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TMI Blog2012 (6) TMI 241X X X X Extracts X X X X X X X X Extracts X X X X ..... s case who is a builder and not a construction contractor, without taking note of para 1 of AS-7 clearly enjoining that this Accounting Statement also applies to enterprises undertaking construction activities "not as contractors but on their own as a venture of commercial nature where the enterprise has entered into agreement for sale" as was the case here." 2. Facts in brief as emerged from the corresponding assessment order passed u/s.143(3) of the IT Act dated 29/12/2006 for A.Y. 2004-05 were that the assessee-firm is in the business of construction of Civil Work and Road Construction as a Contractor. During the year, the assessee had shown "work-in-progress" as on 31.3.2004 at Rs. 4,20,25,000/- in the balance-sheet. The assessee was asked to submit the computation of work-in-progress in respect of each project. From the side of the assessee, a project-wise detail was submitted. On perusal of a long list of 19 such projects we have noticed that the assessee has furnished the names of the projects, income of the year, opening work-in-progress as on 01.4.2003 and closing work-in-progress as on 31.3.2004. On the basis of that chart, the AO had summarized that there were certain a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have declared profit of the said project on percentage of completion method. As per AO, according to AS-7, revised in 2002 with effect from 01/04/2003 the "completed contract method" or the "project completion method" have been scrapped. According to paragraph No.21, revised AS-7, in all cases where the outcome of the construction contract can be estimated reliably, the contract, the value and the contract cost have to be recognized as Revenue and expenses respectively upto the stage of completion of the activity the AO has commented. According to AO, the income has to be computed in each year without waiting for the completion of the project. In support, AO has placed reliance on few decisions; namely, (i) Sukhdev Jalan v. CIT 26 ITR 617 (Pat), (ii) Tirathram Ahuja Pvt. Ltd. v. CIT 103 ITR 15 (Del), (iii) CIT v. Nandram Huntram 103 ITR 433 (Ori), (iv) Uttam Singh Duggal & Co. Pvt. Ltd. v. CIT 127 ITR 21 (Del) and (v) Champion construction Company v. IOT 5 ITD 495 (Mum-Trib). For the sake of completeness, relevant paragraph of the AO is reproduced below:- "6.1. The assessee's above submission has been considered but not found acceptable, as the assessee had entered into an agreeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplying the percentage completion method, an amount of Rs.22,10,000/- was taxed in the hands of the assessee. The matter was carried before the first appellate authority. 3. The main contention of the assessee before CIT(A) was that it was not a contractor but a developer. According to the arguments, AS-7 was not to be applied in assessee's case. It was also clarified that AS-7 is applicable in respect of contractor and AS-9 in respect of developer. It was pleaded that since the assessee being developer therefore to be taxed as per the provisions of AS-9. Ld. CIT(A) has given a finding that the assessee was developing the commercial complex and, therefore, acting as a developer and not as a contractor. Ld. CIT(A) has further given a finding that on developing of the complex the assessee has identified the lessees vis-a-vis units and those units were to be transferred to those lessees on approval of GSRTC. An another finding of ld. CIT(A) was that as per the documents submitted, the lease in fact was not approved by GSRTC uptill the end of the accounting period. Since only part money was received, hence shown as an advance. According to ld. CIT(A) sales were not materialised uptill ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by MSRTC and in the absence of sale, the profit could not be assumed by increasing the work-in-progress. Further, Assessing Officer applied 10% rate of profit on work-in-progress which is also based on assumption. Profit can be worked out by reducing cost from sale price. In this case, sale is not effected therefore profit cannot be worked out. Profit can be 5% or it can be even 25%. Applying 10% rate by the Assessing Officer is without any basis. Since the appellant is not a contractor but a developer, in whose case percentage completion method cannot be applied and accordingly the addition made by the Assessing Officer on work-in-progress is not justified. The same is therefore deleted." 4. From the side of the Revenue, ld.Sr. DR Mr. B.L. Yadav appeared. According to him, the assessee has worked as a contractor, therefore the AO has rightly applied the revised provisions of AS-7. According to him, as per the agreement with GSRTC dated 03rd day of March-2001 the assessee is only to construct the building specified therein and, therefore, the assessee has simply acted as a contractor. Ld. DR has placed reliance on CIT v. Bilahari Investment Pvt. Ltd. 299 ITR pg 1 (SC) for the lega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re the Hon'ble Supreme Court was altogether different and in that context the Hon'ble Supreme Court has expressed an opinion as communicated by ld. DR but the same is not relevant to decide the issue as raised in this appeal, hence must be treated as misplaced. 6. We have heard both the sides at some length. At the outset, it is worth to mention that there was a change in the AS-7 with effect from 01-04-2003 and the relevant portion is like this:- "21. When the outcome of a construction contract can be estimated reliably, contract revenue and contract costs associated with the construction contract should be recognized as revenue and expenses respectively by reference to the stage of completion of the contract activity at the reporting date. An expected loss on the construction contract should be recognized as an expense immediately in accordance with paragraph 35." Whether the assessee has followed "project completion method" or followed "percentage completion method" has to be ascertained on the basis of the facts of this case. The assessee undisputedly has received advance from the customers. The AO has therefore formed an opinion that since the assessee had shown substantial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... approval by GSRTC for the allotment to such lessees. Rather it has been emphasized that the collection although made before such approval, in case of denial of approval, was to be refunded. The provisions of AS-7 have thus kept in mind such eventuality as well. Although the recognition of Revenue as per AS-7 is upto the stage of completion of a contract but it has also been prescribed that an enterprise is generally able to make reliable estimates after it has agreed to a contract which establishes each parties enforceable rights regarding the assets to be constructed. The Institute has prescribed percentage of completion method as per para-24, reproduced below:- "24. The recognition of revenue and expenses by reference to the stage of completion of a contract is often referred to as the percentage of completion method. Under this method, contract revenue is matched with the contract costs incurred in reaching the stage of completion, resulting in the reporting of revenue, expenses and profit which can be attributed to the proportion of work completed. This method provides useful information on the extent of contract activity and performance during a period." 6.1 Under the percen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... our of the intending lessee. Facts of the case have further revealed that such approvals have in fact been granted by GSRTC in the F.Y. 2004-05 relevant for A.Y. 2005-06 onwards. Rather, there was some controversy and our attention has been drawn that vide an order dated 18/5/2004 the District Collector has restrained the assessee from leasing in any manner whatsoever any of the shop in the GSRTC project. On account of these reasons, we are of the view that the AO has incorrectly applied AS-7 on the assessee. 6.3 Although it can be said that as per the revised AS-7 of 2002 which is effective from 01/04/2003, a project completion method has been recognized and AS-7 has not approved completed contract method, although with certain riders, but in a situation when a contractor is also working as a developer, then what should be the basis for recognition of Revenue. In this regard, our attention has been drawn on AS-9 which deals the basis of recognition of Revenue arising from rendering of services but do not deal with Revenue arising from construction contracts. The purpose of introduction of AS-9 is as follows:- "Introduction 1. This Statement deals with the bases for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Where the ability to assess the ultimate collection with reasonable certainty is lacking, then Revenue recognition is to be postponed to the extent of uncertainty involved. It has therefore been prescribed vide para-9 that it is appropriate to recognize revenue only when it is reasonably certain that the ultimate collection will be made. Para-9.4 thus streamlined the situation as under:- "9.4. An essential criterion for the recognition of revenue is that the consideration receivable for the sale of goods the rendering of services or from the use by others of enterprise resources is reasonably determinable. When such consideration is not determinable within reasonable limits, the recognition of revenue is postponed." 6.4 In the light of the above discussion, since the assessee can be termed as a contractor as also a developer, therefore the Revenue can be recognized in terms of AS-9 guidelines. But before we conclude, we must place on record that as per the statement made from the side of the assessee, the completion certificates were obtained of Halol on 15.3.2005, about Kapadvanj on 10.8.2004 and for Deesa on 31.12.2004. The AO is empowered to examine this aspect and in view of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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