Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN, VICE PRESEIDENT & SHRI PADMAVATHY S
Per Padmavathy S., Accountant Member
This appeal is at the instance of revenue directed against the order of the CIT(Appeals)-1, Bengaluru dated 08.11.2016 for the AYs 2007-08.
The assessee is a private limited company and a property developer. It filed its return of income on 28.10.2007 declaring an income of Rs. 52,61,240. The order of Assessment u/s 143(3) was completed by the DCIT Circle 11(4) vide order dated 30.12.2009 by determining the income at Rs. 6,56,48,700. The AO applied Percentage of Completion Method [POCM] and adopted average sale price of Rs.4,000 per sq. ft. and taking the cost price declared by the assessee at Rs 3,091 per sq. ft., thereby arriving at profit of Rs 6,03,37,460.
On appeal, the CIT(Appeals) vide order dated 28.01.2010 dismissed the appeal filed by the assessee. On further appeal, the ITAT vide its order dated 26.04.2013 remanded the issue to the Assessing officer with the following directions :-
“6.3 We have heard both parties and carefully perused the material on record. After considering the facts and circumstances of the case vis-a-vis the order of assessment and the orders of the learned CIT(Appeals), we find merit in the argument of the learned Authorised Representative that without rejecting the assessee's books of account, the Assessing Officer could not have estimated the income of the assessee, whether it is completed contract method or POCM. Further, as contended by the learned Authorised Representative, the Assessing Officer could not have arrived at the average selling price when there is a contract of agreement to sell with prospective buyers. What is actual consideration as per sale deed has to be considered and only in the absence of such material, could the Assessing Officer have calculated the average selling price at Rs.4,000 per sq. ft. As contended by the learned Authorised Representative the selling price of flats may vary from flat to flat based on varied criteria and reasons. When the actual sale consideration is available, then only the actual figures have to be considered, not some hypothetical, imaginary / estimated figures. We find that the learned CIT(Appeals) too has failed to appreciate these aspects of the matter. In this view of the matter, we are of the considered opinion that for the reasons discussed above, in the interest of equity and justice, the orders of the authorities below require to be set aside and accordingly do so. The matter of assessment of the assessee's income for Assessment Year 2007-08 is restored to the file of the Assessing Officer for taking up the assessment afresh for de novo consideration, taking into consideration our observations in this order, with a direction to pass a speaking order of assessment after affording the assessee adequate opportunity of being heard, keeping all contentions raised by the assessee and revenue open. The assessee is directed to co-operate in filing the details / explanations called for so that the matter can be disposed off expeditiously. It is ordered accordingly.”
During the remand proceedings, the assessee submitted before the AO that without rejecting the books of Account and method of accounting, the AO could not impose AS-7 and recommendatory guidance note issued by ICAI on assessee when the "significant Risk and reward has not been transferred, i.e., the POCM is not applicable to assessee under the facts and circumstances. Further, having accepted the accounts, actual revenue recognised as per AS -9 (i.e., recognising revenue as and when transfer of ownership, along with its risk and rewards, is made vide registered sale deed) has to be considered. Further, the AO is not justified in considering the average sales, when actual sales are made available. The assessee also brought to the notice of the AO the following:-
3.3.1. Risk/ Uncertainty: That the project has not materialised, due to litigation, (till date), hence the there is still significant Risk and uncertainty in recognising the profits. [Note: Even till date i.e., today 03/08/2021, the project is not materialised]. 3.3.2. Alternative claim: Due to litigation, there is new revised estimated cost as on 01/06/2011, was provided, and requested the learned assessing officer, even if POCM is considered the project is under loss, and the same has to be considered by assessee, as the entire Assessment was set-aside by ITAT, and all factors ought to be considered. The revised estimated cost Rs 230 Cr (as against Rs 207.02 Cr).
The AO summarized the directions of the ITAT as under:-
“(i) We find merit in the argument of learned Authorised Representative that without rejecting the assessee's books of account, the Assessing Officer could not have estimated the income of the assessee, whether it is completed contract method or POCM. (ii) When the actual sole consideration was available, then only the actual figures had to be considered, not some hypothetical, imaginary/estimated figures.”
During the remand proceedings, the AO was of the view that the ITAT has only questioned the procedure of application of POCM and not the validity of the POCM and this question is already adjudicated by the ITAT. Accordingly, the AO applied the actual value and recalculated the addition at Rs.97.16,224. The AO rejected the plea of the assessee to consider the revised estimate of the cost stating that the revised estimate as on 1.6.2011 cannot be made for the AY 2007-08 as the assessment order was already passed on 30.12.2009.
The assessee reiterated its submissions before the CIT(Appeals), who upheld the order of the AO stating that the question of applicability of a specific method was no longer before the AO. He observed that though the assessee had challenged the applicability of POCM before the ITAT, that issue was not decided in favour of assessee by the ITAT and that the action of the AO in restricting himself to applying POCM in this case cannot be faulted with. With regard to the revised estimated cost, he upheld the action of the AO on the reasoning that project cost has to be taken only on the basis of information available in original assessment and cannot be substituted by any later information. Aggrieved, the assessee is in appeal before the Tribunal in the second round.
The ld. AR submitted that the AO has wrongly interpreted the directions of the ITAT while remanding the issue to the AO. He submitted that the ITAT had restored the issue to the AO for de novo consideration, keeping all the contentions raised by the assessee and the revenue open.
Therefore, the ITAT had not adjudicated on the method of revenue recognition followed by the assessee and the applicability of POCM in assessee’s case as claimed by the revenue authorities. The ld. AR submitted that the following issues raised by assessee in the first round of appeal have to be considered for adjudication by the Tribunal:-
7.1 Whether learned AO is justified in making addition by adopting percentage of project completion method as against project completion method. 7.2. Whether learned Assessing officer can thrust any particular method of accounting on the assessee, without rejecting the books of accounts maintained by assessee. 7.3. Whether learned assessing officer has jurisdiction u/s 145(2) of the Act to verify any issue, beyond whether the method of accounting is being regularly followed by assessee. (i.e., whether has jurisdiction in the matter of accounting followed by the assessee. 7.4. Whether learned Assessing officer is justified in thrusting (AS-7) POCM method as against completion method (AS- 9) adopted by appellant, being regularly & consistent followed method of accounting, having neutral tax effect. 7.5. Whether participation by assessee in earlier round of litigation either before AO or before Tribunal or consequently before AO can operate as a bar to assessee to challenge Jurisdictional authority of AO.
In this regard, he relied on the following decisions of the coordinate Bench of the Tribunal:-
(i) M/s. Esteem Classic v. PCIT [ITA No.1053 to 1055/Bang/2016 dated 2.5.2018 which is confirmed by the Karnataka High Court in to 844/2018 dated 22.3.2021.
(ii) M/s. S.N. Builders & Developers v. ACIT [ITA No.487 & 654/Bang/2013 dated 11.4.2014] confirmed by the Karnataka High Court in dated 7.1.2021.
The ld. DR argued that the applicability of POCM is not an issue for contention in the remand proceedings and that the directions of the ITAT was with respect to actual sale consideration to be considered. He therefore supported the order of the AO. With regard to the issue of non- consideration of revised estimated cost, the ld. DR relied on the order of the CIT(Appeals).
We have considered the rival submissions and perused the material on record. From the perusal of para 6.3 of the order of the Tribunal dated 26.4.2013, it is clear that the issue was remanded for a de novo consideration keeping all the contentions of the assessee as well as the revenue open. Given this, the AO has grossly misunderstood the directions of the Tribunal and proceeded on a wrong footing. The issue of applicability of POCM was not decided by the Tribunal and since the case was remanded for fresh consideration, the AO ought to have examined the issue of applicability of POCM afresh during the remand proceedings.
We notice that the coordinate Bench of the Tribunal in the case of Esteem Classic (supra) has considered the applicability of POCM or Completed Contract Method [CCM] in a case of similar line of business as that of present assessee. The Tribunal held as follows:-
“20. We have carefully considered the rival submissions. The issue that needs to be adjudicated is as to whether the action of the revenue authorities in determining income of the Assessee from the project "Esteem Classic" for AY 2010-11 & 2011-12 by spreading over the income declared by the Assessee from the said project in AY 2012-13 of Rs.17,66,54,389/- by applying the POCIv1 of recognizing income and arriving at an income of Rs.7,94,94,475 for AY 2010-11,Rs.9,18,60,282/- 2011-12 and Rs.52,99,632/- for AY 2012-13 is sustainable? There is no dispute that income from the project upto AY 2012-13 is Rs.17,66,54.389/-. The Assessee by following the Project Completion Method of Accounting recognized accrual of income in AY 2012-13. The Revenue claims that the Assessee ought to have followed POCM and recognized income proportionately for AY 2010-11, 2011-12 7 2012-13. There is no dispute that the rate of tax for all these years is same and there is no advantage in teams of tax payable to the Assessee by postponing recognition of income.
The relevant statutory provisions regarding method of accounting under the Act, have to be first seen. Sec.145 of the Act (prior to its amendment by the Finance Act, 2014 w.e.f. 1.4.2015 applicable in the present case) deals with Method of accounting and it reads thus: "Sec.145: Method of Accounting: (1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (2) The Central Government may notify in the Official Gazette from time to time Accounting standards to be followed by any class of assessees or in respect of any class of income. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or Accounting Standards as notified under sub-section (2) have not been regularly followed by the Assessee, the Assessing Officer may make an assessment in the manner provided in section 144.
Vide Notification No. 9949, dated 25-1-1996 [(1996) 130 CTR (St) 33], 0-Kiting Standard I relating to disclosure of accounting policies and Accounting Standard II relating to disclosure of prior period and extraordinary items and changes in accounting policies had alone been notified as Accounting Standards to be followed by an Assessee and no other accounting standard has seen notified.
AS-7, AS-9 issued by ICAI or the ICAI Guidance Note on Accounting for Real Estate Transactions, 2006, have been notified and hence they do not have statutory force. The Assessee follows mercantile system of Accounting. AS-7 or AS-9 or ICAI Guidance Note on Accounting for Real Estate Transactions, 2006, cannot be said to be either Cash system or Mercantile system of accounting. All these system of recognizing revenue has trappings of both cash system or mercantile system but cannot be said to fall strictly within the parameters of either cash system of mercantile system of accounting. For e in a real estate project if none of the flats constructed are sold there is no need to recognize revenue as no income has accrued or arisen. However in POCM, you have to presume accrual of income based on the stage of completion of the project. This is definitely not in tune with the mercantile system of accounting. Similarly in PCM, even prior to completion of the project sale of some of the flats in a project could be made, but income from such sale is not recognized but postponed. Therefore PCM is also not strictly not in tune with the mercantile system of Accounting.. Therefore the case of the revenue that the Assessee should follow the POCM or the PCM or the ICAI Guidance Note on Accounting for Real Estate Transactions, 2006 has not statutory force. Therefore the AO cannot insist that the Assessee should follow POCM or PCM or ICAI Guidance Note on Accounting for Real Estate Transactions, 2006 for recognizing income. Under the Act, he was empowered only to compute in accordance with the mercantile system of accounting. U/s.145(3) of the Act, he has powers to reject the books of accounts and estimate income as he would do in a best judgment assessment u/s.144 of the Act. Beyond this the AO has not power to thrust upon the Assessee either to follow POCM or PCM or ICAI Guidance Note on Accounting for Real Estate Transactions, 2006. We however wish to make it clear that the aforesaid observations will hold good only for AY upto AY 2012-13 because Sec.145 of the Act has undergone some statutory amendments and the position after
such amendment is not and cannot be subject of decision in this appeal.” 13. The Hon’ble Karnataka High Court upheld the decision of the Tribunal by its judgment to 844 of 2018 dated 22.3.2021 as follows:-
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 instant case, the assessee has followed CCM for recognition of revenue. The AO in the original proceedings did not reject the books, but went on to arrive at the income of the assessee based on POCM. In the remand proceedings, the AO misinterpreted the directions of the Tribunal in not examining the applicability of POCM or CCM in assessee’s case and only computed the addition under POCM. The CIT(Appeals) has also not appreciated the directions of the ITAT properly and confirmed the order of the AO. In view of the above and considering the decision of the jurisdictional High Court in the case of Esteem Classic (supra), we hold that the revenue authorities were not right in computing the income of the assessee under POCM without rejecting the books of accounts of the assessee. We therefore delete the addition and decide the issue in favour of the assessee.
In the result, the appeal by the assessee is allowed.
Pronounced in the open court on this 28th day of June, 2022..