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2016 (7) TMI 270 - ITAT MUMBAI

2016 (7) TMI 270 - ITAT MUMBAI - TMI - Disallowance toward provision for loss on contracts - reporting profit on the basis of proportionality as per AS-7 - Held that:- It is the profit (or loss) for the relevant year that is to be assessed and brought to tax for that year each year being an independent unit of assessment. The decline in the market price, even where relevant and material, i.e., with reference to the price obtaining as at the year-end, would therefore fall to be considered as an .....

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booking the same proportionately. AS-7, on the other hand, clearly provide for reporting profit on the basis of proportionality when the project is likely to yield a profit, while booking the loss where not so, and which in the present case, as we understand, has been provided for on a proportionate basis. The reliability of the estimate is indeed very relevant and crucial to the claim for loss, lest any amount could be claimed under the garb of the likely loss, and which brings us to the next a .....

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ard to cost escalation/s may require a closer examination, which the AO is even other obliged to, even as to be fair to the assessee the loss stands provided for in the audited accounts, so that it has been subject to both internal as well as external scrutiny. The same though cannot bind the A.O. We decide accordingly. The appeal is accordingly disposed on the above said terms. - Decided in favour of assessee for statistical purposes. - I.T.A. No. 2334/Mum/2013 - Dated:- 10-6-2016 - SHRI SANJAY .....

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issue arising in the instant appeal is with regard to the confirmation of the disallowance toward provision for loss on contracts made by the assessee in its accounts for ₹ 125.39 lacs. The assessee is a domestic company and its principal activities comprise manufacturing and installation of cold rolling mills, galvanizing lines, colour coating lines, tension leveling lines, skin pass mills, acid regeneration plants and pickling lines for ferrous and non-ferrous industries worldwide. For .....

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The provision was explained to be made on the basis of technical assessments carried out by the company of the individual projects, based on their nature, estimated expenses, cost escalation, etc. The Revenue, however, found the assessee s claim as being not in terms with the requirements of law. Firstly, the Accounting Standards were notified by the Government in December, 2006, while the assessee had effected a change only w.e.f. 01.4.2008. When the assessee had not recognized the revenue from .....

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everal projects. The assessee s claim to have made the estimation of loss on scientific basis, thus, did not hold. Besides, only the provision for liabilities which had not crystallized during the year, and which was evident from the fact that the assessee did not contest the addition for the same amount made while computing its book profit u/s. 115JB. The case law relied to by the assessee was found distinguishable by him on facts. Aggrieved, the assessee is in second appeal. 3. We have heard t .....

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rmined with certainty and represents only a best estimate in the light of available information), would validate the assessee s claim. The said principle, along with substance over form and materiality , constitute the principal considerations for the selection of the accounting policies. As such, irrespective of the stage of completion of the project, where, on the basis of the facts and data, a project stands to incur a loss on its completion, the same is to be provided in the first instance, .....

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ntegral, aspect - the assessee s claim for loss meriting an in principle approval or acceptance. True, in a given case, the loss itself may arise only on account of inflated cost, so that on facts there is no application of the principle, but that would not detract from the fact that such a loss, where properly made, cannot be denied. Further, the estimate may itself change from time to time, i.e., as time goes by and more and more work, incurring cost, is undertaken, so that it is only the bala .....

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sis that the estimates are not scientific or not based on reliable data, is misconceived. In fact, the variation, as reported (refer para 4 of the impugned order), is itself quite insignificant, so that it should not have, even on that basis, led to the inference of rejection of the estimates. The Revenue can no doubt, and it is indeed duty bound to, verify the assessee s claim qua both the cost and the revenue estimates. Why, in a given case, the actual costs, incurred subsequently, may itself .....

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the statement of law by the Hon ble Apex Court in respect of claim for deduction qua a liability. The two, i.e., a liability and loss , though para materia from the stand-point of prudence, may not be so as regards provision therefor. The provision of loss would be justified on a factual basis to arrive at the conclusion that the estimated expenditure (for the work to be undertaken or the services to be rendered), together with the actual cost already incurred thereon, shall exceed the estimated .....

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T [1959] 37 ITR 1 (SC). Once, on the basis of the facts and the information on record, the loss is likely to arise, the same has to be provided for under the prudence mandate, which is what AS-7 (also notified by the Central Government) in substance provides under the segment Recognition of expected losses vide paras 35 and 36, reproduced as under: Recognition of Expected Losses 35. When it is probable that total contract costs will exceed total contract revenue, the expected loss should be reco .....

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vs. Kamani Metals & Alloys Ltd. [1994] 208 ITR 1017 (Bom), the same, in our view, shall not govern the facts or the issue involved in the present case, even as admittedly the accountancy principle of valuation of inventories is also based on the principle of prudence. In that case, the assessee-company, a manufacturer of copper and copper based alloys, strips and coils of various specifications, valued its raw materials, being virgin metals (viz. copper, zinc, tin), following the valuation p .....

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k as on that date, the Hon ble Court held that the reduction in the price with reference to the contract date even as on 31.12.1974 also could not allowed. Further, even though the value of the raw material cost may have decreased, the firm may stand to earn profit on the basis of the net realizable value of the finished goods, i.e., on the basis of the ruling price less cost of realization thereof. The prices of finalized goods may or may not move in sympathy with that of the raw materials, dep .....

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ining as at the year-end, would therefore fall to be considered as and form part of the profit (or loss) of the subsequent year. This also explains the standard prescription for valuing raw material at historical cost (refer AS-2 issued by ICAI). The project/s in the instant case, on the other hand, spread over 2-3 years, and it is on account of this that the loss thereon, the enterprise following percentage completion method (for recognizing income), the profit (or loss) on the entire project, .....

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under the garb of the likely loss, and which brings us to the next aspect of the matter. 3.4 The Revenue, moving on the premise that the assessee s claim is both factually and legally untenable, has rejected the same. We find no exercise conducted by it at any stage to verify the assessee s claim, which we have found acceptable in principle. In this respect, the ld. AR would before us contend that the assessee has also, and only rightly so, taken into account the likely cost escalations; the pr .....

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