2015 (2) TMI 111 - AT - Income Tax

Estimation of profit - revenue recognition - rejection of books of accounts - as per AO assessee was following project completion method and no profit is declared on the basis of percentage completion method - in respect of project Iraisaa and Costarica, the AO made an addition by taking 10% profit on work-in-progress in respect of these projects also confirmed by CIT(A) - Held that - After verifying all the accounts for the years under consideration, we found that assessee was following percentage completion method for Iraisaa and Costarica projects and has offered for taxation he amount of ₹ 3,60,509/- and ₹ 474,060/- respectively for the said projects, the work of which is under progress. In view of these facts allegation of AO to the effect that the assessee did not declare any profit with regard to work-in-progress and the completed project, is also having no basis. In view of above discussion, we set aside the order of lower authorities for making addition by estimating 10% profit on work-in-progress for both the years. The AO is directed to reframe assessment keeping in view our above observation. Needless to say the assessee should be given full opportunity before finalizing the assessment. - Decided in favour of assessee for statistical purposes. Disallowance of business expenditure - Held that - It is clear from the record that payments so made was towards compensation to the customers, who have booked their flats and the same was paid for the reason of commercial expediency. It is pertinent to mention that assessee has not claimed expenditure in respect of refund of sale consideration of ₹ 1,43,97,500/-, however, only amount of compensation termed as buy-back expenses aggregating to ₹ 65,68,500/- which has been claimed as deduction which amount as has been informed in the course of regular business. Thus, there is no reason to disallow such expenses as revenue expenses. Accordingly, we direct the AO to allow expenses of ₹ 65,68,500/- as revenue expenses. - Decided in fvaour of assessee.

Summary

Issues Involved:

1. Rejection of Books of Accounts and Estimation of Business Income
2. Method of Revenue Recognition for Completed and Ongoing Projects
3. Disallowance of Business Expenditure

Issue-Wise Detailed Analysis:

1. Rejection of Books of Accounts and Estimation of Business Income:

The Assessing Officer (AO) rejected the books of accounts of the assessee for the assessment years 2008-09 and 2009-10 by invoking provisions of Section 145(3) of the Income Tax Act. The AO estimated the business income based on the actual sale of flats, observing that the assessee did not declare any profit on work-in-progress and was following the project completion method instead of the percentage completion method mandated by the revised AS-7. The AO estimated the profit at 10% of the work done during the year, which was challenged by the assessee.

2. Method of Revenue Recognition for Completed and Ongoing Projects:

The CIT(A) deleted the addition made by the AO for three completed projects (Woods, Meadows, and Hermitage) but upheld the addition for two ongoing projects (Costarica and Iraisaa). The CIT(A) reasoned that applying the new method to completed projects would result in double taxation since profits had already been declared in previous years. However, for new projects, the CIT(A) agreed with the AO that the percentage completion method should be applied, noting inconsistencies in the profit percentages declared by the assessee for Iraisaa (3.74%) and Costarica (24.48%).

The ITAT found that the assessee had consistently followed the percentage completion method, which was accepted by the department in previous years. The AO's estimation of profit without rejecting the method of accounting and the books of accounts was deemed incorrect. The ITAT noted that the assessee had declared profits for both Iraisaa and Costarica projects based on the percentage completion method, and the AO's allegation of non-declaration of profit was factually incorrect. The ITAT directed the AO to reframe the assessment, considering the percentage completion method followed by the assessee.

3. Disallowance of Business Expenditure:

The AO disallowed business expenditure of Rs. 65,68,500/- claimed by the assessee for compensation paid to purchasers who opted out of deals due to non-performance. The AO treated this expenditure as capital in nature, and the CIT(A) confirmed this disallowance. The ITAT, however, found that the compensation was paid for commercial expediency and was part of the regular business. The ITAT directed the AO to allow the expenditure as revenue expenses, noting that the assessee did not claim the refund of sale consideration but only the compensation amount.

Conclusion:

The ITAT allowed the appeals of the assessee in part. The AO was directed to reframe the assessment for both years, considering the percentage completion method for revenue recognition. Additionally, the AO was instructed to allow the compensation expenditure as revenue expenses. The ITAT emphasized the need for consistency in the method of accounting and recognized the commercial nature of the compensation paid by the assessee.