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TMI Blog2025 (5) TMI 1157X X X X Extracts X X X X X X X X Extracts X X X X ..... re the due date prescribed under the law and thus, in the interests of justice, we condone delay in filing of appeal and admit the appeal filed by the revenue for adjudication. 3. The brief facts of the case are that the assessee is a Limited Liability Partnership firm carrying on business as a civil contractor. The assessee firm e-filed its return of income for the A.Y. 2017-18 on 31.10.2017 declaring a total income of Rs. 9,79,75,000/-. The return of income was processed u/s. 143(1) and subsequently selected for scrutiny under CASS. Later the statutory notice u/s. 143(2) was issued and served on the assessee on 22.09.2018. Further notices came to be issued to which replies were furnished by the assessee. 4. During the course of the assessment proceedings before the AO, one of the issues that was raised by the AO was whether the assessee had complied with ICDS III (percentage of completion method) for recognition of income as the assessee was engaged in the business of construction contract. In reply the assessee stated that the percentage of completion method (POCM) as per ICDS III was adopted by the assessee. The AO however found that there was a discrepancy between the POCM a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant has recognized lesser revenue cumulatively than that which should have been offered so far, based on the POCM. Therefore, in relation to these projects, the difference between the revenue that should have been reckoned so far and that which has been actually been offered to tax till date, i.e. (a) minus (b) amounting to Rs.10,76,23,212/- has been the subject matter of addition. It is true that as per ICDS III, the income has to be recognized in the Profit and Loss Account as per the percentage of completion method. However, it was explained during the course of assessment proceedings that although apparently, it may seem that there is a shortfall in revenue recognition with respect to the above projects, the position has to be seen in conjunction with the work in progress which has also been reckoned at contract price. Therefore, it was submitted that when viewed in conjunction with WIP, there is no deficit in revenue recognition in these projects. The aspect of WIP lying as closing stock in respect of unbilled work has completely ignored. Therefore, it is humbly submitted that the order has been passed without application of mind and without proper appreciation of the fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rchase of materials and the percentage of completion would be very low. In such cases, the entire advance would have to be shown as sales and in relation to such projects, the WIP would be reckoned at a negative figure. The net credit to the Profit and Loss Account on account of such projects would be the credit that should have been reckoned in terms of the POCM approach only. It should be noted that the valuation of WIP is not at cost but at contract price. This becomes amply clear from the workings which are given by way of Annexure-1. The difference between the contract price and the amount recognized as revenue in the Profit and Loss Account is reckoned as WIP in respect of each of the contract. This is equivalent to reckoning year end stock at selling price. It does not make a difference in terms of profit whether the product is reckoned as sold or in stock since the valuation is on contract price. Since WIP has been reckoned at contract price and ICDS-III has been entirely complied with, as is clearly brought in Annexure 1, the question of adding the difference between the revenue actually recognized and the revenue to be recognized in terms of ICDS-III based on POCM, doe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he work in progress credited to the Profit and Loss Account is provided as Annexure -2. In this connection, the decision of Jaipur bench of Hon'ble Income Tax Appellate Tribunal in the case of Vastukar Township Pvt. Limited v DCIT reported in 2018 (2) TMI 97 - ITAT JAIPUR where the principle of revenue recognition in terms of Percentage of Completion Method was enunciated, particularly the fact that where POCM is applied, the percentage should be reckoned even in respect of advances received. The relevant portion of the decision is reproduced for ready reference of this respected authority: "Further, it is noted that in respect of revenues from executed sale deeds, the revenues have been recognized to the extent of work completed and the said principle will apply in respect of advances so received from the buyers. In light of above discussions, in respect of total advances actually received from the customers as on 31.03.2012 amounting to Rs. 4,44,28,514/- arising out and in respect of which plot buyers agreement has been executed, revenues to the extent of percentage of work completed (45.73%) which comes to Rs 2,03,17,159/-, following the percentage completion met ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account as WIP and that once the WIP is recognised there is no difference between the sales credited to profit and loss account and increased by the WIP credited to the profit and loss account and the POCM as computed by the AO subject to a reconciliation. 11. The assessee explained that this reconciliation was also primarily because of the fact that the projects where the revenue recognised on the basis of sales credited to the profit and loss account being in excess of the POCM which had to be reduced from the income reckoned by the AO since this had already been debited to WIP and one mistake committed by the AO in not recognising the amount transferred to WIP in respect of one project and further not taking into account the difference on account of materials at site. 12. The reconciliation submitted by the assessee is as follows: WIP of all the projects (as per WIP statement) 10,60,98,182 Reconciliation between addition made by the Assessing Officer and WIP as per the Profit/Loss a/c Difference between revenue to be reckoned and revenue actually reckoned (as per AO) in relation to the projects mentioned in the assessment order 10,76,23,212 Add: Projects with posi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontract costs incurred upto the reporting date Total estimated contract costs Ashok Verghese - 2500000 8713501 - 574888 4388000 13.10% 1141588 -1358412 Gowri Hospital Pvt Ltd - 200000 30000000 - 6956 14401000 0.05% 14492 -185508 Grt - Chengalpet - 10913699 14550829 54658 8383942 8611000 98.00% 14259509 3345810 GRT Jewellers India Pvt Ltd- Avadi 23639801 - 28814595 16166051 393759 17559810 94.31% 27173655 3533854 GRT Jewellery India Pvt Ltd - Tutricorin 2504735 14223468 42611198 7495 17027160 26882000 63.37% 27001974 10273771 Hindustan College of Arts & Science 9459081 21619234 134400881 16222750 23657705 84007000 47.47% 63803829 32725514 Jayachandren Industries Private Limited - 452489 9000000 - 990827 4733000 20.93% 1884100 1431611 New Saravana Stores Bramandamai 2500000 3097081 5597081 961181 2615466 3576647 100.00% 5597081 - Otto Clothing Pvt Ltd - 72224000 115000000 78363 42476663 67889000 62.68% 72085728 -138272 Pothys - Nagercoil 76437551 - 76437551 30191953 10968661 41245000 99.80% 76281161 -156390 Prince Gold & Diamonds 4436080 6795744 17752676 1360894 4772737 9351000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny other ground including amendment of grounds that may be raised during the course of the appeal proceedings, the order of learned CIT(Appeals) may be set aside and that of the Assessing Officer be restored. 17. The Ld. DR supported the order the AO and prayed for reversal of the order of the Ld. CIT(A) and restoration of the order of the AO. The ld.DR further relied on the grounds of appeal filed by the revenue. 18. Per contra the Ld. AR on the other hand sought to explain the fact that the income as per the POCM had already been offered as income by the assessee and elaborately explained the working on the basis of which the Ld. CIT(A) allowed the appeal of the assessee. The Ld. AR further stated that the assessee has returned a total income of Rs. 9,79,75,000/- on a gross POCM of Rs. 42,26,67,000/- which amounts to a net income of 23.18%. If the addition made by the AO is taken into account the net margin of the assessee would be 48.64% which is improbable in the assessee's line of business. The ld.AR further submitted that the ld.CIT(A) has considered all the aspects of the revenue as well as the closing WIP recognised in lieu of revenue and deleted the additions made by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on is what the AO seeks to add and is nothing but the amount credited to the profit and loss account as WIP [subject to the reconciliation made and explained before the Ld. CIT(A)] 24. Further we note that the assessee before the Ld. CIT(A) has submitted that the entire invoice value is shown as sales for GST but the income in the profit and loss account is recognised on the basis of the POCM. 25. We have gone through the workings made by the assessee in respect of the POCM and the manner in which the same has been accounted in the profit and loss account by the assessee. The profit and loss account of the assessee clearly has a credit by way of closing WIP amounting to Rs. 10,60,98,182/- over and above the sales of Rs. 31,65,68,818/- credited to the profit and loss account. 26. Taking the aggregate of these two (Revenue and Closing WIP) and the reconciliation as explained by the assessee which is nothing but the arithmetic difference in respect of some projects which the AO has missed out in computing the POCM but which has been correctly taken by the assessee and transferred to WIP in order to be compliant with ICDS III in so far as recognising income as per POCM is concerned. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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