2019 (5) TMI 414 - AT - Income Tax

Addition being 8 % of total Work In Progress(WIP) - projects at the stage of completion and no sale or opening/closing of WIP were shown by the assessee in P L, A/c. - Incremental WIP including expenditure incurred in previous year - second round of litigation - The whole controversy is that any income on the WIP on construction work carried out by the assessee is chargeable to tax in the impugned assessment year - HELD THAT - The method of accounting being completed contract method is also consistently followed by the assessee which was permitted by AS-7 issued by ICAI till it was amended in the year 2002. This is second round of litigation and despite that the Revenue is not able to controvert the contentions of the assessee with any cogent incriminating material even before us and only bald statements are made which has no basis whatsoever. We have no material on record to hold that the assessee had any other stream of income apart from these service charges which emanated from construction and development work carried out by the assessee for these two societies and which stood declared in return of income filed with Revenue for AY 2003-04. So far as tribunal observations in its order dated 24.11.2010 in first round of litigation as to verification that the WIP for the impugned AY 2000-01 of ₹ 23.32 crores from the construction of residential buildings of these two societies being carried forward to subsequent years till the work was completed in AY 2003-04 of which income was being offered for taxation by assessee, we have no hesitation in holding that the assessee has sufficiently discharged its onus in proving that it only worked for these two societies since its formation in June 1997 till the construction was completed in previous year 2002-03 relevant to AY 2003-04 and the income earned from the construction work carried out with respect to these societies were ultimately offered for taxation in AY 2003-04 and due taxes paid to Revenue. The detailed reasoning is outlined by us in our conclusions as above in preceding para s of this order. Now it was for the Revenue to have brought on record cogent incriminating material to disprove and dislodge the contentions of the assessee by making necessary enquiries and investigations which in our considered view, the Revenue failed to bring on record any cogent incriminating material to dislodge contention of the assessee and we have no hesitation in confirming the well reasoned appellate order dated 12.03.2014 passed by CIT(A) - Decided against revenue

Summary

Issues Involved:

1. Deletion of addition made by AO on Work in Progress (WIP).
2. Adoption of Completion Contract Method (CCM) by the assessee.
3. Application of Supreme Court judgment in Hyundai Heavy Industries Co. Ltd. case.
4. Estimation of income by AO based on WIP.

Issue-wise Detailed Analysis:

1. Deletion of Addition Made by AO on Work in Progress (WIP):

The primary issue was whether the income on the work-in-progress (WIP) on construction work carried out by the assessee is chargeable to tax in the assessment year 2000-01. The AO had reopened the assessment and brought to tax income estimated at 8% of the WIP, which was ?23.32 crores, based on the assumption that the project was almost complete. The CIT(A) deleted the addition, noting that the assessee followed the completed contract method and had declared the income in AY 2003-04 when the project was completed. The tribunal upheld the CIT(A)’s decision, confirming that the income from the projects was duly declared in AY 2003-04 and hence, no addition should be made in AY 2000-01 to avoid double taxation.

2. Adoption of Completion Contract Method (CCM) by the Assessee:

The assessee consistently followed the completed contract method (CCM) for recognizing revenue, which is permissible under the un-amended AS-7 issued by ICAI. The AO’s contention that income should be declared on a percentage completion method was rejected by the CIT(A) and the tribunal. The tribunal noted that the assessee had the liberty to choose either the percentage completion method or the completed contract method as per its desire. The tribunal also observed that the completed contract method was consistently followed by the assessee and accepted by the Revenue in subsequent years, including AY 2003-04 when the project was completed, and income was declared.

3. Application of Supreme Court Judgment in Hyundai Heavy Industries Co. Ltd. Case:

The AO argued that the CIT(A) erred in applying the Supreme Court judgment in Hyundai Heavy Industries Co. Ltd. [2007] 161 Taxman 191 (SC) to the assessee’s case. The tribunal, however, found that the facts of the Hyundai case were different but upheld the CIT(A)’s application of the principle that the assessee has the liberty to choose its method of accounting, provided it is consistently followed and does not distort the profits. The tribunal confirmed that the completed contract method was a recognized method under AS-7 and was consistently followed by the assessee.

4. Estimation of Income by AO Based on WIP:

The AO estimated the income at 8% of the WIP, assuming that 85% of the project was complete by the end of the previous year relevant to the assessment year 2000-01. The CIT(A) and the tribunal found this estimation baseless and without any factual support. The tribunal noted that the income from the project was duly declared in AY 2003-04 when the project was completed, and the WIP was carried forward from year to year until its completion. The tribunal emphasized that taxing the income in AY 2000-01 based on an arbitrary estimation would lead to double taxation, which is impermissible.

Conclusion:

The tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to delete the addition made by the AO. The tribunal confirmed that the assessee consistently followed the completed contract method, declared the income in AY 2003-04 when the project was completed, and paid the due taxes. The tribunal also noted that the AO's estimation of income based on WIP was arbitrary and unsupported by facts, and taxing the same income in AY 2000-01 would result in double taxation.