Tribunal directs AO to apply 40.22% profit ratio to 'Sai Sthaan' project WIP

The tribunal directed the Assessing Officer to verify and apply the profit ratio of 40.22% to the incremental Work-in-Progress for the 'Sai Sthaan' project, including a proportionate allocation of basic costs. The assessee's method was accepted with correctives for the 'Sai Sthaan' project, while no adjustment was required for the 'Sai Swar' project. As a result, the assessee's appeal was partly allowed.

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Issues Involved:
1. Validity of the Assessee's Method of Accounting.
2. Correctness of the Profit Disclosed for the 'Sai Sthaan' Project.
3. Adjustment of Profit for the 'Sai Swar' Project.

Issue-wise Detailed Analysis:

1. Validity of the Assessee's Method of Accounting:
The assessee, a real estate developer, followed the percentage completion method for accounting, which is recognized under both accountancy and law. The percentage completion method aligns with Accounting Standard (AS)-9 and Section 145 of the Income Tax Act, 1961. However, the assessee's claim of also adopting the cost-plus method was found to be incorrect. The cost-plus method is typically applicable in scenarios where income is contractually linked to costs incurred, which was not the case here. The assessee's income varied significantly year-to-year, indicating that the cost-plus method was not consistently applied. The tribunal acknowledged the percentage completion method but emphasized that the assessee must report true and fair operating results, and the Assessing Officer (AO) is authorized to make adjustments if the disclosed profits do not reflect the correct operating results.

2. Correctness of the Profit Disclosed for the 'Sai Sthaan' Project:
The AO computed the profit for the 'Sai Sthaan' project at Rs. 6,79,52,123, significantly higher than the Rs. 47,90,899 disclosed by the assessee. The AO's basis was the receipt of the Occupancy Certificate (OC) indicating project completion. The tribunal noted that the OC signifies the completion of civil construction, not necessarily the entire project, as common areas might still be incomplete. The tribunal found the assessee's profit disclosure arbitrary and lacking a clear basis. The assessee failed to provide a consistent method for estimating profits, often citing vague terms like 'market perception.' The tribunal directed the AO to verify the profit ratio of 40.22% on total costs as claimed by the assessee and apply it to the incremental Work-in-Progress (WIP) for the current year, including a proportionate allocation of basic costs like land and utilities.

3. Adjustment of Profit for the 'Sai Swar' Project:
The AO accepted the profit disclosed by the assessee for the 'Sai Swar' project. The tribunal found no basis for the assessee's grievance regarding this acceptance. The AO had disturbed the reported profits based on the receipt of the OC, which the assessee argued did not indicate project completion. The tribunal considered the matter factual and noted that costs were incurred subsequently, making the year indeterminate as the terminal year. The tribunal upheld the AO's adjustments in principle but found them selective, leading to profit distortions across years. Consequently, the assessee's method, with some correctives, was directed for application. No adjustment was warranted for the 'Sai Swar' project since the AO made no changes to the returned profit, and the terminal year adjustments would be necessary for the final year, which was not the current year for 'Sai Swar.'

Decision:
The tribunal directed the AO to verify and apply the profit ratio of 40.22% to the incremental WIP for the 'Sai Sthaan' project, including a proportionate allocation of basic costs. The assessee's method was accepted with correctives for the 'Sai Sthaan' project, while no adjustment was required for the 'Sai Swar' project. The assessee's appeal was partly allowed.

Result:
The assessee's appeal is partly allowed.

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