2010 (8) TMI 1001 - AT - Income Tax

Summary

Issues Involved:
1. Rejection of books of account under section 145(3) of the Income-tax Act, 1961.
2. Method of accounting and estimation of profits.
3. Treatment of work-in-progress and administrative expenses.
4. Allowance of depreciation.
5. Enhancement of assessed income by the CIT(A).

Issue-wise Detailed Analysis:

1. Rejection of Books of Account under Section 145(3):
The Assessing Officer (AO) rejected the books of account of the assessee by invoking section 145(3) of the Income-tax Act, 1961. The AO's primary reason was that the assessee was following a hybrid method of accounting, which was not in accordance with the generally accepted accounting principles or Accounting Standard-7 and Accounting Standard-9. The AO also pointed out that the assessee did not maintain stock registers and details of inward and outward registers. However, the Tribunal found that the AO did not point out any specific defects in the books of account or the expenditure claimed by the assessee. The Tribunal held that the rejection of books of account under section 145(3) was bad in law as there was no finding that the expenditure was not for business purposes or that it was excessive.

2. Method of Accounting and Estimation of Profits:
The assessee consistently followed a method of accounting where it offered a certain percentage of the amount received from sales as net profit on an estimated basis. This method was accepted by the revenue for over 22 years. The AO contended that the assessee should have offered the total income from the project to tax in the year in which the occupation certificate was received (1992). The Tribunal noted that there was no prescribed method of accounting for real estate developers during the period under consideration. The Tribunal held that the method of accounting followed by the assessee, though not the most desirable, could not be changed mid-way, especially when it had been consistently followed and accepted by the revenue. The Tribunal emphasized the principle of consistency and ruled in favor of the assessee.

3. Treatment of Work-in-Progress and Administrative Expenses:
The AO observed that the assessee had added administrative expenses to the work-in-progress year after year, which inflated the work-in-progress. The AO did not accept the assessee's contention that it had already returned a profit of Rs. 3,87,93,921 up to 31.3.2005. The Tribunal found that the assessee had been consistently following a method where the construction-related expenses incurred each year were carried forward in the balance sheet as work-in-progress under the head "Bangalore Works Account." The Tribunal held that the method of determining income from the projects could not be changed mid-way and that the administrative expenditure should be allowed as there was no finding that it was not for business purposes.

4. Allowance of Depreciation:
The AO disallowed the depreciation claimed by the assessee without recording any specific reason. The Tribunal noted that the AO had not pointed out any defects in the claim for depreciation and that depreciation had been allowed in all the earlier assessment years. The Tribunal held that the depreciation should be allowed and ruled in favor of the assessee.

5. Enhancement of Assessed Income by the CIT(A):
The CIT(A) upheld the assessment order and enhanced the assessed income by reducing the work-in-progress claimed and determined by the AO. The CIT(A) held that the amounts paid as advances to various contractors could not go to increase the work-in-progress as they were still in the nature of advances. The Tribunal found that the CIT(A) had not given an opportunity to the assessee to provide details and evidences regarding the advances. The Tribunal ruled that the enhancement made by the CIT(A) was not justified and allowed the appeal of the assessee on this ground.

Conclusion:
The Tribunal allowed the appeal of the assessee, holding that the rejection of books of account under section 145(3) was not justified, the method of accounting followed by the assessee should be accepted, the administrative expenses and depreciation should be allowed, and the enhancement of assessed income by the CIT(A) was not justified. The Tribunal emphasized the principle of consistency and ruled in favor of the assessee on all grounds.