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Income Tax Appellate Tribunal, MUMBAI BENCH “G”, MUMBAI
Before: SHRI RAJESH KUMAR & SHRI AMARJIT SINGH
Per Rajesh Kumar, Accountant Member:
The present appeal has been preferred by the Revenue against the order dated 05.02.2018 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] relevant to AY 2014- 15.
The only issue raised by the Revenue in the various grounds of appeal is against the deletion of addition of Rs.1,77,57,559/- as made by the AO by disallowing the reversal of profit of Rs.1,52,11,787/- and making addition of Rs.25,45,772/- towards profit on the project during the year based on the project completion method.
Smith Buildcon 3. The facts in brief are that the assessee engaged in the business of real estate development and filed return of income on 16.09.2015 declaring total income of Rs.27,80,750/- which was processed u/s 143(1) of the Act. Thereafter the case of the assessee was selected for scrutiny under CASS. During the financial year, the assessee is engaged in construction and development of three projects namely Dhiryaniwas and Swapna Building, Chetan Kunj and filed separate profit & loss a/c for all these three projects. The AO during the course of assessment proceedings noticed that the assessee has claimed loss in Dhairyanwan Niwas project of Rs.1,52,11,787/- against the profit realized from sale of plot in Chetan Kunj of Rs.1,80,26,699/- and thus declared profit of Rs.27,80,752/- during the current A.Y. Accordingly the AO called upon the assessee to explain these entries. The AO observed that in respect of Dhairyaniwas project, Chief Fire Officer has issued completion certificate dated 10.06.13 whereas the building occupancy certificate was issued on 07.04.16. Therefore, the AO came to the conclusion that the construction was completed in financial year 2013-14 the year under consideration. The assessee submitted before the AO by letter dated 21.12.16 that till A.Y 2012-13 the assessee has offered profits from its Dhairyaniwas project on percentage completion method by declaring around 10% on its work-in-progress on year to year basis and the same was done by debiting the work in progress account and crediting the profit & loss account in the respective years. So, till A.Y 2012-13, the assessee had offered a total of Rs.1,52,11,787/- as profits on annual basis. However after introduction of Revised Guidance Note on real estate transactions prescribed by ICAI, the assessee was calculated the revenue recognition for A.Y 2014-15 based on the costs incurred, agreements entered till date and further estimating the costs and future sales
Smith Buildcon expected and thus calculated the total loss of Rs.1,16,13,477/- from the project in A.Y 2014-15 and there was a loss in A.Y 2015-16 of Rs.2,26,93,966/-. Since the loss from the project was incurred which was calculated at the time of finalization of account for A.Y 2015-16. Thus the assessee had no option then to reverse the profits already declared till A.Y 2012-13 and hence the profit of Rs.1,52,11,787/- was reversed in A.Y 2014-15 by crediting the work-in-progress account in the current year as the same was inflated by debiting the earlier years. It is also pertinent to mention that the assessee filed revised return on 16.09.2015 after calculating the loss of A.Y 2015- 16. However, the AO recalculated the profit as under:
PARTICULAR AMOUNT RS AMOUNT RS. PROJECT REVENUE 25,41,90,099 PROJECT COST WITHOUT PROFIT OFFERED) Till 31-3-11 15,68,19,583 2011-12 2,65,68,631 2012-13 3,27,07,005 2013-14 1,61,58,779 Total project cost 23,22,53,998 23,22,53,998 Project profit 2,19,36,101 Sales booked on % 20,57,70,196 ( 80.95% of completion in F.Y 13-14 total sales)
Total profit as per % 80.95% of Rs. 1,77,57,559 completion method as on 2,19,36,101 31-3-14 Less:
Profit declared in F.Y 8980417 2010-11 Profit declared in F.Y 6231370 1,52,11,787
Smith Buildcon 2011-12 Profit from Project 25,45,772 Dhairyawan niwas for F.Y. 2013-14 on % completion method.
Finally, the AO made the addition of Rs.1,77,57,559/-
The ld. CIT(A) after taking into account the submission of the assessee allowed the appeal of the assessee by observing as under:
“5.7 After considering the totality of facts, rival submissions and on the basis of discussion mentioned above, I find force in the argument of the appellant. The appellant has been consistently following the percentage completion method. The percentage of completion method prescribed by the Institute of Chartered Accountants of India. The appellant firm had declared profits Rs.1,52,11,787/- on percentage of completion method basis, year after year. When the appellant was finalizing the accounts and revenue working for A.Y. 2014-15, by following the percentage of completion method, there was a total loss emerging of more than Rs.1.15 cr. from the aforesaid project. Therefore, the appellant had no option than to declare such a loss by reversing the profits declared in the earlier years and arrive at a total correct picture of profitability of the project. The AO solely relied on the NOC given by the Chief Fire Officer. It is evident from the certificate that the Chief Fire Officer has given NOC related to his work only. He is not the authorized person who can issue NOC regarding the completion of the entire building for the purpose of obtaining the occupancy certificate. Further, the A.O. has analyzed some of the expenses related to the construction work. The observation of A.O. is neither specific nor supported by any corroborative evidences. The observations were made wholly on the basis of assumptions and presumptions. The AO himself was not sure about his observations therefore he used word "normally". The AO did not verify the genuineness of the expenses. The A.O. had all the powers to verify the claim of the appellant but he failed to exercise the same and made imaginary allegations. Further, the AO should have provided an opportunity to appellant to explain the findings but he failed to do so. The Hon’ble Apex Court in the case of Andaman Timber Industries in CIVIL APPEAL No.4228 OF 2006 held that not allowing the assessee to cross examine the witnesses by the Adjudicating Authority though the statements of those witnesses were made the basis of the impugned order is a serious flaw which makes the order nullity inasmuch as it amounted to violation of principles of natural justice.
5.8 Further the A.O. has not rejected the books of accounts. The A.O. has considered the appellant's figure of total estimate cost and cost incurred till A.Y.2014-15 in order to arrive at percentage of completion. Further, the A.O. himself accepted the fact that project was completed to the extent of 80.95%. There was neither any change in the method of accounting as compared to year nor any change in any accounting policy. The books of accounts are audited under section 44AB of the I.T. Act, 1961. The tax audit
Smith Buildcon report was submitted by the appellant before AO during assessment proceedings. There were no adverse remark by Tax Auditor. All the aforementioned payments were made by the appellant through proper banking channel and TDS was deducted at the applicable rate. In the case of ACIT vs. ITD Cementation India Ltd (2014) 146 ITD 59 /160 TTJ Mumbai, it has been held that where books of account of assessee were audited and auditor had not given adverse comments on maintenance of books of account or stock register, it was apparent that assessee's books of account are genuine. Further, appellant has stated that there was an actual loss of Rs.2,26,93,966/- in the A.Y.2015-16 and Rs.81,26,173/- in the A.Y.2016- 17. The appellant has filed loss return for the A.Y. 2015-16 and A.Y.2016- 17 and the said loss return was accepted by the department. In view of the above discussion, I came to the conclusion that the appellant has rightly follow the guidance note and recognized the loss correctly in the return of income. The A.O. is directed to delete the addition of Rs.1,52,11,787/- on account of reversal of profit and Rs.25,45,772/- as estimated profit of project. This ground is allowed.”
After hearing both the parties and perusing the materials available on record, we observe that the assessee was following the percentage completion method which is an approved method by the Institute of Chartered Accountants. The assessee has accordingly offered the profits from Dhairyanwan Niwas project. However while calculating the revenue for A.Y 2014-15 by applying the same method, there was a loss of more than 1.15 crores. Thus, the assessee has to chose to return the loss by reversing the profits declared in the earlier years. In this case, we note that the assessee has obtained NOC from Chief Fire Officer and Chief Fire Officer is not the authorized person to issue NOC for completion of the entire building for the purpose of obtaining the occupancy certificate. In this case, the books of accounts are audited u/s 44AB of the Act. The ld. CIT(A) has passed a detailed and reasoned order while deleting the addition made by the AO. In our opinion, there is no reason to interfere in the findings of the ld. CIT(A) which is otherwise a very reasoned and as per system of accounting recognized by ICAI and consistently followed by the assessee. There may be a loss but the system of accounting consistently and books of accounts are correctly maintained by the assessee. Under these facts and circumstances ,
Smith Buildcon we thus inclined to uphold the order of ld. CIT(A) by dismissing the appeal of the revenue.
In the result, the appeal of the Revenue is dismissed.
Order pronounced in the open court on 29.01.2020.