9911796707
TMI Blog2010 (10) TMI 707X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. The facts involved in both the years are common, therefore, grounds in respect to additions deleted on account of valuation of closing stock are disposed of together. 6. Briefly stated the facts in this case are that the assessee is a partnership firm comprising of four partners. The appellant is engaged in the business of construction and development of properties, flats, shops etc. The appellant has been engaged in the development of project consisting of three buildings namely Gokul Nagari-I, Gokul Nagari-II and Gokul Concord. The assessee filed the return of income declaring loss of Rs. 2,72,18,140 for asst. yr. 1998-99 and AO completed assessment under s. 143(3) determining total income at Rs. 1,44,41,090. In fact the assessee is a builder and the closing work-in-progress/sales was valued by the assessee at Rs. 901.58 per sq. ft., which was the average rate realised for all the years including current year. The AO adopted Rs. 1,023 per sq. ft., which was the current year's rate of realisation and gave a concession of Rs. 23 per sq. ft., in respect of flats sold in earlier years and valued the work-in-progress/sales at Rs. 1,000 per sq. ft. 6.1 Before the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f determining percentage of completion recognises the following:- (a) The extent of work completed on the project from year to year is as certified by the architect. (b) Every year, the sale value of the work completed is estimated based on the rates actually realised. (c) Average of (a) and (b) above gives a more realistic value of extent of project completion. (d) All expenses incurred on the project are plotted against the work-in-progress to give true and fair results of the year." 6.2 The assessee before the AO explained the accounting procedure it has adopted for arriving at loss of Rs. 2,74,05,097. According to the assessee, opening work-in-progress on 1st April, 1997 was Rs. 28,83,00,000 and to this, the expenses incurred during the year amounting to Rs. 11,79,98,267 were added. Thus, the total expenditure on the project were Rs. 40,62,98,268. The assessee determined the revenues from the project in the form of closing work-in-progress at Rs. 37,87,00,000. There was other income to the extent of Rs. 1,93,171. The assessee finally arrived at a loss of Rs. 2.74 crores. In the opinion of AC, the assessee has taken into account the factor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ected the contemporaneous market trend which was an indicator of value of work-in-progress. (iv) The assessee gave more weightage to historical cost taking the average of 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 based on sales realisation upto date. (v) The method adopted by the assessee did not reflect the correct position of profit and the percentage of profit shown by the assessee on the entire project upto asst. yr. 2000-01 was 2.1 per cent. AO furnished the rates at which work-in-progress was valued and the profits reflected by the assessee from year to year which were as under:- Asst yr. Work-in-progress (crores) Rate Profit (crores) Work-in-progress Percentage of completion 1996-97 12.09 749 55% 1.13 1997-98 28.83 Not known 74% 0.92 1998-99 37.87 901.58 89% Loss 2.72 1999-2000 41.52 935 94% Loss 4.08 2000-01 49.24 (completed) 100% 5.81 6.4 However, as stated above, the AO did not accept the claim of the assessee and by adopting a rate of Rs. 1,000 per sq. ft. he valued the work-in-progres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rage of progress payments and work completed is taken to determine the extent of work completion. (ii) No. Average of percentage of work completed (as certified by the architect) and percentage of sales effected on the project are considered for determining the extent of project completion. (iii) Further the estimated sale value is also loaded with the factor of percentage of sales effected and realisation thereon which deviates from AS-7 guidelines. (iii) Factually incorrect. The estimated sale value of the entire project is then loaded with the extent of the project completed. (iv) It is seen that by this method the assessee does not even reflect the cost of construction in the work-in-progress. (iv) Factually incorrect. The cost of construction is extensively considered and reflected in the percentage of work completed at the end of the year which is certified by architect. Even the AS-7 guidelines also say that project completion should not be based on just the sales effected/realised but on all other relevant factors. Here the project completion is reckoned on the basis of work actually completed and the sales effected on the project by averaging the two. (iii) AO has no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by adopting their peculiar method has not even acknowledged any value addition to the work-in-progress in consonance to the amount expended during the year. (ii) These are adequately factored in when the extent of work completed is considered and the same is certified by the architects. After considering this, the WIP as arrived at is matched with the expenses incurred during the year and the resultant figure is the profit/loss for the year. This remark shows poor appreciation of the method of accounting followed by the appellant. (iii) The current rates of realisation reflect contemporaneous market trends which is also an indicator of value of work-in-progress. The current rates of realisation are already considered by assessee but when only a handful of flats are sold at current rates against more than 80% sold in earlier years, it is illegal to force the assessee to adopt current rate against the average rate adopted by the assessee. (iv) Assessee has given more weightage to historical cost taking the average of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cord, the CIT(A) was satisfied with the explanation filed on behalf of the assessee. Thereafter, discussing the issue in detail, including the objections raised by the AO, the CIT(A) found that the AO was not justified in not accepting the claim of the assessee. Accordingly, he deleted the addition made on account of work-in-progress. 7. The learned Departmental Representative, who appeared before the Tribunal placed reliance on the order of the AO and on the other hand, the learned counsel of the assessee placed reliance on the order of the CIT(A). It was further submitted that on the basis of percentage of completion of contract method, the assessee has filed its return for subsequent year and the same has been accepted by the Department also. In earlier year, the return of income on the same method has been accepted by the Department. Therefore, it was submitted that the CIT(A) was justified in allowing the claim of the assessee. 8. We have heard rival submissions and considered them carefully. After considering the orders of the authorities below, we do not see any reason to interfere with the findings of the learned CIT(A). The findings of the learned CIT(A) ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the project is 4,72,010 sq. ft. and the assessee multiplied the average rate with the total area of the project and arrived at the total estimated sales of Rs. 42,55,55,767 (4,72,010 x 901.58). After arriving at the total estimated sales on 31st March, 1998 at Rs. 42.55 crores, the assessee estimated 89 per cent of the total estimated sales as the sales for the previous year ended 31st March, 1998 which works out to Rs. 37,87,44,633 and the assessee has rounded off to Rs. 37,87,00,000. This was the value which the assessee reflected as closing stock in the P and L a/c. In my opinion, the value of closing stock is nothing but the revenue which the assessee has recognised on the area sold till the end of the accounting year. The AO estimated the revenues or closing work-in-progress at Rs. 1,000 per sq. ft. as against Rs. 901.58 per sq. ft. adopted by the assessee. The exact finding of AO is reproduced as under:- 'It is seen that the average rate of sales realisation during the year is Rs. 1,023 per sq. ft. However, considering the assessee's argument that all the buildings including the completed one comprise one project a certain weightage is allowed for rates at which flats ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one comprising of three buildings. The AO accepted the fact that 85 per cent of the sales were made till the end of the accounting year. The percentage of sale has not been disputed. When the sales were made in the past to the extent of 80 per cent, the rates prevailing in the past have to be considered and AO cannot estimate the sales made in the past with the current year rate. (13) The next finding of the AO is that the work-in-progress did not reflect the expenses incurred during the year by way of purchases, direct and indirect expenses or value addition to the work-in-progress. There is no doubt that the nomenclature adopted by the assessee has caused confusion. At one place the assessee says it is the estimated sales value and at another place the appellant says it as closing work-in-progress. In the P and L a/c the total expenditure accounted by the assessee was Rs. 40.62 crores including the current year expenditure. On the credit side the assessee recognized the revenue to the extent of Rs. 37.87 crores by following the AS-7. In my opinion, the name given by the assessee is immaterial and in substance the revenue recognized by the assessee in the form of work-in- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of accounting for contracts for recognition of revenue:- (i) the percentage of completion method, (ii) the completed contract method. In the present case, the appellant followed percentage of completion method. The broad features of percentage of completion method are:- (i) revenue is recognised based on the stage of completion reached, (ii) costs incurred in reaching the stage of completion or matched or compared with the revenue, (iii) reporting of results which can be attributed to the proportion of work, completed, (iv) based on the principle of prudence, the revenue is recognised on realisation, (v) the stage of completion is measured in an appropriate manner. No weightage should be given to a single factor, instead all relevant factors should be considered, (vi) while recognising the profit, under this method, an appropriate allowance for future unforeseeable factors which may effect the ultimate quantum of profit is generally made on either a specific or a percentage basis, (vii) under both the methods provision is made for losses for the stage of completion reached on the contract. (17) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (20) During the current previous year not a significant number of flats were sold by the assessee. 80 per cent of the project area was sold in earlier years. It is not justifiable to estimate the sales or closing work-in-progress at a higher rate prevailing at the end of the current year in respect of sales which were made in the earlier years. The AO did not point out any defects in the books of account and the assessee followed the method of accounting regularly. The method of accounting followed by the assessee is in consonance with the AS-7. AO was of the opinion that the profit rate reflected by the assessee at the end of the project was low. The assessee explained the reasons for loss and low profitability before AO. The assessee submitted that rate realised was very poor and the real estate business was in depression. The assessee explained before me that it had to incur substantial expenses in providing various amenities and facilities which were unforeseen. In my opinion, AO cannot adopt the rate of Rs. 1,000 per sq. ft. in respect of flats which were sold at lower rates in preceding years. AO accepted that weightage has to be given for the past sales. In my opinion, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f fact, particularly in the case of a reversing decision, to meet the reasoning of the Trial Court and indicate its own reasons for the conclusions reached." 10.2 The Hon'ble Supreme Court in the case of State of West Bengal vs. Atul Krishna Shaw AIR 1990 SC 2205 has held that:- "On top of all, the appellate authority being final authority on facts is enjoined and enactments upon it to appreciate the evidence, consider the reasoning of the primary authority and assign its own reasons as to why it disagrees with the reasons and findings of the primary authority. Unless adequate reasons are given, merely because it is an appellate authority, it cannot brush aside the reasoning or findings recorded by the primary authority." 10.3 The AO, in the present case applied the rate for the purpose of valuing the closing stock of work-in-progress on the basis of current rate only whereas the assessee applied the rate on the basis of percentage of completion of contract method adopted consistently. The CIT(A) has given detailed reasoning that how the order of the AO is not correct. 11. In the present case, the learned Departmental Representative has not made out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erial, ad hoc addition made by the AO was also not justified. 15.3 After considering the submissions, the CIT(A) was satisfied with the explanation filed on behalf of the assessee. Accordingly, he deleted the addition. 16. The learned Departmental Representative simply placed reliance on the order of the AO and on the other hand, the learned counsel of the assessee placed reliance on the order of the CIT(A). 17. After considering the submissions and the orders of the authorities below, again we do not find any infirmity in the findings of the learned CIT(A). The findings of the learned CIT(A) are given in para 25 of his order which are as under:- "25. I have considered the submissions of the learned counsel and perused the file. AO has relied on the assessment order for asst. yr. 1996-97 and did not bring any material on record to prove that the assessee sold the flats at a price higher than the price recorded in the books of account. The assessee contended that the addition in asst. yr. 1996-97 was accepted in protest and I find this finding in the assessment order in asst. yr. 1996-97. The assessee submitted before AO that flats were sold at a disc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stock of work-in-progress. As noted in para 10.3 of the proposed order, the assessee has valued the closing stock at historical costs whereas the AO valued the same at current rates and thereby made the impugned additions. The assessee seeks to justify its valuation of closing stock on the ground that the assessee had been valuing the stock on the same principle as in the past and hence the AO, according to the assessee, was not justified in disturbing the same. 3. The method of valuation of stock held as goods-in-process or work-in-progress is now authoritatively established by the judgment in CIT vs. Britsh Paints India Ltd. (supra). In the said case, the assessee-company was engaged in the business of manufacture and sale of paints and had valued the goods-in-process as also the finished products at the cost of raw materials only, which, according to the assessee, formed 84.49 per cent. In support of valuation, the assessee had contended that the paints had a limited storage life and if they were not sold within a certain period, they lost their market value. It was also contended that the same practice had been uniformly followed. The AO, however, valued stocks of good ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sistently been following the present method of stock valuation, is of no help to the assessee unless the method of stock valuation so followed by the assessee is in conformity with the principles laid down in the aforesaid judgment. As held by the Hon'ble Supreme Court in the aforesaid judgment, it is incorrect to say that the AO is bound to accept the system of accounting regularly employed by the assessee the correctness of which had not been questioned in the past and that there is no estoppel in these matters and the officer is not bound by the method followed in the earlier years. In the absence of any finding by the learned CIT(A) that the stock valuation done by the assessee or by the AO is in conformity with the principles laid down in the said judgment, it is not possible to pronounce a judgment on the correctness of the stock valuation done by the AO. Besides, the assessee has not filed a copy of the tax audit report before us. The tax audit report is relevant in as much as it contains all relevant details regarding stock valuation. There is no reference to the tax audit report in the order of the AO or the learned CIT(A). Tax audit report is useful in finding out the bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ell as short-term capital loss of Rs. 2,20,736) respectively. Assessments were taken up for scrutiny and during the course of examination of the books of account it was noticed that there was undervaluation of closing stock; the assessee valued the closing stock at historical cost whereas the AO has valued the same at current rates. Closing work-in-progress/sales was valued by the assessee at Rs. 901.58 per sq. ft. which was the average rate realised for all the years including the previous year relevant to the asst. yr. 1998-99. The AO however adopted Rs. 1,023 per sq. ft. which was the current year rate of realisation and after reducing Rs. 23 per sq. ft. he valued work-in-progress/sales at Rs. 1,000 per sq. ft. Similarly in the assessment for the asst. yr. 1999-2000 average rate at Rs. 1,289 was shown by the assessee whereas the AO considered average rate at Rs. 1,200 per sq. ft. and reworked out the closing work-in-progress accordingly. 3. On an appeal filed by the assessee learned CIT(A) considered the facts in great detail to arrive at the conclusion that the method of accounting followed by the assessee i.e., percentage completion method, is in consonance with the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT(A), wherein it was explained that the method of accounting followed by the assessee was an approved method of accounting and had been consistently followed and accepted by the AO from year to year. It was also submitted that the book results were not rejected by the AO and it is not the case of the AO that the guidelines issued by the ICAI under AS-7 were deviated by the assessee. It was also highlighted that the method of valuing work-in-progress was as per the guidelines issued by the Institute which are mandatory for determining true, fair and correct profits in a construction contract and thus merely because in one year it resulted in loss the same cannot be rejected without any basis particularly when the books maintained by the assessee were subjected to tax audit. 6. The matter was heard on 2nd April, 2008 on which date the Division Bench appears to have not asked any specific question concerning the correctness of the books of accounts maintained or the need to verify the tax audit report. Upon hearing the arguments, the case was taken up by the learned JM for passing an order and accordingly by May 2008 a draft was placed before the Hon'ble AM. Since the Hon'ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... port after long lapse of time reckoned from the date of hearing of the appeal. 9. Learned Departmental Representative on the other hand submitted that files could not be traced and being an old matter it would be difficult to make a comment as to what exactly transpired on the date of hearing of the appeal. At this juncture, the Authorised Representative submitted that he is not interested in pursuing his objection on the above issue and proceeded to argue the matter on merits. It was submitted that construction activity commenced in 1996-97 and assessee consistently followed the percentage completion method and as per the agreement/ norms no revenue is recognized until the project is completed to the extent of 30 per cent and thereafter revenue is recognized but the work-in-progress is computed as per the norms prescribed under AS-7 and the same was accepted by the tax authorities from year to year. In fact, on the same basis the assessee filed a return declaring Rs. 5 crores of profit for the asst. yr. 2000-01 and the same has been accepted by the Department which clearly shows that there was no dispute with regard to method of accounting consistently followed by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecognition of revenue:- (i) the percentage of completion method, (ii) the complete contract method. In the present case, the appellant followed percentage of completion method. The broad features of percentage of completion method are:- (i) revenue is recognised based on the stage of completion reached, (ii) costs incurred in reaching the stage of completion or matched or compared with the revenue, (iii) reporting of results which can be attributed to the proportion of work completed, (iv) based on the principle of prudence, the revenue is recognised on realisation, (v) the stage of completion is measured in an appropriate manner. No weightage should be given to a single factor, instead all relevant factors should be considered, (vi) while recognising the profit under this method, an appropriate allowance for future unforeseeable factors which may effect the ultimate quantum of profit is generally made on either a specific or a percentage basis, (vii) under both the methods provision is made for losses for the stage of completion reached on the contract. 17. The AO has not considered the AS-7 in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n behalf of the assessee, has also relied upon several case law in support of his contention that the decision of the apex Court in the case of British Paints (supra) is applicable only in a case where the method followed is not a standard method of accounting. In other words, when an approved method of accounting is followed by the assessee, in the absence of any doubts raised by the AO with regard to correctness of the books maintained by the assessee, principle of consistency has to be adopted. He has also referred to AS-7 to highlight that the assessee has not deviated from the method prescribed by the Institute in valuing the closing work-in-progress. He thus, submitted that the order passed by the learned JM is in accordance with law and the learned AM was not justified in raising new issues while passing a dissenting order, particularly when the same were not called upon at the stage of hearing the appeal. 12. Despite detailed submissions of the learned counsel, appearing on behalf of the assessee, learned Departmental Representative merely relied upon the order of the learned AM and did not challenge specific pleas urged by the learned Authorised Representative appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T(A) has discussed the issue elaborately and met each point of dispute raised by the AO to highlight that there is no merit in the conclusion reached by the AO. In fact, learned JM has extracted the operative portion of the order of the learned CIT(A) from paras 7 to 20 wherein learned CIT(A) not only analysed each issue raised by the AO but also supported the conclusions drawn by him while holding that assessee has adopted correct method of accounting and the same was followed consistently. In addition to that, learned JM had highlighted that the project was ultimately completed in the previous year relevant to the asst. yr. 2000-01 wherein the assessee declared income of Rs. 5 crores plus and the same has been accepted by the Department which has attained finality, in the absence of any proceedings initiated under s. 263 or otherwise. Neither the learned AM controverted the findings of the CIT(A) or the learned JM nor the learned Departmental Representative sought to controvert the findings of the learned CIT(A) and learned JM. 14. It is also not out of place to mention that with regard to deletion of addition of Rs. 2,70,230 (vide ground No. 2 in asst. yr. 1998-99) thoug ..... X X X X Extracts X X X X X X X X Extracts X X X X
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