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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SMT ASHA VIJAYARAGHAVAN & SHRI INTURI RAMA RAO
Per Inturi Rama Rao, Accountant Member
This appeal filed by the assessee directed against the order of the learned Commissioner of Income Tax (Appeals) - I, Bangalore dated 22.07.2011 for the assessment year 2007-08.
Briefly the facts of the case are the appellant is a firm engaged in the business of development of property. The Return of Income for the assessment year 2008-09 was filed on 08.05.2008 declaring Nil income in response to notice under section 142 of the Income Tax Act (hereinafter called “the Act”). Subsequently the assessment was completed under section 143(3) of the Income Tax Act after issuing the requisite notice under section 143(2) of the Act vide order dated 29.12.2009 at a total income of Rs.2,37,37,172/-. While doing so, the learned Assessing Officer had not accepted the method of recognizing the income adopted by the appellant in respect of sale of plots. The appellant recognized revenue only in the year in which the plots were sold and registration of conveyance deed. The Assessing Officer is of the view that the revenue should be recognized at every stage of receipt sale consideration. The relevant observations of the Assessing Officer are given in para 6 of the assessment order which reads as under:
“6. Arrival of work in progress and Quantification of income:
The accounting standard AS-2 deals with valuation of inventories. It defines the term cost for the purpose of valuation of inventory to include the following:
• Cost of purchase • Cost of conversion • Other attributable costs minus abnormal waste, storage and distribution costs.
In the assessments for the earlier years, the value of closing stock was arrived at by including the cost and the development cost of land as furnished by the assessee and in accordance with the principles of AS 2. The assessee was therefore asked to furnish the particulars of cost and development cost for the current year too with reference to the closing stock. The value of closing balance of stock arrived at for the previous assessment year is taken to be the opening stock for this year. The total revenue received on sales of sites and the development costs collected from such purchasers is considered as sales made during the year. With this the trading account is drawn as under:
Opening balance 1,80,75,849 Sales 3,31,90,915 Development cost 56,61,952 Closing stock 1,49,44,660 Gross profit 2,43,97,774 The gross profit of Rs.2,43,97,774 has to be set off against the administrative expenses claimed for Rs.9,69,819.50. Thus, the net profit of Rs.2,34,27,955/- is determined as income for the year and accordingly brought to tax.”
Thus the Assessing Officer is of the opinion that the revenue should be recognized based on the stage of receipt of consideration. Being aggrieved, an appeal was preferred before the CIT(A). The CIT(A) confirmed the addition vide para 10 of the impugned order which is as follows:
“10. The facts relating to third ground are that the appellant submitted return of income on project completion method at Rs.Nil since the project was going on during the year under consideration. As against this, the Assessing Officer arrived income under mercantile system of deriving income on yearly basis.
In the appellate order of CIT(A) for the asst. years
2004-05, 2005-06 and 2006-07 (common order) in -1(2)/A-I/08-09, dated 27.04.2009,
(against which an appeal is pending before ITAT,
Bangalore Bench), my predecessor dismissed this ground by observing (page 20):
The AO is perfectly right in interpreting the Accounting Standards in the manner that he has. It is quite apparent in the case of the appellant that the profitability of the business cannot be computed ignoring opening and closing work-in-progress. The appellant itself has followed this principle for AY 2004-
05 and there is neither reason nor rhyme to alter this accounting methodology. Consideration the facts, it would appear that if the project completion methodology were to be adopted in the instant case, the dept. would indefinitely be waiting for the “cows to come home” as it were, before being able to collect any tax from the appellant as the project completion would need to be indefinitely awaited.”
Being aggrieved, the appellant is in appeal before us.
The learned counsel for the appellant vehemently pointed out that the revenue in respect of sale of plots can be recognized only when the risk and rewards and ownership of the plots are transferred to the buyers till such time the revenue cannot be recognized on sale of plots. Thus, he contended that the appellant had adopted the correct method of recognizing the income in respect of sale of plots by adopting Completed Contract Method. Thus, he prayed that the assessment made by the Assessing Officer be quashed. On the other hand, the learned DR placed reliance on the order of the CIT(A).
We heard the rival submissions and perused the material on record.
The only dispute in this appeal is with regard to the method of recognizing the income for the assessment to tax in respect of sale of plots. The appellant firm had recognized the income in respect of sale of plots by adopting Completed Contract Method, whereas, the Assessing Officer is of the view that income should be offered to tax received on year to year basis based on the stage of receipt of consideration, irrespective of the fact that the title in the plots have been passed on the buyer or not. It is an undisputed fact that the plots forms a part of stock-in-trade in the business of appellant firm and are immovable properties. The title in the immovable property can be passed on only in terms of the provisions of Transfer of Properties Act. In this connection, the observations made by the Hon’ble Jurisdictional High Court in the case of Wipro Ltd. vs. DCIT 382 ITR 179 at para 136 to 138, page 248 are as under:
Section 45(1) deals with profits or gains arising from the transfer “136 of a capital asset. Therefore, it does not deal with transfer of a business asset or a stock-in-trade. It provides that the profits and gains arising from the transfer of the capital asset shall be chargeable to income-tax under the head "Capital gains" and shall be deemed to be the income of the previous year in which the transfer took place. It is here that the definition of transfer under section 2(47) assumes importance. The definition of transfer contemplated in the provision is only in relation to the capital asset and not in relation to the stock-in-trade or a business asset. However, sub-section (2) contains a non-obstante clause by saying not withstanding anything contained in sub-section (1), the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into or its treatment by him as stock-in - trade of business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him. Therefore, in so far as stock-in- trade is concerned, the relevant year in which the capital gain tax is leviable is the previous year in which such stock-in-trade is sold. The word used is sold or otherwise transferred by him. In view of the expressed words used in section 45(2), it is clear that section 45(1) deals with capital gains on transfer of capital asset, section 45(2) deals with payment of capital gains in a transaction where stock-in-trade is sold or otherwise transferred by him. 137 Under section 45(1), the capital gains are chargeable to income- tax of the previous year in which the transfer took place. The said transfer may be in anyone of the modes prescribed under section 2(47). It need not necessarily be by way of sale, exchange or relinquishment of the asset as evidenced by registered documents. It can be in anyone of the modes contemplated in clause (i) to (vi) of section 2(47). However, when it comes to levying of capital gains under sub-section (2) of section 45, it deals with capital asset converted by the owner thereof into, or is treated by him as stock-in- trade of a business carried on by him as contemplated under section 2(47)(iv). Once such capital asset which is converted as stock-in-trade is sold, it is also subjected to capital gains, but the said capital gains is chargeable to income-tax in the previous year in which such stock-in- trade is sold. The word used is sold, not transferred. However, if the stock-in- trade is not sold, but is transferred otherwise, which has the effect of a sale, then the capital gains is chargeable to income-tax in the previous year in which such stock-in-trade is otherwise transferred. Having regard to the scheme of the entire section and the express words used in sub-section (2) of section 45, the case of considering stock-in-trade otherwise transferred, would arise only if stock-in-trade is not sold. If stock-in-trade is sold, the question of considering whether the stock-in-trade is otherwise transferred would not arise for consideration. The object of using the words" otherwise transferred" as it is in the other provisions in the same section is to prevent avoidance of payment of capital gains by the owners thereof by resorting to modes which are not recognized in law, but which in substance has the same effect. In other words, if the owner by such transfer ceases to have any interest in the property and transfers all his interest in the property to the transferee and earns profits and gains, but declines to pay the capital gain, on the ground that such transfer is not one such transfer recognized in law, then the law in such cases to plug the loop hole has used the term otherwise transferred. Once it is sold, the question of considering whether it has been otherwise transferred would not arise. 138 In the instant case, the assessee entered into an agreement with M/s. Prestige Estates Pvt. Ltd. on February 9, 2000, to sell the aforesaid property for a sum of rupees twelve crores fifty thousand. Clause (6) of the said agreement provides that, as desired by the purchasers, in order to enable the purchasers to process with the preparation of the plan, sanction and other orders required for commencement of the construction in the schedule property, the vendors have this day executed a power of attorney in favour of the purchasers and their nominees to enable them to secure appropriate clearance and other sanctions as detailed therein which shall be valid till completion of sale in terms of this business. Further, it stated anything contained herein shall on delivery of possession of the said property or empower the purchasers to claim any prospective rights in the schedule property. In the power of attorney executed, there is no whisper of delivery of possession of the schedule property to the power of attorney holder. Under section 2(47), any transaction involving the allowing possession of immovable property be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer Property Act is a deemed transfer in relation to a capital asset. Therefore even if the stock-in-trade which was prior to its conversion a capital asset as treated by the Tribunal as a capital asset, as possession is not delivered. it would not become a transfer and question of payment of capital gains would not arise.”
Thus the provisions of section 2(47) of the Act have no application to the transactions of stock-in-trade. In this case, the stock-in-trade in immovable property and the title in immovable property can be transferred or alienated in accordance with the provisions of the Transfer of Properties Act. The right, title or interest in the immovable property can be transferred
Page 8 of 9 only by way of registering the conveyance deed executed in this behalf. Even the accounting standard 9 dealing with the recognition of income also lays down that the income in respect of transfer of immovable property can be recognized only when the risks, rewards and ownership of the property is transferred to the buyer. Therefore in our considered opinion, the matter requires a fresh examination by the Assessing Officer in the light of the above position of law. Therefore, we remand this matter back to the file of the Assessing Officer with a direction that the income in respect of sale of plots can be recognized only in the year in which conveyance deed executed is registered in favour of the buyers and to allow the development expenditure incurred as expenditure or the expenditure likely to be incurred on the plots sold as expenditure. And this direction also goes in line in consonance with the provisions of accounting standard 9 which clearly lays down that matching is required to be done on accrual basis in respect of the income offered to tax and upheld by Hon’ble Supreme Court in the case of CIT Vs. Taparia Tools Ltd.
In the result, the appeal is partly allowed for statistical purposes.
Pronounced in the open court on this 04th day of November, 2016.