ITO 9(1)(1), MUMBAI vs. ABODE CONSTRUCTION LTD, MUMBAI

O R D E R Per Mahavir Singh, Judicial Member

This appeal by the revenue is arising out of the order of the CIT(A) – IX, Mumbai, in appeal No.CIT(A)-IX/9(1)(1)/I.T/24/2008-09 dated 27.04.2009. The only issue in this appeal of the revenue is against the order of the CIT(A) deleting the penalty of Rs.1,50,00,000/- levied by the AO u/s. 271(1)(c) of the Act on the addition made by the AO of Rs.3,48,03,446/-

According to the assessee it was under bona fide belief that the method adopted by it was recognized method for computing income for construction business i.e. project completion method. However, the AO has not accepted the explanation of the assessee by observing as under:

”ii) The explanation of the assessee compay’s AR gives details about the facts of the case and inter-alia it is stated that the project completion method adopted by the assessee company has been accepted by the Hon’ble ITT in assessee’s own case in earlier years. However, in the current year, the additions made by the AO under percentage completion method has been confirmed by the Ld. CIT(A). It is also submitted that all particulars of income and expenditure have been truly and fully disclosed in the audited accounts itself. However, this is not true as the project had been completed and the profit could be determined.” And he levied the penalty of Rs.1,50,00,000/- for furnishing of inaccurate particulars of income to the tune of Rs.3,48,03,446/-. Aggrieved, the assessee preferred appeal before the CIT(A), who after considering the submissions of the assessee and the provisions of section 271(1)(c) of the Act deleted the penalty vide para 3 as under:

“3. I have gone through the contention of the appellant as well as that of the AO. From the facts perused what is evident is that the AO had included income in respect of project considering the fact that said project was practically complete and that the appellant had already received amount against such project meaning thereby that there was reasonable certainty of estimation of income. Whereas as such project meaning thereby that there was reasonable certainty of estimation of income. Whereas according to the appellant since the aforesaid project was subject matter of litigation before the Hon’ble Mumbai High Court, therefore, the appellant was under a bonafide belief that the project cannot be treated as complete considering the dispute between MHADA, the appellant and the Chandivali Residence Association, wherein the petitioner i.e. the association has categorically mentioned about the incomplete and defective work of the appellant and the counterclaim made by the MHADA on the appellant. Besides this, it was also contended that full disclosure regarding the status of the project and the accounting policy adopted by the appellant were clearly reflected in the balance sheet, statement of income and the note forming part of the accounts. It is further stated that in respect of Oshiwara Project, the appellant has treated the same as complete during the year ended 31-03-2005 relevant to A.Y. 2005-06 and the profit of the said project amounting to Rs.1,63,84,573/- has been offered as income in A.Y. 2005-06. It is also contended that the department had taxed 4% of the receipt of the income of the appellant from the year 1994-95 onwards based on the percentage of completion method, though, the appellant was following Project Completion Method. The Hon’ble ITAT has duly confirmed the appellant’s view in the earlier years. It is not in dispute that the said project was under litigation and that certain claims and counter claims were made by and against the appellant company and therefore as a prudent policy the appellant may be justified in deferring the decision of revenue recognition till the issue is settled. It is well settled that assessment proceedings and the penalty proceedings are two different proceedings and that addition made in assessment proceedings may not necessarily be the ground for levying the penalty. It would be apt to refer to the provisions of section 271(1)(c) which reads as under: .... ... 3.1 Clause (A) to explanation indicate that where the assessee fails to offer an explanation or offers an explanation which is found by the AO to be false, then in such case penalty would be levied. It is not in dispute that the appellant had filed all the requisite details/explanation which were necessary for the assessment proceedings and therefore in so far as particulars in respect of such income being filed it could not be said that either the appellant had concealed the income or that he had not furnished the facts and material before the AO or the explanation filed by the assessee was found to be false which could be construed or concealment under clause (A). Clause (B) to explanation indicate that where the assessee gives an explanation and if such explanation is bonafide then in such case penalty would not be levied. In the instant case there is a reason for not recognizing revenue for the project since there was litigation where claims and counter claims were made and hence under the bonafide belief that revenue could not be recognized and if the assessee acts on such bonafide belief no penalty should be levied. Thus, it could not be said that either the appellant has concealed the income or that he has not furnished facts and material before the AO which could be construed as concealment either under clause (A) or clause (B). It would be apt to refer the recent decision of the Hon’ble Mumbai ITAT in the case of ACIT s. V.I.P. Industries Ltd. (supra), wherein it was held as under: ... 3.2 Thus, considering the totality of the facts I hold that no penalty for concealment or for furnishing inaccurate particulars of income can be levied on income which has been estimated by the Department on the basis of material facts disclosed by the appellant company. The mere fact that an addition is confirmed cannot per se lead to the confirmation of the penalty because quantum and penalty proceedings are independent of each other. It is on record that all the facts have been disclosed by the appellant company in its return of income, balance sheet and profit and loss account and on the basis of such details filed by the appellant the income could be estimated. Therefore considering the overall facts of the case and following the jurisdictional ITAT order in the case of VIP Industries (supra) I am of the considered view that the A.O. was not justified in levying penalty in this case, hence the same is deleted.” Aggrieved against the deletion of penalty the revenue is now in appeal before the Tribunal.

“12. I have carefully considered the facts and the rival contentions in the light of the orders passed by the learned Members. So far as the first point of difference is concerned, I am inclined to agree with the contention of the Department that on the facts and in the circumstances of the case, the project executed by the assessee can be taken to be complete during the previous year relevant to the assessment year 2004- 05. There were disputes between the assessee and MHADA regarding the work executed by the assessee in respect of the project and it was referred to the arbitrator who by two awards had directed MHADA to pay a sum of Rs. 18.53 crores together with interest to the assessee. The award was challenged by MHADA before the Hon'ble Bombay High Court in Arbitration Petition No.63 of 2003. However, subsequently an amicable settlement of the disputes was reached between the parties and consent terms dated 05.08.2003 were filed before the High Court. After narrating the events leading up to the amicable settlement, it was agreed between the parties that the Petition filed by the assessee before the Hon'ble

High Court in Arbitration Petition (Lodging) No: 518 of 2003 against MHADA would be withdrawn. It was further agreed by clause 5 of the consent terms as under: - “5. IT is hereby agreed, declared and undertaken by the Respondents that they will not obstruct in any manner whatsoever the Petitioners’ on going/balance work of the said project (more particularly mentioned in paragraph No.1 above) either through its directors, agents, servants, employees, officers, contractors or anyone claiming through the Respondents” In clause 6 of the consent terms, the parties agreed that all the materials lying on the site of the project would belong to MHADA and the assessee will have no claim against the same. In clause 7, it was provided that “with the payment of the above stated amount by the petitioners to the Respondents, all the bills of Respondents, for the work under reference, shall be deemed to have been fully paid and cleared. According to clause 8 of the consent terms, in case any adverse claim or any other claim is raised by any third party in respect of the project, MHADA shall not be liable for the same. It is common ground that in accordance with the consent terms payment of Rs.13,35,17,603/- was made to the assessee (subject to TDS) by MHADA on 04.08.2003 There is no dispute that the aforesaid amount was paid to the assessee in the accounting year relevant to the assessment year 2004-05. The Housing Society through its Secretary questioned the consent terms in Civil Writ Petition No: 2611 of 2003, which was registered as a PIL in the Hon'ble Bombay High Court and the assessee was made the second respondent therein. A perusal of the prayer in the Writ Petition shows that, inter alia, the Housing Society had prayed for quashing of the record and proceedings pertaining to the release of the money to the assessee with a direction that MHADA should recover the amount from the assessee with interest at 18% per annum, The Writ Petition was admitted by the Hon'ble Bombay High Court on 11.03.2004 and MHADA and the State Government were directed to produce all original files relating to the settlement with the assessee. A copy of the order of the Hon'ble High Court is at page 111 of the Paper Book. On these facts it is difficult to accept the contention of the assessee that the project was not completed in the relevant accounting year. The consent terms which are in effect even today, put an end to the relationship between MHADA and the assessee. It was even agreed that the assessee will not obstruct the work which will be carried on in the project site and that all the materials lying in the site would be the property of MHADA and the assessee will have no claim. For all practical purposes the relationship between MHADA and assessee came to an end with the consent terms and it is difficult to say, in this background, that the project was not completed. I am inclined to agree with the view taken by the learned Accountant Member on this point expressed in paragraph 5.1 of his order, where he has held that the project cannot be said to be incomplete merely-because the-Housing-Society has alleged irregularities in the release of the amount by MHADA to the assessee. As on date the assessee is out of the project and it is only a mere possibility that it may be directed to complete the work in the project. Having regard to the consent terms, I agree with the view taken by the learned Accountant Member in respect of the first point of difference. I may also add that even if the assessee is directed to complete the work at a future date by the orders of the Hon'ble High Court, that cannot be considered to be part of the contract between the assessee and MHADA which has worked itself out by the consent terms as on date. Further the Third Member also considered the debate or dispute vide para 14 as under:

“14. The contention of the Department that because the PIL is at the instance of a third party who is not party to the contract which is between the assessee and MHADA and, therefore, the right of the assessee to appropriate the amount as its income does not get affected cannot, with respect, be accepted because even where the dispute is raised by a third party, if it has the potential of affecting the right of the recipient to appropriate the money as its income, income cannot be said to have accrued. In my humble opinion, it does not matter that the dispute is raised by a third party and what is to be seen is whether the dispute is real and substantial and has the potential to 'affect the right of the recipient of the money to appropriate the same as his income. In any case, in CIT vs. Sharda Sugar Industries Ltd. (supra), the assessee had collected the excess sugar price from Food Corporation of India. Subsequently, the Government of India enacted the Levy Sugar price Equalisation Fund Act, 1976, according to which amounts realised in excess of the levy prices were required to be credited to the said fund. The excess collection was treated as income by the Assessing Officer, whose orders were reversed by the CIT(A), whose decision was confirmed by the Tribunal. The Hon'ble High Court confirmed the order of the Tribunal. It may be seen that in this case the dealings were between the assessee and Food Corporation of India but the right of the assessee to appropriate the excess sugar price as its income was effected by the passing of the law by the Government of India which was not party to the dealings between the assessee and Food Corporation of India. There can be no valid distinction between statutory enactment which affects the rights of an assessee to appropriate a receipt as his income and the ruling of a Court or competent jurisdiction, rendered at the instance of a third party, which affects the accrual of the income in favour of the assessee. In the present case, firstly, in the PIL filed by the Housing Society the assessee has been made the second respondent. It is therefore, party to the litigation. One of the prayers of the Housing

Society in the litigation is that the record and proceedings pertaining to the sanction of the amount by MHADA to the assessee should be called for and quashed and MHADA, which was the first respondent, should be directed to recover the amount from the assessee with interest at 18% per annum. The Writ Petition filed by the Housing Society was admitted and Rule was issued to MHADA and the State Government and they were directed to produce all original files relating 0 to the settlement with the assessee. This order was passed on 11.03.2004, within the relevant accounting year. In case the Hon'ble High Court accepts the prayer of the Housing Society, the assessee will have to return the amount to MHADA. This possibility cannot be ruled out. So long as this possibility exists, it means that there is a real and substantial dispute which affects the right of the assessee to appropriate the receipt as its income. In case the litigation ends with such a direction, the assessee will have to return the money to MHADA and in the year in which it is so returned, it cannot be allowed as a deduction in computing the assessee's income because there is no provision in law to do so. The basic question however, is not whether in the year of refund the assessee can claim a deduction or not. The fundamental question to be addressed is whether the amount accrued to the assessee as its income. In my view, in view of the pending litigation treated by the Hon’ble Bombay High Court as a PIL filed at the instance of the Housing Society, there is no indefeasible right of the assessee to the income. It is noteworthy that it is the purchasers of the flats in the project who are the real stakeholders in the transaction and the PIL has been filed by them.” In view of the above order of the Third Member in assessee’s own case, it is clear that the issue is highly debatable whether assessee’s project is complete or not and this being the situation, we are of the view that the penalty is not leviable u/s. 271(1)(c) of the Act. Furthermore, the assessee has not furnished any inaccurate particulars of income for the reason that the assessee’s view that the project was not complete due to the ongoing litigation, whereas the AO was of the view that the project was completed during the year under consideration. He has computed the income based on all the facts and figures available in the Finance Statements of the assessee and accordingly this is not a case of furnishing of inaccurate particulars of income. In terms of the above, we confirm the order of the CIT(A) deleting the penalty.

Order pronounced in the open court on this day of 8th July 2016.