2019 (11) TMI 1117 - AT - Income Tax

Under-valuation of closing work-in-progress - Method of accounting followed by the assessee to recognize the income from its real estate development business - additions made by the Assessing Officer on account of the alleged undervaluation of closing work-in-progress and undisclosed closing stock - HELD THAT - The income of the Projects completed during the year under consideration was accordingly recognized by the assessee to the extent of flats sold during the year under consideration as per the method of accounting followed by it and corresponding expenses proportionate to such sale booked under work-in-progress were debited to the Profit Loss Account. In Parijat Project, the assessee-company had constructed 150 flats having total area of 80141 sq.ft., out of which 138 flats having area of 70912 sq.ft. were sold during the year under consideration. The total sale consideration of the 138 flats sold was recognized by the assessee-company as its income during the year under consideration and the corresponding cost attributable to the said sale amounting to ₹ 6,02,38,280/- out of the total cost of ₹ 6,53,15,103/- on proportionate basis was transferred from work-in-progress and debited to the profit loss account. Similarly 64,610 sq.ft. of the total constructed area of Pratyee Project having been sold during the year under consideration, the sale consideration of 64,610 sq.ft. was recognized by the assessee-company as its income of the said Project and corresponding cost of ₹ 6,94,55,750/- out of the total cost of the said Project of ₹ 14,67,04,702/- was transferred from the work-in-progress and debited to the Profit Loss Account. As evident from the details furnished by the assessee before the AO as well as before the ld. CIT(Appeals), cost of construction incurred by the assessee during the year under consideration on all the Projects was ₹ 11,31,63,423/- while the general expenses incurred were ₹ 1,25,33,241/-. These two amounts were added to the opening work-in-progress and after transferring the general expenses to the extent of 10% amounting to ₹ 12,53,324/- and the corresponding cost attributable to the sale of flats of the completed two Projects amounting to ₹ 6,02,38,280/- and ₹ 6,94,55,750/-, the balance amount of ₹ 17,49,74,366/- was shown as closing work-in-progress. The amount of closing work-in-progress reflected in the balance-sheet of the assessee-company at ₹ 17,49,74,366/- thus was correctly shown as per the method of accounting consistently followed by the assessee to recognize the income of its real estate development business. It appears that the AO did not appreciate the working of closing work-in-progress as done by the assessee-company by following the method of accounting consistently followed and proceeded to determine the closing work-in progress by taking the unsold flats to the extent of 35% on adhoc basis, which as rightly held by the ld. CIT(Appeals) was totally untenable. CIT(Appeals), in our opinion, properly understood the working of closing work-in-progress as made by the assessee and deleted the addition made by the Assessing Officer on account of the alleged under valuation of closing work-in-progress. We, therefore, uphold the impugned order of the ld. CIT(Appeals) giving relief to the assessee on this issue and dismiss Ground No. 1 of the Revenue s appeal. Undisclosed closing stock - As already noted that the total cost of construction incurred during the year under consideration was included by the assessee company in work-in-progress. Since the entire material purchased for the construction was included in the cost of construction and thereby in the work-in-progress, there was no question of showing any material purchased at the fag end of the year which was not utilized for construction in the closing stock separately. As rightly contended on behalf of the assessee and accepted by the CIT(Appeals), the material purchased at the fag end of the year, which had remained un-utilized for construction was duly reflected in the value of closing work-in-progress and there was no case of any closing stock of material that had remained to be disclosed by the assessee as alleged by the AO. The addition made by the Assessing Officer on account of such alleged undisclosed closing stock thus was not sustainable and the ld. CIT(Appeals), in our opinion, was fully justified in deleting the same. Ground No. 2 of the Revenue s appeal. Addition on account of the profit of the assessee attributable to the unsold flats of the completed two Project - method of accounting followed by the assessee to recognize the income from its real estate development business, whereby the income was recognized in respect of the completed Projects to the extent of area sold during the relevant year. Since the said method of accounting was consistently followed by the assessee-company, the income attributable to the flats sold of the completed two Projects was recognized by the assessee company during the year under consideration, while the income from unsold flats of the said Projects was recognized in the subsequent years as and when the said flats were sold. This position was accepted by the CIT(Appeals) himself and the details of sale of such unsold flats during the subsequent years as furnished by the assessee were also taken note of by the ld. CIT(Appeals). As per the accounting method followed by the assessee, the income from the real estate development was recognized on Project Completion Method to the extent of sale of the completed project and there was no justification to disturb this method followed by the assessee to recognize the income from the real estate development business consistently. Secondly, since the flats had remained unsold during the year under consideration, the profit attributable to the said flats could not be said to be realized or accrued to the assessee during the year under consideration so as to bring it to tax during the year under consideration. Thirdly, the sale price of the unsold flats was ascertainable only on the actual sale, which happened in the subsequent year and, therefore, determination of profit of the said flats during the year under consideration on any estimate basis involved assumptions and presumptions. Moreover, the profit of such unsold flats of the completed project was offered to tax by the assessee in the subsequent year as and when the same were sold on actual basis by following the method of accounting consistently adopted by it and addition of such profit from the said flats on estimated basis by the ld. CIT(Appeals) during the year under consideration clearly resulted into double addition. Keeping in view all these facts and circumstances of the case, we are of the view that the addition made by the ld. CIT(Appeals) on account of estimated profit on the estimated sale of unsold flats of the completed Projects is not sustainable and the same is liable to be deleted. We accordingly delete the said addition made by the ld. CIT(Appeals) and allow the appeal of the assessee.

Summary

Issues Involved:
1. Alleged under-valuation of closing work-in-progress.
2. Alleged undisclosed closing stock.
3. Addition of profit attributable to unsold flats of completed projects.

Issue-wise Detailed Analysis:

1. Alleged under-valuation of closing work-in-progress:
The Assessing Officer (AO) rejected the value of closing work-in-progress shown by the assessee, a company engaged in real estate development, due to discrepancies in the figures provided and the failure to furnish detailed project-wise information. The AO estimated the area of unsold flats and adjusted the closing work-in-progress, resulting in an addition of ?1,59,13,161 to the total income of the assessee. The assessee argued that the revenue was recognized using the Project Completion Method, and the closing work-in-progress was correctly shown after adjusting for the cost of sold flats. The Commissioner of Income Tax (Appeals) [CIT(A)] found merit in the assessee's explanation, noting that the AO did not consider the sales of flats and made factual errors. The CIT(A) deleted the addition, stating that the AO's estimation was untenable and the assessee's method of accounting was consistent and correct.

2. Alleged undisclosed closing stock:
The AO noted that construction material worth ?70,15,063 was purchased at the end of the year and should have been disclosed as closing stock. The assessee contended that these purchases were included in the cost of construction and reflected in the closing work-in-progress. The CIT(A) accepted the assessee's explanation, noting that the entire cost of construction was included in the work-in-progress, and there was no separate closing stock to disclose. The CIT(A) concluded that the AO's addition was unnecessary and misconceived, leading to its deletion.

3. Addition of profit attributable to unsold flats of completed projects:
The CIT(A) observed that the assessee completed two projects during the year and made substantial sales. The CIT(A) held that the entire income from these projects should be recognized, including the profit from unsold flats. The CIT(A) calculated the profit from unsold flats and added ?27,50,748 to the total income. The assessee appealed, arguing that the profit should be recognized only upon actual sale, as per the Project Completion Method consistently followed. The Tribunal agreed with the assessee, stating that the profit from unsold flats could not be estimated and taxed in the year of project completion as it would lead to double addition. The Tribunal deleted the addition made by the CIT(A).

Judgment Summary:
The Tribunal upheld the CIT(A)'s deletion of additions related to the alleged under-valuation of closing work-in-progress and undisclosed closing stock, agreeing that the assessee's method of accounting was consistent and correct. However, the Tribunal reversed the CIT(A)'s addition of ?27,50,748 for profit attributable to unsold flats, emphasizing that profit should be recognized upon actual sale, not on an estimated basis. The Revenue's appeal was dismissed, and the assessee's appeal was allowed.