Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “A” BENCH, CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI S. JAYARAMAN
आदेश/ O R D E R
PER S. JAYARAMAN, ACCOUNTANT MEMBER:
The assessee filed this appeal against the order of the Commissioner of Income Tax (Appeals)-9, Chennai in dated 29.07.2019 for the assessment year 2016- 17.
M/s. Bauer L&T Geo JV, the assessee, is a firm, an unincorporated Joint Venture between L&T Geo Structure LLP and Bauer Specialized Foundation Contractor India Pvt. Ltd, formed on 16.01.2015 for the specific purpose of construction of plastic concrete Diaphragm Wall for Earth cum Rock fill Dam at Head Works of Indira Sagar Polavaram, Dam Project, Andhra Pradesh. As per the JV agreement, the participating interests of both the parties to the Joint Venture is equal i.e., 50% each. The Government of Andhra Pradesh had invited proposal for Indira Sagar Polavaram Project for the design and cut-off wall, vibro-compaction and sheet piling works and the contract was awarded to one M/s. Transtroy India Ltd. Thereafter, the Transtory India Ltd had subcontracted part of the work to the assessee. During the assessment proceedings, the AO has ascertained that the assessee raised invoices till 31.03.2016 at Rs. 59.42 crores, against which it recognised the revenue of 47.95 crores and on the balance after adjusting for stock at site, it arrived at Rs. 11.16 crore and shown it as “Due to Customers”. The assessee recognised Rs. 47,95,02,620/- as revenue from operations based on the percentage completion method, and submitted that it is in the business of construction contracts, recognised the revenue as per Accounting Standard 7-Construction Contracts read with Guidance note on Accounting for Real Estate Transactions etc, for the reason that the cost incurred during the current financial year to the total project revenue is @11.36% only and it has not achieved a reasonable level of 25% and therefore it has not recognised margin. The AO after due examination held, inter alia, that invoices cannot be raised without measurable quantities, the payments of invoiced amount may be made after due measuring by the principal but that does not prevent the contractor from recognising the revenue therein or admitting the income earned. It is clear that the quantities have been measured as one of the creditors M/s. Keller Engineering, apparently, sub-contractor involved in the project have raised a bill on the assessee firm and provided clear measurements of the work done.
The Accounting Standards as put forth by the AR himself states that revenue can be recognised if atleast 10% of the contract consideration as per the agreement of sale or any other legally enforceable documents are realised at the reporting date in respect of each of the contracts and when it is reasonable to expect that the parties to such contracts will comply with the payment terms as defined in the contracts. Therefore, the AO held that in the assessee’s case both the conditions are satisfied i.e., the assessee has completed 10%, in fact 11.36% as admitted by it and 14% if the invoices raised of Rs. 59.42 crores is taken into account. As far as the payment terms are concerned, the assessee is in receipt of unadjusted mobilisation advance and moreover, the project itself is funded by the Govt. of Andhra Pradesh. Thereafter, the AO held that the accounting standards and guidance notes are specifically relevant to Real Estate and Builders following the percentage completion method. Even if the assessee were to adopt the same in its accounting, the notional margin on the completed value should have been rightly admitted. Even if the assessee contentions were to be accepted, the work in progress as at the end of the year should have been reported. The assessee has not admitted the same either. Therefore, the AO adopted the notional margin of 5% on the receipts or the construction related activity of Rs. 47.95 crores as admitted by the assessee in its P&L account and thus added Rs. 2,39,75,131/- to the returned income. Aggrieved, the assessee filed an appeal before the CIT (A) .After examining the issues and the material before him, the Ld. CIT(A) issued an enhancement notice to the assessee as to why the invoice value of Rs. 59.42 crores should not be recognised as revenue from operations. After considering the assessee’s explanation etc, the Ld. CIT(A) enhanced the assessee’s income at Rs. 11,47,56,392/- being a difference between (Rs.
59,42,59,012/- minus 47,95,02,620/-). Aggrieved against that order, the assessee filed this appeal with the following grounds of appeal:
“1. The order of the Commissioner of Income tax (Appeals) is contrary to law, facts and in the circumstances of the case.
2. The Commissioner of Income tax (Appeals) erred in enhancing the disallowance to Rs.11,47,56,392/- as against the disallowance of Rs.2,39,75,139/- made by the assessing officer. 2.1. The Commissioner of Income tax (Appeals) erred in holding that the appellant ought to have credited the amounts of invoices raised to the extent of Rs. 59.42 crore to the Profit & Loss account rather than adopting the balancing figure of contract costs incurred of Rs.47. 95 crore as revenue from operations. Therefore, the income of the appellant is enhanced by Rs.11,47,56,392/- being the difference between Rs. 59,42,59,012/- and Rs.47, 95,02,620/-. 2.2 The Commissioner of Income tax (Appeals) ought to have appreciated that the appellant is in the business of construction contracts and revenue is recognized as per Accounting Standard 7- construction contracts read with Guidance note on Accounting for Real Estate Transactions. 2.3 The Commissioner of Income tax (Appeals) ought to have appreciated that the appellant had recognized Rs.47,95,02,620/- as Revenue from operations based on percentage of completion method. The cost incurred during the current financial year to the total project revenue is proportionate11.36% (i.e 47,96,16,890/422,00,00,000). 2.4 The Commissioner of Income tax (Appeals) ought to have appreciated that the appellant has not achieved a reasonable level 25% and only 11.36% of total cost has been incurred the appellant has not recognized the margin. Hence addition of difference between invoice raised and revenue recognized is not warranted. 2.5 Without prejudice the differential amount has been offered in subsequent years and hence the addition for the current year amounts to double taxation. 2.6 Without prejudice, if a higher value of invoices is recognised then corresponding proportion of expenditure estimated to be incurred for the entire project should also be reduced.
3. Appellant craves leave to adduce additional grounds at the time of hearing. ”
The AR inviting our attention to the copy of the completion certificate issued by the Govt. of Andhra Pradesh, water sources department, Polavaram Irrigation Project dated 04.04.2019 submitted that the impugned project was completed in 2019. Inviting our attention to the copies of certificate issued by M.K. Dandeker & Co., Chartered Accountant dated 05.09.2019 and summary of revenue and margin recognised over the period of project etc placed in the paper book, the Ld. AR submitted that the work was completed between financial year 2015-16 & 2018-19 and how the revenue is recognised, how much is actual cost incurred, the margin, the tax paid etc., between financial year 2015-16 & 2018-19, therefore, in accordance with accounting standard-7, the assessee has admitted income in various years.
Following the same standard for this year, the assessee has admitted an amount equal to the expenditure incurred for construction and project related activity and has not offered any margin / given over and above the expenses incurred in the activity carried out during the year. He invited following the observations made by the AO
“As per Guidance Note" ... At least 25% of the saleable project area is secured by contracts or agreements with buyers. At least 10% of the contract consideration as per the agreements of sale or any other legally enforceable documents are realized at the reporting date in respect of each of the contracts and it is reasonable to expect that the parties to such contracts will comply with the payment terms as defined in the contracts. To illustrate - if there are 10 agreements of sale and 10% of gross amount is realized in case of 8 agreements revenue can be recognized with respect to these 8 agreements only. In the present case, the assessee has incurred an amount of Rs.47,96,16,890/-. On applying the percentage of completion method. The cost incurred during the current financial year to the total project revenue is 11.36% (47,96,16,890/422.00,00,000). As per the accounting standard and the guidance note, the assessee shall recognize revenue when a reasonable level of development is achieved. The guidance note defines reasonable level of development as 'where not less that25% of the construction and development cost are incurred'. In the present case, since the total cost incurred is only 11. 36%, hence the assessee has not recognized the margin. Moreover, since the contract is in the initial stage of development, the assessee has not recognized margin as revenue in the cost incurred. Also, this is a industry practice followed by Construction Companies ...”and relied on the same .
Per contra, the Ld. DR submitted that the main contract is given by the Govt. of Andhra Pradesh to M/s. Transtroy India Ltd., and the assessee is a sub-contractor, for executing part of the work as per sub- contract agreement. It raised invoice to the tune of Rs. 59.42 crores, incurred Rs 47.95 crores. Therefore, there is no difficulty at all in recognising the revenue as per books of account i.e., on mercantile system. The AO had already clearly dealt that the invoices cannot be raised without measurable quantities, the payments of invoiced amount may be made after due measuring by the principal but that does not prevent the contractor from recognising the revenue therein or admitting the income earned. It is clear that the quantities have been measured as one of the creditors M/s. Keller Engineering, apparently, sub-contractor involved in the project have raised a bill on the assessee firm and provided clear measurements of the work done. The Accounting Standards as put forth by the AR himself states that revenue can be recognised if atleast 10% of the contract consideration as per the agreement of sale or any other legally enforceable documents are realised at the reporting date in respect of each of the contracts and when it is reasonable to expect that the parties to such contracts will comply with the payment terms as defined in the contracts. Therefore, the AO held that in the assessee’s case both the conditions are satisfied i.e., the assessee has completed 10%, in fact 11.36% as admitted by it and 14% if the invoices raised of Rs. 59.42 crores is taken into account. As far as the payment terms are concerned, the assessee is in receipt of unadjusted mobilisation advance and moreover, the project itself is funded by the Govt. of Andhra Pradesh. Thereafter, the A O held that the accounting standards and guidance notes are specifically relevant to Real Estate and Builders following the percentage completion method. Even if the assessee were to adopt the same in its accounting, the notional margin on the completed value should have been rightly admitted. Further, even if the assessee contentions were to be accepted, the work in progress as at the end of the year should have been reported. The assessee has not admitted the same either.
During the appeal proceedings, the Ld. CIT(A) issued an enhancement notice as to why the invoice value of Rs. 59.42 crores should not be recognised as revenue from operations. After considering the assessee’s explanation, the Ld. CIT(A) held that the assessee’s contention is not acceptable as the assessee itself has raised the invoice. Therefore, there is no difficulty at all in recognising the revenue as per books of account on mercantile system. Further, the main contract was given by Govt. of Andhra Pradesh to M/s. Transtroy India Ltd., and the assessee is a sub-contractor for executing part of the work, as per the sub-contract agreement, and therefore relying on the Supreme Court decision in the cases of Tuticorin Alkali Chemicals and Fertilizers Ltd vs CIT 227 ITR 172 (SC) and CIT vs British Paints India Ltd 54 Taxmann 499 (SC), the Ld. CIT(A) held, inter alia, that the accounting policies march step by step together with the provisions of Income Tax Act and what prevails is the provisions of the Act and not the accounting principles. Each assessment year is a self-contained unit and tax of a particular year being payable with reference to the income of that year, the income has to be computed in terms of the Act. The income of one year cannot be shifted to another year. Therefore, the CIT(A) held that the revenue recognition followed by the assessee is not acceptable, especially when the invoices were raised by the assessee to the extent of Rs. 59.42 crores. Therefore, there is no justification at all to recognise only the expenses incurred to the extent of Rs. 47.95 crores as revenue from operations. The assessee should have credited the amounts of invoices raised to the extent of Rs. 59.42 crores to the P&L account rather than adopting the balancing figure of contract cost incurred of Rs. 47.95 crores as revenue from operations.
Therefore, the Ld. CIT(A) correctly enhanced the assessee’s income at Rs. 11,47,56,392/- being a difference between (Rs. 59,42,59,012/- minus 47,95,02,620/-. Thus, the Ld. DR supported the orders of the lower authorities.
We heard the rival submissions and gone through the relevant material. It is clear from the above that the assessee is a sub- contractor. It claims that its revenue should be recognised in accordance with accounting standard AS-7, on the project completion method. However, the revenue holds that the main contract was given by Govt. of Andhra Pradesh to M/s. Transtroy India Ltd., and Transtroy India Ltd., has given sub-contract to the assessee, therefore, the assessee’s income has to be assessed in accordance with regular method of accounting. From the orders of lower authorities, it is clear that they have not examined the terms of sub-contract, the scope of the sub-contract as to whether it covers the entire work or unit wise work including the time limit in which such work has/have to be completed, the process of ascertaining completion of each of the work and its quantification etc., so that the accrual of income, evaluation and application of appropriate accounting standard/method etc can be determined. Therefore, we deem it fit to remit the issues arising in this appeal back to the AO for a fresh examination on the above lines. The assessee shall place all the material in support of its contention before the AO and comply with the requirements of the AO in accordance with the law. The AO is also at liberty to conduct appropriate enquiry as deemed fit. However, he shall offer effective opportunity to the assessee on the material etc., to be used against it and then decide the issue in accordance with law.
In the result, the assessee’s appeal is treated as partly allowed for statistical purposes.
Order pronounced on 03rd January, 2020 at Chennai.