KAYJI REAL ESTATE PVT. LTD. vs. THE ASST. COMMISSIONER OF INCOME TAX AND ANR.

ORAL JUDGMENT : (Per V. M. Kanade, J.) The appellant has filed this appeal challenging the 2 judgment and order passed by Income Tax Appellate Tribunal ('ITAT' for short), Panaji Bench dated 27/01/2006 in ITA No.8/PNJ/1999 for Assessment Year 1996-1997. 2. The appeal was admitted by order dated 03/10/2006 on the following two substantial questions of law : “(i) Whether on the facts and in the circumstances of the case the Tribunal was right in rejecting the method of valuation of work in progress adopted by the appellant which was based upon the Accounting Standard No.7 (AS-7) laid down by the Institute of Chartered Accountants of India as per which the profits of the appellant could be correctly computed and which was regularly followed by the appellant in subsequent years ? (ii) Whether on the facts and in the circumstances of the case, the decision of the Hon'ble Supreme Court in on behalf of the appellant by the Hon'ble Tribunal before placing reliance on the same as mandated by the Hon'ble Supreme Court in Sandvik Asia Ltd. Vs. CIT(281 ITR page 643) ?”

3 The appellant is a Company engaged in business of constructing residential and commercial buildings and sale of the flats and commercial shops and also business of Real Estate Development. The relevant financial year in the present case is financial year ended on 31/03/1996. It is the case of the appellant that till the financial year ended on 31/03/1995, the appellant Company had only one project known as 'Radha Enclave' which consisted of construction and sale of residential flats and commercial shops. It is the contention of the appellant that all the direct and indirect costs which were incurred by the appellant were in respect of only one project namely 'Radha Enclave' and, therefore, all these costs were included under the head “works- in- progress”. The appellant's case is that during the next assessment year i.e. year ended on 31/03/1996, the appellant had started two work projects and as such, it was not possible to allocate indirect costs including financial costs, selling costs and general administrative costs on the three projects. The appellant, therefore, made change in the method of valuation of work in progress and excluded the marketing and financial costs and a portion of administrative costs. The case of the appellant is that they followed Accounting Standard 7 system ('AS-7 system' for short) and thereafter continued to follow the said system in all 4 subsequent years. According to the appellant, since in the year ended on 31/03/1995, the Company did not sell any flat, it had included all the direct and indirect costs in respect of the project 'Radha Enclave' and these costs therefore, included under the head 'work-in-progress'.

8 of finding of fact could not be set aside.

9 Tax (Appeals) in his judgment has rightly held that change in the accounting system was bona fide after taking into consideration the facts in the present case. The ITAT however, while giving its reasons has clearly avoided to give any finding on this question of fact and as such, it cannot be said that ITAT had given any finding against the appellant on the question of bona fides of the appellant or had set aside the finding which was recorded by the Commissioner of Income Tax (Appeals). The submission made by learned Counsel appearing on behalf of the respondents that this finding was confirmed by ITAT cannot be accepted. Learned Commissioner of Income Tax has rightly observed that since there was no sale of flats in the earlier assessment year, the appellant could have shown the said expenditure which was incurred, as loss and could have carried forward the loss in the next year. Secondly, it is admitted position that in the subsequent years, the appellant has been following AS-7 accounting system and the same was accepted by the Assessment Officer. In fact thereafter, the Central Government has directed all the developers and builders to follow AS-7 accounting system. Taking into consideration the aforesaid facts, therefore, the ITAT has clearly erred in setting aside the order passed by the Commissioner of Income Tax (Appeals). Thirdly, in our view, the ratio of the judgment in the case of British Paints India Ltd (supra) would strictly not apply to the facts of the 10 present case though the principles governing work in progress may be similar to those governing the stock. The fact remains that in the said case, the costs incurred by the Company which were part of the manufacturing costs were not taken into consideration and, therefore, those costs were trading costs and would be covered under the trading account. In the present case, however, the costs in fact were indirect costs namely financial costs, general administrative costs and marketing costs and, therefore, they had to be shared amongst three projects and had to be considered in the profit and loss account under AS-7 system. The ratio of this judgment, therefore, strictly speaking would not support the case of the revenue.

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