M/S. SHIVSHAIHI PUNARVASAN PRAKALP LTD., V. ITO 10(1) (4), MUMBAI

ITA 3486/MUM/2007

• Counselvise Citation: 348619914 RSA 2007
• Duration Of Justice: 4 year(s) 5 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-10-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: H
• Next Hearing Date: 29-09-2011
• Assessment Year: 2003-2004
• Appeal Filed On: 07-05-2007
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: GOLI SRINIWAS RAO
• Assessee Lawyers: PANKAJ TOPRANI
• Keywords: Business income
• Section: 145; 28; 44AD; 115JB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH H : MUMBAI BEFORE SHRI B.R. MITTAL, ( JUDICIAL MEMBER) AND SHRI RAJENDRA SINGH,(ACCOUNTANT MEMBER) ITA NO.5002/MUM/2010 ASSESSMENT YEAR : 2000-01 ITA NO.3050/MUM/2007 ASSESSMENT YEAR : 2001-02 ITA NO.5003/MUM/2010 ASSESSMENT YEAR : 2002-03 ITA NO.3486/MUM/2007 ASSESSMENT YEAR : 2003-04 M/S. SHIVSHAHI PUNARVASAN PRAKALP LTD. 5 TH FLOOR, GRIHA NIRMAN BHAVAN BANDRA (E) MUMBAI-400 051. ..( APPELLANT ) P.A. NO. (AACCS 1590 C) VS. INCOME TAX OFFICER WARD 10(1)(4) AAYAKAR BHAVAN M.K. ROAD MUMBAI-20. ..( RESPONDENT ) APPELLANT BY : SHRI PANKAJ TOPRANI RESPONDENT BY : SHRI GO LI SRINIWAS RAO DATE OF HEARING : 29.9.2011 DATE OF PRONOUNCEMENT : 31 ST OCTOBER, 2011 O R D E R PER BENCH. THESE APPEALS BY THE ASSESSEE ARE DIRECTED AGAINST DIFFERE NT ORDERS OF CIT(A) DATED 29.4.2010, 18.2.2008, 29.4.20 10 AND 8.3.2007 FOR ASSESSMENT YEARS 2000-01 TO 2003-04 RESPECTIVELY. THE DISPUTES RAISED BY THE ASSESSEE IN THESE APPEALS RELATE TO DISALLOWA NCE OF FUTURE ITA NO.3486,3050,5002 & 5003/M/ A.Y:00-01 TO 03-04 2 ESTIMATED LOSSES, ADDITION ON ACCOUNT OF SALE OF TDR, ADDI TION UNDER SECTION 115JB AND LEGAL VALIDITY OF REOPENING OF THE ASSESSMENT. AS THE MAIN DISPUTE REGARDING DISALLOWANCE OF FUTURE LOSSE S IS COMMON IN ALL THE ASSESSMENT YEARS, THESE APPEALS WHICH WERE HEARD TO GETHER ARE BEING DISPOSED OF BY A SINGLE CONSOLIDATED ORDER FOR T HE SAKE OF CONVENIENCE. 2. WE FIRST TAKE UP THE DISPUTE REGARDING DISALLOWANCE OF FUTURE LOSSES WHICH IS RELEVANT FOR ALL THE YEARS. THE FACTS IN B RIEF ARE THAT THE ASSESSEE IN THE RELEVANT YEARS WAS EXECUTING SLUM REHA BILITATION PROJECTS APPROVED BY SLUM REHABILITATION AUTHORITY (S RA). AS PER THE SCHEME OF REHABILITATION, A DEVELOPER APPROACHES SRA WI TH A PROPOSAL TO DEVELOP A SLUM AREA. ONCE THE PROJECT IS APPROVED BY SRA, THE DEVELOPER IS UNDER OBLIGATION TO CONSTRUCT FREE OF COST TENEMENT OF SIZE OF 225 SQ.FT. TO ALL SLUM DWELLERS. IN CONSIDERATION FO R DEVELOPING THE PROJECTS, THE DEVELOPER RECEIVES TDR/ OR RIGHT TO CONSTRU CT OVER AND ABOVE THE NORMAL PERMISSIBLE LIMIT AND THIS ADDITIONAL AREA IS ALLOWED TO BE SOLD IN THE OPEN MARKET. THUS THE COST TO THE DE VELOPER COMPRISED COST OF CONSTRUCTION OF REHABILITATION AREA AND COST OF FREE SALE AREA AND THE REVENUE GENERATED COMPRISED OF SALE OF TDR AND/ OR REVENUE FROM SALE OF FREE SALE AREA IN THE OPEN MARKE T. ITA NO.3486,3050,5002 & 5003/M/ A.Y:00-01 TO 03-04 3 2.1 THE ASSESSEE WHO WAS FOLLOWING MERCANTILE SYSTEM OF ACCOU NTING HAD ADOPTED PERCENTAGE COMPLETION METHOD OF ACCOUNTING OF INCOME FROM THE PROJECT AS PER PARA 7.2 OF ACCOUNTING STANDARD S (AS-7) RELATING TO ACCOUNTING OF CONSTRUCTION CONTRACTS ISSUED BY I NSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI). IN TERMS OF PAR A 19 OF AS-7, THE ASSESSEE HAD RECOGNIZED REVENUE WITH REFERENCE TO COM PLETION OF STAGE OF CONSTRUCTION AT THE BALANCE SHEET DATE. HOWEVER, THE LOSS ENVISAGED IN THE ENTIRE PROJECT WORK WAS IMMEDIATELY R ECOGNIZED AS PROVIDED IN PARA 19 OF AS -7. THE SAID PARA 19 READ S AS UNDER:- A FORESEEABLE LOSS ON THE ENTIRE CONTRACT SHOULD BE PROVIDED FOR IN THE FINANCIAL STATEMENTS IRRESPECTIVE OF THE AMOUNT OF WORK DONE AND THE METHOD OF ACCOUNTING FOLLOWED. 2.2 PARA 13.1 OF AS-7 ALSO PROVIDES FOR ACCOUNTING OF F UTURE LOSSES. THE SAID PARA IS ALSO REPRODUCED FOR READY REFERENCE. WHEN CURRENT ESTIMATES OF TOTAL CONTRACT COST AND REVENUE INDICATE A LOSS, PROVISION IS MADE FOR ENTIRE LOSS ON THE CONTRACT IRRESPECTIVE OF THE AMOUNT OF WORK DONE AND THE MET HOD OF ACCOUNTING FOLLOWED. IN SOME CIRCUMSTANCES, THE FO RESEEABLE LOSSES MAY EXCEED THE COST OF WORK DONE TO DATE. P ROVISION IS NEVERTHELESS MADE FOR THE ENTIRE LOSS OF THE CONTRA CT. 2.3 THE ASSESSEE WHILE WORKING OUT THE FUTURE LOSSES FROM DIFFERENT PROJECTS, ESTIMATED THE COST OF THE PROJECT BY ADDING AMO UNT FOR ESCALATION-COST, CONTINGENCIES, INTEREST ETC. SIMILARLY, T HE SALE PRICE WAS ESTIMATED BY ADOPTING THE SALE RATE OF 380 SQ.F T. FOR TDR AND 200 SQ.FT. FOR SHOPS. FOR INSTANCE, IN RESPECT OF TURBE MANDALE ITA NO.3486,3050,5002 & 5003/M/ A.Y:00-01 TO 03-04 4 MANKHURD PROJECT, THE ASSESSEE COMPUTED THE ESTIMATED REVE NUE AT RS.76.75 CRORES AND ESTIMATED COST AT RS.136 CRORES RESULT ING INTO LOSS OF RS.69.25 CRORES. SIMILARLY, COMPUTATION OF LOSS W AS MADE IN RESPECT OF OTHER PROJECTS ALSO AND CLAIMED AS DEDUCTION. F OR ASSESSMENT YEAR 2001-02, THE ASSESSEE CLAIMED DEDUCTION ON ACCO UNT OF FUTURE LOSSES IN RESPECT OF DIFFERENT PROJECTS AT RS.69 .52 CRORES. SIMILARLY, FUTURE LOSSES CLAIMED FOR ASSESSMENT YEAR 2000-0 1, 2002-03 AND 2003-04 WERE RS. 18,29,90,000/-, RS.1,21,,00,000/ - AND RS. 88,71,918/- RESPECTIVELY. 2.4 THE ASSESSEE SUBMITTED BEFORE THE AO THAT IT WAS FOL LOWING LOWER OF COST OR NET REALIZABLE VALUE METHOD OF VALU ATION OF WORK IN PROGRESS, WHICH WAS AN ACCEPTED METHOD GIVING RISE TO LOSSE S. RELIANCE WAS PLACED ON THE JUDGMENT OF HON'BLE SUPREME COURT IN THE CASE OF UNITED COMMERCE BANK LTD., VS. CIT (240 ITR 35 5). IT WAS POINTED OUT THAT IN CERTAIN CIRCUMSTANCES, IT WAS POSSIBLE , THAT WIP TURNS NEGATIVE AS WAS IN THE PRESENT CASE. IT WAS ALSO SUB MITTED THAT THE FUTURE ANTICIPATED LOSSES IN RESPECT OF THE PROJECT WA S NOTHING BUT NET REALIZABLE VALUE OF THE PROJECT WHICH WAS NEGATIVE . THE AO HOWEVER DID NOT ACCEPT THE CONTENTIONS RAISED. IT WAS OBSERVED BY HIM THAT THE ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF A CCOUNTING AS PER WHICH THE INCOME OR EXPENDITURE ON ACCOUNT OF LIA BILITY ACCRUES ONLY WHEN THERE IS ENFORCEABLE RIGHT IN RESPECT OF INCOM E OR LIABILITY. ITA NO.3486,3050,5002 & 5003/M/ A.Y:00-01 TO 03-04 5 IN THIS CASE THE LOSSES WERE ESTIMATED WHICH WERE ONLY CON TINGENT AND THEREFORE, ANY PROVISION FOR CONTINGENT LOSS COULD NOT B E ALLOWED. THE AO FURTHER OBSERVED THAT THE ASSESSEE HAD CREATED THE P ROVISIONAL LOSSES FOR ADJUSTING AGAINST INTEREST INCOME TO REDUCE TA X LIABILITY. THE AO THEREFORE, ALLOWED THE LOSSES ONLY TO THE EXTENT AT TRIBUTABLE TO THE WIP AT THE END OF THE YEAR AND NOT THE LOSSES OF THE E NTIRE PROJECTS WHICH WERE YET TO BE COMPLETED. THE AO THUS DISALLOWED THE LOSS OF RS.69.52 CRORES FOR A.Y 2001-02. THE WORKING OF THE L OSSES CLAIMED AND LOSSES DISALLOWED BY AO FOR A.Y 2001-02 IS GIVEN IN THE TABLE GIVEN BELOW: (RS. IN CRORE) SR. NO. NAME OF THE PROJECT TOTAL WIP AS ON 31.3.01 ESTIMATED COST OF THE PROJECT AS ON 31.03.01 LOSS ENVISAGED DURING THE YEAR % OF LOSS TO THE TOTAL PROJECT LOSS TO THE EXTENT OF WIP EXCESS LOSS TO BE DISALLOW ED 1 DINDOSHI 97.67 191.9 9.85 5.13 5.01 4.84 2 MATUNGA LABOUR CAMP 4.25 10.22 10.22 100 4.25 5.97 3 SHED COMPLEX DHARAVI 8.85 16.03 16.03 100 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 ITA NO.3486,3050,5002 & 5003/M/ A.Y:00-01 TO 03-04 6 2.5 SIMILARLY, LOSSES CLAIMED IN ASSESSMENT YEARS 2000-20 01, 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 DISALLO WED THE LOSSES OF RS.18,29,90,000/-, RS.1,21,00,000/- AND RS.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. RELI ANCE WAS PLACED ON THE JUDGMENT OF HON'BLE SUPREME COURT IN SA NJEEV WOOLLEN MILLS LTD. VS. CIT (279 ITR 434). IT WAS POINTED OUT THAT EVERY YEAR THE ASSESSEE WAS PREPARING ESTIMATES OF REVENUE AND EXPENSE S IN RESPECT OF EACH PROJECT BASED ON TECHNICAL DATA AVAILABLE AND LOSSES WERE CLAIMED IF THE NRV WAS FOUND TO BE LOWER AND THI S WAS IN ACCORDANCE WITH THE ACCOUNTING STANDARD AS-7. IT WAS ALS O SUBMITTED THAT THE AO HAD NOT DISPUTED THE FACTUM OF LOSS NOR P OINTED OUT ANY SPECIFIC PROVISION OF THE ACT WHICH WAS CONTRARY TO THE MET HOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE. 2.7 CIT(A) ON CAREFUL EXAMINATION OF ACCOUNTING STANDAR DS AND THE MATERIAL ON RECORD AS WELL AS SUBMISSION OF THE ASSESSEE DID NOT ACCEPT THE CONTENTIONS RAISED. IT WAS OBSERVED BY HIM TH AT THE LOSS ITA NO.3486,3050,5002 & 5003/M/ A.Y:00-01 TO 03-04 7 HAD BEEN COMPUTED BY THE ASSESSEE ON THE BASIS OF ESTIMATES OF REVENUE. ESTIMATED FUTURE REVENUE AND FUTURE EXPENSE S WOULD ONLY ACCRUE IN THE FUTURE YEARS BUT UNDER THE MERCANTILE SYSTE M OF ACCOUNTING, ONLY THE INCOME OR EXPENSES WHICH HAD BECOME D UE DURING THE RELEVANT YEAR COULD BE ALLOWED. CIT(A) F URTHER OBSERVED THAT IT WAS A SETTLED LEGAL POSITION THAT PROVISIONAL LOSSES AND CONTINGENT LIABILITIES COULD NOT BE ALLOWED IN MERCANT ILE SYSTEM. ONLY THE INCOME AND EXPENSES WHICH HAVE BECOME DUE DURING THE RELEVANT YEAR COULD BE CONSIDERED FOR COMPUTATION OF TOTAL INCOM E. CIT(A) ALSO NOTED THAT THE ACCOUNTING STANDARD AS-7 HAD BEEN REV ISED FROM 1.4.2003 WHICH WAS SILENT ON APPLICABILITY OF THE SAID S TANDARD TO CONSTRUCTION ACTIVITIES UNDERTAKEN BY THE ENTERPRISE ON I TS OWN ACCOUNT AND NOT AS A CONTRACTOR. CIT(A) FURTHER OBSERVED THAT EVEN THE PRE- REVISED AS-7 HAD A NON-OBSTANTE CLAUSE IN THE INTRODU CTION WHICH WAS AS UNDER :- THIS STATEMENT DEALS WITH ACCOUNTING FOR CONSTRUCT ION CONTRACTS IN THE FINANCIAL STATEMENTS OF ENTERPRISES UNDERTAK ING SUCH CONTRACTS (HEREAFTER REFERRED TO AS CONTRACTORS ) . THE STATEMENT ALSO APPLIES TO ENTERPRISES UNDERTAKING C ONSTRUCTION ACTIVITIES OF THE TYPE DEALT WITH IN THIS STATEMENT AND NOT AS CONTRACTORS BUT ON THEIR OWN ACCOUNT AS A VENTURE O F COMMERCIAL NATURE WHERE THE ENTERPRISE HAS ENTERED INTO AGREEM ENT FOR SALE. 2.8 CIT(A) THUS OBSERVED THAT IN CASE OF DEVELOPERS WHO WERE EXECUTING CONTRACTS ON THEIR OWN, THE AS-7 WOULD APPLY ONLY IF THEY HAD ALREADY ENTERED INTO SALE AGREEMENTS. THUS, THE L OGIC OF BOOKING ITA NO.3486,3050,5002 & 5003/M/ A.Y:00-01 TO 03-04 8 FUTURE LOSSES COULD BE APPRECIATED ONLY WHEN THE DEVELOP ER HAD ENTERED INTO SALE AGREEMENT. IN THE PRESENT CASE, ASSESSEE HAD NOT ENTERED INTO ANY SALE AGREEMENT DURING THE YEAR AND THEREFORE, AS-7 WAS NOT APPLICABLE. MOREOVER, IN THIS CASE THE SALE PRICE OF TDR AND EXPENSES TO BE INCURRED 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. CT( A) ALSO OBSERVED THAT THE ASSESSEE IN FACT CONCEDED THE POSITION IN THE SUBMI SSION 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 PRO VISIONS OF AS-2 WERE NOT APPLICABLE AS NO EVIDENCE HAD BEEN PLACED BY T HE 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 I N APPEAL BEFORE THE TRIBUNAL IN ALL THE YEARS UNDER CONSIDERATI ON. 2.10 BEFORE US, THE LD. AUTHORISED REPRESENTATIVE FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE LOWER AUTHO RITIES THAT INCOME FROM THE REHABILITATION PROJECT HAS TO BE COMPU TED AS PER ACCOUNTING STANDARD AS-7 WHICH WAS MANDATORY FOR THE ASSE SSEE TO FOLLOW. IT WAS ADMITTED THAT THE ASSESSEE WAS FOLLOWING PERCENTAGE ITA NO.3486,3050,5002 & 5003/M/ A.Y:00-01 TO 03-04 9 COMPLETION METHOD BUT ARGUED THAT IN TERMS OF PARA-13 .1 OF AS-7, THE FUTURE LOSSES HAD TO BE ALLOWED IN ENTIRETY. IT WAS AL SO POINTED OUT THAT THE ASSESSEE WAS EXECUTING A FIXED PRICE CONTRACT. WH EN POINTED OUT THAT THE AS-7 HAD NOT BEEN NOTIFIED BY THE GOVE RNMENT AND THEREFORE, THE TOTAL INCOME FOR THE PURPOSE OF COMPUTA TION OF TAXES COULD NOT BE DETERMINED IN TERMS OF SAID ACCOUNTING STA NDARD, THE LD. AR SUBMITTED THAT THE ACCOUNTING STANDARD AS-1 HAD BEE N NOTIFIED AND EVEN IN TERMS OF SAID STANDARD, PROVISION FOR ALL KNOWN LIABILITIES EVEN IF DETERMINED ON ESTIMATE HAS TO BE ALLOWED. T HE LD. AR REFERRED TO THE FOLLOWING DECISIONS IN SUPPORT OF THE CASE. I) 49 DTR 253(DEL.)- TRIVENI ENGINEERING AND INDUSTRY L TD., II) 312 ITR 254 (SC)-CIT VS. WOODWARD GOVERNOR INDIA PVT . LTD., III) 29 SOT 356 (MUM.) MAZGAON DOCK LTD. VS. JCIT, IV) TRIBUNAL DECISION IN ITA NO.335 AND 336/MUM/2007 IN CA SE OF JACOBS ENGINEERING INDIA PVT. LTD. VS. ACIT DATED 26.5 .2009. 2.10.1 THE LD. D.R ON THE OTHER HAND STRONGLY SUPPORT ED THE ORDERS OF AUTHORITIES BELOW. IT WAS SUBMITTED THAT THE ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING AND THEREFORE, ONLY THE INCOME WHICH HAS BECOME DUE DURING THE YEAR OR LIABILIT Y WHICH HAS BEEN ACTUALLY INCURRED DURING THE YEAR COULD BE ALLOW ED. IT WAS POINTED OUT THAT THE ASSESSEE WAS NOT EXECUTING A FIXED PRICE CONTRACT AS CONSIDERATION PAYABLE TO ASSESSEE WAS IN THE FORM OF TDR , INCOME ITA NO.3486,3050,5002 & 5003/M/ A.Y:00-01 TO 03-04 10 FROM WHICH COULD NOT BE DETERMINED PROPERLY AND THE SA ME WILL DEPEND UPON THE MARKET CONDITIONS PREVAILING DURING T HE PERIOD OF SALE OF TDR OR THE SALE OF THE CONSTRUCTED AREA AS PER TDR E NTITLEMENT. THERE WAS THEREFORE, VARIABLE ELEMENT INVOLVED. MOR EOVER, IF DUE TO SOME UNAVOIDABLE REASONS, PROJECT IS NOT COMPLETED AND IS ABANDONED, NO INCOME WILL ACCRUE TO THE ASSESSEE. THUS ACCRUAL OF INCOME AND INCURRING OF EXPENSES, BOTH WERE UNCERTAIN. LD. D.R. A LSO ARGUED THAT INCOME HAS TO BE COMPUTED UNDER THE PROVISIONS OF THE AC T AND NOT AS PER ACCOUNTING STANDARD AS-7 WHICH HAS NOT BEEN NOTIFIE D BY THE GOVERNMENT. IT WAS FURTHER POINTED OUT THAT THE GOV ERNMENT HAD NOTIFIED ONLY AS-1 AND AS-2 WHICH WERE REGARDING DI SCLOSURE OF ACCOUNTS DETAILS BY THE ASSESSEE AND NOT REGARDING COMPUTATI ON INCOME. THE ASSESSEE WAS FOLLOWING PERCENTAGE COMPLETION METHOD AND THEREFORE, INCOME/LOSS ATTRIBUTABLE TO THE CONSTRUCTI ON COMPLETED TILL THE END OF THE YEAR COULD ONLY BE CONSIDERED AND THE AO HAD THEREFORE RIGHTLY DISALLOWED THE ANTICIPATED LOSSES OF FUTURE YEARS. 2.11 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVA L CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING COMPUTA TION OF INCOME FROM REHABILITATION PROJECTS BEING EXECUTED BY THE ASSESS EE. IN TERMS OF THE SLUM REHABILITATION SCHEME, THE ASSESSEE WAS REQUIR ED 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 ITA NO.3486,3050,5002 & 5003/M/ A.Y:00-01 TO 03-04 11 CONSTRUCT ADDITIONAL AREA OVER AND ABOVE THE NORMAL PE RMISSIBLE LIMITS WHICH THE ASSESSEE COULD SELL IN THE OPEN MARKET. NONE OF THE PROJECTS BEING EXECUTED BY THE ASSESSEE WERE COMPLETE AND W ERE ONLY IN THE INITIAL STAGES OF CONSTRUCTION. THE ASSESSEE HOWEV ER ESTIMATED THE TOTAL REVENUE FROM THE ENTIRE PROJECT TO BE COMPL ETED IN FUTURE AND ALSO THE COST INVOLVED IN COMPLETION OF THE PROJECT INCLU DING THE ESTIMATED ESCALATION COST, CONTINGENCIES ETC., WHICH SHOWED THAT THERE WERE LOSSES WHICH HAD BEEN CLAIMED AS DEDUCTION IN THE REL EVANT 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 LOSS, PROVISION IS MADE FOR ENTIRE LOSSES ON T HE CONTRACT IRRESPECTIVE OF THE AMOUNT OF WORK DONE AND METHOD OF ACCOUNTING FOLLOWED. 2.11.1 THE ISSUE IS WHETHER THE INCOME DETERMINED OR CLAIM OF LOSS MADE BY THE ASSESSEE AS PER AS-7 CAN BE ACCEPTED. THE ACCOUN TING STANDARDS PRESCRIBED BY ICAI ARE THE STANDARDS TO BE FOL LOWED BY THE ASSESSEE IN RESPECT OF DIFFERENT BUSINESS ACTIVITIES. THESE STA NDARDS ARE HOWEVER NOT BINDING ON THE AO WHILE COMPUTING IN COME FOR THE PURPOSE OF TAXATION. THE INCOME FOR THE PURPOSE OF TAX ATION IS REQUIRED TO BE COMPUTED UNDER THE PROVISIONS OF THE INCOME TAX A CT. THE ITA NO.3486,3050,5002 & 5003/M/ A.Y:00-01 TO 03-04 12 COMPUTATION OF INCOME UNDER THE INCOME TAX ACT FOR DIFF ERENT HEADS OF INCOME IS REQUIRED TO BE MADE UNDER THE PROVISIONS OF SE CTIONS 14 TO 59 AND COMPUTATION OF INCOME UNDER THE HEAD BUSINESS IS REQUIRED TO BE MADE UNDER THE PROVISIONS OF SECTION 28 TO SECTION 44 DB. IN CASES WHERE THE ACT REQUIRES THE INCOME IN RESPECT OF A PA RTICULAR BUSINESS ACTIVITY TO BE COMPUTED IN A DIFFERENT MANNER , THERE ARE SPECIAL PROVISIONS INCORPORATED IN THE ACT. FOR INSTANCE , FOR COMPUTATION OF INCOME FROM CIVIL CONSTRUCTION IN CASES WHE RE THE ACCOUNTS HAVE NOT BEEN MAINTAINED AS REQUIRED UNDER SECT ION 44AA(2)(I) AND THE TURNOVER DOES NOT EXCEED RS.40.00 L ACS, THERE IS SPECIAL PROVISION UNDER SECTION 44AD TO COMPUTE THE INCOME @8% OF TURNOVER OR GROSS BUSINESS RECEIPTS. SIMILARLY THERE IS SPE CIAL PROVISION FOR COMPUTATION OF PROFIT FROM RETAIL BUSINESS UNDER SE CTION 44AF. THERE ARE ALSO SPECIAL PROVISIONS FOR COMPUTATION OF INCO ME FOR CERTAIN SPECIFIED BUSINESSES IN RESPECT OF NON-RESIDENTS. FOR INSTAN CE, THE INCOME FROM SHIPPING BUSINESS IN CASE OF A NON-RESIDENT IS R EQUIRED TO BE COMPUTED UNDER THE PROVISIONS OF SECTION 44AB UNDER CERTAIN CONDITIONS WHICH ARE NOT SATISFIED. THERE ARE NO SPECIAL P ROVISIONS FOR COMPUTATION OF INCOME FROM CONSTRUCTION PROJECTS. IT I S NO WHERE PROVIDED IN THE ACT THAT INCOME FROM CONSTRUCTION PROJECT S HAS TO BE COMPLETED IN THE MANNER PRESCRIBED IN AS-7. THEREFORE, THE INCOME FROM REHABILITATION PROJECTS IS REQUIRED TO BE COMPUTED UNDER THE ITA NO.3486,3050,5002 & 5003/M/ A.Y:00-01 TO 03-04 13 NORMAL PROVISIONS OF THE ACT. THE ACCOUNTING STANDARD, AS-7 HAS ALSO NOT BEEN NOTIFIED BY THE GOVERNMENT. THEREFORE, T HERE IS NO CASE FOR COMPUTATION OF INCOME FOR THE PURPOSE OF TAXATION TO B E MADE AS PER ACCOUNTING STANDARD AS-7. WHEN POINTED OUT, THE LD. A.R FOR THE ASSESSEE SUBMITTED THAT EVEN THE ACCOUNTING STANDARD AS-1 NOTIFIED BY THE GOVERNMENT PROVIDES FOR ALLOWANCE OF LOSS IN RESP ECT OF ALL KNOWN LIABILITIES AND THEREFORE, PROVISIONS FOR LOSSES H AS 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), TH E INCOME CHARGEABLE UNDER THE HEAD PROFIT AND GAIN OF BUSINESS OR PROFESSION OR INCOME FROM OTHER SOURCES, HAS TO BE COMPUTED IN ACCOR DANCE WITH EITHER THE CASH OR MERCANTILE SYSTEM OF ACCOUNTING R EGULARLY EMPLOYED BY THE ASSESSEE. THE SUB-SECTION (2) OF SECTION 1 45 PROVIDES THAT THE CENTRAL GOVERNMENT MAY MODIFY IN T HE OFFICIAL GAZETTE FROM TIME TO TIME ACCOUNTING STANDARDS TO BE F OLLOWED 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 BELO W AS READY REFERENCE. ITA NO.3486,3050,5002 & 5003/M/ A.Y:00-01 TO 03-04 14 IN EXERCISE OF THE POWERS CONFERRED BY SUB-SECTI ON (2) OF SECTION 145 OF THE INCOME-TAX ACT, 1961 (43 OF 1961), THE C ENTRAL GOVERNMENT HEREBY NOTIFIES THE FOLLOWING ACCOUNTIN G STANDARDS TO BE FOLLOWED BY ALL ASSESSEES FOLLOWING MERCANTILE SYST EM OF ACCOUNTING, NAMELY : A. ACCOUNTING STANDARD I RELATING TO DISCLOSURE OF ACCOUNTING POLICIES: 1. ALL SIGNIFICANT ACCOUNTING POLICIES ADOPTED IN THE PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS SHALL BE DISCL OSED. 2. THE DISCLOSURE OF THE SIGNIFICANT ACCOUNTING POL ICIES SHALL FORM PART OF THE FINANCIAL STATEMENTS AND THE SIGNIFICANT ACC OUNTING POLICIES SHALL NORMALLY BE DISCLOSED IN ONE PLACE. 3. ANY CHANGE IN AN ACCOUNTING POLICY WHICH HAS A MATERIAL EFFECT IN THE PREVIOUS YEAR OR IN THE YEARS SUBSEQUENT TO THE PREVIOUS YEARS SHALL BE DISCLOSED. THE IMPACT OF, AND THE ADJUSTM ENTS RESULTING FROM, SUCH CHANGE, IF MATERIAL, SHALL BE SHOWN IN THE F INANCIAL STATEMENTS OF THE PERIOD IN WHICH SUCH CHANGE IS MADE TO REFLECT THE EFFECT OF SUCH CHANGE. WHERE THE EFFECT OF SUCH CHANGE IS NOT ASCE RTAINABLE, WHOLLY OR IN PART, THE FACT SHALL BE INDICATED. IF A CHANG E IS MADE IN THE ACCOUNTING POLICIES WHICH HAS NO MATERIAL EFFECT ON THE FINANCIAL STATEMENTS FOR THE PREVIOUS YEAR BUT WHICH IS REASO NABLY EXPECTED TO HAVE A MATERIAL EFFECT IN ANY YEAR SUBSEQUENT TO PR EVIOUS YEAR, THE FACT OF SUCH CHANGE SHALL BE APPROPRIATELY DISCLOSE D IN THE PREVIOUS YEAR IN WHICH THE CHANGE IS ADOPTED. 4. ACCOUNTING POLICIES ADOPTED BY AN ASSESSEE SHOUL D BE SUCH SO AS TO REPRESENT A TRUE AND FAIR VIEW OF THE STATE OF AFF AIRS OF THE BUSINESS, PROFESSION OR VOCATION IN THE FINANCIAL STATEMENTS PREPARED AND PRESENTED ON THE BASIS OF SUCH ACCOUNTING POLICIES. FOR THIS PURPOSE THE MAJOR CONSIDERATIONS GOVERNING THE SELECTION AN D APPLICATION OF ACCOUNTING POLICIES ARE FOLLOWING, NAMELY : (I) PRUDENCE-PROVISIONS SHOULD BE MADE FOR ALL KNOW N LIABILITIES AND LOSSES EVEN THOUGH THE AMOUNT CANNO T BE DETERMINED WITH CERTAINTY AND REPRESENTS ONLY A B EST ESTIMATE IN THE LIGHT OF AVAILABLE INFORMATION; (II)SUBSTANCE OVER FORM - THE ACCOUNTING TREATMENT AND PRESENTATION IN FINANCIAL STATEMENTS OF TRANSACTION S AND EVENTS SHOULD BE GOVERNED BY THEIR SUBSTANCE AND NO T MERELY BY THE LEGAL FORM; (III) MATERIALITY - FINANCIAL STATEMENTS SHOULD DIS CLOSE ALL MATERIAL ITEMS, THE KNOWLEDGE OF WHICH MIGHT INFLUE NCE THE DECISIONS OF THE USER OF THE FINANCIAL STATEMENTS. 5. IF THE FUNDAMENTAL ACCOUNTING ASSUMPTIONS RELATI NG TO GOING CONCERN, CONSISTENCY AND ACCRUAL ARE FOLLOWED IN FI NANCIAL STATEMENTS, SPECIFIC DISCLOSURE IN RESPECT OF SUCH ASSUMPTIONS IS NOT REQUIRED. IF A FUNDAMENTAL ACCOUNTING ASSUMPTION IS NOT FOLLOWED, SUCH FACT SHALL BE DISCLOSED. ITA NO.3486,3050,5002 & 5003/M/ A.Y:00-01 TO 03-04 15 6. FOR THE PURPOSES OF PARAGRAPHS (1) TO (5), THE E XPRESSIONS, (A) ACCOUNTING POLICIES MEANS THE SPECIFIC ACCOUN TING PRINCIPLES AND THE METHODS OF APPLYING THOSE PRINCI PLES ADOPTED BY THE ASSESSEE IN THE PREPARATION AND PRES ENTATION OF FINANCIAL STATEMENTS; (B) ACCRUAL REFERS TO THE ASSUMPTION THAT REVENUE S 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 ACC OUNTING POLICIES ARE CONSISTENT FROM ONE PERIOD TO ANOTHER; (D) FINANCIAL STATEMENTS MEANS ANY STATEMENT TO P ROVIDE INFORMATION ABOUT THE FINANCIAL POSITION, PERFORMAN CE AND CHANGES IN THE FINANCIAL POSITION OF AN ASSESSEE AN D INCLUDES BALANCE SHEET, PROFIT AND LOSS ACCOUNT AND OTHER ST ATEMENTS AND EXPLANATORY NOTES FORMING PART THEREOF; (E) GOING CONCERN REFERS TO THE ASSUMPTION THAT T HE ASSESSEE HAS NEITHER THE INTENTION NOR THE NECESSIT Y OF LIQUIDATION OR OF CURTAILING MATERIALLY THE SCALE O F THE BUSINESS, PROFESSION OR VOCATION AND INTENDS TO CON TINUE HIS BUSINESS, PROFESSION OR VOCATION FOR THE FORESEEABL E FUTURE. B. ACCOUNTING STANDARD II RELATING TO DISCLOSURE OF PRIOR PERIOD AND EXTRAORDINARY ITEMS AND CHANGES IN ACCOUNTING P OLICIES: 7. PRIOR PERIOD ITEMS SHALL BE SEPARATELY DISCLOSED IN THE PROFIT AND LOSS ACCOUNT IN THE PREVIOUS YEAR TOGETHER EIR NA IC AN AMOUNT IN A MANNER SO THAT THEIR IMPACT ON PROFIT OR LOSS IN THE PREVI OUS YEAR CAN BE PERCEIVED. 8. EXTRAORDINARY ITEMS OF THE ENTERPRISE DURING THE PREVIOUS YEAR SHALL BE DISCLOSED IN THE PROFIT AND LOSS ACCOUNT AS PAR T OF TAXABLE INCOME. THE NATURE AND AMOUNT O EACH SUCH ITEM SHALL BE SEP ARATELY DISCLOSED IN A MANNER SO THAT THEIR RELATIVE SIGNIFICANCE AND EFFECT ON THE OPERATING RESULTS OF THE PREVIOUS YEAR CAN BE PERCE IVED. 9. A CHANGE IN AN ACCOUNTING POLICY SHALL BE MADE O NLY IF THE ADOPTION OF A DIFFERENT ACCOUNTING POLICY IS REQUIRED BY STA TUTE OR IF IT IS CONSIDERED THAT THE CHANGE WOULD RESULT IN A MORE A PPROPRIATE PREPARATION OR PRESENTATION OF THE FINANCIAL STATEM ENTS BY AN ASSESSEE. 10. ANY CHANGE IN AN ACCOUNTING POLICY WHICH HAS A MATERIAL EFFECT SHALL BE DISCLOSED. THE IMPACT OF, AND THE ADJUSTME NTS RESULTING FROM SUCH CHANGE, IF MATERIAL, SHALL BE SHOWN IN THE F INANCIAL STATEMENTS OF THE PERIOD IN WHICH SUCH CHANGE IS MADE TO REFLECT THE EFFECT OF SUCH ITA NO.3486,3050,5002 & 5003/M/ A.Y:00-01 TO 03-04 16 CHANGE. WHERE THE EFFECT OF SUCH CHANGE IS NOT ASCE RTAINABLE, WHOLLY OR IN PART, THE FACT SHALL BE INDICATED, IF A CHANG E IS MADE IN THE ACCOUNTING POLICIES WHICH HAS NO MATERIAL EFFECT ON THE FINANCIAL STATEMENTS FOR THE PREVIOUS YEAR BUT WHICH IS REASO NABLY EXPECTED TO HAVE A MATERIAL EFFECT IN YEARS SUBSEQUENT TO THE P REVIOUS YEARS, THE FACT OF SUCH CHANGE SHALL BE APPROPRIATELY DISCLOSE D IN THE PREVIOUS YEAR IN WHICH THE CHANGE IS ADOPTED. 11. A CHANGE IN AN ACCOUNTING ESTIMATE THAT HAS A M ATERIAL EFFECT IN PREVIOUS YEAR SHALL BE DISCLOSED AND QUANTIFIED. AN Y CHANGE IN AN ACCOUNTING ESTIMATE WHICH IS REASONABLY EXPECTED TO HAVE A MATERIAL EFFECT IN YEAR SUBSEQUENT TO PREVIOUS YEAR SHALL AL SO BE DISCLOSED. 12. IF A QUESTION ARISES AS TO WHETHER A CHANGE I S A CHANGE IN ACCOUNTING POLICY OR A CHANGE IN AN ACCOUNTIN G ESTIMATE, SUCH A QUESTION SHALL BE REFERRED TO THE BOARD FOR DECISIO N. 13. FOR THE PURPOSES OF PARAGRAPHS (7) TO (12), THE EXPRESSIONS, (A) ACCOUNTING ESTIMATE MEANS AN ESTIMATE MADE FO R THE PURPOSE OF PREPARATION OF FINANCIAL STATEMENTS WHIC H IS BASED ON THE CIRCUMSTANCES EXISTING AT THE TIME WHE N THE FINANCIAL STATEMENTS ARE PREPARED; (B) ACCOUNTING POLICIES MEANS THE SPECIFIC ACCOUN TING PRINCIPLES AND THE METHOD OF APPLYING THOSE PRINCIP LES ADOPTED BY THE ASSESSEE IN THE PREPARATION AND PRES ENTATION OF FINANCIAL STATEMENTS; (C) EXTRAORDINARY ITEMS MEANS GAINS OR LOSSES WHI CH ARISE FROM EVENTS OR TRANSACTIONS WHICH ARE DISTINCT FROM THE ORDINARY ACTIVITIES OF THE BUSINESS AND WHICH ARE B OTH MATERIAL AND EXPECTED NOT TO RECUR FREQUENTLY OR RE GULARLY. EXTRAORDINARY ITEMS INCLUDE MATERIAL ADJUSTMENTS NECESSITATED BY CIRCUMSTANCES WHICH, THOUGH RELATED TO YEARS PRECEDING TO THE PREVIOUS YEARS, ARE DETERMIN ED IN THE PREVIOUS YEAR: PROVIDED THAT INCOME OR EXPENSES ARISING FROM THE ORDINARY ACTIVITIES OF THE BUSINESS OR PROFESSION O R VOCATION OF AN ASSESSEE, THOUGH ABNORMAL IN AMOUNT OR INFREQ UENT IN OCCURRENCE, SHALL NOT QUALIFY AS EXTRAORDINARY ITEM ; (D) FINANCIAL STATEMENTS MEANS ANY STATEMENT TO P ROVIDE INFORMATION ABOUT THE FINANCIAL POSITION, PERFORMAN CE AND CHANGES IN THE FINANCIAL POSITION OF AN ASSESSEE AN D INCLUDES BALANCE SHEET, PROFIT AND LOSS ACCOUNT AND OTHER ST ATEMENTS AND EXPLANATORY NOTES FORMING PART THEREOF; (E) PRIOR PERIOD ITEMS MEANS MATERIAL CHARGES OR CREDITS WHICH ARISE IN THE PREVIOUS YEAR AS A RESULT OF ERR ORS OR OMISSIONS IN THE PREPARATION OF THE FINANCIAL STATE MENTS OF ONE OR MORE PREVIOUS YEARS: ITA NO.3486,3050,5002 & 5003/M/ A.Y:00-01 TO 03-04 17 PROVIDED THAT THE CHARGE OR CREDIT ARISING ON THE OUTCOME O F A CONTINGENCY, WHICH AT THE TIME OF OCCURRENCE COULD NOT BE ESTIMATED ACCURATELY SHALL NOT CONSTITUTE THE CORRECTION OF A N ERROR BUT A CHANGE IN ESTIMATE AND SUCH AN ITEM SHALL NOT BE TREATED A S A PRIOR PERIOD ITEM. THIS NOTIFICATION SHALL COME INTO FORCE WITH EFFECT FROM 1ST DAY OF APRIL, 1996 AND SHALL, ACCORDINGLY, APPLY TO ASSESSMENT YE AR 1997-98 AND SUBSEQUENT ASSESSMENT YEARS. 2.11.3 A CAREFUL PERUSAL OF THE ACCOUNTING STANDARDS AS- 1 & AS-2 NOTIFIED ABOVE SHOWS THAT THESE ARE ONLY REGARDING DI SCLOSURE OF ACCOUNTING POLICIES AND DISCLOSURE OF PRIOR PERIOD EXPE NSES AND EXTRAORDINARY ITEMS AND CHANGES IN ACCOUNTING POLICIES. THESE PROVIDE THAT THE ASSESSEE SHOULD DISCLOSE ALL SIGNIFICANT ACCO UNTING POLICIES OR ANY CHANGES IN ACCOUNTING POLICIES. IT FURTHER PROVIDES THAT THE ACCOUNTING POLICY SHOULD BE SUCH SO AS TO REPRESENT A TRUE AND FAIR VIEW OF THE STATE OF AFFAIRS OF THE BUSINESS, PROFESSION O R VOCATION. IN THIS CONTEXT IT HAS BEEN MENTIONED THAT THE PROVISIO NS SHOULD BE MADE FOR ALL KNOWN LIABILITIES. THE ACCOUNTING STANDARD NO TIFIED NO WHERE PROVIDES THAT THE PROVISIONS FOR KNOWN LIABILITIES SHOUL D BE ALLOWED AS DEDUCTION WHILE COMPUTING TOTAL INCOME. WHETHER THE P ROVISION MADE CAN BE ALLOWED AS DEDUCTION OR NOT WILL DEPEND ON FACTS AND CIRCUMSTANCES OF THE CASE. IT IS A SETTLED LEGAL POSITION TH AT PROVISIONS IN RESPECT OF LIABILITIES WHICH HAD BEEN INCURRED DURING THE YEAR HAVE TO BE ALLOWED AS DEDUCTION EVEN IF LIABILITIES ARE REQUIR ED TO BE DISCHARGED AT A FUTURE DATE IF THEY CAN BE ESTIMATED WITH REASONA BLE CERTAINTY. ITA NO.3486,3050,5002 & 5003/M/ A.Y:00-01 TO 03-04 18 THIS LEGAL POSITION HAS BEEN DECLARED BY THE HON'BLE SUP REME COURT IN SEVERAL CASES SUCH AS IN THE CASE OF CALCUTTA & CO. (37 ITR 0 1); IN CASE OF METAL BOX COMPANY OF INDIA (73 ITR 53); AND I N CASE OF BHARAT EARTH MOVERS (245 ITR 428).IT HAS BEEN MADE CLEAR IN THESE CASES THAT FOR CLAIMING DEDUCTION ON ACCOUNT OF ANY PROVISION FOR LIABILITY, THE INCURRING OF LIABILITY DURING THE YEAR MUST BE CERTAIN . IN CASE OF CALCUTTA & COMPANY (SUPRA), THE ASSESSEE HAD SOLD LAND WIT H AN UNDERTAKING TO DEVELOP IT WITHIN SIX MONTHS. THE SALE DEED HAD BEEN EXECUTED AND ON THE SALE DEED DATE, THE ASSESSEE HAD RECEI VED PART OF THE SALE CONSIDERATION AND BALANCE WAS TO BE RECEIVED IN INSTALLMENTS IN FUTURE. THE ASSESSEE HAD ALSO TO DEVELOP THE LAND WI THIN SIX MONTHS FROM THE SALE DEED DATE. IT WAS HELD THAT ON THE DAT E OF SALE DEED, INCOME HAD ACCRUED AS PER MERCANTILE SYSTEM EVEN IF PART CONSIDERATION WAS TO BE RECEIVED LATER. SIMILARLY ON E XECUTION OF SALE DEED, ASSESSEE INCURRED THE LIABILITY TO INCUR EXPENSES TO DEVELOP THE LAND IN FUTURE AND THEREFORE ESTIMATED EXPENDITURE O N DEVELOPMENT OF THE LAND ON A REASONABLE BASIS WAS HELD ALLOWABLE AS D EDUCTION. PRECISELY BECAUSE OF THESE REASONS AND THE RULINGS MENTIONE D ABOVE, THE ACCOUNTING STANDARD-AS-1 NOTIFIED BY THE GOVERNME NT PROVIDES THAT PROVISIONS SHALL BE MADE IN RESPECT OF ALL KNOWN L IABILITIES SO THAT AO COULD ALLOW DEDUCTION IN RESPECT OF LIABILITIES WHICH HAD BEEN INCURRED DURING THE YEAR. ITA NO.3486,3050,5002 & 5003/M/ A.Y:00-01 TO 03-04 19 2.11.4 THE CASE OF THE ASSESSEE IS DIFFERENT. IN THIS CASE , THE ASSESSEE WAS EXECUTING A REHABILITATION PROJECT AND T HE ASSESSEE WAS ENTITLED FOR TDR /RIGHT TO SELL THE ADDITIONAL SP ACE. THE TDR ACCRUES TO THE ASSESSEE ONLY AFTER COMPLETION OF CERTAIN PER CENTAGE OF THE PROJECT AND ANY INCOME ON ACCOUNT OF SALE OF ADDITIO NAL SPACE WILL ACCRUE ONLY WHEN IT HAS BEEN CONSTRUCTED AND SOLD. IT IS POSSIBLE THAT THE ASSESSEE IN SOME CASES MAY ABANDON THE PROJECT IN THE MI D-WAY AND IN THAT CASE NO INCOME MAY ACCRUE TO THE ASSESSEE AT ALL . THE INCOME IN THE CURRENT YEAR WILL ACCRUE TO THE ASSESSEE ONLY ON ACCOUNT OF TDR RELEASED AND SOLD OR IN RESPECT OF ANY ADDITIONA L SPACE CONSTRUCTED FOR WHICH AGREEMENT FOR SALE HAS BEEN ENTERED INTO AND ONLY IN RESPECT OF SUCH ACCRUED INCOME IF ANY EXPENDITURE HAS TO BE INCURRED IN FUTURE, THE ASSESSEE WILL INCUR THE LIABILITY IN THE CURRENT YEAR ITSELF. NO AGREEMENTS FOR SALE HAD BEEN ENTERED INTO BY THE ASSESSEE. THEREFORE, THE METHOD FOLLOWED BY THE ASSESSEE TO SHOW THE ESTIMATED INCOME AND EXPENSES IN RESPECT OF THE ENTIR E PROJECT MOST OF WHICH WAS YET TO BE EXECUTED COULD NOT BE ACCEPT ED AS A PROPER METHOD TO COMPUTE INCOME UNDER THE PROVISIONS OF INCOME TAX ACT. IN CASE OF CONSTRUCTION PROJECTS WHICH ARE EXECUTED ON OWN ACCOUNT AND NOT AS A CONTRACTOR, WHICH IS THE POSITION IN THE PRESENT CASE, INCOME FROM THE PROJECT WILL ACCRUE ONLY WHEN THE P ROJECT IS COMPLETE AND AREA IS SOLD AND THEREFORE, COMPLETED CONTR ACT METHOD ITA NO.3486,3050,5002 & 5003/M/ A.Y:00-01 TO 03-04 20 WILL BE THE PROPER METHOD TO COMPUTE INCOME IN SUCH CASE S. HOWEVER, SINCE THE CONSTRUCTION PROJECT HAS LONG GESTATION PERIOD, PERCENTAGE COMPLETION METHOD IS ALSO ACCEPTED METHOD FOR INCOME TAX PURPOSES AS PER WHICH INCOME/LOSSES PROPORTIONATE TO THE CONSTRUCTION COMPLETED IN THE RELEVANT YEAR CAN BE OFFERED TO TAX. FOR THIS PURPOSE, INCOME AND EXPENDITURE FROM THE ENTIRE PROJECT IS ESTI MATED ON SOME REASONABLE BASIS AND PROPORTIONATE INCOME/LOSS RELATING T O THE WORK COMPLETED DURING THE YEAR CAN BE OFFERED FOR TAX. TH IS IS EXACTLY WHAT THE AO HAS DONE IN THIS CASE. HE HAS ALLOWED THE LOSSES ONL Y PROPORTIONATE TO THE WORK IN PROGRESS AT THE END OF T HE RELEVANT YEAR. THE LOSS ALLOWED BY THE AO ON PROPORTIONATE BASIS TO TH E WORK COMPLETED TILL THE END OF THE YEAR HAS THEREFORE, BE EN RIGHTLY CONFIRMED BY CIT(A) AND THE CLAIM OF THE ASSESSEE FOR THE ENTIRE A NTICIPATED LOSSES FROM THE ENTIRE PROJECT HAS BEEN RIGHTLY REJECTED . WE, THEREFORE, CONFIRM THE ORDER OF CIT(A) ON THIS ISSUE IN ALL THE YEARS UNDER CONSIDERATION. 2.11.5 LD. AR FOR THE ASSESSEE HAS PLACED RELIANCE ON CERT AIN JUDICIAL PRONOUNCEMENTS WHICH IN OUR VIEW ARE DISTINGUISH ABLE AND CANNOT BE FOLLOWED. IN CASE OF TRIVENI ENGINEERING IND USTRY LTD. (49 DTR 253), THE ASSESSEE WHO WAS EXECUTING A CONSTRUCTION CONT RACT WAS FOLLOWING THE COMPLETED CONTRACT METHOD OF ACCOUNTING . THE ASSESSEE HAD RECOGNIZED THE ENTIRE INCOME FROM THE PROJE CT DURING THE ITA NO.3486,3050,5002 & 5003/M/ A.Y:00-01 TO 03-04 21 RELEVANT YEAR. THEREFORE, THE CLAIM OF DEDUCTION ON ACCOUNT OF FUTURE LIABILITIES IN RESPECT OF THE PROJECTS WHICH WERE KNOWN L IABILITIES WERE FOUND TO BE ALLOWABLE. IT WAS ALSO IN CONSONANCE WITH T HE MATCHING PRINCIPLE. THE CASE OF THE ASSESSEE IS DIFFERENT. THE ASSE SSEE IS FOLLOWING PERCENTAGE COMPLETION METHOD BUT THE ENTIRE FUTURE LOSSES HAVE BEEN CLAIMED THOUGH ONLY SMALL PORTION OF THE PR OJECT WAS COMPLETE, QUITE IN VIOLATION MATCHING PRINCIPLE. REL IANCE HAS ALSO BEEN PLACED ON THE JUDGMENT OF HONBLE SUPREME COURT IN TH E CASE OF WOODWARD GOVERNOR INDIA P. LTD.(312 ITR 254). IN T HAT CASE, THE ASSESSEE WHO WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING HAD TAKEN FOREIGN CURRENCY LOANS FOR REVENUE PURPOSES. THE RE WAS ADDITIONAL LIABILITY AT THE END OF THE YEAR DUE TO FOREIGN EXCHANGE FLUCTUATION WHICH WAS CLAIMED AS DEDUCTION. HON'BLE SUPRE ME COURT OBSERVED THAT IN MERCANTILE SYSTEM OF ACCOUNTING, WHAT IS DUE IS BROUGHT INTO CREDIT BEFORE ACTUAL RECEIPT AND SIMILARLY WHAT IS LEGALLY INCURRED IS DEBITED BEFORE IT IS ACTUALLY DISBURSED. T HE CLAIM WAS THUS ALLOWED. THIS WAS IN CONFORMITY WITH THE SETTLED PRINCI PLE THAT EXPENDITURE IN RESPECT OF LIABILITY ACTUALLY INCURRED HAS TO BE ALLOWED EVEN IF LIABILITY IS TO BE DISCHARGED AT A LATER DAT E. ON THE LAST DATE OF THE BALANCE SHEET, THE ADDITIONAL LIABILITY ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION HAD BEEN INCURRED BY THE ASSESSEE AND INCURRING OF LIABILITY WAS CERTAIN AND THEREFORE, CLAIM WAS FOUND TO BE ALLOWABLE. ITA NO.3486,3050,5002 & 5003/M/ A.Y:00-01 TO 03-04 22 IN THE PRESENT CASE, DURING THE RELEVANT YEAR, THERE W AS NO LIABILITY INCURRED BY THE ASSESSEE ON ACCOUNT OF EXPENSES TO BE INCURR ED IN FUTURE YEARS. THE CASE IS OBVIOUSLY DIFFERENT. 2.11.6 RELIANCE HAS ALSO BEEN PLACED ON THE DECISION OF THE TRIBUNAL IN THE CASE OF MAZAGAON DOCK LTD. (29 SOT 356) AND DECI SION OF THE TRIBUNAL IN THE CASE OF JACOBS ENGINEERING PVT. LTD. V S. ASSTT. COMMISSIONER OF INCOME TAX (SUPRA), IN WHICH THE PREVIO US DECISION OF THE TRIBUNAL HAS BEEN FOLLOWED. THUS RELIANCE IS BASICA LLY ON THE DECISION OF THE TRIBUNAL IN THE CASE OF MAZAGAON DOCK PV T. LTD. (SUPRA). IN THAT CASE ALSO, THE DEDUCTION HAD BEEN CLAIM ED ON ACCOUNT OF ANTICIPATED LOSS AS PER ACCOUNTING STANDARD AS-7. THE ASSESSEE HAD CLAIMED THE LOSS BY SWITCHING OVER THE METHOD OF ACCOU NTING OF INCOME TO AS-7. THE TRIBUNAL OBSERVED IN THE ORDER T HAT MERELY BECAUSE CHANGE IN METHOD WAS BONAFIDE, IT COULD NOT LEAD TO THE INFERENCE THAT INCOME WAS ALSO DEDUCTIBLE PROPERLY UNDER THE ACT. THUS, EVEN IN THAT CASE THE TRIBUNAL HELD THAT INCOME H AS TO BE COMPUTED UNDER THE PROVISIONS OF THE ACT. HOWEVER, TRIB UNAL HAD ALSO OBSERVED THAT THERE WAS NO DISPUTE IN PRINCIPLE THAT E STIMATED LOSSES WERE ALLOWABLE. THE TRIBUNAL THEREFORE, HELD THAT THE LOSS COULD NOT BE CONSIDERED AS BOGUS AS HELD BY CIT(A) BECAUSE THE SAME HAD BEEN COMPUTED AS PER THE ACCOUNTING STANDARD AS-7. THE TRI BUNAL HAD RESTORED THE ISSUE TO THE AO FOR PROPERLY ESTIMATING TH E LOSS. IT THUS ITA NO.3486,3050,5002 & 5003/M/ A.Y:00-01 TO 03-04 23 APPEARS THAT THE TRIBUNAL EVEN THOUGH OBSERVING THAT INCOME HAS TO BE COMPUTED UNDER THE PROVISIONS OF THE ACT ALLOWED TH E CLAIM IN THE UNDERSTANDING THAT THERE WAS NO DISPUTE ABOUT ALLOWAB ILITY OF THE LOSSES. IN THE PRESENT CASE, THE CLAIM OF THE ASSESSEE HAS BEE N STRONGLY DISPUTED AND THEREFORE, IN OUR VIEW, THE ISSUE HAS TO BE DECIDED UNDER THE PROVISIONS OF LAW AND NOT AS PER ACCOUN TING STANDARD AS-7 WHICH HAS NOT BEEN NOTIFIED BY THE GOVE RNMENT. THE CASES CITED BY THE ASSESSEE ARE, THEREFORE, OF NO HELP. TH E ASSESSEE HAD ALSO NOT PRESSED THE APPLICATION OF AS-7 BEFORE CIT (A), AS THE SAME HAS NOT BEEN NOTIFIED BY THE GOVERNMENT. EVEN B EFORE US EMPHASIS WAS PLACED ONLY ON AS-1 AS NOTIFIED BY THE GO VERNMENT, 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 O RDER OF CIT(A) IN ALLOWING THE LOSS ONLY TO THE EXTENT, IT RELATED TO T HE 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 Y EAR 2003-04 IS REGARDING ADDITION OF RS .7,37,41,582/- ON ACCOUNT OF SALE OF TDR. THE AO NOTED THAT THE ASSESSEE HAD SOLD TDR DURI NG THE YEAR FOR RS.24,99,25,721/- IN RELATION TO TURBHE MANDALE PROJECT. IN THE SAID PROJECT TOTAL WORK DONE TILL 31.3.2003 WAS OF RS. 25,39,59,098/- ITA NO.3486,3050,5002 & 5003/M/ A.Y:00-01 TO 03-04 24 INCLUDING THE WORK COMPLETED DURING THE ASSESSMENT YEAR 2 003-04 OF RS.17,61,84,139/-. THE TOTAL TDR SOLD IN RELATION TO THE SAID PROJECT TILL 31.3.2003 WAS RS .56.80 CRORES. THE ASSESSEE HAD HOWEVER BOOKED TDR SALE OF ONLY RS.20.45 CRORES UP TO 31.3.2003 ON PER CENTAGE BASIS. THE AO HELD THAT TDR SOLD DURING THE YEAR TO THE EXT ENT OF WORK DONE IN THE YEAR UNDER CONSIDERATION HAS TO BE CONSIDERED FOR TAXATION. THE AO OBSERVED THAT TDR WAS RELEASED ON THE BASIS OF STAGE OF COMPLETION OF WORK. FOR INSTANCE, IF 20% OF THE PROJE CT WAS COMPLETE, 20% OF TOTAL TDR IS RELEASED. THE ASSESSEE GETS THE RIG HT TO SELL TDR IMMEDIATELY ON ITS RELEASE BY SRA. THE SALE OF TDR WA S NOT LINKED TO THE COMPLETION OF THE PROJECT AND CAN BE DONE INDEPEND ENTLY. THEREFORE, THE AO HELD THAT INCOME FROM SALE OF TDR H AD TO BE TAXED IN THE YEAR IN WHICH SALE TOOK PLACE. HE, THEREFORE, COMPUTED THE INCOME FROM SALE OF TDR AT RS.7,37,41,582/-( RS .24,99,25,721 RS .17,61,64,139/-) AND ADDED TO THE TOTAL INCOME. IN APPEAL CIT(A) AGREED WITH THE DECISION OF THE AO THAT TDR SALE COULD NOT BE LINKED TO THE PROJECT FROM WHICH IT WAS GENERATED. THE ASSESSEE HA D THE RIGHT TO SELL THE TDR AS SOON AS IT WAS RELEASED. HE, THEREFORE , CONFIRMED THE ADDITION OF RS.7,37,41,582/- MADE BY THE AO ON A CCOUNT OF TDR SALE. AGGRIEVED BY THE SAID DECISION THE ASSESSEE IS IN APP EAL BEFORE THE TRIBUNAL. ITA NO.3486,3050,5002 & 5003/M/ A.Y:00-01 TO 03-04 25 3.1 BEFORE US THE LD. AR FOR THE ASSESSEE SUBMITTED THAT IN CASE ANTICIPATED LOSSES FROM THE ENTIRE PROJECT ARE ALLOWED BY THE TRIBUNAL THE ASSESSEE WILL NOT PRESS THE GROUND RELATED TO INCOME F ROM SALE OF TDR. HOWEVER, IN CASE THE CLAIM OF ANTICIPATED LOSSES WAS NOT ALLOWED THEN TDR INCOME MAY BE ALLOWED ON THE BASIS OF PERCENT AGE COMPLETION METHOD. THE LD. DR ON THE OTHER HAND SUPP ORTED THE ORDER OF CIT(A). 3.2 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE MATTE R CAREFULLY. THE DISPUTE IS REGARDING COMPUTATION OF IN COME FROM SALE OF TDR. THERE IS NO DISPUTE THAT THE ASSESSEE HAD RECEIVED INCOME FROM SALE OF TDR DURING THE YEAR ON RELEASE BY SRA. THE DI SPUTE IS REGARDING COMPUTATION OF INCOME FROM SUCH SALE OF TDR. WE AGREE WITH THE FINDINGS OF THE AUTHORITIES BELOW BUT INCOME FROM SALE OF TDR HAD ACCRUED DURING THE YEAR AS PER MERCANTILE SYSTEM OF ACCOUNTING FOLLOWED BY THE ASSESSEE. HOWEVER, PART OF SUCH INCOME HA S ALREADY BEEN CONSIDERED WHILE ALLOWING THE ESTIMATED LOSSES IN RE LATION TO WIP OF THE RELEVANT YEARS AS PER THE PERCENTAGE COMPLETION METHOD. THE ASSESSEE WHILE CLAIMING THE ANTICIPATED FUTURE LOSS, HAD C OMPUTED 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 P ROJECT. THE LOSS WHICH HAS BEEN ALLOWED IS ONLY PROPORTIONATE TO WIP OF THE RELEVANT ITA NO.3486,3050,5002 & 5003/M/ A.Y:00-01 TO 03-04 26 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 CORRESP ONDING ESTIMATED VALUE OF TDR CONSIDERED FOR THE PURPOSE OF COM PUTATION OF ANTICIPATED LOSS OR SALE VALUE OF TDR RECEIVED IN EXCESS O F THE TDR ENTITLEMENT CONSIDERED IN THE ESTIMATE IS REQUIRED TO B E ADDED AND IN CASE SALE VALUE OR ENTITLEMENT IS LOWER THAN THE ESTIMAT ED 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, T HE EXCESS EXPENDITURE HAS TO BE ALLOWED. THE ISSUE IN OUR VIEW REQUIRES FRESH EXAMINATION. WE, THEREFORE, SET ASIDE THE ORDER OF C IT(A) AND RESTORE THE MATTER BACK TO AO FOR PASSING A FRESH ORDER ON THIS POINT AFTER NECESSARY EXAMINATION IN THE LIGHT OF THE OBSERVATION M ADE ABOVE AND AFTER ALLOWING OPPORTUNITY OF HEARING TO THE ASSESSEE. 4. THE THIRD DISPUTE IS REGARDING ADDITION OF RS.1,93 ,061/- UNDER SECTION 115JB WHICH IS RELEVANT ONLY FOR ASSESSMENT YEAR 20 03-04. THE AO NOTED THAT THE ASSESSEE HAD DEBITED A SUM OF RS .1,93,061/- TO THE P&L ACCOUNT ON ACCOUNT OF EXPENSES PERTAINING TO EARLIER YEARS. WHILE COMPUTING THE BOOK PROFIT UNDER SECTION 115JB, AO ADDE D THE SAID AMOUNT ON THE GROUND THAT THE SAID AMOUNT PERTAINED TO THE EARLIER YEARS. IN APPEAL, CIT(A) AGREED WITH THE ADDITION M ADE BY THE AO ON ITA NO.3486,3050,5002 & 5003/M/ A.Y:00-01 TO 03-04 27 THE GROUND THAT ASSESSEE HAD NOT PROVED THAT PRIOR PERI OD EXPENSES HAD CRYSTALLIZED DURING THE YEAR. ACCORDINGLY THE ADDI TION WAS UPHELD, AGGRIEVED, BY WHICH THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 4.1 BEFORE US THE LD. AUTHORISED REPRESENTATIVE FOR TH E ASSESSEE SUBMITTED THAT BOOK PROFIT HAS TO BE COMPUTED ON THE BASIS OF P&L ACCOUNT PREPARED IN ACCORDANCE WITH THE PROVISIONS OF PART II AND III OF SCHEDULE-6 OF COMPANIES ACT, 1956 AND ONLY ADJUSTME NTS PROVIDED IN THE EXPLANATION-1 TO SECTION 115JB (2) COULD BE MA DE. AO WAS NOT EMPOWERED TO MAKE ANY OTHER ADJUSTMENT OR DISALLOWANCE . RELIANCE WAS PLACED ON THE JUDGMENT OF HON'BLE SUPREME COURT IN THE CASE OF APOLLO TYRES LTD. (255 ITR 273). THE LD. DEPARTMENT AL REPRESENTATIVE ON THE OTHER HAND PLACED RELIANCE ON THE ORDERS OF AUT HORITIES BELOW. 4.2 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING ADDITI ON MADE ON ACCOUNT OF DISALLOWANCE OF PRIOR PERIOD EXPENSES AMOUNTIN G TO RS.1,93,061/- WHILE COMPUTING BOOK PROFIT UNDER SECTIO N 115JB. UNDER THE PROVISIONS OF SECTION 115JB, BOOK PROFIT HAS T O BE THE PROFIT DISCLOSED AS PER P&L ACCOUNT PREPARED IN ACCORDANCE WITH THE PROVISIONS OF PART II AND III OF SCHEDULE-6 OF THE COM PANIES ACT, 1956 AND LAID BEFORE THE COMPANY IN ITS AGMS AND TO THE SAID PROFIT, ONLY ADJUSTMENTS AS SPECIFIED IN EXPLANATION-1 TO SECTION 115J B COULD BE ITA NO.3486,3050,5002 & 5003/M/ A.Y:00-01 TO 03-04 28 MADE. THERE IS NO DISPUTE THAT CLAIM ON ACCOUNT OF PRIO R PERIOD EXPENSES HAD BEEN DEBITED IN THE P&L ACCOUNT PREPARED U NDER THE COMPANIES ACT AND LAID BEFORE AGM. THERE IS NO PROVIS ION FOR ANY ADJUSTMENT ON ACCOUNT OF PRIOR PERIOD EXPENSES IN EXPLA NATION -1 TO SECTION 115JB(2). THEREFORE, ANY ADDITION ON ACCOUNT OF DISALLOWANCE OF PRIOR PERIOD EXPENSES WHILE COMPUTING BOOK PROFIT I S NOT PERMITTED IN VIEW OF THE JUDGMENT OF HON'BLE SUPREME COURT IN THE CASE OF APOLLO TYRES LTD. (SUPRA). WE, THEREFORE, SET ASIDE THE ORDE R OF CIT(A) AND DELETE THE ADDITION MADE. 5. THE FOURTH DISPUTE IS REGARDING LEGAL VALIDITY OF RE-OPENING OF THE ASSESSMENT WHICH IS RELEVANT ONLY FOR ASSESSMENT YEARS 2000-01 AND 2002-03. AT THE TIME OF HEARING OF THESE APPEALS, TH E LD. AUTHORISED REPRESENTATIVE FOR THE ASSESSEE DID NOT PRESS THIS GROUND AND THEREFORE, THE GROUND REGARDING RE-OPENING OF ASSESSMEN T RAISED IN THE APPEALS FOR ASSESSMENT YEARS 2000-01 AND 2002-03 ARE DISMISSED. 6. IN THE RESULT, APPEALS OF THE ASSESSEE FOR THE ASSESSMENT YEARS 2000-01, 2001-02, 2002-03 ARE DISMISSED WHEREAS FOR TH E ASSESSMENT YEAR 2003-04 IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 31.10.2011. SD/- SD/- (B.R. MITTAL) (RAJENDRA SINGH ) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 31.10.2011. JV. ITA NO.3486,3050,5002 & 5003/M/ A.Y:00-01 TO 03-04 29 COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR BENCH TRUE COPY BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.