2016 (9) TMI 1215 - AT - Income Tax

Determination of income on project completion method - Ad-hoc estimation of profits - assessment completed u/s 143 - Held that - In the present case, assessee had demonstrated that there was no substantial completion of project in the instant assessment year, and rather the fact-situation clearly showed that on account of litigation amongst the partners the continuation of the project itself was in jeopardy. In any case, the facts brought out by the CIT(A), and which have not been negated by the Assessing Officer in his remand report to the CIT(A), clearly point out that the stage of project in the instant year could not be construed to have been substantially completed. It is also noted by the CIT(A) that the sale and booking money received upto the instant assessment year was also partly refunded to the intending buyers in the subsequent assessment year. We are also conscious of the fact that in the earlier two assessment years, where in one of the assessment years assessment was completed u/s 143(3) of the Act, the income has been assessed by following the project completion method adopted by the assessee. There is also no repudiation to the assertions of the assessee before us that the decision of CIT(A) for Assessment Year 2007-08, rendered under similar situation, has not been appealed against by the Revenue before the Tribunal. For all the above reasons, in our considered opinion, CIT(A) made no mistake in holding that in view of the uncertainties involved, the action of the Assessing Officer in deducing the income of the assessee in the current year by making an ad-hoc estimation of profits is not justified. Apart therefrom, in our view, the Assessing Officer has not been able to demonstrate any justifiable reason for departing from his earlier accepted position of Assessment Year 2005-06 that the income is to be computed on project completion method . For all the above reasons, the order of CIT(A) deserves to be affirmed. - Decided against revenue

Summary

Issues:
Single issue: Assessment of income from construction project using ad-hoc estimation method.

Analysis:
The appeal pertains to the assessment year 2006-07, where the Revenue challenges the CIT(A)'s order regarding the assessment of the assessee's income from a construction project. The Assessing Officer estimated profits at 8% of advances received, resulting in an addition of ?37,70,718 to the returned income. The primary contention revolves around the Assessing Officer deviating from the 'project completion method' followed by the assessee. The CIT(A) set aside the ad-hoc estimation, emphasizing the incomplete status of the project and the ongoing litigations affecting progress.

The assessee argued that the project completion method had been accepted in previous assessments and highlighted delays due to disputes among partners, leading to a halt in construction progress. The CIT(A) noted that only about 50% of the project was completed by the assessment year, with significant litigations affecting the project's continuity. Moreover, refunds to buyers and unresolved expenses further complicated profit estimation. The CIT(A) concluded that an ad-hoc 8% profit estimation was unwarranted given the project's uncertainties and incomplete status.

In response, the Revenue defended the Assessing Officer's approach, citing potential tax liability deferral under the project completion method due to extended project timelines and substantial advances. However, the assessee pointed out the CIT(A)'s consistent stance on similar matters in previous assessments, including the subsequent year of 2007-08, where no appeal was made against the deletion of additions. The Revenue's appeal was dismissed, affirming the CIT(A)'s decision based on the lack of substantial completion, unresolved litigations, and the absence of justifiable reasons for deviating from the accepted 'project completion method.'

In conclusion, the Tribunal upheld the CIT(A)'s order, emphasizing the need for a rational basis in income estimation and rejecting the ad-hoc approach in light of incomplete project status and unresolved issues. The decision highlighted the importance of consistency in assessment methods and the consideration of project-specific circumstances in determining taxable income.