9911796707
TMI Blog2010 (10) TMI 707X X X X Extracts X X X X X X X X Extracts X X X X ..... pproved method of accounting - in the instant case, there is no such finding either by the AO or by the learned CIT(A); AO has not rejected the book results by pointing out any defect in the books maintained by the assessee - Decided in favor of assessee. X X X X Extracts X X X X X X X X Extracts X X X X ..... architect), (ii) The percentage of sales effected in respect of the building. (d) At the end of each year, the total sale value (to completion) of the project is estimated by multiplying the area available for development with the actual average rate realised on flats sold. (e) The estimated sale value (for the entire project) so determined is reduced to the extent of percentage of project completed as obtained in (c) above. This figure is the work-in-progress as on the end of the accounting 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 P and L a/c. (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 P and L a/c. 3. The above method of determining percentage of completion recognises the following:- (a) The extent of work compl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was noticed by AO that the average rate of sales realisation during the year was Rs. 1,023 per sq. ft. AO considered the argument of the assessee that the flats were sold in earlier years and allowed a reduction of Rs. 23 per sq. ft. and adopted Rs. 1,000 per sq. ft. to arrive at the value of closing work-in-progress of Rs. 42,00,88,900 as against Rs. 37.87 crores offered by the assessee. Thus, the difference of Rs. 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 historica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oject completed) Nil He submitted that the method of accounting followed by assessee was accepted by AO in the preceding year i.e. asst. yr. 1996-97 under s. 143(3) and the average rate adopted by the assessee in asst. yr. 1996-97 was Rs. 749 whereas, in the current assessment year the average rate actually realised was Rs. 902 per sq. ft. (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 are as under:- AO's finding Appellant's contention (i) It is seen that in the assessee's case the factor of sales realisation is taken to determine extent of completion of work of the project 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 sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urther submits that as much as 80 per cent of the flats were sold in earlier period and to the sales made in earlier years, AO cannot notionally 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 AO at para 7 of the assessment order. Findings of AO and appellant's submissions are as under:- AO's findings Appellant's contention (i) Weightage given to past sales effected in the past years is greater considering the fact that completion of work and realisation of sales of Gokul Nagari-I and II is 100%. (i) When as much as 85% of the area available for sale is sold, obvious that in estimating the sales on the project, weightage be given to the sales effected 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 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the sales on the project were 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 ICAI and there can be loss, if work-in-progress falls short of the expenses incurred. He argued that it was wrong to estimate the work-in-progress for asst. yr. 1998-99 based on income returned for subsequent years mainly, asst. yrs. 1999-2000 and 2000-01. AO has not appreciated that rates of sale of flats in asst. yr. 1996-97 were accepted by AO after a detailed scrutiny under s. 143(3). He finally submitted that rate reflected by the appellant at Rs. 901.58 per sq. ft., was reasonable and the adoption Rs. 1,000 by AO was unreasonable and without any basis." 6.6 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 raised by the AO, the CIT(A) found that the AO was not justified in not acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of unsold area 14.94% (II) (i) Total aggregate value of area sold (4,01,475 sq. ft.) Rs. 36,19,62,674 (ii) Average rate realised (Rs. 36,19,62,674/4,01,475 sq. ft.) Rs. 901.58 (iii) Amount received from the area sold Rs. 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 31st March, 1998 at the average rate realised till the end of the accounting year, which works out to Rs. 901.58 per sq. ft. The total area of the project is 4,72,010 sq. ft. and the assessee multiplied the average rate with the total area of the project and arrived at the total estimated sales of Rs. 42,55,55,767 (4,72,010 x 901.58). After arriving at the total estimated sales on 31st March, 1998 at Rs. 42.55 crores, the assessee estimated 89 per cent of the total estimated sales as the sales for the previous year ended 31st March, 1998 which works out to Rs. 37, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 AO in the asst. yr. 1996-97 under s. 143(3) of the IT Act. The average rate realised by the assessee in various years was as under:- Asst. yr. Average rate 1996-97 749 1997-98 861 1998-99 902 1999-2000 928 2000-01 Project completed (12) AO 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 AO accepted the fact that the project is one comprising of three buildings. The AO 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 made in the past to the extent of 80 per cent, the rates prevailing in the past have to be considered and AO cannot estimate the sales made in the past with the current year rate. (13) The next finding of the AO is that the work-in-progress did not reflect the expenses incurred du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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) AO gave another finding that the method adopted by the assessee deviated from the AS-7 guidelines. I have perused the AS-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) the percentage of completion method, (ii) the completed contract method. In the present case, the appellant followed percentage of completion method. The broad features of percentage of completion method are:- (i) revenue is recognised based on the stage of completion reached, (ii) costs incurred in reaching the stage of completion or matched or compared with the revenue, (iii) reporting of results which can be attributed to the proportion of work, co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epted the percentage of work completed in the assessment order at 89 per cent. The assessee produced the architect's certificate before the AO, 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 AS-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 AO in earlier years. The assessee has rightly estimated the sales or closing work-in-progress at Rs. 901.58 per sq. ft. (20) During the current previous year not a significant number of flats were sold by the assessee. 80 per cent of the project area was sold in earlier years. It is not justifiable to estimate the sales or closing work-in-progress at a higher rate prevailing at the end of the current year in respect of sales which were made in the earlier years. The AO did not point out any defects in the books of account and the assessee followed the method of accounting regularly. The method of accounting followed by the assessee is in consonance with the AS-7. AO was of the opinion that the profit rate reflected by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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 Court of fact, particularly in the case of a reversing decision, to meet the reasoning of the Trial Court and indicate its own reasons for the conclusions reached." 10.2 The Hon'ble Supreme Court in the case of State of West Bengal vs. Atul Krishna Shaw AIR 1990 SC 2205 has held that:- "On top of all, the appellate authority being final authority on facts is enjoined and enactments upon it to appreciate the evidence, consider the reasoning of the primary authority and assign its own reasons as to why it disagrees with the reasons and findings of the primary authority. Unless adequate reasons are given, merely because it is an appellate au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is agreed for earlier year i.e. asst. yr. 1996-97 and in this way, Rs. 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 asst. yr. 1996-97 under protest and that doesnt mean that the assessee accepted the addition in all the assessment years. It was also submitted that without any material, ad hoc addition made by the AO was also not justified. 15.3 After considering the submissions, the CIT(A) was satisfied with the explanation filed on behalf of the assessee. Accordingly, he deleted the addition. 16. The learned Departmental Representative simply placed reliance on the order of the AO and on the other hand, the learned counsel of the assessee placed reliance on the order of the CIT(A). 17. After considering the submissions and the orders of the authorities below, again we do not find any infirmity in the findings of the learned CIT(A). The findings of the learned CIT(A) are given in para 25 of his order which are as under:- "25. I have considered the submissions o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned 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 para 10.3 of the proposed order, the assessee has valued the closing stock at historical costs whereas the AO valued the same at current rates and thereby made the impugned additions. The assessee seeks to justify its valuation of closing stock on the ground that the assessee had been valuing the stock on the same principle as in the past and hence the AO, according to the assessee, was not justified in disturbing the same. 3. The method of valuation of stock held as goods-in-process or work-in-progress is now authoritatively established by the judgment in CIT vs. Britsh Paints India Ltd. (supra). In the said case, the assessee-company was engaged in the business of manufacture and sale of paints and had valued the goods-in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 learned CIT(A) on the fact that the assessee has consistently been following the present method of stock valuation, is of no help to the assessee unless the method of stock valuation so followed by the assessee is in conformity with the principles laid down in the aforesaid judgment. As held by the Hon'ble Supreme Court in the aforesaid judgment, it is incorrect to say that the AO is bound to accept the system of accounting regularly employed by the assessee the correctness of which had not been questioned in the past and that there is no estoppel in these matters and the officer is not bound by the method followed in the earlier years. In the absence of any finding by the learned CIT(A) that the stock valuation done by the assessee or by the AO is in conformity with the principles laid down in the said judgment, it is not possible to pronounce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estore 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 of construction and development of properties, flats, shops etc., declared loss of Rs. 2.72 crores and Rs. 4.03 crores (as well as short-term capital loss of Rs. 2,20,736) respectively. Assessments were taken up for scrutiny and during the course of examination of the books of account it was noticed that there was undervaluation of closing stock; the assessee valued the closing stock at historical cost whereas the AO has valued the same at current rates. Closing work-in-progress/sales was valued by the assessee at Rs. 901.58 per sq. ft. which was the average rate realised for all the years including the previous year relevant to the asst. yr. 1998-99. The AO however adopted Rs. 1,023 per sq. ft. which was the current year rate of realisation and after reducing Rs. 23 per sq. ft. he valued work-in-progress/sales at Rs. 1,000 per sq. ft. Similarly in the assessment for the asst. yr. 1999-2000 average rate at Rs. 1,289 was shown by the assessee whereas t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T(A)-XXV, Mumbai in Appeal No. CIT(A) XXV/Dy. CIT 25(1)/115-2000-01 dt. 1st March, 2002 in the assessee's own case for asst. yr. 1998-99 ignoring the facts brought out by AO in the assessment order." 5. Assessee preferred cross-objections, which were merely to support the orders passed by the learned CIT(A), wherein it was explained that the method of accounting followed by the assessee was an approved method of accounting and had been consistently followed and accepted by the AO from year to year. It was also submitted that the book results were not rejected by the AO and it is not the case of the AO that the guidelines issued by the ICAI under AS-7 were deviated by the assessee. It was also highlighted that the method of valuing work-in-progress was as per the guidelines issued by the Institute which are mandatory for determining true, fair and correct profits in a construction contract and thus merely because in one year it resulted in loss the same cannot be rejected without any basis particularly when the books maintained by the assessee were subjected to tax audit. 6. The matter was heard on 2nd April, 2008 on which date the Division Bench appears to have not asked any sp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tially submitted that the learned AM has never raised such issue and with the concurrence of both the Members the matter was treated as heard, upon hearing both the parties, and thus it was not proper on the part of Hon'ble AM to raise an issue with regard to need to verify the audit report after long lapse of time reckoned from the date of hearing of the appeal. 9. Learned Departmental Representative on the other hand submitted that files could not be traced and being an old matter it would be difficult to make a comment as to what exactly transpired on the date of hearing of the appeal. At this juncture, the Authorised Representative submitted that he is not interested in pursuing his objection on the above issue and proceeded to argue the matter on merits. It was submitted that construction activity commenced in 1996-97 and assessee consistently followed the percentage completion method and as per the agreement/ norms no revenue is recognized until the project is completed to the extent of 30 per cent and thereafter revenue is recognized but the work-in-progress is computed as per the norms prescribed under AS-7 and the same was accepted by the tax authorities from year to yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontracts:- The contractor agrees to a fixed contract price or rate, in some cases subject to cost escalation clause. (ii) Cost plus contacts. In the present case it is a fixed price contract. There are two methods of accounting for contracts for recognition of revenue:- (i) the percentage of completion method, (ii) the complete contract method. In the present case, the appellant followed percentage of completion method. The broad features of percentage of completion method are:- (i) revenue is recognised based on the stage of completion reached, (ii) costs incurred in reaching the stage of completion or matched or compared with the revenue, (iii) reporting of results which can be attributed to the proportion of work completed, (iv) based on the principle of prudence, the revenue is recognised on realisation, (v) the stage of completion is measured in an appropriate manner. No weightage should be given to a single factor, instead all relevant factors should be considered, (vi) while recognising the profit under this method, an appropriate allowance for future unforeseeable factors which may effect the ultimate quantum of profit is generally made on either a spe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the AO in earlier years. The assessee has rightly estimated the sales or closing work-in-progress at Rs. 901.58 per sq. ft." 11. Learned counsel, appearing on behalf of the assessee, has also relied upon several case law in support of his contention that the decision of the apex Court in the case of British Paints (supra) is applicable only in a case where the method followed is not a standard method of accounting. In other words, when an approved method of accounting is followed by the assessee, in the absence of any doubts raised by the AO with regard to correctness of the books maintained by the assessee, principle of consistency has to be adopted. He has also referred to AS-7 to highlight that the assessee has not deviated from the method prescribed by the Institute in valuing the closing work-in-progress. He thus, submitted that the order passed by the learned JM is in accordance with law and the learned AM was not justified in raising new issues while passing a dissenting order, particularly when the same were not called upon at the stage of hearing the appeal. 12. Despite detailed submissions of the learned counsel, appearing on behalf of the assessee, learned Departme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the ICAI (under AS-7), was not challenged before the Tribunal by learned Departmental Representative by producing any evidence thereof. Learned CIT(A) has discussed the issue elaborately and met each point of dispute raised by the AO to highlight that there is no merit in the conclusion reached by the AO. In fact, learned JM has extracted the operative portion of the order of the learned CIT(A) from paras 7 to 20 wherein learned CIT(A) not only analysed each issue raised by the AO but also supported the conclusions drawn by him while holding that assessee has adopted correct method of accounting and the same was followed consistently. In addition to that, learned JM had highlighted that the project was ultimately completed in the previous year relevant to the asst. yr. 2000-01 wherein the assessee declared income of Rs. 5 crores plus and the same has been accepted by the Department which has attained finality, in the absence of any proceedings initiated under s. 263 or otherwise. Neither the learned AM controverted the findings of the CIT(A) or the learned JM nor the learned Departmental Representative sought to controvert the findings of the learned CIT(A) and learned JM. 14. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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