TaxTMI 
TaxTMI 
2013 (8) TMI 483
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....Department. Toward this, he would place on record the copies of the assessment orders u/s. 143(3) for the assessment years 1997-98, 2001-02 and 2004-05 (PB-III/ Pages 27-38). For the year under reference, the assessee has returned profit on two projects, viz. 'Sai Swar' & 'Sai Sthaan', commenced during the previous years relevant to AY 2004-05 & 2006-07, at Rs. 64,12,084/- and Rs. 47,90,899/- respectively. This is possible as the assessee maintains separate accounts, projectwise, drawing separate operating statements, which are then consolidated to arrive at the operating results for the year. While the Assessing Officer (A.O.) leaves the profit of the project 'Sai Swar' undisturbed, assessing it as such, he has, following his own method, computed the same for the 'Sai Sthaan' project at Rs. 6,79,52,123/-, thereby making a huge addition of Rs. 631.61 lacs. For this, he would take us to, firstly, the computation of income (PB-I/ Pages 52-54), and then to the relevant part of the assessment order. The basis of the AO's action is that the Occupancy Certificate (OC) for this project stands received in this year. i.e., 12.09.2008, signifying the compl....
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.... incurred toward project completion, need to be made. This necessarily involves revision of profit estimate, and being made bona fide, could not be impugned on that score. This is on account of the very nature of the work, the project work, spreading across years, while the profit attributable to each year has to be estimated and subject to tax. He would then take us to the profit working by the A.O., which is at pages 15-19 of the assessment order. He has proceeded, he continued, on the basis that the project is complete, and this was the final year of the project. Accordingly, he has brought the entire income on the project, save the flats unsold, to tax for the current year. There is no correspondence, as would be readily seen, between the figures of the opening and closing stock-in-trade. The OC does not signify the completion of the project, but only of the civil construction. Though, therefore, possession, could be given, as it indeed has been; the construction being inhabitable, work on common areas, viz, stairways, lifts, parking space, etc., and consequentially expenditure thereon, could yet remain. This is also evident from the fact that expenses to the tune of Rs. 123.75....
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.... he would submit that the land cost represents 20 % of the total land cost, the balance having been expensed in two installments of 40% each during the A.Y. 2007-08 and 2008-09, being the 2nd and 3rd year of the project respectively. The cost of the utilities, however, represents that entire cost of utilities on the project, and which though stands incurred earlier, stands expensed, as per regular accounting practice, only in the final (terminal) year. On being further inquired if the assessment for A.Y. 2011-12 (f.y. 2010-11) has been made, and if so, the profit rate adopted, he would clarify that the return for that year was filed only on 28.03.2012, and its assessment was pending. 2.3 The ld. DR was equally vehement in pleading the Revenue's case. It is apparent from the assessee's working that there is no basis to it; the assessee taking refuge in the vague and imprecise words 'market perception'. It is in this view of the matter that the AO, finding, in contradiction to the assessee's claim with respect to receipt of OC, that two projects, 'Sai Swar' and 'Sai Sthaan' on which the profit had been disclosed in the main for the current year,....
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....is no question of consistency here, as the assessee is not following any definite or proper method, so that the principle of consistency, as explained in the case of Radhasoami Satsang vs. CIT [1992] 193 ITR 321 (SC) and Gopal Purohit vs. Jt. CIT [2009] 20 DTR (Mum.) (Trib.) 99, being relied upon by the assessee, would not apply. The principle of res judicata, it is trite, is not applicable to the proceedings under the Act. Reliance was placed by him on New Jhangir Vakil Mills Co. Ltd. vs. CIT [1963] 49 ITR 137 (SC) toward the same. With regard to the assessee's contention that the matter is essentially a timing dispute, he continued, the same would be of no consequence, as income of each year is to be brought to tax for that year. In fact, most of the disputes in tax matters relate to time or the correct year of taxability (or deduction). All adjustments to the closing stock would stand to be offset subsequently, so that there is only a timing difference, as also in the case of depreciation. Why, the difference between the revenue and the capital expenditure itself, would again boil down to one of time, as most capital expenditure is subject to depreciation, so that ultimately....
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....eceding year (A.Y. 2008- 09) and, in fact, further plummeted to Rs. 11.28 lacs for the following year (A.Y. 2010-11), whereat in fact hardly any work remained to be completed on the project, disclosing a huge profit for the terminal year, whereat again hardly any work had been executed, so that the charge of arbitrariness in reporting profit was not without substance, would rely on the adequacy of the profit as finally disclosed, stating that it is not a case of an enterprise disclosing a profit percentage in the range of 8 % to 10 %, but a healthy profit of as much as 28%, furnishing a statement of the disclosed profit on the project for the year, and that on the entire project, also tabulating the corresponding costs, reproduced as under: (Table 'C') Financial Year WIP during the year (excluding profit and indirect income) Net Profit Offered % of Profit on WIP 2008-09 2,99,43,123 47,90,890 16.00 Total 25,35,93,504 10,19,92,356 40.22 % of F. Y. 2008-09 to Total 11.81 4.70 Findings 3. We have heard the parties, and perused the material on record. 3.1 The first thing that needs to be determined b....
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....ost/s incurred, that it could be said that the cost incurred forms the basis of the income, and that, therefore, the cost plus method becomes applicable. It is as under these circumstances once the cost stands incurred, or certified to be so, for which a periodic review is contractually envisaged, income in the prescribed rate inures. This method is generally followed in construction or other large civil-mechanical projects, spreading across a number of years, over which costs cannot be anticipated accurately, so as to insulate or largely so the contractor, who has in any case, or has right to be, remunerated for his labours, and which is defined as a rate of cost (or specified costs), incurred. A variant of this model is the cost escalation clause in multi-year projects. Additional charges are provided for being raised on the cost, or such of it over which the contractor has little control, increasing beyond a specified limit from that as envisaged while finalizing the contract. The present case is of a builder, as is generally the case in the construction business, who builds for the public at large (or a particular segment of it), selling his wares through the open market route.....
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....d rewards of ownership, i.e., as are associated with the ownership of the property. The price risk is considered as one of the most significant risks in the real estate business. Transfer of legal title or possession is generally considered as a transfer of all significant risks and rewards incident to the property. Similar would be a case where legally enforceable agreement/s for sale with the buyers is entered into, in which case there would be a transfer of beneficial ownership, warranting recognition of income, even if there has been no passing of legal title or possession. The qualifying criteria is, thus, that the buyer has the right to sell or transfer his interest in the property without any condition or subject only to such conditions which do not materially effect his rights in the property. It is only under these premises that the assessee has been disclosing the profits on his different projects from year to year. Clearly, there is no question of any income unless the sale or transfer has taken place, so that the builder-seller retains no effective control of the real estate, i.e., to the degree as usually associated with the ownership, which is thus beneficially tra....
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....In this, the revenue is recognized straightaway on the percentage completion (as at the year-end) as certified by the architect/valuer. For example, if a project is 40% complete, 40% of the project sale value is accounted for as income, bringing effectively the additional income for the year to the fore inasmuch as a similar exercise would also have been made as at the end of the immediately preceding year. Of course, consideration as to whether the entire project is sold or not is made, so that if the project is unsold to any extent, no income relatable thereto is taken into account, and cost in its respect is carried over as WIP. Accordingly, if in the example afore-stated, 90% of the project only is sold out, only 40% thereof is taken to income account, setting it off against 90% of the costs incurred, carrying over the balance 10% as stock. This method can be said to be technically inferior to that described in the earlier part of this para inasmuch as it does not take into account any anticipated increase/s in the input costs. This is as the same would remain to be considered to the extent they pertain to the project yet to be completed, i.e., the balance 60%, while, as clarif....
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....since which the project stands commenced. Of course, if some sales are generated during the year, income thereon - to the proportionate extent - has to be accounted for. This is despite the fact that the project had been already completed to an extent prior to the beginning of the current year. This would once again emphasize as to why, though no doubt having a proximate and direct relationship with the costs incurred during the year, so as to be computed with reference thereto, the profit as disclosed cannot be solely attributed to the cost incurred during the year. What, for example, if there is a sudden depression in the real estate market. If the Management considers that it cannot hold on to the project, the subsequent sales would have to be necessarily estimated at the going market rate. The same, if lower than the cost as anticipated, would impact the valuation of the WIP. This would depress the overall profit, which though, as evident, has no direct relation with the costs incurred during the year, i.e., the incremental WIP for the year. Coming back to the AO's working, he has proceeded just in the manner he ought to have or substantially so. Whether the OC signifies....
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...., is the only valid basis, even as, as explained earlier, the profit is to be arrived that not on the basis of profit rate, either with reference to cost or sales, but as actually accrued, i.e., as a difference between the revenue/s accrued and the costs toward the same, including a provision for that for which the bills are yet to be received and accounts not finalized. 3.4 As such, all that therefore needs to be done is to provide for the costs yet to be incurred (as at the end of the year), which could be fairly assessed, having been incurred, or contracts in their respect entered into up to the date of finalization of the accounts for the current year. The income could be proportionately booked, i.e., excluding the project not yet sold. As such, in principle, we find nothing wrong in the computation algorithm followed by the AO. Further, as afore-stated, a provision for contingencies, say @ 5% to 10% for costs yet to be incurred, could be provided. Again, some further provisioning may be required if the Management considers that the remaining project may not be sold in near future, i.e., there exists significant uncertainty as to its actual sale, which though would only be s....
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....by merely postponing the incurring or booking of some minor costs. It is only toward the project unsold that revenues thereon would not be booked. Accordingly, to this extent, the entire shortfall in the accounting would necessarily find reflection and resolution in this, i.e., the terminal, year. As such, we cannot under the given facts and circumstances, subscribe to the AO's method as well. The assessee has furnished a revised chart (Table C) by eliminating the profit included in the valuation of the closing stock, so that it is valued at cost, which shows the profit on the project at 40.22% of the total cost. In view of the fact that some percentage of the total cost remains to be incurred as at the year-end, which though could be fairly assessed, in our view, adopting the said percentage (of course upon verifying the same to be correct) to the incremental cost for the year would be a fair assessment of the profit arising for the current year. As the assessee has booked the cost of land and utilities in some years, in preference to others, without furnishing any explanation for the same, much less a reasonable one, in our view, the cost of land and utilities, i.e., the basi....