ASSISTANT COMMISSIONER OF INCOME TAX 25(3), MUMBAI V. S. S. ENTERPRISES, MUMBAI

ITA 2649/MUM/2018

• Counselvise Citation: [2019] 115 COUNSELVISE.COM (IT) 7369 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 6 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-10-2019
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: J
• Assessment Year: 2014-2015
• Appeal Filed On: 27-04-2018
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: CHAUDHARY ARUN KUMAR SINGH
• Keywords: Set aside
• Section: 143(3); 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH G MUMBAI BEFORE SHRI SAKTIJIT DEY (JUDICIAL MEMBER) AND SHRI N.K. PRADHAN (ACCOUNTANT MEMBER) ITA NO. 2649/MUM/2018 ASSESSMENT YEAR: 2014-15 ASST. COMMISSIONER OF INCOME TAX-25(3), ROOM NO. 01, C-10, 6 TH FLOOR, PRATYAKSHKAR BHAVAN, BANDRA KURLA COMPLEX, BANDRA (EAST), MUMBAI- 400051. VS. M/S SS ENTERPRISES, GROUND FLOOR, CHANDRA VILLA, NEHRU ROAD, VILE PARLE (E), MUMBAI-400057. PAN NO. AADFS4279G APPELLANT RESPO NDENT REVENUE BY : MR. CHAUDHARY ARUN KUMAR SINGH, DR ASSESSEE BY : MR. VIJAY MEHTA & MR. GOVIND JAVER I, AR DATE OF HEARING : 01/08/2019 DATE OF PRONOUNCEMENT : 28/10/2019 ORDER PER N.K. PRADHAN, AM THIS IS AN APPEAL FILED BY THE REVENUE. THE RELEVAN T ASSESSMENT YEAR IS 2014-15. THE APPEAL IS DIRECTED AGAINST THE ORDER PASSED BY THE COMMISSIONER OF INCOME TAX (APPEALS)-37, MUMBAI [IN SHORT CIT(A)] AND ARISES OUT OF ASSESSMENT U/S 143(3) OF THE INCO ME TAX ACT 1961, (THE ACT). M/S S.S. ENTERPRISES ITA NO. 2649/MUM/2018 2 2. THE GROUNDS OF APPEAL FILED BY THE REVENUE READ AS UNDER : 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW, THE LD . CIT(A) HAS ERRED IN DELETING THE ADDITION MADE BY THE AO OF RS .6,81,13,165/-. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD . CIT(A) HAS ERRED IN DELETING THE ADDITION BY STATING THAT THAT AN ENTERPRISE MAY CHOOSE TO APPLY THIS GUIDE NOTE FROM AN EARLIER DAT E PROVIDED IT APPLIES THIS GUIDANCE NOTE TO ALL TRANSACTIONS WHICH COMMENCED O R WERE ENTERED INTO ON OR AFTER SUCH EARLIER DATE. WHEREAS, NO DOCUMENTARY EVIDENCE WAS BOUGHT BEFORE AO DURING SCRUTINY PROCEEDINGS WHICH SUGGEST ED THAT THE SAME PRINCIPLE WAS APPLIED TO TRANSACTIONS WHICH COMMENC ED OR WERE ENTERED INTO ON OR AFTER SUCH EARLIER DATE? 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD . CIT(A) HAS ERRED IN IGNORING THAT THERE IS NO PROVISION OF REVERSAL OF PROFIT AS PER INCOME-TAX ACT, 1961. THE ASSESSMENT 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE, A REAL ESTATE DEVELOPER FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR (AY) 2014-15 ON 18.11.2014 DECLARING CURRENT YEAR LOSS A T RS.1,43,06,726/-. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AS SESSING OFFICER (AO) NOTICED FROM THE DETAILS OF WORK-IN-PROGRESS (WIP) THAT WIP HAS BEEN SHOWN AT RS.97,37,27,944/- AND FROM THE SAME AN AMO UNT OF RS.6,81,13,165/- WAS REDUCED ON ACCOUNT OF REVERSA L OF PROFITS DECLARED IN THE EARLIER YEARS ON ACCOUNT OF ESTIMATED LOSS E XPECTED AND THE CLOSING WIP AS ON 31.03.2014 WAS SHOWN AT RS.91,07, 72,883/-. THE SAME ADJUSTMENT WAS ALSO DONE IN THE P&L ACCOUNT. I N THE P&L ACCOUNT, THE ASSESSEE HAS SHOWN ON CREDIT SIDE REVERSAL OF PROFITS DECLARED IN M/S S.S. ENTERPRISES ITA NO. 2649/MUM/2018 3 EARLIER YEARS ON ACCOUNT OF ESTIMATED LOSS EXPECTED OF RS.6,81,13,165/-. SIMILARLY, THE ASSESSEE HAS SHOWN CESSATION OF LIAB ILITY OF LOAN FROM M/S DAHLIA TRADERS PVT. LTD. OF RS.5,14,85,030/-. THERE FORE, THE AO ASKED THE ASSESSEE THE REASONS WHY THE PROFITS OF RS.6,81,13, 165/- EARNED IN THE EARLIER YEARS WAS REVERSED. IN RESPONSE TO IT, THE ASSESSEE FILED A REPLY STAT ING THAT (I) TILL THE ASSESSMENT YEAR 2012-13, IT HAD OFFERED PROFITS FRO M ITS PROJECT S.S. HOUSE, ON PERCENTAGE COMPLETION METHOD BASIS, BY D ECLARING AROUND 10-12% PROFITS ON ITS WIP ON YEAR TO YEAR BASIS AND THE SAME WAS DONE BY DEBITING THE WIP ACCOUNT AND CREDITING THE P&L A CCOUNT IN THE RESPECTIVE YEARS; THIS WAY TILL AY 2012-13, IT HAD OFFERED A TOTAL OF RS.6,81,13,165/- AS PROFITS ON ACCRUAL BASIS ; (I I) HOWEVER, AFTER THE INTRODUCTION OF REVISED GUIDANCE NOTE ON REAL ESTA TE TRANSACTIONS PRESCRIBED BY THE INSTITUTE OF CHARTERED ACCOUNTANT OF INDIA (ICAI)[ IN SHORT GUIDANCE NOTE] IN AY 2013-14, IT HAD AGAIN OFFERED PROFITS BASED ON PERCENTAGE COMPLETION METHOD BASIS, THIS TIME BY SHOWING SALES OF RS.65,12,000/- AND CLAIMING PROPORTIONATE COST OF R S.45,07,663/-, THEREBY DECLARING NET PROFIT OF RS.20,04,337/-, (II I) HOWEVER, WHEN THE ASSESSEE-FIRM WAS WORKING OUT THE REVENUE RECOGNITI ON FOR AY 2014-15, BASED ON THE COSTS INCURRED AND AGREEMENTS ENTERED TILL DATE, FUTURE ESTIMATED COSTS AND FUTURE SALES EXPECTED, THERE WA S A TOTAL EXPECTED LOSS OF RS.3,95,51,736/- TILL AY 2014-15 ; AS PER T HE PROJECT REPORT THERE WAS A FURTHER PROBABLE LOSS IN AY 2015-16; (IV) THE ASSESSEE WAS INCURRING A HUGE LOSS FROM THE SAID PROJECT DUE TO THE FACT THAT THERE WERE SOME IRREGULARITIES IN ITS CONSTRUCTION ACTIVI TIES DUE TO WHICH M/S S.S. ENTERPRISES ITA NO. 2649/MUM/2018 4 CERTAIN PORTION OF THE BUILDING HAD TO BE RECONSTRU CTED, THEREBY RESULTING INTO AN INFLATED COSTS OF INTEREST AND MC GM CHARGES, (V) THERE WAS ALSO A DELAY IN THE EXECUTION OF THE SAID PROJE CT DUE TO FINANCIAL CONSTRAINTS ON ACCOUNT OF LACK LUSTURE RESPONSE TO THE SALES OF THE COMMERCIAL UNIT IN THE SAID BUILDING, (VI) AS PER T HE AFORESAID GUIDANCE NOTE, ANY EXPECTED FUTURE LOSSES SHOULD BE RECOGNIZ ED AS AN EXPENSE IMMEDIATELY AND THEREFORE IN VIEW OF THE LOSSES, WH ATEVER PROFITS DECLARED EARLIER HAD TO BE REVERSED IN AY 2014-15, SO THAT THE TRUE STATUS OF THE PROJECT COULD BE REFLECTED IN THE FIN ALIZED ACCOUNTS FOR AY 2014-15, (VII) THEREFORE, THE ASSESSEE-FIRM HAD NO OPTION THAN TO REVERSE THE PROFITS SHOWN IN THE EARLIER YEARS, ON ACCOUNT OF EXPECTED ESTIMATED LOSS, BY CREDITING THE WIP IN THE CURRENT YEAR (TO BRING WIP TO ITS ACTUAL AMOUNT OF COST INCURRED) AS THE SAME WAS INFLATED B Y DEBITING IN THE EARLIER YEARS, (VIII) FURTHER, TO REVERSE THE PROFI TS DECLARED IN AY 2013- 14, IT HAD TO ADD BACK THE PROPORTIONATE COSTS TO T HE COST OF WIP, BY DEBITING THE SAME TO WIP ACCOUNT IN THE CURRENT YEA R WHICH WAS CREDITED IN THE EARLIER YEARS AND ALSO BY ADDING BA CK THE AMOUNT OF SALES DECLARED IN AY 2013-14, TO THE AMOUNT OF ADVANCES R ECEIVED IN THE CURRENT YEAR, BY CREDITING THE SAME TO THE ADVANCES ACCOUNT, WHICH WAS EARLIER REDUCED FROM THE ADVANCES IN AY 2013-14. HOWEVER, THE AO WAS NOT CONVINCED TO THE ABOVE SUB MISSIONS OF THE ASSESSEE FOR THE REASON THAT THE ASSESSEE COULD NOT JUSTIFY THE CRITERIA LAID DOWN IN THE GUIDANCE NOTE ON WHICH IT SOLELY R ELIED. THE AO HAS QUOTED THE FOLLOWING CLAUSE 1.5 OF THE GUIDANCE NOT E WHICH IS AS UNDER : M/S S.S. ENTERPRISES ITA NO. 2649/MUM/2018 5 1.5 THIS GUIDANCE NOTE SHOULD BE APPLIED TO ALL P ROJECTS IN REAL ESTATE WHICH ARE COMMENCED ON OR AFTER APRIL 1, 2012 AND ALSO TO PROJECTS WHICH HAVE ALREADY COMMENCED BUT WHERE REVENUE IS BEING RECOGN IZED FOR THE FIRST TIME ON OR AFTER APRIL 1, 2012. AN ENTERPRISE MAY CHOOSE TO APPLY THIS GUIDANCE NOTE FROM AN EARLIER DATE PROVIDED IT APPLIES THIS GUIDANCE NOTE TO ALL TRANSACTIONS WHICH COMMENCED OR WERE ENTERED INTO O N OR AFTER SUCH EARLIER DATE. THIS GUIDANCE NOTE SUPERCEDES THE GUIDANCE NO TE ON RECOGNITION OF REVENUE BY REAL ESTATE DEVELOPERS, ISSUED BY THE IN STITUTE OF CHARTERED ACCOUNTANTS OF INDIA IN 2006, WHEN THIS GUIDANCE NO TE IS APPLIED AS ABOVE.' FURTHER, THE AO REFERRED TO THE CLAUSE 5.9 OF THE GUIDANCE NOTE WHICH IS PRODUCED BELOW: THE CHANGES TO ESTIMATE REFERRED IN PARAGRAPH 5.8 ABOVE ALSO INCLUDE CHANGES ARISING OUT OF CANCELLATION OF CONTRACTS AN D CASES WHERE THE PROPERTY OR PART THEREOF IS SUBSEQUENTLY EARMARKED FOR OWN U SE OR FOR RENTAL PURPOSES. IN SUCH CASES ANY REVENUES ATTRIBUTABLE TO SUCH CON TRACTS PREVIOUSLY RECOGNIZED SHOULD BE REVERSED AND THE COSTS IN RELA TION THERETO SHALL BE CARRIED FORWARD AND ACCOUNTED IN ACCORDANCE WITH AS 10, ACCOUNTING FOR FIXED ASSETS.' THE AO OBSERVED THAT IN ASSESSEES CASE NEITHER TH E CONTRACTS WERE CANCELLED NOR THE PROPERTY WAS EARMARKED FOR I TS OWN USE OR FOR RENTAL PURPOSE. THIS IS EVIDENT FROM THE FACT THAT THE ASSESSEE HAD NOT REFLECTED ANY RENTAL INCOME IN THE P&L ACCOUNT. FUR THER, AS PER THE BALANCE SHEET, THE ASSESSEE HAS NOT SHOWN ANY FLAT/ SHOP FROM ONGOING PROJECT I.E. S.S. HOUSE IN FIXED ASSET SCHEDULE. THUS OBSERVING THAT THERE IS NO PROVISION TO REVER SE THE PROFITS ALREADY OFFERED ON YEAR TO YEAR BASIS AND THE FACT THAT THE ASSESSEE, WHO M/S S.S. ENTERPRISES ITA NO. 2649/MUM/2018 6 IS FOLLOWING PERCENTAGE COMPLETION METHOD CAN RECOG NIZE SOME GAIN OR LOSS RELATED TO A PROJECT IN EVERY ACCOUNTING YEAR IN WHICH THE PROJECT CONTINUES TO BE ACTIVE, THE AO DISALLOWED THE CLAIM OF REVERSED PROFIT OF RS.6,81,13,165/- IN THE P&L ACCOUNT. ORDER OF THE CIT(A) 4. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE F ILED AN APPEAL BEFORE THE LD. CIT(A). IT IS FOUND THAT THE LD. CIT (A) VIDE ORDER DATED 05.02.2018 OBSERVED THAT (I) THE ASSESSEE-FIRM HAD DECLARED PROFITS ON AN ANNUAL BASIS ON PERCENTAGE OF COMPLETION METHOD BASIS, YEAR AFTER YEAR, AGGREGATING IN ALL TO RS.6,81,13,165/- ; THE SAID PROFITS WERE DECLARED BY DEBITING THE WIP ACCOUNT IN THE RESPECT IVE YEAR AND CREDITING THE P&L ACCOUNT BY A PROFIT PERCENTAGE ON THE AMOUNT OF WORK CARRIED OUT IN EACH OF THE YEARS, (II) WHEN THE ASS ESSEE WAS FINALIZING THE ACCOUNTS AND REVENUE WORKING FOR AY 2014-15, BY FOL LOWING THE PERCENTAGE OF COMPLETION METHOD, THERE WAS A TOTAL LOSS OF MORE THAN RS.3.95 CRORES FROM THE AFORESAID PROJECT ; THE ASS ESSEE HAD NO OPTION THAN TO DECLARE SUCH A LOSS BY REVERSING THE PROFIT S DECLARED IN EARLIER YEARS AND ARRIVE AT A TOTAL CORRECT PICTURE OF PROF ITABILITY OF THE PROJECT, (III) AS PER THE ESTIMATED WORKINGS OF REVENUE FOR THE SAID PROJECT, THE TOTAL ESTIMATED SALES WAS ONLY RS.90.04 CRORE AS AG AINST THE TOTAL ESTIMATED COSTS OF RS.94.07 CRORE, THEREBY RESULTIN G INTO A TOTAL ESTIMATED LOSS OF RS.3.95 CRORE, (IV) IN PARA 5.7 O F THE GUIDANCE NOTE OF ICAI, WHEN THE TOTAL PROJECT COSTS WILL EXCEED TOTA L ELIGIBLE PROJECT REVENUES, THE EXPECTED LOSS SHOULD BE RECOGNIZED AS AN EXPENSE IMMEDIATELY ; THEREFORE, THE ASSESSEE HAS CORRECTLY FOLLOWED THE M/S S.S. ENTERPRISES ITA NO. 2649/MUM/2018 7 GUIDANCE NOTE AND HAS CORRECTLY RECOGNIZED LOSS FOR THE YEAR UNDER APPEAL BY RECOGNIZING THE LOSS IMMEDIATELY, (V) THE AO HAS INTERPRETED IN THE ASSESSMENT ORDER THAT THE SAID GUIDANCE NOTE APPLIES ONLY TO PERIODS ON OR AFTER 01.04.2012 OR TO PROJECTS WHICH HAVE COMMENCED ON OR AFTER 01.04.2012, HOWEVER, THE SAID GUIDANCE NOT E CAN BE CLEARLY APPLIED EVEN TO THOSE PERIODS OR THOSE PROJECTS WHI CH HAVE COMMENCED EARLIER PROVIDED IT IS APPLIED CONSISTENTLY TO ALL THE TRANSACTIONS THEREAFTER. OBSERVING AS ABOVE, THE LD. CIT(A) HELD AT PARA 5. 7 OF HIS ORDER THE FOLLOWING : 5.7 AFTER CONSIDERING THE TOTALITY OF FACTS, RIVAL SUBMISSIONS AND ON THE BASIS OF DISCUSSION MENTIONED ABOVE, I FIND FORCE IN THE ARGUMENT OF THE APPELLANT. THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA HAS PRESCRIBED FROM TIME TO TIME OF VARIOUS ACCOUNTING STANDARDS AND GUIDANCE N OTES IN ORDER TO GUIDE VARIOUS ENTERPRISES WHILE COMPUTING THEIR PROFITS F ROM YEAR TO YEAR. THE PERCENTAGE OF COMPLETION METHOD PRESCRIBED BY THE I NSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA. THE APPELLANT HAS BEEN CONSIS TENTLY FOLLOWING THE PERCENTAGE COMPLETION METHOD. AS PER GUIDANCE NOTE OF INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA, WHEN THE TOTAL PROJ ECT COSTS WILL EXCEED TOTAL ELIGIBLE PROJECT REVENUES, THE EXPECTED LOSS SHOULD BE RECOGNIZED AS AN EXPENSE IMMEDIATELY. THE APPELLANT FIRM HAD DECLARE D PROFITS RS.6,81,13,165/- ON PERCENTAGE OF COMPLETION METHOD BASIS, YEAR AFTER YEAR. WHEN THE APPELLANT WAS FINALIZING THE ACCOUNTS AND REVENUE WORKING FOR A.Y. 2014-15, BY FOLLOWING THE PERCENTAGE OF COMPLETION METHOD, THERE WAS A TOTAL LOSS EMERGING OF MORE THAN RS.3.95 CR. FROM THE AFO RESAID PROJECT. THEREFORE, THE APPELLANT HAD DECLARED SUCH A LOSS BY REVERSING THE PROFITS DECLARED IN THE EARLIER YEARS AND ARRIVE AT A TOTAL CORRECT PICTURE OF PROFITABILITY OF THE PROJECT. THE SAID GUIDANCE NOTE CAN BE APPLIED EVEN TO THOSE PERIODS AND OR THOSE M/S S.S. ENTERPRISES ITA NO. 2649/MUM/2018 8 PROJECTS WHICH HAVE COMMENCED EARLIER, FROM THAT EA RLIER DATE, PROVIDED IT IS APPLIED CONSISTENTLY TO ALL THE TRANSACTIONS THEREA FTER. FURTHER, APPELLANT HAS STATED THAT THERE WAS AN ACTUAL LOSS OF RS.6,77,81, 536/- IN THE A.Y.2015-16 AND RS.2,10,01,300/- IN THE A.Y. 2016-17. THE APPEL LANT HAS FILED LOSS RETURN FOR THE A.Y. 2015-16 AND A.Y. 2016-17 AND THE SAID LOSS RETURN WAS ACCEPTED BY THE DEPARTMENT. IN VIEW OF THE ABOVE DISCUSSION, I CAME TO THE CONCLUSION THAT THE APPELLANT HAS RIGHTLY FOLLOWED THE GUIDANC E NOTE AND RECOGNIZED THE LOSS CORRECTLY IN THE RETURN OF INCOME. THEREFORE, A.O. IS DIRECTED TO DELETE THE ADDITION OF RS.6,81,13,165/-. THIS GROUND IS ALLOWE D. CONTENTIONS OF THE REVENUE 5. BEFORE US, THE LD. DEPARTMENTAL REPRESENTATIVE ( DR) SUBMITS THAT THE ORDER PASSED BY THE LD. CIT(A) BE SET ASIDE FOR THE REASON THAT THERE IS NO PROVISION OF REVERSAL OF PROFIT IN THE ACT. F URTHER, IT IS ARGUED THAT THE LD. CIT(A) IS NOT CORRECT IN DELETING THE ADDIT ION BY STATING THAT AN ENTERPRISE MAY CHOOSE TO APPLY THE SAID GUIDANCE NO TE FROM AN EARLIER DATE PROVIDED IT APPLIES IT TO ALL TRANSACTIONS WHI CH COMMENCED OR WERE ENTERED INTO ON OR AFTER SUCH EARLIER DATE. THE LD. DR FURTHER SUBMITS THAT IN ASSESSEES CASE NEITHER THE CONTRACTS WERE CANCELLED NOR THE PROPERTY WAS EARMA RKED FOR ITS OWN USE OR FOR RENTAL PURPOSES. THIS IS EVIDENT FROM TH E FACT THAT THE ASSESSEE HAS NOT REFLECTED ANY RENTAL INCOME IN THE P&L ACCO UNT ; FURTHER, ON PERUSAL OF THE BALANCE SHEET, IT IS SEEN THAT THE A SSESSEE HAS NOT SHOWN ANY FLAT/SHOP FROM THE ONGOING PROJECT I.E. S.S. H OUSE IN FIXED ASSET SCHEDULE. THUS THE LD. DR SUPPORTS THE ORDER OF THE AO STATING THAT THE ASSESSEE HAS FAILED TO SUBSTANTIATE ITS CLAIM TO RE VERSE THE PROFITS. M/S S.S. ENTERPRISES ITA NO. 2649/MUM/2018 9 THE LD. DR DRAWS OUR ATTENTION TO TWO SETS OF WORK ING OF ESTIMATED PROFITS AS ON 31 ST MARCH 2014 SIGNED AND FILED BY THE ASSESSEE. STATING THAT THE ASSESSEE IS FOLLOWING PERCENTAGE COMPLETION METHOD AND THERE IS NO SUCH PROVISION TO REVERSE TH E PROFITS ALREADY OFFERED ON YEAR TO YEAR BASIS, THE LD. DR ARGUES TH AT THE ORDER PASSED BY THE AO BE RESTORED. CONTENTIONS OF THE ASSESSEE 6. PER CONTRA , THE LD. COUNSELS FOR THE ASSESSEE SUBMIT THAT DUR ING THE YEAR UNDER APPEAL, THE ASSESSEE-FIRM WAS UNDERT AKING THE CONSTRUCTION OF ITS COMMERCIAL PROJECT KNOWN AS S. S. HOUSE, WHICH WAS COMPLETE TO THE EXTENT OF APPROX 90%. THE ASSESSEE HAS REGULARLY AND CONSISTENTLY FOLLOWED THE METHOD OF PERCENTAGE COMP LETION, ALL OVER THE YEARS, TO RECOGNIZE REVENUE FROM THE SAID PROJECT A ND THE SAID METHOD WAS ALSO APPLIED DURING THE YEAR UNDER APPEAL. PRIO R TO THE YEAR UNDER APPEAL, THE ASSESSEE HAD OFFERED TOTAL PROFITS AGGR EGATING TO RS.6,81,13,165/- TILL AY 2012-13. DURING THE YEAR U NDER APPEAL, WHEN THE ASSESSEE WAS WORKING OUT THE REVENUE RECOGNITIO N, THE RESULTS AS EMERGED SHOWED A NET ESTIMATED LOSS OF MORE THAN RS .3.95 CRORES TILL AY 2014-15. FURTHER THERE WAS AN ACTUAL LOSS OF RS.2,6 2,68,079/- IN AY 2015-16. THE WORKING OUT OF LOSS OR PROFIT FOR AY 2 014-15 WAS BASED ON THE PRINCIPLES OF ESTIMATION. FURTHER, THE LD. COUNSELS EXPLAIN THAT THE ASSESSE E HAD INCURRED A TOTAL LOSS FROM THE AFORESAID PROJECT DUE TO THE FA CT THAT THE PROJECT GOT DELAYED BEYOND THE EXPECTED DATE OF COMPLETION WHIC H WAS FURTHER DUE M/S S.S. ENTERPRISES ITA NO. 2649/MUM/2018 10 TO CERTAIN MODIFICATIONS CARRIED OUT IN THE INTERNA L LAYOUT OF THE COMMERCIAL OFFICES; FURTHER THERE WERE CERTAIN DISP UTES BETWEEN THE PARTNERS INTER SE , DUE TO WHICH THE PROJECT GOT DELAYED. ALSO IT IS ARGUED THAT THE ASSESSEE HAS CORRECTLY REVERSED THE PROFITS DECLARED TILL AY 2012-13, AS THE NET RESULT FROM THE PROJECT WAS A LOSS AND IT HAD CORRECTLY FOLLOWED THE PRINCIPLES L AID DOWN IN THE GUIDANCE NOTE. AS PER THE SAID GUIDANCE NOTE, IF TH ERE WERE FUTURE EXPECTED LOSSES, I.E. WHEN THE PROBABLE COSTS ARE L IKELY TO EXCEED THE PROBABLE REVENUES, THEN IN SUCH A CASE, THE ESTIMAT ED LOSSES SHOULD BE IMMEDIATELY RECOGNIZED NOT WAITING FOR THE ACTUAL L OSSES TO OCCUR. SUCH LOSSES CAN ALSO BE RECOGNIZED WHICH ARE LIKELY TO B E INCURRED, DUE TO REVISION IN THE ESTIMATES, WHICH PRINCIPLE THE ASSE SSEE HAS RIGHTLY FOLLOWED, WHILE ASCERTAINING THE PROFITABILITY FOR THE YEAR UNDER APPEAL. IT IS THUS STATED THAT THE SAID GUIDANCE NOTE CLEAR LY LAYS DOWN THE CRITERIA THAT THE ESTIMATES CAN BE REVISED SUBSEQUE NTLY AND THE REVENUES PREVIOUSLY RECOGNIZED CAN BE REVERSED DUE TO SUCH R EVISION IN ESTIMATES. REFERRING TO PARA 5.9 OF THE SAID GUIDANCE NOTE I. E. THE CHANGES TO ESTIMATES REFERRED TO IN PARAGRAPH 5.8 ABOVE ALSO I NCLUDE CHANGES ARISING OUT OF CANCELLATION OF CONTRACTS , IT IS EXPLAINED THAT THE SAID WORDS SIGNIFY THAT CANCELLATION OF CONTRACTS AND OT HERS ARE INCLUDED AND THAT BY ITSELF DOES NOT INFER, ONLY IN SUCH CASES T HE ESTIMATES CAN BE REVISED AS THE WORD MENTIONED IS INCLUDE. THUS TH E LD. COUNSELS ARGUE THAT THE REVISION OF OTHER ACCOUNTS ARE ALSO COVERE D IN THE INTERPRETATION OF THE SAID GUIDANCE NOTE. M/S S.S. ENTERPRISES ITA NO. 2649/MUM/2018 11 THUS IT IS EXPLAINED THAT THE AO HAS FAILED TO REA D THAT THE SAID GUIDANCE NOTE WHICH MENTIONS THAT AN ENTERPRISE MA Y CHOOSE TO APPLY THIS GUIDANCE NOTE FROM AN EARLIER DATE PROVIDED IT APPLIES THIS GUIDANCE NOTE TO ALL TRANSACTIONS WHICH COMMENCED O R WERE ENTERED INTO ON OR AFTER SUCH EARLIER DATE. THUS THE LD. COUNSELS SUBMIT THAT AS THE GUIDANCE NOTE ISSUED BY THE ICAI IS APPLICABLE TO THE INSTANT CASE, THE ASS ESSEE HAS RIGHTLY FOLLOWED THE SAME AND THEREFORE, THE ORDER PASSED B Y THE LD. CIT(A) BE AFFIRMED. FURTHER, THE LD. COUNSELS RELY ON THE DECISION IN CIT V. VIRTUAL SOFT SYSTEMS LTD. (2018) 404 ITR 409 (SC), ACIT V. M/S ITD CEMENTATION INDIA LTD. (ITA NO. 3669/MUM/2011 FOR AY 2004-05 BY ITAT, MUM BAI), DREDGING INTERNATIONAL N.V. V. ADIT (2011) 48 SOT 430 (MUMBAI), AARTS MODULE V. ITO (ITA NO. 9302/BOM/92 FOR A.Y. 1984-85). REASONS FOR THE DECISION 7. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED THE RELEVANT MATERIALS ON RECORD AND DECISIONS CITED. THE REASON S FOR OUR DECISIONS ARE GIVEN BELOW. WE DISCUSS NOW THE CASE-LAWS RELIED ON BY THE LD. COUNSELS. IN THE CASE OF VIRTUAL SOFT SYSTEMS LTD . (SUPRA) FOR THE AY 1998-99, THE ASSESSEE HAD ENTERED THE AMOUNT, INTER ALIA , UNDER THE HEAD LEASE EQUALIZATION ACCOUNT AT RS.4,35,89,486/-. UNDER THE P&L ACCOUNT FOR THE SAID YEAR, THE ASSESSEE HAD REDUCED THE AFORESAID AMOUNT REPRE SENTING THE LEASE EQUALIZATION ACCOUNT FROM THE LEASE RENTAL OF RS.11 ,84,21,434/-. THE AO M/S S.S. ENTERPRISES ITA NO. 2649/MUM/2018 12 DISALLOWED THE SAID CLAIM ON THE GROUND THAT THE SA ME WAS NEITHER A LIABILITY NOR AN ALLOWANCE NOR AN EXPENDITURE. THE AO OBSERVED THAT THE SAME WAS JUST A MATCHING ENTRY FOR THE PURPOSE OF T ALLYING THE ACCOUNTS WITH REGARD TO THE ASSETS LEASED OUT. AGGRIEVED BY THE SAID ORDER THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A), WHO DISMISSED THE APPEAL. IN FURTHER APPEAL THE TRIBUNAL HELD THAT TH IS IS AN APPROPRIATION ON PROFIT AND THUS CANNOT BE ALLOWED IN THE DEDUCTI ON. HOWEVER, THE HIGH COURT DISMISSED THE DEPARTMENTS APPEAL FROM T HE ORDER OF THE TRIBUNAL. ON APPEAL BY THE DEPARTMENT, THE HONBLE SUPREME COURT HELD: THAT THE ASSESSEE COULD BE CHARGED ONLY ON REAL IN COME WHICH COULD BE CALCULATED ONLY AFTER APPLYING THE PRESCRIBED METHO D. THE ACT IS SILENT ON SUCH DEDUCTION. FOR SUCH CALCULATION, THE ASSESSEE HAD TO HAVE RECOURSE TO THE GUIDANCE NOTE PRESCRIBED BY THE INSTITUTE OF CHARTE RED ACCOUNTANTS OF INDIA. ONLY AFTER APPLYING SUCH METHOD WHICH WAS PRESCRIBE D IN THE GUIDANCE NOTE, COULD THE ASSESSEE SHOW FAIR AND REAL INCOME LIABLE TO TAX UNDER THE ACT. THEREFORE, IT COULD NOT BE SAID THAT THE ASSESSEE C LAIMED DEDUCTION BY VIRTUE OF THE GUIDANCE NOTE : IT ONLY APPLIED THE METHOD O F BIFURCATION AS PRESCRIBED BY THE EXPERT TEAM OF THE INSTITUTE OF CHARTERED AC COUNTANTS OF INDIA. THE ASSESSEE WAS ENTITLED TO BIFURCATE THE LEASE RENTAL IN ACCORDANCE WITH THE ACCOUNTING STANDARDS PRESCRIBED BY THE INSTITUTE. T HERE WAS NO EXPRESS BAR IN THE ACT REGARDING THE APPLICATION OF SUCH ACCOUN TING STANDARDS. IN M/S ITD CEMENTATION INDIA LTD. (SUPRA), THE FACTS ARE THAT THE AO ISSUED SHOW CAUSE NOTICE TO THE ASSESSEE REQUIRING TO EXPLAIN AS TO WHY 100% LOSS WAS CLAIMED EVEN WHEN THE PROJECT WAS NOT COMPLETED 100%. THE AO ASKED THE ASSESSEE TO EXPLAIN WHY LOSS SHOUL D NOT BE ALLOWED ONLY UPTO THE PERCENT OF WORK COMPLETED AND WHY THE EXCESSIVE LOSS OF M/S S.S. ENTERPRISES ITA NO. 2649/MUM/2018 13 RS.1,58,77,508/- SHOULD NOT BE DISALLOWED AND ADDED BACK TO THE INCOME OF AY 2003-04. IN RESPONSE TO IT, THE ASSESSEE EXP LAINED TO THE AO THAT IT WAS CONSISTENTLY FOLLOWING THE ACCOUNTING STANDARD- 7 (AS-7) ISSUED BY ICAI FOR VALUATION OF WIP. IT WAS EXPLAINED THAT TH E VALUATION FIGURES WERE BASED ON THE ACTUAL COST RECORDED IN THE BOOKS OF ACCOUNT AND AN ESTIMATE OF THE PROFIT/LOSS ON A PROJECT ON COMPLET ION. HOWEVER, THE AO OBSERVED THAT THE ASSESSEE HAS CLAIMED ENTIRE FORES EEABLE LOSSES OF FUTURE YEARS IN AY 2004-05. THE TRIBUNAL HELD THAT (I) SECTION 145(2) OF THE ACT PROVIDES THAT THE CENTRAL GOVERNMENT MAY NO TIFY IN THE OFFICIAL GAZETTE FROM TIME TO TIME ACCOUNTING STANDARDS TO B E FOLLOWED BY ANY CLASS OF ASSESSEES OR IN RESPECT OF ANY CLASS OF IN COME; IT IS A FACT THAT AS- 7 HAS NOT BEEN NOTIFIED BY THE CENTRAL GOVERNMENT ; HOWEVER, THIS DOES NOT MEAN THAT THE ASSESSEE IS PRECLUDED FROM FOLLOW ING AS-7, (II) A PERUSAL OF THE PROVISIONS OF SECTION 145 SHOWS THAT THE ACCOUNTING STANDARDS WHICH HAVE BEEN NOTIFIED BY THE CENTRAL G OVERNMENT HAVE TO BE MANDATORILY FOLLOWED BY THE ASSESSEE ; BUT THIS DOES NOT MEAN THAT THE ASSESSEE CANNOT FOLLOW THE OTHER ACCOUNTING STA NDARDS ISSUED BY ICAI, (III) ICAI BEING THE HIGHEST ACCOUNTING BODY OF THE COUNTRY, CREATED BY AN ACT OF PARLIAMENT, ACCOUNTING STANDARDS ISSUE D BY IT CANNOT BE BRUSHED ASIDE LIGHTLY; ON THE CONTRARY, IF AN ASSES SEE IS FOLLOWING ACCOUNTING STANDARDS ISSUED BY ICAI, IT WOULD GIVE MORE CREDIBILITY AND AUTHENTICITY TO ITS ACCOUNTS. IN DREDGING INTERNATIONAL N.V. (SUPRA), IT IS HELD THAT PROVISIONS FOR FORESEEABLE LOSSES MADE IN ACCORDANCE WITH GUIDELIN ES OF AS-7 AND DULY DEBITED IN AUDITED ACCOUNTS OF COMPANY IS AN ALLOWA BLE EXPENDITURE. M/S S.S. ENTERPRISES ITA NO. 2649/MUM/2018 14 IN AARTS MODULE (SUPRA), IT IS HELD THAT IT IS PERMISSIBLE FOR THE ASSESSEE TO WORK OUT THE PROFIT OR LOSS IN RESPECT OF A PROJECT ON THE BASIS OF THE WIP WORKED OUT AT THE NET REALIZABLE VALUE. WE FOLLOW THE RATIO LAID DOWN IN THE ABOVE CASE-LAW S RELIED ON BY THE LD. COUNSELS. HOWEVER, WE FIND THAT THE WORKING S OF TOTAL ESTIMATED LOSS ON THE PROJECT S.S. HOUSE AS WORKED OUT BY T HE ASSESSEE ARE NOT BASED ON SUPPORTING COMPUTATION AND THERE ARE WIDE VARIATIONS AS DISCUSSED INFRA. 7.1 WE MAY MENTION HERE THAT ACCOUNTING STANDARD (A S) IS AN AUTHORITATIVE STATEMENT ISSUED BY ICAI, A PREMIER B ODY OF ACCOUNTING IN OUR COUNTRY. IT DEALS WITH THE ACCOUNTING ISSUES RE LATED TO A PARTICULAR AREA WHICH THAT STANDARD WANTS TO ADDRESS. GUIDANCE NOTES ARE PRIMARILY DESIGNED TO PROVIDE G UIDANCE TO MEMBERS OF ICAI ON MATTERS WHICH MAY ARISE IN THE C OURSE OF THEIR PROFESSIONAL WORK AND ON WHICH THEY MAY DESIRE ASSI STANCE IN RESOLVING ISSUES WHICH MAY POSE DIFFICULTY. GUIDANCE NOTES AR E RECOMMENDATORY IN NATURE. 7.2 THE ASSESSEE HAS CONSISTENTLY FOLLOWED THE MERC ANTILE SYSTEM OF ACCOUNTING AS WELL AS PERCENTAGE COMPLETION METHOD. IN CIT V. A. GAJAPATHY NAIDU , (1964) 53 ITR 114 (SC), IT IS HELD BY THE HONBLE SUPREME COURT THAT INCOME IS TAXABLE WH EN IT ACCRUES OR IS EARNED, IF THE ASSESSEES ACCOUNTS ARE MAINTAINED O N THE MERCANTILE BASIS. A PROFIT CAN BE SAID TO HAVE ACCRUED OR A LI ABILITY OR LOSS CAN BE SAID TO HAVE BEEN INCURRED ONLY WHEN THE PROFIT IS EITHER ACTUALLY DUE OR M/S S.S. ENTERPRISES ITA NO. 2649/MUM/2018 15 THE LIABILITY BECOMES ENFORECEABLE. FURTHER, IT IS HELD BY THE HONBLE BOMBAY HIGH COURT IN CIT V. ASSOCIATED COMMERCIAL CORPORATION , (1963) 48 ITR 1 (BOM) THAT A MERE CLAIM TO A PROFIT OR TO A LIABILITY IS NOT SUFFICIENT TO MAKE THE PROFIT TO ACCRUE OR THE LIABILITY TO BE INCURRED FOR THE PURPOSES OF THE INCOME TAX ACT. IT IS ALSO CLAR IFIED BY THE HONBLE SUPREME COURT IN MORVI INDUSTRIES LTD. V. CIT, (1971) 82 ITR 835 (SC) THAT ONCE ACCRUED, IT IS LIABLE TO THE CHARGE EVEN IF, SUBSEQUENTLY, IT IS FORGONE AND NOT REALIZED. WHEN A STATUTE BRINGS TO CHARGE CERTAIN INCOME, IT S INTENTION IS TO ENFORCE THE CHARGE AT THE EARLIEST POINT OF TIME. T HE SAME IS CLARIFIED IN DECISION IN T.N.K. GOVINDARAJULU CHETTY V. CIT (1973) 87 ITR 22 (MAD), AFFIRMED IN (1987) 165 ITR 231 (SC). IN EXERCISE OF THE POWERS CONFERRED BY SUB-SECTION (2) OF SECTION 145 OF THE INCOME TAX ACT, 1961 (43 OF 1961), THE C ENTRAL GOVERNMENT NOTIFIED AS-I AND AS-II TO BE FOLLOWED BY ALL ASSES SEES FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING. AS PER IT ACCRUAL REFERS TO THE ASSUMPTION THAT REVENUES AND COSTS ARE ACCRUED, THA T IS, RECOGNIZED AS THEY ARE EARNED OR INCURRED (AND NOT AS MONEY IS RE CEIVED OR PAID) AND RECORDED IN THE FINANCIAL STATEMENTS OF THE PERIODS TO WHICH THEY RELATE. 7.3 THE ASSESSEE IS FOLLOWING CONSISTENTLY PERCENTA GE OF COMPLETION METHOD. AS-7 (REVISED) ALLOWS ONLY PERCENTAGE OF CO MPLETION METHOD FOR CONSTRUCTION CONTRACTS. THE BASIC INGREDIENTS O F THE ABOVE METHOD ARE (I) THE RECOGNITION OF REVENUE AND EXPENSES BY REFERENCE TO THE STAGE OF COMPLETION OF A CONTRACT IS CALLED THE PERCENTA GE OF COMPLETION METHOD, (II) THE CONTRACT REVENUE IS MATCHED WITH THE CONTRACT COSTS M/S S.S. ENTERPRISES ITA NO. 2649/MUM/2018 16 INCURRED IN REACHING THE STAGE OF COMPLETION, (III) THIS RESULTS IN THE REPORTING OF REVENUE, EXPENSES AND PROFIT THAT CAN BE ATTRIBUTED TO THE PROPORTION OF WORK COMPLETED, (IV) THIS METHOD PROV IDES USEFUL INFORMATION ON THE EXTENT OF CONTRACT ACTIVITY AND PERFORMANCE DURING A PERIOD, (V) CONTRACT REVENUE IS RECOGNIZED AS REVEN UE IN THE STATEMENT OF PROFIT AND LOSS IN THE ACCOUNTING PERIODS IN WHICH THE WORK IS PERFORMED, (VI) CONTRACT COSTS ARE USUALLY RECOGNIZ ED AS AN EXPENSE IN THE STATEMENT OF PROFIT AND LOSS IN THE ACCOUNTING PERIODS IN WHICH THE WORK TO WHICH THEY RELATE IS PERFORMED, (VII) HOWEV ER, ANY EXPECTED EXCESS OF TOTAL CONTRACT COSTS OVER TOTAL CONTRACT REVENUE IS RECOGNIZED AS AN EXPENSE IMMEDIATELY. 7.4 IT IS THE CONTENTIONS OF THE LD. COUNSEL THAT T HE ASSESSEE BY FOLLOWING THE GUIDANCE NOTE REVERSED THE PROFITS SH OWN IN EARLIER YEARS, ON ACCOUNT OF EXPECTED ESTIMATED LOSS, BY CREDITING THE WIP ACCOUNT IN THE CURRENT YEAR (TO BRING THE WIP TO ITS ACTUAL AM OUNT OF COST INCURRED) AS THE SAME WAS INFLATED BY DEBITING IN THE EARLIER YEARS. THE YEAR-WISE DETAILS OF PROFIT DECLARED ON THE PR OJECT S.S. HOUSE FILED BY THE ASSESSEE ARE GIVING BELOW : SR. NO. A.Y. PROFIT DECLARED (RS.) 1. 2010-11 RS.2,65,93,359/- 2. 2011 - 12 RS.1,95,32,020/ - 3. 2012-13 RS.2,19,87,786/- TOTAL RS.6,81,13,165/- A PERUSAL OF THE WIP ACCOUNT FOR THE YEAR ENDED 31. 03.2014 SHOWS THAT THE WIP WAS SHOWN AT RS.97,88,86,048/- AND FRO M THE SAME THE M/S S.S. ENTERPRISES ITA NO. 2649/MUM/2018 17 ABOVE AMOUNT OF RS.6,81,13,165/- WAS REDUCED ON ACC OUNT OF REVERSAL OF PROFITS DECLARED IN THE EARLIER YEARS ON ACCOUNT OF ESTIMATED LOSS EXPECTED. THE GUIDANCE NOTE PRIMARILY PROVIDES GUIDANCE ON AP PLICATION OF PERCENTAGE OF COMPLETION METHOD PRESCRIBED IN AS-7, CONSTRUCTION CONTRACTS WHERE IT IS APPROPRIATE TO APPLY THIS ME THOD AS SUCH TRANSACTIONS AND ACTIVITIES OF REAL ESTATE HAVE THE SAME ECONOMIC SUBSTANCE AS CONSTRUCTION CONTRACTS. IN RESPECT OF TRANSACTIONS OF REAL ESTATE, WHICH ARE IN SUBSTANCE SIMILAR TO THE DELIV ERY OF GOODS, THE PRINCIPLES LAID DOWN IN AS-9, REVENUE RECOGNITION ARE APPLIED. THE RELEVANT PARAGRAPHS OF THE GUIDANCE NOTE ARE AS UNDER : 5.7 WHEN IT IS PROBABLE THAT TOTAL PROJECT COSTS W ILL EXCEED TOTAL ELIGIBLE PROJECT REVENUES, THE EXPECTED LOSS SHOULD BE RECOG NIZED AS AN EXPENSE IMMEDIATELY. THE AMOUNT OF SUCH A LOSS IS DETERMINE D IRRESPECTIVE OF: (A) COMMENCEMENT OF PROJECT WORK; OR (B) THE STAGE OF COMPLETION OF PROJECT ACTIVITY . 5.8 THE PERCENTAGE OF COMPLETION METHOD IS APPLIED ON A CUMULATIVE BASIS IN EACH REPORTING PERIOD TO THE CURRENT ESTIMATES OF P ROJECT REVENUES AND PROJECT COSTS. THEREFORE, THE EFFECT OF A CHANGE IN THE ESTIMATE OF PROJECT COSTS, OR THE EFFECT OF A CHANGE IN THE ESTIMATE OF THE OU TCOME OF A PROJECT, IS ACCOUNTED FOR AS A CHANGE IN ACCOUNTING ESTIMATE. T HE CHANGED ESTIMATES ARE USED IN DETERMINATION OF THE AMOUNT OF REVENUE AND EXPENSES RECOGNIZED IN THE STATEMENT OF PROFIT AND LOSS IN THE PERIOD IN W HICH THE CHANGE IS MADE AND IN SUBSEQUENT PERIODS. M/S S.S. ENTERPRISES ITA NO. 2649/MUM/2018 18 5.9 THE CHANGES TO ESTIMATES REFERRED TO IN PARAGRA PH 5.8 ABOVE ALSO INCLUDE CHANGES ARISING OUT OF CANCELLATION OF CONTRACTS AN D CASES WHERE THE PROPERTY OR PART THEREOF IS SUBSEQUENTLY EARMARKED FOR OWN U SE OR FOR RENTAL PURPOSES, IN SUCH CASES ANY REVENUES ATTRIBUTABLE TO SUCH CON TRACTS PREVIOUSLY RECOGNIZED SHOULD BE REVERSED AND THE COSTS IN RELA TION THERETO SHALL BE CARRIED FORWARD AND ACCOUNTED IN ACCORDANCE WITH AS 10, ACCOUNTING FOR FIXED ASSETS. 7.4.1 IN THE INSTANT CASE, THE ASSESSEE HAS STATED THAT IT HAD INCURRED A TOTAL LOSS FROM THE AFORESAID PROJECT DUE TO THE FA CT THAT THE PROJECT GOT DELAYED BEYOND THE EXPECTED DATE OF COMPLETION WHIC H WAS FURTHER DUE TO CERTAIN MODIFICATIONS CARRIED OUT IN THE INTERNA L LAYOUT OF THE COMMERCIAL OFFICES AND FURTHER THERE WERE CERTAIN D ISPUTES BETWEEN THE PARTNERS INTER SE DUE TO WHICH THE PROJECT GOT DELA YED. BUT NO DETAILS ON THE ABOVE WERE FILED BEFORE THE AO.. 7.4.2 WE ARE REMINDED OF THE ACCOUNTING PRINCIPLES THAT A REVERSING ENTRY IS THE EXACT REVERSE OF THE ADJUSTING ENTRY T O WHICH IT RELATES, THE AMOUNTS AND THE ACCOUNTS ARE THE SAME ; THE DEBITS AND CREDITS ARE JUST REVERSED. WE ARE ALSO REMINDED THAT ONE CAN REVERSE ADJUSTING ENTRIES ONLY FOR ACCRUALS, SUCH AS SALARIES PAYABLE AND UNB ILLED REVENUE, WITH EVIDENCE. THE CLAIM OF THE ASSESSEE IS THUS NOT TENABLE. 7.5 THE LD. COUNSEL HAS FILED AN WORKING OF TOTAL E STIMATED PROFITS AS ON 31.03.2014 OF THE PROJECT S.S. HOUSE WHICH IS PRODUCED BELOW : S.S. ENTERPRISES PROJECT. 'S.S. HOUSE' M/S S.S. ENTERPRISES ITA NO. 2649/MUM/2018 19 WORKING OF ESTIMATED PROFITS AS ON 31 ST MARCH 2014 TOTAL AGREEMENTS FOR SALE ENTERED TILL 31/03/2014 = 60,04,48,264.00 FURTHER SALE AGREEMENTS EPECTED IN F.Y. 2014 - 15 = 30,00,00,000.00 TOTAL ESTIMATED SALES = 90,04,48,264.00 TOTAL COST INCURRED TILL 31/03/2014 = 91,07,85,390.00 FURTHER ESTIMATED COSTS = 3,00,00,000.00 94,07,85,390.00 SAY = 94,00,00,000.00 ESTIMATED LOSS = 94,00,00,000.00 - 90,04,48,264.00 TOTAL ESTIMATED LOSS = 3,95,51,736.00 7.5.1 THE LD. DR ALSO FILED AN WORKING OF TOTAL EST IMATED PROFITS AS ON 31.03.2014 OF THE PROJECT S.S. HOUSE GIVEN BY THE LD. COUNSEL, WHICH IS PRODUCED BELOW : S.S. ENTERPRISES PROJECT. 'S.S. HOUSE' WORKING OF ESTIMATED PROFITS AS ON 31 ST MARCH 2014 TOTAL AGREEMENTS FOR SALE ENTERED TILL 31/03/20 = 600,448,264.00 FURTHER SALE AGREEMENTS EPECTED IN F.Y. 2014 = 300,000,000.00 TOTAL ESTIMATED SALES = 900,448,264.00 TOTAL COST INCURRED TILL 31/03/2014 = 978,886,048.00 FURTHER ESTIMATED COSTS = 3,00,00,000.00 1,008,886,048.00 SAY = 1,008,880,000.00 ESTIMATED LOSS = 1,008,880,000.00 - 900,448,264.00 TOTAL ESTIMATED LOSS = 108,431,736.00 OUT OF LOSS OF RS.10.84 CRORES, RS. 6.81 CR. HAS BE EN RECOGNIZED AND BALANCE RS.3.53 CR. HAS NOT BEEN RECOGNIZED. M/S S.S. ENTERPRISES ITA NO. 2649/MUM/2018 20 7.6 BUT HOW TO CALCULATE THE PERCENTAGE OF COMPLETI ON AND CURRENT REVENUE FROM CONTRACT? THE PERCENTAGE OF COMPLETION WOULD BE ESTIMATED BY COMPARING TOTAL COST INCURRED TO DATE WITH TOTAL COST EXPECTED FOR THE ENTIRE CONTRACT : PERCENTAGE OF COMPLETION = COST TO DATE X 100% CUMULATIVE COST INCURRED + ESTIMATED COST TO COMPLE TE CURRENT REVENUE FROM CONTRACT CONTRACT PRICE X PERCENTAGE OF COMPLETION REVENUE PREVIOUSLY RECOGNIZED. 7.6.1 LET US ILLUSTRATE IT FURTHER BY ARITHMETIC: QUESTION: ON 1 ST DECEMBER 2003, XYZ CONSTRUCTION CO. LTD. UNDERTOOK A CONTRACT TO CONSTRUCT A BUILDING FOR RS. 85 LAKHS. ON 31ST MARC H, 2003 THE COMPANY FOUND THAT IT HAD ALREADY SPENT RS.64,99,000 ON THE CONS TRUCTION. PRUDENT ESTIMATE OF ADDITIONAL COST FOR COMPLETION WAS RS. 32,01,000 . WHAT AMOUNT SHOULD BE CHARGED TO REVENUE IN THE FINAL ACCOUNTS FOR THE YE AR ENDED 31 ST MARCH, 2003 AS PER PROVISIONS OF ACCOUNTING STANDARD 7 (REVISED )? ANSWER : RS. COST INCURRED TILL 31 ST MARCH, 2003 64,99,000 32,01,000 PRUDENT ESTIMATE OF ADDITIONAL COST FOR COMPLETION TOTAL COST OF CONSTRUCTION 97,00,000 85,00,000 LESS : CONTRACT PRICE M/S S.S. ENTERPRISES ITA NO. 2649/MUM/2018 21 TOTAL FORESEEABLE LOSS 12,00,000 ACCORDING TO AS 7 (REVISED 2002), THE AMOUNT OF RS .12,00,000 IS REQUIRED TO BE RECOGNIZED AS AN EXPENSE. STAGE OF COMPLETION = RS.64,99,000 X 100 97,00,000 = 67% PROPORTION OF TOTAL CONTRACT VALUE RECOGNIZED AS TU RNOVER AS PER AS 7 (REVISED) ON CONSTRUCTION CONTRACTS = 67% OF R S.85,00,000 = RS. 56,95,000/- COST RECOGNIZED =RS.64,99,000 LOST TILL DATE =RS.8,04,000 PROVISION FOR ADDITIONAL LOSS TILL DATE =RS.3,96,0 00 TOTAL ESTIMATED LOSS =RS.12,00,000 7.7 AN EXAMINATION OF THE WORKING OF TOTAL ESTIMATE D LOSS ON THE PROJECT S.S. HOUSE AS WORKED OUT BY THE ASSESSEE CLEARLY INDICATES THAT IT SUFFERS FROM BASIC DEFICIENCIES VIZ. (I) TOTAL C OST INCURRED TILL 31/03/2014 RS. 91,07,85,390/ OR RS. 978,886,048/- I S NOT A RELIABLE ONE, AS THE ASSESSEE IS STICKING TO TWO FIGURES, WI THOUT SUPPORTING COMPUTATION, AND (II) TOTAL ESTIMATED LOSS OF RS. 3 ,95,51,736/- OR RS.108,431,736/- IS NOT A RELIABLE ONE, AS THE ASSE SSEE IS STICKING TO TWO FIGURES, WITHOUT SUPPORTING COMPUTATION, (III) THER E IS NO PRUDENT ESTIMATE OF ADDITIONAL COST FOR COMPLETION OF THE P ROJECT. M/S S.S. ENTERPRISES ITA NO. 2649/MUM/2018 22 THE MATCHING PRINCIPLE REQUIRES RECORDING EXPENSES IN THE SAME ACCOUNTING PERIOD IN WHICH THE REVENUES WERE EARNED AS A RESULT OF THE EXPENSES. EXPENSE RECOGNITION, SIMILAR TO REVENUE R ECOGNITION, HAS A BALANCE SHEET EFFECT. IN THIS VIEW, EXPENSE RECOGNI TION IS SIMULTANEOUS WITH A DECREASE IN AN ASSET OR AN INCREASE IN A LIA BILITY. IN SUCH A SCENARIO, REVERSAL OF PROFITS DECLARED IN THE EARLIER YEARS ON ACCOUNT OF ESTIMATED LOSS EXPECTED OF RS. 6,81,1 3, 166/- IN WIP FOR THE IMPUGNED ASSESSMENT YEAR BY THE ASSESSEE UPSETS THE APPLECART OF MERCANTILE SYSTEM OF ACCOUNTING, THE MATCHING PRINC IPLES. FURTHER, IT DISLOCATES THE EQUILIBRIUM OF THE FOLLOWING EQUATIO N, WHICH IS CENTRAL TO AS-7 (REVISED). PERCENTAGE OF COMPLETION = COST TO DATE X 100% CUMULATIVE COST INCURRED + ESTIMATED COST TO COMPLE TE CURRENT REVENUE FROM CONTRACT CONTRACT PRICE X PERCENTAGE OF COMPLETION REVENUE PREVIOUSLY RECOGNIZED. THEREFORE, NO RELIANCE CAN BE PLACED ON THE ABOVE WORKINGS OF TOTAL ESTIMATED LOSS AS ON 31.03.2014 OF PROJECT S.S. HOUSE ARRIVED AT BY THE ASSESSEE, WHICH ARE NOTHING BUT BALD STATEME NTS. AS THE ORDER PASSED BY THE LD. CIT(A) IS NOT BASED ON PROPER APPRECIATION OF FACTS AND LAW, WE SET IT ASIDE. RES ULTANTLY, THE ORDER PASSED BY THE AO IS RESTORED. 8. IN THE RESULT, THE APPEAL IS ALLOWED. M/S S.S. ENTERPRISES ITA NO. 2649/MUM/2018 23 ORDER PRONOUNCED IN THE OPEN COURT ON 28.10.2019. SD/- SD/- (SAKTIJIT DEY) (N.K. PR ADHAN) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI; DATED: 28/10/2019 S. SAMANTA,P.S.(ON TOUR) COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A) - 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE . BY ORDER, //TRUE COPY// (ASSISTANT REGISTER) ITAT, MUMBAI