TaxTMI 
TaxTMI 
2010 (11) TMI 90
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....s, the Assessing Officer (AO) noticed that the assessee had debited a sum of Rs. 139 lacs to the Profit and Loss Account as provision for losses, which occur for different projects undertaken by it. These projects had been substantially completed during the said year and revenue gain had also been recognized during the year. The AO was of the view that the provision had been made against a liability, which may arise in future due to any defect noticed in the project and liabilities incurred by removing those defects. According to him, such a liability to be incurred by a future date, was a contingent liability and therefore, he refused to acknowledge this liability and give the allowance thereof to the assessee. 4. View of the AO was confirmed by the CIT (A) in the appeal preferred by the assessee holding that this liability provided by the assessee was of a contingent nature and was not allowable under Section 37(1) of the Income Tax Act (hereinafter referred to as „the Act‟). 5. Not satisfied with the view taken by the AO as well as CIT (A), the assessee went in appeal before the Income Tax Appellate Tribunal (hereinafter referred to as „the Tribunal‟). ....
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.... up to the stage of completion was based on the consistent accounting policy. This was so stated under Clause (b)(iv) of Significant Accounting Policies forming part of "Notes to Accounts and Significant Accounting Policies", is as under: "Revenue Recognition ... ..... iv) Profit on project related activities are recognized on completion or on substantial completion of the project. Provision is, however, made for foreseeable losses, if any, in respect of projects which have been substantially completed. " As per Accounting Standard (AS) 7 (Accounting of Construction Contracts) as applicable at the relevant time under the completed contact method, revenue is recognized only when the project is complete or substantially complete. Till that date, all costs incurred and accumulated as part of work in progress and on account payments received are shown as current liabilities. In the year, when the project is complete/substantially complete, (i) Revenue on the project is recognized included balance billing left, (ii) All costs taken as part of work in progress are debited to the profit and loss account and (iii) additionally, anticipated costs till completion are also debited to th....
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....(i) of the Act, profits and gains of business which was carried on by the assessee at any time during the previous year are chargeable under the head "profit and gains of business or profession". For calculating these profits and gains of business, Section 145 of the Act provided the method of accounting, as per which such profits and gains were computed in cash or mercantile system of accounting regularly employed by the assessee. It was a submission that no doubt, the AO was not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting had not been followed by the assessee. In the present case, the assessee had followed consistently mercantile method of accounting. In respect of project related activities, the assessee had consistently and regularly followed the completed contract method in terms of Accounting Standard (AS) 7 issued by the ICAI. This method had been accepted by the Revenue all along. Even in this year, this method was not rejected from which it would be evident that the AO was satisfied with the correctness and completeness of the accounts of the assessee and further with the method of accounting regularly ....
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....cial statements of the periods to which they relate" Para 17 of the said Accounting Standard further provides that selection and application of accounting policy must be governed, inter alia, by "prudence", which has been explained in the following terms: "(i) Prudence: Provisions should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information ." He thus, argued that as per Section 145(2) of the Act, it as mandatory that the assessee follows the accounting standard that may be notified by the Central Government and referred to the Notification No.SO 69(E) dated 25.1.1996. He submitted that the Central Government had notified Accounting Standard - I relating to Disclosure of Accounting Policies and therefore, following the aforesaid Accounting Standard prescribed by ICAI became mandatory even for the purposes of income tax in view of the aforesaid provisions. 3) Invoking the principle of matching cost with revenue, it was also the submission of Mr. Vohra that this principle justified the manner in which accounts were maintained by the assessee following ....
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....hat it is a matter of record that against the provision of Rs. 139 lacs, the assessee had to actually incur expenditure of Rs. 218.03 lacs, i.e., more than the provision made. It is undisputed that the expenditure incurred by the assessee on the project is admissible deduction. The only dispute that the Revenue seeks to raise is regarding the year of allowability of expenditure. Considering that the assessee is a company assessed at uniform rate of tax, the entire exercise of seeking to disturb the year of allowability of expenditure is, in any case, revenue neutral. 12. We are reminded of the classic observations made by Justice Tendolker in the case of the Commissioner of Income-tax, Delhi, Ajmer, Rajasthan and Madhya Bharat Vs. Nagri Mills Co. Ltd. [33 ITR 681], which reads as under: "We have often wondered why the Income-tax authorities, in a matter such as this where the deduction is obviously a permissible deduction under the Income-tax Act, raise disputes as to the year in which the deduction should be allowed. The question as to the year in which a deduction is allowable may be material when the rate of tax chargeable on the assessee in two different years is different; ....