INCOME TAX ACT, 1961

Section 145 (2)

Accounting method - Revenue recognition - Percentage completion method - Applicability of AS-7 and AS-9 to seperately identifiable components of single contract

Assessee-company, engaged in activities relating to water distribution, supply and maintenance, etc., was offered and implementing construction contract of Project Demo Zone (PDZ) pertaining to rehabilitation and implementation of water supply in the pilot area of Dharampeth of Nagpur Municipal Corporation (NMC). The contract received by assessee consisted of three parties, namely, Study Phase, Rehabilitation Phase and operation and maintenance (O&M) Phase). AO held that entire contract value had to be considered while calculating percentage of completion method on the grounds that it was a composite contract consisting of three different part and hence, third part could not be considered separately. CIT(A) held that O&M phase of contract was to be considered for computation as per AS-7, instead of AS-9. Held: Pattern of payments made by NMC to assessee revealed that assessee had raised separate invoices for O&M phase on a regular basis as per section 5 of TOR and same had been duly accounted in the years in which it had been received. Accordingly, three different phases of work were totally separate in execution. Keeping in view the fact, that O&M phase could not be a part of the construction activity as O&M phase involved the supply of water to the residence giving connections and monitoring connections which was clearly a post-construction activity, amount allotted for O&M phase could not be included in determining percentage of completion method in recognition of revenue. Also amounts of O&M phase had been duly offered to tax in the year of receipts. Phase-I and the Phase- II were the preparatory construction phases over a period of 18 months, whereas operations and maintenance (O&M phase) of such constructed project was of 60 months. Hence, maintenance activities could not be clubbed with construction activity. Having gone through accounting standards (AS-7 and AS-9), application of standard to separately identifiable components of single contract was allowable while determining percentage completion of project. Since O&M phase commences after the construction of activity of rehabilitation phase, amount pertaining to O&M phase was to be separately considered while determining profits out of construction activities.

REFERRED :

FAVOUR : In assessee's favour.

A.Y. :

INCOME TAX ACT, 1961

Section 145

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