TaxTMI 
TaxTMI 
2025 (5) TMI 1157
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....he revenue in not filing appeal on or before the due date prescribed under the law and thus, in the interests of justice, we condone delay in filing of appeal and admit the appeal filed by the revenue for adjudication. 3. The brief facts of the case are that the assessee is a Limited Liability Partnership firm carrying on business as a civil contractor. The assessee firm e-filed its return of income for the A.Y. 2017-18 on 31.10.2017 declaring a total income of Rs. 9,79,75,000/-. The return of income was processed u/s. 143(1) and subsequently selected for scrutiny under CASS. Later the statutory notice u/s. 143(2) was issued and served on the assessee on 22.09.2018. Further notices came to be issued to which replies were furnished by the assessee. 4. During the course of the assessment proceedings before the AO, one of the issues that was raised by the AO was whether the assessee had complied with ICDS III (percentage of completion method) for recognition of income as the assessee was engaged in the business of construction contract. In reply the assessee stated that the percentage of completion method (POCM) as per ICDS III was adopted by the assessee. The AO however found t....
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.....31% 97,05,842 - Saravana Stores (Shanmugadurai) 100.00% 3,00,00,000 2,51,44,051 42,12,80,060 (a) 31,36,56,848(b) The Assessing Officer has observed that with respect to the above projects, the appellant has recognized lesser revenue cumulatively than that which should have been offered so far, based on the POCM. Therefore, in relation to these projects, the difference between the revenue that should have been reckoned so far and that which has been actually been offered to tax till date, i.e. (a) minus (b) amounting to Rs.10,76,23,212/- has been the subject matter of addition. It is true that as per ICDS III, the income has to be recognized in the Profit and Loss Account as per the percentage of completion method. However, it was explained during the course of assessment proceedings that although apparently, it may seem that there is a shortfall in revenue recognition with respect to the above projects, the position has to be seen in conjunction with the work in progress which has also been reckoned at contract price. Therefore, it was submitted that when viewed in conjunction with WIP, there is no deficit in revenue recognition....
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.... has been reckoned as work in progress (WIP) of the different contracts. It may be noted for GST purposes, entire amount received has to be reckoned as revenue which may not be in line with the percentage of work completed. For instance, mobilization advance may be received in respect of certain projects for purchase of materials and the percentage of completion would be very low. In such cases, the entire advance would have to be shown as sales and in relation to such projects, the WIP would be reckoned at a negative figure. The net credit to the Profit and Loss Account on account of such projects would be the credit that should have been reckoned in terms of the POCM approach only. It should be noted that the valuation of WIP is not at cost but at contract price. This becomes amply clear from the workings which are given by way of Annexure-1. The difference between the contract price and the amount recognized as revenue in the Profit and Loss Account is reckoned as WIP in respect of each of the contract. This is equivalent to reckoning year end stock at selling price. It does not make a difference in terms of profit whether the product is reckoned as sold or in stock sin....
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.... for the impugned projects should have been applied by Assessing Officer. It may be noted that if all the projects are considered, the difference between the revenue to be recognized and the amount credited as work in progress would tally excepting for a small difference. The reconciliation between the addition made by the Assessing Officer and the work in progress credited to the Profit and Loss Account is provided as Annexure -2. In this connection, the decision of Jaipur bench of Hon'ble Income Tax Appellate Tribunal in the case of Vastukar Township Pvt. Limited v DCIT reported in 2018 (2) TMI 97 - ITAT JAIPUR where the principle of revenue recognition in terms of Percentage of Completion Method was enunciated, particularly the fact that where POCM is applied, the percentage should be reckoned even in respect of advances received. The relevant portion of the decision is reproduced for ready reference of this respected authority: "Further, it is noted that in respect of revenues from executed sale deeds, the revenues have been recognized to the extent of work completed and the said principle will apply in respect of advances so rec....
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....ffered by the assessee under the POCM. 10. The assessee submitted that the confusion that lead the AO to believe that the revenue is not correctly recognised as per the POCM was that the AO had not noticed that the excess to be offered under the POCM over and above the amount already credited to sales (being the entire amount of collection from the customers during the year) had been credited to the profit and loss account as WIP and that once the WIP is recognised there is no difference between the sales credited to profit and loss account and increased by the WIP credited to the profit and loss account and the POCM as computed by the AO subject to a reconciliation. 11. The assessee explained that this reconciliation was also primarily because of the fact that the projects where the revenue recognised on the basis of sales credited to the profit and loss account being in excess of the POCM which had to be reduced from the income reckoned by the AO since this had already been debited to WIP and one mistake committed by the AO in not recognising the amount transferred to WIP in respect of one project and further not taking into account the difference on account of materials at....
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.... 97,05,482 - - - 97,05,001 97,05,001 481 Saravan Stores (Thangadurai) 3,00,00,000 - 2,51,44,051 2,51,44,051 48,55,949 3,00,00,000 - Total 42,12,80,060 7,68,04,993 23,68,51,852 31,36,56,845 10,76,41,579 42,12,98,424 -18,364 14. Further that the Ld. AO had taken the POCM only of select projects which the assessee had tabulated which is as follows: WORK IN PROGRESS AS ON 31.03.2017 PROJECTS CONTRACT REVENUE CONTRACT COST % of completion Earned Revenue WIP Revenue recognised in previous company Revenue recognised DURING THE YEAR Total contract value as agreed Contract costs incurred in previous company Contract costs incurred upto the reporting date Total estimated contract costs Ashok Verghese - 2500000 8713501 - 574888 4388000 13.10% 1141588 -1358412 Gowri Hospital Pvt Ltd - 200000 30000000 - 6956 14401000 0.05% 14492 -185508 Grt - Chengalpet - 10913699 14550829 54658 8383942 8611000 98.00% 14259509 3345810 GRT Jewellers India Pvt Ltd- Avadi 23639801 - 28814595 16166051 ....
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....ognition is not sustainable and deleted the same. 16. Aggrieved by the order of the Ld.CIT(A) the revenue is in appeal before us on the following grounds: 1. The order of the learned Commissioner of Income Tax (Appeals) is erroneous on facts of the case and in law. 2. The Ld.CIT(A) erred in deleting the addition of Rs. 10,76,23,212/- towards percentage completion method as prescribed under ICDS III 3. The Ld.CIT(A)'s has erred in not considering the fact that the assessee has chosen to alter the WIP without providing satisfactory documentary evidences and computation as mandated by ICDS III during the assessment proceedings and appellate proceedings. 4. The Ld.CIT(A) has erred in accepting the contention of the assessee that it recognized advance receipts for the purpose of the GST whereas opted to defer the revenue in the case of the Income Tax. 5. The Ld.CIT(A) has erred in not considering the facts in case of conflict between the ICDS and provisions of the Act, the provisions of the Act shall prevail in the interest of revenue. 6. For these grounds and any other ground including amendment of grounds that may be raised duri....
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....ette from time to time Income Computation Disclosure Standard to be followed by any class of assessees in respect of any class of income. It can also be seen that ICDS III is applicable in respect of a construction contract and that Para 17 of the ICDS makes it expressly clear that the revenue and expenditure should be recognised on the basis of the POCM 22. At the outset ICDS III it may be noted is not in conflict with any of the provisions of the IT Act and consequently has to be followed. We find that there is no dispute between the assessee and the revenue on the percentage of work completed in respect of each project but only on whether the amount to be recognised as per the ICDS has been recognised as revenue or not. 23. It is the case of the assessee that the amount of revenue to be recognised as per POCM which has not been credited to sales since the same is yet to be collected has been carried to WIP which is nothing but the unbilled revenue which is to be recognised along with sale which will in effect result in the amounts as per the POCM being credited to the profit and loss account. The difference subject to the reconciliation is what the AO seeks to add and is n....