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Income Tax Appellate Tribunal, PANAJI BENCH, PANAJI
Before: SHRI SHAMIM YAHYA, AM & SHRI RAM LAL NEGI, JM
IN THE INCOME TAX APPELLATE TRIBUNAL PANAJI BENCH, PANAJI
BEFORE SHRI SHAMIM YAHYA, AM AND SHRI RAM LAL NEGI, JM
ITA No.272/Pan./2017 (Assessment Year: 2007-08) Devashri Nirman LLP Asst. CIT, Circle 1(1) Dempo House, Campal, Aayakar Bhavan, Vs. Panjai, Goa Patto, Panaji, Goa
PAN/GIR No. AABFD 2012 N (Appellant) : (Respondent)
: Shri M. C. Maniwadekar Appellant by Respondent by : Shri Y. V. Raviraj
Date of Hearing : 15.11.2018 Date of Pronouncement : 17.12.2018
O R D E R Per Shamim Yahya, A. M.:
This appeal by the assessee is directed against the order of the learned
Commissioner of Income Tax (Appeals) Panjai-1, confirming the levy of penalty u/s.
271(1)(c) of the Income Tax Act, 1961 dated 16.08.2017, pertaining to assessment year
2007-08.
The grounds of appeal raised by the assessee are as under:–
The order of the Learned Commissioner of Income Tax (Appeals) in confirming levy of 300% penalty in the sum of Rs.69,19,527/- is opposed to law and facts. Your petitioner contenders that the appellant has neither concealed any particulars of income nor has furnished any inaccurate particulars thereof. Your petitioner prays for deleting the penalty of 300% confirmed by the Commissioner of Income Tax (Appeals).
In this case, the assessee is engaged into the real estate construction business. The
Assessing Officer (A.O. for short) noted that the assessee has not offered any profit under
2 ITA No. 272/Pan./2017 real estate business. The A.O. found that the assessee should have offered 12% estimated
profit on the area sold. On query in this regard, the assessee responded that the assessee is
following the percentage completion method and since the total cost incurred being less
than 20%, no profit was being offered. However, the A.O. was not convinced. He opined
that in the Accounting Standard (AS for short) there is no such mention that the profit is
to be recognized only if project costs incurred is 20%. Hence, he made the impugned
addition. We may gainfully refer to the order of the A.O. in this regard which reads as
under:
The Authorised Representative was asked to explain why 12% of the estimated profit on area sold in respect of Devashri Garden Phase II, Porvorim, should not be brought to tax. In reply the Authorised Representative made the following submission:- Revenue from constructed properties is recognized on "percentage of completion method". Total sale consideration as per the agreement to sell constructed properties entered into is recognized as revenue based on the percentage of actual project costs incurred thereon to total estimated project cost, subject to such actual cost incurred being 20 percent or more of the total estimated project cost. Project cost includes cost of land, estimated construction and development cost of such properties." The assessee's submission is considered but same is not accepted. From the details of Devashri Garden Phase II, Porvorim, it can be seen that 9,899 sq. meters out of 16,732 sq. meters area available for sale, i.e. 58.95% of the project Devashri Garden, phase II, Porvorim, has been sold in the p.y. under consideration. When more than 50% of the project is sold, non recognition of profits thereof is not in consonance with the assessee's own method of accenting in the other projects. Even Accounting Standards of Revenue Recognition based on percentage of actual project cost incurred to total estimated project does not specify that revenue is to be recognized only if the incurred project cost exceeds 20%. In view of the above facts & circumstances, the profit to be recognized on area sold in the project Devashri Garden, Phase II, Porvorim is taken at 12% of the estimated profit on area sold (57,103,142) i.e. Rs. 68,52,377/- & added to the income declared.
The said addition was confirmed by the ld. CIT(A) and the ITAT. In connection
with this addition, penalty was also levied. In the penalty order also the assessee’s claim
3 ITA No. 272/Pan./2017 was rejected that as per AS-7 offering profit under percentage completion method, the
profit should be offered after the project cost incurred is 20%. The A.O., in fact, levied
300% penalty of the tax sought to be evaded and, hence, penalty was levied at
Rs.68,52,377/-. This levy of penalty was confirmed by the A.O. and the ld. CIT(A) also.
Against this order, the assessee is in appeal before us.
We have heard both the counsel and perused the records. The ld. Counsel of the
assessee stated that the assessee’s claim was a cogent one. If the same is not accepted by
the Revenue authorities, it cannot lead to levy of penalty u/s. 271(1)(c). He pleaded that
the assessee’s submission that under the project completion method, until the project is
completed to the extent of 20%, no profit need to be offered has been rejected by the
authorities below by referring that the AS do not provide any such stipulation. However,
the ld. Counsel of the assessee submitted that this is an erroneous finding. He referred to
the order of the ITAT, Mumbai in the case of Lingtec Constructors LP vs. ITO (in ITA
No. 3988/Mum/2004 vide order dated 05.04.2013), wherein the extract of AS-7 is
produced as under:
“9. Percentage of Completion Method 9.1 Under the percentage of completion method, the amount of revenue recognised is determined by reference to the stage of completion of the contract activity at the end of each accounting period. The advantage of this method of accounting for contract revenue is that it reflects revenue in the accounting period during which activity is undertaken to earn such revenue. 9.2 The stage of completion used to determine revenue to be recognised in the financial statements is measured in an appropriate manner. For this purpose no special weightage should be given to a single factor; instead, all relevant factors should be taken into consideration; for example, the proportion that costs incurred to date bear to the estimated total costs of the contract, by surveys which measure work performed and completion of a physical proportion of the contract work. 9.3 Progress payments and advances received from customers may not necessarily reflect the stage of completion and therefore cannot usually be treated as equivalent to revenue earned.
4 ITA No. 272/Pan./2017 9.4 If the percentage of completion method is applied by calculating the proportion that costs to date bear to the latest estimated total costs of the contract, adjustments are made to include only those costs that reflect work performed. Examples of items which may need adjustment include: (i) the costs of materials that have been purchased for the contract but have not been installed or used during contract performance; and (ii) payments to subcontractors to the extent that they do not reflect the amount of work performed under the subcontract. 9.5 The application of the percentage of completion method is subject to a risk of error in making estimates. For this reason, profit is not recognised in the financial statements unless the outcome of the contract can be reliably estimated. If the outcome cannot be reliably estimated, the percentage of completion method is not used. 9.6 While recognising the profit under this method, an appropriate allowance for future unforeseeable factors which may affect the ultimate quantum of profit is generally made on either a specific or a percentage basis. 9.7 In the case of fixed price contracts, the conditions which will usually provide this degree of reliability are: (i) total contract revenues to be received can be reliably estimated; (ii) both the costs to complete the contract and the stage of contract performance completed at the reporting date can be reasonably estimated; and (iii) the costs attributable to the contract can be clearly identified so that actual experience can be compared with prior estimates. 9.8 Normally, the profit is not recognised in fixed price contracts unless the work on a contract has progressed to a reasonable extent. Ordinarily, this test is not considered as having been satisfied unless 20 to 25% of the work is completed. 9.9 In the case of cost plus contracts, the conditions which usually provide this degree of reliability are: (i) costs attributable to the contract can be clearly identified; and (ii) costs other than those that are specifically reimbursable under the contract can be reliably estimated.”
Referring to the above, the ld. Counsel of the assessee submitted that the AS-7 in
para 9.8 duly mentions that normally, the profit is not recognized unless 20 to 25% of the
work is completed. Hence, the ld. Counsel of the assessee submitted that the very
foundation of the levy of penalty in this case is unsustainable, as the method adopted by
the assessee has the mandate of AS. He also referred to the Guidance Note on Accounting
for Real Estate Transactions issued by the Chartered Accountants of India, where in para
5.3 it has been provided that where the expenditure incurred on construction and
development cost is less than 25%, profit may not be estimated. Furthermore, the ld.
5 ITA No. 272/Pan./2017 Counsel of the assessee submitted that in estimating the percentage of construction and
offer of the profits is a debatable matter and penalty on this issue cannot be levied. For
this proposition, he referred to the decision of the ITAT, Mumbai Bench in the case of
M/s. Parinee Developers Pvt. Ltd. vs. ACIT (in ITA No. 6772/Mum/2013 vide order
dated 11.09.2015). In this connection, the ld. Counsel of the assessee referred to the
following paragraphs of the said order:
We have heard both the parties and perused the orders of the Revenue Authorities on this issue of levy of penalty on the addition of Rs. 28.62 Crs on account of reworking of estimated project cost based on actual cost incurred up to 31.3.2013. We find that there is no dispute on the fact that the total estimated cost of the project is 1628.02 Crs. There is no fact based reasons for the CIT (A) to adopt the sum of Rs. 1425.19 Crs as an actual expenditure spent on the project till the end of AY 2012-2013, the year of completion of project. Rest of the calculations made by the CIT (A) is directly related to the change in the method of accounting rejecting the assessee‟s figures and the methods in this regard. What is the better method of accounting is a matter of debate and no concealment of penalty should be attracted to such debatable issues. We find the addition of Rs. 28.62 Crs has the genesis in the estimations on one side and preponement on the other and also on the change of method of accounting. In our opinion, penalty cannot be levied on such additions as they constitute debatable issues. It is an undisputed fact that the said profits of the project are subject to tax in the AY 2009-2010 or in AY 2012- 2013. It is a matter of dispute. The above citations were also perused and we find they are relevant for the proposition that change in the method of accounting involving the estimates do not attract the penalty u/s 271(1)(c) of the Act. Therefore, we are of the opinion that the penalty levied by the AO on the said addition of Rs. 28.62 Crs is unsustainable in law.
In the background of the aforesaid discussion and precedent, the ld. Counsel of the
assessee pleaded that the assessee’s view is legally permissible view and if the same is
rejected by the authorities below, the same would not lead to levy of penalty u/s.
271(1)(c) of the Act.
Per contra, the ld. Departmental Representative relied upon the orders of the
authorities below.
6 ITA No. 272/Pan./2017 13. Upon hearing both the counsel and perusing the records, we find that the addition
in this case has been solely made on the ground that the assessee’s plea that the
Accounting Standard provide that the profit under project completion method need not be
recognize unless 20% of the project is completed, is not specified in the Accounting
Standards. However, as per the extract of the Accounting Standard and the guidance note
submitted by the ld. Counsel of the assessee and reproduced by us hereinabove, the ld.
Counsel of the assessee is correct in the submission that the very foundation of the levy
of penalty is unsustainable as the AS and Guidance note do provide for non recognistion
of profits unless project is completed atleast 20% to 25%. Moreover, the ITAT in the case
of Lingtec Constructors LP (supra) has held that these are debatable issues and in such
debatable issues penalty u/s. 271(1)(c) cannot be levied. Furthermore, in our considered
opinion, the decision of the Hon’ble Apex Court in the case of Reliance Petroproducts
(P.) Ltd. [2010] 322 ITR 158 (SC) comes to the rescue of the assessee. In the said case, it
was expounded that mere rejection of the claim of the assessee would not lead to
automatic levy of the penalty.
Furthermore, we note that the in the assessment order, the A.O.’s charge is of
furnishing of inaccurate particulars of income. But in the penalty order, penalty is levied
from concealment of income. Further, in the last para of the penalty order after giving a
finding that the assessee is guilty of concealment, the A.O. has levied 300% of penalty
for furnishing inaccurate particulars of income. The above clearly demonstrate that
authorities below are not sure as to what is the charge against the assessee. In such
situation, penalty cannot be sustained under section 271(1)(c) as held by the Hon'ble
Bombay High Court in the case of CIT vs. Samson Perinchery [2017] 392 ITR 4 (Bom).
7 ITA No. 272/Pan./2017
In the background of the aforesaid discussion and precedent, in our considered
opinion, penalty u/s. 271(1)(c) in this case is not sustainable. Accordingly, we set aside
the orders of the authorities below and delete the levy of penalty.
In the result, this appeal by the assessee stands allowed.
Order pronounced by listing the result on the Notice Board of the Bench under Rule 34(4) of the Appellate Tribunal Rules, 1963.
Sd/ Sd/- - RAM LAL NEGI SHAMIM YAHYA JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 17.12.2018 Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The CIT(A); (4) The CIT, Panji City concerned; (5) The DR, ITAT, Panji; (6) Guard file. // True Copy //
By Order Roshani, Sr. PS
(Sr. P.S./P.S.) ITAT