9. We have considered the rival submissions and perused the record o the case. The short dispute is whether the anticipated loss on the valuation of fixed price contract, in view of the mandatory requirements of AS-7, is to be allowed in the year in which the contract has been entered into or it is 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 is concern, it cannot be disputed that in view of mandatory requirements of 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 as by Comptroller & Auditor General of India. Therefore, at the very outset, we may observe that the observation of Ld CIT (A) that the assessee had booked bogus loss is not correct. As far as the basis of estimation is concerned, the same was done on technical estimation basis and, therefore, merely because there were some variations in the figures furnished by the assessee at different stages, it cannot be said that the estimated loss was not allowable. It is not disputed that the department in earlier years has allowed the loss on estimated basis having regard to the expenditure actually incurred in various years. Therefore, in principle, it is not disputed that the estimated loss under the present and circumstances is an allowable deduction. However, merely because the change in method of accounting is bona fide, it would not lead to the inference that the income is also deducible properly under the I.T. Act. This aspect is very evident from 1st proviso to section 145 as it stood prior to amendment 1995 w.e.f.1.4.1997 which reads as under:-
“Method of accounting –(1) Income chargeable under the head “Profits and gains of business or profession” or “Income from other Sources” shall be computed in accordance with the method of accounting regularly employed by the assessee:
Provided that in any case where the accounts are correct and complete to the satisfaction of the AO but the method employed is such that, in the opinion of the AO, the income cannot property be deducted therefrom, them the computation shall be made upon such basis and in such manner as the AO may determine”.
Therefore, it is to be examined whether income is property deductible or not. In our opinion, it cannot be disputed that from the method adopted by the assessee, assessee’s income cannot be deducted properly in the year in which the loss has been anticipated. As a matter of fact this aspect is not disputed by the AO also. He seems to have swayed more by the revenue loss then by the correct principle to be applied. The matching principle is of relevance where income and expenditure, both are to be considered together. However, in the present case, the effect of valuation of WIP will automatically affect the profits of subsequent years accordingly. We, accordingly do not find any reason for not accepting in principle the assessee’s claim as being allowable. However, in view of discrepancies pointed out by Ld CIT (A) for correct estimation of loss, we restore the matter to the file of the AO to examine the correctness of amount claimed. This ground is, accordingly, treated as allowed for statistical purposes.