ITO, CHENNAI vs. NARESH KUMAR JAIN, CHENNAI

आदेश / O R D E R

PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER:

ITA No.833/Mds/2017 :- 2 -:

‘’1. The order of the Commissioner of Income- tax (Appeals) is contrary to the law and facts of the case.

Facts apropos are that assessee engaged in digging and 2. laying of telephone cables, on contract basis had filed his return of income for the impugned assessment year disclosing income of �6,64,530/-. During the course of assessment proceedings, ld. Assessing Officer noted that assessee had shown a sum of �1,15,17,290/- as part of work in progress in his Balance Sheet under the head Current Assets. However, in the trading account there was no work in progress shown by the assessee. As per the ld. Assessing Officer, assessee was following Mercantile system of accounting and was required to show work in progress in the trading account.

ITA No.833/Mds/2017 :- 3 -:

Assessee was put on notice on this lacuna. Reply of the assessee was as under:-

‘’.........the amount of �1,15,17,290/- appearing in the books as work in progress is the amount carried forward being orders which were in progress and not completed during the year. The breakup of the same is enclosed herewith. The respective expenses have been credited and work in progress debited for the said amount on 31.03.2012. These amounts are again debited on 01.04.2014 and credited work in process account. In the same way the amount of �34,96,888/- shown as work in process as �34,96,888/- was transferred to the respective expense account on 01.04.2012 and work in process account was credited’’.

However, ld. Assessing Officer did not accept the above reply.

According to him, assessee was following a practice of not showing work in progress in his Trading Profit and Loss account, though this was shown in his Balance Sheet. According to him, difference between closing and opening work in progress had to be taken as income of the assessee. Work in progress as per Balance Sheet as on 31.03.2011 was �34,96,888/- and work in progress as per Balance Sheet as on 31.03.2012 was �1,15,17,290/-. Difference of �80,20,402/-was added by the ld. Assessing Officer.

Ld. Assessing Officer also noted that assessee had in the 3.

Profit and Loss account excluded expenditure coming under work in progress from direct cost. According to him, work in progress having

ITA No.833/Mds/2017 :- 4 -: been brought into the Trading Account, it was required that expenditure which went into such work in progress was included in the direct cost. He worked out a sum of �4,27,346/- as net profit not taken into account when the such expenditure was charged to the Profit and Los account. Thus a total addition of �84,47,748/- was made.

Aggrieved, assessee moved in appeal before the ld. 4.

Commissioner of Income Tax (Appeals). Argument of the assessee was that it was following project completion method. As per the assessee, if the work in progress was treated as part of Trading Profit and Loss account, then expenditure which formed such work in progress should also go into such Trading account. As per the assessee, it had earlier excluded such work in progress as well as expenditure components therein from the Trading Profit and Loss account. Contention of the assessee was that even if these were included in the trading Profit and Loss account, it made no difference.

Assessee also gave a work-out of his net profit ratio for various assessment years which read as under:-

AY 2010-11 2011-12 2012-13 2013-14 2014-15 NP Ratio 6.63% 4.70% 4.36% 2.51% -34.83% ITA No.833/Mds/2017 :- 5 -:

Ld. Commissioner of Income Tax (Appeals) after considering 5. the submissions of the assessee was of the opinion that ld. Assessing Officer had not properly understood the method of accounting followed by the assessee. As per the ld. Commissioner of Income Tax (Appeals) when expenditure included in work in progress was not reckoned while preparing the Trading Profit and Loss account, then exclusion of work in progress made no difference. However, as per the ld. Commissioner of Income Tax (Appeals) net profit shown by the assessee was widely fluctuating. It seems assessee’s representative agreed on an estimated profit of 8%. Ld. Commissioner of Income Tax (Appeals) upheld the addition to the extent of �7,51,430/- being difference between what was returned by the assessee and profit estimated at 8%.

Now before us, the ld. Departmental Representative strongly 6. assailing the order of the ld. Commissioner of Income Tax (Appeals) submitted that without considering opening and closing work in progress, Trading profit and loss account could not be accepted. As

per the ld. Departmental Representative, ld. Assessing Officer was justified in reworking the trading account including work in progress.

Contention of the ld. Departmental Representative was that increase in work in progress was rightly considered as part of income.

ITA No.833/Mds/2017 :- 6 -:

According to him, ld. Commissioner of Income Tax (Appeals) fell in error in rejecting the method adopted by ld. Assessing Officer and estimating the profit of the assessee at 8% of his contract receipts.

We have considered the rival contentions and perused the 8. orders of the authorities below. It is true that assessee had not shown opening work in progress and closing work in progress in its Trading profit and loss account, though these sums were shown in the Balance Sheet. Contention of the assessee is that expenditure going in the work in progress were never included in the direct cost charged to the trading account. Or in other words, as per the assessee if the work in progress was forcibly introduced in the Trading account then the corresponding direct expenditure should also be increased proportionally. We find much strength in this contention of the assessee. Ld. Assessing Officer had not increased the direct cost that went into the work in progress in the reworked trading account. If such cost was included then in our opinion there would not have been much effect of exclusion or inclusion work in progress on the profit of the assessee. That apart, ld. Commissioner of Income Tax (Appeals) had appreciated the matching principle, and had estimated the profit

ITA No.833/Mds/2017 :- 7 -: of the assessee at 8% of contract receipts, since the working results were varying wildly over the years. In the facts and circumstances of the case, we do not find any reason to interfere with the order of the ld. Commissioner of Income Tax (Appeals).

In the result, the appeal of the Revenue stands dismissed. 9.

Order pronounced on Thursday, the 7th day of December, 2017, at Chennai.