2024 (9) TMI 356 - AT - Income Tax

Disallowance of general expenses - HELD THAT - After excluding these expenses directly attributable to Phase-1, the CIT(A) had apportioned the remaining general expenses between Phars-1 Phase-2 in the ratio of cost allocation. Accordingly, the addition only was upheld by the Ld. CIT(A). Revenue has not pointed out any defect in the finding of the CIT(A) in respect of expenses pertaining to Phase-I and in the allocation of balance expense as made by the Ld. CIT(A). We, therefore, do not find anything wrong with the order of the Ld. CIT(A) on this issue. Accordingly, the disallowance on account of general expenses as restricted by the CIT(A) is upheld and the ground taken by the Revenue is dismissed. Addition towards cost of construction of unsold flats pertaining to Phase1 and addition being profit margin of flats sold - HELD THAT - Additions had been made on wrong presumption of the accounting standards. The Percentage Completion method doesn t stipulate that all the flats will be deemed to be sold on completion of the project and that revenue will be deemed to be realized without actual sale of the flats. Therefore, the addition in respect of cost of construction of 149 unsold flats is found to be based on total wrong presumption. The addition in respect of profit margin of booked flats is also not found correct. CIT(A) has correctly appreciated the principles of Accounting Standards and the methodology adopted by the assessee to recognize its revenue and has rightly allowed the relief in respect of both the additions. It was held in the case of CIT v Shivalik Buildwell P Ltd 2012 (10) TMI 1019 - GUJARAT HIGH COURT that in case of developer of project, profit would arise only on transfer of title of property and the receipt of advance or booking amount cannot be treated as trading receipt of year under consideration. As rightly held by Ld. CIT(A), the guidelines of AS-7 didn t trigger recognition of revenue for booked flats, as the advance received was less than 10%. Hence, the addition was rightly deleted by Ld. CIT(A). Addition in respect of cost of construction of 149 unsold flats was also without any basis. The cost of construction as already incurred by the assessee cannot be disallowed on an arbitrary basis. The books of accounts of the assessee were audited and the Auditor had certified that the assessee was correctly following the Percentage Completion Method to recognize its revenue. No discrepancy or any infraction in the accounting system of the assessee was pointed out by the Auditor or any other authority. Since, the accounting of income in this case was in accordance with the guidelines of ICAI, we do not find any basis for the additions as made by the AO. Decided against revenue.

Summary

Issues Involved:

1. Disallowance of general expenses of Rs. 42,65,761/-
2. Addition of Rs. 82,53,21,404/- towards undisclosed portion of profit pertaining to Phase 1
3. Addition of Rs. 1,84,31,150/- being profit on unrecorded sales

Issue-wise Detailed Analysis:

1. Disallowance of General Expenses of Rs. 42,65,761/-:

The assessee, engaged in the construction of a project named "Casa Vyoma," followed the percentage completion method to recognize its revenue. The total general expenses claimed were Rs. 1,54,94,955/-. The AO bifurcated these expenses into two parts according to the cost incurred in the ratio of Phase-1 & Phase-2 projects, disallowing Rs. 42,65,761/- as Phase-2 revenue was not recognized during the year. The CIT(A) restricted this disallowance to Rs. 19,28,265/- after examining the nature of the expenses and determining that Rs. 1,02,79,961/- was exclusively attributable to Phase-1. The ITAT upheld the CIT(A)'s decision, noting that the AO's apportionment without examining the actual nature of the expenses was incorrect. The disallowance of Rs. 19,28,265/- on account of general expenses was upheld, and the ground taken by the Revenue was dismissed.

2. Addition of Rs. 82,53,21,404/- towards Undisclosed Portion of Profit Pertaining to Phase 1:

The AO added Rs. 82,53,21,404/- to the income, representing the cost of construction of 149 unsold flats in Phase-1, which was completed 100%. The AO presumed that revenue should have been recognized for all flats under the percentage completion method. The CIT(A) deleted this addition, explaining that the percentage completion method does not imply that all flats are deemed sold upon project completion. The ITAT agreed, stating that the addition was based on a wrong presumption of accounting standards. The cost of construction of unsold flats could not be treated as profit, and the addition was found to be without merit. The ITAT upheld the CIT(A)'s deletion of the addition.

3. Addition of Rs. 1,84,31,150/- Being Profit on Unrecorded Sales:

The AO added Rs. 1,84,31,150/- as profit margin on 9 booked flats, assuming that the revenue should have been recognized under the percentage completion method. The CIT(A) deleted this addition, explaining that the revenue recognized for these flats was less than 10%, and some bookings were canceled. The ITAT upheld the CIT(A)'s decision, noting that the percentage completion method did not trigger revenue recognition for these flats as the advance received was less than 10%. The addition was found to be without basis, and the ITAT upheld the deletion of the addition.

Conclusion:

The ITAT dismissed the appeal preferred by the Revenue, upholding the CIT(A)'s order in all respects. The disallowance of general expenses was restricted to Rs. 19,28,265/-, and the additions of Rs. 82,53,21,404/- and Rs. 1,84,31,150/- were deleted. The ITAT found no merit in the Revenue's grounds and upheld the CIT(A)'s findings based on a correct understanding of the accounting standards and the methodology adopted by the assessee.