TaxTMI 
TaxTMI 
2013 (11) TMI 1681
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....sue:- "(a) Whether on facts and circumstances of the case and in law, the Ld.CIT(A) justified in holding that the rejection of books of account in terms of Sec.145 of the Income Tax Act, 1961 was not justified without appreciating the fact that the assessee has failed to recognize revenue in terms of revised Accounting Standard, wherein revenue has to be recognized in the year in which it has earned and the same cannot be postponed to future. (b) Whether on facts and circumstances of the case and in law, the Ld.CIT(A) justified in deleting the addition of Rs. 3,36,35,031/- on account of income from the Ganga Tower II project, holding that it cannot be taxed in the current year, when the facts of the case show that even under project completion method, income is taxable in the current year as the project of the assessee is 67.32% complete. The Ld.CIT(A) has erred in observing that Assessing Officer made no attempt to show that substantial part of the project is complete. Further CIT(A) has erred in holding that no income from the project can be taxed in the current year as such income has been offered to tax in the subsequent year as is the present case. (....
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....e assessee under execution and in the return of income, profit of three projects namely Gopala, Atur Park and Kukreja Plaza aggregating to Rs. 35,41,190/- was offered by the assessee on estimated basis. The method of accounting stated to be followed by the assessee was mercantile and the Revenue in respect of three projects namely Atur Park, Gopala and Kukreja Plaza was claimed to be recognized by following percentage completion method. The Revenue from other projects was claimed to be recognized on project completion basis. According to the A.O., the revised Accounting Standard - 7 (AS-7) was notified and made effective from A.Y. 2004-05 and the profit of the assessee, therefore, was liable to be determined as per the said standard. He, therefore, required the assessee to furnish certain details relating to its projects under execution during the year under consideration. As stated by the A.O. in his order, the assessee however, did not produce some of the material details required by him and furnished only some details and that too at the fag end of the assessment proceedings. He also noted that different methods of accounting were adopted by the assessee to recognize the income ....
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....d method of accounting thereafter or that he has in fact adopted it thereafter, that satisfies the requirement of section 145. Neither principle nor authority bars an assessee from substituting one method of accounting for another at his choice. A change in the method of the assessee's choice or the application of the first proviso to section 145 (1) [Indo-Commercial Bank Ltd. v. CIT (1962) 44 1TR 22, 36, 37 (Mad); Forest Industries Travancore Ltd. v. CIT (1966) 61 1TR 395 (All); Dr. ITR 329 (Ker); New Victoria Mills Co. Ltd. v. CIT (1966) (ITR) 395 (All); Once. having so changed the method of accounting, if the assessee continues with the changed method, it becomes his regularly employed method within the meaning of section 145(1) and the Assessing Officer is bound to base his assessment on the changed method provided that income can properly be deducted from such method. If, however, the changed method is not followed regularly by the assessee, the taxing authority cannot fall back upon the earlier method of accounting. This is so because in such a case it cannot be said that the assessee had followed the earlier method regularly in view of the intermediary changed method ....
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.... back upon the earlier method of accounting. This is so because in such a case it cannot be said that the assessee had followed the earlier method regularly in view of the intermediary changed method of accounting. Such a case will be a case falling under section 145(2) where no method of accounting has been regularly employed by the assessee entitling the assessing authority to make an assessment in the manner provided in section 144 (Reform r Mills P. Ltd. V. CIT (1978) 114 1TR 227, 230 (Cal)" (v) The assessee has not followed the method of accounting regularly and has been changing the method of accounting from completion method to percentage method and then again, completion method for a particular project, and even in the percentage completion method, the rates are varying from year to year in the same projects. The assessee firm has estimated percentage of profit, which are even different in every year on the same project, and applied the said percentage on the work carried out during the year. (vi) The said method cannot be accepted because it is pt bringing the real income of the respective year for tax. Tax statutes require taxing the real income of the y....
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....ect. The assessee has adopted a method of accounting, which is partially applied on some projects and not applied at all on one project viz. Ganga Tower II. As has already been stated earlier that where the assessee has substantially realized the construction work carried out by it by making agreements and receiving considerations under such agreements, the taxability of income on such estimation of profit on such receipts cannot be allowed to be postponed. 6.3 The assessee has not offered any profit on the sales consideration/ realisation from the Ganga Tower II project. The income under the percentage completion method discussed here-in-above is required to be computed in respect of the Ganga Tower II project. As has been discussed in the foregoing paragraphs, inspite of opportunities provided, the assessee has failed to or deliberately avoided furnishing the information and evidences regarding the projects called for vide notice u/s 142(1) issued on 10.11.2006. Even whatever sketchy and incomplete information is provided by the assessee, it has been provided only at the fag end of the year just a few days before the limitation date thereby closing all the paths to explore the....
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....rofits of Gopala project are also computed as under: Total area constructed/under construction 45094 sq. ft. Total area sold upto 31-3-2003 31090 sq. ft. Total sales consideration of area sold Rs. 9,98,96,050 Average rate of booking made during the year Rs. 1,675 (average of first three and last three bookings Total estimated sales Rs. 12,33,52,750 (45094-31090)* 1675 + 99896050 Total projected cost Rs. 7,89,68,646 As available from Records Total estimated profits Rs. 4,43,84,104 Total cost of project as on 31-03-2004 before profit Rs. 7,26,85,990 92.04% of estimated profits Less: profits declared till 31-3-2003 Rs. 51,50,493 As per assessee's Submissions Profits taxable in this year Rs. 3,57,00,636 7.2 From the above chart, it can be clearly seen that the total estimated sales have been computed taking into account the area already sold by the assessee at the amount of sale consideration shown by the assessee and the additional area has been valued at average bookings price for the year. Thus a fair and just estimate of the total projected sa....
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....its for the year Percentage of the above cost to total projected cost 88.89% Profits upto 31-3-2004 Rs. 4,20,72,643 88.89% of estimated profits Less: profits offered to tax upto 31-3-2003 Rs. 1,53,68,452 As per assessee's submissions Profits taxable in this year Rs. 2,67,04,191 8.3 Thus, the profits of Kukreja Project taxable in the year under consideration are computed at Rs. 2,67,04,191/-. Since the assessee has concealed the particulars of its income/furnished inaccurate particulars of the income, penalty proceedings u/s 271(1)(c) of the Act are hereby initiated. 9. Atur Park Project 9.1 Regarding the Atur Park Project, the assessee has shown the opening WIP at Rs. 17,63,91486/-. On the additions to the cost of project during the year shown at Rs. 4,96,468/-, the assessee has offered profits @ 12.5% at O697-.oeflsof the total area of construction, projected sales, projected profits, area sold, rate of sale, no. of flats constructed/sold, etc. have been furnished by the assessee. It is gathered from the records that the opening Work-In-Progress includes the WIP of three projects viz. Ganga Tow....
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....he assessee has not shown any profit from this project in the year under consideration which is clear evasion and concealment of income. 10.3 It has already been established in the foregoing paragraphs that the assessee is not following correct method of accounting whereby., correct profit is not being declared and as a result of this, the book result has been rejected. When the project was already completed as on 31.03.2004, there was no question left regarding method of accounting to be adopted as the profits of the entire project which was completed during the year were to be compulsorily included in the total income by the assessee on its own. When the book results have been rejected and the project has already been completed, postponement of the taxability of income as per assessee's own convenience is not allowed under the law. 10.4 Hence, the profit of the project is taken at Rs. 3,00,22, 193/- and added to the total income of the assessee. Since the assessee has concealed the particulars of its income/furnished inaccurate particulars of the income, penalty proceedings u/s 271(1) (c) of the Act are hereby initiated." Accordingly, the income of the assessee from ....
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....ccepted by the department and only in respect of two projects which were newly started i.e. Madhuri - started in asst. year 2001-02 and completed in asst. year 2003-04 and Ganga Tower-Il - started in asst. year 2002-03 and completed in asst. year 2005-06, the firm has adopted the completion method, which is also accepted by the department in the asst. year 2001-02, 2002-03 and 2003-04 in which Madhuri project was completed and there is no basis for this finding that some times revenue is recognized on the basis of percentage of completion method and some times on the basis of completion method. Regarding the argument of the Assessing Officer on parà 4.3 of his order is that revised Accounting Standard - 7/2002 (wrongly mentioned by the Assessing Officer as AS-7/2 000) issued by the Institute of chartered Accountants of India is applicable on the appellant firm, the learned AR of the appellant stated that this Accounting Standard is applicable only on the Contractors as in the scope of the Accounting Standard, it is clearly mentioned that 'This Statement should be applied in accounting for construction contracts in the financial statements of contractors." The appellan....
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....po & Co. Pvt. Ltd. - 131 CTR 203 (Bom) (iv) D. K. Enterprises v. ITO - 39 ITD 394 (ITAT - Bombay Bench) (v) Shapoorjl Pallonji & Co. (Rajkot) (P) Ltd. v. ITO -- 49 ITD 479 (Bom) (vi) ITO v. W. D. Estate (P) Ltd. - 45 ITD 473 (Bombay) (vii) Happy Home Developers v. ACIT- 115 Taxman 309 (Bombay) (viii) Magnum International Trading Co. (P) Ltd. - 84 ITD 113 (TM) (Del) (ix) H. M. Constructions v. JCIT -- 84 ITD 429 (Bangalore) (f) For change in method of computing profit, the learned AR relied on following decisions - (i) Calcutta High Court in the case of Snow White Food Products Co. Ltd. V. CIT -- 141 ITR 861, wherein it has been held that when it is found that an assessee has changed his regular method of accounting by another recognized method and he has followed the latter regularly thereafter, it is not open to the AO to go into the question of bona fides of the introduction and continuance of the change. (ii) CIT v. A.V. Appu Chettiar -- 45 ITR 152 (Madras). In this case, the method of valuation of stock has been changed. New method of stock valuation cannot be rejected merely because there wo....
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....gain the issue was that AO has not accepted the profit declare @ 10% of the work in progress in respect of all four projects and mad the addition of Rs. 3,15,94,761/- which has been deleted by the Id. CII(A) and the appeal of the department is dismissed by the Tribunal. (Page 323-326). (iv) Order dated 23-8-2006 passed by the Tribunal in the case of group concern M/s Motiram Tolaram for asst. year 2000-01. (Page Nos. 327-328). (v) Order dated 19-3-2003 passed by the Tribunal in the case of four group concerns for asst. year 1995-96. (Page Nos. 329-334). 9. In addition to the above submissions, the action of the A.O. in rejecting its books of account was also challenged by the assessee by submitting that it had maintained all the books of account which were audited and even the tax audit report was obtained. It was contended that no defect was pointed out by the A.O. in the books of account maintained by the assessee and even the defect pointed out by the A.O. in respect of method of accounting adopted by the assessee was not based on the actual fact of the case. 10. The assessee also filed additional evidence before the ld. CIT(A) in support of its case and ....
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....method from that of the preceding previous year. In respect of revenue relating to construction work-in-progress, it was stated that the same is determined on percentage completion method of the Atur park, Gopala and Kukreja Plaza projects. In as far as Ganga Tower II project, it is stated that the revenue will be determined on completion, contract basis. The AO also observed that the appellant has been following mercantile system of accounting but has been determining the revenue in respect of various project some times on the basis of project completion method and some times on percentage completion method. It was also observed that the revised Accounting Standard AS7 (2002) was notified by the ICAI and made effective from the A.Y. 2004-05 in respect of construction contracts. He was therefore of the view that the assessee should have determined the profits for the year in respect of various projects having regard to the said revised Accounting Standard. He there fore proceeded to estimate the profit for the year on the basis of total estimated sales as prescribed by the revised Accounting Standard. 2. In this regard, it may be mentioned that since the accounting standards ....
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.... of the relevant year and such pro-rata profit has to be treated as profit for the year after reducing such pro-rata profit completed upto the immediately preceding year. Accordingly, the assessing officer proceeded to work out taxable profit in respect of each project on the same lines as enunciated in the revised Accounting Standard 7 (2002) for recognizing revenue and expenses. 4. It is observed that as per Annexure-8 of Tax Audit Report, the assessee has shown the opening work-in-progress, cost of construction, estimated profit and closing work-in-progress for the year as under: - Project Opening WIP Cost of construction Rate of Est. profit Estimate profit Closing WIP Gopala 57841957 14844033 20% 2968807 75654797 Atur Park 176391486 496468 12.5% 62058 176950012 Kukreja Plaza 158358429 (Less: WIP of K. Star Hotel -35035247 Net of Kukreja Plaza 123323182 20277538 20% 510325 126385133 Ganga Tower II 31214273 20277538 - - 51491811 It is also seen that ....
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....onsistency in the manner of projecting profit from project to project within the same accounting year itself. Therefore, the A.O. has correctly worked out the profit on the basis of total estimated sales in respect of this project as has been done in the other 3 projects, namely Gopala, Atur park and kukreja Plaza projects. As has been narrated in paras 2 & 3 above, the assessee has not observed the said revised Accounting Standards to arrive at the profits of each of the projects during the year and there being no consistency in the method of accounting employed, the assessing officer was right in rejecting the book results and estimating the profits of the projects on the estimated sales basis as has been done in the assessment order at paras 6,7,8 & 9 which is on the basis of the revised Accounting Standard. Thus, the assessee's contention as offered in its letter dated 14-03-2007 may not be accepted." 12. When the remand report of the A.O. was confronted by the ld. CIT(A) to the assessee, the later filed a letter dtd. 16-2-2009 offering his comments on the remand report of the A.O. as under:- "5.16. In para 2 of the remand report, the Ld. AO has again repeated t....
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....n repeated the finding given in the assessment order that the firm sometimes follows completion method and sometimes follows percentage of work in progress method which is not justified in law. 5.17 In para 3 of the remand report, the AO has stated that Accounting Standard (AS) 7 is applicable or AS 9 is applicable and accordingly, the firm should compute the profit on the basis of percentage of work in progress every year and not on completion method. Appellant's submissions (6) As already submitted in our above said written submissions, in para 3.1 and 3.2 under Ground No.2, AS-7 is not applicable on the builders but it is only applicable to contractors, as it is clearly mentioned in AS- 7 that "this Statement should be applied in accounting for construction contracts in the financial statements of contractors." (7) In this remand report, the AC has raised a new issue that AS-9 is applicable to the cases of Real Estate Developers wherein the revenue is to be recognized in the year in which it has arisen and as per the said AS-9, revenue is to be recognized when risk and reward are transferred. In the case of the firm, when the projects are under construction, the ....
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....eason to reject the books of accounts u/s 145(3). 5.19 Vide letter dated 15th April, 2009, the appellant further reiterated the submissions made earlier. 5.20 The Appellant vide its letter dated 27th August, 2009, further submitted the following: "With reference to the further hearing of the above said appeal fixed before Your Honour on 28-08-2009 we have to submit as under :- 1. There is no notification of GBDT regarding applicability of revised Accounting Standard -- 7. The Accounting Standard-7 is issued by the Institute of Chartered Accountants of India, a copy of which is already given at Page Nos. 294 - 211 of the compilation filed with our letter dated 14-3 -2007. 2. We are filling herewith copy of Accounting Standard notified under Sea. 145(2) by the CBDT being No. 9949 (F No. 132/M95 FRZ) dated 25-1-1996. 3. We are filing herewith details of work-in-progress and estimated profit for every year from beginning to completion of the project in respect of 3 project i.e. (i) Gopala; (ii) Atur Park and (iii) K-Plaza. 4. The written submissions regarding the applicability of AS-7 is given in para 3.1 and 3.2 of the written submiss....
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....the basis of percentage of work in progress in respect of such projects. However, since this was not giving a true picture each year and to keep in step with the practice followed by the construction industry in general, it was decided by the assessee to adopt the completion method of profit in respect of new projects undertaken from the asst. year 2001-02 onwards. Since there were some projects in which the assessee is already following the percentage of work in progress method, the said method cannot be changed in the middle of the project and, therefore, the assessee continues to follow the percentage of work in progress method in respect of such earlier projects till they are completed in future and In respect of the new projects undertaken from asst. year 2001 -02 onwards, the assessee is following the completion method only. 7. Accordingly, there is no change in the system of accounting as prescribed In Section 145 of the I. T. Act. The assessee continues to follow the 'mercantile system of accounting and there is no change in that. It is only the method of computing of the profit in respect of the project which takes number of years to be completed and where there is ....
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....ot change the method of working out the profit on project completion method, since the estimated profit on percentage completion was already shown in earlier years for those projects. This change in method showing profit for A.Y.2001-02 onwards for the new project is the main reason for the Assessing officer to conclude that the appellant has not been showing consistent method of accounting profits. 5.23.2 Another related observation of the Assessing Officer is that the appellant has been showing different percentages of profit on work-in- progress, as the profit of a project in different years. 5.23.3 Further, these are issues relating to non-furnishing of complete details and application of accounting standard AS-7 to the case of the builders. 5.23.4 In this regard, it is important to consider that project completion method is a very well recognized method of revenue recognition and profit estimation in the case of builders. A builder is well within his rights to show profits on this basis for his projects. Merely because he had been following a different method earlier does not take away his rights to show his profits on project completion method from a particular date.....
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....ng Standard AS-7 is applicable to the case of builders, are both wrong. Therefore, the Assessing Officer 'i led by incorrect appreciation of facts and applicability of accounting treatment, to hold the view held by him in this' assessment order. 5.23.8 It is precisely for this reason that while finalizing the assessment for AYs. 2001-02 and 2002-03, the Assessing Officer has himself allowed the completion method of declaring profit in Madhuri project which started in Asst. year 2000-01. Also in case of Ganga Tower -II, which commenced in asst. year 2002-03 the said completion method of showing profit was allowed in the Asstt. Years 2002-03 and 2003-04. 5.23.9 The Ld. AR have quoted plethora of judgments in support of the claim that the choice of the method of his accounting lies with the assessee and it is also open to the assessee to follow one system of accounting in respect of one source and another system in respect of other source, CIT v/s Mc Millan & Co. (1950) 33 ITR 182-188 S.C. 5.23.10 Under the given facts of the case, the Appellant can only be said to have consistently followed the method of accounting for a project as it has never changed the method fro....
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....e dealing with ground no. 2 that revenue has been correctly recognized by them when the risk and reward are being transferred. Therefore, there is no justification for accepting the profit of the project twice, i. e., once in AY 2004-05, and again in AY 2005-06. The learned AO has not proved that a penny more than what is shown as receipt has been, received, or an expenditure not supported by evidence or hot wholly and exclusively attributable to the business has been claimed. Thus, both the receipt and payment sides have been accepted by the Ld. AD. Therefore, the entire argument veers around the allocation of profits in respect of each of the project in different Assessment Years. Therefore, the action of the Ld. AO in increasing the overall profit of the project without giving instance of extra receipt or unaccounted/unrelated expenditure can not be upheld. As a result, this ground of appeal is allowed." 7.5.3 Considering the various facts enumerated above and the decision in respect of Gr. No. 2 of this appeal, it is apparent that the Assessing Officer was not justified in rejecting the books of accounts of the appellant and consequently, making an estimate of the Income.....
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....f estimation of profit by the appellant. Accordingly, the Assessing Officer is directed not to disturb the estimate of profit for the current year in respect of this project. It is held that the appellant has completed the project in the period relevant to A.Y. 2005-06 and has shown the balancing figure of profit of that year and therefore, the addition of Rs. 3,00,22,193/- made by the Assessing Officer being the profit of Ganga Tower-I is directed to be deleted for the current year." Kukreja Project 8.6 The Appellant has started the project in the year 1994-95 and till 2005-06, the assessee has declared profit on percentage of work in progress method totaling to Rs. 1,72,68,519/- and declared balance profit on completion of the project In the Asst, Year 2006-07 at Rs. 88,61,730/-. The AO has completed the assessment for Asst. Year. 2006-07 and accepted the profit of this project without granting any deduction in respect of the additions made on estimate basis in the Asst Year 2004-05. The Ld Assessing Officer, therefore, calculated the profit of this project in the same manner as he calculated for Ganga Tower II Project. 8.7 Since the Method. of accounting the profit on perc....
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....ts which were executed during the year under consideration. He invited our attention to the specific findings/observations recorded by the A.O. at page 4 to 6 of the assessment order and submitted that the methods of accounting followed by the assessee to recognize the income from different projects were rejected by the A.O. on the basis of the specific adverse findings. He submitted that even the basis of estimation of income of the assessee from different projects was specifically given by the A.O. in the assessment order. He contended that the ld. CIT(A), however, overlooked these specific basis given by the A.O. and accepted the methods adopted by the assessee as well as income computed by the assessee from projects by adopting such method relying on the submissions made by the assessee. He contended that the impugned order of the ld. CIT(A) giving relief to the assessee on this issue thus is liable to be set aside and that of the A.O. is deserved to be restored. 17. The ld. counsel for the assessee, on the other hand, submitted that the assessee is in the business of builder and developer for the last 35 years and the project completion method followed by it to recognize th....
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....k results declared by it showing profits from the different projects under execution during the year under consideration were rejected by the A.O. mainly on the ground that there was a change in method adopted by the assessee to recognize the income of different projects from percentage completion method to project completion method. It was also noted by the A.O. in this context that different methods were simultaneously followed by the assessee to recognize the income of different projects for the year under consideration. It is, however, observed that the method of recognizing income from housing projects was changed by the assessee from percentage completion method to project completion method in the earlier years by deciding to follow project completion method in respect of all the projects which commenced after 31-3- 2000. the new method adopted by the assessee was consistently followed to recognize the income of all the projects which started after 31-3-2000 and the method was adopted by the assessee was also accepted by the A.O. in the earlier years up to A.Y. 2003-04. During the year under consideration, some of the projects under execution had started prior to 31-3-2000 wh....
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....enced in A.Y. 2002- 03 i.e. after 31-3-2000, the entire profit of the said project amounting to Rs. 4.23 crores was declared by the assessee in A.Y. 2005-06 when it was completed by following the project completion method. This method consistently followed by the assessee for the said project was accepted by the A.O. in A.Y. 2002-03. Even in the assessment completed for A.Y. 2005-06, the entire profit offered by the assessee from Ganga Tower II project on project completion method was accepted by the A.O. bringing to tax the entire profit of the said project in that year. The A.O., however, disturbed this method in the year under consideration i.e. A.Y. 2004-05 and assessed the income of Rs. 3.36 crores as profit from the said project in the hands of the assessee by following percentage completion method. This clearly resulted in the double addition of the said income once in A.Y. 2004-05 and again in A.Y. 2005-06 which was totally unjustified. As regards Ganga Tower I project, it is observed that the same was commenced in the previous year relevant to A.Y. 1986-87 i.e. prior to 31-3-2000 and income from the said project was offered by the assessee in A.Y. 1986-87 to A.Y. 1994-95 b....
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....he assessee. 20. Having considered all the facts of the case as discussed by the ld. CIT(A) in his impugned order and remained uncontroverted/rebutted by the ld. D.R., we find that the income from different projects under execution during the year under consideration was offered by the assessee to tax by following consistently the well recognized method and there was no justification in the action of the A.O. in estimating the profit of the said projects at higher value by disturbing the method consistently followed by the assessee which clearly resulted in double addition of the same income. In our opinion, the addition made by the A.O. on this issue thus was not sustainable either in law or in the facts of the case and the ld. CIT(A) was fully justified in deleting the same. We, therefore, uphold the impugned order of the ld. CIT(A) on this issue and dismiss ground No. a to f of the Revenue's appeal. 21. As regards ground No. 'g', it is observed that the issue involved therein relating to assessee's claim for deduction on account of business expenses of Rs. 36,37,375/- is consequential to the main issue involved in ground No. 'a' to 'f' of th....
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....s commenced during the year under consideration and all the assets were put to use for the said business:- "(I) Fire NOC from Navi Mumbai Municipal Corporation dated 03.01.2004 for Hotel K Plaza D wing. - V (ii) Licence for Eating House for K Star Hotel from NMMC (iii) Licence fo Lodging, for K Star Hotel from NMMC (iv) Shop & Establishment Licence of the K Star Hotel (v) Permission from NMMC for displaying cloth banners on electricity polls of NMMC from 14.01.2004 to 11.02.2004 & 15.01.2004 to L4,02.2004 in Belapur & Nerul (vi) Sale Bill No. 6 dated 19.01.2004 of K Star". 25. When the additional evidence filed by the assessee was forwarded by the ld. CIT(A) to the A.O. for his comments, the A.O. did not offer any material adverse comment to dispute the claim of the assessee made on the basis of the said additional evidence. The ld. CIT(A) also found that the said evidence was sufficient to establish that hotel K. Stars had started functioning on 17-1-2004 and keeping in view of the same as well as the fact that gross receipts from the occupancy of the hotel has been shown at Rs. 18,23,766/-, he held that the assessee was ent....