Tribunal overturns CIT(A) decision, upholds AO's disallowance of reversed profit by real estate developer.

Asst. Commissioner of Income Tax-25 (3) Versus M/s SS Enterprises

Asst. Commissioner of Income Tax-25 (3) Versus M/s SS Enterprises - TMI Issues Involved:
1. Deletion of addition made by the AO of Rs. 6,81,13,165/-.
2. Application of the Revised Guidance Note on Real Estate Transactions.
3. Provision of reversal of profit as per the Income Tax Act, 1961.

Detailed Analysis:

1. Deletion of Addition Made by the AO of Rs. 6,81,13,165/-
The AO noticed that the assessee, a real estate developer, had reduced Rs. 6,81,13,165/- from its Work-in-Progress (WIP) account, claiming it as 'reversal of profits declared in the earlier years on account of estimated loss expected.' The AO disallowed this claim, stating that there is no provision to reverse profits already offered on a year-to-year basis and the assessee could not justify the criteria laid down in the Guidance Note. The CIT(A) deleted the addition, observing that the assessee had consistently followed the percentage of completion method and had correctly recognized the loss as per the Guidance Note.

2. Application of the Revised Guidance Note on Real Estate Transactions
The AO argued that the assessee could not apply the Revised Guidance Note retrospectively. The assessee contended that the Guidance Note allows for the recognition of future expected losses immediately. The CIT(A) supported the assessee's application of the Guidance Note, stating that it can be applied to projects commenced before April 1, 2012, provided it is applied consistently. The Tribunal, however, found that the assessee's workings of total estimated loss were not based on supporting computation and varied widely, thus lacking reliability.

3. Provision of Reversal of Profit as per the Income Tax Act, 1961
The Revenue argued that the Act does not provide for the reversal of profit. The assessee countered that the Guidance Note issued by ICAI, which it followed, allows for the reversal of profits in case of future expected losses. The Tribunal noted that the assessee's claim of reversing profits declared in earlier years was not tenable as it upset the principles of the mercantile system of accounting and the matching principle. The Tribunal emphasized that the reversal of profits should be supported by reliable calculations and evidence, which was not provided by the assessee.

Conclusion:
The Tribunal found that the assessee's workings of total estimated loss were unreliable and unsupported by evidence. Therefore, the order of the CIT(A) was set aside, and the AO's disallowance of the reversed profit of Rs. 6,81,13,165/- was restored. The appeal was allowed in favor of the Revenue.