DCIT, Circle - 1, Kolkata, Kolkata V. M/s. McNally Bharat Engineering Company Limited, Kolkata

ITA 99/KOL/2011

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 9616 (ITAT-KOLKATA)
• Duration Of Justice: 5 year(s) 11 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-01-2017
• Appeal Filed By: Department
• Bench Allotted: A
• Next Hearing Date: 25-10-2016
• Assessment Year: 2003-2004
• Appeal Filed On: 13-01-2011
• Court: TRIBUNAL
• Department Lawyers: RAM BILAS MEENA
• Keywords: Capital asset; Question of law; Assessment record; Revenue expenditure
• Section: 143(3); 37(1); 37; 28

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A, BENC H KOLKATA BEFORE SHRI WASEEM AHMED, AM & SHRI S.S.VISWANETHR A RAVI, JM ./ ITA NO.99/KOL/2011 ( / ASSESSMENT YEAR :2003-2004) DCIT, CIRCLE-1, 7 TH FLOOR, AAYAKAR BHAWAN, KOLKATA-700069 VS. M/S MCNALLY BHARAT ENGINEERING COMPANY LTD, 4, MANGOE LANE,KOLKATA-1 ./ ./PAN/GIR NO. : AABCM 9443 R ( /APPELLANT ) .. ( / RESPONDENT ) /REVENUE BY : SHRI RAM BILAS MEENA, CIT /ASSESSEE BY : SHRI VIJAY SHAH CA / DATE OF HEARING : 21/12/2016 /DATE OF PRONOUNCEMENT 11/01/2017 / O R D E R PER SHRI WASEEM AHMED, AM : THE ABOVE APPEAL IS DIRECTED BY THE REVENUE AGAINST THE ORDER DATED 20.09.2010, PASSED BY THE LD. COMMISSIONER OF INCOME TAX (APPEALS)-I, KOLKATA IN APPEAL NO.605/CIT(A)-1/CIR. 1/.09-10, PERTAINING TO ASSESSMENT YEAR 2003-04, ARISING OUT OF ASSESSME NT ORDER DATED 31.12.2009, PASSED BY THE CIT-1 KOLKATA U/S.143(3)/ 254 OF THE INCOME TAX ACT, 1961. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL :- 1. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS.1,4 6,976/- MADE ON ACCOUNT OF ADVANCES WRITTEN OFF BY ACCEPTIN G IT AS LOSS ALLOWABLE U/S. 37 WHEN HE HIMSELF OBSERVED THA T THE ADVANCE WAS GIVEN FOR CAPITAL ASSETS. 2. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS.5,6 7,156/- MADE ON ACCOUNT OF LOOSE TOOLS WRITTEN OFF WHEN THE ASSESSEE FAILED TO SUBSTANTIATE THAT LOSS WAS GENUINELY CLAI MED. 3. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS.1,4 5,57,065/- MADE ON ACCOUNT OF CORPORATE ADVANCES WRITTEN OFF W ITHOUT APPRECIATING THE FACT THAT ASSESSEE FAILED TO PROVE AND SUBSTANTIATE THE GENUINENESS OF LOSS. ITA NO.99/11 M/S MCNALLY BHARAT ENGINEERING COMPANY 2 4. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS.6,5 0,00,000/- MADE ON ACCOUNT OF CONTRACT WIP WRITTEN OFF WITHOUT APPRECIATING THE FACT THAT ASSESSEE BOOKED A PROVIS IONAL LOSS ALLOWABLE U/S.37. 5. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS.10, 43,715/- MADE BY DISALLOWING SUB-CONTRACTOR CHARGES WHEN THE IDENTITY OF THE SUB-CONTRACTOR AND GENUINENESS OF THE TRANSA CTION WAS DOUBTFUL. 2. THE FIRST ISSUE RAISED BY REVENUE IN THIS APPEAL IS THAT LD. CIT(A) ERRED IN DELETING THE ADDITION MADE BY THE AO FOR R S.1,46,976/- ON ACCOUNT OF ADVANCES WRITTEN OFF BY THE ASSESSEE. 3. BRIEFLY STATED THE FACTS ARE THAT THE ASSESSEE, IN THE PRESENT CASE, IS A LIMITED COMPANY AND ENGAGED IN THE MANUFACTURI NG BUSINESS AND TURNKEY CONTRACTS. THE ASSESSEE, IN THE YEAR UNDER CONSIDERATION, HAS WRITTEN OFF AN AMOUNT OF RS.1,46,976/- GIVEN TO M/S CRB CAPITAL MARKET (MCRBCM FOR SHORT) ON THE GROUND THAT THE COMPANY H AS GONE UNDER LIQUIDATION. HOWEVER, THE AO DURING ASSESSMENT PROC EEDINGS OBSERVED THAT THE AMOUNT OF MONEY GIVEN TO MCRBCM HAS NOT BE EN EXPLAINED WITH REFERENCE TO THE PURPOSE FOR WHICH IT WAS GIVE N. THEREFORE, THE ASSESSEE FAILED TO ESTABLISH WHETHER IT WAS GIVEN I N THE NORMAL COURSE OF BUSINESS. ACCORDINGLY, THE AO DISALLOWED THE SAME A ND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. 4. AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL BEFO RE LD. CIT(A) WHEREAS ASSESSEE SUBMITTED THAT THE SAID AMOUNT WAS GIVEN TO MCRBCM AS PER THE HONBLE JURISDICTIONAL HIGH COURT ORDER AS THE OFFICIAL LIQUIDATOR RAISED THE CLAIM AGAINST THE AS SESSEE FOR THE SAID AMOUNT. THE SAID AMOUNT WAS ACCORDINGLY GIVEN AND S HOWN AS ADVANCES TO BE REALIZED AFTER THE SETTLEMENT OF THE PROCESS OF LIQUIDATION. BUT THE SAME WAS NOT REALIZED, THEREFORE, IT WAS TR EATED AS LOSS TO THE BUSINESS OF ASSESSEE. LD. CIT(A) AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE HAS DELETED THE ADDITION MADE BY THE AO BY OBSERVING AS UNDER :- ITA NO.99/11 M/S MCNALLY BHARAT ENGINEERING COMPANY 3 5.2 I HAVE CAREFULLY EXAMINED THE ABOVE FACTS AND SUBMISSIONS. THE LEASE WAS TAKEN TO PURCHASE THE ASSET WHICH WAS FOR THE PURPOSE OF THE BUSINESS. CRB CAPITAL MARKET WHO FIN ANCED THE LEASE WENT INTO LIQUIDATION AND THE AMOUNT HAD TO B E PAID TO THE OFFICIAL LIQUIDATOR OF THE COMPANY. THEREFORE, THE CONTENTION OF THE A.O. THAT THE AMOUNT WAS NOT GIVEN IN THE NORMAL CO URSE OF BUSINESS IS NOT CORRECT AS IT CAN BE SEEN THAT ADVA NCES HAS BEEN MADE IN ORDER TO PAYOFF THE LIQUIDATOR WHICH WAS EX PECTED TO BE RECOVERED ONCE THE MATTER IS SETTLED. HENCE, A.O. I S DIRECTED TO DELETE THE DISALLOWANCE MADE FOR ADVANCES GIVEN TO CRB CAPITAL MARKET AMOUNTING TO RS.1,46,976/- AND TO TREAT IT A S GENUINE BUSINESS LOSS. BEING AGGRIEVED BY THIS, REVENUE HAS COME IN AN APP EAL BEFORE US. 5. BEFORE US LD. DR VEHEMENTLY SUPPORTED THE ORDER OF ASSESSING OFFICER WHEREAS LD. AR BEFORE US FILED A PAPER BOOK , WHICH IS RUNNING FROM PAGES 1 TO 336 AND DREW OUR ATTENTION ON PAGES 17 TO 20 OF THE PAPER BOOK WHERE THE NECESSARY DETAILS OF MCRBCM LI QUIDATION WERE PLACED AND HE RELIED ON THE ORDER OF LD. CIT(A). 6. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. FROM THE FOREGOING DISCUSSIONS, WE FIND THAT THE AMOUNT GIVEN TO MCRBC M WAS WRITTEN OFF BY THE ASSESSEE IN THE YEAR UNDER CONSIDERATION BUT THE SAME WAS DISALLOWED BY THE AO BY OBSERVING THAT THE PURPOSE OF THE ADVANCES GIVEN TO MCRBCM HAS NOT BEEN GIVEN. HOWEVER, ON PER USAL OF RECORDS, WE FIND THAT ALL THE NECESSARY DETAILS WERE FURNISH ED BEFORE APPELLATE STAGE WITH THE NATURE AND PURPOSE OF TRANSACTION. T HE ASSESSEE ACQUIRED LEASED ASSET FROM THE MCRBCM BUT LATER THE COMPANY WENT INTO LIQUIDATION. SUBSEQUENTLY THE HONBLE JURISDICTION AL HIGH COURT ORDERED TO THE ASSESSEE FOR THE PAYMENT OF THE AFORESAID SU M WHICH LATER BECAME IRRECOVERABLE. FROM THE ABOVE, IT GETS ESTAB LISHED THAT THE ADVANCES WERE GIVEN IN THE COURSE OF BUSINESS AND A CCORDINGLY THE SAME IS ELIGIBLE FOR DEDUCTION. IN VIEW OF THE ABOV E, WE FIND NO INFIRMITY IN THE ORDER OF LD. CIT(A). HENCE, THIS GROUND OF APPE AL OF REVENUE IS DISMISSED. ITA NO.99/11 M/S MCNALLY BHARAT ENGINEERING COMPANY 4 7. THE SECOND ISSUE RAISED BY REVENUE IN THIS APPEA L IS THAT LD. CIT(A) ERRED IN DELETING THE ADDITION MADE BY THE A O FOR RS.5,67,156/- ON ACCOUNT OF LOOSE TOOLS WRITTEN OFF. THE ASSESSEE IN THIS YEAR HAS WRITTEN OFF RAW MATERIAL FOR RS.18,52,714/- INCLUDI NG THE LOOSE TOOLS ON THE GROUND THAT LOOSE MATERIAL WERE OBSOLETE AND NON-MO VING ITEMS DUE TO CHANGE IN THE TECHNOLOGY. HOWEVER, THE AO DURING TH E ASSESSMENT PROCEEDINGS, OBSERVED THAT NO DETAILS WAS SUBMITTED WITH REGARD TO LOOSE TOOLS WRITTEN OFF FOR RS.5,67,156/-. THEREFORE, THE AO DISALLOWED THE CLAIM OF LOSS FOR RS.5,67,156/- ON ACCOUNT OF NON-AVAILAB ILITY OF DETAILS. THE DISALLOWED AMOUNT WAS ADDED TO THE TOTAL INCOME OF THE ASSESSEE. 8. AGGRIEVED, ASSESSEE PREFERRED APPEAL BEFORE LD. CIT(A) WHEREAS ASSESSEE SUBMITTED THAT THE DETAILS OF LOOSE TOOLS WHICH WAS WRITTEN OFF FOR RS.5,67,156/- WAS DULY SUBMITTED BEFORE THE AO ALONG WITH LETTER DATED 24 TH FEBRUARY, 2006. ACCORDINGLY, THE ARGUMENT OF THE A O THAT THE DETAILS WERE NOT SUBMITTED IS NOT TENABLE. LD. CIT( A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE HAS DELETED THE ADDITIO N MADE BY THE AO BY OBSERVING AS UNDER :- HENCE, THE CONTENTION OF THE A.O. THAT NO DETAILS HAVE BEEN FILED IS NOT CORRECT. THE A/R IN ITS WRITTEN SUBMISSION H AS FILED COPIES OF THE ABOVE DETAILS WITH THE DOCUMENTARY EVIDENCE THA T THE SAME WERE BEFORE THE HON'BLE ITAT AND COPY OF IT WAS SUB MITTED TO THE A.O. THE AIR FURTHER CONTENDED THAT THE ABOVE DETAI LS MAY HAVE BEEN MISSED OUT BY THE A.O. WHILE GIVING EFFECT TO THE ORDER OF ITAT. AGGRIEVED BY THIS, THE REVENUE HAS COME UP IN APPEA L BEFORE US. 9. BEFORE US BOTH THE PARTIES BEFORE US RELIED UPON THE ORDER OF AUTHORITIES BELOW AS FAVORABLE TO THEM. 10. WE HAVE HEARD RIVAL CONTENTIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. ON PERUSAL OF THE DETAILS OF T HE STORES AND LOOSE TOOLS WRITTEN OFF FURNISHED AT THE TIME OF ASSESSME NT, WHICH IS PLACED AT PAGES FROM 21 TO 71, WE FIND THAT THE NECESSARY SUP PORTING EVIDENCE ITA NO.99/11 M/S MCNALLY BHARAT ENGINEERING COMPANY 5 WERE DULY SUBMITTED BY THE ASSESSEE BEFORE THE AO A T THE TIME OF ASSESSMENT. BEFORE US LD. DR HAS ALSO NOT BROUGHT A NYTHING ON RECORD CONTRARY TO THE FINDINGS OF LD. CIT(A). IN VIEW OF THE ABOVE, WE FIND NO INFIRMITY IN THE ORDER OF LD. CIT(A). HENCE, THIS G ROUND OF APPEAL OF THE REVENUE IS DISMISSED. 11. THE THIRD ISSUE RAISED BY THE REVENUE IN THIS A PPEAL IS THAT LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS.1,45,57 ,065/- ON ACCOUNT OF CORPORATE ADVANCES WRITTEN OFF. THE ASSESSEE, FOR T HE YEAR UNDER CONSIDERATION, HAS GIVEN ADVANCES IN CONNECTION WIT H ITS BUSINESS TO SEVERAL PARTIES BUT COULD NOT RECOVER THE SAME. THE REFORE, THE ASSESSEE HAS WRITTEN OFF SUCH ADVANCES IN ITS BOOKS OF ACCOU NTS. HOWEVER, THE AO OBSERVED THAT THE NECESSARY DETAILS OF THE PARTIES SUCH AS NAME, ADDRESS, AMOUNT OF ADVANCES GIVEN, PURPOSE FOR GIVI NG ADVANCES WERE NOT FURNISHED. THEREFORE, THE GENUINENESS OF THE TR ANSACTIONS CANNOT BE ESTABLISHED. ACCORDINGLY, THE AO DISALLOWED THE SAM E AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. 12. AGGRIEVED, ASSESSEE PREFERRED AN APPEAL BEFORE THE LD. CIT(A) WHEREAS ASSESSEE SUBMITTED THAT THE ADVANCES WERE G IVEN TO THE FOLLOWING PARTIES :- SL.NO. NAME OF THE PARTY AMOUNT 1. TECHNO PERFECT PVT. LTD. 5,00,000 2. ODC CARRIERS PVT. LTD. 1,40,57,065 THE ASSESSEE FURTHER SUBMITTED THAT THE NECESSARY D ETAILS WAS FURNISHED TO THE AO DURING THE ASSESSMENT PROCEEDINGS VIDE LE TTER DATED 14.02.2006. THE ADVANCES WRITTEN OFF AS IRRECOVERAB LE WERE DULY APPROVED BY THE BOARD OF DIRECTORS IN ITS MEETING D ATED 30.03.2004. LD. CIT(A) AFTER CONSIDERING THE SUBMISSION OF THE ASSE SSEE HAS DELETED THE ADDITION MADE BY THE AO BY OBSERVING AS UNDER :- 7.4 I HAVE PURSUED THE DOCUMENTS AS FILED BY THE A PPELLANT BOTH BEFORE THE A.O. AS WELL AS BEFORE THE HON'BLE ITAT. THE CONTENTION OF THE A.O. THAT THE NAME, ADDRESS AND PURPOSE OF G IVING THE ADVANCE HAS NOT BEEN FURNISHED IS NOT TOTALLY CORRE CT. THE ASSESSEE DURING THE COURSE OF ASSESSMENT PROCEEDING S U/S 143(3) ITA NO.99/11 M/S MCNALLY BHARAT ENGINEERING COMPANY 6 ITSELF HAD DULY PROVIDED THE NAME OF THE PARTY TO W HOM ADVANCES WERE GIVEN ALONGWITH THE PURPOSE FOR WHICH SUCH ADV ANCE WAS GIVEN. ON PERUSAL OF THE ASSESSMENT RECORDS IT COUL D BE NOTED THAT THE A.O. HAD NO WHERE ASKED THE ASSESSEE TO PRODUCE ANY FURTHER DETAILS. THE A.O. HIMSELF HAS ALLOWED WRITE OFF IN RELATION TO 1 PARTY I.E . FLORA VANIJYA FOR RS. 1,07,52,690/- THOUGH TH E ADVANCE GIVEN TO SAID PARTY WAS FOR THE SAME CONTRACT AND FOR THE SAME PURPOSE. IF THE SAID ADVANCE CAN BE ALLOWED AS BUSINESS LOSS I FAIL TO UNDERSTAND HOW THE ADVANCE GIVEN TO OTHER 2 PARTIES FOR THE SAME CONTRACT CAN BE DISALLOWED WITH THE CONTENTION THAT THE PURPOSE OF GIVING THE ADVANCE HAVE NOT BEEN FURNISHED. WHAT IS TRUE FOR 1 PARTY SHOULD BE FOLLOWED FOR THE OTHER 2 PARTIES AL SO WHEN ALL THE 3 CONTRACTORS WERE IN RELATION TO ONLY 1 CONTRACT I.E . NEYVELI LIGNITE CORPORATION LTD. 7.5 THE A.O WHILE MAKING THE DISALLOWANCE HAS ALSO RELIED UPON THE DECISION IN THE CASE OF SALEM MAGNESITE (P) ITD . -VS.- CIT (2009) ITCL 549 (BOM-HC). THE A/R SUBMITTED THAT TH E ABOVE JUDGMENT RELIED BY THE AO HAS NO RELEVANCE IN THE P RESENT CASE. IT HAS BEEN SUBMITTED THAT THE ABOVE DECISION SPEAKS A BOUT CAPITAL ADVANCE MADE TO ITS SUBSIDIARY COMPANY FOR THE PURP OSE OF CONSTRUCTION OF AN ASSET. HENCE, THE HIGH COURT HAS HELD SUCH CLAIM NOT ELIGIBLE TO BE ALLOWED AS BAD DEBT U/S 36 (1)(VII). THE CONTENTION OF THE A/R SEEMS CORRECT AS THE APPELLAN T, IN THE PRESENT CASE, HAVE GIVEN THE ADVANCES TO ITS SUB CO NTRACTOR IN ORDER TO COMPLETE THE CONTRACT. THEREFORE ADVANCES ARE GIVEN SOLELY FOR THE PURPOSE OF THE BUSINESS. 7.6 WITH THE ABOVE OBSERVATION THE A.O. IS DIRECTED TO DELETE THE DISALLOWANCE MADE FOR RS. 1,45,57,065/- AS THE ABOV E ADVANCES ARE ALLOWABLE AS BUSINESS LOSS U/S 28 READ WITH SEC 37(1) AS PER THE DIRECTIONS OF HON'BLE ITAT VIDE ITS ORDER DATED 21-02-2008. AGGRIEVED BY THIS, THE REVENUE HAS COME UP IN APPEA L BEFORE US. 13. BEFORE US BOTH THE PARTIES RELIED UPON THE ORDE R OF AUTHORITIES BELOW AS FAVORABLE TO THEM. 14. WE HAVE HEARD RIVAL CONTENTIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. ON PERUSAL OF THE RECORD, WE F IND THAT ALL THE NECESSARY DETAILS OF THE IMPUGNED ADVANCES GIVEN TO THE PARTIES WERE FURNISHED BY THE ASSESSEE AT THE TIME OF ASSESSMENT AND THE RELEVANT DETAILS ARE ENCLOSED AT PAGES 79 OF THE PAPER BOOK. THE ADVANCES REPRESENT THE MONEY GIVEN IN RELATION TO BUSINESS C ONTRACTS OF THE ASSESSEE WITH NEVYELI LIGNITE CORPORATION. ON FURTH ER PERUSAL, WE FIND ITA NO.99/11 M/S MCNALLY BHARAT ENGINEERING COMPANY 7 THAT THE ADVANCES WRITTEN OFF WERE ALSO APPROVED IN THE MINUTES OF BOARD MEETING HELD ON 30 TH MARCH, 2004. THE NECESSARY DETAILS OF THE PARTIES WERE DULY FURNISHED AT THE TIME OF ASSESSMENT. IN T HIS CONNECTION, WE RELY IN THE CASE OF ASHOKA MARKETING LIMITED VS CIT REPORTED IN 253 ITR 460 WHEREIN THE HONBLE JURISDICTIONAL HIGH COURT H AS OBSERVED AS UNDER: IN THE PRESENT CASE, UNDOUBTEDLY SHALIMAR WORKS (P ) LTD. AT THE RELEVANT TIME WAS A SUBSIDIARY OF THE ASSESSEE AND THIS COMPANY WAS WOU ND UP BECAUSE OF THE ORDERS PASSED BY THIS COURT AND ALL THE ASSETS OF THE COMPANY WERE P URCHASED BY A WHOLLY-OWNED COMPANY OF THE GOVERNMENT OF WEST BENGAL FOR A SUM OF RS. 74,0 0,000 AND THE ENTIRE AMOUNT WENT TO THE SECURED CREDITOR WITH THE RESULT THAT UNDOUBTEDLY T HE ASSESSEE HAD NO CHANCE OF RECOVERING THE AMOUNT IN QUESTION FROM THE AFORESAID SUBSIDIAR Y.' WHEN THIS COURT WHILE CONSIDERING THE POSSIBILITY F OR RECOVERY OF LOAN IN CASE UNSECURED CREDITORS FOUND THAT THE ENTIRE AMOUNT WENT TO THE SECURED CREDITORS AND NOTHING REMAINS TO BE PAID FOR UNSECURED CREDITORS, THERE IS NO JUSTIF ICATION TO DENY THE CLAIM OF THE ASSESSEE. THEREFORE, FOLLOWING THE AFORESAID FINDING OF THIS COURT REGARDING POSSIBILITY OF THE RECOVERY OF LOAN OF UNSECURED CREDITORS WHEN THERE IS NO CHANCE THE ASSESSEE HAS RIGHTLY WRITTEN OFF THAT DEBT TREATING AS A BAD DEBT. RESPECTFULLY FOLLOWING THE AFORESAID JUDGMENT AND I N VIEW OF THE FACTS DISCUSSED ABOVE, WE FIND NO INFIRMITY IN THE ORDER OF LD. CIT(A). HENCE, THIS GROUND OF APPEAL OF REVENUE IS DISMISSED. 15. THE FOURTH ISSUE RAISED BY REVENUE IS THAT LD. CIT(A) ERRED IN DELETING THE ADDITION MADE BY AO FOR RS.50 LAKH ON ACCOUNT OF WIP WRITTEN OFF. 16. FACTS RELATING TO THIS GROUND ARE THAT THE ASSE SSEE DURING THE YEAR HAS UNDERTAKEN SEVERAL PROJECTS INCLUDING THE FOUR PROJECTS AS DISCUSSED SUBSEQUENTLY. THESE FOUR PROJECTS WERE BASED ON POR T HANDLING, ASH HANDLING AND WATER MANAGEMENT ACTIVITIES. THE ASSES SEE NEVER HAD ANY EXPERIENCE OF THESE PROJECTS IN EARLIER YEARS. AS SUCH, THESE PROJECTS WERE NEW TO THE ASSESSEE BUT THE ASSESSEE WANTED TO ENTER INTO THE AFORESAID ACTIVITIES. THEREFORE SUCH PROJECTS WERE UNDERTAKEN BY THE ASSESSEE WITHOUT ANY PROFIT MARGIN. THESE PROJECTS WERE UNDERTAKEN IN THE YEAR UNDER CONSIDERATION AND WERE COMPLETED IN THE FINANCIAL YEAR ENDING AS ON 31 ST OF MARCH 2007. IN ALL THESE PROJECTS, THE ASSESSEE INCURRED HUGE LOSSES WHICH WERE SPREAD OVER IN THE FINANCIAL YEARS BEGINNING FROM 31 ST MARCH 2003 TO 31 ST MARCH 2007. ACCORDINGLY, THE ASSESSEE CLAIMED LOSSES IN THE DIFFERENT FINANCIAL YEARS AS MENTIONED ITA NO.99/11 M/S MCNALLY BHARAT ENGINEERING COMPANY 8 ABOVE. THE LOSS CLAIMED IN THE YEAR UNDER CONSIDERA TION CAN BE PRESENTED IN THE FOLLOWING MANNER. SL.NO. 1 2 3 4 TOTAL PROJECT NAME KANDLA PORT TRUST NTPC RAMA GUMDAM NTPC RIHAND AHMEDABAD MUNICIPAL CORPORATION COST INCURRED TILL 31 ST MARCH, 2003 1 ,00,00,000 5,48,00,472 7,66,81,075 24,74,989 14,39,56,536 COST WRITTEN OFF 1,00,00,000 3,50,00,000 75,25,000 24,74,989 5,50,00,000 BILL RAISED IN THE YEAR NIL 1,54,02,000 5,87,83,000 NIL 7,41,85,000 THE ASSESSEE CLAIMED THE LOSS IN THE YEAR UNDER CON SIDERATION AFTER PUTTING ITS RELIANCE IN ACCOUNTING STANDARD 7 ISSUE D BY INSTITUTE OF CHARTERED ACCOUNTANT OF INDIA (ICAI). HOWEVER THE A O DISREGARDED THE CLAIM OF THE ASSESSEE BY OBSERVING THAT THE NECESSA RY DETAILS OF THE EXPENDITURE INCURRED BY THE ASSESSEE AS WELL AS THE STAGE OF COMPLETION OF THE WORK WAS NOT FURNISHED AT THE TIME OF ASSESS MENT. SIMILARLY THE AO OBSERVED THAT THE FUTURE LOSS IN A CONTRACT IS S UBJECT TO HIGH DEGREE OF UNCERTAINTY. MOREOVER, THE ASSESSEE WAS FOLLOWING C OMPLETED CONTRACT METHOD AS PER ACCOUNTING STANDARD 7 AS MENTIONED IN NOTES TO ACCOUNTS. IN THE COMPLETED CONTRACT METHOD THE PROFIT AND LOS S IS DETERMINED AT THE TIME OF COMPLETION OF CONTRACT AND NOT ON THE BASIS OF ESTIMATES AS DONE IN THE PRESENT CASE. THE CONTRACT IN THE PRESENT CA SE HASNT NOT YET BEEN COMPLETED THEREFORE THE CLAIM FOR THE LOSS BY THE A SSESSEE IS NOT TENABLE. IT WAS ALSO OBSERVED BY THE AO THAT THE FUTURE LOSS ES WHICH ARE CONTINGENT IN NATURE MAY BE RECOGNIZED AS PER THE A CCOUNTING STANDARD BUT UNDER THE PROVISIONS OF INCOME TAX ACT SUCH POS SIBLE LOSSES ARE NOT ALLOWABLE. THEREFORE THE LOSS CLAIMED BY THE ASSESS EE IS CONTINGENT IN NATURE. THE AO ALSO OBSERVED THAT THE LOSS HAS BEEN ADJUSTED AGAINST THE REVALUATION RESERVE AND THE SAME WAS NOT ROUTED THROUGH PROFIT AND LOSS ACCOUNT. IN VIEW OF ABOVE THE AO DISALLOWED TH E LOSS CLAIMED BY THE ASSESSEE AND ADDED TO THE TOTAL INCOME OF THE ASSES SEE. 17. AGGRIEVED, ASSESSEE PREFERRED AN APPEAL BEFORE LD.CIT(A) WHEREAS ASSESSEE SUBMITTED THAT ALL THE RELEVANT DE TAILS ALONG WITH BILLS, INVOICES WERE DULY SUBMITTED BEFORE THE AO AT THE T IME OF ASSESSMENT PROCEEDINGS. THE LOSS INCURRED BY THE ASSESSEE IN A LL CONTRACTS IS ITA NO.99/11 M/S MCNALLY BHARAT ENGINEERING COMPANY 9 SUBSTANTIALLY HIGHER THAN THE EXPENSES ACTUALLY WRI TTEN OFF IN THE BOOKS OF ACCOUNTS IN THE YEAR UNDER CONSIDERATION. SO THE EX PENSES WRITTEN OFF ON THE BASIS OF ESTIMATED COST IS REASONABLE AND JUSTI FIABLE. THE ASSESSEE FURTHER SUBMITTED THAT NO LOSS WAS CLAIMED ON THE B ASIS OF AD HOC ESTIMATION AS THE ASSESSEE WAS WELL AWARE THAT IT I S THE NEW LINE OF ACTIVITY AND THESE PROJECTS WERE UNDERTAKEN WITHOUT ANY MARGIN. THEREFORE, ALL THE LOSSES WERE REASONABLY ESTIMATED ON THE BASIS OF SUPPORTING QUOTATIONS AND THESE LOSSES WERE CLAIMED IN TERMS OF PROVISIONS OF ACCOUNTING STANDARD-7 ISSUED BY ICAI. LD. CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE HAS DEL ETED ADDITION MADE BY THE AO BY OBSERVING AS UNDER :- ON PERUSAL OF THE ABOVE PROVISIONS IT IS IMPERATIV E TO NOTE THAT THE ASSESSEE FOLLOWING COMPLETED CONTRACT METHOD BOOKS REVENUE AND ITS RELATED COSTS ONLY AFTER THE COMPLETION OF THE CONTRACT. HOWEVER, AS PER PARA 13 OF AS-7, WHEN AS PER THE ES TIMATES OF TOTAL COST AND REVENUE, LOSS IS DETERMINED, PROVISI ON IS MANDATORILY REQUIRED TO BE MADE OF THE ENTIRE LOSS IRRESPECTIVE OF THE METHOD OF ACCOUNTING FOLLOWED AND THE PERCENTAGE OF CONTRACT COMPLETED. HENCE, THE LOSS IS REQUIRED TO BE BOOKED UNDER BOTH PERCENTAGE COMPLETION METHOD AND COMPLETED CONTRACT METHOD. FU RTHER PARA 13.3 PROVIDES THAT SUCH LOSS CAN BE BOOKED EVEN BEF ORE THE CONTRACT IS COMMENCED. IN THE PRESENT CASE, THE CON TENTION OF THE A.O. THAT THE APPELLANT CANNOT PROVIDE FOR THE FORE SEEABLE LOSS IN THE FIRST YEAR OF CONTRACT WHEN IT IS FOLLOWING COM PLETED CONTRACT METHOD IS NOT TENABLE. THE APPELLANT IS REQUIRED TO BOOK SUCH LOSS AS AND WHEN SUCH LOSS IS ESTIMATED. HENCE WRITING O FF OF SUCH EXPENDITURE IN THE FIRST YEAR OF THE CONTRACT EVEN IN THE COMPLETED CONTRACT METHOD IS IN ACCORDANCE WITH THE ACCOUNTIN G STANDARD-7 ISSUED BY ICAI WHICH THE APPELLANT IS MANDATORILY R EQUIRED TO FOLLOW. (D) NOW THE ISSUE ARISE WHETHER LOSS WRITTEN OFF AS PER THE MANDATORY ACCOUNTING STANDARDS ARE BINDING ON THE I NCOME TAX ACT ALSO. IN THIS REGARD, REFERENCE -WAS MADE BY TH E APPELLANT ON VARIOUS CASE LAWS WHICH HAS ALREADY BEEN MENTIONED ABOVE IN PARA ABOVE. ON READING OF THE ABOVE CASE LAWS AND T AKING INTO ACCOUNT THE SUBMISSION MADE BY THE A.O. AND THE APP ELLANT, IT IS OBSERVED THAT THE ABOVE MATTER IS SQUARELY COVERED BY THE DECISION OF HON'BLE MUMBAI TRIBUNAL IN THE CASE OF JACOBS ENGINEERING PVT LTD.-VS.-ACIT (2009) 30 DTR 614(MUM ). THE A.O. IN HIS ORDER DATED 31-12-2009 HAS NOT STATED THE FA CTS OF THE ABOVE JUDGEMENT CORRECTLY. HENCE THE CONTENTION OF THE A. O. THAT THE ABOVE JUDGEMENT HAS NO RELEVANCE IN THE CASE OF THE APPELLANT IS COMPLETELY WITHOUT ANY BASIS. HENCE IN THE LIGHT OF ABOVE ITA NO.99/11 M/S MCNALLY BHARAT ENGINEERING COMPANY 10 JUDGEMENT AND ON THE BASIS OF THE DECISION OF APEX COURT IN THE CASE OF WOODWARD GOVERNOR INDIA (P) LTD. & ORS THE FORESEEABLE LOSS BOOKED BY THE APPELLANT IS AN ALLOWABLE DEDUCT ION UNDER THE INCOME TAX ACT. WITH THE ABOVE OBSERVATION, THE A.O. IS DIRECTED TO DELETE THE DISALLOWANCE MADE FOR RS. 5,50,00,000/- ON ACCOUNT OF CONTRACT WORK IN PROGRESS WRITTEN OFF FOLLOWING AS-7 AND THI S GROUND OF APPELLANT IS ALLOWED. AGGRIEVED BY THIS, THE REVENUE HAS COME UP IN APPEA L BEFORE US. 18. THE LD. AR BEFORE US SUBMITTED THAT LOSS HAS BE EN INCURRED AT THE END OF THE COMPLETION OF THE PROJECT I.E. TOTAL COS T INCURRED IS HIGHER THAN THE TOTAL REVENUE BOOKED BY THE ASSESSEE FOR THE SA ID PROJECTS. YEAR- WISE REVENUE, COST INCURRED AND LOSS SUFFERED IN TH E PROJECT FOR THE YEARS ENDED 31-03-2003, 31-03-2004, 31-03-2005, 31-03-200 6 AND 31-03- 2007 HAS BEEN FILED WITH THE PAPER BOOK. FROM ABOVE IT COULD BE NOTED THAT, THE TOTAL LOSS INCURRED FOR EACH PROJECT IS S UBSTANTIALLY HIGHER THAN THE EXPENSES WRITTEN OFF IN THE YEAR UNDER CONSIDER ATION. THEREFORE, EXPENSES WRITTEN OFF ON THE BASIS OF ESTIMATED COST IS JUSTIFIED AS THE ACTUAL EXPENDITURE INCURRED IS HIGHER THAN THE AMOU NT WRITTEN OFF IN THE YEAR UNDER CONSIDERATION. HENCE, THE CONTENTION OF THE A.O. THAT DETAILS IN RELATION TO WRITE OFF OF WIP, DETAILS OF CONTRAC T REVENUE AND DETAILS OF ESTIMATES OF COST IN RELATION TO EACH PROJECT HAVE NOT BEEN FURNISHED IS NOT CORRECT. DETAILED STATEMENT SHOWING ESTIMATED C OST OF CONTRACT PREPARED AT THE TIME OF ACQUIRING THE CONTRACT WAS FILED BEFORE THE A.O. WHICH IS PLACED ON PAGES 169 TO 280 OF THE PAPER BO OK. THE SAID STATEMENT WAS SUPPORTED BY THE QUOTATIONS TAKEN FOR COSTS TO BE INCURRED FOR THE SAID PROJECT. IT WAS PREPARED ON THE BASIS OF PROPER ESTIMATION OF THE COSTS WHICH WAS TO BE INCURRED AT THE TIME OF E XECUTION OF THE CONTRACT. FURTHER, THE CONTRACT REVENUE WAS DETERMI NED ON THE BASIS OF AGREEMENT ENTERED INTO BETWEEN THE ASSESSEE AND THE CONTRACTEE WHICH IS A FIXED VALUE CONTRACT. THE COPY OF THE AGREEMEN T ENTERED INTO WITH EACH CONTRACTOR HAS ALSO BEEN ENCLOSED IN THE PAPER BOOK WHICH ARE PLACED ON PAGES 244 & 264 OF THE PAPER BOOK. ON PE RUSAL OF THE ABOVE, ITA NO.99/11 M/S MCNALLY BHARAT ENGINEERING COMPANY 11 IT COULD BE NOTED THAT ESTIMATED COST OF EACH CONTR ACT IS HIGHER THAN ITS CONTRACT VALUE. SINCE AT THE TIME OF OBTAINING THE CONTRACT, THE ASSESSEE WAS CONSCIOUS OF THE FACT THAT THE CONTRACT WOULD B E EXECUTED WITHOUT ANY MARGIN, HENCE THE DIFFERENCE BETWEEN THE ESTIMA TED COST OF THE CONTRACT AND THE CONTRACT VALUE WAS WRITTEN OFF IN THE FIRST YEAR FOLLOWING AS-7. THEREFORE, FOLLOWING THE PRINCIPLE OF PRUDENC E AND COMPLYING WITH THE AS-7 WHICH IS MANDATORILY REQUIRED TO BE FOLLOW ED, FORESEEABLE LOSS WAS WRITTEN OFF IN THE BOOKS OF ACCOUNTS. OUR ATTEN TION WAS ALSO DRAWN TO THE ACCOUNTING POLICY OF THE ASSESSEE AND REFERENCE IS ALSO DRAWN TO SCHEDULE 22 OF NOTES TO ACCOUNTS WHICH IS BEING REP RODUCED BELOW:- 'REVENUE ON CONTRACTS IS RECOGNIZED WHEN THE CONTRA CT IS COMPLETED. IN RESPECT OF CONTRACTS INVOLVING MILEST ONES REVENUE IS RECOGNIZED ON COMPLETION OF RESPECTIVE MILESTONE . IN CASE THE LONG TERM CONTRACTS MAINLY, WHERE THE CURRENT ESTIM ATE OF TOTAL CONTRACT COST AND REVENUE INDICATE A LOSS, PROVISIO N IS MADE FOR THE ENTIRE LOSS ON THE CONTRACT. THE COSTS ON LONG TERM CONTRACTS NOT YET COMPLETED LESS RELATED FORESEEABLE LOSSES A ND PROGRESS PAYMENTS ARE SHOWN IN THE STOCKS AS JOBS-IN-PROGRES S CONTRACT' HENCE, TO ALLEGE THAT THE LOSS DERIVED BY ASSESSEE IS AD HOC IS WRONG AS THE SAME IS WELL SUBSTANTIATED. BESIDES THE ABOVE FOR ASSESSABLE LOSS ACCOUNTED IN ACCORDANCE WITH AS- 7 IS NOT CONTINGENT IN NATURE. SUCH LOSS HAS BEEN A CCOUNTED AS PER AS-7 ISSUED BY ICAI WHICH PERMITS THE CONTRACTOR TO BOOK THE LOSSES WHERE ESTIMATED LOSS IS INDICATED. ON THE OTHER HAND, LD. DR BEFORE US SUBMITTED THAT ALL THE LOSSES CLAIMED BY THE ASSESSEE ARE CAPITAL IN NATURE AND, THEREFOR E, THE SAME CANNOT BE DISALLOWED IN THE YEAR UNDER CONSIDERATION. BESIDES , ALL THE LOSSES WERE NOT QUANTIFIED ON ANY SCIENTIFIC BASIS, THEREFORE, ALL THE LOSSES WERE IN CONTINGENT IN NATURE. LD. DR VEHEMENTLY SUPPORTED T HE ORDER OF AO. 19. WE HAVE HEARD RIVAL CONTENTIONS. ON PERUSAL OF THE RECORD WE FIND THAT THE ISSUE IN THE INSTANT CASE RELATES TO THE DISALL OWANCE MADE BY THE AO ON ACCOUNT OF THE LOSSES CLAIMED BY THE ASSESSEE. THE REASONS FOR THE LOSSES HAVE BEEN ELABORATED IN THE PRECEDING PARAGRAPH AND THE SAME ARE NOT ITA NO.99/11 M/S MCNALLY BHARAT ENGINEERING COMPANY 12 REPEATED HERE FOR THE SAKE OF BREVITY. IN THE INSTA NT THE ASSESSEE IS FOLLOWING COMPLETED CONTRACT METHOD AS PER ACCOUNTING STANDAR D 7 ISSUED BY ICAI WHICH STATES ABOUT THE CLAIM OF FORESEEABLE LOSS. A CCORDINGLY THE LOSS WAS CLAIMED BY THE ASSESSEE. THIS FACT ABOUT THE AS 7 W AS DULY OBSERVED BY THE AO IN ITS ORDER. BUT THE AO WAS OF THE VIEW THAT TH E AS 7 HAS NO APPLICATION IN THE PROCEEDINGS UNDER THE INCOME TAX ACT. THEREF ORE THE LOSS CLAIMED BY THE ASSESSEE WAS TREATED AS CONTINGENT IN NATURE AN D ACCORDINGLY THE SAME WAS DISALLOWED. HOWEVER WE FIND THAT THE PROVISIONS OF AS 7 HAS APPLICATION IN THE INCOME TAX PROCEEDINGS AS HELD BY THE HON'B LE DELHI HIGH COURT IN THE CASE OF CIT -VS.- TRIVENI ENGINEERING & INDUSTRIES LTD (2011) 336 ITR 0374 (DEL). THE RELEVANT EXTRACT OF THE JUDGMENT IS REPRODUCED BELOW: NO DOUBT, UNLESS THE EXPENDITURE IS ACTUALLY INCUR RED OR IT ACCRUED IN THE RELEVANT YEAR, IT WOULD NOT BE ALLOWED AS DEDUC TION. SUCH A LIABILITY HAS TO BE IN PRAESENTI. HOWEVER, AT THE S AME TIME, IN THE GIVEN SCENARIO WHERE IN RELATION TO THE PROJECT WOR KS UNDERTAKEN BY THE ASSESSEE, COMPLETED CONTRACT METHOD OF ACCOUNTI NG IS FOLLOWED, WHICH IS CONSISTENT WITH THE ACCOUNTING STANDARDS A ND THESE ACCOUNTING STANDARDS ALSO LAY DOWN THE NORMS INDICA TING THE PARTICULAR POINT OF TIME WHEN THE PROVISION FOR ALL KNOWN LIABILITIES AND LOSSES HAS TO BE MADE, THE MAKING OF SUCH A PROVISI ON BY THE ASSESSEE APPEARS TO BE JUSTIFIED MORE SO WHEN THE A SSESSEE HAD RECOGNIZED GAIN AS WELL ON SUCH PROJECT DURING THIS YEAR ITSELF. THIS APPEARS TO BE IN CONSONANCE WITH PRINCIPLE OF MATCH ING COST AND REVENUE AS WELL. HOWEVER, IN THE PROJECTED SCENARIO OF THIS CASE, AFTER TAKING STOCK OF THE ENTIRE SITUATION, IT IS NOT NEC ESSARY TO CONCLUSIVELY ANSWER THE QUESTIONS FORMULATED. IT IS BECAUSE OF T HE REASON THAT THE ENTIRE EXERCISE IS REVENUE NEUTRAL. IT MAY BE POINT ED OUT THAT IT IS A MATTER OF RECORD THAT AGAINST THE PROVISION OF RS. 139 LAKHS, THE ASSESSEE HAD TO ACTUALLY INCUR EXPENDITURE OF RS. 2 18.03 LAKHS, I.E., MORE THAN THE PROVISION MADE. IT IS UNDISPUTED THAT THE EXPENDITURE INCURRED BY THE ASSESSEE ON THE PROJECT IS ADMISSIB LE DEDUCTION. THE ONLY DISPUTE THAT THE REVENUE SEEKS TO RAISE IS REG ARDING THE YEAR OF ALLOWABILITY OF EXPENDITURE. CONSIDERING THAT THE A SSESSEE IS A COMPANY ASSESSED AT UNIFORM RATE OF TAX, THE ENTIRE EXERCISE OF SEEKING TO DISTURB THE YEAR OF ALLOWABILITY OF EXPE NDITURE IS, IN ANY CASE, REVENUE NEUTRAL. IN SUCH CIRCUMSTANCES, SUBST ANTIAL QUESTIONS OF LAW THAT NEED TO BE ANSWERED DO NOT ARISE.CIT V S. VS. NAGRI MILLS CO. LTD. (1958) 33 ITR 681 (BOM) AND CIT VS. SHRI R AM PISTONS & RINGS LTD. (2008) 220 CTR (DEL) 404 APPLIED. AS THE ASSESSEE HAD TO INCUR EXPENDITURE IN EXCESS OF THE PROVISION MADE BY IT AND THE ASSESSEE BEING A COMPANY ASSESSABLE A T UNIFORM RATE OF TAX, THE ENTIRE EXERCISE OF SEEKING TO DISTURB THE YEAR OF ALLOWABILITY OF EXPENDITURE IS REVENUE NEUTRAL AND, THEREFORE, NO S UBSTANTIAL QUESTION OF LAW ARISES FROM THE ORDER OF THE TRIBUNAL ALLOWING THE PROVISION FOR FUTURE LOSSES. ITA NO.99/11 M/S MCNALLY BHARAT ENGINEERING COMPANY 13 19.1 FROM THE ABOVE JUDGMENT, IT IS CLEAR THAT THER E IS NO DENIAL OF FOLLOWING THE AS-7 ISSUED BY ICAI IN THE BOOKS OF A CCOUNTS AND ACCORDINGLY THE DEDUCTION IS ALLOWED UNDER THE INCO ME TAX ACT. THE ISSUE IS ALSO SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE FOLLOWING DECISIONS OF ACIT -VS.- ITD CEMENTATION INDIA LTD ( 2014) 146 ITD 59 (MUM TRIB) SEC 145(2) PROVIDES THAT CENTRAL GOVT MAY NOTIFY I N THE OFFICIAL GAZETTE FROM TIME TO TIME ACCOUNTING STANDARDS TO BE FOLLOW ED BY ANY CLASS OF ASSES SEES OR IN RESPECT OF ANY CLASS OF INCOME. IT IS A FACT THAT AS-7 HAS NOT BEEN NOTIFIED BY THE CENTRAL GOVT. THIS DOES NO T MEAN THAT THE ASSESSEE IS PRECLUDED FROM FOLLOWING AS-7 ISSUED BY ICAL. LCAI BEING THE HIGHEST ACCOUNTING BODY OF THE COUNTRY, CREATED BY AN ACT OF PARLIAMENT, ACCOUNTING STANDARDS ISSUED BY IT CANNO T BE BRUSHED ASIDE LIGHTLY. ON THE CONTRARY, IF AN ASSESSEE WAS FOLLOW ING THE ACCOUNTING STANDARDS ISSUED BY ICAI, IT WOULD GIVE MORE CREDIB ILITY AND AUTHENTICITY TO ITS ACCOUNT. IT WAS NOT IN DISPUTE THAT THE ASSE SSEE WAS EXECUTING FIXED PRICE CONTRACT WHICH MEANS THAT THE CONTRACTO R HAS AGREED TO A FIXED CONTRACT PRICE OR RATE IN SOME CASES SUBJECT TO COST ESCALATION PRICES. AS PER AS- 7, THE ASSESSEE WAS ENTITLED TO MAKE PROVISION FOR FORESEEABLE LOSSES. HENCE PROVISION FOR FORESEEABLE LOSS MADE IN ACCORDANCE WITH GUIDELINES OF AS-7 AND DULY DEBITED IN AUDITED ACCOUNTS OF COMPANY IS AN ALLOWABLE EXPENDITURE U/S 37(1). 2. ACIT VS.- ASHOKA BUILDCON LTD (2014) 42 CCH 149( PUNE TRIB) WORK CARRIED OUT BY THE ASSESSEE WAS A COMPOSITE F IXED CONTRACT WORK INVOLVING IMPROVEMENT OF ROAD AND ITS MAINTENANCE T HEREOF FOR A FIXED PERIOD. WHERE AN ASSESSEE IS EXECUTING AN INFRASTRU CTURE DEVELOPMENT FIXED PRICE CONTRACT, THE FORESEEABLE LOSSES OF FUT URE YEARS CAN BE RECOGNIZED FOLLOWING THE RATIONALE OF AS-7 ISSUED B Y ICAL, AND SUCH A PROVISION IS AN ALLOWABLE DEDUCTION. 3. DREDGING INTERNATIONAL -VS.- ADIT (2011) 48 SOT 430 (MUM) ASSESSEE'S CLAIM FOR PROVISION FOR LOSS, WHICH WAS MADE IN ACCORDANCE WITH GUIDELINES OF AS-7 AND DULY DEBITED IN THE AUD ITED ACCOUNTS OF THE COMPANY IS AN ALLOWABLE EXPENDITURE. 4. JACOBS ENGINEERING PVT LTD -VS.- ACIT (2009) 30 DTR 614 (MUM) SINCE THE FORESEEABLE LOSSES WERE PROVIDED IN THE BOOKS IN ACCORDANCE WITH AS-7 WHICH IS MANDATORILY REQUIRED TO BE FOLLO WED, SUCH LOSSES ARE ALSO ALLOWED UNDER THE INCOME TAX ACT. ITA NO.99/11 M/S MCNALLY BHARAT ENGINEERING COMPANY 14 19.2 WE ALSO FIND THAT THE AFORESAID LOSS WAS CLAIM ED BY THE ASSESSEE IN TERMS OF THE PROVISIONS OF AS-7 ISSUED BY THE IC AI WHICH READS AS UNDER : 13. PROVISION FOR FORESEEABLE LOSSES 13.1 WHEN CURRENT ESTIMATES OF TOTAL CONTRACT COSTS AND REVENUES INDICATE A LOSS, PROVISION IS MADE FOR THE ENTIRE L OSS ON THE CONTRACT IRRESPECTIVE OF THE AMOUNT OF WORK DONE AND THE MET HOD OF ACCOUNTING FOLLOWED. IN SOME CIRCUMSTANCES, THE FOR ESEEABLE LOSSES MAY EXCEED THE COSTS OF WORK DONE TO DATE. P ROVISION IS NEVERTHELESS MADE FOR THE ENTIRE LOSS ON THE CONTRA CT. 13.2 . 13.3. IF A PROVISION FOR LOSS IS REQUIRED, THE AMOU NT OF SUCH PROVISION IS USUALLY DETERMINED IRRESPECTIVE OF (I) WHETHER OR NOT WORK HAS COMMENCED ON THE CONTRA CT; AND (II) THE STAGE OF COMPLETION OF CONTRACT ACTIVITIES AND (HI) THE AMOUNT OF PROFITS EXPECTED TO ARISE ON OTH ER UNRELATED CONTRACTS. 19. A FORESEEABLE LOSS ON THE ENTIRE CONTRACT SHOUL D BE PROVIDED FOR IN THE FINANCIAL STATEMENTS IRRESPECTIVE OF THE AMOUNT OF WORK DONE AND THE METHOD OF ACCOUNTING FOLLOWED' THUS ON THE PERUSAL OF AS-7, WE FIND THAT WHERE THE EXPECTED CONTRACT COSTS EXCEEDS TOTAL CONTRACT REVENUE, THEN THE PROB ABLE LOSS SHOULD BE RECOGNIZED IN THE BOOKS IMMEDIATELY. LOSS COULD BE RECOGNIZED IRRESPECTIVE OF THE STAGE OF COMPLETION OF CONTRACT AND METHOD OF ACCOUNTING FOLLOWED. HENCE, LOSS IS PERMISSIBLE TO BE ACCOUNTED FOR EVEN IN THE PERIOD IN WHICH THE CONTRACT IS SIGNED OR WHEN THE LEGAL OR CONSTRUCTIVE OBLIGATION HAS BEEN ASSUMED. ASSESSEE HAS DETERMINED THE LOSS ON THE BASIS OF THE COST THAT CAN BE ATTRI BUTED TO A CONTRACT IN ACCORDANCE WITH AS-7. ACTUAL EXPENDITURE INCURRED I N THE FIRST YEAR IS IN EXCESS OF AMOUNT WRITTEN OFF IN THE FIRST YEAR OF C ONTRACT. SUCH WRITE OFF HAVE BEEN MADE TO COMPLY WITH THE PROVISIONS OF ACC OUNTING STANDARD - 7 AS PRESCRIBED BY THE LCAI. THE FACT THAT ASSESSEE HAS MADE A CORRECT ESTIMATE OF THE LOSS IS FURTHER SUPPORTED BY THE FA CT THAT ACTUAL LOSS ITA NO.99/11 M/S MCNALLY BHARAT ENGINEERING COMPANY 15 BORNE BY THE ASSESSEE IN EVERY CONTRACT REFERRED AB OVE IS HIGHER THAN THE AMOUNT WRITTEN OFF IN THE FIRST YEAR OF CONTRAC T. HENCE, THE CONTENTION OF THE A.O THAT SUCH LOSS IS A CONTINGENT LOSS AND DOES NOT HAVE ANY BASIS DOES NOT HOLD GOOD. FORESEEABLE LOSSES WRITTE N OFF IN ACCORDANCE WITH ACCOUNTING STANDARD 7- ' CONSTRUCTION CONTRACTS ' IS AN ALLOWABLE LOSS. PARA 13 OF ACCOUNTING STANDARD 7- ' CONSTRUCTION CONTRACTS ' AS PRESCRIBED BY LCAL MANDATES AN ENTITY TO MAKE A PRO VISION FOR LOSSES IRRESPECTIVE OF THE METHOD OF ACCOUNTING FOLLOWED A ND PERCENTAGE OF CONTRACT COMPLETED. 19.3 THE NEXT ALLEGATION OF THE AO WAS THAT THE ASS ESSEE FAILED TO FILE NECESSARY DETAILS OF THE EXPENDITURE AND WORK COMPL ETED AT THE TIME OF ASSESSMENT. HOWEVER ON PERUSAL OF THE LD. CIT(A) OR DER WE FIND THAT THE LD. CIT(A) HAS GIVEN VERY CLEAR FINDING THAT ALL TH E DETAILS WERE SUBMITTED BEFORE THE AO AND ACCORDINGLY THE FINDING OF THE AO IS WRONG. THE RELEVANT EXTRACT OF THE ORDER IS REPRODUCED BELOW:- (A) THE APPELLANT HAS DULY SUBMITTED DETAILS OF AC TUAL EXPENDITURE WRITTEN OFF DURING THE YEAR AS WELL AS DETAILS OF E STIMATED COST ON THE BASIS OF WHICH EXCESS COST INCURRED OVER THE CO NTRACT VALUE HAS BEEN WRITTEN OFF. ON PERUSAL OF THE SAID DETAIL S IT COULD BE NOTED THAT THE LOSS WRITTEN OFF WAS ESTIMATED BY TH E APE BEFORE THE CONTRACT WAS COMMENCED. THE AMOUNT WRITTEN OFF WAS ON ACCOUNT OF ACTUAL EXPENDITURE INCURRED BY THE APPELLANT. HE NCE, THE CONTENTION OF THE AO THAT THE DETAILS WERE NOT SUBM ITTED IS NOT CORRECT AND WRITE OFF OF SUCH LOSS IS A GENUINE LOS S INCURRED DURING THE COURSE OF BUSINESS. 19.4 THE NEXT ALLEGATION OF THE AO WAS THAT THE ASS ESSEE HAS NOT ACCOUNTED FOR SUCH LOSS IN ITS PROFIT & LOSS ACCOUN T. IN THIS REGARD WE FIND THAT THE LOSS WAS ADJUSTED AGAINST THE REVALUATION RESERVE IN TERMS OF THE HONBLE JURISDICTIONAL HIGH ORDER IN THE OWN CASE O F THE ASSESSEE. IN FACT THERE WAS AMALGAMATION WHICH WAS SANCTIONED BY THE HONBLE JURISDICTIONAL HIGH COURT AND ACCORDINGLY THE AFORE SAID LOSS WAS CLAIMED AGAINST THE REVALUATION RESERVE. HOWEVER IN OUR VIE W THE LOSS WAS GENUINE AS NO DEFECT HAS BEEN POINTED OUT BY THE AO . SIMPLY THE LOSS WAS NOT WRITTEN IN THE PROFIT & LOSS ACCOUNT BUT AD JUSTED AGAINST THE ITA NO.99/11 M/S MCNALLY BHARAT ENGINEERING COMPANY 16 REVALUATION RESERVE DOES NOT MEAN THAT THE ASSESSEE IS NOT ENTITLED. IN THIS CONNECTION WE RELY IN THE CASE OF DCIT VS. TAT A SPONGE IRON LIMITED REPORTED IN 90 ITD 138. THE RELEVANT HAND NOTE READ S AS UNDER : SECTION 37(1) OF THE INCOME-TAX ACT, 1961 - BUSINE SS EXPENDITURE - ALLOWABILITY OF - ASSESSMENT YEAR 199 8-99 - ASSESSEE-COMPANY CONSTRUCTED RAILWAY SIDINGS ON RAI LWAY LAND FOR QUICK AND EASY MOVEMENT OF RAW MATERIALS A ND FINISHED GOODS AND IN BOOKS OF ACCOUNT, EXPENDITURE INCURRED ON CONSTRUCTION OF RAILWAY SIDINGS WAS CAPITALIZED AND WAS WRITTEN-OFF OVER A PERIOD OF FIVE YEARS - HOWEVER, IN INCOME- TAX RETURN, ASSESSEE CLAIMED SAID EXPENDITURE AS RE VENUE EXPENDITURE - ASSESSING OFFICER DISALLOWED ASSESSEE S CLAIM - IT WAS FOUND THAT EXPENDITURE HAD BEEN INCURRED BY ASSESSEE ONLY TO RUN ITS BUSINESS MORE EFFICIENTLY AND ADVAN TAGEOUSLY AND IT WAS NOT IN RELATION TO ASSETS OWNED BY ASSES SEE OR TO ACQUIRE ANY NEW ASSET BUT IN ORDER TO FACILITATE MO VEMENT OF MATERIALS FOR BUSINESS OPERATION OF ASSESSEE - WHET HER, SINCE EXPENDITURE DID NOT BRING ANY ASSET TO ASSESSEE AND RAILWAYS OWNED IT AND ALSO RESERVED RIGHT TO CLOSE SIDINGS, THOUGH ASSESSEE HAD BEEN GIVEN A LONG-TERM RIGHT OF USE, S AID EXPENDITURE DID NOT RESULT IN ACQUISITION OF CAPITA L ASSET AND, HENCE, BY NO STRETCH OF IMAGINATION COULD BE TREATE D AS EXPENDITURE FOR CREATION OF AN ASSET OF ENDURING NA TURE - HELD, YES - WHETHER, THEREFORE, SAID EXPENDITURE WAS ALLO WABLE AS REVENUE EXPENDITURE - HELD, YES IN VIEW OF ABOVE AND RESPECTFULLY FOLLOWING THE AFO RESAID JUDGMENTS OF VARIOUS HON'BLE HIGH COURTS, WE DO NOT FIND ANY INF IRMITY IN THE ORDER OF LD. CIT(A). WE UPHOLD ACCORDINGLY. HENCE, GROUND RA ISED BY THE REVENUE IS DISMISSED. 20. LAST ISSUE RAISED BY THE REVENUE IS THAT LD. CI T(A) ERRED IN DELETING THE ADDITION MADE BY THE AO FOR RS.10,43,715/- ON A CCOUNT OF PAYMENT MADE TO SUB-CONTRACTOR. 21. THE ASSESSEE, IN THE YEAR UNDER CONSIDERATION, HAS CLAIMED EXPENSES UNDER THE HEAD SUB-CONTRACT CHARGES. ONE O F THE PARTY ACTING ITA NO.99/11 M/S MCNALLY BHARAT ENGINEERING COMPANY 17 AS SUB-CONTRACTOR WAS M/S LAXMI ENTERPRISES TO WHOM THE NOTICE U/S.133(6) OF THE ACT WAS ISSUED BUT RETURNED AS UN -SERVED. THE ASSESSEE IN THE COURSE OF ASSESSMENT ALSO SUBMITTED NECESSARY DETAILS SUCH AS LEDGER ACCOUNT, VOUCHERS, DETAILS OF PAYMEN T ALONG WITH CHEQUE DETAILS, PAN CARD ALONG WITH ADDRESSES OF THE PARTI ES IN SUPPORT OF THE IMPUGNED TRANSACTION. HOWEVER, THE AO REJECTED THE CLAIM OF THE ASSESSEE BY HOLDING THAT THE IDENTITY OF THE PARTY HAS NOT BEEN ESTABLISHED, THEREFORE, SUB-CONTRACT CHARGES FOR RS .10,43,712/- WAS DISALLOWED AND ADDED TO THE TOTAL INCOME OF THE ASS ESSEE. 22. AGGRIEVED, ASSESSEE PREFERRED AN APPEAL BEFORE THE LD. CIT(A), WHO HAS DELETED THE ADDITION MADE BY THE AO BY OBSE RVING AS UNDER :- 9.4 ON PERUSAL OF THE DETAILS FILED BY THE APPELLA NT, IT CAN BE SEEN THAT THERE IS SUFFICIENT MATERIAL ON RECORD TO STAT E THAT THE TRANSACTION IS A GENUINE ONE. THE APPELLANT HAS DUL Y DEDUCTED TDS ON THE AMOUNT PAID TO THE SUB CONTRACTOR. MEREL Y BECAUSE THE NOTICE WAS RETURNED UNSERVED, IT CANNOT BE CONCLUD ED THAT THE ASSESSEE DOES NOT EXIST AND THE TRANSACTION IS NOT FOR THE PURPOSE OF BUSINESS. THERE IS NO REASON TO DOUBT THE GENUIN ENESS OF THE TRANSACTION IN VIEW OF THE DETAILS AND EVIDENCES PR ODUCED BY THE APPELLANT. ACCORDINGLY, THE DISALLOWANCE OF RS.10,4 3,712/- IS DELETED. AGGRIEVED BY THIS, THE REVENUE HAS COME UP IN APPEA L BEFORE US. 23. BEFORE US BOTH THE PARTIES RELIED UPON THE ORDE R OF AUTHORITIES BELOW AS FAVORABLE TO THEM. 24. WE HAVE HEARD RIVAL CONTENTIONS. ON PERUSAL OF THE RECORD, WE FIND THAT ALL THE NECESSARY DETAILS OF SUB-CONTRACTOR CH ARGES PAID TO M/S LAKSHMI ENTERPRISES WERE DULY SUBMITTED BEFORE THE AO, WHICH ARE PLACED AT PAGE 281 TO 305 OF THE PAPER BOOK. IN OUR CONSIDERED VIEW, THE ASSESSEE HAS FILED THE NECESSARY DETAILS, WHICH ARE SUFFICIENT ENOUGH TO ITA NO.99/11 M/S MCNALLY BHARAT ENGINEERING COMPANY 18 PROVE THE IDENTITY OF THE PARTY. NON-SERVICE OF NOT ICE ISSUED U/S.133(6) OF THE ACT CANNOT BE THE SOLE REASON FOR TREATING THE PAYMENT AS IN-GENUINE. IN REJOINDER, LD. DR HAS NOT BROUGHT ANYTHING ON RE CORD CONTRARY TO THE FINDING OF LD. CIT(A), HENCE, WE UPHOLD THE SAME AN D GROUND OF APPEAL RAISED BY THE REVENUE IS DISMISSED. 25 . IN THE RESULT, APPEAL OF REVENUE STANDS DISMISSED . ORDER PRONOUNCED IN THE OPEN COURT ON THIS 11/0 1/2017. S D/ - (S.S.VISWANETHRA RAVI) S D/ - (WASEEM AHMED) # / JUDICIAL MEMBER $# / MEMBER ACCOUNTANT /KOLKATA ; $% DATED 11/01/2017 & ()* /PRAKASH MISHRA , . / PS %&' (' / COPY OF THE ORDER FORWARDED TO : / BY ORDER, ( ASSTT. REGISTRAR) , / ITAT, 1. / THE APPELLANT-DCIT, CIR-1, KOLKATA 2. / THE RESPONDENT-M/S MCNALLY BHARAT ENGINERING CO LTD 3. 4 ( ) / THE CIT(A), KOLKATA. 4. 4 / CIT 5. 56 7 8 , 8 , / DR, ITAT, KOLKATA 6. 7 9 / GUARD FILE. 5 //TRUE COPY//