SURELA INVESTMENT & TRADING P. LTD,MUMBAI vs. ASSISTANT COMMISSIONER OF INCOME TAX (OSD)-2(3), MUMBAI

The brief facts of the case are that assessee is a company in which public are not substantially interested and is engaged in the business of builders and developers. The assessee filed its return of income on 30.10.07 declaring total income at Rs. 12,14,340/-. The return was processed u/s 143(1). Subsequently, the case was selected for scrutiny under CASS and accordingly, notices u/s 143(2) and 142(1) were issued and served on the assessee. In response, AR of the assessee filed the relevant information as called for. After considering the submission of assessee, AO passed assessment order u/s 143(3) of the Act thereby making additions, determining the total income at Rs.54,02,192/-.

Aggrieved by the above order of AO, assessee preferred appeal before Ld. CIT(A) and Ld. CIT(A) rejected the contention of the assessee by relying on the various judicial pronouncements and the findings of the AO. Accordingly, Ld. CIT(A) dismissed the appeal of the assessee.

Now before us, the assessee has preferred appeal by raising the grounds of appeal as under:-

Ground no. 1 :

We have heard the rival contention and gone through the facts and circumstances of the case. Admittedly, the assessee is regularly following project completion method of accounting for computation of its income. Admittedly, the assessee has also not completed the construction, as per Revenue, as it has completed the construction of 4,244 sq. Meter of area as against the area of 50,089.63 sq. meters. The AO also admitted that Surela Investments & Trading Pvt. Ltd. the RCC work is completed up to 90%, finishing work is completed up to 80% and extern development and services work is completed up to 70%.The learned Counsel for the assessee filed complete detail of cumulative amount received from parties and cumulative expenditure incurred year wise from 1994- 2005. The assessee also filed details of progress of project year wise and method of accounting followed. The method of accounting followed by the assessee is completed contract method which is followed throughout and there is no change at all. Even the Revenue either u/s 143(1) or u/s 143(3) also accepted the completed contract method adopted by the assessee qua this project only. The learned Counsel for the assessee filed a complete computation of income and accounts for AY 1999-2000 to 2004-05 and also assessment order completed u/s 143(3) for AY 2000-01. The learned Counsel for the assessee also made a statement at bar that project was completed in AY 2007- 08 i.e. year ending 31-03-2007 and profit from this project was disclosed in AY 2007-08. According to him, the stock in trade in case of no sale was carried forward in AY 2008-09 and 2009-10 and that remains as stock in trade. We find that the facts in these case are undisputed that the assessee are regularly following completed project method which was never disturbed except in AY Surela Investments & Trading Pvt. Ltd. 2005-06 and 2008-09, the years under dispute. On this proposition the learned Counsel for the assessee relied on the decision of the Hon’ble Bombay High Court in the case of CIT vs. V.S. Dempo and Co. Pvt. Ltd. (1996) 131 CTR 203 (Bom) wherein the principle of complete contract method was accepted on the basis of consistency. The relevant finding of Hon’ble High Court are that once the completed project method has been constantly followed since beginning of the business and the assessing authorities have accepted the same in the preceding years, the construction of projects in hand during the relevant assessment years were not complete at all and were at the various stages of construction/development. There is no dispute to the fact that the income returned was only on account of other receipts and the AO adopted the fixed percentage of profit method in respect of construction projects and added to the income. Hon’ble High Court laid down the proposition that the completed contract method followed by the assessee was correct and resort to section 145(1) was not justified.

Before concluding, we may point out that under section 211(2) of the Companies Act, Accounting Standards ("AS") enacted by the Institute of Chartered Accountants have now been adopted [see: judgment of this Court in J.K. Industries case (supra)]. Shri Tripathi, learned counsel for the Department, has placed reliance on AS 22 as the basis of his argument that the completed contract method should be substituted by deferred revenue expenditure (spreading the said expenditure on proportionate basis over a period of time). He also relied upon the concept of timing difference introduced by AS 22. It may be stated that all these developments are of recent origin. It is open to the Department to consider these new accounting standards and concepts in future cases of chit transactions. We express no opinion in that regard. Suffice it to state that, these new concepts and accounting standards have not been invoked by the Department in the present batch of civil appeals..”

In the present case before us also the AO tried to invoke AS-7 of the accounting standard which is applicable to the contracts entered into during accounting period commencing on or after 01-04-2003. In the present case, the contract was entered in 1993 by way of development agreement and the assessee has returned the working progress from AY 1999-2000 and department has accepted consistently. In view of these facts, we direct the AO to compute the income on the basis of completed project method and not on percentage completion method of accounting. The appeal of the assessee is allowed.

We have heard counsels for both the parties and we have also perused the material placed on record as well as the orders passed by revenue authorities. We find that the identical ground raised in the present appeal has already been decided by the consolidated order of Coordinate Bench of ITAT in No. 546/Mum/2009 for AY 2005-06 and ITA No. 3770/Mum/2013 for AY 2008-09 in assessee’s own case on merits.