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TMI Blog2010 (5) TMI 697X X X X Extracts X X X X X X X X Extracts X X X X ..... rred in holding that it is AS-9 that is applicable to the case of the assessee, without appreciating that AS- 9 deals with revenue recognition in general and para 2 of AS-9 specifically excludes construction contractors (including builders selling the units by agreement for sale), and that in view of peculiar nature of the product in the case of builders involving considerable gestation period, general rules regarding sale of goods cannot apply. 3. The ld, CIT(A) failed to appreciate that, in the case of builders, each fraction of work completed is embedded with profits and hence the revenue is recognized with reference to the stage of completion reached at the end of the accounting year determined as the proportion of costs incurred to the estimated total costs as per para 9.2 of AS-7, which is in conformity with the principles of law regarding accrual when applied to the specific facts of builders. 4. The ld. CIT(A) failed to appreciate that charging section 4 of the Income-tax Act treats previous year as the unit of charge and hence profit from any business venture has to be taxed in each previous year irrespective of the span of activity spreading beyond the previous year and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Vs CIT 103 ITR 15. Thus, it is clear that what the assessee has shown booking advances are in fact the part payments for the units proposed to be sold to the unit buyers. In view of the above facts and circumstances, income is being assessed on the basis of percentage completion method. The opening stock of work-in-progress is at Rs.22,43,700/- and the closing stock of work-in-progress is Rs.2,04,41,717/-. The value of work-in-progress comes to Rs.l,81,98,017/- after reducing the opening stock of work-in-progress from closing of work-in- progress." 3.2. It is contended by the ld.counsel that the appellant is engaged in the construction contract and therefore the Assessing Officer reached a conclusion that the income should be assessed on the basis of percentage completion method. It is also contended that the Assessing Officer has neither issued any show cause notice nor even asked any question regarding the valuation of work-in- progress and made addition without giving any opportunity being heard. The appellant follows mercantile method of accounting and fair revenue recognition. Appellant has been consentingly recognizing revenue from various projects undertaken by it in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ised Accounting Standard 7 issued by ICAI and assumed that as assessee is engaged in the construction contract and therefore, reached a conclusion that the income should be assessed on the basis of percentage completion method. In this conned ion, appellant state that it is not engaged in the work of carrying out construction contracts. In fact, it is a builder and is engaged in construction and sale of immovable properties hence revised Accounting Standard 7 is not applicable in case of it. In this background, it may be important to consider the AS-7, on which the Assessing Officer has heavily relied on for making the addition. The objective of the said AS-7 is as under : "The objective of this Statement is to prescribe the accounting treatment of revenue and costs associated with construction contracts. ..............................." Further paragraph-2 of the said AS- 7 defines the construction contracts as under: "A construction contract is a contract specifically negotiated far the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use." Thus, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision relied upon by AO is not applicable to present case. 1.8 The appellant states that AO has applied % of gross profit on work in progress as assessee has received advance sales consideration for Rs.23,25,223 during the year. In this connection, appellant states project " SPRING VIEW" has scheme of 25 duplex and closing work in progress of Rs.2,04,41,717 comprising of land cost at Rs.1,72,07,671 and material & other allied cost for Rs.32,34,036. It is stated that aforesaid project is at initial stage, no major work has been carried out and majority portion of closing work in progress being 84.18% is of land cost therefore AO has erred in applying gross profit ratio on entire amount of work in progress as significant construction work is not incurred during the year. It is stated that no hypothetical profit can be earned by appellant only on purchase of land of project as completion of entire project comes on construction of housing units and not on purchase of land only. Apart from above, appellant states that it can be seen from following chart that major cost relating to project being purchase of building material, labour cost etc. excluding land has been incurred in subse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estimating gross profit on closing work in progress nor estimating profit on advances as entire project undertaken by appellant is at early stage. Apart from above, appellant submits (he break up of advances received during the year for 9 duplexes for Rs.23,25,223 , its subsequent realizations and when income has been offered in return of income as under: Duplex No Amount % of Amount Amount Sales Value received in total received in received in A. Y. 2004- agreed A.Y. 2005-06 A. Y. 2006- 2005 as sales towards sales 07 towards advance value value sales value 2&3 3,22.222 10.19 27,43.259 96,717 31,62.198 4 2,00,000 11.43 13.50,000 2,00,000 17,50,000 5 4,00,000 23.51 13,01,000 -- 17,01,000 7.2415 1,50,001 16,22,000 3,00.000 20,72,000 21 & 22 4,00,000 13.92 17,62,379 35,000 28,76,000 23 3,53,000 20.17 13,96.999 --- 17,49,999 24 1.00,000 6.06 15,50,000 --- 16,50,000 25 4,00,000 16.80 19,80,650 - 23,80,650 Total 23,25,223 13.95 1,37,06,287 6,31,717 1,66,63,227 Total sale 3,83,24,879 74,01,000 4,57,25,354 value (Offered as (Offered 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... di Housing (P) Ltd. Vs. Dy. CIT (2003) 80 TTJ (Bang) 750 2 Chainrup Sampatram Vs CIT 24 ITR 481 3 ALA firm Vs. CIT 4 CIT Vs. Dynavisions Limited 267 ITR 600 5 CIT v. English Electric Co. of India Ltd. [2000] 243 ITR 512 (Mad) 3.3. I have considered the submissions of the ld.counsel and facts of the case. It is not in dispute that appellant is a developer and not a contractor. Assessing Officer applied accounting standard-7 in the case of the appellant which is applicable for construction contracts. Assessing Officer noticed from the balance-sheet that the work-in- progress shown in balance-sheet is Rs.2,04,41,717/- and advances received from customers Rs.23,25,223/-. He concluded that appellant had followed project completion method which was not correct for revenue. He referred the decision of Tirathram Ahuja that income accrued along with the progress of work done. He applied the gross profit rate of 20.21% to the work-in-progress and addition was made. I have gone through the revised accounting standard-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 cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for Assessing Officer to conclude that the appellant is following project completion method and AS-7 applies in its case. Since closing stock has to be valued at cost and cannot be valued at market value, profit estimated by the Assessing Officer on work-in- progress is without any legal basis. On the other hand the decision relied upon by the appellant supports the view that stock has to be valued at cost. Since the method of accounting following by appellant is as per proper accounting standard and substantial revenue has been recognised in subsequent year from this project, I do not see any basis for estimating gross profit on the work-in-progress. Addition made by the Assessing Officer is therefore deleted. 4. We have heard the rival submissions and perused the materials available on record. The undisputed facts of the case are that the assessee is engaged in the business of builder and developer. During the year under consideration, the assessee has shown closing work-in-progress of Rs.2,04,41,717/- 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 In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidered view, provisions of Accounting Standard-7 cannot override 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. In the instant case, we find that the Learned Assessing Officer 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 Learned Commissioner of Income Tax(Appeals) has recorded a finding after perusing the assessment records of the subsequent 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 Re ..... 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