2014 (9) TMI 194 - AT - Income Tax

Tribunal upholds accounting method for real estate, remits disallowance issue for verification.

Deputy Commissioner of Income Tax Versus Ansal Landmark Townships (P) Ltd.

The Tribunal dismissed the Revenue's appeal on the method of accounting for real estate projects, upholding the CIT(A)'s decision. Regarding the ... Year of taxability of amount - Amount spent on projects reworked for sub-project in various locations – Held that:- CIT(A) was right in holding that AS-7 is not applicable to Real Estate also Bench mark for recognizing revenues adopted by the assessee are reasonable and the rule of consistency applies in this case, in order to invoke sec. 145(3), the AO must necessarily express dissatisfaction about the correctness and completeness of the accounts and also note that such system of accounting is not regularly followed by the assessee, and the correctness of the overall profit from the project is not disputed by the AO only year of taxability is disputed – relying upon Commissioner of Income Tax and Another vs. Hyundai Heavy Industries Co. Ltd. [2007 (5) TMI 196 - SUPREME Court] - 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 Income Tax Act – AS-7 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 - the order of the CIT(A) is upheld – Decided against revenue. Deduction u/s 40(a)(ia) - Payment made for purchase of technical know-how – Tax withholding obligations u/s 194A of the Act not discharged – Held that:- Following the decision in Rajeev Kumar Agarwal Versus Additional Commissioner of Income Tax [2014 (6) TMI 79 - ITAT AGRA] - The net effect of the amendments is that the disallowance u/s 40(a)(ia) shall not be attracted in the situations in which even if the assessee has not deducted tax at source from the related payments for expenditure but the recipient of the monies has taken into account the receipts in computation of income, paid due taxes, if any, on the income so computed and has filed his income tax return u/s 139(1) - it is beyond doubt that the underlying objective of section 40(a)(ia) was to disallow deduction in respect of expenditure in a situation in which the income embedded in related payments remains untaxed due to non-deduction of tax at source by the assessee - section 40(a)(ia) cannot be seen as intended to be a penal provision to punish the lapses of non-deduction of tax at source from payments for expenditure- particularly when the recipients have taken into account income embedded in these payments, paid due taxes thereon and filed income tax returns in accordance with the law. A curative amendment to avoid unintended consequences is to be treated as retrospective in nature even though it may not state so specifically, the insertion of second proviso must be given retrospective effect from the point of time when the related legal provision was introduced - it cannot subscribe to the view that it could have been an 'intended consequence' to punish the assessees for non-deduction of tax at source by declining the deduction in respect of related payments, even when the corresponding income is duly brought to tax - That will be going much beyond the obvious intention of the section - the insertion of second proviso to Section 40(a)(ia) is declaratory and curative in nature and it has retrospective effect from 1st April, 2005, being the date from which sub clause (ia) of section 40(a) was inserted by the Finance (No. 2) Act, 2004 – thus, the matter is remitted back to the AO for fresh adjudication – Decided in favour of Assessee. Issues Involved:1. Method of computation of profit from projects.2. Disallowance under section 40(a)(ia) of the Income-tax Act.3. Retrospective application of the second proviso to section 40(a)(ia).Issue-wise Detailed Analysis:1. Method of Computation of Profit from Projects:The primary issue was whether the method of accounting adopted by the assessee for computing profits from real estate projects was correct. The Assessing Officer (AO) rejected the assessee's method, arguing it was not in conformity with Accounting Standard (AS-7) on construction contracts. The AO contended that the percentage completion method should be used. However, the assessee argued that AS-7 does not apply to real estate companies and that the method of accounting used had been consistently followed and accepted in previous years.The Tribunal upheld the Commissioner of Income Tax (Appeals) [CIT(A)]'s decision, stating that AS-7 is not applicable to real estate companies. The Tribunal emphasized the rule of consistency, noting that the method of accounting had not been disturbed in earlier or subsequent years. The Tribunal cited the Delhi High Court's decision in CIT vs. Manish Buildwell Pvt. Ltd., which supports the project completion method as a recognized method of accounting. Consequently, the Tribunal dismissed the Revenue's appeal on this issue.2. Disallowance under Section 40(a)(ia) of the Income-tax Act:The assessee faced disallowance under section 40(a)(ia) for payments made to Ansal Properties & Infrastructure Limited without deducting tax at source. The CIT(A) upheld the disallowance, stating that the payment represented professional and technical services liable to TDS under section 194J. The assessee argued that the payment was for the transfer of technical know-how and should not be disallowed.The Tribunal examined the applicability of the second proviso to section 40(a)(ia), which was inserted by the Finance Act, 2012. This proviso states that if the recipient has included the income in their return and paid taxes, the disallowance should not be made. The Tribunal referred to the Agra Bench's decision in Rajiv Kumar Aggarwal, which held that the second proviso is declaratory and curative, with retrospective effect from 01.04.2005.The Tribunal remitted the issue back to the AO for verification. The AO was directed to verify whether the recipient had filed their return and paid taxes. If confirmed, no disallowance should be made.3. Retrospective Application of the Second Proviso to Section 40(a)(ia):The Tribunal addressed whether the second proviso to section 40(a)(ia) should be applied retrospectively. The Tribunal cited the Agra Bench's decision, which concluded that the proviso is curative and should be applied retrospectively from 01.04.2005. The Tribunal emphasized that the objective of section 40(a)(ia) is to ensure tax compliance, not to penalize the assessee if the recipient has already paid taxes.The Tribunal remitted the matter to the AO for verification, instructing the AO to confirm whether the recipient had included the income in their return and paid taxes. If so, the disallowance should not be made.Conclusion:The Tribunal dismissed the Revenue's appeal regarding the method of accounting and upheld the CIT(A)'s decision. For the disallowance under section 40(a)(ia), the Tribunal remitted the matter to the AO for verification, applying the second proviso retrospectively. The appeals of the assessee were allowed for statistical purposes, and the Revenue's appeal was dismissed.