TaxTMI 
TaxTMI 
2001 (1) TMI 209
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.... is a recognised one. iv. On the facts and in the circumstances of the case, the learned CIT failed to appreciate that the income is assessable to tax only after completion of a project in all respects. 2. At the time of hearing Smt. Vidya Sharma, Advocate, appeared on behalf of the assessee and Shri P.C. Chadaga, DR, appeared on behalf of the Revenue. Their detailed submissions were heard. 3. Briefly the facts are that the assessee has been carrying on work of development of properties and also construction of apartments. The business activity carried out by the assessee involves various steps being identification of a plot, securing approval of the plans and construction and delivery thereof and simultaneously identifying buyers for the apartments. The undivided right and interest in land is sold by the owner of the land to the prospective buyers directly and after completion of the building hands over the possession of the respective units to the buyers. The assessee has been following the mercantile method of accounting in respect of the projects developed by it as part of its income. The profit on each project was taken by the assessee on the basis of completion of th....
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....bsp; Rs, 60,00,000 Second year Rs. 40,00,000 Profit @ 8% - first year Rs. 4,80,000 Second year Rs. 3,20,000 --------------- Total Rs. 8,00,000  ....
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....whose monies have been repaid owing to cancellations made by such customers due to the non-completion of the projects in time and other defaults on the part of the assessee. The assessee's counsel attempted to demonstrate that the monies being received by the assessee progressively till the date of completion of the project does not entitle the assessee with the right to appropriate the same unless the obligations under the contract are completed. The assessee's counsel submitted that therefore, the income from those accrues to the assessee only on the completion of the contract and not at any stage earlier. 5. It is also pointed out by the learned counsel that during the currency of the project, the construction thus carried out is shown as work-inprogress in the balance sheet year after year till the completion of the project. According to her the said reflects the right of the assessee to the work-in-progress as its own property and not as a property belonging to the customer since the customer does not become entitled to it till the assessee also gets the corresponding right to appropriate the money paid by the customers as its accrued income. It is pointed out by the learne....
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....ards (AS 7) for Accounting for Construction Contracts issued by the ICAI as extracted below: "10.1. The principal advantage of the completed contract method is that it is based on results as determined when the contract is completed or substantially completed rather than on estimates which may require subsequent adjustment as a result of unforeseen costs and possible losses. The risk of recognising profits that may not have been earned is therefore minimised." 7. The learned counsel also justified the selection of the completed contract method in detail. According to her, it was impossible to quantify the degree of completion of project as the work would be going on from the foundation, first slab, second slab etc., and the nature of working not being uniform. She also highlighted the imponderables and practical difficulties that would arise if any other system of accounting was to be adopted. It was pointed out by the learned counsel by way of an illustration that in terms of the agreement made by the assessee, the customer makes the payment either on the basis of time whether or not the building is complete or on the basis of the completion of each slab and a substantial po....
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.... v. Rajasthan Financial Corpn. [1998] 229 ITR 246 is on identical facts and is clearly applicable. The assessee's counsel has also placed reliance on the decision of the jurisdictional High Court in Khoday Distillers Ltd ITRC No. 1920 and 1921 of 1993, dated 12-9-1995. Further reliance was also placed on a decision of the Bangalore Bench of the Tribunal in Dy. CIT v. Somerset Apartments (P.) Ltd. [IT Appeal No. 145 (Bang.) of 1991, dated 25-6-1997], wherein the completed contract method of accounting is approved. 9. On the other hand, the learned DR has elaborately defended the orders of the CIT (A) mainly on the reasoning contained in the impugned order. According to the learned DR, the method of accounting adopted by the assessee to declare income from contracts on completed contract method is in variance with what is required by section 145 of the Income-tax Act. According to him, as per section 5 of the Income-tax Act, an income is liable to be taxed when it is either received or accrued. As per the DR, the assessee's method of accounting does not follow either of the two as the method is neither mercantile nor cash as is required to be followed as per section 145 of the Act....
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....ue. We may start with the discussion on the alternative methods of accounting. There are two well accepted methods of accounting in relation to construction contracts. One is the method of completed contract method which the assessee has been following and the other is the percentage of completion of contract method. The two said accounting methods have been enunciated by the premier accounting body in the country, namely, ICAI. The said body which is incorporated under an Act of Parliament issues accounting statements, guidance notes, accounting standards, etc., in the field of accountancy on various complex issues. One such Accounting Standard issued by the ICAI is Accounting for Construction Contracts (AS 7) which deals with accounting for construction contract in the financial statements of enterprises undertaking construction activities. Indeed, the two alternative methods of accounting for construction contracts have been recommended by the ICAI. The selection of a particular method of accounting for construction contracts depends on appropriate considerations. The choice of a method of accounting by an assessee is represented by the accounting policy followed by the assessee....
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....iate from the same. We have perused very carefully the decision in British Paints India Ltd.'s case and are unable to subscribe to the stand of the Revenue. In this decision, the Apex Court held that the method of evaluating the work-in-progress by not including the over heads was not an accepted method of accounting at all and, therefore, it upheld the discretion of the Revenue, notwithstanding that the said method was being followed for several years in the past. We are conscious of the fact that the Hon'ble Supreme Court did not have an occasion to deal with a situation as to whether if the method of accounting were to be a well accepted recognised one, the Revenue could still be entitled to bypass such an accepted method of accounting under the provisions of section 145 of the Income-tax Act. Our aforesaid view is fortified by the decision of the Ahmedabad Tribunal in the case of Shri Dinesh Mills Ltd. v. Asstt. CIT [2000] 72 ITD 110, the relevant extracts of which are as under: "...There is nothing in the decision which says that even a recognised method of valuation of stock can be rejected by the Assessing Officer. The true ratio of the Supreme Court decision is that the ....
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.... not completed. Whereas in the case before us, the amounts received by the assessee are as advances and are refundable to the plot owners in view of certain circumstances prescribed therein. Further, in the instant case, the assessee is in a position to calculate the work-in-progress under each one of the projects at the end of each accounting year and the same is not disputed. Therefore, although the dicta laid down by the Hon'ble High Court is well respected, but the same does not apply to the facts of the present case. 15. The second decision relied by the CIT is of the Orissa High Court in CIT v. Nandram Hunatram [1976] 103 ITR 433. In the said case, the Assessing Officer rejected the books of account of the assessee and adopted a percentage of receipts as the net profit on the plea that the assessee had the right to receive the said sums towards the amount spent on the rescinded contract. However, in the assessee's case as can be inferred from the detailed submissions made by the counsel that the amounts are received as advances and the right to appropriate it towards the contract receipts arises only upon the delivery of the flats and not earlier and the contracts are not ....
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....en by the Tribunal holding that the completed contract method had to be applied in the case of the assessee would be wrong." 17. Before we part, we may also discuss the reliance placed by the Department on the decision of the Tribunal in the case of United Property Developers (P.) Ltd. The facts of the case as can be seen from the order is quite different from that of the assessee before us. In United Properly Developers (P.) Ltd.'s case, it was an admitted fact that the assessee was receiving payments and billing the same towards contract receipts and it acquired the right to appropriate the same towards its income. In the case of the assessee before us, the assessee has not billed for the amounts received at different intervals but is receiving the same as advances. In this regard, we find that the decision of the Tribunal in Somerset Apartments (P.) Ltd.'s case, for the assessment year 1984-85 is more akin to the facts of the present case. The Hon'ble Tribunal in Somerset Apartments (P.) Ltd.'s case was dealing with a case of a builder and it upheld the completed contract method of accounting as one of the recognised methods. Further, the Bangalore Bench in the case of Somers....