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TMI Blog2013 (8) TMI 483X X X X Extracts X X X X X X X X Extracts X X X X ..... price, as is generally the case, has increased over the period since which the project stands commenced. - if there is a sudden depression in the real estate market. If the Management considers that it cannot hold on to the project, the subsequent sales would have to be necessarily estimated at the going market rate. The same, if lower than the cost as anticipated, would impact the valuation of the WIP. This would depress the overall profit, which though, as evident, has no direct relation with the costs incurred during the year, i.e., the incremental WIP for the year. The assessee has furnished a revised chart (Table C) by eliminating the profit included in the valuation of the closing stock, so that it is valued at cost, which shows the profit on the project at 40.22% of the total cost. In view of the fact that some percentage of the total cost remains to be incurred as at the year-end, which though could be fairly assessed, in our view, adopting the said percentage (of course upon verifying the same to be correct) to the incremental cost for the year would be a fair assessment of the profit arising for the current year. As the assessee has booked the cost of land and utilitie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aves the profit of the project 'Sai Swar' undisturbed, assessing it as such, he has, following his own method, computed the same for the 'Sai Sthaan' project at ₹ 6,79,52,123/-, thereby making a huge addition of ₹ 631.61 lacs. For this, he would take us to, firstly, the computation of income (PB-I/ Pages 52-54), and then to the relevant part of the assessment order. The basis of the AO's action is that the Occupancy Certificate (OC) for this project stands received in this year. i.e., 12.09.2008, signifying the completion of the project and, further, that the possession had been given in most cases. Accordingly, he has proceeded by treating it as a final year for this project. Likewise, as the OC for 'Sai Swaar' stood received on 10.04.2007, i.e., during the previous year relevant to (AY) 2008-09, he has, taking advantage of the fact that the assessment for that year was u/s. 143(1), and a period of four years had thus not lapsed since the relevant assessment year, subject the returned profit on that project for that year (Rs. 44.10 lacs) to a substantial increase (Rs. 530.28 lacs), adverting to the assessment order u/s. 143(3) r.w.s. 147 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... timates with regard to the potential sale as well as costs yet to be incurred toward project completion, need to be made. This necessarily involves revision of profit estimate, and being made bona fide, could not be impugned on that score. This is on account of the very nature of the work, the project work, spreading across years, while the profit attributable to each year has to be estimated and subject to tax. He would then take us to the profit working by the A.O., which is at pages 15-19 of the assessment order. He has proceeded, he continued, on the basis that the project is complete, and this was the final year of the project. Accordingly, he has brought the entire income on the project, save the flats unsold, to tax for the current year. There is no correspondence, as would be readily seen, between the figures of the opening and closing stock-in-trade. The OC does not signify the completion of the project, but only of the civil construction. Though, therefore, possession, could be given, as it indeed has been; the construction being inhabitable, work on common areas, viz, stairways, lifts, parking space, etc., and consequentially expenditure thereon, could yet remain. This i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the total of ₹ 387.51 lacs incurred for that year, he would submit that the land cost represents 20 % of the total land cost, the balance having been expensed in two installments of 40% each during the A.Y. 2007-08 and 2008-09, being the 2nd and 3rd year of the project respectively. The cost of the utilities, however, represents that entire cost of utilities on the project, and which though stands incurred earlier, stands expensed, as per regular accounting practice, only in the final (terminal) year. On being further inquired if the assessment for A.Y. 2011-12 (f.y. 2010-11) has been made, and if so, the profit rate adopted, he would clarify that the return for that year was filed only on 28.03.2012, and its assessment was pending. 2.3 The ld. DR was equally vehement in pleading the Revenue's case. It is apparent from the assessee's working that there is no basis to it; the assessee taking refuge in the vague and imprecise words 'market perception'. It is in this view of the matter that the AO, finding, in contradiction to the assessee's claim with respect to receipt of OC, that two projects, 'Sai Swar' and 'Sai Sthaan' on which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estate projects would become liable to be recognized. There is no question of consistency here, as the assessee is not following any definite or proper method, so that the principle of consistency, as explained in the case of Radhasoami Satsang vs. CIT [1992] 193 ITR 321 (SC) and Gopal Purohit vs. Jt. CIT [2009] 20 DTR (Mum.) (Trib.) 99, being relied upon by the assessee, would not apply. The principle of res judicata, it is trite, is not applicable to the proceedings under the Act. Reliance was placed by him on New Jhangir Vakil Mills Co. Ltd. vs. CIT [1963] 49 ITR 137 (SC) toward the same. With regard to the assessee's contention that the matter is essentially a timing dispute, he continued, the same would be of no consequence, as income of each year is to be brought to tax for that year. In fact, most of the disputes in tax matters relate to time or the correct year of taxability (or deduction). All adjustments to the closing stock would stand to be offset subsequently, so that there is only a timing difference, as also in the case of depreciation. Why, the difference between the revenue and the capital expenditure itself, would again boil down to one of time, as most capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laws). 2.5 He, on being questioned by the Bench as to the basis of the profit disclosed, which exhibits wide variation, for no apparent reason, falling to ₹ 47.91 lacs for the current year, whereat the project has only advanced further, both in terms of percentage completion and percentage sold, as against ₹ 219.71 lacs for the immediately preceding year (A.Y. 2008- 09) and, in fact, further plummeted to ₹ 11.28 lacs for the following year (A.Y. 2010-11), whereat in fact hardly any work remained to be completed on the project, disclosing a huge profit for the terminal year, whereat again hardly any work had been executed, so that the charge of arbitrariness in reporting profit was not without substance, would rely on the adequacy of the profit as finally disclosed, stating that it is not a case of an enterprise disclosing a profit percentage in the range of 8 % to 10 %, but a healthy profit of as much as 28%, furnishing a statement of the disclosed profit on the project for the year, and that on the entire project, also tabulating the corresponding costs, reproduced as under: (Table 'C') Financial Year WIP during t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come over the years with the progression of the project/s under execution. As such, without doubt, to that extent he follows the percentage completion method of accounting. However, to say that he further adopts cost plus method is completely incorrect. Costs, which represent the inputs, though toward earning income, by itself do not generate income, which is to necessarily flow from a third person, who accepts the output/s. Further, it is only in arrangements where the income is contractually linked to incurring costs, so that a charge is provided on the basis of the cost/s incurred, that it could be said that the cost incurred forms the basis of the income, and that, therefore, the cost plus method becomes applicable. It is as under these circumstances once the cost stands incurred, or certified to be so, for which a periodic review is contractually envisaged, income in the prescribed rate inures. This method is generally followed in construction or other large civil-mechanical projects, spreading across a number of years, over which costs cannot be anticipated accurately, so as to insulate or largely so the contractor, who has in any case, or has right to be, remunerated for his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d for 'Sai Sthaan' for the current year as being not the correct operating result, i.e., as not consistent with the method of accounting being ostensibly followed. The assessee, firstly, has completely failed to show the basis of the disclosing operating results on its projects, seeking refuge, as correctly stated by the ld. DR during hearing, in the vague expression 'market perception'. Even in the percentage completion method, the assessee-developer is not obliged to recognize income until the point in time there is transfer of all significant risks and rewards of ownership, i.e., as are associated with the ownership of the property. The price risk is considered as one of the most significant risks in the real estate business. Transfer of legal title or possession is generally considered as a transfer of all significant risks and rewards incident to the property. Similar would be a case where legally enforceable agreement/s for sale with the buyers is entered into, in which case there would be a transfer of beneficial ownership, warranting recognition of income, even if there has been no passing of legal title or possession. The qualifying criteria is, thus, that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roject cannot exceed 37.5% (50% x 75%) of the total profit on the project. The assessee in the instant case has, however, not explained his profit disclosure for any of the years in terms of such variables, and which has led the Revenue to hold the same as being without basis and arbitrary. We cannot but agree. All that can be said, though, in his favour, is that he has disclosed income with the progression of the project and, thus, broadly speaking, adopted the percentage completion method. In fact, he has also not followed the more popular variant of the said method. In this, the revenue is recognized straightaway on the percentage completion (as at the year-end) as certified by the architect/valuer. For example, if a project is 40% complete, 40% of the project sale value is accounted for as income, bringing effectively the additional income for the year to the fore inasmuch as a similar exercise would also have been made as at the end of the immediately preceding year. Of course, consideration as to whether the entire project is sold or not is made, so that if the project is unsold to any extent, no income relatable thereto is taken into account, and cost in its respect is carri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribed to by the assessee itself (for which reference may be made to the submission by the ld. AR before us as delineated at para 2.1 (at pg.3 above), the operating result in case of a project spanning across years is to be made by making fresh estimate/s of the cost/s yet to be incurred. No income can be anticipated in respect of the part of the project yet to be sold (i.e., as at the relevant year- end), so that it would be, from the stand point of reporting profit on the project, be immaterial if the sale price, as is generally the case, has increased over the period since which the project stands commenced. Of course, if some sales are generated during the year, income thereon - to the proportionate extent - has to be accounted for. This is despite the fact that the project had been already completed to an extent prior to the beginning of the current year. This would once again emphasize as to why, though no doubt having a proximate and direct relationship with the costs incurred during the year, so as to be computed with reference thereto, the profit as disclosed cannot be solely attributed to the cost incurred during the year. What, for example, if there is a sudden depression ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect. In fact, having been incurred, there is no scope for any variation or for any escalation therein, which would normally attend an expenditure that is yet to be incurred. Accordingly, accounting for the same in some years, as done by the assessee, is, to our mind of little merit and, in any case, to no consequence, even as assessee was not able to explain its rationale during the course of hearing. The assessee has worked out the profit on the entire project at ₹ 1019.92 lakhs. The same yields a ratio of 40.22% on cost and 28.68% on sales. The proportion on sale, if at all, is the only valid basis, even as, as explained earlier, the profit is to be arrived that not on the basis of profit rate, either with reference to cost or sales, but as actually accrued, i.e., as a difference between the revenue/s accrued and the costs toward the same, including a provision for that for which the bills are yet to be received and accounts not finalized. 3.4 As such, all that therefore needs to be done is to provide for the costs yet to be incurred (as at the end of the year), which could be fairly assessed, having been incurred, or contracts in their respect entered into up to the dat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bjection is upheld. Of course, it would be a different matter if the current year was a terminal year, which is clearly not the case, as evident from the fact that the costs, i.e., other than qua land and utilities, stand incurred in the succeeding year, if not also in the year following it. The terminal year, i.e., the year of completion of the project, has necessarily to bear the entire project cost as well as all the revenues accrued on the project to date. The decision in respect of the terminal year though would have to be based on facts, rather than by 'deferring' it by merely postponing the incurring or booking of some minor costs. It is only toward the project unsold that revenues thereon would not be booked. Accordingly, to this extent, the entire shortfall in the accounting would necessarily find reflection and resolution in this, i.e., the terminal, year. As such, we cannot under the given facts and circumstances, subscribe to the AO's method as well. The assessee has furnished a revised chart (Table C) by eliminating the profit included in the valuation of the closing stock, so that it is valued at cost, which shows the profit on the project at 40.22% of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cate, which the assessee claims to be not determinative of the fact of the completion of the project. The matter is essentially one of fact. Full facts being not on, or brought on, record, we have, in view of the fact that the costs on the project stand incurred subsequently, considered the matter as indeterminate, so that the said year could not be considered as the terminal year. The adjustment to the reported profit, as made by the A.O., though approved in principle, has been found as nevertheless not leading to the correct profit for the relevant year even in terms of the method followed, in view of it being done selectively, resulting in distortion of profits across years. Consequently, the assessee's method, subject to some correctives, has been directed for application. No adjustment can possibly be made where the A.O. has himself not made any adjustment to the returned profit on the project. The final adjustment would, in any case, have to be made in the terminal year, which could be different for each project. The terminal year for the project 'Sai Swar' being f.y. 2009-10, no adjustment, accordingly, is called for. We decide accordingly, and the assessee's ..... X X X X Extracts X X X X X X X X Extracts X X X X
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