ACIT Vs Tanvee Housing Development Pvt Ltd

No addition for undervaluation of closing work-in-progress can be made if working is done as per Project Completion Method followed consistently by the assessee

– Revenue’s appeal dismissed: KOLKATA ITAT

Whether addition for undervaluation of closing work-in-progress can be made if working is done as per Project Completion Method followed consistently by the assessee – NO : ITAT

 the income of the business was recognized by the assesee-company as per the Project Completion Method followed consistently. It is observed that there were several projects that were undertaken by the assessee-company of real estate development, out of which two Projects, namely ‘Parijat’ and ‘Pratyee’ were completed during the year under consideration. The income of the Projects completed during the year under consideration was accordingly recognized by the assessee to the extent of flats sold during the year under consideration as per the method of accounting followed by it and corresponding expenses proportionate to such sale booked under work-in-progress were debited to the Profit & Loss Account. In ‘Parijat’ Project, the assessee-company had constructed 150 flats having total area of 80141 sq.ft., out of which 138 flats having area of 70912 sq.ft. were sold during the year under consideration. The total sale consideration of the 138 flats sold was recognized by the assessee-company as its income during the year under consideration and the corresponding cost attributable to the said sale amounting to Rs.6,02,38,280/- out of the total cost of Rs.6,53,15,103/- on proportionate basis was transferred from work-in-progress and debited to the profit & loss account. Similarly 64,610 sq.ft. of the total constructed area of ‘Pratyee’ Project having been sold during the year under consideration, the sale consideration of 64,610 sq.ft. was recognized by the assessee-company as its income of the said Project and corresponding cost of Rs.6,94,55,750/- out of the total cost of the said Project of Rs.14,67,04,702/- was transferred from the work-in-progress and debited to the Profit & Loss Account. As cost of construction incurred by the assessee during the year under consideration on all the Projects was Rs.11,31,63,423/- while the general expenses incurred were Rs.1,25,33,241/-. These two amounts were added to the opening work-in-progress and after transferring the general expenses to the extent of 10% amounting to Rs.12,53,324/- and the corresponding cost attributable to the sale of flats of the completed two Projects amounting to Rs.6,02,38,280/- and Rs.6,94,55,750/-, the balance amount of Rs.17,49,74,366/- was shown as closing work-in-progress. The amount of closing work-in-progress reflected in the balance-sheet of the assessee-company at Rs.17,49,74,366/- thus was correctly shown as per the method of accounting consistently followed by the assessee to recognize the income of its real estate development business. It appears that the Assessing Officer did not appreciate the working of closing work-in-progress as done by the assessee-company by following the method of accounting consistently followed and proceeded to determine the closing work-in progress by taking the unsold flats to the extent of 35% on adhoc basis, which as rightly held by the CIT(Appeals) was totally untenable. The CIT(Appeals), properly understood the working of closing work-in-progress as made by the assessee and deleted the addition made by the Assessing Officer on account of the alleged undervaluation of closing work-in-progress.

ITA No.1204/Kol/2017