The ITO,, Bhopal v. M/s Elixir Infrastructures,, Bhopal

IN THE INCOME TAX APPELLATE TRIBUNAL INDORE BENCH : INDORE BEFORE SHRI JOGINDER SINGH JUDICIAL MEMBER AND SHRI R.C.SHARMA ACCOUNTANT MEMBER PAN NO. : AABFE9619A I.T.A.NO.381/IND/2009 A.Y. : 2006-07 INCOME-TAX OFFICER ELIXIR INFRASTRUCTURES 3(1) BHOPAL VS BEHIND B.P. PETROL PUMP KAROND BY PASS ROAD VILLAGE PALASI BHOPAL (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI PRADEEP KUMAR MITRA SR. DR RESPONDENT BY : SHRI PRAKASH JAIN CA O R D E R PER R. C. SHARMA A.M. THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER OF CIT(A) DATED 02.03.2009 FOR THE ASSESSMENT YEAR 2006-07 IN THE MATTER OF ORDER PASSED U/S 143(3) OF THE INCOME -TAX ACT 1961. 2. THE ONLY GRIEVANCE OF THE REVENUE RELATES TO THE AC TION OF CIT(A) FOR DELETING THE ADDITION OF RS. 12.23 LA KHS MADE BY -: 2: - 2 THE ASSESSING OFFICER ON ACCOUNT OF NET PROFIT BY R EJECTING THE BOOKS OF ACCOUNT. 3. RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORDS PERUSED. 4. FACTS IN BRIEF ARE THAT THE ASSESSEE HAS STARTED PR OJECT OF DEVELOPING THE HOUSING PROJECT AND THIS WAS THE FIRST YEAR OF THE ASSESSEES OPERATION. THE ASSESSEE HAS PLANNED TO CONSTRUCT 166 UNITS ON THIS LAND. DURING THE YEAR THE ASSESSEE HAS INCURRED TOTAL EXPENDITURE WHICH WAS SHOWN AS CLOSING WORK IN PROGRESS OF RS. 87.64 LAKHS INCLUDI NG DIRECT AND INDIRECT EXPENSES. NO SALES HAS BEEN SHOWN IN T HE PROFIT AND LOSS ACCOUNT AND MONEY RECEIVED FROM CUSTOMERS HAVE BEEN TREATED AS ADVANCES WHICH WAS TO THE TUNE OF RS. 76.28 LAKHS. IN THE COURSE OF SCRUTINY ASSESSMENT THE AO OBSERVED THAT THE ASSESSEE HAS SOLD 52 PLOTS TO THE CUSTOMER S AND ALSO BOOKED HOUSES IN THE RELEVANT PERIOD BUT NO SALES OR INCOME HAVE BEEN OFFERED FOR TAXATION. IN REPLY TO AOS QU ERY IT WAS EXPLAINED THAT THE ASSESSEE WAS FOLLOWING PROJECT C OMPLETION METHOD AS PROVIDED BY THE INSTITUTE OF CHARTERED AC COUNTANTS OF INDIA AS AS-7. AS PER AO THE ASSESSEE WAS REQUI RED TO -: 3: - 3 FOLLOW AS-7 ACCORDING TO WHICH PERCENTAGE COMPLETIO N PROJECT METHOD IS TO BE FOLLOWED AND PROPORTIONATE INCOME W AS REQUIRED TO BE SHOWN. HE THEREFORE REJECTED ASSES SEES BOOKS OF ACCOUNT BY INVOKING PROVISIONS OF SECTION 145(3) AND ESTIMATED ASSESSEES INCOME AT RS. 12.23 LAKHS. 5. BY THE IMPUGNED ORDER THE LD. CIT(A) DELETED THE ADDITION BY HOLDING THAT REVISED AS7 IS NOT APPLICA BLE TO THE ASSESSEE AND SINCE THE ASSESSEE HAD NOT SHOWN ANY S ALES DURING THE YEAR UNDER CONSIDERATION NO INCOME ACCR UED TO THE ASSESSEE. THE LD. CIT(A) ALSO RECORDED A FINDING TO THE EFFECT THAT AS PER THE METHOD OF ACCOUNTING CONSTANTLY FOL LOWED BY THE ASSESSEE THE ASSESSEE HAD SHOWN PROFIT OF RS. 69 58 405/- IN THE ASSESSMENT YEAR 2008-09 AS PER THE AUDIT REP ORT ON THE BASIS OF COMPLETION AND POSSESSION GIVEN FOR THE RO W HOUSES TO THE BUYERS. THUS THE ASSESSEE WAS CONSISTENTLY FOL LOWING PROJECT COMPLETION METHOD OF ACCOUNTING WHEREIN IN COME IS OFFERED ON COMPLETION OF THE ON GOING PROJECT. ACCO RDINGLY THE LD. CIT(A) HELD THAT THE AO HAS WRONGLY REJECTED TH E BOOKS OF ACCOUNT AND THEREBY WRONGLY ESTIMATED THE INCOME OF THE -: 4: - 4 ASSESSEE AT RS. 12.23 LAKHS. AGGRIEVED BY THIS ORDE R THE REVENUE IS IN FURTHER APPEAL BEFORE US. 6. WE HAVE CONSIDERED THE RIVAL CONTENTIONS CAREFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AN D DELIBERATED UPON VARIOUS JUDICIAL PRONOUNCEMENTS DI SCUSSED BY THE LD. CIT(A) IN HIS APPELLATE ORDER WITH REGAR D TO PROJECT COMPLETION METHOD FOLLOWED BY THE ASSESSEE. IT IS U NDISPUTED FACT THAT IT WAS THE FIRST YEAR OF ASSESSEES BUSIN ESS WHEREIN TOTAL EXPENDITURE INCURRED WAS SHOWN AS CLOSING WOR K IN PROGRESS AMOUNTING TO RS. 87.64 LAKHS. WHATEVER ADV ANCE WAS RECEIVED ON BOOKING/SALE OF LAND WAS ACCOUNTED AS A DVANCE TO THE TUNE OF RS. 76.28 LAKHS. THERE WAS NO SALE IN THE PROFIT AND LOSS ACCOUNT. AS THE ASSESSEE WAS SHOWING PROJE CT COMPLETION METHOD NO INCOME WAS SHOWN IN THE PROFI T AND LOSS ACCOUNT AS NONE OF THE FLATS WERE COMPLETE AND GIVEN POSSESSION. HOWEVER THE AO ON THE BASIS OF ESTIMAT ION OF SALE REALIZATION OF THE PROJECT AS A WHOLE ON ITS COMPLE TION ESTIMATED 8.5 % AS HAVING BEEN COMPLETED DURING THE YEAR AND THEREBY BROUGHT RS. 12.23 LAKHS TO TAXABLE INCOME. WE FOUND THAT WITH REGARD TO THE AOS OBSERVATION REGARDING APPLICABILITY -: 5: - 5 OF REVISED AS-7 THERE WAS A QUERY IN THIS REGARD B EFORE THE EXPERT ADVISORY COMMITTEE OF I.C.A.I. WHICH WAS CLA RIFIED BY THE SAID COMMITTEE IN THE FOLLOWING MANNER :- Q. WHETHER REVISED ACCOUNTING STANDARD-7 WOULD BE APPLICABLE TO THE COMPANY FOR ACCOUNTING FOR NEW HOUSING PROJECTS WHICH MAY BE UNDERTAKEN BY THE COMPANY ON OR AFTER 1.4.2003 FOR THE CONSTRUCTION ACTIVITIES ON THEIR OWN ACCOUNT AS A VENTURE OF COMMERCIAL NATURE ? REPLY : THE COMMITTEE NOTES THAT ACCOUNTING STANDARD (AS) 7 ACCOUNTING FOR CONSTRUCTION CONTRACTS ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA IN DECEMBER 1983 STATES IN PARAGRAPH 1 THAT THE STATEM ENT ALSO APPLIES TO ENTERPRISES UNDERTAKING CONSTRUCTION ACTIVITIES OF THE TYPE DEALT WITHIN THIS STATEMENT NOT AS CONTRACTORS BUT ON THEIR OWN ACCOUNT AS ADVENTURE OF A COMMERCIAL NATURE WHERE THE ENTERPRISE HAS ENTERED INTO AGREEMENT FOR SALE . THEREFORE THE STANDARD WAS APPLICABLE TO THE ACTIVITIES CARRIED ON BY THE COMPANY AS STATED IN PARAGRAPH 1 AND 2 ABOVE. THE COMMITTEE ALSO NOTES THAT THE REVISED ACCOUNTING STANDARD (AS) 7 CONSTRUCTION CONTRACTS ISSUED BY THE INSTITUTE O F CHARTERED ACCOUNTANTS OF INDIA IN 2002 DOES NOT CONTAIN THE AFORESAID SENTENCE CONTAINED PRE- REVISED AS-7. ON THE OTHER HAND PARAGRAPH 1 OF REVISED AS-7 CLEARLY STATES THAT THIS STATEMENT SHOULD BE APPLIED IN ACCOUNTING FOR CONSTRUCTION CONTRACTS IN THE FINANCIAL STATEMENTS OF CONTRACTORS THEREFORE THE COMMITTEE IS OF THE VIEW THAT THE REVISED AS-7 IS NOT APPLICABLE TO SUC H ENTERPRISES. ( SOURCE : COMPENDIUM OF OPINIONS VOLUME XXIII) ( P.NO.1-5) -: 6: - 6 7. IN VIEW OF THE ABOVE THE PRE-REVISED AS-7 HOLDS GOOD REGARDING ACCOUNTING FOR BUILDERS AND DEVELOPERS AN D AS SUCH HE HAS RIGHTLY APPLIED PROJECT COMPLETION ACCOUNTIN G METHOD FOR RECOGNIZING REVENUE IN HIS BOOKS. IN THE INSTAN T CASE THE CONSTRUCTION PROJECT OF THE ASSESSEE WAS APPROVED B Y TOWN PLANNER ON 12.12.2005 AND BY THE BHOPAL MUNICIPAL CORPORATION ON 26.12.2005 AND DURING THE YEAR UNDER CONSIDERATION ONLY PRELIMINARY WORK LIKE LAND AND S ITE DEVELOPMENT ELECTRIFICATION FOUNDATION HAD BEEN C ARRIED OUT TILL END OF THE YEAR AND NO MAJOR CIVIL CONSTRUCTIO N ACTIVITY WERE STARTED DURING THAT YEAR. THE ASSESSEE HAD INC URRED TOTAL EXPENDITURE OF RS. 87.64 LAKHS INCLUDING COST OF LA ND AND THE SAME HAD BEEN SHOWN AS CLOSING STOCK AND WORK IN PR OGRESS SINCE PROJECT COMPLETION METHOD WAS FOLLOWED BY THE ASSESSEE WHEREIN THE REVENUE IS RECOGNIZED AT THE TIME OF HA NDING OVER POSSESSION OF FULLY COMPLETED UNITS TO THE CUSTOMER S. DURING THE YEAR THE COMPLETION OF HOUSING PROJECT WAS TO THE EXTENT OF 7 TO 8 % SO EVEN ON PRUDENT BUSINESS NORMS IT WAS NOT THE VISIBLE TO RECOGNIZE REVENUE AT THIS POINT OF TIME. ACCORDINGLY NO INCOME WAS ACCRUED DURING THE YEAR UNDER CONSIDE RATION. -: 7: - 7 8. IN THE RESULT THE APPEAL OF THE REVENUE IS DISMIS SED. THIS ORDER HAS BEEN PRONOUNCED IN THE OPEN COURT ON 8 TH FEBRUARY 2011. SD/- SD/- (JOGINDER SINGH) ( R.C.SHARMA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED :8 TH FEBRUARY 2011. CPU* 892