The Assessee claimed a sum of Rs.4,22,02,468/-on account of foreseeable losses. The AO asked to justify the claim of such losses. In response, the Assessee submitted that is engaged in the business of construction activity. It has executed projects at various places. In some of the contracts, the total cost exceeds the contract value of the project. Thus, the transaction resulted into losses. The Assessee relied upon the Accounting Standard (AS) 7 for construction contracts prescribed by ICAI and stated that the said unforeseen loss is allowable. The Assessee has been allowed such losses in its own case for the earlier assessment years. The AO held that provision for foreseeable losses is not an expenditure incurred in the year under consideration. Therefore, though it may be required to be provided as per AS 7, the same is not allowable under the Act. On appeal, the CIT(A) upheld the action of the AO. On appeal the ITAT held that the foreseeable loss is a claim under section 28 and not under section 37(1). It is determined by looking at total revenue generated, less cost of expenses to be incurred for the contract if there is a profit same is not recognized but if there is a loss, same is recognized as loss in the books as per principle of “prudence” in accounting. It is same method where the closing stock is valued at cost or market value whichever is less. When market value is higher than the actual cost, such profit is ignored and when market value is less than actual cost such losses are recognized immediately in the books.. The prudence principle deviates from conventional accounting as it provides for all possible losses, but does not anticipate profits. It is allowable under section 28 itself. In this case, the Assessee has not claimed the expenditure under section 37(1). ITAT observed that determination of profit based on the accounting standard where there is no contrary provision in the Income Tax Act, is required to be accepted, as accounting standards are based on sound principles of Accounting and determine real income. The ITAT, therefore, held that the Assessee is entitled to the expected loss provided in the manner explained by the Accounting Standard 7 ’Construction Contracts‟ Issued by ICAI. However, for quantification of loss, the ITAT directed the AO to quantify the claim and allow it in accordance with the law. [AY. 2017-18]