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TMI Blog2010 (1) TMI 912X X X X Extracts X X X X X X X X Extracts X X X X ..... . 2004-05 respectively may be treated as returns filed in response to notice u/s. 153A. Coming to the A.Y. 2006-07, the assessee declared Rs.26,14,385 on 31.6.07. Notice u/s. 143(2) and questionnaire was issued to the assessee on 29.11.07 along with notice u/s. 142(1) and the case was posted for hearing on 4.12.07. The assessee requested time upto 7.12.07 for furnishing the reply. The case was adjourned to 7.12.07 but no information was filed by the assessee on the said date. The Assessing Officer noticed for the year under consideration assessee has shown sales of Rs.26,92,009 and claimed expenditure in respect of sold area at Rs.29,52,650 and the difference between sales and expenditure worked out to (-) Rs.2,60,650. 3. The AO noticed the assessee is in real estate business and purchased lands over a period of time and developed the land into residential layouts. Plots were being sold on a monthly scheme. From the system of accounting followed by the assessee, it was noticed, assessee was arriving at the value of closing work-in-progress of the saleable area developed by it after adding all the expenses incurred during the year to the opening work-in-progress. It was furt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. The approach adopted by the assessee must help the authority to ascertain and arrive at the value of the work-in-progress and deduce profit from the business. 9.3. Premier Accounting body in India, The Institute of Chartered Accountants of India (ICAI) also has recognized the fact that there cannot be a particular method that can be prescribed for the this type of business. Kind attention is invited to paragraphs 1 under the heading Scope of AS 2 -Valuation of Inventories (page nos. 1 and 2 of Paper book). Thus, it has excluded valuation of WIP in the case of construction contract from the purview of Accounting Standard (AS - 2). Method of arriving WIP and recognition of Income is provided in page no. 30 of Paper book. 9.4. The mandate of the Income Tax Act is that where income chargeable under the head "Profit and gains of business or profession" is returned on the basis of accounts maintained by the assessee by employing a method of accounting regularly, such income is to be computed in accordance with the method regularly employed by the assessee, unless a situation emerges that profits disclosed by the assessee as a result of his own method of accounting are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the CIT(Appeals) is also incorrect. The assessee's representative inviting our attention to the paperbook page 3, demonstrated the method adopted by the assessee from the inception and how the assessee calculated the valuation of work-in-progress. The same is reproduced below: An illustration Position of Sites Particulars Nos. Sites available at the beginning of the financial year 100 Less: Sites sold during the year 10 Sites available at the end of the financial year 90 Position of Sites Particulars Amount (in Rs.) Value of opening WIP 1000 Add: Expenses incurred during the year 500 1500 Less: WIP attributable to sites sold (1500/100*10) 150 Value of Closing WIP (1500/100*90) 1350 Assessee's representative submitted if the plots available are 100, expenses during the year under consideration for the entire plots is treated as expenditure for the whole year, whereas the assessee normally sells only a portion of the developed plot. Therefore, in the normal course, the expenditure is high than the price fetched by the assessee on selling a small portion of the plots. 8. When the matter was taken up for hearing, the Bench put a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccounting regularly, such income is to be computed in accordance with the method regularly employed, unless a situation emerges that profits disclosed by the assessee as a result of his own method of accounting, are so unreasonable and patently unacceptable, it is to be accepted. In such situation it leads to the rejection of books of account and consequent estimation of income and revaluation and recomputation of work-in-progress could be justified. In the instant case of the assessee, the Assessing Officer has not arrived at any such finding, that method of accounting/valuation of WIP adopted by the assessee is not reasonable leading to rejection of financial results. This is one of the accepted method as per revised Accounting Standard (AS-2). Therefore there is no justification for the Assessing Officer estimating income of the assessee. 12. It was further submitted that the state of affairs as regards maintenance of accounts, valuation of WIP being the same as in earlier years and the same having been accepted by the department, there is no justification to tamper with the method of valuation of WIP. There is no finding by the AO that the accounts of the assessee appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income. In this connection the Id. Representative invited our attention to the decision of the Karnataka High Court in CIT vs. Shankarnarayanan Construction 197 ITR 688, particularly para 4 of the judgment. In this case, the Hon'ble High Court held that the assessee executing projects for a power corporation wherein the assessee receives the amounts in excess of what was actually due and such excess receipt is adjusted towards future work, cannot be treated as assessee's income accrued. The Hon'ble High Court held every kind of receipt cannot be taxed, such excess amounts are to be considered as deposits in the hands of the assessee and excess receipts cannot be taxed. The assessee's representative submitted actually as per the method followed by the assessee, expenditure incurred on the project is claimed in the year of appropriation of income, the method of accounting followed by the assessee is in tune with the generally accepted accounting policy of matching costs with revenue i.e., when the revenue is taken into account, the commensurate expenditure is also taken and vice versa. He relied upon the judgment of the Hon'ble Karnataka High Court in the case of Khoday Distillers L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and balance sheet that reflect true and fair view of the business. It is the true and fair view of the business which is ultimate governing principle in recognizing revenue and costs. ICAI, which is the authority for issuing standards of accounting, has removed the provision of completed contact method w.e.f. 1.4.2003, thus made it mandatory to follow only one method i.e. Percentage Completion Method of accounting for the financial year 2003-04 and onwards. However, the assessee company ignoring this mandatory provision of Percentage Completion Method, followed the Completed Contract Method for recognizing the revenue. Coming to the contention of the assessee that it does not apply to the assessee is incorrect and for this proposition the ld. DR relied on the decision of the Hon'ble Supreme Court in the case of J.K. Industries Ltd. vs. UOI, Appeal (Civil) 3761 of 2007, date of judgment 19.11.07. It is submitted that this decision is squarely applicable in the instant case of the assessee, copy of which has been placed on record vide paperbook page 1-94. The ld. DR specifically brought to our attention the observation of the Hon'ble Supreme Court in paras 4 to 8 with regard to meani ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n June, 1981 and revised in 1999 excludes construction contracts from the scope of Accounting Standard (AS-7). The method adopted by the assessee is one of the recognized method. The AO has not rejected the assessee's books. In these circumstances, as rightly contended by the ld. Representative for the assessee, the estimation of income to the extent of 30% and reduction of the same by CIT(Appeals) to 15% is incorrect. In the light of the above discussion, we are of the view that the CIT(Appeals) was not justified in retaining the estimated addition and the CIT(Appeals) was not justified also in treating this as an accepted method. The appeals by the assessee for the assessment years 2002-03, 2003-04, 2004-05 and 2006-07 are allowed. ITA Nos.494 to 496/09 (Revenue's appeals - M/s. Concorde Developers) 21. Coming to the revenue's appeals, the only ground for A.Y. 2004-05 and first effective ground (ground No.2) for the A.Ys. 2005-06 and 2006-07 are common. It is the case of the revenue that the CIT(Appeals) ought to have considered that no specific accounting method has been adopted by the assessee and therefore it was mandatory to estimate income as per Accounting S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs.4,55,82,384. Closing work-in-progress for A.Y. 2004-05 was Rs.4,29,60,166 only, which in fact should have been the opening work-in-progress for the year under consideration. There were certain other mistakes according to the AO. Instead of adding the expenditure incurred during the year to opening work-in-progress as was done in the earlier years, the assessee adopted different computation. AO noticed that the assessee added estimated expenditure incurred during the year to the work-in-progress, of the sites sold and treated it as taken as closing work-in-progress, AO held this is not correct as per accounting principles and also as per the method followed by the assessee in the earlier years. On this ground, the AO added the amount of Rs.1,41,73,178. The issue has been dealt with by the CIT(Appeals) vide para 12 and 13 of his order as under: "12. Ground No.2.4 of A.Y. 2005-06, Rs.1,41,73,160/- In this ground, the alleged difference in closing stock of A.Y. 2004-05 and opening stock of A.Y. 2005-06 of W/P of Rs.1,41,73,178 (Rs.4,55,82,384/- Rs.4,29,60,166/-) has been appealed against. The written submission of Authorised Representative on this issue is reproduced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rongly taken note of closing stock of the previous year, we find no merit in the appeal by the revenue on this ground. These grounds by the revenue fails and is dismissed. 27. Coming to the A.Y. 2006-07, the other effective ground (No.3) by the revenue is against the order of the CIT(Appeals) in giving relief on the amount of Rs.1 crore claimed as unsecured loans of the assessee. According to the revenue, the CIT(Appeals) has not considered the facts that the onus was on the assessee to prove that such loan has not been discharged. It is also the grievance of the revenue that the CIT(Appeals) erred in relying on the statement of the assessee that the details of the lenders of unsecured loans had been filed by the assessee and therefore onus is shifted to the AO to disprove the same. No details were furnished by the assessee before the AO and therefore at the most the CIT(Appeals) should have called for a remand report. 28. The brief facts for the A.Y. 2006-07 are that the assessee filed a return on 31.6.07 declaring total loss of Rs.26,14,385. The AO noticed there was claim of unsecured loans and the details were called for. He found no information was forthcoming from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te. The assessee's representative submitted that he is instructed not to press this ground and hence for both the years, this ground is dismissed as not pressed. 34. Coming to the 2nd common ground, it is against the order of the CIT(Appeals) retaining the addition made by the AO on estimation to the extent of 15%. The facts leading to the dispute briefly are as under: Similar to the connected case of the assessee's group i.e. ITA Nos.456 to 459/B/09 - M/s. Concorde Developers, there was a search and seizure action in the case of this assessee on 13.4.05. Consequent to search notice u/s. 153A was issued on 13.1.06. In response to the above notice, assessee filed a letter on 7.6.06 stating that return filed by the assessee with the ITO may be treated as return filed in response to this notice. For the A.Y. 2003-04, the return was filed on 29.10.03 declaring income at Rs.1,32,520 and for the A.Y. 2004-05 on 24.9.04 declaring income at Rs.17,29,030. The assessee is in the business of real estates. The AO noticed that the assessee was having two projects one at Green City, Gulbarga and the other, Concorde Paradise. As regards the project at Green City, Gulbarga, the plo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % 10.04% 2.13% 30% 10% 32,29,666 1,86,09,924 9,07,324 16,28,646 12. The above shows the basis of such disallowance is the unbelievably low rate of profit shown by the appellant. For example, it can be seen that the appellant showed Net profit rate of 3.98% in A.Y. 2003-04. For the project at Gulbarga of A.Y. 2004-05, the net profit rate was shown at 10.04%, while that of Condorde Paradise, Bangalore, the net profit rate shown was only 2.13%. Against this the corresponding rate adopted by the A.O. was 30%, 30% and 10%. I find the estimate made by the A.O. for Gulbarga properties in A.Y. 2004-05 and all properties involved in A.Y. 2003-04 @ 30% of sale price is very much on the higher side. The nature of work of the appellant is such that it gets reimbursement of construction expenses from flat owners with a minimum margin while maximum profit is gained from sale of plots of land but that too cannot be projected or put at 30%. I therefore reduce the estimation of disallowance of expenditure to 15% from 30%. Thus, for the A.Y. 2003-04 appellant gets relief of rs. 1,87,365/- and in A.Y. 2004-05, Rs.2,15,253/-. I find the estimation of profit ratio of 10% for M/s. Concorde Paradise ..... X X X X Extracts X X X X X X X X Extracts X X X X
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