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M/s Bhumiraj Constructions, D/5-6, Big Splash, Sector-17, Vashi, Navi Mumbai-400 703 Vs. JCIT-15(1), Mumbai-400 008
December, 12th 2014
                                                         ,,   ,
     IN THE INCOME TAX APPELLATE TRIBUNAL "B", BENCH MUMBAI

                                                         ,

                  BEFORE : SHRI R.C.SHARMA, AM
                                    &
                           SHRI AMIT SHUKLA, JM
                                  ITA No.5195/Mum/2012
              (               Assessment Year : 2009-10)
     M/s Bhumiraj Constructions, Vs. JCIT-15(1), Mumbai-400 008
     D/5-6, Big Splash, Sector-17,
     Vashi, Navi Mumbai-400 703
                                PAN/GIR No. : AAFFB 3546 H
           (        Appellant)      ..       (     Respondent)

                                    AND
                                  ITA No.3380/Mum/2012
              (               Assessment Year : 200 8-09)
     M/s Bhumiraj Constructions, Vs. JCIT-15(1), Mumbai-400 008
     D/5-6, Big Splash, Sector-17,
     Vashi, Navi Mumbai-400 703
                                PAN/GIR No. : AAFFB 3546 H
           (        Appellant)      ..       (     Respondent)

                   /Assessee by        :     Shri Pradip N. Kapasi
                  /Revenue by          :     Shri Sujit Bangar
                   Date of Hearing :            8th Sept. 2014
                  Date of Pronouncement :        11th Dec, 2014

                                    ORDER

PER R.C.SHARMA (A.M.) :

        These are the appeals filed by assessee against the order of CIT(A)

for assessment years 2008-09 & 2009-10, in the matter of order passed

u/s.143(3) of the I.T. Act.


2.      Rival contentions have been heard and record perused. The issue

in both the years under consideration are same, therefore, both the
                                     2                 ITA No.5195 &3380 /12

appeals were heard together and are now disposed of by this

consolidated order.

3.    Facts in brief are that the assessee is a partnership firm engaged in

the business of development and construction of housing project since

inception. During the Assessment Year 2009-10, the assessee has

undertaken five projects. The AO has rejected the books of accounts by

invoking provisions of Section 145(3) and estimated business income of

the assessee on the basis of actual sale of flats. The AO observed that

assessee has offered profit in respect of its three projects viz. Woods,

Meadows and Hermitage, but no profit is offered in respect of two projects

viz. Iraisaa and Costarica. It was further observed by the AO that the

assessee was following project completion method and no profit is

declared on the basis of percentage completion method. The AO also

observed that the assessee did not declare any profit in respect of work-

in-progress during the year. The total work-in-progress during the year in

respect of all the five projects is Rs.32,84,47,955/-. In the opinion of the

AO, accounting system followed by the assessee by not offering taxable

profit on the basis/of percentage completion method is not in accordance

with the I.T Act and as per the methods prescribed by the Chartered

Accountant's Institute for developers. On the other hand, at the time of

assessment the assessee submitted that it has correctly declared profit

from various projects. It was further submitted that the assessee is

following the same method of accounting consistently during the last·

several years, but the AO did not agree with the contentions of the

appellant and it 'was held by him that with effect from 1.4.2003 as per

revised AS-7, the project completion method has been done away and the
                                        3                   ITA No.5195 &3380 /12

only method for recognizing the revenue is percentage completion

method. Accordingly, the AO has estimated the profit @ 10% of work

done during the year as against the profit declared by the assessee.




4.    By the impugned order, CIT(A) deleted the addition made in respect

of three projects, namely, Woods, Meadows and Hermitage by observing

that these projects have already been completed in the immediately

preceding year i.e. 2007-08. However, in respect of the remaining two

projects, namely, Costarica and Iraisaa, the CIT(A) has confirmed the

addition made by the AO. Relevant observation of the CIT(A) in this

regard was as under :-

      "3.2 I have carefully considered the findings of the AO as well as
      the submissions of the appellant. After considering the rival
      submissions, it is noted that during the .year, the appellant has
      disclosed profit/loss on it's five running 'projects, Out of these
      projects, three projects have already been completed in the
      immediately preceding year i.e. 2007-08, These projects are
      Woods, Meadows and Hermitage. The remaining two projects are
      new projects and these are Costarica and Iraisaa, whereas
      Costarica is still in initial phase, where only 1% saleable area is
      sold and in project 'Iraisaa' more than 43% area has been sold upto
      the year under consideration. Under these circumstances, in my
      considered opinion, it would not be appropriate to apply the
      changed method adopted by the AO in the cases of old projects,
      which have already been completed and the method consistently
      followed by the appellant was accepted in earlier years. These
      projects are almost sold out and profit on them have already been
      disclosed by the assessee in earlier years. Therefore, to that
      extent, I agree with the contention of the appellant that if 10% profit
      is again charged on the remaining work in progress completed
      during the year relating to such projects, it will tantamount to double
      addition because in that case, profit will be taxed once at the time.
      of sale as has already been declared in earlier years and now once
      again on the basis of new method adopted by the AO. Therefore,
      the AO is directed 'to delete the addition made in respect of WIP of
      the three complete projects i.e Woods, Meadows and Hermitage.
      However, I do' not agree with the contention of the appellant that in
      the new projects i.e. Costarica and Iraisaa also, the consistently
      followed method of accounting of the assessee should be allowed.
      The principle of consistency does not extend to the new project. In
      this 'regard, I do agree with the finding of the AO that as per the
      revised accounting standard AS-7, the profit is required to be
      recognized on the basis of work-in-progress as it is a more
      scientific manner, which gives a correct picture of the profit as
                                       4                   ITA No.5195 &3380 /12

      compared to the method adopted by the assessee on the basis of
      percentage of area sold. This fact gets further strengthened from
      the assessee's own statistics, wherein by the method adopted by
      the assessee profit of project Iraisaa is worked out at 3.74%,
      whereas in Costarica it is 24.48%, whereas work-in-progress during
      the year in both the projects are almost similar i.e. in the range of
      12 crores each. The appellant has not. been able to submit any
      satisfactory explanation regarding such huge variation in 'the profits
      of these two projects, which are of almost same magnitude. Under
      these circumstances, taking a holistic view of the matter, I am
      convinced that the method adopted by the AO by applying a
      uniform 10% net profit on WIP is more reasonable, hence the
      addition made by the AO in respect of the two new projects i.e.
      Costarica and Iraisaa, is sustained. These grounds of appeal are
      accordingly, partly allowed."

5.    In respect of addition deleted by CIT(A), the Revenue is not in

appeal before us, however, against the above order of CIT(A), assessee

is in further appeal before us.

6.    Learned AR reiterated the contentions taken before CIT(A), which

are as under :-

      "The AO's observations that the assessee is recognizing the
      revenue by following the project completion method is not correct at
      all. The correct method, which has consistently been adopted by
      the assessee is on the basis of percentage completion method. It
      was further pointed out that the another observation of the AO that
      no profit is disclosed on project 'Iraisaa' and 'Costarica' is also
      incorrect, because the assessee has disclosed profits of
      Rs.3,60,509/- for project 'Iraisaa' and Rs.4,74,060/- for project
      'Costarica'. It was further submitted that as against the estimated
      addition made by the AO on the basis of 10% profit on work-in-
      progress, the assessee has adopted a different percentage
      completion method on the basis of sales made during the year and
      not on the basis of work in progress during the year. It was further
      submitted that the percentage of profit declared in 'Costarica',
      where only less than 1 % area is sold, is worked out at 25.48%
      whereas in 'the case of 'Iraisaa', where 43.22% area has been sold
      on, profit is declared at 3.74%. It was vehemently argued by the Ld.
      AR of the assessee that the method adopted by the assessee for
      working out the profit on the basis of sales, made during the year is
      also a correct and scientific method of working out the profits by
      percentage completion method. Therefore on the basis of these
      grounds, it was requested that the method consistently followed by
      the appellant should not be disturbed and the disclosed profit
      should be assessed as such."
                                     5                 ITA No.5195 &3380 /12

7.    On the other hand, learned DR relied on the findings recorded by

AO and CIT(A).

8.    We have considered rival contentions, carefully gone through the

orders of the authorities below and found from the record that out of five

projects the CIT(A) has deleted the addition made in respect of three

projects which were found to be completed in earlier years. However, in

respect of project Iraisaa and Costarica, the AO made an addition by

taking 10% profit on work-in-progress in respect of these projects and the

same has been confirmed by the CIT(A) and assessee is in further appeal

before us.

9.    From the record, we found that assessee in respect of the project

Costarica, had on its own recognized the profit on percentage of

completion method of accounting as in the past. We also found that the

AO has also treated administrative expenses as part of the cost of work

done which is absolutely wrong. It appears that assessee has recognized

revenue by applying percentage of completion method prescribed by the

ICAI vide the Guidance Note on recognition of revenue by real estate

developers read with the Accounting Standard 9 and 7 of the ICAI. It is

also clear from the record that the AO has estimated profit without

rejecting method of accounting and the books of accounts maintained by

assessee. The AO has also not invoked provisions of Section 145 for

rejection of books of accounts. In case of Iraisaa, we found that during the

year 43.22% area has been sold on, profit was declared at 3.74%. The

assessee has duly declared profit on the basis of sales made during the

year. In view of the fact that assessee was following percentage

completion method of accounting for recognizing its profit of the projects
                                       6                     ITA No.5195 &3380 /12

under construction and sale of flats for the completed, there is no merit in

the observation of the AO that assessee was following project completion

method. We also found that percentage completion method followed by

assessee in earlier year was accepted by the department in earlier years.

We found that for the assessment year 2004-05 to 2007-08, the accounts

were finalized by following percentage completion method of account,

total profit thereon was accepted by the AO under scrutiny assessment

framed u/s.143(3). The project Iraisaa was undertaken on a plot 1, Sector

19, Sanpada in Navi Mumbai in the year 2005. The said housing project

was commenced on 19th May,2005 as certified in the Commencement

Certificate issued by the Navi Mumbai Municipal Corporation and

completed on 20th September, 2008 as noted in the Occupancy Certificate

issued by the Navi Mumbai Municipal Corporation. Profits for the

assessment     year   2008-09    was       determined   at    Rs.3,60,509/-    on

percentage completion method of Rs.12,14,16,969/-

10.   In respect of Costarica project, it was undertaken on a plot 1 and 2,

Sector-18, Sanpada in Navi Mumbai in the year 2007. The said

commercial project is still in progress. Profits for the year is determined at

Rs.4,74,060/- on percentage completion method of Rs.12,75,62,614/-.

The objection of the AO was that no profit has been declared by the

assessee in respect of its Iraisaa and Costarica projects, but the same is

factually incorrect. From the record, we found that assessee has offered

Rs.3,60,509/- as profit for Iraisaa project and Rs.4,74,060/- for Costarica

project. The said profits were scientifically computed and the details

thereof were annexed with the return of income. Furthermore, the

assessee consistently followed the method of account for computing
                                     7                 ITA No.5195 &3380 /12

profits of these projects under progress as in the past years in whose

assessments, this method of accounting has been accepted under orders

passed u/s.143(3). After verifying all the accounts for the years under

consideration, we found that assessee was following percentage

completion method for Iraisaa and Costarica projects and has offered for

taxation he amount of Rs.3,60,509/- and Rs.474,060/- respectively for the

said projects, the work of which is under progress. In view of these facts

allegation of AO to the effect that the assessee did not declare any profit

with regard to work-in-progress and the completed project, is also having

no basis. We found that assessee has recognized profit for these two

projects, which was under progress. The details are as under :-

          Project      Profit of the year   Method of accounting
          Woods        21,84,818            Actual Sales basis
          Meadows      (9,16,107)           Actual Sales basis
          Hermitage    1,77,78,443          Actual Sales basis
          Iraisaa      3,60,509             Percentage Completion
          Costarica    4,74,060             Percentage Completion





11.   In view of above discussion, we set aside the order of lower

authorities   for making addition by estimating 10% profit on work-in-

progress for both the years. The AO is directed to reframe assessment

keeping in view our above observation. Needless to say the assessee

should be given full opportunity before finalizing the assessment.

12.   In the assessment year 2008-09, the AO has also disallowed

business expenditure of Rs.65,68,500/-. From the record, we found that

assessee had paid an amount of Rs.65,68,500/- during the year to certain

persons, to whom the assessee had agreed to sell the premises under

construction in the preceding financial years. The said amount was
                                      8                  ITA No.5195 &3380 /12

debited to the profit & loss account and was claimed as business

expenditure u/s.37 or as a business loss u/s.28 of the Act. The reasons

for disallowance has been recorded by the AO at para 9 & 9.7 of his

order. The AO held that such expenditure was capital in nature. By the

impugned order, the CIT(A) confirmed the action of the AO.

13.   We have considered rival contentions and found that assessee is

engaged in the business of development and construction of buildings

comprising of several units to be used for the purposes of residence

and/or office. In the preceding years, the assessee had agreed to sell

certain premises in the buildings under construction to various persons on

the terms and conditions and for consideration mutually agreed upon with

such persons. The aforesaid sales were duly reflected in the books of

accounts of the respective year/years of sales and the profit thereon was

duly recognized in the books and was offered for taxation in spite of the

fact that the work was in progress and the possession of the flats was not

given. Since the assessee was unable to comply with some of the

conditions of sale and the purchasers of the said flats were not satisfied

with the progress of the work and had expressed their desire to opt out of

the deals on payment of compensation for non-performance. Accordingly,

assessee settled the dispute, took over the rights of the said persons in

the said flats on surrender of all their rights, title and interest in the said

flats in favour of the assessee on refund of consideration received till date

and on payment of compensation to the said persons during the year

under consideration.
                                            9                   ITA No.5195 &3380 /12

14.    It is clear from the record that payments so made was towards

compensation to the customers, who have booked their flats and the

same was paid for the reason of commercial expediency. It is pertinent to

mention that assessee has not claimed expenditure in respect of refund of

sale consideration of Rs.1,43,97,500/-, however, only amount of

compensation       termed        as    buy-back         expenses   aggregating         to

Rs.65,68,500/- which has been claimed as deduction which amount as

has been informed in the course of regular business. Thus, there is no

reason to disallow such expenses as revenue expenses. Accordingly, we

direct the AO to allow expenses of Rs.65,68,500/- as revenue expenses.

15.    In the result, both appeals of the assessee are allowed in
part, in terms indicated hereinabove.
       Order pronounced in the open court on this 11/12/2014.
                                                               /12/2014

                Sd/-                                               Sd/-
          (        )                                            (       )
        (AMIT SHUKLA)                                         (R.C.SHARMA)
                / JUDICIAL MEMBER                             / ACCOUNTANT MEMBER
      Mumbai;              Dated       11/12/2014
       /pkm,      PS
                        Copy of the Order forwarded to :
1.         / The Appellant
2.       / The Respondent.
3.                      / The CIT(A), Mumbai.
4.              / CIT
5.                                       / DR, ITAT, Mumbai

6.           Guard file.

                                   //True Copy//
                                                                               / BY ORDER,



                                                                     (Asstt.   Registrar)
                                                                           / ITAT, Mumbai

 
 
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