DCIT, Cochin V. M/s.Vichus Constructions P.Ltd, Cochin

ITA 362/COCH/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 81397 (ITAT-COCHIN)
• Duration Of Justice: 1 year(s) 11 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-11-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 20-10-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 14-12-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K K JOHN
• Assessee Lawyers: JOSE KAP

Judgement Text

1 ITA NO.362/COCH/2012 IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE SHRI N.R.S. GANESAN (JM) AND SHRI CHANDRA PO OJARI (AM) I.T.A NO.362/COCH/2012 (ASSESSMENT YEAR 2008-09) DY.CIT, CIR.4(2) VS M/S VICHUS CONSTRUCTIONS P LTD KOCHI 3 RD FLOOR, CRH COMPLEX M.G. ROAD, KOCHI PAN : AABCV6566E (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI K.K. JOHN RESPONDENT BY : SHRI JOSE KAPPAN DATE OF HEARING : 20-10-2014 DATE OF PRONOUNCEMENT : 21-11-2014 O R D E R PER N.R.S. GANESAN (JM) THIS APPEAL OF THE REVENUE IS DIRECTED AGAINST THE ORDER OF CIT(A)-I, KOCHI DATED 23-08-2012 AND PERTAINS TO ASSESSMENT Y EAR 2008-09. 2. SHRI K.K. JOHN, THE LD.DR SUBMITTED THAT THE ASS ESSEE IS ENGAGED IN THE BUSINESS OF CONSTRUCTION AND SALE OF RESIDENTIA L FLATS. ACCORDING TO THE LD.DR, THE ASSESSEE UNDERTOOK VARIOUS PROJECTS AND FOLLOWED PROJECT COMPLETION METHOD OF ACCOUNTING. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE PRODUCED BOOKS OF ACCOUNT FOR THE FINANCIAL 2 ITA NO.362/COCH/2012 YEAR 2007-08. HOWEVER, THE BOOKS OF ACCOUNT RELATI NG TO EARLIER ASSESSMENT YEARS WERE NOT PRODUCED. THE LD.DR FURT HER SUBMITTED THAT SINCE THE ASSESSEE WAS FOLLOWING PROJECT COMPLETION METHOD OF ACCOUNTING, THE ASSESSEE IS EXPECTED TO PRODUCE THE BOOKS OF ACCOUNT, BILLS, VOUCHERS, ETC. RIGHT FROM THE COMMENCEMENT O F PROJECT, I.E. FROM THE YEAR 1994-05 TILL THE COMPLETION OF THE PROJECT. T HE LD.DR FURTHER SUBMITTED THAT THE BOOKS OF ACCOUNT OF THE ASSESSEE FOR EARLI ER ASSESSMENT YEARS WERE NOT VERIFIED BY THE ASSESSING OFFICER. THEREF ORE, THE ASSESSING OFFICER, ACCORDING TO THE LD.DR, ESTIMATED THE PROFIT AT 3% OF THE TOTAL TURNOVER. THE LD.DR PLACED HIS RELIANCE ON THE JUDGMENT OF THE PU NJAB & HARYANA HIGH COURT IN JAMNA DAS RAMESHWAR DAS VS CIT (1952) 21 I TR 109. 3. REFERRING TO NEXT GROUND OF APPEAL WITH REGARD T O DISALLOWANCE OF EXPENSES TO THE EXTENT OF RS.1,21,281 THE LD.DR SUB MITTED THAT THE ASSESSEE HAS CLAIMED LOSS IN COMPUTATION OF INCOME. ACCORDING TO THE LD.DR, THE PROFIT IS ADOPTED ON ESTIMATE BASIS, THE REFORE, THE HEAD OFFICE EXPENSES WAS DEEMED TO HAVE BEEN ALLOWED WHEN THE P ROFIT WAS ESTIMATED. 4. ON THE CONTRARY, SHRI JOSE KAPPAN, THE LD.EPRESE NTATIVE FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE IS FILING INCO ME-TAX RETURNS REGULARLY FOR ALL THE ASSESSMENT YEARS, THE ASSESSEE ALSO WAS FILING AUDIT REPORTS FOR 3 ITA NO.362/COCH/2012 THE ENTIRE PROJECT. THE BOOKS OF ACCOUNT HAVE BEEN PRODUCED FOR ALL EARLIER ASSESSMENT YEARS AND THE ASSESSING OFFICER EXAMINED THE SAME. THE ASSESSEE HAS FILED COPIES OF THE ASSESSMENT ORDERS FOR THE ASSESSMENT YEARS 2006-07 AND 2007-08 TO SHOW THAT THE BOOKS OF ACCOUNT HAVE BEEN EXAMINED BY THE ASSESSING OFFICER. THE LD.REPRESEN TATIVE SUBMITTED THAT AFTER EXAMINING THE BOOKS OF ACCOUNT, THE INCOME RE TURNED BY THE ASSESSEE WAS ACCEPTED BY THE ASSESSING OFFICER FOR ALL EARLIER ASSESSMENT YEARS, THEREFORE, IT MAY NOT BE CORRECT TO SAY THAT THE ASSESSEE HAS NOT PRODUCED THE BOOKS OF ACCOUNT FOR EARLIER ASSESSMEN T YEARS. THE LD.REPRESENTATIVE FURTHER SUBMITTED THAT THE WORK-I N-PROGRESS WAS DISCLOSED IN THE RESPECTIVE RETURNS OF INCOME FOR EARLIER ASS ESSMENT YEARS. THE ASSESSING OFFICER HAS NOT RAISED ANY OBJECTION WHIL E COMPLETING THE ASSESSMENT OF THE EARLIER ASSESSMENT YEARS. FOR THE YEAR UNDER CONSIDERATION, ACCORDING TO THE LD.REPRESENTATIVE, THE ASSESSING OFFICER REJECTED THE BOOKS OF ACCOUNT AND ESTIMATED THE PRO JECT IN RESPECT OF THE PROJECT KNOWN AS GOLD HEIGHTS; HOWEVER, ACCEPTED THE INCOME FROM GOLDEN KAYALORAM AS DISCLOSED. ACCORDING TO THE LD.REPRESENTATIVE, SINCE THE ASSESSING OFFICER HAS ACCEPTED THE BOOK RESULTS FOR ALL EARLIER ASSESSMENT YEARS AFTER EXAMINING THE SAME AS ALSO T HE WORK-IN-PROGRESS OF THE PROJECT, IT MAY NOT BE CORRECT TO SAY THAT T HE ASSESSEE HAS NOT PRODUCED THE BOOKS OF ACCOUNT. THE LD.REPRESENTATI VE PLACED HIS RELIANCE ON THE DECISION OF THE MUMBAI BENCH OF THIS TRIBUNL IN SAVALA ASSOCIATES 4 ITA NO.362/COCH/2012 VS ITO (ITA NO.4441(MUM)/2008 DATED 27-10-2009 AND HYDERABAD BENCH IN ACIT VS GODAVARI DEVELOPERS ITA NO.918/HYD/2011 DATED 31-10-2012. 5. THE LD.REPRESENTATIVE FURTHER SUBMITTED THAT THE ASSESSEE COMPANY WAS FORMED IN THE YEAR 1993. AFTER PURCHASING LAND IN 1995, CONSTRUCTION WAS STARTED FOR 44 APARTMENTS. AT THE INITIAL STAG E, ONLY A FEW APARTMENTS WERE BOOKED. HOWEVER, THE CONSTRUCTION WAS IN PROG RESS. IN THE YEAR 1999, THE ASSESSEE COMPANY FACED FINANCIAL PROBLEMS AND A SUM OF RS.1 CRORE WAS BORROWED FROM FEDERAL BANK AND KERALA FIN ANCIAL CORPORATION. THE LD.REPRESENTATIVE FURTHER SUBMITTED THAT THERE WAS AN ACCIDENT IN THE PROJECT SITE IN WHICH FIVE WORKERS LOST THEIR LIVES WHICH WAS WIDELY REPORTED IN ALL NEWSPAPERS AS FRONT PAGE HEADLINES. THE ACC IDENT DAMAGED THE GOODWILL OF THE ASSESSEE. ALL THESE PROBLEMS DELAY ED THE COMPLETION OF THE PROJECT AND IT TOOK ALMOST 24 YEARS TO COMPLETE THE ENTIRE PROJECT. DUE TO DELAY IN COMPLETION OF THE PROJECT WHICH WAS BEY OND THE CONTROL OF THE ASSESSEE, THE COST OF CONSTRUCTION WAS INCREASED TR EMENDOUSLY AND THE COMPANY WAS MOVING TOWARDS WINDING UP AT THE INSTAN CE OF THE FINANCIAL INSTITUTIONS. 6. THE MANAGEMENT OF THE COMPANY WAS TOOK OVER BY T HE PRESENT MANAGEMENT ON 05-07-2005 AND SETTLED ALL THE LIABIL ITIES OF THE FINANCIAL INSTITUTIONS BY INFUSING OWN FUNDS. THE ACTIVITY O F THE COMPANY WAS 5 ITA NO.362/COCH/2012 RESTARTED DURING THE FINANCIAL YEAR 2005-06. AT TH AT TIME, THE CIVIL CONSTRUCTION WAS IN A VERY BAD STAGE SINCE IT WAS N OT TAKEN CARE OF FOR THE LAST SEVEN YEARS. THE ASSESSEE HAD TO INCUR FURTHE R COST FOR REPAIRS AND REPLACEMENT OF DAMAGED ITEMS. THIS IS ALSO ONE OF THE REASONS FOR HUGE INCREASE IN THE COST OF CONSTRUCTION. APART FROM T HAT SOME OF THE CUSTOMERS HAD WITHDRAWN FROM THE PROJECT AND THE CO MPANY HAD TO RETURN THEIR ADVANCE. THE CUMULATIVE EFFECT OF ALL THESE FACTORS SUCH AS HIGHER COST OF CONSTRUCTION, HUGE OPERATING COST, ABNORMAL DELAY IN COMPLETION OF THE PROJECT, ADDITIONAL EXPENSES INCURRED IN RESPEC T OF MATERIAL, LABOUR, ADMINISTRATION, SELLING OVERHEADS, THE LOWER SELLIN G PRICE DUE TO BAD REPUTATION AND GOODWILL RESULTED IN LOSS OF RS.43,9 18 IN THE PROJECT CALLED GOLDEN HEIGHTS. COMING TO THE EXPENSES TOWARDS A UDIT AND BANK CHARGES, THE LD.REPRESENTATIVE SUBMITTED THAT THE A SSESSEE HAS ALSO RECEIVED INTEREST FROM THE BANK ACCOUNT. THE NET A MOUNT OF RS.1,21,289 WAS SET OFF AGAINST INCOME FROM VARIOUS CONSTRUCTIO N PROJECTS. IN THE CASE BEFORE US, ACCORDING TO THE LD.REPRESENTATIVE, THER E WERE FIVE PROJECTS IN PROGRESS AND NET INCOME FROM ONLY ONE PROJECT IS ES TIMATED. THEREFORE, THERE IS NO JUSTIFICATION FOR DISALLOWING THE EXPEN DITURE TO THE EXTENT OF RS.1,21,281. 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITH ER SIDE AND ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD. ADMITTED LY, THE ASSESSEE IS 6 ITA NO.362/COCH/2012 FOLLOWING PROJECT COMPLETION METHOD IN RESPECT OF C ONSTRUCTION. IT IS ALSO NOT IN DISPUTE THAT THERE WAS A DELAY IN COMPLETION OF THE PROJECT DUE TO VARIOUS FACTORS WHICH WAS BEYOND THE CONTROL OF THE ASSESSEE SUCH AS ACCIDENT IN THE SITE, FINANCIAL CONSTRAINTS, ETC. THIS FACT MAY BE A REASON TO REDUCE THE PROFIT ON THE PROJECT. THE ASSESSING OF FICER REJECTED THE BOOK RESULTS ON THE GROUND THAT THE ASSESSEE IS FOLLOWIN G PROJECT COMPLETION METHOD AND THE EXPENDITURE INCURRED FOR EARLIER ASS ESSMENT YEARS WERE NOT EXAMINED. THE ASSESSEE HAS PRODUCED ONLY THE B OOKS OF ACCOUNT FOR THE CURRENT ASSESSMENT YEAR AND FOR THE OTHER ASSES SMENT YEAR UNDER CONSIDERATION NO BOOKS OF ACCOUNT WAS PRODUCED. NO DOUBT, THE BOOKS OF ACCOUNT WERE AUDITED AS CLAIMED BY THE ASSESSEE. A DMITTEDLY, THE PROJECT GOLDEN HEIGHTS WAS COMPLETED DURING THE YEAR UNDE R CONSIDERATION. THE ASSESSMENT ORDER OF THE EARLIER YEAR SHOWS THAT THE BOOKS OF ACCOUNT WERE PRODUCED BY THE ASSESSEE AND THE SAME WERE EXAMINED . IT IS ALSO NOT IN DISPUTE THAT THE ASSESSEE IS FOLLOWING PROJECT COMP LETION METHOD. WHEN THE ASSESSEE IS FOLLOWING THE PROJECT COMPLETION ME THOD AND DISCLOSED THE WORK IN PROGRESS IN ALL EARLIER ASSESSMENT YEARS, I T CANNOT BE SAID THAT THE ASSESSING OFFICER HAS NOT EXAMINED THE BOOKS OF ACC OUNT. THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN M/S GODAVARI DEVELOPERS ( SUPRA) HAS OBSERVED AS FOLLOWS: 7 ITA NO.362/COCH/2012 15. IN THE CASE F ITO VS. SAVA ASSOCIATES, ON WHICH RELIANCE PLACED BY THE CIT(A), THE ITAT MUMBAI BENC H HELD AS UNDER:- IN PRINCIPLE, ONE AGREES WITH THE ABOVE VIEW OF REVENUE THAT IN CASE OF COMPLETED CONTRACT METHOD THE AO IS EMPOWERED TO EXAMINE THE EXPENDITURES INCURRED DURI NG THE YEAR WHICH INCREASES THE OPENING WORK-IN-PROGRESS O R ADDITION IN WORK-IN-PROGRESS. BUT ONE DOES NOT AGREE WITH T HE VIEW OF REV2ENUE THAT ADDITION IS TO BE MADE IN TOTAL INCOM E, IF SOME EXPENDITURE WERE FOUND NOT ALLOWABLE. TE CORRECT P ROCEDURE IN COMPLETED CONTRACT METHOD IS THAT INSTEAD OF MAK ING ADDITION, THE AO SHOULD CORRECT THE AMOUNT OF WORK- IN- PROGRESS BY REDUCING OR ENHANCING WORK-IN-PROGRESS AS THE CASE MAY BE. SUCH CORRECTED WIP WILL BE FINALLY CON SIDERED IN P&L A/C / CONTRACT ACCOUNT FOR THE YEAR IN WHICH WO RK IS COMPLETED. THE RESULT OF CALCULATION OF CORRECT PRO FIT IN CASE OF COMPLETED CONTRACT METHOD COULD BE ATTAINED BY TH IS PROCEDURE IN VIEW OF THE ABOVE, THE ASSESSING OFFICER IS NOT JUSTIFIED IN ESTIMATING THE PROFIT AT 3%. ACCORDINGLY, THE ADDITION MADE BY AO ON ESTIMATE BSIS IS DELETED. 8. NOW COMING TO DISALLOWANCE OF RS.1,21,281 THE AS SESSING OFFICER DISALLOWED THE CLAIM OF THE ASSESSEE ON THE GROUND THAT SINCE THE PROFIT IS ESTIMATED, THERE IS NO QUESTION OF ANY SEPARATE ALL OWANCE. SINCE THE ISSUE WITH REGARD TO ESTIMATION OF PROFIT IS SET ASIDE, T HE ADDITION MADE BY THE ASSESSING OFFICER IS DELETED, THERE CANNOT BE ANY D ISALLOWANCE OF 8 ITA NO.362/COCH/2012 RS.1,21,281. ACCORDINGLY, THE ORDERS OF THE LOWER AUTHORITIES ARE CONFIRMED. 9. IN THE RESULT, APPEAL OF THE REVENUE STANDS DISM ISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 21 ST NOVEMBER, 2014. SD/- SD/- (CHANDRA POOJARI) (N.R.S. GANESAN) ACCOUNTANT MEMBER JUDICIAL MEMBER COCHIN, DT : 21 ST NOVEMBER, 2014 PK/- COPY TO: 1. M/S VICHUS CONSTRUCTIONS P LTD, 3 RD FLOOR, CRH COMPLEX, M.G. ROAD, KOCHI 2. THE DY.CIT, CIR.4(2), KOCHI 3. THE COMMISSIONER OF INCOME-TAX, CENTRAL-KERALA, KOCHI 4. THE COMMISSIONER OF INCOME-TAX(A)-I, KOCHI 5. THE DR (TRUE COPY) BY ORDER ASSTT. REGISTRAR, INCOME-TAX APPELLATE TRIBUNAL, COCHIN BENCH