ASST CIT CIR 19(2), MUMBAI V. JAVED R. QURESHI, MUMBAI

ITA 1052/MUM/2011

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 4065 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 5 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-07-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Next Hearing Date: 11-07-2013
• Assessment Year: 2006-2007
• Appeal Filed On: 04-02-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: O P SINGH
• Assessee Lawyers: AJAY R SINGH
• Keywords: Depreciation
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL I BENCH, MUMBAI .. , !'# $ $ $ $ ! %, & !'# !' BEFORE SHRI P.M. JAGTAP, AM AND SHRI SANJAY GARG, J M !./ I.T.A. NO. 1052 /MUM/2011 ( &) % $*% &) % $*% &) % $*% &) % $*% / / / / ASSESSMENT YEAR : 2006-07) ASSTT. COMMISSIONER OF INCOME TAX 19(2), ROOM NO. 315,3 RD FL., PIRAMAL CHAMBERS, LALBAUG, PAREL, MUMBAI 400 012. ) ) ) ) / VS. SHRI JAVED R. QURESHI, M/S MANDELIA ASSOCIATES, 25, DHEERAJ HERITAGE, S.V. ROAD, SANTACRUZ (W), MUMBAI 400 054. #+ !./ PAN : AACPQ2384F D ( +, / // / APPELLANT ) .. ( -.+, / RESPONDENT ) +, / 0 ! / APPELLANT BY : SHRI O.P. SINGH -.+, / 0 ! / RESPONDENT BY : SHRI AJAY R. SINGH !)$ / / // / DATE OF HEARING : 11-07-2013 12* / / DATE OF PRONOUNCEMENT : 19-07-13 '3 / O R D E R PER P.M. JAGTAP, A.M . : THIS APPEAL IS PREFERRED BY THE REVENUE AGAINST THE ORDER OF LD. CIT(A) 30, MUMBAI DATED 15-11-2010 ON THE FOL LOWING GROUNDS:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LEARNED CIT(A) HAS ERRED IN HOLDING THAT TO EXCLUDE INDIRECT EXPENSES OF RS.25,38,584/- FROM THE WIP FOR WORKING OUT THE G.P . OF THE ASSESSEE WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE HAS NOT INDULGED IN ANY ITA 1052/MUM/2011 2 OTHER ACTIVITY DURING THE YEAR AND THE EXPENDITURE ARE INCURRED IN RELATION TO THE BUILDING PROJECT ONLY. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) HAS ERRED IN HOLDING THAT TO EXCLUDE THE BROKERAGE PAID TO M/S. KUNAL ASSOCIATES OF RS.7,22,216/- WHILE COM PUTING WIP FOR THE YEAR, IGNORING THE FACT THAT THE ASSESSEE HAD PAID BROKERAGE DURING THE YEAR WHICH WAS NOT REFLECTED IN EITHER THE PROJECT A/C. OR IN THE P & L ACCOUNT. 3. THE APPELLANT PRAYS THAT THE ORDER OF THE CIT(A) ON THE ABOVE GROUND BE SET ASIDE AND THAT OF THE AO BE RESTORED. 3. THE ASSESSEE IN THE PRESENT CASE IS AN INDIVIDUA L WHO IS ENGAGED IN THE BUSINESS OF DEVELOPERS, BUILDERS AND CIVIL CONTRACT ORS. UNDER THE NAME AND STYLE OF HIS PROPRIETARY CONCERN M/S MANDELIA ASSOC IATES. THE RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION WAS FILED B Y HIM ON 31-10-2006 DECLARING TOTAL INCOME OF RS. 11,18,062/-. IN THE P &L ACCOUNT FILED ALONG WITH THE SAID RETURN, DIRECT EXPENSES INCURRED ON LABOUR AND MATERIAL FOR DEVELOPMENT OF JUHU PROJECT AMOUNTING TO RS. 5,38,9 0,160/- WERE DEBITED BY THE ASSESSEE AND GROSS PROFIT THEREON WAS ESTIMATED AT RS. 33,41,190/- BY APPLYING THE GP RATE OF 6.2%. SIMILARLY, THE GROSS PROFIT FROM MAHIM PROJECT WAS ESTIMATED BY THE ASSESSEE AT RS. 3627/-. FROM T HIS GROSS PROFIT OF RS. 33,41,190/- + RS. 3627/-, THE ASSESSEE HAD CLAIMED VARIOUS EXPENSES ON ACCOUNT OF SALARY, BANK INTEREST, INTEREST ON LOAN, SECURITY CHARGES AND DEPRECIATION ETC. AGGREGATING TO RS. 25,38,584/- A ND ACCORDINGLY NET PROFIT WAS SHOWN. ACCORDING TO THE A.O., THESE VARIOUS EXP ENSES INCURRED BY THE ASSESSEE WERE RELATED TO THE BUILDING PROJECTS ONLY AND THE SAME THEREFORE WERE REQUIRED TO BE CAPITALIZED TO THE WIP ACCOUNT. HE WAS OF THE OPINION THAT THE PROFIT SHOULD HAVE BEEN ESTIMATED BY THE A SSESSEE ON THE TOTAL EXPENSES INCLUDING THE INDIRECT EXPENSES INCURRED I N RELATION TO THE BUILDING PROJECTS AND ACCORDINGLY THE WIP SHOULD HAVE BEEN W ORKED OUT FOR THE YEAR UNDER CONSIDERATION WHICH WAS ALLOWABLE AS A COST F OR THE YEAR IN WHICH THE SALES FROM PROJECT ARE BOOKED. HE, THEREFORE, REQU IRED THE ASSESSEE TO EXPLAIN AS TO WHY THE WIP FOR THE YEAR UNDER CONSIDERATION SHOULD NOT BE WORKED OUT ITA 1052/MUM/2011 3 IN THAT MANNER. IN REPLY, THE FOLLOWING EXPLANATIO N WAS OFFERED BY THE ASSESSEE:- AS THE JUHU PROJECT HAS NOT BEEN COMPLETED IN ONE Y EAR, THE FIRM HAS FOLLOWED THE PERCENTAGE METHOD FOR DETERMINING TH E GROSS PROJECT. THEREFORE, M/S MANDELIA ASSOCIATE HAS TAKEN THE EST IMATED GROSS PROFIT EVERY YEAR AND THEY HAVE DEDUCTED THE ADMINI STRATIVE EXPENSES OF THE RESPECTIVE YEAR FROM THE ESTIMATED GROSS PROFIT . THUS THEY HAVE ARRIVED AT THE NET PROFIT OF EVERY YEAR AFTER DEDUC TING THE ADMINISTRATIVE EXPENSES FROM THE ESTIMATE GROSS PROFIT OF THE RESP ECTIVE YEAR. THE ABOVE EXPLANATION OF THE ASSESSEE WAS NOT FOUND ACCEPTABLE BY THE A.O. AND HE PROCEEDED TO ESTIMATE THE INCOME OF ASSESSEE IN THE MANNER WHICH WAS FOUND TO BE PROPER BY HIM. IN THIS REGARD, HE ALSO NOTED THAT THE BROKERAGE OF RS. 7,22,216/- WAS PAID BY THE ASSESSE E IN THE YEAR UNDER CONSIDERATION WHICH WAS NOT REFLECTED EITHER IN THE PROJECTS ACCOUNT OR IN THE P&L ACCOUNT. HE, THEREFORE, INCLUDED THE BROKERAGE EXPENSES ALSO IN THE TOTAL EXPENSES INCURRED BY THE ASSESSEE DURING THE YEAR U NDER CONSIDERATION IN RELATION TO THE BUILDING PROJECTS AND ESTIMATED THE PROFIT AT RS. 35,46,986/- AS UNDER IN THE ASSESSMENT COMPLETED U/S 143(3) OF THE INCOME TAX ACT, 1961 VIDE AN ORDER DATED 26-12-2008. JUHU PROJECT DIRECT EXPENSES : RS. 5,38,90,160/- MAHIM PROJECT DIRECT EXPENSES : RS. 58,4 92/- INDIRECT EXPENSES : RS. 25,38,584/- BROKERAGE TO M/S KUNAL ASSOCIATES : RS. 7,2 2,216/- =============== RS. 5,72,09,452/- =============== ESTIMATED PROFIT @ 6.2% ON ABOVE = RS. 35,46,9 86/- =============== 4. AGAINST THE ORDER PASSED BY THE A.O. U/S 143(3) OF THE ACT, AN APPEAL WAS PREFERRED BY THE ASSESSEE BEFORE THE LD. CIT(A) AND THE FOLLOWING SUBMISSIONS WERE MADE ON BEHALF OF THE ASSESSEE BEF ORE THE LD. CIT(A) IN SUPPORT OF THE STAND THAT ESTIMATION MADE IN THE RE TURN OF INCOME WAS CORRECT:- ITA 1052/MUM/2011 4 THE SAID METHOD OF ESTIMATION OF GROSS PROFIT HAS BEEN ADOPTED BY YOUR APPELLANT BECAUSE THE COMPLETION OF THE PROJEC T IS SPANNING OVER MORE THAN ONE FINANCIAL YEAR. AGAINST THE SAID GROS S PROFIT OF @ 6.2% THE APPELLANT HAS CLAIMED EXPENSES WHICH ARE INDIRE CT EXPENSES AND NOT DIRECTLY RELATED WITH EITHER OF THE PROJECTS. T HE SAID EXPENSE ARE GENERAL IN NATURE AND ARE FIXED OVERHEADS WHICH OUG HT TO BE INCURRED BY YOUR APPELLANT IRRESPECTIVE OF HAVING INCURRED A NY DIRECT EXPENSES TOWARDS COST OF PROJECTS. THE LIST OF INDIRECT EXPE NSES CHARGED TO P&L A/C AND CLAIMED BY THE APPELLANT ARE SEPARATELY DIS CLOSED IN THE P/L A/C COPY WHICH IS FORMING A PART OF PAPER BOOK & TH E SAME WERE FURNISHED IN THE COURSE OF ASSESSMENT PROCEEDING S BEFORE AO VIDE LETTER DT. 06.08.2008. 24.11 2008 & 22.12.2008. IN THE YEAR UNDER CONSIDERATION THE AO HAS ERRED IN COMPUTING THE WIP OF APPELLANT BY INCLUDING THEREIN DIRECT AND INDIRECT EXPENSES AS C OST OF PROJECT FOR WORKING OUT A GP RATIO OF 6.2% AND THEREBY MAKING A N ADDITION OF RS. 27,32,917/- (RS. 35,46,986/- -RS. 8,14,069/-). THE APPELLANT HAS OFFERED A GROSS PROFIT OF RS. 33,44,817/- @ 6.2% ON DIRECT COST AND CLAIMED INDIRECT EXPENSES OF RS. 25.38,584/-. NET R ESULTS OF RS.8.14,069/- IS OFFERED FOR TAXATION, WHICH HAS BE EN ENHANCED BY THE AO TO 35.46.986/- BY MAKING AN ADDITION OF RS. 27.3 2,917/- THE SAID METHOD OF ESTIMATING GROSS PROFIT AT @6 2% ON DIREC T COST INCURRED BY THE APPELLANT DURING THE FINANCIAL YEAR RELEVANT TO THE AY 2006-07 HAS BEEN CONSISTENTLY FOLLOWED BY YOUR APPELLANT FROM Y EAR AFTER YEAR. EVEN THE ASSESSMENT PROCEEDING FOR A Y 2005-06 HAS BEEN COMPLETED U/S. 143(3) OF THE ACT BY ADOPTING A GROSS PROFIT OF @ 6 .2% OF DIRECT EXPENSES INCURRED FOR THE PROJECTS BY THE APPELLAN T. COPY OF P&L A/C ALONG WITH ASSESSMENT ORDER FOR THE AY 2005-06 ARE ENCLOSED IN THE PAPER BOOK, FOR YOUR KIND PERUSAL. THE ASSESSMENT P ROCEEDING EVEN FOR SUBSEQUENT ASSESSMENT YEAR I.E. A. Y. 2007-08 HAS B EEN COMPLETED U/S. 143(3) OF THE ACT BY ADOPTING GROSS PROFIT OF @ 6.2% OF DIRECT EXPENSES INCURRED OF THE PROJECTS BY THE APPELLANT. COPY OF P&L A/C ALONG WITH COPY OF ASSESSMENT ORDER FOR THE A. Y. 2 00 7-08 ARE ENCLOSED HEREWITH IN FORMING A PART OF PAPER BOOK. DISREGARD ING THE ABOVE FACTS THE LEARNED AO HAS WORKED OUT GROSS PROFIT ON WIP @ 6.2% BY INCLUDING THEREIN THE INDIRECT EXPENSES WHICH ARE M AINLY ADMINISTRATIVE EXPENSES IN NATURE. THE SAID EXPENSES ARE INCURRED BY YOUR APPELLANT ON DAY TO DAY BASIS WHICH ARE NOT DIRECTLY CONNECTE D IN CONNECTION WITH THE PROJECT COST OF BOTH INCOMPLETE PROJECTS. THE L EARNED AO FAILED TO APPRECIATE THAT EVEN IN THE PAST, THE METHOD ADOPTE D BY THE APPELLANT BY OFFERING GROSS PROFIT @ 6 2% ON WIP HAS BEEN ACC EPTED BY THE DEPT. THE AO HAS FAILED TO BRING ANYTHING CONTRARY ON REC ORDS TO SHOW THAT THE METHOD ADOPTED AND CONSISTENTLY FOLLOWED BY THE APPELLANT FROM YEAR AFTER YEAR IS DEFECTIVE. YOUR APPELLANT CONTENDS THAT THE JUDICIAL PROPRIETA RY DEMANDS CONSISTENCY AND THEREFORE ACTION OF AO OF ESTIMATIN G GROSS PROFIT @6.2% OF WIP BY INCLUDING THEREIN THE INDIRECT EXPENSES D ESERVES TO BE SET ASIDE AND ESTIMATION OF GROSS PROFIT @ 6.2% OF WIP BASED ON DIRECT EXPENSES ADOPTED BY YOUR APPELLANT BE ACCEPTED AND CLAIM OF THE ITA 1052/MUM/2011 5 APPELLANT OF INDIRECT EXPENSES OF RS..F5.38.584/- A GAINST THE SAID G.P. @ 6.2% BE ALLOWED. 5. THE LD. CIT(A) FOUND MERIT IN THE SUBMISSIONS MA DE BY THE ASSESSEE AS ABOVE AND DIRECTED THE A.O. TO ACCEPT THE PROFIT AS DECLARED BY THE ASSESSEE AFTER DEDUCTING THE INDIRECT EXPENSES FROM THE GROS S PROFIT ESTIMATED AT THE RATE OF 6.2% OF THE DIRECT COST FOR THE FOLLOWING R EASONS GIVEN IN PARA 8 OF HIS IMPUGNED ORDER:- I HAVE CAREFULLY GONE THROUGH THE ASSESSMENT ORDER AND THE SUBMISSIONS OF THE APPELLANT AND OTHER RELEVANT MAT ERIAL ON RECORD, IN THIS CASE THE AD HAS ESTIMATED THE PROFIT OF THE AP PELLANT ON THE TOTAL EXPENSES INCLUDING THE INDIRECT EXPENSES OF RS. 25, 38,584/-. ACCORDING TO THE AD IN THE CASE OF BUILDERS, DEVELOPERS ALL T HE EXPENSES DIRECT OR INDIRECT NEED TO BE CAPITALIZED TO WIP AND THE TOTA L WIP IS ALLOWED AS A COST IN THE YEAR IN WHICH THE SALES FROM THE PROJEC T ARE BOOKED. THE CONTENTION OF THE APPELLANT ON THE OTHER HAND IS TH AT THE WIP AT THE END OF EVERY FINANCIAL YEAR IS ARRIVING AT BY ADDING ES TIMATED GROSS PROFIT @ 6.2% ON DIRECT EXPENSES INCURRED BY THE APPELLANT I N THE YEAR THE INDIRECT EXPENSES ARE NOT DIRECTLY RELATED WITH EIT HER OF THE PROJECT. THE SAID EXPENSES ARE GENERAL IN NATURE AND ARE FIXED O VERHEADS WHICH ARE REQUIRED TO BE INCURRED BY THE APPELLANT IRRESPECTI VE OF HAVING INCURRED ANY DIRECT EXPENSES TOWARDS COST OF PROJECTS. FURTH ER, THE SAID METHOD OF ESTIMATING GP @ 6.2% ON DIRECT COST INCURRED BY THE APPELLANT DURING THE FINANCIAL YEAR RELEVANT TO THE ASSESSMENT YEAR 2006-07 HAS BEEN CONSISTENTLY FOLLOWED BY THE APPELLANT FROM YEAR TO YEAR. IT IS ALSO SUBMITTED BY THE APPELLANT THAT EVEN THE ASSESSMENT PROCEEDINGS FOR A.Y. 2005-06 HAS BEEN COMPLETED U/S. 143(3) OF THE ACT BY ADOPTING A GROSS PROFIT OF 6.2% OF DIRECT EXPENSE INCURRED FOR THE PROJECTS BY THE APPELLANT. AFTER HAVING HEARD THE RIVAL SUBMISSIONS, I FIND CO NSIDERABLE FORCE IN THE ARGUMENTS OF THE APPELLANT FOR NON-INCLUSION OF INDIRECT EXPENSES IN THE WIP FOR WORKING OUT GROSS PROFIT. I AGREE WITH THE APPELLANT THAT INDIRECT EXPENSES WHICH ARE MAINLY ADMINISTRATIVE E XPENSES IN NATURE ARE REQUIRED TO BE INCURRED IRRESPECTIVE OF DIRECT EXPENSES AS THE SAME ARE NOT RELATED TO THE COST OF THE PROJECT. THEREFO RE, THE AO IS DIRECTED TO EXCLUDE INDIRECT EXPENSES FROM WIP FOR WORKING GROS S PROFIT OF THE APPELLANT. THIS GROUND OF APPEAL IS ALLOWED. AGGRIEVED BY THE ORDER OF THE LD. CIT(A), THE REVEN UE HAS PREFERRED THIS APPEAL BEFORE THE TRIBUNAL. ITA 1052/MUM/2011 6 6. AT THE TIME OF HEARING, THE LD. D.R. RELIED ON T HE ORDER OF THE A.O. IN SUPPORT OF THE REVENUES CASE ON THIS ISSUE. THE L D. COUNSEL FOR THE ASSESSEE, ON THE OTHER HAND, STRONGLY SUPPORTED THE IMPUGNED ORDER OF THE LD. CIT(A) SUBMITTING THAT THE SAME IS WELL REASONED AND WELL DISCUSSED. HE SUBMITTED THAT TWO PROJECTS WERE COMPLETED BY THE ASSESSEE DU RING THE PERIOD OF FOUR YEARS INCLUDING THE YEAR UNDER CONSIDERATION AND TH E PROFIT OF THE SAID PROJECTS WAS DECLARED BY THE ASSESSEE FOLLOWING THE PERCENTAGE COMPLETION METHOD BY ESTIMATING THE GROSS PROFIT AT 6.2% ON TH E DIRECT COST AND DEDUCTING INDIRECT EXPENSES ACTUALLY INCURRED FROM SUCH GROSS PROFIT. HE CONTENDED THAT THIS METHOD OF ACCOUNTING FOLLOWED B Y THE ASSESSEE WAS ACCEPTED BY THE A.O. IN THE REMAINING PERIODS BUT T HE SAME WAS NOT ACCEPTED ONLY IN THE YEAR UNDER CONSIDERATION. HE CONTENDED THAT THE ENTIRE PROFIT OF THE TWO PROJECTS WAS FINALLY OFFERED TO TAX BY THE ASSESSEE AS PER THE METHOD CONSISTENTLY FOLLOWED BY THE ASSESSEE AND THIS POSI TION WAS RIGHTLY APPRECIATED BY THE LD. CIT(A) WHILE DIRECTING THE A .O. TO ACCEPT THE METHOD FOLLOWED BY THE ASSESSEE IN THE YEAR UNDER CONSIDER ATION. 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND ALS O PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. IT IS OBSERVED THAT THE PERCENTAGE COMPLETION METHOD WAS FOLLOWED BY THE ASSESSEE TO RECOGNIZE IN COME FROM THE DEVELOPMENT OF TWO PROJECTS AND AS PER THE SAID MET HOD CONSISTENTLY FOLLOWED, GROSS PROFIT WAS ESTIMATED AT 6.2% OF THE DIRECT CO ST AND INDIRECT EXPENSES WERE DEDUCTED FROM SUCH GROSS PROFIT TO ARRIVE AT THE NET PROFIT. IN OUR OPINION, THIS ESTIMATION OF INCOME MADE BY THE ASSE SSEE WAS IN ACCORDANCE WITH THE PERCENTAGE COMPLETION METHOD FOLLOWED BY T HE ASSESSEE AND IT APPEARS THAT THE A.O. DID NOT ACCEPT THE SAID ESTIM ATION AND SUBSTITUTED THE SAME BY HIS OWN ESTIMATION ASSUMING THAT THE ASSESS EE WAS FOLLOWING PROJECT COMPLETION METHOD. IT IS WELL SETTLED THAT WHEN TH E PERCENTAGE COMPLETION METHOD IS FOLLOWED BY THE ASSESSEE, ONLY DIRECT COS T IS TAKEN INTO CONSIDERATION AFTER ADDING ESTIMATED GROSS PROFIT T O WORK OUT THE WIP FOR THE ITA 1052/MUM/2011 7 RELEVANT YEAR WHILE THE INDIRECT EXPENSES INCURRED IN THE RELEVANT YEAR ARE ALLOWED AND REDUCED FROM THE GROSS PROFIT SO ESTIMA TED TO ARRIVE AT THE NET PROFIT OF THAT YEAR. THE WIP SO WORKED OUT IS CARR IED FORWARD TO THE SUBSEQUENT YEAR AND THE SAME IS FINALLY REDUCED/ADJ USTED AGAINST THE SALES VALUE OF THE PROJECT IN THE YEAR WHEN THE PROJECT I S COMPLETED AND THE SALE THEREOF ARE BOOKED. AS RIGHTLY CONTENDED BY THE LD . COUNSEL FOR THE ASSESSEE, THE ENTIRE PROFIT OF THE PROJECT THUS IS OFFERED TO TAX DURING THE PERIOD OF EXECUTION AND THERE WAS NO JUSTIFICATION IN THE ACT ION OF THE A.O. IN DISTURBING THE METHOD FOLLOWED BY THE ASSESSEE OF RECOGNIZING THE INCOME FROM THE PROJECTS ONLY IN THE YEAR UNDER CONSIDERATION WHEN THE SAME WAS ACCEPTED IN THE REMAINING THREE YEARS. WE, THEREFORE, FIND NO INFIRMITY IN THE IMPUGNED ORDER OF THE LD. CIT(A) DIRECTING THE A.O. TO ACCEP T THE METHOD FOLLOWED BY THE ASSESSEE OF ESTIMATING THE GROSS PROFIT ON DIRECT C OST AND DEDUCTING THE INDIRECT EXPENSES FROM SUCH GROSS PROFIT TO ARRIVE AT THE NET PROFIT. THE SAME IS, THEREFORE, UPHELD ON THIS ISSUE DISMISSING THIS APPEAL FILED BY THE REVENUE. 8. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISS ED. 4 5 #$ / 4 / 67 ORDER PRONOUNCED IN THE OPEN COURT ON 19-07-13. . '3 / 12* 8')5 19-07-13 2 / SD/- SD/- (SANJAY GARG) (P.M. JAGTAP ) & !'# JUDICIAL MEMBER !'# / ACCOUNTANT MEMBER MUMBAI ; 8') DATED 19-07-13 $.&).!./ RK , SR. PS