2011 (10) TMI 153 - AT - Income Tax

Tribunal upholds disallowance of estimated losses, remands TDR income issue for fresh computation, and deletes addition under section 115JB.

Shivshahi Punarvasan Prakalp Ltd. Versus Income-tax Officer

The Tribunal upheld the disallowance of future estimated losses for the assessment years 2000-01 to 2003-04, rejecting the assessee's claim for deductions ... Disallowance of future estimated losses - mercantile system of accounting - AS-7 issued by ICAI - AS-1 and AS-2 notified under Income Tax Act - lower of cost or the Net Realisable Value (NRV) - method of valuation of work in progress. - Held that:- the claim of the assessee has been strongly disputed and therefore, in our view, the issue has to be decided under the provisions of law and not as per Accounting Standard AS-7 which has not been notified by the Government. The cases cited by the assessee are, therefore, of no help. The assessee had also not pressed the application of AS-7 before CIT(A), as the same has not been notified by the government. Even before us emphasis was placed only on AS-1 as notified by the government. - we do not see any infirmity, in the order of CIT(A) in allowing the loss only to the extent, it related to the WIP at the end of the relevant year. The order of CIT(A) is accordingly upheld.Addition on account of sale of TDR - the sale value of TDR in excess of the corresponding estimated value of TDR considered for the purpose of computation of anticipated loss or sale value of TDR received in excess of the TDR entitlement considered in the estimate is required to be added and in case sale value or entitlement is lower than the estimated 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, the excess expenditure has to be allowed. - matter remanded back for fresh consideration.Addition under section 115JB - any addition on account of disallowance of prior period expenses while computing book profit is not permitted in view of the judgment of Hon'ble Supreme Court in the case of Apollo Tyres Ltd. [2002 (5) TMI 5 - SUPREME Court]. Issues Involved:1. Disallowance of future estimated losses.2. Addition on account of sale of Transferable Development Rights (TDR).3. Addition under section 115JB.4. Legal validity of reopening of the assessment.Issue-wise Detailed Analysis:1. Disallowance of Future Estimated Losses:The primary issue across all assessment years (2000-01 to 2003-04) was the disallowance of future estimated losses. The assessee, executing slum rehabilitation projects, followed the percentage completion method of accounting as per AS-7, recognizing revenue based on the stage of construction. The assessee claimed deductions for future estimated losses, arguing that these were foreseeable losses as per AS-7, which mandates provisioning for total contract losses irrespective of the work done. The AO disallowed these losses, stating they were contingent and not actual liabilities, and allowed only losses proportionate to the Work in Progress (WIP) at the end of the year. CIT(A) upheld the AO's decision, noting that under mercantile accounting, only due income or expenses could be allowed, and AS-7 was not applicable as the projects were not under sale agreements. The Tribunal confirmed CIT(A)'s order, emphasizing that income for tax purposes must be computed under the Income Tax Act and not as per AS-7, which was not notified by the Government. The Tribunal also noted that the notified AS-1 did not mandate allowing provisions for known liabilities as deductions.2. Addition on Account of Sale of TDR:For the assessment year 2003-04, the AO added Rs. 7,37,41,582/- to the income from the sale of TDR, arguing that the income accrued during the year of sale as per the mercantile system. The assessee contended that TDR income should be recognized based on the percentage completion method. The Tribunal agreed with the AO that TDR income accrued during the year of sale but noted that part of this income had already been considered while allowing estimated losses related to WIP. The Tribunal set aside CIT(A)'s order and remanded the matter back to the AO for fresh computation, ensuring no double counting of TDR income.3. Addition Under Section 115JB:Relevant to the assessment year 2003-04, the AO added Rs. 1,93,061/- to the book profit under section 115JB, disallowing prior period expenses. CIT(A) upheld this addition. The Tribunal, however, cited the Supreme Court's judgment in Apollo Tyres Ltd., stating that book profit must be computed based on the P&L account prepared as per the Companies Act, and only specified adjustments under Explanation-1 to section 115JB are permissible. Since prior period expenses were part of the P&L account, the Tribunal deleted the addition.4. Legal Validity of Reopening of the Assessment:This issue was relevant for assessment years 2000-01 and 2002-03. The assessee did not press this ground during the hearing, and thus, the Tribunal dismissed the ground regarding the reopening of assessments.Conclusion:The Tribunal dismissed the appeals for the assessment years 2000-01, 2001-02, and 2002-03, upholding the disallowance of future estimated losses and confirming the legal validity of reopening the assessments. For the assessment year 2003-04, the Tribunal partly allowed the appeal, remanding the issue of TDR income back to the AO for fresh computation and deleting the addition under section 115JB for prior period expenses.