ITD CEMENTATION INDIA LTD ( FORMERLY KNWON AS SKANSKA CEMENTATION INDIA LTD), MUMBAI V. ITO 1(3)(4), MUMBAI

ITA 2991/MUM/2011

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 3387 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 1 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-05-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 08-05-2013
• Assessment Year: 2004-2005
• Appeal Filed On: 15-04-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P K SHUKLA
• Keywords: Business income; Corroborative evidences
• Section: 133(6); 37(1); 145; 28; 144

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL I BENCH, MUMBAI . . ,, !'#$ , % & BEFORE SHRI B.R. MITTAL JM AND SHRI N.K. BILLAIYA, AM ./I.T.A. NO. 3669/MUM/2011 ( ' ' ' ' / ASSESSMENT YEAR : 2004-05 THE ACIT, RANGE 10(1), AAYAKAR BHAVAN, MUMBAI-400 020 / VS. M/S. ITD CEMENTATION INDIA LTD., APEEJAY HOUSE, DINSHAW VACHHA ROAD, MUMBAI-400 020 ./I.T.A. NO. 2991/MUM/2011 ( ' ' ' ' / ASSESSMENT YEAR : 2004-05 M/S. ITD CEMENTATION INDIA LTD., APEEJAY HOUSE, DINSHAW VACHHA ROAD, MUMBAI-400 020 / VS. THE ACIT, RANGE 10(1), AAYAKAR BHAVAN, MUMBAI-400 020 ( % ./ )* ./PAN/GIR NO. : AAACT 1426A ( (+ /APPELLANT ) .. ( ,-(+ / RESPONDENT ) (+ . / APPELLANT BY: SHRI VIJAY MEHTA ,-(+ / . / RESPONDENT BY : SHRI P.K. SHUKLA / 01% / DATE OF HEARING : 08.05.2013 23' / 01% / DATE OF PRONOUNCEMENT : 17.05.2013 4 / O R D E R PER N.K. BILLAIYA, AM: THESE CROSS APPEALS BY THE REVENUE AND THE ASSESSEE ARE DIRECTED AGAINST THE VERY SAME ORDER OF THE LD. CIT(A)-21, M UMBAI DT.28.2.2011 ITA NOS. 3699 & 2991/M/2011 2 PERTAINING TO A.Y. 2004-05. AS BOTH THESE APPEALS WERE HEARD TOGETHER, THEY ARE DISPOSED OF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE AND BREVITY. ITA NO. 3699/M/2011 REVENUES APPEAL 2. THE SUM AND SUBSTANCE OF THE GRIEVANCE OF THE RE VENUE IS THAT THE LD. CIT(A) OUGHT NOT TO HAVE HELD THAT THE ACCOUNTS OF THE ASSESSEE COULD NOT BE SAID TO BE INCORRECT OR INCOMPLETE AND BY HO LDING SUCH THE LD. CIT(A) FAILED TO APPRECIATE THAT THE AO HAD GIVEN A CATEGORICAL AND WELL REASONED FINDING IN THE ASSESSMENT ORDER AS TO WHY THE BOOKS OF ACCOUNTS OF THE ASSESSEE COMPANY WERE NOT COMPLETE AND RELIA BLE. THE AO HAD RIGHTLY ESTIMATED THE BUSINESS INCOME OF THE ASSESS EE AT 5% OF THE TURNOVER. 3. THE ASSESSEE IS IN THE BUSINESS OF INFRASTRUCTU RE DEVELOPMENT WHICH INCLUDES BUILDING UP OF ROADS, BRIDGES, TUNNE LS, PORTS, JETTIES ETC. THE JOB IS DONE ON CONTRACTUAL BASIS. THE ASSESSEE COMPANY HAS ENTERED INTO VARIOUS PROJECTS, RELATING TO CONSTRUCTION OF ROADS AND BRIDGES AND ALSO NON ROADS PROJECTS WHICH ARE SPREAD THROUGHOUT THE COUNTRY. DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS, A DETAILE D QUESTIONNAIRE WAS ISSUED AND SERVED ON THE ASSESSEE. THE ASSESSEE FI LED DETAILS/DOCUMENTS FROM TIME TO TIME. THE AO WAS OF THE OPINION THAT THE BOOKS OF ACCOUNT CONTAIN MANY DISCREPANCIES, FLAWS AND LOOPHOLES. T HE ASSESSEE WAS ASKED TO PRODUCE THE BOOKS OF ACCOUNT. THE ASSESSE E SUBMITTED THAT SINCE ITS BUSINESS IS DIVERSIFIED ACROSS THE COUNTRY PROJ ECTS BEING IN DIFFERENT SITES, BOOKS ARE COMPUTERIZED AND THE SAME ARE VERY HUGE IN QUANTITY AND BULKY. THE AO ASKED THE ASSESSEE TO PRODUCE THE FL OPPY/CD OF THE BOOKS OF ACCOUNT. THE AO FINALLY ISSUED SHOW CAUSE NOTIC E WHICH INCORPORATED ITA NOS. 3699 & 2991/M/2011 3 THE DISCREPANCIES FOUND IN THE BOOKS OF ACCOUNT FOL LOWING WHICH THE AO PROPOSED TO REJECT THE BOOKS IN VIEW OF SECTION 145 (3) OF THE I.T. ACT. 2.1. THE SUMMARY OF THE DEFECT NOTE BY THE AO IS EX PEDITED AT PAGE-55 AND 56 OF THE PAPER BOOK. THE MAJOR DEFECT NOTED B Y THE AO RELATE TO 1) NON MAINTENANCE OF DAY TODAY REGISTERS. NO DETAILS OF CLOSING STOCK OF WIP 2) UNBILLED WIP NOT INCLUDED IN TURNOVER OF THE ASSESS EE COMPANY. 3) NON-RECEIPT OF CONFIRMATIONS FROM SUPPLIERS OR RECE IPT OF PART CONFIRMATIONS. 4) SUBSTANTIAL INCREASE IN ALL THE EXPENSES DEBITED TO PROFIT & LOSS ACCOUNT. 5) NO SUPPORTING EVIDENCES WERE AVAILABLE IN CASE OF E XPENSES LIKE TRAVELLING EXPENSES, MISCELLANEOUS EXPENSES ETC. A ND 6) LEDGER ACCOUNT NOT MADE AVAILABLE 3. THE AO ALSO MADE OBSERVATIONS RELATING TO THE TA X AUDIT REPORT. IN RESPONSE TO THE SHOW CAUSE NOTICE AND THE DISCRE PANCIES POINTED OUT BY THE AO, THE ASSESSEE SUBMITTED THE CLARIFICATIONS V IDE LETTER DT. 23.12.2006. IT WAS EXPLAINED THAT THE NATURE OF AC TIVITIES INVOLVED IN THE CONSTRUCTION BUSINESS ARE FAR DIFFERENT THAN IN THE CASE OF MANUFACTURING CONCERN. IT WAS FURTHER EXPLAINED THAT THE ASSESSE E IS CARRYING CONSTRUCTION ON VARIOUS PROJECT SITES, MOST OF WHI CH ARE IN REMOTE AND FAR OFF LOCATIONS, SOMETIMES SITUATED FAR AWAY FROM TH E TOWNS AND CITIES. SO FAR AS OBSERVATION RELATING TO WORK-IN-PROGRESS IS CONCERNED, THE ASSESSEE SUBMITTED THAT WORK-IN-PROGRESS REPRESENTS COST INC URRED FOR THE PROJECT BUT YET TO BE BILLED TO THE CLIENT. IT WAS FURTHER EXPLAINED THAT VARIOUS COSTS INCLUDING MATERIALS, LABOUR, SUBCONTRACT, EST ABLISHMENT AND ITA NOS. 3699 & 2991/M/2011 4 OVERHEAD COST ARE BEING INCURRED AT VARIOUS PROJECT SITES, THE BILLING TO THE CLIENTS IS BASED ON THE ACTUAL MEASUREMENT OF THE W ORK DONE AND CERTIFIED BY THE CLIENTS. THE DIFFERENCE BETWEEN THE COSTS I NCURRED AND THE VALUE OF WORK BILLED TO THE CLIENTS IS REPRESENTED BY WORK I N PROGRESS. THE ASSESSEE SHOWED ITS INABILITY TO GET IT CERTIFIED B Y THE ENGINEER/ARCHITECT. IT WAS EXPLAINED BY THE ASSESSEE THAT FULL DETAILS OF ALL COST INCURRED AND MATERIALS RECEIVED, ISSUED AND CONSUMED ARE MAINTAI NED ON A DAILY BASIS AT ALL PROJECT SITES. OBSERVATION RELATING TO THE DETAILS OF RAW MATERIALS, IT WAS EXPLAINED THAT MONTHLY STOCK CONSUMPTION REPOR T OF CERTAIN SITES ARE ALREADY BEEN SUBMITTED. 3.1. AFTER CONSIDERING THE SUBMISSIONS MADE BY THE ASSESSEE, THE AO WAS OF THE OPINION THAT THE ASSESSEE HAS FAILED TO SUPPORT ITS SUBMISSIONS BY NOT SUBMITTING THE DAILY STOCK REGISTER. THE AO WAS OF THE FIRM BELIEF THAT CONSIDERING THE COMPLEX NATURE OF THE BUSINESS OF THE ASSESSEE AND THE COMPLICATED MAINTENANCE OF BOOKS OF ACCOUNTS, THE TRUE AND CORRECT INCOME OF THE COMPANY CAN BE ASCERTAINED ONLY AFTER THE ASSESSEE PRODUCES COMPLETE BOOKS OF ACCOUNTS WITH SUPPORTING DOCUMENTS AND IN VIEW OF THE VARIOUS DEFICIENCIES NOTED BY THE AO, H E PROCEEDED TO REJECT THE BOOKS OF ACCOUNTS U/S. 145(3) OF THE ACT. THER EAFTER, THE AO WENT ON TO MAKE THE BEST JUDGEMENT ASSESSMENT U/S. 144 OF T HE ACT AND ESTIMATED THE BUSINESS INCOME OF THE ASSESSEE AT THE RATE OF 5% OF THE TOTAL TURNOVER AND THE BUSINESS INCOME WAS COMPUTED AT RS. 3,155.7 4 LCAS. 4. AGGRIEVED BY THIS FINDINGS, THE ASSESSEE AGITATE D THE MATTER BEFORE THE LD. CIT(A). BEFORE THE LD. CIT(A) IT WAS CONTE NDED THAT THE AO HAS NOT CONSIDERED THE DEFENCE OF THE ASSESSEE INASMUCH AS THE RECORDS PERTAINING TO VARIOUS SITES ARE KEPT AT THOSE SITES AND THEREFORE IT WAS IMPRACTICAL TO SUBMIT ALL THOSE RECORDS FOR VERIFIC ATION. HOWEVER IT WAS ITA NOS. 3699 & 2991/M/2011 5 CONTENDED THAT THE BOOKS OF ACCOUNTS ARE STATUTORIL Y AUDITED AND THE AUDITORS HAVE NOT POINTED OUT ANY DEFECT IN THE BOO KS OF ACCOUNT. IT WAS ALSO EXPLAINED THAT THERE WAS NO CHANGE IN THE METH OD OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. NO BOOKS OF AC COUNTS WERE REJECTED BY EARLIER ASSESSING OFFICERS. THE ASSESSEE EXPLAIN ED POINT-WISE DISCREPANCIES NOTICED BY THE AO. THE ASSESSEES SU BMISSIONS WERE FORWARDED TO AO BY THE LD. CIT(A) FOR SUBMITTING R EMAND REPORT THEREON. IN RESPONSE TO WHICH, THE AO SUBMITTED TH E REMAND REPORT VIDE LETTER DT. 26.11.2010. THE AO RESPONDED POINT-WISE TO THE SUBMISSIONS MADE BY THE ASSESSEE IN RESPECT OF CLOSING STOCK. THE AO REPORTED THAT THE ASSESSEE HAS NOT GIVEN FULL INVENTORY OF CLOSIN G STOCK. THE CLOSING STOCK OF THE RAW MATERIAL, CONSUMABLES ETC COULD NO T BE VERIFIED BECAUSE THE ASSESSEE SUBMITTED DETAILS ON SAMPLE BASIS. FO R OTHER SUBMISSIONS, THE RESPONSE OF THE AO WAS THAT THE ASSESSEE HAS S UBMITTED ONLY SAMPLE DETAILS AND NOT COMPLETE DETAILS. 4.1. AFTER CONSIDERING THE FACTS AND THE SUBMISSION S AND THE REMAND REPORT OF THE AO, THE LD. CIT(A) WAS CONVINCED WITH THE REPLY OF THE ASSESSEE IN RESPECT TO THE DISCREPANCIES POINTED OU T BY THE AO AND CONSIDERING THE ENTIRE SUBMISSIONS/EXPLANATION, THE LD. CIT(A) WAS CONVINCED THAT ASSESSEES ACCOUNTS WERE CORRECT AND COMPLETE FOLLOWING REGULARLY THE METHOD OF ACCOUNTING AND THE ACCOUNTI NG STANDARDS PRESCRIBED BY THE GOVERNMENT. WHATEVER DEFECTS WER E NOTICED BY THE AO WERE SUBJECT MATTER OF VERIFICATION AND RECONCILIAT ION. THE LD. CIT(A) OBSERVED THAT DURING REMAND REPORT PROCEEDINGS SUCH DISCREPANCIES WERE DULY RECONCILED/EXPLAINED BY THE ASSESSEE AND WHICH HAVE ALSO BEEN ACCEPTED BY THE AO. THE LD. CIT(A) CONCLUDED THAT THERE WAS NO CASE BEFORE THE AO FOR INVOKING THE PROVISIONS OF SEC. / 145(3) OF THE ACT AND ACCORDINGLY DISAPPROVED THE ACTION OF THE AO REJECT ING THE BOOKS OF ITA NOS. 3699 & 2991/M/2011 6 ACCOUNT OF THE ASSESSEE. CONSEQUENTLY THE LD. CIT( A) FURTHER HELD THAT THE ESTIMATION OF BUSINESS INCOME OF THE ASSESSEE @ 5% OF TURNOVER WAS ALSO NOT IN ORDER. 5. AGGRIEVED BY THIS FINDING, THE REVENUE IS BEFORE US. THE LD. DEPARTMENTAL REPRESENTATIVE STRONGLY SUPPORTED THE ASSESSMENT ORDER. IT IS THE SAY OF THE DR THAT THE ASSESSEE HAS NOT FURN ISHED FULL AND COMPLETE DETAILS AS SOUGHT BY THE AO THEREFORE AO WAS LEFT W ITH NO CHOICE BUT TO REJECT THE BOOKS OF ACCOUNT AND ESTIMATE THE PROFIT S OF THE ASSESSEE. 6. THE LD. COUNSEL FOR THE ASSESSEE REITERATED THAT THE ASSESSEE HAS MAINTAINED BOOKS OF ACCOUNT FOLLOWING THE PRINCIPLE S OF ACCOUNTANCY AND THE SAME METHOD HAS BEEN FOLLOWED IN EARLIER YEARS AND ALSO IN SUBSEQUENT YEARS AND IN NONE OF THESE YEARS, THE BO OKS OF ACCOUNT HAVE BEEN REJECTED. THE LD. COUNSEL FOR THE ASSESSEE FU RTHER DREW OUR ATTENTION TO THE DECISION OF THE TRIBUNAL IN ASSESS EES OWN CASE FOR A.Y. 2005-06 AND 2006-07 IN ITA NO. 4492/M/09 FOR A.Y. 2 005-06 AND ITA NOS. 4679 & 4680/M/09 FOR A.Y. 2005-06 & 2006-07. IT IS THE SAY OF THE COUNSEL THAT DURING THE REMAND PROCEEDINGS, THE AO HAS ACCEPTED MOST OF THE SUBMISSIONS RELATING TO THE BOOKS OF ACCOUNT S OF THE ASSESSEE. 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PER USED THE ORDERS OF THE LOWER AUTHORITIES AND THE DECISION OF THE TR IBUNAL RELIED UPON BY THE ASSESSEE IN ITS OWN CASE. IT IS AN ADMITTED FAC T THAT THE BUSINESS OF THE ASSESSEE IS STRETCHED ACROSS THE COUNTRY. IT IS AL SO AN ADMITTED FACT BOOKS OF ACCOUNTS ARE MAINTAINED PROJECT-WISE AT EACH SI TE. THOUGH THE CONSOLIDATED BOOKS OF ACCOUNTS ARE MAINTAINED IN EL ECTRONIC FORM WHICH FACT HAS ALSO BEEN ACCEPTED BY THE AO. THE MAIN GR IEVANCE OF THE AO IS THAT THE ASSESSEE IS NOT MAINTAINING DAY TODAY STOC K REGISTER HAS BEEN SUCCESSFULLY EXPLAINED BY THE ASSESSEE AND ACCEPTED BY THE LD. CIT(A) ITA NOS. 3699 & 2991/M/2011 7 BASED ON THE REMAND REPORT OF THE AO. WHATEVER DIS CREPANCIES RELATING TO THE EXPENSES HAVE BEEN POINTED OUT, IN OUR HUMBL E VIEW, IF THE AO WAS NOT SATISFIED WITH THE QUANTUM OF EXPENSES, HE COUL D HAVE PROCEEDED TO DISALLOW THEM ON ADHOC BASIS. SIMPLY BECAUSE THE V OLUME OF EXPENSES HAVE INCREASED DURING THE YEAR VIS--VIS EARLIER YE AR THAT CANNOT BE A GROUND FOR REJECTING THE BOOKS OF ACCOUNT. THE AO HIMSELF HAS CALLED FOR INFORMATION FROM VARIOUS PARTIES DURING THE REM AND PROCEEDINGS AND MOST OF THE PARTIES HAVE RESPONDED TO HIS NOTICE U/ S. 133(6) OF THE ACT. IF SOME OF THE BALANCES REMAINED UNRECONCILED, THE AO COULD HAVE ASKED DIRECTLY FROM THE PARTIES FOR THE DIFFERENCE. SUCH UNRECONCILED ACCOUNTS CANNOT LEAD TO THE REJECTION OF BOOKS OF ACCOUNT. AS SEEN FROM THE ASSESSMENT ORDER, THERE IS NO FINDING THAT THE BOOK S OF ACCOUNTS ARE NOT CORRECT OR COMPLETE. THERE IS ALSO NO FINDING THA T THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE IS NOT IN ACCOR DANCE WITH THE STANDARDS NOTIFIED. THE MAJOR PLANK FOR REJECTION OF THE BOOKS OF ACCOUNT SEEMS TO BE THE UNVERIFIABLE NATURE OF EXPENSES AND NON MAINTENANCE OF THE STOCK REGISTER. THE LD. CIT(A) HAS NOT ONLY CO NSIDERED THE ABOVE ISSUE BUT ALSO OTHER ISSUES RAISED BY THE AO IN THE REMAND PROCEEDINGS. AS SEEN FROM THE REMAND REPORT PLACED AT PAGE 53 OF THE PAPER BOOK , THE AO INSTEAD OF EXAMINING THE VOLUMINOUS OF DETAI LS FILED, GIVING A COMPLETE REPORT REITERATED THE OBJECTION AS STATED IN THE ASSESSMENT ORDER. AS THE EXPLANATIONS/DETAILS FURNISHED BY THE ASSESS EE BEFORE THE LD. CIT(A) HAVE BEEN DULY CONSIDERED BY THE LD. CIT(A) AND ALSO THAT THESE DETAILS WERE SENT TO AO FOR REMAND, WE DO NOT FIND ANY REASON TO DEFER FROM THE FINDINGS OF THE LD. CIT(A). 7.1. FROM A PERUSAL OF THE DISCREPANCIES POINTED OU T BY THE AO, IT IS DIFFICULT TO ACCEPT THAT THE BOOKS OF ACCOUNTS OF T HE ASSESSEE ARE DEFECTIVE OR INCOMPLETE FROM WHICH THE CORRECT PROFIT CANNOT BE DEDUCED. THE ITA NOS. 3699 & 2991/M/2011 8 BOOKS OF ACCOUNTS ARE AUDITED , THE AUDITORS HAVE N OT GIVEN ANY ADVERSE COMMENTS IN THE MAINTENANCE OF BOOKS OF ACCOUNT OR STOCK REGISTERS. THEREFORE WE SEE NO REASON FOR NOT UPHOLDING THE FI NDINGS OF THE LD. CIT(A). WE CONFIRM THE FINDINGS OF THE LD. CIT(A) AND HOLD THAT THE ASSESSEE HAS MAINTAINED PROPER BOOKS OF ACCOUNT IN ACCORDANCE WITH THE PROVISIONS OF LAW. THE APPEAL FILED BY THE REVENUE IS DISMISSED. 8. BEFORE PARTING, IT WOULD NOT BE OUT OF PLACE TO MENTION THAT THE TRIBUNAL , IN ASSESSEES OWN CASE FOR A.Y. 2005-06 AND 2006-07 , ON IDENTICAL FACTS AND FOR SIMILAR REASONS, HAS ACCEPT ED THE CORRECTNESS OF THE BOOKS OF ACCOUNT OF THE ASSESSEE. ITA NO. 2991/MUM/2011 ASSESSEES APPEAL 9. THE SUM AND SUBSTANCE OF THE GRIEVANCE OF THE AS SESSEE IS THAT THE LD. CIT(A) HAS ERRED IN UPHOLDING THE REQUEST OF TH E AO TO DISALLOW THE FUTURE LOSSES RECOGNIZED BY THE COMPANY AS PER ACCO UNTING STANDARD -7 (AS-7) , AS DURING ORIGINAL ASSESSMENT PROCEEDINGS THERE WAS NO DISCUSSION OR DISALLOWANCE ON THIS GROUND. 10. THE FACTS ON RECORD SHOW THAT DURING REMAND REP ORT PROCEEDINGS, THE AO ISSUED SHOW CAUSE NOTICE TO THE ASSESSEE REQ UIRING TO EXPLAIN AS TO WHY 100% LOSS WAS CLAIMED EVEN WHEN THE PROJECT WAS NOT COMPLETED 100%. THE AO ASKED THE ASSESSEE TO EXPLAIN WHY LOS S SHOULD NOT BE ALLOWED ONLY UPTO THE PERCENT OF WORK COMPLETED AND WHY THE EXCESSIVE LOSS OF RS. 1,58,77,508/- SHOULD NOT BE DISALLOWED AND ADDED BACK TO THE INCOME OF A.Y. 2003-04. IN RESPONSE TO WHICH THE A SSESSEE EXPLAINED TO THE AO THAT IT WAS CONSISTENTLY FOLLOWING ACCOUNTIN G STANDARD-7 (AS-7) ISSUED BY THE ICAI FOR VALUATION OF WORK-IN-PROGRES S. IT WAS EXPLAINED THAT THE VALUATION FIGURES WERE BASED ON THE ACTUAL COST RECORDED IN THE ITA NOS. 3699 & 2991/M/2011 9 BOOKS OF ACCOUNT AND AN ESTIMATE OF THE PROFIT/LOSS ON A PROJECT ON COMPLETION. IT WAS FURTHER EXPLAINED THAT MANDATOR Y ACCOUNTING STANDARD REQUIRES TO ESTIMATE THE PROBABLE OUTCOME OF ANY PROJECT. DURING THE COURSE OF EXECUTING ANY PROJECT IT IS PO SSIBLE THAT ACTUAL EXPENDITURE INCURRED MAY NOT BE BILLED TO THE CLIEN T WITHIN THE SAME ACCOUNTING PERIOD. MEANING THEREBY THAT THE COST M AY BE INCURRED IN ONE ACCOUNTING YEAR AND THE BILLING IN RESPECT OF THAT ITEM COST IS DONE IN A SUBSEQUENT ACCOUNTING YEAR. AS PER AS-7 SUCH COST T HAT RELATES TO A FUTURE ACTIVITY ARE RECOGNIZED AS AN ASSET AND CLASSIFIED AS WORK-IN-PROGRESS. THEREFORE, IT WAS PRAYED THAT THE LOSSES CLAIMED BY THE ASSESSEE SHOULD BE ALLOWED IN TOTAL. 10.1. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSE SSEE, THE AO OBSERVED THAT THE ASSESSEE HAS CLAIMED ENTIRE FORESEEABLE LO SSES OF FUTURE YEARS IN A.Y. 2004-05. THE AO WAS OF THE OPINION THAT SUCH CLAIM COULD NOT BE ALLOWED BECAUSE IT WAS ONLY BASED ON ESTIMATE AND W AS CONTINGENT IN NATURE. SINCE NO SUCH OBSERVATION WAS TAKEN TO ITS LOGICAL CONCLUSION DURING THE ASSESSMENT PROCEEDINGS, THE AO REQUESTED THE LD. CIT(A) TO DISALLOW THE CLAIM OF FUTURE LOSSES CLAIMED BY THE ASSESSEE. 11. THE LD. CIT(A) PUT A QUESTION TO HIMSELF WHETH ER HE HAS THE POWER TO MAKE SUCH DISALLOWANCES AT THE APPELLATE S TAGE. THE LD. CIT(A) WAS OF THE OPINION THAT THE AO IN THE ASSES SMENT ORDER HAS INDIRECTLY DISALLOWED THE ASSESSEES CLAIM OF FUTUR E LOSSES BY ESTIMATING THE TAXABLE INCOME AT THE RATE OF 5%. ACCORDING TO THE LD. CIT(A) ISSUE OF DISALLOWANCE OF FUTURE LOSSES WAS VERY MUCH PRES ENT BEFORE THE AO DURING ASSESSMENT PROCEEDINGS THOUGH THE AO DID NO T DISCUSS ANYTHING ON THIS ISSUE IN ASSESSMENT ORDER SINCE THE BOOK RE SULTS WERE PROPOSED TO BE REJECTED. THE LD. CIT(A) WAS OF THE FIRM BELIE F THAT HE HAS THE POWER ITA NOS. 3699 & 2991/M/2011 10 TO DO WHAT THE AO HAS OMITTED TO IT AND THE LD. CIT (A) HAS ALSO THE POWER TO REDUCE OR ENHANCE THE INCOME/ADDITION. ON THE BASIS OF THE REPORT OF AO , ASSUMING SUCH POWER, THE LD. CIT(A) WENT ON TO DISALLOW THE CLAIM OF FUTURE LOSSES BY THE ASSESSEE. THE LD . CIT(A) WAS OF THE FIRM BELIEF THAT THE EXPENSES RELATING TO BUSINESS ARE ALLOWABLE AS PER PROVISIONS OF SEC. 28 TO 43 OF THE ACT. THE EXPEN SES ALLOWABLE HAVE BEEN SPECIFICALLY MENTIONED IN THE RELEVANT SECTION OF THE ACT. THE RESIDUARY EXPENSES WHICH ARE ALLOWABLE U/S. 37(1) ONLY. THEREAFTER, THE LD. CIT(A) RELIED UPON TWO DECISIONS OF THE HONB LE SUPREME COURT IN THE CASES OF WALLFORT SHARES & STOCK BROKERS 233 C TR 42 AND INDIAN MOLASSES CO. VS CIT 37 ITR 66. THE LD. CIT(A) CONC LUDED THAT ASSESSEES CLAIM OF FUTURE LOSSES WAS NOT FITTING IN THE FRAME WORK OF PROVISIONS OF SEC. 37(1) OF THE ACT. THE LD. CIT(A ) OBSERVED THAT THE PROVISIONS OF ACCOUNTING STANDARD CANNOT OVER WRI TE THE STATUTORY PROVISIONS OF THE ACT. ACCORDINGLY, THE LD. CIT(A) DIRECTED TO REWORK OUT THE ACCOUNTS/WORK-IN-PROGRESS BY EXCLUDING THER E FROM THE CLAIM OF FUTURE LOSSES. 12. AGGRIEVED BY THIS FINDING, THE ASSESSEE IS BEFO RE US. THE LD. COUNSEL FOR THE ASSESSEE VEHEMENTLY ARGUED THAT SI NCE THE ASSESSEE IS A LIMITED LIABILITY COMPANY IN WHICH PUBLIC ARE SUBST ANTIALLY INTERESTED ACCOUNTING STANDARDS OF THE ICAI HAVE TO BE MANDATO RY FOLLOWED AND THEREFORE THE ASSESSEE HAS BEEN FOLLOWING AS-7 RELY ING UPON THE SPECIFIC CLAUSES OF AS-7, THE LD. COUNSEL SUBMITTED THAT TH E CLAIM OF THE ASSESSEE IS VERY MUCH IN LINE AS PER THE LAW. TO SUBSTANTIA TE, THE LD. COUNSEL RELIED UPON THE DECISIONS OF MAZAGAON DOCK LTD. VS JCIT 29 SOT 356 (BOM), JACOBS ENGINEERING INDIA PVT. LTD. VS ACIT ( 2009)-TIO-533, ITAT MUMBAI AND DREDGING INTERNATIONAL VS ADI (201 1) 48 SOT 430 (MUM). THE LD. COUNSEL FOR THE ASSESSEE CONCLUDED THAT IN THE LIGHT OF ITA NOS. 3699 & 2991/M/2011 11 ACCOUNTING STANDARD-7 AND THE JUDICIAL DECISIONS CI TED HEREINABOVE, THE CLAIM OF THE ASSESSEE DESERVES TO BE ALLOWED. 13. PER CONTRA, THE LD. DEPARTMENTAL REPRESENTATIVE SUPPORTED THE ORDERS OF THE LOWER AUTHORITIES. IT IS THE SAY OF THE LD. DR THAT FUTURE LOSSES ARE NOTHING BUT CONTINGENT LOSSES AND THEREF ORE CANNOT BE ALLOWED. 14. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PE RUSED 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. SE C. 145(2) OF THE ACT PROVIDES THAT THE CENTRAL GOVERNMENT MAY NOTIFY IN THE OFFICIAL GAZETTE FROM TIME TO TIME ACCOUNTING STANDARDS TO BE FOLLOW ED 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 PE RUSAL OF THE PROVISIONS OF SEC. 145 SHOW THAT ACCOUNTING STANDAR DS WHICH HAVE BEEN NOTIFIED BY THE CENTRAL GOVERNMENT HAVE TO BE MANDA TORILY FOLLOWED BY THE ASSESSEE. BUT THIS DOES NOT MEAN THAT THE ASSE SSEE CANNOT FOLLOW THE OTHER ACCOUNTING STANDARDS ISSUED BY ICAI. ICAI BE ING THE HIGHEST ACCOUNTING BODY OF THE COUNTRY , CREATED BY AN ACT OF PARLIAMENT, ACCOUNTING STANDARDS ISSUED BY IT CANNOT BE BRUSHED ASIDE LIGHTLY. ON THE CONTRARY, IF AN ASSESSEE IS FOLLOWING THE ACCOU NTING STANDARDS ISSUED BY ICAI, IT WOULD GIVE MORE CREDIBILITY AND AUTHENT ICITY TO ITS ACCOUNT. AS 7 , INTER ALIA , PROVIDES : WHEN THE OUTCOME OF A CONSTRUCTION CONTRACT CANNOT BE ESTIMATED RELIABLY (A) REVENUE SHOULD BE RECOGNIZED ONLY TO THE EXTENT OF CONTRACT COSTS INCURRED OF WHICH RECOVERY IS PROBAB LE AND ITA NOS. 3699 & 2991/M/2011 12 (B) CONTRACT COSTS SHOULD BE RECOGNIZED AS AN EXPENSE I N THE PERIOD IN WHICH THEY ARE INCURRED. AN EXPECTED LOSS ON THE CONSTRUCTION CONTRACT SHOUL D BE RECOGNIZED AS AN EXPENSE IMMEDIATELY IN ACCORDAN CE WITH PARAGRAPH 35. 15. IT IS NOT IN DISPUTE THAT THE ASSESSEE IS EXECU TING FIXED PRICE CONTRACT WHICH MEANS THAT THE CONTRACTOR HAS AGREED TO A FIXED CONTRACT PRICE OR RATE IN SOME CASES SUBJECT TO COST ESCALAT ION PRICES. AS PER AS-7, THE ASSESSEE IS ENTITLED TO MAKE PROVISION FOR FORE SEEABLE LOSSES. 16. A PERUSAL OF THE ACCOUNTING STATEMENT OF THE AS SESSEE FOR THE YEAR UNDER CONSIDERATION SHOWS THAT AT PARA-1.6 TO THE N OTES TO THE FINANCIAL STATEMENT, THE AUDITORS HAVE PROVIDED AS UNDER: REVENUE RECOGNITION ON CONTRACTS CONTRACT PRICES ARE EITHER FIXED OR SUBJECT TO PRIC E ESCALATION CLAUSES. REVENUE FROM CONTRACTS IS RECOGNIZED ON T HE BASIS OF PERCENTAGE COMPLETION METHOD, AND THE LEVEL OF COMPLETION DEPENDS ON THE NATURE AND TYPE OF EACH C ONTRACT INCLUDING : *UNBILLED WORK-IN-PROGRESS VALUED AT LOWER OF COST AND NET REALIZABLE VALUE UPTO THE STAGE OF COMPLETI ON. COST INCLUDES DIRECT MATERIAL, LABOUR COST AND APPROPRIATE OVERHEADS; AND * AMOUNTS DUE IN RESPECT OF THE PRICE AND OTHER ESCALATION, BONUS CLAIMS AND/OR VARIATION IN CONTRA CT WORK APPROVED BY THE CUSTOMER/THIRD PARTIES ETC. WHERE THE CONTRACT ALLOWS FOR SUCH CLAIMS OR VARIATIONS AND THERE IS EVIDENCE THAT THE CUSTOMER/THIRD PARTY HAS ACCEPTED IT. IN ADDITION, IF IT IS EXPECTED THAT THE CONTRACT WI LL MAKE A LOSS, THE ESTIMATED LOSS IS PROVIDED FOR IN THE BOO KS OF ACCOUNT. ITA NOS. 3699 & 2991/M/2011 13 CONTRACTUAL LIQUIDATED DAMAGES, PAYABLE FOR DELAYS IN COMPLETION OF CONTRACT WORK OR FOR OTHER CAUSES, AR E ACCOUNTED FOR AS COSTS WHEN SUCH DELAYS AND CAUSES ARE ATTRIBUTABLE TO THE COMPANY OR WHEN DEDUCTED BY THE CLIENT. 17. A SIMILAR ISSUE HAS BEEN CONSIDERED BY THE TRIB UNAL 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 FI XED PRICE CONTRACT IN VIEW OF THE MANDATORY REQUIREMENTS OF T HE AS-7, WAS TO BE ALLOWED IN THE YEAR IN WHICH THE CONTRACT HAD BE EN ENTERED INTO OR IT WAS TO BE SPREAD OVER A PERIOD OF CONTRACT, A S 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 COU LD 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 WO RK-IN-PROGRESS, PARTICULARLY IN VIEW OF THE QUALIFICATION MADE IN T HIS REGARD BY STATUTORY AUDITORS AS WELL AS BY THE COMPTROLLER & AUDITOR GENERAL OF INDIA. THEREFORE, THE OBSERVATION OF THE COMMIS SIONER (APPEALS) THAT THE ASSESSEE HAD BOOKED BOGUS LOSS W AS NOT CORRECT. AS FAR AS THE BASIS OF ESTIMATION WAS CONCERNED, TH E SAME WAS DONE ON TECHNICAL ESTIMATION BASIS AND, THEREFORE, MEREL Y BECAUSE THERE WERE SOME VARIATIONS IN THE FIGURES FURNISHED BY TH E ASSESSEE AT DIFFERENT STAGES, IT COULD NOT BE SAID THAT THE EST IMATED LOSS WAS NOT ALLOWABLE. IT WAS NOT DISPUTED THAT THE DEPARTMENT IN EARLIER YEARS HAD ALLOWED THE LOSS ON ESTIMATED BASIS HAVING REGA RD TO THE EXPENDITURE ACTUALLY INCURRED IN VARIOUS YEARS. TH EREFORE, 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 ACCOUNTING W AS BONA FIDE, IT COULD NOT LEAD TO THE INFERENCE THAT THE INCOME WAS ALSO DEDUCIBLE PROPERTY UNDER THE ACT. THIS ASPECT IS V ERY EVIDENT FROM THE FIRST PROVISO TO SECTION 145 AS IT STOOD PRIOR TO THE AMENDMENT BY THE FINANCE ACT, 1995 WITH EFFECT FROM 1/4/1997. IT COULD NOT BE DISPUTED THAT FROM THE METHOD ADOPTED BY THE ASSESS EE, THE ASSESSEES INCOME COULD NOT BE DEDUCTED PROPERTY IN THE YEAR IN WHICH THE LOSS HAD BEEN ANTICIPATED. AS A MATTER O F FACT THIS ASPECT WAS NOT DISPUTED BY THE ASSESSING OFFICER ALSO. HE HAD SWAYED MORE BY THE REVENUE LOSS THAN BY THE CORRECT PRINCI PLE TO BE ITA NOS. 3699 & 2991/M/2011 14 APPLIED. THE MATCHING PRINCIPLE OF ACCOUNTING WAS NOT OF MUCH SIGNIFICANCE IN THE PRESENT CONTEXT BECAUSE IF THE LOSS HAD BEEN PROPERLY ESTIMATED IN THE YEAR IN WHICH THE CONTRAC T HAD BEEN ENTERED INTO, THEN IT HAD TO BE ALLOWED IN THAT VER Y YEAR AND COULD NOT BE SPREAD OVER THE PERIOD OF CONTRACT. THE MAT CHING PRINCIPLE IS OF RELEVANCE WHERE INCOME AND EXPENDITURE, BOTH ARE TO BE CONSIDERED TOGETHER. HOWEVER, IN THE INSTANT CASE, THE EFFECT OF VALUATION OF WIP WOULD AUTOMATICALLY AFFECT THE PRO FITS OF SUBSEQUENT YEARS ACCORDINGLY. THEREFORE, THERE WAS NO REASON FOR NOT ACCEPTING IN PRINCIPLE THE ASSESSEES CLAIM AS BEING ALLOWABLE. HOWEVER, IN VIEW OF DISCREPANCIES POINTED OUT BY TH E COMMISSIONER (APPEALS) FOR CORRECT ESTIMATION OF LO SS, THE MATTER WAS TO BE RESTORED TO THE FILE OF THE AO TO EXAMINE THE CORRECTNESS OF AMOUNT CLAIMED. 18. A SIMILAR VIEW HAS BEEN TAKEN BY THE TRIBUNAL I N THE CASE OF JACOBS ENGINEERING INDIA PVT. LTD. (SUPRA) WHEREIN THE ASS ESSEES CLAIMS OF FORESEEABLE LOSSES WERE ALLOWED IRRESPECTIVE OF MET HOD OF ACCOUNTING IN TERMS OF AS-7. IN THE CASE OF DREDGING INTERNATION AL (SUPRA), THE ISSUE BEFORE THE TRIBUNAL WAS WHETHER U/S. 37(1) OF THE A CT PROVISION FOR FORESEEABLE LOSS MADE IN ACCORDANCE WITH GUIDELINES OF AS-7 AND DULY DEBITED IN AUDITED ACCOUNTS OF COMPANY IS AN ALLOWA BLE EXPENDITURE. THE TRIBUNAL DECIDED THE CASE IN FAVOUR OF THE ASSESSEE AND HELD THAT YES IT IS AN ALLOWABLE EXPENDITURE. THE TRIBUNAL WHILE DECID ING 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 B Y THE REVENUE , REVERSING THE FINDINGS OF THE LD. CIT(A) ,WE DIREC T THE AO TO RECOMPUTE THE BUSINESS PROFITS BY ALLOWING THE LOSSES PROVIDE D BY THE ASSESSEE IN ITS BOOKS. THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. ITA NOS. 3699 & 2991/M/2011 15 21. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED AND THE APPEAL FILED BY THE ASSESSEE IS ALLOWED ORDER PRONOUNCED IN THE OPEN COURT ON 17.5.2013 . 4 / 3' % 5 67 17.5.2013 3 / 8 SD/- SD/- (B.R. MITTAL ) (N. K. BILLAIYA ) /JUDICIAL MEMBER % / ACCOUNTANT MEMBER MUMBAI; 6 DATED 17 /05/2013 . . ./ RJ , SR. PS 4 4 4 4 / // / ,0! ,0! ,0! ,0! 9!'0 9!'0 9!'0 9!'0 / COPY OF THE ORDER FORWARDED TO : 1. (+ / THE APPELLANT 2. ,-(+ / THE RESPONDENT. 3. : ( ) / THE CIT(A)- 4. : / CIT 5. !;8 ,0 , , / DR, ITAT, MUMBAI 6. 8< = / GUARD FILE. 4 4 4 4 / BY ORDER, -!0 ,0 //TRUE COPY// > >> > / ? ? ? ? ) ) ) ) (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI