TMI Blog2010 (10) TMI 1106X X X X Extracts X X X X X X X X Extracts X X X X ..... g followed by the assessee is an approved method of accounting. The decision of the Apex Court in the case of British Paints India Ltd.[ 1990 (12) TMI 2 - SUPREME COURT] 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. 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 not deviated from guidelines issued by the Institute of Chartered Accountants (under AS-7) , was not challenged before the Tribunal by learned D.R. by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... years 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 ₹ 4,13,88,900 and ₹ 4,87,61,517 made by the Assessing Officer on account of undervaluation of closing stock. The department is also objecting in deleting the addition of ₹ 2,70,230 made on account of enhancement 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nting 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 Profit and Loss Account. (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 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 ado ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to arrive at the value of closing work-in-progress of ₹ 42,00,88,900 as against ₹ 37.87 crores offered by the assessee. Thus, the difference of ₹ 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 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee in assessment year 1996-97 was ₹ 749, whereas, in the current assessment year the average rate actually realised was ₹ 902 per sft. (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 as under :- A.O s Finding Appellant s Contention (i) It is seen that in the assessee s case the factor of sales realization is taken to determine extent of completion of work 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ears, Assessing Officer cannot nationally 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 Assessing Officer at para 7 of the Assessment Order. Findings of Assessing Officer and appellant s submissions are as under : A.O Findings Appellant Contention (i) Weightage given to past sales effected in the past years is greater considering the fact that completion of work and 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Institute of Chartered Accountants of India and there can be loss, if work-in-progress fall short of the expenses incurred. He argued that it was wrong to estimate the work-in-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 ₹ 901.58 per sft., was reasonable and the adoption ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ious year 4,01,475 Sft. (c) Area unsold 70,535 Sft. (d) Percentage of area sold 85.06% (e) Percentage of unsold area 14.94% (II) (i) Total agreement value of area sold (4,01,475 Sft.) ₹ 36,19,62,674 (ii) Average rate realised (Rs. 36,19,62,674/ 4,01,475 Sft.) ₹ 901.58 (iii) Amount received from the area sold ₹ 33,79,27,329 (iv) Recovery 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 ₹ 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 ₹ 42,55,55,767 (4,72,010 901.58). After arriving at the total estimated sales on 31-3-1998 at ₹ 42.55 crores, the assessee estimated 89 per cent of the total estimated sales as the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompletion 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 Assessing Officer, 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate for estimation of work-in-progress based on percentage of completion and sales realisation up to 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 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) th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udence 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 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 ₹ 901.58 per sft. 20. During the current previous year not a significant number of fl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nor any defect pointed out in the books of account. There was also no material with the Assessing Officer 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 ld. 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 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 cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sequent year also. 15. There is one more ground in the assessment year 1998-99, which is against in deleting the addition of ₹ 2,70,230 made on account of enhancement of rates of sales effected during the year. 15.1 While completing assessment for the assessment year 1996-97, Assessing Officer 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 Assessing Officer enhanced the rate on the basis of agreed for earlier year i.e., assessment year 1996-97 and in this way, ₹ 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 additi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Department and thereby confirming the order passed by the learned CIT(A) deleting the (i) addition of ₹ 4,13,88,900 made by the Assessing Officer in assessment year 1998-99 on account of undervaluation of closing stock and further addition of ₹ 2,70,230 on account of suppression of sales price; and (ii) ₹ 4,87,61,517 made by the Assessing 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 parag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Income-tax Appellate Tribunal under section 255(4) of the Income-tax 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enhancement of rates of sales effected during the year. Grounds for assessment year 1999-2000 : 1. On the facts and circumstances of the case and in law, learned CIT(A) has erred in deleting the addition of ₹ 4,87,61,517 made by Assessing Officer 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 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (A) has referred to the principles 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 in British Paints India Ltd. s case (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 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 n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manufacturer of paints and under the peculiar circumstances the Hon ble Court observed that if an established 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. Assessing Officer gave another finding that the method adopted by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the work-in-progress. Learned counsel submitted that this finding of the Assessing Officer 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 ₹ 36.19 crores and the assessee received ₹ 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 complet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the assessee declared profit of more than ₹ 5 crores the Assessing Officer appears to have accepted the same method to accept the income declared therein which in itself is an indication that the method of accounting followed by the assessee is an approved method of accounting. The decision of the Apex Court in the case of British Paints India 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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