The ACIT, Central Circle-1, Surat V. M/s. Evergreen Industries Pvt.Ltd., Surat

ITA 2065/AHD/2008

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 5794 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-06-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 19-05-2010
• Assessment Year: 2005-2006
• Appeal Filed On: 29-05-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SIDDHARTHA MU KHERJEE
• Assessee Lawyers: KK SHAH
• Section: 44AD

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL : D BENCH : A HMEDABAD CAMP AT SURAT (BEFORE HONBLE SHRI T.K. SHARMA, J.M. & HON'BLE SH RI D.C. AGRAWAL , A.M.) I.T.A. NO. 2065/AHD./2008 ASSESSMENT YEAR : 2005-2006 DEPUTY COMMISSIONER OF INCOME TAX, -VS.- EVER GREEN INDUSTRIES PVT. LTD., SURAT CENTRAL CIRCLE-1, SURAT (PAN : AAACE 5088 R) (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI SIDDHARTHA MUKH ERJEE, CIT, D.R. RESPONDENT BY : SHRI K.K. SHAH O R D E R PER SHRI T.K. SHARMA, JUDICIAL MEMBER : THIS APPEAL FILED BY THE REVENUE IS AGAINST THE OR DER DATED 26.03.2008 OF LEARNED COMMISSIONER OF INCOME TAX(APPEALS)-II, AHMEDABAD F OR THE ASSESSMENT YEAR 2005-06. 2. BRIEFLY STATED THE FACTS ARE THAT THE ASSESSEE I S A COMPANY ENGAGED IN THE BUSINESS OF CONSTRUCTION OF RESIDENTIAL FLATS ON CONTRACT BASIS . DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE WAS EXECUTING A PROJECT KNOWN AS ASHIRWAD PALACE. 3. ON EXAMINATION OF THE DIRECTORS REPORT ACCOMPAN YING THE FINAL ACCOUNTS, THE ASSESSING OFFICER OBSERVED THAT THE COMPANY HAS COMPLETED 20% WORK OF PROJECT KNOWN AS ASHIRWAD PALACE. THE DETAILS OF WORK DONE, ADVANCES RECEIVE D AND VARIOUS EXPENSES INCURRED IN THE LAST TWO YEARS AND DURING THE CURRENT YEAR ARE AS UNDER :- A.Y. INCOME SHOWN WIP LABOUR EXP. CEMENT/ MATERIAL EXP. ADMINISTRATIVE EXP. ADV. RECEIVED 2003-04 NIL 1,91,971 NIL NIL 2,38,915 15,00,000 2004-05 NIL 6,29,68,699 1,44,91,789 4,94,57,374 24,27,565 3,30,00,000 2005-06 NIL 18,94,20,133 1,75,06,143 10,10,60,925 82,84,366 9,32,52,000 4. FROM THE NOTES FORMING PART OF ACCOUNT, THE ASSE SSING OFFICER OBSERVED THAT THE ASSESSEE MAINTAINS THE ACCOUNTS ON ACCRUAL BASIS AND SALE WA S RECOGNIZED AFTER THE DELIVERY OF THE SHOP 2 ITA NO. 2065/AHD/2008 (FLATS) ARE TAKEN BY THE BUYERS. THE PROJECT KNOWN AS ASHIRWAD PALACE WAS STARTED IN APRIL, 2003. IT CONSISTS OF 463 FLATS. THE TABLE PREPARED ABOVE GIVEN YEAR-WISE WORK-IN-PROGRESS, VARIOUS MAJOR EXPENSE AND ADVANCES RECEIVED FROM TH E FLAT BUYERS. FROM THE ABOVE, THE ASSESSING OFFICER OBSERVED THAT IN THE CURRENT YEAR THE ASSESSEE HAS SHOWN RECEIPTS OF RS.9.32 CRORES AND WORK-IN-PROGRESS OF RS.18.94 CRORES. THE ASSESSING OFFICER FURTHER OBSERVED THAT DESPITE SUCH HUGE RECEIPTS AND WORK-IN-PROGRESS, TH E ASSESSEE HAS NOT SHOWN THE INCOME ON YEAR TO YEAR BASIS. BEFORE THE ASSESSING OFFICER, THE AS SESSEE STATED THAT IT IS FOLLOWING THE PROJECT COMPLETION METHOD AND THE SALES ARE RECOGNIZED WHEN THE FLATS ARE HANDED OVER TO THE CUSTOMERS. THE ASSESSING OFFICER NOTED THAT ACCORDING TO SECTI ON 4, THE INCOME IS CHARGEABLE IN RESPECT OF THE TOTAL INCOME OF EACH PREVIOUS YEAR. AS A NECESS ARY COROLLARY, THE INCOME ACCRUING IN ONE YEAR CANNOT BE DEFERRED TO FUTURE YEARS BY ADOPTING AN I NCORRECT METHOD OF ACCOUNTING WITH A VIEW TO POSTPONE THE TAX LIABILITY. IN VIEW OF THIS REASON AND KEEPING IN VIEW THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF TIRTHRAM AHUJA PVT. LT D. VS.- CIT [186 ITR 428], THE ASSESSING OFFICER ASKED THE ASSESSEE WHY 20% OF WORK-IN-PROGR ESS BE NOT TREATED AS INCOME OF THE CURRENT YEAR. IN RESPONSE TO THIS, THE ASSESSEE MADE THE FO LLOWING SUBMISSIONS :- (I) THE ESTIMATE OF NET PROFIT AT 20% OUGHT NOT TO BE ON THE GROSS AMOUNT OF RS.18.94 CRORES OF THE WORK IN PROGRESS AS THE REVE NUE HAS ALREADY ESTIMATED PROFIT ON WORK-IN-PROGRESS OF THE EARLIER YEARS. (II) AS PER THE ACCOUNT STANDARDS AS-7, THERE OUGHT TO BE REASONABLE STAGE OF COMPLETION OF WORK WHEREFROM THE ESTIMATE PROFIT OF WORK IN PROGRESS CAN BE MADE, IN THE INSTANT CASE, THE INITIAL STAGE OF WOR K IN PROGRESS AND NO PROFIT OUGHT TO BE ESTIMATED ON THE BASE OF WORK IN PROGRESS WHI CH IS JUST 20% OF THE TOTAL PROJECT. (III) THIS IS A PROJECT OF CONSTRUCTION OF 23 APART MENTS (463 FLATS) AND THE WORK OF ENTIRE PROJECT WAS GOING ON AT A TIME, OBVIOUSLY, T HE CONSTRUCTION OF PARTICULAR APARTMENT WAS NOT SUBSTANTIALLY COMPLETED. IN OTHER WORDS, THIS IS NO THE REASONABLE STAGE OF COMPLETION OF WORK AND HENCE, Q UESTION OF ESTIMATE OF PROFIT ON WORK IN PROGRESS IS NOT JUSTIFIED. (IV) AS PER THE ACCOUNTING STANDARD AS-7, IF THE RE CEIPTS (BOOKING AMOUNT) IS RS.9,32,52,000/- LESS THAN THE WORK IN PROGRESS I.E . AMOUNT SPENT RS.18,94,20,133/- THAN THE LOSS OUGHT TO BE WORKED OUT IN THIS YEAR RS.6,61,68,133/- OUGHT TO BE ADJUSTED AGAINST IN TH E PROFIT IN THE SUBSEQUENT YEAR AFTER COMPLETION OF REASONABLE STAGE OF WORK. (V)IN CASE OF CONSTRUCTION WORK MARGIN OF PROFIT PE RCEIVED U/S. 44AD IS 8% SO QUESTION OF ESTIMATING PROFIT @ 20% IS NOT JUSTIFIE D. 3 ITA NO. 2065/AHD/2008 (VI) WITHOUT PREJUDICE TO THE ABOVE AND IN ALTERNAT IVE, THE REVENUE HAD ALREADY ESTIMATED GROSS PROFIT AT 15% OF THE WORK IN PROGRE SS CARRIED OUT DURING THE YEAR. THE REVENUE HAD FURTHER ALLOWED OR OTHER EXPENSES L IKE ADMINISTRATIVE AND INTEREST EXPENSES OUT OF GROSS PROFIT AND THE NET P ROFIT WAS WORKED OUT. I, THEREFORE, URGED THAT THE PROFIT OUGHT TO BE ESTIMA TED AS GROSS PROFIT AT 15% AND NOT THE NET PROFIT AT 20%. 5. AFTER CONSIDERING THE AFORESAID SUBMISSIONS, THE ASSESSING OFFICER ESTIMATED 15% GROSS PROFIT AMOUNTING TO RS.1,89,67,715/- ON WORK IN PRO GRESS OF RS.12,64,51,434/-.. ON APPEAL, BEFORE THE LEARNED COMMISSIONER OF INCOME TAX(APPEA LS) THE ASSESSEE ARGUED AT LENGTH AND CONTENDED THAT THE ASSESSING OFFICER OUGHT TO HAVE CONSIDERED THE ENTIRE AS-7 (REVISED) BEFORE MAKING ESTIMATE OF PROFIT. AS PER PARAS 31, 32 AND 35 OF AS-7 (REVISED), NO PROFIT OUGHT TO BE ESTIMATED WHEN IT IS NOT A RELIABLE STAGE OF WORK. IT WAS FURTHER CONTENDED THAT THERE IS A LOSS WHEN RECOVERY OF THE CONSTRUCTION COST IS LESS THAN THE EXPENDITURE. BEFORE THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS), IT WAS CONTEND ED THAT CONSTRUCTION COST OF RS.12,64,51,434/- WAS INCURRED AND AS AGAINST THAT RECOVERY OF RS.60,25,200/- WERE RECEIVED AND, THEREFORE, AS PER PARA 35 OF AS-7 (REVISED), THERE WOULD BE LOSS. 6. AFTER CONSIDERING THE VARIOUS SUBMISSIONS, THE L EARNED COMMISSIONER OF INCOME TAX(APPEALS) DELETED THE ENTIRE ADDITION MADE BY TH E ASSESSING OFFICER FOR THE DETAILED REASONS GIVEN IN PARA-5, WHICH READS AS UNDER :- 5. I HAVE CONSIDERED THE ASSESSMENT ORDER AND THE SUBMISSIONS FILED BY THE AR AND HOLD THAT FIRSTLY, THE APPELLANT HAS OBJ ECTED THE ESTIMATE OF PROFIT AS PER THE ACCOUNTING STANDARD (AS-7) AS IT IS NOT A PROPER STAGE OF COMPLETION OF WORK. THUS, IT IS WRONGLY OBSERVED BY THE ASSESSING OFFICER THAT THE ASSESSEE HAS MERELY OBJECTED TO THE MARGIN OF P ROFIT ONLY. THE MAIN CONTENTION IS THAT THE APPELLANT COMPANY IS NOT MER ELY A CONTRACTOR BUT DEVELOPER AND, THEREFORE, AS-7(REVISED) IS NOT APPL ICABLE. IT IS FURTHER CONTENTED THAT THE PROJECT COMPLETION METHOD IS APP ROVED BY VARIOUS JUDICIAL AUTHORITIES AND, THEREFORE, THE METHOD OF ACCOUNTIN G ADOPTED AND ACCEPTED IN THE EARLIER YEARS BY THE DEPARTMENT SHOULD BE FOLLO WED. IT IS ALSO CONTENDED THAT THIS BEING A LIMITED COMPANY AND THE RATE OF T AX IS UNIFORM FOR ALL THE YEARS AND HENCE THREE IS NO LOSS TO THE REVENUE. IT IS STRONGLY CONTENDED THAT EVEN AS AS-7 (REVISED) IS FOLLOWED, THERE IS NO INC OME RATHER THERE IS A LOSS AS IT IS IN INITIAL STAGE OF THE WORK. IT IS ALSO EXPL AINED THAT IN SUCH CIRCUMSTANCES, THERE IS HUGE LOSS OF RS.9,61,68,133/- AS PER AS-7( REVISED). THE ABOVE SAID ISSUE IS ALREADY DECIDED IN MY APPEAL ORDER, IN THI S CASE ITSELF VIDE APPEAL NO. LEARNED COMMISSIONER OF INCOME TAX(APPEALS)-II/CC-1 /530/2006-07 DATED 14.5.2007. THOUGH IT WAS ONLY 6% OF THE ESTIMATED V ALUE OF TOTAL PROJECT OF RS.113 CRORES IN THE EARLIER YEAR, EVEN IN THE CURR ENT YEAR, THERE IS STILL NOT THE 4 ITA NO. 2065/AHD/2008 PROPER STAGE OF COMPLETION OF WORK AS ONLY 16.76% O F THE CONTRACT WORK IS COMPLETE. AS EXPLAINED IN THE EARLIER YEAR, THERE A RE 23 APARTMENTS CONSISTING OF 461 FLATS. IT IS ONLY EXPLAINED THAT THERE IS CO NSTRUCTION OF COMMON FACILITIES LIKE COMMUNITY HALL, SWIMMING POOL AND SPORTS CLUB AND FOUNDATION WORK AND INITIAL STAGE OF RCC WORK, ETC. THUS 16.76% OF THE ENTIRE PROJECT IS CONSIDERED TO BE A STAGE OF PRELIMINARY WORK OF THE CONSTRUCTI ON. IT IS ALTERNATIVELY CONTENDED THAT EVEN AS PER AS-7(REVISED), INCOME CA N BE ESTIMATED ONLY ON AMOUNTS SPENT FOR CONSTRUCTION FOR WHICH RECOVERY I S POSSIBLE. IT IS ALSO SUBMITTED THAT AS AGAINST THE CONSTRUCTION COST INC URRED DURING THE YEAR, THE RECOVERY IS ONLY OF RS.6,02,52,000/-. IT IS CONTEND ED THAT PARA NO. 31, 32 & 35 OF AS-7 (REVISED) ARE REQUIRED TO BE CONSIDERED INS TEAD OF PARA NO. 31(A) ONLY. AFTER CONSIDERING ALL THE ASPECTS, I AM OF THE VIEW THAT THE APPELLANT HAS A RIGHT TO ADOPT PROJECT COMPLETION METHOD. I FURTHER IN MY OPINION, HOLD THAT EVEN AS PER AS-7 (REVISED) THERE CANNOT BE ESTIMATE OF PROFIT, AS IT IS NOT AT A STAGE OF COMPLETION OF WORK. I AM OF THE VIEW AND I HOLD THAT ESTIMATE OF PROFIT AT 15% OF WORK IN PROGRESS IS NOT JUSTIFIED MORE PA RTICULARLY WHEN THERE ARE NO DEFECTS IN THE BOOKS OF ACCOUNTS AND EXPENDITURE INCURRED IS SUPPORTED BY BILLS AND VOUCHERS. I AM OF THE VIEW THAT THE ADDIT ION OF RS.1,38,97,823/- MADE BY THE A.O. IS NOT JUSTIFIED APPARENTLY AND HEREBY DELETED. THE GROUND OF APPEAL IS ALLOWED. 7. AT THE TIME OF HEARING, ON BEHALF OF REVENUE SHR I SIDDHARTHA MUKHERJEE, CIT, D.R. APPEARED AND RELYING ON THE REASONING GIVEN BY THE ASSESSING OFFICER IN THE ASSESSMENT ORDER CONTENDED THAT THE LEARNED COMMISSIONER OF INCOME T AX(APPEALS) IS NOT JUSTIFIED IN DELETING THE ADDITION MADE BY THE ASSESSING OFFICER. THE LD. D.R . SUGGESTED THAT THE ORDER OF LEARNED COMMISSIONER OF INCOME TAX(APPEALS) BE CANCELLED. 8. ON THE OTHER HAND, SHRI K.K. SHAH APPEARING ON B EHALF OF THE ASSESSEE VEHEMENTLY SUPPORTED THE ORDER OF LEARNED COMMISSIONER OF INCO ME TAX(APPEALS). HE POINTED OUT THAT THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) IN THE IMPUGNED ORDER AFTER CONSIDERING EACH AND EVERY CONTENTION OF THE ASSESSEE AND AS-7 (REVI SED), DELETED THE ADDITION MADE BY THE ASSESSING OFFICER. THEREFORE, THE VIEW TAKEN BY THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) BE UPHELD. 9. HAVING HEARD BOTH THE SIDES, WE HAVE CAREFULLY G ONE THROUGH THE ORDERS OF AUTHORITIES BELOW. IT IS PERTINENT TO NOTE THAT BEFORE THE LEAR NED COMMISSIONER OF INCOME TAX(APPEALS), THE ASSESSEE CONTENDED THAT IF WORK-IN-PROGRESS METHOD IS ADOPTED, NO INCOME ACCRUES IN THE INITIAL STAGE OF THE PROJECT AS PER AS-7 ITSELF. THE AS-7 S PEAKS ABOUT WORKING OF LOSS IN THE INITIAL STAGE WHICH IS DETERMINED BY DEDUCTING GROSS AMOUNT SPENT AND THE AMOUNT COLLECTED AGAINST WORK-IN- 5 ITA NO. 2065/AHD/2008 PROGRESS. IN THIS CASE, WORK IN PROGRESS IS DETERMI NED AT RS.12,64,51,434/- AND THE AMOUNT RECEIVED DURING FINANCIAL YEAR 2004-05 COMES TO RS. 6,02,52,000/- AND ACCORDINGLY, THERE IS LOSS OF RS.6,61,99,434/- AS PER AS-7. EVEN IF THE CUMULA TIVE FIGURE IS TAKEN INTO ACCOUNT, THE TOTAL AMOUNT COMES TO RS.18,94,20,133/- TILL THE DATE OF 31 ST MARCH, 2005 AND THE AMOUNT RECEIVES AGAINST BOOKING IS OF RS.9,32,52,000/- AND, THEREFO RE, THERE IS LOSS OF RS.9,61,68,133/-. WE ARE, THEREFORE, OF THE VIEW THAT THE LEARNED COMMISSIONE R OF INCOME TAX(APPEALS) IN THE IMPUGNED ORDER HAS GIVEN COGENT REASON FOR DELETING THE ADDI TION MADE BY THE ASSESSING OFFICER. WE, THEREFORE, INCLINE TO UPHOLD THE ORDER OF LEARNED C OMMISSIONER OF INCOME TAX(APPEALS). 10. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. THE ORDER WAS PRONOUNCED IN THE COURT ON 25.06.201 0 SD/- SD/- (D.C. AGRAWAL) (T.K. SHARMA ) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 25 / 06 / 2010 COPY OF THE ORDER IS FORWARDED TO : 1) THE ASSESSEE (2) THE DEPARTMENT. 3) CIT(A) CONCERNED, (4) CIT CONCERNED, (5) D.R., ITAT, AHMEDABAD. TRUE COPY BY ORDER DEPUTY REGISTRAR, ITAT, AHMEDABAD LAHA/SR.P.S.