Decided on August 28,2014

Sudhir V. Shetty Respondents


Sanjay Arora, Member (A) - (1.) THIS is an appeal by the Revenue directed against the order by the Commissioner of Income -tax (Appeals) -33, Mumbai ("CIT(A)" for short) dated November 25, 2010, partly allowing the assessee's appeal contesting its assessment under section 143(3) of the Income -tax Act, 1961 ("the Act" hereinafter) for the assessment year (A.Y.) 2007 -08 vide order dated December 29, 2009. The dispute in the instant case concerns the "method of accounting" to be adopted in computing the assessee's, a builder, income from the various construction projects being undertaken by it. While the assessee admittedly follows project completion method, which it claims to do so consistently, the Revenue's stand is that the percentage completion method is to be adopted. The basis of the Revenue's stand is its view that the revised Accounting Standard (AS) -7, issued by the Institute of Chartered Accountants of India (ICAI), is applicable to all construction contracts. The apex court had in Challapalli Sugars Ltd. v. CIT : [1975] 98 ITR 167 (SC), clarified that for the purpose of computing the profits and gains of business, the principles of commercial accounting shall prevail, so that where not in conflict or inconsistent with the provisions of law, shall obtain. As explained by it, the views of the Institute of Chartered Accountants of India as the premier regulatory body for the profession of the accountancy had to be accorded respect. The assessee's profit on different construction projects under progress (as on March 31, 2007) was, thus, taken at 8 per cent, of the incremental work -in -progress (WDP), i.e., during the relevant year, being Rs. 121.57 lakhs.
(2.) THE assessee has before us, on the basis of the view of the Expert Advisory Committee of the Institute of Chartered Accountants of India, which issues opinions in respect of the various queries raised by the members of the institute on various accounting issues, clarified that as per the institute itself, the revised Accounting Standard -7, titled "Accounting for construction contracts", applicable for contracts entered into during accounting periods commencing on or after April 1, 2003, is applicable only to contractors. The activity of developing housing project/s on own account as a commercial venture is in the nature of production activity and, therefore, is to be construed as such. Accordingly, the inventories have to be valued following Accounting Standard -2 "Valuation of inventories" and the income recognized following Accounting Standard -9 "Recognition of income". The Committee notes, on the basis of the language of the revised Accounting Standard -7, a difference between the two versions, i.e., prior to and subsequent to the revision, so that the revised standard departs from the earlier one, which was admittedly applicable to both contractors and the builders (paper book pages 5 -8). Accounting Standard -9, it is contended, recognizes both the project completion and the percentage completion methods. The learned Commissioner of Income -tax (Appeals) has also allowed relief to the assessee on that basis. Its stands further observed by him that the Tribunal in the assessee's own case for the two preceding years whereat the matter travelled to it, i.e., assessment years 1989 -90 and 2003 -04, accepted the assessee's case of following the project completion method as an accepted method of accounting. The foregoing sums up the respective cases of the opposing sides as well as the controversy attending the present case.
(3.) WE have heard the parties, and perused the material on record.;

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