M/S. WEST COAST LANDBASE PVT. LTD.,NEW DELHI vs. ITO, NEW DELHI

This appeal is preferred by the assessee against the order dated 31.05.2016 passed by the Ld. CIT (Appeals)-22, New Delhi for assessment year 2011-12.

2.0 Brief facts of the case are that during the year under consideration the assessee was engaged in the business of development and sales of plots in Riverdale Tourism Village in the Sindhudurg district of Maharashtra. There were two concerns of the assessee group: (a) West Coast Land Base Pvt. Ltd i.e. the Assessment year 2011-12 asseseee and (b) West Cost Land Base Construction Pvt. Ltd. Both the concerns were connected with different aspects of the project. The assessee company was incorporated of 21.12.2005, while M/s West Coast Land Base Construction Pvt. Ltd was incorporated on 21.06.2006. The project involved construction and development of Tourism Village popularly known as Riverdane Kinley spread on approximately 300 acres of land with individual Villas, Club House, Boutique Hall, Movie Theatre, Jogging Track, Swimming Pool, Lake etc., situated close to the beach .

2.1 The assessee followed a method of accounting in which the sale proceeds were credited to the Profit & Loss account only in the year in which the registered sale deed was executed. As a result, in many cases, although the assessee had received full sale consideration, the corresponding sales were not credited in the Profit & Loss account and the amount was carried forward as liability till the registered sale deed was executed. In the year of execution of registered sale deed, the corresponding cost of the plot was reduced from the closing stock and sale proceeds were credited. For the purpose of computing the cost of plot, the average value of plots was taken after duly taking into account Assessment year 2011-12 the development cost also. The average stock value worked out in this manner was then multiplied by the area of plots for which registered sale deeds were executed during the year and the corresponding stock value was reduced from the closing stock while the corresponding sale proceeds were credited in the Profit & Loss account.

2.2 During the year under consideration, the return of income was filed declaring an income of Rs. 4,79,332/-. The total sale proceeds credited to the Profit & Loss account were Rs. 44,57,500/-. After adding the extra receipts on accounts of development charges, maintenance charges, power connection charges and water charges , the total receipts from operations were shown at Rs. 49,13,984/- besides interest receipts on FDRs of Rs. 1,02,584/-. The net profit as per Profit & Loss account was been shown at Rs. 3,63,933/-. The closing stock was shown at Rs. 2.8 cores, while the purchase cost of land was shown at Rs. 2.44 crores. The advance/s from customers was shown at Rs. 5.04 crores as against the opening balance of Rs. 4.43 crores.

During the relevant year, the total amount received from customers was Rs. 75,50,180/-. This amount was received from eight persons. The AO issued notices u/s 133(6) to all the eight Assessment year 2011-12 persons. However, in two cases the letters were received back un- served or no reply was received. The amounts received from these two persons totaled to Rs. 24,86,000/- and the AO asked the assessee to show cause as to why this amount should not be added to the assessee’s income. In response, the assessee filed confirmations from these two persons. The AO held that mere filing of confirmation was not sufficient. In this background, the AO made an addition of Rs. 24,86,000/- u/s 68 of the Act and the assessment was completed at an income of Rs. 29,82,033/-.

2.3 Aggrieved, the assessee preferred an appeal before the learned first appellate authority. However, the Ld. CIT(A) while allowing the assessee’s appeal by deleting the addition made u/s 68 enhanced the assessee’s appeal by Rs. 1,27,07,336/- by invoking provisions of section 251(1)(a) of the Act. This enhancement was arrived at by calculating the gross profit which was earned on the sale proceeds of Rs. 1,53,91,253/- pertaining to sale of eight plots the sale of which were credited to the Profit/Loss Account in subsequent assessment years. This enhancement was made on the ground that although 100% advance had been received from these eight persons during the year, the sales had not been recognized. The Ld. CIT (A) was of Assessment year 2011-12 the view that this postponed the collection of tax liability and also increased the average cost of land pushing up the cost of closing stock.

2.4 Now, the assessee is in appeal before the ITAT and has raised the following grounds of appeal:-

“1. That on facts and circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) [hereinafter referred to as ‘the Ld. CIT(A)’] has grossly erred in arbitrarily enhancing the income of the Appellant by wrongly invoking section 251(1)(a) of the Income tax Act, 1961 by Rs 1,27,07,336.

1.1 That in doing so, the Ld. CIT (A) has exceeded his authority by travelling to the assessment years beyond the Assessment year in question.

2 That the Ld. CIT (A) has erred in facts and circumstances of the case and in law in rejecting the books of accounts of the Appellant u/s 145(3) of the Income Tax Act, 1961 (hereinafter referred to as "the Act").

2.1 That in doing so, the Ld. CIT (A) has failed to appreciate that it is not open to reject the books of accounts unless the adjudicatory authority comes to a determination that the notified accounting standards have not been regularly followed.

2.2 That in doing so, the Ld. CIT (A) has failed to appreciate the letter and intent of section 145(1) of the Act and has employed the section irregularly.

3.1 That on the facts and circumstances of the case and in law, the Ld. CIT (A) has failed to appreciate that the Appellant had been consistently following the method of accounting of recognizing the revenues on the completion of the project i.e. on registration of the sale deeds ever since its incorporation and such method of 5 Assessment year 2011-12 accounting was not challenged by the Revenue in any of the earlier years.

3.2 That on the facts and circumstances of the case and in law, the Ld. CIT (A) failed to appreciate that there was no transfer in as much as not only the sale deed was executed but not even physical possession of the property was given.

3.3 That the Ld. CIT(A) ‘has failed to appreciate the business model of the Appellant that the lands were purchased by the Appellant in its own name and were held as stock in trade till the registration was effected. The Ld. CIT (A) has misconstrued the terms of the developer agreement while passing the impugned order.

4 That on the facts and circumstances of the case and in law, the Ld. CIT (A) erred in not appreciating that the Appellant regularly followed and recognized revenues in terms of Accounting Standard 9 issued by the Institute of Chartered Accountants of India which recognizes the revenue as and when significant risk and reward of ownership/title is transferred.

5 That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in making the addition of Rs. 1,27,07,336 without appreciating that the entire exercise was revenue neutral and that the dispute raised is academic.

6 That on the facts and circumstances of the case and in law, the Ld. CIT (A) erred in holding that the sale would be treated as completed and would be subject to tax when the entire sale consideration is received irrespective of the fact that the sale deed is not registered. This has been so done without any cogent basis or reasoning.

7 That on the facts and circumstances of the case, the Ld. CIT (A) did not appreciate that the delay is getting the sale deed registered was attributable to the buyers and was not attributable to the Appellant.

Assessment year 2011-12 The abovementioned grounds are independent and without prejudice to each other.”

3.0 The Ld. AR submitted that the assessee has been following the same accounting method over the years since the year 2005 when the company was incorporated and further that the department has been accepting the method of accounting followed by the assessee and had not disturbed the financial results in earlier assessment years. It was submitted that the Ld. CIT (A) had erred in enhancing the assessee’s income by including the advances received from customers while deleting addition made u/s 68 of the Act by the Assessing Officer. The Ld. AR further submitted that the method of accounting being followed by the assessee was correct inasmuch as section 53A of the Transfer of Property Act, 1882 was amended with the effect that now the transfer of immoveable property is complete only when the sale deed stands executed. It was submitted that in all these eight cases when the sale deeds had been executed, the assessee had duly taken the corresponding receipts/advances as income in the profit & loss account. The Ld. AR also drew attention to the amendment made to the Registration Act, 1908 wherein clause 1(a) has been inserted w.e.f. 2001 to section 17 and wherein it has been specified that unregistered documents for the purpose of sale 7 Assessment year 2011-12 and purchase of immoveable property shall have no effect for the purpose of section 53A of the Transfer of Property Act, 1882. It was submitted that the revenue recognition by the assessee was, therefore, in light of the provisions of Transfer of Property Act, as well as Registration Act, and further that the assessee had been following the practice of showing the amounts received from the customers as advances till the execution of sale deed and treating them as income in the year in which the sale deed was executed.

He also drew our attention Para 26 of the developer-buyer agreement placed at pages 22 and 23 of the paper book wherein it has been mentioned that the title to the property was to pass only when the sale deed was registered. It was also submitted that it is not the case of the department that the possession was given to the buyers but the sale deed was not registered. Reliance was also placed on the judgment of the Hon’ble Apex Court in the case of CIT vs. Balbir Singh Maini in Civil Appeal No. 15619 of 2017 reported in www.itatonline.org wherein it has been held that the effect of amendment to section 17 of the Registration Act, 1908 was that after the commencement of the Amendment Act, 2001, in absence of any registered agreement, there would be no transfer in terms of section 53A of Transfer of Property Act, 1882.

Assessment year 2011-12 4.0 In response, the Ld. Sr. DR placed extensive reliance on the order of the Ld. CIT (A) and also submitted that in the case of the assessee, it was an undisputed fact that the customers had given 100% of the sale consideration and no amount was due from them but still the assessee had treated the amount received as advance received instead of treating the same as income. It was submitted that the enhancement deserved to be upheld.

5.0 We have heard the rival submissions and perused the material on record. Although the method of accounting being followed by the assessee resembles Completed Contract Method but it cannot be said to be purely Completed Contract Method of accounting. However, on an overall perusal of the assessment order as well as the impugned order, it is seen that neither any defect has been pointed out in the method of accounting being followed by the assessee nor any concrete finding has been given that correct profits cannot be computed following the method of accounting adopted by the assessee. The main thrust of the Ld. CIT (A) seems to be that the assessee is deferring the payment of taxes. But this inference of the Ld. CIT (A) cannot be accepted as the assessee has been consistently following one method of accounting which has been accepted by the Department in earlier Assessment year 2011-12 assessment years. On the facts of the case it is our concerned opinion that since the assesseee has been following a certain system of accounting consistently which has even been accepted by the Department in earlier assessments and, moreover, in the instant appeal the department has not been able to demonstrate as to how the accounting system being followed was giving distorted figures of profit, it would be patently wrong to disturb the method of accounting being followed. At this juncture, any change in the method will result in the income for many assessment years to be recomputed which would be contrary to the judgment of the Hon'ble Supreme Court in the case of Excel Industries Ltd. reported in 358 ITR 295 (SC) wherein it has been held that an exercise which only results in change in income in various years but is overall tax neutral need not be pursued. Here also, the method adopted by the Ld. CIT (A) will only result in profit for each year being different but the overall profitability will be the same.

We also draw support from the judgment of the Hon'ble Supreme Court in the case of COT vs. M/s Bilahari Investment reported in (2008) 299 ITR 1 (SC) for the preposition that every assessee is entitled to arrange its affairs and follow the method of accounting, which the Department has earlier accepted. It is only in those Assessment year 2011-12 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. The Hon’ble Delhi High Court also had an occasion to adjudicate on an identical issue in the case of Paras Buildtech India Pvt. Ltd. vs. CIT and vice-versa in ITA 602/2015 and 603/2015 and vide Order dated 18.11.2015, the Hon’ble High Court held as under:

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"b) Revenue Recognition Sale of building: i) When building is ready to be delivered - Assessment year 2011-12 Sale is booked in the books of accounts on the date of possession agreed upon or on the date of sale if the sale deed is executed before the date of possession agreed. ii) When the building is not ready to be delivered- Sale is booked on the date of the building transferred and possession handed over. The income and expenditure are accounted for on accrual basis revenue of sale of offices/shops etc is recognized on signing of title deeds. All sums received till then for the construction project are treated as advances and shown as liability."

"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 the method determined by reference to the stage of completion of the 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."

5.1 Accordingly, on facts of the case and respectfully following the ratio laid down by the Hon’ble Apex Court and the Hon’ble Delhi High Court as above mentioned, we set aside the order of the Ld. CIT (A) making the impugned enhancement and also direct the Assessing Officer that the income as declared by the assessee in its Return of Income be taken as the figure for the purpose of calculation of the tax liability.

6.0 In the final result, the appeal of the assessee stands allowed. Order pronounced in the open court on 23rd October, 2018.