Per M.A. Ajinkya (Accountant Member) - This appeal has been filed by the assessee for the assessment year 1987-88. The substantial ground raised in the appeal is that the CIT(A) erred in confirming the stand of the ITO that the books of account and the profits shown be rejected and in conforming the addition made by the ITO of Rs. 6,61,504, being alleged profit earned on a project undertaken by the assessee.
2. The second substantial ground is that the CIT(A) erred in confirming the addition made by the ITO to the extent of Rs. 10 lakhs in respect of the structures sold by the appellant, which was purchased along with the land, in the execution of the project.
3. Certain facts are required to be stated before we deal with the issues raised in the appeal.
The assessee is a firm and we are concerned with the assessment year 1987-88 for which the accounting period ended on 31-12-86. The assessee is a builder and it had shown, during the relevant accounting year, total expenditure, including value of land, at Rs. 4,02,50,871 and the same had been transferred to the Project Account as ‘work-in-progress’. In terms of its letter dated 8-2-90, addressed to the Assessing Officer, the assessee stated that it had not carried out any construction activity; that method of accounting followed by it was Project Method wherein total profit was offered for taxation as and when the project was completed and, till then, all-expenses were capitalised and debited to the Project Account. The Assessing Officer found, while verifying the details, that the assessee had received advances of deposits from the prospective buyers to the tune of Rs. 13,81,000 and, further, that the assessee had appointed selling agents for flats and shops and had received by way of sale selling agency Rs. 20,00,000. The Assessing Officer, therefore, came to the conclusion that the moment the assessee purchased the land and started incurring expenditure on the project, the construction activity of the assessee commenced although the piling work and other super-structural work had not started. He had received advances from prospective buyers and had also engaged services of sole selling agents. In these circumstances, the ITO invoked the provisions of section 145(2) of the I.T. Act, 1961, and estimated the profit at 15 per cent on the work-in-progress less the value of land, i.e., on the cost of construction of Rs. 53,18,599. He allowed expenses of Rs. 1,36,282 and assessed tax on amount of Rs. 6,61,504, which, according to the ITO, was the profit earned by the assessee during the relevant accounting period.
4. In appeal, the CIT(A) agreed with the ITO and held that 15 per cent rate of gross profit was reasonable and declined to interfere with the order passed by the ITO. Against this finding of the CIT(A) the present appeal has been filed before the Tribunal.
5. Shri S.E. Dastur, ld. counsel for the assessee, pointed out that the system of accounting followed by the assessee was being consistently followed in the past, current and subsequent years and this system was to account for profits when the projects were completed. Next, the ld. counsel submitted that the appellant had not even started construction activity during the relevant accounting period. The ac-counting year of the appellant ended on 31st December, 1986. The ‘bhoomi puja’ for the project was done on 24th January, 1988, i.e., more than one year after the close of the year, and, therefore, there was no question of any construction activity having been undertaken and profit accruing to the assessee. The firm was constituted in November 1984, and it entered into an agreement with the limited company called Padmashri Synthetics Pvt. Ltd. on 7-11-84 for purchase of land with structures at Dadar for an amount of Rs. 3,25,00,000. With a view to raising funds, the firm entered into several agreements with various parties in 1985 and as a part of this activity, in May 1985, the firm entered into an agreement with the firm, Vidhi Constructions. In terms of this agreement (page 28 of the compilation), they were to pay Rs. 10 lakhs, which they did in two instalments by cheques drawn on Hong Kong & Shanghai Banking Corporation on 15-5-85 and 22-5-85 of Rs. 5 lakhs each. This amount they paid for being entitled to take away the debris of the structures demolished. At the end of the accounting year ending 31-12-85, the work-in-progress was Rs. 2,00,00,059. The appellant entered into an agreement with Hira Housing Agency (pages 38 to 41 of the compilation) appointing them as sole selling agents. The position of work-in- progress on 31-12-86 was Rs. 4,02,00,000. On 22-10-87, the conveyance of the property was excuted. Approval from the Urban Development Department allowing change of user was obtained on 20-11-87 (page 58 of the compilation). Bhoomi puja for starting the project was performed on 23-1-88. A copy of the newspaper advertisement as well as reply to the invitation extended in this regard by the Mayor of Bombay Municipal Corporation have been filed at pages 54 to 57 of the compilation. Intimation of the disapproval (what is called IOD) was given on 12-4-88 and the first agreement of sale was entered into on 22-8-89.
6. After stating all these facts, the ld. counsel for the assessee pointed out that in a detailed letter dated 27th Oct., 1990, addressed to the CIT(A) (copy filed) all these facts were stated at great length. The question for consideration was whether any profit can be ascertained on these facts in respect of the project under consideration. The ld. counsel pointed out that even Rs. 10 lakhs was received in 1985 in two instalments. All that was really received was deposit from sole selling agents (page 39 of the compilation) of Rs. 20 lakhs as per the agreement entered into with Hira Housing Agency on 2nd May, 1986. This deposit carried no interest. The ld. counsel pointed out that composition of work-in-progress in 1985 was the same as that in the year 1986 and no profit was assessed in the earlier accounting year, i.e., calendar year 1985, and, therefore, there was no justification for bringing to tax any profit when the facts were the similar as those for the earlier assessment year. The ld. counsel pointed out that till 1989, there was no sale of any flats. There was neither construction nor sale during the relevant accounting period and, in support of his argument that the assessee was entitled to maintain accounts on completed contract basis, which was an accepted method of accounting, the ld. counsel referred to Batliboi’s "Double Entry Advanced Accounting" (14th edition page 971). On these facts, the ld. counsel argued that there was no need to send the matter back to the CIT(A) who should have decided the issue on the facts put before him and pleaded that there was no justification for making the estimate, as had been done by the ITO and confirmed by the CIT(A).
7. The departmental representative, while relying on the orders of the ITO and the CIT(A), pointed out that the appellant had received substantial advances and such advances should be treated as part of the price of the flats to be sold, since these advances were received from the prospective buyers. He relied on the decision of the Delhi High Court in Tirath Ram Ahuja (P.) Ltd. v. Commissioner Of Income-Tax, Delhi. [1976] 103 ITR 15 and particularly the observations of the court at page 19. He also relied on the decision of the Supreme Court in CIT v. British Paints India Ltd. [1991] 188 ITR 44, besides the decision of the Tribunal reported in Champion Construction Co. v. First ITO [1983] 5 ITD 495 (Bom.).
8. The ld. counsel for the assessee, in reply, argued that the decision of Delhi High Court in Tirth Ram Ahuja’s case (supra) was distinguishable on facts because in that case, substantial amount was spent on carrying out the work of construction and substantial amount was received during the year of account, whereas in the present case, no construction work had started and nothing was received because no flats were, in effect, sold. He also pointed out that the decision of the Tribunal in Champion Construction Co.’s case (supra) was also distinguishable and, for this purpose, he referred to para 18 of the Tribunal’s order at page 507, Since there was no work done during the accounting year and there was no sale in the present case, no profits were assessable to tax. Finally, he stated that the decision of the Supreme Court in British Paints India Ltd.’s case (supra) was not relevant.
9. We have heard the ld. counsel for the assessee and also to the departmental representative. We have also gone through the papers filed. In our opinion, there is considerable substance in what the ld. counsel has to say. We find that for assessment year 1986-87, for which accounting period was the calendar year 1985, ITO accepted the business income at nil, almost on the same set of facts, and although some income was brought to tax, it was income from other sources being unexplained loans etc., but no estimate of profit on the figure of work-in-progress was made. Copies of the balance sheet and the profit and loss account for the year concerned have been filed (pages 42 to 49 of the compilation). Scrutiny of the profit and loss account shows the balance brought forward from earlier year of the expenses incurred amounting to Rs. 2,59,32,292. Out of the expenses incurred for the calendar year, the major expenditure was Rs. 90 lakhs towards plot purchase and an amount of interest paid to the vendor of Rs. 10 lakhs for late payments. There was no evidence of any construction activity having been started nor of any amounts received from the prospective buyers. An amount of Rs. 2,90,15,882, which has been received from the various parties, was in the form of unsecured loan for raising finances and the details of such unsecured loan are given in Schedule-B attached to the balance sheet (pages 45 to 47 of the compilation).
10. As regards the argument that advances received from the prospective buyers represented receipts in respect of the contracts undertaken, we find that this argument is not supported by facts and figures. In fact, what is seen from the balance sheet shows a different position. The deposits from prospective buyers stood at Rs. 82,51,000 at the end of the earlier accounting yew, i.e., 31-12-85 and such deposits were reduced to Rs. 13,81,000 as on 31-12-86 as per the details given at page 49 of the compilation. Thus, substantial amounts were repaid to the prospective buyers from whom only loans were taken which, as argued by the ld. counsel, was only a mode of getting finance. If the amounts received from the prospective buyers are, to be treated as sale proceeds, one cannot conceive of a situation where sale proceeds will so substantially go down, as has happened in the present case, where the deposits have gone down from Rs. 82,51,000 in the earlier year to Rs. 13,81,000 at the end of the present year. Therefore, we are of the view that the argument that the amounts received from prospective buyers should be treated as ‘sales’ is fallacious argument and has to be rejected.
11. Next, we find that the firm in its capacity as promoter had entered into an agreement to sell on 7-11-84 and it secured a certificate under section 269-UL(3) of I.T. Act, 1961, in respect of the property agreed to be sold, only on 18-2-87, as per the communication of the Appropriate Authority of that date, a copy of which has been filed at page 25 of the compilation. Letters were addressed to the prospective buyers on 27-4-85, a specimen of which has been filed at pages 26 and 27 of the compilation. Such letters were addressed to people who advanced money to enable the firm to carry on its activities. The Project Account showing capital work-in-progress on 31-12-85 was Rs. 2,59,32,292 (page 29 of the compilation) and deposits from customers included deposits from prospective buyers of Rs. 82,51,000. Deposit of Vidhi Construction of Rs. 10 lakhs and of Hira Housing Agency of Rs. 11 lakhs. Thus, although substantial deposits were received from prospective buyers, an amount of Rs. 10 lakhs was from Vidhi Construction in terms of letter dated 30-5-85 (page 28 of the compilation). This amount was received in earlier year (1985). Even then, effort was made to bring to tax profit by estimating G-p-on work in progress which was substantial during the accounting period ended 31-12-85, mainly because no construction activity was carried on during this year. An amount of Rs. 2,35,00,000 was paid towards purchase of plot, nevertheless, no work was done. Commencement certificate from the Bombay Municipal Corporation under section 69 of the Maharashtra Regional & Town Planning Act, with intimation of its IOD under section 346 of the Bombay Municipal Corporation Act was received by the appellant as late as on 20-2-88 (pages 50 to 53 of the compilation). Bhoomi Puja was done on 23-1-88. The Urban Development Department, allowing the change of user, communicated its approval on 20-11-87. All these facts would indicate that there was no work done during the year and no amount was received towards flats. What was received from prospective buyers was only in the nature of loans, a good portion of which was repaid between 1985 and 1986 and, therefore, could not be considered as amounts received towards price of the flats intended to be sold. We agree that the system of accounting of working out profits on completed contract basis is an accepted system of accounting and such system has been followed consistently in the past by the appellant. It has been accepted in the earlier year by the department and, therefore, there is no justification whatsoever to reject this system by invoking provisions of section 145 and making estimate of profit of work-in-progress which, on facts we find, is only an incorrect procedure.
12. The cases cited by the departmental representative in Tirath Ram Ahuja (P.) Ltd.’s case (supra) and 108 ITR 55 (sic) were decided on the facts obtaining in those cases and do not lay down general principle which can be applied in all the cases of promoters or builders. In any case, on the facts discussed at length in the foregoing paragraphs, we are of the view that there was no justification for making any addition by estimating profits on work-in-progress. We would, therefore, reverse the order of the CIT(A) and allow the first ground of appeal of the appellant.
13. As regards the second ground concerning the addition of Rs. 10 lakhs in respect of the amounts received from Vidhi Construction, we find that the sale of structures did not yield any income and a portion of Rs. 20 lakhs, agreed to be received, was received in earlier year and was not brought to tax. This amount is in respect of agreement entered into by the assessee on 30-5-85 with Vidhi Construction (page 28 of the compilation). We find that as part of this agreement, Rs. 10 lakhs were received in 1985 on 15-5-85 and 22-5-85 and there is no justification for bringing this amount to tax in the accounting year under appeal. On this ground also, in our opinion, the assessee is entitled to succeed. We find that the directions given by the CIT(A) in para 12 of his order in this regard are vague and conditional. On the facts stated before us and the papers filed, we are satisfied that no amount was received during the year and, therefore, there is no justification for taxing it in the year under appeal. The amount has not been accounted for as receipt in the books relating to the year of account and, on the other hand, papers filed indicate that the amount was received in 1985 and its taxation in the year under appeal as revenue receipt is not only arbitrary but also incorrect. The same is, therefore, directed to be deleted.
14. The appeal is allowed.