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Income Tax Appellate Tribunal, INDORE BENCH, INDORE
This appeal by the Assessee is directed against the order dated 27.03.2023 of Commissioner of Income Tax(appeals) National Faceless Appeal Centre (NFAC) for A.Y. 2016-17. The assessee has raised following grounds of appeal:
“1. On the facts and circumstances of the case and applicable law, Ld. CIT(A) erred in sustaining the order passed by Ld. AO u/s 143(3) which is contrary to the material on record and provisions of the Act, unjust and bad in law.
ITANo.216/Ind/2023 S.P. Enterprises 2. On the facts and circumstances of the case and applicable law, Ld. CIT(A) erred in sustaining the addition made by Ld. AO by estimating net profit at the rate of 8% of the closing stock at of Rs. 32,73,637.
On the facts and circumstances of the case and applicable law, Ld. CIT(A) erred in sustaining the addition made by Ld. AO of Rs. 32,73,637 by estimating net profit at the rate of 8% without rejecting the books of accounts u/s 145. 4.On the facts and circumstances of the case and applicable law, Ld. CIT(A) erred in sustaining the addition made by Ld. AO of Rs. 32,73,637 without considering the written submissions and documentary evidences placed on record in proper perspective. 5.The appellant craves leave to add, amend, alter or otherwise raise any other ground of appeal."
2. The Solitary issue arises in this appeal of the assessee is whether the CIT(A) is justified in sustaining the addition made by the AO on the basis of estimation of net profit @ 8% without rejecting books of account of the assessee. The assessee is a partnership firm and engaged in the business of builder and developers. The assessee has carried out the only project under consideration. The assessee filed its return of income on 03.12.2016 declaring total income of Rs.5,76,900/-. During the course of scrutiny assessment the AO noted that the assessee has shown closing stock of work in progress at Rs.4,09,20,456/- whereas the assessee has shown creditors at Rs.2,80,37,623/- which is more than 68% of the closing stock of work in progress. The AO issued show cause notice to assessee to explain method of computation of income declared from real Estate Business and to justify the amount of closing stock of work in progress. The AO also asked the assessee to explain as to why 8% of the closing stock of WIP shown should not be taken as the income over and above income declared Page 2 of 9 ITANo.216/Ind/2023 S.P. Enterprises by the assessee. In reply the assessee explained that apart from booking made by the investors the amount was received as booking amounts of the plots purchased by the actual buyers and shown as sales. The assessee further explained that the flats booked by the investors are being shown in the closing stock of WIP and the booking amount is treated as sales only when the sale deed is executed on further transfer of the flats by the investors to the actual buyers and consequently the closing stock would be reduced with the same amount. The assessee objected to the proposal of the AO for estimation of income at 8% of closing stock of WIP. The AO was not satisfied with the reply of the assessee and proceeded to apply profit @ 8% on the closing balance of WIP while passing the assessment order. Aggrieved by the order of the AO the assessee filed the appeal before the CIT(A) but could not succeed.
3. Before the Tribunal Ld. AR has submitted that the assessee has declared the sale in respect of the flats sold through registered deeds but the flats booked by the investors through agreement to sell are shown in the closing stock of WIP. She has pointed out that the only when the investors sell the flats to the actual buyers and assessee executes the sale deeds in favour of the subsequent buyers the sale is declared by the assessee and the amount is reduced from the closing balance of WIP. The Ld. AR has referred to the schedule- G to the balance sheet and submitted that the closing stock includes opening stock of Rs.4,00,14,446/- and only Rs.9,06,020/- is the addition during the year under consideration.
ITANo.216/Ind/2023 S.P. Enterprises Ld. AR has further contended that the assessee explained and furnished all the details regarding the booking, subsequent cancelation of bookings and amounts refunded to the buyers. Therefore, the booking which was cancelled and amount was refunded cannot be taxed. She has referred to the ledger account showing the transactions of booking as well as refund to buyers. Thus, Ld. AR has submitted that the closing stock comprising of the flats yet to be sold and the details of these flats shown in the closing stock of WIP are given at page no.67 of the paper book. Most of flats shown in the closing balance of WIP were booked and the amounts were received from the investors. The assesse declared the sale only when the investor sells the flat to the ultimate buyer and assessee executes sale deed in favour of actual purchaser. Thus, the Ld. AR has submitted that when the assesse is declaring the sales whenever these flats are finally sold then the assessing the income by estimating of income of these flats is not justified.
On the other hand, Ld. DR has submitted that the assessee is understating the sales in the garb of showing sold flats in the closing stock of WIP. He has further submitted that once the assessee has sold the property to the investor the transaction of sale qua the assessee is completed and only post sale obligation having no bearing on the income of the assessee a sale deed is executed in the name of subsequent purchaser/buyers from the investors but the same would not alter the transactions of sale on the part of the assessee to the investors. He has further submitted ITANo.216/Ind/2023 S.P. Enterprises that the assessee admitted the fact that the project was almost completed and the assessee received the booking of almost entire project during the year under consideration except few cancellation of booking. Therefore, the sale to the extent of booking which were not cancelled during the year under consideration would be taxed for the year under consideration. He has further submitted that the CIT(A) called for a remand report on the submissions and explanations submitted by the assessee and after considering the remand report of the AO the addition on this account is upheld. He has reiterated his contention that the assessee has not disputed the fact that the project was almost completed during the year under consideration and only in some cases registration was not executed but the payment was already received and therefore, the sale transactions was completed in respect of those flats where the assessee accepted the booking through agreement to sale. Ld. DR has pointed out that the assessee has shown 68% of the total closing stock of WIP as creditors which is not as per law particularly when the amount was received by the assessee against booking of flats. He has relied upon by the orders of the authorities below.
We have considered rival submission as well as relevant material on record. The assessee has developed a residential project namely “Jai Shri Shyam Hights” Village Bicholi Mardana, Indore. The assesse had declared sales only in respect of the flats for which sale deeds were executed by the assessee during the year under consideration and the remaining flats are shown in the ITANo.216/Ind/2023 S.P. Enterprises closing stock of WIP. The AO noted that the assessee has shown 68% of closing stock of work in progress as creditors. The AO issued show cause notice to assessee to explain method of computation of income declared from real Estate Business. It was explained by the assesse that the booking accepted from the investors is not treated as sales until and unless the investor further sales the said property to the actual buyer and only when the sale deed is executed in favour of the actual buyer the assessee recognized the sales. We find that the assesse is accepting bookings for sale of flats through agreement to sale but the said booking is not declared as sales and the same is shown in closing stock of work in progress at cost price. This modus operandi of the assessee is not acceptable because the transactions of sale is completed when the assessee received full sale consideration from the so called investors and executed an agreement to sale. A subsequent transaction of sale by the investor in favour of the purchaser is only a transaction between the investor and the subsequent buyer. The role of the assessee is in the subsequent transaction of sale is only to execute the sale deed in favour of the purchaser. This arrangement does not result any income or business transaction of the assesse but this is merely an arrangement to avoid stamp duty at the time of sale through agreement to sell. Once the assessee receives sale consideration and executes the agreement to sell then the flat sold through the agreement to sale cannot be shown in WIP at cost. The transactions of sale between the assessee and the investors are completed when the assessee received sale consideration and ITANo.216/Ind/2023 S.P. Enterprises executed an agreement to sale in favour of the investor/purchaser. Thus only where the booking is subsequently cancelled the same would not be considered as sale but if cancellation happen in the subsequent year then the same would be shown as sales return in the subsequent year and appropriate treatment is to be given in the books of accounts. Therefore, we do not find any substance in the contentions of the assessee that until and unless the investor sells the flat to the actual purchaser and assessee executes the sale deed transactions of booking of flat cannot be considered as sales. It is not a case of accepting the booking at a token amount but the assessee received full consideration and the subsequent sale deed executed by the assessee on the behest of the investor cannot be regarded as business transaction of the assessee. The CIT(A) has considered this issue in para 11 to 15 as under: “11. The submission of the appellant has been gone through. The appellant has itself stated that all the documents were placed before the AO, and the AO in remand report has also stated that the then AO in assessment proceedings had considered all such submissions including the ledger accounts of various parties and registries. The appellant has stated that it is consistently following mercantile system of accounting. The appellant is contending that no adverse view was taken on purchase, sale of opening stock then why closing stock is doubted and further, the books of accounts were also not rejected, as per section 145.
It cannot be denied that most units in the closing stock were sold and in this line of business, payments are received in this manner only and hence, the huge piling up of creditors is not possible. In this background, the estimation of profit @ 8% over and above the profit declared by the appellant even without explicitly rejecting books of accounts u/s 145, is accordingly, held to be justified. It is not leading to double addition as AO is Page 7 of 9 ITANo.216/Ind/2023 S.P. Enterprises not disturbing the closing stock. Further, it is strange that remaining list of 18 parties, are being able to furnish reply through the appellant, only now, with such a delay despite many being family members of the partner, with "deals" showing "cancelled" in most of the cases. Thus, entire description shows that AO was justified in his stand for rejecting the claim of the appellant even during remand report stage.
In the case of MC Puri vs. ACIT, 69 taxmann.com 313 (Chandigarh-ITAT) (2016) - where there was a book entry for sundry creditors, profit should be estimated at a little higher rate or a separate addition for creditors should have been made since the AO himself had not made a separate addition for creditors, considering the peculiarity of this case, the profit should be estimated @ 11% - Held, in favour of Revenue.
In view of above facts, as the appellant has already received payments as per his own submission dated 20-11- 2018 but still showing huge creditors standing in the account, the same was rightly held to be not commensurate with its following of 'Percentage Completion Method', as per accounting standards.
In view of above discussion, the estimated addition of 8% profit on WIP, keeping in view of "creditors", made by the AO is held to be reasonable, more realistic and hence, is confirmed and accordingly. Ground Nos. 1 and 2 of the appellant are dismissed.”
The CIT(A) has considered all the relevant facts as well as the remand report of the AO while confirming addition made by the AO. In view of the facts and circumstances discussed above we do not find any error or illegality in the impugned order of the CIT(A) to the extent of estimation of income on the sales done by the assessee through agreement to sale except the transactions where the booking was subsequently cancelled. Accordingly for limited ITANo.216/Ind/2023 S.P. Enterprises purpose of recalculation of the sales after reducing the booking subsequently cancelled the matter is remanded to the record of the AO to verify the relevant record and then considering the relief to the extent of booking got cancelled.
In the result, appeal of the assessee is partly allowed for statistical purposes. Order pronounced in the open court on 21 .02.2024.