Joint Commissioner Of Income Tax (OSD), Central Circle-I, Noida vs M/S Rudra Buildwell Homes Pvt. Ltd.

1.

Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.10,63,68,619/- made on account of difference in turnover reported in GST returns and turnover declared in the Income-tax Return, without appreciating the factual and legal position on record'

2 Whether on the facts and circumstancesofthecaseandin1aw,theLd.CIT(A) has erred in accepting the assessee's claim of adoption of Percentage of Completion Method (POCM) without verifying the reconciliation of substantial variation between GST turnover and income offered to tax and without insisting upon cogent documentary evidences.

3.

Whether on the facts and circumstancesofthecaseandinlaw,theLd.CIT(A) failed to appreciate that the assessee did not furnish project-wise reconciliation of receipts, stage of completion certificates, architect/engineer certification or any independent verification of percentage completion during the assessment proceedings, and therefore the acceptance of internal working furnished at the appellate stage is erroneous.

4.

That the order of Ld. CIT(A)-3, Noida being erroneous in law and facts be set aside and order of the A.O be restored.

5.

That the above grounds are without prejudice to each other and appellant craves leave to add, alter or amend any ground or grounds on or before the date of hearing of appeal.”

7. Submission in respect of Ground No-1

Ground No. 1 The Ld. AO is not justified in facts and circumstances of 1 the case to make addition of Rs.10,63,68,619/- on account of difference in turnover in GST and ITR.

7.1

That the Assessing Officer (AO) has concluded that the assessee has concealed income to the extent of Rs. 10,63,68,619/- based solely on a mismatch between turnover figures reported in the Service Tax Return (Rs. 15,74,15,623/-) and the Income Tax Return and Tax Audit Report (Rs. 5,10,47,004/-), without conducting any independent inquiry or verification.

7.2

That the Ld. AO presumed that the entire difference between the two figures to preset unaccounted turnover and undisclosed income and added it to the total income of the assessee purely on a presumption, without seeking any reconciliation or clarification.

7.3

That the addition has been made without invoking or applying the provisions of Section 145(3) of the Income Tax Act, 1961, i.e., without rejection of books of accounts maintained by the assessee. The assessee was not issued any notice or opportunity to explain the nature of the difference, nor was any inquiry conducted into the assessee's method of accounting or the basis of recognition of revenue.

7.4

That the Ld. AO failed to analyze the nature of the receipts, the stage of completion of projects, or the revenue recognition method adopted by the assessee, which is critical in the case of real estate transactions. That the assessee is engaged in the business of real estate development and follows the Percentage of Completion Method (POCM) for recognizing revenue, as is appropriate and mandated for such businesses.

7.5

That the assessee is engaged in the business of real estate development, which follows percentage of completion method. The details of Rs.15,63,58,844/- are as under:

Particular	Amount
Amount received in April	1096442
Amount received in May	4280688
Amount received in June	28528088
Amount raised in June from Customer	112585646
Total	156358844

7.6

That the sum of Rs. 15,63,58,844/- reported in the Service Tax Return comprises multiple components, including amounts received in April (Rs.1,09,64,422), May (Rs. 42,80,688), and June (Rs. 2,85,28,088), and demand raised in June (Rs.11,25,85,646).

7.7

That these amounts represent amount received and demands raised, and under mercantile system and POCM, such receipts do not constitute income until the relevant stage of construction or sale is achieved. The recognition of income under POCM requires matching of revenue with proportionate project costs incurred, which ensures income is recorded only when it is accrued and earned.

7.8

The calculation of turnover on the basis of percentage of completion method is as under:

Computation
Cost of the project	6,02,29,00,000
Cost incurred till date upto 31.03.2018	2,33,08,16,514
% age completion	38.70%
Saleable Area	2143394
Area sold till date	703227
Revenue to be recognised
Expected Sales realization	2103796149
Revenue till now (38.70% of 2103796149)	814153117
Less: Revenue shown in F.Y.15-16	522787050
Less: Revenue shown in F.Y. 16-17	240319063
Revenue to be recognised in F.Y. 17-18	51047004

7.9

Based on POCM, the total cost of the project was Rs. 6,02,29,00,000, and cost incurred till date was Rs. 2,33,08,16,514, representing 38.70% completion. Total saleable area was 21,43,394 sq. ft., of which 7,03,227 sq. ft. was sold, with an expected sales realization of Rs. 2,10,37,96,149. Accordingly, revenue to be recognized till date was Rs. 81,41,53,117 (i.e., 38.70% of total expected realization), out of which Rs. 52,27,87,050 was recognized in FY 2015-16 and Rs. 24,03,19,063 in FY 2016-17.The screenshot of the revenue recognised is as under:

7.10

The revenue recognized for FY 2017-18, therefore, correctly stood at Rs. 5,10,47,004, fully in line with the PoCM and accounting standards. The assessee has maintained complete and audited books of accounts as per Section 44AB, and no discrepancies have been reported in the audit under Form 3CD.

7.11

The differential figure between STR and ITR arises purely due to difference in the basis of recognition-STR recognizes turnover on receipt basis for service tax applicability), while the books recognize income as per PoCM under the mercantile system.

7.12

Under the erstwhile Chapter V of the Finance Act, 1994, service tax was applicable on advances received, even if the service was yet to be rendered or possession not given, thereby inflating the STR turnover figure.Under the Income Tax Act, 1961, Section 145(1) permits computation of income in accordance with the method of accounting regularly followed by the assessee, which in this case POCM.

7.13

The ICAI's Guidance Note on Accounting for Real Estate Transactions (Revised 2012) mandates that revenue must be recognized only when the conditions of revenue recognition are fulfilled, including substantial completion and transfer of significant risks and rewards.The AO failed to appreciate the applicable accounting standards, and made the addition without referring to the assessee's accounting policy, disclosures in the financials, or supporting documents like customer ledgers and bank statements.

7.14

The entire difference is attributable to timing differences and accounting basis, and cannot be treated as unaccounted income unless it is proved to be bogus or unexplained.The AO failed to carry out any verification or inquiry to examine whether the receipts were indeed advances or whether they had culminated in revenue through completed sales.There is no finding or allegation of suppression, falsification, or manipulation of accounts, and no defect has been pointed out in the regularly followed accounting method.

7.15

It is a settled legal principle, as held by the Hon'ble Supreme Court in CIT v. Excel Industries Ltd. (2013) 358 ITR 295 (SC), that income must be realand not hypothetical, and mere advances cannot be treated as taxable income z. That the AO acted in a mechanical manner and treated the entire STR turnover as taxable income, without applying his mind to the nature of real estate business or the established accounting and taxation principles.

7.16

Even assuming without admitting that a portion of the advance might be attributable to income, the AO was duty-bound to determine what portion had actually accrued as income based on project status, which he failed to do.The assessee's financials disclose advances received, and these figures match the amounts reported in the STR, demonstrating consistency and transparency in reporting.

7.17

The Tax Audit Report under Form 3CD clearly sets out the accounting policies followed, including revenue recognition method, which has not been questioned or rejected by the tax auditor or AO. In absence of rejection of books, absence of any finding of suppression or concealment, and full disclosure in the financials and audit report, the impugned addition is entirely unjustified. The AO has not brought any evidence or adverse material on record to justify the addition, and has acted solely on a perceived mismatch without understanding the underlying accounting treatment. The addition of Rs.10,63,68,619/- is thus contrary to law, factually incorrect, unsupported by evidence, and deserves to be deleted in full.