AI Structured Summary
Not yet generated for this judgment
Judgment
PER VIKAS AWASTHY, JM:
This appeal by the Revenue is directed against the order of Commissioner of Income Tax (Appeals)-33, Delhi [in short 'the CIT(A)'] dated 03.07.2020, for AY 2016-17.
The Revenue in appeal has assailed the order of CIT(A) on following grounds:-
The Ld. CIT(A) has erred on law and on facts as the accounts of assessee cannot be relied and liable to be rejected on account of the following:-
The Progress of completion already exceeded 25% during preceding previous year itself as project cost incurred 33.87 Cr. against estimated project cost of 97.11 Cr. i.e. 34.87% and amount received on booking exceeded 10% while no revenue was recognized during that year thereby postponing payment of taxes.
No basis or details or certification for estimated project cost of 97.11 Cr. are on record and cannot be relied upon.
The Ld CIT(A) also erred on facts and on law by allowing VAT payments to Vendor as expenditure since sale of real estate before completion is liable for VAT and VAT paid to vendors on input can be claimed for set-off against output VAT and therefore not an expenditure.
The facts of the case in brief as emanating from records are: The assessee is an AOP formed by M/s. Krish Infrastructure P. Ltd., and M/s. Amco India Ltd. in the ratio of 60:40 for development of real estate project “Krish Icon”. The assessee filed its return of income for AY 2016-17 declaring income of Rs.2,57,38,320/-. The case of the assessee was selected for limited scrutiny. During assessment, the assessee explained before the AO that the assessee is consistently following Accounting Standard-7 (AS-7) to recognize profit on project completion method basis. In the period relevant to assessment year under appeal, the assessee booked 70.54% of the total project area and recognized sales revenue amounting to Rs. 97,07,04,566/-. The AO rejected assessee’s submissions and held that the assessee has made incorrect claim of expenditure. Further, the AO rejected books of account and extrapolated sales revenue to the remaining 30% of the unsold area and brought to tax the total sale of 100% area. Thus, the AO made addition of Rs.7,02,25,175/-. The AO further disallowed assessee’s claim of inter state VAT paid by third party amounting to Rs.42,51,655/-. Aggrieved by the assessment order dated 23.12.2018 passed u/s.144 of the Income Tax Act,1961(hereinafter referred to as ‘the Act’) for AY 2016-17, the assessee filed appeal before the CIT(A). The assessee also approached High Power Committee against the high-pitched assessment made by the AO. The Committee after examining facts of the case, gave its findings and recommendations holding that the AO has erred in extrapolating sales which has resulted in high pitched assessment. The CIT(A) considering recommendations of the high-power committee and books of the assessee deleted the additions made by the AO. Further, the CIT(A) held that the AO has wrongly rejected books of the assessee. Thus, the CIT(A) deleted entire addition made by the AO. Against the findings of the First Appellate Authority, the Revenue is in appeal before the Tribunal.
Shri Om Prakash, representing the department vehemently supporting the assessment order submitted that the CIT(A) without examining the documents on record vide impugned order has deleted the additions made by the Assessing Officer (AO). He thus, prayed for reversing findings of the CIT(A) and upholding the assessment order.
Shri Pranav Yadav, appearing on behalf of the assessee/respondent strongly supporting the impugned order submitted that the assessee is consistently following AS-7 for recognizing profits on the basis of project completion method. The addition made by AO was the result of extrapolating profits to the unsold area without any basis. Such extrapolation made by AO has resulted in high pitched assessment. The ld. Counsel for the assessee pointed that in immediate preceding assessment year i.e. AY 2015-16, the case of the assessee was selected for limited scrutiny for similar reasons. The AO accepted assessee’s method of accounting and made no addition. Thus, income returned by the assessee for AY 2015-16 was accepted. The facts in impugned assessment year in so far as manner of accounting and recognizing of profit are identical. He thus, prayed for dismissing appeal of the Revenue.
Both sides heard, orders of the authorities below examined. The Assessing Office made high pitched addition of Rs.7.02 crores after rejecting assessee’s books of account and the manner of recognizing of profit by the assessee. The assessee approached High Power Committee against the high-pitched assessment made by the AO. The relevant excerpts of the findings and recommendations of the High-Power Committee are extracted herein below:-
“The A0 while passing the assessment order, recomputed the revenue on the basis of Accounting Standard -7 but ignored the main Accounting Standard AS-9 laid down for revenue recognition. The assessee explained the implications of AS 7 in its case. It was stated that the assessee may he assumed as Contractors and the flat Buyers with whom the Agreement to Sale have been executed shall be treated as Contractee. Now in order to determine the Total Contract Value, the Total of the sales value of only those flats can be considered whose agreements have been executed as only in those cases the Cohtractor-Contractee relationship has been established. Accordingly the sales value of the unsold units shall not be considered as no contractual obligations have been created on those flats till the end of the financial year in question. Further AS 9 states that revenue shall be recognized when substantial risk has been transferred, whereas in the given case the matter of transfer of risk doesn't arise at all as the flats haven't been sold and thus the revenue cannot be recognized
Since, assessee has sold only 3,25,655 sqf flat area, those total sale consideration is Rs. 97.07 cr of which Rs. 57.14 cr is recognized, there is no case of am extrapolation of sale consideration, as Rs. 97.07 cr, is itself full value of sale consideration, for this area, For balance area unsold of 1,35,986 saft, no agreement for sale is there Hence contractor -contractee relationship is not existent and risk of that part of the Project is still entirely of the assessee. Hence extrapolation done by the AO to arrive at estimated sales of Rs. 1,37,60, 48, 353/-is not based on any sound footings or basis Such extrapolation has thus made his assessment high pitcheded. A0 was free to examine whether cost allocated of the project against recognized revenue was correct or not. Bul instead of examining the facts at hand AO restored to extrapolation of sales which rendered this assessment high pitcheded.”
[Emphasized by us]
A bare reading of the recommendations clearly indicate flaw in the approach of AO to extrapolate sales consideration of 70% of the area sold to the remaining 30% unsold area.
The CIT(A) after examining documents on record accepted that the assessee’s manner of recognizing profit and accounting is in accordance with AS-7 read with AS-9. The aberration that led to the addition of more than Rs.7 crores in case of the assessee for AY 2016-17 is on account of faulty method adopted by the AO in extrapolating sales revenue to the unsold area. Hence, the addition made by the AO was deleted by the CIT(A). The Revenue has not been able to point out any infirmity in the order of CIT(A). We find no reason to interfere with the impugned order, hence, the same is upheld.
Before parting with this order, we may point that the high-pitched assessment made by the AO was referred to High Power Committee assigned the task to examine high pitched assessments. The said committee in its recommendations came to the conclusion that due to the flawed approach of the AO to extrapolate profits to the unsold areas has resulted in high pitched assessment. The relevant extract of the committee reported has already been reproduced above. Despite, the fact that such High-Power Committee specially constituted by the Board has given its recommendations and findings highlighting aberrations in the manner of assessment and the CIT(A) deleting the addition inter alia based on such recommendations, the Department still chooses to file appeal disregarding findings and recommendations of the Committee.
While making above observations, we are live to the fact that recommendations of committee are not substitute to quasi-judicial proceedings, nevertheless, its recommendations are internally binding mechanism for correcting administrative excess in high-pitched assessments. The objective is to curtail the litigation. This is a typical case of administrative apathy where the Income Tax Department has forced litigation on the assessee. It is a fit case for levy of cost on the Department for dragging the assessee into a protracted and vexations litigation. However, we refrain ourselves from levying costs.
In the result, appeal of the Revenue is dismissed.