TMI Blog2009 (5) TMI 601X X X X Extracts X X X X X X X X Extracts X X X X ..... hat:- deduction under Chapter VIA are to be allowed only on net income and not on gross income. The net income is to be computed after giving full effect to the provisions of sections 80AB, 32, 70, 71 & 72 of the Act. decided against Assessee. - IT APPEAL NOS. 7017 AND 7018 (MUM.) OF 2006, 335 AND 336 (MUM.) OF 2007 - - - Dated:- 26-5-2009 - N.V. VASUDEVAN, MEHAR SINGH, JJ. Sunil M. Lala and Aliasger Rampurwala for the Appellant. Ajay for the Respondent. ORDER Mehar Singh, Accountant Member. The assessee as well as revenue are in cross appeals against the separate orders of ld. CIT(A) VIII, Mumbai dated 26/10/2006 31/10/2006, for the assessment years 2002-03 and 2003-04 respectively, passed under section 250(6) of the Income-tax Act, 1961. The grounds of appeal raised by the assessee as well as revenue for both the years are reproduced hereunder:- Grounds Assessee's Appeal A.Y. 2002-03: "1. On the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals) [CIT(A)] has legally erred in confirming the disallowance of the foreseeable fosses of Rs. 18,73,568. It is prayed that the learned Assessing Officer (AO) be direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .O. examined the percentage completion method followed by the assessee and concluded that provision for such future losses could not be allowed as contemplated in the decision of the Apex Court, in the case of "Tuticorin Alkali Chemicals Fertilizers Ltd. v. CIT [1997] 227 ITR 172/93 Taxman 502. The A.O. also observed that it does not represent actual loss and under mercantile system of accountancy, what is deductible is only liability existing and not the liability which will come into existence, when certain events take place. 3.1 Before the ld. CIT(A), the assessee contended that the system of accounting followed by it had been accepted by the Hon'ble Tribunal in ITA No. 9701/Bom./91 dated 10/8/2001. The ld. CIT(A), observed that a careful perusal shows that the ld. CIT(A) had in the year 2000-01, taken into account a particular contract which was completed by 90.92%. It was under such circumstances that he concluded and stipulated that the loss cannot be allowed. On perusal of the order of Hon'ble Tribunal, it is clear that what was before the Hon'ble Tribunal was whether the accounting system followed could be challenged by the A.O. and whether section 145 of the IT Act wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matter, we are of the view that having reared to the factual aspects of the matter, which have been very elaborately presented before the CIT(A) and accepted by him and which have not been challenged before us on behalf of the Revenue, there is no justification for disturbing the findings, reasons and conclusion of the CIT(A). We therefore, uphold his order on this point and dismiss the ground." 3.2 Finally, the CIT(A), held on the issue in question as under.- "Now coming to the facts of the present case, what is in dispute is, whether or not the appellant even after following the mercantile system of accounting and the percentage completion method can claim deduction of "foreseeable losses" against the contracts. First and foremost, it is not the case of appellant that the contracts in hand during the year under consideration were complete. In fact this is not the case of the appellant at all for the year under consideration, inasmuch as it is apparent that the work completed during the year under consideration was not a major part of the contract. Thus, to provide in the books of account of "foreseeable loss" on apparently only partially completed works appears to be incorre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion or jurisdiction to meddle with the matter. Pronouncement of accounting bodies/Accounting standards are relevant in determining commercial profits. 6. The ld. 'A.R.' further placed reliance on the decision of Dy. CIT v. OTIS Elevator Co. India Ltd. [2006] 284 ITR 173 (AT)/90 ITD 73 (Mum.), Aarts Module v. ITO [IT Appeal No. 9302 (Bom.) of 1992, Mkb (Asia) (P.) Ltd. v. CIT [2007] 294 ITR 655/[2008] 167 Taxman 256 (Gauhati) and CIT v. Woodward Governor (India) (P.) Ltd. [2007] 294 ITR 451/162 Taxman 60 (Delhi), Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53 (SC) and Gopal Purohit v. Dy. CIT [2009] 20 DTR 99 (Mum.). The Ld. A.R also field a chart showing percentage completion on the expired contracts for the A.Ys. 2002-03 and 2003-04, wherein percentage completion ranges from 39.49 to 97.86% and 33.80 to 97.96% respectively. 7. The ld. 'D.R.' drawn attention of the Bench to the provisions of section 145(2) of the Income-tax Act, 1961 and contended that accounting standards are required to the notified by the Central Government and the same are notified vide notification No. SC(169E) dated 25/1/1996. It was also contended that these notified accounting standards ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 was concerned, it could not be disputed that in view of mandatory requirement of the AS-7, it was a bona fide change in the method of valuation of work-in-progress, particularly in view of the qualification made in this regard by statutory auditors as well as by the Comptroller Auditor General of India. Therefore, the observation of the Commissioner (Appeals) that the assessee had booked bogus loss was not correct. As far as the basis of estimation was concerned, the same was done on technical estimation basis and, therefore, merely because there were some variations in the figures furnished by the assessee at different stages, it could not be said that the estimated loss was not allowable, it was not disputed that the department in earlier years had allowed the loss on estimated basis having regard to the expenditure actually incurred in various years. Therefore, in principle, it was not disputed that the estimated loss under the present circumstances was an allowable deduction. However, merely because the change in method of acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had consistently followed this method of accounting, the addition of Rs. 75,218/- is deleted." 11. Having regard to the above legal and factual discussions, and following the decision of the ITAT in the case of Mazagon Dock Ltd. (supra) and Metal Box Co. of India Ltd. (supra) and decision of the Hon'ble Delhi High Court in the case of Woodward Governor India (P.) Ltd. (supra) the contention of the assessee regarding allowability of foreseeable loss is accepted in principle. However, the issue is restored to the file of A.O., for the purpose of quantification and calculation of the said loss in terms of Accounting Standard - 7, as the same has not been done. The A.O. is, further, directed to afford reasonable and proper opportunity to the assessee for the purpose of calculation and quantification of the said foreseeable losses. It is, further, made clear that the similar ground has been raised by the assessee for the A.Y. 2003-04, vide ground No.2. As the issue is identical expect the assessment year and the amount of foreseeable losses at Rs. 5,83,038/-, the findings given in respect of A.Y. 2002-03 is also applicable for the A.Y. 2003-04. Therefore, ground No.1 of A.Y. 2002-03, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estored to the file of ld. CIT(A) for fresh adjudication in terms of the decision of Amway India Enterprises (supra). 16. We have carefully considered the relevant facts of the case and rival submissions. Having regard to the fact situation of the case, it is evident that the lower authorities did not have the benefit of the Special Bench decision, in the case of Amway India Enterprises (supra) at the time of passing their respective orders. Therefore, the issue is set aside to the file of the A.O., for fresh adjudication, in the light of the Special Bench decision in the case of Amway India Enterprises (supra), after affording proper and reasonable opportunity to the assessee. Consequently, the finding of the ld. CIT(A) on this ground are set aside for both the assessment years and restored to the file of the A.O., for fresh adjudication as mentioned earlier in the light of the decision of the Special Bench (supra). 17. In ground No.3, raised in A.Y. 2003-04, the assessee contended that the learned CIT(A), has erred in confirming the action of A.O., in reducing unabsorbed depreciation of earlier years while computing 'profits from the business' when granting deduction under se ..... 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