2018 (3) TMI 1584 - AT - Income Tax

Calculating the net profit @12.68% on closing WIP - assessee has claimed to have offered to tax entire income arising from this project in AY 2008-09 when the project was claimed by the assessee to have been completed - Held that - This matter need to be restored to the file of the AO for verification whether the assessee has offered entire income arising from this project in AY 2008-09 when the project was stated by the assessee to be completed and also to verify since when the project completion method was adopted by the assessee for computing income from this project as the project was stated to be started in 1995 and the stand adopted by the Revenue for the earlier years in accepting project completion method of earlier years. If the aforesaid contentions of the assessee are found to be correct, then additions will stand deleted. AO shall grant proper and adequate opportunity of being heard to the assessee in accordance with principles of natural justice in accordance with law. AO shall admit evidences filed by the assessee in its defence in the interest of substantial justice Penalty u/s 271(1)(c) - undisclosed being compensation from Chedda Housing - Held that - Revenue is contending that it is only after when the assessee was cornered by revenue, the assessee came forward and made disclosure of income voluntarily being compensation from Chedda Housing which was earlier disclosed as an unsecured loan. It is very crucial to have correct facts on record and there has to be ad idem as to the findings of the authorities below so as to establish bonafide of the assessee or there need to be proper justification for arriving at contrary findings and it can not be left in the realm of speculation. It is also not on record as to under what circumstances, the said income was earned by the assessee and what made the assessee in not disclosing the said income. The assessee is claiming that the same to be an accountant mistake. This aspect also needs to be looked into to establish the bonafide of the assessee and whether the assessee is able to come out with reasonable explanations and justifications to come out of clutches of penalty provisions u/s 271(1)(c) of the 1961 Act. Thus this matter needed to be restored to the file of the AO for recording the entire factual matrix of the case and then arrive at the decision as to the leviability of penalty u/s 271(1)(c) of the 1961 Act in accordance with law. - Appeal of assessee decided for statistical purposes.

Issues Involved:
1. Adoption of Percentage Completion Method vs. Project Completion Method for revenue recognition.
2. Calculation of net profit on closing Work-In-Progress (WIP).
3. Imposition of penalty under Section 271(1)(c) for furnishing inaccurate particulars of income.

Detailed Analysis:

1. Adoption of Percentage Completion Method vs. Project Completion Method for Revenue Recognition:
The core issue was whether the assessee should follow the percentage completion method or the project completion method for revenue recognition in the construction business. The AO applied the percentage completion method, arguing it provided a true and fair picture of taxable profit, citing various judicial precedents. The assessee contended that they consistently followed the project completion method since 1995, which was accepted by the Revenue in previous years.

The Tribunal noted that the project completion method is a recognized method of accounting, as upheld by various judicial precedents, including the Supreme Court. The Tribunal emphasized the need for consistency in the method of accounting, referencing the judgment in CIT v. Manish Buildwell Private Limited. The Tribunal restored the matter to the AO for verification of whether the entire income from the project was offered for taxation in AY 2008-09 and to confirm the consistent application of the project completion method since the project's inception in 1995.

2. Calculation of Net Profit on Closing Work-In-Progress (WIP):
The AO estimated the income by applying a 40% net profit on the advances shown against the WIP. The CIT(A) upheld the percentage completion method but revised the net profit estimation to 12.68% based on the profit declared in earlier years by the assessee.

The Tribunal found that the CIT(A)'s approach of using the assessee's historical profit percentage (12.68%) was more reasonable than the AO's arbitrary 40% estimation. However, the Tribunal reiterated the need for verification of the assessee's claim that the entire profit from the project was offered for taxation in AY 2008-09. If verified, the additions would be deleted to avoid double taxation.

3. Imposition of Penalty under Section 271(1)(c) for Furnishing Inaccurate Particulars of Income:
The AO imposed a penalty under Section 271(1)(c) for furnishing inaccurate particulars of income, specifically for declaring ?30,00,000 as a loan instead of compensation received from Chedda Housing. The CIT(A) confirmed the penalty, noting that the assessee only disclosed the income after being cornered by the AO during scrutiny.

The Tribunal observed conflicting findings between the AO and CIT(A) regarding whether the disclosure was voluntary or prompted by the AO's scrutiny. The Tribunal highlighted the need to establish the bona fides of the assessee's claim of an accountant's mistake and the circumstances under which the income was earned. The Tribunal restored the matter to the AO for a thorough examination of the facts and circumstances, directing that the assessee be given a proper opportunity to present their case.

Conclusion:
Both appeals were allowed for statistical purposes, with directions for the AO to verify the facts and circumstances surrounding the revenue recognition method and the imposition of the penalty. The AO is to ensure consistency in the method of accounting and avoid double taxation, while also establishing the bona fides of the assessee's explanations regarding the inaccurate particulars of income.

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