Asstt.CIT Cir.-2, Nashik V. Ashoka Buildcon Ltd., Nashik

ITA 394/PUN/2007

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 85350 (ITAT-PUNE)
• Duration Of Justice: 7 year(s) 9 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-12-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 05-11-2013
• Assessment Year: 2003-2004
• Appeal Filed On: 13-03-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P S NAIK
• Assessee Lawyers: SUNIL PATHAK
• Keywords: Business income
• Section: 143(3); 37(1); 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI R.S. PADVEKAR, JUDICIAL MEMBER ITA NO.394/PN/2007 (ASSESSMENT YEAR : 2003-04) ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE-2, NASHIK. . APPELLANT VS. ASHOKA BUILDCON LTD., S.NO.861, ASHOKA MARG, WADALA, NASHIK 422 011. PAN : AABCA9292J . RESPONDENT DEPARTMENT BY : SHRI P. S. NAIK ASSESSEE BY : SHRI SUNIL PATHAK DATE OF HEARING : 10-11-2014 DATE OF PRONOUNCEMENT : 31-12-2014 ORDER PER G. S. PANNU, AM THE CAPTIONED APPEAL BY THE REVENUE IS DIRECTED AGA INST AN ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-II, NASHIK DATED 22.12.2006 WHICH, IN TURN, HAS ARISEN FROM AN ORDER DATED 28.0 3.2006 PASSED BY THE ASSESSING OFFICER U/S 143(3) OF THE INCOME-TAX ACT, 1961 (IN SHORT THE ACT) PERTAINING TO THE ASSESSMENT YEAR 2003-04. 2. IN THIS APPEAL, REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL :- 1. THAT THE LEARNED CIT(A) ERRED IN LAW AND FACTS IN ALLOWING RELIEF OF RS.1,24,85,000/- TO THE ASSESSEE BY HOLDING IT T HAT THE FORESEEABLE LOSSES CLAIMED BY THE ASSESSEE REPRESENT ASCERTAINED LIABI LITY IGNORING THE FACT THAT THESE EXPENSES ADMITTEDLY PERTAIN TO PERIOD APRIL 2 003 TO NOVEMBER 2006. 2. THAT THE LEARNED CIT(A) ERRED IN LAW AND FACTS I N ALLOWING RELIEF OF RS.1,24,85,000/- TO THE ASSESSEE IGNORING THE FA CT THAT THESE EXPENDITURE REPRESENT CONTINGENT LIABILITY AND ADMITTEDLY PERTA IN TO PERIOD APRIL 2003 TO NOVEMBER 2006. 3. THAT THE LEARNED CIT(A) ERRED IN LAW AND FACTS I N ALLOWING RELIEF OF RS.1,24,85,000/- TO THE ASSESSEE RELYING ON AS-7 OF ACCOUNTING STANDARDS IGNORING THE FACT THAT THESE ACCOUNTING STANDARDS A RE NOT NOTIFIED U/S 145 OF THE I.T. ACT. ITA NO.394/PN/2007 3. BRIEFLY PUT, THE RELEVANT FACTS AND BACKGROUND O F THE DISPUTE CAN BE SUMMARIZED AS FOLLOWS. THE RESPONDENT-ASSESSEE IS A COMPANY INCORPORATED UNDER THE PROVISIONS OF COMPANIES ACT, 1956 AND IS, INTER-ALIA, ENGAGED IN THE BUSINESS OF CIVIL CONSTRUCTION, CONTRACTING, IMPLEM ENTATION OF INFRASTRUCTURE PROJECT, ETC.. THE ASSESSING OFFICER NOTED THAT AS SESSEE HAD UNDERTAKEN A PROJECT FOR CONSTRUCTION AND MAINTENANCE OF EAST CO AST ROAD FOR TAMILNADU ROAD DEVELOPMENT CORPORATION (IN SHORT TNRDC). T HE STATED PROJECT WAS AWARDED TO THE ASSESSEE IN THE YEAR 2000-01 AND IT WAS A COMPOSITE CONTRACT WHICH INVOLVED IMPROVEMENT WORK/CONSTRUCTION AND MA INTENANCE 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 P ER THE TERMS AND CONDITIONS OF THE CONTRACT AWARDED BY TNRDC. SINCE THE WORK OF M AINTENANCE OF ROAD WAS FOR A PERIOD OF FIVE YEARS AND CONSTRUCTION WAS COM PLETED DURING THE YEAR UNDER CONSIDERATION, ASSESSEE ANTICIPATED LOSSES ON ACCOUNT OF MAINTENANCE WORK. THE ASSESSEE DETERMINED SUCH FUTURE FORESEEA BLE LOSSES AT RS.1,24,85,000/- AND MADE A PROVISION OF SUCH AMOUN T. THE PROVISION SO MADE WAS DEBITED TO THE PROFIT & LOSS ACCOUNT AND C LAIMED AS A DEDUCTION WHILE COMPUTING INCOME FOR THE YEAR UNDER CONSIDERA TION. THE ASSESSING OFFICER TREATED SUCH PROVISION FOR FORESEEABLE LOSS ES AS A CONTINGENT LIABILITY AND DISALLOWED THE SAME WHILE FINALIZING THE ASSESS MENT U/S 143(3) OF THE ACT DATED 28.03.2006. THE AFORESAID ACTION OF THE ASSE SSING OFFICER IS THE SUBJECT-MATTER OF CONTROVERSY BEFORE US. 4. THE CIT(A), HOWEVER, DISAGREED WITH THE ASSESSIN G OFFICER AND HELD THAT THE FORESEEABLE LOSS WAS NOT A CONTINGENT LIAB ILITY BUT IT WAS LIABLE TO BE CONSIDERED WHILE DETERMINING THE INCOME OF THE ASSE SSEE FOR THE PERIOD UNDER CONSIDERATION. AS PER THE CIT(A), SUCH LOSSES WERE ASCERTAINED LOSSES ON THE MAINTENANCE PORTION OF THE CONTRACT THOUGH IT WAS A N ESTIMATION MADE IN THE LIGHT OF THE AVAILABLE INFORMATION. THE CIT(A) ALS O NOTED THAT AS PER THE ITA NO.394/PN/2007 JUDGEMENT OF THE HONBLE SUPREME COURT IN THE CASE OF CALCUTTA CO. LTD. VS. CIT, 37 ITR 1 (SC), WHERE AN ASSESSEE WAS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING, IT WAS ENTITLED TO DEDUCT EXPENDITUR E WHICH IS INCIDENTAL TO THE BUSINESS AND SUCH EXPENDITURE WAS DEDUCTIBLE ON ACC RUAL BASIS THOUGH IT MAY NOT HAVE BEEN ACTUALLY INCURRED DURING THE RELEVANT ASSESSMENT YEAR. IN NUTSHELL, THE CIT(A) HELD THAT THE FUTURE FORESEEAB LE LOSSES OF RS.1,24,85,000/- CLAIMED BY THE ASSESSEE REPRESENTED AN ASCERTAINED LIABILITY WHICH WAS ALLOWABLE AS DEDUCTION WHILE COMPUTING INCOME FOR T HE ASSESSMENT YEAR UNDER CONSIDERATION. AGAINST SUCH A DECISION OF TH E CIT(A), REVENUE IS IN APPEAL BEFORE US. 5. BEFORE US, THE LD. DEPARTMENTAL REPRESENTATIVE H AS REFERRED TO THE ASSESSMENT ORDER AND IN-PARTICULAR PARAS 8 (IV) AND (V) TO POINT OUT THAT THE IMPUGNED PROVISION FOR FORESEEABLE LOSSES WAS MEREL Y AN ESTIMATION AND THEREFORE THE CLAIM WAS JUSTIFIABLY DISALLOWED BY T HE ASSESSING OFFICER. ACCORDING TO THE LD. DEPARTMENTAL REPRESENTATIVE, T HE EXPENSES FOR MAINTENANCE WORK OF THE ROAD WAS REQUIRED TO BE CON SIDERED BY THE ASSESSEE ON ACTUAL BASIS IN THE RESPECTIVE YEARS AND THE IMP UGNED PROVISION TOWARDS FUTURE LOSSES OF FIVE YEARS ON ACCOUNT OF MAINTENAN CE EXPENSE WAS ONLY AN ESTIMATE AND THEREFORE IT WAS A CONTINGENT LIABILIT Y. IN THIS MANNER, THE LD. DEPARTMENTAL REPRESENTATIVE CONTENDED THAT THE CIT( A) ERRED IN ALLOWING THE CLAIM OF THE ASSESSEE. 6. ON THE OTHER HAND, LD. REPRESENTATIVE FOR THE RE SPONDENT-ASSESSEE HAS DEFENDED THE CONCLUSION DRAWN BY THE CIT(A). A T THE TIME OF HEARING, THE LD. REPRESENTATIVE REFERRED TO THE PAPER BOOK FILED WHEREIN IS PLACED A COPY OF THE CONTRACT ENTERED INTO WITH TNRDC, WHICH IS P LACED AT PAGES 1 TO 45 OF THE PAPER BOOK. THE LD. REPRESENTATIVE EXPLAINED T HAT THE CONTRACT WITH TNRDC WAS A COMPOSITE CONTRACT INASMUCH AS IT INVOL VED IMPROVEMENT/CONSTRUCTION AND MAINTENANCE OF THE EAS T COAST ROAD OF 113 ITA NO.394/PN/2007 KILOMETERS BETWEEN PONDICHERRY TO CHENNAI. IN THIS CONTEXT, OUR ATTENTION WAS INVITED TO THE TERMS AND CONDITIONS OF THE CONTRACT WHICH SHOWS THAT IT WAS A COMPOSITE CONTRACT. IN-PARTICULAR, REFERENCE WAS M ADE TO PAGE 8 OF THE PAPER BOOK WHEREIN THE EXPRESSIONS USED IN THE CONTRACT H AVE 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 M AINTENANCE FOR A SPECIFIED PERIOD THEREON. IT WAS POINTED OUT THAT IN TERMS O F THE CONTRACT, ASSESSEE WAS REQUIRED TO CARRY OUT THE NECESSARY IMPROVEMENT/CON STRUCTION OF THE ROAD AND TO MAINTAIN IT FOR THE PERIOD STIPULATED THEREON WH ICH 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 P ORTION OF MAINTENANCE WORK. IN TERMS THEREOF, IT IS SUBMITTED THAT THE V ALUE OF THE IMPROVEMENT WORK WAS RS.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 WHIC H IS PLACED AS ANNEXURE- 1 TO THE CONTRACT AT PAGE 143 OF THE PAPER BOOK. TH EREAFTER, IN TERMS OF THE CONTRACT, ASSESSEE WAS REQUIRED TO MAINTAIN THE ROA D FROM OCTOBER, 2001 TO JULY, 2006 AND THE TOTAL AMOUNT PAYABLE TO THE ASSE SSEE IN INSTALLMENTS FOR MAINTENANCE OF THE ROAD WAS RS.1,77,15,800/- DURING THE AFORESAID PERIOD. THE DETAILS OF THE MAINTENANCE WORK TO BE CARRIED O UT IS ALSO REFLECTED IN APPENDIX-1 OF THE CONTRACT, WHICH IS ALSO PLACED IN THE PAPER BOOK. 7. THE LD. REPRESENTATIVE SUBMITTED THAT DURING THE YEAR UNDER CONSIDERATION, ASSESSEE HAD COMPLETED THE IMPROVEME NT WORK OF THE ROAD AND ITS LIABILITY TO MAINTAIN THE CONTRACT FOR THE NEXT FIVE YEARS HAD STARTED. THE ASSESSEE REALIZED, IT MIGHT INCUR LOSS ON MAINTENAN CE OF THE ROAD AS IT ANTICIPATED THAT THE EXPENSES LIKELY TO BE INCURRED ON MAINTENANCE WOULD ITA NO.394/PN/2007 EXCEED THE AMOUNTS RECEIVABLE OVER THE YEARS FOR TH E MAINTENANCE AS STIPULATED IN THE CONTRACT. ACCORDINGLY, ASSESSEE MADE A PROVISION FOR LOSSES ON MAINTENANCE OF ROAD AMOUNTING TO RS.1,24,85,000/ -. JUSTIFYING THE BASIS OF ESTIMATION OF LOSS, A REFERENCE HAS MADE TO THE PAG ES 245 TO 255 OF THE PAPER BOOK, WHEREIN A DETAILED WORKING IN THIS REGARD HAS BEEN PLACED. THE LD. REPRESENTATIVE EMPHASIZED THAT THE WORKING OF SUCH LOSSES HAVE NOT BEEN DISPUTED BY THE ASSESSING OFFICER BUT THE SAME HAVE BEEN REJECTED MERELY ON THE GROUND THAT IT WAS A CONTINGENT LIABILITY. 8. AT THE TIME OF HEARING, THE LD. REPRESENTATIVE S UBMITTED THAT A SIMILAR SITUATION HAD ARISEN BEFORE THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF ACIT VS. ITD CEMENTATION INDIA LTD., (2014) 146 ITD 59 WHEREIN A PROVISION MADE FOR FORESEEABLE LOSSES WAS ALLOWED AS A DEDUCT ION. APART THEREFROM, RELIANCE HAS ALSO BEEN PLACED ON THE DECISION OF TH E MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF MAZAGON DOCK LTD. VS. JCIT, (2009) 29 SOT 356 IN SUPPORT OF THE CASE OF THE ASSESSEE. IN THE COURSE OF HEARING, REFERENCE HAS ALSO BEEN MADE TO THE FOLLOWING DECISIONS : (I) JUD GEMENT OF THE HONBLE SUPREME COURT IN THE CASE OF CALCUTTA CO. LTD. VS. CIT, 37 ITR 1 (SC); (II) BHARAT EARTH MOVERS VS. CIT, 245 ITR 428 (SC); AND, (III) ROTORK CONTROLS INDIA P. LTD. VS. CIT, (2009) 314 ITR 62 (SC). 9. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS. THE RESPONDENT- ASSESSEE IS ENGAGED IN THE EXECUTION OF AN INFRASTR UCTURE DEVELOPMENT PROJECT WHICH WAS AWARDED BY THE TNRDC. THE WORK RELATED T O IMPROVEMENT OF WORK AND ITS MAINTENANCE FOR A PERIOD OF FIVE YEARS. TH E JOB HAS BEEN DONE ON A CONTRACTUAL BASIS. FACTUALLY SPEAKING, THE CONTRAC T 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 T NRDC HAS AWARDED SEPARATE CONTRACTS, I.E. ONE FOR CONSTRUCTION OF RO AD AND SECOND FOR ITS MAINTENANCE FOR A SPECIFIED PERIOD. THE ASSESSING OFFICER HAS OBSERVED SO ITA NO.394/PN/2007 ON THE GROUND THAT TNRDC HAS SPECIFICALLY QUANTIFIE D THE AMOUNT PAYABLE FOR THE TWO COMPONENTS OF THE WORK SEPARATELY. FOR THI S 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 EFFECT ED. 10. IN OUR CONSIDERED OPINION, THOUGH THE TNRDC HAS QUANTIFIED THE CONTRACT PAYMENTS SEPARATELY WITH REGARD TO THE IMP ROVEMENT WORK AND THE MAINTENANCE WORK, SO HOWEVER, IT WOULD BE INAPPROPR IATE TO SAY THAT THE TWO WORKS WERE DIFFERENT. IN-FACT, IT WAS A COMPOSITE WORK AWARDED BY TNRDC WHICH INVOLVED IMPROVEMENT OF ROAD AND ITS MAINTENA NCE THEREOF FOR A SPECIFIED PERIOD. AT PAGE 115 OF THE PAPER BOOK IS PLACED A COMMUNICATION ADDRESSED BY THE ASSESSEE TO TNRDC WHEREIN THE PERF ORMANCE GUARANTEE HAS BEEN FURNISHED WHICH IS FOR THE COMPOSITE WORK RELATING TO IMPROVEMENT OF ROAD AND ITS MAINTENANCE THEREOF. APART THEREFROM, A PERUSAL OF THE VARIOUS TERMS AND CONDITIONS OF THE CONTRACT AWARDED BY TNR DC MAKES IT QUITE CLEAR THAT THE OBLIGATION OF THE ASSESSEE WAS A COMPOSITE ONE I.E. INVOLVING IMPROVEMENT OF THE ROAD AND ITS SUBSEQUENT MAINTENA NCE FOR THE SPECIFIED PERIOD. THEREFORE, WE ARE UNABLE TO AGREE WITH THE ASSESSING OFFICER THAT THE WORKS OF IMPROVEMENT AND MAINTENANCE OF ROAD WERE S EPARATE. IN-FACT, FACTUALLY SPEAKING, THE WORK CARRIED OUT BY THE ASS ESSEE WAS A COMPOSITE FIXED CONTRACT WORK INVOLVING IMPROVEMENT OF ROAD A ND ITS MAINTENANCE THEREOF FOR A FIXED PERIOD. 11. THE ASSESSING OFFICER HAS DISALLOWED THE IMPUGN ED PROVISION ON THE GROUND THAT IT IS LIABLE TO BE ALLOWED IN THE YEAR WHEN IT IS ACTUALLY INCURRED, AND BECAUSE ASSESSEE HAD SHOWN THE TOTAL INCOME OF RS.4 1,92,05,032/- FROM TNRDC FOR ROAD CONSTRUCTION ON RECEIPT BASIS. THIS ASPECT OF THE MATTER HAS BEEN CHALLENGED BEFORE THE CIT(A), WHO HELD THAT TH E ASSESSING OFFICER WAS ITA NO.394/PN/2007 WRONG IN INFERRING THAT THE ASSESSEE HAS OFFERED IN COME ON RECEIPT BASIS. THE CIT(A) HAS RECORDED IN PARA 12 (II) OF HIS ORDER TH AT ASSESSEE COMPANY IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING AND IS RE COGNIZING INCOME FROM CONTRACTS ON PERCENTAGE OF COMPLETION METHOD. IN O UR CONSIDERED OPINION, THERE IS NOTHING TO DISAGREE WITH THE CIT(A) ON THI S ASPECT OF THE MATTER. IN- FACT, THE FINANCIAL STATEMENTS OF THE ASSESSEE COMP ANY WHICH ARE PLACED AT PAGES 206 TO 220 OF THE PAPER BOOK ALSO POINT OUT T HAT THE ASSESSEE COMPANY IS MAINTAINING ITS ACCOUNTS ON A MERCANTILE SYSTEM. IN SO FAR AS THE ISSUE OF ALLOWABILITY OF FUTURE FORESEEABLE LOSSES IS CONCER NED, A SIMILAR SITUATION HAD COME UP BEFORE THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF ITD CEMENTATION INDIA LTD. (SUPRA). IN THE CASE BEFORE THE MUMBAI BENCH, ASSESSEE WAS CARRYING ON THE BUSINESS OF INFRASTRUC TURE DEVELOPMENT AND THE WORK WAS EXECUTED ON A CONTRACTUAL BASIS. THE ASSE SSEE THEREIN WAS EXECUTING A FIXED PRICE CONTRACT AND IN TERMS OF AC COUNTING STANDARD-7 ISSUED BY INSTITUTE OF CHARTERED ACCOUNTANT OF INDIA (ICAI ) MADE A PROVISION FOR FUTURE 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 O RDER OF THE TRIBUNAL IS REPRODUCED AS UNDER :- 14. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND P ERUSED THE ORDERS OF THE LOWER AUTHORITIES. WE HAVE ALSO THE B ENEFIT OF GOING THROUGH THE AS-7 ISSUED BY ICAI. AT THE VERY OUTSET, IT WOULD N OT 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 OFFIC IAL GAZETTE FROM TIME TO TIME ACCOUNTING STANDARDS TO BE FOLLOWED BY ANY CLA SS OF ASSESSEES OR IN RESPECT OF ANY CLASS OF INCOME. IT IS A FACT THAT A S-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 TH E CENTRAL GOVERNMENT HAVE TO BE MANDATORILY FOLLOWED BY THE ASSESSEE. BU T THIS DOES NOT MEAN THAT THE ASSESSEE CANNOT FOLLOW THE OTHER ACCOUNTING STA NDARDS ISSUED BY ICAI. ICAI BEING THE HIGHEST ACCOUNTING BODY OF THE COUNT RY, CREATED BY AN ACT OF PARLIAMENT, ACCOUNTING STANDARDS ISSUED BY IT CANNO T BE BRUSHED ASIDE LIGHTLY. ON THE CONTRARY, IF AN ASSESSEE IS FOLLOWI NG THE ACCOUNTING STANDARDS ISSUED BY ICAI, IT WOULD GIVE MORE CREDIBILITY AND AUTHENTICITY TO ITS ACCOUNT. AS 7 , INTER ALIA , PROVIDES : ITA NO.394/PN/2007 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 PROBABLE AND (B) CONTRACT COSTS SHOULD BE RECOGNIZED AS AN EXPEN SE IN THE PERIOD IN WHICH THEY ARE INCURRED. AN EXPECTED LOSS ON THE CONSTRUCTION CONTRACT SHOUL D BE RECOGNIZED AS AN EXPENSE IMMEDIATELY IN ACCORDANCE 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 ESCALATION PR ICES. AS PER AS-7, THE ASSESSEE IS ENTITLED TO MAKE PROVISION FOR FORESEEA BLE 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 NOTES 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 THE BASIS O F PERCENTAGE COMPLETION METHOD, AND THE LEVEL OF COMPLETION DEPE NDS ON THE NATURE AND TYPE OF EACH CONTRACT INCLUDING : UNBILLED WORK-IN-PROGRESS VALUED AT LOWER OF COST A ND NET REALIZABLE VALUE UPTO THE STAGE OF COMPLETION. COST INCLUDES D IRECT MATERIAL, LABOUR COST AND APPROPRIATE OVERHEADS; AND AMOUNTS DUE IN RESPECT OF THE PRICE AND OTHER ESCAL ATION, BONUS CLAIMS AND/OR VARIATION IN CONTRACT WORK APPROVED BY THE C USTOMER/THIRD PARTIES ETC. WHERE THE CONTRACT ALLOWS FOR SUCH CLA IMS 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 BOOKS OF ACCO UNT. CONTRACTUAL LIQUIDATED DAMAGES, PAYABLE FOR DELAYS IN COMPLETION OF CONTRACT WORK OR FOR OTHER CAUSES, ARE ACCOUNTED FO R AS COSTS WHEN SUCH DELAYS AND CAUSES ARE ATTRIBUTABLE TO THE COMP ANY 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 H ELD AS UNDER: THE QUESTION THAT CAME UP FOR CONSIDERATION WAS AS TO WHETHER THE ANTICIPATED LOSS ON THE VALUATION OF FIXED PRICE CO NTRACT IN VIEW OF THE MANDATORY REQUIREMENTS OF THE AS-7, WAS TO BE ALLOW ED 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 A S BY THE COMPTROLLER & AUDITOR GENERAL OF INDIA. THEREFORE, THE OBSERVAT ION 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, TH EREFORE, MERELY BECAUSE THERE WERE SOME VARIATIONS IN THE FIGURES F URNISHED BY THE ASSESSEE AT DIFFERENT STAGES, IT COULD NOT BE SAID THAT THE ESTIMATED LOSS WAS NOT ALLOWABLE. IT WAS NOT DISPUTED THAT TH E DEPARTMENT IN ITA NO.394/PN/2007 EARLIER YEARS HAD ALLOWED THE LOSS ON ESTIMATED BAS IS HAVING REGARD TO THE EXPENDITURE ACTUALLY INCURRED IN VARIOUS YEARS. THEREFORE, IN PRINCIPLE, IT WAS NOT DISPUTED THAT THE ESTIMATED L OSS UNDER THE PRESENT CIRCUMSTANCES WAS AN ALLOWABLE DEDUCTION. HOWEVER, MERELY BECAUSE THE CHANGE IN METHOD OF ACCOUNTING WAS BONA FIDE, I T COULD NOT LEAD TO THE INFERENCE THAT THE INCOME WAS ALSO DEDUCIBLE PR OPERTY UNDER THE ACT. THIS ASPECT IS VERY EVIDENT FROM THE FIRST PRO VISO 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 T HE METHOD ADOPTED BY THE ASSESSEE, THE ASSESSEES INCOME COULD NOT BE DEDUCTED PROPERTY IN THE YEAR IN WHICH THE LOSS HAD BEEN ANT ICIPATED. AS A MATTER OF FACT THIS ASPECT WAS NOT DISPUTED BY THE ASSESSING OFFICER ALSO. HE HAD SWAYED MORE BY THE REVENUE LOSS THAN B Y THE CORRECT PRINCIPLE TO BE 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 VERY YEAR A ND COULD NOT BE SPREAD OVER THE PERIOD OF CONTRACT. THE MATCHING PRINCIPLE IS OF RELEVANCE WHERE INCOME AND EXPENDITURE, BOTH ARE TO BE CONSID ERED TOGETHER. HOWEVER, IN THE INSTANT CASE, THE EFFECT OF VALUATI ON OF WIP WOULD AUTOMATICALLY AFFECT THE PROFITS OF SUBSEQUENT YEAR S ACCORDINGLY. THEREFORE, THERE WAS NO REASON FOR NOT ACCEPTING IN PRINCIPLE THE ASSESSEES CLAIM AS BEING ALLOWABLE. HOWEVER, IN VI EW OF DISCREPANCIES POINTED OUT BY THE COMMISSIONER (APPE ALS) FOR CORRECT ESTIMATION OF LOSS, THE MATTER WAS TO BE RESTORED T O 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 ASSESSEES CLAIMS OF FORESEEABLE LOSSES WERE ALLOWED IRRESPECTIVE OF MET HOD OF ACCOUNTING IN TERMS OF AS-7. IN THE CASE OF DREDGING INTERNATIONAL (SUP RA), THE ISSUE BEFORE THE TRIBUNAL WAS WHETHER U/S. 37(1) OF THE ACT PROVISIO N FOR FORESEEABLE LOSS MADE IN ACCORDANCE WITH GUIDELINES OF AS-7 AND DULY DEBI TED IN AUDITED ACCOUNTS OF COMPANY IS AN ALLOWABLE EXPENDITURE. THE TRIBUNAL D ECIDED THE CASE IN FAVOUR OF THE ASSESSEE AND HELD THAT YES IT IS AN ALLOWA BLE EXPENDITURE. THE TRIBUNAL WHILE DECIDING THIS ISSUE HAS ALSO CONSIDERED THE D ECISION 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 MU MBAI 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 ITA NO.394/PN/2007 FORESEEABLE LOSSES OF FUTURE YEARS CAN BE RECOGNIZE D FOLLOWING THE RATIONALE OF AS-7 ISSUED BY ICAI, AND SUCH A PROVISION IS AN ALL OWABLE DEDUCTION. 13. THE OTHER ASPECT TO BE CONSIDERED IS THE EFFICA CY OF THE PROVISION ESTIMATED BY THE ASSESSEE AT RS.1,24,85,000/-. IN THIS CONTEXT, THE LD. REPRESENTATIVE FOR THE ASSESSEE CLARIFIED THAT THE ESTIMATION OF THE PROVISION IS BASED ON THE MAINTENANCE EXPENSE RATES ON ROADS ISS UED BY THE PWD, GOVERNMENT OF MAHARASHTRA. A CIRCULAR OF THE PWD I S PLACED AT PAGE 253 OF THE PAPER BOOK WHICH CONTAINS THE RATES PREVAILING FOR THE YEAR 1989-90 WHEREIN THE PWD HAS ESTIMATED MAINTENANCE EXPENSES OF RS.25,600/- TO RS.38,200 PER KM., WHICH IS LIKELY TO BE INCURRED O N MAINTENANCE OF STATE HIGHWAYS EVERY YEAR. THE LD. REPRESENTATIVE EXPLAI NED THAT THE ROAD CONTRACT IN QUESTION IS ALSO FOR A STATE HIGHWAY AND BASED O N THE RATES OF THE PWD FOR 1989-90, ESTIMATE OF LIKELY EXPENSES TO BE INCURRED BY THE ASSESSEE DURING THE FINANCIAL YEARS 2003-04 TO 2006-07 CAME TO RS.3,00, 91,193/-, WHICH IS HIGHER THAN THE AMOUNT ESTIMATED BY THE ASSESSEE AT RS.2,7 2,57,400/-, AS PER THE WORKING PLACED IN THE PAPER BOOK AT PAGE 255. IT H AS BEEN POINTED OUT THAT AFTER GIVING CREDIT FOR THE AMOUNT RECEIVABLE FOR M AINTENANCE WORK AS PER THE CONTRACT, THE PROVISION REQUIRED TO BE MADE AS PER THE PWD RATES CAME TO RS.1,53,18,793/-, WHICH IS EVEN MORE THAN THE PROVI SION OF RS.1,24,85,000/- MADE BY THE ASSESSEE. IN THIS MANNER, IT IS SOUGHT TO BE POINTED OUT THAT THE PROVISION MADE BY THE ASSESSEE FOR FORESEEABLE LOSS ES WAS REASONABLE AND JUSTIFIED. 14. AT THIS STAGE, THE LD. REPRESENTATIVE HAS ALSO REFERRED PAGES 242 TO 243 OF THE PAPER BOOK, WHEREIN CERTAIN NOTES TO ACC OUNT OF SOME OF THE STOCK- EXCHANGE LISTED COMPANIES ENGAGED IN EXECUTION OF C ONTRACTS HAVE BEEN PLACED TO SHOW THAT SUCH COMPANIES WERE ALSO MAKING PROVISIONS FOR FORESEEABLE LOSSES IN EXECUTION OF CONTRACTS. IT I S SOUGHT TO BE POINTED OUT ON ITA NO.394/PN/2007 THE BASIS OF THE AFORESAID MATERIAL THAT CREATION O F AN ADEQUATE PROVISION FOR FUTURE LOSSES IS A GENERALLY ACCEPTED COMMERCIAL PO LICY. 15. WE HAVE CONSIDERED THE WORKING OF THE PROVISION MADE AND FIND THAT THE SAME IS NEITHER IRRATIONAL AND NOR IRRELEVANT T O THE KIND OF BUSINESS OPERATIONS UNDER CONSIDERATION. IN ANY CASE, WE FI ND THAT THE ASSESSING OFFICER HAS NOT DISPUTED THE WORKING OF THE PROVISI ON SUBMITTED BY THE ASSESSEE. AN ASPECT WHICH HAS BEEN RAISED BY THE L D. DEPARTMENTAL REPRESENTATIVE IS TO THE EFFECT THAT IN THE SUBSEQU ENT ASSESSMENT YEAR OF 2007-08 WHEN THE MAINTENANCE PERIOD WAS OVER ASSESS EE HAS WRITTEN-BACK AN AMOUNT OF RS.76,00,000/- OUT OF A PROVISION OF RS.1 ,24,85,000/- AND THAT SUCH AN ACTION INDICATED THAT ESTIMATION MADE BY THE ASS ESSEE 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 EST IMATION, CERTAIN DEGREE OF GUESSWORK IS INVARIABLY PRESENT, BUT THE SAME WOULD NOT MAKE IT UNREASONABLE, SO LONG AS THE BASIS ADOPTED FOR MAKI NG 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 YEA R, ASSESSEE HAS WRITTEN- BACK ONLY A PORTION OF THE PROVISION DOES NOT INDIC ATE ITS UNREASONABLENESS, RATHER THE FACTS INDICATE THAT ASSESSEE INDEED INCU RRED EXPENDITURE ON MAINTENANCE WORK WHICH IS MORE THAT THE RECEIPTS DU E TO IT AS PER THE CONTRACT. THEREFORE, THE JUDGEMENT OF THE ASSESSEE THAT IT WA S LIKELY TO INCUR LOSS ON MAINTENANCE WORK AFTER FIVE YEARS WAS INDEED JUSTIF IED, AS THE FACTUM OF INCURRENCE OF SUCH LOSS IS NOT DISPUTED. IN SUM AN D SUBSTANCE, WE ARE IN AGREEMENT WITH THE CIT(A) THAT THE PROVISION FOR FO RESEEABLE LOSSES DEBITED BY THE ASSESSEE IN THE PROFIT & LOSS ACCOUNT, IS NOT A CONTINGENT LIABILITY SO AS TO BE DISALLOWED WHILE COMPUTING BUSINESS INCOME FOR T HE YEAR UNDER ITA NO.394/PN/2007 CONSIDERATION. AS A CONSEQUENCE, WE HEREBY AFFIRM THE ORDER OF THE CIT(A) AND REVENUE FAILS IN ITS APPEAL. 16. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISS ED. ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST DECEMBER, 2014. SD/- SD/- (R.S. PADVEKAR) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE, DATED: 31 ST DECEMBER, 2014. SUJEET COPY OF THE ORDER IS FORWARDED TO : - 1) THE ASSESSEE; 2) THE DEPARTMENT; 3) THE CIT(A)-II, NASHIK; 4) THE CIT-II, NASHIK; 5) THE DR B BENCH, I.T.A.T., PUNE; 6) GUARD FILE. BY ORDER //TRUE COPY// ASSISTANT REGISTRAR I.T.A.T., PUNE