9911796707
TMI Blog1996 (11) TMI 111X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee had a contract for transportation and installation of a statue of Lord Budha by entering into a contract with the Government of Andhra Pradesh. The contract was for transportation of a monolithic statue of Lord Budha weighing about 450 tonnes to Hussainsagar at Hyderabad and erecting it on Gibraltor rock in the said lake. The first phase of the contract work was the transportation of the statue from Raigiri hill site to the shore of the above lake at Hyderabad. The second phase of the contract work was the transportation of the statue from the shore of Hussainsagar lake to the installation site and installation of the statue on the Gibraltor rock. The first phase of the contract was completed during the previous year ended 31st March, 1989, and receipt and expenses relating to the first phase of the contract were accounted for in the asst. yr. 1989-90. 5. The assessee-company during the relevant previous year ended 31st March, 1990, had taken up the second phase of the contract. An amount of Rs. 92,10,476 was received from the Government of Andhra Pradesh. The assessee also incurred a total expenditure of Rs. 1,35,30,836 in the course of carrying out the second ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccordingly treated the amount of Rs. 92,10,746 as assessee's income during the previous year and the difference of Rs. 26,60,746 between the amount received and Rs. 65,50,000 credited in the P L a/c was added to the income of the assessee. 6. Being aggrieved the assessee carried the matter in appeal before the CIT(A). The CIT(A) while considering ground No. 6 of the grounds of appeal by the assessee against an addition of Rs. 26.60 lakhs as income issued a notice under s. 251 for enhancement of the income by Rs. 69.80 lakhs. The reason as per the CIT(A) are that the assessee-company followed accrual system of accounting. The profit was shown on the basis of completion of job phase-wise in respect of jobs undertaken. In respect of phase 2 of the contract work, the assessee-company had shown Rs. 65.50 lakhs as work-in-progress but debited Rs. 69.80 lakhs to the P L a/c, in this year and according to the CIT(A), this is erroneous and contrary to the accepted principle of accounting regarding work-in-progress. According to the CIT(A) the entire expenditure of Rs. 135.30 lakhs should have been shown as work-in-progress and the losses on account of accident cannot be claimed in this ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... formance should be measured either under the completed services contract method or under the proportionate completion method. Since the assessee has followed the completed service method in respect of first phase of the job, no deviation should be made in respect of the second phase of the job because that will involve a change of method without any basis. The opinion of Chartered Accountant Institute's accountancy cannot override the accepted norms of accounting of work-in-progress. He also did not accept the argument that the loss was not related to the work performance. The CIT(A) also has taken a view that the assessee has indirectly admitted that the second phase of the job was not yet completed and, therefore, claiming of the loss was patently wrong and untenable in law. The CIT(A) also did not accept the contention that for completion of the second phase of the job a new contract was made after the accident had occurred by taking a view that the contract of the second phase of the job was never terminated and the subsequent agreement was only supplementary and continuation of earlier contract. He, therefore, concluded that the loss incurred in the midst of the work cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng loss incurred in an earlier year but was not allowed for some reason was not eligible for deduction in any subsequent year in the computation of net profit of that year. To this proposition reliance was placed on the decision of the Hon'ble Madras High Court in the case of Devi Films Pvt. Ltd. vs. CIT (1970) 75 ITR 301 (Mad). It was, therefore, submitted by the learned counsel of the assessee that the addition originally made by the AO and by the CIT(A) (after enhancing the figure of disallowance) are liable to be deleted. 8. The learned Departmental Representative has opposed the submissions and argument made by the assessee's counsel by relying on the order of the CIT(A). It is submitted that the facts of the case, arguments advanced on behalf of the assessee and the method of accounting followed by the assessee in respect of the contract works and other relevant matters were duly considered by the CIT(A) in his appellate order. It is submitted that the profit/loss as a result of execution of contract works by the assessee has to be determined in the year of completion of the contract work. The CIT(A) is, therefore, perfectly justified in disallowing the loss claimed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the claiming of loss when the job was half done is wrong and untenable in law. The CIT(A) for the detailed reasons stated at paras 2 to 6 of his appellate order has taken a view that loss incurred in the midst of the work cannot be allowed by any accepted principle of accountancy. He, therefore, disallowed the loss claimed by the assessee at Rs. 69.80 lakhs. By adjusting the addition made by the AO the CIT(A) has directed for net enhancement of Rs. 43,20,360. We find that the phase 2 of the contract job was transportation of the statue of Lord Budha from the shore of Hussainsagar lake to Gibraltor rock in the middle of the lake and installation thereof on rock site. It is not disputed that while the statue was being transported for installation an accident occurred on 10th March, 1990, as a result of which the barge in which the statue and other machines on board were sunk. It also resulted in the death of some workers. It is not disputed that the assessee received Rs. 92.10 lakhs against part 2 of the contract job which was reflected in the balance sheet as on 31st March, 1990. The total expenses incurred upto 31st March, 1990, relating to part 2 of the contract job was Rs. 13 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be distinguished from the facts of the present case. The decision in the case of Jamna Das Rameshwar Das can also be distinguished on facts as the facts considered by their Lordships was loss as a result of speculative transactions. The decision has, therefore, no application to the facts of the present case. On careful consideration of the facts and circumstances and arguments advanced by the rival parties and the various decisions cited by both sides, we are of the opinion that the claim of the assessee has to be allowed. As the claim of the assessee to have suffered loss of Rs. 69.80 lakhs as a result of sinking of the barge in Hussainsagar lake while executing its contract work is not disputed by the Revenue authorities, the claim has, therefore, to be accepted as real loss. It is also clearly a loss on revenue account which was actually suffered by the assessee and such loss was incidental to the execution of the contract works. It is also not disputed that the loss claimed by the assessee at Rs. 69.80 lakhs was on account of the fact that as per the review committee report, the materials valued at the above figure was a dead loss and there was no scope to reuse the various m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. The AO accordingly added the amount of Rs. 64,375 to the assessee's income. 11. When the assessee carried the matter in appeal before the CIT(A), the CIT(A) took a view that the liability was contractual in nature and it can be allowed on the basis of settlement in the Court only. He, therefore, took a view that it should be allowed in the year of settlement in the Court and on actual ascertainment basis. The order of the AO was confirmed. 12. On behalf of the assessee it was submitted that the liability added by the Revenue authorities was not claimed as deduction in this year. The finding made by the CIT(A) is, therefore, not relevant in so far as the present assessment year under appeal is concerned. According to the learned counsel, the issue does not attract the provisions of s. 41(1) of the IT Act, 1961, though the AO apparently added the amount under the above section. It is submitted that the negotiations were going on and Court cases were also pending in respect of the claim and there was no cessation of liability. It was submitted that the cessation of liability can take place only on the bilateral acts of the parties i.e., the creditor and the debtor by a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee's counsel support the case of the assessee. We, therefore, hold that there was neither a remission or a cessation of the liability and the aforesaid amount cannot be included in the total income of the assessee. We accordingly vacate the orders of the Revenue authorities on this point. 14. Ground No. 4 is against disallowance of depreciation on building including office and residential ownership flats for which the company has paid in full, obtained possession and were being used. The claim of the assessee was disallowed by the AO for identical reason as in the preceding assessment year. 15. On appeal, the CIT(A) by following the appellate order of his predecessor in respect of asst. yr. 1987-88 confirmed the order of the AO. 16. We have heard the rival parties. We have also considered the issue and the paper book filed by the assessee-company. We find that the claim of the assessee has to be allowed on this point, by respectfully following the order of the Tribunal, Gauhati Bench, in the assessee's own case in, ITA No. 564 (Gau) of 1990, dt. 14th Jan., 1993, in respect of the asst. yr. 1987-88 where at paras 5 to 7 the issue was discussed and the claim of the assessee was ..... X X X X Extracts X X X X X X X X Extracts X X X X
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