TMI Blog1996 (2) TMI 81X X X X Extracts X X X X X X X X Extracts X X X X ..... take the stock of work-in-progress for the purpose of ascertainment of profits as far as the assessee is concerned. The assessee is a contractor for practical purposes carrying on in the name of "Geo Tech Construction Corporation", principally engaged in multi-storeyed buildings for the assessment year 1981-82 ending on March 31, 1981. The accounts as kept by the assessee are factually accepted by the Department. The system of accounting shows that the receipts are accounted on cash basis and at the other end expenses on mercantile basis. The business activity of the firm mainly engaged in the construction of multi-storeyed buildings has peculiarities of its own in relation to the work-in-progress. The assessee has freedom to maintain his own accounts that are intelligible to him and others. What is required in the process is the internal consistency in regard thereto. There are two basic methods for arriving at the value of the work-in-progress. Generally one is called as the "direct cost method" and the other as "on cost method". Under the first one the cost of direct materials used and the wages of the labour directly employed are required to be taken into account. As regar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ances in regard thereto are also required to be taken into consideration. This is all because there has to be a clear basis for inclusion of the profit amount which becomes difficult by reason of the activity being in progress and continuous. In this aspect overriding consideration is required to be anticipated. This is as to whether the profit to be valued, in the process could be ascertained and foreseen with a reasonable degree of certainty which can only be in sight at the point of completion of the contract. The accounting process is the individual function of the assessee to know his position of accounts and in this context if it is found that the assessee has maintained accounts according to his system, may be based on convenience to adopt one known system with an admixture and intermixture with the other known system, it has always been understood that the assessee who maintains his own accounts has the liberty to employ his system for the purpose of maintaining accounts in respect of his transactions. The courts and even those engaged in the ancillary field have sought to introduce and stamp labours in regard thereto and, as is common, a ready phrase from the field of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the subsequent years 1983-84 up to 1985-86 (independent subject-matter of these petitions) the additions are made in the following manner : Rs. 1982-83 4,00,000 1983-84 7,00,000 1984-85 4,00,000 1985-86 4,00,000 The appellate authority-Commissioner of Income-tax (Appeals) considered the question in paragraph 5 of its order (annexure "B"). The appellate authority took into consideration that the assessee is the successor of the original firm in the name and style of "United Builders" which did not maintain any books of account. It is then observed that the present firm "Geo Tech Construction Corporation" emerged on the basis of a fresh and new partnership deed. The firm started maintaining books of account from the year April 1, 1980. It is obvious that the accounts came to be closed for the first year on March 31, 1981. It is observed that in regard to this year the assessment was completed without making any addition on account of work-in-progress. It is further observed that in spite of these, as far as the next assessment year 1982-83, there is no material change perceptible in any Way and the firm was showing consistently a profit without taking into account the w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in this situation the Tribunal has considered the question observing that the value of the stock on hand should be taken into account to ascertain the true profits. It is observed that in the case of a contractor it would not be necessary to take the stock of work-in-progress for ascertainment of profit. The Tribunal has recorded the reason for this approach especially emphasising that the work-in-progress represents incomplete work as distinguished from the true, correct and legal meaning of a contract which is understandable feasibly only as a completed work. As a corollary it is observed that unless the work done reaches the stage of completion, measured and certified, the assessee cannot be reasonably expected to be certain in the matter of payments and consequent profits. The Tribunal proceeds to observe that the value of the work-in-progress has necessarily to be understood on "nil" basis with regard to on-going contracts because there are always inherent risks faced by the contractor implicit in the very contracting process requiring redoing the work, rectifying the defects for which there has to be a provision and realisation requiring retention of the required amount. Ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of retention, making it more than difficult to resort to valuation of work-in-progress. Learned senior counsel for the Department relied on G. Padmanabha Chettiar and Sons v. CIT [1990] 182 ITR 1 (Mad) to contend that the assessee is not permitted to adopt mercantile system to claim deduction of amounts payable and cash system in respect of amounts due to it. In other words, the change of work or inherent inconsistencies are not permissible. Having gone through the decision cited, we find that the facts before us are completely at tangent. There is no question of there being internal inconsistency, but on the contrary as we have emphasised, factually the accounts have been accepted and are not even contended to be wrong or erroneous on the factual matrix before us. Learned counsel relied on another decision of the Supreme Court in CIT v. Central India Industries Ltd. [1971] 82 ITR 555 to place reliance on really a stray observation (page 560 of the report) to urge that no one gets a vested right in an erroneous order. None can dispute the strength and application of the proposition but it is not applicable in any way to the disputes raised before us in these proceedings. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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