2012 (9) TMI 352 - AT - Income Tax

Best Judgement assessment - alleged suppression of gross profit - real estate - Punjab Urban Planning & Development Authority (PUDA) Rules prescribed wastage of land for the developer at 40.33% and developer is not entitled to sell that part - assessee following mercantile system of accounting debited provision of the expenditure on development in the trading account and correspondingly included the same in closing stock - claimed construction expenses and PUDA fees fully - deducted non-saleable area out of total land while accounting for closing stock - Revenue contending construction expenses and PUDA fees to be debited proportionately on the basis of area of land sold as divided by the total area of colony and deducting cost of non-saleable area of land on proportionate basis of land sold viz-viz total area of land Held that - A.O. has ignored the rule of consistency when the assessee had been adopting mercantile system of accounting and development expenses have been accounted for on mercantile system basis and have been accepted by the Department in the preceding year. Though by debiting development expenses in the trading account and correspondingly by crediting amount to the closing stock does not affect the revenue. As per PUDA rules, a developer has to account for 40.33% as wastage is not under dispute. PUDA fees and construction charges have been incurred wholly and exclusively for the purpose of business. In the absence of any defects in the books of account, the AO is not justified in invoking the provisions of section 145(3) and therefore no addition is called in the facts and circumstances of the present case - Decided in favor of assessee

Summary

Issues involved:
1. Revenue's appeal against CIT(A)'s order for the assessment year 2008-09.
2. Grounds raised by the Revenue.
3. Grounds raised by the assessee in C.O. No.19(Asr)/2011.
4. Dispute over correct gross profit earned from sale of plots in a real estate business.
5. Assessment of provision for development charges, construction expenses, and PUDA fees.
6. Disagreement over the treatment of wastage of land and non-saleable area.
7. AO's rejection of book results under section 145(3) and consequent trading addition.
8. Arguments before CIT(A) regarding consistency in accounting method and expenses incurred for business purposes.
9. CIT(A)'s decision to delete the trading addition and uphold the assessee's claims.

Analysis:
1. The Revenue's appeal stemmed from the CIT(A)'s order for the assessment year 2008-09, focusing on various grounds of appeal related to the treatment of expenses and income in a real estate business.

2. The Revenue raised multiple grounds, including issues with the provision of expenditure on development, construction expenses, PUDA fees, and treatment of non-saleable land, challenging the CIT(A)'s decision.

3. In response, the assessee in C.O. No.19(Asr)/2011 supported the CIT(A)'s decision, arguing for the deletion of the addition made by the Assessing Officer and questioning the basis of the Revenue's appeal.

4. The dispute revolved around the correct calculation of gross profit from the sale of plots in a real estate business, with the AO proposing a trading addition due to alleged suppression of gross profit.

5. The assessment involved the treatment of provision for development charges, construction expenses, and PUDA fees, with the AO rejecting the book results under section 145(3) and making a trading addition.

6. Contentions included disagreements over the treatment of wastage of land, non-saleable area deductions, and the proportionate allocation of expenses based on land sold versus total land area.

7. The AO's decision to reject the book results under section 145(3) and make a trading addition was challenged, leading to a detailed analysis of the expenses and accounting methods employed by the assessee.

8. Arguments before the CIT(A) emphasized the consistency in the assessee's accounting method, the business purpose of expenses incurred, and compliance with prescribed norms such as PUDA rules for land development.

9. Ultimately, the CIT(A) upheld the assessee's claims, citing the rule of consistency in accounting methods, acceptance of development expenses, and proper allocation of expenses, leading to the deletion of the trading addition and dismissal of the Revenue's appeal and the assessee's grounds in C.O. No.19(Asr)/2011.