INCOME TAX ACT, 1961

Section 145

Accounting method - Percentage completion method - Computation of WIP - Deduction for contingencies

Assessee (UJV) was following percentage completion method of construction accounting. The income was offered for the first time in the assessment year 2003-04, as the work completed exceeded 50% of the works. Market value/realizable value of closing stock of WIP was equal to the cumulative value of total bills raised on the Employer (Government of India) as on 31-3-2003 subject to certain adjustments. The cumulative value of billing as on 31-3-2003 was Rs. 4,12,23,71,211. The UJV reduced Rs. 20,40,10,166 as other allowances which was 5% of gross bills realised and arrived at the net market value/realisable value of WIP at Rs. 391.84 crores. This figure was further reduced by opening WIP and the net figure of Rs. 189.99 crores was credited to P&L account of the UJV. The assessee explained to the AO that the reduction of Rs. 20,40 crores was based on method prescribed in accounting standard-7 and the 5% contingency was supported by the fact that the contract envisages retention of 5% of total value. AO was not convinced with the explanation of the assessee for the reason that AS-7 gives only guidelines and does not say that contingent liabilities can be taken into account to compute profit. As per the AO the claim of the assessee was merely contingent. Therefore, he disallowed the claim of deuction of Rs. 20,40,10,166. CIT(A) confirmed the disallowance of deduction of Rs. 20,40,10,166 made by the AO.Held: In ITAT 'G' Bench, Mumbai in the case of Larsen & Toubro Ltd. v. Dy. CIT [ITA No. 2423/Mum/1992 for assessment year 1988-89 it was held that practice followed by the assessee was as per the accounting standard issued by the Institute of Chartered Accountant of India, i.e., Accounting for constrction contract, AS-7. this sytem of accounting was being consistently followed by the assessee and because of these two reasons, similar disallowance was deleted by the CIT(A) in the case of the assessee for assessment year 1995-96 and 1996-97 and it seems that these orders of the CIT(A) had been accepted by the department. This Tribunal following the order of the Co-ordinate Bench in the case of L&T deleted the disallowance of Rs. 20,40,10,166 made by the AO.