TaxTMI 
TaxTMI 
2020 (5) TMI 593
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.... before him that AO made the addition on adhoc basis and based on surmises and conjecture. 4. After considering the submissions of the assessee, Ld. CIT(A) deleted the addition made for this AY 2013-14. Ld. CIT(A) observed that assessee was following percentage completion method of accounting for computing its profit from the project. He noted that the profit from the project called 'NOP' was not determined using the percentage completion method by the assessee. Accordingly, Ld. CIT(A) issued enhancement notice and asked for the clarification from the assessee. In order to enhance the profit from the project 'NOP' at Rs. 2,60,77,525/- for the current assessment year, a notice was issued in this regard. In reply, assessee filed following submissions before him:- "In this regard, under instructions from our client, we object to the proposed enhancement in the following grounds: * You have furnished the working that forms the basis of arriving at the income of Rs. 2,58,43,592/- by which you propose to enhance the income. * We respectfully submit that the method improperly rests on an assumption that 25.97% was the margin on sales even in the years prior to F.Y.2012-13, which is....
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....is worked out without considering the expenses. Though the NOP project was completed before the relevant previous year, it was not the case where no expenses were incurred after the construction of the NOP project was completed. Thus, the actual profit from NOP project is lower than Ks. 33,76,100/-. A statement showing expenses incurred in F.Y.2012-13, and the net profit is worked out as under: Sales As per formula As per Books Less: Cost of Sales 1,30,00,000 1,26,04,476 96,23,900 43,10,000 33,76,100 82,94,476 Less: Employees 9,91,310 Cost Finance 52,70,956 Cost Depreciation 5,28,424 Other Expenses 18,43,454 86,34,244 86,34,244 (-)52,58,144 (-)3,39,768 Thus, other client has shown loss of Rs. 3,39,768/- which is lower than that worked out on the basis of the formula. This leaves no scope far enhancement. In view of the above, we object to the proposed enhancement." 5. After considering the submissions of the assessee, Ld. CIT(A) reject....
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....e learned CIT(A) erred on facts and in law in not appreciating that the method adopted by him for working out profit of a year on the basis of the percentage of completion method of revenue recognition was wrong. 1.2 The learned CIT(A) erred on facts and in law in not appreciating that though estimates of project revenue and project costs are reviewed every year, such estimates are relevant for the work to be carried out, and the outcome of the estimates reflects expectation from the project work to be carried out. Relief claimed: Rs. 2,58,43,592/- worked out by the wrong method and by which the income is enhanced be directed to be deleted. 1. Percentage of completion method not appreciated The learned CIT(A) erred on facts and in law in not appreciating that the percentage of completion method is used to decide the amount of revenue to be recognized and the cost of sale to be attributed to such revenue, and not for working out straight profits. 2. Profits exceeding Revenue The learned CIT(A) erred on facts and in law in not appreciating that the net profit of a year cannot exceed the gross revenue of or attributable to the relevant year. Relief claimed: Rs. 2,58,43,5....
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....entage of completion method can be applied for construction contract as well as real estate development project with reference Guidance Note GN(A) 23 (R2012). We notice that assessee has commenced this project in AY 2006-07 and completed the whole project. It developed the total saleable area of 56727 Sq. ft. and upto AY 2012-13, it sold 46006 Sq. ft, this assessment year, it sold 1032 Sq. ft. only and it carried unsold stock of 9689 Sq.ft. This indicates that assessee has divergent business module. As per guidance note, percentage completion method can be applied only when revenue, costs and profit from transactions and activities of real estate which have same economic substance as construction contracts. Though, it is clear that only when the economic substance in real estate development and construction contract has to be same. In the given case, the project 'NOP' does not have same economic substance as construction contract. The difference in revenue generating pattern. The 'NOP' project already completed but certain portion of development remain unsold. It shows that revenue model is not same i.e. in construction contract, the whole revenue is already determined and only con....