S B Patel Infrastructure Private Limited Vs ITO Ward–2(1)(3) (ITAT Ahmedabad)
Rejection of books of account under section 145 is not justified merely because a real estate developer follows the completed contract or project completion method, or because different flats are sold at different documented rates. In the absence of specific defects in the books or cogent evidence of actual receipt of on money, addition for alleged undisclosed consideration based merely on an assumed common base price and estimation cannot be sustained.
Summary: The assessee was engaged in real estate development and was developing a project named Eshanya Floreza. It consistently followed the completed contract/project completion method for recognition of revenue. For AY 2014-15, the assessee returned a loss of Rs. 41,60,727. The Assessing Officer noticed that approximately 90% of the sale consideration had been received in respect of 26 flats, whereas revenue had been recognized only in respect of four flats on the basis of sale deeds executed during the year. The AO also noticed variations in the rates mentioned in construction agreements for flats having similar specifications. On these grounds, the AO rejected the books under section 145 and estimated profit at 8% of the receipts of Rs. 7,09,86,589, resulting in an addition of Rs. 56,78,927. The AO further adopted Rs. 16.75 lakh as a common base price for the flats and made an addition of Rs. 1,94,04,869 towards alleged undisclosed receipts. The CIT(A) partly allowed the appeal but upheld the rejection of books. The Tribunal held that the completed contract/project completion method was a recognised method of accounting and had been consistently followed by the assessee. Merely because the AO considered that revenue should have been recognised earlier owing to substantial receipt of sale consideration could not establish that the books were incorrect or incomplete. The Tribunal further noted that the AO, after rejecting the books, applied an 8% profit rate to receipts already recorded in the books and did not independently determine income under the percentage completion method. No specific defect such as unrecorded sales, suppression of receipts, incorrect valuation of work-in-progress or other accounting infirmity was established. Variation in agreement rates for different flats, by itself, also could not establish receipt of undisclosed consideration. The addition of Rs. 1,94,04,869 was principally based on adoption of Rs. 16.75 lakh as a common base price for all flats, without evidence that such amount represented the actual agreed consideration or was actually received from each purchaser. The Tribunal also found that payments referred to in purchaser inquiries related to extra work undertaken by Jay Ambay Construction under separate agreements and did not establish receipt by the assessee-company. The fact that Shri S. B. Patel was also a director of the assessee-company was insufficient to attribute receipts of the separate proprietorship concern to the company. None of the purchasers admitted payment of on-money to the assessee-company. Relying upon PCIT v. Shri Pushkar Construction Co., DCIT v. Era Realtors (P.) Ltd. and Prashant Arjunrao Kolhe v. DCIT, the Tribunal held that the alleged undisclosed consideration could not be sustained on suspicion, assumption or estimation without cogent evidence connecting the alleged receipt with the assessee. The rejection of books under section 145 was therefore held unsustainable and the addition of Rs. 1,94,04,869 was deleted. The decision for AY 2014-15 was applied mutatis mutandis to AY 2015-16. Both appeals were allowed. Section 145 governs the method of accounting and the circumstances in which the books may be rejected; the Tribunal found that the statutory threshold was not met on the facts of the present case.
