M/S. RUPAYAN UDYOG,KOLKATA vs. ITO, WARD-49(4), KOLKATA, KOLKATA

The first issue to be decided in this appeal is as to whether the Learned CIT(A) is justified in recognizing revenue under Project Completion Method in the facts and circumstances of the case.

The facts in Asst Year 2003-04 are stated herein and they remain the same for Asst Year 2004-05 also except change in figures. & 1 1944/Kol/2014 M/s. Rupayan Udyog-C-AM

The brief facts of this issue is that the assessee is a partnership firm engaged in the business of Construction and Development. For the Asst Year 2003-04, the assessee had declared 11 running projects involving 160 units. The assessee had sold 35 such units only during the Asst Year 2003-04 and declared sale receipts at Rs. 1,02,51,125/-. However, the 11 projects were at various stages of development / completion and the assessee also had declared flat and shop booking advances of Rs. 1,34,11,791/- in its Balance Sheet. The closing work in progress was declared at Rs. 1,08,10,361/-. According to Learned AO, since the assessee was following percentage of completion method for recognizing revenue, the entire advance from customer should be treated as sale receipt and the Learned AO made an addition of Rs. 2,58,848/- after applying the net profit rate of 1.93% to the advance of Rs. 1,34,11,791/-. Before the Learned CITA, the assessee submitted that the assessee has followed Accounting Standard (AS) 7 issued by The Institute of Chartered Accountants of India (ICAI) for recognizing the revenue out of the advance received by the assessee on percentage of completion method. It was argued that no where it is mentioned in AS 7 that the whole amount of receipts / advances from customers are treated as revenue or sale in the year of receipt while the construction work is spread over number of years. Advances or receipts from customers are treated as revenue or sale with reference to the stages of completion of work year to year. The assessee submitted various details together with the manner in which revenue recognition is done by him. The Learned CIT(A), however, felt that the assessee’s method of revenue recognition is totally incorrect as per the Project Completion Method. According to Learned CIT(A), the assessee has been consistently following Percentage of Completion Method for recognizing revenue and 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 profits which can be attributed to the proportion of work completed. It was further held that as per AS 7, the assessee should maintain very specific and completely transparent accounting to enable determination of the percentage completion work and the attendant profits and & 2 1944/Kol/2014 M/s. Rupayan Udyog-C-AM in the case of the assessee, this accounting was not there. Hence he ignored the workings of the assessee and proceeded to make his own calculation for recognizing the revenue and held that the entire advances received by the assessee in the sum of Rs. 1,34,11,791/- is to be brought to tax. Similarly, he held that advances as on 31.3.2004 amounting to Rs. 1,53,43,975/- is to be brought to tax for Asst Year 2004- 05. Aggrieved, the assessee is in appeal before us by raising the following grounds:-

The Learned AR argued that the Learned CIT(A) had completely proceeded on the wrong understanding of AS 7. The Learned CIT(A) thought that the assessee is following Project Completion Method , whereas he himself records in his order that assessee is following Percentage of Completion Method. He argued that the Learned CIT(A) had resorted to estimate the revenue recognition and ultimately concluded by bringing the entire advances received from customers to tax in the sums of Rs. 1,34,11,791/- and Rs. 1,53,43,975/- for Asst Years 2003-04 and 2004-05 respectively. He filed a chart containing the details of sales reflected in the earlier and subsequent years including the assessment years under appeal, details of advances received in each year , details of work in progress in each year. He further stated that the Learned AO while completing the assessment for the Asst Year 2005-06 u/s 143(3) of the Act vide his order dated 31.12.2007 had accepted the revenue recognition method adopted by the assessee. He referred to the balance sheet together with the tax audit report of the assessee as on 31.3.2005 vide pages 18-32 of the Paper Book , wherein minimum & 3 1944/Kol/2014 M/s. Rupayan Udyog-C-AM inventory of units were left with the assessee which were sold in Asst Year 2006-07. He argued that there is no need to disturb the accounts of the assessee and the manner in which the revneue has been recognized by the assessee. In response to this, the Learned DR relied on the order of the Learned CIT(A).

We have heard the rival submissions and perused the materials available on record including the paper book filed by the Learned AR. The facts stated hereinabove remain undisputed and hence they are not reiterated herein for the sake of brevity. We find that the assessee has been consistently recognizing revenue based on percentage of completion of work in accordance with the AS 7 issued by ICAI. The following chart submitted by the assessee would clearly explain the scenario :- RUPAYAN UDYOG & 1944/K/2014 Asstt.Year Sales (Rs.) Advance (Rs.) Work-In Progress(Rs.) 2001-02 21,56,600.00 81,63,120.00 77,57,896.00 2002-03 72,39,370.00 1,50,98,255.00 1,19,28,939.00 2003-04 1,02,51,125.00 1,34,11,791.00 1,08,10,361.00 2004-05 1,05,74,033.00 1,53,43,975.00 1,19,51,978.00 2005-06 3,13,07,200.00 4,62,136.00 3,51,800.00 From the chart, it could be seen that the advances received from customers as on 31.3.2004 (Asst Year 2004-05) amounting to Rs. 1,53,43,975/- had been reduced to Rs. 4,62,136/- as on 31.3.2005 and similarly the sales as on 31.3.2004 amounting to Rs. 1,05,74,033/- has been increased substantially to Rs. 3,13,07,200/- as on 31.3.2005. This goes to prove that the advances received from customers has been converted into sales year on year depending upon the percentage of completion of work by the assessee. We also find from Page 85 of the paper book containing scrutiny assessment order u/s 143(3) of the Act for Asst Year 2005-06 dated 31.12.2007 and a re-assessment order for Asst Year 2005-06 framed u/s 143(3) read with section 147of the Act on 28.12.2010 enclosed in Page 88 of Paper Book , that the revenue recognition method adopted and declared by the assessee has been accepted & 4 1944/Kol/2014 M/s. Rupayan Udyog-C-AM by the Learned AO and no addition was made on that account. We find that the Learned CIT(A) without any basis and ignored the accounts of the assessee and resorted to make estimation of percentage of work completed and erroneously concluded that the entire advances have to be treated as income in the Asst Years 2003-04 and 2004-05. We are convinced with the manner of revenue recognition by the assessee. Hence the additions made by the Learned AO in this regard and have no hesitation in deleting the additions made thereon. Accordingly the grounds 1 to 3 raised by the assessee in this regard are allowed.

With regard to the ground raised by the assessee on disallowance of donation, the Learned AR stated that he is not pressing the said ground. The same is taken as a statement from the Bar. Accordingly, the ground no. 4 raised by the assessee is dismissed as not pressed.

The last ground raised by the assessee is general in nature and does not require any adjudication.

In the result, the appeals of the assessee are partly allowed.