2025 (7) TMI 1578 - AT - Income Tax

Method of accounting - submitted that the assessee has been consistently recognizing work-in-progress related to expenses - assessee is continuing with project completion method and still the assessee is incurring loss on the project as the assessee has not been able to sell the project - HELD THAT - Upon perusal we observe that the CIT(A) has correctly recorded his findings in the impugned appellate order. Thus the reduction of the disallowance to 10% by the CIT(A) appears prima facie justified. We also note that the CIT(A) s confirmation of 10% of the WIP cost as disallowance is not supported by any objective or comparative data related to other projects. The adoption of such percentage is arbitrary and lacks a rational basis in the appellate order. It is impermissible for the revenue to suo motu adopt an ad hoc percentage of 10% for the purpose of disallowance without any cogent reasoning or supporting material. Accordingly the ground raised by the revenue is dismissed and the ground of the assessee stands allowed. Addition on account of interest paid to partner on capital introduced - assessee had failed to substantiate the claim - HELD THAT - Assessee has availed a loan from its partner M/s Kavya Buildcon Pvt. Ltd. which introduced substantial capital into the firm amounting to Rs. 26, 43, 43, 966/- as on 31.03.2018. The assessee was paying interest at the rate of 10.7% amounting to Rs. 2, 32, 46, 520/-. AO failed to produce any comparable data or benchmark analysis to demonstrate that the interest paid was excessive or unreasonable. The addition made was not substantiated by any reliable basis. The assessee submitted detailed replies dated 05.01.2021 15.03.2021 and 08.04.2021 along with a certificate as per RERA norms explaining that the interest was paid on the loan obtained from the partner. The creditor s balance is duly reflected in the books of account and the interest rate of 10.7% was never disputed by the AO. It is evident that the interest component forms part of the financial cost necessary for the sustenance of the project. We find no infirmity in the order passed by the CIT(A). Therefore the ground raised by the revenue is rejected.

Summary

ISSUES:

Whether the Assessing Officer (AO) was justified in adopting the percentage completion method to estimate profits on incremental work-in-progress (WIP) instead of the project completion method adopted by the assessee.Whether the addition of interest paid to a partner on capital introduced into the firm was justified, given the assessee's claim of interest expense and lack of substantiation by the AO.Whether additional evidence filed by the assessee at the appellate stage can be admitted and the matter remanded for verification by the AO.

RULINGS / HOLDINGS:

On the issue of profit estimation method, the tribunal held that the AO erred in estimating profit at 30% of incremental WIP without bringing relevant facts such as total built-up area, estimated cost, or advances received. The CIT(A)'s reduction of disallowance to 10% on incremental cost excluding interest component was upheld as a safeguard but noted as arbitrary and unsupported by objective data. Consequently, the revenue's ground to increase disallowance was dismissed and the assessee's ground allowed.Regarding interest paid to the partner, the tribunal found it to be a legitimate expense as the interest was paid on capital introduced by the partner, supported by books of account and no evidence was produced by the AO to show the interest was excessive or unreasonable. The addition made by AO was deleted and the CIT(A)'s order allowing the interest was upheld.On admission of additional evidence filed by the assessee for the Assessment Year 2017-18, the tribunal allowed the evidence but remanded the matter to the AO for de novo verification, directing the AO to provide reasonable opportunity to the assessee and conduct proceedings in accordance with law.

RATIONALE:

The tribunal applied the legal framework under the Income-tax Act, 1961, specifically sections 143(3), 144B, 250, 40(b), 37(1), 28, 41(1), and 68. It recognized both project completion and percentage completion methods as acceptable accounting methods under applicable Accounting Standards but emphasized that the revenue cannot unilaterally change the accounting method without proper basis.The tribunal relied on the absence of material and factual basis by the AO to justify the 30% profit addition and noted that the CIT(A)'s adoption of 10% was a compromise but lacked objective support, rendering the revenue's appeal unsustainable.The tribunal accepted that interest paid on capital introduced by a partner is allowable under section 40(b) when properly substantiated and reflected in accounts, and the AO failed to rebut this.In respect of additional evidence, the tribunal followed procedural fairness principles by allowing the evidence but remanding for verification, ensuring compliance with the rules under the Income-tax (Appellate Tribunal) Rules, 1962.