M/s. Chirag Developers, Mehsana V. The Income tax Officer,Mehsana Ward-1, Mehsana

ITA 2421/AHD/2008

• Counselvise Citation: 242120514 RSA 2008
• Duration Of Justice: 3 year(s) 7 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-02-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 24-01-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 26-06-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S P TALATI
• Assessee Lawyers: VIJAY RANJAN
• Keywords: Rejection of books of accounts; Business income
• Section: 44AD; 234B; 68; 69; 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH AHMEDABAD (BEFORE SHRI BHAVNESH SAINI, JM AND SHRI B. P. JAIN , AM) ITA NO.2421/AHD/2008 AND 856/AHD/2009 A. Y.: 2005-06 M/S. CHIRAG DEVELOPERS, VISNAGAR ROAD, MEHSANA PA NO. AACFC 8269 P VS THE INCOME TAX OFFICER, MEHSANA WARD NO.1, MEHSANA (APPELLANT) (RESPONDENT) APPELLANT BY SHRI VIJAY RANJAN, AR RESPONDENT BY SHRI S. P. TALATI, SR. DR DATE OF HEARING: 24-01-2012 DATE OF PRONOUNCEMENT: 07-02-2012 O R D E R PER BHAVNESH SAINI: THIS ORDER SHALL DISPOSE OF BOTH THE APPEALS FILED BY THE ASSESSEE FOR ASSESSMENT YEAR 2 005-06. 2. THE APPEAL OF THE ASSESSEE IN ITA NO.2421/AHD/20 08 WAS EARLIER DISMISSED IN DEFAULT VIDE ORDER DATED 15-06 -2010. THE SAID ORDER WAS RECALLED WHILE ALLOWING MISC. APPLICATION FILED BY THE ASSESSEE IN M. A. NO.258/AHD//2010 AND THE APPEAL O F THE ASSESSEE WAS RE-FIXED FOR HEARING ON MERIT. 3. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF BO TH THE PARTIES, PERUSED THE FINDINGS OF THE AUTHORITIES BELOW AND C ONSIDERED THE MATERIAL ON RECORD. ITA NO.2421/AHD/2008 & 856/AHD/2009 M/S. CHIRAG DEVELOPERS VS ITO, W-1, MEHSANA 2 ITA NO.2421/AHD/2008 4. THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE LEARNED CIT(A), GANDHINAGAR DATED 27-03-2008 FOR AS SESSMENT YEAR 2005-06, ON THE FOLLOWING GROUNDS: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE CIT(A) ERRED IN MAKING IT A CASE OF ENHANCEMENT WHI LE ACTUALLY ASSESSEE SHOULD HAVE BEEN ALLOWED FULL REL IEF AS CLAIMED BY IT. 2. WITHOUT PREJUDICE, ON THE FACTS AND IN THE CIRCU MSTANCES OF THE CASE, THE CIT(A) ERRED IN REJECTING THE BOOK RESULTS AND HE FURTHER ERRED IN COMPUTING THE TOTAL INCOME AT RS.13,79,046/-. ACTUALLY, ALL THIS IS DONE PRIMARIL Y ON THE BASIS OF CONJECTURES AND SURMISES. 3. WITHOUT PREJUDICE, ON THE FACTS AND IN THE CIRCU MSTANCES OF THE CASE, THE ASSESSING OFFICER ERRED IN REJECTI NG THE BOOK RESULTS AND FURTHER ERRED IN COMPUTING THE TOT AL INCOME AT RS.11,66,800. ACTUALLY, ALL THIS IS DONE PRIMARILY ON THE BASIS OF CONJECTURES AND SURMISES. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE CIT(A) ERRED IN NOT REALIZING THAT IT WAS NOT AT AL L FIT CASE FOR LEVY OF INTEREST U/S. 234B AND WITHOUT PREJUDIC E, THE ASSESSING OFFICER ERRED IN LEVYING INTEREST U/S. 23 4B WHILE ACTUALLY ASSESSING OFFICER ALSO SHOULD HAVE REALIZE D THAT IT WAS NOT AT ALL A FIT CASE FOR LEVY OF INTEREST U /S.234B. 5. IN THIS CASE, WHEN THE LEARNED CIT(A) WAS HEARIN G THE APPEAL, HE HAS ISSUED A NOTICE OF ENHANCEMENT OF INCOME. TH E ISSUE BEFORE THE LEARNED CIT(A) WAS REGARDING THE CURRENT ASSETS SHOWN IN THE BALANCE SHEET WERE TREATED AS SOLD AND FOR APPLYING NET PROFIT RATE OF 8% FOR MAKING ADDITION OF RS.9,78,000/- BY THE AO. THE FACTS ARE THAT DURING THE COURSE OF SCRUTINY ASSESSMENT, THE AO NO TICED THAT THE ITA NO.2421/AHD/2008 & 856/AHD/2009 M/S. CHIRAG DEVELOPERS VS ITO, W-1, MEHSANA 3 TRADING ACCOUNT PREPARED DURING THE YEAR DOES NOT S HOW THE OPENING STOCK OF THE BUILDING COMPLETED PLUS THE WORK IN PR OGRESS EQUIVALENT TO THE CLOSING STOCK FOR THE PRECEDING YEAR AMOUNTI NG TO RS.95,25,000/-. THE AO FURTHER NOTICED THAT THERE I S NO CLOSING STOCK AS WELL AND THAT ALONG WITH THE WORK IN PROGRESS OF RS.27,00,000/- SHOWN IN THE YEARS TRADING ACCOUNT, THE ENTIRE CLO SING STOCK OF RS.1,22,25,000/- HAS BEEN TAKEN DIRECTLY TO THE BAL ANCE SHEET. ONLY AN OPENING STOCK OF RS.87,765/- AS RAW MATERIAL OP ENING STOCK, WHICH IS THE CLOSING STOCK ON THAT ACCOUNT FOR THE PRECEDING YEAR, HAS BEEN SHOWN IN THE TRADING ACCOUNT. FOR THE SAKE OF CLARITY, THE TWO TRADING ACCOUNTS ARE REPRODUCED BELOW, WHICH ALSO F EATURE ON PAGE 3 AND 5 OF THE ASSESSMENT ORDER: TRADING AND PROFIT & LOSS ACCOUNT AS PER AUDITED A CCOUNT FILED ALONG WITH THE RETURN FOR A. Y. 2004-05 PARTICULARS AMOUNT PARTICULARS AMOUNT TO, OPENING STOCK WORK IN PROGRESS (2002-03) A/C. 52348.00 5750000.00 BY, SHOP SALES 1276000.00 TO, CONSTRUCTION A/C. 2747014.23 BY, BUILDING CONST. COMPLETED 4025000.00 TO, CONS. LABOUR CHARGES 1157198.00 BY, WORKING IN PROGRESS 5500000.00 TO, FREIGHT & OCTORI 125855.00 BY, CLOSING STOCK 85765.00 TO, ELECTRICITY EXP. 219761.00 TO, MACHINERY REPAIRING EXP. 7490.00 TO, ARCHITECT FEES EXP. 108000.00 TO, RETI PURCHASE 458000.00 TO GROSS PROFIT TRANSFER TO PROFIT & LOSS A/C. 673298.77 10886765.00 10886765.00 ITA NO.2421/AHD/2008 & 856/AHD/2009 M/S. CHIRAG DEVELOPERS VS ITO, W-1, MEHSANA 4 TRADING AND PROFIT & LOSS ACCOUNT AS PER AUDITED A CCOUNT FILED ALONG WITH THE RETURN FOR A. Y. 2005-06 PARTICULARS AMOUNT PARTICULARS AMOUNT TO, OPENING STOCK 85765.00 BY, SHOP SALES 1226000.00 TO, ELECTRICITY EXP. 210531.00 BY W I P 2700000.00 TO, LABOUR CHARGE EXP. 579495.75 TO, R. D. PURCHASE 911002.08 TO, CONSTRUCTION EXP. 1287899.00 BY CLOSING STOCK 10425 TO, GROSS PROFIT TRANSFER TO PROFIT & LOSS ACCOUNT 861732.17 3936425.00 3936425.00 SIMILARLY, THE RESPECTIVE BALANCE SHEETS ARE AS FOL LOWS: BALANCE SHEET AS PER AUDITED ACCOUNTS FILED ALONG W ITH THE RETURN FOR A.Y.2004-05 LIABILITIES AMOUNT ASSETS AMOUNT CAPITAL ACCOUNT SCHEDULE A 1095778.27 FIXED ASSETS BOREWELL PURCHASE DEAD STOCK ELECTRIC MOTOR LAND PURCHASE LIFT PUR& INSTALLATION OFFICE FURNITURE 17775.00 11474.00 3872.00 770000.00 245875.00 575000.00 SECUREED LOAN UNSECURD LOAN DEPOSITORS PARAM ENTERPRISE, MEHSANA 1107700.00 INVESTMENT DHARTI CO-OP. CREDIT SOC. SHARE 4020.00 CURRENT LIABIALITIES AND PROVISIONS SUNDRY CREDIT FOR GOODS & EXP. SCHEDULE B 990914.23 CURRENT ASSETS, LOANS AND ADVANCES CLOSING STOCK (AS TAKEN VALUED AND CERTIFIED BY 5500000.00 ITA NO.2421/AHD/2008 & 856/AHD/2009 M/S. CHIRAG DEVELOPERS VS ITO, W-1, MEHSANA 5 PARTNERS) WORK IN PROGRESS CLOSING STOCK (CONSTRUCTION (2003/04) 85765.00 4025000.00 CUSTOMER BOOKING 8501700.00 SUNDRY DEBTORS 171125.00 TDS(INTEREST) 12300.00 DEPOSITS GEB DEPOSITS 240704.00 TDS FOR LABOUR 1226.00 CASH & BANK BALANCES 54035.50 ADVANCE INCOME TAX 5000.00 11709645.50 11709645.50 BALANCE SHEET AS PER AUDITED ACCOUNTS FILED ALONG W ITH THE RETURN FOR A. Y. 2005-06 LIABILITIES AMOUNT ASSETS AMOUNT CAPITAL ACCOUNT SCHEDULE A 1412448.17 FIXED ASSETS BOREWELL PURCHASE OFFICE FURNITURE 21647.00 1812800.80 SECUREED LOAN CO.OP. BANK OF MEH. H.P. DHARTI CO. CREDIT SOCIETY 2602248.00 11609.00 INVESTMENT DHARTI CO-OP. CREDIT SOC. SHARE DHARTI CREDIT SOC. SHARE 21647.00 1812800.80 UNSECURD LOAN DEPOSITORS PARAM ENTERPRISE, MEH 1107760.00 CURRENT ASSETS, LOANS AND ADVANCES CLOSING STOCK (AS TAKEN VALUED AND CERTIFIED BY PARTNERS) CLOSING STOCK CONSTRUCTION (2003/04) 10425 11112500.00 ITA NO.2421/AHD/2008 & 856/AHD/2009 M/S. CHIRAG DEVELOPERS VS ITO, W-1, MEHSANA 6 CURRENT LIABILITIES AND PROVISION 7909682.90 SUNDRY DEBTORS 31009.27 13043748.07 13043748.07 THE AO FELT THAT THE ASSESSEE HAS CHANGED HIS METHO D OF ACCOUNTING AND THEREFORE, THE PROPER INCOME COULD NOT BE COMPU TED AND TREATED IT AS A FIT CASE FOR REJECTION OF BOOKS U/S. 145(3) OF THE IT ACT AND PROCEEDED TO ESTIMATE THE PROFIT BY APPLYING SECTIO N 44AD ON THE ENTIRE WORK IN PROGRESS OF RS.1,22,25,000/- @ 8% LE ADING TO THE CONSEQUENTIAL ESTIMATIONS OF INCOME AT RS.9,78,000/ -. THE LEARNED CIT(A) ISSUED ENHANCEMENT NOTICE ON THE FACTS OF TH E CASE OBSERVING THAT SINCE CLOSING WORK IN PROGRESS TO THE EXTENT O F RS.55,00,000/- HAS NOT BEEN CARRIED FORWARD IN THE CURRENT YEAR, T HE ASSESSEE HAS CONCEALED INCOME TO THE EXTENT OF RS.55,00,000/- WH ICH NEEDS TO BE ADDED TO THE INCOME ASSESSED BY THE AO. DURING THE APPELLATE PROCEEDINGS BEFORE THE LEARNED CIT(A) THE ASSESSEE SUBMITTED VARIOUS SUBMISSIONS BUT THERE WAS VARIATION IN THE OVERALL REPLY OF THE ASSESSEE FROM IN DIFFERENT STAGES. AS PER THE STATE MENT OF FACTS FILED ALONG WITH FORM NO.35, THE ASSESSEE WAS CONSTRUCTIN G BUILDING AND AS PER THE ACCOUNTING STANDARDS LAID DOWN BY ICAI, THE ACCOUNTING OF THE FIXED ASSETS HAD BEEN FOLLOWED. THE ASSESSEE HA S TAKEN THE COMPLETED BUILDINGS CURRENT ASSET WHICH WAS TO BE S OLD AND WHEN THERE WAS NO SALES, THE ASSETS CONTINUED AT THE SAM E FIGURES AND WHENEVER IT WAS SOLD, RECEIPTS REDUCED THE COST AND EXCESS HAD BEEN TAKEN AS PROFIT. SINCE THE ASSETS HAD NOT BEEN SOLD , HENCE THERE WAS NO QUESTION OF ANY PROFIT U/S 145 OF THE IT ACT. ITA NO.2421/AHD/2008 & 856/AHD/2009 M/S. CHIRAG DEVELOPERS VS ITO, W-1, MEHSANA 7 6. BEFORE THE LEARNED CIT(A), THE ASSESSEE FILED WR ITTEN SUBMISSIONS THE RELEVANT PORTION OF WHICH IS AS UND ER: THE APPELLANT SUBMITS THAT BOOKS OF ACCOUNTS ARE MAINTAINED AS PER THE ACCOUNTING PRINCIPLES. BOOKS OF ACCOUNTS ARE AUDITED. TAX AUDIT REPORTS ARE ALSO FI LED. THERE IS NO CHANGE IN ACCOUNTING. FROM THE AUDITED ACCOUNTS IT IS SEEN THAT IN THE ASSTT. YEAR 2003-04 WE HAVE TRANSFERRED THE COMPLETED BUILDINGS AS STOCK-I N- TRADE. SIMILARLY, WE HAVE ALSO TRANSFERRED CONSTRUC TED PROPERTIES TO STOCK-IN-TRADE AND ALSO THE SALES OF THE COMPLETED PROPERTIES HAVE BEEN DEDUCTED FROM THE ST OCK. DURING THE YEAR ALSO THE COMPLETED BUILDINGS HAVE BEEN TAKEN TO THE STOCK AND AS SUCH THERE IS NO QUESTION OF ANY SALE DURING THE YEAR EXCEPT WHAT HAS BEEN ALREADY S HOWN IN THE TRADING ACCOUNT. IN FACT THERE WAS NO SALE A ND NO NOTIONAL INCOME CAN BE ESTIMATED ON THE STOCK VALUE , WHICH HAS BEEN SHOWN IN THE BOOKS OF ACCOUNTS. IT S EEMS THAT THE ASSESSING OFFICER HAS MISUNDERSTOOD THE PRINCIPLES OF ACCOUNTANCY THAT IF THE WORK-IN-PROGR ESS IS TRANSFERRED TO STOCK-IN-TRADE IT IS CONSIDERED TO B E SALE AND ESTIMATED THE PROFIT AS THE ASSESSEE HAS CHANGE D IN METHOD. IN CONTINUATION TO THE SAME SUBMISSION, THE ASSESSE E VIDE ITS LETTER DATED AUGUST 27, 2007 FURTHER STATED THAT - THE ESTIMATE U/S 44AD CAN BE MADE IF BOOKS OF ACCO UNTS MAINTAINED BY THE APPELLANT ARE NOT IN ACCORDANCE W ITH THE PRINCIPLES OF ACCOUNTANCY. FURTHER, IF THE BOOK S OF ACCOUNTS ARE AUDITED THEN THE QUESTION OF APPLYING SEC. 44AD DOES ARISE. ALSO ESTIMATING THE PROFIT ON THE PROVISIONS OF SECT. 145 PROVISO, THERE MUST BE DEFE CTS IN THE BOOKS OF ACCOUNTS FROM WHICH THE INCOME CAN NOT BE ASCERTAINED. IN OUR CASE NO DEFECT HAS BEEN FOUND F ROM THE BOOKS OF ACCOUNTS EXCEPT HE HAS NOT PROPERLY UNDERSTOOD THE TRADING ACCOUNT MAINTAINED BY THE APPELLANT. NO DOUBT, THERE SOME CHANGE IN THE WORKI NG OF ITA NO.2421/AHD/2008 & 856/AHD/2009 M/S. CHIRAG DEVELOPERS VS ITO, W-1, MEHSANA 8 CLOSING STOCK AND WORK-IN-PROGRESS. BUT IN THE ORDE R THE TOTAL WORK CARRIED OUT OPENING STOCK SALES AND AFTE R ASCERTAINING THE PROFIT THE CLOSING BALANCE TAKEN I NCLUDING WORK-IN-PROGRESS AND COMPLETED WORKS DURING THE YEA R AND IN EARLIER YEARS. THE ASSESSING OFFICER HAS EST IMATED THE PROFIT IN RESPECT OF CLOSING STOCK OF RS.1,11,1 2,500/- AND THE OFFICE BUILDING, WHICH IS SHOWN AS ASSTS IN THE BOOKS OF ACCOUNTS AT RS.11,12,500/- TOTALING TO RS.1,22,25,000/-. THE AMOUNT IS ASSETS APPEARING ON THE DEBIT SIDE OF THE BALANCE SHEET. THIS STOCK IS STIL L UNSOLD. IT IS NOT UNDERSTOOD HOW CAN THERE BE AN ESTIMATE OF I NCOME U/S. 44AD IN RESPECT OF CLOSING STOCK AND WORK-IN- PROGRESS. SEC. 44AD PROVIDES THAT IF BOOKS ARE MAINTAINED IN SUCH A WAY THAT INCOME CANNOT BE DETERMINED THEN THE PROFIT IS TO BE ESTIMATED AT 8% ON SALE. DURING THE YEAR WE HAVE SOLD THE BUILDING FOR RS.12,26,000/- AND THE GROSS PROFIT EARNED DURING T HE YEAR WAS RS.8,61,732/- WHICH IS MUCH MORE THAN 8%. AS SUCH THE QUESTION OF ESTIMATING THE INCOME AT 8% ON THE SALE ALSO DOES NOT ARISE. ON THE SPECIFIC QUERY AS TO WHAT SYSTEM THE ASSESSE E WAS FOLLOWING IN PREPARING ITS ACCOUNT, THE ASSESSEE VIDE ITS REP LY DATED 02-01-2008 STATED THAT THE ASSESSEE WAS FOLLOWING AS-9 READ WI TH AS-2 OF THE ICAI BECAUSE IT HAD BEEN HELD BY THE EXPORTS THAT A S-7 (REVISED) WAS NOT VALID FOR BUILDERS. REGARDING VALUATION OF THE STOCK THE ASSESSEE SUBMITTED AS UNDER: AT THE OUTSET WE SUBMIT THAT THERE IS A MISTAKE IN PREPARING THE TRADING ACCOUNT AS WE HAVE NOT TAKEN THE STOCK AND WORK-IN-PROGRESS CARRIED FORWARD IN THE C URRENT YEAR. HOWEVER, WHILE PREPARING THE BALANCE SHEET WE HAVE INCLUDED THE CLOSING STOCK AND INVENTORIES BY TAKING THE CLOSING STOCK OF EARLIER YEAR WITH WORK-IN-PROG RESS DURING THE YEAR. FROM THE REVISED TRADING ACCOUNTS FILED AS REQUIRED IT CAN BE SEEN THAT WHOLE WORKS EITHER FULL CONSTRUCTION OR WORK-IN-PROGRESS HAVE BEEN TAKEN IN THE ITA NO.2421/AHD/2008 & 856/AHD/2009 M/S. CHIRAG DEVELOPERS VS ITO, W-1, MEHSANA 9 BALANCE SHEET. THIS IS A MISTAKE APPARENT FROM RECO RD BUT THERE IS NO UNDERVALUATION IN THE WORKS CARRIED OUT AND TAKEN TO THE BALANCE SHEET. FROM THE ACCOUNTS OF ASSESSMENT YEAR 2006-07 AND 2007-08 THE SALE HAVE BEEN CARRIED OUT AND PROFIT HAS BEEN SHOWN ON WHICH TAX HAS BEEN PAID. WE ARE ALSO FILING OUR PARTNERSHIP D EED WHEREIN THE ACTIVITIES CARRIED ON BY THE FIRM HAVE BEEN MENTIONED. IT HAS BEEN STATED THAT WE ARE TAKING CO NTRACT ON OUR OWN AND NOT ON BEHALF OF PERSONS, WHO REQUIR E THE WORK TO BE CARRIED ON BY US. REGARDING THE ENHANCEMENT NOTICE THE ASSESSEE SUBMI TTED AS UNDER: FOR THE ASSESSMENT YEAR 2005-06 NO OPENING BALANCE OF COMPLETE WORK WAS SHOWN AS WELL AS WORK IN PROGR ESS, BUT ONLY TRADING ACCOUNT WAS PREPARED FOR THE YEAR AS THE CLOSING SOCK WAS SHOWN AS SEPARATE ITEMS IN THE BALANCE SHEET. IN THE ASSESSMENT YEAR 2005-06 WE HA VE RE-CASTED THE TRADING ACCOUNT, AS IN THE BOOKS OF ACCOUNTS THE COMPLETED WORK AND THE WORK IN PROGRES S WAS KEPT IN A SEPARATE ACCOUNT AS THE SAME WAS TO B E CARRIED FORWARD ONLY. WE HAVE SHOWN THE CLOSING STO CK OF RS.1,11,22,925/-. THIS INCLUDES THE WORK IN PROGRES S OF RS.55 LAKHS. FOR EARLIER YEAR THE COMPLETED WORKS S HOWN IN THE BALANCE SHEET IS RS.40,25,000/- AND WORK IN PROGRESS OF RS.55 LAKHS CARRIED FORWARD PLUS RS.27 LAKHS FOR THE YEAR TOTALING TO RS.82 LAKHS. THUS THE QUER Y RAISED BY YOUR HONOUR THAT THE WORK IN PROGRESS OF RS.55 L AKHS HAS NOT REFLECTED IN THE OPENING STOCK FOR THE PERI OD ENDED ON MARCH, 2005. FROM PAGE 10 OF OUR EARLIER SUBMISSION IT MAY KINDLY BE SEEN THAT ACCOUNT FOR T HE ASSESSMENT YEAR 2005-06 SHOWS OPENING BALANCE OF RS.1,11,22,925/-. THIS IS INCLUSIVE OF RS.55 LAKKS AS PER THE TRADING ACCOUNT SHOWN AT PAGE 9 FOR F. Y. 2004- 05. IN FACT ASSESSING OFFICER HAS NOT DOUBTED THAT THE STO CK OF RS.55 LAKHS HAS NOT BEEN TAKEN IN THE BOOKS OF ACCO UNTS AS CLOSING STOCK. THUS IT IS SUBMITTED THAT RS.55 L AKHS WORK IN PROGRESS HAS ALREADY BEEN INCLUDED ON THE ITA NO.2421/AHD/2008 & 856/AHD/2009 M/S. CHIRAG DEVELOPERS VS ITO, W-1, MEHSANA 10 CLOSING STOCK AT THE END OF THE YEARS AS PER TRADIN G ACCOUNT GIVEN TO YOUR HONOR A PER PAGE-9. OURS IS THE BUSINESS OF CONSTRUCTION OF IMMOVABLE PROPERTIES. THE SALE OF IMMOVABLE PROPERTIES CANNOT BE DONE WITHOUT REGISTRATION OF THE TRANSACTION WITH T HE SUB- REGISTRAR. IF THERE WOULD HAVE BEEN ANY TRANSFER OR SALE BY US IT WOULD HAVE BEEN ONLY THROUGH THE OFFICIAL DOCUMENTS. AS THERE IS NO EVIDENCE OF ANY SALE OUTS IDE THE BOOKS OF ACCOUNTS AND NOTHING HAS BEEN POINTED OUT BY THE ASSESSING OFFICE. IT IS SUBMITTED THAT THERE IS NO OMISSION OF TAKING THE WORK IN PROGRESS OF RS.55 LA KHS. 7. THE LEARNED CIT(A) CONSIDERING THE SUBMISSIONS O F THE ASSESSEE IN THE LIGHT OF THE FINDINGS OF THE AO NOT ONLY CONFIRMED THE ADDITION BUT ALSO ENHANCED THE INCOME. HIS FINDINGS IN THE IMPUGNED ORDER ARE REPRODUCED AS UNDER: 3.9. THE ISSUE HAS BEEN GIVEN SERIOUS CONSIDERATION AND THE APPELLANT WAS GIVEN MORE THAN ADEQUATE OPPORTUN ITY TO EXPLAIN IS STAND. NOT ONLY THE COUNSEL AUTHORIZED F OR THE APPEAL PROCEEDINGS ATTENDED, ONE OF THE PARTNERS, THE ACCO UNTANT OF THE FIRM AS ALSO PARTNER OF THE AUDITORS' FIRM HAVE ATTENDED THE PROCEEDINGS ON ONE OR THE OTHER HEARING. 3.9.1. TO START WITH, IT IS NECESSARY TO COMMENT ON THE TREATMENT GIVEN BY THE ASSESSING OFFICER TO THE SUB JECT. THE APPELLANT IS A BUILDER AND NOT. CONTRACTOR, THEREF ORE, PER SE SECTION 44AD IS NOT APPLICABLE. ALSO THE BASIS COMP UTATION OF SECTION 44AD IS SALES OF THE APPELLANT OF THAT YEAR AND NOT THE W.I. P. / COMPLETED WORK OF ENTIRE PROJECT, AS HAS BEEN DONE BY THE ASSESSING OFFICER. HOWEVER, ON THE OTHER HAND I T MUST BE STATED THAT ASSESSING OFFICER HAS LOCATED A MAJOR D EFICIENCY IN THE MANNER THE APPELLANT IS MAINTAINING ITS ACCOUNT S AND I AGREE WITH HIM THAT CORRECT PROFITS CAN NOT BE DERI VED BY MANNER APPELLANT HAS PREPARED ITS ACCOUNTS. ITA NO.2421/AHD/2008 & 856/AHD/2009 M/S. CHIRAG DEVELOPERS VS ITO, W-1, MEHSANA 11 3.9.2. THE FACT THAT THE APPELLANT HAS NOT TAKEN OP ENING STOCK OF RS.95,25,000/- IN THE TRADING ACCOUNT OF T HE YEAR EQUAL TO THE CLOSING STOCK OF PRECEDING YEAR IS PATENTLY OBVIOUS AND SIMILARLY HE HAS NOT TAKEN THE CLOSING STOCK OF THE COMPLETED BUILDING AND THE WORK IN PROGRESS IN HAND IN THE TR ADING ACCOUNT, EXCEPT THAT RS.27,00,000/- OF W.I.P. CREAT ED DURING THE YEAR. THE STAND OF THE APPELLANT IS THAT THIS TREAT MENT HAS NOT EFFECTED THE COMPUTATION OF PROFITS OF THE YEAR AND IT HAS NO OTHER REPERCUSSION. 3.9.3. TO START WITH, THE STATEMENT THAT THE APPELL ANT IS FOLLOWING AS-9 IN CASTING ITS ACCOUNTS IS ABSOLUTEL Y INCORRECT. THE SAID STANDARDS WOULD TREAT THE FLATS COMPLETED AS A COMMODITY AND TAKEN WITH AS-2, THE TRADING ACCOUNT WOULD SHOW PROFITS EARNED OUT OF TRADING OF GOODS. THE MA NNER THE APPELLANT HAS DRAWN ITS TRADING ACCOUNT, IT IS SHOW ING A GROSS PROFIT OF RS.861732/- ON SALES OF RS.1226000/- (70. 29%), WITHOUT REFERENCE TO THE COST OF GOODS SOLD. IN FAC T THE FIGURE OF GROSS PROFIT SEEMS TO BE AN ARBITRARY FIGURE, WITH W.I.P. BEING A RESULTANT FIGURE. THE FACT THAT THERE IS NO CERTIFI CATION BY ANY INDEPENDENT EXPERT FOR THE W.I.P. SHALL HAVE TO BE KEPT IN MIND. DURING THE COURSE OF APPELLATE PROCEEDINGS, APPELLA NT WAS SPECIFICALLY ASKED BUT FAILED TO RECONCILE OR PROVI DE BASIS OR DETAILS OF VALUATION OF W.I.P. ETC. (QUERY DATED 05 /03/2007). 3.9.4. AT THIS STAGE, APPELLANT'S PAST HISTORY OF T HE CONCERNED OPERATING PARAMETER IS WORTH BRINGING ON RECORD: SR. NO . A.Y. SALES W.I.P. PROFIT PROFIT AS % OF SALES PROFITS AS % OF WIP 1. 02-03 5,50,000 19,00,000 1,25,383 22.79% 6.59% 2. 03-04 18,95,000 57,00,000 5,66,232 29.88% 9.93% 3. 04-05 12,76,000 55,00,000 6,73,299 52,76% 12.42% 4. 05-06 12,26,000 27,00,000 8,61,732 70.28% 31.91% ITA NO.2421/AHD/2008 & 856/AHD/2009 M/S. CHIRAG DEVELOPERS VS ITO, W-1, MEHSANA 12 THE VARIATION IN THE RATIOS IS TOO VAST AND NOT IN CONSONANCE WITH THE ACCEPTED NORMS THAT THE GROSS PROFIT RATE SHOWS THE TRADING RESULTS AND IS GENERALLY CONSISTENT IN NORM AL CIRCUMSTANCES. THE APPELLANT HAS BEEN CLEARLY ESTIM ATING GROSS PROFIT ON PURELY AD-HOC BASIS WITH W.I.P. BEING THE BALANCING FIGURE. 3.9.5. HOWEVER, MUCH MORE STRIKING IS THE FACT THAT IN THE MANNER OF ACCOUNTS PREPARED BY THE APPELLANT FOR TH E YEAR, WHILE THE APPELLANT HAS SHOWN SALE OF FLATS, IN ITS BOOKS, THERE HAS NOT BEEN CORRESPONDING DECREASE IN STOCK IN HAND IN THE CLOSING STOCK SHOWN IN BALANCE SHEET, OR IN OTHER WORDS THE SALE OF GOODS HAS BEEN SHOWN WITHOUT GOODS BEIN G IN HAND. IN THE VARIOUS SUBMISSIONS OF THE APPELLANT REPRODU CED EARLIER, THE GENERAL STAND IS THAT STOCK SOLD STANDS REDUCED FROM CLOSING STOCK. A REFERENCE TO THE BALANCE SHEET FOR THE YEA R SHOWS STOCK IN HAND AT RS.1,11,12,500/-, WHICH IS MADE UP AS FOLLOWS: OPENING STOCK (OR CLOSING STOCK AS PER B/SHEET OF A .Y. 2004-05) RS. 95,25,000 W.I.P. DURING THE YEAR AS PER PROFIT & LOSS ACCOUNT OF THE YEAR RS. 27,00,000 RS.1,22,25,000 LESS: TRANSFER TO SELF A/C. RS. 11,12,500 BALANCE RS.1,11,12,500 HENCE, ALTHOUGH THE APPELLANT HAS SOLD FLATS WORTH RS.12,26,00O/-, HIS STOCK IN HAND REMAINS UNAFFECTE D AND NO ADJUSTMENT HAS BEEN MADE FOR THE STOCK SOLD. SUCH A TREATMENT IS OBVIOUSLY AGAINST ALL PRINCIPLES OF ACCOUNTANCY. THE CLOSING STOCK, WHICH IS A PHYSICALLY VERIFIED FIGURE, OBVIO USLY HAS TO BE NET OF GOODS ALREADY SOLD DURING THE YEAR AND SUCH NET FIGURE HAS TOT FEATURE BOTH IN TRADING ACCOUNT AS WELL AS IN BALANCE SHEET. SUCH A SITUATION CAN OBVIOUSLY MEAN EITHER OF THE FOLLOWING TWO THINGS - EITHER (I) THE APPELLANT HAD STOCK IN HAND WHICH H AS NOT BEEN DISCLOSED IN ITS ACCOUNTS AND THE SAME IS BEING SOL D NOW. ITA NO.2421/AHD/2008 & 856/AHD/2009 M/S. CHIRAG DEVELOPERS VS ITO, W-1, MEHSANA 13 OR (II) THE APPELLANT HAS SHOWN INFLATED FIGURE O F CLOSING STOCK IN THE BALANCE SHEET, TO THE EXTENT OF SALE O F STOCK AND THE GAP BETWEEN THE ACTUAL AND INFLATED STOCK HAS BEEN BALANCED BY FICTITIOUS ENTRIES ON TH E CREDIT SIDE. 3.9.6. ALTHOUGH NOT AN ISSUE OF APPEAL, PRIMA-FACIE IT DOES APPEAR THAT APPELLANT IS NOT ACCOUNTING FOR PROPER ACCOUNTING OF STOCK SHOWN AS SOLD IN THE ACCOUNTS IN EARLIER YEAR S ALSO. E.G. FOR A.Y. 2004-05 (F. Y. 2003-404) THE FOLLOWING TRA DING ACCOUNT HAS BEEN PREPARED: PARTICULAR AMOUNT PARTICULARS AMOUNT OPENING STOCK 52,348 SHOP SALES 12,76,000 WORK IN PROGRESS (2002-03) A/C. 57,50,000 BUILDING CONSTRUCTION COMPLETED 40,25,000 CONSTRUCTION EXP. 44,11,118 WORKING IN PROGRESS 55,00,000 GROSS PROFIT 6,73,298 CLOSING STOCK 85,765 3.9.7. SO THE SUM OF WORK-IN-PROGRESS BROUGHT FORWA RD AND ADDED DURING THE YEAR COMES TO RS. 1,01,61,118/ -, SALE APPEARS TO BE NOT RELATED TO BUILDING CONSTRUCTED A S THE CLOSING STOCK OF CONSTRUCTED BUILDING PLUS WORK IN PROGRESS COMES TO RS.95,25,000/- IN SPITE OF SALE OF RS.12,76,000/-. 3.9.8. WHILE THE ACCOUNTS PREPARED AND PROFITS DECL ARED FOR EARLIER YEARS NEED SEPARATE SCRUTINY WITH REFER ENCE TO PRIMARY RECORDS, THE OVERALL WORKING OF THE APPELLA NT IS QUITE CLEAR FROM THESE FIGURES. 3.9.9. TILL THE END OF THIS ASSESSMENT YEAR, SALES OF GOODS OF RS.49,47,000/- HAS BEEN SHOWN BUT THE TOTAL CONS TRUCTED STOCK HAS SHOWN AT RS.40,25,000/- FROM F.Y. 2001-02 TO F.Y. ITA NO.2421/AHD/2008 & 856/AHD/2009 M/S. CHIRAG DEVELOPERS VS ITO, W-1, MEHSANA 14 2004-05. BESIDES THE ABOVE SALE, THE APPELLANT HAS SHOWN TRANSFER OF COMPLETED BUILDING OF RS.11,12,500/- IT S OWN ACCOUNT. THESE FIGURES CLEARLY SHOW NOT ONLY THE UN RELIABILITY OF ACCOUNTS BUT ALSO POINT OUT TO MANIPULATIONS AND OB VIOUSLY TINE PROFITS CANNOT BE CULLED OUT FROM THEM. 3.9.10. THEREFORE, I THINK, THE ISSUE BOILS DOWN TO NOT ONLY TO THE CHANGE OF METHOD OF ACCOUNTANCY BUT THE VERY AUTHENTICITY OF ACCOUNTS. TWO ISSUES WHICH COME OUT ARE I) ESTIMATION FOR THE COST OF THE SALE SHOW N. II) ESTIMATION OF PROFITS OF THE YEAR. 3.9.11. AS BROUGHT OUT IN PARA 3.9.4 THE GROSS PROF IT RATE IS NOT THE RESULTANT FIGURE OF TRADING ACTIVITY BUT AN ARBITRARY FIGURE. THE METHOD ADOPTED BY THE APPELLANT CAN NOT BE CALL ED PERCENTAGE COMPLETION METHOD ALSO AS NEITHER SUCH A CLAIM HAS BEEN MADE NOR IS THERE ANY SUCH CORRELATION/TREND W ITH RESPECT TO PROGRESS OF THE CONSTRUCTION AS THE FIGURES IN P ARA 3.9.4 SHOW. HENCE THE COST OF GOODS SOLD CANNOT BE ARRIVE D BY DISCOUNTING THE SALE CONSIDERATION AT THE GROSS PRO FIT RATE SHOWN; INSTEAD WE NEED TO HAVE A STANDARD AD-HOC MA RKUP FIGURE. KEEPING IN VIEW THE NET PROFIT RATE AND THE QUANTUM OF OVERHEAD EXPENSES SHOWN BY THE APPELLANT, IN MY VIE W A DEDUCTION OF 20% FROM THE SALE VALUE OF THE FLATS M AY THROW UP, A REASONABLE ESTIMATE OF VALUE OF COST OF GOODS SOL D. ACCORDINGLY FOR THE SALE OF RS.12,26,000/-, THE COS T OF GOODS SHALL BE RS.10,21,666/-. VIEWED EITHER AS THE COST OF UNEXPLAINED STOCK IN HAND SHOWN AS THE ADJUSTMENT D ONE IN BALANCE SHEET, THE ADDITION OF RS.10.21,666/- IS CA LLED FOR. THIS SHALL BE ADDED TO THE ASSESSMENT FRAMED AS AN ENHAN CEMENT AMOUNT COVERED BY THE NOTICE DATED 17/09/2007 OF CI T(A)-XXI AND THE ORDER SHEET ENTRY DATED 05/10/2007 MADE BY UNDERSIGNED DULY NOTED BY THE AUTHORISED REPRESENTA TIVE. 3.9.12 COMING TO THE ESTIMATION OF PROFITS FOR TH E YEAR, AS THE EARLIER DISCUSSION SHOWS IT IS NOT POSSIBLE TO WORK OUT PROFITS FROM THE TRADING ACCOUNT PREPARED. IT IS AL SO NOT POSSIBLE TO RECAST THE TRADING OUT ACCOUNT AS THE OPENING AN D CLOSING ITA NO.2421/AHD/2008 & 856/AHD/2009 M/S. CHIRAG DEVELOPERS VS ITO, W-1, MEHSANA 15 STOCK OF EACH OF THE EARLIER YEAR, CANNOT BE RELIED UPON TO ARRIVE AT THE CONSEQUENTIAL FIGURE OF CURRENT YEARS OPENI NG STOCK. THEREFORE, THE ONLY WAY IS (TO ESTIMATE THE NET PRO FIT ON THE W.I.P. DURING THE YEAR, AKIN TO PERCENTAGE COMPLETI ON METHOD. 3.9.13. IF ONE WERE TO SEE THE APPELLANTS PROFIT & LOSS ACCOUNT, THE AMOUNT OF NET PROFIT DECLARED BY THE A PPELLANT (BEFORE INKING PARTNERS SALARY AND INTEREST PAID T O THEM) COMES TO RS.2,26,652/- WHICH IS 8.39% OF THE W.I.P. APPAR ENTLY IT LOOKS THAT SOMEWHERE AT THE BACK OF THE MIND OF THE APPELLANT, THE PERCENTAGE FIGURE AS REFERRED TO BY SECTION 44A D HAS BEEN PRESENT. HOWEVER, WHILE ARRIVING AT THIS FIGURE OF PROFIT, A RENTAL INCOME OF RS.70,000/- HAS ALSO BEEN INCLUDED. THERE FORE, THE NET PROFIT FROM CONSTRUCTION, IF RENTAL INCOME IS T AKEN OUT, COMES TO RS.1,56,652/-, WHICH IS 5.8% OF THE W.I.P. 3.9.14. THEREFORE, KEEPING ALL THE FACTORS IN VIEW, ALTHOUGH SECTION 44AD PER SE IS NOT APPLICABLE, A NET PROFIT RATE OF 8% ON W.I.P. FOR THE CONSTRUCTION ACTIVITY APPEARS A REAS ONABLE ESTIMATE OF PROFIT. THIS WILL COME TO RS.2,16,000/- . 3.9.15. TO THE ABOVE REFERRED AMOUNT SHALL BE ADDED RS.70,000/- AS THE RENTAL INCOME. ALSO THE APPELLAN T PLEA THAT IF INCOME IS TO BE ESTIMATED, THE PARTNERS SALARIES B E ALLOWED IS ACCEPTED. HENCE A SUM OF RS.82,500/- SHALL BE GIVEN DEDUCTION OF. 3.9.16 HENCE, THE INCOME OF THE YEAR ESTIMATED FROM BUSINESS SHALL BE RS.2,16,000/- (+) RS.70,000/- (-) RS.82,500/- = RS.1,93,500/-. 3.9.17. HENCE, TO SUM UP, WHILE AN ADDITION OF RS.10,21,666/- SHALL BE MADE FOR THE SALE OF FLATS OUT OF UNDECLARED STOCKS (AS AN ENHANCEMENT), INCOME OF RS.1,93,500/- SHALL BE ESTIMATED FOR THE YEAR AGAIN ST RS.17,530/- DECLARED BY THE APPELLANT. 4. THE SECOND EFFECTIVE GROUND OF APPEAL IS AGAINST THE ADDITION OF RS.1,88,804/- IN RESPECT OF UNDISCL OSED INVESTMENT IN FIXED ASSETS. AS PER THE ASSESSMENT O RDER, THE ITA NO.2421/AHD/2008 & 856/AHD/2009 M/S. CHIRAG DEVELOPERS VS ITO, W-1, MEHSANA 16 ADDITION HAS BEEN MADE BECAUSE NO PROOF WHATSOEVER HAS BEEN SUBMITTED FOR THE INCREASE IN THESE ASSETS, WH EREAS THE APPELLANT HAS DONE DIRECT ENTRIES OF FIXED ASSETS ( P.7,8 & 12). 4.1. THE APPELLANTS EXPLANATION VIDE SUBMISSION DA TED 07/07/2007 IS AS FOLLOWS: AT THE OUTSET WE SUBMIT THAT IT IS NOT CLEAR FROM THE ASSESSMENT ORDER FROM WHERE RS.1,88,804/- HAS COME IN. DURING THE YEAR WE HAVE TRANSFERRED THE OFFICE PREM ISES CONSTRUCTED FOR OUR OWN USE HAVE BEEN TAKEN AS FIXE D ASSET. THIS MAY KINDLY BE SEEN FROM PARA 4 OF THE ASSESSMENT ORDER WHEREIN THE ASSESSING OFFICER HAS TAKEN THE FIGURE OF RS.11,12,500/- REGARDING TRANSF ER OF PROPERTY TO THE SELF USE. THERE HE HAS TAKEN THE AS SET WHICH WE HAVE SHOWN IN OUR BOOKS OF ACCOUNTS AS ASS ETS. IT SEEMS FROM THE TOTAL VALUE OF RS.18,12,800/- HE HAS ESTIMATED THE INCOME OF RS.1,88,804/-. WHEN ALL THE ASSETS HAVE BEEN SHOWN IN THE BOOKS OF ACCOUNTS THE RE IS NO QUESTION OF ESTIMATING ANY INCOME FROM THE SELF OWNED PROPERTY. THE CONSTRUCTED PROPERTY WHICH WE H AVE TRANSFERRED TO OUR FIXED ASSETS ACCOUNT IS IN ACCOR DANCE WITH THE PRINCIPLES LAID DOWN BY THE INSTITUTE OF C HARTERED ACCOUNTANTS OF INDIA IN ACCOUNTING STANDARD- 10. 4.1.1. FURTHER, VIDE SUBMISSION DATED 27/08/2007, IT HAS BEEN STATED AS FOLLOWS: WE HAVE FILED THE BALANCE SHEET WHEREIN THE FIXED ASSETS AS ON 31/03/2004 AND 31/03/2005 ARE AS UNDER : PARTICULARS AS ON 31/03/2004 AS ON 31/03/2005 BORE WELL 17,775 21,647 ELECTRIC MOTOR 3,872 DEAD STOCK 11,474 11,474 LAND - 7,70,000 ITA NO.2421/AHD/2008 & 856/AHD/2009 M/S. CHIRAG DEVELOPERS VS ITO, W-1, MEHSANA 17 (TRANSFER TO LIFT INSTALLATION CONSTRUCTION ACCOUNT) 2.45,875 FURNITURE 5,75,000 5,75,000 ADDITION IN OFFICE FURNITURE 1,14,310 ADDITION IN RESPECT OF OFFICE BUILDING 11,12,500 ADDITION ELECTRIC COST - 49,570 THE DIFFERENCE BETWEEN TWO AFTER DEDUCTING RS.50000 /- BEING AMOUNT DEBITED IN EARLIER YEAR, THE ASSET STA ND IN THE YEAR 2005-06 IS RS.18,12,800/-, WHILE FOR EARLI ER YEAR IT IS RS.16,23,996/-. THUS THE ASSESSING OFFICER HA S MENTIONED ON PAGE-7 OF THE ASSESSING OFFICER THAT T HE DIFFERENCE IN RESPECT OF BOTH THE YEAR I.E. 18,12, 800/- 16,23,996 = 1,88,104/-. THE ASSESSING OFFICER MAD E THE ADDITION. THE ADDITION HAS BEEN MADE TAKING INTO AC COUNT THAT THERE HAS BEEN INCREASE IN FIXED ASSETS DURING THE YEAR. GENERALLY FIXED ASSETS (EITHER PURCHASE OR CONSTRUCTED) HAVE BEEN ADJUSTED AGAINST THE INCREAS E IN THE LIABILITY OR BY WAY OF PROFIT IN THE BOOKS. IF THE ASSETS ARE MORE THAN THE LIABILITIES THEN THE QUESTION COM E FROM WHERE THE ADDITIONAL ASSETS COME INTO THE BOOKS OF ACCOUNTS, FOR WHICH EXPLANATION IS REQUIRED BY THE ASSESSING OFFICER. IN OUR CASE IN THE BALANCE SHEE T THE ASSETS SIDE AS WELL AS LIABILITIES SIDES ARE EQUAL AND THERE ARE NO PURCHASES OR DEBITED THE ASSETS WITHOUT CORRESPONDING ENTRIES ON THE LIABILITY SIDE. THE D IFFERENCE CAN BE TAXED ONLY IF THERE IS AN EXCESS ON ASSETS S IDE THEN THE LIABILITY SIDE. THE PURCHASE IN RESPECT O F ASSETS HAS BEEN PROVED. ALL THE ASSETS ARE FULLY EXPLAINA BLE WITH RESPECT TO THE ENTRIES OF PURCHASE MADE BY THE APPE LLANT. IT IS ALSO NOT UNDERSTOOD UNDER WHAT SECTION THE ASSESSING OFFICER HAS ASSESSED THIS AMOUNT I.E. RS.1,88,804/- I.E. DIFFERENCE BETWEEN OPENING BALAN CE OF FIXED ASSETS AND CLOSING VALUE OF THE FIXED ASSETS. NEITHER SEC. 68 NOR 69 IS APPLICABLE IN THIS RESPECT. ' ITA NO.2421/AHD/2008 & 856/AHD/2009 M/S. CHIRAG DEVELOPERS VS ITO, W-1, MEHSANA 18 4.2. THE MATTER HAS BEEN GIVEN DUE CONSIDERATION. TO START WITH THERE IS QUITE A CONFUSION WITH RESPECT TO FIGURES. WHILE ASSESSING OFFICER'S COMPUTATION OF THE FIGURE OF RS.1,88,804/- HAS BEEN ARRIVED AT BY MERE ARITHMETI C WITHOUT CONSIDERING THE ITEMS TRANSFERRED TO DIFFERENT ACCO UNTS (E.G. LAND), THE FIGURES SUPPLIED BY APPELLANT (TABLE ON PG. 13) DO NOT TALLY WITH THE BALANCE SHEET FIGURE. THE SUM OF FIX ED ASSETS (OTHER THAN BOREWELL) AS PER THIS TABLE COMES TO RS .18,62,854/- AS AGAINST RS.18,12,800/- SHOWN IN THE BALANCE SHEE T. WHAT TREATMENT HAS BEEN GIVEN TO THE AMOUNT OF RS.50,000 /- CLAIMED TO HAVE BEEN DEBITED IN THE-PRECEDING YEAR IS NOT K NOWN. ON TOP OF THIS, THE APPELLANT HAS NOT ATTENDED TO THE ASSESSING OFFICER'S BASIC OBJECTION THAT PROOF OF ASSETS BE P ROVIDED. EVEN BEFORE ME, THE APPELLANT HAS NOT PROVIDED ANY BILLS / VOUCHERS TO EVIDENCE THE CREATION OF ASSETS AS CLAIMED. AFTER C ONSIDERING THESE POINTS, AND AS PER FIGURES AVAILABLE IN MY VI EW APPELLANT HAS BEEN UNABLE TO PROVIDE SUPPORTING DOCUMENTS FOR CREATION OF ASSETS WORTH RS.1,14,310/- PLUS RS.49,570/- I.E. RS.1,63,880/- 4.2.1. THE MANNER IN WHICH THE APPELLANT IS MAINTAI NING ITS BOOKS STANDS DISCUSSED EARLIER. CLEARLY WE HAVE A SITUATION WHERE THE MANNER OF CREATION OF ASSETS HAS NOT BEEN EXPLAINED. THE APPELLANT'S STATEMENT, THAT IT COULD BE CREATED OUT OF PROFITS OR LIABILITIES IS THEORETICALLY CORRECT BUT ONUS WA S ON THE APPELLANT TO SHOW EVIDENCE OF (I) THE COST OF ASSET (S) (II) MANNER OF FINANCING AND (III) THE ACCOUNTING ENTRY PASSED. SINCE BOOKS OF ACCOUNTS STAND REJECTED, ASSERTION THAT THE ASSE T FEATURE IN A BALANCE SHEET DULY BALANCED IS A CONTRADICTION. SINCE A SIMPLE EXPLANATION OF THE SOURCE OF ACQUISI TION OF THE ASSETS HAS BEEN PROVIDED, I THINK THE ASSESSING OFFICER HAS CORRECTLY INVOKED PROVISIONS OF SECTION 69 AND HENC E ADDITION OF RS.1,63,880/- IS SUSTAINED. THE APPELLANT WILL GET CONSEQUENTIAL RELIEF. 5. HENCE, OVERALL, THE APPEAL RESULTS IN ENHANCEMEN T. THE ASSESSED INCOME OF RS.11,66,880/- BEING ENHANCE D TO (RS.10,21,666 + RS.1,93,500 + RS.1,63,880) = RS.13, 79,046/-. ITA NO.2421/AHD/2008 & 856/AHD/2009 M/S. CHIRAG DEVELOPERS VS ITO, W-1, MEHSANA 19 8. THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW AND S UBMITTED THAT THE ASSESSEE MAINTAINED BOOKS OF ACCOUNTS AS PER AC COUNTING PRINCIPLES AND THERE WAS NO CHANGE IN THE METHOD OF ACCOUNTING AND HAS MERELY TRANSFERED THE OPENING AND CLOSING STOCK OF THE BROUGHT FORWARD WORK IN PROGRESS AND COMPLETED CONSTRUCTION DIRECTLY TO THE BALANCE SHEET. THE BOOKS OF ACCOUNTS MAINTAINED DAY TO DAY REFLECT THE SAME METHOD OF ACCOUNTING, HOWEVER, WHILE FINAL IZING THE ACCOUNTS THE AFORESAID ITEMS OF CLOSING STOCK AND O PENING STOCK HAVE BEEN DIRECTLY TAKEN TO THE BALANCE SHEET WHICH HAS NO IMPACT WHATSOEVER ON METHOD OF ACCOUNTING OR PROFIT DISCLO SED BY THE ASSESSEE IN THE BOOKS OF ACCOUNTS. THE AUTHORITIES BELOW HAVE HOWEVER, NOT APPRECIATED THE FACTS OF THE CASE. THE ENTRIES MADE BY THE ASSESSEE WOULD NOT CHANGE THE RESULT. THE WORKI NG OF THE SAME IS REFERRED TO AT PAGE 6 OF THE PAPER BOOK. HE HAS FURTHER SUBMITTED THAT VALUE OF THE WORK IN PROGRESS FOR ASSESSMENT Y EAR UNDER APPEAL CANNOT BE ADDED TO THE WORK IN PROGRESS OF EARLIER YEAR OF RS.95,25,000/- FOR THE PURPOSE OF ESTIMATING THE PR OFIT. THE WORK IN PROGRESS IS PART OF THE CLOSING STOCK AND CANNOT BE TREATED AS SALES. NO DEFECT HAS BEEN POINTED OUT IN THE BOOKS OF ACCO UNTS OF THE ASSESSEE. NO SALES HAVE BEEN FOUND OUTSIDE THE BOOK S OF ACCOUNT. THE CHART OF ASSESSMENT YEAR AS WELL AS PRECEDING A SSESSMENT YEARS AND SUBSEQUENT ASSESSMENT YEAR HAS BEEN FILED TO EX PLAIN THE POSITION. HE HAS SUBMITTED THAT BOOKS HAVE BEEN REJ ECTED ARBITRARILY WITHOUT ANY JUSTIFICATION, THEREFORE, ENHANCEMENT M ADE BY THE LEARNED CIT(A) IS HIGHLY UNJUSTIFIED. THE AUTHORITIES BELOW HAVE ACCEPTED THE SALES OF THE ASSESSEE AND THE SAME ARE COMPLETELY V ERIFIABLE. ITA NO.2421/AHD/2008 & 856/AHD/2009 M/S. CHIRAG DEVELOPERS VS ITO, W-1, MEHSANA 20 THEREFORE, THE AUTHORITIES BELOW SHOULD NOT HAVE MA DE THE ADDITION AND FURTHER SUBMITTED THAT WORK IN PROGRESS AND CO MPLETED CONSTRUCTION ARE TAKEN AS SALES WHICH INCLUDES WORK IN PROGRESS OF RS.27,00,000/- OF THE ASSESSMENT YEAR UNDER APPEAL WHICH WOULD BE OPENING STOCK OF NEXT YEAR, THEREFORE, THE SAME CAN NOT BE TREATED AS UNACCOUNTED SALES OF THE ASSESSEE. THE FINDINGS OF THE AUTHORITIES BELOW ARE NOT SUPPORTED BY ANY EVIDENCE OF MATERIAL ON RECORD. ALL EXPENDITURE HAS BEEN PROPERLY BOOKED IN THE BOOKS O F ACCOUNTS. THEREFORE, ADDITION MADE MERELY ON PRESUMPTION IS N OT JUSTIFIED. THE LEARNED COUNSEL FOR THE ASSESSEE FURTHER SUBMITTED THAT THE ASSESSEE WAS FOLLOWING ACCOUNTING STANDARD AS-9 OF INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI) BECAUSE IT WAS HELD BY THE EXPERTS THAT AS-7 (REVISED) IS NOT VALID FOR BUILDERS. AFTER REV ISION, IT WAS APPLICABLE ON CONSTRUCTION CONTRACTORS ONLY AND NOT ON REAL ESTATE DEVELOPERS. AS PER AS-9, THE KEY CRITERIA TO DETERM INE RECOGNITION OF THE REVENUE ARE WHEN THE SELLER HAS TRANSFERRED THE PROPERTY IN THE GOODS TO THE BUYER FOR A CONSIDERATION. THE TRANSFE R OF PROPERTY IN THE GOODS IN MOST CASES RESULTS IN OR COINCIDES WITH TH E TRANSFER OF SIGNIFICANT RISK OR REWARDS AND OWNERSHIP TO THE BU YER. THE GUIDELINE NOTE IN CASE OF REAL ESTATE EXPLAIN THAT SALES SHOU LD BE RECOGNIZED WHEN SELLER HAS TRANSFERRED TO THE BUYER OF SIGNIFI CANT RISK AND REWARDS AND THE SELLER RETAINS NO EFFECTIVE CONTROL OF THE REAL ESTATE. NO SIGNIFICANT UNCERTAINTY EXISTS REGARDING AMOUNT OF CONSIDERATION THAT WILL BE DERIVED FROM THE REAL ESTATE SALES. IT WAS, THEREFORE, SUBMITTED THAT AS-7 IS NOT APPLICABLE TO BUYERS. AC CORDINGLY, THE ASSESSEE RECOGNIZES REVENUE FROM THE SALE OF SHOPS WITH ALL RISKS AND REWARDS OF OWNERSHIP HAVE BEEN TRANSFERRED TO T HE BUYER. HE HAS ITA NO.2421/AHD/2008 & 856/AHD/2009 M/S. CHIRAG DEVELOPERS VS ITO, W-1, MEHSANA 21 FURTHER SUBMITTED THAT ON COMPLETION OF THE PROJECT IN ASSESSMENT YEAR 2006-07, APPROXIMATELY 75% OF THE STOCK WAS LY ING UNSOLD IN A SUM OF RS.1,19,10,748/-. HE HAS, THEREFORE, SUBMITT ED THAT ADDITION IS CLEARLY UNJUSTIFIED. 9. ON THE OTHER HAND, THE LEARNED DR RELIED UPON TH E ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT THE BOOKS OF A CCOUNTS WERE RIGHTLY REJECTED BY THE AUTHORITIES BELOW BECAUSE S IMILAR ACCOUNTING SYSTEM WAS NOT FOLLOWED BY THE ASSESSEE BECAUSE WOR K IN PROGRESS IS NOT MENTIONED IN THE OPENING STOCK. THE LEARNED DR, THEREFORE, SUBMITTED THAT SINCE THE BOOKS ARE NOT RELIABLE, TH EREFORE, THE LEARNED CIT(A) RIGHTLY ENHANCED THE ADDITION. 10. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND MA TERIAL ON RECORD. IT IS UNDISPUTED FACT THAT CURRENT ASSETS O R WORK IN PROGRESS ARE PART OF THE CLOSING STOCK AND AS SUCH THEY CANN OT FORM PART OF SALES. THE AO WHILE ESTIMATING THE BUSINESS INCOME APPLIED PROFIT RATE AT 8% ON THE ENTIRE WORK IN PROGRESS OF RS.1,2 2,75,000/- WHICH CONTAINS WORK IN PROGRESS OF EARLIER YEARS AND CONS TRUCTION COST OF RS.95,25,000/- AND ALSO ADDED WORK IN PROGRESS OF R S.27,00,000/- OF THE CURRENT ASSESSMENT YEAR. RS.27,00,000/- WORK IN PROGRESS IS PART OF THE CLOSING STOCK OF THE ASSESSMENT YEAR UNDER A PPEAL WHICH WOULD BE OPENING STOCK IN THE NEXT YEAR AND AS SUCH IT WAS HIGHLY UNJUSTIFIED TO WORK PROFIT ON THE CLOSING STOCK OF THE CURRENT YEAR. SIMILARLY, IN THE EARLIER YEARS WORK IN PROGRESS A ND CONSTRUCTION COST SHOULD NOT BE CONSIDERED FOR THE PURPOSE OF ESTIMAT ING THE BUSINESS INCOME OF THE ASSESSEE. THE ASSESSEE AT PAGE 6 OF T HE PAPER BOOK ITA NO.2421/AHD/2008 & 856/AHD/2009 M/S. CHIRAG DEVELOPERS VS ITO, W-1, MEHSANA 22 HAS SHOWN RECASTED TRADING AND PROFIT & LOSS ACCOUN T FOR THE FINANCIAL YEAR 2004-05 (AY 2005-06 UNDER APPEAL) AND TOOK ALL TH4E FIGURES NOTED BY THE AO IN THE ASSESSMENT ORDER AND THE SAM E WOULD PROVIDE THAT THE GROSS PROFIT WOULD REMAIN THE SAME AS IS DISCLOSED BY THE ASSESSEE AT RS.8,61,732/-. AS SUCH THERE WOULD BE NO IMPACT ON THE PROFITABILITY OF THE ASSESSEE. NO ADVERSE COMME NT HAS BEEN MADE AGAINST THE WORKING GIVEN BY THE ASSESSEE AT P AGE 6 OF THE PAPER BOOK. THE ASSESSEE EXPLAINED BEFORE THE LEARN ED CIT(A) THAT IT IS FOLLOWING ACCOUNTING STANDARD 9 BECAUSE THE ASSE SSEE IS ENGAGED IN THE BUSINESS OF CONSTRUCTION WORK AS A BUILDER A ND ESTATE DEVELOPERS. ACCORDING TO SAME GUIDELINES, THE LEARN ED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE RECOGNIZES REVENUE FROM SALE OF THE SHOPS ONLY WHEN ALL SIGNIFICANT RISK AN D REWARDS OF OWNERSHIP HAVE BEEN TRANSFERRED TO THE BUYER AND TH E ASSESSEE DO NOT RETAIN ANY EFFECTIVE CONTROL OF THE SHOPS. NOTH ING ADVERSE IS BROUGHT ON RECORD AGAINST THE APPLICABILITY OF AS-9 TO THE CASE OF THE ASSESSEE. THE ASSESSEE HAS FILED THE CHART TO SHOW COMPLETE DETAILS OF OPENING STOCK, CONSTRUCTION EXPENDITURE, PERCENT AGE OF COMPLETION WITH CLOSING STOCK AND SALES. THE SALES SHOWN BY TH E ASSESSEE IN ASSESSMENT YEAR UNDER APPEAL AS WELL AS IN EARLIER YEARS HAVE BEEN REPRODUCED IN THE FINDINGS OF THE LEARNED CIT(A) AL ONG WITH WORK IN PROGRESS AND PROFIT ON SALES. THE SALES MADE IN EAR LIER YEARS HAVE NOT BEEN DISPUTED AND THE SALES MADE IN THE ASSESSM ENT YEAR UNDER HAVE ALSO NOT BEEN DISPUTED. IN THE NEXT ASSESSMENT YEAR 2006-07, THE ASSESSEE HAS SHOWN FURTHER SALES OF RS.1,66,000 /-. THE PERCENTAGE OF COMPLETION OF CONSTRUCTION WORK IN VA RIOUS ASSESSMENT YEARS HAVE BEEN SHOWN AS UNDER: ITA NO.2421/AHD/2008 & 856/AHD/2009 M/S. CHIRAG DEVELOPERS VS ITO, W-1, MEHSANA 23 ASSESSMENT YEAR PERCENTAGE OF COMPLETION 2002-03 14.8 2003-04 47.6 2004-05 75.4 2005-06 (IN APPEAL) 94.2 2006-07 100 10.1 THUS, IN ASSESSMENT YEAR UNDER APPEAL I.E. 200 5-06 THE PERCENTAGE COMPLETION OF THE PROJECT WAS ABOUT 19%. THE CONSTRUCTION EXPENSES HAVE BEEN BOOKED IN THE BOOKS OF ACCOUNTS IN THE RESPECTIVE YEAR AND TOTAL SALES HAVE BEEN SHOWN IN ALL THE ABOVE YEARS AT RS.51,13,000/- AND IN NEXT ASSESSMENT YEA R 2006-07 CLOSING STOCK IS SHOWN AT RS.1,19,10,748/-. THUS, I T WAS APPROXIMATELY 75% OF THE STOCK WHICH REMAINED UNSOL D AS IS WORKED OUT BY THE LEARNED COUNSEL FOR THE ASSESSEE. NO DEF ECT HAS BEEN POINTED OUT IN THE BOOKS OF ACCOUNTS IN THE EARLIER YEAR OR IN THE ASSESSMENT YEAR UNDER APPEAL. THE AUTHORITIES BELOW DID NOT FIND OUT ANY UNACCOUNTED SALES MADE BY THE ASSESSEE OUTSIDE THE BOOKS OF ACCOUNTS. DURING THE YEAR THE COMPLETE BUILDINGS HA VE BEEN TAKEN TO THE STOCK IN THE CURRENT ASSETS WHICH ARE TO BE SOL D. SINCE NO SALE INSTANCE WAS FOUND OUTSIDE THE BOOKS OF ACCOUNT, TH EREFORE, NO PROVISION OF SECTION 145 OF THE IT ACT COULD BE APP LIED TO ESTIMATE THE PROFIT OF THE ASSESSEE. SECTION 44AD OF THE IT ACT IS APPLICABLE IN ESTIMATING THE PROFIT AGAINST GROSS RECEIPTS. THERE FORE, ESTIMATION OF THE PROFIT BY APPLYING THE PROVISIONS OF SECTION 44 AD IN RESPECT OF CLOSING STOCK AND WORK IN PROGRESS IS HIGHLY UNJUST IFIED. THE GROSS PROFIT RATE OF THE ASSESSEE IS ADMITTEDLY BETTER AS COMPARED TO THE EARLIER YEARS. EVEN IF, ACCORDING TO THE AO, THERE IS CHANGE IN THE ITA NO.2421/AHD/2008 & 856/AHD/2009 M/S. CHIRAG DEVELOPERS VS ITO, W-1, MEHSANA 24 ACCOUNTING SYSTEM BUT THE SALES SHOWN BY THE ASSESS EE IN SEVERAL ASSESSMENT YEARS AND PERCENTAGE OF COMPLETION IS NO T IN DISPUTE AND AS SUCH ESTIMATE OF THE PROFIT ON WORK IN PROGRESS AND COMPLETED CONSTRUCTION WOULD NOT BE JUSTIFIED IN THIS CASE. NO SPECIFIC REASON OR BASIS HAS BEEN GIVEN TO ENHANCE THE INCOME OF THE A SSESSEE OR ESTIMATE THE PROFIT ON WORK IN PROGRESS. FINDINGS O F THE LEARNED CIT(A) FOR ESTIMATING INCOME IS NOT BASED ON SOUND PRINCIPLE OF LAW TO IGNORE THE SALES MADE BY THE ASSESSEE IN ASSESSMENT YEAR UNDER APPEAL AS WELL AS IN PROCEEDING ASSESSMENT YEARS AN D SUBSEQUENT ASSESSMENT YEAR. THE WHOLE PROJECT DETAILS SHOULD B E TAKEN INTO CONSIDERATION WHILE ESTIMATING INCOME OF THE ASSESS EE. THEREFORE, ENHANCEMENT OF INCOME IS CLEARLY UNJUSTIFIED IN THE MATTER. THE HONBLE RAJASTHAN HIGH COURT IN THE CASE OF GOTTEN LIME KHANIZ UDYOG, 256 ITR 243 HELD THAT MERE REJECTION OF BOOKS OF ACCOUNTS DOES NOT MEAN ADDITION IS TO BE NECESSARILY MADE. THE HONBLE PRIVY COUNCIL IN THE CASE OF LAXMINARAIN BADRIDAS, 5 ITR 170 HELD THAT ESTIMATE OF PROFIT SHOULD BE FAIR. THE AO SHOULD N OT ACT DISHONESTLY OR VINDICTIVELY OR CAPRICIOUSLY. THE PR EVIOUS HISTORY, LOCAL KNOWLEDGE AND CIRCUMSTANCES OF THE ASSESSEE T O BE CONSIDERED TO ARRIVE AT A FAIR AND PROPER ESTIMATE OF INCOME. THE HONBLE DELHI HIGH COURT IN THE CASE OF AERO CL UB, 336 ITR 400 HELD THAT ESTIMATION SHOULD BE MADE ON RATIONAL BASIS. PROFI T MARGIN DECLARED BY THE ASSESSEE CANNOT BE REJECTED ARBITRARILY. CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE , PERCENTAGE COMPLETION AND CLOSING STOCK, SALES SHOWN IN SEVERA L YEARS IN RESPECT OF THE PROJECT OF THE ASSESSEE WOULD CLEARLY REVEAL THAT REJECTION OF THE BOOKS OF ACCOUNTS IN THE MATTER IS HIGHLY UNJUS TIFIED AND AS SUCH ITA NO.2421/AHD/2008 & 856/AHD/2009 M/S. CHIRAG DEVELOPERS VS ITO, W-1, MEHSANA 25 THE RESULTANT ADDITION COULD NOT BE SUSTAINED AGAIN ST THE ASSESSEE. WE ACCORDINGLY, SET ASIDE THE ORDERS OF THE AUTHORI TIES BELOW AND DELETE THE ENTIRE ADDITION. IN THE RESULT, GROUNDS NO.1 TO 3 OF THE APPEAL OF THE ASSESSEE ARE ALLOWED. 11. GROUND NO.4 OF THE APPEAL OF THE ASSESSEE IS RE GARDING CHARGING OF INTEREST U/S 234B OF THE IT ACT WHICH I S MANDATORY AND CONSEQUENTIAL AND IS ACCORDINGLY DISMISSED. 12. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. ITA NO.856/AHD/2009 13. THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE LEARNED CIT(A), GANDHINAGAR DATED 31-12-2009 FOR AS SESSMENT YEAR 2005-06, CHALLENGING LEVY OF PENALTY U/S 271 (1) ( C ) OF THE IT ACT. THE LEARNED CIT(A) ON THE BASIS OF THE FACTS OF QUA NTUM NOTED ABOVE CONFIRMED THE LEVY OF PENALTY DISMISSING THE APPEAL OF THE ASSESSEE. CONSIDERING THE FINDING OF FACT RECORDED ABOVE IN T HE QUANTUM APPEAL ABOVE IN WHICH ALL THE ADDITIONS HAVE BEEN DELETED, LEVY OF PENALTY IS NOT JUSTIFIED AND CANNOT BE SUSTAINED. ACCORDINGLY, WE SET ASIDE THE ORDERS OF THE AUTHORITIES BELOW AND CANCEL THE PENA LTY. 14. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED. ITA NO.2421/AHD/2008 & 856/AHD/2009 M/S. CHIRAG DEVELOPERS VS ITO, W-1, MEHSANA 26 15. IN THE RESULT, THE APPEAL OF THE ASSESSEE IN ITA NO.2421/AHD/2008 IS PARTLY ALLOWED. HOWEVER, THE AP PEAL OF THE ASSESSEE IN ITA NO.856/AHD/2009 IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT. SD/- SD/- (B. P. JAIN) ACCOUNTANT MEMBER (BHAVNESH SAINI) JUDICIAL MEMBER LAKSHMIKANT DEKA/ LAKSHMIKANT DEKA/ LAKSHMIKANT DEKA/ LAKSHMIKANT DEKA/- -- - COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE CIT(A) CONCERNED 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE BY ORDER D Y. REGISTRAR, ITAT, AHMEDABAD