Case Law Details
Issue- The sum and substance of the grievance of the assessee is that the Ld. CIT(A) has erred in upholding the request of the AO to disallow the future losses recognized by the company as per Accounting Standard -7 (AS-7) , as during original assessment proceedings there was no discussion or dis allowance on this ground.
Facts– The facts on record show that during remand report proceedings, the AO issued show cause notice to the assessee requiring to explain as to why 100% loss was claimed even when the project was not completed 100%. The AO asked the assessee to explain why loss should not be allowed only upto the percent of work completed and why the excessive loss of Rs. 1,58,77,508/- should not be disallowed and added back to the income of A.Y. 2003-04. In response to which the assessee explained to the AO that it was consistently following Accounting Standard-7 (AS-7) issued by the ICAI for valuation of work-in-progress. It was explained that the valuation figures were based on the actual cost recorded in the books of account and an estimate of the profit/loss on a project on completion. It was further explained that mandatory Accounting Standard requires to estimate the probable outcome of any project. During the course of executing any project it is possible that actual expenditure incurred may not be billed to the client within the same accounting period. Meaning thereby that the cost may be incurred in one accounting year and the billing in respect of that item cost is done in a subsequent accounting year. As per AS-7 such cost that relates to a future activity are recognized as an asset and classified as work-in-progress. Therefore, it was prayed that the losses claimed by the assessee should be allowed in total.
Held :- Mazagoan Dock (supra) – The question that came up for consideration was as to whether the anticipated loss on the valuation of fixed price contract in view of the mandatory requirements of the AS-7, was to be allowed 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 as by the Comptroller & Auditor General of India. Therefore, the observation 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, therefore, merely because there were some variations in the figures furnished by the assessee at different stages, it could not be said that the estimated loss was not allowable.
A similar view has been taken by the Tribunal in the case of Jacobs Engineering India Pvt. Ltd. (supra) wherein the assessee’ s claims of foreseeable losses were allowed irrespective of method of accounting in terms of AS-7. In the case of Dredging International (supra), the issue before the Tribunal was whether u/s. 37(1) of the Act provision for foreseeable loss made in accordance with guidelines of AS-7 and duly debited in audited accounts of company is an allowable expenditure. The Tribunal decided the case in favor of the assessee and held that ‘yes’ it is an allowable expenditure. The Tribunal while deciding this issue has also considered the decision of Mazagaon Dock (supra).
INCOME TAX APPELLATE TRIBUNAL, MUMBAI
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