TMI Blog2015 (8) TMI 555X X X X Extracts X X X X X X X X Extracts X X X X ..... the A.Y. 2004-05 and since there is no loss to the revenue the order of the CIT(A) should be upheld. Here, in the instant case the question is not relating to loss to the Revenue. It relates to the taxability of the income in a particular year. In the instant case the assessee follows mercantile system of accounting, has debited all the expenditure to the profit and loss account during the impugned assessment year, has valued the WIP at a particular figure, got its accounts audited and filed the return of income belatedly. Having done so the question that arises is whether the assessee be allowed to value the WIP at a reduced figure merely on receipt basis. The answer in our opinion in the facts of the present case is negative, i.e. in favour of the Revenue and against the assessee. So far as the various decisions relied on by the Ld. Counsel for the assessee are concerned we find the same are not applicable to the facts of the present case. In the instant case the assessee initially raised the bill on the Government department which has not been disputed by the department. The assessee has categorically submitted before the CIT(A) that the departmental engineer endorsed on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee at ₹ 22,28,630/-. The assessee filed a revised return of income on 20-01-2003 declaring a loss of ₹ 2,63,95,650/- which was erroneously processed u/s.143(1) of the Act on the same day determining a refund of ₹ 21,77,337/-. No notice u/s.143(2) (ii) of the Act was issued on the basis of the first return filed on 20-02-2002. However, on the basis of the revised return filed on 20-01-2003 a notice u/s.143(2)(ii) of the Act was issued on 27-05-2003 which was served on the assessee on 28-05-2003. The Assessing Officer later moved a petition u/s.263 of the Act to the CIT who vide order passed u/s.263 of the Act dated 26-08-2003 held that the second return furnished on 20-01-2003 was not a valid return and cancelled the second intimation dated 20-01-2003. Accordingly, the CIT cancelled the notice served on 28-05-2003 issued u/s.143(2)(ii) of the I.T. Act thus confirming the first intimation dated 15-06-2003 a final. 3. Subsequently, the assessee moved a petition u/s.264 of the I.T. Act on 03-09-2003 before the CIT, Aurangabad wherein the assessee sought revision of intimation dated 15-06-2002. It was submitted that as per the accounting policy consistentl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer may issue a notice u/s. 143(2)(ii) of the Act, and thereafter he may take a regular assessment . 6. Based on the directions of the CIT the Assessing Officer proceeded to make fresh assessment in respect of A.Yrs. 2001-02 to 2003-04. The main issue involved was the time and valuation of work-in-progress as on 31-03-2001 at ₹ 3 crores or at ₹ 4.94 crores. During the course of assessment proceedings it was contended by the assessee that the WIP should be taken at ₹ 3 crores and not ₹ 4.94 crores. To substantiate his claim the assessee filed the following submissions which has been summarised by the CIT(A) at para 7 of her order which reads as under : The main issue was regarding valuation of work in progress as on 31-03-2001. The assessee was awarded the contract work of Ghatprabha Medium Project at Phatlakwad, Tq: Chandgad, Dist. Kolhapur in the year 1997. Since the work is of long term, the same is being carried on continuously. The method of accounting of the assessee is to recognise the revenue only on final passing of running bill by the concerned department. Every running payment is evaluated by the Engineer or Surveyor of the Departmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i) The work in progress both certified and uncertified are part of work in progress. Without prejudice to this fact, in assessee s case entire work was certified: In case of the assessee, the R.A. Bill No.15 was duly certified and therefore, question of accounting of ₹ 3,00,00,000/- out of ₹ 5,88,69,955/-, does not arise. ii) The assessee himself has argued that assessee relied on AS- 7 and the work in progress is being valued on the basis of amount of bill payable once the departmental Engineer take measurement and valued the work which has been done in case of R.A. Bill No.15 on 31/03/2001. iii) The claim of the assessee that measurement was checked on 31/03/2001, but the papers were kept in his custody till 31/05/2002 is a statement devoid of any truth because the executive Engineer himself has clarified the position and secondly the final financial statement of the assessee are prepared after reconciliation and verification of the relevant facts and figures. iv) The accounting of ₹ 3,0,00,000/- on the basis of receipt of payment and considering the same for work in progress is not justified once the accounts are being maintained on mercantile basis. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es necessary to deal with the subject in a different manner. The basic characteristic of a construction contract necessitates a different approach as that the work under contract expands over more than one recognition period. Earlier, there were two methods for revenue recognition one is completion contract method and the other one is percentage completion method. The revised accounting standard contains only percentage completion method. In case of percentage completion method, revenue is estimated and recognized as the work progresses. The salient features of revenue recognition under this method are; i) When outcome of a contract can be reliably estimated, contract receipt and contract cost should be estimated proportionately with reference to stage of completion. ii) Cost incurred on contract to the extent they are recoverable should be treated as receipt and total contract cost should be treated as expenses. Accordingly, profit and loss upto the date of stage of contract should be accounted for. iii) If it is expected that the total contract cost will exceed total contract revenue, the expected loss should be accounted for. The estimation of profit in percentage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -- 4 12/97 7401327 7401327 51-12/99 170231 -- 5 1/98 6082393 6082393 14-1/98 139895 -- 6 3/98 12001132 12001132 6-3/98 240023 -- 7 7/98 41205968 17210000 94-7/98 344200 Due to shortage of funds part payment was made. 8 8/98 -- 6000000 67-8/98 120000 Withheld amount released 9 10/98 -- 17995968 50-10/98 359920 -do- 10 5/99 34259443 20000000 79-5/99 400000 -- 11 6/99 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cutive Engineer in the A.Y. 2004-05. It was submitted that the AO decided the issue against the assessee entirely relying on one sided evidence of letter of Executive Engineer, MP Division, Kolhapur. He has disbelieved the version of the assessee without any reason. Referring to the Accounting Standard-7 which deals with valuation of WIP in construction contract it was submitted that a reliable estimate of total contract is first step towards estimation of income from year to year under the method of percentage completion method. It was submitted that in assessee s own case at every stage running bills are raised by the assessee depending on the various factors of contractual agreement, work completed by the contractor which is examined by and certified by the Department and so on. 9. It was argued that although Bill No.15 was submitted but no sanction was made upto 31-05-2002 and that the WIP was valued on the basis of the bill. It was submitted that the contractor is not aware at the time of closing of books as to how much amount of bill is going to be admitted for payment. The audit was completed showing WIP of ₹ 4,94,00,000/-. The department has sanctioned the bill fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P of ₹ 4.28 crores to be taken for A.Y. 2004-05 and not in A.Yrs. 2001-02 to 2003-04. While doing so, she further noted that the letter received from the Executive Engineer, Medium Project No.2, Kolhapur reveals that whenever the payments have been made due to shortage of funds it has been mentioned in the letter itself. However, as far as the Bill No.15A is concerned, i.e. which was submitted by the assessee for claim of ₹ 5,88,68,955/- but was sanctioned only for ₹ 3 crores nothing has been mentioned in the remarks column. It is only against Column No.15B it was written that withheld amount realised. Therefore, she held that it cannot be said that the amount of ₹ 2.88 crores was withheld on account of shortage of funds. The Executive Engineer, has not categorically stated in respect of Bill No.15A that the part payment in respect of Bill No. 15A has been made because of shortage of funds. He has simply mentioned that sometimes the payments are withheld due to shortage of funds. Therefore, it does not mean that the part payment in respect of Bill No.15 has been made due to shortage of funds. She accordingly held that the amount of ₹ 2.88 crores was wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f accounting followed by him consistently, i.e. valuation of stock at cost or market value whichever is less. 17. Aggrieved with such order of the CIT(A) the Revenue is in appeal before us with the following grounds : Grounds in ITA No.169/PN/2006 : i. On the facts and in the circumstances of the case, the CIT(A) has erred in directing to take WIP for A.Y. 2001-02 at ₹ 3 Crs and not ₹ 4.94 for Ghatprabha Project as adopted by the AO. ii. On the facts and in the circumstances of the case, the CIT(A) has further erred in arriving at the decision that for A.Y. 2001-02 correct value of WIP is ₹ 3 Crs and not ₹ 4.94 Crs for Ghatprabha Project. iii. On the facts and in the circumstances of the case, the CIT(A) has further erred in holding that entire WIP of ₹ 4.28 Crs has to be taken for A.Y. 2004-05 and not in 2001-02, 2002-03 and 2003-04. iv. On the facts and in the circumstances of the case that the assessee firm has filed return of income for A.Y. 2001-02 belated showing income at ₹ 94,56,820/- on 26-02-2002, which was processed u/s. 143(1) on 15-06-2002. Thereafter, a revised return of income for A.Y. 2001-02 was filed on 20-0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rroneous and prejudicial to the interests of revenue. The setting aside of the notice served under section 143(2) is beyond the purview of section 263 of the Act. 4. On the facts and circumstances of the case and in law the assessment is also barred by limitation in view of the provisions of section 153(1)(a) since the assessment was not completed within two years from the end of the assessment year, that is before 31-03- 2004, considering the fact that the Ld. CIT Aurangabad had cancelled all the proceedings including intimation under 143(1)(a) of the Act. The invalid assessment therefore, be quashed. 5. The facts and circumstances of the case and in law and since the action under section 263 and u/s. 264 were initiated prior to completion of assessment under section 143(3) and there was no order available under section 263/264 setting aside the same the provisions of S.153 (2A) also become inapplicable. The only legal alternative would be the illegal assessment will have to be quashed and it be quashed accordingly. 6. On the facts and circumstances of the case and in law the Cross objections raised are delayed in view of sub-section (4) of Section 253 of the Act. The Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of contractor carrying out a Government contract and regularly following mercantile system of accounting, the income accrues only when the bills are admitted by the contractee and not when the bills are raised. He submitted that in the said decision the Hon ble High Court referred to the decision of the Hon ble Bombay High Court in the case of Vishnu Agencies Pvt. Ltd. Vs. CIT reported in 48 ITR 444 (Bom.). He submitted that in the said decision the Hon ble High Court has held that the income accrued at the time when the bills were accepted and its accrual had no reference to the time when it would be actually received. The mere assertion of a claim on the part of the Government for damages for breach of contract was not sufficient to make the claim enforceable one or to affect the accrual of the income to the assessee. He submitted that the Hon ble Patna High Court in the said decision has also referred to the decision of the Hon ble Bombay High Court in the case of CIT Vs. ACC reported in 48 ITR 1 wherein it has been held that the presentation of the bills by the assessee was only a claim by the assessee and unless the claim is admitted and accepted by the Government department ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the order passed u/s.264 set aside the intimations issued u/s.143(1)(a) on 15-06-2002 and 20-01-2003 and directed the Assessing Officer to make fresh assessment denovo right from the stage of furnishing the return. Similarly the intimation for A.Y. 2002-03 passed u/s.143(1)(a) was also set aside with a direction to the Assessing Officer to make fresh assessment denovo. For A.Y. 2003-04 the Ld.CIT directed the Assessing Officer to issue notice u/s.143(2)(ii) and thereafter make a regular assessment. 22. Subsequently, the Assessing Officer passed the order u/s.143(3) r.w.s.263/264 of the I.T. Act on 31-03-2005 for the A.Y. 2001-02 wherein he rejected the claim of the assessee that the WIP of the Ghatprabha project be ₹ 3 crores as per the revised return as against ₹ 4.94 crores in the original return of income. We find the Ld.CIT(A) allowed the claim of the assessee holding that the correct value of WIP is ₹ 3 crores and not ₹ 4.94 crores for the Ghatprabha Project. According to her the amount of ₹ 1.94 crores has to be considered in the A.Y. 2004- 05 in which the assessee was vested with the right to receive the income. 23. It is the case of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6/97 16781049 16781049 77-6/97 247964 -- 3 10/97 5000000 5000000 57-10/97 115000 -- 4 12/97 7401327 7401327 51-12/99 170231 -- 5 1/98 6082393 6082393 14-1/98 139895 -- 6 3/98 12001132 12001132 6-3/98 240023 -- 7 7/98 41205968 17210000 94-7/98 344200 Due to shortage of funds part payment was made. 8 8/98 -- 6000000 67-8/98 120000 Withheld amount released 9 10/98 -- 17995968 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Dn.No.2, Kolhapur 25. From the above, it is clear that the bill raised by the assessee has been accepted by the department and for whatever reason an amount of ₹ 2.88 crores was not paid during F.Y. 2001-02 but the fact remains that there is no such dispute as claimed by the assessee. No documentary evidence/correspondence has been filed by the assessee during assessment proceedings or appeal proceedings or even before us to substantiate the contention that some dispute was going on between the assessee and department. It is also to be noted that the assessee has not incurred any further expenditure in subsequent years for receipt of the above amount. We do not find merit in the submission of the Ld. Counsel for the assessee that since the assessee has offered the income in the A.Y. 2004-05 and since there is no loss to the revenue the order of the CIT(A) should be upheld. Here, in the instant case the question is not relating to loss to the Revenue. It relates to the taxability of the income in a particular year. In the instant case the assessee follows mercantile system of accounting, has debited all the expenditure to the profit and loss account during the impugned a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts of the present case. Since the assessee is following mercantile system of accounting and since the assessee himself has shown in the belated original return of income the figure of WIP as per the bills raised by it on the Government department and since the assessee has not incurred any further expenditure on such amount received in subsequent year, therefore, the order of the CIT(A) reducing the WIP from ₹ 4.94 crores to ₹ 3 crores for A.Y. 2001-02 in our opinion cannot be accepted. Merely because assessee has offered the same to tax in A.Y. 2004-05 cannot be a ground to reduce the correct WIP from ₹ 4.94 crores to ₹ 3 crores. We accordingly set aside the order of the CIT(A) and the grounds raised by the revenue are allowed. For the reasons given above, the grounds raised by the Revenue for A.Y. 2002-03 and 2003-04 are also allowed. 28. Since no arguments was advanced by the Ld. Counsel for the assessee in respect of the grounds raised in the CO, therefore, the CO is dismissed as not pressed . 29. In the result, all the 3 appeals filed by the Revenue are allowed and the CO filed by the assessee is dismissed. Pronounced in the Open court ..... X X X X Extracts X X X X X X X X Extracts X X X X
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