ACIT, CIR-2, DURGAPUR, DURGAPUR vs. TANVEE HOUSING DEVELOPMENT PVT. LTD., DURGAPUR

Assessment Year: 2012-2013 M/s. Tanvee Housing Development Pvt. Limited 1256/KOL/2017, are cross appeals, which are directed against the order of ld. Commissioner of Income Tax (Appeals), Durgapur dated 27.02.2017.

The relevant facts of the case giving rise to these appeals are as follow:- The assessee in the present case is a Company, which is engaged in the business of Real Estate Development. The return of income for the year under consideration was filed by it on 30.09.2012 declaring total income of Rs.32,96,440/-. In the balance-sheet filed along with the said return, closing work-in-progress was shown by the assessee at Rs.17,49,74,365/-. Since the opening work-in-progress shown by the assessee was Rs.18,02,20,356/-, the Assessing Officer required the assessee to explain as to why the closing work-in-progress shown as on 31.03.2012 was so low. In reply, it was submitted by the assessee that the two Projects, namely ‘Parijat’ and ‘Pratyee’ were completed during the year under consideration. It was also submitted that the total area of flats constructed in the said two projects was 80,141 sq,ft, and 1,36,470 sq.ft., out of which flat area of 73,912 sq.ft. and 64,610 sq.ft. was sold out of ‘Parijat’ and ‘Pratyee’ Projects respectively. It was further submitted that the total cost of construction and other expenses incurred during the year under consideration were Rs.12,57,23,965/- and after adding the same to the opening work-in-progress, the total value of closing work-in-progress as on 31.03.2012 became Rs.30,59,49,321/-. It was submitted that the total cost attributable to ‘Parijat’ Project and ‘Pratyee’ Project completed during the year under consideration was Rs.6,53,15,103/- and Rs.14,67,04,701/- respectively and the same attributable to the flat area sold to the extent of Rs.6,02,38,280/- and Rs.6,94,55,750/- was debited to the Profit & Loss Account. It was submitted that after reducing the said amounts from the total value of work-in-progress, the balance amount of Rs.17,49,74,365/- was shown as closing work-in-progress. This Assessment Year: 2012-2013 M/s. Tanvee Housing Development Pvt. Limited explanation offered by the assessee was not found acceptable by the Assessing Officer for the following reasons given in his order:- “(A). It is evident from the aforesaid submission of the assessee that it failed to explain low value of closing work-in-progress amounting to Rs.17,49,74,365/-. Also in course of hearing the assessee was categorically asked to produce project wise details of entire project area, built up area, super built area, date of commencement of constructions of which project, year wise completion(expenses incurred for each project), estimated revenue of each project. But the assessee failed to furnish details of project area, flat area in course of hearing initially. It furnished only area of flats on 30.03.2015.

For the reasons given above and keeping in view the failure of the assessee to furnish the relevant details of agreement values, the Assessing Officer rejected the value of work-in-progress shown by the assessee. He estimated the area of unsold flats completed by the assessee at 35% and worked out the value of closing work-in-progress at Rs.19,08,87,526/- as against the value of closing work-in-progress shown by the assessee at Rs.17,49,74,365/-. Accordingly the difference of Rs.1,59,13,161/- was added by the Assessing Officer to the total income 3 Assessment Year: 2012-2013 M/s. Tanvee Housing Development Pvt. Limited of the assessee on account of under-valuation of closing work-in- progress.

During the course of assessment proceedings, it was also noted by the Assessing Officer that construction material worth Rs.70,15,063/- was purchased by the assessee at the fag end of the year. According to the Assessing Officer, the said material should have been disclosed by the assessee as closing stock and since the assessee had failed to disclose the same in the Balance-sheet, the Assessing Officer required the assessee to offer its explanation in the matter. In reply, it was submitted by the assessee that the said purchases made at the fag end of the year were included in the cost of construction and the same were duly reflected in the closing work-in-progress. It was submitted that the closing stock of material thus was duly disclosed in the form of closing work-in-progress and the same was not disclosed separately in the balance-sheet. This explanation of the assessee was also not found acceptable by the Assessing Officer. According to him, the building materials purchased by the assessee to the extent not utilized for construction could not be incorporated in the closing work-in-progress and in the absence of any evidence brought on record by the assessee to show that the building material in question purchased at the fag end of the year was immediately used for the construction, he treated the closing stock of Rs.70,15,063/- as undisclosed and addition to that extent was made by him to the total income of the assessee. The total income of the assessee thus was determined by the Assessing Officer for the year under consideration at Rs.2,62,24,664/- in the assessment completed under section 143(3) vide an order dated 31.03.2015.

Against the order passed by the Assessing Officer under section 143(3), an appeal was preferred by the assessee before the ld. CIT(Appeals) challenging both the additions made by the Assessing Assessment Year: 2012-2013 M/s. Tanvee Housing Development Pvt. Limited Officer on account of alleged under-valuation of closing work-in-progress and undisclosed closing stock. During the course of appellate proceedings before the ld. CIT(Appeals), it was explained on behalf of the assessee- company that the revenue of its business of real estate development was recognized by following the Project Completion Method as prescribed by Accounting Standard-9. It was submitted that till the revenue is not recognized as per the Project Completion Method followed by it, the amount, which was incurred on the construction of incomplete project was shown as closing work-in-progress in the balance-sheet and the corresponding amount received from customers had been shown as advances under the head ‘liabilities’. It was submitted that the two Projects, namely ‘Parijat’ and ‘Pratyee’ were completed during the year under consideration and revenue of the said two Projects was recognized to the extent of flats of the said two Projects sold on proportionate basis. It was also submitted that the corresponding cost of the said two Projects reflected in the work-in-progress was transferred to the Profit & Loss Account and the balance amount was shown as closing work-in-progress. The relevant Project-wise details showing opening work-in-progress, work done during the year, general expenses apportioned to the Project, cost of completed projects transferred to P&L A/c. on proportionate basis and the balance closing work-in-progress were also prepared and furnished by the assessee before the ld. CIT(Appeals) as under:- Name of the Opening(A) Work done General Cost Balance project during the expenses(C) transferred (A+B+C)- (D) year(B) to P/L A/c.(D) General 12,53,324 12,53,324 NIL expenses for all project Gopalpur 300479 100800 401279 Panagarh 55690 509278 654968 Parijat 48464768 15597011 1253324 60238280 5076823.20 Prabortak 24521262 23358957 2506648 0 50386867.40 Prtayayee 89612867 51451876 5639958.90 69455750 77248951.90 Purulia 47468 0 47468 Puspak 79327 71900 151227 ITA No. 1256/KOL/2017 Assessment Year: 2012-2013 M/s. Tanvee Housing Development Pvt. Limited Santiniketan 8454961 4316175 12771136 Tapoban 8688234 17757426 1879986.30 28325646 Total 180225056 113163423 12533241.20 130947354 174974366

As regards the objections raised by the Assessing Officer in the assessment order while rejecting the closing work-in-progress shown in the balance-sheet, a detailed submission was also filed by the assessee to meet the said objections as under:- “PARA NO 3A OF THE ASSESSMENT ORDER:- Sir, The Ld. DCIT in the para No.3A of the assessment order has mention that, the assessee has failed to explain the low value of closing stock is not correct, in the course of assessment the assessee has submitted the details of computation closing stock, sir for your kind perusal here I am again submitting the same which shows actual closing work in progress as per actual figure and his observation showing low closing stock is without any justification.

The ld. CIT(Appeals) found merit in the submissions made by the assessee and deleted the addition of Rs.1,59,13,161/- made by the Assessing Officer on account of the alleged under-valuation of closing work-in-progress for the following reasons given in his impugned order:- “I have perused the assessment order and the submission of the appellant which have been summarised above. Perusal of A.O's order shows that A.O did not consider the sale of the flats which are reduced from work in progress and only then closing stock has been arrived at. The observation of the A.O that advances received against Parijat & Pratyee were at Rs.22,77,07,424/- is also factually is incorrect. The appellant has submitted before the A.O. that respective advances are of Rs.6,02,38,280/- for Parijat and Rs.6,94,55,750/- against Pratyee. It is further seen that the project wise work in progress along with the sale is submitted before the A.O, but the A.O. did not consider the same while processing the assessment order. The case was sent for remand report with the submission of the appellant where the appellant has resubmitted the facts which were endorsed by the A.O but in his remand report the A.O tried to justify the addition made by the then A.O without narrating any reasons. In this case, it is seen that the A.O made factual errors while ascertaining closing stock. The chart narrated in the above Para project wise clearly shows the opening closing, and sale project wise. The aforesaid facts were neither controverted by the A.O. nor considering the same while framing the assessment order if the sale part and general expenses are ignored then the appellant has shown its WIP to the extent of Rs.3,05,92,179/-. It is further to point out that subsequently in this case survey was also conducted. The certain books of account were impounded. The A.O. was asked to inform if any incriminatory material has been found during the course of the survey which shows suppression of sale or cost of construction. The A.O did not report any such fact. Considering the fact that the appellant was maintaining project wise cost and corresponding sale and its closing balance the A.O's action for estimating closing at the rate of 35% without any basis is not tenable hence, assessment made by the A.O on this account is hereby deleted. The ground of appeal is allowed”.

As regards the addition of Rs.70,15,063/- made by the Assessing Officer on account of the alleged undisclosed closing stock, the Assessment Year: 2012-2013 M/s. Tanvee Housing Development Pvt. Limited submission as made on behalf of the assessee before the Assessing Officer and reiterated before him was found acceptable by the ld. CIT(Appals) and he deleted the said addition for the following reasons given in his impugned order:- “In this case, it is seen that A.O. has simply stand raw material purchase for the work in progress and was of the opinion that when the material was not utilised then it cannot be the part of work in progress. Even if the contention of the A.O. is accepted there would be no material change because only the figure will remain same as the entire value of aforesaid closing stock has already been shown in the part of work in progress. If the same is shown as closing stock then the figure of work in progress has to be reduced which makes no change. The A.O. has not proved that this was the case of inflation of cost. In the construction business as per accounting system entire purchase relating to the construction is added in the work in progress when the raw material purchased at the end of March is added in the work in progress. The addition made by the A.O further tantamount to double deduction. Therefore, the addition made by the A.O. is unwanted and misconceived hence, deleted, the ground of appeal is allowed”.

Aggrieved by the order of the ld. CIT(Appeals), the revenue and assessee both are in appeals before the Tribunal on the following grounds: Revenue’s appeal in (1) In the facts and circumstances of the case, the Ld. CIT (Appeals) Durgapur has erred by deleting addition of Rs.l,59,13,1611- by accepting the contention of the assessee without considering the fact that claim of the assessee of receiving of advances against the projects were not supported by agreements. (2) In the facts and circumstances of the case, the order of Ld. CIT (Appeals) Durgapur is erroneous as he reduced addition of Rs.70,84,7211- to Rs.27,50,748/- on estimation basis by taking 5% of sale next year ignoring the fact that this undisclosed stock was found as not disclosed in audited Balance Sheet. (3) In the facts and circumstances of the case, the Ld. CIT (Appeals) Durgapur has erred by deleting addition of Rs.43,33,973/- by arriving at the value of closing stock of materials on estimate basis by taking into account the flats sold in the subsequent years.

At the time of hearing before the Tribunal, the ld. D.R. has not pressed Ground No. 3 raised in the Revenue’s appeal. The same is accordingly dismissed as not pressed.

As regards the Grounds No. 1 & 2 of the Revenue’s appeal, the ld. D.R. strongly relied on the order of the Assessing Officer in support of the revenue’s case on the issues raised therein. He has contended that the findings/observations recorded by the Assessing Officer in the assessment order while making the additions on account of under- valuation of closing work-in-progress and undisclosed closing stock could not be properly appreciated by the ld. CIT(Appeals) and the relief was given by him to the assessee by deleting the said two additions by simply accepting the assessee’s contention.

The ld. Counsel for the assessee, on the other hand, strongly supported the impugned order of the ld. CIT(Appeals) giving relief to the assessee on both these issues. He contended that the value of closing work-in-progress shown by the assessee was found to be correct by the ld. CIT(Appeals) after understanding the method of accounting consistently followed by the assessee. He invited our attention to the detailed submission made on behalf of the assessee before the ld. CIT(Appeals) in this regard as reproduced in the impugned order of the ld. CIT(Appeals) and strongly relied on the same. He further submitted that the construction material purchased at the fag end of the year was included in the cost of construction by the assessee and since the entire cost of construction was reflected in the work-in-progress, the assessee was not required to disclose separately the closing stock of material in Assessment Year: 2012-2013 M/s. Tanvee Housing Development Pvt. Limited the balance-sheet and it was not a case of undisclosed closing stock as alleged by the Assessing Officer.

We have considered the rival submissions and also perused the relevant material available on record. The assessee in the present case is a Company, which is engaged in the business of real estate development. As claimed before the authorities below as well as before the Tribunal, the income of the said business was recognized by the assesee-company as per the Project Completion Method followed consistently. It is observed that there were several projects that were undertaken by the assessee-company of real estate development, out of which two Projects, namely ‘Parijat’ and ‘Pratyee’ were completed during the year under consideration. The income of the said Projects completed during the year under consideration was accordingly recognized by the assessee to the extent of flats sold during the year under consideration as per the method of accounting followed by it and corresponding expenses proportionate to such sale booked under work-in-progress were debited to the Profit & Loss Account. In ‘Parijat’ Project, the assessee-company had constructed 150 flats having total area of 80141 sq.ft., out of which 138 flats having area of 70912 sq.ft. were sold during the year under consideration. The total sale consideration of the 138 flats sold was recognized by the assessee-company as its income during the year under consideration and the corresponding cost attributable to the said sale amounting to Rs.6,02,38,280/- out of the total cost of Rs.6,53,15,103/- on proportionate basis was transferred from work-in-progress and debited to the profit & loss account. Similarly 64,610 sq.ft. of the total constructed area of ‘Pratyee’ Project having been sold during the year under consideration, the sale consideration of 64,610 sq.ft. was recognized by the assessee-company as its income of the said Project and corresponding cost of Rs.6,94,55,750/- out of the total cost of the said Project of Rs.14,67,04,702/- was transferred from the work-in-progress Assessment Year: 2012-2013 M/s. Tanvee Housing Development Pvt. Limited and debited to the Profit & Loss Account. As evident from the details furnished by the assessee before the Assessing Officer as well as before the ld. CIT(Appeals), cost of construction incurred by the assessee during the year under consideration on all the Projects was Rs.11,31,63,423/- while the general expenses incurred were Rs.1,25,33,241/-. These two amounts were added to the opening work-in-progress and after transferring the general expenses to the extent of 10% amounting to Rs.12,53,324/- and the corresponding cost attributable to the sale of flats of the completed two Projects amounting to Rs.6,02,38,280/- and Rs.6,94,55,750/-, the balance amount of Rs.17,49,74,366/- was shown as closing work-in-progress. The amount of closing work-in-progress reflected in the balance-sheet of the assessee-company at Rs.17,49,74,366/- thus was correctly shown as per the method of accounting consistently followed by the assessee to recognize the income of its real estate development business. It appears that the Assessing Officer did not appreciate the working of closing work-in-progress as done by the assessee-company by following the method of accounting consistently followed and proceeded to determine the closing work-in- progress by taking the unsold flats to the extent of 35% on adhoc basis, which as rightly held by the ld. CIT(Appeals) was totally untenable. The ld. CIT(Appeals), in our opinion, properly understood the working of closing work-in-progress as made by the assessee and deleted the addition made by the Assessing Officer on account of the alleged under- valuation of closing work-in-progress. We, therefore, uphold the impugned order of the ld. CIT(Appeals) giving relief to the assessee on this issue and dismiss Ground No. 1 of the Revenue’s appeal.

As regards the issue relating to the addition of Rs.70,84,721/- made by the Assessing Officer on account of the alleged undisclosed closing stock, we have already noted that the total cost of construction incurred during the year under consideration was included by the assessee- Assessment Year: 2012-2013 M/s. Tanvee Housing Development Pvt. Limited company in work-in-progress. Since the entire material purchased for the construction was included in the cost of construction and thereby in the work-in-progress, there was no question of showing any material purchased at the fag end of the year which was not utilized for construction in the closing stock separately. As rightly contended on behalf of the assessee and accepted by the ld. CIT(Appeals), the material purchased at the fag end of the year, which had remained un-utilized for construction was duly reflected in the value of closing work-in-progress and there was no case of any closing stock of material that had remained to be disclosed by the assessee as alleged by the Assessing Officer. The addition made by the Assessing Officer on account of such alleged undisclosed closing stock thus was not sustainable and the ld. CIT(Appeals), in our opinion, was fully justified in deleting the same. We, therefore, uphold the impugned order of the ld. CIT(Appeals) giving relief to the assessee on this issue and dismiss Ground No. 2 of the Revenue’s appeal.

As regards the solitary issue involved in the assessee’s appeal relating to the addition of Rs.27,50,748/- made by the ld. CIT(Appeals) on account of the profit of the assessee attributable to the unsold flats of the completed two Projects, we have already discussed the method of accounting followed by the assessee to recognize the income from its real estate development business, whereby the income was recognized in respect of the completed Projects to the extent of area sold during the relevant year. Since the said method of accounting was consistently followed by the assessee-company, the income attributable to the flats sold of the completed two Projects was recognized by the assessee- company during the year under consideration, while the income from unsold flats of the said Projects was recognized in the subsequent years as and when the said flats were sold. This position was accepted by the ld. CIT(Appeals) himself and the details of sale of such unsold flats during Assessment Year: 2012-2013 M/s. Tanvee Housing Development Pvt. Limited the subsequent years as furnished by the assessee were also taken note of by the ld. CIT(Appeals) on page no. 28 of his impugned order. He, however, still held that the profit attributable to the said sale ought to have recognized by the assessee as income of the year under consideration as the corresponding projects were completed by the assessee-company during the year under consideration. We are unable to subscribe to this view taken by the ld. CIT(Appeals). First of all, as per the accounting method followed by the assessee, the income from the real estate development was recognized on Project Completion Method to the extent of sale of the completed project and there was no justification to disturb this method followed by the assessee to recognize the income from the real estate development business consistently. Secondly, since the flats had remained unsold during the year under consideration, the profit attributable to the said flats could not be said to be realized or accrued to the assessee during the year under consideration so as to bring it to tax during the year under consideration. Thirdly, the sale price of the unsold flats was ascertainable only on the actual sale, which happened in the subsequent year and, therefore, determination of profit of the said flats during the year under consideration on any estimate basis involved assumptions and presumptions. Moreover, the profit of such unsold flats of the completed project was offered to tax by the assessee in the subsequent year as and when the same were sold on actual basis by following the method of accounting consistently adopted by it and addition of such profit from the said flats on estimated basis by the ld. CIT(Appeals) during the year under consideration clearly resulted into double addition. Keeping in view all these facts and circumstances of the case, we are of the view that the addition of Rs.27,50,748/- made by the ld. CIT(Appeals) on account of estimated profit on the estimated sale of unsold flats of the completed Projects is not sustainable and the same is liable to be deleted. We accordingly delete the said addition made by the ld. CIT(Appeals) and allow the appeal of the assessee. Assessment Year: 2012-2013 M/s. Tanvee Housing Development Pvt. Limited

In the result, the appeal of the Revenue is dismissed, whereas the appeal of the assessee is allowed. Order pronounced in the open Court on November22, 2019.