- (1.) This appeal under Section 260A of the Income-tax Act, 1961 is at the instance of an Assessee and is directed against an order dated October 24, 2002, passed by the Income-tax Appellate Tribunal, "A" Bench, Kolkata, in ITA No. 466(Cal)/90 and ITA Nos. 1337 and 1338(Cal)/91 for the Assessment Years 1986-87, 1987-88 and 1988-89 dismissing the said appeal.
(2.) Being dissatisfied, the Assessee has come up with the present appeal.
(3.) The facts giving rise to filing of this appeal may be summed up thus: a) The Assessee company is a Central Government Undertaking deriving income from the execution of contract works that includes construction of Bridge etc. It is also engaged in the business of fabrication of steel structure due to specialization in structural engineering. b) Previously, the Appellant used to debit the total cost of work-in-progress to the profit and loss account. The realizable value of the completed work for which bills were not submitted was taken as the value of the work-in-progress. The Appellant then used to deduct from the valuation of work-in-progress, 10% of the estimated profit as contingent liability to accommodate probable loss in future in course of completion of the particular contract. Such set off at the estimated rate of 10% of the profit to accommodate future losses against the work-in-progress account was not accepted by the Department and the Assessment for the Years 1978-79 and 1979-80 had been completed by the Income-tax Officer by accepting the aforesaid method of valuation of work-in-progress. Both the assessments were subsequently cancelled under Section 163 of the Act. c) With effect from the Assessment Year 1986-87 another method was adopted by the Appellant. The valuation of work-in-progress was made in two steps. In the first step, work-in-progress was valued by adopting the contracted rate. In the second step, a deduction was made by an estimated figure which represented an anticipated loss in completing the particular contract. The crux of the matter was that by following the new method of valuing the work-in-progress, the anticipated loss in the future years was provided at Rs. 1,31,88,000/- which was set off against the work-in-progress valued at the contractual rate in the first step. Thus, according to the Assessing Officer, the work-in-progress was undervalued by a sum of Rs. 1,31,88,000/-. The Assessing Officer was of the view that the result of the new method for valuing the work-in-progress was that a provision for future loss was made in the contract amount thereby inflating the actual loss, if any, incurred in the year under the consideration. The Assessing Officer further observed that such an action on the part of the Appellant was contrary to Sections 3 and 4 of the Income-tax Act inasmuch as in the accounts for the Assessment Year 1986-87, the Appellant made provisions for loss which would arise after the expiry of the year under consideration. The Appellant maintained its accounts on mercantile basis and the Assessing Officer observed that loss can be debited only when it had actually accrued and since the Appellant debited loss that it had not actually accrued, the action of the Appellant in adopting the method of accounting for valuing the work-in-progress was contrary to the principles of mercantile systems of accounting. In other words, the Assessing Officer found no justification in the change of the method of accounting adopted by the Appellant with regard to the valuation of the work-in-progress. He also found that such method of accounting was not in conformity with the mercantile system of accounting. d) The Appellant submitted before the Assessing Officer that the method of accounting for valuing the work-in-progress was in conformity with the National Accounting Standard. It was further alleged that such method had been approved by the Institute of Chartered Accountant. e) The Assessing Officer examined the documents furnished by the Appellant to show that the change in the method of accounting was in pursuance of National Accounting Standard. After examining the documents, the Assessing Officer observed that there was no specific direction in those documents for valuing the work-in-progress in the manner that has been done by the Appellant. The Assessing Officer was of the view that the National Accounting Standard Committee and the Indian Institutions of Chartered Accounts have only suggested that a provision should normally be made for loss that are likely to be incurred on the unfinished part of the work and such a suggestion was made only to ensure that accounts of the company engaged in execution of civil works contract reflected a realistic financial position. A profit in a particular year may simply be swallowed by losses in future. The Assessing Officer, thus, held that the undervaluation of the work-in-progress to the extent of Rs. 1,31,88,000/- representing provision for contingent liability should be rejected. f) The Appellant on May 9, 1989 filed an application for rectification under Section 154 of the Income-tax Act by taking the following plea: Your honour have not allowed deductions as follow in computing the total income, on the basis of departments own treatment of provision for loss on incomplete contracts as reduced from work in progress in earlier years- JUDGEMENT_369_CALLT2_2011_1.html;