ACIT 27(1), MUMBAI, MUMBAI vs. GAMMON NEELKANTH REALTY CORPORATION, MUMBAI

The AO noticed that due to increase in the FSI, the area that could be developed has increased and accordingly the assessee would build more number of flats in the additional area of 289000 sq. ft. Accordingly, the AO did not accept the cost estimation furnished by the assessee and proceeded to make an addition by attributing 5% of advances received during the year as income of the assessee. Aggrieved the assessee filed further appeal before the CIT(A). The CIT(A) deleted the addition by placing reliance on the decision of the Co-ordinate Bench in assessee's own case for AY 2009-10 (ITA No. 3392/M/2013 dated 21.06.2017) where it has been held that “8. We have heard the rival contentions and perused the material available on record. As could be seen, the Assessing Officer has computed the income from the incomplete housing project by estimating the profit at 5% of the advance of 61,11,85,660 received from customers as on 31st March 2009. However, the Assessing Officer has not provided any basis for adoption of such rate of profit. As could be seen from the facts placed before the Assessing Officer himself, the construction of the housing project started in the financial year 2005-06 and as per the details submitted, out of 184 flats sold by the assessee 4 ITA 1896& 1897/Mum/2025 Gammon Neelkanth Realty Corporation as on 31st March 2009, 150 flats were sold in financial year 2005-06 and another 27 flats were sold in financial year 2006-07. However, even though the assessee was following percentage of completion method of accounting, the Assessing Officer has not assessed any profit in the assessment years 2006-07, 2007-08 and 2008-09. It also emerges from the fact on record that as on 31st March 2008, the assessee had received advances of Rs. 60,41,52,000 which increased to 61,11,85,660 by 31st March 2009. Thus, the assessee received advances of Rs. 70,33,660, in the impugned assessment year. Therefore, if the assessee is following percentage completion method of accounting, the Assessing Officer could not have estimated profit on the advances received pertaining to earlier assessment years. Further, on a perusal of the annual report of the assessee, it is noticed that recognition of revenue would start once the actual cost as a percentage of the total cost exceeds the threshhold limit of 40%. As per the facts emerging from record, the actual cost incurred by the assessee as on 31st March 2009 as a percentage of the estimated cost works out to 38% which is below the threshhold limit of 40%. Therefore, at least in the impugned assessment year, the assessee was not required to recognise revenue from the housing project. That besides, it has been demonstrated by the assessee that the cost incurred in the project is far in excess of the advance received. Therefore, even in the assessment years where revenue is to be recognised, there would be a loss. This fact is evident from the assessment order passed under section 143(3) for assessment year 2012-13 wherein the Assessing Officer has accepted the loss shown by the assessee. One more crucial factor which has to be kept in perspective is, the Assessing Officer has not found any major defect or discrepancies in the books of account, hence, has not rejected the book result. That being the case, the estimation of profit is without any reasonable basis. Therefore, considering the overall facts and circumstances of the case, we are of the view that the learned Commissioner (Appeals) was justified in deleting the addition made by the Assessing Officer on ad-hoc basis. Accordingly, upholding the order of the learned Commissioner (Appeals), we dismiss the grounds raised

The ld. AR on the other hand argued that the percentage of cost being less than the threshold limit of 40% is not the only ground on which the Tribunal has allowed the appeal in favour of the assessee. The ld. AR further argued that the Tribunal deleted the addition made by the AO on the ground that the cost incurred by the assessee is much more than the advances received that would result in loss even if revenue is declared and that the AO has not rejected the books of account. The ld. AR also argued that there were lot of uncertainties around the completion of the project and therefore the assessee has not offered to income under percentage completion method as the same would result in loss. It is submitted that the project was completed after a long delay and that the assessee has offered the income in the subsequent AYs when the flats were actually handed over to the buyers. It is further submitted that even in the subsequent years when the income is offered, the assessee has declared loss from business for the fact remains that the cost of the project due to delay and other reasons has far exceeded the consideration received from the buyer. Accordingly it was submitted that even otherwise, it is only the timing difference and there is no real gain to the revenue by the contention that the revenue on percentage completion method should have been offered. The ld. AR submitted that the AO has made the addition based on 6 ITA 1896& 1897/Mum/2025 Gammon Neelkanth Realty Corporation the incorrect understanding on the fact that due to change in the FSI the assessee is building additional flats. The ld. AR drew our attention to the working based on the revised FSI to submit that the overall area for building flats has not changed and that the assessee has started a different project called "Neelkanth Palacia" a commercial project in the additional area. Accordingly, the ld. AR submitted that the AO has proceeded to make the addition based on incorrect understanding of facts.

We heard the parties and perused the material on record. The assessee has entered into joint development agreement with M/s Vidya Vihar Container Ltd. As per the agreement, the assessee gets certain number of flats and it is an admitted fact that these flats have been booked by the purchasers and the advances are received from them. The contention of the revenue is that though the assessee has incurred substantial cost towards construction, no revenue is recognised under the percentage completion method by the assessee. The assessee's claim is that there has been a delay in completing the project due to various reasons and that the assessee has not received the entire consideration from the purchasers. The assessee is further contending that the cost incurred by the assessee is far more than the advance money received and therefore even assuming that revenue is recognised, it would result in loss only. Accordingly it is argued that there is no actual benefit to the department even if the contention that the income should be offered under percentage completion method to be accepted. In this regard on perusal of the financial statements we notice that the assessee has capitalised the cost incurred towards the project as work in-progress and the difference between the closing and opening work in-progress has been shown as movement in closing stock in the credit side of the Profit & Loss Account. It is further noticed from the perusal of financial statements that the assessee has claimed deduction towards 7 ITA 1896& 1897/Mum/2025 Gammon Neelkanth Realty Corporation some administrative and other expenses and has declared a loss from business to the tune of Rs.17,35,024/-. However, the AO has not considered these factual positions and the business loss declared by the assessee before proceeding to make an addition by estimating the income at 5% of advances received from the buyers of the flats. We notice that the assessee after the commencement of the project, has obtained additional space for development due to the increase in FSI from 0.75 to 1 and that the assessee has initiated a separate project in the name of "Neelkanth Palacia" to build commercial space. From the perusal of AO's order, we notice that the AO has rejected the claim of the assessee that the project is resulting in a loss for the reason that the AO has made an assumption that the additional space would earn additional revenue to the assessee as more flats would be built or TDR would be sold. Therefore there is merit in the contention of the ld AR that the AO has proceeded based on incorrect assumption without considering the facts. We further notice that the AO has not accepted the running bills submitted by the assessee in support of the cost incurred. We also notice that the AO has relied on the findings of AY 2009-10 to hold that the cost estimate of the assessee is very high and that the claim of assessee incurring a loss from this project is not acceptable. In summary the basis for AO making the addition is on the assumption that the additional area due to increased FSI would fetch more income to the assessee and the claim that the project is resulting in loss as reason for not offering income is not realistic. Accordingly the AO estimated the income at 5% of the advances received during the year. It is relevant to mention here that the AO while estimating the income has not rejected the books of accounts, nor disallowed the claim of expenses by the assessee.

The impugned issue of revenue not being recognised under percentage completion method has been considered in assessee's own case for AY 2009-10 8 ITA 1896& 1897/Mum/2025 Gammon Neelkanth Realty Corporation and the relevant findings of the Tribunal is extracted in the earlier part of this order. From the perusal of the same we notice that the Tribunal has upheld the order of the CIT(A) on the following grounds (i) Even if the revenue is to be recognised, there would be a loss (ii) The AO in AY 2012-13 has accepted the claim of loss by the assessee (iii) The books of accounts of the assessee has not been rejected by the AO and hence estimation is without any basis (iv) The percentage of cost incurred is less than 40%

The revenue's argument is that the decision of the coordinate bench is followed by the CIT(A) without considering the fact that the cost incurred during the year under consideration has exceeded 40% and that according to the Accounting Standard the revenue ought to have been recognised. On perusal of the workings submitted by the ld DR, we notice that for arriving at the percentage of cost at 43% the revenue has considered the overall cost of the project i.e. Rs.417.17 which according to revenue's own admission is very high and not acceptable (refer findings of AO in page 5 of assessment order). Given this, we are unable to appreciate the claim of the revenue that the decision of the coordinate bench cannot be applied for the year under consideration since the percentage of cost has exceeded 40%. Further, as already stated the percentage of cost is not the only basis for the decision of the coordinate bench and it is noticed that there is no other change to the facts of the year under consideration as compared to AY 2009- 10 are brought to our notice. We further notice that the claim of the assessee that due to delay the assessee has incurred loss from the project is substantiated by the financial statement where the cost incurred is more than the advances received from the customers and the overall cost of the project is also more than the sale consideration towards the flats. As per Accounting Standard 7 under percentage completion method, the revenue is recognised to the extent of the cost incurred and 9 ITA 1896& 1897/Mum/2025 Gammon Neelkanth Realty Corporation both cost and the revenue are recognised in the Profit & Loss account. In assessee's case as already mentioned the assessee has capitalised the cost incurred towards the project under work-in-progress and consideration received is accounted as advances. The action of the AO to make an adhoc addition by applying 5% of advances while holding that the revenue ought to have been recognised under percentage completion method is not tenable and is not supported by any valid basis. In view of these discussions, and respectfully following the decision of the coordinate bench we see no reason to interfere with the order of the CIT(A) in deleting the addition made on adhoc basis by the AO.

Since the facts in AY 2011-12 are identical to AY 2010-11, we are of the considered view that our decision as enumerated herein above for AY 2010-11 is mutatis mutandis applicable to AY 2011-12 also. Accordingly we see no infirmity in the order of the CIT(A) in deleting the addition made by the AO.

In result the appeals of the revenue for AY 2010-11 and AY 2011-12 are dismissed. Order pronounced in the open court on 02-09-2025. Sd/- Sd/- (JUSTICE (RETD.) C.V. BHADANG) (PADMAVATHY S) President Accountant Member *SK, Sr. PS Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. DR, ITAT, Mumbai 4. Guard File 5. CIT BY ORDER,