9911796707
TMI Blog2014 (1) TMI 1182X X X X Extracts X X X X X X X X Extracts X X X X ..... 03 2008 and therefore has no force of law until approved by APHB. 4. The CIT(A) ought to have appreciated the fact that the assessee has inflated the cost unduly. Though the reason of removal of boulders and rock sheets was given. It is definitely valid one as this expenditure existed at the time of entered into original agreement. Hence the CIT(A) ought to have disputed the inflated estimated cost by the assessee at his whims vide supplementary agreement. 5. The CIT(A) ought to have appreciated the fact that the supplementary agreement is with regard to the extension of existing floors i.e., vertical not horizontal and the area involved is the same. 3. The assessee raised the following grounds: 1. On the facts and circumstances of the case, the Learned Commissioner of Income tax (Appeals) I, Hyderabad, has erred in partly allowing the Appeal preferred by the assessee company against the Orders passed under section 143(3) by the Hon'ble Assessing Officer by making an addition of Rs. 4,27,98,318 for the Assessment Year 2008 2009. 2. The Learned Commissioner of Income tax (Appeals) I, Hyderabad, has erred in applying his own accounting policy for making the impugned addition and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and commercial complexes and Bit V into residential complex. The AO observed that as per the development agreement cum GPA dated 30 4 2005, the recognition of revenue for sale of developed properties is accounted for by the percentage completion method in respect of each project where the outcome can be reliably estimated. The percentage completion is determined by reference to the cost incurred to date to the total estimated cost, provided the company has incurred 30% of the total projected cost and booked sales of 30% of the total number of units to be sold. The AO further observed that during search operation conducted on 9 10 2007 in the business premises of M/s. Ambience Properties Ltd., the DDIT(Inv) had found certain documents pertaining to the assessee company i.e., M/s. Universal Realtors Pvt. Ltd. which contain details of consideration received by the company from various customers as per the agreement of sale, details of expenditure incurred by the company for various projects, details of revenue shared between the developer company and APHB, etc. Basing on the material found, the DDIT (Inv) prepared an estimate of profit as on date of search. As per the detailed estimat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fterthought escalated the projected cost as on 31 3 2008 and suppressed the profit and postponed the tax liability. He negated the argument of the assessee company in support of the supplementary agreement and proceeded to compute the profit of the assessee company basing on the original agreement which is as below. Bit III Estimated revenue as per original agreement Rs. 29.25 crores Estimated cost as per original agreement Rs. 17.33 crores WIP costs incurred up to 31 3 2008 Rs. 6.37 crores Percentage of WIP to the estimated cost 36.75% Gross revenue recognized proportionately Rs. 10,74,93,750 Less: Expenditure incurred Rs. 6,37,14,757 Estimated profit Rs. 4,37,78,993 Bit IV Estimated revenue as per original agreement Rs. 105.45 crores Estimated cost as per original agreement Rs. 35.63 crores WIP costs incurred up to 31 3 2008 Rs. 24.37 crores Percentage of WIP to the estimated cost 67.55% Gross revenue recognized proportionately Rs. 71,23,14,750 Less: Expenditure incurred Rs. 24,07,85,430 Estimated profit Rs. 47,15,29,320 7. Accordingly, the total estimated profit as per percentage completion method of accounting followed by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of additional space under commercial block as well as under parking for a consideration. It means there is an intention on the part of both the developer cum contractor as well as the buyer to utilize the maximum built up area allowable as per prescribed rules. 9. At the time of search a statement was recorded from the Director Shri Pawan Kumar Agarwal, wherein he has admitted the income from projects Bit Ill and Bit IV based on workings as on the date of search. The working was made on the basis of the system of accounting adopted by the assessee to recognize revenue on the project. According to the assessee, as and when threshold limit of 30% is achieved both in respect of sales and in respect of cost, the revenue is recognized on % to the sales and to the cost. Accordingly, the admission was recorded on the date of search. Subsequently, the assessee came up with the argument that due to additional FSI, permitted by the Govt. of AP, the assessee company is entitled to exploit the land taken by it from the APHB on development basis to the full extent possible. Thereby it entered into supplementary agreements with respective buyers of all the projects and accordingly books of acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the assessee company are in line with the commercial thinking and to maximize the revenue to full extent possible. Hence it is not correct on the part of the AO to disregard the supplementary agreements and consequentially the revised built up area and enhanced projected revenues and cost of the project merely on conjectures and surmises. It is to be considered whether the assessee company is entitled to have the additional FSI allowable as per the Govt. of Andhra Pradesh GO or not. If a case is established that the assessee company is not eligible to exploit the land to the maximum usage by using the revised GO for constructing additional space, then the AO is justified in rejecting such supplementary agreements. But no such ineligibility criteria have been established by the AO to arrive at such decision. On the other hand, it is contended by the assessee company that it has received the permission for building the additional built up area to some of the projects. Therefore, rejection of such supplementary agreements purely on hypothetical basis is not justified. It is not the case that the assessee company is suppressing the cost of the project. On the contrary, the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounting system. Income tax Act is applied to each entity and to each assessment year independent of others (Subhdeodas Jalan vs. CIT, 26 ITR 617). There are so many judicial decisions defending the action of the assessing authorities to change the method of accounting when it was found that the method followed by the assessee does not represent correct profits for the purpose of taxation. The matter of taxability cannot be decided on the basis of entries which the assessee may choose to make in his accounts but has to be decided in accordance with the provisions of law. The CIT(A) referred to the Apex Court decision in the case of Sutlej Cotton Mills Ltd vs. CIT 116 ITR 1. Similarly in the case of UP State Industrial Development Corporation (225 ITR 703) their Lordships have held that principles of commercial accounting should be applied in ascertaining profits and gains. It is the duty of the Assessing Authority to consider whether income can be properly deduced from accounts even if method of accounting is regularly followed, the AO can reject it. Attention is invited to the decision in the case of CIT vs. Sarangapur Cotton Manufacturing Co Ltd, 6 ITR 36 and Sundaram & Co Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 59,40,00,000 169,68,50,000 Estimated cost as per Supplementary Agreement 51,42,87,675 149,32,28,000 WIP cost up to 31.3.2008 6,37,14,757 28,07,85,430 % of WIP to the estimated cost 12.39 16.13 Gross revenue recognised proportionately 7,35,96,600 27,37,01,905 Expenditure incurred 6,37,14,757 24,07,85,430 Estimated cost 98,81,843 3,29,16,475 15. The CIT(A) observed that while considering the estimated project cost, due consideration was given to the fact of boulders and rock sheet in the site of Project Bit IV. It is evidenced by the fact that the assessee had engaged the contractor M/s. Indu Projects for a consideration of Rs. 96 crores for land development and excavating the boulders and rock sheets etc. The above computation as per the Table is a reasonable estimation of profit on each project after considering the total sale value, projected cost, and cost incurred as on 31 3 2008, etc. It gives rational picture of the profit estimation on the project so far executed. Accordingly, the CIT(A) directed the Assessing Officer to add a sum of Rs. 98,81,843/ towards estimated profit in respect of Project Bit Ill and Rs. 3,29,16,475/ in respect of Project Bit IV as agains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... him in the statement made u/s. 132(4) of the Act. The supplementary agreement entered with the APHB, which is Government authority, cannot be said to be an afterthought and that agreement was validly entered on 10.3.2008. It is required to be validly acted upon. He submitted that the statement was made by the MD based on the working available at the time of search. However, the same has subsequently undergone change because of increased cost for excavation as also increased cost on account of additional built up area. 18. While answering the Question No. 15, the Director has clearly mentioned as to what point the revenue is recognized. It was also made clear that the payment of revenue sharing of 4% made to APHB was only to discharge the liability of the company as advances have been received from the customers. The Tribunal may kindly note that a declaration of income which is a part of the regular books of account under section 132(4), when no incriminating materials or undisclosed income observed, cannot be the basis for making an assessment more so when the statement is not corroborating with the facts and records produced during the assessment. The statement given by the Dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2008 but also the projected revenue increase substantially. During the course of assessment, it was clearly explained that as on 31.3.2008, when the accounts for the year 2007 2008 were drawn up, it was observed that the company did not achieve the threshold limits, and therefore, revenue was not recognized. The Assessing Officer has merely made his assessments based on the statement under section 132(4) of the Act. The entire assessment order is on the presumption that the supplementary agreements entered were an "after thought" and only made with an intention to escalate the projected cost so that revenue cannot be recognized as per the company's Accounting Policy. It would be relevant to draw the attention of the Bench that Supplementary Agreement was also executed with the Bit I buyer on 20.3.2008 i.e., after the date of statement made under section 132(4) which has been accepted by the Assessing Officer as no negative inference is made on the Bit I in the Order. The fact of the matter is that the project work is being carried out as per supplementary agreements and sanctions obtained accordingly. The sale consideration agreed under the supplementary agreement is also accounted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eport that the supplementary agreements for Bit IV was not submitted by the company to APHB. The company has been regularly submitting all sale agreements, supplementary agreements and copies of sanction plans etc., to APHB. The company is also keeping APHB informed through the Project Coordinator specifically nominated by them for the development work being carried by the company. 21. The AR submitted that company is also regularly discharging its obligations of paying the revenue share at the contracted rate of 4% for bits I to IV to APHB. The Hon'ble Bench may also note that while making the revenue share payment, the total consideration as per the supplementary agreement is also in formed to APHB, and revenue share paid accordingly. In fact APHB is getting more revenue because of the Supplementary agreements. With regard to the observations made in the remand report by the Hon'ble Assessing Officer on the DPR (Detailed Project Report), the Hon'ble Bench may kindly note that DPR is not an approval. The DPR is for the limited purpose of achieving financial closure and it was required to be submitted before getting the Power of Attorney from APHB. The Power of Attorney was execut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... threshold limit of 30% is not an artificial limit but is an accepted accounting practice since till the cost incurred on the project achieves a desired level, cost estimation cannot be done properly, and where the company follows "Percentage Completion Method" without proper estimations, there would be no consistency in the revenue reporting from year to year and fluctuations in the profit of the project will not be consistent from year to year. The Commissioner of Income Tax (Appals) cannot thrust a new policy when the Assessing Officer has accepted the accounting policy followed by the company since the additions made by him in the Assessment Order were not on account of accounting policy followed by the company but on account of the Assessing Officer not accepting the supplementary agreement. In fact, the Assessing Officer has endorsed the accounting policy of the company. In the circumstances that the additions were not made on accounting policy issued, can the Hon'ble Commissioner of Income Tax (A) be justified in making his own accounting policy and thrusting it on the company, more so, when the accounts have been audited, and the Statutory Auditors have not made any comment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tatement on 5/12/2007, offered Rs. 31 crores approximately as the income from development of Bits 3 and Bit 4 as given in Table 1 as per project completion method read with their accounting policy of recognizing revenue if sales as well as work in progress (construction cost) exceeds 30% threshold limit of total estimated sales and total project cost.(answer to q 13 and 17). The declaration was subject to receipt of necessary permissions by 31/3/08 and by 31/3/08, there were no approvals pending. The company, however, did not offer these incomes in the returns filed and when queried stated that, the expenditure incurred (Work in progress}did not cross threshold limit of 30% as on 31/3/2008 even though the sales were completed 100%. This happened because, on account of a supplementary agreement with the buyers, the company revised both its sales and total cost figures. 27. The DR submitted that the AO rejected this revised working and also the supplementary agreements holding them to be an "afterthought" to avoid taxes and proceeded to assess the income. The CIT(A) , rejected the AO's working on the stand that supplementary agreements are a ruse. He however stated that the 30% thre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e agreements revising the revenue and area of sale were entered into on 18/3/08 and 10/3/08 BUT how can the cost of construction be determined and estimated without plans? The plans were submitted in May and June of 2009 show that they were not there in March 2008. The revision as brought out in Table 6 is patently to assessee's developers disadvantage. The entire additional revenue is equal to or less than enhanced cost (as in bit 4). So why should anyone build at a loss ? The "taking advantage" of enhanced FSA rules is to make more money not less. The rock cutting costs are said to be abnormal for bit 4 but then they were there from the beginning not a new discovery. So costs would be passed on or nothing stops the assessee to sell the extra space to others. It need not sell at a loss to the same buyer. The CIT(A) accepted the supplementary agreements with the concomitant enhanced cost escalations along with depressed revenues without a question. This flies against all the norms as anyone will sell extra space at a higher cost than the original value (passage of time) is an accepted business practice. This itself should have triggered the question that the Assessing Officer was r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted cost gone up to Rs. 130.55 crores from Rs. 35.63 crores and sale consideration also was at Rs. 105.45 crores and there was no achieving of 30% threshold limit to recognise the income. Contrary to this, the AO is not willing to accept the supplementary agreement entered by the assessee as they were entered at the fag end of the year. According to the AO the assessee's intention is to manipulate profit for the current year by deferment of tax liability. Accordingly, he computed the income of the assessee as follows: Bit III Estimated revenue as per original agreement Rs. 29.25 crores Estimated cost as per original agreement Rs. 17.33 crores WIP costs incurred up to 31 3 2008 Rs. 6.37 crores Percentage of WIP to the estimated cost 36.75% Gross revenue recognized proportionately Rs. 10,74,93,750 Less: Expenditure incurred Rs. 6,37,14,757 Estimated profit Rs. 4,37,78,993 Bit IV Estimated revenue as per original agreement Rs. 105.45 crores Estimated cost as per original agreement Rs. 35.63 crores WIP costs incurred up to 31 3 2008 Rs. 24.37 crores Percentage of WIP to the estimated cost 67.55% Gross revenue recognized proportionately Rs. 71,23,14,750 Less: Expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed by the assessee to defer the taxability. Once the AO accepted the supplementary agreement in assessing the assessee's income in subsequent assessment years, for the assessment year under consideration it cannot be overlooked. The reason given by the AO for not considering the supplementary agreements is that the supplementary agreements are entered at the fag end of the year. It is a business decision to enter into supplementary agreements in the interest of business of the assessee, the AO cannot thrust upon the assessee to pay tax though there is a valid agreement which was submitted before him. In our opinion, the assessee is following the same method of accounting consistently. The AO cannot thrust upon the assessee to pay tax in accordance with the original agreement without recognising the supplementary agreement. 35. Further, in this case, the assessment was not based on the seized material but, it is based only on wrong accounting standards followed by the assessee company in recognising the revenue and hence, the only issue is to be adjudicated upon in this appeal is whether the AO is right in rejecting the accounting method regularly employed by the assessee and sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , he cannot substitute one more computation in place of assessee's computation as well as AO's computation. The assessee has recognised the income in accordance with the true terms of the agreement and if there is any inconsistency in recognising the income then only revenue authorities can disturb the same. There is no whisper in the CIT(A)'s order that the assessee has not recognised the income in accordance with the supplementary agreements. Once the assessee recognised the income in accordance with the supplementary agreements, the CIT(A) cannot substitute his assessment to say that the assessee has postponed the tax liability. The CIT(A) observed that there is no basic deviation in the method followed by the assessee regarding recognising of income. However, he observed in the same breath that there is basic flaw in the method followed by the assessee to have threshold limit of 30% as the said threshold limit can be differed by various means. When there is no deviation in recognising the income by the assessee, the CIT(A) cannot recompute the profit of the assessee by observing that there is basic flaw in the method followed by the assessee to have threshold limit of 30% as th ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
