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Income Tax Appellate Tribunal, VISAKHAPATNAM BENCH, VISAKHAPATNAM
Before: SHRI V. DURGA RAO, HON’BLE & SHRI D.S. SUNDER SINGH, HON’BLE
PER V. DURGA RAO, JUDICIAL MEMBER
These appeals by the Revenue are directed against the common order of Commissioner of Income Tax (Appeals), Visakhapatnam, dated 29/03/2013 for the Assessment Years 2009-10 to 2010-11. Since the facts and issues are common, clubbed and heard together and disposed of by way of this consolidated order.
2 ITA Nos.380 & 381/VIZ/2014 (M/s. Akshaya Gold Farms & Villas India Ltd.)
For the sake of convenience, grounds raised in ITA No. 380/VIZ/2014 are extracted as under:-. “1. The Order of the Ld.CIT(A) is erroneous on grounds of law and fact. 2. The Ld.CIT(A) erred in taking the view that the amounts collected by the assessee towards refundable plot booking advances in installment basis are nothing but advances which cannot be treated as revenue receipts as no plots were registered or even identified in the names of the buyers. 3. The Ld.CIT(A) erred in not giving a finding to arrive at the profit of the year after considering all the receipts and expenditures of each layout/project. 4. The Ld.CIT(A) erred in overlooking the fact that the assessee had claimed only expenses of its layouts/ projects without admitting any relatable receipts which is patently erroneous accounting. 5. The Ld.CIT(A) should have directed the AO to ascertain the profits considering all receipts and expenditures of each layout /project carried out in the previous year. 6. The Ld.CIT(A) erred in overlooking the fact that the assessee was perennially postponing the ascertainment of the profit and thereby consequently postponing the payment of Income tax on the ground that plots were not registered / sold. 7. The Ld.CIT(A) erred in overlooking the fact that the nomenclature of refundable plot booking advances cannot change its nature from a revenue receipt to a liability which is not exigible to tax. 8. Any other ground that may be urged at the time of hearing.”
Ground Nos. 1 & 8 are general in nature, no adjudication is required, therefore, same are dismissed. 4. Ground Nos. 2 to 7 relate to advance received by the assessee from the customers to allot plots in future, whether it has to be treated as capital receipt or revenue receipt and also the
3 ITA Nos.380 & 381/VIZ/2014 (M/s. Akshaya Gold Farms & Villas India Ltd.)
expenses collected in connection with receiving advances has to be treated as revenue receipts. 5. Facts of the case in brief are that the assessee is a public limited company incorporated on 05/11/2007 and is engaged in the business of selling agricultural plots, farm lands on instalment basis under various schemes to its members. As per the sales scheme, the assessee received advances/instalments from the customers on daily / weekly / monthly basis. At the end of the scheme period, the assessee will register the plots to its customers in future. The Assessing Officer has noted that against the amounts so collected by the assessee, share of undivided land is promised to the customers. A perusal of the profit & loss account and the balance sheet filed along with return of income, reveals as follows:- a)The P & L account was debited by the items of expenditure like 1. Commission payments Rs. 1,49,86,610 2 MFR payments Rs. 10,37,004 3 Business Development expenditure Rs. 1,78,258 4 C.C. charges Rs. 26,30,262 Waiting Compensation payments etc. Rs. 6,12,626 have been claimed by the assessee company b) The liabilities side of the balance sheet include the following:- under current liabilities, Schedule-3, Provisions like 1. Refundable Plot Booking Advances Rs. 7,87,43,619/- 2. Daily commission (Mark. Members Rs. 51,13,212/- payable)
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The Assessing Officer asked the assessee to submit the details of plots allocated against the advances received from the customers and to correlate the advances received against the plots booked or earmarked for the customer. The assessee was failed to correlate and was not in a position to work out the same. The Assessing Officer on verification of the list of ‘refundable plot booking advances’ produced by the assessee, noticed that the amounts as low as Rs. 1,000/-; Rs. 2,000/- & Rs. 5,000/- were collected towards plots. The Assessing Officer noted that the assessee promised to register land admeasuring 180 sq. ft. which is practically impossible in the absence of identification of such plot of land by the assessee. The Assessing Officer inferred that assessee is resorting to collection of deposits in the guise of allotment of undivided share of land. The Assessing Officer also noticed that even after completion of three years the plots were not registered to the customers. The Assessing Officer further noted that assessee though acquired lands, it has never completed or undertaken any developmental activity in the lands, no plotting or earmarking of the lands towards the amounts received from the customers is done. The Assessing Officer further found that the entire amounts collected from the customers were not utilized for the purchase of lands and
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developmental activities etc. and the total area of lands acquired by the assessee not proportionate to and not commensurate with the plot amounts collected. The Assessing Officer also noted that there is a clear violation of the Companies Act which clearly stipulated the approval from the competent authority to undertake activity of the collection of amounts from customers/public. The Assessing Officer called upon the assessee to explain why income was not admitted. In response, the assessee has submitted as under:-
"As far as the sale of goods are concerned the revenue has to be recognized when the seller has passed on the right over the property to the buyer. The transfer of property in goods results in or coincides with the transfer of significant risks and rewards of ownership to the buyer. Revenue has to be recognized when the significant risks and rewards are passed on to the buyer. In the instant case of the assessee the risks and rewards i.e., the title over the property has not passed on to the buyer and it is still in the possession of the assessee only. Moreover, the prospective buyers may cancel the bookings and ask for the refund of the money. When such situations prevalent, the assessee cannot recognize the revenue as there is no certainty and the risks and rewards has not been passed."
The Assessing Officer has considered the explanation of the assessee and also examined the Managing Director of the Company Sri Bhogi Subrahmanyam under oath and a statement was recorded from him. During the course of his statement, he has stated, inter alia, that the company received advances from
6 ITA Nos.380 & 381/VIZ/2014 (M/s. Akshaya Gold Farms & Villas India Ltd.)
public/customers for sale of undivided share in agricultural lands; that till now, the company has not registered any plot in this regard; that there are no earmarked plots for the public and entire land is in the form of undivided share of land only; that no development work carried out on the lands purchased, nor any plan approvals taken for the above purpose; that the remaining amounts collected from public/customers after purchases are deposited in current account. Therefore, the Assessing Officer is of the opinion that the assessee company is not utilized the amounts on the development of the land or trying to register the plot in the name of the customer and therefore the assessee cannot resort to AS-9 clause(i) which would be inapplicable in this case as ‘no significant uncertainty exists’ insofar as the amounts are received from customers in the form of plot booking advances. Therefore, the Assessing Officer took the view that the assessee should account for the above advances as revenue receipts. 8. The Assessing Officer further noted that in the audit report, it was stated that the confirmation of balances of refundable plot booking advances and other advances, and current liabilities have not been obtained, and hence, the balances are subject to confirmation. The audit report also failed to indicate the nature of business of the assessee. Further, on perusal of profit & loss
7 ITA Nos.380 & 381/VIZ/2014 (M/s. Akshaya Gold Farms & Villas India Ltd.)
account ending 31/03/2009, it was noted that all the expenses pertaining to the year including those incurred for the collection of plot booking advances are also claimed as expenditure and in contrast, the assessee company convincingly claimed the plot booking advances as liability in the balance sheet instead of admitting the same as receipt/revenue. Thus, the net loss arrived at Rs. 2,80,99,285/-. In view of the above finding, the Assessing Officer noted that the profit and loss account and balance sheet submitted by the assessee give a distorted picture of the affairs of the company. Hence, the Assessing Officer took the view that the claim of loss as discussed previously cannot be allowed and the assessment was completed as per the provisions of section 144 of the Act based on the material available on record. The refundable plot booking advances at Rs. 7,58,14,368/- was assessed as receipts in the hands of the assessee company for the year under consideration and the same are treated as income in the profit & loss account. Against this income, the assessee claimed expenditure of Rs.3,92,63,194/- and accordingly the profit was worked out to Rs.3,65,51,174/-. The Assessing Officer further noted that from the Form No. 3D report that the assessee to deduct tax on advertisement charges for Rs. 1,02,971/- and finance charges for Rs. 27,526/- and it is also seen from the TDS
8 ITA Nos.380 & 381/VIZ/2014 (M/s. Akshaya Gold Farms & Villas India Ltd.)
ledger account that the TDS deducted for the F.Y. 2008-09 on commission payables, the amount of outstanding TDS stood at Rs.7,69,612/- as on 31/03/2009. The same was not remitted to the Government account within the stipulated due dates. Accordingly, the total amount of Rs. 9,00,109/- is disallowed under section 40(a)(ia) of the Act and determined total income of Rs. 3,74,51,280/-. 9. On appeal before the ld. CIT(A), it was submitted that the plot booking advance cannot be treated as revenue receipt. It was contended that the contract between the parties have a phenomenal effect on the revenue recognition of an enterprise. In the assessee’s case, the sale of plots has not taken place; the title over the property has not passed on to the buyer and as the risks and rewards have not passed the assessee cannot recognize the revenue. It was contended that the advances received i.e. the instalments received are not to be recognized as income of the assessee until and unless the registered sale deed is executed by the assessee. It was also contended that the expenditure is allowable as the assessee has commenced its business; the expenditure debited to the profit & loss account pertain to activity conducted by the assessee. It was contended that the expenditure debited to the profit & loss account relate to the business and not
9 ITA Nos.380 & 381/VIZ/2014 (M/s. Akshaya Gold Farms & Villas India Ltd.)
to any other activity; there is no justification to say that the assessee has not followed the matching concept. It was further contended that ‘current liability’ cannot be assessed as income. 10. The ld. CIT(A) after considering the explanation of the assessee, he has observed that as per the agreement on the completion of the instalment payments, the customer is entitled to get land of specified extent agreed, to be registered in his name. However, in the agreement signed with the customer, there is no reference or specification of the land the customer would get if he pays the entire instalments as agreed. The customer may also opt to get out of the scheme after payment of certain expenses, but would be entitled to certain element of interest on the instalment amounts paid by him and no interest over land is conveyed to the customers. The agreements only show mere promises to convey certain specified area of land. The customer does not get any right or any sort of interest in respect of land shown to him for which he pays the instalments. Thus, the money collected from the customers cannot be considered as ‘plot advance’. It cannot be conceived as advance paid towards purchase of plot. It is a misnomer to characterize these amounts as ‘refundable plot booking advance’, and it is a mere device to collect money from the public on the pretext that certain piece of
10 ITA Nos.380 & 381/VIZ/2014 (M/s. Akshaya Gold Farms & Villas India Ltd.)
land will be registered after payment of the instalments. It is also pertinent to note that the assessee has not admitted any single instance of sale of plot to the customers. Hence, the scheme floated by the assessee-company is a mechanism to collect money/deposits from the public with a promise to allot plot in future. Therefore, it can be said that the assessee has engaged itself in collection of money from the public in violation of RBI norms. The ld. CIT(A) further observed that the amounts collected in the name of plot advance are in the nature of capital receipts, and as a result, the expenditure incurred towards acquiring such capital has to be adjusted against such capital receipts and cannot be claimed separately as a revenue expenditure as no other business activity, was carried on by the assessee. Further, the purchase of land out of such receipts is also on the capital field and the corresponding expenses towards such purchases also have to be capitalized as the development work has not commenced in respect of any piece of land. The method of accounting adopted by the assessee would only give a distorted picture of its profits and therefore he found that Assessing Officer is justified in making the assessment in the manner provided in section 144 of the Act by rejecting the books of account as not reliable. The ld. CIT(A) further observed that
11 ITA Nos.380 & 381/VIZ/2014 (M/s. Akshaya Gold Farms & Villas India Ltd.)
the plot advance received by the assessee cannot be considered as a revenue receipt and these receipts would continue to remain in capital receipts even if no development activity had taken place and directed the Assessing Officer to delete the addition made in treating them as revenue receipts. However, the corresponding expenditure would not be allowed as revenue expenditure. The ld.CIT(A) further observed that the other expenses claimed in the profit & loss account are not revenue expenditure as they are all incurred towards collection of deposits and as the revenue activity in relation to such collection of deposits have not commenced and they are liable to be disallowed as revenue expenses. For the sake of convenience, the relevant portion of the ld. CIT(A)’s order is extracted as under:- “I have considered the submissions made. I have also perused some sample agreements entered by the assessee with customers. It is seen that the assessee has floated several schemes for sale of plots, under which amounts have been collected from the customers by way of installments either daily/weekly/or monthly basis. As per the agreement on the completion of the installments payments, the customer is entitled to get land of specified extent agreed, to be registered in his name. However, in the agreement signed with the customer there is no reference or specification of the land the customer would get if he pays the entire installments as agreed. The customer may also opt to get out of the scheme after payment of certain expenses, but would be entitled to certain element of interest on the installment amounts paid by him. Thus, a careful perusal of the agreement show that no interest over land is conveyed to the customers. The said agreements are mere promises to convey certain specified area of land. The customer does not get any
12 ITA Nos.380 & 381/VIZ/2014 (M/s. Akshaya Gold Farms & Villas India Ltd.)
right or any sort of interest in respect of land shown to him for which he pays the installments. Thus the money collected from the customers cannot be considered as "plot advance". It cannot be conceived as advance paid towards purchase of plot. It is a misnomer to characterize these amounts as 'Refundable Plot Booking is also pertinent to note that the assessee has not admitted any single instance of sale of plot to the customers. Similarly no evidence could be filed that development works have been carried in regard to the land purchased to allot them as plots. Hence the scheme floated by the assessee-company is a mechanism to collect money/deposits from the public with a promise to allot plot in future. Therefore it can be said that the assessee has engaged itself in collection of money from the public in violation of RBI norms. In this background the various contentions raised by the AR and the inferences drawn by the AO has to be seen. 4.3 The money collected from the public is shown as 'plot advance' under "provisions" in the balance-sheet. The assessee has not carried out any development activity in regard to such lands purchased out of money collected. But, the expenditure incurred in the collection of money/deposits such as collection charges, commission payments etc have been claimed as revenue expenditure in the profit and loss account and thereby it gives a distorted picture the income of the enterprise violating the basic principles of accounting. The entire expenses relating to collection of deposits cannot be characterized as revenue expenditure as the assessee has not carried out any revenue yielding activity in regard to such collection of deposits. The amounts collected in the 1ivathe of 'plot advance' are in the nature of capital receipts, and as a result the expenditure incurred towards acquiring such capital has to be adjusted against such capital receipts and cannot be claimed separately as revenue expenditure as no other business activity was carried on by the company. Further the purchase of land out of such receipts is also on the capital field and the corresponding expenses towards such purchase also has to be capitalized as the development work has not commenced in respect of any piece of land. The method of accounting adopted by the assessee-company would only give a distorted picture of its profits and therefore I find that the AO is justified in making the assessment in the manner provided in section 144 of the I.T.Act by rejecting the books of account as not reliable. However, the AO is not justified in holding the 'plot advance' as revenue receipts. Even if these receipts represent "deposits collected" it would not take the character of revenue receipts. These receipts would continue
13 ITA Nos.380 & 381/VIZ/2014 (M/s. Akshaya Gold Farms & Villas India Ltd.)
to remain 'capital receipts' even if no development activity had taken place. Therefore, the AO is directed to delete the addition made in treating them as revenue receipts. However, the corresponding expenditure would not be allowed as revenue expenditure. 4.4 The revenue receipts admitted from other sources during the year relevant to A.Y.2009-10 was Rs.48,11,812/-. The expenditure incurred towards earning of the above receipts could be reasonably estimated at 30% which would be Rs.14,43,543/-. Thus the income from other sources to be subjected to tax would be Rs.33,68,269/-. I find that the other expenses claimed in the P&L account are not revenue expenditure as they are all incurred towards collection of deposits and as the revenue activity in relation to such collection of deposits have not commenced and they are liable to be disallowed as revenue expenses. Consequently, it would be appropriate, in the circumstances of the case, to estimate and determine the income under other sources at Rs.33,68,269/- which may be taken as the total income for the subject year. 11. The revenue receipts admitted from other sources during the year relevant to Assessment Year 2009-10 was Rs.48,11,812/-. The expenditure incurred towards earning of the above receipts could be reasonably estimated at 30% which would be Rs. 14,43,543/-. Thus, the income from other sources to be subjected to tax would be of Rs. 33,68,269/-. We find that the ld. CIT(A) by considering all the facts and relevant material, he came to a conclusion that the amount collected by the assessee for allotment of the plots in future, though not allotted, has to be treated as a capital receipt because the assessee has collected the deposits from various customers to acquire the capital asset and therefore, the amount received by the assessee has to be treated
14 ITA Nos.380 & 381/VIZ/2014 (M/s. Akshaya Gold Farms & Villas India Ltd.)
as a capital receipt. So far as expenditure incurred by the assessee in relation to acquire of the capital asset, it cannot be considered as a revenue receipt. We find that ld. CIT(A) has correctly directed the Assessing Officer to delete the addition and also directed corresponding expenditure would not be allowed as revenue expenditure. We find no infirmity in the order passed by the ld. CIT(A). 12. So far as disallowance under section 40(a)(ia) is concerned, it was submitted before the ld. CIT(A) that TDS was effected and remitted to government account. Therefore, ld. CIT(A) directed the Assessing Officer to verify the claim and if it is found that TDS was effected and remitted to government account within the time prescribed, then the impugned addition may be deleted. We find no infirmity in the order passed by the ld. CIT(A). Thus, this ground of appeal raised by the revenue is dismissed. ITA No. 381/VIZ/2014 13. Facts are remaining similar for the earlier assessment year, except certain material aspects itself has discussed by the ld.CIT(A) that from the perusal of the financial statement, it is seen that during this relevant year the money/deposits collected under the name ‘plot booking advance’ was Rs. 49.75 crores. The assessee has incurred huge expenses towards collection charges,
15 ITA Nos.380 & 381/VIZ/2014 (M/s. Akshaya Gold Farms & Villas India Ltd.)
commission payments, marketing expenses, payment to personnel and waiting compensation, which were claimed as revenue expenditure. The assessee has shown income from other sources of Rs.1,48,15,886/- but returned a loss of Rs. 19,27,71,424/- on account of claiming expenses which are not allowable. For this year also, the assessee is not commenced any developmental activity in regard to advance collected from the customers. Therefore, the expenditure incurred towards such collection of deposits cannot be allowed as revenue expenditure and the loss claimed is not justified. The receipts from ‘plot advance’ would remain capital receipts even if no developmental activity had taken place. Therefore, ld. CIT(A) directed the Assessing Officer to delete the addition made in treating those receipts as revenue receipts. However, the expenditure incurred towards collection of these deposits would not take the character of revenue expenditure and are liable to be disallowed. Consequently, the income with reference to receipts admitted from other sources can be reasonably estimated and determined after allowing estimated expenditure of 30% for earning of such receipts which would be Rs. 44,44,766/-; thereby the income from other sources may be determined at Rs. 1,03,71,120/- (Rs.1,48,15,886 – Rs.44,44,766) which may be taken as the total income for the subject year. We
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find that year under consideration also, the Assessing Officer treated the plot advance received by the assessee from the customers is a revenue receipt and taxed accordingly. The assessee only received advance and not allotted any plot to the customers and the assessee also not started any developmental activity. Therefore, it has to be considered that assessee not started its activities for which the advance received from the customers. The ld. CIT(A) has rightly held that the advances received by the assessee from the customers is only a capital receipt. So far as expenditure claimed by the assessee is concerned, we find that these expenditure claimed by the assessee in connection with the plot advance received by the assessee. Therefore, the plots advance has already treated as a capital receipt, therefore, this cannot be considered as a revenue receipt. The ld. CIT(A) rightly held that the expenditure incurred towards collection of these deposits would not take the character of revenue expenditure and accordingly, directed the Assessing Officer to estimate the income. We find no infirmity in the order passed by the ld. CIT(A). 14. Insofar as disallowance made by the Assessing Officer in respect of unverifiable expenses of Rs. 2,20,25,655/-, the ld.CIT(A) has observed that the above expenses are apparently
17 ITA Nos.380 & 381/VIZ/2014 (M/s. Akshaya Gold Farms & Villas India Ltd.)
found to be incurred towards collection of deposits and are not to be allowed as a revenue expenditure, the addition made towards disallowance of expenditure is not warranted, hence, directed the Assessing Officer to delete the same. We find no infirmity in the order passed by the ld. CIT(A). Thus, this ground of appeal raised by the revenue is dismissed. 15. In the result, both the appeals filed by the Revenue are dismissed. Order Pronounced in open Court on this 12th day of Sep., 2018.
(D.S. SUNDER SINGH) (V. DURGA RAO) Accountant Member Judicial Member Dated : 12th Sep., 2018. vr/- Copy to: 1. The Assessee – M/s. Akshaya Gold Farms & Villas India Ltd., HIG-34, Sector-I, MVP, Visakhapatnam. 2. The Revenue – DCIT, Circle-3(1), Visakhapatnam. 3. The CIT-1, Visakhapatnam. 4. The CIT(A), Visakhapatnam. 5. The D.R., Visakhapatnam. 6. Guard file. By order
(VUKKEM RAMBABU) Sr. Private Secretary, ITAT, Visakhapatnam.