2018 (8) TMI 2076 - AT - Income Tax

Under-reporting of income from business - accounting for real estate transactions - assessee did not follow the percentage completion method while following mercantile system of accounting - HELD THAT - Revenue could not point out any specific error in the order of the CIT(A). Ld D.R. could not controvert the findings of the CIT(A) that according to guidance note of accounting for real estate transactions (Revised 2012) issued by the ICAI percentage completion method can be applied when the stage of completion of the project reaches a reasonable level of development. A reasonable level of development is not achieved if the expenditure incurred on construction and development cost is less than 25% of the construction cost. In the instant case except in three project out of seventeen running projects construction cost is less than 25%of the project cost. Out of the closing work in progress of Rs. 2, 73, 68, 844/- Rs. 2, 40, 98, 078/- belongs to 14 projects which have incurred marginal expenditure and even less than 25% of the projected cost of the concerned project. So percentage completion method are not applicable to these projects. Out of rest amount of Rs. 32, 70, 766/- in three projects it is noticed from the WIP-sheet already submitted some flats are pending to be completed. If at all percentage completion method is applied on Rs. 32, 70, 766/- for three projects namely Jagannath Estate Jagannath Prava and Jagannath Park Enclave element of estimated profit in the project works out to Rs. 6, 16, 257/-. We find that the CIT(A) after considering the entire facts of the case has allowed relief of Rs. 8, 93, 83, 742/- and sustained the disallowance of Rs. 6, 16, 258/-. Therefore we find no infirmity in the order of the CIT(A) which is hereby confirmed and ground of appeal of the revenue is dismissed. Suppression of sale receipts on sale of land/plot when the assessed has booked loss on it - HELD THAT - The profit disclosed by the assessee on land sales comes to around 5.91% which appears to be reasonable. Further the only reason given by the Assessing Officer in the assessment order to reject book results in respect of land sales was disclosure of loss from such transaction. Since the assessee has not disclosed any loss from land sale the very reason given by the Assessing Officer to reject the book results does not exist. Hence the profit disclosed by the assessee has to be accepted. We find that the CIT(A) after considering the entire facts of the case has deleted the addition of Rs. 5, 43, 99, 650/-. Therefore we find no infirmity in the order of the CIT(A) which is hereby confirmed and ground of appeal of the revenue is dismissed.

Summary

Issues Involved:

1. Deletion of addition on account of underreporting of income from business due to non-adoption of the percentage completion method (PCM).
2. Deletion of addition on account of suppression of sale receipts on the sale of land/plot.

Detailed Analysis:

Issue 1: Deletion of addition on account of underreporting of income from business due to non-adoption of PCM

The revenue appealed against the CIT(A)'s order deleting the addition of Rs. 9,00,00,000 made by the AO for underreporting of income. The AO observed that the assessee followed a peculiar completed project method, recognizing income only upon significant completion or sale of flats. The AO insisted on PCM as per ICDS-III, which was not applicable for AY 2013-14 but referenced the 2012 guidance note from ICAI. The AO recalculated the receipts, resulting in an additional income of Rs. 9,00,00,000.

The assessee argued that PCM was not mandatory for AY 2013-14 and that the AO's application of PCM was based on incorrect figures and assumptions. The CIT(A) found that the AO's calculations were flawed and that PCM should only apply to projects with at least 25% of the construction cost incurred. Out of 17 projects, only 3 met this criterion, resulting in a correct addition of Rs. 6,16,258, not Rs. 9,00,00,000. The CIT(A) also noted that the AO had previously applied PCM for AY 2012-13 with a minor addition, which the assessee accepted.

The tribunal upheld the CIT(A)'s decision, confirming that the AO's application of PCM was incorrect and the addition of Rs. 9,00,00,000 was not justified.

Issue 2: Deletion of addition on account of suppression of sale receipts on the sale of land/plot

The AO added Rs. 5,43,99,650 to the assessee's income, alleging suppression of sale receipts and booking of losses on land sales. The AO argued that it was improbable for a prudent businessman to sell land at a loss. The AO recalculated the profit margin at 8%, resulting in the addition.

The assessee contended that the AO misunderstood the figures, incorrectly including development expenses related to construction projects in the land costs. The CIT(A) found that the AO's figures were incorrect, as the development expenses were related to construction, not land. The correct profit from land sales was Rs. 62,77,130, not a loss, making the AO's addition baseless.

The tribunal confirmed the CIT(A)'s findings, noting that the AO's rejection of the book results was based on incorrect assumptions and figures. The profit disclosed by the assessee was reasonable, and the addition of Rs. 5,43,99,650 was unjustified.

Conclusion:

The tribunal dismissed the revenue's appeal and the assessee's cross-objection, confirming the CIT(A)'s decisions on both issues. The tribunal found no errors in the CIT(A)'s orders, which were based on correct interpretations of the facts and applicable accounting standards. The additions made by the AO were not justified, and the assessee's method of income recognition was upheld.