2010 (12) TMI 760 - AT - Income Tax

Block assessment - Nature of cancellation charges - Project completion method or the completed contract method - Accounting Standards 7 (AS7) - stamp duty and electrification charges recoverable by the assessee - admission of additional evidence by CIT(A) under rule 46A - all the issues decided in favor of assessee.

Issues Involved:
1. Deletion of addition on account of cancellation charges.
2. Deletion of addition on account of registration and electrification charges.
3. Adoption of percentage completion method versus project completion method.
4. Deletion of addition towards unexplained cash credits under Section 68.
5. Admission of additional evidence without affording opportunity to the Assessing Officer (AO), violating Rule 46A of Income Tax Rules, 1962.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Cancellation Charges:
The AO added Rs. 10,97,850/- as notional income from cancellation charges, assuming the assessee should have forfeited earnest money from clients who defaulted on installment payments. The CIT(A) deleted this addition, noting that there was no evidence of cancellation charges being received outside the books of account. The CIT(A) emphasized that forfeiture of booking amounts due to non-fulfillment of stipulated conditions is different from charging cancellation fees. The Tribunal upheld CIT(A)'s decision, agreeing that the AO cannot impose notional income based on business decisions made by the assessee to maintain customer relations and market reputation.

2. Deletion of Addition on Account of Registration and Electrification Charges:
The AO added Rs. 3,82,94,536/- considering registration and electrification charges as capital expenditure. The CIT(A) deleted the addition, explaining that these expenses were recoverable from buyers and were shown as advances in the balance sheet, not claimed as expenses in the profit and loss account. The Tribunal upheld this view, noting that the assessee adopted a proper method of accounting, either by including these amounts in the cost of the project or showing them as recoverable from buyers. The amounts were not capital in nature and were not claimed as expenses, thus no addition was warranted.

3. Adoption of Percentage Completion Method versus Project Completion Method:
The AO added Rs. 28,21,000/- by adopting the percentage completion method, contrary to the project completion method consistently followed by the assessee. The CIT(A) deleted the addition, supporting the project completion method as a recognized accounting practice for the construction business. The Tribunal upheld this decision, noting that the department had accepted this method in earlier years and no defects were found in the books of account. The Tribunal emphasized that changing the method without any material discrepancy was unjustified.

4. Deletion of Addition Towards Unexplained Cash Credits Under Section 68:
The AO added Rs. 1,61,67,600/- as unexplained cash credits due to the failure of the assessee to produce confirmations from certain buyers. The CIT(A) deleted the addition, admitting additional evidence in the form of confirmations from buyers, noting that the AO had only requested confirmations for advances received in cash, not by account payee cheques. The Tribunal upheld CIT(A)'s decision, stating that the CIT(A) acted judiciously and within his powers to admit additional evidence, and there was no violation of Rule 46A since the AO did not specifically request confirmations for cheque transactions.

5. Admission of Additional Evidence Without Affording Opportunity to the AO, Violating Rule 46A:
The AO contended that the CIT(A) admitted additional evidence without giving an opportunity to the AO, thus violating Rule 46A. The CIT(A) admitted the additional evidence, noting that the AO did not request confirmations for advances received by cheque. The Tribunal upheld CIT(A)'s decision, stating that the CIT(A) has independent powers to call for information and examine evidence. The Tribunal found no procedural violation and emphasized that setting aside the matter would cause injustice to the assessee and give the AO another opportunity without a valid reason.

Conclusion:
The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decisions on all grounds. The CIT(A) acted within his powers, and the additions made by the AO were rightly deleted based on proper appreciation of facts and adherence to recognized accounting practices. The Tribunal emphasized the importance of procedural fairness and the proper exercise of judicial discretion by the CIT(A).

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