Construction firm wins appeal on indirect expenses disallowance for work-in-progress calculation.

The partnership firm in the construction business appealed against the disallowance of indirect expenses for calculating closing work-in-progress. The Commissioner of Income Tax (Appeals) allowed these expenses as revenue expenditure in proportion to completion, in line with recognized accounting principles. The Tribunal upheld the decision, ordering the disallowance to be deleted. Additionally, the Tribunal overturned the disallowance of specific expenses added to work in progress, considering them as revenue expenditure. The issue of set off of brought forward losses was restored for adjudication. Ultimately, the appeal was allowed in favor of the assessee.

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Issues:
1. Disallowance of indirect expenses for calculating closing work-in-progress.
2. Disallowance of specific expenses to be added to work in progress.
3. Failure to adjudicate on set off of brought forward losses.

Issue 1 - Disallowance of Indirect Expenses:
The assessee, a partnership firm in the construction business, appealed against the disallowance of employee cost, administrative expenses, and selling expenses for calculating closing work-in-progress. The Assessing Officer (AO) contended that all expenses should be capitalized to work-in-progress, but the assessee argued that these expenses were not directly related to the project under construction. The Commissioner of Income Tax (Appeals) (CIT(A)) allowed these expenses as revenue expenditure in proportion to completion. The Tribunal agreed, citing accounting standards and guidelines that exclude certain expenses from inventory cost. The Tribunal upheld the assessee's method of accounting, which was consistent with recognized principles, and ordered the disallowance to be deleted.

Issue 2 - Disallowance of Specific Expenses:
The assessee contested the addition of specific expenses to work in progress. The AO recomputed the closing work-in-progress, but the CIT(A) adjusted the amount to be carried forward based on the percentage of completion. The Tribunal upheld the CIT(A)'s decision, considering the expenses as revenue expenditure in proportion to the completion of the project. The assessee's accounting method was found to be in line with accounting standards, and the disallowance was overturned.

Issue 3 - Failure to Adjudicate on Set Off:
The CIT(A) did not adjudicate on the set off of brought forward losses. As both parties requested a proper opportunity to present their case on this issue, the Tribunal restored it to the CIT(A) for adjudication. Ultimately, the appeal of the assessee was allowed, and the order was pronounced in favor of the assessee on 10.12.2014.

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