terms: "(i) Prudence: Provisions should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best esti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h is consistent with the Accounting Standards and these accounting standards also lay down the norms indicating the particular point of time when the provisions for all known liabilities and losses has to be made, the making of such a provision by the assessee appears to be justified moreso when the assessee had recognized gain as well on such project during this year itself. This appears to be in consonance with principle of matching cost and revenue as well. However, in the projected scenario of this case after taking stock of the entire situation, we are of the opinion that it is not necessary to conclusively answer the aforesaid questions formulated. It is because of the reason that we find that the entire exercise is revenue neutral. It may be pointed out that it is a matter of record that against the provision of ₹ 139 lacs, the assessee had to actually incur expenditure of ₹ 218.03 lacs, i.e., more than the provision made. It is undisputed that the expenditure incurred by the assessee on the project is admissible deduction. The only dispute that the Revenue seeks to raise is regarding the year of allowability of expenditure. Considering that the assessee is a com ..... X X X X Extracts X X X X X X X X Extracts X X X X
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