2004 (9) TMI 311 - AT - Income Tax

Summary

Issues Involved:

1. Assessment of profit in construction business based on the percentage of receipts versus the project completion method.
2. Classification of the assessee as a contractor versus a builder/developer.
3. Estimation of profits at 4% of construction receipts.
4. Entitlement to deduction of depreciation.
5. Levy of interest under section 234B.

Issue-Wise Detailed Analysis:

1. Assessment of Profit in Construction Business:
The primary dispute was whether the income of the assessee should be computed using the project completion method or assessed based on the percentage of receipts received each year. The assessee, a construction firm engaged in a turnkey project for MAHADA, had consistently followed the project completion method since its inception. This method is recognized under the Companies Act and by the IT Department. The AO, however, framed the assessment based on a 4% net profit rate on receipts, arguing that the assessee, being a contractor and not a builder/developer, could not follow the project completion method. The CIT(A) upheld this view, but the Tribunal found that the project completion method was appropriate given the assessee's consistent use of this method, the absence of defects in the books of account, and the recognition of this method by accounting standards and judicial decisions.

2. Classification of the Assessee:
The AO classified the assessee as a contractor rather than a builder/developer, which influenced the decision to reject the project completion method. The Tribunal, however, noted that the assessee was awarded a turnkey project by MAHADA, which involved developing land, constructing tenements, and providing infrastructure. The Tribunal found that the project was a single, integrated project rather than two separate projects as suggested by the AO, thus supporting the assessee's classification as a builder/developer.

3. Estimation of Profits at 4% of Construction Receipts:
The AO estimated the profits at 4% of the construction receipts, which the CIT(A) upheld. The Tribunal, however, found this estimation to be arbitrary, noting that the assessee's books of account were regularly maintained and audited without any adverse comments. The Tribunal emphasized that the project completion method, consistently followed by the assessee and accepted in past and subsequent years, provided a more accurate reflection of the income.

4. Entitlement to Deduction of Depreciation:
The CIT(A) denied the deduction of depreciation claimed by the assessee. However, given the Tribunal's decision to uphold the project completion method, the issue of depreciation became moot as the profits were not to be estimated on a year-to-year basis.

5. Levy of Interest under Section 234B:
The CIT(A) did not adjudicate on the issue of interest under section 234B. Given the Tribunal's decision on the primary issues, this ground was rendered infructuous and did not require further adjudication.

Conclusion:
The Tribunal allowed the appeal, holding that the project completion method was the appropriate method for computing the assessee's income. The AO's estimation of profits at 4% of receipts was deleted, and the issues of depreciation and interest under section 234B were rendered moot.