SURESH WADHWA, NAVI MUMBAI V. JTCIT RG 22(3), MUMBAI

ITA 6395/MUM/2012

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 70609 (ITAT-MUMBAI)
• Duration Of Justice: 9 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-08-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 06-06-2013
• Assessment Year: 2009-2010
• Appeal Filed On: 18-10-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PRAVIN KUMAR
• Assessee Lawyers: S C TIWARI
• Keywords: Depreciation; Rule of consistency; Capital expenditure
• Section: 143(3); 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL I BENCH, MUM BAI . . , , ! ' BEFORE SHRI B.R. MITTAL, JM AND SHRI SANJAY ARORA, AM ./ I.T.A. NO. 6395/MUM/2012 ( #$ #$ #$ #$ %$ %$ %$ %$ / ASSESSMENT YEAR: 2009-10 SURESH G. WADHWA 429, ARENJA CORNER, SECTOR 17, VASHI, NAVI MUMBAI-400 706 # # # # / VS. JT. COMMISSIONER OF INCOME TAX, RANGE 22(3), MUMBAI ( ! ./ * ./ PAN/GIR NO. AAAPW 0812 A ( (+ / APPELLANT ) : ( ,-(+ / RESPONDENT ) (+ . / APPELLANT BY : SHRI S.C. TIWARI ,-(+ / . / RESPONDENT BY : SHRI PRAVIN KUMAR # / 01! / // / DATE OF HEARING : 07.06.2013 2% / 01! / DATE OF PRONOUNCEMENT : 02.08.2013 3 / O R D E R PER SANJAY ARORA, A. M.: THIS IS AN APPEAL BY THE ASSESSEE AGITATING THE ORD ER BY THE COMMISSIONER OF INCOME TAX (APPEALS)-33, MUMBAI (CIT(A) FOR SHORT ) DATED 09.08.2012, PARTLY ALLOWING THE ASSESSEES APPEAL CONTESTING ITS ASSESSMENT FOR ASSESSMENT YEAR (A.Y.) 2009-10, VIDE ORDER U/S. 143(3) OF THE INCOME TAX ACT, 1961(THE ACT HEREINAFTER) DATED 26.12.2011. 2 ITA NO.6395 /MUM/2012 (A.Y. 2009-10) SURESH G. WADHWA. VS. JT. CIT ARGUMENTS 2.1 OPENING THE ARGUMENTS FOR AND ON BEHALF OF THE ASSESSEE, IT WAS SUBMITTED BY THE LD. AR, HIS COUNSEL, THAT THE ASSESSEE, AN INDIVIDUAL, IS A DEVELOPER OF REAL ESTATE, BUILDING RESIDENTIAL COMPLEXES. HE HAS BEEN IN THIS BUSINESS FOR THE PAST 17-18 YEARS, RETURNING INCOME FOLLOWING THE PERCENTAGE COMPLETION METHOD, I.E., IN ACCORDANCE WITH THE PROGRESSION OF THE HOUSING PROJECT, AND WHICH HAS B EEN REGULARLY ACCEPTED BY THE DEPARTMENT. TOWARD THIS, HE WOULD PLACE ON RECORD T HE COPIES OF THE ASSESSMENT ORDERS U/S. 143(3) FOR THE ASSESSMENT YEARS 1997-98, 2001-02 AN D 2004-05 (PB-III/ PAGES 27-38 ). FOR THE YEAR UNDER REFERENCE, THE ASSESSEE HAS RETURNED PROFIT ON TWO PROJECTS, VIZ. SAI SWAR & SAI STHAAN, COMMENCED DURING THE PREVIOUS YEARS R ELEVANT TO AY 2004-05 & 2006-07 , AT RS. 64,12,084/- AND RS.47,90,899/- RESPECTIVELY. TH IS IS POSSIBLE AS THE ASSESSEE MAINTAINS SEPARATE ACCOUNTS, PROJECTWISE, DRAWING SEPARATE OP ERATING STATEMENTS, WHICH ARE THEN CONSOLIDATED TO ARRIVE AT THE OPERATING RESULTS FOR THE YEAR. WHILE THE ASSESSING OFFICER (A.O.) LEAVES THE PROFIT OF THE PROJECT SAI SWAR UNDISTURBED, ASSESSING IT AS SUCH, HE HAS, FOLLOWING HIS OWN METHOD, COMPUTED THE SAME FOR THE SAI STHAAN PROJECT AT RS. 6,79,52,123/-, THEREBY MAKING A HUGE ADDITION OF RS . 631.61 LACS. FOR THIS, HE WOULD TAKE US TO, FIRSTLY, THE COMPUTATION OF INCOME (PB-I/ PAGES 52-54 ) , AND THEN TO THE RELEVANT PART OF THE ASSESSMENT ORDER. THE BASIS OF THE AOS ACTION IS THAT THE OCCUPANCY CERTIFICATE (OC) FOR THIS PROJECT STANDS RECEIVED IN THIS YEAR. I.E. , 12.09.2008 , SIGNIFYING THE COMPLETION OF THE PROJECT AND, FURTHER, THAT THE POSSESSION HAD BEEN GIVEN IN MOST CASES. ACCORDINGLY, HE HAS PROCEEDED BY TREATING IT AS A FINAL YEAR FOR THIS P ROJECT. LIKEWISE, AS THE OC FOR SAI SWAAR STOOD RECEIVED ON 10.04.2007 , I.E., DURING THE PREVIOUS YEAR RELEVANT TO (AY) 2 008-09, HE HAS, TAKING ADVANTAGE OF THE FACT THAT THE ASSESSM ENT FOR THAT YEAR WAS U/S. 143(1), AND A PERIOD OF FOUR YEARS HAD THUS NOT LAPSED SINCE THE RELEVANT ASSESSMENT YEAR, SUBJECT THE RETURNED PROFIT ON THAT PROJECT FOR THAT YEAR (RS. 44.10 LACS) TO A SUBSTANTIAL INCREASE (RS. 530.28 LACS), ADVERTING TO THE ASSESSMENT ORDER U/S . 143(3) R.W.S. 147 OF THE ACT DATED 14.03.2013 FOR THAT YEAR (PB-II, PAGES 39 -43 ). HOW COULD HE, THEN, ASSESS THE INCOME ON THE SAID PROJECT AT THE SUM RETURNED (RS. 64.12 LAC S), AND WHICH FORMS THE SUBJECT MATTER OF THE ASSESSEES GROUND NO.2 ? 3 ITA NO.6395 /MUM/2012 (A.Y. 2009-10) SURESH G. WADHWA. VS. JT. CIT COMING BACK TO THE SAI STHAAN PROJECT, THE ASSESS EE, IN CONSISTENCE WITH ITS PAST PRACTICE, DISCLOSED PROFIT AT A PERCENTAGE OF THE W ORK COMPLETED DURING THE YEAR. THE SAME, IT MAY BE APPRECIATED, IS A COST PLUS METHOD, DUL Y RECOGNIZED UNDER ACCOUNTANCY, ADVERTING TO A TABLE APPEARING AT PAGES 21-22 OF THE ASSESSEES PAPER BOOK-1 (PB-I), AS UNDER: - TABLE A FINANCIAL YEAR OPENING WIP CLOSING WIP NET WIP OR SALES NET PROFIT OFFERED % OF PROFIT ON WIP OR SALES. 2005-06 - 12,929,686 12,929,686 957,785 7.41 2006-07 12,929.686 107,095,866 94,166,180 8,560,561 9.09 2007-08 107,095,866 205,065,624 97,969,758 21,971,316 22.43 2008-09 205,065,624 239,732,338 34,666,714 4,790,899 13.82 2009-10 239,732,338 252,107,245 12,374,907 1,127,817 9.11 2010-11 - 354,347,577 354,347,577 64,583,979 18.23 TOTAL PROFIT 101,992,357 28.78 NOTE: RS.35,43,47,577/- IN F.Y. 2010-2011, SHOWN A S SALES OF THE PROJECT. TOTAL SALE VALUE OF THE PROJECT RS.35,43,47,576/- TOTAL PROFIT OFFERED FOR TAXATION RS.10,19,92,357 /- % OF THE PROFIT ON SALES 28.78% THE VARIATION IN THE PROFIT PERCENTAGE FROM YEAR TO YEAR IS ON ACCOUNT OF MARKET PERCEPTION. AS AT EACH YEAR-END, A PART OF THE PROJECT IS UNSOL D, AND ALSO INCOMPLETE, ESTIMATES WITH REGARD TO THE POTENTIAL SALE AS WELL AS COSTS YET T O BE INCURRED TOWARD PROJECT COMPLETION, NEED TO BE MADE. THIS NECESSARILY INVOLVES REVISION OF PROFIT ESTIMATE, AND BEING MADE BONA FIDE , COULD NOT BE IMPUGNED ON THAT SCORE. THIS IS ON A CCOUNT OF THE VERY NATURE OF THE WORK, THE PROJECT WORK, SPREADING ACROSS YEARS, WHILE THE PROFIT ATTRIBUTABLE TO EACH YEAR HAS TO BE ESTIMATED AND SUBJECT TO TAX. HE WOULD THEN TAKE US TO THE PROFIT WORKING BY THE A.O., WHICH IS AT PAGES 15-19 OF THE ASSESSMENT ORDER. HE HAS P ROCEEDED, HE CONTINUED, ON THE BASIS THAT THE PROJECT IS COMPLETE, AND THIS WAS THE FINAL YEA R OF THE PROJECT. ACCORDINGLY, HE HAS BROUGHT THE ENTIRE INCOME ON THE PROJECT, SAVE THE FLATS UNSOLD, TO TAX FOR THE CURRENT YEAR. THERE IS NO CORRESPONDENCE, AS WOULD BE READILY SEE N, BETWEEN THE FIGURES OF THE OPENING AND CLOSING STOCK-IN-TRADE. THE OC DOES NOT SIGNIFY THE COMPLETION OF THE PROJECT, BUT ONLY 4 ITA NO.6395 /MUM/2012 (A.Y. 2009-10) SURESH G. WADHWA. VS. JT. CIT OF THE CIVIL CONSTRUCTION. THOUGH, THEREFORE, POSSE SSION, COULD BE GIVEN, AS IT INDEED HAS BEEN; THE CONSTRUCTION BEING INHABITABLE, WORK ON C OMMON AREAS, VIZ, STAIRWAYS, LIFTS, PARKING SPACE, ETC., AND CONSEQUENTIALLY EXPENDITU RE THEREON, COULD YET REMAIN. THIS IS ALSO EVIDENT FROM THE FACT THAT EXPENSES TO THE TUNE OF RS.123.75 LACS AND RS.387.51 LACS STAND INCURRED DURING THE IMMEDIATELY TWO SUCCEEDING YEAR S RESPECTIVELY AND, ACCORDINGLY, DEBITED TO THE PROFIT AND LOSS ACCOUNT FOR THOSE YE ARS, WITH THE LATTER, I.E., A.Y. 2011-12, BEING THE TERMINAL YEAR (FOR SAI STHAAN), IN WHIC H YEAR THE FINAL PROFIT ON THE PROJECT HAS BEEN OFFERED (PB-II PAGES 48-51 ). AS LONG AS THIS IS DONE, THE AO HAS NO JURISDICT ION TO IGNORE THE SAME, PARTICULARLY WHERE FOLLOWED CONSIS TENTLY, AS IN THE INSTANT CASE. IT IS QUITE OPEN TO THE AO TO QUESTION THE ASSESSEE WITH REGARD TO THE REASONABLENESS OF THE PROFIT PERCENTAGE ADOPTED/DISCLOSED FOR A PARTICULAR YEAR, AND WHERE NOT SATISFIED, TO MAKE ADJUSTMENT/S THERETO ON SOME DEFINITE, OBJECTIVE BA SIS. THIS IS AS IT MAY BE POSSIBLE THAT THE ASSESSEES WORKING IS DEFICIENT IN SOME RESPECTS. B UT THEN THAT DOES NOT AUTHORIZE THE AO TO COMPLETELY REJECT AND MAKE WHOLESALE CHANGES, AS DO NE BY HIM. WITH REFERENCE TO SECTION 145 AND THE ACCOUNTING STANDARDS ISSUED THEREUNDER, HE WOULD SUBMIT THAT WHAT THE LAW REQUIRES OF THE ASSESSEE IS A REASONABLE BASIS FOR RETURNING PROFITS, AND NOT THE BEST METHOD THAT IS POSSIBLE UNDER THE CIRCUMSTANCES. THE SAME HAS NO BASIS IN LAW. HE WOULD THEN TAKE US TO THE TABLE ABOVE-REFERRED (TABLE A HEREINAFT ER) DISCLOSING A PROFIT RATE OF 13.82% FOR THE CURRENT YEAR AS AGAINST OVERALL PROFIT OF 28.78 %. 2.2 ON BEING POINTED OUT TO THE LD. AR BY THE BENCH DURING HEARING THAT AS PER TABLE A: - NO EXPENDITURE HAS BEEN INCURRED IN THE LAST YEAR ; - HOW HAS THE PERCENTAGE OF PROFIT (18.23%) FOR THE LAST YEAR BEEN COMPUTED IN THE ABSENCE OF ANY INCREMENTAL WIP FOR THAT YEAR; - HOW COULD THE OVER ALL PROFIT BE AS 28.78%, WHILE THE PROFIT PERCENT FOR THE DIFFERENT YEARS VARIED BETWEEN 7.41% TO 22.43%; AND - THAT THE VALUATION OF THE WIP IS INCLUSIVE OF THE PROFIT ELEMENT, DISTORTING ITS %AGE WITH REFERENCE THERETO, HE CONCEDED TO SOME ERRORS THEREIN, SO THAT A REVIS ED (CORRECT) WORKING WOULD BE DULY SUBMITTED, WHILE CLAIMING THAT SOME EXPENDITURE HAD BEEN INCURRED IN THE LAST YEAR. ON 5 ITA NO.6395 /MUM/2012 (A.Y. 2009-10) SURESH G. WADHWA. VS. JT. CIT BEING FURTHER QUESTIONED IN RESPECT OF COST OF LAN D AND EXPENDITURE ON UTILITIES, WHICH CONSTITUTE THE BULK OF THE EXPENDITURE ON THE PROJE CT IN THE TERMINAL YEAR (F.Y. 2010-11) (PB- II/PG.48), I.E., AT RS.368.59 LACS, OUT OF THE TOTA L OF RS.387.51 LACS INCURRED FOR THAT YEAR, HE WOULD SUBMIT THAT THE LAND COST REPRESENTS 20 % OF THE TOTAL LAND COST, THE BALANCE HAVING BEEN EXPENSED IN TWO INSTALLMENTS OF 40% EACH DURIN G THE A.Y. 2007-08 AND 2008-09, BEING THE 2 ND AND 3 RD YEAR OF THE PROJECT RESPECTIVELY. THE COST OF THE UTILITIES, HOWEVER, REPRESENTS THAT ENTIRE COST OF UTILITIES ON THE PRO JECT, AND WHICH THOUGH STANDS INCURRED EARLIER, STANDS EXPENSED, AS PER REGULAR ACCOUNTING PRACTICE, ONLY IN THE FINAL (TERMINAL) YEAR. ON BEING FURTHER INQUIRED IF THE ASSESSMENT FOR A.Y . 2011-12 (F.Y. 2010-11) HAS BEEN MADE, AND IF SO, THE PROFIT RATE ADOPTED, HE WOULD CLARIF Y THAT THE RETURN FOR THAT YEAR WAS FILED ONLY ON 28.03.2012, AND ITS ASSESSMENT WAS PENDING. 2.3 THE LD. DR WAS EQUALLY VEHEMENT IN PLEADING THE REVENUES CASE. IT IS APPARENT FROM THE ASSESSEES WORKING THAT THERE IS NO BASIS TO IT ; THE ASSESSEE TAKING REFUGE IN THE VAGUE AND IMPRECISE WORDS MARKET PERCEPTION. IT IS IN T HIS VIEW OF THE MATTER THAT THE AO, FINDING, IN CONTRADICTION TO THE ASSESSEES CLAIM W ITH RESPECT TO RECEIPT OF OC, THAT TWO PROJECTS, SAI SWAR AND SAI STHAAN ON WHICH THE PROFIT HAD BEEN DISCLOSED IN THE MAIN FOR THE CURRENT YEAR, HAD IN FACT BEEN COMPLETED, WITH THE OC FOR SAI SWAR HAVING BEEN IN FACT RECEIVED DURING THE IMMEDIATELY PRECEDING YEAR, PRO CEEDED TO MAKE ADJUSTMENT TO THE RETURNED INCOME. NOT ONLY HAD, THUS, THE CONSTRUCTI ON BEEN COMPLETED, THE BULK OF IT STOOD SOLD OUT AND MONIES RECEIVED, AND EVEN POSSESSION - WHICH IS IN ANY CASE A MATTER BETWEEN THE ASSESSEE AND THE BUYER GIVEN. IN OTHER WORDS, ALL THE RISKS AND REWARDS OF THE PROJECT STOOD TRANSFERRED, SO THAT THE PROFIT THEREON COULD BE REASONABLY DETERMINED. THIS EXPLAINS HIS WORKING, SO THAT THE ONLY ESTIMATION REQUIRED W AS FOR THE MINOR WORK THAT MAY HAVE REMAINED TO BE DONE. IN FACT, AS IT APPEARS, AND EV EN AS ADMITTED BY THE LD. AR, THE EXPENDITURE BOOKED IN THE FOLLOWING YEARS ON THE SE TWO PROJECTS, IS ONLY BOOKED AS EXPENDITURE FOR THOSE YEARS, HAVING BEEN INCURRED E ARLIER. WHAT IS THE BASIS, ONE MAY ASK, FOR APPROPRIATING THE LAND COST AT 40%, 40% AND 20% FOR THE 2 ND , 3 RD AND 6 TH (FINAL) YEAR WHEN THE LAND IS COMMITTED TO THE PROJECT AT ITS INCEPTI ON AND, FURTHER, WORK ON THE PROJECT, ON 6 ITA NO.6395 /MUM/2012 (A.Y. 2009-10) SURESH G. WADHWA. VS. JT. CIT WHICH BASIS PROFITS ARE STATED TO HAVE BEEN OFFERED , UNDERTAKEN FROM YEAR TO YEAR, INCURRING COST, WHILE LAND COST IS FROZEN AND DEFINITE ? WHY, AGAIN, SHOULD THE COST OF UTILITIES, WHICH AGAIN STANDS INCURRED EARLIER, SHOULD BE DEFERRED F OR BEING EXPENSED ONLY TO THE LAST, TERMINAL YEAR? THE ASSESSEE IS NOT FOLLOWING ANY PR OPER METHOD, BUT DISCLOSING PROFIT ARBITRARILY, AND THUS THE PROFIT DISCLOSED IS NEITH ER TRUE NOR FAIR. AND, THUS, STOOD NOT ACCEPTED BY THE ASSESSING AUTHORITY. GOVERNMENT OF INDIA IS NOT A CHARITY BOX, TO WHICH THE ASSESSEE MAY CONTRIBUTE AT HIS FANCY! THE DISCLOSER OF PROFIT HAS TO BE IN TERMS OF AND SATISFY THE TEST OF THE REQUIREMENT OF LAW. THE AO IS UNDER SUCH CIRCUMSTANCES EMPOWERED, NAY, DUTY BOUND, TO ESTIMATE AND ARRIVE AT THE CORRECT P ROFITS, AND THIS IS WHAT HE SETS OUT TO DO, AND ACTUALLY DOES. HE WOULD THEN FURNISH A COPY OF THE GUIDANCE NOTE O N RECOGNITION OF REVENUE BY REAL ESTATE DEVELOPERS ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA, THE PREMIER AND REGULATORY BODY FOR THE PROFESSION OF A CCOUNTANCY IN INDIA. THE SAME EXPLAINS THE RELEVANT CONSIDERATIONS THAT HAVE A BEARING IN THE MATTER, AND THE CONDITIONS SUBJECT TO FULFILLMENT OF WHICH, AND THE EXTENT TO WHICH, REVE NUE ON REAL ESTATE PROJECTS WOULD BECOME LIABLE TO BE RECOGNIZED. THERE IS NO QUESTION OF CO NSISTENCY HERE, AS THE ASSESSEE IS NOT FOLLOWING ANY DEFINITE OR PROPER METHOD, SO THAT TH E PRINCIPLE OF CONSISTENCY, AS EXPLAINED IN THE CASE OF RADHASOAMI SATSANG VS. CIT [1992] 193 ITR 321 (SC) AND GOPAL PUROHIT VS. JT. CIT [2009] 20 DTR (MUM.) (TRIB.) 99, BEING RELIED UPON BY THE ASSESSEE, WOULD NOT APPLY. THE PRINCIPLE OF RES JUDICATA , IT IS TRITE, IS NOT APPLICABLE TO THE PROCEEDINGS UNDER THE ACT. RELIANCE WAS PLACED BY HIM ON NEW JHANGIR VAKIL MILLS CO. LTD. VS. CIT [1963] 49 ITR 137 (SC) TOWARD THE SAME. WITH REGARD TO THE ASSESSEES CONTENTION THAT THE MATTER IS ESSENTIALLY A TIMING DISPUTE, HE CONTINUED, THE SAME WOULD BE O F NO CONSEQUENCE, AS INCOME OF EACH YEAR IS TO BE BROUGHT TO TAX FOR THAT YEAR. IN FACT , MOST OF THE DISPUTES IN TAX MATTERS RELATE TO TIME OR THE CORRECT YEAR OF TAXABILITY (OR DEDUCTIO N). ALL ADJUSTMENTS TO THE CLOSING STOCK WOULD STAND TO BE OFFSET SUBSEQUENTLY, SO THAT THER E IS ONLY A TIMING DIFFERENCE, AS ALSO IN THE CASE OF DEPRECIATION. WHY, THE DIFFERENCE BETWEEN T HE REVENUE AND THE CAPITAL EXPENDITURE ITSELF, WOULD AGAIN BOIL DOWN TO ONE OF TIME, AS MO ST CAPITAL EXPENDITURE IS SUBJECT TO DEPRECIATION, SO THAT ULTIMATELY THE EXPENDITURE ST ANDS TO BE ALLOWED, ALBEIT IN THE 7 ITA NO.6395 /MUM/2012 (A.Y. 2009-10) SURESH G. WADHWA. VS. JT. CIT ASSESSMENT FOR THE SUBSEQUENT YEARS. THE ARGUMENT O NLY SEEKS TO BELITTLE AND DIVERT THE CONTROVERSY. 2.4 THE LD. AR, IN REJOINDER, WOULD FURNISH THE REV ISED FIGURES FOR FY 2010-11 OF TABLE- A, AS UNDER, FURTHER STATING THAT, THAT BEING THE T ERMINAL YEAR, THE PROFIT WOULD NECESSARILY BE THE BALANCING FIGURE OF SALES MINUS THE TOTAL COST (PB-III/PAGE 23) : TABLE B SAI STHAAN PERIOD 01.04.2010 TO 31.03.2011 OPENING WIP 25,21,07,244 ADD: REPAIRS (MATERIALS) LABOUR CHARGES 13,10,456 COST OF LAND 2,31,45,452 UTILITY 1,37,13,061 DEPRECIATION 5,16,600 OTHER EXPENSES 65,062 29,08,57,875 LESS: SALES & OTHER INCOME 35,54,56,844 NET PROFIT (6,45,98,969) HE WOULD FURTHER REITERATE THAT THE ISSUE ARISING H AS TWO LIMBS TO IT, AS: (A) THE VALIDITY OF THE ASSESSEES METHOD; AND (B) THE WORKING ADOPTED BY THE ASSESSEE IN PURSUANCE TO ITS METHOD. THE AO CANNOT DISTURB THE ASSESSEES REGULAR METHOD OF REPORTING PROFIT, I.E., THE COST PLUS METHOD, FALLING UNDER THE PERCENTAGE COMPLETIO N METHOD, THOUGH COULD REVISE OR ENHANCE THE PROFIT PERCENTAGE FOR A PARTICULAR YEAR WHERE HE FINDS THE SAME AS NOT REPRESENTING THE CORRECT PROFIT FOR THAT YEAR. HIS WORKING MAY BE SUPERIOR TO THAT OF THE ASSESSEE, BUT THAT WOULD NOT ENTITLE HIM TO DISTURB THE ASSESSEES WORKING, WHICH COULD ONLY BE ON FINDING THE ASSESSEES WORKING AS NOT YIELDIN G TRUE AND CORRECT PROFITS OR OPERATING RESULTS. IN ANY EVENT, HE CANNOT, IN THE NAME OF TH E REVISED WORKING, BRING THE PROFIT FOR THE PRECEDING AS WELL AS SUCCEEDING YEARS TO TAX. IT NE EDS TO BE NOTED THAT EVEN IN THE CASE OF CHAMPION CONSTRUCTION CO. V. FIRST INCOME-TAX OFFIC ER [1983] 5 ITD 495, THE DECISION 8 ITA NO.6395 /MUM/2012 (A.Y. 2009-10) SURESH G. WADHWA. VS. JT. CIT FOLLOWED BY THE AO, THE TRIBUNAL PER ITS DECISION O NLY HELD JUST THAT, FINDING THE DISCLOSED PROFIT TO BE LOWER, DIRECTED FOR ADOPTION THEREOF A T 15% (PAGES 1-10 OF THE COMPILATION ON CASE LAWS). 2.5 HE, ON BEING QUESTIONED BY THE BENCH AS TO THE BASIS OF THE PROFIT DISCLOSED, WHICH EXHIBITS WIDE VARIATION, FOR NO APPARENT REASON, FA LLING TO RS.47.91 LACS FOR THE CURRENT YEAR, WHEREAT THE PROJECT HAS ONLY ADVANCED FURTHER, BOT H IN TERMS OF PERCENTAGE COMPLETION AND PERCENTAGE SOLD, AS AGAINST RS.219.71 LACS FOR THE IMMEDIATELY PRECEDING YEAR (A.Y. 2008- 09) AND, IN FACT, FURTHER PLUMMETED TO RS.11.28 LA CS FOR THE FOLLOWING YEAR (A.Y. 2010-11), WHEREAT IN FACT HARDLY ANY WORK REMAINED TO BE COMP LETED ON THE PROJECT, DISCLOSING A HUGE PROFIT FOR THE TERMINAL YEAR, WHEREAT AGAIN HARDLY ANY WORK HAD BEEN EXECUTED, SO THAT THE CHARGE OF ARBITRARINESS IN REPORTING PROFIT WAS NOT WITHOUT SUBSTANCE , WOULD RELY ON THE ADEQUACY OF THE PROFIT AS FINALLY DISCLOSED, STATIN G THAT IT IS NOT A CASE OF AN ENTERPRISE DISCLOSING A PROFIT PERCENTAGE IN THE RANGE OF 8 % TO 10 %, BUT A HEALTHY PROFIT OF AS MUCH AS 28%, FURNISHING A STATEMENT OF THE DISCLOSED PRO FIT ON THE PROJECT FOR THE YEAR, AND THAT ON THE ENTIRE PROJECT, ALSO TABULATING THE CORRESPONDI NG COSTS, REPRODUCED AS UNDER: (TABLE C) FINANCIAL YEAR WIP DURING THE YEAR (EXCLUDING PROFIT AND INDIRECT INCOME) NET PROFIT OFFERED % OF PROFIT ON WIP 2008-09 2,99,43,123 47,90,890 16.00 TOTAL 25,35,93,504 10,19,92,356 40.22 % OF F. Y. 2008-09 TO TOTAL 11.81 4.70 FINDINGS 3. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. 3.1 THE FIRST THING THAT NEEDS TO BE DETERMINED BY US IS THE METHOD OF ACCOUNTING BEING FOLLOWED BY THE ASSESSEE FROM YEAR TO YEAR, WHICH H E CLAIMS TO BE THE PERCENTAGE COMPLETION METHOD, FURTHER ADOPTING THE COST PLUS M ODULE, BOTH OF WHICH ARE RECOGNIZED IN ACCOUNTANCY AS WELL AS UNDER LAW. 9 ITA NO.6395 /MUM/2012 (A.Y. 2009-10) SURESH G. WADHWA. VS. JT. CIT TOWARD THIS, WE MAY FIRSTLY CLARIFY THAT THE PERCE NTAGE COMPLETION METHOD (FOR CLOSING ITS ACCOUNTS AND DISCLOSING THE OPERATING R ESULTS), IS IN COMPLETE HARMONY WITH BOTH THE ACCOUNTING STANDARD (AS)-9 ISSUED BY THE INSTIT UTE OF CHARTERED ACCOUNTANTS OF INDIA AS WELL AS SECTION 145 OF THE ACT. THIS IS AS ACCRUAL OR OTHERWISE OF INCOME, OR EVEN EXPENDITURE FOR THAT MATTER, IS ESSENTIALLY A MATTE R OR QUESTION OF FACT. THE SAME DEPENDS UPON EVALUATION OF A VARIETY OF FACTORS INCIDENT TH EREON, VIZ., WHETHER THE UNDERLYING SERVICES HAVE BEEN RENDERED OR GIVEN DELIVERY OF, S O THAT THE RISKS AND REWARDS INCIDENT THERETO STAND PARTED WITH; WHETHER ANY UNCERTAINTY EXISTS AS TO THE ULTIMATE REALIZATION OF THE INCOME, ETC. IN THE CASE OF PROJECTS SPREAD OVER YE ARS, SUCH FACTORS GET ACCENTUATED. CONSERVATISM AND PRUDENCE, WHICH ARE FUNDAMENTAL AC COUNTING ASSUMPTIONS, WOULD SUGGEST PROVIDING FOR ALL KNOWN LIABILITIES, WHILE NOT RECO GNIZING INCOME IN CASE ANY UNCERTAINTY IN ITS RESPECT EXISTS. THIS, OF COURSE, CANNOT BE USE D OR EMPLOYED AS A RUSE OR BOGEY, AND HAS TO HAVE ITS BASIS IN FACT/S. FURTHER, IN CASE OF A MUL TI-YEAR PROJECT, ENTAILING ESTIMATES OVER THE FUTURE, WHICH IS UNCERTAIN, REASONABLE AND INFORMED PROVISIONS QUA ESCALATION AND CONTINGENCIES MAY BE REQUIRED. THE PROVISIONING IS SUBJECT TO REVIEW AS AT EACH YEAR-END, WHICH IS INFORMATION BASED, REPRESENTING THE BEST J UDGMENT IN LIGHT OF THE INFORMATION AVAILABLE. AGAIN, EMPHASIZING AND UNDERLINING THE C RITICALITY OF FACTS. COMING TO THE FACTS OF THE CASE, THE ASSESSEE HAS D ISCLOSED AND RETURNED INCOME OVER THE YEARS WITH THE PROGRESSION OF THE PROJECT/S UND ER EXECUTION. AS SUCH, WITHOUT DOUBT, TO THAT EXTENT HE FOLLOWS THE PERCENTAGE COMPLETION ME THOD OF ACCOUNTING. HOWEVER, TO SAY THAT HE FURTHER ADOPTS COST PLUS METHOD IS COMPLETE LY INCORRECT. COSTS, WHICH REPRESENT THE INPUTS, THOUGH TOWARD EARNING INCOME, BY ITSELF DO NOT GENERATE INCOME, WHICH IS TO NECESSARILY FLOW FROM A THIRD PERSON, WHO ACCEPTS T HE OUTPUT/S. FURTHER, IT IS ONLY IN ARRANGEMENTS WHERE THE INCOME IS CONTRACTUALLY LINK ED TO INCURRING COSTS, SO THAT A CHARGE IS PROVIDED ON THE BASIS OF THE COST/S INCURRED, THAT IT COULD BE SAID THAT THE COST INCURRED FORMS THE BASIS OF THE INCOME, AND THAT, THEREFORE, THE C OST PLUS METHOD BECOMES APPLICABLE. IT IS AS UNDER THESE CIRCUMSTANCES ONCE THE COST STANDS INCU RRED, OR CERTIFIED TO BE SO, FOR WHICH A PERIODIC REVIEW IS CONTRACTUALLY ENVISAGED, INCOME IN THE PRESCRIBED RATE INURES. THIS METHOD IS GENERALLY FOLLOWED IN CONSTRUCTION OR OTH ER LARGE CIVIL-MECHANICAL PROJECTS, 10 ITA NO.6395 /MUM/2012 (A.Y. 2009-10) SURESH G. WADHWA. VS. JT. CIT SPREADING ACROSS A NUMBER OF YEARS, OVER WHICH COST S CANNOT BE ANTICIPATED ACCURATELY, SO AS TO INSULATE OR LARGELY SO THE CONTRACTOR, WHO HAS I N ANY CASE, OR HAS RIGHT TO BE, REMUNERATED FOR HIS LABOURS, AND WHICH IS DEFINED AS A RATE OF COST (OR SPECIFIED COSTS), INCURRED. A VARIANT OF THIS MODEL IS THE COST ESCALATION CLAUSE IN MULT I-YEAR PROJECTS. ADDITIONAL CHARGES ARE PROVIDED FOR BEING RAISED ON THE COST, OR SUCH OF I T OVER WHICH THE CONTRACTOR HAS LITTLE CONTROL, INCREASING BEYOND A SPECIFIED LIMIT FROM T HAT AS ENVISAGED WHILE FINALIZING THE CONTRACT. THE PRESENT CASE IS OF A BUILDER, AS IS G ENERALLY THE CASE IN THE CONSTRUCTION BUSINESS, WHO BUILDS FOR THE PUBLIC AT LARGE (OR A PARTICULAR SEGMENT OF IT), SELLING HIS WARES THROUGH THE OPEN MARKET ROUTE. COSTS ARE INCURRED B Y PROCURING GOODS AND SERVICES FROM THE OPEN MARKET, AND THE PROJECT, I.E., THE PROPERTY CO NSTRUCTED, SOLD ON THE BASIS OF THE PREVAILING AND PROJECTED MARKET RATES, ON THE STREN GTH OF HIS CREDITABILITY AND GOODWILL BUILT OVER THE YEARS. THERE IS NO SEMBLANCE OF REGULATED COSTS OR OF THE SALE VALUE BEING DEFINED OR FIXED AS A PERCENTAGE OF THE COST. WHY, THE ASSE SSEES INCOME FOR THE SAME PROJECT HAS VARIED FROM YEAR TO YEAR, WHEN RECKONED IN TERMS OF COST? THAT IS, THE CLAIM OF COST PLUS METHOD, BESIDES BEING INCORRECT, IS ALSO INCONSISTE NT WITH THE % AGE COMPLETION METHOD. IN FACT, THIS, I.E., FOLLOWING THE PERCENTAGE COMPL ETION METHOD, IS AN ADMITTED POSITION, WITH THE ASSESSEE, RATHER, BEFORE US, ALS O CONCEDING TO THE A.O.S RIGHT TO ADJUSTMENT/CORRECTION WHERE THE ASSESSEE IS FOUND T O HAVE NOT CORRECTLY REPORTED THE PROFITS IN TERMS OF THE SAID METHOD OF ACCOUNTING BEING ADM ITTEDLY FOLLOWED BY HIM. IN OTHER WORDS, THE FACT OF DISCLOSING THE PROFIT ON THE PER CENTAGE COMPLETION BASIS, I.E., AS THE PROJECT PROGRESSES, DOES NOT ABSOLVE THE ASSESSEE F ROM REPORTING CORRECT PROFITS, IMPLYING TRUE AND FAIR OPERATING RESULTS, NOR THE DUTY OF TH E ASSESSING AUTHORITY TO EXAMINE THE SAME, AND TO EFFECT SUITABLE ADJUSTMENTS WHERE NOT SATISF IED WITH THE DISCLOSED RESULTS, MITIGATED. IN FACT, THIS AGAIN IS AN ADMITTED POSITION AS EMER GES FROM THE LENGTHY ARGUMENTS ADVANCED BY BOTH THE SIDES, WHICH STAND ENUMERATED/NARRATED AT PARAS 2.1 TO 2.5 ABOVE. THE AREA OF DISPUTE, THUS, CENTERS ON THE EXTENT OF SUCH ADJUST MENT, WHICH THE A.O. OUGHT TO HAVE, OR, RATHER, COULD HAVE, IN THE GIVEN FACTS AND CIRCUMST ANCES OF THE CASE, MADE. 11 ITA NO.6395 /MUM/2012 (A.Y. 2009-10) SURESH G. WADHWA. VS. JT. CIT 3.2 HOWEVER, BEFORE WE PROCEED TO DETERMINE THE SAM E, WE WOULD LIKE TO CLARIFY THE BASIS OF OUR DECISION IN FINDING THAT THE PROFIT AS DISCLOSED FOR SAI STHAAN FOR THE CURRENT YEAR AS BEING NOT THE CORRECT OPERATING RESULT, I.E ., AS NOT CONSISTENT WITH THE METHOD OF ACCOUNTING BEING OSTENSIBLY FOLLOWED. THE ASSESSEE, FIRSTLY, HAS COMPLETELY FAILED TO SHOW THE BASIS OF THE DISCLOSING OPERATING RESULTS ON IT S PROJECTS, SEEKING REFUGE, AS CORRECTLY STATED BY THE LD. DR DURING HEARING, IN THE VAGUE E XPRESSION MARKET PERCEPTION. EVEN IN THE PERCENTAGE COMPLETION METHOD, THE ASSESSEE-DEVE LOPER IS NOT OBLIGED TO RECOGNIZE INCOME UNTIL THE POINT IN TIME THERE IS TRANSFER OF ALL SIGNIFICANT RISKS AND REWARDS OF OWNERSHIP, I.E., AS ARE ASSOCIATED WITH THE OWNERSH IP OF THE PROPERTY. THE PRICE RISK IS CONSIDERED AS ONE OF THE MOST SIGNIFICANT RISKS IN THE REAL ESTATE BUSINESS. TRANSFER OF LEGAL TITLE OR POSSESSION IS GENERALLY CONSIDERED AS A TR ANSFER OF ALL SIGNIFICANT RISKS AND REWARDS INCIDENT TO THE PROPERTY. SIMILAR WOULD BE A CASE W HERE LEGALLY ENFORCEABLE AGREEMENT/S FOR SALE WITH THE BUYERS IS ENTERED INTO, IN WHICH CASE THERE WOULD BE A TRANSFER OF BENEFICIAL OWNERSHIP, WARRANTING RECOGNITION OF INCOME, EVEN I F THERE HAS BEEN NO PASSING OF LEGAL TITLE OR POSSESSION. THE QUALIFYING CRITERIA IS, THUS, TH AT THE BUYER HAS THE RIGHT TO SELL OR TRANSFER HIS INTEREST IN THE PROPERTY WITHOUT ANY CONDITION OR SUBJECT ONLY TO SUCH CONDITIONS WHICH DO NOT MATERIALLY EFFECT HIS RIGHTS IN THE PROPERTY . IT IS ONLY UNDER THESE PREMISES THAT THE ASSESSEE HAS BEEN DISCLOSING THE PROFITS ON HIS DIF FERENT PROJECTS FROM YEAR TO YEAR. CLEARLY, THERE IS NO QUESTION OF ANY INCOME UNLESS THE SALE OR TRANSFER HAS TAKEN PLACE, SO THAT THE BUILDER-SELLER RETAINS NO EFFECTIVE CON TROL OF THE REAL ESTATE, I.E., TO THE DEGREE AS USUALLY ASSOCIATED WITH THE OWNERSHIP, WHICH IS THU S BENEFICIALLY TRANSFERRED. THIS ESSENTIAL CONDITION FOR RECOGNIZING INCOME BEING SATISFIED, T HE NEXT STEP WOULD BE TO DETERMINE THE EXTENT TO WHICH IT COULD BE SO. WE HAVE ALREADY EXP LAINED OF THE FUNDAMENTAL ACCOUNTING ASSUMPTIONS OF CONSERVATISM AND PRUDENCE, WHICH ARE TO NECESSARILY INFORM THE ACCOUNTING ESTIMATES AND STATEMENTS AND, IN FACT, STAND ALSO S TATUTORILY RECOGNIZED PER THE ACCOUNTING STANDARDS ISSUED BY THE CBDT U/S. 145 OF THE ACT. T HE COST OF THE PROJECT REMAINING TO BE EXECUTED IS TO BE ESTIMATED BASED ON THE BEST JUDGM ENT IN LIGHT OF THE INFORMATION AVAILABLE. THE REVENUE THAT THE SELLER STANDS TO REALIZE STAND S ALREADY CRYSTALLIZED, OR THE MANNER IN WHICH THE SAME IS TO BE WORKED OUT, DETERMINED. THE ESTIMATED PROFIT ON THE PROJECT IS THEN 12 ITA NO.6395 /MUM/2012 (A.Y. 2009-10) SURESH G. WADHWA. VS. JT. CIT SCALED DOWN TO THE PROPORTION IN WHICH IT IS COMPLE TE, I.E., AS AT THE YEAR-END, FOR WHICH CERTIFICATION IS OBTAINED FROM THE TECHNICAL PEOPLE , VIZ. ARCHITECT, ENGINEERS, ETC., AS A PROJECT COULD BE COMPLETE IN DIFFERENT PERCENTAGES QUA ITS DIFFERENT ASPECTS, VIZ. CIVIL, ELECTRICAL, ETC . IN FACT, REVENUE TO THE PROPORTIONATE EXTENT WOULD ALSO HAVE BEEN REALIZED, AS AGREEMENTS OF SALE GENERALLY PROVIDE FOR RECOVERY OF SALE CONSIDE RATION WITH THE PROGRESSION OF THE PROJECT. EVEN IF HIGHER PROPORTION STANDS REALIZED, THE MANA GEMENT COULD DEFER RECOGNITION OF EXCESS AS INCOME IN VIEW OF THE NON-PERFORMANCE OF THE WORK FOR THE DIFFERENCE. EXCEPT FOR SUCH PARAMETERS, WHICH ARE LARGELY POLICY DRIVEN, O R BY THE PECULIAR FACTS OF THE CASE, ALL THE VARIABLES IMPINGING ON THE PROFIT ESTIMATION ARE KN OWN; RATHER, THE PROFIT ARISING ONLY AS A RESULT OF DETERMINATION THEREOF. AGAIN, WITHOUT DOU BT, NO PROFIT CAN BE BOOKED QUA THE PROJECT OR PART THEREOF WHICH IS UNSOLD. AS SUCH, I F THE PROJECT IS (SAY) 50% COMPLETE, AND SOLD TO THE EXTENT OF 75% ONLY, THE PROFIT ON THE PROJECT CANNOT EXCEED 37.5% (50% X 75%) OF THE TOTAL PROFIT ON THE PROJECT. THE ASSESSEE IN THE INSTANT CASE HAS, HOWEVER, NOT EXPLAINED HIS PROFIT DISCLOSURE FOR ANY OF THE YEARS IN TERMS OF SUCH VARIABLES, AND WHICH HAS LED THE REVENUE TO HOLD THE SAME AS BEING WITHOUT BASIS AND ARBITRARY. WE CANNOT BUT AGREE. ALL THAT CAN BE SAID, THOUGH, IN HIS FAVOUR, IS THAT HE HAS DISCLOSED INCOME WITH THE PROGRESSION OF THE PROJECT AND, THUS, BROADLY SPEAKING, ADOPTED THE PERCENTAGE COMPLETION METHOD. IN FACT, HE HAS ALSO NOT FOLLOWED THE MORE POPULAR VAR IANT OF THE SAID METHOD. IN THIS, THE REVENUE IS RECOGNIZED STRAIGHTAWAY ON THE PERCENTAG E COMPLETION (AS AT THE YEAR-END) AS CERTIFIED BY THE ARCHITECT/VALUER. FOR EXAMPLE, IF A PROJECT IS 40% COMPLETE, 40% OF THE PROJECT SALE VALUE IS ACCOUNTED FOR AS INCOME, BRIN GING EFFECTIVELY THE ADDITIONAL INCOME FOR THE YEAR TO THE FORE INASMUCH AS A SIMILAR EXERCISE WOULD ALSO HAVE BEEN MADE AS AT THE END OF THE IMMEDIATELY PRECEDING YEAR. OF COURSE, CONSI DERATION AS TO WHETHER THE ENTIRE PROJECT IS SOLD OR NOT IS MADE, SO THAT IF THE PROJECT IS U NSOLD TO ANY EXTENT, NO INCOME RELATABLE THERETO IS TAKEN INTO ACCOUNT, AND COST IN ITS RESP ECT IS CARRIED OVER AS WIP. ACCORDINGLY, IF IN THE EXAMPLE AFORE-STATED, 90% OF THE PROJECT ONL Y IS SOLD OUT, ONLY 40% THEREOF IS TAKEN TO INCOME ACCOUNT, SETTING IT OFF AGAINST 90% OF THE C OSTS INCURRED, CARRYING OVER THE BALANCE 10% AS STOCK. THIS METHOD CAN BE SAID TO BE TECHNIC ALLY INFERIOR TO THAT DESCRIBED IN THE EARLIER PART OF THIS PARA INASMUCH AS IT DOES NOT T AKE INTO ACCOUNT ANY ANTICIPATED INCREASE/S 13 ITA NO.6395 /MUM/2012 (A.Y. 2009-10) SURESH G. WADHWA. VS. JT. CIT IN THE INPUT COSTS. THIS IS AS THE SAME WOULD REMAI N TO BE CONSIDERED TO THE EXTENT THEY PERTAIN TO THE PROJECT YET TO BE COMPLETED, I.E., T HE BALANCE 60%, WHILE, AS CLARIFIED EARLIER, ACCOUNTING NORMS WOULD REQUIRE ALL ANTICIPATED LOSS ES/COSTS TO BE PROVIDED FOR, WHICH WOULD TO BE CO-OPTED ONLY WHERE AN ASSESSMENT OF THE REMA INING PROJECT COST IS MADE AS AT EACH YEAR-END, EXERCISING JUDGMENT IN LIGHT OF THE INFOR MATION AVAILABLE. A PROVISION FOR CONTINGENCIES, THOUGH, WOULD MAKE UP FOR SOME OF TH E SAID DEFICIENCY IN THE LATTER VARIANT OF THE PERCENTAGE COMPLETION METHOD. IN FACT, A REASON ABLE PART OF PROFIT WOULD IN ANY CASE WARRANT BEING SET ASIDE FOR SUCH CONTINGENCIES, WIT H THE PROJECT SPREADING ACROSS YEARS, OF COURSE BASED ON A FACTUAL ASSESSMENT OF THE DIFFERE NT FACTORS OF PRODUCTION. THE SAME IN FACT IS DIRECTLY LINKED TO THE PERCENTAGE COMPLETION OF THE PROJECT AS UNCERTAINTY GETS REDUCED AS THE PROJECT NEARS COMPLETION. 3.3 WE, NEXT, CONSIDER THE ASSESSEES CHARGE OF THE AOS METHOD FOR COMPUTING INCOME AS HAVING IN FACT BROUGHT THE INCOME OF THE PRECEDI NG AS WELL AS THE SUCCEEDING YEARS TO TAX. WE HAVE ALREADY EXPLAINED THAT THE ASSESSEES METHO D OF ACCOUNTING CANNOT BE CONSIDERED AS A COST PLUS METHOD. AS SUCH, EVEN AS IT MAY WORK OUT THE PROFIT AS A PERCENTAGE OF INCREMENTAL WIP, I.E., THE INCREMENTAL COSTS INCURR ED DURING THE RELEVANT YEAR, WHICH IS CONCEPTUALLY NOT INCORRECT INASMUCH AS THE PROFIT O R LOSS, AS ACCRUED UP TO THE END OF THE IMMEDIATELY PRECEDING YEAR, STANDS PRESUMABLY DULY ACCOUNTED FOR, SO THAT IT IS ONLY THE PROFIT/LOSS AS ACCRUED OR ARISING DURING THE CURREN T YEAR, FOR WHICH THE ACTIVITY OR WORK, AS MEASURED BY THE COST INCURRED OR SUFFERED TOWARD TH E SAME, HAS BEEN UNDERTAKEN, AND WHICH, THEREFORE, HAS A PROXIMATE RELATIONSHIP WITH THE SA ID PROFIT AND LOSS, AS A CASE MAY BE. HOWEVER, AS EXPLAINED PER THE PRECEDING PARAGRAPH, WHILE DISCUSSING THE MANNER IN WHICH THE SAME IS TO BE ARRIVED AT AND, IN FACT, EVEN SUB SCRIBED TO BY THE ASSESSEE ITSELF (FOR WHICH REFERENCE MAY BE MADE TO THE SUBMISSION BY THE LD. AR BEFORE US AS DELINEATED AT PARA 2.1 (AT PG.3 ABOVE), THE OPERATING RESULT IN CASE OF A PROJECT SPANNING ACROSS YEARS IS TO BE MADE BY MAKING FRESH ESTIMATE/S OF THE COST/S YET TO BE INCURRED. NO INCOME CAN BE ANTICIPATED IN RESPECT OF THE PART OF THE PROJECT YET TO BE SOLD ( I.E., AS AT THE RELEVANT YEAR- END), SO THAT IT WOULD BE, FROM THE STAND POINT OF REPORTING PROFIT ON THE PROJECT, BE IMMATERIAL IF THE SALE 14 ITA NO.6395 /MUM/2012 (A.Y. 2009-10) SURESH G. WADHWA. VS. JT. CIT PRICE, AS IS GENERALLY THE CASE, HAS INCREASED OVER THE PERIOD SINCE WHICH THE PROJECT STANDS COMMENCED. OF COURSE, IF SOME SALES ARE GENERATED D URING THE YEAR, INCOME THEREON - TO THE PROPORTIONATE EXTENT - HAS TO BE ACCOUNTED FOR. THI S IS DESPITE THE FACT THAT THE PROJECT HAD BEEN ALREADY COMPLETED TO AN EXTENT PRIOR TO THE BE GINNING OF THE CURRENT YEAR. THIS WOULD ONCE AGAIN EMPHASIZE AS TO WHY, THOUGH NO DOUBT HAV ING A PROXIMATE AND DIRECT RELATIONSHIP WITH THE COSTS INCURRED DURING THE YEA R, SO AS TO BE COMPUTED WITH REFERENCE THERETO, THE PROFIT AS DISCLOSED CANNOT BE SOLELY A TTRIBUTED TO THE COST INCURRED DURING THE YEAR. WHAT, FOR EXAMPLE, IF THERE IS A SUDDEN DEPRE SSION IN THE REAL ESTATE MARKET. IF THE MANAGEMENT CONSIDERS THAT IT CANNOT HOLD ON TO THE PROJECT, THE SUBSEQUENT SALES WOULD HAVE TO BE NECESSARILY ESTIMATED AT THE GOING MARKET RAT E. THE SAME, IF LOWER THAN THE COST AS ANTICIPATED, WOULD IMPACT THE VALUATION OF THE WIP. THIS WOULD DEPRESS THE OVERALL PROFIT, WHICH THOUGH, AS EVIDENT, HAS NO DIRECT RELATION WI TH THE COSTS INCURRED DURING THE YEAR, I.E., THE INCREMENTAL WIP FOR THE YEAR. COMING BACK TO THE AOS WORKING, HE HAS PROCEEDED JUST IN THE MANNER HE OUGHT TO HAVE OR SUBSTANTIALLY SO. WHETHER THE OC SIGNIFIES COMPLETION OF THE PROJECT OR NOT IS LARGELY IRRELEVANT TO THE QUESTION BEFORE US, INASMUCH AS T RANSFER HAS ALREADY TAKEN PLACE, SO THAT THE FACT THAT INCOME HAS TO BE RECOGNIZED TO THE PROPOR TIONATE EXTENT IS NOT IN DISPUTE. THAT IS, THE QUESTION BEFORE US IS ONLY ONE OF PROFIT DETERM INATION. IN FACT, THE ASSESSEE HAS BEEN DISCLOSING PROFIT ON THE PROJECT SAI STHAAN SINCE A.Y. 2006-07. NOTHING, THEREFORE, TURNS ON THE OC, THOUGH WITHOUT DOUBT IT WOULD SHOW THAT THE PROJECT IS ALMOST COMPLETE, AND NOT ONLY THE CIVIL CONSTRUCTION. AGAIN, THAT POSSESSION HAS BEEN GIVEN IN MOST CASES FURTHER REINFORCES AND CONFIRMS THE FACT OF SUBSTANTIAL COM PLETION OF THE PROJECT AND INHABITABLE STATUS OF THE RESIDENTIAL UNITS. THE POINT IS: HOW IS THE PROFIT FOR THE YEAR TO BE COMPUTED, GIVEN THAT THE PROJECT IS ALMOST COMPLETE ? WITHOUT DOUBT, IF COSTS FORMING PART OF THE PROJE CT COST ARE YET TO BE INCURRED, THE PROJECT CANNOT BE SAID TO HAVE BEEN COMPLETED AND, THEREFORE, PROFIT THEREON COULD ONLY TO BE BOOKED TO THE PROPO RTIONATE EXTENT. AS SUCH, IF THE PROJECT IS (SAY) 90% COMPLETE, PROFIT CAN ONLY BE SAID TO HAVE ACCRUED, AS INDICATED ABOVE, TO THAT EXTENT EVEN IF SALE VALUE TO THE EXTENT OF 100% STA NDS RECEIVED. THE ESTIMATE OF 90 % WOULD 15 ITA NO.6395 /MUM/2012 (A.Y. 2009-10) SURESH G. WADHWA. VS. JT. CIT BE ON THE TOTAL PROJECT PROFIT, FOR WHICH A REASONA BLE ESTIMATE OF THE COSTS YET TO BE INCURRED WOULD BE REQUIRED TO BE MADE. COMING TO THE SPECIFICS, AN ADDITIONAL EXPENDITURE FOR RS.123.75 LACS STANDS INCURRED IN F.Y. 2009-10, AND TO THE EXTENT OF RS.18.92 LAKH S IN F.Y. 2010-11. WE SAY ADDITIONAL EXPENDITURE, AS EXPENDITURE ON LAND PURCHASE AND U TILITIES HAS ALREADY BEEN INCURRED. ONCE A COST STANDS INCURRED AND EXPENDITURE IN ITS RESPE CT CRYSTALLIZED, THE SAME HAS TO BE NECESSARILY TAKEN INTO ACCOUNT IN ESTIMATING THE PR OFIT ON THE PROJECT. IN FACT, HAVING BEEN INCURRED, THERE IS NO SCOPE FOR ANY VARIATION OR FO R ANY ESCALATION THEREIN, WHICH WOULD NORMALLY ATTEND AN EXPENDITURE THAT IS YET TO BE IN CURRED. ACCORDINGLY, ACCOUNTING FOR THE SAME IN SOME YEARS, AS DONE BY THE ASSESSEE, IS, TO OUR MIND OF LITTLE MERIT AND, IN ANY CASE, TO NO CONSEQUENCE, EVEN AS ASSESSEE WAS NOT ABLE TO EXPLAIN ITS RATIONALE DURING THE COURSE OF HEARING. THE ASSESSEE HAS WORKED OUT THE PROFIT ON THE ENTIRE PROJECT AT RS.1019.92 LAKHS. THE SAME YIELDS A RATIO OF 40.22% ON COST AND 28.68% ON SALES . THE PROPORTION ON SALE, IF AT ALL, IS THE ONLY VALID BASIS, EVEN AS, AS EXPLAI NED EARLIER, THE PROFIT IS TO BE ARRIVED THAT NOT ON THE BASIS OF PROFIT RATE, EITHER WITH REFERE NCE TO COST OR SALES, BUT AS ACTUALLY ACCRUED, I.E., AS A DIFFERENCE BETWEEN THE REVENUE/S ACCRUED AND THE COSTS TOWARD THE SAME, INCLUDING A PROVISION FOR THAT FOR WHICH THE BILLS ARE YET TO BE RECEIVED AND ACCOUNTS NOT FINALIZED . 3.4 AS SUCH, ALL THAT THEREFORE NEEDS TO BE DONE IS TO PROVIDE FOR THE COSTS YET TO BE INCURRED (AS AT THE END OF THE YEAR), WHICH COULD B E FAIRLY ASSESSED, HAVING BEEN INCURRED, OR CONTRACTS IN THEIR RESPECT ENTERED INTO UP TO THE D ATE OF FINALIZATION OF THE ACCOUNTS FOR THE CURRENT YEAR. THE INCOME COULD BE PROPORTIONATELY B OOKED, I.E., EXCLUDING THE PROJECT NOT YET SOLD. AS SUCH, IN PRINCIPLE, WE FIND NOTHING WRONG IN THE COMPUTATION ALGORITHM FOLLOWED BY THE AO. FURTHER, AS AFORE-STATED, A PROVISION FOR C ONTINGENCIES, SAY @ 5% TO 10% FOR COSTS YET TO BE INCURRED, COULD BE PROVIDED. AGAIN, SOME FURTHER PROVISIONING MAY BE REQUIRED IF THE MANAGEMENT CONSIDERS THAT THE REMAINING PROJECT MAY NOT BE SOLD IN NEAR FUTURE, I.E., THERE EXISTS SIGNIFICANT UNCERTAINTY AS TO ITS ACTU AL SALE, WHICH THOUGH WOULD ONLY BE SO IN CASE OF A DEPRESSED MARKET. SO, HOWEVER, CONSIDERIN G THE CONSPECTUS OF THE CASE, WE DO NOT CONSIDER THAT IT WOULD BE PROPER TO SUGGEST OR DIRE CT SO. THIS IS FOR THE SIMPLE REASON THAT 16 ITA NO.6395 /MUM/2012 (A.Y. 2009-10) SURESH G. WADHWA. VS. JT. CIT FOLLOWING SUCH A COURSE PRESUMES, AS ALSO AFORE-STA TED, THE ASSESSEE TO HAVE FOLLOWED SUCH A COURSE FOR THE PRECEDING YEARS AS WELL, WHICH IS NO T THE CASE. THAT IS, IT BEING NOT SO AS A FACT, ADOPTING THE SAME, IN ISOLATION FOR THE CURRE NT YEAR, WOULD RESULT IN THE PROFITS, EVEN AS CONTENDED BY THE ASSESSEE, THAT WERE LEGITIMATELY A ND RIGHTLY ASSESSABLE FOR THE EARLIER YEARS, BEING BROUGHT TO TAX FOR THE CURRENT YEAR. WE MAY EXPLAIN OUR DECISION FURTHER, WHICH WE ARE IMPELLED TO IN VIEW OF THE CONSIDERABLE APPLICA TION EXHIBITED BY THE REVENUE IN THE MATTER, WHICH WE COMMEND. THE VERY SAME EXERCISE TO WARD PROFIT ESTIMATION, I.E., AS SUGGESTED FOR THE CURRENT YEAR, AND AS SUBSTANTIALL Y FOLLOWED BY THE A.O., COULD VALIDLY, AND WITH EQUAL JUSTIFICATION, BE MADE FOR THE PRECEDING YEARS AS WELL, BEING CONSISTENT WITH THE TENENTS OF INCOME RECOGNITION NORMS. THE ONLY CONST RAINT THIS WOULD BE SUBJECT TO IS THAT THE PROJECT IS COMPLETED TO NOT LESS THAN 25% AS AT THE END OF THE RELEVANT YEAR. THE ARRANGEMENT FOR PURCHASES OF MATERIALS ARE GENERALLY MADE SUFFI CIENTLY IN ADVANCE, SO THAT THE COSTS YET TO BE INCURRED CAN BE FAIRLY ESTIMATED AND, IN ANY CAS E, PROVIDED FOR WITH A MEASURE OF ANTICIPATED INCREASE THEREIN, I.E., AS INDICATED BY THE PAST, EMPIRICAL DATA. THE REVENUE, THEREFORE, IF IT DESIRES TO BRING THE TRUE AND CORR ECT PROFIT FOR EACH YEAR TO TAX WOULD NECESSARILY HAVE TO FOLLOW THE SAID PROCEDURE FOR E ACH YEAR. NOT DOING SO, AND APPLYING THE CHANGED METHOD IN ONE YEAR WOULD BRING THE INCOME F OR EARLIER YEARS TO TAX FOR THE CURRENT YEAR, AND WHICH CANNOT BE COUNTENANCED, AND THE ASS ESSEES OBJECTION IS UPHELD. OF COURSE, IT WOULD BE A DIFFERENT MATTER IF THE CURRENT YEAR WAS A TERMINAL YEAR, WHICH IS CLEARLY NOT THE CASE, AS EVIDENT FROM THE FACT THAT THE COSTS, I.E. , OTHER THAN QUA LAND AND UTILITIES, STAND INCURRED IN THE SUCCEEDING YEAR, IF NOT ALSO IN THE YEAR FOLLOWING IT. THE TERMINAL YEAR, I.E., THE YEAR OF COMPLETION OF THE PROJECT, HAS NECESSAR ILY TO BEAR THE ENTIRE PROJECT COST AS WELL AS ALL THE REVENUES ACCRUED ON THE PROJECT TO DATE. THE DECISION IN RESPECT OF THE TERMINAL YEAR THOUGH WOULD HAVE TO BE BASED ON FACTS, RATHER THAN BY DEFERRING IT BY MERELY POSTPONING THE INCURRING OR BOOKING OF SOME MINOR C OSTS. IT IS ONLY TOWARD THE PROJECT UNSOLD THAT REVENUES THEREON WOULD NOT BE BOOKED. A CCORDINGLY, TO THIS EXTENT, THE ENTIRE SHORTFALL IN THE ACCOUNTING WOULD NECESSARILY FIND REFLECTION AND RESOLUTION IN THIS, I.E., THE TERMINAL, YEAR. AS SUCH, WE CANNOT UNDER THE GIVEN FACTS AND CIRCUMSTANCES, SUBSCRIBE TO THE AOS METHOD AS WELL. THE ASSESSEE HAS FURNISHED A R EVISED CHART (TABLE C) BY ELIMINATING 17 ITA NO.6395 /MUM/2012 (A.Y. 2009-10) SURESH G. WADHWA. VS. JT. CIT THE PROFIT INCLUDED IN THE VALUATION OF THE CLOSING STOCK, SO THAT IT IS VALUED AT COST, WHICH SHOWS THE PROFIT ON THE PROJECT AT 40.22% OF THE TO TAL COST. IN VIEW OF THE FACT THAT SOME PERCENTAGE OF THE TOTAL COST REMAINS TO BE INCURRED AS AT THE YEAR-END, WHICH THOUGH COULD BE FAIRLY ASSESSED, IN OUR VIEW, ADOPTING THE SAID PER CENTAGE (OF COURSE UPON VERIFYING THE SAME TO BE CORRECT) TO THE INCREMENTAL COST FOR THE YEAR WOULD BE A FAIR ASSESSMENT OF THE PROFIT ARISING FOR THE CURRENT YEAR. AS THE ASSESSEE HAS B OOKED THE COST OF LAND AND UTILITIES IN SOME YEARS, IN PREFERENCE TO OTHERS, WITHOUT FURNISHING ANY EXPLANATION FOR THE SAME, MUCH LESS A REASONABLE ONE, IN OUR VIEW, THE COST OF LAND AND U TILITIES, I.E., THE BASIC COSTS, SINCE INCURRED, BE ALLOTTED TO EACH YEAR IN PROPORTION TO THE OTHER COSTS INCURRED IN THAT YEAR. THAT IS, A RATIO OF THE BASIC COST (TOTAL) TO THE OTHER (TOTAL) COST S (FOR THE ENTIRE PROJECT) BE WORKED OUT, WHICH PERCENTAGE WOULD THEN BE APPLIED FOR EACH YEAR, INC LUDING THE CURRENT YEAR, IN PROPORTION TO THE OTHER COST FOR THAT YEAR. DECISION 4.1 THE A.O. IS ACCORDINGLY DIRECTED TO VERIFY THE AFORE-MENTIONED RATIO OF 40.22% AS WORKED OUT BY THE ASSESSEE, AND APPLY THE SAID PERC ENTAGE, I.E., 40%, ASSUMING THE SAME AS CORRECT, TO THE INCREMENTAL WIP FOR THE CURRENT YEA R. THE INCREMENTAL WIP SHALL INCLUDE, IRRESPECTIVE OF THE YEAR OF INCURRING, THE PROPORTI ON OF BASIC COST, AS REFERRED TO ABOVE, ATTRIBUTABLE TO THE CURRENT YEAR, AS EXPLAINED ABOV E. WE MAY HASTEN TO ADD THAT BY DIRECTING SO, WE ARE NOT IN ANY MANNER ADVOCATING OR ENDORSIN G THE SAID METHOD FOR CONSISTENT APPLICATION, BUT ONLY PROVIDING FOR A REASONABLE BA SIS FOR ALLOCATION OF INCOME ON THE PROJECT SAI STHAAN FOR THE CURRENT YEAR IN THE GIVEN FACT S AND CIRCUMSTANCES OF THE CASE. NEEDLESS TO ADD, THE INCOME AS FINALLY ASSESSED ON THIS PROJ ECT SHALL BE GIVEN DUE CREDIT OF WHILE DETERMINING THE PROFIT ON THE PROJECT FOR THE TERMI NAL YEAR. THE ASSESSEES GROUND NO. 1 IS ANSWERED ACCORDINGLY, AND THE ASSESSEE GETS PART RE LIEF. 4.2 WITH REGARD TO THE ASSESSEES SECOND GROUND, WH ICH IS IN RESPECT OF THE PROJECT SAI SWAR, THE A.O. HAS ACCEPTED THE PROFIT AS DISCLOSE D BY THE ASSESSEE. UNDER THE CIRCUMSTANCES, WE ARE UNABLE TO FATHOM THE GRIEVANC E CAUSED TO THE ASSESSEE, WHICH ONLY WOULD ENTITLE IT TO APPEAL AGAINST HIS ORDER, SEEKI NG REDRESSAL OF THE SAID GRIEVANCE. THE A.O. 18 ITA NO.6395 /MUM/2012 (A.Y. 2009-10) SURESH G. WADHWA. VS. JT. CIT HAS DISTURBED THE PROFIT DISCLOSED BY THE ASSESSEE ON ITS PROJECTS ON THE BASIS OF RECEIPT OF OCCUPANCY CERTIFICATE, WHICH THE ASSESSEE CLAIMS TO BE NOT DETERMINATIVE OF THE FACT OF THE COMPLETION OF THE PROJECT. THE MATTER IS ESSENTIALL Y ONE OF FACT. FULL FACTS BEING NOT ON, OR BROUGHT ON, RECORD, WE HAVE, IN VIEW OF THE FACT TH AT THE COSTS ON THE PROJECT STAND INCURRED SUBSEQUENTLY, CONSIDERED THE MATTER AS INDETERMINAT E, SO THAT THE SAID YEAR COULD NOT BE CONSIDERED AS THE TERMINAL YEAR. THE ADJUSTMENT TO THE REPORTED PROFIT, AS MADE BY THE A.O., THOUGH APPROVED IN PRINCIPLE, HAS BEEN FOUND AS NEV ERTHELESS NOT LEADING TO THE CORRECT PROFIT FOR THE RELEVANT YEAR EVEN IN TERMS OF THE M ETHOD FOLLOWED, IN VIEW OF IT BEING DONE SELECTIVELY, RESULTING IN DISTORTION OF PROFITS ACR OSS YEARS. CONSEQUENTLY, THE ASSESSEES METHOD, SUBJECT TO SOME CORRECTIVES, HAS BEEN DIREC TED FOR APPLICATION. NO ADJUSTMENT CAN POSSIBLY BE MADE WHERE THE A.O. HAS HIMSELF NOT MAD E ANY ADJUSTMENT TO THE RETURNED PROFIT ON THE PROJECT. THE FINAL ADJUSTMENT WOULD, IN ANY CASE, HAVE TO BE MADE IN THE TERMINAL YEAR, WHICH COULD BE DIFFERENT FOR EACH PROJECT. TH E TERMINAL YEAR FOR THE PROJECT SAI SWAR BEING F.Y. 2009-10, NO ADJUSTMENT, ACCORDINGLY, IS CALLED FOR. WE DECIDE ACCORDINGLY, AND THE ASSESSEES GROUND GETS DISMISSED IN RESULT. 4.3 BEFORE PARTING WITH THE ORDER, WE MAY CLARIFY H AVING PERUSED THE CASE LAWS PER THE COMPILATION THEREOF ADDUCED BY THE LD. AR, EVEN AS THE MATTER IS PRINCIPALLY FACTUAL, AND DECIDED BY ISSUING DEFINITE FINDINGS OF FACT. THIS EXPLAINS THE SPECIFIC NON-REFERENCE TO THESE DECISIONS IN THE ORDER. FURTHER, IT WOULD BE NOTED THAT OUR ORDER IS IN FACT CONSISTENT WITH THE DECISION IN THE CASE OF CHAMPION CONSTRUCTION CO. (SUPRA), REFERRED TO DURING HEARING; WE HAVING DIRECTED APPLICATION OF THE RATE OF PROFIT ( VIS--VIS THE COST) FOR THE ONLY PROJECT FOR WHICH ADJUSTMENT HAS BEEN MADE BY THE A.O. BY ADOPT ING THE SAME RATIO AS REFLECTED PER THE ASSESSEES ACCOUNTS, CONSISTENT WITH THE METHOD BEI NG FOLLOWED BY HIM. 19 ITA NO.6395 /MUM/2012 (A.Y. 2009-10) SURESH G. WADHWA. VS. JT. CIT RESULT 5. IN THE RESULT, THE ASSESSEES APPEAL IS PARTLY A LLOWED. 4 05 #$40 / 3 60 / 0 78 ORDER PRONOUNCED IN THE OPEN COURT ON AUGUST 02, 20 13 SD/- SD/- (B.R. MITTAL) (SANJAY ARORA) / JUDICIAL MEMBER ! / ACCOUNTANT MEMBER MUMBAI; 9# DATED : 02.08.2013 AKHILESH , PS & ROSHANI , SR. PS 3 3 3 3 / // / ,0: ,0: ,0: ,0: ; :%0 ; :%0 ; :%0 ; :%0 / COPY OF THE ORDER FORWARDED TO : 1. (+ / THE APPELLANT 2. ,-(+ / THE RESPONDENT 3. < ( ) / THE CIT(A) 4. < / CIT CONCERNED 5. :=> ,0# , , / DR, ITAT, MUMBAI 6. >?$ @ / GUARD FILE 3# 3# 3# 3# / BY ORDER, A AA A / 7 7 7 7 (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI