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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI ARUN KUMAR GARODIA & SHRI PAVAN KUMAR GADALE
O R D E R
Per Shri A.K. Garodia, Accountant Member
This appeal is filed by the assessee and the same is directed against the order of ld. CIT(A)-4, Bangalore dated 28.11.2016 for Assessment Year 2007-08.
The grounds raised
by the assessee are as under. “1. The Order of the Ld. Commissioner of Income - tax (Appeals) is opposed to law, facts and circumstances of the case.
2. The Order is passed in haste, without providing sufficient and reasonable opportunity of being heard.
3. The Order is passed against the principle of natural justice and thus liable to be quashed.
4. The Ld. AO erred in computing the income of the Appellant at Rs. 4,15,26,408/- as against the returned income of Rs. 82,15,770/-. The Ld. CIT(A) erred in confirming the order of the Ld. AO.
5. The Ld. CIT(A) erred by not considering the plea that the impugned re-computation of income, based on which the assessment was completed, was not furnished by the Appellant.
6. The Ld. CIT(A) erred in dismissing the appeal of the Appellant without adjudicating the merits of the case.
The Ld. CIT(A) ought to have appreciated that impugned assessment order was not in accordance with the directions under sec. 263 of the Act. 8. The Ld. CIT(A) ought to have appreciated that the direction under sec. 263 of the Act was to re-do the assessment whereas the Ld. AO merely relied on the re-computation statement allegedly filed by the Appellant. 9. The Ld. CIT(A) ought to have considered that the impugned assessment order was a nonspeaking order without having any reason for not considering cost of club house while arriving at the assessed income. 10. The Ld. CIT(A) and the Ld. AO erred by not appreciating the fact that the Appellant never made any real/actual income from the impugned project. 11. The Ld. AO while redoing the assessment under sec. 143(3) r.w.s. 263 of the Act ought to have taken cognizance of the prevailing facts of the case 12. The Ld. CIT(A) erred in upholding the Order of Ld. AO wherein the income of the Appellant is computed in accordance with percentage completion method prescribed under the Accounting Standard - 7 issued by the ICAI. 13. The Ld. CIT(A) ought to have appreciated that the Appellant is a real estate developer and. therefore, Accounting Standard -7 is not applicable in its case. 14. The Ld. CIT(A) erred in confirming the interest charged by the Ld. AO under sec. 234B, 234C and 234D of the Act. The Appellant seeks your leave to add, alter, amend or delete any of the grounds urged at the time of hearing.” 3. At the very outset, the ld. AR of assessee submitted the copy of written submissions filed by the assessee before ld. CIT(A) on 20.06.2016. Our attention was drawn to Para nos. 14 to 18 of the written submissions. It was pointed out that this was the claim of the assessee before CIT(A) that the assessee has not earned any real income and therefore, adopting the percentage completion method is not justified. He submitted that these written submissions filed before CIT (A) on 20.06.2016 and the impugned Page 3 of 9 order has been passed by the ld. CIT (A) on 28.11.2016 after obtaining remand report from the AO dated 19.10.2016. But neither in the remand report of the AO nor in the impugned order of CIT(A), these aspects raised by assessee before CIT(A) were dealt with. He submitted that under these facts, the matter may be restored back to the file of AO/CIT(A) for fresh decision by way of a speaking and reasoned order in respect of these aspects raised by the assessee before CIT(A) in the written submissions. The ld. DR of revenue supported the order of CIT(A). In reply to a specific query of the bench, he also agreed that the matter may be restored back to the file of CIT(A) for fresh decision. 4. We have considered the rival submissions. First of all, we reproduce paras 14 to 18 of the written submissions filed by the assessee before CIT(A) on 20.06.2016. The same are as under. “Validity of Percentage Completion Method 14. Without prejudice to the above submissions, it is pertinent to note that the entire project was marred by one litigation after another and the advances that were collected from the buyers were eventually returned without the Appellant even being able to recover the cost of development incurred. The factual position is elucidated hereunder: a. Sy. No. 10, Sonnenayakapura and Sy. No. 0-28, Adur The Hon'ble High Court of Karnataka ordered the Appellant to restrain from interfering with the Plantiff's peaceful possession of the property. Copy of judgement is enclosed in Annexure 7. Also, the Govt. of Karnataka vide notification no. BM RDA/PROJ/IRR- STRR/2005-06 dated 29.11.2006 proposed to acquire 3.5 acres of land under Sy. No. 46 for the development of the satellite town ring road which resulted in the Appellant losing significant portion of the land. Copy of the notification along with relevant extracts of the Annexures is enclosed as Annexure 8. b. Sy. No. 46, Thimmasandra The Appellant acquired the land vide sale deeds registered as document no. 28861/04-05 and 28864/04-05 on 22.03.2005. As per the title deed, the aforementioned land was acquired in Sy. No. 46 of Thimmasandra. After obtaining conversion of land and carrying out of land developmental activity to almost 80%, the Appellant on compliant raised by the owner, realized that development was carried out on a wrong plot. The Appellant inadvertently instead of carrying out the development work in Sy. No. 46 carried out the development on land in survey no. 48 for which even approvals was granted by Authorities. Nevertheless, the Appellant filed a letter with the Tahsildar, Anekal seeking an exchange in the ownership of land, Page 4 of 9 translated copy of which has been enclosed in Annexure 9. Despite various surveys by the District Administration, there has been no headway in this matter. To add to the misery of the Appellant, the satellite town ring road was proposed to be laid through the land in Sy No. 46. Copy of the proposal has been enclosed in Annexure 8 of this submission. 15. As a result of the aforementioned litigations, inadvertence of the Appellant, unfavorable judgments and unavoidable government policies, the development work was stalled and so much so that the disputed parties demolished some of the constructed structures. 16. Owing to the delay in project, some of the buyers filed plaints before the Consumer Court as a result of which the Appellant returned the advances collected from prospective buyers, in extreme cases along with interest. 17. In view of the above, the Ld. AO was not justified in adopting prescribed under AS-7 as the method of revenue recognition for the following reasons: 17.1 The pre-revised accounting standard - 7 issued by ICAI in the year 1983 applied both to persons carrying on construction work on contract for others as well as builders and developers who carry on construction work for themselves. However, paragraph 1 of Accounting Standard – 7 (revised) giving its scope mention that the standard should be applied only for accounting for construction contracts in the financial statement of contractors. 17.2 In response to a query on applicability of revised AS 7 to a real estate developer before the Expert Advisory Committee (EAC) formed by the ICAI, the EAC observed that the pre revised AS 7 specifically mentions about its applicability to enterprises undertaking construction activities on their own which would include real estate developer. However, the revised AS 7 is applicable only to Contractors. The Hon'ble Bangalore Tribunal in the case of Prestige Estate Projects (P) Ltd. v. DCIT [2010] 33 DTR 514 (Bang.) also examined the opinion given by the EAC on the applicability of AS 7 and held that the revised AS 7 does not apply to builders and real estate developers. 17.3 In the instant case, the Appellant is a real estate developer and not a contractor. Consequently, the general principles of Revenue Recognition as per AS 9 would become applicable. The Appellant recognized revenue voluntarily adopting the percentage completion method since the going concern assumption was valid as on the date of filing the tax returns. However, the Ld. AO was not justified in adopting the percentage completion method, as the going concern assumption was no longer valid as on the date of framing the assessment.
17.4 The Ld. AO while re-doing the assessment u/s. 143(3) r.w.s. 263 ought to have taken cognizance of the prevailing facts as stated above. It was well within his jurisdiction to verify the above facts by making a visit to the project site and then, accordingly proceed with the assessment proceedings. Instead, he completed the assessment in haste by adopting the income computed in a revised statement that he has incorrectly stated to have been furnished by the Appellant. 17.5 In other words, the profit offered to tax by the Appellant or the additional profit brought to tax by the Ld. AO is only in the nature of notional profit since the Appellant never made any real/actual profit from the project. 17.6 The advances received by the Appellant constitute Deferred Revenue or Unearned Revenue. Only income received or deemed to be received or income that accrues or arises or deemed to accrue or arise are included in total income under section 5 of the Income-tax Act, 1961. Deferred Revenue or Unearned Revenue falls outside the scope of total income under section 5 of the Act and is, therefore, not chargeable under section 4 of the Act. Under the Indian law, the taxation of income is scheduler in character. This implies that tax is imposed on only those heads of income which are specifically covered under the Income Tax Act. Consequently, notional income is not taxable unless specifically provided for in the Act. Various courts, over the years, have uniformly supported the instance that the taxation of notional income is impermissible. As highlighted by the Hon'ble Supreme Court in the case of Poona Electricity Supply Co. Ltd. vs CIT (1965) 3 SCR 818, this reasoning postulates that 'income tax is tax on real income, i.e. the profits arrived at on commercial principles subject to the provisions of the Income-tax Act.' Subsequently, the Hon'ble Orissa High Court in CIT vs. Prafulla Kumar Malik AIR 1969 Ori 187 emphasized that income tax is imposed only on "profits he actually receives and not on the profits he might have, but has not received". 17.7 This real accrual of income test was further elaborated by the Hon'ble Supreme Court in Godhra Electricity Co. Ltd. vs. CIT (1997) 4 SCC 530. In this case, a government circular entitled the Appellant to recover consumption charges from its customers at enhanced rates. As this Order was the subject matter of protracted litigation, the Appellant was unable to recover the enhanced charges. Consequently, it challenged the inclusion of such amount within its assessable income on the ground that no real income had accrued. Reiterating its earlier decision in Morvi Industries Ltd. Vs. CIT (1972) 4 SCC 451 and CIT vs. Birla Gwalior (1974) 3 SCC 196, the Court held that tax cannot be imposed on hypothetical accrual of income. It was observed that the question of real accrual of income must be considered by taking the probability of realization in realistic manner. Applying the above principles, Courts have consistently refrained from allowing Page 6 of 9 taxation of notional profits that is not expressly allowed in the Act.
Accordingly, adoption of percentage completion method is not only contrary to the facts of the instant case prevalent as on the date of assessment but also to the general principles of taxation and provisions of the Income-tax Act.”
Now we reproduce Para 6 of the order of CIT(A) in which the CIT(A) has reproduced the relevant portion of AO’s remand report dated 19.10.2016. “6. Remand Proceedings : The AO submitted his remand-report vide letter dated 19/10/2016. The AO has contested the assessee's submissions and has supported the impugned order u/s. 143(3) r.w.s. 263 of the I.T. Act. The relevant portion of the AO's remand-report dated 19/10/2016 is extracted as under: "3. The brief facts of the case are:- The assessee filed return of income on13.11.2007 declaring income of Rs. 82,15,770/- and subsequently, A/R has filed a revised computation of income declaring income of Rs. 4,11,61,379/-. The reasons for filing a revised computation of income is that the A/R has removed part of the expenditure of club house for the above mentioned assessment year, proportionate to the project completion carried out till the end of the Financial Year 2006-07.
The additional evidence filed by the assessee and Assessment record have been examined and following has been observed after giving the opportunity of being heard to the assessee It is seen from the assessment record that the assessee has himself filed the revised computation of income after removing part of the expenditure of club , house and assessment order was passed based on that computation. Nowhere from the record available, it is found that assessee objected to the revised computation of income being considered for concluding the assessment during the course of assessment proceedings.
5. The claim of the assessee cannot be allowed for the reasons stated above. In view of the above facts, it is requested the addition may kindly be sustained " 6.1 The Assessee was given an opportunity to furnish his rejoinder/comments if any on the remand-report vide this office letter dated 26/10/2016. The Assessee has filed his reply vide letter dated 09.11.2016, which has been perused. The Assessee therein has more or less reiterated its submissions, relevant portion of the same is reproduced as under :- ".................... However, the Ld. Commissioner of Income Tax, Bangalore-IV was of the opinion that the assessment completed was Page 7 of 9 erroneous and prejudicial to the interest of revenue. The Ld. CIT subsequently passed an order under sec. 263 of Act dated 30-March- 2012, cancelling the order passed under sec 14393) of the Act dated 04-Dec-2009. Assessment was therefore completed by the Ld.AO under sec. 143(3) r.w.s. 263 of the Act dated 26-March-2013, determining the income of the Appellant at Rs. 4,15,26,408/-. An appeal was preferred by the Appellant in this connection against the order of the Ld.AO before your Ld. Authority wherein relevant documents and submissions were made during the course of proceedings. A Remand report was thereafter called for from the Ld. AO, which was issued on 19-Oct-2016. Your Ld. Authority vide letter dated 26-Oct-2016 has called for a rejoinder. In this regard, we wish to submit as under : The Ld. CIT in his order under sec.263 of the Act had specifically directed the Ld. AO to examine if the clubhouse was transferred to the buyers of the plots. However, the Ld.AO has merely adopted a statement purportedly filed by the Appellant and completed the assessment under sec. 143(3) r.w.s. 263 of the Act determining the income of the Appellant at Rs. 4,15,26,408/-. While no opportunity was accorded to the Appellant to file evidences at the time of assessment to establish that the ownership of the clubhouse was transferred to the buyers, at the time of issuing of the remand report, the Ld. AO has completely ignored the submissions made before your Ld. Authority. Once again, the Ld. AO has erred in relying on a statement re-computing the profits that he claims to have been filed by the Appellant. Even assuming that the statement was filed by the Appellant, which in itself does not establish that the Appellant agrees to the re-computed profits and does not have any objection to it. On the other hand, the Ld. AO was duty bound to make enquiries regarding the transfer of ownership of the clubhouse and compute the profits in accordance with the law, which he has failed to do.””
We also reproduce the relevant Paras from page nos. 11 and 12 of the order of CIT(A) which are as under. “It has been explained in the preceding paras that With regard to the appellant's additional submissions / evidences filed by the appellant with respect to project losses due to non-completion, were forwarded to the AO for a remand report after due examination. The AO was also directed to verify and report upon, the assessee's contention, against the authenticity of the re-computation, as alleged before the under signed. The AO in his remand report dated 19.10.2016 (as reproduced at Para-6 above), has however affirmed the AO's findings in the impugned order. It has been reiterated by the AO, in the remand report as under : "It is seen from the assessment record that the assessee has himself filed the revised computation of income after removing part of the expenditure of club house and assessment order was passed based on that computation. Nowhere from the record available, it is found that Page 8 of 9 assessee objected to the revised computation of income being considered for concluding the assessment during the course of assessment proceedings." In background of the above detailed discussion and facts & circumstances of the case, it is quite clear that in the impugned order u/s.143(3) r.w.s 263, the AO determined the assessable income at Rs. 4,15,26,408/- only on basis of the re-computation by the appellant himself. No interference is therefore called for in this respect. With regard to the assessee's contentions on the project losses suffered during the subsequent period, nothing prevented the assessee from claiming justifiable loses if any, as per law, in the ensuing / relevant assessment periods. In background of the above detailed discussion & facts and circumstances of the case the assessee’s grounds of appeal cannot be sustained. The AO’s action is therefore upheld.”
7. From the above paras reproduced from the order of CIT(A) being para no. 6 and some paras from page nos. 11 and 12 of the order of CIT(A), it is seen that although ld. CIT(A) has obtained remand report from the AO in respect of various submissions made by the assessee before CIT(A) in which assessee has stated that the assessee has incurred losses due to non- completion of the project and therefore, there is no real income and reliance has been placed by ld. AR of assessee on various judicial pronouncements such as judgement of Hon’ble Apex Court rendered in the case of Godhra Electricity Co. Ltd. Vs. CIT as reported in (1997) 4 SCC 530, Morvi Industries Ltd. Vs. CIT as reported in (1972) 4 SCC 451 and in the case of CIT Vs. Birla Gwalior as reported in (1974) 3 SCC 196. But there is no reference to these submissions and claim of the assessee in the remand report of the AO or in the order of CIT(A). Under these facts, we feel it proper to restore back the matter to the file of CIT(A) for fresh decision by way of a speaking and reasoned order in respect of these claims of the assessee made by the assessee before CIT(A). If required, CIT(A) can obtain fresh remand report from the AO and if ld. CIT(A) ask the AO for fresh remand report, then AO should furnish the fresh remand report which should be a speaking report in respect of all these submissions of the assessee. In view of this decision, no adjudication on merit is called for at the present stage.
In the result, the appeal filed by the assessee is allowed for statistical purposes. Order pronounced in the open court on the date mentioned on the caption page.