Tribunal confirms completed contract method for work-in-progress income, avoids double taxation

The tribunal upheld the CIT(A)'s decision to delete the addition made by the AO regarding the income on work-in-progress (WIP) for the assessment year 2000-01. It confirmed that the assessee appropriately followed the completed contract method, declared the income in AY 2003-04, and that the AO's estimation of income based on WIP was arbitrary and could lead to double taxation.

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Issues Involved:

1. Deletion of addition made by AO on Work in Progress (WIP).
2. Adoption of Completion Contract Method (CCM) by the assessee.
3. Application of Supreme Court judgment in Hyundai Heavy Industries Co. Ltd. case.
4. Estimation of income by AO based on WIP.

Issue-wise Detailed Analysis:

1. Deletion of Addition Made by AO on Work in Progress (WIP):

The primary issue was whether the income on the work-in-progress (WIP) on construction work carried out by the assessee is chargeable to tax in the assessment year 2000-01. The AO had reopened the assessment and brought to tax income estimated at 8% of the WIP, which was Rs. 23.32 crores, based on the assumption that the project was almost complete. The CIT(A) deleted the addition, noting that the assessee followed the completed contract method and had declared the income in AY 2003-04 when the project was completed. The tribunal upheld the CIT(A)’s decision, confirming that the income from the projects was duly declared in AY 2003-04 and hence, no addition should be made in AY 2000-01 to avoid double taxation.

2. Adoption of Completion Contract Method (CCM) by the Assessee:

The assessee consistently followed the completed contract method (CCM) for recognizing revenue, which is permissible under the un-amended AS-7 issued by ICAI. The AO’s contention that income should be declared on a percentage completion method was rejected by the CIT(A) and the tribunal. The tribunal noted that the assessee had the liberty to choose either the percentage completion method or the completed contract method as per its desire. The tribunal also observed that the completed contract method was consistently followed by the assessee and accepted by the Revenue in subsequent years, including AY 2003-04 when the project was completed, and income was declared.

3. Application of Supreme Court Judgment in Hyundai Heavy Industries Co. Ltd. Case:

The AO argued that the CIT(A) erred in applying the Supreme Court judgment in Hyundai Heavy Industries Co. Ltd. [2007] 161 Taxman 191 (SC) to the assessee’s case. The tribunal, however, found that the facts of the Hyundai case were different but upheld the CIT(A)’s application of the principle that the assessee has the liberty to choose its method of accounting, provided it is consistently followed and does not distort the profits. The tribunal confirmed that the completed contract method was a recognized method under AS-7 and was consistently followed by the assessee.

4. Estimation of Income by AO Based on WIP:

The AO estimated the income at 8% of the WIP, assuming that 85% of the project was complete by the end of the previous year relevant to the assessment year 2000-01. The CIT(A) and the tribunal found this estimation baseless and without any factual support. The tribunal noted that the income from the project was duly declared in AY 2003-04 when the project was completed, and the WIP was carried forward from year to year until its completion. The tribunal emphasized that taxing the income in AY 2000-01 based on an arbitrary estimation would lead to double taxation, which is impermissible.

Conclusion:

The tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to delete the addition made by the AO. The tribunal confirmed that the assessee consistently followed the completed contract method, declared the income in AY 2003-04 when the project was completed, and paid the due taxes. The tribunal also noted that the AO's estimation of income based on WIP was arbitrary and unsupported by facts, and taxing the same income in AY 2000-01 would result in double taxation.

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