2012 (10) TMI 1019 - HC - Income Tax

Estimating gross profit - rejection off books of accounts - Held that - The assessee being a developer of the project, profit in his case, will arise on transfer of title of the property and receipt of any advances or booking amount cannot be treated as trading receipt of the year under consideration. The Tribunal further noted that such method of accounting followed by the assessee had been accepted by the revenue in earlier years. The Tribunal was, therefore, of the opinion that the Assessing Officer s decision to reject the book results during the year under consideration was not justified. We are of the opinion that the Tribunal committed no error. If as per the accounting standard available, the assessee was entitled to claim the entire income on completion of the project and if such accounting standard was accepted by the revenue in the earlier years, in the present year, the Assessing Officer could not have taken a different stand and that too, without hearing the assessee. Tribunal is right in law and on facts in deleting the addition in respect of deemed dividend under section 2(22)(e)

Summary

Issues:
1. Addition of estimated gross profit
2. Deletion of deemed dividend under section 2(22)(e) of the I.T. Act, 1961

Analysis:
1. The first issue pertains to the addition of Rs. 27.85 lakh as estimated gross profit by the Assessing Officer. The CIT (Appeals) deleted this addition on the grounds that the Assessing Officer did not issue a notice to the assessee before making such substantial additions. Moreover, it was argued that the assessee, being an organizer and developer, is entitled to receive only supervision fees, not income on booking amounts. The Tribunal upheld this decision, stating that profit for the developer arises on property transfer, not on booking amounts. The Tribunal also noted that the revenue had accepted the assessee's accounting method in previous years. The High Court agreed with the Tribunal, emphasizing that the Assessing Officer should not have rejected the book results without hearing the assessee, especially when the accounting standard was consistent with previous years.

2. The second issue concerns the deletion of Rs. 3,56,878 related to deemed dividend under section 2(22)(e) of the I.T. Act, 1961. The High Court decided to admit the appeal only for this question, to be heard alongside another tax appeal. The specific details and arguments related to this issue were not discussed in the provided summary, indicating that a more comprehensive analysis would require access to additional information or the complete judgment.

In conclusion, the High Court upheld the decision of the Tribunal regarding the addition of estimated gross profit, emphasizing the importance of consistency in applying accounting standards and the necessity of hearing the assessee before making significant additions. The issue of deemed dividend under section 2(22)(e) was admitted for further consideration, indicating the need for a detailed examination in conjunction with another tax appeal.