9911796707
TMI Blog2010 (10) TMI 1106X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of rates of sales effected for assessment year 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. 5. The facts involved in both the years are common, therefore, ground 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, flat, 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 assessment year 1998-99 and Assessing Officer completed assessment under section 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 sft., which was the average rate realised for all the years including current year. The Assessing Officer adopted Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ject is 100 per cent completed, the total advances received from flat purchases are transferred to Sales Account in Profit and Loss Account." "3. The above method of 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 Assessing Officer 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 1-4-1997 was Rs. 28,83,00,000 and to this, the expenses incurred during the year amounting to Rs. 11,79,98,267 was added. Thus, the total expenditure on the project was 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rchases, 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 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 up to 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 up to assessment year 2000-01 was 2.1 per cent Assessing Officer furnished the rates at which work-in-progress was valued and the profit reflected by the assessee from year to year which were as under :- A.Y. Work-in-progress (Crores) Rate Profit (Crores) Work-in-progress (Rs.) Percentage of completion 1996-97 12.09 749 55% 1.13 1997-98 28.83 Not known 74% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k of the project as well as the value of work-in-progress 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 realisation as assumed. It is the average of percentage of work completed (as certified by the architect) and percentage of sales effected on the project. (ii) The average 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 percent-age of work completed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... realization of sales of Gokul Nagari- I & II is 100% (i) When as much as 85 per cent of the area available for sale is sold, obvious that in estimating the sales on the project, weightage be given to the sales effect in the past years, this being one project only. (ii) Expenses incurred during the year - purchase, direct expenses and indirect expenses are an indication of value addition to the work-in-progress. The assessee by adopting by 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 result-ant 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -progress for assessment year 1998-99 based on income returned for subsequent years mainly, assessment years 1999-2000 and 2000-01. Assessing Officer has not appreciated that rates of sale of flats in assessment year 1996-97 were accepted by Assessing Officer after a detailed scrutiny under section 143(3) . He finally submitted that rate reflected by the appellant at Rs. 901.58 per sft., was reasonable and the adoption Rs. 1,000 by Assessing Officer was unreasonable and without any basis. 6.5 After considering the submissions and perusing the material on record, 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 Assessing Officer, the CIT(A) found that the Assessing Officer 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 ld. DR, who appeared before the Tribunal placed reliance on the order of the Assessing Officer and on the other hand, the ld. counsel of the assessee placed reliance on the order of the CIT(A) . It was further submitted that on the basis of percentage of comple ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry as a percentage of total agreement value (Rs. 33.79 crores/36.19 crores) 93.36% (III) Percentage of work completed as on 31-3-1998 as certified by the Architect 93.33% (IV) Project completed (Average of work completed and sales) 89.15 or 89% Work Completed 93.33 Sales 85.06 178.39 178.39/2 = 89.15% 9. The assessee estimated the sales on the project as on 31-3-1998 at the average rate realised till the end of the accounting year, which works out to Rs. 901.58 per cent. The total area of the project is 4,72,010 sft. 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 31-3-1998 at Rs. 42.55 crores, the assessee estimated 89 per cent of the total estimated sales as the sales for the previous year ended 31-3-1998 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 Profit and Loss Account. In my opinion, the value of Closing Stock is nothing but the revenue which the assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ethod of adopting average rate realised from the beginning of the project and it was accepted by Assessing Officer in the assessment year 1996-97 under section 143(3) of the Income-tax Act. The average rate realised by the assessee in various years was as under : A.Y. Average Rate 1996-97 749 1997-98 861 1998-99 902 1999-2000 928 2000-01 Project completed 12. Assessing Officer was of the opinion that weightage given to the past sales was greater considering the fact that completion of work and realisation of sales in Gokul Nagari-I and II was 100 per cent. The Assessing Officer accepted the fact that the project is one comprising of three buildings. The Assessing Officer 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 Assessing Officer cannot estimate the sales made in the past with the current year rate. 13. The next finding of the Assessing Officer is that the work-in-progress did not reflect the expenses incurred during the year by way of purchases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rded at the price at which transactions have taken place. The assessee has been adopting average rate for the purpose of estimation of sales and which was accepted in the past and the assessee followed the same from year to year. Historical cost is the bedrock of accountancy. 16. Assessing Officer gave another finding that the method adopted by the assessee deviated from the AS-7 guidelines. I have perused the accounting standard-7 guidelines. Construction contracts are formulated in a variety of ways but generally fall into two basic types. (i) Fixed Price Contracts - The contractor agrees to a fixed contract price or rate, in some cases subject to cost escalation clause. (ii) Cost plus contracts. In the present case it is a fixed price contract. There are two methods 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 compare ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given to a single factor and while evaluating the stage of completion all factors should be taken into account. As observed by me earlier Assessing Officer accepted the percentage of work completed in the assessment order at 89 per cent. The assessee produced the architect's certificate before the Assessing Officer, wherein, the extent of work completed was certified. In my opinion, the method of accounting adopted by the assessee for recognition of revenue is in accordance with Accounting Standared-7. 19. The assessee has been following the method of adopting average rate realised consistently from year to year and the same was accepted by Assessing Officer in earlier years. The assessee has rightly estimated the sales or closing work in progress at Rs. 901.58 per sft. 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 Assessing Officer did not point out any defects in the books of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) . 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 v. Nirmal Liquors [1991] 190 ITR 636 has held that : "The Tribunal is the final fact finding authority. It is an appellate forum on facts as well as law. In exercising its appellate power, the Tribunal is rehearing the case. At the hearing of the appeal, it is for the appellant to show that the decision appealed against is wrong. It will not be sufficient for the appellant to urge or plead that a contrary conclusion is possible on the basis of materials and circumstances disclosed in the case. The burden is on the appellant to prove that the decision appealed against is wrong. It is incumbent upon the final court of 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 v. Atul Krishna Shaw AIR 1990 SC 2205 has held that : "On top of all, the appellate authority being final authority on fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eclared 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 Assessing Officer enhanced the rate on the basis of agreed for earlier year i.e., assessment year 1996-97 and in this way, Rs. 2,70,230 was made. 15.2 Detailed submissions were filed before the CIT(A) and it was explained that there was no reason to make enhancement for the year under consideration. It was further submitted that the assessee admitted the same enhancement in rates for assessment year 1996-97 under protest and that doesn't mean that the assessee accepting the addition in all the assessment years. It was also submitted that without any material, ad hoc addition made by the Assessing Officer 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 ld. DR simply placed reliance on the order of the Assessing Officer and on the other hand, the ld. counsel of the assessee place ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessing Officer in assessment year 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 v. British Paints India Ltd. [1991] 188 ITR 44 1, I am unable to concur with the order proposed by my learned Brother confirming the order of the CIT(A) deleting the impugned additions and, therefore, I proceed to write my order separately. 2. The assessee is a partnership firm engaged in the business of construction and development of properties, viz., flats, shops, etc. The assessee follows percentage of completion method for working out its profits. The common dispute in both the appeals relates to the valuation of closing stock of work-in-progress. As noted in paragraph 10.3 of the proposed order, the assessee has valued the closing stock at historical costs whereas the Assessing Officer has 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate 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 Assessing Officer 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 before us. Besides, neither the Assessing Officer nor the CIT(A) has referred to the aforesaid judgment or to the principles laid down therein while deciding upon the issue of stock valuation. Since the principles laid down in the aforesaid judgment cover the issue in hand, they should have examined the matter keeping in view the principles laid down in the aforesaid judgment. The emphasis by the learned CIT(A) on the fact that the assessee has consistently 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ide 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. THIRD MEMBER ORDER Per D. Manmohan, Vice President (As a Third Member) On a difference of opinion between the learned Members of the ITAT, 'H' Bench, Mumbai, the Hon'ble President of the ITAT nominated me under section 255(4) of the Income-tax Act, 1961, to adjudicate the following question of law : "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 ?" 2. Facts necessary for the disposal of the appeal are stated in brief. In respect of previous years 1998-99 and 1999-2000 assessee, a partnership firm, engaged in the business of construction and development of properties, flat, shops etc., declared loss of Rs. 2.72 crores and Rs. 4.03 crores (as well 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 undervalua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ethod 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 Assessing Officer 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., 59820 sq. ft.) is not proper ignoring the facts brought out by the Assessing Officer 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 Assessing Officer by way of addition of the value of work-in-progress over that determined by the assessee by relying on the decision of the CIT(A) -XXV, Mumbai in Appeal No. CIT(A) XXV./DCIT 25(1) /115-2000-01, dated 1-3-2002 in the assessee's own case for assessment year 1998-99 ignoring the facts brought out by Assessing Officer in the assessment order." 5. Assessee preferred cross objections, which were merely to support the orders passed by the learned CIT(A), wherein it was explained that the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in order to verify as to whether the order passed by the learned Judicial Member 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 A.M. 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 India Ltd. (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 section 255(4) of the Act to adjudicate the question which was set out in para 1 hereinabove. 8. Learned Counsel, appearing on behalf of the assessee, initially submitted that the learned A.M. has never raised such issue and with the concurrence of both the Members the matter was treated as heard, upon hearing both the parties, and thus it wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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. Assessing Officer gave another finding that the method adopted by the assessee deviated from the AS-7 guidelines. I have perused the accounting standard-7 guidelines. Construction contracts are formulated in a variety of ways but generally fall into two basic types : (i) Fixed price contracts - The contractor agrees to a fixed contract price or rate, in some cases subject to cost escalation clause (ii) Cost plus contracts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Assessing Officer accepted the percentage of work completed in the assessment order at 89 per cent. The assessee produced the architect's certificate before the Assessing Officer, wherein the extent of work completed was certified. In my opinion, the method of accounting adopted by the assessee for recognition of revenue is in accordance with Accounting Standard-7. 19. The assessee has been following the method of adopting average rate realised consistently from year to year and the same was accepted by the Assessing Officer in earlier years. The assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. (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 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 Assessing Officer or by the learned CIT(A) ; Assessing Officer has not rejected the book results by pointing out any defect in the books maintained by the assessee. Categorical findings of the learned CIT(A) to highlight that assessee has no ..... X X X X Extracts X X X X X X X X Extracts X X X X
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