2015 (4) TMI 1361 - AT - Income Tax

Rejection of books of accounts - Correct Method of accounting - changing the recognized method of revenue generation based from Project Completion to % Completion Method - AO s allegation of non-maintenance of stock register and consequent non-compliance with AS-2 - application of Percentage of Completion method by Ld. AO in order to compute the income of assessee - Assessee filed its return at NIL income following Project Completion Method - rejection of methods of accounting regularly followed by assessessee is in accordance with the Accounting Standards recognized by the ICAI - reference made u/s 142A to the DVO - Accrual of income - non disclosure of advances received on booking of a flat - difference between the cost declared by assessee and determined by DVO. HELD THAT - Correctness of books become very material inasmuch as there is neither any gain nor motive for assesses to indulging in such practices when all the profits were deductible u/s 80IB. Besides the entire evidence and material has not been considered to come to a justiciable conclusion to reject the books of regularly audited accounts. A generalized observation about the notorious trade practices in real estate business cannot be a reason for rejecting the books of accounts. Hon ble Apex Court in the case of Lalchand Bhagat Ambica Ram 1959 (5) TMI 12 - SUPREME COURT and Discovery Estate Pvt. Ltd. 2013 (3) TMI 124 - DELHI HIGH COURT held that practice of making additions on mere suspicions and surmises or by taking note of the notorious trade practices prevailing in trade circles cannot be relied for making additions. Consequently and finding of on-money transactions based on assumption and in the absence of any incriminating material or examination of buyers is without any basis and justification. These observations therefore cannot be valid reasons for rejecting the audited books of account maintained by the assessee in regular course of its business as per past practices and accounting policies. Substituting the method of accounting from Project Completion to % Completion by the authorities below is by observations that assessee s have not followed Accounting Standards 9 7 which tantamount to not following Accounting Standard-1 as prescribed u/s 145(2) - It is admitted position that the appellant were regularly following project completion method from year to year and the assessments prior to the date of search were also framed by accepting project completion method. As per ICAI guidelines real estate developer has an option to choose from Project Completion method or the Percentage Completion method as both are recognized methods for revenue recognition in such cases. Once the option is exercised by assessee it is not open to the Assessing Officer to substitute his own opinion to change the method of accounting because mid way it is found that other method of accounting better suits the revenue. It is the accounting principle consistent following of method and its earlier adoption which decides the issue and not the suitability or revenue. In any case assessee s are eligible for deduction u/s 80IB against their income in this eventuality take this method or that the result is NIL taxable profits after deduction. Thus in these cases the substitution of method to % Completion Method is based on surmises unwarranted facts irrelevant considerations and a fruitless exercise. Except making some academic and theoretical rhetoric s the revenue has not been able to demonstrate that the method of accounting adopted by assessee is not in conformity with set accounting guidelines provisions of sec. 145. In the case of CIT vs. Smt. V. Sikka Another 1983 (11) TMI 48 - DELHI HIGH COURT held that if the method of accounting is accepted in first year and regularly followed in subsequent year it cannot be substituted at the whims of AO. It is not mandatory for a real estate developer to follow percentage of completion method as prescribed by the Institute of Chartered Accountants of India under AS-7. AS-7 issued by the Institute of Chartered Accountants of India recognizes the position that in the case of construction contracts the assessee can follow either the project completion method or the Percentage completion method. Neither the revised Guidance Notes 2012 issued by Institute of Chartered Accountants of India nor the Exposure Draft for Guidance Note on Recognition of Revenue issued by the Institute of Chartered Accounts of India in 2011 are mandatory or override the statutory provisions. CIT(A) has also taken contradictory stand; on one hand it is held that there can be no revenue recognition unless 25% project is complete rightly so as no builder can earn from plinth or pillars on other hand it is held that the property in flats stands transferred by booking amount. The project completion method followed by the appellants therefore could not be faulted with by the revenue. The assumptions made by the authorities below that by not following AS-9 7 the same tantamount to not following prescribed AS-1 u/s 145(2) is profoundly misplaced unnecessary and uncalled for besides being contrary to principles of accountancy and interpretation of the statutory provisions. The same therefore could not be taken a valid basis for change of method regularly employed by the appellant. Thus we uphold the method of revenue recognition adopted by the assessee s as Project Completion Method. The other judicial precedents cited by the assessee mentioned in ITAT orders as well as written submissions support our view. Addition addition based on loose paper found from third party - Apropos Annexure A-2/51 as well as the statement of Shri Naveen Bhutani recorded on 28.01.2009 u/s 132(4) of the Act regarding a print out taken from his laptop; he stated that it was in relation to Unique Dream Builders only and not the assessee entities. This person was not produced for cross examination by the appellants and AO himself admits that the print out inventorized as seized Annexure revealing net realization of Rs. 17.91 crores and a profit of Rs. 5.17 crores reflects only the estimates. The said document does not reveal the actual state of affairs of the projects done by the assessees. No corroborative evidence has been found as a result of search on him or from either side of separated group to support that figures written therein for the area constructed sold or transferred nor about the net realization or profits earned in any such projects. The said excel sheet data was prepared for marketing of Unique Builder s projects products and could not be taken as a relevant and reliable information of business operations or earning any extra money or on money was received by the appellant which could enable the Assessing Officer to reject the accounts maintained in regular course. In fact this document as such did not have any evidentiary value against the assessee. The authorities below made some projections to convert these hypothetical figures into assessee s business operations on hypothetical assumptions. The booking agreements of these flats were reached at different timings at different locations with different specifications. The appellants have made detailed submissions in the synopsis on this factual circumstances inconsistencies in laptop projections impossibility of such profits in real estate trade as extrapolated by department and explained variation in rates. The explanation is bonafide and remains uncontroverted by the revenue. The observation as well as findings reached by authorities below cannot be upheld as they lack in credibility being based on irrelevant considerations and pure conjectures. Looking at the gamut of inconsistencies and infirmities in the projections of department vis a vis laptop found from Mr. Bhutani therefore could not be a reason sufficient to endorse that the accounts maintained by the assessee are unreliable or they were not verifiable. Consequently assesses ground in this behalf deserve to be allowed. On these facts the ITAT Jaipur in similar group cases have already decided these issues in favor of the assessee which we respectfully follow. Reference u/s 142A by the ADIT to DVO the relevant provisions have been mentioned above. It is clear that this Section empowers only the AO as authorized officer to make reference to the DVO u/s 142A of the Act. This Section does not use any term like ADIT being an authorized officer. Further it has not been disputed that what has been referred to for valuation of stock in trade of the assessee and not any investment referred u/s 69A or 69B; buillion jewellery or any other valuable article referred to in Section 69A or 69B; is not a property referred u/s 56(2) of the Act. In these eventualities the judgment of Umiya Co-op Housing Society Ltd. 2006 (7) TMI 200 - GUJARAT HIGH COURT and ME Mummy Hospital vs. ACIT 2014 (2) TMI 898 - GUJARAT HIGH COURT and various other judgements cited before us support the contentions of the assessee. Thus DVO reference is held to be invalid. We also find merit in the contention of the assessee that DVO ought to have applied the PWD rates in place of CPWD rates. Besides 2.5% rebate on account of self supervision and self bulk procurement of material is too meager. In our view this rebate ought to have been to at least to the scale of 5% as the assessees are the professional builders having their own engineering staff. Going by DVO valuation the difference of valuation comes to 5.5% which amounts to nominal difference when viewed from the angle that its comparisons of two estimates which basically are two opinions. If the PWD rates are applied alongwith 5% rebate as mentioned above then it will leave no scope for any diferrence or addition on account of valuation report. Thus DVO s reference is bad in law being void ab initio besides it has no merit. Consequently any addition in respect of valuation cannot be made under the assessee s case. Apropos revenue appeal we have already upheld that Project Completion Method adopted by the assessee being proper; books of accounts have been upheld Projections of Mr. Bhutani having been found as not representing the actual business operations of the assessee. Consequently the findings of ld. CIT(A) about there being no revenue recognition unless 25% project if completed become redundant. Therefore revenue ground becomes inconsequential. Allowability of sec. 80IB deduction to assesses we find no infirmity in the orders of ld. CIT(A) in as much as per material available on record assesses have complied with relevant conditions of sec. 80IB. Besides revenue grounds challenge admission of additional evidence u/r 46A and relief based thereon. Thus assessee s eligibility on merits is not specifically challenged. In view thereof we see no infirmity in the order of ld. CIT(A) on the issue of allowing deduction u/s 80IB furthermore it will be eligible in the year of revenue recognition. By upholding the Project Completion Method of accounting and upholding of books of accounts and rejection of estimates; there will be no taxable profits.

Summary

Issues Involved:
1. Rejection of books of accounts under section 145(3) of the Income Tax Act, 1961.
2. Substitution of "Project Completion Method" with "Percentage Completion Method."
3. Treatment of flat booking advances as income.
4. Use of third-party laptop contents for making additions.
5. Reference of under-construction projects to DVO under section 142A.
6. Allowance of deduction under section 80IB of the Income Tax Act, 1961.
7. Admission of additional evidence under Rule 46A.

Issue-wise Detailed Analysis:

1. Rejection of Books of Accounts:
The Assessing Officer (AO) rejected the books of accounts by invoking section 145(3) due to the alleged non-maintenance of a detailed qualitative and quantitative stock register and inability to verify certain vouchers. However, it was contended that all expenses were charged to the project/work-in-progress and directly taken to the balance sheet. The Tribunal found that the accounts maintained by the assessee conformed to commercially accepted accounting standards, and no specific defects were pointed out. The Tribunal referenced several judicial precedents, including *Pandit Brothers vs. CIT* and *S.N. Namasivayam Chettiar vs. CIT*, supporting the assessee's contention that mere non-maintenance of a stock register cannot justify the rejection of books.

2. Substitution of Accounting Method:
The AO substituted the "Project Completion Method" with the "Percentage Completion Method," arguing that the former did not present a true picture of profits. The Tribunal noted that both methods are recognized by the Institute of Chartered Accountants of India (ICAI) and that the choice of method lies with the assessee. The Tribunal cited *CIT vs. Smt. V. Sikka & Another* and *CIT vs. Bilahari Investment Pvt. Ltd.*, holding that the AO cannot change the method of accounting regularly followed by the assessee without just cause. The Tribunal upheld the "Project Completion Method."

3. Treatment of Flat Booking Advances:
The AO treated flat booking advances as income, arguing that the ownership of property gets transferred on receipt of booking itself. The Tribunal found this contrary to the provisions of the Transfer of Property Act and the terms of the advance booking agreement, which specified that no right, title, or interest is conferred upon the buyer until the execution of the sale deed. Thus, the Tribunal rejected the AO's treatment of advances as income.

4. Use of Third-Party Laptop Contents:
The AO made additions based on contents from the laptop of a third party, Mr. Navin Bhutani. The Tribunal noted that the printouts from the laptop were projections and not actual transactions. The Tribunal emphasized that the AO did not provide the assessee an opportunity to cross-examine Mr. Bhutani and relied on *CIT V/s S.M.S. Investment Corporation (P) Ltd.* and other cases, concluding that the projections could not be used to justify additions.

5. Reference to DVO Under Section 142A:
The AO referred under-construction projects to the DVO for valuation under section 142A. The Tribunal found this reference invalid, as no assessment or reassessment proceedings were pending before the ADIT (Inv.)-1, Jaipur, who made the reference. The Tribunal cited *CIT Vs. Umiya Co-op. Housing Society Ltd.* and *ME & Mummy Hospital Vs. ACIT*, holding that the reference was beyond the jurisdiction of the ADIT and thus void.

6. Allowance of Deduction Under Section 80IB:
The AO did not allow the deduction under section 80IB, as it was not claimed in the original return. The Tribunal, however, upheld the CIT(A)'s decision to allow the deduction, noting that the appellate authorities have the power to entertain new claims. The Tribunal referenced *Chicago Pneumatic India Ltd. v. DCIT* and *CIT v. Jai Parabolic Springs Ltd.*, emphasizing that the appellate authorities can adjudicate on new claims arising from the facts of the case.

7. Admission of Additional Evidence Under Rule 46A:
The Tribunal found no infirmity in the CIT(A)'s admission of additional evidence under Rule 46A, as it was necessary for the just adjudication of the case. The Tribunal upheld the CIT(A)'s decision to allow the deduction under section 80IB based on the additional evidence.

Conclusion:
The Tribunal allowed the appeals of the assessee, upholding the "Project Completion Method," rejecting the books of accounts under section 145(3), and the invalid reference to the DVO under section 142A. It also allowed the deduction under section 80IB and dismissed the revenue's grounds as inconsequential and academic.