ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCEL-2(1), BANGALORE vs. SRI MATHIKERE RAMAIAH SEETHARAM, BANGALORE

PER CHANDRA POOJARI, ACCOUNTANT MEMBER:

These three appeals by revenue and three Cross Objections by assessee are directed against common order of CIT(A)-11, Bangalore dated 16.8.2021 for the assessment years 2014-15 to 2016-17. The issues in the appeals and COs are common in nature in all the assessment years i.e. 2014-15 to 2016-17. Hence, these are clubbed together, heard together and disposed of by this common order for the sake of convenience. The common grounds of appeals are as follows:- ITA Nos.542 to 544/Bang/2021 (AYs 2014-15 to 2016-17): Common Grounds:- 1. The order of the CIT(A) is opposed to law and facts of the case. 2. The CIT(A) erred in holding that land in consideration was held as fixed asset in the books of accounts although it was admitted by assessee in his statement u/s 132(4) of I T Act dated 28.08.2016 and reaffirmed in his statement u/s 131 of I T Act dated 19.10.2016 that the said land was held as stock in trade in his books. 3. The CIT(A) erred in holding that the sale of units by land owner in a project developed on JDA basis will attract taxation u/s 45(2) of I T Act only after it is sold by a registered deed. 4. The CIT(A) has erred in not considering the principles of revenue recognition as prescribed in AS9 to determine income. 5. Any other ground that may be urged at the time of appeal. CO Nos.17 to 19/Bang/2021 (AYs 2014-15 to 2016-17): Common grounds:-

ITA Nos.542 to 544/Bang/2021 & CO Nos.17 to 19/Bang/2021 Sri Mathikere Ramaiah Seetharam, Bangalore

Page 3 of 96 (Appeals) are not to be decided upon in view of the appellant getting relief on the factual issues involved in this appeal. The learned Commissioner of Income tax (Appeals) should have decided the legal grounds also.

In view of the above and other grounds to be adduced at the time of hearing, it is requested that the impugned assessment order passed by the Assessing Officer be held to be bad in law and void ab initio and be quashed.

ITA Nos.542 to 544/Bang/2021 & CO Nos.17 to 19/Bang/2021 Sri Mathikere Ramaiah Seetharam, Bangalore

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4.1 The Respondent inter-alia owned a land measuring 20 Acres 19 guntas at Thanisandra, K.R. Puram, Bengaluru East. This land was shown as Fixed Asset in the Balance sheet of the Respondent. A Development Agreement (‘DA’) was entered into between M/s. G Corp Homes Pvt Ltd (developer), and the Respondent (land owner) on 02.09.2010 for development and construction of residential building in the land. Copy of the Development Agreement is available at Page no. 185 to 223 of the Paper book filed. Thereafter two Supplementary Agreements and a Deed of Rectification were also entered into which are available at page nos. 224 to242 of the Paper Book filed. At the time of entering into DA, amount of Rs. 25 Crores was given to the Respondent as refundable security deposit which was subsequently adjusted proportionally against the advances received. In terms of DA, the revenue earned from sale, lease, license of the area covered under the project was to be shared between the Respondent and developer in the ratio of 37% and 63% respectively. The developer started giving the owners share to the Respondent from FY 2012-13 onwards. These advances were shown as liabilities in the Balance sheet of the Respondent.

4.2 Respondent’s share of revenue under this agreement has been offered to tax by the Respondent under the head capital gains. The

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revenue has been offered to tax in the year in which the flats have been registered in favour of the buyers. Such registrations began from FY 16-17 (AY 2017-18), although the Respondent had started receiving advances as early as in FY 12-13.

4.3 The details of advances received by the Respondent for the referred years are as under: AY 2014-15 Rs. 37,19,07,751/- AY 2015-16 Rs. 59,50,41,812/- AY 2016-17 Rs. 33,67,10,815/-

4.4 In the impugned assessment orders passed for AYs 2014-15 to 2016-17, the above advances received by the Respondent under the Development Agreement, towards sale of flats are held to be business income of the Respondent. Further, it has been concluded that such income from business, under Respondent’s case has to be computed as per income recognition principles of Accounting Standard 9 (Revenue recognition). It has been concluded that during the years under appeal there is significant transfer of risks and rewards of the flats agreed to be sold by the Respondent and therefore entire advances received during the respective years are held to be taxable revenue for the year under the head Business in the hands of the Respondent. Against such revenue, no deduction has been allowed in respect of cost of land and other incidental expenses. (Such costs have been quantified at Rs. 9,79,54,204/- and have held to be allowable only in the first year of receipt of advances i.e. FY 12-13) (The appeal against assessment order for Assessment Year 2013-14, which was passed later, is pending in appeal before Commissioner of Income tax (Appeals). The details of correct amount of costs and incidental expenses works out to Rs. 29,15,56,531/-.

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4.5 Against these assessment orders, the Respondent filed appeals before CIT(A)-11, Bengaluru. The CIT(A)-11 vide composite order dated 16/08/2021 allowed the appeals filed by the Respondent.

4.6 Against the orders of Ld. CIT(A), the Department has preferred the above appeals before the Tribunal.

4.7 The assessee also filed cross objections for AYs 2014-15 to 2016-17 in CO Nos.17 to 19/Bang/2021.

5.1 Ld. D.R. submitted that Shri M.R. Seetharam in his statement stated that the said land is recognized as stock -in-trade in his books. However, as he is regularly receiving the amounts of advances received from M/s. G-Corp Homes Pvt Ltd., the assessee was questioned as to why his part of the advances received shall not be considered as revenue under percentage completion method. In reply, Shri. M R Seetharam accepted this position of the department and agreed to offer the revenue in the respective Assessment Years as per the table below:

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Assessment Year Amount offered to Tax in (Rs.) 2014-15 27,00,00,000/-

2015-16 50,00,00,000/-

2016-17 25,00,00,000/-

TOTAL 102,00,00,000/-

5.2. Again, a sworn statement of Shri. M R Seetharam was recorded u/s 131 of the Act on 19.10.2016. In the statement recorded on 19.10.2016, Shri. Seetharam once again reaffirmed the admission of unaccounted income that he admitted at the time of the search proceedings. Thus, the assessee admitted, confirmed and reaffirmed the declarations of Rs.102 crore on account of his share of income received from M/s G Corp Homes P Ltd as his business income for the respective Assessment Years.

5.3 However, in the return filed in response to notice u/s 153C of I T Act, the assessee did not declare the income as admitted during search proceedings. The assessee was asked to show-cause as to why the revenue received from M/s G Corp Homes P Ltd during the Asst Year 2014-15 should not be treated as his business income.

5.4. Ld. D.R. submitted that in the return of income filed by the assessee for the AY 2017-18, the assessee is declaring the amount received from G Corp Homes P Ltd under the head 'Long Term Capital Gains' in the year, when the property is registered in the name of the buyer. The assessee has considered the nature of transactions, by transferring the land which was his stock in trade to the developer for the purpose of joint development of land and treated it as income

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in the nature of capital gains and declared Long term capital gain on the basis that the capital gain arises from Asst Years 2017-18 onwards as under: Asst. year Long term capital gain 2017-18 30,58,92,850 2018-19 19,16,49,421

5.5 However, it is noticed from the returns of income filed by the assessee that till AY 2015-16 the assessee had shown this land under JDA as stock in trade. Subsequently, from AY 2016-17 it has been shown as capital asset in the books of accounts and the income is offered by the assessee as income from capital gains.

5.6 The details of year wise amounts received by the assessee, being the land owner, for phase 1 is as under: Assessment Year Amount Received 2013-14 13,87,39,209 2014-15 37,19,07,751 2015-16 59,50,41,812 2016-17 33,67,10,815 2017-18 12,93,09,653 Total 157,17,09,340

5.7 The Ld. D.R. further submitted that the assessee entered into a JDA with M/s G Corp Homes Pvt Ltd. in the capacity of land owner and the revenue sharing model is followed in this JDA instead of sharing of built-up area, which means that the assessee is getting 37% share of the revenue earned on account off development and sale of the constructed area. i. The assessee is in the business of real estate development in addition to the JDA referred above, particularly the

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nature of business is that of land development, Plotting and selling of plots and offered the income under the head business. ii. Possession of the land was given to the developer, M/s G Corp Homes P Ltd indicating transfer of the land. It is specifically mentioned in the JDA as per point no 6 that the owner executed an irrevocable power of attorney in respect of the property to the developer for development of the property and construction thereon. Another power of attorney was given in favour of the developer giving power to the developer for selling the premises, including selling of the undivided interest in the land. Thus, risk of the assessee is shifted to the developer. By virtue of this, the assessee is receiving the advances from developer at end of every month.

iii. The revenue-sharing model of Joint Development being followed by the assessee is a composite arrangement wherein land is contributed by one party and the development being carried out by the other party with a clear understanding on sharing of the proceeds from sale of entire developed property and also with an understanding on sharing of unsold inventory between both the parties. iv. The very terms of revenue-sharing Joint Development Agreement - 37% of the total revenue from the developed property indicates the transaction is that of business in nature similar to that of developer and not that of mere transfer of assessee's property to the customers as a capital asset as claimed by the assessee. v. The developed property is being sold in the form of apartments. Each apartment is sold to a prospective

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customer with an agreement to sell the undivided share of land and agreement to construct as entered between developer, assessee as represented by developer and the buyer. The receipts of payment by the assessee constitute not just the receipts from agreement to sell the undivided share of land but a predetermined proportion on the sale of entire developed property. vi. The land is being registered as undivided share of the entire project under development and not as separate identifiable portion of land. This indicates that the transfer of rights over the Undivided share of land is more in the nature of business income rather than attracting capital gains for transfer of property. vii. The revenue received by the assessee cannot be construed as a simple case of transfer of property under capital gains. In any transfer of property, the transferor and the transferee exercise effective control over the transaction. In the present scenario, the assessee has no control over the sale process (right to choose the transferee) and the cancellation of the contract (right to terminate the agreement to sell). In all the agreements, developer is also a party indicating significant sharing of business between assessee and developer. In other words, the entire business process - development of the property, sale of the apartments, transfer of assessee's share of revenue to the assessee's account is irreversible by the assessee. The business process is similar to that of a business activity of a developer and assessee ought to have offered the income under Accounting Standard 9, him being the land owner.

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viii. The other party (Developer) which is developing the land is regularly accounting the revenue generated on the development generated from the land as per the percentage completion method under AS-7. ix. There is transfer of significant risks and rewards by way of agreement to sell and agreement to construct signifying the applicability of AS-9. Registration of the final sale deed by the assessee to customers is only a way of formalizing the contract and its impact on recognition of revenue and corresponding tax liability is extremely limited in scope. x. It is to be noted that the revenue/income should be recognized when there is an actual transfer even though the legal title is not transferred.

• ICAI guidance note on recognition of revenue for real estate transactions states that the basic principles of AS-09 would apply to Real Estate transactions. • The point at which all significant risks and rewards of ownership can be considered as transferred is required to be determined on the basis of the terms and conditions of the agreement for sale. In case of real estate sales, the seller usually enters into an agreement for sale with the buyer at initial stages of construction. This agreement for sale is also considered to have the effect of transferring all significant risks and rewards of ownership to the buyer provided the agreement is legally enforceable and subject to the satisfaction of conditions which signify, transferring of significant risks and rewards even though the legal title is not transferred of the possession of the flat/apartment is not given to the buyer.

ITA Nos.542 to 544/Bang/2021 & CO Nos.17 to 19/Bang/2021 Sri Mathikere Ramaiah Seetharam, Bangalore

Page 12 of 96 • Application of AS-9 for sale of goods in real estate transactions - the completion of the revenue recognition process is usually identified the following conditions are satisfied:

o The seller has transferred to the buyer all significant risks and rewards of ownership and the seller retains no effective control of the real estate to a degree usually associated with ownership. o The seller has effectively handed over possession of the real estate unit to the buyer forming part of the transaction. Once the payment is received from the customer at the time of booking as per the construction schedule, the concerned flat is effectively handed over and the customer is/gets involved from the construction stage to suggest the modification to suit his/her requirement, selection of materials to be used, interior work and fittings to be carried out before the apartment is ready to occupy for the customer. Receiving of Occupancy Certificate (OC) and registering the apartment in customer’s name is only a formality. o No significant uncertainty exists regarding the amount of consideration that will be derived from the sale of flats/ apartments. o It is not unreasonable to expect ultimate collection of revenue from buyers. • In the 2006 Guidance Note, it was stated that the significant risks and rewards of ownership are normally passed on when the buyer has legal right to sell his interest in the property without any condition or only such conditions which do not materially affect his rights to the benefits. It was also stated in the guidance note that

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if the seller continues to involve in the assets and exercises control over the assets and if such involvement and control are significant it cannot be said that the risks and rewards of ownership are passed on.

5.8 The Ld. D.R. submitted that in the present case, the very nature of JDA with revenue sharing model indicates that the transactions are similar to that of a developer and not that of mere transferring of property to developer. The revenue share received by the assessee cannot be construed as a simple case of transfer of property. In any transfer of property, the transferor and transferee exercise effective control over the transaction. In the present scenario, the assessee has no control over the sale process, i.e. right to choose the transferee and the cancellation of contract. In all the agreements, developer is a party indicating significant sharing of business between the assessee and the developer. In other words, the entire business process of development of- property, sale of the apartments, transfer of assessee's share of revenue to the assessee's account is irreversible by the assessee. The business process is similar to that of a business activity of a developer and the assessee should have recognized revenue as per AS-9, being a land owner. It is also noticed by the Ld. D.R. that from the returns of income filed by the assessee till AY 2015-16, the assessee had shown this land which is under JDA as stock in trade. Subsequently, from AY 2016-17 it has been shown as capital asset in the books of accounts and the income is offered by the assessee as income from capital gains. Further, the other party, i.e. G Corp Homes Pvt. Ltd. is also recognizing the revenue on the development as per

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percentage completion method under relevant accounting standards and once the sale agreement has been entered and the assessee has received his share of revenue, it has the effect of all significant risks and rewards even though legal title is not transferred. As per the sample sale agreements submitted by the assessee during the assessment proceedings, nowhere it is specifically mentioned that there is any risk on assessee. The JDA was executed on 2nd September 2010 and the developer has started giving the owner's share to the assessee from Financial Year 2012-13 onwards. In fact, an amount of Rs.25,00,00,000/- was given to the assessee as refundable security deposit at the time of JDA only, which is getting adjusted proportionately against, revenue received. Thus, the assessee has started receiving advances from Asst Year 2013-14 onwards but is delaying the taxation of the same till Asst Year 2017-18 and further years. For the reasons stated, the income received cannot be treated as long term capital gain in view of the above facts and is treated as business income whenever they are received. The assessee had incurred cost of Rs 9,79,54,204/- from the FY 2002- 03 to 2010-11. The entire land is entered into JDA against which the income is received by way of advances. The cost of land is allowed to be an expenditure in the first year in which the advances are received i.e. FY 201-13. Hence, Ld. D.R. stated that no expenditure on account of cost of land is allowed in this year and the entire sum of Rs 37,19,07,751/- is treated as income from business.

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Accordingly, over the years, as and when flats built on such land (under DA) were sold, the gains arising therefrom have been offered to tax by the Respondent under the head Capital Gains. The details of capital gains offered by the Respondent as and when the sale deeds got registered as under:

Year-wise Capital Gains offered to Tax relating to ICON Project with a Corp Homes Pvt. Ltd,

Income from Capital Gains:

Asst. Year Sale Cost of Transfer Net Sale indexed cost of capital gain consideration consideration acquisition offered to tax 352,599,441 3,084,915 2017-18 349,514,526 43,621,676 305,892,850 2018-19 218,214,035 1,780,301 216,433,734 24,784,313 191,649,421 2019-20 762,950,740 6,980,579 755,970,161 83,182,154 672,788,007 2020-21 276,366,036 2,821,635 273,544,401 32,467,521 241,076,880 2021-22 87,323,301 971,873 86,351,428 11,448,343 74,903,085

Total 1,486,310,243

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Advances received for the project are as under:

Yearwise Receipts The Icon - M/s. G Corp Homes Pvt Ltd Asst. Year Total

2013-14 13,87,39,209 2014-15 37,19,07,751 2015-16 59,50,41,812 2016-17 34,66,85,997 2017-18 15,61,45,940 2018-19 15,73,03,035 2019-20 22,86,64,369 2020-21 12,41,04,010 2021-22 5,11,66,373

Total 2,16,97,58,496

6.1. The reading of several clauses of Development Agreement (ref point nos. 1, 2 and 10) would show that the Respondent has nothing to do with Development of the Property. The entire construction and development costs were borne by the Developer only. The Respondent had no active role to play in the Development of the Property. This fact is not doubted by authorities below and also accepted by the DR during the course of hearing before the Tribunal.

6.2 During the years under consideration, the construction of residential apartments by the developer was under progress. No sales were registered during the years under appeal. As the flats were under construction and no registration took place and possession of the flats in respect of which advances were received was also not be handed over to the buyers. Thus, in effect no transfer took place during the years under consideration, Therefore, the question of

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taxation of income in the year of receipt of advances against sale of flats does not arise at all.

6.3 The Ld. AR of the Respondent further argued that advances received against sale of flats cannot result in transfer of flats and therefore the advances received against sale of flats cannot be held to trigger a taxable event. If this proposition is upheld then there would be as many transfers as advances received for a Flat which is unconceivable in the eyes of law.

6.4 During the year under consideration, no flats were sold in the project. There were only few agreements to sale under which some advances were received and the Respondent received his share of advance. The actual sale vide registered sale deeds happened only from AY 17-18. Under the agreement to sale with the buyers of flat, there was no sale or exchange or relinquishment of any asset. The agreement to sale also did not result in any actual sale of flats. The Supreme Court has in the case of Suraj Lamp & Industries (P) Ltd v State of Haryana [2012] 340 ITR 1 (SC) held that immovable property can be legally and lawfully transferred/conveyed only by a registered deed of conveyance. The Respondent relied upon various case laws Copies of which are available at page nos. 1529 to 1579 of the compilation of case laws filed.

6.5. In support of Respondent’s claim, a detailed written submission was filed before CIT(A) –11, Bengaluru. The gist of written submissions filed on merits of the case is as under:

a) Income is to be recognized on registration of sale deed and not on execution of sale agreements/advances received.

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b) In order to qualify a transaction as transfer even in terms of section 53A of the Transfer of Property Act 1882, the agreement should be a registered document (CIT vs Balbir Singh Maini 398 ITR 531 (SC)

c) The land under consideration was never held as stock in trade by the Respondent.

d) The Respondent is into Real Estate Business with respect to other following projects:

Project Address Nature of project MSR Green City Koolipura Plot development Project Syadamipalya,Krishnajapur by self Nelamangala Phase I Village of Nelamangala Police Layout MSR Royal City Madagalli Village, Yelwalla Plot Project Hobli, Mysore taluk, developments by Mysore self

e. The above real estate projects form part of Respondent’s business activities wherein the Respondent is actively involved in development activities and income from these projects have been offered to tax as business income. Thus, the Respondent in the bucket of assets held two categories of immovables - one as capital asset and the other as stock in trade. Merely because, the Respondent is holding some of the lands as stock in trade, the land under consideration i.e., land at Thanisandra cannot be called as stock in trade.

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f. It has been judicially held in catena of case laws that an assessee may have two portfolios – investment portfolio comprising of capital assets and a trading portfolio comprising of stock in trade. The case laws in this regard are available at page nos. 1580 to 1587 of the compilation of case laws filed. Further as per circular no. 4/2007 dated 16/6/2007 (Page No.1588-1589 of compilation of case laws filed), the concept of dual portfolios has been acknowledged. Therefore, Revenue’s stand that the land at Thanisandra was held as stock in trade is not correct.

g. In any case and without prejudice assuming without acceding, even if the land at Thanisandra is treated as stock in trade, the advances received during the impugned assessment years would not be in the nature of income & would remain as advances (liabilities) in the hands of the Respondent. The profit on sale of flats will be recognized only in the year of sale when significant risk and rewards are transferred to the buyer. However, the Assessing officer has brought to tax the entire advances received in the respective years in which advances were received.

h. In the present case the Respondent is following the Mercantile system of accounting & not Cash system of accounting, which are the only two systems of accounting recognized by the Income Tax Act. Under the Mercantile System of Accounting the Respondent is following the completed contract method to determine the year of taxability of income arising out of the same.

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In the event he owns the land as Stock in Trade, does not by itself confer any right to the AO to recognise income from the said project on percentage completion method. The said method is to be applied to the person who is developing the land & not the Respondent as he is landlord simpliciter in the present case. The Land if held as Stock in Trade is no doubt a business asset but that does not by itself make the Respondent a Developer & nor can he be deemed to be one. In fact, the impugned agreement is called a Development Agreement & not a Development Agreement & the Respondent is termed as ‘Owner’. Further as espoused by the decision of Bangalore bench of the ITAT in the case of Chaitanya Properties Pvt Ltd, the Respondent can be said to earn income only upon transfer of ownership of the asset by means of a registered sale deed. The AO has not brought out a single instance where the Respondent has sold any portion of the said property to any person by means of a registered sale deed during any of the three impugned assessment years. In fact, it is an undisputed fact that the Respondent has not done so.

6.6 The Revenue in ground no. 2 had stated that the CIT(A) had erred in holding that the land under consideration as Fixed Asset although it was admitted by the Respondent in the statements recorded that the said land was held as stock in trade. In this regard, it is submitted that the Revenue’s reliance on sworn statements is misplaced:

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6.7 It is noted that at page 4 of the impugned order, the learned assessing officer has produced selective extracts from the sworn statements of the Respondent recorded in the course of search in the premises of M/s MS Ramaiah Developers and Builders P Ltd. In the impugned order, for making additions to the Respondent’s returned income, no reliance is placed on these sworn statements. The Respondent however wishes to clarify that in any case no adverse conclusions can be drawn in the Respondent’s case on the basis of those sworn statements.

6.8 In the sworn statements the Respondent had agreed to offer to tax advances received in accordance with Law.

6.9 Even otherwise, the Respondent submits that there cannot be any estoppel to law. An incorrect position of law even if admitted by the assessee cannot alter the correct legal provision. Any admission which does not represent the correct legal position is not binding.

6.10. In ground no.3 raised by the Department, it was stated that the CIT(A) in the appellate order passed had held that sale of units by landowner in a project developed on DA Basis will attract taxation u/s 45(2) of the Act only after it is sold by a registered deed. In this regard, it is submitted that there is no such finding in the CIT(A)’s order with respect to applicability of section 45(2) of the Act. The provisions of section 45(2) of the Act are applicable in a case of transfer by way of conversion of capital asset into stock in trade. In the instant case there is no such conversion of capital asset into stock in trade. The land at Thanisandra was held as Capital asset only and at no point of time such capital asset was converted into stock in trade. The Respondent in the submissions made before

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CIT(A) had alternatively contended that even if the land at Thanisandra is considered as stock in trade then also the taxability arises only in the year of sale and not in the year of receipt of advances.

6.11. The Department in ground no. 4 raised a contention that the principles of revenue recognition as prescribed in AS9 should have been adopted. In this regard, the Respondent submits as under:

6.12 Accounting standard 9 – not applicable to the facts of the Respondent’s case:

6.13 ICDS IV (AS 9) deals with three forms of revenue. They are - (i) sale of goods; (ii) rendering of services; and (iii) use of other person’s resources yielding interest, royalties or dividends.

6.14 In the present case, the Respondent has given the land as a part of the DA. The revenue earned by the Respondent is therefore on account of transfer of land. Section 2(7) of the Sale of Goods Act defines the term “Goods” which excludes immovable property from the definition of the term “Goods”. Thus, on this count, Transfer of land cannot be governed by ICDS IV (AS 9).

6.15. Even if AS-9 applies, no income has accrued during the year under consideration:

6.16 Without prejudice and without acceding, the Respondent submits that even for the sake of argument if the learned assessing officer’s contention that AS 9 applies to Respondent’s transaction is to be admitted, no income has accrued to the Respondent during the year under consideration.

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6.17 The Accounting Standard 9 as issued by ICAI is available at page nos. 348 to 360 of the paper book filed. As has been submitted earlier AS 9 deals with three forms of revenue. They are – (i) sale of goods (ii) rendering of services; and (iii) use of other person’s resources yielding interest, royalties or dividends.

6.18 A conjoint reading of para 10 and 11 of AS-9 gives us following 3 conditions for revenue recognition from sale of goods: a. it is not unreasonable to expect ultimate collection b. 1) The property in the goods is transferred to the buyer or 2) All significant risks and rewards of ownership have been transferred to the buyer and buyer retains no effective control of the goods transferred c. No significant uncertainty exists regarding the amount of the consideration.

6.19 In the Respondent’s case, upon entering into an agreement to sale, there is no significant uncertainty that exists as regards the amount of consideration, as the consideration for future sale is fixed on the date of agreement to sale. The agreements to sale are binding legal agreements and it could be said that in most cases there is also no improbability as regards ultimate collection of revenue. Thus condition a. and c. above are met upon entering into the agreement to sale.

6.20 However, the most critical condition under point b. above is not met upon entering into agreement to sale. In the

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Respondent’s case as has been detailed earlier, the property (title / ownership) of the flat and consequently of undivided interest on land is not transferred to the buyer upon entering of the agreement to sale. The legal title in the flats and undivided share of land is transferred only upon registration of the final sale deed.

6.21 In the Respondent’s case, the alternate conditions – transfer of significant risks and rewards of ownership to the buyer and loss of effective control by seller are also not met. These conditions are deliberated in detail below:

6.22 Risks and rewards of ownership

a. Under the agreement to sale, which is a composite agreement, the buyer has bargained for two future performances for an agreed monetary consideration: 1. Purchase on a future date of undivided share in land from the Respondent. 2. Construction of residential apartment by the developer. b. Respondent’s transaction with buyer, concerns transfer of undivided share of land from the Respondent to the buyer on a future date. Undivided Share of Land is a part of the plot agreed to be given to the buyer of an apartment complex on which the entire structure is built. This share of land has no defined boundaries. Out of the overall land available, the buyer’s share of land agreed to be bought is not identifiable. c. In the case of real estate sales, the events, such as, transfer of legal title to the buyer or giving possession of real estate to the buyer under an agreement for sale, usually, provide an evidence to the effect that all significant risks and rewards of ownership has been transferred to the buyer. In

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Page 25 of 96 the Respondent’s case neither possession nor title are transferred upon entering into agreement to sale. d. Land being an indestructible asset, does not carry physical risks. Common risks associated with goods like possibility of theft, destruction etc. are not linked with land. The only significant risk associated with ownership of land is the risk of bad / illegal title. Under the agreement to sale, there is no transfer of legal title from the Respondent to the buyer and therefore there is no transfer of risks from the Respondent to the buyers. e. Rewards of ownership in the context of Respondent’s case would include returns / benefits to the buyer from use and disposal of the future asset bought. In other words, the benefit accruing to the buyer from use of the land or disposal of the land at his discretion would constitute the reward of ownership of land. f. Whether significant rewards of ownership in the inventory have been transferred is a question of fact to be determined on the basis of terms and conditions agreed between the contracting parties. g. A copy of Respondent’s agreement with one of the buyers is available at page no. 361 to 395 of the paper book filed. All other agreements are also similarly structured and worded. Relevant clauses of the agreement are extracted below: • Clause 4 at page 10: 4) The Purchaser is aware that there may be a slight variation in the proportionate undivided interest in the land in relation to the Apartment being sold under this Agreement for Sale and the Purchaser confirms that he/ she/ they have no objection to such variation provided that the same is

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Page 26 of 96 corresponding to the Saleable Area of the Apartment and is in line with the saleable area of other apartments in the Project. • Page 23: XII. TRANSFER/ ASSIGNMENT 1) The Purchaser shall not assign or transfer in any manner the interests, duties, rights, obligations; responsibilities etc., under this Agreement to any other person without the prior written permission of the Vendors until all the dues are paid to the Developer. 2) The written permission for any such assignment or transfer shall be considered by the Vendors, only if the Purchaser satisfies the Vendors of the credibility and financial capability of the prospective assignee or transferee and on payment of transfer charges plus service tax or any other taxes as applicable as determined by the Developer from time to time. • Clause 1 at page 12: Purchaser has no right to interfere with the progress of construction of the apartment and/or the residential buildings or the Project or any part thereof and the Purchaser is aware that he shall not be permitted to enter upon the said property at the time of construction in the interests of safety.

h. From the above extract of agreement, following restrictions on buyer’s rewards associated with ownership emerges: i) The buyer’s undivided share of land is not identifiable in the overall land held by the Respondent. In fact, the exact quantum of undivided share of land is also not certain and is liable to future variations. ii) The buyer’s right to transfer / assign his rights under the contract are highly restricted and requires prior approval of the sellers. The buyer has no independent right to transfer what he has agreed to buy under the agreement to sale.

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Page 27 of 96 iii) Buyer has no rights to enter into the property and cannot interfere in any manner the construction of flats. The undivided share of land cannot be put to any other use. iv) The buyers share in land cannot be leased / rented / commercially exploited in any other manner.

i. Thus, the buyer can neither dispose nor use the undivided share for his benefits in the manner he deems fit. j. The buyer may have the ability to pledge the apartment as the construction is in progress to obtain funding from a bank; but what is pledged is a future right to an apartment, and not the apartment itself. The requirement for revenue recognition is actual and present transfer of risks and rewards of ownership and not possible future assumption of risks and rewards of ownership. k. In light of above deliberations, both risks and rewards of ownership have not been transferred under the agreement to sale. No revenue can therefore accrue at the time of execution of agreement to sale.

6.23 Effective control over land

a. Another key requirement for revenue recognition, as has already been discussed, is transfer of effective control over the asset being sold. In the Respondent’s case the buyer has not obtained any effective control over the undivided share of land agreed to be sold. The buyer neither has possession of the land, nor ability to direct use of land in a desired manner nor does it have control over sale of the share in land. The relevant clauses of the agreement which highlight the above position are extracted below:

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Page 28 of 96 • Clause 1 at page 12: Purchaser has no right to interfere with the progress of construction of the apartment and/or the residential buildings or the Project or any part thereof and the Purchaser is aware that he shall not be permitted to enter upon the said property at the time of construction in the interests of safety. • Clause f) at page 18: The Purchaser/s shall only be entitled to an undivided share of Land and undertake/s that the/she/they shall not seek partition and /or separate possession of the said UDI and shall not object to the construction of other apartments /residential buildings that shall be constructed on the said Property and he/she/they do/es hereby specifically confirm and agree that the Developer shall be entitled to construct composite multi-storied residential apartment buildings on the said Property without any intervention of the Purchaser/s as per the development Scheme.

b. Thus, clearly, under the agreement to sale, neither risks and rewards of ownership nor control over the land have been transferred to the buyer. Therefore, no income has accrued to the Respondent during the year under consideration. The conclusions drawn by the learned assessing officer being contrary to the generally accepted accounting principles is erroneous and have to be ignored.

6.24 Even legally speaking under agreement to sale, no significant risks and rewards get transferred under the agreement to sale. An immoveable property of the value of Rs. 100 and above can be transferred only by through a registered conveyance Deed. The Supreme Court in the case of Suraj Lamp & Industries (P) Ltd v State of Haryana [2012] 340 ITR 1 (SC) has held that immovable property can be legally and lawfully transferred/conveyed only by a registered

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deed of conveyance. There are catena of cases to support the above view. Even the law (Transfer of property Act read with Indian Registration Act) is very clear on the issue. Therefore, significant risks and rewards exchange hands only at the moment of final transfer i.e. on the conveyance of the registered deed.

6.25 Therefore, both in accounting sense and under general legal principles, no transfer has taken place during the year under consideration and no income has accrued to the Respondent.

6.26 Deliberation on ICAI’s guidance note on accounting for real estate transactions:

a. ICAI in the year 2012 revised its earlier guidance note on accounting for real estate transactions. The revised guidance note is applicable to all real estate projects which are commenced on or after April 1, 2012 and also to projects which have already commenced but where revenue is being recognised for the first time on or after April 1, 2012. Accordingly, in the Respondent’s case, the revised guidance note is relevant. A copy of the guidance note is available at page nos. 397 to 412 of the paper book filed.

b. Para 4 of the guidance note deals with ‘Application of Principles of AS 9 in Respect of Sale of Goods to a Real Estate Project’. A perusal of para 4 of guidance note reveals that the guidance note is broadly based on the principles of revenue recognition from sale of goods contained in AS 9. The three conditions of AS 9 - a) transfer of risk, rewards and effective control; b) reasonable certainty of ultimate collection of consideration and c) certainty of amount of

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consideration are also found under the guidance note. These have already been deliberated in detail in the preceding paragraphs of the current submissions. The guidance note lists a 4th condition which is not expressly present in AS 9 – i.e. transfer of possession to the buyer. c. The Respondent has through various clauses of the agreement to sale already demonstrated that the buyer under the agreement has not received possession of the share in land. In fact the buyer’s share in land is not at all identifiable. The buyer is expressly prohibited from entering into any part of the overall land. There can be no interventions by the buyer whatsoever. d. Thus, even in terms of ICAI’s guidance note the conditions precedent for revenue recognition are not present. Therefore, no revenue can be recognised at the time of agreement to sale.

6.27 Para 7 of AS- 9 specifies principles for recognition of revenue from services. The standard provides for two methods of revenue recognition: a) Project Completion method – Under this method revenue is recognised only upon completion of the project. b) Percentage completion method – Under this method revenue is recognised in proportion to percentage of overall work completed during the year.

6.28 As per the accounting standard, percentage completion method (also referred to as proportionate completion method) is apt for cases where performance consists of execution of more than one acts.

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6.29 Project completion method is recommended in scenarios where a. the performance consists of execution of a single act or b. where there are more than one acts to be executed but the actions yet to be performed are so significant that the performance cannot be deemed to have been completed until execution of those final acts

6.30 In the Respondent’s case the only performance obligation pending from the Respondent’s end is transfer of legal title of share in land by registration and execution of sale deed. The Respondent’s case thus falls under the scenario where only single act is pending for discharge of performance obligations. Therefore, the project completion method of accounting is most appropriate to the facts of the Respondent’s case.

6.31 In any case, where there are two or more alternatives, the Respondent submits that the choice of method of accounting is always that of the assessee. Under any situation, if Respondent’s transaction is held to be taxable as revenue from services, the Respondent chooses to be taxed under project completion method and not under percentage completion method.

6.32 Project completion method is compatible with general principles of Accrual of income under I.T. Act: a. Income is taxable either on accrual or receipt basis. The receipt should be an income. In other words, the receipts should be accompanied by a right with power to appropriate the same, the other party having no right or recourse over

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that amount. For an item to be taxed as income, there should be a right to receive coupled with a right to appropriate. In the absence of a right to appropriate, the amount received would be in the nature of liability. There would, in the event of non-fulfillment of the conditions, be an obligation to return or refund the money.

b. The right to receive and appropriate in the case of Respondent arose at the time the project is completed by it. Such performance would be evidenced by obtaining the occupancy certificate and handing over of possession of the property to the purchasers. Till such time the performance remain incomplete (and the possession thus not handed over), there would be an inherent liability to repay the moneys advanced by the prospective customers. This liability gets exhausted / extinct only on completion of projects. It is only at that point of time therefore that the income is to be recognized.

c. Even the test of accrual would mean that there has to be a legal debt in favour of an assessee. In Respondent’s case as long as the project is not completed, it does not have any debt in its favour. On the contrary there would be a debt due by the Respondent to the extent of monies paid by the prospective customers. Therefore, there would be no occasion for appropriating the money till such time that the project is completed.

d. It is true that by virtue of the agreement entered into with the prospective purchasers the said purchasers agree to pay money periodically over the duration of the agreement.

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However, it is only a financing arrangement, which enables the Respondent and the developer to complete the project in time. When the advance amount is paid as per the agreement, it becomes a debt due by the Respondent and not debt due to the Respondent. Therefore, till project is completed there would be no legal right to appropriate the advance money paid by the prospective customers.

e. The project completion method chosen by the Respondent is therefore in accordance with section 5 of the Act.

f. The case laws upholding project completion method for assessing income are available at page nos. 1590 to 1687 of the compilation of case laws filed.

6.33 Income recognition of one business cannot be applied to another:

a. At para 12(viii), of the impugned order, the learned assessing officer has noted that the developer has accounted and offered revenue to tax under percentage completion method. This however cannot be a basis to compel the Respondent also to adopt percentage completion method. As has been explained earlier the choice of method of accounting is always that of the assessee. As long as the method followed by the assessee is valid and recognised, the department can never force upon the assessee any other method of accounting.

b. Even otherwise the Respondent submits that the economic substance of Respondent’s transactions and developer’s

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transactions are vastly different. The Respondent is a landowner. Respondent’s contribution, role, functions, objectives, risks and responsibilities are significantly distinct from a developer. This being the case, method of accounting adopted by the developer cannot be mechanically applied to a landowner.

The Bangalore ITAT in the case of Chaitanya Properties Pvt. Ltd. vs. JCIT in ITA No.52/Bang/2013 has that Completed Contract Method of Accounting is an accepted method of accounting recognised in Income Tax Law which is not prohibited u/s 145 of the Act. The Tribunal has also decided on the applicability of Accounting Standard AS 7 and held that the same applies to pure contractors. It was held that Developers are also not precluded from following Completed Contract Method of Accounting. Extending the same rationale in the present case, the Assessee who is neither a Contractor and nor a developer, but a landowner cannot be compelled to follow Percentage Completion method.

6.34 The Ld. A.R. submitted that the learned CIT(A) after verifying the detailed submissions, had allowed the appeals filed by the Respondent holding that the sale of flats (received under Development Agreement) are to be taxed in the year of execution of sale deed and not in the year of advances received and prayed that the same to be confirmed.

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According to the Ld. D.R., the same to be treated as income from business in all these assessment years and percentage completion to be followed and income recognition to be done as per AS-7. The ld. AO also has not granted any deduction in respect of cost of land and other incidental expenditure and he observed that such expenditure to be allowed only in the first year of receipt of advances i.e. AY 2013-14.

7.1 Thus, the main issue before us is with regard to taxability of the gain arising out of the Development agreement dated 2.9.2010 in these assessment years. The assessee entered into development agreement with G. Corp Homes Pvt. Ltd., under which G. Corp Homes Pvt. Ltd. undertake to develop the scheduled property by constructing the residential buildings which shall be constructed by utilizing the minimum permitted FAR/FPI available on the scheduled property from time to time. On execution of agreement, the assessee has granted to the developer a license to enter upon the scheduled property for the purpose of guarantee the development and construction thereon as per this agreement. The assessee also executed a power of attorney in favour of the developer in respect of scheduled property authorising the developer to inter-alia apply for and obtain various permissions required for development of the scheduled property. As per Development Agreement dated 2.9.2010, the obligation of the owner (assessee) which is placed at assessee paper book page Nos.185 to 223 (page Nos.193 & 201) is as follows:- “9. OBLIGATIONS OF THE OWNER:

9.1 The Owner shall sign arid execute necessary applications, papers, and documents and do ail acts, deeds arid things as the Developer may lawfully require in order to give effect to the provisions of this Agreement.

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Page 37 of 96 9.2 The Owner shall not create any mortgage, charge, lease, lien or other encumbrance in respect of the Schedule Property during the currency of this Agreement.

Provided however, at the request of the Developer the Owner shall sign and execute necessary mortgage/charge/lien documents for the purpose of raising finance by the Developer for the Project against Developers right/share under this Agreement. The loans/finance obtained by the Developer against the security of the Schedule Property shall be used only for the purposes of the Project in relation to the Schedule Property Provided however that the Developer shall be responsible for repayment of the loans availed of and will indemnify and keep indemnified the Owner at all times in relation to the loans / construction finance availed of. 9.3 The Owner shall handover to acquire title and khata in the Owner's name in respect of certain other lands bearing Sy. Nos. 45/3, 46/9, 49,2, 55/2, 55/3, 55/4 and 55/5 ('Additional Lands") which are contiguous to the Subject Property and if the Owner acquires title and khata in relation to the Additional Lands, the Owner shall be obliged to enter into a Supplemental Agreement to this Agreement and grant developments rights in respect of the Additional Lands in favour of the Developer on the same terms and conditions as set cut in this Agreement. It is clarified that no further Refundable Security Deposit will be payable by the Developer to the Owner for the Additional Lands. 9.4 The Owner shall not interfere or create hindrance in the construction or do or permit anyone to do any act, deed, matter or thing which may affect the marketability of the Schedule Property or which may cause obstruction in construction. 9.5 The Owner shall provide, at the request of the Developer, from time to time, all data, documents, information as may be deemed necessary or reasonably required by the Developer and also to communicate to the Developer in writing any information coming to their knowledge which is likely to adversely affect the development of the Schedule Properly in terms of this Agreement or prejudice the rights of the Developer hereunder, 9.6 The Owner undertakes to execute such writings, papers end documents as may be necessary and expedient for

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Page 38 of 96 enabling the Developer to carry out and complete the construction work on the Schedule Property as herein contemplated. 9.7 The Owner undertakes to execute necessary documents for conveying undivided Interest in the Schedule Property from time to time to the individual purchasers of premises in the Residential Building(s) proposed to be constructed on the scheduled Property.”

7.2 The Obligation of Developer is as follows:- “10, OBLIGATIONS OF THE DEVELOPER 10.1 Simultaneously on the execution of this Agreement, it will be the responsibility of the Developer to apply for and obtain all necessary permissions required for development of the Schedule Property. 10.2 The Developer shall be responsible lot complying with all statutory and regulatory requirements for the development and construction of the Residential Building(s). 10.3 The Developer shall take the lead in the development of the Project 10 4 The Developer shall be responsible for development of the Project al its own costs and shall be responsible for arranging for the necessary funding. 10.5 The Developer shall be responsible for taking necessary Insurance policies relating to the development being carried out on the Schedule Property and shall keep the insurance policies in full force and effect at all times upto the completion of the construction of the Residential Building(s) on the Schedule Property. 10.6 All rates, taxes, charges, assessments, duties, and outgoings in respect of the Schedule Property from the date of this Agreement shall be paid by the Developer. It is clarified that if any payments made relate to the period prior to the date of this Agreement, the same shalt be recoverable from the Owner.”

7.3 Marketing and sale of premises as per clause 14 is as follows:-

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Page 39 of 96 “14. MARKETING AND SALE OF PREMISES 14.1 The Developer shall be responsible for the marketing and sale of the Project and at the areas and premises to be constructed on the Schedule Properly and forming part of the Project in terms of this Agreement 14.2 The residential premises or any other premises constructed in relation to the Project on the Schedule Property shall be marketed as a G. Corp MSR Project and the name of the Project will be mutually decided by and between the parties 14.3 The Agreement for Sale and/or other writings to be entered into with the prospective purchasers of the premises {"Customer Agreements") shall be prepared by the Developer and for this purpose the Developer may engage legal advisors for drafting the Agreement for Sale and other writing/s to be executed with the prospective purchasers. 14.4 The Owner as represented by their Power of Attorney Holder i.e. the Developer, the Developer and the Customer shall be parties to the Customer Agreements and/or other writings to be executed with the purchasers of the premises in the Schedule Property. 14.5 The Developer shall allow the Owner to inspect all the agreements / deeds that are executed by the Developer upon the request of the Owner BANK ACCOUNT 14.6 The Developer shall be responsible for all the collection of dues from apartment/flat/unit purchasers in its own name. Ali collection of Revenue from the Project shall be deposited in a separate bank account. 14.7 The separate bank account shall be opened in the name of G:Corp Homes Pvt. Ltd and shall be operated by joint signatories, one signatory representing the Developer and one signatory, being either Mr. Seetharam or Mr. Raksharam, representing the Owner. The account shall be operated on a joint basis with each party proactively involved in the arrangement. 14.8 The account shall be reconciled every month/quarter and the monies shall then be transferred to the accounts of the Owner and the Developer at the end of the said period.”

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7.4 Correctness of accounts is stipulated in clause 17 as follows:

7.5 Settlement between owner (assessee) and developer is as follows:-

7.6 Commencement and completion of project as per clause 20 is as follows:-

20.COMMENCEMENT AND COMPLETION OF THE PROOJECT:

20.1 the Developer shall make best efforts to obtain the approval of the BBMP in relation to the plans within a period of 9 months from the date of execution and registration of this Agreement subject to the provisos below. Provided that the period of 9 months shall be calculated from the date of the Owner obtaining the amalgamated Khata from the BBMP in relation to Part I, Part II and Part III of the Schedule property, to the satisfaction of the Developer

Provided that the period of 9 months shall be calculated from the date of the Owner obtaining the amalgamated Khata from the BEMP in relation to Part I, Part II and Part Ill of the Schedule Property, to the satisfaction of the Developer,

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Page 41 of 96 Provided however that any time taken by the Owner to give his comments in relation to the plans and any period during which approvals a'-e not being granted by statutory / municipal authorities, which is beyond the control of the Developer, shall be excluded from the period of g months. However, in case there is a delay in receiving the approvals for reasons beyond the Developer's control, the period shall be extended mutually by the Owner and the Developer.

7.7 As seen from the various clauses as narrated above, the assessee agrees to sell the specified share for percentage of undivided interest in the land to the prospective buyers as nominated by the developer in lieu of developer to construct for the owner certain specified extent of built-up area with the right to use certain common area, facilities and amenities. Development agreement between assessee and developer are contractual and commercial in nature and assessee given right to enter into the property for the purpose of construction to be carried out in the scheduled property and such right of enter is only license giving coming within the purview of section 52 of the Indian Easement Act, 1882. The legal domain, control and physical possession of the property shall be vested with and remained with the owner till the same are part thereof or sold to the prospective buyers. In other words, the developer is only permitted into enter the property for the limited purpose of development of the project as enumerated in development agreement. At this stage, it is appropriate to mention clause 5 of development agreement (PB 189), which reads as follows: “5. LICENCE TO ENTER UPON THE SCHEULE PROPERTY 5.1 Simultaneously with the execution of this Agreement, the Owner has granted to the Developer and all other persons as may be authorized by the Developer, a license to enter upon the Schedule Property for the purpose of carrying out development and construction thereon in the manner contemplated under this Agreement and for carrying out all activities for the purpose of

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Page 42 of 96 undertaking and completing the Project and performing all acts, deeds, matters and things incidental of ancillary thereto.

Provided however that nothing contained in this agreement or otherwise shall be construed as the grant of possession in part performance of an agreement under the Transfer of Property Act 1882 or under section 2(47)(v) and (vi) of the Income Tax Act, 1961.”

7.8 As per this clause, permission given under this development agreement cannot be considered as delivery of possession in part performance of an agreement under TP Act, 1882 or under section 2(47)(v)&(vi) of the Act.

7.9 At this stage, it is appropriate to consider few judgements on this issue of transfer u/s 2(47)(v) of the Act.

7.10 Hon’ble Bombay High Court in the case of Chaturbhujdas Dwarkadas Kapadia vs. CIT (260 ITR 491), considered this issue and it is necessary to first appreciate what this judgment lays down, and perhaps even more important that, what it does not lay down.

7.10 Their Lordships of Hon’ble Bombay High Court were examining the scope and import of Section 2(47)(v) which was introduced w.e.f. 1st April, 1988. This provision, which covers one of the modes of deemed ‘transfer’, lays down that the scope of expression ‘transfer’ includes "any transaction involving the allowing of, the possession of any immovable property (as defined) to be taken or retained in part performance of a contract of the nature referred to in Section 53A of the Transfer of Property Act”. Elaborating upon the scope of section 2(47)(v), their Lordships observed as follows:

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Page 43 of 96 "Under Section2(47)(v), any transaction involving allowing of possession to be taken or retained in part performance of the contract of the nature referred to in section 53A of the Transfer of Property Act would come within the ambit of Section 2(47)(v). That, in order to attract Section 53A, the following conditions need to be fulfilled. There should be contract for consideration; it should be in writing; it should be signed by the transferor; it should pertain to the transfer of immovable property; the transferee should have taken possession of property; lastly, transferee should be ready and willing to perform the contract. That even arrangements confirming privileges of ownership, without transfer of title, could fall under section 2(47)(v)."

7.11 Their Lordships, having made the above observations, took note of the fact that section 2(47)(v) was introduced in the Act w.e.f. A.Y 1988-89 because prior thereto, in most cases, it was argued on behalf of the assessee that no transfer took place till execution of conveyance. It was also noted by their Lordships that, in this scenario, assessee used to enter into agreements for developing properties with the builders and under arrangement with the builders, they used to confer privileges of ownership without executing conveyance, and to plug that loophole, section 2(47)(v) came to be introduced in the Act.

7.12 It is important to bear in mind that section 2(47)(v) refers to “possession to be taken or retained in part performance of the contract of the nature referred to in section 53A of the Transfer of Property Act" and in the case before Hon’ble Bombay High Court, there was no dispute that the conditions of section 53A were satisfied. In other words, the proposition laid down by their Lordships can at best be inferred as that when conditions under section 53A are satisfied, and when the assessee enters into a contract which is a development agreement, in the garb of agreement of sale, it is the date of this development agreement which is material date to decide

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the date of transfer. However, by no stretch of logic, this legal precedent can support the proposition that all development agreements, in all situations, satisfy the conditions of section 53A which is a sine qua non for invoking section 2(47)(v).

7.13 In order to invoke the ’principles’ laid down by the Hon’ble Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia (supra), it is, therefore, necessary to demonstrate that the conditions under section 53A of the Transfer of Property Act are satisfied. This section is reproduced below for ready reference:

"Sec. 53A : Part performance—Where any person contracts to transfer for consideration any immovable property by writing signed by him or on his behalf from which the terms necessary to constitute transfer can be ascertained with reasonable certainty, and the transferee has, in part performance of the contract, taken possession of the property or any part thereof, or the transferee, being already in possession, continues in possession in part performance of the contract and has done some act in furtherance of the contract, and the transferee has performed or is willing to perform his part of the contract then, notwithstanding that the contract, though required to be registered, has not been registered, or, where there is an instrument of transfer, that the transfer has not been completed in the manner prescribed thereof by the law for the time being in force, the transferor or any person claiming under him shall be debarred from enforcing against the, transferee and persons claiming under him any right in respect of the property of which the transferee has taken or continued in possession, other than the right specifically provided by the terms of the contract;

Provided that nothing in this section shall affect the rights of a transferee for consideration who has no notice of the contract or of the part performance thereof."

7.14 A plain reading of the section 53A of the Transfer of Property Act shows that in order that a contract can be termed to be "of the nature referred to in s. 53A of the Transfer of Property Act" it is one of the necessary preconditions that transferee should have or is willing to perform his part of the contract. This aspect has been

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duly taken note of by the Hon’ble Bombay High when their Lordships observed as follows:

"That, in order to attract s. 53A, the following conditions need to be fulfilled. There should be contract for consideration; it should be in writing; it should be signed by the transferor; it should pertain to the transfer of immovable property; the transferee should have taken possession of property; lastly, transferee should be ready and willing to perform the contract.".

Elaborating upon the scope of expression "has performed or is willing to perform", the oft quoted commentary "Mulla—The Transfer of Property Act" (9th Edn.: Published by Butterworths India), at p. 448, observes that:

"The doctrine of readiness and willingness is an emphatic way of expression to establish that the transferee always abides by the terms of the agreement and is willing to perform his part of the contract. Part performance, as a statutory right, is conditioned upon the transferee’s willingness to perform his part of the contract in terms covenanted thereunder.

Willingness to perform the roles ascribed to a party in a contract is primarily a mental disposition. However, such willingness in the context of s. 53A of the Act has to be absolute and unconditional. If willingness is studded with a condition, it is in fact no more than an offer and cannot be termed as willingness. When the vendee company expresses its willingness to pay the amount, provided the (vendor) clears his income tax arrears, there is no complete willingness but a conditional willingness or partial willingness which is not sufficient.

In judging the willingness to perform, the Court must consider the obligations of the parties and the sequence in which these are to be performed......"

7.15 We are in agreement with the views so expressed by the Hon’ble Bombay High Court. It is thus clear that ‘willingness to perform’ for the purposes of section 53A is something more than a statement of intent; it is the unqualified and unconditional willingness on the part of the vendee to perform his obligations. Unless the party has performed or is willing to perform his obligations under the contract, and in the same sequence in which these are to be performed, it cannot be said that the provisions of section 53A of

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the Transfer of Property Act will come into play on the facts of that case. It is only elementary that, unless provisions of section 53A of the Transfer of Property Act are satisfied on the facts of a case, the transaction in question cannot fall within the scope of deemed transfer under section 2(47)(v) of the IT Act. Let us therefore consider whether the transferee, on the facts of the present case, can be said to have ‘performed or is willing to perform’ his obligations under the agreement.

7.16 At this point, we will go through the clause No.5 & 5.1 of the development agreement dated 2.9.2010 as enumerated therein, which itself states that no possession of property has been given through the impugned development agreement. The development agreement is only for granting license to enter property and start development activity, thus, as a result of this provision of section 2(47)(v) of the Act have no application. This falls within the purview of section 53A of the T.P. Act and such part performance has been defined as “Transfer” u/s 2(47) of the Act. The A.O. himself aware of the fact that the possession of the property was not given vide development agreement and valid consideration was also not received by the assessee and only permissive possession of the property was given by the assessee to the developer in these assessment years. The A.O. apparently posted on the basis that mere grant of license, coupled with entering of development agreement was enough to invoke deemed transfer u/s 2(47)(v) of the Act. That is clearly an erroneous estimation and an action based on such a fallacious estimation cannot be sustained by law. The provisions of deemed transfer u/s 2(47)(v) of the Act could not have been invoked on the facts of present case. The assessee received only an amount of Rs.5 crores as refundable deposit vide the development agreement dated

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13.03.2005. Even the assessee received the advances consequent to this development agreement, yet the assessee not expected to pay the tax on the sales consideration so received and it cannot be said that development agreement cannot be therefore be said to be in nature of contract referred to in section 53A of the TP Act. It cannot, therefore, be said that the provisions of section 2(47)(v) of the Act will not apply in a situation before us. The argument of the Ld. D.R. is that the income of the assessee has to be assessed as business income as the assessee received sales consideration and that amount to be offered to tax under head “business income”. In our opinion, income may accrue to assessee without actual receipt of the same. Similarly, assessee actually received the amount without accrual of the income. If the assessee acquires the right to receive the income, the income can be said to have accrued to him, though it may be received later, on its being ascertained. The basic conception is that he must have acquired a right to receive the income. There must be a debt owed to him by somebody. There must be, as is otherwise expressed, debitum in praesenti, solvendum in futuro (26 ITR 27). In other words, unless and until a debt is created in favour of the assessee by somebody, it cannot be said that he has acquired a right to receive the income or that income, as accrued to him. It is no doubt that accrual of income does not depend upon its ascertainment or the accounts cast by assessee. The accounts may be made by it at a much later date that depends upon the convenience of the assessee and also upon the exigencies of the situation. Amount of the income, profit or gains may then be ascertained later on the accounts being made up. But when the accounts are thus made up the income, profits & gains ascertained as a result of the accounts are referred back to the chargeable accounting period during which they have accrued or arisen and the assessee is liable to tax in

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respect of the same during that chargeable accounting period. It is not how an assessee treats any monies received. But what is the nature of the receipts, which is decisive of its being taxable. Income tax is a levy on income. No doubt, the IT Act takes into account two points of time on which liability to tax is attracted. Namely, the accrual of the income or its receipt “but the substance of the matter is the income”. If income does not result at all, there cannot be a tax even though any book keeping an entry made about an income, which does not materialize. Where income as, in fact, been received and in subsequently given up in such situation that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said to have resulted at all there is obviously neither accrual nor receipt of income, even though an entry to that effect might in certain circumstances have been made in the books of accounts. Mere book keeping entry cannot be income unless income has actually received. In our opinion, legal consequences of the transaction must be kept in mind and should be taken as an acting factor for arriving at a decision from the point of view of the income tax as well. This is because of the fact that what is sought to be taxed under income tax act is the commercial profit and not the theoretical or notional income unless the statute otherwise provides for imposing of tax on the notional basis by the legislative fiction. If the income does not result at all, there cannot be a tax even though in book keeping an entry made about a hypothetical income, which does not materialize. As we have already held earlier that in these assessment years, it cannot be said that transfer has been took place in terms of section 2(47)(v) of the Act. It cannot be said that any income accrued to the assessee once we hold that there is no income accrued to the assessee, there is no question of taxing any amount either as capital gain or as business income,

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which issue not required to be answered at this stage as the income is not accrued in these assessment years. The quantum of applicability of Accounting Standard-9 with regard to revenue recognition is not required to be decided at this stage.

a) In our opinion, this issue has been decided in favour of the Assessee by several decisions of the jurisdictional Hon'ble High Court of Karnataka wherein it has been held that the method of accounting followed by the Assessee which is the project completion method of recognizing revenue is permitted in law and can be followed. The decisions of the Hon'ble Court High Court of Karnataka on this issue are as under -

CIT v. Banjara Developers & Constructions P. i) Ltd. (2020) 425 ITR 673 (Kar.) ii) CIT v. Prestige Estate Projects P. Ltd. (2020) 116 taxmann.com 554 (Kar.) iii) CIT v. S.N.Builders & Developers (2021) 431 ITR 241 (Kar.) iv) ACIT v. S.N. Builders & Developers in ITA No.739 of 2018 dt. 20.01.2021 (Kar.) v) DCIT v. Varun Developers in ITA No.198 of 2014 dt. 08.02.2021 (Kar.) DCIT v. Esteem Classic in ITA No.842 of 2018 vi) dt. 22.03.2021 (Kar.) In our opinion, the decision of the higher authority is required b) to be followed and further the decision of the Hon'ble Jurisdictional High Court of Karnataka is to be followed' as a judicial proprietary demand.

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c) The learned Assessing Officer has come to the conclusion that the Assessee ought to have recognized income by way of percentage completion method on the basis of the revenue recognition policy adopted by the developer. In our opinion, the land owner i.e, the Assessee and the developer are two independent assesses in the scheme of the Act. Merely because the developer has followed the percentage completion method the land owner need not follow the same as each of them are independent assessable entities under the scheme of Act and are entitled to choose the method that is preferred by them.

d) It has to be noted that the expert advisory committee of the Institute of Chartered Accountants of India have opined that the provisions of the Accounting Standard - 7 - Construction Contracts are not applicable developers and that the provisions of Accounting Standard - 9 - Revenue Recognition would apply to them

e) In our opinion, no possession has been granted to the prospective customers. The purchasers do not have a right to obstruct the development. It is also be noted that if the prospective purchases do not make the payments, the agreement can be terminated. The clauses in the agreements with customers, which clearly states that the parties confirm that the owner shall retain legal possession, domain and control over the property till the same is developed and sold either in whole or in parts to prospective purchasers as provided in the agreement.

As per clause 2 & 3 of the development agreement at page no.5 f) & 6 of JDA dated 13.03.2005 which clearly states as follows:-

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“Clause 2 PLANS/LICENSES

The developer shall prepare, submit and obtain sanction of the plans for construction of the Project from the Bangalore Development Authority and/or the appropriate sanctioning authority. The owner shall co-operate with the Developer in obtaining the sanction of Project plans and other approvals. The Developer shall be entitled to make marginal modifications in the plan, design and layout depending on the exigencies during the execution of construction work without materially affecting the entitlement of the Owner. The Developer shall ensure that maximum permissible F.A.R. is obtained and construction done accordingly. The Developer shall have the absolute discretion in matters relating to the method, manner and design of construction without affecting the design basically. The owner may be consulted and kept informed in this regard. Submission of plans and obtaining sanctions shall be completed within six months from this date and construction shall be commenced thereafter.

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proposition as even the Guidance note states that revenue should not be recognized till such time legal title is validly transferred to the buyer.

7.18 In our opinion, the assessee has been following project completion method of recognition of revenue and this system of accounting has been followed by from year to year which can be seen from the assessment order in assessment year from 2014-15 passed u/s 143(3) dated 19.5.2015. Thus, it was the submission ld. AR that it is not open to the department to change the method of accounting in the middle of the period of completion of the project even percentage competition method is applicable. He submitted that rule of consistency has to be followed. For this purpose, he relied on various judgements.

8.1 In view of the above, the proposition of the learned Assessing Officer that the income offered in the subsequent years is income of the impugned assessment year will result in double taxation which is impermissible in law.

8.2 We place reliance on the decision of the Hon'ble Supreme Court in ITO v. Bachu Lal Kapoor (1966) (60 ITR 74) (SC), wherein held that:

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Page 53 of 96 “A HUF is a separate unit of assessment. It is a distinct assessable entity. It is a “person” within its definition in the Act. It is liable to be assessed to income-tax in respect of its income. A member of that HUF is not liable to pay any tax in respect of any sum which he receives as a member of that family out f the income of that family. If the said HUF has escaped assessment for any year, the ITO, subject to the conditions laid down in section 34(1) of the 1922 Act, may issue a notice thereunder calling upon the said HUF to submit a return of its income for that year and proceed to assess it in terms thereof. It is manifest from a combined reading of the said provisions of sections 3, 14, 2, 22 and 34 of the 1922 Act that the ITO can issue a notice to a HUF under section 34 of the 1922 Act on the ground that it has escaped assessment.

In the counter-affidavit filed by the ITO in the High Court, it was stated that he had reason to believe, in consequence of information in his possession, that income, profits or gains chargeable to income-tax had escaped assessment. His information was that, notwithstanding the compromise decree, the members of the family were living together had joint mess and the business was run by the assessee. In short, the case of the revenue was that the compromise was a make-believe one and the family in fact continued to be a joint Hindu family.

The exercise of the option to do one or other of the two alternatives open to an officer assumes knowledge on his part of the existence of two alternatives. If the case of the revenue be true, the ITO at the time he assessed the individual members of the family had no knowledge that a united joint family existed, he presumably proceeded on the basis that the said family had really ceased to exist under the terms of the compromise decree. This was, therefore, not a case of election between two alternative units of assessment, but an attempt to bring to tax the income of an assessable entity which had escaped assessment. That apart, under section 3 of the 1922 Act, in the matter of assessment, there is no question of any election apart, under section 3 of the 1922 Act, in the matter of assessment, there is no question of any election between a HUF and a member thereof in respect of the income of the family. If a HUF exists, under section 3 of the 1922 Act, the ITO has to assess it in respect of its income. Indeed, under section 14(1) of the 1922 Act, any part of the income reeived by its members cannot be assessed over again. While section 3 of the 1922 Act confers an option on the ITO to assess either the association of persons or the members of the association individually, no such option is conferred on him thereunder in the case of a HUF, as its existence excludes the liability of its members in respect of the income of the former received by the latter.

It was true that the Act does not envisage taxation of the same income twice over “one passage of money in the form of one sort of income”. It is equally true that section 14(1) of the 1922 Act expressly debars the imposition of tax on any part of the income of a HUF received by its members. The fact that there is no provision in the Act dealing with a converse position does not affect

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Page 54 of 96 the question, for the existence of such a converse position is legally impossible under the Act. So long as the HUF exists, the individuals thereof cannot separately be assessed in respect of its income. None the less, if, under some mistake, such income was assessed to tax in the hands of the individual members, which should not have been done, when a proper assessment was made on the HUF in respect of that income, the revenue had to make appropriate adjustments; otherwise, the assessment made in respect of that income on the HUF would be contrary to the provisions of the Act, particularly section 14(1) of the 1922 Act. Therefore, if the assessment proceedings initiated under section 34 of the 1922 Act culminates in the assessment of the HUF, appropriate adjustments have to be made by the ITO in respect of the tax realised by the revenue in respect of that part of the income of the family assessed on the individuals of the said family. To do so was not to reopen the final orders of assessment, but in reality to arrive at the correct figure of tax payable by the HUF. The only question that arises at the time the ITO proposes to take proceedings under section 34 of the 1922 Act is, whether the income has escaped assessment or has been under assessed in the hands of the person against whom the said proceedings are initiated. At this stage, the question of resolving the conflict between the proposed assessment and an earlier assessment made on a wrong person does not arise. Therefore, the High Court went wrong in holding that the ITO had no jurisdiction to initiate proceedings under section 34 against the assessee as the karta of a HUF. Further, the High Court had not expressed its opinion on the question based upon section 25 of the 1992 Act. In the result, the order of the High Court was set aside and the appeal was remanded to the High Court for disposal in accordance with law.”

8.3 In our opinion, the entire issued is revenue neutral and consequently no addition could have been in the impugned assessment year. For this proposition, we place reliance on the following decisions –

CIT v. Excel Industries Ltd. (2013) 358 ITR 295 (SC) i) CIT v. Bilhari Investment (P.) Ltd 299 ITR 1(SC) ii)

8.4 It is a settled position of law that department cannot collect tax twice on the very same income and observation of the AO is absolutely contrary to the scheme of the Act that income can only' be taxed once more so when the revenue has accepted the income determined using the same method in two

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earlier assessment years and once subsequent assessment year. Further the information has been given to the Investigation Officer during the course of investigation. Therefore, it is more than reasonably correct to follow the same method of revenue recognition as there is an implied formidable fortified concurrence of the revenue on the method adopted by the assessee. The observation of the AO is further not under the spirit and the scheme of the Act.

8.5 It is needless to add that the department is excepted to assist the assesses in computing taxable income as per the provisions of the Act as enunciated by the CBDT in Circular No. No. 14 (XL-35) of 1955, dated 11.04.1995 and amplified by the decision of the Hon'ble Karnataka High Court in the case of Rajeshwari Cotton Ginning & Pressing Industries v. ALIT (2017) 88 taxmann.com 463 (Kar.). Therefore, the officers of the department ought to have atleast guided the assessee in offering income correctly. Failure to even suggest the same during the course of enquiry and therefore, the statement of the CIT(A) that the assessee was not directed to offer income in subsequent years is absolutely not within the spirit and intent of the Act and also unsustainable in law.

8.6 It was noted that Joint Development agreement and the method of revenue recognition of the assessee are details/ information which were already available with the department during the course earlier assessment proceedings and other proceedings and the department has accepted the method of computation of income from the Habitat project as declared by the assessee i.e. completion contract method. On same set of facts, now onwards, the department wanted to change the method of

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computation of income by following percentage contract completion method instead of project completion method. As regards the argument of ld DR that advance received from the prospective buyers vide sale agreement represent the receipts in respect of the contracts undertaken, it was found that this was not supported by facts and figures. The assessee is not a contractor who has undertaken the construction activity. On the other hand, is a land owner who has given the land for construction to M/s. G-Corp Homes Pvt. Ltd.. He is getting his share of constructed area and against which assessee entered into sale agreement with various parties. The sale agreement is different from sale deed. In case of sale deed, the right in property transferred from seller to buyer immediately. However, it does not transfer in case of sale agreement. Sale deed is an executed contract. On the other hand, sale agreement is executory contract. In case of sale deed, seller can sue the buyer for breach of the contract. However, in the case of sale agreement, seller can sue the buyer only for damages but not for the price. In case of sale, if the property is destroyed, loss is borne by the buyer himself as he is the owner of the property. In case of agreement to sell, loss falls on the seller even though possession in the hands of buyer. Therefore, the contention that the amounts received from the prospective buyer through agreement to sell should be treated as “sale” was fallacious. The facts in the instant case, showed that there was no construction work done by assessee itself and it was the developer i.e. M/s. G-Corp Homes Pvt. Ltd. and there was no handing over of the constructed area by present assessee to prospective purchasers. What was received from the prospective buyers was in the nature of advance, therefore, it cannot be considered as amount received towards absolute transfer of price of flats intended to be sold. The system of

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accounting of working out profits on completed contract basis was an accepted system of accounting and such system had been followed consistently in the past by the assessee, which had been accepted by the department in earlier years, therefore, there was no justification, whatsoever to reject this system by invoking the provisions of section 145 of the Act and making estimate of profit by AO.

8.7 At this stage, it is appropriate mention the Third member decision in the case of JCIT Vs. Magnum International Trading Company Ltd. (84 ITD 113) (Third Member) (Del.) wherein held that: “Assessee following project completion method, AO not justified in rejecting the method midway and estimated profit more so on when it was not permissible for the assessee or for the revenue to correctly work out the profit by changing the method of accounting in midway and make estimate of the income from ongoing contract for which there is no specific allocation of expenditure.”

8.8 In the case of Haware Constructions (P) Ltd. Vs. ITO 30 CCH 425 (Mum. Trib) wherein held that:

“Assessee builder having regularly employed project completion method which is an accepted method of accounting and the AO having accepted the same in the preceding assessment year, there is no justification to reject the said method to apply the percentage completion method when the assessee has offered the income in the year of completion of the project.”

8.9 In the case of ACIT Vs. National Builders 137 ITD 227 (Ahd Trib) wherein held that:

“AS-7 has also made a provision that advances received from customers may not necessarily reflect work performed. Outcome of a contract cannot be estimated reliably, therefore, no profit can be recognized. Clauses of agreement dated 1st March- 2002 prescribe that lease of units agreed to be allotted by assessee to intending allottees become legally en forcible only upon GSRTC approving allotment and uptill that time, there would be no legally tenable transaction

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Page 58 of 96 by appellant in favour of intending lessee. Such approvals have in fact been granted by GSRTC in F.Y. 2004-05 relevant for A.Y. 2005-06 onwards. Vide order dated 18/5/2004 District Collector has restrained assessee from leasing in any manner whatsoever any of shop in GSRTC project. Therefore, AO has incorrectly applied AS-7 on assessee. Since the assessee can be termed as a contractor as also a developer, therefore Revenue can be recognized in terms of AS-9 guidelines. As per statement made by assessee, completion certificates of respective projects were obtained on 15.3.2005, 10.8.2004 and 31.12.2004. AO is empowered to examine this aspect and in view of guidelines and position of law narrated hereinabove, can take appropriate action prescribed under law. It was wrong on part of AO to assess income irrespective of year of completion of project when amount received in advance has not reached certainty and that too AO has merely estimated 10% as recognition of Revenue of construction contract, without assigning any specific basis of such an estimation, such an estimation is not approved. Order of CIT(A) is upheld - Appeals dismissed.”

8.10 In the case of DCIT Vs. Maxworth Infrastructure P. Ltd. 63 CCH 151 (Del.) that: “Accounting Standard AS-7 relied upon by the Assessing Officer is applicable strictly in the case of construction contracts only. Further, the assessee is following consistently this method of revenue recognition in prior years as well as in subsequent years and which has been accepted by the revenue and thus rule of consistency also demand that in the year under consideration the assessing officer is not justified in deviating the consistent approach of the Department. In view of above, there is no error in the order of the CIT(A) on the issue in dispute. Revenue’s appeal dismissed.”

8.11 In the case of DCIT Vs. Ankit Chirag Developers Pvt Ltd. 40 CCH 18 (Jodh) (Trib). held that

“On perusal of clause 10 & 11 of AS-9 it is noted that in the appellant’s case the retractions involving of sale of good, the performance can be regarded as achieved when conditions laid down in clause 11 are fulfilled. In this connection it may be noted that the appellant has not transferred to the buyers the property i.e. flats in as much as significant risk and rewards of ownership have not been transferred. No sale deeds of sale of flats or any legally enforceable documents have been executed by the appellant. Though the AO has mentioned in the assessment order that sale agreements were executed but such findings appear to be factually incorrect in as much as in assessment order or in subsequent remand report there is no reference of any sales agreement. The appellant has also denied to have executed any sale agreement for sale of flat. It may also be noted that the appellant during assessment proceedings, vide written submission dated 8.1.2011 (para 2) also brought to the notice of the AO that no sales was

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Page 59 of 96 made during the A.Y. under consideration as alscs that even during search proceedings, no sale agreement were found which may be-said to be of legally enforceable. Therefore in the absence of any sale agreement or execution of any sale deed it cannot said that accounting standard AS-9 for revenue recognition was applicable in the appellant's case. It may further be stated that the appellant company in earlier A.Y. followed project completion method and in the background of above discussion when AS-7 and AS-9 are prima facie not found to be applicable therefore there was no basis of determination of income by percentage completion method. (Paras 8) Conclusion: In the absence of any sale agreement or execution of any sale deed it cannot said that accounting standard AS-9 for revenue recognition was applicable in the appellant’s case. Conclusion: Rejection of books of accounts by application of provisions of sec. 145(3) was not justified when there was nothing on record which may indicate that any item of income was suppressed or any item of expenditure was suppressed or inflated.”

8.12 In the case of S.K. Properties Vs. ITO 162 ITD 419 (Bang.) (Trib) wherein held that:

“Appellant firm had recognized the income in respect of sale of plots by adopting Completed Contract Method, whereas, the Assessing Officer is of the view that income should be offered to tax received on year to year basis based on the stage of receipt of consideration, irrespective of the fact that the title in the plots have been passed on the buyer or not. It is an undisputed fact that the plots forms a part of stock-in-trade in the business of appellant firm and are immovable properties. The title in the immovable property can be passed on only in terms of the provisions of Transfer of Properties Act. (Para 6) Provisions of section 2(47) of the Act have no application to the transactions of stock-in-trade. In this case, the stock-in-trade in immovable property and the title in immovable property can be transferred or alienated in accordance with the provisions of the Transfer of Properties Act. The right, title or interest in the immovable property can be transferred only by way of registering the conveyance deed executed in this behalf. Even the accounting standard 9 dealing with the recognition of income also lays down that the income in respect of transfer of immovable property can be recognized only when the risks, rewards and ownership of the property is transferred to the buyer. Therefore, the matter requires fresh examination by the Assessing Officer in the light of the above position of law. Therefore, court remand this matter back

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Page 60 of 96 to the file of the Assessing Officer with a direction that the income in respect of sale of plots can be recognized only in the year in which conveyance deed executed is registered in favour of the buyers and to allow the development expenditure incurred as expenditure or the expenditure likely to be incurred on the plots sold as expenditure. And this direction also goes in line in consonance with the provisions of accounting standard 9 which clearly lays down that matching is required to be done on accrual basis in respect of the income offered to tax and upheld by Hon’ble Supreme Court in the case of CIT Vs. Taparia Tools Ltd.”

8.13 In the case of Prestige Estate Projects (P) Ltd. Vs. DCIT 129 TTJ 680 (Bang) (Trib) wherein held that:

“The appellant undertakes construction activity for those persons to whom it intends to sell the super-built area along with undivided share of land in a project which it is developing as a developer. Hence, the assessee is not a construction contractor and revised AS-7 was considered as not applicable. Accounting Standard-7 has not been specified by the Central Government under s. 145(2). Hence, the AD could not have rejected the accounts under s. 145(3) on the ground that the assessee has not followed the prescribed method of accounting. As per s. 145(1), income is to be computed in accordance with system of accounting regularly employed by the assessee. The assessee was employing regularly the project completion method and the project completion method is an accepted method of accounting. The assessee has changed the method of accounting from project completion method to percentage completion method in the subsequent year. Hence, the change in this year will be revenue neutral. Moreover, the assessee was under the bona fide belief that it was adopting a method of accounting, which was applicable to it as per the expert committee report of the ICAI. This bona fide belief is evident from the fact contained in letter dt. 3rd Sept., 2007 addressed to AO. In view of this, revised AS-7 cannot be applied in the case of the assessee. —CIT vs. Khoday Distilleries Ltd. (ITRC Nos. 19, 20 & 21 of 1993) and H.M. Constructions vs. Jt. CIT (2004) 90 TTJ (Bang) 510 : (2003) 84 ITD 429 (Bang) followed; CIT vs. Bilahari Investment (P) Ltd. (2008) 215 CTR (SC) 201 : (2008) 3 DTR (SC) 329 : (2008) 299 ITR 1 (SC) relied on.

(Paras 3.17 to 3.21)

In case the revised AS-7 is to be applied then the opening inventories are also to be valued as per revised AS-7 though revised AS-7 is not applicable in the case of the assessee. Also on the principle of consistency, the Revenue should have accepted the method of accounting adopted by the assessee as the same was being followed for the last so many years. When the guidance note provided that revised AS-7 is applicable to real estate developers, the assessee

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Page 61 of 96 has itself changed the method of accounting. Hence the AO is directed to accept the project completion method of accounting for the year under reference.—Motor Industries Company Ltd. vs. Asstt. CIT (ITA Nos. 335 & 336/Bang/2005, dt. 12th June, 2008) followed.

(Para 3.25)

Conclusion:

Assessee developer having regularly employed project completion method which is an accepted method of accounting, and the Central Government having not notified AS-7 under s. 145(2), AO could not reject the accounts under s. 145(3) on the ground that the assessee had not followed the percentage completion method.”

8.14 In the case of CIT Vs. Banjara Developers & Constructions P. Ltd. 425 ITR 673 (Karn.) wherein held that: We have considered the submissions made on both the sides and have “7. perused the record. Section 145 of the Act deals with method of accounting. Section 145(1) provides that income chargeable under the head 'profits and gains of business or profession' or 'income from other sources' shall subject to provisions of sub-section (2) be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. It is noteworthy that section 145 came to be amended w.e.f. 1-4-1987 and has not been given retrospective operation. The supreme court in the case of Bilahari Investments (P.) Ltd. supra has held as under: "Every assessee is entitled to arrange its affairs and follows the method of accounting which the department has earlier accepted. It is only in those cases where the department records a finding that the method adopted by the assessee results in distortion a profits that the department can in substitution of the existing method." 8. In the instant case, admittedly the assessee is following mercantile system of accounting and as per notes to the accounts, the assessee is following completed contract method of accounting for contracts. The aforesaid method of assessment has been accepted by the department in the past and therefore, in view of law laid down by the Supreme Court in Bilahari Investments Pvt. Ltd., the Commissioner of Income-tax (Appeals) as well as the tribunal has rightly held that there was no justification on the part of the assessing officer to change the earlier method adopted by the assessee and to determine the income on estimate basis. 9. The submission made on behalf of the revenue that the directions issued by a bench of this court vide order dated 23-9-2010jn I.T.A.No.36/2006 appears to be attractive at the first blush but on careful scrutiny of the order it is evident

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Page 62 of 96 that the tribunal has referred to the decision of this court in the case of Skytop Builders (P.) Ltd. (supra) as well as the decision of the supreme court in Bilahari Investments (P.) Ltd. supra and has held that the assessee was following completed contract method which was accepted by the department in .-the past as well and therefore, there is no justification for the assessing officer to change the same. For the aforementioned reasons the submission made on behalf of the revenue cannot be accepted. Similarly, the contention that the controversy involved in this case is covered by decision of this court dated 9-9-2014 rendered in I.T.A.No.835-837/2008 is concerned, suffice it to say that substantial questions of law involved in the aforesaid appeals were entirely different. By reading the order of the tribunal as a whole, it is evident that the tribunal has taken note of the effect of Section 145 of the Act. Therefore, the aforesaid submission made on behalf of the revenue also does not deserve acceptance. 10. In view of preceding analysis, the substantial question of law framed by this court is answered against the revenue and in favour of the assessee. In the result, we do not find any merit in this appeal, the same fails and is hereby dismissed.”

8.15 In the case of CIT Vs. Prestige Estate Projects P. Ltd. 440 ITR 343 (Karn.) wherein held that “10. In the instant case, assessee entered into a Development Agreement with M/s. Karnataka Realtors Private Limited, under which agreement the assessee was to develop the property and after development of the property, the owner and the developer were entitled to a specified percentage of super built area and both were free to sell the super built area allotted to their respective shares before construction of the built up area fallen to the share of the assessee, it (assessee) entered into agreement with the proposed buyer to construct the portion as per their specification. In other words, construction is undertaken by the assessee on behalf of the proposed buyer. However, for the purposes of stamp duty payable on the sale of undivided share of land sold to the buyer, only value of the land is taken and assessee had followed consistently this method of accounting to declare the profit namely, on project completion method as per the provisions of the Companies namely, section 211(3A) the Profit and Loss Account and balance sheet of the company has to comply with the Accounting Standard. As per proviso to section 211(3C), Standards of accounting specified by the ICAI are deemed to be Accounting Standard until the Accounting Standards are prescribed by the Central Government. In other words, the companies are required to adopt and follow the Accounting Standards as prescribed by ICAI. In the event of such prescribed Accounting Standards are not being followed, then, such companies are required to disclose in its Profit and Loss Account and Balance sheet the reasons as prescribed under section 211(3B) of the Companies Act. To put it differently, the

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Page 63 of 96 Companies Act also provided for deviation from the Accounting Standards also. There is no dispute to the fact that AS-7 effective from 01.04.2003 is applicable to all construction contractors. The objective of AS-7 reads: "The objective of this Standard is to prescribe the accounting treatment of revenue and costs associated with construction contracts. Because of the nature of the activity undertaken in construction contracts, the date at which the contract activity is entered into and the date when the activity is completed usually fall into different accounting periods. Therefore, the primary issue in accounting for construction contracts is the allocation of contract revenue and contract costs to the accounting periods in which construction work is performed. This Standard uses the recognition -criteria established in the Framework for the- -and -Presentation of Financia- Statements-to Preparation determine when contract revenue and contract costs should be recognized as revenue and expenses in the statement of profit and loss. It also provides practical guidance on the application of these criteria." Thus, assessee-company which is required to follow Standard as prescribed by ICA' will have to necessarily take into account the reply furnished by the Institute for the Expert Committee, which reads as under: --* (i) the seller of the goods has transferred to the buyer the property in the goods for a specific price or on significant risks and rewards of ownership has been transferred to the buyer and the seller retains no effective control of the goods transferred to a degree usually associated with ownership; (ii) no significant uncertainty exists regarding amount of consideration that has been derived from the sale of the goods. In the instant case, it has been noticed by the appellate Tribunal that assessee was in the activity of projects and was not a construction contractor. Thus, the revised AS-7 would be applicable to an enterprise undertaking construction activities on their own account as a venture of commercial nature. Whereas, the assessee undertakes construction activities for those persons to whom it intends to sell super built area along with undivided share of land in a project which it is developing as a developer. 11. There cannot be any dispute to the fact that every assessee being entitled to arrange its affairs and follow the method of accounting, which the Department has earlier accepted. Under similar circumstances as obtained from the facts on hand, Hon'ble Apex Court in the case of CIT v. Bilahari Investment (P) Ltd. [2008] 168 Taxman 95/299 ITR 1 has held:

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Page 64 of 96 "Recognition/identification of income under the 1961 Act is attainable by several methods of accounting. It may be noted that the same result could be attained by any one of the accounting methods. The completed contract method is one such method. Similarly, the percentage of completion method is another such method. Under the completed contract method, the revenue is not recognized until the contract is complete. Under the said method, costs are accumulated during the course of the contract. The profit and loss is established in the last accounting period and transferred to the profit and loss account. The said method determines results only when the contract is completed. This method leads to objective assessment of the results of the contract. On the other hand, the percentage of completion method tries to attain periodic recognition of income in order to reflect current performance. The amount of revenue recognized under this method is determined by reference to the stage of completion of the contract."

8.16 In the case of SN Builders & Developers 431 ITR 241 (Karn) “7. Now we may deal with the second substantial question of law. The Tribunal relied upon the decision in the case of Prestige Estate Projects (P.) Ltd. (supra), rendered by it and held that for the Assessment Year 2005-06 the Accounting Standard 7 was not applicable to the real estate developers. Therefore, percentage completion method cannot be thrust upon the assessee and the assessee was right following the project completion method of accounting as per Accounting Standard 9. The aforesaid decision has been upheld by this Court in Prestige Estate Projects (P.) Ltd. (supra). Besides it, once the first substantial question of law is answered in favour of the assessee, the second substantial question of law is otherwise even rendered academic. The Institute of Chartered Accountants has issued a clarification wherein it has been clarified that revised Accounting Standard 7 is not applicable to the enterprises undertaking construction activities. Therefore, the second substantial question of law is also answered against the revenue and in favour of the assessee.”

8.17 In the case of SN Builders & Developers 739 of 2018 dated 20.1.2018 (Karn) wherein followed the earlier judgement in 431 ITR 241 cited (supra).

8.18 In the case of DCIT Vs. Varun Developers (440 ITR 354) (Karn.)

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Page 65 of 96 4. We have considered the submissions made by learned counsel for the parties and have perused the record. The first three substantial questions of law are answered in favour of the assessee for the reasons assigned by learned Senior counsel for the assessee in the judgments referred to supra. So far as fourth substantial question of law is concerned, it is pertinent to note that under section 145(1) of the Act, the income chargeable under the head Profits and Gains of Business shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. The general provision is subject to accounting standards that the Central Government may notify. The assessee is a builder and developer and not a construction contractor simplicitor. Accounting Standard 7, titled construction contracts is applicable only in case of contractors and does not apply to the case of developers and builders which is evident from opinion rendered by expert advisory committee of ICAI. It is pertinent to note that the assessee had offered the income for. Assessment Year 2007-08 and no income from the project was offered for the Assessment Year 2007-08 on the basis of project completion method and that either method of accounting finally lead to the same results in terms of profits and therefore, revenue neutral. In view of preceding analysis, the fourth substantial question of law is also answered against the revenue and in favour of the assessee. In the result, the appeal fails and is hereby dismissed.”

8.19 In the case of DCIT Vs. Esteem Classic in ITA No.842 e of 2018 dated 22.3.2021 (Karn) “8. We have considered the submissions made on both sides and have perused the afore-mentioned decisions carefully. On perusal of the afore-mentioned decisions referred to supra rendered by this Court in the case of PRESTIGE ESTATE PROJECTS, BANJARA DEVELOPERS & CONSTRUCTIONS (P) LTD., VARUN DEVELOPERS, S.N. BUILDERS & DEVELOPERS IN ITA 393/2014 AND ITA 739/2018 as well as the decisions of the Hon’ble Supreme Court in EXCEL INDUSTRIES and in BILAHARI INVESTMENTS supra and taking into account the fact that the Revenue itself has recognized the completed contract method for computation of the subsequent Assessment years, that is 2013-2014 and 2014-2015, we answer the substantial questions of law against the Revenue and in favour of the assessee.

In the result, the appeals preferred by the Revenue fail and are hereby dismissed.”

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Page 66 of 96

8.20 In the case of Investment Ltd. Vs. CIT reported in (1970) 77 ITR 533 (SC), Hon’ble Supreme Court held as under:- "assessee is free to employ for the purpose of his trade, his own method of keeping accounts, and for that purpose to value his stock-in-trade either at cost or at market price. A method of accounting adopted by the trader consistently and regularly cannot be discarded by departmental authorities on the view that he should have adopted a different method of keeping accounts or of valuation. The method of accounting regularly employed may be discarded only, if, in the opinion of taxing authorities, income of the trade cannot be properly deduced there from (as per provisions of 1922 Act in force at that time, presently only if case falls in sub section (3) of section 145)". 30. Further in another judgment of Hon'ble Supreme Court in the case of CIT V/s Krishna Swamy Mudiliar reported in (1964) 53 ITR 122 (SC), their Lordship's of Apex court while dealing provisions of section 13 of 1922 Act (the provisions of which are in pari-materia of section 145 of 1961 Act) have held as under: "Section 13 of 1922 Act merely prescribes that the computation of taxable profits shall be made according to the method of accounting regularly employed. Where in the opinion of the ITO the income, profits and gains cannot be properly deduced from the method of accounting, it is open to ITO to compute the income upon such basis and in such manner as he may determine". Comparing the provisions with the English provisions, it is held, "the only departure made by section 13 of 1922 Act from tax legislation in England is that whereas under English legislation the commissioner is not obliged to determine profits of a business venture according to method of accounting adopted by the assessee, under the Indian Income Tax Act, prima-facie, the ITO has for purposes of section 10 & 12 of 1922 act to compute income, profits and gains in accordance with method of accounting regularly employed. If, therefore, there is a system of accounting regularly employed and by appropriate adjustments from the accounts maintained taxable profits may be properly deduced, the ITO is bound to compute profits in accordance with method of accounting. but where in the opinion of ITO, the profits cannot be properly deduced from eth system of accounting adopted by assessee it is open to him to adopt a more suitable basis for computation of true profits. Their Lordships then also dealt with method of accounting and observed as under-

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Page 67 of 96 "among Indian businessmen as elsewhere, there are current two principle systems of book keeping, there is, firstly, the cash system in which record is maintained of actual receipts and actual disbursements, entries being posted when money or money's worth is actually received, collected or disbursed. There is secondly, mercantile system in which entries are posted in eth books of account on the date of transaction i.e. on the date on which rights accrue or liabilities are incurred irrespective of the date of payment. 31. Further in the decision of the coordinate Bench, ITAT Allahabad Bench in the case of Mahabir Jute Mills V/s JCIT reported in (2013) 36 Taxmann.com 587 as also on the decision in the case of CIT V/s Advance Construction Company P. Ltd reported in (2005) 275 ITR 30 (Guj), where their Lordships have reiterated position that choice of accounting method lies with that of assessee, the only caveat being that it has to show that the chosen method has been regularly followed. The section is couched in mandatory terms and the department is bound to accept the assessee's choice of method regularly employed except for the situation wherein the AO is permitted to intervene, in case it is found that true income profits and gains cannot be arrived at by the method employed by assessee. Their Lordship's further held that the position of law is further well settled that regular method adopted by assessee cannot be rejected merely because it gives benefit to assessee in

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Page 68 of 96 being any finding as contemplated u/s 145(3) on the basis of satisfaction required by that section viz., (1)about correctness or completeness of the accounts of the assessee or (2) about the fact that the assessee has not regularly employed the method of accounts provided in section 145(1) or (3) that the income has not been computed in accordance with the standards notified u/s 145(2). 33. Now it is an admitted fact based on the financial statement and audited reports for 2010-11 and 2011-12 accepted by the revenue authorities in the assessment proceedings u/s 143(3) read with respect of 153(A) of the Act that the assessee has been consistently following project completion method/completed contract method for the treatment of advances received from proposed buyers through developer JSM DPL. In the light of the above fact we observe that Hon'ble Gujarat High Court in the case of Manjusha Estates (P) Ltd Vs ITO reported in (2017) 393 ITR 644 (Guj,) adjudicating similar issue i.e. "Whether on the facts and in the circumstances of the case, the Tribunal was right in law in rejecting the project completion method which was followed consistently by the assessee and instead applying work in progress method and taxing 80 per cent. Thereon as net profit? held that "as assessee has followed the method which is consistent considering the decision in the case of CIT v Shivalik Buildwell P Ltd (2013) 40 taxmann.com 219 (Guj))(supra) and CIT Vs. Umang Hiralal Thakur (2014) 42 taxmann. com 194 (Guj)(supra) and therefore this court is are of the opinion that the view taken by the Tribunal and the Commissioner of Income Tax is not correct. Issue decided in favour of assesssee. 34. Further the Hon’ble High Court of Gujarat in the case of CIT v Shivalik Buildwell P Ltd (2013) 40 taxmann.com 219 (Guj.) dealing with the similar issue observed as follows; "On the Revenue's appeal, the Tribunal confirmed the view of the Commissioner of Income Tax (Appeals), however, on slightly different ground, namely, that the assessee being a developer of the project, profit in his case, will arise on transfer of title of the property and receipt of any advances or booking amount cannot be treated as trading receipt of the year under consideration. The Tribunal further noted that such method of accounting followed by the assessee had been accepted by the Revenue in earlier years. The Tribunal was, therefore, of the opinion that the Assessing Officer's decision to reject the book results during the year under consideration was not justified. We are of the opinion that the Tribunal committed no error. If as per the accounting standard available, the assessee was entitled to claim the entire income on completion of the project and if such accounting standard was accepted by the Revenue in the earlier years, in the present year, the Assessing Officer could not have taken a different sand and that too, without hearing the assessee".

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Page 69 of 96 35. Further in another judgment by CIT Vs. Umang Hiralal Thakur (2014) 42 taxmann.com 194 (Guj) is placed on the following paragraphs of its judgment. "In the present case, it is not the Assessing Officer's case that the appellant is not reporting or under reporting its income. In fact, I find in the subsequent assessment year, i.e. the assessment year 2007-08, the appellant has disclosed substantial income from the projects undertaken in the business proprietary concerns, viz, M/s. Neelkanth Enterprises, M/s. Ghanshyam Enterprises and M/s. Swaminarayan Enterprises. In the subsequent year, i.e. the assessment sear 2007-08 the profit declared from the projects run by these three proprietary concerns ranges from 43 per cent to 46 per cent. The Supreme Court in the case of Sanjeev Woolden Mills v. CIT (supra), has clearly held that to attract the proviso to section 145(1) of the Act, the Assessing Officer should be of the view that the accounts are correct and complete but the method employed is such that the income cannot be property deduced there from. The choice of method of accounting regularly employed by the assessee lies with the assessee but the assessee would be required to show that he assessee's regular method would not be rejected as improper merely because it gives the assessee the benefit in certain years or that as per the Assessing Officer, the other method would have been more preferable. If the method adopted does not afford true picture of profit, it would be rejected, but then such rejection should be based on cogent evidence and should be done with caution. In the present case, the appellant has declared substantial profits on the basis of project completion method in the subsequent years. In construction, the project completion method and percentage completion methods, both have also been recognized by the Central Board of Direct Taxes in the instruction No.4 of 2009 dated June 30, 2009. Therefore, the Assessing Officer is not considered justified in bringing to tax the profit of Rs.1,66,70,811 in the year under consideration, particularly when such profits have already been offered to tax by the appellant in the assessment year 2007-08. The addition of Rs.1,66,70,811 are directed to be deleted".

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Page 70 of 96 which is assessable under the Income tax Act is to be computed in accordance with the consistent system of accounting followed by the assessee unless such system, of accounting is defective and/or from such system of accounting, profit cannot be deduced. Thus, in our considered opinion, the option for choosing the system of account is with the assessee and not with the learned Assessing Officer provided the system chosen by the assessee is consistently followed by him and such system is not a defective system. In our considered view, provisions of AS7 cannot override the provisions of section 145 in so far as the computation of business income under the Income Tax Act for the purpose of determining income is concerned. In the instant case, we find that the learned Assessing Officer has brought no material on record to show that the system of accounting adopted by the assessee for the year under appeal was not consistently followed y the assessee or the system adopted was a defective system. In our considered view, even a project completion method is also a recognized system of accounting. Simply the Institute of Chartered Accountants of India has recommended the percentage completion method does not mean that project accounting or the same is a defective system of accounting. The learned Commissioner of Income- tax (Appeals) has recorded a finding after pursuing the assessment records of the subsequent years that the assessee has offered for taxation its income in the. subsequent year as per the consistent system of accounting followed by the assessee. The learned Departmental representative could not point out any error in the above finding of the learned Commissioner of Income-tax (Appeals). In view of the above discussion, we do not find any error in the order of the learned Commissioner of Income-tax (Appeals) and therefore, the same is upheld and the appeal of the Revenue is dismissed. It is reported that the decision of Appellate Tribunal in the case of Vraj Developers (supra) has attained the finality as the said decision is not challenged by the Department before higher forum. In view of the above and more particularly, when it has been found that the assessee is consistently following the accounting system of percentage completion method, which is permissible and accepted by ICAI and the Central Board of Direct Taxes with respect to construction work, it cannot be said that the learned Appellate Tribunal has committed any error/or illegality, which call for the interference of this court. We see no reason to see to interfere with the impugned judgment and order passed by the learned Commissioner of Income tax (Appeals) deleting the addition of Rs.1,66,70,881 which was made by the Assessing Officer on rejecting the accounting system on percentage completion method followed by the assessee. No question of law much less any substantial question of law arise in the present appeal. Hence, the present appeal deserves to be dismissed and is accordingly dismissed." 37. We further find the co-ordinate bench of Mumbai in the case of Prem Enterprises lncome Tax Officer (2012) 25 taxmann.com 179 (Mum.) deal with the similar issue wherein the assessee was constructing a project and was consistently following project completion method and the assessing officer rejected the method of project completion adopted by the assessee on observing that 8% of the total project has been incurred up to the relevant assessment year

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Page 71 of 96 the income should have declared on the percentage completion method. The Co- ordinate Bench decided in favour of the assessee holding that the results declared by the assessee on the basis of method of accounting consistently followed and the entire profit of the project has been offered in subsequent assessment year therefore there is no justification in rejecting the method of accounting followed by the assessee and substituting the same by adopting accounting AS-7 issued by ICAI and followed it for accounting. 38. Similarly Hon'ble High Court of Punjab & Haryana in the case of Commissioner of Income Tax (Central), Gurgaon V. Principal Officer, Hill View Infrastructure (P) Ltd (2017) 81 taxmann.com 58 (Punjab & Haryana) order dated 13.8.2015 confirmed the view taken by the Tribunal deciding in favour of the assessee relating to the issue of the project completion method adopted by the assessee vis-a-vis percentage completion method applied by us, the Assessing Officer observing as follows; "The assessee in reply to the query raised by the Assessing Officer had inter alia claimed that it had been consistently following method of booking of the revenue on the completion of the flat when full payment had been made to it by the person concerned and possession was delivered to him. It was pointed out that neither Accounting standard 9 (AS 9) or Accounting Standard 7 (AS 7) issued by the Institute of Chartered Accounts of India has been recognized by the Act and in such circumstances, there was no guidance or strict procedure for adopting a particular accounting standard under the/act and it depends upon facts and circumstances of each case. In other words, the assessee was entitled to adopt Project Completion method for determining its income which was being regularly followed by it. Though the Assessing Officer had rejected the plea of the assessee, but the CIT(A) while accepting the appeal of the assessee made the following observations:- "It is however not the AO's case that the profits have been distorted by following the project completion method. The impugned order is also silent as regards the position of the books of account. In other words the books have not been rejected, nor any defects pointed out. In the case of CIT vs. Bilahari Investment (P) Ltd (2008) 299 ITR 1 SC, the Apex Court held that the completion contract method adopted by the assessee for chit discount consistently over the years, is not required to be substituted by percentage completion method. In CIT v Manish Buildwell (P) Ltd (2011) 245 CTR 397 (Del), it was enunciated that project completion method is one of the recognized methods of accounting. That it cannot be said that the project completion method followed by the assessee would result in deferment of payment of taxes. Therefore, considering the discussion above, I do not find any merit on the part of the AO to have worked out the income by applying the percentage completion method". The Tribunal affirmed the order of the CIT(A). It was concluded that project completion method and percentage completion method are accepted standards of accounting and the assessee has option to adopt any one of them. The relevant findings recorded by the Tribunal read thus:-

"We have heard the rival contentions and perused the record. The issue arising in the present appeal before us is in relation to the method to be applied for recognizing the revenue generated by the assessee in the course of carrying on

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Page 72 of 96 the business of real estate developers. The case of the assessee is that it is following one of the accepted accounting standards approved by ICAI for recognizing the revenue generated by it. The assessee had followed project completion method which had been consistently followed by the assessee for the preceding years also. The Assessing Officer on the other hand, had applied percentage completion method to compute the income in the hands of the assessee. The Commissioner of Income Tax (Appeals) had allowed the claim of the assessee. Both the methods of accounting are i.e. project completion method and percentage completion method is accepted standards of accounting and either of the methods can be applied by the assessee. In the facts of the present case before us, the assessee had chosen to compute its income on the basis of project completion method i.e. recognizing the income on -the completion of the project and not from year to year whereas the case of the revenue was that it should account for the income as it is generated in the hands of the assessee i.e. from year to year on the basis of the work completed being relatable to the revenue generated from year to year. The Hon`ble Supreme Court in CIT Vs. Bilahari Investment (P) Ltd (supra) had held that "recognition/identification of income under the 1961 Act is attainable by several methods ,of accounting. It may be noted that the same result could be attained by any one of the accounting methods. Completed contract method is one such method. "It was further held that "Every assessee is entitled to arrange its affairs and follow the method of accounting which the Department has earlier accepted. It is only on those cases where the department records a finding that the method adopted by the assessee results in distortion of profits, the Department can insist on substitution of the existing method". Applying the above said principles to the facts of the present case we find that the assessee before us has been following the systematic method of accounting from year to year which has been accepted by the department and no defects have been pointed out by the department in the method of accounting adopted by the assessee and thus, there is no reason to reject the same. The Hon'ble Delhi High Court in CIT v Manish Buildwell (P) Ltd (supra) had held that "It is well settled that the project completion method is one of the recognized methods of accounting. It cannot be said that the projection completion method followed y the assessee would result in deferment of the payment of the taxes which are to be assessed annually under the IT Act. AS-7 issued by the ICAI also recognizes the position that in the case of construction contracts, the assessee can follow either the project completion method or the percentage completion method. " Where the assessee was following a particular method of accounting consistently, which has been accepted by the department from year to year and in the absence of any defect being pointed out by the Assessing Officer that t4 following such method, income had escaped assessment, we find no merit in the order of the Assessing Officer in holding that percentage completion method should be applied to the assessee for the year under consideration. It is the prerogative of the assessee to arrange its affairs in such a manner and follow

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Page 73 of 96 any recognized method of accounting to compute its profits. In view thereof, we find no merit in the order of the Assessing Officer in recomputing the income in the hands of the assessee. Upholding the order of Commissioner of Income Tax (Appeals), we dismiss ground of appeal raised by the revenue.” The Delhi High Court in CIT V. Manish Build Well (P) Ltd. (2011) 16 taxmann.com 27(2002) 204 Taxman 106 noted that project completion method is one of the recognized methods of accounting. It was held as under:- "It is well settled that the project completion method is one of the recognized methods of accounting. It cannot be said that the project completion method followed by the assessee would result in deferment of the payment of the taxes which are to be assessed annually under the IT Act" The assessee respondent had been consistently following one of the recognized methods of accountancy, i.e project completion method, for computation of its income. In the absence of any prohibition or restriction under the Act for doing so, it cannot be held that the approach of the CIT (A) and the Tribunal was erroneous or illegal in any manner so as to call for interference by this Court. No substantial question of law arises. Consequently, finding no merit in these appeals, the same are dismissed." 38. It is well settled that the project completion method is one of the recognized methods of accounting. In CIT v Hyundai Heavy Industries Co. Ltd (2007) 291 ITR 482/161 Taxman 191 (SC) the Supreme Court held as follows:- "Lastly, there is a concept in accounts which is called the concept of contract accounts. Under that concept, two methods exist for ascertaining profit for contracts, namely, "completed contract method" and "percentage of completion method". To know the results of his operations, the contractor prepares what is called a contract account which is debited with various costs and which is credited with revenue associated with a particular contract. However, the rules of recognition of cost and revenue depend on the method of accounting. Two methods are prescribed in Accounting Standard No.7. They are "completed contract method" and "percentage of completion method". 39. This view was reiterated by the Supreme Court in CIT v. Bilahari Investment (P) Ltd. (2008) 299 ITR 1/168 Taxman 95 with the following observations: "Recognition/identification of income under the 1961 Act is attainable by several methods of accounting. It may be noted that the same result could be attained by any one of the accounting methods. The completed contract method is one such method. Similarly, the proceedings of completion method is another such method.

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Page 74 of 96 Under the completed contract method, the revenue is not recognized until the contract is complete. Under the said method, costs are accumulated during the course of the contract. The profit and loss is established in the last accounting period and transferred to the profit and loss account. The said method determines results only when the contract is completed. This method leads to objective assessment of the results of the contract. The On the other hand, the percentage of completion method tries to attain periodic recognition of income in order to reflect current performance. The amount of revenue recognized under this method is determined by reference to the stage of completion of tht contract. The stage of completion can be looked at under this method by taking into consideration the proportion that costs incurred to date bears to the estimated total costs of contract. The above indicates the difference between the completed contract method and the percentage of completion method." (underlining ours)

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Page 75 of 96 April, 2014 onwards and the assessee has offered the revenue for taxation from F.Y 2014-15 onwards as and when the sale deed has been registered. As held by various courts as discussed above that the method of adopting project completion method is not ultra virus and the assessee is free to adopt either the percentage completion method or project completion method with the only rider that it should be consistently adopted and in case of any deviation the effect of profit or loss should be offered to tax as the case may be. Revenue has not disputed this fact that assessee has offered the impugned advances to tax in the subsequent years i.e. from financial year 2014-15 based on sale deed registered which proves that there has been no loss to the revenue. Mere postponement of tax as a result of method employed by assessee has not been viewed adversely by courts so long as the method is regularly and consistently employed as held by Hon'ble Apex Court in the case of Excel Industries Ltd (2013) 358 ITR 295.”

8.21 In the case of ACIT Vs. Satyam Developers Ltd. 56 CCH 370 (Ahd) (Trib) wherein it was held as under:-

“The taxability on estimated income from the development and construction project of building is in controversy. As noticed by the CIT(A) as well as pointed out on behalf of the assessee, assessee is engaged as a developer and constructor of the building project and is not a mere Civil Contractor. Thus, the AO could not challenge the project completion method adopted by the assessee to the percentage completion method unless all significant risks and rewards of ownership have been transferred to the buyer and the seller retains no effective control of the goods transferred to a degree usually associated with ownership. The assessee has referred to BU permission etc. and has demonstrated on facts that the risks associated with the project continued with the developer in a significant way during the year under consideration. It is also not in dispute that the income has been ultimately offered in the later assessment year and duly assessed. Thus, the entire exercise of the AO is revenue neutral. The CIT(A) has correctly appreciated the facts and circumstances of the case and has taken note of the revenue recognition in the later year. The assessee has also demonstrated that the revenue recognized from project has been actually assessed and accepted in 143(3) r.w.s. 263 of the Act proceedings.

(Para 8)

Conclusion:

AO cannot challenge the project completion method adopted by the assessee, a developer and constructor of the building project, to the percentage completion method unless all significant risks and rewards of ownership have been transferred

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Page 76 of 96 to the buyer and the seller retains no effective control of the goods transferred to a degree usually associated with ownership.”

8.22 The following case laws also support the case of the assessee which are as follows:- • CIT V. Realest Builders & Services Ltd. 216 CTR (SC) 345 • Paras Buildtech India Pvt. Ltd. Vs CIT (2016) 382 ITR 0630 (Delhi) • CIT V. Manish Buildwell Pvt. Ltd. (2011) 245 CTR 0397 (Del) • CIT vs. Shivalik Buildwell (P.) Ltd. - 40 taxmann.com 219(Gujarat) • ITA No. 853 of 2015(Bom) CIT vs. Millennium Estates Private Ltd. • CIT vs. Aditya Builders - 378 ITR 75(Bom) • Bakshi Vikram Vikas Construction Co. P. Ltd. V. DCIT - 158 Taxman 61 (Del.) • CIT v. V. S. Dempo & Co. Pvt. Ltd. (131 CTR 203)(Bom) • ACIT v. Rajesh Builders (2004-TIOL-88-ITAT-MUM) • Maitri Developers v. ITO (2011-TIOL-472-ITAT-Mum)

8.23 It is pertinent to mention here that recently the jurisdictional High Court in the case of CIT Vs. Varun Developers (126 Taxmann.com 235) (Karn.) held as under:- 5. “We have considered the submissions made by learned counsel for the parties and have perused the record. The first three substantial questions of law are answered in favour of the assessee for the reasons assigned by learned Senior counsel for the assessee in the judgments referred to supra. So far as fourth substantial question of law is concerned, it is pertinent to note that under section 145(1) of the Act, the income chargeable under the head Profits and Gains of Business shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. The general provision is subject to accounting standards that the Central Government may notify. The assessee is a builder and developer and not a construction contractor simplicitor. Accounting Standard 7, titled construction contracts is applicable only in case of contractors and does not apply to the case of developers and builders which is evident from opinion rendered by expert

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Page 77 of 96 advisory committee of ICAI. It is pertinent to note that the assessee had offered the income for Assessment Year 2007-08 and no income from the project was offered for the Assessment Year 2007-08 on the basis of project completion method and that either method 'of accounting finally lead to the same results in terms of profits and therefore, revenue neutral.

In view of preceding analysis, the fourth substantial question of law is also answered against the revenue and in favour of the assessee.”

8.24 As seen from the various judgements, jurisdictional High Court time and again held that method of accounting followed by the assessee, which is the project completion method of recognizing revenue is permitted in law and could be followed by assessee. Thus, it is settled position of law that decision of the higher authority to be followed and judicial discipline requires consistency in its proceedings.

8.25 Thus, in case of JDA the assessee being landlord share the proceeds arising from the development of immovable property belonging to the land owner share at specified percentage of constructed area and retains the legal ownership, domain and control of the land with him being a land owner and no portion of it will be transferred to the developer or his nominee, as the case may be. There is no allocated area designated as owner share or developer share as the case may be. The revenue shall be recognized by land owner being present assessee only at the point of transfer of risk and rewards of ownership of divided/undivided shares of land to the purchaser of unit i.e. at the point of conveyance or possession, whichever is earlier.

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8.26 Income recognition of one business cannot be applied to another:

a. At para 12(viii), of the impugned order, the learned assessing officer has noted that the developer has accounted and offered revenue to tax under percentage completion method. This however cannot be a basis to compel the Respondent also to adopt percentage completion method. As has been explained earlier the choice of method of accounting is always that of the assessee. As long as the method followed by the assessee is valid and recognised, the department can never force upon the assessee any other method of accounting.

b. Even otherwise the Respondent submits that the economic substance of Respondent’s transactions and developer’s transactions are vastly different. The Respondent is a landowner. Respondent’s contribution, role, functions, objectives, risks and responsibilities are significantly distinct from a developer. This being the case, method of accounting adopted by the developer cannot be mechanically applied to a landowner.

The Bangalore ITAT in the case of Chaitanya Properties Pvt. Ltd. vs. JCIT in ITA No.52/Bang/2013 has that Completed Contract Method of Accounting is an accepted method of accounting recognised in Income Tax Law which is not prohibited u/s 145 of the Act. The Tribunal has also decided on the applicability of Accounting Standard AS 7 and held that the same applies to pure contractors. It was held that Developers are also not precluded from following

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Completed Contract Method of Accounting. Extending the same rationale in the present case, the Assessee who is neither a Contractor and nor a developer, but a landowner cannot be compelled to follow Percentage Completion method.

8.27 The Ld. D.R. made an argument that in the sworn statement the assessee has agreed to offer to tax advance received as income in the assessment year under consideration and Shri M.R. Seetharam also agreed in the statement recorded u/s 132(4) of the Act 28.8.2016 that the assessee has been received amount of advance from M/s. G-Corp Homes Pvt. Ltd. towards his share in constructed area and agreed to offer the income from the said JDA under contract completion method and quantified the amount for the AYs 2014-15, 205-16 & 2016-17 at Rs.27 crores, Rs.50 crores & Rs.25 crores respectively for these assessment years. It was also confirmed by him in his statement recorded u/s 131 of the Act on 19.10.2016 that a total amount of Rs.102 crores will be offered as income for these assessment years as his share of income received from M/s. G-Corp Homes Pvt. Ltd. as business income. However, while filing return of income assessee not declared this income as admitted during the course of search proceedings.

8.28 We have carefully considered the submission of the ld. DR. In our opinion, the question that needs to be addressed is whether the addition could be made merely on the basis of admission made by the assessee in the statement recorded u/s 132(4) of the Act? In our opinion, the statement recorded u/s 132(4) of the Act is not conclusive and it is rebuttable. For this proposition, we place reliance on the decision rendered by Hon'ble Supreme Courtin the case of Pullangode Rubber Product Co. Vs. State of Kerala (91 ITR

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18) (SC), wherein it was held that the admission may be an important piece of evidence, but the same is not conclusive. It is open to the person who made the admission to show that it was incorrect. We may also refer to the decision rendered by Hon'ble Supreme Court in the case of CIT vs. V. MR.P Firm (1965) 56 ITR 67, wherein it was held that the principle of estoppels will not against the Income tax Act. The relevant observations are extracted below:

"The contention is that the assessees having opted to accept the scheme, derived benefit there-under, and agreed to have their discharged debts excluded from the assets side in the balance-sheet subject to the condition that subsequent recoveries by them would be taxable income, they are now precluded, on the principle of "approbate and reprobate", from pleading that the income they derived subsequently by realization of the revived debts is not taxable income. The doctrine of "approbate and reprobate" is only a species of estoppel; it applies only to the conduct of parties. As in the case of estoppel, it cannot operate against the provisions of a statute. If a particular income is not taxable under the Income-tax Act, it cannot be taxed on the basis of estoppel or any other equitable doctrine. Equity is out of place in tax law; a particular income is either eligible to tax ITA Nos.709 to 712 /Bang/2018 ITA Nos.1142 to 1148 /Bang/2018 CO Nos.88 to 89 /Bang/2018 under the taxing statute or it is not. If it is not, the Income- tax Officer has no power to impose tax on the said income."

Hence, mere admission of additional income would not automatically entitle the assessing officer to assess the same, if the assessee disputes the same subsequently with corroborative evidences.

8.29 The Hon'ble Bombay High Court has dealt with this issue in case of Balmukund Acharya (310 ITR 310), wherein it was held as under:-

"31. Having said so, we must observe that the Apex Court and the various High Courts have ruled that the authorities under the Act are under an obligation to act in accordance with law. Tax can be collected only as provided under the Act. If any assessee, under a mistake, misconceptions or on not being properly instructed is over assessed, the authorities under the Act are required to assist him and ensure that only legitimate taxes due are collected (see S.R. Kosti v. CIT [2005] 276 ITR 165 (Guj.), CPA Yoosuf v. ITO[1970] 77 ITR 237 (Ker.), CIT v. Bharat General Reinsurance Co. Ltd. [1971] 81 ITR 303 (Delhi), CIT v. Archana R. Dhanwatey [1982] 136 ITR 355 (Bom.).

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8.30. The Hon'ble Calcutta High court in case of CIT V. Bhaskar Mitter (73 Taxmann 437) has held as under:

"8. The controversy raised in the second question is as to whether the annual letting value of the property determined by the Tribunal could be a figure lower than that returned by the assessee. The principles for determining the annual letting value under section 23 are now well-settled and if the value returned is not in accordance with such principles, it is open to the assessee to contend that the value as may be determined upon correct application of the law should form the basis of assessment. The revenue authorities, in our view, cannot be heard to say that merely because the assessee has returned a figure which is higher than the annual value determined in accordance with the correct legal principles, such higher amount and not the correct amount should be lawfully assessed. An assessee is liable to pay tax only upon such income as can be in law included in his total income and which can be lawfully assessed under the Act. The law empowers the ITO to assess the income of an assessee ITA Nos.709 to 712 /Bang/2018 ITA Nos.1142 to 1148 /Bang/2018 CO Nos.88 to 89 /Bang/2018 according to law and determine the tax payable thereon. In doing so he cannot assess an assessee on an amount, which is not taxable in law, even if the same is shown by an assessee. There is no estoppel by conduct against law nor is there any waiver of the legal right as much as the legal liability to be assessed otherwise than according to the mandate of the law (sic). It is always open to an assessee to take the plea that the figure, though shown in his return of total income, is not taxable in law. The Tribunal, therefore, in our view did not commit any error in directing to fix the correct annual letting value of the premises in question, in accordance with the provisions of section 23 of the said Act with reference to the municipal valuation, although such sum was lower than the figure shown by the assessee in his returns of total income."

8.31. In the instant cases, the Shri M.R. Seetharam, has stated that an amount of Rs.102 Crores be offered as income from the construction revenue as discussed above. The reason cited for his

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admission is that till date the revenue is not recognized for the advance received as the assessee was of the opinion that the percentage completion method is not applicable to assessee company as their revenue share was derived from transfer of right, title and interest in land. The contention of ld AR is that this admission cannot be base for issue of notice u/s 153C of the Act as the seized material does not throw any light on the undisclosed income of the assessee in this assessment year under consideration as the assessment for AY 2014-15 vide order dated 19.5.2016 u/s 143(3) of the Act, wherein department accepted the returned income of the assessee at Rs.1,85,34,040/- under head Business Income and Rs.1 lakh from agricultural income. The date of search in the case of M/s. Ramaiah Developers & Builders Pvt. Ltd. was on 23.8.2016 and the assessment has already been concluded. Thus, for the assessment year 2014-15 which is a concluded assessment, to frame assessment u/s 153C of the Act the seized material is must. In the present case, the assessing officer relying only on the basis of sworn statement recorded u/s 132(4) as well as 131 of the Act without valid seized material. In our opinion, that should be a valid seized material found during the course of search and the sworn statement of the Directors cannot substitute this seized material found during the course of search, though sworn statement is a piece of evidence to frame the assessment but it is not conclusive evidence to frame the assessment or sustain the addition.

8.32 For the assessment year 2015-16 and 2016-17, these assessments were framed u/s 143(3) r.w.s. 153D of the Act and there was no valid seized material found during the course of search to frame the assessment. The ld. AO cannot rely only on the sworn statement recorded from Shri M.R. Seetharam to frame the

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Page 83 of 96 assessment. In our opinion, as discussed in earlier para, sworn statement is not conclusive evidence to frame the assessment or to sustain the addition. The addition shall be based on the evidence found during the course of search action or during the course of assessment.

8.33 The learned CIT(A) after verifying the detailed submissions, had allowed the appeals filed by the Respondent holding that the sale of flats (received under Development Agreement) are to be taxed in the year of execution of sale deed and not in the year of advances received. In view of this, we confirm the order of the CIT(A) in all these years in deleting the addition made by AO. Since we have confirmed the deletion of additions by ld. CIT(A) made by ld. AO, at this stage, we refrain from commenting on the head of income under which the income to be taxed as there is no accrual of income in these assessment years. 9. In the result, the appeals of the revenue are dismissed. 10. Now we will take up CO Nos.17 to 19/Bang/2021 for the AYs 2014-15 to 2016-17. The common grounds of the Cross objections raised by the assessee are reproduced as under:- 1. The learned Commissioner of Income-tax (Appeals) has erred in holding that several legal issues raised by the Cross Objector in the appeal before the learned Commissioner of Income-tax (Appeals) are not to be decided upon in view of the appellant getting relief on the factual issues involved in this appeal. The learned Commissioner of Income tax (Appeals) should have decided the legal grounds also.

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Page 84 of 96 Commissioner of Income tax (Appeals) ought to have held that the order passed is bad in law for not having followed the legal principles.

11.1 Notice u/s. 153C r.w.s. 153A of the Act was issued to the assessee on 30.08.2018 requiring 'him to file the Return of Income within 30 days from the date of receipt of notice. In response to. the notice issued, the assessee submitted a copy of the return filed by him on 18.09.2018 vide acknowledgement number 296341471180918 declaring the total income at Rs.1,85,34,040/- and requested for the withdrawal of the notice u/ s 153A as according to him no document related to him was found during the

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search proceedings. The assessee was intimated vide letter dated 24.09.2018 that documents were seized in his case as per seized document in folder no. A/MSRIT/01 to 10, and was provided a photocopy of the same. Original Return of income u/s 139(1) was filed by the assessee on 30.09.2014 vide Acknowledgement No. 378916001300914 declaring the total income as Rs. 1,85,34,040/-

11.2 Notice u/s 143(2) of the I T Act, 1961 dated 20.11.2018 was issued and served on the assessee. Notice u/s 142(1) of the Income Tax Act, 1961 dated 30.10.2018 along with an annexure was issued and served on the assessee. In response to the notice issued, the authorized representative of the assessee, Shri Nagin Khincha, CA, attended and submitted details.

11.3 During the course of search and survey actions at the office premises of M/s M S Ramaiah Developers and Builder Pvt. Ltd., a copy of the JDA dated 02.09.2010 entered between M/s G-Corp Homes Pvt. Ltd. and Shri. M R Seetharam was found and seized. The assessee was owner of a block of land ad-measuring 20 acres 19 guntas at Thanisandra, K R Puram, Bangalore East. He entered into a joint development agreement with M/s G Corp Homes P Ltd on 02.09.2010 for development and construction of residential buildings on the same. As per the agreement, the revenue earned from sale, lease, license of the areas covered under the project shall be shared between the owner of the land and developer in the ratio of 37% and 63% respectively. As per the agreement, there is no specified flats are allotted to the assessee. The marketing and sales are taken care by the developer anti the sale proceeds by way of advances received were deposited in a common joint bank account operated by both the assessee

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and developer. The sharing of revenue based on the ratio agreed is done at the end of every month. The assessee's share of 37% advances received were transferred from joint account. to the assessee's account every month. The assessee had shown these amounts received as advances in his books of accounts.

11.4 During the course of assessment proceedings, it was found that M/s G-Corp Homes Pvt. Ltd. is following the percentage completion method for revenue recognition being a developer of the project. Further, it was also found that the company is transferring the land owner's share of advances received regularly to Shri. M R Seetharam. This was confronted to the assessee, Shri. M R Seetharam and his sworn statement was recorded u/s 132(4) of I T Act on 28.08.2016 during the course of the search. The relevant part of the statement is reproduced as below: “Q.No.13 Please state the various stages in which the JDAs are in presently with respect to completion.

Ans. The JDAs with G-Corp Homes Pvt. Ltd., M/s. Kalyam Tech Park Ltd. are under development. The JDA with M/s. Micro Construction is under preliminary clearances and construction has not started till date. With respect to M/s. Roma Builders, construction is in the final stages. Some sale deeds have been already entered into and I am yet to receive the possession of 2 to 3 apartments.

Q.No.14 Please explain in detail the aspects of the JDA with G-Corp Homes Pvt. Ltd.

Ans. The JDA was entered into in the FY 2010-11 between myself in the individual capacity as a owner and M/s. G-Corp Homes Pvt. Ltd. as a Developer. The period consists of 14 towers out of which 2 towers are almost completed. The M/s. G-Corp Homes Pvt. Ltd. is responsible for the construction, marketing, sales & the overall completion of the project. 3 towers are under construction. Advances have been received from all the towers. These advances have been accounted in our books as “Advances Received towards booking.”

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Page 87 of 96 According to my understanding till now regarding the revenue share of M/s. G- Corp Homes Pvt. Ltd. project, the taxes become due as and when the flats are registered. Today, during the discussions and as explained by you regarding the Department’s stand, I agree to pay taxes according to law. Accordingly, I wish to state that as on 31.3.2014, 31.302015 & 31.3.2016, the amount of advances received by me towards booking amounts should be offered to tax on the basis of Percentage Completion Method. The Net income calculated accordingly for this project would be Rs.27,00,00,000/- for the AY 2014-15, Rs.50,00,00,000/- for AY 2015-16 & Rs.25,00,00,000/- for AY 2016-17. I shall be paying the taxes accordingly whenever they fall due and I shall be filing the required Returns of income accordingly.

11.5 In his statement, Shri M.R. Seetharam stated that the said land is recognized as stock-in-trade in his books. However, as he is regularly receiving the amounts of advances received from M/S Gr-Corp Homes Pvt Ltd., the assessee was questioned as to why his part of the advances received shall not be considered as revenue under percentage completion method. In reply, Shri. M R Seetharam accepted this position of the department and agreed to offer the revenue in the respective Assessment Years as per the table below: Assessment Year Amount offered to Tax in Rs 2014-15 27,00,00,000/- 2015-16 50,00,00,000/- 2016-17 25,00,00,000/- TOTAL 102,00,00,000/- 11.6 Again, a sworn statement of Shri. M R Seetharam was recorded u/s 131 of I. T Act on 19.10.2016. In the statement recorded on 19.10.2016, Shri. Seetharam once again reaffirmed the admission of unaccounted income that 'he admitted at the time of the search proceedings. Thus, the assessee admitted, confirmed and reaffirmed the declarations of Rs.102 crore on

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account of his share of income received from M/s G. Corp Homes P Ltd as his business income for the respective Assessment Years.

11.7 However, in the return filed in response to notice u/s 153C of I T Act, the assessee did not declare • the income as admitted during search proceedings. The assessee was asked to show-cause as to why the revenue received from M/s G Corp Homes P Ltd during the Asst Year 2014-15 should not be treated as his business income.

ORDER IS BAD IN LAW FOR INCORRECT ASSUMPTION OF JURISDICTION:

12.1 Transfer of Respondent’s case from ACIT Circle 6(3)(1) to ACIT Central Circle 1(2) in violation of Sec. 127 is bad in law.

12.2 As has been submitted earlier, the file of the Respondent was with ACIT Circle 6(3)(1) In fact for the year under appeal the Respondent was earlier assessed u/s 143(3) of the Act by ACIT Circle 6(3)(1).

12.3 However, in the Respondent’s case a notice u/s 153C dated 30.08.2018 was served on the Respondent by ACIT Central Circle 1(2). On 19-09-2018 the Respondent filed a letter questioning the assumption of jurisdiction u/s 153C on the ground that the Respondent was not made aware of the reasons for transfer/assignment of his record from one officer to another officer on the ground that requirement of section 153C was not stated. (page nos. 131-132 of paper book filed). In response thereto the assessing officer served a letter dated 24.09.2018 enclosing copy of

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centralization order. Copy of the centralization order is available at page nos.136-137 of the paper book filed.

12.4 The Respondent filed another letter dated 03.10.2018 filed on 04.10.2018 stating that the facts of transfer of the case was not intimated or informed to the Respondent before issue of notice u/s 153C and that copy of reasons if any for transfer and assignment of case was also not made available to the Respondent prior to initiation of transfer in the Respondent’s case. There has been no further response to the Respondent’s letter dated 03-10-2018.

12.5 Department’s power to assign a case is found in section 127 of the Act. A plain reading of the provisions of section 127 of the Act clearly shows that the relevant authority under the I.T. Act may transfer the case of an assessee from one Assessing Officer to another Assessing Office only after : a) Giving the assessee a reasonable opportunity of being heard and b) Recording the reasons for such transfer

12.6 Under sub section 3 the requirement of providing the assessee a reasonable opportunity of being heard has been relaxed only where the assessee’s case is transferred from one Assessing Officer to another Assessing Officer within the same city. It is pertinent to note that the relaxation under sub section 3 is only in respect of providing the assessee a reasonable opportunity of being heard and not in respect of recording reasons for transfer. Further, in all cases copy of reasons recorded for transfer of case has to be communicated to the assessee.

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12.7 The case of the Respondent has been transferred without following the prescribed process of law as contained in section 127. In the Respondent’s case, the Respondent’s jurisdiction has been transferred without intimating the Respondent the reasons for transferring the Respondent’s case. Only after transfer of Respondent’s case the Respondent was provided with an order of centralization.

12.8 The reason for transfer of Respondent’s case, as emanating from the centralization order seems to be: facilitation of “effective and coordinated investigations in the connected group case of M/s Gokula Education Foundation (medical), M/s Valdel Engineering and Constructors Pvt Ltd and M/s Ramaiah Developers and Builders Pvt Ltd.”.

12.9 The Respondent submits that there is however no cogent material to demonstrate as to how transfer of Respondent’s case could facilitate ‘effective and coordinated investigation’. The Respondent’s case is not a case where large number of assessees have been subject to action of search u/s. 132. The Respondent’s case has not been linked to search action in the case of any other assessee. Throughout all proceedings, there has never even been a whisper of any linkage between the Respondent’s case and the search carried out in the case of other assessees. One therefore fails to decipher as to how transfer of Respondent’s case to Central Circle could assist in ‘effective and coordinated investigation’.

The jurisdictional high court in the case of Y. Moideen 12.10 Kunhi & Co. Vs. ITO [1993] 71 Taxman 177 (Karnataka)/[1993] 204 ITR 29 (Karnataka)/[1993] 114 CTR 174 (Karnataka) has categorically/ held “mere mention of stock - phrases like 'to facilitate coordinated investigation' or variations thereof will not be in compliance with the mandatory requirement of section 127(1)”

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. Thus the reason for transfer forthcoming from the centralization order is not a valid reason in the eyes of law. The transfer of Respondent’s case is therefore invalid and the subsequent assessment order is void-ab-initio.

12.11 The relevant case laws are available at page nos. 1733 to 1781 of the Compilation of case laws filed.

12.12. Impugned order is bad in law for lack of necessary compliances for assumption of jurisdiction U/s. 153C [A] Proceedings u/s 153C in the absence of any incriminating material is bad in law

12.13 As has been submitted earlier, a search action u/s 132 was initiated on 23.08.2016 in the case of M/s MS Ramaiah Developers and Builders P Ltd. It has been stated at para 1 of the impugned assessment order that several documents were seized in the course of the search. It is further stated that ‘some documents had a bearing on total income’ of the Respondent. Vide letter dated 24.09.2018 the Respondent was provided with copy of the documents seized in the course of above search and which in view of the learned assessing officer had a bearing on the Respondent’s income. These seized document on the basis of which proceedings u/s 153C have been initiated in the Respondent’s case is nothing but Copy of Development Agreement between the Respondent and M/s. G Corp Homes Pvt Ltd (developer).

12.14 For the years under consideration, the Respondent had filed returns of income u/s 139 of the Act. For AY 2014-15, the Respondent’s return of income has been assessed u/s 143(3) of the Act. With respect to AYs 2015-16 and 2016-17, the returns filed were

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not selected for scrutiny and the time limit for issuance of notice u/s 143(2) of the Act had been expired. The details of which are as under:

Assessment Date of Filing Due date for Assessment order years of return of issuing notice u/s 143(3) income u/s 143(2) 2014-15 30.09.2014 30.09.2015 19.05.2016 2015-16 30.09.2015 30.09.2016 Case not selected for Scrutiny 2016-17 31.03.2018 30.09.2018 Case not selected for Scrutiny 12.15 In the assessment order passed for AY 2014-15, the Respondent’s returned income had been accepted without any variations. In the original assessment proceedings, the fact that the Respondent had entered into a DA and had received advances was very much within the knowledge of the assessing officer. The Respondent’s tax treatment of offering receipts under development agreement to tax only in the year of registration was then accepted by the jurisdictional assessing officer.

12.16 In the present search and impugned assessment proceedings no new / hidden fact has come to light. The learned assessing officer has only changed the opinion and has now sought to tax the receipts in the year of receipt as against the year of registration. Thus, the additions in the impugned order are purely based on a change in legal opinion and not on any ‘incriminating material’.

12.17 The predominant condition for satisfaction under 153C of the Act is the incriminating nature of evidence found. Though there has been change in the wordings of the section, the intention behind the section is not changed and the presence of document or

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evidence with incriminating nature is necessary before a notice u/s. 153C is issued. [B] Non-recording of satisfaction u/s 153C invalidates the entire proceedings 12.18 Without prejudice, from a plain reading of the provisions of law it is clear that for a valid proceeding u/s 153C following steps and procedures have to be duly followed: a. During the course of the search some incriminating material must be found. The AO of the "person searched" must be satisfied that the incriminating material does not belong to the "person searched" but belongs to "other person" who has to be identified by the AO.

b. If "other person" is not identified and AO is satisfied that incriminating material does not belong to the "person searched", then such material cannot be utilized anywhere for the purposes of assessment. c. The second step is that after such satisfaction is arrived at, the documents are handed over to the AO of the "other person". d. The third step is that AO of the "other person" has to segregate the incriminating material, year wise and has to satisfy himself that there are specific incriminating material which will have impact on the determination of total income of the "other person" for that assessment year. 12.19 In the Respondent’s case there is no record of any satisfaction recorded by the Assessing Officer who had jurisdiction over the search proceedings. There is also no record of the assessing officer who had conducted search proceedings in the case of searched person of having identified the Respondent as ‘the other person’ to whom the seized documents belong. The Hon’ble Delhi HC in the case

ITA Nos.542 to 544/Bang/2021 & CO Nos.17 to 19/Bang/2021 Sri Mathikere Ramaiah Seetharam, Bangalore

Page 94 of 96 of Pepsi Foods (P) Ltd v. ACIT (2015) 231 Taxman 58/ 162 DTR 129 (Delhi) (HC) has categorically held that the assessing officer is required to arrive at a conclusive satisfaction that documents belongs to a person other than searched person. In absence, the notice u/s 153C was quashed. The revenue’s SLP against the order of Delhi HC has been dismissed by the Apex Court in ACIT v. Pepsi Foods (P) Ltd (2018) 252 Taxman 372 (SC). 12.20 The assessing officer passing the impugned order has also failed to record his satisfaction as regards any incriminating material having been received from the other Assessing Officer and of such records having impact on the Respondent’s determination of total income. 12.21 In the following cases it has been held that recording of satisfaction by Assessing Officer of searched person is a necessary pre-condition for initiation of proceedings u/s. 153C of the Act.

• ACIT v. Global Estate (2013) 142 ITD 740(Agra)(Trib.) • Ingram Micro (India) Exports Pvt. Ltd. v. Dy. DIT (Mum.)(Trib.) ITA Nos.8133, 8137,8138,8136, 8135 & 8132/Mum/2010 Assessment years: 2002-03 to 2007-08 • V. K. Fiscal Services Pvt. Ltd. v. DCIT (Delhi)(Trib.) ITA nos. 5460.5461, 5462,. 5463, 5464 and 5465/Del/2012 AYs 2004-05 to 2009-10 • DSL Properties (P.) Ltd. v. Dy. CIT (2013) 60 SOT 88 (URO)(Delhi)(Trib.) • ACIT .v. Inlay Marketing Pvt. Ltd(2015) 167 TTJ 273 (Delhi)(Trib.) • Pepsi Foods P. Ltd. .v. ACIT (2014) 367 ITR 112 (Delhi)(HC) • CIT .v. Gopi Apartment (2014) 365 ITR 411 (All.)(HC) • DCIT.v. Akash Arogya Mindir P.Ltd. (2015) 167 TTJ 578/ 114 DTR 61 (Delhi)(Trib.) • ACIT v. Surbhi Sen Jindal (2018) 68 ITR 12(SN) (Patna) (Trib.) • Avalanche Reality P. Ltd. v. ACIT (2018) 68 ITR 79 (SN) (Indore)(Trib.) • CIT v. Sinhgad Technical Education Society (2015) 378 ITR 84/ 278 CTR 144 (Bom.)(HC) • CIT v. Mechmen (MP)(HC) AYs 2000-01 to 2006-07 I.T.A. No.44/2011, I.T.A. No.45/2011 • DCIT .v. Aakash Arogya Mindir (P) Ltd. (2015) 167 TTJ 578 (Delhi)(Trib.)

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Page 95 of 96 • CIT v. N. S. Software (FIRM) (2018) 403 ITR 259/ 165 DTR 201 / 302 CTR 136/ 255 Taxman 230 (Delhi) (HC) 12.22 Even the jurisdictional high court in the following cases has held that A satisfaction note is sine qua non and must be prepared by the Assessing Officer before he transmits the records to the Assessing Officer who has jurisdiction over such other person. Not furnishing the reasons for satisfaction renders the entire proceedings invalid: • SVK Minerals v. DCIT (2019) 411 ITR 709/ 311 CTR 789 / 184 DTR 36 (Karn.)(HC) • Shyamraj Singh v. DCIT (2019) 411 ITR 709/ 311 CTR 789/184 DTR 36 (Karn.)(HC) 12.23 It may be submitted here that the filing of the return of income in response to notice u/s. 153C and participation in assessment proceedings does not disentitle the Respondent to question the assumption of jurisdiction in the present proceedings. Section 292B and 292BB would be of no use or avail to the department in the matter for the reason that the satisfaction of preconditions U/s. 153C are pre-requisite for assumption of jurisdiction u/s. 153C of the Act and department cannot take shelter u/s. 292B / 292BB of the Act, as jurisdictional defect / lacuna cannot be cured u/s. 292B /292BB of the Act. The following case laws affirm the above proposition of law. • CIT v/s. Norton Motors 275 ITR 595 (P&H); • CIT v/s. Harinder Kaur 310 ITR 71 (P&H); • Srinath Sureshchand Ram Naresh v/s. CIT 280 ITR 396 (All) • CIT v/s. Micron Steels Pvt. Ltd, 370 ITR 386 (Delhi) • N R Sudhir vs DCIT (Inv.) 159 Taxman 37 (Bang) • G.S. Singhi and M N Agarwal (P&H) 146 Taxmann 701 • Spice Infotainment Ltd., vs CIT 247 CTR 500 (Delhi) • Nawal kishore & Sons Jewellers v/s. CIT [(2012) 79 DTR (All) 241] • CITvs.Bihari Lal Agarwal [(2012) 346 ITR 67 (All)] [(2012) 68 DTR (All) 112 • Manish Prakash Gupta v/s. CIT [(2012) 68 DTR 112 (All) • ACIT v/s. Supreme Appar and Associates [(2009) 30 DTR (Mum) (Trib) 229]

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Page 96 of 96 • ITO v. Aligarh Auto Centre [(2013) 83 DTR (Agra) (Trib)

14.1 After hearing both the parties, we are of the opinion that Ld. CIT(A) not dealt these grounds in his orders for these assessment years and hence all the legal grounds raised by the assessee herein remitted back to Ld. CIT(A) for his adjudication. The COs filed by the assessee are partly allowed for statistical purposes.

Sd/- Sd/- (Beena Pillai) (Chandra Poojari) Judicial Member Accountant Member

Bangalore, Dated 7th Nov, 2022. VG/SPS Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order