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2020 (5) TMI 375 - AT - Income TaxRecognition of contract revenue under Accounting Standard (AS) 7 - Construction Contracts - whether the costs and expenses pertaining to O& M Phase are includable or not while calculating percentage completion method as per the provisions of AS 7 (accounting standard relating to construction contract)? - HELD THAT:- The payment pattern reveals that the assessee has raised separate invoices for O& M phase on a regular basis as per Section 5 of TOR Clause 8.3 and the same have been duly accounted in the years in which it has been received. On going through the entire facts of the case, we find that the three different phases of the work which are totally separate in execution. Keeping in view the fact, that the O& M phase cannot be a part of the construction activity as the O& M phase involves the supply of water to the residence giving connections and monitoring the connections which is clearly a post construction activity, we hold that the amount allotted for O& M phase cannot be included in determining the percentage of completion method in recognition of the revenue. The amounts of O& M phase have been duly offered to tax in the year of receipts. We also find that the Phase-I and the Phase- II are the preparatory construction phases over a period of 18 months whereas the operations & maintenance ( O&M phase) of such constructed project is of 60 months. Maintenance activities cannot be clubbed with the construction activity. Having gone through the accounting standards (AS-7 and AS-9 ), we find that application of the standard to separately identifiable components of single contract is allowable while determining the percentage completion of the project. Since, the O&M phase commences after the construction of activity of rehabilitation phase, we hereby hold that the amount pertaining to O&M phase needs to be separately considered while determining the profits out of the construction activities. Consideration of VAT for recognizing the revenue under AS-7 - HELD THAT:- AO has considered this amount for calculating the revenues of the year. CBDT Circular No. 4 /2008 dated 04.04.2008 clarified that service tax doesn’t partake the nature of income. The Circular was issued while dealing with Section 194-I. Since, the sum and substance of the circular is that the service tax doesn’ t form a part of the income of the assessee, the same need not be considered for calculating the profits of the assessee for the year. Similarly, the Value Added Tax which do not form the part of the income of the assessee also needs to be excluded while determining the revenues of the year in the instant case. As a result, appeal of the assessee on ground is hereby allowed.
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