PER N.K. PRADHAN, AM The appeal by the Revenue and the cross objection by the assessee are directed against the order of the Commissioner of Income Tax M/s Sandhu Builders ITA No. 2925/MUM/2017 & CO. NO. 272/MUM/2018 2 (Appeals)-34, Mumbai [in short CIT(A)] and arise out of the order passed by the Assessing Officer (AO) u/s 143(3) r.w.s. 254 of the Income Tax Act 1961, (the Act).

2. The grounds of appeal filed by the revenue read as under:

1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A)- 34, Mumbai has erred in not considering WIP at Rs.26,18,08,847/- (Rs.61,63,16,666/- (-) opening balance WIP Rs.34,45,07,819/-) and restricting it to Rs.22,52,70,653/- and without any reason allowing relief in WIP of Rs.3,65,38,194/-.

2. On the facts and in the circumstances of the case and law, the Ld. CIT(A)-34, Mumbai in doing so erred by not following the Honble ITATs decision dated

06.12.2013 for the impugned assessment year.

3. Briefly stated, the facts are that the assessee-firm filed its return of income for the assessment year (AY) 2009-10 on 25.03.2010 declaring total income at Rs.5,26,93,040/-. The assessment was completed u/s 143(3) on 29.12.2011 determining the total income at Rs.16,45,30,120/- . In the said order, the Assessing Officer (AO) made addition of Rs.9,36,82,560/- on account of suppression of income on sale of flat and addition of Rs.18,34,524/- on account of unexplained cash payment. Also the AO determined the income @ 12% on gross receipts of Rs.57,51,08,600/- i.e. Rs.6,90,13,032/- instead of Rs.5,26,93,040/- shown by the assessee and made an addition of the difference of Rs.1,63,19,995/-. Aggrieved by the order of the AO, the assessee filed an appeal before the Ld. CIT(A), who vide order dated 31.05.2012 deleted the M/s Sandhu Builders ITA No. 2925/MUM/2017 & CO. NO. 272/MUM/2018 3 addition of Rs.9,36,82,560/- made by the AO on account of suppression of income on sale of flats and confirmed the action of the AO in respect of determination of income under the percentage completion method. The said decision of the Ld. CIT(A) was not accepted by the assessee and the department and the cross appeal were filed before theAT. It is seen that theAT vide order dated 06.12.2013 confirmed the order of the Ld. CIT(A) with regard to deletion of addition of Rs.9,36,82,560/- and set aside the issue of determining the income under the percentage completion method and restored the matter back to the file of the AO for fresh determination/estimation of profit. In the set aside assessment proceedings, the assessee filed a submission dated 26.02.2015, wherein the cost of project which was earlier estimated at Rs.366,95,00,000/- was revised and shown at Rs.266,35,00,000/-. However, the assessee also revised its estimation of sales considerations of Rs.414,60,00,000/- shown earlier to Rs.275,80,00,000/-. In this revised estimate of sales considerations, the assessee had reduced the value of closing stock by reducing 37,733 sq. ft. from the saleable area on account of the following: i Area of 5 members who have not signed agreement with the appellant for using their TDR 11,958 sq. ft. ii Excess area utilized as per architects certificate 25,775 sq. ft. Total 37,733 sq. ft. However, the AO was not convinced with the above explanation of the assessee for the reason that the plan for the project stood approved by the competent authority, which did not show any reduction in area. M/s Sandhu Builders ITA No. 2925/MUM/2017 & CO. NO. 272/MUM/2018 4 Regarding litigation in respect of TDR of 5 members, the AO observed that the Honble Bombay High Court had granted permission to carry out finishing work and apply to BMC for completion certificate. Accordingly, the AO issued a show cause notice dated 05.03.2015 to the assessee to explain as to why profits should not be estimated by considering the total sale value at Rs.414,60,00,000/- as per its submission dated 20.12.2014 and cost of the project be estimated at Rs.266,35,00,000/- as per submission dated 26.02.2015. In response to it, the assessee filed submission dated 13.03.2015, wherein it had given working, showing total sale consideration at Rs.275,80,00,000/- and cost of project at Rs.266,35,00,000/- which translated into total profitability of the project of less than Rs.10 crore. The AO found it unacceptable as the assessee had itself offered Rs.5.26 crores as income in AY 2009-10 and revised income of Rs.8.56 crore in AY 2011-12. As the assessee had not disputed the cost of project, the AO adopted it at Rs.266,35,00,000/- and estimated the profit of Rs.20,82,87,006/-. As the assessee itself had offered income of Rs.5,26,93,037/- on percentage completion method, the AO added back the difference of Rs.15,55,93,969/-.

4. Aggrieved by the above order of the AO, the assessee filed an appeal before the Ld. CIT(A). During the appellate proceedings, the assessee submitted that the direction given by the Tribunal, while setting aside the matter has not been followed by the AO. It was also submitted before the Ld. CIT(A) that because it cannot be implemented, the ground regarding non-reduction of disputed TDR from the total M/s Sandhu Builders ITA No. 2925/MUM/2017 & CO. NO. 272/MUM/2018 5 saleable area is not pressed by the assessee. Broadly, the grievances of the assessee before the Ld. CIT(A) were as under: (i) non-consideration of estimated cost of damages and repairs of Rs.63,81,38,718/- for estimating profit, (ii) adopting Rs.61,63,16,666/- as cost of construction for estimating profit for the year under consideration, (iii) non-reduction of proportionate direct cost and administrative expenses on the estimated profit of the year. Having examined the above contentions of the assessee, the Ld. CIT(A) held that in the estimation of cost of construction, the amount of Rs.50,00,00,000/- is already included on account of cost of renovation due to damages. As the estimated cost of repair due to damages has already been considered in the total estimated cost of construction, the Ld. CIT(A) held that no separate deduction can be allowed while calculating the profit. Regarding the adoption of Rs.61,63,16,666/- as cost of construction for estimating the profits for the year under consideration, the Ld. CIT(A) observed that this amount is the cumulative work-in- progress (WIP) of all expenses including direct costs, construction expenses and administrative expenses from AY 2006-07 to AY 2009-10. He referred to the following observation of theAT in the instant case:

What is relevant is the percentage of total work completed in respect of the project and that is to be worked with reference to the actual construction M/s Sandhu Builders ITA No. 2925/MUM/2017 & CO. NO. 272/MUM/2018 6 expenses incurred by the assessee during the relevant year, out of the total estimated construction cost of the project

. Observing that the amount of Rs.61,63,16,666/- includes opening balance of WIP of Rs.35,45,07,819/- carried forward from AY 2006-07 onwards, the Ld. CIT(A) observed that the opening balance of WIP is to be excluded for the purpose of estimating the profit for the year under consideration. The assessee had given break up of balance amount of Rs.26,18,00,847/- relating to direct cost, construction expenses and administrative expenses and contended that only construction expenses of Rs.20,55,94,974/- is to be considered for estimating the profit for the year under consideration. Such contention of the assessee was not acceptable to the Ld. CIT(A) for the reason that the total estimated cost of construction of Rs.266,35,00,000/- also included administrative expenses. Administrative expenses incurred during the year have been shown at Rs.1,96,75,679/-. Therefore, the Ld. CIT(A) considered Rs.22,52,70,653/- (Rs.20,55,94,974/- + Rs.1,96,75,679/-) for calculating the percentage of work completed during the year. Regarding the non-reduction of proportionate direct cost and administrative expenses from the estimated profit for the year, the Ld. CIT(A) followed the following observation of the Tribunal:

From the said WIP/gross value of the project as completed in that year,, proportionate land cost to the extent of 40% is to be reduced as well as the other expenses to the extent actually incurred by the assessee in that year to work out the profit of the project for the relevant year.

M/s Sandhu Builders ITA No. 2925/MUM/2017 & CO. NO. 272/MUM/2018 7 The Ld. CIT(A) found that the AO has not followed the above direction of the Tribunal. Finally, the Ld. CIT(A) held at para 6.5 as under:

6.5 To sum up, the Assessing Officers working in estimating the profits of the appellant is confirmed till upto the stage of estimating the total profits of the project at Rs.90,55,95,680/-. Therefore, the Assessing Officer is directed to take the WIP of Rs.22,52,70,653/- as the cost of construction for estimating the profits for the year under consideration. The percentage of work completed during the year would work out to 8.46% (22,52,70,653/266,35,00,000 X 100). This percentage is to be applied to the total estimated profits of the project. From such profit, 8.46% of the total direct costs of the project and administrative expenses of Rs.1,96,75,679/- actually incurred during the year are to be reduced to arrive at the profits for the year under consideration as per directions of the Honble Tribunal.

5. Before us, the Ld. DR submits that the Ld. CIT(A) made a mistake in not considering WIP at Rs.26,18,08,847/- [Rs.61,63,16,666/- minus opening balance of WIP Rs.35,45,07,819/-] and restricting it to Rs.22,52,70,653/-. Thus it is stated that the Ld. CIT(A) has allowed relief in WIP of Rs.3,65,38,194/-.

6. On the other hand, the Ld. counsel of the assessee submits that the development agreement of the society was entered into on 31.12.2005 and the plans were approved on 24.01.2006. For AYs 2006-07, 2007-08 and 2008-09, the entire expenditure were capitalized to WIP and no income/loss was booked. There was a survey at the office premises of the assessee on 26.09.2008. Even though the project was completed M/s Sandhu Builders ITA No. 2925/MUM/2017 & CO. NO. 272/MUM/2018 8 only to the extent of 12% by the time, the partner of the assessee-firm offered income at 12% of the advance money received from persons who had booked flats in the building under construction. Accordingly, the return of income was filed on 25.03.2010 by offering income of Rs.5.26 crores being 12% of the advances of Rs.3.91 crores received by

31.03.2008. In the assessment made u/s 143(3), among other additions, the only addition made by the AO in this regard was to apply 12% to the amount receivable from the flat purchases, instead of the amount received from flat purchasers, and thereby calculated the income of the project for the year at Rs.6.90 crore in place of Rs.5.26 crores as offered by the assessee. The CIT(A) confirmed all the additions. In appeal, the Tribunal deleted the other major additions. As regards the issue of estimating income of the project for the impugned assessment year, the Tribunal set aside the matter to the AO to recalculate the estimate with certain directions. The Ld. counsel submits that in the 2nd round of assessment the AO adopted a particular method of estimating the income of the project for the impugned assessment year at an exorbitant figure of Rs.20.82 crores. It is stated by him that in fact this amount is almost 200% of the amount estimated and added by the AO in the 1st round. In appeal, the Ld. CIT(A) passed the order by recalculating the estimation of income. The Ld. counsel submits that the entire project is at stake in the suit/writ pending before the Bombay High Court and the last thing that the assessee wants is to continue to have litigations with the department for this year as well as for subsequent years. Because of these extreme M/s Sandhu Builders ITA No. 2925/MUM/2017 & CO. NO. 272/MUM/2018 9 circumstances, the assessee on the date of hearing on 29.11.2018 offered to withdraw its cross-objection and to not to challenge the departments appeal, thereby practically accepting all points of the department-if the method of estimating income as finally settled and accepted at this stage is consistently followed. It is submitted by him that this plea is solely with a view to have certainty, either way, and to end litigations so that there is no scope for any further dispute in this regard, thereby saving precious resources of both sides from getting consumed in endless rounds of litigations. Also it is submitted by him that otherwise on merit, it is very well settled legal position under the, laid down by catena of judicial pronouncements, that the doctrine of Real Income Theory is a fundamental principle governing computing/estimating income under the. Referring to the decision in Peterson Candy International v. ITO (1989) 33 TTJ 252 (Bom), the Ld. counsel submits that this basic principle also holds true for the income to be estimated under Percentage Completion Method for a construction contract.

7. We have heard the rival submissions and perused the relevant materials on record. The reasons for our decisions are given below. The sole dispute of the revenue is that the Ld. CIT(A) should have considered WIP at Rs.26,18,08,847/- [Rs.61,63,16,666/- minus opening balance of WIP of Rs.35,45,07,819/-]. A perusal of the audited accounts of the assessee would resolve the above issue. As per Schedule-E to the Balance Sheet as at M/s Sandhu Builders ITA No. 2925/MUM/2017 & CO. NO. 272/MUM/2018 10

31.03.2009 relating to Construction A/c- WIP, the balance b/f is Rs.35,45,07,819/-. The addition during the year is Rs.26,18,08,847/-. The closing balance is Rs.61,63,16,666/-. We may refer here to AS-7 (Revised): Accounting for Construction Contract for guidance. The recognition of revenue and expenses by reference to the stage of completion of a contract is called the percentage of completion method. As per this method, the contract revenue is matched with the contract costs incurred in reaching the stage of completion. This results in the reporting of revenue, expenses and profit that can be attributed to the proportion of the work completed. This method provides useful information on the extent of contract activity and performance during a period. Under this method, contract revenue is recognized as revenue in the statement of profit and loss in the accounting periods in which the work is performed. Contract costs are usually recognized as an expense in the statement of profit and loss in the accounting periods in which the work to which they relate is performed. However, any expected excess of total contract costs over the total contract revenue for the contract is recognized as an expense immediately. A contractor may have incurred contract costs that relate to future activity on the contract. Such contract costs are recognised as an asset provided it is probable that they will be recovered. Such costs represent an amount from the customer and are often classified as contract WIP. M/s Sandhu Builders ITA No. 2925/MUM/2017 & CO. NO. 272/MUM/2018 11 A WIP statement is used to compile the information necessary for the percentage of completion calculation but also to provide information about the total value and progress of work completed. Typically, the calculation of ending WIP is as under: Beginning WIP + Manufacturing costs Cost of Goods manufactured. As mentioned earlier, as per Schedule-E to the Balance Sheet as at 31.03.2009 relating to Construction A/c- WIP, the balance b/f is Rs.35,45,07,819/-. The addition during the year is Rs.26,18,08,847/-. The closing balance is Rs.61,63,16,666/-. Thus the Ld. CIT(A) should not have tinkered with the above figure of WIP which is reflected in the audited accounts. There is merit in the above contention of the Ld. DR. Thus the appeal filed by the revenue is allowed.

8. As mentioned earlier, the assessee has offered to withdraw its cross-objections.

9. In the result, the appeal filed by the revenue is allowed, whereas the cross-objection by the assessee is dismissed. Order pronounced in the open Court on 11/03/2019. Sd/- Sd/- (PAWAN SINGH) (N.K. PRADHAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; M/s Sandhu Builders ITA No. 2925/MUM/2017 & CO. NO. 272/MUM/2018 12 Dated: 11/03/2019 Rahul Sharma, Sr. P.S. 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// (Sr. Private Secretary) ITAT, Mumbai