Case Law Details
RELEVANT PARAGRAPHS:
13.5 That in the case of running contracts, no income, profits or gains can in fact be computed unless the contract is completed and if the contract is completed in a period of more than a year, the crucial time for calculating the income, profits and gains arrives only when the entire contract is completed in other words, argument was that the only method by which the gains or profits of the assessee could be determined was to wait until the whole of the expenditure to be incurred by the assessee over this contract business had been made good and thereafter to assesss all receipts in full. In our opinion this argument is based on the assumption that unless and until the entire amount of expenditure to be incurred over the contract is known, no profit or gain can be calculated even if the contract moneys are received by an assessee in the course of the contract we find no justification for this assumption. It is true, as laid down in the case of Gresham Life Assurance Society v. Styles, that “profits and gains must be ascertained on ordinary principles of commercial trading” and the word “Profits” has to be understood as observed in that very case. “In the natural and proper sense, in a sense which no commercial man would misunderstood. ” But that means only this much “that no gain or profit could be said to arise unless and until a balance had been struck between the cost of construction and the proceeds of contract.” It, however, cannot be disputed that as a rule the balance between the cost of construction and the proceeds of contract for the purpose of assessment under the Income-tax Act has to be struck at an interval of every accounting year because that is the unit of time stipulated under the Act. The exception may arise when the balance cannot be struck between the cost of acquisition and the proceeds of sale on any method known in the field of commercial trading for in that case no profit can be said to arise in that period as in the case of a solitary adventure in the nature of trade.
13.6 The primary issue in accounting for construction contracts is the allocation of construction revenue and contract costs to the accounting periods in which construction work is performed. In the case under consideration the assessee followed percentage of completion method under this method contract revenue is matched with the contract cost incurred in reaching the stage of completion of resulting in the reporting of revenue, expends and profit which can be attributed to the proportion of work completed. This method of percentage of completion is a recognized method of accounting.
13.9 With above back ground of discussion if we consider the issue under consideration, whether two projects, jogeswari and Nalasopera project of the assessee were completed in the year under consideration or not. The contention of the assessee is that the assessee has tried to obtain TDR in respect of Jogeshwari Project but the same could not be materialized. SMC had restricted to grant permission for utilization of TDR in the corridor area and the Jogeshwari project situated in the corridor area. The Commissioner (Appeals) has given categorical finding that originally the assessee applied for construction of Jogeshwari project only up to third floor by utilizing full FSI. The fourth floor was not there to construct originally. As regards Nala Sopera project the Commissioner (Appeals) held that originally the assessee applied for approval of construction of 40 flats in Wing A upto second floor,
Wing B up to third floor and Wing C up to third floor. The competent authority CIDCO approved the project. The construction as approved was completed and, therefore, CIDCO issued occupancy certificate on 4-5-2001. The possession of all the flats was handed over to the respective buyers before 31-3-2002. Subsequently, the assessee applied for construction of third & fourth floor of Wing A (Flats). CIDCO issued commencement certificate on 14-5-2003, almost three years after the first phase of the project was fully constructed.
3.12 When the assessee claimed that contract that contract work was in progress and was not completed, the onus is on the assessee to prove this aspect by necessary evidence & material. One of the best evidence available with the assessee is the expenditure incurred subsequently, to support the fact that the work was in complete and the assessee has incurred certain expenditure to complete the work. In the case under consideration, the assessee has failed to point out such expenditure, if any, incurred to complete the existing works. Contrary to that we noticed that the assessee has shown work-in-progress in subsequent years as under :-
YEAR Jogeshwari Nalasopara
31-3-2002 22543500 9126000
31-3-2003 23093500 9815100
31-3-2004 23093500 9901000
31-3-2005 23093500 9975800
31-3-2006 23093500 1079700
13.3 From the above comparative position of work-in-progress shown by the assessee in subsequent years, we find that the assessee did not incur any further expenditure in respect of Jogeshwari project. Similarly in respect of Nalasopara project, though work-in-progress has been increased in subsequent years but the assessee has failed to prove that the expenditure was incurred to complete the works. In absence of such details it can be presumed that the expenditures were incurred for second phase of project which is a separate project. Thus, we find that the Assessing Officer has rightly held that works/projects were completed in the year under consideration. However, we find that profits calculated by the Assessing Officer require recalculation. The Assessing Officer is directed to recalculate the project profit or loss as per law, as per above discussion after considering facts of the additional grounds raised before us, after considering Accounting Standard AS-7 – Construction Contracts issued by the Chartered Accountants of India and after providing reasonable opportunity of hearing to the assessee.
