ITAT deletes disallowance on ad hoc basis where assessee recognises revenue as per percentage completion method

The assessee in this case is a real estate developer and said to be following percentage completion method as per Accounting Standard-7 of ICAI. The Assessing Officer (AO) made an ad hoc disallowance/addition on observing form the P&L account form the assessee company that it is not showing any revenue income from operations. It was specifically asked as to why the same has not been shown as per accounting standard 7. The reply of the assessee is submitted as “As per architect certificate the status of work done uptob31.03.2012 is (i) project construction flat @ 5%, (ii) colony development is @ 10%. As per accounting standard 7 at least 25% of salable project area is secured by contract or agreement with buyer. However during the year under consideration” However during the year under consideration assessee debited Rs.39,65,954/- for salaries and incentives and out of this only 50% has been transferred to project account-WIP. Keeping in view the reply filed by the assessee w.r.t. revenue income shown during the year under consideration, 70% salaries and incentives is transferred to project A/c hence Rs.7,91,191/- added to the income of the assessee.

Upon assessee’s appeal, ld. CIT (A) referred to the assessee’s financials and observed that it can be analyzed that over a period of four years there have been spending on the project and the inventories have piled up but the assessee has not recognized revenue in accordance with the completion of project. Against the above ordee, assessee preferred an appeal before th tribunal.

ITAT observed that the order passed by CIT(A) does not exhibit proper application of mind. As per ld. CIT (A), the project has been completed more than what the assessee has reflected. In such case, the addition should have been made according to the stage of completion as per the Revenue authorities. The ld. CIT (A) has made no examination or remanded the matter to the AO for finding of the actual completion. What is the justification of AO holding that 70% of the salary and wages should be debited to project account and not 50% is not at all spelt out by the AO or the ld. CIT (A). If the authorities below were of the opinion that assessee is falsifying his records than the books should have been rejected. This has not been done. Even if books have been rejected the estimation of income has to be done on a reasonable basis as per past performance or the prevalent industry norms. Devoid of any reasoning, addition of 20% of salaries and incentive to project account is solely based upon surmises and conjectures, hence not sustainable in law. Accordingly, it set aside the orders of authorities below and delete the disallowance/addition made by the AO.

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