TMI Blog2011 (10) TMI 153X X X X Extracts X X X X X X X X Extracts X X X X ..... ated loss or sale value of TDR received in excess of the TDR entitlement considered in the estimate is required to be added and in case sale value or entitlement is lower than the estimated rate, deduction has to be allowed. The expenses have already been considered in computation of anticipated losses. However, if actual expenditure is in excess of the estimated expenditure, the excess expenditure has to be allowed. - matter remanded back for fresh consideration. Addition under section 115JB - any addition on account of disallowance of prior period expenses while computing book profit is not permitted in view of the judgment of Hon'ble Supreme Court in the case of Apollo Tyres Ltd. [2002 (5) TMI 5 - SUPREME Court]. - ITA Nos. 5002 & 5003/Mum./2010 and 3050 & 3486/Mum./2007 - - - Dated:- 31-10-2011 - SHRI B.R. MITTAL AND SHRI RAJENDRA SINGH, JJ. Represented By: For the Appellant: Shri Pankaj Toprani For the Respondent: Shri Goli Sriniwas Rao PER BENCH. 1. These appeals by the assessee are directed against different orders of CIT(A) dated 29.4.2010, 18.2.2008, 29.4.2010 and 8.3.2007 for assessment years 2000-01 to 2003-04 respectively. The disputes raise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s on the contract irrespective of the amount of work done and the method of accounting followed. In some circumstances, the foreseeable losses may exceed the cost of work done to date. Provision is nevertheless made for the entire loss of the contract. 2.3 The assessee while working out the future losses from different projects, estimated the cost of the project by adding amount for escalation-cost, contingencies, interest etc. Similarly, the sale price was estimated by adopting the sale rate of 380 sq.ft. for TDR and 200 sq.ft. for shops. For instance, in respect of Turbe Mandale Mankhurd Project, the assessee computed the estimated revenue at ₹ 76.75 crores and estimated cost at ₹ 136 crores resulting into loss of ₹ 69.25 crores. Similarly, computation of loss was made in respect of other projects also and claimed as deduction. For assessment year 2001-02, the assessee claimed deduction on account of future losses in respect of different projects at ₹ 69.52 crores. Similarly, future losses claimed for assessment year 2000-01, 2002-03 and 2003-04 were ₹ 18,29,90,000/-, ₹ 1,21,,00,000/- and ₹ 88,71,918/- respectively. 2.4 The assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8.85 7.18 4 Turbhe Mandale Mankhurd 21.93 136 59.25 43.57 9.55 49.7 5 Wadala Site 15.68 39 3.028 7.9 1.24 1.84 2.5 Similarly, losses claimed in assessment years 2000-2001, 2002-03 and 2003-04 were also restricted by AO to the loss relating to WIP at the end of relevant year. The AO thus disallowed the losses of ₹ 18,29,90,000/-, ₹ 1,21,00,000/- and ₹ 88,71,918/- respectively for the assessment years 2000-01, 2002-03 and 2003-04. 2.6 The assessee disputed the decision of AO and submitted before CIT(A) that lower of cost or the Net Realisable Value (NRV) was an accepted method of valuation of work in progress. Reliance was placed on the judgment of Hon'ble Supreme Court in Sanjeev Woollen Mills Ltd. v. CIT (279 ITR 434). It was pointed out that every year the assessee was preparing estimates of revenue and expenses in respect of each project based on technical data a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red in future were quite uncertain and therefore, the loss could not be computed with reasonable certainty. CIT(A) thus held that provisions of AS-7 were not applicable. CIT(A) also observed that the assessee in fact conceded the position in the submission dated 30.1.2008 in which it was stated that AS-2 and not AS-7 was applicable to the WIP. CIT(A) observed that even provisions of AS-2 were not applicable as no evidence had been placed by the assessee before AO to show that sale price of inventory was less than cost. CIT(A) therefore, upheld the order of AO restricting the loss in proportion to percentage of work completed at the end of the year i.e. WIP. Aggrieved by the order of CIT(A) the assessee is in appeal before the Tribunal in all the years under consideration. 2.10 Before us, the ld. Authorised Representative for the assessee reiterated the submissions made before the lower authorities that income from the rehabilitation project has to be computed as per accounting standard AS-7 which was mandatory for the assessee to follow. It was admitted that the assessee was following percentage completion method but argued that in terms of para-13.1 of AS-7, the future losses h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pated losses of future years. 2.11 We have perused the records and considered the rival contentions carefully. The dispute is regarding computation of income from rehabilitation projects being executed by the assessee. In terms of the slum rehabilitation scheme, the assessee was required to construct and provide free of cost tenements of size 225 sq.ft. to all slum dwellers and in consideration was entitled to TDR/ or the right to construct additional area over and above the normal permissible limits which the assessee could sell in the open market. None of the projects being executed by the assessee were complete and were only in the initial stages of construction. The assessee however estimated the total revenue from the entire project to be completed in future and also the cost involved in completion of the project including the estimated escalation cost, contingencies etc., which showed that there were losses which had been claimed as deduction in the relevant years even though the projects were far from complete. The claim had been made as per para 13.1 of the Accounting Standard AS-7, which provides that when current estimate of total contract cost or revenue indicates a l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting Standard AS-1 notified by the Government provides for allowance of loss in respect of all known liabilities and therefore, provisions for losses has to be allowed as per the notified AS-1. 2.11.2 We have considered the arguments of the ld. A.R based on the Accounting Standard, AS-1, which has been notified by the government. Under the provisions of section 145(1), the income chargeable under the head profit and gain of business or profession or income from other sources , has to be computed in accordance with either the cash or mercantile system of accounting regularly employed by the assessee. The sub-section (2) of Section 145 provides that the Central Government may modify in the Official Gazette from time to time Accounting Standards to be followed by any class of assessees or in respect of any class of income. The Government has since notified Accounting Standards AS-1 AS-2. The Accounting Standards so notified are reproduced below as ready reference. In exercise 'of the powers conferred by sub-section (2) of section 145 of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby notifies the following accounting standards to be followed by al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... losure in respect of such assumptions is not required. If a fundamental accounting assumption is not followed, such fact shall be disclosed. 6. For the purposes of paragraphs (1) to (5), the expressions,- (a) Accounting policies means the specific accounting principles and the methods of applying those principles adopted by the assessee in the preparation and presentation of financial statements; (b) Accrual refers to the assumption that revenues and costs are accrued, that is, recognised as they are earned or incurred (and not as money is received or paid) and recorded in the financial statements of the period to which they relate; (c) Consistency refers to the assumption that accounting policies are consistent from one period to another; (d) Financial Statements means any statement to provide information about the financial position, performance and changes in the financial position of an assessee and includes balance sheet, profit and loss account and other statements and explanatory notes forming part thereof; (e) Going concern refers to the assumption that the assessee has neither the intention nor the necessity of liquidation or of curta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a) Accounting estimate means an estimate made for the purpose of preparation of financial statements which is based on the circumstances existing at the time when the financial statements are prepared; (b) Accounting policies means the specific accounting principles and the method of applying those principles adopted by the assessee in the preparation and presentation of financial statements; (c) Extraordinary items means gains or losses which arise from events or transactions which are distinct from the ordinary activities of the business and which are both material and expected not to recur frequently or regularly. Extraordinary items include material adjustments necessitated by circumstances which, though related to years preceding to the previous years, are determined in the previous year: Provided that income or expenses arising from the ordinary activities of the business or profession or vocation of an assessee, though abnormal in amount or infrequent in occurrence, shall not qualify as extraordinary item; (d) Financial Statements means any statement to provide information about the financial position, performance and changes in the financial p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Calcutta Company (supra), the assessee had sold land with an undertaking to develop it within six months. The sale deed had been executed and on the sale deed date, the assessee had received part of the sale consideration and balance was to be received in installments in future. The assessee had also to develop the land within six months from the sale deed date. It was held that on the date of sale deed, income had accrued as per mercantile system even if part consideration was to be received later. Similarly on execution of sale deed, assessee incurred the liability to incur expenses to develop the land in future and therefore estimated expenditure on development of the land on a reasonable basis was held allowable as deduction. Precisely because of these reasons and the rulings mentioned above, the Accounting Standard-AS-1 notified by the government provides that provisions shall be made in respect of all known liabilities so that AO could allow deduction in respect of liabilities which had been incurred during the year. 2.11.4 The case of the assessee is different. In this case, the assessee was executing a rehabilitation project and the assessee was entitled for TDR /ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reliance on certain judicial pronouncements which in our view are distinguishable and cannot be followed. In case of Triveni Engineering Industry Ltd. (49 DTR 253), the assessee who was executing a construction contract was following the completed contract method of accounting. The assessee had recognized the entire income from the project during the relevant year. Therefore, the claim of deduction on account of future liabilities in respect of the projects which were known liabilities were found to be allowable. It was also in consonance with the matching principle. The case of the assessee is different. The assessee is following percentage completion method but the entire future losses have been claimed though only small portion of the project was complete, quite in violation matching principle. Reliance has also been placed on the judgment of Hon'ble Supreme Court in the case of Woodward Governor India P. Ltd.(312 ITR 254). In that case, the assessee who was following mercantile system of accounting had taken foreign currency loans for revenue purposes. There was additional liability at the end of the year due to foreign exchange fluctuation which was claimed as deduction. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore, in our view, the issue has to be decided under the provisions of law and not as per Accounting Standard AS-7 which has not been notified by the Government. The cases cited by the assessee are, therefore, of no help. The assessee had also not pressed the application of AS-7 before CIT(A), as the same has not been notified by the government. Even before us emphasis was placed only on AS-1 as notified by the government, which we have already dealt with in para 2.11.3. 2.11.7 In view of the foregoing discussion and for the reasons given earlier, we do not see any infirmity, in the order of CIT(A) in allowing the loss only to the extent, it related to the WIP at the end of the relevant year. The order of CIT(A) is accordingly upheld. 3. The second dispute which is relevant only to assessment year 2003-04 is regarding addition of ₹ 7,37,41,582/- on account of sale of TDR. The AO noted that the assessee had sold TDR during the year for ₹ 24,99,25,721/- in relation to Turbhe Mandale project. In the said project total work done till 31.3.2003 was of ₹ 25,39,59,098/- including the work completed during the assessment year 2003-04 of ₹ 17,61,84,139/-. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claiming the anticipated future loss, had computed the estimated net income from the entire project which also included the estimated income from TDRs and sale of shops etc. We have not upheld the claim of anticipated loss from the entire project. The loss which has been allowed is only proportionate to WIP of the relevant year and in computation of the said proportionate loss estimated income from sale of TDR on proportionate basis has been considered. Therefore, the sale value of TDR in excess of the corresponding estimated value of TDR considered for the purpose of computation of anticipated loss or sale value of TDR received in excess of the TDR entitlement considered in the estimate is required to be added and in case sale value or entitlement is lower than the estimated rate, deduction has to be allowed. The expenses have already been considered in computation of anticipated losses. However, if actual expenditure is in excess of the estimated expenditure, the excess expenditure has to be allowed. The issue in our view requires fresh examination. We, therefore, set aside the order of CIT(A) and restore the matter back to AO for passing a fresh order on this point after necess ..... X X X X Extracts X X X X X X X X Extracts X X X X
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