Income Tax Appellate Tribunal - Mumbai
Prem Enterprises, Mumbai vs Assessee on 25 July, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH 'C', MUMBAI
BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER &
SHRI VIVEK VARMA, JUDICIAL MEMBER
I.T.A. NO. 4189/M/2008 (AY: 2005-2006)
I.T.A. NO. 5678/M/2009 (AY: 2006-2007)
M/s. Prem Enterprises, Vs. ITO - 22 (2)-2,
1, Sukh Sagar, D.K. Sandu Marg, Vashi,
Chembur, Navi Mumbai.
Mumbai - 400 071.
PAN: AAGFP1420K
(Appellant) (Respondent)
Appellant by : Mr. Dhirendra M. Shah
Respondent by : Mr. P.C. Maurya, DR
Date of Hearing: 12.07.2012 Date of order:25.07.2012
ORDER
Per VIVEK VARMA, JM:
These two appeals filed by the assessee are against the orders of CIT (A)-XXII, Mumbai, dated 22.04.2008 and 26.08.2009 respectively for assessment years 2005- 2006 and 2006-2007.
2. The common issue in both years involved is the estimated profit taken at 8% on total cost, instead of project completion method adopted by the assessee.
3. The facts of the case are that the assessee was carrying on a project and was consistently following the project completion method and the assessee declared its profit from the project in assessment year 2007-2008, on the basis of completion of project and the occupation certificate issued by the BMC on 22.09.2006. 2 ITA No. 4189/M/2008 ITA No. 5678/M/2009
4. The CIT(A), in the impugned order, has reproduced the AO's observations, against the declared results and observed as under:
"During the assessment proceedings, the Assessing Officer observed that the appellant is following project completion method for determining the profit of the project. The profit shown in the project was offered for taxation for the AY 2007-2008 on the basis of completion of the project and occupation certificate issued by the B.M.C. on 22.09.2006. The Assessing Officer has pointed out to the appellant that there was a change of accounting standard w.e.f 01.04.2003. The Counsel of the appellant has claimed that accounting AS-9 is applicable to the builders and developers and AS-7 is meant for Civil Contractors. Accounting Standard AS-9 gives the option of proportionate completion method and completed service contract method. Proportionate completion method is defined as performance consists of the execution of more than one act. Revenue is recognized proportionately by reference to the performance of each act. The appellant has further submitted that completed service method is relevant to this pattern of performance and accordingly revenue is recognized when the sole of final act takes place and service becomes chargeable. With these arguments the appellant was of the view that he has option and he can opt the accounting method of service-completed act. The Assessing officer has considered the reply of the appellant and rejected the plea of the appellant that the profit arises only when possession of the constructed building is give. The Assessing Officer is of the view that revenue is to be recognized in the year in which it has been earned and the same cannot be postponed on future on the ground of following projection completion method. The Assessing Officer further argued that in this case the appellant is not executing a large project consisting of several buildings where the profit from the project cannot be determined during the previous year relevant to assessment year under consideration. The appellant's project was of constructing second floor on a one plus building by purchasing an existing building and utilization of TDP in the project. The Assessing Officer has further argued that land has been purchased during the period relevant to AY 2003-2004. As per the working of the Counsel of the appellant, the total cost including land cost, construction cost, Municipal Tax and Administrative expenses amounting to Rs. 4,58,07,762/- as against the total expenditure debited to the accounts of Rs. 5,69,18,846/- and final profit for Assessment Year 2007-2008 was shown at Rs.3 ITA No. 4189/M/2008 ITA No. 5678/M/2009
52,75,919/-. The Assessing Officer has observed that 80% of the total project costs including land cost, construction cost and administrative expenses have been incurred up to the end of the previous year relevant to this assessment year. Hence, he has concluded that by following the work completion method, the appellant is creating loss to the revenue and estimated the profit at the rate of 8% of the total cost including land cost, construction cost and administrative expenses of Rs. 4,58,07,762/- and determining the profit at Rs. 36,64,620/-".
5. Not satisfied with the view taken by the AO, the assessee approached the CIT (A), before whom, the assessee's counsel reiterated the factual position and submitted as under:
"Our client has purchased land along with tenanted ground and first floor structure situated at Madan Malviya Road, Mulund (W), Mumbai - 400 080 for M/s. Pressure Pack Pvt. Ltd. Our client has purchased TDS on the said premises and constructed second floor on the said property.
Our client followed the accountancy method of work completion basis and accordingly carried forward the work-in-progress account till the work is completed. The possession was also given to the purchasers after occupation certificate from the authority is received. The work is completed in FY 2006-2007 i.e. AY 2007-2008 and occupation certificate is also obtain during he said period. Moreover the possession is also parted to the purchaser in FY 2006-2007 is Assessment Year 2007-2008.
The accounting AS-9 is applicable to builders and developers i.e. rendering of services. This accountancy gives the option i.e. proportionate completion method and completed service contract method.
Proportionate complete method is defined as perfornmance3s consists of the execution of more than one act. Revenue is recognized proportionately by reference to the performance of each act. When services are provided by an indeterminate number of act over a specific period of time, revenue is recognized on a straight line basis over the specific period unless there is evidence that same other method better represents the pattern of performance.
Completed services contract method is performance consists of the execution of a single act. Alternatively, services are performed in more than 4 ITA No. 4189/M/2008 ITA No. 5678/M/2009 single act and the services yet to be performed are so significant in relation to the transaction taken as a whole that performance cannot be deemed to have been completed until the execution of those acts. The completed service contract method is relevant to this pattern of performance and accordingly revenue is recognized when the sole or final act taken place and the services becomes chargeable.
Thus it is clear that our client can opt the accountancy method of completed service contract. The performance is to construct the units in the building and giving possession of the said constructed unit to the purchasers. This is the sole and single act of our client and the said act takes place when possession is given to the purchasers.
Our client has completed the project and given the possession of the said units during AY 2007-2008 after obtaining occupation certificate from authority. Thus our client's sole and final act i.e. giving possession, taken place in AY 2007- 2008 and as such the services becomes chargeable in AY 2007-2008 and our client has offered income of Rs. 52,75,919/- after deducting the administrative expenses such as Audit fees, legal fees, Account writing charges etc. on total accost of project Rs. 569,18,846/- and has paid the total taxes of Rs. 18,46,087/- including interest u/s 234C Rs. 70,212/- comprising advance tax of Rs. 15,00,000/- and self assessment tax of Rs. 3,46,087/-.
We further, state that accounting standard AS-7 which has been revised by ICAI is applicable to Construction Contracts. The revised AS-7 recognized only the percentage completion method and is to be applicable only to the Construction Contractors' Financial accounting and not be builders and developers doing activity in their own account. These builders will have to recognize the Revenue as AS-9 "Revenue Recognition".
Under the circumstances and facts stated above, we request you to kindly adopt the accounting method as followed by our client as stated above and allow the above appeal and oblige".
6. The CIT (A), while deciding the issue recognized the fact that the applicability of AS-7 and AS-9 are debatable issues. However, the CIT(A) came to the conclusion that the AO was correct in bringing to tax the amount of deemed profit in the current years 5 ITA No. 4189/M/2008 ITA No. 5678/M/2009 and not in assessment year 2007-2008, which according to the revenue authorities was postponement of tax liability.
7. Aggrieved, the assessee is in appeal before the ITAT in both the years.
8. Before us, the AR pointed out that being a builder, the assessee was following AS-9, which gave option to the assessee for adoption of proportionate completion method and completed service contract method and accordingly, the assessee declared its profit and paid taxes when the assessee was in a position of handing over the possession, i.e. after the receipt of occupation certificate from B.M.C. on 22.09.2006, which fell in assessment year 2007-2008. The AR also pointed out that the CIT(A) sustained the computation at 8%, which is in accordance with section 44AE of the Act and also made a passing reference of applicability of section 145, wherein the Act gives inherent power to estimate the income of the assessee. But in reality, the assessee was maintaining its books, which have not been found to be incorrect or incomplete or not giving out proper results. In these circumstances, the estimation of income at 8% in both the years was not correct and therefore, the income so estimated should be deleted in the year under consideration.
9. We have gone though the order of the revenue authorities and have perused the material placed on record.
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10. It is a fact that the assessee received the occupation certificate on 22.09.2006, falling in assessment year 2007-2008, where the assessee declared its profit and paid the taxes thereon.
11. If we strictly go into the computation of profits for both the years under consideration, applicability of 8% is acceptable if the profit is to be accepted as per section 44AE, where no books are claimed to have been maintained. The AO neither ignored the books nor rejected the books, but he applied 8% of the profit as estimated/ computed, which according to us is neither legal nor permissible. We also cannot endorse the observation of the CIT (A), when he holds that the AO has inherent power given in section 145 to estimate the income of the assessee, if he is not showing the correct profit by applying the particular method. Section 145(3) is very clear, where it provides as under:
"Sec.145 (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144".
12. In the instant cases, it has been accepted in the impugned orders that application of AS-7 or AS-9 is debatable issues, besides this, at no point of time; the AO makes any attempt to reject the books, which in these circumstances have to be accepted. The AR has referred to the case of CIT vs Advanced Construction Co. P. Ltd., reported in 275 ITR 30 (Guj), wherein it was observed that, "the provision, therefore, specifically provides that the choice of method of accounting lies with the assessee, the 7 ITA No. 4189/M/2008 ITA No. 5678/M/2009 only caveat being that it has to show that the chosen method has been regularly followed. The section is couched in mandatory terms and the Department is bound to accept the assessee's choice of method and regularly employed, except for the situation, wherein the Assessing Officer is permitted to intervene, in case it is found that true income, profits and gains cannot be arrived at by the method employed by the assessee. In the present case, the Tribunal has categorically found that "the assessee has followed the standard accounting method as this being the first year of the business it was the sole choice of the assessee to adopt a particular method of accounting contemplated under section 145 of the Act". The AR also referred to the case of ACIT vs Dharti Estate 129 ITD 1 (Mum)(TM), wherein it was held (head notes), "On appeal, Commissioner (Appeals) held that method of accounting followed by assessee, i.e., percentage completion method, was in consonance with Accounting Standard No. 7 issued by Institute of Chartered Accountants of India. On revenue's appeal, it was noted that assessee had followed percentage completion method consistently since its inception and had been declaring income / loss from year to year and same was accepted in earlier years - Moreover, Assessing Officer had not rejected book results by pointing out any defect in books maintained by assessee - It was also noticed that categorical finding of Commissioner (Appeals) highlighting that assessee had not deviated from guidelines issued by Institute of Chartered Accountants (under AS-7), was not challenged by revenue by producing any evidence thereof - Whether, on facts, Commissioner (Appeals) was justified in upholding method of valuation of stock adopted by assessee".
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13. With these observations, we accept the arguments of the AR, that when an option has been statutorily provided for maintenance of books in AS-9, which the assessee was following. This is, besides the fact that there was no observation from either of the two revenue authorities that the results declared by the assessee did not show correct results. Had there been rejection of books, that could have, possibly and consequently, amounted to estimation of income under section 44AE, which the revenue authorities did apply. In these circumstances, we, do not find any justification in rejecting the method of accounting followed by the assessee and substituting the same, and adopting AS-7 and then follow it up by estimation. We reject the theory adopted by the revenue authorities. Moreover, as per the project completion method followed by the assessee, the entire profit of the project has been offered to tax by the assessee in assessment year 2007-08, which has been accepted by the AO.
14. We, therefore, set aside the order of CIT (A) and direct the AO to delete the addition made in both the impugned years and accept the results, declared by the assessee.
15. In the result, both the appeals are allowed.
Order pronounced in the open court on 25.07.2012.
Sd/- Sd/-
(P.M. JAGTAP) (VIVEK VARMA)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Date : 25.07.2012
At :Mumbai
9
ITA No. 4189/M/2008
ITA No. 5678/M/2009
Okk
Copy to :
1. M/s. Prem Enterprises, Mumbai.
2. ITO-22(2)(2), Mumbai.
3. The CIT (A), Concerned.
4. The CIT concerned.
5. The DR "C", Bench, ITAT, Mumbai.
6. Guard File.
// True Copy//
By Order
Assistant Registrar
ITAT, Mumbai Benches, Mumbai