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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
Surela Investment & Trading P. Income Tax Officer, Ltd. Ward 2(3)(2) Old ICI Godown, Fosbery RD Mumbai-400 020 off Eary Rd, Station (E) Vs. Mumbai-400 033 PAN No. AACCS2358C Appellant .. Respondent .. Shri JD Mistry, AR Assessee by Revenue by .. Mr.Vishwas Mundhe, DR .. Date of hearing 03-05-2017 Date of pronouncement .. 12-05-2017 O R D E R PER MAHAVIR SINGH, JM:
These two appeals by the assessee are arising out of the different orders of CIT(A)-XXX & CIT(A)-6 in appeal No. CIT(A)-XXX/IT-138/Rg. 2(3)/07-08 & CIT(A)-6/IT-107/2010-11, Mumbai dated 30-12-2008 & 19-03-2013. The Assessments were framed by ITO-2(3)2, Mumbai for the A.Y. 2005-06 & 2008- 09 vide order dated 28-12-2007 & 18-10-2010 u/s 143(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’).
The only issue in this appeal of assessee in for 2. AY 2005-06 is against the order of CIT(A) confirming the adhoc addition of 3% of work in progress at Rs. 2,63,44,750/-. For this assessee has raised following grounds: - “
Ground No 1. (I) The learned Commissioner of Income tax (Appeals) erred in confirming the action of the A.O. in disregarding
ITA No.546/Mum/2009 & Surela Investment & Trading P. Ltd.; AYs:05-06, 08-09 the method of accounting followed by the appellant consistently and assessing the appellant on the income of an ad- hoc figure of Ps. 2,63,44750/- (at 3% of Work-in- Progress Rs. 87,81,58,362/- (ii) He failed to appreciate that the appellant was following Project Completion method regularly and had on its own, in future years offered income for taxation as and when the project got completed.
(iii) The learned CIT(A) erred in confirming the A.O.'s judgement regarding method of accounting to be followed over the method of accounting followed by the appellant and taxing the appellant on an income of Rs. 2,63,44.750/-.
(iv) The appellant prays that such an ad-hoc estimation of income is totally unjustified and the Order of the CIT (A) in the confirming the assessment of income made by A.O. on such ad hoc basis be quashed.”
Briefly stated facts are that the assessee company entered into an agreement for development of land belonging to Swadeshi Mills Company Ltd vides agreement dated 17-03-1993. The assessee was in the process of seeking numerous permissions from various State Govt. authorities for commencement of development project thereon. The assessee for this reason till 31-03-2000 booked expenditure in respect of various payments made to BMC like scrutiny fee, development charges, survey charges etc. incurred on the aforesaid project. Thereafter, the assessee started construction on the project to complete the project started in FY 2001-02. During the course of assessment proceedings, the AO noted that the assessee has disclosed work in progress at Rs. 87,81,58,362/- as against the assessee received advances of Rs. 86,04,96,957/-. The AO computed the percentwise total construction completed up to 31-03-2005 as per certificate dated 30-11-2007 of the architect which is as under: -
ITA No.546/Mum/2009 & Surela Investment & Trading P. Ltd.; AYs:05-06, 08-09 RCC Work 90% complete approx. Finishing Work 80% complete approx. External Dev. & services 70% compete approx.
According to AO, the considerable amount of work in progress is completed and sale amount has been received for total 282 flats having been sold equivalent to the area of 4424 sq. meter out of total saleable area of 50089.36 sq. meters. The assessee was asked to show cause as to why percentage completion method should not be adopted in view of AS-7 issued by ICAI. The assessee replied that what has been received is part consideration i.e. advance and at the time of sale consideration, the construction of apartment is not completed and total consideration is not received. It was explained before the AO that the meager part of construction work still remains to be carried out and income if any arising from sale of flats is not ascertainable because assessee is regularly following project completion method of accounting and as and when project will be completed he will disclose the profits. The assessee also replied that the AS-7 is applicable in respect of contracts entered into during accounting period commencing on or after 01-04-2003 and assessee’s contract was awarded long back in 1993. The AO considering the reply not accepted the explanation and he applied on adhoc basis 3% of work in progress and after applying percentage completion method assessed the income of the assessee by observing as under: - “Hence, it is thus necessary to bring the income earned to tax. As the project is not complete the exact profit cannot be crystalized but some proper method has to be adopted to envisage the profits earned during the year. The assessee has shown cost of construction of about Rs 1800 per sq. ft. The general profit percentage of the other persons in this type of business is in the range of 10 to 12%. Hence, I treat 3 % of the WIP of Rs. 87,81,53,362/- as profit during the year i.e. Rs 2,63,44,750/- as profit for the year under consideration
ITA No.546/Mum/2009 & Surela Investment & Trading P. Ltd.; AYs:05-06, 08-09 Subject to above remarks the total income of the assessee is computed as under Total income as per Return (-) 13,900/ Add: On account of profits as per Percentage completion Rs. 2,63,44,750/- Revised total income Rs. 2,63,30,850/- Assessed u/s. 143(3) of the I.T. Act. Give credit for taxes paid, if any. Issue Demand Notice/Challan accordingly. the ITNJS-150 forms part of this order.”
Aggrieved, assessee preferred the appeal before CIT(A).
The CIT(A) also confirmed the action of the AO by observing in Para 6.1 5. to 6.3 as under: -.
“6.1 I see that as per the certificate dated 30.11.2007 (of the architect) of the appellant Shri Farhad Kharegat, the percentage-wise construction completed is as under: - RCC Work 90% complete approx. Finishing Work 80% complete approx. External Dev. & services 70% compete approx.
6.2 From the facts on record, it is ample clear that substantial work of the project completed Substantial amount of sale proceed is also had received. 282 flats have already been sold i.e 42440 sq. meters area is already sold out of 55089.36 sq. meters. The above facts clearly suggest that project is almost at complete stage but appellant has not offered any income for taxation and has chosen to defer the profits by adopting project completion method. The appellant has taken umbrella of accounting method AS-7 which is already revised
ITA No.546/Mum/2009 & Surela Investment & Trading P. Ltd.; AYs:05-06, 08-09 considering the same as erroneous to revenue. It is strange to note that the appellant had been working on project for last several years, collecting the advances from the customers, the project is also almost ready but not offering any income for taxation. Therefore, in my opinion the assessing officer was quite justified by applying 3% profit on WIP after giving the detailed reasoning The assessing officer has rightly relied upon the decision of the Hon'ble Patna High Court in the case of Shri Sukhdeodas Jalan vs. CII 1954, 26 ITR 617 and ratio of the Hon’ble Supreme Court decision in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT 227 ITR 172. On the other side, the facts of the oases relied upon by the appellant, are not identical to the appellant's case.
6.3 In view of the above facts and circumstances of the case, I do not see any reason to interfere in the action of the assessing officer, which appear to be very reasonable by applying 3% on WIP and rejecting the project completion method followed by the appellant Therefore. I confirm the action of the Assessing Officer”
Aggrieved assessee came in second appeal before Tribunal.-.
We have heard the rival contention and gone through the facts and circumstances of the case. Admittedly, the assessee is regularly following project completion method of accounting for computation of its income. Admittedly, the assessee has also not completed the construction, as per Revenue, as it has completed the construction of 4,244 sq. Meter of area as against the area of 50,089.63 sq. meters. The AO also admitted that the RCC work is completed up to 90%, finishing work is completed up to 80% and extern development and services work is completed up to 70%.The learned Counsel for the assessee filed complete detail of cumulative amount received from parties and cumulative expenditure incurred year wise from 1994-2005. The assessee also filed details Page 5 of 9
ITA No.546/Mum/2009 & Surela Investment & Trading P. Ltd.; AYs:05-06, 08-09 of progress of project year wise and method of accounting followed. The method of accounting followed by the assessee is completed contract method which is followed throughout and there is no change at all. Even the Revenue either u/s 143(1) or u/s 143(3) also accepted the completed contract method adopted by the assessee qua this project only. The learned Counsel for the assessee filed a complete computation of income and accounts for AY 1999-2000 to 2004-05 and also assessment order completed u/s 143(3) for AY 2000-01. The learned Counsel for the assessee also made a statement at bar that project was completed in AY 2007-08 i.e. year ending 31-03-2007 and profit from this project was disclosed in AY 2007-08. According to him, the stock in trade in case of no sale was carried forward in AY 2008-09 and 2009-10 and that remains as stock in trade. We find that the facts in these case are undisputed that the assessee are regularly following completed project method which was never disturbed except in AY 2005-06 and 2008-09, the years under dispute. On this proposition the learned Counsel for the assessee relied on the decision of the Hon’ble Bombay High Court in the case of CIT vs. V.S. Dempo and Co. Pvt. Ltd. (1996) 131 CTR 203 (Bom) wherein the principle of complete contract method was accepted on the basis of consistency. The relevant finding of Hon’ble High Court are that once the completed project method has been constantly followed since beginning of the business and the assessing authorities have accepted the same in the preceding years, the construction of projects in hand during the relevant assessment years were not complete at all and were at the various stages of construction/development. There is no dispute to the fact that the income returned was only on account of other receipts and the AO adopted the fixed percentage of profit method in respect of construction projects and added to the income. Hon’ble High Court laid down the proposition that the completed contract method followed by the assessee was correct and resort to section 145(1) was not justified.
The learned Counsel for the assessee also relied on the decision of the Hon’ble Supreme court in the case of CIT vs. Bilhari Investment Pvt. Ltd. (2008) 299 ITR 1 (SC) wherein the Hon’ble Supreme Court has considered the issue of Page 6 of 9
ITA No.546/Mum/2009 & Surela Investment & Trading P. Ltd.; AYs:05-06, 08-09 change of method from the completed contract method to deferred Revenue expenditure and held that the completed contract method was not required to be substituted by the percentage completion method despite the fact that the accounting standard enacted by the ICAI to be adopted for the reason that the position would be the same as the developments were of recent origin. Hon’ble Supreme Court observed as under : - “20. As stated above, we are concerned with assessment years 1991-1992 to 1997-1998. In the past, the Department had accepted the completed contract method and because of such acceptance, the assessees, in these cases, have followed the same method of accounting, particularly in the context of chit discount. Every assessee is entitled to arrange its affairs and follow the method of accounting, which the Department has earlier accepted. It is only in those cases where the Department records a finding that the method adopted by the assessee results in distortion of profits, the Department can insist on substitution of the existing method. Further, in the present cases, we find from the various statements produced before us, that the entire exercise, arising out of change of method from completed contract method to deferred revenue expenditure, is revenue neutral. Therefore, we do not wish to interfere with the impugned judgment of the High Court.
Before concluding, we may point out that under section 211(2) of the Companies Act, Accounting Standards ("AS") enacted by the Institute of Chartered Accountants have now been adopted [see: judgment of this Court in J.K. Industries case (supra)]. Shri Tripathi, learned counsel for the Department, has placed reliance on AS 22 as the basis of his argument that the completed contract method should be substituted by deferred revenue expenditure (spreading the said expenditure on Page 7 of 9
ITA No.546/Mum/2009 & Surela Investment & Trading P. Ltd.; AYs:05-06, 08-09 proportionate basis over a period of time). He also relied upon the concept of timing difference introduced by AS 22. It may be stated that all these developments are of recent origin. It is open to the Department to consider these new accounting standards and concepts in future cases of chit transactions. We express no opinion in that regard. Suffice it to state that, these new concepts and accounting standards have not been invoked by the Department in the present batch of civil appeals..”
In the present case before us also the AO tried to invoke AS-7 of the accounting standard which is applicable to the contracts entered into during accounting period commencing on or after 01-04-2003. In the present case, the contract was entered in 1993 by way of development agreement and the assessee has returned the working progress from AY 1999-2000 and department has accepted consistently. In view of these facts, we direct the AO to compute the income on the basis of completed project method and not on percentage completion method of accounting. The appeal of the assessee is allowed.
Similar is the issue in for AY 2008-09 and hence, taking a consistent view, we direct the AO accordingly.
Another issue of disallowance u/s 14A in respect to expenses relatable to exempted income, the learned Counsel for the assessee fairly conceded the ground due to smallness of amount and hence the same is dismissed.
In the result, appeals of assessee in is Allowed and in ITA No. 3770/Mum/2013 is partly allowed.
Order pronounced in the open court on 12-05-2017.