2021 (7) TMI 790 - AT - Income Tax

Appeal allowed for incomplete project: ITAT directs reassessment of income

The ITAT allowed the appeal for statistical purposes, directing the AO to reassess the case considering that the project was incomplete during the ... Accrual of income - profit of the project - Year of assessment - HELD THAT:- We noticed that AO has proceeded to make addition of whole expected profit in this AY based on the promised payment schedule since assessee is a company and expected to follow the mercantile system of accounting. The same view was expressed by the CIT(A) in his order. In our considered view, from the records submitted before us, it clearly indicate that the project was not completed in this assessment year and promised payments against this project is part of the total agreed sales proceeds when the project is completed. We do not agree with the AO in bringing the whole profit of the project in the first year of execution of the MOU. Since, the claim of the assessee was not verified by the Ld. CIT(A) and it needs proper verification. We deem it fit to remit this issue back to the file of AO to redo the assessment de novo and direct him to verify the status of the project and can be taxed only to the extent of income which accrues to the assessee during this assessment year and direct AO to give proper opportunity of being heard to the assessee. Accordingly, the grounds raised by the assessee are allowed for statistical purpose. Issues Involved:1. Whether the addition of Rs. 63,75,600/- as business income by the AO was justified.2. Whether the income had accrued or was received by the assessee during the assessment year under consideration.3. Whether the sum of Rs. 63,75,600/- is chargeable to tax.4. Whether the income amounting to Rs. 63,75,600/- had accrued to the appellant.5. Whether the levy of interest u/s 234B amounting to Rs. 14,80,487/- was justified.Detailed Analysis:Issue 1: Addition of Rs. 63,75,600/- as Business IncomeThe AO observed that the assessee had entered into an MOU with SIPL to invest in ongoing projects and had invested Rs. 31,046,400/- during the assessment year. The AO noted that the assessee was promised 18 installments of Rs. 20,79,000/- each, totaling Rs. 3,74,22,000/-. The AO made the addition by considering the difference between the total realization of post-dated cheques and the initial investment as income from investment made. The CIT(A) upheld this addition, reasoning that the right to receive Rs. 3,74,22,000/- had clearly arisen from the MOU and the post-dated cheques issued by SIPL.Issue 2: Accrual or Receipt of Income During the Assessment YearThe assessee argued that no income had accrued or was received during the assessment year as the project was still under construction, and no flats were sold. The CIT(A) dismissed this argument, stating that the MOU created a right in favor of the appellant to receive the amount, and the issuance of post-dated cheques reinforced this right. The CIT(A) relied on the principle that income accrues when the right to receive it arises, irrespective of actual receipt.Issue 3: Chargeability of Rs. 63,75,600/- to TaxThe CIT(A) concluded that the sum was chargeable to tax as the right to receive the amount had accrued to the appellant. The CIT(A) referenced the Supreme Court's decision in Morvi Industries Ltd. vs. CIT, which held that the postponement of payment does not affect the accrual of income.Issue 4: Accrual of Income Amounting to Rs. 63,75,600/-The CIT(A) determined that the income had accrued to the appellant by virtue of the MOU and the issuance of post-dated cheques. The appellant's argument that the flats were not sold and the project was incomplete was not accepted, as the MOU provided an unconditional right to deposit the cheques.Issue 5: Levy of Interest u/s 234BThe assessee contested the levy of interest u/s 234B amounting to Rs. 14,80,487/-. The CIT(A) upheld the levy of interest, as it was consequential to the addition made by the AO.Conclusion:The ITAT examined the submissions and material on record, noting that the project was not completed during the assessment year and the payments received were considered advances. The ITAT disagreed with the AO's approach of bringing the entire profit to tax in the first year of the MOU's execution. The ITAT remitted the issue back to the AO for proper verification of the project's status and directed that only the income accruing during the assessment year should be taxed. The appeal filed by the assessee was allowed for statistical purposes.Order:The appeal filed by the assessee is allowed for statistical purposes. The AO is directed to redo the assessment de novo, verify the project's status, and tax only the income that accrues during the assessment year, providing the assessee with a proper opportunity to be heard.