TMI Blog2015 (10) TMI 181X X X X Extracts X X X X X X X X Extracts X X X X ..... The Revenue disallowed the Provision made for such foreseeable losses. The Tribunal concurred with the stand of the assessee that such a Provision was an allowable deduction. Therefore, in view of the aforesaid precedents in-principle, it has to be inferred that where an assessee is executing an infrastructure development fixed price contract, the foreseeable losses of future years can be recognized following the rationale of AS-7 issued by ICAI, and such a Provision is an allowable deduction. In the present case, the estimate made by the assessee has been benchmarked against PWD notified rates and it appears to be reasonable. The fact that in the subsequent year, assessee has writtenback only a portion of the Provision does not indicate its unreasonableness, rather the facts indicate that assessee indeed incurred expenditure on maintenance work which is more that the receipts due to it as per the contract. Therefore, the judgement of the assessee that it was likely to incur loss on maintenance work after five years was indeed justified, as the factum of incurrence of such loss is not disputed. In sum and substance, we are in agreement with the CIT(A) that the Provision for fore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... work/construction and maintenance of road. During the previous year relevant to the assessment year under consideration, assessee completed the construction of the road and it was under an obligation to maintain the road for five years as per the terms and conditions of the contract awarded by TNRDC. Since the work of maintenance of road was for a period of five years and construction was completed during the year under consideration, assessee anticipated losses on account of maintenance work. The assessee determined such future foreseeable losses at ₹ 1,24,85,000/- and made a Provision of such amount. The Provision so made was debited to the Profit Loss Account and claimed as a deduction while computing income for the year under consideration. The Assessing Officer treated such Provision for foreseeable losses as a contingent liability and disallowed the same while finalizing the assessment u/s 143(3) of the Act dated 28.03.2006. The aforesaid action of the Assessing Officer is the subject-matter of controversy before us. 4. The CIT(A), however, disagreed with the Assessing Officer and held that the foreseeable loss was not a contingent liability but it was liable to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h shows that it was a composite contract. In-particular, reference was made to page 8 of the Paper Book wherein the expressions used in the contract have been defined. In terms of the said definition of the expressions improvement works contract value ; improvement works period ; and, improvement works completion date , etc. it is sought to be established that it was a composite contract inclusive of the construction of the road and its maintenance for a specified period thereon. It was pointed out that in terms of the contract, assessee was required to carry out the necessary improvement/construction of the road and to maintain it for the period stipulated thereon which was five years. A reference has also been invited to pages 110-111 of the Paper Book, wherein the relevant clauses of the agreement are reflected which show the schedule of payments for improvement works as well for the portion of maintenance work. In terms thereof, it is submitted that the value of the improvement work was ₹ 42,01,07,171/- and the same was required to be executed between September, 2000 to July, 2001. The detailed scope of work in the improvement category has also been referred to which i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... related to improvement of work and its maintenance for a period of five years. The job has been done on a contractual basis. Factually speaking, the contract for improvement of the road and its maintenance for a period of five years is a composite contract. The Assessing Officer, however, has observed that TNRDC has awarded separate contracts, i.e. one for construction of road and second for its maintenance for a specified period. The Assessing Officer has observed so on the ground that TNRDC has specifically quantified the amount payable for the two components of the work separately. For this reason, the Assessing Officer held that the impugned losses calculated by the assessee are only relating to the maintenance portion of the work and therefore maintenance expenses should be allowed only to be considered in the period corresponding to the period for which maintenance is being effected. 10. In our considered opinion, though the TNRDC has quantified the contract payments separately with regard to the improvement work and the maintenance work, so however, it would be inappropriate to say that the two works were different. In-fact, it was a composite work awarded by TNRDC which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure foreseeable losses and claimed deduction of such a Provision. The Revenue disallowed the Provision made for such foreseeable losses. The Tribunal concurred with the stand of the assessee that such a Provision was an allowable deduction. The relevant portion of the order of the Tribunal is reproduced as under :- 14. We have considered the rival submissions and perused the orders of the lower authorities. We have also the benefit of going through the AS-7 issued by ICAI. At the very outset, it would not be out of place to consider the provisions of Sec. 145 of the Act. Sec. 145(2) of the Act provides that the Central Government may notify 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. It is a fact that AS-7 has not been notified by the Central Government. This does not mean that the assessee is precluded from following AS-7. A perusal of the provisions of Sec. 145 show that Accounting Standards which have been notified by the Central Government have to be mandatorily followed by the assessee. But this does not mean that the assessee cannot follow the other Accounting standards issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the client. 17. A similar issue has been considered by the Tribunal in the case of Mazagoan Dock (supra) wherein the Tribunal has held as under: The question that came up for consideration was as to whether the anticipated loss on the valuation of fixed price contract in view of the mandatory requirements of the AS-7, was to be allowed in the year in which the contract had been entered into or it was 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 was concerned, it could not be disputed that in view of mandatory requirements 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 assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al decided the case in favour of the assessee and held that yes it is an allowable expenditure. The Tribunal while deciding this issue has also considered the decision of Mazagaon Dock (supra). 19. Considering the facts of the case in the light of the accounting standards and the decisions of the Tribunal (supra), and as no distinguishing cases have been brought on records by the revenue , reversing the findings of the Ld. CIT(A) ,we direct the AO to re-compute the business profits by allowing the losses provided by the assessee in its books. The appeal filed by the assessee is allowed. 12. To the similar effect is the decision of the Mumbai Bench of the Tribunal in the case of Mazagaon Dock (supra) which has also been relied upon by the Tribunal in the case of ITD Cementation India Ltd. (supra). Therefore, in view of the aforesaid precedents in-principle, it has to be inferred that where an assessee is executing an infrastructure development fixed price contract, the foreseeable losses of future years can be recognized following the rationale of AS-7 issued by ICAI, and such a Provision is an allowable deduction. 13. The other aspect to be considered i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s over assessee has written-back an amount of ₹ 76,00,000/- out of a Provision of ₹ 1,24,85,000/- and that such an action indicated that estimation made by the assessee is not justified. The aforesaid approach of the Revenue, in our view, is not justified. The efficacy of the Provision has to be examined in the light of the circumstances prevailing at the time when the estimate was made. In any estimation, certain degree of guesswork is invariably present, but the same would not make it unreasonable, so long as the basis adopted for making the estimate is rationale and is acceptable. In the present case, the estimate made by the assessee has been benchmarked against PWD notified rates and it appears to be reasonable. The fact that in the subsequent year, assessee has writtenback only a portion of the Provision does not indicate its unreasonableness, rather the facts indicate that assessee indeed incurred expenditure on maintenance work which is more that the receipts due to it as per the contract. Therefore, the judgement of the assessee that it was likely to incur loss on maintenance work after five years was indeed justified, as the factum of incurrence of such loss i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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