TMI Blog2010 (8) TMI 1001X X X X Extracts X X X X X X X X Extracts X X X X ..... profit of the assessee on the project constructed at M.G. Road, Bangalore. 3. The Assessing Officer pointed out that the assessee followed the method of recognizing income on estimation of profit on the basis of percentage of recovery of sales during the year. He observed that the assessee firm has developed the commercial property at M.G. Road, Bangalore, for which a plan was sanctioned vide letter No. LP.2924/81-82 dated 4.11.1981. The Assessing Officer considered three blocks i.e. A, B, and C. Each block consisted basement + ground + Mezzanine + Thirteen upper floors. The occupation certificate for A Block was issued on 31.1.1992. As regards other two blocks occupation certificates was given on 1.7.1992. This occupation certificate was granted by the Bangalore Mahanagar Palika on receipt of the notice of the completion of the building from the Registered Architect and also clearance certificate issued from Karnataka Fire Force Department. 4. The Assessing Officer observed that though the occupation certificate was received in 1992, the income from the project has not been offered to tax till date. The Assessing Officer asked the assessee to explain (a) the method of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d followed by the assessee has no justification. Further, the A.O. held that the assessee s contention that it had already returned profit of ₹ 3,87,93,921/- upto 31.3.2005 is also not acceptable as the assessee has offered a very low rate of profit i.e. 12% on the total receipts during the year. He also observed that the assessee after offering to tax certain percentage of profits, had also claimed certain expenses on ad hoc basis to reduce the taxable profits. The A.O. also mentioned that the assessee claimed depreciation of ₹ 23,54,923/- and that this resulted in a net loss of ₹ 17,92,681/-. He has also observed that whatever was offered to tax, was added to work in progress of the project and it was carried forward so that whenever the project is offered for taxation, there is no double taxation on the same income. 7. The Assessing Officer was of the view that the assessee should have offered the total income from the project to tax in the year in which occupation certificate was received by it i.e. 1992. He held by not offering the income to tax, the assessee had added administrative expenses, to the work-in-progress year after year, and inflated the work- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computed accordingly. The CIT(A) ought to have held that on facts of the case, the project is not completed during the year and therefore loss of ₹ 12,57,430/- declared by the appellant ought to have been accepted. 3. Without prejudice to the ground No.2 above, learned CIT(A) has erred in directing the AO to allow expenses at ₹ 59,14,724/- as against ₹ 62,74,544/- incurred by the appellant, on the ground that the balance amount of ₹ 3,59,820/- being advance to contractors cannot be allowed as details of the nature of advances and evidences thereof was not filed. 4. Without prejudice to ground 2, if it is to be held that the project was completed during the year, provision for all the expenses required to be incurred for achieving completion of the project but incurred subsequent to the year ought to be allowed while determining the profits from the project. 5. On the facts and in circumstances of the case, depreciation of ₹ 23,75,310/- ought to be allowed while determining the income of the appellant. 12. Shri S.C. Tiwari, learned counsel for the assessee submitted that for the last 22 years the assessee has been following a particular me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contrary, the A.O. himself has added the same to the work-in-progress. There is no finding whatsoever that this expenditure is not for business purposes nor is it mentioned that the deduction is at all called for. 14. The learned counsel for the assessee submitted that there was no accounting standard nor a guidance note on the method of accounting that has to be followed by the real estate builders and developers. He further submitted that there is no regulatory requirement. He vehemently contends that if the argument of the A.O. is to be taken to its logical conclusion, then the income has to be assessed in the year in which the construction of the building is completed i.e. 1992 and not in this year. He further submitted that when the accepted fact is that the construction of the project is completed in 1992, , there is no requirement of the assessee maintaining stock register or inward and outward registers, etc. He submitted that when closing stock is worked out by the A.O., he should have worked out the opening stock also, which was not done. He contended that, whatever is the infirmities in the method of accounting, the same cannot be changed midway. 15. The learned c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le High Court in CIT v. Tata Iron Steel Co. Ltd. (106 ITR 363)(Bom.) for the proposition that when the method of accounting followed by the assessee could not be said to be unreasonable method, even if a better method perhaps be visualized, the same cannot be imposed on the assessee. 17. He further relied on the judgment of the Hon ble Supreme Court in the case of CIT v. Bilahari Investment (P) Ltd. 299 ITR 1 (SC). When the change of method is neutral, there is no need to interfere with the same. He further relied upon the decision of the Supreme Court in the case Radhasoami Satsang (193 ITR 321)(SC) on the proposition that principles of consistency - 18. On ground No. 2 is on the issue of enhancement by the learned CIT(A). The learned counsel for the assessee submitted that the learned CIT(A) has not given an opportunity nor was he asked for the details and hence the enhancement is bad in law. On the last ground, he submitted that the depreciation is disallowed without mentioning any reason whatsoever. He submitted that the same should be allowed. 19. The learned Departmental Representative, Shri Naresh Kumar Balodia, on the other hand, opposed the contention of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on put forward by the counsel is accepted, it would amount to giving the assessee a license to put off his tax liabilities for an unlimited period, by ensuring the ventures project never comes to an end in the sense that some or the other wwork always remains to be done. He pointed out that the Tribunal has observed that when the entire costs/expenditure to the assessee is recouped and or the major portion of the ventures/project is complete, there is really no justification in not taxing the income from the project which quite often may represent excess of receipts over expenditure. He relied on the order of the A.O. and submitted that there is no plan in the working of the A.O. as claimed by the assessee. Shri Balodia, learned Departmental Representative, took this Bench through the order of the Income-tax Officer in the assessee s own case for the assessment year 1998-99, which is at page 9 of the assessee s paper book and pointed out that E and F buildings are residential blocks and A to C buildings were shops and that E and F buildings were completed. He relied on the order of the AO. He further referred to page 1 of the assessee s paper book and read out the method of account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of matching concept all future expenditure should be taken into account and matched with the receipts and only then the correct income has to be estimated. He reiterated his contention that the A.O. has not pointed a single defect in the books of account or rejected a single item of expenditure claimed during the year and on the contrary, has accepted that each and every expenditure claimed is for the purpose of business and allowed the same under section 37 and thereafter included the same in the workin- progress. He once again submitted that even if as it is not included in the work-inprogress, this expenditure has to be allowed as regular expenditure u/s.37 and this would go to reduce the profits of the company and in case of loss, the loss could be carried forward to the future years. He submitted that if the argument of the learned Departmental representative is accepted, then the project completion method has to be accepted and income estimated in the assessment year 1991-92 when admittedly the project is completed. He emphasized there is no event or occasion or material to change the method of accounting this year, specifically when in the assessment year 2005-06, the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a sale of ₹ 30,73,216/-, out of which it received an amount of ₹ 29,00,759/-. During the assessment year 1978-79, the assessee had incurred an expenditure of `. 47.91 lakhs and had sale value of ₹ 58.02 lakhs. The construction of the building was completed by the end of the assessment year 1978- 79. Under those circumstances, the Tribunal held that income from profit is to be assessed for the assessment year 1978-79. Para 19, it states as follows: However, the position as regards the assessment year 1978-79 is materially different. The construction of the building is completed in that year. Total area earmarked for sale is 61,396 sq.ft. out of which upto the end of that year the assessee had sold 49,965 sq. ft. i.e. about 80 per cent of the area. The net receipts have far exceeded the total cost or expenditure to the assessee. Assuming there is any possibility of the assessee s incurring some liability in future in connection with the completion of the project or otherwise, the unsold portion comprising of 12,331 sq. ft. and the difference between the net receipts and the total expenditure and the amount actually treated as the assessee s income are more than ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... followed by the assessee, the project is fully completed only once all the shops are sold. This method of accounting is being consistently followed since the financial year 1984085 at page 8 of the assessee s paper book, the estimate of profit declared over the years which have been offered for taxation are listed. Asst.Year Recoveries Against sale Profit estimated Percentage Construction expenses 1985-86 4,565,507.00 456,550.70 10 13,730,976 1986-87 3,570,340.00 357,034.00 10 3,793,108 1987-88 4,391,600.00 438,897.00 10 1,722,211 1988-89 6,958,270.00 695,827.00 10 5,088,083 1989-90 10,607,141.00 1,272,856.92 12 10,082,088 1990-91 12,006,167.00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing followed by the assessee. At para 4 page 3 of his order the then Assessing Officer, held as follows: The estimated profits for A, B, C Building should be taken at 12% instead of 10% of the total receipt on the following grounds: a) If E F building is taken as a criteria, the actual profit works out to be 12% of actual receipt without the compound wall. b) Assessee changed his construction plans and switched over from Residential flats construction to office and shops construction. This shows that assessee itself is going for a higher profit earning construction. 28. From the above extract, it is clear that even before completion of the construction the assessee has been offering a certain percentage of his receipts to tax on estimate basis and also that the figure of 12% is what the Assessing Officer has been fixed and which the assessee has followed. In fact, for the assessment year 1991-92, and assessment year 1996-97, the assessee has offered net profit at 14% of receipts. From the assessment year 1997-98 to 2003-04, the assessee has offered net profit of 17%. Thus, there is factual inaccuracy in the arguments of Mr. Balodia, the learned Departmental Represen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cognition of income in order to reflect current performance. The amount of revenue recognized under this method is determined by reference to the stage of completion of the contract. The stage of completion can be looked at under this method by taking into consideration the proportion that costs incurred to date bears to the estimated total costs of contract. 18. the above indicates the difference between completed contract method and percentage of completion method. 19. In the judgment of the Bombay High Court in Taparia Tools Ltd. (supra) it has been held that in every case of substitution of one method by another method, the burden is on the Department to prove that the method in vogue is not correct and it distorts the profits of a particular year. Under the mercantile system of accounting based on the concept of accrual, the method of accounting followed by the assessee is relevant. In the present case, there is no finding recorded by the AO that the completed contract method distorts the profits of a particular year. Moreover, as held in various judgments, the Chit Scheme is one integrated scheme spread over a period of time, sometimes exceeding 12 months. We have exami ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... declared in A.Y. 2005-06 are considered low, the A.O may say no in that year and not in his year. Coming to the decision of Mumbai C Bench of the Tribunal in the case of Juhu Construction Co.Ltd., ITA No. 6259/Mum/04, Order dated 2nd February, 2009, the facts were identical. The Tribunal observed that the case of Champion Construction Co., the assessee was not offering income for assessment, for each year on the ground that the profit accrued only on the completion of full sale of the project and that the assessee in this case was offering income from the project every year. In this case also, the assessee was offering income by working out estimated profit for each project every year at a suitable percentage of sales during the year. 32. In the case of Chainrup Sampatram v. CIT (24 ITR 481), the Hon ble Full Bench of the Supreme Court has held that while valuing closing stock, anticipated losses are taken into account and that the anticipated profit in the shape of appreciation in the value of stock is not brought into account. This case law, in our considered opinion, is not of much help to assessee. 33. The Ho ble Bombay High Court in the case of CIT vs. Tata Iron Ste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of accounting provided in sub-section (1) or Accounting Standard as notified in sub-section (2). Admittedly, there is no Accounting Standard notified under sub-section (2), which is applicable to he assessee concerned. Hence, application of section 145(3) is bad in law. Books of account cannot be rejected without pointing out defects. 38. In view of the fact that the assessee is consistently following a particular method of accounting and also in view of the fact that all the expenditure recorded by the assessee in the books of account and thereafter loaded on the work-in-progress, is otherwise allowable under section 137(1) and has only the year of taxability is in dispute and as admittedly the entire exercise is revenue neutral, we allow ground Nos.1 and 2 of the assessee. 39. Coming to ground No. 3, in view of our findings in ground No.2, the finding on this aspect would not be necessary. The enhancement made by the learned CIT(A) consequently gets cancelled. In the result, ground No. 3 is to be allowed. 40. Ground Nos. 4 and 5 are on the claim of depreciation made by the assessee. Neither in the assessment order nor the appellate order, any particular reason is given ..... X X X X Extracts X X X X X X X X Extracts X X X X
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