M/S CANARA HOUSING DEVELOPMENT COMPANY,BANGALORE vs. JCIT, BANGALORE

Per Shri Vijay Pal Rao, J.M. :

This appeal by the assessee is directed against the order

dt.28.11.2013 of Commissioner of Income Tax (Appeals) for the

Assessment Year 2005-06.

however at the time of hearing the learned Authorised Representative of

2 ITA No.193/Bang/2014 Canara Housing Devt. Co. the assessee has stated at Bar that the effective ground of appeal is only

Ground No.1 which reads as under :

“ 1. The learned CIT (Appeals) is not justified in dismissing the appeal – claim of deduction of Rs.64 Crores paid to M/s. Caraka Academy of Life Long Learning.”

We find that the other grounds are only in the nature of argument in

support of Ground No.1.

partnership firm and engaged in the business of real estate including

purchases, procurement, acquisition of right in the land and real estate

properties, integrated development of properties, etc. The assessee

entered into an Agreement to Sale dt.2.4.2002 in respect of four

properties referred to therein. As per the terms of the Agreement

dt.2.4.2002, the assessee agreed to sell / transfer the constructed area to

M/s. Manipal Infocom Pvt. Ltd. (MIPL) against the total consideration of

Rs.22 Crores which was received by the assessee in advance at the time

of agreement. It is pertinent to mention that in the meantime the name

of M/s. MIPL was changed to M/s. Manipal Universal Learning Pvt. Ltd.

(MULPL). Further due to the legal restriction of acquiring the real estate

interest by MIPL, the right/interest in said four properties was assigned

3 ITA No.193/Bang/2014 Canara Housing Devt. Co. to M/s. Caraka Academy of Lifelong Learning Pvt. Ltd. (CALL) vide

Agreement dt.5.4.2005. Since the assessee failed to deliver the property

within time frame as stipulated in the Agreement and revised Agreement

a dispute arose in respect of the quantum of compensation to be paid by

the assessee to the other party. The matter was referred to the

arbitration for resolution of dispute. The Learned Arbitrator had given its

award on 30.8.2005 based on the consent terms arrived by the parties to

the dispute. Accordingly, the assessee paid Rs.64 Crores as

compensation / damages to CALL. The assessee claimed deduction of

the said amount however the Assessing Officer disallowed the claim of

deduction for compensation paid to CALL while completing the

assessment under Section 143(3) of the Income Tax Act, 1961 (in short

'the Act') on 28.12.2007. The assessee challenged the action of the

Assessing Officer before the CIT (Appeals) but could not succeed. The

matter was carried to the Tribunal in the first round of appeal and vide

order dt.10.11.2010 in ITA No.406/Bang/2010, this Tribunal set aside the

matter to the file of the Assessing Officer with the direction to examine

the parties to the agreement and also to the Joint Development

Agreement (JDA) and then decide the issue as per law. In the set aside

4 ITA No.193/Bang/2014 Canara Housing Devt. Co. proceedings, the Assessing Officer repeated the disallowance of claim of

Rs.64 Crores on account of compensation paid. The matter has again

reached the Tribunal for adjudication.

has submitted that the Assessing Officer has denied the claim particularly

on three grounds viz.

(i) Agreements are entered into by Shri P. Dayananda Pai in his

individual capacity and not on behalf of the assessee firm.

(ii) The property agreed to be sold did not belonging to the assessee and

(iii) The liability had not crystallised in the previous year relevant to the

Assessment Year 2005-06.

Agreements were entered into by Shri P. Dayananda Pai in his individual

capacity, the learned Authorised Representative of the assessee has

submitted that all transactions of the assesseeare entered in the name of

Shri P. Dayananda Pai who is Managing Partner of the assessee-firm. The

learned Authorised Representative has referred to an Agreement

dt.15.05.2006 for sale of property for Rs.18.75 Crores entered into on

the name of Shri P. Dayananda Pai and submitted that it is a routine

5 ITA No.193/Bang/2014 Canara Housing Devt. Co. business practice of the assessee-firm to acquire and sale the properties

through the agreement in the name of Shri P. Dayananda Pai. Thus the

learned Authorised Representative of the assessee has submitted that

the income arising from such transaction done through Shri P.

Dayananda Pai in the earlier year i.e. Assessment Year 2004-05 has been

offered to tax and accepted by the Assessing Officer while completing

the assessment under Section 143(3) on 16.03.2005. He has also

referred to the details of various transactions entered into in the name of

Shri P. Dayananda Pai which has been recorded in the books of accounts

of the assessee and the income from those transactions were offered to

tax and accepted by the Assessing Officer. Thus the learned Authorised

Representative has submitted that Shri P. Dayananda Pai and other

partners as per prevailing business practice entered into agreements in

their own names with the intention to acquire the properties for and on

behalf of the assessee firm. The acts of Shri P. Dayananda Pai and other

partners are with consent of all other partners and duly recorded in the

books of accounts of the assessee. The learned Authorised

Representative has referred to the balance sheet as on 31.3.2005 and

Schedule showing property advances paid and submitted that profit

6 ITA No.193/Bang/2014 Canara Housing Devt. Co. arising from these transactions are consistently shown in the accounts,

return of income and Assessing Officer has been consistently accepted

the same in the earlier assessment years as well as in the subsequent

assessment years. He has referred to the assessment order passed

under Section 143(3) for the Assessment Year 2004-05 as well as for the

Assessment Year 2008-09 and submitted that the Assessing Officer has

accepted the income offered to tax from such transaction of purchase

and sale of the property in the name of Shri P. Dayananda Pai as well as

other partners on behalf of the assessee. The Assessing Officer has

recognized this practice in the assessment order passed for Assessment

Year 2008-09. Thus the evidences accepted by the Assessing Officer

clearly show that Shri P. Dayananda Pai had acquired rights in the

properties and entered into formal agreement for and on behalf of the

assessee although the documents pertaining to the properties are

entered by Shri P. Dayananda Pai in his individual name. Thus the

learned Authorised Representative has contended that the Assessing

Officer having accepted the income arising from similar transactions in

the hands of the assessee in the earlier and subsequent assessment

years cannot treat the transaction entered into under identical manner

7 ITA No.193/Bang/2014 Canara Housing Devt. Co. differently merely because the assessee had incurred loss therein.

Further the learned Authorised Representative has pointed out that the

Tribunal in the set aside order had specifically directed the Assessing

Officer to examine the parties to the agreement as well as to the JDA to

find out the real nature of the transaction however the Assessing Officer

did not carry out direction of the Tribunal to examine the parties.

Therefore without examining the parties to the agreements the

Assessing Officer cannot arrive at this conclusion regarding entity who

had entered into the transaction merely based on surmises.

did not belong to the assessee, the learned Authorised Representative of

the assessee has submitted that the assessee identifies the land in and

around Bangalore city belonging to various persons and acquire interest,

rights and title over the properties without actually registering the title in

its name. The assessee offered to tax the income arising from sale of

such interest, rights and title over the properties. The assessee

negotiates with the potential buyers and gets land / property directly to

the buyers from the original land owners. For rendering of such service

the assessee received substantial consideration as aggregator of land and

8 ITA No.193/Bang/2014 Canara Housing Devt. Co. as a consenting party in the transfer and title deed. The assessee also

acts as a venture capitalist contributes towards cost of the projects and

creates rights, interest and title over the property. The advances paid to

the property owners are shown as asset and advances received against

the properties are shown as liability in the balance sheet. Thus the

assessee need not to be the owner of the property and still enter into a

contract with promoters to sell such property to deliver in future to the

buyer of the property. The learned Authorised Representative of the

assessee has pointed out that this nature of business of the assessee has

been accepted by the department and particularly by the Assessing

Officer for the Assessment Year 2008-09. It is clear from the Agreement

dt.2.4.2002 that the assessee agreed to sale part of its rights and

entitlement in the properties being developed by other developers. The

financials of the assessee disclosed various properties owned by the

assessee however these properties are not registered in the name of

the assessee. He has referred to the balance sheet and other Schedules

of assets and liabilities and submitted that the assessee has been

showing rights in the properties in the accounts thought the same are

not registered in the name of the assessee. The income arising on the

9 ITA No.193/Bang/2014 Canara Housing Devt. Co. transfer of these properties/rights therein has been consistently offered

to tax by the assessee and the same has been assessed by the Assessing

Officer. The acts done by Shri P. Dayananda Pai are for and on behalf of

the assessee firm even as per the provisions of Sections 4, 14,18,19,20

and 22 of the Partnership Act. The payment of damages has been made

during the course of business and to protect its goodwill by doing so the

assessee has maintained its goodwill that it honours and maintains

commitment in the property related matter which spill over several years

and therefore inspires and enhance the customers of the assessee which

is necessary for the purpose of business. In support of his contention he

has relied upon the decision of Hon'ble Supreme Court in the case of CIT

Vs. Nainital Bank Limited 62 ITR 638.

liability has not crystallized in the previous year relevant to the

assessment year under consideration, the learned Authorised

Representative has asserted that the claim of deduction is based on the

principle of prudence and conservatism. He has contended that the

assessee failed to deliver the property as on 31.3.2005. Therefore the

default / failure occurred and consequently liability stood crystallized on

10 ITA No.193/Bang/2014 Canara Housing Devt. Co. 31.3.2005. Accordingly, the assessee claimed deduction in the

Assessment Year 2005-06. The learned Authorised Representative has

referred to the para 8.2 of the Accounting Standard 4 (AS-4) regarding

contingenices and events occurring after the date of balance sheet and

submitted that it provides need of adjustment to the assets and liabilities

on account of the events occurring after the balance sheet date that

provide additional information materially affecting the determination of

amounts relating to condition existing at the balance sheet date. The

assessee had liability of Rs.22 Crores prevailing as on the date of balance

sheet i.e. 31.3.2005 which was insufficient. The assessee failed to deliver

the property and it occurred liability to pay compensation of higher

amount which stand corroborated by the award given subsequently to

the date of balance sheet. Thus the learned Authorised Representative

of the assessee has argued that as per AS-4, the assessee has correctly

valued its liability based on the event occurred after the date of balance

sheet. He has relied upon the following decisions :

(i) ACIT Vs. Allied Gems Corporation (Bombay) 163 ITR 56 (Bom)

(ii) Bharat Earth Movers Vs. CIT 245 ITR 428 (SC)

11 ITA No.193/Bang/2014 Canara Housing Devt. Co. 8. Alternatively the learned Authorised Representative of the assessee

has submitted that in case the liability has not crystallized in the

Assessment Year 2005-06 then the Assessing Officer may be directed to

allow the deduction in Assessment Year 2006-07. The learned Authorised

Representative has further pointed out that the amount of compensation

received by the other party has been accepted by the Assessing Officer.

In support of his contention, he has relied upon the following decisions :

(i) Perfect Equipments Vs. DCIT 85 ITD 50 (AHD).

(ii) Ajay Devagan Vs. Addl. CIT in ITA No.514/Mum/2007 dt.9.10.2009.

(iii) JCIT Vs. Mukund Limited 291 ITR (AT) 249 (Mum) (SB)

disallowing the claim of the assessee, the learned Authorised

Representative of the assessee has submitted that for claiming the

deduction as a business expenditure it need not be necessary there is

yield of income from the project. The assessee was not developed any of

the properties in question by itself and therefore yield of income from

the projects is irrelevant in deciding the issue of allowing of deduction for

compensation paid on account of breach of contract. The compensation

paid for failure to transfer does not amount to buy back of such property

12 ITA No.193/Bang/2014 Canara Housing Devt. Co. as observed by the Assessing Officer. The compensation is paid for

relinquishment of right and not for purchase of constructed property.

The transaction has been entered into with a third party at arm’s length

and therefore the same cannot be treated as a colourable transaction.

The recipient of the compensation offered the amount to tax. The

assessee has also offered income to tax arising from these projects.

There is not even an allegation that the money has come back to the

assessee. There is no evasion of tax and as such the transaction cannot

be termed as colourable device. Even otherwise when the Assessing

Officer has not given effect to the directions of the Tribunal then the

order passed by the Assessing Officer is liable to be quashed/set aside on

this ground alone. He has relied upon the following decisions : I. Deepak Diwan Vs ITO 54 TTJ 567 (Del) II. Ushdev International Limited Vs. JCIT (ITA No.1905/Mum/2013) Thus it was prayed that disallowance made by the Assessing Officer of

Rs.64.74 Crores be deleted.

referred to the Agreement Dt.2.4.2002 and submitted that the second

party invested a sum of Rs.22 Crores for the purchase of various

13 ITA No.193/Bang/2014 Canara Housing Devt. Co. properties belonging to first party Shri P. Dayananda Pai but the fact

remains that as on the date of agreement the first party was not having

any ownership or right in the properties in question. In the year 2002,

neither the assessee nor Shri P. Dayananda Pai was the owner of these

properties or had any right in the properties in question. He has

referred to revised agreement dt.10.3.2004 and submitted that the time

period of handing over of the constructed portion to the second party

was extended upto 10.3.2006 and prior to the expiry of the said

extended time limit no damages can be claimed. Therefore the liabilities

to pay any damages or compensation would not arise or crystallize

before 10.03.2006 as extended time limit vide agreement dt.10.03.2004.

The Assessing Officer has given an opportunity to the assessee and also

considered the submissions of the assessee however the assessee failed

to establish that it was the owner of the property or any right in the

properties in question. The learned Departmental Representative has

further contended that the Tribunal has clearly left the matter open to

the Assessing Officer to complete the assessment as per law. The

assessee has not brought any record to suggest that there was some

information which the Assessing Officer has missed taking into account.

14 ITA No.193/Bang/2014 Canara Housing Devt. Co. He has contended that liability was not crystallized during the year under

consideration. He has relied upon the orders of the authorities below.

has submitted that the payment to acquire the property was admittedly

made by the assessee. One of the property was belonging to the sister

concern and the assessee was having right in the built up area in the

property. The time period to transfer the built up area was spread over

to two years and not at the end of two years. The assessee has agreed to

pay compensation because it was not possible for the assessee to honour

the obligation of handing over the built up area by the end of the time

period allowed.

material on record. This is second round of appeal. In the first round,

the Tribunal vide order dt.10.11.2010 remanded the matter to the file of

the Assessing Officer for conduct of further enquiry / examination and

reconsideration of the issue as directed in para 8 of the Tribunal as

under :

“ 8. The other findings of the CIT (Appeals) was that the agreements were entered into by Shri Dayand Pai in his individual capacity and his name is mentioned as representative of the assessee firm only in the arbitration

15 ITA No.193/Bang/2014 Canara Housing Devt. Co. award. On perusal of the copies of the said agreement dt.2.4.2002 and 4.6.2005, we find that the status of Shri Dayanand Pai, is in his capacity as individual and not in the capacity of the Managing Partner of the assessee firm. But, another point worth taking note of and cannot be ignored is that the assessee firm had received the sale consideration of Rs.22.00 Crores as reflected in its accounts and therefore, it is the case of the assessee that it is the beneficiary of the said agreement and therefore, will have to fulfill the liability of paying the compensation. The assessee firm has shown it as an advance in its books of accounts. This gives credence to the argument of the assessee that Shri Dayanand Pai being the sheet anchor of the group had entered into the agreement on behalf of the firm. We feel that some more factual findings are necessary in this regard. According to us, the Assessing Officer should have examined the other parties to the agreement i.e. M/s. MIPL and also M/s. Caraka Academy of Life Long Learning Pvt. Ltd., to find out the pith and substance of the agreements and not go by mere recitals in the agreements. Therefore, in the interest of justice, we deem it fit and proper to remand the issues to the file of the Assessing Officer with a direction to examine the parties to the agreements and also to examine the joint development agreements and to reconsider the issue in accordance with law. Needless to mention that the assessee shall be given a fair opportunity of hearing and the assessee also shall co-operate with the revenue authorities in speedy disposal of the case.”

Thus it is clear that in the remand proceedings, the Assessing Officer was

required to examine the parties to the agreement and also to examine

the JDA. The Assessing Officer while passing the order dt.30.12.2011 in

pursuant to the directions of the Tribunal has observed and held in paras

1.1, 2, 3 to 6 as under :

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17 ITA No.193/Bang/2014 Canara Housing Devt. Co.

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24 ITA No.193/Bang/2014 Canara Housing Devt. Co.

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It is manifest from the order of the Assessing Officer that he did not even

take any step to examine the parties to the agreement. Thus it is a case

of gross violation of directions of the Tribunal to examine parties to the

agreement. It is pertinent to mention that the jurisdiction of the

Assessing Officer and scope of remand proceedings cannot go beyond

the directions of the remand order. It was not a open remand of the

matter as contended by the learned Departmental Representative but

the matter was remanded by the Tribunal with specific directions.

Therefore the scope of the remand proceedings and the jurisdiction of

the Assessing Officer was determined in the remand order itself. The

Assessing Officer chose not to give effect to the specific directions of the

Tribunal and therefore the order passed by the Assessing Officer is

contrary to the directions of the Tribunal and also against the judicial

discipline. Therefore the impugned order passed by the Assessing Officer

28 ITA No.193/Bang/2014 Canara Housing Devt. Co. is liable to be quashed being not sustainable on this ground alone. A

similar view is taken by in the case of Deepak Deewan Vs. ITO (supra),

Delhi Bench of the Tribunal while dealing with an issue arising from the

order passed by the Assessing Officer in pursuant to the remand order by

the CIT (Appeals) has held in paras 5 to 7 as under :

“ 5. After recording these findings the Commissioner (Appeals) restored the matter to the file of the Assessing Officer on the limited point for making necessary investigation after giving the assessee due opportunity of being heard in the matter. 6. Whereas the Commissioner (Appeals) did ask the Assessing Officer to make further enquiry and investigation and record a finding, certain aspects of the matter as have been highlighted above had been decided by him. Revenue did not challenge the order of the Commissioner (Appeals). Therefore, these findings have become final. When we see the order of the Assessing Officer and that of the appellate authority in the second round, we do not find any fresh material having been collected by the Assessing Officer for taking a different view. The only enquiry made by the Assessing Officer after the matter was set aside was regarding Shri Sachdeva. As is clear from the records, the Assessing Officer has not been able to enforce the attendance of Shri Sachdeva. No other material against the assessee has been collected in the second round of the proceedings. As such the addition of Rs. 10 lakhs made by the Assessing Officer is unwarranted. 7. We do not know what would have been the fate of the findings of the Commissioner (Appeals) in his appellate order dated 3rd January, 1989 if these were challenged before the Tribunal. However once these findings have not been challenged, the Assessing Officer while making the fresh assessment cannot ignore those findings as these have become final. We are, therefore, making ourselves very clear that we are not subscribing to the view of the Commissioner (Appeals) in his appellate order dated 3rd January, 1989 but since the present appeal arises out of order of the Assessing Officer passed as a result of the first appellate order, we are bound to hold that the Assessing Officer was legally bound to act upon the findings of the first appellate authority. The Revenue not having established the case as perceived by the Commissioner (Appeals) vide order dated 3rd January, 1989, the addition of Rs. 10 lakhs, in our view, could not be repeated. The addition is accordingly deleted.”

29 ITA No.193/Bang/2014 Canara Housing Devt. Co. Accordingly, in view of the above discussion, we set aside the impugned

order dt.30.12.2011 passed by the Assessing Officer qua this issue being

not sustainable.

O N M E R I T S

deduction on account of compensation paid is that the assessee was not

the owner of the property in question at the time of Agreement

dt.2.4.2002. This objection of the Assessing Officer is based on the fact

that the JDA in respect of the properties in question were on subsequent

dates and not prior to the Agreement dt.2.4.2002. It is pertinent to

note that the particulars of the properties to be developed and

constructed area to be given to M/s. Manipal Infocom Pvt. Ltd. (MIPL)

have been specifically mentioned in the said agreement dt.2.4.2002. At

this stage the relevant part of the recital as well as terms & conditions of

the Agreement dt.2.4.2002 are reproduced below :

30 ITA No.193/Bang/2014 Canara Housing Devt. Co.

31 ITA No.193/Bang/2014 Canara Housing Devt. Co.

32 ITA No.193/Bang/2014 Canara Housing Devt. Co.

5………….

6……………..

33 ITA No.193/Bang/2014 Canara Housing Devt. Co. 7…………..

8…………..

properties to be transferred by the assessee to the other party were duly

identified in the said agreement dt.2.4.2002. The assessee agreed to

deliver the constructed area in the projects in future and within the time

period as provided in the agreement. The parties to the agreement had

no doubt and ambiguity about the properties to be developed under JDA

34 ITA No.193/Bang/2014 Canara Housing Devt. Co. and therefore the question of having the ownership of the property at

the time of agreement does not arise. The assessee produced all the

JDAs in respect of the properties in question and therefore the assessee

acquired rights in these properties and particularly in the constructed

area of the properties through the JDAs and part of which was to be

transferred to MIPL / MULPL / CALL. Therefore the properties which are

particularly lands were identified by the assessee for development

through the other developers under the JDAs then the registration of the

ownership of the property is not a pre-requisite condition for acquiring

interest, right and title in the constructed area of the property is being

developed under JDAs. There is no embargo for entering into a contract

for performance of one part in future. The properties were very much in

existent at the time of agreement as specified in the agreement itself and

it was the intention of the parties to the agreement to have share in the

constructed area of the properties to be developed in future. The

assessee being in the business of real estate for several decades and

derived income from various land deals, including selling of rights over

certain properties as well as interest and share over the land which were

created by way of agreement, token receipts, Memorandum of

35 ITA No.193/Bang/2014 Canara Housing Devt. Co. Understanding without actually registering the property in its name, had

entered into the agreement which is part of the normal business activity

of the assessee. The validity and enforceability of agreement dt.2.4.2002

as well as the revised agreement dt.10.3.2004 cannot be questioned on

the basis that the assessee was not the registered owner of the property

when it was clear to the parties to the agreement that these properties

would be developed in future under JDA and therefore they will receive

the constructed area as per the agreement. Accordingly we do not find

any substance or merit in this object of the A.O./CIT (Appeals).

Pai and not by the assessee firm or for or on behalf of the assessee firm it

is worth noting that the transaction of receipt of Rs.22 Crores being

advance from MIPL / MULPL was duly recorded in the books of accounts

of the assessee partnership firm. The amount of advance was shown in

the balance sheet as on 31.3.2003 as well as in subsequent balance

sheets which have been placed at pages 113 to 159 of the paper book.

Further this is not an isolated transaction carried out through Shri P.

Dayananda Pai but it is a regular practice of the assessee to purchase

and sell the property through Shri P. Dayananda Pai. All other

36 ITA No.193/Bang/2014 Canara Housing Devt. Co. transactions of purchase and sale have been accepted by the Assessing

Officer. For the Assessment Years 2004-05 and 2008-09, the Assessing

Officer has accepted the income from the transaction of purchase and

sale of property through Shri P. Dayananda Pai and therefore this

practice of the assessee partnership firm of doing the transaction

through Shri P. Dayananda Pai was very well recognized and accepted by

the Assessing Officer except this particular transaction where the

assessee paid the compensation to the other party. Once the

transactions are recorded in the books of accounts of the assessee

partnership firm and the receipt and payment in respect of the purchase

and sale of the properties are made by the assessee firm then it is a clear

case of mutual understanding and consent between the partners of the

assessee firm as well as the parties to the transaction that Shri P.

Dayananda Pai acted on behalf of the assessee partnership firm and not

in his personal individual capacity. Section 14 of the Partnership Act deal

with the property belong to the partnership firm if rights and interests in

the property originally brought into the stock of the firm. For ready

reference, we quote Section 14 of the Partnership Act, 1932 as under :

37 ITA No.193/Bang/2014 Canara Housing Devt. Co.

“14. The property of the firm. --- Subject to contract between the partners, the property of the firm includes all property and rights and interests in property originally brought into the stock of the firm, or acquired, by purchase or otherwise, by or for the firm, or for the purposes and in the course of the business of the firm, and includes also the goodwill of the business.”

Therefore the provisions of Partnership Act also permits the property to

be recognized as of the firm if brought into the stock of the firm. In the

case on hand when the transaction is recorded in the books of accounts

of the firm and the right and interest in the properties was included in

the stock of the firm then, the question of ownership in respect of the

said property does not arise. Similar transaction of purchase of rights in

the property and sale of the same through the agreement entered into

by Shri P. Dayananda Pai has been accepted by the Assessing Officer as

the income arising from the similar transaction has been accepted in the

hand of the partnership firm in the earlier year i.e. Assessment Year

2004-05 as well as in the subsequent year i.e. Assessment Year 2008-09.

We find that in the books of accounts the assessee used to disclose

various properties owned by the assessee though these properties are

not registered in the name of the assessee firm. The Assessing Officer

has not questioned all these transactions as shown in the books of

38 ITA No.193/Bang/2014 Canara Housing Devt. Co. accounts for the Assessment Years 2003-04, 2004-05 and 2005-06 except

for the year under consideration and particularly one transaction in

respect of the assessee paid compensation to the other party. The

income rising on sale / transfer of the property / rights have been

regularly offered to tax and the same has been assessed by the Assessing

Officer. Therefore acquiring the rights, interest and title over the

property without registering to its name is the normal and regular

business activity of the assessee. This fact has been acknowledged by

the Assessing Officer in the assessment order dt.30.12.2010 for the

Assessment Year 2008-09 as under :

39 ITA No.193/Bang/2014 Canara Housing Devt. Co.

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Thus the advance paid to the property owners are shown as assets in the

balance sheet and advance received from purchaser of the property /

rights are shown as liabilities in the balance sheet. On completion of the

actual transfer the said advances converted to income or expenditure as

the case may be. Therefore in view of the facts and circumstances of the

case as well as above discussion, we are of the considered opinion that

the transactions in question under the Agreement dt.2.4.2002 are in the

normal course of business of the assessee through its Principal Partner

by Shri P. Dayananda Pai and therefore all these transactions were duly

recorded in the books of accounts of the assessee then the genuineness

of the transaction cannot be questioned merely on the ground that the

properties were not registered in the name of the assessee or the

Agreements were executed by Shri P. Dayananda Pai.

41 ITA No.193/Bang/2014 Canara Housing Devt. Co. CRYSTALLISATION OF LIABILITY

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42 ITA No.193/Bang/2014 Canara Housing Devt. Co. …………………

…………….

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The assessee agreed to give the other party specified area in four

properties for a consideration of Rs.22 Crores already received in

advance by the assessee at the time of original Agreement dt.2.4.2002.

As per Clause 5 of the revised agreement the assessee undertook to

provide built up area with occupancy certificate within a spread over

period of two years from the date of agreement. Failing which the

assessee would be liable to make good for all losses and damages to the

other party as provided in Clause 12 of the Agreement.

43 ITA No.193/Bang/2014 Canara Housing Devt. Co. 16. The objection of the department is that the time period for delivery

of the constructed area was to expire on 10.03.2006 and therefore

liability was not crystallized as on 31.3.2005. It is pertinent to note that it

is not a case of sale of good but it is an agreement for transfer of

constructed area in the project to be constructed under JDAs. Therefore

it depends on the progress of the work of construction and very well be

judged in advance whether the assessee would be able to fulfill its

commitment / obligation within the time limit as provided in the

agreement. Thus when the assessee realized that the status of the

construction of the project under JDA has not reached to the stage as

expected and therefore it was not at all possible to deliver the completed

property to the other party within the time limit then the assessee is free

to take a decision to protect its business interest and minimize the losses

which would be suffered by it in future. Though the event of final

amount of compensation happened after closing of Financial Year under

consideration however, as per the prudent and conservative accounting

principle such contingencies are to be taken into account even after the

date of balance sheet. As per para 8.2 of AS-4, the adjustment to the

44 ITA No.193/Bang/2014 Canara Housing Devt. Co. assets and liability are required for the events occurring after the balance

sheet date. Such events have been defined in para 3.2 of AS-4 as under :

“3.2 Events occurring after the balance sheet date are those significant events, both favourable and unfavourable, that occur between the balance sheet date and the date on which the financial statements are approved by the Board of Directors in the case of a company, and, by the corresponding approving authority in the case of any other entity.”

Therefore the loss due to the event took place after the date of balance

sheet could be allowed while computing the income for the relevant

assessment year. Section 145(2) provides that the Central Govt. may

notify in the official Gazette from time to time the accounting standards

to be followed by any class of assessee or in respect of any class of

income. The amended provisions of section 145(2) elaborate the

requirement of accounting standards to be followed for computation of

taxable income. Therefore, the accounting standards notified under

section 145(2) of IT Act are to be followed for computation of income

and disclosure of information by any class of assesee or any class of

income. The standards for income computation and discloser of

information as notified under section 145(2) of the Act are not meant for

maintenance of books of accounts but are to be followed for

45 ITA No.193/Bang/2014 Canara Housing Devt. Co. computation of income and disclosure of information for the purpose of

assessment to tax. Events occurring after balance sheet date might

confirm the state of affairs on the balance sheet date and therefore to

deal with such situation AS4 permits adjustment of assets and liabilities

at the balance sheet date if events occurring after the balance sheet date

confirm the conditions existing on balance sheet date. The concept/rule

of taxing the real income and not merely on the basis of book entries has

been laid down by Hon’ble Supreme Court in the following decisions:

i) CIT v. Shoorji Vallabhdas & Co. (1962) 46 ITR 144 (SC)

ii) CIT v. Birla Gwalior (P) Ltd. (1973) 89 ITR 266 (SC)

iii) Godhra Electricity Co. Ltd. V. CIT (1998) 225 ITR 746 (SC)

The Hon’ble Supreme Court again in case of Sutlej Cotton Mills v. CIT 116

ITR 1 held that the entries in the books of accounts are not conclusive of

matter if the same are not in conformity with the accounting principles.

What is required is the true nature of the transaction and whether it has

resulted in profit or loss to the assessee. Therefore, it is settled

proposition that regardless of entries in the books of accounts taxability

of income or transaction is always based on the provisions of Act,

substance which brings the true state of affairs and financial results. If a

46 ITA No.193/Bang/2014 Canara Housing Devt. Co. transaction, treatment and claim of the assessee is legal, valid and Bona

Fide then the same has to be accepted. The Mumbai Bench of the

Tribunal in the case of ACIT Vs. Applied Gems Corporation (Bombay)

163 ITD 56 (Bom) while dealing with an identical issue has held in para

4.4 as under :

“ 4.4 We have carefully considered the rival submissions. It is quite well understood that section 4 of the Act, charges income tax in respect of the total income of a previous year relevant to the concerned assessment year. Section -5 of the Act, prescribes the scope of total income and so far as we are concerned, the dispute relates to the income chargeable under the head 'profits and gains of business or profession'; which is liable to be computed in accordance with the methodology prescribed in section 145(1) of the Act i.e. either in terms of cash or mercantile system of accounting regularly employed by the assessee. Sub- section (2) of section 145 empowers the Central Government to notify Accounting Standards for any class of assessees or in respect of any class of income. In the present case, assessee firm has maintained its accounts on mercantile system and while computing income for the year under consideration, it claimed deduction for a sum of Rs. 49,64,937/- representing loss on short realization of export proceeds, which were outstanding as on 31/3/2009, of course, short realization having taken place in the subsequent period. The claim of the assessee is that the mercantile system of accounting adopted by the assessee justifies such adjustment and for that matter, reference is made to the principle of prudence, which has been emphasized in the Accounting Standard -1 notified under section 145(2) of the Act also. The principle of prudence seeks to ensure that provision ought to be made for all known liabilities and losses even though there may remain some uncertainty with its determination. So however, it has to be appreciated that what the principle of prudence signifies is that the probable losses should be immediately recognized. In the present context, the stand of the assessee is that though realization of export receivables took place in the subsequent period, but the loss could be accounted for in the instant year itself as it would be prudent in order to reflect the correct financial results. Factually speaking, Revenue does not dispute the short realization from debtors to the extent of Rs. 49,64,937/- and, therefore, insofar as the quantification of the loss is concerned, the claim of the assessee cannot be assailed on grounds of uncertainty. Therefore, assessee is justified in determination of such loss on the basis of actual figures which were available while assessing its income in the instant assessment year. In the case of U.B.S. Publishers and Distributors (supra), which has been relied upon before us, the issue relates to the assessment year 1967-68 (previous year ending on 31/05/1966). In the assessment proceedings, it was found that

47 ITA No.193/Bang/2014 Canara Housing Devt. Co. assessee therein had claimed an expenditure by way of purchases of a sum of Rs. 6,39,124/- representing additional liability towards foreign suppliers in respect of books imported on credit up to the end of 31/05/1966. The said additional claim was based on account of devaluation of Indian currency, which had taken place on 06/06/1966 i.e. after the close of the accounting year. Such a claim was disallowed on the ground that it did not pertain to the previous year ending 31/5/1966 and that the event of devaluation had taken place only on 06/06/1966, which was after the close of the accounting period. The claim of the Assessing Officer was that since assessee was maintaining its accounts on mercantile system, the liability on account of devaluation of the Indian currency could not be said to have accrued during the accounting period ending on 31/5/1966 as devaluation took place after the end of the accounting period. The Tribunal allowed the claim of the assessee holding that though devaluation of Indian currency took place after the end of the previous year, but assessee was justified in determining his liability on the basis of the actual figures available when accounts for that year were yet not finalized. The Hon'ble Allahabad High Court affirmed the decision of the Tribunal and noted that liability to pay in foreign exchange accrued with the import of books and was not as a result of devaluation. According to the High Court, since the actual figure of loss on account of devaluation was available when the accounts for 31/5/1966 ending were finalized, the same was an allowable deduction in assessment year 1967- 68 itself. The parity of reasoning laid down by the Hon'ble Allahabad High Court is squarely applicable in the present case also. In the present case, short realization of export proceeds to the extent of Rs. 49,64,937/-, took place in next year but it related to export receivable for the instant year, and at the time of finalization of accounts for the instant year, the actual figure was available, and therefore, assessee made no mistake in considering it for the purposes of arriving at the taxable income.”

Thus it is held that the principle of prudence seeks to ensure that

provision ought to be made for all known liability and losses even though

may remain some uncertainty with its determination. The claim of

damages and compensation was made by the other party to the

agreement vide claim statement dt.11.07.2005. The dispute was

referred to the sole arbitrator. The basis of the claim was the Fair

Market Price of the area to be delivered by the assessee to the other

party. The assessee never disputed the liability but only the quantum

48 ITA No.193/Bang/2014 Canara Housing Devt. Co. was to be determined through the arbitration. Therefore the liability

was already in existence in terms of the agreement between the parties

that in the event of failure to deliver the completed constructed area,

the assessee would be liable to make good of the losses and damages to

the other party. Even otherwise right from beginning the advance

received by the assessee has been shown as liability in the books of

accounts. The liability to pay the compensation and damages is also a

certain liability as per the terms and conditions of the agreement

between the parties though the quantum was to be determined through

arbitration. In the case on hand, the failure of the assessee to fulfill its

obligation is in the nature of default of business obligation and therefore

the compensation payable / paid by the assessee would become an

allowable claim being the business loss / expenses in order to carry out

their business / obligation and therefore the said claim of deduction is in

the revenue field.

the Arbitration Award has been passed on the basis of mutual consent of

the parties however, it is pertinent to note that when the compensation

is determined between the parties as per the fair market price as on the

49 ITA No.193/Bang/2014 Canara Housing Devt. Co. date then merely because the assessee agreed to settle the dispute by

mutual compromised terms cannot be a reason of doubting the

genuineness of the claim. Further the actual payment of the

compensation has not been disputed therefore, when the assessee has

realized in definite terms that it would not be possible for it to honour

the commitment and obligation under the agreement then the liability

arises under the agreement is a certain liability though the quantum of

the same could have been determined subsequently. The Assessing

Officer has relied upon the decision of Hon'ble Kerala High Court in the

case of Asuma Cashew Company Vs. CIT 162 ITR 175 however, we find

that the dispute in the said case was liability to pay damages as

determined by the Arbitration was held to be crystallized on the date of

Award because in that case the assessee denied its liability to pay the

damages and it was only because of the arbitration award the assessee

recognize the same. Whereas in the case on hand, the assessee did not

dispute the liability to pay the compensation in the event of failure on

the part of assessee to honour its obligation. Therefore the liability to

pay the compensation was never disputed by the assessee, only the

quantum was settled through Arbitration. Accordingly in view of the

50 ITA No.193/Bang/2014 Canara Housing Devt. Co. above discussion, we hold that the liability to pay the compensation was

crystallized when the assessee accepted its failure to perform its part

under the agreement within the stipulated time period and thus

determination of compensation after the balance sheet date has to be

taken into account in view of the principle of prudence and conservatism

accounting as provided under AS-4. Hence we decide this issue in favour

of the assessee and allow the claim.

the property has not started yielding income and the transaction is a

colourable device however we find that yielding of income is not a pre-

condition for allowance of deduction when this particular transaction is

only a part of a regular business activities of the assessee. It is not the

case of the Assessing Officer that the business of the assessee has not

established or commenced but the objection of the Assessing Officer is

restricted to the point that this particular transaction has not started

yielding income. We are of the view that the business activity of

assessee comprises all the transactions and therefore a particular

transaction or deal which is only a part of the regular business activity

need not start yielding income for allowing the claim in question.

51 ITA No.193/Bang/2014 Canara Housing Devt. Co. Further when the transaction is not between the related parties and it is

not the case of the Assessing Officer that the money has come back to

the assessee then the said transaction of payment of compensation as

per the outcome of the Arbitration Award cannot be held as a colourable

device. The recipient of the compensation has considered this amount

for the purpose of income chargeable to tax. Hence the objections of the

Assessing Officer are without any legal material or basis. The assessee

has offered the income arising from the project in question to tax and

therefore the transaction of development of properties in question

cannot be held as a bogus or colourable device.

this issue and the claim of the assessee is allowed. Since we have

allowed the claim of the assessee for the assessment year under

consideration therefore the alternate plea raised by the assessee

becomes infructuous.

Sd/- Sd/- (INTURI RAMA RAO) (VIJAY PAL RAO) Accountant Member Judicial Member Bangalore, Dt.12.05.2017. *Reddy gp