RAMESH W. SAWANT & CO., THANE V. DCIT CIR 3, MUMBAI

ITA 385/MUM/2010

• Counselvise Citation: 38519914 RSA 2010
• Duration Of Justice: 1 year(s) 6 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-07-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2006-2007
• Appeal Filed On: 15-01-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: KUBAL
• Assessee Lawyers: ARATI SATHE; ARUN SATHE
• Keywords: Business income; Cost of acquisition; Tax effect; Capital receipt

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH D MUMBAI BEFORE SHRI PRAMOD KUMAR AND SMT. ASHA VIJAYARAGHAVAN (JM) ITA NO. 385/MUM/2010 ASSESSMENT YEAR 2006-07 SHRI RAMESH W. SAWANT, R.W. SAWANT & CO., PROP. RAMESH W. SAWANT, SURVEY NO. 96/97, OPP GOLDEN DYES, MAJIWADE, THANE (W)-400 602 PAN-ANFPS 2683D VS. THE DY. CIT, CIRCLE 3, THANE (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI ARUN SATHE & MS. ARATI SATHE RESPONDENT BY : SH RI M.R. KUBAL DATE OF HEARING : 15.06.2011 DATE OF PRONOUNCEMENT: 29 TH JULY, 2011 O R D E R PER ASHA VIJAYARAGHAVAN (JM) THIS APPEAL PREFERRED BY THE ASSESSEE IS DIRECTED A GAINST THE ORDER DATED30.10.2009 PASSED BY THE LD. CIT(A)-1FOR THE A SSESSMENT YEAR 2006- 07. 2. THE ASSESSEE, PROPRIETOR OF M/S.R.W.SAWANT & CO, IS A BUILDER & DEVELOPER. THE ASSESSEE HAD FOLLOWED PROJECT COMPL ETION METHOD OF ACCOUNTING AND THEREFORE NO INCOME HAD BEEN ADMITTE D IN RESPECT OF TWO PROJECTS WHICH ARE UNDER CONSTRUCTION DURING THE YE AR. THE AO ESTIMATED THE INCOME AT 10% OF WORK IN PROGRESS AFTER REJECTING T HE BOOKS OF ACCOUNT AND MADE TOTAL ADDITION OF RS.1,24,52,496/- APART FROM TWO OTHER ADDITIONS. THE ASSESSMENT WAS COMPLETED U/S.143(3) OF THE ACT AND DETERMINED THE TOTAL INCOME AT RS.1,52,03,822/-. ITA NO. 385/M/2010 2 3. THE AO FOUND DURING THE COURSE OF ASSESSMENT PRO CEEDINGS THAT THE ASSESSEE HAD REDUCED FROM THE WIP IN RESPECT OF THE PROJECT CALLED DEVASHREE PARK BY A SUM OF RS.12,57,780/-. THIS SUM REPRESENTED MONEY REALIZED FOR SALE OF SCRAP FROM THE SITE OF A PROJE CT. THERE WERE CERTAIN STRUCTURES EXISTING AT THE SITE OF M/S. CATALYST IN DS PVT. LTD IN RESPECT OF WHICH, THE ASSESSEE BROUGHT DEVELOPMENT RIGHTS FROM ONE M/ S. ROMA BUILDERS PVT LTD, DEMOLISHED THE SAME AND REALIZED THE AFORESAID AMOUNT OF RS.12,57,780/-. RELYING ON THE DECISION IN THE CAS E OF M/S. TUTICORIN ALKALI CHEMICALS & FERTILIZERS LTD., 227 ITR 172, THE AO A DDED THE AFORESAID AMOUNT OF RS.12,57,780/- TO THE RETURNED INCOME AS PROFIT FROM SALE OF SCRAP. 4. AGGRIEVED THE ASSESSEE APPEARED BEFORE THE CIT(A ). THE AUTHORIZED REPRESENTATIVE SUBMITTED BEFORE THE CIT(A) THAT THE SCRAP REALIZED ON DEMOLITION OF OLD STRUCTURE WHICH EXISTED ON THE CO NSTRUCTION SITE HAD BEEN TAKEN AS WORK IN PROGRESS THEREBY REDUCING THE WIP TO THE EXTENT OF RS.12,57,780/-. THE CIT(A) CONFIRMED THE ADDITION OF RS.12,57,780/- MADE ON ACCOUNT OF SALE OF SCRAP FROM DEMOLITION OF OLD STR UCTURE RELYING ON M/S. TUTICORIN ALKALI CHEMICALS & FERTILIZERS LTD., 227 ITR 172. AGGRIEVED THE ASSESSEE IS ON APPEAL BEFORE US. THE LEARNED COUNS EL SUBMITTED THAT THE SCRAP MATERIAL DERIVED FROM THE STRUCTURE SITUATED AT THE SITE OF M/S. CATALYST INDS PVT LTD, WHICH WAS BOUGHT BY THE ASSESSEE ALON G WITH DEVELOPMENT RIGHTS FROM M/S. ROMA BUILDERS PVT LTD WAS SOLD AT RS.12,57,780/-. THE ASSESSEE HAS REDUCED THE COST OF LAND DEVELOPMENT R IGHTS BY THAT AMOUNT SINCE IT WAS DERIVED ON ACCOUNT OF THE EXPENDITURE INCURRED ON THE ACQUISITION OF RIGHTS. IT IS PART AND PARCEL OF THE ACQUISITIO N COST. THEREFORE, THE DECISION OF THE LOWER AUTHORITIES TREATING THE PROFIT ON SAL E OF SCRAP AS INCOME FROM OTHER SOURCES RELYING ON M/S. TUTICORIN ALKALI CHEM ICALS & FERTILIZERS LTD., 227 ITR 172 IS NOT PROPER. 5. WE AGREE WITH THE CONTENTION OF THE ASSESSEE THA T THE RATIO OF THE DECISION IN THE CASE OF M/S. TUTICORIN ALKALI CHEMI CALS & FERTILIZERS LTD., DOES NOT APPLY IN THE INSTANT CASE. IN THAT CASE BEFORE THE APEX COURT, THE ASSESSEE HAD SURPLUS FUNDS WHICH WAS INVESTED AND Y IELDED INTEREST. THE ITA NO. 385/M/2010 3 INVESTMENT OF FUNDS HAD NOTHING TO DO WITH THE OPER ATIONS OF THE ASSESSEE. BUT HERE THE OLD BUILDING WAS PART OF THE PROPERTY PURCHASED AND IT GOES INTO THE COST OF ACQUISITION OF THE PROPERTY WHILE COMPU TING THE BUSINESS INCOME OF THE ASSESSEE. AS THE SCRAP SALE IS RECEIPT FROM SAL E OF PART OF THE STOCK IN TRADE VIZ., LAND AND BUILDING PURCHASED, THE SAME S HOULD BE CONSIDERED AS BUSINESS PROFITS AND WILL GO TO REDUCE THE COST OF ACQUISITION OF THE PROPERTY. THE DECISIONS OF THE APEX COURT IN THE CASE OF CIT V BOKARO STEEL LTD (236 ITR 315) IS MORE APPROPRIATE TO THIS CASE. IN THAT CASE THE APEX COURT THE ASSESSEE IN THE COURSE OF CONSTRUCTION CHARGED RENT FOR PROVIDING ACCOMMODATION TO THE EMPLOYEES OF CONTRACTORS AND R ENT FOR HIRE OF MACHINERY TO CONTRACTORS. THE APEX COURT HELD THAT THESE RECEIPTS ARE DIRECTLY CONNECTED WITH OR INCIDENTAL TO THE CONSTRUCTION AC TIVITY AND HENCE ARE CAPITAL RECEIPTS TO BE ADJUSTED AGAINST THE COST OF CONSTRU CTION. HERE ALSO THE DEMOLITION OF EXISTING OLD BUILDINGS AND SALE OF TH E SCRAP IS CONNECTED WITH BUILDING ACTIVITY AND HENCE THE ASSESSEE HAS RIGHTL Y SET IT OFF AGAINST THE COST OF ACQUISITION OF THE LAND AND BUILDING IN THE CIRC UMSTANCES WE DIRECT THE DELETION OF THE ADDITION OF RS. RS.12,57,780/- WHI CH SHOULD BE REDUCED FROM THE COST OF ACQUISITION OF LAND AND BUILDING. THE A SSESSEES APPEAL ON THIS ISSUE IS ALLOWED. 6. THE NEXT GROUND OF APPEAL IS REGARDING THE ADDIT ION OF RS.1,24,52,596/- ON ACCOUNT OF ESTIMATION OF PROFIT ON WORK IN PROGR ESS ACCOUNT. THE AO FOUND THAT AS PER SCHEDULE K OF THE BALANCE SHEET THE TOT AL WORK IN PROGRESS IS RS.17,02,76,612/-. THIS WORK IN PROGRESS HAS TO BE INCREASED BY AN AMOUNT OF RS.12,57,780/- ON ACCOUNT OF SALE OF SCRAP WHICH WA S DEDUCTED FROM THE WORK IN PROGRESS. THEREFORE THE TOTAL WORK IN PROGRESS AMOUNTED TO RS.17,15,34,392/- OUT OF WHICH WORK IN PROGRESS AMO UNTING TO RS.4,57,51,649/- BELONGS TO ANOTHER PROJECT, DEVASH REE PARK, WHICH IS UNDER CONSTRUCTION AND IS IN THE INITIAL STAGE OF WORK. THEREFORE, THE TOTAL WORK IN PROGRESS EXCLUDING THE WORK IN PROGRESS REFERABLE T O DEVASHREE PARK COMES TO RS.12,45,24,963/-. THE AO HAS ESTIMATED 10% OF THIS WORK IN PROGRESS AMOUNTING TO RS.1,24,52,496/- IS ASSESSABLE TO TAX. ITA NO. 385/M/2010 4 7. THE ASSESSEE SUBMITTED THAT THEY ARE REGULARLY F OLLOWING THE COMPLETED PROJECT METHOD WHICH HAS BEEN ACCEPTED IN THE PAST BY THE DEPARTMENT. FOR THIS YEAR ALSO THE ASSESSEE HAD FOLLOWED THE METHOD OF ACCOUNTING COMPLETED CONTRACT METHOD AND HAS ACCORDINGLY NOT O FFERED TAX ON PROJECTS WHICH HAVE NOT BEEN COMPLETED. THE DEPARTMENT HAS NOT FOUND ANY FACTS TO COME TO THE CONCLUSION THAT THIS METHOD OF ACCOUNTI NG WILL NOT YIELD TRUE PROFITS. FURTHER, EVEN UNDER THE PERCENTAGE COMPLE TION METHOD, THE ESTIMATED PROFIT ACCRUING ON THE COMPLETION OF THE PROJECT HA S TO BE DETERMINED AND THE PROPORTION OF THE PROFIT ATTRIBUTABLE TO THE PERCEN TAGE OF PROJECTS COMPLETED SHOULD BE ASSESSED. THE AOS ACTION IN ESTIMATING THE 10% OF THE PROFIT IS WITHOUT ANY BASIS AND HENCE COULD NOT BE ACCEPTED. THE ASSESSEE ALSO SUBMITTED THAT THE POSSESSION OF THE FLAT GIVEN TO THE ALLOTTEES IN THE BEGINNING OF THE ASSESSMENT YEAR 2008-09 AND THE ASSESSEE HAS OFFERED THE INCOME ON THE SAME PROJECT ON THE BASIS OF PROJECT COMPLETION METHOD, HENCE ASSESSING THE INCOME OF THE SAME PROJECT WOULD AMOUNT TO DOUB LE TAXATION. 8. THE LD. CIT(A) HAS HELD THAT THE ASSESSEE HAS SH OWN THE TOTAL COST OF CONSTRUCTION AT RS.12,44,74,963/- AND HAS RECEIVED A TOTAL SUM OF RS.18,89,70,729/- AS ADVANCE FOR THIS BUILDING FOR THE PERIOD ENDING 31.3.06. AS AGAINST THIS, FOR THE YEAR ENDED 31.3.08 THE TOT AL CONSTRUCTION COST AMOUNTED TO RS. 22,71,73,457/-AND THE BOOKING RECEI PTS WERE RS.25,49,49,030/-. IN TERMS OF BOOKING RECEIPTS 74 % OF THE TOTAL SALES WAS RECEIVED AS ON 31.3.06 AND 54% COST OF CONSTRUCTION WAS INCURRED AS ON 31.3.06. IN THE RETURN FILED 2008-09 THE ASSESSEE H AS RETURNED A TOTAL INCOME OF RS.2,50,62,945/-. IN THE LIGHT OF THE ABOVE, CI T(A) HELD THAT THE ASSESSEE IS IN A POSITION TO COMPUTE THE INCOME FROM PROJECT WI THOUT WAITING FOR THE PROJECT TO BE COMPLETED. HENCE, HE HAD CONFIRMED THE ADDIT ION OF RS.1,24,52,496/- BEING THE ESTIMATED PROFIT AT 10% OF WIP IS IN ACCO RDANCE WITH LAW. 9. AGGRIEVED THE ASSESSEE IS ON APPEAL BEFORE US. T HE LD. COUNSEL FOR THE ASSESSEE SHRI ARUN SATHE SUBMITTED THAT IT IS N OT IN DISPUTE THAT THE ASSESSEE HAS BEEN FOLLOWING COMPLETED CONTRACT METH OD FOR BOOKING HIS PROFITS IN RESPECT OF CONSTRUCTION PROJECTS AND THE DEPARTMENT HAS ACCEPTED THAT METHOD OF ACCOUNTING SO FAR. THAT BEING SO, I T IS NOT FOR THE DEPARTMENT TO ITA NO. 385/M/2010 5 TAX AN ESTIMATED PORTION AS ON THE CLOSE OF 31.3.06 , CIT(A) CANNOT TAKE WHAT HAS HAPPENED SUBSEQUENTLY AND RELATE IT BACK TO THE CURRENT ASSESSMENT YEAR IN SO FAR AS THE COST OF CONSTRUCTION, SALES PRICE AND PROFITABILITY IS CONCERNED AND ESTIMATE THE PROFIT EVEN THOUGH THE PROJECT IS NOT COMPLETED. HE FURTHER SUBMITTED THAT HAVING ACCEPTED THE METHOD OF ACCOUN TING FOLLOWED FOR ALL THESE YEARS IT IS NOT OPEN TO THEM TO SUBSTITUTE ON E METHOD BY ANOTHER. 10. THE LD. DEPARTMENTAL REPRESENTATIVE RELIED ON T HE ORDER OF THE LOWER AUTHORITIES. 11. WE HEARD BOTH THE PARTIES. THE SUPREME COURT IN THE CASE OF CIT VS. BILAHARI INVESTMENT (P) LTD 299 ITR 1 HAD OCCASION TO COMPARE THE COMPLETED CONTRACT METHOD AND THE PERCENTAGE COMPLETION METHO D. THE COURT HELD THAT RECOGNITION/IDENTIFICATION OF INCOME UNDER THE ACT IS ATTAINABLE BY SEVERAL METHODS OF ACCOUNTING. IT MAY BE NOTED THAT THE SA ME RESULT WOULD BE ATTAINED BY ANY ONE OF THE ACCOUNTING METHODS COM PLETED CONTRACT METHOD IS ONE AND PERCENTAGE OF COMPLETION METHOD IS ANOTH ER. IN THE COMPLETED CONTRACT METHOD REVENUE IS NOT RECOGNIZED UNTIL THE CONTRACT IS COMPLETE. UNDER THE SAID METHOD COST WERE ACCUMULATED DURING THE COURSE OF THE CONTRACT. THE PROFIT OR LOSS IS ESTABLISHED IN THE LAST ACCOUNTING PERIOD AND TRANSFERRED TO P&L ACCOUNT. THE SAID METHOD DETERM INES THE RESULTS ONLY WHEN CONTRACT IS COMPLETED. THIS METHOD LEADS TO O BJECTIVE ASSESSMENT OF THE RESULTS OF THE CONTRACT. ON THE OTHER HAND, PE RCENTAGE OF COMPLETION METHOD TRIES TO ATTAIN PERIODIC RECOGNITION OF INCO ME IN ORDER TO REFLECT CURRENT PERFORMANCE. THE AMOUNT OF REVENUE RECOGNIZED UNDE R THIS METHOD IS DETERMINED BY REFERENCE TO THE STAGE OF COMPLETION OF THE CONTRACT. THE STAGE OF COMPLETION CAN BE LOOKED AT UNDER THIS METHOD BY TAKING INTO CONSIDERATION THE PROPORTION THAT COST INCURRED TO DATE BEARS TO THE ESTIMATED TOTAL COSTS OF THE CONTRACT. 12. THE MUMBAI HIGH COURT IN THE CASE OF TAPARIA TO OLS VS. JCIT 263 ITR 102 HAD HELD THAT IN EVERY CASE OF SUBSTITUTION OF ONE METHOD BY ANOTHER ITA NO. 385/M/2010 6 METHOD, BURDEN IS ON THE DEPARTMENT TO PROVE THAT T HE METHOD IN VOGUE IS NOT CORRECT AND IT DISTORTS THE PROFIT OF THE PARTICULA R YEAR. THE SUPREME COURT HAS ALSO HELD THAT IN CASES WHERE THE DEPARTMENT HAD AC CEPTED THE COMPLETED CONTRACT METHOD AND BECAUSE OF SUCH ACCEPTANCE THE ASSESSEE HAD FOLLOWED THE SAME METHOD OF ACCOUNTING THE DEPARTMENT, UNLES S IT RECORDS THE FINDING THAT THE METHOD ADOPTED BY THE ASSESSEE RESULTS IN DISTORTION OF PROFITS FOR THAT YEAR AS COMPARED TO THE EARLIER YEARS THEY CAN INSI ST OF SUBSTITUTION TO THE EXISTING METHOD. THE COMPUTATION OF TAX EFFECT IN EITHER METHOD OF ACCOUNTING IS REVENUE NEUTRAL. CONSIDERING THE FACTS, THE APEX COURT HELD THAT THE ASSESSEES METHOD OF ACCOUNTING FOLLOWING COMPLETED CONTRACT METHOD CANNOT BE INTERFERED WITH. IN THE CIRCUMSTANCES OF THE CAS E THE SUPREME COURT UPHELD THE COMPLETED CONTRACT METHOD ADOPTED BY THE ASSESS EE. IN THE PRESENT CASE ALSO THE METHOD FOLLOWED BY THE ASSESSEE OF COMPLET ED CONTRACT METHOD HAS BEEN ACCEPTED BY THE DEPARTMENT IN THE EARLIER YEAR S. THERE IS NO FINDING BY THE AO THAT THE COMPLETED CONTRACT METHOD DISTORTS THE PROFIT OF THE YEAR. WE FIND THE RATIO OF THE DECISION OF THE APEX COURT IN THE CASE OF BILAHARI INVESTMENTS WILL SQUARELY APPLY TO THE PRESENT CASE ALSO. THE METHOD OF ACCOUNTING OF COMPLETED CONTRACT METHOD HAS BEEN CO NSISTENTLY FOLLOWED BY THE ASSESSEE AND HAS BEEN ACCEPTED BY THE DEPARTMEN T AND THE ASSESSEE HAS ALSO OFFERED THE TOTAL INCOME ON THE COMPLETION OF THE PROJECT. THIS BEING SO, WE HOLD THAT THE AO AND CIT(A) HAVE ERRED IN ES TIMATING THE PROFIT FROM THIS PROJECT FOR THE CURRENT YEAR BEFORE THE COMPLE TION OF THE PROJECT. IN THE CIRCUMSTANCES, WE DELETE THE ADDITION OF RS.1,24,52 ,496/- MADE BY THE AO AND ALLOW THE APPEAL OF THE ASSESSEE ON THIS ISSUE. 13. IN THE RESULT THE APPEAL OF THE ASSESSEE IS ALL OWED. ORDER PRONOUNCED ON THIS 29 TH DAY OF JULY, 2011 SD/- SD/- (PRAMOD KUMAR) (ASHA VI JAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED 29 TH JULY, 2011 RJ ITA NO. 385/M/2010 7 COPY TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT-CONCERNED 4. THE CIT(A)-CONCERNED 5. THE DR D BENCH TRUE COPY BY ORDER ASSTT. REGISTRAR, I.T.A.T, MUMBAI ITA NO. 385/M/2010 8 DATE INITIALS 1. DRAFT DICTATED ON: 15.7.2011 SR. PS/PS 2. DRAFT PLACED BEFORE AUTHOR: 22.07.2011 SR. PS/PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER: JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER: JM/AM 5. APPROVED DRAFT COMES TO THE SR. PS/PS: SR. PS/PS 6. ORDER PRONOUNCED ON: SR. PS/PS 7. FILE SENT TO THE BENCH CLERK: 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK: SR. PS/PS 9. DATE ON WHICH FILE GOES TO AR 10. DATE OF DISPATCH OF ORDER: