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TMI Blog2014 (1) TMI 1182X X X X Extracts X X X X X X X X Extracts X X X X ..... tly - The AO cannot thrust upon the assessee to pay tax in accordance with the original agreement without recognising the supplementary agreement. Rejection of method of accounting As per AS 7 – Computation of profits – Held that:- The CIT(A) was of the opinion that the AO simply by rejecting the method of accounting followed by the assessee is not proper since assessments have been completed in other assessment years cases based on the same accounting method – there was force in the finding of the ClT(A) for the reason that since the assessing officer rejected the method of accounting followed by the assessee but he accepted the same method of accounting followed by assessee in subsequent assessment year - The assessing officer has not given a clear finding mandated under section 145(3) of the Act and yet re computed the profit from the projects done by the assessee company - The additions made by the assessing officer are not supported by any facts and figures which can demonstrate that the impugned method of accounting policy adopted by the assessee company resulted in under estimation of profit - Although the assessing officer discussed in detail about the accounting aspects ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Chandra Poojari, AM: The above two appeals are cross appeals, the former by the Revenue and the latter by the assessee directed against the order of the CIT(A) I, Hyderabad dated 29.12.2011 for A.Y. 2008 09. 2. The Revenue raised the following grounds of appeal: 1. The CIT(A) ought to have held that the supplementary agreement does not form the basis of recognition of revenue for the A.Y. 2008 09 and the figures adopted during search proceedings by the assessee for disclosing additional income hold good. 2. The CIT(A) ought to have held that the adoption of estimated cost as per the supplementary agreement is a clear afterthought by the assessee and ought to be rejected. 3. The CIT(A) ought to have considered the fact that the supplementary agreements were submitted to APHB much beyond 31 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s as the profit before DDIT (Inv) as on 5 12 2007. However while filing the return of income for the AY 2008 09, assessee has not admitted any such profit and stated that they have not reached the threshold limit of more than 30% of the estimated cost as on 31 3 2008. The AO observed that as per clause 2.7 of the Development Agreement cum GPA entered into with APHB, the developer company shall be solely responsible for marketing of project and make its best endeavours in this regard. Further as per clause 2.8 of the agreement, the developer company shall operate and maintain the project in accordance with the standard for reasonable and prudent developer. Accordingly, the developer company has entered into agreement of sale with 4 different customers for developing the Bits i.e. Bit I to Bit IV into hotels 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IV. The AO observed that as on 5 12 2007 the assessee company had achieved 30% of the estimated cost and it was under the obligation to recognize the Revenue for Bit Ill and Bit IV which was not done. 6. A show cause letter was addressed by the AO calling for assessee's explanation. In reply, the assessee stated that as per their accounting policy, the company has not reached the threshold limit of 30% in any of the projects and as such revenue recognition was not done in respect of any of the projects. It was observed by the AO that the WIP incurred as on 5 12 2007 for Bit Ill and Bit IV was Rs. 581.82 lakhs and Rs. 1395.53 lakhs respectively which gives 33.57% and 39.16% respectively as the estimated percentage of WIP prior to December, 2007. The WIP incurred was increased to the tune of Rs. 637.15 lakhs for Bit III and Rs. 2407.85 lakhs for Bit IV thereby the percentage of WIP incurred to the project came down to 12.47% for Bit Ill and 18.44% for Bit IV as on 31 3 2008. The AO observed that the assessee company intentionally with an afterthought escalated the projected cost as on 31 3 2008 and suppressed the profit and postponed the tax liability. He negated the argument of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. originally on 17 3 2006 for sale of commercial block with infrastructure to the extent of 1,50,000 sft along with parking space of 90,000 sft. The sale consideration was worked out @ Rs. 1800/ per sft for cold shell and Rs. 250 per sft for parking space. Thus the total consideration is to the extent of Rs. 29.25 crores. In the same agreement there is a provision for additional construction for both cold shell as well as for parking space beyond 1,50,000 and 90,000 respectively @ Rs. 600/ per sft and Rs. 250/ per sft, respectively. This agreement has been revised by a supplementary agreement dated 18 3 2008 for increased built up area for both cold shell and parking space and measuring about 4,14,000 sft and 2,07,000 sft respectively for a total consideration of Rs. 59.40 crores. Similarly for Bit IV, it had entered into Agreement of sale originally on 15 3 2007 for sale of commercial block of 3,00,000 sft along with parking space of 66,000 for a total consideration of 105.45 crores. Subsequently, supplementary agreement was executed on 10 3 2008 for enhanced built up area of 5,50,000 sft commercial space and 3,05,000 sft for parking space for a total consideration of Rs. 169.6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tage of such approvals from various departments, the assessee could execute supplementary agreement with the buyers after ensuring no blocks in view of subsequent denial of approvals from the various departments. Accordingly, in the month of March, 2008, it executed supplementary agreements with enhanced built up area in respect of commercial cold shell and parking space for enhanced sale consideration. Even if examined on commercial lines, no prudent business man or for that purpose, no land owner would be idling its land without exploiting to its maximum commercial usage when the Govt. permits them to construct additional FSI subject to certain conditions. Even in the instant case, though it is a Govt. enterprise, APHB is very much interested to the maximum usage of the land given on development to the assessee company. They have nothing to lose by virtue of such additional built up area, on the other hand they have everything to gain in view of the percentage of revenues on gross sales. Thereby any increase in additional space is to the advantage of APHB. Similarly, the developer as well as the ultimate buyer is also benefitted for maximum usage of the same land without incurrin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the project rather than fixing an artificial limit of 30% as threshold limit to recognize the income. The assessee is nothing but a civil contractor executing the work to the single buyer based on the specifications of the buyer and the approvals of the sanctioning authority. As and when the work is progressing the assessee should work out the revenue based on the total sales and the total cost of the project vis a vis work completed as at the end of the financial year. Such system of accounting method would give correct profits rather than fixing some artificial percentage as threshold limit. Guidelines of the Accounting Standards (AS 7 and AS 9) prescribed by the ICAI also suggest recognizing the income on progressive percentage completion method of the project. When it was pointed out to the AR, it vehemently argued that the holding company of the assessee M/s. Ambience Properties Ltd., is following the same method for so many years, therefore, the assessee is also following the same method in recognizing the revenue, and therefore, it is not correct to deviate from regular method followed by it. 12. The CIT(A) observed that there is no justification in the argument of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jurisdiction to adopt percentage completion method without fixing any artificial limits to arrive at profits for the purpose of taxation under I.T. Act. In fact, while going with the system of accounting followed by the assessee, the artificial percentage of 30% fixed by the assessee without any reasonable basis is altered to delete such a fixed rate to recognize the income on regular basis. Therefore, there is no basic deviation from the method followed by the assessee. There is basic flaw in the method followed by the assessee to have threshold limit of 30% as the said threshold limit can be deferred by various means. The assessee is in a position to postpone some of the tax liabilities so as to get out of the threshold limit to disclose profits of the year. Hence correct profits cannot be deduced by such system followed by the assessee. Accordingly, the income of the assessee on Bit Ill and Bit IV is computed as under by removing the 30% threshold limit and by following the progressive percentage completion method on the basis of the supplementary agreements. 14. In view of the above discussion, according to the CIT(A) the computation of income is to be made as follows: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se taxes have been collected in subsequent year it cannot be considered to exclude the income assessable in the earlier years. Therefore, the submission of the assessee is not tenable as per the provisions of law. According to the AR, the CIT(A) wrongly directed the AO to verify the assessment records of the assessee in subsequent years and accordingly give due credit to the profits assessed in this year while computing the total income of those years by excluding the same. 17. He submitted that there was no incriminating material found during the course of search to suggest any undisclosed income for the assessment year under consideration. The assessee being in real estate business recognised the income in accordance with the Guidance Note issued by the Institute of Chartered Accountants. He submitted that the assessee has recognised the income based on the proposed construction of built up area as per "agreement of sale" entered with the customers. Based on this working, no revenue was recognised for the year ended on 31.3.2007 as threshold limit of 30% of cost was not achieved for any of the Bits. The statement made by the Managing Director u/s. 132(4) of the Act cannot be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment under section 132(4). In fact, the Andhra Pradesh High Court in CIT vs. Ramdas Motor Transport (1999) 238 ITR 177, 183 held as follows: Thus, where a person is found to be not in possession of any incriminating material, question of examining him by the authorized officer during the course of search and recording any statement from him by invoking the powers under section 132(4), does not arise. Therefore, the statement of such a person, recorded patently under section 132(4), does not have any evidentiary value. This provision embedded in section 132(4) is obviously based on the well established rule of evidence that mere confessional statement without there being any documentary proof shall not be used in evidence against the person who made such statement. Where the finding of the Tribunal is based on the above well settled principle, such finding cannot give rise to a question of law. From the above, it is clear that the question of examining any person by the Authorized Officer arises only when he finds such person is in possession of any undisclosed money or books of account. 19. The AR submitted that in the instant case also, the subsequent events which have taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that Bench may take note of this admission by the Assessing Officer which underlines the fact that there was a supplementary agreement which is legal and' binding and agreed to by the company and the two respective buyer companies. The copy of Remand Report and the Reply by the Assessee are on record. The cost of the projects increased on account of (i) Rock cutting and excavation costs which were done manually as against the controlled blasting envisaged earlier. This was necessitated as the Police Authorities did not allow the company to go for controlled blasting and criminal cases were filed by the immediate neighbours for using explosives for rock blasting. At the time the original agreements were made and prices agreed with the customers, it was not possible to comprehend this aspect. This has resulted in substantial increase in the cost or the excavations. The Bench may kindly further note that the entire land excavation costs have been incurred and paid in the Financial Years 2007 2008 and 2008 2009 for all the Bits including Bit III and Bit IV and verified by the Assessing Officer during the course of scrutiny assessment for the Assessment Year 2009 10 and accepted (ii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greements will remain the same for each of the assessment years. Similarly, the estimated project cost will also remain the same subject to increase/decrease on account of fresh estimations based on actual construction work done, and cost incurred thereto. There cannot be a case that the Department will accept a lower sales figure for the same project in one year and higher sales figure in the subsequent years. The AR requested the Bench to kindly accept and approve the findings made by the Commissioner in his order with regard to the genuineness of the Supplementary Agreements and the consequential increase in the project cost and project revenue. 24. Further regarding assessee's appeal the AR submitted that while the findings made by the Commissioner of Income Tax (A) with regard to the supplementary agreements as well as the cost of the project is true and correct, the assessee objects to the fact that the Commissioner of Income Tax (A) has thrust his own accounting policy on the company and arrived :at a profits from the project of Bit Ill and Bit IV ignoring the accounting policy followed consistently by the company. The AR submitted that the accounting policy followed by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Statutory auditors and adopted by the general meeting should be accepted by the Income Tax Department. The system of accounting consistently adopted by the assessee should not be disturbed by the Assessing Officer/Commissioner of Income Tax unless there is positive inference of an understatement of income with respect of the books of account. In the case of the company, there is no understatement of income because of the accepted and consistent accounting policy followed by the company. The Hon'ble Bench is therefore requested to delete the additions made by the Hon'ble Commissioner of Income Tax (Appeals) by applying his own accounting policy and rejecting the consistent accounting policy being followed by the company. 26. On the other hand, the learned DR submitted that the assessee company entered into a development agreement involving issue of power of attorney by the AP Housing board for development of 19 acres and 35 guntas at Gachi Bowli, Hyderabad. The assessee was to pay Rs. 1.65 crores per acre and also a revenue of 1.75 % of sales on residential development and 2% of sales (revenue) on commercial development which was subsequently enhanced to 3.5% and 4%. The asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt (original) with AGR Constructions for BIT"3 for 29.25 crores. 17.03.2006 3 Sale Agreement for BIT"4 with Murty 4 You Infra Services for Rs. 105.50 crores 15.03.2007 4 Application to GHMC for approval of original plans 17.03.2006 5 Supplementary Agreements for BIT"I and BIT"2 28.09.2006 25.06.2007 6 Date of search 09.10.2007 7 132(4) Statement 05.12.2007 8 Supplementary Agreement for BIT"3 18.03.2008 9 Supplementary Agreement for BIT"4 10.03.2008 10 Date of submission of revised plans to GHMC for approval 13.05.2009 for BIT"3 30.06.2009 for BIT"4 11 Approval of GHMC came on 24.10.2009 29. Further he submitted that the assessee had already revised agreement for Bit 1 and Bit 2 by 25/6/07 itself and if anything in this nature was in the offing for Bit 3 and Bit 4, the MD would have mentioned it in his statement or made efforts by then. There is nothing. The supplementary agreements were entered into on 18/03/08 and 10/3/08 but the letters seeking approval for revised plan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2007 29.25 105.45 Bookings from 1 4 07 to 31 10 07 % of booking made up to 31 3 07 100 100 Total estimated WIP (In Cr.) 17.33 35.63 WIP incurred up to 31 3 07 (in cr.) 4.91 10.42 WIP incurred from 1 4 07 to 31 10 07 (in cr.) 0.90 3.53 WIP up to 31 10 07 (in cr.) 5.81 13.95 % of WIP as on date of search 33.57 39.16 Revenue to be recognized (in cr.) 9.81 41.29 Estimated profit admitted (incr.) 3.99 27.33 31. As per this table, the assessee's income is Rs. 3.99 crores from Bit 3 and Rs. 27.33 crores from Bit 4. However, the assessee has not shown this income in its return of income and according to the assessee there was supplementary agreement as per which the assessee has not achieved the threshold limit of 30% to recognise income for the assessment year under consideration and as per the supplementary agreement, revised estimate revenue and floor space are as follows: Bits Name of the customer Date of Sup.Agr. Estimated revenue Estimated cost Details of construction III ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 34. Admittedly, this is a search assessment. Assessment is to be based on seized material or any other material with the AO. "Project Percentage Method" is an accepted method of accounting, particularly for long term projects which take several years for completion, accounting for the profit on pro rata basis, whereby the profit is taken into account on the basis of percentage completion method though no final sales had been made which would materialise only on completion of construction, yet sale agreement had been entered into and advance received thereunder. The assessee has been maintaining books of account in the present case. No defects are noticed in the books of account. The income/loss has been arrived at by the assessee after taking all the direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact that the Department accepted method of accounting in subsequent assessment years and assessments were completed under section 143(3) of the Act by the AO. The categorical finding of the CIT(A) is that the AO simply by rejecting the method of accounting followed by the assessee is not proper since assessments have been completed in other assessment years cases based on the same accounting method. We find force in the finding of the ClT(A) for the reason that since the assessing officer rejected the method of accounting followed by the assessee but he accepted the same method of accounting followed by assessee in subsequent assessment year. The assessing officer has not given a clear finding mandated under section 145(3) of the Act and yet re computed the profit from the projects done by the assessee company. The additions made by the assessing officer are not supported by any facts and figures which can demonstrate that the impugned method of accounting policy adopted by the assessee company resulted in under estimation of profit. Although the assessing officer discussed in detail about the accounting aspects in his order, however no conclusion has been reached by the assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X
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