TMI Blog2010 (1) TMI 912X X X X Extracts X X X X X X X X Extracts X X X X ..... t years 2002-03, 2003-04, 2004-05 and 2006-07. In all these appeals, common grounds are urged by the assessee. The only effective ground urged is against the order of the CIT (Appeals) for treating 15% of the sales as net profit for all the years. 2. In these cases, there was a search and seizure action u/s. 132 on 13.4.2005. Consequent to search notice u/s. 153A was issued on 13.1.2006. In response to the above notice, the assessee filed a letter dated 7.6.2006 stating that the return already filed on 29.10.02, 29.10.03 and 24.9.2004 declaring total income at Rs.98,891 for the A.Y. 2002-03, Rs.5,75,041 for A.Y. 2003-04 and Rs.4,27,560 for A.Y. 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ieved by the above order, the assessee approached the first appellate authority. The CIT(Appeals) vide para 6 (items 9.1 to 9.7) of his order records brief submissions of the assessee, as under:- "9. Estimation of income: 9.1. The assessee is a Firm which is into the business of real estate. The assessee had filed the Return of Income on 31.10.2006 declaring total loss of Rs.26,14,385/- for the A.Y. 2006-07 relevant to the P.Y. 2005-06. 9.2. It is submitted that there cannot be a preferred method/thumb rule percentage which can be adopted to arrive at the WIP or the income of the assessee in this type of business. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted to compute the relief accordingly." For the A.Y. 2005-06 there was no addition made by the AO. Aggrieved by the order of CIT(A) retaining estimation 15% addition of income, assessee is in appeal before the Tribunal. 7. Ld. Representative for the assessee submitted for the A.Y. 2007-08, the assessee declared a profit of 9.75% and 7.63% for the A.Y. 2005-06 which has been accepted. There is no rejection of books of accounts in any of these years and therefore the additions made by the AO on estimate basis is incorrect and retention of the same to the extent of 15% on estimation 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dard as revised in 1999 excludes the following four categories from the scope of AS-2 i.e.: (a) work in progress arising under construction contracts, including directly related service contracts (see Accounting Standard (AS) 7, Accounting for Construction Contracts); (b) ........ (c) ........ (d) ........ It is clear from the above that the valuation of work-in-progress in case of construction contracts is excluded from the purview of Accounting Standard (AS-2). 11. As per the Income-tax Act, where income chargeable under the head 'profits 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, 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 Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the option to refuse delivery leading to termination of the contract. The monies received by the assessee progressively till the date of completion of the project do not entitle the assessee with a right to appropriate the same unless the obligations under the contract are completed. Therefore, the income from those accrues to the assessee only on the completion of the contract and not at any stage earlier. If the methodology enunciated by the AO is followed, it will lead to absurd results i.e., in one year there could be receipts only and not any activity construction at all. The AO appears to have proceeded on the basis that if the money has been collected, it becomes assessee's 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofit estimated is 30% on par with sales as discussed, which works out to Rs.56,72,140 and therefore the amount was rightly added to the total income of the assessee. Similarly in all the years under appeal, the assessee's expenditure is more and therefore always the assessee claimed a minus income, avoiding tax. It was in these circumstances that the AO rightly estimated the income at 30% of the sales. 16. Coming to the argument of the assessee with regard to Accounting Standards, the ld. DR submitted a written submission briefly as under. The basic purpose of following Accounting Standards is to derive the financial statements which include profit and loss account 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 provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one method to be adopted i.e. percentage completion method is incorrect. The decision of the Supreme Court relied upon by the revenue in the case of J.K. Industries Ltd. vs. UOI (supra) on facts is quite distinguishable. Their Lordships were dealing with Accounting Standard (AS-22). In that case, the assessee, a public limited company, was carrying on business of manufacture and sale of automotive tyres, tubes, sugar and agrigenetics, challenged AS-22 issued by ICAI which was mandatory for the companies listed in stock exchange in India in preparation of their accounts for the financial year 2001-02 and onwards. 20. AS-2 which was originally issued in 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 e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and loss account for the year under consideration which was rightly taken note by the AO. For the year under consideration, there was an action u/s. 132 in the case of assessee on 13.4.05. Consequent to search, notice u/s. 153A was issued. In response to the notice, the assessee filed a letter stating that the return filed on 31.10.05 declaring income at Rs.31,35,550 may be treated as return filed in response to notice u/s. 153A. 24. While framing the assessment order, it was noticed from the computation of closing work-in-progress filed by the assessee along with the return that assessee had adopted opening work-in-progress at 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have considered the opening WIP balance of 1.4.2003 instead of opening WIP balance of 1.4.2004. Ld. CIT(A) after verifying the claim of the assessee provided relief on this score." 26. Considering the rival submissions and going through the orders of the revenue authorities and in the light of the specific finding by the CIT(Appeals) that closing stock for the A.Y. 2004-05 as on 31.3.2004 and opening stock for the A.Y. 2005-06 as on 1.4.2005 are exactly identical and considering the submission of the assessee that in fact the AO instead of looking to the closing stock for the A.Y. 2004-05 had wrongly 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( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssuing summons so as to ascertain the veracity of the confirmation and in view of the decisions relied upon by the ld. representative for the assessee cited hereinabove, we are of the view that this ground of the revenue is without merits and is dismissed. 32. In the result, the appeals of the Revenue for all the years fail and are dismissed. ITA No.247 and 248/09 (Assessee's appeals - M/s. Concorde Shelters) 33. The common ground urged by the assessee for the assessment year 2003-04 and 2004-05 is against the order of the AO in completing the assessment in haste. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the. appellant on percentage basis and disallowed and added the same with the returned income. The details thereof can be tabulated as under: A.Y. 2003-04 Total Sale Price in Rs. Expenditure claimed Expenditure Ratio Profit Ratio A.O. Adopted ratio for disallowance of Expenditure Amount allowed in Rs. Amount disallowed and added to returned income in Rs. 2003-04 16,99,230 16,31,711 96.02% 3.98% 30% 11,89,461 4,22,250 2004-05 (i) Green City Gulbarga 46,13,808 (ii) Concorde Paradise, Bangalore 2,06,77,694 41,36,990 2,02,38,571 89.96% 97.87% 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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