Income Tax Appellate Tribunal - Bangalore
Nandi Housing (P) Ltd. vs Deputy Commissioner Of Income Tax on 21 April, 2003
Equivalent citations: (2003)80TTJ(BANG)750
ORDER
G.E. Veerabhadrappa, A.M.
1.This is an appeal by the assessee arising out of the order dt. 28th Sept., 2001, of the CIT(A)-III, Bangalore.
2. The assessee is a private limited company engaged in the development of property as a developer and builder. For the assessment year under consideration, the assessee filed return of income declaring income of Rs. 4,26,440, which included contract income and other income. The income was supported by the P&L a/c and balance sheet. The perusal of balance sheet by the AO showed that the assessee-company has shown work-in-progress valued at cost at Rs. 13,07,67,368 as on 31st March, 1997, (Schedule 7 of the balance sheet). The work-in-progress is valued at cost based on the expenses incurred in relation to the projects. When asked to explain, the assessee explained that the entire expenditure incurred in the construction of the apartments is taken to the work-in-progress in the balance sheet and the assessee stated to be following completed contract system whereby the entire profits of the project will be offered for taxation only in the year in which the project is completed. The AO did not accept these contentions. Following the decision of the Tribunal, Bangalore, Bench, in the case of United Property Developers (P) Ltd., in ITA No. 546/Bang/1997, order dt. 10th Sept., 1999, he proceeded to add 8 per cent of the work-in-progress as income from apartment construction.
3. It was contended on behalf of the assessee before the CIT(A) that in all the preceding years, the assessee was following project completion method, which has all along been accepted by the Department, but this contention did not find favour with the CIT(A). According to him, the principle of res judicata or estoppel is not applicable to the income-tax proceedings and even if the method has been regularly followed by the assessee and even if it is earlier accepted by the Department, if the method itself was faulty and was not reflecting the correct income of the assessee, the AO was well within his rights to invoke the provisions of Section 145 and to pass appropriate orders to determine income for particular assessment year. The CIT(A) further observed that the assessee was following mercantile method of accounting wherein income was to be taxed on the principle of accrual. The assessee was receiving regular payment from the flat owners on completion of different stages of construction and up to the asst. yr. 1997-98 the total of such receipts from the flat purchasers was a sum of Rs. 16,48,43,729. This was with respect to the flats already sold. There were certain other flats, which were not yet sold and in whose case (unsold flats) the receipt would be in lump sum as and when sold. Thus, whereas the receipt on account of sale of flats was Rs. 16.54 crores, the accumulated work-in-progress as on 31st March, 1997, reflected by the assessee was to the extent of Rs. 13,07,67,368. The receipts from the flats purchasers were much more than the work-in-progress shown by the assessee. Each rupee earned on account of such sale of flats at various stages of construction has income embedded in the same and it was exactly this income, which was sought to be taxed by the AO. According to him, the AO need not wait till the completion of the project for determining the profits of the venture. He justified the action of the AO in the light of the principle laid down by the Supreme Court in the case of P.M. Mohammed Meerakhan. v. CIT (1969) 73 ITR 735 (SC) and CIT v. British Paints India Ltd. (1991) 188 ITR 44 (SC). The CIT(A), however, went on to discuss about the guidelines issued by the Institute. of Chartered Accountants of India for construction contracts. According to him, there are two methods, which have been suggested for construction contracts (i) percentage of completion method, and (ii) completed contract method. He went on to discuss in detail about these methods and expressed a view that as per the guidelines, both the methods have been recognized as valid accounting systems. The CIT(A) went on to discuss the methodology adopted by the buyers of flats wherein payments have to be made by the buyers over different stages of construction. According to him, after the completion of each event, the buyer has to make the payment to the contractor as per the contract. There are stipulations of charging interest where the buyers failed to make payment as per the agreed schedule. According to the CIT(A), there is substantial amount of certainty with which the project proceeds based on the completion of various different stages and the payments received from the buyers minus the expenditure incurred up to that stage the income could easily be determined in the case of a developer. The AO, according to the CIT(A) , in the facts and circumstances of the case, in the light of discussions made in his order, is justified in estimating income at 8 per cent of the work-in-progress.
4. The assessee is aggrieved. The order of the CIT(A) is challenged by the assessee on several grounds. The learned counsel pleaded that the assessee is a developer and builder and has been declaring income on project completion method from year to year. The income returned on such project completion method has been accepted for the previous year as shown below:
Asst. yr Name of the project 1990-91 Fernville & Glendale 1994-95 Nandi, Himagiri, Ligoury Court, Rucella & Varsha 1995-96 Jacaranda & Iris 1996-97 Brindavan Layout 2000-01 Kamanahalli Canara Bank Layout (Assessment pending) 2001-02 Nandi Enclave (Assessment pending)
5. The learned counsel pleaded that in view of the consistent method of accounting followed, the Department had no legal authority to alter the method of accounting to make addition on the basis of the work-in-progress in the project (Nandi Enclave). The learned counsel further pleaded that the Department has totally ignored that even in respect of Nandi Enclave project,the assessee had declared huge income of Rs. 60,50,447 for the asst. yr. 2001-02 on the basis of the project completion method which resulted in the payment of substantial taxes. The addition of 8 per cent on the work-in-progress by taking help of Section 44AD is prima facie illegal and disregards the books of account maintained in accordance with the accepted accounting principles and duly audited by the chartered accountant as required by the IT Act as also the Companies Act. The learned counsel pleaded that the assessee is legally justified to offer income on project completion method having regard to the assessee's nature of business wherein projects usually have a long gestation period and the profits from such projects cannot be determined on the basis of accounting- years involved. The project completion method has been approved by the Bombay High Court in the case of CIT v. Vikas Oberoi 165 Taxation 7 and also of the jurisdictional High Court in the case of Khoday Distillers Ltd. ITRC Nos. 19 to 21 of 1993. The Department has accepted the decision of the jurisdictional High Court in the case of Khoday Distilleries Ltd., by not filing any appeal before the Supreme Court. The Tribunal, Bangalore Bench, in the case of Reliance Estate Developers in ITA Nos. 55 to 57/Bang/1994 has also accepted the completion contract method for the purpose of determining income by following the jurisdictional High Court's decision in the case of Khoday Distilleries Ltd, Copy of the order is on record. Reliance was placed on the order of the Tribunal in the case of Shapoorji Pallonji & Co. (Rajkot) (P) Ltd. v. ITO (1994) 49 ITD 479 (Bom), and Thermax Babcock & Wilcox Ltd. v. Dy. CIT (2001) 72 TTJ (Pune) 827 and Supreme Court decision in Calcutta Co. Ltd. v. CIT (1959) 37 ITR 1 (SC).
The learned Departmental Representative, on the other hand, strongly relied upon the order of the Tribunal in the case of M/s United Property Developers (supra). He further relied on the discussions in the order of the CIT(A), especially the fallacies of the project completion method for recognizing the Revenue wherein it postpones such ascertainment for an indefinite period.
6. We have carefully gone through the records and considered the rival submissions. In our view, the contentions of the assessee have to succeed. Section 145 of the IT Act requires that business income or other sources income shall be normally computed in accordance with the method of accounting regularly employed by the asssessee. If the assessee has maintained accounts the section leaves it to the assessee to adopt any system of accounting and obliges the AO to compute income, profits and gains in accordance with such method of accounting regularly employed if profits of the business can properly be deduced therefrom. If an authority is required to this proposition, useful reference may be made to the decision of the Supreme Court in the case of CIT v. A. Krishnaswamy Mudaliar and Ors. (1964) 53 ITR 122 (SC) and CIT v. McMillan & Co. (1958) 33 ITR 182 (SC). The assessing authority has to look into the substance of the situation and decide the matter in such a manner that neither Revenue is put to unreasonable loss nor the assessee is subject to unreasonable hardship [see CIT' v. Hazaribagh Coal Syndicate (P) Ltd. (1989) 177 ITR 135 (Cal)]. In the facts of that case the practice which was followed by the assessee year after year in treating the expenditure and the reimbursement from Coal Board in its account has been held to be a regular method of keeping its accounts. The choice of method of his accounting lies with the assessee. However, if an authority is required, reference may be made to the decision of the Supreme Court in the case of Investment Ltd. v. CIT (1970) 77 ITR 533 (SC), A. Krishnaswamy Mudaliar (supra) and McMillan & Co. (supra). It is not anybody's case that the method adopted by the assessee is not one of the recognized methods permissible for the assessees who are in the construction contracts. As the facts clearly indicate, the projects undertaken by the assessee are spread over a longer duration than one particular accounting year. The execution of the project takes a few years and actual sale may take place subsequently for few more years. So, the Department could have appreciated the peculiar nature of the assessee's business where one accounting year cannot close all the receipts and payments of a particular venture. In other words, the receipts and payments for the venture are spread over a long gestation period. This is exactly for this reason the Institute of Chartered Accountants of India have issued guidelines and the assessee has followed one of the two permissible methods prescribed by the Institute of Chartered Accountants of India recognizing the revenue from the business transactions. Therefore, in our view, the choice of method of accounting is entirely upon the assessee. The assessee having adopted such a method of accounting and has been regularly employing such method and the Department in the past and in future years has also accepted such method as proper method, for arriving at the income, in such situation, it is not open to the Department to choose one of the intermediary and try to distort the whole assessment and adding certain percentage to the total expenses that are incurred on the project as disclosed in the balance sheet. This will distort the apart from distorting income of the year and such an exercise may also have an impact on the other years where the total income from such projects have been disclosed by the assessee by the method of accounting regularly employed by it. When once the choice is made by the assessee of a system that is recognized by the production of accounting or by the assessees of the same class the assessee cannot be taken away from that class just for the purpose of bringing some income to tax by arbitrarily making addition to the disclosed income. It is not the case of the Department that the assessee has not followed this method in its true requirements nor the Department has found any mistakes in this method which the assessee suggests has followed from year to year. In our view, it becomes the duty of the AO to accept the results disclosed by the assessee from the method of accounting adopted by the assessee which itself is a recognized method in the class of the business to which the assessee falls. The Department, in making this exercise has not followed any principle or method which can be said to be recognised. It has only unjustly and arbitrarily estimated income which cannot be permitted especially when the assessee has maintained elaborate books of account and also subjected its books of account to audit by an outside agency. The AO has not pointed out any defects in such maintenance of accounts. Therefore, in our view, the Department is not justified in rejecting the method of accounting followed by the assessee. The jurisdictional High Court was concerned with the similar situation in the case of Khoday Distillers Ltd. in ITRC Nos. 19 to 21 of 1993 wherein the assessee adopted completion contract method and the Department made adjustment to the income declared under that method. In para 5 of the aforesaid judgment, the Hon'ble High Court of Karnataka has made the following observation:
"Sec. 145 of the IT Act provided that the method of accounting adopted by the assessee shall be adopted for the purpose of computation of income except in the circumstances set forth in the provisos thereto. No case has been made out by the Department that the provisos of Section 145 of the Act are attracted. The case of the assessee is that consistently the method of accounting adopted is a completed contract method and that was the situation available for several years and therefore it was not open to the Department to change its stance and bring to tax the profit earned by the assessee by spreading it over for different periods. In fact, the Tribunal placed reliance upon the Accounting Standards issued by the Institute of Chartered Accountants of India on accounting for construction contracts. It is noticed therein that completed contract method is one of the methods. Same is the position indicated in "Advance Accounting" by Batliboi, well known text-book on accountancy. It is no doubt true that even in case where there is a completed contract, for good reasons the concerned authorities may adopt percentage of completion method and spread it over different periods. But, in this case, when the assessee has taken the contract as a whole and maintained accounts on that basis rather than on the estimated which may require subsequent adjustments as a result of unforeseen possible losses, the authorities cannot adopt a different method of accounting. When the assessee had adopted a completed contract method and there was no particular reason as to why that accounting method could not be adopted, we fail to see how the view taken by the Tribunal holding that the completed contract method had to be applied in case of the assessee would be wrong."
7. In the light of the binding decision of the Karnataka High Court in the case cited supra as well as the authorities of the different High Courts and of the Supreme Court discussed above, we are of the view that the addition of 8 per cent on the work-in-progress disclosed in the balance sheet is totally uncalled for and the AO is directed to accept the assessee's method of accounting regularly employed for the computation of income for the year in question.
8. In the result, the appeal is allowed.