Advance received from clients against the bookings of shops

IN THE INCOME TAX APPELLATE TRIBUNAL

(DELHI BENCH ‘F’ NEW DELHI)

BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER

AND

SHRI T.S. KAPOOR, ACCOUNTANT MEMBER

I.T.A. No.2498/Del/2011

Assessment year: 2007-08

ITO,

Ward-14 (3),

New Delhi.

(Appellant)

V.

M/s Premium Buildwel (P) Ltd.,

A-53, Prashant Vihar,

New Delhi.

 (Respondent)

PAN /GIR/No.AADCP-9915-B

Appellant by: Shri Rajiv Ranka, Sr. DR.

Respondent by: Shri Suresh Kumar Gupta.

ORDER

PER TS KAPOOR, AM:

This is an appeal filed by the revenue against the order of Ld CIT(A) dated 17.2.2011. The grounds raised by the revenue are as under:-

1. That on the facts and circumstances of the case and in law the Ld CIT(A) erred in deleting the addition of `.1,41,74,510/- made on account of advance received from clients against the bookings of shops by accepting the assessee’s contention that he was maintaining the accounts on project completion method. The CIT(A) also failed to appreciate the fact that these advances are none other than accrued income of the assessee as the project was completed during the year and further expenses were pending to be booked.

2. The appellant craves to be allowed to add any fresh grounds of appeal and/or delete or amend any of the grounds of appeal.

2. The brief facts of the case are that the assessee is a private limited company and is engaged in the business as builder and developer. Return for the year under consideration was filed on 31.10.2007. The case of the assessee was selected for scrutiny under CASS. During assessment proceedings, the Assessing Officer noted that assessee had received a sum of `.1,55,09,000/- from customers as advance against the booking of shops and the assessee had booked under sale amount to the extent of `.13,34,430/- only and the balance amount of `.1,41,74,510/- has been shown by the assessee as advance in the balance sheet. The Assessing Officer asked the assessee to explain that since the project was completed as no further expenses were pending to be booked then why not as per percentage completion method the complete amount of advances received from customers against sale price of shops be considered as the trading receipts of the assessee and taxed accordingly. The Ld AR did not submit any reply in this regard. The Assessing Officer, during the assessment proceedings informed the Ld AR about numerous judicial pronouncements and particularly the case law reported in the case of Commissioner Of Income Tax, Orissa. v. Nandram Hunatram. 103 ITR 433. & in the case of Uttam Singh Duggal in 127 ITR 21 was referred wherein it was held that advance payments received on account of sale vested a right or interest is acquired in the property and hence these advances assume the character of trading receipts in the peculiar nature of construction business. The Assessing Officer further observed that as per balance sheet, the project was complete but assessee had deliberately not shown the trading receipts as sales so as to defer the tax liability. A number of case laws was discussed in the assessment order and ultimately the Assessing Officer concluded that advance of `.1,41,74,510/- is the income of the assessee.

3. Dissatisfied with the order of Assessing Officer, the assessee filed appeal before Ld CIT(A) and submitted as under:-

a) That Assessing Officer has considered the above amount as the sale consideration in view of the fact that project was completed ignoring the fact even if it is treated a sale amount, the value of stock should have been reduced to that extent to arrive at the true profit.

b) The action of the Assessing Officer in taking the entire sale consideration as profit is a gross violation of the principle of accounting. There is no basis or material or the ratio of argument put forward by Assessing Officer in support of his above assumption and since the addition is based on wrong assumption, the action of the Assessing Officer needs to be quashed.

c) That the Assessing Officer has assumed that project undertaken by the appellant was complete but this was not correct.

d) That as a matter of fact, the amount was received from these parties with the understanding that they had the option for buying the shops when the project comes to the finalization stage and if they so opt the company was bound to give them the area booked and in case they do not, they have the option to take back the money. In the present case, the amount has been refunded in some cases and in other cases the shops has been sold and this proves that sale had not taken place when the amount was received.

e) That out of total amount of `.1,41,74,510/-, `.70,72,510/- resulted into sale in the next year and the balance amount of `.71,02,000/- was returned to one of the parties.

f) That Hon'ble Bangalore ITAT in the case of Madhuvana House Building Cooperative Society v. ACIT 76 TTJ 948 had held that the assessee is entitled to adopt such method of accounting as would give complete picture of true income of the assessee provided the same is regularly employed. In this line of civil construction business when the duration of project is spread over several years , the completed contract method of accounting is preferable as unforeseen expenditure on account of escalation in price etc. may arise during the later stage of the project. Therefore, during pendency of work income or loss cannot be ascertained.

g) That the case laws relied upon by the Assessing Officer are in relation to the project where major expenses are incurred and there is no variable cost to be met. In the case of the appellant, the entire profit could be washed out if the shops are not sold in time and bank interest could take away whatever profit could be accounted for. In the present case, the appellant has offered for taxation income year to year on the basis of the sale made and therefore it is wrong to say that the assessee has employed the project completion method.

4. The Ld CIT(A) after considering the submissions of the assessee agreed with the contentions of Ld AR and deleted the addition. The relevant para of Ld CIT(A)’s order is reproduced below:-

“I have carefully considered the remarks of the Assessing Officer and also the submission of the appellant. Out of total advances of `.1,55,09,000/- there has been sale against above advance to the extent of `.13,34,490/- during the year under consideration.

The detail and subsequent treatment of balance amount of `.1,41,74,510/- is as under:-

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From the above table, it is apparent that out of total advances of `.11,41,74,510/- amount of `.71,02,000/- has been refunded back in the subsequent year and balance `.70,72,510/- has been booked as sales. There can be no rationale for treating the above advances of `.1,41,74,510/- as income for the year when such advance represents either advance against sales or the advance which was refundable. The confirmation of the above advances have been furnished by the appellant and there is no dispute by the Assessing Officer about the genuineness of these advances. Mere acceptance of advance which is refundable at the option of the other party cannot be treated as contracted sales much less the income of the appellant as has been taken by the Assessing Officer. The amount which was refundable and which has in fact been refunded cannot be treated as income. Similarly the amount which has been disclosed and declared as sales in the subsequent year cannot be treated as sale or income of the appellant for the year under consideration. The tax rate for the year under consideration as well as for the subsequent year are more or less the same and therefore no mala fide intention on the part of the appellant can be inferred so as to postpone the accrual of sales of the year to the next year. In my considered opinion, there is no basis or the justification in the addition made by the Assessing Officer. The addition made by the Assessing Officer is therefore deleted. This ground of appeal is allowed.”

5. Aggrieved, the revenue filed appeal before this Tribunal.

6. At the outset the Ld Dr argued that the amount was received during the assessment year under consideration from two parties namely M/s Eagle Buildcon Ltd. and M/s BMRC Construction Pvt. Ltd. amounting to `.66,25,000/- and `.75,49,510/- respectively. He further argued that since project was completed and assessee had received the sale consideration so sale should have been booked. He further argued that no agreements with the parties giving option to buyers was filed with Ld CIT(A). . Therefore, in view of the above fact, he argued that assessee had deliberately not accounted the trading receipts as sale just to postpone the tax liability. He further argued that the observation of Ld CIT(A) that there was some addition in the next year of about `.10 lakhs against cost of project of `.5.5 crores is not a significant amount and which could be due to small repairs.

7. On the other hand, the Ld AR argued that Assessing Officer has not commented adversely during remand proceedings. He further argued that though there was no formal agreement for buy back but due implication can be drawn from the fact that the parties were investors and amount was refunded to them in the next year. In this respect, he took us to pages 56 to 59 of paper book wherein copies of accounts of the two parties for the period from 1.4.2007 to 31st March, 2003 were placed. He further argued that income arises only when the goods are handed over and sale deed is executed in favour of buyers. In the present case no such deed was executed and hence it cannot be said that sales had accrued.

8. We have heard the rival submissions of both the parties and have gone through the material available on record. We have observed that assessee is engaged in the business of construction and it is a common practice in the construction business that shops/plots are booked in advance against initial amount and then during course of construction the installments are collected and the investor is generally given an option to exist any time and money is refunded to them if they do not intend to buy. This practice is done to meet the cost of project which generally is quite high. In the present case also, the same trade practice was followed and advance was received from two parties. In the case of M/s Eagle Buildcon Pvt. Ltd. the sales were booked on 15.6.2007 i.e. in the next year against entire amount received from it and in the case of M/s BMRC Construction Pvt. Ltd. sales were booked for an amount of `.4,47,510/- and the balance amount of `.71,02,000/- was returned back in the next year. Moreover, the Assessing Officer had added back the entire amount of advance received as income of the assessee without reducing the cost of sale which is against the natural justice and against the accepted accounting principle. Therefore, in our considered view, the amount received by the assessee cannot be said to be sale in the year under consideration and Ld CIT(A) had rightly deleted the addition made by the Assessing Officer.

9. In the result, the appeal filed by the revenue is dismissed.

10. Order pronounced in the open court on 7th day of September, 2012.

                                                    Sd/-                                Sd/-

                                   (RAJPAL YADAV)           (T.S. KAPOOR)

                                 JUDICIAL MEMBER ACCOUNTANT MEMBER

Dt.07.09.2012.

HMS

Copy forwarded to:-

1. The appellant

2. The respondent

3. The CIT

4. The CIT (A)-, New Delhi.

5. The DR, ITAT, Loknayak Bhawan, Khan Market, New Delhi.

True copy.

By Order

(ITAT, New Delhi).

Date of hearing 26.7.2012

Date of Dictation 4.9.2012

Date of Typing 5.9.2012

Date of order signed by both the Members & pronouncement. 7.9.2012

Date of order uploaded on net & sent to the Bench concerned.7.9.2012