Income Tax Appellate Tribunal - Mumbai
Shivshaihi Punarvasan Prakalp Ltd., vs Assessee on 29 September, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH 'H' : MUMBAI
BEFORE SHRI B.R. MITTAL, ( JUDICIAL MEMBER) AND
SHRI RAJENDRA SINGH,(ACCOUNTANT MEMBER)
ITA No.5002/Mum/2010
Assessment Year : 2000-01
ITA No.3050/Mum/2007
Assessment Year : 2001-02
ITA No.5003/Mum/2010
Assessment Year : 2002-03
ITA No.3486/Mum/2007
Assessment Year : 2003-04
M/s. Shivshahi Punarvasan Prakalp Ltd.
5th Floor, Griha Nirman Bhavan
Bandra (E)
Mumbai-400 051. .....(Appellant)
P.A. No.(AACCS 1590 C)
Vs.
Income tax Officer
Ward - 10(1)(4)
Aayakar Bhavan
M.K. Road
Mumbai-20. .....(Respondent)
Appellant by : Shri Pankaj Toprani
Respondent by : Shri Goli Sriniwas Rao
Date of hearing : 29.9.2011
Date of pronouncement : 31st October, 2011
ORDER
PER BENCH.
These appeals by the assessee are directed against different orders of CIT(A) dated 29.4.2010, 18.2.2008, 29.4.2010 and 8.3.2007 for assessment years 2000-01 to 2003-04 respectively. The disputes raised by the assessee in these appeals relate to disallowance of future 2 ITA No.3486,3050,5002 & 5003/M/ A.Y:00-01 to 03-04 estimated losses, addition on account of sale of TDR, addition under section 115JB and legal validity of reopening of the assessment. As the main dispute regarding disallowance of future losses is common in all the assessment years, these appeals which were heard together are being disposed of by a single consolidated order for the sake of convenience.
2. We first take up the dispute regarding disallowance of future losses which is relevant for all the years. The facts in brief are that the assessee in the relevant years was executing slum rehabilitation projects approved by Slum Rehabilitation Authority (SRA). As per the scheme of rehabilitation, a developer approaches SRA with a proposal to develop a slum area. Once the project is approved by SRA, the developer is under obligation to construct free of cost tenement of size of 225 sq.ft. to all slum dwellers. In consideration for developing the projects, the developer receives TDR/ or right to construct over and above the normal permissible limit and this additional area is allowed to be sold in the open market. Thus the cost to the developer comprised cost of construction of rehabilitation area and cost of free sale area and the revenue generated comprised of sale of TDR and/ or revenue from sale of free sale area in the open market. 3 ITA No.3486,3050,5002 & 5003/M/
A.Y:00-01 to 03-04 2.1 The assessee who was following mercantile system of accounting had adopted percentage completion method of accounting of income from the project as per para 7.2 of Accounting Standards (AS-7) relating to accounting of construction contracts issued by Institute of Chartered Accountants of India (ICAI). In terms of para 19 of AS-7, the assessee had recognized revenue with reference to completion of stage of construction at the balance sheet date. However, the loss envisaged in the entire project work was immediately recognized as provided in para 19 of AS -7. The said para 19 reads as under:-
" A foreseeable loss on the entire contract should be provided for in the financial statements irrespective of the amount of work done and the method of accounting followed."
2.2 Para 13.1 of AS-7 also provides for accounting of future losses. The said para is also reproduced for ready reference.
"When current estimates of total contract cost and revenue indicate a loss, provision is made for entire loss on the contract irrespective of the amount of work done and the method of accounting followed. In some circumstances, the foreseeable losses may exceed the cost of work done to date. Provision is nevertheless made for the entire loss of the contract."
2.3 The assessee while working out the future losses from different projects, estimated the cost of the project by adding amount for escalation-cost, contingencies, interest etc. Similarly, the sale price was estimated by adopting the sale rate of 380 sq.ft. for TDR and 200 sq.ft. for shops. For instance, in respect of Turbe Mandale 4 ITA No.3486,3050,5002 & 5003/M/ A.Y:00-01 to 03-04 Mankhurd Project, the assessee computed the estimated revenue at Rs.76.75 crores and estimated cost at Rs.136 crores resulting into loss of Rs.69.25 crores. Similarly, computation of loss was made in respect of other projects also and claimed as deduction. For assessment year 2001-02, the assessee claimed deduction on account of future losses in respect of different projects at Rs.69.52 crores. Similarly, future losses claimed for assessment year 2000-01, 2002-03 and 2003-04 were Rs. 18,29,90,000/-, Rs.1,21,,00,000/- and Rs. 88,71,918/- respectively.
2.4 The assessee submitted before the AO that it was following lower of cost or net realizable value method of valuation of work in progress, which was an accepted method giving rise to losses. Reliance was placed on the judgment of Hon'ble Supreme Court in the case of United Commerce Bank Ltd., vs. CIT (240 ITR 355). It was pointed out that in certain circumstances, it was possible, that WIP turns negative as was in the present case. It was also submitted that the future anticipated losses in respect of the project was nothing but net realizable value of the project which was negative. The AO however did not accept the contentions raised. It was observed by him that the assessee was following mercantile system of accounting as per which the income or expenditure on account of liability accrues only when there is enforceable right in respect of income or liability. 5 ITA No.3486,3050,5002 & 5003/M/
A.Y:00-01 to 03-04 In this case the losses were estimated which were only contingent and therefore, any provision for contingent loss could not be allowed. The AO further observed that the assessee had created the provisional losses for adjusting against interest income to reduce tax liability. The AO therefore, allowed the losses only to the extent attributable to the WIP at the end of the year and not the losses of the entire projects which were yet to be completed. The AO thus disallowed the loss of Rs.69.52 crores for A.Y 2001-02. The working of the losses claimed and losses disallowed by AO for A.Y 2001-02 is given in the table given below:
(Rs. In crore) Sr. Name of Total Estimated Loss % of Loss Excess No. the WIP as cost of envisaged loss to to the loss to project on the during the the total extent be 31.3.01 project as year project of WIP disallow on ed 31.03.01 1 Dindoshi 97.67 191.9 9.85 5.13 5.01 4.84 2 Matunga 4.25 10.22 10.22 100 4.25 5.97 Labour camp 3 Shed 8.85 16.03 16.03 100 8.85 7.18 complex Dharavi 4 Turbhe 21.93 136 59.25 43.57 9.55 49.7 Mandale Mankhurd 5 Wadala 15.68 39 3.028 7.9 1.24 1.84 Site 6 ITA No.3486,3050,5002 & 5003/M/ A.Y:00-01 to 03-04 2.5 Similarly, losses claimed in assessment years 2000-2001, 2002-03 and 2003-04 were also restricted by AO to the loss relating to WIP at the end of relevant year. The AO thus disallowed the losses of Rs.18,29,90,000/-, Rs.1,21,00,000/- and Rs.88,71,918/- respectively for the assessment years 2000-01, 2002-03 and 2003-04.
2.6 The assessee disputed the decision of AO and submitted before CIT(A) that lower of cost or the Net Realisable Value (NRV) was an accepted method of valuation of work in progress. Reliance was placed on the judgment of Hon'ble Supreme Court in Sanjeev Woollen Mills Ltd. vs. CIT (279 ITR 434). It was pointed out that every year the assessee was preparing estimates of revenue and expenses in respect of each project based on technical data available and losses were claimed if the NRV was found to be lower and this was in accordance with the accounting standard AS-7. It was also submitted that the AO had not disputed the factum of loss nor pointed out any specific provision of the Act which was contrary to the method of accounting followed by the assessee.
2.7 CIT(A) on careful examination of accounting standards and the material on record as well as submission of the assessee did not accept the contentions raised. It was observed by him that the loss 7 ITA No.3486,3050,5002 & 5003/M/ A.Y:00-01 to 03-04 had been computed by the assessee on the basis of estimates of revenue. Estimated future revenue and future expenses would only accrue in the future years but under the mercantile system of accounting, only the income or expenses which had become due during the relevant year could be allowed. CIT(A) further observed that it was a settled legal position that provisional losses and contingent liabilities could not be allowed in mercantile system. Only the income and expenses which have become due during the relevant year could be considered for computation of total income. CIT(A) also noted that the Accounting Standard AS-7 had been revised from 1.4.2003 which was silent on applicability of the said Standard to construction activities undertaken by the enterprise on its own account and not as a contractor. CIT(A) further observed that even the pre-
revised AS-7 had a non-obstante clause in the introduction which was as under :-
"This statement deals with accounting for construction contracts in the financial statements of enterprises undertaking such contracts (hereafter referred to as 'contractors' ). The statement also applies to enterprises undertaking construction activities of the type dealt with in this statement and not as contractors but on their own account as a venture of commercial nature where the enterprise has entered into agreement for sale."
2.8 CIT(A) thus observed that in case of developers who were executing contracts on their own, the AS-7 would apply only if they had already entered into sale agreements. Thus, the logic of booking 8 ITA No.3486,3050,5002 & 5003/M/ A.Y:00-01 to 03-04 future losses could be appreciated only when the developer had entered into sale agreement. In the present case, assessee had not entered into any sale agreement during the year and therefore, AS-7 was not applicable. Moreover, in this case the sale price of TDR and expenses to be incurred in future were quite uncertain and therefore, the loss could not be computed with reasonable certainty. CIT(A) thus held that provisions of AS-7 were not applicable. CT(A) also observed that the assessee in fact conceded the position in the submission dated 30.1.2008 in which it was stated that AS-2 and not AS-7 was applicable to the WIP. CIT(A) observed that even provisions of AS-2 were not applicable as no evidence had been placed by the assessee before AO to show that sale price of inventory was less than cost. CIT(A) therefore, upheld the order of AO restricting the loss in proportion to percentage of work completed at the end of the year i.e. WIP. Aggrieved by the order of CIT(A) the assessee is in appeal before the Tribunal in all the years under consideration. 2.10 Before us, the ld. Authorised Representative for the assessee reiterated the submissions made before the lower authorities that income from the rehabilitation project has to be computed as per accounting standard AS-7 which was mandatory for the assessee to follow. It was admitted that the assessee was following percentage 9 ITA No.3486,3050,5002 & 5003/M/ A.Y:00-01 to 03-04 completion method but argued that in terms of para-13.1 of AS-7, the future losses had to be allowed in entirety. It was also pointed out that the assessee was executing a fixed price contract. When pointed out that the AS-7 had not been notified by the Government and therefore, the total income for the purpose of computation of taxes could not be determined in terms of said accounting standard, the ld. AR submitted that the Accounting Standard AS-1 had been notified and even in terms of said Standard, provision for all known liabilities even if determined on estimate has to be allowed. The ld. AR referred to the following decisions in support of the case.
i) 49 DTR 253(Del.)- Triveni Engineering and Industry Ltd.,
ii) 312 ITR 254 (SC)-CIT vs. Woodward Governor India Pvt. Ltd.,
iii) 29 SOT 356 (Mum.) - Mazgaon Dock Ltd. vs. JCIT,
iv) Tribunal decision in ITA No.335 and 336/Mum/2007 in case of Jacobs Engineering India Pvt. Ltd. vs. ACIT dated 26.5.2009.
2.10.1 The ld. D.R on the other hand strongly supported the orders of authorities below. It was submitted that the assessee was following mercantile system of accounting and therefore, only the income which has become due during the year or liability which has been actually incurred during the year could be allowed. It was pointed out that the assessee was not executing a fixed price contract as consideration payable to assessee was in the form of TDR, income 10 ITA No.3486,3050,5002 & 5003/M/ A.Y:00-01 to 03-04 from which could not be determined properly and the same will depend upon the market conditions prevailing during the period of sale of TDR or the sale of the constructed area as per TDR entitlement. There was therefore, variable element involved. Moreover, if due to some unavoidable reasons, project is not completed and is abandoned, no income will accrue to the assessee. Thus accrual of income and incurring of expenses, both were uncertain. Ld. D.R. also argued that income has to be computed under the provisions of the Act and not as per Accounting Standard AS-7 which has not been notified by the Government. It was further pointed out that the Government had notified only As-1 and AS-2 which were regarding disclosure of accounts details by the assessee and not regarding computation income. The assessee was following percentage completion method and therefore, income/loss attributable to the construction completed till the end of the year could only be considered and the AO had therefore rightly disallowed the anticipated losses of future years. 2.11 We have perused the records and considered the rival contentions carefully. The dispute is regarding computation of income from rehabilitation projects being executed by the assessee. In terms of the slum rehabilitation scheme, the assessee was required to construct and provide free of cost tenements of size 225 sq.ft. to all slum dwellers and in consideration was entitled to TDR/ or the right to 11 ITA No.3486,3050,5002 & 5003/M/ A.Y:00-01 to 03-04 construct additional area over and above the normal permissible limits which the assessee could sell in the open market. None of the projects being executed by the assessee were complete and were only in the initial stages of construction. The assessee however estimated the total revenue from the entire project to be completed in future and also the cost involved in completion of the project including the estimated escalation cost, contingencies etc., which showed that there were losses which had been claimed as deduction in the relevant years even though the projects were far from complete. The claim had been made as per para 13.1 of the Accounting Standard AS-7, which provides that when current estimate of total contract cost or revenue indicates a loss, provision is made for entire losses on the contract irrespective of the amount of work done and method of accounting followed.
2.11.1 The issue is whether the income determined or claim of loss made by the assessee as per AS-7 can be accepted. The Accounting Standards prescribed by ICAI are the standards to be followed by the assessee in respect of different business activities. These standards are however not binding on the AO while computing income for the purpose of taxation. The income for the purpose of taxation is required to be computed under the provisions of the Income Tax Act. The 12 ITA No.3486,3050,5002 & 5003/M/ A.Y:00-01 to 03-04 computation of income under the Income Tax Act for different heads of income is required to be made under the provisions of sections 14 to 59 and computation of income under the head "business" is required to be made under the provisions of section 28 to section 44 DB. In cases where the Act requires the income in respect of a particular business activity to be computed in a different manner, there are special provisions incorporated in the Act. For instance, for computation of income from civil construction in cases where the accounts have not been maintained as required under section 44AA(2)(i) and the turnover does not exceed Rs.40.00 lacs, there is special provision under section 44AD to compute the income @8% of turnover or gross business receipts. Similarly there is special provision for computation of profit from retail business under section 44AF. There are also special provisions for computation of income for certain specified businesses in respect of non-residents. For instance, the income from shipping business in case of a non-resident is required to be computed under the provisions of section 44AB under certain conditions which are not satisfied. There are no special provisions for computation of income from construction projects. It is no where provided in the Act that income from construction projects has to be completed in the manner prescribed in AS-7. Therefore, the income from rehabilitation projects is required to be computed under the 13 ITA No.3486,3050,5002 & 5003/M/ A.Y:00-01 to 03-04 normal provisions of the Act. The Accounting Standard, AS-7 has also not been notified by the Government. Therefore, there is no case for computation of income for the purpose of taxation to be made as per Accounting Standard AS-7. When pointed out, the ld. A.R for the assessee submitted that even the Accounting Standard AS-1 notified by the Government provides for allowance of loss in respect of all known liabilities and therefore, provisions for losses has to be allowed as per the notified AS-1.
2.11.2 We have considered the arguments of the ld. A.R based on the Accounting Standard, AS-1, which has been notified by the government. Under the provisions of section 145(1), the income chargeable under the head "profit and gain of business or profession"
or "income from other sources", has to be computed in accordance with either the cash or mercantile system of accounting regularly employed by the assessee. The sub-section (2) of Section 145 provides that the Central Government may modify in the Official Gazette from time to time Accounting Standards to be followed by any class of assessees or in respect of any class of income. The Government has since notified Accounting Standards AS-1 & AS-2.
The Accounting Standards so notified are reproduced below as ready reference.14 ITA No.3486,3050,5002 & 5003/M/
A.Y:00-01 to 03-04 " In exercise 'of the powers conferred by sub-section (2) of section 145 of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby notifies the following accounting standards to be followed by all assessees following mercantile system of accounting, namely :--
A. Accounting Standard I relating to disclosure of accounting policies:
1. All significant accounting policies adopted in the preparation and presentation of financial statements shall be disclosed.
2. The disclosure of the significant accounting policies shall form part of the financial statements and the significant accounting policies shall normally be disclosed in one place.
3. Any change in an accounting policy which has a material effect in the previous year or in the years subsequent to the previous years shall be disclosed. The impact of, and the adjustments resulting from, such change, if material, shall be shown in the financial statements of the period in which such change is made to reflect the effect of such change. Where the effect of such change is not ascertainable, wholly or in part, the fact shall be indicated. If a change is made in the accounting policies which has no material effect on the financial statements for the previous year but which is reasonably expected to have a material effect in any year subsequent to previous year, the fact of such change shall be appropriately disclosed in the previous year in which the change is adopted.
4. Accounting policies adopted by an assessee should be such so as to represent a true and fair view of the state of affairs of the business, profession or vocation in the financial statements prepared and presented on the basis of such accounting policies. For this purpose the major considerations governing the selection and application of accounting policies are following, namely :--
(i) Prudence-Provisions should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a 'best estimate in the light of available information;
(ii)Substance over form - The accounting treatment and presentation in financial statements of transactions and events should be governed by their substance and not merely by the legal form;
(iii) Materiality - Financial statements should disclose all material items, the knowledge of which might influence the decisions of the user of the financial statements.
5. If the fundamental accounting assumptions relating to Going Concern, Consistency and Accrual are followed in financial statements, specific disclosure in respect of such assumptions is not required. If a fundamental accounting assumption is not followed, such fact shall be disclosed.
15 ITA No.3486,3050,5002 & 5003/M/
A.Y:00-01 to 03-04
6. For the purposes of paragraphs (1) to (5), the expressions,--
(a) "Accounting policies" means the specific accounting principles and the methods of applying those principles adopted by the assessee in the preparation and presentation of financial statements;
(b) "Accrual" refers to the assumption that revenues and costs are accrued, that is, recognised as they are earned or incurred (and not as money is received or paid) and recorded in the financial statements of the period to which they relate;
(c) "Consistency" refers to the assumption that accounting policies are consistent from one period to another;
(d) "Financial Statements" means any statement to provide information about the financial position, performance and changes in the financial position of an assessee and includes balance sheet, profit and loss account and other statements and explanatory notes forming part thereof;
(e) "Going concern" refers to the assumption that the assessee has neither the intention nor the necessity of liquidation or of curtailing materially the scale of the business, profession or vocation and intends to continue his business, profession or vocation for the foreseeable future.
B. Accounting Standard II relating to disclosure of Prior period and Extraordinary items and changes in accounting policies:
7. Prior period items shall be separately disclosed in the profit and loss account in the previous year together eir na Ic an amount in a manner so that their impact on profit or loss in the previous year can be perceived.
8. Extraordinary items of the enterprise during the previous year shall be disclosed in the profit and loss account as part of taxable income. The nature and amount o each such item shall be separately disclosed in a manner so that their relative significance and effect on the operating results of the previous year can be perceived.
9. A change in an accounting policy shall be made only if the adoption of a different accounting policy is required by statute or if it is considered that the change would result in a more appropriate preparation or presentation of the financial statements by an assessee.
10. Any change in an accounting policy which has a material effect shall be disclosed. The impact of, and the adjustments resulting from such change, if material, shall be shown in the financial statements of the period in which such change is made to reflect the effect of such 16 ITA No.3486,3050,5002 & 5003/M/ A.Y:00-01 to 03-04 change. Where the effect of such change is not ascertainable, wholly or in part, the fact shall be indicated, If a change is made in the accounting policies which has no material effect on the financial statements for the previous year but which is reasonably expected to have a material effect in years subsequent to the previous years, the fact of such change shall be appropriately disclosed in the previous year in which the change is adopted.
11. A change in an accounting estimate that has a material effect in previous year shall be disclosed and quantified. Any change in an accounting estimate which is reasonably expected to have a material effect in year subsequent to previous year shall also be disclosed.
12. If a question arises as to whether a change is a change in accounting policy or a Change in an accounting estimate, such a question shall be referred to the Board for decision.
13. For the purposes of paragraphs (7) to (12), the expressions,--
(a) "Accounting estimate" means an estimate made for the purpose of preparation of financial statements which is based on the circumstances existing at the time when the financial statements are prepared;
(b) "Accounting policies" means the specific accounting principles and the method of applying those principles adopted by the assessee in the preparation and presentation of financial statements;
(c) "Extraordinary items" means gains or losses which arise from events or transactions which are distinct from the ordinary activities of the business and which are both material and expected not to recur frequently or regularly.
Extraordinary items include material adjustments necessitated by circumstances which, though related to years preceding to the previous years, are determined in the previous year:
Provided that income or expenses arising from the ordinary activities of the business or profession or vocation of an assessee, though abnormal in amount or infrequent in occurrence, shall not qualify as extraordinary item;
(d) "Financial Statements" means any statement to provide information about the financial position, performance and changes in the financial position of an assessee and includes balance sheet, profit and loss account and other statements and explanatory notes forming part thereof;
(e) "Prior period items" means material charges or credits which arise in the previous year as a result of errors or omissions in the preparation of the financial statements of one or more previous years:17 ITA No.3486,3050,5002 & 5003/M/
A.Y:00-01 to 03-04 Provided that the charge or credit arising on the outcome of a contingency, which at the time of occurrence could not be estimated accurately shall not constitute the correction of an error but a change in estimate and such an item shall not be treated as a prior period item.
This notification shall come into force with effect from 1st day of April, 1996 and shall, accordingly, apply to assessment year 1997-98 and subsequent assessment years."
2.11.3 A careful perusal of the Accounting Standards AS-1 & AS-2 notified above shows that these are only regarding disclosure of accounting policies and disclosure of prior period expenses and extraordinary items and changes in accounting policies. These provide that the assessee should disclose all significant accounting policies or any changes in accounting policies. It further provides that the accounting policy should be such so as to represent a true and fair view of the state of affairs of the business, profession or vocation. In this context it has been mentioned that the provisions should be made for all known liabilities. The Accounting Standard notified no where provides that the provisions for known liabilities should be allowed as deduction while computing total income. Whether the provision made can be allowed as deduction or not will depend on facts and circumstances of the case. It is a settled legal position that provisions in respect of liabilities which had been incurred during the year have to be allowed as deduction even if liabilities are required to be discharged at a future date if they can be estimated with reasonable certainty.18 ITA No.3486,3050,5002 & 5003/M/
A.Y:00-01 to 03-04 This legal position has been declared by the Hon'ble Supreme Court in several cases such as in the case of Calcutta & Co. (37 ITR 01); in case of Metal Box Company of India (73 ITR 53); and in case of Bharat Earth Movers (245 ITR 428).It has been made clear in these cases that for claiming deduction on account of any provision for liability, the incurring of liability during the year must be certain. In case of Calcutta & Company (supra), the assessee had sold land with an undertaking to develop it within six months. The sale deed had been executed and on the sale deed date, the assessee had received part of the sale consideration and balance was to be received in installments in future. The assessee had also to develop the land within six months from the sale deed date. It was held that on the date of sale deed, income had accrued as per mercantile system even if part consideration was to be received later. Similarly on execution of sale deed, assessee incurred the liability to incur expenses to develop the land in future and therefore estimated expenditure on development of the land on a reasonable basis was held allowable as deduction. Precisely because of these reasons and the rulings mentioned above, the Accounting Standard-AS-1 notified by the government provides that provisions shall be made in respect of all known liabilities so that AO could allow deduction in respect of liabilities which had been incurred during the year.
19 ITA No.3486,3050,5002 & 5003/M/
A.Y:00-01 to 03-04 2.11.4 The case of the assessee is different. In this case, the assessee was executing a rehabilitation project and the assessee was entitled for TDR /right to sell the additional space. The TDR accrues to the assessee only after completion of certain percentage of the project and any income on account of sale of additional space will accrue only when it has been constructed and sold. It is possible that the assessee in some cases may abandon the project in the mid-way and in that case no income may accrue to the assessee at all. The income in the current year will accrue to the assessee only on account of TDR released and sold or in respect of any additional space constructed for which agreement for sale has been entered into and only in respect of such accrued income if any expenditure has to be incurred in future, the assessee will incur the liability in the current year itself. No agreements for sale had been entered into by the assessee. Therefore, the method followed by the assessee to show the estimated income and expenses in respect of the entire project most of which was yet to be executed could not be accepted as a proper method to compute income under the provisions of Income tax Act. In case of construction projects which are executed on own account and not as a contractor, which is the position in the present case, income from the project will accrue only when the project is complete and area is sold and therefore, completed contract method 20 ITA No.3486,3050,5002 & 5003/M/ A.Y:00-01 to 03-04 will be the proper method to compute income in such cases. However, since the construction project has long gestation period, percentage completion method is also accepted method for income tax purposes as per which income/losses proportionate to the construction completed in the relevant year can be offered to tax. For this purpose, income and expenditure from the entire project is estimated on some reasonable basis and proportionate income/loss relating to the work completed during the year can be offered for tax. This is exactly what the AO has done in this case. He has allowed the losses only proportionate to the work in progress at the end of the relevant year. The loss allowed by the AO on proportionate basis to the work completed till the end of the year has therefore, been rightly confirmed by CIT(A) and the claim of the assessee for the entire anticipated losses from the entire project has been rightly rejected. We, therefore, confirm the order of CIT(A) on this issue in all the years under consideration.
2.11.5 Ld. AR for the assessee has placed reliance on certain judicial pronouncements which in our view are distinguishable and cannot be followed. In case of Triveni Engineering Industry Ltd. (49 DTR 253), the assessee who was executing a construction contract was following the completed contract method of accounting. The assessee had recognized the entire income from the project during the 21 ITA No.3486,3050,5002 & 5003/M/ A.Y:00-01 to 03-04 relevant year. Therefore, the claim of deduction on account of future liabilities in respect of the projects which were known liabilities were found to be allowable. It was also in consonance with the matching principle. The case of the assessee is different. The assessee is following percentage completion method but the entire future losses have been claimed though only small portion of the project was complete, quite in violation matching principle. Reliance has also been placed on the judgment of Hon'ble Supreme Court in the case of Woodward Governor India P. Ltd.(312 ITR 254). In that case, the assessee who was following mercantile system of accounting had taken foreign currency loans for revenue purposes. There was additional liability at the end of the year due to foreign exchange fluctuation which was claimed as deduction. Hon'ble Supreme Court observed that in mercantile system of accounting, what is due is brought into credit before actual receipt and similarly what is legally incurred is debited before it is actually disbursed. The claim was thus allowed. This was in conformity with the settled principle that expenditure in respect of liability actually incurred has to be allowed even if liability is to be discharged at a later date. On the last date of the balance sheet, the additional liability on account of foreign exchange fluctuation had been incurred by the assessee and incurring of liability was certain and therefore, claim was found to be allowable. 22 ITA No.3486,3050,5002 & 5003/M/
A.Y:00-01 to 03-04 In the present case, during the relevant year, there was no liability incurred by the assessee on account of expenses to be incurred in future years. The case is obviously different.
2.11.6 Reliance has also been placed on the decision of the Tribunal in the case of Mazagaon Dock Ltd. (29 SOT 356) and decision of the Tribunal in the case of Jacobs Engineering Pvt. Ltd. vs. Asstt. Commissioner of Income tax (supra), in which the previous decision of the Tribunal has been followed. Thus reliance is basically on the decision of the Tribunal in the case of Mazagaon Dock Pvt. Ltd. (supra). In that case also, the deduction had been claimed on account of anticipated loss as per Accounting Standard AS-7. The assessee had claimed the loss by switching over the method of accounting of income to AS-7. The Tribunal observed in the order that merely because change in method was bonafide, it could not lead to the inference that income was also deductible properly under the Act. Thus, even in that case the Tribunal held that income has to be computed under the provisions of the Act. However, Tribunal had also observed that there was no dispute in principle that estimated losses were allowable. The Tribunal therefore, held that the loss could not be considered as bogus as held by CIT(A) because the same had been computed as per the Accounting Standard AS-7. The Tribunal had restored the issue to the AO for properly estimating the loss. It thus 23 ITA No.3486,3050,5002 & 5003/M/ A.Y:00-01 to 03-04 appears that the Tribunal even though observing that income has to be computed under the provisions of the Act allowed the claim in the understanding that there was no dispute about allowability of the losses. In the present case, the claim of the assessee has been strongly disputed and therefore, in our view, the issue has to be decided under the provisions of law and not as per Accounting Standard AS-7 which has not been notified by the Government. The cases cited by the assessee are, therefore, of no help. The assessee had also not pressed the application of AS-7 before CIT(A), as the same has not been notified by the government. Even before us emphasis was placed only on AS-1 as notified by the government, which we have already dealt with in para 2.11.3.
2.11.7 In view of the foregoing discussion and for the reasons given earlier, we do not see any infirmity, in the order of CIT(A) in allowing the loss only to the extent, it related to the WIP at the end of the relevant year. The order of CIT(A) is accordingly upheld.
3. The second dispute which is relevant only to assessment year 2003-04 is regarding addition of Rs.7,37,41,582/- on account of sale of TDR. The AO noted that the assessee had sold TDR during the year for Rs.24,99,25,721/- in relation to Turbhe Mandale project. In the said project total work done till 31.3.2003 was of Rs.25,39,59,098/- 24 ITA No.3486,3050,5002 & 5003/M/
A.Y:00-01 to 03-04 including the work completed during the assessment year 2003-04 of Rs.17,61,84,139/-. The total TDR sold in relation to the said project till 31.3.2003 was Rs.56.80 crores. The assessee had however booked TDR sale of only Rs.20.45 crores up to 31.3.2003 on percentage basis. The AO held that TDR sold during the year to the extent of work done in the year under consideration has to be considered for taxation. The AO observed that TDR was released on the basis of stage of completion of work. For instance, if 20% of the project was complete, 20% of total TDR is released. The assessee gets the right to sell TDR immediately on its release by SRA. The sale of TDR was not linked to the completion of the project and can be done independently. Therefore, the AO held that income from sale of TDR had to be taxed in the year in which sale took place. He, therefore, computed the income from sale of TDR at Rs.7,37,41,582/-(Rs.24,99,25,721 - Rs.17,61,64,139/-) and added to the total income. In appeal CIT(A) agreed with the decision of the AO that TDR sale could not be linked to the project from which it was generated. The assessee had the right to sell the TDR as soon as it was released. He, therefore, confirmed the addition of Rs.7,37,41,582/- made by the AO on account of TDR sale. Aggrieved by the said decision the assessee is in appeal before the Tribunal.
25 ITA No.3486,3050,5002 & 5003/M/
A.Y:00-01 to 03-04 3.1 Before us the ld. AR for the assessee submitted that in case anticipated losses from the entire project are allowed by the Tribunal the assessee will not press the ground related to income from sale of TDR. However, in case the claim of anticipated losses was not allowed then TDR income may be allowed on the basis of percentage completion method. The ld. DR on the other hand supported the order of CIT(A).
3.2 We have perused the records and considered the matter carefully. The dispute is regarding computation of income from sale of TDR. There is no dispute that the assessee had received income from sale of TDR during the year on release by SRA. The dispute is regarding computation of income from such sale of TDR. We agree with the findings of the authorities below but income from sale of TDR had accrued during the year as per mercantile system of accounting followed by the assessee. However, part of such income has already been considered while allowing the estimated losses in relation to WIP of the relevant years as per the percentage completion method. The assessee while claiming the anticipated future loss, had computed the estimated net income from the entire project which also included the estimated income from TDRs and sale of shops etc. We have not upheld the claim of anticipated loss from the entire project. The loss which has been allowed is only proportionate to WIP of the relevant 26 ITA No.3486,3050,5002 & 5003/M/ A.Y:00-01 to 03-04 year and in computation of the said proportionate loss estimated income from sale of TDR on proportionate basis has been considered. Therefore, the sale value of TDR in excess of the corresponding estimated value of TDR considered for the purpose of computation of anticipated loss or sale value of TDR received in excess of the TDR entitlement considered in the estimate is required to be added and in case sale value or entitlement is lower than the estimated rate, deduction has to be allowed. The expenses have already been considered in computation of anticipated losses. However, if actual expenditure is in excess of the estimated expenditure, the excess expenditure has to be allowed. The issue in our view requires fresh examination. We, therefore, set aside the order of CIT(A) and restore the matter back to AO for passing a fresh order on this point after necessary examination in the light of the observation made above and after allowing opportunity of hearing to the assessee.
4. The third dispute is regarding addition of Rs.1,93,061/- under section 115JB which is relevant only for assessment year 2003-04. The AO noted that the assessee had debited a sum of Rs.1,93,061/- to the P&L Account on account of expenses pertaining to earlier years. While computing the book profit under section 115JB, AO added the said amount on the ground that the said amount pertained to the earlier years. In appeal, CIT(A) agreed with the addition made by the AO on 27 ITA No.3486,3050,5002 & 5003/M/ A.Y:00-01 to 03-04 the ground that assessee had not proved that prior period expenses had crystallized during the year. Accordingly the addition was upheld, aggrieved, by which the assessee is in appeal before the Tribunal. 4.1 Before us the ld. Authorised Representative for the assessee submitted that book profit has to be computed on the basis of P&L Account prepared in accordance with the provisions of Part II and III of Schedule-6 of Companies Act, 1956 and only adjustments provided in the Explanation-1 to Section 115JB (2) could be made. AO was not empowered to make any other adjustment or disallowance. Reliance was placed on the judgment of Hon'ble Supreme Court in the case of Apollo Tyres Ltd. (255 ITR 273). The ld. Departmental Representative on the other hand placed reliance on the orders of authorities below. 4.2 We have perused the records and considered the rival contentions carefully. The dispute is regarding addition made on account of disallowance of prior period expenses amounting to Rs.1,93,061/- while computing book profit under section 115JB. Under the provisions of section 115JB, book profit has to be the profit disclosed as per P&L account prepared in accordance with the provisions of Part II and III of Schedule-6 of the Companies Act, 1956 and laid before the company in its AGMs and to the said profit, only adjustments as specified in Explanation-1 to section 115JB could be 28 ITA No.3486,3050,5002 & 5003/M/ A.Y:00-01 to 03-04 made. There is no dispute that claim on account of prior period expenses had been debited in the P&L Account prepared under the Companies Act and laid before AGM. There is no provision for any adjustment on account of prior period expenses in Explanation -1 to Section 115JB(2). Therefore, any addition on account of disallowance of prior period expenses while computing book profit is not permitted in view of the judgment of Hon'ble Supreme Court in the case of Apollo Tyres Ltd. (Supra). We, therefore, set aside the order of CIT(A) and delete the addition made.
5. The fourth dispute is regarding legal validity of re-opening of the assessment which is relevant only for assessment years 2000-01 and 2002-03. At the time of hearing of these appeals, the ld. Authorised Representative for the assessee did not press this ground and therefore, the ground regarding re-opening of assessment raised in the appeals for assessment years 2000-01 and 2002-03 are dismissed.
6. In the result, appeals of the assessee for the assessment years 2000-01, 2001-02, 2002-03 are dismissed whereas for the assessment year 2003-04 is partly allowed.
Order pronounced in the open court on 31.10.2011.
Sd/- Sd/-
(B.R. MITTAL) (RAJENDRA SINGH )
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai, Dated: 31.10.2011.
Jv.
29 ITA No.3486,3050,5002 & 5003/M/
A.Y:00-01 to 03-04
Copy to: The Appellant
The Respondent
The CIT, Concerned, Mumbai
The CIT(A) Concerned, Mumbai
The DR " " Bench
True Copy
By Order
Dy/Asstt. Registrar, ITAT, Mumbai.