Income Tax Appellate Tribunal - Bangalore
Concorde Shelters Pvt. Ltd.,, ... vs Assessee on 7 June, 2006
IN THE INCOME TAX APPELLATE TRIBUNAL
"B" BENCH : BANGALORE
BEFORE SHRI K.P.T. THANGAL, VICE PRESIDENT
AND SHRI AKBER BASHA, ACCOUNTANT MEMBER
ITA Nos.456 to 459/Bang/2009
Assessment years : 2002-03 to 2004-05 & 2006-07
M/s. Concorde Developers,
No.46/A, 1st Main,
3rd Phase, J.P. Nagar,
Bangalore - 560 078. : APPELLANT
Vs.
The Assistant Commissioner of
Income-tax,
Central Circle 2(3),
Bangalore. : RESPONDENT
ITA Nos.494 to 496/Bang/2009
Assessment years : 2004-05 to 2006-07
The Assistant Commissioner of
Income-tax,
Central Circle 2(3),
Bangalore. : APPELLANT
Vs.
M/s. Concorde Developers,
No.46/A, 1st Main,
3rd Phase, J.P. Nagar,
Bangalore - 560 078. : RESPONDENT
ITA No.456 to 459/B/09 etc.
Page 2 of 26
ITA Nos.247, 248/Bang/2009
Assessment years : 2003-04, 2004-05 & 2004-05
M/s. Concorde Shelters Pvt. Ltd.,
No. 42, Rajini Towers,
27th Cross, 7th "B" Main,
4th Block, Jayanagar,
Bangalore - 560 076. : APPELLANT
Vs.
The Assistant Commissioner of
Income-tax,
Central Circle 2(3),
Bangalore. : RESPONDENT
ITA No.854/Bang/2009
Assessment year : 2004-05
(By Revenue)
Assessees by : Shri Sachin Kumar
Revenue by : Smt. Preethi Garg
ORDER
Per K.P.T. Thangal, Vice President ITA Nos. 456 to 459/B/09 (Assessee's appeals - M/s. Concorde Developers) These appeals are by the assessee and pertain to assessment years 2002-03, 2003-04, 2004-05 & 2006-07. In all these appeals, common grounds are urged by the assessee. The only effective ground urged is against the order of the CIT(Appeals) for treating 15% of the sales as net profit for all the years.
2. In these cases, there was a search and seizure action u/s. 132 on 13.4.2005. Consequent to search notice u/s. 153A was issued on 13.1.06.
ITA No.456 to 459/B/09 etc. Page 3 of 26 In response to the above notice, the assessee filed a letter dated 7.6.2006 stating that the return already filed on 29.10.02, 29.10.03 and 24.9.2004 declaring total income at Rs.98,891 for the A.Y. 2002-03, Rs.5,75,041 for A.Y. 2003-04 and Rs.4,27,560 for A.Y. 2004-05 respectively may be treated as returns filed in response to notice u/s. 153A. Coming to the A.Y. 2006-07, the assessee declared Rs.26,14,385 on 31.6.07. Notice u/s. 143(2) and questionnaire was issued to the assessee on 29.11.07 along with notice u/s. 142(1) and the case was posted for hearing on 4.12.07. The assessee requested time upto 7.12.07 for furnishing the reply. The case was adjourned to 7.12.07 but no information was filed by the assessee on the said date. The Assessing Officer noticed for the year under consideration assessee has shown sales of Rs.26,92,009 and claimed expenditure in respect of sold area at Rs.29,52,650 and the difference between sales and expenditure worked out to (-) Rs.2,60,650.
3. The AO noticed the assessee is in real estate business and purchased lands over a period of time and developed the land into residential layouts. Plots were being sold on a monthly scheme. From the system of accounting followed by the assessee, it was noticed, assessee was arriving at the value of closing work-in-progress of the saleable area developed by it after adding all the expenses incurred during the year to the opening work-in-progress. It was further noticed assessee was offering the sales in respect of plots registered during the year as income in the profit & loss account and reducing the closing work-in-progress. For all these years by adoption of this method, the assessee was showing losses. For the A.Y. 2002-03, the assessee has shown sales of Rs.81,63,650 and ITA No.456 to 459/B/09 etc. Page 4 of 26 claimed expenditure in respect of sold areas at Rs.86,55,105 working out a loss of Rs.4,91,455. Coming to the A.Y. 2003-04, the sales was to the tune of Rs.66,28,240, expenditure was Rs.65,47,369 the difference in sale and expenditure was only Rs.80,871. Coming to the A.Y. 2004-05, the sales was Rs.80,68,500 and expenditure claimed for sold area was Rs.88,73,303 and the consequential loss was Rs.8,04,803. Coming to the A.Y. 2006-07, the loss claimed was Rs.2,60,650. The AO held in this line of business it cannot be expected that the assessee sold the sites without keeping a profit margin. He further noted, assessee was also continuously adding the land to its project each year and also taking new advances each year. In such circumstances, he held it is not clear from the facts furnished in the return of income whether, that portion of land where the project taken up originally is completed or not, and what is the exact amount of expenditure allocable to that part of the area which were sold. In the absence of any meticulous details, he estimated profit on the sale at 30% for every year and consequently reduced the expenditure in respect of the sold area and the difference was added to the assessee's income.
4. The estimated additions made was Rs.29,40,550, Rs.19,07,601 for A.Y. 2003-04, Rs.32,25,353 for A.Y. 2002-03, 2003-04 & 2004-05 respectively and Rs.10,68,250 for A.Y. 2006-07.
5. Aggrieved by the above order, the assessee approached the first appellate authority. The CIT(Appeals) vide para 6 (items 9.1 to 9.7) of his order records brief submissions of the assessee, as under:-
ITA No.456 to 459/B/09 etc. Page 5 of 26 "9. Estimation of income:
9.1 The assessee is a Firm which is into the business of real estate. The assessee had filed the Return of Income on 31.10.2006 declaring total loss of Rs.26,14,385/- for the A.Y. 2006-07 relevant to the P.Y. 2005-06. 9.2 It is submitted that there cannot be a preferred method / thumb rule percentage which can be adopted to arrive at the WIP or the income of the assessee in this type of business.
The approach adopted by the assessee must help the authority to ascertain and arrive at the value of the work-in-progress and deduce profit from the business.
9.3 Premier Accounting body in India, The Institute of Chartered Accountants of India (ICAI) also has recognized the fact that there cannot be a particular method that can be prescribed for the this type of business. Kind attention is invited to paragraphs 1 under the heading Scope of AS 2 -
Valuation of Inventories (page nos. 1 & 2 of Paper book). Thus, it has excluded valuation of WIP in the case of construction contract from the purview of Accounting Standard (AS - 2). Method of arriving WIP and recognition of Income is provided in page no. 30 of Paper book.
9.4 The mandate of the Income Tax Act is that where income chargeable under the head "Profit and gains of business or profession" is returned on the basis of accounts maintained by the assessee by employing a method of accounting regularly, such income is to be computed in accordance with the method regularly employed by the assessee, unless a situation emerges that profits disclosed by the assessee as a result of his own method of accounting are so unreasonable and patently unacceptable; leading to a situation of rejection of books of accounts and consequent estimation of income and revaluation and re-computation of work-in-progress would not get any justification on factual basis. In the present case, the AO has not arrived at any finding to substantiate that the method of accounting/valuation of WIP adopted by the assessee is unreasonable leading of rejection of financial results. Therefore there is no justification for the AO to estimate the income of the assessee.
9.5 Further the assessee submits that the state of affairs as regards maintenance of accounts, valuation of WIP being the same as in earlier years and the same having been accepted by the department, there was no justification to tamper with the method of valuation of WIP/recognition of revenue in the current year.
ITA No.456 to 459/B/09 etc. Page 6 of 26 9.6 In the absence of any finding by the AO that the expenses incurred on any account appears to be unreasonable or excessive, the additions made merely on suspicion and whimsical is not justified. Reliance is placed on the decisions in CIT Vs. Gotan Lime Khanij Udyog 256 ITR 243 (Raj) and CIT Vs. Geotech Construction Corp 133 CTR 468 (Ker).
9.7 In any event it is the profit rate adopted by the AO @ 30% of sales which is arbitrary and unscientific. He has not given comparable case in any line of activity to support his conclusion. The rate is liable to reduced substantially."
6. The CIT(Appeals) after considering the issue vide para 9 of his order allowed the claim of the assessee in part for all the years i.e. A.Ys. 2002- 03, 2003-04, 2004-05 and 2006-07 observing as under:-
" I consider the net profit of 30% of sales is on higher side. Therefore, I restrict the same to 15%. The A.O. is directed to compute the relief accordingly."
For the A.Y. 2005-06 there was no addition made by the AO. Aggrieved by the order of CIT(A) retaining estimation 15% addition of income, assessee is in appeal before the Tribunal.
7. Ld. Representative for the assessee submitted for the A.Y. 2007-08, the assessee declared a profit of 9.75% and 7.63% for the A.Y. 2005-06 which has been accepted. There is no rejection of books of accounts in any of these years and therefore the additions made by the AO on estimate basis is incorrect and retention of the same to the extent of 15% on estimation by the CIT(Appeals) is also incorrect. The assessee's representative inviting our attention to the paperbook page 3, demonstrated the method adopted by the assessee from the inception and how the ITA No.456 to 459/B/09 etc. Page 7 of 26 assessee calculated the valuation of work-in-progress. The same is reproduced below:
An illustration Position of Sites Particulars No.s Sites available at the beginning of the financial 100 year Less: Sites sold during the year 10 Sites available at the end of the financial year 90 Position of Sites Particulars Amount (in Rs.) Value of opening WIP 1000 Add : Expenses incurred during the year 500 1500 Less: WIP attributable to sites sold 150 (1500/100*10) Value of Closing WIP 1350 (1500/100*90) Assessee's representative submitted if the plots available are 100, expenses during the year under consideration for the entire plots is treated as expenditure for the whole year, whereas the assessee normally sells only a portion of the developed plot. Therefore, in the normal course, the expenditure is high than the price fetched by the assessee on selling a small portion of the plots.
8. When the matter was taken up for hearing, the Bench put a specific query before the assessee's representative as to whether the assessee has declared income for any year and it was submitted that for the A.Y. 2005-06, the assessee declared 7.63% and for the A.Y. 2007-08 the ITA No.456 to 459/B/09 etc. Page 8 of 26 assessee declared profit at 9.75% and the same has been accepted. The assessee's representative also relied on the decision of the Tribunal, Bangalore Bench in the case of Madhuvana House Building Co-operative Society vs. Assistant Commissioner of Income Tax [76 TTJ (Bang) 948], H.M. Constructions vs. JCIT 84 ITD 429 (Bang) and CIT vs. Shankaranarayana Construction Co. 197 ITR 688 (Kar) in support of the contention that without rejection of books of account no addition could be made and the system followed by the assessee is an accepted method.
9. The ld. AR submitted that there cannot be a preferred method or thumb rule percentage which can be adopted to arrive at the work-in- progress ("WIP") or the income of the assessee in this type of business. The only condition is that the method adopted by the must help the revenue authorities to ascertain and arrive at the value of work-in-progress and deduce profits from the business.
10. The Institute of Chartered Accountants of India ("ICAI"), the premier accounting body in India, recognized the fact that there cannot be a particular method that could be prescribed for this type of business. The ld. representative for the assessee invited our attention to para 1 under the head "Scope" of Accounting Standard (AS-2) of ICAI dealing with valuation of inventory. AS-2 which was revised in 1999 was originally issued in June, 1981. The ld. Representative submitted the Accounting Standard as revised in 1999 excludes the following four categories from the scope of AS-2 i.e., :
(a) work in progress arising under construction contracts, including directly related service contracts (see ITA No.456 to 459/B/09 etc. Page 9 of 26 Accounting Standard (AS) 7, Accounting for Construction Contracts);
(b) ........
(c) ........
(d) ........
It is clear from the above that the valuation of work-in-progress in case of construction contracts is excluded from the purview of Accounting Standard (AS-2).
11. As per the Income-tax Act, where income chargeable under the head 'profits and gains of business or profession' is returned on the basis of accounts maintained by the assessee by employing a method of accounting regularly, such income is to be computed in accordance with the method regularly employed, unless a situation emerges that profits disclosed by the assessee as a result of his own method of accounting, are so unreasonable and patently unacceptable, it is to be accepted. In such situation it leads to the rejection of books of account and consequent estimation of income and revaluation and recomputation of work-in- progress could be justified. In the instant case of the assessee, the Assessing Officer has not arrived at any such finding, that method of accounting/valuation of WIP adopted by the assessee is not reasonable leading to rejection of financial results. This is one of the accepted method as per revised Accounting Standard (AS-2). Therefore there is no justification for the Assessing Officer estimating income of the assessee.
12. It was further submitted that the state of affairs as regards maintenance of accounts, valuation of WIP being the same as in earlier years and the same having been accepted by the department, there is no ITA No.456 to 459/B/09 etc. Page 10 of 26 justification to tamper with the method of valuation of WIP. There is no finding by the AO that the accounts of the assessee appear to be unreasonable or excessive even with regard to expenses. The additions are made merely on the basis of suspicion, which is not justified. The assessee's representative further submitted, in any case, the profit rate adopted by the AO @ 30% of sales is arbitrary and unscientific. There is no comparable case given in any line of activity to support his estimation. The assessee's representative also relied on the decisions of CIT v. Gotan Lime Khanij Udyog 256 ITR 243 (Raj) and CIT v. Geotech Construction Corp 133 CTR 468 (Ker).
13. The assessee's representative further submitted referring to assessment years 2004-05 to 2006-07, the assessee receives the sale consideration in fixed instalments from the customers. As and when these instalments are received, it is considered as advance received from the customer. Upon receipt of entire consideration, the sale deed is executed in favour of the customer. Sale is recognized only upon execution of sale deed as the customer is always at liberty to cancel the agreement and ask for the return of the total advances paid. The sites developed by the assessee are in fact held as assessee's own property, till all the obligations on the part of the assessee is completed and handed over to the buyer. Therefore, it is the submission of the assessee's representative that the right of the assessee to receive the monies from the customers and to appropriate the same arises only after the completion of the obligation under the contract and effecting delivery of the apartments complete in all respects in terms of the contract. In the absence of the satisfactory ITA No.456 to 459/B/09 etc. Page 11 of 26 discharge of such obligations on the part of the assessee, the customers have the option to refuse delivery leading to termination of the contract. The monies received by the assessee progressively till the date of completion of the project do not entitle the assessee with a right to appropriate the same unless the obligations under the contract are completed. Therefore, the income from those accrues to the assessee only on the completion of the contract and not at any stage earlier. If the methodology enunciated by the AO is followed, it will lead to absurd results i.e., in one year there could be receipts only and not any activity construction at all. The AO appears to have proceeded on the basis that if the money has been collected, it becomes assessee's income. In this connection the ld. Representative invited our attention to the decision of the Karnataka High Court in CIT v. Shankarnarayanan Construction 197 ITR 688, particularly para 4 of the judgment. In this case, the Hon'ble High Court held that the assessee executing projects for a power corporation wherein the assessee receives the amounts in excess of what was actually due and such excess receipt is adjusted towards future work, cannot be treated as assessee's income accrued. The Hon'ble High Court held every kind of receipt cannot be taxed, such excess amounts are to be considered as deposits in the hands of the assessee and excess receipts cannot be taxed. The assessee's representative submitted actually as per the method followed by the assessee, expenditure incurred on the project is claimed in the year of appropriation of income, the method of accounting followed by the assessee is in tune with the generally accepted accounting policy of matching costs with revenue i.e., when the revenue is taken into ITA No.456 to 459/B/09 etc. Page 12 of 26 account, the commensurate expenditure is also taken and vice versa. He relied upon the judgment of the Hon'ble Karnataka High Court in the case of Khoday Distillers Ltd. (ITRC No.19, 20 and 21 of 1993 dated 12.09.1995), wherein it was held that "When one of the accounting procedures is to compute the profits only on the completion of the contract and that method is adopted by the assessee throughout, it cannot be said that the view taken by the Tribunal is wrong."
14. Replying to the above, the ld. DR submitted that first of all, the assessment was completed u/s. 144 r.w.s. 153A. He submitted that in fact it is not clear from the facts furnished in the return regarding the completion of the work during the year and what the exact amount of expenditure allowable is in respect of the part of area where sales are effected. Expenditure claimed is only on estimate basis, no details have been furnished by the assessee.
15. The ld. DR further submitted according to the Accounting Standard AS-7 which is effective from A.Y. 2004-05 and onwards, the assessee being in the business of real estate and incurring expenditure towards civil work has to adopt Percentage Project Completion Method. The assessee is continuously adding the land and selling the plots in the layout. There is no clear demarcation as to the purchase of the land and completion of the project every year. As per the scheme adopted by the assessee it is selling plots on a monthly payment basis covering about 50 months which works out to about 4 years. The advances received during the year is to the tune of Rs.7,56,28,256 (2004-05) which should have been offered as income in Percentage Project Completion Method. Since 4 years is adopted as the ITA No.456 to 459/B/09 etc. Page 13 of 26 project time, the AO has estimated the income for the year out of advances at 25% of Rs.7,56,28,256, which works out to Rs.1,89,07,132. The profit estimated is 30% on par with sales as discussed, which works out to Rs.56,72,140 and therefore the amount was rightly added to the total income of the assessee. Similarly in all the years under appeal, the assessee's expenditure is more and therefore always the assessee claimed a minus income, avoiding tax. It was in these circumstances that the AO rightly estimated the income at 30% of the sales.
16. Coming to the argument of the assessee with regard to Accounting Standards, the ld. DR submitted a written submission briefly as under. The basic purpose of following Accounting Standards is to derive the financial statements which include profit and loss account and balance sheet that reflect true and fair view of the business. It is the true and fair view of the business which is ultimate governing principle in recognizing revenue and costs. ICAI, which is the authority for issuing standards of accounting, has removed the provision of completed contact method w.e.f. 1.4.2003, thus made it mandatory to follow only one method i.e. Percentage Completion Method of accounting for the financial year 2003-04 and onwards. However, the assessee company ignoring this mandatory provision of Percentage Completion Method, followed the Completed Contract Method for recognizing the revenue. Coming to the contention of the assessee that it does not apply to the assessee is incorrect and for this proposition the ld. DR relied on the decision of the Hon'ble Supreme Court in the case of J.K. Industries Ltd. v. UOI, Appeal (Civil) 3761 of 2007, date of judgment 19.11.07. It is submitted that this decision is squarely applicable in the ITA No.456 to 459/B/09 etc. Page 14 of 26 instant case of the assessee, copy of which has been placed on record vide paperbook page 1-94. The ld. DR specifically brought to our attention the observation of the Hon'ble Supreme Court in paras 4 to 8 with regard to meaning and purpose of Accounting Standards, wherein the Hon'ble Supreme Court held that adoption of Accounting Standards and of accounting income as taxable income would avoid distortion of the real income. This is the reason for introducing Accounting Standard AS 22. The ld. DR submitted the main object behind the introduction of Accounting Standards is to prevent tax evasion and to bring to tax net the real income. In the light of the decision of the Hon'ble Supreme Court (supra), the Accounting Standards are mandatory for the assesses to follow. As regards the view taken by the department in the earlier years, the same was decided in view of the then prevailing provisions available in the relevant Accounting Standards. ICAI since modified the Accounting Standards, the reference to the earlier standards prescribed is no more valid.
17. In view of the above, the ld. DR submitted the percentage completion method of accounting should be adopted for determining correct income as per the new Accounting Standard (AS-7) which is introduced by the ICAI w.e.f. assessment year 2004-05. All the decisions relied on by the assessee pertains to a period prior to 2004-05 when the percentage completion method as per new Accounting Standard (AS-7) was not mandatory.
18. In reply to the above, the ld. AR reiterated the submissions made before us.
ITA No.456 to 459/B/09 etc. Page 15 of 26
19. Considering the rival submissions, we are of the view that the arguments by the assessee are to be accepted. Accounting Standard (AS-
2) as it stands now as a result of revision in 1999 excludes the construction contracts from the scope of AS-7. The same has been reproduced in para 10 above. Therefore, the stand of the revenue that AS-7 which permits only one method to be adopted i.e. percentage completion method is incorrect. The decision of the Supreme Court relied upon by the revenue in the case of J.K. Industries Ltd. v. UOI (supra) on facts is quite distinguishable. Their Lordships were dealing with Accounting Standard (AS-22). In that case, the assessee, a public limited company, was carrying on business of manufacture and sale of automotive tyres, tubes, sugar and agrigenetics, challenged AS-22 issued by ICAI which was mandatory for the companies listed in stock exchange in India in preparation of their accounts for the financial year 2001-02 and onwards.
20. AS-2 which was originally issued in June, 1981 and revised in 1999 excludes construction contracts from the scope of Accounting Standard (AS-7). The method adopted by the assessee is one of the recognized method. The AO has not rejected the assessee's books. In these circumstances, as rightly contended by the ld. Representative for the assessee, the estimation of income to the extent of 30% and reduction of the same by CIT(Appeals) to 15% is incorrect. In the light of the above discussion, we are of the view that the CIT(Appeals) was not justified in retaining the estimated addition and the CIT(Appeals) was not justified also in treating this as an accepted method. The appeals by the assessee for ITA No.456 to 459/B/09 etc. Page 16 of 26 the assessment years 2002-03, 2003-04, 2004-05 and 2006-07 are allowed.
ITA Nos.494 to 496/09 (Revenue's appeals - M/s. Concorde Developers)
21. Coming to the revenue's appeals, the only ground for A.Y. 2004-05 and first effective ground (ground No.2) for the A.Ys. 2005-06 and 2006-07 are common. It is the case of the revenue that the CIT(Appeals) ought to have considered that no specific accounting method has been adopted by the assessee and therefore it was mandatory to estimate income as per Accounting Standard AS-7 considering the line of the business of the assessee and therefore CIT(Appeals) ought to have appreciated that AO rightly estimated the sales on advances as per percentage completion method under AS-7, and thereafter estimated profit on such sale proceeds.
22. While dealing with the assessee's appeals (ITA Nos. M/s. Concorde Developers in ITA Nos. 456 to 459/B/09), we have held that in the line of business of the assessee i.e., construction contracts, AS-7 is not mandatory in view of the revised Standard AS-2 issued by the ICAI. We have also held that the decision of the Hon'ble Supreme Court in the case of J.K. Industries Ltd. v. UOI (supra) relied on by the ld. DR is distinguishable on facts from the instant case of the assessee. We have further held that the ld. AO has not rejected the books results. In view of the above, this ground for all the years fails and it is rejected.
23. For the A.Y. 2005-06, the second effective ground by the revenue (ground Nos.3 to 5) is against the order of the CIT(Appeals) giving relief of Rs.1,41,73,160 relating to closing work-in-progress despite wrong ITA No.456 to 459/B/09 etc. Page 17 of 26 computation being adopted by the assessee for arriving at the closing stock. According to the revenue, the CIT(Appeals) ought to have appreciated that closing work-in-progress was worked out by the AO on the basis of details furnished by the assessee in the return of income and therefore, the addition was rightly made. According to the revenue, the CIT(Appeals) ought to have appreciated that the question involved is not on the opening and closing work-in-progress shown by the assessee in the profit & loss account. The mistake has crept in while calculating the closing work-in-progress to be taken to the profit & loss account for the year under consideration which was rightly taken note by the AO. For the year under consideration, there was an action u/s. 132 in the case of assessee on 13.4.05. Consequent to search, notice u/s. 153A was issued. In response to the notice, the assessee filed a letter stating that the return filed on 31.10.05 declaring income at Rs.31,35,550 may be treated as return filed in response to notice u/s. 153A.
24. While framing the assessment order, it was noticed from the computation of closing work-in-progress filed by the assessee along with the return that assessee had adopted opening work-in-progress at Rs.4,55,82,384. Closing work-in-progress for A.Y. 2004-05 was Rs.4,29,60,166 only, which in fact should have been the opening work-in- progress for the year under consideration. There were certain other mistakes according to the AO. Instead of adding the expenditure incurred during the year to opening work-in-progress as was done in the earlier years, the assessee adopted different computation. AO noticed that the assessee added estimated expenditure incurred during the year to the ITA No.456 to 459/B/09 etc. Page 18 of 26 work-in-progress, of the sites sold and treated it as taken as closing work- in-progress, AO held this is not correct as per accounting principles and also as per the method followed by the assessee in the earlier years. On this ground, the AO added the amount of Rs.1,41,73,178. The issue has been dealt with by the CIT(Appeals) vide para 12 & 13 of his order as under:
"12. Ground No.2.4 of A.Y. 2005-06, Rs.1,41,73,160/-
In this ground, the alleged difference in closing stock of A.Y. 2004-05 and opening stock of A.Y. 2005-06 of W/P of Rs.1,41,73,178 (Rs.4,55,82,384/- - Rs.4,29,60,166/-) has been appealed against. The written submission of Authorised Representative on this issue is reproduced verbatim.
"11. Valuation of WIP 11.1 The AO erred in treating the difference in closing work-in-progress of Rs.1,41,73,178/- (Rs.5,99,48,390 - Rs.4,57,75,212) as income of the assessee. The AO alleges that there is difference in the opening WIP balance which is overstated. We submit that there is absolutely no difference between opening WIP of current year (P.Y. 2004-05) and closing WIP of the last year (P.Y. 2003-04). Both the amounts are Rs.4,29,60,166. Reference is invited to the page no.19 of the page book which reflects valuation of closing WIP wherein the computation of begins with an opening balance amount of Rs.4,29,60,166/-".
13. The written submission above was examined vis-à-vis the records. I see the opening stock as on 01.04.2004 and closing stock as on 31.04.2004 are same at Rs.4,29,60,166/-. Also the closing stock of A.Y. 2004-05 31.3.2004 stands at Rs.4,57,75,212 while opening stock of A.Y. 2005-06 - 1.4.2005 .... stands at Rs.4,57,75,212/-. The relevant copies of audit report placed in the paper book are enclosed herewith as Annexures A, B and C. In view of above, addition is deleted. Ground of appeal is allowed."
ITA No.456 to 459/B/09 etc. Page 19 of 26
25. The ld. DR supported the order of the Assessing Officer, as against this the ld. representative for the assessee made the following written submissions :-
" The AO erred in treating the difference in closing work-in- progress of Rs.1,41,73,178/- (Rs.5,99,48,390 - Rs.4,57,75,212) as income of the assessee. The AO alleges that there is difference in the opening WIP balance which is overstated. We submit that there is absolutely no difference between opening WIP of current year (P.Y. 2004-05) and closing WIP of the last year (P.Y. 2003-
04). Both the amounts are Rs.4,29,60,166. The AO would have considered the opening WIP balance of 1.4.2003 instead of opening WIP balance of 1.4.2004. Ld. CIT(A) after verifying the claim of the assessee provided relief on this score."
26. Considering the rival submissions and going through the orders of the revenue authorities and in the light of the specific finding by the CIT(Appeals) that closing stock for the A.Y. 2004-05 as on 31.3.2004 and opening stock for the A.Y. 2005-06 as on 1.4.2005 are exactly identical and considering the submission of the assessee that in fact the AO instead of looking to the closing stock for the A.Y. 2004-05 had wrongly taken note of closing stock of the previous year, we find no merit in the appeal by the revenue on this ground. These grounds by the revenue fails and is dismissed.
27. Coming to the A.Y. 2006-07, the other effective ground (No.3) by the revenue is against the order of the CIT(Appeals) in giving relief on the amount of Rs.1 crore claimed as unsecured loans of the assessee. According to the revenue, the CIT(Appeals) has not considered the facts that the onus was on the assessee to prove that such loan has not been discharged. It is also the grievance of the revenue that the CIT(Appeals) ITA No.456 to 459/B/09 etc. Page 20 of 26 erred in relying on the statement of the assessee that the details of the lenders of unsecured loans had been filed by the assessee and therefore onus is shifted to the AO to disprove the same. No details were furnished by the assessee before the AO and therefore at the most the CIT(Appeals) should have called for a remand report.
28. The brief facts for the A.Y. 2006-07 are that the assessee filed a return on 31.6.07 declaring total loss of Rs.26,14,385. The AO noticed there was claim of unsecured loans and the details were called for. He found no information was forthcoming from the assessee though the loans were taken during the year under consideration and he made the impugned addition. When the matter was carried before the CIT(Appeals), he found that confirmation letters were furnished at the time of assessment proceedings and this fact was admitted by the AO in his remand report dated 15.7.08. However, the AO took a view that mere filing of the confirmation letter in support of loan is not conclusive evidence of receipt of loan. The CIT(Appeals) noted that the addresses of the lenders and their PAN Nos. were submitted and he could have verified the same at his end. He accepted the claim of the assessee that the burden of proof shifted to the department. He therefore held there was no justification in the addition and deleted the same.
29. The ld. representative for the assessee submitted confirmation letters of lenders were enclosed vide paperbook pages 24 to 43 and details of names, addresses and PAN of the lenders were contained in Annexure 2 to Form 3CD (page 44 and 45 of the paperbook). Hence he relied upon the decision of the Hon'ble Supreme Court in the case of CIT v. Orissa ITA No.456 to 459/B/09 etc. Page 21 of 26 Corporation 52 CTR 138, wherein it was held where assessee furnished names and addresses of the creditors, their PAN and GI numbers, it was the duty of the AO to proceed further by issuing summons so as to verify the genuineness and to make further enquiries. He also relied on the decision of the Hon'ble Orissa High Court in CIT v. Baishnab Charan Mohanty (212 ITR 199) to the same effect.
30. The ld. DR supported the order of the Assessing Officer.
31. In the light of the above facts and considering the finding of the CIT(Appeals) that confirmation letters were filed with address and PAN numbers and since the revenue did not take further steps by issuing summons so as to ascertain the veracity of the confirmation and in view of the decisions relied upon by the ld. representative for the assessee cited hereinabove, we are of the view that this ground of the revenue is without merits and is dismissed.
32. In the result, the appeals of the Revenue for all the years fail and are dismissed.
ITA No.247 & 248 /09 (Assessee's appeals - M/s. Concorde Shelters)
33. The common ground urged by the assessee for the assessment year 2003-04 and 2004-05 is against the order of the AO in completing the assessment in haste. The assessee's representative submitted that he is instructed not to press this ground and hence for both the years, this ground is dismissed as not pressed.
ITA No.456 to 459/B/09 etc. Page 22 of 26
34. Coming to the 2nd common ground, it is against the order of the CIT(Appeals) retaining the addition made by the AO on estimation to the extent of 15%. The facts leading to the dispute briefly are as under:
Similar to the connected case of the assessee's group i.e. ITA Nos.456 to 459/B/09 - M/s. Concorde Developers, there was a search and seizure action in the case of this assessee on 13.4.05. Consequent to search notice u/s. 153A was issued on 13.1.06. In response to the above notice, assessee filed a letter on 7.6.06 stating that return filed by the assessee with the ITO may be treated as return filed in response to this notice. For the A.Y. 2003-04, the return was filed on 29.10.03 declaring income at Rs.1,32,520 and for the A.Y. 2004-05 on 24.9.04 declaring income at Rs.17,29,030. The assessee is in the business of real estates. The AO noticed that the assessee was having two projects one at Green City, Gulbarga and the other, Concorde Paradise. As regards the project at Green City, Gulbarga, the plots were being sold on a monthly scheme. The assessee arrived at the closing stock on saleable area developed by it after adding all the expenses incurred during the year to the opening work-in- progress . The assessee is offering the sales in respect of plots during the year as income in the profit & loss account and reduced the closing work- in-progress with the work-in-progress of the sites sold as estimated by the management. The assessee has shown sales for the A.Y. 2003-04 at Rs.16,99,230, expenditure incurred towards work-in-progress in respect of sold area at RS.16,31,711, the difference was negative figure of Rs.67,519. Coming to the A.Y. 2004-05, the sales shown was Rs.46,13,808 and expenditure claimed was at Rs.41,36,990 and the difference was again a ITA No.456 to 459/B/09 etc. Page 23 of 26 negative figure of Rs.4,76,818. The AO held the expenditure is claimed on estimate basis only. The AO was of the view that margin of 3.97% and 10% respectively for both the years cannot be true state of affairs. He further noted that the assessee was continuously adding land to the project year after year. In the light of the above facts, he estimated profit @ 30% and 10% respectively on sales and on this basis made addition of Rs.4,42,250 for A.Y. 2003-04 and Rs.9,07,324 & Rs.16,28,646 for A.Y. 2004-05. Aggrieved by the order, the assessee approached the first appellate authority.
35. Before the CIT(Appeals), the assessee made exactly identical submissions that were made in the case of M/s. Concorde Developers in ITA Nos. 494 to 496/B/09. The claim of the assessee was partly accepted by CIT(Appeals) particularly vide para 11 and 12 of his order observing as under:
"11. The third limb objects to the estimation of income at the rate higher than that was shown by the appellant. I find the A.O. has reduced the claim of expenditure of the appellant on percentage basis and disallowed and added the same with the returned income. The details thereof can be tabulated as under:
A.Y. Total Sale Expenditure Expend- Profit A.O. Amount Amount 2003- Price in claimed iture Ratio Adopted allowed in disallowed 04 Rs. Ratio ratio for Rs. & added disallow- to ances of returned Expendi- income ture in Rs.
2003- 16,99,230 16,31,711 96.02% 3.98% 30% 11,89,461 4,22,250 04 2004- (i)Green 41,36,990 89.96% 10.04% 30% 32,29,666 9,07,324 05 City Gulbarga 46,13,808
(ii)Concorde Paradise, Bangalore 2,02,38,571 97.87% 2.13% 10% 1,86,09,924 16,28,646 2,06,77,694 ITA No.456 to 459/B/09 etc. Page 24 of 26
12. The above shows the basis of such disallowance is the unbelievably low rate of profit shown by the appellant. For example, it can be seen that the appellant showed Net profit rate of 3.98% in A.Y. 2003-04. For the project at Gulbarga of A.Y. 2004-05, the net profit rate was shown at 10.04%, while that of Condorde Paradise, Bangalore, the net profit rate shown was only 2.13%. Against this the corresponding rate adopted by the A.O. was 30%, 30% and 10%. I find the estimate made by the A.O. for Gulbarga properties in A.Y. 2004-05 and all properties involved in A.Y. 2003-04 @ 30% of sale price is very much on the higher side. The nature of work of the appellant is such that it gets reimbursement of construction expenses from flat owners with a minimum margin while maximum profit is gained from sale of plots of land but that too cannot be projected or put at 30%. I therefore reduce the estimation of disallowance of expenditure to 15% from 30%. Thus, for the A.Y. 2003-04 appellant gets relief of rs.1,87,365/- and in A.Y. 2004-05, Rs.2,15,253/-. I find the estimation of profit ratio of 10% for M/s. Concorde Paradise, Bangalore properties of A.Y. 2004-05 is reasonable and therefore not inclined to disturb the same. Appeal is allowed partly on this ground."
36. Aggrieved, the assessee is in appeal before the Tribunal. Suffice to say that the argument advanced by the assessee and the Department before us are identical with the submissions made in the case of assessee's sister concern i.e., M/s. Concorde Developers in ITA Nos. 456 to 459/B/09. After discussing the issue in detail, we have held vide para 20 hereinabove that the CIT(Appeals) was not justified in retaining the addition of 15%. The same finding holds good for both the years in the present case also.
37. In the result, both the appeals of the assessee are allowed.
ITA No.456 to 459/B/09 etc. Page 25 of 26 ITA No.858/09 (Revenue's appeal - M/s. Concorde Shelters )
38. Coming to the appeal preferred by the revenue for the A.Y. 2004-05, as in the case of the sister concern of the assessee in M/s. Concorde Developers in ITA Nos. 494 to 496/B/09, the revenue has objected to the order of the CIT(Appeals) on the following grounds. Firstly, the revenue contentions is the CIT(Appeals) ought to have considered that no specific accounting method has been adopted by the assessee and income needed to be estimated as per the accounting standard AS-7 considering the line of the business of the assessee. Further it is the case of the revenue that CIT(Appeals) ought to have appreciated that the AO estimated the sales on advances as per percentage completion method which is valid method in this line of business.
39. Exactly identical issue has been decided in the case of sister concern of the assessee in ITA Nos.494 to 496/09 - M/s. Concorde Developers. The arguments put forth by both the parties are same and the facts are also identical, hence for the same reasons stated in ITA Nos.494 to 496/09 - M/s. Concorde Developers hereinabove, we dismiss the appeal by the revenue.
40. In the result, the appeal by the revenue is dismissed.
Pronounced in the open court on this 22nd day of January, 2010.
Sd/- Sd/-
(AKBER BASHA) ( K.P.T. THANGAL )
Accountant Member Vice President
Bangalore,
Dated, the 22nd January, 2010.
Ds/-
ITA No.456 to 459/B/09 etc.
Page 26 of 26
Copy to:
1. Appellants
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT, Bangalore.
6. Guard file (1+1)
By order
Assistant Registrar
ITAT, Bangalore.