Income Tax Appellate Tribunal - Kolkata
Apollo Construction Co., Hooghly vs Assessee on 23 August, 2012
आयकर अपीलीय अधीकरण, Ûयायपीठ - "ऐ" कोलकाता,
IN THE INCOME TAX APPELLATE TRIBUNAL "A" BENCH: KOLKATA
(सम¢)Before ौी महावीर िसंह, Ûयायीक सदःय एवं/and ौी संजय अरोड़ा,अरोड़ा लेखा सदःय)
[Before Shri Mahavir Singh, JM & Shri Sanjay Arora, AM]
आयकर अपील संÉया / I.T.A Nos. 1201 & 1202/Kol/2011
िनधॉरण वषॅ/Assessment Years : 2005-06 & 2006-07
Apollo Construction Co. Vs. Income-tax Officer, Ward-1(1), Hooghly
(PAN: AAJFA2617C)
(अपीलाथȸ/Appellant) (ू×यथȸ/Respondent)
For the Appellant: Shri Somnath Ghosh
For the Respondent: Shri A. K. Pramanik
Date of hearing: 23.08.2012
Date of pronouncement: 23.08.2012
आदे श/ORDER
Immediately upon conclusion of hearing of this appeal on 23rd August,
2012, the bench passed the following order:
"23rd August, 2012
Appeals of Assessee are allowed. Order pronounced in open court.
Detailed order will follow.
Per Mahavir Singh, JM ( महावीर िसंह, Ûयायीक सदःय)
सदःय Both these appeals by assessee are arising out of separate orders of CIT(A)-XXXVI, Kolkata in Appeal Nos. 42/CIT(A)-XXXVI/Kol/Wd.1(1),Hgl./07-08 and 291/CIT(A)- XXXVI/Kol/37/Wd.1(1),Hgl/08-09/303 dated 22.08.2011. Assessments were framed by ITO, Ward-1(1), Hooghly u/s. 143(3) of the Income Tax Act, 1961 (hereinafter referred to as "the Act") for Assessment Years 2005-06 and 2006-07 vide his separate orders dated 28.12.2007 and 31.12.2008 respectively.
2. The only issue in these two appeals of assessee is against the application of method as per accounting standard - 7 by invoking the provisions of section 145(3) of the Act and thereby estimating the income.
3. The brief facts leading to the above issue are that that the assessee firm was engaged in building construction as a promoter and developer. It disclosed total income at Rs.1,60,212/- for Assessment Year 2005-06 and Rs.28,590/- for Assessment Year 2006-07 after deducting partners' remuneration and interest on capital. Assessing Officer observed that assessee had 2 ITA 1201 & 1202/K/2011 Apollo Construction Co.
A.Y. 05-06 & 06-07 not maintained its accounts as per recognized method "Accounting Standard 7", prescribed by the Institute of Chartered Accountant of India. Apart from that Assessing Officer observed that assessee failed to file details of 'year wise project value' and 'percentage of completion'. Assessing Officer, therefore, rejected the books of account of assessee u/s. 145(3) of the Act and estimated gross income from the projects at 15% of the gross sales/receipts, equivalent to Rs.4,83,445/- for Assessment Year 2005-06 and Rs. 2,70,444/- for Assessment Year 2006-07 after allowing deduction for partners' remuneration and interest on capital, computed the net income at Rs.2,37,570/- for Assessment Year 2005-06 and Rs.30,720/- for Assessment Year 2006-07. Aggrieved assessee preferred appeals before CIT(A), who upheld the action of AO and for the sake of brevity, we reproduce the relevant portion of his order in respect of AY 2005-06, as under :
"I have duly considered the submission of the Ld. AR of the appellant. For a running building project, maintenance of books of accounts as per Accounting Standard-7 (AS-7) is a well recognized method and accepted in various courts of law. Since the value of the closing stock of a running project cannot be exactly arrived at, the 'percentage completion method' prescribed in AS-7 by the ICAI, is an accepted norm and widely followed. The Special Bench of ITAT, Mumbai lhas recently decided the case of ACIT Vs. Dharti Estate, (2011) 129 ITD 1 (Mum) ™, based on the principle laid down in AS-7. The appellant had not submitted year-
wise project value and year-wise percentage of completion of the project, in spite of specific requisition by the AO during the assessment proceedings. In absence of that and in absence of maintenance of accounts as per AS-7, year-wise profit of a running project cannot be arrived at. Under the facts and circumstances, I do not find any inconformity in AO's decision in rejecting the books of the appellant and to estimate income @ 15% of the gross sales/receipts. Therefore, the addition made by the AO is sustained."
Being aggrieved, assessee is in appeals before us.
4. The Ld. Counsel for the assessee, Sri Somnath Ghosh submitted that the requirement of s. 44AA of the Income Tax Act 1961 was met with fully and completely as all such actual data as required by the AO was culled out from the books of accounts maintained by the assessee. However, the AO failed to mention in which respect the method of accounting regularly employed by the assessee and/or the books maintained by it fell short of the requirements prescribed u/s. 44AA of the Income Tax Act 1961. Moreover, the non furnishing of the speculative data cannot have any relevance to the requirement of the statute as per the provisions of s. 44AA of the Act. Assessing Officer has not brought out any evidence on record to prove that the method of accounting followed by assessee were not maintained in such a manner as to make it in any way impossible to determine the correct profits to be computed therefrom and as such the invocation of the provision of s. 145 of the Act is redundant in the circumstances. He also submitted that the conception of "Accounting Standard 7" is applicable to construction contracts and not otherwise. He further submitted that the 3 ITA 1201 & 1202/K/2011 Apollo Construction Co.
A.Y. 05-06 & 06-07 assessee maintains its accounts as per mercantile system (Accounting Standard 9) as per guidelines issued by the ICAI meant for real estate developers. In support of this contention, he relied on the decision of the co-ordinate Bench in the case of A.C.I.T vs. North City Developers (ITA No. 1307(Kol)/10, Assessment Year 2007-08 dated 14.07.11). He also submitted that revenue has all along accepted the method of accounting since its inception, except the impugned assessment years and in support of this submission assessee furnished copy of order of ITAT in ITA No.501/Kol/2009 dated 14.08.2009 for AY 2004-05 and copy of assessment order for AY 2007-08 which are attached with the paper book. He lastly submitted that the actions of the lower authorities may be reversed.
5. On the other hand, the Ld. DR Shri A. K. Pramanik relied on the orders of the authorities below and stated that the CIT(A) has acted within the four corners of law in upholding the order of the AO.
6. We have heard the rival submissions of the parties and gone through the facts and circumstances of the case. We find that, it is admitted fact that the assessee is a promoter and developer in civil construction. The returns of income for the assessment years under dispute were accompanied by the statutory audit report by an auditor under the provisions of s. 44AB of Act. We also find that cash book, ledger and bank book were maintained by the assessee, which are supported by bills and vouchers. The only allegation of AO is that the assessee is required to maintain its books of accounts under the method of "Accounting Standard 7" and on such basis, he desired furnishing of particulars being "year wise project value from the year in which the plan was sanctioned". We find that the AO desired this particular in order to apply "Accounting Standard 7" in the case of the assessee. The assessee had disputed such action on the premise that the method of accounting followed is mercantile system and is recognized under the provision of s. 145 of the Act. All that the AO is required to consider under the law is whether income, profits and gains can properly be deduced from the method of accounting followed and books maintained by the assessee. We also find that it is not the case of the revenue that the accounts maintained by assessee were not correct and complete. We also find that under section 145 revenue always insist on the change in the method of accounting following by assessee over the years provided, the impugned method of accounting results in underestimation of profits/net income. In the instant case no such allegation of that kind was ever made by the AO. The Hon'ble Supreme Court in the case of CIT V. Realest Builders & Services Ltd. (2008) 307 ITR 202 (SC) has held as under:
"In cases where the department wants to tax an assessee on the ground of the liability arising in a particular year, it should always ascertain the method of accounting 4 ITA 1201 & 1202/K/2011 Apollo Construction Co.
A.Y. 05-06 & 06-07 followed by the assessee in the past and whether change in method of accounting was warranted on the ground that profit is being underestimated under the impugned method of accounting. If the Assessing Officer comes to the conclusion that there is underestimation of profits, he must give facts and figures in that regard and demonstrate to the Court that the impugned method of acocunting adopted by the assessee results in underestimation of profits and is , therefore, rejected. Otherwise, the presumption would be that the entire exercise is revenue neutral. In the instant case, that exercise had never been undertaken. The Assessing Officer was required to demonstrate both the methods, one adopted by the assessee and the other by the department."
We also find that it is not the case of the revenue that the method of accounting followed by assessee did not disclose correct profits or underestimation of profits. Therefore, we are of the considered view that the actions of the lower authaorities insisting upon change the method of accounting to Accounting Standard 7 was uncalled for. We also find that the method of accounting followed by the assessee under the mercantile system of accounting for the AY 2004-05 as well as in AY 2007-08 were duly accepted by the Revenue authorities. We further draw support from the order of this Tribunal in the case of North City Developers (supra), wherein Tribunal in para 28 and 28.1 considered the issue of applicability of accounting standard AS-7 issued by ICAI as under:
"28. Before we conclude this appeal, we observe that A.O. has also rejected the book results of the assessee on the ground that the method of accounting followed by the assessee is not in conformity with AS-7 issued by ICAI. According to this method, the assessee shall be obliged to recognize revenue on year to year basis by following the partial completion of project method. As rightly stated by ld. A/R, AS-7 is applicable only for construction contracts, i.e. enterprises carrying on business as contractors and not to any other enterprise. In this case, we observe that the assessee was not acting as a mere contractor, but it was engaged in the business of developing housing project on the land belonging to it. Further, the A.O. himself has admitted that the assessee's nature of business was "real estate development" and in para-3 of the assessment order, the A.O. has stated that the disclosed business of the assessee was in the nature of development of housing projects. Therefore, the contention of AO that assessee's method of accounting was not in conformity with AS-7 is incorrect in view of the fact that the assessee was not in the business of executing construction contracts, rather it was engaged in the business of developing housing projects.
28.1. The second objection of A.O. was that benefit under Instruction No. 4 of 2009 of C,B.D.T. could only be availed by an assessee who followed partial completion of project method and obtained completion certificate within the time prescribed, i.e. in the same accounting year ending 31/3/2007. We observe that the said Instruction No. 4 indicates that an assessee could follow either partial completion project method or project completion method. The said Instruction nowhere indicates/provides that the assessees were obliged to follow partial completion of project method as provided in AS-7. In our opinion, therefore, the said Instruction was issued by C.B.D.T, in the background where it was an admitted position that the assessees could follow either partial completion of contract method or completed contract method in respect of business of developing a housing project. By this Instruction, the doubts were clarified only with regard to the eligibility of the assessees to claim deduction u/s. 80-IB(10) of the Act where the assessees followed partial completion of project method. As per tax audit report, the system of accounting and the method of revenue recognition regularly followed by the assessee are only of completion of project. In 5 ITA 1201 & 1202/K/2011 Apollo Construction Co.
A.Y. 05-06 & 06-07 that view of the matter, the objection of the A.O. about violation of AS-7 vis-à-vis Instruction No. 4 of 2009 of C.B,D.T. is not found to be at par with the activities of the assessee and method of accounting regularly followed by it. Hence the action of the A.O. to reject book results of the assessee even on the ground that the method of accounting followed by the assessee is not in conformity with AS-7 is not justified. We, therefore, uphold the order of Ld. C,I,T,(A) by dismissing the appeal of the department."
We further draw support from the order of this Tribunal in assessee's own case in ITA No.501/Kol/2009 for AY 2004-05 dated 14.08.2009, wherein Tribunal in para 5 has held as under:
"5. We have heard the rival submissions and perused the material available on record. We find force in the submissions of the assessee that the assessee maintained books of accounts comprising cash book, bank book, general ledger and purchase and sale register as required under commercial book keeping system and the entries therein were supported by bills and vouchers. We also find that the said books of account were duly audited by an auditor under the statutory requirement of section 44AB of the I. T. Act. It is also undisputed fact that books of account were duly audited by an auditor under the statutory requirement of section 44AB of the I. T. Act. The AO as well as the Ld. CIT(A) did not ever point out any discrepancy in the said method of accounting and also did not reject the books of accounts maintained by the assessee. Since the addition made by the AO on estimate basis without placing reliance on any material available on record has been confirmed by the Ld. CIT(A) on the same lines, we are of the considered opinion that the addition made by the AO and sustained by the Ld. CIT(A) is not sustainable and the same is hereby deleted. The grounds of appeal of the assessee is, therefore, allowed."
In view of the facts in the instant case and following the aforesaid decisions cited supra, we are of the view that the method of accounting consistently followed by the assessee, being an approved method cannot be changed without any finding of understatement of profit. Even otherwise on merits also, the applicability of net profit @ 15% in civil construction work is not viable hence, the profit rate disclosed by assessee is quite reasonable and we uphold the same. Accordingly, these appeals of assessee are allowed.
7. In the result, appeals of assessee are allowed.
8. Order pronounced in open court.
Sd/- Sd/-
संजय अरोड़ा,
अरोड़ा लेखा सदःय महावीर िसंह, Ûयायीक सदःय
(Sanjay Arora) (Mahavir Singh)
Accountant Member Judicial Member
तारȣख)
तारȣख) Dated: 23rd August, 2012
(तारȣख
वǐरƵ िनǔज सिचव Jd.(Sr.P.S.)
6 ITA 1201 & 1202/K/2011 Apollo Construction Co.
A.Y. 05-06 & 06-07
आदे श कȧ ूितिलǒप अमेǒषतः- Copy of the order forwarded to:
1. अपीलाथȸ/APPELLANT - Apollo Construction Co., C/o Advocate Shri Somnath Ghosh, Seven Brothers Lodge, P.O. Buroshibtala, Chinsurah, Dist. Hooghly, Pin 712 105 2 ू×यथȸ/ Respondent -ITO, Ward-1(1), Hooghly.
3. आयकर किमशनर (अपील)/ The CIT(A), Kolkata
4. आयकर किमशनर/CIT, Kolkata.
5. वभािगय ूितनीधी / DR, Kolkata Benches, Kolkata स×याǒपत ूित/True Copy, आदे शानुसार/ By order, सहायक पंजीकार/Asstt. Registrar.