Loading judgment…
Facts
The assessee, a builder and developer, filed its return for AY 2013-14. The Assessing Officer (AO) noted that the assessee had computed profit at 22% on Work in Progress (WIP) for a project, which was consistent over several years. The AO, considering real estate price increases, estimated profit at 23% on WIP, leading to an addition.
Held
The Tribunal held that the AO's adhoc addition of profit at 23% on WIP, based on surmises and conjecture without rejecting the assessee's books of accounts or taking recourse to Section 145, was unjustified. The Tribunal noted that the profit calculation method had a revenue-neutralizing effect and the addition was hypothetical.
Key Issues
Whether the addition of profit by the AO based on an estimated higher rate on WIP, without rejecting books of accounts, is sustainable.
Sections Cited
143(3), 145, 44AB, 28
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “F” BENCH, MUMBAI
Before: SHRI SANDEEP SINGH KARHAIL & SHRI GIRISH AGRAWAL
Assessment Year: 2013-14 Sai Shiv Developers Vs ACIT Circle 32(1), Ground Floor, Amar Mumbai. Mahal, A.D. Road, Near Kautilya Bhavan, G Block, Chandan Cinema, Juhu, Bandra Kurla Complex, Mumbai 400049 Bandra (E), Mumbai 400051 PAN: AANFS2229J Appellant Respondent Present for: Appellant by : Shri Ketan Vajani, CA Respondent by : Ms. Kavitha Kaushik, DR Date of Hearing : 25.02.2025 Date of Pronouncement : 20.05.2025 O R D E R PER GIRISH AGRAWAL, ACCOUNTANT MEMBER:
This appeal filed by the assessee is against the order of National Faceless Appeal Centre (NFAC), Delhi vide appeal No: CIT(A), Mumbai- 37/10110/2019-20 dated 06.11.2024 passed against the assessment order u/s.143(3) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”), dated 31.03.2016 for AY 2013-14.
Grounds taken by the assessee are reproduced as under: “1. The grounds of appeal
mentioned hereunder are without prejudice to one another.
2. Ground The learned Commissioner of Income-tax (Appeals), National Faceless Appeal Centre [CIT(A)] erred on facts as also in law in confirming addition of Rs.40,09,839/-. The addition has been confirmed by the appellant authority without providing opportunity of being heard AY: 2013-14 Sai Shiv Developers despite of the fact that adjournment was sought against notices issued during appellant proceedings. The addition confirmed by CIT(A) is bad in law as also on facts and therefore the same may kindly be deleted.
3. Ground The learned Commissioner of Income-tax (Appeals), National Faceless Appeal Centre [CIT(A)] erred on facts as also in law in confirming addition of Rs.40,09,839/-. The addition has been made u/s 28 on the alleged ground of considering estimated profit @ 23% on value of WIP as Profit and gains on business and profession as income against 22% considered as income by the appellant. The addition confirmed by CIT(A) is bad in law as also on facts and therefore the same may kindly be deleted.
Ground Your Honor's appellant craves leave to add, to amend, alter, or withdraw any or more grounds of appeal
on or before the hearing of appeal.”
3. Brief facts of the case are that, assessee is a partnership firm engaged in the business as builder and developer. It derives income from house property and business during the year. Return was filed on 29.09.2013 reporting total income at Rs.80,34,616/-. Ld. Assessing Officer noted that assessee has a construction project at Goregaon (W) under the name and style of “Sai Baba Enclave”. According to him, assessee had computed profit from the project for the year under consideration at Rs.62,34,639/-. From the submissions made by the assessee, he further noted that assessee has in all, reported net profit of Rs.10,78,52,970/- spread over several assessment years from assessment year 2005-06 to assessment year 2013-14, details of which is as under: Asstt. Year Amount(RS.) 2005-06 & 2006-07 93,46,121/- 2007-08 55,13,196/- 2008-09 96,96,111/- 2009-10 1,22,31,598/- 2010-11 2,43,47,438 2011-12 2,62,89,591/-
4. He further noted that opening balance of work in progress (WIP) reported by the assessee is Rs.47,60,95,782/-, to which addition made during the year for building construction expenses amounts to Rs. 1,02,64,258/-, thus totaling to closing balance at Rs.48,63,60,040/-. On this, assessee had cumulatively declared net profit @ 22% which is spread over the past several years as noted above. To this effect, ld. Assessing Officer presumed that price of real estate increases with time as circle rates are also revised based on market rate. He thus, concluded that reporting of uniform rate of profit @ 22% by the assessee is not acceptable. After confronting the assessee, he adopted an estimate profit @ of 23% on the WIP to arrive at total profit which ought to have been reported by the assessee up to the assessment year 2013-2014 at Rs.11,18,62,809/-. From this, he reduced the profit already declared by the assessee cumulatively, for assessment year 2005-06 to assessment year 2013-2014 at Rs.10,78,52,970/-, to make an addition of Rs.40,09,839/- for the year under consideration as additional profit. Aggrieved, assessee went in appeal before the Ld. CIT(A).
4.1. Before the first appellate authority, assessee reiterated the factual position and also submitted that Ld. Assessing Officer has not brought any instance of defect in the books of accounts nor the same have been rejected u/s. 145 of the Act. It was also submitted that books of account have been audited and audited balance sheet, profit and loss account along with tax audit report u/s. 44AB of the Act were placed on record which have not been rejected nor has been held as unreliable.
4.2. According to the assessee, estimation of profit was done on the WIP only for the purpose of calculating the closing value of WIP. Project of the assessee is spread over several years and 85% of the same has been completed. Assessee had been offering profit year on year basis at higher side to avoid, heavy tax burden on completion of the construction project. According to the assessee, though there is no sale of flat during the year, yet assessee has declared profit from business on estimate basis at Rs. 62,34,639/-. There is no basis for making an addition of Rs. 40,09,839/- by the Ld. Assessing Officer. Nothing has been brought on record to evidently demonstrate any comparative case or to suggest any past historical reference for the purpose of making this adhoc addition which is arbitrary in nature.
While disposing the appeal, Ld. CIT(A) took note of delay in filing the appeal at the first appellate stage. According to him, assessee had not made any substantial reasons for condonation of delay in filing the appeal. He thus, held that delay cannot be condoned. In this regard it is important to note that assessee had filed the first appeal manually on 02.05.2016. For this, assessee has placed on record acknowledged and duly stamped submission made by the assessee forming part of the paper book. This manual appeal filed by the assessee was dismissed by the Ld. CIT(A) vide order dated 19.07.2019, since, it was held that assessee was mandatorily required to file the appeal electronically which was not done even within the extended date. He thus, held that manual appeal filed is not admissible and thus, treated as not maintainable and dismissed it. Subsequent to this, disposal vide order dated 19.07.2019, assessee electronically filed the appeal before the first appeal authority against which the assessee is in appeal before the Tribunal. While filing this appeal electronically, in Form 35 at row no. AY: 2013-14 Sai Shiv Developers 14 and 15, while making submission regarding if there is delay in filing the appeal, assessee mentioned “No” Ld. CIT(A) observed that the date of the impugned assessment order is 31.03.2016 whereas, Form 35 has been electronically filed on 06.07.2019 and thus, there is a delay of 39 months and 6 days. Facts relating to appeal filed at the first instance manually by the assessee remained to be considered while rejecting the condonation of delay by the Ld. CIT(A). In these set of facts, it is appropriate to adopted a lenient approach owing to shift from manual process to digitization and electronic regime adopted by the department for its tax administration. There is no dispute about filing of appeal manually by the assessee. Subsequent to its dismissal assessee took appropriate action to file it electronically. In this given set of facts and considering the bonafide of the assessee, the delay at the first appellate stage noted by Ld. CIT(A) in the electronically filed appeal is condoned. Further, it is noted that despite not condoning the delay in filing the appeal, Ld. CIT(A) proceeded to adjudicate on the appeal taking into account merits of the case and upheld the addition made by the Ld. Assessing Officer. He thus, dismissed the appeal filed by the assessee. Disposal of the appeal by the Ld. CIT(A) on the merits of the case impliedly signifies that the delay in filing the appeal by the assessee has been condoned.
Aggrieved by the said order, assessee is in appeal before the Tribunal. Before us, Ld. Counsel for the assessee reiterated the above narrated facts which are not repeated to avoid duplicity. Admittedly, the factual position as evidenced from the impugned assessment order reveals that Ld. Assessing Officer has adopted on adhoc approach without any cogent and corroborative material placed on record to estimate profit @ 23% of the WIP. The reasoning given by the Ld. Assessing Officer to counter the profit which has already been reported AY: 2013-14 Sai Shiv Developers by the assessee, spread over several assessment years from 2005-06 to assessment year 2013-14 is generic in nature. It is also important to note that assessee had been reporting profit from the construction project on a year-on-year basis against the total estimated profit of Rs. 48,63,60,040/- on the project under taken by it in the name and style of “Sai Baba Enclave”. Once the project gets completed, the actual profits would get accounted for against these net profits which have already been reported by the assessee.
6.1. What the assessee has essential done is the spreading of its estimated profits from the construction project over the period of construction on estimate basis which comes on an aggregated basis to @ 22% of the WIP. Against this, Ld. Assessing Officer has estimated the profit @ 23% of WIP and made addition for the differential. While doing so, Ld. Assessing Officer has not rejected the books of accounts nor has taken any recourse to provisions of Section 145. Further, the treatment given by both, assessee and the Ld. Assessing Officer have a revenue neutralizing effect since, in the ultimate, the actual and real net profit on the construction project would be brought to tax as and when the project gets completed after taking in to account the net profit which has already been declared by the assessee, spread over past several years. The addition made by the Ld. Assessing Officer is hypothetical in nature without any income accruing on real basis. This increase in net profit by making an addition by the Ld. Assessing Officer would ultimately get offset from the actual and real profit earned by the assessee upon completion of the project and therefore, has a revenue neutralizing effect, unless there is a significant change in the rate of tax in the subsequent, assessment year when the actual and real net profit is reported by the assessee. Considering the overall facts and circumstances of the case, the addition made by the Ld. Assessing
In the result, appeal of the assessee is allowed.
Order pronounced in the open court on 20th May, 2025.