AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2015 (10) TMI 181
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....ssessee ignoring the fact that these expenditure represent contingent liability and admittedly pertain to period April 2003 to November 2006. 3. That the learned CIT(A) erred in law and facts in allowing relief of Rs. 1,24,85,000/- to the assessee relying on AS-7 of accounting standards ignoring the fact that these accounting standards are not notified u/s 145 of the I.T. Act." 3. Briefly put, the relevant facts and background of the dispute can be summarized as follows. The respondent-assessee is a company incorporated under the provisions of Companies Act, 1956 and is, inter-alia, engaged in the business of civil construction, contracting, implementation of infrastructure project, etc.. The Assessing Officer noted that assessee had undertaken a project for construction and maintenance of East Coast Road for Tamilnadu Road Development Corporation (in short "TNRDC"). The stated project was awarded to the assessee in the year 2000-01 and it was a composite contract which involved improvement work/construction and maintenance of road. During the previous year relevant to the assessment year under consideration, assessee completed the construction of the road and it was under an o....
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....red to be considered by the assessee on actual basis in the respective years and the impugned Provision towards future losses of five years on account of maintenance expense was only an estimate and therefore it was a contingent liability. In this manner, the Ld. Departmental Representative contended that the CIT(A) erred in allowing the claim of the assessee. 6. On the other hand, Ld. Representative for the respondent-assessee has defended the conclusion drawn by the CIT(A). At the time of hearing, the Ld. Representative referred to the Paper Book filed wherein is placed a copy of the contract entered into with TNRDC, which is placed at pages 1 to 45 of the Paper Book. The Ld. Representative explained that the contract with TNRDC was a composite contract inasmuch as it involved improvement/construction and maintenance of the East Coast Road of 113 Kilometers between Pondicherry to Chennai. In this context, our attention was invited to the terms and conditions of the contract which shows that it was a composite contract. In-particular, reference was made to page 8 of the Paper Book wherein the expressions used in the contract have been defined. In terms of the said definition of t....
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....t the time of hearing, the Ld. Representative submitted that a similar situation had arisen before the Mumbai Bench of the Tribunal in the case of ACIT vs. ITD Cementation India Ltd., (2014) 146 ITD 59 wherein a Provision made for foreseeable losses was allowed as a deduction. Apart therefrom, reliance has also been placed on the decision of the Mumbai Bench of the Tribunal in the case of Mazagon Dock Ltd. vs. JCIT, (2009) 29 SOT 356 in support of the case of the assessee. In the course of hearing, reference has also been made to the following decisions : (i) judgement of the Hon'ble Supreme Court in the case of Calcutta Co. Ltd. vs. CIT, 37 ITR 1 (SC); (ii) Bharat Earth Movers vs. CIT, 245 ITR 428 (SC); and, (iii) Rotork Controls India P. Ltd. vs. CIT, (2009) 314 ITR 62 (SC). 9. We have carefully considered the rival submissions. The respondent-assessee is engaged in the execution of an infrastructure development project which was awarded by the TNRDC. The work related to improvement of work and its maintenance for a period of five years. The job has been done on a contractual basis. Factually speaking, the contract for improvement of the road and its maintenance for a period of ....
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.... is following mercantile system of accounting and is recognizing income from contracts on percentage of completion method. In our considered opinion, there is nothing to disagree with the CIT(A) on this aspect of the matter. Infact, the financial statements of the assessee company which are placed at pages 206 to 220 of the Paper Book also point out that the assessee company is maintaining its accounts on a mercantile system. In so far as the issue of allowability of future foreseeable losses is concerned, a similar situation had come up before the Mumbai Bench of the Tribunal in the case of ITD Cementation India Ltd. (supra). In the case before the Mumbai Bench, assessee was carrying on the business of infrastructure development and the work was executed on a contractual basis. The assessee therein was executing a fixed price contract and in terms of Accounting Standard-7 issued by Institute of Chartered Accountant of India (ICAI) made a Provision for future foreseeable losses and claimed deduction of such a Provision. The Revenue disallowed the Provision made for such foreseeable losses. The Tribunal concurred with the stand of the assessee that such a Provision was an allowable ....
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....prices are either fixed or subject to price escalation clauses. Revenue from contracts is recognized on the basis of percentage completion method, and the level of completion depends on the nature and type of each contract including : Unbilled work-in-progress valued at lower of cost and net realizable value upto the stage of completion. Cost includes direct material, labour cost and appropriate overheads; and Amounts due in respect of the price and other escalation, bonus claims and/or variation in contract work approved by the customer/third parties etc. where the contract allows for such claims or variations and there is evidence that the customer/third party has accepted it. In addition, if it is expected that the contract will make a loss, the estimated loss is provided for in the books of account. Contractual liquidated damages, payable for delays in completion of contract work or for other causes, are accounted for as costs when such delays and causes are attributable to the company or when deducted by the client." 17. A similar issue has been considered by the Tribunal in the case of Mazagoan D....
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....riod of contract. The matching principle is of relevance where income and expenditure, both are to be considered together. However, in the instant case, the effect of valuation of WIP would automatically affect the profits of subsequent years accordingly. Therefore, there was no reason for not accepting in principle the assessee's claim as being allowable. However, in view of discrepancies pointed out by the Commissioner (Appeals) for correct estimation of loss, the matter was to be restored to the file of the AO to examine the correctness of amount claimed." 18. 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 favour of the assessee and held that 'yes'....
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....s. 1,24,85,000/- made by the assessee. In this manner, it is sought to be pointed out that the Provision made by the assessee for foreseeable losses was reasonable and justified. 14. At this stage, the Ld. Representative has also referred pages 242 to 243 of the Paper Book, wherein certain Notes to account of some of the stockexchange listed companies engaged in execution of contracts have been placed to show that such companies were also making Provisions for foreseeable losses in execution of contracts. It is sought to be pointed out on the basis of the aforesaid material that creation of an adequate Provision for future losses is a generally accepted commercial policy. 15. We have considered the working of the Provision made and find that the same is neither irrational and nor irrelevant to the kind of business operations under consideration. In any case, we find that the Assessing Officer has not disputed the working of the Provision submitted by the assessee. An aspect which has been raised by the Ld. Departmental Representative is to the effect that in the subsequent assessment year of 2007-08 when the maintenance period was over assessee has written-back an amount of Rs. 7....