2009 (1) TMI 540 - AT - Income Tax

Summary

Issues Involved:
1. Treating both the Jogeshwari and Nalasopara Projects as completed and computing profits from both projects erroneously.
2. Not considering the grounds of appeal regarding disallowance out of Telephone Expenses.
3. Allowance of Business Purchase Expenses and Development Expenses as cost of the project if treated as completed.
4. Treatment of Maintenance Charges receivable as income from the project.

Detailed Analysis:

1. Treating both the Jogeshwari and Nalasopara Projects as completed and computing profits from both projects erroneously:

The assessee, a proprietor of M/s. Millan Corporation engaged in the business of builder and developer, adopted the percentage completion method for accounting. The Assessing Officer (AO) treated both Jogeshwari and Nalasopara Projects as completed before the end of the previous year under consideration, computing profits accordingly. The AO's calculations were as follows:

- Jogeshwari Project: Rs. 10,209,611
- Nalasopara Project: Rs. 916,510
- Total Business Profit: Rs. 11,126,121

The CIT(A) upheld the AO's decision, rejecting the assessee's contention that expenditures under business purchase and development accounts should have been deducted while computing the project profits due to lack of proper explanation and evidence.

The assessee argued that both projects were incomplete, supported by certificates from the architect. For Jogeshwari Project, the fourth floor was not constructed due to pending TDR acquisition. For Nalasopara Project, construction was only partially completed, with subsequent phases planned.

The Tribunal examined the principles of accounting for construction contracts, referencing ICAI's Accounting Standard AS-7 and relevant case law. It emphasized the importance of the method of accounting regularly employed by the assessee and the need for the method to reflect true profits. The Tribunal noted that the assessee failed to provide evidence of subsequent expenditures to complete the projects, indicating that the projects were indeed completed as per the AO's findings. However, the Tribunal directed the AO to recalculate the project profit or loss after considering the additional grounds raised and the AS-7 guidelines.

2. Not considering the grounds of appeal regarding disallowance out of Telephone Expenses:

The assessee raised a ground regarding disallowance out of Telephone Expenses, which was not considered by the CIT(A). The Tribunal dismissed this ground of appeal since the rectification application was pending before the CIT(A), directing the CIT(A) to dispose of the rectification application promptly.

3. Allowance of Business Purchase Expenses and Development Expenses as cost of the project if treated as completed:

The assessee raised additional grounds, arguing that if the projects were treated as completed, then Business Purchase Expenses (Rs. 6,36,848) and Development Expenses (Rs. 73,16,292) should be allowed as costs of the project. The Tribunal agreed that if the projects were considered complete, all related expenses should be included in the profit calculation. The AO was directed to consider these expenses in the recalculated project profits.

4. Treatment of Maintenance Charges receivable as income from the project:

The AO treated Maintenance Charges receivable (Rs. 34,99,193 for Jogeshwari and Rs. 92,088 for Nalasopara) as income from the project. The assessee contended that these were actual maintenance charges incurred and should be set off against maintenance charges received. The Tribunal directed the AO to reconsider the treatment of these charges in the recalculated project profits.

Conclusion:

The Tribunal allowed the appeal for statistical purposes, directing the AO to recalculate the project profits considering the additional grounds, AS-7 guidelines, and after providing a reasonable opportunity of hearing to the assessee. The Tribunal emphasized the importance of accurate accounting methods and the necessity of reflecting true profits in the financial statements.