2016 (6) TMI 171 - AT - Income Tax

Nature of major Repair and Renovation expenditure on land without approval from local authorities - capital cost of improvement as contemplated by section 43(6)(c)(i)(A) - construction / renovation activity done by the same person who purchased the same premises later - Held that - on the touch stone of preponderance of probabilities which cannot be simply brushed aside or demolished by the Revenue based on conjectures and surmises on suspicion , except through cogent incriminating material which revenue has failed to bring on record in the instant case. In our considered view, the assessee has duly discharged his burden cast under the Act and now it was for the Revenue to have brought on record cogent incriminating material and evidences to rebut and demolish the contentions of the assessee conclusively on the touchstone of preponderance of probabilities which the revenue could not do except by bringing on record inspector report that two of the parties are not existing on the addresses given on the invoices which is not sufficient enough to fasten the liability on the assessee as it does not prove that these purchases were bogus and are accommodation entries as set out above by Revenue Even for the sake of argument it is assumed that the assessee has not obtained the approval from CIDCO for doing this major and extensive structural repair and modification work to the factory Building, this technical breach will not in itself disentitle the assessee from claiming the same under the Act as cost of improvement and more-so it is a case of major and extensive structural repair and modification to the existing factory building and not a case of construction of altogether new factory building. - No addition - Decided in favor of assessee. Accrual of income - project completion method - assessee has submitted that merely by receiving occupation certificate on 30/03/2009 , does not by itself mean that the project is complete as there are several other work which are done post receipt of this occupancy certificate dated 30-03-2009, such as applying for electrical connection, water connection, drainage connection etc and also finishing work is to be done in these flats to complete construction of these flats, as also there are other relevant factors to be kept in mind to book revenue as per percentage completion method apart from the occupancy certificate - Held that - Revenue has not rejected the books of accounts . Thus, keeping in view the peculiar facts and circumstances of the case and in the interest of substantial justice, we are setting aside this matter to the file of the A.O. with a direction to verify the contentions of the assessee that the entire profit from this Project Carmel with respect to all 27 flats so constructed is duly offered for taxation by the assessee albeit in the assessment year 2008-09,2009-10 and 2010-11. - Matter remanded back.

Summary

Issues Involved:

1. Rejection of the assessee's claim of ?48,22,390/- as capital cost of improvement.
2. Addition of ?77,99,056/- by altering the work in progress and adding it to the profit disclosed by the assessee.

Issue-wise Detailed Analysis:

1. Rejection of the Assessee's Claim of ?48,22,390/- as Capital Cost of Improvement:

The dispute centers around whether the assessee's claimed expenses of ?48,22,390/- for repairs and improvements to a factory building should be considered as a capital cost of improvement under section 43(6)(c)(i)(A) of the Income Tax Act, 1961. The Assessing Officer (AO) rejected the claim, citing the lack of approval from local authorities, the disproportionate amount of claimed expenses relative to the size of the building, and the absence of a written agreement specifying the need for such repairs before the sale. The AO also found discrepancies in the bills submitted by the assessee and deemed some purchases as bogus based on an inspector's report.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, emphasizing the absence of the claimed expenses in the deed of assignment and the suspicious nature of the Memorandum of Understanding (MOU) dated 3rd September 2007. The CIT(A) also noted that the MOU was not mentioned in the deed of assignment and found discrepancies in the amounts shown in the bills.

The Income Tax Appellate Tribunal (ITAT) examined the evidence, including the MOU, architect's certificate, and invoices, and found that the authorities below had based their conclusions on surmises and conjectures without sufficient evidence. The ITAT noted that the payments were made through banking channels, and taxes were deducted at source where applicable. The Tribunal concluded that the assessee had discharged his burden under the Act, and the Revenue had failed to bring cogent incriminating material to rebut the assessee's contentions. The ITAT directed the AO to verify the complete invoices totaling ?48,22,390/- and allow the claim if found genuine.

2. Addition of ?77,99,056/- by Altering the Work in Progress and Adding it to the Profit Disclosed by the Assessee:

The second issue pertains to the addition of ?77,99,056/- to the assessee's income by the AO, who argued that the Project Carmel was completed during the relevant financial year, and the entire sale consideration should have been recognized. The AO based this on the receipt of the occupancy certificate on 30th March 2009 and the substantial advances received from buyers.

The CIT(A) upheld the AO's decision, stating that the assessee had received substantial portions of the consideration, and there was no significant risk or uncertainty regarding the realization of income. The CIT(A) rejected the assessee's contention that the project was not fully complete and that the revenue should be recognized based on the percentage completion method.

The ITAT considered the assessee's method of accounting, which followed the percentage completion method as per Accounting Standards AS-7 and AS-9. The Tribunal noted that the assessee had consistently followed this method and had offered the entire profit from Project Carmel over three financial years. The ITAT found that the Revenue had accepted this method in the past and in the succeeding assessment year. The Tribunal directed the AO to verify whether the entire profit from Project Carmel had been offered for taxation over the three years and, if so, to delete the addition of ?77,99,056/- as it would be revenue-neutral.

Conclusion:

The ITAT allowed the appeal partly for statistical purposes, directing the AO to verify the invoices and the method of accounting followed by the assessee. The Tribunal emphasized the need for proper and adequate inquiry by the Revenue and the importance of consistency in the method of accounting.