TMI Blog2010 (5) TMI 697X X X X Extracts X X X X X X X X Extracts X X X X ..... erride the provisions of section 145 in so far as the computation of business income under the Income Tax Act for the purpose of determining assessable income is concerned. A reading of section 145 of the Act shows that the business income which is assessable under the income Tax Act is to be computed in accordance with the consistent system of accounting followed by the assessee unless such system of accounting is defective and /or from such system of accounting, profit cannot be deduced. We find that AO has brought no material on record to show that the system of accounting adopted by the assessee for the year under appeal was not consistently followed by the assessee or the system adopted was a defective system. In our considered view, even a project completion method is also a recognised system of accounting. Simply, The Institute of Chartered Accountants of India has recommended percentage completion method does not mean that project completion method if consistently followed by the assessee, the same is not a bonafide system of accounting or the same is a defective system of accounting. The CIT (A) has recorded a finding after perusing the assessment records of the subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m any business venture has to be taxed in each previous year irrespective of the span of activity spreading beyond the previous year and the profit of one year cannot be postponed to the subsequent year(s) as settled in the case of CIT Vs. British Paints India Ltd. 168 ITR 44 (SC)and as laid down in the specific context of builders in the following decisions: (i) SukhdevJalan Vs. CIT 26 ITR 617(Pal) (ii) Tirathram Ahuja Pvt. Ltd., Vs. CIT 103 ITR 15(Del) confirmed in 186 ITR 428 (SC) (iii) CIT Vs. Nandram Huntram 103 ITR 433 (Orissa) (iv) Uttam Singh Duggal Co. Pvt. Ltd. vs CIT 127 ITR 21 (Del)." 3. The Learned Commissioner of Income Tax (Appeals) has observed as under:- "3. The second ground of appeal is against addition of Rs.36,77,819/- on account of work-in-progress. 3.1. The issue is discussed in detail at Para-3 of the assessment, which is reproduced here below ; "3. During the course of assessment proceedings, it was found by the Assessing Officer that the appellant has followed work completion method. However, as per AS-7 accounting principals refers only percentage completion method to be followed in such type of construction contract activities. During the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od of accounting and fair revenue recognition. Appellant has been consentingly recognizing revenue from various projects undertaken by it in the year of sale or when possession of unit has been transferred in favour of buyer of property and the assessing officer has wrongly assumed that appellant has been following project completion method. It is stated that under such project completion, entire cost is carried forward as closing stock till the date of completion of entire project and revenue is recognized when the project is completed whereas in case of appellant it is not so as it has not been recognizing revenue on completion of entire project but showing income in the year in which possession of any unit is given to buyer irrespective of the fact whether entire project has been completed or not. It is further stated that it has undertaken two projects viz, Sakar II and Spring View during the year under consideration. As Sakar II was completed during the year, it has recognized entire income during the year under consideration in profit loss account filed along with return of income. As project being Spring View has just commenced in A.Y.2004-2005 and initial work has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use." Thus, in case of construction contract, the contractor carry out the construction work on behalf of the other person, who has awarded the said contract to him. However, in case of builders, they build the immovable properties for sale to customers. Therefore, in such cases there is no construction contract. Since, the appellant is a builder, the AS-7 is not applicable in the case of the assessee and it is not bound to follow percentage completion method of accounting. The addition made by assessing officer following percentage completion method of accounting is without any has and requires to be deleted. 1.7 The appellant states that while making aforesaid addition, the Assessing Officer has relied upon the decision of the Delhi High Court in the case of Tirath Ram Ahuja Pvt. Ltd v. CIT [1976] 103-ITR-J5 (Del). However, it may be pointed out that the said decision, the Court has held as under: "In the case of contract, profits can he estimated on the basis of receipts in each year and one need not waif till the completion of contrac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e seen from following chart that major cost relating to project being purchase of building material, labour cost etc. excluding land has been incurred in subsequent assessment years and not in current assessment year and which will further prove that no substantial construction has been carried out during the year hence no estimation of profit can be made by applying gross profit on closing work in progress as substantial work relating to construction has been carried out in A. Y. 2005-2006 and 2006-2007. Particulars of Cost % Cost % Cost % of Total major cost incurred in of Incurred of incurred total A.Y. 2004- total In A.Y. total in A.Y.. cost 2005 cost 2005- cost 2006- 2006 2007Building Materials 14.10,074 12.00 85.96,719 73.20 17,37,530 14.80 1,17.44.323 including cement,iron. Kapachi, electric goods etc. Labour expenses 4.29,540 4.58 57,52.553 61.30 32,02.517 34.12 93,84,610 Site Expneses 11.473 4.33 1.57.153 50.41 95.893 36.26 2,64,519 Total of above 18,51,087 8.65 1,45,06,425 67.81 50,35,940 23.54 2,13,93,452. It can be seen from above details that only 12% of total material cost. nearly 4.5% to 5% of total labour site expenses and only 8.65% of total cost has been i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fered of income in as Income project A.Y.05-06) in A. K 06-07) With regards to observation of AO that assesses has shown hooking advances are part payments for the units proposed to be sold in unit buyers hence income is required to be assessed on percentage completion method of account, the appellant states that it can be seen from above fact that booking advances received during the year are only 13.95% of total sales consideration of such duplexes and 5.09% of total sales consideration of project referred herein above hence it cannot be said that assessee has received major consideration during the year against sale of aforesaid duplexes leading to estimation of profit on closing work in progress. It is stated that majority portion of amount against sales of aforesaid 9 duplexes had been received in A. Y. 2005-2006 and assessee company has recognized entire agreed sales consideration as income in that assessment year. It is further stated that though it has not received Rs.6,31,717 during the year out of total sales consideration of Rs.7,66,63,227, same has been recognized as income in A.Y. 2005-2006 as sales deeds have been executed / significant risks and rewards of owners ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd-7 AS-7 is applicable for construction contracts for construction of assets such as bridges, buildings, dam, pipe-line, etc. It is clearly mentioned that AS-7 applies to contractors and not to enterprises that are constructing properties on their own account i.e. builders and developers. It is mentioned in response to a query by ICAI that in the case of builders and developers revenue recognition and valuation of inventories should be in accordance with AS-9 and AS-2 respectively. The enterprise should value the completed project as inventories held for sale in the ordinary course of business. The revenue should be recognition in accordance with AS-9 when each flat was sold. It is further clarified that AS-7 would apply when they are being constructed under a contract on behalf of a third party. From this discussion, it is clear that AS-7 is not applicable to the case of appellant and therefore the percentage of gross profit applied by the Assessing Officer to work-in-progress is not justified. What method the appellant is following is that sale of flats is considered as revenue the moment the possession of flat is given or the document is executed. Appellant is not following p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which included land value of Rs.1,72,07,671/- and construction expenses of Rs.32,34,036/-. According to the Learned Assessing Officer, as per accounting standard issued by The Institute of Chartered Accountants of India (in short 'ICAI') AS-7 the assessee should have shown income on the basis of percentage completion method and thus, the assessee should have offered income in respect of closing work- in-progress for taxation during the year under consideration. Thus, the Learned Assessing Officer estimated gross profit on the closing work-in- progress @ 20.21% and thereby added Rs.36,77,819/- to the income of the assessee. The Learned Commissioner of Income Tax(Appeals) was of the view that AS-7 was not applicable in the case of the assessee as the assessee was not a contractor. Further, the assessee followed AS-2 issued by ICAI for valuing closing inventory and has followed AS-9 for revenue recognition and therefore, there was no defect in the system of accounting followed by the assessee. He therefore deleted the entire addition of Rs.36,77,819/- made by the Learned Assessing Officer. 5. The Learned Departmental Representative supported the order of the Learned Assessing Offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... years that the assessee has offered for taxation its income in the subsequent year as per the consistent system of accounting followed by the assessee. The Learned Departmental Representative could not point out any error in the above finding of the Learned Commissioner of Income Tax(Appeals). In view of the above discussion, we do not find any error in the order of the Learned Commissioner of Income Tax(Appeals) and therefore, the same is upheld and the appeal of the revenue is dismissed. 5. Grounds of cross Objection reads as under:- 1. On the facts and in the circumstances of the respondent's case, the CIT(A) has erred in upholding the disallowance of Rs.25,000 out of labour expenses, carting expenses, site expenses and freight and octroi expenses when no such expenses is called for. 2. On the facts and in the circumstances of the respondent's case, the CIT(A) erred in rejecting the assessee's claim that it was not at all a fit case for levy of interest u/s.234A, 234B and 234C of the IT. Act. 6. At the time of the hearing, the Learned Authorised Representative of the assessee submitted that he is not pressing the above grounds of Cross Objection taken in Cross Objection ..... X X X X Extracts X X X X X X X X Extracts X X X X
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