SANGEETA P. RAHTOD & BABITA P[. RATHOD JOINT VENTURE, MUMBAI V. ITO 24(3)(4), MUMBAI

ITA 5116/MUM/2009

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 1306 (ITAT-MUMBAI)
• Duration Of Justice: 9 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-06-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Assessment Year: 2006-2007
• Appeal Filed On: 08-09-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P C MORYA
• Assessee Lawyers: H N MOTIWALA
• Section: 271(1)(c)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL E BENCH: MUMBAI BEFORE SHRI D K AGARWAL, JUDICIAL MEMBER AND SHRI PRAMOD KUMAR, ACCOUNTANT MEMBER ITA NO 5116/MUM/2009 (ASSESSMENT YEAR: 2006-07) M/S SANGEETA P RATHOD & BABITA P RATHOD JOINT VENTURE , 5-VAKIL INDL ESTATE, WALBHAT ROAD, GOREGAON (E), MUMBAI -400 063 PAN: AACAS 5346 L VS DCIT, CIRCLE 3(1), ROOM NO.607, 6TH FLOOR, AAYAKAR BHAVAN, MUMBAI -400 021 APPELLANT RESPONDENT APPELLANT BY: SHRI H N MOTIWALA RESPONDENT BY: SHRI P C MORYA ORDER PER PRAMOD KUMAR 1. THIS IS AN APPEAL FILED BY THE ASSESSEE AND IS D IRECTED AGAINST CIT (A)S ORDER DATED 27TH JULY 2009 FOR THE ASSESSMENT YEAR 2006-0 7. 2. GRIEVANCES RAISED BY THE ASSESSEE ARE AS FOLLOWS :- 1. THE COMMISSIONER OF INCOME TAX (APPEALS) HAS ER RED IN FACT AND IN LAW IN CONFIRMING THE ASSESSMENT OF INCOME OF RS 997625 0/- ON ESTIMATE BASIS BY ASSESSING OFFICER. 2. THE ABOVE ESTIMATE OF PROFIT RS 99,76,250/- BY A SSESSING OFFICER SHOULD BE DELETED BECAUSE: A) THE PERCENTAGE COMPLETION METHOD IS APPLICABLE WHERE SALES VALUE OF THE CONSTRUCTION PROJECT CAN BE ESTIMATED WITH REASONABLE CERTAINTY. B) THE ASSESSEE HAS NOT ENTERED INTO ANY WRITTEN A GREEMENT OF SALE TILL 31.03.2006. ITA 5116/M/2009 M/S SANGEETA P RATHOD & BABITA P RATHOD JOINT VENTU RE 2 C) THE ASSESSEE HAD RECEIVED ADVANCE OF RS 75 LACS AS ON 31.03.2006 FROM WHICH DEAL FOR WHICH RS 50 LACS ADV ANCE WAS RECEIVED WAS CANCELLED AND ADVANCE WAS GIVEN BACK DURING AY 2007-08. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF CASE A ND IN LAW, THE LD CIT (A) ERRED IN DELETING PENALTY LEVIED BY AO U/S 271(1)(C) AMOUNTING TO RS 4,76,238/-. 3. THE ISSUE IN APPEAL LIES IN A NARROW COMPASS OF UNDISPUTED FACTS. THE ASSESSEE BEFORE US IS AN ASSOCIATION OF PERSONS (AO P) ENGAGED, INTER ALIA , IN THE BUSINESS OF BUILDING CONSTRUCTION. ON 5TH JANUARY 2005, THE ASSESSEE RECEIVED APPROVAL FOR CONSTRUCTION. ON 5TH JANUARY 2005, TH E ASSESSEE RECEIVED APPROVAL FOR CONSTRUCTION OF A BUILDING, CONSISTING OF GROUND FL OOR PLUS SEVEN FLOOR, AT CST NO 659, NS ROAD NO 9, JVPD, JUHU, VILE PARLE (WEST) MUMBAI. DURING THE RELEVANT PREVIOUS YEAR, THE ASSESSEE ALSO STARTED CONSTRUCTION ACTIVI TY AT SAID SITE, AND BY THE END OF THE YEAR, THE LEVEL OF COMPLETION WAS ABOUT 38%. H AVING NOTED THIS, AND HAVING NOTED THAT THE ASSESSEE HAS ALREADY BOOKED FLAT # 5 , 6 & 7 IN THE SAID BUILDING, THE ASSESSING OFFICER PROCEEDED TO BRING TO TAX POINT IN ACCORDANCE WITH THE WORK IN PROGRESS AND THE PERCENTAGE OF WORK COMPLETED. TH E ASSESSING OFFICER THUS PROCEED TO TAX INCOME, ON AN ESTIMATED BASIS @ 10% ON THE W ORK IN PROGRESS OF RS 9,97,62,462/- ON THE BASIS OF WHAT HE TERMED AS AC CRUAL BASIS. AGGRIEVED, ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CI T (A) BUT WITHOUT ANY SUCCESS. THE CIT (A) CONFIRMED THE ACTION OF THE ASSESSING O FFICER, AND OBSERVED AS FOLLOWS:- 4. I HAVE CONSIDERED THE FACTS OF THE CASE AND SUB MISSIONS OF LD AUTHORISED REPRESENTATIVE CAREFULLY. THE ACCOUNTING STANDARD 7 ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA GIVES THE GUIDELINES FOR ACCOUNTING OF INCOME FROM A CONSTRUCTION PROJECT. THIS ACCOUNTING STAND ARD IS FOLLOWED IN THE CASE OF BUILDERS ALSO. THERE ARE TWO METHODS OF ACCOUNT ING OF INCOME FROM CONSTRUCTION PROJECT / BUILDING PROJECT AS PER THE SAID ACCOUNTING STANDARD I.E. THE PROJECT COMPLETION METHOD AND PERCENTAGE COM PLETION METHOD. NORMALLY ALL THE BUILDERS FOLLOW EITHER OF THE METH ODS OF ACCOUNTING GIVEN IN AS-7. IN THE PROJECT COMPLETION METHOD THE INCOME FROM THE PROJECT IS SUBJECTED TO TAX IN THE YEAR IN WHICH THE CONSTRUCT ION OF THE PROJECT IS COMPLETED AND SUBSTANTIAL PORTION THEREOF IS SOLD. THE CASE OF PERCENTAGE COMPLETION METHOD THE INCOME IS ESTIMATED ON THE W IP OF EACH ASSESSMENT YEAR. AS SUCH PERCENTAGE COMPLETION METHOD IS AL SO SAID AS WIP METHOD. IN THIS CASE THE APPELLANT HAD NOT BROUGHT ANY MATE RIAL BEFORE THE ASSESSING OFFICER TO SHOW THAT IT WAS FOLLOWING PROJECT COMP LETION METHOD OF ITA 5116/M/2009 M/S SANGEETA P RATHOD & BABITA P RATHOD JOINT VENTU RE 3 ACCOUNTING. NEITHER THE RETURN OF INCOME NOR THE A UDIT REPORT MENTIONED SUCH METHOD OF ACCOUNTING. NO DOCUMENT HAS BEEN FILED E VEN DURING THE APPEAL PROCEEDING TO SHOW THAT THE APPELLANT HAD FOLLOWED PROJECT COMPLETION METHOD OF ACCOUNTING IN THE ASSESSMENT YEAR 2006-0 7. AS SUCH THERE IS NO INFIRMITY IN THE FINDING OF THE ASSESSING OFFICER T HAT THE APPELLANT HAD NOT FOLLOWED THE PROJECT COMPLETION METHOD OF ACCOUNT ING IN THE ASSESSMENT YEAR 2006-07. I DO NOT AGREE WITH THE LD AUTHORISED REP RESENTATIVE THAT BECAUSE THE APPELLANT OFFERED THE INCOME FORM THE PROJECT I N THE ASSESSMENT YEAR 2007-08, THE ASSESSING OFFICER SHOULD HAVE ASSUMED THAT IT WAS FOLLOWING PROJECT COMPLETION METHOD OF ACCOUNTING IN THE EA RLIER YEAR ALSO. THE EVENT OF A SUBSEQUENT YEAR CANNOT JUSTIFY THE ACCOUNTING MADE IN THE PAST YEAR. IN SUCH A CASE THE ONLY OTHER METHOD FOR ACCOUNTING TH E INCOME FROM THE PROJECT WAS PERCENTAGE COMPLETION METHOD. THE ASSESSING OFFICER APPLIED THE SAID OTHER METHOD. IN MY OPINION THERE IS NO INFIRMITY IN APPLYING THE PERCENTAGE COMPLETION METHOD OF ACCOUNTING FOR ASSESSING THE INCOME FROM THE PROJECT WHEN THE APPELLANT COULD NOT SHOW THAT IT WAS FOLLO WING PROJECT COMPLETION METHOD. THE ASSESSING OFFICER APPLIED THE RATE OF PROFIT AT 10% OF THE WIP SHOWN BY THE APPELLANT ITSELF IN ITS ACCOUNTS. THE RATE OF 10% CANNOT BE SAID AS EXCESSIVE OR UNREASONABLE IN THE CASE OF A BUILD ING PROJECT BEING DEVELOPED IN THE PRIME AREA OF JUHU, (VILE PARLE) AT MUMBAI. I DO NOT AGREE WITH LD AUTHORISED REPRESENTATIVE THAT THE LAND COST AND TD R COST SHOULD NOT HAVE BEEN INCLUDED IN THE WIP FOR ESTIMATING THE INCOME. LAND COST AND TDR COST WERE VERY MUCH PART OF THE COST OF THE PROJECT AND A BUILDER DEVELOPS A PROJECT WITH AN INTENTION TO HAVE CERTAIN RANGE OF PROFIT O N ALL EXPENSES INCURRED ON THE PROJECT. THE ASSESSING OFFICER WAS THEREFORE J USTIFIED IN APPLYING THE PROFIT RATE OF 10% ON ENTIRE WIP AS ON 31/03/2006. THE CO MPARATIVE CASES CITED BY LD AUTHORISED REPRESENTATIVE ARE NOT HELPFUL TO THE CASE OF THE APPELLANT. IN THE CASE OF M/S SATYA SONAL DEVELOPERS, LD AUTHORIS ED REPRESENTATIVE OF THE APPELLANT FILED THE COPY OF THE ASSESSMENT ORDER FO R THE ASSESSMENT YEAR 2003-04. IT IS CLEARLY MENTIONED THEREIN THAT THE S AID PARTY WAS FOLLOWING PROJECT COMPLETION METHOD OF ACCOUNTING. IN THE CASE OF JAGDISH R MEHTA LD AUTHORISED REPRESENTATIVE FILED THE ASSESSMENT ORDE R FOR THE ASSESSMENT YEAR 2004-05. IN THAT CASE THERE IS NO DISCUSSION OF TH E METHOD OF ACCOUNTING FOLLOWED BY THE SAID PARTY IN THE ASSESSMENT ORDER AND THAT PARTY HAD SHOWN TOTAL INCOME OF RS 33,76,261/-. THE ASSESSING OFFI CER HAD ACCEPTED THE TOTAL INCOME. LD AUTHORISED REPRESENTATIVE OF THE APPELL ANT COULD NOT SHOW HOW THE FACTS OF THOSE CASES ARE APPLICABLE TO THE CASE OF THE APPELLANT. THE JUDGMENTS RELIED ON BY LD AUTHORISED REPRESENTATIVE WERE ALSO NOT APPLICABLE TO THE FACTS OF THE CASE. I, THEREFORE, CONFIRM THE ASSESSMENT OF THE INCOME OF THE PROJECT AT RS 99,76,250/- IN THE ASSESSMENT YEAR UNDER CONS IDERATION. HOWEVER AS THE APPELLANT DECLARED THE PROFIT FROM THE PROJECT FOR TAXATION IN THE ASSESSMENT YEAR 2007-08, THE INCOME ASSESSED DURING THE YEAR SHOULD BE ADJUSTED WITH THE INCOME OF THE AY 2007-08 TO AVOID DOUBLE TAXATION. ITA 5116/M/2009 M/S SANGEETA P RATHOD & BABITA P RATHOD JOINT VENTU RE 4 4. AGGRIEVED BY THE STAND SO TAKEN BY THE CIT (A), THE ASSESSEE IS IN FURTHER APPEAL BEFORE US. 5. HAVING HEARD THE RIVAL CONTENTIONS AND HAVING PE RUSED THE MATERIAL ON RECORD, WE HAVE NOTED THAT THE ASSESSING OFFICER HAS PROCEE DED TO TAX INCOME, ON WHAT HE TERMS AS ACCRUAL BASIS, EVEN THOUGH THERE HAS BEE N NO SALES IN THE RELEVANT PREVIOUS YEAR. OUT OF THE DEPOSITS OF RS 75 LAKHS RECEIVED BY THE ASSESSEE, RS 50 LAKHS HAVE BEEN RETURNED TO THE DEPOSITOR SHORTLY A FTER THE END OF THE RELEVANT PREVIOUS YEAR AND WITHIN ALMOST ONE MONTH OF HAVING RECEIVED THE SAID DEPOSIT. IT CANNOT THEREFORE BE SAID THAT THE SAID RS 50 LAKHS REPRESENTED ADVANCE FOR PURCHASE OF FLAT. AS REGARDS REMAINING RS 25 LAKHS, THIS HA S BEEN THE CASE OF THE ASSESSEE THAT NO FORMAL AGREEMENT TO SALE WAS EXECUTED IN TH E RELEVANT PREVIOUS YEAR AND IT WAS TENTATIVE DEPOSIT BY THE INTENDING BUYER. UNDE R THESE CIRCUMSTANCES, NO SALE CAN BE SAID TO HAVE TAKEN PLACE IN THE RELEVANT PRE VIOUS YEAR. NO MATERIAL HAS BEEN BROUGHT ON RECORD TO CONTROVERT THIS CLAIM AND IT H AS NOT BEEN DISPUTED EVEN. IT IS ONLY ELEMENTARY THAT EVEN UNDER THE ACCRUAL BASIS O F ACCOUNTING AN INCOME CAN BE BOOKED IN THE CASE OF A BUILDER ONLY WHEN THE SALES TAKES PLACE AND NOT MERELY BECAUSE BUILDING HAS BEEN CONSTRUCTED. EVENT TRIGG ERING REALISATION OF PROFIT IS THE SALE AND NOT CONSTRUCTION. LET US TAKE A SITUATION IN WHICH 100% OF THE BUILDING IS COMPLETED BUT THERE IS NO SALE OUT OF THE BUILDING SO CONSTRUCTED. CAN IT BE SAID THAT, IN SUCH A SITUATION, THE PROFITS ON CONSTRUCTION OF BUILDING CAN BE BROUGHT TO TAX?. OBVIOUSLY, THE ANSWER HAS TO BE NEGATIVE, BECAUSE, THE QUESTIONS OF PROFIT ARISES ONLY WHEN SALES TAKE PLACE AND VALUE OF UNSOLD STOCK AND WORK-IN-PROGRESS, EVEN IF THAT IS MORE THAN THE COST OF SUCH UNSOLD STOCK AND WORK-IN -PROGRESS CANNOT BE TAKEN INTO ACCOUNT FOR THE PURPOSE OF COMPUTING PROFITS. AS H AS BEEN HELD IN THE CLASSIC CASE OF CHAINRUP SAMPATRAM VS CIT 24 ITR 481, NO METHOD OF ACCOUNTING CAN PERMIT ANTICIPATED PROFITS TO BE BROUGHT TO TAX AS HAS BEE N SOUGHT TO BE DONE IN THE PRESENT CASE. IN ANY EVENT, WE HAVE NOTED THAT THE ASSESSE E HAS OFFERED THE INCOME TO TAX ON SALE OF THESE FLATS IN THE SUBSEQUENT ASSESSMENT YEAR IE WHEN THE SALE HAS ACTUALLY TAKEN PLACE. THE ASSESSING OFFICER HAS DU LY ASSESSED THOSE PROFITS IN THE HANDS OF THE ASSESSEE IN THE SUBSEQUENT YEAR. IN V IEW OF THESE DISCUSSIONS AND BEARING IN MIND THE ENTIRETY OF THE FACTS OF THE CA SE WE ARE OF THE CONSIDERED OPINION ITA 5116/M/2009 M/S SANGEETA P RATHOD & BABITA P RATHOD JOINT VENTU RE 5 THAT THE AUTHORITY BELOW CLEARLY ERRED IN BRINING T O TAX NOTIONAL PROFITS ON WORK-IN- PROGRESS INSTEAD OF BUILDING UNDER CONSTRUCTION. W E, THEREFORE, UPHOLD THE GRIEVANCE OF THE ASSESSEE AND DIRECT THE ASSESSING OFFICER TO DELETE THE IMPUGNED ADDITION OF RS 99,76,250/-. THE ASSESSEE GETS RELIEF ACCORDIN GLY. 6. IN THE RESULT, APPEAL IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT TODAY ON THE 25 TH DAY OF JUNE 2010. SD/- (D K AGARWAL) JUDICIAL MEMBER SD/- (PRAMOD KUMAR) ACCOUNTANT MEMBER MUMBAI, DATE: 25TH JUNE 2010 COPY TO:- 1) THE APPELLANT. 2) THE RESPONDENT. 3) THE CIT (A)-XXIV, MUMBAI. 4) THE CIT 24, MUMBAI. 5) THE D.R. E BENCH, ITAT, MUMBAI. BY ORDER / / TRUE COPY / / ASSTT. REGISTRAR CHAVAN* I.T.A.T., MUMBAI ITA 5116/M/2009 M/S SANGEETA P RATHOD & BABITA P RATHOD JOINT VENTU RE 6 SR.N. EPISODE OF AN ORDER DATE INITIALS CONCERNED 1 DRAFT DICTATED ON 15.06.2010 SR.PS 2 DRAFT PLACED BEFORE AUTHOR 16.06.2010 SR.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 SR.PS 6 KEPT FOR PRONOUNCEMENT ON SR.PS 7 FILE SENT TO THE BENCH CLERK SR.PS 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER