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Income Tax Appellate Tribunal, “B” BENCH, MUMBAI
Before: SHRI JOGINDER SINGH & SHRI D. KARUNAKARA RAO
सुनवाई की तायीख / Date of Hearing : 14.09.2016 घोषणा की तायीख /Date of Pronouncement : 18.11.2016 आदेश / O R D E R PER D. KARUNAKARA RAO, AM:
This appeal filed by the assessee on 10.9.2012 is against the order of the CIT (A)-29, Mumbai dated 27.6.2012 for the assessment year 2006-07. In this appeal, assessee raised the following grounds which read as under:- “1. The Ld CIT (A) erred in confirming the addition of Rs. 20,46,734/- representing reversal of excess profit recognized a income in the past period on the Pusalkar Project undertaken by the appellant in the year under consideration.
2. The Ld CIT (A) erred in not appreciating, that as regards, the same project, the income recognized in the past years ie from AY 2000-2001 to AY 2005-06 have been accepted by the Department without any dispute, including downward revision in the estimated project income made in AY 2005-06.
3. The Ld CIT (A) erred in holding that adjustments to the income from project on account of changes in the accounting estimate can be made only in the year of completion of the project and not in the intervening period when the construction is in process.”
2. Briefly stated relevant facts leading the above grounds include that the assessee is a builder & developer of real estate. “Project Pusalkar” is one of such project developed by the assessee. This project started in the AY 1999-2000 and completed in the AY 2007-2008. During the year, assessee filed the return of income declaring the total loss of Rs. 59,50,278/-. This loss is unique for this year under consideration as the assessee was consistently offering profits based on the „percentage completion method‟ qua the WIP of the project completed. The percentage of profits qua the cost estimated over the years ie from AY 2000-01 to AY 2006-07 are 15%; 15%; 15%; 20%; 20% 16% and 12% respectively. When it comes to the 12% of the WIP (cost of the project) offered for the year under consideration, assessee returned the loss of Rs. 59.50 lakhs. During the scrutiny proceedings, Assessing Officer questioned the loss returned by the assessee raising questions relating to 12%, which is the least profit estimated in the earlier AYs from 2000-01 to 2005-06. Further, AO raised various questions relating to the method of accounting, assessee tried to play with. Assessee submitted that 16% & 20% of profits offered in the earlier AYs was excessive and therefore, it is the decision of the management to reduce from 16% (AY 2005-06) to 12% (2006-07). Justifying the same, assessee submitted that BMC raised unexpected demand at the time of issuance of No Objection Certificate (NOC) and the same is to the tune of Rs. 55,51,600/-. He relied on the BMC Letter dated 7.11.2006. Mentioning that 16% is a higher side, the assessee proceeded to rectify the same by reducing 4% and offering in the return only 12% of profit. After considering the assessee and on perusal of the written submissions, AO concluded the assessment by rejecting the assessee‟s rectification attempts and disallowed the loss of Rs. 20,46,764/-. The loss on account of Pusalkar project at the end of the AY 2006-07 is worked out to Rs. 27,50,993/-. In the process, AO reasoned the assessee‟s attempt to not to rectify the earlier AYs where the profit percentage of 20% was offered and why now the percentage of 20% is reduced to 12% deviating from the method of accounting, said to be consistently followed by the assessee. This deviation is not permitted and it violates the provisions of law. AO is also of the view that the letter dated 7.11.2006, issued by the BMC is relatable to the AY 2007-2008, the year in which the project is completed. When the books of accounts are closed on 19.10.2006, as evident from the auditor‟s report u/s 44AB of the Act, AO could not understand as to why the BMC letter subsequently dated 7.11.2006 should be the basis for the assessee to rectify any entries in such completed / closed books of accounts of the assessee. Resultantly, AO restored the profit of 16% adopted by the assessee in the AY 2005- 06 ie immediately preceding to the AY under consideration. AO also reasoned that the BMC‟s demand since relatable to the AY 2007-2008, the corresponding debits should only be made in the AY 2007-2008. However, Assessing Officer did not given relief amounting to Rs. 20,40,734/- to the assessee on this account in the AY 2007- 2008. Matter travelled to the first appellate authority.
During the proceedings before the first appellate authority, the assessee raised various grounds touching upon the issues raised by the assessee before the AO. So far as the double taxation issue is concerned, the CIT (A) held that the assessee is entitled to corresponding relief on account of BMC‟s demand of Rs. 55,51,600/-. In this regard, CIT (A) held in para 3.3 that „However, appellant has claimed that in the final year Assessing Officer has not allowed this addition (of Rs.20,46,734/-) to total income from the total project profits and therefore, the amount has suffered double taxation. That year is not before me in appeal. However, this amount cannot be taxed twice and Assessing Officer has to allow it by modifying his order under necessary provisions of law........”. Regarding the core issue of enhancement of profit percentage from 12% to 16%, CIT (A) mentioned that the BMC‟s demand vide letter dated 7.11.2006 should not control the profits of the year under consideration and the same should only effect on the profits of the AY 2007-2008 to which the letter belongs. However, CIT (A) did not appreciate the assessee‟s decision of reducing the profit to 12% based on the BMC‟s claim relatable to the later year. However, in contraction, the CIT (A) gave relief to the tune of Rs. 11,52,523/- for want of evidences. The contents of para 4.3 are relevant in this regard. Aggrieved with the same, assessee is in appeal before us.
During the proceedings before us, Ld Counsel for the assessee filed paper book on 7.4.2014 and 8.9.2016 and relied heavily on the written submissions made before the CIT (A) vide letter dated 10.5.2010. Mentioning about the project, Ld Counsel for the assessee submitted that the Pusalkar project was intended to be completed in nine years time and the same is eventually considered completed in the AY 2007-2008 and the profit percentage of that year is only 10%. Otherwise, the assessee was offering differential percentages of profit varying from 15% to 20% for different assessment years. Referring to the AO‟s reasoning regarding the BMC‟s demand of Rs. 55,51,600/-, Ld Counsel for the assessee mentioned that the accounts of the assessee for the AY 2006-07 are outside to be rectified considering the information available to the assessee at the time of filing of the return of income.
Mentioning about the method of accounting followed by the assessee, Ld Counsel for the assessee submitted that the assessee follows percentage completion method linked to the WIP / cost to the contractors. Under bonafide belief that the profit would be higher than 12%, assessee offered the profits ranged from 15%; 20%; 16%; 12% etc. Assessee has not deviated from the method of percentage completion of the cost being the principle in substance. What is changed is only the percentage of profits qua the cost of the projects up to the year. Mentioning that the CIT (A) is not justified in commenting adversely against the assessee in para 4.3 of his order. He also appreciated the CIT (A)‟s decision in directing the AO to grant relief to the tune of Rs.20,46,734/- in the subsequent assessment year ignoring the fact that he failed to grant relief in the year under consideration.
On the other hand, Ld DR for the Revenue submitted that the assessee did not appreciate that fact of maintaining consistently the method of accounting opted by him for the project (Pusalkar) under consideration. He also submitted that the percentage of profits, to be consistently adopted, is an integral part of the method of accounting. The assessee cannot deviate from the percentage of profits over the years in general, for the AY 2006-07 in particular. Assessee cannot alter / rectify the accounts of the firm already closed, as discussed above. This kind of rectification with the back of the statutory auditors is unsustainable in law. He also submitted that the BMC‟s letter dated 7.11.2006 raising huge demand amounting to Rs. 55,51,600/- being connected to the later assessment year, cannot prompt the management to alter the profits of the year. Otherwise, he relied heavily on the order of the AO / CIT (A). During the rebuttal time, Ld Counsel for the assessee submitted that the contents of para 4.3 are cryptic and the conclusions are confusing and suffer from ambiguity. To demonstrate the same, Ld Counsel for the assessee submitted that the CIT (A) is not allowing the grounds of appeal
in one way and granted relief to the tune of 4% on the other. He also mentioned that directing the AO to grant relief to the tune of Rs. 20,46,764/- out of profits of the next year, which is not before him, is also unfair.
6. We have heard both the parties and perused the orders of the Revenue Authorities and the paper book filed before us. The grounds raised before us relates to the confusion about the confirming of the addition of Rs. 20,46,764/- relatable to the reversal of the excess profits recognised as income in the post period. We have also perused the relevant finding on if the assessee reduced the current year‟s profit based on event (BMC‟s letter dated 7.11.2006) relatable to the next year. CIT (A)‟s finding in this regards reads as under:- “As per the accounting standards also, any claims or penalties payable by contractor arising out of delays or from other causes provided for full disclosure in the financial statements in the financial year in which they occur. Thus, the adjustments, if any, need to be done, then the same may be carried out in AY 2007-2008, in which the event has occurred and the certainty regarding the expense has been achieved (sic).”
7. CIT (A) further held that the auditor‟s report did not contain any disclosure about the BMC‟s notices of demand. What is disclosed is only the decision of the management to scale down the profits to 12%. From the above, it is evident that the sum of Rs. 20,46,764/-, being relatable to the deferential profit rate of 4% for the AY 2005-06, is rectified this year in view of the drop in the overall profits of the project due to BMC‟s huge demands, is the core issue and if the same constitutes proper rectification. We need to decide if the same is permissible in law. We find, there is no dispute on the fact of completion of the assessments of the earlier years to which the said amount of Rs. 20,46,764/- belongs. In our view, this kind of rectification / reversal of entries constitutes the amendment to the account unauthorizedly done by the management and it is outside the Accounting Standard (AS)-7, relied upon by the assessee. In the scheme of percentage completion method adopted by the assessee and the adjustments of this in the earlier assessment years is not proper as the final assessments, if any, can be done in the year in which the project is conclusively completed ie AY 2005-06. We find no mistake in the order of the CIT on this issue. Therefore, in our opinion, the CIT (A)‟s order on this issue is fair and reasonable and it does not call for any interference. Accordingly, grounds raised by the assessee are dismissed.