WEST BENGAL HOUSING INFRASTRUCTURE DEVELOPMENT CORPORATION LTD. ,KOLKATA vs. ACIT, CIR-13(1). , KOLKATA

O R D E R

PER DR. MANISH BORAD, ACCOUNTANT MEMBER :

2. That the order dated 10 June2021 is bad in law and is liable to be quashed and / or set aside as the same proceeds on the basis of the return filed on the basis of accounts of the appellant under GAAP and not on the basis of accounts converted into IND-AS, as the adoption of IND-AS became Assessment Year: 2018-19 West Bengal Housing Infrastructure Development Corporation Limited mandatory for the appellant for the first time with effect from the financial year 2017-18, relevant to the assessment year 2018-19.

3. While passing the order dated 10 June 2021, the AO, as well as the Ld. CIT (Appeals) in his order dated 14 February 2023, have erred in law as well as on facts in adding back a sum of Rs.45,31,06,825, being alleged inflated cost of land, to the total income of the appellant amounting to Rs.68,36,94,059/-, under the accounts on conversion to IND-AS ignoring the method of accounting followed by the appellant in the converted IND-AS accounts.

4. That both the AO and the Ld.CIT (Appeals) have erred in ignoring the basic principle of accounting as well as the converted IND-AS Accounts without considering the fact that the said conversion was made, inter alia, applying the Percentage of Completion Method (POCM), whereby the book profit was earned on cost of land sold at actuals, being Rs. 172,46,50,000/- and the sale of land appears at Rs.280,58,13,000/-, thereby there could not have been any inflation on account of the cost of land.

5. That the Ld. CIT (Appeals) has grossly erred in ignoring the contention of the appellant vide its submissions dated 06 February 2023.

6. That the Appellant craves leave to add, modify or withdraw any ground or grounds of appeal before or at the time of hearing of the appeal.”

3. From perusal of the above grounds, we notice that the sole issue involved in this appeal is regarding addition of Rs. 45,31,06,825/- made by the Assessing Officer on account of alleged inflated cost of land. Facts in brief are that the assessee, namely, WBHIDCO, is a wholly owned company of Government of West Bengal. The main object of the assessee is development, operation and maintenance of infrastructural activities like development of land, drainage, construction of roads including highway project and housing and other activities being an integral part of highway projects etc. Assessee company has prepared its financial statement on the basis of generally Assessment Year: 2018-19 West Bengal Housing Infrastructure Development Corporation Limited accepted accounting principles (GAAP) and filed its return of income on the basis of such accounts on 25.10.2018 for Assessment Year 2018- 19. Thereafter, the return was selected for complete scrutiny on account of various issues and notice u/s 143(2) dt. 22/09/2019 and u/s 142(1) of the Act dt. 22/02/2021 were validly served upon the assessee. In the meantime on 29/11/2019 vide resolution of the Board of Directors and as per the directions given by the Comptroller and Auditor General of India (in short ‘CAG’), the assessee was required to prepare the financial statement on the basis of revised IND AS, which was made mandatory for the assessee from financial year 2017-18. Income under GAAP was Rs.38,55,63,633/-, whereas income under the revised account under Ind AS was computed at Rs.68,36,94,059/-. However, by the time the revised financial statements were prepared as per Ind AS, time limit to file the revised return expired. During the course of assessment proceedings, the ld. Assessing Officer examined the financial statements based on GAAP and did not take note of the financial statements prepared as per Ind AS, which were filed by the assessee during the course of assessment proceedings. The ld. Assessing Officer based on the financial statement prepared as per GAAP and also considering the cost of land as computed by the assessee based on West Bengal Consultancy Organization Ltd. (WEBCON)’s report and based on the accounting system, consistently adopted by the assessee i.e., percentage of completion method (PCM), came to a conclusion that the assessee had made over statement of cost of land in the profit and loss account to the tune of Rs. 45,31,06,825/- Assessment Year: 2018-19 West Bengal Housing Infrastructure Development Corporation Limited and made addition thereto. Relevant extract of the finding of the Assessing Officer in para 5 of the assessment order is extracted below:- “5. A show cause notice vide ITBA/AST/F/143(3)(SCN)/20 21-22/1032672658(1) dated 26.04.2021 was issued to the assessee. The assessee on 10.05.2021, made its submissions against the additions proposed in the order. The assessee claimed that during the year it had changed the accounting standards from GAAP to IndAS and based on the new standards the cost of land should be Rs. 172,46,50,000/- instead of Rs. 215,55,62,718/-. The assessee claimed that this amount of Rs. 172,46,50,000 doesn't contain the component of price escalation at 7.25% (based on WEBCON report). However, the assessee provided no working of how this cost was arrived at. The assessee has over the years adhered to the WEBCON report, citing the price escalation as a necessary addition to the cost of land. The assessee has given no explanation as to why then the price escalation of land was not adhered to when the accounting standards were revised. As mentioned in para 4.8 based on discussions made in the order, it has already been observed that as per the accounts of the assessee under GAAP, there was a component of price escalation in the cost of land sold. But, the assessee claims that the same price escalation is not done when the accounts were revised to the IndAS, and this claim is not supported with any documentary evidence. Thus, without proper evidence, the claims of the assessee cannot be accepted. As per the revised accounts as per IndAS, assessee sold 5022.19 cottah for Rs. 172,46,50,000/- i.e. still at an enhanced rate of Rs. 3,43,405.96/- per cottah in place of Rs. 2,53,185/-per cottah as discussed above. Applying the rate per cottah @ Rs. 2,53,185/-, the cost of land sold is worked at Rs. 127,15,43,175/-. As such overstatement of cost of land in the claim made in the profit and loss account is worked at Rs. 45,31,06,825/-and the said sum of Rs. 45,31,06,825/- is added back to the income of the assessee. Penalty proceedings u/s 270A are initiated for under-reporting of income.”

3.1. Aggrieved assessee preferred appeal before the ld. CIT(A) but failed to get any relief. Though the assessee made detailed submissions but the ld. CIT(A) confirmed the addition by making general observations and without giving any reasoning and the finding of the ld. CIT(A) is purely a non-speaking finding and the same is reproduced below:- “I have gone through the facts of the case in detail. The AO has made a very fine case based on the facts before him. Before him, as well as before me, the appellant has not been convincing as to why the addition should not have been made. When I Assessment Year: 2018-19 West Bengal Housing Infrastructure Development Corporation Limited compare the reasoning of the AO and that of the appellant, I find no reason to interfere with the order of the AO on the addition of Rs.45,31,06,825/-.”

1 : This ground of Appeal is general in Nature and as such does not need any comment at this juncture.

2. GROUNDS OF APPEAL 2 : Under this ground of appeal the Appellant submits that 1) the Assessing Officer has assessed the Income on the basis of the Statements of Account of of the Appellant under GAAP. 2) Board of Directors vide resolution dated 29.11.2019,vide Page 174 of the Paper Book, clearly mentioning that the revised IND-AS Compliant Final Accounts of the Company for the Financial Year 2017-18 ( AY 2018-19 ) have been approved by the Board and the Annual Accounts based on Indian GAAP are cancelled / scrapped and returned to the Statutory Auditors. 3) The Accounts of WBHIDCO had to be converted from Indian GAAP to IND-AS since the adoption of IND-AS has become mandatory for the first time with effect from the Financial Year 2017-18, which was pointed out by the CAG while reviewing the Audited Accounts and accordingly the same were cancelled/rejected. 4) By the time the Indian GAAP Accounts are converted to IND - AS Accounts and its Audit are finalized the filing of Revised Return got time barred. 5) In course of the Assessment Proceedings the Appellant submitted all the facts and figures relating to the relevant IND AS Accounts for 2017-18 which have been duly audited and published in public domain of MCA after being reviewed by CAG. 6) The details of the Accounts and the Computation of Income Statement as compared to GAAP Accounts have been duly submitted before the AO with necessary explanations and clarifications on the same, vide pages37 to 43 (against Notice u/s 143(2) and 59 to 68 (against Show Cause Notice and for rectification of mistake u/s 154) of the Paper Book. In view of the above facts and circumstances the Income and Tax payable thereon should be assessed on the basis of the Accounts as Converted to IND-AS and audited and published in public domain of MCA since the Accounts under GAAP are non est during assessment proceedings.

Assessment Year: 2018-19 West Bengal Housing Infrastructure Development Corporation Limited

3. 4 &5: 1) At the outset the Appellant submits here-in-below the chronology of events in connection with the assessment of income for Assessment Year 2018-19. The Annual Accounts for the Financial Year 2017

18. ( AY 2018-19 ) under IND AS are Audited by the Statutory Auditors and duly reviewed by CAG before the same being published in the public domain of MCA. 3) The reasons as to why the Accounts under GAAP had to be cancelled / rejected and instead Accounts under GAAP had to be revised and converted into the Accounts under IND AS have been clearly explained before the AO as well as CIT(A) vide our replies / submissions dated 27.01.2021, 25.02.2021 and 07.05.2021 against the Notices u/s 143(2), 142(1) and the Show Cause Notice, enclosing all the supporting documents / statements and audited accounts.

Assessment Year: 2018-19 West Bengal Housing Infrastructure Development Corporation Limited 4) Note 41 of the Audited Statements of Accounts (Pages 165 to 167) has disclosed the first time adoption of IND AS and its impact of recognition of revenue and expenses based on Percentage of Completion Method (POCM) and this has been done in compliance with the Guidance Note on Accounting for Real Estate Transactions issued by ICAI. 5) The AO as well as the CIT(A) has failed to realize that the Revenue and Expenses have been recognized in the Accounts on actual basis based on percentage of Completion since the New Town Project is still not completed which is evident from the facts and figures tabled in Pages 4 and 5 of the Paper Book. The impact of the Conversion of Accounts from GAAP system to IND AS on the revenues and Expenses are detailed in Page 6 of the Paper Book. It is evident that on conversion of Accounts under IND AS, i.e. at actual on POCM the Loss before Tax under GAAP to the extent of Rs.390,735,031/- has turned into Profit at Rs.711,698,123/- and accordingly the returned Loss of Rs,385,562,633/- has turned into Taxable Income of Rs.683,694,059/- (Page6 -7 of Paper Book.). 6) The AO has failed to realize that i) The Cost of Land sold has been considered at Rs.l,724,650,152/-at actual on the basis of POCM and as such transferred from Work in Progress Account (Page 182 of the Paper Book). It is also evident from the details of Work-in-Progress (Pages 175 to 182 of the Paper Book) that to make the Work-in- Progress in the Accounts at actuals necessary adjustments have been made for estimations in earlier years. ii) The determination of the Cost of Land sold at Rs.127,15,43,175/- causing thereby disallowance / add back of Rs.45,31,06,825/- is unjustifiably based on the Cost of WIP at Rs.6037,39,00,000/- as on 01.04.2006 forgetting thereby that the Cost of WIP as at 01.04.2017 at 38,977,430,395/-. As such the cost of land sold at Rs.2,53,185 per cottah vide page 29 of the Paper Book is absolutely wrong, unjustified and untenable and as such should be deleted. Further the AO has failed to correctly interpret the nature of Activities / Business of the Appellant in as much as the Appellant (WBHIDCO) is not a dealer of Land purchase and sale and its activities are concerned Assessment Year: 2018-19 West Bengal Housing Infrastructure Development Corporation Limited strictly on developing the Land acquired by WB Government for New Town Project with developing all infrastructural facilities attached therewith to make the Lands suitable for New Township Project and selling the same as per the instructions of the Government. iii) The Cost of Land sold at actuals appear to be Rs.1,724,650,152/- as detailed below; - a) The cost of WIP as at 01.04.2017 is Rs.38,977,430,395 b) Addition to WIP during FY 2017-18 Rs. 743,093,949 (pages 175 to 182 of the Paper Book) Rs.39,720,524,344 c) Percentage of Land sold till FY 2017-18 (AY2018-19 being 58.4647% of Total Land 193021.17 Cottah and the quantum of Land Sold in the FY 20117-18 is 5002.19 Cottah i.e., 4.43263% of the Land sold till FY 2017- 18. As such 4.34% of the Cost of Land with all infrastructural facilities incurred till 31.03.2018 have been transferred i.e., Rs.1,724,650,152/- being 4.34196% of Rs.39,720,524,344/- to the Profit & Loss Account on actual basis. In view of the above and considering the facts that AO has erred in estimating the Cost of Land sold at Rs.127,15,43,175 /-,as estimated on the basis of the Cost incurred till 01.04.2006 at Rs.6037,39,00,000/-, instead of the Cost of Land sold at actuals, as debited to WIP Account as well as Profit & Loss Account duly audited and reviewed by CAG before being published in public domain and accepted by all statutory authorities, we pray for the deletion of disallowance / add back of Rs.45,31,06,825/-(Page 30 of the Paper Book).”