9911796707
TMI Blog1979 (11) TMI 34X X X X Extracts X X X X X X X X Extracts X X X X ..... less". In all subsequent years, the assessee was adopting the changed method mentioned above. Under the changed method when the assessee found that its expenditure in the execution of any contract exceeded the amount realisable under the contract, the assessee was writing off the difference in its accounts at the end of the year. The ITO was not accepting this changed method of valuation. He was adding back in the relevant assessments the amounts written off in the accounts. He was not allowing the claim on the ground that the change which the assessee had made amounted to a change in the method of accounting and such a change was not permissible. He was not allowing the claim also on the ground that actual losses could be allowed on completed contracts but losses anticipated in contracts remaining incomplete at the end of the year could not be allowed. The AAC was upholding the additions from year to year which the ITO had made in the aforesaid assessments. For the assessment year 1957-58, the Tribunal decided against the assessee. The Tribunal held that the method which the assessee regularly followed and which the department accepted till the preceding year was that only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ows : Assessment year Addition Rs. 1963-64 13,53,834 1964-65 8,90,700 1965-66 12,56,778 1966-67 29,05,421 Apart from repeating the contentions made on behalf of the assessee for the assessment year 1961-62, certain other arguments were also advanced by the assessee's representative in the appeals which were the subject-matter of the present reference. For the sake of convenience we intend to place those arguments on record, at this stage, inasmuch as, more or less, the same arguments have been advanced before us. The assessee's contention that the method of valuing the closing work-in-progress at " cost or realisable value, whichever is less ", which the assessee has adopted, accords with the well-recognised principles of accountancy. The opinions of some recognised authorities and accountancy institutions were cited before the Tribunal. The same opinions have also been cited before us. For instance, our attention has been drawn to statements of standard accounting practice issued by the United Kingdom Chartered Accountancy Institute in May, 1975. We have also been taken through a booklet issued by the International Accounting Standards Committee on Accounti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isable value', whichever is less ? " On behalf of the assessee, learned counsel has argued before us that the change in the method of valuation referred to in question No. (2) above was made long ago in the year relevant to the assessment year 1957-58. But the tax authorities did not accept those methods and chose to impose taxes with reference to the completed contracts only. In the years under reference there is no finding by the Tribunal that the method which the assessee had employed was such that the income could not properly be deduced therefrom. There was no finding that the change of method was mala fide. According to learned counsel, in cases where there are completed contracts as well as incomplete contracts, foreseeable losses with regard to incomplete contracts are always provided for in the accounts. This is also a recognised principle of accountancy. Anticipated losses are always admissible for tax purposes. The Tribunal, therefore, should have accepted the assessee's method of valuation and given relief to the assessee on that basis. A large number of decisions were cited before us but it would not be necessary to disclose those decisions in this judgment, as we p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... term contract work-in-progress. The method by which profit may be taken into account needs to take into consideration the type of business concerned. In all businesses, however, it is normal to define the point before which no profit should be taken. The overriding consideration is that of the profit which in the light of all the circumstances can be foreseen with a reasonable degree of certainty to arise on completion of the contract; there is regarded as earned to date only that proportion which prudently reflects the amount of work carried out to date. The method adopted for taking up profits needs to be consistently applied. Other facts to be considered before taking any anticipated profit are (a) any future costs of rectification and guarantee work (b) likely increases in wages and salaries; (c) increases in prices of raw materials and overheads, where such increases are not recoverable from the customer. When practical, separate parts of the contract may be treated as separate contracts where costs can be matched against performance. In relation to long term contracts the following additional information should be given: (a) Balance-sheet (i) the separ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itself. There is no finding by the Tribunal also that correct profits or gains cannot be computed in the case of the assessee by following the changed method of valuation. The method followed by the assessee in keeping its books or in preparing its balance-sheet or profit and loss accounts requires detailed examination of facts which can be done only by the tax authorities or the Tribunal. Sitting here, in the reference court, we are not entitled to express any opinion on those facts. The Tribunal's findings in this regard have to be accepted by us. In none of the recognised text books have we discovered any direct support for the principle that the valuation of work-in-progress of long-term contracts has to be made on the basis of " cost or realisable value, whichever is less" ; on the contrary, these text books have given detailed information as to how accounts in respect of long-term contracts have to be maintained and there is scope, we find, for taking into consideration foreseeable losses and various other factors, if any. It is for the assessee to convince the Tribunal, so far as the subsequent years are concerned, that its method of valuation of these long-term contract ..... X X X X Extracts X X X X X X X X Extracts X X X X
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