2020 (5) TMI 593

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....referred appeal before Ld. CIT(A) and contested 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 2....

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.... Thus, It may be noted that the maximum profit that can be attributed to previous year relevant to A. Y.2013-14 is Rs. 33,76,100 which 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....

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....turn, in arriving at the profit for the year. Therefore, the claim of the appellant is rejected. 7.4.5 Accordingly, the income of the appellant is enhanced by Rs. 2,58,43,592/- as proposed. 6. Aggrieved with the above order, assessee is in appeal before us raising the following grounds of appeal:- 1.1 Uncalled for Enhancement of Income The 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 comple....

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....thorities. 10. Considered the rival contentions and the material placed on record, we notice from the record that assessee is following percentage of completion method and assessee has two main stream of revenues, one from 'NOP' Project and from other project. Assessee is basically construction contractor and also indulged in developing and sale of project named 'NOP'. On overall basis, assessee is following percentage completion method. Whether the method of percentage 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 i....