2012 (9) TMI 758 - AT - Income Tax

Presumptive taxation - Builder/Developer - assessee following the project completion method for recognising income from such projects - Revenue estimated business income at the rate of 8% on booking advance collected by the assessee during the year on the basis of Revised AS 7(Construction Contracts) issued by ICAI - AY 06-07 - Held that - It is noted that the project of the assessee had commenced on 9-1-2005 by execution of development agreement and the project was approved on 17-2-2005. It is also admitted that the project was mostly completed in the FY 2006-2007 (i.e. AY 2007-08), and income was shown in AY 07-08. Tribunal in case of Unique Enterprises has held that assessees, who are following project completion method and have offered income-tax in the year in which substantial work has been completed, the same should be accepted. In view of aforesaid it is held that no income can be assessed on presumptive basis in the AY 2006-2007 as the assessee has already shown the income in the subsequent year 2007-2008 as per the regular accounting method of project completion employed by the assessee. Addition confirmed by the CIT(A) stands deleted - Decided in favor of assessee

Summary

Issues Involved:
1. Disallowance of interest paid on unsecured loans.
2. Estimate of business income at the rate of 8% on booking advance collected by the assessee.

Issue-wise Detailed Analysis:

1. Disallowance of Interest Paid on Unsecured Loans:
The first issue raised by the assessee was the disallowance of interest of Rs. 5,27,550/- paid on unsecured loans and the claim of such an expenditure against the interest received from the bank. However, the learned counsel for the assessee submitted that this issue is not pressed as the assessee is proposing to file an application under Section 154 in the assessment year 2007-2008 to seek the claim. Consequently, this issue was dismissed as not pressed.

2. Estimate of Business Income at the Rate of 8% on Booking Advance Collected:
The primary issue for adjudication was the addition on account of the estimate of presumptive profit at the rate of 8% on booking advance received during the year. The assessee, a partnership firm engaged in the business as a builder/developer in Navi Mumbai, followed the 'project completion method' for recognizing income from its projects. The Assessing Officer observed that the work-in-progress as on 31-3-2006 was valued at Rs. 6,59,21,547/- and all expenses incurred were transferred to work-in-progress without computing any profit for the year. The receipts from customers were shown as booking advances amounting to Rs. 4,84,25,000/-, with no profit or income shown on these advances.

The assessee argued that the 'project completion method' was employed because the risks associated with the project did not transfer to the purchasers until completion. The project was still in progress during the year, and profits were offered in the subsequent year when the project was at the completion stage. The Assessing Officer, however, held that the 'project completion method' was not correct for computing taxable income in view of the Revised Accounting Standard-7, which requires income to be computed annually. Consequently, the Assessing Officer estimated a presumptive profit of 8% on the advance of Rs. 4,84,25,000/-, resulting in an addition of Rs. 38,74,000/- under "business income."

The CIT(A) upheld the Assessing Officer's view, rejecting the assessee's contention and confirming the addition. The assessee cited the ITAT Mumbai Bench decision in the case of M/s Unique Enterprises Vs. ITO, which supported the 'project completion method' for recognizing income when substantial work is completed. The ITAT Mumbai Bench had concluded that the revised AS-7 does not apply to builders and real estate developers, and the 'project completion method' should be accepted if it has been consistently followed.

Upon careful consideration, it was noted that the assessee had been offering income on the 'project completion method' consistently. The project commenced on 9-1-2005 and was mostly completed in the financial year 2006-2007, with income shown in the assessment year 2007-2008. The ITAT Mumbai Bench referenced the case of M/s Unique Enterprises, where it was held that revised AS-7 issued in 2002 does not apply to builders and real estate developers. The Tribunal emphasized that the revenue should accept the method of accounting consistently followed by the assessee.

The Tribunal concluded that no income can be assessed on a presumptive basis for the assessment year 2006-2007 as the assessee had already shown the income in the subsequent year 2007-2008 as per the 'project completion method.' Therefore, the addition confirmed by the CIT(A) was deleted.

Conclusion:
The appeal of the assessee was allowed, with the Tribunal holding that the 'project completion method' consistently followed by the assessee should be accepted, and no income should be assessed on a presumptive basis for the assessment year 2006-2007.