TMI Blog2012 (6) TMI 241X X X X Extracts X X X X X X X X Extracts X X X X ..... on of project when the amount received in advance has not reached certainty and that too the AO has merely estimated 10% as the recognition of Revenue of the construction contract, without assigning any specific basis of such an estimation. Thus, percentage completion method could not be applied. Deletion of addition upheld - Decided in favor of assessee. - IT APPEAL NOS. 879 AND 3535 (AHD.) OF 2008 - - - Dated:- 31-5-2012 - MUKUL Kr. SHRAWAT, A. MOHAN ALANKAMONY, JJ. ORDER Mukul Kr. Shrawat, Judicial Member These two appeals have been filed by the Revenue arising form the order(s) of CIT(A)-II, Baroda for A.Ys. 2004-05 2005-06 respectively dated 3.12.2007 and 13.8.2008. For both the years, Revenue has raised number of grounds, however, those are argumentative in nature. We have been informed that through ground No.1, the main issue has been raised, identically worded for both the years except change in the quantum addition, reproduced below from A.Y.2004-05, the lead assessment year under consideration:- 1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs.22,10,000/-(Rs.17,48,400/- for A.Y. 2005- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ujarat State Road Transport Corporation (in short GSRTC) for the development of Vaahan Vyavahaar Sankul and also a commercial complex at Halol, Kapadvanj and Deesa (Gujarat). As per the terms of the said agreement, the land was the property of the Corporation. The Developer had only right to make construction on the land. As per the agreement, after the completion of the construction, the same was to be transferred to GSRTC by the said Developer. Thereafter, GSRTC is entitled to transfer the commercial complex on lease for 90 days by allotting the same to different users or companies as per the terms and conditions. The Developer, in turn, was stated to be entitled to receive the amount in respect of the area which was constructed by it, but not entitled to sell the unit. In respect of each project, the assessee has informed that the completion was made in the following manner. " The completion certificate was obtained in case of (1) Halol 15-03-2005 (2) Kapadvanj 10-08-2004 (3) Deesa 31-12-2004" 2.2 The AO's allegation was that the assessee had entered into an agreement with GSRTC for the development ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and Supreme Court have laid down the principle that the income has to be computed and taxed in each year without waiting for the completion of the project. In the following decisions, the principle that the income has to be computed and taxed each year without waiting for the completion of project was recognized. ** ** ** From the above, it is very clear that, irrespective of the year of completion of project, income has to be worked out in each year depending on the receipts, expenses, work-in-progress and stock-in-trade. Further, it is well settled that each year is a separate year under the I.T. Act the profit of one year cannot be shifted to another year. In view of the above, it is clear that profit has to be computed on percentage completion method. Almost entire construction work has been completed by the assessee, as the completion certificate has been issued in the next year, therefore, it is treated that construction work was mostly completed. However, in absence of exact allocation of expenditure and percentage of completion of the said project in respect of which the W.I.P. has been shown, the addition is made @ 10% of the addit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the appellant establishes that eh leases were not approved till the end of accounting year and as such, part money received from lessees were shown as advance. In short, the sales did not materialize till the end of this year and therefore the stock was valued at cost. The entire addition made by the Assessing Officer is based on assumption that revised AS-7 applicable for contractors applies to the appellant. I have gone through the revised AS-7 issued by ICAI and I found that the same doesn't apply to the builders or developers. In fact, in the question-answer on accounting standards released by ICAI, it is mentioned that revised AS-7 applies to contractors and not to the enterprises that are constructing properties on their own. Therefore, revenue recognition and valuation of inventories should be in accordance with AS-9 and AS-2 respectively. The revenue should be recognized in accordance with AS-9 when each unit is sold. Considering this the appellant who is clearly a builder/developer is not subjected to AS-7 and accordingly the revenue has to be recognized on sale of unit and not on the valuation of work-in-progress which is supposed to be at cost. The decisions relied up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n in respect of the construction of Syndicate Bank, wherein the assessee was awarded the work and during the year under consideration no profit was recognized. He has informed that in the case of Kishandham Developers Pvt. Ltd. v. ACIT the ITAT Bench "C" Ahmedabad in ITA Nos.3754, 3755/Ahd/2008(Assessee's appeals) 3778/Ahd/2008 (Revenue's appeal) for AYs 1998-99, 2005-06 2005-06 respectively vide order dated 28/02/2011 has also canvassed that the year of closure of the project is not to be changed by the Revenue Department and the preponement of the contract and treating that the work-in-progress has completed in a particular year was unjustified having considered the material facts of each case. He has also referred to Awadesh Builders 37 SOT 122 (Mum.) for the legal proposition that a case of a contractor is different from that of a real estate developer. In the case of a real estate developer, the profit can be earned only when the space so constructed is sold. In respect of the case law cited by ld. DR of Bilhari Investment Pvt. Ltd. ( supra ), ld. AR has commented that the issue before the Hon'ble Supreme Court was in respect of AS-22. Even in that case, the method of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the accounting periods in which construction is performed. This Statement uses the recognition criteria established in the Framework for the Preparation ad Presentation of Financial Statements to determine when contract revenue and contract costs should be recognized as revenue and expenses in the statement of profit and loss. It also provides practical guidance on the application of these criteria." The definition of a "construction contract" is a contract specifically negotiated for 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. Whereas a "cost plus contract" is a construction contract in which the contractor is reimbursed for allowable or otherwise defined costs, plus percentage of these costs or a fixed fee. In the present case, the assessee had entered into an agreement with GSRTC for the development of a shopping complex. The assessee as a developer has been allowed to find intending allottees and to collect sale consideration from such lessees. However, a significant clause was that the intending lessees could become allottees only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be constructed; ( b ) the consideration to be exchanged; and ( c ) the manner and terms of settlement" We may also like to reproduce para-29 through which stage of completion of a contract can be determined. "29. The stage of completion of a contract may be determined in a variety of ways. The enterprise uses the method that measures reliably the work performed. Depending on the nature of the contract, the methods may include: ( a ) the proportion that contract costs incurred for work performed upto the reporting date bear to the estimated total contract costs; or ( b ) surveys of work performed; or ( c ) completion of a physical proportion of the contract work. Progress payments and advances received from customers may not necessarily reflect the work performed." 6.2 At this stage, let us pause for a moment, so that we can appreciate that AS-7 has also made a provision that advances received from customers may not necessarily reflect the work performed. Even otherwise, during the early stages of a contract, it is often the case, that the outcome of a contract cannot be estimated reliably. Therefore, as the outcome of the contract at that stage cannot b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch recognizes Revenue in the statement of P L account only when the rendering of service under a contract has substantially completed. Right now we are not concerned with the recognition of Revenue on the sale of goods as prescribed in AS-9. We can confine our discussion in respect of recognition of Revenue emerging from rendering of services. Revenue from service transactions is usually recognised as the services performed. As per AS-9, Revenue can be recognised (i) either by the proportionate complete method or (ii) by the completed service contract method. The completed service contract method is defined vide para-7, (7.1) (ii) as follows:- "( ii ) Completed service contract method - Performance consists of the execution of a single act. Alternatively, services are performed in more than a single act, and the services yet to be performed are so significant in relation to the transaction taken as a whole that performance cannot be deemed to have been completed until the execution of those acts. The completed service contract method is relevant to these patterns of performance and accordingly revenue is recognized when the sole or final act takes place and the service becomes ch ..... X X X X Extracts X X X X X X X X Extracts X X X X
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