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Income Tax Appellate Tribunal, “ A” BENCH : KOLKATA
Before: Hon’ble Shri S.S. Godara, JM & Shri M. Balaganesh, AM]
ORDER PER BENCH 1. The Revenue has filed this instant appeal against the CIT(A)-12, Kolkata’s order, dated 23-08-2016 passed in case no. 596/CIT(A)-12/Kol/Ward-7(1)/2014-15 involving proceedings u/s 143(3) of the Income-tax Act, 1961 ( in short ‘Act’).
Heard both the parties. Case file perused.
The Revenue’s first substantive ground seeks to reverse the CIT(A)’s findings deleting undisclosed sales addition amounting to Rs. 26,63,100/- made in the course of the assessment in issue framed on 23.1.2014. The CIT(A)’s detailed discussion in issue reads as follows:-
M/s. Nadia Constructions P.Ltd “3. Ground number 1 to 4 relates to the Rs.26,63,100/ added to the Total Income of the assessee as Undisclosed Sale. The relevant portion in the assessment order is as under : "As per reply received from The Addl. District Sub Registrar, Durgapur in reply to notice u/s 133(6) of [he Income Tax Act 1961, it is found that the sale agreement without possession of the following flats were registered during the relevant year:
Sl Date of Name of the Flat Details Value as Paid till Registration purchaser per date Agreement 1. 25/11/2010 Sujata Pal & Block Rs.11,93,500 Rs.11,93,500 Madhusudhan C2 Site Pal C, Flat 3rd 03, Floor 2. 25/11/2010 Rohit Basu & Block – Rs.14,69,600 Rs. Kumud Ranjan B3 Site 13,22,520 Basu C, Flat E 4, 4th Floor Rs.26,63,100 The assessee is following "Project Completion Method", i.e. when the project is complete and all the flats are registered with possession, only then revenue is recognized.
For recognition of revenue in case of real estate sales, it is necessary that all the conditions specified in Accounting Standards (AS)9, are satisfied. In case of Real Estate Sale, the seller usually enters into an agreement for sale with the initial stage 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 which signify transferring of significant risk and reward even though the legal title is not transferred or the possession of the real estate is not given to the buyer.
The assessee also claimed that they affected registration of agreement without possession certificate at the request of the respective purchaser and risk has not been transferred. However the assessee could not elaborate how risk has not been transferred As the agreement has become legally enforceable, the risk has automatically transferred to the purchaser.
M/s. Nadia Constructions P.Ltd In this case the seller has transferred all the significant risks and reward of ownership to the buyer and other conditions for recognition of revenue specified in AS9 are satisfied. Once the saleagreement has been registered, 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. No significant uncertainty exists regarding the amount of the consideration that will be derived from the real estate sales and there is no uncertainty about ultimate collection. (Collection of 100% and 90%, respectively made but till date but revenue has not yet been recognised).
When the seller has transferred to the buyer all significant risks and rewards of ownership, it would be appropriate to recognize revenue at that stage subject to the fulfillment of conditions as discussed above.
The assessee was asked to show cause vide this office letter dated 8/1/2014, why such revenue of Rs. 26,63,1001 shall not be assessed in the hands of the assessee for the relevant Assessment Year 201112.
The assessee vide it reply dated 10/1/2014, claimed that since the whole payment has not been received, they have not booked revenue. This argument has no legs to stand since the assessee is not booking revenue even when 100% revenue has bee received The assessee is booking revenue only at the time of registration. In this case, registration (without possession) has been done, stamp duty has been paid, risk has been transferred.
The assessee also claimed that they have affected registration of agreement without giving possession at the request of the respective purchasers and the risk factor has not been transferred.
For recognition of revenue in case of real estate sales, it is necessary that all the conditions specified in Accounting Standards (AS) 9, are satisfied In case of Real Estate Sale, the seller usually enters into an agreement for sale with the initial stage 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 which signify transferring of significant risk and reward even though the legal title is not transferred or the possession of the real estate is not given to the buyer.
In this case, the seller has transferred all the significant risks and reward of ownership to the buyer and other conditions for recognition of revenue specified in AS9 are satisfied Once the sale agreement has been registered the seller has transferred to the buyer all significant risks and rewards of 3
M/s. Nadia Constructions P.Ltd and the seller retains no effective control of the real estate. No significant uncertainty exists regarding the amount of the consideration that will be derived from the real estate sales and there is no uncertainty about ultimate collection. (Collection of 100% and 90%, respectively made but till date but revenue has not yet been recognized).
When the seller has transferred to the buyer all significant risks and rewards of ownership, it would be appropriate to recognise revenue at that stage. When the assessee itself has taken the 'Thumb Rule' of Registration to be taken as effective Sale, now it can not backtrack only because possession was not given. When the value of sales, instalments of payments, possession etc. all has been fixed by a legally enforceable instrument, an actual sale has already been effected in a mercantile system.
Further, in West Bengal, registration of Sale agreement is not compulsory. Therefore, both the parties voluntarily registered the sale agreement to keep other party binding. The Purchaser obviously wanted to not keep any chance of sale to a third party and take the reward of ownership. Similarly, the seller wanted to ensure full payments from the buyer. The stamp duty is paid by the Purchaser only. In these two cases, purchaser paid stamp duty from their pocket in this year itself so as to ensure the reward to ownership. The seller thus transfers the reward of ownership in lieu of ensuring the payments. In all other cases, the purchasers obviously took the risk as they didn't want to pay their stamp duty early.
As per the agreement, the Developer shall handover the possession of flat within 18 months from the date of agreement and the purchaser agreed to pay the developer as consideration for the said flat the said sum mentioned in part II of the third schedule. It was also mentioned that the purchaser shall pay interest at the rate of 24% per annum on the sum due, if the purchaser. fail to pay to the developer. The interest to be paid from the elate of default to the date of payment. To sum up, all risks has been transferred to the hand of purchaser.
In the facts & circumstances of the case, as discussed above, Rs. 26, 63,1 00/ added to the Total Income of the assessee as Undisclosed Sale". 3.1 In support of the appeal the appellant has furnished the following written submission first on 07.02.2015:
"The appellant is Property Developer. The appellant claimed loss on sale of landed property as business loss but after applying Section 50C of 4
M/s. Nadia Constructions P.Ltd Income Tax Act, 1961, the same has been taxed as Short Term Capital Gain. The appellant has entered into sale agreement with two parties and received advance. No possession has been given. Entire sale value as per agreement has been taxed as undisclosed sale. Hence the appeal before your honour.
Grounds of Appeal
No.1 to 4. Addition for undisclosed sale Rs.2663100/- (1) As is mentioned on page 7 of the Assessment Order
2. Sale Agreements were registered without possession for total Rs. 2663100/.
(2) Upto 31st March 2011 relevant to Asst. Year 201112 for which assessment is being made advance received against these 2 flats was as follow Sujata Pal 1014475 (Not Rs.1193500/ as mentioned ill Asst. Order) Rohit Basu 273920 (Not Rs. E322520/ as mentioned in Asst. Order.)
(3) In support of above Audited Accounts and Advance from Customers list is enclosed marked Annexure 'A' and Annexure 'B '. Schedule 'L' shows Advance from Customers of Rs. 81295899/. At S. No. 89 of Advance from customer list name of Rohit Easu appears and at S.No. 119 name of Sujata Pal appears.
(4) As only part advance has been received, no possession has been given and even flats were not fully ready as on 3rt March 2011 there is no question of treating the Sale Agreement value as undisclosed sale.
(5) In view of above submissions addition of Rs. 2663100/ is liable to be deleted.
In support of the appeal the appellant has further furnished the following written submission on 14.02.2015:
Copy of letter dated 10.1.2014 filed before ITO Annexure 'A' is enclosed where the appellant has categorically said that Registration of Sale Agreements has been done without possession. Full consideration has not been received till 31.3.11.
Payment made upto 31.3.11 is Rs. 273920/ and 1014475/ and not 1322520/ 5
M/s. Nadia Constructions P.Ltd and 1193500/ as mentional in the Assessment order wrongly.
2 Copy of Payment details filed before ITO also are enclosed Annexure 'B' and 'C' which shows payments till date which are not relevant. What is relevant is only payment upto 31.3.11 (Asst. Year 201112) and not payments made after Summary of Payments will show as follow…… Sujata Pal Rohit Basu Value as per Agreement 1193500 1469600 Payment upto 31.3.11 24.6.10 238700 6.10.10 68480 Asst. Year 201112 1.12.10 298375 3.11.10 205440
1.12.10 298375 13.1.11 179025 1014475 273920 Payment after 1.4.11 59675 30.9.11 342400 1.4.11 18.5.11 119350 4.7.12 342400 179025 5.10.12 205440 12.4.13 141260 21.5.13 17100 1048600 Final Total 1193500 1322520 (As wrongly taken by ITO in Asst. order)
Provisional Possession letter issued on 15.3.14 to Rohit Basu and on 17. 4.14 to Sujata Pal is enclosed as additional evidence Annexure 'D' and 'E' . Accounting Standards 9 (As 9) as stated by the ITO for recognition of revenue in case of real estate sales is wrong. Rather AS9 says that " This statement does not deal with the following aspects of revenue recognition to which special considerations apply. Revenue arising from Construction Contracts”.
Relevant page of AS 9 is enclosed Annexure 'F'. AS 7 for Accounting for Construction Contracts applies.
A mere advance against booking of flat which has been duly shown in Accounts and that without possession which is under construction cannot give rise to a 6
M/s. Nadia Constructions P.Ltd sale. On Page 8 of Assessment Order ITO has agreed that sale agreement is registered to keep other party binding. Hence there is no sale and addition for undisclosed sale should be deleted.
3.2 I have considered the submissions of the appellant as well as the facts of the case. The following facts relating to this ground of appeal are important and they are : As per Assessment Order Page
7. Agreement for 2 flats were registered on 25.11.2010 for value of 26,63,100/ ( Copy of Two Agreement for Sale for Sujata Paul and Rohit Basu were submitted and verified and these are clearly an Agreement for Sale), As per AO, risk has been transferred to the hand of purchaser so this is undisclosed sale as per Page 9 of Assessment order. In remand report the Ao says that as Deed is registered, significant risk is transferred (Registration of Agreement to Sell is to keep both the parties binding. Assessing Officer himself has agreed to this in last para on Page 8 of Assessment Order) The AO has applied Accounting Standard 9 as per Page 7 and 8. (As9) is not applicable and only AS7 is applicable), According to the AO as per Page 7 of Assessment Order Paid till date is 11,93,500 + 13,22,520 but it is seen in Audited Accounts as on 31.3.11 Schedule ‘L ‘Advance from Customers is shown and in the details filed thereof advance are shown as below S.No. Name Amount Wrongly taken ITO in Asst. Order
89. Rohit Basu and 2,73,920 13,22,520 Kumud Ranjan Basu 119 Sujata Pal 10,14,475 11,93,500 12,88,375 (Datewise details of above amount is given in Supplementary Written Submission Page 2) The AO while making Assessment for Asst. Year 201112 has taken into account payments made after 31st March 2011. The AO has wrongly taken into account payments made up date of Assessment Order which is obvious not correct.
It is seen that Accounting Standard 9 has been applied by AO. I agree with the appellant that only AS7 applies in the case of t appellant. Thus it can be admitted stated that mere registration of Agreement for Sale without full payment and without possession does not complete the Sales and this cannot be termed as 7
M/s. Nadia Constructions P.Ltd concealed Sales. The advances received by the appellant Rs. 12,88,375/ from the two parties were clearly part of the total advances received (Rs.8,12,95,899/) shown by the appellant in its balance sheet (Rohit Basu (Rs.2,73,920/) appears at serial number 89 while Sujata Pal (Rs.10,14,475/) appears at serial number 119).
In view of above as AO has applied “Paid till date” rather than Advance Payment upto 31.3.2011, has wrongly applied Accounting Standard 9 and has treated Agreement for Sale as complete Sale only because of registration is done without possession and without full payment addition. Thus there is no case of concealed Sales of Rs.26,63,100/ and is hereby deleted. “
Mr. Pradip Majumdar vehemently contends during the course of hearing that the Assessing Officer rightly followed the Accounting Standard (AS-7) in assessing the tax payer’s impugned receipts totaling to Rs. 26,63,100/- as income of the relevant previous year only. He places his reliance on the assessment findings that the assessee had transferred its flats in issue vide registered agreement(s) dated 25-11-2010. He therefore, he seeks to restore the impugned addition in assessment year under consideration. The assessee supports the CIT(A)’s action deleting the impugned addition vide aforesaid discussion.
4. We have given our thoughtful consideration to rival contentions. The Revenue’s instant substantive formal grievance seeks to assess the instant tax payer for sale consideration of Rs.26,63,100/- in the relevant previous year. Its case solely rests on the fact that the agreement in question is a registered document transferring the twin residential units in vendee’s favour. We find no merit in the Revenue’s instant arguments. Case records suggest that the assessee had in fact executed registered sale deeds on 30-03-2016 only in assessment year 2016-17. The said registered documents indicate that vendor- vendee duly acknowledged the registered agreements dt. 25-11- 2010 (supra). The assessee had shown the sum in issue as advances only though out in the intervening period. It duly followed project completion method only and sought to 8
M/s. Nadia Constructions P.Ltd offer all receipts on gross basis whereas the Revenue’s emphasis is to assess the impugned advances received from two customers in view of the two registered agreements in issue. This tribunal’s decision in & 686/Ind/2016 M/s. Ashoka Hi-Tech Builders P.Ltd case dated 03.8.2018 has declined the Revenue’s similar argument seeks to invoke AS-7 as follows: Para 19 to 44 of the said order:
“19. We have heard rival contentions and perused the records placed before us. The only issue for our consideration in these two appeals is that whether both the lower authorities were justified in making additions in the hands of assessee by applying percentage completion method as against the project completion method/completed contract method followed by the assessee. The assessee company which was incorporated in June, 2009 owns a land. Vide agreement dated 1.4.2009 (registered on 17.4.2009) it entered into development agreement with another company namely JSM Devcon (P) Ltd for development of the lands owned by the company in the capacity as land owner. As per the agreement placed in the paper book, on getting necessary sanctions, approvals and NOC the developer would construct high rise buildings on the land belonging to the appellant with all necessary facilities, amenities etc. Out of the total constructed saleable area the appellant as the land owner would be entitled to 32% of total constructed salable area as the right of ownership and this 32% constructed area shall vest with the assessee only upon completion of the entire construction (As agreed in Clause 9 of the agreement).
Before moving further it is worth discussing certain clauses of the agreement between the assessee and JSM DPL as they are the foundation of the issues emanating out at these two appeals: (i) As per clause (9), on completion of the entire construction the completed flats are to be divided and allocated between the land owner and developer in accordance with clause (2) of the agreement which entitles the owner to get 32% constructed area upon completion of the entire construction . A combined reading of clause (2) & (9) would thus go to show that the appellant’s right to get 32% of the area would crystallize / accrue on completion of the entire construction and till then owner has no right to claim any right over any of the constructed portion.
(ii) Clause (7) of the agreement specifies the period for construction of buildings according to which the developer is required to complete the construction within 54 months ( subject to a grace period of 6 months ) from the date of handing over of the possession by owner and obtaining necessary permissions, approvals, NOCs etc . The developer is thus required to handover the 9
M/s. Nadia Constructions P.Ltd landowner’s share of 32% of the completed constructed saleable area within 60 Months from above date failing which the developer is required to first allocate 32% area to the land owner out of the area constructed till then. This has been stated to be an essential condition of the agreement. The failure of developer to give such 32% area, makes the developer liable to pay interest @ 12% p.a. on the remaining area. A closure study of the agreement thus shows that appellant’s right to get 32% of the constructed area would crystallize only on completion of construction and demarcation / division as per clause (9) or 60 months from the date of possession as aforesaid whichever is earlier. Since the agreement is executed on 01042009, the period of sixty months will be completed on 31st March 2014 . In other words the appellant has no right to claim possession of its share of 32% of constructed area. It would thus be clear that. in the years under consideration i.e in AY 201213 & 201314 , the appellant’s right to receive the constructed area as per agreement had not accrued. The appellant did not have any cause of action under the agreement till completion of the period specified in the agreement.
(iii) Clause (4) of the agreement requires developer to pay to the owner a sum of Rs. 5,01,00,000/ (Rupees Five Crores One Lakhs) towards refundable security deposit for ensuring the performance of the terms of contract . The security deposit is refundable as per clause (11) of the agreement. The refund of security is also linked with completion of construction and handing over of possession of 32% of the constructed area to the owner. The manner of refund of security deposit is phase wise as specified in said clause. However, the total refund is only upon completion of construction and handing over of 32% of the constructed area to the owner. (iv) Clause (10) of the agreement gives exclusive right of sale of constructed flats to the developer along with right to determine / fix the rates for sale , conditions and other policies about sale of Flats , obviously from the point of view of uniformity of the policy in that behalf . Since the exclusive right of sale has been conferred upon the developer, the owner is required to execute sale deeds in respect of its 32% area as per the deal struck by the developer.
A bare reading of the agreement as a whole thus goes to show that the appellant’s capacity in the said agreement is only as a land owner whereby the appellant has assigned development rights in respect of the lands in question in favour of the developer and the appellant is entitled to 32% of constructed saleable area in the project constructed by the developer. The agreement in question cannot therefore be construed either as a Joint Venture or a Partnership agreement but is merely a development agreement between the developer and the land owner and the appellant’s right to receive 32% of the constructed saleable area accrues and arises only upon completion of the entire construction by developer or upon completion of the period of 60 months from the date of handing over of the possession of the land by the appellant land owner along with necessary permissions , NOCs etc , whichever is earlier.
M/s. Nadia Constructions P.Ltd 22. It is further observed that the assessee follows mercantile system of accounting and since during the years under consideration, the construction on the lands handed over to the developer for development and construction was not completed but the appellant had merely received advances from the proposed buyers, no revenue was recognized by appellant and the advances received against proposed sales were credited in advances against sale of flat account and shown as liability in the Balance Sheet. At this stage it may be relevant to note that since as per the agreement, exclusive right of sale was given to the developer M/s JSM Devcons Pvt. Ltd., the advances against sales were to be received by appellant through the developer, as such the accounting in that respect has been done accordingly. It may further be relevant to mention that the appellant started receiving advances against the sales from A.Y. 2010 11 which have been duly reflected in the books of account from year to year on consistent basis.
From perusal of the financial statement we observe that the assessee is maintaining its books of accounts on mercantile basis and it is consistently showing the advances received from JSM DPL on behalf of various proposed buyers of flats under the head advance against sale of flat in the liability side of the balance sheet. It started receiving the money from assessment year 201011 onwards. The revenue authorities has accepted the income/loss declared in the income tax returns for A.Y. 200910, 201011 and 201112 under the respective orders passed u/s 153A r.w respect to section 143(3) of the Act. This fact cannot be disputed that the assessment of income/loss in these years support the contention of the assessee that the accounting method followed by the appellant stands accepted according to which the amounts received from proposed buyers (through developer) in advances against sale of flats shown as liability in the balance sheet has been accepted. The reason for showing such advances was the liability of assessee as the transaction of sale was not completed and treated as sales when sale deed was executed and registered in favour of the buyer and as the assessee has adopted project completion method it has recognized the revenue only on the completion of sale i.e. upon execution and registration of sale deeds in favour of the buyer.
Audited financial statement for the A.Y. 201011 and 201112 placed at 49 and 64 of paper book shows that during the assessment year 201011 the assessee received Rs.19 lakhs and for the assessment year 201112 sum of Rs. 4,65,35,702/ was received as advance from proposed buyers. The revenue authorities have accepted this system for accounting adopted by the assessee for both the years in the assessment framed u/s 143(3) r.w.t 153A of the Act.
It was only for assessment year 201213, 201314 that the Assessing Officer applied the method of percentage completion adopted by the developer i.e. JSM DPL on the assessee and made the addition observing that assessee has entered into the agreement as a joint venture for development and the method of accounting applied by JSM DPL is binding on the appellant also. The Ld.AO 11
M/s. Nadia Constructions P.Ltd without giving any weightage to the advances received during the year by the assessee as well as the accounting method adopted consistently just for the basis of the value of construction completed during the year and on the basis of the ratio agreed in the development agreement of 68:32, calculated the addition of Rs.16.12 crores (approx) for A.Y. 201213 and Rs.12.25 crores for A.Y 201314.
When the matter came up before the CIT(A) he also confirmed the addition without considering the fact that assessee is the land owner who has assigned the development right in favour of the developer on the terms and conditions specified in the agreement between the parties. We find that the assessee is entitled to the possession of its share of 32% of constructed area only upon completion of entire construction and before that the assessee has no right to claim possession of its 32% constructed area which is required to be completed within 60 months from the date of handing over of possession of land along with all necessary permissions/approvals. The period of 60 months taken from the date of agreement shall end on 31.3.2014 and the assessee still have the right to sale the completed area as per agreement thereafter.
To summarize the facts we find that the assessee got the right to sell its 32% share of the salable constructed area only during the F.Y. 201415 and onwards and money received from the developer i.e. JSM DPL was only an advances from proposed buyers on which the assessee was not having the legal right and the fact could not be denied that when a person does not have a right to hold an amount the same can be taken back by the proposed buyers in case there is a default on the part of the developer and in such situation there could be a remote possibility that assessee could have disclosed the income from sale of flats, the right of which was not devolved on it.
Now the issue as to whether a person is mandatorily required to adopt percentage completion method or not. The method of accounting is governed by section 145 of the Act and as per section 145(2) of the Act the income is to be computed in accordance with either cash or mercantile system of accounting to be regularly employed. This sub section further empowers Central Government to notify the accounting standards to be followed by any case of assessee or in respect of clause from time to time and sub section 3 of section 145 empowers the Assessing Officer to make the assessment of the assessee in the manner provided under section 144, in case he is not satisfied about the correctness or completeness of the assessee or where the method of accounting have not been regularly followed by the assessee. Once the assessee followed accounting regularly the Assessing Officer is bound to assess the income of the assessee on the basis of such method of accounting. On perusal of the provision of section 145 shows that it nowhere empowers the authorities to assess the income on the basis of method of accounting followed by another assessee nor does it empower the authorities to thrust upon the assessee to adopt the method of accounting followed by another assessee. In the instant appeal both the lower authorities have rejected the books of accounts of assessee and applied the percentage 12
M/s. Nadia Constructions P.Ltd completion method adopted by the developer JSM DPL and computed the income accordingly. Whether such action of the revenue authorities is justified or not needs to be examined in light of the jurisdictional pronouncements.
We find that Hon’ble Supreme Court in case of Investment Ltd V/s CIT reported in (1970) 77 ITR 533 (SC) , where their Lordships have held that “assessee is free to employ for the purpose of his trade , his own method of keeping accounts, and for that purpose to value his stockintrade 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 )”.
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 parimateria 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 , primafacie , 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 “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 13
M/s. Nadia Constructions P.Ltd 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 .
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 assesse , 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 certain years.
Examining the facts of instant appeal we in light of above judgments we find that the method of accounting along with following project completion method for treatment of advances received from proposed buyers the assessee has been consistently followed this method and appellant’s assessment has been completed by the Ld. AO for first two years viz, A.Y. 201011 & 201112. In both these years also the appellant has credited the advance received against proposed sales of flats to a separate account and shown as a liability in balance sheet . At this stage it may be relevant to mention that in those years also the appellant has credited the advance received against proposed sale of flats to the Advance against sale of Flat A/c and not treated the same as income for said years on the basis that revenue in respect of sale of said flats would be recognized only on execution and registration of sale deeds of flats . The assessment of the said years have been completed by AO by the same common order , accepting the method of accounting and method of recognition of revenue . Thus the method followed by appellant is a consistent method which has been accepted by AO for two years i.e. AY 201011 & 201112 Since the said method has been consistently followed by appellant and even accepted by department, the same cannot be deviated in the present two years without there 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).
Now it is an admitted fact based on the financial statement and audited reports for 201011 and 201112 accepted by the revenue authorities in the assessment proceedings u/s 143(3) read with respect of 153(A) of the Act that 14
M/s. Nadia Constructions P.Ltd 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.
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”.
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 200708, 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 year 200708 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 15
M/s. Nadia Constructions P.Ltd 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 has followed the chosen method regularly. The Department is bound by the 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 200708. The addition of Rs.1,66,70,811 are directed to be deleted”.
Further the coordinate Bench of Ahmedabad Tribunal in the case of Vraj Developers passed in which attained finality as it is not challenged by the department before the high forum observed as follows; “The learned Departmental representative supported the order of the learned Assessing Officer and the learned authorized representative of the assessee supported the order of the learned Commissioner of Income tax (Appeals) and also placed reliance on the Bangalore Bench of the Tribunal in the case of Nandi Housing P. Ltd v. Deputy CIT (2003) 80 TTJ (Bang) 750, wherein the Tribunal followed the decision of the Karnataka High Curt in the case of Khoday Distillers Ltd, in ITRC Nos. 19mto 21 of 1993. This, it is observed that the issue which requires our adjudication is that the income in the instant case is to be computed as per system of accounting followed by the assessee or as per accounting followed by the assessee or as per accounting standard AS7 for the purpose of charging of income tax. We find that the issue is to be decided in accordance with the provisions of section 145 of the Act shows that the business income 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 16
M/s. Nadia Constructions P.Ltd 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 Incometax (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 Incometax (Appeals). In view of the above discussion, we do not find any error in the order of the learned Commissioner of Incometax (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.”
We further find the coordinate bench of Mumbai in the case of Prem Enterprises V Income 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 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 AS7 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 17
M/s. Nadia Constructions P.Ltd relating to the issue of the project completion method adopted by the assessee visàvis 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 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 18
M/s. Nadia Constructions P.Ltd 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. AS7 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 by 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 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 19
M/s. Nadia Constructions P.Ltd 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.”
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”.
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. 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 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.” (underlining ours)
After the above judgments of the Supreme Court it cannot be said that the project completion method followed by the assessee would result in deferment of 20
M/s. Nadia Constructions P.Ltd the payment of the taxes which are to be assessed annually under the Income Tax Act. Accounting Standards 7 (AS7) issued by the Institute of Chartered Accountants of India also recognize the position that in the case of construction contracts, the assessee can follow either the project completion method or the percentage completion method. In view of the judgments of the Supreme Court (Supra), the finding of the CIT(A), upheld by the Tribunal, does not give rise to any substantial question of law. Further, the Tribunal has also found that there was no justification on the part of the assessing officer to adopt the percentage completion method for one year(the year under appeal) on selective basis. This will distort the computation of the true profits and gains of the business. For these reasons, we are of the view that no substantial question of law arises. We, therefore, decline to admit question Nos. 2 and 3.”
From perusal of all the judgments it has been consistently held rather a settled law that the action of revenue authorities cannot be held justified if they substitute another method of accounting on the assessee which in the instant case was imposing of percentage completion method on the assessee even when it has been consistently maintaining the regular books of accounts on mercantile basis u/s 145 of the Act adopting project completion method to account for the revenue and the revenue authorities have failed to bring forth any inconsistency in the books of accounts. The Assessing Officer in the instant case has merely applied the method of percentage completion adopted by the Developer JSM DPL and calculated the income of the assessee completely ignoring the fact that the assessee was merely the owner of land and he was entitled to 32% of saleable area only on completion of construction and the deadline of which was 60 months from the date of agreement i.e. from 1.4.2009. The Ld.A.O also ignored the fact that right to sale its share of constructed area with the assessee was only from April, 2014 onwards and the assessee has offered the revenue for taxation from F.Y 201415 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 201415 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.
Before parting of with adjudication of this issue it would be relevant to take note of the amendment brought in statute with retrospective effect w.e.f. 1.4.2017 by way of insertion of Section 43CB for the purpose of computation of income from construction and service contract. The relevant provision of Section 43CB of the Act reads as follows; 21
M/s. Nadia Constructions P.Ltd
"43CB. Computation of income from construction and service contracts.—(1) The profits and gains arising from a construction contract or a contract for providing services shall be determined on the basis of percentage of completion method in accordance with the income computation and disclosure standards notified under subsection (2) of section 145: Provided that profits and gains arising from a contract for providing services,— (i) with duration of not more than ninety days shall be determined on the basis of project completion method; (ii) involving indeterminate number of acts over a specific period of time shall be determined on the basis of straight line method. (2) For the purposes of percentage of completion method, project completion method or straight line method referred to in subsection (1)— (i) the contract revenue shall include retention money; (ii) the contract costs shall not be reduced by any incidental income in the nature of interest, dividends or capital gains.".
From the perusal of above section it is crystal clear that before the insertion of this section there was no legal obligation on the part of the assessee to follow percentage completion method only. Before insertion of this section person engaged in construction and service contracts were free to follow either the project completion/ Completed project method or percentage completion method in accordance with the provisions of Section 145 of the Act. In the instant appeal assessee even though not directly involved in the construction activity and it is merely gave its land for development and it was agreed between the assessee company and the developer that 32% of the saleable area shall be given to the assessee. The assessee is constituently followed completed project contract/percentage completion method as recognized its revenue at the time of execution of getting the sale deed registered and before that it has to be consistently showing the advance from sale of flats as the liability in the balance sheet.
We therefore in the given circumstances of the case and in the light of judgment referred in preceding paragraphs are of the considered view that the Ld. A.O was not justified in applying the percentage completion method on the assessee merely on the basis that it was followed by the developer JSM DPL and arbitrarily making addition to the income ignored the fact that project completion method/ completed contract method of accounting has been consistently adopted by the assessee and even have been accepted by the revenue authority for the A.Y. 201011 and A.Y. 201112. We therefore set aside the findings of Ld.CIT(A) and delete the addition of Rs.16,12,34,754/ for Assessment Year 201213.”
M/s. Nadia Constructions P.Ltd 5.. We adopt the above detailed reasoning mutatis mutandis to conclude that the assessee builder/ developer had rightly not recognized advances received from the two customers as income ongoing by project completion method as per its past practice accounting system regularly followed. More so in view of the fact that it had actually sold the flats in issue in AY 2016-17 (supra). We therefore confirm the CIT(A) ‘s findings deleting the impugned addition of undisclosed sales. The Revenue fails in this former ground.
The Revenue’s second substantive ground is that the CIT(A) has erred in law and on facts in treating the loss disallowance of Rs.58,46,550/- under the head ‘business’ than short term capital loss treated during assessment. The CIT(A)’s detailed discussion on the instant issue reads as under:-
Ground numbers 5 to 7 relate to the addition of Rs .51,73,068 plus Rs. 6,73,482 = Rs, 58,46,550 which was added to the income as Short Term Capital Gain. The relevant portion of the assessment order is as under " The main activity of the assessee being Real Estate Developer, the assessee also has Investments in Lands as fixed assets.
On verification of accounts, it is found that the assessee has claimed "Loss on Sales of Landed Property' amounting Rs. 6, 73,482/. A letter issued to The Addl. District Sub Registrar, Durgapur for verification of such land sales and its Stampduty value: Office of the Incometax Officer, Ward7(1),Kolkata Aayakar Bhizvan, P7, Chowing/zee Square,Kol700069 Ph. 8902196988 No.ITOIW7(l)/NadialI33(6)/20I314/ Dated 3172013 To The Addl. District Sub Registrar, Durgapur City Centre Durgapur 713216
M/s. Nadia Constructions P.Ltd Sub: Information sought for u/s 133(6) of the Incometax Act in the case of Nadia Construction Pvt. Ltd. (PAN: AACCN8686N) For the F. Y 201011 relevant to the A. Yr. 201112 Matter regarding Please refer to the above As evident from the records of Nadia Constructions Pvt. Ltd. for the F. Y 201011 relevant to the A. Yr. 201112, my abovementioned assessee sold some lands. Now, regarding the same, following information are to be submitted by your office : Details of Sale of land by Nadia Constructions Pvt. Ltd during the financial year 201011 (including Stamp duty value)
Details of Purchase of such lands by Nadia Constructions Pvt. Ltd. (Probable time period November '2007 to March '2008)
The aforesaid information should reach the undersigned within 7 days from receipt of this letter. This letter may be treated a notice U/S 133(6) of the Incometax Act 1961. Noncompliance for each day of failure may attract penalty of Rs. 100/.
PIs. Provide your telephone no. for any clarifications.
(Sumit Dasgupta) ITO, Ward7(1),Kolkata After receiving the informations,following showcause letter was issued: Office of the Incometax Officer, Ward7(1),Kolkata Aayakar Bhavan, P7, Chowinghee Square,Kol700069 Ph.8902196988 No.ITOIW7(l)INADIAl2013141 Dated 8112013 To The Principal Officer M/s. Nadia Construction Pvt. Ltd. 81/2A, Raja Dinendra Street, Kolkata 700006 Sub : Final Show Cause before completion of Assessment u/s 143(3) 24
M/s. Nadia Constructions P.Ltd For A. Y. 201112Mattter regarding Please refer to the above.
On verification of Profit & Loss a/c. it is found that you have claimed Loss on Sale of Landed Property amounting Rs. 6, 73,482/. But, from the fixed assets schedule, it is found that you have shown Land worth Rs.56,54,177/ sold during the year. From the reply received from Addl. Dist. SubRegistrar, Durgapur, Burdwan in reply notice u/s 133 (6), it is found that you have sold the following lands during the relevant year:
Sl Date of Sale Mouza Land Area Sale Value Full Value of Conisderation 1. 02/11/2010 Gopalpur 332 decimal Rs.28,17,020 Rs.46,82,534 2. 02/11/2010 Gopalpur 332 decimal Rs.21,63,675 Rs.35,66,632 3. 02/11/2010 Gopalpur 302 decimal Rs.25,62,470 Rs.39,26,372 4. 02/11/2010 Gopalpur 599 decimal Rs.50,82,515 Rs.74,10,828 Rs.1,95,86,366 Corresponding Purchases of lands were as below:
Sl Date of Mouza Land Area Purchase Full Value of Total purchase Cost Consideration 1 10/03/2018 Gopalpur 332 Rs.30,18,212 Rs.191,470 Rs.32,09,682 . decimal 2 10/03/2018 Gopalpur 255 Rs.23,18,205 Rs.126,290 Rs.24,44,495 . decimal 3 10/03/2018 Gopalpur 302 Rs.27,45,482 Rs.164,730 Rs.29,10,212 . decimal 4 10/03/2018 Gopalpur 599 Rs.54,45,509 Rs.403,400 Rs.58,48,909 . decimal Rs.1,44,13,298 Out of the above, Purchases vide sl. no. (3) & (4) were undisclosed, which you are required to explain. Now, you are hereby asked to explain why Short Term Capital Gain of (Rs.1,95,86,366
M/s. Nadia Constructions P.Ltd minus Rs. 1,44,13,298), i.e. Rs,51, 73,0681 shall not be assessed in your hand. The "Loss on Sale of Landed Property" amounting Rs. 6,73,4821 shall accordingly also to be disallowed". The aforesaid information should reach the undersigned on 15/11/2013 at 11 :30 A.i'l1.
( Sumit Dasgupta ) ITO, Ward, Ward7(l),Kolkata The assessee accepted the addition vide letter dated 2111112013 : Reference to the above mentioned matter vide your letter dated 08.11.2013, you have advised us to explain why Short Term Capital Gain of (Rs. 1,95,86,366 minus Rs. 1,44,13,298), i.e. Rs. 51,73,068 shall not be assessed in the hands of the assessee and accordingly, "Loss on sale of landed property" amounting to Rs.6, 73,482 shall be disallowed. We would like to inform you that we have inadvertently calculated the transaction taking into account the same proceeds value instead of stamp duty value. Thus, there was not deliberate intention on our part to conceal anything for tax. "
Thus, it is crystal clear that the assessee not only failed to disclose two pieces of land but also failed to take stamp duty value as per Sec.50C of Income Tax Act 1961. The following two piece of land sales were undisclosed by the assessee:
Sl Date of Mouza Land Area Purchase Registration Total purchase Cost Cost 1 10/03/2018 Gopalpur 302 Rs.27,45,482 Rs.164,730 Rs.29,10,212 . decimal 2 10/03/2018 Gopalpur 599 Rs.54,45,509 Rs.403,400 Rs.58,48,909 . decimal Now, the sale proceeds of undisclosed land has been taken into consideration and capital Gain computed on sale of all the four piece of land applying Stamp Duty Value as per Sec 50C of Income Tax Act 1961. Accordingly, Rs.51,73,068 plus Rs. 6,73,482 = Rs, 58,46,550 added to the Total Income of the assessee as Short Term Capital Gain. .
The appellant has submitted as under :" Addition of Rs. 58,46,5501 for Short Term Capital Gain.
M/s. Nadia Constructions P.Ltd (1) Land was purchased on 10.3.2008 and sold on 2.11.2010 after about 2 Years 7 Months. (2) Copy of Memorandum and Articles filed with your honour also shows that appellant is engaged in the business of real estate. (3) As part of business appellant develops real estate as well is also engaged in purchase and sale of land. (4) The Company was incorporated on 10.3.2008 and land purchase was done. Hence there is no question of any purchase of land in the past. (5) Purchase and Sale of land has to be held in course of business and not as sale of investments. (6) Supreme Court cases cited on Page 5 Para 8 of earlier written submissions will support the fact that only because Land is shown by mistake in Fixed Assets and not in Stock it is not a Short Term Capital Gain but is a Business Profit/ Loss. (7) On Page 6 of Assessment Order the ITO has said " The assessee accepted the addition vide letter dated 21.11.2013 is not correct. A copy of letter is enclosed Annexure 'G' The essence of letter is not to accept Short Term Capital Gain but to request for not imposing penalty. Moreover an acceptance under wrong presumption of law is no acceptance at all. A Company incorporated with the object of carrying out real estate transactions and on very first day acquires land cannot be presumed to have made Investments but rather it is business assets with a view to sale them at a later date. Only because in Balance Sheet, Land is shown in Fixed Assets and not in Stock cannot change the nature of Land which is part of Business Assets and as such Section 50C does not apply and Profit/ Loss on Sale of Land has to be assessed under the head Business". In support of the appeal the appellant has furnished the following written submission first on 08.05.2015:
The appellant is a Property Developer as per Point 9 of the face of Assessment Order. As per Page 2 of Assessment Order the main activity of the assessee being Real Estate Developer and the assessee also has Investments in Lands as Fixed Assets. As per Asst. Order Page 2 on verification of accounts it is found that the assessee has claimed Loss on Sales of Land Property Rs. 6,73,482/.
M/s. Nadia Constructions P.Ltd 4. Land Parcels were sold as per Page 5 of Assessment Order. As per Accounts and also as per Page 5 of Assessment Order Property Number Purchase Cost Sale Value 1 Rs. 32,09,682 Rs. 28,17,020 2 Rs. 24,44,495 Rs. 21,63,675 Rs. 56,54,177 Rs. 49,80,695
Purchase Rs.56,54, 177 Sale Rs.49,80, 695 Business Loss Rs. 6,73,482 As per Asst. Order Page 5 and 6 Property No. 3 and 4 purchase is undisclosed SI. No. Purchase Cost Sale Value 3 Rs. 29,10,212 Rs. 25,62,470 4 Rs. 58,48,909 Rs. 50,82,515 Rs.87,59.121 Rs. 76.44.980
Purchase Rs.87,59,121 Sale Rs.76,44,980 Business Loss Rs.11,14,136 ITO wrongly applying Section 50C has taken stamp value of all 4 properties and Computed Short Term Capital Gain as follow as per Page 5 of Asst. Year SI. No. Stamp Value Purchase Cost 1 Rs.46,82,534 Rs.32,09,682 2 Rs.35,66,632 Rs. 24,44,495 3 Rs.39,26,372 Rs.29,10,212 4 Rs.74,10,828 Rs.58,48,909 Rs.1,95,86,366 Rs.1,44,13,298
Stamp Value Rs. 1,95,86,366 Less: Purchase Cost Alleged Short Term Capital Gain Rs.51.73,068 ITO has relied on 3 things to apply Section 50C In accounts land shown under Fixed Assets Letter dated 31.11.2013 of Assessee on Page 6 of Assessment Order. 28
M/s. Nadia Constructions P.Ltd In remand report " ignorance is no excuse ".
The appellant has in Written Submission Page 5 Para8 contended as below (8) Now as regards Land being shown erroneously under the head Fixed Assets it has been held that nomenclature is not sole test to decide a matter. Treatment of a transaction in books is not decisive. Accountancy is a matter of taste. Bad Accounting does not effect taxability or non taxability. Please refer to Para 22 on Page 235 of Accelerated Freez and Drying Co. Vs. Dy. CIT in 1 ITR (Tribunal) Page 226 Cochin Bench where various Supreme Court decision like Kedarnath Jute 82 ITR 363, Punjab Distilling 35 ITR 519. Delhi Stock Exchange 41 ITR 495 and Hoshiarpur Electric 41 ITR 608 have been Quoted. Thus as appellant is engaged in Property Development, only because land is shown as Fixed Assets and not as Stock would not be detrimental to the interest of The assessee. Land is part of business stock to which Section 50C does not apply and accordingly loss of Rs. 6,73,4821 has to be accepted and Short Term Capital Gain u/s 50C of Rs. 51.73,0681 has to be deleted. The appellant has in Supplementary Written Submission Page Para 7 contended as below (7) On Page 6 of Assessment Order the ITO has said "The assessee accepted the addition vide letter dated 21.11.2013" is not correct. A copy of letter is enclosed Annexure 'G' The essence of letter is not to accept Short Term Capital Gain but to request for not imposing penalty. Moreover an acceptance under wrong presumption of law is no acceptance at all. A Company incorporated with the object of carrying out real estate transactions and on very first day acquires land cannot be presumed to have made Investments but rather it is business assets with a view to sale them at a later date. Only because in Balance Sheet Land is shown in Fixed Assets and not in Stock cannot change the nature of Land which is part of Business Assets and as such Section 50C does not apply and Profit / Loss on Sale of Land has to be assessed under the head Business. In Second Supplementary Written Submission on Page 3 Para 4 and 5 appellant contended as follow (4) In last hearing on 25.3 .15 a copy of order dated 13 May 2011 of Honourable Income Tax Appellate Tribunal, Kolkata 'A' Bench in the 29
M/s. Nadia Constructions P.Ltd case of Sushil Kumar Das Vs. ITO was filed reported in 11 ITR . ( T ) 17 Kolkata whereby it has been held that even if amount is erroneously offered to tax Assessee is entitled to raise plea before Appellate Authorities against its Assessment. 4.2 I have considered the facts of the case and the submissions of the appellant . The facts of the case in brief are: " The appellant is a Property Developer and the main activity of the assessee is Real Estate Developer and the assessee also has Investments in Lands as Fixed Assets. The assessee has claimed Loss on Sales of Land Property of an amount of Rs. 6,73,482/. 4 Land Parcels were sold by the appellant as per following details.
Sl Date of Sale Mouza Land Area Sale Value Full Value of Conisderation 1. 02/11/2010 Gopalpur 332 decimal Rs.28,17,020 Rs.46,82,534 2. 02/11/2010 Gopalpur 332 decimal Rs.21,63,675 Rs.35,66,632 3. 02/11/2010 Gopalpur 302 decimal Rs.25,62,470 Rs.39,26,372 4. 02/11/2010 Gopalpur 599 decimal Rs.50,82,515 Rs.74,10,828 Rs.1,95,86,366 Out of the above, Purchase vide sl. No. (3) & (4) were undisclosed which is not disputed by the appellant. The amount totaling to Rs.1,95,86,366 as above is the value determined by the Addl. District Sub Registrar, Durgapur. Property Number Purchase Cost Sale Value 1 Rs. 32,09,682 Rs. 28,17,020 2 Rs. 24,44,495 Rs. 21,63,675 Rs. 56,54,177 Rs. 49,80,695 Purchase Rs.56,54, 177 Sale Rs.49,80, 695 Business Loss Rs. 6,73,482 As stated above, it is not disputed that Property No. 3 and 4 were undisclosed. The assesse has claimed a loss in these two properties as under: SI. No. Purchase Cost Sale Value 3 Rs. 29,10,212 Rs. 25,62,470 4 Rs. 58,48,909 Rs. 50,82,515 30
M/s. Nadia Constructions P.Ltd Rs.87,59.121 Rs. 76.44.980
Purchase Rs.87,59,121 Sale Rs.76,44,980 Business Loss Rs.11,14,136 The AO has treated these properties as investments and applied Section 50C of the IT Act and has taken stamp value ( as valued by the Addl. District Sub Registrar, Durgapur) of all 4 properties and Computed Short Term Capital Gain as follow as per Page 5 of Asst. Year Property. Stamp Value (as per 50C) Purchase Cost 1 Rs.46,82,534 Rs.32,09,682 2 Rs.35,66,632 Rs. 24,44,495 3 Rs.39,26,372 Rs.29,10,212 4 Rs.74,10,828 Rs.58,48,909 Rs.1,95,86,366 Rs.1,44,13,298 Stamp Value Rs. 1,95,86,366 Less: Purchase Cost Rs.1,44,13,298 Alleged Short Term Capital Gain Rs. 51.73,068 The main claim of the Appellant is that the properties were business assets as they are in realty business but had wrongly reflected them in fixed assets in their Balance Sheet . The appellant has submitted "that nomenclature is not sole test to decide a matter. Treatment of a transaction in books is not decisive. Accountancy is a matter of taste. Bad Accounting does not effect taxability or non taxability. Please refer to Para 22 on Page 235 of Accelerated Freeze and Drying . Vs. Dy. CIT in 1 ITR (Tribunal) Page 226 Cochin Bench where various Supreme our! decision like Kedarnath Jute 82 ITR 363, Punjab Distilling 35 ITR 519. Delhi Stock Exchange 41 ITR 495 and Hoshiarpur Electric 41 ITR 608 have been been Quoted."
I have considered the judgements relied upon by the appellant. The appellant is engaged in Property Development. Only becasue land is shown as Fixed Assets in the balance sheet and not as Stock should not be detrimental to the interest of the assessee. Land being part of business stock to which Section 50C does not apply and accordingly loss of Rs. 6,73,482/ has to be accepted and Short Term Capital Gain u/s 50C of Rs. 51,73,068/ has to be deleted. 31
M/s. Nadia Constructions P.Ltd A Company incorporated with the object of carrying out real estate transactions and on very first day acquires land cannot be presumed to have made Investments but rather it is business assets with a view to sell them at a later date. Only because in Balance Sheet Land is shown in Fixed Assets and not in Stock cannot change the nature of Land which is part of Business Assets and as such Section 50C does not apply and Profit 1 Loss on Sale of Land has to be assessed under the head Business.
The appellant has relied upon the order dated 13 May 2011 of Hon'ble Income Tax Appellate Tribunal, Kolkata 'A' Bench in the case of Sushil Kumar Das Vs. ITO reported in 11 ITR (T) 17 Kolkata whereby it has been held that even if amount is erroneously offered to tax Assessee is entitled to raise plea before Appellate Authorities against its Assessment. Central Board of Direct Taxes vide Circular No.14(XL35) dated April 11, 1955 has directed the officers not to take advantage of the ignorance of the assessee. In view of above submissions case laws and Board Circular I hold that Section 50C does not apply and delete the addition of Rs. 51,73,068/ for Short Term Capital Gain and Business loss shall stand allowed as per claim. However the department is free to proceed for undisclosed purchase of 2 Lands as the law permits. The appeal is treated as allowed.”
Heard rival contentions . The Revenue’s only endeavor during hearing is to go by the assessee’s books treating the land in issue as a fixed asset than stock-in-trade. It vehemently urges us to treat the asset not as stock in trade there giving rise to business loss. We find no reason to accept the Revenue’s instant arguments. The fact remains that the assessee is engaged in property development business. It has been developing residential projects throughout all preceding assessment years. We therefore are of the view that the assessee’s mere book treatment of the land in issue as a fixed asset cannot form the sole criteria to hold that the same gives rise to capital loss. Hon’ble apex court landmark is Kedarnath Jute & Mills case (1971) 82 ITR 363(SC) already holds that an assessee’s book treatment cannot form the sole guiding factor giving rise to a tax incidence. This tribunal’s co-ordinate bench decision in (2017) 60 ITR (Trib) 1 (Bang) Canara Bank v/s. JCIT also holds that any treatment given at the assessee’s 32
M/s. Nadia Constructions P.Ltd behest in books of account; item-wise on expenditure, has no relevant to decide taxability or otherwise thereof under the provisions of the Income-tax Act, 1961. We reject Revenue’s instant substantive ground as well and cured that the assessee is entitled to treat its land as stock-in-trade than fixed assets/investments.
The learned departmental representative at this stage vehemently contended that the Assessing Officer in his assessment order had recorded assessee’s consent on the instant issue during scrutiny. We find no substance in the technical plea as well as the purpose of a scrutiny assessment is to determine appropriate taxable income as per provisions of the Act only. This tribunal’s co-ordinate bench’s decision in “Canara Bank” (supra) holds that estopple does not apply in income-tax proceedings. The Revenue’s latter substantive ground is rejected therefore.