2022 (11) TMI 772 - AT - Income Tax

Tribunal Invalidates Jurisdiction Assumption for AY 2016-17, Upholds Revenue Recognition Method

The Tribunal invalidated the assumption of jurisdiction under Section 153A for the assessment year (AY) 2016-17 due to lack of incriminating material, ... Assessment u/s 153A - incriminating materials found during the course of search or not? - HELD THAT:- As for making an assessment u/s 153A the sine qua non is incriminating materials ought to have been found during the course of search. The assessee has made submissions with respect to the joint development agreement and its method of revenue recognition several times as enumerated above and consequently the same cannot be said to be incriminating material. In the instant case as could be seen from the order of assessment passed under section 153A r.w.s 143(3) of the Act, AO has made addition under the head income from business by adopting percentage completion method of revenue recognition. It is observed that the addition is made based on the opinion of the learned Assessing Officer that the significant risk and rewards of ownership have been transferred and consequently the percentage completion method of revenue recognition ought to have been followed. The same is not based on any incriminating material found during the course of search. In our opinion, learned Assessing Officer did not assume proper jurisdiction to issue notice under section 153A of the Act and consequently the notice issued under section 153A of the Act and the assessment order passed under section 153A r.w.s 143(3) of the Act for the assessment year 2016-17 is bad in law. Accordingly, the assessment for the AY 2016-17 is quashed. Period of limitation to issue notice u/s 153C - AY 2017-18 - The time limit to issue notice was upto 30.9.2018. The search took place on 10.1.2018. The assessment is pending during this time. As such, in case of pending assessments only one assessment shall be made separately for each assessment year on the basis of the income unearthed during the search or any other material existing or brought on the record of the AO. Even in the absence of any incriminating material abated assessment or reassessment could be done. The returns filed u/s 139 of the Act gets replaced by return filed u/s 153A(1) of the Act. Pending proceedings in appeal, revision/application shall not abate subsequent to initiation of section 153A of the Act. Further, recording of satisfaction under section 153A of the Act is not necessary unlike section 153C of the Act which mandates the recording of satisfaction. (Delhi International Pvt. Ltd.[2021 (11) TMI 928 - KARNATAKA HIGH COURT]). In view of this discussion, we hold that issue of notice u/s 153A of the Act for the AY 2017-18 and consequent framing of assessment u/s 143(3) r.w.s. 153A of the Act is valid. Method of revenue recognition - additions made under the income from business by computing the income based on percentage completion method with respect to the Prestige Lakeside Habitat project - whether project completion method or percentage completion method has to be followed? - HELD THAT:- We are of the opinion that department is precluded from changing the method of accounting which has been consistently followed by the assessee from year to year in middle of the duration of the project. At the same time, we are aware of the fact that the concept of res judicata does not apply to income tax proceedings as each assessment year is being independent assessable unit, what is decided in one year may not apply in the following assessment year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and the parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in the subsequent year. There is no doubt that the land is held to be applicable to be stock in trade of the assessee and consequently 2(47) has no application. Thus, assessments have to be made under normal provisions of computing business income and the same has to be computed only when the transaction is complete. A mere advance received, especially when there is a right to terminate on failure to pay the balance amount, cannot by any stretch of imagination held to be a completed transaction. It is well settled law that agreement does not confer absolute title and merely enables the parties to pursue remedies available in law as per the contract. Thus, the offering of income on the conclusion of the transaction regularly is the correct and only method for computing the income in respect of the assessee. The assessee also gives an example in normal business transaction for other than property will it be income answer is no. It is not the case of the department that that assessee has received 100% money of the land and the department itself even on the percentage completion method is only considering the income progressively. Thus, the question of applying the project completion method does not apply on these type of transactions. The lower authorities have committed an error in adopting the percentage completion method of income recognition in computing the income from business. Adopting percentage completion method of recognizing revenue has resulted in double taxation which is impermissible in law and also brought on record by assessee that the same income has been offered for taxation in subsequent assessment years and paid tax thereon - the income offered in the subsequent years is income of the impugned assessment year will result in double taxation which is impermissible in law. Addition being expenditure of personal nature - HELD THAT:- As assessee has not placed any evidence in support of cheque was cancelled and no payment has been made. Hence, we dismiss this ground. Issues Involved:1. Assumption of jurisdiction under Section 153A of the Income Tax Act.2. Validity of search under Section 132 of the Income Tax Act.3. Validity of notices issued under Section 153A of the Income Tax Act.4. Method of revenue recognition: Percentage completion method vs. project completion method.5. Double taxation resulting from adopting the percentage completion method.6. Reliance on the retracted statement of the Managing Director.7. Violation of principles of natural justice in the appellate order.8. Addition of personal expenditure.9. Setting off brought forward losses.10. Calculation of interest under Sections 234A, 234B, and 234C.Detailed Analysis:1. Assumption of Jurisdiction under Section 153A:The Tribunal held that the assumption of jurisdiction under Section 153A was invalid for the assessment year (AY) 2016-17 due to the absence of any incriminating material found during the search. The Tribunal emphasized that the addition made was based on the change in the method of revenue recognition and not on any seized material. Consequently, the assessment for AY 2016-17 was quashed. However, for AY 2017-18, since the assessment was pending, the notice under Section 153A and the consequent assessment were held valid. For AY 2018-19, being a regular assessment year, the assessment under Section 143(3) was also upheld.2. Validity of Search under Section 132:The Tribunal concluded that it cannot adjudicate upon the validity of the search conducted under Section 132 while disposing of the appeal against the block assessment, as per the decision of the Special Bench in Proman Ltd. v. DCIT and the Hon'ble Supreme Court in N.K. Jewellers Vs. CIT. Therefore, the assessee's challenge to the validity of the search was dismissed.3. Validity of Notices Issued under Section 153A:The Tribunal found that the notices issued under Section 153A for AY 2016-17 were invalid due to the lack of incriminating material. However, for AY 2017-18 and 2018-19, the notices were upheld as valid.4. Method of Revenue Recognition:The Tribunal held that the assessee, being a landowner, was justified in following the project completion method of revenue recognition instead of the percentage completion method. This decision was supported by multiple judgments from the jurisdictional High Court, including CIT v. Banjara Developers & Constructions P. Ltd., CIT v. Prestige Estate Projects P. Ltd., and CIT v. S.N. Builders & Developers. The Tribunal emphasized that the assessee had consistently followed the project completion method, which was accepted by the department in earlier and subsequent years.5. Double Taxation:The Tribunal agreed with the assessee's contention that adopting the percentage completion method would result in double taxation, as the same income had already been offered and taxed in subsequent years. The Tribunal cited the Hon'ble Supreme Court's decision in ITO v. Bachu Lal Kapoor, which held that the same income cannot be taxed twice.6. Reliance on the Retracted Statement:The Tribunal noted that the statement of the Managing Director, which had been retracted, could not be the sole basis for making additions. It emphasized that an admission is only a piece of evidence and not conclusive, as per the Hon'ble Supreme Court in Pullangode Rubber Product Co. Vs. State of Kerala and CIT vs. V. MR.P Firm.7. Violation of Principles of Natural Justice:The Tribunal found that the appellate order was passed without granting an opportunity for a personal hearing to the assessee, violating the principles of natural justice. However, this issue was rendered academic as the Tribunal had already decided in favor of the assessee on the main grounds.8. Addition of Personal Expenditure:The Tribunal dismissed the assessee's ground regarding the addition of Rs. 2,01,556/- for personal expenditure in AY 2018-19, as no evidence was provided to support the claim that the cheque was canceled and no payment was made.9. Setting Off Brought Forward Losses:The Tribunal directed the Assessing Officer to set off the brought forward losses of earlier years in accordance with the law.10. Calculation of Interest:The Tribunal held that the charging of interest under Sections 234A, 234B, and 234C was consequential and mandatory, to be computed accordingly.Conclusion:The Tribunal allowed the appeals partly, quashing the assessment for AY 2016-17 and upholding the method of revenue recognition followed by the assessee. The Tribunal also directed the Assessing Officer to give effect to the setting off of brought forward losses and to compute interest as per the law.