Income Tax Appellate Tribunal - Kolkata
Best & Best Construction, Kolkata vs Department Of Income Tax on 20 May, 2010
आयकर अपीलीय अधीकरण, Ûयायपीठ - " ए ", कोलकाता,
IN THE INCOME TAX APPELLATE TRIBUNAL "ए" BENCH : KOLKATA
(सम¢)Before ौी डȣ. ×यागी, Ûयायीक सदःय, एवं/and ौी सी.
डȣ. के. ×यागी, सी.डȣ.
डȣ.राव,
राव लेखा सदःय)
[Before Hon'ble Sri D. K. Tyagi, JM & Hon'ble Sri C. D. Rao, AM]
आयकर अपील संÉया / I.T.A No. 1612/Kol/2010
िनधॉरण वषॅ/Assessment Year : 2006-07
Income-tax Officer, Wd-50(4), Kolkata -Vs- M/s. Best & Best Construction
(PA No. AAEFB 9851 C)
(अपीलाथȸ/Appellant) (ू×यथȸ/Respondent)
For the Appellant : Sri S. C. Jain
For the Respondent : Sri D. K. Saha
आदे श/ORDER
Per D. K. Tyagi, JM (ौी डȣ.
डȣ. के. ×यागी, ×यागी, Ûयायीक सदःय) This appeal filed by the revenue is directed against the order passed by the Ld. CIT(A), Kolkata dated 20th May, 2010 for assessment year 2006-07 on the following grounds :
"1.The Ld. Commissioner of Income Tax (Appeals)- XXXII, Kolkata, has erred in deleting the addition of Rs.9,63,587/- made by you as the profit amount was not recognized in the accounts of the assessee without considering the facts that assessee has recovered (Rs.1,37,32,156/-) from the purchasers, more than what could be its cost of projects ( Rs 1,32,45000-).
2. The Ld. Commissioner of Income Tax (Appeals)- XXXII, Kolkata has also erred by holding that the assessee had not transferred the significant risk and rewards of the ownership of the property to the buyers without considering the facts that the assessee was in a position to handover the title ownership of flats but did not do so.
3. Assessee had given loan amounting to Rs 25.90.000/- to its partners but no interest had been shown. It should charged interest to partners if it was giving interest on capital of the partners and for the reason interest of Rs. 1,39.636- was not allowed.
4. New partner inducted instead of deceased partner. There was no mention in amended Partnership deed regarding remuneration to this new partner. So, remuneration paid to New partner amounting to Rs 76.664/- was disallowed."2
2. Ground nos. 1 and 2 relate to the action of the Ld. CIT(A) in deleting the addition of Rs.9,63,587/- as the profit amount was not recognized in the accounts of the assessee. Briefly stated facts as observed by the Assessing Officer are as follows :
"2. The assessee is a builder and in business of constructing flats and selling them. Profit and Loss account of assessee shows that during the year under consideration assessee has shown value of work-in-progress of Rs 41,50,000/-. Assessee was asked to furnish the details of this work in progress, in response assessee furnished a certificate from valuer stating as under :
"This is to certify that the civil construction work done for the period from 01.4.2005 to 31/3/2006 at premise no 520 Dumdum road, Kolkata-700074 has been worked out to 30% (àpprox) of the total work to be completed and the market value of such work done has been estimated to be Rs.41,50,000.00"
3. The aforesaid certificate has not given any basis how the valuer computed the market value work done during the year. It also does not state whether 30 % of the total work is the last 30% i. e balance of the work left or how much work still left after completion of these work. However, following facts emerged during the scrutiny proceeding showed that the certificate was fetched to give the work-in-progress which is arbitrary -- a colour of authenticity of the value of work in progress.
I. Building plan was sanctioned on 14/11/2003.
ii. The valuer who valued work-in-progress also made the project report for assessee. His project report dated 16/10/2004 mentioned under heading "Period and stage of construction" as under :
"The plan has been sanctioned from South Dum Dum Municipality vide no. The construction of building started in 2004 and by this time the following work has already been completed.
Complete foundation complete R C Work of all floors.
Complete external and internal brick work.
Therefore as on 16/10/2004 major work was already completed.
The project cost was estimated by the valuer at Rs. 1,10,04,994 which included even the architect fee. The assessee has spent more than 1,30,00,000/ till now, which is almost 20 % more than projected cost and still claimed that work is in progress.
iii. As per balance sheet, the assessee has collected of Rs 1,37,32,156 purchase price in advance which means that more than 100 % of the cost has been recovered already.
4. During the year under consideration, assessee-has shown 12 purchaser. It is seen that 7 out of them have paid the amount of purchase fully by FY 2005-06. And the rest 3 of 5 purchaser had to pay only balance 10% as on 31/3/2006. Therefore, on the basis of aforesaid facts the assessee was asked very simple question vide notice u/s 142(1) dt. 15/12/2008 as under:
"The value of work shown in the P & L account is arbitrary and without any basis .Same is the case of certificate issued by the registered valuer who without assigning any reason stated that market value of the work completed during FY 2005-06 is Rs 41,50,000.
The revenue recognition has to be according to well established accounting method. It is seen that out of total 12 parties whom you have sold the flats and garage, 7 have paid fully by FY 2005-06. Even rest of the five purchasers have paid more than 90 % of the value of flats.
Which means that the risk has signficantly shifted to the purchaser from the builder. As such, you should have recognized the full value of flats computed as under Total sale value of flats of 12 purchasers = Rs 1,42,08,587 Less value already shown upto Fy 2004-05 Rs. 90,95,000 Revenue required to be recognized Rs 51,13,587 Explain why should your accounts not be rejected u/s 145(3) of the I T Act as not recognizing the revenue which you should have is not showing true profit of yours."
5. The A.R of the assessee submitted a letter dated 19/12/2008 by which he stated that an application u/s 144A has been made to Addl.CIT Range -50 on the ground that reasoning for rejection of accounts u/s 145(3) by the aforesaid notice u/s 142(1) dt 15/12/2008 is not correct. Apart from this, the A.R also made following arguments :
1. It is following percentage completion method as stated under AS-7.
2. It is regularly following this method.
The application u/s 144A was rejected by the Addl. CIT-Range 50 Kolkata by a speaking order vide no Addl.CITIR-50/KoII144A/2008-09/614 dated 30/12/2008.
6. Although the issue of rejection of accounts has been dealt by a higher authority, still it requires to be impressed that the contention of the assessee that it follows the percentage completion method is not correct because the in case of percentage completion method, even cost is followed in percentage terms. That is the cost equivalent to the percentage of work is debited and the revenue is also recognized up to that percentage of work. In case of assessee, while the cost is debited fully, the work in progress is valued arbitrarily and claimed to be a percentage of work.
Moreover, the accounting standard AS-7 is applicable in case of contractors and not builders. The reason for such non application is that while in case of contractor the revenue accrues the moment a portion of work is finished or fully finished, in case of 4 builders the revenue is generated on sale of finished product i.e flat or house. Even if the building is completed, still there will not be any revenue to a builder if the flat is not sold.
There is no accounting standard for accounting in case of builders is notified , 1CAI -- the highest constitutional accounting body- has issued Guidance Note on revenue recognition in case of builders. The relevant portion of the Guidance note is given as under :
"RECOMMENDATION Revenue in case of real estate sales should be recognised when all the following conditions are satisfied :
1. The seller has transferred to the buyer all significant risks and rewards of ownership and the seller retains no effective control of the real estate transferred to a degree usually associated with ownership;
ii. at the time of transfer of all significant risks and rewards of ownership it is not unreasonable to expect ultimate collection; and iii. no significant uncertainty exists regarding the amount of the consideration that will be derived from the real estate sales.
All significant risks and rewards of ownership are also considered to be transferred, if the seller has entered into a legally enforceable agreement for sale with the buyer and all the following conditions are satisfied even though the legal title is not passed or the possession of the real estate is not given to the buyer:
(a) The significant risks related to real estate have been transferred to the buyer. In case of real estate, price risk is generally considered to be one of the most significant risks.
(b) The buyer has a legal right to sell or transfer his interest in the properly, without any condition or subject to only such conditions which do not materially affect his right to benefits in the property Therefore, even the Guidance Note by 1CM states that the revenue should be recognized if payments have been received even though
1. Legal title has not passed.
2. Possession has not been given to the buyer.
7. In the instant case, all the aforesaid conditions are satisfied . The assessee has received Rs.1,37,32,156 from purchasers when the total work in progress including for the FY 2005-06 is only Rs 1,32,45,000 . Which means that assessee has recovered more than what could be its cost. Therefore there is no reason for it not to recognize the revenue related to sold out flats. As it has not done same, the profit which is being shown is not correct which is result of wrong accounting followed by the assessee. Therefore, I am compelled to invoke provision u/s 145(3) to hold that the assesses profit has to be computed by recognizing revenue of Rs 51,13,587 as computed in the show 5 cause ('Para 4). That means that profit has to be increased by Rs 9,63,587 (Rs 51,13,587 -- Rs 41,50,000 )."
In appeal, the Ld. CIT(A) deleted the said addition. Aggrieved by the said order, the revenue is now in appeal before us.
3. At the time of hearing before us the Ld. DR relied on the order of the Assessing Officer and submitted that the assessee is engaged in the business of builders and constructing flats and selling them. In the assessment year 2006-07 addition to assesee's income was made on account of revenue not recognized at Rs.9,63,587/-. The Assessing Officer made the addition for the reason that during the financial year 2005- 06 assessee had showed 12 purchasers and out 12 purchasers 7 purchasers paid the full amount by F.Y. 2005--06 and rest 5 purchasers paid more than 90% by F.Y. 2005-06.
In view of above full value of flats of 12 purchasers: Rs. 1,42.08.587/- Less: value already shown in F'.Y.2004-05 : Rs. 90,95.000/-
Revenue required to he recognized : Rs. 51,13,587/ The asscssee had received Rs. 1,37,32,156/- from purchasers when the total work-in- progress including for the financial year 2005-06 was only Rs. 1.32.45,000/-, which means that assessee has recovered more than what could he its cost. Therefore, there is no reason ft)r it not to recognize the revenue related to sold out flats. As it has not done same. the profit which was being shown was not correct which result of wrong accounting followed by the assessee. Therefore, profit had to be computed by recognizing rcvenue of Rs.51,13,587/-and that means profit had to be increased by Rs.9,63,587 and added to the total income. He lastly prayed before the bench that the order of the Ld. CIT(A) may be set aside and that of the Assessing Officer be restored.
4. On the other hand, the Ld. Counsel for the assessee while reiterating his same submissions as submitted before the Ld. CIT(A) placed reliance on his order and urged before the bench to confirm the same. He also placed reliance on the decision of Hon'ble Apex Court in the case of CIT Vs. Realest Builders & Services Ltd. reported in (2008) 307 ITR 202 (SC).
5. After hearing both the parties, perusing the material available on record and the case law cited by the Ld. Counsel for the assessee, we find that while deleting the addition of Rs.9,63,587/- as made by the Assessing Officer on account of revenue not 6 recognized, the Ld. CIT(A) had passed a very speaking order. For the sake of brevity, we reproduce the relevant portion of his order as under :
"I have carefully considered the reasoning adopted by the A.O. in making the impugned addition and also the submissions of the A.R. It is a fact that the assessee has followed the same method of accounting during the relevant year which it had followed in the past. Though rule of consistency is not sacrosanct for the purpose of Income Tax proceedings but the same cannot be disregarded altogether unless and until it can be shown that the method of accounting consistently followed by the assessee has resulted in under estimation of his income in the past. The assessee has been following, what can be loosely termed as Percentage Completion Method, in respect of its business. The A.O. has made an observation that the valuer who prepared the project report for the assessee had estimated the cost of the entire project at Rs. 1,10,04,994/- and since the assessee had spent an amount of Rs.1,30,00,000/- by the end of the financial year under consideration in the project and recovered Rs.1,37,32,156/- in consideration. The A.O. further observed that out of the twelve purchasers declared by the assessee during the year under consideration, seven of them have paid the full amount of purchase consideration and from the rest of the five such purchasers only 10% of the purchase consideration was remaining to be received. Considering these facts the A.O. concluded that all significant risks and rewards of ownership of the property had been transferred to the buyers and since the assessee had recovered more than the cost of its project, there was no reason not to recognize the revenue related to the sold flats. The A.O. has also made reference to the Guidance Notes on Revenue Recognition m the case of Builders which have been reproduced above in the preceding paras). For the sake of convenience the recommendations contend in the said Guidance Note are reproduced below:
" RECOMMENDATIONS -
Revenue in case of real estate sales should be recognized when all the following conditions are satisfied:
(vi) The seller has transferred to the buyer all significant risks and rewards of ownership and the seller retains no effective control of the real estate to a degree usually associated with ownership;
(vii) No significant uncertainty exists regarding the amount of the consideration that will be derived from the real estate sales; and
(viii) It is not unreasonable to expect ultimate collection.
The determination of point of time when all significant risks and rewards of ownership are transferred depends on the facts and circumstances of each case considering the terms and conditions of the agreement. In case of real estate sales, all significant risks and rewards of ownership are normally considered to be transferred when legal title passes to the buyer (e.g., at the time of the registration, with the relevant authorities, of the real estate in the name of the buyer) or when the seller enters into an agreement for sale and gives possession of the real estate to the buyer under the agreement. All significant risks and rewards of ownership are also considered to be transferred, if the seller has entered into a legally enforceable agreement for sale with the buyer and all the following conditions are satisfied even though the legal title is not passed or the possession of the real estate is not given to the buyer.
7(a) The significant risks related to real estate have been transferred to the buyer. In case of real estate, price risk is generally considered to be one of the most significant risks.
(b) The buyer has a legal right to sell or transfer his interest in the property, without any condition or subject to only such conditions which do not materially affect his right to benefits in the property. When the seller has transferred to the buyer all significant risks and rewards of ownership, it would be appropriate to recognize revenue at that stage subject to fulfillment of other conditions specified in paragraph 6 above, provided the seller has no further substantial acts to complete under the contract. However, in case the seller is obliged to perform any substantial acts after the transfer of all significant risks and rewards of ownership, revenue should be recognized on proportionate basis as the acts are performed, i.e. by applying the percentage of completion method in the manner explained in Accounting Standard (AS)7, construction contracts. An example is a building or other facility on which construction has not been completed though all significant risks and rewards of ownership have been transferred pursuant to the fulfillment of conditions stated in paragraph 7 above. Another example is of a land which is yet to be developed though the seller has transferred all significant risks and rewards of ownership of the land to the buyer through an agreement for sale as per paragraph 7 above."
A perusal of the above shows that the revenue in case of real estate developers should be recognized when the significant risks and rewards of ownership related to the real estate have been transferred to the buyers. This happens, generally, when either the property is transferred to the buyer by way of registration in his name with the relevant authorities when the seller enters into an agreement for sale and gives possession of the property to the buyer under the agreement. The guidance note also recommended that revenue may be recognized even though the legal title of the property is not passed or the possession of the property is not handed over to the buyer, when the seller has transferred all the significant risks and rewards of the ownership and the seller retains no effective control over the property and seller has no further substantial cause to complete under the contract.
In the instant case, no legal title of the properties had been transferred to the buyers nor possession of the property had been given to them. As regards the transfer of risks and rewards of ownership of the property to the buyers, though 90% or more of the sale consideration has already been received by the assessee, it is observed from the assessment order itself that only 30% of the project had been completed during the relevant finncial year and the job regarding foundation, RC work and external and internal bricks had been completed. This itself shows that the building construction was still incomplete and the seller still had substantial act to complete under the contract in respect of the property under consideration, therefore, the seller was not in a position to pass on the risks and rewards of the ownership of the property to the buyers. In the light of the above facts, it is clear that the assessee had not transferred significant risks and rewards of the ownership of the property to the buyers, therefore, the recognition of revenue, as has been done by the A.O. by treating the transactions with the twelve buyers who had paid 90% or more of the sale consideration to be completed transactions, is not correct. Accordingly, the conclusion by the A.O. that the accounting method followed by the assessee has resulted in incorrect computation of profits is not correct. Since, as has been held above, the sale of flats to the 12 buyers had not been 8 completed, and since the method of the accounting followed by the assessee during the relevant year was consistent with that the method of accounting being followed by it in all the earlier years, the addition of Rs.9,63,5 871- made by the A.O. is found to be unjustified, therefore, the same is deleted. Thus, ground no.2 of the appeal is allowed."
In view of the above and in the absence of any contrary material brought on record by the revenue to rebut the aforesaid finding of the Ld. CIT(A), we do not find any infirmity in his order and the same is hereby upheld. Therefore, the ground of appeal of the revenue is dismissed.
6. In respect of Ground No. 3 brief facts of the case are that the Assessing Officer observed that the assessee had claimed interest to partners of Rs.1,39,636/-. She also observed that the assessee had extended loan worth Rs.25,90,000/- to its partners on which no interest was charged by it. Accordingly, the A.O. disallowed the claim of interest of Rs.1,39,636/- paid by the assessee to its partners on their capital. In appeal, the Ld. CIT(A) restricted the disallowance on this account to the interest relatable to Rs.7,40,000/-. Aggrieved by the said order, the revenue is now in appeal before us.
7. At the time of hearing before us, the Ld. DR relied on the order of the Assessing Officer and submitted that from the Balance Sheet it was seen that the assessee gave loan to their partners amounting to Rs.25,90,000/- and no interest was shown. During the scrutiny assessment the assessee was asked why interest was not charged on this loan, there was no reply on behalf of the assessee. Therefore, it was clear that if the firm gives loan to partners, it should charge interest to partners if it is giving interest on capital of the partners. For this reason, the Assessing Officer has rightly disallowed the interest of Rs.1,39,636/-. He, therefore, urged before the bench to set aside the order of the Ld. CIT(A) and that of the Assessing Officer be restored.
8. On the other hand, the Ld. Counsel for the assessee relied on the order of the Ld. CIT(A) and urged before the bench to confirm the same.
9. We have heard both the parties and perused the material available on record. We find that the interest of Rs.1,39,636/- paid by the assessee to its partners on their capital was disallowed by the Assessing Officer as business expenses since the assesee had extended loan worth Rs.25,90,000/- to its partners on which no interest was charged by it. However, the Ld. CIT(A) restricted the disallowance on this account to the interest relatable to Rs.7,40,000/- of the interest bearing funds by observing as under :
9"Though it is true that charging of interest on loans extended to the partners is not mandatory but it is expected that the funds of the assessee are utilized for the purposes of its business, especially interest bearing funds. From the perusal of the balance sheet of the assessee for the relevant year it is observed that the partners had opening Capital of Rs.11,63,642/- which was interest hearing. It is further observed hat the assessee had received loans of Rs, 17,00,000/- from the partners on which no interest has been paid. There is another loan of Rs. 1,50000/- from another creditor on which no interest is shown to have been paid. As a result the assessee had total interest free funds to the tune of Rs. 18,50,000/- during the relevant year. Since, the assesee had interest free funds of Rs.18,50,000/-, the AO was not justified in disallowing the entire amount of interest allowed to the partners. In my view, disallowance of interest relatable to Rs.7,40,000/- of the interest bearing funds will be justified. Therefore, the disallowance on this account is restricted to the interest relatable to Rs.7,40,000/-."
In view of this and also in the absence of any contrary material brought on record by the revenue authorities to rebut the aforesaid finding of the Ld. CIT(A), we do not find any infirmity in his order and the same is hereby upheld. This ground of appeal of the revenue is, therefore, dismissed.
10. In respect of ground No. 4 the relevant facts as observed by the Assessing Officer are that the assessee had inducted a new partner on the death of one of its partners who is the wife of the deceased partner. The assessee had also produced an amended deed of partnership before the Assessing Officer. Since there was no mention of remuneration to the new partner in the amended partnership deed, the Assessing Officer disallowed the claim of remuneration paid to her. In appeal, the Ld. CIT(A) deleted the said addition. Aggrieved by the said order, the revenue is in appeal before us.
11. At the time of hearing before us, the Ld. DR relied on the order of the Assessing Officer and submitted that since the amended partnership deed does not mention regarding remuneration to the new partner, the Assessing Officer has rightly disallowed the payment of remuneration to the new partner. He, therefore, prayed before the bench to set aside the order of the Ld. CIT(A) and restore that of the Assessing Officer.
12. On the other hand, the Ld. Counsel for the assessee while reiterating his same submissions as submitted before the lower authorities relied on the order of the Ld. CIT(A) and prayed before the bench to confirm the same. He also contended that the new partner Smt. Sunanda Roy was inducted in place of deceased partner Swapan Kumar Roy, the husband of Smt. Sunanda Roy and all the terms and conditions of the 10 original partnership deed shall remain unaltered and shall form part and parcel of the amended partnership deed.
13. We have heard the rival submissions and perused the material placed before us. We find that the Assessing Officer disallowed the remuneration paid to the new partner since the amended partnership deed does not mention regarding remuneration to the new partner. We find force in the submission of the Ld. Counsel that the new partner Smt. Sunanda Roy was inducted in place of deceased partner Swapan Kumar Roy, the husband of Smt. Sunanda Roy and all the terms and conditions of the original partnership deed shall remain unaltered and shall form part and parcel of the amended partnership deed. The Ld. CIT(A) also in the light of the above submission deleted the addition so made by the Assessing Officer. In view of the above and in the absence of any contrary material brought on record by the revenue authorities, we do not find any infirmity in the order of the Ld. CIT(A) in deleting the disallowance of remuneration of Rs.76,664/- to Smt. Sunanda Roy and the same is hereby upheld. This ground of revenue is, therefore, dismissed.
14. In the result, the appeal of the revenue is dismissed.
15. Order is pronounced in the open court on 31.1.2011.
Sd/- Sd/-
सी.डȣ.राव, लेखा सदःय डȣ. के. ×यागी, Ûयायीक सदःय
(C. D. Rao) (D. K. Tyagi)
Accountant Member Judicial Member
(तारȣख)
तारȣख) Dated : 31st January, 2011
Jd.(Sr.P.S.)
वǐरƵ िनǔज सिचव
आदे श कȧ ूितिलǒप अमेǒषतः- Copy of the order forwarded to:
1. अपीलाथȸ/APPELLANT - ITO, Ward-50(4), Kolkata.
2 ू×यथȸ/ Respondent, M/s. Best & Best Construction, 347/1, Dum Dum Road,
Kolkata-74..
3. आयकर किमशनर/The CIT, Kolkata.
4. आयकर किमशनर (अपील)/The CIT(A), Kolkata.
5. वभािगय ूितनीधी / DR, Kolkata Benches, Kolkata
स×याǒपत ूित/True Copy, आदे शानुसार/ By order,
उप पंजीकार/Deputy Registrar.