2001 (8) TMI 281 - AT - Income Tax

Tribunal sets aside CIT(A)'s order on profit computation, emphasizes cost spreading over saleable area

The appeal was partly allowed, with the Tribunal setting aside the CIT(A)'s order on profit computation and remanding the matter to the AO for fresh ... Method Of Accounting, Project Completion Method Issues Involved:1. Computation of profits for the assessee engaged in land development and sale of plots.2. Applicability of section 145(1) for determining true profits.3. Justification of profit rate applied by CIT(A).4. Disallowance of various expenses.5. Charging of interest u/s 215/217.Summary:1. Computation of Profits:The main issue pertains to the computation of profits for the assessee engaged in the development of land and sale of plots. The assessee followed the project completion method, showing the sale consideration as a liability and development expenses as work-in-progress, resulting in no profit being declared for the year. The Assessing Officer (AO) rejected this method, arguing that profits should be assessed in the year of sale, not deferred, and made an addition of Rs. 6,65,204.2. Applicability of Section 145(1):The CIT(A) invoked section 145(1), disagreeing with the AO's profit determination but applying a profit rate of 12.5%. The Tribunal upheld the invocation of section 145(1), stating that the project completion method does not allow for the true and correct profits of each year to be deduced. The Tribunal emphasized that income accruing in one year cannot be deferred to future years, aligning with the Supreme Court's stance in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT and CIT v. K.C.P. Ltd.3. Justification of Profit Rate Applied by CIT(A):The Tribunal found no basis for the CIT(A) to apply a profit rate of 12.5%, as no comparable cases were cited. The Tribunal directed that profits should be determined by spreading the estimated cost of development over the saleable area of the plots, following the Supreme Court's decision in Calcutta Co. Ltd. v. CIT.4. Disallowance of Various Expenses:The Tribunal upheld the disallowance of Rs. 15,313 on traveling expenses, Rs. 9,740 on other traveling expenses, Rs. 3,693 on car repairs and maintenance, Rs. 6,546 on car depreciation, Rs. 4,097 on telephone expenses, and Rs. 63 on donations, finding no merit in the assessee's arguments.5. Charging of Interest u/s 215/217:The issue of charging interest u/s 215/217 was deemed consequential, with the AO directed to recompute the interest after giving effect to the Tribunal's order.Conclusion:The appeal was partly allowed, with the Tribunal setting aside the CIT(A)'s order on profit computation and remanding the matter to the AO for fresh determination, ensuring the fresh working of profits does not exceed the amount determined by the CIT(A).