TaxTMI 
TaxTMI 
2010 (10) TMI 707
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....do not require any separate adjudication. 5. The facts involved in both the years are common, therefore, grounds in respect to additions deleted on account of valuation of closing stock are disposed of together. 6. Briefly stated the facts in this case are that the assessee is a partnership firm comprising of four partners. The appellant is engaged in the business of construction and development of properties, flats, shops etc. The appellant has been engaged in the development of project consisting of three buildings namely Gokul Nagari-I, Gokul Nagari-II and Gokul Concord. The assessee filed the return of income declaring loss of Rs. 2,72,18,140 for asst. yr. 1998-99 and AO completed assessment under s. 143(3) determining total income at Rs. 1,44,41,090. In fact the assessee is a builder and the closing work-in-progress/sales was valued by the assessee at Rs. 901.58 per sq. ft., which was the average rate realised for all the years including current year. The AO adopted Rs. 1,023 per sq. ft., which was the current year's rate of realisation and gave a concession of Rs. 23 per sq. ft., in respect of flats sold in earlier years and valued the work-in-progress/sal....
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....rchases are transferred to sales account in P and L a/c. 3. The above method of determining percentage of completion recognises the following:- (a) The extent of work completed on the project from year to year is as certified by the architect. (b) Every year, the sale value of the work completed is estimated based on the rates actually realised. (c) Average of (a) and (b) above gives a more realistic value of extent of project completion. (d) All expenses incurred on the project are plotted against the work-in-progress to give true and fair results of the year." 6.2 The assessee before the AO explained the accounting procedure it has adopted for arriving at loss of Rs. 2,74,05,097. According to the assessee, opening work-in-progress on 1st April, 1997 was Rs. 28,83,00,000 and to this, the expenses incurred during the year amounting to Rs. 11,79,98,267 were added. Thus, the total expenditure on the project were Rs. 40,62,98,268. The assessee determined the revenues from the project in the form of closing work-in-progress at Rs. 37,87,00,000. There was other income to the extent of Rs. 1,93,171. The assessee finally arrived ....
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....tent of work-in-progress during the previous year. (iii) The current rates of realisation reflected the contemporaneous market trend which was an indicator of value of work-in-progress. (iv) The assessee gave more weightage to historical cost taking the average of rates for the actual sales effected by the assessee over the years and adopting an average rate for estimation of work-in-progress based on percentage of completion and based on sales realisation upto date. (v) The method adopted by the assessee did not reflect the correct position of profit and the percentage of profit shown by the assessee on the entire project upto asst. yr. 2000-01 was 2.1 per cent. AO furnished the rates at which work-in-progress was valued and the profits reflected by the assessee from year to year which were as under:- Asst yr. Work-in-progress (crores) Rate Profit (crores) Work-in-progress Percentage of completion 1996-97 12.09 749 55% 1.13 1997-98 28.83 Not known 74% 0.92 1998-99 37.87 901.58 89% Loss 2.72 1999-2000 41.52 935 94% Loss 4.08 2000-01 49.24 (completed) ....
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....letion of the project is not based on sales realisation as assumed. It is the average of percentage of work completed (as certified by the architect) and percentage of sales effected on the project. (ii) The average of progress payments and work completed is taken to determine the extent of work completion. (ii) No. Average of percentage of work completed (as certified by the architect) and percentage of sales effected on the project are considered for determining the extent of project completion. (iii) Further the estimated sale value is also loaded with the factor of percentage of sales effected and realisation thereon which deviates from AS-7 guidelines. (iii) Factually incorrect. The estimated sale value of the entire project is then loaded with the extent of the project completed. (iv) It is seen that by this method the assessee does not even reflect the cost of construction in the work-in-progress. (iv) Factually incorrect. The cost of construction is extensively considered and reflected in the percentage of work completed at the end of the year which is certified by architect. Even the AS-7 guidelines also say that project completion should not be based on ....
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....iven to the sales effected in the past years, this being one project only. (ii) Expenses incurred during the year - purchase, direct expenses and indirect expenses are an indication of value addition to the work-in-progress. The assessee by adopting their peculiar method has not even acknowledged any value addition to the work-in-progress in consonance to the amount expended during the year. (ii) These are adequately factored in when the extent of work completed is considered and the same is certified by the architects. After considering this, the WIP as arrived at is matched with the expenses incurred during the year and the resultant figure is the profit/loss for the year. This remark shows poor appreciation of the method of accounting followed by the appellant. (iii) The current rates of realisation reflect contemporaneous market trends which is also an indicator of value of work-in-progress. The current rates of realisation are already considered by assessee but when only a handful of flats are sold at current rates against more than 80% sold in earlier years, it is illegal to force the assessee to adopt current rate against the average rate adopted by the assessee.....
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....s. 143(3). He finally submitted that rate reflected by the appellant at Rs. 901.58 per sq. ft., was reasonable and the adoption Rs. 1,000 by AO was unreasonable and without any basis." 6.6 After considering the submissions and perusing the material on record, the CIT(A) was satisfied with the explanation filed on behalf of the assessee. Thereafter, discussing the issue in detail, including the objections raised by the AO, the CIT(A) found that the AO was not justified in not accepting the claim of the assessee. Accordingly, he deleted the addition made on account of work-in-progress. 7. The learned Departmental Representative, who appeared before the Tribunal placed reliance on the order of the AO and on the other hand, the learned counsel of the assessee placed reliance on the order of the CIT(A). It was further submitted that on the basis of percentage of completion of contract method, the assessee has filed its return for subsequent year and the same has been accepted by the Department also. In earlier year, the return of income on the same method has been accepted by the Department. Therefore, it was submitted that the CIT(A) was justified in allowing the claim of ....
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....) Project completed (average of work completed and sales) 89.15% or 89% Work completed 93.33 Sales 85.06 178.39 178.39/2 89.15% (9) The assessee estimated the sales on the project as on 31st March, 1998 at the average rate realised till the end of the accounting year, which works out to Rs. 901.58 per sq. ft. The total area of the project is 4,72,010 sq. ft. and the assessee multiplied the average rate with the total area of the project and arrived at the total estimated sales of Rs. 42,55,55,767 (4,72,010 x 901.58). After arriving at the total estimated sales on 31st March, 1998 at Rs. 42.55 crores, the assessee estimated 89 per cent of the total estimated sales as the sales for the previous year ended 31st March, 1998 which works out to Rs. 37,87,44,633 and the assessee has rounded off to Rs. 37,87,00,000. This was the value which the assessee reflected as closing stock in the P and L a/c. In my opinion, the value of closing stock is nothing but the revenue which the assessee has recognised on the area sold till the end of the accounting year. The AO estimated the revenues or closing work-in....
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.... IT Act. The average rate realised by the assessee in various years was as under:- Asst. yr. Average rate 1996-97 749 1997-98 861 1998-99 902 1999-2000 928 2000-01 Project completed (12) AO was of the opinion that weightage given to the past sales was greater considering the fact that completion of work and realisation of sales in Gokul Nagari-I and II was 100 per cent. The AO accepted the fact that the project is one comprising of three buildings. The AO accepted the fact that 85 per cent of the sales were made till the end of the accounting year. The percentage of sale has not been disputed. When the sales were made in the past to the extent of 80 per cent, the rates prevailing in the past have to be considered and AO cannot estimate the sales made in the past with the current year rate. (13) The next finding of the AO is that the work-in-progress did not reflect the expenses incurred during the year by way of purchases, direct and indirect expenses or value addition to the work-in-progress. There is no doubt that the nomenclature adopted by the assessee has caused confusion. At one place the assessee says it is the estimate....
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....ing that the method adopted by the assessee deviated from the AS-7 guidelines. I have perused the AS-7 guidelines. Construction contracts are formulated in a variety of ways but generally fall into two basic types:- (i) Fixed price contracts:- The contractor agrees to a fixed contract price or rate, in some cases subject to cost escalation clause. (ii) Cost plus contracts. In the present case it is a fixed price contract. There are two methods of accounting for contracts for recognition of revenue:- (i) the percentage of completion method, (ii) the completed contract method. In the present case, the appellant followed percentage of completion method. The broad features of percentage of completion method are:- (i) revenue is recognised based on the stage of completion reached, (ii) costs incurred in reaching the stage of completion or matched or compared with the revenue, (iii) reporting of results which can be attributed to the proportion of work, completed, (iv) based on the principle of prudence, the revenue is recognised on realisation, (v) the stage of completion is mea....
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....e produced the architect's certificate before the AO, wherein, the extent of work completed was certified. In my opinion, the method of accounting adopted by the assessee for recognition of revenue is in accordance with AS-7. (19) The assessee has been following the method of adopting average rate realised consistently from year to year and the same was accepted by AO in earlier years. The assessee has rightly estimated the sales or closing work-in-progress at Rs. 901.58 per sq. ft. (20) During the current previous year not a significant number of flats were sold by the assessee. 80 per cent of the project area was sold in earlier years. It is not justifiable to estimate the sales or closing work-in-progress at a higher rate prevailing at the end of the current year in respect of sales which were made in the earlier years. The AO did not point out any defects in the books of account and the assessee followed the method of accounting regularly. The method of accounting followed by the assessee is in consonance with the AS-7. AO was of the opinion that the profit rate reflected by the assessee at the end of the project was low. The assessee explained the reasons f....
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....is an appellate forum on facts as well as law. In exercising its appellate power, the Tribunal is rehearing the case. At the hearing of the appeal, it is for the appellant to show that the decision appealed against is wrong. It will not be sufficient for the appellant to urge or plead that a contrary conclusion is possible on the basis of materials and circumstances disclosed in the case. The burden is on the appellant to prove that the decision appealed against is wrong. It is incumbent upon the final Court of fact, particularly in the case of a reversing decision, to meet the reasoning of the Trial Court and indicate its own reasons for the conclusions reached." 10.2 The Hon'ble Supreme Court in the case of State of West Bengal vs. Atul Krishna Shaw AIR 1990 SC 2205 has held that:- "On top of all, the appellate authority being final authority on facts is enjoined and enactments upon it to appreciate the evidence, consider the reasoning of the primary authority and assign its own reasons as to why it disagrees with the reasons and findings of the primary authority. Unless adequate reasons are given, merely because it is an appellate authority, it cannot brush a....
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....O enhanced the rate on the basis agreed for earlier year i.e. asst. yr. 1996-97 and in this way, Rs. 2,70,230 was made. 15.2 Detailed submissions were filed before the CIT(A) and it was explained that there was no reason to make enhancement for the year under consideration. It was further submitted that the assessee admitted the same enhancement in rates for asst. yr. 1996-97 under protest and that doesnt mean that the assessee accepted the addition in all the assessment years. It was also submitted that without any material, ad hoc addition made by the AO was also not justified. 15.3 After considering the submissions, the CIT(A) was satisfied with the explanation filed on behalf of the assessee. Accordingly, he deleted the addition. 16. The learned Departmental Representative simply placed reliance on the order of the AO and on the other hand, the learned counsel of the assessee placed reliance on the order of the CIT(A). 17. After considering the submissions and the orders of the authorities below, again we do not find any infirmity in the findings of the learned CIT(A). The findings of the learned CIT(A) are given in para 25 of his order w....
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....sh Paints India Ltd. (1991) 91 CTR (SC) 108 : (1991) 188 ITR 44 (SC), I am unable to concur with the order proposed by my learned Brother confirming the order of the CIT(A) deleting the impugned additions and therefore I proceed to write my order separately. 2. The assessee is a partnership firm engaged in the business of construction and development of properties, viz., flats, shops, etc. The assessee follows percentage of completion method for working out its profits. The common dispute in both the appeals relates to the valuation of closing stock of work-in-progress. As noted in para 10.3 of the proposed order, the assessee has valued the closing stock at historical costs whereas the AO valued the same at current rates and thereby made the impugned additions. The assessee seeks to justify its valuation of closing stock on the ground that the assessee had been valuing the stock on the same principle as in the past and hence the AO, according to the assessee, was not justified in disturbing the same. 3. The method of valuation of stock held as goods-in-process or work-in-progress is now authoritatively established by the judgment in CIT vs. Britsh Paints India ....
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....ses incurred by the assessee. The aforesaid finding was neither referred to at the time of hearing nor controverted by the assessee before us. Besides, neither the AO nor the CIT(A) has referred to the aforesaid judgment or to the principles laid down therein while deciding upon the issue of stock valuation. Since the principles laid down in the aforesaid judgment cover the issue in hand, they should have examined the matter keeping in view the principles laid down in the aforesaid judgment. The emphasis by the learned CIT(A) on the fact that the assessee has consistently been following the present method of stock valuation, is of no help to the assessee unless the method of stock valuation so followed by the assessee is in conformity with the principles laid down in the aforesaid judgment. As held by the Hon'ble Supreme Court in the aforesaid judgment, it is incorrect to say that the AO is bound to accept the system of accounting regularly employed by the assessee the correctness of which had not been questioned in the past and that there is no estoppel in these matters and the officer is not bound by the method followed in the earlier years. In the absence of any finding by the l....
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....er s. 255(4) of the IT Act, 1961, to adjudicate the following question of law:- "Whether on the facts and circumstances of the case, the order of the CIT(A) is liable to be confirmed or to be set aside and to restore the issue to his file to decide the same afresh?" 2. Facts necessary for the disposal of the appeal are stated in brief. In respect of previous years 1998-99 and 1999-2000 assessee, a partnership firm, engaged in the business of construction and development of properties, flats, shops etc., declared loss of Rs. 2.72 crores and Rs. 4.03 crores (as well as short-term capital loss of Rs. 2,20,736) respectively. Assessments were taken up for scrutiny and during the course of examination of the books of account it was noticed that there was undervaluation of closing stock; the assessee valued the closing stock at historical cost whereas the AO has valued the same at current rates. Closing work-in-progress/sales was valued by the assessee at Rs. 901.58 per sq. ft. which was the average rate realised for all the years including the previous year relevant to the asst. yr. 1998-99. The AO however adopted Rs. 1,023 per sq. ft. which was the current year rate ....
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.... assessment order. 2. On the facts and circumstances of the case and in law, learned CIT(A) has erred in deleting the addition of Rs. 4,87,61,517 made by AO by way of addition of the value of work-in-progress over that determined by the assessee by relying on the decision of the CIT(A)-XXV, Mumbai in Appeal No. CIT(A) XXV/Dy. CIT 25(1)/115-2000-01 dt. 1st March, 2002 in the assessee's own case for asst. yr. 1998-99 ignoring the facts brought out by AO in the assessment order." 5. Assessee preferred cross-objections, which were merely to support the orders passed by the learned CIT(A), wherein it was explained that the method of accounting followed by the assessee was an approved method of accounting and had been consistently followed and accepted by the AO from year to year. It was also submitted that the book results were not rejected by the AO and it is not the case of the AO that the guidelines issued by the ICAI under AS-7 were deviated by the assessee. It was also highlighted that the method of valuing work-in-progress was as per the guidelines issued by the Institute which are mandatory for determining true, fair and correct profits in a construction contr....
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....; 7. On account of difference of opinion the Hon'ble Members have forwarded the point of difference to the Hon'ble President who was pleased to nominate me under s. 255(4) of the Act to adjudicate the question which was set out in para 1 hereinabove. 8. Learned counsel, appearing on behalf of the assessee, initially submitted that the learned AM has never raised such issue and with the concurrence of both the Members the matter was treated as heard, upon hearing both the parties, and thus it was not proper on the part of Hon'ble AM to raise an issue with regard to need to verify the audit report after long lapse of time reckoned from the date of hearing of the appeal. 9. Learned Departmental Representative on the other hand submitted that files could not be traced and being an old matter it would be difficult to make a comment as to what exactly transpired on the date of hearing of the appeal. At this juncture, the Authorised Representative submitted that he is not interested in pursuing his objection on the above issue and proceeded to argue the matter on merits. It was submitted that construction activity commenced in 1996-97 and assessee consistently follo....
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....od followed by the assessee was approved as a standard method of accounting:- "16. AO gave another finding that the method adopted by the assessee deviated from the AS-7 guidelines. I have perused the AS-7 guidelines. Construction contracts are formulated in a variety of ways but generally fall into two basic types:- (i) Fixed price contracts:- The contractor agrees to a fixed contract price or rate, in some cases subject to cost escalation clause. (ii) Cost plus contacts. In the present case it is a fixed price contract. There are two methods of accounting for contracts for recognition of revenue:- (i) the percentage of completion method, (ii) the complete contract method. In the present case, the appellant followed percentage of completion method. The broad features of percentage of completion method are:- (i) revenue is recognised based on the stage of completion reached, (ii) costs incurred in reaching the stage of completion or matched or compared with the revenue, (iii) reporting of results which can be attributed to the proportion of work completed, (iv) based on the....
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.... by me earlier AO accepted the percentage of work completed in the assessment order at 89 per cent. The assessee produced the architect's certificate before the AO, wherein the extent of work competed was certified. In my opinion, the method of accounting adopted by the assessee for recognition of revenue is in accordance with AS-7. 19. The assessee has been following the method of adopting average rate realised consistently from year to year and the same was accepted by the AO in earlier years. The assessee has rightly estimated the sales or closing work-in-progress at Rs. 901.58 per sq. ft." 11. Learned counsel, appearing on behalf of the assessee, has also relied upon several case law in support of his contention that the decision of the apex Court in the case of British Paints (supra) is applicable only in a case where the method followed is not a standard method of accounting. In other words, when an approved method of accounting is followed by the assessee, in the absence of any doubts raised by the AO with regard to correctness of the books maintained by the assessee, principle of consistency has to be adopted. He has also referred to AS-7 to highlight th....
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.... not a well recognized method of accounting, the Hon'ble Court observed that rule of consistency or res judicata do not come into play when the method followed by the assessee is contrary to law. However, in the instant case, there is no such finding either by the AO or by the learned CIT(A); AO has not rejected the book results by pointing out any defect in the books maintained by the assessee. Categorical finding of the learned CIT(A) to highlight that assessee has not deviated from guidelines issued by the ICAI (under AS-7), was not challenged before the Tribunal by learned Departmental Representative by producing any evidence thereof. Learned CIT(A) has discussed the issue elaborately and met each point of dispute raised by the AO to highlight that there is no merit in the conclusion reached by the AO. In fact, learned JM has extracted the operative portion of the order of the learned CIT(A) from paras 7 to 20 wherein learned CIT(A) not only analysed each issue raised by the AO but also supported the conclusions drawn by him while holding that assessee has adopted correct method of accounting and the same was followed consistently. In addition to that, learned JM had highlighte....