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2013 (8) TMI 483 - ITAT MUMBAIApplication of percentage completion method for computation of profit real-estate business – Held that:- 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 transferred. This essential condition for recognizing income being satisfied, the next step would be to determine the extent to which it could be so. We have already explained of the fundamental accounting assumptions of conservatism and prudence, which are to necessarily inform the accounting estimates and statements and, in fact, stand also statutorily recognized per the accounting standards issued by the CBDT u/s. 145 of the Act. Regarding cost plus method and valuation of WIP - Unsold project - Held that:- No income can be anticipated in respect of the part of the project yet to be sold (i.e., as at the relevant year- end), so that it would be, from the stand point of reporting profit on the project, be immaterial if the sale price, as is generally the case, has increased over the period since which the project stands commenced. - 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. 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 basic costs, since incurred, be allotted to each year in proportion to the other costs incurred in that year. That is, a ratio of the basic cost (total) to the other (total) costs (for the entire project) be worked out, which percentage would then be applied for each year, including the current year, in proportion to the other cost for that year. The A.O. is accordingly directed to verify the afore-mentioned ratio of 40.22% as worked out by the assessee, and apply the said percentage - Decided partly in favor of assessee.
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