DCIT 23(3), MUMBAI vs. SAINATH ENTERPRISES, MUMBAI

The facts relating to the case are that the assessee is a builder and developer. The assessee is following percentage completion method for determining its profit. The assessee declared profit @ 10% on the value of work in progress. The assessing officer completed the assessments of assessment years 2007-08 and 2008-09 by determining higher profit by adopting higher rate of profit on the basis of certain comparable cases. The Ld CIT(A) gave partial relief to the assessee in AY 2007-08 and hence the revenue has filed appeal for that year challenging the order of Ld CIT(A).

In AY 2008-09, the Ld CIT(A) confirmed the order of the AO and hence the assessee has filed appeal challenging the order of Ld CIT(A).

The penalty levied u/s 271(1)(c) of the Act in AY 2008-09 was deleted by Ld CIT(A) and hence the revenue has filed appeal challenging the order of Ld CIT(A).

We shall first take up the appeal filed by the revenue for AY 2007-08. The Assessee had declared profit under percentage completion method @ 10% of the value of work in progress. The net profit declared by the assessee worked out to 3.36%. The AO collected details of profits declared by the comparable companies from Capitaline database and noticed that the average industry margin was 12.80%. After making some adjustments, the AO adopted the average rate of profit at 11.80%. Accordingly the AO held that the assessee has under reported its profit by 8.44% and accordingly added the shortfall in profit, which worked out to Rs.42.03 lakhs, to the total income of the assessee.

The Ld CIT(A), by placing reliance on the decision of Champion Construction (5 ITD 495)(Mum), took the view that the Gross profit margin should have been compared by the assessing officer. In the above said case, it was held that the gross profit margin of 12% was reasonable. He noticed that the gross profit margin declared by the assessee was 10.30%. Accordingly, the 3 M/s. Sainath Enterprises Ld CIT(A) sustained addition to the extent of 1.70%, which was worked out to Rs.6,81,976/-. Aggrieved the revenue has filed this appeal.

We heard the parties and perused the record. We notice that the assessee is following Percentage completion method for estimating its profits. During the year under consideration, the assessee has estimated profit @ 10% of the value of work in progress. We notice that the AO has enhanced the profit by adopting certain percentage and the Ld CIT(A) has reduced the same. In effect, one estimate was substituted by another estimate. Since the project of the assessee extended to more than one year, the correct profitability from the project could be ascertained only after completion of the project. In any case, the profit estimated in between years on percentage completion method would automatically get offset from the profit finally declared. Hence, the reduction of profit effected by Ld CIT(A) would have corresponding effect (increase) in the final year of completion of project, meaning thereby, the adjustments made in between years is tax neutral. In this view of the matter, we do not find any reason to interfere with the order passed by Ld CIT(A). Accordingly we uphold his order passed for AY 2007-08.

We shall now take up the appeal filed by the assessee for AY 2008-09. In this year, the assessee declared income of Rs.12.55 lakhs. The AO took four comparables and noticed that the average rate of net profit declared by them works out to 40.35%. However, the AO adopted net profit rate of 12.8% and added a sum of Rs.35.41 lakhs as addition towards shortfall in profits. The Ld CIT(A) noticed that the assessee could not negate the fact that the comparable cases are showing net profits at higher rate. Accordingly she confirmed the order of the AO. Aggrieved, the assessee has filed this appeal.

We heard the parties and perused the record. We notice that in this year also, i.e., in assessment year 2008-09, the project was in progress and the income was declared by the assessee on estimated basis on the value of work in progress. In paragraph 7, while dealing with the appeal filed by the revenue

We shall now take up the appeal filed by the revenue for assessment year 2008-09 challenging the order passed by Ld CIT(A) in penalty proceedings. The assessing officer levied penalty of Rs.10.54 lakhs u/s 271(1)(c) of the Act on the addition made by him in AY 2008-09 on account of shortfall in profits. Before Ld CIT(A), the assessee contended that the AO has made adhoc addition to net profit on the basis of certain comparables and the same would not give rise to any penalty u/s 271(1)(c) of the Act. It was further contended that there was no material to show that the assessee has concealed the particulars of income or furnished inaccurate particulars of income. The Ld CIT(A) was convinced with the contentions of the assessee and accordingly deleted the penalty. Aggrieved, the revenue has filed this appeal.

We heard the parties and perused the record. It is an admitted fact that the AO has made impugned addition on account of shortfall in profits on estimated basis by taking some comparables. In fact, according to AO, the comparables have reported net profit @ 40.35%. However, he himself has adopted a rate of 12.80% for determining the quantum of suppressed profit. We also find merit in the contention of the assessee that the AO did not bring on record any independent material to show that there were concealment of particulars of income or furnishing of inaccurate particulars of income. Thus, we notice that the AO has made the impugned addition on estimated basis only. Under these set of facts, we agree with the view taken by Ld CIT(A) that 5 M/s. Sainath Enterprises the impugned addition would not give rise to any penalty u/s 271(1)(c) of the Act. Accordingly we confirm the order passed by Ld CIT(A).

In the result, both the appeals of the revenue and the appeal of the assessee are dismissed. Order has been pronounced in the Court on 8.11.2017.