DCIT, New Delhi V. M/s. Friends Buildtech & Developers Pvt. Ltd., New Delhi

ITA 2102/DEL/2012

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 6465 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 10 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-03-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 12-01-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 03-05-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SUSAN GEORGE SENIOR
• Assessee Lawyers: PRASHANT KHANDELWAL
• Keywords: Bonafide belief
• Section: 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH B : NEW DELHI) BEFORE SHRI A.T. VARKEY, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA NO.2102/DEL./2012 (ASSESSMENT YEAR : 2008-09) DCIT, CIRCLE 11 (1), VS. M/S. FRIENDS BUILDTECH & DEVELOPERS PVT. LTD., NEW DELHI. R 116, 2 ND FLOOR, GREATER KAILASH I, NEW DELHI 110 048. (PAN : AAGCS3126E) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI PRASHANT KHANDELWAL, CA REVENUE BY : MS. SUSAN GEORGE, SENIOR DR O R D E R PER A.T. VARKEY, JUDICIAL MEMBER : THIS IS AN APPEAL PREFERRED BY THE REVENUE AGAINST THE ORDER OF THE CIT (APPEALS)-XIII, NEW DELHI DATED 29.02.2012 FOR THE ASSESSMENT YEAR 2008-09. 2. THE SOLE GROUND TAKEN BY THE REVENUE IS AGAINST THE DELETION OF ADDITION OF RS.55,37,847/- MADE ON ACCOUNT OF RECOGNIZING THE I NCOME BY APPLYING THE PERCENTAGE OF COMPLETION METHOD AS PER ACCOUNTING S TANDARD-7 ISSUED BY ICAI. 3. BRIEF FACTS OF THE CASE ARE THAT DURING THE COUR SE OF ASSESSMENT PROCEEDINGS, THE AO OBSERVED THAT THE ASSESSEE COMP ANY IS ENGAGED IN THE BUSINESS OF REAL ESTATE. THE ASSESSEE FILED ITS RET URN OF INCOME ON 22.09.2008 DECLARING THE TOTAL INCOME AT LOSS OF RS.(-) 24,58, 790/-. THE CASE WAS SELECTED FOR SCRUTINY AND NOTICE WAS ISSUED AND SERVED ON TH E ASSESSEE. IN RESPONSE TO THE ITA NO.2102/DEL./2012 2 NOTICE, THE AR OF THE ASSESSEE ATTENDED AND FURNISH ED THE DETAILS CALLED FOR. THE AO OBSERVED THAT AS PER PROFIT & LOSS ACCOUNT, NO SALES WERE DECLARED DURING THE YEAR, HOWEVER, THE ASSESSEE HAD CARRIED OUT CON STRUCTION WORK AND COLLECTED ADVANCES AGAINST SALES FROM CUSTOMER. THE AO FURTHE R OBSERVED THAT THE SAME WAS DISCUSSED IN DETAIL IN THE LAST ASSESSMENT ORDE R FOR AY 2007-08. HE OBSERVED THAT THE PROFIT OF THE ASSESSEE FROM THE P ROJECT WAS ESTIMATED BY APPLYING AS-7. THE AO, THEREFORE, ASKED THE ASSESSE E TO FURNISH THE WORKING OF THE PROFIT AS APPLIED IN THE LAST YEAR. THE ASSESSE ES REPRESENTATIVE ATTENDED THE ASSESSMENT PROCEEDINGS AND SUBMITTED THE FOLLOWING WORKING OF PERCENTAGE COMPLETION METHOD:- TOTAL ESTIMATED SALES RS.8,38,92,000/- TOTAL ESTIMATED COST RS.7,29,63,555/- ESTIMATED PROFIT RS.1,09,28,445/- PERCENTAGE COMPLETION TOTAL COST INCURRED UP TO 31.03.2008 RS.3,17,82,4 80/- TOTAL COST OF LAND RS.L,15,13,006/- LAND DEVELOPMENT CHARGES RS. 28,70,738/- SUB TOTAL RS.4,61,66,224/- PERCENTAGE COMPLETED UP TO 31.03.2008 63.27% GROSS PROFIT (NET) TO BE RECOGNIZED UP TO 31.03.2008 (AS PER CALCULATION GIVEN BY THE ASSESSEE) RS. 55,37,847/- THE AO NOTED THAT AS PERCENTAGE COMPLETION METHOD, PROFIT OF RS.55,37,847/- WAS ESTIMATED AND COMPLETED THE ASSESSMENT DETERMIN ING THE TOTAL INCOME AT RS.30,79,057/- AS AGAINST THE RETURNED LOSS OF RS.2 4,58,790/-. ITA NO.2102/DEL./2012 3 4. AGGRIEVED, THE ASSESSEE FILED AN APPEAL BEFORE T HE CIT (A) AND THE CIT (A) DELETED THE ADDITION MADE BY THE AO BY APPLYING PERCENTAGE COMPLETION METHOD. 5. LD. DR FOR THE REVENUE RELIED ON THE ORDER OF TH E AO. 6. LD. AR FOR THE ASSESSEE, WHILE REITERATING THE S UBMISSIONS MADE BEFORE THE LD. CIT (A), SUBMITTED THE FOLLOWING ARGUMENTS FOR DELETING THE ADDITION :- (I) THAT THE ICAI ISSUED ACCOUNTING STANDARD (AS) 7 - 'CONSTRUCTION CONTRACT' IN THE YEAR 1983 WHICH WAS LATER ON REVIS ED IN THE YEAR 2002. THE AS-7 LAID DOWN THE PRINCIPLES OF ACCOUNTI NG FOR 'CONSTRUCTION CONTRACTS' IN THE FINANCIAL STATEMENT S OF THE CONTRACTORS. AS PER THE REVISED AS-7, THE ACCOUNTIN G WAS TO BE DONE AS PER PERCENTAGE/PROGRESSIVE COMPLETION METHO D. THE REVISED AS-7 IS APPLICABLE ONLY TO CONTRACTORS. (II) THAT RECOGNITION/IDENTIFICATION OF INCOME UNDE R THE ACT IS ATTAINABLE BY SEVERAL METHODS OF ACCOUNTING INCLUDI NG THE COMPLETED CONTRACT METHOD OR THE PERCENTAGE OF COMP LETION METHOD. (III) EVERY ASSESSEE IS ENTITLED TO ARRANGE ITS AFF AIRS AND FOLLOW EITHER THE COMPLETED CONTRACT METHOD OF ACCOUNTING OR THE PERC ENTAGE COMPLETION METHOD OF ACCOUNTING AND THE SAME IS BIN DING ON THE DEPARTMENT UNLESS IT IS SHOWN THE CHOSEN METHOD DIS TORTS THE PROFITS. (IV) UNDER THE MERCANTILE SYSTEM OF ACCOUNTING, THE MATCHING OF EXPENSES AND REVENUE (MATCHING CONCEPT) IS REQUIRED TO BE DONE ON ACCRUAL BASIS. (TAPARIA TOOLS VS. JCIT 260 ITR 102 (BOM)) (V) THAT THE METHOD FOLLOWED BY THE ASSESSEE COMPAN Y CANNOT BE CALLED AS AN UNREASONABLE METHOD AND ANY CHANGE IN THE METHOD IS REVENUE NEUTRAL. FURTHER, THE TAX DEPARTMENT CANNOT CHANGE THE METHOD OF ACCOUNTING WHICH WAS ACCEPTED BY IT OVER THE YEARS. ITA NO.2102/DEL./2012 4 (VI) THAT THE GOVERNMENT HAS NOT SPECIFIED AS-7 IN SECTION 145 OF THE ACT AND THE TAXPAYER DEVELOPER HAD BEEN REGULARLY, UNDER A BONAFIDE BELIEF, EMPLOYING PROJECT COMPLETION METHO D WHICH IS AN ACCEPTED METHOD OF ACCOUNTING. ACCORDINGLY, THE AO CANNOT REJECT THE ACCOUNTS OF THE TAXPAYER UNDER SECTION 1 45(3) OF THE ACT. (VII) THAT THE MUMBAI TRIBUNAL IN THE CASE OF CHAMP ION CONSTRUCTION CO. AND HELD THAT IT WOULD BE APPROPRIATE TO OFFER INCOME TAX IN THE YEAR IN WHICH 80 PERCENT OF THE CONSTRUCTION WAS CO MPLETED. SINCE THE TAXPAYER ADMITTEDLY COMPLETED ONLY 53.95 PERCEN T OF THE CONSTRUCTION IT CANNOT BE SAID THAT THE TAXPAYER HA S SUBSTANTIALLY COMPLETED THE PROJECT SO AS TO RECOGNIZE INCOME UND ER THE PROJECT COMPLETION METHOD OF ACCOUNTING. (VIII) THAT BOMBAY HIGH COURT IN THE CASE OF CIT V. TATA IRON & STEEL CO. LTD., WHERE IT WAS HELD THAT THE METHOD OF ACCO UNTING FOLLOWED BY THE TAXPAYER COMPANY CANNOT BE SAID TO BE UNREAS ONABLE, AND THAT IN SUCH A CASE, EVEN IF A BETTER METHOD COULD BE VISUALIZED, THE METHOD CONSISTENTLY FOLLOWED SHOULD BE ACCEPTED. (IX) THAT THE SUPREME COURT IN THE CASE OF CIT V. R EALEST BUILDERS & SERVICES LTD.[200B] 170 TAXMAN 218 (SC) HAS HELD TH AT THE TAX DEPARTMENT NEEDS TO PROVIDE FACTS AND FIGURES THAT THE IMPUGNED METHOD OF ACCOUNTING ADOPTED BY THE TAXPAYER RESULT S IN UNDERESTIMATION OF PROFITS FOR CHANGING THE METHOD OF ACCOUNTING UNDER SECTION 145 OF THE ACT. OTHERWISE, IT WILL BE PRESUMED THAT THE ENTIRE EXERCISE IS REVENUE NEUTRAL. (LATEST JUD GEMENT - UNIQUE ENTERPRISES V. ITO [2010-TIOL-737-ITAT-MUM). (X) THAT RECENTLY, THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF UNIQUE ENTERPRISES HAS HELD THAT THE ACCOUNTING STA NDARD (AS)-7 - 'CONSTRUCTION CONTRACT' (REVISED) ISSUED BY THE INS TITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI) IS APPLICABLE ONLY TO CONTRACTORS AND NOT TO BUILDERS AND REAL ESTATE DEV ELOPERS. ACCORDINGLY, THE PROJECT COMPLETION METHOD FOLLOWED BY THE ITA NO.2102/DEL./2012 5 TAXPAYER FOR RECOGNIZING REVENUE IN THE BOOKS OF AC COUNTS CANNOT BE REGARDED AS AN UNREASONABLE. FURTHER, THE TAX DE PARTMENT CANNOT CHANGE THE METHOD OF ACCOUNTING AS ANY CHANGE WOULD BE A TAX NEUTRAL. IN VIEW OF THE ABOVE, LD. AR FOR THE ASSESSEE WANT S US NOT TO INTERFERE WITH THE ORDER OF THE LD. CIT (A). 7. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE MAT ERIAL ON RECORD. WE NOTE THAT ASSESSEE WAS FOLLOWING PROJECT COMPLETION METHOD FROM THE BEGINNING FOR CALCULATING ITS INCOME FROM THE PROJECTS AND TH E DEPARTMENT WAS ACCEPTING THE SAME THROUGHOUT, HOWEVER, THIS YEAR ONLY THE AO HAS NOT ACCEPTED THIS METHOD WITHOUT SPELLING OUT HOW THIS METHOD DISTORT S THE PROJECTS. ADMITTEDLY, THE ASSESSEE IS NOT A CONTRACTOR SO REVISED AS-7 NE ED NOT BE FOLLOWED BY THE ASSESSEE WHO IS REAL ESTATE DEVELOPER. WE HAVE ALS O GONE THROUGH THE FOLLOWING JUDICIAL PRONOUNCEMENTS RELIED UPON BY TH E ASSESSEE :- (I) CHAMPION CONSTRUCTION CO. VS. FIRST ITO (1983 ) 5 ITD 495 (BOM.); (II) CIT, NEW DELHI VS. REALEST BUILDERS & SERVICES LTD. (2008) 170 TAXMAN 218 (SC); (III) M/S. UNIQUE ENTERPRISES VS. ITO 2010-TIOL-7 37-ITAT-MUM. WE CONCUR WITH THE CIT (A) THAT THE RATIO OF THE AF ORESAID JUDGMENTS ARE APPLICABLE TO THE FACTS OF THE ASSESSEES CASE AS T HE CONSTRUCTION IS COMPLETED UP TO 53.95%, THEREFORE, THE PROJECT WAS NOT COMPLETE AND REAL PROFITS CANNOT BE ESTIMATED FROM THE SAME. THE LD. CIT (A) HAS RIGHT LY HELD THAT THE AO HAS NOT POINTED OUT ANY DISCREPANCY THAT METHOD FOLLOWED RE GULARLY BY THE ASSESSEE WAS DISTORTING OR UNDER ESTIMATING THE PROFITS AND SINC E NO SUCH FACTS AND FIGURES ITA NO.2102/DEL./2012 6 HAVE BEEN BROUGHT ON RECORD BY THE AO, THEREFORE, T HE METHOD REGULARLY FOLLOWED BY THE ASSESSEE CANNOT BE INTERFERED WITH. THEREFORE, THE PERCENTAGE COMPLETION METHOD APPLIED BY THE AO CANNOT BE APPLI ED IN THE CASE OF THE ASSESSEE. THEREFORE, IN VIEW OF THE ABOVE, WE DO N OT FIND ANY INFIRMITY IN THE ORDER OF THE CIT (A) AND ACCORDINGLY, WE UPHOLD THE SAME. 8. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISM ISSED. ORDER PRONOUNCED IN OPEN COURT ON THIS 11 TH DAY OF MARCH, 2016. SD/- SD/- (PRASHANT MAHARISHI) (A.T. VARKEY) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 11 TH DAY OF MARCH, 2016 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT(A)-XIII, NEW DELHI. 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.