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TMI Blog2016 (7) TMI 270X X X X Extracts X X X X X X X X Extracts X X X X ..... he instant appeal is with regard to the confirmation of the disallowance toward provision for loss on contracts made by the assessee in its' accounts for Rs. 125.39 lacs. The assessee is a domestic company and its principal activities comprise manufacturing and installation of cold rolling mills, galvanizing lines, colour coating lines, tension leveling lines, skin pass mills, acid regeneration plants and pickling lines for ferrous and non-ferrous industries worldwide. For the year under reference, it has changed its system of accounting in certain areas to fall in line with the Accounting Standards for these areas. Accordingly, provision for Rs. 1,25,39,456/- was made in respect of fixed price contracts undertaken by it following the Accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... addition for the same amount made while computing its' book profit u/s. 115JB. The case law relied to by the assessee was found distinguishable by him on facts. Aggrieved, the assessee is in second appeal. 3. We have heard the parties, and perused the material on record. 3.1 The assessee is a manufacturer of heavy industrial machinery, which has a gestation period of two to three years. It follows accrual system of accounting, which is mandatory for it under its' governing Act, i.e., the Companies Act, 1956. It follows percentage completion method for recognition of revenue. The fundamental accounting principle of prudence, providing for all known liabilities and losses (even though the amount thereof cannot be determined with certainty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... work, i.e., which is yet to be completed, qua which the costs are to be estimated. The cost estimate is again bound to vary on the basis of and in light of the available information. That (variation), rather, is the norm, as inflow of information, having both qualitative and quantitative implications, and which aspects are themselves interrelated, is a continuous phenomenon. To contend, therefore, as does the ld. CIT(A), that there has been a variation, and inferring on that basis that the estimates are not scientific or not based on reliable data, is misconceived. In fact, the variation, as reported (refer para 4 of the impugned order), is itself quite insignificant, so that it should not have, even on that basis, led to the inference of r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... again that in the absence of any specific provision of law to the contrary, the principles of commercial accounting shall apply. Reference in this regard may also be made with profit to its' celebrated decision in Calcutta Co. Ltd. vs. CIT [1959] 37 ITR 1 (SC). Once, on the basis of the facts and the information on record, the loss is likely to arise, the same has to be provided for under the prudence mandate, which is what AS-7 (also notified by the Central Government) in substance provides under the segment 'Recognition of expected losses' vide paras 35 and 36, reproduced as under: 'Recognition of Expected Losses 35. When it is probable that total contract costs will exceed total contract revenue, the expected loss should be recognised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as on that date, the Hon'ble Court held that the reduction in the price with reference to the contract date even as on 31.12.1974 also could not allowed. Further, even though the value of the raw material cost may have decreased, the firm may stand to earn profit on the basis of the net realizable value of the finished goods, i.e., on the basis of the ruling price less cost of realization thereof. The prices of finalized goods may or may not move in sympathy with that of the raw materials, depending upon the demand and supply forces in the relevant market. Two, even the raw material price may stand to reverse, and may not be irreversible so as to conclude that the loss had indeed been incurred. Thirdly, and most importantly, it is the profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it at any stage to verify the assessee's claim, which we have found acceptable in principle. In this respect, the ld. AR would before us contend that the assessee has also, and only rightly so, taken into account the likely cost escalations; the projects being scheduled to be completed only over a period of two to three years. True, but the same would also have been similarly factored into while negotiating the contract rates. The matter would require being examined for the veracity of the estimations, and particularly qua cost escalations, as also with reference to the relevant clauses, if any, of the contract, i.e., as regards the cost escalation, which could also be made operative where the project is delayed beyond a particular time li ..... X X X X Extracts X X X X X X X X Extracts X X X X
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