ACIT, ERNAKULAM vs. RUBBER PARK INDIA PVT. LTD., COCHIN

Per CHANDRA POOJARI, AM:

These appeals filed by the Revenue are directed against the different orders of

the CIT(A)-I, Kochi dated and pertain to the assessment years 2012-13 & 2013-

14.

I.T.A. Nos.135 & 353/Coch/2017 the issue in the assessee’s case are different and distinguishable from those cases.

acquiring/purchasing of freehold or leasehold land and undertake development

thereof and develop all other infrastructure facilities including power, water,

transportation, conducive for the development of industries based on rubber and

rubber wood and sell, lease or otherwise dispose of the developed plots and other

facilities including build up structures thereon to entrepreneurs. The assessee had

set up an industrial park for making available land on long term lease to

entrepreneurs engaged in manufacture of rubber based products. For this purpose,

the assessee had taken a property on a long term lease, admeasuring 106.4 acres

of land (i.e., aggregate of land leased out and treated as inventory and the land

used for roads and utilities and the land not usable) per the lease deed executed

between Kerala Industrial Infrastructure Development Corporation (KINFRA) and

the assessee of an area, for a value of Rs.3,74,50,870/-. (Though the area

I.T.A. Nos.135 & 353/Coch/2017 mentioned in the lease deed aggregated to 106.40 acres, the actual area of land

made available to the assessee was 107.52 acres. The difference is very marginal).

Of these land taken on lease as above, the assessee had converted an area of 77.07

acres into stock-in-trade in an earlier assessment year, as the said land was to be

leased to entrepreneurs for setting up industrial units on long term basis. The

balance area of 23.98 acres was used for setting up the common utilities for use of

the units to set up in the industrial park. The Assessing Officer found that the

compensation was paid on the basis of clause 3 of the lease deed with KINFRA dt.

25.02.2005. According to the Assessing Officer, in the lease agreement entered

into between the entrepreneurs and the assessee, there was no provision to

recover the enhanced compensation. Income from revenue operation was received

during the period 2003-04 and onwards. It was noticed that there was no specific

condition to collect enhanced compensation from the sub-lessees. The Assessing

Officer found that the assessee had issued demand notices to all lessees and the

receipts from the lessees towards enhanced land compensation received in the

respective years were credited to the Profit and Loss Account and offered as

income. The Assessing Officer was of the view that the recoverability of enhanced

land value from the lessee was not certain even though the company had issued

demand notices to all lessees because there was no specific clause in the sub-lease

deed in respect of collection of enhanced compensation. The Assessing Officer

concluded that the enhanced compensation paid is not allowable as revenue

expenditure u/s.37 (1) of the IT Act and the arguments of the assessee that the

I.T.A. Nos.135 & 353/Coch/2017 company had treated the original cost of land leased as an expense in the preceding

years' accounts are incorrect.

3.1 As per clause 2 of the agreement executed with KINFRA, if additional

(enhanced) compensation becomes payable in respect of the land covered under

the lease deed as a result of any orders of any Court, in proceedings pursuant to

the provisions of the Land Acquisition Act, the premium payable will get enhanced

proportionately to that extent and the assessee shall be liable to pay the same as

and when called upon to do so. During the relevant assessment years on the basis

of the decision of the High Court, it was legally determined that KINFRA is liable to

pay enhanced (additional) compensation which as per the clause referred above

became legally payable by the assessee. As per the consistent accounting policy

followed by the assessee, the value of land classified as Stock in Trade and then

leased to various units were taken to the Profit and Loss Account of the respective

assessment years as below:

Sl.No Asst. Year Proportionate Cost of Land Income from Sublease of land Debited (Rs.) (Rs.)

1 2003-04 21,13,639.00 35,08,200.00

2 2004-05 47,81,727.00 1,04,95,000.00

3 2005-06 6,69,838.00 18,65,100.00

4 2006-07 86,18,379,00 2,72,12,200.00

5 2007-08 28,32,952.00 91,30,200.00

6 2008-09 1,42,38,748.00 5,93,79,790.00 4

I.T.A. Nos.135 & 353/Coch/2017

7 2009-10 78,60,488.00 4,10,41,650.00

8 2010-11 21,77,458.00 1,34,10,900.00

9 2011-12 5,34,164.00 56,40,000.00

8.

CIT (A) reworked the claim of enhanced compensation paid, with reference to the

portion of land acquired and assigned to KINFRA by Government of Kerala from

various private parties, which are subject matter of enhanced compensation. The

CIT (A) reworked the allowable expenses at Rs. 2,72,59,316/- for the AY 2012-13

and at Rs.2,83,42,420/- for AY 2013-14. The CIT(A) allowed the remainder amounts

(i.e., Rs. 34,34,193/- and Rs.35,70,645/- respectively for AY 2012-13 & AY 2013-14)

to be retained as stock in trade, since the said amounts related to stock of land not

yet sold. The CIT(A) observed that Clause No.2 of the Lease Deed with KINFRA

stipulates that if any additional premium payable will get enhanced proportionately

to that extent and the lessee shall be liable to pay the same as and when called up

on to do so. According to the CIT(A), any change in the accounting system on

accrual-mercantile basis will create inter-temporal entries and transfers that are

revenue neutral in the long-run and therefore counter productive in terms of costs

and effort. The consistent treatment by the Dept. of these receipts in the accounts

of the assessee over the preceeding financial years provides for a valid claim in the

current financial year too. The CIT (A) relied on the decision of the Supreme Court 5

I.T.A. Nos.135 & 353/Coch/2017 in the case of CIT v. Realest Builders and Services Ltd. (307 1TR 202) wherein it

was held that if the AO is to disturb the accounting method followed by the

assessee, he must give facts and figures in that regard and demonstrate to the

underestimation of profits. The CIT (A) also relied on the decision of the Supreme

Court in the case of CIT v. Bilahari Investment Pvt Ltd (299 1TR 1), which reads as

follows:

"Every assesee is entitled to arrange its affairs and follow the method of accounting............................................................................... The method of accounting cannot be rejected"

The CIT(A) held that the above decisions are squarely applicable to the assessee’s

case. According to the CIT(A), the AO did not bother to consider the eventuality

that by making the impugned addition, he was interfering with the accounting

practice/method consistently being followed by the Appellant over the previous

years, to which no challenge has apparently been made by the Dept and he has not

shown or demonstrated in any manner that there has been any underestimation or

under-reporting of taxable income under the said accounting practice/method.

5.1 The Ld. DR submitted that the payment of enhanced compensation to the 70

land owners of 47.28 acres of land cannot be treated as general expenses and it

does not come under the provisions of section 37(1) of the Income-tax Act. In view

of the same, a portion of the cost of land value originally fixed by the KINFRA had

I.T.A. Nos.135 & 353/Coch/2017 been treated as fixed assets of the company and the remaining value in respect of

77.07 acres of land was accounted as stock in trade in the audited accounts of the

assessee company until the lease rents are collected from the lessees in proportion

to the land sub-leased, the claim of expenditure under enhanced compensation was

restricted to the extent of additional amount of enhanced compensation collected

from the sub-lessees. Thus, the expenditure under land compensation expenses

was restricted to Rs.16,59,1367- being the amount collected from the lessees and

the balance amount of Rs. 2,75,24,248/-[Rs. 2.91,83,384 - 16,59,136 =

Rs.2,745,24,248] was added to the returned income. He relied on the order of the

Assessing Officer.

the assessee was required to pay enhanced compensation of Rs.2,91,83,384/- &

Rs.3,19,13,065/-respectively in respect of the 77.07 acres of land converted into

Stock in Trade in AY 2003-04. However, in the absence of any enforceable

clause in the agreements based on which the property was leased out by the

Respondent, the Respondent could not recover the full amount of compensation

from the lessees. Hence, the amounts to the extent received from lessees was

offered to tax by the Respondent assessee. This treatment was consistently followed by the assessee and accepted by the Revenue for the above

assessment years and the income was assessed to tax and the expenditure was

allowed as such.

I.T.A. Nos.135 & 353/Coch/2017 6.1 The Ld. AR submitted that the assessee had converted the property under

reference as stock-in-trade in the assessment year 2003-04 and as and when the

property was sold/ leased out, the cost portion of the stock in trade was debited to

P&L A/c and the amounts recovered from subleases were offered as income. It was

submitted that in the case of enhanced compensation paid to lessors relating to the

stock in trade, there is no enabling clause in the lease deeds to recover such

enhanced compensation and hence, there is high degree of uncertainty of collection

of such amounts from the sublessees. Hence, it was submitted that the relative

revenue is accounted and offered to tax as and when it is actually recovered which

is in accordance with the Accounting policy consistently followed by the assessee

and accepted by the Revenue in the past completed assessments. The ld. AR

submitted that it was legally liable to pay additional compensation in relation to the

property which was treated as stock-in-trade and was leased out/sold in the prior

years which was accepted by the Revenue.

6.2 That being so, it was submitted that the resultant expenditure is revenue

expenditure in nature and is allowable u/s.28 of the IT Act as it is incurred in the

course of business of leasing out of the property. The Ld. AR submitted that as per

sec. 145 of the Income Tax Act, while computing the income chargeable under the

head Profits from Business or Profession, the accounting standard notified by the

Central Government is required to be mandatorily followed. By virtue of provisions

of sec. 145(2) of the Income Tax Act, the Central Government by Notification No.

S.O 69(E), dt 25.01.2996, has notified Accounting Standards I & II, to be followed

I.T.A. Nos.135 & 353/Coch/2017 by all assesses following the mercantile system of accounting. According to the Ld.

AR, Accounting Standard I is 'Disclosure of accounting Policies'. In accordance with

the said accounting standard, the fundamental accounting assumptions are:

- Going concern

- Accrual &

- Consistency

It was submitted that the Accounting Standard describes the term 'Accrual' as the

assumption that revenues and costs are accrued, that is, recognized as and when

they are earned (and not as money is received or paid) and recorded in the financial

statements of the periods to which they relate. In the assessee’s case, the

enhanced compensation expenses relating to stock in trade were incurred and paid

and hence as per the above definition of the term 'Accrual' the said expenditure was

accrued. Hence, the assessee had rightly accounted such enhanced compensation

paid relating to stock in trade as expenditure and claimed in the return of income

u/s.28 of the Act. It was submitted that by virtue of lack of enabling clauses in the

sub lease deeds, there is high degree of uncertainty in the case of receipt of income

by way of recovery of enhanced compensation from sub lessees and the AO himself

had accepted that there is no enabling clause in the sub lease deed to collect

proportionate enhanced compensation from the sub lessees. Accordingly, as per

the above Accounting Standard, the relative income cannot be said to have been

earned or received. In such a case, the said income can be accounted as income

and offered to tax only when it is recovered/received. In the above circumstances,

it was submitted that the question of accounting for income prior to actual receipt

I.T.A. Nos.135 & 353/Coch/2017 does not arise. The assessee had therefore offered the income relating to enhanced

compensation as and when it was recovered.

6.3 The Ld. AR referred to Accounting Standard 11 which relates to disclosure of

Prior period and Extraordinary items and changes in accounting policies. The

Accounting Standard II requires that any change in an accounting policy shall be

made only if:

- the adoption of a different accounting policy is required by Statute or

- if it is considered that the change would result in a more appropriate

preparation or presentation of the financial statements by an assessee.

In view of the above, the Ld. AR submitted that there is no power for the AO to

change the accounting policy consistently adopted by the assessee, since there was

no situation warranting such change during the periods under appeal, i.e., neither

such change is required by the Statue nor the change would result in a more

appropriate preparation or presentation of financial statements. Hence, it was

submitted that AO grossly erred in changing the consistently followed accounting

policy without looking into whether there is a requirement under the enabling

provisions of sec. 145 of the IT Act.

6.4 The Ld. AR referred to para 9 of the mandatory Accounting Standard (AS-9),

prescribed by the Company's Accounting Standard Rules 2006:

"9.1. Recognition of revenue requires that revenue is measurable and that at the time of sole or the rendering of the service it would not be unreasonable to expect ultimate collection.

I.T.A. Nos.135 & 353/Coch/2017 9.2 Where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, e.g., for escalation of price, export incentives, interest etc., revenue recognition is postponed to the extent of uncertainty involved. In such cases, it may be appropriate to recognise revenue only when it is reasonably certain that the ultimate collection will be made. Where there is no uncertainty as to ultimate collection, revenue is recognised at the time of sale or rendering of service even though payments are made by instalments..."

Thus, it was submitted that the assessee had been correctly following the above

mandatory accounting standard consistently and accounting for enhanced

compensation as and when it was recovered, in view of the high degree of

uncertainty involved. Thus, it was submitted that the findings of the AO were not

supported by any of the provisions of the Income Tax Act.

6.5 It was submitted that as per the provisions of sec. 37(1) of the Act, any

expenditure (not being expenditure of the nature described in sections 30 to 36 and

not being in the nature of capital expenditure or personal expenses of the

assessee), laid out or expended wholly and exclusively for the purposes of the

business or profession shall be allowed in computing the income chargeable under

the head "Profits and gains of business or profession". Hence, the enhanced

compensation paid relating to stock in trade is to be allowed also u/s.37(l) of the

Act, since it is not in the nature of capital expenses or personal expenses of the

Respondent assessee and the expenditure was incurred wholly and exclusively for

the purposes of the business of the assessee.

6.6 It was submitted that the assessee had offered the amounts recognized in the

assessment year under appeal and thereafter to tax as detailed below: 11

I.T.A. Nos.135 & 353/Coch/2017 Sl. No Asst. Year Amount Actually Received Whether offered to (Rs.) Tax

1 2012-13 1,659,136.00 yes

2 2013-14 9,707,630.00 yes

3 2014-15 7,913,119.00 yes

4 2015-16 1,533,210.00 yes

5 2016-17 Nil Not applicable

6 2017-18 1,344,159.00 yes

7 2018-19 16,620,955.00 yes

The Ld. AR submitted that the AO though disallowed the assessee’s claim of

expenditure in the AY 2012-13 and also in the AY 2013-14, no allowance was given

when the same amount was actually offered to tax which resulted in taxing an

income twice, which is against the basic principles of income tax law. From the

above, it may be seen that the AO was not justified in disturbing the consistently

accepted accounting policy in respect of the years under appeal, viz., for the AY

2012-13 & AY 2013-14, without stating any detailed reasons, though the said policy

was accepted by the revenue from the AY 2003-04 to AY 2011-12. Thus, it was

submitted that the findings of the AO were not supported by any of the provisions

of the Income Tax Act.

the assessee claimed enhanced compensation as expenditure. According to the

I.T.A. Nos.135 & 353/Coch/2017 Assessing Officer the assessee is entitled to recover it from the lessee from whom

the loan was taken. In view of this, he allowed payment of enhanced compensation

to the extent of amount recovered from the lessee which was offered as income.

The balance compensation payable was not allowed by the Assessing Officer.

However, neither the Assessing Officer nor the CIT(A) has examined the lease

agreements based on which the assessee is entitled to recover the enhanced

amount of compensation from the lessee. Without examining the lease agreement

entered into by the assessee with the lessee, it is not possible for us to hold that to

what extent the assessee is entitled for the claim of enhanced compensation as an

expenditure. If there is enforceable clause in the lease agreement based on which

the property was leased out by the assessee, the assessee can recover the amount

of enhanced compensation from the lessee. Hence, the amount to the extent

received or receivable from the lessee is to be brought to tax. In other words,

when the assessee is claiming the payment of enhanced compensation as an

expenditure, it is incumbent on the part of the assessee to offer the recoverable

amount of compensation from its lessee. The assessee cannot pick and choose only

the claim of expenditure towards payment of enhanced compensation and cannot

withhold the offering of receipt of enhanced compensation from its lessee. Hence,

in our opinion, it is appropriate to remit the issue to the file of the Assessing Officer

to examine the relevant lease agreement entered into by the assessee with its lesee

and decide thereupon . However, we make it clear that if the assessee offered the

receipt of enhanced compensation from its lessee in any other assessment year,

I.T.A. Nos.135 & 353/Coch/2017 there cannot be double taxation in these years. With this observation, we remit this

issue to the file of the Assessing Officer for fresh consideration.

purposes. Order pronounced in the open Court on this 6th May, 2019

sd/- sd/- (GEORGE GEORGE K.) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER

Place: Kochi Dated: 6th May, 2019

GJ Copy to: 1. M/s. Rubber Park India Pvt. Ltd., 2AQ, Kauteeliyam, Rubber Park, Valayachirangara, Ernakulam, Kochi-683 665. 2. The Assistant Commissioner of Income-tax, Corp. Circle-2(1) 3. The Commissioner of Income-tax(Appeals)-I, Kochi. 4. The Pr. Commissioner of Income-tax, Kochi. 5. D.R., I.T.A.T., Cochin Bench, Cochin. 6. Guard File. By Order

(ASSISTANT REGISTRAR) I.T.A.T., Cochin