TMI Blog2010 (10) TMI 707X X X X Extracts X X X X X X X X Extracts X X X X ..... AO has not rejected the book results by pointing out any defect in the books maintained by the assessee - Decided in favor of assessee. - ITA Nos. 2808/Mum/2002 and 5056/Mum/2003, - - - Dated:- 29-10-2010 - D. Manmohan, R.K. Gupta, D.K. Srivastava, JJ. N.N. Mishra and S.K. Pahwa for the Revenue Pramod Kumar Parida and Sanjukta Chowdhury for the Assessee ORDER R.K. Gupta, Judicial Member:- May, 2008 1. These are two appeals by the Department and two cross-objections by the assessee relating to asst. yrs. 1998-99 and 1999-2000 respectively. 2. Common issues are involved in the appeals and the cross-objections, therefore, they are disposed of by this single order. 3. The Department in its appeals is objecting the deletion of addition of Rs. 4,13,88,900 and Rs. 4,87,61,517 made by the AO on account of undervaluation of closing stock. The Department is also objecting in deleting the addition of Rs. 2,70,230 made on account of enhancement of rates of sales effected for asst. yr. 1998-99. 4. Since the cross-objections filed by the assessee are in support of the orders of the CIT(A), therefore, they do not require any separate adjudication. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chitect), (ii) The percentage of sales effected in respect of the building. (d) At the end of each year, the total sale value (to completion) of the project is estimated by multiplying the area available for development with the actual average rate realised on flats sold. (e) The estimated sale value (for the entire project) so determined is reduced to the extent of percentage of project completed as obtained in (c) above. This figure is the work-in-progress as on the end of the accounting year. [The closing work-in-progress of last year forms the opening work-in-progress to which expenses incurred during the year are added]. (f) Expenses incurred on the project during the year are put on the debit side of the P and L a/c. (g) The difference between (e) and (f) is the profit/loss during the year. (h) The advances received from flat purchases are taken on liabilities side of balance sheet from year to year. When the project is 100 per cent completed, the total advances received from flat purchases are transferred to sales account in P and L a/c. 3. The above method of determining percentage of completion recognises the following:- (a) The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 901.58 per sq. ft. It was noticed by AO that the average rate of sales realisation during the year was Rs. 1,023 per sq. ft. AO considered the argument of the assessee that the flats were sold in earlier years and allowed a reduction of Rs. 23 per sq. ft. and adopted Rs. 1,000 per sq. ft. to arrive at the value of closing work-in-progress of Rs. 42,00,88,900 as against Rs. 37.87 crores offered by the assessee. Thus, the difference of Rs. 4,13,88,900 was treated as the assessee's income by assigning the following reasons:- (i) Weightage given to the past sales effected in the past years was greater considering the fact that completion of work and realisation of sales was hundred per cent in the case of Gokul Nagari-I and II. (ii) The expenses incurred during the year towards purchases, direct expenses and indirect expenses were an indication of value addition to work-in-progress and the assessee did not acknowledge the value addition to work-in-progress to the extent of work-in-progress during the previous year. (iii) The current rates of realisation reflected the contemporaneous market trend which was an indicator of value of work-in-progress. (iv) The asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le value of the project. He submits that the average rate actually realised by the appellant in various years was as under:- Asst. yr. Average rate of sale (realised) 1996-97 749 1997-98 861 1998-99 902 1999-2000 928 2000-01 (project completed) Nil He submitted that the method of accounting followed by assessee was accepted by AO in the preceding year i.e. asst. yr. 1996-97 under s. 143(3) and the average rate adopted by the assessee in asst. yr. 1996-97 was Rs. 749 whereas, in the current assessment year the average rate actually realised was Rs. 902 per sq. ft. (ii) He submitted that there were factual errors in the assessment order (para 5 of the assessment order) and his submissions against the each finding area are as under:- AO's finding Appellant's contention (i) It is seen that in the assessee's case the factor of sales realisation is taken to determine extent of completion of work of the project as well as the value of work-in-progress. (i) This is factually wrong. The extent of completion of the project is not based on sales realisa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct. He submitted that estimate of sales was based on the rates actually realised and the rate adopted by the appellant was absolutely fair. (iv) He submitted that AO has adopted the current year rate of sales in respect of flats which were sold in the past years at a lower rate. AO has ignored the fact that the valuation of work-in-progress at the current year rate would result in great injustice. He further submits that as much as 80 per cent of the flats were sold in earlier period and to the sales made in earlier years, AO cannot notionally value the flats sold in earlier years at the current year rate. (v) The learned counsel further submitted his arguments in respect of findings given by AO at para 7 of the assessment order. Findings of AO and appellant's submissions are as under:- AO's findings Appellant's contention (i) Weightage given to past sales effected in the past years is greater considering the fact that completion of work and realisation of sales of Gokul Nagari-I and II is 100%. (i) When as much as 85% of the area available for sale is sold, obvious that in estimating the sales on the project, weightage be given to the sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted that AO considered that it was fit to give weightage for past sales but unjustifiably limited the rate of sales to Rs. 1,000 per sq. ft., without assigning any valid reasons. He further submitted that average rate of realisation from the beginning of the project upto the end of previous year was Rs. 901.58 per sq. ft., and the same was adopted. AO has adopted the rate of realisation during the current year which was Rs. 1,023 per sq. ft. He submitted that more than 80 per cent of the sales on the project were made at lower rates in the preceding year and a very small fraction was sold in the current previous year and it was incorrect to estimate the total sales at the higher value prevailing at the end of the current year. (viii) He submitted that appellant did not deviate from AS-7 guidelines issued by ICAI and there can be loss, if work-in-progress falls short of the expenses incurred. He argued that it was wrong to estimate the work-in-progress for asst. yr. 1998-99 based on income returned for subsequent years mainly, asst. yrs. 1999-2000 and 2000-01. AO has not appreciated that rates of sale of flats in asst. yr. 1996-97 were accepted by AO after a detailed scrutiny u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 86,960 Rs. 2,72,18,137 or Rs. 2,72,18,140 The project undertaken by the appellant comprises of construction and sale of three complexes namely Gokul Nagari-I, Gokul Nagari-II and Gokul Concord. AO has accepted that it is one project. During the previous year the expenditure incurred by the assessee on the project was Rs. 11,79,98,267 (Rs. 6,74,97,797 + Rs. 3,69,61,233 + Rs. 1,35,39,237). The other facts relating to the project are as under:- (I) (a) Total area of the project 4,72,010 sq. ft. (b) Total area sold till the end of previous year 4,01,475 sq. ft. (c) Area unsold 70,535 sq. ft. (d) Percentage of area sold 85.06% (e) Percentage of unsold area 14.94% (II) (i) Total aggregate value of area sold (4,01,475 sq. ft.) Rs. 36,19,62,674 (ii) Average rate realised (Rs. 36,19,62,674/4,01,475 sq. ft.) Rs. 901.58 (iii) Amount received from the area sold Rs. 33,79,27,329 (iv) Recovery as a percentage of total agreement value (Rs. 33.79 crores/36.19 crores) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t., (iii) it is reasonable to give certain weightage to past sales and the weightage given by AO to the past sales was Rs. 23 per sq. ft. and finally adopted Rs. 1,000 to arrive at the estimated sales or work-in-progress. (10) AO accepted the architect's certificate regarding percentage of work completed which was 93.33 per cent. AO also accepted that percentage of sales effected at 85.06 per cent. AO accepted that project completed was 89 per cent which was the average of work completed and sales. The assessee explained the method of accounting in detail before the AO. (11) The dispute raised by AO is with reference to the method of accounting adopted by the assessee and explained at 'D' of para 2 of the assessment order which is reproduced as under:- 'At the end of each year the total sale value to completion of the project is estimated by multiplying the area available for development with the actual average rate realised on agreements executed on flats agreed to be sold.' Before the AO, it was explained that it had been adopting average rate realised on agreements executed in respect of flats sold. The assessee has been following this method of adopting aver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P and L a/c. AO accepted that cash realised was Rs. 33.79 crores till the end of the accounting year. AO cannot adopt the current rate of realisation for arriving at the estimated sale value or closing work-in-progress of the flats which were sold in the past. In my opinion, there is no merit in the argument of the AO that the current rate should be applied for the area which was sold in the past. The average rate adopted by the assessee includes the current year rate also. (15) Next finding of the AO is that the assessee gave more weightage to the historical costs taking the average of the rates for the actual sales effected by the assessee over the years and adopting an average rate for estimation of work-in-progress based on percentage of completion and sales realisation upto date. In my opinion, the purpose of accountancy is recording, classification, analysis, preparation and interpretation of financial statements based on historical cost. In accounting there is no scope for opportunity cost. Actual transactions have to be recorded at the price at which transactions have taken place. The assessee has been adopting average rate for the purpose of estimation of sales and whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Provision is nevertheless made for the entire loss on the contract.' (18) AO was of the opinion that factor of sales realisation was taken to determine the extent of completion of work as well as the work-in-progress. Learned counsel submitted that this finding of the AO is not correct and I agree with him. Let me assume for a minute that the assessee relied on the sales realisation to determine the extent of completion of work. As observed by me earlier the total value of the sales as per agreements was Rs. 36.19 crores and the assessee received Rs. 33.79 crores till the end of the accounting year. The Accounting Standard itself stipulates that as a measure of prudence revenue is recognised on realisation. Therefore, there is nothing wrong in relying on the realisation of sales by the assessee. Accounting Standard further stipulates that stage of completion should be measured in an appropriate manner. Accounting Standard did not define 'appropriate manner' but suggested that no special weightage should be given to a single factor and while evaluating the stage of completion all factors should be taken into account. As observed by me earlier AO accepted the percentage of work ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case and then only held that the AO was not justified in making his own estimate of value of the work-in-progress. The assessments of earlier years have been completed under s. 143(3) by which the method of accounting adopted on the basis of percentage of completion of contract method has been accepted. On the same basis, this year also the assessee has valued its work-in-progress. Complete details of accounts have been maintained by the assessee. Neither the books of account are doubted by the AO nor any defect pointed out in the books of accounts. There was also no material with the AO to doubt the accounting system of the assessee. Therefore, without any basis, disturbing the method of accounting is not correct on the facts of the case or in the eyes of law. Therefore, we see no reason to interfere with the findings of the learned CIT(A). 10. Various Courts have held that without controverting the findings of any authority, the order of that very authority cannot be questioned or cannot be disturbed. 10.1 The Hon'ble Kerala High Court in the case of CIT vs. Nirmal Liquors (1991) 92 CTR (Ker) 213 : (1991) 190 ITR 636 (Ker) has held that:- "The Tribunal is the final f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere is any proceedings initiated under s. 263. Therefore, in view of the above facts and circumstances, we confirm the order of the learned CIT(A) for the year under consideration. 14. In the subsequent year also, the facts are identical as by adopting his own rate of valuation, the AO has made addition on account of valuation of work-in-progress. Similarly, the CIT(A) has allowed the claim of the assessee for subsequent year also. Since the facts are identical, therefore, in view of the reasoning given by the CIT(A) for subsequent year, we confirm his order for the subsequent year also. 15. There is one more ground in the asst. yr. 1998-99, which is against deleting the addition of Rs. 2,70,230 made on account of enhancement of rates of sales effected during the year. 15.1 While completing assessment for the asst. yr. 1996-97, AO had enhanced the rates by 15 per cent over the declared rate of booking in Gokul Nagari-I and II on flats which were covered by letter of allotment issued by the predecessor for I.M. Doodhwala Estate. Enhancement of rates was agreed by the assessee under protest. During the course of present assessment proceedings AO enhanced the rate on the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed Departmental Representative nor any other material was brought on record to establish otherwise. Therefore, we confirm the order of the learned CIT(A) on this issue also. 19. In the result, the appeals filed by the Department are dismissed and the cross-objections filed by the assessee are also dismissed as the same become infructuous. D.K. Srivastava, Accountant Member:- 1st Dec., 2008 1. I have carefully gone through the order proposed by my learned Brother dismissing the appeal filed by the Department and thereby confirming the order passed by the learned CIT(A) deleting the:- (i) addition of Rs. 4,13,88,900 made by the AO in asst. yr. 1998-99 on account of undervaluation of closing stock and further addition of Rs. 2,70,230 on account of suppression of sales price; and (ii) Rs. 4,87,61,517 made by the AO in asst. yr. 1999-2000 on account of undervaluation of closing stock. In the absence of relevant materials on record as also in the absence of examination of the issue in the light of the principles laid down by the Hon'ble Supreme Court in CIT vs. Britsh Paints India Ltd. (1991) 91 CTR (SC) 108 : (1991) 188 ITR 44 (SC), I am unable to concur with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntained. It is incorrect to say that the officer is bound to accept the system of accounting regularly employed by the assessee the correctness of which had not been questioned in the past. There is no estoppel in these matters and the officer is not bound by the method followed in the earlier years. (ii) It is a well recognised principle of commercial accounting to enter in the P and L a/c the value of the stock at the beginning and at the end of the accounting year at cost or market price, whichever is lower. (iii) That any system of accounting which excluded, for the stock valuation, all costs other than the cost of raw materials for the goods-in-process and finished products, was likely to result in a distorted picture of the true state of the business for the purpose of computing the taxable income. 4. The principles laid down in the aforesaid judgment are squarely applicable to the present case in view of the categorical finding by the AO that the value of the work-in-progress shown by the assessee is lower than the cost and expenses incurred by the assessee. The aforesaid finding was neither referred to at the time of hearing nor controverted by the assessee befo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... antly, both the appeals and cross-objections stand allowed for statistical purposes. Reference under S. 255(4) of the IT Act, 1961 16th Dec., 2008 While adjudicating these appeals, both the Members have expressed their independent views. We, therefore, make a reference to the Hon'ble President of the Tribunal under s. 255(4) of the IT Act, 1961, for an appointment of a Third Member or to pass necessary order to adjudicate the following question of law on a point of difference:- "Whether on the facts and circumstances of the case, the order of the CIT(A) is liable to be confirmed or to be set aside and to restore the issue to his file to decide the same afresh?" The Registry is accordingly directed to place this reference before the Hon'ble President for his kind perusal and necessary orders. D. Manmohan, Vice President (As Third Member):- 13th Oct., 2010 1. On a difference of opinion between the learned Members of the Tribunal, 'H' Bench, Mumbai, the Hon'ble President of the Tribunal nominated me under s. 255(4) of the IT Act, 1961, to adjudicate the following question of law:- "Whether on the facts and circumstances of the case, the order of the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the facts and circumstances of the case and in law, learned CIT(A) erred in deleting the addition of Rs. 2,70,230 made on account of enhancement of rates of sales effected during the year." Grounds for asst. yr. 1999-2000:- "1. On the facts and circumstances of the case and in law, learned CIT(A) has erred in deleting the addition of Rs. 4,87,61,517 made by AO by way of addition to the value of work-in-progress over that determined by the assessee by holding that the method of accounting adopted by the assessee is proper and consistently followed over the years and accepted by the Department in the past and further holding that the action of the AO in valuing the work-in-progress by considering two buildings Gokul Nagri-I and Gokul Nagri-II as separately completed and the third building Gokul Concords as separate project and as fully sold where 36 per cent of the total area was unsold (i.e. 59,820 sq. ft.) is not proper ignoring the facts brought out by the AO in the assessment order. 2. On the facts and circumstances of the case and in law, learned CIT(A) has erred in deleting the addition of Rs. 4,87,61,517 made by AO by way of addition of the value of work-in-progr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inciples laid down therein while deciding upon the issue of stock valuation. He was strongly of the opinion that the method of stock valuation contrary to the principles laid down by the apex Court (supra) cannot be accepted even if such system of accounting was regularly employed by the assessee and in order to verify as to whether the order passed by the learned JM is in conformity with the principles laid down in the aforecited judgment, verification of the tax audit report is called for whereas, such details were neither furnished before the Tribunal nor before the tax authorities. Considering the overall circumstances, the learned AM was of the view that the matter deserves to be sent back to the file of learned CIT(A) with a direction to decide the matter afresh, after bringing all relevant material on record so as to enable CIT(A) to decide in accordance with principles laid down by the Hon'ble Supreme Court in the case of British Paints (supra). 7. On account of difference of opinion the Hon'ble Members have forwarded the point of difference to the Hon'ble President who was pleased to nominate me under s. 255(4) of the Act to adjudicate the question which was set out in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tablished method is not followed by the assessee, merely because a wrong method has been consistently followed it does not fetter the powers of the Court to take upon itself to correct the same. In other words, res judicata/rule of consistency is not applicable in a case where a wrong method is followed in the earlier years through which true and correct profits cannot be deduced. Learned counsel, appearing on behalf of the assessee, submitted that in the case of the assessee, a builder and developer, an approved method, as prescribed under AS-7, was consistently followed by including not only capital cost of land but direct overheads incurred in the project and considering the factual matrix of the case learned CIT(A) accepted the plea of the assessee that there is no warrant for deviating from the method followed by the assessee. Paras 16 to 19 of the order of the CIT(A) are extracted for immediate reference which shows that the method followed by the assessee was approved as a standard method of accounting:- "16. AO gave another finding that the method adopted by the assessee deviated from the AS-7 guidelines. I have perused the AS-7 guidelines. Construction contracts are fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with him. Let me assume for a minute that the assessee relied on the sales realisation to determine the extent of completion of work. As observed by me earlier the total value of the sales as per agreements was Rs. 36.19 crores and the assessee received Rs. 33.79 crores till the end of the accounting year. The accounting standard itself stipulates that as a measure of prudence revenue is recognised on realisation. Therefore, there is nothing wrong in relying on the realisation of sales by the assessee. Accounting Standard further stipulates that stage of completion should be measured in an appropriate manner. Accounting standard did not define 'appropriate manner' but suggested that no special weightage should be given to a single factor and while evaluating the stage of completion all factors should be taken into account. As observed by me earlier AO accepted the percentage of work completed in the assessment order at 89 per cent. The assessee produced the architect's certificate before the AO, wherein the extent of work competed was certified. In my opinion, the method of accounting adopted by the assessee for recognition of revenue is in accordance with AS-7. 19. The assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing followed by the assessee is an approved method of accounting. The decision of the apex Court in the case of British Paints (supra) comes into play only in a case where a plea of the assessee is accepted in contravention of law or an incorrect method of accounting followed by the assessee was accepted from year to year. As rightly submitted by the learned counsel, appearing on behalf of the assessee, in the case of British Paints (supra) overheads which ought to have been taken into account to arrive at the correct cost of raw materials was not taken into consideration by the assessee but at the same time pleaded that the method has been consistently followed and hence the same deserves to be accepted. Since the said method, in the opinion of the apex Court, do not reflect the true and correct profits and was not a well recognized method of accounting, the Hon'ble Court observed that rule of consistency or res judicata do not come into play when the method followed by the assessee is contrary to law. However, in the instant case, there is no such finding either by the AO or by the learned CIT(A); AO has not rejected the book results by pointing out any defect in the books mainta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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