Ambarwadikar & Co., Aurangabad vs Assessee

नधा रती क ओर से / Assessee by : Shri M.K.Kulkarni यथ क ओर से / Department by : Shri B.C. Malakar Singh

सन ु वाई क तार ख / घोषणा क तार ख / Date of Hearing : 21.05.2015 Date of Pronouncement:31.07.2015 2

आदे श / ORDER

PER R.K. PANDA, AM :

ITA Nos. 169 to 171/PN/2006 filed by the Revenue are

directed against the common order dated 30-11-2005 of the

CIT(A)-II, Aurangabad relating to the Assessment Years 2001-02

to 2003-04 respectively. The assessee has also filed CO No.

27/PN/2010 against the appeal filed by the Revenue for

Assessment Year 2001-02. For the sake of convenience all the 3

appeals filed by the Revenue and the CO filed by the Assessee

were heard together and are being disposed of by this common

order.

2. First we take up ITA No.169/PN/2006 for A.Y. 2001-02.

Facts of the case in brief are that the assessee is a partnership

firm engaged in the business of Civil Construction. It filed its

return of income on 20-02-2002 u/s.139(4) of the I.T. Act

declaring total income of Rs. 94,56,820/- which was duly

processed u/s. 143(1), on 15-06-2002 determining the tax

payable by the assessee at Rs.22,28,630/-. The assessee filed a

revised return of income on 20-01-2003 declaring a loss of

Rs.2,63,95,650/- which was erroneously processed u/s.143(1) of

the Act on the same day determining a refund of Rs.21,77,337/-.

No notice u/s.143(2) (ii) of the Act was issued on the basis of the

first return filed on 20-02-2002. However, on the basis of the

revised return filed on 20-01-2003 a notice u/s.143(2)(ii) of the

Act was issued on 27-05-2003 which was served on the assessee

on 28-05-2003. The Assessing Officer later moved a petition

u/s.263 of the Act to the CIT who vide order passed u/s.263 of

the Act dated 26-08-2003 held that the second return furnished 3

on 20-01-2003 was not a valid return and cancelled the second

intimation dated 20-01-2003. Accordingly, the CIT cancelled the

notice served on 28-05-2003 issued u/s.143(2)(ii) of the I.T. Act

thus confirming the first intimation dated 15-06-2003 a final.

3. Subsequently, the assessee moved a petition u/s.264 of the

I.T. Act on 03-09-2003 before the CIT, Aurangabad wherein the

assessee sought revision of intimation dated 15-06-2002. It was

submitted that as per the accounting policy consistently followed

by the assessee, the assessee treats the work done as work-in-

progress and the same is measured and accounted for after

reducing the gross profit as per the books on the work done. In

the month of March 2001, the assessee had raised a running

account bill for a sum of Rs.5,88,69,955/-. As per the practice

followed in the past, the assessee reduced certain amount as

percentage from this amount on account of gross profit and value

of work-in-progress as on 31-03-2001 was arrived at by it at

Rs.4.94 crores in respect of the Ghatprabha site. It was claimed

that this running account bill of the assessee raised in March

2001 was not cleared by the Executive Engineer concerned

throughout the F.Y. 2001-02. It was further claimed that the

Executive Engineer, Medium Project No.2, Kolhapur without

assigning any reason scaled down the value of said running

account bill on 31-05-2002 from Rs.5,88,69,955/- to Rs.3 crores.

According to the assessee, since the value of running bill raised in

the month of March 2001 has been scaled down to Rs. 3 crores,

therefore, the value of the work-in-progress at Rs.4,94,00,000/-

was required to be revised. Accordingly, the assessee filed a

revised return.

4

4. It was submitted that the assessee also furnished return of

income on 31-10-2002 for A.Y. 2002-03 declaring loss of

Rs.3,75,76,870/-. In the said return the value of opening work-

in-progress was disclosed at Rs.4.94 crores. This return was also

revised on 20-01-2003 showing a loss of Rs. 1,74,92,950/-. In

the said revised return, the value of opening work-in-progress was

taken at Rs.3 crores. Since this is a continuous process the

assessee filed a revised return for A.Y. 2003-04 also. It may be

pertinent to mention here that the assessee had filed original

return of income for A.Y. 2003-04 showing income at

Rs.33,21,880/-.

5. The CIT disposed of the revised petitions for all the 3 years

by giving the following directions :

"(i) "Intimations dated 15-06-2002/20-02-2003 u/s. 143(1)(a) of the Act, were set-aside. The Assessing Officer is hereby directed to make a fresh assessments de novo for the Assessment Years 2001-02 and 2002-03 right from the stage of furnishing of return of income after affording a reasonable opportunity of being heard to the assessee.

(ii). As to the assessment year 2003-04, the Assessing Officer may issue a notice u/s. 143(2)(ii) of the Act, and thereafter he may take a regular assessment".

6. Based on the directions of the CIT the Assessing Officer

proceeded to make fresh assessment in respect of A.Yrs. 2001-02

to 2003-04. The main issue involved was the time and valuation

of work-in-progress as on 31-03-2001 at Rs.3 crores or at Rs.4.94

crores. During the course of assessment proceedings it was

contended by the assessee that the WIP should be taken at Rs. 3

crores and not Rs.4.94 crores. To substantiate his claim the

assessee filed the following submissions which has been

summarised by the CIT(A) at para 7 of her order which reads as

under :

5

"The main issue was regarding valuation of work in progress as on 31-03-2001. The assessee was awarded the contract work of Ghatprabha Medium Project at Phatlakwad, Tq: Chandgad, Dist. Kolhapur in the year 1997. Since the work is of long term, the same is being carried on continuously.

The method of accounting of the assessee is to recognise the revenue only on final passing of running bill by the concerned department. Every running payment is evaluated by the Engineer or Surveyor of the Department and the payments are made on the basis of valuation by the Department.

There were interruptions on account of lack of funds and the concerned department did not value the work as on and upto 31-03-2001 even though a running bill was submitted by the assessee.

The amount of bill payable only after the Department Engineer takes measurement and evaluate the work and pass the payment. The concerned Engineer endorsed on the bill that the measurements were checked on 31-03-2001, but kept the papers in his custody only and did not show the same to the assess upto 31-05-2002.

The assessee closed its accounts on 31-10-2001 and got accounts audited. Since the assessee was not aware that the bill was passed only for Rs. 3 Crores, the firm valued the work in progress at Rs. 4,94,00,000/-.

There is a mistake in the profit arrived at on the basis of estimated WIP at Rs. 4.94 Crores instead of Rs. 3 Crores. According to the standards prescribed by the Institute of Chartered Accountants of India and adopted by the Government of India, revenue of percentage and completion cannot be recognised unless the surveying authority evaluates the bill and approves the claim admitted as on any date.

The work in progress having been wrongly valued resulted in disclosure of excess income for the assessment year 2001-02 and the same may be reduced by Rs. 1,94,00,000/-.

As there is a contravention of accounting standards, there is a mistake in arriving at the net profit and the same deserves to be corrected.

The assessee relied on the accounting statement No. 7 dealing with "accounting for construction contracts (AS7) of the Institute of Chartered Accountant of India. The Accounting standards are being under Company law and other Laws and are to be uniformly followed. Copy of AS 7 enclosed for my ready reference."

7. However, the Assessing Officer, after considering the

various submissions filed by the assessee held that the WIP

should be Rs.5.88 crores as against Rs.3 crores claimed by the 6

assessee. The relevant observation of the Assessing Officer which

has been summarised by the CIT(A) at para 8 to 12 of her order

reads as under :

"8. The A.O. after consideration of the issues involved and the submissions made by the assessee, decided the issues as under:-

"From the entire discussion given above, it can be concluded that;

i) The work in progress both certified and uncertified are part of work in progress. Without prejudice to this fact, in assessee's case entire work was certified:

In case of the assessee, the R.A. Bill No.15 was duly certified and therefore, question of accounting of Rs.3,00,00,000/- out of Rs.5,88,69,955/-, does not arise.

ii) The assessee himself has argued that assessee relied on AS-

7 and the work in progress is being valued on the basis of amount of bill payable once the departmental Engineer take measurement and valued the work which has been done in case of R.A. Bill No.15 on 31/03/2001.

iii) The claim of the assessee that measurement was checked on 31/03/2001, but the papers were kept in his custody till 31/05/2002 is a statement devoid of any truth because the executive Engineer himself has clarified the position and secondly the final financial statement of the assessee are prepared after reconciliation and verification of the relevant facts and figures.

iv) The accounting of Rs.3,0,00,000/- on the basis of receipt of payment and considering the same for work in progress is not justified once the accounts are being maintained on mercantile basis.

v) The return filed belatedly i.e. on 20/02/2002 depicts the correct position of work in progress as per the R.A.Bill No.15 related to Ghatprabha Project is the correct statement of Financial Affairs of the assessee firm."

9. In other words, for the AY 2001-02 the A.O. held that the WIP should be on the basis of Bill No.15 submitted by the assessee to the Government amounting to Rs.5,88,69,955/- instead of Rs.3 Crores which was the amount sanctioned by the Executive Engineer on RA Bill No.l5A. These conclusions were drawn by the A.O. on the various facts and observations made by him during the course of the assessment proceedings which can be narrated in brief as under:-

i. The A.O. observed that the Bill No.15 submitted by the assessee for an amount of Rs.5.88 Crores was served by the EE on 31-03-2001.

7 ii. The original return itself was filed belatedly u/s.139(4) and the same could not be revised u/s.139(5) as per the assessee's version the original bill No.15 was kept by the EE and it was handedover to the assessee only on 30-05-2002 whereas the assessee filed its return on 20-01-2003 i.e. approximately after 8 months after the so called reduction in the Bill No.15.

iii. The original return for AY 2002-03 was filed on 31-10- 2002 but the pending WIP was shown as per the closing WIP of original return for AY 2001-02 i.e. Rs.4.94 Crores.

iv. The return for AY 2001-02 & 2002-03 were simul- taneously revised on 20-10-2003 which according to the AO itself indicate that the so called reduction was not taken.

10. While coming to the conclusion that WIP should be based on Rs.5,88,69,955/- instead of Rs.3 Crores for AY 2001-02 the A.O. also refers to the accounting standards. The same are reproduced below:-

"The Accounting standards-7 (AS-7) deals with accounting of construction contracts. Para-3 of AS-7 defines a construction contract as a contract for construction of an asset or a continuation of assets. Construction of bridges, dams, ships, building and other complex of equipments are some of the examples which are detailed by AS-7. The subject matter of AS-7 is revenue recognition and it provides time and manner in which revenue i.e. profit and loss in a construction contract is to be reorganized. Due to long time between commen- cement of work and its completion and determination of revenue, earned, it becomes necessary to deal with the subject in a different manner. The basic characteristic of a construction contract necessitates a different approach as that the work under contract expands over more than one recognition period.

Earlier, there were two methods for revenue recognition one is completion contract method and the other one is percentage completion method. The revised accounting standard contains only percentage completion method. In case of percentage completion method, revenue is estimated and recognized as the work progresses. The salient features of revenue recognition under this method are;

i) When outcome of a contract can be reliably estimated, contract receipt and contract cost should be estimated proportionately with reference to stage of completion.

ii) Cost incurred on contract to the extent they are recoverable should be treated as receipt and total contract cost should be treated as expenses. Accordingly, profit and loss upto the date of stage of contract should be accounted for.

iii) If it is expected that the total contract cost will exceed total contract revenue, the expected loss should be accounted for.

8 The estimation of profit in percentage completion method, depends on estimation of total profit, stage of completion and provisioning of certain items. A reliable estimate of total contract is first step towards estimation of income from year to year under this method. The estimate of total profit may be required to be changed from year to year, having regard to expenditure already incurred and changes in terms of contract relating to revenue in flow. The stage of completion of contract can be determined in various manners. The most reliable approach is based on the ascertainment of work done with reference to survey of work performed and certification of physical preposition of the contract work.

In assessee's case, at every stage, the running bills are raised by the assessee and depending on the various factors of contractual agreement, work completed by the contractor is examined and certified by the department, i.e. Dy. Engineer, Executive Engineer, Executive Engineer, Superintendent Engineer and so on."

11. The A.O. also referred the matter regarding R.A.Bill No.15 to the Executive Engineer, Kolhapur, for verification of reduction in work in progress of Rs.5,88,69,955/- to Rs.3 Crores by the assessee. The Executive Engineer, replied vide letter No.MPD-2/AB-l/IT/469 dated 24-03-2005. The contents of this letter are reproduced below :-.

" With respect to the above, it is informed that the work of construction of Main Dam, I.C.P.O. of Ghatprabha Medium Project, Tal.Chandgad, Dist.Kolhapur is entrusted to M/s. Ambarwadikar &, Co. Aurangabad vide agreement No.B.I/CE/I for 1997-98, the work was started by the agency in the month of April, 1997 and the following payment has been made against their Running Account bills to date :

R.A.bill Month of Amount of Paid amount CV No. & IDS Remarks No. Bill bill month amount 1 5/97 7865467 7865467 46-5/97 180905 --

2 6/97 16781049 16781049 77-6/97 247964 --

3 10/97 5000000 5000000 57-10/97 115000 --

4 12/97 7401327 7401327 51-12/99 170231 --

5 1/98 6082393 6082393 14-1/98 139895 --

6 3/98 12001132 12001132 6-3/98 240023 --

7 7/98 41205968 17210000 94-7/98 344200 Due to shortage of funds part payment was made.

8 8/98 -- 6000000 67-8/98 120000 Withheld amount released

9 10/98 -- 17995968 50-10/98 359920 -do-

10 5/99 34259443 20000000 79-5/99 400000 --

11 6/99 -- 13857697 43-6/99 277160 Withheld amount released

12 7/99 -- 401746 62-7/99 8035 -do-

13 5/2000 9820000 9820000 TEBI No.9- 225860 --

8/2000 9 14 9/2000 23103000 23103000 -do- 11- 508270 --

11/2000 I5A 3/2001 58869955 30000000 37-5/2002 630000 --

15B -do- -- 28800000 TEBI No.11, 60480 Withheld amount released 12, 13, 18- 7/2003

16A -do- 19212825 13700000 -do- 287700 -- 16B -do- -- 337000 120-3/04 7414 Withheld amount released

However, as may be seen above, sometimes the R.A.bills were not paid fully, only part payment was made due to shortage of funds, there was no question of dispute in the passed bills as mentioned in your reference letter. The xerox copies of R.A.Bill No.15 and onwards is hereby enclosed for ready reference. Still an amount of Rs.51,75,825/- is pending under R.A.bill No.16 due to shortage of funds and will be paid as soon as the funds are received.

However there is no question of any sort of dispute as far as the amount of passed bills is concerned, as mentioned in your letter. Sometimes the part payment of R.A.bills has been made only due to shortage of funds."

12. It is on the basis of the accounting standard, Executive Engineer's letter that A.O. held that the WIP on the basis of bill amount of Rs.2.88 Crores should be taken in AY 2001-02 and not in AY 2004-05."

8. Before the CIT(A) the assessee contended that the income

accrues to the assessee only at the time of final sanction of the

bill which in the instant case was finally paid by the Executive

Engineer in the A.Y. 2004-05. It was submitted that the AO

decided the issue against the assessee entirely relying on one

sided evidence of letter of Executive Engineer, MP Division,

Kolhapur. He has disbelieved the version of the assessee without

any reason. Referring to the Accounting Standard-7 which deals

with valuation of WIP in construction contract it was submitted

that a reliable estimate of total contract is first step towards

estimation of income from year to year under the method of

percentage completion method. It was submitted that in

assessee' s own case at every stage running bills are raised by the 10

assessee depending on the various factors of contractual

agreement, work completed by the contractor which is examined

by and certified by the Department and so on.

9. It was argued that although Bill No.15 was submitted but

no sanction was made upto 31-05-2002 and that the WIP was

valued on the basis of the bill. It was submitted that the

contractor is not aware at the time of closing of books as to how

much amount of bill is going to be admitted for payment. The

audit was completed showing WIP of Rs.4,94,00,000/-. The

department has sanctioned the bill for Rs.3 crores and withheld

balance amount of the bill. Accordingly, the assessee revised the

WIP at Rs. 3 crores and filed the revised return.

10. Referring to the accounting policy followed by the assessee

it was submitted that only bills which are not withheld are taken

as WIP. If the bill is withheld or part of the bill is withheld the

withheld amount was not recognised as income either as contract

receipt or WIP.

11. So far as the observation of the AO regarding the letter

dated 24-03-2005 of the Executive Engineer on the basis of which

the AO has based his decision it was submitted that the

Executive Engineer has stated in general terms that sometimes

part payments are made for shortage of funds. He never

pinpointed that Bill No.15 was short paid for shortage of funds.

12. As regards the observation of the Executive Engineer that

there was no question of dispute in its bills it was argued that

there are definitely differences between the claim and sanction.

This itself is source of dispute even though there were no court or 11

arbitration proceedings. Relying on various decisions it was

submitted that the assessee has taken the value of WIP correctly

as per the method of valuation regularly followed by the assessee

and as per the accounting policy for valuation of stock and WIP as

disclosed right from 1996 onwards.

13. Based on the arguments advanced by the assessee the

Ld.CIT(A) held that the belated return filed by the assessee cannot

be revised and the return filed originally is the valid return.

However, at the same time, the correct value of WIP for

Ghatprabha project for A.Y. 2001-02 is Rs.3 crores and not

Rs.4.94 crores. Therefore, even if the original return is not a valid

return the assessee is liable for tax in A.Y. 2001-02 on the WIP of

Rs.3 crores and not Rs.4.94 crores for the Ghatprabha project.

Since the assessee has considered the amount of Rs.1.94 crores

during A.Y. 2004-05 the same has to be considered only in A.Y.

2004-05 and not in A.Y. 2001-02.

14. So far as the Bill Nos.15B, 16A and 16B are concerned, she

held that the assessee is vested with the right to receive the

income in the year relevant to A.Y.2004-05 amounting to Rs.4.28

crores as the correct net realisable value was ascertained in the

year relevant to A.Y. 2004-05. She accordingly directed the AO to

consider the entire WIP of Rs.4.28 crores to be taken for A.Y.

2004-05 and not in A.Yrs. 2001-02 to 2003-04. While doing so,

she further noted that the letter received from the Executive

Engineer, Medium Project No.2, Kolhapur reveals that whenever

the payments have been made due to shortage of funds it has

been mentioned in the letter itself. However, as far as the Bill

No.15A is concerned, i.e. which was submitted by the assessee for 12

claim of Rs.5,88,68,955/- but was sanctioned only for Rs.3

crores nothing has been mentioned in the remarks column. It is

only against Column No.15B it was written that withheld amount

realised. Therefore, she held that it cannot be said that the

amount of Rs.2.88 crores was withheld on account of shortage of

funds. The Executive Engineer, has not categorically stated in

respect of Bill No.15A that the part payment in respect of Bill No.

15A has been made because of shortage of funds. He has simply

mentioned that sometimes the payments are withheld due to

shortage of funds. Therefore, it does not mean that the part

payment in respect of Bill No.15 has been made due to shortage

of funds. She accordingly held that the amount of Rs.2.88 crores

was withheld not because shortage of funds but because of the

fact that either the work was not done completely or the work was

not done satisfactorily as per the directions of the Irrigation

department.

15. Under these circumstances, according to her, it has to be

decided as to whether the amount of Rs.2.88 crores which was

withheld by the Irrigation department as on 31-03-2001 which

was later on passed and paid in the previous year relevant to A.Y.

2004-05 has to be taken for A.Y. 2001-02 for the purpose of

income/WIP or the same has to be taken in the A.Y. 2004-05.

Relying on various decisions, she held that the income has to be

taxed in the year in which the assessee gets the right to receive

that income or in other words the income will be said to accrue to

the assessee when the assessee gets the right to receive that

income whether it is paid later or during the same year. Relying

on various decisions she noted that in the A.Y. 2001-02 the

assessee has right to receive an amount of Rs.3 crores only and in 13

respect of the balance amount of Rs.2.8 crores the claim had not

become bills receivable and therefore this amount cannot be

treated as WIP unless the work done in respect of this amount

has been accepted by the appropriate authority.

16. So far as the situation in respect of A.Y. 2002-03 and 2003-

04 are concerned she noted that as per the work done certificate

given by the Executive Engineer, the work in respect of bill

No.15B, 16A and 16B has been completed to the satisfaction in

the year relevant to A.Y. 2004-05. Hence, the income in respect

of these bills accrued to the assessee in A.Y. 2004-05 only. Since

the income of Rs.4.28 crores has already been offered by the

assessee and taxes have been paid by way of TDS, therefore, she

held that same cannot be taxed in the year A.Y. 2002-03 and

2003-04. Even otherwise also, she noted that it is the settled

principle of law that closing stock has to be valued either at cost

or market price whichever is less. In the instant case the

assessee was following this method of accounting regularly.

Initially, when assessee submitted the bill he followed the WIP at

estimated net realisation value. Afterwards, i.e. when the bill was

sanctioned at Rs.3 crores the assessee corrected his WIP at the

net realisable value which was Rs.3 crores only. The assessee did

this in view of method of accounting followed by him consistently,

i.e. valuation of stock at cost or market value whichever is less.

17. Aggrieved with such order of the CIT(A) the Revenue is in

appeal before us with the following grounds :

Grounds in ITA No.169/PN/2006 :

i. On the facts and in the circumstances of the case, the CIT(A) has erred in directing to take WIP for A.Y. 2001-02 at Rs. 3 Crs and not Rs. 4.94 for Ghatprabha Project as adopted by the AO.

14 ii. On the facts and in the circumstances of the case, the CIT(A) has further erred in arriving at the decision that for A.Y. 2001-02 correct value of WIP is Rs. 3 Crs and not Rs. 4.94 Crs for Ghatprabha Project.

iii. On the facts and in the circumstances of the case, the CIT(A) has further erred in holding that entire WIP of Rs. 4.28 Crs has to be taken for A.Y. 2004-05 and not in 2001-02, 2002-03 and 2003-04.

iv. On the facts and in the circumstances of the case that the assessee firm has filed return of income for A.Y. 2001-02 belated showing income at Rs. 94,56,820/- on 26-02-2002, which was processed u/s. 143(1) on 15-06-2002. Thereafter, a revised return of income for A.Y. 2001-02 was filed on 20-01-2003 declaring a loss of Rs. 2,63,95,650/-. Therefore, the loss shown in the revised belated return cannot be allowed to be carried forward to next year. Similarly, for A.Y. 2002-03, the assessee has filed revised return of income on 20-01-2003 declaring a loss of Rs. 1,74,92,950/-.

v. On the facts and in the circumstances of the case that the assessee was consistently following the method of accounting, i.e., work done as work in progress and the same is accounted for after reducing the gross profit as per the book on the work done. However, before the CIT(A)-II, A'bad, the assessee in respect of accounting policy, has stated that only bills which are not withheld are taken as work in progress. If the bills are withheld or part of the bill is withheld, the withheld amount was not recognised as income either as contract receipt or work in progress until the withheld amount is released.

vi On the facts and in the circumstances of the case the order of the CIT(A) may be vacated and that of the AO be restored.

vii. The appellant craves leaves to add, amend, alter any ground(s) of appeal.

17.1 Identical grounds have been raised by the revenue in A.Yrs.

2002-03 and 2003-04.

17.2 The assessee has filed the Cross Objections by taking the

following grounds ;

"1. On the facts and circumstances of the case and in law assessment dated 31-03-2005 is bad in law, illegal land without jurisdiction as the same was so completed without issue and service of notice under S.143(2) of the Act which is an undisputed fact since the AO himself has accepted this in his assessment order (ParaA).

2. On the facts and circumstances of the case and in law the fall out of the order of Ld. CIT Aurangabad passed under section 263 of the Act dated 26-08-2003 is that the statutory notice issued under section 143(2) which was served on 28-05-2003 was held to be invalid and was cancelled. This means the assessment completed 15

u/s. 143(3) r.w.s. 263/264 was illegal and without jurisdiction and is required to be quashed.

3. On the facts and circumstances of the case and in law the order cancelling the statutory notice issued and served under section 143 (2) was without jurisdiction as the CIT is not empowered to cancel the statutory notice issued and served under section 143(2) as the provisions of section 263 only mandate him to set-aside any assessment which is erroneous and prejudicial to the interests of revenue. The setting aside of the notice served under section 143(2) is beyond the purview of section 263 of the Act.

4. On the facts and circumstances of the case and in law the assessment is also barred by limitation in view of the provisions of section 153(1)(a) since the assessment was not completed within two years from the end of the assessment year, that is before 31-03- 2004, considering the fact that the Ld. CIT Aurangabad had cancelled all the proceedings including intimation under 143(1)(a) of the Act. The invalid assessment therefore, be quashed.

5. The facts and circumstances of the case and in law and since the action under section 263 and u/s. 264 were initiated prior to completion of assessment under section 143(3) and there was no order available under section 263/264 setting aside the same the provisions of S.153 (2A) also become inapplicable. The only legal alternative would be the illegal assessment will have to be quashed and it be quashed accordingly.

6. On the facts and circumstances of the case and in law the Cross objections raised are delayed in view of sub-section (4) of Section 253 of the Act. The Hon'ble Supreme Court held in Shreemant Shamrao Suryawanshi & Another Vs. Pralhad Bhairoba Suryawanshi (dead) 2002 AIR SCW 659 held "the established rule of limitation is not applicable to a plea taken n defence unless expressly a provision is made in the statute. This is also in consonance with Rule 27 of ITAT Rule, 1963. The delay be condoned and cross objection be admitted for hearing.

7. The appellant craves to leave, add/amend or alter any of the above grounds of appeal."

18. The Ld. Departmental Representative strongly opposed the

order of the CIT(A). He submitted that when the assessee filed the

original return, which was a belated one, he cannot file a revised

return. He submitted that the assessee in the original return of

income has declared the WIP in respect of Ghatprabha Project at

Rs.4,94,00,000/-. Further, the assessee follows mercantile

system of accounting, therefore, the value of WIP shown originally

at Rs.4.94 crores for the Ghatprabha Project has to be treated as 16

correct. Referring to the certificate issued by the Executive

Engineer he submitted that there is no such dispute as such and

once the assessee has booked the expenditure in the profit and

loss account and valued the WIP at a particular figure which was

duly certified by the auditors, therefore, the assessee should not

be permitted to reduce the same just to suit his requirement. He

submitted that the CIT(A) without considering the accounting

principles allowed the claim of the assessee by substituting the

revised WIP which is not permissible in law. So far as the various

decisions relied on by the Ld. CIT(A) are concerned, he submitted

that those are not applicable to the facts of the present case and

are distinguishable. He accordingly submitted that the order of

the CIT(A) be reversed and that of the AO be restored.

19. The Ld. Counsel for the assessee on the other hand strongly

relied on the order of the CIT(A). He submitted that he was

following a particular method of accounting consistently. He

submitted that the assessee in the A.Y. 2004-05 has offered the

contract receipts which have been accepted by the AO in the order

passed u/s.143(3) and there is no loss to the Revenue. Referring

to the decision of the Hon'ble Patna High Court in the case of CIT

Vs. Chanchani Brothers (Contractors) Pvt. Ltd. he submitted that

Hon'ble High Court has held that in the case of contractor

carrying out a Government contract and regularly following

mercantile system of accounting, the income accrues only when

the bills are admitted by the contractee and not when the bills are

raised. He submitted that in the said decision the Hon'ble High

Court referred to the decision of the Hon'ble Bombay High Court

in the case of Vishnu Agencies Pvt. Ltd. Vs. CIT reported in 48 ITR

444 (Bom.). He submitted that in the said decision the Hon'ble 17

High Court has held that the income accrued at the time when

the bills were accepted and its accrual had no reference to the

time when it would be actually received. The mere assertion of a

claim on the part of the Government for damages for breach of

contract was not sufficient to make the claim enforceable one or

to affect the accrual of the income to the assessee. He submitted

that the Hon'ble Patna High Court in the said decision has also

referred to the decision of the Hon'ble Bombay High Court in the

case of CIT Vs. ACC reported in 48 ITR 1 wherein it has been held

that the presentation of the bills by the assessee was only a claim

by the assessee and unless the claim is admitted and accepted by

the Government department income will not accrue. He

accordingly submitted that since the bill raised by the assessee

has finally been accepted by the Government department in the

A.Y. 2004-05 and the assessee has already offered the same to tax

in the A.Y. 2004-05, therefore, there is no loss to the Revenue.

According to him since the order of the CIT(A) is in consonance

with law, therefore, the same has to be upheld and the grounds

raised by the Revenue should be dismissed.

20. So far as the CO of the assessee is concerned no argument

was made by either side.

21. We have considered the rival arguments made by both the

sides, perused the orders of the AO and the CIT(A) and the paper

book filed on behalf of the assessee. We have also considered the

various decisions cited before us. Before proceeding to decide the

issue at hand the chronology of events that have taken place are

material. In the instant case although the due date of filing of the

return for A.Y. 2001-02 was 31-10-2001 the assessee filed return 18

of income on 20-02-2002 declaring total income of

Rs.94,56,820/-. However, the audit report u/s.44AB dated 31-

10-2001 was furnished on 31-10-2001. The return filed on 20-

02-2002 was processed u/s.143(1) on 15-06-2002 determining

the tax payable at Rs.22,28,630/-. Subsequently, on 20-01-2003

the assessee filed a revised return declaring a loss of

Rs.2,63,95,650/- which was processed u/s.143(1) on the same

day determining the refund to the assessee at Rs.21,77,332/-.

The Assessing Officer issued a notice u/s.143(2)(ii) on 27-05-2003

on the basis of the revised return filed on 20-01-2003 which was

served on the assessee on 28-05-2003. The CIT issued a show

cause notice to the assessee u/s.263 on 22-07-2003 fixing the

date of hearing on 06-08-2003. Subsequently, he passed the

order u/s.263 on 26-08-2003 cancelling the notice issued and

served u/s.143(2)(ii) holding it as invalid. It was held that the

intimation issued u/s.143(1) dated 15-06-2002 was the only legal

document and on that basis whatever recovery is required to be

made should be made by the Assessing Officer immediately. The

assessee filed a petition u/s.264 on 03-09-2003 seeking revision

of the intimation dated 15-06-2002 before CIT. It was submitted

during the 264 proceedings that the WIP of Ghatprabha Medium

Project, Kolhapur be reduced from Rs.4.94 crores to Rs.3 crores.

The CIT in the order passed u/s.264 set aside the intimations

issued u/s.143(1)(a) on 15-06-2002 and 20-01-2003 and directed

the Assessing Officer to make fresh assessment denovo right from

the stage of furnishing the return. Similarly the intimation for

A.Y. 2002-03 passed u/s.143(1)(a) was also set aside with a

direction to the Assessing Officer to make fresh assessment

denovo. For A.Y. 2003-04 the Ld.CIT directed the Assessing 19

Officer to issue notice u/s.143(2)(ii) and thereafter make a regular

assessment.

22. Subsequently, the Assessing Officer passed the order

u/s.143(3) r.w.s.263/264 of the I.T. Act on 31-03-2005 for the

A.Y. 2001-02 wherein he rejected the claim of the assessee that

the WIP of the Ghatprabha project be Rs.3 crores as per the

revised return as against Rs.4.94 crores in the original return of

income. We find the Ld.CIT(A) allowed the claim of the assessee

holding that the correct value of WIP is Rs.3 crores and not

Rs.4.94 crores for the Ghatprabha Project. According to her the

amount of Rs.1.94 crores has to be considered in the A.Y. 2004-

05 in which the assessee was vested with the right to receive the

income.

23. It is the case of the Revenue that when the assessee is

following mercantile system of accounting, has raised the bill of

Rs.5.88 crores out of which an amount of Rs.3 crores was paid by

the department in the month of May 2002 and the amount of

Rs.2.88 crores in the month of July 2003, therefore, the assessee

cannot reduce the WIP of Ghatprabha project on the ground that

same was disputed. It is also case of the Revenue that when the

assessee has received the difference amount of Rs.2.88 crores in

subsequent year without incurring any further expenditure to the

socalled disputed work, therefore, it is not known as to under

what circumstances the dispute arose and without any additional

work how remaining amount was released especially when the

assessee is following mercantile system of accounting.

24. We find merit in the above argument of the Ld.

Departmental Representative. From the copy of the letter 20

addressed by the Executive Engineer, Medium Project, Kolhapur

dated 24-03-2005 addressed to the Addl.CIT we find the

Executive Engineer has stated as under :

"No.MPD-2/AB-1/TT/1469 Office of the Executive Engineer, Medium Project Dr.No.2, Kolhapur

Date : 24-03-2005

To The Addl. Commissioner of Income Tax, Range-1, Kolhapur.

Subject : Commission u/s.131(1)(d) to conduct verification and obtain Explanation documents with respect to assessment proceedings in the case of M/s. Amberwadikar & Company, Aurangabad - Reg.

Reference : Addl. Commissioner of Income Tax, Range-2, Aurangabad's letter No.ABD/ADDL..CIT/R- /131/(1)(d)/2004-05, dt.23-03-2005.

Dear Sir,

With respect to the above, it is informed that the work of construction of Main Dam, I.C.P.O. of Ghatprabha Medium Project, Tal. Chandgad, Dist. Kolhapur is entrusted to M/s. Amberwadikar & Co., Aurangabad vide agreement No.B.1/CE/1 for 1997-98, the work was started by the agency in the month of April 1997 and the following payment has been made against their Running Accounts bills to-date.

R.A.bill Month of Amount of Paid amount CV No. & IDS Remarks No. Bill bill month amount 1 5/97 7865467 7865467 46-5/97 180905 -- 2 6/97 16781049 16781049 77-6/97 247964 -- 3 10/97 5000000 5000000 57-10/97 115000 -- 4 12/97 7401327 7401327 51-12/99 170231 -- 5 1/98 6082393 6082393 14-1/98 139895 -- 6 3/98 12001132 12001132 6-3/98 240023 -- 7 7/98 41205968 17210000 94-7/98 344200 Due to shortage of funds part payment was made. 8 8/98 -- 6000000 67-8/98 120000 Withheld amount released

9 10/98 -- 17995968 50-10/98 359920 -do-

10 5/99 34259443 20000000 79-5/99 400000

11 6/99 -- 13857697 43-6/99 277160 Withheld amount released

12 7/99 -- 401746 62-7/99 8035 -do-

13 5/2000 9820000 9820000 TEBI No.9- 225860 -- 8/2000 21

14 9/2000 23103000 23103000 -do- 11- 508270 -- 11/2000 I5A 3/2001 58869955 30000000 37-5/2002 630000 -

15B -do- -- 28800000 TEBI No.11, 60480 Withheld amount released 12, 13, 18- 7/2003 16A -do- 19212825 13700000 -do- 287700 - 16B -do- 337000 120-3/04 7414 Withheld amount released

Balance payment of Rs.5175825/-.

However as may be seen above, some times the R.A. bills were not paid fully, only part payment was made due to shortage of funds, there was no question of dispute in the passed bills as mentioned in your reference letter. The Xerox copies of R.A. Bill No.15 and onwards is hereby enclosed for ready reference. Still an amount of Rs.5175825/- is pending under R.A. bill No.16 due to shortage of funds and will be paid as soon as the funds are received.

However there is no question of any sort of dispute as far as the amount of passed bill is concerned, as mentioned in your letter. Sometimes the part payment of R.A. bills has been made only due to shortage of funds.

Thanking you.

Yours faithfully, Sd/-

(G.K. Shinde) Executive Engineer, Medium Project Dn.No.2, Kolhapur"

25. From the above, it is clear that the bill raised by the

assessee has been accepted by the department and for whatever

reason an amount of Rs.2.88 crores was not paid during F.Y.

2001-02 but the fact remains that there is no such dispute as

claimed by the assessee. No documentary

evidence/correspondence has been filed by the assessee during

assessment proceedings or appeal proceedings or even before us

to substantiate the contention that some dispute was going on

between the assessee and department. It is also to be noted that

the assessee has not incurred any further expenditure in

subsequent years for receipt of the above amount. We do not find

merit in the submission of the Ld. Counsel for the assessee that 22

since the assessee has offered the income in the A.Y. 2004-05 and

since there is no loss to the revenue the order of the CIT(A) should

be upheld. Here, in the instant case the question is not relating

to loss to the Revenue. It relates to the taxability of the income in

a particular year. In the instant case the assessee follows

mercantile system of accounting, has debited all the expenditure

to the profit and loss account during the impugned assessment

year, has valued the WIP at a particular figure, got its accounts

audited and filed the return of income belatedly. Having done so

the question that arises is whether the assessee be allowed to

value the WIP at a reduced figure merely on receipt basis. The

answer in our opinion in the facts of the present case is negative,

i.e. in favour of the Revenue and against the assessee.

26. So far as the various decisions relied on by the Ld. Counsel

for the assessee are concerned we find the same are not

applicable to the facts of the present case. So far as the decision

of Hon'ble Patna High Court is concerned we find the same is

distinguishable and not applicable to the facts of the present

case. In that case the assessee was engaged as contractor

deriving income from construction of earthen dam, spillway etc.

for irrigation department. The assessee has raised certain bills

which were not admitted by the department pending verification

of satisfactory conclusion of the work was done. The assessee was

not showing any income on the amount covered by such non

admitted bills. It was argued that the assessee had no right to

claim such withheld amount and therefore it does not accrue as

income of the assessee. It was accordingly held that if the liability

is accepted relating to the bill of the contractor and the amount is

not disputed, then in the mercantile system of accounting the 23

accrual will take place the moment the bills are accepted and the

claim is admitted but where the claim is not admitted and

accepted by the Government it cannot be said that the income

accrues to contractor by mere presentation of the bill. It was held

that since the claim has not become a debt the income cannot

accrue.

27. However, in the instant case the assessee initially raised the

bill on the Government department which has not been disputed

by the department. The assessee has categorically submitted

before the CIT(A) that the departmental engineer endorsed on the

bill that the measurements were checked on 31-03-2001. Even

the assessee in the profit and loss account has also accounted for

such WIP. Further, from the copy of the letter addressed by the

Executive Engineer to the Addl.CIT there appears to be no dispute

so far as the bill is concerned. Only there was a delay in release

of the payment. Therefore, the decision of Hon'ble Patna High

Court is not applicable to the facts of the present case. Since the

assessee is following mercantile system of accounting and since

the assessee himself has shown in the belated original return of

income the figure of WIP as per the bills raised by it on the

Government department and since the assessee has not incurred

any further expenditure on such amount received in subsequent

year, therefore, the order of the CIT(A) reducing the WIP from

Rs.4.94 crores to Rs.3 crores for A.Y. 2001-02 in our opinion

cannot be accepted. Merely because assessee has offered the

same to tax in A.Y. 2004-05 cannot be a ground to reduce the

correct WIP from Rs.4.94 crores to Rs.3 crores. We accordingly set

aside the order of the CIT(A) and the grounds raised by the

revenue are allowed. For the reasons given above, the grounds 24

raised by the Revenue for A.Y. 2002-03 and 2003-04 are also

allowed.

28. Since no arguments was advanced by the Ld. Counsel for

the assessee in respect of the grounds raised in the CO, therefore,

the CO is dismissed as 'not pressed'.

29. In the result, all the 3 appeals filed by the Revenue are

allowed and the CO filed by the assessee is dismissed.

Pronounced in the Open court on 31-07-2015.

Sd/- Sd/-

(VIKAS AWASTHY) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER

iq.ks Pune; #दनांक Dated : 31st July, 2015. lrh'k

आदे श क( )"त+ल प अ,े षत/Copy of the Order forwarded to :

1. अपीलाथ / The Appellant

2. यथ / The Respondent

3. आयकर आय( ु त(अपील)-II, औरं गाबाद / The CIT(A)-II, Aurangabad

4. आयकर आय( ु त-II, औरं गाबाद / The CIT-II, Aurangabad

5. -वभागीय त न/ध, आयकर अपील य अ/धकरण, "बी" iq.ks / DR, ITAT, "B" Pune;

6. गाड फाईल / Guard file.

आदे शानस ु ार/ BY ORDER,

स या-पत त //True Copy// स या-पत त //True Copy// व र4ठ नजी स/चव / Sr. Private Secretary आयकर अपील य अ/धकरण, iq.ks / ITAT, Pune