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TMI Blog2011 (10) TMI 153X X X X Extracts X X X X X X X X Extracts X X X X ..... s executing slum rehabilitation projects approved by Slum Rehabilitation Authority (SRA). As per the scheme of rehabilitation, a developer approaches SRA with a proposal to develop a slum area. Once the project is approved by SRA, the developer is under obligation to construct free of cost tenement of size of 225 sq.ft. to all slum dwellers. In consideration for developing the projects, the developer receives TDR/ or right to construct over and above the normal permissible limit and this additional area is allowed to be sold in the open market. Thus the cost to the developer comprised cost of construction of rehabilitation area and cost of free sale area and the revenue generated comprised of sale of TDR and/ or revenue from sale of free sale area in the open market. 2.1 The assessee who was following mercantile system of accounting had adopted percentage completion method of accounting of income from the project as per para 7.2 of Accounting Standards (AS-7) relating to accounting of construction contracts issued by Institute of Chartered Accountants of India (ICAI). In terms of para 19 of AS-7, the assessee had recognized revenue with reference to completion of stage of construc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... observed by him that the assessee was following mercantile system of accounting as per which the income or expenditure on account of liability accrues only when there is enforceable right in respect of income or liability. In this case the losses were estimated which were only contingent and therefore, any provision for contingent loss could not be allowed. The AO further observed that the assessee had created the provisional losses for adjusting against interest income to reduce tax liability. The AO therefore, allowed the losses only to the extent attributable to the WIP at the end of the year and not the losses of the entire projects which were yet to be completed. The AO thus disallowed the loss of Rs. 69.52 crores for A.Y 2001-02. The working of the losses claimed and losses disallowed by AO for A.Y 2001-02 is given in the table given below: (Rs. In crore) Sr.No. Name of the project Total WIP as on 31.3.01 Estimated cost of the project as on 31.03.01 Loss envisaged during the year % of loss to the total project Loss to the extent of WIP Excess loss to be disallowed 1 Dindoshi 97.67 191.9 9.85 5.13 5.01 4.84 2 Matunga Labour camp 4.25 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contractor. CIT(A) further observed that even the pre-revised AS-7 had a non-obstante clause in the introduction which was as under :- "This statement deals with accounting for construction contracts in the financial statements of enterprises undertaking such contracts (hereafter referred to as 'contractors'). The statement also applies to enterprises undertaking construction activities of the type dealt with in this statement and not as contractors but on their own account as a venture of commercial nature where the enterprise has entered into agreement for sale." 2.8 CIT(A) thus observed that in case of developers who were executing contracts on their own, the AS-7 would apply only if they had already entered into sale agreements. Thus, the logic of booking future losses could be appreciated only when the developer had entered into sale agreement. In the present case, assessee had not entered into any sale agreement during the year and therefore, AS-7 was not applicable. Moreover, in this case the sale price of TDR and expenses to be incurred in future were quite uncertain and therefore, the loss could not be computed with reasonable certainty. CIT(A) thus held that pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f TDR, income from which could not be determined properly and the same will depend upon the market conditions prevailing during the period of sale of TDR or the sale of the constructed area as per TDR entitlement. There was therefore, variable element involved. Moreover, if due to some unavoidable reasons, project is not completed and is abandoned, no income will accrue to the assessee. Thus accrual of income and incurring of expenses, both were uncertain. Ld. D.R. also argued that income has to be computed under the provisions of the Act and not as per Accounting Standard AS-7 which has not been notified by the Government. It was further pointed out that the Government had notified only As-1 and AS-2 which were regarding disclosure of accounts details by the assessee and not regarding computation income. The assessee was following percentage completion method and therefore, income/loss attributable to the construction completed till the end of the year could only be considered and the AO had therefore rightly disallowed the anticipated losses of future years. 2.11 We have perused the records and considered the rival contentions carefully. The dispute is regarding computation of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess receipts. Similarly there is special provision for computation of profit from retail business under section 44AF. There are also special provisions for computation of income for certain specified businesses in respect of non-residents. For instance, the income from shipping business in case of a non-resident is required to be computed under the provisions of section 44AB under certain conditions which are not satisfied. There are no special provisions for computation of income from construction projects. It is no where provided in the Act that income from construction projects has to be completed in the manner prescribed in AS-7. Therefore, the income from rehabilitation projects is required to be computed under the normal provisions of the Act. The Accounting Standard, AS-7 has also not been notified by the Government. Therefore, there is no case for computation of income for the purpose of taxation to be made as per Accounting Standard AS-7. When pointed out, the ld. A.R for the assessee submitted that even the Accounting Standard AS-1 notified by the Government provides for allowance of loss in respect of all known liabilities and therefore, provisions for losses has to be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fairs of the business, profession or vocation in the financial statements prepared and presented on the basis of such accounting policies. For this purpose the major considerations governing the selection and application of accounting policies are following, namely :- (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; (ii) Substance over form - The accounting treatment and presentation in financial statements of transactions and events should be governed by their substance and not merely by the legal form; (iii) Materiality - Financial statements should disclose all material items, the knowledge of which might influence the decisions of the user of the financial statements. 5. If the fundamental accounting assumptions relating to Going Concern, Consistency and Accrual are followed in financial statements, specific disclosure in respect of such assumptions is not required. If a fundamental accounting assumption is not followed, such fact shall be disclosed. 6. For the purposes of paragraphs (1) to (5), the expression ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of such change is not ascertainable, wholly or in part, the fact shall be indicated, If a change is made in the accounting policies which has no material effect on the financial statements for the previous year but which is reasonably expected to have a material effect in years subsequent to the previous years, the fact of such change shall be appropriately disclosed in the previous year in which the change is adopted. 11. A change in an accounting estimate that has a material effect in previous year shall be disclosed and quantified. Any change in an accounting estimate which is reasonably expected to have a material effect in year subsequent to previous year shall also be disclosed. 12. If a question arises as to whether a change is a change in accounting policy or a Change in an accounting estimate, such a question shall be referred to the Board for decision. 13. For the purposes of paragraphs (7) to (12), the expressions,- (a) "Accounting estimate" means an estimate made for the purpose of preparation of financial statements which is based on the circumstances existing at the time when the financial statements are prepared; (b) "Accounting policies" means the specific acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... where provides that the provisions for known liabilities should be allowed as deduction while computing total income. Whether the provision made can be allowed as deduction or not will depend on facts and circumstances of the case. It is a settled legal position that provisions in respect of liabilities which had been incurred during the year have to be allowed as deduction even if liabilities are required to be discharged at a future date if they can be estimated with reasonable certainty. This legal position has been declared by the Hon'ble Supreme Court in several cases such as in the case of Calcutta & Co. (37 ITR 01); in case of Metal Box Company of India (73 ITR 53); and in case of Bharat Earth Movers (245 ITR 428).It has been made clear in these cases that for claiming deduction on account of any provision for liability, the incurring of liability during the year must be certain. In case of Calcutta & Company (supra), the assessee had sold land with an undertaking to develop it within six months. The sale deed had been executed and on the sale deed date, the assessee had received part of the sale consideration and balance was to be received in installments in future. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cepted method for income tax purposes as per which income/losses proportionate to the construction completed in the relevant year can be offered to tax. For this purpose, income and expenditure from the entire project is estimated on some reasonable basis and proportionate income/loss relating to the work completed during the year can be offered for tax. This is exactly what the AO has done in this case. He has allowed the losses only proportionate to the work in progress at the end of the relevant year. The loss allowed by the AO on proportionate basis to the work completed till the end of the year has therefore, been rightly confirmed by CIT(A) and the claim of the assessee for the entire anticipated losses from the entire project has been rightly rejected. We, therefore, confirm the order of CIT(A) on this issue in all the years under consideration. 2.11.5 Ld. AR for the assessee has placed reliance on certain judicial pronouncements which in our view are distinguishable and cannot be followed. In case of Triveni Engineering Industry Ltd. (49 DTR 253), the assessee who was executing a construction contract was following the completed contract method of accounting. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at merely because change in method was bona fide, it could not lead to the inference that income was also deductible properly under the Act. Thus, even in that case the Tribunal held that income has to be computed under the provisions of the Act. However, Tribunal had also observed that there was no dispute in principle that estimated losses were allowable. The Tribunal therefore, held that the loss could not be considered as bogus as held by CIT(A) because the same had been computed as per the Accounting Standard AS-7. The Tribunal had restored the issue to the AO for properly estimating the loss. It thus appears that the Tribunal even though observing that income has to be computed under the provisions of the Act allowed the claim in the understanding that there was no dispute about allowability of the losses. In the present case, 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claim of anticipated losses was not allowed then TDR income may be allowed on the basis of percentage completion method. The ld. DR on the other hand supported the order of CIT(A). 3.2 We have perused the records and considered the matter carefully. The dispute is regarding computation of income from sale of TDR. There is no dispute that the assessee had received income from sale of TDR during the year on release by SRA. The dispute is regarding computation of income from such sale of TDR. We agree with the findings of the authorities below but income from sale of TDR had accrued during the year as per mercantile system of accounting followed by the assessee. However, part of such income has already been considered while allowing the estimated losses in relation to WIP of the relevant years as per the percentage completion method. The assessee while claiming the anticipated future loss, had computed the estimated net income from the entire project which also included the estimated income from TDRs and sale of shops etc. We have not upheld the claim of anticipated loss from the entire project. The loss which has been allowed is only proportionate to WIP of the relevant year and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count of disallowance of prior period expenses amounting to Rs. 1,93,061/- while computing book profit under section 115JB. Under the provisions of section 115JB, book profit has to be the profit disclosed as per P&L account prepared in accordance with the provisions of Part II and III of Schedule-6 of the Companies Act, 1956 and laid before the company in its AGMs and to the said profit, only adjustments as specified in Explanation-1 to section 115JB could be made. There is no dispute that claim on account of prior period expenses had been debited in the P&L Account prepared under the Companies Act and laid before AGM. There is no provision for any adjustment on account of prior period expenses in Explanation -1 to Section 115JB(2). Therefore, 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. (Supra). We, therefore, set aside the order of CIT(A) and delete the addition made. 5. The fourth dispute is regarding legal validity of re-opening of the assessment which is relevant only for assessment years 2000-01 and 2002-03. At the time of he ..... X X X X Extracts X X X X X X X X Extracts X X X X
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