PR COMMISSIONER OF INCOME TAX vs. M/S FORTUNA PROJECTS

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ITA/192/2018HC KarnatakaKAHC01051994201811 October 2022Bench: P.S.DINESH KUMAR,C.M. POONACHA12 pages
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What did the High Court hold?

The High Court considered the rival contentions and the record. It noted that for AY 2007-08, the assessee, a developer, followed the completed contract method as per AS-9, which was accepted by the Revenue. The AO had initially considered AS-7 but ultimately accepted the assessee's submissions that AS-7 was not applicable and completed the assessment on a 'nil' returned income basis. For AY 2008-09, the AO proceeded on a percentage completion method, and the CIT(A) reduced the income on estimation. The ITAT had corrected the AO's order, holding that the assessee opted for the 'completed contract method' and remanded the matter to the AO to complete the assessment accordingly. The High Court found no error in the ITAT's order regarding the accounting method, answering questions 1 and 2 in favour of the assessee. Regarding question 3, concerning disallowances under Section 40A(3) and 40(a)(ia), the Court agreed with both parties that since the matter was remanded to the AO, the ITAT's specific finding that the question of taxing profits did not arise was erroneous. Similarly, the question of disallowance would need to be considered by the AO based on the factual matrix during the assessment. Therefore, the Revenue's appeal was allowed in part, with questions 1 and 2 held against the Revenue and in favour of the assessee, and question 3 held in favour of the Revenue and against the assessee.

What were the facts?

The Revenue filed appeals before the High Court of Karnataka against an order dated 30.06.2017 passed by the Income-Tax Appellate Tribunal (ITAT) in ITA No. 1144/Bang/2011 for Assessment Year 2008-2009. The assessee, M/s Fortuna Projects, is a land developer. The Assessing Officer (AO) determined the taxable income at Rs. 8,50,16,647/-. The Commissioner of Income Tax (Appeals) [CIT(A)] reduced this to Rs. 3,56,82,035/- on an estimate basis. Both the assessee and the Revenue appealed to the ITAT. The ITAT partly allowed the assessee's appeal and dismissed the Revenue's appeal, leading to the present appeals by the Revenue. The appeals were admitted to consider substantial questions of law.

What were the issues?

1. Whether the ITAT was justified in holding that the changed method of accounting adopted by the respondent did not give a distorted picture of the business for computing taxable income and was acceptable? (Question of law) 2. Whether the ITAT was justified in directing the Assessing Officer to adopt the project completion method, contrary to the return of income filed by the respondent which also adopted the project completion method? (Question of mixed law and fact) 3. Whether the ITAT was justified in holding that the question of disallowance under Section 40A(3) and 40(a)(ia) of the Income-Tax Act does not arise as there was no claim for deduction of expenses? (Question of law) Assessee's Contention (argued by Amicus Curiae Sri A. Shankar): The assessee followed AS-9 on a completed contract basis for AY 2007-08, which was accepted by the Revenue. The ITAT's direction to the AO to assess on a project completion method as per AS-9 was just and appropriate, especially since the Revenue had accepted the assessee's method for the previous year. The ITAT's finding that taxing profits did not arise for the year under consideration was also appropriate in light of the remand. Revenue's Contention (argued by Sri E.I. Sanmathi): The AO correctly determined taxable income on a percentage completion basis. The CIT(A)'s reduction on an estimate basis was unsustainable. The ITAT's order was erroneous, particularly its finding that taxing profits during the year did not arise, as the matter was remanded. The Revenue argued that the ITAT was not justified in its findings on the accounting method and the disallowances.

Which sections of the Income-tax Act were involved?

Section 260-A,Section 40A(3),Section 40(a)(ia)

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 11TH DAY OF OCTOBER, 2022 PRESENT THE HON'BLE MR. JUSTICE P.S.DINESH KUMAR AND THE HON’BLE MR. JUSTICE C.M. POONACHA

I.T.A. No.191 OF 2018 C/W I.T.A. NO.192 OF 2018

IN I.T.A. NO.191/2018

BETWEEN

1 . PR. COMMISSIONER OF INCOME TAX BANGALORE 6, BMTC COMPLEX, KORAMANGALA, BANGALORE

2 . DEPUTY COMMISSIONER OF INCOME TAX CIRCLE 2(3), BANGALORE BMTC COMPLEX, KORMANGALA, BANGALORE ...APPELLANTS (BY SRI E I SANMATHI, ADVOCATE)

AND

M/S FORTUNA PROJECTS NO. 212, 4TH FLOOR, BELLARY ROAD, SADASHIVNAGAR, BANGALORE 560080 …RESPONDENT (RESPONDENT SERVED AND UNREPRESENTED SRI A SHANKAR, SENIOR CUNSEL IS APPOINTED AS AMICUS CURIAE)

2 THIS INCOME TAX APPEAL UNDER SEC.260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 30.06.2017 PASSED IN ITA NO. 1144/BANG/2011, FOR THE ASSESSMENT YEAR 2008-2009, PRAYING TO DECIDE THE FOREGOING QUESTIONS OF LAW AND/OR SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BY THE HON'BLE COURT AS DEEMED FIT AND SET ASIDE THE ORDER DATED 30.06.2017 PASSED BY THE INCOME-TAX APPELLATE TRIBUNAL, 'A' BENCH, BANGALORE IN ITA NO. 1144/BANG/2011 FOR THE A.Y 2008- 2009 AND ETC.,

IN ITA NO.192/2018

BETWEEN

1 . PR. COMMISSIONER OF INCOME TAX BANGALORE 6, BMTC COMPLEX, KORAMANGALA, BANGALORE

2 . DEPUTY COMMISSIONER OF INCOME TAX CIRCLE 2(3), BANGALORE BMTC COMPLEX, KORMANGALA, BANGALORE

…APPELLANTS (BY SRI E I SANMATHI, ADVOCATE)

AND

M/S FORTUNA PROJECTS NO. 212, 4TH FLOOR, BELLARY ROAD, SADASHIVNAGAR, BANGALORE 560080

…RESPONDENT (RESPONDENT SERVED AND UNREPRESENTED SRI A SHANKAR, SENIOR CUNSEL IS APPOINTED AS AMICUS CURIAE)

THIS INCOME TAX APPEAL UNDER SEC.260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 30.06.2017 PASSED IN ITA NO. 1144/BANG/2011, FOR THE ASSESSMENT YEAR 2008-2009, PRAYING TO DECIDE THE FOREGOING

3 QUESTIONS OF LAW AND/OR SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BY THE HON'BLE COURT AS DEEMED FIT AND SET ASIDE THE ORDER DATED 30.06.2017 PASSED BY THE INCOME-TAX APPELLATE TRIBUNAL, 'A' BENCH, BANGALORE IN ITA NO. 1144/BANG/2011 FOR THE A.Y 2008- 2009 AND ETC.,

THESE ITA'S COMING ON FOR FINAL HEARING, THIS DAY P.S. DINESH KUMAR J., DELIVERED THE FOLLOWING:

JUDGMENT Re - ITA No.191/2018 This appeal by the Revenue directed against the order dated 30.6.2017 in ITA No.1144/Bang/2011 passed by the ITAT1, has been admitted to consider the substantial questions of law as per order dated 02.11.2020 and they read as follows:

1.

Whether in the facts and circumstances of the case, the ITAT is justified in holding that the changed method of accounting adopted by the respondent did not give a distorted picture of the business for the purpose of computing the taxable income of the assessee and was acceptable?

1 Income Tax Appellate Tribunal

2.

Whether, the ITAT is justified in giving directions to the Assessing Officer to adopt the project completion method contrary to the return of income filed by the respondent adopting the project completion method?

3.

Whether, on facts and circumstances of the case, the ITAT is justified in holding that the question of disallowance under Section 40A(3) and 40(a)(ia) of the Income - Tax does not arise as there was no claim for deduction of expenses? 2. Heard Sri E.I. Sanmathi, learned Advocate for the Revenue. 3. Despite service, there is no representation on behalf of the Assessee. Hence, on the last date of hearing, we had requested Sri A.Shankar, learned Senior Advocate to assist the Court as amicus curiae and we have heard him today. 4. Sri E.I.Sanmathi, assailing the impugned order (in ITA No.1144/Bang/2011 dated 30.06.2017 passed by the

5 ITAT) submitted that the Assessee is a land developer and he has been following the Accounting Standards-9 (AS-9 for short). 5. The Assessing officer determined the Taxable income as Rs.8,50,16,647/-. The Assessee has challenged the Assessing Officer's order before the CIT(A)2. The CIT(A) reduced the taxable income to Rs.3,56,82,035/- on estimate basis. Feeling aggrieved by the said order, both Assessee and Revenue challenged the same before the ITAT. By the impugned common order dated 30.06.2017, the ITAT has partly allowed assesse's appeal and dismissed Revenue's appeal. The Revenue has challenged the said order in this appeal. 6. In substance, the contention of Sri E.I.Sanmathi is, the deduction of taxable income made by the CIT(A) on estimation basis is unsustainable and the Assessing Officer's view that the accounting standard to be applied as per AS-7 is correct.

2 Commissioner of Income Tax (Appeals)

6 7. Sri A. Shankar submitted that the assessment for A.Y.3 2007-08 was made as per AS-9 on completed contract basis and the same has been accepted by the Revenue. He adverted to paragraph No.2.3 of the order passed by the CIT(A) and pointed out that it has been specifically recorded in the order for the A.Y.2007-08 that AS-7 was not applicable. However, the ITAT in para No.8.3 of the impugned order has directed the A.O. to complete the assessment on project completion method as per AS-9. He submitted that in view of Revenue having accepted the method of accounting adopted by the assessee for the A.Y. 2007-08, the direction to the Assessing Officer to re-do the assessment on project completion method is just and appropriate. 8. We have carefully considered the rival contentions and perused the record. 9. It is not in dispute that the CIT(A) in its order dated 22.09.2011 has held as follows:

3 Assessment Year

7 2.3 It is submitted that the learned A.O. took up proceedings firstly for the assessment year 2007-08. In course of the assessment proceedings for the assessment year 2007-08, the learned A.O. issued a show cause notice calling upon the appellant to state as to why income should not be taxed in terms of Accounting Standard 7 (AS7) taking into account the material gathered in course of survey. The appellant filed a detailed reply under the letter dated 06.11.2009 explaining that the AS7 was not applicable as the appellant was not a contractor but, was only a developer and that NIL return of income was to be filed for the said assessment year. After considering the submissions of the appellant, the AO concluded the assessment for the assessment year 2007- 08 by the order u/s. 144 of the Act dated 31.12.2009 in which he observed in the concluding part of the assessment as under:- "The assessee's submissions have been carefully considered. The assessee claims that there was no sale of flats during the

8 relevant period. It also claims that the firms is only to development and not into construction and the AS-7 is not applicable in its case. The submissions made by the assessee has been carefully considered. In view of the above facts there was no sale booked for the year and the AS-7 being not applicable in the case of the assessees, the assessment is completed acting the "nil" returned income". A copy of the order of assessment for the assessment year 2007-08 is enclosed herewith as Annexure-2. 10. Admittedly, the Assessee is a Developer. He had followed the completion of contract method as per AS-9 for the year 2007-08 and the same has been accepted by the Revenue. For the assessment year in question viz., 2008- 09, the Assessing Officer completed the assessment proceedings based on percentage completion method. The CIT(A) reduced the taxable income on estimate basis. The ITAT has corrected the order of the Assessing Officer by

9 holding that the assessee has opted for 'completed contract method' and remanded the matter to the Assessing Officer to complete the assessment accordingly. 11. Therefore, we see no error in the impugned order passed by the ITAT. Accordingly, ITA No.191/2018 is dismissed.

12.

Accordingly, questions No.1 and 2 are answered in favour of the assessee and against the Revenue. Question No.3 does not arise for consideration. Re - ITA No.192/2018. 13. This appeal by the Revenue directed against order dated 30.06.2017 in ITA No.1248/Bang/2011, has been admitted to the consider the following substantial questions of law as per order dated 02.11.2020 and they read as follows:

i) Whether in the facts and circumstances of the case, the ITAT is justified in holding that the changed method of accounting

10 adopted by the respondent did not give a distorted picture of the business for the purpose of computing the taxable income of the assessee and was acceptable?

ii) Whether, the ITAT is justified in giving directions to the Assessing Officer to adopt the project completion method contrary to the return of income filed by the respondent adopting the project completion method?

iii) Whether, on facts and circumstances of the case, the ITAT is justified in holding that the question of disallowance under Section 40A(3) and 40(a)(ia) of the Income-Tax Act does not arise as there was no claim for deduction of expenses? 14. Sri E.I. Sanmathi, learned Advocate for the Revenue submitted that the Assessing Officer on appreciation of the facts on record has rightly completed the assessment on 'percentage completion basis'. The CIT(A) has reduced the taxable income on estimation basis. The ITAT has dismissed the appeal filed by the Revenue and allowed assessee's appeal. In addition, the

11 ITAT has held in para No.11 of its order that the question of taxing profits during the year under consideration does not arise. He argued that since the matter has been remanded, the finding recorded by the Tribunal in para No.11 is erroneous. 15. Sri Shankar, learned Senior Advocate also contended that in view of matter having been remitted to the Assessing Officer, the finding recorded in para No.11 that the question of taxing profits does not arise, is not sustainable. 16. We have simultaneously considered the ITA No.191/2018 and for reasons recorded, we hold questions No.1 and 2 against the Revenue and in favour of the assessee. 17. So far as question No.3 is concerned, Sri E.I.Sanmathi and Sri Shankar are right in their submission, that since the matter has been remanded to the Assessing Officer, specific finding by the ITAT that the question of taxable profit during the assessment year in question does

12 not arise, is erroneous. Similarly, question of disallowance will also have to be considered at the time of assessment based on the factual matrix.

18.

In view of the above, the Revenue's appeal merits consideration. Hence, ITA No.192/2018 is allowed in part. Substantial questions of law No.1 and 2 are held against the Revenue and in favour of the Assessee. Question No.3 is held in favour of the Revenue and against the Assessee.

No costs.

SD/-

JUDGE

SD/-

JUDGE

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