M/s Sai Sree Developers Private Limited, Hyderabad V. ACIT., .Cir-3(1), Hyderabad

ITA 1724/HYD/2013

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 6304 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 8 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-08-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 11-08-2016
• Assessment Year: 2004-2005
• Appeal Filed On: 16-12-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A SITARAMA RAO
• Assessee Lawyers: A V RAGHURAM
• Keywords: Depreciation

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A, HYDERABAD BEFORE SMT P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NOS. 1724 & 1725/HYD/2013 ASSESSMENT YEARS: 2004-05 & 2005-06 M/S SAI SREE DEVELOPERS PVT. LTD., HYDERABAD. PAN AAFCS 0223H VS. ASST. COMMISSIONER OF INCOME-TAX, CIRCLE 3(1), HYDERABAD. (ASSESSEE) (RESPONDENT) ASSESSEE BY : SHRI A.V. RAGHURAM REVENUE BY : SHRI A. SITARAMA RAO DATE OF HEARING 11-08-2016 DATE OF PRONOUNCEMENT 26-08-2016 O R D E R PER S. RIFAUR RAHMAN, A.M.: BOTH THESE APPEALS ARE PREFERRED BY THE ASSESSEE A GAINST A COMMON ORDER OF THE LEARNED COMMISSIONER OF INCOME- TAX(A) - IV, HYDERABAD FOR AYS 2004-05 AND 2005-06. 2. BRIEFLY THE FACTS OF THE CASE ARE THAT THE ASSE SSEE IS A COMPANY ENGAGED IN THE BUSINESS OF DEVELOPMENT AND CONSTRUCTION OF REAL ESTATE PROJECTS. IN THE COURSE OF THE ASSESSME NT PROCEEDINGS, THE ASSESSING OFFICER NOTED THAT THE ASSESSEE WAS ENGAG ED IN THE FOLLOWING THREE PROJECTS DURING THE AY 2004-05: 1. HIMASAI PUJITHA, BLOCK A, L.B. NAGAR 2. HIMASAI GARDENS, GANDHI NAGAR 3. SAI PARKVIEW APTT., BANJARA HILLS PROJECT IT WAS ENGAGED IN THE FOLLOWING TWO PROJECTS DURING THE AY 2005-06: 1. HIMASAI PUJITHA, BLOCK A, L.B. NAGAR 2. HIMASAI GARDENS, GANDHI NAGAR 2 ITA NO. 1724 & 1725/H/13 M/S SAI SREE DEVELOERS PVT. LTD., HYD 2.1 THE AO NOTED THAT THE ASSESSEE HAD PREPARED SE PARATE WORKS ACCOUNTS FOR EACH PROJECT. THE ENTIRE AMOUNT RECEIV ED FROM CUSTOMERS WERE RECOGNIZED AS SALES DURING THE YEAR AND THE EN TIRE EXPENDITURE INCURRED DURING THE YEAR WAS TAKEN TO THE WORKS ACC OUNT. THE CLOSING WORK-IN-PROGRESS AT THE END OF THE YEAR FOR EACH PR OJECT WAS ESTIMATED BY REDUCING 10% OF ESTIMATED PROFIT FROM GROSS RECEIPTS OF THE YEAR. THE RESULTANT AMOUNT WAS THEN REDUCED FRO M THE ESTIMATED COST OF PROJECT COMPLETED ON THE CLOSING DATE TO AR RIVE AT CLOSING WORK-IN-PROGRESS. THUS, THE GROSS PROFIT AND CLOSIN G WORK-IN-PROGRESS ADOPTED BY THE ASSESSEE WAS WITHOUT ANY BASIS. THE ASSESSING OFFICER OBSERVED THAT MOST OF THE BILLS AND VOUCHER S WERE SELF-MADE AND NOT AMENABLE TO VERIFICATION. FOR THE AY 2005-0 6, THE ASSESSING OFFICER FOUND THAT 75% OF THE BILLS WERE SUPPORTED BY SELF-MADE VOUCHERS, THAT SOME OF THE VOUCHERS WERE ACCOMPANIE D BY SOME ROUGH SHEETS WITH ESTIMATES WHICH COULD NOT BE CONS IDERED AS BILLS, THAT MANY OF THE VOUCHERS WERE WRITTEN IN TWO DIFFE RENT PERIODS OF TIME AND WHILE LIABILITY MERELY THE HEAD OF EXPENDITURE WAS MENTIONED, NAMES OF PERSONS WERE INCLUDED LATER ON, THAT DETAI LS OF QUANTITY OF WORK CARRIED OUT, COMPLETE DETAILS OF RECIPIENT WAS NOT RECORDED IN THE VOUCHERS AND THAT MANY OF THE VOUCHERS WERE NOT SIG NED BY THE RECEIVERS. IN VIEW OF THESE OBSERVATIONS, THE ASSES SING OFFICER REJECTED THE BOOKS OF ACCOUNT AND ESTIMATED THE PRO FIT AT 15% OF THE GROSS RECEIPTS FOR BOTH THE YEARS, RELYING ON THE F OLLOWING DECISIONS: 1. CIT VS. BRITISH PAINTS (INDIA) LIMITED [1991] 1 88 ITR 44(SC) 2. CHAMPION CONSTRUCTION CO. VS. ITO (ITAT BOMBAY, 'B' BENCH-104 TAXMAN 222). 3. AGGRIEVED, THE ASSESSEE PREFERRED APPEAL BEFORE THE CIT(A). 4. IN THE COURSE OF THE APPELLATE PROCEEDINGS, THE AR SUBMITTED THAT IN THE ASSESSEE'S LINE OF BUSINESS, THE MATERI AL WHICH WAS PURCHASED FROM SHOPS WAS SUPPORTED BY BILLS WHEREAS EXPENDITURE ON ITEMS LIKE SAND, BRICK, METAL, LABOUR ETC., WAS SUP PORTED BY SELF-MADE 3 ITA NO. 1724 & 1725/H/13 M/S SAI SREE DEVELOERS PVT. LTD., HYD VOUCHERS AND THE ASSESSING OFFICER'S OBJECTION TO S UCH SELF-MADE VOUCHERS WAS WITHOUT BASIS. THE AR ALSO SUBMITTED T HAT THE EXPENDITURE ON SUCH ITEMS WAS NOT VERY HIGH, THAT T HE ESTIMATION OF INCOME AT 15% WAS ON THE HIGHER SIDE FOR THE ASSESS EE'S LINE OF BUSINESS, THAT REJECTION OF BOOKS FOR THIS REASON W AS UNJUSTIFIED AND THAT THE ASSESSING OFFICER HAD NOT CONSIDERED THE R EMUNERATION PAID TO DIRECTORS AND INTEREST ON CAPITAL/UNSECURED LOAN S OF THE SHAREHOLDERS. THE AR FURTHER SUBMITTED THAT ASSESS MENT IN THE ASSESSEE'S CASE HAD SIMILARLY BEEN MADE FOR AY 2002 -03 ESTIMATING THE INCOME AT 15% OF THE GROSS RECEIPTS, AND THAT T HE CIT(A) VIDE HIS ORDER IN ITA NO. 128/CC-4, HYD/CIT(A)-I/05-06, DATE D 7.2.2006 HAD GIVEN DIRECTIONS WHICH WERE RELEVANT FOR THE AY 200 4-05 AS WELL. THE AR ALSO SUBMITTED A STATEMENT WITH REGARD TO THE DE TAILS OF THE PROJECTS FOR THE AY 2002-03 TO AY 2005-06 ON PERCEN TAGE COMPLETION BASIS IN ACCORDANCE WITH THE DIRECTIONS OF THE CIT( A) IN HIS ORDER FOR AY 2002-03. 5. FOR THE AY 2002-03, THE ASSESSEE HAD BEEN ENGAG ED IN TWO CONSTRUCTION PROJECTS, VIZ. SAI PARKVIEW APARTMENTS , BANJARA HILLS AND GULMOHAR APARTMENTS, GANDHI NAGAR. THE ASSESSING OF FICER HAD REJECTED THE BOOKS OF ACCOUNT AND ESTIMATED THE INC OME AT 15% OF THE GROSS RECEIPTS OF RS.69,40,000. IN HIS ORDER IN ITA NO.128/CC- 4,HYD/CIT(A)1/2005-06, DATED 07.02.2006, THE CIT(A) NOTED THAT THE GANDHI NAGAR PROJECT HAD GOT STUCK IN THE BEGINNING ITSELF ON ACCOUNT OF LEGAL PROBLEMS AND THAT AS ON 31.03.2002, IT WAS A DOUBTFUL PROJECT. THEREFORE, THE CIT (A) DID NOT DIRECT ASSE SSMENT OF PROFITS FROM THIS PROJECT FOR AY 200203. FOR THE SAME REASO N, THE CIT(A) ALSO DID NOT AGREE WITH THE ASSESSING OFFICER'S VIEW THA T THE NET PROFIT WAS TO BE DETERMINED @ 15% OF ADVANCES RECEIVED FROM BU YERS TO ARRIVE AT THE TRUE PROFITS OF THE ASSESSEE. THEREAFTER, TH E CIT(A) HAD AGREED WITH THE ASSESSING OFFICER THAT THE ASSESSEE WAS NO T FOLLOWING ANY REGULAR METHOD OF ACCOUNTING TO OFFER THE PROFITS T O TAX AND REJECTED THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE T O SHOW THE 4 ITA NO. 1724 & 1725/H/13 M/S SAI SREE DEVELOERS PVT. LTD., HYD PROFITS OF BANJARA HILLS PROJECT AS IT DID NOT REFL ECT THE TRUE PROFITS OF THE YEAR. UNDER THE CIRCUMSTANCES THE CIT(A) GAVE T HE FOLLOWING DIRECTIONS IN HIS ORDER: '05(B) IN THE GIVEN FACTS AND CIRCUMSTANCES OF THE CASE, I AM OF THE VIEW THAT THE CORRECT PROFITS CAN BE COMPUTED B Y FOLLOWING THE PERCENTAGE COMPLETION METHOD PRESCRIBED IN ACCOUNTI NG STANDARD-7. THE ASSESSEE HAS SHOWN THE TOTAL COST O F PROJECT AT RS.129.24 LAKHS INCLUDING THE COST OF LAND. THE TOT AL REVENUE RECOGNIZED ON THE SALE OF ALL THE FLATS WAS OF RS.1 48 LAKHS. HENCE, THE PROFIT OF VARIOUS YEARS INVOLVED IN THIS PROJECT CAN BE COMPUTED AS UNDER ON THE BASIS OF DETAILS FURNISHED BY THE ASSESSEE DURING THE APPEAL PROCEEDINGS- AY 2001-02 AY 2002- 03 AY 2003- 04 AY 2004- 05 TOTAL % OF COMPLETION OF PROJECT 3.6 36.6 31.12 20.70 100 COST TO BE RECOGNIZED (RS. IN LAKHS) 4.65 47.31 50.56 26.74 129.26 REVENUE TO BE RECOGNIZED (RS. IN LAKHS) 5.32 54.16 57.89 30.63 148 GROSS PROFIT TO BE RECOGNIZED (RS. IN LAKHS) 0.67 6.85 7.33 3.89 18.74 05( C) THE ASSESSING OFFICER IS DIRECTED TO COMPUT E THE GROSS PROFIT OF A Y 2002-03 AT RS.6,85,000. THE MISCELLAN EOUS RECEIPTS OF RS.35,106 SHOWN BY THE ASSESSEE IS TO BE FURTHER ADDED BEFORE ALLOWING THE OVERHEAD EXPENSES TO DETERMINE THE NET PROFIT. THE ASSESSING OFFICER IS ALSO DIRECTED TO G IVE CONSEQUENTIAL RELIEF TO THE ASSESSEE IN AY 2003-04 AND AY 2004- 05.' 6. THE CIT(A) NOTED THAT THE BANJARA HILLS PROJECT WAS COMPLETED DURING THE AY 2004-05. RESPECTFULLY FOLLOWING THE D IRECTIONS OF THE CIT(A) IN HIS ORDER FOR AY 2002-03, THE CIT(A) DIRE CTED THE ASSESSING OFFICER TO ESTIMATE THE PROFIT FROM THE BANJARA HI LLS PROJECT FOR THE AY 2004-05 AT RS.3.89 LAKHS. 7. THE CIT(A) OBSERVED THAT HOWEVER, THE FACTORS TH AT PROMPTED THE CIT(A) TO ACCEPT THE GROSS PROFIT DECLARED BY T HE ASSESSEE DO NOT 5 ITA NO. 1724 & 1725/H/13 M/S SAI SREE DEVELOERS PVT. LTD., HYD APPLY TO THE YEARS NOW IN APPEAL. CIT(A) FOUND THAT WHILE THE G.P. DECLARED BY THE ASSESSEE FOR THE BANJARA HILLS PROJ ECT AS A WHOLE WAS 12.66%, THE ASSESSEE HAS DECLARED GP OF 8.16% FOR T HE GANDHI NAGAR PROJECT AND 10.9% FOR THE LB NAGAR PROJECT. T HE ASSESSEE IS ENGAGED IN THE BUSINESS OF CONSTRUCTION AND DEVELOP MENT OF RESIDENTIAL APARTMENTS. HE, THEREFORE, HELD THAT ES TIMATION OF THE ASSESSEE'S INCOME AT 12.5% OF THE GROSS RECEIPTS FR OM THE TWO PROJECTS, GANDHI NAGAR AND LB NAGAR, NET OF ALL DED UCTION INCLUDING DEPRECIATION AND REMUNERATION AND INTEREST TO PARTN ERS, IS FAIR AND REASONABLE. 8. THE CIT(A) OBSERVED THAT FOR GANDHI NAGAR PROJEC T, THE ASSESSEE HAD NOT EFFECTED ANY SALES FOR AY 2002-03 AND 2003-04 AND, THEREFORE, NOT DECLARED ANY PROFITS FROM IT. F URTHER, NO INCOME WAS ESTIMATED FROM THIS PROJECT IN ASSESSMENT OR BY THE CIT(A). FOR THIS REASON, THE CIT(A) DIRECTED THE AO TO ESTIMATE PROFITS (AND INCOME) FROM THIS PROJECT ON THE BASIS OF SALES EFF ECTED BY THE ASSESSEE FOR THREE RELEVANT YEARS AS FOLLOWS: AY SALES (RS.) INCOME @ 12.5 (RS.) 2004-05 28.81 CRORES 3.60 CR. 2005-06 55.25 CR. 6.91 CR. 2006-07 190.98 CR. 23.87 CR. 9. THE CIT(A) OBSERVED THAT FOR THE LB NAGAR PROJE CT, HOWEVER, AY 2004-05 IS THE FIRST YEAR OF OPERATION AND IT WO ULD BE REASONABLE TO ESTIMATE THE INCOME ON THE BASIS OF THE PERCENTA GE OF COMPLETION METHOD, AS WAS DONE FOR THE BANJARA HILLS PROJECT. THE ASSESSING OFFICER WAS DIRECTED TO ASSESS THE ESTIMATED INCOME FROM THIS PROJECT AS FOLLOWS ON THE BASIS OF THE DATA FURNISHED BY TH E ASSESSEE: AY 2004- 05 AY 2005-06 AY 2006-07 AY 2007-08 TOTAL COST OF WORK DONE 15.72 42.94 126.77 81.34 266.77 % OF WORK COMPLETED 5.90 16.10 47.52 30.48 100.00 SALES - 36.56 131.26 127.44 295.26 ADVANCE 4.46 32.10 131.26 127.44 295.26 6 ITA NO. 1724 & 1725/H/13 M/S SAI SREE DEVELOERS PVT. LTD., HYD RECEIVED REVENUE TO BE RECOGNIZED 17.42 47.53 140.31 90.00 295.26 INCOME ON THE BASIS OF % OF WORK DONE 2.18 5.94 17.54 11.25 36.91 10. THE CIT(A) DIRECTED THE ASSESSING OFFICER TO COMPUTE THE PROFITS FROM THESE PROJECTS FOR THE AYS 2004-05 AND 2005-06 ACCORDINGLY. THE MISCELLANEOUS RECEIPTS, IF ANY, AR E TO BE FURTHER ADDED BEFORE ARRIVING AT THE TOTAL INCOME. THE ASSE SSING OFFICER WAS ALSO DIRECTED TO GIVE CONSEQUENTIAL EFFECT TO THE A SSESSEE'S INCOME FROM THE TWO PROJECTS IN QUESTION VIZ. GANDHI NAGAR PROJECT AND L.B. NAGAR PROJECT(BLOCK-A) FOR THE AY 2006-07 AND 2007- 08. 11. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSES SEE IS IN APPEAL BEFORE US RAISING THE FOLLOWING GROUNDS OF APPEAL, WHICH ARE COMMON IN BOTH THE APPEALS UNDER CONSIDERATION: 1. THE LD. CIT(A) DID NOT FULLY FOLLOWED THE PREVIO US ORDER OF THE CIT(A) GIVEN FOR THE AY.2002-03 TO AY.2003-04. 2. THE LD. CIT(A) ESTIMATED THE APPELLANTS INCOME A T 12.5% OF THE GROSS RECEIPTS, NET OF ALL DEDUCTIONS WHICH IS NOT FAIR. 3. THE DIRECTIONS GIVEN IN THE CASE OF GANDHI NAGAR PROJECT ARE NOT FAIR AND CORRECT. 12. WE HEARD BOTH THE PARTIES AND PERUSED THE ORDER S OF THE LOWER AUTHORITIES. ASSESSEE IS ENGAGED IN THE EXECUTION O F CONTRACT WORKS/SUB-CONTRACT WORKS, AND THE DISPUTE INVOLVED IN THE PRESENT APPEAL, IN THE FIRST PLACE RELATES TO RATE TO BE AD OPTED FOR ESTIMATING THE INCOME OF THE ASSESSEE OUT OF THE CONTRACT RECE IPTS; AND THEN ALLOWABILITY OF DEPRECIATION AND REMUNERATION TO PA RTNERS OUT OF SUCH INCOME ESTIMATED. THE ASSESSING OFFICER ESTIMATED T HE PROFIT OF THE ASSESSEE AT 15% CLEAR OF DEPRECIATION AND 40(B) PAY MENTS AND DETERMINED THE TOTAL INCOME OF RS.1,29,07,656. ON A PPEAL THE CIT(A), 7 ITA NO. 1724 & 1725/H/13 M/S SAI SREE DEVELOERS PVT. LTD., HYD DIRECTED ESTIMATION OF PROFIT AT 12.5% OF G.P., NET OF ALL DEDUCTIONS INCLUDING DEPRECIATION AND REMUNERATION AND INTERES T TO PARTNERS. 12.1 ON CAREFUL CONSIDERATION OF THE MATTER, WE FI ND THAT AS FAR AS RATE TO BE ADOPTED FOR ESTIMATION OF INCOME IS CONC ERNED, THIS TRIBUNAL HAS BEEN CONSISTENTLY HOLDING, AS IN ITS R ECENT DECISION IN ITA NO.1191/HYD.2011 IN ACIT V/S. TEJA CONSTRUCTION S SECUNDERABAD FOR THE ASSESSMENT YEAR 2006-07 VIDE ORDER DATED 17 TH FEBRUARY, 2012 THAT ESTIMATION OF INCOME AT 9% IN RESPECT OF THE CONTRACTS TAKEN BY THE ASSESSEE ITSELF AND EXECUTED BY IT; AT 8% IN RESPECT OF RECEIPTS FROM SUB-CONTRACT WORKS TAKEN FROM OTHERS AND EXECU TED BY THE ASSESSEE; AND 4% OF THE GROSS RECEIPTS IN RESPECT O F CONTRACTS GIVEN BY THE ASSESSEE TO THIRD PARTIES ON SUB-CONTRACT BA SIS, AS REASONABLE. IN CONSONANCE WITH THE VIEW TAKEN IN SIMILAR CASES, ALSO CONSIDERING THE FACT THAT THE ASSESSEE IS DEALING WITH CONSTRUC TION AS WELL AS DEVELOPMENT ACTIVITIES, WE SET ASIDE THE IMPUGNED O RDER OF THE CIT(A) AND DIRECT THE ASSESSING OFFICER TO RECOMPUTE THE I NCOME OF THE ASSESSEE AT 9% OF THE GROSS RECEIPTS IN RESPECT OF CONTRACTS TAKEN ON ITS OWN FOR CONSTRUCTION AND ADDITIONAL 2% FOR THE DEVELOPMENT ACTIVITIES. IN TOTAL, THE INCOME SHOULD BE ESTIMATE D @ 11% OF THE GROSS RECEIPTS. 12.2 AS FOR THE ALLOWABILITY OF DEPRECIATION OUT O F ESTIMATED INCOME IS CONCERNED, WE FIND THAT THIS TRIBUNAL IN SIMILAR MATTERS, AS IN ITA NO.1191/HYD/2011 IN THE CASE OF M/S. TEJA CONSTRUCT IONS, SECUNDERABAD, NOTED ABOVE, HAS BEEN CONSISTENTLY HO LDING THAT DEPRECIATION BEING AN ALLOWABLE DEDUCTION UNDER S.3 2 OF THE ACT, AND SINCE ALL OUT GOINGS FALLING UNDER S.30 TO 38 ARE D EEMED TO HAVE BEEN ALLOWED WHILE ESTIMATING THE INCOME, NO SEPARATE DE DUCTION IS ALLOWABLE IN RESPECT OF THE SAME OUT OF THE ESTIMAT ED INCOME IN THIS RESPECT. DEPRECIATION SHOULD BE EXCLUDED BUT THE IN TEREST AND REMUNERATION TO WORKING PARTNERS ARE ALLOWABLE AS DEDUCTION AS IT DOES NOT FALL UNDER SECTION 3O TO 38 OF THE ACT. AC CORDINGLY, ASSESSING OFFICER IS DIRECTED TO ESTIMATE THE INCOM E @ 11% ON GROSS 8 ITA NO. 1724 & 1725/H/13 M/S SAI SREE DEVELOERS PVT. LTD., HYD RECEIPTS AND TO GIVE DEDUCTION OF INTEREST AND REMU NERATION TO PARTNERS. 13. IN THE RESULT, BOTH THE APPEALS OF ASSESSEE ARE PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON 26 TH AUGUST, 2016. SD/- SD/- (P. MADHAVI DEVI) (S. RIFAUR RAH MAN) JUDICIAL MEMBER A CCOUNTANT MEMBER HYDERABAD, DATED: 26 TH AUGUST, 2016 KV COPY TO:- 1) M/S SAI SREE DEVELOPERS PVT. LTD., C/O K. VASANTKUMAR & A.V. RAGHURAM, ADVOCATES, 610, 6 TH FLOOR, BABHUKHAN ESTATE, BASHEERBAGH, HYDERABAD. 2) ACIT, CIRCLE 3(1), HYDERABAD 3) CIT(A) - IV, HYDERABAD 4 CIT - III, HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDE RABAD.