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July 18, 2009 (Date of publication) |
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Even “foreseeable losses” are allowable as deduction
The assessee was engaged in the business of executing works contracts and was following the mercantile system of accounting and the “percentage completion method”. It claimed a deduction for “foreseeable losses” on incomplete projects which was disallowed by the AO and CIT (A) on the basis that it was merely an anticipated loss based on an estimate. It was also held that as a major part of the work was not completed, the losses could not be properly anticipated. On appeal by the assessee, HELD, allowing the appeal:
(i) Para 13.1 of Accounting Standard 7 (AS-7) mandates that a foreseeable loss on the entire contract should be provided for in the financial statements irrespective of the amount of work done and the method of accounting followed;
(ii) The fact that AS-7 has not been notified by the Central Government as an accounting standard for purposes of s. 145 (2) is not relevant;
(iii) In principle, anticipated losses on incomplete projects are allowable as a deduction subject to their being calculated as per AS-7.
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