TMI Blog1996 (10) TMI 495X X X X Extracts X X X X X X X X Extracts X X X X ..... dings. The other two buildings were though completed but no income thereof was offered on the ground that sale of the flats had not taken place and that the assessee had to wait for securing contract for additional amenities to be carried out at the requests of the intending purchasers. The Assessing Officer did not agree with the contentions of the assessee. According to him there was no relation to the accrual of income with the completion of the building as the assessee was entitled to 5% profit on the expenses incurred by it on the construction. It has incurred a sum of ₹ 2,61,256 for Panchvati I and ₹ 5,59,936 for Panchsheel II. The profit thereon at the rate of 5% is worked out at ₹ 41,060 which is added to the income of the assessee. The Assessing Officer has also not accepted the method of accounting of the assessee, viz., Project Completion Method , by giving the following reasons : (i) that the department has not accepted the project completion method in the past; (ii) that the assessee did not follow the project completion method in the past, which is a change in the method of accounting, the Company being following mercantile system in the past; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 252, the project completion method cannot be applied to the assessee. A reference may also be invited to the Patna and Delhi High Court decisions referred to by the learned Departmental Representative, in the case of Sri Sukhdeodas Jalan v. CIT (1954) 26 ITR 617; and in the case of Tirath Ram Ahuja (P.) Ltd. v. CIT (1976) 103 ITR 15. The assessee s income, as per the agreement, accrues by incurring the expenditure on behalf of the builder. It acquired a right of 5% profit on completion of the work. The assessee s plea that the sale of the flats have not been made and that the possibility of the intending purchasers to ask for certain additional amenities and consequently the assessee s liability to incur certain additional expenditure, has nothing to do with the assessee s accrual of profit from the contract with M/s. Unique Estates DevelopmentCompany Limited. If the assessee has to take some other job for providing additional facilities for the intending purchasers, it would be a separate contract with the purchasers and profit and loss thereon would accrue in the year when such additional facilities were provided and the job was completed by the assessee on their behalf. In so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of stock without including the overhead cost is a recognised method and the assessee is free to adopt the same. The finance charges, referring to the Accounting Standards (AS-7) issued by the Institute of Chartered Accountants, are categorised as indirect/overhead cost which cannot be related to a specific contract. The contention of the learned counsel for the assessee is that the interest of ₹ 4.95 lakhs cannot be related to the Girnar Apartments Project and, therefore, the Income-tax Officer was not justified in disallowing the same, it being an annual expenditure incurred for the purpose of carrying on the business of the assessee. The Learned Departmental Representative, supporting the orders of the Assessing Officer and the CIT (Appeals) , submitted that the interest cost though categorised as overhead or indirect cost, is identifiable and is calculated based on the utilisation of the borrowed money in the construction business at Girnar. According to him, the expenditure cannot be allowed on year to year basis when the assessee is offering the income from the contract in which the borrowed money was utilised on project completion method. 7. We have heard the par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ference to the period that commences with the securing of the contract and closes when the contract is completed. 8.2 Costs not specifically attributable to any contract incurred by the contractor before a contract is secured are usually treated as expenses of the period in which they are incurred. However, if costs attributable to securing the contract can be separately identified and either the contract has been secured or there is a clear indication that the contract will be obtained, the costs are sometimes treated as applicable to the contract and are deferred. As a practical measure, costs directly identifiable with a contract are sometimes deferred until it is clear whether the contract has been secured or not. 8.3 Costs attributable to a contract include expected warranty costs. Warranty costs are provided for when such costs can be reasonably estimated. 8.4 Costs incurred by a contractor can be divided into : (i) Costs that relate directly to a specific contract; (ii) Costs that can be attributed to the contract activity in general and can be allocated to specific contracts; (iii) Costs that relate to the activities of the contractor generally ..... X X X X Extracts X X X X X X X X Extracts X X X X
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