,, ,
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
|