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2019 (8) TMI 1357 - AT - Income TaxRevenue recognition - the percentage of completion method - Inclusion of land in Working of cost of the real estate development project - developing and constructing residential buildings - HELD THAT - We find that the acquisition of land is the very first step for the commencement of the project. The work on the project takes place after the acquisition of land. Generally, cost of land constitutes a very large portion but by the acquisition of land itself, there is no work-in-progress. At the stage where land only is acquired, it cannot be said that the project has commenced but if the cost of land is included in the percentage of the project completion, then it would show that the project has been substantially completed say, to the extent of 50-60% at the beginning itself. Hence, for working out the stage of completion of the project land value should not be included. Hence we hold that the CIT-A is justified in excluding the value of land while working out the percentage of work completed. We find that the AO had considered the sale area while determining the percentage of completion method as against the cost incurred upto 31.3.2010. Hence we hold that the percentage of work completed upto 31.3.2010 should be considered at 67.38% as determined by the assessee in the return of income. Addition to the valuation of unsold flats as on 31.3.2010 - HELD THAT - We find that the Hon ble Supreme Court in the case of Chainrup Sampatram vs CIT 1953 (10) TMI 2 - SUPREME COURT and United Commercial Bank vs CIT 1999 (9) TMI 4 - SUPREME COURT had accepted the basis of valuation of inventories at lower of cost or market value and had also held that no profit could arise out of valuation of closing stock. Their Lordships held that valuation of unsold stock at the close of an accounting period is a necessary part of the process of determining the trading results of that period and can in no sense be regarded as the source of such profits. CIT-A by valuing unsold flats at the average of sale price CIT(A) had assessed profit attributable to unsold flats which is not permissible. We direct the ld AO to accept the valuation of unsold flats as on 31.3.2010 as done by the assessee. Addition based on price rate difference of Flat - The assessee had sold flat D-5 to Mr. Bharat D. Shah and others on 29.12.2009 at the rate of ₹ 28,750 per sq. ft., whereas approximately 28 months earlier, the assessee had sold 2 flats bearing No. D- 3 D- 4 to Mr. Bharat Daftary and Gautam Daftary at the rate of ₹ 33,750 per sq. ft. - HELD THAT - Merely by showing that the first condition is satisfied, the revenue cannot ask the Court to presume that the second condition too is fulfilled, because even in a case where the first condition of 15 per cent difference is satisfied, the transaction may be a perfectly honest and bona fide transaction and there may be no understatement of the consideration. The fulfilment of the second condition has, therefore, to be established independently of the first condition and merely because the first condition is satisfied, no inference can necessarily follow that the second condition is also fulfilled. Each condition has got to be viewed and established independently before sub-section (2) can be invoked and the burden of doing so is clearly on the revenue. It is a well-settled rule of law that the onus of establishing that the conditions of taxability are fulfilled is always on the revenue and the second condition being as much a condition of taxability as the first, the burden lies on the revenue to show that there is understatement of the consideration and the second condition is fulfilled. Moreover, to throw the burden of showing that there is no under statement of the consideration on the assessee would be to cast an almost impossible burden upon him to establish a negative, namely, that he did not receive any consideration beyond that declared by him. AO had not brought any material on record to prove that the assessee had indeed received onmoney to the exten of ₹ 4 crores from Mr Bharat D Shah and others. Infact the ld AO had not even bothered to make any examination of Mr Bharat D Shah by summoning him to understand the truth in the matter. Hence it could be safely concluded that the entire addition of ₹ 4 crores has been made merely on suspicion , surmise and conjecture and not backed by any material evidences and accordingly, the addition cannot be sustained in the eyes of law. Hence we hold that the CIT-A had rightly deleted the addition in the sum of ₹ 4 crores in the facts and circumstances of the instant case, which in our considered opinion, does not call for any interference. - Decided in favour of assessee.
Issues Involved:
1. Working of income from the real estate development project. 2. Addition of ?4 crores due to alleged suppression of sales. 3. Valuation of unsold flats as on 31.03.2010. Issue-wise Analysis: 1. Working of Income from Real Estate Development Project: The assessee, a builder and developer, follows the percentage of completion method for accounting. The dispute arose over the percentage of work completed and the corresponding revenue recognition for the project at Cuffe Parade, Mumbai. The Assessing Officer (AO) calculated the percentage of work completed as 77.16% by including the cost of land, while the assessee declared it as 67.38%, excluding the cost of land. The Commissioner of Income Tax (Appeals) [CIT(A)] sided with the assessee, stating that land acquisition is the initial step and should not be included in the work-in-progress calculation. The Tribunal upheld the CIT(A)'s view, confirming that the percentage of work completed should be 67.38%. 2. Addition of ?4 Crores Due to Alleged Suppression of Sales: The AO added ?4 crores to the income, suspecting that the assessee received "on money" for selling a flat at a lower price compared to earlier sales. The CIT(A) deleted this addition, noting that property prices fluctuate and the AO had no evidence of actual receipt of additional money. The Tribunal upheld the CIT(A)'s decision, emphasizing that additions based on mere suspicion without evidence are not sustainable. The Tribunal cited the Supreme Court's rulings in K.P. Varghese v. ITO and CIT v. Sati Oil Udyog, which require concrete evidence of understatement of consideration. 3. Valuation of Unsold Flats as on 31.03.2010: The assessee valued the unsold flats at the lower of cost or market value, which is a generally accepted accounting principle. The CIT(A) disagreed, valuing the unsold flats at the average sale price, leading to an addition of ?85,18,702. The Tribunal overturned this, referencing Supreme Court decisions (Chainrup Sampatram vs CIT and United Commercial Bank vs CIT) that support valuation of inventories at the lower of cost or market value. The Tribunal directed the AO to accept the assessee's valuation method. Conclusion: The Tribunal allowed the appeals of the assessee and dismissed the revenue's appeal. It upheld the exclusion of land cost in the percentage of work completed, rejected the addition based on alleged suppression of sales due to lack of evidence, and accepted the valuation of unsold flats at the lower of cost or market value. The order was pronounced on 10/07/2019.
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