2014 (8) TMI 240 - AT - Income Tax

Estimation of income at 8% on the advances received Held that - There was determination of total income under the normal computation before allowing deduction - Other income was brought to tax separately - It could not be understood as to how on the percentage completion method, the AO could arrive at some profits when project was not even substantially started - As seen from the advances received and amounts invested in the project, the advances received are much more as the assessee s projects command respect in the market and customers simply paid advances once project was announced - estimation of income on advances cannot be sustained, considering the fact that assessee book results as such were accepted in later two years without resorting to estimation on advances to be consistent with first year s method followed by the A.O. Relying upon Lingtec Constructors LP vs. ITO 2013 (5) TMI 469 - ITAT MUMBAI - assessee having consistently followed percentage completion method as per the accounting standards and completed the project in the later years, no addition could be made on the advances received during the year the order is modified and the AO is directed to accept book results as such - assessee has spent various amounts other than project related expenditure, the expenditure in the P & L Account gets set off as a loss from business to the income from other sources - Decided in favour of Assessee.

Summary

Issues Involved:
1. Estimation of income at 8% on advances received by the assessee.
2. Non-granting of deduction under section 80IB(10) of the I.T. Act.
3. Taxation of interest income separately and not allowing interest payments as an alternate contention.

Issue-Wise Detailed Analysis:

1. Estimation of Income at 8% on Advances:
The assessee, a real estate development company, filed a return declaring a loss of Rs. 73,80,725/-. The Assessing Officer (A.O.) noticed the assessee had received substantial advances for two projects but had not offered any income, following the percentage completion method. The A.O. rejected the books of accounts under section 145 of the I.T. Act and estimated the income at 8% on the advances received, resulting in an income determination of Rs. 1,45,14,879/-. The CIT(A) upheld this estimation, stating that the books did not provide accurate financial information and the appellant's interpretation of revenue recognition was incorrect. However, the Tribunal found that the A.O. and CIT(A) did not consider the actual percentage of project completion and the consistent method followed by the assessee. The Tribunal concluded that the estimation on advances received was unsustainable, especially since the A.O. accepted the book results in subsequent years. Therefore, the Tribunal directed the A.O. to accept the book results as such.

2. Non-Granting of Deduction under Section 80IB(10):
The assessee claimed deduction under section 80IB(10) on any income estimated. The CIT(A) rejected this claim, stating the A.O. did not examine it as no income was disclosed. The Tribunal noted that the A.O. allowed the deduction in subsequent years after detailed analysis. The Tribunal criticized the CIT(A) for not considering the alternate claim and directed that since no income was to be considered for the year, the issue of 80IB deduction became academic. However, it emphasized that the A.O. should have verified the claim when the request was made.

3. Taxation of Interest Income Separately:
The A.O. brought to tax an interest income of Rs. 39,40,006/- separately, which the assessee contended should be set off against business expenditure. The CIT(A) upheld the A.O.'s decision, stating there was no merit in the appellant's ground. The Tribunal found that the interest was from fixed deposits and not eligible for 80IB deduction but should be set off against business expenditure not capitalized. It directed the A.O. to allow the loss as claimed, noting that this approach was consistent with the treatment in subsequent years.

Conclusion:
The Tribunal allowed the assessee's appeal, directing the A.O. to accept the book results without estimation of income on advances, and to allow the set-off of interest income against business expenditure, thus accepting the returned loss. The issue of 80IB deduction was rendered academic due to the Tribunal's findings on income estimation.